project on performance of capital market final

7/31/2019 Project on Performance of Capital Market Final

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PERFORMANCE OF CAPITAL MARKETS

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CHAPTER-I

Introduction and Research methodology


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1.1INTRODUCTION:

Indian Capital market has witnessed a paradigm shift at par with the advanced

markets of the world in the last 10 years or so. Business process, functionality,

monitoring / regulating mechanisms, hardware, software etc., are all revamped to

compete with the global leaders. The current stand of Indian capital market has a long

history in its back. The history of the capital market in India dates back to the

eighteenth century when East India Company securities were traded in the country. In

1850s, the trading was limited to a dozen brokers and their trading place was under a

banyan tree in front of the Town Hall in Bombay. The location of trading changed

many times, as the number of brokers constantly increased. The group eventually

moved to Dalal Street in 1874 and in 1875 became an official organization known as

The Native Share & Stock Brokers Association. In 1895, this association acquired a

premise in the Dalal Street and it was inaugurated in 1899. Thus, the Stock exchange

at Bombay was consolidated. And, the orderly growth of the capital market in India

began. The Bombay stock exchange got recognition in May 1927 under the Bombay

Securities Contracts Control Act, 1925. The constitution of India came into being on

26th January, 1950. The constitution put the stock exchanges and the forward markets

under the exclusive authority of the Government of India. In 1956, the BSE became

the first stock exchange to be recognized by the Indian Government under the

Securities Contracts (Regulation) Act. The 1980s witnessed an explosive growth of

the securities market in India, with millions of investors suddenly discovering

lucrative opportunities. Many investors jumped into the stock markets for the first

time. The governments liberalization process initiated during the mid-1980s, spurred

this growth. The Bombay Stock Exchange developed the BSE Sensex in 1986, giving

the BSE a means to measure overall performance of the exchange.

The 1990s will go down as the most important decade in the history of the capital

market of India. The Capital Issues (Control) Act, 1947 was repealed in May 1992.

The decade was characterized by a new industrial policy, emergence of SEBI as a

regulator of capital market, advent of foreign institutional investors, euro-issues, freepricing, new trading practices, new stock exchanges, entry of new players such as


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private sector mutual funds and private sector banks, and primary market boom and

bust. The 1991-92 securities scam revealed the inadequacies of and inefficiencies in

the financial system. It was the scam, which prompted a reform of the equity market.

The Indian stock market witnessed a sea change in terms of technology and market

prices. Technology brought radical changes in the trading mechanism. The Bombay

Stock Exchange (BSE) was subject to nationwide competition by two new stock

exchanges the National Stock Exchange (NSE), set up in 1994, and Over the

Counter Exchange of India (OTCEI), set up in 1992. The National Securities Clearing

Corporation (NSCC) and National Securities Depository Limited (NSDL) were set up

in April 1995 and November 1996 respectively form improved clearing and

settlement and dematerialized trading. The Securities Contracts (Regulation) Act,

1956 was amended in 1995-96 for introduction of options trading. Moreover, rolling

settlement was introduced in January 1998 for the dematerialized segment of all

companies. With automation and geographical spread, stock market participation

increased.

In 1996, the National Stock Exchange of India launched S&P CNX Nifty and CNX

Junior Indices that make up 100 most liquid stocks in India. CNX Nifty is a

diversified index of 50 stocks from 25 different economy sectors. The Indices are

owned and managed by India Index Services and Products Ltd (IISL) that has a

consulting and licensing agreement with Standard & Poors. In 1998, the National

Stock Exchange of India launched its web-site and was the first exchange in India that

started trading stock on the Internet in 2000. The NSE has also proved its leadership

in the Indian financial market by gaining many awards such as Best IT Usage

Award by Computer Society in India (in 1996 and 1997) and CHIP Web Award by

CHIP magazine (1999).

In 2000 the BSE used the sensitive index, i.e., Sensex to open its derivatives market,

trading Sensex futures contracts. The development of Sensex options along with

equity derivatives followed in 2001 and 2002, expanding the BSEs trading platform.

The introduction of rolling settlement system in all scrips and electronic fund transfer

in 2003 reduced the settlement cycle to T+2.


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Indian capital market in 2007-08, thus, features a developed regulatory environment, a

modern market infrastructure, a steadily increasing market capitalization and

liquidity, better allocation and mobilization of resources, a rapidly developing

derivatives market, a robust mutual fund industry, and increased issuer transparency.

However, in the last quarter of 2008 and up to the first quarter of 2009, the capital

market went through a phase of downsizing due to the direct impact of global

financial crisis that originated from the USA sub-prime mortgage market. Indian

capital market has seen its worst time with the global financial crisis. The most

popular stock index, i.e., Sensex declined to its levels attained in December 2005.

Similar decline has also been noticed for S & P CNX Nifty index.

Despite the scale down of popular capital market indices up to the first quarter of

2009, Indian stock markets now provide the evidence of strong resistance to global

financial contagion. This infers the strong investor confidence and well risks

diversification in Indian capital markets. The figures below clarify the trend of these

index movements from January 2007 to July 2009.


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1.2 Objectives OF THE STUDY

To understand and analyze the functioning of the capital markets.

To understand the importance of capital markets.

To understand the evolution of capital markets.

To understand the new developments and challenges faced in the capital

markets

To understand the recent reforms in the capital markets.

To understand the background of capital markets in brief.

To identify the factors influencing capital markets.

To understand the impact of capital markets on economic growth.


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1.3 SCOPE OF THE STUDY

In this report the broadest and simplest limitation of the boundaries of the capital

market has been used. It covers all financial assets and liabilities and all transactions

in such assets except those which involve the exchange of money for a nonfinancial

consideration, i.e., except monetary payments in exchange for commodities and for

labour and capital services. For statistical convenience, gross transactions in money

and money market instruments (Treasury bills, bankers' acceptances, commercial and

finance company paper),though not the holdings or net changes in them, will be

disregarded.

The report so defined includes transactions not only in organized marketssecurities

exchanges or the over-the-counter marketsbut also in nonmonetary financial assets

effected among financial institutions, between a financial institution and a member of

another sector of the economy, or among members of nonfinancial sectors.

The capital market also covers imputed transactions of a financial character, the most

important of which are retained earnings (internal saving) accruals and capital

consumption allowances, and interest accrued. These are sometimes called nonmarket

capital fund flows to distinguish them from actual capital market transactions.

This definition of the capital market entirely ignores the distinction often made

between the capital market and the money market, i.e., the separation of liquid short-

term claims and liabilities from other financial assets. There seems to be no soundreason for making this distinction as no sharp boundary &lists between short-term

claims, on the one hand, and long-term claims and equities, on the other.

The capital market has two aspectsflows of financial transactions and stocks of

financial assets and liabilitieswhich are closely related because stocks may be

looked upon as the sum of net previous flows and net flows can be regarded as first

differences in stocks.


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1.4 SIGNIFICANCE OF THE STUDY:

This project has attempted to demonstrate an important role played by capital market

in economic growth and development. Capital market enhances efficient financial

intermediation. It increases mobilization of savings and therefore improves efficiency

and volume of investments, economic growth and development.

It has been shown that development of capital market in India will play a significant

role in promoting growth and development within the country. It will increase the

level of financial intermediation, leading to increased volume and quality ofinvestments, and therefore economic growth. Effective bond market will free up

capital for investment in private sector; allow the Government access to finance and

therefore pursue development objectives and fuel economic growth. It will also

increase investments and flow of money within the country; and support the

development of other financial markets like stock exchange. In short, it will increase

sources of investment funds for the domestic economy.

