Chapter I Introduction and Research methodology 1.

1 Introduction CAPITAL MARKET

Capital markets are like any other markets, but differ in terms of the products traded and their organization. Capital markets deal with the trading of securities. Capital markets provide avenue where companies can raise funds to expand on their businesses or establish new ones by issuing securities owned by the companies. Like businesses in the private sector, Government issue its securities to raise funds in capital markets to build electricity damn, construct new roads, bridges by issues. It is an organized market mechanism for effective and efficient transfer of money capital or financial resources from the investing class i.e. from (individual or institutional savers) to the entrepreneur class (individual engaged in business or services) in the private or public sectors of the economy. In a broader sense, According to Goldsmith The capital market of a modern economy has two basic functions first the allocation of savings among users and investment; second the facilitation of the transfer of existing assets, tangible and intangible among individual economic units. Capital Market is generally understood as the market for long term funds. It provides long term debt and equity finance for the government and the corporate sector. It is a best performing markets in the world since last few years. It facilitates the transfer of capital i.e. financial assets from one owner to another. 36

The rapid growth in Indian capital markets and the spread of Equity culture has doubtlessly strained its infrastructure and regulatory resources. Nevertheless securities market is a watchdog as SEBI plays a vital role in redressing investors grievances. Capital Markets are mainly leaded by two major Indian exchanges BSE and NSE which 16th & 17th rank among all the exchanges around the world in terms of market capitalization. In terms of risk and returns the Indian those in industrialized nations. Due to such strong stock exchanges there is a strong economic growth and a large inflow of foreign institutional investors (FIIs) was developed truly great explosive growth rising over 3 times during last 5 years.

1.2 Objectives of study The objective of this study is to show the present status of INDIAN SECURITIES MARKET and how it is gaining worldwide acceptance. In the age of stiff competition gaining its momentum to the world financial markets in the race of highly regulated markets around the globe.

1.3 Scope of the study

The purpose of the study is to provide depth information on the INDIAN CAPITAL MARKET. Various factors contributing to the growth of the capital market in India. And the various products available in the market to the market participants including the FIIS. And providing knowledge of the functioning of the capital market.

1.4 Research Methodology

Collection of data (Secondary data) Datas are the useful information or any forms of document designed in a systematic and standardize manner which are used for some further proceedings. One of the important tools for conducting marketing research is the availability of necessary and useful data. Sometime the data are available readily in one form or the other and some time the data are collected afresh. The sources of Data fall under two categories, Primary Source and Secondary Sources.

Secondary Data

INDIAN FINANCIAL SYSTEM Economic growth and development of any country depends upon a well-knit financial system. Financial system comprises a set of sub-systems of financial institutions financial markets, financial instruments and services which help in the formation of capital. Thus a financial system provides a mechanism by which savings are transformed into investments and it can be said that financial system play an significant role in economic growth of the country by mobilizing surplus funds and utilizing them effectively for productive purpose. The financial system is characterized by the presence of integrated, organized and regulated financial markets, and institutions that meet the short term and long term financial needs of both the household and corporate sector. Both financial markets and financial institutions play an important role in the financial system by rendering various financial services to the community. They operate in close combination with each other.

Financial System
The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediation

PRE-REFORMS PHASE Until the early 1990s, the role of the financial system in India was primarily restricted to the function of channeling resources from the surplus to deficit sectors. Whereas the financial system performed this role reasonably well, its operations came to be marked by some serious deficiencies over the years. The banking sector suffered from lack of competition, low capital base, low Productivity and high intermediation cost. After the nationalization of large banks in 1969 and 1980, the Government-owned banks dominated the banking sector. The role of technology was minimal and the quality of service was not given adequate importance. Banks also did not follow proper risk management systems and the prudential standards were weak. All these resulted in poor asset quality and low profitability. Among non-banking financial intermediaries, development finance institutions (DFIs) operated in an over-protected environment with most of the funding coming from assured sources at concessional terms. In the insurance sector, there was little competition. The mutual fund industry also suffered from lack of competition and was dominated for long by one institution, viz., the Unit Trust of India. Non-banking financial companies (NBFCs) grew rapidly, but there was no regulation of their asset side. Financial markets were characterized by control over pricing of financial assets, barriers to entry, high transaction costs and restrictions on movement of funds/participants between the market segments. This apart from inhibiting the development of the markets also affected their efficiency.

FINANCIAL SECTOR REFORMS IN INDIA:

It was in this backdrop that wide-ranging financial sector reforms in India were introduced as an integral part of the economic reforms initiated in the early 1990s with a view to improving the macroeconomic performance of the economy. The reforms in the financial sector focused on creating efficient and stable financial institutions and markets. The approach to financial sector reforms in India was one of gradual and non-disruptive progress through a consultative process. The Reserve Bank has been consistently

working towards setting an enabling regulatory framework with prompt and effective supervision, development of technological and institutional infrastructure, as well as changing the interface with the market participants through a consultative process. Persistent efforts have been made towards adoption of international benchmarks as appropriate to Indian conditions. While certain changes in the legal infrastructure are yet to be effected, the developments so far have brought the Indian financial system closer to global standards. The Indian financial system has undergone structural transformation over the past decade. The financial sector has acquired strength, efficiency and stability by the combined effect of competition, regulatory measures, and policy environment. While competition, consolidation and convergence have been recognized as the key drivers of the banking sector in the coming years

CONSTITUENTS OF INDIAN FINANCIAL SYSTEM:

Indian financial system consists of financial market, financial instruments and financial intermediation.

1) FINANCIAL INSTITUTIONS

Financial institutions are intermediaries that mobilize savings and facilitate allocation of funds in an efficient manner. Financial Institutions can be classified as banking and nonbanking financial institutions. Banking institutions are creators of credit while nonbanking financial institutions are purveyors of credit. In India non-banking financial institutions are the Developmental Financial institutions (DFIs) and Non-Banking Financial Companies (NBFCs) as well as housing finance companies (HFCs) are the major institutional purveyors of credit. Financial institutions can also be classified as 10

term finance institutions such as Industrial Development Bank of India (IDBI), Industrial credit and Investment Corporation of India (ICICI), Industrial Finance Corporation of India (IFCI), Small Industries Development bank of India (SIDBI) and Industrial Investment bank of India (IIBI). Financial institutions can be specialized finance institutions like the Export Import Bank of India (EXIM), Tourism Finance Corporation of India (TFCI), ICICI Venture, Infrastructure development Finance Company (IDFC) and sectoral such as the National Bank for Agricultural and Rural Development (NABARD) and National Housing Bank (NHB). Investment institutions in the business of Mutual Funds (UTI, Public Sector and Private Sector Mutual Funds) and Insurance activity (LIC, GC and its subsidiaries) are also classified as financial institutions.

