an overview of indian stock market-indiabuls

8/3/2019 An Overview of Indian Stock Market-Indiabuls

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JitendraVirahy

[email protected]

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A Project Report

OnAN OVERVIEW OF INDIAN STOCK MARKET

Submitted in Partial fulfillment for the award of the degree

MASTER IN BUSINESS ADMINISTRATION.

(Batch2008-2010)

Under Guidance Of, Submitted By,

Mr. C cccc vvvv

(faculty in finance)

MBA

DCTE SCHOOL OF MANAGEMENT,JP

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NNNNN

CANDIDATE DECLARATION

I solely declare that the report titled An Overview

Of Indian Stock Market is a bonafied record of

work carried by me, submitted partial fulfillment of

requirement for the award of degree Master Of Business

administration under the guidance of MR.

VVVV(FINANCE FACULTY OF DCTE

SCHOOL OF MANAGEMENT)

This research is solely the work of me based upon

questionnaire, printed material given in bibliography. The

matter embodied in this report has not been submitted for

the award of any other degree.

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Dated MR.C C C

ACKNOWLEDGEMENT

Dissertation Report is a bridge connecting the educationaland professional use. It is the path leading to success byshouldering responsibilities under the careful guidance ofseniors and experienced personnel without fear and failures.

It gives me immense pleasure to take the opportunity toremember and thanks to the personalities who are involved

with this project work during its study stage during my daysof hard work. I feel that it is my duty to express thanks anddeep gratitude to everyone who is directly or indirectlyassociated in the completion of this Dissertation Report

With deep reverence, I offer my deepest regards gratitude toMr. C Cccc Vvvv who is my finance faculti and, finance

faculty of Dcte School Of Management, without whom thisReport could not have been fulfilled.

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C C C

Executive Summary

Indian securities markets have undergone many changes during the

last decade. Exponential growth in trading volumes is pushing existing

trading systems and processes to capacity and increasing settlement

risk. With Indian market moving to a T+3 rolling settlement cycles in

line with global markets, SEBI is continuing its efforts to increase the

efficiency and transparency in Indian markets. Indeed it has been SEBI

endeavor to make the Indian markets, one of the most competitive and

efficient markets of the world.

Income, Savings mobilization and promotion of investment are

functions of the stock and capital markets which are a part of the

organized financial system in India.

This Project titled An Overview of Indian stock market is an

attempt to understand the stock market and role played by Indian retail

Brokerage Firms in stock market. The objective of brokerage firms is to

help the investor to minimize the risk involved in investment andmaximize the return. Some of the main characteristics of the brokerage

industry include growth in e-broking; growing derivatives market,

decline in brokerage fees etc.An endeavor was also made to

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understand the role played by Indiabulls Securities compared to its

competitors in Indian retail brokerage market.

The role played by Indian retail brokerage industry is of immense

significance, taking into account the health of the capital markets and

the intensity of competition among the brokerage companies.

Table of ContentsParticulars

Chapter 1 Outlook on Indian Stock market................

Chapter 2 Overview of Indiabulls..............................

Chapter 3 Overview of Indiabulls Securities..............

Chapter 4 Financial Analysis....................................

Chapter 5 Understanding Capital market..................

Chapter 6 Derivatives..............................................

Chapter 7 Competitors............................................

Chapter 8 Competitive Analysis...............................

Chapter 9 SWOT Analysis.........................................

Chapter 10 Research Methodology

Chapter 11 Findings & Suggestions..........................

Questionnare

Conclusion

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Bibliography...........................................................

Appendix................................................................

Chapter 1

OUTLOOK ON INDIAN STOCK

MARKET1.1 Introduction

Indian Stock Markets is one of the oldest in Asia. Its history dates back

to nearly 200 years ago. The earliest records of security dealings in

India are meager and obscure. The East India Company was the

dominant institution in those days and business in its loan securities

used to be transacted towards the close of the eighteenth century.

By 1830's business on corporate stocks and shares in Bank and Cotton

presses took place in Bombay. Though the trading list was broader in

1839, there were only half a dozen brokers recognized by banks and

merchants during 1840 and 1850. The 1850's witnessed a rapid

development of commercial enterprise and brokerage business

attracted many men into the field and by 1860 the number of brokers

increased into 60. In 1860-61 the American Civil War broke out and

cotton supply from United States to Europe was stopped; thus, the

'Share Mania' in India began. The number of brokers increased to

about 200 to 250.

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At the end of the American Civil War, the brokers who thrived out of

Civil War in 1874, found a place in a street (now appropriately called as

Dalal Street) where they would conveniently assemble and transact

business. In 1887, they formally established in Bombay, the "Native

Share and Stock Brokers' Association, which is alternatively

known as The Stock Exchange". In 1895, the Stock Exchange

acquired a premise in the same street and it was inaugurated in 1899.

Thus, the Stock Exchange at Bombay was consolidated.

The Indian stock market has been assigned an important place in

financing the Indian corporate sector. The principal functions of the

stock markets are enabling mobilizing resources for investment directly from the

investors

providing liquidity for the investors and monitoring

Disciplining company management.

The two major stock exchanges in India are National Stock Exchange

(NSE) and Bombay Stock Exchange (BSE).

1.2 National Stock Exchange

With the liberalization of the Indian economy, it was found inevitable to

lift the Indian stock market trading system on par with the international

standards. On the basis of the recommendations of high powered

Pherwani Committee, the National Stock Exchange was incorporated in

1992 by Industrial Development Bank of India, Industrial Credit and

Investment Corporation of India, Industrial Finance Corporation of India,

all Insurance Corporations, selected commercial banks and others.

