What Is Capital Market...........

Booming Of Indian Capital Market
1.1 GENERAL INDIAN ECONOMY

India is the fourth largest economy in the world, and has the second largest GDP among developing countries, based on purchasing power parity. Until the economic reforms in 1991, the Indian economy was characterized by highly regulated business environment with high tariffs. Later due to economic reforms that were highly supported by successive governments have ensured India's position in the global map as the favored investment destination with open and liberal police. External trade has been liberalized, tariffs steadily lowered, import controls progressively reduced and tax rates have been rationalized and are at present are lowest ion the world.
1.2 FINANCIAL MARKET AN OVERVIEW:Financial markets are an integral part of the economy of any nation. They play a key role in the development of the Indian economy. In simple words financial markets facilitate the reallocation of savings from savers to entrepreneurs. In India the financial markets and institutions have, in recent years, undergone significant changes keeping in pace with the changing needs of market participants. Also the market has gone through various stages of liberalization that has increased its degree of integration with the global markets. In the financial markets savings are linked to investment by a variety of intermediaries through a range of complex financial products called securities. Securities are defined in the securities contracts (regulation) act, 1956 to include shares, bond, scrip, stocks, or other marketable securities of like nature in or of any incorporate company or body corporate, government securities, derivatives of securities, units of collective investment scheme, interest and rights in securities, security receipts or any other instruments so declared by central Government.
1.3 CLASSIFICATION OF FINANCIAL MARKETS

The financial market comprises of two broad groups Financial market
Capital market
Money market
Gilt ended securities market
Industrial Securities Market
Primary Market
Secondary market
1.3(A) CAPITAL MARKET? Capital market may be defined as a market for borrowings and lending long term capital funds required by business enterprises. Capital market is the market for financial assets that have long or indefinite maturity. Capital market offers an ideal source of external finance. Capital market forms an important part of countrys financial system too. Capital market represents all the facilities and the institutional arrangements for borrowing and lending medium-term and long term funds.like any financial market, capital market is also composed of those who demands funds (borrowers) and those who supply (lenders). The capital market is the market for securities, where companies and governments can raise long-term funds. The capital market includes the stock market and the bond market. Financial regulators, the capital markets consist of the primary market, where new issues are distributed to investors, and the secondary market, where existing securities are traded.

IMPORTANCE OF CAPITAL MARKET The capital market serves a very useful purpose by pooling the capital resources of the country and making them available to the enterprising investors well-developed capital markets augment resources by attracting and lending funds on the global scale. A developed capital market can solve this problem of paucity of funds. For an organized capital market can mobilize and pool together even the small and scattered savings and augment the availability of invest able funds. While the rapid growth of capital markets, the growth of joint stock business has in its turn encouraged the development of capital markets. A developed capital market provides a number of profitable investment opportunities for small savers. The Indian capital market is broadly divided into the gilt-edged market and the industrial securities market. GILT-EDGED MARKET Gilt-edged Market also known as government securities market is the market for government and semi-government securities. AN important feature of the securities traded in this market is that they are stable in value and are much sought after by banks (as banks are obligated under the banking regulation act to maintain a proportion of total deposits in government securities). Some of the special feature of gilt edged market is as follows:1. 2. 3. 4. 5. Guaranteed return on investment No speculation in securities Institutional based investor which are completed by law to invest portion of their funds in these securities Predominated by such institution as LIC , GIC, the provident funds and the commercial banks Heavy volume of transactions necessitating negotiation of each transaction INDUSTRAIL SECURITIES MARKET
This market deals with equities, bonds and derivatives. The securities market has essentially three categories of participants, namely the issuer of securities, investors in securities and the intermediaries. The issuer and investor are consumer of services rendered b the intermediaries. While the investors are consumers of securities issued by the issuer as they subscribe for and trade in those securities. The securities market has two independent and inseparable segments 1. PRIMARY MARKET 2. SECONDARY MARKET PRIMARY MARKET Meaning:- Primary market also known as new issue market is a market for raising fresh capital in the form of shares and debentures. Corporate enterprise, which are desirous of raising capital funds through the issue of securities, approach the primary market. Issuers exchange financial securities for long-term funds. The primary market allows for the formation of capital in the country and the accelerated industrial and economic development. Modes of Raising Capital:Following are the popular ways by which capital funds are raised in the primary market:1. Public Issue: - Where the securities are issued to the members of the general public, it takes the form of public issue. It is the most of popular method of raising long term funds
2. Rights Issue:-
Where the issue of equity shares of a body corporate is made to
the existing shareholder as a pre-emptive right, it takes the form of right issue

Under this method, additional securities are offered for subscription to the existing shareholders. 3. Private Placement:Where the shares of a body corporate are sold to a group of
small investors, it takes the form of private placement.
SECONDARY MARKET The securities are issued in the primary market; they are traded in the secondary market by the investors. The stock exchanges along with a host of other intermediaries provide the necessary platform for trading in secondary market and also for clearing and settlement. The securities are traded, cleared and settled within the regulatory framework prescribed by the Exchanges and the SEBI. The secondary market operates through two mediums, namely, the over-the-counter (OTC) market and the exchange-traded market. OTC markets are informal markets where trades are negotiated. Most of the trades in the government securities are in the OTC market. All the spot trades where securities are traded for immediate delivery and payment take place in the OTC market. The other option is to trade using the infrastructure provided by the stock exchanges. There are 23 exchanges in India and all of them follow a systematic settlement period. All the trades taking place over a trading cycle (day=T) are settled together after a certain time (T+2 day). The trades executed on the National Stock Exchange (NSE) are cleared and settled by a clearing corporation. The clearing corporation acts as a counterparty and guarantees settlement. Nearly 100% of the trades in capital market segment are settled through demat delivery. NSE also provides a formal trading platform for trading of a wide range of debt securities, including government securities. A variant of the secondary market is the forward market, where securities are traded for future delivery and payment. A variant of the forward market is Futures and Options market. Presently only two

exchanges viz., NSE and Stock Exchange, Mumbai (BSE) provides trading in the derivatives of securities. IMPORTANCE The importance of the secondary market springs from the fact that it acts as the basis upon with rests the edifice of the primary market. In other words, for the effficent growth of the primary market, a sound secondary market is an essential requirement. This is because the secondary offers an important facility to transfer of securities. DEVELOPMENT OF SECONDARY MARKET While there has been increased activity in primary debt issues, the secondary market for debt is yet to become active. The entry of FIIs into the debt market and the launching of fixed income schemes and money market schemes by mutual funds are expected to activate the debt market. Several technical impediments that prevented more active secondary market trading in Government securities have been removed over the past few years. But still there are significant barriers to the active development of the secondary market for fixed income assets.
1.3(B) MONEY MARKET?

The money market concerned with borrowings and lending of short term funds. It deals with near substitutes for money like trade bills, Promissory notes and government papers drawn or a short period not exceeding one year. These short term instruments can be converted into cash readily without any loss and at low transactions cost. This market supplies fund for financing current business operations, working capital requirements, and short period requirements of the government
END OF CHAPTER 1
2.1 HISTORY OF THE INDIAN CAPITAL MARKETS 2.1 (A)ORIGIN

The history of the capital market in India dates back to the eighteenth century when East India Company securities were traded in the country. Until the end of the nineteenth century, securities trading was unorganized and the main trading centres were Bombay (now Mumbai) and Calcutta (now Kolkata). Of the two, Bombay was the chief trading centre wherein bank shares were the major trading stock. During the American Civil War (1860-61), Bombay was an important source of supply for cotton. Hence, trading activities flourished during the period, resulting in a boom in share prices. This boom, the first in the history of the Indian capital market, lasted for a half a decade. The bubble burst on July 1, 1865, when there was tremendous slump in share prices. Trading was at that time limited to a dozen brokers: their trading place was under a banyan tree in front of the Town Hall in Bombay. These stockbrokers organized an informal association in 1875-Native Shares and Stock Brokers Association, Bombay. The stock exchanges in Calcutta and Ahmedabad, also industrial and trading centers, came up later. The Bombay Stock Exchange was recognized in May 1927 under the Bombay Securities Contracts Control Act,1 925. The capital market was not well organized and developed during the British rule because the British government was not interested in the economic growth of the country. As a result, many foreign companies depended on the London capital market for funds rather than on the Indian capital market.
In the post-independence period also, the size of the capital market remained small. During the first and second five-year plans, the governments emphasis was on the development of the agricultural sector and public sector undertakings. The public sector undertakings were healthier than the private undertakings in terms of paid-up capital but
10

their shares were not listed on the stock exchanges. Moreover, the Controller of Capital Issues (CCI) closely supervised and controlled the timing, composition, interest rates, pricing, allotment, and floatation costs of new issues. These strict regulations de motivated many companies from going public for almost four and a half decades. In the 1950s, Century Textiles, Tata Steel, Bombay Dyeing, National Rayon, and Kohinoor Mills were the favorite scrips of speculators. As speculation became rampant, the stock market came to be known as Satta Bazaar. Despite speculation, non-payment or defaults were not very frequent. The government enacted the Securities Contracts (Regulation) Act in 1956s was also characterized by the establishment of a network for the development of financial institutions and state financial corporations.
The 1960s was characterized by wars and droughts in the country which led to bearish trends. These trends were aggravated by the ban in 1969 on forward trading and badla, technically called contracts for clearing. Badla provided a mechanism for carrying forward positions as well as borrowing funds. Financial institutions such as LIC and GIC helped to revive the sentiment by emerging as the most important group of investors. The first mutual fund of India, the Unit Trust of India (UTI) came into existence in 1964.
In the 1970s, badla trading was resumed under the disguised form of handdelivery contracts-A group. This revived the market. However, the capital market received another severe setback on July 6, 1974, when the government promulgated the Dividend Restriction Ordinance, restricting the payment of dividend by companies to 12 per cent of the face value or one-third of the profits of the companies that can be distributed as computed under section 369 of the Companies Act, whichever was lower. This led to a slump in market capitalization at the BSE by about 20 per cent overnight and the stock market did not open for nearly a fortnight.
11

