Capital Markets in India

The capital market of India is very vulnerable. India has been politically instable in the past but it is a
little politically stable now-a-days the political instability of the country has a very strong impact on
the capital market. The share market of India changes as the political changes took place. The BSE
Index, SENSEX goes up and down with any kind of small and big political news, like, if there is news
that a particular political party has withdrawn its support from the ruling party, and then the capital
market will go down with a bang. The capital market of India is too weak and is based on speculations.
The political stability of the country is very important for the stability and growth of capital market in
India. The political imbalance or balance of the country is the major factor in deciding the capital
market of India. The political factors include:

• employment laws
• tax policy
• trade restrictions and tariffs
• political stability

ECONOMICAL:

The economical measures taken by the government of India has a very strong relationship with the
capital market. Whenever the annual budget is announced the capital market goes up and down with
the economical policies of the government .If the policies are supportive to the companies then the
capital market takes it positively and if there is any other policy that is not supportive and it is not
welcomed then the capital market goes down. Like, in the case of allocation of 3-G spectrum, those
companies that got the license for 3-G, they witnessed sharp growth in their share values so the
economic policies play a major part in the growth and decline of the capital market and again if there
is relaxation on any kind of taxes on items of automobile industry then the share of automobile sector
goes up and virtually strengthen the capital market .The economical factors include:

• inflation rate
• economic growth
• exchange rates
• interest rates

SOCIAL:

India is a country of unity in diversity .India is socially rich but the capital market is not very attached
with the social factors .Yes, there is some relation between the social factors with the capital market. If
there is any big social factor then to some extent it affects the capital market but small social factors
don’t impact at all. Like, there was opposition of reliance fresh in many cities and many stores were
closed. The share prices of the reliance fresh went down but the impact was on and individual firm
there was not much impact on the capital market on a whole the social factors have not much of
impact on the capital market in India. The social factors include:

• emphasis on safety
• career attitudes
• population growth rate
• age distribution
• health consciousness

TECHNOLOGICAL:
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The technological factors have not that much effect on the capital market. India is technological
backward country. Same as social factors, technological factor can have an effect on an individual
form but it cannot have a big impact on a whole of capital market. The Bajaj got a patent on its dts-i
technology, and launched it in its new bike but it does not effect on capital market. The technological
change in India is always on a lower basis and it doesn’t effect on country as a whole. The
technological factors include:

• R&D activity
• technology incentives
• rate of technological change
• automation

ENVIORNMENTAL FACTORS:

Initially The environmental factors don’t play a vital role in the capital market. But the time has
changed and people are more eco-friendly. This is really bothering them that if any firm or industry is
environment friendly or not. An increasing number of people, investors, corporate executives are
paying importance to these facts, the capital markets still see the environment as a liability. They belie
that it is of no use for their strategy. The environmental performance is even under-valued by the
markets.

LEGAL FACTORS:

Legal factors play an important role in the development and sustain the capital market. Legal issues
relating to any industry or firm decides the fate of the capital market. If the govt. of India or the
parliament introduces a new law that can affect the running of the industry then the industry will be
demotivated and this demonization will lead to the demonization of the investors and will result in the
fall of capital market. Like after the Hardhat Mehta scam, new rules and regulations were introduced
like PAN card was made necessary for trading, if any investor was investing too much money in a
small firm, then the investors were questioned, etc. These regulations were meant to maintain
transparency in the capital market, but at that time, investment was discouraged. Legal factors are
necessary for the improvement and stability of the capital market.

Securities and Exchange Board of India

The Genesis of SEBI

In the 1980s, Indian capital markets witnessed significant changes. During the sixth Five-Year plan
(1980-85), many major industrial policy changes were introduced.

These included opening up the Indian economy to foreign corporations and emphasizing a greater role
for the private sector.

Many companies tapped the primary market to raise required funds from the public. The total capital
raised from the primary market increased from Rs 1.96 bn in the fiscal 1979-80 to Rs. 65 bn in 1989-
90.

With more companies raising money by issuing shares, retail investors got another investment avenue
to park their surplus funds.

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Between 1987 and 1991, 12% of household savings were invested in equity and corporate debentures
as compared to only 7% between 1982 and 1985, signifying the increasing number of retail investors
in the stock market.

With the increasing interest of retail investors, many dubious companies that did not have any real
plans to do business raised money by issuing shares, only to vanish at a later date.

These malpractices took on significant proportions and the grievances of retail investors increased
alarmingly. The investors turned to GoI for redressal. However, GoI was rather helpless in solving the
retail investors' grievances in such large volumes because of the lack of proper penal provisions.

The government, therefore, constituted SEBI as a supervisory body to regulate and promote security
markets...

Introduction

On April 12, 1988, the Securities and Exchange Board of India (SEBI) was established with a dual
objective of protecting the rights of small investors and regulating and developing the stock markets in
India.

In 1992, the Bombay Stock Exchange (BSE), the leading stock exchange in India, witnessed the first
major scam masterminded by Harshad Mehta (Mehta).

Analysts unanimously felt that if more powers had been given to SEBI, the scam would not have
happened.

As a result, the Government of India (GoI) brought in a separate legislation by the name of 'SEBI Act
1992' and conferred statutory powers to it. Since then, SEBI had introduced several stock market
reforms. These reforms significantly transformed the face of Indian stock markets.

SEBI introduced on-line trading and DEMAT of shares which did away with the age-old paper-based
trading, thus bringing more transparency into the trading system.

Analysts and experts appreciated SEBI for these reforms. One stock market analyst said, "I'm sure that
most of us would agree that SEBI has handled the challenges exceptionally well." In spite of SEBI's
capital market reforms and increasing regulatory powers over the years, analysts felt that it had failed
miserably in stopping stock market scams. In the ten years after the Mehta scam, several scams came
to light, casting doubt on the efficiency of SEBI as a regulatory body.

However, a few analysts felt there was a need to confer more powers to SEBI to stop these scams. One
analyst commented, "It's rather daunting task of putting in place a regulatory framework for the market
against all odds."
The Regulator

The Indian economy was liberalized in 1991. In order to achieve the full potential of liberalization and
enable the Indian stock market to attract huge investments from foreign institutional investors (FIIs), it
was necessary to introduce a series of stock market reforms.

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SEBI's efforts to boost investments in the capital markets faced a severe setback in 1992 when Mehta's
illegal activities led to a stock market scam. Mehta had managed to obtain huge funds from top banks
and financial institutions in India, including State Bank of India, Stanchart, National Housing Bank,
Citibank and ANZ Grindlays, to manipulate stock prices, which rose significantly. Between September
1991 and April 1992, the BSE index went up by 143%. However, when the prices crashed, several
small investors lost their hard-earned money. The amount involved in this crisis was approximately
Rs.54 bn. SEBI's inefficiency in regulating the markets was brought to light for the first time. A
journalist commented, "Harshad Mehta in 1992 had caught the SEBI napping"...