2) FINANCIAL MARKETS

Financial markets are a mechanism enabling participants to deal in financial claims. The markets also provide a facility in which their demands and requirements interact to set a price for such claims. The main organized finance markets in India are the Money Market and Capital Market. Money market is for short-term securities while the Capital Market is for long-term securities. Financial Markets are also classified as primary and secondary markets. While primary market deals in new issues, the secondary market is meant for trading in outstanding or existing securities. It's through financial markets the financial system of an economy works. The main functions of financial markets are:

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1. to facilitate creation and allocation of credit and liquidity; 2. to serve as intermediaries for mobilization of savings; 3. to assist process of balanced economic growth; 4. to provide financial convenience

3) FINANCIAL INSTRUMENTS

A Financial instrument is a claim against a person or an institution for the payment at a future date a sum of money and/or a periodic payment in the form of interest or dividend. The term and/or implies that either of the payments will be sufficient but both of them may be promised. Financial securities may be primary or secondary securities. Primary securities are also termed as direct securities as they are directly issued by the ultimate borrowers of funds to the ultimate savers. Primary securities include equity shares and debentures. Secondary securities are also referred to as indirect securities, as they are issued by the financial intermediaries to the ultimate savers. Bank deposits, mutual fund units and insurance policies are secondary securities. Financial instruments differ in terms of marketability, liquidity, reversibility, type of options, return, risk and transaction costs. Financial instruments help the financial markets and the financial intermediaries to perform the important role of channelizing funds from lenders to borrowers 12

4) FINANCIAL SERVICES

Efficiency of emerging financial system largely depends upon the quality and variety of financial services provided by financial intermediaries. The term financial services can be defined as "activities, benefits and satisfaction connected with sale of money that offers to users and customers, financial related value". Financial intermediaries provide key financial services such as merchant banking, leasing, and hire purchase, credit-rating and so on. Financial services rendered by financial intermediarys bridge the gap between lack of knowledge on the part of investors and increasing sophistication of financial instruments and markets. These financial services are vital for creation of firms, expansion and economic growth. The financial services sector includes broking firms, investment services, national banks, private banks, mutual funds, car and home loans, and equity market

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INDIAN FINANCIAL MARKETS

INTRODUCTION of FINANCIAL MARKETS In Simple terms, Financial Markets refers to as those centers and arrangement which facilitate buying and selling of financial claims, assets and services. Typically, in other words, Financial Markets are defined, By having transparent pricing, basic regulations on trading, cost, fees & market forces determining the price of securities that are traded. Financial market is a market where financial instruments are exchanged or traded and helps in determining the prices of the assets that are traded in and is also called the price discovery process The arrangement that provide facilities for buying and selling of financial claims and services are called as Financial Markets. As in India organized Financial Markets play a vital role as because it facilitates the exchange of liquid assets. As it attains the equilibrium position when the demand and supply are equal to each other. It includes Issue of Equity shares, Granting of loans by term lending institutions, Deposit of Money into banks, sale of shares and debentures so on. Financial markets provide the following three major economic functions: 1) Price discovery 2) Liquidity 3) Reduction of transaction costs

1) Price discovery: Function means that transactions between buyers and sellers of financial instruments in a financial market determine the price of the traded asset. At the same time the required return from the investment of funds is determined by the participants in a financial market. The motivation for those seeking funds (deficit units) depends on the required return that investors demand. It is these functions of financial markets that signal how the

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funds available from those who want to lend or invest funds will be allocated among those needing funds and raise those funds by issuing financial instruments.

2) Liquidity function provides an opportunity for investors to sell a financial instrument, since it is referred to as a measure of the ability to sell an asset at its fair market value at any time. Without liquidity, an investor would be forced to hold a financial instrument until conditions arise to sell it or the issuer is contractually obligated to pay it off. Debt instrument is liquidated when it matures, and equity instrument is until the company is either voluntarily or involuntarily liquidated. All financial markets provide some form of liquidity. However, different financial markets are characterized by the degree of liquidity.

3) The function of reduction of transaction costs is performed, when financial market participants are charged and/or bear the costs of trading a financial instrument. In market economies the economic rationale for the existence of institutions and instruments is related to transaction costs, thus the surviving institutions and instruments are those that have the lowest transaction costs.

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History of India Financial Market

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 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, Ahmedabad 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, Ahmedabad 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. 16

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 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 17

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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Chapter II EVOLUTION OF CAPITAL MARKET

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. The earliest records of security dealings in India are meagre and obscure. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century. By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850. The 1850's witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60. In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump. At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street now appropriately called as Dalal Street where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, the "Native Share and Stock Brokers' Association" which is alternatively known as The Stock Exchange ". In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated. There have been many fluctuations in stock market due to American war and battles in Europe. Then there were dealing of brokers and government started. Controller of Capital Issues Act was passed in 1947. During such period the wealth and expenditure tax was in hands of Mr. T. T. Krishnamachari in 1957 who was the finance minister. During such period war was occurred in China has occurred a great fall in price of capital market. The BSE building, icon of Indian Capital Market is called the P.J. tower in the memory. Then the planning process started in India in 1951which gave importance to formation of institutions and 19

markets through securities Regulation Act 1956.After this act basic law was followed by securities markets to regulate the share price in the market. After such regulations of SEBI scams of Harshad Mehta had occurred in the year 1992 due to which shares in market fall down. Then to uplift the stock market mid in -1990 Gujarat stock exchange got listed in BSE. Then in end of 1990 emergence of Ketan Parekh and information companies and entertainment companies came into the limelight. This period stock of software companies were most favored stock in US. Then there was a meltdown in software stock in early 2000 Even Multinational companies were in operation with Indian stock market this lead to sale of fresh stock in Indian markets due to which the shares of other companies were down. The next big boom and mass retail investors happened in 1980, with the entry of Mr. Dhirubhai Ambani who was said to be the father of modern capital markets. Reliance public issue and subsequent issues on various reliance companies generated huge interest. Due to reliance shares people were aware of the share certificate that were not educated. Mr. Dhirubhai Ambani really gave a helping hand to stock market in India.

Post-independence Scenario
Most of the exchanges suffered almost a total eclipse during depression. Lahore Exchange was closed during partition of the country and later migrated to Delhi and merged with Delhi Stock Exchange. Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963. Most of the other exchanges languished till 1957 when they applied to the Central Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only Bombay, Calcutta, Madras, Ahmadabad, Delhi, Hyderabad and Indore, the well established exchanges, were recognized under the Act. Some of the members of the other Associations were required to be admitted by the recognized stock exchanges on a concessional basis, but acting on the principle of unitary control, all these pseudo stock exchanges were refused recognition by the Government of India and they thereupon ceased to function.

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Thus, during early sixties there were eight recognized stock exchanges in India (mentioned above). The number virtually remained unchanged, for nearly two decades. During eighties, however, many stock exchanges were established: Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982), and Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange Association Limited (1983), Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadha Stock Exchange Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990) and recently established exchanges Coimbatore and Meerut. Thus, at present, there are totally twenty one recognized stock exchanges in India excluding the Over the Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL). The Table given below portrays the overall growth pattern of Indian stock markets since independence. It is quite evident from the Table that Indian stock markets have not only grown just in number of exchanges, but also in number of listed companies and in capital of listed companies. The remarkable growth after 1985 can be clearly seen from the Table, and this was due to the favouring government

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Chapter III STRUCTURE OF INDIAN CAPITAL MARKET

Broadly speaking the capital market is classified in to two categories. They are the Primary market (New Issues Market) and the Secondary market (Old (Existing) Issues Market). This classification is done on the basis of the nature of the instrument brought in the market. However on the basis of the types of institutions involved in capital market, it can be classified into various categories such as the Government Securities market or Gilt-edged market, Industrial Securities market, Development Financial Institutions (DFIs) and financial intermediaries. All of these components have specific features to mention. The structure of the Indian capital market has its distinct features. These different segments of the capital market help to develop the institution of capital market in many dimensions. The primary market helps to raise fresh capital in the market. In the secondary market, the buying and selling (trading) of capital market instruments takes place. The following chart will help us in understanding the organizational structure of the Indian Capital market.

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1) Government Securities Market: This is also known as the Gilt-edged market. This refers to the market for government and semi-government securities backed by the Reserve Bank of India (RBI). There is no speculation in securities. Huge volume of transaction can take place as because it is obligated under Banking Regulation Act 1949.