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The National Stock Exchange (NSE) is India's leading stock

exchange covering various cities and towns across the country. NSE

was set up by leading institutions to provide a modern, fully automated

screen-based trading system with national reach. The Exchange has

brought about unparalleled transparency, speed & efficiency, safety

and market integrity. It has set up facilities that serve as a model for

the securities industry in terms of systems, practices and

procedures.

NSE has played a catalytic role in reforming the Indian securities

market in terms of microstructure, market practices and trading

volumes. The market today uses state-of-art information technology toprovide an efficient and transparent trading, clearing and settlement

mechanism, and has witnessed several innovations in products &

services viz. demutualization of stock exchange governance, screen

based trading, compression of settlement cycles, dematerialization and

electronic transfer of securities, market of debt and derivative

instruments and intensive use of information technology.

Trading at NSE can be classified under two broad categories:

Wholesale debt market

Capital market

Wholesale debt market operations are similar to money market

operations - institutions and corporate bodies enter into high value

transactions in financial instruments such as government securities,

treasury bills, public sector unit bonds, commercial paper, certificate of

deposit, etc.

Capital market: A market where debt or equitysecurities are traded.

There are two kinds of players in NSE:

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Trading members

Participants

Recognized members of NSE are called trading members who trade on

behalf of themselves and their clients. Participants include trading

members and large players like banks who take direct settlement

responsibility.

Trading at NSE takes place through a fully automated screen-based

trading mechanism which adopts the principle of an order-driven

market. Trading members can stay at their offices and execute the

trading, since they are linked through a communication network. The

prices at which the buyer and seller are willing to transact will appear

on the screen. When the prices match the transaction will be

completed and a confirmation slip will be printed at the office of the

trading member.

NSE has several advantages over the traditional trading exchanges.

They are as follows:

NSE brings an integrated stock market trading network across

the nation.

Investors can trade at the same price from anywhere in the

country since inter-market operations are streamlined coupled

with the countrywide access to the securities.

Delays in communication, late payments and the malpracticesprevailing in the traditional trading mechanism can be done away

with greater operational efficiency and informational

transparency in the stock market operations, with the support of

total computerized network.

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NSE Nifty

S&P CNX Nifty is a well diversified 50 stock index accounting for 22

sectors of the economy. It is used for a variety of purposes such as

benchmarking fund portfolios, index based derivatives and index funds.

NSE came to be owned and managed by India Index Services and

Products Ltd. (IISL), which is a joint venture between NSE and CRISIL.

IISL is India's first specialised company focused upon the index as a

core product. IISL have a consulting and licensing agreement with

Standard & Poor's (S&P), who are world leaders in index services.CNX

stands for CRISIL NSE Indices. CNX ensures common branding of

indices, to reflect the identities of both the promoters, i.e. NSE and

CRISIL. Thus, 'C' stands for CRISIL, 'N' stands for NSE and X stands for

Exchange or Index.The S&P prefix belongs to the US-based Standard &

Poor's Financial Information Services.

1.3 Bombay Stock Exchange

The Bombay Stock Exchange is one of the oldest stock exchanges in

Asia. It was established as "The Native Share & Stock BrokersAssociation" in 1875. It is the first stock exchange in the country to

obtain permanent recognition in 1956 from the Government of India

under the Securities Contracts (Regulation) Act, 1956. The Exchange's

pivotal and pre-eminent role in the development of the Indian capital

market is widely recognized and its index, SENSEX, is tracked

worldwide.

SENSEX

The Stock Exchange, Mumbai (BSE) in 1986 came out with a stock

index that subsequently became the barometer of the Indian stock

market.

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SENSEX is not only scientifically designed but also based on globally

accepted construction and review methodology. First compiled in 1986,

SENSEX is a basket of 30 constituent stocks representing a sample

of large, liquid and representative companies. The base year of SENSEX

is 1978-79 and the base value is 100. The index is widely reported in

both domestic and international markets through print as well as

electronic media

The Index was initially calculated based on the "Full Market

Capitalization" methodology but was shifted to the free-float

methodology with effect from September 1, 2003. The "Free-float

Market Capitalization" methodology of index construction is regardedas an industry best practice globally. All major index providers like

MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float

methodology.

Due to is wide acceptance amongst the Indian investors; SENSEX is

regarded to be the pulse of the Indian stock market. As the oldest index

in the country, it provides the time series data over a fairly long period

of time. Small wonder, the SENSEX has over the years become one of

the most prominent brands in the country.

The SENSEX captured all these events in the most judicial manner. One

can identify the booms and busts of the Indian stock market through

SENSEX.

The launch of SENSEX in 1986 was later followed up in January 1989 by

introduction of BSE National Index (Base: 1983-84 = 100). It comprised

of 100 stocks listed at five major stock exchanges. The Exchange

launched dollar-linked version of BSE-100 index i.e. Dollex-100 on May

22, 2006.

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In order to fulfill the need of the market participants for still broader,

segment-specific and sector-specific indices, the Exchange has

continuously been increasing the range of its indices. The launch of

BSE-200 Index in 1994 was followed by the launch of BSE-500 Index

and 5 sectoral indices in 1999. In 2001, BSE launched the BSE-PSU

Index, DOLLEX-30 and the country's first free-float based index - the

BSE TECK Index. The Exchange shifted all its indices to a free-floatmethodology (except BSE PSU index) in a phased manner.

