FINANCIAL MARKETS Finance is the pre-requisite for modern business and financial institutions play a vital role in the

economic system. It is through financial markets and institutions that the financial system of an economy works. Financial markets refer to the institutional arrangements for dealing in financial assets and credit instruments of different types such as currency, cheques, bank deposits, bills, bonds, equities, etc. Financial market is a broad term describing any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. They are typically defined by having transparent pricing, basic regulations on trading, costs and fees and market forces determining the prices of securities that trade. Generally, there is no specific place or location to indicate a financial market. Wherever a financial transaction takes place, it is deemed to have taken place in the financial market. Hence financial markets are pervasive in nature since financial transactions are themselves very pervasive throughout the economic system. For instance, issue of equity shares, granting of loan by term lending institutions, deposit of money into a bank, purchase of debentures, sale of shares and so on.

In a nutshell, financial markets are the credit markets catering to the various needs of the individuals, firms and institutions by facilitating buying and selling of financial assets, claims and services.

Investment in Indian market India, among the European investors, is believed to be a good investment despite political uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies. India presents a vast potential for overseas investment and is actively encouraging the entrance of foreign players into the market. No company, of any size, aspiring to be a global player can, for long ignore this country which is expected to become one of the top three emerging economies

MARKET POTENTIAL India is the fifth largest economy in the world (ranking above France, Italy, the United Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. It is also the second largest among emerging nations. (These indicators are based on purchasing power parity.) India is also one of the few markets in the world which offers high prospects for growth and earning potential in practically all areas of business. Yet, despite the practically unlimited possibilities in India for overseas businesses, the world's most populous democracy has, until fairly recently, failed to get the kind of enthusiastic attention generated by other emerging economies such as China.

DIVERSE MARKET `The Indian market is widely diverse. The country has 17 official languages, 6 major religions, and ethnic diversity as wide as all of Europe. Thus, tastes and preferences differ greatly among sections of consumers. Therefore, it is advisable to develop a good understanding of the Indian market and overall economy before taking the plunge. Research firms in India can provide the information to determine how, when and where to enter the market. There are also companies which can guide the foreign firm through the entry process from
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beginning to end --performing the requisite research, assisting with configuration of the project, helping develop Indian partners and financing, finding the land or ready premises, and pushing through the paperwork required.

DEVELOPING UP-FRONT TAKES : Market Study Is there a need for the products/services/technology? What is the probable market for the product/service? Where is the market located? Which mix of products and services will find the most acceptability and be the most likely to generate sales? What distribution and sales channels are available? What costs will be involved? Who is the competition.

CHECK ON ECONOMIC POLICIES: The general economic direction in India is toward liberalization and globalization. But the process is slow. Before jumping into the market, it is necessary to discover whether government policies exist relating to the particular area of business and if there are political concerns, which should be taken into account.

Integrating Financial Markets A segmented financial system complicates the conduct of monetary policy and adversely affects resource allocation and growth to illustrate, suppose that interest rate ceilings are set at higher levels for non-bank financial institutions than for banks. A policy of credit restraint would then encourage the outflow of funds from the banking system. The income velocity (that is, ratio of GNP to money) of broad money (currency and demand deposits plus savings and time deposits) may increase, while that of narrow money (currency and demand deposits), which is used as reserve asset of non-bank financial institutions, may fall. A redefinition of monetary and credit targets for purposes of financial management cannot
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sufficiently counteract the possible negative impact on the intermediation capability of a financial system that is segmented by excessive and inappropriate regulations. A long-term solution is to reform the domestic regulatory framework to eliminate the major causes of segmentation, such as inadequate licensing regulations, burden some reserve requirements and portfolio restrictions, unrealistic interest rate ceilings, and the operating inefficiencies of the regulated markets.

CLASSIFICATION OF FINANCIAL MARKETS

Financial markets

Organized markets

Unorganized markets Money Lenders, Indigenuos Bankers

Capital Markets

Money Markets

Industrial Securities Market

Call Money Market

Primary Market

Commercial Bill Market

Secondary market Government Securities Market Long-term loan market

Treasury Bill Market

Capital Market
The capital market is a market for financial assets which have a long or indefinite maturity. Generally, it deals with long term securities which have a period of above one year. In the widest sense, it consists of a series of channels through which the savings of the community are made available for industrial and commercial enterprises and public authorities. As a whole, capital market facilitates raising of capital. The major functions performed by a capital market are: 1. Mobilization of financial resources on a nation-wide scale. 2. Securing the foreign capital and know-how to fill up deficit in the required resources for economic growth at a faster rate. 3. Effective allocation of the mobilized financial resources, by directing the same to projects yielding highest yield or to the projects needed to promote balanced economic development.

