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SMDRP/Policy/Cir-10/2001

Feb 13, 2001
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Circulars

SECURITIES AND EXCHANGE BOARD OF INDIA
SECONDARY MARKET DEPARTMENT
Mittal Court, B Wing, First Floor,
224, Nariman Point, Mumbai 400 021


SMDRP/Policy/Cir-10/2001
February 13, 2001

 

To:

The President/Executive Director/
Managing Director
Of all the Stock Exchanges

Dear Sir/Madam,

Pursuant to the discussions in the meeting of the Group on Risk Management in Equity Markets held on January 31, 2001, the stock exchanges are advised to implement the following :

  1. Automated Lending and Borrowing Mechanism (ALBM)


    Vide circular no. SMDRP/POLICY/CIR-31/2000 dated July 27, 2000, an option was given to the pure securities borrower of withdrawal of shares from the clearing house/clearing corporation, subject to margins. This option is being withdrawn w.e.f. the next settlement following date of this circular and the shares borrowed under this facility shall be retained with the clearing corporation or clearing house of the exchange.

  2. System for Gross Margining at the sub-broker level


    With effect from February 28, 2001, the sub-brokers will mandatorily provide the client code number while acting on behalf of clients at the order entry level and the exchanges will ensure the same.

  3. Continuous Net Settlement (CNS)


    Vide circular no. SMDRP/POLICY/CIR-51/2000 dated November 6, 2000, it was provided that the facilities of CNS would be provided in 15 scrips mentioned in that circular. It has now been decided that the CNS facility would also be available in voluntary rolling settlement segment of the stock exchanges in all the scrips which are having facility of ALBM/MCFS in those stock exchanges in the account period settlement.

  4. Scrips eligibility for ALBM/MCFS

For the eligibility of the scrips for the facility of ALBM/MCFS, the exchanges shall henceforth ensure that the scrip satisfies all the three parameters mentioned below :

  1.  
    1. Market capitalisation
    The scrips must have a minimum market capitalisation of Rs. 200 crores. The scrips which are currently in the ALBM or MCFS in any of the exchanges would however continue to be eligible for this facility even though the market capitalisation is now less than Rs. 200 crores. However, in subsequent review, these scrips would have to qualify on criteria other than market capitalisation.

  1. Liquidity


    For the purpose of liquidity, the scrips shall satisfy either all the following four parameters or the parameter of impact cost.

  1.  
    1.  
      1. Liquidity measured as under :
  1. Trading Volume - average trading volume in the scrip in the last six months should be among the top 75% of the above universe meeting the market capitalisation criterion.
  2. Number of Trades - average number of trades should be among the top 75% of the trading above universe meeting market capitalisation criterion.
  3. Trading Frequency - the scrip should have been traded on at least 75% of the trading days in the last 6 months.
  4. Velocity of Trades - the scrip should have been among the top 75% in terms of number of shares traded as a percentage of the total number of shares traded as a percentage of the total number of shares in the equity capital of the company for at least six months.

OR

  1.  
    1.  
      1. Liquidity based on impact cost

Impact cost must be less than 2.5%. The procedure for computation of impact cost is enclosed as 'Annexure'

  1.  
    1. Floating Stock

The minimum floating stock criteria should be applied as under:

  1.  
    1.  
      1. at least 25% of the company's equity capital must be held by non-promoters
      2. in case, the non-promoter holding is less than 25%, the market capitalisation of non-promoter holding of the company's capital should be at least Rs.100 crores subject to a minimum non-promoter holding of 10% of paid up capital.

Non-promoter holding shall be as provided in our circular No. SMDRP/POLICY/CIR-7/2001 dated February 1, 2001 .

The list of scrips so eligible would be reviewed every six months.

  1. Mark to Market Margin in Rolling Settlement


    Vide circular no. SMDRP/Policy/CIR-53/2000 dated November 15, 2000, it was provided that the mark to market margin in rolling settlement would be applicable as in the account period settlement system. It has now been decided that the mark-to-market profits and losses across the settlements for which the positions are unsettled would be permitted to be netted off.

  2. Collection of Margins


    All the margins prescribed by SEBI shall be collected on T+1 basis.

  3. Bank Guarantee towards Base Minimum Capital (BMC)

The stock exchanges may take their own decisions regarding tenure of bank guarantees deposited by members towards BMC.
Yours faithfully,

P. K. BINDLISH
DEPUTY GENERAL MANAGER,
SECONDARY MARKET DEPOSITORY,
RESEARCH & PUBLICATIONS DEPARTMENT
e-mail : pkb@sebi.gov.in

ANNEXURE

IMPACT COST

Definition :– Impact cost represents the near actual cost of executing a transaction as a single transaction forthwith in a given security/portfolio, in proportion of its weightage in the portfolio under consideration, at any point of time.

Calculation :- This is the percentage mark up observed while buying / selling the desired quantity of a security compared to its ideal price (best buy + best sell) / 2

Example A :-

ORDER BOOK

Buy Quantity

Buy Price Sell Quantity Sell Quantity Sell Price

1000 98 1000 99
2000 97 1500 100
1000 96 1000 101

TO BUY 1500 SHARES

IDEAL PRICE = 99 + 98 = 98.5
2

ACTUAL BUY PRICE = 1000 X 99 + 500 X 100 = 99.33
1500

IMPACT COST = 99.33 - 98.5 X 100 = 0.84%
(FOR 1500 SHARES) 98.5

Steps involved for calculating impact cost

  1. Selection of Portfolio


    A portfolio of securities, for which the impact cost is to be computed, needs to be selected.

  2. Period


    The period, for which the impact cost is required, has to be defined. This period could be for 6 months, 1 year etc.

  3. No. of snapshots


    The snapshots of buy and sell orders from the limit order book are required to be taken on the basis of the period selected. (They may be four times/five times/six times during the day, keeping away the beginning and closing hours).

    Eg. Portfolio of 5 securities

    Securities Close Prices (Rs.) Market Cap (Rs. Crs.)

    SCRIP 'A' 300 3000
    SCRIP 'B' 85 600
    SCRIP 'C' 100 800
    SCRIP 'D' 150 2500
    SCRIP 'E' 5000 5000

    Snapshot of order book of SCRIP 'A'

    Buy Qty. Buy Price Sell Qty. Sell Price

    1000 305.25 1500 307.30
    200 304.60 200 308.45
    400 302.85 800 309.50
    500 301.50 400 310.75

  4. Corpus


    A corpus which is envisaged to be invested in the portfolio needs to be defined. This corpus is to be invested in the securities comprising the portfolio. It may be Rs.50 lakhs or any other pre-fixed amount.

  5. Define weightage


    The weightage of each security in the portfolio is arrived at by dividing the market cap of the security by the total market capitalization of the entire portfolio. The market capitalization as of the last day of the period, for which the impact cost is to be calculated, is reckoned for this exercise.

    Eg.

    Securities Close Prices (Rs.) Market Cap (Rs. Crs.) Wghts.

    SCRIP 'A' 300 3000 25%
    SCRIP 'B' 85 600 5%
    SCRIP 'C' 100 800 7%
    SCRIP 'D' 150 2500 21%
    SCRIP 'E' 5000 5000 42%

    Total 11900

  6. Identifying amount to be invested in each security


    The amount out of the total corpus (Rs.50 lakhs) to be invested in each security is arrived at by multiplying the weightage of each stock with the total corpus earmarked to be invested in the portfolio. The sum of the amount invested individually in each security in the portfolio should be equal to the corpus to be invested in the portfolio.

    Eg. The amount to be invested in SCRIP 'B' would be 0.05 x Rs.50 lakhs = Rs.2,50,000.

  7. Lastly, the number of shares of each company to be purchased / sold is found out by dividing the amount to be invested in each stock by the close price of that stock.. The close price reckoned for this purpose is the close price as of the last day of the period for which the impact cost is to be calculated.