2) Industrial Securities Market

This is a market for industrial securities i.e. market for shares and debentures of the existing and new corporate firms. Buying and selling of such instruments take place in this market. This market is further classified into two types such as the New Issues Market (Primary) and the Old (Existing) Issues Market (secondary).

In primary market fresh capital is raised by companies by issuing new shares, bonds, units of mutual funds and debentures. However in the secondary market already existing that is old shares and debentures are traded. This trading takes place through the registered stock exchanges. In India we have three prominent stock exchanges. They are the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE) and Over the Counter Exchange of India (OTCEI) I. Primary market Primary market provides an opportunity to the issuers of securities, both Government and corporations, to raise funds through issue of securities. The securities may be issued in the domestic or international markets, at face value, or at a discount (i.e. below their face value) or at a premium (i.e. above their face value). II. Secondary market Secondary market refers to a market, where securities that are already issued by the Government or corporations, are traded between buyers and sellers of those securities. The securities traded in the secondary market could be in the nature of equity, debt, derivatives etc.

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3) Development Financial Institutions (DFIs) : This is yet another important segment of Indian capital market. This Comprises various financial institutions. These can be special purpose institutions like IFCI, ICICI, SFCs, IDBI, IIBI, UTI, etc. These financial institutions provide long term finance for those purposes for which they are set up.

4) Financial Intermediaries
The fourth important segment of the Indian capital market is the financial intermediaries. An institution that acts as the middleman between investors and firms raising funds, often referred to as financial institutions. Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. As such, 24

financial intermediaries channel funds from people who have extra money (savers) to those who do not have enough money to carry out a desired activity (borrowers). This comprises various merchant banking institutions, mutual funds, leasing finance companies, venture capital companies and other financial institutions. These are important institutions and segments in the Indian capital market.

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CAPITAL MARKET INSTRUMENTS.

1) Equity (instrument of ownership) Equity shares are instruments issued by companies to raise capital and it represents the title to the ownership of a company. You become an owner of a company by subscribing to its equity capital (whereby you will be allotted shares) or by buying its shares from its existing owner(s). As a shareholder, you bear the entrepreneurial risk of the business venture and are entitled to benefits of ownership like share in the distributed profit (dividend) etc. The returns earned in equity depend upon the profits made by the company. Companys future growth etc. 2. Debt (loan instruments) A. Corporate debt I) Debentures are instrument issued by companies to raise debt capital. As An investor, 2you lend you money to the company, in return for its promise To pay you interest at a fixed rate (usually payable half yearly on specific Dates) and to repay the loan amount on a specified maturity date say after 5/7/10 years (redemption). Normally specific asset(s) of the company are held (secured) in favour of Debenture holders. This can be liquidated, if the company is unable to pay The interest or principal amount. Unlike loans, you can buy or sell these Instruments in the market. Types of debentures that are offered are as follows: Non convertible debentures (NCD) Total amount is redeemed by the Issuer Partially convertible debentures (PCD) Part of it is redeemed and the Remaining is converted to equity shares as per the specified terms Fully convertible debentures (FCD) Whole value is converted into Equity at a specified price II) Bonds are broadly similar to debentures. They are issued by companies, Financial institutions, municipalities or government companies and are Normally not secured by any assets of the company (unsecured). Types of bonds 26

Regular Income Bonds provide a stable source of income at regular, predetermined intervals -Tax-Saving Bonds offer tax exemption up to a specified amount of investment, depending on the scheme and the Government notification

Examples are: -Infrastructure Bonds under Section 88 of the Income Tax Act, 1961 NABARD/ NHAI/REC Bonds under Section 54EC of the Income Tax Act, 1961 RBI Tax Relief Bonds B. Government debt: Government securities (G-Secs) are instruments issued by Government of India to raise money. G Secs pays interest at fixed rate on specific dates on half-yearly basis. It is available in wide range of maturity, from short dated (one year) to long dated (up to thirty years). Since it is Sovereign borrowing, it is free from risk of default (credit risk). You can Subscribe to these bonds through RBI or buy it in stock exchange. D. Money Market instruments (loan instruments up to one year tenure) Treasury Bills (T-bills) are short term instruments issued by the Government for its cash management. It is issued at discount to face Value and has maturity ranging from 14 to 365 days. Illustratively, a T-bill Issued at Rs. 98.50 matures to Rs. 100 in 91 days, offering an yield of 6.25% p.a. Commercial Papers (CPs) are short term unsecured instruments issued By the companies for their cash management. It is issued at discount to face value and has maturity ranging from 90 to 365 days. Certificate of Deposits (CDs) are short term unsecured instruments issued by the banks for their cash management. It is issued at discount to face value and has maturity ranging from 90 to 365 days.

3. Hybrid instruments (combination of ownership and loan instruments)

Preferred Stock / Preference shares entitle you to receive dividend at a fixed rate. Importantly, this dividend had to be paid to you before dividend can be paid to equity shareholders. In the event of liquidation of the company, your claim to the companys 27

surplus will be higher than that of the equity holders, but however, below the claims of the companys creditors, bondholders / debenture holders. Cumulative Preference Shares: A type of preference shares on which dividend accumulates if remains unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares. Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company. Participating Preference Shares gives you the right to participate in profits of the company after the specified fixed dividend is paid. Participation right is linked with the quantum of dividend paid on the equity shares over and above a particular specified level.

4. Mutual Funds Mutual funds collect money from many investors and invest this corpus in equity, debt or a combination of both, in a professional and transparent manner. In return for your investment, you receive units of mutual funds which entitle you to the benefit of the collective return earned by the fund, after reduction of management fees. Mutual funds offer different schemes to cater to the needs of the investor are regulated by securities and Exchange board of India (SEBI)

Types of Mutual Funds At the fundamental level, there are three types of mutual funds: Equity funds (stocks) Fixed-income funds (bonds) Money market funds

5. Repo / Reverse Repo A repo agreement is the sale of a security with a commitment to repurchase the same security as a specified price and on specified date. The difference between the two prices is effectively the borrowing cost for the party selling the security as part of the first leg of the transaction. 28

Reverse repo is purchase of security with a commitment to sell at predetermined price and date. The difference between the two prices is effectively interest income for the party buying the security as part of the first leg of the transaction. A repo transaction for party would mean reverse repo for the second party. As against the call money market where the lending is totally unsecured, the lending in the repo is backed by a simultaneous transfer of securities.

6. DERIVATIVES A derivative is a financial instrument, whose value depends on the values of basic underlying variable. In the sense, derivatives is a financial instrument that offers return based on the return of some other underlying asset, i.e the return is derived from another instrument. Derivative products initially emerged as a hedging device against fluctuations in commodity prices, and commodity linked derivatives remained the sole form of such products for almost three hundred years. . It was primarily used by the farmers to protect themselves against fluctuations in the price of their crops. From the time it was sown to the time it was ready for harvest, farmers would face price uncertainties. Through the use of simple derivative products, it was possible for the farmers to partially or fully transfer price risks by locking in asset prices. From hedging devices, derivatives have grown as major trading tool. Traders may execute their views on various underlying by going long or short on derivatives of different types.

FINANCIAL DERIVATIVES: Financial derivatives are financial instruments whose prices are derived from the prices of other financial instruments. Although financial derivatives have existed for a considerable period of time, they have become a major force in financial markets only since the early 1970s. In the class of equity derivatives, futures and options on stock indices have gained more popularity especially among institutional investors.

