Unit 01: Introduction to Indian Securities Market and Trading Membership

Objective Type Questions [1Mark]

Fill in the blanks with appropriate
1. when the issuer makes an issue of securities to a select group of persons not
exceeding 49 and which is neither a rights issue nor a public issue it is
called………………..
Ans a private placement
2. ……………..refers to market where securities are traded after being offered to the
public in the listed on the Stock Exchange
Ans. Secondary market
3. Secondary market comprises of equity, ............. and the debt markets
Ans. derivatives
4. The secondary market is operated through two mediums, namely__________market
and the Exchange-Traded market.
Ans. the Over-the-Counter (OTC)
5. …………………markets are informal markets where trades are negotiated.
Ans. Over the counter
6. The blue chip index of NSE is ………………
Ans. CNX Nifty
7. An...................... is used to give information about the price movements of
products in the financial, commodities or any other markets.
Ans. Index
8. …………………….is defined as value of all listed shares on the country‘s exchanges.
It iscomputed on a daily basis
Ans. Market capitalization
9. The market capitalization ratio is defined as market capitalization of stocks divided
by …………
Ans. GDP
10. How is stock market index created?
Ans. The stock market index is created by selecting a group of stocks that are
representative of the whole market or a specified sector or segment of the market.
11. How the turnover for a share is computed?
Ans. Turnover Ratio = Turnover at Exchange / Market Capitalization at Exchange
12. Financial Products are called _____________________
Ans. Securities.
13. Name the participants of securities market.
Ans. (i) The Issuer (ii) The Intermediaries (iii) Investors
14. Participants of securities market are regulated by
 (a) The Securities and Exchange Board of India (SEBI),
(b) Reserve Bank of India
(c) Ministry of Corporate Affairs (MCA)
(d) The Department of Economic Affairs (DEA) of the Ministry of Finance
Out of the above,
(i) only a, b and c are correct (ii) Only a and c are correct
(iii) All are correct (iv) b and c are correct
Ans. All are correct
15. …………..enables investors to apply for IPOs / FPOs and rights issues without
making apayment
Ans. ASBA
Very Short Answer Type Questions. [ 2 Marks]
1. Who is a stock broker?
Ans. A stockbroker is member of a stock exchange and requires to hold a
certificate ofregistration from SEBI in order to buy, sell or deal in securities
2. How is Net worth of a member calculated?
Ans. The net worth of the member is calculated as summation of Capital and free
reservesless non allowable assets.
( Non-allowable assets include fixed assets, pledged securities,member‘s card, non-
allowable securities (unlisted securities), bad deliveries, doubtful debts and
advances, prepaid expenses, intangible assets and 30% of marketable securities.)
3. What is the maximum brokerage charged by a trading member?
Ans. 2.5% ofthe contract price, exclusive of statutory levies
4. What is the role of an Investor Service Cell (ISC)?
Ans. 1. To handle the Investor’s complaints received against the trading members or
companies in respect of claims/ disputes for transactions executed on exchange.
2. The complaints are forwarded to the trading members for resolution and
seeking clarifications.
3. The ISC follows-up with the trading members and makes efforts to resolve the
complaint speedily.
5. What is meant by Arbitration?
Ans. Arbitration is a quasi-judicial process. It is an alternate dispute resolution
mechanism prescribed under the Arbitration and Conciliation Act, 1996. The
Exchange bye-laws prescribe the provisions and procedures in respect of
arbitration.
6. When was currency futures launched in India?
Ans. On August 29, 2008, (NSE launched trading in currency future contracts in the
USD-INR pair for the first time in India. Trading in other currency pairs like Euro
– INR,
Pound Sterling – INR and Japanese Yen was further made available for trading in
March 2010.)
7. Mention the securities traded in Capital Market segment.
Ans. Equity shares, warrants, debentures etc. are traded in capital Market Segment.
8. T-Bills, PSU Bonds, Corporate debentures, Commercial Papers, Certificate of
Deposits are traded in which market?
Ans. Wholesale Debt Market
9. Explain Demutualization.
Ans. Demutualization of stock exchanges means the segregation of members’
right into different sets of people viz. ownership, management and trading.

(Historically, stock exchanges were owned, controlled and managed by the

brokers. In case of disputes, integrity of the stock exchange suffered. NSE,
however, was set up with a pure demutualized governance structure, having
ownership, management and trading with three different sets of people.
Currently, all the stock exchanges in India have a demutualized set up.)
10. What is Screen Based Trading?
Ans. Screen Based Trading is nation-wide on-line fully automated screen based
trading system (SBTS) on the CM segment.
11. Why is margin collected from clients?
Ans.
In case of default, margin collected from clients are utilized for making
payment to the clearing corporation for settlement with respect to that
client.
12. What are the standards for admission of members laid down by the Exchange?
Ans. (i) corporate structure (shareholding pattern), (ii) capital adequacy (Paid up
capital) (iii) Net worth, (iv) Interest Free Security Deposit (IFSD),
(v) Collateral Security Deposit (CSD), (vi) track record, (vii) Education,
experience etc.
This is done to ensure quality broking services so as to build and sustain
confidence among investors in the Exchange‘s operations.
13. Explain the category of Trading Cum Self Clearing Member.
Ans. Trading Cum Self Clearing Member executes, clear and settle the trades executed
on his own account as well as on account of his clients.
14. Name the two types of memberships offered by NSE.
Ans. Two types of memberships offered:

1. Normal - Unrestricted business expansion

2. Alpha - For focused proprietary trading with limited clientele
15. Write a note on ASBA.
Ans. Application Supported by Blocked Amount (ASBA) enables investors to apply for
IPOs / FPOs and rights issues without making a payment.
Instead, the amount is blocked in investors‘ own account and only an amount
proportionate to the shares allotted goes out when allotment is finalized
16. What is Dematerialisation?
Ans. Dematerialisation is the process by which a client can get physical
certificates converted into electronic balances. An investor intending to
dematerialise its securities needs to have an account with a DP .
Short Answer Type Questions. [3 Marks]

1. Explain the dominant promoter norms applicable in case of unlisted

trading members.
Ans. 1. If a person holds 51% of shares in the trading member corporation, either alone or with
their relatives as defined by the Companies Act 2013.
2. If a person holds 51% of shares in the trading member corporation, either alone or with
those classified as having 'control' under the Substantial Acquisition of Shares and
Takeovers Regulations, 1997.
3. If a person holds 51% of shares in the trading member corporation, either alone
or with the support of strategic investors.
2. Explain the dominant promoter norms applicable in case of listed
trading members.
Ans. Any person identified as promoter in the offer document
 or
in any document for offer of securities to the public
or
existing shareholders
or
in the shareholding pattern disclosed by the corporate trading member
under the provisions of the Listing Agreement,
whichever is later, would be eligible to constitute dominant promoter
group
3. Explain the dominant promoter norms applicable in case of Banks,
central or state government owned finance and/or development
institutions.
Ans. The following entities are allowed to be identified as dominant
shareholders provided they have a net worth of at least Rs.50
crores:

(a) Scheduled Banks;

(b) Central or State Government owned Finance and/or Development
Institutions;
(c) Any financial institution registered and regulated by any regulatory
authority such as RBI, SEBI, IRDA;
4. What requirements need to be fulfilled in case of an individual sub-broker
applicant?
Ans. (a) They should not be less than 21 years of age;
(b) They should not have been convicted of any offence involving fraud or
dishonesty;
(c) They should have either passed 12th standard equivalent
examination fromaninstitution recognized by the Government or
10th standard with2 years of work experience in securities market.

(d) They should not have been debarred by SEBI

5. What is a contract note and what its elements?
Ans.
Contract note is a confirmation of trade(s) done on a particular day.
 Elements of the contract note:
1. Name and address (registered office address as well as dealing office
address) of the TM,
2. The SEBI registration number of the TM,
3. details of trade viz. order number, trade number, order time, trade time,
security name, quantity, trade price, brokerage,
4. settlement number and details of other levies.
Long Answer Type Questions: ( 4 Marks)
1. Name the various segment groups for which Persons or Institutions
desirous of securing admission as members (stock brokers) on the
Exchange may apply formembership.
Ans. (a) Wholesale Debt Market (WDM) Segment
(b) Capital Market (CM) segment

(c) Capital Market (CM) and Wholesale Debt Market (WDM)segment

(d) Capital Market (CM) and Futures & Options (F&O) segment
(e) Capital Market (CM), Futures & Options (F&O) segment and
WholesaleDebt Market (WDM) segment

(f) Currency Derivatives (CD) segment with or without the above

mentionedsegments.
Clearing Membership of National Securities Clearing Corporation Ltd.
(NSCCL) as aProfessional Clearing Member (PCM).
2. Who can become a trading member with NSE?
Ans.
(a) Individuals;
(b) Partnership firms registered under the Indian Partnership Act, 1932.
(c) Limited Liability Partnerships registered under the Limited
LiabilityPartnership Act, 2008

(d) Institutions, including subsidiaries of banks engaged in financial

services;
 (e) Banks for Currency Derivatives Segment;
(f) Body corporates including companies as defined in the Companies Act,
2013
3. What are the conditions on which a certificate is granted to a stock
broker byexchange?
Ans.
(a) Holds membership in any stock exchange.
(b) Must follow the rules and regulations of the stock exchanges where they are a
member.
(c) Must get prior permission from SEBI to continue trading in securities if there is a
change in status or structure.
(d) Must pay the registration fees as required and take steps to address investor
complaints within one month of receipt, keeping SEBI informed about the
complaints received.
4. While considering the application of an entity for the grant of registration as a
stockbroker, what points are checked by SEBI out of the applicant?
Ans. (a) is eligible to be admitted as a member of a stock exchange;
(b) has the necessary infrastructure like adequate office space,
equipmentand manpower to effectively discharge his activities;

(c) has any past experience in the business of buying, selling or dealing in
securities;
(d) Is involved in any disciplinary proceedings under the stock exchange rules related to
his business as a stockbroker, affecting him or any of his partners, directors, or

employees.

