EXECUTIVE SUMMARY A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments

can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year. Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-thecounter, or elsewhere. The capital market is important to a countrys economic and social system. It plays the crucial roles of capital raising for public and private sectors, promoting balance and stability in the financial system, decreasing dependency on the banking sector, driving the economy forward and creating jobs, as well as being an alternative method for savings. A strong capital market will lessen the impact of economic fluctuations which can be compounded by the fast-flowing nature of capital. Indian securities markets have undergone many changes during the last decade. Exponential growth in trading volumes is pushing existing trading systems and processes to capacity and increasing settlement risk. With Indian market moving to a T+3 rolling settlement cycles in line with global markets, SEBI is continuing its efforts to increase the efficiency and transparency in Indian markets. This would result in lowering of trade costs and make Indian markets a more attractive destination for global investors. Indeed it has been SEBI endeavor to make the Indian markets, one of the most competitive and efficient markets of the world. The move from a 5 day settlement period to a three day period requires firms to streamline trading processes by way of a foolproof, faster, cost effective and universally acceptable mode of communication among market participants. With changes happening in rapid succession, derivatives markets looking to expand, the settlement risk are increasing and this is pushing the need for Straight Through Processing (STP) and making it a pre-requisite for success of smooth functioning of securities market with a settlement period of T + 3 or less.

The study of Indian capital market begins with the introduction of capital markets. What is capital market and what is the problem in capital market in past times is revealed in problem statement

OBJECTIVE OF THE STUDY PRIMARY OBJECTIVE: To understand the relationship between stock market development and economic growth in pre and post liberalization of Indian economy. SECONDARY OBJECTIVE: To study about the impacts of stock market on Indian economy. To study about the significant growth of stock market and Indian economy. To study about the status of capital market and Indian economy in pre and post liberalized economy of India. SCOPE OF THE STUDY There are following scope of the study: Relationship between stock market and Indian economy. Impact of stock market on the growth of industrial sector of India and viceversa. Relationship between stock market and different sectors of Indian economy. Impact of stock market on gross domestic product (G.D.P.).Stock market and Indian economy affects each other in significant way. So in this study I identified those areas of Indian economy which are related with the fluctuation and variation of stock market. IMPORTANCE OF THE TOPIC There are various significant impacts on the Indian economy and industrial sector. Its contribution to the economy reflects the importance of the Indian stock market. So there are following importance of the topic of research paper: 1. Study of the impact of stock market on Indian economy. 2. It helps to understand the reflection of the stock market fluctuation on industrial sectors and their growth.

3. Study of stock market impact on gross domestic product (GDP). 4. Help to understand the contribution to the better corporate governance. 5. It helps to understand the significance impact on the higher liquidity and control over credit. 6. Debt markets impact the economy? Increased funds for implementation of government development plans. The government can raise funds at lower costs by issuing government securities. Conducive to implementation of a monetary policy. Less risk compared to the equity markets, encouraging low-risk investments. This leads to inflow of funds into the economy. Higher liquidity and control over credit. Opportunity for investors to diversify their investment portfolio. Better corporate governance. Improved transparency because of stringent disclosure norms and auditing requirements. There are following use and importance of the topic apart from above points: Impacts on Stock Market After Liberalization Impacts on Indian economy after liberalization Comparative study of various factors that affects the economy and stock market

TYPE OF DATA USED:There are basically two types of Data Primary Data Secondary Data But here in the research report, I have used only secondary data. Which provides relative data regarding the research?

PRIMARY DATA:Primary Data is first hand information that the researcher collects. It helps in collecting useful and most accurate information that is needed for the researcher to do his research. SECONDARY DATA:Secondary data is what the researcher collects from different sources. It also help researcher to get elaborate information to do his research. SOURCES OF SECONDARY DATA: Internets Journals Data from other organizations

RESEARCH METHODOLOGY For covering the Theoretical part I went through a lot of literature including books on FII & Capital Market. Beyond this I was tracking the performance of FII through the help of internet. To Study the major episodes of volatility in India, I visited various sites for their comments during that period. For the study purpose, I took only SENSEX that is the Bombay Stock Exchange (BSE) benchmark Index is considered. The daily index volatility and volatility in daily FII cash flows were studied and daily FII volatility on the SENSEX volatility. Thus throughout the project I shall be making use of secondary data. Nature of Research The research is Descriptive and Analytical in nature.

A Descriptive Research is one that is concerned with describing the characteristics of a particular individual or group as it exists at present. An analytical Research on the other hand, is one in which the researcher aims at finding solution to a given problem. Descriptive study is a fact- finding investigation with adequate interpretation. It is the simplest type of research. It is more specific than an explanatory study, as it has focus on particular aspect of the problem studied. It is designed to get her descriptive information and provide information for formulating more sophisticated studies. Data are collected by using one or more appropriate method, observation, interviewing and mail questionnaire. Research Design A research design is the arrangement of conditions for the collection and analyses of data in a manner that aims to combine relevance to the research purpose with economy in procedure. The research design is the conceptual structure within which research is conducted; it constitutes the blueprint for the collection, measurement and analyses of the data.

INTRODUCTION TO SHARE MARKET The Indian securities market has become one of the most dynamic and efficient securities marketing Asia today. The Indian market now conforms to international standards in terms of operation efficiency. At present there are twenty-three stock exchanges in the country. Four of them can be considered as national level exchanges, namely, NSE, BSE, OTCEI, & ISE; the remaining nineteen are regional stock exchanges (RSEs) located important cities of the country.

List of Regional Stock Exchanges in India Ahmedabad Stock Exchange Bangalore Stock Exchange Calcutta Stock Exchange Cochin Stock Exchange Coimbatore Stock Exchange Delhi Stock Exchange Guwahati Stock Exchange Hyderabad Stock Exchange Jaipur Stock Exchange Ludhiana Stock Exchange Madhya Pradesh Stock Exchange Madras Stock Exchange Magadh Stock Exchange Mangalore Stock Exchange Meerut Stock Exchange Pune Stock Exchange Saurashtra Kutch Stock Exchange Uttar Pradesh Stock Exchange Vadodara Stock Exchange Bombay Stock Exchange (BSE)

BOMBAY STOCK EXCHANGE

Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich heritage. Popularly Known as BSE, it was established as The Native Share & stock Brokers Association in 1875. It is the First stock exchange in the country to obtain permanent recognition in 1956 from the Government of India under the Securities contracts (regulation act, 1956). The Exchanges pivotal and pre-eminent role in the development of the Indian capital market is widely recognized and its index, SENSEX, is tracked worldwide. Earlier an Association of persons (AOP), the Exchange is now a demutualised and corporatized entity incorporated under the provisions of the Companies Act, 1956, pursuant to the of India (SEBI). With demutualization, the trading rights and ownership rights have been de-linked effectively addressing concerns regarding perceived and real conflicts of interest. The Exchange is professionally managed under the overall direction of the Board of Directors. The Board comprises eminent professionals, representatives of Trading Members and the Managing Director and a management team of professionals. The Exchange has a nation wide reach with a presence in 417 cities and towns of India. VISION BSE (Corporatization and Demutualization) Scheme, 2005 notified by the Securities and Exchange Board

Emerge as the premier Indian stock exchange by establishing global benchmarks. NATIONAL STOCK EXCHANGE (NSE)

The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the best of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country. On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in Derivatives segment commenced in June2000. MISSION NSEs mission is setting the agenda for change in the securities markets in India. The NSE was set-up with the main objectives of: establishing a nation wide trading facility for equities, debt instruments and hybrids, ensuring equal access to investors all over the country through an appropriate communication network,

Providing a fair, efficient and transparent securities market to investors using electronic trading systems,

Enabling shorter settlement cycles and book entry settlements systems and Meet ing the current international standards of securities markets. The standards set by NSE in terms of market practices and technologies have become industry benchmarks and are being emulated by other market participants. NSE is more than a mere market facilitator. Its that force which is guiding the industry towards new horizons and greater opportunities Securities Exchange Board of India (SEBI)

Securities and Exchange Board of India (SEBI) is a board (autonomous body) created by the Government of India in 1988 and given statutory form in 1992 under the SEBI Act 1992. SEBI has three functions rolled into one body: legislative, judicial and executive. It drafts rules in its legislative capacity, it conducts enquiries and enforcement action in its executive function and it passes rulings and orders in its judicial capacity. SEBI has had a mixed history in terms of its success as a regulator. Though it has pushed systemic reforms aggressively and successively (e.g. the quick movement towards making the markets electronic and paperless), it seems to lack the legal expertise needed to sustain prosecutions/enforcement actions. Headquarter SEBI is headquartered at Mumbai. Present Management Mr. U.K. Sinha Chairman, Dr. K.P. Krishna Joint Secretary CM. The Securities and Exchange Board of India was established on April 12, 1992 in

accordance with the provisions of the Securities and Exchange Board of India Act, 1992. PREAMBLE The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as ..to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto Basic Information Related to Stock market What is equity trading? It is simply buying and selling of equities. However, unlike other commodities, equities are not traded every where, and are traded only in special market places called exchanges. What is an exchange? An exchange is a mechanism through which buyers and sellers of equities are brought together. These days, this is largely electronic and done with computers. Investors cannot, however, participate directly in the exchange and can participate only through members of the exchange, popularly referred to as brokers. How does the exchange works? An exchange has pre-specified timings. During that time, all the members of the exchange link up to a central computer through their remote terminals. The members then place bids to buy equities, or make offers to sell equities. Other members who can match the bid or the offer confirm their acceptance, and the transaction is completed. Members of stock exchanges place bids and offers on behalf of their clients, who are the investors.

Why are brokers required? Investing in equities is quite risky. The broker is a professional, who knows the risk and can advise the investor accordingly. Secondly, an exchange will become an unwieldy mechanism if the entire universe of investors were to go and start making bids and offers. Reducing the number of individuals is a way of keeping control. Third, equity trading can also be abused. To prevent these abuses, exchanges as well as the Government has a number of regulations in place. Restricting activity to the members of the exchange will enable the regulations to be followed, preventing abuse of the system. How are shares traded? Like in any other buying or selling, once the broker confirms the trade, if you are buying the share, you pay the broker the value of the shares and take delivery of the shares. If you are selling the shares, you hand over the equities to the broker and the broker will pay you for your shares. When settlement does happen? Each exchange has its own settlement period within which the entire process of delivery and purchase should be completed. Typically, the process is completed in a week to ten days time.

Which shares to Buy and sell? An index is an indicator of how the stock market is doing on the whole. An index comprises a basket of stocks. The collective value of these stocks on a given date is taken and given a score of 100. From that day onwards, the value of these stocks is tracked and its score relative to 100 is computed.