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TYPES OF DERIVATIVES

1) FORWARDS A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price, other contract details like delivery date, price and quantity are negotiated bilaterally by the parties to the contract. The forward contracts are normally traded outside the exchange.

2) FUTURES Futures contract is a standardized transaction taking place on the futures exchange. Futures market was designed to solve the problems that exist in forward market. A futures contract is an agreement between two parties, to buy or sell an asset at a certain time in the future at a certain price, but unlike forward contracts, the futures contracts are standardized and exchange traded To facilitate liquidity in the futures contracts, the exchange specifies certain standard quantity and quality of the underlying instrument that 30

can be delivered, and a standard time for such a settlement. Futures exchange has a division or subsidiary called a clearing house that performs the specific responsibilities of paying and collecting daily gains and losses as well as guaranteeing performance of one party to other

3) OPTIONS An option is a contract, or a provision of a contract, that gives one party (the option holder) the right, but not the obligation, to perform a specified transaction with another party (the option issuer or option writer) according to the specified terms. The owner of a property might sell another party an option to purchase the property any time during the next three months at a specified price. For every buyer of an option there must be a seller. The seller is often referred to as the writer. As with futures, options are brought into existence by being traded, if none is traded, none exists; conversely, there is no limit to the number of option contracts that can be in existence at any time. As with futures, the process of closing out options positions will cause contracts to cease to exist, diminishing the total number. Thus an option is the right to buy or sell a specified amount of a financial instrument at a pre-arranged price on or before a particular date.

4) SWAPS: Swaps are private agreement between two parties to exchange cash flows in the future according to a pre-arranged formula. They can be regarded as portfolio of forward contracts. The two commonly used Swaps are i) Interest Rate Swaps: - A interest rate swap entails swapping only the interest related cash flows between the parties in the same currency. ii) Currency Swaps: - A currency swap is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and after a specified period of time, to give back the original amount swapped.

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Chapter IV INDIAN CAPITAL MARKET

Indian Capital Market

Equity Market
Government Securities

Debt Market

Primary Market

Secondary market

PSU Bonds

Corporate Bonds

Equity market in India:Stock is the type of equity security with which most people are familiar. When investors (savers) buy stock, they become owners of a "share" of a company's assets and earnings. If a company is successful, the price that investors are willing to pay for its stock will often rise and shareholders who bought stock at a lower price than stand to make capital profit. If a company does not do well, however, its stock may decrease in value and shareholders can lose money. Stock prices are also subject to both general economic and industry-specific market factors.

The equity market is classified as:(a) Primary market (b) Secondary market 32

(a) Primary market:The first time that a companys shares are issued to the public, it is by a process called the initial public offering (IPO). In an IPO the company offloads a certain percentage of its total shares to the public at a certain price. Most IPOS these days do not have a fixed offer price. Instead they follow a method called BOOK BUILDIN PROCESS, where the offer price is placed in a band or a range with the highest and the lowest value (refer to the newspaper clipping on the page). The public can bid for the shares at any price in the band specified. Once the bids come in, the company evaluates all the bids and decides on an offer price in that range. After the offer price is fixed, the company allots its shares to the people who had applied for its shares or returns them their money.

Features of primary markets are:

1. This is the market for new long term capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the New Issue Market (NIM). 2. In a primary issue, the securities are issued by the company directly to investors. 3. The Company receives the money and issues new security certificates to the investors. 4. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. 5. The primary market performs the crucial function of facilitating capital formation in the economy. The primary market issuance is done either through public issue or private placement .A public issue does not limit any entity in investing while in private placement , the issuance is done to select people. In terms of Indian Companies Act , 1956 as issue becomes public if it results in allotment to more than 50 persons. This means an issue resulting in allotment to less than 50 persons is private placement . An IPO is the first sale of stock by a company to the public. In this market company can raise money by issuing equity. If the company has never issued equity to the public, it's known as an IPO.

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Mostly public companies go for IPO. But large privately-owned companies may also go for an IPO to become publicly traded. In an IPO the company offloads a certain percentage of its total shares to the public at a certain` price In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market.. Most IPOS these days do not have a fixed offer price. Instead they follow a method called BOOK BUILDIN PROCESS, where the offer price is placed in a band or a range with the highest and the lowest value (refer to the newspaper clipping on the page). The public can bid for the shares at any price in the band specified. Once the bids come in, the company evaluates all the bids and decides on an offer price in that range. After the offer price is fixed, the company allots its shares to the people who had applied for its shares or returns them their money in case of non allotment of shares.

(B)Secondary market:Secondary market is the market for buying and selling securities of the existing companies. Under this, securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange. The stock exchanges are the exclusive centres for trading of securities. It is a sensitive barometer and reflects the trends in the economy through fluctuations in the prices of various securities. It been defined as, "a body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating and controlling the business of buying, selling and dealing in securities". There are 23 stock exchanges in India. Listing on stock exchanges enables the shareholders to monitor the movement of the share prices in an effective manner. This assist them to take prudent decisions on whether to retain their holdings or sell off or even accumulate further. However, to list the securities on a stock exchange, the issuing company has to go through set norms and procedures.

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Various aspects of secondary/ stock market in India :-

(a) Corporate Securities:

The stock exchanges are the exclusive centers for trading of securities. Though the area of operation/jurisdiction of an exchange is specified at the time of its recognition, they have been allowed recently to set up trading terminals anywhere in the country. The three newly set up exchanges (OTCEI, NSE and ICSE) were permitted since their inception to have nationwide trading. The trading platforms of a few exchanges are now accessible from many locations. Further, with extensive use of information technology, the trading platforms of a few exchanges are also accessible from anywhere through the Internet and mobile devices. This made a huge difference in a geographically vast country like India.

(b) Exchange Management : Most of the stock exchanges in the country are organized as Mutuals which was considered beneficial in terms of tax benefits and matters of compliance. The trading members, who provide okering services, also own, control and manage the exchanges. This is not an effective model for self -regulatory organizations as the regulatory and public interest of the exchange conflicts with private interests. Efforts are on to demutualize the exchanges whereby ownership, management and trading membership would be segregated from one another. Two exchanges viz. OTCEI and NSE are demutualized from inception, where ownership, management and trading are in the hands of three different sets of people. This model eliminates conflict of interest and helps the exchange to pursue market efficiency and investor interest aggressively.

(c) Membership : The trading platform of an exchange is accessible only to brokers. The broker enters into trades in exchanges either on his own account or on behalf of clients. No stock broker or 35

sub-broker is allowed to buy, sell or deal in securities, unless he or she holds a certificate of registration granted by SEBI. A broker/sub-broker complies with the code of conduct prescribed by SEBI. Over time, a number of brokers proprietor firms and partnership firms - have converted themselves into corporates. The standards for admission of members stress on factors, such as corporate structure, capital adequacy, track record, education, experience, etc. and reflect a conscious endeavour to ensure quality broking services.

