PROJECT REPORT ON “A STUDY ON THE GROWTH OF EQUITY DERIVATIVES IN INDIA” SUBMITTED IN PARTIAL FULFILLMENT OF DEGREE OFMASTER OF BUSINESS ADMINISTRATION SUBMITTED BY TAMSEEL NAJMI MBA (GEN) 2011-2013 UNDER SUPERVISION OF MR. PANKAJ BHARDWAJ (Branch Manager) Department of Management Studies JAMIA HAMDARD NEW DELHI
DECLARATIONI hereby declare that the project work entitled “A STUDY ON THE GROWTH OFEQUITY DERIVATIVES IN INDIA” submitted to Department of Management, JAMIAHAMDARD, is a record of an original work done by me under the guidance of Mr.Shahnawaz Abdin, Asstt Professor, FMIT. This project work is submitted in the partialfulfilment of degree of Master of Business Administration. The results embodied in thisreport have not been submitted to any other university or institute for the award of any degreeor diploma.DATE: TAMSEEL NAJMIPLACE: MBA (GEN) 2011-13
COMPANY DETAILSIndia Infoline (IIFL) founded in 1995 by Mr. Nirmal Jain (Chairman and Managing Director)as an independent business research and information provider. It gradually evolved into a onestop financial services solutions provider. Its strong management team comprises copetentand dedicated professionals.India Infoline is a pan India financial services organisation with a network of over 3,000business locations spread over 500 cities and towns across India. Its global footprints extendsacross geographies with offices in New York, Singapore, Dubai, Mauritius, London,Colombo and Hong Kong.IIFL offers advice and execution platform for the entire range of financial services coveringproducts ranging from equities and derivatives, commodities, wealth management, assetmanagement, insurance, fixed deposits, loans, investment banking, gold bonds, property andother small saving instruments.BOARD OF DIRECTORS Mr. Nirmal Jain Mr. R. Venkatraman Mr.Nilesh Vikamsey Chairman Managing Director Independent Director Mr. Kranti Sinha Mr. A. K. Purwar Mr. Sunil Kaul Independent Director Independent Director Independent Director
Vision StatementThe vision of the organisation is to be the most respected company in the financial servicesspace.India Infoline Group subsidiaries India Infoline Media and Research Services Limited India Infoline Commodities Limited India Infoline Marketing and Services India Infoline Investment Services Limited IIFL (Asia) Pvt Pte LimitedSWOT ANALYSISSWOT analysis of IIFL is done under the following heads:STRENGTHS:- 1. Wide range of financial products. 2. Successful Implementation of “Insurance Broking” Model. 3. Online portal‟s successful branding as “5paisa.com”. 4. Have over 3,000 offices in India across 500 cities. 5. First Indian brokerage house to get membership of Singapore exchange. 6. IIFL has been awarded the “Best Broker, India”, “Most Improved Brokerage, India” and “Fastest Growing Equity Broking House”.WEAKNESSES:- 1. High risk exposure as seen by conservative population. 2. Less emphasis on advertising causes lack of brand visibility.
OPPORTUNITIES:- 1. High income urban families. 2. More penetration into the growing cities.THREATS:- 1. Stringent economic measure by government and SEBI. 2. Entry of foreign finance firms in Indian market.COMPETITORSSome of the major competitors of IIFL are:- 1. Sharekhan 2. Indiabulls 3. Angel Broking 4. Edelweiss
COMPANY STRUCTUREIndia Infoline Limited is listed on both the leading stock exchanges in India, viz. the StockExchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member ofboth the exchanges. It is engaged in the businesses of Equities broking, Wealth AdvisoryServices and Portfolio Management Services. It offers broking services in the Cash andDerivatives segments of the NSE as well as the Cash segment of the BSE. It is registered withNSDL as well as CDSL as a depository participant, providing a one-stop solution for clientstrading in the equities market. It has recently launched its Investment banking andInstitutional Broking business.A SEBI authorized Portfolio Manager; it offers Portfolio Management Services to clients.These services are offered to clients as different schemes, which are based on differinginvestment strategies made to reflect the varied risk-return preferences of clients.