Capital market consists of primary market and secondary market. Primary market: Primary market is a market for new issues or new financial claims. Hence it is also called as New Issue Market. It basically deals with those securities which are issued to the public for the first time. The market, therefore, makes available a new block of securities for public subscription. In other words, it deals with raising of fresh capital by companies either for cash or for consideration other than cash. The best example could be Initial Public Offering (IPO) where a firm offers shares to the public for the first time.

Secondary market: Secondary market is a market where existing securities are traded. In other words, securities which have already passed through new issue market are traded in this market. Generally, such securities are quoted in the stock exchange and it provides a continuous and regular market for buying and selling of securities. This market consists of all stock exchanges recognized by the government of India.

Importance of Capital Market The pace of economic development is conditioned, among others things, by therate of long-term investment and capital formation. And capital formation is conditioned by the mobilisation, augmentation and channelisation of investible funds. 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 a global scale. The Euro-currency and Eurobond markets are international finance markets in terms of both the supply and demand for funds. The increase in the size of the industrial units and business corporations due to technological developments, economies of scale and other factors has created a situation where in the capital at the disposal of one or few individuals is quite insufficient to meet the growing investment demands. A developed capital market can solve this problem of paucity of funds. An organised capital market can mobilise and pool together even the small and scattered savings and augment the availability of investible funds. While the rapid growth of joint stock companies has been made possible to a large extent by the growth of capital markets, the growth of joint stock business has in its turn, encouraged the development of
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capital markets. A developed capital market provides a number of profitable investment opportunities for the small savers.

Indian Capital Market Today The Indian capital market with over 7,500 listed companies and 23.s/tock exchanges is second in size only to that of the USA, in terms & availability of industrial securities. The Indian capital market offers good potential for further expansion in terms of absorption of large capital flows. It is noteworthy that despite problems faced on account of irregularities in security transactions earlier this year, the Indian stock markets have shown creditable business resilience and recovery. As per the review published by Fortune International in its Autumn Special 1992 number, the Indian capital market has appreciated by 44 per cent in US dollar - terms an appreciation rate which was second only to that of the Philippines 71%. Comparable statistics for other emerging markets are: South Korea (-) 24 per cent, Indonesia (-) 5 per cent, Singapore 5 per cent, Malaysia 9 per cent, Hong Kong 39 per cent, etc. It is true that the price-earning ratio of 29 is comparatively high when compared with the prevailing ratios in the aforementioned markets. But it needs mention that in the Indian market; the PE ratio is influenced to a very large extent by 4 or 5 leading scrips. If one leaves out these scripts, the PE ratio would certainly compare favourably with those prevailing in other emerging markets. Infact, considering that active trading is confined to few hundred scrips; it is conceivable that with substantial inflow of foreign capital, many of the currently dormant scrips, mainly of medium-sized corporate bodies, would show growth potential. There are a couple of areas where some improvement will be necessary. The first is the factor of a long time between the transaction and the actual registration of transfer of securities at present. Secondly, the reporting and controlling system will
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have to be geared up to ensure compliance with the stipulations regarding upper limit for investment in a domestic company (24%) and by a particular investor (5%). The Reserve Bank authorities confirm that steps are being taken to overcome these problems. Following the recommendations of Chakravarty Committee Report on Monetary System, the RBI during the year, began the auction of 182 days treasury bills in the money market. The objective of this measure has been to broad base the development of money market by introducing new instruments, create an active secondary market, bring the interest rates on treasury bills to the market level and gradually reduce the monetisation of public debt. Capital market Instruments The following instruments are being used for raising resources: 1. Equity shares 2. Preference shares 3. Non-voting equity shares 4. Cumulative convertible preference shares 5. Company fixed deposits 6. Warrants 7. Debentures/bonds 8. Secured premium notes (SPNs) 9. Euro Convertible Bonds (ECBs)/Global Depository Receipts Capital Market Developments The capital market has passed through a phase of substantial adjustment and advancements in recent years. A significant development was the entry of public sector enterprises in the power and telecommunication sectors in the capital market to raise larger resources by issue of tax-free bonds. Although this did not have any crowding out effect on the private sector borrowers, they faced stiffer competition
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in the market and had to come out with more attractive features attached to their issues.

