Derivaties Govind Project.docx 2222.docx

A STUDY ON DERIVATIVE MARKETS IN INDIA WITH REFERENCE TO KARVY STOCK BROKING LIMTED A Project report Submitted in Partial Fulfillment for the award of the Degree of MASTER OF BUSINESS ADMINISTRATION

DEPARTMENT OF MANAGEMENT STUDIES

PYDAH COLLEGE OF ENGINEERING & TECHNOLOGY (Approved by AICTE & Affiliated to Andhra University) GAMBHEERAM, ANANDAPURAM MANDAL, VISAKHAPATNAM – 531 163 Submitted by PANCHADA CHITTI VARAHALA GOVINDU (Reg.No.115232102064) Under the guidance of Dr.SOWDAMINI Associate Professor 1

DECLARATION I here by declare that the project entitled A STUDY ON "DERIVATIVE MARKETS" IN INDIA with reference to “KARVY STOCK BROKING LTD”, submitted by me in partial fulfillment for the award of degree of Master of Business Administration to the Department of M.B.A., PYDAH COLLEGE OF ENGG&TECH ,Visakhapatnam, is genuine and bonafide work done by me and it is not previously submitted by me for the award of degree or diploma in any other institute or university.

Place: Visakhapatnam Date:

p.ch.v.govindu 115232102064

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CERTIFICATE

This is to certify that PANCHADA CHITTI VARAHALA GOVINDU student of M.B.A PADAH COLLEGE OF ENGG&TECHNOLOGY, GAMBHEERAM, Visakhapatnam. during the academic year 2015-2017 has Under taken the project work on “DERIVATIVE MARKETS” at “KARVY STOCK BROKING LTD”, This is a record of bonafied work carried out by him under my guidance and

supervision and

had

fulfilled the

requirements concerning the project work.

Place: Visakhapatnam

Dr. Sowdamini

Date:

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ACKNOWLEDGEMENT I would like to thank all the people whose constant support helped me to bring my project into existence. I express my sincere thanks to Dr,v.chiranjeevi rao pydah college of engg & tech visakhapatanam for his ecouragement throughout Academic period. I take this opportunity to express my thanks to Prof.sarabandhi,Director, School of Management studies, Visakhapatnam for giving me permission to do my project. I am thankful to Dr.v.chiranjeevi Rao, Associate Professor and Head of Department, Dept. of Management Studies, for his valuable guidance to complete my project at Symbiosys Technologies. I would like to thank Mr. P. Nagireddy Area Manager and other staff at KARVY STOCKBROKING LTD for his guidance during my project. Last but not the least I thank one and all who have contributed their part in helping me during completion of my project work P.CH.V.GOVINDU Regd no: 115232102064

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CONTENTS Page No Chapter I  Introduction  Need for the study  Objectives of the study  Limitations of the study Chapter-II 

Industry profile



Future prospectus

Chapter-III 

Company Profile

Chapter-IV 

Conceptual Profile Chapter-V 

Findings , Comparison and Analysis

Chapter-VI 

Summary



Conclusion



Bibliography 5



Chapter-I

INTRODUCTION

India can boast of being one of the oldest stock markets in Asia. Earlier in the initial days trading in securities was done in a Very+ informal or Unsystematic manner Company agents or representatives representing different corporate Companies, already listed in the “Stock Exchange”. These representatives has to openly outcry the necessary details about the company and give a brief description of the number of shares allotted to issue and their quoted prices. After this the bidding process takes Place. This system was lacking the information technology for immediate matching or recording of trades. This was time consuming and inefficient. In order to provide efficiency, liquidity and transparency, NSE(National Stock Exchange) introduced a nation wide online fully automated screen based trading system(SBTS) where a member can punch into the computer Quantities of securities and the prices at which he likes to transact and the transaction is executed as soon as it finds matching sell or buy orders from a Counter party . Today India can boast that almost 100% trading takes place through Electronic order matching. NSE has main computer which is connected through Very Small Aperture Terminal (VSAT) installed at its office. Brokers have terminals (identified as PCs) installed at their premises which are connected through VSATS/ Leased Lines/ Modems. With the emergence of online trading in Indian Stock Exchanges the volume of the securities traded, the size of the market and the market turnover has increased tremendously. This accounts for about 2/3rd of the National Income of the Economy

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NEED FOR THE STUDY Investment without planning always gives negative results .investing in single security leads to more risk and may give higher returns. But here the investors like to enjoy higher returns at low risk.it is only possible by constructing and managing a portfolio. There are many ways to constructing optimal portfolio, which includes traditional and modern methods. All methods have their own merits and demerits. Sharpe single index model is one of the methods to construct the optimal portfolio. Underlying principal of Sharpe single index model is to choose a portfolio which generates high return when all portfolios offering same return.Sharpe single index used quadratic equations to construct the optimal portfolio. The process prescribed is complex but gives us fruitful results in maximizing returns



“Performance

Evaluation of derivatives” makes the reader understand about the

performance of the particular scrips .  My study can make the investor understand various operations done in Stock Exchange.  This gives them a clear idea about the performance of the scrips and how and where to invest.  After going through my study the reader can be very well benefited by not only knowing about Stock Exchange but also its operation, various guidelines and by learning the performance on scrips

 SIGNIFICANCE OF THE STUDY:  Everyone put his or her time, money

and efforts because to have some

significance. My studies have some significance to:

 The Organization:  As organization has got valuable data regarding customer preference and market share of Karvy stock broking ltd., in finance industry. Now the organization can take some significant actions in the direction of customer 7

satisfaction so that the customer can avail more benefits and the organization can get good customers and more business.

 The Student: It also has significance to me that I got the precious knowledge about the various operation of different department, policies and data regarding various schemes provided by the Karvy stock broking ltd., It will help me in my future for the practical applications in real life.

OBJECTIVES

 To study various operations of various Stock Exchange in India.  To study the fluctuations of selected scrips that is traded regularly in NSE and suggestions given.  To study the derivatives trading in the Indian Capital Market.  To study the Futures and forwards contract in the derivative markets.  To study the factors which determine or influence the Option price.  To study about Futures and Options as a hedging tools.  To study clearing and Settlement procedure of Futures and Options.

 To study the payoff for Future and Options in the long and short run.

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METHODOLOGY The study was under taken in the trading floor of kotak. The Information regarding the derivatives is collected from both primary as well as secondary sources of data. Primary data

 Watching the online trading live.  Interacting with the operators at the computer terminal’s the clients trading in kotak .  Collecting information from the head of each department and from the staff working in those departments.

Secondary data  Collecting the data from the website of NSE.  Referring the topics in textbooks and journals relating to stock exchange operations.  Collecting information through internet and also from KARVY STOCK BROKING Limited.

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LIMITATIONS

As the subject chosen comparatively new one, the study suffers from

certain

limitations.

1. Stock Exchange is an ocean and study is an attempt to understand which a drop in the ocean. The activities in stock exchange and derivatives market are vast and to understand all the activities is a difficult task, as there are only few persons who can provide information. 2. To know the entire activities of stock exchange is very difficult as it takes a long period to understand.

3. Though the system, people and time were there, some information regarding certain topics in stock trading was not collected due to non availability of time to the key persons from their busy schedule. 4. Because of the comprehensive nature of some information is not disclosed though sources of information are available. 10

CHAPTER –II INDUSTRIAL PROFILE INTRODUCTION TO FINANCIAL MARKETS Finance is the integral part of modern business. Financial markets refer to the institutional arrangements for dealing in financial assets and credit instruments of different types, such as currency cheques, bank deposits bills, etc. The main functions of the financial markets are: (i) To facilitate creation and allocation of credit and liquidity (ii) To serve as intermediaries for mobilization of savings; (iii) To assist the process of balanced economic growth; (iv) To provide financial convenience; (v) To cater to the various credits needs of the business houses.

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Types of Financial markets: On the basis of the maturity period of the financial assets, the market can be divided into: 1. Money market:

A money market is a mechanism through which short-term funds are loaned and borrowed and through which a large part of the financial transaction of a particular country of the world are cleared. The money market is divided into 3 sectors namely organized sector, unorganized sector and Cooperative sector.

a. Organized sector is comparatively well developed in terms of organized relationships and specialization of functions. It consists of the Reserve Bank of India, various scheduled and non-scheduled commercial banks. The development banks, other financial institutions like LIC, UTI, discount and finance house of India limited are all a part of the organized sector.

b. The unorganized sector is more dominate in India. The only link between the organized and unorganized sectors is through commercial banks. It consists of the indigenous bankers, Moneylenders, Nidhis and Chit funds.

c. The cooperative sector consists of the state –cooperative banks, primary agricultural credit societies, Central Cooperative banks, and State Land Development banks. 2. Capital market:

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Capital market is an organized mechanism for effective and efficient transfer of money capital of financial resources form the investing class i.e., a body of individual or institutional savers, to the entrepreneur class i.e., a body of individual or institutions engage in industry, business or service in the private and public sectors of the economy. Functions of capital market: The capital market is directly responsible for the following activities. 

Mobilization of National savings for economic development



Mobilization and import of foreign capital and foreign investment capital plus skill to fill up the deficit in the required financial resources to maintain expected rate of economic growth.



Productive utilization of resources



Direction the flow to funds of high yields and also strives for balance and diversified industrialization.

Constituents of capital market: The capital market comprises of mutual funds, development banks, specialized financial institutions, investment institutions, state level development banks, lease companies, financial service companies, commercial banks and other specialized institutions set up for the growth of capital market like SEBI, CRISIL. Instruments Capital market: The following instruments are being used for raising resources. Equity shares Preference shares Non-voting equity shares 13

Cumulative convertible preference shares company fixed deposits, banks, and debentures, global depository receipts. The capital market is divided into two parts namely new issues market and Stock market.

STOCK EXCHANGES IN INDIA At the end of the June 1989, there were 18 recognized stock exchanges in India. Among the 18 stock exchanges, the first organized stock exchange set up at Bombay in 1857 is distinguished not only by its size but also it has been recognized permanently, while the recognition for other markets is renewed every 5 years. Stock markets are organized either as voluntary, non-profit making associations (Bombay, Ahmadabad, Indore) or public limited companies (Calcutta, Delhi, Bangalore) or company limited by guarantee (Madras, Hyderabad). In India, the growth of stock exchanges has been linked to the growth of

corporate

sector. Though a number of stock exchanges were set up before independence but, there was no All India legislation to regulate they’re working. Every stock exchange followed its own methods of working .To rectify this situation, 14

The SECURITY CONTRACTS (REGULATIONS) ACT was passed in 1956. In 1965, 22 separate provincial stock exchanges were merged into 3 regional stock exchanges and in 1973 these, in turn, were combined to form the National Stock Exchange (NSE) under the title of the stock exchange that has trading floors in many former provincial center. At present, there are 26 stock exchanges in our country. The over-the counter exchange of India began its operations in 1992. Since 1995, trading in securities is screen based (on-line)

BOMBAY STOCK EXCHANGE (BSE): Bombay stock exchange is the first organized stock exchange set up at Bombay in 1857. It is the premier or apex stock exchange in India as it is distinguished not only by its size but also it has been recognized permanently while recognition of other stock exchanges is renewed every 5 years. It is the oldest stock market. Bombay Stock Exchange raised the threshold limit for listing to Rs.10 crores, moved on to weekly settlement and quicker actions for each settlement. Settlement is through the clearinghouse. 12 days carry forward is allowed on BSE. Index in BSE is ‘SENSEX’. BSE membership fee in 1857 was just Rs1lakh and now it in about Rs 2crores.

NATIONAL STOCK EXCHANGE (NSE)

National Stock Exchange of India Ltd was started in 1992 with a paid-up equity of Rs.25 crores. The government recognized it in the same year and NSE started its operations in wholesale in Nov 1994.

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NSE MISSION NSE mission is setting the agenda for change in the securities markets in India.

