Chapter 1 Introduction

Capital Markets In India An Introduction:

Capital is often defined as wealth used in the production of further wealth. In simple words, it comprises the money value invested in a business unit. Market is that place where buyer and sellers are contact to each other and when these two words are merging together make capital market A business enterprise can raise capital from various sources long-term funds can be raised either through issue of securities or by borrowing from certain institutions. Shortterm funds can also be borrowed from various agencies. Thus business units can raise capital from issue of securities or by borrowings (long-term and short-term).The borrowers and lenders are brought together through the financial markets. The term financial market collectively refers to all those organizations and institutions which lend funds to business enterprises and public authorities. It is composed of two constituents. (i) The money market, (ii) The capital market. While the money market deals with the provision of short-term credit, the capital market deals in the lending and borrowing of medium-term and long-term and long-term credit. Structure of the capital market------------ two constituents. Broadly describe, the capital market can be divided into two constituents. (1) The financial institution:- e.g., IFCI, IDBI, SFCs, LIC, UTI etc. provide long-term and medium-term loan facilities. (2) The Securities Market:- The securities market is divided into (A) the gilt edged market and (B) the corporate securities market.

A) Gilt-Edged Market The gilt edged market is the market in government securities or the securities guaranteed (as to both principle and interest) by the government. Since the government cannot default on its payment obligations, the government securities are risk free and hence are known as gilt-edged (which means of the best quality). 1. It is a risk free market and returns are guaranteed. Accordingly, there is no uncertainty regarding yield, payment on time, etc. and there is no scope for speculation and manipulation ') of the market. 2. The government securities market consists of two parts - the new issues market and the secondary market. Since it is the Reserve Bank of India that manages entirely the public debt operations of the Central as well as the State governments, it is responsible for all the new issues of government loans. The secondary market deals in old issues of government loans and operates largely through a few large stockbrokers who keep in touch with the Reserve Bank and other prospective buyers and sellers. 3. Reserve Bank of India plays a dominant role in the government securities market. As noted by S.B. Gupta, "there are only brokers or investors in the market and no dealers or jobbers (other than the RBI) who would make a market in government loans by standing ready to buy and sell any amount of government securities on their own account."2 4. Government securities are the most liquid debt instruments. 5. The transactions in the government securities market are very large and each transaction may run into several crores of rupees.

B) Corporate Securities Market Corporate securities market is a market where securities issued by corporate firms (Le. shares, bonds and debentures) can be bought and sold freely. It consists of the new issues market (the primary market) and the stock exchange (the secondary market). The New Issues Market. The new issues market is also known the primary market. The new issues market is that part of the capital market which is concerned with the issue of new securities, i.e. bonds, debentures, shares, and so on. 1. By prospectus. Capital can be raised from the general public by the issue of prospectus. The prospectus is an invitation to the general public for subscribing to the capital. The prospectus must contain various details regarding particulars of the company, its financial position, etc. 2. By offer for sale. This method is almost similar to the prospectus method except with a difference that initially shares are taken up by a third party in bulk. Later, a statement like prospectus is issued for sale of shares to the public. 3. By private placing. Under this arrangement, the shares are sold to individuals or institutions directly by making a private appeal to them. This results in substantial saving as the cost of raising capital in this method is less than the cost of raising capital via other methods. 4. By offering rights issue. Companies may also raise capital from the existing shareholders by making a rights issue. Under a rights issue, the shareholders have the right to a certain number of shares in proportion to the shares held by them. The Stock Exchange. The stock exchange (or the secondary market) is a highly organised market for the purchase and sale of second-hand quoted or listed securities 'Quoting' or 'listing' of a particular security implies incorporating that security in the register of the stock exchange so that it can be bought and sold there. The Securities Contracts (Regulation) Act, 1956 defines a stock exchange as "an association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities."
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Indian Capital Market

The capital market is the place where finance is raised by the companies government and their agencies for meeting their requirements of funds for new projects , modernization ,expansion and diversification programs ,long term working capital requirements ,repayment of loans and various other purposes and projects . The capital market mobilizes the long term savings of individuals for investment in shares , debentures ,bonds ,units of the mutual fund and other financial instruments , which are ultimately deployed for productive purposes in various sectors of economy.

A capital market may be defined as an organized mechanism for effective and efficient transfer of money capital or financial resources from the investing public i.e. individuals or institutional savers to entrepreneurs engaged in industry or commerce . Capital market thus plays a vital role in channelizing the savings of individuals for investment in the economic development of the country .as a result the investors are not constrained by their individual abilities, but by the abilities of the companies , which in turn enhance the savings and investments in the country.

Capital market involves the following: Raising of capital by issue of new shares . Raising of borrowings by issue of new debentures. Raising of long term borrowings by inland and foreign banks and financial institutions.

Components of Indian Capital Market The following are the main components of the Indian capital market: 1. New Issues Market. 2. Stock Market. 3. Financial Institutions.

1. New Issues Market: The new issues market represents the primary market where new shares or bonds are offered. Both the new companies and the existing ones can raise capital on the new issue market. The prime function of the new issues market is to facilitate the transfer of funds from the willing investors to the entrepreneurs setting up new corporate enterprises, going in for expansion, diversication, growth or modernization. Besides, helping the corporate enterprises in securing their funds, then issues market channelizes the savings of individuals and others into investments. The availability of nancial resources for corporate enterprises, to a great extent, depends upon the status of the new issues market of the country. Successful issues of new securities is a highly specialized activity and requires both experience and skill. There are a number of methods of marketing new issues of securities.

2. Secondary Market or Stock Market: Stock market represents the secondary market where existing shares and debentures are traded. Stock exchange provides an organised mechanism of purchase and sale of existing securities. The stock exchanges enable free purchase and sale of existing securities. The stock-exchanges enable free purchase and sale of securities as commodity exchange allow trading in commodities.

3.Financial Institutions: Special nancial institutions are the most active constituents of the Indian capital market. Such organisations provide medium and long-term loans repayable on easy installments to big business houses. Such institutions help in promoting new companies, expansion and development of existing companies and meeting the nancial requirements of companies during economic depression. After independence, a number of nancial institutions have been set up at all India and regional levels for accelerating the growth of industries by providing nancial and other assistance. The following are the main nancial institutions that are most active constituents of the Indian capital market: (a) The Industrial Finance Corporation of India Ltd. (b) The Industrial Credit and Investment Corporation of India. (c) State Financial Corporations. (d) The Industrial Development Bank of India.
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(e) National Industrial Development Corporations. (f) Unit Trust of India. (g) Life Insurance Corporation of India. (h) Nationalised Commercial Banks. (i) Merchant Banking Institutions. (j) The Credit Guarantee Corporation of India.

Growth of Capital Market in India

A) Government securities market Since 1991, the investor base for government securities has expanded rapidly. Besides banks and insurance corporations, finance companies, corporates and financial institutions have also begun to invest in government securities. The maturity structure of debt has significantly shifted in favour of medium-term and short-term borrowings. The amount of market - based primary issuance of government securities which was about Rs. 12.000 crore in 1991-92 rose to as high as Rs. 99,630 crore in 1999-2000. The gross market borrowings of the Central and State governments rose to Rs. 1,81,747crore during 2005-06. As far as secondary market is concerned, a deep, wide and vibrant gilt-edged market has emerged as a result of a series of structural and institutional reforms. The secondary market turnover of government securities registered spectacular increase since mid-1990s.2 This is due to a substantial rally in the government securities market.3

B) Corporate Securities Market Consequent upon the policy of liberalisation adopted by the government in July 1991 and the subsequent abolition of Capital Issues Control with effect form May 29, 1992, the corporate securities market got a tremendous boost in the first three-four years of the post-liberalisation phase. C) Debt Market. The Indian debt market is composed of government bonds and corporate bonds. Debt Market is however dominated by government bonds. Bonds issued by the Central government, i.e., the Government of India are the predominant and most liquid component of the
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bond market. Government bonds are usually much less volatile than equities and far more liquid than equities. Table Issuance of Bonds 2006 Government of bonds Corporate Bonds Source: Economic Survey 2010, pp.68 and 74 and Economic Survey 2009, pp. 70 and 76. Mutual Funds. The mutual funds (MFs) have proved to be important conduits of mobilising resources particularly since 1987-88 when the public sector banks were allowed to set up subsidiaries to undertake mutual fund business. At present this country has four types of mutual funds - Unit Trust of India, MF subsidiaries of public sector banks, MF subsidiaries of investment institutions like LlC and GIC, and private sector MFs. In 2004-05 there was a steep fall in resources mobilisation through mutual funds. It was as low as Rs. 2,201 crore. The year 2005-06 recorded the highest ever resource mobilisation of Rs. 52,780 crare by mutual funds (of this, as many as 81.4 per cent resources were mobilised by the private sector mutual funds). NSE AND SSE. The biggest stock exchange of India is the National Stock Exchange (NSE) which was set up in November 1992. It started its trading operations effective June 30, 1994. Only the debt market segment of the NSE was put into operation initially The second largest stock exchange in India is the Bombay Stock Exchange (BSE). It was the first organised stock exchange established in India at Mumbai as far back as 1887. Presently NSE and BSE account for almost the entire trading of scrips on Indian stock markets and most of the regional stock exchanges have been rendered redundant. 4,549 5,284 2,383 66 389 India 1,20,213 2007 1,13,000 2008 1,19,600 2009 1,29,350 2010 1,47,000

International Comparison. In 2007, 2008 and 2009 NSE and BSE ranked third and fifth respectively in the world on the basis of the number of transactions. In 2009, BSE slipped by one position to sixth while NSE retained its third position.