The stocks selected are based upon a number of parameters that the creators of the index decide. Equally, the valuation is also done using complex mathematical principles. Periodically, the list of shares used for computing the index also undergoes a change. These changes are decided by the index creators based on the parameters they have set for the stocks for inclusion. An index shows whether the stock market, on the whole, is appreciating in value or declining in value. The movement of the index itself is no indicator for individual shares. You may find that a particular share may be increasing in its price even when the index is down and vice versa. The index is only an indicator of the general trend. The common indexes in Indian stock markets are the SENSEX, the index for stocks listed on the Bombay Stock Exchange and Nifty, the index for stocks listed on the National Stock Exchange. What is an index? Buying and selling shares involve a fair amount of research. These involve assessing how well the company is managed, how the company is performing compared to others in the industry, how the industry itself is doing, the financial performance of the company, the interest of the lay public in the company, etc. It is best that you consult an expert in such analysis, before you decided to buy or sell a particular share. Such investment advice is also provided by your share brokers. How long to hold on the shares? Historically, it has been demonstrated that investments in equities offer the best long term returns and hence the highest opportunity to enhance your capital. Thus, the longer you stay invested in the equity markets, the better will be your returns.

However, this holds true for the equity market as a whole, and not necessarily for shares of individual companies. The value of shares of specific companies are subject to various pulls and pressures which could cause a share that is highly valued one day, to drop its value overnight, as a result of unpredictable factors ranging from Government policy to acts of omission and commission by the management of the company. It is advisable that you periodically, at least once in a year, evaluate your holdings and decide whether to continue with them or change them. However, one very important thumb rule which the professionals offer is, never to get emotional about a share. In other words, do not hold on to the share of a company whose value is declining, just because its history has been very good! Are investments in shares safe? Any investment is prone to a certain degree of risk. Shares, as a class of investment have the highest element of risk. The only services riskier than shares are lotteries and other games of chance. These risks arise as a result of factors described earlier. However, today there is strong legislation, procedures and a regulatory authority - Securities Exchange Board of India (SEBI), which to a large extent prevents risk as a result of misleading the investing public.

ABOUT INDIA INFOLINE LTD IIFL is a one-stop financial services shop, most respected for quality of its advice, personalized service and cutting-edge technology. IIFL was founded in 1995 by Mr. Nirmal Jain (Chairman and Managing Director) as an independent business research and information provider. It gradually evolved into a one-stop financial services solutions provider. Our strong management team comprises competent and dedicated professionals. We are a pan-India financial services organization across 1,361 business locations and a presence in 428 cities. Our global footprint extends across geographies with offices in New York, Singapore and Dubai. IIfl is listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). It offer a wide range of services and products comprising broking (retail and institutional equities and commodities), wealth management, credit and finance, insurance, asset management and investment banking. It is registered with the BSE and the NSE for securities trading, MCX, NCDEX and DGCX for commodities trading, CDSL and NSDL as depository participants. We are registered as a Category merchant banker and are a SEBI registered portfolio manager. We also received the FII license in IIFL Inc. IIFL Securities Pte Ltd received approval from the Monetary Authority of Singapore to carry out corporate advisory and dealing in securities operations.

Two subsidiaries India

Infoline

Investment

Services

and Money

line

Credit Limited are registered with RBI as non-deposit taking non-banking financial services companies. India Infoline Housing Finance Ltd, the housing finance arm, is registered with the National Housing Bank. Vision Statement: IIFL vision is to be the most respected company in the financial services space. India Infoline Group: The India Infoline group, comprising the holding company, India Infoline Limited and its wholly-owned subsidiaries, straddle the entire financial services space with offerings ranging from Equity research, Equities and derivatives trading, Commodities trading, Portfolio Management Services, Mutual Funds, Life Insurance, Fixed deposits, GoI bonds and other small savings instruments to loan products and Investment banking. India Infoline also owns and manages the websiteswww.indiainfoline.com and www.5paisa.com The Company has a network of 976 business locations (branches and sub-brokers) spread across 365 cities and towns. It has more than 800,000 customers. India Infoline Group subsidiaries: India Infoline Media and Research Services Limited India Infoline Commodities Limited India Infoline Marketing & Services India Infoline Investment Services Limited IIFL (Asia) Pte Limited

Global Presence: China, Brazil, Dubai, INDIA, Russia, Singapore, UK, USA

COMPANY STRUCTURE India Infoline Limited is listed on both the leading stock exchanges in India, viz. the Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member of both the exchanges. It is engaged in the businesses of Equities broking, Wealth Advisory Services and Portfolio Management Services. It offers broking services in the Cash and Derivatives segments of the NSE as well as the Cash segment of the BSE. It is registered with NSDL as well as CDSL as a depository participant, providing a one-stop solution for clients trading in the equities market. It has recently launched its Investment banking and Institutional Broking business.

A SEBI authorized Portfolio Manager; it offers Portfolio Management Services to clients. These services are offered to clients as different schemes, which are based on differing investment strategies made to reflect the varied risk-return preferences of clients. India Infoline Media and Research Services Limited The content services represent a strong support that drives the broking, commodities, mutual fund and portfolio management services businesses. Revenue generation is through the sale of content to financial and media houses, Indian as well as global. It undertakes equities research which is acknowledged by none other than Forbes as 'Best of the Web 'and 'a must read for investors in Asia'. India Info lines research is available not just over the internet but also on international wire services like Bloomberg (Code: IILL), Thomson First Call and Internet Securities where India Infoline is amongst the most read Indian brokers India Infoline Commodities Limited. India Infoline Commodities Pvt Limited is engaged in the business of commodities broking. Our experience in securities broking empowered us with the requisite skills and technologies to allow us offer commodities broking as a contra-cyclical alternative to equities broking. We enjoy memberships with the MCX and NCDEX, two leading Indian commodities exchanges, and rece ntly acquired membership of DGCX. We have a multi-channel delivery model, making it among the select few to offer online as well as offline trading facilities. India Infoline Marketing & Services India Infoline Marketing and Services Limited is the holding company of India Infoline Insurance Services Limited and India Infoline Insurance Brokers Limited.

1. India Infoline Insurance Services Limited is a registered Corporate Agent with the Insurance Regulatory and Development Authority (IRDA). It is the largest Corporate Agent for ICICI Prudential Life Insurance Co Limited, which is India's largest private Life Insurance Company. India Infoline was the first corporate agent to get licensed by IRDA in early 2001. 2. India Infoline Insurance Brokers Limited is a newly formed subsidiary which will carry out the business of Insurance broking. We have applied to IRDA for the insurance broking license and the clearance for the same is awaited. Post the grant of license, we propose to also commence the general insurance distribution business. India Infoline Investment Services Limited Consolidated shareholdings of all the subsidiary companies engaged in loans an d financing activities under one subsidiary. Recently, Orient Global, a Singaporebased investment institution invested USD 76.7 million for a 22.5% stake in India Infoline Investment Services. This will help focused expansion and capital raising in the said subsidiaries for various lending businesses like loans against securities, SME financing, distribution of retail loan products, consumer finance business and housing finance business. India Infoline Investment Services Private Limited consists of the following step-down subsidiaries. India Infoline Distribution Company Limited (distribution of retail loan products) Money line Credit Limited (consumer finance) India Infoline Housing Finance Limited (housing finance)

IIFL (Asia) Pte Limited IIFL (Asia) Pte Limited is wholly owned subsidiary which has been incorporated in Singapore to pursue financial sector activities in other Asian markets. Further to obtaining the necessary regulatory approvals, the company has been initially capitalized at 1 million Singapore dollars.

MANAGEMENT TEAM Mr. Nirmal Jain Chairman & Managing Director India Infoline Ltd Nirmal Jain, MBA (IIM, Ahmedabad) and a Chartered and Cost Accountant, founded Indias leading financial services company India Infoline Ltd. In 1995, providing globally acclaimed financial services in equities and commodities broking, life insurance and mutual funds distribution, among others. Mr. Jain began his career in1989 with Hindustan Levers commodity export business, contributing tremendously to its growth. He was also associated with InquireIndian Equity Research, which he co-founded in 1994 to set new standards in equity research in India. R Venkataraman, Co-promoter and Executive Director India Infoline Ltd R Venkataraman Co-promoter and Executive Director of India Infoline Ltd., is a B.Tech (Electronics and Electrical Communications Engineering, IIT Kharagpur) and an MBA (IIM Bangalore). He joined the India Infoline board in July 1999. He previously held senior managerial positions in ICICI Limited, including ICICI Securities Limited, their investment banking joint venture with J P Morgan of USA and with BZW and Taib Capital Corporation Limited. He was also Assistant Vice President with G E Capital Services India Limited in their private equity division, possessing a varied experience of more than 16 years in the financial services sector. THE BOARDS OF DIRECTORS Apart from Nirmal Jain and R Venkataraman, the Board of Directors of India Infoline Ltd. Comprises: Mr. Vikamsey Board member since February 2005 - a practicing Chartered Accountant and partner (Khimji Kunverji & Co., Chartered Accountants), a member firm of HLB International, headed the audit department till 1990 and thereafter also

handles financial services, consultancy, investigations mergers and acquisitions, valuations etc; an ICAI study group member for Proposed Accounting Standard 30 on Financial Instruments Recognition and Management, Finance Committee of The Chamber of Tax Consultants (CTC), Law Review, Reforms and Rationalization Committee and Infotainment and Media Committee of Indian Merchants Chamber (IMC) and Insurance Committee and Legal Affairs Committee of Bombay Chamber of Commerce and Industry (BCCI). Mr. Vikamsey is a director of Miloni Consultants Private Limited, HLB Technologies (Mumbai) Private Limited and Chairman of HLB India. Mr. Sat Pal Khattar Board member since April 2001 - Presidential Council of Minority Rights member, Chairman of the Board of Trustee of Singapore Business Federation, is also a life trustee of SINDA, a non profit body, helping the under-privileged Indians in Singapore. He joined the India Infoline board in April 2001. Mr. Khattar is a Director of public and private companies in Singapore, India and Hong Kong; Chairman of Guocoland Limited listed in Singapore and its parent Guoco Group Ltd listed in Hong Kong, a leading property company of Singapore, China and Malaysia. A Board member of India Infoline Ltd, Gateway Distri parks Ltd both listed and a number of other companies he is also the Chairman of the Khattar Holding Group of Companies with investments in Singapore, India, UK and across the world. Mr. Kranti Sinha Board member since January 2005 completed his masters from the Agra University and started his career as a Class I officer with Life Insurance Corporation of India. He served as the Director and Chief Executive of LIC Housing Finance Limited from August 1998 to December 2002 and concurrently as the Managing Director of LICHFL Care Homes (a wholly owned subsidiary of LIC Housing Finance Limited). He retired from the permanent cadre of the Executive Director of LIC; served as the Deputy President of the Governing

Council of Insurance Institute of India and as a member of the Governing Council of National Insurance Academy, Pune apart from various other such bodies. Mr. Sinha is also on the Board of Directors of Hindustan Motors Limited, Larsen & Toubro Limited, LICHFL Care Homes Limited, Gremach Infrastructure Equipments and Projects Limited and Cinemax (India) Limited. Mr. A.K. Purvar Board member since March 2008 completed his Masters degree in commerce from Allahabad University in 1966 and a diploma in Business Administration in 1967. Mr. Purvar joined the State Bank of India as a probationary officer in 1968, where he held several important and critical positions in retail, corporate and international banking, covering almost the entire range of commercial banking operations in his illustrious career. He also played a key role in co-coordinating the work for the Bank's entry into the field of insurance. After retiring from the Bank at end May 2006, Mr. Purvar is now working as Member of Board of Governors of IIM- Lucknow, joined IIMIndore as a visiting professor, joined as a Hon.-Professor in NMIMS and he is also a member of Advisory Board for Institute of Indian Economic Studies (IIES), Waseda University, Tokyo, Japan. He has now taken over as Chairman of India Venture Advisors Pvt. Ltd., as well as IL & FS Renewable Energy Limited. He is also working as Independent Director in leading companies in Telecom, Steel, Textiles, Auto parts, Engineering and Consultancy. Companys philosophy on Corporate Governance The India Infoline Group is committed to placing the Investor First, by continuousl y striving to increase the efficiency of the operations as well as the systems and processes for use of corporate resources in such a way so as to maximize the value to the stakeholders. The Group aims at achieving not only the highest possible standards of legal and regulatory compliances, but also of effective management.

