CHAPTER-1

INTRODUCTION

The capital market provides the support to the system of capitalism of the country.

The Securities and Exchange Board of India (SEBI), along with the Reserve Bank of India

are the two regulatory authority for Indian securities market, to protect investors and improve

the microstructure of capital markets in India. With the increased application of information

technology, the trading platforms of stock exchanges are accessible from anywhere in the

country through their trading terminals. India has a fair share of the world economy and

hence the capital markets or the share markets of India form a considerable portion of the

world economy. The capital market is vital to the financial system.

The capital Markets are of two main types. The Primary markets and the secondary

markets. In a primary market, companies, governments or public sector institutions can raise

funds through bond issues. Alos, Corporations can sell new stock through an initial public

offering (IPO) and raise money through that. Thus in the primary market, the party directly

buys shares of a company. The process of selling new shares to investors is called

underwriting.

In the Secondary Markets, the stocks, shares, and bonds etc. are bought and sold by

the customers. Examples of the secondary capital markets include the stock exchanges like

NSE, BSE etc. In these markets, using the technology of the current time, the shares, and

bonds etc. are sold and purchased by parties or people.

Definition of capital marketing

According to P.K Dhar “This is not a market for capital goods; rather it is a market for

raising and advancing money capital for investment purposes”

Meaning of capital marketing

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Capital Market is the part of financial system which is concerned with raising capital funds

by dealing in Shares, Bonds, and other long- term investments. The market where Investment

instruments like bonds, equities and mortgages are traded is known as the capital market.

OBJECTIVE

Even this aspect of the review required resolution of some key issues. Should it simply

consist of annotated bibliographies of the research? Should it be a commentary on the works

done without drawing any inferences for the future, or should it be our assessment about the

emerging scenario in the Indian capital market based on the research over the chosen period?

We decided to provide a detailed bibliography at the end of the paper and provide a

commentary on the more serious works in the main body of the paper. In several areas,

particularly where there have been dramatic changes in the regulatory or operating

environment, we have also identified the kind of research that is needed

Chapter 2
Indian Capital Market: An Overview

The development of the capital market in India dates back to the eighteenth century when
East India Company securities were traded in the country. In 1850s, the trading was limited to
a dozen brokers and their trading place was under a banyan tree in front of the Town Hall in
Bombay. The location of trading changed many times, as the number of brokers constantly
increased. The group eventually moved to Dalal Street in 1874 and in 1875 became an
official organization known as ‘The Native Share & Stock Brokers Association’. In 1895, this
association acquired a premise in the Dalal Street and it was inaugurated in 1899. Thus, the
Stock exchange at Bombay was consolidated. And, the orderly growth of the capital market
in India began. The Bombay stock exchange got recognition in May 1927 under the Bombay
Securities Contracts Control Act, 1925. The constitution of India came into being on 26th
January, 1950. The constitution put the stock exchanges and the forward markets under the
exclusive authority of the Government of India. In 1956, the BSE became the first stock
exchange to be recognized by the Indian Government under the Securities Contracts
(Regulation) Act. The main objective of recognizing the Indian capital market is to mobilize

2
savings from numerous economic units for economic growth and development, provide
adequate liquidity to investors, broaden the ownership base of assets as well as the creation of
a buoyant private sector, provide alternative source of funds for government, encourage more
efficient allocation of new investments through the price mechanism, encourage more
efficient allocation of a given amount of tangible wealth through changes in the composition
and ownership of wealth, create a built-in efficiency in the operations and allocation in the
financial system to ensure optimal utilization of resources, and promote rapid capital
formation. The 1980s witnessed an explosive growth of the securities market in India, with
millions of investors suddenly discovering lucrative opportunities. Many investors jumped
into the stock markets for the first time. The government’s liberalization process initiated
during the mid-1980s, spurred this growth. The Bombay Stock Exchange developed the BSE
Sensex in 1986, giving the BSE a means to measure overall performance of the exchange.
The 1990s will go down as the most important decade in the history of the capital market of
India. The Capital Issues (Control) Act, 1947 was repealed in May 1992. The decade was
characterized by a new industrial policy, emergence of SEBI as a regulator of capital market,
advent of foreign institutional investors, euro-issues, free pricing, new trading practices, new
stock exchanges, entry of new players such as private sector mutual funds and private sector
banks, and primary market boom and bust. The 1991-92 securities scam revealed the
inadequacies of and inefficiencies in the financial system. It was the scam, which prompted a
reform of the equity market. The Indian stock market witnessed a sea change in terms of
technology and market prices. Technology brought radical changes in the trading mechanism.
The Bombay Stock Exchange (BSE) was subject to nationwide competition by two new stock
exchanges – the National Stock Exchange (NSE), set up in 1994, and Over the Counter
Exchange of India (OTCEI), set up in 1992. The National Securities Clearing Corporation
(NSCC) and National Securities Depository Limited (NSDL) were set up in April 1995 and
November 1996 respectively form improved clearing and settlement and dematerialized
trading. The Securities Contracts (Regulation) Act, 1956 was amended in 1995-96 for
introduction of options trading. Moreover, rolling settlement was introduced in January 1998
for the dematerialized segment of all companies. With automation and geographical spread,
stock market participation increased. In 1996, the National Stock Exchange of India launched
S&P CNX Nifty and CNX Junior Indices that make up 100 most liquid stocks in India. CNX
Nifty is a diversified index of 50 stocks from 25 different economy sectors. The Indices are
owned and managed by India Index Services and Products Ltd (IISL) that has a consulting
and licensing agreement with Standard & Poor’s. In 1998, the National Stock Exchange of
India launched its web-site and was the first exchange in India that started trading stock on

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the Internet in 2000. The NSE has also proved its leadership in the Indian financial market by
gaining many awards such as ‘Best IT Usage Award’ by Computer Society in India (in 1996
and 1997) and CHIP Web Award by CHIP magazine (1999).

REVIEW OF LITERATURE

There exists a voluminous literature concerning the role of capital market in the
process of economic growth of a country. The most important and systematic early
contribution on financial and economic development came from Joseph Schumpeter.
Schumpeter (1912) contended that financial development causes economic development –
that financial markets promote economic growth by funding entrepreneurs and in particular
by channelling capital to the entrepreneurs with high return projects. However, a systematic
approach to the issue has been addressed with the empirical study by Goldsmith (1969). He
demonstrated a positive correlation between financial development (measured by the value of
financial intermediary assets relative to GNP) and economic growth.
But the seminal work of McKinnon (1973) and Shaw (1973) brought to the forefront
the role of financial development in promoting economic growth. Their argument was that
the financial liberalization and deepening in countries that suffer from ‘shallow finance’ or
‘financial repression’ are critically important to the economic growth of these countries. Ever
since this pioneering contribution, the relationship between economic growth and financial
development remained an important issue of debate among academicians and policy makers
(De Gregorio and Guidotti, 1995). There is now a growing theoretical and empirical body of
literature on how financial intermediation mobilizes savings, allocates resources, diversifies
risks, and contributes to economic growth (Jbili, Enders, and Treichel, 1997; Greenwood and
Jovanovic, 1990).

These early works, though insightful, lacks rigor analytical structures. Starting from the
beginning of 1990s, a growing body of work builds a series of analytical frameworks which
show how the financial intermediaries and markets appear endogenously to contribute to
long-run economic growth. Levine (1996), Jacque(2001), Tufano (2003), Chou (2007),
Agarwal (2000), Mohtadi and Agarwal(1998), Sarkar (2006), Capasso(2006), Kamat, Kamat
and Murthy(2007), Agrawalla and Tuteja (2007), Deb and Mukherjee (2008), and
Chakraborty (2008) have contributed a lot to the literature in this direction

4
Indian capital markets have been receiving global attention, especially from sound
investors, due to the improving macroeconomic fundamentals. The presence of a great pool
of skilled labor and the rapid integration with the world economy increased India’s global
competitiveness. No wonder, the global ratings agencies Moody’s and Fitch have awarded
India with investment
grade ratings, indicating comparatively lower sovereign risks. The Securities and Exchange
Board of India (SEBI), the regulatory authority for Indian securities market, was established
in 1992 to protect investors and improve the microstructure of capital markets. In the same
year, Controller of Capital Issues (CCI) was abolished, removing its administrative controls
over the pricing of new equity issues. In less than a decade later, the Indian financial markets
acknowledged the use of technology (National Stock Exchange started online trading in
2000), increasing the trading volumes by many folds and leading to the emergence of new
financial instruments. With this, market activity experienced a sharp surge and rapid progress
was made in further strengthening and streamlining risk management, market
regulation,andsupervision.

