CHAPTER : 1

INTRODUCTION TO CAPITAL MARKET

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, as the raising of short-term funds

takes place on other markets (e.g., the money market). The capital market includes the

stock market (equity securities) and the bond market (debt).

The capital market plays a very important role in promoting economic growth through the

mobilization of long-term savings and the savings get invested in the economy for

productive purpose. The capital market in India is a well-integrated structure and its

components include stock exchanges, developed banks investment trusts, insurance

corporations and provident fund organization. It caters to the varied needs for capital of

agriculture, industrial and trading sectors of the economy. There are two important

operations carried on in these markets. The raising the new capital and Trading in the

securities already issued by the companies. The capital market deals with capital. Capital

Market is generally understood as a market for long term funds and investments in long

term instruments available in this market. Capital markets mean the market for all the

financial instruments, short term and long term as so commercial industrial and

government paper.

The capital market is a market where borrowing and lending of long term funds takes

place.

Capital market deals in both, debt and equity. In these markets productive capital is raised

and made available to the corporate. The governments both central and state raise money

1
in the capital market through the issue of government securities. Capital market refers to

all the institutes and mechanisms of raising medium and long-term funds, through various

instruments available like shares, debentures, bonds etc.

With the pace of economic reforms followed in India, the importance of capital markets

has grown in the last ten years. Corporate both in the private sector as well as in the

public sector raise thousands of crores of rupees in these markets. The governments,

through Reserve Bank of India, as well as financial institutes also raise a lot of money

from these markets. The capital market serves a very useful purpose by pooling the

savings. The capital markets encourage capital formation in the country. The capital

markets mobilize savings of the households and of the industrial concerns. Such savings

are then invested for productive purposes. Capital markets also facilitate the growth of the

industrial sector, as well as the other sectors of the economy. The capital markets provide

funds for the projects in backward areas. Thus, Capital markets generate employment in

the country. They also facilitate the development of stock markets. Due to capital

markets, the public has alternative sources of investment. The public can invest not only

in bank deposits, but also in shares and debentures issued by public companies. The

commercial banks and FIs provide timely financial assistance to viable sick units to

overcome their industrial sickness. The banks and FIs may also write off a part of loan, or

they re-schedule the loan, so as to offer payment flexibility to the weak units, which in

turn helps the weak units to overcome financial crisis.

The institutions, players and mechanism that bring suppliers and users of capital together,

is known as capital market. It allows people to do more with their savings by providing

variety of assets thereby enhancing the wealth of investors who make the right choice.

Simultaneously, it enables entrepreneurs to do more with their ideas and talent,

facilitating capital formation.

2
The market is supervised by SEBI. It ensures supply of quality securities and non-

manipulated demand for them. It develops best market practices and takes enforcement

actions against the miscreants. It essentially maintains discipline in the market so that the

participants can undertake transaction safely.

Two types of Markets : Capital markets may be classified as primary markets and

secondary markets.

Primary Market :-

Primary market is the new issue market of shares, preference shares and debentures of

non-government public limited companies and issue of public sector bonds.

Secondary Market

This refers to old or already issued securities. It is composed of industrial security market

or stock exchange market, over-the-counter, or elsewhere.

DIFFERENCE BETWEEN
Primary market Secondary market
Deals with new securities Market for existing securities, which are

already listed
Provides additional capital to issuer No additional capital generated. Provides

companies liquidity to existing stock

CHAPTER : 2

3
 THE INDIAN CAPITAL MARKET

2.1 OVERVIEW

Capital market is a market for long-term debt and equity shares. In this market, the capital

funds comprising of both equity and debt are issued and traded. This also includes private

placement sources of debt and equity as well as organized markets like stock exchanges.

Capital market includes financial instruments with more than one year maturity. Indian

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

The Bombay Stock Exchange was inaugurated in 1899 when the brokers formally

established a stock market in India. Thus, the Stock Exchange at Bombay was

consolidated. After that more & more stock exchanges have emerged in India & this

forms a huge capital market in India.

A. EQUITY MARKET IN INDIA

The Indian Equity Market is more popularly known as the Indian Stock Market. The

Indian equity market has become the third biggest after China and Hong Kong in the

Asian region. According to the latest report by ADB, it has a market capitalization of

nearly $600 billion. As of March 2009, the market capitalization was around $598.3

billion (Rs 30.13 lakh crore) which is one-tenth of the combined valuation of the Asia

region. The market was slow since early 2007 and continued till the first quarter of 2009.

Stock Exchange : Stock Exchange is an Organized and regulated financial market where

securities (bonds, notes, shares) are bought and sold at prices governed by the forces of

demand and supply.

4
The Role of Stock Exchanges : Stock exchanges have multiple roles in the economy.

This may include the following :

Raising Capital For Businesses : The Stock Exchange provide companies with the facility

to raise capital for expansion through selling shares to the investing public.