Classification of Capital Market Capital market divides in to two markets that are: 1. New Issue Market/ Primary Market 2. Stock Exchange/Secondary Market New issue market The industrial securities market is divided into two parts, namely, New Issue Market and Stock market. The new issue market derives its name from the fact that in makes available a new block of securities for public subscription. The new issue market provides additional funds for starting a new enterprise or for either expansion or diversification of the existing one. The main function of new issues market is to facilitate the transfer of resources from savers to entrepreneurs 1) Issues by new companies Issues by old companies 2) New money issues New non-money issues From the operational standpoint of view, the general function of the new issue market is split into three distinct serviced. Organisation Underwriting Distribution This calls for the presence of specialist agencies in the market. The money market is a short-term credit market. It also refers to the institutional arrangement facilitating borrowing and lending of short-term funds. Crowther has observed, "The money market is the collective name given to various firms and institutions that deal in the various grades of near money." A systematic presentation
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comprises of investment market, inter bank market, bills market, treasury bills market, and the Reserve Bank of India (RBI), financial institutions and banks also play a key role

Money Market
Money markets are the markets for short-term, highly liquid debt securities. Money market securities are generally very safe investments which return relatively low interest rate that is most appropriate for temporary cash storage or short term time needs. It consists of a number of sub-markets which collectively constitute the money market namely call money market, commercial bills market, acceptance market, and Treasury bill market. At the outset, it is necessary to examine what we mean by the term money market, which has sometimes been defined as an organization for dealings in loan market or borrowed funds. This is a very broad definition and has been adopted by a number of writers. It is also defined as follow: A money market is a mechanism through which short-term funds are loaned and borrowed and through which a large part of the financial transactions of a particular country or of the world are cleared. Broadly conceived, it includes the entire mechanism employed in financial business of all types. In the narrower sense, in which the term is generally used, however, a money market includes only dealings in more or less standardised types of loans, such as call loans and in credit instruments, such as acceptance and treasury bills, in which personal relations between lender and borrower are of negligible importance. In this sense, a money market is distinct from, but supplementary to the commercial banking system.

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The development of securities markets usually starts with trading in a short-term money market instrument, often a government security. Other money market instruments are interbank deposits, bankers acceptances, certificates of deposit and commercial paper issued by non-financial corporations. Money markets provide a non-inflationary way to finance government deficits. They also allow governments to implement monetary policy through open market operations and provide a market-based reference point for setting other interest rates. Further more, money markets are a source of funds for commercial banks and other leading institutions.

Monetary Policy
Monetary policy in any country is largely determined by the institutional framework and environment in which it is expected to operate. It is necessarily moulded by the world in which it takes shape. The structure of the money market is the base on which depends the operation of the monetary policy. Monetary management is largely governed by such institutional factors as the use of credit, credit consciousness of the people and their preferences, the general banking structure and the development of the banking habit among the people as a whole. Any effective organization and the response of financial institutions in general and banks in particular depend upon the nature of the money market and the degree of cooperation between its various components. The structure of the money market is, therefore, abases for introducing monetary discipline and for implementing monetary discipline and for implementing monetary policies in any central banking is the unanimity with which all writers functioning of the central bank. An attempt has been made here to examine the effectiveness of the monetary policy in India in the context of the money market in this country.

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Monetary Management
The monetary policy in India is a case study of monetary management in a developing economy with an unorganized money market. The study is, therefore, valuable for the undeveloped and under-developed countries as well as for developed countries. Since the monetary policy in India operates in the organized and unorganized sectors of money markets, the structural changes have to be analysed first .An objective analysis of the structure of the Indian money market, therefore, assumes great importance in the study of monetary policy and central banking activities. Features of Money Market It is a collection of market for following instruments- Call money, notice money, repos, term money, treasury bills, commercial bills, certificate of deposits, commercial papers inter-bank participation certificates, inter-corporate deposits, swaps, etc. The sub markets have close inter- relationship & free movement of funds from one sub-market to another. A network of large number of participants exists which will add greater depth to the market. Activities in the money market tend to concentrate in some centre, which serves a region or an area. The width of such area may vary depending upon the size and needs of the market itself. The relationship that characterizes a money market is impersonal in character so that competition is relatively pure. Price differentials for assets of similar type will tend to be eliminated by the interplay of demand & supply.