The values of all BSE indices are updated every 15 seconds during the

market hours and displayed through the BOLT system, BSE website and

news wire agencies.

All BSE-Indices are reviewed periodically by the "Index Committee" of

the Exchange.

Chapter 2

OVERVIEW OF INDIABULLS

2.1 Introduction

Indiabulls is Indias leading Financial and Real Estate Company with a

wide presence throughout India. Indiabulls Financial Services Limited

was established in the year 2000 by three promoters all of whom are

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engineers from Indian Institute of Technology, New Delhi, and has

attracted over Rs 700 million of investments from venture capital firms,

private equity funds and institutional investors.

History

Indiabulls Financial Services Limited was incorporated on January

10, 2000 as Orbis Infotech Private Limited at New Delhi.

The name of the Company was changed to Indiabulls Financial

Services Private Limited on March 16, 2001 due to change in the

main objects of our Company from Infotech business to

Investment & Financial Services business.

It became a Public Limited Company on February 27, 2004 and

the name of the Company was changed to Indiabulls Financial

Services Limited.

Indiabulls has over 640 branches all over India. The customers of

Indiabulls are more than 4,50,000 which covers from a wide range

of financial services and products from securities, derivatives

trading, depositary services, research & advisory services, consumer

secured & unsecured credit, loan against shares and mortgage &

housing finance. The company employs around 4000 Relationship

managers who help the clients to satisfy their customized financial

goals. Indiabulls entered the Real Estate business in the year 2005

with its group of companies.

Indiabulls Financial Services Ltd is listed on the National StockExchange, Bombay Stock Exchange and Luxembourg Stock

Exchange. The market capitalization of Indiabulls is around USD

2500 million (29th December 2006). Indiabulls and its group

companies have attracted USD 500 million of equity capital in

Foreign Direct Investment (FDI) since March 2000. Some of the large

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shareholders of Indiabulls are the largest financial institutions of the

world such as Fidelity Funds, Goldman Sachs, Merrill Lynch, Morgan

Stanley and Farallon Capital.

2.2 Growth of Indiabulls

Year 2000-01:

One of Indias first trading platforms was set up by Indiabulls Financial

Services Ltd. with the development of an in-house team.

Year 2001-03: The service offered by Indiabulls was increased to

include Equity, F&O, Wholesale Debt, Mutual fund, IPO

Financing/Distribution and Equity Research.

Year 2003-04: In this particular year Indiabulls ventured into

Distribution and Commodities Trading business.

Year 2004-05:This was one of the most important years in the history

of Indiabulls. In this year:

Indiabulls came out with its initial public offer (IPO) in September

2004.

Indiabulls started its Consumer Finance business.

Indiabulls entered the Indian Real Estate market and became the

first company to bring FDI in Indian Real Estate.

Indiabulls won bids for landmark properties in Mumbai.

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Securities &Derivatives

Broking

Mortgage &HousingFinance

Consumer

Financing

FinancialProducts

Distribution

SecuredFinancing

Year 2005-06: The world renowned investment banks like Merrill

Lynch and Goldman Sachs increased their shareholding in Indiabulls. It

also became a market leader in securities brokerage industry, with

around 31% share in Online Trading. The worlds largest hedge fund,

Farallon Capital and its affiliates committed Rs. 2000 million for

Indiabulls subsidiaries Viz. Indiabulls Credit Services Ltd. and Indiabulls

Housing Finance Ltd. In the same year, the Steel Tycoon Mr. LN Mittal

promoted LNM India Internet venture Ltd. acquired 8.2% stake in

Indiabulls Credit Services Ltd.

Year 2006-07: In this year, Indiabulls Financial Services Ltd. was

included in the prestigious Morgan Stanley Capital International Index

(MSCI). The company also received an in principle approval from

Government of India for development of multi product SEZ in the state

of Maharashtra.

Diversified Business Group of Indiabulls

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Fig 2.1: Diversified Business Groups of Indiabulls

2.3 IndiaBulls Subsidiaries

Indiabulls securities limited: business comprises of Securities &

Derivatives broking.

Indiabulls Credit services limited: business comprises of personal

loans, secured and unsecured loans, and housing and auto loans.

Financial products distribution: distribution of mutual funds andinsurance products.

Indiabulls commodities Pvt ltd: deals with commodity brokerage

business

Indiabulls Realities limited: is into development of Real estate and

mining.

Indiabulls housing loans: is into mortgage of properties and housing

loan business.

2.4 Organizational Structure of Indiabulls

The organizational structure of Indiabulls is Functional, which consist of

several departments.

Functioning Online: serving clients primarily through an Internet

based relationship targeted towards clients who value anytime,

anywhere access and can be serviced at low incremental costs.

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Functioning Offline:serving clients primarily through an office based

relationship targeted towards clients who value physical interaction.