The Crash

SEBI's role as a regulator of Indian capital markets was once again questioned on March 02, 2001,
when the BSE index crashed by 176 points. This was the result of the large position taken by a
stockbroker - Ketan Parikh (KP) in ten stocks, popularly known as K10.

The companies in which KP held high equity stakes included Amitabh Bachchan Corporation Limited,
Mukta Arts, Tips, Pritish Nandy Communications, HFCL, Global Telesystems, Zee Telefilms, Crest
Communications and PentaMedia Graphics. He had huge exposures in these stocks, which required a
lot of money. Reportedly, KP borrowed from various companies and banks for this purpose...

The Reasons

Analysts felt that the major reason for SEBI's failure to protect investors against scams was lack of
skilled human capital. For instance, they quoted the example of the KP scam in which KP had taken
huge positions in ten stocks. In spite of SEBI possessing this information, it could not gauge KP's
vested interests in acquiring these huge positions and his illegitimate plans...

Restoring Investor Confidence

In a poll conducted in early 2002 by Equity Master, an equity research company in India, over 90% of
the respondents believed that the regulatory environment was not sufficient to protect the rights of
retail investors in India.

Bajpai realized that SEBI had to change this belief of retail investors. He said, "Restoring the
confidence of retail investors in the market will be an important task of SEBI."

Bajpai decided to achieve this objective by focusing on investor education, corporate governance,
transparency and enforcement of regulations...

Role of SEBI in Capital Market

SEBI is regulator to control Indian capital market. Since its establishment in 1992, it is doing hard
work for protecting the interests of Indian investors. SEBI gets education from past cheating with
naive investors of India. Now, SEBI is more strict with those who commit frauds in capital market.
The role of security exchange board of India (SEBI) in regulating Indian capital market is very
important because government of India can only open or take decision to open new stock exchange in
India after getting advice from SEBI.

If SEBI thinks that it will be against its rules and regulations, SEBI can ban on any stock exchange to
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trade in shares and stocks.

Now, we explain role of SEBI in regulating Indian Capital Market more deeply with following points:

1. Power to make rules for controlling stock exchange :

SEBI has power to make new rules for controlling stock exchange in India. For example, SEBI fixed
the time of trading 9 AM and 5 PM in stock market.

2. To provide license to dealers and brokers :

SEBI has power to provide license to dealers and brokers of capital market. If SEBI sees that any
financial product is of capital nature, then SEBI can also control to that product and its dealers. One of
main example is ULIPs case. SEBI said, " It is just like mutual funds and all banks and financial and
insurance companies who want to issue it, must take permission from SEBI."

3. To Stop fraud in Capital Market :

SEBI has many powers for stopping fraud in capital market.

It can ban on the trading of those brokers who are involved in fraudulent and unfair trade practices
relating to stock market.

It can impose the penalties on capital market intermediaries if they involve in insider trading.

4. To Control the Merge, Acquisition and Takeover the companies :

Many big companies in India want to create monopoly in capital market. So, these companies buy all
other companies or deal of merging. SEBI sees whether this merge or acquisition is for development
of business or to harm capital market.

5. To audit the performance of stock market :

SEBI uses his powers to audit the performance of different Indian stock exchange for bringing
transparency in the working of stock exchanges.

6. To make new rules on carry - forward transactions :

Share trading transactions carry forward cannot exceed 25% of broker's total transactions. 90 day limit
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for carry forward.

7. To create relationship with ICAI :

ICAI is the authority for making new auditors of companies. SEBI creates good relationship with ICAI
for bringing more transparency in the auditing work of company accounts because audited financial
statements are mirror to see the real face of company and after this investors can decide to invest or
not to invest. Moreover, investors of India can easily trust on audited financial reports. After Satyam
Scam, SEBI is investigating with ICAI, whether CAs are doing their duty by ethical way or not.

8. Introduction of derivative contracts on Volatility Index :

For reducing the risk of investors, SEBI has now been decided to permit Stock Exchanges to introduce
derivative contracts on Volatility Index, subject to the condition that;
a. The underlying Volatility Index has a track record of at least one year.
b. The Exchange has in place the appropriate risk management framework for such derivative
contracts.
2. Before introduction of such contracts, the Stock Exchanges shall submit the following:
i. Contract specifications
ii. Position and Exercise Limits
iii. Margins
iv. The economic purpose it is intended to serve
v. Likely contribution to market development
vi. The safeguards and the risk protection mechanism adopted by the exchange to ensure market
integrity, protection of investors and smooth and orderly trading.
vii. The infrastructure of the exchange and the surveillance system to effectively monitor trading in
such contracts, and
viii. Details of settlement procedures & systems
ix. Details of back testing of the margin calculation for a period of one year considering a call and a
put option on the underlying with a delta of 0.25 & -0.25 respectively and actual value of the
underlying.

9. To Require report of Portfolio Management Activities :

SEBI has also power to require report of portfolio management to check the capital market
performance. Recently, SEBI sent the letter to all Registered Portfolio Managers of India for
demanding report.
10. To educate the investors :
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Time to time, SEBI arranges scheduled workshops to educate the investors. On 22 may 2010 SEBI
imposed workshop. If you are investor, you can get education through SEBI leaders by getting update
information on this page.

Public Issue
Any company or a listed company making a public issue or a rights issue of value of more than Rs 50
lakhs is required to file a draft offer document with SEBI for its observations. The company can
proceed further only after getting observations from SEBI. The company has to open its issue within
three months from the date of SEBI's observation letter.

Through public issues, SEBI has laid down eligibility norms for entities accessing the primary market.
The entry norms are only for companies making a public issue (IPO or FPO) and not for listed
company making a rights issue.

The entry norms are as follows

Who decides the price of an issue?

Indian primary market ushered in an era of free pricing in 1992. Following this, the guidelines have
provided that the issuer in consultation with Merchant Banker shall decide the price. There is no price
formula stipulated by SEBI. SEBI does not play any role in price fixation. The company and merchant
banker are however required to give full disclosures of the parameters which they had considered
while deciding the issue price. There are two types of issues one where company and LM fix a price
(called fixed price) and other, where the company and LM stipulate a floor price or a price band and
leave it to market forces to determine the final price (price discovery through book building process).

How does one come to know about the issues on offer? And from where can I get copies of the
draft offer document?

SEBI issues press releases every week regarding the draft offer documents received and observations
issued during the period. The draft offer documents are put up on the website under
Reports/Documents section. The final offer documents that are filed with SEBI/ROC are also put up
for information under the same section. Copies of the draft offer documents in hard copy form may be
obtained from the office of SEBI.

on a payment of Rs.100 or from SES, LMs etc. The soft copies can be downloaded from the SEBI
website under Reports/Documents section. Some LMs also make it available on their webisties for
download. The final offer documents that are filed with SEBI/ROC can also be downloaded from the
same section of the website.

Who is eligible to be a BRLM?

