National Stock Exchange Of India Ltd Directors Report

NATIONAL STOCK EXCHANGE OF INDIA LIMITED ANNUAL REPORT 2010-2011 DIRECTORS REPORT To The Members, Your Directors have pleasure in presenting the Nineteenth Annual Report and Audited Accounts of the Company for the year ended March 31, 2011. 1. OPERATIONS AND MAJOR DEVELOPMENTS DURING THE YEAR 1.1 Global rankings-Equity Derivatives Market 1.1.1 Stock Futures During the year 2010, NSE continued to rank as the 2nd largest exchange in respect of contracts traded in stock futures. The details of top 5 exchanges trading stock futures is given in Table 1 below: Table 1 Exchange Contracts traded during 2010 (in millions) 1. NYSE Liffe Europe 291.27 2. National Stock Exchange of India 175.67 3. Eurex 150.75 4. JSE 78.76 5. Korea Exchange 44.71 Source: WFE. 1.1.2 Index Options NSE continues to be ranked as the 2nd largest exchange in the world in index options. The details of top 5 exchanges in index options are given in Table 2 below: Table 2 Exchange Contracts traded during 2010 (in millions) 1. Korea Exchange 3,525.90 2. National Stock Exchange of India 529.77 3. Eurex 342.92 4. Chicago Board Options Exchange 270.01 5. Taifex 88.91 Source: WFE 1.1.3 Index Futures NSE continues to be ranked as the 3rd largest exchange in the world in index futures. The details of top 5 exchanges in index futures are given in Table 3 as under: Table 3 Exchange Contracts traded during 2010 (in millions) 1. CME Group 695.15 2. Eurex 407.77 3. National Stock Exchange of India 156.35 4. Osaka SE 147.60 5. NYSE Liffe Europe 94.27 Source: WFE 1.1.4 Nifty Index Global rankings Nifty Index options ranked 4th across the top 20 Index options traded globally during the year 2010. Nifty Index futures ranked 9th across the top 20 Index futures traded globally during the year 2010. (Source: www.futuresindustry.org rankings based on number of contracts traded or cleared between Jan 10 - Dec 10) 1.1.5 All products NSE ranked 5th across all the Derivatives exchanges in the world based on the volume of contracts traded during the year 2010. (Source: www.futuresindustry.org rankings based on number of contracts traded or cleared between Jan 10 - Dec 10) 1.2 Global rankings-Capital Market In capital market segment, NSE continues to remain the fourth largest exchange in the world based on the number of transactions during the calendar year 2010. The details of top 10 Exchanges are given in the Table 4 below. Table 4 Exchange No. of transactions (in Thousands) 1. NYSE Euronext (US) 2,050,985.2 2. NASDAQ OMX 1,743,302.2 3. Shanghai SE 1,661,489.0 4. National Stock Exchange of India 1,556,620.5 5. Shenzhen SE 1,329,287.6 6. Korea Exchange 921,843.2 7. Bombay SE 555,719.3 8. Tokyo SE Group 334,676.9 9. Taiwan SE Corp. 232,740.0 10. London SE Group 207,497.8 Source: WFE. The sale and purchase of a share are counted as one transaction 1.3 Membership at NSE 92 new members (61 in CM, F&O and CD segments; 18 in CM and F&O segments; 12 in CD segment; and 1 in CM and CD segments) were registered during the Financial Year 2010-11. The Exchange also granted additional segment membership to 68 members during the Financial Year 2010-11. Table 5 showing membership details for the Financial Year 2010-11 Particulars CM WDM F&O CD segment segment segment segment SEBI registered trading members 1,337 81 1,210 739 Members registered in additional segments 4 1 10 57 Registered Sub-brokers/ Authorised persons 54,290 Nil 44,731 3,020 Surrender of membership 10 4 9 4 1.4 Wholesale Debt Market (WDM) segment The WDM segment provides a trading platform for trading of a wide range of fixed income securities. Initially, government securities, treasury bills and bonds issued by public sector undertakings (PSUs) were made available for trading. This range has been widened to include non-traditional instruments like floating rate bonds, zero coupon bonds, index bonds, structured products, corporate debentures, state government loans, SLR and non-SLR bonds issued by financial institutions, units of mutual funds and Supra Institutions (Foreign institutions). There were 4,479 securities available for trading as on March 31, 2011 all belonging to listed category. The turnover on WDM segment decreased in the financial year 2010-11. The turnover decreased from Rs 5,63,815.93 crores in 2009-10 to Rs 5,59,446.75 crores in 2010-11 registering a decline of 0.77%. The average daily turnover decreased to Rs 2,255.83 crores in 2010-11 from Rs 2,359.06 crores in 2009-10. The transaction in government securities account for a substantial share of transaction on the WDM segment with 54.49% in 2010-11. Market capitalisation of the WDM segment has witnessed a constant increase indicating an increase in the number of securities available for trading on this segment. Total market capitalisation of the securities available for trading on WDM segment stood at Rs 35,94,877.15 crores as on March 31,2011. Table 6: Trades in WDM segment Particulars 2010-11 2009-10 Number of Trades 20,383 24,069 Average monthly number of trades 1,699 2,006 Average daily number of trades 82 101 Average Trade Value (Rs. in crores) 27.45 23.42 Average Daily Turnover (Rs. in crores) 2,255.83 2,359.06 Turnover (Rs. in crores) 5,59,446.75 5,63,815.93 Number of Active Scrips 1,111 1,144 Number of Active members 35 36 1.4.1 Securities Profile The turnover of government securities in WDM segment decreased by 7.02 % during 2010-11. Its share in total turnover decreased from 58.15% in 2009- 10 to 54.49% in 2010-11. The share of Treasury Bills increased from 16.49% in 2009-10 to 17.64% in 2010-11. The turnover of Non Government securities in WDM segment increased by 9.01% during 2010-11. During 2010-11, the share of Non Government Securities in total turnover increased to 27.87% as compared to 25.37% in 2009-10. Table 7 and Figure 3 represent security-wise distribution of turnover. Table 7: Security-wise Distribution of Turnover Securities 2010-11 2009-10 Turnover % of Turnover % of (Rs. in crores) Turnover (Rs.in crores) Turnover Government Securities 3,04,836.02 54.49 3,27,837.41 58.15 T-Bills 98,713.15 17.64 92,961.12 16.49 PSU Bonds 53,641.20 9.59 60,883.20 10.80 Institutional Bonds 55,944.31 10.00 25,949.67 4.60 Bank Bonds and others 2,475.30 0.44 2,520.00 0.44 Corporate Bonds 43,836.77 7.84 53,664.53 9.52 Total 5,59,446.75 100.00 5,63,815.93 100.00 1.4.2 Issuance in WDM A total of 1080 securities were listed during the financial year 2010-11 .As at end of March 2011, 4,479 securities were available for trading on the WDM segment. Details of Issuance in WDM are provided in Table 8. Table 8: Issuance in WDM Financial Year A B C 2004-05 1,299 3,097 14,61,734.37 2005-06 564 3,177 15,67,573.81 2006-07 661 3,252 17,84,800.57 2007-08 856 3,566 21,23,346.28 2008-09 1,026 3,954 28,48,315.50 2009-10 959 4,140 31,65,929.48 2010-11 1,080 4,479 35,94,877.15 A = No. of New Securities Listed B = Total No. of Securities (at year end) C = Market Capitalisation (at year end Rs. in Crs) 1.4.3 Market Capitalisation Total Market capitalisation of the securities available for trading in WDM segment increased to Rs 35,94, 877.15 crores in 2010-11 from Rs. 31,65,929.48 crores in the previous year registering a growth of 13.55 %. The Central Government securities accounted for the largest share of the market capitalisation with 60.80% while Non Government Securities accounted for 18.07 %. The composition of market capitalisation of various securities on WDM is presented in Table 9. Table 9: Market Capitalisation of WDM segment Securities A B C D Central Government Securities 21,85,721.40 60.80 19,50,436 61.61 PSU Bonds 1,90,921.58 5.31 1,62,979 5.15 State Loans 6,22,069.31 17.30 5,36,996 16.96 T-Bills 1,37,677.03 3.83 1,35,696 4.29 Others 4,58,487.83 12.76 3,79,823 11.99 Total 35,94,877.15 100.00 31,65,930 100.00 A = As on March 2011 - Market Capitalisation (Rs.in crores) B = As on March 2011 - % of total C = As on March 2010 - Market Capitalisation (Rs. in crores) D = As on March 2010 - % of total 1.4.4 Corporate Bond Market Currently for reporting trades in Corporate bonds, Exchanges provides two platform namely NEAT WDM and Report CBT. The average daily traded value reported through corporate bond for 2010-11 was Rs.628.84 crores (NEAT WDM & Report CBT) as compared to Rs 655.30 crores for 2009-10 with an average of around 32 trades being reported on a daily basis as compared to 51 trades for 2009-10. Turnover of Corporate Bond is presented in Table 10 and Figure 5 Table 10: Corporate Bond Turnover Corporate Bond Turnover 2010-11 2009-10 % Change Total Turnover (Rs Crs) 1,55,951.24 1,56,615.53 (0.42) Average Daily Turnover (Rs Crs) 628.84 655.30 (4.04) Total Number of Trades 8,006 12,231 (34.54) Average Daily Trades 32 51 (37.25) 1.5 Capital Market (CM) segment The total turnover of CM segment in the year 2010-11 is Rs. 35,77,410 crores as compared to Rs. 41,38,023 crores in the year 2009-10, showing a decrease of 14 %. The average daily traded value in 2010-11 is Rs.14,029.06 Crores as compared to Rs. 16,959.11 crores in 2009-10. As on March 31, 2011, the number of listed companies available for trading was 1,484 compared to 1,359 at the end of March 31, 2010. In the current year, Exchange allowed trading facility in 61 securities in permitted to trade category. The changes in turnover statistics over the preceding year are presented in Table No. 11 Table 11: Turnover Statistics on CM segment Details 2010-11 2009-10 % Rise/(Fall) in 2010-11 1. Total Number of trades (in lakhs) 15,507 16,816 (7.78) 2. Total no. of shares traded (in lakhs) 18,24,515 22,15,530 (17.65) 3. Total Turnover (Rs. Cr.) 35,77,410 41,38024 (13.55) 4. Market Capitalisation at the end of year (Rs. Cr.) 67,02,616 60,09,173 11.54 5. Turnover of S&P CNX Nifty Securities (Rs. Cr.) 16,89,977.59 21,46,022.84 (21.25) 6. Total number of listed companies. 