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A certain degree of flexibility in the regulatory framework exists and there are constant endeavours for introducing a new instruments / innovative dealing techniques. It is a wholesale market & the volume of funds or financial assets traded are very large i.e. in crores of rupees. The organised sector of the Indian money market is comparatively well developed in terms of organised relationships and specialisation of functions. It more or less centres round the Reserve Bank of India; and the State Bank, commercial banks and cooperative banks are associated with it. The policies and operations of the State Bank and the cooperative banks are governed by the Reserve Bank and are also dependent on it for direct financial assistance. In fact, a substantial portion of the funds, which cooperative credit agencies lend out, is provided by the Reserve Bank. Financial intermediaries, such as the Industrial Financial Corporation, the Industrial Development Bank of India, State Financial Corporation, the Agricultural Refinance Corporation, etc., derive most of their resources from the Reserve Bank. The policies of these financial intermediaries are enunciated with the approvals of the Reserve Bank; even the personnel of some of them are supplied by the Reserve Bank. More important than all the above-mentioned institutions, is the inter-bank call-money market, which is regarded as the core of the Indian money market. "Although the magnitude of funds dealt in this market is not large in relation to the deposit resources of banks, perhaps this is the most sensitive sector of the money market." Then there are the treasury bills and bills of exchange, which absorb the surplus liquidity of the institutions in the organised sector.As regards the agencies constituting the unorganised money. Market, it is necessary at the outset to clarify one important point ' regarding the nomenclature used to designate them. The term-unorganised money market conveys the impression that indigenous agencies providing credit have neither any system nor
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any organisation among themselves, nor any definite procedure regulating their lending practices. In fact, these agencies have been functioning for ages in almost all parts of this country, and have a time-tested organisation. They follow well-set patterns, both as regards their lending policies and their interest rates. Their native origin is mainly responsible for some of their unique features, which have few parallels among similar agencies in Europe.

Indigenous Banking The system of indigenous banking in India is of ancient growth and dates back to Vedic times, which may be taken to range between 2000 B.C. and 1400 B.C. Money lending was regarded as an ancient practice. That it was practiced even in the early Aryan days is evident from the references to money lending as one of the four honest callings, the other three being tillage, trading and harvesting.

The unique aspect of unaccounted currency is that, except when hoarded, it never, remains permanently concealed, not for a continuously long term. A large portion of it is in circulation and constantly changes its character. The impact of unaccounted money on the money market is very significant. With its growth in the country, a number of mushroom indigenous bankers have sprung up, who are quite different from the traditional bankers; and it has been reported that they lend money at very high rates of interest. The indigenous money market has itself become a lawless market, and the old conventions have very little relevance to it. The unaccounted money as part of the indigenous money market is invested in property, small-scale industries, smuggling, and trade. This fact has further limited the effective implementation of the monetary policy. Unaccounted money has further strengthened the indigenous market in India. However, with the devaluation of the Rupee, the effective use of unaccounted money is expected to decline
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somewhat, though its impact on the market will continue as before since there is no direct link between the unorganised and organised money markets, it is essential to establish such a link. The link of commercial banks between the two markets is so weak that it is more advantageous to the unorganized market than to the organised sector.

DEBT MARKET Introduction The object of this chapter is to set out briefly how the public debt of the government has been steadily rising and has become a matter of concern in recent years. In this backdrop, the mechanics of its management by the apex bank are discussed. If the country is really caught in the debt trap, what then are the policy alternatives to extricate itself from the fiscal crisis. Debt Concepts A variety of concepts is used to measure and assess the economic burden of debt. Debt stock, which is often reported as debt outstanding and disbursed, measures the total debt liabilities of the debtor. The payment obligation arising from this is debt service and comprises interest and principal payments. The debt stock does not necessarily predict the debt service. Two concepts describe the net effect of borrowing and repay-ments on the flow of financial resources. Public Debt Governments to meet the gap between budgeted receipts and payments raise public debt. Public debt has far reaching consequences upon production and distribution of a country. Public debt is thus government or state debt. The state generally borrows to: To meet budget deficits;
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To cover other expenses; and to finance development activities. Classification of Public Debt Public debts have been classified into two broad groups internal and external Internal debts are loans raised within the country. External debts are cumulative amount raised outside the country by the government and others.

