1

“A STUDY ON SURVEILLANCE MECHANISM AND

SURVEILLANCE TECHNIQUES IN THE SECURITIES MARKET AT
APOLLO SINDHOORI CAPITAL INVESTMENTS LTD, CHENNAI.”

INTRODUCTION

Market depends upon credibility and fairness. It has been well realized all
over the world that only the best-regulated markets are the most developed
markets. An efficient regulatory environment fosters investor’s confidence in
fairness and integrity of the markets by ensuring true and fair price discovery,
prompt detection of market manipulations like price rigging, circular trading,
insider trading, creating of false market etc., safety of the market through risk
containment measures, leading to orderly and healthy development of the capital
market.

In this context the role of surveillance becomes very crucial. The

development and regulation of capital markets has become a critical issue in the
recent past, as an emerging middle class creates growing demand for property
ownership, small-scale investment and savings for retirement. Effective
surveillance is the sine qua non for a well functioning capital market. As an
integral part in the regulatory process, effective surveillance can achieve investor
protection, market integrity and capital market development. According to
IOSCO, “the goal of surveilance is to spot adverse situations in the markets
and to pursue appropriate preventive actions to avoid disruption to the
markets.”
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1.1 OUTLINE OF PROJECT REPORT

The basic objective of a Stock Market is to protect Market and Investors

from Malpractices in the market. This is done by Surveillance Department in
SEBI.

Its main objective is to develop the market and protect the interest of
investors. For this the Department has specified some mechanism and
Techniques to be carried out by all Stock Exchanges.

These mechanism and techniques has helped the Indian Market to grow
in Equal with other global markets.
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1.2 INDUSTRY PROFILE

1.2.1 Introduction

The economic development of a nation is reflected by the progress of

various economic units, broadly classified into corporate sector, Government and
household sector. While performing their activities these units will be placed in a
surplus / deficit / balanced budgetary situations. Enabling the transfer of funds
from the saver to the borrowers is the function of financial system. The financial
system represents a channel through which savings are mobilized from the
surplus units and routed to the deficit units.

Securities market is a place where buyers and sellers of securities can

enter into transactions to purchase and sell shares, bonds, debentures etc.
Further it performs an important role of enabling corporates, entrepreneurs to
raise resources for their companies and business ventures through public issues.
Stated formally, Securities markets provide channels for allocation of savings to
investments and entrepreneurship.

1.2.2 Historical Perspective

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Securities markets in India have a long history. The Stock Exchange,

Mumbai (BSE), the country’s oldest exchange has its origins in the informal
trading stocks that flourished in the1850s and 1860s.

Formal trading on the BSE began in 1875, and since then, the number of
stock exchanges in the country has grown to 22. Prior to Independence in 1947,
securities markets in India were largely unregulated. In 1947, the Capital Issues
(Control) Act was enacted, which formalized and continued initial controls on the
issue of securities.

The incorporation, regulation and winding up of companies came under

the purview of the companies Act of 1956. In 1956 the securities Contracts
(Regulation) Act, 1956 (SCRA) was also enacted which brought stock
exchanges, their members and contracts in securities which could be traded
under the regulation of the Central Government, through the Ministry of Finance.

1.2.3 Indian Securities Market

The Indian securities markets witnessed several changes since the

Economic reforms introduced in 1991. The changes introduced in the economic
policies provided an active stimulus to the market. Moreover, the market
witnessed several policy initiatives since the year 2000, which further refined the
market micro- structure, modernized operations and broadenened investment
choices for the investors.

The players in the market are broadly divided into three categories:
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 Companies issuing securities

 Financial inter mediaries
 Investors

The securities market has two interdependent segments:

a) Primary Market
b) Secondary Market

1.2.3.1) Primary Market

The Primary market provides the channel for sale of new securities.
Primary market provides opportunity to issuers of securities; Government as well
as corporates, to raise resources to meet their requirements of investment and/or
discharge some obligations. It is also called as New-Issue Market. The New
Issue Market creates financial claims.

The New Issue Market deals with those securities, which have been made
available to the public for the first time. The Indian primary market attracted the
corporate sector to raise resources after economic liberalization. The amount
mobilized increased from Rs. 6214.84 crores in 91-92 to Rs. 33,508 crores in
2006-2007.

1.2.3.2) Secondary Market

Secondary Market refers to a market where securities are traded after

being initially offered to the public in the primary market and/or listed on the
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Stock Exchange. Majority of the trading is done in the secondary market.

Secondary market comprises of equity markets and the debt markets.
 

For the general investor, the secondary market provides an efficient

platform for trading his securities. For the management of the company,
secondary equity markets serve as a monitoring and control conduit—by
facilitating value-enhancing control activities, enabling implementation of
incentive-based management contracts, and aggregating information (via price
discovery) that guides management decisions. Brokers, investors, mutual funds,
and the financial institutions are important constituents of secondary market

1.2.3.3) Stock Exchange

Stock exchange represents an organised market for trading securities. It is

established with the main purpose of providing a market place for the members
to deal in securities. It acts as a trading platform, where buyers and sellers can
meet to transact. There are 22 recognised stock exchanges in India.

In terms of legal structure, the stock exchanges in India are segregated

into two broad groups – 19 stock exchanges which were set up as companies,
either limited by guarantees or by shares, and the 3 stock exchanges which were
associations of persons (AOP) viz. BSE, ASE and Madhya Pradesh Stock
Exchange. BSE subsequently became a public limited company.
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The 19 stock exchanges which are functioning as companies include: the

stock exchanges of Banglore, Bhubaneshwar, Calcutta, Cochin, Coimbatore,
Delhi, Guwahati, Hyderabad, Interconnected SE, Jaipur, Ludhiana, Madras,
Magadh, NSE, Pune, OTCEI, Saurashtra-Kutch, Uttar Pradesh, and Vadodara.

Apart from NSE, all stock exchanges whether established as corporate

bodies or Association of Persons (AOPs), are non-profit making organizations. Of
the 22 stock exchanges, 8 exchanges have been given permanent recognition
and 10 stock exchanges have been given yearly renewal. The remaining
exchanges are awaiting renewal. The market capitalization of stock exchanges
increased from Rs. 507,272 crores to Rs. 69, 12,391 crores.

1.2.3.4) Regulators

The responsibilities for regulating the securities market are shared by:

a. Department of Economic Affairs (DEA),

b. Department of Company Affairs (DCA),
c. Reserve Bank of India (RBI),
d. Securities and Exchange Board of India (SEBI)

1.2.3.5) Legislations

The four main legislations governing the securities market are:

i. The Securities Contracts (Regulation) Act, 1956

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ii. The Companies Act, 1956

iii. The SEBI Act, 1992
iv. The Depository Act, 1996

1.2.3.6) Trading system

In India major trading activities are carried in Bombay Stock Exchange

(BSE) and National Stock Exchange (NSE). OTCEI and other regional stock
exchange also carry out trading activities. But BSE and NSE have huge market
capitalization and market turnover. At first, trading in all the stock exchanges
were being carried out by “public out cry” in the trading ring. This was an
inefficient system and also resulted in lack of transparency in trade. Then the
Government introduced major changes in the Trading system. They are:

1) Incorporation of OTCEI

OTCEI was incorporated in 1990. The Exchange was modeled

along the lines of the NASDAQ market of USA; OTCEI introduced many
novel concepts to the Indian capital markets such as screen-based
nationwide trading, sponsorship of companies, market making and
scrip less trading. Listing on OTCEI was restricted to small and midcap
companies.

Securities are traded on OTCEI through the 'OTCEI Automated

Securities Integrated System' (OASIS), a screen based system. OASIS
combines the principles of order driven and quotes driven markets and
enables trading members to access a transparent & efficient market
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directly through a nationwide telecommunication network.

2) Setting up of National Stock Exchange (NSE)

The NSE was incorporated in 1992 and it was the first stock
exchange to commence its trading as a fully computerized exchange in
1994. NSE operates a sophisticated screen based trading system, which
is called National Exchange for Automated Trading (NEAT). Its trading
is order driven and has no intermediaries. Orders received through the
system are matched and executed on a price time priority basis in a
systematic manner. The tick size for NSE is 3 paise.

