INDEX

SR NO

PARTICULARS

PG NO

INTRODUCTION

FOREIGN EXCHANGE AND FOREIGN EXCHANGE

MARKET

FOREIGN EXCHANGE MANAGEMENT ACT

12

EQUITY

16

INTERDEPENDENCE BETWEEN EQUITY

MARKET AND FOREX MARKET

24

CONCLUSION

27

WEBLOGRAPHY

28

1. INTRODUCTION

EQUITY OR STOCK MARKET

Are markets in which shares are issued and traded either through exchanges or over-the-counter markets. Also
known as the equity market, it is one of the most vital areas of a market economy as it provides companies with
access to capital and investors with a slice of ownership in the company and the potential of gains based on the
company's future performance.
STOCK
Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the company's
assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Whether
you say shares, equity, or stock, it all means the same thing. The importance of being a shareholder is that you are
entitled to a portion of the companys profits and have a claim on assets. Profits are sometimes paid out in the
form of dividends. The more shares you own, the larger the portion of the profits you get.
The securities market has two interdependent segments: the primary (new issues) market and the secondary
market. Primary market is where new issues are first offered, with any subsequent trading going on in the
secondary market. The primary market provides the channel for sale of new securities. Secondary market refers to
a market where securities are traded after being initially offered to the public in the primary market and/or listed
on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of
equity markets and the debt markets.

ORIGIN & EXCHANGES

Share market in Indian started functioning in 1875. The name of the first share trading association in India was
Native Share and Stock Broker's Association, which later came to be known as Bombay Stock Exchange (BSE).
This association kicked of with 318 members. Indian Share Market mainly consists of two stock exchanges
namely Bombay Stock Exchange (BSE) & National Stock Exchange (NSE).
BOMBAY STOCK EXCHANGE (BSE)
Bombay Stock Exchange is the oldest stock exchange not only in India but in entire Asia. Its history is
synonymous with that of the Indian Share Market history. BSE started functioning with the name, The Native
Share and Stock Broker's Association in 1875. It got Government of India's recognition as a stock exchange in
1956 under Securities Contracts (Regulation) Act, 1956. At the time of its origin it was an Association of Persons
but now it has been transformed to a corporate and demutualised entity. BSE is spread all over India and is
present in 417 towns and cities. The total number of companies listed in BSE is around 3500.

The main index of BSE is called BSE SENSEX or simply SENSEX. It is composed of 30 financially sound
company stocks, which are liable to be reviewed and modified from time-to-time.
Index calculation methodology
SENSEX, first compiled in 1986 was calculated on a "Market Capitalization-Weighted" methodology of 30
component stocks representing a sample of large, well established and financially sound companies. The base
year of SENSEX is 1978-79. From September 2003, the SENSEX is calculated on a free-float market
capitalization methodology. The "free-float Market Capitalization-Weighted" methodology is a widely followed
index construction methodology on which majority of global equity benchmarks are based.
Launch of Other BSE Indices
1. The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of BSE National
Index (Base: 1983-84 = 100).
2. The BSE National Index was renamed as BSE-100 Index from October 14, 1996 and since then it is
calculated taking into consideration only the prices of stocks listed at BSE.
3. The Exchange launched dollar-linked version of BSE-100 index i.e. Dollex-100 on May 22, 2006.
4. The Exchange constructed and launched on 27th May, 1994, two new index series viz., the 'BSE-200'
and the 'DOLLEX-200' indices.
5. The launch of BSE-200 Index in 1994 was followed by the launch of BSE-500 Index and 5 sectoral
indices in 1999.
In 2001, BSE launched the BSE-PSU Index, DOLLEX-30 and the country's first free-float based index - the BSE
TECk Index. The Exchange shifted all its indices to a free-float methodology (except BSE PSU index) in a
pahsed manner.
NATIONAL STOCK EXCHANGE (NSE)
National Stock Exchange (NSE) founded although late than BSE, is currently the leading stock exchange in India
in terms of total volume traded. It is also based in Mumbai but has its presence in over 1500 towns and cities. In
terms of market capitalization, NSE is the second largest bourse in South Asia. National Stock Exchange got its
recognition as a stock exchange in July 1993 under Securities Contracts (Regulation) Act, 1956.
The products that can be traded in NSE are: Equity or Share
Futures (both index and stock)
Options (Call and Put)
Wholesale Debt Market
Retail Debt Market
NSE's leading index is Nifty 50 or popularly Nifty and is composed of 50 diversified benchmark Indian company
stocks. Nifty is constructed on the basis of weighted average market capitalization method.
3

FOREIGN EXCHANGE MARKET

The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of
currencies. The main participants in this market are the larger international banks. Financial centres around the
world function as anchors of trading between a wide range of multiple types of buyers and sellers around the
clock, with the exception of weekends. The foreign exchange market determines the relative values of different
currencies.
The foreign exchange market works through financial institutions, and it operates on several levels. Behind the
scenes banks turn to a smaller number of financial firms known as dealers, who are actively involved in large
quantities of foreign exchange trading. Most foreign exchange dealers are banks, so this behind-the-scenes market
is sometimes called the interbank market, although a few insurance companies and other kinds of financial
firms are involved. Trades between foreign exchange dealers can be very large, involving hundreds of millions of
dollars. Because of the sovereignty issue when involving two currencies, Forex has little (if any) supervisory
entity regulating its actions.
The foreign exchange market assists international trade and investments by enabling currency conversion. For
example, it permits a business in the United States to import goods from the European Union member states,
especially Eurozone members, and pay euros, even though its income is in United States dollars. It also supports
direct speculation and evaluation relative to the value of currencies, and the carry trade, speculation based on the
interest rate differential between two currencies.
In a typical foreign exchange transaction, a party purchases some quantity of one currency by paying for some
quantity of another currency. The modern foreign exchange market began forming during the 1970s after three
decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary
management established the rules for commercial and financial relations among the world's major industrial states
after World War II), when countries gradually switched to floating exchange rates from the previous exchange
rate regime, which remained fixed as per the Bretton Woods system.
The foreign exchange market is unique because of the following characteristics:

Its huge trading volume representing the largest asset class in the world leading to high liquidity.
Its geographical dispersion.
Its continuous operation: 24 hours a day except weekends, i.e., trading from 22:00 GMT on Sunday
(Sydney) until 22:00 GMT Friday (New York).
The variety of factors that affect exchange rates.
The low margins of relative profit compared with other markets of fixed income.
The use of leverage to enhance profit and loss margins and with respect to account size.