Capital market efficiency

An analysis of the efficiency of capital markets. This looks at how fair current market prices are for an asset given current market situations. For example, if major news breaks out for a company, an analysis would occur on the stock's price to see how it should be valued given the news. Capital market efficiency measures the extent of the accuracy of the stock's An efficient capital market is a market where the share prices reflect new information accurately and in real time. Capital market efficiency is judged by its success in incorporating and inducting information, generally about the basic value of securities, into the price of securities. This basic or fundamental value of securities is the present value of the cash flows expected in the future by the person owning the securities. The fluctuation in the value of stocks encourage traders to trade in a competitive manner with the objective of maximum profit. This results in price movements towards the current value of the cash flows in the future. The information is very easily available at cheap rates because of the presence of organized markets and various technological innovations. An efficient capital market incorporates information quickly and accurately into the prices of securities. In the weak-form efficient capital market, information about the history of previous returns and prices are reflected fully in the security prices; the returns from stocks in this type of market are unpredictable. In the semi strong-form efficient market, the public information is completely reflected insecurity prices; in this market, those traders who have nonpublic information access can earn excess profits. In the strong-form efficient market, under no circumstances can investors earn excess profits because all of the information is incorporated into the security prices. The funds that are flowing in capital markets, from savers to the firms with the aim of financing projects, must flow into the best and top valued projects and, therefore, informational efficiency is of supreme importance. Stocks must be efficiently priced, because if the securities are priced accurately, then those investors who do not have time for market analysis would feel confident about making investments in the capital market. Eugene Fama was one of the earliest to theorize capital market efficiency, but empirical tests of capital market efficiency had begun even before that.

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CAPITAL MARKET SEGMENTS

CAPITAL MARKET primary market secondary market

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PRIMARY MARKET
Many companies, especially small and medium scale, enter the primary market to raise money from the public to expand their businesses. They sell their securities to the public through an initial public offering. The securities can be directly bought from the shareholders, which is not the case for the secondary market. The primary market is a market for new capitals that will be traded over a longer period. In the primary market, securities are issued on an exchange basis. The underwriters, that is, the investment banks, play an important role in this market: they set the initial price range for a particular share and then supervise the selling of that share. Investors can obtain news of upcoming shares only on the primary market. The issuing firm collects money, which is then used to finance its operations or expand business, by selling its shares. Before selling a security on the primary market, the firm must fulfill all the requirements regarding the exchange. After trading in the primary market the security will then enter the secondary market, where numerous trades happen every day. The primary market accelerates the process of capital formation in a country's economy. The primary market categorically excludes several other new long-term finance sources, such as loans from financial institutions. Many companies have entered the primary market to earn profit by converting its capital, which is basically a private capital, into a public one, releasing securities to the public. This phenomena is known as "public issue" or "going public."There are three methods though which securities can be issued on the primary market: right issue, Initial Public Offer (IPO), and preferential issue. A company's new offering is placed on the primary market through an initial public offer.

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Functioning of Primary Market

Primary Mortgage Market Primary Target Market Transaction Costs in Primary Market PL in Primary Market Revival Of Indian Primary Market Primary Securities Market Problems of Indian Primary Market Investment in Primary Market Primary Money market International Primary Market Association IPO Primary Market Primary Capital Market

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Secondary Market
is the market where, unlike the primary market, an investor can buy a security directly from another investor in lieu of the issuer. It is also referred as "after market". The securities initially are issued in the primary market, and then they enter into the secondary market. All the securities are first created in the primary market and then, they enter into the secondary market. In the New York Stock Exchange, all the stocks belong to the secondary market. In other words, secondary market is a place where any type of used goods is available. In the secondary market shares are maneuvered from one investor to other, that is, one investor buys an asset from another investor instead of an issuing corporation. So, the secondary market should be liquid. Example of Secondary market: In the New York Stock Exchange, in the United States of America, all the securities belong to the secondary market

Importance of Secondary Market Secondary Market has an important role to play behind the developments of an efficient capital market. Secondary market connects investors' favoritism for liquidity with the capital users' wish of using their capital for a longer period. For example, in a traditional partnership, a partner cannot access the other partner's investment but only his or her investment in that partnership, even on an emergency basis. Then if he or she may breaks the ownership of equity into parts and sell his or her respective proportion to another investor. This kind of trading is facilitated only by the secondary market.

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STOCK EXCHANGE Stock Exchange

The origin of the stock market in India goes back to the end of the eighteenth century when longterm negotiable securities were first issued. However, for all practical purposes, the real beginning occurred in the middle of the nineteenth century after the enactment of the companies Act in 1850, which introduced the features of limited liability and generated investor interest in corporate securities. An important early event in the development of the stock market in India was the formation of the native share and stock brokers 'Association at Bombay in 1875, the precursor of the present day Bombay Stock Exchange. This was followed by the formation of associations/exchanges in Ahmedabad (1894), Calcutta (1908), and Madras (1937). In addition, a large number of ephemeral exchanges emerged mainly in buoyant periods to recede into oblivion during depressing times subsequently. Stock exchanges are intricacy inter-woven in the fabric of a nation's economic life. Without a stock exchange, the saving of the community- the sinews of economic progress and productive efficiency- would remain underutilized. The task of mobilization and allocation of savings could be attempted in the old days by a much less specialized institution than the stock exchanges. But as business and industry expanded and the economy assumed more complex nature, the need for 'permanent finance' arose. Entrepreneurs needed money for long term whereas investors demanded liquidity the facility to convert their investment into cash at any given time. The answer was a ready market for investments and this was how the stock exchange came into being. Stock exchange means any body of individuals, whether incorporated or not, constituted for the purpose of regulating or controlling the business of buying, selling or dealing in securities. These securities include: (i) Shares, scrip, stocks, bonds, debentures stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ii) Government securities; and (iii) Rights or interest in securities. The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd (NSE) are the two primary exchanges in India. In addition, there are 22 Regional Stock Exchanges. However, the BSE and NSE have established themselves as the two leading exchanges and
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account for about 80 per cent of the equity volume traded in India. The NSE and BSE are equal in size in terms of daily traded volume. The average daily turnover at the exchanges has increased from Rs 851 crore in 1997-98 to Rs 1,284 crore in 1998-99 and further to Rs 2,273 crore in 1999-2000 (April - August 1999). NSE has around 1500 shares listed with a total market capitalization of around Rs 9, 21,500 crore. The BSE has over 6000 stocks listed and has a market capitalization of around Rs 9, 68,000 crore. Most key stocks are traded on both the exchanges and hence the investor could buy them on either exchange. Both exchanges have a different settlement cycle, which allows investors to shift their positions on the bourses. The primary index of BSE is BSE Sensex comprising 30 stocks. NSE has the S&P NSE 50 Index (Nifty) which consists of fifty stocks. The BSE Sensex is the older and more widely followed index. Both these indices are calculated on the basis of market capitalization and contain the heavily traded shares from key sectors. The markets are closed on Saturdays and Sundays. Both the exchanges have switched over from the open outcry trading system to a fully automated computerized mode of trading known as BOLT (BSE on Line Trading) and NEAT (National Exchange Automated Trading) System. It facilitates more efficient processing, automatic order matching, faster execution of trades and transparency; the scrip's traded on the BSE have been classified into 'A', 'B1', 'B2', 'C', 'F' and 'Z' groups. The 'A' group shares represent those, which are in the carry forward system (Badla). The 'F' group represents the debt market (fixed income securities) segment. The 'Z' group scrip's are the blacklisted companies. The 'C' group covers the odd lot securities in 'A', 'B1' & 'B2' groups and Rights renunciations. The key regulator governing Stock Exchanges, Brokers, Depositories, Depository participants, Mutual Funds, FIIs and other participants in Indian secondary and primary market is the Securities and Exchange Board of India (SEBI) Ltd. Securities contract (regulation) act, 1956.stock exchange means any body of individuals , whether incorporated or not, constituted for the purpose of assisting, Regulating or controlling the business of buying and selling in securities.

