3Ps of Indian Stock Market

3 Ps of the Indian Stock Exchanges Past, Present & Perspective
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ACKNOWLEDGEMENT
I thank Dr. Sanja Srivastava, Director! P"D#, $%it &'siness Schoo(,
)oida, for providing the fo'ndation for this st'd. *he str'ct're, the foc's and the
direction for the s'ccessf'( co%p(etion of this project +ere provided , hi%, and had
it not ,een for the c(arit that he provided, this dissertation report +o'(d not have
,een possi,(e.
I a(so take this opport'nit to thank % fac'(t g'ide Prof. -ikas Sriviastava,
$&S, ).ID$. *he sincerit, dedication and interest that he sho+ed in % st'd +as
ver enco'raging and of extre%e va('e. I a% ver gratef'( to hi% for the pains he
took to s'pport this st'd , giving %e va('a,(e insights and reference %ateria(.
Sir +as a(+as a g'iding (ight of this st'd right fro% the +ord go. /e gave
%e certain insights +hich have proved to ,e ver 'sef'( for %e +hi(e I +ent a,o't
doing this st'd.
I +o'(d a(so (ike to thank #r. Sanja $ggar+a( of )D$ "ro'p of 0o%panies,
#r. Sa'ra,h "'pta & #s. #eenakshi "'pta of India,'((s Sec'rities 1i%ited #r.
Paresh &hagat of #anga( 2eshav Stock and Share &rokers for he(ping %e ana(3e the
s',ject and providing %e +ith necessar infor%ation.
I +ish to express % heartfe(t gratit'de to a(( the fac'(t and staff %e%,ers
+ho have ,een associated +ith this st'd in %an s%a(( and ,ig +as.
I a(so +ish to express % gratit'de to the estee%ed respondents of %
research for their co!operation and s'pport.
1ast ,'t not the (east4 I thank % +orth friends and fa%i( %e%,ers +ho
have constant( ,een enco'raging and s'pporting %e thro'gh o't the vario's stages of
this st'd.
Vikash Goyal
200501109
SECTION - A
PDGM 2YFT
CLASS OF 2005
AMITY !SINESS SC"OOL# NOIDA
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AMITY !SINESS SC"OOL
SECTO$ % &&
NOIDA
200' % 2005
C E $ T I F I C A T E
*his is to certif that M() VI*AS" GOYAL has s'ccessf'(( co%p(eted
his dissertation project on +'P,s o- Th. I/0ia/ S1o2k Ma(k.1s % Pas1#
P(.s./1 3 P.(s4.21i5.6 +ith AMITY !SINESS SC"OOL# NOIDA
& s',%itted the project report on the sa%e in a satisfactor %anner 'nder
the g'idance of D() Sa/6ay S(i5as1a5a 3 P(o-) Vikas S(i5as1a5)
*his project is s',jected to partia( f'(fi((%ent of the re7'ire%ent for the
a+ard of t+o ear f'((!ti%e dip(o%a of Pos1 G(a07a1. Di4lo8a i/
7si/.ss Ma/a9.8./1)
P(o-) Vikas S(i5as1a5a
P(o-.sso(
AS# NOIDA
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Table of Contents
Objectives 005
Executive summary 006
About Bombay Stock Exchange (BSE) 011
About ationa! Stock Exchange 01"
An overvie# o$ the $actors 0%&
'arious segments o$ stock exchanges ( An Ana!ysis 0%)
*he +rimary market , -n a .ee+ s!umber 0&0
Short term 's !ong term 0&1
-nvestors / *ra.ers 0&0
1ro#th 's va!ue investing 0&6
2hy have e3uity +rices $a!!en in the +ast4 00&
5om+any risk6 a c!oser !ook 000
7arket risk 006
8isca! +o!icy an. the stock market 006
7onetary +o!icy an. the stock market 009
-m+act on stock market 00"
*he 7S5- in.ex 051
Stock auctions 05&
7anagement +erce+tion 05)
Aggregate resource mobi!i:ation 061
;es+onse to +ub!ic issues 06&
*he cor+orate governance mantra 0)%
<ub!ic issues 's +rivate +!acement 0)6
E3uity +ub!ic issues 's +rivate +!acement 0)9
5re.it rating 091
Other reasons 09%
Shou!. attem+ts be ma.e to reverse tren.s4 09&
-n.ustry(#ise resource mobi!i:ation 095
Ana!ysis ( ske#ness in turnover an. market ca+ita!i:ation 099
Stu.y o$ vo!ati!ity in our stock markets 0"1
=o# .oes -n.ia com+are #ith other markets 0"6
7anaging vo!ati!ity 0"6
8oreign institutiona! investors 0"9
8--s6 7oving the markets 0"9
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*ren.s in 8-- investments 0""
-n.ia6 an attractive .estination 100
Sustaining 8-- interest6 issues an. cha!!enges 10%
-n.ia 's emerging markets 10&
>e(mutua!i:ation an. cor+oration o$ our stock exchanges 105
-m+ortance o$ in.ex $utures ( Stu.y o$ other re!ate. $actors 109
<rimary ;esearch
Objectives 10"
7etho.o!ogy 10"
Ana!ysis o$ im+!icit cost o$ carry 110
5ost o$ carry ca!cu!ation 11&
Ana!ysis o$ o+en interest 115
-nter(tem+ora! com+arison o$ o+en interest 11)
Arbitrage o++ortunity 1%0
E$$ect o$ in.ex $utures on the cash market vo!ati!ity 1%%
2or!.#i.e ex+erience 1%&
-n.ian ex+erience 1%&
Survey resu!ts 1%0
A++en.ix6 survey 3uestionnaire 1%)
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OBJECTIVE
*he o,jective of the project is to st'd the vario's factors that affect
the %ove%ent of stock prices in the Indian Stock %arkets. $na(3ing
the vario's factors +o'(d he(p 's in 'nderstanding the stock %arkets
in a ,etter %anner and hence ens'ring the safet of o'r invest%ents
as +e(( as %axi%i3ing ret'rns on s'ch invest%ents.
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Executive Summary
*he sharp s+ings in g(o,a( %arkets recent( have rocked Indian %arkets (eaving
investors nervo's. *o p't %atters in context, stock %arkets sho'(d contin'e their ro(e
as a((ocator of capita( for %ost prod'ctive 'ses. ;etai( investors +hose %one is ,eing
invested sho'(d get a fair chance to create +ea(th proportionate to their risk taking
appetite. ;eg'(ators sho'(d ens're fair p(a, contro( sste%ic risks and pena(i3e fra'd.
*he process of (ong ter% +ea(th creation sho'(d not ,eco%e hostage to the avarice of
a fe+ short ter% spec'(ators. *he stock %arket is a ,aro%eter of the f't're +ea(th
creation capacit of the ind'stria( enterprise sste%. In +hatsoever %anner the
ind'stria( enterprise sste% and the stock %arkets are evo(ving, these things re%ain
the sa%e.
"iven that, +h do individ'a( stocks sho+ vo(ati(e price %ove%ents< $ stock price
%oves 'p or do+n depending on +hether for that da or for that period s'pp(
exceeds de%and or vice versa. It is this fragi(e ,a(ance in s'pp( and de%and +hich
+o'(d deter%ine the price %ove%ents for a stock and in aggregate ter%s the price
%ove%ent for a gro'p of stocks or for the stock %arket as a +ho(e.
Individ'a( stocks can ,e vo(ati(e if, there is extre%e( positive or negative infor%ation
for that partic'(ar stock +hich is avai(a,(e to traders. .r, prices %a s+ing if a gro'p
of traders co(('de, to create artificia( scarcit or de%and for a stock. =ina((, price
%ove%ents %a happen, if at a %acro (eve(, there is nationa( or internationa( ne+s
+hich has so%e i%pact on so%e stocks or the entire %arket.
*he c'rrent vo(ati(it is the o'tco%e of a(( these factors acting together, (ike )e+tons
1a+s. Stock prices %ove as a f'nction of a(( the a,ove %entioned factors. >hats ne+
no+ is ho+ the process of g(o,a( kno+(edge disse%ination has expanded and the
red'ced cost of stock %arket transactions for individ'a(s. *hanks to I*, individ'a(s
across the g(o,e have access to infor%ation a(%ost si%'(taneo's(. *echno(og has
a(so %ade transactions easier and cheaper. #ore infor%ation and ease of transactions
%ean that #r S're Shot Singh in ?a(andhar +ants to se(( or ,' depending on +hat
#r ?ohn &ro+n is doing in #anchester. *+o decades ago, Indians 'sed to sta 'p past
%idnight to hear or see +hat S'ni( "avaskar +as doing on the cricket fie(ds of 1ords.
)o+ the sta 'p to +atch +hat the )asda7 is doing. Infor%ation on factors affecting
price %ove%ents is avai(a,(e to %ore peop(e and the are a,(e to act 7'icker, (eading
to steep s+ings in prices.
>hi(e I* has accent'ated short ter% %ove%ents, its %edi'% ter% i%pact is sa('tar.
Infor%ation re%oves i%perfections and (ets peop(e a(ign invest%ents +ith risks.
0o(('sion ,eco%es diffic'(t, reg'(ation easier and sste%ic risks are red'ced. Despite
the t'r,'(ence (ong ter% investors have %ade good ret'rns in the past, as the +i(( in
f't're.
*he recent vo(ati(it serves to prick this ,',,(e of a fiction gaining c'rrenc recent(
in the Indian stock %arkets !! that e7'it stocks and %'t'a( f'nds are a +a to
overnight riches.
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1et 's ,e c(ear in o'r %inds that e7'it stocks and e7'it %'t'a( f'nds offer a +a of
(ong ter% financia( (ife cc(e p(anning. Peop(e +ho have invested in these over a (ong
period have o,tained exce((ent ret'rns. Peop(e +ho invest in stock %arkets ,ased on
ta,(oid advice and +ith the greed of overnight ret'rns are not investors ,'t
spec'(ators. *he can, and do get, ,'rnt. =or a(( the essas +e %a +rite and a(( that
%arket reg'(ators %ight tr to do, no one can protect a spec'(ator against hi%se(f.
>ith the integration of o'r stock %arkets +ith internationa( %arkets, the r'(es of the
ga%e have changed. )o one inf('ence can g'ide the short ter% %ove%ents in the
stock %arkets. $s investors, +e have to (earn to (ive +ith vo(ati(it.
.ne of the %ajor factors ca'sing todas vo(ati(it is the 'nani%it in investors
inc(ination to+ards ne+ econo% stocks and their sh'nning of o(d econo% stocks.
*his has (ed to a h'ge po(ari3ation in the %arkets. *odas %arkets are characteri3ed
, (arge invest%ent f(o+s into co%panies +ith e%erging ,'sinesses !! +hich tpica((
have (o+ f(oating stock !! (eading to +i(d
price s+ings.
-o(ati(it has gone 'p as active( %anaged f'nds ch'rn their portfo(ios %ore often.
*his gets exacer,ated , %o%ent'% investing , da traders and f'nd %anagers.
Soon, stocks are not ,o'ght on the ,asis of their f'nda%enta( va('e ,'t on the greater
foo( theor.
Anrea(istic investor expectations driven , the recent histor of the ,oo% in I* stocks
is a ca'se for concernB no+, the 7'a(it of the stock and f'nda%enta(s are ignored in a
%arket characterised , dai( assess%ent of profits and (osses. ;ecent price histor
c(o'ds the investors %inds so %'ch that the start treating that price as the rea( va('e
of the stock and dont take a (onger perspective of the co%pan.
*he ne+ econo% stocks are a different ,reed. *here is a (ot of the%e or concept
investing taking p(ace in these stocks no+. It is diffic'(t to 7'antif the f't're of the
,'sinesses and p't a va('e to those. *o disco'nt a(( the f't're cash f(o+s and p't a
va('e to the co%pan is passe and PE" ratios ,ased on the next co'p(e of ears
earnings is in. *he near ter% high gro+th rate in these ,'sinesses is overshado+ing
the pricing of risk and techno(ogica( o,so(escence for a partic'(ar co%pan. #arket
vo(ati(it is a sign that investors are 'ns're of ho+ to va('e these stocks. In the %inds
of investors, there is a ,att(e going on ,et+een this great ne+ paradig% and the
va('ations of the stocks. In s'ch a scenario, %ood s+ings ,et+een hope and fear
ca'se vo(ati(it.
*he vo(ati(it in ne+ econo% stocks ref(ects sste%ic changes taking p(ace in the
'nder(ing ,'sinesses. In the ,oardroo%s of co%panies, (ong gone are the %onths of
p(anning and de,ate on capita( a((ocation, %ergersCac7'isitions and joint vent'res. In
the Internet age, a three %onth de(a can ,e the difference ,et+een s'ccess and
fai('re. $(so, +e are no+ in an age +hen co%panies can think of ,eco%ing
%'(tinationa(s in a short span De.g. Eahoo, $%a3onF, +hen esta,(ished age o(d
co%panies see their fort'nes dip ver fast De.g. &ritannicaF and +hen co%panies can
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go ,oo% and then co%e t'%,(ing do+n in a co'p(e of ears De.g. )etscapeF. >hen
,'sinesses are +itnessing s'ch rapid stratospheric ,oo%s and ,'sts, it is nat'ra( to
expect their stocks to ,e vo(ati(e.
In ti%es of extre%e vo(ati(it, invest%ents in diversified e7'it f'nds offer a hedge
against stock specific risk.
*he reg'(ator sho'(d (eave the pricing of the stocks to %arkets and its p(a on fear and
greed, ,'t sho'(d co%e do+n heavi( on rigging ind'ced vo(ati(it. It sho'(d c(a%p
do+n on insider trading and se(ective infor%ation (eaks. Infor%ation disse%ination
+hen done ti%e( and 'nifor%( to a(( investors +o'(d ,ring in transparenc and
sho'(d he(p arrest vo(ati(it to so%e extent.
*he %argin re7'ire%ent in the ne+ econo% stocks sho'(d ,e fixed at a high (eve( as
investors +i(( have to (earn to (ive +ith high vo(ati(it in these stocks.
$(( said and done, short ter% vo(ati(it in the stock %arkets is the friend of (ong ter%
investor +ho 'nderstands va('e as it opens 'p for hi% opport'nities for ,oth entr and
exit at his price (eve(s.
-o(ati(it in stock %arkets is a g(o,a( pheno%enon. #ore and %ore peop(e are getting
('red , the pheno%ena(, a(,eit 'ns'staina,(e, ret'rns Despecia(( in the (ong r'nF,
+hich so%e stocks have seen in the recent past. *his is especia(( tr'e of tech stocks.
Even as I+rite this, %arkets +or(d over have t'%,(ed, +ith the dot!co% and tech
stock!p('nge ca'sing so%e panic a%ong investors.
*here are as %an as 5H %i((ion da traders in the AS. >hi(e no s'ch statistic is
avai(a,(e for India, % g'essti%ate is that this n'%,er sho'(d ,e 7'ite high given that
c(ose to IH to JH per cent of trades in the t+o %ain exchanges, &SE and )SE, are
carried for+ard or s7'ared off respective(. *his is a sign of the ti%es, that Kget rich
7'ick6 attit'de present( in existence a%ong the o'nger (ot in India.
*he extre%e vo(ati(it in the stock %arkets is certain( of concern. >hen the %arkets
are in a ,'((ish phase, investors ,(ind( enter, (ike %ice fo((o+ing the prover,ia( Pied
Piper. >hen the %arkets start rapid( going do+n, the sa%e investors exit in a h'rr.
#ore often than not, investors get their ti%ing tota(( +rong, ,oth on entr as +e(( as
on exit.
/o+ever caref'( one is, vo(ati(it cannot ,e e(i%inated tota((. In fact hea(th
corrections ,oth 'p+ard as +e(( as do+n+ard on a periodic ,asis are good for the
(ong!ter% deve(op%ent of an %arket. $t the sa%e ti%e, it is the vio(ent %ove%ents,
either 'p or do+n that are not good for either the %arket or the psche of the retai(
investor.
In the (ong r'n, the on( +a the vo(ati(it can ,e ,ro'ght do+n to so%e accepta,(e
(eve( is , effecting certain str'ct'ra( changes in the %arket. So%e of the% are as
fo((o+sB
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.ne, privatise pension and provident f'nds and a((o+ the% to ,egin +ith, invest a
s%a(( portion of their corp's Dsa five to 5H per centF in the stock %arket. In the AS,
9H52 P(ans +hich are akin to o'r provident f'nds, have ,een one of the %ajor so'rces
of reg'(ar s'pp( of f'nds to the stock %arkets. *he he(p to sta,i(ise %arkets.
*+o, privatise ins'rance as soon as possi,(e4 a((o+ ins'rance co%panies to invest a
(arger percentage of their corp's in the stock %arkets.
&oth the ins'rance co%panies as +e(( as the pension f'nds are (ong ter% p(aers and
+o'(d ,ring in a (ot %ore sta,i(it in the %arkets. >hi(e the spec'(ators +o'(d
contin'e to perfor% their ro(e and certain( assist in price discover, =IIs +i(( a(so
contin'e to ,e i%portant p(aers, given the sheer si3e of f'nds at their co%%and.
Despite the gro+ing si3e of the do%estic %'t'a( f'nds, neither those, nor =IIs can
%o,i(ise the kind of f'nds that can ,e %o,i(ised , (ong ter% p(aers (ike ins'rance
and pension f'nds.
*hree, a((o+ instit'tions, ,anks and %'t'a( f'nds to participate in ,ad(a financing.
=o'r, introd'ce as soon as possi,(e index ,ased f't'res4 after the initia( teething
period and once the index ,ased f't'res %arket sta,i(ises, consider doing a+a +ith
,ad(a.
.nce the index and f't'res %arket is sta,i(ised, serio's tho'ght sho'(d ,e given to
'nifor% sett(e%ent across the stock exchanges. .nce these refor%s take ho(d, f't'res
%arkets are sta,i(ised, then ro((ing sett(e%ent sho'(d ,e considered and phased in, for
%ore and %ore scrips.
In the i%%ediate f't're, tho'ght sho'(d ,e given to red'cing the eight per cent circ'it
fi(ter present( in operation on a scrip +ise ,asis.
.nce the index and f't'res %arkets tr'( deve(op, the circ'it fi(ter sho'(d ,e (ooked at
for the %arket as a +ho(e and not at a scrip (eve(.
Stock index represents a portfo(io of stocks and stock index f't'res is a standardi3ed
contract of ,'ing and se((ing of portfo(io of stocks represented , the stock index.
Stock indexes have ,een part of invest%ent c'(t'res for %ore than 5HH ears, ,'t
f't'res contract on the% did not ,egin 'nti( 5JIHs. *hese contracts contin'e to
deve(op as the %arkets enter the t+ent!first cent'r. )ear( three!do3en co'ntries
have deve(oped stock index derivatives prod'cts and the (argest econo%ies in the
+or(d have severa( derivatives, trading on different indexes avai(a,(e in their co'ntr.
>hi(e the rest of the +or(d progressed rapid( on the derivative front, Indian %arket
(agged ,ehind. Anti( recent( Indian e7'it %arket +as tota(( devoid of derivatives
tho'gh so%e varieties of the% have ,een in existence in the %one %arket. /o+ever,
the de,t %arket is s%a(( and inactive and does not provide a +ide range of invest%ent
choices to investors to ena,(e the% to design portfo(ios to %atch their risk!ret'rn
preferences.
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It +as in #a 5JJI that SE&I accepted the reco%%endations %ade , 1.0."'pta
co%%ittee on derivatives trading in India. S',se7'ent( SE&I appointed ?.;.-er%a
0o%%ittee to (ook into the operationa( aspects of derivatives %arkets
5
.
*he Sec'rities 1a+s D$%end%entF &i(( 5JJJ +as introd'ced to ,ring a,o't the %'ch!
needed changes. In Dece%,er 5JJJ, the ne+ fra%e+ork +as approved. Derivatives
+ere accorded the stat's of Lsec'rities and the ,an i%posed on trading in derivatives
, the 0entra( "overn%ent +as revoked.
1
Detailed information on L.C.Gupta & J.R.Verma committee is available at SEBIs !ebsite
"!!!.sebi.com#
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ABOUT BOMBAY STOCK EXCHANGE (BSE)
INTRODUCTION
*he Stock Exchange, #'%,ai +hich +as esta,(ished in 5IG: as :Th. Na1i5. Sha(.
a/0 S1o2k;(ok.(s Asso2ia1io/: Da vo('ntar non!profit %aking associationF, has
evo(ved over the ears into its present stat's as the pre%ier Stock Exchange in the
co'ntr. It %a ,e noted that the Stock Exchange is the o(dest one in $sia, even o(der
than the *oko Stock Exchange, +hich +as fo'nded in 5IGI.
*he Stock Exchange, #'%,ai D&SEF is genera(( referred to as the "ate+a to the
capita( %arket in India. It is a (nch!pin of the Indian 0apita( %arket. Its governing
,oard and ad%inistration are keen( a+are of the f't're needs of the exchange to
%aintain its (ead ro(e. $s Indian econo% is opening 'p, the Exchange has ,ro'ght its
operations at par +ith internationa( standards. It is poised to take advantage of
changes in Indian econo%ic dereg'(ation to expand the %arket and %ake the sec'rit
%arket, in India, %ore transparent and %ore (i7'id.
/o+ever, the o,jectives and the ro(e of the Stock Exchange, #'%,ai has re%ained
the sa%e as en'nciated , o'r fo'nding fathers and given to 's as a %andate in 5IIG
thro'gh the charter. *hese o,jectives areB
5. *o safeg'ard the interest of investing p',(ic having dea(ings on the Exchange
and the %e%,ers.
8. *o esta,(ish and pro%ote hono'ra,(e and j'st practices in sec'rities
transactions.
3. *o pro%ote, deve(op and %aintain a +e(( reg'(ated %arket for dea(ing in
sec'rities.
9. *o pro%ote ind'stria( deve(op%ents in the co'ntr thro'gh efficient reso'rce
%o,i(isation , +a of invest%ent in corporate sec'rities.
*he Exchange +hi(e providing an efficient %arket a(so 'pho(ds the interests of the
investors and ens'res redressa( of their grievances, +hether against the co%panies or
its o+n %e%,er!,rokers. It a(so strives to ed'cate and en(ighten the investors ,
%aking avai(a,(e necessar infor%ative inp'ts.
$ "overning &oard co%prising of J e(ected directors Done third of the% retire ever
ear , rotationF, an Exec'tive Director, three "overn%ent no%inees, a ;eserve &ank
of India no%inee and five p',(ic representatives, is the apex ,od +hich reg'(ates the
Exchange and decides its po(icies.
$ President, -ice!President and an /onarar *reas'rer are ann'a(( e(ected fro%
a%ong the e(ected directors , the "overning &oard fo((o+ing the e(ection of
directors.
*he Exec'tive Director as the 0hief Exec'tive .fficer is responsi,(e for the da!to!
da ad%inistration of the Exchange.
*he Exchange has o,tained per%ission fro% Sec'rities and Exchange &oard of India
DSE&IF for expansion of its &SE!.n!1ine!*rading D&.1*F net+ork to (ocations
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o'tside #'%,ai. In ter%s of the per%ission granted , SE&I, the %e%,ers of the
Exchange are free to insta(( their trading ter%ina(s to cities +here there are no Stock
Exchanges. /o+ever, at centres +here the other Exchanges are (ocated, the Exchange
is re7'ired to sign a #e%orand'% of Anderstanding +ith these Exchanges per%itting
it to insta(( the &.1* ter%ina(s in their j'risdictiona( areas.
*he expansion of &.1* net+ork +as ina'g'rated , the then =inance #inister,
"overn%ent of India, Shri P. 0hida%,ara% on $'g'st 3H, 5JJG. *he Exchange has
signed #e%orand'% of Anderstanding +ith e(even Stock Exchanges, vi3., 0a(c'tta,
P'ne, $h%eda,ad, Sa'rashtra!2'tch D;ajkotF, #adha Pradesh, -adodara,
&h',anesh+ar and #agadh Di.e., PatnaF, ?aip'r, 0oi%,atore & 0hennai D#adrasF to
provide &.1* connections to the %e%,ers of these Exchanges after o,taining
necessar c(earance fro% SE&I. *he &.1* net+ork has ,een expanded to centres
o'tside #'%,ai and covers 88G centres having @G8 -!S$*s D-er S%a(( $pert're
*er%ina(sF and J9J *>Ss D*rader >ork StationsF as on $'g'st 35, 5JJJ. .f these,
:J: -!S$*s and IHG *>Ss respective( are insta((ed o'tside #'%,ai.
>ith the expansion of &.1* o'tside #'%,ai, the average dai( t'rnover at the
Exchange has increased fro% ;s. 5H@9 crores in $'g'st 5JJG to ;s. 59H9 crores in
$pri( 5JJI and f'rther to ;s. 88G3 crores in $'g'st 5JJJ.
*he average dai( t'rnover at the Exchange has increased fro% ;s.I:5 crores in 5JJG!
JI to ;s. 58I9 crores in 5JJI!JJ and f'rther to ;s. 88G3 in 5JJJ!8HHH D$pri(
$'g'st 5JJJF.
1IS*I)" .= SE0A;I*IES
1isting %eans ad%ission of the sec'rities to dea(ings on a recogni3ed stock exchange.
*he sec'rities %a ,e of an p',(ic (i%ited co%pan, 0entra( or State "overn%ent,
7'asi govern%enta( and other financia( instit'tionsCcorporations, %'nicipa(ities, etc.
*he o,jectives of (isting are %ain( toB
provide (i7'idit to sec'rities4
%o,i(i3e savings for econo%ic deve(op%ent4
protect interest of investors , ens'ring f'(( disc(os'res.
*he Exchange has a separate 1isting Depart%ent to grant approva( for (isting of
sec'rities of co%panies in accordance +ith the provisions of the Sec'rities 0ontracts
D;eg'(ationF $ct, 5J:@, Sec'rities 0ontracts D;eg'(ationF ;'(es, 5J:G, 0o%panies
$ct 5J:@, "'ide(ines iss'ed , SE&I and ;'(es, &e!(a+s and ;eg'(ations of the
Exchange.
$ co%pan intending to have its sec'rities (isted on the Exchange has to co%p( +ith
the (isting re7'ire%ents prescri,ed , the Exchange, +hich are as 'nderB
<I= N.> Co84a/i.s
a. Mi/i878 Ca4i1al? )e+ co%panies can ,e (isted on the Exchange,
if their Iss'ed & S',scri,ed E7'it 0apita( after the p',(ic iss'e, is
;s.5H crores and a,ove.
! 58 !
___________________________________________________________________________________
,. Mi/i878 P7;li2 O--.(? $s per ;'(e 5JD8F D,F of the Sec'rities
0ontracts D;eg'(ationF ;'(es, 5J:G, sec'rities of a co%pan can ,e
(isted on a Stock Exchange on( +hen at (east 8:M of each c(ass or
kind of sec'rities is offered to the p',(ic for s',scription. =or this
p'rpose, the ter% Noffered to the p',(icN %eans on( the portion
offered to the p',(ic and does not inc('de reservations of sec'rities
on fir% or co%petitive ,asis.
SE&I %a, ho+ever, re(ax this condition on the ,asis of reco%%endations
of stock exchangeDsF, on( in respect of a "overn%ent co%pan defined
'nder Section @5G of the 0o%panies $ct, 5J:@.
<II= Co84a/i.s lis1.0 o/ o1h.( s1o2k .@2ha/9.s
*he co%panies (isted on other Stock Exchanges and seeking (isting on this
Exchange are re7'ired to f'(fi(( the fo((o+ing criteriaB
#ini%'% Iss'ed E7'it 0apita( of ;s.3 crores to ;s.5H crores4
Profit track record for at (east three ears4
#ini%'% #arket 0apita(i3ation of ;s.8H 0rores, ,ased on
average price of (ast six %onths4
*rading for a %ini%'% :HM of the tota( trading das d'ring the
sa%e six %onths on an stock exchange4
#ini%'% average vo('%e traded per da d'ring the (ast three
co%p(ete %onths sho'(d ,e :HH shares and %ini%'% : trades
per da4
8:M of the iss'ed capita( sho'(d ,e +ith p',(ic Dinc('ding ,od
corporateF and %ini%'% 5: shareho(ders per ;s. 5 (akh of
capita( in the p',(ic categor.
<III= Co84a/i.s 0.-lis1.0 ;y 1his E@2ha/9. s..ki/9 (.-lis1i/9 o/ 1his E@2ha/9.
*he co%panies de(!isted , this Exchange and seeking re!(isting are re7'ired to
have a %ini%'% Iss'ed & S',scri,ed E7'it 0apita( of ;s.5H crores
Co84lia/2. >i1h Lis1i/9 A9(..8./1
*he co%panies desiro's of getting their sec'rities (isted are re7'ired to enter into an
agree%ent +ith the Exchange ca((ed the 1isting $gree%ent and the are re7'ired to
%ake certain disc(os'res and perfor% certain acts. $s s'ch, the agree%ent is of great
i%portance and is exec'ted 'nder the co%%on sea( of a co%pan. Ander the 1isting
$gree%ent, a co%pan 'ndertakes, a%ongst other things, to provide faci(ities for
pro%pt transfer, registration, s',!division and conso(idation of sec'rities4 to give
proper notice of c(os're of transfer ,ooks and record dates, to for+ard copies of
'na,ridged $nn'a( ;eports and &a(ance Sheets to the shareho(ders, to fi(e
Distri,'tion Sched'(e +ith the Exchange ann'a((4 to f'rnish financia( res'(ts on a
7'arter( ,asis4 inti%ate pro%pt( to the Exchange the happenings +hich are (ike( to
%ateria(( affect the financia( perfor%ance of the 0o%pan and its stock prices4 etc.
! 53 !
___________________________________________________________________________________
*he 1isting Depart%ent of the Exchange %onitors the co%p(iance of the co%panies
+ith the provisions of the 1isting $gree%ent, especia(( +ith regard to ti%e(
pa%ent of ann'a( (isting fees, s',%ission of 7'arter( res'(ts, re7'ire%ent of
%ini%'% n'%,er of shareho(ders, etc. and takes pena( action against the defa'(ting
co%panies.
:A: G(o74
*he Exchange has introd'ced a ne+ categor ca((ed NO "ro'pN fro% ?'( 5JJJ for
co%panies +ho have not co%p(ied +ith and are in ,reach of provisions of the 1isting
$gree%ent. *he n'%,er of co%panies p(aced 'nder this gro'p as of $'g'st 35, 5JJJ
are 8J3.
O/. Bi/0o> Cl.a(a/2.
Since $pri( 5JJG, the Exchange has introd'ced the concept of N.ne >indo+
0(earanceN for (isting of p',(ic iss'e of sec'rities of co%panies, , a((ocating the
co%panies p',(ic iss'es a(pha,etica(( a%ongst the Exchange officia(s. $ co%pan is
served , one officia( of the 1isting Depart%ent d'ring the entire process of (isting of
its sec'rities, co%%encing fro% approva( of its #e%orand'% and $rtic(es of
$ssociation 'pto granting of trading per%ission for its sec'rities and re(ease of 5M
sec'rit deposit.
*he n'%,er of co%panies (isted at the Exchange as on $'g'st 35, 5JJJ +as :I:8.
*his is the highest n'%,er a%ong the Stock Exchanges in the co'ntr.
*;$DI)"
*he Exchange has s+itched over fro% the open o'tcr trading sste% to a f'((
a'to%ated co%p'teri3ed %ode of trading kno+n as &.1* D&SE .n 1ine *radingF
Sste%. *his sste%, +hich is ,oth order and 7'ote driven, +as co%%issioned on
#arch 59, 5JJ:. It faci(itates %ore efficient processing, a'to%atic order %atching and
faster exec'tion of trades. $,ove a((, the sste% is %ore transparent. *he %e%,ers
no+ enter ordersC7'otes on their *rader >ork Stations D*>SsF in their offices instead
of asse%,(ing in the trading ring.
*he scrips traded on the Exchange have ,een c(assified into L$, L&
5
, L&
8
, L0 = and
LO gro'p. *he n'%,er of scrips (isted on the Exchange 'nder L$, L&
5
and L&
8
gro'ps +hich represent the e7'it seg%ents as on $'g'st 5JJJ +as 59J, 555@ and
9G9H respective(. *he L= gro'p represents the de,t %arket Dfixed inco%e sec'ritiesF
seg%ent +herein @:H sec'rities +ere
(isted as at the end of $'g'st 5JJJ. *he PO gro'p co%prises of 8J3 scrips as of
$'g'st 5JJJ. *he L0 gro'p covers the odd (ot sec'rities in L$, L&5 & L&8 gro'ps
and ;ights ren'nciations.
*he Stock Exchange, #'%,ai, is the on( Stock Exchange in the co'ntr to provide a
faci(it of on!(ine trading in odd (ot sec'rities and ;ights ren'nciations. *his faci(it
of trading in odd (ots of sec'rities and ;ights ren'nciations not on( offers an exit
ro'te to investors to dispose of their odd (ot of sec'rities ,'t a(so provides the% an
! 59 !
___________________________________________________________________________________
opport'nit to conso(idate their sec'rities into %arket (ots. *rading in this seg%ent
covers a(( the scrips (isted in the e7'it seg%ent.
*he trading cc(e for a(( these gro'ps of sec'rities is +eek(.
*he trading cc(e for L$, &
5
, &
8
and L0 gro'p sec'rities representing the phsica(
seg%ent is fro% #onda to =rida and that for L= gro'p sec'rities is fro% *h'rsda
to >ednesda. *he transactions in L$ gro'p scrips are a((o+ed to ,e carried for+ard
fro% one sett(e%ent to another sett(e%ent s',ject to a %axi%'% of G: das fro% the
date of origina( transaction. *he Stock Exchange, #'%,ai is the first Exchange in the
co'ntr to provide the faci(it of carr!for+ard of o'tstanding positions in L$ gro'p
scrips. *he trading session for carr for+ard of transactions fro% one sett(e%ent to
another is cond'cted on Sat'rdas, i.e., at the end of ever trading cc(e in the
phsica( seg%ent.
*rading on the &.1* sste% is cond'cted fro% #onda to =rida ,et+een 5HBHH
a.%. and 3B3H p.%. +hi(e the carr!for+ard session for L$ gro'p sec'rities is
cond'cted on Sat'rdas ,et+een 5HBHH a.%. and 58B3H p.%.
*he Infor%ation Sste%s Depart%ent of the Exchange generates the fo((o+ing
state%ents +hich can ,e do+n(oaded , the %e%,ers in their ,ack offices on a dai(
,asis B
a. state%ents giving detai(s of the dai( transactions entered into , the
%e%,ers.