(d) Listing: A company seeking listing satisfies the exchange that at least 10% of the securities, subject to a minimum of 20 lakh securities, were offered to public for subscription, and the size of the net offer to the public (i.e. the offer price multiplied by the number of securities offered to the public, excluding reservations, firm allotment and promoters' contribution) was not less than Rs. 100 core, and the issue is made only through book building method with allocation of 60% of the issue size to the qualified institutional buyers. In the alternative, it is required to offer at least 25% of the securities to public. The company is also required to maintain the minimum level of non - promoter holding on a continuous basis. In order to provide an opportunity to investors to invest/trade in the securities of local companies, it is mandatory for the companies, wishing to list their securities, to list on the regional stock exchange nearest to their registered office. If they so wish, they can seek listing on other exchanges as well. Monopoly of the exchanges within their allocated area, regional aspirations of the people and mandatory listing on the regional stock exchange resulted in multiplicity of exchanges. The basic norms for listing of securities on the stock exchanges are uniform for all the exchanges. These norms are specified in the listing agreement entered into between the company and the concerned exchange. The listing agreement prescribes a number of requirements to be continuously complied with by the issuers for continued listing and such compliance is monitored by the exchanges. It also stipulates the disclosures to be made by the companies and the corporate governance practices to be followed by them. SEBI has been issuing guidelines/circulars prescribing certain norms to be included in the listing agreement and to be complied with by the companies. A listed security is available for trading on the 36

exchange. The stock exchanges levy listing fees - initial fees and annual fees - from the listed companies. It is a major source of income for many exchanges. A security listed on other exchanges is also permitted for trading. A listed company can voluntary delist its securities from non-regional stock exchanges after providing an exit opportunity to holders of securities in the region where the concerned exchange is located. An exchange can, however, delist the securities compulsorily following a very stringent procedure.

(e) Trading Mechanism: The exchanges provide an on-line fully-automated Screen Based Trading System (SBTS) where a member can punch into the computer quantities of securities and the prices at which he likes to transact and the transaction is executed as soon as it finds a matching order from a counter party. SBTS electronically matches orders on a strict price/time priority and hence cuts down on time, cost and risk of error, as well as on fraud resulting in improved operational efficiency. It allows faster incorporation of price sensitive information into prevailing prices, thus increasing the informational efficiency of markets. It enables market participants to see the full market on real-time, making the market transparent. It allows a large number of participants, irrespective of their geographical locations, to trade with one another simultaneously, improving the depth and liquidity of the market. It provides full anonymity by accepting orders, big or small, from members without revealing their identity, thus providing equal access to everybody. It also provides a perfect audit trail, which helps to resolve disputes by logging in the trade execution process in entirety.

(f) Trading Rules: Regulations have been framed to prevent insider trading as well as unfair trade practices. The acquisitions and takeovers are permitted in a well- defined and orderly manner. The companies are permitted to buy back their securities to improve liquidity and enhance the shareholders' wealth.

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(g) Price Bands : Stock market volatility is generally a cause of concern for both policy makers as well as investors. To curb excessive volatility, SEBI has prescribed a system of price bands. The price bands or circuit breakers bring about a coordinated trading halt in all equity and equity derivatives markets nation-wide. An index-based market-wide circuit breaker system at three stages of the index movement either way at 10%, 15% and 20% has been prescribed. The movement of either S&P CNX Nifty or Sensex, whichever is breached earlier, triggers the breakers. As an additional measure of safety, individual scrip-wise price bands of 20% either way have been imposed for all securities except those available for stock options.

(h) Demat Trading: The Depositories Act, 1996 was passed to proved for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy and security by :(i) making securities of public limited companies freely transferable subject to certain exceptions; (ii) (iii) dematerializing the securities in the depository mode; and providing for maintenance of ownership records in a book entry form.

In order to streamline both the stages of settlement process, the Act envisages transfer of ownership of securities electronically by book entry without making the securities move from person to person. Two depositories, viz. NSDL and CDSL, have come up to provide instantaneous electronic transfer of securities. At the end of March 2002, 4,172 and 4,284 companies were connected to NSDL and CDSL respectively. The number of dematerialized securities increased to 56.5 billion at the end of March 2002. As on the same date, the value of dematerialized securities was Rs. 4,669 billion and the number of investor accounts was 4,605,588. All actively traded scrips are held, traded and settled in demat form. Demat settlement accounts for over 99% of turnover settled by delivery. This has almost eliminated the bad deliveries and associated problems. To prevent physical certificates from sneaking into circulation, it has been 38

mandatory for all new IPOs to be compulsorily traded in dematerialized form. The admission to a depository for dematerialization of securities has been made a prerequisite for making a public or rights issue or an offer for sale. It has also been made compulsory for public listed companies making IPO of any security for Rs. 10 crore or more to do the same only in dematerialized form.

(i) Charges:

A stock broker is required to pay a registration fee of Rs.5, 000 every financial year, if his annual turnover does not exceed Rs. 1 crore. If the turnover exceeds Rs. 1 crore during any financial year, he has to pay Rs. 5,000 plus one-hundredth of 1% of the turnover in excess of Rs.1 crore. After the expiry of five years from the date of initial registration as a broker, he has to pay Rs. 5,000 for a block of five financial years. Besides, the exchanges collect transaction charges from its trading members. NSE levies Rs. 4 per lakh of turnover. The maximum brokerage a trading member can levy in respect of securities transactions is 2.5% of the contract price, exclusive of statutory levies like SEBI turnover fee, service tax and stamp duty. However, brokerage charges as low as 0.15% are also observed in the market.

(j) Trading Cycle: Rolling settlement on T+3 basis gave way to T+2 from April 2003. The market has moved close to spot/cash market.

(k) Risk Management: To pre-empt market failures and protect investors, the regulator/exchanges have developed a comprehensive risk management system, which is constantly monitored and upgraded. It encompasses capital adequacy of members, adequate margin requirements, limits on exposure and turnover, indemnity insurance, on-line position monitoring and automatic disablement, etc. They also administer an efficient market surveillance system to curb excessive volatility, detect and prevent price manipulations. A clearing 39

corporation assures the counterparty risk of each member and guarantees financial settlement in respect of trades executed on NSE.

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Debt Market in India: Government Securities PSU Bonds Corporate Bonds

For a developing economy like India, debt markets are crucial sources of capital funds. The debt market in India is amongst the largest in Asia. It includes government securities, public sector undertakings, other government bodies, financial institutions, banks and companies. The debt markets in India are divided into three segments, viz., Government Securities, Public Sector Units (PSU) bonds, and corporate securities. For a developing economy like India, debt markets are crucial sources of capital funds. The debt market in India is amongst the largest in Asia. It includes government securities, public sector undertakings, other government bodies, financial institutions, banks and companies. The debt markets in India is divided into three segments, viz., Government Securities, Public Sector Units (PSU) bonds, and corporate securities. The market for Government Securities comprises the Centre, State and State-sponsored securities. Government securities (G-secs) or gilts are sovereign securities, which are issued by the Reserve Bank of India (RBI) on behalf of the Government of India (GOI). The GOI uses these funds to meet its expenditure commitments. The PSU bonds are generally treated as surrogates of sovereign paper, sometimes due to explicit guarantee and often due to the comfort of public ownership. Some of the PSU bonds are tax free, while most bonds including government securities are not tax-free. The RBI also issues tax-free bonds, called the 6.5% RBI relief bonds, which is a popular category of tax-free bonds in the market. Corporate bond markets comprise of commercial paper and bonds. These bonds typically are structured to suit the requirements of investors and the issuing corporate, and include a variety of tailor- made features with respect to interest payments and redemption.

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Primary market/ New Issue Market:As in the case of equity primary market , this is the market in which debt instruments government securities, PSU Bonds & corporate bonds are issued for the first time .

Government Securities:In case of government securities, it is the RBI which issues securities on behalf of the government (both state as well as central government). Thus RBI periodically conducts auction of GOI/SDL under Central/State borrowing Treasury program as per the auction calendar and also under MSS for GOI Securities.

Corporate Bonds:The corporate bond market has been in existence in India for a long time. However, despite a long history, the size of the public issue segment of the corporate bond market in India has remained quite insignificant.