The NSE was set-up with the main objectives of:

 establishing a nation-wide trading facility for equities, debt instruments

and

hybrids,  ensuring equal access to investors all over the country through an appropriate communication network,  providing a fair, efficient and transparent securities market to investors using electronic trading systems,  enabling shorter settlement cycles and book entry settlements systems, and  meeting the current international standards of securities markets.

NSE LOGO

The logo of the NSE symbolizes a single nationwide securities trading facility ensuring equal and fair access to investors, trading members and issuers all over the country. The initials of the Exchange viz., N, S and E have been etched on the logo and are distinctly 16

visible. The logo symbolizes use of state of the art information technology and satellite connectivity to bring about the change within the securities industry. The logo symbolizes vibrancy and unleashing of creative energy to constantly bring about change through innovation.

NSE

MILE

STONES

April 1993

November 1992

Incorporati

May 1993

Formulation of business plan

June 1994

Wholesale Debt Market segment goes live

November 1994

Capital Market (Equities) segment goes live

March 1995

Establishment of Investor Grievance Cell

April 1995

Establishment of NSCCL, the first Clearing Corporation

June 1995

Introduction of centralized insurance cover for all trading members

July 1995

Establishment of Investor Protection Fund

October 1995

Became largest stock exchange in the country

April 1996

Commencement of clearing and settlement by NSCCL

April 1996

Launch of S&P CNX Nifty

June 1996

Establishment of Settlement Guarantee Fund

November 1996

Setting up of National Securities Depository Limited, first depository in

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India, co-promoted by NSE November 1996

Best IT Usage award by Computer Society of India

December 1996

Commencement of trading/settlement in dematerialised securities

December 1996

Dataquest award for Top IT User

December 1996

Launch of CNX Nifty Junior

February 1997

Regional clearing facility goes live

November 1997

Best IT Usage award by Computer Society of India

May 1998

Promotion of joint venture, India Index Services & Products Limited (IISL)

May 1998

Launch of NSE Web-site: www.nse.co.in

July 1998

Launch of NSE Certification Programme in Financial Market

August 1998

CYBER CORPORATE OF THE YEAR 1998 award

February 1999

Launch of Automated Lending and Borrowing Mechanism

April 1999

CHIP Web Award by CHIP magazine

October 1999

Setting up of NSE.IT

January 2000

Launch of NSE Research Initiative

February 2000

Commencement of Internet Trading

June 2000

Commencement of Derivatives Trading (Index Futures)

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September 2000

November 2000

Launch of 'Zero Coupon Yield Curve' Launch of Broker Plaza by Dotex International, a joint venture between NSE.IT Ltd. and I-flex Solutions Ltd.

December 2000

Commencement of WAP trading

June 2001

Commencement of trading in Index Options

July 2001

Commencement of trading in Options on Individual Securities

November 2001

Commencement of trading in Futures on Individual Securities

December 2001

Launch of NSE VaR for Government Securities

January 2002

Launch of Exchange Traded Funds (ETFs)

May 2002

NSE wins the Wharton-Infosys Business Transformation Award in the Organization-wide Transformation category

October 2002

Launch of NSE Government Securities Index

January 2003

Commencement of trading in Retail Debt Market

June 2003

Launch of Interest Rate Futures

August 2003

Launch of Futures & options in CNXIT Index

June 2004

Launch of STP Interoperability

August 2004

Launch of NSE electronic interface for listed companies

March 2005

‘India Innovation Award’ by EMPI Business School, New Delhi

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June 2005

Launch of Futures & options in BANK Nifty Index

December 2006

'Derivative Exchange of the Year', by Asia Risk magazine

January 2007

Launch of NSE – CNBC TV 18 media center

March 2007

NSE, CRISIL announce launch of IndiaBondWatch.com

June 2007

NSE launches derivatives on Nifty Junior & CNX 100

October 2007

NSE launches derivatives on Nifty Midcap 50

January 2008

Introduction of Mini Nifty derivative contracts on 1st January 2008

March 2008

Introduction of long term option contracts on S&P CNX Nifty Index

June2008

Launch of NCFM - Derivatives Market (Dealers) Module Test in Hindi language

September 2008 Launch of FEDAI-NSE Currency Futures (Basic) Module

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Jan2009

Launch of Mutual Funds : A Beginners Module

Feb2009

Launch of NCFM - Capital Market (Dealers) Module Test in Gujarati and Hindi languages

Feb2009

Launch of Shariah BeEs on Feb 4, 2009

Mar2009 Launch of "Options Trading Strategies Module"

NSE Technology Across the globe, developments in information, communication and network technologies have created paradigm shifts in the securities market operations. Technology has enabled organizations to build new sources of competitive advantage, bring about innovations in products and services, and to provide for new business opportunities. Stock exchanges all over the world have realised the potential of IT and have moved over to electronic trading systems, which are cheaper, have wider reach and provide a better mechanism for trade and post trade execution.

NSE believes that technology will continue to provide the necessary impetus for the organization to retain its competitive edge and ensure timeliness and satisfaction in customer service. In recognition of the fact that technology will continue to redefine the shape of the securities industry, NSE stresses on innovation and sustained investment in 21

technology to remain ahead of competition. NSE IT set-up is the largest by any company in India. It uses satellite communication technology to energies participation from around 400 cities spread all over the country. In the recent past, capacity enhancement measures were taken up in regard to the trading systems so as to effectively meet the requirements of increased users and associated trading loads. With up gradation of trading hardware, NSE can handle up to 1 million trades per day.

CIRCUIT BREAKERS The Exchange has implemented index-based market-wide circuit breakers in compulsory rolling settlement with effect from July 02, 2001

INDEX-BASED MARKET-WIDE CIRCUIT BREAKERS

The S & P CNX The index-based market-wide circuit breaker system applies at 3 stages of the index movement, either way viz. at 10%, 15% and 20%. These circuit breakers when triggered bring about a coordinated trading halt in all equity and equity derivative markets nationwide. The market-wide circuit breakers are triggered by movement of either the BSE Sensex or the NSE S&P CNX Nifty, whichever is breached earlier.

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 In case of a 10% movement of either of these indices, there would be a one-hour market halt if the movement takes place before 1:00 p.m. In case the movement takes place at or after 1:00 p.m. but before 2:30 p.m. there would be trading halt for ½ hour. In case movement takes place at or after 2:30 p.m. there will be no trading halt at the 10% level and market shall continue trading.

 In case of a 15% movement of either index, there shall be a two-hour halt if the movement takes place before 1 p.m. If the 15% trigger is reached on or after 1:00p.m. but before 2:00 p.m., there shall be a one-hour halt. If the 15% trigger is reached on or after 2:00 p.m. the trading shall halt for remainder of the day.

 In case of a 20% movement of the index, trading shall be halted for the remainder of the day.

S&PCNX NIFTY:

NIFTY is based upon solid economic research it the new world of financial product on the index like index futures, index options and index funds. A trillions calculations were expanded to evolve the rules inside the S&P CNX Nifty index. The result of this work is remarkably simple:

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 The correct size is to use is 50.  Stocks considered for the S&P CNX Nifty must be liquid by the 'Impact

cost

criterion.  The largest 50 stocks that meet the criterion go into the index.

The nifty is uniquely equipped as an index for the index market owing to its  Low market impact cost  High edging effectiveness

1. BACKOFFICE To know the trade position of the client, back-office is done in KSBL everyday immediately after the trade ends. ‘KARVY PACK’ is the package used in back office

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system. Steel City Software team was designed and maintained this “KARVY PACK” Package. The main modules of back office system are:  Trading  Finance  Importing Exporting  Margins  Clearing  Business Controls  Payin-Payout  House Keeping In the back office, first the Import Export module is opened where the trade file of the day’s trade is collected and the text file was imported to the system. There, the old closing prices are inserted by new prices from the Bhavcopy file. Bhavcopy is the average of last half-an-hour prices of the scrips.

To calculate the net mark to market value, Bhavcopy file is imported from NSE/BSE/NCDEX/MCX. Net mark to market value is to be known to know the profit or loss position of the client, basing on which the Trading Manager of KSBL will decide whether the client can trade or not for the next day on comparing it with the margin paid by the client. After importing the Bhavcopy file, the trading module is opened. In trading module, the sauda status is known from the Saud Manager’. Sauda manager is the number of trade confirmations recorded. Confirmation of trading transaction with brokerage commission is known as ‘Sauda’.

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After Sauda Manager, Net positions process is done. In the net positions process, cumulative net position reports, client-wise net position reports and other reports are made and are given to clients and to the accounts department. The bills are prepared and sent to the respective clients.

2. REPORTS:

After selecting ‘REPORTS’ option from main menu, the member has to specify the criteria for which the report is needed. The types of reports that may be generated are: Net Position Reports Client Wise and Scrip Wise; Contract Note reports; Client Wise Confirmation reports; Bills Summary reports; bad deliveries reports; auctions reports; objections reports; margins reports; securities reports and miscellaneous reports. The daily reports of various aspects relating to the trading activities are maintained.

3. CLEARING: Settlement of trades transacted on an exchange requires smooth, preferably instantaneous, movement of securities and funds in accordance with the prescribed schedule of pay-in / pay-out. Movement of securities has been almost instantaneous in the dematerialized environment. Two depositories are in place to provide electronic transfer of securities. 10 major stock exchanges accounting for about 99% of turnover have been connected to depositories. All actively traded scrips are held, traded and settled in de-mat form. NSE follows a different model where a clearing corporation guarantees settlement obligations emanating from trades.

4. SETTLEMENT: 26

The trades accumulated over a trading cycle are clubbed together at the end of the trading cycle, positions (trades) are netted and the balance obligations are settled.

THE ONE TYPE OF SETTLEMENT

ROLLING SETTLEMENT: In a rolling settlement, each trading day is considered as a trading period and trades executed during the day are settled based on the net obligations for the day.

At NSE, trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd working day. For arriving at the settlement day all intervening holidays, which include bank holidays, NSE holidays, Saturdays and Sundays are excluded. Typically trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on hursday and so on. The following table and figure represent rolling settlement process. A tabular representation of the settlement cycle for rolling settlement is given below: Table-4.1

Activity

Day

Trading

Rolling Settlement Trading

T

Clearing

Custodial Confirmation

T+1 working days

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Settlement

Post Settlement

Delivery Generation

T+1 working days

Securities and Funds pay in

T+2 working days

Securities and Funds pay out

T+2 working days

Valuation Debit

T+2 working days

Auction

T+3 working days

SETTLEMENT AGENCIES:

The NSCCL, with the help of clearing members, custodians, clearing banks and depositories settles the trades executed on exchanges. The roles of each of these entities are explained bellow:

a.

NSCCL

b.

CLEARING MEMBERS

c.

CUSTODIANS

d.

CLEARING BANKS

e.

DEPOSITORIES

f.

PROFESSIONAL CLEARING MEMBER

EXPLANATIONS:

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1.

Trade details from Exchange to NSCCL (real-time and end of day trade file).

2.

NSCCL notifies the consummated trade details to CMs/custodians who affirm back. Based on the affirmation, NSCCL applies multilateral netting and determines obligations.

3.

Download of obligation and pay-in advice of funds/securities.

4.

Instructions to clearing banks to make funds available by pay-in-time.

5.

Instructions to depositories to make securities available by pay-in-time.

6.

Pay-in of securities (NSCCL advises depository to debit pool account of custodians/CMs and credit its account and depository does it).

7.

Pay-in of funds (NSCCL advises Clearing Banks to debit account of custodians/CMs and credit its account and clearing bank does it).

8.

Pay-out of securities (NSCCL advises Clearing Banks to credit account of custodians/CMs and debit its account and depository does it).

9.

Pay-out of funds (NSCCL advises Clearing Banks to credit account of custodians and debit its account and clearing bank does it).

10. Depository informs custodians/CMs through DPs. 11. Clearing Banks inform custodians/CMs. 5. COST OF TRADING: The various costs involved in the process of online trading in Steel City Securities Limited, Visakhapatnam are as follows: a. MARGINS: The base capital to set up a trade center is one crore rupees. Earlier, KSBL paid Rs.75 lakhs as base capital when it was set-up. The Trade Corporation has to maintain a reserve of some amount with NSE where 30% - 50% will be in the form of cash and the

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remaining in the form of bank guarantees (securities), FDR’s etc. KSBL has 7.5. crores as margin with NSE at present.

