Intermediaries Involved In Settlement And Banking Institutions

Intermediaries Involved In Settlement

There are many Intermediaries that are involved in the process of settlement of securities transactions. Some of them are:

 

Depositories

National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) are depositories for Equity, Corporate Debt and some Government Securities. They are incorporated under the Companies Act, 1956 as public limited companies limited by shares and are for profit institutions. NSDL and CDSL facilitate clearing of trades through depository participants, by enabling securities transfers across beneficial owners, inter-se and to/from clearing members, based on transfer instructions.

The National Securities Depository Limited (NSDL), promoted by Industrial Development Bank of India, Unit Trust of India and National Stock Exchange of India Limited, is a company established to provide electronic depository facilities for securities traded in the equity and debt markets. The National Securities Depository Limited has been registered by SEBI on June 7, 1996, as India’s first depository to facilitate settlement of securities in dematerialized form.

NSDL provides for holding of securities in the electronic form and settlement of trades done for these electronic holdings. NSDL has designed the software for the operating systems in such a way that the software systems at the Depository and the Depository Participant (DP) office are connected and NSDL has access to all the accounts of individual investors to ensure adequate control.

 

Depository Participants

While NSDL can be compared to a bank, a Depository Participants (DP) is like a bank’s branch and acts as an agent of NSDL. It is evaluated by NSDL to ensure its capability to meet with the strict service standards of NSDL. A further evaluation and approval by SEBI is required by a DP in order to be functional. Investors can open an account with NSDL through its DPs in order to avail of the services provided by NSDL.

 

Custodians

As the name suggests, the custodians perform the task of keeping the securities in a safe manner/custody. They hold the documentary proof of securities, keeping the title of securities intact in the name of the holder. In NSCCL, custodian is only a clearing member and not a trading member. A custodian is required to settle the trades only after confirming to the NSCCL that it will be settling the trade or not. If it takes the obligation, it will have to settle the trades and if not, then the obligation is assigned back to the trading member for whom the custodian works.

 

Clearing Corporation

The NSCCL, a wholly owned subsidiary of NSE, was incorporated in August, 1995. NSCCL commenced clearing operations in April, 1996. It was set up for the following purposes:

• • To provide and sustain confidence in clearing and settlement of securities.
  • To promote and maintain, short and consistent settlement cycles.
  • To provide counter-party risk guarantee.
  • To operate a tight risk containment system.

NSCCL carries out the clearing and settlement of the trades executed in the Equities and Derivatives segments and operates Subsidiary General Ledger (SGL) for settlement of trades in government securities. It performs the following tasks:

• • Clears all trades.
  • Determines obligations of members.
  • Arranges for pay-in of funds and securities.
  • Arranges for pay-out of funds and securities.
  • Assumes the counter-party risk of each member and guarantees financial settlement.
  • It also undertakes settlement of transactions on the other stock exchanges like.
  • Over the Counter Exchange of India.

Through NSCCL, NSE has been able to up-grade the clearing and settlement procedures in the Indian Stock Market and has brought Indian financial markets in line with international markets.

Similarly, MCX-SX also clears its trades through the MCX-SX Clearing Corporation.

 

Clearing Members

Clearing members are responsible for settling the traders done on all the counters. Settling the trades involves taking the responsibility of making available the resources required on time, i.e., making available the funds and securities on the settlement day. Settlement day would mean T+2 day. Funds are made available through the clearing banks where the clearing member has his account and securities are made available through the depository participant. In case of trades done on the capital market segment, all trading members have to be their own clearing members too, i.e., they only have to settle the trades done by them (every TM has to be his own CM). In case of trades have done in ‘Futures and Options’ market clearing member can be a separate entity than trading member as the volumes of trades done in this segment is huge. A clearing member has to get himself registered with NSCCL.

 

Clearing Banks

Clearing banks act as a link between the clearing members and the NSCCL for the settlement of funds, i.e. pay-in and pay-out of funds. Every clearing member gets an account opened with a clearing bank for this purpose only. A clearing bank works on the instructions of the clearing member. A clearing member after defining the obligations in terms of funds informs the clearing bank about the obligations to be fulfilled. The clearing bank makes available the funds required on the pay-out day to meet the obligations on time.

 

Professional Clearing Members (PCM)

Professional Clearing Members (PCM) are special category of members who undertake to clear and settle trades done by the brokers/traders who have appointed them to do the job. They take the responsibility of clearing the trades done by their clients and in no circumstances; they perform the task of trading. The clearing banks and the depository act as an interface between the NSCCL and the clearing members/custodians.

 

Banking Institutions

The Reserve Bank of India (RBI) is the overall regulator of the currency and credit system in India. Since liberalization of the Indian Economy in 1991, monetary policy has become the vehicle for instituting financial sector reforms in the country.

RBI is the regulator and supervisor of the financial system to ensure the following:

• Maintain public confidence in the financial system.
• Protect depositor’s interest and their investments.
• Provide cost effective banking system for the public.

RBI is completely owned by the Government of India. RBI is responsible for securing the monetary stability within the country, through effective policy decision making. RBI lays down the framework for the efficient functioning of the currency, monetary and debt markets. RBI is also the manager of exchange rate control. RBI also controls the currency liquidity in the country, by effecting changes in the money supply. RBI tracks the macro economic variables and also controls banking activity within the country. In order to meet the above objectives, RBI prescribes broad parameters of banking operations within which the banking and financial system operate. If the Government of India decides to borrow funds by issuing Government securities, then it instruct RBI to issue bonds on its behalf. RBI conducts open market operations to issue Government debt. Corporate can also raise debt by issuing commercial papers and bonds. Recently, RBI and SEBI have given permission for the trading in currency futures on the exchange platform.