,. state%ents giving detai(s of %argins paa,(e , the %e%,ers in respect
of the trades exec'ted , the%.
*he %e%,ers are a((o+ed to enter into transactions on ,eha(f of their
Instit'tiona( c(ients, vi3., Sched'(ed 0o%%ercia( &anks, Indian =inancia(
Instit'tions DI=IsF & =oreign Instit'tiona( Investors D=IIsF and #'t'a( ='nds
registered +ith SE&I. *he sett(e%ent of the trades D%one and sec'ritiesF done
on ,eha(f of the Instit'tions %a ,e either thro'gh the %e%,er hi%se(f or
thro'gh a SE&I registered 0'stodian appointed , an Instit'tion. In case the
de(iverCpa%ent is to ,e given or taken , a 0'stodian on ,eha(f of an
Instit'tion, the for%er has to confir% the trade done , a %e%,er. =or this
p'rpose, the 0'stodians have ,een ad%itted as %e%,ers of the 0(earing
/o'se. In case an instit'tiona( transaction is not confir%ed , the 0'stodian,
the (ia,i(it for pa!in of f'nds or sec'rities devo(ves on the concerned
%e%,er.
SE**1E#E)* $)D 01E$;I)"
Pa!in and Pa!o't for N$, &
5,
&
8
& L0 gro'p of sec'rities
*he trades done , the %e%,ers d'ring the +eek( trading period fro% #onda to
=rida are sett(ed , pa%ent of %one and de(iver of sec'rities in the fo((o+ing
+eek. $(( de(iveries of sec'rities are re7'ired to ,e ro'ted thro'gh the 0(earing
/o'se, except for certain off!%arket transactions +hich, a(tho'gh are re7'ired to ,e
reported to the Exchange, %a ,e sett(ed direct( ,et+een the %e%,ers concerned.
! 5: !
___________________________________________________________________________________
*he Infor%ation Sste%s Depart%ent of the Exchange nets off a(( de(ivera,(e trades
Dp'rchases and sa(es in each scripF done , a %e%,er d'ring a sett(e%ent and
generates de(iverCreceive orders and %one state%ents +hich are do+n(oaded , the
%e%,ers in their ,ack offices.
*he de(iver orders provide infor%ation (ike scrip, 7'antit and the na%e of the
receiving %e%,er to +ho% the sec'rities are to ,e de(ivered thro'gh the 0(earing
/o'se. *he #one State%ent provides detai(s of pa%entsCreceipts for the sett(e%ent.
Ear(ier the %e%,ers +ere re7'ired to s',%it a(ong +ith the ,a(ance sheet D=or% 35!
$F +hich inc('des the detai(s of #one State%ent, %argins paa,(eCreceiva,(e, and
other creditsCde,its arising o't of a'ction for shortages, o,jections, ,ad de(iver, etc.,
a che7'e Cdraft depending on +hether the sett(e%ent (ia,i(it is a paa,(e or
receiva,(e position on *h'rsda, i.e., pa!in da. /o+ever, +ith effect fro%
Dece%,er 88, 5JJG Di.e., Sett.)o.3JCJG!JIF, the ,ank acco'nts of %e%,ers
%aintained +ith &ank of India, Stock Exchange &ranch, the on( c(earing ,ank at that
ti%e, +ere direct( de,ited thro'gh co%p'terised posting on the pa!in da for their
sett(e%ent d'es. *he (ist of c(earing ,anks has since ,een expanded to inc('de /D=0
&ank 1td., "(o,a( *r'st &ank 1td. and Standard 0hartered &ank. *h's, the %e%,ers
are no (onger re7'ired to s',%it phsica( =or% 35!$ and che7'eCdraft as +as the
ear(ier practice.
*he sec'rities, as per de(iver orders iss'ed , the Exchange, are to ,e de(ivered in
the 0(earing /o'se on the da designated for pa!in ,i.e., on >ednesda and
*h'rsda as per prescri,ed ti%e s(ots 'pto 5BHH p.%. )o (ate de(iver of shares is
per%itted. #e%,ers have to de(iver the sec'rities in specia( c(osed po'ches iss'ed ,
the Exchange a(ong +ith the re(evant detai(s Ddistinctive n'%,ers, scrip code,
7'antit, receiving %e%,erF on a f(opp. *he data s',%itted , the %e%,ers on
f(oppies is %atched against the %aster fi(e data on the 0(earing /o'se co%p'ter
sste%s. If there are no discrepancies, then a scro(( n'%,er is generated and a scro((
s(ip is iss'ed. *he %e%,ers then s',%it the sec'rities at the receiving co'nter. *he
0(earing /o'se personne( arrange and ta(( the sec'rities received against the
receiving %e%,er+ise report generated on the Pa!in da. .nce this reconci(iation is
co%p(ete, the ,ank acco'nts of %e%,ers having pa!in positions are de,ited on
*h'rsda. *his proced're is ca((ed Pa!in. *he ;eceiving #e%,ers co((ect sec'rities
on =rida and the acco'nts of the %e%,ers having pa!o't are credited on Sat'rda.
*his is referred to as Pa!o't.
$'ction is cond'cted for those sec'rities +hich %e%,ers fai( to de(iverCshort de(iver
d'ring the Pa!in. In case the sec'rities are not received in an a'ction, the positions
are c(osed o't as per the c(ose!o't rate fixed , the Exchange in accordance +ith the
prescri,ed r'(es. *he c(ose o't rate is ca(c'(ated as the highest rate of the scrip
recorded in the sett(e%ent in +hich the trade +as exec'ted or in the s',se7'ent
sett(e%ent 'pto the da prior to the da of a'ction or 8HM a,ove the c(osing price on
the da prior to the da of a'ction, +hichever is higher.
! 5@ !
___________________________________________________________________________________
*he sett(e%ent sched'(es for vario's gro'ps of sec'rities have ,een strict( adhered to
, the Exchange and there has ,een no case of c(',,ing of sett(e%ents or
postpone%ent of pa!in and pa!o't d'ring the (ast over three ears.
*he Exchange is a(so %aintaining a data,ase of fakeCforgedCsto(en sec'rities +ith the
0(earing /o'se so that distinctive n'%,ers s',%itted , %e%,ers on de(iver %a ,e
%atched against the data,ase to +eed o't ,ad paper fro% circ'(ation.
I)*;.DA0*I.) .= */E DE#$* SE"#E)*
*he Exchange has co%%enced trading in the De%ateria(ised DDe%atF seg%ent +ith
effect fro% Dece%,er 8J, 5JJG +here there is no phsica( de(iver of sec'rities as in
the phsica( seg%ent. *rading in the De%at seg%ent is on a ;o((ing Sett(e%ent ,asis
D*Q:F +here * stands for *rade Da. *he pa!in and pa!o't for the transactions in
this seg%ent are ,oth cond'cted on a sing(e da. $'ction session for shortages in
de%at seg%ent is cond'cted on &.1* on the da after pa!inCpa!o't. *he pa!in C
pa!o't D%one partF takes p(ace thro'gh co%p'terised posting of de,its and credits
in the %e%,ers ,ank acco'nts as in the case of phsica( seg%ent.
>ith effect fro% $pri( @, 5JJI, de(iveries in the de%at %ode are per%itted in the
phsica( seg%ent. *his is so ,eca'se se((ers are a((o+ed to give de(iver in de%at or
e(ectronic for%. $s of toda, this is app(ica,(e to 8GI scrips. $s s'ch, a ,reak!'p
session is sched'(ed ever #onda +here %e%,ers %a %ark the %ode of de(iver,
i.e., phsica( or de%at. *he, ho+ever, have an option to change the %ode of de(iver
ti(( the pa!in da, i.e., *h'rsda.
SE&I has directed the stock exchanges in ?an'ar 5JJI that a(( the trades done ,
instit'tiona( investors, vi3., do%estic financia( instit'tions, ,anks, %'t'a( f'nds, =IIs
and overseas corporate ,odies in certain se(ect scrips sho'(d ,e co%p'(sori( sett(ed
in de%ateria(ised for%. *his (ist has ,een expanded , SE&I fro% ti%e to ti%e and as
on Dece%,er 35, 5JJI trades in 559 scrips for instit'tiona( investors are re7'ired to
,e co%p'(sori( sett(ed in de%ateria(ised for%. 8J %ore scrips have ,een specified for
co%p'(sor de%at trading for instit'tiona( investors +ith effect fro% $pri( 5:, 5JJJ
%aking the tota( scrips in de%at for% for instit'tiona( investors to 593.
='rther, 'nder directions fro% SE&I, trades in 58 and 5J scrips are to ,e co%p'(sori(
sett(ed , a(( investors in de%ateria(ised for% +ith effect fro% ?an'ar 9, 5JJJ and
=e,r'ar 5:, 5JJJ respective(. ='rther, trades in another 33 scrips and 9H scrips are
to ,e co%p'(sori( sett(ed in de%at for% , a(( investors +ith effect fro% $pri( : &
#a 35, 5JJJ respective(. *h's, as of no+, trades in 5H9 scrips are to ,e
co%p'(sori( sett(ed , a(( investors in de%ateria(ised for%.
! 5G !
___________________________________________________________________________________
ABOUT NATIONAL STOCK EXCHANGE (NSE)
>hat %akes )SE the dna%ic and enterprising entit that is< *he ans+ers (ie +ithin
the porta(s of this section. $,o't the %anage%ent, the financia(s, the ne+ age
techno(og, the %e%,ers, the trading sste% and %'ch %ore. $(( the facts that +i((
%ake o' rea(ise that )SE is %ore than a %ere %arket faci(itator. ItPs that force +hich
is g'iding the ind'str of the region, to+ards ne+ hori3ons and greater opport'nities.
D.5.lo48./1s o/ 1h. E@2ha/9.
)SE and )S001 +ent (ive +ith the inag'ra( session for
$'to%atic 1ending and &orro+ing #echanis% D$1&#F for
(ending and ,orro+ing of sec'rities on =e,r'ar 5H,5JJJ. *his
is the first ti%e an Indian agenc approved , SE&I +i(( ,e
cond'cting the sec'rities (ending & ,orro+ing transactions
,ased on internationa( practices.
M.8;.(shi4
IJH trading %e%,ers on the 0apita( #arket seg%ent, of +hich
aro'nd I@M acco'nt for corporates and the re%aining are
individ'a(s and fir%s.
.'t of these IJH trading %e%,ers, IJ trading %e%,ers are a(so
%e%,ers of >ho(esa(e De,t #arket seg%ent, a(( of +hich are
corporates and there are G trading %e%,ers excc('sive( on
>ho(esa(e De,t #arket Seg%ent.
G.o9(a4hi2 Dis1(i;71io/
.ver @I3J trading ter%ina(s given to the %e%,ers as on
)ove%,er 8:, 5JJJ
.ver 8398 -S$*Ps across the co'ntr +ith a 89 ho'r )et+ork
%onitoring sste% in over 8J5 cities as of )ove%,er H5, 5JJJ.
N78;.( o- Co84a/i.s
.n the 0apita( #arket seg%ent, E7'it Shares of @I:
co%panies are (isted and :G8 co%panies are per%itted to trade
as of .cto,er 35, 5JJJ.
! 5I !
___________________________________________________________________________________
.n the >ho(esa(e De,t #arket seg%ent, GJG sec'rities are
(isted and :5G sec'rities are per%itted to trade as of .cto,er 35,
5JJJ. .f the GJG sec'rities (isted, 3@J are "overn%ent
Sec'ritiesC*!&i((s and the ,a(ance acco'nt for other sec'rities.
Ca4i1al Ma(k.1 O4.(a1io/s
)SE is +orking to increase the capacit of the trading sste%
fro% the present 9,HH,HHH trades per da to %ore than
5H,HH,HHH trades per da.
*he average dai( n'%,ers of trades have gone 'p fro% over
IJ3 trades in )ove%,er!J9 to over 9,3@,3IG trades in .cto,er
PJJ. .n .cto,er 53,PJJ the n'%,er of trades reached a record
high of :,@9,@:3 +hich %akes )SE one of the (argest stock
exchanges in the +or(d
$verage dai( traded va('e has increased fro% ;s.G crores in
)ove%,er!J9 to %ore than ;s. 393J crores in .cto,er PJJ +ith
a high of ;s.9I:5 crores recorded on .cto,er 53, PJJ
)'%,er of shares traded has increased fro% G@.5H (akhs in
)ove%,er!J9 to 8@,5HH.93 (akhs in .cto,er PJJ.
)et traded va('e has increased fro% ;s.58: crores in
)ove%,erPJ9 to G8,85@ crores in .cto,er PJJ.
*he %arket capita(isation of co%panies has increased fro% ;s.
8,J8,@3G crores in )ove%,er PJ9 to ;s. @,GH,H@8 crores in
.cto,er PJJ.
De(ivered va('e Dsett(e%ent +iseF has increased fro% ;s.@H
crores in )ove%,er !J9 to ;s.J,333 crores in .cto,er PJJ.
)'%,er of shares traded Ddepositor seg%entF has increased
fro% 8HH shares in Dece%,er!J@ to 55H.59 (akh shares in
.cto,er PJJ.
)et traded va('e Ddepositor seg%entF has increased fro%
;s.H.93 (akhs in Dece%,er!J@ to ;s.3J,HHJ.@9 (akhs in .cto,er
PJJ
*he tota( t'rnover in the 3 Da %arket seg%ent d'ring .cto,er
PJJ +as ;s. 55GH.85 crores.
*ota( t'rnover in the shares traded 'nder co%p'(sor de%at
shares d'ring .cto,er PJJ +as ;s. :8,H:: crores
Cl.a(i/9 3 S.11l.8./1
0o%p(eted 8@8 sett(e%ents s'ccessf'(( +itho't an de(a or
postpone%ent as on Dece%,er H8, 5JJJ.
-a('e of shares hand(ed , the 0(earing ho'se per +eek has
increased fro% ;s. 3H crores in )ove%,er 5JJ9 to over
;s.8938 crores per +eek in Septe%,er 5JJJ.
Inter!;egion 0(earing B )S001 has ;egiona( 0(earing 0entres
at De(hi, 0a(c'tta, 0hennai and a 0entra( 0(earing 0entre at
! 5J !
___________________________________________________________________________________
#'%,ai. #e%,ers have the option of de(iveringCreceiving the
sec'rities at a c(earing centre chosen , the%.
Bhol.sal. D.;1 Ma(k.1 O4.(a1io/s
*he >D# seg%ent co%%enced operations on ?'ne 3H, 5JJ9
+ith 889 sec'rities carring an o'tstanding de,t va('e of ;s.
5,3:,HHH crores. *his has no+ increased to 53H@ sec'rities +ith
a %arket capita(isation of ;s. 9,:I,:95.3: crores as on
Septe%,er 3H, 5JJJ.
*he highest dai( traded va('e of ;s. 8939.HH crores recorded
on $'g'st H@, 5JJJ.
*he net %onth( traded va('e in the >D# seg%ent increased
fro% ;s. 5HJ@.8: crores in ?'( !J9 to ;s. 8@,J:G.HJ crores in
$'g'stP JJ
! 8H !
___________________________________________________________________________________
!t!"e #lans of NSE
E@4a/sio/
*he 0apita( #arket seg%ent of the Exchange ,eca%e operationa( in )ove%,er 5JJ9.
Initia((, the entire t'rnover acco'nted fro% #'%,ai. $fter sta,i(ising operations in
#'%,ai, )SE expanded its operations to other cities. *he t'rnover fro% #'%,ai
acco'nts for 93M, De(hi acco'nts for 5JM, 0a(c'tta acco'nts for 55M and 8IM fro%
other centres. $s of =e,PJI, )SE ter%ina(s are present in 5G: to+ns and cities in 5@
states. It is expected that , the end of 5JJI )SE ter%ina(s +i(( ,e avai(a,(e in over
8HH cities. )SE +i(( add %ore ter%ina(s in cities +here it a(read has presence to
provide ,etter services to investors. *he Exchange proposes to expand its -S$*
net+ork to 8:HH and expand its reach. ='rther, )SE is +orking to increase the
capacit of the trading sste% fro% the present 9,HH,HHH trades per da to %ore than
5H,HH,HHH trades per da.
*he sate((ite h', and co%p'ter e7'ip%ent for the disaster recover site at P'ne has
,een proc'red, insta((ed and tested for proper operations. $ detai(ed &'siness
0ontin'it P(an D&0PF has ,een +orked o't to p't the disaster recover site for (ive
operations. *he ,ack!'p site of the Exchange at P'ne +i(( ,e %ade operationa( soon.
*his faci(it is in (ine +ith internationa( practices and the )SE +i(( ,e a,(e to
co%%ence nor%a( ,'siness operations +ithin a ver short ti%e fra%e sho'(d a
disaster occ'r.
In keeping +ith the fast changing scenario in the 0apita( #arkets, )SE has cha(ked
o't p(ans for the vario's ,'siness seg%ents, so%e of +hich are.
! 85 !
___________________________________________________________________________________
An o$e"$%e& of t'e fa(to"s
>e a(( +ant to %ake %one in the stock %arket. >e do so , se((ing stock at a price
higher than +hat +e ,' it for. It %akes sense, then, that to %ake %one in the stock
%arket, +e need to 'nderstand +hat ca'ses prices to change. & having an
appreciation for the things that %otivate stock price change, +e can ,e ,etter at
anticipating the direction and ve(ocit of price %oves.
>hat is Price<
*o ,egin, +e %'st first 'nderstand +hat price is. =inancia( theorists define stock price
as the present va('e of a(( f't're earnings expectations for the co%pan, divided , its
n'%,er of shares o'tstanding. >hat this %eans is that the earning capacit of the
co%pan is +hat defines price. .ften, co%panies can get significant va('e o't of a
re(ative( s%a(( invest%ent in assets ,eca'se the a,i(it for those assets to %ake
%one is significant.
Even co%panies that (ose %one toda can have a high share price ,eca'se price is
,ased on the f't're earnings of the co%pan. )o enterprise is in ,'siness to (ose
%one, so the expectation is that ever ,'siness +i(( %ake %one so%e da. So (ong
as there is the potentia( for f't're reven'e strea%s to shareho(ders, there +i(( ,e a
price that so%eone is +i((ing to pa for the shares.
*he earnings that a co%pan co'(d %ake in the f't're, the gro+th that the co%pan
co'(d rea(i3e and the ti%e to the rea(i3ation of those goa(s are a(( factors +hich affect
the esti%ate that the %arket %akes on the earnings potentia( of the co%pan.
*he #arket #echanis%
*he va('e of p',(ic( traded shares is (i7'idit. P',(ic( traded co%panies are +orth
%ore than private ones si%p( ,eca'se there is greater access to ,'ers and se((ers,
and %arket efficienc can ,etter deter%ine share price. *he stock %arket provides
va('e to an co%pan that chooses to (ist its shares ,eca'se the co%pan gains
(i7'idit.
In a theoretica( sense, an ti%e so%eone ,'s the shares of a co%pan in the %arket,
the are effective( stating that the ,e(ieve the shares of the co%pan are
'nderva('ed. *he fact that the are ,'ing i%p(ies a ,e(ief and expectation that the
shares +i(( increase in va('e in the f't're. $t the sa%e ti%e, the person +ho is se((ing
the shares is expressing the opposite ,e(ief. & se((ing, the i%p( that the stock is
overva('ed and the expectation that the stock +i(( go (o+er in the f't're. In this +a,
the stock %arket is for'% for de,ate on +hat the va('e of the co%pan and its shares
is.
>hat $ffects Price<
! 88 !
___________________________________________________________________________________
*here are fo'r %ain factors that ca'se %ove%ents in stock priceB
N.> i/-o(8a1io/
!/2.(1ai/1y
Psy2holo9i2al Fa21o(s
F.a(
G(..0
S744ly a/0 D.8a/0
I/-o(8a1io/
If o' read a financia( text,ook, o' %a find on( this factor %entioned as the
deter%inant of share price. Infor%ation is ke, as it gives the %arket a reason to va('e
a stock at a partic'(ar price (eve(. *he %arket +i(( price a stock ,ased on a((
infor%ation that the p',(ic is a+are of. $s ne+ infor%ation co%es into the p',(ic
rea(%, the %arket +i(( adj'st prices 'p or do+n ,ased on ho+ the %arket perceives
the infor%ation +i(( effect the f't're earnings capacit of the co%pan.
It is i%portant to 'nderstand ho+ infor%ation f(o+s fro% the co%pan to the p',(ic.
*he p',(ic is s'pposed to (earn a,o't significant ne+ infor%ation thro'gh the
iss'ance of ne+s. *he rea(it is that the infor%ation 's'a(( %akes it o't ,efore the
ne+s is re(eased. ;'%or p(as a ,ig part in the f(o+ of infor%ation, partic'(ar( toda
+hen techno(og a((o+s for the rapid and +ide disse%ination of infor%ation. *hose
c(ose to a co%pan often have access to privi(eged infor%ation that the act 'pon ,
,'ing and se((ing in the %arket.
*he ra%ification of this is that investors +ho +ait for ne+s to %ake invest%ent
decisions often get into stocks (ong after the infor%ation contained in the ne+s has
a(read ,een priced in. N&' on r'%or, and se(( on ne+sN, is a saing that has gro+n
pop'(ar ,eca'se it is often the case that stocks %ove 'p in anticipation of positive
ne+s and then se(( off +hen expectations have ,een ans+ered , the ne+s re(ease.
*echnica( ana(sis is ver 'sef'( ,eca'se it provides too(s that a((o+ investors to
identif the signs that ne+ infor%ation is ,eing priced into a stock ,efore ne+s is
re(eased. Stocks that trade a,nor%a(( often do so ,eca'se of significant ne+
infor%ation, ,oth positive and negative. In this +a, technica( ana(sis he(ps to revea(
f'nda%enta( changes in the co%pan ,efore the ,roader %arket is a+are of it.
!/2.(1ai/1y
>hat a co%pan +i(( %ake in the f't're is far fro% certain. =or this reason, +e sho'(d
expect stocks to ,o'nce aro'nd a (itt(e ,it ,eca'se of the nervo'sness of the %arket
a,o't the f't're of the co%pan. *he 'ncertain f't're of the co%pan +i(( ,ring so%e
vo(ati(it in share prices even d'ring a period in +hich there is no ne+ infor%ation.
0o%panies that have esta,(ished a perfor%ance record +i(( tend to sho+ (ess
vo(ati(it as deter%ined , 'ncertaint. "enera( #otors, +hich is a +e((!esta,(ished
co%pan +ith %an ears of reven'es, +i(( sho+ (ess vo(ati(it than an 'pstart
techno(og co%pan that has not et had an opport'nit to esta,(ish a track record of
! 83 !
___________________________________________________________________________________
reven'es and earnings. &eca'se of 'ncertaint, these stocks +i(( trade different( and
+i(( present different kinds of trading opport'nities.
Psy2holo9i2al Fa21o(s
/'%ans are ,ehind the trading activit of the stock %arket. *hat %eans h'%an
characteristics are a(so factors in ho+ share prices %ove. Anderstanding h'%an
pscho(og is extre%e( va('a,(e +hen eva('ating invest%ent opport'nities ,eca'se
h'%an pscho(og creates and accent'ates %an of the opport'nities that investors
can capita(i3e on.
=or exa%p(e, greed often ca'ses stocks to go higher than the deserve to go. &
deserve, I %ean that the go higher than the present va('e of f't're earnings potentia(
can j'stif. )e+ infor%ation can ca'se a fren3 in the %arket that %akes investors
(ose sight of rationa( va('ation and si%p( ,' the stock for fear of ,eing (eft ,ehind.
*his pheno%enon is the ,asis for so%e great spec'(ative ,',,(es that +e have see in
histor.
$t the sa%e ti%e, fear %otivated , negative infor%ation can ca'se everone to r'sh
for the exit door at once and take a stock, or entire %arkets, dra%atica(( (o+er ver
7'ick(. #'ch of the se((ing press're that prevai(s d'ring %arket crashes is o't of fear,
not a rationa( tho'ght process ,ased on infor%ation.
=ear and greed present incorrect va('ations in the %arket that can exist for re(ative(
short periods of ti%e ,'t (ong eno'gh for s%art investors to capita(i3e on. E%otion in
the %arket can ,e vie+ed as an a%p(ifier for ne+ infor%ation. It can %ake %oves
%ore extre%e than the sho'(d ,e. /o+ever, often the po+er to this a%p(ifier is
p'((ed and the stock %oves ,ack to +here it sho'(d reside ,ased on the infor%ation
that is kno+n a,o't the co%pan.
S744ly a/0 D.8a/0
>hi(e pop'(ar stocks (ike De(( 0o%p'ter or "enera( #otors trade %i((ions of shares
ever da, the %ajorit of stocks that +e can choose to invest in do not have s'ch
(i7'idit. $s a res'(t, stocks that trade s%a((er vo('%es of shares are s',ject to
f('ct'ations ,eca'se of s'pp( and de%and. If a (arge shareho(der +ants to se(( a (arge
n'%,er of shares into a %arket +ith +eak (i7'idit, that shareho(der can dra%atica((
%ove share price. *he f(ip side is a(so tr'e +hen a (arge ,' order co%es into a
%arket that (acks se((ers.
S'pp( and de%and can take the short!ter% ,a(ance o't of the stock %arket and
present opport'nities for investors +ho have the patience to see that ,a(ance restored.
Investors +ho can anticipate a,nor%a( s'pp( or de%and variations can a(so
capita(i3e.
! 89 !
___________________________________________________________________________________
Anal)s%s %f t'e $a"%o!s se*+ent,s of t'e sto(- e.('an*es
In this section +e seek to ana(3e the state of the capita( %arket and its
vario's seg%ents. It is not an eas task, it is a(so not j'st a %atter of (ooking
at n'%,ersB the a%o'nt raised, the t'rnover, govern%ent activit in the
sec'rities %arket and so on. *he c'rrent state of the Indian capita( %arket is
f'(( of contradictor signa(sB co%atose pri%ar %arket and vi,rant secondar
%arket, ding regiona( exchanges and an advantage de,t %arket sste%
+itho't ,rokers, nation +ide access to e(ectronic trading and poor
s'pervision, ,'dding derivatives seg%ent and ding e7'it c'(t're. >hat can
+e %ake o't of this< Do the add 'p to progress or conf'sion<
>e((, (ets %ake an effort and ,egin at the ver ,eginning. *he co'ntr has had
a (ong capita( %arket tradition. *he ear(iest recorded capita( %arket dea(ings
in India +ere transactions in (oan stocks of the East India 0o%pan to+ards
the end of the Eighteenth cent'r. $ +ide range of &ank and 0otton #i((
Sec'rities +ere ,eing traded in &o%,a and 0a(c'tta , 5I3H. *he concept
of (i%ited (ia,i(it +hich ,eca%e pop'(ar in India after the enact%ent of
0o%panies $ct, 5I:H, he(ped to sti%'(ate activit in the sec'rities %arket to a
great extent.
*he capita( %arket activities in India +ere re(ative( on a (o+!ke right 'pto
the IHs %ain( ,eca'se of the a(ien regi%e ti(( 5J9G, +hich concentrated %ore
on ad%inistration and (ess on deve(op%ent. >ePre ta(king a,o't the ti%e
+hen the a'thorities tho'ght the kne+ the right areas of gro+th, the right
tpe of financing and that the kno+ a(( the 7'estions and a(( the ans+ers.
Stock Exchanges +ere p(aced 'nder the exc('sive reg'(ation of the then
govern%ent thro'gh the proc(a%ation in 5J:H of the constit'tion of India.
*he decade of IHS +itnessed a ver i%pressive gro+th record in ,oth the )e+
Iss'es #arket +ith the a%o'nt raised and %arket capita(i3ation %aking
tre%endo's strides . Eet it +as the ,eginning of econo%ic refor% that
,ro'ght the instit'tion into sharp foc's. *he ear( 5JJHs +as the ti%e +hen
the Indian capita( %arket ca%e to occ'p its rightf'( p(ace as a significant
instit'tiona( inter%ediar ,et+een the saving c(ass and the corporate
%o,i(i3ing capita(. $ ,ig achieve%ent of the refor% era has ,een the setting
'p of )SE in 5JJ@, +hich together +ith the &SE has taken on(ine trading
across the co'ntr.
$%ong other %ajor deve(op%ents, SE&I! set 'p in 5JII, ac7'ired its
(egis(ative stat's and po+ers in 5JJ8 thro'gh the SE&I $ct, 5JJ8. Eet this
+as the res'(t of (ong +inding de(i,erations , the ".I. *he need for setting
'p an independent govern%ent agenc to reg'(ate and deve(op the capita(
%arket as in %an deve(oped co'ntries +as recogni3ed since the seventh
! 8: !
___________________________________________________________________________________
five ear p(an +as (a'nched +hen so%e %ajor ind'stria( po(ic changes (ike
opening 'p of the econo% to the o'tside +or(d and greater ro(e to the private
sector (ike opening 'p of the econo% to the o'tside +or(d and greater ro(e to
the private sector +ere initiated. Since 5JJ8, SE&I has introd'ced a set of
co%prehensive g'ide(ines for vario's iss'es invo(ved +ith the pri%ar and
secondar %arket and %ade r'(es and reg'(ations for vario's %arket
inter%ediaries. SE&IPs g'ide(ines on insider trading , registration of %arket
inter%ediaries, takeover reg'(ations 0;$s and depositor etc.
$re a (and%ark . Investor protection ahs ,een the %otive ,ehind these
g'ide(ines and reg'(ations. )onethe(ess , the instit'tion has a (ong +a to go.
Its initiatives are sti(( trapped on the s'rface and it has to (earn a (ot, change a
(ot and i%prove a (ot.
>hi(e the capita( %arket instit'tions have gro+n and the %arkets have gro+n,
sca%s and skepticis% has a(so gro+n d'ring the 5JJHs. Eet the capita(
%arkets toda, have taken the centre stage in Indian ,'siness. *he stock
%arket indices are serio's( considered to ,e the ,aro%eter of the perception
of the econo% and p',(ic po(ic initiatives.
*he gro+th and potentia( of the Indian capita( %arket ac7'ired over ti%e, and
especia(( thro'gh the 5JJHs, are capt'red %ore easi( in the fo((o+ing
state%ents than in an n'%,er of statistics a,o't the c'rrent or past states of
the econo%.
&o%,a Stock Exchange D&SEF is $siaP s first stock exchange having ,een
esta,(ished in 5IG: +hi(e the *oko Stock Exchange +as fo'nded three
ears (ater in 5IGI.
&SE +itnesses second highest intensit of trading in the +or(d next to
*aipei D *ai+an F and %ore than that I 1ondon , *oko or )e+ Eork
>e have the second (argest investor pop'(ation D over 9H %i((ion F in the
+or(d next on( to AS$, +hich has c'rrent( a,o't :5 %i((ion investors.
India is second on( to the AS in ter%s of (isted do%estic co%panies +ith
J@99 (isted co%panies as at end! #arch 8HH8.
India has ,eco%e an i%portant %arket in the e%erging %arkets of the
+or(d nest on( to #a(asia, #exico, *ai+an , 2orea and *hai(and in
ter%s of %arket capita(i3ation.
$s ear( as 5JJ3, the Internationa( =inance 0orporation ranked India 88
nd
in ter%s of %arket capita(i3ation and 89
th
in ter%s of tota( va('e trade
a%ong 9H co'ntries +ith deve(oped as +e(( as deve(oping %arkets.
! 8@ !
___________________________________________________________________________________
.'r investor pop'(ation gro+s , 3: (ac ever ear, according to a recent
esti%ate.
.ne has to ad%it that there is f(ip too. Despite the gro+th, achieve%ents of
the Indian capita( %arket are inade7'ate (ooking at its si3e and investing
pop'(ation. #arket capita(i3ation is aro'nd8HM of "DP, +hich is extre%e(
(o+ as co%pared to other deve(oped co'ntries. *he Econo%ic *i%es +or(d
%arket s'rve revea(ed that India ranks 8:
th
in ter%s of %arket capita(i3ation,
second in ter%s of n'%,er of co%panies, ,'t a poor I: the in ter%s of
average co%pan si3e. In ter%s of average co%pan six, As +hich is at the II
position ahs an average si3e of R 8,5G3 %%, ,'t India is +a ,ehind +ith an
average co%pan six of j'st R5J%%. ;ecent %arket report have pointed o't
that Indian financia( %arket are second on( to )asda7 in spec'(ation, there,
s'rpassing %ost of the %arkets s'ch as )e+ Eork Exchange D)ESEF 1ondon
Stock Exchange and %arkets in /ong 2ong, Singapore and ?apan . *he tota(
pict're revea(s that despite the striking achieve%ents , the si3e, the rapid and
fast gro+th and a(( the hpe o'r capita( %arkets (ack the %ost f'nda%enta(
prere7'isite of dependa,(e %arkets, %at'rit.
/aving o't(ined the deve(op%ent 'nti( ro'gh( the %id JHs the sit'ation
confronting 's and the stat's of the %arket, it is no+ ti%e to ,egin detai(ed
ana(sis for the period 'nder consideration
! 8G !
___________________________________________________________________________________
THE #/IMA/Y MA/KET
IN A DEE# SLUMBE/
.ver the (ast decade, there has ,een a %a%%oth dec(ine in the capita( raising
ro(e of o'r sec'rities %arket. *he pri%ar %arket has ,een co%atose for (ong
no+.. It has ,een denied its d'e p(ace, and o'r foc's contin'es to ,e on the
second %arket and trading. >e see% to have forgotten the %ain ro(e of the
capita( %arket is to provide capita(
*he a%o'nt raised , a non!govern%ent p',(ic co%panies d'ring 8HH5!8HH8 is a,o't
@HM of the a%o'nt raised a decade ,ack. *he severit of the pro,(e% can ,e ga'ged
, a (ook at so%e ,rief pre(i%inar statisticsB D'ring the six ear period fro% 5JJ@!JG
to 8HH5!8HH8 , on( ;s.I5G5 crore +ere raised thro'gh p',(ic e7'it iss'es, a
dis%a( 9HM (o+er than even the sing(e ear %o,i(i3ation of ;s 53,358 crore in
5JJ9!J:S ='rther in 8HH5!8HH8 there +ere on( a precise( @IP.s pro,a,( the +orst
perfor%ance in independent India. *his is in striking contrast to the peak in 5JJ8!
5JJ3 +hen a h'ge I.H3 crore +ere %o,i(i3ed. >orse sti(( response for% investors
even for these pa(tr iss'es +ere %issing4 in 3 IP.s , pro%oters had to stage %anage
the %andator JHM s',scription +hi(e in case, the iss'e deve(oped on the
'nder+riter . .n an aggregate ,asis retai( investor p't in on( 5.GI (akh app(ications D
P)& a(one had 5.: (akh app(ications F in the IP.s of 8HH5!8HH8.