Gross intra-day turnover (buy and sell) of a member shall not exceed 25 times the base capital. Gross exposure of a member at any time shall not exceed 8.5 times the free base capital of one crore rupees and not exceed 12 times over the free base capital of one crore rupees.

Minimum of Rs.20000 is collected as margin money from professional clients in KSBL. For delivery purpose no margin money is collected. Client margin collection is calculated in 16 types known as ‘Span calculation’ and the maximum margin is collected from the clients. KSBL collects 25% margin money in futures from clients. For trading in index 15% margin is charged. For retail clients, the full amount of the value of shares is calculated and collected to allow them to purchase the shares.

Table-5.1

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Gross Exposure

Margin Payable ( Rs. Crore)

<= 1

Nil

> 1 <=3

2.5% in excess of Rs. 1 crores

> 3& <= 6

Rs. 5 lakh plus 5% in excess of Rs. 3crores

> 6& <= 8

Rs.20 lakh plus 10% in excess of Rs. 6 crores

> & <=20

Rs.40 lakh plus 15% in excess of Rs. 8 crores

> 20

Rs. 220 lakh plus 20 % in excess of Rs.20

b. BROKERAGE: Brokerage is of two types: i. Speculation brokerage or square up commission:

This brokerage is charged where buying and selling of shares is done in one day only and at the end of the days trade, the position is zero. The speculation brokerage is charged from 0.01% to 0.03%. ii. Delivery Brokerage: This brokerage is charged where there may be buying or selling lot remaining at the end of the days trade. The delivery brokerage is charged from 0.03% to 0.30%.

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As per SEBI, maximum brokerage shouldn’t exceed 2.5% both in BSE and NSE. For retail clients, the brokerage charged is 0.7%. A sub-broker charge 2.5% from the clients to sell or buy the shares out of which, SCSL charges 1% from the sub-broker. Service tax: In SCSL, 10.3% service tax on brokerage is collected from the clients. Stamp duty: If the stamp duty of 0.006% on turnover is Rs30 or more, only Rs30 is collected in NSE. In BSE, the minimum is 1Re and the maximum stamp duty is unlimited. Security Transaction Tax This has reference to the Securities Transaction Tax (STT) introduced in the Finance Act 2004. As per the Finance Act 2004, STT on the transactions executed on the Exchange will be as under: NSE, BSE: 

Square up -------------0.25% on Turnover



Delivery --------------0.125% on Turnover



F&O 0.017% (Its calculate on Turnover only on Selling ) Options 0.017% (Based only on Premium) Exercise (only for options) 0.125% (Strike + Premium Multiplied by quantity) 32

6) ACCOUNTS: The Accounts/ Finance department maintains the accounts in KSBL. The accounts are prepared in three forms. They are: a.Client-wise net positions, b.Scrip-wise net positions, c.Pay-in and Pay-out settlement of funds. 7) DEMATERIALIZATION AND ELECTRONIC TRANSFER OF SECURITIES: Though de-mat was introduced in 1994, it came into existence in 1996. The depositories Act, 1996 was passed to provide for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy and security by dematerializing the securities in the depository model. A depository holds securities in dematerialized form. It maintains ownership records of securities and effects transfer of ownership through book entry.

The two depositories, National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) provide services to investors and clearing members through Depository Participants (DPs). They do not change the investors and clearing 33

members directly but charge their DPs, who are free to have their own charge structure for their clients.

De-mat Process: When a client places his physical shares for de-mat, KSBL after inputting the information in depository participants sends the physical shares to the company, which issued the shares. The client code number and the information and the clients signature is sent to Share Holding Registrar. When a client enters into DP for de-mat purpose, he is given a unique code member. He can know his share position easily. It is known as client ID number.

8) INTERMEDIARIES: There are no intermediaries in between SCSL and NSE, BSE, NCDEX and MCX. Similarly there are no intermediaries in between SCSL and professional clients. Since SCSL is a share broker to NSE, BSE ,NCDEX and MCX the clients operating in SCSL directly, on behalf of other clients are sub-brokers to the ultimate clients who doesn’t operate the trade directly. So, there may be subbrokers as intermediaries in between KSBLand clients who do not trade directly in KSBL. As mentioned earlier, KSBL is depository participant.

So, KSBL acts as an

intermediary between clients and NSDL & CDSL. 9) MARKET INFORMATION:

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In KSBL, daily the research analyst collects the market information and it is analyzed. The market information is used to forecast the index movement, price movement of the shares and enables the clients to make use of the information in trading to get better results. The research analyst in forecasting the market movement follows the technical analysis, fundamental analysis and efficient market hypothesis. The research analyst collects the information about the company, the industry and the economy through different media to know the company’s position. Since, the NSE & BSE are markets with strong form efficiency, as the market discounts the information itself very quickly and changes as per the information, the research analyst has only fewer jobs to do here. The research analyst not only analyses the marketing information but, every day in KSBL an edition of the research analyst’s, suggestions on scrips that have to be bought and sold is also printed which helps the clients of KSBL to invest in shares that are profitable.

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Chapter –III COMPANY PROFILE

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ABOUT KARVY One fateful evening in the summer of 1982, 5 young men who worked for a renowned chartered accountancy firm decided that it was time they struck out on their own to create an enterprise that would someday become an iconic name in the financial services space. They came from ordinary middle class backgrounds. They had two assets; one was their education and the other an unquenchable desire to succeed. They had a lot stacked against them: the environment was not conducive to entrepreneurship; technology was not fully supportive, financial markets were largely unregulated, they were based out of Hyderabad while most key players in the financial world were in Mumbai or other metros and the wolf was at the door. The odds seemed insurmountable. These remarkable young men’s “Never say die” approach held them in good stead over the years. They stuck to their dreams, burnt the midnight oil, embraced technology and made it work for them and through sheer dint of determination, eventually overcame all obstacles. First came the registry business, followed by broking, and the rest became a lesson for every young individual to emulate.

PROMOTERS & MANAGEMENT TEAM

Mr.C.Parthasarathy Chairman & Managing Director

Mr. C. Parthasarathy is the Chairman and Managing Director of the diversified financial services Karvy group. C Parthasarathy (CP as he is better known in the Industry), has the uncanny knack of staying ahead of the curve and the foresight to spot opportunities that seem invisible on the horizon 37

for the others. Karvy’s entire history is a case study of turning adversity into opportunity. CP is a chartered accountant by qualification, whose entrepreneurial energy drove him to co-found Karvy in 1983 with a less-than-modest capital of Rs 150,000. Over the years CP’s vision and leadership skills have helped the group navigate through the turbulent times CP is one of the pioneers of financial inclusion. Under his leadership Karvy has won numerous industry awards and accolades. He also is an independent Director in many listed companies. with a strong sense of purpose and clarity of thought.

Mr.M.Yugandhar Managing Director

Mr. M Yugandhar, Managing Director is a founder member of the KARVY Group. He is a Fellow Member of the Institute of Chartered Accountants of India and has varied experience in the field of financial services spanning over 30 odd years. Yugandhar has helped position and build a strong brand for the group in the registry and other financial services businesses. The registry business of Karvy is one of its flagship businesses and with the collaboration with Computershare has grown to become the largest registrar in India for over two decades. Yugandhar has played a key role in building strong relationships with public sector banks and other PSUs which has helped Karvywin some important mandates from some of India’s renowned companies. Karvy under his guidance has helped create the equity cult and substantially built retail investor wealth. He is an Independent Director on the board of several reputed companies.

Mr.M.S.Ramakrishna Director

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Mr. M S Ramakrishna, Director, founder member of KARVY GROUP, he is the orchestrator of technology initiatives such as the call center in the service of the customer. Mr. Ramakrishna was a member of the Hyderabad Stock Exchange and has more than 30 years of experience in the financial services arena. He has helped KARVY diversify into the field of medical transcription leveraging on the company's core competency of transaction processing. He is an Independent Director on the board of several reputed companies.

MANAGEMENT TEAM Mr.V.Mahesh Managing Director – Karvy Data Management

Mr. V Mahesh, is the Managing Director of Karvy Data Management and has work experience spanning over 2 decades with in depth exposure to operations on most financial services businesses. Commencing his professional stint with the Registry business where he has to his credit managing over 300 IPOs and other forms of offerings, he was amongst the first few to work closely on the Book Building process initiated by SEBI in 1995. After initially working with MCS as an Assistant Vice President, he moved to Karvy. He was also responsible to initiate the process of setting up the Depository participant business in Karvy and was responsible for both the operations and the 39

marketing of the business. He has been nominated by the NSDL to various committees which addressed key changes to the overall processes and policies for the Demat business. Nurturing the passion for understanding and interpreting technology and processes, he was responsible to create and set up the centralized broking platform, centralized back office operations for all financial products and creating a network of over 500 branches covering over 300 locations for Karvy. He is also instrumental in creating and launching the Online platform of Karvy Stock Broking Limited. He is a Post Graduate in Commerce from University of Madras (M.Com). and also completed Post Graduate Diploma in Computer Applications.

Mr.V.Ganesh CEO – Karvy Computershare

Mr. V Ganesh is a Chartered and Cost Accountant by profession and has over 2.5 decades of experience in the financial services space and is part of Karvy Group’s leadership team. Before joining KARVY, he was associated with ITC’s risk management and financial audit services department. Earlier he was associated with Proctor and Gamble and was responsible for product pricing and financial support functions for P&G’s soaps and health care businesses. He was instrumental in setting up the Mutual Fund registry business for Karvy. At KARVY, for over 2 decades, Ganesh has been instrumental in building a strong techno-commercial base with emphasis on establishing a pan India branch network, back office processing, call center, web initiatives, online trading, B2B interfaces etc., in the transfer agency and BPO businesses.

Mr.AmitSaxena CEO &Wholetime Director - Karvy Finance

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AmitSaxena is the CEO &Wholetime Director, Karvy Financial Services Ltd. He started Karvy Finance, a NBFC in the challenging times of 2009 and has successfully built the company in a short period as a leader in Micro & Small Business Loan Segment with a multi product suite, a differentiated and direct neighbourhood business loan lending model and a pan India branch network. Prior to establishing Karvy Finance, AmitSaxena worked with Citigroup Consumer Finance across leadership roles in Auto Finance, Mortgages and Consumer Finance. AmitSaxena with his keen knowledge of MSME & Consumer Finance industry since its inception in mid-nineties in India, has been instrumental in establishing new geographies, new products &start up ventures across India throughout his career. Conceptualisation, innovation and execution being the key elements defining his success in every venture. Mr. AmitSaxena is an alumnus of Harvard Business School, IIM Lucknow and BITS-Pilani. He is an avid speaker at various forums like 1111111111111111Wharton India Economic Forum, Harvard India Conference & ASSOCHAM MSME Mudra Bank Summit championing the cause and highlighting the vast potential of MSME segment and Indian entrepreneurs.

Mr.SushilSinha Wholetime Director - KarvyComtrade

Mr. Sushil Sinha, the Country Head of KarvyComtrade Ltd, has successfully made KarvyComtrade a force to reckon with in the marketplace. With over 10 years of expertise in the broking sector, he is a well-known face today in the electronic and print media. Under his aegis, the company has won numerous honours and awards nationwide, including the UTV Bloomberg Leadership Award 2011 and India’s Best Market Analyst Award—for two consecutive years—by Zee Business. Having joined KarvyComtrade in December 2005 as Senior Manager (Business Development), he has steadily climbed up the organizational ladder to head the business now. Before joining KCTL, he worked in Geojit Financial Securities for two years. Prior to that, he had worked with the Agriculture department in the Government of Jharkhand under various capacities for four years. 41

A science graduate, Mr. Sinha has completed two MBAs, one majoring in Personnel Management & Industrial Relations from Patna University and the other in Agri Business Management from IIPM, Bangalore, a Ministry of Commerce, Government of India institution.