The stock markets have had many turbulent times in the last 140 years of their existence. The imposition of wealth and expenditure tax in 1957 by Mr. T.T. Krishnamachari, the then finance minister, led to a huge fall in the markets. The dividend freeze and tax on bonus issues in 1958-59 also had a negative impact. War with China in 1962 was another memorably bad year, with the resultant shortages increasing prices all round. This led to a ban on forward trading in commodity markets in 1966, which was again a very bad period, together with the introduction of the Gold Control Act in 1963. 2.2(B) GROWTH The next big boom and mass participation by retail investors happened in 1980, with the entry of Mr. Dhirubhai Ambani. Dhirubhai can be said to be the father of modern capital markets. The Reliance public issue and subsequent issues on various Reliance companies generated huge interest. Later came buoyancy in the stock markets when the multinational companies (MNCs) were forced to dilute their majority stocks in their Indian ventures in favour of the Indian public under FERA, 1973. Several MNCs opted out of India. One hundred and twenty-three MNCs offered shares were lower than their intrinsic worth. Hence, for the first time, the FERA dilution created an equity cult in India. It was the spate of FERA issues that gave a real fillip to the Indian stock markets. For the first time, many investors got an opportunity to invest in the stocks of such MNCs as Colgate, and Hindustan Liver Limited. Then, in 1977, a little-known entrepreneur, Dhirubhai Ambani, tapped the capital market. The scrip, Reliance Textiles, is still a hot favourite and dominates trading at all stock exchanges The 1980s witnessed an explosive growth of the securities market in India, with millions of investors suddenly discovering lucrative opportunities. Many investors jumped into the stock markets for the first time. The governments liberalization process initiated during the mid-1980s, spurred this growth. Participation by small investors, speculation, defaults, ban on badla, and resumption of badla continued. Convertible
12

debentures emerged as a popular instrument of resource mobilization in the primary market. The introduction of public sector bonds and the successful mega issues of Reliance Petrochemicals and Larsen and Toubro gave a new lease of life to the primary market. This, in turn, enlarged volumes in the secondary market. The decade of the 1980s was characterized by an increase in the number of stock exchanges, listed companies, paid up-capital, and market capitalization.
The 1990s will go down as the most important decade in the history of the capital market of India. Liberalization and globalization were the new terms coined and marketed during this decade. The Capital Issues (Control) Act, 1947 was repealed in May 1992. The decade was characterized by a new industrial policy, emergence of SEBI as a regulator of capital market, advent of foreign institutional investors, euro-issues, free pricing, new trading practices, new stock exchanges, entry of new players such as private sector mutual funds and private sector banks, and primary market boom and bust. Major capital market scams took place in the 1990s. These shook the capital market and drove away small investors from the market. The securities scam of March 1992 involving brokers as well as bankers was on of the biggest scams in the history of the capital market. In the subsequent years owing to free pricing, many unscrupulous promoters, who raised money from the capital market, proved to be fly-by-night operators. This led to erosion in the investors confidence. The M S Shoes case, one such scam which took place in March 1995, put a break on new issue activity. The 1991-92 securities scam revealed the inadequacies of and inefficiencies in the financial system. It was the scam, which prompted a reform of the equity market. The Indian stock market witnessed a sea change in terms of technology and market prices. Technology brought radical changes in the trading mechanism. The Bombay Stock Exchange was subject to nationwide competition by two new stock exchanges-the National Stock Exchange, set up in 1994, and Over the Counter Exchange of India, set up in 1992. The National Securities Clearing Corporation (NSCC) and National Securities Depository Limited (NSDL) were set up in April 1995 and November 1996 respectively
13

form improved clearing and settlement and dematerialized trading. The Securities Contracts (Regulation) Act, 1956 was amended in 1995-96 for introduction of options trading. Moreover, rolling settlement was introduced in January 1998 for the dematerialized segment of all companies. With automation and geographical spread, stock market participation increased.
In the late 1990s, the Information Technology (IT) scrips were dominant on the Indian bourses. These scrips included Infosys, Wipro, and Satyam. They were a part of the favourite scrips of the period, also known as New Economy scrips, along with telecommunications and media scrips. The new economy companies are knowledge intensive unlike the old economy companies that were asset intensive.
2.3(C) PRESENT SCENARIO The Indian capital market entered the twenty-first century with the Ketan Parekh scam. As a result of this scam, badla was discontinued from July 2001 and rolling settlement was introduced in all scrips. Trading of futures commenced from June 2000, and Internet trading was permitted in February 2000. On July 2, 2001, the Unit Trust of India announced suspension of the sale and repurchase of its flagship US-64 scheme due to heavy redemption leading to panic on the bourses. The governments decision to privatize oil PSUs in 2003 fuelled stock prices. One big divestment of international telephony major VSNL took place in early February 2002. Foreign institutional investors have emerged as major players on the Indian bourses. NSE has an upper hand over its rival BSE in terms of volumes not only in the equity markets but also in the derivatives market. It has been a long journey for the Indian capital market. Now the 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. Advances in computer and communications technology, coming together on Internet are shattering geographic 14

boundaries and enlarging the investor class. Internet trading has become a global phenomenon. The Indian stock markets are now getting integrated with global markets The current financial year witnessed significant improvements to institutional mechanisms, where the equity market achieved major milestones in the form of complete switchover to rolling settlement and the extension of derivatives trading in equity to index options, stock options and stock futures. The onset of a full range of equity derivatives is an important land mark in the development of the Indian stock market. The closing month of calendar 2001 witnessed a significant increase in equity derivatives turnover at the National Stock Exchange (NSE) . As regards the Government debt market, the year has been characterized by significant moves for important developmental work which should help in transforming the market in the coming years. Indias capital markets have experienced sweeping changes since the beginning of the last decade. Its market infrastructure has advanced while corporate governance has progressed faster than in many other emerging market economies. But in contrast to several developed countries and Asian economies, Indias capital markets are still shallow, implying that further reforms are needed to make India a world-class financial centre. At nearly 40% of GDP, the size of Indias government bond segment is comparable to many other emerging market economies. Its corporate bond market, however, remains small and is dwarfed by those of the United States, South Korea and Malaysia. India boasts a dynamic equity market. The sharp rise in Indias stock markets since 2003 reflects its improving macroeconomic fundamentals. However, the large size of insider holdings and the small presence of institutional investors belie these impressive figures.
15

Innovative products such as securities debt and fund products based on alternative assets are starting to break ground. But an enabling environment is not yet in place and there remains an overriding need to increase domestic investors knowledge regarding the merits and risks of capital market investing. A vibrant, well-developed capital market has been shown to facilitate investment and economic growth. We believe that persistent reforms in the sector can support Indias already impressive growth trend in the coming years.
2.2 A MODERN DYNAMIC CAPITAL MARKET 2007

The market has been transformed in the 15 years since SEBI emerged as the statutory regulator of Indias securities market. Indias market in 2007 features a developed regulatory environment, a modern market infrastructure, a steadily increasing market capitalization and liquidity, better allocation and mobilization of resources, a rapidly developing derivatives market, a robust mutual fund industry, and increased issuer transparency. This Table compares some key market statistics for Indian markets in 1992 and 2007.
16
2.3
SIGNIFICANT
PARTICIPATION
OF
FOREIGN
INSTITUTIONAL INVESTORS (FII)

The changes in market structure, regulation and technology about the Indian brought significant securities
qualitative changes in market, greatly reduced systemic and settlement risks, and helped create more transparent, liquid and efficient securities markets. confidence Increasing in the
fairness and efficiency of the market, and the elimination of barriers to foreign institutional investment in 1994, fueled the growth of foreign portfolio investment. Portfolio Investment by Foreign Institutional Investors (FIIs) in India has grown every year since then, except for 1998, when the Asian crisis led to a major exodus across all markets. This chart shows the FII investments in Indian markets since 1994-95.
2.4
REGULATORY
FRAMEWORK
OF
INDIAN
CAPITAL
MARKET
In India, the capital market is regulated by the Capital Markets Division of the Department of Economic Affairs, Ministry of Finance. The division is responsible for formulating the policies related to the orderly growth and development of the securities markets (i.e. share, debt and derivatives) as well as protecting the interest of the investors. In particular, it is responsible for
17