The securities market is divided into two interdependent

segments:

 The primary market provides the channel for creation of funds through issuance of
new securities by companies, governments, or public institutions. In the case of new
stock issue, the sale is known as Initial Public Offering (IPO).

 The secondary market is the financial market where previously issued securities and
financial instruments such as stocks, bonds, options, and futures are traded.

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Broad Constituents in the Indian Capital Markets

Fund Raisers are companies that raise funds from domestic and foreign sources, both
public and private. The following sources help companies raise funds

Fund Providers are the entities that invest in the capital markets. These can be
categorized as domestic and foreign investors, institutional and retail investors. The
list includes subscribers to primary market issues, investors who buy in the secondary
market, traders, speculators, FIIs/ sub accounts, mutual funds, venture capital funds,
NRIs ,ADR/GDR investors, etc.

Intermediaries are service providers in the market, including stock brokers, sub-
brokers, financiers, merchant bankers, underwriters, depository participants, registrar
and transfer agents, FIIs/ sub accounts, mutual Funds, venture capital funds, portfolio
managers, custodians,etc.

Organizations include various entities such as MCX-SX, BSE, NSE, other regional
stock exchanges, and the two depositories National Securities Depository Limited
(NSDL) and Central Securities Depository Limited (CSDL).

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Market Regulators include the Securities and Exchange Board of India (SEBI), the
Reserve Bank of India (RBI), and the Department of Company Affairs (DCA).

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 REFORMS IN INDIAN CAPITAL MARKET

Indian Capital Market is exposed to tremendous reforms in the last decade. The
reforms are triggered by changes in policy by Union Government and the same is
accepted and stimulated by introduction of new financial products by stock
exchanges, better legal frame work by the regulator and active participation by
depository participants, share brokers, domestic as well as foreign investors.
Primary Market IPO is the major source of raising finance for a corporate. Investor
sentiment towards the corporate as well as the share price plays a major role in the
success of IPOs. SEBI played a mojor role in the development of IPOs. Indian IPO
market witnessed maximum growth and success from 2000 to 2007. The growth in
major indices in India, viz, SENSEX and NIFTY and positive sentiment towards
Indian stock market supported by domestic as well as foreign institutional investors
are the main reason for the IPO boom between 2000 and 2007. This boom continued
till the sub prime crises in 2008 and the investor sentiment became negative after that.
The following table gives the details of IPO market in India in the last few years:
Secondary Market BSE is the oldest stock exchange in India which is stared in the
year 1875. SENSEX is the index of BSE (created based on the average price
movement of 50 stocks) is the representative of stock performance of the shares listed
at BSE as well as considered the representative of price movement of the Indian stock
market. The introduction of derivatives changed the scenario and now NSE is leading
in the Indian market. MCXSX (stock trading wing of Multi Commodities Exchange
which is now called Metropolitan Stock Exchange of India Ltd) also started its
operation last year and it’s yet to capture the market. NIFTY (which shows the
average price movement of 50 stocks) and SX-40 (price movement of 40 stocks) are
the indices of NSE and MCXSX respectively. The reforms in the area of capital
market can be broadly classified in to 3 heads, viz;
1. Capital Market Reforms from the angle of Regulator’s
2. Capital Market Reforms from the angle of Products’, and
3. Other Initiatives All the 3 sectors contributed positively for the growth of capital
market segment in India as well positively contributed to the interest of market’s
stakeholders

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Securities Contracts (Regulation) Amendment Act, 2007
The Securities Contracts Regulation Act, 1956 has been amended to include
securitization instruments under the definition of "securities" and provide for
disclosure based regulation for issue of the securitized instruments and the procedure
thereof. This has been done keeping in view that there is considerable potential in the
securities market for the certificates or instruments under securitization transactions.
The development of the securitized debt market is critical for meeting the humungous
requirements of the infrastructure sector, particularly housing sector, in the country.
Replication of the securities markets framework for these instruments would facilitate
trading on stock exchanges and in turn help development of the market in terms of
depth and liquidity.
Permanent Account Number (PAN) PAN is made compulsory for dealing in stock
market. It has become the unique proof of identity as well as proof of signature. This
helped a lot in avoiding lots of frauds liked with IPO as well as in proper accounting
of income and wealth.
IPO Grading SEBI has made it compulsory for companies coming out with IPOs of
equity shares to get their IPOs graded by at least one credit rating agency registered
with SEBI from May 1, 2007. This measure is intended to provide the investor with
an informed and objective opinion expressed by a professional rating agency after
analyzing factors like business and financial prospects, management quality and
corporate governance practices etc.
Investor Protection and Education Fund (IPEF) SEBI has set up the Investor
Protection and Education Fund (IPEF) with the purpose of investor education and
related activities. SEBI has contributed a sum of Rs.10 crore toward the initial corpus
of the IPEF from the SEBI General Fund. In addition following amounts will also be
credited to the IPEF namely: i. Grants and donations given to IPEF by the Central
Government, State Governments or any institution approved by SEBI for the purpose
of the IPEF; ii. Interest or other income received out of the investments made from the
IPEF; and iii. Such other amount that SEBI may specify in the interests of the
investors.
American Depository Receipt (ADR) & Global Depository Receipt
(GDR)
Government had set up an Expert Committee under the Chairmanship of Mr. Saumitra
Choudhury, Member Economic Advisory Council to Prime Minister to review the

9
extant ADR / GDR. The committee has recently submitted its report to the
Government. The recommendations of the Committee are under consideration.

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Strengthening of Credit Rating Agencies In order to have a greater enforceability of
the regulatory framework relating to issue of capital by companies and to streamline
the disclosures while also taking into account changes in market design, the erstwhile
SEBI (Disclosure and Investor Protection) guidelines (DIP Guidelines) governing
public offerings were replaced by the SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009 (ICDR). There were certain changes made in the
ICDR regulations vis-a-vis the provision contained in DIP Guidelines, on account of:
(a) Removal of redundant provisions contained in DIP Guidelines, (b) Modifications
on account of change in market design, and (c) Bringing more clarity in the existing
provisions of the DIP Guidelines.
Capital Market Reforms in the angle of Products’ Products always play an
important role in any market. Indian capital market has seen a positive growth in the
variety of financial products introduced successfully.
Stocks – Delivery Based Trading Delivery based stock trading is the primitive
product in capital market segment. This base product is also in growth face in the last
10 years. The following table shows the movement of SENSEX in the last 5 years
which is also a reason for the increase in delivery volume
Buy Today Sell Tomorrow (BTST) BTST is a facility provided by the stock broker
with the permission of exchange. T+2 is the settlement cycle followed in India, i.e., if
you buy a stock today then the stock will be credited to your Demat account after 2
day. For example; if you buy a stock on Monday then the stock will be credited to
your account by Wednesday (provided Monday, Tuesday and Wednesday are not
trading holidays). BTST provides the option to sell the stock before the stock is
credited to the investors account. If any default happens in crediting the stock then the
broker buys the stock through auction which makes the product riskier.

Mutual Funds Mutual Funds are one of the oldest products traded in the market.
Mutual Funds eliminate the basic two limitations of Indian investors, viz; lack of big
money and lack of knowledge regarding the price movements. The following table
shows the growth in Assets under Management (AUM) of a few major Asset
Management Companies (AMCs) in India in the last few years:

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 INDIAN CAPITAL MARKET REGULATORY FRAMEWORK

SEBI: Securities and Exchange Board of India (SEBI) was set up as an administrative
arrangement in 1988.In 1992, the SEBI Act was enacted, which gave statutory status to SEBI.
It mandates SEBI to perform a dual function: investor protection through regulation of the
securities market and fostering the development of this market. SEBI has been vested most of
the functions and powers under the Securities Contract Regulation (SCR) Act, which brought
stock exchanges, their members, as well as contracts in securities which could be traded
under the regulations of the Ministry of Finance. It has also been delegated certain powers
under the Companies Act. In addition to registering and regulating intermediaries, service
providers, mutual funds, collective investment schemes, venture capital funds and takeovers,
SEBI is also vested with the power to issue directives to any person(s) related to the securities
market or to companies in areas of issue of capital, transfer of securities and disclosures. It
also has powers to inspect books and records, suspend registered entities and cancel
registration.