Mr.P.B.Ramapriyan Vice President & Head - Financial Product Distribution

Mr. Ramapriyan is working with Karvy for over 2 decades, He has strength of sorts in the distribution of Financial products including Equity, Bonds, Fixed Deposits and Auto Finance. He has successfully marketed several financial products for large number of corporate of various sizes. He is also responsible for managing the Pan India Network of brokers and sub-brokers. He has been instrumental in Karvy’s success in distribution of debt products.

Mr.RajivR.Singh Vice President & Business Head - Karvy Stock Broking Limited

Mr. Rajiv R. Singh is the Vice President & Business Head of the Equity Broking business. He has been associated with Karvy for more than a decade. He joined Karvy in 2001 and moved up the corporate ladder with his sheer dedication, commitment and hard work. Rajiv, with an enormous experience in finance industry leads the responsibility of all aspects of Karvy’s equity broking business which includes strategy, revenue generation, business development and overall customer satisfaction. Rajiv is widely regarded as a results-driven leader who plays a key role in building the stock broking business of KSBL and make it one of the largest stock broking houses in the country. Rajiv also plays a key role in identifying skills and motivating staff in providing outstanding client service. Rajiv is a Certified Management Accountant–CMA. 42

Mr.J.Ramaswamy Group Head - Corporate Affairs

Mr. Ramaswamy, the Group Head for Corporate Affairs, is the official spokesperson for the Karvy Group. Mr. Ramaswamy has more than 25 years of experience in various spheres of the financial services industry, of which 10 years has been in the Legal and Secretarial division of Reliance, handling various public issues, mergers, monitoring performance of various departments, liaising with regulatory bodies and outside agencies (viz., the stock exchange, SEBI, DCA and others), and coordinating all the board meetings. The Corporate Affairs Division is involved in integration and strategic planning of all the business divisions of Karvy. Mr. Ramaswamy’s job responsibility encompasses monitoring the performance of all divisions through regular reviews, initiating and implementing new business initiatives, corporate communication and media relations, acting as official spokesperson for the entire Group, conceptualizing various policies and procedures to improve the internal work environment, and working on a parallel platform with the HR department to develop models for raising productivity and cost-effectiveness. He oversees the international business of Karvy Global Services.

Mr.DeepakGupta Group Head - HR

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Mr. Deepak Gupta brings with him over 20 years of experience in HR, spanning financial services, ITes and manufacturing. Prior to joining Karvy, he was Chief People Officer, Human Resources, with Bajaj Finance Limited, a Rahul Bajaj Group Company, based at Pune. He has also had a successful career with a few prominent corporate, including SREI, Enam, CRISIL, CEAT Financial Services and Reliance Industries. Deepak holds a Master’s degree in Human Resources Development from Jamnalal Bajaj Institute of Management and a diploma in Business Management and Industrial Relations.

Mr.G.KrishnaHari Group Head - Finance

Mr. G. Krishna Hari holds a Bachelors degree in Commerce and is associate member of the Institute of Chartered Accountants of India (ICAI). He has over 27 years of experience in the areas of finance and accounts functions encompassing fund raising, financial reporting, management accounting, working capital management, taxation, budgeting and forecasting and financial due diligence reviews for mergers & acquisitions and investment proposals. He has been associated with the Karvy Group for the past 15 years and is currently designated as the Vice President- Finance & Accounts at Karvy Stock Broking Limited. Prior to joining Karvy, he was the head of finance & accounts division in Asia Pacific Investment Trust Limited, Hyderabad (Formerly Nagarjuna Investment Trust Limited) an NBFC Company.

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WHO WE ARE The Karvy Group is today a well diversified conglomerate. Its businesses straddle the entire financial services spectrum as well as data processing and managing segments. Since most of its financial services were retail focused, the need to build scale and skill in the transaction processing domain became imperative. Also during stressed environment in the financial services segment, the non financial businesses bring in a lot of stability to the group’s businesses. Karvy’s financial services business is ranked among the top-5 in the country across its business segments. The Group services over 70 million individual investors in various capacities, and provides investor services to over 600 corporate houses, comprising the best of Corporate India. The Group offers stock broking, depository participant, distribution of financial products (including mutual funds, bonds and fixed deposits), commodities broking, personal finance advisory services, merchant banking & corporate finance, wealth management, NBFC (loans to individuals, micro and small businesses), Data management, Forex & currencies, Registrar & Transfer agents, Data Analytics, Market Research among others. Karvy prides itself on remaining customer centric as all times through a combination of leading edge technology, Professional management and a wide network of offices across India. Karvy is committed to its quest as an Equal Opportunity Employer and believes in the rights for differently-abled persons. We have over 12% employees who are challenged in some form in one of our prominent businesses.

WHY KARVY

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Karvy’s business entities address a heterogeneous swathe of population from the super rich, to the nouveau riche, the ubiquitous middle class, the lower classes (the SEC E3 according to the new Social Economic Classification), urban and the rural folks. All of whom either make a living through large business (corporate world), SMEs, professional services, traders, farmers, labour, blue and white collar jobs and the government. Another key feature of Karvy has been its ability to offer leading edge advice based on incisive ideas that are strongly rooted in high quality research on every conceivable aspect of investments be it equities, forex, commodities, bonds, fixed returns, debt instruments or any other investment grade asset class. The customer has always been at the centre of every Karvy initiative.

KARVY GROUP The Karvy Group is a premier integrated financial services provider, ranked among the top-5 in the country across its business segments. The Group services over 70 million individual investors in various capacities, and provides investor services to over 600 corporate houses. Karvy Group established its presence through a wide network of over 450 branches, (or 900 offices) covering in excess of 400 cities and towns. Karvy covers the entire spectrum of financial services, viz stock broking, depository participant, distribution of financial products (including mutual funds, bonds and fixed deposits), commodities broking, personal finance advisory services, merchant banking & corporate finance, wealth management, NBFC, among others. The Group is professionally managed and ranks among the best in technology, operations and research across the financial industry. The Karvy Group has evolved over the last three decades and today it assumes many avatars. Broadly the group pursues two lines of businesses and can be graphically represented as follows:

OUR COMPANIES Karvy Stock Broking LTD Equity Broking, Depository Participant, Distribution of Financial Products (Mutual Funds, FD and Bonds), Wealth Management Services, Currency Derivatives, Portfolio Management Services 46

KarvyComtrade LTD Commodities Broking Karvy Capital LTD( Formerly Karvy Capital Private LTD) NBFC & Portfolio Manager Karvy Investment Advisory Services LTD(Formerly known as Karvy Insurance Broking LTD) Investment Advisory Services Karvy Holdings LTD Core Investment Company Karvy Middle East LLC Wealth Management Products for NRI's Karvy Realty (India) LTD Realty Services Karvy Financial Services LTD Non Banking Financial Services Karvy Insurance Repository LTD Insurance Repository services KarvyForex& Currencies Private LTD Currency and forex services Karvy Consultants LTD Consultancy and Advisory Services, Publications Karvy Computershare Private LTD Registrar and Share Transfer agent Karvy Computershare W.L.L( Formerly known as FakhroKarvy Computershare W.L.L ) Agent for Custody & Registration of Securities, Registered Administrator Karvy Data Management Services LTD Data Management Services Karvy Investor Services LTD Merchant Banking and Corporate Finance Karvy Insights LTD Market Research Karvy Analytics LTD Analytics 47

Karvy Solar Power LTD Power Generation Karvy Global Services LTD Business Process Outsourcing Karvy Global Services Inc, USA Business Process Outsourcing KarvyInc, USA Institutional Broking

AWARDS & ACCOLADES

Mr. RajatParthasarathy, Director, Karvy Group and Mr. Rajiv Ranjan Singh, Vice-President & Business Head - Stock Broking receiving awards from India’s premier stock exchange BSE - the SKOCH – BSE Order of Merit award and the SKOCH – BSE Aspiring Nation award - in recognition of its efforts to educate, empower and help create an enlightened corps of financial market investors.

Mr. Sudhendoo Gandhi, GM, KSBL, receiving the "NSDL Star Performer Award 2014” for Highest Asset Value

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Mr. Sushil Sinha, Business Head, KCTL & Mr. Suresh Raval, General Manager, KCTL receiving the ‘Broker with Best Corporate Desk for Commodity Broking’ award from Hon’ble Finance Minister then - Sri PranabMukerjee at the Bloomberg UTV Financial Leadership Awards 2011

Mr. C Parthasarathy, Chairman, Karvy Group, receiving the ‘Largest E-Broking House in India’ award at the Dun & Bradstreet – BSE Equity Broking Awards 2010

Karvy Stock Broking Limited 2014 Won the prestigious "NSDL Star Performer Award 2014 for Highest Asset Value". Organized by the National Securities Depository, the NSDL Star Performers Awards recognize the best performers in the securities and depositories space. The award ceremony was organized on Saturday, December 20, 2014, at TajCoromadel, Chennai. Karvy has won this award consecutively for last two years.

2010 49

"Largest E-Broking House in India" at BSE Equity Broking Awards 2010 by Dun & Bradstreet held in ITC Grand Maratha, Mumbai. This award is based on the study carried out by the world’s leading provider of business information, knowledge and insight, Dun & Bradstreet in association with the oldest stock exchange in India, the Bombay Stock Exchange. The BSE-D&B Equity Broking Awards recognizes the brokerage firms based on the number of online accounts, volume of online trade, and service delivery of their online trading platform. Karvy Stock Broking Limited has won this prestigious award for its state of the art, in-house developed KarvyOnline, a comprehensive online investment platform that enables investors to invest, anytime from anywhere.

2007 Bagged ace award by receiving the coveted Annual Award for 2006 for "Best CEO, Initiating HR Practices”, by, the Uttar Pradesh Chapter of National Institute of Personnel Management (NIPM). The Award has been conferred to Mr. C Parthasarathy, CMD, Karvy Group, for his contribution to HR practices in Lucknow, organized by UP chapter of NIPM.

2007 "Amity Corporate Excellence" award at the 9th International Business Summit and Research Conference-INBUSH (International Business Horizon) which was held at a glittering function in Noida. This award was conferred by Amity International Business School, Noida.

2006 ISTD – "Vivekananda National Award" for Excellence in HRD & Training

2004 "Best Depository Participant in the country" award

KarvyComtrade Limited 2014 50

Won the prestigious ZEE Business Award for the "Best Agri. Analyst" 2014 in the fifth edition of India’s Best Market Analyst Awards on Saturday, 13th Dec. 2014 at The LaLit in Mumbai.

2011 Awarded the "Broker with Best Corporate Desk for Commodity Broking" at the prestigious Bloomberg UTV Financial Leadership Awards 2011 held in Hotel TajLandsend, Mumbai.Hon’ble Finance Minister of India then, Shri.PranabMukerjee was the Chief Guest. The awards have been decided by eminent jury consisting of reputed economists, management & financial consultants. Bloomberg UTV Financial Leadership Awards have been instituted to acknowledge the contribution of the country’s financial champions for extraordinary work done in financial sector. This award is a reflection of KarvyComtrade - Corporate Desk’s unparalleled strengths in providing unique risk management strategies and hedging calculators for Corporates. KarvyComtrade’s ability to handle large volumes of trade.efficiently with prompt, accurate and tailor-made services by a talented pool of professionals ensures that Karvy remains relevant to client at all times.

2011 Adjudged as the "Best Analyst in Base Metal Category" at the prestigious "Best Market Analysts Awards 2011" by Zee Business in association withNCDEX (National Commodity & Derivatives Exchange Limited). The award ceremony was graced with the presence of eminent dignitaries. Zee Business Best Market Analyst Awards have been instituted to honour the contributions of India’s leading financial experts in empowering the retail investors. The Nominations for the Awards were invited from Commodities & Stock Broking companies and Fund houses and were being judged on overall returns achieved for the Stocks, Commodities, Sectors and Companies, the analysts tracked from April 2010 to December 2010.

About Us Karvy Stock Broking Limited (KSBL) which is the broking arm of Karvy Group, a well diversified conglomerate whose business encompasses the entire financial services spectrum along with data processing and managing segments.