As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency
intervention by central banks.
According to the Bank for International Settlements, the preliminary global results from the 2013 Triennial
Central Bank Survey of Foreign Exchange and OTC Derivatives Markets Activity show that trading in foreign
4

exchange markets averaged $5.3 trillion per day in April 2013. This is up from $4.0 trillion in April 2010 and $3.3
trillion in April 2007. Foreign exchange swaps were the most actively traded instruments in April 2013, at $2.2
trillion per day, followed by spot trading at $2.0 trillion.
According to the Bank for International Settlements, as of April 2010, average daily turnover in global foreign
exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily
volume as of April 2007. Some firms specializing on foreign exchange market had put the average daily turnover
in excess of US$4 trillion.

2. FOREIGN EXCHANGE AND FOREIGN EXCHANGE MARKET

FOREIGN EXCHANGE
Foreign Exchange refers to foreign currencies possessed by a country for making payments to other countries. It
may be defined as exchange of money or credit in one country for money or credit in another. It covers methods
of payment, rules and regulations of payment and the institutions facilitating such payments.
FOREIGN EXCHANGE MARKET
A foreign exchange market refers to buying foreign currencies with domestic currencies and selling foreign
currencies for domestic currencies. Thus it is a market in which the claims to foreign moneys are bought and sold
for domestic currency. Exporters sell foreign currencies for domestic currencies and importers buy foreign
currencies with domestic currencies.
According to Ellsworth, "A Foreign Exchange Market comprises of all those institutions and individuals who buy
and sell foreign exchange which may be defined as foreign money or any liquid claim on foreign money".
Foreign Exchange transactions result in inflow & outflow of foreign exchange.
FUNCTIONS OF FOREIGN EXCHANGE MARKET
Foreign exchange is also referred to as forex market. Participants are importers, exporters, tourists and investors,
traders and speculators, commercial banks, brokers and central banks. Foreign bill of exchange, telegraphic
transfer, bank draft, letter of credit etc. are the important foreign exchange instruments used in foreign exchange
market to carry out its functions.
The Foreign Exchange Market performs the following functions.
1. Transfer of Purchasing Power / Clearing Function
The basic function of the foreign exchange market is to facilitate the conversion of one currency into another i.e.
payment between exporters and importers.
For eg. Indian rupee is converted into U.S. dollar and vice-versa. In performing the transfer function variety of
credit instruments are used such as telegraphic transfers, bank drafts and foreign bills. Telegraphic transfer is the
quickest method of transferring the purchasing power.

2. Credit Function
The foreign exchange market also provides credit to both national and international, to promote foreign trade. It is
necessary as sometimes, the international payments get delayed for 60 days or 90 days. Obviously, when foreign
bills of exchange are used in international payments, a credit for about 3 months, till their maturity, is required.

For eg. Mr. A can get his bill discounted with a foreign exchange bank in New York and this bank will transfer the
bill to its correspondent in India for collection of money from Mr. B after the stipulated time.
3. Hedging Function
A third function of foreign exchange market is to hedge foreign exchange risks. By hedging, we mean covering of
a foreign exchange risk arising out of the changes in exchange rates. Under this function the foreign exchange
market tries to protect the interest of the persons dealing in the market from any unforeseen changes in exchange
rate. The exchange rates under free market can go up and down; this can either bring gains or losses to concerned
parties. Hedging guards the interest of both exporters as well as importers, against any changes in exchange rate.
Hedging can be done either by means of a spot exchange market or a forward exchange market involving a
forward contract.

PARTICIPANTS / DEALERS IN FOREIGN EXCHANGE MARKET

A) Foreign exchange market needs dealers to facilitate foreign exchange transactions. Bulks of foreign exchange
transaction are dealt by Commercial banks & financial institutions. RBI has also allowed private authorised
dealers to deal with foreign exchange transactions i.e buying & selling foreign currency. The main participants in
foreign exchange markets are as follow:
1. Retail Clients
Retail Clients deal through commercial banks and authorised agents. They comprise people, international
investors, multinational corporations and others who need foreign exchange.

2. Commercial Banks
Commercial banks carry out buy and sell orders from their retail clients and of their own account. They deal with
other commercial banks and also through foreign exchange brokers.

3. Foreign Exchange Brokers

Each foreign exchange market centre has some authorised brokers. Brokers act as intermediaries between buyers
and sellers, mainly banks. Commercial banks prefer brokers.

4. Central Banks
Under floating exchange rate central bank does not interfere in exchange market. Since 1973, most of the central
banks intervened to buy and sell their currencies to influence the rate at which currencies are traded.
From the above sources demand and supply generate which in turn helps to determine the foreign exchange rate.
7

B) TYPES OF FOREIGN EXCHANGE MARKET

Foreign Exchange Market is of two types retail and wholesale market.
1. Retail Market
The retail market is a secondary price maker. Here travellers, tourists and people who are in need of foreign
exchange for permitted small transactions, exchange one currency for another.
2. Wholesale Market
The wholesale market is also called interbank market. The size of transactions in this market is very large. Dealers
are highly professionals and are primary price makers. The main participants are Commercial banks, Business
corporations and Central banks. Multinational banks are mainly responsible for determining exchange rate.
3. Other Participants
a) Brokers
Brokers have more information and better knowledge of market. They provide information to banks about the
prices at which there are buyers and sellers of a pair of currencies. They act as middlemen between the price
makers.
b) Price Takers
Price takers are those who buy foreign exchange which they require and sell what they earn at the price
determined by primary price makers.
c) Indian Foreign Exchange Market
It is made up of three tiers
i.
ii.
iii.