Development of a countrys capital market can be seen as an important step in

deepening the financial sector and extending access to longer term finance (bonds and

equity) for private sector and public sector business. However attempts to kick start

this by simply providing market infrastructures such as stock exchanges, trading

platforms and efficient registration and settlement systems are not sufficient.

Many of the building blocks for well-rounded capital markets need to be developed in

tandem. For example, rapid development of potential institutional investors such as

pension funds, life insurance companies and some collective investment schemes in a

market where there is a lack of suitable investment product may lead to asset bubbles

or investment in higher risk assets.


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1.5 Research Methodology

1.5.1 FORMATION OF A PROBLEM:-

Indian capital market is truly an emerging market as it is significant in terms of the

degree of development, volumes of trading and in terms of its tremendous growth

potential. Thus, analysis of the parameters like market size, market liquidity and

market turnover should be done to gauge the performance of Indian capital market.

1.5.2 DATA COLLECTION:

Secondary Data :- Data have been gathered from the publications of RBI, NSE

India, and SEBI and from the websites of BSE India, NSE India, RBI, and SEBI.

1.5.3 RESEARCH INSTRUMENTS:-

Analysis of the parameters like Market size, market liquidity, market turnover.

1.5.4 SAMPLING PLAN:

Sample Size: 2 leading stock markets of India.

Sample Unit: Bombay Stock Exchange and National Stock Exchange have been

taken as sample unit as the proxies for Indian Capital market.

Sampling Area: Mumbai.

Sampling Technique: Analysis of the parameters like market size, market liquidity,

market turnover over the sample period of 2004-11 by examining the annual, and the

daily data.


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1.5.5 Research Limitations

Data collection :- The most important constraint in this study will be data

collection as secondary data will be selected for study. Secondary data refers

to data which have already been collected and analysed by someone else.

Reliability :- The data collected in research work puts a question mark on

reliability of the data, which is a very important factor of this study as

conclusion will be derived from this secondary data only.

Accuracy :- The facts and findings of the data cannot be accepted as accurate

to some extent.


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CHAPTER-II

Review of literature


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2. REVIEW OF LITERATURE:

1. European Journal of Economics, Finance and Administrative SciencesIssue

23

ISSN 1450-2275 Issue 23 (2010)

By P K Mishra,M Malla

http://www.eurojournals.com/ejefas_23_04.pdf

Abstract:

In last decade or so, it has been observed that there has been a paradigm shift in

Indian capital market. The applications of technology in the payment and settlement

systems have made the Indian capital market comparable with the international capital

markets. Now, the market features a developed regulatory mechanism and a modern

market infrastructure with growing market capitalization, market liquidity, and

mobilisation of resources. However, the market has witnessed its worst time with the

recent global financial crisis that originated from the US sub-prime mortgage market

and spread over to the entire world as a contagion. The capital market of India

delivered a sluggish performance. In this context, it is imperative to conduct empirical

analysis to study the performance of Indian capital market. It is with this backdrop,

this paper is an attempt to analyse the key market parameters such as market size,

market liquidity, market turnover ratio, market volatility, and market efficiency of

Indian capital market over a period from 2002 to 2009 so as to assess its performance.

The application of time series econometrics provides the evidence of greater volatility

and weak form inefficiency of the market. However, the market shows strong

potential for greater market size, more liquidity and reasonable market turnover ratio.

Therefore, the growth of Indian capital market happens to contribute to the

sustainable development of Indian economy.
http://www.eurojournals.com/ejefas_23_04.pdfhttp://www.eurojournals.com/ejefas_23_04.pdf


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2. The journal of the Indian Institute of Management, Ahmedabad

By Samir K. Barua, V. Raghunathan, Jayanth R.http://www.iimahd.ernet.in/~jrvarma/papers/Vik19-1.htm

Abstract:

In this paper we present a review of research done in the field of Indian capital

markets during the fifteen years from 1977 to 1992. The research works included in

the survey were identified by two search procedures. Firstly, we wrote to 118 Indian

university departments and research institutions requesting information on the works

done in this field in their department/institution. After three reminders, we obtained

responses from 53 institutions. Simultaneously, we searched through various Indian

journals in our library, located books listed in the library catalogue and traced through

the list of references provided in various research works.

Considering the size, vintage and development of the Indian capital market, the total

volume of research on it appears to be woefully modest - about 0.1 unit of work per

institution per year! Moreover, a large number of works are merely descriptive or

prescriptive without rigorous analysis. Certain areas such as arbitrage pricing theory,

option pricing theory, agency theory, and signalling theory are virtually unresearched

in the Indian context. Besides, very little theoretical work has been done by

researchers in India. However, with improved availability of databases and computing

resources, and with increasing global interest in Indian markets, we expect an

explosion of work in the near future.

3. The Critical Role of the African Stock Exchanges in Mobilizing Capital for

African

Private Enterprises. (Nairobi: 1993)

By Peter G. Rwelamira

http://repository01.lib.tufts.edu:8080/fedora/get/tufts:UA015.012.DO.00089/bd

ef:TuftsPDF/getPDF
http://www.iimahd.ernet.in/http://www.iimahd.ernet.in/~jrvarma/papers/Vik19-1.htmhttp://www.iimahd.ernet.in/~jrvarma/papers/Vik19-1.htmhttp://repository01.lib.tufts.edu:8080/fedora/get/tufts:UA015.012.DO.00089/bdef:TuftsPDF/getPDFhttp://repository01.lib.tufts.edu:8080/fedora/get/tufts:UA015.012.DO.00089/bdef:TuftsPDF/getPDFhttp://repository01.lib.tufts.edu:8080/fedora/get/tufts:UA015.012.DO.00089/bdef:TuftsPDF/getPDFhttp://repository01.lib.tufts.edu:8080/fedora/get/tufts:UA015.012.DO.00089/bdef:TuftsPDF/getPDFhttp://repository01.lib.tufts.edu:8080/fedora/get/tufts:UA015.012.DO.00089/bdef:TuftsPDF/getPDFhttp://www.iimahd.ernet.in/~jrvarma/papers/Vik19-1.htmhttp://www.iimahd.ernet.in/


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Abstract:

Over the past two decades, capital markets in developing countries have experienceda rapid evolution. The aggregate market capitalization of countries classified by the

IFC as emerging markets rose from $488 billion in 1988 to $2,225 billion in 1996.

Trading on these stock markets rose in similar magnitude, growing from $411 billion

to $1,586 billion in that period. International donors, governments in developed

countries and international financial institutions seem to pay more attention to the

Asian and Latin American emerging capital markets in contrast to the African markets

(particularly in Sub-Saharan Africa) as evidenced by few studies and literature on the

development of capital markets in Sub-Saharan Africa. This study will, therefore,

focus on capital market development in Africa, with the Nairobi Stock Exchange

(NSE) as a case study. The NSE has continued to increase in importance in economic

growth and capital market development in Kenya and the East Africa region. The

study will, therefore, explore the path of its development with an emphasis on its

structure and organization; rules, regulations and practice; trend in market

performance; recent developments; challenges to development; and the way forward

in the new millennium. The lessons from this study as well as the recommendations

for the future will contribute to the understanding of the development of other capital

markets in Africa and other developing regions of the world.

4. Vilakshan, XIMB Journal of Management

Article-09-10

By JK Nayak

www.ximb.ac.in/ximb_journal/Publications/Article-09-10.pdf

Abstract:

The new issue market, also known as primary market, has undergone an exponential

growth in the last decade or so. The paid up capital as well as the number of listed

companies has risen sharply. Undoubtedly, this is an indication of a healthy trend in

the development of the nation. But the moot question to be answered is whether the

growth of the new issue market has witnessed a decline in investor grievances incomparison to the past i.e., before liberalization or it has been on the rise. In this


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paper an attempt has been made to find out the common grievances and the regulatory

measures undertaken to provide protection. An empirical approach has been

established in this paper.