Secondary Market:Like in the case of equity secondary market, the secondary debt market involves buying and selling of debt instruments which are already issued in the primary market or listed on the exchanges. Government bonds are deemed to be listed as soon as they are issued. Markets for government securities are pre-dominantly wholesale markets, with trades done on telephonic negotiation. NSE WDM provides a trading platform for Government bonds, and reports over 65% of all secondary market trades in government securities. Currently, transactions in government securities are required to be settled on the trade date or next working day unless the transaction is through a broker of a permitted stock exchange in which case settlement can be on T+2 basis. In NDS, all trades between members of NDS have to be reported immediately. The settlement is routed through CCIL for all NDS members. The lack of market infrastructure and comprehensive regulatory framework coupled with low issuance leading to low liquidity in the secondary market, narrow investor base, inadequate credit assessment skills, high cost of issuance and lack of transparency in trades are some of the major factors that hindered the growth of the private corporate debt market. 42

Analysis of Company
Company Current Price (Rs)
Tata Consultancy Reliance Inds. ITC Ltd. ONGC Infosys HDFC Bank Coal India Ltd. Wipro Ltd Tata Motors Ltd. Sun Pharma. HDFC Hindustan Unilever L ICICI Bank Bharti Airtel HCL Technologies SBI L&T NTPC Cairn India Ltd. Indian Oil Corp Axis Bank Ltd. Mahi. & Mahi Bajaj Auto Ltd. 1,030.70 287.35 1,548.95 1,506.75 1,088.15 115.80 324.60 247.45 1,235.15 942.00 1,902.00 -0.53 +1.57 +1.18 -0.26 +0.61 -1.07 -0.03 +1.41 -0.03 -0.10 +2.14 197482 806919 115831 232746 191898 1753034 44587 68728 196505 65344 24836 1,154.59 1,998.70 139.77 684.03 185.21 8,245.46 1,910.80 2,427.95 469.25 295.16 289.37 10 5 2 10 2 10 10 10 10 5 10 1,19,003.59 1,14,865.29 1,08,248.37 1,03,066.22 1,00,768.13 95,482.43 62,024.57 60,079.62 57,959.41 55,608.14 55,038.17 2,188.30 810.40 321.90 282.05 3,782.70 670.80 246.35 595.15 398.60 618.60 811.00 554.20

% Change
+0.46 -0.25 +0.64 0.00 +0.85 +0.09 -2.26 +2.95 +0.50 -0.28 +0.04 -0.11

Volume Equity Face Value

52849 160983 120076 115927 104926 101354 202935 161151 311480 337770 80579 47224 195.87 3,231.00 793.55 4,277.76 286.00 478.92 6,316.36 493.10 643.78 207.12 311.85 216.26 1 10 1 5 5 2 10 2 2 1 2 1

Market Cap (Rs Cr)

4,28,622.32 2,61,840.24 2,55,443.75 2,41,308.44 2,16,370.44 1,60,629.77 1,55,603.53 1,46,734.23 1,28,305.35 1,28,124.43 1,26,455.18 1,19,851.29

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Tata Consultancy Services Limited (TCS) is an Indian multinational information technology (IT) services, business process and consulting company headquartered in Mumbai, Maharashtra. TCS operates in 46 countries and has 199 branches across the world. It is a subsidiary of the Tata Group and is listed on the Bombay Stock Exchange and the National Stock Exchange of India. TCS is the largest Indian company by market and is the largest India-based IT services company by 2013 revenues.TCS is ranked 40th overall in the ForbesWorld's Most Innovative Companies ranking, making it both the highest-ranked IT services company and the top Indian company.

Reliance Industries Limited (RIL) is an Indian conglomerate holding company headquartered in Mumbai, Maharashtra, India. The company operates in five major segments: exploration and production, refining and marketing, petrochemicals, retail and telecommunications. RIL is the second-largest publicly traded company in India by market capitalization and is the second largest company in India by revenue after the state-run Indian Oil Corporation.[5] The company is ranked No. 107 on the Fortune Global 500 list of the world's biggest corporations, as of 2013. RIL contributes approximately 14% of India's total exports.

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Tata Consultancy Services Ltd. vs. Reliance Industries Ltd.

TATA CONSULTANCY SERVICES LTD. VS 814.80 +4.40 +0.54%

RELIANCE INDUSTRIES LTD. -2.50 -0.11%

2,185.80

Volume Prev Close Day's H/L (Rs) 52wk H/L (Rs) Mkt Cap (Rs Cr)

21,221 2,188.30 2,195.00 - 2,178.55 2,384.20 - 1,364.00 428,044.50

Volume Prev Close Day's H/L (Rs) 52wk H/L (Rs) Mkt Cap (Rs Cr)

84,139 810.40 816.50 - 809.25 927.90 - 765.00 263,318.92

* Computed on last 15 days' trading figures.

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Report card
Attribute PE ratio EPS (Rs) Sales (Rs crore) Face Value (Rs) Net profit margin (%) Last bonus Last dividend (%) Return on average equity Value 33.76 65.33 16,692.65 1 25.24 1:1 400 39.32 Mar, 13 20/04/09 16/01/14 Mar, 13 Date 21/02/14 Mar, 13 Dec, 13 Attribute PE ratio EPS (Rs) Sales (Rs crore) Face Value (Rs) Net profit margin (%) Last bonus Last dividend (%) Return on average equity Value 12.47 65.04 1,03,521.00 10 5.70 1:1 90 11.66 Mar, 13 07/10/09 16/04/13 Mar, 13 Date 21/02/14 Mar, 13 Dec, 13

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Chapter V SIGNIFICANCE, ROLE OR FUNCTION OF CAPITAL MARKET

Capital Market plays a significant role in the national economy. A developed, dynamic and vibrant capital market can immensely contribute for speedy economic growth and development. Let us get acquainted with the important functions and role of the capital market:

1. Provide Liquidity for Financial Instrument Capital markets provide liquidity to the Financial Instruments which are traded in the Secondary Market. It depends on the Mobilization of savings Capital market is an important source for mobilizing savings from the economy. It mobilizes funds people for further investments in the productive channels of an economy. In that sense it activates the ideal monetary resources and puts them in proper investments.

2. 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 long period of time. It provides suitable interest rate return also to investors. Instrument such as bonds, mutual Funds, insurance policies definitely provide a diverse investment avenue for the public.

3. Proper regulation of Funds Capital market not only helps in fund mobilization, but it also help in proper allocation of their resources. It can have regulation over the resources so that it can direct funds in a qualitative manner.

47

4. Continuous availability of Funds Capital market is the 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 sellers can easily buy and sell securities as they are continuously available.

5. Raise capital for Industry Capital market helps to raise capital for the industrial sector by investing in various securities such as shares, debentures which can easily provide finance to industries.

6. 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 savings it would generate investment in various segments such as agriculture, industry etc. this helps in capital Formation

7. Speed up Economic growth and Development Capital market provides products and productivity in the national economy. As it makes funds available for a long period of time, the financial requirements of business houses are met by the capital market. Thus increase in production and productivity generates employment and development in infrastructure.

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Role of Capital Market in Indias Industrial Growth

1. Mobilization of Savings and Acceleration of Capital Formation. In developing countries like India plagued by paucity of resources and increasing demand for investments by industrial organizations and governments, the importance of the capital market is self-evident.

2. Promotion of Industrial Growth. The capital market is a central market through which resources are transferred to the industrial sector of the economy. The existence of such an institution encourages people to invest in productive channels rather than in the unproductive sectors like real estate, bullion etc. Thus it stimulates industrial growth and economic development of the country by mobilizing funds for investment in the corporate securities.