Here dealings take place between RBI and Authorised dealers (ADs) (mainly commercial banks).
Here dealings take place between ADs
Here ADs deal with their corporate customers.

TYPES OF TRANSACTION IN FOREX MARKET

For those who have never heard of foreign exchange, also known as forex, they may be incredibly confused when
you explain to them that investors buy, sell, and trade currencies. They may be even more confused to hear that
the exchange rates for these currencies rely on the forex market and the way that investors view the currencies
around the world. Those who begin to get into forex trading and investing may find that it can be even more
confusing to determine what kind of investment to go with. There are multiple ways to have a transaction in the
forex world. Some people may not understand the pros and cons between each, and why they may want to go

with a certain forex transaction type over another. By trying to understand the top 5 transactions made on the
forex market, you may better understand what you may want to do with your own investment.
Forward Transaction
A forward transaction is a transaction that is made for the future; this means that the money does not actually
come into play until a future date. The buyer and seller agree on a specific, stuck exchange rate for that certain
date in the future. Because of the fixed date, the rate is stuck to the choice on that day. The actual market numbers
on the day of the transaction do not matter, as the fixed rate cannot be changed. There is no limit on the extent of
a future forward transaction, as it is dependent on the buyer and seller alone.
Spot Transaction
The spot transaction is the quickest and fastest way to actually exchange your currency. There is an exchange of
two currencies over a two day period on the forex exchange, meaning that no contracts are signed. This allows the
transaction to happen at a faster pace.
Future Transactions
These transactions are also forward transactions, and deal with contracts much like the normal forward
transactions. The contracts usually deal with a certain amount by a certain date, rather than on a certain date. The
contract lasts for the time specified, and are major on the forex market.
Swap Transactions
Swap transactions are easily the most normal and common of the multiple ways to do transactions on the forex
market. Swap transactions are also forward transactions, but they do not happen as a trade through the forex
market itself. A swap transaction can be confusing at first, two investors agree to change currencies for a certain
amount of time. A later date is set for the two investors to change currencies back.
Option Transactions
Option transactions in the forex market common. The foreign exchange options give an investor the right (or
option) to exchange money on the forex market. This option has a fixed exchange rate and a specific date. The
option transaction is the most prominent in the forex market because of the high traffic and amount of money that
is sunk into the currency forex market daily.

FOREX MARKET IN INDIA

Traditionally Indian forex market has been a highly regulated one. Till about 1992-93, government exercised
absolute control on the exchange rate, export-import policy, FDI ( Foreign Direct Investment) policy. The Foreign
Exchange Regulation Act(FERA) enacted in 1973, strictly controlled any activities in any remote way related to
foreign exchange. FERA was introduced during 1973, when foreign exchange was a scarce commodity. Post
independence, union governments socialistic way of managing business and the license raj made the Indian
companies noncompetitive in the international market, leading to decline in export. Simultaneously India import
bill because of capital goods, crude oil & petrol products increased the forex outgo leading to sever scarcity of
foreign exchange. FERA was enacted so that all forex earnings by companies and residents have to reported and
surrendered (immediately after receiving) to RBI (Reserve Bank of India) at a rate which was mandated by RBI.
FERA was given the real power by making any violation of FERA was a criminal offense liable to
imprisonment. It a professed a policy of a person is guilty of forex violations unless he proves that he has not
violated any norms of FERA. To sum up, FERA prescribed a policy nothing (forex transactions) is permitted
unless specifically mentioned in the act.
Post liberalization, the Government of India, felt the necessity to liberalize the foreign exchange policy. Hence,
Foreign Exchange Management Act (FEMA) 2000 was introduced. FEMA expanded the list of activities in which
a person/company can undertake forex transactions. Through FEMA, government liberalized the export-import
policy, limits of FDI (Foreign Direct Investment) & FII (Foreign Institutional Investors) investments and
repatriations, cross-border M&A and fund raising activities.
Prior to 1992, Government of India strictly controlled the exchange rate. After 1992, Government of India slowly
started relaxing the control and exchange rate became more and more market determined. Foreign Exchange
Dealers association of India (FEDAI), set up in 1958, helped the government of India in framing rules and
regulation to conduct
forex exchange trading and developing forex market In India.
A major step in development of Indian forex market happened in 2008, when currency futures (Indian Rupee and
US Dollar) started trading at National Stock Exchange (NSE). Since the introduction, the turnover in futures has
increased leaps and bound. Though banks and authorized dealers were undertaking forex derivatives contracts,
but the introduction of exchange traded currency futures marked a new beginning as the retail investors were able
to participate in forex derivatives trading.

Foreign Exchange Market in India: Historical Perspective

Indian forex market since independence can be grouped in three distinct phases.