5. What are the benefits of being the trading members of NSE?

Ans.  Access to a nationwide trading platform for equities, derivatives, debt, and hybrid products.
 The ability to offer a fair, efficient, and transparent securities market for investors.
 Use of advanced electronic trading systems and technology.
 Working with an organization that meets high trading and settlement standards, similar to
leading international exchanges, and strives to align with the global securities market.
6. What are the Dominant Promoter norms applicable to Foreign Entities?
Ans. Foreign entities can gain trading membership at the Exchange through their Indian
subsidiary with automatic government approval, provided they meet the following RBI
guidelines:
 (a) The foreign entity or its subsidiary must be:

 A bank or insurance organization regulated by its central bank or relevant authority,

or
 A brokerage regulated by a relevant authority that is part of the International
Organization of Securities Commissions (IOSCO) and has a solid reputation,
or
 A foreign entity whose local subsidiary is registered with SEBI for custodial or asset
management services.

(b) The foreign entity must own at least 51% of the controlling interest in the applicant
company seeking trading membership.
7.(IMP) Explain the admission procedure of a new member in NSE.
Ans.
The admission process consists of two stages: an examination and an interview
Applicants must complete a relevant NCFM module before proceeding.

1. Applicants must submit the completed application form and relevant documents to the
Exchange.
2. The application is then forwarded to the Membership Recommendation Committee
(MRC).
3. The MRC recommends candidates for membership to the Membership Selection
Committee (MSC) or the Board of Directors.
4. The MSC reviews the MRC's recommendations and either approves or rejects the
applications.
5. Upon approval, provisional admission is granted, subject to conditions like SEBI
registration and submission of required fees and documents. These are then sent to SEBI.
6. SEBI issues a Registration Certificate if all requirements are met.
7. After SEBI registration, the trading member must fulfill additional formalities with the
Exchange and NSCCL.
8. Once all formalities are completed, the Trading Member can trade on the NEAT system.

8.(IMP) On what grounds of misconduct can a member of NSE be suspended?

Ans. Misconduct: A trading member is considered guilty of misconduct for any of the
following actions:

 Fraud or fraudulent act or if he is convicted of a criminal offence.

 Violation of the provisions of any statute governing the activities,business
and operations of the Exchange.
 Improper conduct.
 Failure to submit to or abide by arbitration.
 Failure to testify or give information sought by the Exchange orany
committee or any other person authorized on that behalf.
 Failure to submit special returns in such form as the relevantauthority
may from time to time prescribe.
  Failure to submit audited accounts.
 Failure to compare or submit accounts with defaulter.
 Failure to submit or make any false or misleading returns.
 Make vexatious, malicious or frivolous complaints.
 Failure to pay subscription fee, arbitration charges etc.
(READ ALL POINTS TO ATTEMPT ONE MARKER)
9. Elaborate the consequences of suspension of a NSE member
Ans.
(a) Suspension of membership rights: The suspended trading member will lose all

membership rights and privileges.

(b) Rights of creditors unimpaired: Suspended members will have to clear all
dues of creditors.
c) Fulfillment of contracts: Suspended trading members must fulfill any outstanding

contracts at the time of suspension.

(d) Further business prohibited: The suspended trading member is further

prohibited to do any business
9. Under which situations can a trading member may be declared a defaulter by
direction
/circular/notification of the relevant authority of the trading segment
Ans. (a) He is unable to fulfill his obligations; or
(b) He acknowledges his inability to fulfill his duties, obligations, and liabilities.

(c) He fails to pay any sum due to the Exchange

(d) If he fails to pay or deliver to the defaulters‘ committee all monies.
(e) If he fails to abide by the arbitration proceedings.
9. List the documents that are required to be submitted by Trading members
desirous ofappointing sub-brokers.
Ans. a) Certified sub-broker-broker agreement.
(b)SEBI registrationform(FormB).
(c)Recommendation letter (Form C) from trading member.
(d)Bank reference letter.
(e)Third-party reference letter (e.g., CA, CS, lawyer).
 (f) Non-conviction declaration (on letterhead).

10. In case a trading member / sub-broker intends to cancel the registration as a sub-
broker, what all documents is he required to submit?
Ans. 1. Request letter of the Trading member on the letter head of TM

2. Undertaking from the Trading Member on the letter head of TM

3. if the sub broker is traceable, Application from Sub-Broker for
surrender of registration

If the sub broker is non-traceable than a copy of termination

notice served to the sub broker along with the proof of delivery by
the TradingMember.

Note: the difference between the proof of delivery of termination

notice and the date of application to Exchange for surrender of
sub-broker registration should be 30 days or more.

4. Copy of public notification intimating the investors/general public

of the surrender of registration of sub broker and not to deal with
such sub broker,

5. SEBI registration certificate of the Sub-Broker in original.

If the original certificate is lost, the Trading Member and Sub-Broker must
separately submit an FIR copy and a notarized affidavit on Rs. 100 stamp paper (or
as per Stamp Act)
6. An undertaking from the member that SEBI has not taken any
action against the sub-broker.