5. The Journal of Business Perspective:Integration of Indian Capital Markets

with Global Markets: An Empirical Study

July 2002 vol. 6 no. 2 73-79

By Partha De Sarkar, Surendra S yadav, DK Banwet

Abstract:

From 1997 onwards, the effect of globalization is becoming evident in the Indian

capital markets. The stock prices of Indian companies and the stock market indices

have been driven not just by the macro and micro factors of the Indian economy.

Events in other parts of the world have also increasingly started having an impact.

This is in stark contrast to the situation in the insular days prior to 1991, when major

policy changes were made by the Indian government to open up the economy.

The increased volatility of stock markets and reduction in controls over capitalmovements across borders has reflected in the stock prices in India. This paper aims

at validating that indeed globalization has found its way into the Indian capital

markets. It estimates the extent of correlation between the major world stock markets

in USA, UK, Japan and Hong Kong with the Indian Stock Market Index like the BSE

Sensex and also how portfolio fund flows have affected its movement. The study

restricts itself to the period between January 1997 and June 2000.

In brief, this paper seeks to:

establish the relationship between the Bombay 30 Stock Sensitivity Index

(SENSEX) and the global indices mentioned above like Dow Jones Industrial

Average, NASDAQ Composite of USA, FTSE100 of UK, Nikkei 225 of

Japan and the Hang Seng of Hong Kong.

look at how portfolio funds flows have been affecting the Indian stock market.


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6. The International journals

Research journal of commerce and behavioural science

ISSN : 2251-1547

By Anuradha Reddy Malipatel

http://www.theinternationaljournal.org/ojs/index.php?journal=rjcbs&page=article&op

=view&path%5B%5D=355

Abstract:

Capital market is the backbone of any countrys economy. It facilitates conversion of

savings to investments. Capital market can be classified as primary and secondary

market. The fresh issue of securities takes place in primary market and trading among

investors takes place in secondary market. Primary market is also known as new

issues market. Equity investors first enter capital market though investment in primary

market. In India, common investors participating in the equity primary market is

massive. The number of companies offering equity through primary markets

increased continuously in the post independence period till the year 1995. After 1995,

there is a continuous slump experienced by the primary market offering equity. The

main reason for slump is lack of investor confidence in the primary market. So it is

important to understand the causes and measures of revival of investor confidence

leading to capital mobilization and investment in right avenues creating, economic

growth in the country. The retail investors play important role in the capital market.

Though, their individual contribution may be small but, when it is summed it will

become a huge amount/fund. The economic disparities can be reduced by encouraging

these retail investors. A survey results says that only 12 per cent of the savings

amount is coming to capital market. The present paper is a modest attempt to study

the retail investors in Indian capital market.
http://www.theinternationaljournal.org/ojs/index.php?journal=rjcbs&page=article&op=view&path%5B%5D=355http://www.theinternationaljournal.org/ojs/index.php?journal=rjcbs&page=article&op=view&path%5B%5D=355http://www.theinternationaljournal.org/ojs/index.php?journal=rjcbs&page=article&op=view&path%5B%5D=355http://www.theinternationaljournal.org/ojs/index.php?journal=rjcbs&page=article&op=view&path%5B%5D=355


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7. An Empirical Evaluation of Indian Capital Market in the Global Perspective

January 9, 2010

By P.K. Mishra

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1533760

Abstract:

Since last decade or so capital market of India has shown tremendous growth amongleading emerging and developed capital markets in the world. Indian capital market

has been really boosted up after the reforms of early 1990s, which opened the door for

the international investments. The market is on the path of maturity and attained a

phenomenal height in spite of its volatility. Now the market is comparable with

developed markets. Thus, this paper attempts to frame an empirical evaluation of the

Indian capital market in the light of various financial and international aspects over a

period from 2001 to 2007. The result provides the evidence of modest degree of

integration of Indian capital market with international capital markets and a very

strong growth potential.

8. Journal of Finance, Accounting and Management, Financial Crisis and its Impact

on Indian Capital Market

1(1), 12-26, July 2010,

By Asst. Prof. ANLI SURESH

Madras Christian CollegeIndia

http://gsmi-jfam.com/Documents/V1%20N1%20JFAM%20P02%20-

Anli%20Suresh%20Financial%20Crisis%20and%20Its%20Impact%20on%20Indian

%20Capital%20Market.pdf
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1533760http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1533760http://gsmi-jfam.com/Documents/V1%20N1%20JFAM%20P02%20-Anli%20Suresh%20Financial%20Crisis%20and%20Its%20Impact%20on%20Indian%20Capital%20Market.pdfhttp://gsmi-jfam.com/Documents/V1%20N1%20JFAM%20P02%20-Anli%20Suresh%20Financial%20Crisis%20and%20Its%20Impact%20on%20Indian%20Capital%20Market.pdfhttp://gsmi-jfam.com/Documents/V1%20N1%20JFAM%20P02%20-Anli%20Suresh%20Financial%20Crisis%20and%20Its%20Impact%20on%20Indian%20Capital%20Market.pdfhttp://gsmi-jfam.com/Documents/V1%20N1%20JFAM%20P02%20-Anli%20Suresh%20Financial%20Crisis%20and%20Its%20Impact%20on%20Indian%20Capital%20Market.pdfhttp://gsmi-jfam.com/Documents/V1%20N1%20JFAM%20P02%20-Anli%20Suresh%20Financial%20Crisis%20and%20Its%20Impact%20on%20Indian%20Capital%20Market.pdfhttp://gsmi-jfam.com/Documents/V1%20N1%20JFAM%20P02%20-Anli%20Suresh%20Financial%20Crisis%20and%20Its%20Impact%20on%20Indian%20Capital%20Market.pdfhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1533760


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Abstract:

India, like most other emerging market economies, has so far, not been seriously

affected by the recent financial turmoil in developed economies. Because, India

adapted financial innovations along with strong regulations. Hence, capital inflows in

the past few years increased sharply and have been well above the current account

deficit, which has largely remained modest. The objective of the study is based on the

impact of financial crisis 2008 and the role of regulations and policy implications

spurred by financial innovations to safeguard the Indian capital market and investorsconfidence. The methodology is based on the hypothesis that the legal framework is a

hindrance to financial innovation and does not comply with the changing economic

condition and investors expectations. This paper elaborates on various aspects of

current financial crisis and its impact on Indian capital market in the arena of financial

innovations and global best practices and their policy implications. The concluding

observation is that financial stability in India has been achieved through perseverance

of prudential policies which prevent institutions from excessive risk taking and

financial markets from becoming extremely volatile and turbulent which boosted

investors confidence.


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CHAPTER-III

Introduction to the topic


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3.1 CAPITAL MARKETS IN BRIEF

Capital markets are markets where people, companies, and governments with more

funds than they need (because they save some of their income) transfer those funds to

people, companies, or governments who have a shortage of funds (because they spend

more than their income). Stock and bond markets are two major capital markets.

Capital markets promote economic efficiency by channelling money from those who

do not have an immediate productive use for it to those who do.

Capital markets carry out the desirable economic function of directing capital toproductive uses. The savers (governments, businesses, and people who save some

portion of their income) invest their money in capital markets like stocks and bonds.

The borrowers (governments, businesses, and people who spend more than their

income) borrow the savers' investments that have been entrusted to the capital

markets.

For example, suppose A and B make Rs. 50,000 in one year, but they only spend

Rs.40,000 that year. They can invest the 10,000 - their savings - in a mutual fund

investing in stocks and bonds all over the world. They know that making such an

investment is riskier than keeping the 10,000 at home or in a savings account. But

they hope that over the long-term the investment will yield greater returns than cash

holdings or interest on a savings account. The borrowers in this example are the

companies that issued the stocks or bonds that are part of the mutual fund portfolio.