Online & offline business consist of following departments

Administration

Operations & Service quality

Technology

Finance

Corporate affairs

Human resources

Marketing

Corporate communications

Legal

Department based Organizational Structure:

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Director-Online Director-Offline

FinanceCorporate

Affairs

Human

Resources

Technolog

y

Operations

&

Service

Administration

CorporateCommuni

cationLegal

Customer

ServiceRecruitment Marketing Training

Sr. Vice President

Regional Manager

Branch Manager

RelationshipManager

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Figure 2.2 Department based organizational Structure

of Indiabulls

Regional Hierarchy of Indiabulls

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Senior Vice President

Regional Manager

Branch Manager

Senior Sales Manager

Support System Sales Function

RM/SRM

ARM

Local Compliance

Officer

Back Office

Executive

Dealer

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Figure 2.3 Regional hierarchies of Indiabulls

Key Positions

Figure 2.4 Key Positions

Chairman

Real Estate

CFO & President

Securities Consumer Finance

Executive DirectorChief Executive

Officer Executive Director

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2.5 Products and Services of Indiabulls

Indiabulls offer the following products and services in the financialmarkets:

Stocks

Options and Futures

Depository Services

Commodities

Insurance Products

Mutual Funds

Bonds and Debt Products

Services

Commercial Vehicle Loans:

In April 2006 Indiabulls started Commercial Vehicle Finance under the

flagship of Indiabulls Credit Services Ltd. in order to provide refinance

to its commercial vehicle clients. Their fundamentals, competent

management and expertise in financing the transporters are pretty

sound. The companys unique market position enables it to excel in

client contentment, quick service and growthled profitability.

.Mortgage Loans:

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Indiabulls Housing Finance Ltd. which is a flagship of Indiabulls has

started lending of Mortgage Loans to prospective customers. This

company enables the home-seekers to access finance to buy their

homes. They provide different types of loans like plot loans, Loan

against Residential, Commercial and Rental Property, thereby enabling

the borrower to leverage the property owned to fund any genuine

needs be it Business Expansion, Child's Education, Child's Marriage or

for Holiday Abroad.

Consumer Finance:

Indiabulls is a retail focused organization that fulfills the credit needs of

a large percentage of population in India. The key aspect of Indiabulls

business model is to provide an extremely unique customer

experience.

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Chapter 3

OVERVIEW OF INDIABULLS SECURITIES LTD

3.1 Introduction

Indiabulls Securities Ltd is engaged in the business of Internet based

trading and is registered with SEBI as a stockbroker, trading and

clearing member of NSE, member of BSE and as a depositary

participant with National Securities Depository Limited (NSDL) and

Central Depository Services (India) Limited (CDSL). ISL is also a

member of the National Securities Clearing Corporation Limited.

History

Indiabulls Securities Limited (ISL) was incorporated as GPF Securities

Private Limited on June 9, 1995.

The name of the company was changed to Orbis Securities Private

Limited on December 15, 1995 to change the profile of the company

and subsequently due to the conversion of the company into a public

limited company; the name was further changed to Orbis Securities

Limited on January 5, 2004.

The name of the company was again changed to Indiabulls Securities

Limited on February 16, 2004 so as to capitalize on the brand image of

the term Indiabulls in the company name. ISL is a corporate memberof capital market & derivative segment of The National Stock Exchange

of India Ltd.

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Trading With Indiabulls

This section will introduce us about the process and instruments used to help

a customer or a client to trade with Indiabulls securities. This process is

almost similar to any other trading firm but there will be some difference in

the cost of brokerage commission.

Trading: It is a process by which a customer is given facility to buy and sell

share this buying and selling can only be done through some broker and this

is where Indiabulls help its customer.

A customer willing to trade with any brokerage house need to have a demat

account, trading account and saving account with a brokerage firm. Any one

having following document can open all the above mentioned account and

can start trading.

Document Required

3 photographs ( signed across)

Photo Identification Proof - any of the following - Voter ID/Driving

License/Passport.

Address Proof any of the following - Voter ID/Driving License/ Passport/

Bank statement or pass book sealed and attestation by bank official/

BSNL landline bill.

A crossed Cheque favoring India bulls Securities Ltd. of the required

amount. The amount for Demat as well as trading will be Rs. 900/-(free

Demat +900 Trading Account) the minimum amount being Rs. 900 a

cheque can be given for a larger amount.

Copy of PAN Card is mandatory.

Registration Kit

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CDSL Demat Kit

Bank and address proof declaration. (Master undertaking)

PAN name discrepancy form

These documents may not be consumer friendly but it is to avoid illegal

transaction and to prevent black money this ensures that money invested

is accounted.

3.2 Business Model & Operations of Indiabulls

Securities Ltd

The three distinct internal business segments are:

Online business

Offline business

Other Sales

Online business: serving clients primarily through an Internet based

relationship targeted towards clients who value anytime, anywhere

access and can be serviced at low incremental costs. The Online sales

force sells all products and services and follows the relationship

manager model.

Offline business: serving clients primarily through an office based

relationship targeted towards clients who value physical interaction

and are typically larger accounts. The Offline Sales force sells all

products and services and follows the relationship manager model. The

Institutional business serving clients such as mutual funds and pension

funds is considered part of the offline business due to largely similar

client servicing and channel needs as required for high net worth

clients. Indiabulls Securities Limited has established relationships with

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some large institutional players in India and is qualified broker for

Equities, F&O and Debt markets for 145 such institutional clients.

Other Sales: includes insurance, research services and other offerings

3.3 Basic Requirement for doing Trading

Trading requires Opening a Demat account.Demat refers to adematerialized account.

You need to open a Demat account if you want to buy or sell stocks. So

it is just like a bank account where actual money is replaced by shares.

We need to approach the Depository Participants (DP, they are like

bank branches), to open Demat account.

A depository is a place where the stocks of investors are held in

electronic form. The depository has agents who are called depository

participants (DPs).

Think of it like a bank. The head office where all the technology rests

and details of all accounts held is like the depository. And the DPs are

the branches that cater to individuals.