India Infoline Media and Research Services LimitedThe content services represent a strong support that drives the broking, commodities, mutualfund and portfolio management services businesses. Revenue generation is through the saleof content to financial and media houses, Indian as well as global.It undertakes equities research which is acknowledged by none other than Forbes as Best ofthe Web and …a must read for investors in Asia. India Infolines research is available notjust over the internet but also on international wire services like Bloomberg (Code: IILL),Thomson First Call and Internet Securities where India Infoline is amongst the most readIndian brokers.India Infoline Commodities LimitedIndia Infoline Commodities Pvt Limited is engaged in the business of commodities broking.Our experience in securities broking empowered us with the requisite skills and technologiesto allow us offer commodities broking as a contra-cyclical alternative to equities broking. Weenjoy memberships with the MCX and NCDEX, two leading Indian commodities exchanges,and recently acquired membership of DGCX. We have a multi-channel delivery model,making it among the select few to offer online as well as offline trading facilities.India Infoline Marketing & ServicesIndia Infoline Marketing and Services Limited is the holding company of India InfolineInsurance Services Limited and India Infoline Insurance Brokers Limited. (a)India Infoline Insurance Services Limited is a registered Corporate Agent with the Insurance Regulatory and Development Authority (IRDA). It is the largest Corporate Agent for ICICI Prudential Life Insurance Co Limited, which is Indias largest private Life Insurance Company. India Infoline was the first corporate agent to get licensed by IRDA in early 2001. (b) India Infoline Insurance Brokers Limited is a newly formed subsidiary which will carry out the business of Insurance broking. We have applied to IRDA for the
insurance broking license and the clearance for the same is awaited. Post the grant of license, we propose to also commence the general insurance distribution business.India Infoline Investment Services LimitedConsolidated shareholdings of all the subsidiary companies engaged in loans and financingactivities under one subsidiary. Recently, Orient Global, a Singapore-based investmentinstitution invested USD 76.7 million for a 22.5% stake in India Infoline Investment Services.This will help focused expansion and capital raising in the said subsidiaries for variouslending businesses like loans against securities, SME financing, distribution of retail loanproducts, consumer finance business and housing finance business. India Infoline InvestmentServices Private Limited consists of the following step-down subsidiaries.(a) India Infoline Distribution Company Limited (distribution of retail loan products)(b) Money line Credit Limited (consumer finance)(c) India Infoline Housing Finance Limited (housing finance)IIFL (Asia) Pte LimitedIIFL (Asia) Pte Limited is wholly owned subsidiary which has been incorporated inSingapore to pursue financial sector activities in other Asian markets. Further to obtaining thenecessary regulatory approvals, the company has been initially capitalized at 1 millionSingapore dollars.