Components of Internal Debt Internal debt of the Government of India comprises of market loans, treasury bills, special securities issued to the Reserve Bank and International financial institution and others. Other liabilities (rupee debt under the public account) com-; prices of small savings, provident funds (State Provident Funds and Public Provident funds), other accounts (mainly postal insurance! and Life Annuity Fund, Special Deposits etc.) reserve funds. The Structure of the Indian Debt Market The Indian debt market includes the money market and the bond market. While the money market is fairly well developed with a wide range of instruments and a fairly large turnover, the secondary market for bonds has been primitive and stunted. The instruments traded in the debt market include Government of India Securities, Treasury Bills, State Government Securities; Government guaranteed bonds, PSU bonds, corporate debentures, commercial; papers and certificates of deposit. Principal issuers, instruments and investors in the debt market. The principal regulatory authorities of the debt market are Ministry of Finance and the Department of Company
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Affairs^ Government of India, the Reserve Bank of India and the Securitities and Exchange Board of India (SEBI). In addition, there are a associations of intermediaries such as brokers, merchant banker and fund managers in the securities industry, some of whom planning to evolve into self-regulatory organisation. A unique feature of our external debt lies in its structure is, probably, the reason why the IMF isn't terribly worried four per cent of our external debt is owed to multilateral institutions, like the World Bank and the IMF, and another 1 is owed to bilateral aid agencies Components Internal debt is of two components floating debt and permanent debt. While floating relates to Treasury bills, special floating loans and Treasury deposits receipts, permanent debt is in the form of market loans, compensation bonds and prize bonds. The Government securities issued may take the form promissory notes, stock certificates or entries in the subsidiary General Ledger Account, kept with the public debt office of the Neither stock certificates nor promissory notes are bearer to Interest on stock certificates is paid by warrants without the need certificates to be presented. Promissory notes are, however, to be presented at the Public Debt Office for issue of interest warrants. Floatation of Loans The centre and state governments budget every year f certain amount of market borrowings as part of the receipts or capital account. The loans are floated in the market at convenient times of the year so as to enable the market to absorb them. The Reserve Bank of India manages the public deposit of Government, both Central and
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State, among its various other function as bankers to the Government As part of these responsibilities the apex bank advises the governments on the quantum, term issue and the timing of the new loans of both the Central and Governments. The RBI also arranges for the floatation of the loans and their successful absorption in the market. The Bank coordinates the borrowing activities of the Centre and State Government respect of their timing and terms, etc. with those of semi-Govern bodies and financial institutions. The Central and State Government loans are floated in two or three instalments every year at a time when the banks and o financial institutions are supposed to have excess funds particular during the slack season. The terms and conditions of the issue are framed by the RBI, consultation with the Government in tune with the market yields and other conditions. Thus, the coupon rates on the new issues floated in 1975 and 1976 were higher than in the earlier years upward adjustment of all interest rates in the recent past. Prior to the announcement of the loans, the Bank plans ahead in consultation with the prospective subscribers, the amounts likely to be contributed by each one of them. Accordingly, the RBI corresponds with the 1 major commercial banks; Provident Fund Commissioners etc obtain from them a prior commitment on their contributions to loans to be floated. The Bank would have already decided on the terms of issue, coupon rates, maturity of the loans, and the quantum likely to be offered under various maturities, in order to enable the banks to decide on these likely contributions. It is well known that banks do need the government securities for their liquidity requirements every year, in tune with the growth in their deposits and their Debt and Cash Management This includes the discontinuance of Ad hoc Treasury Bills and introduction of Ways and Means Advances to the Central Government} brought to the forefront,
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the need for a sophisticated cash cash-management system by the Government and improvements in the debt management techniques by the Reserve Bank. To address these concerns, a Monitoring Group on Cash and Debt Management of the^ Central Government was set up comprising members of the; Government and the RBI, The Group reviews inter alia, the monthly fiscal deficit, progress of borrowing programmed, instruments borrowing, and cash position of the Central Government on ongoing basis. Debt and Liquidity in the Financial System In formulating and implementing monetary policy, the Reserve; Bank places before it a very important aspect, namely, the liquidity^ management at a shorterterm horizon. This facilitates the banking system to provide, in a flexible manner, the cash and payments needs| of the economy. A realistic and timely assessment of liquidity in the system is very essential for timely and effective decision making inj money, debt and forex management.