(i) (ii) (iii) (iv) institutional reforms in the securities markets, building regulatory and market institutions, strengthening investor protection mechanism, and providing efficient legislative framework for securities markets, such as Securities and Exchange Board of India Act, 1992 (SEBI Act 1992); Securities Contracts (Regulation) Act, 1956; and the Depositories Act, 1996. The division administers these legislations and the rules framed there under. The Securities and Exchange Board of India (SEBI) is the regulatory authority established under the SEBI Act 1992, in order to protect the interests of the investors in securities as well as promote the development of the capital market. It involves regulating the business in stock exchanges; supervising the working of stock brokers, share transfer agents, merchant bankers, underwriters, etc; as well as prohibiting unfair trade practices in the securities market. The following departments of SEBI take care of the activities in the secondary market:
Market Intermediaries Registration and Supervision Department (MIRSD) concerned with the registration, supervision, compliance monitoring and inspections of all market intermediaries in respect of all segments of the markets, such as equity, equity derivatives, debt and debt related derivatives.
Market Regulation Department (MRD) - concerned with formulation of new policies as well as supervising the functioning and operations (except relating to derivatives) of securities exchanges, their subsidiaries, and market institutions such as Clearing and settlement organizations and Depositories.
Derivatives and New Products Departments (DNPD) - concerned with supervising trading at derivatives segments of stock exchanges, introducing new products to be traded and consequent policy changes
18
Booming Of Indian Capital Market 2.5 NATURE OF THE INDIAN CAPITAL MARKET
Like the money market, the Indian capital market also consists of an organized sector and an unorganized sector. In the organized market the demand for capital comes mostly from corporate enterprises and government and semi-government institutions and the supply comes from household savings, institutional investors like banks investment trusts, insurance companies, finance corporations, government and international financing agencies. Whereas, the unorganized market consists mostly of the indigenous bankers and moneylenders on the supply side.
2.5 (A) DEVELOPMENT OF THE MARKET The Indian capital market has undergone remarkable changes in the post-independence era. Certain steps taken by the government to place the market on a strong footing and develop it to meet the growing capital requirements of fast industrialization and development of the economy have significantly contributed to the developments that took place in the Indian capital market over the last five decades or so. The important facts that have contributed to the development of the capital marketing India are the following. 1. Legislative measures: Laws like the companies act, the securities contracts (Regulations) and the capital issues (Control). Act empowered the government to regulate the activities of the capital market with a view to assuring healthy trends in the market, protecting the interests of the investors, efficient utilization of the resources, etc. 2. Establishment of development banks and expansion of the public sectors: Starting with the establishment of the IFCI, a number of development banks have been established at national and regional levels to provide financial and other development assistance to
19

the entrepreneurs and enterprises. These institutions today account for a large chunk of the industrial finance. 3. Growth of underwriting business: There has been a phenomenal growth in the underwriting business thanks mainly to the public financial corporations and the commercial banks. In the last one decade the amount underwritten as percentage of total private capital issues offered to public varied between 72 per cent and 97 per cent. 4. Public confidence: Impressive performance of certain large companies encouraged public investment in industrial securities. 5. Increasing awareness of investment opportunities: The improvement in education and communication has created more public awareness about the investment opportunities in the business sector. The market for industrial securities has become broader. 6. Capital Market Reforms: A number of measures have been taken to check abuses and to promote healthy development of the capital market.
20
Booming Of Indian Capital Market 2.6 QUALITATIVE COMPARISON OF INDIAN SECURITIES MARKETS 1992-2007
21
Booming Of Indian Capital Market 2.7 FEATURES OF INDIAN CAPITAL MARKET:TYPES OF SECURITIES Financial securities may be broadly classified into government securities and industrial securities. Securities that are issued by the central government, state government and local self government such as municipalities, autonomous institution like port trusts improvement Trusts. State Electricity Boards, Metropolitan Authorities, Public Sector Corporations, and other government agencies like IDBI, IFCI, SFCs, SIDCs, Housing Boards, etc are called government securities. The government securities market is the most dominant and occupies a significant position in the Indian capital market The instrument for raising funds in the industrial securities market is bonds, debentures, preference shares and equity shares. Composition:- The Indian capital market, like its counterpart, the Indian money market consist of organized and unorganized sectors. The unorganized sectors consist of indigenous bankers and money lenders. The organized market consists of non banking institution, and special and development financial institutions. A notable feature of the Indian capital market has been dominating presence of development banks, which besides providing finance also extend other services such as consultancy, technical know-how, and training. Role:- The capital market causes accelerated development of the economy by undertaking such functions as stimulating the general finance market conditions providing risk capital and seed capital, direct subscription and underwriting of issues, promoting broad based entrepreneurship, encouraging new industries, modernizing the existing industries, encouraging export promotion and import substitution industries, and promoting backward area and regional development. Special institutions:- A number of special institutions of finance, development and promotion came to be setup after independence. The first development bank, The Industrial Finance Corporation of India (IFCI) was established in 1948. The SFCs Act
22

was passed in the year 1951, in order to enable the establishment of development institution at provincial levels. In 1955, Industrial Credit and Investment Corporation of India (ICICI) was established with the main objective of enlarging underwriting facilities for public issue of capital, foreign currency loans and direct subscription to shares and debentures. Later on IDBI was established in the year 1964 and many other such as LIC(Life Insurance Corporation of India) For the purpose of growth in rural development, the national bank for agriculture and Rural Development (NABARD) was established in 1982. TYPES OF MARKETS The market divided into primary market and secondary market and this securities market consist of organized stock exchanges and over the counter exchanges. Stock exchange is place where members, on their own or on behalf of their clients, Bu and Sell securities but merely provides a trading place where members through bids and offers, trade in securities. In the stock exchange only listed securities, which are permitted by the governing body of the stock exchange, are traded National stock Exchange: The national stock exchange works on the standardized
system software used all over the world. The systems support is being provided by the Tata Consultancy Services(TCS). The exchange works with the help of satellite communication network. The network is used to link all the national stock exchanges. He exchanges also provides networking around the globe. All market information relating tot the trading will be available continuously on the screen at the press of a button. This is possible through the online updating of information pertaining to the depth of the market, the types of order floating into the system, the best order value, the best buy price, all previous traders that have taken place, outstanding orders of the concerned trading member, etc. the identity of trader is concealed Third Market:- the over the counter (OTC) market for listed stock is known as third markets. Any exchange-listed security in the OTC market can be traded in this type of
23

market. Members of an organized stock exchange can deal in the third market. Shares traded are the same as those traded on a regural stock exchange. As prices are fixed through negogation, dealers have no responsibilities of market-making. Trading takes place even after the trading hours The third marke has its origin in the U.S., when in 1970, the New York stock exchange committed non members of the exchange to trade in securities without having to pay huge commission. Institutional investors such as investment institutions, insurance companies, pension funds, and mutual funds are the main customer of the third market. It is possible for these investor to reduce the cost of transaction so as to obtains prices. Transaction takes place more rapidly then at the organized exchanges. Small brokers- dealers, Private individuals and small odd lot customers who are not an member of organized exchange can also actively take part in third market. They can buy and sell the listed stock at negotiate prices. Usually, large stock transactions are conducted in third market in order to benefit from lower commissions. Fourth Market: - In the forth market institutions and wealthy investors who directly buys ands secretaries among themselves. Originate in the U.S., in essential feature of this market is that buys and sellers directly deal in the securities without the help of brokers. Only two parties are involves in the transaction as the deals are direct. The market eventually comprises a communication network among block traders. Direct deals are facilitated through a negotiated price. Many institutions have dispensed with brokers and exchanges completely for transaction in listed stock. Transaction is facilitated by computer communication system which
automatically provides quotation and execution. Under this mechanism offers made by party are recorded in the system and transaction is automatically recorded as two orders are matched. The system then setup the paperwork for completion. It is also possible for subscriber to find partners for a trade and than conduct negotiations by telephone with the
24

help of this system. Ariel is the monitor system that exist in the U.K. the main advantages of fourth market are less commissions better price through direct negotiations and rapid execution of the deal.
2.8 INDIAN ECONOMY AND CAPITAL MARKET AT A GLANCE