RBI: Reserve Bank of India (RBI) has regulatory involvement in the capital market, but
this has been limited to debt management through primary dealers, foreign exchange control
and liquidity support to market participants. It is RBI and not SEBI that regulates primary
dealers in the Government securities market. RBI instituted the primary dealership of
Government securities in March 1998. Securities transactions that involve foreign exchange
transactions need the permission of RBI.

Stock Exchanges: SEBI issued directives that require that half the members of the governing
boards of the stock exchanges should be non broker public representatives and include a
SEBI nominee. To avoid conflicts of interest, stock brokers are a minority in the committees
of stock exchanges set up to handle matters of discipline, default and investor-broker
disputes. The exchanges are required to appoint a professional, non member executive
director who is accountable to SEBI for the implementation of its directives on the regulation
of stock exchanges. SEBI has introduced a mechanism to redress investor grievances against
brokers. Further, all issues are regulated through a series of disclosure norms as prescribed by
SEBI and respective stock exchanges through their listing agreement. After a security is
issued to the public and subsequently listed on a stock exchange, the issuing company is
required under the listing agreement to continue to disclose in a timely manner to the
exchange, to the holders of the listed securities and to the public any information necessary to
enable the holders of the listed

12
securities to appraise its position and to avoid the establishment of a false market in such
listed securities.

The powers and functions of regulatory authorities for the securities market seem to be
diverse in nature. SEBI is the primary body responsible for regulation of the securities
market, deriving its powers of registration and enforcement from the SEBI Act. There was an
existing regulatory framework for the securities market provided by the Securities Contract
Regulation (SCR) Act and the Companies Act, administered by the Ministry of Finance and
the Department of Company Affairs (DCA) under the Ministry of Law, respectively. SEBI
has been delegated most of the functions and powers under the SCR Act and shares the rest
with the Ministry of Finance. It has also been delegated certain powers under the Companies
Act. RBI also has regulatory involvement in the capital markets regarding foreign exchange
control, liquidity support to market participants and debt management through primary
dealers. It is RBI and not SEBI that regulates primary dealers in the Government securities
market. However, securities transactions that involve a foreign exchange transaction need the
permission of RBI. So far, fragmentation of the regulatory authorities has not been a major
obstacle to effective regulation of the securities market. Rather, lack of enforcement capacity
by SEBI has been a more significant cause of poor regulation. But since the Indian stock
markets are rapidly being integrated, the authorities may follow the global trend of
consolidation of regulatory authorities or better coordination among them.

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A security, in a financial context, is a certificate or other financial instrument that has
monetary value and can be traded. Ownership securities are the instruments or insiders funds
in which an investor has full control and influence over operating decisions of the company.
One who purchases the ownership securities has various rights to take decisions of the
company affairs.
On the other hand, creditor ship securities are those instruments or outsiders funds in which
an investor does not have the control and influence over the decisions of the company.
A joint stock company divides its capital into units of equal denomination. Each unit is called
a share. These units i.e. shares are offered for sale to raise capital. This is termed as issuing
shares. A person who buys share/ shares of the company is called a shareholder and by
acquiring share or shares in the company he/she becomes one of the owners of the company
Thus, a share is an indivisible unit of capital. It expresses the proprietary relationship between
the company and the shareholder. The denominated value of a share is its face value. The
total capital of a company is divided into number of shares. Kinds of shares According to the
Companies Act, a company can issue the following types of Shares: (i) Preference shares (ii)
Equity shares

(i) Preference shares A preference share is one which carries following preferential rights
over other type of shares called equity shares in regard to the following:

l Payment of dividend

2 Repayment of capital at the time of winding up of the company.

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(ii) Equity shares All shares which are not preference shares are equity shares. Holders of
these shares receive dividend out of the profits of the company after the payment of dividend
has been made to the preference shareholders. Equity shareholders have the right to elect
directors of the company. Equity shares are the permanent source of capital.

Debenture is an instrument of debt owed by a company. As an acknowledgement of debt,

such instruments are issued under the seal of a company and duly signed by authorized
signatory. The debenture instrument specifies nominal/par value, the rate of interest,
periodicity of payment, the tenure of the debentures and terms of redemption.
Bond is similar to that of debenture, both in terms of contents and texture. Traditionally,
bonds had been issued by the government, but these days bonds are also being issued by
semi-government and non-government organizations as an acknowledgment of debt. The
significant difference between bonds and debentures is with respect to the issue condition,
i.e., bonds can be issued without predetermined rate of interest as is in case of deep discount
bonds. A deep discount bond is issued without prefixed rate of interest which is implicitly in-
built in the terms of payment.
A capital market is a market for securities (debt or equity), where business enterprises and
government can raise long-term funds. It is defined as a market in which money is provided
for periods longer than a year, as the raising of short-term funds takes place on other markets
(e.g., the money market). The capital market is characterized by a large variety of financial
instruments: equity and preference shares, fully convertible debentures (FCDs), non-
convertible debentures (NCDs) and partly convertible debentures (PCDs) currently dominate
the capital market, however new instruments are being introduced such as debentures
bundled with warrants, participating preference shares, zero-coupon bonds, secured premium
notes, etc.

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 ROLE AND IMPORTANCE OF CAPITAL MARKET IN INDIA:-
Capital market has a crucial significance to capital formation. For a speedy economic
development adequate capital formation is necessary. The significance of capital market in
economic development is explained below:-
1. Mobilization Of Savings And Acceleration Of Capital Formation :-

In developing countries like India the importance of capital market is self evident. In this
market, various types of securities helps to mobilize savings from various sectors of
population. The twin features of reasonable return and liquidity in stock exchange are definite
incentives to the people to invest in securities. This accelerates the capital formation in the
country.
2. Raising Long - Term Capital :-

The existence of a stock exchange enables companies to raise permanent capital. The
investors cannot commit their funds for a permanent period but companies require funds
permanently. The stock exchange resolves this dash of interests by offering an opportunity to
investors to buy or sell their securities, while permanent capital with the company remains
unaffected.
3. Promotion Of Industrial Growth :-

The stock exchange is a central market through which resources are transferred to the
industrial sector of the economy. The existence of such an institution encourages people to
invest in productive channels. Thus it stimulates industrial growth and economic
development of the country by mobilizing funds for investment in the corporate securities.
4. Ready And Continuous Market :-

The stock exchange provides a central convenient place where buyers and sellers can easily
purchase and sell securities. Easy marketability makes investment in securities more liquid as
compared to other assets.
5. Technical Assistance :-

An important shortage faced by entrepreneurs in developing countries is technical assistance.

By offering advisory services relating to preparation of feasibility reports, identifying growth
potential and training entrepreneurs in project management, the financial intermediaries in
capital market play an important role.

6. Reliable Guide To Performance :-

The capital market serves as a reliable guide to the performance and financial position of
corporate, and thereby promotes efficiency.

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 7. Proper Channelization Of Funds :-

The prevailing market price of a security and relative yield are the guiding factors for the
people to channelize their funds in a particular company. This ensures effective utilization of
funds in the public interest.

8. Provision Of Variety Of Services :-

The financial institutions functioning in the capital market provide a variety of services such
as grant of long term and medium term loans to entrepreneurs, provision of underwriting
facilities, assistance in promotion of companies, participation in equity capital, giving expert
advice etc.

9. Development Of Backward Areas :-

Capital Markets provide funds for projects in backward areas. This facilitates economic
development of backward areas. Long term funds are also provided for development projects
in backward and rural areas.

10. Foreign Capital :-

Capital markets makes possible to generate foreign capital. Indian firms are able to generate
capital funds from overseas markets by way of bonds and other securities. Government has
liberalized Foreign Direct Investment (FDI) in the country. This not only brings in foreign
capital but also foreign technology which is important for economic development of the
country.