IIFL
The IIFL (India Infoline) group, comprising the holding company, India Infoline Ltd (NSE: INDIAINFO, BSE: 532636) and its subsidiaries, is one of Indias premier providers of financial services. IIFL offers advice and execution platform for the entire range of financial services covering products ranging from Equities and derivatives, Commodities, Wealth management, Asset management, Insurance, Fixed deposits, Loans, Investment Banking, Gold bonds and other small savings instruments. IIFL have a presence in: Equities-core offering, gives a leading market share in both retail and institutional segments. Over a million retail customers rely on our research, as do leading FIIs and MFs that invest billions. Private Wealth Management services cater to over 2500 families who have trusted us with close to Rs 25,000 crores ($ 5bn) of assets for advice. Investment Banking services are for corporate looking to raise capital. Our forte is Equity Capital Markets, where we have executed several marquee transactions. Credit & Finance focuses on secured mortgages and consumer loans. Our high quality loan book of over Rs. 6,200 crores ($ 1.2bn) is backed by strong capital adequacy of approximately 20%. IIFL Mutual Fund made an impressive beginning in FY12, with lowest charge Nifty ETF. Other products include Fixed Maturity Plans. Life Insurance, Pension and other Financial Products, on open architecture complete our product suite to help customers build a balanced portfolio.

IIFL has received membership of the Colombo Stock Exchange becoming the first foreign broker to enter Sri Lanka. IIFL owns and manages the website, www.indiainfoline.com, which is one of Indias leading online destinations for personal finance, stock markets, economy and business. IIFL has been awarded the Best Broker, India by Finance Asia and the Most improved brokerage, India in the Asia Money polls. India Info line was also adjudged as Fastest Growing Equity Broking House - Large firms by Dun & Bradstreet. A forerunner in the field of equity research, IIFLs research is acknowledged by none other than Forbes as Best of the Web and a must read for investors in Asia. IIFL research is available not just over the Internet but also on international wire services like Bloomberg, Thomson First Call and Internet Securities besides others where it is amongst one of the most read Indian brokers. IIFL is a listed company with a consolidated group net worth of about Rs 1,800 crores. The income and net profit during FY2010-11 were Rs. 14.7 bn and Rs. 2.1 bn respectively. The Group has a consistent and uninterrupted track record of profits and dividends since its listing in 2005. The company is listed on both Exchanges and also trades in the derivatives segment. IIFLs Crisil and ICRA Rating for short term is top rated as CRISIL A1+ and ICRA (A1+) respectively. For long term, IIFL has been rated ICRA (AA-) by ICRA and CRISIL AA-/Stable by CRISIL indicating high degree of safety for timely servicing of financial obligations. All offices are connected with the corporate office in Mumbai with cutting edge networking technology. The group caters to a customer base of about a million customers. IIFL physical presence in key global markets includes subsidiaries in Colombo, Dubai, New York, Mauritius, London, Singapore and Hong Kong.

2011 Launched IIFL Mutual Fund 2010 Received in-principle approval for membership of the Singapore Stock Exchange Received membership of the Colombo Stock Exchange 2009 Acquired registration for Housing Finance SEBI in-principle approval for Mutual Fund Obtained Venture Capital license 2008 Launched IIFL Wealth Transitioned to insurance broking model 2007 Commenced institutional equities business under IIFL Formed Singapore subsidiary, IIFL (Asia) Pvt Ltd 2006 Acquired membership of DGCX Commenced the lending business 2005 Maiden IPO and listed on NSE, BSE 2004 Acquired commodities broking license Launched Portfolio Management Service 2003 Launched proprietary trading platform Trader Terminal for retail customers 2000 Launched online trading through www.5paisa.com Started distribution of life insurance and mutual fund 1999 Launched www.indiainfoline.com

1997 Launched research products of leading Indian companies, key sectors and the economy Client included leading FIIs, banks and companies. 1995 Commenced operations as an Equity Research firm

IIFL (India Infoline Ltd) - Corporate Structure

The IIFL Foundation focuses on specific areas of need such as healthcare and education, the foundation will screen and select institutions and developmental agencies which are working in these domains and will provide necessary aid to improve the lives of the underprivileged and help them in achieving their potential. Some of the activities undertaken by the IIFL Foundation Barsana Camp Sponsored an Eye and Dental camp, from Jan. 31st to Feb. 3rd, 2012, conducted by expert Doctors and Surgeons from the Bhakti Vedanta Foundation in the village of Barsana near Mathura Pandharpur Medical Camp Sponsored the Pandharpur Medical Camp, held by the Bhakti Vedanta Hospital in July 2011 at Pandharpur. Free medical treatment and food was given to approximately 60,000 pilgrims who had come to Pandharpur during Ashadi Ekadashi. The pilgrims were treated for fever, injuries, fractures, gastroenteritis, myalagia, headache, epilepsy, malaria, respiratory infections etc, during the camp. Blood Donation Drives Organized blood donation drives at camps all across India. Over 800 employees have participated in these camps so far. Adopt a Village To expand IIFL initiatives; IIFL now exploring the best ways to take education in rural and tribal areas beyond the key basics of abc In Adopt a Village scheme IIFL hope to impart knowledge about water conservation, waste management, sanitation, corruption prevention, and many other essential fields.

FLAME (Financial Literacy Agenda for Mass Empowerment) is an IIFL initiative to promote financial literacy amongst the masses in order to make them an integral part of India's spectacular growth story. In an era of accelerating GDP and rising per capita growth, financial literacy has become more critical than ever before such that we all reap the tangible benefits of the nation's economic prosperity. Financial inclusion has been quite high on the governmental agenda, given its emphasis on widening the Banking & Financial services network across the country. IIFL's FLAME initiative stands committed to complement this effort by helping common people gain financial growth and security though better awareness and education on the variety of financial products while avoiding the lure of and loss from unrealistic claims made by unscrupulous agents and ponzi schemes. Our objective is to light a FLAME, as the name suggests, which will set ablaze a chain of FLAMEs across the country. The new-found light of knowledge will undoubtedly dispel the dark clouds of financial illiteracy and ensure the bright sunshine of financial growth and prosperity This portal is but one of the various IIFL initiatives that would be part of FLAME

STOCK MARKET OF INDIA

Introduction
Stock markets refer to a market place where investors can buy and sell stocks. The price at which each buying and selling transaction takes is determined by the market forces (i.e. demand and supply for a particular stock). Let us take an example for a better understanding of how market forces determine stock prices. ABC Co. Ltd. enjoys high investor confidence and there is an anticipation of an upward movement in its stock price. More and more people would want to buy this stock (i.e. high demand) and very few people will want to sell this stock at current market price (i.e. less supply). Therefore, buyers will have to bid a higher price for this stock to match the ask price from the seller which will increase the stock price of ABC Co. Ltd. On the contrary, if there are more sellers than buyers (i.e. high supply and low demand) for the stock of ABC Co. Ltd. in the market, its price will fall down. In earlier times, buyers and sellers used to assemble at stock exchanges to make a transaction but now with the dawn of IT, most of the operations are done electronically and the stock markets have become almost paperless. Now investors dont have to gather at the Exchanges, and can trade freely from their home or office over the phone or through Internet.

CONCEPT OF STOCK EXCHANGE

The Securities Contracts (Regulation) Act, 1956, has defined Stock Exchange as an association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business of buying, selling and dealing in Securities. Stock exchange as an organized security market provides marketability and price continuity for shares and helps in a fair evaluation of securities in terms of their intrinsic worth. Thus it helps orderly flow and distribution of savings between different types of investments.

This institution performs an important part in the economic life of a country, acting as a free market for securities where prices are determined by the forces of supply and demand. Apart from the above basic function it also assists in mobilizing funds for the Government and the Industry and to supply a channel for the investment of savings in the performance of its functions. The Stock Exchanges in India as elsewhere have a vital role to play in the development of the country in general and industrial growth of companies in the private sector in particular and helps the Government to raise internal resources for the implementation of various development programmes in the public sector. As a segment of the capital markets, it performs an important function in mobilizing and channelizing resources which remain otherwise scattered. Thus the Stock Exchanges tap the new resources and stimulate a broad based investment in the capital structure of industries. A well developed and healthy stock exchange can be and should be an important institution in building up a property base along with a socialist in India with broader distribution of wealth and income. Thus Stock Exchange is a vital organ in a modern society. Without a stock exchange a modern democratic economy cannot exist. The system of joint stock companies financed through the public investment as emerged has put the vast means of finances almost to entrepreneurs needs. 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 meager 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, in 1865, 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.

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 realized 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 between1904 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 100members. 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. In1937, a stock exchange was once again organized in Madras - Madras Stock Exchange Association (Pvt.) Limited. (In1957, the name was changed to Madras Stock Exchange Limited). 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.

Existing structure of the stock exchanges in India

The Act recognizes stock exchanges with different legal structure. Presently the stock exchanges which are recognized under the Securities Contracts (Regulation) Act in India could be segregated into two broad groups 20 stock exchanges which were set up as companies, either limited by guarantees or by shares, and the 3 stock exchanges which are functioning as associations of persons (AOP) viz. BSE, Ahmedabad Stock Exchange and Indore Stock Exchange. The 20 stock exchanges which are companies are: the stock exchanges of Bangalore, Bhubaneswar, Calcutta, Cochin, Coimbatore, Delhi, Guwahati, Hyderabad, Interconnected SE, Jaipur, Ludhiana, Madras, Magadha, Mangalore, NSE, Pune, OTCEI, Saurashtra-Kutch, Uttar Pradesh, and Vadodara. Of these, the stock exchanges of Ahmedabad, Bangalore, BSE, Calcutta, Delhi, Hyderabad, Madhya Pradesh, Madras and Guwahati were given permanent recognition by the Central Government at the time of setting up of these stock exchanges. Apart from NSE, all stock exchanges whether established as corporate bodies or Association of Persons (AOPs), are non-profit making organizations.