3) BOLT system

Bombay Stock Exchange was formally established in 1875. The

exchange was corporatised in the year 2005. It introduced Bombay stock
Exchange On-Line Trading system (BOLT) in March 1995and had
completely replaced the open outcry system of trading by June 1995.

The BOLT system accepts two-way quotes from jobbers and

market and limit orders from brokers who have received such orders from
their investors. Then it matches them according to the matching logic
specified for this system. The tick size for BSE is 1 paise.
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1.2.3.7) Clearing & Settlement Mechanism

In order to enhance proper Trading and settlement periods, the

Exchange / Clearing Corporation was established. The function of this clearing
corporation is to specify Trading and Settlement period from time to time. NSE
was the first Stock Exchange to setup a separate corporation for settlement and
clearing mechanism, The National Securities Clearing Corporation Ltd.
(NSCCL). NSCCL carries out clearing and settlement functions as per the
settlement cycles of different sub-segments in the Equities segment, Derivatives
and Retail debt segment as per the guidelines given by SEBI and NSE. .
Likewise, the clearing operation of BSE is carried out through Bank of India
Shareholding Limited.

At present trades are settled using rolling settlement system. The trades
pertaining to the rolling settlement are settled on a T+2 day basis where T stands
for the trade day. Hence, trades executed on a Monday are typically settled on
the following Wednesday (considering 2 working days from the trade day).

1.2.3.8) Indices
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An Index is an important tool to measure the price behaviour of the overall

market. In India there are two famous indexes SENSEX and NIFTY of BSE and
NSE. Both exchanges have separate indices for different sectors. For e.g. there
are indices for bank, IT industry, small cap, mid cap etc.

1.2.4 Functions of Securities Market

The securities market allows people to invest their savings in the preferred
investment.

 It mobilizes savings and channelizes them through securities into

preferred enterprises.

 The securities market enables all individuals, irrespective of their means,

to share the increased wealth provided by competitive enterprises.

 The securities market helps the individuals who invest their savings as
well as the enterprise that use the resources, by giving the returns.

 The securities market also provides a market place for purchase and sale
of securities, which satisfy the needs of the enterprises for capital, and of
investors for liquidity.

 The security market confers the yield promised or anticipated on security

that encourages people to make additional savings out of current income,
which results in net savings.
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 The securities market enables a person to allocate his savings among a

number of investments. This helps him to diversify risks among many
enterprises, which increases the likelihood of long term overall gains.

1.2.5 Securities Market And Economic Growth

A well functioning securities market is conducive to sustained economic

growth. The securities market fosters economic growth to the extent that it-

a. Augments the quantities of real savings and capital formation from any given
level of national income,
b. Increases net capital inflow from abroad
c. Raises the productivity of investment by improving allocation of investible
funds, and
d. Reduces the cost of capital.

The securities market facilitates the internationalization of an economy by

linking it with the rest of the world. Moreover, a strong domestic stock market
performance forms the basis for well performing domestic corporate to raise
capital in the international market. The Market helped the Governments to tap
savings on a low or even no-cost basis.

1.2.5.1) Significance in Indian Economy

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The securities market in India has paved the way for the development of
economy in many folds. The Indian economy saw a major drift in its economic
growth. The economy witnessed a sharp rise after the economic reforms
introduced in 1991. These reforms have changed the market structure.

There are three main sets of entities that depend on securities market.
The corporates and Governments raise resources from the securities market to
meet their obligations, where as the households invest their savings in the
securities. These three sectors witnessed the emergence of new market as a
result of economic reforms introduced in the 1991.

The corporate sector identified the markets as a major source of finance,

rather than depending on banks/FIs. They mobilized resources by issuing IPO’s,
Rights Issue and Private Placement. The numbers of companies registered with
stock exchanges are increasing. Companies raised Rs. 170,560 crores in the
year 2007. The Government dependence on market borrowings increased as the
fiscal deficits increased. The market borrowing for the Government increased
from Rs. 10,557 crores to Rs. 147,000 crores. The household savings increased
from 16.8% in 1995 to 23.8% in 2007.

The Indian economy witnessed a descent growth of 6% per year in 1990s.

This was possible by the contributions made by the organised secondary and
tertiary sectors (industry and service). The securities market helped these
organized sectors, corporate and Government, to raise resources to realize a
growth rate of 6%. Now the Indian economy has witnessed a growth of 8.5% in
2007-2008.
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Tables 1.1 indicate the significance of the securities market in Indian economy

Share (%) of Securities Market

Year External Fiscal DeficitFiscal Deficit Financial
Finances of of Centralof State Savings of
Corporates Government Government Household
1990-91 19.35 17.9 13.6 14.4
1991-92 19.17 20.7 17.5 22.9
1992-93 33.38 9.2 16.8 17.2
1993-94 53.23 48.0 17.6 14.0
1994-95 44.99 35.2 14.7 12.1
1995-96 21.67 54.9 18.7 7.7
1996-97 22.12 30.0 17.5 6.9
1997-98 28.16 36.5 16.5 4.5
1998-99 27.05 60.9 14.1 4.2
1999-00 3.58 67.1 13.9 7.3
2000-01 31.39 61.4 13.8 4.3
2001-02 N.A 69.4 15.2 N.A
[Source: Economic Intelligence service-Corporate Sector, CMIE, & RBI
(Extracted from Indian Securities Market Review, Publication of NSEIL]

1.2.5.2) Reforms in Securities Market

With the objectives of improving market efficiency, enhancing

transparency, preventing unfair trade practices and bringing the Indian market to
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international standards, a package of reforms consisting of measures to

liberalize, regulate and develop the securities market were introduced. The major
reforms introduced were:

Features 1992 2007

A specialized Regulator
for securities market
No specific Regulator, but
(SEBI) vested with powers
Regulator Central Government
to protect investors'
oversight
interest and to develop
and regulate securities
market.

A variety of specialized
intermediaries emerged.
They are registered and
Some of the
regulated by SEBI (also by
Intermediaries (stock
SROs). They as well as
Intermediaries brokers authorized clerks
their employees are
and registers) were
required to follow a code
regulated by the SROs.
of conduct and are subject
to a number of
compliances.

Eligible issuers access the

market after complying
Granted by Central
Access to Market with issue requirement as
Government.
given by SEBI.

Determined by market,
either by the issuer
Determined by Central
Pricing of securities through fixed price or by
Government
the investors through book
building.
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Corporate are allowed to

issue ADRs/GDRs to raise
ECBs. ADRs/GDRs have
two-way fundability. FIIs
Access to International
No access are allowed to trade in
Market
Indian Market. MFs are
also allowed to invest in
overseas.

Emphases are given on

disclosures, accounting
Corporate Compliance Very little emphasis
standards and corporate
governance.

Opened to private sector

and emergence of variety
Mutual Funds Restricted to public sector
of funds and schemes.

Screen based trading

system; Orders are
Open outcry, Available at matched on price-time
the trading rings of the parity, Transparent,
Trading Mechanism
exchanges, Opaque, Trading Platform
Auction/negotiated deals. accessible all over the
country.

Order flow observed. The

Fragmented market exchanges have open
through geographical electronic consolidated
Aggregation Order flow
distance. Order flow limit order books
unobserved. (OECLOB).

Anonymity in Trading Absent Complete

Clearing House of the

Exchange or the Clearing
Settlement System Bilateral Corporation is the central
counter party through
which settlement are
made.
Settlement Cycle 14 day account period Rolling settlement on T+2
settlement, but not basis
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adhered to always
Absent
Counter party risk Present

Fully electronic
Form of settlement Physical

Multilateral Netting
Basis of Settlement Bilateral Netting

Securities are freely

Transferable. Depositories
Cumbersome Transfer by
record transfers of shares
Transfer of Securities endorsement of security
electronically in book entry
and registration by issuer
form.

Comprehensive risk
management system
encompassing capital
adequacy, limits on
No focus on risk
Risk Management exposure and turnover,
management
VaR based margining,
client level gross
margining, on line position
monitoring etc.

Exchange Traded futures

and options available on
Derivatives Trading Absent
two indices & select
securities

TABLE 1.2

1.2.6 Conclusion

The securities market promotes economic growth. It is, therefore,

necessary to ensure that the securities market is efficient, transparent and safe.
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In order to make Indian securities market a model for a robust system, SEBI and
the Government had introduced major changes, which were initiated due to
economic reforms in 1991. The reforms like Free Pricing, abolition of CCI,
introduction of screen based trading, Derivatives trading etc., had paved way for
the growth of Indian Securities Market, which has positioned itself as a favorable
and the most secured market inline with other global markets.

