Meaning and Concept of Capital Market

Capital Market is one of the significant aspect of every financial market. Hence it is necessary to study its
correct meaning. Broadly speaking the capital market is a market for financial assets which have a long
or indefinite maturity. Unlike money market instruments the capital market intruments become mature
for the period above one year. It is an institutional arrangement to borrow and lend money for a longer
period of time. It consists of financial institutions like IDBI, ICICI, UTI, LIC, etc. These institutions play the
role of lenders in the capital market. Business units and corporate are the borrowers in the capital
market. Capital market involves various instruments which can be used for financial transactions. Capital
market provides long term debt and equity finance for the government and the corporate sector. Capital
market can be classified into primary and secondary markets. The primary market is a market for new
shares, where as in the secondary market the existing securities are traded. Capital market institutions
provide rupee loans, foreign exchange loans, consultancy services and underwriting.
he primary role of the capital market is to raise long-term funds for governments, banks, and corporations while
providing a platform for the trading of securities. This fundraising is regulated by the performance of the stock
and bond markets within the capital market.
The member organizations of the capital market may issue stocks and bonds in order to raise funds. Investors
can then invest in the capital market by purchasing those stocks and bonds. The capital market, however, is
not without risk.

It is important for investors to understand market trends before fully investing in the capital market. To that end,
there are various market indices available to investors that reflect the present performance of the market.

Significance, Role or Functions of Capital Market

Like the money market capital market is also very important. It plays a significant role in the national
economy. A developed, dynamic and vibrant capital market can immensely contribute for speedy
economic growth and development.

Let us get acquainted with the important functions and role of the capital market.
Mobilization of Savings : Capital market is an important source for mobilizing idle savings from the
economy. It mobilizes funds from people for further investments in the productive channels of an
economy. In that sense it activate the ideal monetary resources and puts them in proper investments.
Capital Formation : Capital market helps in capital formation. Capital formation is net addition to
the existing stock of capital in the economy. Through mobilization of ideal resources it generates
savings; the mobilized savings are made available to various segments such as agriculture, industry, etc.
This helps in increasing capital formation.
Provision of Investment Avenue : Capital market raises resources for longer periods of time.
Thus it provides an investment avenue for people who wish to invest resources for a long period of time.
It provides suitable interest rate returns also to investors. Instruments such as bonds, equities, units of
mutual funds, insurance policies, etc. definitely provides diverse investment avenue for the public.
Speed up Economic Growth and Development : Capital market enhances production and
productivity in the national economy. As it makes funds available for long period of time, the financial
requirements of business houses are met by the capital market. It helps in research and development.
This helps in, increasing production and productivity in economy by generation of employment and
development of infrastructure.
Proper Regulation of Funds : Capital markets not only helps in fund mobilization, but it also helps
in proper allocation of these resources. It can have regulation over the resources so that it can direct
funds in a qualitative manner.
Service Provision : As an important financial set up capital market provides various types of
services. It includes long term and medium term loans to industry, underwriting services, consultancy
services, export finance, etc. These services help the manufacturing sector in a large spectrum.
Continuous Availability of Funds : Capital market is place where the investment avenue is
continuously available for long term investment. This is a liquid market as it makes fund available on
continues basis. Both buyers and seller can easily buy and sell securities as they are continuously
available. Basically capital market transactions are related to the stock exchanges. Thus marketability in
the capital market becomes easy.
These are the important functions of the capital market.

Final Glance and Conclusion on Capital Market

The lack of an advanced and vibrant capital market can lead to underutilization of financial resources.
The developed capital market also provides access to the foreign capital for domestic industry. Thus
capital market definitely plays a constructive role in the over all development of an economy.



Meaning and Features:
The capital market is a market which deals in long-term loans. It supplies industry
with fixed and working capital and finances medium-term and long-term borrowings
of the central, state and local governments. The capital market deals in ordinary
stock are shares and debentures of corporations, and bonds and securities of
governments.

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The funds which flow into the capital market come from individuals who have
savings to invest, the merchant banks, the commercial banks and non-bank financial
intermediaries, such as insurance companies, finance houses, unit trusts, investment
trusts, venture capital, leasing finance, mutual funds, building societies, etc.
Further, there are the issuing houses which do not provide capital but underwrite
the shares and debentures of companies and help in selling their new issues of
shares and debentures. The demand for funds comes from joint stock companies for
working and fixed capital assets and inventories and from local, state and central
governments, improvement trusts, port trusts, etc. to finance a variety of
expenditures and assets.
The capital market functions through the stock exchange market. A stock exchange
is a market which facilitates buying and selling of shares, stocks, bonds, securities
and debentures. It is not only a market for old securities and shares but also for new
issues shares and securities. In fact, the capital market is related to the supply and
demand for new capital, and the stock exchange facilitates such transactions.
Thus the capital market comprises the complex of institutions and mechanisms
through which medium-term funds and long-term funds are pooled and made
available to individuals, business and governments. It also encompasses the process
by which securities already outstanding are transferred.
Importance or Functions of Capital Market:
The capital market plays an important role immobilising saving and channel is in
them into productive investments for the development of commerce and industry.
As such, the capital market helps in capital formation and economic growth of the
country. We discuss below the importance of capital market.
The capital market acts as an important link between savers and investors. The
savers are lenders of funds while investors are borrowers of funds. The savers who
do not spend all their income are called. Surplus units and the borrowers are
known as deficit units. The capital market is the transmission mechanism between
surplus units and deficit units. It is a conduit through which surplus units lend their
surplus funds to deficit units.
Funds flow into the capital market from individuals and financial intermediaries
which are absorbed by commerce, industry and government. It thus facilitates the
movement of stream of capital to be used more productively and profitability to
increases the national income.
Surplus units buy securities with their surplus funds and deficit units sells securities
to raise the funds they need. Funds flow from lenders to borrowers either directly or
indirectly through financial institutions such as banks, unit trusts, mutual funds, etc.
The borrowers issue primary securities which are purchased by lenders either
directly or indirectly through financial institutions.
The capital market prides incentives to savers in the form of interest or dividend and
transfers funds to investors. Thus it leads to capital formation. In fact, the capital
market provides a market mechanism for those who have savings and to those who
need funds for productive investments. It diverts resources from wasteful and
unproductive channels such as gold, jewellery, real estate, conspicuous
consumption, etc. to productive investments.
A well-developed capital market comprising expert banking and non-banking
intermediaries brings stability in the value of stocks and securities. It does so by
providing capital to the needy at reasonable interest rates and helps in minimising
speculative activities.
The capital market encourages economic growth. The various institutions which
operate in the capital market give quantities and qualitative direction to the flow of
funds and bring rational allocation of resources. They do so by converting financial
assets into productive physical assets. This leads to the development of commerce
and industry through the private and public sector, thereby inducing economic
growth.
In an underdeveloped country where capital is scarce, the absence of a developed
capital market is a greater hindrance to capital formation and economic growth.
Even though the people are poor, yet they do not have any inducements to save.
Others who save, they invest their savings in wasteful and unproductive channels,
such as gold, jewellery, real estate, conspicuous consumption, etc.
Such countries can induce people to save more by establishing banking and non-
banking financial institutions for the existence of a developed capital market. Such a
market can go a long way in providing a link between savers and investors, thereby
leading to capital formation and economic growth.

