30

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

31

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

32

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

33

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

34

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,

35

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

36

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).

37

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.

38

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

39

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

40

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,

41

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

42

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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