Facilitating Company Growth : A takeover bid or a merger agreement through the stock

market is one of the simplest and most common ways for a company to grow by

acquisition or fusion.

Creating Investment Opportunities For Small Investors : As opposed to other businesses

that require huge capital outlay, investing in shares is open to both the large and small

stock investors because a person buys the number of shares they can afford. Therefore the

Stock Exchange provides the opportunity for small investors to own shares of the same

companies as large investors.

Barometer of the Economy : At the stock exchange, share prices rise and fall depending,

largely, on market forces. Share prices tend to rise or remain stable when companies and

the economy in general show signs of stability and growth. An economic recession,

depression, or financial crisis could eventually lead to a stock market crash. Therefore the

movement of share prices and in general of the stock indexes can be an indicator of the

general trend in the economy.

Speculation : The stock exchanges are also fashionable places for speculation. In a

financial context, the terms "speculation" and "investment" are actually quite specific. For

instance, although the word "investment" is typically used, in a general sense, to mean

any act of placing money in a financial vehicle with the intent of producing returns over a

5
period of time, most ventured money including funds placed in the world's stock markets

is actually not investment but speculation.

The Indian market has 22 stock exchanges. The larger companies are enlisted with BSE

and NSE. The smaller and medium companies are listed with OTCEI (Over The counter

Exchange of India).

Bombay Stock Exchange (BSE) : BSE is the oldest stock exchange in Asia. The

extensiveness of the indigenous equity broking industry in India led to the formation of

the Native Share Brokers Association in 1875, which later became Bombay Stock

Exchange Limited (BSE). BSE is widely recognized due to its pivotal and pre-eminent

role in the development of the Indian capital market.

In 1995, the trading system transformed from open outcry system to an online screen-

based order-driven trading system.

The exchange opened up for foreign ownership (foreign institutional investment).

Allowed Indian companies to raise capital from abroad through ADRs and GDRs.
Expanded the product range (equities/derivatives/debt).
Introduced the book building process and brought in transparency in IPO issuance.
Depositories for share custody (dematerialization of shares).
Internet trading (e-broking).

BSE has a nation-wide reach with a presence in more than 450 cities and towns of India.

BSE has always been at par with the international standards. It is the first exchange in

India and the second in the world to obtain an ISO 9001:2000 certifications.

The equity market capitalization of the companies listed on the BSE was US$1.63 trillion

as of December 2010, making it the 4th largest stock exchange in Asia and the 8th largest

in the world. The BSE has the largest number of listed companies in the world. As of June

2011, there are over 5,085 listed Indian companies and over 8,196 scrips on the stock

6
exchange, the Bombay Stock Exchange has a significant trading volume. Though many

other exchanges exist, BSE and the National Stock Exchange of India account for the

majority of the equity trading in India.

National Stock Exchange (NSE) : With the liberalization of the Indian economy, it was

found inevitable to lift the Indian stock market trading system on par with the

international standards. On the basis of the recommendations of high powered Pherwani

Committee, the National Stock Exchange was incorporated in 1992 by Industrial

Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India

(ICICI), Industrial Finance Corporation of India (IFCI), all Insurance Corporations,

selected commercial banks and others.

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

which adopts the principle of an order-driven market. Trading members can stay at their

offices and execute the trading, since they are linked through a communication network.

The prices at which the buyer and seller are willing to transact will appear on the screen.

When the prices match the transaction will be completed and a confirmation slip will be

printed at the office of the trading member.

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

NSE brings an integrated stock market trading network across the nation.
Investors can trade at the same price from anywhere in the country since inter-

market operations are streamlined coupled with the countrywide access to the

securities.
Delays in communication, late payments and the malpractices prevailing in the

traditional trading mechanism can be done away with greater operational

efficiency and informational transparency in the stock market operations, with the

support of total computerized network.

7
Over The Counter Exchange of India (OTCEI) : The traditional trading mechanism

prevailed in the Indian stock markets gave way to many functional inefficiencies, such as,

absence of liquidity, lack of transparency, unduly long settlement periods and benami

transactions, which affected the small investors to a great extent. To provide improved

services to investors, the country's first ring less, scrip less, electronic stock exchange -

OTCEI - was created in 1992 by country's premier financial institutions - Unit Trust of

India (UTI), Industrial Credit and Investment Corporation of India (ICICI), Industrial

Development Bank of India (IDBI), SBI Capital Markets, Industrial Finance Corporation

of India (IFCI), General Insurance Corporation and its subsidiaries and CanBank

Financial Services. Compared to the traditional Exchanges, OTC Exchange network has

the following advantages :

OTCEI has widely dispersed trading mechanism across the country which

provides greater liquidity and lesser risk of intermediary charges.