Indian Capital Market: Classification and Growth of Indian Capital
Market!
The Indian capital market is the market for long term loanable funds as distinct from
money market which deals in short-term funds.
It refers to the facilities and institutional arrangements for borrowing and lending
term funds, medium term and long term funds. In principal capital market loans
are used by industries mainly for fixed investment. It does not deal in capital goods,
but is concerned with raising money capital or purpose of investment.
Classification:
The capital market in India includes the following institutions (i.e., supply of funds
tor capital markets comes largely from these); (i) Commercial Banks; (ii) Insurance
Companies (LIC and GIC); (iii) Specialised financial institutions like IFCI, IDBI,
ICICI, SIDCS, SFCS, UTI etc.; (iv) Provident Fund Societies; (v) Merchant Banking
Agencies; (vi) Credit Guarantee Corporations. Individuals who invest directly on
their own in securities are also suppliers of fund to the capital market.
Thus, like all the markets the capital market is also composed of those who demand
funds (borrowers) and those who supply funds (lenders). An ideal capital market at
tempts to provide adequate capital at reasonable rate of return for any business, or
industrial proposition which offers a prospective high yield to make borrowing
worthwhile.
The Indian capital market is divided into gilt-edged market and the industrial
securities market. The gilt-edged market refers to the market for government and
semi-government securities, backed by the RBI. The securities traded in this market
are stable in value and are much sought after by banks and other institutions.
The industrial securities market refers to the market for shares and debentures of
old and new companies. This market is further divided into the new issues market
and old capital market meaning the stock exchange.
The new issue market refers to the raising of new capital in the form of shares and
debentures, whereas the old capital market deals with securities already issued by
companies.
The capital market is also divided in primary capital market and secondary capital
market. The primary market refers to the new issue market, which relates to the
issue of shares, preference shares, and debentures of non-government public limited
companies and also to the realising of fresh capital by government companies, and
the issue of public sector bonds.
The secondary market on the other hand is the market for old and already issued
securities. The secondary capital market is composed of industrial security market or
the stock exchange in which industrial securities are bought and sold and the gilt-
edged market in which the government and semi-government securities are traded.
Growth of Indian Capital Market:
Indian Capital Market before Independence:
Indian capital market was hardly existent in the pre-independence times.
Agriculture was the mainstay of economy but there was hardly any long term lending
to agricultural sector. Similarly the growth of industrial securities market was very
much hampered since there were very few companies and the number of securities
traded in the stock exchanges was even smaller.
Indian capital market was dominated by gilt-edged market for government and
semi-government securities. Individual investors were very few in numbers and that
too were limited to the affluent classes in the urban and rural areas. Last but not the
least, there were no specialised intermediaries and agencies to mobilise the savings
of the public and channelise them to investment.
Indian Capital Market after Independence:
Since independence, the Indian capital market has made widespread growth in all
the areas as reflected by increased volume of savings and investments. In 1951, the
number of joint stock companies (which is a very important indicator of the growth
of capital market) was 28,500 both public limited and private limited companies
with a paid up capital of Rs. 775 crore, which in 1990 stood at 50,000 companies
with a paid up capital of Rs. 20,000 crore. The rate of growth of investment has been
phenomenal in recent years, in keeping with the accelerated tempo of development
of the Indian economy under the impetus of the five year plans.
Factors Influencing Capital Market:
The firm trend in the market is basically affected by two important factors: (i)
operations of the institutional investors in the market; and (ii) the excellent results
flowing in from the corporate sector.
New Financial Intermediaries in Capital Market:
Since 1988 financial sector in India has been undergoing a process of structural
transformation.
Some important new financial intermediaries introduced in Indian
capital market are:
Merchant Banking:
Merchant bankers are financial intermediaries between entrepreneurs and investors.
Merchant banks may be subsidiaries of commercial banks or may have been set up
by private financial service companies or may have been set up by firms and
individuals engaged in financial up by firms and individuals engaged in financial
advisory business. Merchant banks in India manage and underwrite new issues,
undertake syndication of credit, advice corporate clients on fund raising and other
financial aspects.
Since 1993, merchant banking has been statutorily brought under the regulatory
framework of the Securities Exchange Board of India (SEBI) to ensure greater
transparency in the operation of merchant bankers and make them accountable. The
RBI supervises those merchant banks which were subsidiaries, or are affiliates of
commercial banks.
Leasing and Hire-Purchase Companies:
Leasing has proved a popular financing method for acquiring plant and machinery
specially or small and medium sized enterprises. The growth of leasing companies
has been due to advantages of speed, informality and flexibility to suit individual
needs.
The Narasimhan Committee has recognised the importance of leasing and hire-
purchase companies in financial intermediation process and has recommended that:
(i) a minimum capital requirement should be stipulated; (ii) prudential norms and
guidelines in respect of conduct of business should be laid down; and (iii)
supervision should be based on periodic returns by a unified supervisory authority.
Mutual Funds:
It refers to the pooling of savings by a number of investors-small, medium and large.
The corpus of fund thus collected becomes sizeable which is managed by a team of
investment specialists backed by critical evaluation and supportive data.
A mutual fund makes up for the lack of investors knowledge and awareness. It
attempts to optimise high return, high safety and high liquidity trade off for
maximum of investors benefit. It thus aims at providing easy accessibility of media
including stock market in country to one and all, especially small investors in rural
and urban areas.
Mutual funds are most important among the newer capital market institutions.
Several public sector banks and financial institutions set up mutual funds on a tax
exempt basis virtually on same footing as the Unit Trust of India (UTI) and have
been able to attract strong investor support and have shown significant progress.
Government has now decided to throw open the field to private sector and joint
sector mutual funds. At present Securities and Exchange Board of India (SEBI) has
authority to lay down guidelines and to supervise and regulate working of mutual
funds.
The guidelines issued by the SEBI in January 1991, are related in advertisements and
disclosure and reporting requirements etc. The investors have to be informed about
the status of their investments in equity, debentures, government securities etc.
The Narasimhan Committee has made the following recommendations regarding
mutual funds: (i) creation of an appropriate regulatory framework to promote
sound, orderly and competitive growth of mutual fund business: (ii) creation of
proper legal framework to govern the establishments and operation of mutual funds
(the UTI is governed by a special statute), and (iii) equality of treatment between
various mutual funds including the UTI in the area of tax concessions.
Global Depository Receipts (GDR):
Since 1992, the Government of India has allowed foreign investment in the Indian
securities through the issue of Global Depository Receipts (GDRs) and Foreign
Currency Convertible Bonds (FCCBs). Initially the Euro-issue proceeds were to be
utilised for approved end uses within a period of one year from the date of issue.
Since there was continued accumulation of foreign exchange reserves with RBI and
there were long gestation periods of new investment the government required the
issuing companies to retain the Euro-issue proceeds abroad and repatriate only as
and when expenditure for the approved end uses were incurred.
Venture Capital Companies (VCC):
The aim of venture capital companies is to give financial support to new ideas and to
introduction and adaptation of new technologies. They are of a great importance to
technocrat entrepreneurs who have technical competence and expertise but lack
venture capital.
Financial institutions generally insist on greater contribution to the investment
financing, in which technocrat entrepreneurs can depend on venture capital
companies. Venture capital financing involves high risk.
According to the Narasimhan Committee the guidelines for setting up of venture
capital companies are too restrictive and unrealistic and have impeded their growth.
The committee has recommended a review and amendment of guidelines.
Knowing the high risk involved in venture capital financing, the committee has
recommended a reduction in tax on capital gains made by these companies and
equality of tax treatment between venture capital companies and mutual funds.
Other New Financial Intermediaries:
Besides the above given institutions, the government has established a number of
new financial intermediaries to serve the increasing financial needs of commerce
and industry is the area of venture Capital, credit rating and leasing etc.
(1) Technology Development and Information Company of India (TDICI) Ltd., a
technology venture finance company, which sanctions project finance to new
technology venture since 1989.
(ii) Risk Capital and Technology Finance Corporation (RCTFC) Ltd., which provides
risk capital to new entrepreneurs and offers technology finance to technology-
oriented ventures since 1988.
(iii) Infrastructure Leasing and Financial Services (IL&FS) Ltd., set up in 1988
focuses on leasing of equipment for infrastructure development.
(iv) The credit rating agencies namely credit rating information services of India
(CRISIS) Ltd., setup in 1988; Investment and Credit Rating Agency (ICRA) setup in
1991, and Credit Analysis and Research (CARE) Ltd., setup in 1993 provide credit
rating services to the corporate sector.
Credit rating promotes investors interests by providing them information on
assessed comparative risk of investment in the listed securities of different
companies. It also helps companies to raise funds more easily and at relatively
cheaper rate if their credit rating is high.
(v) Stock Holding Corporation of India (SHCIL) Ltd., setup in 1988, with the
objective of introducing a book entry system for transfer of shares and other type of
scrips thereby avoiding the voluminous paper work involved and thus reducing
delays in transfers.


