Under the module "Indian Banking Today and Tomorrow" we studied how the series of structural and functional reforms in the banking & financial sector, brought Indian banking & financial Institutions to global standards. Simultaneously far reaching changes have also taken place in the securities/capital markets (primary/secondary markets), resulting in the total integration of the securities market; diversification of the products traded, and providing the investor a risk-free and transparent environment. Like banks, stock exchanges have also been, in the post reform period, freed from the direct control of the Government and placed under a professional regulatory authority, i.e. Securities & Exchange Board of India (SEBI). Major changes that have taken place resulted in the complete transformation of the structure and composition of the market. Some of them are briefly described here-under. Detailed articles can be viewed in the module Indian Stock Exchanges.

Establishment of SEBI: The Securities and Exchange Board of India was established by the Government of India in 1988 through an executive resolution, and it was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act on 30th January 1992. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities (covering both development & regulation of the market) and independent powers have been set up. Paradoxically this is a positive outcome of the Securities Scam of 1990-91 (popularly identified as the Harshad Mehta Scam).

The basic objectives of the Board were identified as:

• to protect the interests of investors in securities;

• to promote the development of Securities Market;

• to regulate the securities market and

• for matters connected therewith or incidental thereto.

Since its inception SEBI has been attending to the fulfillment of its objectives with commendable zeal and dexterity. The improvements in the securities markets like capitalization requirements, margining, establishment of clearing corporations etc. reduced market and credit risks. More details on the performance record SEBI is given in another article.

The second epoch-making transformation in the market is the setting up of National Stock Exchange in November 1992 and commencement of electronic networking of stock exchanges with dealing brokers and introduction of on-line screen based trading. NSC is able to radically transform the Indian Capital market during the decade of its existence. It has changed the mindset of all market players and has built investor confidence in the secondary markets. Around the year 1995 all stock exchanges switched over from the open outcry system to screen based online trading. This enabled both NSE and BSE to spread their operations to every nook and corner of the country. Market Integration is uniquely achieved through this measure.

The next major positive change is the passing of the Depositories Act, 1996 and establishment of National Securities Depository Limited (NSDL) in the same year followed by the setting up of the Central Depository Services Limited (CDSL). A depository is an organization, which holds the shares in the form, of electronic accounts in the same way a bank holds the money. Buying and selling electronic shares in the market is just like selling physical shares, only it's much more simple and safe. Under the Depository System, transfer of ownership of securities is done by book entry similar to a bank deposit account. This has enabled shares and securities to be held electronically instead of in the form of paper-printed documents. This has eliminated several handicaps hither-to felt and provided several benefits like-

• a safe, convenient way to hold securities;

• immediate transfer of securities;

• no stamp duty on transfer of securities;

• elimination of risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc.;

• reduction in paperwork involved in transfer of securities;

• reduction in transaction cost; no odd lot problem, & even one share can be sold; etc.

SEBI has introduced comprehensive regulatory measures and prescribed registration norms, eligibility criteria, code of obligations and code of conduct for different intermediaries like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, portfolio managers, credit rating agencies, underwriters etc. It has introduced model bye-laws, risk identification and risk management systems for Clearing houses of stock exchanges, surveillance system etc. that has made dealing in securities both safe and transparent to the end investor.

Another significant event worth highlighting is the approval of trading in stock indices (like S&P CNX Nifty & Sensex) by SEBI in the year 2000. A market Index is a convenient and effective product because of the following reasons:

• It acts as a barometer for market behavior;

• It is used to benchmark portfolio performance;

• It is used in derivative instruments like index futures and index options;

• It can be used for passive fund management as in case of Index Funds.

NSC launched S & P CNX Nifty in April 96. S&P CNX Nifty is a well diversified 50 stock index accounting for 23 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds. NSE also introduced in Decr.96 CNX Nifty Junior. The total traded value of all Nifty stocks is approximately 70% of the traded value of all stocks on the NSE

BSE introduced Sensex. Sensex index is an indicator of the broad market. For instance, tracking the changes in the Sensex enables one to effectively gauge stock market movements. The BSE 30 Sensex, first compiled in 1986 is a market capitalisation weighted index of 30 Scrips. It represents 30 large well-established and financially sound companies. The Sensex also has the largest social recall attached with it. It was the first index to be launched by any Stock Exchange in India and has acquired a unique place in the collective memory of investors. It facilitates investors to relate to the market. The most important advantage is that, as one of the oldest and reliable barometers of the Indian Stock Market, it provides time series data over a fairly long period of time. The Sensex represents a broad spectrum of companies in a variety of industries. It represents 14 major industry groups which are large enough to be used for effective hedging. Given the lower cost structure and the overwhelming popularity of the Sensex. launch of BSE-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 in India at Mumbai, Calcutta, Delhi, Ahmedabad and Madras. The BSE National Index was renamed as BSE-100 Index from October 14, 1996 and since then it is calculated taking into consideration only the prices of stocks listed at BSE.