0o%ing to specifies their are severa( facets of the ko+to+ of the pri%ar %arket
+hich are far fro% satisfactor.
$ggregate reso'rce %o,i(i3ation has s'ffered a serio's set,ack.
It is the govern%ent and not ind'str +hich is active( tapping the %arket, a(so
(eading to cro+ding o'ting the process
E7'it c'(t're see%s to ,e disappearing.
IP.s enor%o's( i%portant as an entr vehic(e for ne+ fir%s and hence instr'%enta(
in +idening the %arket are not pop'(ar.
.verseas =(oatation have (ost the ear(ier ,'oance
$(( these +i(( ,e disc'ssed in t'rn that the process these c(ai%s +i(( ,e s'pported +ith
evidence atte%pts +i(( ,e %ade to ana(3e the ca'ses for the state of things and
s'ggestions for i%prove%ent +i(( ,e %ade if possi,(e.
S'o"t Te"+ 0s Lon* Te"+
! 8I !
___________________________________________________________________________________
In the short r'n, stock prices are dictated %ore , %arket senti%ent or de%and!s'pp(
%is%atches. &'t in the (ong r'n, stock prices va('e the earnings of the 'nder(ing
,'siness.
All $ot%n* %s a so"t of *a+%n*1 l%-e ('e(-e"s o" ba(-*a++on1 &%t' a
sl%*'t +o"al t%n*e to %t1 a 2la)%n* &%t' "%*'t an3 &"on*4
5 Hen") Da$%3 T'o"ea!
>e have a(( cast votes in so%e e(ection or the other. It co'(d ,e an e(ection to e(ect
o'r c(ass representative in schoo( or an e(ection to e(ect the #P of o'r constit'enc.
#an of o'r votes %ade candidates +in. )everthe(ess, have o' ever +ished
so%eti%es that if on( o' had another chance, %a,e o' +o'(d have voted for
another candidate +ho +o'(d have done ,etter. .r do o' so%eti%es fee( (et do+n ,
the person o' cast o'r vote for<
)o+, i%agine a sit'ation +here o' co'(d cast o'r vote d'ring the entire ten're of a
govern%ent on an ongoing ,asis, sa ever %onthT a genera( e(ection ever %onthS
If this +ere to ,e tr'e, ho+ +o'(d things change<
Since a(( of 's have certain expectations fro% the candidates +e cast o'r vote for, the
ongoing e(ections +i(( give 's an opport'nit to vote Po'tP a candidate +ho does not
%eet expectations or sha(( +e sa f'(fi( the mandate
5
and vote PinP candidates +ho
have a ,etter chance of doing +e((. In other +ords, over a period, +e +i(( ,e a,(e to
+eigh the candidates co((ective(, there, recognising their tr'e a,i(ities to de(iver on
their promises to %eet our expectations.
$s a res'(t of this ongoing co((ective action, the candidateC part that co%es to po+er
cannot take the %andate for granted. $fter a((, if the do not f'(fi( the aspirations of
the e(ectorate that voted the% in, the +i(( soon ,e voted o't of po+erS /ence, the
stead state sit'ation is that, at an given ti%e, representatives +ho are ,est s'ited to
%eet the expectations of the peop(e at (arge +i(( ,e in po+er.
Anot'e" s!2"e+e 3e+o("at%( %nst%t!t%on 5 t'e sto(- +a"-et6
*he e(ectorate here is the shareho(der. *he %anage%ent of the co%pan has the
%andate to %axi%ise the e(ectoratePs +ea(th. P>ea(thP ! that is the operative +ord in
this instit'tion. An(ike the govern%ent +here its actions he(p a co'ntr progress, and
ens're the +e(( ,eing of a(( its citi3ens. *he shareho(der here parts +ith his Pcapita(P
+hen he casts his vote to s'pport a ,'siness that he expects +i(( in the end gro+ his
capita(S
! 8J !
___________________________________________________________________________________
Since there is +ea(th invo(ved and the e(ectoratePs capita( is at stake, his vote co%es in
the for% of a PpriceP he is +i((ing to ,'. $ price that ens'res %axi%isation of his
ret'rns on his capita(S An(ike a once!in!fo'r!or!five!ears genera( e(ection, the stock
%arket provides the shareho(ders an opport'nit to cast their vote ever second, ever
trading da. $n opport'nit to price the ,'sinesses in ter%s of their a,i(it to
%axi%ise +ea(th for the%.
.ften ,ad ,'sinesses j'st get voted o't of the %arket tooS *he co((ective action of
these shareho(ders ens'res that the ,'sinesses ref(ect their re(ative a,i(ities to create
+ea(th for their shareho(ders.
.f co'rse, one can infer at this stage that as the participants in the stock %arket
increase to cover the (arger part of the pop'(ation, there +i(( ,e convergence Dsince the
+ord has ,eco%e so pop'(arF of +hat is good for the cons'%er and +hat is good for
the shareho(der. $n+a, that is a different storS
T'e sto(- +a"-et7 $ot%n* +a('%ne o" &e%*'%n* +a('%ne8
9In t'e s'o"t "!n1 t'e +a"-et %s a $ot%n* +a('%ne 5 "e:e(t%n* a
$ote"5"e*%st"at%on test t'at "e;!%"es onl) +one)1 not
%ntell%*en(e o" e+ot%onal stab%l%t) 5 b!t %n t'e lon* "!n1 t'e
+a"-et %s a &e%*'%n* +a('%ne49
- Ben<a+%n G"a'a+
&'t does the %arket rea(( end 'p ,eing a P+eighing %achineP in the (ong r'n<
&et+een )ove%,er 5JJJ and =e,r'ar 8HHH, an soft+are stock o' to'ched t'rned
into go(d. 1etPs take the instances of Infoss, the esta,(ished (eader, and Si(ver(ine
*echno(ogies, the desperate +anna,e!Infoss. In )ove%,er 5JJJ, Si(ver(ine
appreciated , @3M +hi(e Infoss appreciated , j'st 3JM. *he %arkets in their
fren3 +ere ,idding 'p Si(ver(ine expecting it to o'tshine Infoss. &'t did it %ean
that it act'a(( did<
)ope. *he %arket rea(ised its fo(( ver soon, +hich is +h ,et+een 5st Dece%,er
5JJJ and 3Hth )ove%,er 8HHH, Infoss appreciated , :GM and Si(ver(ine dec(ined
, 9@M.
! 3H !
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>h did this happen<
$ te%porar %adness
*ake a (ook at the ,ig pict're for these t+o stocksT
0hart 5 DInfossF
In order to even o't the f('ct'ations ca'sed , the dai( voting pattern of the %arket,
+e have taken the si%p(e average of prices over the 3H!da and 5HH!da period.
)otice so%e corre(ation ,et+een the average prices and the profit gro+th of these t+o
co%panies<
! 35 !
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0hart 8 DSi(ver(ine *echno(ogiesF
*he gro+th in profits has dictated price %ove%ents or sha(( +e sa the %arket has
recognised the stocks for their individ'a( %erits.
Despite the fact that Si(ver(ine is in a high gro+th sector and has the advantage of
,eing s%a(( si3ed, the co%pan has co%po'nded profits at @3M p.a. +hereas Infoss
has co%po'nded profits at t+ice the rate D58@M p.a.F. & no+, o' kno+ eno'gh of
co%po'nding to +ork o't +hat this differentia( can do over even a short period of
three ears.
Praise the stock %arket. It has it a(( fig'red o't in the (ong r'n. It does get carried
a+a so%eti%es ,'t never fai(s to recogni3e its %istake and get ,ack on co'rse.
In a ver si%p(istic %anner, +e fo'nd for o'rse(ves ho+ the %oving average prices
over a period track the change in the 'nder(ing profits. Ever participant casts a vote
in the stock %arket ever ti%e the trade. *here are a fe+ peop(e +ho keep po((ing
everda +hi(e there are the others +ho step in +henever the spot a distortion in the
(ong!ter% trend of the ,'siness that provides an opport'nit to %ake so%e ,ig profits.
.f co'rse these are the t+o categories of participants PtradersP and PinvestorsP.
In$esto"s an3 T"a3e"s
If *ho%as $(va Edison +ere a stock %arket ana(st, he +o'(d have re%arked that
short r'n stock prices are deter%ined , JJM senti%ent and 5M f'nda%enta(s. .n
the other hand, stock prices in the (ong r'n are deter%ined , 5M senti%ent and JJM
f'nda%enta(s.
The two forces in play
Since there are t+o ,road tides that inf('ence stock prices, it is (ogica( that the
participants in the %arket are ,road( sp(it into t+o categoriesB
! 38 !
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5. *hose +ho tr to profit , s+i%%ing +ith the Psenti%entP tide that inf('ences
prices in the short r'n. *he are pop'(ar( kno+n as PtradersP.
8. *hose +ho tr to ,enefit fro% the Pf'nda%enta(sP tide that inf('ence prices
over the (ong r'n. *he are pop'(ar( kno+n as PinvestorsP.
& no+ +e kno+ that prices in the (ong r'n track earnings per share. .f co'rse, this is
a fair( o,vio's conc('sion ! +hat e(se +o'(d one pa for< Ever shareho(der o+ns a
part stake in the ,'siness and is there, entit(ed to a proportionate share in the profits
of the ,'siness.
*raders and investorsB spot the differencesS
)o+ i%agine thisB "iven that stock prices track earnings over (onger periods, if ever
participant t'rned a ,'er for the (ong ha'(, ho+ +o'(d the %arket s',sist< So +hat
happens to the traders< In s'ch a scenario, +hat +o'(d disting'ish a trader fro% an
investor<
&'t thatPs not a(( ! the p(ot thickensS >hat adds the interesting t+ist to investing in
stocks is that earnings fro% a ,'siness are 'ncertain. *he depend on %an factors,
so%e of +hich affect a(( ,'sinesses (ike an epide%ic +hi(e the rest affect individ'a(
enterprises at a ,'siness (eve( . In this %anner, the interp(a of these inf('entia( factors
creates diversit of opinion, one of the ,asic re7'ire%ents for a fair %arket p(ace.
*raders and investors a(ike cast their vote ever ti%e the ,' or se(( a partic'(ar
stock. *he stock price at ever %o%ent in ti%e ref(ects the res'(tant of the co((ective
action of the %arket participants at that %o%ent in ti%e.
Differing reasons and ,ases for %aking a ca((
*raders po(( in everda ,ased on their j'dge%ent of ho+ infor%ation on the Pfactors
of inf('enceP +i(( affect stock earnings and hence prices. $fter a(( stock prices are
,ased on expectations of 'ncertain f't're earnings. $s infor%ation f(o+s in, the
traders po(( in to profit fro% short ti%e gaps ,et+een rea(it and expectations. *he
on( factors that keep changing often are the factors that inf('ence a(( stock prices.
*raders can on( hope to %axi%ise profits , trading as %an ti%es in the short r'n
that +i(( keep fetching the% s%a(( ti%e profits. /ence, these traders thrive on
vo(ati(it.
&'ing ,ased on %is%atches in price and va('e
P*radersP as a c(ass expect to ,e re+arded , the PinvestorsP for pricing the short!ter%
factors of inf('ence rightS $fter a(( a trader has a position in a stock, hoping to profit
fro% the short ter% %is%atches. In the process, the trader hopes to get re+arded ,
the investor +ho he(ps offset the traderPs position.
.n the other hand, investors ,' stocks hoping to ,enefit fro% the gro+th in earnings.
/ence the respond to factors that inf('ence the trajector of gro+th. /ence, the %ost
,asic st(e of investing +i(( a(+as ,e gro+th investing.
! 33 !
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/o+ever, there is another evo(ved investing st(e adapted , investors. *here are
occasions +hen there are (arge gaps ,et+een the va('e of a stock and the potentia(
earnings that can accr'e to the shareho(der in the f't're. *hese gaps nor%a(( res'(t
fro% %is'nderstanding the ,'siness specific factors of inf('ence and correct over a
(onger period of ti%e. Investors po(( ,ased on these %is%atches too. *his st(e of
investing is pop'(ar( kno+n as va('e investing.
Growth Vs Value Investing
"ro+th -s. -a('e investing is one of those de,ates that have ,een aro'nd for ages
no+ and o' can ,e s're that in the ear 8H:H the inheritors of o'r portfo(io +i(( sti((
,e at it, ha%%er and tongs. &eca'se, the are t+o dia%etrica(( opposite schoo(s of
tho'ght on the +a to %ake %one in the stock %arket. &'t +h re!invent the +hee(<
1et 's first t'rn to the "'r's +ho +rote the ,ook on +hat ,oth these schoo(s of
investing stand for.
o" 0al!e sto(-s &e t!"n to S%" =o'n Te+2leton7
*hese are stocks se((ing at s',stantia( disco'nts to o'r appraisa( of their (onger ter%,
intrinsic va('e. "enera((, +e choose so(id co%panies +hose stock is trading at prices
that are 'nd'( (o+ in re(ation to their va('e and potentia(.
$nd for gro+th stocks herePs the +ord fro% the doen of gro+th investing, #r.
*ho%as ;o+e Price, a pioneer of this approach in the (ate 5J3HsB
"ro+th stock investing foc'ses on +e((!%anaged co%panies +hose earnings and
dividends are expected to gro+ faster than ,oth inf(ation and the overa(( econo%.
*he rea( test for a gro+th co%pan is its a,i(it to s'stain earnings %o%ent'% even
d'ring econo%ic s(o+do+ns. S'ch co%panies +i(( provide (ong!ter% gro+th of
capita(, preserving the investorPs p'rchasing po+er against erosion fro% rising prices,
he predicted.
)o+ that +e have the +ords of the %asters (etPs de(ve into the -a('e schoo( .
&'ing a Do((ar for :H cents
-a('e investing is a ver si%p(e concept. $s >arren &'ffett, the (egendar investor
and discip(e of &enja%in "raha% p't it, its a(( a,o't N...,'ing a Do((ar for :H
cents...N. So if o' find a ce%ent co%pan +hich is trading at ;s58H a share, D(ike sa
$00 isF and o' ,e(ieve that the intrinsic va('e of the co%pan is act'a(( ;s8HH per
share ,eca'se that is +hat o'r ana(sis of its ,'siness, assets and prospects j'stif,
then o' +o'(d j'%p to ,' it ,eca'se it +o'(d c(ear( ,e a ,argain ,'.
-a('e investing is a (ot (ike ,'ing an $rro+ shirt at their $nn'a( sa(e. .r &'ing a
*- d'ring the festiva( season +hen ever %an'fact'rer is tring to +oo o' +ith a
Pva('e for %oneP offer ! 8H D-DPs +orth ;sJHHH free +ith a 59P *- priced at
;s59,HHH. $s o' can see, in ,oth instances there is an e(e%ent of +aiting for the ,est
,argain and ,'ing at that opport'ne ti%e.
! 39 !
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?'st (ike the shopper +ho sco'rs the %arket for the ,est ,argain ,efore %aking his
p'rchase, the -a('e Investor h'nts for stocks that are P trading at prices that are 'nd'(
(o+ in re(ation to their va('e and potentia(.P
Price Earnings ratios, Price C&ook ratio, Enterprise -a('eC;ep(ace%ent va('e,
Dividend ie(d, 1i7'idation va('e. *hese are the %etrics , +hich -a('e investors
tpica(( p(ace great store.
1o+ PCE & PC& ratios, a disco'nt to rep(ace%ent va('e, a high dividend va('e and a
disco'nt to (i7'idation va('e can get a va('e!oriented Investor high( excited.
>hat does the va('e investor hope for<
*hat sooner or (ater the asset +i(( trade at a price %ore ref(ective of its Intrinsic va('e
and then he, +ho ,o'ght it at a ,argain +i(( ,e sitting on neat (itt(e pi(e of %one
DprofitF.
.ne of the %ost pop'(ar de('sions a,o't va('e investing is that it is a(( a,o't
(i7'idation va('e and does not (ook at an enterprise on a going ,asis. So%e harsh
critics +o'(d have 's ,e(ieve that -a('e investing is the e7'iva(ent of investing ,
(ooking in the rear vie+ %irror. /o+ever, the +ords of the %asters indicates
other+ise.
1et 's go ,ack to the +ords of Sir *e%p(eton and foc's on his choice of 8 phrases !
P...(onger ter%, intrinsic va('e...P and P...prices that are 'nd'( (o+ in re(ation to their
va('e and potentia(...P.
It sho'(d ,e 7'ite o,vio's that P1onger ter% Intrinsic va('eP is not and cannot ,e a
f'nction of the past. $nd %ark the 'se of the +ord Potentia( in the second phrase !
that again i%p(ies a peep into the f't're.
/erePs &en "raha%, the a'thor of Sec'rit $na(sis & Inte((igent Investor, and the
father of -a('e investing on the sa%e s',ject.
>hi(e it is tr'e that it is the expected f't're earnings and not the past that deter%ines
va('e, it is a(so tr'e that there tends to ,e a ro'gh re(ationship or contin'ing
connection ,et+een past earnings and f't're earnings. In the tpica( case, therefore, it
is +orth+hi(e for the ana(st to pa a great dea( of attention to the past earnings, as
the ,eginning of his +ork, and to go on fro% those past earnings to s'ch adj'st%ents
for the f't're as are indicated , his f'rther st'd.
>hat +e are driving at is that P-a('eP investing does not ignore the f't're. It %ere(
attri,'tes a (o+er pro,a,i(it of ,eing a,(e to s'ccessf'(( predict the f't're.
*he attri,'tes of a -a('e Investor
! 3: !
___________________________________________________________________________________
-a('e investing p(aces a great pre%i'% on a virt'e ca((ed Patience. If o' are the kind
of shopper +ho r'shes into a shop to ,' +hat o' ca%e for and r'sh pro%pt( o't,
then va('e investing is not for o'.
.n the other hand, if o' are the tpe to +a(k into 5H shops, co%pare prices and +ork
o't the arith%etic of the specia( offers ,efore %aking 'p o'r %ind, then va('e
investing %ight ,e j'st +hat the doctor orderd. *he va('e investor does not %ind
+aiting for a ,argain to co%e a(ong ! the ann'a( $rro+ sa(e, the festiva( season...
&'t that is not the on( reason +h Patience is a ke virt'e for a +anna,e -a('e
investor. ItPs one thing to possess the too(s and the kno+(edge to fig're o't that
so%ething is trading ,e(o+ its intrinsic va('e. &'t o' %ake %one fro% an
'nderva('ed stock on( +hen the price finds it correct (eve(s. *hat happens +hen
%ore peop(e recogni3e the fact that the stock is 'nderva('ed. $nd that can ,e a (ong,
(ong +ait.
*he fact that va('e investing p(aces a pre%i'% on patience in a ro'nd a,o't +a
again reinforces o'r ,e(ief that -a('e investing is not a ,ack+ard (ooking too(. *hink
a,o't the ce%ent co%pan in 7'estion. $s per o'r esti%ate its intrinsic va('e is
;s8HH per share toda. &'t re%e%,er, its not +hat it is +orth toda, ,'t +hat it +i((
,e +orth on the da that the %arket correct( prices it, that +i(( deter%ine the profits
o' %ake.
>hat if a ne+ revo('tionar techno(og red'ces the cost of ,'i(ding a ce%ent p(ant ,
8HM d'e to a change in the %an'fact'ring process< >hat if D'pont or &P deve(ops a
ne+ p(astic that does a+a +ith the need for ce%ent next ear< *hen +hat< It +o'(d
,e on( fair then to pres'%e that in those circ'%stances $00Ps intrinsic va('e +o'(d
fo((o+ s'it and head (o+er.
*he Intrinsic va('e as esti%ated toda is ,ased on o'r kno+(edge of the factors that
i%pact the co%pan and o'r a,i(it to forecast the%.
*he %ora( of stor is that o' can ignore the f't're on( at o'r o+n peri(. $nd a
-a('e investor %'st recogni3e that. *he great -a('e investors kne+ that.
>hat the -a('e investors are (ooking for is #argin of safet. *he are (ooking at
,'ing a stock at as %'ch of a disco'nt to Intrinsic va('e as possi,(e. *his provides
the% +ith a %argin of safet ,eca'se the f't're is a(+as diffic'(t to predictS
.n the other hand, the Growth School ,ets the far% on the ='t're.
"ro+th investing, as defined , #r *ho%as ;o+e Price, a pioneer of this approach in
the (ate 5J3Hs, isB
! 3@ !
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"ro+th stock investing foc'ses on +e((!%anaged co%panies +hose earnings and
dividends are expected to gro+ faster than ,oth inf(ation and the overa(( econo%.
*he rea( test for a gro+th co%pan is its a,i(it to s'stain earnings %o%ent'% even
d'ring econo%ic s(o+do+ns. S'ch co%panies +i(( provide (ong!ter% gro+th of
capita(, preserving the investorPs p'rchasing po+er against erosion fro% rising prices.
.k, thatPs si%p(e eno'gh. *his is of co'rse the PInP schoo( for the past fe+ ears.
"ro+th investing has ,een tro'ncing va('e!,ased investing for the past fe+ ears , a
+ide %argin. >hi(e +e have (itt(e data for the Indian %arket, there is a +ea(th of it on
s'ch iss'es a,o't the AS %arket. $nd if o' (ook at the chart ,e(o+ it is a%p( c(ear
that "ro+th has ,een the +a to go for the past fe+ ears.
*he ,asic ass'%ption 'nder(ing gro+th stock investing is that these co%panies have
a,ove average rate of earnings gro+th and that over ti%e their stock prices +i(( ref(ect
this gro+th. *he difference ,et+een gro+th and va('e investing is ,est 'nderstood ,
the fo((o+ing 7'estion.
>o'(d o' rather ,' a great co%pan at a good price or a good co%pan at a great
price<
"ro+th investing p(aces great store in ,'ing great co%panies at a good price. )ot
necessari( at a great price.
*he %etrics of gro+th investing are ver different fro% that of va('e investing. *he
do not p(ace great e%phasis on too(s s'ch as PCE, PC&, dividend ie(d or ;ep(ace%ent
va('e. "ro+th investors tend to (ook %ore at the f't're. So the are %ore concerned
+ith prospective PCEPs and PE" ratios. In other +ords the are %ore concerned +ith
the co%panPs PCE ,ased on 8HH9 earnings than +ith 8HHH earnings.
Since the p(ace great store , Intangi,(es s'ch as ,rand va('e, techno(og edge et a(,
the tpica(( disregard %eas'res s'ch as ;ep(ace%ent va('e and &ook va('e.
#eas'res s'ch as ;ep(ace%ent va('e and &ook va('e are ,ased on acco'nting entries
in the &a(ance sheet and do not therefore capt're the intangi,(e assets of the co%pan.
*he intangi,(es co'(d ,e the co%panPs ,rands, its h'%an capita( or its IP;s.
! 3G !
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$(so, since the are tpica(( on the (ooko't for high gro+th ,'sinesses, the
disregard dividend ie(ds. )ot +itho't reason ! fast gro+ing co%panies j'stifia,(
prefer to reinvest their profits in their ,'siness rather than pa the% o't.
Irrespective of +hether o' are gro+th or va('e investor, #anage%ent is a(+as a ke
attri,'te in ,'ing a stock. &'t +ith a gro+th co%pan, +here the jo, is not j'st to
%aintain consistent ,'t higher than average gro+th rates, the nat're of the cha((enge
faced , %anage%ent is of a higher order. >itho't an prej'dice to the -a('e schoo(,
it is fair to pres'%e that the pre%i'% p(aced on %anage%ent 7'a(it , "ro+th
investing is definite( in another (eag'e a(together.
*he sa%e app(ies to interest rates as +e((. *pica(( "ro+th stocks are %ore sensitive
to interest. *his has %ore to do +ith the gro+th pre%i'% than +ith de,t (eve(s.
"ro+th pre%i'%<
"iven their stead ,'t a,ove average gro+th rates, gro+th co%panies o,vio's( get
%ore attractive d'ring the period +hen interest rates are (o+ or are headed (o+er.
/o+ever +hen interest rates head higher, then the va('e of the f't're cash f(o+s gets
i%pacted 7'ite s',stantia(( and the appea( of gro+th co%panies does s'ffer as a
conse7'ence.
$(so, re%e%,er that "ro+th stocks get a (ot of their va('e fro% f't're cash f(o+s.
*pica((, the i%pact of f't're cash f(o+s in a stockPs c'rrent va('ation is %'ch higher
than that for a va('e stock. &'t +hen interest rates rise, the va('e of those f't're cash
f(o+s drops ver rapid(, hence %aking the stock %ore v'(nera,(e to interest rates.
The key issues that a growth company faces are
5. 0an it s'stain its rapid pace of gro+th<
8. 0an gro+th ,e financed interna(( or does it re7'ire ,orro+ing %one<
3. Is the co%pan gro+ing faster than it its peer gro'p< D*his is partic'(ar(
i%portant ,eca'se in a favo'ra,(e ,'siness environ%ent a (ot of co%panies
+i(( record high gro+th rates. *he ke is to identif +hether this gro+th is an
ind'str +ide pheno%enon or +hether the said co%pan has a ke advantage
that is prope((ing it at a higher gro+th rate than the peer gro'p. $nd +hether
that advantage is s'staina,(e.F
9. Does the %anage%ent have the a,i(it to %anage this gro+th<
*he 7'estion of ho+ to va('e gro+th stocks is one that has no straightfor+ard or
si%p(e ans+ers. An(ike -a('e investing +hich is 7'ite +e(( defined and has eas to
'nderstand %etrics, gro+th investing is %ore diffic'(t to 7'antif. Disco'nted 0ash
=(o+ DD0= or )P-F is the on( too( that an Investor tring to eva('ate gro+th
co%panies can t'rn to.
*he catch is that D0= invo(ves severa( ass'%ptions B
! 3I !
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the rate at +hich cash f(o+s +i(( gro+, the period of the exp(icit forecast Dfor
+hich cash f(o+s have ,een esti%atedF,
the interest rate to ,e 'sed to disco'nt the f't're cash f(o+s D,eca'se %one to
,e received to%orro+ has a (o+er va('e toda F
an esti%ate of ter%ina( va('e Dthe va('e at +hich one expects the stock to trade
at the end of the exp(icit forecast periodF.
*he D0= %ode( has its roots in +hat is ca((ed the Dividend Disco'nt %ode(. It o+es
its origin to ?ohn &'rr >i((ia%s +ho introd'ced this %ode( in his *heor of
Invest%ent va('e in 5J3I. In his +ords,
9In s'o"t a sto(- %s &o"t' onl) &'at )o! (an *et o!t of %t4 >
*his is o,vio's( no eas task, ,eca'se it invo(ves co%p(ex ca(c'(ations and %an
ass'%ptions. &'t this re%ains the on( +a to va('e gro+th stock. It is ,eca'se it
invo(ves so %an ass'%ptions a,o't the f't're that gro+th investing stands apart
fro% va('e investing.
$nd ,eca'se "ro+th investing is (ess a,o't a r'(e!,o'nd approach, it is 7'ite eas to
err. "ro+th stock investors +o'(d do +e(( to re%e%,er this +arning fro% >arren
&'ffett in his 5JIJ 0hair%anPs speech
NIn a finite +or(d, high gro+th rates %'st se(f!destr'ct. If the ,ase fro% +hich the
gro+th is taking p(ace is tin, this (a+ %a not operate for a ti%e. &'t +hen the ,ase
,a((oons, the part ends. $ high gro+th rate event'a(( forges its o+n anchor.
0ar( Sagan has entertaining( descri,ed this pheno%enon, %'sing a,o't the destin of
,acteria that reprod'ce , dividing into t+o ever 5: %in'tes. Sas SaganB N*hat
%eans fo'r do',(ings an ho'r, and J@ do',(ings a da. $(tho'gh a ,acteri'% +eighs
on( a,o't a tri((ionth of a gra%, its descendants, after a da of +i(d asex'a( a,andon,
+i(( co((ective( +eigh as %'ch as a %o'ntain...in t+o das, %ore than the s'n ! and
,efore ver (ong, everthing in the 'niverse +i(( ,e %ade of ,acteria.N
)ot to +orr, sas Sagan. So%e o,stac(e a(+as i%pedes this kind of exponentia(
gro+th. N*he ,'gs r'n o't of food, or the poison each other, or the are sh a,o't
reprod'cing in p',(ic.N
So +hich is the ,etter +a to %ake %one< "ro+th or -a('e investing<
$s histor sho+s there have ,een %an investors fro% ,oth schoo(s +ho have %et
+ith great s'ccess. *he ke to their s'ccess has ,een their discip(ine and co%%it%ent
to fo((o+ing +hat the 'nderstood ,est.
Investors +ho p(a %'sica( chairs ,et+een these 8 st(es r'n a greater risk. *he risk
of fo((o+ing the +rong strateg at the +rong pointS
! 3J !
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.f co'rse, it is a diffic'(t to c(ear( state +ho is a PtraderP and +ho is an PinvestorP< $
,etter +a to disting'ish the% is fro% +hat tide the hope to profit fro%S *he +orst
state is to ,e thinking (ike one and acting (ike the other.
*i%e is another disting'ishing factor
$ critica( e(e%ent that creates diversit of opinion and hence a fairer %arket is ti%e.
.ne, factors that affect ,'sinesses change over a period of ti%e. *+o, since traders
and investors have different ti%e hori3ons, their vie+s on the i%pact of these factors
of inf('ence varies in degrees.
1ost< 0onsider a sharp fa(( in )asda7 in a sing(e da. *he i%pact of a sharp dec(ine
has a (ot of effect on the short!ter% perception of Indian techno(og stocks. /o+ever,
in the (ong r'n, the earnings of Infoss, sa, is not i%pacted , a daPs dec(ine in the
)asda7.
/ence a trader is (ike( to react negative( to the sing(e da dec(ine in )$SD$U
+here as an investor +o'(d ,e 'nfa3ed. In fact, the Pva('eP investors +i(( step in if the
prices reach attractive (eve(s, thanks to the terrified traders.
/o+ever, a s'stained dec(ine in )asda7 %a have the potentia( to set panic attacks
a%ong the 's'a(( serene investorsS
*i%e is a(so the great (eve((er
9T%+e 3est"o)s t'e s2e(!lat%on of +en1 b!t %t (on?"+s nat!"e49
5 Ma"(!s T!ll%!s C%(e"o (@ABBC 5 CBC)
*raders get to kno+ soon +hether the are right or +rong, ,'t investors have to +ait
for a (ong ti%e. /ence, Ph'%i(itP is a traderPs virt'e +hi(e PpatienceP +o'(d ,e
associated +ith an investor.
Bhy ha5. .C7i1y 4(i2.s -all./ i/ 1h. 4as1D
>henever govern%ents have fa((en4 po(itica( insta,i(it D*op!of!the!%ind
reca((F
Inf(ation hitting do',(e digits4 r'pee fa((ing4 interest rate hikes Dthe
kno+(edgea,(e +i(( te(( o' these are ,road econo%ic para%eters that affect
a(( ,'sinessesF
$ (ot of peop(e +i(( te(( o' that +ars have spooked the %arketV"'(f >ar,
2argi( crisis, etc Dco'ntr and (ives are at stake.F.
Sca%sSS D/'%an greed kno+s no ,o'ndsF.
&ad %anage%ent interested in %aking a 7'ick ,'ck the%se(ves
0o%pans prod'cts ,o%,ed D&ad ('ck, ,ad strateg or ,ad %arketing<F.
! 9H !
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1aksh%i #achine >orks s'ffers as texti(e %i((s are not doing +e(( Da case of a
specific sector going ,ad that +ipes o't even the ,est of co%paniesF.
$ che%ica( co%pans p(ant ca'ght fire destroing it co%p(ete( D"od save
'sSF
$ ,ri((iant prod'ct ,'t the co%pans ,orro+ings strang(ed the prod'ct ,efore
it sa+ the (ight of the da DDe,t (eads to deathSF
So %an of the%, o' ask< 1et 's see if +e can c(assif the% into ,road categories. If
o' (ook at these reasons in detai(, o' rea(ise that there are so%e factors that are
+ithin the co%pans contro( or specific to the co%pans ,'siness D,ad %anage%ent,
prod'cts ,o%,ing, sector do+ns(ide, fire, ,orro+ingsTF. *he rest of the factors
Dpo(itics, %acroecono%ic iss'es and +arsF affect the %arket in genera(.
.2, +e see% to have got t+o +atertight c(assifications for e7'it risk. .ne affects
specific co%panies and sectors. *ext,ooks have vario's na%es for itVLdiversifia,(e
risk, L'nsste%ic risk, L,'siness risk, Lco%pan risk and so on. *he other set of
risk affects the entire %arketVL'ndiversifia,(e risk, sste%ic risk, L%arket risk.....
*he a%a3ing po+er of c(assificationS S'dden(, o'r ,ig (ist of risks (ooks %anagea,(e.
>e j'st need to 'nderstand +hich ,asket the ,e(ong toS *o get the c(assification
right, (et 's de(ve a (itt(e deeper into the t+o gro'ps.
! 95 !
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Co84a/y (isk? a 2los.( look
*ho'gh co%pan risk is specific to the co%pan, so%e risk factors that affect the
,'siness are +ithin the contro( of the co%pan. 0orporate India is rep(ete +ith
instances of ho+ a co%pan co'(d have contro((ed its f't're ,etter.
;ea( -a('es Dthe L0easefire co%panF i((!conceived fora into Lvac''%isers is an
exa%p(e of strateg going ha+ire. *here are ha3ar Indian pro%oters +ho have
siphoned %one fro% their (isted co%paniesVexa%p(es of ,ad %anage%ent. 0ore
/ea(thcare Dear(ier 0ore Parentera(sF is another c(assic exa%p(e of a co%pan that had
the right prod'ct ,'t, in its 'rge to ,'i(d %ega p(ants, it ,orro+ed ,eond its %eans
,efore creating a %arketVthe rest is histor Dthe co%pan got into a de,t trap, and the
prod'ct ,eca%e a co%%oditF.
$(( these risks can ,e avoided if proper ho%e+ork is done to 'nderstand ,'sinesses
and %ake a f't're (ooking ca(( on their ,'sinesses. .n( stock!picking ski((s can see
o' thro'gh this %a3e of risks. )o+ o' kno+ +h good research ana(sts are so
so'ght afterS
*he other sets of risks that are ,'siness specific are ,eond the contro( of the
co%pan. >hat can #adras 0e%ents do if the ce%ent %arket s'dden( s('%ps as
there is too %'ch ne+ capacit +ith no %atching de%andS >hat can *)P1 do if
de%and for ne+sprint fa((s as %ore and %ore peop(e take to reading ne+spapers on
the InternetS D)ot no+S &'t it can happen 5H ears do+n the (ineF >hat can *isco do
if Posco d'%ps a %i((ion tons of stee( in the co'ntr Dnot (itera((SFS
.f co'rse there is so%ething that these co%panies can do to re+ork their strategies,
,'t it is ti%e cons'%ing. $nd o' kno+ o'r stock %arketsS *he prices +i(( get
ha%%ered +ith the first +aft of ,ad ne+s. In an case, if one +ere to diversif ones
ho(dings across vario's sectors and co%panies, the risks can get %ini%ised to a
certain extent.