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

scrip less trading.

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

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

Faster settlement and transfer process compared to other exchanges.

Derivative Markets : The emergence of the market for derivative products such as

futures and forwards can be traced back to the willingness of risk-averse economic agents

to guard themselves against uncertainties arising out of price fluctuations in various asset

classes. This instrument is used by all sections of businesses, such as corporate, SMEs,

banks, financial institutions, retail investors, etc. According to the International Swaps

and Derivatives Association, more than 90 percent of the global 500 corporations use

derivatives for hedging risks in interest rates, foreign exchange, and equities.

8
Three broad categories of participantshedgers, speculators, and arbitragerstrade in

the derivatives market.

Hedgers face risk associated with the price of an asset. They belong to the

business community dealing with the underlying asset to a future instrument on a

regular basis. They use futures or options markets to reduce or eliminate this risk.
Speculators have a particular mindset with regard to an asset and bet on future

movements in the assets price. Futures and options contracts can give them an

extra leverage due to margining system.

Arbitragers are in business to take advantage of a discrepancy between prices in

two different markets. For example, when they see the futures price of an asset

getting out of line with the cash price, they will take offsetting positions in the two

markets to lock in a profit.

B. DEBT MARKET IN INDIA

Debt market refers to the financial market where investors buy and sell debt securities,

mostly in the form of bonds. These markets are important source of funds, especially in a

developing economy like India. India debt market is one of the largest in Asia.

The most distinguishing feature of the debt instruments of Indian debt market is that the

return is fixed. This means, returns are almost risk-free. This fixed return on the bond is

often termed as the 'coupon rate' or the 'interest rate'. Therefore, the buyer (of bond) is

giving the seller a loan at a fixed interest rate, which equals to the coupon rate.

A. Classification of Indian Debt Market

Indian debt market can be classified into two categories :

9
Government Securities Market (G-Sec Market) : It consists of central and state

government securities. It means that, loans are being taken by the central and state

government. It is also the most dominant category in the India debt market.

Bond Market : It consists of Financial Institutions bonds, corporate bonds and

debentures and Public Sector Units bonds. These bonds are issued to meet financial

requirements at a fixed cost and hence remove uncertainty in financial costs.

Advantages : The biggest advantage of investing in Indian debt market is its assured

returns. The returns that the market offer is almost risk-free (though there is always

certain amount of risks, however the trend says that return is almost assured). Safer are

the government securities. On the other hand, there are certain amounts of risks in the

corporate, FI and PSU debt instruments. However, investors can take help from the credit

rating agencies which rate those debt instruments. Another advantage of investing in India

debt market is its high liquidity. Banks offer easy loans to the investors against

government securities.

Disadvantages : As there are several advantages of investing in India debt market, there

are certain disadvantages as well. As the returns here are risk free, those are not as high as

the equities market at the same time. So, at one hand we are getting assured returns, but

on the other hand, we are getting less return at the same time.

Retail participation is also very less here, though increased recently.

B. Private Corporate Debt Market

The private corporate debt market provides an alternative means of long-term resources

(alternative to financing by banks and financial institutions) to corporate. Corporates in

India have traditionally relied heavily on borrowings from banks and financial institutions

10
(FIs) to finance their investments. Equity financing was also used, but largely during

periods of surging equity prices. However, bond issuances by companies have remained

limited in size and scope. Given the huge funding requirements, especially for long-term

infrastructure projects, the private corporate debt market has a crucial role to play and

needs to be nurtured.

C. Private Placement Market in India

In private placement, resources are raised privately through arrangers (merchant banking

intermediaries) who place securities with a limited number of investors such as financial

institutions, corporate and high net worth individuals. Under Section 81 of the Companies

Act, 1956, a private placement is defined as an issue of shares or of convertible securities

by a company to a select group of persons. An offer of securities to more than 50 persons

is deemed to be a public issue under the Act. Corporate access the private placement

market because of its certain inherent advantages. First, it is a cost and time-effective

method of raising funds. Second, it can be structured to meet the needs of the

entrepreneurs. Third, private placement does not require detailed compliance of

formalities as required in public or rights issues. The private placement market was not

regulated until May 2004.

2.2 ROLE AND IMPORTANCE OF CAPITAL MARKET IN INDIA

Capital market has a crucial significance to capital formation. For a speedy economic

development adequate capital formation is necessary. The significance of capital market

in economic development is explained below :-

11
 Mobilisation Of Savings And Acceleration Of Capital Formation :-

In developing countries like India the importance of capital market is self-evident. In this

market, various types of securities help to mobilise savings from various sectors of

population. The twin features of reasonable return and liquidity in stock exchange are

definite incentives to the people to invest in securities. This accelerates the capital

formation in the country.