There are only two depositories in India

The National Securities Depository Ltd (NSDL) and the

Central Depository Services Ltd (CDSL).

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IndiabullsSecuritiesTrading Products

Cash Account Intraday Account Margin Trading

3.4 Trading Products of Indiabulls Securities

Fig

showing 3.1 Trading Products of Indiabulls securities

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Indiabulls Securities provide three products for trading. They are

Cash account

Intraday account

Margin trading (Mantra)

Cash account provides the client to buy 4 times of cash balance in his

trading account.

Intraday product provides the client to buy 8 times of his cash

balance in the trading account.

Mantra account called as margin trading, is a special account to buy on leverage for a

longer duration

Chapter 4

FINANCIAL ANALYSIS OF INDIABULLS SECURITIES

4.1 Income: Indiabulls Securities Ltd income unit has the following

components

Income from Online business : The contribution of revenue from

Online business have grown from Rs. 31.85 million in FY 2002 to Rs.

242.26 million in FY 2004 and from 24.05% of total business in FY 2002to 34.85% of business in FY 2004. The rapid growth of the online

business is driven by growth in total clients, increasing product

flexibility and quality, enhanced online-only features such as portfolio

analysis and updates, streaming tickers, enhanced product offering of

Power Indiabulls.

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Brokerage

Equities

F&O

Income from Offline Business: The offline business unit has one of

the widest branch networks in India with a pan India presence with

large market share. The revenues have grown from Rs. 96.02 million in

FY 2002 to Rs. 447.25 million in FY 2004 and have changed from

72.52% of total business in FY 2001 to 64.34% of business in FY 2004.

The rapid growth of the Offline business is driven by growth in total

clients, increased geographical presence.

Brokerage

Equities

F&O

Wholesale Debt Markets

Brokerage Income

Brokerage Income comprises revenues earned from Equities, F&O and

Wholesale debt markets on all stock exchanges.

The income from brokerage services is driven primarily by the

number of active clients.

The rapid growth in total clients is driven primarily by increased

geographical presence.

Equities constitute the largest portion of brokerage business.

F&O brokerage is becoming an increasingly important component

of its revenues as Futures & Options trading gains more

acceptance.

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Wholesale Debt market is focused on institutional clients.

Income from transaction and service charges andinterest income

Related income comprises revenues earned from market related

activities such as transaction charges, service charges and interest

levied on customer transactions. These charges are dependent on

trading volume, number of transactions completed and any ledger

debit amount in the client account.

Income from other Sales including Insurance, Mutual

Fund Sales and Other Products

Other income comprises revenues earned from sale of third party

products such as Insurance, Mutual Funds and new services such as

Research Services.Revenues are a function of volume of mutual funds

sold, the type of fund sold (active managed equity, passive fixed

income etc.) and the commissions paid on the funds sold.

Brokerage Income of Indiabulls Securities

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Brokerage Income of Indibulls Securities of 3 Years( in Crore)

47.2

99.65

261.11

0

50

100

150

200

250

300

2004 2005 2006Years

BrokerageInc

- - -

Bar Chart 4.1 Brokerage Income of Indiabulls Securities (in

Crore)

Segment wise Sales of Indiabulls securities for March 2005(in

Crore)

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S e g m e n tw i se S a l e s o f I n d i a b u l l s S e c u r iti e s F o r M a r c h

1.93, 2

0.84, 1

9.88, 92 , 2

99.65, 86

Brokerage Income

Incom e From Depos i tory S ervice

Incom e From other F inanc ia l Ac t i

Interest

Transact ion Charges

Pie Chart 4.2 Segment wise Sales of IndiaBulls Securities for

year 2005

Segment wise Sales of Indiabulls securities for March 2006(in

Crore)

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Segmentwise sales of Indiabulls Securities For March 2006(in

Crore)

261.11, 82%

23.06, 7%9.08, 3%

3.57, 1%

21.16, 7%

Brokerage Income Income From Depository Service

Income From other Financial Activity Interest

Transaction Charges

4.2 Financial Ratio Analysis of Indiabulls Securities

Ltd

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Profitability ratios:

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Indiabulls Securities Ltd. Mar 2004 Mar2005

Mar 2006

Per cent (Non-Annualized) 12months

12months

12 months

-

Margins ratios (%)-

As % of operating incomePBDT 43.05 44.75 58.76PBT 41.45 42.87 56.7PAT 25.92 27.25 37.49PBDT (NNRT) 43.01 44.52 58.72PBT (NNRT) 41.41 42.63 56.66PAT (NNRT) 25.88 27.02 37.45-

Corporate tax as per cent of

PBT

35.83 33.69 32.47

-

Returns ratios (%)-

As % of total assetsPBDT 18.95 31.35PBT 18.15 30.25PAT 11.54 20PAT (NNRT) 11.44 19.98Operating cash flow 77.78 65.19

-As % of net worthPBDT 53.48 128.77PBT 51.23 124.25PAT 32.57 82.16PAT (NNRT) 32.29 82.07Operating cash flow 219.53 267.75-

As % of capital employedPBDT 47.39 58.11PBT 45.39 56.06

PAT 28.86 37.07PAT (NNRT) 28.61 37.03Operating cash flow 194.53 120.82-

Appropriation of profits (as %of PAT)Dividends 3.89 19.66 0.52

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Equity dividends 0.44 2.27 0.07Preference dividends 3.44 17.39 0.45Retained profits 96.11 80.34 99.48-Dividends / net worth 6.4 0.43

Equity dividends / equity capital 3.98 0.45Equity dividends / equity cap. & sh.prem.