Derivatives Market
The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets. A derivative is a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. The important financial derivatives are the following: Forwards: Forwards are the oldest of all the derivatives. A forward contract refers to an agreement between two parties to exchange an agreed quantity of an asset for cash at a certain date in future at a predetermined price
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specified in that agreement. The promised asset may be currency, commodity, instrument etc. Futures: Future contract is very similar to a forward contract in all respects excepting the fact that it is completely a standardized one. It is nothing but a standardized forward contract which is legally enforceable and always traded on an organized exchange. Options: A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date). Call options give the option to buy at certain price, so the buyer would want the stock to go up. Put options give the option to sell at a certain price, so the buyer would want the stock to go down. Swaps: It is yet another exciting trading instrument. Infact, it is the combination of forwards by two counterparties. It is arranged to reap the benefits arising from the fluctuations in the market either currency market or interest rate market or any other market for that matter.

Foreign Exchange Market

It is a market in which participants are able to buy, sell, exchange and speculate on currencies. Foreign exchange markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. The forex market is considered to be the largest financial market in the world. It is a worldwide decentralized over-the-counter financial market for the trading of currencies. Because the currency markets are
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large and liquid, they are believed to be the most efficient financial markets. It is important to realize that the foreign exchange market is not a single exchange, but is constructed of a global network of computers that connects participants from all parts of the world. Commodities Market It is a physical or virtual marketplace for buying, selling and trading raw or primary products. For investors' purposes there are currently about 50 major commodity markets worldwide that facilitate investment trade in nearly 100 primary commodities. Commodities are split into two types: hard and soft commodities. Hard commodities are typically natural resources that must be mined or extracted (gold, rubber, oil, etc.), whereas soft commodities are agricultural products or livestock (corn, wheat, coffee, sugar, soybeans, pork, etc.)

INDIAN FINANCIAL MARKETS

India Financial market is one of the oldest in the world and is considered to be the fastest growing and best among all the markets of the emerging economies. The history of Indian capital markets dates back 200 years toward the end of the 18th century when India was under the rule of the East India Company. The development of the capital market in India concentrated around Mumbai where no

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less than 200 to 250 securities brokers were active during the second half of the 19th century. The financial market in India today is more developed than many other sectors because it was organized long before with the securities exchanges of Mumbai, Ahmadabad and Kolkata were established as early as the 19th century. By the early 1960s the total number of securities exchanges in India rose to eight, including Mumbai, Ahmadabad and Kolkata apart from Madras, Kanpur, Delhi, Bangalore and Pune. Today there are 21 regional securities exchanges in India in addition to the centralized NSE (National Stock Exchange) and OTCEI (Over the Counter Exchange of India). However the stock markets in India remained stagnant due to stringent controls on the market economy that allowed only a handful of monopolies to dominate their respective sectors. The corporate sector wasn't allowed into many industry segments, which were dominated by the state controlled public sector resulting in stagnation of the economy right up to the early 1990s. Thereafter when the Indian economy began liberalizing and the controls began to be dismantled or eased out; the securities markets witnessed a flurry of IPOs that were launched. This resulted in many new companies across different industry segments to come up with newer products and services. A remarkable feature of the growth of the Indian economy in recent years has been the role played by its securities markets in assisting and fuelling that growth with money rose within the economy. This was in marked contrast to the initial phase of growth in many of the fast growing economies of East Asia that witnessed huge doses of FDI (Foreign Direct Investment) spurring growth in their initial days of market decontrol. During this phase in India much of the organized sector has been
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affected by high growth as the financial markets played an all-inclusive role in sustaining financial resource mobilization. Many PSUs (Public Sector

Undertakings) that decided to offload part of their equity were also helped by the well-organized securities market in India. The launch of the NSE (National Stock Exchange) and the OTCEI (Over the Counter Exchange of India) during the mid 1990s by the government of India was meant to usher in an easier and more transparent form of trading in securities. The NSE was conceived as the market for trading in the securities of companies from the large-scale sector and the OTCEI for those from the small-scale sector. While the NSE has not just done well to grow and evolve into the virtual backbone of capital markets in India the OTCEI struggled and is yet to show any sign of growth and development. The integration of IT into the capital market infrastructure has been particularly smooth in India due to the countrys world class IT industry. This has pushed up the operational efficiency of the Indian stock market to global standards and as a result the country has been able to capitalize on its high growth and attract foreign capital like never before.