Powers that may be exercised by the Stock Exchange

The powers of the stock exchange are to be exercised as per provisions in its bye-law. As per SCRA Act any recognized stock exchange may, subject to the previous approval of the Securities and Exchange Board of India make bye-laws for the regulation and control of contracts. The bye-laws can provide for the exercise of following powers by the stock exchange. 1. The opening and closing of markets and the regulation of the hours of trade; 2. Set up a clearing house for the periodical settlement of contracts and differences there under, the delivery of and payment for securities, the passing on of delivery orders and the regulation and maintenance of such clearing house; 3. The regulation or prohibition of blank transfers; 4. The regulation, or prohibition of badlas or carry-over facilities; 5. The fixing, altering or postponing of days for settlements; 6. The determination and declaration of market rates, including the opening, closing, highest and lowest rates for securities; 7. The terms, conditions and incidents of contracts, including the prescription of margin requirements, if any, and conditions relating thereto, and the forms of contracts in writing; 8. The regulation of the entering into, making, performance, rescission and termination, of contracts, including contracts between members or between a member and his constituent or between a member and a person who is not a member, and the consequences of default or insolvency on the part of a seller or buyer or intermediary, the consequences of a breach or omission by a seller or buyer, and the responsibility of members who are not parties to such contracts; 9. The regulation of taravani business including the placing of limitations thereon;

10. The listing of securities on the stock exchange, the inclusion of any security for the purpose of dealings and the suspension or withdrawal of any such securities, and the suspension or prohibition of trading in any specified securities; 11. The method and procedure for the settlement of claims or disputes, including settlement by arbitration; 12. The levy and recovery of fees, fines and penalties. The regulation of the course of business between parties to contracts in any capacity; 13. The exercise of powers in emergencies in trade (which may arise, whether as a result of pool or syndicated operations or cornering or otherwise) including the power to fix maximum and minimum prices for securities; 14. The regulation of dealings by members for their own account; 15. The separation of the functions of jobbers and brokers; 16. The limitations on the volume of trade done by any individual member in exceptional circumstances; 17. Fixing the obligation of members to supply such information or explanation and to produce such documents relating to the business as the governing body may require.

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 Exchanges Association Limited.

HISTORY OF THE INDIAN STOCK MARKET - THE ORIGIN

One of the oldest stock markets in Asia, the Indian Stock Markets have a 200 years old history.

18thCentury
East India Company was the dominant institution and by end of the century, business in its loan securities gained full momentum 1830's Business on corporate stocks and shares in Bank and Cotton presses started in Bombay. Trading list by the end of 1839 got broader 1840's Recognition from banks and merchants to about half a dozen brokers 1850's Rapid development of commercial enterprise saw brokerage business attracting more people into the business 1860's The number of brokers increased to 60 1860-61 The American Civil War broke out which caused a stoppage of cotton supply from United States of America; marking the beginning of the "Share Mania" in India

1862-63 The number of brokers increased to about 200 to 250 1865 A disastrous slump began at the end of the American Civil War (Example, Bank of Bombay Share which had touched Rs. 2850 could only be sold at Rs. 87). 1874 With the rapidly developing share trading business, brokers used to gather at a street (now well known as "Dalal Street") for the purpose of transacting business. 1875 "The Native Share and Stock Brokers' Association" (also known as "The Bombay Stock Exchange") was established in Bombay 1880's Development of cotton mills industry and set up of many others 1894 Establishment of "The Ahmedabad Share and Stock Brokers' Association". 1880 -90's Sharp increase in share prices of jute industries in 1870's was followed by a boom in tea stocks and coal. 1908 "The Calcutta Stock Exchange Association" was formed. 1920 Madras witnessed boom and business at "The Madras Stock Exchange" was transacted with 100 brokers. 1923 When recession followed, number of brokers came down to 3 and the Exchange was closed down.

1934 Establishment of the Lahore Stock Exchange 1936 Merger of the Lahore Stock Exchange with the Punjab Stock Exchange 1937 Re-organization and set up of the Madras Stock Exchange Limited (Pvt.) Limited led by improvement in stock market activities in South India with establishment of new textile mills and plantation companies. 1940 Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited was established. 1944 Establishment of "The Hyderabad Stock Exchange Limited" 1947 "Delhi Stock and Share Brokers' Association Limited" and "The Delhi Stocks and Shares Exchange Limited" were established and later on merged into "The Delhi Stock Exchange Association Limited".

POST INDEPENDENCE SCENARIO

The depression witnessed after the Independence led to closure of a lot of exchanges in the country. Lahore stock Exchange was closed down after the partition of India, and later on, merged with the Delhi Stock Exchange. Bangalore Stock Exchange Limited was registered in1957 and got recognition only by 1963. Most of the other Exchanges were in a miserable state till 1957 when they applied for recognition under Securities Contracts (Regulations) Act, 1956. 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 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), Guwahati Stock Exchange Limited (1984), Kanara Stock Exchange 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 21 recognized stock exchanges in India excluding the Over the Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited(NSEIL).Government policies during 1980's also played a vital role in the development of the Indian Stock Markets.

POST REFORMS STOCK MARKET SCENARIO

After the initiation of reforms in 1991, the Indian secondary market now has a three tier form Regional stock exchange National stock exchange (NSE) Over the Exchange of India (OTCEI)

The NSE was set up in 1994. It was the first modern stock exchange to bring in new technology, new trading practices, new institutions, and new products. The OTCEI was set up in 1992 as a stock exchange providing small and medium sized companies the means to generate capital. In all, there are at present, 23 stock exchange in India 19 regional stock exchanges, BSE, NSE, OTCEI, and the interconnected stock exchange of India (ISE). The 19 regional stock exchanges are located at Ahmedabad, Bangalore, Bhubaneswar, Kolkata, Cochin, Coimbatore, Delhi, Guwahati, Hyderabad, Indore, Jaipur, Kanpur, Ludhiana, Chennai, Mangalore, Pune, Patna, Rajkot, and Vadodara. They operate under the rules, bylaws and regulations approved by the government and SEBI.

REFORMS IN INDIAN CAPITAL MARKET

The 1991_92 securities scam prompted the government to increases the pace of reforms in the capital market. Several measures have been undertaken since then in both the primary and secondary market. Primary market reforms: Security exchange Board of India was set up in early 1988 as a non statutory body was given power in January 1992.The two objective mandated in the SEBI act are investor protection and orderly development of the capital market.

The SEBI has introduced various guidelines and regulatory measures for capital market in India. The issuing company is required to make material disclosure about the risk factors, in their offer document and also to get their debt instrument rated.

The infrastructure of the primary capital market has been fairly diversified over the years with the setting up of a large number of merchant bankers, investment and consulting agencies registrars to the issue and so on.

The primary capital market has widened and deepened with public sector banks, financial institutions, and public sector enterprises.

Three new stock exchanges at the national level were set up in the1990s. There are over the counter Exchange of India (1992), National stock Exchange of India (1994), and Inter connected the infrastructure and power sectors increasingly raising resources from the market both way of debt and equity.

Companies are now required to disclose all materials fact and specific risk factor associated with their project while making public issue process.

SEBI has also introduced a code of advertisement for public issues for ensuring fair and true picture.

In order to reduce the cost of issue, the underwriting issue has been made optional subject to the condition that if the subscription is less than 90% of the amount offered, the entire amount collected would be refunded to the investor.

Secondary market reforms: The open outcry trading system, prevalent till 1995, was replaced by the online screen based trading system (SBTS). In all 23 stock exchanges have approximately 8000, trading terminals spread all over the country. Stock Exchange of India (1999).

Trading and settlement cycle were uniformly trimmed from 14 days to 7days in all stock exchanges in Aug 1996.

The settlement cycle for all securities was shorted from T+5 to T+3 days with effect from April 1, 2002.

With a view to maintaining integrity and ensuring safety of the market, various risk containment measures have been initiated such as the mark to mark margin system, intra day trading limit, exposure limit, and setting up of trade / settlement guarantee fund.

To

enhance

the

level

of

investor

protection,

the

process

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dematerialization of securities through the depository system and their transfer through electronic book entry is pursued vigorously. For this purpose National Securities Depository Limited and central Depository service was set up. Issuing company is required to make continuing disclosure under the listing agreement. One of the major reforms in the secondary market is the measure to improve corporate governance this is a set of system and process designed to protect the interest of stakeholders. The insider trading regulations have been formulated prohibiting insider trading and making it a criminal offence, punishable in accordance with the provision under the SEBI Act, 1992. In February 1999, trading terminal was allowed to be set up abroad for facilitating market participation by nonresidents. Internet trading was permitted in February 2000.

How do the debt markets impact the economy?

1. Increased funds for implementation of government development plans. The government can raise funds at lower costs by issuing government securities.

2. Conducive to implementation of a monetary policy. 3. Less risk compared to the equity markets, encouraging low-risk investments. This leads to inflow of funds into the economy. 4. Higher liquidity and control over credit. 5. Opportunity for investors to diversify their investment

portfolio.6.Better corporate governance. 6. Improved transparency because of stringent disclosure norms and auditing requirements.

INTRODUCTION OF INDIAN ECONOMY

PRE LIBERALISED ECONOMY
Early Indian Economy Indian economy in the early period was a self sufficient economy comprising of several villages. Indian villages produced and met their requirement according to division of labour and their economic activity was restricted to village economy. Barter system prevailed as an exchange mechanism. Basically, the primary activity was agriculture. Other services like carpentry, weaving, hair dressing, etc. were offered by labourers who extended their services based on hereditary. They received their wages as food products. In short, Indian villages functioned as an independent republics and the only interference was from the King for whom they paid taxes in kind. Thus, India had happy villages. Prior to the British rule, religion, system of the society and kings law influenced the economy to a great extent. There prevailed caste system which decided the division of labour for the benefit of the societys economy. Further, the prevalence of joint-family system helped them to pool their resources for their individual family benefit and also for the benefit of the society. Another advantage of the joint-family system was that the cultivable lands were not fragmented, yielding to better economic gains. Another influencer

of early Indian economy was the Hindu religion. The religious canters also functioned as Indian trade centers. For example, major pilgrimage spots like Nasik, Allahabad, Varanasi, etc. also functioned as centers of commerce and trade. Many trade and commerce activities were linked to the religious festivals and functions. In short, the Hindu religion acted as an indirect catalyst for the Indian economy. One of the major industries in early India was textile. Handicrafts were also part of the Indian industrial activity. Indian textile products like shawls, dhotis, dopattas, woolen products, cotton goods, etc. and handicraft products were exported to overseas markets, such as Egypt, South East Asia, Greece etc. It was worth noting that when Europe was inhabited by uncivilized people, India was very popular for its craftsmanship and rich economy.