! 98 !
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Ma(k.1 (isk
0o%pan risk is sti(( eas to contend +ith, ,'t +hat do +e do a,o't %arket risks< .'t
of the n'%,er of factors affecting %arkets, o'r experience te((s 's that %arket
dec(ines 'nder %an of these factors are te%porar and provide exce((ent ,'ing
opport'nities for the patient investor +ho thinks and ,'s good co%panies D>e (ove
this kind of an investor or co%panF
#arket risk is a different ani%a( a(together. Diversification does not he(p as a(( stocks
get affected , these factors. &'t fret not, the native ingen'it of %ankind has fo'nd
so('tions to this pro,(e% too, in the for% of L='t'res & L.ptions
Fis2al 4oli2y a/0 1h. s1o2k 8a(k.1
)o escaping the fisca( deficit
*herePs no escaping the fisca( deficit. *he thing has escaped fro% the pink papers,
+here it rightf'(( ,e(ongs, to the ordinar ne+spapers. *he investor has eno'gh on
his %ind tracking his portfo(io, so +h does he need to ,other a,o't the fisca( deficit<
*hink of the govern%ent as the ,iggest p(aer in the financia( %arkets. *hatPs the
reason +h +e (esser %orta(s have to ,other a,o't it. ItPs a ,it (ike the Anit *r'st of
India. >hen the A*I got into tro',(e (ast ear, the %arkets took a t'%,(e, and then
+aited +ith ,ated ,reath for A*I to get ,ai(ed o't. $nd the govern%ent is %an %an
ti%es ,igger than the A*I.
S're, the govern%ent doesnPt p(a the stock%arkets itse(f, except thro'gh its
disinvest%ent progra%%es, ,'t it contro(s the de,t %arkets. *he govern%entPs need
for ,orro+ing %one to finance its expenses is nothing ,'t another na%e for the fisca(
deficit. )o +onder it affects the entire econo%.
"overn%ent ,orro+ing affects the entire econo%
/o+ does it do that< >e((, if govern%ent ,orro+s too %'ch, it Ncro+ds o'tN the
private sector. *he stock of financia( reso'rces D%oneF ,eing (i%ited, excess
govern%ent ,orro+ing res'(ts in there ,eing (ess (eft over for the private sector. $(so,
+hen govern%ent ,orro+ings increase, the de%and for credit increases re(ative to the
s'pp( for it. So the cost of credit increases. *he cost of credit is nothing ,'t the
interest o' pa. $nd +hen interest rates rise, thatPs o,vio's( negative for co%panies,
as higher interest costs eat into profits.
&orro+ing fro% ;&I!a s'refire recipe for inf(ation
So%eti%es, the govern%ent does not ,orro+ direct( fro% the %arket ,'t instead
,orro+s fro% the ;eserve &ank. *hatPs act'a(( e7'iva(ent to printing %one, and is
ca((ed, in the jargon, %onetising the deficit. >hen this happens, the a%o'nt of %one
s'pp( increases and that %akes price rise as +e((. DonPt get it< >e(( if +e a(( had a
printing press at ho%e in +hich +e co'(d print %one then +e co'(d a(( ,eco%e
crorepatis. >e co'(d afford to pa an a%o'nt to ,' anthing +e +anted to.
! 93 !
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Everthing then ,eco%es an a'ction and there is no (i%it on ho+ high prices can go
,eca'se there is no (i%it on ho+ %'ch o' can afford to pa!after a((, o' have a
printing press at ho%e. &'t that is a s'refire recipe for inf(ation.
>hen the govern%ent ,orro+s fro% the ;&I ver %'ch the sa%e happens. S're not
a(( of 's have a printing press. &'t this is one he(( of a ,ig printing press. So prices are
,o'nd to rise. $nd then the price that o' pa for %one D+hich is nothing ,'t
interest ratesF ,egins to rise too 'p.
*o keep deficit in check, govern%ent raises reso'rces thro'gh higher taxes...
*he %ora( of the stor is that the govern%ent sho'(d c't its coat according to its c(oth.
/o+ can the govern%ent do that< .ne eas +a is to raise reso'rces. *he si%p(est
+a to do that, as +e are painf'(( a+are, is to increase taxes. Increased taxes takes
a+a p'rchasing po+er fro% peop(e, there, red'cing de%and. It a(so da%pens the
incentive for peop(e to +ork harder. D'ring the ,ad o(d socia(ist das, %argina( tax
rates +ent 'p to over JHM, (eading to a f(o'rishing ,(ack econo%. *hese das,
thankf'((, finance %inisters rea(ise that too %'ch taxation is co'nter!prod'ctive. &'t
the point is, +hether the govern%ent chooses to tax %ore or not has i%p(ications for
co%panies and therefore for the %arkets.
...and that i%pacts stocks
>hi(e corporate tax rates app( e7'a(( to a(( co%panies, changes in the rates of
excise and c'sto%s d'ties affect different ind'stries in different +as. *hatPs +h +e
have a(( those ana(ses on ,'dget da tring to ga'ge the i%pact of the ,'dget
proposa(s on ind'stries and individ'a( co%panies. .,vio's( stocks too are i%pacted.
Disinvest%ent!a reso'rce!raising ro'te +hich a(so affects %arket
*he other +a of raising reso'rces is thro'gh disinvest%ent. Divesting the
govern%ent stakes in good co%panies ,rings good 7'a(it invest%ents into the
stock%arket and he(ps investors.
Deficit can a(so ,e checked thro'gh expendit're c'ts
&'t raising reso'rces is not the on( +a to keep the deficit in check. *he other +a is
to red'ce govern%ent expendit're. Is that a good thing< It depends on the state of the
econo%. If there is a recession going on and there is s',stantia( excess capacit,
red'cing the deficit +o'(d red'ce p'rchasing po+er and h'rt de%and. *he need here
+o'(d ,e to increase govern%ent expendit're to kickstart the econo%.
*he 7'a(it of the deficit is of great i%port
$t other ti%es, ho+ever, red'cing govern%ent expendit're +o'(d ,e a good thing. It
depends, ho+ever, on +hat kind of expendit're o' pr'ne. If the govern%ent c'ts
do+n on capita( expendit're, that is the expendit're re7'ired for ,'i(ding phsica( and
socia( infrastr'ct're, then econo%ic gro+th is ,o'nd to s'ffer. "overn%ent
invest%ent in roads, te(eco%, ports, etc, has knock!on effects on the rest of the
econo%, i%proving prod'ctivit and raising invest%ent de%and. *hat trans(ates into
orders for capita( goods co%panies. "ro+th o,vio's( trans(ates into gro+th for
individ'a( co%panies, raising their va('ations. If, on the other hand, the govern%ent
red'ces s',sidies, rationa(ises prices, and tri%s f(a, in an effort to ,eco%e %ore
! 99 !
___________________________________________________________________________________
prod'ctive, that is to ,e +e(co%ed. In other +ords, itPs not j'st the fisca( deficit that is
i%portant, ,'t the 7'a(it of that deficit.
State of govern%ent finances sho'(d concern investors
*he govern%ent, thro'gh its fisca( po(ic, has the po+er to contro( the econo%,
interest rates and +ith it, the direction of the %arkets. Investors have reason,
therefore, to ,e concerned a,o't the state of the govern%entPs finances.
Mo/.1a(y 4oli2y a/0 1h. s1o2k 8a(k.1
#onetar po(ic affects a(( of 's .
Eo' +o'(d have noticed the rea%s of ne+sprint ch'rned o't +hen the ;eserve &ank
of India anno'nces its %onetar po(ic ever six %onths. 1ike a (ot of peop(e, o'
+o'(d have tho'ght that
it is %ere( another reason to fi(( the financia( pages4 or,
%ore charita,(, it %a ,e i%portant for ,anks ,'t not for ordinar investors
(ike o' and %e.
*he fact is that ;&I %onetar po(ic has an effect on a(( investors. 1etPs take a (ook
ho+.
$ too( to contro( inf(ation, +hich direct( affects interest rates
#onetar po(ic is ai%ed at contro((ing the (eve( of inf(ation & interest rates in the
econo%. *o do that, the ;eserve &ank tries to (o+er the %one s'pp( +hen prices
are rising. /o+ does it do that< & (o+ering the a%o'nt of %one avai(a,(e +ith
,anks. ;aising reserve re7'ire%ents, i.e., the a%o'nt of %one +hich ,anks %'st
keep i%po'nded +ith the ;&I, is one +a. $nother %ethod is to se(( ,onds to the
,anks. >hen ,anks ,' ,onds fro% the ;&I, %one f(o+s o't fro% ,anks to the ;&I,
(o+ering the a%o'nt of %one avai(a,(e for (ending. Eo'P(( re%e%,er that j'st ,efore
the 5JJ@ e(ection finance %inister #an%ohan Singh tried his ,est to (o+er inf(ation,
,e(ieving that a (o+er inf(ation rate +o'(d i%prove the chances of a 0ongress
govern%ent. /e got that +rong, ,'t in the process ;&I s7'ee3ed %one s'pp(.
>hat happened next is histor. &eca'se %one +as scarce, interest rates started
%oving 'p to astrono%ica( (eve(s. 0o%panies fo'nd that the +ere starved of f'nds,
or co'(dnPt afford the high rates. *he '(ti%ate res'(t +as that the econo% s(id into a
recession.
So , changing the %one s'pp(, the ;eserve &ank can deter%ine the (eve( of
interest rates. /igher (eve(s of interest rates i%pact corporate ,otto%(ines and
disco'rage co%panies fro% investing. *hat s(o+s do+n gro+th.
Does the process +ork the other +a<
In other +ords, can the ;&I spark an econo%ic recover , increasing %one s'pp(,
+ith res'(tant (o+er interest rates< *he evidence does not see% as strong. 1o+er
interest rates can he(p in creating the right at%osphere for a recover, ,'t it is not
eno'gh to spark one , itse(f. So%e kind of sti%'('s to de%and %'st go hand in hand
as +e((.
! 9: !
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I84a21 o/ s1o2k 8a(k.1
In the >est, +here ,oth the ,ond as +e(( as the e7'it %arkets are %at're, an increase
in interest rates (eads to %ore %one f(o+ing into ,onds. .ther things re%aining the
sa%e that %eans (ess %one for the e7'it %arkets. Eo'P(( re%e%,er that (ate (ast
ear, +hen the Do+ sho+ed signs of +eakness, =edera( ;eserve 0hair%an $(an
"reenspan decided to (o+er the =edera( f'nds rate and the disco'nt rate. 1o+ering the
rate at +hich ,anks co'(d access =edera( f'nds +as a signa( for interest rates to go
do+n in the rest of the econo%. #one f(o+ed fro% the ,ond into the e7'it
%arkets, the Do+ crossed the %agic 5H,HHH %ark, and "reenspan sing(e!handed(
saved the +or(dS In India, the ,ond %arkets are not ver (i7'id, and on( the ,anks are
active in that %arket. Since ,anks do not invest in e7'ities, except %argina((, there is
no f(o+ of f'nds fro% the ,ond to the e7'it %arkets. So the i%pact of %onetar
po(ic on the e7'it %arkets here is indirect, rather than thro'gh the direct ro'te.
*herePs et another +a in +hich higher interest rates affect the advanced econo%ies.
&eca'se a(%ost everone in the AS has ,orro+ed 'p to his neck, interest rates are
i%portant for cons'%er spending. >hen interest rates rise, peop(e spend (ess ,eca'se
the canPt afford to ,orro+ at the high rates. *his (o+ers de%and and s(o+s the
econo% do+n.
/o+ever, the ;&I does have a %ore direct +a of inf('encing the stock%arket. *hat
is , varing the percentage of f'nds +hich ,anks are a((o+ed to invest in the
stock%arket. $t present, the (i%it is : per cent of the incre%enta( deposits of ,anks.
*hat %eans, if a ,ank gets ;s5HH +orth of ne+ deposits, it can invest ;s: in the
stock%arket. Anfort'nate(, +ith ,anks not ,eing ver keen on investing in e7'it,
their invest%ents ,een far ,e(o+ the (i%it.
;&I can a(so inf('ence exchange rates
*he centra( ,ank a(so has the po+er to decide the (eve( of the c'rrenc ,oth , direct
intervention and , targeting interest rates, +hich are a ke factor in deter%ining
exchange rates. If it fee(s the r'pee is too +eak, it se((s do((ars in the %arket and ,'s
r'pees. If it fee(s the r'pee sho'(d go do+n a ,it, a(( it has to do is ,' do((ars. *he
r'peePs exchange rate o,vio's( has enor%o's i%p(ications for i%porters and
exporters. >hatPs %ore, even those co%panies +hich prod'ce for the do%estic %arket
+o'(d ,e affected, ,eca'se the price of i%ports +o'(d ,e changed. =or instance,
;e(iance Ind'stries +o'(d ,enefit if the r'pee ,eco%es stronger, as the price of
co%peting i%ports +o'(d rise. Si%i(ar(, co%panies +hich export soft+are +o'(d
,enefit +hen the r'pee +eakens.
! 9@ !
___________________________________________________________________________________
T'e MSCI In3e.
>ho is #S0I<
#organ Stan(e 0apita( Internationa( Inc. D#S0IF is a (eading provider of g(o,a(
indices, ,ench%ark re(ated prod'cts and services to investors +or(d+ide. #S0I
indices are the %ost +ide( 'sed ,ench%arks , g(o,a( portfo(io %anagers.
$ccording to a recent s'rve , #erri(( 1nchC"a(('p, over JHM of the )orth
$%erican and $sian internationa( e7'it assets are ,ench%arked to the #S0I Indices.
In E'rope too, over :HM of the continenta( f'nd %anagers peg their portfo(ios to the
#S0I Indices.
&esides this, the #S0I has 58HH c'sto%ers +or(d+ide +ho 'se its indices as a
,ench%ark. /ence an change in these indices has a significant i%pact on g(o,a(
capita( %arkets.
>hat does it %ean to ,e a ,ench%ark<
/o+ does the g(o,a( f'nd %anger decide +here to invest his %one and in +hat
proportion Dasset a((ocation as the ca(( itF< /e needs a ,ench%ark that indicates the
avai(a,(e invest%ent opport'nities aro'nd the g(o,e.
*he ,ench%ark is tpica(( an Index. *he %ost pop'(ar g(o,a( indices are the #S0I
indices. *he #S0I Indices Dthere are a ,asket of the%F consist of vario's stocks fro%
individ'a( co'ntries. *he g(o,a( f'nd %anagers can then ,ench%ark their perfor%ance
in t+o +as.
Either the can %i%ic the entire portfo(io of stocks and hence peg the ret'rn to that of
the index or the can choose so%e other stocks that can o'tperfor% the ret'rn of this
index. /ence the portfo(io %anagerPs invest%ent patterns are deter%ined not j'st ,
ho+ attractive the co%panies in o'r co'ntr are ,'t a(so , the +eight of o'r
co'ntr in the #S0I index.
/o+ is the index generated<
*he #S0I e7'it indices are constr'cted in a consistent %anner across a(( co'ntries,
enco%passing a tota( of 83 deve(oped %arkets and 8I e%erging %arkets. *his
consistent approach to index constr'ction ens'res proper representation of the
co'ntrPs 'nder(ing ind'str distri,'tion and %arket capita(i3ation. It a((o+s
investors to acc'rate( co%pare e7'it perfor%ance across %arkets, regions and
sectors.
In this process, #S0I tracks deve(op%ents in a(%ost 3HHH co%panies D,oth (isted and
'n(istedF aro'nd the g(o,e. *hese e7'ities acco'nt for over JJM of the +or(dPs tota(
%arket capita(i3ation.
#S0I co'ntr e7'it indices are constr'cted 'sing the fo((o+ing five stepsB
! 9G !
___________________________________________________________________________________
Define the (isted sec'rities +ithin each co'ntr.
Sort the sec'rities into ind'str gro'ps and se(ect sec'rities 'nti( @HM of each
ind'strPs %arket cap.
Se(ect the sec'rities +ith good (i7'idit and free f(oat.
$void cross!o+nership a%ong stocks in the index.
$pp( the f'(( %arket capita(i3ation +eight to each stock.
*his %ethod not on( ens'res the inc('sion of ever ind'str into the co'ntrPs index,
,'t a(so that the represent @HM of the %arket capita(i3ation. In other +ords, one can
deter%ine the perfor%ance of a partic'(ar co'ntrPs %arket , ca(c'(ating the ret'rns
of the co'ntrPs #S0I index.
*hese :5 #S0I 0o'ntr Indices are 'sed to generate regiona( indices s'ch as #S0I
E'rope Index, #S0I E%erging #arket Index. *hose g(o,a( %anagers +ho +ant to
expose their f'nd +ith a certain regiona( risk can 'se these regiona( indices.
*he #S0I +or(d index is constr'cted , co%,ining the #S0I co'ntr indices 'nder
certain +eightages. *his +or(d index is revised on a 7'arter( ,asis and therefore the
co'ntrPs +eightage keeps shifting on the ,asis of expected perfor%ance of different
#S0I 0o'ntr Indices.
Po+erf'( eno'gh to affect co'ntrPs capita( %arket
It is ver diffic'(t for an g(o,a( f'nd %anager to track the +ho(e +or(dPs e7'it
%arket and opti%i3e the profit of his portfo(io. #S0I Indices cover a(%ost JJM of the
entire +or(dPs %arket capita(i3ation4 therefore a(%ost JHM of the g(o,a( %anagers
fro% )orth $%erica and $sia fo((o+ these indices for their invest%ent decisions.
/erePs the c(incher. If #S0I revises +eightage of an co'ntr in the #S0I +or(d
index then %ost of the g(o,a( %anagers react to it and shift their invest%ents
corresponding(.
=or exa%p(e, if #S0I anno'nces an dip in the IndiaPs +eightage in the +or(d index
and increases sa *hai(andPs +eightage, then g(o,a( %anagers +i(( decrease their
expos're to Indian stocks and the %one +i(( shift to *hai stocks.
/ence, these revisions of co'ntrPs +eight in the index can ca'se h'ge s'%s of capita(
to either f(o+ in or o't of a co'ntr changing the fort'nes of its capita( %arket.
S1o2k A721io/s
.f a'ctions and their origin

! 9I !
___________________________________________________________________________________
*he +ord a'ction, in si%p(e ter%s, i%p(ies a p',(ic sa(e in +hich propert or ite%s of
%erchandise are so(d to the highest ,idder.
Did o' kno+ that a'ctions 'sed to take p(ace +a ,ack d'ring the /o%eric period in
"reece< It +as a %eans of transferring the o+nership of s(aves fro% one person to the
other. *his sa%e 'nder(ing concept of a'ction has taken a %ore refined for% in
recent ti%es ! (ike the a'ction of co%%odities or the ,e(ongings of fa%o's
persona(ities. /ave o' ever ,een to an a'ction ho'se (ike 0hristiePs or Sothe,Ps,
+here +orks of art are so(d to the highest ,idder in a'ction<
)o+, o' are pro,a,( ,eginning to +onder +hat +e are doing disc'ssing a'ctions of
s(aves and co%%odities or art a'ction ho'ses (ike 0hristiePs and Sothe,Ps here, in the
invest%ent j'ng(eS $((o+ 's to c(arif that o'r intention is not to disc'ss art a'ctions
per se, ,'t a'ctions cond'cted on the ,o'rses. $'ctions are not cond'cted on( to se((
%erchandise or +orks of art in ,ig a'ction ho'ses4 the are a(so a co%%on feat're on
stock exchanges.
>h cond'ct a'ctions in the stock %arket<
$'ctions are cond'cted on the exchanges +hen, for so%e reason, shares Dphsica( or
de%atF are not de(ivered to the exchange on ti%e.
Exchanges cond'ct a'ctions to pena(ise the part for defa'(ting on de(ivering the
shares on ti%e, and there, to protect the sanctit of sett(e%ents. It is a necessar evi(
! i%agine the chaos if the defa'(ting part +ent scot!free and de(ivered shares at its
o+n free +i((. *his +o'(d trigger a chain reaction of defa'(ts.
If the defa'(ting part fai(s to de(iver the shares on ti%e to the exchange, the exchange
in t'rn is 'na,(e to de(iver the shares to the part +ho p'rchased the%. *he
p'rchasing part in t'rn %ight have a(read so(d those shares ,efore receiving the%
fro% the exchange and no+ it +o'(d ,e 'na,(e to de(iver those shares on ti%e. *his
vicio's chain co'(d go on and on.
*herefore, it ,eco%es i%perative that a'ctions are he(d so that pa!in and pa!o't of
shares take p(ace on ti%e, in accordance +ith the sett(e%ent cc(e of the respective
exchanges.
;easons for shares to go on a'ction
Shares co%e 'nder the ha%%er +hen the have ,een either de(ivered short or fo'nd
to ,e o,jectiona,(e , the exchange. &ased on the reasons +h shares 7'a(if for
a'ction, the have ,een categori3ed into t+o tpesB
5. $'ction d'e to shortages
8. $'ction d'e to o,jection
Auction due to shortages
! 9J !
___________________________________________________________________________________
$s has ,een disc'ssed a,ove, an a'ction d'e to shortages takes p(ace +hen the
de(ivering part fai(s to de(iver its share on ti%e to the exchange, there, triggering
the vicio's chain reaction of the exchange ,eing 'na,(e to de(iver the shares on ti%e
to the p'rchasing part and p'rchasing part in t'rn ,eing 'na,(e to de(iver shares on
ti%e if it has a(read so(d it and so on... .ne of the co%%on reasons +h shares co%e
'nder a'ction d'e to shortages is the conf'sion that arises a,o't the de(iver date of
the shares, if the are going into the Pno de(iverP period.
Auction due to objection
Phsica( shares go in for a'ctions not on( if the are de(ivered short, ,'t a(so if the
are fo'nd to ,e o,jectiona,(e and not rectified on ti%e , the part concerned. *here
are %an reasons +h shares co'(d co%e 'nder o,jection. *o (ist a fe+B
*ransfer deed attached to the share certificate is o't of date
Detai(s (ike distinctive n'%,er, fo(io n'%,er, certificate n'%,er, transferor
na%es etc are not fi((ed or fi((ed incorrect( on the transfer for% attached +ith
the share certificate
>itness sta%p or signat're on transfer deed is %issing
Signat're of the transferor is %issing
De(ivering ,rokerPs sta%p is %issing on the reverse of the transfer deed
Sta%p of the registrar of the co%pan is %issing
>hen a share is ret'rned to the ,roker , the exchange as o,jection, the ,roker is
(ia,(e to infor% the c(ient and get the o,jection rectified. If the part fai(s to rectif
the o,jection +ithin a stip'(ated ti%e period, then the shares go for a'ction. *he
defa'(ting part is then pena(ised , having to ,ear the a'ction price.
Does one a(+as s'ffer a ,ig (oss in an a'ction<
*he defa'(ting part does s'ffer a (oss +hen their shares go in for a'ction. I%agine
the rate at +hich the a'ction +o'(d take p(ace if the %arket is rising and there is a
great de%and for the stock. *he defa'(ting part +o'(d ,e re7'ired to pa for the
difference ,et+een the higher a'ction price and the act'a( sa(e price of the stock.
Even in the case of a fa((ing %arket +hen stocks are taking a ,eating, the defa'(ting
part does not stand to gain the difference in the a'ction price and the act'a( sa(e
price. *he defa'(ting part instead has to forgo the entire sa(e proceeds it had earned.
.r even +orse is the case +hen there are no participants in an a'ction. In s'ch a case,
the a'ction price is decided , the exchange. It varies +ith exchanges and is ca((ed the
Pc(ose!o'tP price.
"o> is 1h. 2los.-o71 4(i2. a((i5.0 a1D
In three si%p(e steps.
! :H !
___________________________________________________________________________________
S1.4 o/.? *he exchange decides 'pon a PfixedP price and adds 8HM to it. Incidenta((,
the fixed price varies +ith exchanges.
=or the &o%,a Stock Exchange the fixed price is the Pstandard rateC ha+a(a rateP
decided , the exchange. *his standard rate is ca(c'(ated on the (ast da of the
sett(e%ent. It is the si%p(e average of a(( the trades exec'ted on that partic'(ar da.
*he )ationa( Stock Exchange, on the other hand, takes the c(osing price of the stock
'nder a'ction as the fixed price. *he c(osing price is arrived at , taking the +eighted
average of a(( the trades exec'ted in the partic'(ar scrip in the (ast thirt %in'tes of
the trading session.
S1.4 1>o? *he res'(ting price is then co%pared +ith the highest price for the stock in
the sett(e%ent in +hich the defa'(ting part so(d the scrip.
S1.4 1h(..? *he higher of the t+o prices, ie the sett(e%ent price and the fixed price
p('s a 8HM pre%i'%, is considered as the c(ose!o't price.
>hich %eans if the fixed price decided , the exchange is higher than the sett(e%ent
price, the sett(e%ent price is dee%ed as the c(ose!o't price. $(ternative(, if the
sett(e%ent price is higher than the fixed price, the stock is Pc(osed o'tP at the sett(e%ent
price.
Anderstand things +ith ;e(iance
1et 's 'nderstand this ,etter +ith an exa%p(e. 1et 's ass'%e that a part has
defa'(ted on shares of ;e(iance Ind'stries D;I1F. $nd his shares are 'p for a'ction on
the &SE. *he &SE PfixesP the Pha+a(aP price for ;I1 at ;s38H. $nd as per r'(e, it a(so
adds 8HM to the fixed price and arrives at the fina( price of ;s3I9.
1et 's %ake another ass'%ption at this stage. *hat the highest price in the sett(e%ent
in +hich the defa'(ting part had so(d the stock, +as ;s9HH.
)o+, o,vio's(, the c(ose!o't +i(( take p(ace at the s.11l.8./1 4(i2. o- $s&00, as it is
higher than the -i@.0 4(i2. E$s'F&G.
.ther side of the coin
>hat if the sett(e%ent had taken p(ace at a price (ess than the fixed price of ;s3I9<
>hat if it had taken p(ace at, sa, ;s3H:< >e((, then the fixed price +i(( ,e taken as
the Pc(ose!o'tP price as it is higher than the sett(e%ent price. $nd the stock +i(( ,e
a'ctioned at ;s3I9.
! :5 !
___________________________________________________________________________________
Mana*e+ent #e"(e2t%on
;evered invest%ent ana(sts the +or(d over have constant( dri((ed into o'r %inds
that it pas to ,e invested in co%panies +hose %anage%ents are perceived to ,e
foc'sed and proactive. $ good %anage%ent a(+as co%%ands pre%i'% va('ations
for the stock. *he (ogic is j'stified given the fact that the %anage%ents attit'de
to+ards the co%pan deter%ines the gro+th c'rve it takes. 1ets test this reasoning
and see +hether the (ogic rea(( ho(ds good for Indian co%panies.
=or the st'd (ets take so%e co%panies kno+n for their rep'ted %anage%ents. *he
sa%p(e inc('des the (ikes of Infoss, /D=0, /D=0 &ank, /11, /ero /onda, P'nja,
*ractors and Dr. ;eddPs.
"LL Vs 2o/1.84o(a(i.s
=#0" %ajor, /ind'stan 1ever D/11F is a pri%e exa%p(e of +hat %anage%ent
perception can do to the va('ations of the stock. /11 has a(+as co%%anded
pre%i'% va('ations not on( ,eca'se of its si3e, ,'t its consistent good perfor%ance.
*ho'gh another =#0" co%pan, )ir%a, too has p't in good perfor%ance ear after
ear, it sti(( (ags ,ehind +hen it co%es to va('ations.
*ho'gh )ir%as %anage%ent is considered to ,e ver foc'sed on its ,'siness, it is
/11s %anage%ent that is considered to ,e %ore pro!active ,et+een the t+o. /11s
%anage%ent has contin'a(( expanded its top(ine , adding %ore prod'cts and
,'sinesses, either organica(( or inorganica((. It spreads the co%pans risk.
#kt. 0ap. D;s %F ;.E DMF PCe DWF
/11 99:,G8G :H.J 95.G
)ir%a 85,@IG 8G.3 J.3
"odrej Soaps 9,8@H 8H.8 G.H
If o' (ook at the va('ation ta,(e, it (ooks as if "odrej Soaps is ,ack +ith a ,ang. &'t
this reviva( in fort'nes of "odrej Soaps can a(so ,e attri,'ted to a (arge extent on the
right %oves the co%pans %anage%ent has ,een %aking in the (ast one ear. *he
%anage%ent has ,roken the co%pan into t+o, to (end %ore foc's to its =#0"
,'siness. *he co%pan has ,een repaing its de,ts in a ,id to i%prove its
profita,i(it. $(( this has not gone 'nnoticed , the ,o'rses. *he va('ations of the
co%pan have started to i%prove in the past co'p(e of %onths, as the %arkets
perceive the %anage%ent to ,e on the right track.
! :8 !
___________________________________________________________________________________
"DFC Vs 2o/1.84o(a(i.s
Indias (eading ho'sing finance co%pan, /o'sing Deve(op%ent =inance 0orporation
1i%ited D/D=0F is another fine exa%p(e. /D=0 is a pioneer in ho'sing finance in
India. *he co%pan contro(s GHM of this %arket. Its consistent perfor%ance, ,oth
financia( as +e(( as in c'sto%er satisfaction has he(ped it retain its %arket share in this
,'siness. Despite ne+ entrants in the ,'siness in the recent ears, it contin'es to ,e
the (eader.
&eca'se of its caref'(( (aid o't h'ge ,ranch net+ork it is a,(e to service its
cons'%ers efficient(. /D=0s %anage%ent is rated ver high( for its foc'sed
approach to its ,'siness. In contrast aggressive entrants (ike I0I0I have historica((
taken on %ore )P$s.
/D=0 @@,GH8 5J.8 5@.@
1I0/= 8,:I@ 5J.3 8.9
I0I0I G@,338 5:.G @.3
>hi(e the co%petition p(as catch 'p +ith /D=0, the co%pan has ,ranched o't into
,anking, ins'rance, %'t'a( f'nds and retai( (oans. Its s',sidiar, /D=0 &ank, is
a(read the fastest gro+ing private ,ank in India. Even this s',sidiar, is va('ed
high( ,eca'se of the %anage%ent Lfee( good factor.
/D=0 &ank @5,335 5@ :5.5
I0I0I &ank 33,@:@ J.8 35.I
S&I 589,G33 5@.J @.5
A*I &ank :,99G 85.3 5H.G
! :3 !
___________________________________________________________________________________
I/-osys Vs 2o/1.84o(a(i.s
1ets take a (ook at one co%pan, +hich has no+ ,eco%e snon%o's +ith the
Indian soft+are revo('tion, Infoss. *he co%pan not on( has ,een t'rning in good
perfor%ances 7'arter on 7'arter, ,'t is a(so at the forefront of %anage%ent reporting.
Infact, Infoss ann'a( report +as one of the first in its kind in India that gave
co%p(ete disc(os're on the co%pans operations to its investors.
*his s%a(( act %'st have added tons of good+i(( to its va('ations. Since then,
disc(os'res , co%panies in their ann'a( reports and %eas'res to i%prove re(ations
+ith investors have to'ched ne+ (eve(s in 0orporate India. *his proactivit and
foresight has he(ped Infoss ,eco%e one of the %ost va('a,(e co%panies in the
co'ntr, adding to shareho(der +ea(th ear after ear.
Infoss 98I,8:: 39.3 59J.I
Sata% 5HG,@I8 3I.: GJ.I
-is'a(soft 5:,G8H 35.J ::.J
Si(ver(ine 5:,G3I 5:.3 88.3
".(o "o/0a Vs 2o/1.84o(a(i.s
In the t+o!+hee(er seg%ent, it is not for nothing that the #'nja( fa%i( is revered.
*he fa%i(s %otorcc(e joint vent're +ith /onda Inc, ?apan, /ero /onda, redefined
the shape of the t+o!+hee(er ind'str in India. $t a ti%e +hen &ajaj $'to +as the
'ncro+ned king of this seg%ent Dread scootersF, the #'nja(s had foresight to ga'ge a
shift in cons'%er preferences to+ards %otorcc(es. =or this, the +ere a%p(
re+arded. )ot on( the co%pan, /ero /onda, ,eca%e the 'ndisp'ted king of the
t+o!+hee(er seg%ent ,'t in the process created a (ot of +ea(th for its investors. *i((
toda, the co%pans distri,'tion %'sc(e co'p(ed +ith its top of the (ine ,ikes,
co%%and the cons'%ers as +e(( the investors (oa(t.
/ero /onda 33,G9J 93.3 5G.@
&ajaj $'to 88,3I@ 5J.5 3.G
*-S S'3'ki 9,335 8G.9 :.H
! :9 !
___________________________________________________________________________________
P7/6a; T(a21o(s Vs 2o/1.84o(a(i.s
*he %anage%ent of P'nja, *ractors, part of the S+araj "ro'p, is not as high profi(e
as so%e of the (eading ,'siness ho'ses in India. &'t the co%pans si(ence is %ore
than %ade 'p , the consistent perfor%ance of the co%pan. *he co%pan is foc'sed
on the tractor seg%ent, 'n(ike %arket (eader #ahindra & #ahindra. It is this foc's
that has paid it rich dividends in ter%s of shareho(der va('e. >henever, the agric'(t're
sector in India is on an 'pt'rn, P'nja, *ractors is the first one to reap the dividends.
.n the other hand, +henever a ,ad crop co%es ,, P'nja, *ractors foc's he(ps it tide
thro'gh the diffic'(t sit'ations s%ooth( as co%pared to its riva(s. *he co%pans
pr'dent financing po(icies and +orking capita( %anage%ent has kept it at the forefront
of providing the %axi%'% ret'rn to investors.
P'nja, *ractors 58,@@3 3:.I J.:
#&# 5I,GI8 59.G @.I
Escorts I,I95 55.J G.J
D() $.00y,s Vs 2o/1.84o(a(i.s
In the (ast fe+ ears, the do%estic Indian co%panies have seen a ,ig re!rating in their
va('ations. *his has co%e in the +ake of the advances %ade in the fie(d of ;esearch
and Deve(op%ent D;&DF. *he co%pan that spearheaded the Indian ;&D effort +as
/dera,ad!,ased Dr. ;edds 1a,oratories. *he co%pans pioneering efforts to
discover ne+ %o(ec'(es, ahead of the %'ch dreaded prod'ct patent regi%e post 8HH:,
ti(ted the ,a(ance in favo'r of ho%egro+n phar%ace'tica( co%panies. *his
enco'raged %an other do%estic co%panies to have faith in their ;&D effort and
increased invest%ents in this area. Its no +onder then that Dr. ;edds sits at the top
of heap in ter%s of va('ations, even ahead of the #)0 phar%ace'tica( co%panies in
India.