Raising Long - Term Capital :-

The existence of a stock exchange enables companies to raise permanent capital. The

investors cannot commit their funds for a permanent period but companies require funds

permanently. The stock exchange resolves this dash of interests by offering an

opportunity to investors to buy or sell their securities, while permanent capital with the

company remains unaffected.

Promotion Of Industrial Growth :-

The stock exchange is a central market through which resources are transferred to the

industrial sector of the economy. The existence of such an institution encourages people

to invest in productive channels. Thus it stimulates industrial growth and economic

development of the country by mobilising funds for investment in the corporate

securities.

Ready And Continuous Market :-

The stock exchange provides a central convenient place where buyers and sellers can

easily purchase and sell securities. Easy marketability makes investment in securities

more liquid as compared to other assets.

12
 Technical Assistance :-

An important shortage faced by entrepreneurs in developing countries is technical

assistance. By offering advisory services relating to preparation of feasibility reports,

identifying growth potential and training entrepreneurs in project management, the

financial intermediaries in capital market play an important role.

Reliable Guide To Performance :-

The capital market serves as a reliable guide to the performance and financial position of

corporates, and thereby promotes efficiency.

Proper Channelisation Of Funds :-

The prevailing market price of a security and relative yield are the guiding factors for the

people to channelise their funds in a particular company. This ensures effective utilisation

of funds in the public interest.

Provision Of Variety Of Services :-

The financial institutions functioning in the capital market provide a variety of services

such as grant of long term and medium term loans to entrepreneurs, provision of

underwriting facilities, assistance in promotion of companies, participation in equity

capital, giving expert advice etc.

Development Of Backward Areas :-

Capital Markets provide funds for projects in backward areas. This facilitates economic

development of backward areas. Long term funds are also provided for development

projects in backward and rural areas.

Foreign Capital :-

13
Capital markets makes possible to generate foreign capital. Indian firms are able to

generate capital funds from overseas markets by way of bonds and other securities.

Government has liberalised Foreign Direct Investment (FDI) in the country. This not only

brings in foreign capital but also foreign technology which is important for economic

development of the country.

Easy Liquidity :-

With the help of secondary market investors can sell off their holdings and convert them

into liquid cash. Commercial banks also allow investors to withdraw their deposits, as and

when they are in need of funds.

Revival Of Sick Units :-

The Commercial and Financial Institutions provide timely financial assistance to viable

sick units to overcome their industrial sickness. To help the weak units to overcome their

financial industrial sickness banks and FIs may write off a part of their loan.

2.3 CAPITAL MARKET INSTRUMENTS

1. EQUITY (INSTRUMENT OF OWNERSHIP)

14
Equity shares are instruments issued by companies to raise capital and it represents the

title to the ownership of a company. You become an owner of a company by subscribing

to its equity capital (whereby you will be allotted shares) or by buying its shares from its

existing owner(s). As a shareholder, you bear the entrepreneurial risk of the business

venture and are entitled to benefits of ownership like share in the distributed profit

(dividend) etc. The returns earned in equity depend upon the profits made by the

company, companys future growth etc.

2. DEBT (LOAN INSTRUMENTS)

A. CORPORATE DEBT

Debentures are instrument issued by companies to raise debt capital. As an investor, you

lend you money to the company, in return for its promise to pay you interest at a fixed

rate (usually payable half yearly on specific dates) and to repay the loan amount on a

specified maturity date say after 5/7/10 years (redemption). Normally specific asset(s) of

the company are held (secured) in favour of debenture holders. This can be liquidated, if

the company is unable to pay the interest or principal amount. Unlike loans, you can buy

or sell these instruments in the market.

Types of debentures that are offered are as follows:

o Non-convertible debentures (NCD) Total amount is redeemed by the issuer

o Partially convertible debentures (PCD) Part of it is redeemed and the remaining is

converted to equity shares as per the specified terms

o Fully convertible debentures (FCD) Whole value is converted into equity at a

specified price

15
 Bonds are broadly similar to debentures. They are issued by companies, financial

institutions, municipalities or government companies and are normally not secured by any

assets of the company (unsecured). Examples are:

Infrastructure Bonds under Section 88 of the Income Tax Act, 1961

NABARD/ NHAI/REC Bonds under Section 54EC of the Income Tax Act, 1961

RBI Tax Relief Bonds

B. GOVERNMENT DEBT:

Government securities (G-Secs) are instruments issued by Government of India to raise

money. G Secs pays interest at fixed rate on specific dates on half-yearly basis. It is

available in wide range of maturity, from short dated (one year) to long dated (up to thirty

years). Since it is sovereign borrowing, it is free from risk of default (credit risk). You can

subscribe to these bonds through RBI or buy it in stock exchange.