Pre-liberalisation policies
Indian economic policy after independence was influenced by the colonial experience (which was seen by Indian leaders as exploitative in nature) and by those leaders' exposure with to Fabian a socialism. Policy tended on import towards protectionism, strong emphasis

substitution, industrialization under state monitoring, state intervention at the micro level in all businesses especially in labour and financial markets, a large public sector, business regulation, and central planning. Five-Year Plans of India resembled central planning in the Soviet Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical plants, among other industries, were effectively nationalized in the mid-1950s. Elaborate licenses, regulations and the accompanying red tape,

commonly referred to as License Raj, were required to set up business in India between 1947 and 1990. Before the process of reform began in 1991, the government attempted to close the Indian economy to the outside world. The Indian currency, the rupee, was inconvertible and high tariffs and import licensing prevented foreign goods reaching the market. India also operated a system

of central planning for the economy, in which firms required licenses to invest and develop. The labyrinthine bureaucracy often led to absurd restrictionsup to 80 agencies had to be satisfied before a firm could be granted a license to produce and the state would decide what was produced, how much, at what price and what sources of capital were used. The government also prevented firms from laying off workers or closing factories. The central pillar of the policy was import substitution, the belief that India needed to rely on internal markets for development, not international tradea belief generated by a mixture of socialism and the experience of colonial exploitation. Planning and the state, rather than markets, would determine how much investment was needed in which sectors.

IMPACTS
The low annual growth rate of the economy of India before 1980, which stagnated around 3.5% from 1950s to 1980s, while per capita income averaged 1.3%. At the same time, Pakistan grew by 5%, Indonesia by 9%, Thailand by 9%, South Korea by10% and in Taiwan by 12%. Only four or five licenses would be given for steel, power and communications. License owners built up huge powerful empires. A huge public sector emerged. State-owned enterprises made large losses. Infrastructure investment was poor because of the public sector monopoly. License Raj established the "irresponsible, self-perpetuating bureaucracy that still exists throughout much of the country" and corruption flourished under this system. Rajiv Gandhi government (1984-1989)

Government in the 80s, the government led by Rajiv Gandhi started light reforms. The slightly reduced License Raj and also promoted the growth of the telecommunications and software industries.

The Vishwanath Pratap Singh government (19891990) and Chandra Shekhar government (19901991) did not add any significant reforms.

Narasimha Rao government (1991-1996) The assassination of Prime minister Indira Gandhi in 1984, and later of her son Rajiv Gandhi in 1991 crushed international investor confidence on the economy that was eventually pushed to the brink by the early 1990s.As of 1991, India still had a fixed exchange rate system, where the rupee was pegged to the value of a basket of currencies of major trading partners. India started having balance of payments problems since 1985, and by the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had reduced to the point that India could barely finance three weeks worth of imports. A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. In return for an IMF bailout, gold was transferred to London as collateral, the Rupee devalued and economic reforms were forced upon India. That low point was the catalyst required to transform the economy through badly needed reforms to unshackle the economy. Controls started to be dismantled, tariffs, duties and taxes progressively lowered, state monopolies broken, the economy was opened to trade and investment, private sector enterprise and competition were encouraged and globalization was slowly embraced. The reforms process continues today and is accepted by all political parties, but the speed is often held hostage by coalition politics and vested interests.

REFORMS

The Government of India headed by Narasimha Rao decided to usher in several reforms that are collectively termed as liberalization in the Indian media. Narasimha Rao appointed Manmohan Singh as a special economical advisor to implement liberalization. The reforms progressed furthest in the areas of opening up to foreign investment, reforming capital markets, deregulating domestic business, and reforming the trade regime. Liberalization has done away with the License Raj (investment, industrial and import licensing) and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Rao's government's goals were reducing the fiscal deficit, privatization of the public sector, and increasing investment in infrastructure. Trade reforms and changes in the regulation of foreign direct investment were introduced to open India to foreign trade while stabilizing external loans. Rao's finance minister, Manmohan Singh, an acclaimed economist, played a central role in implementing these reforms. New research suggests that the scope and pattern of these reforms in India's foreign investment and external trade sectors followed the Chinese experience with external economic reforms. In the industrial sector, industrial licensing was cut, leaving only 18 industries subject to licensing. Industrial regulation was rationalized. Abolishing in 1992 the Controller of Capital Issues which decided the prices and number of shares that firms could issue. Introducing the SEBI Act of 1992 and the Security Laws (Amendment) which gave SEBI the legal authority to register and regulate all security market intermediaries. Starting in 1994 of the National Stock Exchange as a computer-based trading system which served as an instrument to leverage reforms of India's other stock exchanges. The NSE emerged as India's largest exchange by 1996.

Reducing tariffs from an average of 85 percent to 25 percent, and rolling back quantitative controls. (The rupee was made convertible on trade account.) Encouraging foreign direct investment by increasing the maximum limit on share of foreign capital in joint ventures from 40 to 51 percent with 100 percent foreign equity permitted in priority sectors.

Streamlining procedures for FDI approvals, and in at least 35 industries, automatically approving projects within the limits for foreign participation. Opening up in 1992 of India's equity markets to investment by foreign institutional investors and permitting Indian firms to raise capital on international markets by issuing Global Depository Receipts (GDRs).

Marginal tax rates were reduced. Privatization of large, inefficient and loss-inducing government

corporations was initiated.

LATER REFORMS
The Bharatiya Janata Party (BJP)-Atal Bihari Vajpayee administration surprised many by continuing reforms, when it was at the helm of affairs of India for five years. The BJP-led National Democratic Alliance Coalition began privatizing under-performing government owned business including hotels, VSNL, Maruti Suzuki, Airports and began reduction of taxes, a sound fiscal policy aimed at reducing deficits and debts and increased initiatives for public works. Economic and technology-related sanctions have repeatedly not proved to be very effective in compelling nations to change their sovereign decisions made in enlightened self-interest. India faced severe sanctions after Pokhran-I (five nuclear tests on 11 and 13 May 1998 at the Pokhran range in Rajasthan Desert), and sanctions that were more comprehensive were imposed following Pokhran-

II. There were dire predictions of the collapse of the economy, double-digit inflation etc. After five years, most of the sanctions have been lifted and the Indian economy is continuing to grow at an acceptably satisfactory rate. The growth rate for 200304 was 6.0%. Though Indias Gross National Income is only $477.4 billion by conventional calculations, it translates into $2,913 billion purchasing power parity (PPP), according to the latest world development indicators. In PPP terms, it is the world's fourth largest economy, behind only the US, China and Japan. Towards the end of 2011, the Government initiated the introduction of 51% Foreign Direct Investment in retail sector. But due to pressure from fellow coalition parties and the opposition, the decision was rolled back. Impact of reforms The impact of these reforms may be gauged from the fact that total foreign investment(including foreign direct investment, portfolio investment, and investment raised on international capital markets) in India grew from a minuscule US$132 million in 199192 to $5.3 billion in 199596. Cities like NOIDA, Gurgaon, Ghaziabad, Bangalore, Hyderabad, Pune, Chennai, Jaipur Indore and Ahmedabad have risen in prominence and economic importance become centres of rising industries and destination for foreign investment and firms. Annual growth in GDP per capita has accelerated from just 1 per cent in the three decades after Independence to 7 per cent currently, a rate of growth that will double average income in a decade. In service sectors where government regulation has been eased significantly or is less burdensomesuch as communications, insurance, asset management and information technologyoutput has grown rapidly, with exports of information technology enabled services particularly strong. In those infrastructure sectors which have been opened to competition, such as

telecoms and civil aviation, the private sector has proven to be extremely effective and growth has been phenomenal. -OECD Election of AB Vajpayee as Prime Minister of India in 1998 and his agenda was a welcome change. His prescription to speed up economic progress included solution of all outstanding problems with the West (Cold War related) and then opening gates for FDI investment. In three years, the West was developing a bit of a fascination to Indias brainpower, powered by IT and BPO. By 2004, the West would consider investment in India, should the conditions permit. By the end of Vajpayees term as Prime Minister, a framework for the foreign investment had been established. The new incoming government of Dr. Manmohan Singh in 2004 is further strengthening the required infrastructure to welcome the FDI. Today, fascination with India is translating into active consideration of India as a destination for FDI. The A T Kearney study is putting India second most likely destination for FDI in 2005 behind China. It has displaced US to the third position. This is a great leap forward. India was at the 15th position, only a few years back. To quote the A T Kearney Study India's strong performance among manufacturing and telecom & utility firms was driven largely by their desire to make productivity-enhancing investments in IT, business process outsourcing, research and development, and knowledge management activities. There are various significant impacts on the Indian economy and industrial sector. Its contribution to the economy reflects the importance of the Indian stock market. So there are following importance of the topic of research paper. Study of the impact of stock market on Indian economy. It helps to understand the reflection of the stock market fluctuation on industrial sectors and their growth. Study of stock market impact on gross domestic product (GDP). Help to understand the contribution to the better corporate governance.

It helps to understand the significance impact on the higher liquidity and control over credit.

Debt markets impact the economy? Increased funds for implementation of government development plans. The government can raise funds at lower costs by issuing government securities. Conducive to implementation of a monetary policy. Less risk compared to the equity markets, encouraging low-risk investments. This leads to inflow of funds into the economy. Higher liquidity and control over credit. Opportunity for investors to diversify their investment portfolio. Better corporate governance. Improved transparency because of stringent disclosure norms and auditing requirements. There are following use and importance of the topic apart from above points: Impacts on Stock Market after Liberalization Impacts on Indian economy after liberalization Comparative study of various factors that affects the economy and stock market.