1.3 COMPANY PROFILE

1.3.1Introduction

Apollo Sindhoori Capital Investments limited is a professionally managed

financial services organization, belonging to Apollo Hospitals group. Dr.Pratap C
Reddy, chairman of Apollo Hospitals, promoted it. It successfully carries the
strong linage of service, as demonstrated by the flagship company of the group.
The company started its operations in early 1996, at Chennai. Apollo Sindhoori
has spent initial period in establishing and consolidating its presence throughout
South India.

Apollo Sindhoori facilitates trading in Equities and Derivatives segments

of both BSE and NSE. It is also a member of NCDEX and MCX (commodities
exchanges) and as such facilitates trading in commodities for its clients. Clients
are also offered depository services, as Apollo Sindhoori is a depository
participant of both NSDL and CDSL.
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The first phase of expansion has seen the company in establishing its
presence in 13 locations, throughout South India. The expansion has been rapid
since 2001 and it has successfully established its presence at over 750+
locations all over Indian as on date. They have an exclusive branch at Mumbai
to cater to institutional investors. Apollo Sindhoori manages a huge client base in
excess of 150,000 clients throughout the country.

It was achieved through transparent trading systems, effective client

service, highly competitive brokerage structure and prompt payouts. The focus
had always been on client satisfaction through advanced technology, adopting
latest trading methods and adding all other related services. It has enabled all the
branches in the network to trade on commodities at all locations through CTCL
solution networked by V-sat technology. It is an active participant of all major
IPO’s.

1.3.2Board of Directors

The company’s Board of Directors feature many illustrious personalities:

 Mrs.Suneetha Reddy, the chairperson heads the Board. She also

shoulders the huge responsibility as the Director Finance of Apollo
Hospitals.

 Mr. K Venkatraman, Member is also the Chief Financial officer of Apollo

Hospitals.

 Ms.Sucharita Reddy, Member

 Mr. V J Chacko, Member was also MD of Apollo Hospitals

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 Mr. S Narayanan, Member is also the Managing Director of PPN power

generating company.

 Mr. K Padmanaban, Member is also the group President.

 Mr. P B Subramanian, Executive Director manages day-to-day affairs of

the company.

1.3.5Conclusion

These additional services helped ASCIL in establishing a strong hold on stock

and commodities markets and enabled it to provide one stop solution for all
capital markets services to its clients. The company has ambitious plan of
becoming a financial powerhouse and it is striving hard to achieve the same.
With further Up-gradation of technology, it has plans to add more products to the
portfolio like trading on Retail Debt Market and Distribution of Financial Products.

1.4 PRODUCT PROFILE

Apollo Sindhoori capital investment ltd. offers following Products/

Services:

 Stock Exchanges Services

 Trading- Derivatives.
 Depository Services.

1.4.1 Stock Exchange Services

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Description:

 Buying and Selling of shares on both NSE and BSE.

 Margin Trading.
 Spot registration and activation of trading accounts.
 Market Information and news made available through trading terminals.

 Multiple exchanges and multiple segments trading through single screen.

 Integrated margining system for equity and derivatives segments.
 Anywhere trading through network of offices throughout the country.

1.4.2 Trading Derivatives

Description:

 Futures and Options trading

 On-line risk management.
 Hedging opportunity between equity and derivatives segments on the
same screen.
 Security wise real time graph available.
 Online computation of yield.
 Avail volume discounts.
 Access of all the reports through the net.

1.4.3 Depository Services

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Description:

o Providing De-mat services.

o De-materialization of shares.
o Re-materialization of shares.
o Freeze and Defreeze of accounts.

CHAPTER II

RESEARCH METHODOLOGY

2.1 INTRODUCTION

Research methodology generally refers to the systematic procedure

carried out in any project or research. Methodology gives a clear picture of
suitable clarification and sequence of the different stages as to arrive at proper
manifestation of the adjective scope and limitations of the study.

2.2 OBJECTIVE OF THE STUDY

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1) To study Surveillance Mechanisms present in the Securities Market.

In order to ensure investor protection and to safeguard the integrity

of the markets, it is imperative to have in place an effective market
surveillance mechanism. The surveillance function is an extremely vital
link in the chain of activities performed by the regulatory agency for
fulfilling its owed mission of protection of investor interest and
development and regulation of capital markets.

2) To Analyze Surveillance Techniques used in the Securities Market.

The main objective of surveillance function of a stock exchange is

to help maintain a fair and efficient market for securities. To achieve this
objective, surveillance department of stock exchange monitors securities
trading activity on the Exchange. All the securities traded in the Exchange
come under the Surveillance. Significant changes in two key market
parameters – volatility and liquidity – alert the surveillance department to
potential market abuse.

2.3 SCOPE OF THE STUDY

1) To analyze the possible methods of Market abuse activities in the

Securities Market.
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Market Abuse is a broad term which includes fictitious or artificial

transactions, circular trading, false or misleading impressions, insider
trading etc. Effectiveness of surveillance function depends on its ability to
promptly and accurately identify suspicious trading.

2) To analyze the process involved in Surveillance activities.

The surveillance system mission is to protect investor interest,

development and regulation of capital market. It gives suitable indicators
for the detection of illegal activities like price rigging, market manipulation,
insider trading etc., which affects the interest of investors and hinders the
development and regulation of capital market.

2.4 LIMITATIONS

I. The study was conducted for equities segment in the Stock market, and
not applicable to other segments in the market.

II. The study is based purely on secondary data.

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2.5 RESEARCH DESIGN

A research design is a framework or plan for a study that guides the

collection and analysis of data. It is a blueprint that is followed completing the
study. The research design used for this project is Descriptive research design.
Descriptive research design is also called explanatory design. As this project is
based on the information from the market, which is descriptive in nature.

2.6 DATA USED FOR ANALYSIS

Only secondary data has been used. As the information required for the
project was available in one or other source. The main source of data was
collected from websites of SEBI, NSE and BSE.

2.7 TECHNIQUE USED FOR CALCULATION

The technique used for calculation is Price Variation. Price Variation is

defined as the variation between the last trade price (LTPt) and the previous
close price (P) of a security expressed as a percentage of the previous closing
price (P).

(I.e.) price variation ={(LTPt-P)/P}*100.

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2.8 COMPANIES TAKEN FOR CALCULATION

50 companies from NSE (Nifty) have been taken for calculation. The data
has been collected for a quarter (i.e.) 3months (Jan-march).

CHAPTER III

FINDINGS AND ANALYSIS

1) In India ,stock exchanges are managed and controlled by SEBI, RBI, Ministry
of finance, Department of Economic affairs (DEA), Department of Company
affairs(DCA) and Securities appellate tribunal(SAT).

2) Before Surveillance measures were taken, Market was a place where it was
not regulated properly and market abuse activities like price rigging, front
running, and circular trading were common.

3) SEBI was started in the year 1992, to regulate the market. SEBI formulated
rules and regulations in order to develop the market. It started separate
surveillance department in 1995 to protect the interest of investors.
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4) The main aim of surveillance department is to monitor the movements of

prices, volumes of scrips and record the report for each day.

5) The surveillance systems adopted by SEBI are:

a) Separate surveillance department in each stock exchange.

b) The Integrated surveillance system.

6) According to SEBI frauds in the market are classified into:

Market related frauds

Stock brokers frauds.
Frauds by investors.
Frauds by other facilitators.
Frauds related to government securities.

7) To control frauds in the market, SEBI has taken following initiatives:

(i) Conducting weekly surveillance meeting.

(ii) Formation of Integrated market surveillance system (IMSS) to co-ordinate the
stock exchange activities. IMSS performs following function:

a) analyze the information

b) Issue caution letters/Explanation letters.
c) Sharing information with other stock exchanges.

8) Other than surveillance mechanism SEBI has surveillance techniques for

monitoring the price movements. The techniques are:
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(i) Online alert system was generated to measure the price movement in
real time during trading hours.

(ii) Fixation of price bands for scrips depending on the liquidity position. If
the security has high liquidity and if it’s a derivative product the price
band is 20%. If the security has illiquid price bands are fixed as 2%,
5%and 10%.