A Merchant banker possessing a valid SEBI registration in accordance with the SEBI (Merchant
Bankers) Regulations, 1992 is eligible to act as a Book Running Lead Manager to an issue.

Primary Capital Market

Structure of Indian Capital Market

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

1. Government Securities Market : This is also known as the Gilt-edged market. This refers to
the market for government and semi-government securities backed by the Reserve Bank of India
(RBI).
2. Industrial Securities Market : This is a market for industrial securities i.e. market for shares
and debentures of the existing and new corporate firms. Buying and selling of such instruments take
place in this market. This market is further classified into two types such as the New Issues Market
(Primary) and the Old (Existing) Issues Market (secondary). In primary market fresh capital is raised
by companies by issuing new shares, bonds, units of mutual funds and debentures. However in the
secondary market already existing i.e old shares and debentures are traded. This trading takes place
through the registered stock exchanges. In India we have three prominent stock exchanges. They are
the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE) and Over The Counter
Exchange of India (OTCEI).
3. Development Financial Institutions (DFIs) : This is yet another important segment of Indian
capital market. This comprises various financial institutions. These can be special purpose
institutions like IFCI, ICICI, SFCs, IDBI, IIBI, UTI, etc. These financial institutions provide long
term finance for those purposes for which they are set up.
4. Financial Intermediaries : The fourth important segment of the Indian capital market is the
financial intermediaries. This comprises various merchant banking institutions, mutual funds,
leasing finance companies, venture capital companies and other financial institutions.

These are important institutions and segments in the Indian capital market.

SEBI Regulates Indian Capital Market

For the smooth functioning of the capital market a proper coordination among above organizations and
segments is a prerequisite. In order to regulate, promote and direct the progress of the Indian Capital
Market, the government has set up 'Securities and Exchange Board of India' (SEBI). SEBI is the
supreme authority governing and regulating the Capital Market of India.

Capital Markets – Some Basics

The capital market is an important constituent of the financial system. It is a market for long term
funds both equity and debt and funds raised within and outside the country.

The capital market aids economic growth by mobilizing the savings of the economic sectors and
directing the same towards channels of productive uses. This is facilitated through the following
measures.

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1) Issue of primary securities in the primary capital market that is, directing cash flow from the surplus
sector to the deficit sectors such as the government and the corporate sector.
2) Issue of secondary securities in the primary market that is, directing cash flow from the surplus
sector to financial intermediaries such as banking and non- banking financial institutions.
3) Secondary market transactions in outstanding securities which facilities liquidity. The liquidity of
the stock market is an important factor affecting growth. Many profitable projects require long term
finance and investment which means locking up funds for a long period. Investors do not like to
relinquish control over their savings for a long time. Hence, they are reluctant to invest in long
gestation projects. It is the presence of the liquid secondary capital market that attracts investors
because it ensures a quick exit without heavy losses or costs.

Hence, the development of an efficient capital market is necessary for creating a climate conducive to
investment and economic growth.

Functions of a Capital Market:

The functions of an efficient capital market are as follows:

1) Disseminate information efficiently for enabling participants to develop an informed opinion about
investment, disinvestment, reinvestment, or holding a particular financial asset.
2) Enable quick valuation of financial instruments – both equity and debt.
3) Provide insurance against market risk or price risk through derivative trading and default risk
through investment protection fund.
4) Enable wider participation by enhancing the width of the market by encouraging participation
through networking institutions and associating individuals.
5) Provide operational efficiency through -

i) simplified transaction procedure

ii) lowering settlement timings, and
iii) lowering transaction costs

6) Develop integration among -

i) real sector and financial sector
ii) equity and debt instruments
iii) long term and short term funds
iv) long term and short term interest costs
v) private sector and government sector and
vi) domestic funds and external funds.
7) Direct the flow of funds into efficient channels through investment, disinvestment, and
reinvestment.

The capital market is divided in two different markets. These are the primary capital market and
secondary capital market. The primary capital market is concerned with the new securities which are
traded in this market.
This market is used by the companies, corporations and the national governments to generate funds for
different purpose.

The primary capital market is also called the New Issue Market (or NIM). The securities which are
introduced in the market are sold for first time to the general public in this market. This market is also
known as the long term debt market as the money raised from this market provides long term capital.

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The process of offering new issues of existing stocks to the purchasers is known as underwriting. At
the same time if new stocks are introduced in the market, it is called the Initial Public Offering. The
act of selling new issues in the primary capital market follows a particular process. This process
requires the involvement of a syndicate of the securities dealers. The dealers who are running the
process get a certain amount for as commission. The price of the security offered in the primary capital
market includes the dealer’s commission also.

Again, if the issue is a primary issue, the investors get the issue directly from the company and no
intermediary is needed in the process. For the purpose, the investor needs to send the exact amount of
money to the respective company and after receiving the money, the particular company provides the
security certificates to the investors.

The primary issues which are offered in the primary capital market provide the essential funds to the
companies. These primary issues are used by the companies for the purpose of setting new businesses
or to expanding the existing business. At the same time, the funds collected through the primary
capital market, are also used for the modernization of the business. At the same time, the primary
capital market is also involved in the process of creating capital for the respective economy.

Primary Capital Market and Secondary Capital Market:

The capital market comprises the primary capital market and the secondary capital market

Primary market refers to the long term flow of funds from the surplus sector to the government and
corporate sector (through primary issues) and to banks and non banks financial intermediaries (through
secondary issues) Primary issues of the corporate sector lead to capital formation (creation of net fixed
assets) and incremental change in inventories.
The nature of fund raising is as follows:

Domestic
Equity issues by: Corporates (primary issues), Financial intermediaries (secondary issues)

Debt instruments by: Government (primary issues), Corporates (primary issues), Financial
intermediaries (secondary issues)

External
Equity issues through, Global Depository Receipts (GDR), And American Depository Receipts (ADR)

Debt instruments through: External Commercial Borrowings (ECB)

Other External Borrowings: Foreign Direct Investments (FDI) in equity and debt form, Foreign
Institutional Investments (FII) in the form of portfolio Investments, Non-resident Indian Deposits
(NRI) in the form of short term and medium term deposits.

The fund raising in the primary market can be classified as follows:

i) Public issue by prospectus

ii) Private placement
iii) Rights issues

Secondary market is a market for outstanding securities. An equity instruments being an eternal fund,
provides an all time market while a debt instruments with a defined maturity period, is traded at the
secondary market till maturity. Unlike primary issues in the primary market which result in capital
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formation, the secondary market facilitates only liquidity and marketability of outstanding debt and
equity instruments. The secondary market contributes to economic growth by channelizing funds into
the most efficient channel through the process of disinvestment to reinvestment. Te secondary market
also provides instant valuation of securities (equity and debt instruments) made possible by changes in
the internal environment that is through companywide and industry wide factors. Such a valuation
facilitates the measurement of the cost of capital and rate of return of economic entities at the micro
level.