Role of Foreign Investors The changes in total foreign investment split up into direct investment and portfolio investment, over a period since April 2007. It is evident that both have shown a trend of increase followed by decline. FDI has been more stable with relatively moderate fluctuations (even though it does include some portfolio-type

investments that get categorized as. It peaked in February 2008 and thereafter it has been coming down but is still positive. Portfolio investment has been extremely volatile and largely negative (indicating net outflows) since the beginning of 2008, and this has dominated the overall foreign investment trend. As a result, the cumulative value of stock of Indian equity held by FIIs fell quite sharply, by 24% between May 2008 and February 2009. This is not likely to be due to any dramatically changed investor perceptions of the Indian economy, since if anything GDP growth prospects in India Figure 60: Cumulative FII Investments in Equity; remain somewhat higher than in most other developed or emerging markets. Rather, it is because portfolio investors have been repatriating capital back to the US and other Northern markets. This reflects not so much as a flight to safety (for clearly US securities are not safe anymore either) as the need to cover losses that have been incurred in sub-prime mortgages and other asset markets in the North, and to ensure liquidity for transactions as the credit crunch began to bite. Whatever the causes, the impact on the domestic stock market has been sharp and direct. Since the Indian stock market is still relatively shallow, and FII activities play a disproportionately sharp role in determining the movement of the indices, it is not surprising that this flow has been associated with the overall decline in stock market valuations. The Sensex has moved generally in the same direction as net FII inflows. In fact, movements in the latter have been much sharper and more volatile, suggesting that domestic investors have played a more stabilizing role over this period. Overall foreign investment flows (including both FII and direct investment) have also played a role in determining the level of external reserves shows the pattern in aggregate net foreign investment and change in reserves since April 2007. Once again, the two move together. However, in this case, foreign investment has been less volatile. Foreign Investment and Change in Reserves, suggesting that other components of the balance of payments have been important as well. The changes in external commercial borrowing are likely to be significant. In addition, the possibilities of domestic investors moving their funds

out should not be under estimated. The recently liberalized rules for capital outflow by domestic residents have led to outflows that are not insignificant, even if still relatively small. FIIS IMPACT ON INDIAN MARKETS A foreign Institutional Investor (FII) is an institution established or incorporated outside India which proposes to make investment in securities of companies incorporated in India (Indian Companies). FIIs seeking to invest in Indian Companies are required to be registered with the Securities and Exchange Board of India (SEBI). They need to comply with the provisions of the Guidelines for Foreign Institutional Investors and the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995 (the "SEBI Regulations"). The majority of the foreign investment into the securities market in India comes from Mauritius, a member of International Organization of Securities Commissions (IOSCO), because of the existence of a favorable tax treaty between the two countries. Nearly 30% of the FIIs trading on the Indian stock market operate from Mauritius. As on June 27, 2008 the number of FIIs registered with the SEBI was 1403. Regulation of FIIs There are two main bodies regulating portfolio investment in India- SEBI and RBI (Reserve Bank of India). Every FII is required to register with SEBI and shall comply with the Exchange Control Regulations of RBI. SEBI (FII) Regulations, 1995 and Regulation 5(2) of FEMA regulates the FIIs. Under the regulation of FEMA, RBI approval is also required in order to purchase or sell securities on stock exchanges, open foreign currency and Indian Rupee accounts with a designated bank branch. The permission from RBI is not required so long as the FIIs purchase and sell on recognized stock exchange. All non-stock exchange sales/purchases require RBI permission. The number of foreign institutional investors (FIIs) registered with the Securities and Exchange Board of India

(SEBI) crossed the 1,000 mark. The total number of FIIs having their offices in India has now increased to 1,030. In the beginning of calendar year 2006, the figure was 813. As many as 37 foreign entities registered with the market regulator till December 28, highest ever single month registrations by the FIIs since their entry into Indian market in 1993. In the last two months, 57 new FIIs opened their offices, while the last six months figure was 102 as against 92 in2005. The net investments made by the institutions during 2006 were $9,185.90 million against $9,521.80million in 2005. In 1993, Pictet Umbrella Trust Emerging Markets Fund, an institutional investor from Switzerland, was the only FII to enter the Indian market While in 1994, no new registrations were reported, between 1995 and 2003, an average of 51 new FIIs opened their shops in the country each year. The number of new registrations with the SEBI increased to144 in 2004 and 209 in 2005. Out of 1,030 FIIs from 42 different countries, as many as 388 FIIs are from the US, 167 from the Great Britain, 73 from Luxembourg, 51 from Singapore, 35 each from Australia and Hong Kong, 32 from Canada, 29 from Ireland, 27 from Netherlands, 25 from Mauritius,22 from Switzerland and 20 from France. FOREIGN INSTITUTIONAL INVESTOR (FII) FII is used to denote an investor - mostly of the form of an institution or entity, which invests money in the financial markets of a country different from the one where in the institution or entity was originally incorporated. FII investment is frequently referred to as hot money for the reason that it can leave the country at the same speed at which it comes in. In countries like India, statutory agencies like SEBI have prescribed norms to register FIIs and also to regulate such investments flowing in through FIIs. Pension Funds Mutual Funds Investment Trust

Insurance or reinsurance companies Endowment Funds University Funds Foundations or Charitable Trusts or Charitable Societies Asset Management Companies Nominee Companies Institutional Portfolio Managers Trustees Power of Attorney Holders Bank

SOURCES OF FII IN INDIA The sources of these FII flows are varied. The FIIs registered with SEBI come from as many as 28countries (including money management companies operating in India on behalf of foreign investors).US-based institutions accounted for slightly over 41%; those from the UK constitute about 20% with other Western European countries hosting another 17% of the FIIs. It is, however, instructive to bear in mind that these national affiliations do not necessarily mean that the actual investor funds come from these particular countries. Given the significant financial flows among the industrial countries, national affiliations are very rough indicators of the home of the FII investments. In particular institutions operating from Luxembourg, Cayman Islands or Channel Islands, or even those based at Singapore or Hong Kong are likely to be investing funds largely on behalf of residents in other countries. Nevertheless, the regional breakdown of the FIIs does provide an idea of the relative importance of different regions of the world in the FII flows.

FII REGISTERED IN INDIA Lets look at some of the data to get an idea about the trend of FIIs in India, and also to see the future direction of their movement. India had 528 FIIs were registered with SEBI by end of 2001 and by end of Feb-2008 the number increased to1303. The trend in the number of registered FIIs has been consistently on the rise as can be seen from the table; showing the significant amount of confidence that Indian Capital market has developed in the last few years

Not only has been the number increasing on a consistent basis, but the amount of inflow into Indian market has also seen a manifold increased. The gross purchase, sales and net investment figure on an annual basis gives a fair idea about the consistency of their investments in our country INVESTMENTS BY FOREIGN INSTITUTIONAL INVESTORS India, which is the second fastest growing economy after China, has lately been a major recipient of foreign institutional investor (FII) funds driven by the strong fundamentals and growth opportunities. According to analysts, the late revival of monsoon, upward revision of economic growth from 5.8 per cent to 6.1 per cent, better-than-expected performance of companies in the quarter endedJune 30, the new direct taxes code, leading to savings in the tax payers money, and the trade policy with an ambitious target of US$ 200 billion exports for 201011 have all revived the confidence of FIIs investing in India. Both consumption and investment-led industries linked to domestic demand, such as auto, banking, capital goods, infrastructure and retail, are likely to continue attracting FII funds. FIIs have made net investments of US$ 10 billion in the first six months (April to September) of 2009-10. Major portion of these investments have come through the primary market, more than through buying via secondary markets. Earlier, FIIs net investments in Indian equities crossed the US$ 8 billionmark in calendar 2009, the first time in this year, with foreigners buying stocks worth US$ 274 million on August 28, 2009. With FIIs holding 16 per cent of India's biggest 500 companies and increasing growth of the economy, the FII sentiment is expected to remain positive towards India. At the end of July 2009, net inflows from FIIs stood at US$ 7.3 billion. With FIIs increasingly investing in the country's construction sector, the market capitalization of FII investment in construction has gone up by a substantial 422 per cent in the past six months. Further, till September 8, FIIs registered a net investment of US$ 8.38 billion in the domestic stock market. The total FII market cap in 13 leading sectors was US$ 92.5 billion.

REASONS FOR GROWTH IN FII INVESTMENTS Global liquidity is, of course, the primary cause of the recent surge in Asian markets including India. Also low interest rate regime has led foreign investors to look for fresh avenues to invest. This has resulted in most emerging markets seeing heavy inflows. FIIs see India as a good destination to investing and make money. They are happy with the Indian government's commitment to economic reforms. They are also looking closely at sectors (and companies within these sectors) which they think have potential. In fact, the growing competitiveness of Indian companies is an enticing factor. Long-Term Capital Gains Tax This is the tax an investor pays when he sells his shares after more than a year Rupee Appreciation: The dollar has been falling in value vis--vis other currencies. As a result, FIIs dont find the thought of investing in the US market all that attractive. They know they will make more money if they invest elsewhere. Economic Growth: As mentioned earlier we witnessed a GDP growth rate of about 8.5% last year. Our industries like Telecom, Banking etc are doing relatively well. All these make our country very attractive to invest in. The sheer size of India and the relative stability the country offers are other obvious plus points. Whatever the case may be, a perception is gaining momentum that foreign investors are here to stay at least in the short-term. FOREIGN INSTITUTIONAL INVESTMENT: A COST BENEFIT ANALYSIS The role of foreign investment over the years cant be ignored. It certainly has had an impact on the Indian stock market with a lot of benefits but along with these benefits there are a few costs attached with it. Therefore it is useful to summarize the benefits and costs for India of having foreign inflows.

BENEFITS a) Reduced cost of equity FII inflows augment the sources of funds in the Indian capital markets. FII investment reduces the required rate of return for equity, enhances stock prices, and fosters investment by Indian firms in the country. The impact of FIIs upon the cost of equity capital may be visualized by asking what stock prices would be if there were no FIIs operating in India. b) Stability in the balance of payment The mechanism of funding the current account deficit is widely believed to have played a role in the emergence of balance of payments difficulties in 1981 and 1991.Portfolio flows in the equity markets, and FDI, as opposed to debt-creating flows, are important as safer and more sustainable mechanisms for funding the current account deficit. c) Knowledge flows FIIs advocate modern ideas in market design, promote innovation, development of sophisticated products such as financial derivatives, enhance competition in financial intermediation, and lead to spillovers of human capital by exposing Indian participants to modern financial techniques, and international best practices and systems. d) Strengthening corporate governance Domestic institutional and individual investors, used as they are to the ongoing practices of Indian corporate, often accept such practices, even when these do not measure up to the international benchmarks of best practices. FIIs, with their vast experience with modern corporate governance practices, are less tolerant of malpractice by corporate managers and owners (dominant shareholder). FII participation in domestic capital markets often lead to vigorous

advocacy of sound corporate governance practices, improved efficiency and better shareholder value. e) Improving market efficiency A significant presence of FIIs in India can improve market efficiency through two channels. First, when adverse macroeconomic news, such as a bad monsoon, unsettles many domestic investors, it may be easier for a globally diversified portfolio manager to be more dispassionate about India's prospects, and engage in stabilizing trades. Second, at the level of individual stocks and industries, FIIs may act as a channel through which knowledge and ideas about valuation of a firm or an industry can more rapidly propagate into India. For example, foreign investors were rapidly able to assess the potential of firms like Infosys, which are primarily export-oriented, applying valuation principles that prevailed outside India for software services companies. COSTS a) Hedging and positive feedback training There are concerns that foreign investors are chronically ill informed about India, and this lack of sound information may generate herding (a large number of FIIs buying or selling together) and positive feedback (buying after positive returns, selling after negative returns).These Kinds of behavior can exacerbate volatility ,and push prices away from fair values. b) Balance of payment vulnerability There are concerns that in an extreme event, there can be a massive flight of foreign capital out of India, triggering difficulties in the balance of payments front. India's experience with FIIs so far, however, suggests that across episodes like the Pokhran blasts, or the 2001 stock market scandal, no capital flight has taken place. A billion or more of US dollars of portfolio capital has never left India within the period of one month. When juxtaposed with India's enormous current account and capital account flows, this suggests that there is little vulnerability so far.