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Karvy’s financial services business is ranked among the top-five in the country across its business segments. The Group services over 70 million individual investors in various capacities and provides investor services to more than 600 corporate houses, comprising the best of Corporate India. Karvy prides itself on being extremely customer centric at all times providing leading edge technology combined with professional management and servicing through a wide network of offices across India. Karvy Stock Broking Limited (KSBL) is among the country’s leading financial services organizations renowned for its quality of investment and advice. KSBL through its wide network of offices across India offers customized investment solutions to corporate, institutions and individual investors. KSBL helps investors construct a portfolio by factoring in their risk profile and future financial needs so that their investments achieve an optimal balance between risk and returns. Our comprehensive trading account helps clients approach various investment avenues in an integrated fashion, providing them the facility to transact with ease. We have a combined account facility that caters to all investment opportunities such as trade in Equities, Derivatives, Currency and also investing in IPOs, Mutual funds and NCDs. KSBL was awarded BSE Order of Merit award and the SKOCH – BSE Aspiring Nation award in recognition to its efforts to educate, empower and help create financial markets literacy among investors. It has received the NSDL Star Performer Award 2014 for highest asset value generated.

OUR ACCOLADES 

Winners of SKOCH-BSE Order of Merit award 2015

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Winners of SKOCH-BSE Aspiring Nation award 2015

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Won ‘NSDL Star Performer Award 2014 for Highest Asset Value’

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Won ‘Largest E-Broking House in India by Dun & Bradstreet 2010

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Won ‘Broker with Best corporate desk for commodity broking 2011’

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India’s no I registrar and securities transfer agent

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ISO 9002 Certified Operations by DNV

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Largest Independent Distributor

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Most of India’s 500 fortune companies are serviced by Karvy

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Every 20th trade in stock market is done on the Karvy platform

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Every 6th investor in India invests through Karvy

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Amongst top 10 stock brokers in India

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Amongst top 3 depository participants

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Amongst top 10 investment bankers

The Karvy Group is a premier integrated financial services provider, ranked among the top-5 in the country across its business segments. The Group services over 70 million individual investors in various capacities, and provides investor services to over 600 corporate houses. Karvy Group established its presence through a wide network of over 450 branches, (or 900 offices) covering in excess of 400 cities and towns. Karvy covers the entire spectrum of financial services, viz stock broking, depository participant, distribution of financial products (including mutual funds, bonds and fixed deposits), commodities broking, personal finance advisory services, merchant banking & corporate finance, wealth management, NBFC, among others. The Group is professionally managed and ranks among the best in technology, operations and research across the financial industry. The Karvy Group has evolved over the last three decades and today it assumes many avatars. Broadly the group pursues two lines of businesses and can be graphically represented as follows:

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Financial Services             

Equity Broking Depository Participant Wealth Management Commodities Broking Currency Derivatives Non-banking Financial Services Distribution of Financial Products Realty Registry services and Mutual funds Investment Banking Insurance Repository

for

Corporate

The Finapolis Forex & Currencies

Non-Financial Services     

Data Management Services International BPO

Alternate Energy Data Analytics

Market Research

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FINANCIAL SERVICES

EQUITY BROKING SERVICES Stock markets are considered unpredictable, but they reflect the mood of the economy. Over the years, investment in equities is considered to be the best long-term wealth maximization option. The gap between unpredictability and a safety anchor in the market is bridged by the in-depth knowledge of market functioning and changing trends, planning with foresight and choosing one’s options with care. From that perspective, our equity broking and advisory services are beyond just a medium for buying and selling stocks and shares. Instead, we provide services which are multi-dimensional and multi-focused in its scope. Karvy can boast of the largest-owned network among financial-services companies in India. This has ensured that wherever a potential customer is located, it is never too far from a Karvy office. Given the wide network, there are a number of trading terminals that provide retail stock-broking facilities. Our services have increasingly offered customer-oriented convenience which we provide to a spectrum of investors—high net-worth or otherwise— with equal dedication and competence. We offer online trading on both key platforms—National Stock Exchange and Bombay Stock Exchange. More importantly, we make trading safe to the maximum possible extent by accounting for several risk factors and planning accordingly. We have created a very robust trading platform that facilitates customers to trade online not only in equities, but also buy fixed deposits, mutual funds, commodities, currencies and also participate in a public issue. Our online platform enables customers to view their portfolio online and also access our various research reports and views on stocks. It also provides them with a facility to communicate with our research/advisory teams online. We are assisted by our in-depth research, constant feedback and sound advisory capabilities.. Our highly skilled research team—comprising technical analysts and fundamental specialists—secure result-oriented information on market trends, market analysis and market predictions. This crucial information is provided as a constant feedback to our customers, through daily reports delivered twice —the Morning moves, which predicts the market scenario for the day; 55

the Daily Wrap up, the final report for the day, where the market and the report itself is reviewed. To add to this repository of information, we publish a monthly magazine, The Finapolis, which analyzes personal finance and offers share market tips and takes a close look at various investment options and products available in the market. Moreover, our weekly enewsletter, Karvy Bazaar Baatein, keeps you informed on key trends in personal finance and stock market trends. We cover a wide range of sectors and companies which are categorised as large cap, mid cap and small cap. We also provide periodic macroeconomic reports. Above all, we also offer special portfolio analysis packages and provide customized advisory services to help you make the right financial moves to specifically suit your portfolio

DEPOSITORY PARTICIPANT SERVICES The onset of the technology revolution in the financial-services industry saw the emergence of KSBL as an electronic custodian registered with the National Securities Depository Ltd (NSDL) and Central Securities Depository Ltd (CSDL) in 1998. We set standards enabling further comfort to the investor by promoting paperless trading across the country, emerging as the top-3 depository participant in India, in terms of customer serviced. Offering a wide trading platform with dual membership of NSDL and CDSL, KSBL is a powerful medium for trading and settlement of dematerialized shares. We have established live DPMs, internet access to demat accounts, and an easier transaction process in order to offer greater convenience to individuals and corporate investors. A professionally managed team and the latest technological expertise have been allocated exclusively to our demat division, including technological enhancements like SPEED-e. This makes our response time quick and our delivery impeccable. Moreover, a wide national network makes our efficiencies accessible to all.

DISTRIBUTION OF FINANCIAL PRODUCTS The paradigm shift from pure selling to knowledge-based selling drives the business today. With our wide portfolio offerings, we occupy all segments in the retail financial services industry. A highly qualified and dedicated team of professionals, drawn from the best of academic and professional backgrounds, are committed to maintaining high levels of client service delivery. This has propelled us to become one of the top distribution houses for equity and debt issues, with an estimated market share of 15% in terms of applications and amount mobilized. To further tap the immense growth potential in the capital markets, we enhanced the scope of our retail arm, now providing planning and advisory services to the mass affluent. Here, we understand customer needs and lifestyle in the context of current earnings and provide 56

adequate advisory services that will facilitate wealth creation in the long run. Both marketsavvy and the less knowledgeable investors find this service quite satisfactory. The edge that we have over our competitors is the sheer depth of our portfolio of offerings and our professional expertise. The investment planning for each customer is done with an unbiased attitude so that the service is truly customized..

CURRENCY DERIVATIVES Karvy Currency Derivatives Segment, a specialized group vertical within Karvy stock broking limited, has been established in 2008 to cater to the growing needs of corporate houses to manage currency exchange rate risk. With the changing dynamics and increasing volatility of exchange rates across the globe, companies exposed to currency risk face the challenge of maintaining continued profit margins. Currency Derivatives would be one of the best options to manage any related exchange rate risk and be free from the worries of market uncertainties. At Karvy Currency derivatives segment (CDS), we provide customized hedging strategies for importers, exporters and companies with foreign exchange exposure. We offer forex advisory and brokerage service for the Indian currency derivative market, and provide a robust and reliable online trading platform. Currency Derivatives Segment - Karvy Stock Broking Limited is an active member of the National Stock Exchange (NSE), MCX Stock Exchange (MCX-SX) and Bombay Stock Exchange (BSE)..

WEALTH MANAGEMENT SERVICES Karvy, with over 25 years’ expertise in the financial markets, is offering comprehensive wealth management solutions for its customers through Karvy Private Wealth (KPW). Our wealth managers provide direction to a client’s financial decisions, enabling him achieve his financial and life goals. As a wealth manager, we collate the relevant financial information and life goals of the client, assess his risk tolerance level, examine his current financial status, and identify a strategy to fulfill his goals. Wealth management is an all-encompassing service, providing comprehensive research-based advisory along with convenient and personalized investment execution. KPW offers an unmatched product basket, ranging from debt, equity, mutual funds, insurance, derivatives, commodities, structured products, international funds, art funds and real estate. It is a unique service aimed at transforming clients’ dreams into reality. KPW was set up to cater to HNIs, keeping in mind that they require a different kind of financial planning and management. Our services include planning and protection of finances, planning of business and retirement needs, and a host of other services, which will help augment their existing as well as future finances and lifestyle. We combine a hard-nosed business approach with a soft touch of personalized attention and dedicated customer care. 57

Our research reports have been widely appreciated by the HNI segment. The delivery and support modules have been fine-tuned by giving our clients access to online portfolio information, constant updates on their portfolios as well as value-added advice on portfolio churning, sector switches, etc. Moreover, the investment recommendations given by our research team in the cash market have enjoyed a high success rate. To tap NRIs, we commenced operations in the Middle East, Dubai to cater to a significant Indian population that resides there and is keen on participating in India’s growth story. We have a strong team that specialises in offering not only Indian investment products but also local investment products to these customers

PORTFOLIO MANAGEMENT SERVICES Portfolio management services are meant for high net worth individuals or institutions who want a personalized management of their finances. A team of expert professionals conduct extensive research on markets to provide a customized solution to achieve unique investment objectives. This ensures best selection of investment opportunity within an asset class and active monitoring for optimized results. Investors are provided with an all time access to track their portfolios. Our PMS offerings range across two asset classes – Equity and Debt, with multiple options for each asset class...

KARVY FORTUNE KarvyFortune, helps individuals and small organisations forge a partnership with Karvy which is one of the largest financial services group serving over 60 million investors and provides investor services to over 400 corporate houses in the country. Karvy Fortune already has a huge network of franchisees, with presence in 330 cities, and a total of 787 business associates all over India. Karvy Fortune is constantly on the lookout for hard working, ambitious individuals who would like to build a robust business without the usual hassles associated with starting an enterprise. As a business partner of Karvy Fortune you get to be a part of an established broking house, which is hugely successful in providing financial services to millions of customers. The risk reward ratio for the individual/ enterprise becoming a franchisee is also very low considering this is an already established business model and a brand name that has great value in the financial markets in India. In addition, as a franchisee owner one can focus on your core skills in running a business, without the need to assemble a team of specialists from scratch, as the company provides them with the technical and fundamental support and training.

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The burgeoning stock market is offering a never before opportunity for the broking business and a franchisee could use this opportunity to establish a profitable business.

INVESTMENT BANKING Recognized as a leading merchant banker in the country, we are registered with SEBI as a Category I merchant banker. We have built up a reputation as an able merchant banker over the years by capitalizing on opportunities in corporate consolidation, mergers & acquisitions, corporate restructuring and capital raising (including raising resources for corporates or the government). Our success over the past two decades has given us the confidence to focus in this sector with renewed vigor. The high-quality professional team and our work-oriented dedication have propelled us to offer value-added corporate financial services and serve as a professional navigator for the long-term growth of our clients which include leading corporates, state governments, foreign institutional investors, and public and private sector companies and banks in Indian and global markets. Our advisory and consultancy roles in restructuring, divestitures, acquisitions, de-mergers, spin-offs, joint ventures, privatization and takeover defense mechanisms have elevated our relationship with the client to one based on unshakable trust and confidence.