(iii) Maintaining databases of companies listed in stock exchanges,

Brokers, Securities and Trading activities etc.

(iv) Using techniques like price variation, High low variation, consecutive
trade price variation and quantity variation, the movement of price of
scrip is analyzed.

(v) Circuit breaker system is applied to both BSE and NSE indices and is
triggered at 3 stages at 10%, 15%, and 20% on either movement of
indices.

(vi) Investigation is taken up when there is a malpractice in the market and

necessary steps are taken to safeguard the market.
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(vii) Suspension of scrip is done when it shows abnormalities in its price

movement.

(viii) Some scrip is transferred to trade for trade segment in order to avoid
price manipulation. Mostly small cap and mid cap stocks are
transferred to TT segments.

(ix) Financial dailies are verified for any rumors which affects the price
movement of scrips.

3.1 PRICE VARIATION FOR THE MONTH OF JANUARY (NIFTY 50

COMPANIES)

3.1.1 Price Variation of Nifty (1-7)

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Fig 3.1

3.1.2 Price Variation of Nifty (8-14)

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Fig 3.2

3.1.3 Price Variation of Nifty (15-21)

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Fig 3.3

3.1.4 Price Variation of Nifty (22-28)

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Fig 3.4

3.1.5 Price Variation of Nifty (29-35)

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Fig 3.5

3.1.6 Price Variation of Nifty (36-42)

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Fig 3.6

3.1.7 Price Variation of Nifty (43-50)

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Fig 3.7

3.1.8 Inference for January Month

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o The market reached a new peak level by crossing 20,0000 points. Then
the market slid to 15,000 points due U.S sub prime crisis impact, which
had its effect in all the global markets.

o The stock prices of many companies had negative impact in its value. The
stock prices were not stable. The variations in stock prices showed a
combination of positive and negative impact. Many companies witnessed
negative price variation of about 800%.

o On January 22, circuit breaker was pulled as a both BSE and NSE were
down by 10% and the market was halted for 1 hour. As a result all the
companies stock prices were in negative and their price variations were
also in negative ranging from 80% to 1800%.

o The companies, which had high negative price variations, were HDFC-
1800%, GRASIM-1463%, ONGC-1200%, MAHINDRA & MAHINDRA –
1000%, ITC-911%.

o This was due to U.S sub prime crisis which affected the American market
and American economy is expected to be in recession. As a result many
no of FIIs withdrew their amount from the market, which led to liquidity
squeeze. Later amount was pumped into the market by banks and other
government corporate to stabilize the market.

o On January 23, almost all companies recovered and had positive price
variations ranging from 20% to 2000%.

o The companies, which had high positive variations, were RELIANCE

ENERGY-2000%, RPL-1560%, NTPC-1350% and HDFC-800%.
 38

3.2 PRICE VARIATION FOR THE MONTH OF FEBRUARY (NIFTY 50

COMPANIES)

3.2.1 Price Variation of Nifty (1-7)

Fig 3.8
 39

3.2.2 Price Variation of Nifty (8-14)

Fig 3.9
 40

3.2.3 Price Variation of Nifty (15-21)

Fig 3.10
 41

3.2.4 Price Variation of Nifty (22-28)

Fig 3.11
 42

3.2.5 Price Variation of Nifty (29-35)

Fig 3.12
 43

3.2.6 Price Variation of Nifty (36-42)

Fig 3.13
 44

3.2.7 Price Variation of Nifty (43-42)

Fig 3.14
 45

3.2.8 Inference for February Month

o The market started to decline in the last week of January. This trend
continued in February.

o Though many companies recovered, some companies showed negative

price variations below 50%.

o Major companies like BAJAJ AUTO, BHEL, BPCL, HDFC BANK, HERO
HONDA, HDFC, ITC, and IDEA CELLUAR showed negative variation in
most of the trading days.
 46

3.3 PRICE VARIATION FOR THE MONTH OF MARCH (NIFTY 50

COMPANIES)

3.3.1 Price Variation of Nifty (1-7)

Fig 3.15
 47

3.3.2 Price Variation of Nifty (8-14)

Fig 3.16
 48

3.3.3 Price Variation of Nifty (15-21)

Fig 3.17
 49

3.3.4 Price Variation of Nifty (22-28)

Fig 3.18
 50

3.3.5 Price Variation of Nifty (29-35)

Fig 3.19
 51

3.3.6 Price Variation of Nifty (36-42)

Fig 3.20
 52

3.3.7 Price Variation of Nifty (43-50)

Fig 3.21
 53

3.3.8 Inference for March Month

o The 2008-09 budget presented at 29th February had its impact on stock
prices.

o The trading session in March opened with companies having negative

price variations.

o The price variations were not stable. The companies showed negative
variation in one trading day and showed positive variation in other trading
day with greater difference.

o The closing session of final quarter (Jan-March) for the year ended April
2007to March 2008 showed all companies in negative price variation from
40% to 1000%. Only Ambuja cements showed a price variation of about
9800%.

o In This quarter (Jan-march), the market reached an all time peak of

20,000 points and declined to 15,000 points. The recession in America
due to sub prime crisis had affected all major global markets.
 54

CONCLUSION

The goal of surveillance is to protect the market and secure investors from
market malpractices. The analysis from the study reveals that

 Surveillance cell in each stock exchanges carry out the functions

specified by SEBI, which helps SEBI to detect malfunctions easily.

 Online trading gives details about the participant, client and information
regarding purchase and sale of securities.

 The databases maintained helps to identify the broker or dealer who is

doing malpractices.

 The online non real time techniques help the stock exchanges to
identify fictitious movements in stock prices and to control them by
taking corrective actions.

 The steps taken by stock exchanges in preventing insider trading,

artificial movement of scrips prices has boosted investor confidence.

 SEBI undertakes investigations and cancel the membership of broker

or firm, which is under investigation. This protects investors as well as
marketers who do trade as per SEBI regulations.
 55

 The surveillance department has taken several corrective measures,

investigations and preventing the malpractioners from trading.

APPENDIX 1

INDIAN CAPITAL MARKET

1.1 INTRODUCTION

The Indian Capital Markets have a very wide spectrum in terms of number
of stock exchanges, listed companies, turnover, number of brokers and other
intermediaries. The Capital market deals with long-term funds. It supplies long
term and medium term funds. It deals with ordinary shares, stocks, debentures
and bonds of corporations and securities of the Government.

Capital market provides a market mechanism for those who have savings
and to those who need funds for productive investments. The major functions
performed by a capital market are:

 Mobilization of financial resources

 Securing the foreign Capital
 Promote balanced economic development
 56

Indian Capital market consists of gilt-edged market and the industrial

securities market. The gilt-edged market refers to the market for Government and
semi-Government securities backed by RBI.

The industrial securities market refers to the market for equities and
debentures of old and new companies. The industrial securities market is further
divided by the new issues market and further capital issue market.

The developments in the securities market, which supports corporate

initiatives, finance the exploitation of new ideas and facilitate management of
financial risks, hold necessary impetus for growth, development and strength of
the emerging market economy of India.

Since 1951, the Indian capital market has been broadening slowly. The
volume of savings and investments are showing steady improvement due to
many types of encouragement and tax relief given to promote savings.

1.2 STRUCTURE OF CAPITAL MARKET IN INDIA

The structure of capital market has undergone a remarkable

transformation due to liberalization process initiated by the Government,
specifically after 1991. Now the capital market comprises as an impressive
network of financial institutions and new financial instruments

There are various sub-markets in the capital market in India. The sub-
markets are as follows:

I. Equity market
 57

II. Debt market

III. Government securities market
IV. Mutual funds.

1.3 PROBLEMS FACED BY THE MARKET

Indian capital markets have been riddled with several complexities in

terms of infrastructure, systems, and practices etc. For example, the stocks had
multiple listings apart from trading in permitted categories in several exchanges.
The other problems raised out of paper based system and resultant bad
deliveries due to signature differences and fake and stolen shares. Some other
complexities raised out of lack of intermediary training and certification process,
absence of educational awareness of investors.

Before the surveillance activity was initiated, the market was a place
where price rigging was rampant and artificial fluctuations were ranging from
100% to 1000%. Market manipulation like fronting running, circulating trading,
and short squeeze was very common. There was a wide spread misuse of issue
process and also pre-issue manipulations to misguide the investors. In the stock
exchanges there were problems of payments leading to defaults. Margin system
was not very effective and was not even enforced properly.