Second fastest growing economies after China with an average annual growth rate of more than 8 per cent in the last three years Indias growth rate has surpassed some of the developed economies GDP at current market prices is over US $778 billion Foreign investment can be made in India with specific prior approval in sectors other than those prohibited Foreign investment is now freely allowed in all sectors, including the services sector subject to specified sect oral ceilings except in a few strategically sensitive areas General permission granted to the Indian companies for issuing rights/bonus shares to the existing nonresident shareholders Indian companies may issue shares under Employee Stock Option Scheme to its employees who are resident outside Foreign Institutional Investors are allowed to invest in India under the Foreign Institutional Investment scheme
25
Portfolio investment limits in individual companies can be raised by Board resolution keeping the overall sect oral cap in view Investments can be made through foreign venture capital funds Private equity is allowed as an alternative form of investment Qualified Institutional investors are allowed to invest in Indian Depository Receipts (IDR) floated by foreign companies. FIIs and NRIs can also invest in IDRs after obtaining permission from RBI FIIs can make investments in Corporate and Government Bond markets within the limits Household Investment in Shares and debentures as percentage of financial savings at 4.9 per cent Market capitalization of Rs.34,62,692 crore or over US $ 770 billion as on November 17, 2007 India is the worlds 12th largest in market capitalization. With Sensex crossing 13,000 mark ahead of most of the emerging economies with a P/E ratio of 22.01 NSE (Indias National Stock Exchange) is the third largest in the world in the number of trades after NYSE and NASDAQ India has 23 small and 2 big stock exchanges
26
The 2 big stock exchanges (National Stock Exchange and Bombay Stock Exchange) account for 90 per cent of trade Over 7000 listed companies on the stock exchanges largest in the world 9040 brokers in cash segment and 1064 in derivative segment of the market 122 investment bankers in the market 58 under writers to support primary issues 34 foreign venture capital funds 120 Portfolio managers 11 custodian banRise in index during the last eighteen months over 100 per cent Year on year return during the last year at 74 per cent 39 mutual funds with over 500 schemes for investment 2 depositories with over 9 million beneficiary owner accounts Number of traders at 20 million Number of internet trading clients at 1.44 million Cumulative assets of mutual funds over US$68 billion About 1000 foreign institutional investors
27
Investors by foreign institutional investors at over $50 billion At current prices, it is around 15 per cent of the total market capitalization Only broad based entities established and incorporated abroad are eligible to be registered as Foreign Institutional investors in India FIIs can invest on behalf of their clients through sub-accounts For normal FIIs, limit for investment in equity is at least 70 per cent while the rest could be invested in debt up to a maximum limit of 30 per cent FIIs can issue overseas derivative instruments like Participatory Notes (PNs) to the entities registered in the country of origin.
END OF CHAPTER 2
28
29
3.1 BOOMING OF BOMBAY STOCK EXCHANGE

BSE ( BOMBAY STOCK EXCHANGE) The Bombay Stock Exchange, the oldest stock exchange in Asia, was established in 1875 as the Native Share and Stock Brokers Association at Dalal Street in Mumbai. The BSE is managed by a Board of Directors, comprising professionals, trading member representatives and has a managing director too. The Board formulates larger policy issues and exercises overall control. The managing director takes care of daily operations. The exchange is present in 417 cities in India. 3.1(A) BUSINESS TRANSACTED ON THE BSE There were 7639 scrips that are listed on the BSE. Not all are actively traded, with the number of scrips traded in Feb'07 at 2602. The average cash segment daily turnover on the BSE was Rs 4,675 crore in Feb'07 and the market capitalization of scrips listed on the BSE was Rs 34.9 lakh crore. The derivatives segment turnover in the month of Feb'07 was Rs 13,189 crore in Feb'07 In 1956, the BSE obtained permanent recognition from the Government of India -- the first stock exchange to do so -- under the Securities Contracts (Regulation) Act,1956.There are around 3,500 Indian companies listed with the stock exchange, and has a significant trading volume. At October 2006, the market capitalization of the BSE was about Rupees 33.4 trillion that is around 730 billion US dollars. The BSE SENSEX (Sensitive index), also called the "BSE 30", is a widely used market index in India and Asia. As of 2005, it is among the five biggest stock exchanges in the world in terms of transactions volume. The BSE-Sensex is the benchmark index of the Indian capital markets.
30

3.1(B)BSE INDICES The BSE maintains several stock indices that are popular among investors. The following are some of the closely watched indices. 1. BSE Sensitive Index (BSE-30) 2. BSE National Index (BSE-100) or BSE 100 3. BSE-200 and the Dollex 4. BSE-500 Apart from these, there are a host of other indices which focus on certain sections of stocks like small cap and mid-cap stocks. Then there are various other indices that are focused on sectors. These indices are updated on a real time basis in market hours. The most popular index is the BSE Sensitive Index, the Sensex.
1. BSE Sensitive Index (Sensex) Coverage: Originally it comprised 30 companies from both the "specified" i.e., 'A' group and the "non-specified" i.e., 'B1 & B2' groups. However, at present all the securities included in the Sensitive Index are specified group shares. These shares are selected on the basis of their liquidity, depth, and floating-stock-adjusted depth, as well as on the basis of industry representation.
31

The BSE Sensex comprises these 30 stocks 1. ACC 2. Bajaj Auto 3. Bharti Tele 4. BHEL 5. Cipla 6. Dr Reddy's 7. Gujarat Ambuja 8. Grasim 9. HDFC 10. HDFC Bank 11. Hero Honda 12. Hindalco 13. HLL 14. ICICI Bank 15. Infosys 17. L&T 18. Maruti 19. NTPC 20. ONGC 21. Ranbaxy 22. Reliance 23. Reliance Energy 24. Satyam 25. SBI 26. Tata Motors 27. Tata Power 28. TCS 29. Tata Motors 30. Wipro 16. ITC
32
Booming Of Indian Capital Market 3.1 (C) BOOMING SENSEX: FROM 1,000 TO 21000
The Exchange plays a vital role in the development of the Indian capital market. Its index, the Sensex, is tracked worldwide. Robust portfolio investments and heavy fund buying lifted the Bombay Stock Exchange's benchmark 30-share Sensex past the magical 21000 mark. (See below for the timeline). The unprecedented Bull Run started on May 6, 2003 when the Sensex was at 3,001.21 levels. In took just 67 trading sessions to cross the 4,000mark and touch 4,026.27 points on August 19, 2003. The rally continued and the index gained another 1,000 points in 54 trading sessions to post 5,068.66 points on November 3, 2003. Thereafter, it pierced through the 6,000 mark on January 2, 2004 in another 43 trading sessions. The market then seemed to pause for breath as it took a whopping 370 trading sessions to cross the 7,000 mark, at 7001.55 on June 20, 2005. From 7,000-mark, the sentiment turned distinctly firm following good liquidity that played a significant role to determine the market direction and Sensex crossed 8,000mark in just 55 trading sessions at 8,060.26 on September 8, 2005 and 54 trading days to cross 9,000-mark at 9,005.63 on November 28, 2005.
33

From 9K to 10K, it took just 48 trading sessions. The index crossed 10,000-mark on February 6, 2006 at 10,002.83. From 10K to 11K, it only took 29 trading sessions. Following is the timeline on the rise and rise of the Sensex through Indian stock market history. when stock market barometer BSE Sensex touched the various milestones on its journey to 21,000 point mark: 1000, July 25 ,1990 On
July 25, 1990, the Sensex touched the magical fourdigit figure for the first time and closed at 1,001 in the wake of a good monsoon and excellent corporate results.
2000, January 15, 1992 On January 15, 1992, the Sensex crossed the 2,000-mark and closed at 2,020 followed by the liberal economic policy initiatives undertaken by the then finance minister and current Prime Minister Dr Manmohan Singh.
3000, February 29, 1992 On February 29, 1992, the Sensex surged past the 3000 mark in the wake of the marketfriendly Budget announced by the then Finance Minister, Dr Manmohan Singh. 4000 ,March 30, 1992 On March 30, 1992, the Sensex crossed the 4,000-mark and closed at 4,091 on the expectations of a liberal export-import policy. It was then that the Harshad Mehta scam hit the markets and Sensex witnessed unabated selling.
34
5000, October 8, 1999 On October 8, 1999, the Sensex crossed the 5,000-mark as the BJP-led coalition won the majority in the 13th Lok Sabha election.
6000 ,February 11, 2000 On February 11, 2000, the infotech boom helped the Sensex to cross the 6,000-mark and hit and all time high of 6,006.
7000, June 20, 2005 On June 20, 2005, the news of the settlement between the Ambani brothers boosted investor sentiments and the scrips of RIL, Reliance Energy, Reliance Capital and IPCL made huge gains. This helped the Sensex crossed 7,000 points for the first time. 8000, September 8, 2005 On September 8, 2005, the Bombay Stock Exchange's benchmark 30-share index -- the Sensex -- crossed the 8000 level following brisk buying by foreign and domestic funds in early trading. 9000, November 28, 2005 The Sensex on November 28, 2005 crossed the magical figure of 9000 to touch 9000.32 points during mid-session at the Bombay Stock Exchange on the back of frantic buying spree by foreign institutional investors and well supported by local operators as well as retail investors. 10,000, February 7, 2006 The Sensex on February 6, 2006 touched 10,003 points during mid-session. The Sensex finally closed above the 10K-mark on February 7, 2006.
35