FINANCIAL SERVICES PROVIDED BY IIFLIIFL deals in a variety of products and services. These are discussed below: 1. EQUITIES IIFL is a member of BSE and NSE registered with NSDL and CDSL as a depository participant and provides broking services in the cash, derivatives and currency segments, online and offline. IIFL‟s Traders‟ Terminal, its proprietary trading platform is widely acknowledged as one of the best available for retail investors. IIFL received BQ1 broker grading (highest grading) from CRISIL. The grading reflects IIFL‟s healthy regulatory compliance track record and adequate credit risk profile. IIFL‟s analyst team won Zee Business‟ India‟s best market analysts award- 2009 for being the best in the Oil and Gas and commodities sector. IIFL has rapidly emerged as one of the premier institutional equities houses in India with a team of over 25 research analysts, a full-fledged sales and trading team coupled with an experienced investment banking team. 2. COMMODITIES IIFL offers commodities trading to its customers vide its membership of the MCX and the NCDEX. The domain knowledge and data based on in depth research of complex paradigms of commodity kinetics, offers our customers a unique insight into behavioural patterns of these markets. The customers are ideally positioned to make informed investment decisions with a high probability of success. 3. CREDIT AND FINANCE
IIFL offers a wide array of secured loan products. Currently secured loans (mortgage loans, margin funding, loan against shares) comprises 94% of the loan book. The company has discontinued its unsecured products. It has robust credit processes and collection mechanism resulting in overall NPAs of less than 1%. Recently the company has also launched loans against gold.4. INSURANCE IIFL entered the insurance distribution business in 2000 as ICICI Prudential Life Insurance Co Ltd‟s corporate agent. Later it became an insurance broker in October 2008 in line with its strategy to have an „open architecture‟ model. The company now distributes products of major insurance companies through its subsidiary India Infoline Insurance Brokers Ltd.5. WEALTH MANAGEMENT SERVICES IIFL offers private wealth advisory services to high net worth individuals (HNI) and corporate clients under the IIFL Private Wealth brand. IIFL private wealth is managed by a qualified team of MBAs from IIMs and premier institutes and relevant industry experience. The team advices clients across asset classes like sovereign and quasi- sovereign debt, corporate and collateralised debt, direct equity, ETFs and mutual funds, third party PMS, derivative strategies, real estate and private equity. It has also tied up with interactive brokers LLC to strengthen its execution platform and provide investors with a global investment platform.6. INVESTMENT BANKING IIFL‟s investment banking division was launched in 2006. The business leverages upon its strength of research and placement capabilities of the institutional and retail sales teams. The experienced investment banking team possesses the skill-set to manage all kind of investment banking transactions. The close interaction with investors as well as corporates help to understand and offer tailor made solutions to fulfil requirements.
In FY10, the team advised and managed more than 10 transactions including fourIPOs and four Qualified Institutions Placements.HOW DO IIFL HANDLE THEIR CUSTOMERS‟ INVESTMENTS?
OBJECTIVES OF STUDYThe objectives of the study can be summed up as follows: 1. To analyse the growth rate of Derivatives market in India. 2. To study various ways for trading in the derivatives market. 3. To identify the most commonly used instrument used for investment in derivatives market.
RESEARCH METHODOLOGYMethodology refers to the method adopted for collection of information, which forms thebasis of written report. The data collection techniques used are: 1. RESEARCH DESIGN The purpose of the study is descriptive and I had no control over the variables. 2. SOURCES OF DATA The source of data here is the Secondary data source. The information is collected from various research works and journals available on the topic and also from NSE. 3. UNIT OF ANALYSIS The unit of analysis here is the S & P CNX NIFTY. 4. EXTENT OF RESEARCHER INTERFERENCE The extent of my interference is minimal. 5. LIMITATIONS OF THE STUDY The study is primarily based on secondary data, hence any mistake in previous works may lead to discrepancy.
EQUITY DERIVATIVES- AN INTRODUCTIONThe term “derivatives” is used to refer to financial instruments which derive their value fromsome underlying asset. The underlying assets could be equities (shares), debt (bonds, T-bills,notes), currencies and even indices of these various assets, such as the Nifty 50 Index.Derivatives derive their names from their respective underlying asset. Thus, if a derivatives‟sunderlying asset is equity, it is called equity derivative. Derivatives can be traded either on aregulated exchange such as the NSE or off the exchanges, i.e., directly between the partieswhich is called over the counter (OTC) trading. In India only exchange traded equityderivatives are permitted under law. The basic purpose of derivatives is to transfer the pricerisk (inherent in fluctuations of the asset prices) from one party to another; they facilitate theallocation of the risk to those who are willing to take it. In so doing, derivatives help mitigatethe risk arising from the future uncertainty of price. For example, on November 1, 2009 a ricefarmer