10

1947 to1977: During 1947 to 1971, India exchange rate system followed the par value system. RBI fixed rupees
external par value at 4.15 grains of fine gold. 15.432grains of gold is equivalent to 1 gram of gold. RBI allowed
the par value to fluctuate within the permitted margin of 1 percent. With the breakdown of the Bretton Woods
System in 1971 and the floatation of major currencies, the rupee was linked with Pound-Sterling. Since PoundSterling was fixed in terms of US dollar under the Smithsonian Agreement of 1971, the rupee also remained
stable against dollar.
1978-1992: During this period, exchange rate of the rupee was officially determined in terms of a weighted basket
of currencies of Indias major trading partners. During this period, RBI set the rate by daily announcing the
buying and selling rates to authorized dealers. In other words, RBI instructed authorized dealers to buy and sell
foreign currency at the rate given by the RBI on daily basis. Hence exchange rate fluctuated but within a certain
range. RBI managed the exchange rate in such a manner so that it primarily facilitates imports to India. As
mentioned in Section 5.1, the FERA Act was part of the exchange rate regulation practices followed by RBI.
Indias perennial trade deficit widened during this period. By the beginning of 1991, Indian foreign exchange
reserve had dwindled down to such a level that it could barely be sufficient for three-weeks worth of imports.
During June 1991, India airlifted 67 tonnes of gold, pledged these with Union Bank of Switzerland and Bank of
England, and raised US$ 605 millions to shore up its precarious forex reserve. At the height of the crisis, between
2nd and 4th June 1991, rupee was officially devalued by 19.5% from 20.5 to 24.5 to 1 US$. This crisis paved the
path to the famed liberalization program of government of India to make rules and regulations pertaining to
foreign trade, investment, public finance and exchange rate encompassing a broad gamut of economic activities
more market oriented.
1992 onwards: 1992 marked a watershed in Indias economic condition. During this period, it was felt that India
needs to have an integrated policy combining various aspects of trade, industry, foreign investment, exchange
rate, public finance and the financial sector to create a market-oriented environment. Many policy changes were
brought in covering different aspects of import-export, FDI, Foreign Portfolio Investment etc.
One important policy changes pertinent to Indias forex exchange system was brought in -- rupees was made
convertible in current account. This paved to the path of foreign exchange payments/receipts to be converted at
market-determined exchange rate. However, it is worthwhile to mention here that changes brought in by
government of India to make the exchange rate market oriented have not happened in one big bang. This process
has been gradual. Convertibility in current account means that individuals and companies have the freedom to
buy or sell foreign currency on specific activities like foreign travel, medical expenses, college fees, as well as for
payment/receipt related to export-import, interest payment/receipt, investment in foreign securities, business
expenses etc. An related concept to this is the convertibility in capital account. Convertibility in capital
account indicates that Indian people and business houses can freely convert rupee to any other currency to any
extent and can invest in foreign assets like shares, real estate in foreign countries. Most importantly Indian banks
can accept deposit in any currency. Even though the exchange rate has been market determined, from time to time
RBI intervenes in spot and forward market, if it feels exchange rate has deviated too much.

11

3. FOREIGN EXCHANGE MANAGEMENT ACT

The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament of India "to consolidate and
amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for
promoting the orderly development and maintenance of foreign exchange market in India". It was passed in the
winter session of Parliament in 1999, replacing the Foreign Exchange Regulation Act (FERA). This act seeks to
make offenses related to foreign exchange civil offenses. It extends to the whole of India., replacing FERA, which
had become incompatible with the pro-liberalisation policies of the Government of India. It enabled a new foreign
exchange management regime consistent with the emerging framework of the World Trade Organisation (WTO).
It also paved way to Prevention of Money Laundering Act 2002, which was effected from 1 July 2005.
Unlike other laws where everything is permitted unless specifically prohibited, under this act everything was
prohibited unless specifically permitted. Hence the tenor and tone of the Act was very drastic. It required
imprisonment even for minor offences. Under FERA a person was presumed guilty unless he proved himself
innocent, whereas under other laws a person is presumed innocent unless he is proven guilty.
Switch from FERA
FERA, in place since 1975, did not succeed in restricting activities such as the expansion of transnational
corporations (TNCs). The concessions made to FERA in 1991-1993 showed that FERA was on the verge of
becoming redundant. After the amendment of FERA in 1993, it was decided that the act would become the
FEMA. This was done in order to relax the controls on foreign exchange in India, as a result of economic
liberalization. FEMA served to make transactions for external trade (exports and imports) easier transactions
involving current account for external trade no longer required RBIs permission. The deals in Foreign Exchange
were to be managed instead of regulated. The switch to FEMA shows the change on the part of the government
in terms of foreign capital.
Need for this management
The buying and selling of foreign currency and other debt instruments by businesses, individuals and
governments happens in the foreign exchange market. Apart from being very competitive, this market is also the
largest and most liquid market in the world as well as in India. It constantly undergoes changes and innovations,
which can either be beneficial to a country or expose them to greater risks. The management of foreign exchange
market becomes necessary in order to mitigate and avoid the risks. Central banks would work towards an orderly
functioning of the transactions which can also develop their foreign exchange market.
Whether under FERA or FEMAs control, the need for the management of foreign exchange is important. It is
necessary to keep adequate amount of foreign exc from Import Substitution to Export Promotion.

12

Main Features

Activities such as payments made to any person outside India or receipts from them, along with the deals
in foreign exchange and foreign security is restricted. It is FEMA that gives the central government the
power to impose the restrictions.
Restrictions are imposed on residents of India who carry out transactions in foreign exchange, foreign
security or who own or hold immovable property abroad.
Without general or specific permission of the MA restricts the transactions involving foreign exchange or
foreign security and payments from outside the country to India the transactions should be made only
through an authorised person.
Deals in foreign exchange under the current account by an authorised person can be restricted by the
Central Government, based on public interest.
Although selling or drawing of foreign exchange is done through an authorised person, the RBI is
empowered by this Act to subject the capital account transactions to a number of restrictions.
Residents of India will be permitted to carry out transactions in foreign exchange, foreign security or to
own or hold immovable property abroad if the currency, security or property was owned or acquired when
he/she was living outside India, or when it was inherited by him/her from someone living outside India.
Exporters are needed to furnish their export details to RBI. To ensure that the transactions are carried out
properly, RBI may ask the exporters to comply to its necessary requirements.

Similarities
The similarities between FERA and FEMA are as follows:

The Reserve Bank of India and central government would continue to be the regulatory bodies.

Presumption of extra territorial jurisdiction as envisaged in section (1) of FERA has been retained.

The Directorate of Enforcement continues to be the agency for enforcement of the provisions of the law
such as conducting search and seizure

Differences between FERA and FEMA

Sr.
No
1
2

DIFFERENCES

FERA

FEMA

PROVISIONS

FERA consisted of 81 sections, and was FEMA is much simple, and consist of
more complex
only 49 sections.