COMMODITIES BROKING An ISO 9001:2008 certified company, KarvyComtrade Limited (KCTL) is India’s leading commodities brokerage house. We have membership of Multi Commodity Exchange of India (MCX), National Commodity and Derivatives Exchange (NCDEX), National MultiCommodity Exchange of India (NMCE), National Spot Exchange (NSEL), NCDEX Spot Exchange (NSPOT), Ace Commodity Exchange (ACE) and Indian Commodity Exchange (ICEX). We are one of the early players in this business and have built a very strong research which is widely acknowledged across our customer base be it the corporates or the traders who comprise our prime customer segment. We are by far the only commodity trading entity who have a presence in the wholesale markets where the commodities are auctioned purely to get a very strong sense on the demand supply for most of the agricultural products...

NON - BANKING FINANCIAL SERVICE Karvy Finance, an NBFC established in 2009, is primarily focused on Micro & Small Enterprise Secured Business Loans with Loan against Property, Loan against Gold & Loan for Small Commercial Vehicles. Karvy Finance believes in serving the underserved business customers in India’s market for all their loan needs with a network of 75 neighborhoodlending branches in 35 locations. Karvy Finance aims to provide Fast, Friendly & Flexible loan services to its target audience 59

Keeping in line with Karvy credo to be a leading and preferred financial services provider, our focus at Karvy Finance is to provide the complete spectrum of financial services products to our customers and build a strong nationwide distribution footprint to emerge as the leader in Micro, Small & Medium Enterprise segments in India. At Karvy Finance, we recognize your self-worth and help in growing your net worth and achieving your dreams on your own terms..

REALTY SERVICES Karvy’s Realty services is engaged in the business of value-added real estate and property services. We offer individuals and corporates myriad options across investments, financing and advisory services in the realty sector. Building on the Karvy brand as a leading industry benchmark for world-class customer servicing and quality standards, we bring forth a reputation for reliability, dependability and honesty. We have a deep understanding of the sector, and, therefore, the needs and preferences of our clients. Our team of qualified realty professionals facilitates long-term relationships with buyers and sellers of properties alike across the country, thus enabling clients to put their money in genuine properties for a decent value appreciation at the right place and at the right price..

REGISTRY SERVICES Karvy Computershare is a 50:50 joint venture between Karvy and Australia-based Computershare – the world’s largest transfer agent. Karvy Computershare is the largest registrar in India, servicing over 70 million investor accounts spread over 1,300 issuers including banks, PSUs and mutual funds. Karvy Computershare has a workforce of around 4,000 experienced professionals drawn from various disciplines. The worldwide network of Computershare will hold us in good stead by keeping us abreast of the international standards, in addition to letting us leverage the best technologies from around the world. 

Issue registry

Karvy Computershare (KCPL) has emerged as the largest transaction-processing house in the Indian corporate sector, mobilising funds for numerous companies. Our ability to execute voluminous transactions and our hardcore expertise in technology applications has gained us the No.1 slot in our field of business. We are India’s first registry to receive ISO 9002 certification and have now migrated to the ISO 9001:2008 standard for quality management systems, certified by Norwegian company DNV . We have also been awarded ISO 27001:2013 certification by DNV, for high standards with respect to information security and management systems, which stands testimony to our insistence on customer service excellence. In addition to our unique investor servicing presence across all phases of a public 60

issue, we at KCPL are actively coordinating with both depositories (NSDL and CDSL) to develop special models that enable customers to access depository services during an IPO. 

Corporate Shareholder Services

KCPL has been a customer-centric company since inception. We offer a single platform to service multiple financial instruments, in our bid to satisfy the varying needs of both corporates and their retail investors. In that regard, our volume-management capability is legendary. Today, we are recognised as a company that exceeds customer expectations, which is a prime reason for the strong customer loyalty we generate. An opinion poll commissioned by The Merchant Banker Update and conducted by the reputed market research agency MARG found KCPL the “Most Admired” registrar among financialservices companies. 

Mutual Fund Services

KCPL has attained a position of immense strength as a provider of across-the-board transfer agency services to asset management companies (AMCs), distributors and investors. Nearly 40% of India’s AMCs leverage our range of high-quality services. Besides providing the entire back-office processing, we are an interface between the AMC and the investor. Carrying our ‘limitless’ ideology forward, we have explored new dimensions in every aspect of mutual fund servicing, from volume management, cost-effective pricing, delivery in the least turnaround time and efficient back-office and front-office operations, to strong customised service. KCPL has been with AMCs every step of the way, helping them to serve investors better by offering a diverse range of customised services. Our ‘first-to-market’ approach has earned us the reputation of an innovative service provider with a visionary bent of mind

FOREX & CURRENCIES Forex and currencies is another business vertical of the Karvy group to venture into Trade and Corporate Finance Segment, Forex Corporate Advisory Services. The company has been registered with FEDAI. We offer syndication services to the Indian clients in the area of Buyers and Suppliers Credit Services. External Commercial Borrowings, Working capital arrangement, Bill Discounting & Short Term Investment options etc. Intermediary services in Forex interbank broking and help companies/ corporates/individuals to explore extra-ordinary opportunities, manage and sustain growth, and maximize their revenue by minimizing the risks in Forex transactions.

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INSURANCE REPOSITORY Karvy Insurance Repository (Kinrep) is a licensed Insurance Repository in India. Kinrep has been offering various life and general insurance companies since 2008. Kinrep has completely home grown mature business applications to cater to the in house team as well as clients. Karvy Insurance Repository is a leader in transforming and managing business processes using a blend of cutting edge technology and refined practices. Kinrep has wide network of 500 branches across the length and breadth of the country. Kinrep is the first insurance repository to offer full suite of services to insurers, policy holders and agents of life insurance on a variety of mobile / tablet platforms including the conventional ones. Kinrep brings over 2000 man-years of pooled BPO experience with over 100 man-years in the Insurance industry. Kinrep offers the best in class security to insurers with ISO 27001 certified processes ,fully owned branch network and fortified IT and operational controls..

NON FINANCIAL SERVICES DATA MANAGEMENT SERVICES Data Management Services offers services in the areas of E-governance processing, insurance back office processing, record keeping, back office for BFSI clientele and telecom, data management requirements of large corporations. 

E- Governance

In today’s world where governments are gearing up to the ever growing needs of the citizens and scaling to reach their mission, we offer a unique value proposition and present our bouquet of services... More 

Telecom

At a time when telecom companies are looking to grow beyond the boundaries with minimum input costs, with our pedigree and footprint in the country we are offering solutions to help them grow. The service offerings spectrum has been designed in such a way so that an end to end model is offered... More 

Banking

Banks and financial services companies are looking to penetrate into deeper untapped markets. We are helping these companies to reach the potential markets with our wide array of services. Here we have designed our service spectrum in such a way that it is focused for for each product category in order to help you ascertaining the services you need... More 62

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KYC Registrations

With a view to bring uniformity and remove duplication efforts in the KYC requirements for the securities markets, SEBI has introduced the SEBI KYC Registration Agency (KRA) Regulations, 2011...

INTERNATIONAL BUSINESS Karvy Global is a leading Business Process and Knowledge Services Company, focuses on delivering knowledge based business solutions for its clients and provides an innovative framework of solutions that are directly tied to improving bottom line results. We serve investment banks, insurance providers, brokerages, hedge funds, research agencies, and life settlement providers across the United States, Middle East, and Europe. Our clients have found their cost advantage, ability to scale efforts, and specialist knowledge regarding emerging markets to be a strong advantage in the new, fast, and unpredictable world. Our areas of focus include equity research, investment banking support, commodity research, business research and specialized transaction processing services in BFSI & Healthcare verticals.

MARKET RESEARCH Karvy Insights (KI, pronounced ‘key’), is the market research arm of the Karvy Group. It is a full-service market research and insights organization, offering both Qualitative and Quantitative research solutions across sectors like CPG, Automotive, Finance, Retail/ e-comm, Telecom, Infrastructure, Social research to name a few. KI is all about discovering different facets of life in all its nuances, detail and complexities. Its vision is to offer 'operative' intelligence to facilitate growth in every sphere, person and business. So whether it is about shopping behavior/ touch point audits, education choices, healthcare practices, high value spends on luxury items or about regular day-to-day choices of products, KI can support you.

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ANALYTICS Karvy Analytics is building world-class solutions for the global analytics universe. Its solutions bring immediate business benefits to global customers interested in leveraging big data, statistical and mathematical modeling techniques, social analytics, and mobile descriptive analytics for new business insights. Karvy Analytics is focused on multi-industry use cases for companies that need technology and professional services for their functional and operational analytics projects. It has partnerships with the world’s leading brands to ensure a strong and supportive eco

4. CONCEPTUAL FRAMEWORK DERIVATIVES INSTRUMENTS IN INDIA: The first derivative product to be introduced in the Indian securities market is going to be "INDEX FUTURES". In the world, first index futures were traded in U.S. on Kansas City Board of Trade (KCBT) on Value Line Arithmetic Index (VLAI) in 1982. Organized exchanges began trading options on equities in 1973, whereas exchange traded debt options did not appear until 1982, on the other hand fixed income futures began trading in 1975, but equity related futures did not begin until 1982.

DEFINITION OF DERIVATIVES: “Derivative is a product whose value is derived from the value of an underlying asset in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset”. 

Securities Contracts (Regulation) Act, 1956 (SCR Act) defines “debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security.

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

A contract which derives its value from the prices, or index of prices, of underlying securities.

GROWTH OF DERIVATIVES: Over the last three decades, the derivatives markets have seen a phenomenal growth. A large variety of derivative contracts have been launched at exchanges across the world. Some of the factors driving the growth of financial derivatives are:     

Increased volatility in asset prices in financial markets. Increased integration of national financial markets with the international markets. Marked improvement in communication facilities and sharp decline in their costs. Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies, and Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets leading to higher returns, reduced risk as well as transaction costs as compared to individual financial assets.

HISTORY OF DERIVATIVES MARKET: Early forward contracts in the US addressed merchants concerns about ensuring that there were buyers and sellers for commodities. However “credit risk” remained a serious problem. To deal with this problem, a group of Chicago; businessmen formed the Chicago Board of Trade (CBOT) in1848. The primary intention of the CBOT was to provide a centralized location known in advance for buyers and sellers to negotiate forward contracts. In 1865, the CBOT went one step further and listed the first “exchange traded” derivatives contract in the US; these contracts were called “futures contracts”. In 1919, Chicago Butter and Egg Board, a spin-off CBOT was reorganized to allow futures trading. Its name was changed to Chicago Mercantile Exchange (CME). The CBOT and the CME remain the two largest organized futures exchanges, indeed the two largest “financial” exchanges of any kind in the world today. The first stock index futures contract was traded at Kansas City Board of Trade. Currently the most popular stock index futures contract in the world is based on S&P 500 indexes, traded on Chicago Mercantile Exchange. 65

During the Mid eighties, financial futures became the most active derivative instruments generating volumes many times more than the commodity futures. Index futures, futures on T-bills and Euro-Dollar futures are the three most popular futures contracts traded today. Other popular international exchanges that trade derivates are LIFFE in England, DTB in Germany, SGX in Singapore, TIFFE in Japan MATIF in France, Eurexetc.

THE DEVELOPMENT OF DERIVATIVES: Holding portfolios of securities is associated with the risk of the possibility that the investor may realize his returns, which would be much lesser than what he expected to get. There are various factors, which affect the returns: 1. Price or dividend (interest) 2. Some are internal to the firm like    

Industrial policy Management capabilities Consumer’s preference Labour strike, etc. These forces are to a large extent controllable and are termed as non systematic risks. An investor can easily manage such non-systematic by having a welldiversified portfolio spread across the companies, industries and groups so that a loss in one may easily be compensated with a gain in other. There are yet other of influence which are external to the firm, cannot be controlled and affect large number of securities. They are termed as systematic risk. They are: 1. Economic 2. Political 3. Sociological changes are sources of systematic risk. For instance, inflation, interest rate, etc. their effect is to cause prices of nearly all-individual stocks to move together in the same manner. We therefore quite often find stock prices falling from time to time in spite of company’s earnings rising and vice versa. Rational Behind the development of derivatives market is to manage this systematic risk, liquidity in the sense of being able to buy and sell relatively large amounts quickly without substantial price concession. In debt market, a large position of the total risk of securities is systematic. Debt 66

instruments are also finite life securities with limited marketability due to their small size relative to many common stocks. Those factors favor for the purpose of both portfolio hedging and speculation, the introduction of a derivatives securities that is on some broader market rather than an individual security.