1.4 REFORMS

The present process of economic reform, which began in 1991, had

focused on increasing output, efficiency and competitiveness of Indian industry,
 58

at home and abroad by pulling down artificial quantitative entry barriers for
industry, removing restrictions on growth in size of firms and licensing
requirements.

The reform of the financial services sector, especially the securities

markets had aimed at a larger role for the private corporate sector in the
economy, and the allocation of capital through market channels. In this context,
the need for an independent regulatory body, which would regulate the securities
markets and be responsible for fostering its development, was widely felt.

Thus the Securities and Exchange Board of India (SEBI) was set up as an
administrative arrangement in 1988. In 1992, the SEBI Act was enacted, which
gave statutory status to SEBI . The preamble of SEBI provides for “The
establishment of a Board to protect the interest of investors’ in securities and to
promote the development of, and to regulate the securities market”.

In India, the stock exchanges have been given primary responsibility of

undertaking market surveillance. Given the size, complexities and the level of
technical sophistication of the markets, the tasks of information gathering and
analysis of data/information are divided among Stock exchanges, depositories
and SEBI. Information relating to price and volume movements in the market,
broker positions, risk management, settlement process and compliance
 59

pertaining to listing agreement are monitored by the exchanges on a real time

basis as apart of their self regulatory function.

1.5 ROLE OF SEBI

The effort of SEBI to create a regulatory infrastructure based on

transparency and strict disclosure norms have resulted in creation of effective
market surveillance structure that ensures fairness, integrity and safety of the
market.

Thus in the areas of primary markets:

o The disclosure norms have been made more elaborate and stringent to
ensure that only good issues access the market and the investors have
maximum information to make informed investment decisions.

o Effort had been made to create transparent rules and regulations for
various intermediaries to bring about greater accountability and due
diligence on the part of the intermediaries like merchant Bankers etc.

In the field of secondary markets:

1. The trading and settlement systems have been made more efficient and
transparent.
 60

2. The emphasis on automation of the exchanges has made significant

difference.

3. A large number of exchanges have already become on line and that gives
the transparency of transaction and the capability of audit trail.

1.6 FRAUDS IN THE MARKET

To sustain the growth of the markets it is essential to overcome the

inadequacies and curb malpractices in the market. The main aim of surveillance
is to ensure fairness and safety in the market by detecting the frauds and market
abuse activities in the market.

As these activities hinders the growth of the market and investors

confidence. Only investor confidence can bring about investor participation in the
market, without which no development is possible in the capital markets. In this
context the role of surveillance becomes crucial. Some of the possible methods
of market abuse activities are:

 Engaging in a series of transactions that give an impression of activity or

price movement in a security.

 Improper transactions in which there is no genuine change in actual

ownership of the security.

 Transactions where both buy and sell orders are entered at the same
time, with the same price and quantity by different but colluding parties
with a view to create apparent activity or influence the price.
 61

 Buying at increasingly higher prices and then the securities are sold in the
market, often to retail investors, at inflated prices.

 Increasing the bid for a security to increase its price.

 Buying or selling securities at the close of the market in an effort to alter

the closing price of the security.

 Dissemination of false or misleading market information through various

media.

 Securing control of the demand-side of both the derivative and the

underlying markets leading to a dominant position, this is then exploited to
manipulate the price of the derivative and/or the asset.

1.6.1) Broad categories of persons involved in the frauds

1. Companies
2. Facilitators
3. Individual Investors
4. Others

1.6.2) Types of frauds

Various frauds are committed in the transactions relating to shares. They are:
 62

1.6.2.1) Market related frauds

Market related frauds are those frauds, which are committed by various
persons occupying higher positions and are usually carried out on a massive
basis.

a. Bulls / Bears operations

Bull is a speculator who purchases shares in anticipation of price

increase. A bear is a Speculator who sells shares in anticipation of fall in
the prices of shares.

b. Circular trading

Circular Trading is a method whereby buyer and seller of the

shares / stocks come to an Understanding whereby both sell order and
buy order will be matched with both price and quantity and thereby
creating large volumes in the trading of specific scrip of those Companies
with whom they both enter in to an agreement thereby pushing the share
price of the company and thereby take undue advantage from the
increase in prices.

c. Benami deals

Most of the frauds in the Share Market are committed through

Benami Deals only. In this defrauders occupying higher and prestigious
positions in Stock Exchanges, Big Companies, Financial Institutions and
 63

various other institutions use price sensitive information, which comes

under their purview from various sources to gain undue advantages and
gains from deals in the share market. Such people violate the market
regulations and misuse their positions for unlawful activities.

d. Price rigging

Price Rigging is an activity whereby Traders select a few scrips and

pump their funds in to buying of those scrips and send the prices of those
scrips to lucrative levels and also create artificial demand of the scrips in
the market and provoke common investors to pump in their savings in to
those scrips.

There are instances where companies who borrow long term funds
from financial institutions, have diverted the funds in to the stock market
and rigged up their share prices, thereby attracting common investor to
invest in their deposit schemes and make their share a fancy item.

e. Insider information

Fraudsters misuse their official positions to obtain sensitive

information about the market exposure of various brokers and investors
and pass on the information to other operators and also use the
information for operations of Benami trades creating false market.

f. Concentration of Market in a few hands / Inter Stock Exchange

Dealings
 64

The Stock market is concentrated in the hands of a few institutions

and big stocks brokers whose transactions affect the whole market and
also affect the buying and selling sentiments of the small investors and
thus resulting in the raise or fall of the stock market.

Indulging in Price Rigging by big corporate before any takeover or

acquisition by them in coalition with various stock brokers results in
making the small investors lose huge monies, who are unaware of the
things behind the scenes.

The Players in the Stock Market do not restrict their operations to a

single Stock Exchange, but they extend their hands to other Stock
Exchanges and make circles with the help of other brokers listed on other
Stock Exchanges like NSE, BSE, other Regional Stock Exchanges and
make underhand dealings in Inter Stock Exchange Transactions.

With this, the circular effect would not be limited to a group of stock
brokers of a particular stock exchange, but it extends to other stock
exchanges and involves stock brokers from different stock exchanges.
This makes a bigger circle and develops frenzy amongst the individual
investors across the country.

By the time frenzy and the circle become bigger, the Stock Brokers
leave the circle leaving behind gullible individual investors, who lose their
monies, because of the undue appreciation / fall in the prices of the
shares. They make use of the non-uniformity in the settlement dates of
 65

various stock exchanges and shift their positions from one exchange to
the other, with out transfer of funds.

g. Front running

Front running is a illegal practice of a stockbroker executing orders

on a security for their own account, before filling orders previously
submitted by their customers.

1.6.2.2) Stock Brokers – Frauds – Manipulative Activities

1. Stock Brokers delay the delivery of scrips bought by the client and use the
same to compensate their day-to-day transactions of buying and selling
their shares

2. Stockbrokers use clients’ funds to pay for their own trades and they
evade margin requirements and violate fair trade norms by colluding with
other brokers.

3. Stockbrokers deal in fictitious trades in association with other brokers and

deliberately hammering the prices, delaying transfer from broker’s pool
account to beneficiaries beyond stipulated limits and fraudulent and unfair
trade practices.
 66

4. Stock brokers facilitate circular trading through their proprietary accounts

thereby creating an artificial market in number of specific scrips and these
acts are in violation of SEBI code of conduct.

5. Stock brokers violate substantial holding limits set under takeover code
without informing the companies and Stock Exchanges and hold
voluminous number of shares in a single company and make the shares
not available in the open market and create artificial demand for the same.

1.6.2.3) Frauds by Investors

Big investors commit frauds by opening various accounts with various

names and different addresses to pump in the unexplained money or money
which is not supposed to be invested in shares to take the undue advantage of
share price increase and also to violate the SEBI norms for takeovers.

1.6.2.4) Frauds by Other Facilitators

There are various facilitators in relation to the transfer of shares like Issue
Registrar /Share Transfer Agent, Courier Man etc.

i. Issue Registrars / Transfer Agents hold very confidential information

about the particulars of the Share Certificates Issued like the Code
Numbers, Names of allottees, Number of shares etc.
 67

They either circulate the information to others or they themselves print

duplicate share certificates and pledge them with banks and defraud the
banks and in turn the Public Monies.

ii. Share Certificates in transit are stolen and are transferred in the names of
Benami or non-existent persons and are sold to others.

iii. Dividend warrants in transit are stolen and are encashed by opening new
afresh accounts in banks.

1.6.3) Related frauds for Government securities

1.6.3.1) Duplicate Certificates

Duplicate Certificates are printed and are pledged with the Bank and the
Bank has the duty of verifying the authenticity of the certificates pledged before
the loans are sanctioned. It is usually lacking on the part of the Bank to verify the
authenticity and the public funds invested or deposited in the banks are
misappropriated.

1.6.3.2) Stolen Certificates

Fraudsters steal the certificates held by general public and go for pledging
of the same with the banks and it is the duty of the bank to verify the authenticity,
 68

which is usually lacking and in such cases the public funds invested in the banks
are misappropriated.

APPENDIX 2

MARKET SURVEILANCE MECHANISM

2.1 INTRODUCTION

The major thrust of the securities market reforms is to improve the

operational and allocative efficiency of the market by correcting the structural
factors impeding the functioning of the system. It can be observed from global
experience that capital markets cannot develop in a healthy manner without
effective regulations for disclosures, listing, trading, liquidity, intermediation,
settlements, accounting etc. The regulatory policy must focus on visible and
effective maintenance of market discipline and professionalization of
intermediation and support services.

2.2 MARKET SURVEILANCE DEPARTMENT

 69

SEBI set up market surveillance department in July 1995 and also initiated
the setting up of independent surveillance departments in various exchanges.
The effort of SEBI has been on the one hand to create a regulatory infrastructure
based on transparency and strict disclosure norms.

The surveillance system adopted by SEBI is two pronged viz.:

(A)Surveillance Cell in the stock exchange

(B)The Integrated Surveillance Department in SEBI.

2.2.1) Surveillance Cell in the stock exchange

The stock exchanges are the primary regulators for detection of market
manipulation, price rigging and other regulatory breaches regarding capital
market functioning. This is accomplished through Surveillance Cell in the stock
exchanges. SEBI keeps constant vigil on the activities of the stock exchanges to
ensure effectiveness of surveillance systems.

The stock exchanges are charged with the primary responsibility of taking
timely and effective surveillance measures in the interest of investors and market
integrity. Proactive steps are to be taken by the exchanges themselves in the
interest of investors and market integrity as they are in a position to obtain real
time alerts and thus know about any abnormalities present in the market.
 70

SEBI had directed the Stock Exchanges in August 1995 to set up a

separate Surveillance Department with staff exclusively assigned to surveillance
functions. The Exchange has accordingly set up a separate Surveillance
Department to keep a close watch on price movement of scrips, detect market
manipulations like price rigging, etc., monitor abnormal prices and volumes which
are not consistent with normal trading pattern and monitor the member-brokers'
position to ensure that defaults do not occur.

Unusual deviations are informed to SEBI. Based on the feedback from the
exchanges, the matter is thereafter taken up for a preliminary enquiry and
subsequently, depending on the findings gathered from the exchanges,
depositories and concerned entities, the matter is taken up for full-fledged
investigation, if necessary.

2.2.2) The Integrated Surveillance department in SEBI

SEBI set up the Integrated surveillance department in association with

regulatory agencies like Department of Economic Affairs (DEA), Department
of Company Affairs (DCA), Reserve Bank of India (RBI), Securities and
Exchange Board of India (SEBI), Securities Appellate Tribunal (SAT), other
stakeholders (investors, corporate, shareholders) and media reports. It
watches the news appearing in print and electronic media.

The department also generates reports at the end of each day on the
details of major market players, scrips, clients and brokers during the day in the
Cash and F&O segment of the stock exchanges. This ensures timely
identification of the market players responsible for unusual developments on a
 71

daily basis. The department monitors the market movements, analyses the
trading pattern in scrips and indices and initiates appropriate action, if necessary,
in conjunction with stock exchanges and the depositories.

2.3 INITIATIVES TAKEN BY SEBI

Some of the major initiatives taken by SEBI are:

2.3.1) Weekly Surveillance meetings

In these meetings news and rumours appeared in the print and electronic
media are discussed and necessary actions are taken for safeguarding the
market. These meetings have helped in better coordination between the stock
exchanges and ensured uniformity in the surveillance measures taken by the
stock exchanges.

2.3.2) Setting standards

SEBI has established standards for effective surveillance in Indian

securities markets in line with global standards thereby setting global benchmark
for effective surveillance in securities market. SEBI also ensures a rigorous
 72

application of the standards and effective enforcement against offences to

ensure the safety and integrity of the market. SEBI also established cooperation
among overseas regulators of securities and futures markets to strengthen
surveillance on cross border transactions.

2.3.3) Integrated Market surveillance system

IMSS became operational from December 01, 2006. The primary job of
IMSS is to detect abnormalities, in the trading patterns and market behavior in a
timely manner, and to assist in taking corrective action. The system is an
effective tool to oversee the performance of stock exchanges. This system also
helped in sharing significant findings and observations for taking corrective
action. The IMSS seeks to achieve the following objectives:

a) An online data repository with the capacity to capture market transaction data
and reference data from a variety of sources like stock exchanges, clearing
corporations/houses, depositories, etc., in different formats for the securities and
Derivatives markets;

b) A research and regulatory analysis platform to check instances of potential

market abuse; and

c) Sophisticated alert engines that can work with various data formats (database,
numeric and text data) to automatically detect patterns of abuse and then issue
 73

an alert. These include insider trading engine, fraud alert engine and market
surveillance engine.

IMSS performs the following function:

i) Analysis of Information

Information requirement and analysis carried out led to significant

improvement and upgradition of system architecture of stock exchanges,
which are primary source of data for IMSS.

ii) Issuance of Caution Letters/ Explanation Seeking Letters

IMSS issue caution letters/explanation seeking letters to various

market intermediaries and clients cautioning/ seeking explanation about
their trading patterns. These letters issued based on an analysis of trading
behavior, as observed from various functionalities made available by the
system.
 74

iii) Sharing of Information with Stock Exchanges

A large number of observations are made and many instances

indicating abnormal behavior patterns are shared with stock exchanges for
appropriate action. This fulfilled the regulatory objective of ensuring that
stock exchanges continue to act as the first level regulator. This also kept
the stock exchanges always on alert to proactively detect and examine
abnormal trading patterns on their own.

2.3.4) Interim Surveillance Arrangement

The interim surveillance mechanism has been operating from June 2003.
This provides a confidential platform for exchange to view areas of emerging
concern-specific abnormalities and to consider pre-emptive actions and discuss
general surveillance issues.

In the weekly meetings, inputs from SEBI, exchanges and depositories are
pooled for better coordination, sharing of information and pro-active, coordinated
actions. The meeting also provides a highly specialized in interactive forum to
discuss prevailing surveillance issues and emerging concerns.

2.3.5) Inter-Regulatory Alert System

A SEBI-RBI Group on Integrated System of Alerts has been in place since

February 2004. This system was set up to share information and to recommend
suitable measures for coordinated action. In accordance with the
recommendations made by the Group, appropriate alerts and data are being
identified.
 75

2.3.6) Surveillance investigation team

SEBI set up a special investigation team at the Head office and regional
offices for special inspection. The special surveillance Inspection Teams
consisted of both Surveillance and inspection officials. SEBI has initiated all stock
exchanges to prepare a suspect list of entities/ brokers/clients that appears to
have noticeable trading pattern across scrips. The team scrutinize these lists for
further investigation. They conduct surprise and special inspections at the
premises of suspect entities. This is done to protect the investors and market.

APPENDIX 3

SURVEILLANCE TECHNIQUES

3.1 INTRODUCTION

Surveillance function of the stock exchange is to help and maintain a fair

and efficient market for securities. Surveillance function is to promote market
integrity in two ways, first, by monitoring price & volume movements (volatility) as
well as by detecting potential market abuses at a nascent stage, with a view to
minimizing the ability of the market participants, to influence the price of the scrip
in the absence of any meaningful information, and second, by managing default
risk by taking necessary timely actions. Both BSE and NSE use surveillance
techniques to curb the malpractices in the market.
 76

3.2 BSE

Bombay Stock Exchange is the oldest exchange in Asia. It was

established as, "The Native Share & Stock Brokers Association" in 1875. It is
the first stock exchange to gain permanent recognition in India. It was renamed
as, “Bombay Stock Exchange Limited” and received its Certificate of
Incorporation on 8th August 2005 and Certificate of Commencement of Business
on 12th August 2005. BSE is composed of 30 shares of a company, which is
called as SENSEX.