11. Easy Liquidity :-

With the help of secondary market investors can sell off their holdings and convert them into
liquid cash. Commercial banks also allow investors to withdraw their deposits, as and when
they are in need of funds

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 UNIT-II
Primary Markets
Companies raise funds to finance their projects through various methods. The promoters can
bring their own money of borrow from the financial institutions or mobilize capital by issuing
securities. The funds may be raised through issue of fresh shares at par or premium,
preferences shares, debentures or global depository receipts. The main objectives of a capital
issue are given below:
To promote a new company
To expand an existing company
To diversify the production
To meet the regular working capital requirements
To capitalize the reserves Stocks available for the first time are offered through primary
market. The issuer may be a new company or an existing company. These issues may be of
new type or the security used in the past. In the primary market the issuer can be considered
as a manufacturer. The issuing houses, investment bankers and brokers act as the channel of
distribution for the new issues. They take the responsibility of selling the stocks to the public.
The Function
The main service functions of the primary market are origination, under writing and
distribution. Origination deals with the origin of the new issue. The proposal is analyzed in
terms of the nature of the security, the size of the issue, timing of the issue and floatation
method of the issue. Underwriting contract makes the share predictable and removes the
element of uncertainty in the subscription (underwriting is given in the latter part of this
chapter). Distribution refers to the sale of securities to the investors. This is carried out with
the help of the lead managers and brokers to the issue.
To ensure healthy growth of primary market, the investing public should be protected. The
term investor's protection has a wider meaning in the primary market. The principal
ingredients of investor protection are:
 Provision of all the relevant information,
 Provision of accurate information and
 Transparent allotment procedures without any bias.

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To provide the above-mentioned factors several steps have been taken. They are project
appraisal, under writing, clearance of the issue document by the stock exchange and SEBI's
scrutiny of the issue document.
Primary market intermediaries
The following market intermediaries are involved in the Securities Market:
 Merchant Bankers
 Registrars and Share Transfer Agents
 Underwriters
 Bankers to issue
 Debenture Trustees
 Portfolio managers
 Syndicate members
 Stock-brokers and sub-brokers
 Custodians
 Investment Advisers
 Credit Rating Agencies
 Depository Participant

MERCHANT BANKERS ‘Merchant Banker’ means any person engaged in the business of
issue management by making arrangements regarding selling buying or subscribing to
securities or acting as manager/consultant/advisor or rendering corporate advisory services in
relation to such issue management.

REGISTRARS AND SHARE TRANSFER AGENTS ‘Registrar to an Issue’ means the

person appointed by a body corporate or any person or group of persons to carry on the
following activities on its or his or their behalf i.e.:

(i) Collecting application for investor in respect of an issue;

(ii) Keeping a proper record of applications and monies received from investors or paid to
the seller of the securities;

(iii) Assisting body corporate or person or group of persons in determining the basis of
allotment of the securities in consultation with the stock exchange.

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‘Share Transfer Agent’ means: (i) any person who on behalf of anybody corporate, maintains
the records of holders of securities issued by such body corporate and deals with all matters
connected with the transfer and redemption of its securities; (ii) the department or division,
by whatever name called, of a body corporate performing the activities as share transfer
agents if at any time the total number of holders of its securities issued exceed one lakh.

UNDERWRITERS Underwriter means a person who engages in the business of

underwriting of an issue of securities of a body corporate. Underwriting is an arrangement
whereby certain parties assure the issuing company to take up shares, debentures or other
securities to a specified extent in case the public subscription does not amount to the expected
levels. For this purpose, an arrangement (agreement) will be entered into between the issuing
company and the assuring party such as a financial institution, banks, merchant banker,
broker or other person

DEBENTURE TRUSTEES ‘Debenture Trustee’ means a trustee of a trust deed for securing
any issue of debentures of a body corporate. Debentures, Bonds and other hybrid instruments
in most cases unless otherwise specified, carry securities for the investors unlike in the case
of equity and preference shares. It is necessary that the company makes proper arrangements
to extend assurances and comply with legal requirements in favor of the investors who are
entitled to this type of security.

PORTFOLIO MANAGERS Portfolio manager means any person who pursuant to contract
or arrangement with the client, advises or directs or undertakes on behalf of the client
(whether as a discretionary portfolio manager or otherwise) the management or
administration of a portfolio of securities or the funds of the clients as the case may be.
“Discretionary portfolio manager” is defined as one who exercises or may exercise, under a
contract relating to portfolio management, any degree of discretion as to the investment or the
management of the portfolio of the securities or the funds of the client. “Portfolio” means the
total holdings of securities belonging to any person.

SYNDICATE MEMBERS Syndicate Member means an intermediary registered with SEBI

and who is permitted to carry on the activity as an underwriter. The Book Runner(s) may
appoint those intermediaries who are registered with the SEBI and who are permitted to carry
on activity as an ‘Underwriter’ as syndicate members. The syndicate members are mainly
appointed to collect the entire bid forms in a book built issue.

20
STOCK BROKERS & SUB-BROKER Stock-broker means a member of stock exchange
and they are the intermediaries who are allowed to trade in securities on the exchange of
which they are members. They buy and sell on their own behalf as well as on behalf of their
clients. A sub-broker is one who works along with the main broker and is not directly
registered with the stock exchange as a member. Sub-broker means any person not being a
member of stock exchange who acts on behalf of a stock broker as an agent or otherwise for
assisting the investors in buying, selling or dealing in securities through such stock brokers

CUSTODIANS A custodian is a person who carries on the business of providing custodial

services to the client. The custodian keeps the custody of the securities of the client. The
custodian also provides incidental services such as maintaining the accounts of securities of
the client, collecting the benefits or rights accruing to the client in respect of securities.

INVESTMENT ADVISER “Investment Adviser” means any person, who for consideration,
is engaged in the business of providing investment advice to clients or other persons or group
of persons and includes any person who holds out himself as an investment adviser, by
whatever name called. Investment advisers are those, who guide one about his or her
financial dealings and investments.

CREDIT RATING AGENCY Credit Ratings Agency means a body corporate engaged in or
proposes to be engaged in the business of rating of securities offered by way of public or
rights issue. Credit ratings establish a link between risk and return. They thus provide a
yardstick against which to measure the risk inherent in any instrument. An investor uses the
ratings to assess the risk level and compares the offered rate of return with his expected rate
of return (for the particular level of risk) to optimize his risk-return trade-off.

DEPOSITORY PARTICIPANT The Depositories Act, 1996 defines a depository to mean

“a company formed and registered under the Companies Act, 2013 and which has been
granted a certificate of registration under sub-section (IA) of section 12 of the Securities and
Exchange Board of India Act, 1992. A Depository Participant (DP) is described as an agent of
the depository. They are the intermediaries between the depository and the investors. The
relationship between the DPs and the depository is governed by an agreement made between
the two under the Depositories Act, 1996. In a strictly legal sense, a DP is an entity who is
registered as such with SEBI under the provisions of the SEBI Act. As per the provisions of
this Act, a DP can offer depository related services only after obtaining a certificate of
registration from SEBI.

21
 METHODS OF RAISING CAPITAL IN PRIMARY MARKET

1. Public Issue

Here prospectus is issued, and a public appeal is made to subscribe the new shares /
debentures issued by the company. Shares are allocated in response to application received.
Some companies sell shares directly to the public while some take help of share brokers. The
company appoints an advertising agency to advertise about the issue of shares.

2. Rights Issue

Rights issue means new shares are offered to the existing shareholders on the pro-rata basis.
When company wants to raise additional capital, securities are first offered to the existing
shareholders. If the shareholders do not want to buy shares, then the company can sell the
shares to the outside public.

3. Private Placement

Private Placement of shares means the company sells its shares to a small group of investors.
It can sell to banks, insurance companies, financial institutions, etc. It is an economical and
quick method of selling securities. The company does not sell its shares to the public.

REFORMS IN SECONDARY MARKET

Establishment of SEBI: The Securities and Exchange Board of India (SEBI) was established
in 1988. It got legal status in 1992. SEBI was primarily set up to regulate the activities of the
merchant banks, to control the operations of mutual funds, to work as a promoter of the stock
exchange activities and to act as a regulatory authority of new issue activities of companies.
The SEBI Act, 1992 was enacted to empower SEBI with statutory powers for (a) protecting
the interests of investors in securities) promoting the development of the securities market,
and (c) regulating the securities market. Its regulatory jurisdiction extends over corporate in
the issuance of capital and transfer of securities, in addition to all intermediaries and persons
associated with the securities market. It can conduct enquiries, audits, and inspection of all
concerned, and adjudicate offences under the Act. It has the powers to register and regulate
all market

22
intermediaries, as well as to penalize them in case of violations of the provisions of the Act,
Rules, and Regulations made the under. SEBI has full self-government and the authority to
regulate.