Because the companies have spending needs that exceeds their income, they finance

their spending needs by issuing securities in the capital markets.

India has a long tradition of functioning capital markets. The Bombay stock exchange

is over a hundred years old and the volume of activity has increased in the recent

years. The process of capital market reform started in 1992 and aimed at removing

direct government control and replacing it by a regulatory framework based on

transparency and disclosure. The first step was taken in 1992 when SEBI was elevated

as a full-fledged capital market regulator.


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An important policy initiative in 1993 was the opening of capital markets for foreign

institutional investors (FII) and allowing Indian companies to raise capital abroad.

FII registrations in the country have gone up significantly over the years. The number

of registered FIIs has gone up from 823 in December 2005 to 972 in October 2006.

FIIs had made $10.7 billion worth of investment (Rs. 47,181 crore) in calendar 2005.

The FIIs have been rewarded well by attractive valuations and increasing returns. The

depository and share dematerialization systems have been introduced to enhance the

efficiency of the transaction cycle. A number of significant reforms have been

implemented in the spot equity and related exchange traded derivatives markets since

the early 1990s. For instance, spot prices are mostly market-determined, trading

volumes in the derivatives market exceed those in spot markets and market practices

such as speed of settlement and dematerialization are close to international best

practices.

For the past three years, the stock market has seen an unprecented rise. From

languishing in the 4000s, the stock market has risen to more than 12000.

Simultaneously, the Indian economy had been growing consistently at a rate of more

than 8%. Different reports indicated that India and China would be the drivers of

growth of the world economy.

Indian Capital markets remained generally orderly during most part of 2006-07. There

were, however, some spells of volatility at different points of time during the year

reflecting developments in liquidity conditions on account of large and sudden

changes in capital flows and cash balances of the Governments.


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3.2 FINANCIAL MARKETS

The degree of integration of financial markets around the world increased

significantly during the late 1980s and 1990s. A key factor underlying this process

has been the increased globalization of investment seeking higher rates of return and

the opportunity to diversify risk internationally. At the same time, many countries

have encouraged inflows of capital by dismantling restrictions, deregulating domestic

financial markets, and improving their economic environment and prospects through

the introduction of market-oriented reforms. This increase in the degree of integration

of world capital markets has been accompanied by a significant increase in private

capital flows to developing countries. Financial openness is often regarded as

providing important potential benefits. Access to world capital markets expands

investors opportunities for portfolio diversification and provides a potential for

achieving higher risk-adjusted rates of return. It also allows countries to borrow to

smooth consumption in the face of adverse shocks, the potential growth and welfare

gains resulting from such international risk sharing can be large (Obstfeld, 1994). Ithas also been argued that by increasing the rewards of good policies and the penalties

for bad policies, free flow of capital across borders may induce countries to follow

more disciplined macroeconomic policies that translate into greater macroeconomic

stability. An increasingly common argument in favour of financial openness is that it

may increase the depth and breadth of domestic financial markets and lead to an

increase in financial intermediation process by lowering costs and excessive profits

associated with monopolistic or cartelized markets, thereby lowering the cost of

investment and improving resource allocation. Increasing integration of financial

markets also brings in certain risks. It has been recognized that the risk of volatility

and abrupt reversals in capital flows in the context of highly open capital accounts

may represent a significant cost. Concerns associated with such reversals were

heightened by a series of recent financial crisesincluding the Mexican peso crisis of

December 1994, the Asian crisis triggered by the collapse of the Thai Baht in July

1997, the Russia crisis of August 1998, and the collapse of the Brazilian Real in


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January 1999. Although misaligned fundamentals of some sort played a role in all of

the above crises, they have called attention to the inherent instability of financial

markets and the risks that cross-border financial transactions can pose for countries

with relatively fragile financial systems and not so strong regulatory and supervision

structures. Pro-cyclicality of capital flows may also increase macroeconomic

instability, like favourable shocks may attract large amounts of capital inflows and

encourage consumption and spending at levels that are unsustainable in the longer-

term, forcing countries to over-adjust to adverse shocks as a result of abrupt capital

reversals. The large capital inflows induced by financial openness can have

undesirable macroeconomic effects, including rapid monetary expansion (due to the

difficulty in managing and cost of pursuing aggressive sterilization policies),

inflationary pressures (resulting from the effect of capital inflows on domestic

spending), real exchange rate appreciation, and widening current account deficits.

From this perspective, a key issue has been to identify the policy pre-requisites that

may allow countries to exploit the gains, while minimizing the risks, associated with

financial openness in an attempt to integrate with the world capital markets.

India, too, has taken a large number of measures in the process of financial

liberalization during the 1990s. The overall package of structural reform in India hasbeen designed to enhance the productivity and efficiency of the economy as a whole

and thereby make the economy internationally competitive. These reforms include,

inter alia, partial deregulation of interest rates; reduction of pre-emption of resources

from banks through cash reserve ratio (CRR) and statutory liquidity ratio (SLR); issue

of government securities at market related rates; increasing reliance on the indirect

method of monetary control; participation of the same set of players in the alternative

markets; move towards universal banking; development of secondary markets for

several investments; repeal of foreign exchange regulation act (FERA) ; full

convertibility of rupee on the current account ; cross-border movement of capital

and adoption of liberal exchange rate policies that assure flexible exchange rates; and

investors protection and curbing of speculative activities through wide ranging

reforms in the capital market. An important objective of reform has been to develop

the various segments of the financial markets into an integrated one, so that their

inter-linkages can reduce arbitrage opportunities, help achieve a higher level of


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efficiency in market operation and increase the effectiveness of monetary policy in the

economy. We know that, money always flows from surplus sector to deficit sector.

That means persons having excess of money lend it to those who need money to

fulfill their requirement. Similarly, in business sectors the surplus money flows from

the investors or lenders to the businessmen for the purpose of production or sale of

goods and services. So, we find two different groups, one who invest money or lend

money and the others, who borrow or use the money. Now you think, how these two

groups meet and transact with each other.

The financial markets act as a link between these two different groups. It facilitates

this function by acting as an intermediary between the borrowers and lenders of

money. So, financial market may be defined as a transmission mechanism between

investors (or lenders) and the borrowers (or users) through which transfer of funds is

facilitated. It consists of individual investors, financial institutions and other

intermediaries who are linked by a formal trading rules and communication network

for trading the various financial assets and credit instruments. Before reading further l

let us have an idea about some of the credit instruments.

A bill of exchange is an instrument in writing containing an unconditional order,

signed by the maker, directing a certain person to pay a certain sum of money only to

or to the order of a certain person, or to the bearer of the instrument. To clarify the

meaning let us take an example. Suppose Gopal has given a loan of Rs. 50,000 to

Madan, which Madan has to return. Now, Gopal also has to give some money to

Madhu. In this case, Gopal can make a document directing Madan to make payment

up to Rs. 50,000 to Madhu on demand or after expiry of a specified period. This

document is called a bill of exchange, which can be transferred to some other persons

name by Madhu.

A promissory note is an instrument in writing (not being a bank note or a currency

note) containing an unconditional undertaking, signed by the maker, to pay a certain

sum of money only to or to the order of a certain person or to the bearer of the

instrument. Suppose you take a loan of Rs. 20,000 from your friend Jagan. You can

make a document stating that you will pay the money to Jagan or the bearer on

demand. Or you can mention in the document that you will pay the amount after three

months. This document, once signed by you, duly stamped and handed over to Jagan,


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becomes a negotiable instrument. Now Jagan can personally present it before you for

payment or give this document to some other person to collect money on his behalf.