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Features of Stock Exchange Characteristics or features of stock exchange are: 1. Market for securities : Stock exchange is a market, where securities of corporate bodies, government and semi-government bodies are bought and sold. 2. Deals in second hand securities : It deals with shares, debentures bonds and such securities already issued by the companies. In short it deals with existing or second hand securities and hence it is called secondary market. 3. Regulates trade in securities : Stock exchange does not buy or sell any securities on its own account. It merely provides the necessary infrastructure and facilities for trade in securities to its members and brokers who trade in securities. It regulates the trade activities so as to ensure free and fair trade 4. Allows dealings only in listed securities : In fact, stock exchanges maintain an official list of securities that could be purchased and sold on its floor. Securities which do not figure in the official list of stock exchange are called unlisted securities. Such unlisted securities cannot be traded in the stock exchange. 5. Transactions effected only through members : All the transactions in securities at the stock exchange are effected only through its authorised brokers and members. Outsiders or direct investors are not allowed to enter in the trading circles of the stock exchange. Investors have to buy or sell the securities at the stock exchange through the authorised brokers only. 6. Association of persons : A stock exchange is an association of persons or body of individuals which may be registered or unregistered. 7. Recognition from Central Government : Stock exchange is an organised market. It requires recognition from the Central Government. 8. Working as per rules : Buying and selling transactions in securities at the stock exchange are governed by the rules and regulations of stock exchange as well as SEBI Guidelines. No deviation from the rules and guidelines is allowed in any case. 9. Specific location : Stock exchange is a particular market place where authorised brokers come together daily (i.e. on working days) on the floor of market called trading circles and conduct trading activities. The prices of different securities traded are shown on electronic boards. After the working hours market is closed. All the working of stock exchanges is conducted and controlled through computers and electronic system.
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10. Financial Barometers : Stock exchanges are the financial barometers and development indicators of national economy of the country. Industrial growth and stability is reflected in the index of stock exchange

List of Stock Exchanges In India

1. Ahmedabad Stock Exchange Association Ltd. 2. Bangalore Stock Exchange Ltd. (Served by India on Internet) 3. Bhubaneshwar Stock Exchange Association 4. Calcutta Stock Exchange Ltd. 5. Cochin Stock Exchange Ltd. 6. Coimbatore Stock Exchange Ltd. 7. Delhi Stock Exchange Association 8. Guwahati Stock Exchange Ltd. 9. Hyderabad Stock Exchange Ltd. 10. Indore Stock Exchange Ltd. 11. Jaipur Stock Exchange Ltd. 12. Kanara Stock Exchange Ltd. (Mangalore) 13. Ludhiana Stock Exchange Association Ltd. 14. Madras Stock Exchange Ltd. 15. Madhya Pradesh Stock Exchange Ltd. 16. Magadh Stock Exchange Ltd. 17. Meerut Stock Exchange Ltd. 18. Mumbai Stock Exchange 19. Pune Stock Exchange Ltd. 20. Saurashtra Kutch Stock Exchange Ltd. (Rajkot) 21. Utter Pardesh Stock Exchange Association Ltd. Kanpur 22. Vadodara Stock Exchange Ltd

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National Stock Exchange

National Stock The Exchange (NSE) is India's leading stock exchange covering various cities and towns across the country. NSE was set up by leading institutions to providemodern fully automated screen-based trading system with national reach. The Exchangeange has brought about unparalleled transparency, speed & efficiency, safety and market integrity. It has set up facilities that serve as a model for the securities industry in terms of systems, practices and procedures. NSE has played a catalytic role in reforming the Indian securities market in terms of microstructure, market practices and trading volumes. The market today uses state-of-art information technology to provide an efficient and transparent trading, clearing and settlement mechanism, and has witnessed several innovations in products & services viz. demutualization of stock exchange governance, screen based trading, compression of settlement cycles, dematerialization and electronic transfer of securities, securities lending and borrowing, professionalization of trading members, fine-tuned risk management systems, emergence of clearing corporations to assume counterparty risks, market of debt and derivative instruments and intensive use of information technology.

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Bombay Stock Exchange

Established in 1875, BSE Ltd. (formerly known as Bombay Stock Exchange Ltd.), is Asias first Stock Exchange and one of Indias leading exchange groups. Over the past 137 years, BSE has facilitated the growth of the Indian corporate sector by providing it an efficient capital-raising platform. Popularly known as BSE, the bourse was established as "The Native Share & Stock Brokers' Association" in 1875. BSE is a corporatized and demutualised entity, with a broad shareholder-base which includes two leading global exchanges, Deutsche Bourse and Singapore Exchange as strategic partners. BSE provides an efficient and transparent market for trading in equity, debt instruments, derivatives, mutual funds. It also has a platform for trading in equities of small-and-medium enterprises (SME). Around 5000 companies are listed on BSE making it world's No. 1 exchange in terms of listed members. The companies listed on BSE Ltd command a total market capitalization of USD Trillion 1.06 as of May 15, 2012. BSE Ltd is world's fifth most active exchange in terms of number of transactions handled through its electronic trading system. It is also one of the worlds leading exchanges (5th largest in May 2012) for Index options trading (Source: World Federation of Exchanges). BSE also provides a host of other services to capital market participants including risk management, clearing, settlement, market data services and education. It has a global reach with customers around the world and a nation-wide presence. BSE systems and processes are designed to safeguard market integrity, drive the growth of the Indian capital market and stimulate innovation and competition across all market segments. BSE is the first exchange in India and second in the world to obtain an ISO 9001:2000 certification. It is also the first Exchange in the country and second in the world to receive Information Security Management System Standard BS 7799-2-2002 certification for its On-Line trading System (BOLT).

It operates one of the most respected capital market educational institutes in the country (the BSE Institute Ltd.). BSE also provides depository services through its Central Depository Services Ltd. (CDSL) arm.

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BSEs popular equity index - the SENSEX - is India's most widely tracked stock market benchmark index. It is traded internationally on the EUREX as well as leading exchanges of the BRCS nations (Brazil, Russia, China and South Africa).

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Role of Capital Market In Economic Development

1. Mobilization of Savings: Capital market is an important source for mobilizing idle savings from the economy. It

mobilizes funds from people for further investments in the productive channels of an economy. In that sense it activate the ideal monetary resources and puts them in proper investments. 2. Capital Formation: Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. Through mobilization of ideal resources it generates savings; the mobilized savings are made available to various segments such as agriculture, industry, etc. This helps in increasing capital formation. 3. Provision of Investment Avenue: Capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to invest resources for a long period of time. It provides suitable interest rate returns also to investors. Instruments such as bonds, equities, units of mutual funds, insurance policies, etc. definitely provides diverse investment avenue for the public. 4. Speed up Economic Growth and Development: Capital market enhances production and productivity in the national economy. As it makes funds available for long period of time, the financial requirements of business houses are met by the capital market. It helps in research and development. This helps in, increasing production and productivity in economy by generation of employment and development of infrastructure. 5. Proper Regulation of Funds: Capital markets not only helps in fund mobilization, but it also helps in proper allocation of these resources. It can have regulation over the resources so that it can direct funds in a qualitative manner.

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6. Service Provision: As an important financial set up capital market provides various types of services. It includes long term and medium term loans to industry, underwriting services, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum. 7. Continuous Availability of Funds: Capital market is place where the investment avenue is continuously available for long term investment. This is a liquid market as it makes fund available on continues basis. Both buyers and easily buy and sell securities as they are continuously available. Basically capital market transactions are related to the stock exchanges. Thus marketability in the capital market becomes easy. Thus the success of the economy depends upon the quantum of finance raised from the household investors and its rightful application.

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SOME FACTORS AFFECTING CAPITAL MARKET

Correlation between Sensex and FII Flow in Indian capital market

YEAR

SENSEX NET INVESTMENT FII (CR)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

3990.65 3262.01 3383.85 5872.48 6626.49 9422.49 13827.77 20325.27 9720.55 17473.45 20621.61

6,370.08 13,128.20 3,629.60 30,459.00 47,181.90 36,540.20 71,486.30 -52,987.40 83,424.20 133,266.80 -2,714.20

R=0.018503 Source :- www.bse.co.in Above table describe the positive correlation between SENSEX and FII Flow in Indian capital market .whenever FII Flow in Indian capital market increase SENSEX will go up and whenever FII Flow in Indian capital market decrease SENSEX will go down.

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Correlation between Sensex and India GDP rate Year sensex GDP rate 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 3990.65 3262.01 3383.85 5872.48 6626.49 9422.49 3.9 4.6 6.9 8.1 9.2 9.7

13827.77 9.9 20325.27 6.2 9720.55 6.6

17473.45 10.6 20621.61 7.2 15534.67 6.9

R=0.323773 Source :- www.bse.co.in Above table describes a positive correlation between SENSEX and GDP, if GDP increases SENSEX also increases and if it decreases SENSEX will go down.