Chief features of secondary market are:
(1) It Creates Liquidity:
The most important feature of the secondary market is to create liquidity in
securities. Liquidity means immediate conversion of securities into cash. This job is
performed by the secondary market.

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(2) It Comes after Primary Market:
Any new security cannot be sold for the first time in the secondary market. New
securities are first sold in the primary market and thereafter comes the turn of the
secondary market.
(3) It has a Particular Place:
The secondary market has a particular place which is called Stock Exchange.
However, it must be noted that it is not essential that all the buying and selling of
securities will be done only through stock exchange.
Two individuals can buy or sell them mutually. This will also be called a transaction
of the secondary market. Generally, most of the transactions are made through the
medium of stock exchange.
(4) It Encourages New Investment:
The rates of shares and other securities often fluctuate in the share market. Many
new investors enter this market to exploit this situation. This leads to an increase in
investment in the industrial sector of the country.


4 Main Features of the Primary Market (Type of Capital Market)


Main features of the primary market (type of Capital Market) are as follow:
(1) It is related with New Issues:
The first important feature of the primary market is that it is related with the new
issues. Whenever a company issues new shares or debentures, it is known as Initial
Public Offer (IPO).

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(2) It has No Particular Place:
Primary market is not the name of any particular place but the activity of bringing in
new issues is called the primary market.
(3) It has Various Methods of Floating Capital:
Following are the methods of raising capital in the primary market:
(i) Public Issue:
Under this method, the company issues a prospectus and invites the general public
to purchase shares or debentures.
(ii) Offer for Sale:
Under this method, firstly the new securities are offered to an intermediary
(generally firms of stock brokers) at a fixed price. They further resell the same to the
general public. The advantage of doing this is that the issuing company feels free
from the tedious work of making a public issue.
(iii) Private Placement:
Under this method, the company sells securities to the institutional investors or
brokers instead of selling them to the general public. They, in turn, sell these
securities to the selected clients at a higher price. This method is preferred as it is a
cheaper method of raising funds as compared to a public issue.
(iv) Right Issue:
This method is used by those companies who have already issued their shares. When
an existing company issues new shares, first of all it invites its existing shareholders.
This issue is called the right issue. In this case, the shareholder has the right either to
accept the offer for himself or assign a part or all of his right in favour of another
person.
(v) Electronic Initial Public Issue (e-IPOs):
Under this method, companies issue their securities through the electronic medium
(i.e. internet). The company issuing securities through this medium enters into a
contract with a Stock Exchange.
SEBI registered broker have to be appointed for the objective of accepting
applications. This broker regularly sends information about it to the company.
The company issuing security also appoints a Registrar, who helps in making the
issue a success by establishing contact with the stock exchange. (Whatever method,
out of the above five is adopted, it is the activity of the primary market.)
(4) It Comes before Secondary Market:
The transactions are first made in the primary market. The turn of the secondary
market comes later.