FEATURES

Presumption
of
negative
intention These presumptions of MensRea and
(Mens Rea ) and joining hands in offence abatement have been excluded in
(abatement)
existed
in
FEMA FEMA
13

NEW TERMS IN Terms like Capital Account Transaction, Terms

like
Capital
Account
FEMA
current Account Transaction, person, Transaction,
current
account
service etc. were not defined in FERA.
Transaction person, service etc., have
been defined in detail in FEMA
DEFINITION OF Definition of "Authorized Person"
AUTHORIZED
FERA was a narrow one ( 2(b)
PERSON

in The definition of Authorizedperson

has been widened to include banks,
money changes, off shore banking
Units etc. (2 ( c )

MEANING
OF There was a big difference in the definition
"RESIDENT" AS of "Resident", under FERA, and Income
COMPARED
Tax
Act
WITH
INCOME
TAX ACT.

PUNISHMENT
6

QUANTUM
PENALTY.

APPEAL

The provision of FEMA, are in

consistent with income Tax Act, in
respect to the definition of term "
Resident". Now the criteria of "In
India for 182 days" to make a person
resident has been brought under
FEMA. Therefore a person who
qualifies to be a non-resident under the
income Tax Act, 1961 will also be
considered a non-resident for the
purposes of application of FEMA, but
a person who is considered to be nonresident under FEMA may not
necessarily be a non-resident under the
Income Tax Act, for instance a
business man going abroad and
staying therefore a period of 182 days
or more in a financial year will become
a non-resident under FEMA.

Any offence under FERA, was a criminal Here, the offence is considered to be a
offence , punishable with imprisonment as civil offence only punishable with
per code of criminal procedure, 1973
some amount of money as a penalty.
Imprisonment is prescribed only when
one fails to pay the penalty.
OF The
monetary
penalty
payable Under FEMA the quantum of penalty
underFERA, was nearly the five times the has been considerably decreased to
amount involved.
three times the amount involved.
An appeal against the order of
"Adjudicating office", before " Foreign
Exchange Regulation Appellate Board
went before High Court

14

The appellate authority under FEMA is

the special Director ( Appeals) Appeal
against the order of Adjudicating
Authorities and special Director
(appeals) lies before "Appellate
Tribunal
for
Foreign Exchange."

Anappeal from an order of Appellate

Tribunal would lie to the High Court.
(sec 17,18,35)

RIGHT
OF FERA did not contain any express
ASSISTANCE
provision
on
the
right
of
DURING LEGAL onimpleaded person to take legal assistance
PROCEEDINGS.

10

POWER
SEARCH
SEIZE

FEMA expressly recognizes the right

of appellant to take assistance of legal
practitioner or chartered accountant
(32)

OF FERA conferred wide powers on a police The scope and power of search and
AND officer not below the rank of a Deputy seizure has been curtailed to a great
Superintendent of Police to make a search extent

A Step ahead From FERA To FEMA

Enactment of FEMA has brought in many changes in the dealings of Foreign Exchange, as compared to FERA.
Some of them are restrictive, and some has widened the scope.
However some of the relevant progress made, from FERA to FEMA, are as follows:
Withdrawal of Foreign Exchange
Now, the restrictions on withdrawal of Foreign Exchange for the purpose of current Account Transactions, has
been removed. However, the Central Government may, in public interest in consultation with the Reserve Bank
impose such reasonable restrictions for current account transactions as may be prescribed.
FEMA has also by and large removed the restrictions on transactions in foreign Exchange on account of trade in
goods, services except for retaining certain enabling provisions for the Central Government to impose reasonable
restriction in public interest.

15

4. EQUITY
The Definition of Equity
Plain and simple, equity is a share in the ownership of a company. Equity represents a claim on the company's
assets and earnings. As you acquire more equity, your ownership stake in the company becomes greater. Whether
you say shares, equity, it all means the same thing.
Being an Owner
Holding a company's equity means that you are one of the many owners (shareholders) of a company and, as
such, you have a claim (albeit usually very small) to everything the company owns. Yes, this means that
technically you own a tiny sliver of every piece of furniture, every trademark, and every contract of the company.
As an owner, you are entitled to your share of the company's earnings as well as any voting rights attached to the
equity.
A stock is represented by a stock certificate. This is a piece of paper that is proof of your ownership. Today its in
dematerialized form i.e. in electronic form shares have been kept safe. This is done to make the shares easier to
trade. In the past, when a person wanted to sell his or her shares, that person physically took the certificates down
to the brokerage. Now, trading with a click of the mouse or a phone call makes life easier for everybody.
Being a shareholder of a public company does not mean you have a say in the day-to-day running of the business.
Instead, one vote per share to elect the board of directors at annual meetings is the extent to which you have a say
in the company. For instance, being a Reliance shareholder doesn't mean you can call up Mukesh Ambani and tell
him how you think the company should be run.
The management of the company is supposed to increase the value of the firm for shareholders. If this doesn't
happen, the shareholders can vote to have the management removed, at least in theory. In reality, individual
investors like you and I don't own enough shares to have a material influence on the company.
Debt vs. Equity
Why does a company issue stock? Why would the founders share the profits with thousands of people when they
could keep profits to themselves? The reason is that at some point every company needs to raise money. To do
this, companies can either borrow it from somebody or raise it by selling part of the company, which is known as
issuing stock. A company can borrow by taking a loan from a bank or by issuing bonds. Both methods fit under
the umbrella of debt financing. On the other hand, issuing stock is called equity financing. Issuing stock is
advantageous for the company because it does not require the company to pay back the money or make interest
payments along the way. All that the shareholders get in return for their money is the hope that the shares will
someday be worth more than what they paid for them. The first sale of a stock, which is issued by the private
company itself, is called the initial public offering (IPO).
It is important that you understand the distinction between a company financing through debt and financing
through equity. When you buy a debt investment such as a bond, you are guaranteed the return of your money (the
principal) along with promised interest payments. This isn't the case with an equity investment. By becoming an
owner, you assume the risk of the company not being successful - just as a small business owner isn't guaranteed
a return, neither is a shareholder. As an owner, your claim on assets is less than that of creditors. This means that
if a company goes bankrupt and liquidates, you, as a shareholder, don't get any money until the banks and
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bondholders have been paid out; we call this absolute priority. Shareholders earn a lot if a company is successful,
but they also stand to lose their entire investment if the company isn't successful.
Risk
It must be emphasized that there are no guarantees when it comes to individual stocks. Some companies pay out
dividends, but many others do not. And there is no obligation to pay out dividends even for those firms that have
traditionally given them. Without dividends, an investor can make money on a stock only through its appreciation
in the open market. On the downside, any stock may go bankrupt, in which case your investment is worth
nothing.
Although risk might sound all negative, there is also a bright side. Taking on greater risk demands a greater return
on your investment. This is the reason why stocks have historically outperformed other investments such as bonds
or savings accounts. Over the long term, an investment in stocks has historically had an average return of around
10-12%.