1,574 1,470 7.07 1.5.1 Index Movement: S&P CNX Nifty saw an upward movement of 11.14% moving from 5,249.20 to 5,833.75 over the financial year 2010-11. During the year 2010-11, the S&P CNX Nifty touched a high of 6,338.50 on November 05, 2010 and low of 4,786.45 on May 25, 2010. Movement of S&P CNX Nifty is shown in Figure 7 The turnover of S&P CNX Nifty securities was Rs. 16,89,977.59 crores in the year 2010-11 as compared to Rs. 21,46,022.84 crores. The contribution of S&P CNX Nifty securities turnover to total turnover during the year 2010-11 was 47.21% compared to 51.86% in the year 2009-10. 1.5.2 Market Capitalisation The market capitalisation of securities available for trading on CM segment has increased by 11.54% during 2010-11 from Rs. 60,09,173 crores as on March 31, 2010 to Rs. 67,02,616 crores as on March 31, 2011. Increase in market capitalisation is mainly on account of listing of new securities in capital market segment. The market capitalisation growth is shown in Figure 8. During the year, the market capitalisation of S&P CNX Nifty and S&P CNX Nifty Junior also increased by 15.10% and 8.28% respectively. 1.5.3 Distribution of Turnover Turnover-wise distribution of trading members About 74.04% of the trading members had an average daily turnover of Rs. 1 crore or more in 2010-11 as compared to 79.27% in the previous year. In 2010-11 around 28% of the trading members have daily turnover more than Rs. 10 crores as against 34% in 2009-10. 1.5.4 Listing: Initiatives taken during the financial year 2010-11 i) NEAPS The Exchange has launched the online web based application - NEAPS (NSE Electronic Application Processing System) to facilitate web based filing of applications for further issues by listed companies. In the first phase, the facility has been made available for the following further issues - FCCB, ADR, GDR, Bonus, QIP and ESOP. Salient features of NEAPS are as under: * Submission of application with digital signature. * Online processing of the listing application by the Exchange. * Status of application and intimation of expected response time by the Exchange. * Online intimation of pending requirement, in-principle approval letter, etc. * Immediate updation of status of the application to the company and email alert. This initiative has enhanced the quality and speed of processing the applications and will facilitate the companies to move towards paperless processing. ii) Compliance Calendar All listed companies are required to comply with the various clauses of Listing Agreement quarterly, annually and on happening of event in certain cases. In order to facilitate the compliances of critical clauses by listed companies within stipulated time, the compliance calendar has been provided on the Exchange website. iii) Know Your NSE Program Know your NSE is an initiative aimed at building relationship with corporates and to provide an insight into functioning of the Exchange. An overview about live trading, capital market, futures and options, clearing, settlement, risk management, listing and surveillance was imparted during the session. The program organised at Mumbai and Hyderabad was attended by the Chief Financial Officers and Company Secretaries from corporates. More such programs are proposed to be organised in other cities. iv) Corporate Homepage on Exchange website The corporate homepage has been redesigned with enhanced features to facilitate stake holders to get the information relating to corporates in a comprehensive and more user friendly manner. A quick grasp of the features are as under: * Standardisation of Company Names. * Search Facility with multiple parameters like Company Name, Symbol, Short Description, Industry, Period of Broadcast, etc. * Links to other sub-sections within the corporate pages. * Subject standardisation. * Export the data to CSV formats. 1.5.5 New Developments during the year In year 2010-11, various new developments have been taken by the Exchange. The details of the same are given below:- June 2010: Introduction of Indian Depository Receipt IDRs are negotiable receipts issued by an Indian bank or trust company, the depositary, to evidence ownership of a stated number of shares of the securities of a foreign company that the company or shareholder has deposited with the depositarys branch office, affiliate, or agent in the foreign country. IDR has not only given international market exposure to Indian investors but also created a new asset class for the investor. The first IDR of Standard Chartered Bank is listed and available for trading on Exchange on June 11, 2010. July 2010: Real-time dissemination of India VIX The Exchange started real - time calculation of India Volatility Index (India VIX) w.e.f. July 19, 2010. Volatility Index is a measure of markets expectation of volatility over the near term. Volatility is often described as the rate and magnitude of changes in prices and in finance often referred to as risk. India VIX is a volatility index computed by NSE based on the order book of NIFTY Options. For this, the best bid-ask quotes of near and next-month NIFTY options contracts which are traded on the F&O segment of NSE are used. India VIX indicates the investors perception of the markets volatility in the near term i.e. it depicts the expected market volatility over the next 30 calendar days. Higher the India VIX values, higher the expected volatility and vice-versa. India VIX uses the computation methodology of CBOE, with suitable amendments to adapt to the NIFTY options order book using cubic splines, etc. Investors use it to gauge the market volatility and base their investment decisions accordingly. October 2010: Launch of Call Auction in Pre - Open Session The Exchange has introduced call auction in pre-open session w.e.f. October 18, 2010. Pre open phase is the session prior to the continuous trading. The session allows liquidity to be pooled during this session by allowing the participants to place buy as well as sell orders. No matching takes place when the market is in pre-open phase. The users are allowed to enter /modify/cancel orders. Pre-open session provides a trading facility where orders are batched together for simultaneous execution at a predefined time and at a single price which best equates the aggregated buy and sell. The pre-open session helps in better discovery of opening price, minimises opening volatility of prices of securities and also allows for overnight news in securities to be suitably reflected in the opening price. The salient features of call-auction in pre-open session are given below:- * The pre-open session is introduced in securities forming part of Nifty indices. * The pre-open session is for 15 minutes; out of which first 8 minutes is for order entry with last minutes will have a random closure. 4 minutes for order matching and trade confirmation and 3 minutes is buffer timings. * The equilibrium price of pre-open is an opening price of a security. The equilibrium price is a price at which maximum value is executable. * All unmatched order in pre-open is shifted to normal market. * Risk management at order level in pre-open session. 1.6 FUTURES AND OPTIONS SEGMENT The financial year 2010-11 witnessed an increase of 65.58% in volumes and 54.94% in average open interest. The number of contracts traded also increased by 52.25% vis-a-vis 2009-10 in the F&O segment of the Exchange. Average contribution of proprietary category increased to 38.14% in 2010-11 from 31.66% in 2009-10. 1.6.1 Comparison of the close prices of the NIFTY Near Month Futures Contract (F&O segment) with the underlying movement of the NIFTY Index (Cash segment) along with the Daily Traded value of the F&O segment (Figure 10): 1.6.2 Records achieved in the F&O segment during 2010-11 (Table 12): Index Futures (traded value in Rs. crores) 40,123 23-Nov-10 Index Options (traded value in Rs. crores) 1,98,096 24-Feb-11 Stock Options (traded value in Rs. crores) 6,929 12-Aug-10 Total F&O Traded value (in Rs. crores) 2,77,277 24-Feb-11 Number of trades 30,29,676 24-Feb-11 Number of contracts traded 1,04,97,798 24-Feb-11 Open Interest on Contract Expiry (number of contracts) 74,36,882 26-Aug-10 It may be observed that during 2010-11, new records were set on most of the categories. 1.6.3 (a) Basic Statistics of the F&O Segment (Table 13): Particulars Apr 10 July 10 Oct 10 Jan 11 2010-11 2009-10 % Change to to to to Jun 10 Sep 10 Dec 10 Mar 11 Traded Value (Rs. in crores) Daily Average 92567 101847 127304 139500 115150 72392 59.06 Number of Contracts Daily Average 3432844 3608592 4216291 5057126 4071701 2783991 46.25 Open Interest (Rs. in crores) End of day averages 129826 74467 163368 140566 152057 98141 54.94 % of Open interest to Daily Average Traded value 140 171 128 101 132 136 1.6.3 (b) A graphical presentation of monthly product- wise contribution is given below (Figure 11): It may be observed that contribution of Index Option to Total Turnover has increased from 54.17% in April 2010 to 71.18% in March 2011. 1.6.4 Institutional Retail & Proprietary Investors - Turnover Analysis (Table 14): Year A B C D E F 1. 2009-10 3,97,743 13.53 14,93,247 54.81 9,31,287 31.66 2. 2010-11 6,18,641 12.69 23,96,870 49.17 18,59,193 38.14 A = Institutional investors - Average Gross Traded Value (Rs. in Crs.) B = Institutional investors - Percentage Contribution C = Retail - Average Gross Traded Value (Rs. in Crs.) D = Retail - Percentage Contribution E = Proprietary - Average Gross Traded Value (Rs. in Crs.) F = Proprietary - Percentage Contribution It may be observed that average contribution of proprietary category has increased in the year 2010-11 as compared to the year 2009-10. 