Primary Market Transactions

The primary market transactions are done on the new securities issued by the corporations.

The companies, public sector companies and governments issue their securities in the primary market
in order to collect the fund. The primary market transactions include the purchasing of new securities
directly from the issuers. The primary market is also called the New Issue Market as the securities are
sold here for the first time.

The sale and purchase of the new stocks and new bonds define the primary market transactions. A
syndicate of security dealers handles the entire transactions in the primary market. The dealers in
return can earn a commission built in the price of the securities. The selling of new stocks and new
bonds to the investors is also called underwriting in the typical terminology of capital market. When
the sale of new stock is considered, the transaction is called the initial public offering (IPO).

Issuing of new securities in the capital market in order to raise funds is a common technique adopted
by the corporations.

As the primary market deals with the transactions of all new securities, the companies issue their
securities in the primary market only. The investors can purchase the securities like stocks and bonds
from the issuer companies in the primary market.

The major feature of the primary market transaction is to raise long-term capital for the corporations
and companies. In case of the primary market transactions, the companies receive the money and they
issue new stock and bond certificates to the investors. In order to set up new business or to expand the
existing one, the primary issues are used by the companies. Another major feature of the primary
market is to perform the services to facilitate the capital formation in economy.

Since 1991/92, the primary market has grown fast as a result of the removal of investment restrictions
in the overall economy and a repeal of the restrictions imposed by the Capital Issues Control Act. In
1991/92, Rs62.15 billion was raised in the primary market. This figure rose to Rs276.21 billion in
1994/
95. Since 1995/1996, however, smaller amounts have been raised due to the overall downtrend in the
market and tighter entry barriers introduced by SEBI for investor protection.

Capital Market Instruments

Terminology of capital market:
1. Pure Instrument: Equity shares, Preference shares and debenture or bonds which are issued with
the basic charterstics without mixing the instruments are called Pure Instrument.

2. Hybrid Instrument : Those instrument which are created by combining the features of equity
with bond, preference or equity shares is called as Hybrid Instrument. This is created in order to fulfill
the needs of investors. For example: Convertible Preference Shares, Partial convertible debentures etc.

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 3. Derivative: are those instrument whose value is determined from the reference of other
financial instruments. For example: future and option

4. Equity Shares: are those shares which refer to a part of ownership as a shareholder . These type
of shareholder undertakes the maximum entrepreneurial risk associate with the business.

5. Preference shares: Sec. 85(1) of the Companies Act defines preference shares as those shares
which carry preferential rights as the payment of dividend at a fixed rate and as to repayment of capital
in case of winding up of the company. Thus, both the preferential rights include (a) preference in
payment of dividend and (b) preference in repayment of capital in case of winding up of the company,
must attach to preference shares.

Capital market instruments are responsible for generating funds for companies, corporations, and
sometimes national governments.
These are used by the investors to make a profit out of their respective markets. There are a number of
capital market instruments used for market trade, including
Stocks, Bonds, Debentures, Treasury-bills, Foreign Exchange, Fixed deposits, and others.
The primary market is designed for the new issues and the secondary market is meant for the trade of
existing issues. Stocks and bonds are the two basic capital market instruments used in both the primary
and secondary markets. There are three different markets in which stocks are used as the capital
market instrument: the physical, virtual, and auction markets.

Bonds, however, are traded in a separate bond market. This market is also known as a debt, credit, or
fixed income market. Trade in debt securities are done in this market. There are also the T-bills and
Debentures which are used as capital market instruments by the investors. These instruments are more
secured than the others, but they also provide less return than the other capital market instruments.

While all capital market instruments are designed to provide a return on investment, the risk factors
are different for each and the selection of the instrument depends on the choice of the investor.

The risk tolerance factor and the expected returns from the investment play a decisive role in the
selection by an investor of a capital market instrument. Capital market instruments should be selected
only after doing proper research in order to increase one.

What are the products dealt in the secondary markets?

Following are the main financial products/instruments dealt in the secondary market:

Equity: The ownership interest in a company of holders of its common and preferred stock. The
various kinds of equity shares are as follows:-
Equity Shares: An equity share, commonly referred to as ordinary share also represents the form
of fractional ownership in which a shareholder, as a fractional owner, undertakes the maximum
entrepreneurial risk associated with a business venture. The holders of such shares are members of
the company and have voting rights.

• Rights Issue / Rights Shares: The issue of new securities to existing shareholders at a ratio to
those already held.

• Bonus Shares: Shares issued by the companies to their shareholders free of cost by
capitalization of accumulated reserves from the profits earned in the earlier years.

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• Preferred Stock / Preference shares: Owners of these kinds of shares are entitled to a fixed
dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid
in respect of equity share. They also enjoy priority over the equity shareholders in payment of
surplus. But in the event of liquidation, their claims rank below the claims of the company’s
creditors, bondholders / debenture holders.

• Cumulative Preference Shares: A type of preference shares on which dividend accumulates

if remains unpaid. All arrears of preference dividend have to be paid out before paying
dividend on equity shares.

• Cumulative Convertible Preference Shares: A type of preference shares where the dividend
payable on the same accumulates, if not paid. After a specified date, these shares will be
converted into equity capital of the company.

• Participating Preference Share: The right of certain preference shareholders to participate in

profits after a specified fixed dividend contracted for is paid. Participation right is linked with
the quantum of dividend paid on the equity shares over and above a particular specified level.

• Security Receipts: Security receipt means a receipt or other security, issued by a securitisation
company or reconstruction company to any qualified institutional buyer pursuant to a scheme,
evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or
interest in the financial asset involved in securitisation.

• Government securities (G-Secs): These are sovereign (credit risk-free) coupon bearing
instruments which are issued by the Reserve Bank of India on behalf of Government of India,
in lieu of the Central Government's market borrowing programme. These securities have a
fixed coupon that is paid on specific dates on half-yearly basis. These securities are available in
wide range of maturity dates, from short dated (less than one year) to long dated (up to twenty
years).

• Debentures: Bonds issued by a company bearing a fixed rate of interest usually payable half
yearly on specific dates and principal amount repayable on particular date on redemption of the
debentures. Debentures are normally secured / charged against the asset of the company in
favour of debenture holder.

• Bond: A negotiable certificate evidencing indebtedness. It is normally unsecured. A debt

security is generally issued by a company, municipality or government agency. A bond
investor lends money to the issuer and in exchange, the issuer promises to repay the loan
amount on a specified maturity date. The issuer usually pays the bond holder periodic interest
payments over the life of the loan. The various types of Bonds are as follows-

 Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic
interest is paid. The difference between the issue price and redemption price represents
the return to the holder. The buyer of these bonds receives only one payment, at the
maturity of the bond.

 Convertible Bond: A bond giving the investor the option to convert the bond into equity
at a fixed conversion price.