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Correlation between Sensex and Gold price

Year

Sensex

Traded Contracts (in Lots)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

3383.85 5872.48 6626.49 9422.49

3802 724236 2773381 11988919

13827.77 10366705 20325.27 26001228 9720.55 30423657

17473.45 31581365 20621.61 79354310 15534.67 53642729

R=0.767935

Source :- www.bse.co.in

Above table shows a positive correlation between SENSEX and GOLD PRICE , if GOLD PRICE increases SENSEX also increases and if it decreases SENSEX will go down.

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Other Factors
Some of the other factors which influence capital market are as follows:-

A) Performance of domestic companies:The performance of the companies or rather corporate earnings is one of the factors which has direct impact or effect on capital market in a country. Weak corporate earnings indicate that the demand for goods and services in the economy is less due to slow growth in per capita income of people . Because of slow growth in demand there is slow growth in employment which means slow growth in demand in the near future. Thus weak corporate earnings indicate average or not so good prospects for the economy as a whole in the near term. In such a scenario the investors ( both domestic as well as foreign ) would be wary to invest inthe capital market and thus there is bear market like situation. The opposite case of it would berobust corporate earnings and its positive impact on the capital market. The corporate earnings for the April June quarter for the current fiscal has been good. The companies like TCS, Infosys, Maruti Suzuki, BhartiAirtel, ACC, ITC, Wipro, HDFC, Binani Cement, IDEA, Marico Canara Bank, Piramal Health, India cements , Ultra Tech, L&T, Coca-Cola, Yes Bank, Dr. Reddys Laboratories, Oriental Bank of Commerce, Ranbaxy, Fortis, Shree Cement ,etc have registered growth in net profit compared to the corresponding quarter a year ago. Thus we see companies from Infrastructure sector, Financial Services, Pharmaceutical sector, IT Sector, Automobile sector, etc. doing well. This across the sector growth indicates that the Indian economy is on the path of recovery which has been positively reflected in the stock market (rise in Sensex & nifty) in the last two weeks. (July 13-July 24).

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B) Environmental Factors:Environmental Factor in Indias context primarily means- Monsoon. In India around 60 % of Agricultural production is dependent on monsoon. Thus there is heavy dependence on monsoon. The major chunk of agricultural production comes from the states of Punjab, Haryana & Uttar Pradesh. Thus deficient or delayed monsoon in this part of the country would directly affect the agricultural output in the country. Apart from monsoon other natural calamities like Floods, tsunami, drought, earthquake, etc. also have an impact on the capital market of a country. The Indian Met Department (IMD) on 24th June stated that India would receive only 93 %rainfall of Long Period Average (LPA). This piece of news directly had an impact on Indian capital market with BSE Sensex falling by 0.5 % on the 25th June. The major losers were automakers and consumer goods firms since the below normal monsoon forecast triggered concerns that demand in the crucial rural heartland would take a hit. This is because deficient monsoon could seriously squeeze rural incomes, reduce the demand for every Thing from motorbikes to soaps and worsen a slowing economy.

C) Macro Economic Numbers:-The macroeconomic numbers also influence the capital market. It includes Index of Industrial Production (IIP) which is released every month, annual Inflation number indicated by Wholesale Price Index (WPI) which is released every week, Export Import numbers which are declared every month, Core Industries growth rate (It includes Six Core infrastructure industries Coal, Crude oil, refining, power, cement and finished steel) which comes out every month, etc. This macro economic indicators indicate the state of the economy and the direction in which the economy is headed and therefore impacts the capital market in India. A case in the point was declaration of core industries growth figure. The six Core Infrastructure Industries Coal, Crude oil, refining, finished steel, power & cement grew 6.5% in June, the figure came on the 23 rd of July and had a positive impact on the capital market with the Sensex and nifty rising by 388 points & 125 points respectively.

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D) Global Cues: In this world of globalization various economies are interdependent and interconnected. An event in one part of the world is bound to affect other parts of the world; however the magnitude and intensity of impact would vary. Thus capital market in India is also affected by developments in other parts of the world i.e. U.S., Europe, Japan, etc. Global cues includes corporate earnings of MNCs, consumer confidence index in developed countries, jobless claims in developed countries, global growth outlook given by various agencies like IMF, economic growth of major economies, price of crude oil, credit rating of various economies given by Moodys, S & P, etc. An obvious example at this point in time would be that of subprime crisis & recession. Recession started in U.S. and some parts of the Europe in early 2008 .Since then it has impact all the countries of the world- developed, developing, and lessdeveloped and even emerging economies.

E) Political stability and government policies:-For any economy to achieve and sustain growth it has to have political stability and pro- growth government policies. This is because when there is political stability there is stability and consistency in governments attitude which is communicated through various government policies. The vice- versa is the case when there is no political stability .So capital market also reacts to the nature of government, attitude of government, and various policies of the government. The above statement can be substantiated by the fact the when the mandate came in UPA governments favor ( Without the baggage of left party) on May 16 2009, the stock markets on Monday , 18th May had a bullish rally with Sense closing 800 point higher over the previous days close. The reason was political stability. Also without the baggage of left party government can go ahead with reforms.

F) Growth prospectus of an economy:-When the national income of the country increases and per capita income of people increases it is said that the economy is growing. Higher income also means higher expenditure and higher savings. This augurs well for the economy as higher expenditure means higher demand and higher savings means higher investment. Thus when an economy is growing at a good pace capital market of the country attracts more money from investors, both from within and outside the country and vice -versa. So we can say that growth prospects of an economy do have an impact on capital markets.

29

G) Investor Sentiment and risk appetite:-Another factor which influences capital market is investor sentiment and their risk appetite. Even if the investors have the money to invest but if they are not confident about the returns from their investment, they may stay away from investment for some time. At the same time if the investors have low risk appetite, which they were having in global and Indian capital market some four to five months back due to global financial meltdown and recessionary situation in U.S. & some parts of Europe, they may stay away from investment and wait for the right time to come

30

Role of SEBI
Securities and exchange Board of India was set up in 1988 and became a statutory organization from January 1992. It was given a statutory status for healthy regulation of capital markets. Office of Capital Issues (OCI) was abolished and the companies were to approach market directly subject to SEBI guidelines relating to disclosures and other measures of investors protection. This led to removal of hurdles i.e., getting permission from CCI, MRTP commissioner, Company Law Board, Ministry of Finance, Industrial, Registrar of companies etc. The Securities and Exchange Board of India Act (SEBI) empowers SEBI to: 1. Regulate the business of stock exchanges. 2. Register and regulate intermediaries associated with the securities market as

well as working of mutual funds. 3. Promote and regulate self Regulatory organizations. 4. Prohibit fraudulent and unfair trade practices relating to securities transactions. SEBI directed that all Stock Exchanges should computerize their operations to have better transparency and. efficient screen based trading system and also permitted most of the stock exchanges to have their additional trading floors at different places

through VSATS or WAN/LAN systems to suit their requirements. This has facilitated members and investors to do their trading activities in a more and competitive way.

The system of insurance of brokers was made mandatory; the norms for bad deliveries were standardized.

31

Online Trading
In India first fully automated stock exchange was formed in the year 1994 with fully automated trading system called screen based trading or Online trading basing on computers this system has brought revolutionary changes in the secondary markets in India. This system is mainly helpful for the purpose of protecting the investors from the brokers in the price rigging. The NSE has used the software called NEAT (National Exchange for Automated Trading). After NSE starting the Online trading the Indias premier stock exchanges followed the way of NSE and BSE. Objectives of Online Trading: Providing a Nationwide trading facility for all type of securities. Ensuring equal access to investors to all over the country through communication network. Providing a fair, efficient and transparent securities market using an electronic trading system. Enabling the use of shorter settlement cycles and book entry settlement system.

32

Outcry System
Trading on stock exchanges used to take place through open outcry without use of technology for immediate matching or recording of trades. This was a time consuming and inefficient system. The practice of physical trading imposed limits on trading volumes and hence the slow speed with which new information was incorporated into price. NSE is the first exchange in the world to use satellite communication technology for trading. Its trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art client server based application. At the server end all trading information is stored in an in memory database to achieve minimum response time and maximum system availability for users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform response time of less than one second.

33

Demateralisation
The decade of Lhe9Os witnessed a revolution in the clearing and settlements functions in the Indian securities market. Promulgation of the Depositories Ordinance in 1995 and establishment in this revolution which sought to eliminate the ills associated with paper base securities system such as delay in transfer, bad delivery, theft, fake and forged shares, and synchronize the settlement of trade transfer of securities irrespective of geographical locations. Although in the first phase, SEB1 has made Demat trading for selected scripts, efforts should be made to bring in all major exchanges within a well defined time frame for acceptance of Demat Trading. With SEBI allowing Demat delivery even in the fiscal segment more and more retail investor are likely to get in to the system which ultimately encourage more brokers also to become to become depository participants and educate the retail investor. The advantage of script less trading and the need for such Demat trading compulsorily could also be explored. Apart from this the banking network in the country could be used for this purpose by providing tow way quotes to take up this work.