may wish to sell his harvest at a future date (say, January 1, 2010) for a predeterminedfixed price to eliminate the risk of change in prices by that date. Such a transaction is anexample of a derivatives contract. The price of this derivative is driven by the spot price ofrice which is the underlying.The National Stock Exchange of India Limited (NSE) commenced trading in derivatives withthe launch of index futures on June 12, 2000. The futures contracts are based on the popularbenchmark S&P CNX Nifty Index.The Exchange introduced trading in Index Options (also based on Nifty) on June 4, 2001.NSE also became the first exchange to launch trading in options on individual securities fromJuly 2, 2001. Futures on individual securities were introduced on November 9, 2001. Futuresand Options on individual securities are available on 208 securities stipulated by SEBI.The Exchange has also introduced trading in Futures and Options contracts based on CNX-IT, BANK NIFTY, and NIFTY MIDCAP 50 indices.Since the launch of the Index Derivatives on the popular benchmark S&P CNX Nifty Indexin 2000, the National Stock Exchange of India Limited (NSE) today have moved ahead witha varied product offering in equity derivatives. The Exchange currently provides trading inFutures and Options contracts on 9 major indices and 226 securities. The Exchange also
introduced trading in Mini Derivatives contracts to provide easier access for small investorsto invest in Nifty futures and options.At present, the equity derivatives market is the most active derivative market in India.Trading volume in equity derivatives are, on an average, more than three and a half times thetrading volumes in the cash equity markets.November 18, 1996 L.C. Gupta Committee set up to draft a policy framework for introducing derivatives.May 11, 1998 L.C. Gupta Committee submits its report on the policy framework.May 25, 2000 SEBI allows exchanges to trade in index futures.June 12, 2000 Trading on Nifty futures commences on the NSEJune 4, 2001 Trading of Nifty options commences on the NSEJuly 2, 2001 Trading on stock options commences on the NSENovember9, 2001 Trading on stock futures commences on the NSEAugust 29, 2008 Currency derivatives trading commences on the NSEAugust31, 2009 Interest rate derivatives trading commences on the NSEFebruary 2010 Launch of currency futures on additional currency pairsOctober 28, 2010 Introduction of European style stock optionsOctober 29, 2010 Introduction of currency optionsTABLE: MILESTONES IN THE DEVELOPMENT OF INDIAN DERIVATIVESMARKET.
TYPES OF DERIVATIVESThere are various types of derivatives traded on exchanges across the world. They range fromthe very simple to the most complex products. The following are the three basic forms ofderivatives, which are the building blocks for many complex derivative instruments: 1. FORWARDS 2. FUTURES 3. OPTIONSFORWARDSThese are promises to deliver an asset at a pre-determined date in future at a predeterminedprice. Forwards are highly popular on currencies and interest rates. The contracts are tradedover the counter (outside the stock exchanges, directly between the two parties) and arecustomised according to the needs of the parties. Since these contracts do not fall under thepurview of rules and regulations of an exchange, they generally suffer from counterparty riski.e. the risk that one of the parties to the contract may not fulfill his or her obligation.FUTURESA future contract is an agreement between two parties to buy or sell an asset at a certain timein future at a certain price. These are basically exchange traded, standardised contracts. Theexchange stands guarantee to all the transactions and counterparty risk is largely eliminated.The buyers of futures contracts are considered having a long position whereas the sellers areconsidered to be having a short position. It should be noted that this is similar to any assetmarket where anybody who buys is long and the one who sells in short.Futures contracts are available on variety of commodities, currencies, interest rates, stocksand other tradable assets. They are highly popular on stock indices, interest rates and foreignexchange.
OPTIONSOptions give the buyer (holder) a right but not an obligation to buy or sell an asset in future.Options are of two types: CALLS PUTSCalls give the buyer the right but not the obligation to buy a given quantity of the underlyingasset, at a given price on or before a given future date.Puts give the buyer the right, but not the obligation to sell a given quantity of the underlyingasset at a given price on or before a given date. One can buy and sell each of the contracts.When one buys an option he is said to be having a long position and when one sells he is saidto be having a short position.In the first two types of derivatives contracts (forwards and futures) both the parties (buyerand seller) have an obligation i.e. the buyer needs to pay for the asset to the seller and theseller needs to deliver the asset to the buyer on the settlement date. In case of options only theseller (also called option writer) is under an obligation and not the buyer (option purchaser).The buyer has a right to buy (call options) or sell (put options) the asset from/to the seller ofthe option but he may or may not exercise this right. In case the buyer of the option doesexercise his right, the seller of the option must fulfil whatever his obligation is. An option canbe exercised at the expiry of the contract period or anytime up to the expiry of the contractperiod.