c) Possibility of takeovers While FIIs are normally seen as pure portfolio investors, without interest in control, portfolio investor scan occasionally behave like FDI investors, and seek control FDI. of companies that they have a substantial shareholding in. Such outcomes, however, may not be inconsistent with India's quest for greater Furthermore, SEBI's takeover code is in place, and has functioned fairly well, ensuring that all investors benefit equally in the event of a takeover. DETERMINANTS OF FOREIGN INSTITUTIONAL INVESTMENT After the initiation of economic reforms in the early 1990s, the movement of foreign capital flow increased very substantially. There are a lot of factors that determine the nature and cause of foreign institutional investment in a country a few of them being inflation exchange rate equity returns, government policies, price earring ratio and risk. Now if we try to analyze the relation of each of these factors with the level of foreign inflow in the country, we might have a better understanding. Let us broadly classify the factors into inflation, risk and stock market returns and understand the basic principle behind the inflows. a) Equity returns - An increase in the return in the foreign market will induce investors to withdraw from the Indian (domestic) stock market to invest in the foreign market. Investors are believed to follow a higher return, hence when the return in the domestic market increases, FII flows to the domestic market. While the flows are highly correlated with equity returns in India, they are more likely to be the effect than the cause of these returns. . It is assumed that the equity returns have a positive impact on the FII inflow but foreign investors can also get involved in profit booking. They can buy financial assets when the prices are declining, thereby jacking-up the asset prices and sell when the asset prices are increasing and hence be the cause of such returns so making it more of a bi-directional relationship.

b) Risk - Investors are considered to be risk averse, hence when risk in the domestic market increases they will withdraw from the domestic market, when risk in the foreign market increases, investors will withdraw from the foreign market and invest in the Indian (domestic) market. Investments, either domestic or foreign, depend heavily on risk factors. Hence, while studying the behavior of FII, it is important to consider the risk variable. Risk can be divided into ex-ante and unexpected risk. While the ex-ante risk certainly has an inverse relation with the foreign investment nothing can be clearly said about the unexpected risk. c) Inflation - The inflation no doubt has an inverse relation with the foreign investment inflow as the investor would keep in mind the purchasing power of the funds invested and as inflation increase i.e. he purchasing power declines the investor is most likely to withdraw his money. When inflation in the domestic country increases, the purchasing power of the funds invested declines, hence investors will withdraw from the domestic market. Similarly, when inflation in the foreign country increases, the purchasing power of funds invested in the foreign country declines, causing institutional investors to withdraw from the foreign market and make investment in the domestic (Indian) market. d) Exchange rate When the value of the home currency is stronger the FII investments will also increase as the percentage of returns the FII get automatically increases and visa versa So it can be said that the inflation and risk in the domestic country and return in the foreign country adversely affect the FII flowing to the domestic country, whereas inflation and risk in the foreign country and return in the domestic country have a favorable effect on the flow of FII.

ROLE OF INSTITUTIONAL INVESTORS IN CAPITAL MARKET IN INDIA As the Indian capital market opened its gates for the foreign institutional investors with time there has been an increasing trend of their participating in the capital market. With this increasing participation there has been a lot of effect on many parameters of the Indian capital market. The major effect of the increasing participation of the institutional investors has been observed in the following areas. Liquidity: Market liquidity is a business, economics or investment term that refers to an asset's ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value. An act of exchange of a less liquid asset with a more liquid asset is called Liquidation . Liquidity Also refers both to that quality of a business which enables it to meet its payment obligations, in terms of possessing sufficient liquid assets; and to such assets themselves. A liquid asset has some or more of the following features. It can be sold (1) Rapidly, (2) With minimal loss of value, (3) Anytime within market hours. The essential characteristic of a liquid market is that there are ready and willing buyers and sellers at all times. An elegant definition of liquidity is also the probability that the next trade is executed at a price equal to the last one. A market may be considered deeply liquid if there are ready and willing buyers and sellers in large quantities. This is related to a market depth, where sometimes orders cannot strongly influence prices. The liquidity of a product can be measured as how often it is bought and sold; this is known as volume.

Often investments liquid markets such as the stock exchange or futures markets are considered to be more liquid than investments such as real estate, based on their ability to be converted quickly. Some assets with liquid secondary markets may be more advantageous to own, are willing to pay a higher price for the asset than for comparable assets without a liquid secondary market. Price building mechanism: With the increasing participation of the institutional investors in the capital market, it has also helped the different companies to raise funds for their use through the capital market in India. Earlier the companies use to go for debt financing which a cost has attached to it and also in those days the cost of issuing an IPO was higher as compared to the funds that were being generated by the companies. With the help of FII the market has become more competitive. Role of speculation: Generally people transact for three reasons hedging speculating and arbitraging Hedgers are those to intend to hedge their risk. Speculation may be defined as the purchase or sale of a good with a view to resale or repurchase at a later date, where the motive behind such action is the expectation of changes in the prices. Speculation is one of the most watched activity in any capital market its importance varies in different countries in countries like in US it forms an integral part of the market whereas in developing countries like India its taken as a threat. It is often believe that speculators even out the price fluctuation by due to change in demand and supply condition but the concerns about the adverse effects of speculation come from two sources. First, the possibility that speculation, instead of evening out price fluctuations, may end up exacerbating such fluctuations. Second, is the problem of speculation destabilizing rather than stabilizing prices and hence affecting resource allocation? Through speculation, future expected price not only depends on, but also has an impact on the spot price.

The market for shares is subject to much larger fluctuations than the market for bonds or even commodities. Shares represent a share in the expected future profits of a company. When fortunes of companies both in the short run as well as in the medium to long run fluctuate, so do share prices. Uncertainty regarding the future leads to heavy discounting of future profits, and to focus on short- period expectations about capital value rather than long-period prospects of the company. The effect of foreign speculative activity in emerging markets can be particularly beneficial if in the emerging market, liquidity is poor first, the potential of market manipulation is acute in small emerging markets and liquidity is often poor. Although there are many policy initiatives that could increase liquidity and reduce the degree of collusion among large traders, there may not be a sufficient mass of domestic speculators to ensure market liquidity and efficiency. Second, opening the market to foreign speculators may increase the valuation of local companies, thereby reducing the cost of equity capital. Volatilty: Volatility most frequently refers to the standard deviation of the change in value of a financial instrument with a specific time horizon. It is often used to quantify the risk of the instrument over that time period. Volatility is typically expressed in annualized terms, and it may either be an absolute number ($5) or a fraction of the mean (5%).Volatility is often viewed as a negative in that it represents uncertainty and risk. However, volatility can be good in that if one shorts on the peaks, and buys on the lows one can make money, with greater money coming with greater volatility. The possibility for money to be made via volatile markets is how short term market players like day traders hope to make money, and is in contrast to the long term investment view of buy and hold. In today's markets, it is also possible to trade volatility directly, through the use of derivative securities such as options and variance swaps.

Foreign institutional investment is certainly volatile in nature and its volatility has certainly posed some threats to the Indian stock market considering its influence on the market. Given the presence of foreign institutional investors in Sensex companies and their active trading behavior, small and periodic shifts in their behavior lead to market volatility. Such volatility is an inevitable result of the structure of Indias financial markets as well. Markets in developing countries like India are thin or shallow in at least three senses. First, only stocks of a few companies are actively traded in the market. Thus, although there are more than 8,000 companies listed on the stock exchange, the BSE Sensex incorporates just 30companies, trading in whose shares is seen as indicative of market activity. Second, of these stocks there is only a small proportion that is routinely available for trading, with the rest being held by promoters, the financial institutions and others interested in corporate control or influence. And, third the number of players trading these stocks is also small. In such a scenario investment by the foreign institutional investors leads to a sharp price increase this provides incentives to FII investment and enhances investment and when the correction in the stock prices begins it would have to be a pull out by the FII and can result in sharp decline in the prices. The other reason for volatility is that the foreign institutional investors are attracted to a market by the expectation of price increase that tend to be automatically realized, the inflow of foreign capital can result in an appreciation of the rupee vis--vis the dollar This increases the return earned in foreign exchange, when rupee assets are sold and the revenue converted into dollars. As a result, the investments turn even more attractive triggering an investment spiral that would imply a sharper fall when any correction begins. Apart from that the growing realization by the FIIs of the power they wield in what are shallow markets, encourages speculative investment aimed at pushing the market up and choosing an appropriate moment to exit. This manipulation of the market would certainly enhance the volatility and in volatile markets even the domestic investors try to manipulate the market when the prices are really high.

Overall the foreign institutional investors have been bullish on the Indian stocks but the problem is that this bullish nature might be a result of the activities outside the Indian market it might be due to the performance of their equity market or their non equity returns. Therefore they seek out for best returns and diversified geographical portfolio in order to hedge their risk and when they make some adjustments in their portfolio and make shifts in favor or against a country it borings about sharp changes.

ANALYSIS OF DATA COLLECTED

There is a saying: stock markets have predicted 10 out of the last 3 recessions. With plummeting share prices making headline news, it is worth considering the impact of the Stock market on the economy. How much should we worry when share prices fall? How does it impact on the average consumer? And how does it affect the economy?

ECONOMIC EFFECTS OF STOCK MARKET 1. Wealth Effect The first impact is that people with shares will see a fall in their wealth. If the fall is significant it will affect their financial outlook. If they are losing money on shares they will be more hesitant to spend money; this can contribute to a fall in consumer spending. However, the effect should not be given too much importance. Often people who buy shares are prepared to lose money; their spending patterns are usually independent of share prices, especially for short term losses. 2. Effect on Pensions Anybody with a private pension or investment trust will be affected by the stock market, at least indirectly. Pension funds invest a significant part of their funds on the stock market. Therefore, if there is a serious fall in share prices, it reduces the value of pension funds.

This means that future pension payouts will be lower. If share prices fall too much, pension funds can struggle to meet their promises. The important thing is the long term movements in the share prices. If share prices fall for a long time then it will definitely affect pension funds and future payouts.

3. Confidence Often share price movements are reflections of what is happening in the economy. E.g. recent falls are based on fears of a US recession and global slowdown. However, the stock market itself can affect consumer confidence. Bad headlines of falling share prices are another factor which discourages people from spending. On its own it may not have much effect, but combined with falling house prices, share prices can be a discouraging factor.