3.98 0.45

Liquidity ratios:

Indiabulls Securities Ltd. Mar 2004 Mar 2005 Mar 2006

Times (Non-Annualized) 12months

12months

12 months

-

Short term liquidity-Cash / current liabilities &provisions

0.67 0.86 1.7

Quick ratio 1.6 0.86 1.89-Medium to long term liquidity-

Current ratio 1.776 1.141 2.137Solvency ratio 1.567 1.561 1.269Debt equity ratio 1.237 0.848 2.056-

Interest incidence (%) 11.42 19.13 11.67-

Interest cover-PBIT / interest 3.63 4.01 5.2PBIT (NNRT) / interest 3.63 4 5.2

Operating cash flow / interest -2.99 11.97 8.91-(Rs. Crore)Current assets 231.47 261.19 914.49Current liabilities 130.34 228.86 427.87Working capital 101.13 32.33 486.62Net worth 83.34 108.43 181.77Reserves & surplus 20.24 45.33 163.94

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Asset utilization ratiosIndiabulls Securities Ltd. Mar

2004Mar2005

Mar 2006

Times (Non-Annualized) 12months 12months 12 months

-Efficiency ratios-Operating cash flow / total assets 0 0.78 0.65Operating cash flow / gross fixedassets

0 17.46 14.15

Operating cash flow / capitalemployed

0 1.95 1.21

-

Operating income / total assets 0.42 0.53Operating income / GFA / leasedassets

9.51 11.58

Operating income / capitalemployed

1.06 0.99

-PBDT (NNRT) / total assets 0.19 0.31PBDT (NNRT) / gross fixed assets 4.23 6.8PBDT (NNRT) / capital employed 0.47 0.58-PBT / total assets 0.18 0.3PBT / gross fixed assets 4.05 6.56PBT / capital employed 0.45 0.56-PAT / total assets 0.11 0.2PAT / gross fixed assets 2.57 4.34PAT / capital employed 0.29 0.37

4.3 Interpretation:

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Profitability Ratios: Profitability is the net result of a number of

policies and decisions. The ratios examined thus far provide useful

clues to the effectiveness of firms operations.

Liquidity Ratios: liquidity ratios deal with firms ability to pay off its

debts. It includes

Current ratio: The current ratio is calculated by dividing current

assets by current liabilities. The current ratio of Indiabulls

securities is 1.776, 1.441, & 2.137 for year 2004, 2005 & 2006

respectively.

Current ratio = Current assets

Current Liabilities

Quick ratio (acid test ratio): The quick ratio is calculated by

deducting inventories from current assets and then dividing the

remainder by current liabilities. The quick ratio is a measure of

the firms ability to pay-off the short-term liabilities. A large part

of the firms current assets are tied up in slow paying debts. The

industry average for Acid test ratio is 2.1, but for Indiabulls

securities quick ratio is 1.6, 0.86 & 1.89 for year 2004, 2005 &

2006 respectively, which is less than Industry average. The quick

ratio should be high which indicates the companys ability to pay-

off short term obligations.

Debt equity Ratio:

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Debt equity ratio is the related contribution of creditors and owners of

the business in its financing.

4.4 Financial performance Year on Year

Increasing Market Share of Indiabulls on NSE Trading VolumesIncreasing Market Share of Indiabulls on NSE Trading Volumes (1)(1)

(1) Source: NSE data from NSE website (Equity Segment)

22.3%

17.5%

18.8%

21.9%

30.7%

2.2%

5.5%

3.4%

1.1%

1.9%

0%

5%

10%

15%

20%

25%

30%

35%

FY2002

FY2003

FY2004

FY2005

FY2006

Share in OnlineTrading

Share in TotalTrading

(1)

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14%

20%

35%

24%

12%

7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Top 5 Top 10 Top 25

FY02 FY05

Graph 4.3 Market share of Indiabulls on NSE trading

Volumes

UNDERSTANDING CAPITAL MARKET

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Market Shares of Top Brokers on NSEMarket Shares of Top Brokers on NSE (2)(2)


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An Outlook on Indian Stock Market

Capital Market Derivative Segment

Intraday Delivery Futures Options

5.1 Project Framework

Figure 5.1 Project Framework

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The Indian capital markets have witnessed a transformation over the

last decade. India now finds its place amongst some of the most

sophisticated and largest markets of the world. With over 20 million

shareholders, India has the third largest investor base in the world after

the USA and Japan. The Indian capital market is significant in terms of

the degree of development, volume of trading and its tremendous

growth potential.

Over the past few years, the capital markets have also witnessed

substantial reforms in regulation and supervision. Reforms, particularly

the establishment and empowerment of SEBI, market-determined

prices and allocation of resources, screen-based nation-wide trading,

dematerialization and electronic transfer of securities, rolling

settlement and derivatives trading have greatly improved both the

regulatory framework and efficiency of trading and settlement.

5.2 Indian Capital markets - Chronology

1994- Equity Trading commences on NSE

1995- All Trading goes Electronic

1996- Depository comes in to existence

1999- FIIs Participation- Globalization

2000- over 80% trades in Demat form

2001- Major Stocks move to Rolling Set

2003- T+2 settlements in all stocks

2003 - Demutualization of Exchanges

5.3 Capital Market Participants

Banks

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Exchanges

Clearing Corporations

Brokers

Custodians

Depositories

Investors

Merchant Bankers

5.4 Types of Investors

Institutional Investors- MFs / FI / FIIs / Banks

Retail Investors

Arbitrageurs / Speculators

Hedgers

Day traders/Jobbers

5.5 Cash Market

The Spot Market or Cash Market is a commodities or securitiesmarket in which goods are sold for cash and delivered immediately.