Establishment of Creditors Rating Agencies: Three creditors rating agencies viz. The
Credit Rating Information Services of India Limited (CRISIL - 1988), the Investment
Information and Credit Rating Agency of India Limited (ICRA - 1991) and Credit Analysis
and Research Limited (CARE) were set up in order to assess the financial health of different
financial institutions and agencies related to the stock market activities. It is a guide for the
investors also in evaluating the risk of their investments. Among the credit rating agencies in
India, CRISIL is one of the leading credit ratings agencies which cover extensive sectors of
industries and follow procedures for fair rating through substantial analyses in India. CRISIL
was established as an independent body in 1992, and became affiliates of S & P in 1996.
CRISIL was taken over by S&P in 2004, which holds stake of 51% of CRISIL. As one of the
major characteristics of CRISIL on credit ratings and default study, CRISIL has default rate
for company analyses in credit rating exercises. Other credit rating agencies are mainly
focusing on failures of debt. Unlike ICRA (affiliate of Moody’s), CRISIL has an independent
committee on the local credit ratings and not much involved by S&P in local bond ratings.
The rating methods have been established through the relatively long experience of credit
rating. To cater for uniform valuations CRISIL launched the CRISIL Bond Valuation Matrix
(CRISIL BVM), which has since been mandated by SEBI/AMFI as a uniform pricing
standard for the mutual fund industry. As of date nearly Rs. 80,000 crore (US $ 18 billion) of
fund portfolio holdings are marked-to-market every day, based on the CRISIL Bond
Valuation Matrix. The launch of the CRISIL BVM has not only set a uniform pricing standard
but has also led to a considerable deepening of the corporate bond market and helped develop
the broader concept of identifying and pricing “risk” inherent in securities of a portfolio.

Increasing of Merchant Banking Activities: Many Indian and foreign commercial banks
have set up their merchant banking divisions in the last few years. These divisions provide
financial services such as underwriting facilities, issue organizing, consultancy services, etc.

Using Electronic Transactions: Due to technological development in the last few years. The
physical transaction with more paper work is reduced. It saves money, time and energy of

23
investors. Thus it has made investing safer and hassle free encouraging more people to join
the capital market.

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

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

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

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

Creating Investment Opportunities For Small Investors: As opposed to other businesses

that require huge capital outlay, investing in shares is open to both the large and small stock
investors because a person buys the number of shares they can afford. Therefore the Stock
Exchange provides the opportunity for small investors to own shares of the same companies
as large investors.

Bombay Stock Exchange (BSE): BSE is the oldest stock exchange in Asia. The
extensiveness of the local equity broking industry in India led to the formation of the Native
Share Brokers Association in 1875, which later became Bombay Stock Exchange Limited
(BSE). BSE is widely recognized due to its pivotal and preeminent role in the development of
the Indian capital market. , In 1995, the trading system transformed from open outcry system
to an online screen-based order driven trading system.

24
Primary market facilitates government as well corporate in raising capital to meet their
requirements of capital expenditure and/or discharge of other obligation such as exit
opportunity for venture capitalist/ Private Equity firm. The most common primary
mechanism for raising capital is an Initial Public Offer (IPO), under which shares are offered
to common public as precursor to the trading in secondary market of an exchange. When
securities are exclusively offered to the existing shareholders of company, as opposed to the
general public it is called Rights Issue. Another mechanism whereby a listed company can
issue equity shares, fully and partly convertible debentures which can be converted into
equity shares later on, to a Qualified Institutional Buyer (QIB) is termed as Qualified
Institutional Placement. Apart from raising capital in domestic market, companies can also
issue securities in international market through ADR/GDR/ECB route and raise capital.

TRADING AND SETTLEMENT OF SECURITIES:

Clearing: the process of transmitting, reconciling and, in some cases, confirming payment
orders or security transfer instructions prior to settlement, possibly including the netting of
instructions and the establishment of final positions for settlement.

Settlement: the completion of a transaction, wherein the seller transfers securities or

financial instruments to the buyer and the buyer transfers money to the seller

Capital market could be defined as a financial market that works as a conduit for demand and
supply of (primarily) long-term debt and equity capital. It channels the money provided by
savers and depository institutions (banks, credit unions, insurance companies, etc.) to
borrowers and investees through a variety of financial instruments (bonds, notes, stocks)
called securities. A capital market is not a compact unit, but a highly decentralized system
made up of three major parts:

(1) Stock market,

(2) Bond market, and

(3) Money market.

Some entities within the Capital Market: ·

 Securities & Exchange Commission – The Regulator ·

25
  Stock Exchange – Self Regulatory Organization (SRO) ·
 Central Securities Depository (CSD) ·

Other operators such as: Brokers; Settlement Banks; Custodians; Registrars; Lawyers etc.

Securities & Exchange Commission: The mission of any Securities and Exchange
Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate
capital formation The SEC has broad authority over the securities industry. This includes the
power to register, regulate, and oversee brokerage firms, transfer agents, and clearing
agencies as well as the nation's self regulatory organizations (SROs). The SEC oversees the
key participants in the securities world, including securities exchanges, securities brokers and
dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with
promoting the disclosure of important market-related information, maintaining fair dealing,
and protecting against fraud.

Stock Exchange: ·

 Established for the purpose of assisting, regulating and controlling business of

buying, selling and dealing in securities ·
 Provides a market for the trading of securities to individuals and organizations
seeking to invest their saving or excess funds through the purchase of securities ·
 Provides a physical location for buying and selling securities that have been listed for
trading on that exchange ·
 Establishes rules for fair trading practices and regulates the trading activities of its
members according to those rules · The exchange itself does not buy or sell the
securities, nor does it set prices for them.

Central Securities Depository – basic functions: ·

 Maintaining register of securities.

 Issuance of international securities identification number (ISIN) for all issues of
securities.
 Clearance and settlement of securities on the principle "Delivery versus Payment.
 Provision of additional services to issuer of securities

Historically, stock markets were physical locations where buyers and sellers met and
negotiated. With the improvement in communications technology in the late 20th century, the
need for a

26
physical location became less important, as traders could transact from remote locations.
Stock trading is the process of buying or selling of shares on a stock exchange, where
investors are represented by stock brokers. A company that floats its stocks is called a public
company and is listed on a stock exchange. Stock trading can be done either physically or
virtually (online).

Stock Trading: Approaches

There are two main approaches to stock trading:

Active approach: This is the more common of the two approaches. The decision to buy
stocks involves analyzing the company, reviewing the historical share price trends and
understanding the current forecasts. Active investors are guided by the growth and intrinsic
value of the stocks. This approach is mostly applied by the investment managers who manage
mutual funds, pension funds and separately managed individual accounts.

Passive approach: This approach is opted for by investors who prefer low-risk, high-
yielding stocks and invest money in them mainly for their retirement accounts. This approach
assumes the efficiency of markets in the longer term. It is, however, not synonymous with the
strategy of ‘buy-and-hold.’ Rather, it implies buying at low prices and selling when the stocks
have reached a high price level.

Some Trading methods:

Open outcry is the name of a method of communication between professionals on a Stock

exchange or futures exchange which involves shouting and the use of hand signals to transfer
information primarily about buy and sell orders. The part of the trading floor where this takes
place is called a pit. Examples of markets which used this system are the New York
Mercantile Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade, the
Chicago Board Options Exchange.

A "trading floor" is a trading venue. This expression often refers to a place where traders or
stock brokers meet in order to buy and sell equities, also called a pit. Sometimes, the
expression "trading floor" is also used to refer to the "trading room" or "dealing room", i.e.
the office space where market activities are concentrated in investment banks or brokerage
houses.

Electronic trading: It is sometimes called Etrading. It is a method of trading securities (such

as stocks and bonds), foreign currency, and exchange traded derivatives electronically. It uses

27
 information technology to bring together buyers and sellers through electronic media to
create a virtual market place. Etrading is widely believed to be more reliable than older
methods of trade processing.

LISTING OF SECURITIES:

Listing refers to the admission of the securities of a company on a recognized stock exchange
for trading. Listing of securities is undertaken with the primary objective of providing
marketability, liquidity and transferability of shares. Listing is done as per the compliance of
SEBI, companies act, SCRA (securities contract regulation act), rules and regulations of
exchange etc.