1.6.5 Comparative analysis of the Traded Value in the F&O segment with the Cash segment (Figure 12): The ratio of F&O segment turnover to cash segment turnover was 8.18 for the year 2010-11 as compared to 4.27 for 2009-10. 1.6.6. Product-wise Basic Statistics (Table 15): Category Product Apr 10 July 10 Oct 10 Jan 11 to Jun 10 to Sep 10 to Dec 10 to Mar 11 Traded Value (Rs.in crores) Daily Stock Futures 20,052 22,696 24,709 18,966 Average Index Futures 16,626 14,960 17,969 19,143 Stock Options 3,621 4,355 4,505 3,724 Index Options 52,268 59,835 80,121 97,669 Number of Contracts Daily Stock Futures 6,26,377 7,59,445 8,14,926 7,26,782 Average Index Futures 6,83,546 5,66,674 6,24,427 7,28,437 Stock Options 1,04,234 1,36,471 1,38,611 1,32,256 Index Options 20,18,687 21,46,00 26,38,326 34,69,651 Open Interest (end of respective expiry day) Average Stock Futures 38,039 49,470 47,804 36,059 Value in Index Futures 22,545 26,891 24,042 21,591 Rs.Crore Stock Options 8,917 10,873 9,675 7,911 Index Options 85,500 1,13,233 1,04,039 98,185 Average Stock Futures 13,10,639 17,40,756 16,96,819 14,60,460 Number Index Futures 9,09,602 10,08,691 8,40,109 8,28,001 of Stock Options 2,92,478 3,68,112 3,31,485 3,05,785 contracts Index Options 32,91,548 40,08,950 34,93,658 35,30,581 Number of 63 65 64 62 trading Days Category Product 2010-11 2009-10 % Change Traded Value (Rs.in crores) Daily Stock Futures 21,637 21,292 1.62 Average Index Futures 17,153 16,125 6.37 Stock Options 4,056 2,074 95.59 Index Options 72,305 32,901 119.76 Number of Contracts Daily Stock Futures 7,32,447 5,96,685 22.75 Average Index Futures 6,49,699 7,30,766 -11.09 Stock Options 1,27,986 57,444 122.80 Index Options 125,61,569 13,99.096 83.09 Open Interest (end of respective expiry day) Average Stock Futures 42,843 31,369 36.58 Value in Index Futures 23,767 18,648 27.45 Rs.Crore Stock Options 9,344 6,955 34.35 Index Options 1,00,239 61,299 63.52 Average Stock Futures 15,52,169 9,45.028 64.25 Number Index Futures 8,96,601 8,23,777 8.84 of Stock Options 3,24,465 2,11,739 53.24 contracts Index Options 35,81,184 26,09,386 37.24 Number of 254 244 trading Days 1.6.7 New Developments during the year April 2010: Standardisation of Market Lot of Stock Derivative Contracts: Based on new SEBI guidelines, Exchange has standardised market lot of derivative contracts on individual securities from April 2010. Under the new method, market lots are standardised for different underlying price ranges. The Exchange computes one months average price of the underlying to arrive at its revised lot size as per the specified price ranges. Further, on SEBFs recommendation, Exchange has started reviewing and revising market lots once in every six months. 2010: Development in Index Options: The Index options volume in the Exchange has witnessed a substantial rise in 2010 as compared to 2009. Approximately 530 million contracts were traded in 2010 over 321 million contracts in 2009 showing a staggering 65% increase in the volumes. The share of Index options among all other product types in equity derivatives segment on NSE rose to 59% on a daily average in 2010 from less than 50% in 2009. The Exchange took some initiatives in building up the options volume and making it a preferred product choice for traders. After rationalising the daily price range of options based on options delta value, the Exchange further optimised the price range by increasing the minimum price range from Re. 1 to Rs. 3. Considering the market demand in popular Nifty options, the Exchange also revised the strike scheme of Index Options and increased its minimum index coverage percentage from 10% to 20% for all short term options and from 20% to 40% for all Nifty long term options. The equity stock options volume in the Exchange has also witnessed a steady and substantial rise in 2010 as compared to 2009. Approximately 28 million contracts were traded in 2010 over 14 million contracts in 2009 showing a strong 50% increase in volumes. January 2011: Development in Stock Options: The Exchange introduced Stock options with European style of exercise from January 2011 expiry onwards. With this, all Index and Stock options now follow European exercise method only. 1.7 Currency Derivatives segment The financial year 2010-11 witnessed a phenomenal growth in Currency Derivatives (Currency Futures and Options). The average daily turnover in currency derivatives, for the financial year stood at Rs. 13,855 crores, a growth of approximately 87% from Rs. 7,428 crores for the previous financial year. The number of members registered in currency derivative segment stands at 742, of which 31 are banks and 3 Primary dealers. Turnover in Currency futures for the financial year 2010-11 was Rs. 32,79,002 crores as compared to Rs. 17,82,608 crores during the previous financial year. Trading in USD-INR currency options was introduced on 29th Oct 2010. Turnover in currency options was 1,70,786 crores for a period of five months. The growth in volume in currency options has been considerable with the average daily volume for the period October, 2010 to March 2011 being 3,56,382 contracts, with 8,34,111 contracts being traded on average in the month of March, 2011. The launch of currency options has seen a significant increase in the average open interest in currency derivatives from 6,65,054 contracts in April 2010 to 36,30,057 contracts in March 2011. Total volume in Interest Rate futures has dropped to Rs.62 Crores. 1.8 Surveillance System The principal objective of surveillance function of the Exchange is to help maintain fair and efficient markets for securities. The Exchange achieves this objective through a combination of state of the art surveillance system, wide ranging use of cutting edge data analytics and experienced team of analysts. The surveillance system which monitors trading activity at every order and trade level has been developed piecing together experience gathered over the years. The system generates alerts based on multiple parameters using a complex algorithm. The parameters and the thresholds beyond which alerts are generated have been decided after detailed statistical analysis and back testing. A brief perspective on how complex the task of surveillance has become over the years is given as under:- On an average about 3.40 crore orders are entered and about 70 lakh trades get executed in a day on the capital market segment of the Exchange. This translates to an average of about 1500 orders and about 300 trades every second. Added to this, there are about 1.28 crore investors registered with trading members of the Exchange for trading on capital market segment. Unlike most advanced markets in US and Europe, retail investors directly participate in the market. On NSE more than 40% of total trading activity is on account of individual clients. Surveillance system has been designed and tuned to sift through this gigantic mix of orders, trades & investors to generate meaningful alerts that point to possible market abuse. Wherever market abuse practice is suspected, the system can replay the market at a much slower pace so as to enable the analysts to examine the identified deviant activity order by order to piece together evidence for proving manipulation. The exchanges in India are in a unique position to identify and monitor trading activity at client level unlike most markets in US and Europe where exchanges have access only up to the first layer of market participants, namely, the trading members. During the period from April 1, 2010 to March 31, 2011, 248 reports on the investigations conducted were completed of which 215 reports were submitted to SEBI. NSEs expertise in putting data analytics tools to optimum use to mine this wealth of data to establish patterns in trading activity at client level enables the Exchange to quickly identify potential market abuse and refer the matter to the Regulator. The Exchange has implemented series of pattern recognition models which unearth manipulative activity such as Front running, insider trading, circular trading, etc. 2. SERVICES TO INVESTORS The Exchange attaches high importance to investor safety and investor empowerment. Towards this direction, in order to spread awareness about market, products, operational aspects of market, etc., the Exchange regularly conducts investor awareness programs in various cities of the country. During the year, the Exchange conducted 1,382 programs. During the year, the Exchange also issued 371 investor alerts in 37 newspapers and in 8 languages. Important Investor Awareness message showcasing various dos and donts were broadcasted over electronic media in form of animation films in popular TV shows and through investor friendly messages on FM Radio channels. In addition, to enhance general safety levels, the Exchange has started a new service to disseminate trade information directly to investors through emails and sms on their registered email ids and mobile numbers. The Exchange has also has a user friendly trade verification facility on its website wherein common investor can check the trades that have taken place in their account. In order to reach out to a mass, the Exchange has initiated the idea of investor education and financial information on wheels wherein Rajdhani Express is being used to disseminate information on markets, products, flagship index, etc., to help investors understand how to use product & protect themselves. This train is currently running on Delhi - Sealdah (Kolkata) route and in Delhi - Chennai/Bangalore/ Trivandrum routes. The Exchange constantly endeavors to resolve disputes between investor and the trading members through its intervention. 