3. Raising Long-Term Capital. The existence of a stock exchange enables companies to raise permanent capital. The investors cannot commit their funds for a permanent period but companies require funds permanently. The stock exchange resolves this clash of interests by offering an opportunity to investors to buy or sell their securities while permanent capital with the company remains unaffected.

4. Ready and Continuous Market. The stock exchange provides a central convenient place where buyers and sellers can easily purchase and sell securities. The element of easy marketability makes investment in securities more liquid as compared to other assets.

5. Proper Channelization of Funds. An efficient capital market not only creates liquidity through its pricing mechanism but also functions to allocate resources to the most efficient industries. The prevailing market price of a security and relative yield are the guiding factors for the people to channelize 49

their funds in a particular company. This ensures effective utilization of funds in the public interest.

6. Provision of a Variety of Services. The financial institutions functioning in the capital market provide a variety of services, the more important ones being the following: (I) Grant of long-term and medium-term loans to entrepreneurs to enable them to establish, expand or modernize business units (II) Provision of underwriting facilities; (III) Assistance in the promotion of companies (this function is done by the development banks like the idbi); (IV) Participation in equity capital; (V) Expert advice on management of investment in industrial securities.

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Chapter VI
FACTORS CONTRIBUTING TO THE GROWTH OF CAPITAL MARKET IN INDIA

1. Establishment of development banks and industrial financing institutions . With a view to providing long-term funds to industry, the government set up the Industrial Finance Corporation of India (IFCI) in 1948, i.e., soon after Independence. This was followed by the setting up of a number of other development banks and financial institutions like the Industrial Credit and Investment Corporation of India (ICICI) in 1955, Industrial Development Bank of India (lOBI) in 1964, Industrial Reconstruction Corporation of India (IRCI) in 1971, various State Financial Corporations (SFCs) at the State level, Unit Trust of India (UTI) in 1964, State Industrial Development Corporations, Life Insurance Corporations of India etc. In addition, 14 major commercial banks were nationalized in 1969. 56

2. Growing public confidence. The early post-Liberalizations phase witnessed increasing interest in the stock markets. The small investor who earlier shied away from the securities market and trusted the traditional modes of investment (deposits in commercial banks and post offices) showed marked preference in favour of shares and debentures. As a result, public issues of most of the good companies were over-subscribed many times.

3. Increasing awareness of investment opportunities. The last few years have witnessed increasing awareness of investment opportunities among the general public. Business newspapers and financial journals, (The Economic Times, The Financial Express, Business Line, Business Standard, Business India, Business Today, Business World, Money Outlook etc.) have made the people increasingly aware of new long-term investment opportunities in the securities market.

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4. Setting up of SEBI. The Securities and Exchange Board of India (SEBI) was set up in 1988 and was given statutory recognition in 1992. Among other things, the Board has been mandated to create an environment which would facilitate mobilization of adequate resources through the securities market and its efficient allocation.

5. Credit rating agencies. There are three credit rating agencies operating in India at present CRISIL, ICRA and CARE. CRISIL (the Credit Rating Information Services of India Limited) was set up in 1988, ICRA Ltd. (the Investment Information and Credit Rating Agency of India Limited) was set up in 1991 and CARE (Credit Analysis and Research Limited) was set up in 1993.

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Chapter VII

REFORMS IN INDIAN CAPITAL MARKETS

Development In Indian Securities Market

Over a period, the Indian securities market has undergone remarkable changes and grown exponentially, particularly in terms of resource mobilisation, intermediaries, the number of listed stocks, market capitalisation, and turnover and investor population. The following paragraphs list the principal reform measures undertaken since 1992.

1. Creation of Market Regulator Securities and Exchange Board of India (SEBI), the securities market regulator in India, was established under SEBI Act 1992, with the main objective and responsibility for (i) protecting the interests of investors insecurities,(ii) promoting the development of the securities market, and (iii) regulating the securities market.

2. Demutualization Historically, stock exchanges were owned, controlled and managed by the brokers. In case of disputes, integrity of the stock exchange suffered. NSE, however, was set up with a pure demutualised governance structure, having ownership, management and trading with three different sets of people. Currently, all the stock exchanges in India have a demutualised set up.

3. Clearing Corporation The anonymous electronic order book ushered in by the NSE did not permit members to assess credit risk of the counter-party and thus necessitated some innovation in this area. To address this concern, NSE had set up the first clearing corporation, viz. National Securities Clearing Corporation Ltd.(NSCCL), which commenced its operations in April 1996. 53

4. Growing Merchant banking Activities Many Indian and foreign commercial banks have set up their merchant banking divisions in the last few years. These divisions provide financial services like underwriting facilities, issue organizing, consultancy services etc

5. Establishment of Creditors Rating Agencies Three creditors rating agencies viz. The Credit Rating Information Services of India Limited (CRISIL - 1988), the Investment Information and Credit Rating Agency of India Limited (ICRA -1991) and Credit Analysis and Research Limited (CARE) were set up in order to assess the financial health of different financial institutions and agencies related to the stock market activities. It is a guide for the investors also in evaluating the risk of their investment.

6. Investor Protection In order to protect the interest of the investors and promote Awareness, the Central Government (Ministry of Corporate Affairs established the Investor Education and Protection Fund (IEPF) in October 2001. With the similar objectives, the Exchanges and SEBI also maintain investor protection funds to take care of investor claims. SEBI and the stock exchanges have also set up investor grievance / service cells for redress of investor grievance. All these agencies and investor associations also organise investor education and awareness programmers.

7. Screen Based Trading Prior to setting up of NSE, the trading on stock exchanges in India was based on an open outcry system. The system was inefficient and time Consuming because of its inability to provide immediate matching or recording of trades. In order to provide efficiency, liquidity and transparency, NSE introduced a nation-wide on-line fully automated screen based trading system (SBTS) on the on November 3, 1994. 54

8. Growth of Derivative Transaction Since June 2000, the NSE has introduced the derivatives trading in the equities. In November 2001 it has introduced the future and options transactions. These innovative products have given variety for investment in capital market.

9. Indian Capital Market Chronology 1994: Equity Trading Commences on NSE 1995: All Trading goes Electronic 1996: Depository comes into Existence 1999: Foreign institutional Investors participate in Globalization 2000: Over 80% Trades in Demat Form 2001: Major Stock Settlement 2003: T+3 Settlement in all stock 2003: Demutualization of Exchanges

10. Growing Mutual Fund Industry The growing of mutual funds in India has certainly helped the capital market to grow. Public sector banks, foreign banks, financial institutions and joint mutual funds between the Indian and foreign firms have launched many new funds. A big diversification in terms of schemes, maturity,etc. has taken place in mutual funds in India. It has given a wide choice for the common investors to enter the capital market.

11. Growing Stock Exchanges The numbers of various Stock Exchanges in India are increasing. Initially the BSE was the main exchange, but now after the setting up of the NSE and the OTCEI, stock exchanges have spread across the country. Recently a new Inter-connected Stock Exchange of India has joined the existing stock exchanges.

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12. Investor's Protection Under the purview of the SEBI the Central Government of India has set up the Investors Education and Protection Fund (IEPF) in 2001. It works in educating and guiding investors. It tries to protect the interest of the small investors from frauds and malpractices in the capital market.