C. MONEY MARKET INSTRUMENTS (LOAN INSTRUMENTS UP TO ONE YEAR

TENURE)

Treasury Bills (T-bills) are short term instruments issued by the Government for its cash

management. It is issued at discount to face value and has maturity ranging from 14 to

365 days. Illustratively, a T-bill issued at Rs. 98.50 matures to Rs. 100 in 91 days, offering

an yield of 6.25% p.a.

Commercial Papers (CPs) are short term unsecured instruments issued by the companies

for their cash management. It is issued at discount to face value and has maturity ranging

from 90 to 365 days.

16
 Certificate of Deposits (CDs) are short term unsecured instruments issued by the banks

for their cash management. It is issued at discount to face value and has maturity ranging

from 90 to 365 days.

3. HYBRID INSTRUMENTS (COMBINATION OF OWNERSHIP AND LOAN

INSTRUMENTS)

Preferred Stock / Preference shares entitle you to receive dividend at a fixed rate.

Importantly, this dividend had to be paid to you before dividend can be paid to equity

shareholders. In the event of liquidation of the company, your claim to the companys

surplus will be higher than that of the equity holders, but however, below the claims of

the companys creditors, bondholders / debenture holders.

Cumulative Preference Shares: A type of preference shares on which dividend

accumulates if remains unpaid. All arrears of preference dividend have to be paid out

before paying dividend on equity shares.

Cumulative Convertible Preference Shares: A type of preference shares where the

dividend payable on the same accumulates, if not paid. After a specified date, these shares

will be converted into equity capital of the company.

Participating Preference Shares gives you the right to participate in profits of the

company after the specified fixed dividend is paid. Participation right is linked with the

quantum of dividend paid on the equity shares over and above a particular specified level.

4. MUTUAL FUNDS

17
Mutual funds collect money from many investors and invest this corpus in equity, debt or

a combination of both, in a professional and transparent manner. In return for your

investment, you receive units of mutual funds which entitle you to the benefit of the

collective return earned by the fund, after reduction of management fees.

Mutual funds offer different schemes to cater to the needs of the investor are regulated by

securities and Exchange board of India (SEBI)

Types of Mutual Funds

At the fundamental level, there are three types of mutual funds:

o Equity funds (stocks)

o Fixed-income funds (bonds)

o Money market funds

CHAPTER : 3

18
 SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

Initially SEBI was a non statutory body without any statutory power. However in 1995,

the SEBI was given additional statutory power by the Government of India through an

amendment to the securities and Exchange Board of India Act 1992. In April, 1998 the

SEBI was constituted as the regulator of capital market in India under a resolution of the

Government of India.

The basic objectives of the Board were identified as :

To protect the interests of investors in securities;

To promote the development of Securities Market;
To regulate the securities market and
For matters connected therewith or incidental thereto.

In 2002, SEBI is further empowered to do the following:-

1. To file complaints in courts and to notify its regulations without prior approval of

government.

2. To regulate issue of capital and transfer of securities.

3. To impose monetary penalties on various intermediaries and other participants for a

specified range of violations.

4. To issue direction to and to call for documents from all intermediaries.

ROLE, POWERS AND FUNCTIONS OF SEBI :-

1. Protection Of Investor's Interest :-

19
SEBI frames rules and regulations to protect the interest of investors.

It monitors whether the rules and regulations are being followed by the concerned parties

i.e., issuing companies, mutual funds, brokers and others. It handles investor grievances

or complaints against brokers, securities issuing companies and others.

2. Restriction On Insider Trading :-

SEBI restricts insider trading activity. It prohibits dealing, communication or counselling

on matters relating to insider trading. SEBIs regulation states that no insider (connected

with the company) shall - either on his own behalf or on behalf of any other person, deal

in securities of a company listed on any stock exchange on the basis of any unpublished

price sensitive information.

3. Regulates Stock Brokers Activities :-

SEBI has also laid down regulations in respect of brokers and sub-broker. No brokers or

sub-broker can buy, sell or deal in securities without being a registered member of SEBI.

It has also made compulsory for brokers to maintain separate accounts for their clients

and for themselves. They must also have their books audited and audit reports filed with

SEBI.

4. Regulates Merchant Banking :-

SEBI has laid down regulations in respect of merchant banking activities in India. The

regulations are in respect of registration, code of conduct to be followed, submission of

half-yearly results and so on

5. Dematerialisation Of Shares :-

20
Demat of shares has been introduced in all the shares traded on secondary stock markets

as well as those issued to public in prirriary markets. Even bonds and debentures are

allowed in demat form.

6. Guidelines On Capital Issues :-

SEBI has framed necessary guidelines in connection with capital issues. The guidelines

are applicable to :- First Public Issue of New Companies, First Public Issue by Existing

Private / Closely held Companies, Public Issue by Existing Listed Companies.