3. NSEs KNOWLEDGE INITIATIVES Several initiatives have been taken over the last few years with a view to develop the skills of market intermediaries, educate the investors and promote high quality research in the securities market. Such initiatives include certification programs, high school level courses, development of educational materials on financial markets, etc. NSEs Certification in Financial Markets (NCFM) National Stock Exchanges Certification in Financial Markets (NCFM), is an online testing and certification process which tests the practical knowledge and skills that are required to operate in the financial markets. NCFM offers a comprehensive range of modules covering many different areas in finance. The entire process from generation of question papers to testing, assessing, scores reporting and certifying is fully automated. NCFM currently tests expertise in about 32 modules. So far more than 12 lakhs tests have been conducted in various modules. NSE Certified Capital Market Professional (NCCMP) National Stock Exchange in collaboration with reputed colleges and institutes in India, has been offering a short-term course called NSE Certified Capital Market Professional (NCCMP) since August 2009. The aim of the NCCMP Program is to develop skills and competencies in securities markets. It is a 100 hours program, spanning over 3-4 months, covering theory and practical training. Around 50 agreements have been signed so far under NCCMP. * Financial Literacy in schools of Tamil Nadu state National Stock Exchange in association with the Higher Education Department, Tamil Nadu has launched a financial literacy program at the school level, in the state of Tamil Nadu. The curriculum designed by NSE comprises of theory subjects as well as practical. This program has been launched in the year 2010-11 in around 200 schools and is mandatory for class VIII & class XI. The program would be extended to more schools from the academic year 2011-12. * NSE-Manipal Education Training Programs on Stock Markets National Stock Exchange has joined hands with Manipal Education, one of Indias premier educational institutions, to impart training with the aim of improving the participants understanding of how the stock markets function. These programs are designed to cater to people interested in a career in stock markets and other related financial services and also to those who wish to learn about the functioning of the securities markets. It provides relevant tools and techniques that give an in-depth understanding of the various facets of the stock market. So far more than 1600 candidates have undergone this training program. * Visit to NSE Program It has been the endeavor of National Stock Exchange to spread knowledge about financial markets as widely as possible. As part of this endeavor, NSE has been organising the Visit to NSE Program, under which groups of students visit NSE to attend a 2-hour session. The session includes lecture on Overview of the Exchange, Capital Markets, Derivative Markets and NSEs NCFM certification which not only expands their knowledge base, but also improves their career prospects. In this session, the students learn about stock exchange structure, its operations, products traded on it and so on. More than 150 colleges have visited the Mumbai office as well as the regional offices located at Delhi, Kolkata and Chennai during the year 2010-11. * NSEs Research Initiative Knowledge management is very important in todays competitive world. It acts as a tool which helps to acquire the cutting edge in a globalised financial market. The regulators and SROs have been actively promoting academicians and market participants to carry out research on the various segments of securities markets. The completed papers are available on the NSE website www.nseindia.com. 4. KNOWLEDGE MANAGEMENT OR REPOSITORY CREATION INITIATIVE A Knowledge Management project was initiated last year to create an environment and to apply techniques to discover, formally document, manage and maintain the tacit, individual or personal, context specific, experiential and unstructured knowledge, which can be shared and used easily avoiding systemic glitches, rework, undue noise (unwarranted communication) in the system and also reduce the time to market or turnaround time. All the creation/documentation of the Knowledge has been completed for the NSCCL systems, Back office systems, Trading systems as well as Index and Quarter Sigma systems. The format defined was to keep the documents lean, tabulated and carry all the organisational knowledge capturing the processes, inputs and its business validations, business rules, outputs, formats and structures, interface details, triggers for the processes, dependencies, sample calculations, if required, etc. All these documents were reviewed by the respective development group as well as in case of back office and trading by the end users (operations) groups. All the knowledge has been made available in a Knowledge Management portal and to the stake holders with due access / security measures in place. Along with this, the process for the ongoing maintenance of the same has been defined and implemented in the Knowledge Management portal for keeping the knowledge up to date. 5. FINANCIAL RESULTS AND APPROPRIATION OF PROFITS The working of the Company during the year has resulted in a net profit after tax of Rs. 637.51 crores as per particulars given in Table 16 below:- Table 16 Particulars 2010-11 2009-10 (Rs. in crores) (Rs. in crores) Income 1,378.47 1,266.38 Expenditure (excluding Depreciation) 427.07 377.80 Profit before depreciation, prior-period adjustment and tax 951.40 888.58 Depreciation 91.35 76.75 Profit before prior period adjustments 860.05 811.83 Add/(Less): Prior period adjustment (0.74) (0.34) Profit before tax 859.31 811.49 Provision for tax 221.80 197.72 Profit after tax 637.51 613.77 Surplus brought forward from previous year 105.26 62.67 Excess Corporate Dividend Tax for last year transferred back 14.95 9.18 Amount available for appropriation 757.72 685.62 Appropriations General Reserve 530.00 475.00 Investor Compensation Reserve 0.14 0.11 Proposed Dividend 94.50 90.00 Corporate Dividend Tax 15.33 14.95 Staff Welfare Reserve 0.35 0.30 Balance carried to Balance Sheet 117.40 105.26 6. DIVIDEND In view of the above results, your Directors recommend payment of dividend of Rs. 21/- per share for the year 2010-11. 7. SUBSIDIARY COMPANIES 7.1 National Securities Clearing Corporation Limited (NSCCL) CM segment: NSCCL successfully continued its track record of completing all settlements in a timely manner. During the period under review, 255 rolling settlements were handled in de-materialised mode. The per settlement figures in value terms in the current year are higher than the previous year as given below: The average value of securities handled per settlement was Rs. 3,840 crores in 2010-11 compared to Rs. 3,761 crores in 2009-10. The average funds pay-in per settlement during the above periods was Rs 1,150 crores and Rs. 1,141 crores respectively. The average number of shares processed per settlement was about Rs. 1,954 lakhs in 2010-11 compared to Rs. 1,946 lakhs in 2009-10. Short deliveries per settlement averaged around 0.13% in 2010-11 as compared to 0.18% in 2009-10. The highest deliverable value of Rs.8,450.65 crores was observed on November 9, 2010. Percentage of number of shares deliverable to number of shares traded increased to 27.51% in 2010-11 from 21.52% in 2009-10. Percentage of value of shares deliverable to value of shares traded increased to 27.47% in 2010-11 from 22.22% in 2009-10. The Settlement Guarantee Fund stood at Rs. 5,100.35 crores as on 31st March 2011. F&O segment: The period April 2010 - March 2011 witnessed an increase in the total amount settled. The total value of settlement increased from around Rs. 4,034.47 crores in March 2010 to Rs. 5,374.22 crores in March 2011. The highest monthly settlement was Rs. 11,597.10 crores in the month of November 2010. The highest trading volumes on NSE during this period were Rs. 2,77,277.49 crores, witnessed on February 24, 2011 with total of 1,04,97,798 contracts being traded. Currency Derivatives segment: Currency Derivatives trading commenced from August 29, 2008 with the introduction of futures on USD-INR as the currency pair. Futures on multiple currency pairs namely Euro-INR, Pound Sterling- INR and Japanese Yen-INR were introduced in February 2010. In October 2010, option contracts were introduced on the USD-INR pair. Based on the guidelines issued by SEBI, NSE introduced trading in IRF contracts on 10 year notional 7% coupon bearing GOI security on August 31, 2009. Mutual Fund Service System (MFSS) Securities Exchange Board of India (SEBI) vide circular dated November 9, 2010 issued revised guidelines for facilitating transactions in Mutual Fund schemes through the Stock Exchange infrastructure. As on March 31, 2011, 25 mutual fund houses with 1,338 schemes were enabled under the revised MFSS scheme. NSCCL carries out settlement for redemption of units in dematerialised form and funds settlement for subscription requests. Details are as under: The average daily value of funds settled for subscription of mutual fund units for the period January 1, 2011 to March 31, 2011 was Rs. 112.54 lakhs. The average daily quantity of units allotted under subscription for the period January 1, 2011 to March 31, 2011 was 3.89 lakhs. The average daily value of funds settled for redemption of mutual fund units for the period January 1, 2011 to March 31,2011 was Rs. 45.15 lakhs. The average daily quantity of units redeemed for the period January 1, 2011 to March 31, 2011 was 1.83 lakhs. During the financial year 2010-11, NSCCL earned net profit after tax of Rs.238.13 crores as compared to net profit after tax of Rs. 226.02 crores during 2009-10. The Board of NSCCL has recommended a dividend of Rs. 20/- per equity share to its shareholders in respect of the financial year 2010- 11. 7.2 NSE.IT Limited (NSE.IT) With an objective to become a leading vertical specialist enterprise offering end-to-end Information Technology (IT) products, solutions and services as well as specialising in providing complete IT solutions to Stock Exchanges, Clearing Corporations, Brokerage Firms, Insurance Firms and other organisations in the Capital Market, Banking and Insurance industry, NSE. IT, achieved a robust turnover of Rs. 10,304 lakhs during the year which was 28% higher than the previous corresponding year. Continuing with its foray in online examinations, the IRDA project for achieving 100% online examination status by year end was undertaken by the Company across the country and implemented in record time of 9 months. This also included achieving important milestones of 100 new centers within 6 months and 200+ centers going live by end of December 2010 within six months of starting the project. The assessments are conducted pan India for the insurance companies and the Company executes the end-to-end process from registration to examination certificates. During the year the Company worked on adding new customers and bid for various tenders and requirements. The Company was successful in adding new clients to its customer list. During the year the Company embarked on quality journey to certify its online examination centers for ISO 9001:2008 certification. NSE.IT through all the steps of ISO such as gap analysis, documentation, implementation of documented processes, internal auditing, training and awareness. After extensive rounds of internal and external quality implementation efforts in past six months and audits conducted across country by Bureau Veritas Certification India (BVCI) auditors till first week of March, NSE.IT has been certified for ISO 9001:2008 by BVCI for its Online Examination Services. During the year, Company has added to its product portfolio with the introduction of an Algorithmic Trading solution, called AlgoStudio. The product provides various standard algorithmic trading strategies (viz. Cash-Futures arbitrage, Futures-Futures arbitrage, Cash-Cash arbitrage, Conversion/Reversal, Box Spread) as well as custom strategies, taken up as be-spoke development. The most important achievement for the Tea Board e-Auction project this year, was winning the coveted Bronze medal in the National e-Governance Awards 2011, under the category - Specific Sectoral Award (Focus Sector for 2010-11 - Agriculture). The e-Auction program went 100% live in Siliguri this year. This marked 100% sale of tea through e-Auction route across all the six auction centres. Around 370 million kg of tea was sold this year, totaling the sales figure to 610 million kg since inception with a monetary worth of around Rs. 6100 crore. During the financial year 2010-11, NSE.IT earned a net profit after tax of Rs. 13.64 crores as compared to Rs. 9.53 crores in the previous year. The Board of Directors of NSE.IT has recommended a dividend of Rs. 4/-per equity share to its shareholders in respect of the financial year 2010-11. 7.3 DotEx International Limited (DotEx) DotEx manages the data feed of NSEIL and supplies the same to its clients. Currently, the following products are offered by DotEx:- 1) Real Time Data 2) Snapshot Data 3) End of Day Data 4) Historical Data 5) Corporate Data The products related to real time data, snapshot data, end of day data and historical data are further segregated into the following segments: (i) Capital Market [CM] segment (ii) Futures and Options Market [F&O] segment (iii) Wholesale Debt Market [WDM] segment (iv) Securities Lending & Borrowing Market fSLBM] segment (v) Currency & Interest Rate Futures Market segment Currently, real time feed is being subscribed by 33 clients, snapshot feed by 36 clients, end of day feed by 23 clients and Corporate data by 2 clients. DotEx also operationalised the tick by tick data feed and the 1 minute snapshot feed during this financial year. DotEx also provides a shared platform called NEAT on Web (NOW) which is a shared CTCL and risk management tool for the trading members. During the year the DotEx started providing the following additional facilities through NOW platform viz., access to NSE J)PO segment, access to Ace Commodity Exchange (ACE) markets, provision of Direct Market Access (DMA) facility and provision of news from Newswire 18. With the objective of improving the reach and providing stable connectivity to members, the following new initiatives were taken:- * Mobile platform to provide live streaming data and trading capability. Market Data is made available as an open application for any investor or potential investor who registers on NSE website. For investors desirous of trading, they can avail the facility from any NOW enabled trading member. * Tied up with private VSAT service providers to make NOW available through private VSAT Network. This facility has been proved to be a boon to users in northeast regions where even basic internet connectivity is an issue. The above initiatives have resulted in an increase in trading turnover through NOW platform during the financial year 2010-11. During the year 2010-11, DotEx earned a profit of Rs. 1,416.68 lakhs as compared to a profit of Rs. 1,304.32 lakhs during 2009-10. The financial position of DotEx has improved in the current financial year by virtue of income generated through increase in the number of vendors and the end user clients. The Board of DotEx has recommended a dividend of Rs. 1.50/- per equity share to its shareholders in respect of the financial year 2010-11. 7.4 India Index Services and Products Limited (IISL) During the year under review, IISL continued to be the primary provider of indices and related products and services to various participants in the Capital Market in India, in the thirteenth year of its operation. IISL has granted eight additional licenses to asset management/ insurance companies for launching Exchange traded/ Index funds/ Insurance Funds. Currently, there are around 34 funds linked to IISLs indices. IISL provides index and index related services to various stock exchanges, asset management companies, investment banks and other organisations across the globe for business purposes. Apart from the indices being used for Index Funds and trading of index based derivative contracts, the indices of IISL are being used by the mutual funds for benchmarking the performance of their funds. The demand for index related data has increased in past year in line with the improved condition of the equity market. During the year, IISL provided licenses to various clients for using IISLs indices as underlyings for their products. These clients issue products such as index linked notes / certificates, index linked bonds, index linked certificates of deposit, Exchange Traded Funds (ETFs), etc., using IISL Indices as the underlying for their products. IISL also provides annual licenses to its Clients who issue many structured products with IISL indices as underlying for such products. During the year under review, IISL has widened the client base which uses its Indices and index data. IISL has the following major sources of income viz. income from licensing indices to stock exchanges for trading in derivative contracts linked to such indices, income from licensing indices to Index Funds/Exchange Traded Funds, income from licensing indices to finance and insurance companies for debentures/insurance products, income from licensing indices to investment banks for structured products and income from data subscription services. During the year 2010-11, IISL earned a profit of Rs. 1,183.74 lakhs as compared to a profit of Rs. 893.39 lakhs during 2009-10. The Board of IISL has recommended a dividend of Rs. 9/- per equity share to its shareholders in respect of the financial year 2010-11. 7.5 NSE Infotech Services Limited (NSETECH) Technology has been a key differentiator and a strategic driver for NSE. Towards this, NSE Infotech Services Limited continues to deliver and maintain technology products and services for NSE. New Generation Initiatives This financial year has been path-breaking with new architecture of the trading system that allows linear scalability, providing capabilities to handle the multi-fold growth of order transactions. Net Market Rollout in the F&O segment is a milestone towards capacity enhancement of trading system enabling horizontal scalability, to scale up to on demand capacity, by adding multiple market machines. The Appletree Database has been replaced with the newly developed SMFS (Shared Memory File System) in the post trade (PT) layer of the FO trading system. In parallel, the earlier Stratus proprietary messaging solution (VMA) has been migrated to a new generation messaging solution (29West) for communication across various layers of the Trading system. 29West messaging is a high throughput, low latency solution that is being used to achieve throughput of over 100K messages/sec. These implementations enable a low latency and high throughput architecture. The parallel redevelopment of the matching engine (retooling project), currently underway, will result in a final capacity of 100,000 messages/sec. Global Benchmarks In keeping with global trends, the Exchange has provided members a co- location facility for low latency high frequency trading. The Co-location phase II data center is an international standard, state of the art, highly robust, resilient and secure infrastructure data center, built at the BKC premises. This Phase II data center has a capacity of 54 full racks and 28 half racks. With the advent of co-location, there was a market need for real-time data to be disseminated to these high frequency algorithmic trading members, to enable them build the order book and help their algorithms to work optimally. Tick by Tick data provides the latest order (new, modified and cancelled) and trade information to the market. The Exchange has offered a new category of connectivity (Category T) for market data broadcast called Tick by Tick. New Product Launches New business products like Securities lending and Borrowing (SLBM), Call auction in Pre-Open (CM segment), Currency options in CD segment, India VIX, MFSS SIP, TAP on Linux, NSE Electronic Application Processing System (NEAPS) have been introduced. Customer focused self-services Several initiatives have been taken to provide self service capabilities and improved customer experience. Some of these are online client- code/trade modifications, Limit Setting and Auto enablement, Auto Give-ups and Margining Professional Clearing Member (PCM) on T-Day. Operational Excellence With the increase in average number of order messages per day in the F&O segment from around 80 million to 100 million, the F&O trading capacity was increased by adding a third market machine (until the release of Retooling project). With this, the capacity of FO Trading system has increased from 12,000 to 18,000 order messages per second. CM trading capacity was also increased by adding a fourth market machine. With this, the capacity of CM Trading system has increased from 5,000 to 7,000 order messages per second. The time taken by the Securities Pay-in/Pay-out cycle of the settlement cycle on T+2 day was about 90 minutes. The complete process was re- engineered along with the workflow and appropriate automation to reduce the end-to-end time from 90 minutes to 3-5 minutes. The risk management engine in CM and F&O segments were optimised after multiple benchmarks with pre-set parameters (portfolio, trade rate, number of suspensions, intra-day changes). This optimisation has reduced the average turnaround time within the risk management considerably. Cyber Security drill was conducted by CERT-in (Computer Emergency Response Team), Department of Information Technology, Government of India. The performance was evaluated on four categories namely (i) Pro-active actions to secure the drill setup; (ii) Attack defense & detection; (iii) Incident reporting & response; and (iv) Mitigation & Recovery actions. NSE was rated excellent among 18 critical organisations in the financial sector, for its capability in handling and responding to cyber security incidents, across all areas. Awards/Recognitions NOW (NSE on Web) & Inspection applications won the Information Week EDGE award in Sep 2010. During the financial year 2010-11, NSETECH earned net profit after tax of Rs. 94.61 lakhs as compared to the net profit after tax of Rs.99.81 lakhs during 2009-10. As the profit is required to augment operational needs of the Company, the Board of NSETECH did not recommend any dividend to its shareholders. 7.6 National Commodity Clearing Limited NCCL has completed the fourth full year of operations, since its commencement from September 1, 2006, in providing IT and process support to NCDEX in respect of its clearing and settlement of trades done in derivatives segment. The clearing and settlement covers contracts in 44 products ranging from agricultural commodities to base metals, ferrous metals, energy, polymers and precious metals. NCCL carries out funds settlement through 13 clearing banks. During the year 2010-11, NCCL earned net profit after tax of Rs. 99.54 lakhs as compared to the net profit after tax of Rs.93.39 lakhs during 2009-10. As the profit is required to augment operational needs of the Company, the Board of NCCL did not recommend any dividend to its shareholders. 8. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES The following developments have taken place in Human Resources/Industrial Relations front in the Financial Year 2010-11:1) Total Remuneration & Reward Management: NSEIL has undertaken a benchmark study on total remuneration and reward management in the FY 2010-11 in association with Aon Hewitt Associates. As per the recommendation of the consulting firm, remuneration of the employees was revised. 2) Employee Engagement: The Company has started various Employee Engagement Initiatives to raise the engagement levels of the employees across the organisation. Some of them are NSEs participation in Standard Chartered Marathon 2011, employees participation in the Investothon, restructuring the Quarterly Induction Program, initiatives like Office Yoga on chair and various Staff Welfare initiatives so as to build synergy among the various teams. 3) Talent Management and Development: During the Financial Year 2010-11, NSEIL has focused on the following:- a) The Company has partnered with Pricewaterhouse Coopers for creating the Talent Management framework at NSEIL. In this process, NSEIL has identified the behavioral and functional competencies and are working towards the creation of the career pathing framework for the Company to meet the individual aspirations and the Company objectives. b) Learning and Development: In line with the Business Strategy, company has continued to focus on the functional and behavioral training based on the individual and the organisational need. In the past year NSE has focused more on the Regional offices to meet their strategic learning and development needs. 4) Employee Relations: The employee relations scenario has been harmonious throughout the period under consideration. The Employee Strength as on March 31, 2011 is 504. 9. CORPORATE GOVERNANCE The Company is committed to maintain the highest standards of corporate governance and adhere to the corporate governance requirements. The Company being an unlisted Company has voluntarily adopted compliance of corporate governance norms provided in Clause 49 of the Listing Agreement applicable to the Companies which are listed with the Stock Exchanges. A report on corporate governance for the financial year 2010-11 is accordingly furnished as part of the Annual Report for the information of all its stakeholders. The certificate from a Practicing Company Secretary confirming compliance with the conditions of Corporate Governance as stipulated under clause 49 of Listing Agreement, is also attached with the above report. 10. MANAGEMENT DISCUSSION AND ANALYSIS REPORT Managements Discussion and Analysis Report for the year under review is presented in a separate section forming part of the Annual Report. 11. CORPORATE SOCIAL RESPONSIBILITY (CSR) INITIATIVES Your Company, being part of an integral part of society, recognises its corporate social responsibilities and has been engaged in various CSR initiatives. Several energy efficiency measures have been taken to reduce the consumption of energy and promote use of renewable energy. The details of various energy conservation measures taken by your company are given under the heading Conservation of energy, technology absorption and foreign exchange earnings/outgo in the Directors Report. Your Company along with its group companies organised and contributed to welfare programs with various Non-Government Organisations (NGOs) to promote upliftment of disadvantaged sections of society. Also, a number of Go-Green initiatives have been taken up contributing towards energy conservation and reducing Carbon Footprint. Some of these programs are mentioned below: * Tie up with HelpAge India which is a secular, not-for-profit organisation protecting the rights of Indias elderly and provides relief to them through various interventions. One thousand calendars were printed from Archies Limited. The printing amount paid included the contribution towards HelpAge India NGO. * A number of Go Green Initiatives were successfully launched and completed. A few of these are * Global Warming awareness campaigns by email, videos, etc. * Tree Plantation Drive near Exchange Plaza * Invited NGO Vaitarna and put up a stall of Eco-Friendly products in Exchange Plaza. * Leadership in Energy & Environmental Design (LEED) certification for office building. * Installation and commissioning of the Solar Power System. * Setup of Vermiculture plant which provides manure to the garden. * Setting up of a voluntary group of employees called Green Warriors supported by NSEIL whose mission is based on the principles of the 3Rs (Reuse, Reduce &Recycle) and whose objective is to identify and work towards finding ways to help protect and sustain our environment in a manner that is least resource intensive. Some of the activities conducted by the Green Warriors during the year include monthly awareness programmes Green Evening for all employees with screening of movie/messages on global warming and environmental conservation, tree plantation drive in the BKC area, sapling distribution to staff, monthly bulletin to the employees with simple effective environment tips for use homes/offices, targeted annual paper reduction drive, etc 12. DIRECTORS Dr. Vijay Kelkar, Chairman of your Company was awarded Padma Vibhushan, which is the second highest civilian award in the Republic of India, as recognition towards his exceptional and distinguished service to the nation in the field of public affairs. Mr. Anjan Barua, Mrs. Bhagyam Ramani, Mr. S.B. Mainak and Mr. S.B. Mathur retire by rotation at the ensuing Annual General Meeting and are eligible for reappointment. Mr. Anand G. Mahindra and Mr. B.N. Srikrishna ceased to be the Directors of the Company consequent upon their resignation from the Board with effect from December 28, 2010 and January 14, 2011 respectively. The Board wishes to place on record its sincere appreciation and gratitude for their valuable contribution made during their tenure as Directors. 