Role of Stock Exchange in the Development of Indian Capital Market:
A Study of National Stock Exchange

By

Rakesh Kumar Sharma
Senior Lecturer of Management
Ansal Institute of Technology
Gurgaon

Dr. Vijay Kumar Sharma
Associate Professor
Department of Commerce
Himachal Pradesh University
Shimla


Capital occupies a position so dominant to the economic theory of production and distribution that it is
natural to assume that it should occupy at least an equally important place in the theory and practice of
economic growth. The subject whether approached historically or analytically or from the standpoint of
policy, it is the process of capital accumulation that occupies the front of the stage. It is usually implied
that economic growth and capital accumulation with a high positive and significant correlation and
additions to the stock of capital can provoke and facilitate faster rate of growth even under the
circumstances which can be described as shortage of capital.
The aforesaid correlation between the process of economic growth and capital accumulation inspired the
earlier theorists of economic development and even in the works of modern economists output is still
assumed to be limited by capital whether there is abundant labour or not. A high rate of capital formation
usually results in rapid growth in the production and income, but more capital formation by itself will not
bring a corresponding acceleration in the growth of production. It also depends to a large extent on the
manner in which the capital is utilized.
Capital market means the market for all the financial instruments, short term and long term as also
commercial, industrial and government paper. The capital market deals with capital. The capital market
is a market where borrowing and lending of long term funds takes place. Capital markets deal in both
debt and equity. The governments both central and state raise money in the capital market, through the
issue of government securities. Capital markets refer to all the institutes and mechanisms of raising
medium and long-term funds, through various instruments available like shares, debentures, bonds etc.
Corporate both in the private sector as well as in the public sector raise thousands of crores of rupees in
these markets. The government, through Reserve Bank of India, as well as financial institutions also raise
a lot of money from these markets. Example of a well-developed markets are The Global depository
and American depository.
There are two important operation carried on in these markets:

1. The raising the new capital
2. Trading in securities already issued by the companies.
The important constituents of the capital market are:

1. The stock exchanges
2. Banks
3. The investment trusts and companies
4. Specialised financial institutions or development banks.
5. Mutual funds
6. Post office saving banks
7. Non banking financial institutions
8. International financial investors and institutions.
The supply in this market comes from saving from different sectors of the economy. These come from the
following sources:

1. Individuals
2. Corporates
3. Governments
4. Foreign countries
5. Banks
6. Provident funds
7. Financial institutions.
Moreover the establishment of National Stock Exchange and Bombay Stock Exchange has been turning
point in the working of capital markets. Recently the RBI has allowed participation of individuals in the
government securities markets. This move is likely to open new avenues for investment to individuals.
Moreover the Finance Ministry has announced the removal of income tax on dividend in the hands of the
receiver and no capital gains tax on investments made in equity after 1.3.03 and held for one year.
HISTORY OF THE INDIAN CAPITAL MARKET
The history of the capital market in India dates back to the eighteenth century when East India Company
securities were traded in the country. Until the end of the nineteenth century, securities trading was
unorganized and the main trading centres were Bombay (now Mumbai) and Calcutta (now Kolkata). Of
the two, Bombay was the chief trading centre wherein bank shares were the major trading stock. During
the American Civil War (1860-61), Bombay was an important source of supply for cotton. Hence, trading
activities flourished during the period, resulting in a boom in share prices. This boom, the first in the
history of the Indian capital market, lasted for a half a decade. The bubble burst on July 1, 1865, when
there was tremendous slump in share prices.
Trading was at that time limited to a dozen brokers: their trading place was under a banyan tree in front
of the Town Hall in Bombay. These stockbrokers organized an informal association in 1875-Native Shares
and Stock Brokers Association, Bombay. The stock exchanges in Calcutta and Ahmedabad, also industrial
and trading centres, came up later. The Bombay Stock Exchange was recognized in May 1927 under the
Bombay Securities Contracts Control Act, 1925.
The capital market was not well organized and developed during the British rule because the British
government was not interested in the economic growth of the country. As a result, many foreign
companies depended on the London capital market for funds rather than on the Indian capital market.
In the post-independence period also, the size of the capital market remained small. During the first and
second five-year plans, the government's emphasis was on the development of the agricultural sector and
public sector undertakings. The public sector undertakings were healthier than the private undertakings in
terms of paid-up capital but their shares were not listed on the stock exchanges. Moreover, the Controller
of Capital Issues (CCI) closely supervised and controlled the timing, composition, interest rates, pricing,
allotment, and floatation costs of new issues. These strict regulations demotivated many companies from
going public for almost four and a half decades.
In the 1950s, Century Textiles, Tata Steel, Bombay Dyeing, National Rayon, and Kohinoor Mills were the
favorite scrips of speculators. As speculation became rempant, the stock market came to be known as
'Satta Bazaar'. Despite speculation, non-payment or defaults were not very frequent. The government
enacted the Securities Contracts (Regulation) Act in 1956s was also characterized by the establishment of
a network for the development of financial institutions and state financial corporations.
The 1960s was characterized by wars and droughts in the country which led to bearish trends. These
trends were aggravated by the ban in 1969 on forward trading and 'badla', technically called 'contracts for
clearing.' 'Badla' provided a mechanism for carrying forward positions as well as borrowing funds.
Financial institutions such as LIC and GIC helped to revive the sentiment by emerging as the most
important group of investors. The first mutual fund of India, the Unit Trust of India (UTI) came into
existence in 1964.
In the 1970s, badla trading was resumed under the disguised form of 'hand-delivery contracts-A group.'
This revived the market. However, the capital market received another severe setback on July 6, 1974,
when the government promulgated the Dividend Restriction Ordinance, restricting the payment of
dividend by companies to 12 per cent of the face value or one-third of the profits of the companies that
can be distributed as computed under section 369 of the Companies Act, whichever was lower. This led to
a slump in market capitalization at the BSE by about 20 per cent overnight and the stock market did not
open for nearly a fortnight. Later came a buoyancy in the stock markets when the multinational
companies (MNCs) were forced to dilute their majority stocks in their Indian ventures in favour of the
Indian public under FERA, 1973. Several MNCs opted out of India. One undred and twenty-three MNCs
offered shares were lower than their intrinsic worth. Hence, for the first time, the FERA dilution created
an equity cult in India. It was the spate of FERA issues that gave a real fillip to the Indian stock markets.
For the first time, many investors got an opportunity to invest in the stocks of such MNCs as Colgate, and
Hindustan Liver Limited. Then, in 1977, a little-known entrepreneur, Dhirubhai Ambani, tapped the capital
market. The scrip, Reliance Textiles, is still a hot favourite and dominates trading at all stock exchanges.
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.
Participation by small investors, speculation, defaults, ban on badla, and resumption of badla continued.
Convertible debentures emerged as a popular instrument of resource mobilization in the primary market.
The introduction of public sector bonds and the successful mega issues of Reliance Petrochemicals and
Larsen and Toubro gave a new lease of life to the primary market. This, in turn, enlarged volumes in the
secondary market. The decade of the 1980s was characterized by an increase in the number of stock
exchanges, listed companies, paid up-capital, and market capitalization.
The 1990s will go down as the most important decade in the history of the capital market of India.
Liberalisation and globalization were the new terms coined and marketed during this decade. 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.
Major capital market scams took place in the 1990s. These shook the capital market and drove away
small investors from the market. The securities scam of March 1992 involving brokers as well as bankers
was on of the biggest scams in the history of the capital market. In the subsequent years owing to free
pricing, many unscrupulous promoters, who raised money from the capital market, proved to be fly-by-
night operators. This led to an erosion in the investors' confidence. The M S Shoes case, one such scam
which took place in March 1995, put a break on new issue activity.
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 was subject to nationwide competition by two new stock
exchanges-the National Stock Exchange, set up in 1994, and Over the Counter Exchange of India, 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 the late 1990s, the Information Technology (IT) scrips were dominant on the Indian bourses. These
scrips included Infosys, Wipro, and Satyam. They were a part of the favourite scrips of the period, also
known as 'New Economy' scrips, alongwith telecommunications and media scrips. The new economy
companies are knowledge intensive unlike the old economy companies that were asset intensive.
The Indian capital market entered the twenty-first century with the Ketan Parekh scam. As a result of this
scam, badla was discontinued from July 2001 and rolling settlement was introduced in all scrips. Trading
of futures commenced from June 2000, and Internet trading was permitted in February 2000. On July 2,
2001, the Unit Trust of India announced suspension of the sale and repurchase of its flagship US-64
scheme due to heavy redemption leading to panic on the bourses. The government's decision to privatize
oil PSUs in 2003 fuelled stock prices. One big divestment of international telephony major VSNL took
place in early February 2002. Foreign institutional investors have emerged as major players on the Indian
bourses. NSE has an upper hand over its rival BSE in terms of volumes not only in the equity markets but
also in the derivatives market.
It has been a long journey for the Indian capital market. Now the capital market is organized, fairly
integrated, mature, more global and modernized. The Indian equity market is one of the best in the world
in terms of technology. Advances in computer and communications technology, coming together on
Internet are shattering geographic boundaries and enlarging the investor class. Internet trading has
become a global phenomenon. The Indian stock markets are now getting integrated with global markets.
CONCEPT OF STOCK EXCHANGE
The Securities Contracts (Regulation) Act, 1956, has defined Stock Exchange as an "association,
organization or body of individuals, whether incorporated or not, established for the purpose of assisting,
regulating and controlling business of buying, selling and dealing in Securities".
Stock exchange as an organized security market provides marketability and price continuity for shares
and helps in a fair evaluation of securities in terms of their intrinsic worth. Thus it helps orderly flow and
distribution of savings between different types of investments. This institution performs an important part
in the economic life of a country, acting as a free market for securities where prices are determined by
the forces of supply and demand. Apart from the above basic function it also assists in mobilizing funds
for the Government and the Industry and to supply a channel for the investment of savings in the
performance of its functions.
The Stock Exchanges in India as elsewhere have a vital role to play in the development of the country in
general and industrial growth of companies in the private sector in particular and helps the Government
to raise internal resources for the implementation of various development programmes in the public
sector. As a segment of the capital market it performs an important function in mobilizing and
channelising resources which remain otherwise scattered. Thus the Stock Exchanges tap the new
resources and stimulate a broad based investment in the capital structure of industries.
A well developed and healthy stock exchange can be and should be an important institution in building up
a property base alongwith a socialist in India with broader distribution of wealth and income. Thus Stock
Exchange is a vital organ in a modern society. Without a stock exchange a modern democratic economy
cannot exist. The system of joint stock companies financed through the public investment as emerged
has put the vast means of finances almost to enterpreneurs' needs.
Finance from external sources mainly from the investing public can become possible only when an
institute like Stock Exchange provides opportunities for the conversion of scattered savings into profitable
investments with the promises of a reasonable yield and minimum element of risk. Such a mechanism as
provided by Stock Exchanges is not merely a source of capital but also a conduit which channelises the
savings into investment alongwith a free movement of capital.
With the probable exception of a totalitarian state no Government will be able to mobilize resources from
the public if the money market in the form of stock exchange does not exist. The Stock Exchange benefits
the entire community in a variety of way. It enables the producers to raise capital which directly and
indirectly gives gainful employment to millions of people on the one hand and helps consumers to get
;the variety of goods needed by them on the other. It provides opportunities to savers to store the value
either as temporary abode of purchasing power or as a permanent abode of purchasing power in the form
of financial assets. It also helps the segments of the savers who put their savings in commercial firms and
non-banking financial intermediaries because these institutions avail themselves of the services of Stock
Exchange to invest the money thus collected.
The Stock Exchange comes close enough to a perfectly competitive market allowing the forces of demand
and supply a reasonable degree of freedom to operate as compared to other markets specially the
commodity markets. This segment of the factor market can be considered as a perfect or a nearly perfect
market. Apart from providing a mechanism for transacting business in stock and shares it generates
genuine potential for a new entrepreneur to take up initiative in the private sector enterprises and allows
the expansion of investing community by offering gainful development of their otherwise sluggish or shy
capital. The Stock Exchange must assume the responsibility of protecting the rights of investors specially
the small investors in the Joint Stock Companies.