The organization of the Indian financial system since the mid-eighties has been characterized by profound transformation. The fundamental focus shifted towards free market economics, since the economic liberalization in 1990s.

Following are some of the important events and policy decisions that have transformed the Indian financial systems landscape.

• 1948: Reserve Bank of India was nationalized.
• 1956: State Bank of India was established by takeover of the then Imperial Bank of India.
• 1956: Over 245 life insurance companies were nationalized to form the Life Insurance Corporation of India (LIC).
• 1969: Nationalization of 14 major commercial banks.
• 1972: The General Insurance Corporation was established.
• 1980: Six more commercial banks were nationalized.

Commercial Banking between 1950 and 1985 saw the utilization of short term deposits to fund trade and commerce. Industrial financing accounted for a small fraction of the total bank credit. RBI attempted to orient the operations of the commercial banking activities towards the growth and development of the Indian economy. Control of the macroeconomic variable under the purview of central bank enabled selective credit controls and moral suasion, in order to ensure that commercial banking activity supplemented the impact of development banks on industrial growth. Commercial banks were encouraged to underwrite new corporate issues and also provide term-lending facility. Their exposures in these areas were refinanced by the Refinancing Corporation of India. Joint underwriting by a consortium of banks and insurance companies mitigated risk to a large extent. Banks also extended financial assistance by investing in shares / debentures of corporate enterprises. Commercial banks were also encouraged to increase their exposure to small scale industries, exports and agriculture.

• Credit Guarantee Corporation (CGO) was established to cover all credit made available to small scale industries as part of the Credit Guarantee Scheme (CGS).
• For encouraging credit towards export-oriented units, the Export Credit and Guarantee Corporation (ECGC) was established (this was earlier known as the Export Risk Insurance Corporation).
• Agricultural financing was guaranteed by the Agricultural Refinance Corporation (ARC) – established in 1963. The ARC provided refinance for all agri loans made by banks and financial institutions.

Recently, public and private sector banks are competing in the Indian financial markets for sourcing deposits and providing credit lending facilities.

New Financial Institutions for term lending facilities were established. These institutions were both at Central Government level and State level. This also resulted in the formation of the Unit Trust of India (an investment trust organization). Also, the pension and provident funds were brought under Government control, in terms of regulations governing their investments. Thus, the entire financial system was controlled by the Government.

Establishment of Development Banks / financial institutions / term lending institutions ensured availability of credit for industry. The Government intervention also ensured that capital was disbursed in areas of priority – in other words, capital was directed towards development.

• 1948: Industrial Finance Corporation of India was established.
• 1951: Under the State Financial Corporation Act, financial institution at the state – level (State Financial Corporation or the SFC) were established. These institutions aided the small and medium scale enterprises.
• 1954: The National Industrial Development Corporation (NIDC) was established for a more dynamic involvement in industrial growth.
• 1955: The Industrial Credit and Investment Corporation of India (ICICI) Ltd. was established as a development banking institution. This pioneered underwriting of issues of capital and channelization of foreign currency loans from the World Bank to private industry.
• 1958: The Refinance Corporation of India (RCI) was created to provide refinance to banks against term loans granted by them to medium and small enterprises. This entity later merged with the Industrial Development Bank of India (IDBI) in 1964.
• 1964: Establishment of Industrial development bank of India (IDBI) as a subsidiary of RBI. IDBI not only disbursed funds towards planned economic development, but also coordinated the activities of all other financial institutions. IDBI was delinked from RBI in 1976 and was covered into a holding company.
• 1971: The Industrial Reconstruction Corporation of India (IRCI) was established jointly by IDBI and LIC, to look after rehabilitation of sick mills. This was renamed as the Industrial Reconstruction Bank of India in 1984. This was once again converted into a full-fledged public financial institution (PFI) and was renamed as the Industrial Investment Bank of India in 1997.

The establishment of the State Industrial Development Bank of India (SIDBI), State Industrial Investment Corporations (SIIC) and the Technical Consultancy Organizations (TCO) at the state level added new dimensions to the Indian Financial System and aided in reviving growth and development.

Indian banking which experienced rapid growth following the nationalization in expanding nationwide presence and business began to face pressures on asset quality by the 1980s. Simultaneously, the banking world everywhere was gearing towards new prudential norms in operational standards pertaining to capital adequacy, accounting and risk management. In the early 1990s, India embarked on an ambitious economic reform program in which the banking sector reforms formed a major part. The Committee on Financial System (1991) more popularly known as the Narasimhan Committee prepared the blue print of the reforms leading to modern Indian banking. A few of the major aspects of reform include moving towards international norms in income recognition and provisioning, liberalization of entry and exit norms leading to the establishment of several new private sector and entry of a number of foreign banks, freeing of deposit and lending rates (except the Saving Deposit rate), allowing access to public equity markets for capital by the public sector banks, introduction of technology in banking operations etc. The reforms led to major changes in the approach of the banks that was reflected in growth of competition, focus on profitability and productivity, rationalization and more efficient use of human resources and greater use of technology in banking operations and promotion of electronic banking etc.

The reforms led to significant changes in the strength and sustainability of Indian banking. Following the reforms, Indian banking industry grew in strength and stature. In addition to significant growth in business, Indian banks experience sharp growth in profitability, focus on prudential norms with higher provisioning levels, reduction in the non performing assets and surge in capital adequacy.

 

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