7. Regulates Working Of Mutual Funds :-

SEBI regulates the working of mutual funds. SEBI has laid down rules and regulations

that are to be followed by mutual funds. SEBI may cancel the registration of a mutual

fund, if it fails to comply with the regulations.

8. Monitoring Of Stock Exchanges:-

To improve the working of stock markets, SEBI plays an important role in monitoring

stock exchanges. Every recognised stock exchange has to furnish to SEBI annually with a

report about its activities during the previous year.

9. Investors Grievances Redressal :-

SEBI has introduced an automated complaints handling system to deal with investor

complaints. It assist investors who want to make complaints to SEBI against listed

companies.

CHAPTER : 4

21
 DEVELOPMENT OF CAPITAL MARKET IN INDIA

4.1 REFORMS IN CAPITAL MARKET OF INDIA

The major reform undertaken in capital market of India includes :

Establishment of SEBI :

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

status in 1992. SEBI was primarily set up to regulate the activities of the merchant banks,

to control the operations of mutual funds, to work as a promoter of the stock exchange

activities and to act as a regulatory authority of new issue activities of companies.

Establishment of Creditors Rating Agencies :

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

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

Limited (ICRA - 1991) and Credit Analysis and Research Limited (CARE) were set up in

order to assess the financial health of different financial institutions and agencies related

to the stock market activities. It is a guide for the investors also in evaluating the risk of

their investments.

Increasing of Merchant Banking Activities :

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

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

facilities, issue organizing, consultancy services, etc.

Rising Electronic Transactions :

22
Due to technological development in the last few years. The physical transaction with

more paper work is reduced. It saves money, time and energy of investors. Thus it has

made investing safer and hassle free encouraging more people to join the capital market.

Growing Mutual Fund Industry :

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

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

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

terms of schemes, maturity, etc. has taken place in mutual funds in India. It has given a

wide choice for the common investors to enter the capital market.

Dematerialisation Of Shares :-

Demat of shares has been introduced in all the shares traded on the secondary stock

markets as well as those issued to the public in the primary markets. Even bonds and

debentures are allowed in demat form. The advantage of demat trade is that it involves

Paperless trading.

Screen Based Trading :-

The Indian stock exchanges were modernised in 90s, with Computerised Screen Based

Trading System (SBTS), It cuts down time, cost, risk of error and fraud and there by leads

to improved operational efficiency. The trading system also provides complete online

market information through various inquiry facilities.

Investor Protection :-

23
The Central Government notified the establishment of Investor Education and Protection

Fund (IEPF) with effect from 1st Oct. 2001: The IEPF shall be credited with amounts in

unpaid dividend accounts of companies, application moneys received by companies for

allotment of any securities and due for refund, matured deposits and debentures with

companies and interest accrued there on, if they have remained unclaimed and unpaid for

a period of seven years from the due date of payment. The IEPF will be utilised for

promotion of awareness amongst investors and protection of their interests.

Rolling Settlement :-

Rolling settlement is an important measure to enhance the efficiency and integrity of the

securities market. Under rolling settlement all trades executed on a trading day (T) are

settled after certain days (N). This is called T + N rolling settlement. Since April 1, 2002

trades are settled' under T + 3 rolling settlement. In April 2003, the trading cycle has been

reduced to T + 2 days. The shortening of trading cycle has reduced undue speculation on

stock markets.

The Clearing Corporation Of India Limited (CCIL) :-

The CCIL was registered in 2001, under the Companies Act, 1956 with the State Bank of

India as the Chief Promoter. The CCIL clears all transactions in government securities

and repos and also Rupee / US $ forex spot and forward deals All trades in government

securities below Rs. 20 crores would be mandatorily settled through CCIL, white those

above Rs. 20 crores would have the option for settlement through the RBI or CCIL.

The National Securities Clearing Corporation Limited (NSCL) :-

The NSCL was set up in 1996. It has started guaranteeing all trades in NSE since July

1996. The NSCL is responsible for post-trade activities of NSE. It has put in place a

24
comprehensive risk management system, which is constantly monitored and upgraded to

pre-expect market failures.

Growing Stock Exchanges :

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

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

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

Exchange of India has joined the existing stock exchanges.

Trading In Central Government Securities :

In order to encourage wider participation of all classes of investors, Including retail

investors, across the country, trading in government securities has been introduced from

January 2003. Trading in government securities can be carried out through a nation wide,

anonymous, order-driver, screen-based trading system of stock exchanges in the same

way in which trading takes place in equities.