• Commercial Paper: A short term promise to repay a fixed amount that is placed on the market
either directly or through a specialized intermediary. It is usually issued by companies with a
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 high credit standing in the form of a promissory note redeemable at par to the holder on
maturity and therefore, doesn’t require any guarantee. Commercial paper is a money market
instrument issued normally for tenure of 90 days.

• Treasury Bills: Short-term (up to 91 days) bearer discount security issued by the Government
as a means of financing its cash requirements.

DEEP DISCOUNT BONDS

A bond that sells at a significant discount from par value and has no coupon rate or lower coupon rate
than the prevailing rates of fixed-income securities with a similar risk profile. They are designed to
meet the long term funds requirements of the issuer and investors who are not looking for immediate
return and can be sold with a long maturity of 25-30 years at a deep discount on the face value of
debentures.
Ex-IDBI deep discount bonds for Rs 1 lac repayable after 25 years were sold at a discount price of Rs
2,700.
FULLY CONVERTIBLE DEBENTURES WITH INTEREST
This is a debt instrument that is fully converted over a specified period into equity shares. The
conversion can be in one or several phases. When the instrument is a pure debt instrument,
interest is paid to the investor. After conversion, interest payments cease on the portion that is
converted. If project finance is raised through an FCD issue, the investor can earn interest even when
the project is under implementation. Once the project is operational, the investor can participate in the
profits through share price appreciation and dividend payments.
SWEAT EQUITY SHARES
The phrase `sweat equity' refers to equity shares given to the company's employees on favorable terms,
in recognition of their work. Sweat equity usually takes the form of giving options to employees to
buy shares of the company, so they become part owners and participate in the profits, apart from
earning salary. This gives a boost to the sentiments of employees and motivates them to work harder
towards the goals of the company.
The Companies Act defines `sweat equity shares' as equity shares issued by the company to employees
or directors at a discount or for consideration other than cash for providing knowhow or making
available rights in the nature of intellectual property rights or value additions, by whatever name
called.
DISASTER BONDS
Also known as Catastrophe or CAT Bonds, Disaster Bond is a high-yield debt instrument that is
usually insurance linked and meant to raise money in case of a catastrophe. It has a special condition
that states that if the issuer (insurance or Reinsurance Company) suffers a loss from a particular pre-
defined catastrophe, then the issuer's obligation to pay interest and/or repay the principal is either
deferred or completely forgiven.
Ex- Mexico sold $290 million in catastrophe bonds, becoming the first country to use a World Bank
program that passes the cost of natural disasters to investors. Goldman Sachs Group Inc. and Swiss
Reinsurance Co. managed the bond sale, which will pay investors unless an earthquake or hurricane
triggers a transfer of the funds to the Mexican government.
MORTGAGE BACKED SECURITIES (MBS)
MBS is a type of asset-backed security, basically a debt obligation that represents a claim on the cash
flows from mortgage loans, most commonly on residential property. Mortgagebacked securities
represent claims and derive their ultimate values from the principal and payments on the loans in the
pool. These payments can be further broken down into different classes of securities, depending on the
riskiness of different mortgages as they are classified under the MBS.
◦ Mortgage originators to refill their investments
◦ New instruments to collect funds from the market, very economic and more effective
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◦ Conversion of assets into funds
▪ Financial companies save on the costs of maintenance of the assets and other costs related to assets,
reducing overheads and increasing profit ratio.
▪ Kinds of Mortgage Backed Securities:
◦ Commercial mortgage backed securities: backed by mortgages on commercial property
Collateralized mortgage obligation: a more complex MBS in which the mortgages are ordered into
tranches by some quality (such as repayment time), with each tranche sold as a separate security
Stripped mortgage backed securities: Each mortgage payment is partly used to pay down the loan's
principal and partly used to pay the interest on it
◦ Residential mortgage backed securities: backed by mortgages on residential property

GLOBAL DEPOSITORY RECEIPTS/ AMERICAN DEPOSITORY RECEIPTS

A negotiable certificate held in the bank of one country (depository) representing a specific number of
shares of a stock traded on an exchange of another country. GDR facilitate trade of shares, and are
commonly used to invest in companies from developing or emerging markets. GDR prices are often
close to values of related shares, but they are traded and settled independently of the underlying share.
Listing on a foreign stock exchange requires compliance with the policies of those stock exchanges.
Many times, the policies of the foreign exchanges are much more stringent than the policies of
domestic stock exchange. However a company may get listed on these stock exchanges indirectly –
using ADRs and GDRs.
If the depository receipt is traded in the United States of America (USA), it is called an American
Depository Receipt, or an ADR. If the depository receipt is traded in a country other than USA, it is
called a Global Depository Receipt, or a GDR.
But the ADRs and GDRs are an excellent means of investment for NRIs and foreign nationals wanting
to invest in India. By buying these, they can invest directly in Indian companies without going through
the hassle of understanding the rules and working of the Indian financial market – since ADRs and
GDRs are traded like any other stock, NRIs and foreigners can buy these using their regular equity
trading accounts!
Ex- HDFC Bank, ICICI Bank, Infosys have issued both ADR and GDR

FOREIGN CURRENCY CONVERTIBLE BONDS (FCCBs)

A convertible bond is a mix between a debt and equity instrument. It is a bond having regular coupon
and principal payments, but these bonds also give the bondholder the option to convert the bond into
stock. FCCB is issued in a currency different than the issuer's domestic currency.
The investors receive the safety of guaranteed payments on the bond and are also able to take
advantage of any large price appreciation in the company's stock. Due to the equity side of the bond,
which adds value, the coupon payments on the bond are lower for the company, thereby reducing its
debt-financing costs.
Advantages
 S ome companies, banks, governments, and other sovereign entities may decide to issue bonds in
foreign currencies because, as it may appear to be more stable and predictable than their domestic
currency
Gives issuers the ability to access investment capital available in foreign markets
Companies can use the process to break into foreign markets
The bond acts like both a debt and equity instrument. Like bonds it makes regular coupon and
principal payments, but these bonds also give the bondholder the option to convert the bond into stock
It is a low cost debt as the interest rates given to FCC Bonds are normally 30-50 percent lower than
the market rate because of its equity component
Conversion of bonds into stocks takes place at a premium price to market price. Conversion price is
fixed when the bond is issued. So, lower dilution of the company stocks
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Advantages to investors
Safety of guaranteed payments on the bond
Can take advantage of any large price appreciation in the company’s stock
Redeemable at maturity if not converted
Easily marketable as investors enjoys option of conversion in to equity if resulting to
capital appreciation
Disadvantages
Exchange risk is more in FCCBs as interest on bond would be payable in foreign currency. Thus
companies with low debt equity ratios, large forex earnings potential only opted for FCCBs
FCCBs means creation of more debt and a FOREX outgo in terms of interest which is in foreign
exchange
In case of convertible bond the interest rate is low (around 3 to 4%) but there is exchange risk on
interest as well as principal if the bonds are not converted in to equity
If the stock price plummets, investors will not go for conversion but redemption. So, companies
have to refinance to fulfill the redemption promise which can hit earnings
It remains a debt in the balance sheet until conversion

Secondary Capital Market

Introduction

Secondary capital Market is the market where, unlike the primary capital market, an investor can buy a
security directly from another investor in lieu of the issuer. It is also referred as "after market".
The securities initially are issued in the primary capital market, and then they enter into the
secondary capital market. All the securities are first created in the primary capital market and
then, they enter into the secondary capital market. In the New York Stock Exchange, all the
stocks belong to the secondary capital market.