Dr. ;eddPs 39,:5@ 5:.I :G.8
;an,ax GJ,883 53.I 9H.G
S'n Phar%a J,355 8I.G 5H.3
0ip(a GH,5@: 83.5 :8.G
&'t it %'st ,e added here, that a good perception of the %anage%ent is ,orne ,
ears of so(id perfor%ance and doesnt ,'i(d overnight. )o short c'ts to this
! :: !
___________________________________________________________________________________
AGG/EGATE /ESOU/CE MOBILISATION IS GOING
DOWNSHILL
$ (ook at the statistics for reso'rce %o,i(i3ation , the corporate sector ,oth
fro% do%estic and overseas %arkets +i(( revea( that the sit'ation is extre%e(
disappointing
*$&1E 5B *.*$1 ;ES.A;0E #.&I1IS$*I.) &E */E 0.;P.;$*E
SE0*.; =;.# */P;I#$;E #$;2E*
EE$; $#.A)* ;$ISED PE;0E)*$"E
-$;I$*I.)
5JJG!5JJI 9858:
5JJI!5JJJ @H5J8 98.IJ
5JJJ!8HHH G89:H 8H.3@
8HHH!8HH 5G99H3 8.G
8HH5!8HH8 GI3J@ :.3G
8HH8!8HH3 9HIG3.:3 !9G.I@
So'rceB Sec'rities in India a revie+, )SE. +++.nseindia.co% #onth(
;evie+ of the Indian econo%, 0#IE $%o'nt are in ;s 0rore
)ot on( is reso'rce %o,i(i3ation increasing at a decreasing rate over the
entire period, , for the Eear 8HH8!8HH3 the a%o'nt raised fro% the pri%ar
%arket has dec(ined in a,so('te ter%s.. $ s'ggestive s'%%ar of the a,ove
data revea(sB
Starting fro% a striking and i%pressive acce(eration of 98.IJM in 5JJI!JJ,
the gro+th rate of pri%ar %arket %o,i(i3ation do+n to a pitia,(e !9G.I@M in
8HH8!8HH3t thro'gh a stead dec(ine.
0orporate iss'es fig'res too( a sharp do+n+ard spin tota( a%o'nt raised
started at ;s 98,58: crore in 5JJG!JI and ended at ;s 9H,IG3.:3 crore in
8HH8!8HH3 (ess that the for%er , Inspite of reaching a peak of ;s GI,,3J@ crore
in 8HHH!H5.
>hat is perhaps %ost striking is the dec(ine in the corporate iss'es in 8HH8!
8HH3 , a(%ost :HM the a%o'nt raised fe(( , nothing (ess than ;s 3G,:88.3G.
! :@ !
___________________________________________________________________________________
*$&1E 8B ;ES.A;0E ;$ISED &E */E 0.;P.;$*E SE0*.; -IS!X!
-IS ; S.A;0ES ;$ISED &E */E ".-E;)E#* =;.# */E P;I#$;E
#$;2E*
EE$;
*.*$1
$#.A)*
;$ISED
0.;P.;$*E SE0*.; ".-* SE0*.;
$#.A)*
;$ISED
PE;0E)*$"E
-$;I$*I.)
$#.A)*
;$ISED
PE;0E)*$"E
-$;I$*I.)
5JJG!5JJI 5HJ:55 9858: @G3I@
5JJI!5JJJ 5H@H@G @H5J8 98.IJ 5H@H@G :G.9
5JJJ!8HHH 55333@ G89:H 8H.3@ 55333@ @.I:
8HHH!8HH5 8H@IGJ G99H3 8.G 58I9I3 53.3@
8HH5!8HH8 88@J55 :.3G 5:8:HI 5I.G
So'rceB Sec'rities #arket in India, a ;evie+, +++.nseindia.co%
$%o'nts are in ;s 0rore
*he i%portant facts reva('e , that data areB
)ot on( does the govern%ent raise higher a%o'nt of reso'rces ver ear
vis!a!vis the corporate sector, ,'t the rate of gro+th is a(so higher for the
for%er as co%pared to the (atter
*he second graph sho+s that the share of the govern%ent is higher than
that of the corporate sector on a s'stained ,asis.
Data s'ggest the presence of cro+ding o't effect +herein excessive
,orro+ing , the govern%ent (eaves (itt(e roo% for the corporate in the
%arket. Except 5JJI!5JJJ, ears of high gro+th of corporate ,orro+ings
D 8H.3@MF correspond to (o+er gro+th rates for the govern%ent D @.I:MF B
5JJJ!8HHH and vice versa B in 8HH5!H5 and 8HH5!H8 gro+th rates for
corporate sector and govern%ent are 8.G M and :.3GM and 53.3@M and
5I.GM respective(.
>ith dis%ant(ing of contro( regi%e and grad'a( (o+ering S1; and 0;;, there
has ,een a change in foc's in the govern%ents ,orro+ing progra%%e.
Dependence oh high cost ho'seho(d saving 'nder tax re,ate sche%es is ,eing
! :G !
___________________________________________________________________________________
grad'a(( phased o't as it is increasing( tapping the %arket to raise reso'rce
at %arket cost. 0onse7'ent( +hi(e 5IM of the fisca( deficit +as ,eing
financed , %arket ,orro+ing , the centre in 5JJH!J5 this fig're has co%e
'p to a record @JM , 8HH5!H8 D in percentage ter%s dependence of the state
govern%ents on %arket ,orro+ing has not increased %'ch hovering aro'nd
5IM F *his has fo'nd a ref(ection in the a,ove trends sho+ing high share of
the govern%ent in a%o'nt raised as +e(( as the cro+ding o't effect on the
corporate sector.
! :I !
___________________________________________________________________________________
/es2onse to 2!bl%( Iss!es
*he sa(ient aspects +hich need to e%phasi3ed areB
*he response to p',(ic iss'es is +orsening over ti%e as the proportion of
iss'es e(iciting ade7'ate response DY5.: ti%esF has ,een steadi( dec(ining
+ith on( s(ight recover in 8HH5!8HH8.
*he percentage of iss'es s',scri,ed to %ore that 5H ti%es is extre%e( (o+
for the entire period for 5JJJ!8HH8, hovering at or ,e(o+ @ in the
re%aining ears.
5JJJ!8HHH has ,een s(ight( ,etter +ith a significant( :3M of the iss'es
s',scri,ed to %ore that 5H ti%e as ho+ , the peek at this ear. *his is
d'e to increase in %ega iss'es d'ring this ear!there +ere 5J %ega
iss'esD ;s.5HHcrore and a,oveF as against 55 s'ch iss'es in the preceding
ear.
$nother +a to s',stantiate the contention that p',(ic iss'es are (osing
gro'nd, +ith the exception of 5JJJ!8HHH, is , noting that the %ost
s',scri,ed iss'e d'ring 5JJI!JJ +as , 2PI* sste%s +hich +as over
s',scri,ed , 98 ti%es4 the 'p trend in 5JJJ!8HHHis evident in the fact
that Sankha Infotech 1td., %ost s',scri,ed d'ring the period, +as over
s',scri,ed on( :I ti%es4 facts for 8HH5!H8 are extre%e( disappointing
+ith P'nja, )ationa( ,ank ,eing overs',scri,ed , a %ere 9.8J ti%es
high(ighting the fact that a,so('te( no iss'e +as s',scri,ed %ore than 5H
ti%es in this ears.
;ecent s'rves thro+ (ight on severa( aspects of the %arket that the
investors are dissatisfied +ith and a(so revea( the pscho(ogica( attit'de of the
investor to+ards the %arket. I%portant excerpts fro% these s'rves fo((o+B
$ s'rve cond'cted , Dr. 1.0 "'pta of Societ for 0apita( #arket
;esearch and Deve(op%ent D S0#;DF sho+s tat the n'%,er of investors
is stagnating at 8 crore since 5JJG . *his is s(ight( (o+er than the
investors in #=s, +hich stand at 83 %i((ion.
*hese investors acco'nt for ,are( GM of a(( Indian ho'seho(ds since 5JJ:.
*here are st'dies ,ased on the active acco'nts +ith the )ationa( Share
Depositor 1td. +hich s'ggest that 8 crore %ight ,e an overesti%ation for
investor pop'(ation . the p't the fig're at :H (akh or so, and given that
an person +ith a portfo(io of at (est : share has to open an acco'nt to se((
these shares, this esti%ate is pro,a,( correct.
! :J !
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*he ,iggest gro+th in investor pop'(ation happened ,et+een 5JJ5 and
5JJ: ,'t repeated sca%s have ,ro'ght this gro+th to a grinding ha(t. $
s'rve , )SE sho+s that confidence in the %arket %echanis% has
received ,(o+ after ,(o+ over the (ast fe+ ears d'e to repeated %arket
scanda(s.
*he S0#;D st'd points o't that investors perceive the pri%ar %arket
as far riskier than the secondar %arket . *he SE&I!)0$E; s'rve
cond'cted in 8HHHreinforeces this.
*he Shankarachara co%%ittee appointed , the finance %inister in 5JJI
conc('dedN %ost corporates enjo (itt(e credi,i(it +ith investorsN
$ccording to the SE&I! )0$E; s'rve , safet and (i7'idit are the
pri%ar considerations that deter%ine the choice of an assetB ,ank fixed
deposits are considered to ,e the safest +hi(e capita( %arket instr'%ents as
the %ost risk
1o+ per capita( inco%e, apprehension of (oss of capita(, a and econo%ic
insec'rit, +hich are a(( inter!re(ated factors, significant( inf('enced the
invest%ent attit'de of the ho'seho(ds.
*he (ack of a+areness a,o't sec'rities %arket and a,sence of a
dependa,(e infrastr'ct're and distri,'tion net+ork co'p(ed +ith aversion
to risk inhi,ited non!investor ho'seho(d fro% entering the sec'rities
%arkets
$s per the S0#;D s'rve conc('ded in 8HH5, IP.s have gone do+n into
investorPs preference +ith on( 8JM of the respondents regarding the% as
Nas a reasona,( good (ong ter% invest%entN d'e to recent deve(op%ents
and the position of the secondar %arket has i%proved d'e to refor%s , as
the corresponding percentage is 3JM.
*he sa%e s'rve conc('des that peop(e intending to invest in N ne+ share
iss'esN +as %'ch (o+er than those intending to ,' shares fro% the
secondar %arkets , the respective percentages ,eing 5@M and 95M
*he SE&I! )0$E; st'd sho+s that a st'nning JHM of the e7'it investor
pop'(ation o+ns : stocks or (ess. .ver G:M o+ns shares in j'st three
co%panies and j'st 'nder a 7'arter of a(( investors have ,ro'ght shares in
on( one co%pan.
S'rprising(, near( GJM of the pri%ar %arket investors ho(d on to their
invest%ents for over three ears.
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*he sit'ation is indeed extre%e( gri%. *he (ast o,servation sho+s that India
had serio's investors +ho +ere defeated , repeated sca%s and
s'pervisor fai('res. Severa( initiatives to t'rn aro'nd the sit'ation can ,e
derived fro% the a,ove disc'ssion itse(f.
>e have to 'nderstand that %aking state%ents (ikeN 0apita( %arkets canPt
deve(op 'n(ess investors deve(op a hea(th and %ore confident attit'de
to+ards risk taking N doesnPt take 's an+here. *he econo%ics ,ehind this
state%ent is expected to ho(d in nor%a(( f'nctioning and hea(th %arket ,
not in %arkets , +hich are, tor%ented , repeated sca%s and s'pervisor
fai('res, and I s'ch circ'%stances , investors +i(( sta a+a. $nd it is not fair
to p't the ,(a%e on the%. In fact, radica( steps need to ,e taken to so(ve the
pro,(e% of sca%s, fra'ds and %anip'(ations. *his is of 'nprecedented
i%portance as this is the ca'se that is f'nda%enta(( i%portant for the present
state of affairs. .ther ca'ses are s',sidiar.
0onse7'ent(. Sca%s need to ,e noticed and dea(t +ith ,efore the da%ageB
in the past, +e have ,een %'te spectators to the %aking and deve(op%ent of
sca%s and on( +hen these had f'(( ,(o+n, '(tra!restrictive g'ide(ines
+ere introd'ced +hich in effect a(%ost strang'(ated. $ good exa%p(e of
this is ho+ after the vanishing co%panies sca%, ne+ entries ,arriers a((o+ed
on( 3! ear dividend paing co%panies to f(oat iss'es, not rea(i3ing that
c(ose( he(d co%panies in the do',(e taxation era +ere not dividend paers.
;eg'(ation has to ,e on going and a da to da affair and not a +ake 'p ca((
+henever the is a crisis. *here is an 'rgent need as s'ch to insta(( a proactive
P%arket!+atchP sste% so that e%erging %a( practices are detected and nipped
in the ,'d itse(f.
$higher degree of investor friend(iness is ca((ed for in the reg'(ator set!'p .
.ne can ,(a%e the antedi('vian co%pan (a+ provision s governing acco'nts
and %anner of their presentation to shareho(ders. Indeed , the acco'nt
state%ents of %ost Indian co%panies are no+ not even ,are( co%prehensi,(e
to ordinar shareho(ders and investors. Even the a,ridged prospect's , +hich
is %eant for the retai( investor , is not an investor friend( doc'%ent ! its
7'a(it , 7'antit and for%at of disc(os're do not address his concerns.
"iven the finding that %ost of the ho'seho(ds donPt enter the capita( %arket
,eca'se of (ack of a+areness, the need for a concerted effort to+ards
increasing the grasp of the +orking of the %arket of the genera( p',(ic is
o,vio's. *his ,eco%es a(( the %ore i%%inent ,eca'se investors tend to %ake
the%se(ves s'scepti,(e to risk, ,oth event re(ated as +e(( a s ones that occ'r
,eca'se of (ack of kno+(edge or c(arit. &esides, to expect hi%, +ho cannot
or dos not read a prospect's, to %ake a j'dicio's decision is expecting the
i%possi,(e, so%ething +hich has not happened even in the deve(oped
%arkets.
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DISCLOS!$E - H!ALITY O$ H!ANTITYD
$ historica( perspective revea(s that %an pro,(e%s faced , the pri%ar
%arket can ,e traced ,ack to the directive of 5JJ8 +hich overnight a,o(ished
the office of 00I $)0 =reed the %arkets . $s opposed to the ear(ier %ethod
of 00I deciding 'pon the pricing of iss'es, the ne+ era +as ,ased on free
pricing . >hen the ne+ po(icies +ere (i,era(i3ed in 5JJ8, the ke pi((ar
!infor%ation disc(os'res +ere p't in p(ace on( grad'a(( and in steps.
"rad'a((, on( the 7'antit of infor%ation increased ,' not (ists 7'antit.
0onsider, risk factors, a ke disc(os're e(e%ent in offer doc'%ents. *hese are
either not +e(( defined or are s'ppressed in the prospect's. *he foc's
re%ains on 7'antit, +ith risk factors on( fi((ing 'p pages and %an a ti%es,
the critica( ones are either not (isted at a(( or these get (ost in a %a3e. *here
a(so appears to ,e a (ot of high !handedness in addressing the risk factors.
0onse7'ent(, 'nti(( 5JJ5!J8, a(%ost everone +ho invested in pri%ar iss'es
o,tained ret'rns. S',se7'ent(, a(%ost everone +ho has invested in pri%ar
iss'es has (ost %one. )o +onder, then, that the %arket is a %ess.
>hen ta(king of refor%s, changes and reco%%endation, +e have to rea(i3e
that 7'a(it infor%ation is the (ife,(ood of vi,rant transparent %arkets.
*hro'gh significant progress has ,een %ade in the (ast fe+ ears, a (ot %ore
need to ,e done. *here are severa( reco%%endation in this regardB
$n extensive revie+ of iss'e stage disc(os're is reco%%ended sooth these
are ,ro'ght in (ine +ith ,est internationa( practices. $ credi,(e
%echanis% for assess%ent of risks and their disc(os're in a co%p(ete,
re(evant and investor friend( %anner is a(so critica( to enco'rage inforend
decision %aking , investors . $(so, infor%ation sho'(d ,e %ade
avai(a,(e 'nifor%( to a(( c(asses of investors and at the sa%e ti%e.
$tte%pts sho'(d ,e %ade to rationa(i3e the ro(e of exchangesB disc(os're is
present( dispersed over 89 stocks exchanges. >hi(e infor%ation is fi((ed
, a co%pan on( +ith the stock exchange +here it is (isted, its investors
are spread a((over the co'ntr. #oreover, it is co%%on( agreed that stock
exchanges have not perfor%ed their ro(e ade7'ate( co%p(iance ,
(isted co%panies has ,een poor +ith %an co%panies of fi(ing even their
ann'a( reports reg'(ar(. *hese things need to ,e eradicated.
>e need to ens're eas avai(a,i(it of infor%ation to investors. Severa(4
critica( infor%ation pieces or too(s are si%p( not %ade avai(a,(e , the
exchanges. *he s%a(( investor, of co'rse, has to r'n fro% pi((ar to post for
his infor%ation needs. *he desired infor%ation is a(so not avai(a,(e to
researchers, ana(st and %edia. =or exa%p(e, to get the ,a(ance sheet of
and (isted co%pan toda is a /erc'(ean task, even of a (arge co%pan.
=or effective and fair disse%ination of infor%ation, SE&I itse(f, or on a
! @8 !
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contract ,asis host at tone p(ace on the +e, a(( ,a(ance sheets, 7'arter(
ha(f ear( res'(ts and a(( other %ateria( infor%ation re(ating to each
co%pan.
MA*E T"E BEA* $EG!ALTO$ A ST$ONG ONE
#an +i(( arg'e that the reg'(ator has fai(ed the investors. despite the fact
that it kept de%anding %ore po+ers, the rea(it is that it did not 'se even its
existing po+er f'(( and reg'(ar(. .ver the ears, there have ,een hard(
an convictions and p'nish%ents that act as deterrents have ,een (acing. &'t
fair( eno'gh, the reg'(ator too has ,een fai(ed. It has had to operate +ith
severa( handicaps inc('ding (ack of ade7'ate p'nitive po+ers and the (ack of
independence that a reg'(ator sho'(d enjo. $(so, severa( of its initiatives
co'(dnPt %ateria(i3es d'e to o,jections on the gro'nd of preserving corporate
freedo%. *he fact is that %ore freedo% act'a(( re7'ires %ore reg'(ation. $
(ook at the h'ge reg'(ations enacted , the SE0 in free $%erica is %ore than
an a%p(e proof. *here are severa( steps that a can ,e taken to i%prove
scenarioB
In the past , %ost of the reg'(ations had ,een drafted in an ar,itrar %anner
and sooner of (ater, (oopho(es +ere sixcovered and exp(oited , the %arket.
/ence, it +o'(d rea(( %ake a difference if in the f't're, once the need for a
reg'(ation is fe(t, a draft sho'(d ,e first evo(ved thro'gh a co%%ittee ro'te
+hich sho'(d then p't 'p for p',(ic disc'ssion thro'gh a press re(ease or a
>e,site. $part fro% ade7'ate( descri,ing the rationa(e of the reg'(ation ,
an i%pact ana(sis sho'(d ,e done and p't o't in the p',(ic do%ain.
#oreover, it is necessar to revie+ reg'(ations reg'(ar(.
$ %ajor overha'(ing of SE&IA is ca((ed for. $t the end of the da, it is
i%portant that SE&I is feared and respected as a reg'(ator o'ght to ,e. *he
starting point ahs to ,e s'ita,(e e%po+er%ent of SE&I +ith (a+s for search
and sei3're and for s(apping higher %onetar pena(ties for disagree%ents of
'n(a+f'( earnings and for co%pensation to investors. E7'a(( i%portant is the
need to i%prove SE&IPs ski(( sets. >hat SE&I needs are experienced tea%s of
(a+ers, acco'nts, %arket practitioners, ana(sts and #= specia(ist. =or this,
the SE0 %ode( %a ,e adopted.
"IG" ENT$Y A$$IE$S NEED TO E $EMOVED
*he entr ,arriers need to ,e revised and po(icies have ,eco%e %ore rationa(.
*he %ain re7'ire%ent sho'(d ,e of (i7'idit. In this respect, there are %an
accepta,(e e(igi,i(it criteria an done or a co%,ination of %ore than one of
the% co'(d adoptedB these are net tangi,(e asserts, %arket capita(i3ation , to
assets, tota( reven'es, retain inco%e, operation histor and so on. It needs to
,e %entioned that an atte%pt ahs a(read ,een %ade , the Pri%ar #arket
! @3 !
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$dvisor 0o%%ittee in this regard4 it ahs reco%%ended rep(acing the
profita,i(it criterion , a ,ench%ark for a net tangi,(e assets in case of IP.s.
$nother i%portant reco%%endation is the one to scrap the re7'ire%ent of
8HM pro%oterPs contri,'tion is case of de,t iss'es. *his is a step in the right
direction ,eca'se this re7'ire%ent is advisa,(e pri%ari( for IP.s of e7'it so
as to ens're a certain (eve( of pro%otersP co%%it%ent to the co%pan and is
not re(evant for de,t iss'es an+a.
$nother re7'ire%ent that needs to ,e revised is the %ini%'% %arket
capita(i3ation re7'ire%ent. I* co%panies, in 5JJJ, +ere a((o+ed to red'ce
%ini%'% p',(ic offer fro% 8:M to 5HM of the iss'ed capita( provided their
%ini%'% %arket capita(i3ation +as ;s. :HH crore. *his +as s',se7'ent(
extended to cover a(( the sectors ,'t the %ini%'% %arket capita(i3ation +as
increased to ;s 5,HHH 0rore. *his ne+ (eve( is too high and is a severe
hindrance to attracting %ore offerings , good co%panies. Even the ear(ier
(i%it of ;s.:HH crore +as on the higher side and had ena,(ed on( three
co%panies in the entire three ears to tap the %arket, despite the ,oo% in
5JJJ!8HHH.
! @9 !
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MINIM!M P!LIC OFFE$ NO$MS
.ver the ears there has ,een a rapid di('tion in he %ini%'% p',(ic offer
re7'ire%ents. *he proportion that has to ,e offered to the retai( investor has
,een ,ro'ght do+n fro% @HM to 8: M and in so%e cases to 5HM. *here is
no+ a %ove that in case of si%'(taneo's( do%estic and overseas offering,
their re7'ire%ent %a ,e f'rther di('ted to on( that part of t 5HM +hich is
not a((otted of foreign investors on the gro'nds that the on( do%estic
%arket does not have the re7'isite depth. *his is c(ear( against the gro+th of
the do%estic %arket. *herefore, it is s'ggested that the %ini%'% p',(ic
offer sho'(d ,e increased to 8:M to i%part the desira,(e p',(ic character to
(isted co%panies and a(so to offer a ,igger pie of the %arket tot the s%a((er
investor.
T"E VANIS"ING ACT
*he (ast fe+ ears have +itnessed a ro,,ing vanishing act , (arge n'%,er of
co%panies +hich ahs had a negative i%pact not on( d'e to the (ost f'nds
+hich co'(d not 'ti(i3ed for prod'ctive invest%ent ,'t a(so d'e tot erosion of
investor confidence and the %a(aise of )P$s that has fo((o+ed.
In ear( 8HH5, a high (eve( co%%ittee +as set 'p as a joint effort , SE&I and
Depart%ent of 0o%pan $ffairsD D0$F to do so%ething a,o't it. *he
co%pan adopted the fo((o+ing definition of a Pvanishing co%panPB a
co%pan +hich had not fi(ed its ann'a( ret'rns or an ret'rns for then (ast
t+o ears +ith the ;.0s inspite of iss'e of a defa'(t notice +ithin fifteens
das, or no office of the co%pan is (ocated at the %entioned registered
office address at a the ti%e of inspection , stock exchange +as treated as a
vanishing co%pan. Since then, 88J s'ch co%panies have ,een identified and
order have ,een iss'ed to I@ co%panies and 3H8 directories prohi,iting the%
for associating +ith capita( %arket activities.
Eet, this narro+ technica( definition ignored the da pro,(e%NB *hat the case
of vanishing co%panies +as in fact one of vanishing f'nds ca'sed , the
co%panies g'i(t of aggressive overpricing and %is'se of iss'e f'nd. $
research done , P;I#E ;E-E$1ED that of the 5HH (argest e7'it iss'es of
the period 5JJ8!J@, G8 M had ,een (ost. ='rther, inter%s of action, on( %inor
p'nitive %eas're +ere initiated (ike prohi,iting co%panies or is directors
for% tapping the %arket for : ear B this is hard( a deterrent, its %ore (ike
catching a thief and (etting hi% off +ith a +arning that he cannot stea( for the
next five ears. 0(ear(, a (ot can ,e done , the reg'(ator on this front so as
to ens're that the %arket doesnPt t'rn 'nfriend( to a (arge n'%,er of
deserving co%panies on( ,eca'se of %iscond'ct , a %inorit.
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$ re(ated iss'e is the need for a fra%e+ork for %onitoring the end !'se of
f'nds. 0o%panies sho'(d ,e re7'ired to s',%it detai(ed disc(os'res a,o't 'se
of iss'e f'nds in their 7'arter( and ann'a( reports.
! @@ !
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THE CO/#OAT/E GO0E/NANCE MANT/A
.n the corporate governance front, there are so%e critica( iss'es that tindai
Inc %'st address. *he re(ated to the '%,re((a s',ject of co%%it%ent of
Indian 0o%panies to their stakeho(dersB protecting the shreho(dersP +ea(th ,k
enhancing the +ea(th thro'gh proper 'ti(i3ation of asserts and not frittering it
a+a in 'nconnected and non profita,(e vent'res or thro'gh expropriation
sho'(d ,e i%portant ai%s for the %anage%ent. $(so, co%p(iance +ith the
co'ntries (egis(ative fra%e+ork is extre%e( i%portant.
-en tho'gh the das of ra%pant taxCexcise evasion and foreign exchange
%anip'(ation are, , and (arge, ,ehind 's, there sti(( are co%panies that are
doing N innovative N tax p(anning for paing 3ero tax or %'ch (o+er a%o'nts
than their tr'e tax d'es. >itho't financia( pre%ised on so'nd, hones
n'%,ers, capita( %arkets +i(( co((apse 'pon the%se(ves. $s (ong as Indian
co%panies o,e the dictates of c(ever (a+ers and acco'ntants rather than
the (ong gro'nd r'(es of ethics and fair p(a, this (a%enta,(e state of
affairs is (ike( to contin'e.
St'dies of fir%s have sho+n that %arkets and share investors take notice of
+e(( %anaged co%panies, respond positive( to the%, and re+ard s'ch
co%panies , thro'gh higher va('ations. ='rther, it has ,een o,served that
foc's on corporate governance is an inevita,(e o'tco%e of a process, +hich
(eads fir%s to increasing shift to financia( %arkets as the pre!e%inent so'rce
of capita(. $s s'ch, it is ,eing ackno+(edged that corporate governance is
indispensa,(e to effective %arket discip(ine.
Th. L.a(/i/9 C7(5.
0o%ing to (ook at it in retrospect, the %ost i%portant arg'%ent that can ,e
attri,'ted to the %arket co((apse in 8HHH is 'nrea(istic va('ations. In 8HHH,
prices +ere ,eing %arked exact( at the (eve( +here instit'tiona( ,'ers and
retai( investors +ere co%forta,(e. ;egard(ess of the f'nda%enta( strengths of
the co%pan and i%portant tenets (ike %anageria( strength, IP. prices and
especia(( those ,e(onging to the I0E ,racket DInfor%ation, 0o%%'nication
and Entertain%entF +ere p'%ped 'p to exor,itant( high (eve(s. Since the
investors took it a((, in f(e+ the f(!,!night operators and na%es of severa(
co%panies +ere changed overnight to an I* tag. )o do',t then, the stor of
post IP. crash is end(ess.
!!"#opes and $eality
$n assess%ent , P;I#E Data,ase had indicated that there +ere 8HH IP.s
(ined 'p to ,e (isted I 8HH8, ad a(( these do%inant( fro% ,('e chip co%panies
+ith credi,(e profit records, ,acked , good %anage%ent. $(so, these iss'es
+ere not the res'(t of an g(o,a( trend of techno(og s+ing or %edia %ania.
! @G !
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0onse7'ent(, an active ear +as expected. Ironica((, as reported , P;I#E,
d'ring 8HH8!8HH3, a pa(tr ;s. 5,H3J crore +as raised thro'gh e7'it IP.s.
Evident(, the %arket has sti(( not recovered fro% the heart,reaks inf(icted in
8HHH.
200'-Ma(71i IPO a/0 ;.yo/0
Ever since the divest%ent of 8:M govern%ent e7'it in #ar'ti via the ,ook!
,'i(ding IP. ro'te has ,een anno'nced, hopes have ,een high. #ar'ti
Adogs p(ans is to %ake an IP. of G,88,93,3HH e7'it shares +ith a face
va('e of ;s. : each to the instit'tiona( investors as +e(( as the genera( p',(ic.
*he f(oor price for a sing(e share +as specified at ;s. 55:. *he %arket has
received the iss'e ver +e(( giving it a th'%ping responseB the iss'e +as
overs',scri,ed +ithin three ho'rs of its opening4 it had ,een overs',scri,ed
, 5.99 ti%es at the end of the first da of the open offer4 on the second da
it +as overs',scri,ed , a,o't three ti%es4 on the third da of opening,
#ar'ti %anaged to garner ,ids for over five crore shares in a sing(e da.
)o+ after seeing this h'%ongo's response fro% the p',(ic, the ,ig 7'estion
that i%%ediate( co%es to everones %ind isB >o'(d this (ead to the reviva(
of the Pri%ar %arket< >hi(e it +o'(d ,e too ear( to reach a conc('sion
a,o't the pri%ar %arket, it +o'(d ,e pertinent to point o't that the s'ccess
of the *i%es &ank IP. in 5JJI +as a prec'rsor to the ,oo% in the pri%ar
%arket in 5JJI and 5JJJ, after the indigence in the preceding three ears.
)everthe(ess, the ke to a pri%ar %arket reviva( +o'(d '(ti%ate( (ie in the
post (isting perfor%ance of the co%pan on the ,o'rses. /o+ever, one thing
that has ,eco%e ver c(ear fro% the response to the iss'e is that the de%and
for good 7'a(it paper is 7'ite high. $(( the signa(s see% to indicate that the
govern%ent sho'(d h'rr 'p +ith its p(ans for &P01 and )a(co. &esides, the
ear 8HH9 co'(d +itness the %'ch a+aited *ata 0ons'(tanc Services D*0SF
IP. +hich is expected to ,e in the range of a h'ge ;s. 3H!9H ,i((ion. $(( in
a((, it can ,e said that the f't're offers a ,etter perspective and does have a
good chance of t'rning aro'nd the IP. senti%ent.
Thrust for reforms%
*he response to the #ar'ti IP. %arket it c(ear that the Indian investor is an
eager and +i((ing one provided he is offered an attractive dea(. ='rther, a
st'd of 9 ,ank IP.s of 8HH8 revea(s that in three of the fo'r cases, the s%a((
investor a(one had s',scri,ed to over G:M of the tota( iss'e, despite his (o+
confidence (eve( and the nervo's state of the %arket. *he ,otto%(ine is %ake
a reasona,(e offer to the investor and he +i(( respond. Eet he has ,een driven
a+a for% the %arket pri%ari( d'e to t+o reasonsB the crash that fo((o+ed
the 8HHH IP. ,oo% and the poor perfor%ance of these iss'es over the ears.
! @I !
___________________________________________________________________________________
0(ear(, a(( energies sho'(d ,e directed to+ards ens'ring that these %a(adies
are e(i%inated.
"oing +ith the second iss'e, e%pirica( st'dies have sho+n that IP.s are
'nder priced in the short r'n, et in the (ong r'n the co%%on retai( investor
does not %ake %ore in IP.s. $ co%parison of the offer price +ith the %arket
price, sa one ear (aer or %ore, +i(( sho+ that %ost Indian IP.s are gross(
overpriced. 0onsider these factsB of the 58H odd IP.s that hit the %arket in
the past five ears, t+o thirds of the scrips +ere (isted at a pre%i'% to the
iss'e price, G8M of the scrips gave the investor an opport'nit to enter at a
si3ea,( (o+er price than the iss'e price +ith one ear of getting (isted4 and
near( @8M of the scrips c(osed at an average price +ithin one ear of getting
(isted4 and near( @8M of the scrips c(osed at an average price that +as (o+er
than the iss'e price in the first ear after (isting. 0onse7'ent(, the %ost
(ogica( so('tion to the pro,(e% is to take so%e steps to rationa(ise the pricing
process. It sho'(d ,e %entioned here that even tho'gh the reg'(ator can
specif so%e criteria that have to ,e %et, the on's +o'(d (ie +ith the
corporate sector.
*o correct the %arket inefficiencies and the reg'(ator gaps that (ed to the
8HH5 fiasco, the Pri%ar #arket $dvisor 0o%%ittee set 'p , SE&I
s',%itted a report in #arch, 8HH3. *he "ro'p +as constit'ted in order to
rationa(ise ad strengthen the existing e(igi,i(it nor%s so as to ens're that
+hi(e raising of capita( thro'gh p',(ic iss'es is faci(itated for good co%panies
, providing a +ider p(atfor% for entr points, the ne+ nor%s sho'(d act as
deterrents to fra'd'(ent co%panies so that the incidence of 'ndeserving
co%panies accessing the %arket is restricted. $t the sa%e ti%e, the "ro'p has
caref'(( exa%ined the nor%s existing in vario's other co'ntries (ike
$'stra(ia, AS$ and /ong 2ong and has atte%pted to ,ring the Indian nor%s
in consonance +ith the g(o,a( scenario. $n en'%eration of the
reco%%endation of the co%%ittee fo((o+sB
5. Shift fro% distri,'ta,(e profits to net tangi,(e assets D)*$F as a
,ench%arkB
$t present, co%panies f(oating IP.s need to have pre!iss'e net +orth of not
(ess than ;s. 5 crore and a track record of distri,'ta,(e profits in three o't of
five preceding ears. $(so the si3e of the iss'e sho'(d not exceed five ti%es
its pre iss'e net +orth.
*his, ho+ever, has severa( shortco%ings. Profita,i(it, as a criterion, ind'ces
fra'd'(ent co%panies to resort to Lcreative acco'nting and Ldisp(a profits.
$(so, thee is no +a of g'aranteeing profita,i(it after the stock is (isted.
='rther, a profita,(e track record ,rings in co%p(acenc in the investor, as
the a'to%atica(( tends to ,e(ieve that the iss'e is a,ove a certain thresho(d.
$nother fact is that (i7'idit and not profita,i(it sho'(d ,e e%phasised.
! @J !
___________________________________________________________________________________
;eco%%endationsB 0o%panies f(oating IP.s sho'(d have net tangi,(e assets
of ;s. 3 crore in each of the preceding t+o ears. .f this, not %ore than :HM
sho'(d ,e he(d in %onetar assets! cash or its e7'iva(ent(. *his criterion
seeks to ens're the phsica( existence of a co%pan, that it is engaged in
gen'ine ,'siness activit and that it is not created thro'gh fictitio's ,ook
entries.
II 0o%p(iance for co%panies changing their na%esB
*he 0o%%ittee seeks to %ake it %andator for co%panies changing their
na%es to ens're that a %ini%'% :HM of tota( reven'es are derived fro% the
,'siness activit s'ggested , the ne+ co%pan. *his +i(( go a (ong +a to
keep a check on co%panies +hich change their na%es +ith the so(e p'rpose of
ref(ecting the (atest s'nrise sector, +itho't act'a(( having an operations in
that area. *his +i(( he(p preventing a repeat of the 8HH5 I* driven crash
episode.
! GH !
___________________________________________________________________________________
#UBLIC ISSUES 0S #/I0ATE #LACEMENT
D'ring the (ast fe+ ears, the pop'(arit of the private p(ace%ent %arket has
gro+n %anifo(d. *his has ,een associated +ith a corresponding dec(ine in the
;e(aince of the corporates on p',(ic iss'es for %eeting their capita( needs.
*he %arket for p',(ic iss'es appears to have dried 'p since 5JJ:!J@ d'e to
interp(a of de%and and s'pp( side forces. In rea( ter%s, the a%o'nt raised
, non!govern%ent co%panies in 8HHH!H5 is @HM of the a%o'nt raised a
decade ,ack in 5JJH!J5. #an investors +ho +ere ('red into the %arket
d'ring the ear( JHs see% to ,e adopting a ver ca'tio's approach ,eca'se of
the +idespread dissatisfaction +ith so%e of the iss'ing co%panies as +e(( as
so%e inter%ediaries associated +ith the %arket. *he have not exact(
+ithdra+n for% the %arket, ,'t are (ooking for 7'a(it iss'es +hich are no+
extre%e( hard to co%e ,. Si%'(taneo's(, the convenience of str'ct'ring of
iss'es to %atch the needs of iss'ers +ith those of investors co'p(ed +ith
savings in ter%s of ti%e and cost has contri,'ted to rapid gro+th of the
%arket for private p(ace%ent.
='rther, +hat is private( p(aced is %ost( de,t. &et+een 5JJ:!J@ and 8HHH!
H5, the share of de,t private p(ace%ents in tota( %o,i(i3ation has gone 'p
fro% @HM to IJM. .ver the (ast six ears, ;s. 8,5:,:G: crore have ,een raised
thro'gh de,t private p(ace%ents. *his is an a(ar%ing sit'ation as this ref(ects
a near tota( (ack of %o,i(i3ation of reso'rces fro% the ho'seho(d sector for
infrastr'ct're deve(op%ent. #an fear that thee is too %'ch +rong +ith this
%arket and the ,'rgeoning gro+th %a sooner than (ater res'(t in the ,',,(e
,'rst.
Table8: Public Issues Vs Private Placement
P7;li2 Iss7.s P(i5a1. Pla2.8./1
Year
A8o7/1
(ais.0
P.(2./1a9.
5a(ia1io/
Share
A8o7/1
$ais.0
P.(2./1a
9.
5a(ia1io/
Sha(.
5JJG!
5JJI
9@:G ! 55.H@ 3HHJJ ! G5.9:
5JJI!
5JJJ
J3@: 5H5.HJ 5:.:@ 9J@GJ @:.H: I8.:3
5JJJ!
8HHH
GGH9 !5G.G9 5H.@3 @5.8:J 83.85 I9.::
! G5 !
___________________________________________________________________________________
8HHH!
8HH5
@3@8 !5G.98 I.58 @GI3@ 5H.G9 I@.:3
8HH5!
8HH8
G558 55.GJ J.:@ @9J:H !9.8: IG.8J
8HH8!
8HH3
@@8G !@.I8 5@.85 33@53 !9I.8: I8.89
So'rceB Sec'rities #arket in India, a ;evie+, )SE +++.nseindia.co%
#onth( ;evie+ of the Indian Econo%, 0#IE
$%o'nts are in ;s. crore
Zshare I tota( reso'rce %o,i(i3ation fro% the pri%ar %arket.
$na(sis of the data thro+s (ight on severa( insightsB
$%o'nts raised thro'gh p',(ic iss'es for the entire period are fair(
insignificant as co%pared to a%o'nts raised thro'gh private p(ace%ent.
*he inertia is so strong that despite the dec(ine , a(%ost :HM in private
p(ace%ents fig're in 8HH8!H3, the trend (ine as seen in the first graph sti((
indicates an 'p+ard (inear trend.
$part fro% the ears 5JJI!JJ and 8HH8!H3, the rate of change of private
p(ace%ents is %'ch %ore sta,(e and consistent( on the rise.
*he preponderance of private p(ace%ents is a(so ref(ected in the
co%parative ana(sis of the shares of the t+o in tota( reso'rces raised for%
the pri%ar %arket. >hi(e the highest share of private p(ace%ents has
,een IG.8JM, that for p',(ic iss'es has ,een a pa(tr 5:.:@M. *his (ack of
proportion is %aintained thro'gho't the entire period.
! G8 !
___________________________________________________________________________________
E;!%t) 2!bl%( %ss!es 0s 2"%$ate 2la(e+ent
*he t+o f'nda%enta( characteristics of the %arket that +e have a(read
esta,(ished areB =irst, that private p(ace%ent is the preferred %ode for
reso'rce %o,i(i3ation for corporate and second, that +hat is raised thro'gh
private p(ace%ents is %ost( de,t. Eet, +e sti(( have to find o't +hether
p',(ic iss'es of e7'it have ,een overshado+ed , private p(ace%ent of
e7'it or not.
Table 9: Equity Public Issues Vs Private Placements
Year
EC7i1y-47;li2 iss7.s EC7i1y-4(i5a1.
4la2.8./1s
5JJI!5JJJ :H9 5HJ35
5JJJ!8HHH 8JG: @::I
8HHH!H5 89GJ 5:9H8
8HH5!H8 5HI8 5IG3H
So'rce B Sec'rities #arket in India, a ;evie+, )SE, +++.nseindia.co%
$%o'nts are in ;s. crore
*he statistics presented evident( s'pport the contention that private
p(ace%ents have overtaken p',(ic iss'es in the e7'it seg%ent as +e((. $s the
a,ove graph high(ights, not on( is the a%o'nt raised thro'gh private
p(ace%ents enor%o's as co%pared to the a%o'nt raised thro'gh p',(ic iss'es,
the for%er is rising rapid( except for the ear 5JJJ!8HHH and the (atter is
fa((ing steadi( except for that one ear.
;easons for the change in preference
*he increasing s',stit'tion , co%panies a+a fro% p',(ic iss'es and
to+ards private p(ace%ent as the preferred %eans for reso'rce raising has
a(read ,een s',stantiated +ith evidence. *he rationa(e for this preference
'(ti%ate( (ies in the convenience and f(exi,i(it to the iss'ers as +e(( as
investors. #ore specifica(( there are severa( reasons for thisB
! G3 !
___________________________________________________________________________________
A;s./2. o- (.97la1o(y 2o84lia/2. i/ 4(i5a1. 4la2.8./1s?
- Ma/0a1o(y 0is2los7(.s
- C(.0i1 $a1i/9
- Lis1i/9 (.C7i(.8./1s
O1h.( (.aso/s
Di--.(./2.s i/ (.97la1io/ ;.1>../ 47;li2 iss7.s a/0 4(i5a1. 4la2.8./1?
*he reg'(ator differences ,et+een p',(ic iss'es and the private p(ace%ents
process can ,road( fa(( in three categoriesB the %andator disc(os'res to ,e
%ade in the (etter of offer or the prospect's for co%ing o't +ith a p',(ic
iss'e, (isting re7'ire%ents for co%ing o't +ith a p',(ic iss'e and the need to
o,tain credit rating and to disc(ose it.
Ma/0a1o(y Dis2los7(.s?
.n the pres'%ption that private p(ace%ent invo(ves a((ot%ent of sec'rities to
a fe+ sophisticated and experienced investors and the p',(ic at (arge donPt
have %'ch stake in it, the sec'rities offered in a private p(ace%ent are exe%pt
fro% the p',(ic disc(os're reg'(ations. Ander the Disc(os're and Investor
Protection DDIPF g'ide(ines, the reg'(ator has specified vario's categories of
infor%ation +hich sho'(d ,e disse%inated to the p',(ic in case of a p',(ic
iss'e, either thro'gh the (etter of offer or thro'gh the prospect's. *he ,asic
p'rpose of these disc(os'res is ens'ring that the pheno%ena of as%%etrica(
infor%ation +herein the iss'er has access to %ore infor%ation than the
investor doesnPt %ateria(i3e. *his he(ps in ena,(ing the investors to %ake a
so'nd invest%ent decision +itho't their ,eing at a disadvantage vis![!vis the
iss'er , injecting transparenc in transactions. $n en'%eration of these
%andator disc(os're re7'ire%ents fo((o+sB
;isk factors as perceived , the %anage%ent.
Profita,i(it projections for three ears +ith ass'%ptions sho'(d ,e
incorporated in the prospect's.
$n adverse co%%ents of the a'ditors sho'(d ,e separate( high(ighted.
?'stification of pre%i'% and high and (o+ prices sho'(d a(so ,e disc(osed.
0o%p(aints redressa( of co%p(aints in the past and na%e and address of
0o%p(iance .fficer.
! G9 !
___________________________________________________________________________________
*he iss'es %a ,e f'(( 'nder+ritten and if 'nder+ritten, na%es of
'nder+riters sho'(d ,e disc(osed +ith addresses.
Disc(os're that in case of over s',scription, a SE&I no%inated p',(ic
representative sha(( ,e associated in the process of fina(ising the ,asis of
a((ot%ent.
0ertification fro% (ead %anagers and practicing co%pan secretaries
regarding a(( co%p(iance and f'(fi((%ent of for%a(ities , co%pan Dd'e
di(igence certificateF.
Prospect's sho'(d ,e approved , ;egiona( Stock Exchange as +e(( as
SE&I.
$(( a((ot%ents and ref'nds are no+ to ,e dispatched co%p'(sori( ,
registered post. *his sho'(d a(so ,e pro%inent( disc(osed in the
prospect's.
In case of iss'e of part( converti,(e de,ent'res or non!converti,(e
de,ent'res, an arrange%ent %ade for ,'!,ack of non!converti,(e portion
sho'(d ,e disc(osed in the (etter of offer or the prospect's.
"oing thro'gh the a,ove, it is i%%ediate( noticea,(e that the first fo'r
disc(os'res re(ating to risk factors, profita,i(it projections, pre%i'%
j'stifications and adverse a'ditor co%%ents pertain to infor%ation that is
extre%e( sensitive and a(so, at ti%es, s'scepti,(e to %isinterpretation. It is
not hard to see +h co%panies +ish to avoid the discip(ine of p',(ic iss'es
and opt instead for the private p(ace%ent ro'te. Even re7'ire%ents (ike
o,taining the d'e di(igence certificate, approva( of prospect's, for%a(ities in
case of over s',scription are p(ain c'%,erso%e and tedio's %aking the +ho(e
process of co%ing o't +ith a p',(ic iss'e ver inconvenient as opposed to the
iss'er friend( option of private p(ace%ents.
! G: !
___________________________________________________________________________________
C"e3%t "at%n*
0redit ;ating is governed , the SE&I D0redit ;ating $genciesF ;eg'(ations,
5JJJ. An(ike p',(ic iss'es, it is not stat'tor for corporates going in for
private p(ace%ents to o,tain and disc(ose credit rating fro% an approved
credit rating agenc. )ot on( is this rating a prere7'isite for (isting +hich is
essentia( for %aking a p',(ic iss'e ,'t an o,(igation has ,een cast on the
iss'er to disc(ose in the offer doc'%ents a(( the ratings it has got d'ring the
previo's three ears for an of its (isted sec'rities. =or a(( p',(ic and rights
iss'es of de,t sec'rities of iss'e si3e greater than or e7'a( to ;s. 5HH crore,
t+o ratings fro% different 0;$s +o'(d ,e re7'ired ZZZZZ ,eing an expensive
and ti%e cons'%ing (ega(it, rating re7'ire%ents a(so pose f'rther pro,(e%s
to iss'ers if overti%e the n'%,er of iss'es for +hich ratings are do+ngraded
are increasing.
Ta;l. 10 ? $a1i/9 s788a(y
1999-200I 2000-2001I 2001-2002 I
Apgraded 3.I 3.8 H.:5
Do+ngraded J.8 J.9 85.3
)e+ ratings 35.3 3@.J 8H.8
So'rceB Sec'rities #arket in India, a ;evie+, )SE, +++.nseindia.co%
It is apparent that over the ears, in ter%s of a%o'nt rated, a ver s%a((
proportion has ,een 'pgraded and this +as at an a(( ti%e (o+ of H.:5M in
8HH5!H8. .n the contrar, a h'ge 85.3M of the iss'es +ere do+ngraded in the
sa%e ear. *he share of ne+ ratings has a(so dec(ined significant( fro%
3@.JM to 8H.8M over the sa%e hori3on. "iven these facts, fir%s have
o,vio's( ,een facing diffic'(ties to ind'ce the genera( p',(ic to If s',scri,e
to their iss'es and have no option ,'t to take reco'rse to private p(ace%ents.
1isting ;e7'ire%entsB
&efore %aking a p',(ic iss'e, a co%pan has to (ist on the concerned regiona(
exchange. *here are too %an stock exchanges in o'r co'ntr. 0o%panies
have to decide +hich one to (ist on. ='rther, not on( does each fo((o+ a
separate set of (isting g'ide(ines, their ski(( sets are a(so +ide( different.
.ften, a co%pan rejected , one exchange is accepted , another. )o
+onder, co%panies consider this to ,e a hass(e.
.*/E;! ;E$S.)S
! G@ !
___________________________________________________________________________________
*here are severa( other advantages that can ,e enjoed in the private
p(ace%ents %arketB
*his %arket is preferred , s%a(( and %id!si3ed fir%s, partic'(ar( ne+
entrants +ho do not have a track record of perfor%ance and hence are
sceptica( a,o't generating ade7'ate p',(ic response for their iss'es. *his
consideration has ac7'ired 'nprecedented i%portance after the dring 'p
of the IP. %arket.
Even ,ig!si3e fir%s %a prefer this ro'te if the genera( %arket
environ%ent is not cond'cive for f(oating p',(ic iss'es.
*his ro'te is a(so preferred , corporates +ishing to iss'e sec'rities +ith
co%p(ex or non!standard feat'res, as dea(s can ,e tai(or %ade to s'it the
re7'ire%ents of ,oth parties.
*he rates at +hich corporates raise f'nds in this seg%ent are %'ch (o+er
than the P1;s of %ost co%%ercia( ,anks. *his can ,e exp(oited ,
corporates to their advantage. #an co%panies %a a(so prefer private
p(ace%ents if the +ish to raise f'nds 7'ick( to take advantage of interest
rate change in vo(ati(e %arket conditions.
#ost of the private p(ace%ent iss'es are de,t iss'es and these are
pri%ari( do%inated , ,anks, =(s and govern%ent entities. *he o'tco%e
is that severa( ,ig iss'ers in this seg%ent, (ike ID&I and I0I0I, are a,(e to
%o,i(ise f'nds a(%ost on a dai( ,asis. *his i%parts considera,(e ease and
f(exi,i(it to their operations.
Private p(ace%ents a(so, at ti%es, e(icit ,etter response fro% investors and
therefore, 'nder these circ'%stances, iss'ers t'rn to this %arket. >hen
there is not ade7'ate s'pp( of good p',(ic iss'es to %atch the a%o'nt of
investi,(e f'nds avai(a,(e, investors (ook for ,onds at attractive rates in
the private p(ace%ent %arket. ='rther, the private p(ace%ents %arket
provides sec'rities +ith %ore or (ess fixedC predicta,(e cash f(o+s +hich
he(ps the investor to %atch the expected strea% of ret'rns +ith the
expected cash o'tf(o+s.
SHOULD ATTEM#TS BE MADE TO /E0E/SE THESE
T/ENDS8
$fter disc'ssing the evident predo%inance of private p(ace%ents and a(so the
reasons for the sa%e, the nat'ra( 7'estions that arise areB Is this desira,(e< .r
! GG !
___________________________________________________________________________________
sho'(d +e tr to reverse the tide< >hat are the disadvantages< $s a %atter of
fact, these trends %a ,e a pre('de to so%e profo'nd( 'ndesira,(e
deve(op%ents +hich need to ,e disc'ssed.
*he private p(ace%ent iss'es are offered to %at're instit'tiona( investors
as opposed to the genera( p',(ic. $%ong others, %'t'a( f'nds are %ajor
s',scri,ers in this seg%ent in India and the %one ,eing invested , these
#=s is, to a great extent, Pp',(ic %oneP, co((ected fro% s%a(( or
'nsophisticated investors +ho are s'pposed( ,etter off not exposed to the
risks of the private p(ace%ent %arket. *o this extent, the sa%e disc(os're
standards sho'(d app( to p',(ic iss'es as +e(( as private p(ace%ents.
#ost of the iss'es in the private p(ace%ent %arket are de,t iss'es, and d'e
to the pop'(arit of raising reso'rces thro'gh this %ode, corporates
re(iance on e7'it has co%e do+n. If this trend contin'es, the o,vio's
i%pact +o'(d ,e arise in the de,t!e7'it ratio, +hich has ra%ifications for
the asset!(ia,i(it str'ct're of the Indian co%panies.
#an iss'es %ade , p',(ic enterprises in the private p(ace%ent %arket
carr govern%ent g'arantees, +hich ind'ce an e(e%ent of co%p(acence
a,o't their 7'a(it. $s a res'(t, ver (itt(e track is kept of the end 'se of
f'nds. *hese pose sste%atic risks to the sste%, if the s',scri,ers to the
iss'e happen to ,e (arge =Is, ,eca'se of the (ike(ihood of their t'rning into
)P $s in the a,sence of contin'ed %onitoring of the via,i(it of these
projects. $s s'ch, the a,i(it of a (arge n'%,er of iss'ers to redee% the
de,t on %at'rit has co%e into 7'estion. *he state e(ectricit ,oards are a
pri%e exa%p(e of s'ch iss'ers, +ho in the (ast six ears have raised
;s.88,G@@ crore.
$s %ost of the private( p(aced iss'es are not traded, it is diffic'(t to
esti%ate the c'rrent va('e of s'ch invest%ents.
De,t p(ace%ents are essentia(( %ade +ith the inter%ediar sector
D,anking, pension f'nds etc.F and do not cover an retai( %o,i(i3ation.
>e see% to ,e (iving +ith a pop'(ar %th that f'nds are not s'ch a serio's
iss'e for the corporate as the are 'sing the a(ternative ro'te of de,t
private p(ace%ents. $n ana(sis of these, ho+ever, c(ear( revea(s that
%ost of the iss'ances are on( , $$$ co%panies and the %one ,eing
raised is either 'sed for retire%ent of o(d expensive de,t, and as s'ch, is
on( an incident of de,t recc(ing or for %eeting nor%a( +orking capita(
re7'ire%ents and that ver (itt(e %one is going to+ards projects or
expansion.
$.2o88./0a1io/s?
! GI !
___________________________________________________________________________________
In case of p',(ic iss'es, a(( iss'es co%ing to the %arket are screened for their
7'a(it as investors re( on rating and other infor%ation for eva('ation of risk.
*herefore, the %arket itse(f f'nctions as a se(f!discip(ining %echanis% for the
corporates. S'ch a screening %echanis% is %issing in case of private
p(ace%ents +hich increases the risks invo(ved. *he fore%ost concern in the
private p(ace%ent %arket sho'(d therefore ,e 7'a(it of iss'es and
transparenc in dea(s. $nother i%portant point is that the a,sence of (eve(
p(aing fie(d ,et+een p',(ic iss'es and private p(ace%ent %arket ref(ects
reg'(ator ar,itrage and it is 7'ite possi,(e that p',(ic iss'es %arket is not
gathering %o%ent'% as the private p(ace%ent %arket exists as an easier
a(ternative.
0onse7'ent(, it can ,e said that in order to ens're the deve(op%ent of the
private p(ace%ent %arket in a hea(th %anner, it is essentia( to (a do+n a
c(ear po(ic fra%e+ork for this seg%ent. *he reg'(ator fiat is necessar to
p't in p(ace 'nifor% practicesB it is necessar to %andate greater infor%ation
disc(os're, reg'(ate invest%ents , ,anks, exa%ine the va(idit of state
g'arantees, provide for %andator credit rating, provide for %andator
(isting, deve(op an active secondar %arket, and i%prove (i7'idit. It is a(so
necessar to %ake tr'stees as +e(( as de,ent're rede%ption reserve
co%p'(sor.
! GJ !
___________________________________________________________________________________
CA#ITALISATION O OU/ CA#ITAL MA/KET
#arket capita(isation is a good indicator not on( of the hea(th of the capita(
%arket ,'t a(so of the financia( +e(( ,eing of the ind'stria( sector. &efore
ta(king a,o't +h this is so, (et 's get o'r f'nda%enta(s straight. #arket
capita(isation Dreferred to as %arket cap in shortF, in ver si%p(e ter%s, is the
capita( of a %arket. *o ,egin +ith, %arket cap of a partic'(ar stock is the tota(
n'%,er of o'tstanding shares of the co%pan %'(tip(ied , the share price of
that stock. *h's stock %arket cap +o'(d %ean the s'%%ation of the %arket
cap of a(( the individ'a( stocks that are (isted on the exchanges. )o+, going
,ack to +here +e ,egan, %arket cap is considered as an indicator of the
hea(th of the capita( %arket as +e(( as of the ind'stria( sector for it ref(ects
the extent to +hich the ind'stria( sector is active( tapping the capita( %arket.
If %arket cap is high, it i%p(ies that a (ot %an enterprises are fo((o+ing the
discip(ine re7'ired , capita( %arkets in their financia( practices and a(so that
these %arkets are tr'sted , a (ot %an corporates and have s'cceeded in
,eing a 'sef'( a(( and so'rce of f'nds for the%. $ sti(( ,etter indicator of a((
these things is the %arket cap as a percentage of the "DP! ,'t +e +i(( not
%ove ahead of o'rse(ves and co%e to this (ater. $s of no+, a (ook at the
%arket cap fig'res and their direction and pace of change can ,e exa%ined.
$part fro% a significant increase in %arket capita(i3ation d'ring 5JJJ!8HH8
+hich recorded a pheno%ena( increase of 5HG.G:M and a s(ight increase in
8HH5!H8 of3.:9M, %arket cap has ,een dec(ining in a(( the ears. *he ear
5JJJ!8HH8 sa+ s'ch a s',stantia( 'pt'rn ,eca'se of the I* ,oo% +hich %ade
%an I* co%panies (ist on the exchanges and raise reso'rces and a(so d'e to
the high va('ation that these stocks received. &'t , and (arge, the position on
this front is far fro% satisfactor.
Bha1 8ak.s 1hi/9s .5./ >o(s. is the indifferent re(ationship ,et+een "DP
gro+th and the gro+th in %arket cap and a(so the ratio of %arket cap to "DP.
It is ,e(ieved that stock %arkets tend to ref(ect the tr'e pict're of the econo%
as the gro+th in ind'stria( activit Das %eas'red , "DP gro+th, to an extentF
sho'(d a(so (ead to gro+th in the financia( needs of ind'str there, i%p(ing
an increase in the ,ase of capita( %arkets D%eas'red , %arket cap F. &'t a
(ook at the act'a( %arket trends is eno'gh to depress anoneB the re(ationship
,et+een "DP and %arket cap is ver +eek +ith the gro+th in the t+o not
%oving snc +ith each other at a(( graph. *o %ake thins +orse, %arket cap as
a proportion of "DP rests at a,o't 88M to 8HHH!H3 +hich is fair( (o+ Doff
for% its peak of 9GM in 8HHH!H5 d'e to the techno(og ,oo%F. $ (ook at the
graph 5G revea(s that, , and (arge, %arket cap as a percentage of "DP is on a
path of steep descent.
! IH !
___________________________________________________________________________________
*o p't things in perspective, +e need to co%pare o'r position +ith g(o,a(
standards. #arket cap as a percentage of "DP is %'ch higher for deve(oped
econo%ies (ike AS and A2, standing at a(%ost 59HM to their "DP. Even for
co'ntries (ike "er%an, 0hina and ?apan, the fig'res rest at aro'nd 9H!:HM.
1et a(one the deve(oped econo%ies, even e%erging %arket (ike /ong 2ong,
Singapore and *ai+an are a(so positioned at the over 5HHM (eve(. ='rther, the
percentage share of AS in tota( +or(d cap is a(%ost :HM +hi(e that for India is
a %eagre H.:M.
*a,(eB #arket 0ap of (eading econo%ies
Co7/1(i.s Lis1.0 Cos) Mk1) Ca4) E!SJ ;/G I o- GDP
AS$ @3:: 59.HHH 539
A2 5J83 8.8HH 53I
"er%an JII 5.5HH :8
0hina 55@H :8: 9H
India :GJ: 55: 88
So'rceB +++.infiapress.org , data is for 8HH8!H3.
$nother re(ated %atter is the iss'e of co%pan si3e. $s a(read %entioned
e(se+here, the Econo%ic *i%es +or(d %arket s'rve revea(ed that India ranks
8:
th
in ter%s of %arket capita(i3ation, second in ter%s of n'%,er of
co%panies, ,'t a poor I:
th
in ter%s of average co%pan si3e. In ter%s of
average co%pan si3e, AS +hich is at the II position, has an average si3e of
R8,5G3 %n, ,'t India is +a ,ehind +ith an average co%pan si3e of j'st R5J
%n. *here are j'st 88 Indian co%panies +hich have a %arket capita(i3ation of
%ore than a ,i((ion do((ars. *he pro,(e% is f'rther aggravated d'e to the fact
that great %an fir%s that +o'(d co%%and good va('e on the %arkets are
private( he(d, inc('ding ones (ike "enera( E(ectric, 0oca 0o(a, Sa%s'ng, 1"
etc. *he fact that the average co%pan si3e in India is ver (o+ goes a(ong
+a to+ards exp(aining +h o'r %arket is not +e((!capita(ised inspite of a
h'ge n'%,er of (isted co%panies.
*a,(e 5:B $verage co%pan si3e
Year
Ma(k.1
2a4i1aliKa1io/
Lis1.0 2o84a/i.s A5.(a9. 2o84a/y
siK.L
5JJI!JJ :G9H@9 JIGG :I.58
5JJJ!HH 55J8@3H JIG5 58H.I8
! I5 !
___________________________________________________________________________________
8HHH!H5 G@II@3 JJ:9 GG.89
8HH5!H8 GJ@HG@ J@99 I8.::
So'rceB Sec'rities #arket in India, a revie+, )SE, +++.nseindia.co%
a%o'nts are in ;s. 0rore, Zratio of %arket capita(i3ation to n'%,er of (isted
co%panies.
! I8 !
___________________________________________________________________________________
CONCENT/ATION
AN ANALYSIS OF T"E S*EBNESS IN T!$NOVE$ AND MA$*ET
CAPITALISATION
$. st'd of %arket (i7'idit via the t'rnover statistics and the %arket
capita(i3ation +itho't St'ding the %arket concentration can (ead to a sort of
optica( i(('sion. =or instance, kno+ing that the %arket cap is so and so and
not kno+ing that %ost of it is acco'nted for , a ver s%a(( n'%,er of
sec'rities can generate a fa(se sense of sec'rit! +e do not keep in %ind the
fact that the high %arket cap fig'res are on( d'e to the strength of a (i%ited
seg%ent of the corporate sector and that a (arge part of ind'str is effective(
not (inked to the capita( %arket at a((. *he exp(anation for concentration in
t'rnover +i(( fo((o+ exact( the sa%e (ogic. 0onse7'ent(, an ana(sis of
%arket concentration is a prere7'isite if +e are to assess the hea(th and
activit (eve(s of o'r secondar %arkets.
*$&1E 5JB PE;0E)*$"E S/$;E .= *.P L) S0;IPS I) *A;).-E; .=
)SE
Y.a( N78;.( o- S.27(i1i.s
5 10 25 50 100
5JJG!5JJI G8.JI I:.5G J8.95 J:.G@ JG.J
5JJI!5JJJ :8.:@ @G.55 I9.G5 J8.H3 J:.JI
5JJJ!8HHH 3J.:@ :J.88 I8.35 II.@J J3.@@
8HHH!8HH5 99.93 @8.J8 I8.89 J5.:@ J:.J5
Source% Securities &arket I India' a review' (S) www.nseindia.com
! I3 !
___________________________________________________________________________________
Ta;l. 20? P.(2./1a9. sha(. o- 1o4 50 2o84a/i.s i/ 8a(k.1 2a4i1alisa1io/
o- NSE
Y.a( Ma(k.1 CAP Ma(k.1 Ca4 o-
1o4 50 lis1.0
Co,s
Sha(. I
5JJG!5JJI 9I5:H3 388GI@ @G.H9
5JJI!5JJJ 9J55G: 3HJJ58 @3.5
5JJJ!8HHH 5H8H98@ G3IGG9 G8.9
8HHH!8HH5 @:GI9G 9@:3H@ GH.G3
8HH5!8HH8 @3@I@5 9:88IH G5.H8
So'rceB Sec'rities #arket in India, a revie+. )SE +++.nseindia.co%
0apita( #arkets, 0#IE
$%o'nts are in ;s. corore
#arket cap of to :H co%paniesCtota( %arket capZ5HH
$ revea(ed , the data, the %arket is high( concentrated in a fe+ stocks ,oth
in ter%s of t'rnover and in ter%s of %arket capita(i3ation the predo%inant
share of the top :H co%panies in %arket cap is evident for% \ 0o%ing to
t'rnover, a (ook at the share of top : scripts indicates increasing diff'sion of
trades a%ong a (arge n'%,er of sec'rities +ith their share co%ing do+n for%
G8.JIM in 5JJG!JI to 99.93M in 8HH5!H8. /o+ever, o'r s%'g satisfaction
,egins to (eave 's +hen +e (ook at the share of, sa top 5HH sec'rities in the
tota( t'rnover. *he top 5HH scrips acco'nt for a(%ost a(( the %arket t'rnover
+ith the peak ,eing reached in 8HH5!H8 at JG.9@M and the tro'gh is p(aced at
J3.@@M in 5JJJ!8HHH4 hard( an difference. *he period ends at a significant
J:.J5M share for the top 5HHP sin 8HH5!H8. 0(ear(, +ith the re%aining
tho'sands of sec'rities acco'nting for on( a 9.HJM share of the t'rnover, +e
need no expert ana(st to point o't the (opsidedness of o'r %arket or the
extent of inactivit in these re%aining scrips.
$(so, there has ,een a rapid change in the sectora( concentration of the
%arket4 the sectors +hich previo's( enjoed a (arge part of the %arket pie
have ,een disp(aced , ne+ ones. *he share of %an'fact'ring, financia(
services and =#0" in t'rnover has gone do+n significant( +hi(e that of I*
! I9 !
___________________________________________________________________________________
has recorded pheno%ena( increases over the ears. Even phar%ace'tica(s has
seen a s(o+ ,'t stead increase. *hings are not ver different +hen +e (ook at
%arket cap in ter%s of the sectors +ith sa%e sectors ,eing the ,eneficiaries
and the sa%e ones ,eing the (osers. &'t the %agnit'de of the increases and
decreases of the shares of the vario's sectors are (ess co%pared to the
%agnit'des of change in t'rnover .
='rther, t'rnover and %arket cap is India see%s to ,e %ore concentrated in
co%parison to that in other e%erging %arkets.
Ta;l. 21? Ma(k.1 2o/2./1(a1io/ i/ .8.(9i/9 Asia/ Ma(k.1s
Ma(k.1 I/0.@ S1o2ks sha(. o- Sha(. o- 10
la(9.s1 i/0.@
s1o2ks i/
8a(k.1 2a4
Sha(. o- 10
8os1 a21i5.
i/0.@ s1o2ks
17(/o5.(
Ma(k.1 Ca4 T7(/o5.(
0hina :5.G 95.J 8@.I 55.G
*hai(and J.3 @5.8 98.3 8G.G
*ai+an GH.5 @5.: 3I.@ 8G.I
2orea I3.: :H.G :H.3 85.J
#a(asia GH.@ G5.: 3G.: 38.9
India G9.5 I8.: 9H.3 :G.5
So'rceB Sec'rities #arket in India, a revie+, )SE. +++.nseindia.co%
$(( fig'res are expressed as percentages.
*his sho+s that India does rather ,ad( as co%pared to the other e%erging
econo%ies. It is second on( to 2orea in ter%s of ,oth Index stocks share in
%arket cap and share of the 5H (argest index stocks in %arket cap. Its
perfor%ance on the t'rnover front is even +orse. *he index stocks share in
%arket t'rnover and the share of top 5H index stocks in %arket t'rnover is the
highest in India.
! I: !
___________________________________________________________________________________
I//ATIONAL EXUBE/ANCE
A STUDY O 0OLATILITY IN OU/ STOCK MA/KETS
Anti( no+, I have ,een providing so'nd exp(anations for an ne+ concepts
and ana(tica( ter%s that I have ,een ,ringing in, for the sake of c(arit and
co%p(eteness. &'t this ti%e IP% at a (oss, for vo(ati(it is not one of those
jargon ter%s +hich peop(e can first %ention in their st'dies, and then i%press
their readers , giving thoro'gh( technica( and i%pressive definitions. >e((
then, I have to fa(( ,ack on the ti%e!tr'sted and re(ia,(e thing ca((ed the
dictionar! vo(ati(it i%p(ies the propensit to change s'dden( and
'nexpected(, often in a vio(ent +a. &'t (etPs j'st stick to c(arit and
co%p(eteness for a (itt(e +hi(e (onger and ,e a ,it %ore descriptive if not
technica(B rando%, i%p'(sive, 'npredicta,(e, erratic, 'nsta,(e, fick(e,
capricio's, 'nre(ia,(e, +avering are tho'ghts that are co%ing to % %ind. &'t
sti((, to ,e technica(( thoro'gh, +e need to %ention that here +e are (ooking
at vo(ati(it of prices of vario's sec'rities that are traded in the stock
%arkets.