FUNCTIONS OF THE DERIVATIVE MARKETS: In spite of the fear and criticism with which the derivative markets are commonly looked at, these markets perform a number of economic functions. 

Prices in an organized derivatives market reflect the perception of market participants about the future and lead the price of underlying to the perceived future level. The prices of derivatives converge with the prices of the underlying at the expiration of the derivative contract. Thus derivatives help in discovery of future as well as current prices.



Derivatives market helps to transfer risks from those who have them but may not like them to those who have an appetite for them.

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Derivative due to their inherent nature, are linked to the underlying cash markets. With the introduction of derivatives, the underlying market witness higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk.



Speculative trades shift to a more controlled environment of derivatives market. In the absence of an organized derivatives market, speculators trade in the underlying cash markets. Margining, Monitoring and surveillance of the activities of various participants become extremely difficult in these kinds of mixed markets.

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An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. The derivatives have a history of attracting many bright, creative, Well-educated people with an entrepreneurial attitude. They often energize others to create new businesses, new products and new employment opportunities, the benefit of which are immense.



Derivatives trading acts as a catalyst for new entrepreneurial activity.

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Derivatives markets help increase saving and investment in long run.

REGULATION FOR DERIVATIVES TRADING: 67

SEBI set up a 24-member committee under Chairmanship of Dr.L.C. Gupta to develop the appropriate regulatory framework for derivatives trading in India. The committee submitted its report in March 1998. On May 11, 1998 SEBI accepted the recommendations of the committee and approved the phased introduction of derivatives trading in India beginning with stock index futures. SEBI also approved the “suggestive bye-laws” recommended by the committee for regulation and control of trading and settlement of derivatives contracts. The provisions in the SC(R) A and the regulatory framework developed there under govern trading in securities. The amendment of the SC(R) A to include derivatives within the ambit of ‘securities’ in the SC(R) A made trading in derivatives possible within the framework of the Act. 1. Any exchange fulfilling the eligibility criteria as prescribed in the L C Gupta committee report may apply to SEBI for grant of recognition under Section 4 of the SC(R) a, 1956 to start trading derivatives. The derivatives exchange/segment should have a separate governing council and representation of trading / clearing members shall be limited to maximum of 40% of the total members of the governing council. The exchange shall regulate the sales practices of its members and will obtain approval of SEBI before start of trading in any derivative contract. 2. The exchange shall have minimum 50 members. 3. The members of an existing segment of the exchange will not automatically become the members of derivative segment. The members of the derivative segment need to fulfill the eligibility conditions as laid down by the L C Gupta committee. 4. The clearing and settlement of derivatives trades shall be through a SEBI approved clearing corporation / house. Clearing corporation / houses complying with the eligibility conditions as laid down by the committee have to apply to SEBI for grant of approval. 5. Derivative brokers/dealers and clearing members are required to seek registration from SEBI. 6. The minimum contract value shall not be less than Rs. 2 Lakh. Exchanges should also submit details of the futures contract they propose to introduce. 7. The trading members are required to have qualified approved user and sales person who have passed a certification programme approved by SEBI. While from the purely regulatory angle, a separate exchange for trading would be a better arrangement. Considering the constraints in infrastructure facilities, the existing stock (cash) exchanges may also be permitted to trade derivatives subject to the following conditions. 1.Trading should take place through an on-line screen based trading system. 2.An independent clearing corporation should do the clearing of the derivative market.

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3.The exchange must have an online surveillance capability, which monitors positions, price and volumes in real time so as to deter market manipulation price and position limits should be used for improving market quality. 4.Information about trades quantities, and quotes should be disseminated by the exchange in the real time over at least two information-vending networks, which are accessible to investors in the country. 5.The exchange should have at least 50 members to start derivatives trading. 6.The derivatives trading should be done in a separate segment with separate membership; That is, all members of the cash market would not automatically become members of the derivatives market. 7.The derivatives market should have a separate governing council which should not have representation of trading by clearing members beyond whatever percentage SEBI may prescribe after reviewing the working of the present governance system of exchanges. 8.The chairman of the governing council of the derivative division / exchange should be a member of the governing council. If the chairman is broker / dealer, then he should not carry on any broking or dealing on any exchange during his tenure. 9.No trading/clearing member should be allowed simultaneously to be on the governing council both derivatives market and cash market.

TYPES OF DERIVATIVES: 1. Equity Derivatives (security Derivatives):  Index Future & Option  Stock Future & Option 2. Financial Derivatives:  Equity Derivatives  Forex currency future  Interest rate future 3. Underlying Asset or Derivatives:  Financial Derivatives  Commodities 69



Any other asset

DIFFERENCE BETWEEN FUTURE MARKET & OPTION MARKET:        

A future contract buyer give the right but obligation to buy A future contract seller give the right but obligation to sell Call gives the buyer the right, but not obligation to sell Put gives to buyer the right, but not obligation to sell Call gives the seller option premium, but obligation to sell Put gives to seller option premium, but obligation to buy Value of option increase, when volatility increase Value of option decrease, when volatility decreases.

TYPES OF DERIVATIVES: The following are the various types of derivatives, explained below: FORWARDS: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price. FUTURES: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange traded contracts. OPTIONS: Options are of two types-calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a give future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. WARRANTS: Options generally have lives of up to one year; the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the counter. LEAPS:

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The acronym LEAPS means long-term Equity Anticipation securities. These are options having a maturity of up to three years. BASKETS: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average of a basket of assets. Equity index options are a form of basket options. SWAPS: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used Swaps are:  

INTREST RATE SWAPS: These entail swapping only the related cash flows between the parties in the same currency. CURRENCY SWAPS: These entail swapping both principal and interest between the parties, with the cash flows in on direction being in a different currency than those in the opposite direction. SWAPTION: Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has received swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and received floating.

PARTICIPANTS IN THE DERIVATIVE MARKETS: The following three broad categories of participants:

HEDGERS: Hedgers face risk associated with the price of an asset. They use futures or options markets to reduce or eliminate this risk.

SPECULATORS: Speculators wish to bet on future movements in the price of an asset. Futures and options contracts can give them an extra leverage; that is, they can increase both the potential gains and potential losses in a speculative venture.

ARBITRAGERS: 71

Arbitrageurs are in business to take of a discrepancy between prices in two different markets, if, for, example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting position in the two markets to lock in a profit.

INTRODUCTION OF FUTURES: Futures markets were designed to solve the problems that exist in forward markets. A futures contract is an agreement between two parties to buy or sell an asset as a certain time in the future at a certain price. But unlike forward contract, the futures contracts are standardized and exchange traded. To facilitate liquidity in the futures contract, the exchange specifies certain standard underlying instrument, a standard quantity and quality of the underlying instrument that can be delivered, (or which can be used for reference purpose in settlement) and a standard timing of such settlement. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. More than 90% of futures transactions are offset this way. The standardized items in a futures contract are:     

Quantity of the underlying Quality of the underlying The date and the month of delivery The units of price quotation and minimum price change Location of settlement

DEFINITION: A future contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts.

FEATURES OF FUTURES:    

Futures are highly standardized. The contracting parties need not pay any down payments. Hedging of price risks. They have secondary markets to.

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TYPES OF FUTURES: On the basis of the underlying asset they derive, the futures are divided into two types:  Stock futures  Index futures

DISTINCTION BETWEEN FUTURES & FORWARDS CONTRACTS: Forward contracts are often confused with futures contracts. The confusion is primarily because both serve essentially the same economic functions of allocating risk in the presence of futures price uncertainty. However futures are a significant improvement over the forward contracts as they eliminate counterparty risk and offer more liquidity. Comparison between two as follows: FUTURES FORWARDS 1. 2. 3. 4. 5.

Trade on an Organized Exchange Standardized More Liquidity Require Margin payment Follows daily settlement

1. 2. 3. 4. 5.

OTC in nature Customized Less Liquidity No Margin Payment Settlement happens at end of Period

Table : 4.1

FUTURES TERMINOLOGY:   

 

SPOT PRICE: The price at which an asset trades in the spot market. FUTURES PRICE: The price at which the futures contract trades in the futures market.3 CONTRACT CYCLE: The period over which contract trades. The index futures contracts on the NSE have one-month, two–month and three-month expiry cycle which expire on the last Thursday of the month. Thus a January expiration contract expires on the last Thursday of January and a February expiration contract ceases trading on the last Thursday of February. On the Friday following the last Thursday, a new contract having a three-month expiry is introduced for trading. EXPIRY DATE: It is the date specifies in the futures contract. This is the last day on which the contract will be traded, at the end of which it will cease to exist. CONTRACT SIZE: The amount of asset that has to be delivered under one contract. For instance, the contract size on NSE’s futures market is 50 Nifties. 73



   

BASIS: In the context of financial futures, basis can be defined as the futures price minus the spot price. These will be a different basis for each delivery month for each contract. In a normal market, basis will be positive. This reflects that futures prices normally exceed spot prices. COST CARRY: The relationship between futures prices and spot prices can be summarized in terms of what is known as the cost of carry. This measures the storage cost plus the interest that is paid to finance the asset less the income earned on the asset. INITIAL MARGIN: The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin. MARKING-TO-MARKET: In the futures market, at the end of each trading day, the margin account is adjusted to reflect the investor’s gain or loss depending upon the futures closing price. This is called marking-to-market. MAINTENANCE MARGIN: This is somewhat lower than the initial margin. This is set to ensure that the balance in the margin account never becomes negative. If the balance in the margin account falls below the maintenance margin, the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day.

INTRODUCTION OF OPTIONS: In this section, we look at the next derivative product to be traded on the NSE, namely options. Options are fundamentally different from forward and futures contracts. An option gives the holder of the option the right to do something. The holder does not have to exercise this right. In contrast, in a forward or futures contract, the two parties have committed themselves to doing something. Whereas it costs nothing (except margin requirement) to enter into a futures contracts, the purchase of an option requires as up-front payment.

DEFINITION: Option is a type of contract between two persons where one grants the other the right to buy a specific asset at a specific price within a specific time period. Alternatively the contract may grant the other person the right to sell a specific asset at a specific price within a specific time period. In order to have this right. The option buyer has to pay the seller of the option premium. The assets on which option can be derived are stocks, commodities, indexes etc. If the underlying asset is the financial asset, then the option are financial option like stock options, currency options, index options etc, and if options like commodity option.

PROPERTIES OF OPTION: 74

  

Options have several unique properties that set them apart from other securities. The following are the properties of option: Limited Loss High leverages potential Limited Life

PARTIES IN AN OPTION CONTRACT: BUYER/HOLDER/OWNER OF AN OPTION: The buyer of an option is one who by paying option premium buys the right but not the obligation to exercise his option on seller/writer.

SELLER/WRITER OF AN OPTION: The writer of the call /put options is the one who receives the option premium and is there by obligated to sell/buy the asset if the buyer exercises on him

TYPES OF OPTIONS: The options are classified into various types on the basis of various variables. The following are the various types of options. I.

ON THE BASIS OF THE UNDERLYING ASSET: On the basis of the underlying asset the option are divided into two types: 

INDEX OPTIONS: These options have the index as the underlying. Some options are European while others are American. Like index futures contract, index options contracts are also cash settled.

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STOCK OPTIONS: Stock options are options on the individual stocks. Options currently trade on over 500 stocks in the United States. A contract gives the holder the right to buy or sell shares at the specified price

II.

ON THE BASIS OF THE MARKET MOVEMENTS: 75

On the basis of the market movements the option are divided into two types. They are: 

CALL OPTION: A call option is bought by an investor when he seems that the stock price moves upwards. A call option gives the holder of the option the right but not the obligation to buy an asset by a certain date for a certain price.