He can endorse it in somebody elses name who in turn can endorse it further till the

final payment is made by you to whosoever presents it before you. This type of a

document is called a Promissory Note.

Let us now see the main functions of financial market.

It provides facilities for interaction between the investors and the borrowers.

It provides pricing information resulting from the interaction between buyers

and sellers in the market when they trade the financial assets.

It provides security to dealings in financial assets.

It ensures liquidity by providing a mechanism for an investor to sell the

financial assets.

It ensures low cost of transactions and information.

TYPES OF FINANCIAL MARKETS

A financial market consists of two major segments: (a) Money Market; and (b)

Capital Market. While the money market deals in short-term credit, the capital

market handles the medium term and long-term credit.


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3.3 STRUCTURE OF CAPITAL MARKETS

Primary markets:

The primary market is where new securities (stocks and bonds are the most common)

are issued. The corporation or government agency that needs funds (the borrower)

issues securities to purchasers in the primary market. Big investment banks assist in

this issuing process. The banks underwrite the securities. That is, they guarantee a

minimum price for a business's securities and sell them to the public. Since theprimary market is limited to issuing new securities only, it is of lesser importance than

the secondary market.

Secondary market:

The vast majority of capital transactions, take place in the secondary market. The

secondary market includes stock exchanges (like the New York Stock Exchange and

the Tokyo Nikkei), bond markets, and futures and options markets, among others. All

of these secondary markets deal in the trade of securities.

Securities:

The term "securities" encompasses a broad range of investment instruments. Investors

have essentially two broad categories of securities available to them:

1. Equity securities (which represent ownership of a part of a company)

2. Debt securities (which represent a loan from the investor to a company or

government entity).


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Equity securities:

Stock is the type of equity security with which most people are familiar. When

investors (savers) buy stock, they become owners of a "share" of a company's assets

and earnings. If a company is successful, the price that investors are willing to pay for

its stock will often rise and shareholders who bought stock at a lower price then stand

to make a profit. If a company does not do well, however, its stock may decrease in

value and shareholders can lose money. Stock prices are also subject to both general

economic and industry-specific market factors. In our example, if Carlos and Anna

put their money in stocks, they are buying equity in the company that issued the stock.Conversely, the company can issue stock to obtain extra funds. It must then share its

cash flows with the stock purchasers, known as stockholders.

Debt securities:

Savers who purchase debt instruments are creditors. Creditors, or debt holders,

receive future income or assets in return for their investment. The most common

example of a debt instrument is a bond. When investors buy bonds, they are lending

the issuers of the bonds their money. In return, they will receive interest payments

(usually at a fixed rate) for the life of the bond and receive the principal when the

bond expires. National governments, local governments, water districts, global,

national, and local companies, and many other types of institutions sell bonds.


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3.4 IMPORTANCE OF CAPITAL MARKETS

Capital market plays an important role in mobilising resources, and diverting them in

productive channels. In this way, it facilitates and promotes the process of economic

growth in the country.

Various functions and significance of capital market are discussed below:

1. Link between Savers and Investors:

The capital market functions as a link between savers and investors. It plays an

important role in mobilising the savings and diverting them in productive investment.

In this way, capital market plays a vital role in transferring the financial resources

from surplus and wasteful areas to deficit and productive areas, thus increasing the

productivity and prosperity of the country.

2. Encouragement to Saving:

With the development of capital, market, the banking and non-banking institutions

provide facilities, which encourage people to save more. In the less- developed

countries, in the absence of a capital market, there are very little savings and those

who save often invest their savings in unproductive and wasteful directions, i.e., in

real estate (like land, gold, and jewellery) and conspicuous consumption.

3. Encouragement to Investment:

The capital market facilitates lending to the businessmen and the government and thus

encourages investment. It provides facilities through banks and nonbank financial

institutions. Various financial assets, e.g., shares, securities, bonds, etc., induce savers

to lend to the government or invest in industry. With the development of financial

institutions, capital becomes more mobile, interest rate falls and investment increases.


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4. Promotes Economic Growth:

The capital market not only reflects the general condition of the economy, but also

smoothens and accelerates the process of economic growth. Various institutions of the

capital market, like nonbank financial intermediaries, allocate the resources rationally

in accordance with the development needs of the country. The proper allocation ofresources results in the expansion of trade and industry in both public and private

sectors, thus promoting balanced economic growth in the country.

5. Stability in Security Prices:

The capital market tends to stabilise the values of stocks and securities and reduce the

fluctuations in the prices to the minimum. The process of stabilisation is facilitated by

providing capital to the borrowers at a lower interest rate and reducing the speculative

and unproductive activities.

6. Benefits to Investors:

The credit market helps the investors, i.e., those who have funds to invest in long-term

financial assets, in many ways:

(a) It brings together the buyers and sellers of securities and thus ensure the

marketability of investments,

(b) By advertising security prices, the Stock Exchange enables the investors to keep

track of their investments and channelize them into most profitable lines,

(c) It safeguards the interests of the investors by compensating them from the Stock

Exchange Compensating Fund in the event of fraud and default.


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3.5 ROLE OF CAPITAL MARKETS

The primary role of the capital market is to raise long-term funds for governments,

banks, and corporations while providing a platform for the trading of securities. This

fundraising is regulated by the performance of the stock and bond markets within the

capital market. The member organizations of the capital market may issue stocks and

bonds in order to raise funds. Investors can then invest in the capital market by

purchasing those stocks and bonds. The capital market, however, is not without risk.

It is important for investors to understand market trends before fully investing in the

capital market. To that end, there are various market indices available to investors that

reflect the present performance of the market.

Regulation of the Capital Market

Every capital market in the world is monitored by financial regulators and their

respective governance organization. The purpose of such regulation is to protect

investors from fraud and deception. Financial regulatory bodies are also charged with

minimizing financial losses, issuing licenses to financial service providers, and

enforcing applicable laws.

The Capital Markets Influence on International Trade

Capital market investment is no longer confined to the boundaries of a single nation.

Todays corporations and individuals are able, under some regulation, to invest in the

capital market of any country in the world. Investment in foreign capital markets has

caused substantial enhancement to the business of international trade.

The Primary and Secondary Markets

The capital market is also dependent on two sub-marketsthe primary market and the

secondary market. The primary market deals with newly issued securities and is

responsible for generating new long-term capital. The secondary market handles the

trading of previously-issued securities, and must remain highly liquid in nature

because most of the securities are sold by investors. A capital market with high

liquidity and high transparency is predicated upon a secondary market

with the same qualities.


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3.6 EVOLUTION OF CAPITAL MARKETS

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200

years ago. The earliest records of security dealings in India are meagre and obscure.

The East India Company was the dominant institution in those days and business in its

loan securities used to be transacted towards the close of the eighteenth century.

By 1830's business on corporate stocks and shares in Bank and Cotton presses took

place in Bombay. Though the trading list was broader in 1839, there were only half a

dozen brokers recognized by banks and merchants during 1840 and 1850.

The 1850's witnessed a rapid development of commercial enterprise and brokerage

business attracted many men into the field and by 1860 the number of brokers

increased into 60.

In 1860-61 the American Civil War broke out and cotton supply from United States of

Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers

increased to about 200 to 250. However, at the end of the American Civil War, in1865, a disastrous slump began (for example, Bank of Bombay Share which had

touched Rs 2850 could only be sold at Rs. 87).

At the end of the American Civil War, the brokers who thrived out of Civil War in

1874, found a place in a street (now appropriately called as Dalal Street) where they

would conveniently assemble and transact business. In 1887, they formally

established in Bombay, the "Native Share and Stock Brokers' Association" (which is

alternatively known as " The Stock Exchange "). In 1895, the Stock Exchange

acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock

Exchange at Bombay was consolidated.