4. Investment Falling share prices can hamper firms ability to raise finance on the stock market. Firms who are expanding and wish to borrow often do so by issuing more shares it provides a low cost way of borrowing more money. However, with falling share prices it becomes much more difficult.

As I said earlier there is an oft repeated quote saying the stock market has predicted 10 out of the last 3 recessions. The point is that falling stock markets do not necessarily predict the economic future. Share prices can fall without causing a downturn in the economy. For example, one thinks of the stock market crashes of October 1987; there wasnt an obvious economic factor causing this share price fall. The major economies remained relatively unaffected by this stock market crash. In fact, the UK had record growth in the late 1980s.This time the stock market fall is due to economic weaknesses so is a better guide to future economic performance. How does the economy affect stock investments?

A stocks price will go up and down based on what investors think about that individual company, its industry sector, or its competitors. But the economy can also play a role in stock prices. Stock prices go up and down in response to: Interest rates: The Bank of Canada can raise or lower interest rates to stabilize or stimulate the Canadian economy. This is known as monetary policy. If a company borrows money to expand and improve its business, higher interest rates will affect the cost of its debt. This can reduce company profits and the dividend sit pays shareholders. As a result, the stock price may drop. Economic outlook: If it looks like the economy is going to expand, stock prices may rise. Why? Investors may buy more stocks thinking they will see future profits and higher stock prices. Inflation: Inflation means higher consumer prices. This often slows sales and reduces profits. Higher prices will also often lead to higher interest rates. For example, the Bank of Canada may raise interest rates to slow down inflation. These changes will tend to bring down stock prices. However, commodities and some industries and companies can do better with inflation, so their prices may rise. Deflation: Here, the cost of goods and services drops. A dollar buys more. Interest rates rise, so people borrow less. They often wait to buy goods in the hope that prices will drop more. The Great Depression (1929-1939) was one of the worst periods of deflation ever.

Economic shocks: Big changes in the world can affect both the economy and stock prices. For example, lets say energy costs rise. This can affect a lot of companies and consumers and lead to lower sales, lower profits, and lower stock prices. Another example is an act of terrorism, which can lead to a downturn in economic activity and a fall in stock prices. Changes of government: A new government can make new policies. Sometimes these changes can be seen as good for business, and sometimes not. Sometimes they may lead to changes in inflation and interest rates. These changes may affect stock prices. The value of the Canadian dollar: Many Canadian companies sell products to buyers in other countries. If the Canadian dollar rises, their customers will have to spend more to buy Canadian goods. This sometimes drives down sales, which in turn can lead to lower stock prices. On the other hand, when the price of the Canadian dollar falls, it makes it cheaper for others to buy our products. This can make stock prices raise. In the pre liberalized period the Indian economy is more instable. At that time it becomes negative due to various constraint and other factors. There are following two charts which reflect the pre and post liberalized position of Indian economy. These charts reflect the variation in economic system through GROSS DOMESTIC PRODUCT, which more appropriate measure of Indian economy.

PRE-LIBERALISED PERIOD

IMPACT OF GLOBAL RECESSION ON INDIAN MARKET In the globalize market scenario, the impact of recession at one place/ industry/ sector peculate down to all the linked industry and this can be truly interpreted from the current market situation which is faced by the world since approx 2 month and still the situation is not in control in spite of various measures taken to fight back the recession in the market. The badly hit sector at present was being the financial sector, and major issue being the "LIQUIDITY Crises" in the market. In-spite of the various measures to subsidies the impact of the recession and cut down the inflation present nothing really sound have been done. Various steps taken by RBI to curb the present recession in the economy and counter act the prevailing situation. The sudden drying-up of capital inflows from the FDI which were invested in Indian stock markets for greater returns visualizing the Potential Higher Returns flying back is continuing to challenge liquidity management. At the heart of the current liquidity tightening is the balance of payments deficit, and this NRI deposit move should help in some small way. Because of the various reforms and improvement in various sectors strengthen the Indian economic system. After the reforms period Indian GDP reflects the positive trends. The reforms progressed furthest in the areas of opening up to foreign investment, reforming capital markets, deregulating domestic business, and reforming the trade regime. Liberalisation has done away with the License Raj (investment, industrial and import licensing) and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Rao's government's goals were reducing the fiscal deficit, Privatization of the public sector, and increasing investment in infrastructure. Trade reforms and changes in the regulation of foreign direct investment were introduced to open India to foreign trade while stabilizing external loans. Rao's finance minister, Manmohan Singh, an acclaimed economist, played a central role in implementing

these reforms. New research suggests that the scope and pattern of these reforms in India's foreign investment and external trade sectors followed the Chinese experience with external economic reforms. The major step taken in the reform is the Establishment of SECURITIES EXCHANGE BOARD OF INDIA which regulates the whole stock market. Entry of foreign institutional investor, who played a very important role in the success of stock market. Rules and regulation which strengthen the stock market. Economic perspective of the Indian stock market performance. After the reforms Indian stock exchanges has taken various step such as: Establishment of National Stock Exchange, Depositories, introduction of mutual fund, Dematerialization of securities etc Electronic trading also a positive effort taken by the SEBI to make stock market more effective.

WHY STOCK MARKETS AND BANKS BOTH, INDEPENDENTLY OF EACH OTHER, BOOST ECONOMIC GROWTH? Although the empirical evidence is consistent with the view that stock markets and banks promote economic growth independently of each other, the reasons are not fully understood. One argument is that stock markets and banks provide different types of financial services. Stock markets offer opportunities primarily for trading risk and boosting liquidity; in contrast, banks focus on establishing longterm relationships with firms because they seek to acquire information about projects and managers and enhance corporate control. (There is, of course, some overlap. Like stock markets, banks help savers diversify risk and provide liquid deposits.

Like banks, stock markets may stimulate the acquisition of information about firms, because investors want to make a profit by identifying undervalued stocks to invest in; stock markets may also help improve corporate governance by simplifying takeovers, providing an incentive to improve managerial competency.)

FINDINGS OF THE RESEARCH:

Indian economy and Indian stock market are positively related to each other. A positive growth of Indian economy reflects the significant growth of Indian stock market. A part from this a positive growth in stock market investments reflects the growth in valuation of organization which ultimately leads to the growth of the Indian economy. There are significant impacts of reforms on Indian economy. Step taken by Indian government are strengthen the economic system. Capital market reforms influence the investments pattern of foreign as well as domestic investors. Indian economy leads to the growth of stock market with positive correlation. Indian stock market is the gateway to increase the value of the organization. Where open trading of various securities reflects the market value of the organization. With the development in Indian economy since pre liberalized period stock market get positive development. Indian government has taken various steps to strengthen the stock market and economic system.

Apart from Indian economy, the stock market affected from various other factor such as: Investments from foreign institutional investors, Demand and supply of order to buy or sell the various securities. Indian economy also affects from various other factor such as: various sector as service, transportation, power etc.

CONCLUSION OF THE STUDY:

In developing countries like India the positive growth of economy and stock market is possible through the proper strategies and balance of both. On the basis of analysis and findings, it is clear that economy leads the stock market and vice-versa. The Indian stock market is uncertain but fundamentally it depends upon economic condition and various other factors. Economic condition of developing countries like India depend upon income and consumption pattern and growth of industrial, service , transportation sectors etc The combination of both stock market and economic development leads to the rapid growth of any individual country. Highly affected economy from the foreign investments. The stock market is driven by changes in economic growth. Economic performance (1994-2005) By 1995, the Indian stock markets were busy restructuring their systems. The industry continued to consolidate/restructure, improved its efficiency and shifted focus from capacity creation to cost competitiveness. Remember: Many factors can affect stock prices as well as economy of the country.

RECOMMENDATION OF RESEARCH:
After the analysis of the project study, following recommendations can be made: Simplifying procedures and relaxing entry barriers for business activities and providing investor friendly laws and tax system for foreign investors. There should be strict rules and regulation for strengthen the stock market and economy of the country. Government should taka care economic system and regulation of stock market to protect the interest of Indian people. There should be strict regulatory framework for economic and stock market activities. Indian government should emphasis on infrastructure development which leads the Indian economy as well as stock market through change in investments pattern of Indian people. More emphasis on untouched sector of Indian economy at the time of policy formulation. There should be positive correlation between stock market development and Indian economy.

LIMITATIONS:
Besides following scientific methodologies the study has come across some limitations. These are: The Indian capital market was plagued with many limitations such as following. Uncertainty of execution. Uncertain delivery and settlement period.

Front running, that is trading ahead of a client based on knowledge of the client order.

High transaction cost. Absence of risk management. Club mentality of brokers. Private off market deals.

But now Indian capital market is organized, fairly integrated, mature, more global, and modernized. The Indian equity market is one of the best in the world in terms of technology. 1. The study is based on Sensex sample. The Sensex index has an external image that they are the best performers in the country. If the sample companies consist of probably a heterogeneous group then the results may give better insight in to relationship of the specific variables. 2. The data is taken on monthly basis. The data on daily basis can give more positive results. 3. Due to time constraint, my research report is not fully exhaustive. 4. Secondary data that I have used in this study may not give true picture of the concern. 5. The complexities of economy and stock market. 6. Relevant data collection about economy and stock. In case of Indian Stock Exchange it has improvement in size and liquidity. Apart from this Indian stock market is more volatile. Because of various factor introduced in reforms

GROSS DOMESTIC PRODUCT: There are following data of GROSS DOMESTIC PRODUCT of India in pre and post liberalization period. The data shows the trend of the GDP in various phases. Indias Growth Performance (Percent per year) Year 1970-72 to 1980-81 1981-82 to 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 1992-93 to 1996-97 1997-98 to 2001-02 2002-03 2003-04 2005-06 Total GDP Growth 3.2 5.7 1.3 5.1 5.9 7.3 7.3 7.8 4.8 6.5 6.1 4.0 5.4 6.7 5.4 3.8 8.5 7.1

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

7.5 9.0 9.5 9.2 6.7 7.2

The above data shows the growth of GDP after the reforms India GDP shows a positive trend but again due to recession it become down in 2008-09.The recessionary impact on India reflect the slowdown in Indian economy. India will suffer a lot of pain in the next 18 months, as the economy slows down along with the current global slowdown. The US, Europe and Japan are sinking into recession together. Forget claims that India has decoupled from the US and can keep growing fast regardless. India and most developing countries are indeed much less dependent on the US economy than in the past. So, Indian growth will be dented rather than smashed. GDP growth will slide from 9 % last year to 7%this financial year, and to maybe 6% next year. This recession affects the whole economy of the world. So India also affects from this up to some extent. BIBLIOGRPHY: I have used following references to prepare this research report. The bibliography includes: WEB SITES: