historical persepctive of equity derivatives market in...
TRANSCRIPT
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CHAPTER 2
HISTORICAL PERSEPCTIVE OF EQUITY DERIVATIVES
MARKET IN INDIA
Index :
2.1 Evolution of Global Derivatives Markets 31
2.2 Evolution of Capital Markets in India 36
2.3 Evolution of Derivatives Markets in India 39
2.3.1 Evolution of Equity Derivatives Market 40
2.3.2 Reference to Commodity and Currency Derivatives
Market in India 46
2.4 Development of Equity Derivatives Markets in India 48
2.5 Comparison of Equity Derivatives Indices and Stocks on NSE
and BSE 51
2.6 Equity Turnover on BSE 52
2.7 Equity Turnover on NSE 54
2.8 Comparison of Equity Turnover and Turnover in various
segments of Indian Stock Market 55
2.9 Equity Derivatives Turnover in India during the period from
2000-01 to 2011-12 58
2.10 Comparison of Futures Turnover of BSE and NSE 59
2.11 Comparison of Options Turnover of BSE and NSE 61
2.12 Product-wise Comparison of Equity Derivatives Turnover of
BSE and NSE 62
2.13 Product-wise Comparison of Equity Derivatives across Indian
Equity Derivatives 64
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CHAPTER 2
HISTORICAL PERSEPCTIVE OF EQUITY DERIVATIVES
MARKET IN INDIA
2.1 Evolution of Global Derivatives Markets:
The history of derivatives is considered to be longer than what many
people believe. Derivatives have been around in the global market for a very long
time. The evidence of characteristics of derivative contracts can even be found in
incidents that date back to the ages before Jesus Christ. However, the beginning
of modern day derivative contracts is ascribed to the requirement of farmers to
protect themselves from any decline in the price of their crops due to delayed
monsoon, or over production etc. “The first recorded instance of futures trading
appears to have been occurred with Yodoya rice market in Osaka, Japan around
1650. In the ancient age, merchants used to store rice in warehouses to use the
same in future and to raise cash. The Warehouse holders used to sell the receipts
against the stored rice. These were the earliest known form of forward contracts
whereby the landlords were protected against any future economic losses due to
falling prices. These were evidently standardized contracts, which made them
much like today's futures. It is said that there may also have been rice futures
traded in China as long as 6000 years ago.”1
“The evolution of markets in commodities and financial assets may be
viewed as a worldwide long-term historical process. In this process, the
emergence of futures has been recognized in economic literature as a financial
development of considerable significance. A vast economic literature has been
built around this subject. From “forward” trading in commodities emerged the
commodity “futures”. The emergence of financial futures is a more recent
phenomenon and represents an extension of the idea of organized futures
markets”.2
“However, modern origin of futures/forwards as an exchange based
industry lies in the productive fields of the grain belt of U.S. in the first half of
the 19th century. This evolution was supported by the exigencies of supply and
demand where price fluctuations for grain were violently volatile and
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consequently had a serious and noticeable effect on the economy by causing an
increase in food prices. At harvest time in the 19th
century, when farmers
hauled their grain filled wagons to Chicago and with so many sellers looking
for a buyer, the price went firmly down and farmers were forced to accept
whatever was offered or worse, he was forced to watch it spoil or dumped in a
lake. And the wise grain merchant made money in later months when the
supply was short and demand was high.
All this prompted a group of Chicago businessmen to do something and
in 1848, 82 merchants representing every important business interest in
Chicago met above a flour store on South Water Street and founded the
Chicago Board of Trade (CBOT) which till today remains foremost in
commodity futures trading. The primary intention of the CBOT was to provide
a centralized location known in advance for buyers and sellers to negotiate
forward contracts. Thus, the Chicago Board of Trade (CBOT), the largest
derivative exchange in the world, was established in 1848 in United States of
America where forward contracts on various commodities were standardized
around 1865. In 1865, the CBOT went further and listed the first “exchange
traded” derivatives contract in the U.S. these contracts were called “futures
contracts”. Since then, futures contracts have remained more or less in the
similar form, as we know them today.”3 There were many other Exchanges that
came into existence in the late 19th
Century. "The New York Coffee, Cotton
and Produce Exchanges came into existence in the United States of America in
1870s and 1880s. In 1919, Chicago Butter and Egg Board, a spin-off of CBOT,
was reorganized to allow futures trading and renamed as Chicago Mercantile
Exchange (CME). The first stock index futures contract was traded at Kansas
City Board of Trade. Today, there exist several other commodity exchanges
such as the New York Mercantile Exchange, the New York Commodity
Exchange, and the New York Coffee, Sugar and Cocoa Exchanges in the
United States of America.”4
“Development of derivative market in UK can be traced back to the
arrival of a centralized commodities market, founded in 1565 by Sir Thomas
Gresham and opened by Queen Elizabeth I. It was based in the Royal
Exchange (which in 1982 became the first home to the London International
Financial Futures Exchange, LIFFE) and was run along similar lines to the
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Amsterdam Trade Centre in the Netherlands which had opened a few years
earlier. Each commodity had a different part of the exchange from which to
trade. These markets were using spot trading methods and it is from these
origins that the more complicated forward markets arose.”5
Derivatives are intended for the purpose of facilitating the hedging of
price risks of the underlying asset which may be in the form of inventory
holdings or a financial/ commercial transaction over a certain period. When the
asset prices are locked in, derivative products help in minimizing or
neutralizing the impact of fluctuations in asset prices on the profitability and
cash flow situation and serves as an important tool for risk management.
“Due to growing instability in the financial markets, the financial
derivatives gained prominence after 1970. The pace of innovation in derivatives
markets increased remarkably in the 1970s. The first major innovation occurred
in February 1972, when the Chicago Mercantile Exchange (CME) began
trading futures on currencies. The biggest increase in derivatives trading
activity was observed subsequently in the 1970s when futures on financial
instruments started trading in CME. This was the first time any futures contract
was written on anything other than a physical commodity. There are now many
futures trading exchanges established all over the world. Foreign currencies
such as the Swiss Franc and the Japanese Yen were first. In the 1980s, futures
began trading on stock market indexes such as the S&P 500. Another
innovation that further uplifted the financial derivatives trading to the next
platform was observed in April 1973, when the CBT formed the Chicago Board
Options Exchange (CBOE) to trade options on common stocks. This was the
first time an option was traded on any exchange in the world.
Subsequently, in October 1975, the CBOT introduced the first futures
contract on an interest rate instrument - Government National Mortgage
Association futures. In January 1976, CME launched Treasury bill futures and
in August 1977, the CBOT launched Treasury bond futures.
In1980s, the use of cash settlement came in. In December 1981, the
IMM launched cash settlement contracts, the 3-month Eurodollar futures. Cash
settlement made feasible the introduction of derivatives on stock index futures.
In February 1982, the Kansas City Board of Trade (KCBT) listed futures on the
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Value Line Composite stock index and in April 1982, the CME listed futures
on the S&P 500. These contract introductions marked the launch of futures
contracts on stock indexes.
In 1980s, the exchange-traded option contracts were also written on
"underlying" other than individual common stocks. The CBOE and AMEX
listed interest rate options in October 1982 and the Philadelphia Stock
Exchange (PHLX) listed currency options in December 1982 as also options
and gold futures. In January 1983, the CME and the New York Futures
Exchange (NYFE) began to list options directly on stock index futures and in
March 1983, the CBOE began to list options on stock indexes.
Since 1970, the introductions of new products completely transformed
the nature of derivatives trading activity on the exchanges. While derivatives
exchanges were originally developed to help market participants manage the
price risk of physical commodities, today's trading activity is focused on
hedging the financial risks associated with unanticipated price movements in
various underlying such as commodities, stocks, bonds, and currencies.
The 1980s also saw the re-emergence of OTC derivatives trading. As
derivatives on financial assets became increasingly popular, investment banks
began to think of new ways to tailor contracts to meet customer needs. Some
innovations were minor changes in the standard terms of exchange-traded
derivatives contracts on financial instruments (e.g., modifications to the
expiration date and/or the contract denomination).
In 1980, the first OTC Treasury bond option was traded. Other contracts
were new and seemingly different. They fall under the generic heading of
"swaps". A swap contract is a contract to "swap" a series of periodic future cash
flows, where the terms of the swap are usually set such that the up-front
payment is zero.
The first interest rate swap was in 1981, when the Student Loan
Marketing Association (i.e., "Sallie Mae") swapped interest payments on
intermediate-term fixed rate debt for floating-rate payments indexed to the
three-month Treasury bill rate. The cash flows of the two legs of a swap can be
linked to virtually any asset or index. A basis rate swap, for example, is an
exchange of floating rate payments where the two floating rates are linked to,
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say, a three-month Treasury bill rate and a three-month Eurodollar time deposit
rate. A currency swap is an exchange of interest payments (either fixed or
floating) in one currency for payments (either fixed or floating) in another. An
equity swap involves the exchange of an interest rate payment and a payment
based on the performance of a stock index. An equity basis swap involves an
exchange of payments on two different indexes. Swap agreements may appear
different from standard forward and option contracts, but they are not. Every
swap can be decomposed into a portfolio of forwards and options. The benefit a
swap provides is that several transactions are bundled into a single product."6
The calendar of introduction to Derivatives Products in the Global
market has been given below:
Table: 2.1
Calendar of Introduction of Derivatives Products in the Global Market
Year Products
1874 Commodity futures
1972 Foreign currency futures
1973 Equity options
1975 T-bonds futures
1981 Currency swaps
1982 Interest rate swaps; T notes futures; Eurodollar futures; Equity index
futures; options on T-bond futures; Exchange- listed currency options
1983 Options on equity index; Options on T- notes futures; Euro-dollar
futures; options on equity index futures; interest rates caps and floors
1985 Euro-dollar options; swaptions
1987 OTC compound options; OTC average options
1989 Futures on interest rate swaps; quanto options
1990 Equity index swaps
1991 Differential swaps
1993 Captions; exchange-listed FLEX options
1994 Credit default options
Source: www.kannanpersonal.com/content/derivatives/first
As can be seen from the above table, there have been various
innovations that can be seen in the derivatives market globally. In the last four
decades there have been numerous derivatives products that have been
introduced globally. “Since 1972, the financial futures have quickly spread to
an increasing number of developed and developing countries. They are
recognized as the best and most cost-efficient way of meeting the need for risk-
hedging felt in certain types of commercial and financial operations. In recent
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years, the market for financial derivatives has grown in terms of the variety of
instruments available, as well as their complexity and turnover. Countries not
providing such globally accepted risk-hedging facilities are disadvantaged in
today‟s rapidly integrating global economy.”7
2.2 Evolution of Capital Markets in India
The Stock Exchanges in India has been in existence since now more
than a century. Bombay Stock Exchange, commonly referred to as the BSE, is a
stock exchange located in Mumbai, Maharashtra was established in 1875 as
"The Native Share & Stock Brokers' Association" in 1875. BSE is Asia‟s first
Stock Exchange and one of India‟s leading exchange. Over the past 137 years,
BSE has facilitated the growth of the Indian corporate sector by providing it an
efficient capital raising platform for a very long time. Subsequently, when the
National Stock Exchange was set up in November 1992, the way markets were
functioning started transforming. By 1995, all the Stock Exchanges switched
over from the open outcry system to screen based online trading system. With
the advent of electronic networking of stock exchanges with dealing brokers
and introduction of on-line screen based trading in the Indian capital market,
the capital market radically transformed during last two decades. In last two
decades, the mindset of investors and all market players has changed and there
has been immense confidence developed in the minds of investors in Indian
Capital Market across India as well as globally. The advent of technology has
also enabled the Indian Stock Exchanges to spread their operations to every
nook and corner of the country and through internet to different parts of the
world as well.
Series of structural and functional reforms had taken place in the
financial sector, bringing capital market to the global standards. Many changes
have 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. Stock exchanges, in the post reform period, were freed from the
direct control of the Government and placed under a professional regulatory
authority, i.e. Securities & Exchange Board of India (SEBI).
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The Securities and Exchange Board of India (SEBI) 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 Body) in the
year 1992 with the passing of the Securities and Exchange Board of India Act
on January 30, 1992. In place of Government Control, a statutory and
autonomous regulatory board with defined responsibilities and independent
powers was set up.
“The basic objectives of SEBI are:
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.”8
Since its inception SEBI has taken many commendable steps towards
fulfilling the objectives set for it. SEBI has contributed in making the capital
market a safe place to invest and be reliable by way of streamlining
capitalization requirements, margining system, compulsory dematerialization,
establishment of clearing corporations etc. thereby reducing market and credit
risks.
The Indian Capital market, further gave fillip to the Indian and global
investor‟s confidence when the Depositories Act, 1996 was passed and
National Securities Depository Limited (NSDL) and Central Depository
Services Limited (CDSL) were set up. A depository is an organization, which
holds the shares in the form, of electronic accounts just in the similar way as
bank holds the money. This has enabled shares and securities to be held
electronically instead of in the form of paper-printed documents. This has
addressed many issues and provided several benefits like-
it provided a safe, convenient way of holding securities;
it facilitated immediate transfer of securities instead of earlier months
period taken in physical deliveries;
it eliminated risks associated with physical certificates such as bad delivery,
fake securities, delays, thefts etc.;
it helped in reducing paperwork involved in transfer of securities;
it reduced transaction cost;
it addressed odd lot problem as now even one share can be sold; etc.
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it made process faster thereby helping the settlement cycle to today‟s T+2
day
Another significant development in Indian capital market was launch of
indexes by the Exchanges. 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.
BSE introduced Sensex index in 1986 as an indicator of the broad
market. Sensex enables tracking changes of the market direction convenient to
effectively gauge stock market movements. The BSE 30 Sensex was first
compiled with the market capitalization weighted index of 30 Scrips. It
represented 30 large well-established and financially sound companies. It was
the first index to be launched by any Stock Exchange in India. BSE
subsequently launched in January 1989, 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 May 27, 1994, two new
indices viz., the 'BSE-200' and the 'DOLLEX-200' 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.
NSE launched S & P CNX Nifty in April 1996. S&P CNX Nifty is a
well diversified 50 stock index accounting for 23 sectors of the economy. NSE
also introduced in December 1996 CNX Nifty Junior.
While derivatives markets flourished in the developed world, Indian
markets remained deprived of financial derivatives till beginning of 21st
century. While the rest of the world progressed by leaps and bounds on the
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derivatives front, Indian market lagged behind. The exchange traded financial
derivatives emerged in the global markets of the developed nations in the 1970s
and their derivatives markets grew from strength to strength. The trading
volumes nearly doubled in every three years making it a trillion-dollar business.
The financial derivatives have become so universal that, now, one cannot think
of the existence of financial markets without derivatives as its part.
Indian securities markets have indeed waited for too long for derivatives
trading to emerge. The development of futures trading is advancement over
forward trading which has existed for centuries and grew out of the need for
hedging the price risk involved in many commercial operations. Futures trading
represent a more efficient way of hedging risk. Mutual Funds, FIIs and other
investors who are deprived of hedging opportunities were the main
beneficiaries of derivatives market.
2.3 Evolution of Derivatives Markets in India:
Derivatives markets in India also have been in existence in one form or
the other for a long time. “The existence of characteristics of derivatives
contracts is considered to be as old as epic Mahabharata. In India derivatives in
the form of commodity forwards were also prevalent in 19th
century. The
commodity derivative market has been functioning since the 19th century with
organized trading in cotton through the establishment of Cotton Trade
Association in 1875. There have been various contracts introduced on
other commodities since then.
But the tangible developments in this area took place only in the
beginning of 20th
Century. The Bombay Securities Contract (Control) Act,
1925 was passed after the Atlay Committee recommendations to regulate
activities in Stock Exchanges. It empowered the Government to grant and
withdraw recognition to a stock exchange and provided that rules of a
recognized stock exchange could be made or amended only after prior approval
of the Government. Though the stock exchanges were in operation, there was
no legislation for their regulation till this Act was enacted in 1925. This was,
however, deficient in many respects. Under the constitution which came into
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force on January 26, 1950, stock exchanges and forward markets came under
the exclusive authority of the central government.”9
However, the commodity market activities remained unregulated. With
a view to restricting speculative activity in cotton market, the Government of
Bombay issued an Ordinance in September 1939 prohibiting option business.
Bombay Options in Cotton Prohibition Act, 1939, later replaced the Ordinance.
In 1943, the Defence of India Act was utilized on large scale for the purpose of
prohibiting forward trading in some commodities and regulating such trading in
others on all India basis. In the same year oilseeds forward contracts prohibition
order was issued and forward contracts in oilseeds were banned. Similarly
orders were issued banning forward trading in food-grains, spices, vegetable
oils, sugar and cloth. These orders were retained with necessary modifications
in the Essential Supplies Temporary Powers Act 1946, after the Defence of
India Act had lapsed. Government with a view to evolving the unified systems
of Bombay enacted the Bombay Forward Contract Control Act 1947.
The Bombay Forward Contracts (Control) Act, 1947 which was applied
on cotton, bullion and seeds but still the operations was not extended to stocks
and shares because of BSE‟s objections.
After Independence, the Constitution of India adopted by Parliament on
26th January, 1950 placed the subject of "Stock Exchanges and Futures
Market" in the Union list and therefore the responsibility for regulation of
forward contracts devolved on Government of India. The Parliament passed
Forward Contracts (Regulation) Act, 1952 which presently regulated forward
contracts in commodities all over India and banned cash settlement and options
trading. Hence, derivatives trading subsequently shifted to informal forwards
markets.
2.3.1 Evolution of Equity Derivatives Market:
“In 1969 government banned all forward trading in securities
under the power of Section 16 of SC(R)A. Its preamble stated that it “was
to prevent undesirable transactions in securities by regulating business of
dealings in, by prohibiting options and by providing for certain other
matters connected therewith”. Also Section 20 of the Act explicitly
prohibited all options in securities.”10
Thus using the power of section 16,
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the central government had prohibited all forwards trading in securities. In
last few decades, government‟s policy shifted in favour of an increased
role of market-based pricing. Though the Indian securities market was
substantially improving day by day towards in the 90‟s however it was
felt that there were inadequate risk management tools. In order to provide
such tools and to deepen and strengthen cash markets, a need was felt for
trading of derivatives like futures and options. But introduction of futures
and options was not possible in view of prohibitions in the SC(R)A and
required withdrawal of these prohibitions. “In line with the change in the
thought process, the Government of India took its first step to opening up
the derivatives market by introduction of financial derivatives trading in
India by promulgating the Securities Laws (Amendment) Ordinance,
1995. It withdrew prohibition on options in securities.”11
Thus on January 25, 1995, the securities laws amendment
ordinance withdrew the prohibitions by repealing section 20 of the SCRA
and amending its preamble.
The market for derivatives, however, did not take off, as there was
no regulatory framework to govern trading of derivatives. Hence, SEBI
set up a 24 member committee under the chairmanship of Dr L. C. Gupta
on November 18, 1996 to develop appropriate regulatory framework for
derivatives trading in India. The committee submitted its report on March
17, 1998 recommending among others, that the derivatives may be
declared as securities under section 2(h) (iia) of the SC(R)A, so that the
regulatory framework applicable to trading of securities could govern
trading of derivatives also.
The Dr. L.C. Gupta Committee in its report strongly favoured the
introduction of financial derivatives in order to provide the facility for
hedging in the most cost-efficient way against market risk. The
Committee also acknowledged the fact that a soundly based derivatives
market requires the presence of both hedgers and speculators.
“The Committee is of the opinion that there is need for equity
derivatives, interest rate derivatives and currency derivatives. In the case
of equity derivatives, while the Committee believes that the type of
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derivatives contracts to be introduced will be determined by market forces
under the general oversight of SEBI and that both futures and options will
be needed, the Committee suggests that a beginning may be made with
stock index futures.
The Committee's recommendations on regulatory framework for
derivatives trading envisaged two-level regulation, i.e. exchange-level and
SEBI-level. The Committee‟s main emphasis is on exchange-level
regulation by ensuring that the derivative exchanges operate as effective
self regulatory organizations under the overall supervision of SEBI. It
emphasized on a much stricter governance system is needed for the
derivative exchanges in order to ensure that a derivative exchange will be
a totally disciplined market place.
The Committee opined that the entry requirements for
brokers/dealers for derivatives market have to be more stringent than for
the cash market. These include not only capital adequacy requirements
but also knowledge requirements in the form of mandatory passing of a
certification programme by the brokers/dealers and the sales persons. An
important regulatory aspect of derivatives trading was mentioned to be
strict regulation of sales practices.”12
“Further, SEBI in June 1998 set up a committee under the
Chairmanship of Prof. J. R. Varma to study and recommend measures for
risk management in equity derivatives market in India. Prof. J. Varma
Committee submitted its report in October 1998 suggesting the required
risk containment measures in the form of margining system, methodology
for charging initial margins, broker net-worth requirement, liquid asset
definition, deposit requirement, position limits applicability, and real time
monitoring requirement.
The securities contracts regulation Amendment Bill, 1998 was
introduced in the Lok Sabha on July 4, 1998 proposing to expand the
definition of securities to include derivatives within its ambit so that
trading in derivatives would be introduced and regulated under the SC(R)
A. The Bill however lapsed following the dissolution of 12th Lok Sabha.
43
The recommendations of the Committee headed by Prof. J.R.
Varma for risk containment in derivatives market were accepted by SEBI
in March 1999.”13
“A fresh Bill was introduced on Oct 28, 1999 and was converted
into an Act on December 16, 1999 making way for derivatives trading in
India. Besides giving the definition of derivatives this act inserted sub-
clause (ia) infection to acts to include derivatives within the ambit of
securities. Since derivatives contracts are generally cash settled, these
may be classified as wagers being null and void under section 30 of the
Indian contracts act 1872, end it may be difficult to enforce derivatives
contracts. In order to avoid such legal and Fidelity's, a new section 18 a
has been inserted to provide that notwithstanding anything contained in
any of the long for the time being reinforced, contracts in derivatives shall
be legal and valid if such contracts are traded on a recognized stock
exchange and settled on its clearing house in accordance with the rules
and bylaws of such stock exchange. This means that the act prohibits
OTC derivatives. Section 23 has been amended to provide that anybody
who enters into a contract in contravention of section 18A shall be
punishable.”14
It was well known fact that derivatives were traded in the India, as
private contracts, even before introduction of exchange trades contracts in
derivatives were offered. Since, these contracts were private contracts,
they faced usual problems associated with such contracts such as defaults,
no arbitration mechanism, no guarantee of their settlements etc. They also
faced various risks associated with these private contracts such as credit
risks, market risks, liquidity risks, market risks, legal risks etc. The road
for stock exchange traded derivatives contracts was cleared with removal
of prohibition of options on securities by way of amendment to Securities
Laws through Securities Laws (Amendment) Ordinance, 1995.
Derivatives trading commenced in India in June 2000 after SEBI granted
the final approval to this effect in May 2000.
The Dr. L.C Gupta Committee on Derivatives had also permitted
existing stock exchanges having cash trading to trade in derivative
44
contracts through a separate segment with separate membership.
“However, it was required that the derivative segment of an exchange and
its Clearing House/ Corporation shall be separate from the cash segment
in the following areas –
The legal framework governing trading, clearing and settlement of the
derivative segment should be separate from the cash market segment.
In other words, the Regulations and / or Bye-laws of derivative
segment, as the case may be for specific exchanges, shall be separate
from the cash market.
Trade Guarantee Fund (TGF)/Settlement Guarantee Fund (SGF) of
the derivative segment shall be separate from the TGF/SGF of cash
market segment.
Membership of the derivative segment shall be separate from the cash
market segment.
The Governing Council/Clearing Council/Executive Committees of
the derivative segments shall be separate from the cash market
segment.
The separation, if any, as regard to the functional, operational and
administrative modalities were left at the discretion of the Exchange. The
cash and derivative segment of an Exchange were also permitted to have
common personnel, trading terminal and infrastructure.
As per SEBI guidelines, the exchanges fulfilling the eligibility
criteria as prescribed in Dr. L.C. Gupta Committee Report are eligible to
apply to SEBI for grant of recognition under Section 4 of the Securities
Contract Regulation Act, 1956. It is also required that the derivatives
exchange/segment should have a separate governing council and
representation of trading/clearing members should be limited to maximum
of 40% of the total members of the Governing Council. The exchange is
also required to regulate the sales practices of its members and need to
obtain prior approval of SEBI before start of trading in any derivatives
contract.”15
At that time in 2000, there were 23 stock exchanges recognized
by SEBI for offering equity market trading in India. In the Capital
Market, the stock exchanges need to be recognized under the Securities
45
Contracts (Regulation) Act, 1956. The Stock Exchanges are required to
obtain the recognition/registration from SEBI to be eligible to offer
trading in various segments in the Indian Market. As on March 31, 2012,
there were 20 Stock Exchanges recognized/ registered by SEBI for
trading in various segments such as Equity, Equity Derivatives and
Currency Derivatives in India. The names of these are:
Ahmedabad Stock Exchange Limited (ASE)
Bangalore Stock Exchange Limited (BgSE)
Bhubaneswar Stock Exchange Limited (BhSE)
Bombay Stock Exchange Limited (BSE)
Calcutta Stock Exchange Limited (CSE)
Cochin Stock Exchange Limited (CoSE)
Delhi Stock Exchange Limited (DSE)
Gauhati Stock Exchange Limited (GSE)
Inter-connected Stock Exchange (ISE)
Jaipur Stock Exchange Limited (JSE)
Ludhiana Stock Exchange Limited (LSE)
MCX SX Exchange Limited (MCXSX)
Madhya Pradesh Stock Exchange Limited (MPSE)
Madras Stock Exchange Limited (MSE)
National Stock Exchange of India Limited (NSE)
OTC Exchange of India (OTCEI)
Pune Stock Exchange Limited (PSE)
Vadodara Stock Exchange Limited (VSE)
U.P. Stock Exchange Limited (UPSE)
United Stock Exchange of India Limited (USE)
Out of the above Stock Exchanges, Securities and Exchange
Board of India (SEBI) permitted only NSE and BSE to launch the
derivative segments and their clearing house/corporation to commence
trading and settlement in approved derivatives contracts. To begin with,
SEBI approved trading in index futures contracts based on S&P CNX
Nifty Index and BSE-30 (Sensex) Index. In June 2000, exchange-traded
equity derivatives were introduced at the two national stock exchanges,
National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
This was followed by approval for trading in options based on these two
46
indices and options on individual securities. The trading in index options
commenced in June 2001. The trading in Stock Options commenced on
July 2001 & Stock Futures on November 2001, the approval for trading
Interest rate Futures was given in June 2003. In India, the Index option
contracts are cash settled European style options and the Stock options are
also cash settled American style contracts. Interest rate derivatives are
based on notional 10 year bond and 91 days T-bills. All the exchange
traded equity derivatives contracts in India today are cash settled
contracts.
Till recent time (2012), only two exchanges in India were
permitted to offer trading in equity derivatives contracts by SEBI viz.
NSE and BSE. It was only on July 11, 2012, the third exchange MCX-SX
has been given permission to facilitate the trading in equity derivatives
contracts.
2.3.2 Reference to Commodity and Currency Derivatives Market in India:
In the commodities market, by a notification issued on March 1,
2000, the government lifted the three decades old prohibitions on forward
trading in securities by repealing 1969 notification. During that period,
national electronic commodity exchanges were also set up. The National
Commodity & Derivatives Exchange Limited (NCDEX) started its
operations in December 2003, to provide a platform for commodities
trading.
“In India, under the Forward Contracts (Regulation) Act, 1952,
forward trading in commodities notified under section 15 of the Act can
be conducted only on the Exchanges, which are granted recognition by
the Central Government (Department of Consumer Affairs, Ministry of
Consumer Affairs, Food and Public Distribution). All the Exchanges,
which deal with forward contracts, are required to obtain certificate of
Registration from the Forward Markets Commission (FMC).”16
At present
22 Exchanges are recognized / registered for forward / futures trading in
commodities.