Objectives of Listing

 Provide ready marketability

 liquidity & negotiability to securities
 Mobilize savings for economic development
 Ensure proper supervision and control of dealing
 Protect interest of investors by ensuring full disclosures.
 Transparency in dealing with securities
 To gain national importance and widespread recognition.

Listing is done with the help of an application filed with the necessary documents with
regional stock exchange. For this purpose companies have been classified into 2 groups:- 1.
Large Cap Companies (minimum issue size of Rs.10 Crores and market capitalization of not
less than Rs.25 Crores) 2. Small Cap Companies (minimum issue size of Rs.3 Crores and
market capitalization of not less than Rs.5 Crores. The SEC and SEBI decide whether the
security of the company qualifies for listing or not.

Procedure to list securities:

The process of security listing on the Exchange consists of several steps and process is
specific to stock exchange. Preliminary discussion with stock exchange followed by articles
of association approval. Draft prospectus approval is the essential pre-requisite for the
security to be listed.

1. As per S. 73 of the companies Act, 1956, a company seeking listing of its securities on a
stock exchange is required to submit a Letter of application to all the stock exchanges
where

28
 it proposes to have its securities listed before filing the prospectus with the registrar of
companies.
2. Every issuer, depending on the category and type of security has to submit supporting
documents required for specific stock exchange along with application.
3. All listing are subject to compliance with Bye laws, Rules and other requirements framed
by the Exchange from time to time in addition to the SEBI and other statutory
requirements.
4. Companies making public/rights issues are required to deposit 1 % of the issue amount
with the designated stock exchange before the issue price.
5. On getting an in-principle consent of the exchange the issuer has to enter into a listing
agreement specific to Stock Exchange.
6. On getting an in-principle consent of the exchange the issuer has to enter into a listing
agreement.
7. The companies are also required to pay to the exchange some listing fee as prescribed by
the exchange every financial year.

STOCK MARKET INDEX

A stock index or stock market index is a measurement of the value of a section of the stock
market. It is computed from the prices of selected stocks (typically a weighted average). It is
a tool used by investors and financial managers to describe the market, and to compare the
return on specific investments. Stock market index is a method of measuring a section of the
stock market. Many indices are cited by news or financial services firms and are used as
benchmarks, to measure the performance of portfolios such as mutual funds. Alternatively, an
index may also be considered as an instrument (after all it can be traded) which derives its
value from other instruments or indices. The index maybe weighted to reflect the market
capitalization of its components, or may be a simple index which merely represents the net
change in the prices of the underlying instruments. Most publicly quoted stock market indices
are weighted. Stock market indices are useful in understanding the level of prices and the
trend of price movements of the market. A stock market index is created by selecting a group
of stocks that are capable of representing the whole market or a specified sector or segment of
the market. The change in the prices of this basket of securities is measured with reference to
a base period. There is usually a provision for giving proper weights to different stocks on the
basis of their importance in the economy. A stock market index act as the indicator of the
performance of the economy or a sector of the economy.

29
 There are various indexes of stocks but in India we have only two.
 NIFTY 50
 SENSEX
Nifty is the index of National stock Exchange operating 50 stocks of the companies in India.
Nifty 50 checks the price fluctuations based on weighted average on daily basis.
Whereas sensex is the index of Bombay Stock Exchange operating 30 stocks of the
companies in India. Sensex also applies the same method.
Market capitalization is the total worth of all outstanding (issued) shares of a company. It
represents the total worth of a company. Market capitalization=No of shares outstanding x
market price of share Free Float Market Capitalization Free float concept is an index
construction methodology which makes use of free float shares in the market. Free float
market capitalization is the total worth of all shares of a company which are available for
trading in the open market. Theses hares are called free float shares and are available for
trading by anyone.

SEBI TO INCREASE LIQUIDITY IN THE STOCK MARKET

The SEBI regulation of stock exchanges and their members had started as early as February
1992 and the reforms later introduced have been on a continuous basis. It was started with the
licensing and registration of brokers and sub-brokers in the recognized stock exchanges. This
was later extended to underwriters, portfolio managers and other categories of players in the
stock market including foreign securities firms, FFIs, OCBs, FIIs, Debenture Trustees,
Collecting Bankers, etc. The other reforms are briefly summarized below:
 Compulsory audit and inspection of stock exchanges and their member brokers and
their accounts.
 Transparency in the prices and brokerage charged by brokers by showing them in
their contract notes.
 Broker accounts and client accounts are to be kept separate and clients' money is to
be separately maintained in bank's accounts and the same to be reported to the stock
exchanges.

30
  Board of Directors of stock exchanges has to be reconstituted so as to include non-
brokers, public representative, and Government representatives to the extent 126 of
50% of the total number of members.
 Capital adequacy norms have been laid down for members of various stock exchanges
separately and depending on their turnover of trade and other factors.
 Guidelines have been laid down for dealings of FIIs and Foreign broker firms in the
Indian stock exchanges through Indian brokers.
 New guidelines for corporate members have been laid down with limited liability of
directors and opening up of their membership to more than one stock exchange
without
the limiting requirement of experience of five years in one exchange, as imposed
earlier. The term "Investor Protection" is a wide term encompassing various measures
designed to protect the investors from malpractices of companies, brokers, merchant bankers,
issue managers, Registrars of new issues, etc. "Investors Beware" should be the watchword of
all programs for mobilization of savings for investment. As all investments have some risk
element, this risk factor should be borne in mind by the investors and they should take all
precautions to protect their interests in the first place. If caution is thrown to the winds and
they invest in any venture without a proper assessment of the risk, they have only to blame
themselves. But if there are malpractices by companies, brokers etc., they have every reason
to complain. Such grievances have been increasing in number in recent years.
The complaints of investors come from two major sources:
 Against member broker of Stock Exchanges;
 Against companies listed for trading on the Stock Exchanges.
Besides, there can be complaints against sub-brokers, agents, merchant bankers, issue
managers, etc., which cannot be entertained by the stock exchanges as per their rules.

31
 UNIT-III
MEANING, NEED AND BENEFITS OF DEPOSITORY SYSTEM
Depositories The Indian Capital Markets were notorious for their outdated ways of doing
business. It was a major relief when NSE and BSE had introduced on line trading that
transformed the trading from scream based to screen based. But the clumsy procedures of
handling share certificates and the recurring problem of bad deliveries made life horrendous
not for just an amateur investor but even for a professional broker. With the paper work
nightmare looming large, securities business was never a pleasant job. That's till; the new
method of holding stocks in the electronic form was introduced in 1996. The new system
called a depository was put in place to hold stocks of all companies in electronic form on
behalf of the investors and maintain a record of all "buy" and "sell" transactions. Technology
had made it possible to provide bank like ease and convenience. As it alleviated the hardships
associated with handling physical stocks, investors experiencing the relief, have begun to
slowly come back to the stock markets. Investing in stocks has now become much more
convenient and safe.
The organization responsible for holding and handling securities on behalf of investors is
known as a Depository. It caters to both large and small investors through a network of
intermediaries called Depository Participants or DPs for short. Well-developed capital
markets all over the world have depositories.
In India, National Securities Depository Limited (NSDL) as a joint venture between IDBI,
UTI and the National Stock Exchange has set up the first depository. The second depository
has been set up by Central Depository Services Limited (CDSL), which was promoted by the
Bombay Stock Exchange and Bank of India. Both the depositories have a network of
Depository Participants (DPs) who are electronically connected to the depository and serve as
contact points with the investors.
Dematerialization: Dematerialization or Demat for short, is a process where securities held by
you in physical form are cancelled and credited to your DP account in the form of electronic
balances.
Cost of transactions would be less, as you don't have to pay for the stamp duty on transfer
of shares. As there are no bad deliveries, you need not waste time and money unlike in
physical segment where shares keep coming back to the seller due to Company Objections.
You would save expenses associated with notarization and follow up.
For convenience, there is nothing like Demat holding. It offers you a host of possibilities
just like a bank account does. You can convert your physical stock into electronic form

32
(Dematerialization) or reconvert electronic holdings into physical certificates
(Rematerialization), transfer your shares to some other account and ensure settlement of all
your trades through a single account by simply giving the necessary instructions to your
Depository Participant.