EVOLUTION OF STOCK EXCHANGES IN INDIA
Any attempt at raising the standard of living of the masses must address itself to the task of producing
the right quantity of the right types of goods and have them available for consumption at the right time.
This requires large-scale production through coordination of activities of hundreds of people under the
same roof even when the product is the simplest to make.
This, however, calls for raising vast amounts of financial resources for the purpose of acquiring land,
buildings and equipments, besides purchasing raw materials and employing labor. No one individual or a
small group of individuals is rich enough to provide all the capital required by modern business enterprise
and savings of hundreds, if not thousands, of people must be mobilized.
The corporate form of organization is well adapted to the task of raising capital from many people. This is
done by issuing or offering for sale at cash, different types of securities, that is, shares and bonds, which
offer to individual investors a means of productively employing capital/savings suited to his/her needs
and temperament.
The need for offering for sale different types of securities is obvious. Some people may desire safety of
the amount they have invested and a regular income from their investment. To them the corporation or
company may offer debenture bonds- a certificate issued under the seal of the company promising a
refund of the loan on a specified date and payment of interest at prescribed intervals.
Other investors may be willing to commit their savings for an indefinite period of time and to assume
greater risk while still desiring safety of capital and stability of income. To them the corporation will sell
preference shares. Still other investors may be willing to shoulder the business risk that goes along with
the ownership of the business in the hope that the profit realized would be large enough to compensate
the greater risk they are assuming.
But no one will buy these securities unless there exists an organized market where the holders can
dispose of them, should the need arise, and new investors can purchase them. Over the years, such
organized markets have come into existence in all democratic and capitalistic countries including India.
Such a market is called stock market or a stock exchange in English speaking countries and a 'brouse' in
continental Europe. There is, obviously, no need for stock exchange in Communist countries since in such
countries all the productive organizations are owned by the government.
Organised stock exchange in India are of recent origin. As late as 1933 there were only three stock
exchanges one each at Ahmedabad, Bombay and Calcutta, but trading in securities was in vogue
much prior to that year. Of course, no one can tell when the first transaction took place, however, it is
generally agreed that business in securities had begun as early as the concluding years of the
18
th
century, that is, between the years 1790 and 1800 A.D.
Existing structure of the stock exchanges in India
The Act recognizes stock exchanges with different legal structure. Presently the stock exchanges which
are recognised under the Securities Contracts (Regulation) Act in India, could be segregated into two
broad groups 20 stock exchanges which were set up as companies, either limited by guarantees or by
shares, and the 3 stock exchanges which are functioning as associations of persons (AOP) viz. BSE,
Ahmedabad Stock Exchange and Indore Stock Exchange. The 20 stock exchanges which are companies
are: the stock exchanges of Bangalore, Bhubaneswar, Calcutta, Cochin, Coimbatore, Delhi, Gauhati,
Hyderabad, Interconnected SE, Jaipur, Ludhiana, Madras, Magadh, Managalore, NSE, Pune, OTCEI,
Saurashtra-Kutch, Uttar Pradesh, and Vadodara. Of these, the stock exchanges of Ahmedabad,
Bangalore, BSE, Calcutta, Delhi, Hyderabad, Madhya Pradesh, Madras and Gauhati were given permanent
recognition by the Central Government at the time of setting up of these stock exchanges. Apart from
NSE, all stock exchanges whether established as corporate bodies or Association of Persons (AOPs), are
non-profit making organizations.
Powers that may be exercised by the Stock Exchange
The powers of the stock exchange are to be exercised as per provisions in its bye-law. As per SCRA Act
any recognised stock exchange may, subject to the previous approval of the[Securities and Exchange
Board of India make bye-laws for the regulation and control of contracts. The bye-laws can provide for
the exercise of following powers by the stock exchange

a. The opening and closing of markets and the regulation of the hours of trade;

b. Set up a clearing house for the periodical settlement of contracts and differences thereunder, the
delivery of and payment for securities, the passing on of delivery orders and the regulation and
maintenance of such clearing house;

c. The regulation or prohibition of blank transfers;

d. The regulation, or prohibition of badlas or carry-over facilities;

e. The fixing, altering or postponing of days for settlements;

f. The determination and declaration of market rates, including the opening, closing, highest and lowest
rates for securities;

g. The terms, conditions and incidents of contracts, including the prescription of margin requirements, if
any, and conditions relating thereto, and the forms of contracts in writing;

h. The regulation of the entering into, making, performance, rescission and termination, of contracts,
including contracts between members or between a member and his constituent or between a member
and a person who is not a member, and the consequences of default or insolvency on the part of a seller
or buyer or intermediary, the consequences of a breach or omission by a seller or buyer, and the
responsibility of members who are not parties to such contracts;

i. The regulation of taravani business including the placing of limitations thereon;

j. The listing of securities on the stock exchange, the inclusion of any security for the purpose of dealings
and the suspension or withdrawal of any such securities, and the suspension or prohibition of trading in
any specified securities;

k. The method and procedure for the settlement of claims or disputes, including settlement by
arbitration;

l. The levy and recovery of fees, fines and penalties

m. The regulation of the course of business between parties to contracts in any capacity;

n. The exercise of powers in emergencies in trade(which may arise, whether as a result of pool or
syndicated operations or cornering or otherwise) including the power to fix maximum and minimum prices
for securities;

o. The regulation of dealings by members for their own account;

p. The separation of the functions of jobbers and brokers;

q. The limitations on the volume of trade done by any individual member in exceptional circumstances;

r. Fixing the obligation of members to supply such information or explanation and to produce such
documents relating to the business as the governing body may require.

THE NATIONAL STOCK EXCHANGE OF INDIA LIMITED
The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group
on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange
by financial institutions (FIs) to provide access to investors from all across the country on an equal
footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the
behest of the Government of India and was incorporated in November 1992 as a tax-paying company
unlike other stock exchanges in the country.
On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April
1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The
Capital Market (Equities) segment commenced operations in November 1994 and operations in
Derivatives segment commenced in June 2000.
NSE's Mission
NSE's mission is setting the agenda for change in the securities markets in India. The NSE was set-up
with the main objectives of:

1. Establishing a nation-wide trading facility for equities, debt instruments and hybrids,

2. Ensuring equal access to investors all over the country through an appropriate communication
network,

3. Providing a fair, efficient and transparent securities market to investors using electronic trading
systems, enabling shorter settlement cycles and book entry settlements systems, and