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PUT OPTION: A put option is bought by an investor when he seems that the stock price moves downwards. A put option gives the holder of the option right but not the obligation to sell an asset by a certain date for a certain price.

III.

ON THE BASIS OF EXERCISE OF OPTION: On the basis of the exercised of the option, the options are classified into two categories. 

AMERICAN OPTION:

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American options are options that can be exercised at any time up to the expiration date, most exchange-traded option are American. EUOROPEAN OPTION: European options are options that can be exercised only on the expiration date itself. European options are easier to analyze than American options, and properties of an American option are frequently deduced from those of its European counterpart.

FACTORS EFFECTING THE PRICE OF AN OPTION: 

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The following are the various factors that affect the price of an option they are: Stock price: The pay–off from a call option is a amount by which the stock price exceeds the strike price. Call options therefore become more valuable as the stock price increases and vice versa. The pay-off from a put option is the amount; by which the strike price exceeds the stock price. Put options therefore become more valuable as the stock price increases and vice versa. Strike price: In case of a call, as a strike price increases, the stock price has to make a larger upward move for the option to go in-the-money. Therefore, for a call, as the strike price increases option becomes less valuable and as strike price decreases, option become more valuable. 76

   

Time to expiration: Both put and call American options become more valuable as a time to expiration increases. Volatility: The volatility of a stock price is measured of uncertain about future stock price movements. As volatility increases, the chance that the stock will do very well or very poor increases. The value of both calls and puts therefore increase as volatility increase. Risk-free interest rate: The put options prices decline as the risk-free rate increases where as the prices of call always increase as the risk-free interest rate increases. Dividends: Dividends have the effect of reducing the stock price on the x-dividend rate. This has a negative effect on the value of call options and a positive effect on the value of put options.

DIFFERENCES BETWEEN FUTURES & OPTIONS: FUTURES 1.Exchange traded, with Novation 2.Exchange defines the product 3.Price is zero, strike Price moves 4.Price is zero 5.Linear payoff 6.Both long & Short at risk

OPTIONS 1.Same in nature 2.Same in nature 3.Strike price is fixed, price moves 4.Price is always positive 5.Nonlinear payoff 6.only short at risk

Table : 4.2

5.DATA ANALYSIS & INTERPRETATION: The Objective of this analysis is to evaluate the profit/loss position futures and options. This analysis is based on sample data taken of M/s. KOTAK STOCK BROCKING LIMITED scrip. This analysis considered the May contract of kotak. The lot size of kotak is 100, the time period of the analysis is, from 11-05-2012 to30-06-2012. Table : 5.1 KOTAK STOCK FUTURES & OPTIONS PRICE

CALL OPTION

(2)

(3)

PUT OPTION

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DATES

(4)

(1)

May/fri/11 May/sat/12 May/sun/13 May/mon/14 May /tue/15 May /wed/16 May /thu/17 May /fri/18 May/sat/19 May/sun/20 May/mon/21 May /tue/22 May /wed/23 May/thu/24 May /fri/25 May /sat/26 May/sun/27 May/mon/28 May/tue/29 May/wed/30 May/thu/31 Jun/fri/01

Jun/sat/02 Jun/sun/03

SPOT

FUTURE

740

742.00 742.80

738.85 740.20

780.00 785.00 815.55 848.00 845.00 776.55

770.05 822.95 823.15 855.70 848.75 774.55

767.70 700.00 685.00 690.00 711.00 722.00

712.30 685.40 692.50 696.85 716.65 724.45

707.05 695.00 697.00 660.00 640.10

704.05 682.90 660.65 634.80 637.10

48.45 25.35 14.00 65.15 30.35 17.00 TRADING HOLIDAY 55.25 32.25 16.30 94.00 51.80 31.90 108.20 55.15 32.80 0 75.80 48.50 123.00 71.35 42.25 0 32.60 19.05 TRADING HOLIDAY 38.55 16.95 8.60 24.15 11.55 8.00 24.70 9.80 8.40 21.55 9.05 0 23.80 8.80 0 22.75 8.00 0 TRADING HOLIDAY 15.95 6.70 0 31.00 77.00 13.00 3.50 1.05 0 0.90 0.75 1.05 0.55 0.20

645.00

673.25

1.20

800

0.20

840

740

800

840

47.50 30.15

0 0

0 0

30.95 4.80 13.00 7.65 8.90 26.3

64.95 30.55 31.55 20.10 20.25 53.75

0 0 0 44.65 36.55 72.75

60.00 73.00 0 0 0 0

101.0 130.0 0 0 0 0

0 0 0 0 0 0

0 0 105.5 0

0 0 0 0

0 0 0 0

0

0

0

0

0

0

0

0

0

0

0

TRADING HOLIDAY Jun/mon/04

681.35

661.45

0.05

0.05

0.05

78

TABLE DETAILS: 

The first column explains TRADING DATE.



Second Column (a) explains the SPOT MARKET PRICE in cash segment on that date of Opening Balance of Equity Amount.



Second column (b) explains the FUTURE MARKET PRICE in cash segment on that date of Closing Balance on Future Market Amount.



The Third column explains call Option premiums amounting 740, 800, 840.



The Fourth column explains Put Option premiums amounting 740, 800, 840.

OBSERVATIONS & FINDINGS: CALL OPTION:  BUYERS PAY OFF: As brought 1 lot of KOTAK that is 100, those who buy for 740, paid 48.45 premiums per share. Settlement price is 681.35 Spot price 681.35 Strike price 740.00 Amount -58.65 Premium paid (-) 48.45 Net Loss -10.20 x 100 = -1020 Buyer Loss = Rs.1020 (Loss) Because it is negative it is in the money contract, hence buyer will get more loss, incase spot price decrease buyer loss also increase.

 SELLERS PAY OFF: It is in the money for the buyer, so it is in out of the money for seller; hence his profit is also increase. Strike price

740.00 79

Spot price 681.35 Amount +58.65 Premium Received 48.45 Net profit 10.20 x 100 = +1020 Seller Profit = Rs.1020 (Net Amount) Because it is positive it is out of the money, hence seller will get more profit, incase spot price increase in below strike price, seller get loss in premium level

80

OBSERVATIONS & FINDINGS: PUT OPTION:  BUYERS PAY OFF: Those who have purchase put option at a strike price of 740, the premium payable is 47.50 On the expiry date the spot market price enclosed at 681.35 Strike price Spot price Net pay off

740.00 681.35 58.65 x 100 = 5865

Already, premium paid 48.45, so it can get profit is 5865 Because it is Positive, out of the money contract, hence buyer will get more profit, incase spot price increase buyer get loss in premium level.

 SELLERS PAY OFF: As seller is entitled only for premium so, if he is in profit and also seller has to borne total profit. Spot price Strike price Amount

681.35 740.00 -58.65 x100 =-5865

Already premium received 48.45 so, it can get loss is 5865 Because it is negative, in the money contract, Hence seller gets more loss, incase spot price increase in above strike price seller can get profit in premium level.

81

ANALYSIS OF FUTURE PRICES: The Objective of this analysis is to evaluate the profit/loss position futures and options. This analysis is based on sample data taken of M/s. KOTAK STOCK BROCKING LIMITED scrip. This analysis considered the May contract of KOTAK. The lot size of KOTAK is 100, the time period of the analysis is, from 11-05-2012 to 30-06-2012 Table : 5.2 DATE FUTURE PRICE MAY/FRI/11 MAY/SAT/12 MAY/MON/14 MAY /TUE/15 MAY /WED/16 MAY /THU/17 MAY /FRI/18 MAY/SAT/19 MAY/MON/21 MAY /TUE/22 MAY /WED/23 MAY/THU/24 MAY /FRI/25 MAY /SAT/26 MAY/MON/28 MAY/TUE/29 MAY/WED/30 MAY/THU/31 JUN/FRI/01 JUN/SAT/02 JUN/MON/04

738.85 740.20 770.05 822.95 823.15 855.70 848.75 774.55 712.30 685.40 692.50 696.85 716.65 724.45 704.05 682.90 660.65 634.80 637.10 673.25 661.45

Figure : 5.1

82

FUTURE MARKET: BUYER 11/05/2012(Buying)

SELLER

738.85

04/06/2012(Cl., period)

738.85 681.35

Loss

681.35 57.00

Profit

57.00

Profit 100 x57.00=5700, Loss 100 x 57.00=5700 Because buyer future price will decrease so, he can get loss. Seller future price also decrease so, profit also increase, In case seller future will increase, and he can get loss. The closing price of “Mahindra Satyam” formerly “Satyam Computer services”,at the end of the contract period is 681.35 and this is considered as settlement price.

DATA OF KOTAK – THE FUTURES & OPTIONS OF THE MAY – JUNE MONTH 2012: DATE MAY/FRI/11 MAY/SAT/12 MAY/MON/14 MAY /TUE/15 MAY /WED/16 MAY /THU/17 MAY /FRI/18 MAY/SAT/19 MAY/MON/21 MAY /TUE/22 MAY /WED/23 MAY/THU/24 MAY /FRI/25 MAY /SAT/26 MAY/MON/28

Table : 5.3 SPOT PRICE 742.00 742.80 780.00 785.00 815.55 848.00 845.00 776.55 767.70 700.00 685.00 690.00 711.00 722.00 707.05

FUTURE PRICE 738.85 740.20 770.05 822.95 823.15 855.70 848.75 774.55 712.30 685.40 692.50 696.85 716.65 724.45 704.05 83

MAY/TUE/29 MAY/WED/30 MAY/THU/31 JUN/FRI/01 JUN/SAT/02 JUN/MON/04

695.00 697.00 660.00 640.10 645.00 681.35

682.90 660.65 634.80 637.10 673.25 661.45

Figure : 5.2

6.CONCLUSIONS 84

OBSERVATIONS AND FINDINGS: 

The future price of M/S KOTAK STOCK moving along with the market price.



If the buy price of the future is less than the settlement price, than the buyer gets profit on futures.



If the selling price of the future is less than the settlement price, than the seller incur losses.

SUGGESTIONS: 

In bullish market the call option writer incurs more losses so the investor is suggested to go for a call option to hold, where as the put option holder suffers in a bullish market, so he is suggested to write a put option.



In bearish market the call option holder will incur more losses so the investor is suggested to go for a call option to write, where as the put option writer will get more losses, so he is suggested to hold a put option.



In the above analysis the market price of M/S.KOTAK is having low volatility, so the call option writers enjoy more profits to holders.



The derivative market is newly started in India and it is not known by every investor, so SEBI has to take steps to create awareness among the investors about the derivative segment.



In order to increase the derivatives market in India, SEBI should revise some of their regulations like contract size, participation of FII in the derivatives market.



Contract size should be minimized because small investors cannot afford this much of huge premiums.



SEBI has to take further steps in the risk management mechanism.



SEBI has to take measures to use effectively the derivatives segment as a tool of hedging.

CONCLUSIONS:

85



Derivatives market is an innovation to cash market. Approximately its daily turnover reaches to the equal stage of cash market. The average daily turnover of the NSE derivative segments



In cash market the profit/loss of the investor depends on the market price of the underlying asset. The investor may incur huge profits or he may incur huge loss. But in derivatives segment the investor enjoys huge profits with limited downside.



In cash market the investor has to pay the total money, but in derivatives the investor has to pay premiums or margins, which are some percentage of total money.



Derivatives are mostly used for hedging purpose.



In derivative segment the profit/loss of the option writer is purely depend on the fluctuations of the underlying asset.

BIBLIOGRAPHY:  BOOKS:   

Derivatives Dealers Module Work book–NCFM Financial Markets and Services–GORDAN and NATRAJAN Financial Management – PRASANNA CHANDRA

 JOURNALS:  

The journal of derivatives. International journal of financial markets & derivatives.

 NEWS PAPERS:   

Economic times The Hindu Business Standard

 MAGAZINES:   

Business Today Business World Business India 86

 WEBSITES:      

www.derivativesindia.com www.indianinfoline.com www.nseindia.com www.bseindia.com www.sebi.gov.in www.google.com

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