DIFFERENCE BETWEEN DMAT AND PHYSICAL ACCOUNT

S no DMAT ACCOUNT s.no PHYSICAL ACCOUNT
1 It maintains the record of securities 1 It maintains the records of securities
electronically physically
2 It requires less paper work for opening 2 Lot of paper work is required.
3 Less prone to errors 3 More prone to errors in handling large
records
4 Convenient and easy to operate 4 Less convenient
5 Less human effort is required 5 More human effort is required
6 More accurate 6 Less accurate

IMPORTANCE OF DEBT MARKET IN CAPITAL MARKET

Debt markets are markets for the issuance, trading and settlement of various types and
features of fixed income securities. Fixed income securities can be issued by any legal entity
like central and state governments, public bodies, statutory corporations, banks and
institutions and corporate bodies.
The debt market in India comprises mainly of two segments viz.,
 the Government securities market consisting of Central and State Governments
securities, Zero Coupon Bonds (ZCBs), Floating Rate Bonds (FRBs), T-Bills and

 The corporate securities market consisting of FI bonds, PSU bonds, and

Debentures/Corporate bonds. Government securities form the major part of the
market in terms of outstanding issues, market capitalization and trading value

The trading of government securities on the Stock exchanges is currently through Negotiated
Dealing System using members of Bombay Stock Exchange (BSE) / National Stock
Exchange (NSE) and these trades are required to be reported to the exchange. The bulk of the
corporate bonds, being privately placed, were, however, not listed on the stock exchanges.
Two

33
Depositories, National Securities Depository Limited (NSDL) and Central Depository
Services (India) Limited (CDSL) maintain records of holding of securities in a dematerialized
form. Records of holding of government securities for wholesale dealers like banks/Primary
Dealers (PDs) and other financial institutions are maintained by the RBI.

The key role of the debt markets in the Indian Economy stems from the following reasons:

 Efficient mobilization and allocation of resources in the economy

 Financing the development activities of the Government
 Transmitting signals for implementation of the monetary policy
 Facilitating liquidity management in tune with overall short term and long term
objectives
 Reduction in the borrowing cost of the Government and enable mobilization of
resources at a reasonable cost.
 Provide greater funding avenues to the public-sector and private sector projects and
reduce the pressure on institutional financing.
 Enhance mobilization of resources by unlocking illiquid retail investments like gold.
 Development of heterogeneity of market participants
 Assist in the development of a reliable yield curve.

PARTICIPANT IN THE DEBT MARKET

Primary Dealers Primary dealers (PDs) are important intermediaries in the government
securities markets. They act as underwriters in the primary market, and as market makers in
the secondary market. PDs underwrite a portion of the issue of government security that is
floated for a predetermined amount. The underwriting commitment of each PD is broadly
decided on the basis of its size in terms of its net owned funds, its holding strength, the
committed amount of bids and the volume of turnover in securities.

Brokers play an important role in secondary debt market by bringing together counterparties
and negotiating terms of the trade. It is through them that the trades are entered on the stock
exchanges. The brokers are regulated by the stock exchanges and also by SEBI.

34
TYPES OF INSTRUMENT TREATED IN THE DEBT MARKET

Corporate debenture A Debenture is a debt security issued by a company, which offers to

pay interest in lieu of the money borrowed for a certain period. In essence it represents a loan
taken by the issuer who pays an agreed rate of interest during the lifetime of the instrument
and repays the principal normally, unless otherwise agreed, on maturity. These are long-term
debt instruments issued by private sector companies, in denominations as low as ` 1000 and
have maturities ranging between one and ten years. Debentures enable investors to reap the
dual benefits of adequate security and good returns. Unlike other fixed income instruments
such as Fixed Deposits, Bank Deposits, Debentures can be transferred from one party to
another. Debentures can be divided into different categories on the basis of convertibility of
the instrument and Security. The debentures issued on the basis of Security includes

 Non-Convertible Debentures (NCDs)

 Partly Convertible Debentures (PCDs)
 Fully convertible Debentures (FCDs)
 Optionally Convertible Debentures (OCDs)
 Secured Debentures
 Unsecured Debentures

FIXED INCOME PRODUCTS

Deposit: Deposits serve as medium of saving and as a means of payment and are a very
important variable in the national economy. A bank basically has three types of deposits, i.e.
time deposit, savings deposit and current account.
Fixed Deposit: Fixed Deposits are sums accepted by most of the NBFCs and banks. The
amount of deposits that may be raised by NBFCs is linked to its net worth and rating.
However, the interest rate that may be offered by a NBFC is regulated. The deposits offered
by NBFCs are not insured whereas the deposits accepted by most banks are insured up to a
maximum of `1,00,000.
INTEREST BASED BONDS
Coupon Bonds Coupon Bonds typically pay interest periodically at the pre specified rate of
interest. The annual rate at which the interest is paid is known as the coupon rate or simply
the coupon. Interest is usually paid half-yearly though in some cases it may be monthly,
quarterly, annually or at some other periodicity. The dates on which the interest payments are
made, are

35
known as the coupon due dates. Zero Coupon Bonds A plain bond is offered at its face
value, earns a stream of interest till redemption and is redeemed with or without a premium at
maturity. A zero coupon bond is issued at a discount to its face value, fetches no periodic
interest and is redeemed at the face value at maturity.

MONEY MARKET INSTRUMENTS

Call Money Call/Notice money is an amount borrowed or lent on demand for a very short
period. If the period is more than one day and up to 14 days it is called ‘Notice money’
otherwise the amount is known as Call money. No collateral security is required to cover
these transactions. The call market enables the banks and institutions to even out their day to
day deficits and surpluses of money. Commercial banks, Co-operative Banks and primary
dealers are allowed to borrow and lend in this market for adjusting their cash reserve
requirements.
Treasury Bills In the short term, the lowest risk category instruments are the treasury bills.
RBI issues these at a prefixed debt and a fixed amount. These include 91-day T-bills, 182-
Day T-bills, and 364-day T-bills. The usual investors in these instruments are banks who
invest not only to part their short-term surpluses. These T-bills, which are issued at a
discount, can be traded in the market. The transaction cost on T-bills is nonexistent and
trading is considerably high in each bill, immediately after its issue and immediately before
its redemption.
Term Money Market Inter-bank market for deposits of maturity beyond 14 days and up to
three months is referred to as the term money market.
Certificates of Deposits (CDs) after treasury bills, the next lowest risk category investment
option is the certificate of deposit (CD) issued by banks and Financial Institutions. CDs are
issued by banks and FIs mainly to augment funds by attracting deposits from corporate, high
net worth individuals, trusts, etc. The foreign and private banks, especially, which do not have
large branch networks and hence lower deposit base use this instrument to raise funds.
Commercial Papers (CP) CPs are negotiable short-term unsecured promissory notes with
fixed maturities, issued by well rated companies generally sold on discount basis. Companies
can issue CPs either directly to the investors or through banks / merchant banks (called
dealers). These are basically instruments evidencing the liability of the issuer to pay the
holder in due course a fixed amount i.e. face value of the instrument, on the specified due date.
These are issued for a fixed period
of time at a discount to the face value and mature at par.

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 UNIT-IV

“A development bank is like a living organism that reacts to the social economic environment
and its success depends on reacting most aptly to that environment”Development Bank
Development banks are unique financial institution that act as catalytic agents in promoting
balanced development of the country and thereby aid in the economic growth of the country.
Development Bank is a financial institution dedicated to fund new and upcoming businesses
and economic development projects by equity capital or loan capital. Development banks are
those financial institutions engaged in the promotion and development of industry, agriculture
and other key sectors.

Development banks were set up in India at various points of time starting from the late 1940s
to cater to the medium to long term financing requirements of industry as the capital market
in India had not developed sufficiently. The endorsement of planned industrialization at the
national level provided the critical enticement for organization of Development banks at both
all India and state levels. In order to perform their role, Development Banks were extended
funds in the shape of Long Term Operations (LTO) Fund of the Reserve bank of India and
government guaranteed bonds, which constituted main sources of their funds. Funds from
these sources were not only available at concessional rates, but also on a long term basis with
their maturity period ranging from 10-15 years.

Development Banks in India:

Industrial Finance Corporation of India (IFCI)-1948.

The industrial Development Bank of India (IDBI)-1964

The Industrial Reconstruction Bank of India (IRBI)-1971

The Industrial Credit and Investment Corporation of India (ICICI)-1955 Etc.