Accessing Global Funds Market :

Indian companies are allowed to access global finance market and benefit from the lower

cost of funds. They have been permitted to raise resources through issue of American

Depository Receipts (ADRs), Global Depository Receipts (GDRs), Foreign Currency

Convertible Bonds (FCCBs) and External Commercial Borrowings (ECBs). Further

Indian financial system is opened up for investments of foreign funds through Non-

Resident Indians (NRIs), Foreign Institutional investors (FIls), and Overseas Corporate

Bodies (OCBs).

Growth of Derivative Transactions :

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

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

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

market.

Commodity Trading :

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

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

transactions is growing at a splendid rate.

Internet Trading :-

Trading on stock exchanges is allowed through internet, investors can place orders with

registered stock brokers through internet. This enables the stock brokers to execute the

orders at a greater pace.

Buy Back Of Shares :-

Since 1999, companies are allowed to buy back of shares. Through buy back, promoters

reduce the floating equity stock in market. Buy back of shares help companies to

overcome the problem of hostile takeover by rival firms and others.

PAN Made Mandatory :-

In order to strengthen the Know your client" norms and to have sound audit trail of

transactions in securities market, PAN has been made mandatory with effect from January

1, 2007.

These reforms have resulted into the tremendous growth of Indian capital market.

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4.2 GROWTH OF CAPITAL MARKET IN INDIA

After Independence capital market has shown a remarkable progress. The first organised

stock exchange was established in India at Bombay in 1887. When the Securities

Contracts (Regulation) Act 1956 was passed, only 7 Stock exchanges Viz. Mumbai,

Ahmedabad, Kolkata, Chennai, Delhi, Hyderabad and Indore, received recognition. By

end of March 2004, the number of stock exchanges increased to 23.

1) Primary Market :-

After liberalisation policy of 1991 and the abolition of capital issues control with effect

from May 29,1992, the primary market got a tremendous, boost. The number of new

capital issues by private sector was only 364 in 1990-91 and the amount raised by them

was 4,312 crore. The number of new capital issues rose to 1,678 in 1994-95 and the

amount raised by them was 26,418 crore. Since 1995 the capital market was sluggish and

the resources raised fell to 10,409 crores in 1996-97. In 2003-04, the amount raised from

new capital issues was only 3,210 crores. In 2004 it increased again to 33,475 crore and

in 2005 30,325 crore of resources were raised on this market. The primary issues of debt

securities felt a low of around 66 crore in 2005.

2) Secondary Market :-

In 1991-92, there was an huge rise in the share prices. The RBI All India Index Number

of Ordinary Share Prices rose to 1,485.4 in 1991-92 (base year 1980-81), showing a gain

of 181.4%. In 1992-93 due to irregularities the Stock Market declined. The years 1993

and 1994 saw increased activity in stock market due to Better performance of companies,

Improvement in Balance of Payment position, Increasing investment by Foreign

Institutional investors etc.

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FACTORS CONTRIBUTING TO THE GROWTH OF CAPITAL MARKET :-

1) Growth Of Development Banks And Financial Institutions :-

For providing long term funds to industry, the government set up Industrial Finance

Corporation in India (IFCI) in 1948. This was followed by a number of other

development banks and institutions like the Industrial Credit and Investment Corporation

of India (ICICI) in 1955, Industrial Development Bank of India (IDBI) in 1964, Industrial

Reconstruction Corporation of India (IRCI) in 1971, Foreign Investment Promotion

Board in 1991, Over the Counter Exchange of India (OTCEI) in 1992 etc. In 1969, 14

major commercial banks were nationalised. Another 6 banks were nationalised in 1980.

These financial institutions and banks have contributed in widening and strengthening of

capital market in India.

2) Setting Up Of SEBI :-

The Securities Exchange Board of India (SEBI) was set up in 1988 and was given

statutory recognition in 1992.

3) Credit Rating Agencies :-

Credit rating agencies provide guidance to investors / creditors for determining the credit

risk. The Credit Rating Information Services of India Limited (CRISIL) was set up in

1988 and Investment Information and Credit Rating Agency of India Ltd. (ICRA) was set

up in 1991. These agencies are likely to help the development of capital market in future.

4) Growth Of Mutual Funds :-

The mutual funds collects funds from public and other investors and channelise them into

corporate investment in the primary and secondary markets. The first mutual fund to be

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set up in India was Unit Trust of India in 1964. In 2007-08 resources mobilised by mutual

funds were Rs. 1,53,802 crores.

5) Increasing Awareness :-

During the last few years there have been increasing awareness of investment

opportunities among the public. Business newspapers and financial journals (The

Economic Times, The Financial Express, Business India, Money etc.) have made the

people aware of new long-term investment opportunities in the security market.

6) Growing Public Confidence

A large number of big corporations have shown impressive growth. This has helped in

building up the confidence of the public. The small investors who were not interested to

buy securities from the market are now showing preference in favour of shares and

debentures. As a result, public issues of most of the good companies are now over-

subscribed many times.