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Other leading cities in stock market operations

Ahmedabad gained importance next to Bombay with respect to cotton textile industry.

After 1880, many mills originated from Ahmedabad and rapidly forged ahead. As

new mills were floated, the need for a Stock Exchange at Ahmedabad was realised

and in 1894 the brokers formed "The Ahmedabad Share and Stock Brokers'

Association".

What the cotton textile industry was to Bombay and Ahmedabad, the jute industry

was to Calcutta. Also tea and coal industries were the other major industrial groups in

Calcutta. After the Share Mania in 1861-65, in the 1870's there was a sharp boom in

jute shares, which was followed by a boom in tea shares in the 1880's and 1890's; and

a coal boom between 1904 and 1908. On June 1908, some leading brokers formed

"The Calcutta Stock Exchange Association".

In the beginning of the twentieth century, the industrial revolution was on the way in

India with the Swadeshi Movement; and with the inauguration of the Tata Iron and

Steel Company Limited in 1907, an important stage in industrial advancement under

Indian enterprise was reached.

Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies

generally enjoyed phenomenal prosperity, due to the First World War.

In 1920, the then demure city of Madras had the maiden thrill of a stock exchange

functioning in its midst, under the name and style of "The Madras Stock Exchange"

with 100 members. However, when boom faded, the number of members stood

reduced from 100 to 3, by 1923, and so it went out of existence.

In 1935, the stock market activity improved, especially in South India where there

was a rapid increase in the number of textile mills and many plantation companies

were floated. In 1937, a stock exchange was once again organized in Madras - Madras

Stock Exchange Association (Pvt) Limited. (In 1957 the name was changed to Madras

Stock Exchange Limited).


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Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with

the Punjab Stock Exchange Limited, which was incorporated in 1936.

Indian Stock Exchanges - An Umbrella Growth

The Second World War broke out in 1939. It gave a sharp boom which was followed

by a slump. But, in 1943, the situation changed radically, when India was fully

mobilized as a supply base.

On account of the restrictive controls on cotton, bullion, seeds and other commodities,

those dealing in them found in the stock market as the only outlet for their activities.

They were anxious to join the trade and their number was swelled by numerous

others. Many new associations were constituted for the purpose and Stock Exchanges

in all parts of the country were floated.

The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited

(1940) and Hyderabad Stock Exchange Limited (1944) were incorporated.

In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited

and the Delhi Stocks and Shares Exchange Limited - were floated and later in June

1947, amalgamated into the Delhi Stock Exchnage Association Limited.

Post-independence Scenario

Most of the exchanges suffered almost a total eclipse during depression. Lahore

Exchange was closed during partition of the country and later migrated to Delhi and

merged with Delhi Stock Exchange.

Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963.

Most of the other exchanges languished till 1957 when they applied to the Central

Government for recognition under the Securities Contracts (Regulation) Act, 1956.

Only Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad and Indore, the well

established exchanges, were recognized under the Act. Some of the members of the

other Associations were required to be admitted by the recognized stock exchanges on


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a concessional basis, but acting on the principle of unitary control, all these pseudo

stock exchanges were refused recognition by the Government of India and they

thereupon ceased to function.

Thus, during early sixties there were eight recognized stock exchanges in India

(mentioned above). The number virtually remained unchanged, for nearly two

decades. During eighties, however, many stock exchanges were established: Cochin

Stock Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at

Kanpur, 1982), and Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange

Association Limited (1983), Gauhati Stock Exchange Limited (1984), Kanara StockExchange Limited (at Mangalore, 1985), Magadh Stock Exchange Association (at

Patna, 1986), Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange

Association Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot,

1989), Vadodara Stock Exchange Limited (at Baroda, 1990) and recently established

exchanges - Coimbatore and Meerut. Thus, at present, there are totally twenty one

recognized stock exchanges in India excluding the Over The Counter Exchange of

India Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL).

The Table given below portrays the overall growth pattern of Indian stock markets

since independence. It is quite evident from the Table that Indian stock markets have

not only grown just in number of exchanges, but also in number of listed companies

and in capital of listed companies. The remarkable growth after 1985 can be clearly

seen from the Table, and this was due to the favouring government policies towards

security market industry.


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Growth Pattern of the Indian Stock Market

Sl.No.As on 31st

December

19461961 1971 19751980 1985 1991 1995

1No. of

Stock Exchanges

7 7 8 8 9 14 20 22

2No. of

Listed Cos.

11251203159915522265 4344 6229 8593

3

No. of Stock

Issues of

Listed Cos.

15062111283832303697 6174 8967 11784

4Capital of Listed

Cos. (Cr. Rs.)

270 753 1812 26143973 9723 32041 59583

5

Market value of

Capital of Listed

Cos. (Cr. Rs.)

971 129226753273675025302110279478121

6

Capital per

Listed Cos. (4/2)

(Lakh Rs.)

24 63 113 168 175 224 514 693

7

Market Value of

Capital per Listed

Cos. (Lakh Rs.)

(5/2)

86 107 167 211 298 582 1770 5564

8

Appreciated value

of Capital per

Listed Cos. (Lak Rs.)

358 170 148 126 170 260 344 803

Source : Various issues of the Stock Exchange Official Directory, Vol.2 (9) (iii), Bombay

Stock Exchange, Bombay.


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TRADING PATTERN IN INDIAN STOCK MARKET

Trading in Indian stock exchanges are limited to listed securities of public limitedcompanies. They are broadly divided into two categories, namely, specified securities

(forward list) and non-specified securities (cash list). Equity shares of dividend

paying, growth-oriented companies with a paid-up capital of atleast Rs.50 million and

a market capitalization of atleast Rs.100 million and having more than 20,000

shareholders are, normally, put in the specified group and the balance in non-specified

group.

Two types of transactions can be carried out on the Indian stock exchanges: (a) spot

delivery transactions "for delivery and payment within the time or on the date

stipulated when entering into the contract which shall not be more than 14 days

following the date of the contract" : and (b) forward transactions "delivery and

payment can be extended by further period of 14 days each so that the overall period

does not exceed 90 days from the date of the contract". The latter is permitted only in

the case of specified shares. The brokers who carry over the outstandings pay carry

over charges (cantango or backwardation) which are usually determined by the rates

of interest prevailing.

A member broker in an Indian stock exchange can act as an agent, buy and sell

securities for his clients on a commission basis and also can act as a trader or dealer as

a principal, buy and sell securities on his own account and risk, in contrast with the

practice prevailing on New York and London Stock Exchanges, where a member can

act as a jobber or a broker only.

The nature of trading on Indian Stock Exchanges are that of age old conventional

style of face-to-face trading with bids and offers being made by open outcry.

However, there is a great amount of effort to modernize the Indian stock exchanges in

the very recent times.


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Over The Counter Exchange of India (OTCEI)

The traditional trading mechanism prevailed in the Indian stock markets gave way to

many functional inefficiencies, such as, absence of liquidity, lack of transparency,

unduly long settlement periods and benami transactions, which affected the small

investors to a great extent. To provide improved services to investors, the country's

first ringless, scripless, electronic stock exchange - OTCEI - was created in 1992 by

country's premier financial institutions - Unit Trust of India, Industrial Credit and

Investment Corporation of India, Industrial Development Bank of India, SBI Capital

Markets, Industrial Finance Corporation of India, General Insurance Corporation andits subsidiaries and CanBank Financial Services.