Contracts bought and sold on these markets are immediately effective.

Spot markets can operate wherever the infrastructure exists to conduct

the transaction. The Spot market for most securities exists primarily on

the internet. The trading in this cash market can be further divided into

Intraday and Delivery.

5.6 Key Terms

Intraday refers to buying or selling stocks today with an

obligation to sell or buy the stock on the same day. It means

completing the trading cycle in the same day. Here the stocks do

not come to the Demat account.

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Delivery refers to buying stocks today with a plan of selling it in

future. In India there is a concept of T+2 settlements. Which

means a stock bought on trade day is credited to your Demat

account (or delivered) into your Demat account after 2 days.

Square off- making the position nil. Say selling off the stocks.

(or buying back in case of short selling)

Short selling- selling without having the possession of the

stocks (possible in intraday trade). Selling the stocks initially and

buying them back later. It is a concept used in the falling

markets.

Demat Account- the account where in the shares are delivered.

Every Demat account is linked to a trading account and a savings

bank account. Demat account are provided by CDSL (central

depository services limited) and NSDL (national securities

depository limited). Indiabulls is a depository participant which

links the depository to the beneficial owner of the account

(client).

Trading pool/margin account- the place where the stock is

received after the trade, it is the brokers account called the

broker pool account.

T+2= Transaction + 2 days

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Chapter 6

DERIVATIVESBy far the most significant event in finance during the past decade has

been the extraordinary development and expansion of financial

derivatives. These instruments enhance the ability to differentiate risk

and allocate it to those investors most able and willing to take it

6.1 Definition:

Derivatives are instruments whose value is derived, in whole or in

part, from the value of one or more underlying assets.

History of Derivatives

The history of derivatives is surprisingly longer than what most people

think. Some texts even find the existence of the characteristics of

derivative contracts in incidents of Mahabharata. Traces of derivative

contracts can even be found in incidents that date back to the ages

before Jesus Christ. However, the advent of modern day derivative

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contracts is attributed to the need for farmers to protect themselves

from any decline in the price of their crops due to delayed monsoon, or

overproduction.

The first 'futures' contracts can be traced to the Yodoya rice market in

Osaka, Japan around 1650. These were evidently standardized

contracts, which made them much like today's futures.

The Chicago Board of Trade (CBOT), the largest derivative exchange inthe world, was established in 1848 where forward contracts on various

commodities were standardized around 1865. From then on, futures

contracts have remained more or less in the same form, as we know

them today.

Derivatives have had a long presence in India. The commodity

derivative market has been functioning in India since the nineteenth

century with organized trading in cotton through the establishment of

Cotton Trade Association in 1875. Since then contracts on various other

commodities have been introduced as well.

Exchange traded financial derivatives were introduced in India in June

2000 at the two major stock exchanges, NSE and BSE. There are

various contracts currently traded on these exchanges. National

Commodity & Derivatives Exchange Limited (NCDEX) started its

operations in December 2003, to provide a platform for commodities

trading.

The derivatives market in India has grown exponentially, especially at

NSE. Stock Futures are the most highly traded contracts on NSE

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accounting for around 55% of the total turnover of derivatives at NSE,

as on April 13, 2005.

6.2 Understanding Derivatives

The primary objectives of any investor are to maximize returns and

minimize risks. Derivatives are contracts that originated from the need

to minimize risk.

The word 'derivative' originates from mathematics and refers to a

variable, which has been derived from another variable. Derivatives are

so called because they have no value of their own. They derive their

value from the value of some other asset, which is known as the

underlying.

Derivatives are specialized contracts which signify an agreement or an

option to buy or sell the underlying asset of the derivate up to a certain

time in the future at a prearranged price, the exercise price. The

contract also has a fixed expiry period mostly in the range of 3 to 12months from the date of commencement of the contract. The value of

the contract depends on the expiry period and also on the price of the

underlying asset.

For example, a farmer fears that the price of soybean (underlying),

when his crop is ready for delivery will be lower than his cost of

production.

Let's say the cost of production is Rs 8,000 per ton. In order to

overcome this uncertainty in the selling price of his crop, he enters into

a contract (derivative) with a merchant, who agrees to buy the crop at

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a certain price (exercise price), when the crop is ready in three months

time (expiry period).

In this case, say the merchant agrees to buy the crop at Rs 9,000 per

ton. Now, the value of this derivative contract will increase as the price

of soybean decreases and vice-a-versa.

If the selling price of soybean goes down to Rs 7,000 per ton, the

derivative contract will be more valuable for the farmer, and if the price

of soybean goes down to Rs 6,000, the contract becomes even more

valuable.

This is because the farmer can sell the soybean he has produced at Rs

9000 per ton even though the market price is much less. Thus, the

value of the derivative is dependent on the value of the underlying.

6.3 Difference between Commodity Derivative & Financial

Derivative

If the underlying asset of the derivative contract is coffee, wheat,

pepper, cotton, gold, silver, precious stone or for that matter even

weather, then the derivative is known as a commodity derivative.

If the underlying is a financial asset like debt instruments, currency,

share price index, equity shares, etc, the derivative is known as a

financial derivative.

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Derivative contracts can be standardized and traded on the stock

exchange. Such derivatives are called exchange-traded derivatives. Or

they can be customized as per the needs of the user by negotiating

with the other party involved.