47
Hence, in Commodity Derivatives as of 2012 there are five
national commodity exchanges recognized by Forward Market
Commission (FMC) to offer trading in contracts of commodity
derivatives in India. The names of these national commodity exchanges
are as follows:
Multi Commodity Exchange of India Ltd., Mumbai (MCX)
National Commodity & Derivatives Exchange Ltd., Mumbai
(NCDEX)
National Multi Commodity Exchange of India Limited, Ahmedabad
(NMCE)
Indian Commodity Exchange Limited, New Delhi (ICEX)
Ace Derivatives and Commodity Exchange Limited, Mumbai (ACE)
Also there are various other regional commodity exchanges
operating in India as recognized by FMC, the details of whom are as
given below:
Bikaner Commodity Exchange Ltd., Bikaner
Bombay Commodity Exchange Ltd., Vashi
Chamber Of Commerce, Hapur
Central India Commercial Exchange Ltd., Gwalior
Cotton Association of India, Mumbai
East India Jute & Hessian Exchange Ltd., Kolkata
First Commodities Exchange of India Ltd., Kochi
First Commodities Exchange of India Ltd., Kochi
Haryana Commodities Ltd., Sirsa
India Pepper & Spice Trade Association., Kochi
Meerut Agro Commodities Exchange Co. Ltd., Meerut
National Board of Trade, Indore
Rajkot Commodity Exchange Ltd., Rajkot
Rajdhani Oils and Oilseeds Exchange Ltd., Delhi
Surendranagar Cotton oil & Oilseeds Association Ltd., Surendranagar
Spices and Oilseeds Exchange Ltd., Sangli
Vijay Beopar Chamber Ltd., Muzaffarnagar
It may be noted here that, the Government of India identified the
best international systems and practices in respect of trading, clearing,
settlement and governance structure and invited applications from
48
associations - existing and potential - to set up National Commodity
Exchanges by introducing such systems and practices. The term,
"National" used here for these Exchanges does not mean that other
regional Exchanges are restricted from having nationwide operations.
Further, National Commodity Exchanges are granted recognition in all
permitted commodities by FMC whereas the other regional exchanges
have to approach the FMC for grant of recognition for each futures
contract separately.
There are also two national spot exchanges operating in India
offering spot trading in commodities. They are:
NCDEX Spot Exchange Ltd (NSPOT)
National Spot Exchange Limited (NSEL)
There were also largely three stock exchanges namely NSE, BSE
and MCX-SX permitted to offer the contracts in currency derivatives
segment in India since they were permitted in India in 2008. At later date,
BSE entered into arrangement with United Stock Exchange of India Ltd
(USEIL) and BSE suspended its currency derivatives segment operations
and USEIL started offering the same. Thus at all point of times, there
were only three major stock exchanges which offered the trading in
Currency Derivatives in India.
2.4 Development of Equity Derivatives Markets in India
The Exchanges play a very important role in the entire system of
derivatives trading in India since the exchanges are required to design contracts
which are traded on the Exchanges. These contracts are not capable of being
modified by any participants, i.e., these contracts are standardized. The
Exchanges also provide the trading platform, which facilitates the bid and offer
platform which emanate from geographically dispersed locations across India
and now with electronic media across globe. The Exchanges are also required
to provide facilities for clearing, settlement, risk management, arbitration
mechanism and other relevant functions related to the trading activity in the
derivatives contracts. The Exchanges are also required to provide financially
secured environment by putting in place suitable risk management mechanism
49
(margining system etc.) and guaranteeing settlement performance of contract
through the process of novation.
In equity derivatives, NSE has a market share in the total turnover of the
derivatives market in India of almost 100 percent. Hence, while giving the
market structure, eligibility of stocks in derivatives market, risk management
system and other relevant structures in the derivatives segment of the
exchanges the reference and inferences are drawn from the derivatives segment
of NSE.
The derivatives trading on NSE commenced with popular benchmark
S&P CNX Nifty Index futures on June 12, 2000. The trading in S&P CNX
Nifty Index Options commenced on June 4, 2001. The trading on NSE in
Single Stock Options and Single Stock Futures commenced on July 2, 2001 and
November 9, 2001 respectively.
NSE launched trading in Interest Rate Futures on June 24, 2003. The
first sector specific futures and options in the form of CNX IT Futures &
Options were launched in August 29, 2003 for trading. Since then, there are
many other sector specific and index futures and options such as Bank Nifty
Futures & Options, CNX Nifty Junior Futures & Options, CNX 100 Futures &
Options, Nifty Midcap 50 Futures & Options, Mini Nifty Futures & Options on
S&P CNX Nifty, Long term Options on S&P CNX Nifty, S&P CNX Defty
Futures and Options etc are launched by NSE for trading. The Interest Rate
Futures introduced by NSE were subsequently banned due to pricing issue.
The Sensex Index Futures on BSE were introduced on June 09, 2000.
Subsequently, the Index Options on Sensex were introduced on June 1, 2001.
The stock options in 109 stocks and stock futures in 109 stocks were introduced
by BSE on July 9, 2001 and November 9, 2002 respectively. Subsequently,
BSE also introduced weekly Options on 4 Stocks on September 13, 2004 and
Futures & Options on various sector specific indices such as BSE TECK, BSE
FMCG, BSE Metal, BSE Bankex and BSE Oil & Gas etc.
The table given below gives the chronology of events about the
development of derivatives market in India:
50
Table: 2.2
Development of Equity Derivatives Markets in India: A Chronology of events
Date Gist of events
Dec. 14, 1995 NSE sought permission from SEBI to start trading in index futures.
Nov. 18, 1996 SEBI setup L. C. Gupta Committee to draft a policy framework
for index futures.
May 11, 1998 L. C. Gupta Committee submitted report.
July 07, 1999 RBI gave permission for OTC forward rate agreements (FRAs)
and interest rate swaps
May 24, 2000 SIMEX chose Nifty for trading futures and options on an Indian index.
May 25, 2000 SEBI gave permission to NSE and BSE to do index futures trading.
Jun. 09, 2000 Trading of BSE Sensex futures commenced on BSE.
Jun. 12, 2000 Trading of Nifty futures commenced on NSE.
Aug. 31, 2000 Trading of futures and options on Nifty to commence on
Singapore International Monetary Exchange (SIMEX)
Sep., 2000 SIMEX (now known as Singapore Stock Exchange -SGX)
introduces Nifty Futures on its exchange
Jun. 01, 2001 Index Options launched on BSE
Jun. 04, 2001 Trading of Equity Index Options on NSE
Jul. 02, 2001 Trading of Single Stock Options on NSE
Jul. 09, 2001 Stock Options launched on BSE
Nov. 09, 2001 Trading in Single Stock Futures on NSE
Nov. 01, 2001 Trading of Single Stock futures on BSE
Jun. 24, 2003 Trading of Interest Rate Futures on NSE
Oct. 2003 Trading in Interest Rate Futures withered out
Aug. 29, 2003 Trading of CNX IT Futures and Options on NSE
Jan. , 2004 Permitted introduction of Futures contracts on a basket of GoI
securities
Sep. 13, 2004 Weekly Options on BSE
Jun. 13, 2005 Trading on Bank Nifty Futures and Options on NSE
Jun. 01, 2007 Trading CNX Nifty Junior Futures and Options on NSE
Jun. 01, 2007 Trading CNX 100 Futures and Options on NSE
Oct. 05, 2007 Trading Nifty Midcap 50 Futures and Options on NSE
Dec. 27, 2007 SEBI permitted introduction of mini derivative (Futures and
Options) contract on Index -Sensex and Nifty
Jan. 1, 2008 Trading of Chhota (Mini) Sensex Futures & Options on BSE
Jan. 1, 2008 Trading of Mini Nifty Futures & Options on S&P CNX Nifty on NSE
Jan. 11, 2008 SEBI permitted Exchanges to introduce option contracts on
SENSEX and Nifty with a longer tenure of up to five years
Feb. 29, 2008 BSE introduced Long Dated Options' on its index Sensex on
February 29, 2008 with an expiry of up to 3 years
Mar. 03, 2008 Trading of Long term Options (upto 5 years) on S&P CNX Nifty on
NSE
Aug. 29,2008 Launch of Currency Futures contracts in USD-INR on NSE
Oct. 2,2008 Trading of Currency Futures contracts in USD-INR on BSE
Oct. 08, 2008 Launch of Currency Futures contracts in USD-INR on MCX-SX
Dec. 10, 2008 Trading of S&P CNX Defty Futures and Options on NSE
51
Aug. 07, 2009 BSE-United Stock Exchange (USE) form alliance to develop
Currency and Interest Rate Derivatives Markets
Aug. 31, 2009 Re-introduced Trading in Interest Rate Futures on NSE under
Currency Derivatives
Feb. 01, 2010 Launch of currency futures on additional currency pairs such as
Euro-INR, Pound Sterling-INR and Japanese Yen-INR on NSE
and MCX-SX
Apr. 27, 2010 SEBI permitted Stock Exchanges to introduce derivatives
contract on volatility index
Jul. 15, 2010 SEBI allowed Stock Exchanges to introduce physical settlement
stock options and/or stock futures
Jul. 30, 2010 SEBI allowed introduction of options on USD-INR spot rate on
currency derivatives segment of stock exchanges
Oct. 04, 2010 EUREX-SENSEX Futures launched by BSE
Sep. 11, 2011 SEBI permitted Stock Exchanges to introduce derivative
contracts (Futures and Options) on foreign stock indices in the
equity derivatives segment
Mar. 30, 2012 BSE launched trading in BRICMART indices derivatives
Jul. 16, 2012 SGX launches Nifty Options on its exchange
Nov. 20, 2012 SEBI banned trading in Futures & Options mini contracts on
indices which came with a minimum contract size of Rs 1 lakh to
protect retail investor
Source: Compiled from BSE, NSE and SEBI
As can be seen from the above table giving the chronology of events in
the equity derivatives market in India, the equity derivatives market has been
constantly seen some development or the other year after year. As can be seen
from the above, it took almost four and half years for SEBI to evaluate the
proposal of NSE to start equity derivatives in India. However, once the
permission was granted by SEBI in May 2000, there have been many new
products that have been introduced and SEBI has also granted permission for
various developments in the equity derivatives market.
2.5 Comparison of Equity Derivatives Indices and Stocks on NSE and BSE
The trading activity in India consistently grew over a period of time.
The number of underlying indexes has also seen steady increase over the years.
It was necessary to understand the growth of stocks introduced for trading in
the equity derivatives on these exchanges. The table below narrates the story of
the underlying indices and stocks in the equity derivatives market since their
introduction on the derivatives stock exchanges:
52
Table: 2.3
Equity Derivatives Indices and Stocks Traded on NSE and BSE
Financial
Year
NSE-Stocks NSE –
Index(es)
BSE-Stocks BSE –
Index(es)
2000-01 0 1 0 1
2001-02 31 1 31 1
2002-03 41 1 38 1
2003-04 53 2 42 1
2004-05 52 2 46 1
2005-06 117 3 76 7
2006-07 155 3 89 7
2007-08 265 7 126 7
2008-09 268 8 120 5
2009-10 245 8 92 4
2010-11 227 5 98 4
2011-12 238 9 190 4
2012-13* 215 10 170 9
Source: Compiled from SEBI, BSE and NSE
*For the year 2012-13, the date has been taken as November 15, 2012 for the number arrived
As can be seen from the above, the indices traded on both the
derivatives exchanges have grown year after year. The stocks qualifying on
NSE have been largely found to be more than that of BSE. However, both these
exchanges have common stocks traded on them. Further, the stocks traded in
the equity derivatives market on these exchanges have been inconsistent. The
stocks traded on the exchanges were growing till 2007-08, which started
decreasing since then. Today, there almost half the number of stocks traded on
the exchanges compared to the peak number of stocks traded on the Exchanges.
2.6 Equity Turnover on BSE:
India has really seen exponential growth of the equity derivatives
market especially at NSE. The equity derivatives trading on NSE has grown
multifold and even overtaken the cash market turnover since 2003-04. The cash
equity turnover has also seen a good growth in India in the last decade. The
exchanges BSE and NSE have emerged as major equity exchanges over a
period of last decade. The other exchanges have either become defunct or have
started trading on these two major stock exchanges through their subsidiaries.
53
The details of Equity Turnover on BSE for the period from 1992-93 till 2011-
12 have been given in the table below:
Table: 2.4
Equity Turnover on BSE during the period from 1992-93till 2011-12
Year
No. of
Compan
ies
Listed
No. of
Compan
ies
Traded
No. of
Tradin
g Days
No. of
Trades
(in
Lakhs)
Traded
Quantity
(in
Lakhs)
Turnover
(in Rs.
crores)
Avg
Daily
Turnove
r (in
Rs.
crores)
Market
Capitaliz
ation (in
Rs.
crores)
% increase
in
Turnover
on
previous
year
1 2 3 4 5 6 7 8 9 10
1992-93 2,861 NA 192 126 35,031 45,696 238 1,88,146 NA
1993-94 3,585 NA 218 123 75,834 84,536 388 3,68,071 85.00%
1994-95 4,702 NA 231 196 1,07,248 67,749 293 4,68,837 -19.86%
1995-96 5,603 NA 232 171 77,185 50,064 216 5,63,748 -26.10%
1996-97 5,832 1,888 240 155 80,926 1,24,190 517 5,05,137 148.06%
1997-98 5,853 1,796 244 196 85,877 2,07,113 849 6,30,221 66.77%
1998-99 5,849 2,018 243 354 1,29,272 3,10,750 1,279 6,19,532 50.04%
1999-00 5,815 2,302 251 740 2,08,635 6,86,428 2,735 9,12,842 120.89%
2000-01 5,869 1,528 251 1,428 2,58,511 10,00,032 3,984 5,71,553 45.69%
2001-02 5,782 2,113 247 1,277 1,82,196 3,07,292 1,244 6,12,224 -69.27%
2002-03 5,650 2,191 251 1,413 2,21,401 3,14,073 1,251 5,72,197 2.21%
2003-04 5,528 2,610 254 2,028 3,90,441 5,03,053 1,981 12,01,206 60.17%
2004-05 4,731 2,382 253 2,374 4,77,171 5,18,715 2,050 16,98,428 3.11%
2005-06 4,781 2,548 251 2,640 6,64,455 8,16,074 3,251 30,22,190 57.33%
2006-07 4,821 2,641 249 3,462 5,60,777 9,56,185 3,840 35,45,041 17.17%
2007-08 4,887 2,709 251 5,303 9,86,010 15,78,857 6,290 51,38,014 65.12%
2008-09 4,929 3,194 243 5,408 7,39,600 11,00,074 4,527 30,86,075 -30.32%
2009-10 4,975 3,297 244 6,056 11,36,513 13,78,809 5,651 61,65,619 25.34%
2010-11 5,067 2,933 255 5,285 9,90,777 11,05,027 4,333 68,39,084 -19.86%
2011-12 5,133 2,977 249 3,944 6,54,137 6,67,498 2,681 62,14,941 -39.59%
Source: Compiled from SEBI and BSE NA – Not Available or Not Applicable
As can be seen from the above table, total number of companies listed in
BSE had grown since 1992-93 till 2000-01 and had started falling only since 2001-
02 till 2005-06. The number of companies listed since 2006-07 has continuously
seen some increase. However, the number of companies traded on BSE has been
growing somewhat constantly barring few years. In terms of turnover on the
exchange, it had seen huge deep in the year 2001-02 over the previous year by -
69.27%. Subsequently, it was steadily growing till 2007-08. Since, the market
crash in 2008-09, the market volume had been declining over the previous year
except for the year 2009-10.
54
2.7 Equity Turnover on NSE
NSE received the approval from SEBI as a recognized Stock Exchange
in April 1993. The exchange started its operation as stock exchange with its
Capital Market (Equities) segment going live in November 1994. Since then
NSE has emerged as the most preferred stock exchange in India as can be seen
from the market share commanded by NSE. The details of equity turnover on
NSE since its commencement of trading activity in India till 2011-12 is given
below in the table:
Table: 2.5
Equity Turnover on NSE during the period from 1994-95 till 2011-12
Year
No. of
Compa
nies
Listed
No. of
Compa
nies
Trade
d
No. of
Tradi
ng
Days
No. of
Trades
(in
Lakhs)
Traded
Quantity
(in
Lakhs)
Turnover
(in Rs.
crores)
Average
Daily
Turnover
(in Rs.
crores)
Market
Capitalisat
ion
(in Rs.
crores)
% increase
in T.O.
previous
year
1 2 3 4 5 6 7 8 9 10
1994-95 135 NA 102 3 1,391 1,805 17 3,63,350 NA
1995-96 422 NA 246 66 39,912 67,287 276 4,01,459 3627.79
1996-97 550 NA 250 264 1,35,561 2,95,403 1,176 4,19,367 339.02
1997-98 612 NA 244 381 1,35,685 3,70,193 1,520 4,81,503 25.32
1998-99 648 NA 251 546 1,65,327 4,14,474 1,651 4,91,175 11.96
1999-00 720 NA 254 984 2,42,704 8,39,052 3,303 10,20,426 102.44
2000-01 785 1,201 251 1,676 3,29,536 13,39,510 5,337 6,57,847 59.65
2001-02 793 1,019 247 1,753 2,78,408 5,13,167 2,078 6,36,861 -61.69
2002-03 818 899 251 2,398 3,64,065 6,17,989 2,462 5,37,133 20.43
2003-04 909 804 254 3,780 7,13,301 10,99,534 4,329 11,20,976 77.92
2004-05 970 856 255 4,508 7,97,685 11,40,072 4,471 15,85,585 3.69
2005-06 1,069 928 251 6,089 8,44,486 15,69,558 6,253 28,13,201 37.67
2006-07 1,228 1,114 249 7,847 8,55,456 19,45,287 7,812 33,67,350 23.94
2007-08 1,381 1,244 251 11,727 14,98,469 35,51,038 14,148 48,58,122 82.55
2008-09 1,432 1,277 243 13,650 14,26,355 27,52,023 11,325 28,96,194 -22.50
2009-10 1,470 1,343 244 16,816 22,15,530 41,38,023 16,959 60,09,173 50.36
2010-11 1,574 1,450 255 15,507 18,24,515 35,77,410 35,77,410 67,02,616 -13.55
2011-12 1,646 1,533 249 14,377 16,16,978 28,10,893 11,289 60,96,518 -21.43
Source: Compiled from SEBI and NSE
NA – Not Available or Not Applicable
As can be seen from the above table, total number of companies listed in
NSE has been continuously growing since 1994-95 till 2000-01. The number of
companies traded on NSE had seen deep since 2001-02 till 2003-04. However,
since 2004-05 the number of companies traded on NSE has been continuously
growing. In terms of turnover on the exchange, the trend observed on NSE is
similar to that of BSE. NSE had also seen huge deep like BSE in the year 2001-02
55
over the previous year by 69.27%. Subsequently, it was steadily growing till 2007-
08. Since, the market crash in 2008-09, the market volume had been declining over
the previous year except for the year 2009-10.