    Eg. No. of shares for SCRIP 'B' = Rs.2,50,000 / 85 = 2900 (round off)

  8. The buy / sell impact cost is computed for the required no. of shares for each security as per Example A given above. In the example of SCRIP 'B', for buying and selling of 2900 shares (snapshot quantity), all the snapshots are taken from the order books.
  1. In case of securities for which the required number of shares cannot be bought or sold taking into account all the orders in the limit order book snapshot, predetermined values are attached as impact costs to such unexecuted orders, as follows :

Impact Cost (%)
Fully executed snapshots Computed Impact Cost
Other than fully executed snapshots Imputed Impact cost of 5% on snapshot quantity, ignoring executed quantity

Explanation:

  1.  
    1. For eg. In case of SCRIP 'B' as mentioned above, 2900 shares are required to be bought / sold for determining the impact cost of SCRIP 'B'.
    2. An execution of 2900 shares is required for calculating the impact cost of SCRIP 'B'. The Impact Cost is calculated as per the Example A given above, if the entire 2900 shares can be bought / sold.
    3. In case the entire qty. (2900 shares) cannot be bought / sold, an imputed impact cost of 5% is assigned ignoring executed orders/quantity for each snapshot.
    4. Partial non-execution would mean the remainder quantity that could not be executed e.g. out of 2900 shares and out of 3 snapshots only 1500, 2000 or 2200 shares could be executed. This means the quantity of 1400 in 1st snapshot, 900 in 2nd snapshot, 700 in 3rd snapshot could not be executed. (This is called other than fully executed snapshot) and full 2900 in 4th snapshot could not be executed. (This also is called other than fully executed snapshot). For all such snapshots where other than full execution does not occur, an impact cost of 5% is assigned.
    5. For all fully executed snapshots, the impact cost is calculated as per Example A given above and the simple average impact cost of the snapshots are taken into consideration for determining the impact cost of a security.

For e.g. there are approx. 250 trading days in a year. The snapshots for calculating impact cost are taken 4 times during the day. Which means there would be 1000 snapshots. Out of these, for all those snapshots where the required quantity of shares (2900 for SCRIP 'B') can be bought/sold, the impact cost is calculated as given in Example A. For the remaining snapshots where only a partial non-execution or total non-execution happens, an impact cost of 5% is assigned, ignoring quantity executed. An average impact cost is then computed for all the 1000 snapshots observed and the impact cost of the security is thus determined.

Mechanics of computation of Impact Cost

Assumptions:

  1.  
    1. 250 trading days
    2. Normally, 4 snapshots during trading hours excluding beginning and closing hours trades.
    3. For minimum 85% of snapshots, full quantity required to be bought/sold ought to be bought/sold.
    4. Computed impact cost is taken for snapshot where full quantity is executed.
    5. Imputed impact cost of 5% is taken, for snapshots other than fully executed quantity.
    6. Simple average impact cost of 100 snapshots is then computed and thus impact cost is determined.
    7. An example, depicting the computation of the impact cost, is enclosed.
Eg. Impact Cost of SCRIP 'B' for execution of 2900 shares
Date Time Buy IC (%) Execution Qty. Sell IC (%) Execution Qty.

11:00 AM
0.12
2900
0.11
2900
01-Nov
 12:00 noon
0.12
2900
0.11
2900

1:00 PM
0.11
2900
0.10
2900

2:00 PM
0.10
2900
0.11
2900







11:00 AM
0.14
2900
0.14
2900
02-Nov
 12:00 noon
0.13
2900
0.12
2900

1:00 PM
5.00
2000
0.12
2900

2:00 PM
5.00
0
0.12
2900







11:00 AM
0.10
2900
0.11
2900
03-Nov
 12:00 noon
0.10
2900
0.10
2900

1:00 PM
0.11
2900
0.11
2900

2:00 PM
0.11
2900
0.10
2900







11:00 AM
0.12
2900
0.11
2900
04-Nov
 12:00 noon
0.11
2900
0.10
2900

1:00 PM
0.10
2900
0.09
2900

2:00 PM
0.12
2900
0.11
2900







11:00 AM
0.10
2900
5.00
0
05-Nov
 12:00 noon
0.10
2900
5.00
1500

1:00 PM
0.11
2900
0.12
2900

2:00 PM
0.12
2900
0.12
2900

Avg. Buy IC
0.60
Avg. Sell IC
0.60







Avg. IC
0.60