The regulating authority for capital markets in India is the SEBI (Securities and Exchange Board of India). SEBI came into prominence in the 1990s after the capital markets experienced some turbulence. It had to take drastic measures to plug many loopholes that were exploited by certain market forces to advance their vested interests. After this initial phase of struggle SEBI has grown in strength as the regulator of Indias capital markets and as one of the countrys most important institutions.

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FINANCIAL MARKET REGULATIONS Regulations are an absolute necessity in the face of the growing importance of capital markets throughout the world. The development of a market economy is dependent on the development of the capital market. The regulation of a capital market involves the regulation of securities; these rules enable the capital market to function more efficiently and impartially. A well regulated market has the potential to encourage additional investors to partake, and contribute in, furthering the development of the economy. The chief capital market regulatory authority is Securities and Exchange Board of India (SEBI). SEBI is the regulator for the securities market in India. It is the apex body to develop and regulate the stock market in India It was formed officially by the Government of India in 1992 with SEBI Act 1992 being passed by the Indian Parliament. Chaired by C B Bhave, SEBI is headquartered in the popular business district of Bandra-Kurla complex in Mumbai, and has Northern, Eastern, Southern and Western regional offices in New Delhi, Kolkata, Chennai and Ahmedabad. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities, to cover both development & regulation of the market, and independent powers has been set up. The basic objectives of the Board were identified as:

to protect the interests of investors in securities; to promote the development of Securities Market; to regulate the securities market and For matters connected therewith or incidental thereto.
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Since its inception SEBI has been working targeting the securities and is attending to the fulfillment of its objectives with commendable zeal and dexterity. The improvements in the securities markets like capitalization requirements, margining, establishment of clearing corporations etc. reduced the risk of credit and also reduced the market.

SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, the eligibility criteria, the code of obligations and the code of conduct for different intermediaries like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, portfolio managers, credit rating agencies, underwriters and others. It has framed bye-laws, risk identification and risk management systems for Clearing houses of stock exchanges, surveillance system etc. which has made dealing in securities both safe and transparent to the end investor. Another significant event is the approval of trading in stock indices (like S&P CNX Nifty & Sensex) in 2000. A market Index is a convenient and effective product because of the following reasons:

It acts as a barometer for market behavior; It is used to benchmark portfolio performance; It is used in derivative instruments like index futures and index options; It can be used for passive fund management as in case of Index Funds.

Two broad approaches of SEBI is to integrate the securities market at the national level, and also to diversify the trading products, so that there is an increase in number of traders including banks, financial institutions, insurance companies, mutual funds, primary dealers etc. to transact through the Exchanges. In this
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context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD is a real landmark. SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively and successively (e.g. the quick movement towards making the markets electronic and paperless rolling settlement on T+2 bases). SEBI has been active in setting up the regulations as required under law.

STOCK EXCHANGES IN INDIA

Stock Exchanges are an organized marketplace, either corporation or mutual organization, where members of the organization gather to trade company stocks or other securities. The members may act either as agents for their customers, or as principals for their own accounts. As per the Securities Contracts Regulation Act, 1956 a stock exchange is 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. Stock exchanges facilitate for the issue and redemption of securities and other financial instruments including the payment of income and dividends. The record keeping is central but trade is linked to such physical place because modern markets are computerized. The trade on an exchange is only by members and stock broker do have a seat on the exchange.

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BOMBAY STOCK EXCHANGE

A very common name for all traders in the stock market, BSE, stands for Bombay Stock Exchange. It is the oldest market not only in the country, but also in Asia. In the early days, BSE was known as "The Native Share & Stock Brokers Association." It was established in the year 1875 and became the first stock exchange in the country to be recognized by the government. In 1956, BSE obtained a permanent recognition from the Government of India under the Securities Contracts (Regulation) Act, 1956.

In the past and even now, it plays a pivotal role in the development of the country's capital market. This is recognized worldwide and its index, SENSEX, is also tracked worldwide. Earlier it was an Association of Persons (AOP), but now it is a demutualised and corporatised entity incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatisation and Demutualization) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI). BSE Vision The vision of the Bombay Stock Exchange is to "Emerge as the premier Indian stock exchange by establishing global benchmarks." BSE Management Bombay Stock Exchange is managed professionally by Board of Directors. It comprises of eminent professionals, representatives of Trading Members and the

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Managing Director. The Board is an inclusive one and is shaped to benefit from the market intermediaries participation. The Board exercises complete control and formulates larger policy issues. The day-to-day operations of BSE are managed by the Managing Director and its school of professional as a management team.