2.8 Comparison of Equity Turnover and Turnover in various segments of
Indian Stock Market
Even though there has been many equity stock exchanges registered and
recognized in India, BSE and NSE are the two major equity stock exchanges
where large amount of equity trading (i.e. almost 99%) takes place. Hence, the
comparison was made with regard to the equity turnover of both these
exchanges. The comparison of the equity turnover on these exchanges for the
period from 1994-95 till 2011-12 has been given in the table below:
Table: 2.6
Comparison of Equity Turnover on BSE and NSE (1994-95 till 2011-12) (Turnover in Rs. crores)
BSE NSE Total
Turnover
(TO)
BSE
TO %
of
Total
TO
NSE TO
% of
Total
TO Year
No. of
Compani
es Listed
Turnover No. of
Companie
s Listed Turnover
1 2 3 4 5 6 7 8
1994-95 4,702 67,749 135 1,805 69,554 97.40 2.60
1995-96 5,603 50,064 422 67,287 1,17,351 42.66 57.34
1996-97 5,832 1,24,190 550 2,95,403 4,19,593 29.60 70.40
1997-98 5,853 2,07,113 612 3,70,193 5,77,306 35.88 64.12
1998-99 5,849 3,10,750 648 4,14,474 7,25,224 42.85 57.15
1999-00 5,815 6,86,428 720 8,39,052 15,25,480 45.00 55.00
2000-01 5,869 10,00,032 785 13,39,510 23,39,542 42.74 57.26
2001-02 5,782 3,07,292 793 5,13,167 8,20,459 37.45 62.55
2002-03 5,650 3,14,073 818 6,17,989 9,32,062 33.70 66.30
2003-04 5,528 5,03,053 909 10,99,534 16,02,587 31.39 68.61
2004-05 4,731 5,18,715 970 11,40,072 16,58,787 31.27 68.73
2005-06 4,781 8,16,074 1,069 15,69,558 23,85,632 34.21 65.79
2006-07 4,821 9,56,185 1,228 19,45,287 29,01,472 32.96 67.04
2007-08 4,887 15,78,857 1,381 35,51,038 51,29,895 30.78 69.22
2008-09 4,929 11,00,074 1,432 27,52,023 38,52,097 28.56 71.44
2009-10 4,975 13,78,809 1,470 41,38,023 55,16,833 24.99 75.01
2010-11 5,067 11,05,027 1,574 35,77,410 46,82,437 23.60 76.40
2011-12 5,133 6,67,498 1,646 28,10,893 34,78,391 19.19 80.81
Source: Compiled from SEBI, BSE and NSE
As can be seen from the above table even though there are more number
of companies listed on BSE compared to NSE, today the NSE is in the
commanding position in the terms of Equity Cash turnover with market share of
56
almost 80.81% in 2011-12. In fact, the number of companies listed on BSE are
almost more than 3 times that of are listed on NSE. Even though BSE is very old
organization which commanded huge market share prior to launch of NSE in
1994-95, BSE has been over a period of time lost good market share to NSE.
NSE has come long way starting with the meager 2.6% market share in
the equity market in the year 1994-95 compared with total turnover on only
these two national level stock exchanges. Immediately, in the year 1995-96 we
saw NSE commanding almost 57% of the market share in the equity cash
market. Since then, the market share of NSE only has been growing year after
year barring a period from 1997-2000 which is more attributed to the bad
economy in those years. Today, in 2011-12 NSE‟s market share in the equity
market segment is almost 80% of the total turnover in the equity markets in India.
Further, equity turnover is compared below with the equity derivatives
turnover to analyse the growth of equity derivatives turnover vis-à-vis equity
turnover:
Table: 2.7
Comparison of Cash Segment Turnover with Equity Derivatives (in Rs. crores)
Year Total Equity
Turnover in
India
Total Equity
Derivatives
Turnover in
India
OI at the
end of
Turnover
% of Equity
Derivatives Turnover
to Equity Turnover
1 2 3 5 4
2001-02 8,20,459 1,03,851 2,150 12.66%
2002-03 9,32,062 4,42,344 2,201 47.46%
2003-04 16,02,587 21,42,521 7,189 133.69%
2004-05 16,58,787 25,63,165 21,052 154.52%
2005-06 23,85,632 48,24,260 38,469 202.22%
2006-07 29,01,472 74,15,276 38,683 255.57%
2007-08 51,29,895 1,33,32,786 48,974 259.90%
2008-09 38,52,097 1,10,22,257 57,705 286.14%
2009-10 55,16,833 1,76,63,899 97,978 320.18%
2010-11 46,82,437 2,92,48,375 1,01,816 624.64%
2011-12 34,78,391 3,21,58,208 89,784 924.51%
Source: Compiled from SEBI
In the FY 2005-06, the derivative market turnover was 202% of the cash
market turnover on all Indian Equity Stock Exchanges. Open interest, a crucial
measure of the dynamics of the derivative market measures the depth of the
market. The value of the open interest in FY2005-06 was Rs.38,469 crores.
57
Further, a comparison of equity segment turnover, equity derivatives
turnover, currency derivatives turnover and interest rate derivatives turnover is
presented in the table below which clearly shows that equity derivatives has
become very prominent in the recent years.
Table: 2.8
Growth of turnover in various segments of Indian Stock Market Turnover (in Rs. crores)
Year Cash
Segment
(All India)
Equity
Derivatives (NSE+BSE)
Currency
Derivatives (NSE+MCX+USE)
Interest Rate Derivatives
(NSE)
2001-02 8,95,818 1,01,925 NA NA
2002-03 9,68,910 4,39,866 NA NA
2003-04 16,20,497 21,30,447 NA NA
2004-05 16,66,888 25,47,053 NA NIL
2005-06 23,90,103 48,24,251 NA NIL
2006-07 29,03,058 73,56,270 NA NIL
2007-08 51,30,815 1,30,90,477 NA NIL
2008-09 38,52,580 1,10,10,482 3,11,389 NIL
2009-10 55,16,857 1,76,63,899 37,27,262 2,975
2010-11 46,85,034 2,92,48,375 76,43,805 62
2011-12 34,78,391 3,21,58,208 98,96,413 3,959
Source: Compiled from SEBI Annual Reports and Handbook of Statistics
NA: Not Applicable/Not Available (since the trading in those segments was not launched)
Note: Currency Derivatives started on NSE in August 2008, on MCX-SX in October 2008 & USE in Sep. 2010.
Interest Rate Futures trading started in April 2003.
NSE re-introduced Interest Rate Futures contracts on 10 Year G-Sec w.e.f. August 31, 2009.
NSE re-introduced Interest Rate Futures contracts on 91 Day GOI T-bill w.e.f. July 04, 2011
As can be seen from the above table, the equity derivatives turnover
completely surpassed the total turnover in its underlying i.e. that of the cash
(equity) turnover in the FY 2003-04. Today in 2011-12, the equity derivatives
turnover is almost more than 9 times the turnover recorded in its underlying i.e.
cash (equity) segment.
The turnover in the equity derivatives segment has gone up from Rs.
2,92,48,375 crores in 2010-11 to Rs. 3,21,58,208 crores in 2011-12. The currency
derivative segment too has seen a rise in its turnover from being Rs.76,43,805
crores in 2010-11 to Rs. 98,96,413 crores in 2011-12 whereas there is deep in the
cash (equity) turnover from Rs. 46,85,034 to Rs. 34,78,391 crores.
58
2.9 Equity Derivatives Turnover in India during the period from 2000-01 to
2011-12
The trading in equity derivatives started in June 2000. There are only
two equity derivatives stock exchanges in India viz. BSE and NSE. Even
though at the time of launch of equity derivatives trading in India, BSE was
having market share of around 40% and NSE was having market share of 60%
in the underlying market i.e. in the equity market, the market share in the equity
derivatives was cornered by one stock exchange i.e. by NSE.
The trading in equity derivatives started only post June 2000, hence the
turnover on NSE and BSE in the year 2000-01 does not represent the complete
financial year. Thus, for the purpose of study and comparison, the financial
year 2000-01 have not been considered anywhere in the thesis. The following
table shows the growth of equity derivatives trading turnover in India on NSE
and BSE during the period from 2001-02 till 2011-12:
Table: 2.9
Equity Derivatives Turnover in India during the period from 2001-02 to 2011-12 (Turnover in Notional Value in Rs. Crores)
Year
No.
of
Tradi
ng
Days
Index
Futures
Stock
Futures
Index Options Stock Options Total
OI at the
end of
%
increase
in T.O.
over
previous
Year
Call Put Call Put
Turnover Turnover Turnover Turnover Turnover Turnover Turnover Turnover
1 2 3 4 5 6 7 8 9 10 11
BSE
2001-02 247 1,276 452 39 45 79 35 1,926 - NA
2002-03 251 1,811 644 1 0 21 0 2,478 7 29
2003-04 254 6,572 5,171 0 0 174 157 12,074 1 387
2004-05 253 13,600 213 1,471 827 2 0 16,112 0.0 33
2005-06 251 5 1 3 0 0 0 9 0.0 -100
2006-07 249 55,491 3,515 0 0 0 0 59,006 13 686020
2007-08 251 2,34,660 7,609 31 8 0 0 2,42,308 74 311
2008-09 243 11,757 9 6 3 0 0 11,775 0 -95
2009-10 244 96 0 138 0 0 0 234 0 -98
2010-11 254 154 0 0 0 0 0 154 0 -34
2011-12 249 1,78,449 10,216 2,00,090 4,18,253 1,277 192 8,08,476 736 523766
NSE
2001-02 247 21,482 51,516 2,466 1,300 18,780 6,383 1,01,925 2,150 NA
2002-03 251 43,951 2,86,532 5,670 3,578 69,645 30,490 4,39,866 2,194 332
2003-04 254 5,54,462 13,05,949 31,801 21,022 1,68,174 49,038 21,30,447 7,188 384
2004-05 253 7,72,174 14,84,067 69,373 52,581 1,32,066 36,792 25,47,053 21,052 20
2005-06 251 15,13,791 27,91,721 1,68,632 1,69,837 1,43,752 36,518 48,24,251 38,469 89
2006-07 249 25,39,575 38,30,972 3,98,219 3,93,693 1,61,902 31,909 73,56,270 38,670 52
2007-08 251 38,20,667 75,48,563 6,68,816 6,93,295 3,08,443 50,693 1,30,90,477 48,900 78
2008-09 243 35,70,111 34,79,642 20,02,544 17,28,957 1,71,843 57,384 1,10,10,482 57,705 -16
2009-10 244 39,34,389 51,95,247 40,49,266 39,78,699 3,89,158 1,16,907 1,76,63,665 97,978 60
59
2010-11 254 43,56,755 54,95,757 90,90,702 92,74,664 7,77,109 2,53,235 2,92,48,221 1,01,816 66
2011-12 249 35,77,998 40,74,671 1,15,54,301 1,11,65,731 6,71,770 3,05,261 3,13,49,732 89,049 7
Note: 1. Notional Turnover = (Strike Price + Premium) * Quantity.
Source : Compiled from Handbooks of Statistics On Indian Securities Market, SEBI, Mumbai
As can be seen from the above, the turnover during 2001-02 on NSE
was Rs. 1,01,925 crores and on BSE was Rs.1,926 crores. The same grew to
Rs.3,13,49,732 crores on NSE and to Rs. 8,08,476 crores on BSE as of 2011-
12. As can be seen there is multifold growth seen by NSE from total turnover
recorded in the FY 2001-02 of Rs. 1,01,925 crores to Rs. 3,13,49,732 crores in
the FY 2011-12 i.e. almost 30,658% growth seen by NSE in the FY 2011-12
over its recorded turnover in the FY 2001-02. Further, BSE had not seen such a
growth since 2001-02 till 2010-12 where the total turnover recorded in the FY
2001-02 of Rs. 1,926 crores fell to Rs. 154 crores in the FY 2010-11. However,
the total turnover on BSE in the FY 2011-12 has seen tremendous increase
completely attributable to the incentive scheme launched by it in the form of
Liquidity Enhancement Incentive Programmes (LEIPS) launched by BSE since
September 2011. If we compare the total turnover of BSE in the FY 2001-02 of
Rs. 1,926 cores with the total turnover of Rs. 8,08,476 crores recorded in FY
2011-12, we see 41,888% growth in the total turnover of BSE for FY 2011-12
over its recorded total turnover in FY 2001-02.
2.10 Comparison of Futures Turnover of BSE and NSE
In order to further dissect the growth seen in the various types of
contracts offered by the Exchanges viz. Futures and Options and to determine
the market share of each of the exchanges, further analysis was carried out.
For the purpose of Futures contracts comparison, the turnover in the
Index Futures and Stock Futures was considered for the FY 2001-02 to FY
2011-12 of NSE and BSE.
The following table gives the analysis of Futures contracts Turnover in
India since 2001-02 till 2011-12:
60
Table: 2.10
Comparison of Futures Turnover of BSE and NSE (Turnover in Rs. Crores)
Year
BSE NSE Total
Futures
Turnover
in India
BSE TO
% of Total
Futures
Turnover
NSE TO
% of Total
Futures
Turnover
Index
Futures
Turnover
Stock
Futures
Turnover
Total
Turnover
Index
Futures
Turnover
Stock
Futures
Turnover
Total
Turnover
1 2 3 4 5 6 7 8 9 10
2001-02 1,276 452 1,728 21,482 51,516 72,997 74,725 2.31% 97.69%
2002-03 1,811 644 2,455 43,951 2,86,532 3,30,483 3,32,939 0.74% 99.26%
2003-04 6,572 5,171 11,743 5,54,462 13,05,949 18,60,411 18,72,154 0.63% 99.37%
2004-05 13,600 213 13,813 7,72,174 14,84,067 22,56,241 22,70,053 0.61% 99.39%
2005-06 5 1 6 15,13,791 27,91,721 43,05,512 43,05,518 0.00% 100.00%
2006-07 55,491 3,515 59,006 25,39,575 38,30,972 63,70,547 64,29,553 0.92% 99.08%
2007-08 2,34,660 7,609 2,42,269 38,20,667 75,48,563 1,13,69,230 1,16,11,499 2.09% 97.91%
2008-09 11,757 9 11,766 35,70,111 34,79,642 70,49,753 70,61,519 0.17% 99.83%
2009-10 96 0 96 39,34,389 51,95,247 91,29,635 91,29,732 0.00% 100.00%
2010-11 154 0 154 43,56,755 54,95,757 98,52,511 98,52,665 0.00% 100.00%
2011-12 1,78,449 10,216 1,88,665 35,77,998 40,74,671 76,52,669 78,41,334 2.41% 97.59%
Source :Compiled from Handbooks of Statistics On Indian Securities Market, SEBI, Mumbai
As can be seen from the above the table, barring few years NSE has
always commanded almost 100% of the market share. Even the few years
where it had little less market share, BSE could command only 2-3% of the
market share. Overall, the Indian Futures contracts have seen a whopping
growth of 10,394% in the total futures turnover in the FY 2011-12 over the
total futures turnover recorded in the FY2001-02.
As can be seen from the above, the total futures contracts turnover
during 2001-02 on NSE was Rs. 72,997 crores and on BSE was Rs.1,728
crores. The same grew to Rs.76,52,669 crores on NSE and to Rs. 1,88,665
crores on BSE as of 2011-12. As can be seen there is multifold growth seen by
NSE from the total futures contracts turnover recorded in the FY 2001-02 of
Rs. 72,997 crores to Rs. 76,52,669 crores in the FY 2011-12 i.e. almost
10,384% growth seen by NSE in the FY 2011-12 over its recorded total futures
contracts turnover in the FY 2001-02. Further, BSE had not seen such a growth
since 2001-02 till 2010-12 where the total futures contracts turnover recorded
in the FY 2001-02 of Rs. 1,728 crores fell to Rs. 154 crores in the FY 2010-11.
However, the total futures contracts turnover on BSE in the FY 2011-12 has
seen tremendous increase completely attributable to the incentive scheme
launched by it in the form of Liquidity Enhancement Incentive Programmes
(LEIPS) launched by BSE since September 2011. If we compare the total
futures contracts turnover of BSE in the FY 2001-02 of Rs. 1,728 cores with
61
the total futures contracts turnover of Rs. 1,88,665 crores recorded in FY 2011-
12, we see 10,819% growth in the total futures contracts turnover of BSE for
FY 2011-12 over its recorded total futures contracts turnover in FY 2001-02.
Even with such increase in the total futures turnover in BSE after the launch of
incentive scheme, it is able to command only around 2.5% of the total market
share in the futures contracts in the FY 2011-12 and NSE still commands a
whopping 97.50% of the market share in the futures contracts.
2.11 Comparison of Options Turnover of BSE and NSE
Similar to the comparison made only for the futures trading across both
the equity derivatives stock exchanges, a comparison was made of only the
options trading i.e. stock options and the index options for both put and call
options in order to understand any inroad has been made or is being made by
BSE in this type of product in terms of the market share. The following table
gives the analysis of Options Contracts turnover in India since 2001-02 till
2011-12.
Table: 2.11
Comparison of Options Turnover of BSE and NSE (Turnover in Rs. Crores)
Year
BSE NSE Total
Options
Turnover
in India
BSE TO
% of
Total
Options
T.O.
NSE
TO %
of Total
Option
s T.O.
Index
Options
(Call+Put)
Turnover
Stock
Options
(Call+Put)
Turnover
Total
Options
Turnover
Index
Options
(Call+Put)
Turnover
Stock
Options
(Call+Put)
Turnover
Total
Options
Turnover
1 2 3 4 5 6 7 8 9 10
2001-02 84 114 198 3,765 25,163 28,928 29,126 0.68 99.32
2002-03 1 21 22 9,248 1,00,135 1,09,383 1,09,405 0.02 99.98
2003-04 0 332 332 52,823 2,17,212 2,70,035 2,70,367 0.12 99.88
2004-05 2,297 3 2,300 1,21,954 1,68,858 2,90,812 2,93,111 0.78 99.22
2005-06 3 0 3 3,38,469 1,80,270 5,18,739 5,18,742 0.00 100.00
2006-07 0 0 0 7,91,912 1,93,811 9,85,723 9,85,723 0.00 100.00
2007-08 39 0 39 13,62,111 3,59,136 17,21,247 17,21,286 0.00 100.00
2008-09 9 0 9 37,31,502 2,29,227 39,60,729 39,60,738 0.00 100.00
2009-10 138 0 138 80,27,964 5,06,065 85,34,029 85,34,167 0.00 100.00
2010-11 0 0 0 1,83,65,366 10,30,344 1,93,95,710 1,93,95,710 0.00 100.00
2011-12 6,18,342 1,469 6,19,811 2,27,20,032 9,77,031 2,36,97,063 2,43,16,874 2.55 97.45
Note: Notional Turnover = (Strike Price + Premium) * Quantity.
Source : Compiled from Handbooks of Statistics On Indian Securities Market, SEBI, Mumbai
As can be seen from the above the table, barring few years NSE has
always commanded almost 100% of the market share. BSE could have very
miniscule percentile of market share in the initial 3-4 years which still was less
than 1% market share in the options contracts. In is only in 2011-12, we see
62
BSE getting some market share i.e. around 2.5%, which again can be attributed
to the incentive scheme launched by BSE in September 2011.
Overall, the Indian Options contracts trading have seen a whopping
growth of 83,390% in the total options contracts turnover in the FY 2011-12
over the total options contracts turnover recorded in the FY2001-02.
As can be seen from the above, the total options contracts turnover
during 2001-02 on NSE was Rs. 28,928 crores and on BSE was Rs.198 crores.
The same grew to Rs.2,36,97,063 crores on NSE and to Rs. 6,19,811 crores on
BSE as of 2011-12. As can be seen there is multifold growth seen by NSE from
the total options contracts turnover recorded in the FY 2001-02 of Rs. 28,928
crores to Rs. 2,36,97,063 crores in the FY 2011-12 i.e. almost 81,818%
growth seen by NSE in the FY 2011-12 over its recorded total options contracts
turnover in the FY 2001-02. Further, BSE had not seen such a growth since
2001-02 till 2010-12 where the total options contracts turnover recorded in the
FY 2001-02 of Rs. 198 crores fell to NIL in the FY 2010-11. However, the
options contracts turnover on BSE in the FY 2011-12 has seen tremendous
increase completely attributable to the incentive scheme launched by it in the
form of Liquidity Enhancement Incentive Programmes (LEIPS) launched by
BSE since September 2011. If we compare the total options contracts turnover of
BSE in the FY 2001-02 of Rs. 198 cores with the total options contracts turnover
of Rs. 6,19,811 crores recorded in FY 2011-12, we see 313,542% growth in the
total futures contracts turnover of BSE for FY 2011-12 over its recorded total
options contracts turnover in FY 2001-02. Even with such increase in the total
options contracts turnover in BSE after the launch of incentive scheme, it is able to
command only around 2.5% of the total market share in the futures contracts in the
FY 2011-12 and NSE still commands a whopping 97.50% of the market share in
the futures contracts.