34

Introduction of Ludhiana Stock Exchange

The Ludhiana Stock Exchange Limited (LSE was established in 1981, by Sh. S.P. Oswal of Vardhman Group and Sh. B.M. Munjal of Hero Group, leading industrial luminaries, to fulfill a vital need of having a Stock Exchange in the region of Punjab, Himachal Pradesh, Jammu & Kashmir and Union territory of Chandigarh. Since its inception, the stock exchange has grown phenomenally. The stock Exchange has played an important role in channelising savings into capital for the various industrial and commercial units of the state of Punjab and other parts of the company. The Exchange has facilitated the mobilization of funds by entrepreneurs from the public and thereby contributed in the overall, economic, industrial and social development of the state under its jurisdiction. Ludhiana Stock Exchange is one of the leading Regional Stock Exchange and has been in the forefront of other stock exchange in every spheres, whether it is formation of subsidiary for providing the platform of trading to investors, for brokers etc. in the era of Screen based trading introduced by national Stock exchange and Bombay stock Exchange, entering into the field of Commodities trading or imparting education to the Public at large by way of starting Certificate Programmes in Capital Market. The vision and mission of stock Exchange is: Reaching small investors by providing services relating to Capital market including Trading Depository operations etc and creating Mass Awareness by way of education and training in the field of Capital market. To create educated investors and fulfilling the gap of skilled work force in the domain in Capital Market. Further, the exchange has 295 members out of which 171 are registered with national Stock exchange as Sub- broker and 124 with Bombay Stock exchange as sub- brokers through our subsidiary.

35

Infrastructure And Assets Base At Ludhiana Stock Exchange

The Exchange building is situated at Feroze Gandhi Market, Ferozepur Road, Ludhiana. It is a six storeyed building, which is centrally air-conditioned. The building has 262 rooms, which are located on various floors ranging from second to fifth. The first floor of the building houses the administrative office and rooms from second to fifth floors have been leased out to brokers. The first floor also has canteen facility. Investor Service Centre is also located at first floor which houses a well-equipped library and view-terminals to provide live rates of NSE and BSE to investors. Investors are also provided with Cable TV for the purpose of viewing the latest happenings in the Capital Market and around. Basement of the building has air-conditioning plant and Generators to provide air-conditioned environment and twenty-four hours power back up. The Exchange has also an additional plot of land measuring 2333 sq. yards in the prime location of city, to enhance its infrastructure and source of income. List Of Board Of Directors Of LSE Sr. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Name of Director Prof. Padam Parkash Kansal Sh. Joginder Kumar Sh. Vikas Batra Sh. Rajinder Mohan Singla Sh. Ashok Kumar Sh. Satish Nagpal Sh. Ashwani Kumar Sh. V.P. Gaur Dr. Raj Singh, RoC Sh. Sanjay Anand Sh. Sunil Gupta Sh. Jaspal Singh Category Chairman Vice Chairman Shareholder Director Shareholder Director Shareholder Director Shareholder Director Public Interest Director Public Interest Director Public Interest Director Trading Member Director Trading Member Director Trading Member Director

36

Strengths of LSE Group

1. LSE brand is popular among masses. The brand image of LSE can be capitalized. 2. We have requisite infrastructure for the Capital Market activities which includes a multistoreyed, centrally air conditioned building situated in the financial hub of the city i.e. Feroze Gandhi Market. 3. We have well experienced staff handling operations of Stock Exchange. 4. We have competent Board and professional management. 5. We have much needed networking of sub brokers in the entire region, who are having rich experience in Stock Market operations for the last 31 years. 6. We have more than 46,000 clients spread across Punjab, Himachal Pardesh, Jammu & Kashmir and adjoining areas of Haryana and Rajasthan. 7. The turnover of our subsidiary is the highest amongst all subsidiaries of Regional Stock Exchanges in India.

Listing Of Securities of Companies At Ludhiana Stock Exchange

At present, Ludhiana Stock Exchange has 324 listed companies, out of which 211 are regional and 113 are Non-regional. The total listed capital of aforesaid companies is Rs. 3063.56 Crores appx. The market capitalization of the said companies is more than Rs. 1890.53 crores. The Stock Exchange is covering the vast investor base through the listing of above said companies, which are situated in the region comprising of Punjab, Himachal Pradesh, Jammu & Kashmir, and Chandigarh. Ludhiana Stock Exchange has facilitated the capital generation for agro based industries as Punjab is a agricultural led economy. It will continue to do so, once it gets approval for a tie up with bigger Exchanges for commencing trading operations.

37

Investor Related Services

The Exchange has been providing a variety of services for the benefit of investing public. The services include Investor Service Centres, Investor Protection fund and Investor Educational Seminars. (I) Investor service centres The Exchange has set-up Investor Service Centre at LSE Building for providing information relating to Capital Market to the general public. The Centres subscribe to leading economic, financial dailies and periodicals. They also store the Annual Reports of the companies listed at the Stock Exchange. The Investor Service Centres are also equipped with a Terminal for providing live rates of trading at NSE and BSE. A large number of the investors visit the centre to utilize the services being provided by the Exchange. (II) Investor awareness seminars The Exchange has been organizing Investor Awareness Seminars for the benefit of Investors of the region comprising State of Punjab, Himachal Pradesh, Jammu & Kashmir, Chandigarh and adjoining areas of Haryana and Rajasthan. This massive exercise of organizing Investor Awareness Seminars has been launched as a part of Securities Market Awareness Campaign launched by SEBI in January, 2003. The Exchange apprises the investors about Dos and Donts to be observed while dealing in Securities Market. During 2011-2012, till date, Exchange has organized more than 83 workshops in the region mentioned above. (III) Website of exchange www.lse.co.in The Exchange has its own website with the domain name www.lse.co.in. The website provides valuable information about the latest market commentary, research reports about companies, daily status of International markets, a separate module for Internet trading, information about listed companies and brokers and sub-brokers of the Exchange and its subsidiary. The website also contains many useful links on portfolio management, investor education, frequently asked questions about various topics relating to Primary and Secondary Market, information about Mutual Funds, Financials of the Company including Quarterly Results, Share Prices, Profit and Loss Accounts, Balance Sheet and Many More. The website also contains daily Technical Charts of various scrips being traded in BSE and NSE.

38

LSE Securities Limited

LSE Securities Ltd., was incorporated in 07th January, 2000 with a view to revive the capital market in the region and for taking full advantage of the emerging opportunities being provided by expansion of bigger stock exchanges like NSE and BSE. The company since its inception has marched forward rapidly and has maintained consistent growth record. LSE Securities Limited is a subsidiary of the Ludhiana Stock Exchange has presence at various locations to effectively service its large base of individual clients. The clients of the company greatly benefit from strong research capability, which encompasses fundamentals as well as technicals of LSE Securities Ltd, besides its wide reach in this part of the country. LSE SECURITIES LIMITED (LSESL) is a subsidiary of the Ludhiana Stock Exchange Limited under the policy formulated by the Securities and Exchange Board of India (SEBI) for Revival of Small Stock Exchanges. The policy enunciated by the SEBI permits a stock exchange to float a subsidiary, which can take up membership of larger stock exchanges, such as the National Stock Exchange of India Ltd. (NSE), and Bombay Stock Exchange Ltd. (BSE). LSESL has been registered by SEBI as a Trading-cum-Clearing Member in the Capital Market segment and Futures & Options segment of NSE and Capital Market segment of BSE and Trading member of MCX-Stock Exchange Limited. Trading Members of LSE can access NSE and BSE by registering themselves with SEBI as Sub-brokers of LSESL.

Objectives of The Company

LSE Securities Limited is a subsidiary of the Ludhiana Stock Exchange, which was formed with an objective to enhance business and investment opportunities for the investors and members of Ludhiana Stock Exchange at large, through innovative products by encompassing a variety of activities related to the capital market. The company has a paid-up capital of Rs 5.55 crores.

39

List of Board Of Directors Of LSE Securities Limited Sr.No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Name Sh. Vishal Goombhir Sh. Vijay Singhania Sh. Rajesh K. Sharma Sh. Lalit Kishor Sh. Sukhjivan Rai Sh. Munish Sood Sh. Ashish Aggarwal Sh. Ajay Chowdhary Dr. Prem Kumar Sh. Vinesh Kumar Sh. Rakesh Gupta Mrs. Pooja M. Kohli Designation Chairman Vice-Chairman Chief Executive Officer Member-Director Member-Director Member-Director Public Representative Director- Independent Director Public Representative Director- Independent Director Public Representative Director- Independent Director Public Representative Director- Independent Director Public Representative Director- Independent Director LSE-Representative Director

Governing Council
The Council of the management of the Company comprises of 10 directors of which 3are broker members and 7non-brokers. Five non broker members are Independent Directors of eminent status from the field of finance, law and management and remaining two are Chief Executive Officer of LSE Securities Limited and Executive Director of the holding company (Ludhiana Stock Exchange), who are on the Board of the company as ex-officio Directors. Thus the council of management has representation of sub-brokers as well as professionals and subject specialists representing various fields of business activities. Operations of the company are run in a professional, transparent and fair manner keeping in view of the interest of investors as well as other stake-holders.