With a view to provide a better representation of the increased number of companies listed, increased market capitalisation and the new industry groups, the Exchange constructed and launched on 27th May, 1994, two new index series viz., the 'BSE-200' and the 'DOLLEX-200' indices. Since then, BSE has come a long way in attuning itself to the varied needs of investors and market participants. 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 taking the family of BSE Indices to 13.

Indian securities markets have indeed waited for too long for derivatives trading to emerge. Mutual Funds, FIIs and other investors who are deprived of hedging opportunities will now have a derivatives market to bank on. First to emerge are the globally popular variety - index futures.

While derivatives markets flourished in the developed world Indian markets remain deprived of financial derivatives to the beginning of this millenium. While the rest of the world progressed by leaps and bounds on the derivatives front, Indian market lagged behind. Having emerged in the markets of the developed nations in the 1970s, derivatives markets grew from strength to strength. The trading volumes nearly doubled in every three years making it a trillion-dollar business. They became so ubiquitous that, now, one cannot think of the existence of financial markets without derivatives.

Two broad approaches of SEBI is to integrate the securities market at the national level, and also to diversify the trading products, so that more number of traders including banks, financial institutions, insurance companies, mutual funds, primary dealers etc. choose to transact through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD is a real landmark.

SEBI first appointed the L.C.Gupta Committee in 1998 to recommend the regulatory framework for derivatives trading and to recommend a suggestive bye-laws for Regulation and Control of Trading and Settlement of Derivatives Contracts. The Board of SEBI in its meeting held on May 11, 1998 accepted the recommendations of the Dr. L.C. Gupta Committee and approved the phased introduction of derivatives trading in India beginning with Stock Index Futures. The Board also approved the "Suggestive Bye-laws" recommended by the committee for Regulation and Control of Trading and Settlement of Derivatives Contracts.

SEBI subsequently appointed the J.R.Verma Committee to recommend Risk Containment Measures in the Indian Stock Index Futures Market. The report was submitted in the same year(1998) in the month of November by the said committee.

However the Securities Contracts (Regulation) Act, 1956 (SCRA) needed amendment to include "derivatives" in the definition of securities to enable SEBI to introduce trading in derivatives. The necessary amendment was carried out by the Government in the year 1999. The Securities Laws (Amendment) Bill, 1999 was introduced to bring about the much needed changes. In December 1999 the new framework has been approved. Derivatives have been accorded the status of `Securities'. The ban imposed on trading in derivatives way back in 1969 under a notification issued by the Central Government has been revoked. Thereafter SEBI formulated the necessary regulations/bye-laws and intimated the Stock Exchanges in the year 2000, while derivative trading started in India at NSE in the same year and BSE started trading in the year 2001. In this module we are covering the different types of derivative products and their features, that are traded in the stock exchanges in India.

• The prohibition on options in SCRA was removed in 1995. Foreign currency options in currency pairs other than Rupee were the first options permitted by RBI.

• The Reserve Bank of India has permitted options, interest rate swaps, currency swaps and other risk reductions OTC derivative products.

• Besides the Forward market in currencies has been a vibrant market in India for several decades.

• In addition the Forward Markets Commission has allowed the setting up of commodities futures exchanges. Today we have 18 commodities exchanges most of which trade futures e.g. The Indian Pepper and Spice Traders Association (IPSTA) and the Coffee Owners Futures Exchange of India (COFEI).

• In 2000 an amendment to the SCRA expanded the definition of securities to included Derivatives thereby enabling stock exchanges to trade derivative products.

• The year 2000 heralded the introduction of exchange traded equity derivative products

• In the equity markets both the National Stock Exchange of India Ltd. (NSE) and The Stock Exchange, Mumbai (BSE) were quick to apply to SEBI for setting up their derivatives segments.

• NSE as stated earlier commenced derivatives trading in the same year i.e. 2000 AD, while BSE followed after a few months in 2001.

• Both the exchanges have set-up an in-house segment instead of setting up a separate exchange for derivatives.

• NSE's Futures & Options Segment was launched with Nifty futures as the first product.

• BSE's Derivatives Segment, started with Sensex futures as it's first product.

• Stock options and stock futures were introduced in both the Exchanges in the year 2001

Thus started trading in Derivatives in Indian Stock Exchanges (both BSE & NSE) covering Index Options, Index Futures, Stock Options & Futures at in the wake of the new millennium. In a short span of three years the volume traded in the derivative market has outstripped the turnover of the cash market

The arrival of this new financial product in the securities markets of India, should now interest us to learn more about the origin and development of the global market in derivatives trading of financial securities. This is equally of a recent origin since 1070s. This is deal with in detail in the next page.