2.12 Product-wise Comparison of Equity Derivatives Turnover of BSE and NSE
Since, largely there are four kind of products offered in equity
derivatives segment namely Index Futures, Index Options, Stock Futures and
Single Stock Options. For the purpose of understanding the preference of the
Indian market specifically to these products a comparison of product-wise
turnover in the Indian equity derivatives market on both the exchanges was
carried out for a period from 2001-02 to 2011-12. For the purpose of options
63
turnover, the notional volume was considered as (strike price + premium) *
quantity. Also, for the options the calls and puts were added to get the total
turnover in order to maintain the standard practice across the calculations for
this purpose. The table below gives product wise details for the above period:
Table: 2.12
Product-wise Comparison of Equity Derivatives Turnover of BSE and NSE
(2001-02 to 2011-12) (Turnover in Rs. Crores)
Year
Index Futures Stock Futures Index Options Stock Options Total
Derivatives
Turnover
% of
Total
T.O. in
the Year
Turnover
% of
Total
Turnover
in the
Year
Call + Put
Turnover
% of
Total
T.O. in
the Year
Call +
Put T.O.
% of
Total
T.O.
in the
Year
Turnover
1 2 2 3 4 5 6 7 8 10
BSE
2001-02 1,276 66.28% 452 23.45% 84 4.36% 114 5.92 1,926
2002-03 1,811 73.09% 644 26.00% 1 0.04% 21 0.85 2,478
2003-04 6,572 54.43% 5,171 42.83% 0 0.00% 332 2.75 12,074
2004-05 13,600 84.41% 213 1.32% 2,297 14.26% 3 0.02 16,112
2005-06 5 58.14% 1 5.81% 3 34.88% 0 0.00 9
2006-07 55,491 94.04% 3,515 5.96% 0 0.00% 0 0.00 59,006
2007-08 2,34,660 96.84% 7,609 3.14% 39 0.02% 0 0.00 2,42,308
2008-09 11,757 99.85% 9 0.07% 0 0.00% 0 0.00 11,775
2009-10 96 41.01% 0 0.13% 138 58.96% 0 0.00 234
2010-11 154 99.84% 0 0.00% 0 0.00% 0 0.00 154
2011-12 1,78,449 22.07% 10,216 1.26% 6,18,342 76.48% 1,469 0.18 8,08,476
NSE
2001-02 21,482 21.08% 51,516 50.54% 3,765 3.69% 25,163 24.69 1,01,925
2002-03 43,951 9.99% 2,86,532 65.14% 9,248 2.10% 1,00,135 22.76 4,39,866
2003-04 5,54,462 26.03% 13,05,949 61.30% 52,823 2.48% 2,17,212 10.20 21,30,447
2004-05 7,72,174 30.32% 14,84,067 58.27% 1,21,954 4.79% 1,68,858 6.63 25,47,053
2005-06 15,13,791 31.38% 27,91,721 57.87% 3,38,469 7.02% 1,80,270 3.74 48,24,251
2006-07 25,39,575 34.52% 38,30,972 52.08% 7,91,912 10.77% 1,93,811 2.63 73,56,270
2007-08 38,20,667 29.19% 75,48,563 57.66% 13,62,111 10.41% 3,59,136 2.74 1,30,90,477
2008-09 35,70,111 32.42% 34,79,642 31.60% 37,31,502 33.89% 2,29,227 2.08 1,10,10,482
2009-10 39,34,389 22.27% 51,95,247 29.41% 80,27,964 45.45% 5,06,065 2.87 1,76,63,665
2010-11 43,56,755 14.90% 54,95,757 18.79% 1,83,65,366 62.79% 10,30,344 3.52 2,92,48,221
2011-12 35,77,998 11.41% 40,74,671 13.00% 2,27,20,032 72.47% 9,77,031 3.12 3,13,49,732
Note: Notional Turnover for Options = (Strike Price + Premium) * Quantity.
Source: Compiled from SEBI, NSE and BSE
It can be seen from the above table, that in BSE even though the volume
in equity derivatives was not much, it has been index futures which were
preferred the most throughout the period from 2001-02 till 2010-11. It was only
in 2011-12 where the clients preferred Index Options over any other products.
64
In the FY 2011-12, the Index Futures turnover accounted for almost 77% of the
volume. This increase is also significant considering that the trading in equity
derivatives on BSE picked up only in that particular financial year. This also
indicates the gradual shift of the investor‟s preference from Index futures to index
options. Even though, options are considered to be riskier than the futures, the
Indian market appears to have matured enough to trade in the options contracts
where the cost of purchasing the similar quantity of stock or index units is less
compared to actual underlying in the cash equity or in the futures contracts.
Similarly, in NSE initially the stock futures contracts were preferred by
the investors over other products which accounted for almost 50% of total
turnover in the FY 2001-02 which remained to be preferred investment choice
contract of the investor‟s at large till 2007-08. Subsequently, the preference of
the investors started shifting to the Index Options which accounted for almost
72% in the FY 2011-12 of the total equity derivatives volume on NSE.
2.13 Product-wise Comparison of Equity Derivatives across Indian Equity Derivatives
Since the introduction of derivatives market in India in 2000, the market
has grown at a very fast rate. At the time of initiating the research work, about
97% of the volume in the NSE F&O Segment was retail and around 3%
institutional. About 50 members out of around 757 members on NSE (as on
January 31, 06) covered almost half of the total turnover on the derivatives
segment. In order to understand the preferences of the investors to any
particular product across all the Exchanges in the Indian equity derivatives
market, a comparison was made of all the products combined turnover across
all the equity derivatives exchanges for the period from 2001-02 till 2011-12.
The comparison has been brought out in the table given below:
Table: 2.13
Product-wise Comparison of Equity Derivatives across Indian Equity Derivatives (Turnover in Notional Value in Rs. Crores)
Year
Index Futures
(BSE+NSE)
Stock Futures
(BSE+NSE)
Index Options
(BSE+NSE)
Stock Options
(BSE+NSE)
Total
Derivatives
Turnover
% of
Total
Turnover
in the
Year
Turnover
% of Total
Turnover
in the Year
Call + Put
Turnover
% of
Total
Turnover
in the
Year
Call +
Put
Turnover
% of
Total
Turnover
in the
Year
(NSE+BSE)
Turnover
1 2 3 4 5 6 7 8 9 10
2001-02 22,758 21.91% 51,967 50.04% 3,849 3.71% 25,277 24.34% 1,03,851
2002-03 45,762 10.35% 2,87,176 64.92% 9,249 2.09% 1,00,156 22.64% 4,42,344
2003-04 5,61,034 26.19% 13,11,120 61.20% 52,823 2.47% 2,17,544 10.15% 21,42,521
65
2004-05 7,85,773 30.66% 14,84,280 57.91% 1,24,251 4.85% 1,68,861 6.59% 25,63,165
2005-06 15,13,796 31.38% 27,91,722 57.87% 3,38,472 7.02% 1,80,270 3.74% 48,24,260
2006-07 25,95,066 35.00% 38,34,487 51.71% 7,91,912 10.68% 1,93,811 2.61% 74,15,276
2007-08 40,55,327 30.42% 75,56,172 56.67% 13,62,150 10.22% 3,59,136 2.69% 1,33,32,786
2008-09 35,81,868 32.50% 34,79,651 31.57% 37,31,502 33.85% 2,29,227 2.08% 1,10,22,257
2009-10 39,34,485 22.27% 51,95,247 29.41% 80,28,102 45.45% 5,06,065 2.86% 1,76,63,899
2010-11 43,56,909 14.90% 54,95,757 18.79% 1,83,65,366 62.79% 10,30,344 3.52% 2,92,48,375
2011-12 37,56,447 11.68% 40,84,886 12.70% 2,33,38,374 72.57% 9,78,500 3.04% 3,21,58,208
Note: Notional Turnover for Options = (Strike Price + Premium) * Quantity.
Source: Compiled from SEBI, NSE and BSE
If we take the overall picture of the investor‟s preference across Indian
equity derivatives market, we see that the same is more skewed toward the
picture of NSE since the Exchange has very large market share in the Indian
equity derivatives market. In the initial years of equity derivatives market in
India, stock futures were more preferred which accounted for almost 50.04% of
the total turnover in equity derivatives, followed by stock options with 24.34%,
then the index futures with 21.91% and the least preferred was index options
with 3.71% of the total turnover in equity derivatives in FY2001-02. The
investors in the initial years preferred stock futures over the other products in
the equity derivatives market. However, their preference started changing since
2008-09 and the investors started preferring Index options over the other equity
derivatives market products. The preference of investors was so heavily tilted
towards the Index options that when the volumes are now far higher compared
to the ones in 2001-02, the index options accounts for almost 72% of the total
equity derivatives turnover, followed by stock futures with 12.70%, then the
index futures with 11.68% and the least preferred are the stock options with
3.04% of the total equity derivatives turnover in 2011-12.
The concentration of Indian derivative markets on the stock futures
contracts was in contrast to the trend in the derivative segments in other parts of
the world. Ever since the introduction of equity derivatives in 2000, the most
active contracts have been Stock Futures, however the trend changed after the
market crash of 2008. The shift to the large trading in the index options,
amongst many other reasons can be explained by way of gradual increased
understanding of the derivatives products by the investors. The investors have
understood the need to hedge the positions after the turmoil witnessed by the
equity markets in the year January 2008 through the cost efficient alternative
available in the form of index options contracts to hedge against any sudden
event leading to sudden market fall.
66
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