40

Corporate Membership of NSE & BSE

SEBI, at the initiative of LSE, permitted smaller Stock Exchanges, to trade on bigger Stock Exchanges through their subsidiary companies. The Ludhiana Stock Exchange floated its subsidiary company, the LSE Securities Limited, with the objective of obtaining trading rights on bigger Stock Exchanges. It has obtained corporate membership of both NSE and BSE in the first half of year 2000.

Trading At NSE And BSE

The LSE Securities Ltd. commenced trading operations in Capital Market Segments of BSE and NSE in September, 2000 and December 2000 respectively. The turnover of the Company at NSE and BSE is growing by leaps and bounds ever since in incorporation. There was encouraging response from the sub-brokers specially at NSE counters. During the financial year 2005-06, the Company recorded a turnover of Rs. 7975 crores and Rs.3834 crores in "Capital Market" segments of NSE and BSE respectively. For the year ended 2005-2006, there were 128 subbrokers registered for NSE and 68 for BSE. F&O SEGMENT OF NSE The LSE Securities Ltd. commenced trading operations in Future and Options Segment of NSE in February 2002. The Company became the first subsidiary of any Regional Stock Exchange which commenced trading in F&O Segment of NSE. Response to trading facilities in the F&O segment of NSE has been very encouraging and volumes generated in this segment soon exceeded those in Capital Market segment.

Trading Through V-SATS

The LSE Securities Limited has provided facility to its sub-brokers for trading on NSE and BSE through VSAT counters which are located outside Stock Exchange Building. During 2005-2006, 27 sub-brokers of the company have been trading through VSAT on NSE and 13 on BSE.

41

Certification in Financial Market

In order to provide professional services to the investors of LSE Securities Limited through its sub-brokers, the company motivated its sub-brokers and its staff to qualify the certification in financial markets conducted by NSE. All trading terminals for Capital Market Segment and F&O segment are being operated by the persons after having qualified the said certification.

Depository Participant Services

1.

National Securities Depository Limited (NSDL): The LSE Securities Ltd. commenced its operations as Depository Participant of NSDL in August 2000. The DP services provided by the Company have technology edge over other DPs, as DP of the company is the only On-line Real-Time DP in the region. As a result of efficient services and competitive rates, the Company has been able to increase its market share in the DP business at the cost of other DPs in the region. As on date DP of NSDL and CDSL of the Company at Ludhiana is servicing over 35000 beneficiary accounts.

2.

Central Depository Services (India) Limited (CDSL): In order to further strengthen its services to sub-brokers and investors, the Company applied for the DP of CDSL. It started DP operations of CDSL in December 2001. With the operationalisation of DP Services of CDSL, the Company has been able to provide delivery of shares to subbrokers and investors on the day of pay-out which in turn helps the sub-brokers to give timely deliveries to their clients. Introduction of CDSL operations has also enabled the sub-brokers and investors of the Company to timely meet the pay-in obligations of securities purchased by the investors on BSE and sold next day on NSE through the Company and vice-versa.

42

Chapter 2 REVIEW OF LITERATRUE

43

There exists a voluminous literature concerning the role of capital market in the process of economic growth of a country. The most important and systematic early contribution on financial and economic development came from Joseph Schumpeter. Schumpeter (1912) contended that financial development causes economic development that financial markets promote economic growth by funding entrepreneurs and in particular by channelling capital to the entrepreneurs with high return projects. However, a systematic approach to the issue has been addressed with the empirical study by Goldsmith (1969). He demonstrated a positive correlation between financial development (measured by the value of financial intermediary assets relative to GNP) and economic growth. But the seminal work of McKinnon (1973) and Shaw (1973) brought to the forefront the role of financial development in promoting economic growth. Their argument was that the financial liberalization and deepening in countries that suffer from shallow finance or financial repression are critically important to the economic growth of these countries. Ever since this pioneering contribution, the relationship between economic growth and financial development remained an important issue of debate among academicians and policy makers (De Gregorio and Guidotti, 1995). There is now a growing theoretical and empirical body of literature on how financial intermediation mobilizes savings allocates resources, diversifies risks, and contributes to economic growth (Jbili, Enders, and Treichel, 1997; Greenwood and Jovanovic, 1990). These early works, though insightful, lacks rigor analytical structures. Starting from the beginning of 1990s, a growing body of work builds a series of analytical frameworks which show how the financial intermediaries and markets appear endogenously to contribute to longrun economic growth. Levine (1996), Jacque(2001), Tufano (2003), Chou (2007), Agarwal (2000), Mohtadi and Agarwal(1998), Sarkar (2006), Capasso(2006), Kamat, Kamat and Murthy(2007), Agrawalla and Tuteja (2007), Deb and Mukherjee (2008), and Chakraborty (2008) have contributed a lot to the literature in this direction. This theoretical and empirical explanation on the nexus between capital market and economic growth of a country has been given a new tint with the development of Efficient Market Hypothesis (EMH) by Fama (1965). Then it has been argued that for capital market to contribute to economic growth and development of a country, it must operate efficiently. If the market operates efficiently, confidence will be generated in the minds of the public and thus, investors
44

will be willing to part with hard earned funds and invest them in securities with the hope that in future they will recoup their investment. On the other side, where the market is highly and unreasonably speculative, investors will be discouraged to invest their funds. The implication is that the entrepreneurs cannot raise additional capital for expansion. Such a situation would have detrimental effect on economic growth of any country. Thus, it suffices to say that capital market efficiency is a necessary condition for growth and development of a country. L.C.Gupta (1992) revealed the findings of his study that there is existence of wild speculation in the Indian stock market. The over speculative character of the Indian stock market is reflected in extremely high concentration of the market activity in a handful of shares to the neglect of the remaining shares and absolutely high trading velocities of the speculative counters. Carter Randal (1992) offered to investors the underlying principles of winning on the stock market. He emphasised on longterm vision and a plan to reach the goals. He advised the investors that to be successful, they should never be pessimists. He revealed that though there has been a major economic crisis almost every year, it remains true that patient investors have consistently made money in the equities market. He concluded that investing in the stock market should be an un-emotional endeavour and suggested that investors should own a stock if they believe it would perform well. Yasaswy N.J. (1993) disclosed how 'turnaround stocks' offer big profits to bold investors and also the risks involved in investing in such stocks. Turnaround stocks are stocks with extraordinary potential and are relatively under priced at a given point of time. Avijit Banerjee (1998) reviewed Fundamental Analysis and Technical Analysis to analyse the worthiness of the individual securities needed to be acquired for portfolio construction. The Fundamental Analysis aims to compare the Intrinsic Value (I..V) with the prevailing market price (M.P) and to take decisions whether to buy, sell or hold the investments. The fundamentals of the economy, industry and company determine the value of a security. If the 1.V is greater than the M.P., the stock is under priced and should be purchased. Mukul Gupta (1999) described the risk management framework as the building blocks for Enterprise Risk Management ERM is the systems and procedures designed to deal with multiple types of risks. The objectives of E.R.M are to obtain information and analyse data so that
45

uncertainty is turned into quantifiable risk and appropriate management action can be taken to mitigate the risk. CRISIL Report on Risk Management (2000) stated that the loss potential from market risk will increase in the absence of strong risk management tools. The banks which adopt a pro-active approach to upgrading risk management skills which are currently unsophisticated as compared to internationally best practices, would have a competitive edge in future. The report commented that in the increasingly deregulated and competitive environment, the risk management strategies of banks would hold the key to differentiation in their credit worthiness. Jayanth M ThakurJ"(2000) disclosed the implications of derivatives. The use of derivatives can be for safeguarding oneself against risks. It is widely recognised by all including the SEBI committee on derivatives that a substantial degree of speculative activity in a market for derivatives is necessary and without this, a good market in derivatives cannot function. Mitra.S.K." (2000) commented on the increasing volatility of the bourses, which forces an investor to shift away from the equity market. He observed that analysts profess to the investors the virtue of long-term time horizon for the equity investment. But sharp volatility has become a feature of the capital market worldwide, resulting in frequent, sharp, downward corrections. In this scenario it is proving difficult to convince the investors to think long-term. The Economic Times Investors' year Book(2000-01) commented on the "Paperless World and described what makes dematerialisation the preferred choice and how it reduces risk. Thedematerialised trading was introduced in India in 1996 to reduce pains and risks in settlement through the loss of share certificates in transit, bad deliveries, delays in transfer and forged/fake/stoIen certificates. It helps in doing away with the risk of loss in transit by directly crediting the account with bonus shares and rights. There is no risk of bad delivery because the ownership status is clearly captured in the Depository's computers. Rukmani Viswanath (2001) reported that the Primary Dealers in Govt. securities are working on a new internal risk management model suited for the Indian market conditions. The attempt is to lay down general parameters for risk perception. The Primary Dealers Association of India (PDAI) is formulating a set of prudential norms for 'risk management practices'. While internationally the principles of risk management may be the same everywhere, the Association
46