$fter s'ch a c(ear and co%p(ete revie+, it is not diffic'(t to see +h it is
i%portant that %arkets are not high( vo(ati(e, for if the are, the are a ,ig
hindrance to (i7'idit +hich is so i%portant for the s%a(( investor. In high(
vo(ati(e %arkets, investors are not ass'red of the fact that the can off(oad
+hatever invest%ents the have %ade +itho't %aking (osses d'e to
'npredicta,(e and rando%( %oving prices. In s'ch a case, the +o'(d rather
invest e(se+here +here the +i(( kno+ +hat ret'rns the +i(( get on their
%one. I think the a,ove disc'ssion %akes the i%portance of +e((!,ehaved
prices to +e(( f'nctioning pri%ar %arkets a%p( c(ear .
! I@ !
___________________________________________________________________________________
"OB VOLATILE A$E O!$ STOC* MA$*ETSD
*his 7'estion can ,e reasona,( ans+ered on( , (ooking at the facts. /ence,
a (ook at the data and graphs given is necessar. &'t as a prec'rsor, (et %e te((
o' that stock %arket vo(ati(it has ,een a ca'se of concern for po(ic %akers
as +e(( as investors thro'gho't the +or(d, and India is no exception.
Ta;l. 22? A/ A/alysis o- Vola1ili1y i/ o7( S1o2k Ma(k.1s
Mo/1hMy.a( Vola1ili1y EIG
S3P CNN Ni-1y S./s.@
$pri( 5JJI 5.J@ 8.5G
#a 5JJI 3.HJ 3.89
?'ne 5JJI :.55 :.8@
?'( 5JJI 3.58 3.9:
$'g'st 5JJI 8.:G 8.@@
Septe%,er 5JJI 3.5 3.85
.cto,er 5JJJ 5.I5 5.J3
)ove%,er 5JJI 8.:I 8.@
Dece%,er 5JJI 8.@J 8.I:
?an'ar 5JJJ 8.J5 8.IG
=e,r'ar 5JJJ 5.GJ 5.G
#arch 5JJJ 5.:3 5.I3
$pri( 5JJJ 3.35 3.3
#a 5JJJ :.3 :.95
?'ne 5JJJ 8.:J 8.95
?'( 5JJJ 3.J 3.JI
$'g'st 5JJJ 3.5J 8.GI
! IG !
___________________________________________________________________________________
Septe%,er 5JJJ 5.93 5.9:
.cto,er 5JJJ 8.HJ 8.55
)ove%,er 5JJJ 5.9: 5.::
Dece%,er 8HHH 5.93 5.@3
?an'ar 8HHH 8.:@ 5.J
=e,r'ar 8HHH 5.I9 8.:5
#arch 8HHH 5.JJ 5.G8
$pri( 8HHH 3.:5 3.J3
#a 8HHH 8.@9 8.IJ
?'ne 8HHH 5.9I 5.:
?'( 8HHH 5.G@ 8.5@
$'g'st 8HHH 5.HG 5.5@
Septe%,er 8HHH 8.H: 8.8
.cto,er 8HHH 5.:J 5.@8
)ove%,er 8HHH 5.99 5.:9
Dece%,er 8HHH 5.98 5.:3
?an'ar 8HH5 5.85 5.33
=e,r'ar 8HH5 5.:I 5.I
#arch 8HH5 8.J 8.J5
$pri( 8HH5
8.83 8.98
#a 8HH5 H.IJ H.J@
?'ne 8HH5 5.8G 5.89
?'( 8HH5 5.5 5.5J
! II !
___________________________________________________________________________________
$'g'st 8HH5 H.:G H.@@
Septe%,er 8HH5 8.:8 8.I3
.cto,er 8HH5 5.85 5.9@
)ove%,er 8HH5 5.8: 5.8@
Dece%,er 8HH5 5.88 5.3@
?an'ar 8HH8 H.JJ H.J3
=e,r'ar 8HH8 5.9I 5.:5
#arch 8HH8 5.5I 5.35
$ s'ggestive s'%%ar of the a,ove trends revea(s thatB
?'ne JI and #a JJ are t+o %onths +hen vo(ati(it +as at its peak!
vo(ati(it of ,oth the indices exceeded SM.
$fter ,oth these periods, vo(ati(it has ,een reasona,( contro((ed d'e to
the stringent %eas'res adopted , SE&I.
P>e a(so need to note that vo(ati(it +as re(ative( higher for the first ha(f
of the period i.e. ti(( $pri( 8HHH and after that, the %agnit'de of the
f('ct'ations tones do+n. *his indicates that +e are %oving to+ards %ore
sta,(e %arkets, even tho'gh ver s(o+(.
$nother i%portant fact is that , and (arge, the vo(ati(it of the Sensex is
%ore than that of the S&P 0)W )ift.
In India, vo(ati(it across scrips varied +ide(. D'ring the entire period,
S&P I* Index and S&P Petroche%ica(s Index have sho+n %'ch higher
vo(ati(it than S&P 0)W )ift as a +ho(e. *he vo(ati(it of S&P
Phar%ace'tica(s Index has ,een (o+er than that of S&P 0)W )ift in
genera(.
$ conso(ing fact is that ,oth S&P 0)W )ift and the &SE Sensex are (ess
vo(ati(e as co%pared to )asda7 5HH.
$(so, a st'd cond'cted , SE&I o,served that for ,oth &SE Sensex and S&P
0)W )ift, intra!da vo(ati(it is (ess as co%pared to inter!da vo(ati(it. *his
is in confor%it +ith so%e of the st'dies a,o't AS, ?apan and /ong 2ong
%arkets. *he reason for this co'(d ,e that a (arge a%o'nt of infor%ation is
(ike( to ,e acc'%'(ated overnight.
! IJ !
___________________________________________________________________________________
! JH !
___________________________________________________________________________________
HOW DOES INDIA COM#A/E WITH OTHE/ MA/KETS
SE&I cond'cted a st'd tit(ed NStock #arket -o(ati(it! $ 0o%parative St'd
of Se(ected #arketsN in 8HHH to %eas're the vo(ati(it of the stock %arkets
across co'ntries. It has foc'sed on e7'it %arket vo(ati(it in 53 deve(oped
and e%erging %arkets, inc('ding India, and the period re(evant to 's is 5JJG
!5JJJ. ='rther, st'dies cond'cted (ater have reaffir%ed that these o,servations
ho(d for the (ater period as +e((! So%e of the res'(ts are presented ,e(o+B
$sian %arkets are %ore vo(ati(e than the deve(oped %arkets!
India exhi,its (o+est variation in stock prices a%ong the e%erging %arkets
and that the post!5JJ: period in India is a %ore sta,(e period. =or the
e%erging %arkets, 5JJG +as the ear of highest vo(ati(it, +ith the
exception of India and 0hi(e. *he das of highest vo(ati(it have ,een
passed , India a(read D5JJ8F +hen %ajor irreg'(arities took p(ace in the
,anking sste%, +hich severe( affected the sec'rities %arket.
$s %arkets ,eca%e g(o,a(( (inked, #a(asia, *hai(and and Singapore
+itnessed higher vo(ati(it than ,efore +hereas for India, vo(ati(it
dec(ined as it re%ained re(ative( i%%'ne for% g(o,a( inf('ences d'e to
+eak g(o,a( (inkages.
)eed(ess to sa, this is one area +here India has fared +e(( in re(ative ter%s.
Ma/a9i/9 Vola1ili1y
In order to contain excessive vo(ati(it, the stock exchanges adopt vario's
%eas'res as
part of their %arket s'rvei((ance %echanis%. /istorica((, t+o %eas'res have
,een taken specifica(( +ith the ai% of red'cing vo(ati(itB ,anning ,ad(a in
5JJ9 +hich did res'(t in red'ced vo(ati(it and ,anning short sa(es for a fe+
da in 5JJ84 this +as a te%porar %eas're as it +as e%pirica(( o,served that
this did not desta,i'(ise vo(ati(it. ='rther, SE&I has ,een i%posing vo(ati(it
%argins and concentration %argins +henever vo(ati(it has ,een excessive.
$part for% these %eas'res, there are three i%portant too(s that ,eing +ide(
'sed , %ost %arkets, inc('ding India, for %anaging %arket vo(ati(it.
Price &ands
0irc'it =i(ters
*rading /a(ts
! J5 !
___________________________________________________________________________________
P(i2. ;a/0s? In India, the price (i%its +ere first introd'ced , )SE in 5JJ:
and +ere s',se7'ent( enforced on a(( stock exchanges , SE&I. Initia((, the
price of an scrip +as not a((o+ed to %ove ,eond] HM in a da and 8:M in
the +eek( trading cc(e. *hese +ere revised to IM in a da and the +eek(
,and +as a,o(ished. >ith effect for% #a 8HH8, SE&I has a%ended
g'ide(ines to a((o+ for price %ove%ent in either direction to the extent of
5@M in a da for se(ect 8HH scrips.
T(a0i/9 "al1s? s'spend trading in individ'a( sec'rities d'ring nor%a( %arket
ho'rs to a((o+ for disse%ination of infor%ation, ne+s of an extraordinar
corporate action, or in case of excess vo(ati(it.
Ci(27i1 Fil1.(s? are a %arket +ide approach to %anaging vo(ati(it ,
stopping trading in the entire %arket d'ring nor%a( ,'siness ho'rs. "enera((,
investor protection is the %ain concern ,ehind i%position of the (ast t+o
%eas'res.
*he trading ha(ts and circ'it fi(ters are %ain( of t+o tpesB
Infor%ation ,ased ha(ts that are 'sed to re(ease infor%ation to the
investors, c(arif r'%o'rs regarding a co%pan, s'spend trading in a
sec'rit that has ,roken r'(es, or to co%%'nicate an other price sensitive
infor%ation.
;'(e ,ased ha((s are app(ied 'nder pre!deter%ined conditions and are
(inked to a percentage change in the %arket index or the price of a scrip.
>hi(e these %eas'res have ,een i%posed , at (east 55 other exchanges, the
j'stification of their 'se and their effectiveness is +ide( de,ated.
! J8 !
___________________________________________________________________________________
FO$EIGN INSTIT!TIONAL INVESTO$S
D'ring the (ast decade, =oreign Instit'tiona( investorsF D=I(sF have ,eco%e an
integra( part of the Indian capita( %arket. *he era off =(( invest%ents in India
originated in 5JJ3 and the net invest%ent d'ring the ear +as RI8G.8H %i((ion
in 5JJ@, this fig're had shot 'p to R3.H: ,i((ion. *he n'%,er of =I1s has a(so
gro+n rapid( and has j'st to'ched the :HH %ark. $s on 8G Dece%,er 8HH8,
=11 invest%ents acco'nted for 5I.8@M of the forex assets of over ;s.3,85,
GHI crore. =I1s o+n a(%ost a third of the free! f(oating %arket avai(a,(e for
invest%ent in the co'ntr and, as s'ch, have i%parted a (ot of (i7'idit and
depth to o'r %arket. >hat ena,(ed s'ch fr'itf'( participation of the =I(s in the
Indian e7'it %arkets9 +ere initiatives (ike de%ateria(i3ation of shares,
introd'ction of ro((ing sett(e%ent, on(ine trading and introd'ction of
derivatives and %an s'ch path! ,reaking changes. & p(acing the Indian
%arkets on par +ith their g(o,a( co'nterparts, these changes sent across a ver
strong %essage to investors across continents.
FIls? 8o5i/9 1h. 8a(k.1
)o+ that the a,ove statistics have a(read given 's a good idea of the c(o't of
the =I(s in the %arket, +e can tr to (ook ,eond +hat n'%,ers and %'(tip(es
sho+4 for s'ch an ana(sis revea(s the 'ncontested a'thorit of the =I1s in the
deter%ination of %arket senti%ents and price trends and the extent to +hich
the can inf('ence the direction of the %arket. *he i%portance the co%%and
(ies in the fact that the do on( de(iver!,ased trades and that the are
perceived to ,e infa((i,(e in their assess%ent of the %arket. >hat %akes the%
a(( the %ore significant is the strong positive corre(ation ,et+een the
transactions , these =I(s and the %ove%ent of prices in the Indian stock
%arket. $ st'd ,ased on the dai( net inf(o+s of =I(s and the %ove%ent of
the &SE Sensex fro% ?an'ar 8HH5 ti(( $'g'st 8HH8 has esta,(ished a c(ear!
c't positive corre(ation ,et+een the t+o to the extent of @3.3HM +ith the
(atter rising in proportion to the p'rchases of =I(s and a(so dec(ining in t'ne
+ith =II sa(es. $nother thing +orth %entioning is that a(tho'gh there are
a,o't :HH registered =I(s, the n'%,er of active operators is a,o't 5:H, +ho
have invested in5HH co%panies +ith ,'(k of the invest%ents ,eing
concentrated in a,o't 3H scrips. It is, therefore, not diffic'(t for =I(s acting in
har%on, to direct the %arket +ith their c'%'(ative net invest%ent
of;s.:G,HJ@ crore acco'nting for J.G3M of the tota( %arket capita(i3ation.
*o give a fair perspective of the +ho(e scenario, +e sho'(d a(so ta(k a,o't the
need to tread +ith ca'tion. =II inf(o+s have the rep'tation of ,eing
notorio's( vo(ati(e as co%pared to other for%s of capita( f(o+s as =I(s
's'a(( p'(( ,ack their %one at the s(ightest hint of tro',(e in the host
co'ntr often (eading to disastro's conse7'ences to its econo%4 the have
often ,een ,(a%ed for exacer,ating s%a(( econo%ic pro,(e%s in a co'ntr ,
! J3 !
___________________________________________________________________________________
%aking (arge and concerted +ithdra+a(s at the first sign of econo%ic
+eakness. *he ro(e p(aed , f(!,!night operators in creating panic in so%e
of the $sian econo%ies is a risk faced , Indian %arkets as +e((. $(tho'gh
;&I and SE&I have ,een pr'dent eno'gh in enforcing strict g'ide(ines for
=I(s entering India and contro((ing repatriation of invest%ent, these
reg'(ations are not foo(proof.
T(./0s i/ FII i/5.s18./1s
=or the entire period 'nder consideration, +ith the exception of 5JJI!JJ and
8HH8!8HH3, =IIs traded heavi( in India. $ (ook at the data ,e(o+ confir%s
this vie+
Ta;l. 2&? T(a/sa21io/s ;y FIIs
5JJG!JI 5JJI!
JJ
5JJJ!
HH
8HHH!
H5
8HH5!
H8
8HH8!
H3
$pri(
8HH3
P'rchase 5IJ@: 5@55: :@I:@ G9H:5 9JJ8H 9@GG3 :J35
Sa(es 58G3G 5G@JJ 9@G39 @955@ 955@: 995I@ 9J5J
)et
invest%ent
:J:G !5:I: 5H588 JJ39 IG:: 8:IG 5H58
0'%'(ative
net invest%ent
8@8GH 89@I@ 39IHI 99G98 :39JG :@HI9 :GHJ@
So'rceB Sec'rities #arket in India, a revie+, )SE. +++.nseindia.co%
$na(sis revea(s that B
*he ear 5JJI!JJ +as a partic'(ar( ,ad ear as there +ere net o'tf(o+s of
;s. 5II: crore4 this represents a s'dden dip for% a positive fig're of ;s.
:J:G crore in 5JJG!JI.
Even 8HH8!H3 +itnessed (ax activit +ith net inf(o+s at ;s.8:IG crore,
one!fo'rth of the inf(o+s in 5JJJ!8HH8 d'ring +hich =II inf(o+s hit their
peak.
=or a(( the re%aining ears, apart for% a significant increase in 5JJJ!
8HHH, net c'%'(ative invest%ents dece(erated as net inf(o+s recorded a
ver s(o+ ,'t stead dec(ine.
*he fisca( 8HH3!H9 ho(ds significant potentia( for i%prove%ent as net
inf(o+ +orth ;s. 5H58 crore +ere experienced in j'st one %onth.
! J9 !
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"iven the fact that =II inf(o+s have ,een sho+ing so%e i%prove%ents in the
'p+ard direction d'ring 8HH3, a disc'ssion a,o't the vario's reasons
j'stifing this positive o't(ook +o'(d (end credi,i(it to o'r opti%istic
expectations. #oreover an en'%eration of the risk factors that co'(d ,e a
hindrance +i(( thro+ (ight on the iss'es that need to ,e addressed.
I/0ia? a/ a11(a21i5. 0.s1i/a1io/
India presents a vast potentia( for overseas invest%ents and is active(
enco'raging the entrance of foreign p(aers into the %arket. Despite Indias
(o+ +eight of 9.JM in the #organ Stan(e capita( internationa( e%erging
%arkets =ree Index D#S0I E#=F! against +hich =IIs ,ench%ark ,ench%ark
their perfor%ance top research fir%s are over+eight on India. =or instance,
#erri(( 1nchs "(o,a( e%erging %arket portfo(io or #a 8HH3 reco%%ends
an a((ocation of @.9M to India. It is over+eight on other co'ntries as +e((B
;'ssia DG.JMF, Indonesia D3.:MF, So'th $frica D5:MF and /'ngar D3MF.
*here are %an reasons for India ,eing vie+ed +ith a sense of expectation ,
the =IIs and tpica(( a(( (ogics ,oi(ed do+n to a strong nationa( econo% and
the s'ccess of refor%s 'ndertaken over the (ast decade. &'t %ore specifica((,
+e can disc'ss the fo((o+ing co%,ination of reasonsB
India is the fifth (argest g(o,a( econo% ,ased on p'rchasing po+er parit
and since the (ast five ears, it has ,een one of the fastest gro+ing
econo%ies of the +o(d "DP gro+th projections for 8HH8 stand at :.:M!@.
$s opposed to this Indias econo%ic riva(s in the region are ree(ing 'nder
S$;S, especia(( 0hina a %arket that has i%pressed investors ,eca'se of
its sheer a,i(it to gro+ at a faster c(ip. Econo%ists forecast that S$;S
co'(d eat into 0hinas " DP gro+th , a,o't 8M. &esides, other %acro
factors (ike the 0PI!,ased inf(ation of a,o't 9M and ind'stria( gro+th at
a,o't :.:M!@M p(aces the Indian econo% in a ver strong position.
*he forex sit'ation has never ,een stronger as the RG9 ,i((ion stacked 'p a
reserves has red'ced the perception of c'rrenc and co'ntr risk
significant(. *his is a ,ig p('s for India given that the strength of the
(oca( c'rrenc is of great significance for =IIs as it can eat into their
ret'rns significant(. ='rther for the first ti%e in India the r'pee
appreciated for one f'(( ear in 8HH8 and the sit'ation is expected to
conso(idate f'rther +ith do((ar reven'es fro% the techno(og sector ,eing
the driving force.
$na(sts ,e(ieve that the Indian stock are 'nderva('ed to the extent of 5:!
8HM and this is one of the %ajor factors attracting =IIs to India. *he
%arket trades at a for+ard PCE %'(tip(e of I.: the cheapest after
Phi(ippines in the $sian region. Even tho'gh %arkets %a not have hit
rock ,otto%, +ith (i%ited do+nside risk there re%ain a (ot of 'nderva('ed
stocks +ith s',stantia( 'pside potentia(.
! J: !
___________________________________________________________________________________
Indias ,oo%ing I* and I*!ena,(ed services have p't the co'ntr on a
different pedesta(. Despite the Indian I* sector going thro'gh a ro'gh
patch on acco'nt of the recession in AS, as per )assco% esti%ates, Indian
I* +i(( gro+ at the rate of 88!8:M in 8HH3. I*!ena,(ed services and
&'siness Process .'tso'rcing D&P.F are expected to gro+ at a %'ch
higher rate of 88!8:M in 8HH3 d'e to the cost advantage that India offers.
Even tho'gh the pace of econo%ic refor%s has ,een s(o+, severa( changes
have ,een introd'ced recent( +hich are (ike( to ,oost investor
confidence and act as cata(st for =II invest%entsB *he decision on
disinvest%ents of /P01, &P01 and )a(co has co%e as a re(ief to the
%arket. *he sec'riti3ation 1a+ passed in 8HH8 +i(( ena,(e the ,anking
sector to co%e c(ean +ith the chronic pro,(e% of )P$s. &'dget 8HH8 has
re%oved a(( sectora( (i%its on invest%ent , =IIs in India co%panies to
%ake Indian %arkets %ore vi,rant. &'dget 8HH5!H8 proposed to per%it
t+o!+a f'ngi,i(it for $D;sC"D;s and the g'ide(ines for the sa%e +ere
iss'ed , ;&I in =e, 8HH8.
0orporate restr'ct'ringB Inspite of to'gh ti%e d'ring the (ast fe+ ears
corporates have ,een a,(e to restr'ct're the%se(ves effective(,
partic'(ar( the %ajor o(d econo% co%panies. India is no+ considered to
,e far ,etter than %an other $sian %arkets in ter%s of disc(os're
transparenc and other corporate governance para%eters. >ith chances of
i%proved ,'siness environ%ent a(ong +ith the re%ova( of infrastr'ct'ra(
,ott(enecks, the position is (ike( to i%prove f'rther.
*o s'% 'p the a,ove disco'rse it can ,e said that driven , factors (ike a
strong c'rrenc an i%proving geopo(itica( environ%ent, refor%s in ke
sectors (ike ,anking po+er and te(eco%%'nications, privati3ations and sta,(e
po(icies +e can expect to see a gro+ing c(ass of =IIs f(ocking to India ,eca'se
the are attracted , India per se and not j'st , the fe+ co%panies that their
ana(sts have discovered in India.
S7s1ai/i/9 FII i/1.(.s1? Iss7.s a/0 Chall./9.s
Even tho'gh the genera( %arket vie+ is that over the next ear =II
invest%ents +o'(d pick 'p, ,oosting the o't(ook for e7'ities there are certain
iss'es +hich need to ,e addressed ,efore +e can reap f'(( ,enefits of the
strong position that India c'rrent( enjos.
*he ,iggest concern p(ag'ing the Indian %arkets is that of concentration
and (i7'idit. *here are on( a handf'( of stocks that have the kind of
(i7'idit for foreign investors to take significant positions in as the
n'%,er of co%panies traded on the &SE or the )SE is on( a,o't a third
of the co%panies (isted on these 8 %ajor exchanges. #oreover, Indian
%arkets are concentrated in ver fe+ stocks in ter%s of vo('%es t'rnover.
! J@ !
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*he share of top ten %ost active index stocks in t'rnover is a,o't :GM in
Indian %arkets, +hi(e it is in the range of 55M to 8GM for co'ntries
inc('ding 0hina, *hai(and, *ai+an and 2orea.
*he second concern is that of the %arket capita(i3ation B .) #a 3H,
8HH3, /ong 2ong, the second (argest %arket (argest %arket in $sia, had a
%arket capita(i3ation of R999 ,i((ion, *ai+an ! R 5II ,i((ion, 2orea!R5GJ
,i((ion and china R55: ,i((ion +hereas India had a %arket capita(i3ation of
on( R JJ ,i((ion. Even in ter%s of the ratio of %arket capita(i3ation to
"DP, India fares ,ad( +ith a ratio of a,o't 8HM +hereas other %ajor
$sian co'nties have a ratio of %ore than :HM. *his i%p(ies that on( a
s%a(( fraction of Indian ,'siness is capt'red in stock %arkets and so%e of
the %ajor ,'siness are not even avai(a,(e for investing. *his a(so poses a
(i%it to =II invest%ents.
=isca( deficit is another %ajor concern for g(o,a( investors and 'n(ess the
govern%ent %akes serio's efforts at fisca( conso(idation, foreign investors
%a not ,e confident of India. =isca( deficit at the end of )ove%,er 8HH8
+as ;s. I33.J9 ,i((ion, representing @5.:HM of the ,'dget esti%ate for the
fisca( ear to #arch 35, 8HH3. $ case in point is &ra3i(. =oreign investors
have sho+n a rene+ed confident in &ra3i(s (eadership after the ne+
president p(edged to %aintain %onetar po(ic and fisca( sta,i(it. Eear to
date, the &ra3i(ian stock %arket has s'rged a,o't 35M.
&efore getting 'nd'( opti%istic, +e a(so need to factor in the negative
g(o,a( senti%ents arising d'e to rising go(d and cr'de prices co'p(ed +ith
the +eakening of the AS do((ar in o'r ca(c'(ations. If AS recover doesnt
happen in the second ha(f of this ear, e%erging %arket f'nd f(o+s co'(d
,e serio's( affected.
I/0ia Vs .8.(9i/9 8a(k.1s
$n capa,i(it or achieve%ent cannot exist in a vac''% and to provide a
%ore rationa( to'ch to o'r disc'ssion a,o't Indias potentia( +e have to j'dge
it against ho other co%para,(e %arkets are doing. S'ch an ana(sis is a(so
i%portant d'e to the +ider g(o,a( scenarioB f'nds are expected to f(o+
genero's( to the e%erging %arkets this ear and ho+ +e(( India is positioned
vis![!vis the other %arkets +i(( deter%ine the extent to +hich it can ,enefit.
Indias perfor%ance and potentia(B a co%parison +ith other %arkets
*he sensex has gained 5@M since #a on the ,ack of strong ,'ing , =IIs. If
o' tho'gh thats reason eno'gh to ce(e,rate, take a (ook at this ,efore o'
cheer. Eear to date, the #S0I India Index has gone no+here, it gained (ess
than 5M in do((ar ter%s. .n the contrar, the #S0I E%erging %arkets =ree
Index s'rged 59.IM d'ring the sa%e period. 1ook at the individ'a( %arkets,
! JG !
___________________________________________________________________________________
and the res'(t is even %ore depressing ever sing(e %arket has done ,etter
than India, ,arring /'ngar, +hich t'rned in a %argina(( negative ret'rn.
$part fro% Indias +eak position ,ased on the #S0I indices, if +e take a
(ook at the ear!to!date perfor%ance of other %arkets in the region o'r
opti%is% ,egins to +ane. Eear to date the &SE index is 'p , a pa(tr H.J:M
in do((ar ter%s. 0o%pare this +ith the other regions 0hina 'p 5@.GJM *ai+an
'p 5:.@8M, thai(and 'p 33.58M, Indonesia 'p 35.HJM and $rgentina 'p :HM.
='rther, on an index ,asis, Indias +eightage in the re(evant $sian and
e%erging %arket ,ench%arks is a,s%a(( (o+ Das a(read %entioned its
+eightage in #S0I E#= Index is a %ere 9.JMF. It %a ,e s'rprising ,'t the
+eightage of individ'a( co%panies (ike Sa%s'ng e(ectronics is %'ch higher
than that for India as a +ho(e in #S0I indices fo((o+ed so +ide( ,
instit'tiona( investors. 0(ear(, India has a (ot of restr'ct'ring and c(earing 'p
to do to ,e a,(e to co%pete effective( in the g(o,a( %arketp(ace.
0onse7'ent( it sho'(d take a %essage for% deve(op%ents (ike the 0hinese
econo%ic s'ccess and rating do+ngrades and get (aser foc'sed on the refor%
process for an investor friend( ,'siness environ%ent.
)o+ ,ring in the positive forecasts ,eing %ade for the e%erging %arkets and
o' +i(( rea(i3e +h I a% reco%%ending that India sho'(d i%prove her
co%petitive position g(o,a((. 1ast ear the perfor%ance of e%erging %arkets
+as f(at ,'t co%pared to deve(oped %arkets the fared ,etter. this ear
indications are that f'nd f(o+s to e%erging %arkets +i(( ,e reaching record
(eve(s. *he internationa( instit'te for finance DII=F forecasts that net portfo(io
e7'it invest%ents +i(( increase to R@ ,i((ion as co%pared to the R 3 ,i((ion
(st ear. *he aggregate PCE %'(tip(e in the e%erging %arkets is ha(f that of S
& P :HH, the (o+est va('ations in the (ast decade4 +hereas stocks in E'rope
and AS are considered to ,e overva('ed. *herefore %one +i(( co%e
increasing( o't of AS and into $sia. $s per II= esti%ates, 1atin $%erica +i((
,e the %ajor ,eneficiar. &'t %an investors aro'nd the +or(d are expected to
re%ain h'ge( over+eight on India despite its see%ing( poor perfor%ance.
$nd there are reasons for this contin'ed confidence and faith!the ,roader
perfor%ance of the %arket is act'a(( not as ,ad and stocks in %an sectors
(ike ,anking, a'to%o,i(e and engineering have rich( re+arded investors.
$(so India has t+o +e(( perfor%ing sector +hich are 'ni7'e +ithin an $sian
context!phar%ace'tica(s and soft+are +hich can attract a (ot of investor
interest. $(( said and done +e can on( hope that the ti%es to co%e ho(d a (ot
of jo for the %arkets.
! JI !
___________________________________________________________________________________
DE-M!T!ALIAATION AND CO$PO$ATION OF O!$ STOC*
ENC"ANGES
De!%'t'a(i3ation and corporatisation of the 83 stock exchanges of o'r
co'ntr is an iss'e +hich has attracted considera,(e attention and has ,een in
the head(ines for the (ast fe+ ears. In this section, +e seek to revie+ the
c'rrent position of the stock exchanges, the proposed changes as +e(( as the
recent deve(op%ents in this regard.
*raditiona(( the stock exchanges +ere organi3ed as L%'t'a( organi3ations. $
%'t'a( organi3ation is an enterprise o+ned , its %e%,ers for their ,enefit4 it
is essentia(( a non!profit organi3ation. $s s'ch the stock exchanges +ere
organi3ed in the for% of a c(', o+ned , the %e%,er +ho enjo exc('sive
trading rights. .n the contrar, a de%'t'a(i3ed stock exchange is a corporate
entit +ith its shares not necessari( ,eing o+ned , the stock,rokers.
&'t +h do +e need to %ove to the de!%'t'a(i3ed organi3ation< Servera(
reasons can ,e given to j'stif this po(ic thr'st. *he %ajor event +hich gave
a ,ig p'sh to this +ho(e process +as the (atest crisis invo(ving the ,roker!
2etan parekh. /o+ever, this is not the on( reason d'e to +hich the finance
%inistr and SE&I are p'shing for the proposed changes. *here are other
organi3ationa( and %anage%ent re(ated advantages that de!%'t'a(i3ed and
corporati3ed enterprises enjo over %'t'a( organi3ations. In the ,roker o+ned
stock exchanges, ,rokers e(ect representatives to reg'(ate activities of the
exchange inc('ding the activities of ,rokers the%se(ves. >henever there are
disp'tes ,et+een the ,rokers and the investors there is no g'arantee that
investors interests +i(( receive the sa%e 't%ost o,jective treat%ent if there
+ere to ,e no ,rokers in the %anage%ent of the exchange. $s one of the
governing ,oard %e%,ers of )$SD$U said the ,roker o+ned exchanges are
se(f!reg'(ator ,odies, +here the se(f %a so%eti%es get precedence over
reg'(ation. $t the sa%e ti%e it is increasing( ,eing ,e(ieved that a de!
%'t'a(i3ed organi3ation can adapt %ore 7'ick(, can o+ners. De!
%'t'a(i3ation e(i%inates an conf(ict of %anage%ent. *he proposed
transfor%ation of stock exchanges is geared to+ards ,eco%ing high( cost
efficient and foc'ssing on the need to satisf their c'sto%ers Di.e., investors
and (isted co%paniesF.
='rther, this %ove is in tande% +ith the trends across the g(o,e. *he
stockho(% stock exchange +as the first %ajor exchange to ,eco%e de!
%'t'a(i3ed in 5JJ3 fo((o+ed , the $%sterda, $'stra(ian and Singapore Stock
exchanges in 5JJG, 5JJI and 5JJJ respective(. *he *oronto, /ong 2ong and
Paris stock exchanges are in the process of co%p(eting the de!%'t'a(i3ation
process. *he %e%,ers of the 1ondon stock exchange approved the de!
! JJ !
___________________________________________________________________________________
%'t'a(i3ation p(an in 8HHH. )ESE and )$SD$U have a(so anno'nced their
p(ans for the sa%e.
In India, for the 83 stock exchanges, on( t+o i.e., .0*EI and )SE are de!
%'t'a(i3ed Ever since SE&I has decided to de!%'t'a(ise and corporatise the
stock exchanges in o'r co'ntr, the +ho(e process has ,een evo(ving in a
contin'o's %anner rather than in one stroke. *he +ho(e process of
i%p(e%entation started in ?an'ar 8HH8 +hen SE&I sent a +ritten directive to
a(( the regiona( stock exchanges asking the% to s'ita,( change their ,(a+s
r'(es and re%ove ,rokers for% the top %anage%ent positions (ike President,
-ice President, treas'rer etc., +ithin a period of t+o %onths for% the date of
the order. De!%'t'a(i3ation +as officia(( anno'nced , the then =inance
%inister Eash+ant Sinha in the Par(ia%ent in #arch 8HH8. >ith respect to
corporati3ation, the govern%ent had introd'ced a ,i(( in the ,'dget session
this ear to this effect. *his is in (ine +ith the SE&I decision to ask for a
(egis(ative change in the sec'rities contract reg'(ation act DS0;$F to faci(itate
the changeover of exchanges for% an association or tr'st to a corporate ,od.
*he %ove to+ards de!%'t'a(i3ation and corporation +i(( fo((o+ the
reco%%endations of the ?'stice #/2ania 0o%%ittee set 'p in #arch 8HH8.
*he high(ights of the reco%%endations of the co%%ittee are as fo((o+sB
$s per the co%%ittee a(( exchanges +o'(d have to s',%it corporati3ation
sche%es +ithin six %onths and this +o'(d affect a(( exchanges except the
)SE. &'t 'n(ike the g(o,a( practice, shares of an ex change +o'(d not ,e
(isted on itse(f ,'t on other exchanges.
.n one iss'e, the finance %inistr differs for% the co%%ittees
reco%%endationsB *he %inistr is fir% that the ,roker %e%,ers sho'(d not
have an representation on the ne+ ,oard of directors to ens're that
investors have confidence that the %anage%ent of the ,o'rses have ,een
distanced for% the ,rokers.
=or corporati3ation and de!%'t'a(i3ation the Ico%e tax $ct and the Sta%p
act +i(( a(so have to ,e a%ended. *his is ,eca'se a(( profits of stock
exchanges +i(( no+ have to ,e taxed ,'t a%end%ents to the act +i((
ens're that the past profits of an exchange, +hich +ere not taxed +hen it
+as a non!profit entit, are not taxed.