7) Legislative Measures :-

The government passed the companies Act in 1956. The Act gave powers to government

to control and direct the development of the corporate enterprises in the country. The

capital Issues (control) Act was passed in 1947 to regulate investment in different

enterprises, prevent diversion of funds to non-essential activities and to protect the

interest of investors. The Act was replaced in 1992.

8) Growth Of Underwriting Business :-

The growing underwriting business has contributed significantly to the development of

capital market.

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9) Development Of Venture Capital Funds :-

Venture capital represents financial investment in highly risky projects with a hope of

earning high returns After 1991, economic liberalisation has made possible to provide

medium and long term funds to those firms, which find it difficult to raise funds from

primary markets and by way of loans from FIs and banks.

10) Growth Of Multinationals (MNCs) :-

The MNCs require medium and long term funds for setting up new projects or for

expansion and modernisation. For this purpose, MNCs raise funds through loans from

banks and FIs. Due to the presence of MNCs, the capital market get a boost.

4.3 CHALLENGES FACED BY INDIAN CAPITAL MARKET

Opening of the financial markets will result in competition and greater efficiency

.However, foreign participation will bring increased risk and exposure . Stability is thus

need for financial markets for which safeguarding mechanism need to be established.

The equity market in India is extremely vibrant but equity based funding solely, cannot

lead the economy to growth. The debt market remains underdeveloped with a huge

potential for increased activity. A strong hand is required to drive the long term financing

of infrastructure, housing and private sector development.

The road ahead for deepening the capital market need to be paved by the strong linkage

between development of economy and the financial system. A greater measure of

transparency is also required to built regulating procedures, to bring in a new dimension

to financial market and take it to the next level.

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One of the challenges before the Indian capital market is expanding the investor base and

provide them access to high quality financial service .With a population of more than a

billion, a mere 1% of population participates in capital market and of that only a fraction

is active. Investor participation is very shallow considering the size of Indian economy

Trading volume in Indian capital market are lower as compared to other markets such as

US, China, UK, Germany etc.

Another Challenge faced by the investor is the cost involved in trading, which are

comparatively higher in India , than in developed markets.

Way Forward to Capital Market

1. Investor education and regulation of mutual fund distributors

2. Allowing AMCs to the flexibility to charge fees

3. Innovative products across different asset classes

4. Amending tax regime to encourage domestic AMCs to manage foreign funds from

India

5. Although higher investment by domestic institutional investors such as insurance

companies , pension funds to make investment in capital markets

6. Make implementation of proposal of SME stock exchange effective

7. Allowing institutional investors to participate in commodity markets

8. Reduction in current withholding tax of 20% on income from debt securities to

encourage investment in debt market

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 CONCLUSION

The Indian capital market has undergone significant change in the last two decades. It has

become efficient through use of modern day technology and proactive legislation. It has

attracted significant global interest and has managed to establish confidence of both

global and local investors. However, as the economy grows, so does its requirements.

Change is a constant and therefore the Indian capital markets also need to continue to

evolve to ensure that it meets the challenges of the current day.

Stock market is considered as most suitable investment for the common people as they

can invest their money into the diversified managed portfolio at relatively low cost. It

may be concluded that due to number of reforms, the capital market of India has

developed a lot, it has made it possible to compare Indian capital market with the

international capital market. SEBI is doing a lot of work for the development of capital

market. It has brought greater transparency in the affairs of organizations and stock

exchanges, though not to the optimum mark. Still the investor doesn't have hundred

percent confidence in capital market. It seems that SEBI worked slowly in transforming

Indian stock market into a globally competitive and contemporary market.

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 BIBLOGRAPHY

BOOKS :

Goyal, Ashima (2005), Regulation and Deregulation of the Stock Market in India,

Available at SSRN: http://ssrn.com/abstract=609322

Gokarn, Subir (1996), Indian Capital Market Reforms, 1992-96: An Assessment,

Economic and Political Weekly, April 13, 1996

Sabarinathan, G (2010). Securities and Exchange Board of India and the Regulation of

Indian Securities Market

Nayak, Jayendra P (1999): in India's Financial System: Getting Ready for the Twenty

First Century, edited by James AHanson and Sanjay Kathuria

WEBSITES :

www.sebi.gov.in

www.rbi.org.in

www.bseindia.com

http://business.mapsofindia.com/india-market/debt.html

http://en.wikipedia.org/wiki/Capital_market

http://kalyan-city.blogspot.com/2010/09/reforms-developments-in-indian-capital.html

http://www.pwc.com/in/en/publications/india-captial-market-11-feb.jhtml

http://business.gov.in/business_financing/capital_market.php

http://www.economywatch.com/market/capital-market/indian.html

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