DERIVATIVES PRODUCTS AT NSESince the launch of the Index Derivatives on the popular benchmark S&P CNX Nifty Indexin 2000, the National Stock Exchange of India Limited (NSE) today have moved ahead witha varied product offering in equity derivatives. The Exchange currently provides trading inFutures and Options contracts on 9 major indices and 226 securities. The Exchange alsointroduced trading in Mini Derivatives contracts to provide easier access for small investorsto invest in Nifty futures and options.Derivatives are available on the following products: 1. S&P CNX Nifty Index 2. Mini Derivative Contracts on S&P CNX Nifty Index 3. CNXIT Index 4. Bank Nifty Index 5. Nifty Midcap 50 Index 6. CNX Infrastructure Index 7. CNX PSE Index 8. Individual SecuritiesTRADING OF DERIVATIVES AT NSENSE introduced for the first time in India, fully automated screen based trading. It uses amodern, fully computerised trading system designed to offer investors across the length andbreadth of the country a safe and easy way to invest.NSE‟s automated screen based trading, modern, fully computerised trading system designedto offer investors across the length and breadth of the country a safe and easy way to invest.The NSE trading system called National Exchange for Automated Trading (NEAT) is a fullyautomated screen based trading system, which adopts the principle of an order driven market.
MARKET TIMINGSTrading on the derivatives segment takes place on all days of the week (except Saturdays andSundays and holidays declared by the Exchange in advance). The market timings of thederivatives segment are:
GROWTH IN FUTURES AND OPTIONSINDEX FUTURESNSE commenced trading in Index Futures on June 12, 2000. The Nifty futures contracts arebased on the popular market benchmark S&P CNX Nifty Index. S&P CNX Nifty is uniquelyequipped as an index for the index futures market owing to(a) low market impact cost and(b) high hedging effectiveness.The good diversification of S&P CNX Nifty will generate low initial margin requirements.Finally, S&P CNX Nifty is calculated using NSE prices, and NSE is the most liquidexchange in India, thus making it easier to do arbitrage for S&P CNX Nifty index futures. YEAR Number Of Contracts Turnover (Rs. Cr.) 2000-01 90580 2365 2001-02 1025588 21483 2002-03 2126763 43952 2003-04 17191668 554446 2004-05 21635449 772147 2005-06 58537886 1513755 2006-07 81487424 2539574 2007-08 156598579 3820667.27 2008-09 210428103 3570111.40 2009-10 178306889 3934388.67 2010-11 165023653 4356754.53 2011-12 146188740 3577998.41 2012-13 36849287 887165.22TABLE: Annual Growth in the Index Futures (2000-2012)
No of Contracts (Index Futures) 250,000,000 210,428,103 200,000,000 178,306,889 165,023,653 156,598,579 146,188,740 150,000,000 100,000,000 81,487,424 58,537,886 36,849,287 17,191,668 50,000,000 90,580 21,635,449 1,025,588 2,126,763 0 No of ContractsFig: Graph Representing the Growth in Number of Contracts for Index Futures.