4. Meeting the current international standards of securities markets.

5. The standards set by NSE in terms of market practices and technologies have become industry
benchmarks and are being emulated by other market participants. NSE is more than a mere market
facilitator. It's that force which is guiding the industry towards new horizons and greater opportunities.
Corporate Structure of NSE
NSE is one of the first de-mutualised stock exchanges in the country, where the ownership and
management of the Exchange is completely divorced from the right to trade on it. Though the impetus for
its establishment came from policy makers in the country, it has been set up as a public limited company,
owned by the leading institutional investors in the country.
From day one, NSE has adopted the form of a demutualised exchange - the ownership, management and
trading is in the hands of three different sets of people. NSE is owned by a set of leading financial
institutions, banks, insurance companies and other financial intermediaries and is managed by
professionals, who do not directly or indirectly trade on the Exchange. This has completely eliminated any
conflict of interest and helped NSE in aggressively pursuing policies and practices within a public interest
framework.
The NSE model however, does not preclude, but in fact accommodates involvement, support and
contribution of trading members in a variety of ways. Its Board comprises of senior executives from
promoter institutions, eminent professionals in the fields of law, economics, accountancy, finance,
taxation, etc, public representatives, nominees of SEBI and one full time executive of the Exchange.
While the Board deals with broad policy issues, decisions relating to market operations are
delegated by the Board to various committees constituted by it. Such committees includes
representatives from trading members, professionals, the public and the management. The
day-to-day management of the Exchange is delegated to the Managing Director who is
supported by a team of professional staff. Distinctive Features of NSE
NSC is able to radically transform the Indian Capital market during the decade of its existence. It has
changed the mindset of all market players and has built investor confidence in the secondary markets.
"The NSE is different from most other stock exchanges in India where membership automatically implies
ownership of the exchange. The ownership and management of NSE have been totally delinked from the
right of trading members. This pattern has been adopted.
Since broker owned stock exchanges are also broker managed there is a clear conflict of interest. This is
a structurally unstable model, as it inevitably leads to emergence of power groups, and investor interests
invariably take a back seat.
Management Structure
The NSE has tried to benefit from the long experience and expertise of its trading members in their
advisory capacities. It Board of Directors does not have any representative of brokers.
The Executive Committee, which is concerned with the management of the exchange, has four brokers
nominated by the board to reflect different types of interests in the market. But the exchange has
appointed different committees to advise in areas such as best market practices, settlement procedures
and risk containment systems.
Securities industry professional and trading members man these committees and NSE staff concerned
with respective areas of exchange operations also participate in them. The day-t-day management of NSE
is delegated is delegated to the Managing Director who is supported by a team of professional staff.
Introduction of Technology Initiatives
Stock exchanges today have to rely increasingly on information technology to stay competitive in
delivering services. This is primarily because of newer trading channels used for communicating and
transacting like Internet and On-line security trading.
The IT department of NSE employs 150 IT professionals forming a third of its total staff strength. The
exchange has invested close to Rs.400 Crores in computers, software and communication equipment. It is
therefore recognized as one of "Top IT User" organizations.
In line with global trends NSE is structured and operates much like an information technology company.
It has the largest VSAT network in this part of the world with a huge and complex web of hardware and
software. It has a detailed disaster recovery site that mirrors all operating systems. The NSE has set up
its own Internet Webster, which is visited daily by four Lakh persons
Stock Exchange Technology
The modern stock exchange technology does not need the traditional type of brokers to match investors'
orders as they used to do on the physical-trading floor. The automated Trading screens can match buy
and sell orders without the intervention of brokers. Today brokers are needed only for settlement
responsibilities. NSE introduced a nation-wide VSAT driven screen based trading system.
Operations commenced in Mumbai and rapidly spread all over India. NSE today offers investors trading
facilities in over 280 cities and town through 4000 terminals. For the first time NSE introduced in India
screen based trading with automated matching.
The system conceals the identity of the parties to an order or trade. This help better functioning of the
market as disclosures of identity would put most members at a disadvantage. The trading system
operates on price time priority. This means given the same set or orders, the orders that come first
receive priority in matching. When an order does not find an immediate match in remains in the system
and is displayed to the whole market, till a fresh order comes in or the earlier order is modified or
cancelled. The market screens at any point of time give the members complete information on the total
order depth in a security, the high price, the low price, the last traded price and other related information.
Nationwide Trading Facility
Nationwide Trading system of NSE has immensely benefited investors in all places, which do not have a
stock exchange nearby. Earlier their orders took three days for confirmation. This time lag is now a thing
of the past, as the orders and prices are visible and instantly available to all investors across the country,
representing a dramatic change in investor access and protection. This has served to unify the earlier
fragmented market into a single national order book, bringing with it unprecedented increases in liquidity
and transparency.
Risk Containment Measures -Investors freed from Counterparty Risks
NSE introduced risk containment measures like mark to market margins, exposure limits etc., bringing
enormous safety to fast growing and changing electronic market.
NSE has introduced the concept of a clearing corporation, by which the counterparty risk of each member
is taken by NSCC and the financial settlement guaranteed by the Corporation. Counterparty risk is being
guaranteed through the tight risk management system and an innovative method of on-line position
monitoring and automatic disablement. NSE introduced this system of automatic disablement to control
grave risks. Under this system each broker of NSC is given a limit up to which he can trade. This limit is
fixed in relation to the money he deposits with NSC or its clearing corporation. This money can be cash or
pledge of securities or Bank Guarantee. Currently the limit is 8.5 times the money deposited.
The trading system works in such a way that the broker gets warning messages after he crosses 70% of
his trading limit and the moment he reaches 100% of his limit NSE computer disconnects all his terminals
from the system so that he cannot trade further. He is allowed to trade again only when he brings
additional deposits or authorise NSC to reduce his trades either by selling or buying on his behalf.
NSE Milestones
November 1992 Incorporation
April 1993 Recognition as a stock exchange
May 1993 Formulation of business plan
June 1994 Wholesale Debt Market segment goes live
November 1994 Capital Market (Equities) segment goes live
March 1995 Establishment of Investor Grievance Cell
April 1995 Establishment of NSCCL, the first Clearing Corporation
June 1995 Introduction of centralised insurance cover for all trading members
July 1995 Establishment of Investor Protection Fund
October 1995 Became largest stock exchange in the country
April 1996 Commencement of clearing and settlement by NSCCL
April 1996 Launch of S&P CNX Nifty
June 1996 Establishment of Settlement Guarantee Fund
November 1996 Setting up of National Securities Depository Limited, first depository in India, co-promoted by
NSE
November 1996 Best IT Usage award by Computer Society of India
December 1996 Commencement of trading/settlement in dematerialised securities
December 1996 Dataquest award for Top IT User
December 1996 Launch of CNX Nifty Junior
February 1997 Regional clearing facility goes live
November 1997 Best IT Usage award by Computer Society of India
May 1998 Promotion of joint venture, India Index Services & Products Limited (IISL)
May 1998 Launch of NSE's Web-site: www.nse.co.in
July 1998 Launch of NSE's Certification Programme in Financial Market
August 1998 CYBER CORPORATE OF THE YEAR 1998 award
February 1999 Launch of Automated Lending and Borrowing Mechanism
April 1999 CHIP Web Award by CHIP magazine
October 1999 Setting up of NSE.IT
January 2000 Launch of NSE Research Initiative
February 2000 Commencement of Internet Trading
June 2000 Commencement of Derivatives Trading (Index Futures)
September 2000 Launch of 'Zero Coupon Yield Curve'
November 2000 Launch of Broker Plaza by Dotex International, a joint venture between NSE.IT Ltd. and i-flex
Solutions Ltd.
December 2000 Commencement of WAP trading
June 2001 Commencement of trading in Index Options
July 2001 Commencement of trading in Options on Individual Securities
November 2001 Commencement of trading in Futures on Individual Securities
December 2001 Launch of NSE VaR for Government Securities
January 2002 Launch of Exchange Traded Funds (ETFs)
May 2002 NSE wins the Wharton-Infosys Business Transformation Award in the Organization-wide
Transformation category
October 2002 Launch of NSE Government Securities Index
January 2003 Commencement of trading in Retail Debt Market
June 2003 Launch of Interest Rate Futures
August 2003 Launch of Futures & options in CNXIT Index
June 2004 Launch of STP Interoperability
August 2004 Launch of NSE's electronic interface for listed companies
June 2005 Launch of Futures & options in BANK Nifty Index
November 2006 NSE awarded 'Derivative Exchange of the Year', by Asia Risk magazine