Trading at OTCEI is done over the centres spread across the country. Securities traded

on the OTCEI are classified into:

Listed Securities - The shares and debentures of the companies listed on the

OTC can be bought or sold at any OTC counter all over the country and they

should not be listed anywhere else

Permitted Securities - Certain shares and debentures listed on other

exchanges and units of mutual funds are allowed to be traded

Initiated debentures - Any equity holding atleast one lakh debentures of a

particular scrip can offer them for trading on the OTC.

OTC has a unique feature of trading compared to other traditional exchanges. That is,

certificates of listed securities and initiated debentures are not traded at OTC. The

original certificate will be safely with the custodian. But, a counter receipt is

generated out at the counter which substitutes the share certificate and is used for all

transactions.

In the case of permitted securities, the system is similar to a traditional stock

exchange. The difference is that the delivery and payment procedure will be


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completed within 14 days. Compared to the traditional Exchanges, OTC Exchange

network has the following advantages:

OTCEI has widely dispersed trading mechanism across the country which

provides greater liquidity and lesser risk of intermediary charges.

Greater transparency and accuracy of prices is obtained due to the screen-

based scriptless trading.

Since the exact price of the transaction is shown on the computer screen, the

investor gets to know the exact price at which s/he is trading.

Faster settlement and transfer process compared to other exchanges.

In the case of an OTC issue (new issue), the allotment procedure is completed

in a month and trading commences after a month of the issue closure, whereas

it takes a longer period for the same with respect to other exchanges.

Thus, with the superior trading mechanism coupled with information transparency

investors are gradually becoming aware of the manifold advantages of the OTCEI.


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National Stock Exchange (NSE)

With the liberalization of the Indian economy, it was found inevitable to lift the

Indian stock market trading system on par with the international standards. On the

basis of the recommendations of high powered Pherwani Committee, the National

Stock Exchange was incorporated in 1992 by Industrial Development Bank of India,

Industrial Credit and Investment Corporation of India, Industrial Finance Corporation

of India, all Insurance Corporations, selected commercial banks and others.

Trading at NSE can be classified under two broad categories:

(a) Wholesale debt market and

(b) Capital market.

Wholesale debt market operations are similar to money market operations -

institutions and corporate bodies enter into high value transactions in financial

instruments such as government securities, treasury bills, public sector unit bonds,

commercial paper, certificate of deposit, etc.

There are two kinds of players in NSE:

(a) trading members and

(b) participants.

Recognized members of NSE are called trading members who trade on behalf ofthemselves and their clients. Participants include trading members and large players

like banks who take direct settlement responsibility.

Trading at NSE takes place through a fully automated screen-based trading

mechanism which adopts the principle of an order-driven market. Trading members

can stay at their offices and execute the trading, since they are linked through a

communication network. The prices at which the buyer and seller are willing to


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transact will appear on the screen. When the prices match the transaction will be

completed and a confirmation slip will be printed at the office of the trading member.

NSE has several advantages over the traditional trading exchanges. They are as

follows:

NSE brings an integrated stock market trading network across the nation.

Investors can trade at the same price from anywhere in the country since inter-

market operations are streamlined coupled with the countrywide access to the

securities.

Delays in communication, late payments and the malpractices prevailing in

the traditional trading mechanism can be done away with greater operational

efficiency and informational transparency in the stock market operations, with

the support of total computerized network.

Unless stock markets provide professionalised service, small investors and foreign

investors will not be interested in capital market operations. And capital market being

one of the major source of long-term finance for industrial projects, India cannot

afford to damage the capital market path. In this regard NSE gains vital importance in

the Indian capital market system.


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Nature of the Indian Capital Market

Like the money market, the Indian capital market also consists of an organized sector

and an unorganised sector. In the organized market the demand for capital comes

mostly from corporate enterprises and government and semi-government institutions

and the supply comes from household savings, institutional investors like banks

investment trusts, insurance companies, finance corporations, government and

international financing agencies. Whereas, the unorganized market consists mostly of

the indigenous bankers and moneylenders on the supply side.

Development of the market

The Indian capital market has undergone remarkable changes in the post-

independence era. Certain steps taken by the government to place the market on a

strong footing and develop it to meet the growing capital requirements of fast

industrialization and development of the economy have significantly contributed to

the developments that took place in the Indian capital market over the last five

decades or so.

The important facts that have contributed to the development of the capital marketing

India are the following.

1. Legislative measures:

Laws like the companies act, the securities contracts (Regulations) and the capital

issues (Control). Act empowered the government to regulate the activities of the

capital market with a view to assuring healthy trends in the market, protecting the

interests of the investors, efficient utilization of the resources, etc.


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2. Establishment of development banks and expansion of the public sectors:

Starting with the establishment of the IFCI, a number of development banks have

been established at national and regional levels to provide financial and other

development assistance to the entrepreneurs and enterprises. These institutions today

account for a large chunk of the industrial finance.

3. Growth of underwriting business:

There has been a phenomenal growth in the underwriting business thanks mainly to

the public financial corporations and the commercial banks. In the last one decade the

amount underwritten as percentage of total private capital issues offered to public

varied between 72 per cent and 97 per cent.

4. Public confidence:

Impressive performance of certain large companies encouraged public investment in

industrial securities.

5. Increasing awareness of investment opportunities:

The improvement in education and communication has created more public awareness

about the investment opportunities in the business sector. The market for industrial

securities has become broader.

6. Capital Market Reforms:

A number of measures have been taken to check abuses and to promote healthy

development of the capital market.


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3.7 REFORMS IN THE CAPITAL MARKETS

The major reforms undertaken in capital market of India includes:-

Establishment of SEBI :

The Securities and Exchange Board of India (SEBI) was established in 1988. It got a

legal status in 1992. SEBI was primarily set up to regulate the activities of the

merchant banks, to control the operations of mutual funds, to work as a promoter of

the stock exchange activities and to act as a regulatory authority of new issue

activities of companies. The SEBI was set up with the fundamental objective, "to

protect the interest of investors in securities market and for matters connected

therewith or incidental thereto."


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The main functions of SEBI are:-

To regulate the business of the stock market and other securities market.

To promote and regulate the self regulatory organizations.

To prohibit fraudulent and unfair trade practices in securities market.

To promote awareness among investors and training of intermediaries about

safety of market.

To prohibit insider trading in securities market.

To regulate huge acquisition of shares and takeover of companies.

Establishment of Creditors Rating Agencies :

Three creditors rating agencies viz. The Credit Rating Information Services of India

Limited (CRISIL - 1988), the Investment Information and Credit Rating Agency of

India Limited (ICRA - 1991) and Credit Analysis and Research Limited (CARE) were

set up in order to assess the financial health of different financial institutions and

agencies related to the stock market activities. It is a guide for the investors also in

evaluating the risk of their investments.

Increasing of Merchant Banking Activities :

Many Indian and foreign commercial banks have set up their merchant banking

divisions in the last few years. These divisions provide financial services such as

underwriting facilities, issue organising, consultancy services, etc. It has proved as a

helping hand to factors related to the capital market.

Candid Performance of Indian Economy :

In the last few years, Indian economy is growing at a good speed. It has attracted a

huge inflow of Foreign Institutional Investments (FII). The massive entry of FIIs in

the Indian capital market has given good appreciation for the Indian investors in

recent times. Similarly many new companies are emerging on the horizon of the

Indian capital market to raise capital for their expansions.


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Rising Electronic Transactions :

Due to technological development in the last few years. The physical transaction with

more paper work is reduced. Now paperless transactions are increasing at a rapid rate.

It saves money, time and energy of investors. Thus it has made investing safer and

hassle free encouraging more people to join the capital market.

Growing Mutual Fund Industry :

The growing of mutual funds in India has certainly helped the capital market to grow.

Public sector banks, foreign banks, financial institutions and joint mutual funds

between the Indian and foreign firms have launched many new funds. A big

diversification in terms of schemes, maturity, etc. has taken place in mutual funds in

India. It has given a wide choice for the common investors to enter the capital market.