Such derivatives are called over-the-counter (OTC) derivatives.

Continuing with the example of the farmer above, if he thinks that the

total production from his land will be around 150 quintals, he can either

go to a food merchant and enter into a derivatives contract to sell 150

quintals of soybean in three months time at Rs 9,000 per ton. Or the

farmer can go to a commodities exchange, like the National Commodity

and Derivatives Exchange Limited, and buy a standard contract onsoybean.

The standard contract on soybean has a size of 100 quintals. So the

farmer will be left with 50 quintals of soybean uncovered for price

fluctuations.

However, exchange traded derivatives have some advantages like low

transaction costs and no risk of default by the other party, which mayexceed the cost associated with leaving a part of the production

uncovered.

In India we have several derivatives, two of the most famous

derivatives traded on National stock exchange are

Futures

Option

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Futures and options are traded on the NSE platform, with a normal

IndiaBulls trading account the client get the access to trade in the

F&O contracts.

6.4 Futures and Forwards

As the name suggests, futures are derivative contracts that give the

holder the opportunity to buy or sell the underlying at a pre-specified

price some time in the future.

They come in standardized form with fixed expiry time, contract sizeand price. Forwards are similar contracts but customizable in terms of

contract size, expiry date and price, as per the needs of the user.

6.5 Options

Option contracts give the holder the option to buy or sell the underlying

at a pre-specified price some time in the future.

An option to buy the underlying is known as a Call Option.

An option to sell the underlying at a specified price in the future

is known as Put Option.

In the case of an option contract, the buyer of the contract is not

obligated to exercise the option contract. Options can be traded on the

stock exchange or on the OTC market.

6.6 Futures Terminology

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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

Contract Cycle: The period over which the contract trades.

The index futures contracts on the NSE have a one-month,

two-month and three-month expiry cycles which expire on the

last Thursday of the month. On the Friday following the last

Thursday, a new contract having a three-month expiry is

introduced for trading.

Expiry Date-the date specified in the futures contract. It is

the last Thursday of the month

Contract Size: the amount of asset that has to be delivered

less than one contract. For instance, the contract size on NSE

futures market is 100 Niftiest. It is prescribed by NSE for

stocks. Each stock had a different lot size.

Basis the futures price minus the spot price. There will be a

different basis for each delivery month for each contract. In a

normal market, basis will be positive. This reflects that futuresprices normally exceed spot prices.

Cost of Carry 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 the futures contract is first entered

into. These margins are prescribed by the exchange. It varies

from stock to stock.

Marking to Market the adjustment made at the end of

each trading day to the investors margin account to reflect

the investors gain or loss depending upon the futures closing

price. It is the difference between todays closing price and

yesterdays closing. The MTM profit /loss are credited to the

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client account on day to day basis. Thus we call this a T+0

settlement.

Maintenance Margin somewhat lower than the initial

margin; the balance in the margin account must never

become negative and in case it does, the investor receives a

margin call that must top-up the account to the initial margin

level before trade commences the following day.

Difference between Long Position & Short Position

A long position is an agreement to buy. You take a long positionon a stock when you are bullish or have a feeling that the stock

will move up.

LONG => BUY

A short position is an agreement to sell. You take a short position

on a stock when you are bearish or have a feeling that the stock

will move down.

SHORT => SELL

There are around 152 companies which are underlying for future

and options in NSE. There are

index Futures (Nifty futures, Bank Nifty, CNX IT futures)

Stock Futures (Infosys futures. ITC futures, etc linked to specific

stocks)

Index options (linked to indices)

Stock option (linked to specific stocks).

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6.7 Option Contracts:The owner of an option has the OPTION to buy

or sell something at a predetermined price. Option provides the buyer

of the contract the right but not the obligation to exercise.

Right to BUY / OWN CALL OPTION

Or Right to SELL / WRITE PUT OPTION

You buy a call option when you are bullish or have an upward

target.

You buy a put option when you are bearish or have a downward

target.

6.8 Options Terminology

Stock options options on individual stocks. A contract gives

the buyer the right to buy or sell shares at the specified price

Buyer of an option the one who by paying price (premium)

buys the right but not the obligation to exercise his/her option on

the seller/writer

Writer of an option the one who by receiving premium, is

obliged to sell/buy the asset if the buyer exercises on him

Call Option gives the buyer the right but not the obligation to

buy an asset by a certain date for a certain price

Put Option gives the buyer the right but not the obligation to

sell an asset by a certain date for a certain price

Spot Price the price at which an asset trades in the spot

market.

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Strike Price the target price or the expected price.

Contract Cycle the period over which the contract trades.

There are three month contracts just like the futures.

Expiry Date the date specified in the option contract. It is the

last Thursday of the month, just as in futures.

Contract Size the amount of asset that has to be delivered

under one contract.

In-The-Money Option (ITM) an option that would lead to a

positive cash-flow to the holder if it were exercised immediately.

A call option on the index is said to be ITM if the current index

stands higher than the strike price (Spot Price > Strike Price).

A put option is ITM if the index is below the Strike price (Spot

Price < Strike Price).

At-The-Money (ATM) an option that would lead to zero cash

flows to the holder if it were exercised immediately.

Out-Of-The-Money Option (OTM) an option that would lead

to a negative cash-flow to the holder if it were exercised

immediately.

A call option on the index is said to be OTM if the current indexstands at a level which is less than the strike price (Spot Price

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