DIFFERENT TYPES OF STOCKS

Common Stock
Common stock is, well, common. When people talk about stocks they are usually referring to this type. In fact,
the majority of stock is issued is in this form. We basically went over features of common stock in the last section.
Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get
one vote per share to elect the board members, who oversee the major decisions made by management.
Over the long term, common stock, by means of capital growth, yields higher returns than almost every other
investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes
bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and
preferred shareholders are paid.
Preferred Stock
Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting
rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed
dividend forever. This is different than common stock, which has variable dividends that are never guaranteed.
Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common
shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the
option to purchase the shares from shareholders at anytime for any reason (usually for a premium).
Some people consider preferred stock to be more like debt than equity. A good way to think of these kinds of
shares is to see them as being in between bonds and common shares.

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CHANGING STOCK PRICES

Stock prices change every day as a result of market forces. By this we mean that share prices change because of
supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up.
Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the
price would fall.
Understanding supply and demand is easy. What is difficult to comprehend is what makes people like a particular
stock and dislike another stock. This comes down to figuring out what news is positive for a company and what
news is negative. There are many answers to this problem and just about any investor you ask has their own ideas
and strategies.
That being said, the principal theory is that the price movement of a stock indicates what investors feel a company
is worth. Don't equate a company's value with the stock price. The value of a company is its market capitalization,
which is the stock price multiplied by the number of shares outstanding. For example, a company that trades at Rs
100 per share and has 1 million shares outstanding has a lesser value than a company that trades at Rs 50 that has
5 million shares outstanding (Rs 100 x 1 million = Rs 100 million while Rs 50 x 5 million = Rs 250 million).
To further complicate things, the price of a stock doesn't only reflect a company's current value, it also reflects the
growth that investors expect in the future.

The important things to grasp about this subject are the following:
1. At the most fundamental level, supply and demand in the market determines stock price.
2. Price times the number of shares outstanding (market capitalization) is the value of a company.
Comparing just the share price of two companies is meaningless.
3. Theoretically, earnings are what affect investors' valuation of a company, but there are other
indicators that investors use to predict stock price. Remember, it is investors' sentiments, attitudes and
expectations that ultimately affect stock prices.
4. There are many theories that try to explain the way stock prices move the way they do. Unfortunately,
there is no one theory that can explain everything.

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HOW TO READ A STOCK/ QUOTE

A stock quote will look like something below.

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Stock Symbol - This is the unique alphabetic name which identifies the stock. If you watch financial TV, you
have seen the ticker tape move across the screen, quoting the latest prices alongside this symbol. If you are
looking for stock quotes online, you always search for a company by the ticker symbol. In above stock quote its
Relcapital
52-Week High and Low - These are the highest and lowest prices at which a stock has traded over the previous
52 weeks (one year). This typically does not include the previous day's trading.
Security Name & Type of Stock - This column lists the name of the company. If there are no special symbols
or letters following the name, it is common stock. Different symbols imply different classes of shares.
For example, "eq" means the shares are equity.
Total Traded Quantity - This figure shows the total number of shares traded for the day. It is the volume for the
day.
Day High and Low - This indicates the price range at which the stock has traded at throughout the day. In
other words, these are the maximum and the minimum prices that people have paid for the stock.
Close - The close is the last trading price recorded when the market closed on the day. Keep in mind, you are not
guaranteed to get this price if you buy the stock the next day because the price is constantly changing (even after
the exchange is closed for the day) . The close is merely an indicator of past performance and except in extreme
circumstances serves as a ballpark of what you should expect to pay.
Net Change - This is the rupee value change in the stock price from the previous day's closing price. When
you hear about a stock being "up for the day," it means the net change was positive.
Order Book On the right hand side you see Buy Qty, Buy Price. This shows the top 5 bid and asks
figures at which the security is trading. This basically shows the demands and supply of a particular stock. It
actually shows the market breadth which will give you the number of buyers and sellers.
BULLS & BEARS
The Bulls
A bull market is when everything in the economy is great, people are finding jobs, gross domestic product (GDP)
is growing, and stocks are rising. Picking stocks during a bull market is easier because everything is going up.
Bull markets cannot last forever though, and sometimes they can lead to dangerous situations if stocks become
overvalued. If a person is optimistic and believes that stocks will go up, he or she is called a "bull" and is said to
have a "bullish outlook".
The Bears
A bear market is when the economy is bad, recession is looming and stock prices are falling. Bear markets make
it tough for investors to pick profitable stocks. One solution to this is to make money when stocks are falling
using a technique called short selling. Another strategy is to wait on the sidelines until you feel that the bear
market is nearing its end, only starting to buy in anticipation of a bull market. If a person is pessimistic,
believing that stocks are going to drop, he or she is called a "bear" and said to have a "bearish outlook".

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After knowing about the stock basics. Lets discuss now about the company research analysis which can help you
in deciding which particular stocks to choose.
TYPES OF RESEARCH
FUNDAMENTAL ANALYSIS:
Fundamental analysis is the cornerstone of investing. In fact, some would say that you aren't really investing if
you aren't performing fundamental analysis. Because the subject is so broad, however, it's tough to know where
to start. There are an endless number of investment strategies that are very different from each other, yet almost
all use the fundamentals.
The biggest part of fundamental analysis involves delving into the financial statements. Also known as
quantitative analysis, this involves looking at revenue, expenses, assets, liabilities and all the other financial
aspects of a company. Fundamental analysts look at this information to gain insight on a company's future
performance. A good part of this tutorial will be spent learning about the balance sheet, income statement, cash
flow statement and how they all fit together.
Basics
When talking about stocks, fundamental analysis is a technique that attempts to determine a securitys value by
focusing on underlying factors that affect a company's actual business and its future prospects. On a broader
scope, you can perform fundamental analysis on industries or the economy as a whole. The term simply refers to
the analysis of the economic well-being of a financial entity as opposed to only its price movements.
Fundamental analysis serves to answer questions, such as:

Is the companys revenue growing?