13. Insurance Sector Reforms Indian insurance sector has also witnessed massive reforms in last few years. The Insurance Regulatory and Development Authority (IRDA) was set up in 2000. It paved the entry of the private insurance firms in India. As many insurance companies invest their money in the capital market, it has expanded.

14. Commodity Trading Along with the trading of ordinary securities, the trading in commodities is also recently encouraged. The Multi Commodity Exchange (MCX) is set up. The volume of such transactions is growing at a splendid rate. Apart from these reforms the setting up of Clearing Corporation of India Limited (CCIL), Venture Funds, etc., have resulted into the tremendous growth of Indian capital market.SEBI vide its press release PR No.59/2010 dated March 6, 2010 has announced the decisions of the board meeting of SEBI held on the same day. The following is an analysis of the above said decisions

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Chapter VIII FINANCIAL REGULATORY BODY IN INDIA.

SEBI Regulates Indian Capital Market

\ Financial sector in India has experienced a better environment to grow with the presence of higher competition. The financial system in India is regulated by independent regulators in the field of banking, insurance, and mortgage and capital market. Government of India plays a significant role in controlling the financial market in India. For the smooth functioning of the capital market a proper coordination among above organizations and segments is a prerequisite. In order to regulate, promote and direct the progress of the Indian Capital Market, the government has set up 'Securities and Exchange Board of India' (SEBI). SEBI is the supreme authority governing and regulating the Capital Market of India. The securities market enables capital formation in the economy and enhances wealth of investors who make the right choices. The investor confidence is the key prerequisite for the emergence of a vibrant and deep capital market. The role of regulator in creating and enhancing investor confidence is, therefore, paramount. Accordingly, Securities and Exchange Board of India (SEBI) was set up by an Act of Parliament of India in April, 1992 with a mandate to Protect the interest of investors Promote the development of and Regulate the securities market

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Market regulation
SEBI prescribes the conditions for issuer companies to raise capital from the pubic so as to protect the interest of the suppliers of capital (investors). The extensive disclosures prescribed for issuers facilitate informed investment decision making by investors while simultaneously ensuring quality of the issuer. Further, it has prescribed norms for such corporates on on going basis and also during their restructuring (like substantial acquisition, buy back and delisting of shares) to safeguard the interest of investors.

To ensure fair and high standards of service to investors, SEBI allows only fit and proper entities to operate in the capital markets as intermediaries. In this regard, it has prescribed detailed and uniform norms of their registration. Further, to ensure market integrity, it has prescribed norms for fair market practices including prohibiting fraudulent and unfair trade practices and insider trading. Detailed norms for safeguarding the interest of investors in secondary markets have also been prescribed. SEBI also prescribes conditions for operation of collective investor schemes, including Mutual Funds.

Market development:

On an ongoing basis, SEBI initiates measures to widen and deepen the Securities markets by bringing changes in market micro and macrostructure. The major market development measures undertaken by SEBI include shift from the non transparent open outcry system to the transparent screen based on line trading system, elimination of problems of physical certificates by shifting to electronic mode (demat), implementing robust risk management framework in stock market trading etc. In the recent past SEBI has initiated ASBA (application supported by blocked amount) to eliminate problems pertaining to refunds in public issues. SEBIs major policy decisions are formulated through a consultative process involving expert committees with representation from industry, academia, and investors associations. Further, public comments are invited before implementation of major changes, rendering the whole process participative

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Investor protection: The above mentioned regulatory framework and the market development measures of SEBI are invariably geared towards protecting the interest of investors. Besides, SEBI also has a comprehensive mechanism to facilitate redressal of investors grievances. Further, in keeping with its belief that an informed investor is a protected investor, SEBI promotes education and awareness of investors. Moreover, mechanisms for dispute redressal (arbitration at stock exchanges) and to compensate investors have also been provided.

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Chapter IX

FOREIGN INSTITUTIONAL INVESTORS IN INDIAN CAPITAL MARKET

FOREIGN INSTITUTIONAL INVESTOR: The term Foreign Institutional Investor is defined By SEBI as under: "Means an institution established or incorporated outside India which proposes to make investment in India in securities. Provided that a domestic asset management company or domestic portfolio manager who manages funds raised or collected or brought from outside India for investment in India on behalf of a sub-account, shall be deemed to be a Foreign Institutional Investor." Foreign Investment refers to investments made by residents of a country in financial assets and production process of another country Entities covered by the term FII include Overseas pension funds, mutual funds, investment trust, asset Management Company, Nominee Company, bank, institutional portfolio manager, university funds, endowments, foundations, charitable trusts, charitable societies etc. The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with Securities & Exchange Board of India (SEBI) to participate in the market. One of the major market regulations pertaining to FII involves placing limits on FII ownership in Indian companies. They actually evaluate the shares and deposits in a portfolio.

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WHY FIIS REQUIRED?

FIIs contribute to the foreign exchange inflow as the funds from multilateral finance institutions and FDI (Foreign direct investment) are insufficient. Following are the some advantages of FIIs. It lowers cost of capital, access to cheap global credit. It supplements domestic savings and investments. It leads to higher asset prices in the Indian market. And has also led to considerable amount of reforms in capital market and financial sector.

HISTORY OF FII
India opened its stock market to foreign investors in September 1992, and in 1993, received portfolio investment from foreigners in the form of foreign institutional investment in equities. This has become one of the main channels of FII in India for foreigners. Initially, there were terms and conditions which restricted many FIIs to invest in India. But in the course of time, in order to attract more investors, SEBI has simplified many terms such as: The ceiling for overall investment of FII was increased 24% of the paid up capital of Indian company. Allowed foreign individuals and hedge funds to directly register as FII. Investment in government securities was increased to US$5 billion. Simplified registration norms.

INFLUENCE OF FII ON INDIAN MARKET Positive fundamentals combined with fast growing markets have made India an attractive destination for foreign institutional investors (FIIs). Portfolio investments brought in by FIIs have been the most dynamic source of capital to emerging markets in 1990s. At the same time there is unease over the volatility in foreign institutional investment flows and its impact on the stock market and the Indian economy.

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Apart from the impact they create on the market, their holdings will influence firm performance. Some major impact of FII on stock market: They increased depth and breadth of the market. They played major role in expanding securities business. Their policy on focusing on fundamentals of share had caused efficient pricing of share.

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Chapter X
Conclusion The Indian capital market has witnessed a radical transformation within a period of just over one decade. During the early part of 1990s the ranking of Indian capital market with reference to global standards of efficiency, safety, market integrity etc., was low. With reference to the risk indices, in particular, the Indian capital market was regarded as one of the worst as it figured almost at the bottom of the league. However, the scenario has now completely changed. Because of extensive capital market reforms carried out over the period of the last one decade or so, the setting up and extension of activities of NSE. And steps taken by SEBI, the Indian capital market is now ranked in the top league. In fact, it is now considered to be way ahead of many developed country capital markets. The lack of an advanced and vibrant capital market can lead to underutilization of financial resources. The developed capital market also provides access to the foreign capital for domestic industry. Thus capital market definitely plays a constructive role in the overall development of an economy. The Indian financial system has undergone structural transformation over the past decade. The financial sector has acquired strength, efficiency and stability by the combined effect of competition, regulatory measures, and policy environment while competition, consolidation and convergence have been recognized as the key drivers of the banking sector in the coming years

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Chapter XI Recommendations

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Chapter XII

GLOSSARY

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Chapter XIII Bibliography

SEARCH ENGINES: GOOGLE WIKIPEDIA SITES: www.scribd.com www.investopedia.com www.economictimes.com www.sebi.gov.in www.rbi.org.in

www.bseindia.com

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