In other words, secondary capital market is a place where any type of used goods is available. In the
secondary capital market shares are maneuvered from one investor to other, that is, one investor buys
an asset from another investor instead of an issuing corporation. So, the secondary market should be
liquid.

Importance of Secondary Capital Market: Secondary Capital Market has an important role to play
behind the developments of an efficient capital market. Secondary capital market connects
investors' favoritism for liquidity with the capital users' wish of using their capital for a longer
period. For example, in a traditional partnership, a partner cannot access the other partner's
investment but only his or her investment in that partnership, even on an emergency basis.
Then if he or she may breaks the ownership of equity into parts and sell his or her respective
proportion to another investor. This kind of trading is facilitated only by the secondary market.

Stock Exchanges

There are 22 stock exchanges in India, the first being the Bombay Stock Exchange (BSE), which
began formal trading in 1875, making it one of the oldest in Asia. Over the last few years, there has
been a rapid change in the Indian securities market, especially in the secondary market. Advanced
technology and online-based transactions have modernized the stock exchanges. In terms of the
number of companies listed and total market capitalization, the Indian equity market is considered
large relative to the country’s stage of economic development. The number of listed companies

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increased from 5,968 in March 1990 to about 10,000 by May 1998 and market capitalization has
grown almost 11 times during the same period.
The debt market, however, is almost nonexistent in India even though there has been a large volume
of Government bonds traded. Banks and financial institutions have been holding a substantial part of
these bonds as statutory liquidity requirement. The portfolio restrictions on financial institutions’
statutory liquidity requirement are still in place. A primary auction market for Government securities
has been created and a primary dealer system was introduced in 1995. There are six authorized
primary dealers.
Currently, there are 31 mutual funds, out of which 21 are in the private sector. Mutual funds were
opened to the private sector in 1992. Earlier, in 1987, banks were allowed to enter this business,
breaking the monopoly of the Unit Trust of India (UTI), which maintains a dominant position.
Before 1992, many factors obstructed the expansion of equity trading. Fresh capital issues were
controlled through the Capital Issues Control Act. Trading practices were not transparent, and there
was a large amount of insider trading. Recognizing the importance of increasing investor protection,
several measures were enacted to improve the fairness of the capital market. The Securities and
Exchange Board of India (SEBI) was established in 1988. Despite the rules it set, problems continued
to exist, including those relating to disclosure criteria, lack of broker capital adequacy, and poor
regulation of merchant bankers and underwriters.
There have been significant reforms in the regulation of the securities market since 1992 in
conjunction with overall economic and financial reforms. In 1992, the SEBI Act was enacted giving
SEBI statutory status as an apex regulatory body. And a series of reforms was introduced to improve
investor protection, automation of stock trading, integration of national markets, and efficiency of
market operations.
India has seen a tremendous change in the secondary market for equity. Its equity market will most
likely be comparable with the world’s most advanced secondary markets within a year or two. The key
ingredients that underlie market quality in India’s equity market are:
• exchanges based on open electronic limit order book;
• nationwide integrated market with a large number of informed traders and fluency of short or long
positions; and
• no counterparty risk.
Among the processes that have already started and are soon to be fully implemented are electronic
settlement trade and exchange-traded derivatives. Before 1995, markets in India used open outcry, a
trading process in which traders shouted and hand-signaled from within a pit. One major policy
initiated by SEBI from 1993 involved the shift of all exchanges to screen-based trading, motivated
primarily by the need for greater transparency.
The first exchange to be based on an open electronic limit order book was the National Stock
Exchange (NSE), which started trading debt instruments in June 1994 and equity in November 1994.
In March 1995, BSE shifted from open outcry to a limit order book market. Currently, 17 of India’s
stock exchanges have adopted open electronic limit order.
Before 1994, India’s stock markets were dominated by BSE. In other parts of the country, the financial
industry did not have equal access to markets and was unable to participate in forming prices,
compared with market participants in Mumbai (Bombay). As a result, the prices in markets outside
Mumbai were often different from prices in Mumbai. These pricing errors limited order flow to these
markets. Explicit nationwide connectivity and implicit movement toward one national market has
changed this situation (Shah and Thomas, 1997). NSE has established satellite communications which
give all trading members of NSE equal access to the market.
Similarly, BSE and the Delhi Stock Exchange are both expanding the number of trading terminals
located all over the country. The arbitrages are eliminating pricing discrepancies between markets.

General obligations and responsibilities of Underwriters:

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a) Code of conduct:

Every underwriter has at all time to abide by a code of conduct; he has to maintain high standard of
integrity, dignity and fairness in all his dealings with his clients and, other underwriters in the conduct
of his business. He has to ensure that he and his personal act in an ethical manner in all dealing with
the issuers of capital. An underwriter has to rendered high standard of service exercise due diligence,
ensure proper care and exercise independent professional judgment. He must disclose to the issuer his
possible source/ potential areas of conflict of duties and interest of other underwriters to place them in
a disadvantageous position in relation to him while competing for/carrying out any assignment. He
must not make any written or oral statement to misrepresent…

• The service that he to be capable of performing for the issuer/ or has rendered to other issuer
or
• He underwriting commitment

He should not divulge to other issuer/ any party any confidence information about his issuer, which
forms the come to his knowledge and deal in securities of any issuer without disclosing to the SEBI or
to the board of director of the issuer. An underwriter should not willfully make untrue
statement/suppress material fact in any document, reports, papers or information furnished to the
SEBI.

b) Agreement with clients: Every underwriter has to enter into an agreement with the issuing
company. The agreement, among others, provides for the period during which the agreement is in for
amount of underwriting obligations, the period within which the underwriter has to subscribe to the
after being intimated by/on behalf of the issue, the amount of commission/ brokerage, and detail of
arrangement, If any , made by the underwriter for fulfilling the underwriting obligations.

c) General responsibilities: An underwriter cannot derive any direct or indirect benefit from
underwriting the issue other than by the underwriting commission. The maximum obligation under all
writing agreements of an underwriter cannot exceed 20 times his net worth, underwriters have to
subscribe for securities under the agreement within 45 days of the receipt of intimation from he issuer.

d) Inspection and disciplinary proceedings: The framework of the SEBI right to undertake the
inspection of the book of account, other record documents of the underwriters, the procedure for
inspection and obligation of the underwriters is on the same pattern as applicable to the lead manager

e) Action in case of default: The liability for action in case of default arising out of

• Non-compliance with any conditions subject to which registration was granted,

• Contravention of any provision of the SEBI act/rules/ regulation underwriter involves the
suspension/cancellation of registration: the effect of suspension/ cancellation on the lines
followed by the SEBI in case of lead manager.