11,000, March 27, 2006 The Sensex on March 21, 2006 crossed the magical figure of 11,000 and touched a lifetime peak of 11,001 points during mid-session at the Bombay Stock Exchange for the first time. However, it was on March 27, 2006 that the Sensex first closed at over 11,000 points. 12,000, April 20, 2006 The Sensex on April 20, 2006 crossed the 12,000-mark and closed at a peak of 12,040 points for the first time. 13,000, October 30, 2006 The Sensex on October 30, 2006 crossed the magical figure of 13,000 during intra-day trading. 14,000 - December 5, 2006 The Sensex opened well past the 14,000 mark - at 14,028.47, to be precise - as the bulls, with their already upbeat mood boosted further by strong global markets, took guard on BSE this morning. 15,000 - July 6, 2007 As buying in blue chip stocks gathered momentum, the benchmark BSE index Sensex scaled Mount 15k this afternoon. The landmark figure, which had proved elusive yesterday, appeared a distant dream when the market opened on a highly listless note this morning. 16,000 - September 19, 2007 The Sensex scaled yet another milestone during early morning trade on September 19, 2007. Within minutes after trading began, the Sensex crossed 16,000, rising by 450 points from the previous close. The 30-share Bombay Stock Exchange's sensitive index took 53 days to reach 16,000 from 15,000. Nifty also touched a new high at 4659, up 113 points.
36

17,000 - September 26,2007 Sensex soars to all-time high of 17,000 points on 26th September. Barely a week ago, on 20 September 2007 to be precise, the barometer had crossed the 16,000 mark after global markets turned upbeat following a 50 basis point cut in US bank rates 18,000 - October 9, 2007 The Sensex opened low this morning with a negative gap of around 89 points at 17,402.24. However, riding on the strength of information technology majors and a few old economy heavyweights, the barometer bounced back into the positive territory to in subsequent trade. The bulls shrugging off the political concerns, lifted Sensex to a new high at 18000 mark on global cues. Predictions that the US economy would weaken and funds would continue to find India a safe haven has made the Sensex poised to cross 18K. 19,000 - October 15, 2007 it was an unbelievable run up in today's session with the momentum continuing in the markets and Sensex crossig the 19,000 level. It was a phenomenal day as Sensex saw the second highest single point day gain. Nifty did even better closing above 5650 levels. The ferrocity has been high and the gains were spread over broader markets as well. 20000 - 29-October-2007 Years later, the song echoed on Dalal Street as the Sensex tore past the psychological 20,000 mark towards the fag end of Mondays session. It took the index a little over 20 years to reach the first 10,000 mark, but just a little over 20 months to double that score 21000-January 08, 2008 if you just see this journey has been covered in 49 days - the journey from 20,000 to 21,000. it is dominated by domestic institutional investors. the domestic institutional investors which comprise mutual funds, insurance companies, banks - they have bought nearly USD 4 billion in the journey from 20,000 to 21,000. But the most important thing here is that in the journey from 20,000 to 21,000, midcap index is up 28% and smallcap index is up 40%
37
Booming Of Indian Capital Market 3.1 (D) DEVELOPMENTS

Up Till 18 July 2003 FIIs have pumped in $2400.3 million in the Indian stock market Reflecting Indias improving macroeconomic fundamentals, increasing corporate profitability competitiveness, integration with and the and greater world
economy, foreign institutional investors(FIIs) participation grew steadily over the past 3 years True, FII invest in local bonds and equity, but their interest has largely been on the latter. The inflow of portfolio capital continues to test new highs and in recent years has outpaced the inflow of foreign direct investment (FDI)
The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. The systems and processes of the Exchange are designed to safeguard market integrity and enhance transparency in operations. The Exchange provides an efficient and transparent market for trading in equity, debt instruments and derivatives. The BSE's On Line Trading System (BOLT) is a proprietary system of the Exchange and is BS 7799-22002 certified. The surveillance and clearing & settlement functions of the Exchange are ISO 9001:2000 certified. BSE has played a pioneering role in the Indian Securities Market - one of the oldest in the world. Much before actual legislations were enacted, BSE had formulated a set of Rules
38

and Regulations for the Indian Capital Markets. It also laid down best practices adopted by the Indian Capital Markets after India gained its Independence. The BSE SENSEX is the benchmark equity index that reflects the robustness of the economy and finance. The Bombay stock Exchange (BSE) boasts of over 4,000 listed companies.
The BSE has been First in India to introduce Equity Derivatives First in India to launch a Free Float Index First in India to launch US dollar version of BSE Sensex First in India to launch Exchange Enabled Internet Trading Platform First in India to obtain ISO certification for Surveillance, Clearing & Settlement BSE On-Line Trading System (BOLT) has been awarded the globally recognized the Information Security Management System standard BS7799-2: 2002. First to have an exclusive facility for financial training Moved from Open Outcry to Electronic Trading
Another important accomplishment of BSE is the launch of a nationwide investor awareness campaign Safe Investing in the Stock Market. It also promoted the securities market awareness campaign of the Securities and Exchange Board of India. BSE with its long history of capital market development is fully geared to continue its contributions to further the growth of the securities markets of the country, thus helping India increase its sphere of influence in international financial markets
39

Conclusion The Bombay Stock Exchange by its strict compliance issues has helped develop the capital market in a huge way. This has resulted in the growth of the capital market into a mature one with a lot of qualitative inputs and emphasis on investor protection. In the last few years the Bombay stock exchange has helped the entire market to go through a process or modernization. Though the market has witnessed various scams in its upbringing it has gone to become one of the most competitive markets in the world.
40
Booming Of Indian Capital Market 3.2 BOOMING OF NATIONAL STOCK EXCHANGE

THE NATIONAL STOCK EXCHANGE OF INDIA LIMITED The NSE was set up in 1992 by leading financial institutions (IDBI , LIC, UTI, ICICI, SBI and others) and was the first one to offer screen based trading all over India. Though the impetus for its establishment came from policy makers in the country, it has been set up as a public limited company. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000.
3.2 (A) NSE'S MISSION

NSE's mission is setting the agenda for change in the securities markets in India. The NSE was set-up with the main objectives of:
1. Establishing a nation-wide trading facility for equities, debt instruments and hybrids, 2. Ensuring equal access to investors all over the country through an appropriate communication network,
3. Providing a fair, efficient and transparent securities market to investors using electronic trading systems, enabling shorter settlement cycles and book entry settlements systems. 4.Meeting the current international standards of securities markets. 41
5. 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. It's that force which is guiding the industry towards new horizons and greater opportunities.
3.2 (B) CORPORATE STRUCTURE OF NSE

NSE is one of the first de-mutualised stock exchanges in the country, where the ownership and management of the Exchange is completely divorced from the right to trade on it. Though the impetus for its establishment came from policy makers in the country, it has been set up as a public limited company, owned by the leading institutional investors in the country.
From day one, NSE has adopted the form of a demutualised exchange - the ownership, management and trading is in the hands of three different sets of people. NSE is owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries and is managed by professionals, who do not directly or indirectly trade on the Exchange. This has completely eliminated any conflict of interest and helped NSE in aggressively pursuing policies and practices within a public interest framework. The NSE model however, does not preclude, but in fact accommodates involvement, support and contribution of trading members in a variety of ways. Its Board comprises of senior executives from promoter institutions, eminent professionals in the fields of law, economics, accountancy, finance, taxation, and etc, public representatives, nominees of SEBI and one full time executive of the Exchange. While the Board deals with broad policy issues, decisions relating to market operations are delegated by the Board to various committees constituted by it. Such committees
42

include representatives from trading members, professionals, the public and the management. The day-to-day management of the Exchange is delegated to the Managing Director who is supported by a team of professional staff. Distinctive Features of NSE NSC is able to radically transform the Indian Capital market during the decade of its existence. It has changed the mindset of all market players and has built investor confidence in the secondary markets. "The NSE is different from most other stock exchanges in India where membership automatically implies ownership of the exchange. The ownership and management of NSE have been totally delinked from the right of trading members. This pattern has been adopted Since broker owned stock exchanges are also broker managed there is a clear conflict of interest. This is a structurally unstable model, as it inevitably leads to emergence of power groups, and investor interests invariably take a back seat
3.2 (C) NUMBER OF LISTED COMPANIES

On the capital market segment, 1,462 companies are available for trading. On the wholesale debt market segment, 3,216 securities are available for trading. Capital market operations data The turnover on the NSE has increased from Rs 1,805 crore in 1994-95 to Rs 15.69 lakh crore in 2005-06. The average daily traded volume has increased from Rs 17 crore during 1994-95 to Rs 6,253 crore during 2005-06. he total market capitalization has increased from Rs 363,350 crore as of end March 1995 to Rs 28.13 lakh crore as of end March 2006.
43