=or (ooking into the %atter of conso(idation of stock exchanges, the #;
#aa 0o%%ittee +hich +as constit'ted as a s',!co%%ittee of the 2ania
0o%%ittee s',%itted its report in Dece%,er 8HH8. Its %ain reco%%endations
+ereB
! 5HH !
___________________________________________________________________________________
$(( regiona( stock exchanges sho'(d ,e %erged +ith the .0*EI to for%
the co'ntrs third (argest ,o'rse, after )SE and &SE. $ccording to the
pane( and %erger sho'(d ,e on the (ines of E'ronext +hich +as ,orn of the
%erger of the Paris, $%sterda% and the &r'sse(s exchanges.
*he e7'it shares of co%panies having a paid 'p capita( of 'p to ;s. 8H
crore %a ,e traded exc('sive( on the ne+ exchange +hi(e fir%s +ith a
paid 'p capita( of rs. 8H crore or %ore and (isted on the regiona(
exchanges %a ,e given the choice to contin'e (isting on the existing
exchanges and ,e a(so avai(a,(e for trading on &SE or )SE.
*he stock ,rokers of a(( exchanges in India sho'(d have trading rights on
the ne+ exchange a'to%atica((4 trading sste% of the ne+ exchange
+o'(d ,e centra(i3ed at the (ocation of an of the participating exchanges
and sett(e%ent of transactions sha(( take p(ace on( in de%at for%.
*he pane( has a(so reco%%ended the introd'ction of %'(tip(e trading
sste%s s'ch as order driven sste%, 7'ote driven sste% +ith
co%peting %arket %akers on the (ines of )asda7 and a sing(e ca(( a'ction
%arket to s'it trading in s%a(( capita(, i((i7'id sec'rities.
It %a ,e pointed o't that the so%ething on the a,ove (ines +i(( %ake sense
as in the (ong r'n, there is ,o'nd to ,e conso(idation as e(se+here in the
+or(d. &'t is it the so('tion for the ai(ing regiona( SEs< *he ne+ stock
exchange, after the %erger, +i(( ,eco%e the third (argest in the co'ntr. *he
%oot 7'estion no+ is +i(( it ,e a,(e to co%pete +ith esta,(ished ones (ike
)SE or &SE< >e have to re%e%,er that %an regiona( stock exchanges
record no ,'siness at a(( and others hard( have an transactions done on
the%. =or exa%p(e the 0a(c'tta Stock exchange c(ocks in a t'rnover of aro'nd
;s. 5:!8H crore per da as against ;s. 8:HH!3HH crore on the )SE .0*EI is
a(so in a ,ad shape despite repeated atte%pts to revive it. In the event of the
%erger the ne+ exchange +i(( not ac co'nt for %ore than 8M of the tota(
%arket t'rnover. *his I% s're, is not +hat +e had envisaged +hen de!
%'t'a(i3ation and corporati3ation of the exchanges +as s'ggested in an
atte%pt to revive the ai(ing regiona( stock exchanges of the co'ntr.
I+2o"tan(e of In3e. !t!"es
P.(5asi5./.ss o- I/0.@
Index derivatives are a po+erf'( too( for risk %anage%ent for anone +ho has
portfo(ios co%posed of positions in e7'it. Asing index f't'res and index options,
investors and portfo(io %anagers can protect the%se(ves fro% the risk of a do+nt'rn
! 5H5 !
___________________________________________________________________________________
in the %arket. =or exa%p(e, for %an investors, the vo(ati(it associated +ith the
,'dget %ight not ,e a ride that the +ish to ,ear. In the a,sence of index derivatives,
the investor has on( one a(ternativeB to se(( off e7'it, and %ove into cash or
de,ent'res, ,efore the ,'dget. ;o'gh( a %onth after the ,'dget, after the ,'dget!
re(ated vo(ati(it has s',sided, these transactions co'(d ,e reversed, and the person
+o'(d ,e ,ack to the origina( e7'it expos're. *his is expensive in ter%s of the
transactions costs faced in se((ing off a significant a%o'nt of e7'it. Asing index
f't'res, the sa%e o,jective +o'(d ,e acco%p(ished at a (esser cost.
I/0.@ is ha(0 1o 8a/i47la1.
Index is a (arge, +e((!diversified portfo(io, and %anip'(ation of the index is %'ch
harder, and re7'ires %'ch (arger reso'rces co%pare to %anip'(ation of individ'a(
sec'rities.
I/0.@ 0.(i5a1i5.s 2o7l0 ;. 7s.0 -o( i/5.s18./1 s1(a1.9i.s
Index f't'res are 'sef'( too( for r'nning index f'ndsB +hen index f't'res %arkets
exist, it ,eco%es easier to r'n index f'nds, +hich ie(d ret'rns that are high( c(ose to
the ret'rns of the act'a( index
8
.
I/0.@ 0.(i5a1i5.s a(. 2ash s.11l.0
Index derivatives are cash!sett(ed, +hich %eans that no de(iver of sec'rities is %ade.
In an environ%ent +here the ro((ing sett(e%ent and depositor has not et co%e to
do%inate a(( sett(e%ent, this co'(d ,e a considera,(e advantage over an transactions
invo(ving sec'rities.
2
Similarl$ inde% options are useful for products li&e 'uaranteed return funds "e.'. an inde%
fund bundled !it( portfolio insurance in t(e form of a put option on t(e inde%#
! 5H8 !
___________________________________________________________________________________
#/IMA/Y /ESEA/CH
OOECTIVES
St'd the efficienc of the %arket in pricing index f't'res ,ased on cost of
carr %ethod.
St'd the ro(e of index f't'res in a sit'ation +here 0arr ! =or+ard C $1&#
exist in the %arket.
St'd the effect of introd'ction of index f't'res on vo(ati(it and (i7'idit of
the cash %arket as so%e on specific shares.
St'd the efficienc of index f't'res in risk c'rtai(%ent fro% individ'a(
investors perspective.
MET"ODOLOGY
*he %ethodo(og adopted for the st'd +as
Exa%ine the Index ='t'res price of &SE SE)SEW and )I=*E, vo('%e
transacted and pricing.
Asing cost of carr %ethod and difference ,et+een i%p(icit costs of carr and
reference rate to see +hether %arket is efficient in pricing index f't'res.
Exa%ine the %od's operandi of Index ='t'res vers's 0arr for+ard C $1&#
and (ook at the f't're of index f't'res 'nder the a,ove scenario.
#eas're vo(ati(it and (i7'idit of the %arket d'ring the pre and post ='t'res
introd'ction period.
0ond'ct a s'rve to 'nderstand the reasons ,ehind the non!pop'(arit of
Index ='t'res.

EICIENCY O THE MA/KET IN #/ICING
! 5H3 !
___________________________________________________________________________________
INDEX UTU/ES
A/alysis o- I84li2i1 2os1 o- 2a((y
I%p(icit cost of carr is the expected financia( ret'rn de%anded , the %arket. *he
i%p(icit cost of carr is
='t're 3@:
Index )'%,er of das to %at'rit
$s it is visi,(e fro% the fo((o+ing ta,(e, that i%p(icit cost of carr is 7'ite vo(ati(e.
Sa%e is the case +ith )SE f't'res. So%e portion of this co'(d ,e attri,'ted to da!to!
da variation. /o+ever, %ost of it co'(d ,e attri,'ted to non!existence of %arket
ie(d c'rve. In addition, it appears that there is not eno'gh ar,itrage interest to ,'i(d
an i%p(icit ie(d c'rve.
Table !: Im"licit C#st #$ carry ESE S.41.8;.( Co/1(a21G
Da1.
SE I/0.@
EA5.(a9.G
F717(.s
EA5.(a9.G
Cos1 o-
2a((y
SE I/0.@
EClosi/9
4(i2.G
F717(.s
EClosi/9
4(i2.G
Cos1 o-
2a((y
53!?'(!8HH5 9J:3.8G :HH5.HH @.9HM 9IIH.I :HH5.HH 5@.39M
89!?'(!8HH5 98@J.95 995G.G3 8@.98M 95II.39 93H3.8H 8H.I:M
8:!?'(!8HH5 9853.GJ 9@3J.:3 GI.9@M 933@.8 9@93.@H ::.H:M
8@!?'(!8HH5 98GJ.GH 995H.HH 89.5@M 95J5.8G 995H.HH 95.95M
8G!?'(!8HH5 98HI.H@ 93HH.HH 5G.G8M 98I5.53 93HH.HH 3.:IM
5!$'g!8HH5 98G8.J3 935J.:G J.9JM 98:3.@J 935J.@H 53.9GM
3!$'g!8HH5 983H.J9 98GH.HH I.98M 98HG.@3 98@:.HH 58.99M
G!$'g!8HH5 95JJ.8J 9838.HH G.9IM 98H5.8: 9838.HH G.H3M
55!$'g!8HH5 9853.J5 98I5.HH 5G.HJM 95J8 98I5.HH 88.GJM
59!$'g!8HH5 98H3.8J 983J.G3 J.:JM 9838.:5 988J.8H !H.I@M
5G!$'g!8HH5 935I.3J 93I@.JG 5I.GHM 98J9.5I 93:H.JH 5:.::M
! 5H9 !
5
Z
___________________________________________________________________________________
5I!$'g!8HH5 9389.I@ 93@@.9G 55.GHM 939G.H9 93GJ.9H J.H@M
85!$'g!8HH5 93JJ.9: 9998.:H 58.38M 99HJ.:G 999J.:H 55.9HM
88!$'g!8HH5 99@@.8@ 99J8.GG G.G9M 99@5.83 9:H:.3H 58.IIM
83!$'g!8HH5 99:9.I: 99JI.I3 53.3:M 9999.GJ 99JJ.:H 5@.@9M
89!$'g!8HH5 999I.95 99G5.HG G.5:M 99:J.HG 99G5.5H 3.GJM
8:!$'g!8HH5 999J.I: 99G9.:H I.HJM 995@.I@ 99@J.:H 5G.9HM
8I!$'g!8HH5 9985.9G 9939.8G 9.9HM 93J:.I5 9989.IH 5H.H3M
8J!$'g!8HH5 93J5.J3 995G.@H J.8IM 99H5.I8 995J.IH @.9IM
3H!$'g!8HH5 9958.JJ 99:H.I3 59.83M 9955.I: 99:9.:H 5@.H9M
35!$'g!8HH5 9999.89 99IJ.8H 5G.:IM 99GG.35 99JJ.@H I.@:M
9!Sep!8HH5 9:IG.J9 9@HH.8H :.53M 9@H8.93 9@53.@H 9.@@M
:!Sep!8HH5 9@H:.3H 9@HJ.@H 5.IJM 9:JI.@: 9@H8.:H 5.GHM
@!Sep!8HH5 9:JI.JG 9@85.GH 5H.@5M 9@H@.3: 9@8I.5H 5H.59M
G!Sep!8HH5 9@55.J8 9@9I.G3 5I.85M 9@8I.J3 9@:H.8H 5H.9IM
I!Sep!8HH5 9@:J.H9 9@GG.HH J.3IM 9@@I.8G 9@GH.HH H.JHM
55!Sep!8HH5 9G53.GI 9G8H.3H 3.@5M 9@J@.@ 9G5@.JH 55.8GM
58!Sep!8HH5 9G8J.85 9G99.5H I.I9M 9G@3.@3 9G@8.3H !H.GIM
53!Sep!8HH5 9G9H.H9 9G33.:3 !9.5IM 9GH8.:8 9GHI.@H 3.J3M
59!Sep!8HH5 9@J9.H: 9@IJ.53 !3.9GM 9@G5.J8 9@G@.9H 3.5IM
5:!Sep!8HH5 9@53.9G 9@53.G3 H.85M 9:@8.3I 9:J@.5H 8@.JIM
5I!Sep!8HH5 993I.3: 99:8.93 58.IGM 93@@.95 93JG.3H 8I.@JM
5J!Sep!8HH5 98IH.:8 98I9.@H 9.3:M 98@9.39 98:@.IH !I.HGM
8H!Sep!8HH5 93HH.:G 98I9.@G !5J.8IM 938:.8: 98I9.HH !9J.G3M
85!Sep!8HH5 98IG.9G 93HH.HH 5G.GIM 98:G.8 98JH.HH 9@.IGM
! 5H: !
___________________________________________________________________________________
88!Sep!8HH5 9559.:H 95H5.IH !88.:3M 9H38.3G 9H@H.9H :H.G9M
8:!Sep!8HH5 95:I.:5 95:3.9H !55.85M 95G3.9I 959@.8H !:J.@:M
8@!Sep!8HH5 955@.9H 95@5.@G 533.GJM 9HIJ.:I 9HJ8.HH G.8HM
8G!Sep!8HH5 9HJ5.GJ 95H@.93 @:.35M 95@9.5 95:H.3H !@H.9IM
8I!Sep!8HH5 9558.I9 95H9.H3 !GI.5IM 9H@G.3I 9H@I.5H @.9@M
$(so (ooking at the i%p(icit cost of carr of )SE for the sa%e period and co%paring
to &SE I%p(icit cost of carr +ide f('ct'ation is visi,(e. So%e of it co'(d ,e attri,'ted
to different period in ,oth %arkets. $nother, pro,a,(e reason co'(d ,e a,sence of
%arket ie(d c'rve. In addition, it appears that there is not eno'gh ar,itrage interest to
,'i(d an i%p(icit ie(d c'rve. *he cost of carr is a(so sho+ing a +ide f('ct'ation
inter!da.
! 5H@ !
___________________________________________________________________________________
Cos1 o- Ca((y Cal27la1io/
=air price D=P
t*
F ^ Spot price Q 0ost of carr Inf(o+
^ 0P
t
Q 0P
t
Z D;
t*
D
t*
F Z D* tF
3@:
=P
t*
^ =air price of the asset at ti%e t for ti%e *.
0P
t
^ 0ash price of the asset
;
t*
^ Interest rate at ti%e t for the period 'p to ti%e *
D
t*
^ Inf(o+s in ter%s of dividend or interest ,et+een t and *.
In this case, dividend has ,een ignored
3
.
In addition, transaction cost has ,een taken into acco'nt in deve(oping the (o+er and
'pper ,o'nd. *ransaction cost of H.:M has ,een taken. *his has ,een arrived after
taking .5G@:M of co%%ission rate and ;s 8:H per contract
9
.
=or the interest rate #i,or and &ad(a rate have ,een 'sed ,eca'se of (ack of ie(d
c'rve.
Table %: &e"tember %''! (utures C#ntract
EDi--.(./2. i/ I84li2i1 2os1 o- 2a((y i/ SE a/0 NSEG
SECOC
EA5.(a9.G
SECOC
EClos.G
NSECOC
EA5.(a9.G
NSECOC
EClos.G
SECOC-
NSECOC
EA5.(a9.G
SECOC-
NSECOC
EClos.G
8I!$'g!8HH5 9.9HM 5H.H3M I.3JM 5H.JJM !3.JJM !H.J@M
8J!$'g!8HH5 J.8IM @.9IM I.5GM 5H.99M 5.55M !3.J@M
3H!$'g!8HH5 59.83M 5@.H9M I.35M 9.J9M :.J8M 55.HJM
35!$'g!8HH5 5G.:IM I.@:M :.G8M 9.JJM 55.I@M 3.@GM
9!Sep!8HH5 :.53M 9.@@M 5:.3@M 5.@IM !5H.83M 8.JIM
:!Sep!8HH5 5.IJM 5.GHM 3.J@M @.G9M !8.HGM !:.H:M
3
)lt(ou'( t(eoreticall$ dividend does affect t(e futures prices* in t(is case it (as been
i'nored.
4
+(ese are t(e c(ar'es of Geo,it securities "!!!.'eo,itsecurities.com#.
! 5HG !
___________________________________________________________________________________
@!Sep!8HH5 5H.@5M 5H.59M 8.I:M 9.95M G.GGM :.G3M
G!Sep!8HH5 5I.85M 5H.9IM I.@3M J.93M J.:IM 5.H:M
I!Sep!8HH5 J.3IM H.JHM 55.3IM I.35M !8.HHM !G.9HM
55!Sep!8HH5 3.@5M 55.8GM 3.JIM !:.5JM !H.3IM 5@.9@M
58!Sep!8HH5 I.I9M !H.GIM 5.@3M G.G:M G.85M !I.:3M
53!Sep!8HH5 !9.5IM 3.J3M :.9IM 5.9@M !J.@:M 8.9GM
59!Sep!8HH5 !3.9GM 3.5IM 5.:9M 53.@@M !:.H8M !5H.9IM
5:!Sep!8HH5 H.85M 8@.JIM 55.@GM 5I.95M !55.9@M I.:@M
5I!Sep!8HH5 58.IGM 8I.@JM !I.G:M 3H.@JM 85.@8M !8.HHM
5J!Sep!8HH5 9.3:M !I.HGM 5:.::M 9H.G5M !55.8HM !9I.GGM
8H!Sep!8HH5 !5J.8IM !9J.G3M :5.3IM 8:.H9M !GH.@@M !G9.GGM
85!Sep!8HH5 5G.GIM 9@.IGM 53.93M G.38M 9.3:M 3J.::M
88!Sep!8HH5 !88.:3M :H.G9M !33.8JM 3G.5IM 5H.G@M 53.:GM
8:!Sep!8HH5 !55.85M !:J.@:M 3@.G@M :.@:M !9G.JGM !@:.8JM
8@!Sep!8HH5 533.GJM G.8HM !I@.3HM !8H.5:M 88H.HIM 8G.3:M
8G!Sep!8HH5 @:.35M !@H.9IM 95.59M 33.5IM 89.5GM !J3.@@M
8I!Sep!8HH5 !GI.5IM @.9@M !95.J8M 5I.G3M !3@.8@M !58.8GM
! 5HI !
___________________________________________________________________________________
A/alysis o- O4./ I/1.(.s1
$n i%portant fig're to +atch is the Nopen interestN (ine and n'%,er of contracts.
>hi(e n'%,er of contract traded o,vio's( indicates the (i7'idit, open interest
,esides (i7'idit a(so sho+s the depth of the %arket. .pen interest is the s'% tota( of
a(( (ong positions D+hich +o'(d a(+as ,e e7'a( to s'% tota( of a(( short positionsF.
/igher the open interest ! higher the depth in the %arket.
(i)ure !: &e"tember %''! C#ntract *O"en Interest+
Th(.. 1hi/9s 1o ;. /o1.0 h.(. a(.?
5. *here is an increase in no of contracts as the contract %at'rit approaches. *his is
expected o'tco%e as sec'rit approaches %at'rit, %ore!(i7'id the sec'rit
,eco%es.
8. *he n'%,er of )SE open interest, has a(+as ,een (ess than &SE .pen interest.
3. *he peak of open interest is ,efore the %at'rit of the contract. So the %ost of
trade is %eant for pre %at'rit sett(e%ent
In addition, the corre(ation ,et+een the t+o is 7'ite significant at IIM.
Sa%e trend is evident +hen co%paring n'%,er of contracts traded. $part fro% fe+
trading das, )SE contracts have a(+as ,een (ess than &SE contracts.
! 5HJ !
0
100
200
300
400
500
600
700
800
7
/
1
3
/
2
0
0
0
7
/
2
0
/
2
0
0
0
7
/
2
7
/
2
0
0
0
8
/
3
/
2
0
0
0
8
/
1
0
/
2
0
0
0
8
/
1
7
/
2
0
0
0
8
/
2
4
/
2
0
0
0
8
/
3
1
/
2
0
0
0
9
/
7
/
2
0
0
0
9
/
1
4
/
2
0
0
0
9
/
2
1
/
2
0
0
0
Open Interest (BSE) Open Interest (NSE)
___________________________________________________________________________________
(i)ure %: &e"tember %''' C#ntract *N# #$ tra,es+
In
addition, (i7'idit in the contract in
the initia( %onth is ver (ess to the
extent of ,eing neg(igi,(e. In
addition, in the initia( t+o %onths, there are %an trading das, in +hich no trade
took p(ace. It is on( in the (ast %onth of the three!%onth contract that there is sp'rt of
trade taking p(ace and peak reaches %ain( ,efore the %at'rit. *h's, (i7'idit is
%ain( in the (ater part of the contract.
! 55H !
0
50
100
150
200
250
300
350
7
/
1
3
/
2
0
0
0
7
/
2
0
/
2
0
0
0
7
/
2
7
/
2
0
0
0
8
/
3
/
2
0
0
0
8
/
1
0
/
2
0
0
0
8
/
1
7
/
2
0
0
0
8
/
2
4
/
2
0
0
0
8
/
3
1
/
2
0
0
0
9
/
7
/
2
0
0
0
9
/
1
4
/
2
0
0
0
9
/
2
1
/
2
0
0
0
No of contracts (BSE) No of Contract( NSE)
___________________________________________________________________________________
I/1.(-1.84o(al Co84a(iso/ o- O4./ I/1.(.s1
*he trends in the (i7'idit or open interest position of index f't'res of contract of
different %onths are co%pared.
(i)ure -: .&E O"en interest */u)ust v0s &e"tember+
=ro% the a,ove fig're, nothing s',stantia(
can ,e conc('ded regarding the trend in the open
interest and thro'gh it, the (i7'idit. $t the %axi%'%, it can ,e said that (i7'idit
increases in the (ater phases of the contract that is in the (ast one %onth of the
contract.
! 555 !
0
200
400
600
800
1000
1200
!"!st Septe#$er
___________________________________________________________________________________
(i)ure 1: &e"tember c#ntract b#un, *2ib#r rate+
5
1ooking at ,oth the chart 'sing #i,or rate and
&ad(a rate three interesting o,servation areB
In the initia( period of contract, index average is a(+as ,e(o+ the (o+er ,o'nd.
D'ring the entire period never does index crosses the 'pper ,o'nd
:
.
*o+ards the end of contract na%e( (ast one %onth, index average +as +ithin the
fair va('e ,o'nd
In the a,ove ana(sis, spread has not ,een taken into consideration. *aking a spread
rate of 9H ,asis points
@
, and the dividend rate of 5.99@GM
G
fo((o+ing scenario
deve(opsB
5
-ossible reason could be curb on s(ort sellin' t(at !as necessar$ to ta&e advanta'e of
above advanta'e.
6
)vera'e spread of .IB/R rate compared to .IBID rate.
7
+(is is calculated as an avera'e of dividend $ield for t(e mont( of Jul$* )u'ust and
September.

! 558 !
4000%00
4100%00
4200%00
4300%00
4400%00
4500%00
4600%00
4700%00
4800%00
7
/
1
3
/
2
0
0
0
7
/
2
0
/
2
0
0
0
7
/
2
7
/
2
0
0
0
8
/
3
/
2
0
0
0
8
/
1
0
/
2
0
0
0
8
/
1
7
/
2
0
0
0
8
/
2
4
/
2
0
0
0
8
/
3
1
/
2
0
0
0
9
/
7
/
2
0
0
0
9
/
1
4
/
2
0
0
0
9
/
2
1
/
2
0
0
0
9
/
2
8
/
2
0
0
0
Se"%es@ Se"%esD Se"%esC
___________________________________________________________________________________
(i)ure 3: &e"tember C#ntract .#un,
*2I.OR4 2I.ID an, Divi,en,+
It can
,e
seen fro% a,ove fig're, there are
%an occasions +hen index average
+as (ing ,e(o+ the (o+er ,o'nd.
! 553 !
4100%00
4300%00
4500%00
4700%00
4900%00
7
/
1
3
/
2
0
0
0
7
/
2
0
/
2
0
0
0
7
/
2
7
/
2
0
0
0
8
/
3
/
2
0
0
0
8
/
1
0
/
2
0
0
0
8
/
1
7
/
2
0
0
0
8
/
2
4
/
2
0
0
0
8
/
3
1
/
2
0
0
0
9
/
7
/
2
0
0
0
9
/
1
4
/
2
0
0
0
9
/
2
1
/
2
0
0
0
9
/
2
8
/
2
0
0
0
a&era"e !pper $o!n' (o)er $o!n'
___________________________________________________________________________________
A(;i1(a9. O44o(17/i1y
*here is sharp difference ,et+een I%p(icit 0ost of 0arr and #I&.; and &$D1$
rate.
Table -: &e"tember C#ntract *(requency #$ ,i$$erence bet5een Im"licit c#st #$
carry an, 2I.OR an, ./D6/+
F(.C7./2y P.(2./1
0.0_#I&.; 9H 95.8
0.0Y#I&.; :G :I.I
*ota( JG 5HH.H

F(.C7./2y P.(2./1
0.0_&$D1$ 95 98.3
0.0Y&$D1$ :@ :G.G
*ota( JG 5HH.H

In addition, the difference is 7'ite significant, at so%e ti%e to the t'ne of GHM
*
.
So (ooking at ,o'nd chart and difference +ith respect to #I&.; and &$D1$ rate, a
reasona,(e state%ent can ,e %ade that %arket is no do',t inefficient. /o+ever, +hi(e
stating fo((o+ing covenants sho'(d ,e taken into consideration.
#is%atch ,et+een the ti%ing of index and f't'res na%e( the c(osing price of
f't'res %ight ,e %'ch ,efore the c(osing of %arket. $(tho'gh +e have taken the
average, this co'(d p(a significant ro(e d'e to fe+ trades ,eing done at present.
Second iss'e is of ,asis risk na%e( %ove%ent in index ,eing 'nd'( inf('enced
, %ove%ent in certain high +eightage stocks.
In addition, dividend paid d'ring the period co'(d p(a so%e ro(e
J
.
8
Refer +able 0.
9
)lt(ou'( in second table dividend (as been ta&en into consideration* t(ere could be affect
of certaint$ as it is loo&in' from no! to past. +(us* uncertaint$ element (as to be ta&en
into consideration.
! 559 !
___________________________________________________________________________________
=ina(( %ain iss'e of re(evance of #I&.; and &ad(a as cost of financing.
In addition, even if it is re(evant another pro,(e% co'(d ,e of spread that is
appropriateness of spread in the ana(sis.

! 55: !
___________________________________________________________________________________
EECT O INDEX UTU/ES
ON
THE CASH MA/KET 0OLATILITY
-o(ati(it is a %eas're of the ho+ certain +e are a,o't f't're prices. -o(ati(it of a
stock has ,een %eas'red ,ased on standard deviation of the ret'rn provided , the
stock in one ear +hen the ret'rn is expressed 'sing contin'o's co%po'nding.
$ record of stock price %ove%ents
+!
has ,een 'sed to esti%ate vo(ati(it. *he dai(
stock price has ,een 'sed.
n Q 5 ^ n'%,er of o,servations
Si ^ Index va('e at end of ith interva(
r ^ 1ength of ti%e interva( in ears
Ai ^ 1n DSi C SiQ5F
*he standard deviation of Ais is ` H.:.
0hoosing an appropriate va('e for n is not eas. >e have considered e7'a(
o,servations on ,oth sides i.e. prior and post introd'ction of f't'res. Since the data
points avai(a,(e after introd'ction of f't'res is (ess, the data is (i%ited.
10
-re and post introduction comprises of 10 tradin' da$s. -re period !as from 2345eb40666
to 274June40666 and post introduction period !as from 284June40666 to 14oct40666.
! 55@ !
___________________________________________________________________________________
Bo(l0>i0. .@4.(i./2.
11
*he o,jective of the st'd +as to find the i%pact of f't'res trading on the (ong r'n
distri,'tiona( characteristics of the 'nder(ing index, th's foc's +as on (ong r'n
rather than short r'n vo(ati(it of index. Ander this data fro% t+ent!three active(
traded f't're index contracts in sixteen different co'ntries +as taken. *he res'(ts
sho+ that , 'sing "$;0/ statistica( vo(ati(it %ode(ing techni7'e, o't of t+ent!
three indices seventeen of the% has (o+er (ong r'n spot variances in the post f't'res
introd'ction period for a hori3on of t+o ears. #oreover, k'rtosis of the distri,'tion
drops for fifteen of the indices in the after%ath of a f't'res introd'ction. Interesting(
%ost of the indices that exhi,it higher (ong r'n spot vo(ati(it and higher k'rtosis in
the after%ath of a f't'res introd'ction ,e(ong to the Anited States. *his co'(d ,e d'e
to co'ntr specifit and co'(d ,e re(ated to the specific nat're of the %arket
58
.
I/0ia/ E@4.(i./2.
T/.6E 1: V#latilities in "re an, "#st (utures Intr#,ucti#n "eri#,
P(io( P.(io0 Pos1 I/1(o0721io/
&SE 98.I@3:: 89.HGHI@
)SE 3J.9J:8@ 85.J5IJ5
-o(ati(it of shares having highest and (o+est +eightage in the index
I)=.SES J5.:@@3J :H.3:GI3
$00 3G.:I59 9G.GIJG9
;e(iance ind'stries @9.3GJ9 33.J895
/11 @H.I5G: 3I.::58
-o(ati(it of ,oth indices has co%e do+n after the introd'ction of index f't'res. $(so
post index f't'res introd'ction has a(so +itnessed the red'ction in vo(ati(it in a((
shares except $00. /o+ever, it cannot ,e conc('sive( stated that it has ,een d'e to
the introd'ction index f't'res.
11
)sli(an )lta$4Sali( and Vol&an 9urtas* :The impact of Stock Index Futures, Introduction
on the Distributional characteristics of the underlying Index: An International
Perspectie!"
12
)lt(ou'( t(ere are evidences to t(e contrar$* t(is stud$ (as been ;uoted on account of
compre(ensivel$ and as !ell as usa'e of G)RC< model* !(ic( (as man$ superior
c(aracteristics compared to traditional met(ods.
! 55G !
___________________________________________________________________________________
SU/0EY /ESULTS
O;6.21i5. o- 1h. s7(5.y
*he s'rve +as intended to st'd the nat're of risk, +hich is of %ost concern to
individ'a( investors, effectiveness of index f't'res in a,ove risk c'rtai(%ent and
i%portance of derivative prod'ct in India.
Ta(9.1 4o47la1io/
Sa%p(e si3e co%prises of individ'a( investors +ho are active( participating in stock
%arket and those +ho have fair kno+(edge of derivative prod'cts
*he n'%,er of peop(e st'died +as t+ent!seven.
$.s7l1s
Mos1 I84o(1a/1 (isk N78;.( o- (.s4o/s.s
-o(ati(it of prices 5@
1i7'idit 9
Interest rate changes 5
$n other H
*h's to individ'a( investors %ost i%portant risk is vo(ati(it of prices. *his is
expected as ever investors (ike gain handso%e( ,'t fears of (osing in that proportion
too.
S722.ss o- i/0.@ -717(.s i/ (.s4.21i5. (isk 27(1ail8./1 No o- $.s4o/s.s
S'ccessf'( @
Ans'ccessf'( 5:
Individ'a( investors ,e(ieve that index f't'res have ,een 'ns'ccessf'( in achieving
their specific risk c'rtai(%ent. *he pro,a,(e reason co'(d ,e that a(tho'gh individ'a(
investors +ant vo(ati(it of prices to red'ce, the do not +ant it at the expense of high
gains.
I84o(1a/2. o- 0.(i5a1i5. 4(o0721 i/ I/0ia No o- 4.o4l.
! 55I !
___________________________________________________________________________________
I%portant 59
)ot i%portant G
#ost of the investors ,e(ieve that derivative is i%portant in India and that to %ain(
for hedging. *here are other reasons in addition to a,ove s'ch as 'p gradation of
capita( %arket, i%prove%ent of econo%ic via,i(it etc. /o+ever there is one vie+
that co'(d ,e interesting is that derivative are not %eant for s%a(( investors.
O1h.( i84o(1a/1 0.(i5a1i5. 4(o0721 -o( i/1(o0721io/
i/ I/0ia
No o- (.s4o/s.s
Stock Index options 53
='t'res on individ'a( stocks 8
.ptions on individ'a( stocks @
#ost of the investors prefer index!,ased options. *his is in consistent +ith investors
concern for vo(ati(it that is +anting 'pside potentia( ,'t not do+nside (oss. $nother
interesting res'(t is ver (o+ or near( neg(igi,(e preference for f't'res on individ'a(
stocks. *he pro,a,(e reason co'(d ,e existence of carr for+ard in Indian %arket,
+hich is in %an senses si%i(ar to f't'res on individ'a( stocks. *h's investors co'(d
,e ,e(ieving that introd'ction of f't'res on individ'a( stocks co'(d ,e in so%e sense
j'st repetition on carr for+ard.
Co/2l7sio/
=or %ost of individ'a( investors, vo(ati(it of prices is of %ost i%portant concern ,'t
according to the% index f't'res have fai(ed in a,ove risk c'rtai(%ent. *here is no
do',t in individ'a( investors %ind a,o't the i%portance of derivative prod'ct in
India. Stock index options appear to ,e the derivative prod'ct, +hich the +o'(d (ike
to see in Indian %arket. *h's overa(( , it appears that investors +o'(d (ike their risk to
,e c'rtai(ed ,'t not at the expense of 'pside gains.
! 55J !
___________________________________________________________________________________
A##ENDIX 7 SU/0EY EUESTIONNAI/E
1) Bhi2h (isks a(. o- 8os1 2o/2.(/ i/ yo7( o4.(a1io/s<
a. -o(ati(it of Prices c. Interest ;ate 0hanges
,. 1i7'idit d. $n other DP(. SpecifF
2) A(. 1h. 4(.s./1 I/0.@ -717(.s s722.ss-7l i/ a;o5. (isk 27(1ail8./1<
DP(ease (ist the risks that Index ='t'res c'rtai(sF

') Do yo7 1hi/k 0.(i5a1i5. 4(o0721s a(. i84o(1a/1 i/ I/0ia< DP(ease exp(ainF
&) "o> .--.21i5. i/0.@ -717(.s ha5. ;../ i/ a2hi.5i/9 1h. (ol.s as ./5isa9.0 ;y
SEI.
5) A4a(1 -(o8 I/0.@ -717(.s# >hi2h o- 1h. -ollo>i/9 0.(i5a1i5. 4(o0721s 2o7l0 ;.
o- 7s. i/ I/0ia<
a. Stock Index options c. ='t'res on Individ'a( stocks
,. .ptions on individ'a( stocks
P) Bha1 0o yo7 1hi/k SEI sho7l0 0o 1o i84(o5. i1s a22.41a;ili1y<
Q) Do yo7 4a(1i2i4a1. i/ i/0.@ -717(.s a21i5i1y<
I- y.s# i/ >ha1 s./s. yo7 a(. 4a(1i2i4a1i/9.
a. /edgers d. Dea(ersCSpec'(ators
,. >riters e. $n .ther __________________
c. &roker
! 58H !

3Ps of Indian Stock Market

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3 Ps of the Indian Stock Exchanges Past, Present & Perspective

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