is of the view that they have to identify the relevant issues and apply those principles in the Indian context. It strongly argues that it must work on a model that can help to manage liquidity and interest rate risk. While the existing RBI guidelines on risk management cover mainly statutory risk, the PDAI hopes that its new risk management model will be able to perceive 'real risk'. These new norms are expected to help gauge several issues like, whether a fall in the prices of securities or yields is a temporary or permanent situation etc. Gabriel (2002) as enunciated by Nyong (2003) lay emphasis on the Romanian capital market and conclude that the market is inefficient and hence, it has not contributed to economic growth of Romania. In a more recent study, Ewah et al (2009) appraise the impact of the capital market efficiency on the economic growth of Nigeria using time series data from 1961 to 2004.The study found that the capital market in Nigeria has the potential of growth inducing, but it has not contributed meaningfully to the economic growth of Nigeria because of low market capitalization, low absorptive capitalization, illiquidity, misappropriation of funds among others. As inferred, the empirical financial economics literature is very thin on the issue that capital market efficiency can exert an impact on the economic growth of a country. And, the studies for an emerging market economy like India are almost non-existent in the literature. Therefore, this paper is, perhaps the first kind of attempt in this direction.

Shaik Abudl Majeeb Pasha & R.Vamsi Krishna & Hemantha Gopi Kiran(2010) report indicate that the SEBI is a regulatory body which is eighteen years old and the capital market system is more than 100 years old. This matured capital market system requires monitoring rather than over-regulation. The SEBI should supervise this capital market system in such a manner that all sub-systems become self-regulatory organisations (SROs) gradually. The SEBI should lay down the boundaries within which these sub-systems should operate. Moreover, the fundamental infrastructure for regulation, disclosure, surveillance and trading are all in place. Hence, the SEBI should stop being pre-occupied with day-to-day regulations and become more of a visionary. The SEBI can ensure a free and fair market and take India into league of major
47

global capital markets in the next round of reforms. To enable this, it has to thoroughly review its structure and functioning. The SEBI has to balance between the costs of regulation and market development. There should be cross-border cooperation between various regulators and between regulators and industry.

48

Chapter 3 RESEARCH METHODOLOGY

49

Research is common parlance refers to research for Knowledge one can also define research is a scientific and systematic search for pertinent information and specific topic. The advance learner dictionary of current English lays down the meaning of research as: A Careful Investigation or enquiry especially through search for new fact in any branch of Knowledge Some People consider search as a moment from not to not so: Research Always start with the problems Its purpose is to find answer or solution of the Problem through application of scientific method. It is a systematic and Intensive study Directive towards a more complete knowledge of the subject studies. The Purpose of search is to discover answers to Questions through the Applications of Scientific procedures. The main aim of search is to find out the truth which is hidden and which has not been discovered as yet.

50

Objectives of the study

To find out investors behavior in the stock market and their perception about it. To study the factors influencing the investment decisions by the investors. To study the nature of relationship between stock market indices with economic, financial and commodity market.ss

51

Nature of the Study

This research is Descriptive in nature. Descriptive Research is designed to describe characteristics of a population or a phenomenon. Descriptive Research Objective Objective are formalized and structure with clearly stated hypothesis or investigative questions Characteristic Descriptors of phenomenon or characteristic associated with subject population (the Who, What, When, Where & How Of A

Topic);Describe market characteristics or function; preplanned & structured design. Methods Primary data, Observation ,Secondary data

Data Collection
In dealing with any real life problem is often found that data at hand are in adequate and hence it becomes necessary to collect data that are appropriate. There are several ways of collecting the appropriate data which differ considerable in context of money cost time and other resources at the disposable of Researcher. Data collection sources are as follow:-

Primary source: Questionnaires filled by respondents

Secondary source: Internet website Journals Books Publication and report

52

Sample size:
50 investors have been contacted in this regard. The research is carried out in Ludhiana city.

Sampling techniques:
The sampling technique used in this research Convenience sampling technique. Convenience sampling (sometimes known as grab or opportunity sampling) is a type of nonprobability sampling which involves the sample being drawn from that part of the population which is close to hand. That is, a sample population selected because it is readily available and convenient.

Data has been represented through: Bar charts and Pie Charts:After the data has been collected, it has been analyzed in the short form that it has been converted with the help of coding, tabulation and drawing various graphs.

Limitations of the Project

Time constraint was a major limiting factor. Forty five days were insufficient to even grasp the theoretical concepts. Some of the persons were not so responsive. Possibility of error in data collection because many of investors may have not given true replies to my questionnaire. Sample size is limited to 100 investors The sample size may not adequately represent the whole market. Some respondents were reluctant to divulge personal information which can affect the validity of all responses. The research is confined to Ludhiana only.

53

Chapter 4 DATA ANALYSIS & INTERPRETATION

54

1. (A) Age distribution of the Investors of Ludhiana. Age group No. investors Below25 25-35 20 35-45 13 Above45 5

of 12

No. of investors
Above45 10%

Below25 24% 35-45 26%

25-35 40%

AGE GROUP OF THE INVESTORS AGE GROUP OF INVESTORS Interpretation:

According to this chart out of 50 - the most are in the age group of 25-35 yrs. i.e.40% the second most investors are in the age group of 35-45 yrs. i.e. 26 %and the least investors are in the age group of above 45 yrs.

55

B). Occupation of the investors of Ludhiana occupation student Self employed No. investors of 15 17 10 8 Service Retired

No. of investors
Retired 16%

student 30%

Service 20% Self employed 34%

OCCUPATIONS OF THE CUSTOMERS

interpretation

In Occupation group out of 50 investors, 30% are students, 34% are self employed, 20% are service and 16% are in retired

56

C) Investors invested in different kinds of the market

Kinds the

of Cash market

Currency market

Derivative market

others

investment

No.

of 30

respondents

35 30 25 20 15 10 5 0 Cash market Currency market Derivative market others Series2

Kind of the investments

Interpretation:

From the above graph it can be inferred that out of 50 people, 30 people have invested in capital market, 8 in currency market, 9 in derivative market and 3 in others.

57

D) mode of the investment preferred by investors Mode of daily weekly monthly yearly

investments

No.

of 9

18

22

respondents

25

20

15 No. of respondents 10

0 daily weekly monthly yearly

Mode of investments

Interpretation From the above graph it can be inferred that out of 50 people, 22 people have preferred mode of the investment in monthly, 18 in weekly, 9 in daily basis.

58

E) investment objective Investment objective Income capital preservation and Long growth term Short term growth Growth and incomes

No. respondents

of 5

30

10

35 30 25 20 15 10 5 0 Income and Long term capital growth preservation Short term Growth and growth incomes No. of respondents

Investment objective

Interpretation From the above graph it can be inferred that out of 50 people, 5 people have invested in capital and income preservation, 30 in long term growth, 10 in short term growth and 5 in others

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F) before investing from where you take advice Take advice Expert opinion No. of 15 On friend Broker advice 18 10 Other

advise 7

respondents

Take advice 0%

Chart Title
other 20% Expert opinion 30%

Broker advice 36%

On friend advise 14%

advice

Interpretation From the above graph it can be inferred that out of 50 people, 30% people have taken the advise from expert opinion, 14% from friend advice, 36%from broker and 20% from others.

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G) Preference of factors while investing Factors High return Lower risk trust Liquidity

No.

of 25

10

respondents

30 25 20 15 10 5 0 High return Lower risk trust liquidity

No. of respondents

factors

Interpretation

Out of 50 People, 25 People prefer to invest where there is High Return, 10 prefer to invest where there is Low Risk, 8 prefer easy Liquidity and 7 prefer Trust.

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H) Before SEBI the functioning of capital market was more effective Capital market Strongly agree agree neutral disagree Strongly disagree

No.

of 2

38

respondents

40 35 30 25 20 15 10 5 0 Strongly agree agree neutral disagree Strongly disagree No. of respondents

Functioning of capital market before SEBI

Interpretation Out of 50 people 38 were strongly disagree about the functioning of capital market was more effective before SEBI.