Features and role of a Development Bank

 A development bank does not accept deposits from the public like commercial banks
and other financial institutions who entirely depend upon saving mobilization.
 It is a specialized financial institution which provides medium term and long-term
lending facilities.
 It is a multipurpose financial institution. Besides providing financial help it
undertakes promotional activities also. It helps enterprises from planning to
operational level.

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  It provides financial assistance to both private as well as public sector institutions.
 The role of a development bank is of gap filler. When assistance from other sources is
not sufficient then this channel helps. It does not compete with normal channels of
finance.
 Development banks primarily aim to accelerate the rate of growth. It helps
industrialization specific and economic development in general.
 The objective of these banks is to serve public interest rather than earning profits.

Functions of development banks

Development banks have been started with the motive of increasing the pace of
industrialization. The traditional financial institutions could not take up this challenge
because of their limitations. In order to help all round industrialization development banks
were made multipurpose institutions. Besides financing they were assigned promotional work
also. Some important functions of these institutions are discussed as follows:

 Financial Gap Fillers Development banks do not provide medium term and long-term
loans only but they help industrial enterprises in many other ways too. These banks
subscribe to the bonds and debentures of the companies, underwrite to their shares
and debentures and, guarantee the loans rose from foreign and domestic sources. They
also help 'undertakings to acquire machinery from within and outside the country.

 Undertake Entrepreneurial Role Developing countries lack entrepreneurs who can

take up the job of setting up new projects. It may be due to lack of expertise and
managerial ability. Development banks were assigned the job of entrepreneurial gap
filling. They undertake the task of discovering investment projects, promotion of
industrial enterprises,

38
 provide technical and managerial assistance, undertaking economic and technical
research, conducting surveys, feasibility studies etc. The promotional role of
development bank is very significant for increasing the pace of industrialization.

 Commercial Banking Business Development banks normally provide medium and

long-term funds to industrial enterprises. The working capital needs of the units are
met by commercial banks. In developing countries, commercial banks have not been
able to take up this job properly. Their traditional approach in dealing with lending
proposals and assistance on securities has not helped the industry. Development banks
extend financial assistance for meeting working capital needs to their loan if they fail
to arrange such funds from other sources. So far as taking up of other functions of
banks such as accepting of deposits, opening letters of credit, discounting of bills, etc.
there is no uniform practice in development banks.

 Joint Finance Another feature of development bank's operations is to take up joint

financing along with other financial institutions. There may be constraints of financial
resources and legal problems (prescribing maximum limits of lending) which may
force banks to associate with other institutions for taking up the financing of some
projects jointly. It may also not be possible to meet all the requirements of a concern
by one institution, So more than one institution may join hands. Not only in large
projects but also in medium-size projects it may be desirable for a concern to have, for
instance, the requirements of a foreign loan in a particular currency, met by one
institution and under writing of securities met by another.
 Refinance Facility Development banks also extend refinance facility to the lending
institutions. In this scheme there is no direct lending to the enterprise. The lending
institutions are provided funds by development banks against loans extended' to
industrial concerns. In this way the institutions which provide funds to units are
refinanced by development banks. In India, Industrial Development Bank of India
provides reliance against ('term loans granted to industrial 'concerns by state financial
corporations. commercial banks and state cooperative banks.

39
 Credit Guarantee The small scale sector is not getting proper financial facilities due to
the clement of risk since these units do not have sufficient securities to offer for loans,
lending institutions are hesitant to extend them loans. To overcome this difficulty
many countries including India and Japan have devised credit guarantee scheme and
credit insurance scheme.

 Underwriting of Securities Development banks acquire securities of industrial units

through either direct subscribing or underwriting or both. The securities may also be
acquired through promotion work or by converting loans into equity shares or
preference shares. So development banks may build portfolios of industrial stocks and
bonds. These banks do not hold these securities on a permanent basis. They try to
disinvest in these securities in a systematic way which should not influence market
prices of these securities and also should not lose managerial control of the units.

 Development banks have become worldwide phenomena. Their functions depend

upon the requirements of the economy and the state of development of the country.
They have become well recognized segments of financial market. They are playing an
important role in the promotion of industries in developing and underdeveloped
countries.

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 MUTUAL FUNDS

Mutual funds are investment companies that use the funds from investors to invest in other
companies or investment alternatives. They have the advantage of professional management,
diversification, convenience and special services such as cheque writing and telephone
account service. It is generally easy to sell mutual fund shares/units although you run the risk
of needing to sell and being forced to take the price offered. Mutual funds come in various
types, allowing you to choose those funds with objectives, which most closely match your
own personal investment objectives. A load mutual fund is one that has sales charge or
commission attached. The fee is a percentage of the initial investment. Generally, mutual
funds sold through brokers are load funds while funds sold directly to the public are no-load
or low-load. As an investor, you need to decide whether you want to take the time to research
prospective mutual funds yourself or pay the commission and have a broker who will do that
for you. All funds have annual management fees attached. Mutual Fund Schemes may be
classified on the Basis of its Structure and its Investment Objective.

Open - Ended Mutual Funds An open-ended mutual fund is the one whose units can be
freely sold and repurchased by the investors. Such funds are not listed on bourses since the
Asset Management Companies (AMCs) provide the facility for buyback of units from unit-
holders either at the NAV, or NAV-linked prices. Instant liquidity is the USP of open-ended
funds: you can invest in or redeem your units at will in a matter of 2-3 days. In the event of
volatile markets, open-ended funds are also suitable for investment appreciation in the short-
term. This is how they work: if you expect the interest rates to fall, you park your money in
an open-ended debt fund. Then, when the prices of the underlying securities rise, leading to
an appreciation in your fund’s NAV, you make a killing by selling it off. On the other hand, if
you expect the Bombay Stock Exchange Sensitivity Index – the Sensex – to gain in the short
term, you can pick up the right open-ended equity fund whose portfolio has scrips likely to
gain from the rally, and sell it off once its NAV goes up.

Closed-ended mutual funds have a fixed number of units, and a fixed tenure (3, 5, 10, or 15
years), after which their units are redeemed or they are made open-ended. These funds have
various objectives: generating steady income by investing in debt instruments, capital
appreciation by investing in equities, or both by making an equal allocation of the corpus in
debt and equity instruments.

41
CONCLUSION
In a broad ranging review of this kind, no amount of care usually suffices
to save the authors from being found guilty of omissions - even glaring
omissions. We tried to exercise as much care as possible to ensure that we did
not miss any research done after 1977 on the Indian capital markets. Some
omissions are bound to have occurred because of reasons beyond our control.
Though we put in fair amount of effort in identifying all relevant institutions, it
is possible that we perhaps did not write to all institutions engaged in research
on the Indian capital markets. Since only 53 institutions responded out of 118
institutions we wrote to, it is quite possible that some unpublished research
works have not been included in the works reviewed. We can only regret such
omissions.
19 paper. Further, not only is the average research output very low but the
distribution of work done by the institutions and individuals is highly skewed.
To some extent, this skewness might have been exacerbated by the fact that the
authors of this paper have had more complete access to the works of their own
institution as compared to other institutions. The main reason as to why Indian
capital market is grossly under-researched is perhaps because of lack of
availability of databases and computing resources. Both these limitations are
being removed and we are optimistic that one is likely to witness an explosion
of work in the near future. The current interest of foreign investors in the Indian
capital market, if it is sustained, would also help give a fillip to research.

42
Bibliography
I. Agrawal G D (1992), "Mutual Funds and Investors' Interest", Chartered Secretary,
Vol. 22, No. 1 (Jan), p. 23.
II. Agrawal N C (1980), "Underwriting Operations in India: Reexamination Needed",
Chartered Accountant, Vol. 28, No. 11 (May), p. 1001-1005.
III. Agarwal P C (1992), "Suggestions on Scripless Trading", Chartered Secretary, Vol.
22, No. 10 (Oct), p. 888.
IV. Anshuman A S & Prakash Chandra R (1991), "Small Equity Shareholdings : The
Repurcussions", Chartered Secretary, Vol 21, No. 7 (Jul), p. 562.
V. Atmaramani K A (1984), "Issue of Non-Convertible Debentures by public limited
companies", Chartered Secretary, Vol. 14, No. 7 (Jul), p. 463-468.
VI. Avadhani V A (1992), Investment & Securities Markets in India: Investment
Management, Himalaya Publishing, Bombay. p 426.

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