Number of shares traded has increased from 0.007 billion in November 1994 to 8.57 billion in March'06. The average daily turnover in the derivatives segment was Rs 37,000 crore in Feb'07.
3.2 (D) CLASSIFICATION OF LISTED SECURITIES

On NSE, securities for account period settlement are classified as 'EQ' segment or 'Normal' segment. For book entry i.e. rolling settlement, the securities are traded in two separate segments known as 'AE Segment' and 'BE Segment'. In case of AE segment, dematerialized securities are traded only in market lots, whereas in BE segment these can be traded in multiples of one share. NSE Indices The popular indices of NSE are: 1. S&P CNX NIFTY 2. S&P CNX DEFTY 3. S&P CNX 500 4. S&P CNX NIFTY JUNIOR 5. CNX MIDCAP 6. CNX Industry Indices 7. CNX Segment Indices 1. S&P CNX Nifty It is the most popular index, which represents about 58% of the total market capitalization of NSE. S&P CNX Nifty comprises 50 stocks and is a market capitalization weighted index. Stocks are selected based on their market capitalization and liquidity. An important criteria of S&P CNX Nifty is that the impact cost (cost of executing the entire set of S&P CNX Nifty securities) is low, making it an optimal index for derivatives trading. The S&P CNX Nifty represents about 58% the total market capitalization of the stocks listed
44

on the Indian bourses as of Dec 29, 2006. The Impact cost (explained in latter part of the article) of S&P for a portfolio of Rs 5 million is 0.08 per cent
2.S&P CNX Defty Defty is a dollar denominated index based on the S&P CNX Nifty. Computations are done using the S&P CNX Nifty index calculated on the NEAT trading system of NSE and USD Rupee exchange rate that is based on the real time polled data feed 3. S&P CNX 500 Equity Index The S&P CNX 500 Equity Index comprises 500 stocks and is market capitalization weighted. Stocks are selected based on their market capitalization, industry representation, trading interest and financial performance. However, the overriding need has been to ensure that the industry weightings in the index dynamically reflect the industry weightings in the market. The S&P CNX~500 Equity Index currently contains 72 industry groups (S&P CNX Industry Indices) representing over 90 per cent of total market capitalization and about 86% per cent of total turnover making it an optimal market benchmark. 4. CNX Nifty Junior CNX Nifty Junior comprises 50 stocks and is a market capitalization weighted Index. The next rung of liquid securities after the Nifty are included in the Junior Index. The Impact cost for CNX Junior Portfolio size of Rs 2.50 million is 0.14% per cent. The CNX Nifty Junior represents about 10% per cent of total market capitalization of all equity shares as on Sep 29'06. 5. CNX Mid Cap CNX Midcap is computed using market capitalization weighted method, wherein the level of the index reflects the total market value of all the stocks in the index relative to a
45

particular base period. The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits, rights, etc without affecting the index value. The constituents and the criteria for the selection judge the effectiveness of the index. Selection of the index set is based on the following criteria : All the stocks, which constitute more than 5% market capitalization of the universe (after sorting the securities in descending order of market capitalization), shall be excluded in order to reduce the skewness in the weightages of the stocks in the universe. After step (a), the weightages of the remaining stocks in the universe is determined again. After step (b), the cumulative weightage is calculated. After step (c) companies which form part of the cumulative percentage in ascending order unto first 75 per cent (i.e. up to 74.99 per cent) of the revised universe shall be ignored. After, step (d), all the constituents of S&P CNX Nifty shall be ignored. From the universe of companies remaining after step (e) i.e. 75th percent and above, first 100 companies in terms of highest market capitalization, shall constitute the CNX Midcap Index subject to fulfillment of the criteria mentioned below 6. S&P CNX Industry Indices The S&P CNX industry indices serve as a standard for comparison of the stock market performance of individual companies vis--vis their respective peer groups and also enable fund managers to benchmark NAV performance vs. specific industries. 7. CNX Segment Indices
46

The reform process in India has resulted in business restructuring and consolidation of the Indian corporate sector. With a view to providing investors with a better perspective of the stock market performance of the various segments of the Indian corporate sector, NSE has constructed various segment Indices such as the CNX MNC (Multinational Corporations) Index, CNX PSE (Public Sector Enterprises) Index and the CNX IBG (Indian Business Groups) Index. These indices aid investors in their asset allocation and segmental exposure decisions 8. CNX Customized Indices Customized indices can be used for tracking the performance of the clients portfolio of stocks vis--vis objectively defined benchmarks or for benchmarking funds' NAV performance to customized indices
3.2 (E) STOCK EXCHANGE TECHNOLOGY

The modern stock exchange technology does not need the traditional type of brokers to match investors' orders as they used to do on the physical-trading floor. The automated Trading screens can match buy and sell orders without the intervention of brokers. Today brokers are needed only for settlement responsibilities. NSE introduced a nation-wide VSAT driven screen based trading system Operations commenced in Mumbai and rapidly spread all over India. NSE today offers investors trading facilities in over 280 cities and town through 4000 terminals. For the first time NSE introduced in India screen based trading with automated matching. The system conceals the identity of the parties to an order or trade. This help better functioning of the market as disclosures of identity would put most members at a disadvantage. The trading system operates on price time priority. This means given the same set or orders, the orders that come first receive priority in matching. When an order does not find an immediate match in remains in the system and is displayed to the whole market, till a fresh order comes in or the earlier order is modified or cancelled. The
47

market screens at any point of time give the members complete information on the total order depth in a security, the high price, the low price, the last traded price and other related information.
NATION WIDE TRADING FACILITY Nationwide Trading system of NSE has immensely benefited investors in all places, which do not have a stock exchange nearby. Earlier their orders took three days for confirmation. This time lag is now a thing of the past, as the orders and prices are visible and instantly available to all investors across the country, representing a dramatic change in investor access and protection. This has served to unify the earlier fragmented market into a single national order book, bringing with it unprecedented increases in liquidity and transparency. Risk Containment Measures -Investors freed from Counterparty Risks NSE introduced risk containment measures like mark to market margins, exposure limits etc., bringing enormous safety to fast growing and changing electronic market. NSE has introduced the concept of a clearing corporation, by which the counterparty risk of each member is taken by NSCC and the financial settlement guaranteed by the Corporation. Counterparty risk is being guaranteed through the tight risk management system and an innovative method of on-line position monitoring and automatic disablement. NSE introduced this system of automatic disablement to control grave risks. Under this system each broker of NSC is given a limit up to which he can trade. This limit is fixed in relation to the money he deposits with NSC or its clearing corporation. This money can be cash or pledge of securities or Bank Guarantee. Currently the limit is 8.5 times the money deposited. The trading system works in such a way that the broker gets warning messages after he crosses 70% of his trading limit and the moment he reaches 100% of his limit NSE computer disconnects all his terminals from the system so that he cannot trade further. He is allowed to trade again only when he brings additional deposits or authorize NSC to
48

reduce his trades either by selling or buying on his behalf
3.2 (F) NSE MILESTONES

November 1992 Incorporation April 1993 Recognition as a stock exchange May 1993. Formulation of business plan June 1994. Wholesale Debt Market segment goes live November 1994 ... Capital Market (Equities) segment goes live March 1995.. Establishment of Investor Grievance Cell April 1995 Establishment of NSCCL, the first Clearing Corporation June 1995. Introduction of centralized insurance cover for all trading members July 1995. Establishment of Investor Protection Fund October 1995... Became largest stock exchange in the country April 1996 Commencement of clearing and settlement by NSCCL April 1996 Launch of S&P CNX Nifty June 1996. Establishment of Settlement Guarantee Fund November 1996 ... Setting up of National Securities Depository Limited, first depository in India, co-promoted by NSE November 1996 Best IT Usage award by Computer Society of India December 1996. Commencement of trading/settlement in dematerialized securities December 1996 . Dataquest award for Top IT User December 1996.. Launch of CNX Nifty Junior February 1997 Regional clearing facility goes live November 1997. Best IT Usage award by Computer Society of India May 1998.. Promotion of joint venture, India Index Services & Products Limited (IISL) May 1998.. Launch of NSE's Web-site: www.nse.co.in
49