Bombay Stock Exchange On-Line Trading system (BOLT) was introduced

in March 1995. The Exchange has a nation-wide reach with a presence in 417
cities and towns of India. The introduction of BOLT system has made
surveillance easier for monitoring market transactions and more effective in
curbing price manipulations. The new system enables BSE to continuously
detect suspicious price movements and automatically activates the circuit
breaker.

3.2.1) Indices

The BSE has other indices. They are:

BSE-100 index
BSE-200 index
BSE-500 index
BSE- Dollex
BSE Teck index
BSE PSU index
BSE Mid- cap
 77

BSE Small-cap
BANKEX

3.2.2) Daily & weekly price limits

From January 1997, BSE imposed price limits as circuit breaker system to
maintain an order in trading system. Daily and weekly price limits are in force for
each stock.

The daily price limit of a stock is measured from stock’s closing price in
the previous trading session. The weekly price limit of a stock is based on the
last trading day in the previous week.

BSE set weekly and daily price limits for listed shares, which differ, on
different group of shares. The price limits were set for A group shares and four
sub- categories of B1 and B2 groups. Daily price limit were fixed as 10%, 20%,
50% and 75%. The weekly price limits for A group of share is 25% and no limits
for other group of shares.

3.2.3) Surveillance in BSE

The Exchange has set up a separate Surveillance Department to keep a

close watch on price movement of scrips, detect market manipulations like price
rigging, etc., monitor abnormal prices and volumes and monitor the member-
brokers' position to ensure that defaults do not occur. One of the objectives of the
Exchange is to promote and inculcate honorable and just practices of trade in
securities transactions and to discourage malpractices. BSE is one of the few
 78

Exchanges in the world, which has obtained ISO certification for its Surveillance
function.

Surveillance activities at the Exchange are divided broadly into three major
segments:

Price Monitoring,
Position Monitoring and
Investigations.

3.2.3.1) Price monitoring

Price monitoring is manly related to the price movement/ abnormal

fluctuation in prices or volumes etc. The function of this cell is to detect potential
market abuses at a nascent stage in order to control undue influence of price of
the scrips traded at the Exchange. The surveillance actions are:

a) Online alert system

The Exchange has developed an On-line Real Time (OLRT)

Surveillance System, which has been commissioned from July 15, 1999.
Under this system, alerts are generated by the system on-line, in real time,
based on certain preset parameters like the price and volume variation in
scrips, members having concentrated position(s) in one or a few scrips,
etc.
 79

An alert is a measure of abnormal behaviour. An Alert occurs in the

Surveillance system when a metric behaves significantly differently from
its benchmark. The alerts generated by the system are analyzed and
corrective action based on preliminary investigations is taken in such
cases. The system also provides facility to access trades and orders of
members.

This system includes databases such as company profile,

members' profile and historical database of turnover and price movement
in scrips, members' turnover, their pay-in obligations, etc.

The system generates alerts on the basis of pre-set parameters

during the trading hours and corrective action based on further
investigations is taken in such cases.

These pro-active measures are taken based on the analysis/

processing of alerts generated based on various parameters and other
inputs like news, company results, etc. The broad parameters considered
for generation and analysis of alerts are price movement, top ‘n’ turnover,
scrips traded infrequently, scrips hitting new high/ low, scrips picked up for
rumor verification, etc.

b) Reduction of Circuit Filters

As per the guidelines issued by SEBI, the Exchanges are required

to apply a daily Circuit Filter of 20% on all the scrips except on the scrips
 80

on which derivative products are available or are included in the indices on

which derivative products are available.

The circuit filters are reduced in case of illiquid scrips or as a price

containment measures. The circuit filters are reduced to 10 % or 5 % or 2
% based on the criteria decided by the department.

c) Trade to Trade

The Exchange transfers the scrips for trading and settlement on a

trade-to-trade basis which would result into giving/taking delivery of shares
on a gross level and no intra-day/settlement netting off/squaring off facility
would be permitted.

The scrips, which form part of ‘Z GROUP’, are compulsorily settled

on a trade-to-trade settlement basis. In addition to that Surveillance
department transfers various scrips from time to time on a trade-to-trade
settlement basis (T & TS group) based on the criteria decided jointly by
the Exchanges and SEBI.

d) Suspension of scrip

The Surveillance department in exceptional cases suspends the

scrips where the abnormal movements continue despite the measures
taken as per SEBI guidelines.

e) Special Margin
 81

The Exchange imposes special margin in the scrips where it is

suspected that there is an attempt to raise up the prices by creating
artificial volumes.

f) Rumor Verification

Surveillance Department along with Compliance Officers of

companies obtains comments on various price sensitive corporate news
items of the company appearing in the selected New Papers. Comments
received from the companies are disseminated to the market by way of
BOLT Ticker and/ or Notices on website. If clarification received from the
company denies the news / information, a letter is sent to the company
asking them to take up the matter with concerned media organization in
view of divergence between company clarification and the news item.

3.2.3.2) Investigations

The investigation cell of the Department of Surveillance and Supervision

conducts following types of analysis of suspected market irregularities in a
systematic and logical manner with a view to detect market abuse and
accordingly take appropriate and timely actions.

a) Snap Investigations:

A preliminary analysis of the trading pattern and corporate

developments in the scrip are taken to ascertain whether the price or
volume variation observed requires further detailed analysis.

b) Examinations:
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Examinations are more detailed form of preliminary analysis of the

trading pattern and various developments in the company wherein a report
is prepared. These examinations are conducted usually on receiving a
reference from SEBI or any other department of the Exchange or based
on an investor complaint.

c) Investigations:

These are full - fledged and detailed investigations wherein a

complete analysis is conducted in a systematic and logical manner based
on the information available with the Exchange and information
sought/received from members, companies, depositories and various
other sources. These investigations are conducted to establish and prove
the manipulation suspected in the course of preliminary analysis.

The department imposes penalty or deactivate BOLT terminals or

suspend the member/s who are involved in market manipulation, based on
the input/ evidence available from investigation report or as and when
directed by SEBI.

3.2.3.3) Position Monitoring

The position monitoring relates mainly to abnormal positions of members

in order to manage the default risk. The Surveillance Department closely
monitors outstanding exposure of members on a daily basis. For this purpose, it
has developed various market monitoring reports.
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The reports are scrutinized to ascertain whether there is excessive

purchase or sale position build up compared to the normal business of the
member, whether there are concentrated purchases or sales, whether the
purchases have been made by inactive or financially weak members and even
the quality of scrips is considered to assess the quality of exposure.

Based on analysis of the above factors some members are advised to

reduce their outstanding exposure in the market. Trading restrictions are placed
on financially weak members as and when deemed fit after taking into
consideration their past track record. The department thus executes the Risk
Management functions to avert possible payment default of members by taking
timely corrective measures.

3.3 NSE

National Stock Exchange was promoted by leading Financial Institutions in

India and was incorporated in November 1992. NSE was recognized as a stock
exchange in April 1993. NSE commenced operations in the Wholesale Debt
Market (WDM) segment in June 1994. The Capital Market (Equities) segment
commenced operations in November 1994 and operations in Derivatives
segment commenced in June 2000.

NSE was the first stock exchange to commence its operation as a fully
computerized stock exchange in India. NSE operates a sophisticated screen
based trading system, which is called National Exchange for Automated
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Trading (NEAT). It is an automated screen based trading system. The system

has more than 2600 trading terminals all over the country.

It also have more than 3000 VSAT’s across country with a 24 hour
Network monitoring system in over 320 cities and more than 9000 users who
trade on NSE online.