Is it actually making a profit?

Is it in a strong-enough position to beat out its competitors in the future?

Is it able to repay its debts?

Note: The term fundamental analysis is used most often in the context of stocks, but you can perform
fundamental analysis on any security, from a bond to a derivative. As long as you look at the economic
fundamentals, you are doing fundamental analysis. For the purpose of this tutorial, fundamental analysis always
is referred to in the context of stocks.
FUNDAMENTAL ANALYSIS:
Quantitative and Qualitative
You could define fundamental analysis as researching the fundamentals, but that doesnt tell you a whole lot
unless you know what fundamentals are. As we mentioned in the introduction, the big problem with defining
fundamentals is that it can include anything related to the economic well-being of a company. Obvious items
include things like revenue and profit, but fundamentals also include everything from a companys market share
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to the quality of its management.

The various fundamental factors can be grouped into two categories: quantitative and qualitative. The financial
meaning of these terms isnt all that different from their regular definitions. Here is how the MSN Encarta
dictionary defines the terms:
QUANTITATIVE capable of being measured or expressed in numerical terms.
QUALITATIVE related to or based on the quality or character of something, often as opposed to its size or
quantity.
In our context, quantitative fundamentals are numeric, measurable characteristics about a business. Its easy to see
how the biggest source of quantitative data is the financial statements. You can measure revenue, profit, assets and
more with great precision.
Turning to qualitative fundamentals, these are the less tangible factors surrounding a business - things such as
the quality of a companys board members and key executives, its brand-name recognition, patents or
proprietary technology.
Quantitative Meets Qualitative
Neither qualitative nor quantitative analysis is inherently better than the other. Instead, many analysts consider
qualitative factors in conjunction with the hard, quantitative factors. Take the Coca-Cola Company, for example.
When examining its stock, an analyst might look at the stocks annual dividend payout, earnings per share, P/E
ratio and many other quantitative factors. However, no analysis of Coca-Cola would be complete without taking
into account its brand recognition. Anybody can start a company that sells sugar and water, but few companies on
earth are recognized by billions of people. Its tough to put your finger on exactly what the Coke brand is worth,
but you can be sure that its an essential ingredient contributing to the companys ongoing success.
The Concept of Intrinsic Value
Before we get any further, we have to address the subject of intrinsic value. One of the primary assumptions of
fundamental analysis is that the price on the stock market does not fully reflect a stocks real value. After all,
why would you be doing price analysis if the stock market were always correct? In financial jargon, this true
value is known as the intrinsic value.
For example: lets say that a companys stock was trading at Rs 20. After doing extensive homework on the
company, you determine that it really is worth Rs 25. In other words, you determine the intrinsic value of the firm
to be Rs 25. This is clearly relevant because an investor wants to buy stocks that are trading at prices significantly
below their estimated intrinsic value.
This leads us to one of the second major assumptions of fundamental analysis: in the long run, the stock market
will reflect the fundamentals. There is no point in buying a stock based on intrinsic value if the price never
reflected that value. Nobody knows how long the long run really is. It could be days or years.
This is what fundamental analysis is all about. By focusing on a particular business, an investor can estimate the
intrinsic value of a firm and thus find opportunities where he or she can buy at a discount. If all goes well, the
investment will pay off over time as the market catches up to the fundamentals.

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TECHNICAL ANALYSIS:
Technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or
trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the
market by studying the market itself, as opposed to its components. If you understand the benefits and limitations
of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or
investor.
Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity,
such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but
instead use charts and other tools to identify patterns that can suggest future activity.
Just as there are many investment styles on the fundamental side, there are also many different types of
technical traders. Some rely on chart patterns, others use technical indicators and oscillators, and most use some
combination of the two. In any case, technical analysts' exclusive use of historical price and volume data is what
separates them from their fundamental counterparts. Unlike fundamental analysts, technical analysts don't care
whether a stock is undervalued - the only thing that matters is a security's past trading data and what
information this data can provide about where the security might move in the future.
The field of technical analysis is based on three assumptions:
1. The market discounts everything.
2. Price moves in trends.
3. History tends to repeat itself.
1. The Market Discounts Everything
A major criticism of technical analysis is that it only considers price movement, ignoring the fundamental factors
of the company. However, technical analysis assumes that, at any given time, a stock's price reflects everything
that has or could affect the company - including fundamental factors. Technical analysts believe that the
company's fundamentals, along with broader economic factors and market psychology, are all priced into the
stock, removing the need to actually consider these factors separately. This only leaves the analysis of price
movement, which technical theory views as a product of the supply and demand for a particular stock in the
market.
2. Price Moves in Trends
In technical analysis, price movements are believed to follow trends. This means that after a trend has been
established, the future price movement is more likely to be in the same direction as the trend than to be against it.
Most technical trading strategies are based on this assumption.
3. History Tends To Repeat Itself
Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price
movement. The repetitive nature of price movements is attributed to market psychology; in other words, market
participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses
chart patterns to analyze market movements and understand trends. Although many of these charts have been
used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price
movements that often repeat themselves.