Growing Stock Exchanges :

The numbers of various Stock Exchanges in India are increasing. Initially the BSE

was the main exchange, but now after the setting up of the NSE and the OTCEI, stock

exchanges have spread across the country. Recently a new Inter-connected Stock

Exchange of India has joined the existing stock exchanges.

Investor's Protection :

Under the purview of the SEBI the Central Government of India has set up the

Investors Education and Protection Fund (IEPF) in 2001. It works in educating and

guiding investors. It tries to protect the interest of the small investors from frauds and

malpractices in the capital market.

Growth of Derivative Transactions :

Since June 2000, the NSE has introduced the derivatives trading in the equities. In

November 2001 it also introduced the future and options transactions. These

innovative products have given variety for the investment leading to the expansion of

the capital market.


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Insurance Sector Reforms :

Indian insurance sector has also witnessed massive reforms in last few years. The

Insurance Regulatory and Development Authority (IRDA) was set up in 2000. It

paved the entry of the private insurance firms in India. As many insurance companies

invest their money in the capital market, it has expanded.

Commodity Trading :

Along with the trading of ordinary securities, the trading in commodities is also

recently encouraged. The Multi Commodity Exchange (MCX) is set up. The volume

of such transactions is growing at a splendid rate.

Apart from these reforms the setting up of Clearing Corporation of India Limited

(CCIL), Venture Funds, etc., have resulted into the tremendous growth of Indian

capital market.


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CHAPTER-IV

Impact, Efficiency and Factors influencing Capital

market.


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4.1 FACTORS INFLUENCING CAPITAL MARKET

The capital market is affected by a range of factors. Some of the factors which

influence capital market are as follows:-

Performance of domestic companies:-

The performance of the companies or rather corporate earnings is one of the factors

which has direct impact or effect on capital market in a country. Weak corporate

earnings indicate that the demand for goods and services in the economy is less due toslow growth in per capita income of people . Because of slow growth in demand there

is slow growth in employment which means slow growth in demand in the near

future. Thus weak corporate earnings indicate average or not so good prospects for the

economy as a whole in the near term. In such a scenario the investors ( both domestic

as well as foreign ) would be wary to invest in the capital market and thus there is

bear market like situation. The opposite case of it would be robust corporate earnings

and its positive impact on the capital market. The corporate earnings for the April

June quarter for the current fiscal has been good. The companies like TCS, Infosys,

MarutiSuzuki, Bharti Airtel, ACC, ITC, Wipro, HDFC, Binani cement, IDEA, Marico

Canara Bank, Piramal Health, India cements , Ultra Tech, L&T, Coca- Cola, Yes

Bank, Dr. Reddys Laboratories, Oriental Bank of Commerce, Ranbaxy, Fortis, Shree

Cement ,etc have registered growth in net profit compared to the corresponding

quarter a year ago. Thus we see companies from Infrastructure sector, Financial

Services, Pharmaceutical sector, IT Sector, Automobile sector, etc. doing well . This

across the sector growth indicates that the Indian economy is on the path of recovery

which has been positively reflected in the stock market( rise in sensex & nifty) in the

last two weeks. (July 13-July 24).


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Environmental Factors :-

Environmental Factor in Indias context primarily means- Monsoon. In India around

60% of agricultural production is dependent on monsoon. Thus there is heavy

dependence on monsoon. The major chunk of agricultural production comes from the

states of Punjab , Haryana & Uttar Pradesh. Thus deficient or delayed monsoon in this

part of the country would directly affect the agricultural output in the country. Apart

from monsoon other natural calamities like Floods, tsunami, drought, earthquake, etc.

also have an impact on the capital market of a country. The Indian Met Department

(IMD) on 24th June stated that India would receive only 93% rainfall of Long Period

Average (LPA). This piece of news directly had an impact on Indian capital market

with BSE Sensex falling by 0.5% on the 25th June . The major losers were automakers

and consumer goods firms since the below normal monsoon forecast triggered

concerns that demand in the crucial rural heartland would take a hit. This is because a

deficient monsoon could seriously squeeze rural incomes, reduce the demand for

everything from motorbikes to soaps and worsen a slowing economy.

Macro Economic Numbers :-

The macro economic numbers also influence the capital market. It includes Index of

Industrial Production (IIP) which is released every month, annual Inflation number

indicated by Wholesale Price Index (WPI) which is released every week, Export

Import numbers which are declared every month, Core Industries growth rate ( It

includes Six Core infrastructure industriesCoal, Crude oil, refining, power, cement

and finished steel) which comes out every month, etc. This macro economic

indicators indicate the state of the economy and the direction in which the economy is

headed and therefore impacts the capital market in India. A case in the point was

declaration of core industries growth figure. The six Core Infrastructure Industries

Coal, Crude oil, refining, finished steel, power & cement grew6.5% in June , the

figure came on the 23rd of July and had a positive impact on the capital market with

the sensex and nifty rising by 388 points &125 points respectively.


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Global Cues :-

In this world of globalisation various economies are interdependent and

interconnected. An event in one part of the world is bound to affect other parts of the

world, however the magnitude and intensity of impact would vary. Thus capital

market in India is also affected by developments in other parts of the world i.e. U.S. ,

Europe, Japan , etc .Global cues includes corporate earnings of MNCs, consumer

confidence index in developed countries, jobless claims in developed countries, global

growth outlook given by various agencies like IMF, economic growth of major

economies, price of crudeoil, credit rating of various economies given by Moodys,

S & P, etc. An obvious example at this point in time would be that of subprime crisis

& recession. Recession started in U.S. and some parts of the Europe in early 2008

.Since then it has impacted all the countries of the world- developed, developing ,

less- developed and even emerging economies.

Political stability and government policies:-

For any economy to achieve and sustain growth it has to have political stability and

pro- growth government policies. This is because when there is political stability there

is stability and consistency in governments attitude which is communicated through

various government policies. The vice- versa is the case when there is no political

stability .So capital market also reacts to the nature of government , attitude of

government, and various policies of the government. The above statement can be

substantiated by the fact the when the mandate came in UPA governments favour

(Without the baggage of left party) on May 16 2009, the stock markets on Monday ,

18th May had a bullish rally with sensex closing 800 point higher over the previous

days close. The reason was political stability. Also without the baggage of left party

government can go ahead with reforms.


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Growth prospectus of an economy:-

When the national income of the country increases and per capita income of people

increases it is said that the economy is growing . Higher income also means higher

expenditure and higher savings. This augurs well for the economy as higher

expenditure means higher demand and higher savings means higher investment. Thus

when an economy is growing at a good pace capital market of the country attracts

more money from investors, both from within and outside the country and vice -versa.

So we can say that growth prospects of an economy does have an impact on capital

markets.

Investor Sentiment and risk appetite :-

Another factor which influences capital market is investor sentiment and their risk

appetite .Even if the investors have the money to invest but if they are not confident

about the returns from their investment, they may stay away from investment for

some time. At the same time if the investors have low risk appetite, which they were

having in global and Indian capital market some four to five months back due to

global financial meltdown and recessionary situation in U.S. & some parts of Europe ,

they may stay away from investment and wait for the right time to come.


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4.2 IMPACT OF CAPITAL MARKET ON ECONOMIC GROWTH

Since last few decades the importance of the capital market as an efficient channel of

financial intermediation has been well recognized by the researchers, academicians,

and policy makers as a primary determinant of the economic growth of a country,

both developed and developing. Some evidence from cross-country studies supports

the view that efficient financial intermediation is crucial to economic development

and positively influences growth (e.g., King and Levine 1993a and 1993b; Beck,