Merchant Bank: A merchant bank deals with the commercial banking needs of international finance,
long-term company loans, and stock underwriting. This type of bank does not have retail offices where
a customer can go and open a savings or checking account. A merchant bank is sometimes said to be a
wholesale bank, or in the business of wholesale banking. This is because merchant banks tend to deal
primarily with other merchant banks and other large financial institutions. In INDIA merchant bankers
is a body corporate who carries on any activity of the issue management, which consist of preparing

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prospectus & other information relating to the issue. Merchant banks in India are not allowed to
conduct any business other than that related to securities market.

The most familiar role of the merchant bank is stock underwriting. A large company that wishes to
raise money from investors through the stock market can hire a merchant bank to implement and
underwrite the process. The merchant bank determines the number of stocks to be issued, the price at
which the stock will be issued, and the timing of the release of this new stock. The bank then files all
the paperwork required with the various market authorities, and is also frequently responsible for
marketing the new stock, though this may be a joint effort with the company and managed by the
merchant bank. For very large stock offerings, several merchant banks may work together, with one
being the lead underwriter.

Among other functions of merchant bank these are important: (i) The role of merchant banker is
dynamic in the wake of diverse nature of merchant banking services. (ii) Merchant banker has to think
and devise new instruments. (iii) In the days ahead, merchant bankers have very significant role to
play tuning their activities to the requirements of the growth pattern of the corporate sector, the
industry and the economy as a whole which is, in it, a challenging task and to meet these challenges
merchant bankers will have to be more vigorous and strategic in playing their role. They will have also
to adopt new ways and means in discharging their role.

By limiting their scope to the needs of large companies, merchant banks can focus their knowledge
and be of specific use to such clients. Some merchant banks specialize in a single area, such as
underwriting or international finance.

Many of the largest banks have both a retail division and a merchant bank division. The divisions are
generally very separate entities, as there is little similarity between retail banking and what goes on in
a merchant bank. Although the lives of most people are probably affected every day in some way by
decisions made in a merchant bank, many people are unlikely ever to visit or deal directly with one.
Merchant banks usually operate behind the scenes and away from the spotlight.

Merchant bank is a financial institution primarily engaged in offering financial services and advice to
corporations and to wealthy individuals. The term can also be used to describe the private equity
activities of banking. The chief distinction between an investment bank and a merchant bank is that a
merchant bank invests its own capital in a client company whereas an investment bank purely
distributes (and trades) the securities of that company in its capital raising role. Both merchant banks
and investment banks provide fee based corporate advisory services including in relation to mergers
and acquisitions ; it includes-: Issue Management Services – to act as Book Running Lead
Manager/Lead Manager for the IPOs/FPOs/Right issues/Debt issues
Project appraisal
Corporate Advisory Services
Underwriting of equity issues
Banker to the Issue/Paying Banker
Refund Banker
Monitoring Agency
Debenture Trustee
Marketing of the issue through a strong network of QIBs/HNIEs/Corporates and Retail investor
Role of Broker and Sub-broker in the Secondary Market

Whom should I contact for my Stock Market related transactions?

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 You can contact a broker or a sub broker registered with SEBI for carrying out your transactions
pertaining to the capital market.

Who is a broker?

A broker is a member of a recognized stock exchange, who is permitted to do trades on the screen-
based trading system of different stock exchanges. He is enrolled as a member with the concerned
exchange and is registered with SEBI.

Who is a sub broker?

A sub broker is a person who is registered with SEBI as such and is affiliated to a member of a
recognized stock exchange.

How do I know if the broker or sub broker is registered?

You can confirm it by verifying the registration certificate issued by SEBI. A broker's registration
number begins with the letters "INB" and that of a sub broker with the letters “INS". For the
brokers of derivatives segment, the registration number begins with the letters “INF”. There is no
sub-broker in the derivatives segment.

Am I required to sign any agreement with the broker or sub-broker?

Yes. For the purpose of engaging a broker to execute trades on your behalf from time to time and
furnish details relating to yourself for enabling the broker to maintain client registration form you
have to sign the “Member - Client agreement” if you are dealing directly with a broker. In case you
are dealing through a sub-broker then you have to sign a ”Broker - Sub broker - Client Tripartite
Agreement”. Model Tripartite Agreement between Broker-Sub broker and Clients is applicable
only for the cash segment. The Model Agreement has to be executed on the non-judicial stamp
paper. The Agreement contains clauses defining the rights and responsibility of Client vis-à-vis
broker/ sub broker. The documents prescribed are model formats. The stock exchanges/stock
broker may incorporate any additional clauses in these documents provided these are not in
conflict with any of the clauses in the model document, as also the Rules, Regulations, Articles,
Byelaws, circulars, directives and guidelines.

What is meant by Unique Client Code?

In order to facilitate maintaining database of their clients and to strengthen the know your client
(KYC) norms; all brokers have been mandated to use unique client code linked to the PAN details
of the respective client which will act as an exclusive identification for the client.

What is an Auction?

The Exchange purchases the requisite quantity in the Auction Market and gives them to the buying
trading member. The shortages are met through auction process and the difference in price
indicated in contract note and price received through auction is paid by member to the Exchange,
which is then liable to be recovered from the client.

What happens if the shares are not bought in the auction?

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 If the shares could not be bought in the auction i.e. if shares are not offered for sale in the auction,
the transactions are closed out as per SEBI guidelines.

The guidelines stipulate that “the close out Price will be the highest price recorded in that scrip on
the exchange in the settlement in which the concerned contract was entered into and up to the date
of auction/close out OR 20% above the official closing price on the exchange on the day on which
auction offers are called for (and in the event of there being no such closing price on that day, then
the official closing price on the immediately preceding trading day on which there was an official
closing price), whichever is higher.

Since, in the rolling settlement the auction and the close out takes place during trading hours, the
reference price in the rolling settlement for close out procedures would be taken as the previous
day’s closing price.

What is Margin Trading Facility?

Margin Trading is trading with borrowed funds/securities. It is essentially a leveraging mechanism

which enables investors to take exposure in the market over and above what is possible with their
own resources. SEBI has been prescribing eligibility conditions and procedural details for allowing
the Margin Trading Facility from time to time.

Corporate brokers with net worth of at least Rs.3 crore are eligible for providing Margin trading
facility to their clients subject to their entering into an agreement to that effect. Before providing
margin trading facility to a client, the member and the client have been mandated to sign an
agreement for this purpose in the format specified by SEBI. It has also been specified that the
client shall not avail the facility from more than one broker at any time.