13. DIRECTORS RESPONSIBILITY STATEMENT Your Directors confirm that:- i. in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures, if any; ii. the Directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year i.e., 31st March, 2011 and of the profit of the Company for that year; iii. the Directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; and iv. the Directors had prepared the annual accounts on a going concern basis. 14. AUDIT COMMITTEE The Audit Committee comprises four Directors viz., Dr. R. H. Patil, Mr. A. P. Kurian, Mr. Y. H. Malegam and Dr. V. A. Sastry as its members. Dr. R. H. Patil is the Chairman of the Audit Committee. The Committee met four times during the year i.e., on June 4, 2010, August 24, 2010, November 22, 2010 and February 1, 2011. The details of the attendance of members of the Audit Committee at their meetings held on the above dates are given in Table 17 hereunder:- Table 17 Name Number of meetings Number of meetings held during the year attended Dr. R.H. Patil 4 2 Mr. A.P. Kurian 4 4 Mr. Y.H. Malegam 4 4 Dr. V.A. Sastry 4 3 15. AUDITORS M/s. Khandelwal Jain & Co., Chartered Accountants, Auditors of the Company, retire at the forthcoming Annual Genera] Meeting of the Company and are eligible for re-appointment. The Company has received a certificate from the Auditors to the effect that their re-appointment, if made, would be within the limits prescribed under Section 224 (IB) of the Companies Act, 1956. Their re-appointment is required to be made by a Special Resolution pursuant to Section 224A of the Companies Act, 1956. 16. CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION AND FOREIGN EXCHANGE EARNINGS/OUTGO a) Conservation of Energy, Technology Absorption As the Company does not fall under any of the industries listed out in the schedule appended to Companies (Disclosure of Particulars in the report of the Board of Directors) Rules, 1988, particulars required to be disclosed with respect to conservation of energy and technology absorption in terms of Section 217(l)(e) of the Companies Act, 1956, read with the aforesaid Rules are not applicable to the Company. However, NSEIL continues to use the major technological initiatives like Thermal Energy Storage System for air-conditioning system during the peak hours, Building Management System for automation in operations of services in the building, Lighting Transformers for regulated voltage of Lighting system, Electronic Ballast and Compact Fluorescent Lamps in lighting system, Automatic Power Factor Control Units towards Effective Energy Conservation as well as Load Management System: In its pursuit of building a system for effective energy conservation, NSEIL has used the following further technological initiatives during the year. 1) Solar Power Plant - In addition to various power saving measures being undertaken at the building, a need had been felt to ascertain the possible alternatives of energy conservation including sourcing of energy from natural resources which is environment friendly (i.e. Green Power). In view of this, Solar Power Plant of the capacity of 10 KW has been installed in the building which harnesses the solar power to cater the part of lighting load at Exchange Plaza. 2) Rain Water Harvesting System - Envisaging water scarcity in future as well as present water shortages, the proper Hydro - Geological survey was conducted at Exchange Plaza to explore the possibility of harvesting the rain water in the periphery of Exchange Plaza. The project is being implemented and expected to complete by July, 2011. By using this system, there would be water saving of around 1 lakh liters per day at Exchange Plaza. 3) Sewerage Treatment Plant - This plant has been installed at the inception stage itself to enable the Company to reuse buildings domestic and flushing water (i.e. after treatment) for its Cooling Towers associated with HVAC System and for Gardening purposes every day. 4) Vermiculture Plant - In this system, the compostable material like food waste collected from canteen, garden organics and paper & cardboard gets collected at one place. Post shredding, the organic material gets loaded into vermiculture unit for the decomposing process. Post 7 days on-going process, vermicompost/manure get generated and used for Gardening purposes. b) Foreign Exchange earnings/outgo during the year under review: The foreign exchange earnings during the year were Rs. 11.01 crores whereas the foreign exchange outgo during the year was Rs. 9.11 crores. 17. Statement of Particulars of Employees covered under the provisions of Section 217(2A) of the Companies Act, 1956 read with Companies (Particulars of Employees) Rules, 1975 is annexed. 18. Your Directors are grateful for the support and co-operation extended by the Government of India, Securities and Exchange Board of India and Reserve Bank of India. Your Directors would like to place on record their sincere appreciation of support provided by the shareholders and also their deep appreciation of the contribution made by employees at all levels to the continued growth of the Company. For and on behalf of the Board of Directors Vijay Kelkar Chairman Place: Mumbai Date : April 29, 2011 MANAGEMENT DISCUSSION AND ANALYSIS Economic & Business environment The Indian Economy growth in 2010-11 had been swift and broad-based. The economy regained its pre-crisis growth trajectory. The Gross Domestic Product (GDP) of India is estimated to have grown at 8.6 per cent in 2010- 11 in real terms. In 2010-11 agriculture is estimated to have grown at 5.4 per cent, industry at 8.1 per cent and services at 9.6 per cent. All three sectors are contributing to the consolidation of growth. More importantly, the economy has shown remarkable resilience to both external and domestic shocks. Fiscal consolidation has been impressive. This year saw significant progress in critical institutional reforms that would set the pace for double-digit growth in the near future. With the strong innate economic fundamentals, India continues to be the highly attractive destination for investment, globally. India is today rated as one of the most attractive investment destinations across the globe. The UNCTAD World Investment Report (WIR) 2010, in its analysis of the global trends and sustained growth of Foreign Direct Investment (FDI) inflows, has reported India to be the second most attractive location for FDI for 2010-2012. The cumulative amount of FDI equity inflows from April 2000 to January 2011 stood at US$ 193.74 billion, according to the data released by the Department of Industrial Policy and Promotion (DIPP). The huge increase in investment mirrors the foreign investors faith in the Indian markets. Even the net investments by FIIs for the period November 1992 till March 31, 2011 was US $ 121.56 billion. The forex reserves increased to US $ 303 billion at end of March 25, 2011. During 2010-11, the Indian securities industry also experienced a number of global, technological and regulatory developments. In addition, demands for new products and services, particularly new asset classes and need for faster and more cost efficient trade execution increased substantially. Thus, the year 2010-11 witnessed major imperatives such as Launch of new products & services, Technological advancements, Regulatory developments etc. Outlook The Indian economy is expected to operate close to its trend growth rate, powered mainly by domestic factors. The investment rate has exceeded 36 per cent of GDP. Even with an incremental capital-output ratio of 4, this should enable the Indian economy to grow at 9 per cent. Thus, the broad macroeconomic parameters relating to savings and investment are conducive for achieving a high growth rate. Aligned with this, as a natural fall out, it is expected that the investment momentum within the economy would continue at an accelerated pace. This would have a significantly positive impact on the capital markets. Similarly, the existing products and asset classes which would continue to evince interest, it is expected that there would be attraction towards new asset classes as well. New products and services, technological innovation and strong risk management framework would continue to be the key drivers for the securities market. Risks and concerns While the fundamentals of Indian economy remain strong, the domestic capital market and especially the inflow of foreign funds are to a large extent susceptible to the developments in the global economy. Any adverse development could have a negative impact on the domestic markets. Also post global financial crisis, much of the recovery in the developed economies was driven by temporary measures such as fiscal stimulus and the like. Some of these countries are considering withdrawal of these fiscal stimuli which could affect the growth levels in those economies it could have adverse impact on the Indian capital market. However, with vibrant growth expectations within the country these risks would be largely mitigated. Internal control systems and their adequacy The Company has well established internal control systems commensurate with the size and nature of its business and are adequate to ensure compliance with various internal processes and procedures as well as with various statutory