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I)

Role of SEBI in stock exchange justifiable

Role SEBI No.

of Strongly agree of 35

agree

neutral

disagree

Strongly disagree

15

respondents

No. of respondents

agree 30% Strongly agree 70%

Role of SEBI

Interpretation Out of 50 People, People prefer to role of SEBI in stock exchange justifiable 70% .

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j) SEBI guidelines assist to put a curb on insider trading: SEBI guidelines Strongly agree agree Neutral disagree Strongly disagree No. respondents 28 15 7 of

No. of respondents
Neutral 14%

agree 30%

Strongly agree 56%

Insider trading

Interpretation Out of 50 people 56% assist to put a curb on insider trading and 30% were agreed.

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K) budget plays an important role while deciding which industry to invest No. respondents Strongly agree agree neutral disagree Strongly disagree 10 17 5 18 of

disagree 10%

No. of respondents
Strongly agree 36% neutral 34% agree 20%

Budgets

Interpretation Out of 50 people 36% agree budgets play an important role while deciding which industry to invest.
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l) GDP of the country affects your decision to invest GDP investing Strongly agree agree neutral disagree Strongly disagree when No. respondents 38 10 2 of

neutral 4%

No. of respondents

agree 20%

Strongly agree 76%

GDP of the country

Interpretation Out of 50 people, 76% strongly agree GDP of the country affects your decision to effect.

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CHAPTER 5 FINDINGS & CONCLUSION

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FINDINGS
The table and pie chart show that mostly investors of Ludhiana are in the age group of2535 yrs. i.e.40% the second most investors are in the age group of 35-45 yrs. i.e. 26 %and the least investors are in the age group of above 45 yrs. The table and pie chart show that out of 50 investors, 30% are students, 34% are self employed, 20% are service and 16% are in retired. The table and bar graph show that out of 50 people, 30 people have invested in capital market, 8 in currency market, 9 in derivative market and 3 in others. The table and bar graph show that out of 50 people, 22 people have preferred mode of the investment in monthly, 18 in weekly, 9 in daily basis. The table and bar graph show that out of 50 people, 5 people have invested in capital and income preservation, 30 in long term growth, 10 in short term growth and 5 in others. The table and pie chart show that out of 50 people, 30% people have taken the advise from expert opinion, 14% from friend advice, 36%from broker and 20% from others. The table and bar graph show that Out of 50 People, 25 People prefer to invest where there is High Return, 10 prefer to invest where there is Low Risk, 8 prefer easy Liquidity and 7 prefer Trust. The table and bar graph show that Out of 50 people 38 were strongly disagree about the functioning of capital market was more effective before SEBI. The table and pie chart show that Out of 50 People, People prefer to role of SEBI in stock exchange justifiable 70%. The table and pie chart show that Out of 50 people, 56% assist to put a curb on insider trading and 30% were agreed. The table and pie chart show that Out of 50 people 36% agree budgets play an important role while deciding which industry to invest. The table and pie chart show that Out of 50 people 76% strongly agree GDP of the country affects your decision to effect.

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CONCLUSION From the project it was found that people always invest in capital market my obtaining proper information that is about the company ,broker and shares. Stock market is a market which fluctuates every second. SEBI that is (Security Exchange Board of India) plays a vital role in functioning of stock exchange. Most of the people are traders in India and avoid investment in stock market. Almost every investor and trader believe that government policies are responsible for movement of indices in capital market. Indians are generally risk averse , they prefer to play safe in stock market with low risk and high returns. Some of the factors shows positive correlation as compared with SENSEX.

Patience ,strategy ,knowledge about the market and govt. policies are some
factors which can boom your returns in spite of fluctuations.

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CHAPTER 6 SUGGESTIONS AND RECOMMENDATIONS

70

The most vital problem spotted is of ignorance. Investors should be made aware of the benefits. Nobody will invest until and unless he is fully convinced. Investors should be made to realize that ignorance is no longer bliss and what they are losing by not investing.

Before making any investment Financial Advisors should first enquire about the risk tolerance of the investors/customers, their need and time (how long they want to invest). By considering these three things they can take the customers into consideration.

Younger people aged under 35 will be a key new customer group into the future, so making greater efforts with younger customers who show some interest in investing should pay off.

Customers with graduate level education are easier to sell to and there is a large untapped market there. To succeed however, advisors must provide sound advice and high quality.

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ANNEXURE

72

BIBLIOGRAPHY

References

Agrawalla, R. K., and Tuteja, S. K. (2007): Causality Between Stock Market Development and Economic Growth: A Case Study of India. Journal of Management Research , Vol.7, No.3, 158-168.

Avijith Banerjee, "A Glimpse of Portfolio Management", nuiiinirageiirei~At ccorrrrtnirt, Monthly Vol. 39, No.10, October 1998, p.774. Capasso, S. (2006): Stock Market Development and Economic Growth. Research Paper No.2006/102, United Nations University , pp.1-25.

Carter Randall Norr-stop ~i~iil~zi0i1r1 gt he stock innrket Vision Books, New Delhi, Bombay (1992). Chou, Y. K. (2007): Modelling Financial Innovation and Economic Growth: Why the Financial Sector Matters to the Real Economy. Journal of Economic Education , 78-91. Deb, S. G., and Mukherjee, J. (2008): Does stock Market Development Cause Economic growth? A Time Series Analysis for Indian Economy. International Research Journal of Finance and Economics, Issue.21, pp.142-149.

Goldsmith, R. W. (1969). Financial Structure and Development. New Haven: CT: Yale University Press. Handsa, Sanjiv K and Partha Ray., BSE and Nasdaq, Globalisation, Information Technology and Stock Prices, Economic and Political Weekly, Feb. 2, 2002
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Jacque, L. L. (2001): Financial Innovations and the Dynamics of Emerging Capital Markets.In L. L. Jacque, & P. M. Vaaler, Financial Innovations and the Welfare of Nations (pp. Chapter1, pp.1-16). Kluwer Academic Publishers. Kamat, M. S., Kamat, M. M., & Murthy, I. B. (2007): Financial Infrastructure and Economic Performance: Causality-Cointegration Using Unrestricted Vector error Correction Models. The Indian Journal of Commerce , Vol.60, No.4. pp.16-37.

L.C.Gupta., "Stock Trading in India", Society for Capital Market Research and Development, Delhi, 1992. Levine, R. (1996): Stock Markets: A Spur to Economic Growth. Finance and Development , March, pp.7-10.Growth: Causality and Causes. Journal of Monetary Economics, Vol.46, 31-77 Mohtadi, H., and Agarwal, S. (1998): Stock Market Development and Economic Growth: Evidence From Developing Countries. Working Paper, University of Wisconsin-Milwaukee , pp.1-19. Sarkar, P. (2006): Stock Market Development, Capital Accumulation and Growth in India Since 1950, Paper Presented in the International Conference on The Indian Economy in the Era of Financial Globalisation, Sept. 28-29. Tufano, P. (2003): Financial Innovation. In G. Constantinides, The Handbook of the Economics of Finance. North Holland: Elsevier.

Yasaswy.N.J., Tzlrnnrotrrzd Stocks, Big Profits for Bold Bargain Htinfers, Vision Books, New Delhi, Bombay, 1993.

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Websites
www.sebi.gov.in. www.lse.co.in www.bse.co.in www.nse.co.in

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QUESTIONNAIRE
Dear Respondent, I am doing my Research Project on the topic A Study of capital market with reference to cash segment which is a part of the MBA curriculum. To pursue the objective, I need your valuable feedback. Kindly spare 5 minutes of your valuable time and fill this questionnaire. I assure you that the information collected will be used only for the academic purpose. 1. Personal Details: (a). Name:(b). Address: Age (in years): Below 25 Occupation: Student Self-employed Service Retired 25-35 35-45 Above 45 Phone:-

Q1 In which market you mostly invest?

Capital market

Currency market

Derivative market

Others

Q 2. How frequently you invest in capital market? Daily Weekly Monthly Yearly

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Q 3. What is your investment objective? Income and capital preservation Long term growth Growth and incomes Short-term growth

Q4. From whom you take advice before investing?

Expert Opinion On friend advice Broker Advise Other

Q5. What do you consider the most important parameter while investing? High Return Lower risk factor Trust liquidity

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Q6 . A functioning of capital market was more effective before SEBI. Strongly agree Agree Neutral Disagree Strongly disagree

Q7. Role of SEBI in stock exchanges justifiable. Strongly agree Agree Neutral Disagree Strongly disagree

Q8. SEBI guidelines assist to put a curb on insider trading. Strongly agree Agree Neutral Disagree Strongly disagree

Q9. Budget plays an important role while deciding which industry to invest. Strongly agree Agree Neutral Disagree Strongly disagree

Q10.GDP of the country affects your decision to invest. Strongly agree Agree Neutral Disagree Strongly disagree

Any suggestions ..

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