The facility of margin trading is available for Group 1 securities and those securities which are
offered in the initial public offers and meet the conditions for inclusion in the derivatives segment
of the stock exchanges.

For providing the margin trading facility, a broker may use his own funds or borrow from
scheduled commercial banks or NBFCs regulated by the RBI. A broker is not allowed to borrow
funds from any other source.

The "total exposure" of the broker towards the margin trading facility should not exceed the
borrowed funds and 50 per cent of his "net worth". While providing the margin trading facility, the
broker has to ensure that the exposure to a single client does not exceed 10 per cent of the "total
exposure" of the broker.

Initial margin has been prescribed as 50% and the maintenance margin has been prescribed as
40%.

In addition, a broker has to disclose to the stock exchange details on gross exposure including
name of the client, unique identification number under the SEBI (Central Database of Market
Participants) Regulations, 2003, and name of the scrip.

If the broker has borrowed funds for the purpose of providing margin trading facility, the name of
the lender and amount borrowed should be disclosed latest by the next day.

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 The stock exchange, in turn, has to disclose the scrip-wise gross outstanding in margin accounts
with all brokers to the market. Such disclosure regarding margin-trading done on any day shall be
made available after the trading hours on the following day.

The arbitration mechanism of the exchange would not be available for settlement of disputes, if
any, between the client and broker, arising out of the margin trading facility. However, all
transactions done on the exchange, whether normal or through margin trading facility, shall be
covered under the arbitration mechanism of the exchange.

What is Arbitration?

Arbitration is an alternative dispute resolution mechanism provided by a stock exchange for

resolving disputes between the trading members and their clients in respect of trades done on the
exchange.

What is the process for preferring arbitration?

The byelaws of the exchange provide the procedure for Arbitration. You can procure a form for
filing arbitration from the concerned stock exchange. The arbitral tribunal has to make the arbitral
award within 3 months from the date of entering upon the reference. The time taken to make an
award cannot be extended beyond a maximum period of 6 months from the date of entering upon
the reference.

Foreign direct investment (FDI) or foreign investment refers to long term participation by country A
into country B. FDI is any form of investment that earns interest in enterprises which function outside of the
domestic territory of the investor. It usually involves participation in management, joint-venture, transfer
of technology and expertise. There are two types of FDI: inward foreign direct investment and
outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of
foreign direct investment", which is the cumulative number for a given period. Direct investment
excludes investment through purchase of shares.
Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place when a multinational
corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by
the MNC. Horizontal foreign direct investments happen when a multinational company carries out a similar
business operation in different nations.
Foreign Direct Investment in India is permitted under the automatic route in construction, i.e., in real estate
and development of housing townships. India has been ranked at the second place in global foreign direct
investments in 2010 and will continue to remain among the top five attractive destinations for
international investors during 2010-12 period, according to United Nations Conference on Trade and
Development (UNCTAD) in a report on world investment prospects titled, 'World Investment
Prospects Survey 2009-2012'.
Foreign Institutional Investor (FII) means an entity established or incorporated outside India which
proposes to make investment in India. Foreign injections amounted to US$ 6.4 billion in October
2010, which was almost 25 per cent of the total inflows in the stock market registered so far in 2010.
The net foreign fund investment crossed the US$ 100 billion mark on November 8, 2010, since the
liberalization policy was implemented in 1992. As per the data given by SEBI, the total figure stood at
US$ 100.9 billion, wherein US$ 4.78 billion were infused in November itself. The humungous
increase in investment mirrors the foreign investors’ faith in the Indian markets. FIIs have made
investments worth US$ 4.11 billion in equities and poured US$ 667.71 million into the debt market.
The Finance Minister's proposal in his Budget speech on 28th February 2011, to allow foreign investors
to invest in mutual funds directly has evoked mixed response from fund houses. At present foreign

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institutional investors (FIIs), non-resident Indians and sub-accounts registered with the Securities and
Exchange Board of India are allowed to invest in mutual funds.
The eligibility criteria for applicant seeking FII registration
As per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are required to
fulfill the following conditions to qualify for grant of registration:

• Applicant should have track record, professional competence, financial soundness, experience,
general reputation of fairness and integrity;
• The applicant should be regulated by an appropriate foreign regulatory authority in the same
capacity/category where registration is sought from SEBI. Registration with authorities, which
are responsible for incorporation, is not adequate to qualify as Foreign Institutional Investor.
• The applicant is required to have the permission under the provisions of the Foreign Exchange
Management Act, 1999 from the Reserve Bank of India.
• Applicant must be legally permitted to invest in securities outside the country or its in-
corporation / establishment.
• The applicant must be a "fit and proper" person.
• The applicant has to appoint a local custodian and enter into an agreement with the custodian.
Besides it also has to appoint a designated bank to route its transactions.
• Payment of registration fee of US $ 5,000.00

Reforms in the Capital Market

Over the last few years, SEBI has announced several far-reaching reforms to promote the capital
market and protect investor interests. Reforms in the secondary market have focused on three main
areas: structure and functioning of stock exchanges, automation of trading and post trade systems, and
the introduction of surveillance and monitoring systems. Computerized online trading of securities,
and setting up of clearing houses or settlement guarantee funds were made compulsory for stock
exchanges.
Stock exchanges were permitted to expand their trading to locations outside their jurisdiction through
computer terminals. Thus, major stock exchanges in India have started locating computer terminals in
far-flung areas, while smaller regional exchanges are planning to consolidate by using centralized
trading under a federated structure. Online trading systems have been introduced in almost all stock
exchanges. Trading is much more transparent and quicker than in the past.
Until the early 1990s, the trading and settlement infrastructure of the Indian capital market was poor.
Trading on all stock exchanges was through open outcry, settlement systems were paper-based, and
market intermediaries were largely unregulated. The regulatory structure was fragmented and there
was neither comprehensive registration nor an apex body of regulation of the securities market. Stock
exchanges were run as “brokers clubs” as their management was largely composed of brokers. There
was no prohibition on insider trading, or fraudulent and unfair trade practices.
Since 1992, there has been intensified market reform, resulting in a big improvement in securities
trading, especially in the secondary market for equity. Most stock exchanges have introduced online
trading and set up clearing houses/corporations. A depository has become operational for scripless
trading and the regulatory structure has been overhauled with most of the powers for regulating the
capital market vested with SEBI.
The Indian capital market has experienced a process of structural transformation with operations
conducted to standards equivalent to those in the developed markets. It was opened up for investment
by foreign institutional investors (FIIs) in 1992 and Indian companies were allowed to raise resources
abroad through Global Depository Receipts (GDRs) and Foreign Currency Convertible Bonds
(FCCBs). The primary and secondary segments of the capital market expanded rapidly, with greater
institutionalization and wider participation of individual investors accompanying this growth.
However, many problems, including lack of confidence in stock investments, institutional overlaps,
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and other governance issues, remain as obstacles to the improvement of Indian capital market
efficiency.

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