and legal requirements. The Company has appointed reputed firms of Chartered Accountants to review the effectiveness of the internal control systems and submits its observations, if any to the Audit Committee of the Board for its review/recommendations. Financials The financial statements have been prepared in compliance with the requirements of the Companies Act, 1956, Generally Accepted Accounting Principles (GAAP) in India and as per the applicable Accounting Standards laid down by the Institute of Chartered Accountants of India. A well known and reputed firm of Chartered Accountants performs the audit and they have confirmed that our practices are as stringent and complete as internationally. Financial performance (2010-11) During the year 2010-11, the total revenue has increased by 9% from Rs.1266.38 crores for the year 2009-10 to Rs. 1378.47 crores for the year 2010-11. The total expenditure for the year 2010-11 was Rs. 519.16 crores as compared to Rs. 454.89 crores for the year 2009-10. An increase of around 14% over the previous year. The total Profit Before tax for the year 2010-11 was Rs. 859.31 crores as against Rs. 811.49 crores for the year 2009-10. An increase of 6% over the previous year. The total Provision for tax (including deferred tax, wealth tax) for the year 2010-11 was Rs. 221.80 crores as against Rs. 197.72 crores for the year 2009-10. The total Profit after tax for the year 2010-11 was Rs. 637.51 crores as against Rs. 613.77 crores for the year 2009-10. An increase of 4% over the previous year. Revenue Transaction charges During the year, there was a modest increase of around 4% in the income from Transaction charges from Rs. 768.43 crores for the year 2009-10 to Rs.799.27 crores for the year 2010-11. The average daily turnover on the Exchange during the year 2010-11 was Rs. 14,090 crores in Cash Market (CM segment) as against Rs. 16,964 crores for the year 2009-10 indicating a decline of 17%. In F&O segment the average daily turnover (billable) for the year 2010-11 was Rs. 39,628 crores as against Rs. 37,990 crores for the year 2009-10 indicating a growth of 4%. Listing Fees Revenue under this head of income increased by around 20% from Rs. 19.30 crores for the year 2009-10 to Rs. 23.24 crores for the year 2010-1 l.The Exchange as of March 31, 2011 had 1,542 listed companies. The total market capitalisation of these companies as of March 31, 2011 stood at Rs.65 lakhs crores. Book Building Fees The total book building fees during the year 2010-11 decreased by around 6% from Rs. 12.33 crores for the year 2009-10 to Rs. 11.67 crores for the year 2010-11. Treasury income (Interest & Other Investment income) In line with the overall increase in the interest rates in the economy and change in the investment strategy, during the year 2010-11, the total income from treasury operations increased from Rs. 292.23 crores for the year 2009-10 to Rs. 336.09 crores for the year 2010-11. NSEs Certification in Financial Markets (NCFM) Based on the feedback received and catering to the growing needs of the capital market, the Exchange continued its focus on educational initiatives by introducing new NCFM modules during the year 2010-11. The income from NCFM activity stood at Rs. 23.35 crores for the year 2010-11. Also, the total number of candidates taking examination during the year 2010-11 was around 1, 69,000. Other Income During the year 2010-11, the other income increased by 39% from Rs. 106.19 crores for the year 2009-10 to Rs. 147.81 crores for the year 2010-11. Expenditure Operating, Administration and Other expenses The total Operating, Administration and Other expenses for the year 2010-11 increased by 29% from Rs. 78.59 crores for the year 2009-10 to Rs. 101.06 crores for the year 2010-11. IT & Telecom expenses Technology is the backbone of our business and also the key differentiator. The Exchange continued to invest in the state of the art technology in different areas of its business keeping clear focus on its cost efficiency. Accordingly, during the year, the total IT & Telecom expenses for the year 2010-11 decreased by 6% from Rs. 150.57 crores for the year 2009-10 to Rs.141.69 crores for the year 2010-11. Clearing & Settlement charges National Securities and Clearing Corporation Limited (NSCCL), a wholly owned subsidiary of the Exchange, carries out the clearing and settlement of the trades executed in the CM and F&O segments. Consequent to the increase in income from transaction charges and change in the charging structure, the clearing & Settlement charges for the year 2010-11 paid to NSCCL increased by 25% from Rs. 95.91 crores for the year 2009-10 to Rs.119.89 crores for the year 2010-11. Payment and Provision for employees The Exchange recognises the value of its human capital deployed at all levels. To continue to provide best in class services to its members and other market participants it is essential for the Company to attract and retain the best talent available. In this direction, the Company continues to take various initiatives to follow HR best practices and also keeps benchmarking it with other forward looking organisations. During the year 2010-11, the Company has taken number of HR initiatives in the areas of employee developments and training, harnessing knowledge and skill levels as well as various staff welfare measures etc. During the year 2010-11, the total employee strength increased by around 6% and the employee related expenses stood at Rs. 64.43 crores which was Rs. 52.73 crores for the year 2009-10. For the year 2010-11, the total employee cost as a percentage to total income was 4.7% and as a percentage of expenditure was 12.4% which is comparable to the industry standards. Depreciation Exchange continued to invest in technology in different areas of its business. Accordingly, the total depreciation increased by 19% from Rs.76.75 crores for the year 2009-10 to Rs. 91.35 crores for the year 2010- 11. Financial Statement as on March 31, 2011 Share Capital The total paid up capital of the Company as on March 31, 2011 is Rs. 45 crores divided into 4,50,00,000 equity shares of Rs. 10 each. Reserves & Surplus The total Reserves & Surplus as on March 31, 2011 is Rs. 2,923.40 crores comprising of Share Premium of Rs. 40 crores, Investor Compensation reserves Rs. 10 crores, staff welfare reserves of Rs. 1 crores, General reserve of Rs. 2,755 crores and balance in P&L A/c of Rs. 117.40 crores. Thus the total Net worth of the Company as on March 31, 2011 is Rs.2,968.40 crores and the book value is Rs.659.64 per share. Deposits from members (Unsecured) The total deposits from members as on March 31, 2011 stood at Rs. 1,115.20 crores as against Rs. 1,043.58 crores as on March 31, 2010. An increase of Rs.71.62 crores. Fixed Assets Total Gross Block as on March 31, 2011 was Rs. 915.23 crores. Total Accumulated depreciation up to March 31, 2011 was Rs. 484.23 crores. Net fixed Assets (including Capital W.I.P) were Rs. 458.00 crores. As part of the total investments in technology areas, during the year 2010-11 the total additions to fixed assets were Rs. 103.27 crores mainly pertaining to the Building, Trading systems and telecom equipments where as total deletions at cost were at Rs. 13.82 crores. These equipments had become obsolete and are fully depreciated. Investments The prudential policy of the Company permits to invest both long term and short term surplus funds in to deposits of highly rated banks, bonds issued by the Central / State governments, institutions and various corporates and into the debt oriented schemes of high performing mutual funds. As on March 31, 2011 the total Long term investments was Rs. 548.24 crores as against Rs. 317.33 crores as on March 31, 2010. Increase of Rs. 230.91 crores. However, short term investments grouped under Other Current Assets were Rs. 110.77 crores as on March 31, 2011 as against Rs. 2,463.98 crores as on March 31, 2010, indicating an decrease of Rs. 2,353.21 crores. This was mainly due to shifting of investments from mutual funds to Bank Fixed deposits to take advantage of higher yields in Fixed Deposits. Current Assets, Loans & Advances (other than short term investments) Total Current Assets, Loans & Advances (other than short term investments) as on March 31, 2011 stood at Rs. 3,532.01 crores comprising of interest accrued on investments and Fixed Deposits amounting to Rs. 96.10 crores, Debtors amounting to Rs. 150.68 crores and cash and bank balances in current and Fixed Deposits and certificates of deposits amounting to Rs.3,221.02 crores and Loans advances of Rs. 64.21 crores. Current Liabilities & provisions Total Current Liabilities as on March 31, 2011 stood at Rs. 552.66 crores comprising of Sundry creditors of Rs. 73.71 crores, Dues from subsidiary companies Rs. 20.01 crores, security deposits as per listing agreement amounting to Rs. 70.55 crores, Securities Transaction Tax of Rs. 120.24 crores, provision for Leave encashment of Rs. 6.49 crores, proposed dividend of Rs. 94.50 crores, corporate dividend tax of Rs. 15.33 crores and other current liabilities amounting to Rs. 151.83 crores. Taxation The total Provision for tax (including deferred tax, wealth tax) for the year 2010-11 was Rs.221.80 crores as against Rs. 197.72 crores for the year 2009-10. Though the present Indian Corporate tax rate is 33.22% comprising of base rate and surcharge and cess, due to investments into various debt schemes of mutual funds the effective tax rate works out to 25.95% Event occurring after the balance sheet date There are no transactions of material nature that have occurred after March 31, 2011 which could have any impact on the financial performance of the Company for the year 2010-11.