3.3.1) Indices

3.3.1.1) Major indices

i. S&P CNX Nifty

ii. CNX Nifty Junior
iii. CNX 100
iv. S&P CNX 500
v. CNX Midcap
vi. Nifty Midcap 50
vii. S&P CNX Defty
viii. CNX Midcap 200
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3.3.1.2) Other Indices

1. CNX IT Index
2. CNX Bank Index
3. CNX FMCG Index
4. CNX MNC Index
5. CNX Service Sector Index
6. S&P CNX Industry Indices
7. CNX Energy Index
8. CNX Pharma Index
9. CNX Infrastructure Index
10. CNX PSU BANK Index
11. CNX Realty Index

3.3.2) Daily and weekly price limits

NSE also has fixed price limits according to three categories of stocks
based on stocks liquidity. The daily limits are 10%, 7% and 15% from the
previous closing price of the day. Weekly price limits are 25%, 20% and 30%
from the previous closing price of the trading period depending upon the
category.

3.3.3) Surveillance in NSE

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Effectiveness of Surveillance function depends on its ability to promptly and

accurately identify suspicious trading. Surveillance function is broadly divided in
to three, they are….

• Online surveillance.
• Offline surveillance.
• Rumor verification.

3.3.3.1) On-line Surveillance:

On-line Surveillance system is a common framework across all the stock

Exchanges. It is used for the purpose of monitoring the prices; volume & volatility
in various series and it analyze the market using various methods like real time
graphs, queries, alerts etc.

The online surveillance is also called as stock watch system. This stock
watch system gives indicators for the potential illegal or improper activity to
protect investor’s confidence and the integrity of the securities market and its
players this system has standardized information available with all the stock
exchanges.

The techniques used in stock watch system are

 Databases
 Alert system

i) Databases
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The stock watch system maintains standardized information in the form of

various databases, which includes information about Issuer, Securities, and
trading activities and about the members of stock exchanges. As these
information are vital for the market the data pertaing to it are maintained in the
form of databases. The databases are maintained by all the stock exchanges
and are updated every week. This standard information is stored in the form of
four databases as follows:

a) Issuer Database

The database contains information about the company who issue

securities to the public and their instruments, which are traded in the stock
exchanges. The information includes the name, address, the line of business,
the promoters, share holding pattern, capital history, balance sheet, profit and
loss accounts, corporate actions, subsidiary companies etc.

b) Securities Database

The database contains information about the instruments like shares,

preference shares, warrants, and debentures etc, which are traded on the
exchange.

The information includes the name of the company, the instrument type,
floating stock, trading start date, Ex-date, no- delivery periods, dates and
reasons for suspension of trading, details of fake and forged shares etc.

c) Trading Database
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The database contains information, which are related to price, volume and
value relating to the trades, obligations, deliveries and auctions, positions,
price bands etc. It is updated on-line/daily/end of settlement based on the
type of information.

d) Member Database

The information in this database includes the name and the type of
membership, name, address and qualification, details of other exchange’s
membership, securities in which the member is active, short and bad delivery
record, suspension record, investor grievance complains, arbitration cases,
sub-brokers with their names and addresses, the turnover details, net worth
etc.

ii) Alert system

Automated surveillance system is the tool for monitoring real-time trading

activities. The alert system compares the movements of price and trading volume
for each security with the parameters based on the present values. The alert
system will generate an alert if there is any change in price / trading volume of
any security. The online securities monitoring team will investigate the reason for
unusual changes. The objective of alerts:

 To detect potential abnormal activity- surveillance system detects on

real time basis potential abnormal activity by comparing with historical
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data. Abnormal activity may be pertaining to abnormality in respect of

price, volume etc.

 Capture real time data on surveillance system- Instantaneous updation

of price and quantity data is provided.

 To generate alert in case of aberrations- Surveillance system

generates alerts across live data based on predefined parameters.

Alerts are received from various sources such as the surveillance group,
referrals from regulators, complaints from investors/ members and referrals
from other departments. There are two types of alert system. They are:

a) Online Real time Alerts

These alerts are based on the trade related information during the trading
hours. The objective of these alerts is to identify any abnormality as soon as it
happens. These alerts include intra-day price movement related and
abnormal trade quantity or value related alerts.

b) Online Non Real time Alerts

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These alerts are based on the traded related information at the end of the
day and the available historical information. The objective of these alerts is to
analyze the price, volume and value variations over a period. The techniques
used are:

 Price variation:

It is defined as the variation between the last trade price (LTPt) and the
previous close price (P) of a security expressed as a percentage of the
previous closing price (P). (I.e.) price variation ={(LTPt-P)/P}*100.

 High-Low Variation

It is defined as the variation between the high price (H) and the low price
(L) of a security expressed as a percentage of the previous close price (P).
i.e. High-Low Variation = {(H-L)/p}*100.

 Consecutive trade price variation

It is defined as the variation between the last trade price (LTPt) and the
previous trade price (LTPt-1) of a security expressed as a percentage of the
previous trade price (LTPt-1) i.e. consecutive trade variation ={(LTPt-LTPt-
1)}*100

 Quantity variation
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It is defined as the percentage variation between the total traded quantity

Q and the average traded quantity Qavg expressed as a percentage of the
average traded quantity.

Quantity variation = {(Q-Qavg)/Qavg}*100

Quantity variation ratio = Q/Qavg

Daily average traded quantity = Total number of shares traded in the last ‘n’
trading days/n

3.3.3.2) Off-line Surveillance:

Offline surveillance includes Margining requirements, procedures in

respect of exception handling, position monitoring, exposure limits, investigation
techniques & disciplinary action procedures. The techniques used are:

i) Price bands

Price bands refer to the daily price limits parameterized through

appropriate program on the trading system, within which the price of a
security is allowed to go up or down. Price bands are applicable on all
securities including debentures, warrants, preference shares etc., other
than specifically identified securities.

No price bands are applicable on securities on which derivative

products are available or securities included in indices on which
derivatives products are available. In order to prevent members from
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entering orders at erroneous prices in such securities, the exchange has

fixed operating range pf 20% for such securities.

At NSE, 5% and 10% daily price bands are applied to specify

securities, which are identified on objective criteria. The circuit filters are
reduced in case of illiquid securities or as a price containment measure.

ii) Market wide circuit breakers

The index –based market-wide circuit breaker system applies at 3

stages of the index movements, either way viz. at 10%, 15%, and 20%.
These circuit breakers trigged bring about a coordinated trading halt in all
equity and equity derivative markets nationwide to provide for a cooling-off
period giving buyers and sellers time to assimilate information. The
movement of either the NSE S&P CNX Nifty or BSE Sensex, which ever is
breached earlier, triggers the market-wide circuit breakers.

STAGE 1:

In case of a 10% movement of either of these indices, there would

be a one-hour 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 1/2 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.

STAGE 2:
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In case of a 15% movement of either index, there shall be a two-

hour halt if the movement takes place before 1:00 p.m. If the 15% trigger
is reached on or after 1:00 p.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 reminder of the day.

STAGE 3:

In case of 20% movement of index, trading shall be halted for the

remainder of the day.

These percentages are translated into absolute points of index

variations on a quarterly basis. At the end of each quarter, these absolute
points of index variations are revised for the next quarter. The absolute
points are calculated based on closing level of index on the last day of the
trading in a quarter and rounded off to the nearest 10n points in case of
S&P CNX Nifty.

iii) Trade for trade

Trade for trade deals are settled on a trade for trade basis and
settlement obligations arise out of every deal. When a security is shifted to
trade for trade segment, selling/buying of shares in that security would
result into giving or taking delivery of share and no intra day or settlement
netting off/square off facility would be permitted.

Surveillance department of the exchange, in co-ordination with

SEBI and BSE, occasionally transfers securities from rolling settlement to
a trade-to-trade settlement as a market surveillance measure. The transfer
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of securities for trading and settlement on a trade-to-trade basis is purely a

market surveillance measure. Securities trading in the trade for trade
segment are subjected to a price band of 5%.

3.3.3.3) Rumor Verification:

The surveillance team analyse leading financial dailies for any price
sensitive information pertaining to the companies listed in stock exchanges. In
case if there is any news is not intimated to exchange and if there is a impact in
price movement letters are sent to the companies seeking clarification. The reply
received from companies are broadcasted and updated in the stock exchange
websites.

They also analyse the price/quantity movement prior to any corporate

announcement regarding Rights issue, Bonus issue, Mergers/ Amalgamation,
open offer, Preferential issue and buyback of Securities.

REFERENCES

WEBSITES

www.nseindia.com

www.bseindia.com

www.google.com
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www.sebi.gov.in