July 1998.. Launch of NSE's Certification Programme in Financial Market August 1998. CYBER CORPORATE OF THE YEAR 1998 award February 1999 . Launch of Automated Lending and Borrowing Mechanism April 1999 CHIP Web Award by CHIP magazine October 1999 Setting up of NSE.IT January 2000 Launch of NSE Research Initiative February 2000 . Commencement of Internet Trading June 2000. Commencement of Derivatives Trading (Index Futures) September 2000 Launch of 'Zero Coupon Yield Curve' November 2000 Launch of Broker Plaza by Dotex International, a joint venture Between NSE.IT Ltd. and I-flex Solutions Ltd December 2000 Commencement of WAP trading June 2001. Commencement of trading in Index Options July 2001.. Commencement of trading in Options on Individual Securities November 2001 Commencement of trading in Futures on Individual Securities January 2002 May 2002. October 2002 January 2003 June 2003. August 2003. August 2004. June 200... November 2006 Launch of Exchange Traded Funds (ETFs) NSE wins the Wharton-Infosys Business Transformation Award in the Organization-wide Transformation category Launch of NSE Government Securities Index Commencement of trading in Retail Debt Market Launch of Interest Rate Futures Launch of Futures & options in CNXIT Index Launch of NSEs electronic interface for listed companies 5 Launch of Futures & options in BANK Nifty Index NSE awarded 'Derivative Exchange of the Year', by Asia Risk Magazine.
50
Conclusion:- To conclude we can say that India has a long tradition of functioning capital markets. The process of reform of capital markets started in 1992 and aimed at removing direct government control and replacing it by a regulatory framework based on transparency and disclosure. The first step was taken in 1992 when SEBI was elevated to a full-fledged capital market regulator. An important policy initiative in 1993 was the opening of capital markets for foreign institutional investors and allowing Indian companies to raise capital abroad. FII registrations in the country have gone up significantly over the years. The number of registered FIIs has gone up from 823 in December 2005 to 972 in October 2006. FIIs had made $10.7 billion worth of investment (Rs 47,181 crore) in calendar 2005. The FIIs have been rewarded well by attractive valuations and increasing returns. The depository and share dematerialization systems have been introduced to enhance the efficiency of the transaction cycle. A number of significant reforms have been implemented in the spot equity and related exchange traded derivatives markets since the early 1990s. For instance, spot prices are mostly marketdetermined, trading volumes in the derivatives market exceed those in spot markets and market practices such as speed of settlement and dematerialization are close to international best practices. As we can see that the stock exchange is now seen increasingly for what it really is, namely an essential financial infrastructure for any economy. It is this view of the exchange as infrastructure that motivated the Indian government to encourage the establishment of the National Stock Exchange of India at Mumbai, which in a few short years completely revolutionized the Indian capital market. The transparency of the price discovery process which results, especially in technology driven stock exchanges encourages participation in economic activity and enhances the efficient utilization of resources. In addition, the stock market is increasingly perceived as an electronic
51

marketplace for buyers and sellers of securities to transact their business, under the full view of observers.
3.3 BOOMING CASE OF BOND MARKET IN INDIA The Bond market is much more popular than the equity markets in most parts of the world. In India the reverse has been true. Nevertheless, the Indian Bond market has transformed itself into a much more vibrant trading field for Bond instruments from the rudimentary market about a decade ago. The sections below encompass the transformation of government and corporate Bond markets in India.
52

e bond market has witnessed significant growth and sophistication in recent years in terms of issuers and investors, instruments, trading volume, and market awareness. Table 18 gives the structure of issuers and instruments in bond markets, distinguishing between national and sub national levels. Central government issues, comprising treasury bills and dated securities, are the most important segment. Other active issuers at the national level are corporate, all-India financial institutions, commercial banks, and central public sector undertakings. Financial institutions have progressively used bond markets to raise resources for lending to infrastructure. Infrastructure bonds have also been found attractive to primary investors due to beneficial fiscal regimes. During 2001/02, the central and state governments raised Rs152.5 billion, accounting for about 75% of total bond issues. Bonds and debentures issued by the private corporate sector made up another Rs52 billion or 25% of total issues. most of the bond issuances by the private corporate sector are in the form of private placement issues. Local bond markets will comprise issues by state governments, state financial institutions, state-level public sector undertakings, and municipal corporations. Bonds issued by state-level undertakings often carry a guarantee by state governments. During 19972002, eight municipal corporations raised funds by issuing bonds, securitized in some form or other by revenue receivables or grants.
The
Bond
market bonds.
is
dominated
by bond
government
Government
issuances, resulting from persistently high fiscal deficits, as well as specific regulatory requirements, have underpinned the supply and demand conditions in Indias debt capital markets. Nearly 90% of total domestic bonds outstanding are government issuances (i.e. Treasury bills, notes and bonds), squeezing out corporate and other marketable debt securities (see chart 1).
53

Initiatives to lift the corporate bond market from its nascent stages have been slow to progress, leaving companies unable to realize their optimum capital structure as a result.
3.3(A) STATE-SPONSORED INSTITUTIONS

State-sponsored institutions include state-level financial institutions, state-sponsored SPVs, and statutory agencies such as water supply and sewerage boards. Most of these state-level entities issue bonds through private placements, which are often guaranteed by state governments (Table 1). Bond issuance can be taxable or tax-free, often in the form of structured issues or carrying credit enhancement features such as revenue dedication. e instruments are usually known in India as structured obligations because they are structured to enhance credit rating. In recent years, these bond issues have increased significantly and carry significant fiscal risks for state governments.
3.3(B) MUNICIPAL BONDS

Municipal bond issuance is of recent origin, with the first occurring through private placement by Bangalore Mahanagara Palike in 1997. Ahmadabad was the first municipal Corporation to make a public offering in January 1998, raising Rs1 billion. So far, eight municipal corporations have issued bonds worth Rs5.3 billion More and more ULBs are expected to enter the bond market to raise funds for infrastructure development. Over 30 major cities have obtained credit rating from agencies such as Credit Rating Information Services of India (Crisil), Investment Information and Credit Rating Agency of India Ltd.
54

(ICRA), and Credit Analysis & Research Ltd. (CARE), with the intention of entering the bond market.
Debt markets shaped by the public sector Indias Bonds markets are divided into two segments. The government bond segment is the larger and more active of the two, with issuers comprising the central government accounting for 90% of the total and state governments. The Reserve Bank of India (RBI) has maintained its role as the governments debt manager and regulator of government-issued papers. The corporate bond market represents the other segment, with Public Sector Undertakings (PSU), corporate, financial institutions and banks being the primary players. PSU bonds by far outweigh the size of private corporate bonds (see chart 2), reflecting a number of factors, foremost of which are the lists of regulatory requirements for private issues. Regulatory oversight of the segment falls under the purview of the Securities and Exchange Board of India (SEBI). Each issuer has a range of instruments available in the market (see chart 3). Since institutional investors, especially banks, have remained the primary participants in fixed income securities, Indias bond markets have predominantly been wholesale.
55
Booming Of Indian Capital Market 3.3(B) GOVERNMENT BOND ISSUANCES RULE THE ROOST
With growing demand from institutional investors such as insurance companies and pension funds, bonds with maturity extending to 30 years are now available, With growing demand from institutional investors such as insurance companies and pension funds, bonds with maturity extending to 30 years are now available, The contours of the government bond market began taking shape around 1992 as a result of the governments broad-based attempts to reform the financial sector.5 Advances in the segment benefited from a host of reforms, such as the move toward an auction-based sale of government securities, appointment of Primary Dealers, acting as market makers, and the implementation of delivery-versus-payment (DVP), mitigating the risks associated with trading and settlement. In the same year, foreign institutions were permitted to invest in government-issued securities, thus broadening the institutional investor base. Zero-coupon bonds and index bonds represent novel products in the marketplace, but have so far received only tepid response from participants. The major reforms that took place in the 1990s were: Introduction of the auction system for sale of dated government securities in June1992. This signaled the end of the era of administered interest rates. The RBI moved to computerize the SGL and implement a form of a delivery versus payment (DvP) system. The DvP enabled mitigating of settlement risk in securities and ensured the smoothness of settlement by synchronizing the payment and delivery of securities.
56

Innovative products in form of Zero Coupon Bonds and Capital Indexed Bonds (Ex. Inflation Linked) were issued to attract a wider gamut of investors. However, the pace of innovation suffered due to non-sophistication of the markets and lack of persistence with Some of the new bonds like Inflation Indexed bonds after the initial lukewarm response. The system of Primary Dealers was established in March 1995. These primary dealers have since then acquired a large chunk of share in the GOI bond market and have played the role of market makers. The RBI setup trade for trade regime, a strong regulatory system which required that every trade must be settled with funds and bonds. All forms of netting were prohibited. Wholesale Debt Market (WDM ) segment was set up at NSE, A limited degree of transparency came about through the WDM at NSE, where roughly half the trading volume of Indias GOI bond market is reported. The Ways And Means agreement put an end to issuance of ad hoc treasury bills, the Governments favourite instrument of funding its profligacy. Interest Income in G-Sections was exempted from the purview of TDS. FIIs with 100% Debt Schemes were allowed to invest in GOI Securities and T-Bills while other FIIs were allowed 30% investment in these instruments. Dematerialized forms of securities in G-Secs was done through the SGL and Constituents SGL accounts.
57
Booming Of Indian Capital Market 3.3(C) CORPORATE BOND MARKET: A HUGE POTENTIAL AWAITS
In contrast to the government bond market, the size of the corporate bond market (i.e. corporate issuers plus financial institutions) shallow remains (see chart very 4),
amounting to just USD 16.8 bn10, or less than 2% of GDP at the end of June 2006. A welldeveloped corporate bond market would give companies greater flexibility to define their optimum capital structure. By the same token, investors would benefit from having a wider range of asset classes to diversify their fixed income investments. Within Indias corporate bond market, stateowned Public Sector Undertakings (PSUs) have persistently outstripped private corporate issuances. PSUs and private companies can raise debt capital either by private placement or public issue, with the former being the preferred method by far. The growth of private placement of debt has shown a marked increase over the past decade, rising over fourfold in fiscal year 2004/2005 to roughly USD 12.6 bn from USD 3 bn in fiscal year 1995/1996 4. The preference for the private placement route arises from less onerous regulatory requirements, such as the type of disclosures and registration requisites, than those for public issues. Also, the considerably higher costs associated with public issuance have deterred corporate from accessing funds through this route, in addition to the fact that private debt placements can be customized in accordance with individual issuers needs. Corporate are not mandated to obtain and disclose credit ratings from an approved credit rating agency, although companies themselves have increasingly sought 58