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5. INTERDEPENDENCE BETWEEN EQUITY MARKET AND FOREX MARKET

In an increasingly complex scenario of the financial world, it is of paramount importance for the
researchers,practitioners, market players and policy makers to understand the working the analysis of dynamic
and strategic Interactions between stock and foreign exchange market came to the forefront because these two
markets are the most sensitive segments of the financial system and are considered as the barometers of the
economic growth through which the country's exposure towards the outer world is most readily felt. The present
study is an endeavor in this direction. Before going to discuss further about the linkages between the stock and
foreign exchange market, it is better to highlight the evolutions and perspectives that are associated with both the
markets since liberalization in the Indian context. There are two explanations for which variable cause the other.
The flow oriented model approach as described in Dornbusch and Fischer (1980) research show that currency
movements directly affect international competitiveness. In turn, currency has an effect on the balance of trade
within the country. As a result, it affects the future cash flows or the stock prices of firms. The counter argument
suggests that taking a portfolio-balance approach (Dornbusch, 1976), where portfolio holders should diversify to
eliminate firm specific risk, requires effective investments allocation including currencies. As with other financial
instruments, currencies therefore are under the rules of supply and demand for assets. In order for investors to
purchase new assets they must sell off other less attractive asset in their portfolio. In other words buying and
selling of domestic or foreign investments if less attractive. As countries assets become more valuable, interest
rates begin to increase creating an appreciation of domestic currency. Although two valid explanations, no
consensus has been made between the two. So, this study attempts to examine whether or not a causal
relationship exists between exchange rates and stock market by using the Granger Causality and co-relation,
relationships were determined for data between 2004 and 2012 in India.
For determining the relationship between stock exchange market and foreign exchange market various studies
were undertaken by the researchers. Researchers used models like granger causality, GARCH (1, 1), vector
autoregressive (VAR), Vector Error Correction Model (VECM), regression, multiregression for finding out
relationship between stock market and foreign exchange market. An early attempt to examine the exchange rate
and stock price dynamics was by Franck and Young (1972) who showed that there is no significant interaction
between the variables. Soenen and Hennigar (1988) studied the same market but considered a different time
period and contrast with prior studies by showing a significant negative relationship between stock prices and
exchange rates. Solnik (1987) made a slightly different study and tried to detect the impact of several economic
variables including the exchange rates on stock prices. He concluded that changes in exchange rates do not have
any significant impact over stock prices. Nieh and Lee (2001) supported the findings of Bahmani-Oskooee and
Sohrabian (1992) and reported no long-run significant relationship between stock prices and exchange rates in
the G-7 countries. Roll (1992) also studied the US stock prices and exchange rates and found a positive
relationship between the two markets. Chow etal. (1997) examined the same markets but found no relationship
between stock returns and real exchange rate returns. They repeated the exercise with a longer time horizons and
found a positive relationship between the two variables. Abdalla and Murinde (1997) employed co-integration
test to examine the relationship between stock prices and exchange rates for four Asian countries named as India,
Pakistan, South Korea and Philippines for a period of 1985 to 1994. They detected unidirectional causality from
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exchange rates to stock prices for India, South Korea and Pakistan and found causality runs from the opposite
direction for Philippines. Yamini Karmarkar and G Kawadia tried to investigate the relationship between RS/$
exchange rate and Indian stock markets. Five composite indices and five spectral indices were studied over the
period of one year: 2000. The results indicated that exchangerate has high correlation with the movement of
stock market. Wu (2000) did a similar study using stock prices and exchange rates of Singapore and portrayed a
unidirectional causality from exchange rates to stock prices. Apte (2001) investigated the relationship between
the volatility of the stock market and the nominal exchange rate of India by using the EGARCH specifications on
the daily closing USD/INR exchange rate, BSE 30 (Sensex) and NIFTY-50 over the period 1991 to 2000. The
study suggests that there appears to be a spillover from the foreign exchange market to the stock market but not
the reverse. In a recent study. Bhattacharya and Mukherjee (2003) investigated Indian markets using the data on
stock prices and macroeconomic aggregates in the foreign sector including exchange rate concluded that there in
no significant relationship between stock prices and exchange rates.

GRAPH OF LAST 5 YEAR USD/INR EXCHANGE RATE

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GRAPH OF LAST 5 YEAR BSE 30 SENSEX

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6. CONCLUSION
Stock market is an important part of the economy of a country. The stock market plays a play a key role in the
growth of the industry and commerce of the country that eventually affects the economy of the country to a great
extent. That is reason that the government, industry and even the central banks of the country keep a close watch
on the happenings of the stock market. Whenever a company wants to raise funds for further expansion or settling
up a new business venture, they have to either take a loan from a financial organization or they have to issue
shares through the stock market. In fact the stock market is the primary source for any company to raise funds for
business expansions. If a company wants to raise some capital for the business it can issue shares of the company
that is basically part ownership of the company. To issue shares for the investors to invest in the stocks a company
needs to get listed to a stocks exchange and through the primary market of the stock exchange they can issue the
shares and get the funds for business requirements.
Forex market or foreign exchange market is being considered as one of the largest trading market as well as the
most liquid market also all over the world. Forex market is open for 24 hours. Many people globally take this
market and trading as one of the best business and money making procedure to venture. Regular people get an
effective chance to trade with foreign currencies. To be more specific, the trading concept is all about buying and
selling of foreign currencies to bank. There are numbers of advantages and benefits for Forex trading. The trading
might be beneficial over the trading vehicles. The trading vehicles are commodities, stocks and bonds. While you
are operational on the largest trading market, it is important to take some special or extra care for financial issues.
The following conclusions have been derived from our correlation analysis:In the above images we can see two things :
Graph of last 5 year usd/inr exchange rate.
Graph of last 5 year bse 30 sensex.

In all 4 years there has been no correlation between the equity market and forex market as we can see in
both the images. But in 2013-2014 there has been a little bit correlation between the forex market and
equity market . With this kind of correlation we cannot say that both the market i.e. equity and forex
market are both interdependent on each other. But they have a little bit of correlation.

There is very less degree of positive correlation between stock indices and foreign exchange rates.
Hence, we cannot reject the hypothesis that there is no relationship between the exchange rate and stock
indices and the two are affected by various factors in spite of the increasing integration between the two
market.

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7. WEBLOGRAPHY

http://economictimes.indiatimes.com/
http://www.bseindia.com/
http://www.investopedia.com/
http://www.forex.com/

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