BSE Network The Exchange reaches physically to 417 cities and towns in the country. The framework of it has been designed to safeguard market integrity and to operate with transparency. It provides an efficient market for the trading in equity, debt instruments and derivatives. Its online trading system, popularly known as BOLT, is a proprietary system and it is BS 7799-2-2002 certified. The BOLT network was expanded, nationwide, in 1997. The surveillance and clearing & settlement functions of the Exchange are ISO 9001:2000 certified. BSE Facts BSE as a brand is synonymous with capital markets in India. The BSE SENSEX is the benchmark equity index that reflects the robustness of the economy and finance. It was the First in India to introduce Equity Derivatives First in India to launch a Free Float Index First in India to launch US$ version of BSE Sensex First in India to launch Exchange Enabled Internet Trading Platform
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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 within just 50 days

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 increases its sphere of influence in international financial markets.

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NATIONAL STOCK EXCHANGE OF INDIA LIMITED

The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock Exchange in the country. On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000. NSE GROUP National Securities Clearing Corporation Ltd. (NSCCL) It is a wholly owned subsidiary, which was incorporated in August 1995 and commenced clearing operations in April 1996. It was formed to build confidence in clearing and settlement of securities, to promote and maintain the short and consistent settlement cycles, to provide a counter-party risk guarantee and to operate a tight risk containment system.

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NSE.IT Ltd. It is also a wholly owned subsidiary of NSE and is its IT arm. This arm of the NSE is uniquely positioned to provide products, services and solutions for the securities industry. NSE.IT primarily focuses on in the area of trading, broker front-end and back-office, clearing and settlement, web-based, insurance, etc. Along with this, it also provides consultancy and implementation services in Data Warehousing, Business Continuity Plans, Site Maintenance and Backups, Stratus Mainframe Facility Management, Real Time Market Analysis & Financial News. India Index Services & Products Ltd. (IISL) It is a joint venture between NSE and CRISIL Ltd. to provide a variety of indices and index related services and products for the Indian Capital markets. It was set up in May 1998. IISL has a consulting and licensing agreement with the Standard and Poor's (S&P), world's leading provider of investible equity indices, for cobranding equity indices. National Securities Depository Ltd. (NSDL) NSE joined hands with IDBI and UTI to promote dematerialization of securities. This step was taken to solve problems related to trading in physical securities. It commenced operations in November 1996. NSE Facts It uses satellite communication technology to energize participation from around 400 cities in India. NSE can handle up to 1 million trades per day. It is one of the largest interactive VSAT based stock exchanges in the world.

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The NSE- network is the largest private wide area network in India and the first extended C- Band VSAT network in the world. Presently more than 9000 users are trading on the real time-online NSE application.

Today, NSE is one of the largest exchanges in the world and still forging ahead. At NSE, we are constantly working towards creating a more transparent, vibrant and innovative capital market. OVER THE COUNTER EXCHANGE OF INDIA OTCEI was incorporated in 1990 as a section 25 company under the companies Act 1956 and is recognized as a stock exchange under section 4 of the securities Contracts Regulation Act, 1956. The exchange was set up to aid enterprising promotes in raising finance for new projects in a cost effective manner and to provide investors with a transparent and efficient mode of trading Modeled along the lines of the NASDAQ market of USA, OTCEI introduced many novel concepts to the Indian capital markets such as screen-based nationwide trading, sponsorship of companies, market making and scrip less trading. As a measure of success of these efforts, the Exchange today has 115 listings and has assisted in providing capital for enterprises that have gone on to build successful brands for themselves like VIP Advanta, Sonora Tiles & Brilliant mineral water, etc.

Need for OTCEI:

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Studies by NASSCOM, software technology parks of India, the venture capitals funds and the governments IT tasks Force, as well as rising interest in IT, Pharmaceutical, Biotechnology and Media shares have repeatedly emphasized the need for a national stock market for innovation and high growth companies. Innovative companies are critical to developing economics like India, which is undergoing a major technological revolution. With their abilities to generate employment opportunities and contribute to the economy, it is essential that these companies not only expand existing operations but also set up new units. The key issue for these companies is raising timely, cost effective and long term capital to sustain their operations and enhance growth. Such companies, particularly those that have been in operation for a short time, are unable to raise funds through the traditional financing methods, because they have not yet been evaluated by the financial world.

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