to do so in recent years. In fiscal year 2004/2005, 93% of companies that raised bonds through private placements obtained credit ratings12. There is a preference to raise funds with maturities between three to five years, which suggests that companies remain cautious of borrowing over the medium-term segment, and also reflects investors still limited demand for longer tenors. Trading, clearing and settlement practices in the corporate bond market are less developed than in the government bond segment. CORPORATE SEIZE BORROWING OPPORTUNITIES ABROAD A more aggressive trend in overseas borrowing by Indian corporate has recently developed (see chart 5), fuelled by fewer listing requirements, lower cost of funding and better liquidity in the secondary markets. The trend also stands in contrast to the sovereigns absence in the international capital markets, reflecting the governments conservative approach to external debt management as a result of the current account crisis in 1991/1992. At the end of 2005, the total amount of bonds outstanding raised by corporates abroad amounted to USD 6.7 bn15, over two and a half times its size in 2001. This represents 60% of the value of corporate issuance in local markets. To put this in perspective, if this amount of issuance had been made in the domestic capital markets, the size of Indias corporate debt market would be 2.5% of GDP instead of just 1.5% of GDP. Indian companies continued to exert their presence in the international bond markets in 2006,
59
Booming Of Indian Capital Market 3.3(D)THE CURRENT BOND MARKET.

In India today, corporate debt capital is raised through private placements and international issues. Corporate debt instruments are predominantly simple fixed-rate coupons. There are very few innovative instruments or derivative or hedging devices that would help investors protect against credit risk. The World Bank report found that a comparison of the size and composition of the domestic debt market in India and seven other prominent emerging market countries puts India ahead of only Mexico in the size of its corporate bond market.
END OF CHAPTER 3
60

.
61
4.1 INDIA'S CAPITAL MARKETS UNLOCKING THE DOOR TO FUTURE GROWTH.. Thus, the capital market plays a vital role in fostering economic growth of the country, as it aug ments the quantities of real savings; increases the net capit75 l inflow from abroad; raises the productivity of investments by improving allocation of investible funds; and reduces the cost of capital in the economy.
The road ahead. Indias regulators have been active in seeking ways to develop the countrys financial markets, and a culture of introducing greater risk management is starting to set in. The main challenge ahead is to strengthen the political will to further ease regulations in the capital markets and the limits prescribed to market participants. Indias economy is expected to benefit enormously from the process of gradual capital market liberalization. Empirical evidence has shown that emerging market economies that have heralded changes in their financial markets experienced higher growth and investment31 (see chart 36). India is no exception, with per-capita GDP and domestic investment rising post-liberalization. Economies which pursued deeper financial market reforms, and whose per-capita incomes were roughly similar to Indias prior to their liberalization periods, not surprisingly experienced even greater rewards. Drawing from these countries experiences, Indias growth potential can experience a sustained pick-up if it stays on the path of reforming its capital markets. Moreover, Indias stock market has outperformed world indices in recent years. And, despite its increasing correlation with world markets in recent years
62
Indian Capital Market: The Way Forward This project has traced the transformation of the Indian Securities Market from 1992 through mid2007 and described its principal engines of growth. It is a remarkable story in which India can take great pride. It has developed a respected market regulator and an enabling legal and regulatory framework; a state of the art market infrastructure; thriving equity and securities market; and improved disclosure and transparency. Indias market has found a respected place in the global market. These achievements are a strong foundation, but are only a start. India must continue to strengthen and transform its market to compete, not only with mature markets, but also with other newer equally dynamic markets as well. By building on its foundation and applying the lessons and techniques that have already succeeded, India can seize the opportunity to continue the transformation of its securities market on a global scale: to add new dimensions that will allow it to better allocate resources; strengthen its economy and infrastructure; and broaden participation of the Indian public, both directly as retail investors and indirectly through institutions such as mutual funds, banks, pension and provident funds and insurance companies. This report sets forth tested strategies and detailed recommendations for strengthening Indias securities market. As they succeed, Todays investors will not recognize tomorrows markets.
END OF CHAPTER 3
63
ABBREVIATIONS

NSE- National Stock Exchange of India Ltd. SEBI - Securities Exchange Board of India NSDL - National Securities Depository Limited NSCCL - National Securities Clearing Corporation Ltd. NYSE- New York Stock Exchange OTC- Over-the-Counter Market IPO- Initial Public Offer EPS Earnings Per Share S&P Standard & Poor ICRA - Investment Information and Credit Rating Agency of India SCRA - Securities Contract (Regulation) Act SCRR Securities Contract (Regulation) Rules BOM- Board of Management BSE- The Stock Exchange, Mumbai CCI- Controller of Capital Issues (India) CFA- Institute Chartered Financial Analyst Institute CICA- Capital Issues (Control) Act (1947) CRD- Central Registration Depository GDP- Gross Domestic Product GIC- General Insurance Corporation of India ICICI- Industrial Credit and Investment Corporation of India IDBI -Industrial Development Bank of India IPO- Initial Public Offering IRDA- Insurance Regulatory and Development Authority (India) LIC- Life Insurance Corporation of India MCX- Multi-Commodity Exchange of India Limited MFDA- Mutual Fund Dealers Association (Canada) MoF- Ministry of Finance (India) MOU- Memorandum of Understanding
64
NASDAQ- National Association of Securities Dealers Automated Quotations (a USstock market) NCDEX- National Commodity and Derivatives Exchange Limited (India) NISM- National Institute of Securities Markets NSDL- National Securities Depository Limited NSE- National Stock Exchange of India Limited NFA- National Futures Association (US) NYSE- New York Stock Exchange (US) PAN- Permanent Account Number issued by the Indian income tax authority RB-I Reserve Bank of India S&P CNX- Nifty Leading index for large companies on the NSE SBI- State Bank of India SCRA -Securities Contracts (Regulation) Act (1956) SEBI- Securities and Exchange Board of India SEBI Act- Securities and Exchange Board of India Act (1992) UTI- Unit Trust of India
65
BIBLOGRAPHY
BOOKS

Capital Market in the bric economies Capital market in india Capital markets
SITES

www.indian-capital-market-basics.blogspot.com www.bseindia.com www.nse.com www.capitalmarkets.com www.financialmarket.com www.theeconomictimes.com www.yahoo.finance.com www.indianmarketoffinance.com
66

What Is Capital Market...........

Загружено:

Сведения о документе

Исходное описание:

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

What Is Capital Market...........

Загружено:

Авторское право:

Доступные форматы

Booming Of Indian Capital Market

Booming Of Indian Capital Market

1.1 GENERAL INDIAN ECONOMY

Booming Of Indian Capital Market

1.3 CLASSIFICATION OF FINANCIAL MARKETS

Gilt ended securities market

Industrial Securities Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Where the issue of equity shares of a body corporate is made to

Booming Of Indian Capital Market

small investors, it takes the form of private placement.

Booming Of Indian Capital Market

1.3(B) MONEY MARKET?

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market

2.1 HISTORY OF THE INDIAN CAPITAL MARKETS 2.1 (A)ORIGIN

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market

2.2 A MODERN DYNAMIC CAPITAL MARKET 2007

Booming Of Indian Capital Market

INSTITUTIONAL INVESTORS (FII)

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market

2.8 INDIAN ECONOMY AND CAPITAL MARKET AT A GLANCE

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market

3.1 BOOMING OF BOMBAY STOCK EXCHANGE

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market 3.1 (D) DEVELOPMENTS

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market 3.2 BOOMING OF NATIONAL STOCK EXCHANGE

3.2 (A) NSE'S MISSION

Booming Of Indian Capital Market

3.2 (B) CORPORATE STRUCTURE OF NSE

Booming Of Indian Capital Market

3.2 (C) NUMBER OF LISTED COMPANIES

Booming Of Indian Capital Market

3.2 (D) CLASSIFICATION OF LISTED SECURITIES

Booming Of Indian Capital Market

Booming Of Indian Capital Market

Booming Of Indian Capital Market

3.2 (E) STOCK EXCHANGE TECHNOLOGY

Booming Of Indian Capital Market

Booming Of Indian Capital Market