Turnover(Rs Cr) 5000000 4500000 4356754.53 3820667.27 3934388.67 4000000 3570111.4 3577998.41 3500000 3000000 2539574 2500000 2000000 1513755 1500000 772147 887165.22 1000000 554446 500000 2365 21483 43952 0 Turnover(Rs Cr)Fig: Graph Representing the growth of turnover in Index Futures
STOCK FUTURESA financial contract obligating the buyer to purchase an asset (or the seller to sell an asset),such as a physical commodity or a financial instrument, at a predetermined future date andprice. Futures contracts detail the quality and quantity of the underlying asset; they arestandardized to facilitate trading on a futures exchange. Some futures contracts may call forphysical delivery of the asset, while others are settled in cash. The futures markets arecharacterized by the ability to use very high leverage relative to stock markets. YEAR No of Contracts Turnover (Rs Cr) 2000-01 - - 2001-02 19,57,856 51,515 2002-03 1,06,76,843 2,86,533 2003-04 3,23,68,842 13,05,939 2004-05 4,70,43,066 14,84,056 2005-06 8,09,05,493 27,91,697 2006-07 10,49,55,401 38,30,967 2007-08 20,35,87,952 75,48,563.23 2008-09 22,15,77,980 34,79,642.12 2009-10 14,55,91,240 51,95,2464 2010-11 18,60,41,459 54,95,756.73 2011-12 15,83,44,617 40,74,670.73 2012-13 4,28,76,791 11,02,711.07Table:Annual Growth in Stock Futures
No of Contracts 25000000 221,577,980 203,587,952 20000000 186,041,459 158,344,617 145,591,240 15000000 104,955,401 10000000 80,905,493 47,043,066 42,876,791 50000000 32,368,842 1,957,856 10,676,843 0 No of ContractsFig: Graph Representing Growth in Number of Contracts for Stock Futures
INDEX OPTIONSA financial derivative that gives the holder the right, but not the obligation, to buy or sell abasket of stocks, such as the S&P 500, at an agreed upon price and before a certain date. Anindex option is similar to other option contracts, the difference being the underlyinginstruments are indexes. Options contracts, including index options, allow investors to profitfrom an expected market move or to reduce the risk of holding the underlying instrument. YEAR No of Contracts Turnover (Rs Cr) 2000-01 - - 2001-02 1,75,900 3,765 2002-03 4,42,241 9,246 2003-04 17,32,414 52,816 2004-05 32,93,558 1,21,943 2005-06 1,29,35,116 3,38,469 2006-07 2,51,57,438 7,91,906 2007-08 5,53,66,038 13,62,110.88 2008-09 21,20,88,444 37,31,501.84 2009-10 34,13,79,523 80,27,964.20 2010-11 65,06,38,557 1,83,65,365.76 2011-12 86,40,17,736 2,27,20,031.64 2012-13 25,76,98,642 66,22,635.23Table: Annual Growth in Index Options
No of Contracts 1E+09 90000000 864,017,736 80000000 70000000 650,638,557 60000000 50000000 40000000 341,379,523 30000000 257,698,642 212,088,444 20000000 55,366,038 1,732,414 12,935,116 175,900 10000000 442,241 3,293,558 25,157,438 0 No of ContractsFig: Graph Representing Growth in Number of Contracts for Index Options
STOCK OPTIONSA privilege, sold by one party to another, that gives the buyer the right, but not the obligation,to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or on aspecific date. Year No of Contracts Turnover (Rs Cr) 2000-01 - - 2001-02 10,37,529 25,163 2002-03 35,23,062 1,00,131 2003-04 55,83,071 2,17,207 2004-05 50,45,112 1,68,836 2005-06 52,40,776 1,80,253 2006-07 52,83,310 1,93,795 2007-08 94,60,631 3,59,136.55 2008-09 1,32,95,970 2,29,226.81 2009-10 1,40,16,270 5,06,065.18 2010-11 3,25,08,393 10,30,344.21 2011-12 3,64,94,371 9,77,031.13 2012-13 1,53,06,914 4,13,052.09Table: Annual Growth in Stock Options
No of Contracts 40000000 36,494,371 35000000 32,508,393 30000000 25000000 20000000 13,295,970 14,016,270 15,306,914 15000000 5,583,071 5,240,776 9,460,631 10000000 5,045,112 5,283,310 5000000 3,523,062 1,037,529 0 No of ContractsFig: Graph Representing Growth in Number of Contracts for Stock Options