To conclude we can say that India has a long tradition of functioning capital markets. The process of
reform of capital markets started in 1992 and aimed at removing direct government control and replacing
it by a regulatory framework based on transparency and disclosure. The first step was taken in 1992
when SEBI was elevated to a full-fledged capital market regulator. An important policy initiative in 1993
was the opening of capital markets for foreign institutional investors and allowing Indian companies to
raise capital abroad. FII registrations in the country have gone up significantly over the years. The
number of registered FIIs has gone up from 823 in December 2005 to 972 in October 2006. FIIs had
made $10.7 billion worth of investment (Rs 47,181 crore) in calendar 2005. The FIIs have been rewarded
well by attractive valuations and increasing returns. The depository and share dematerialization systems
have been introduced to enhance the efficiency of the transaction cycle. A number of significant reforms
have been implemented in the spot equity and related exchange traded derivatives markets since the
early 1990s. For instance, spot prices are mostly market-determined, trading volumes in the derivatives
market exceed those in spot markets and market practices such as speed of settlement and
dematerialization are close to international best practices.
As we can see that the stock exchange is now seen increasingly for what it really is, namely an essential
financial infrastructure for any economy. It is this view of the exchange as infrastructure that
motivated the Indian government to encourage the establishment of the National Stock Exchange of India
at Mumbai, which in a few short years completely revolutionized the Indian capital market. The
transparency of the price discovery process which results, especially in technology driven stock exchanges
encourages participation in economic activity and enhances the efficient utilization of resources. In
addition, the stock market is increasingly perceived as an electronic marketplace for buyers and sellers of
securities to transact their business, under the full view of observers.


What it is:
The capital markets are a source of financing for companies around the world. The most famous of the capital
markets are the stock market and bond market.
How it works/Example:
Companies utilize capital markets to raise money for projects by issuing stock IPOs, bonds and short-term
money market securities. Individual investors wish to earn interest or dividends on their savingscan meet companies
looking to raise funds by issuing securities.
To illustrate how a corporate bond moves through capital markets, suppose AB Co. needs to raise $1000. AB Co.
offers a 10-year bond on the bond market with a par value of $1000. The bond is purchased by someone wishing to
earn interest on the $1000 that they have available. AB Co. receives the $1000 in cash and the investor receives a
bond and the promise of repayment plus interest. Should the bondholder later decide he no longer wants the bond,
he can sell it to another investor in the marketplace.
To illustrate using stocks, suppose AB Co. decided to raise more funds by issuing ten new shares of stock for $100
per share. AB Co. offers these shares in the market and someone purchases all ten for $1000 total. This time, the
investor obtains stock certificates giving him partial ownership of the company. AB Co. gets the $1000 in funds they
wanted to raise. As in the example above, should this investor wish to no longer hold these stocks, he can sell them
to another investor in the stock market for the current market price. Should the company have extra cash, it could buy
the stock back as well.
Why it Matters:
Capital markets serve two purposes. Firstly, they bring together investors holding capital and companies seeking
capital through equity and debt instruments. Secondly, and almost more importantly, they provide a
secondary market where holders of these securities can exchange them with one another at market prices. Without
the liquidity created by a secondary market, investors would be less inclined to purchase equity and debt instruments
for fear of being unable to unload them in the future.

Definition of capital markets
Capital markets are the markets where securities such as shares and bonds are issued to raise medium to long-term
financing, and where the securities are traded. The securities might be issued by a company which could issue
shares or bonds to raise money. Bonds could also be issued by other entitiies in need of long-term cash, such as
regional or national governments. The securities are issued in what is known as the primary market and traded in the
secondary market. In the primary market a company would have face to face meetings to place its securities with
investors. A company might work with an investment bank who would act as an intermediary and underwrite the
offering.




The Importance of Capital Market for the Economic
Development of India
Posted by anil nandyala on March 16, 2013 at 12:07
View Blog
Introduction
Capital Market is a channel through which the wealth of savers are put into long-term productive use. Both the Equity and Bond
markets are parts of Capital Markets. Governments and Companies use Capital Markets to raise money for their long-term
investments. The capital is raised through debt and equity instruments. Capital Markets are of two types: Primary market is a
market for new shares and secondary market is a market for trading existing securities.
History of Capital Markets
The origin of Capital Markets goes back to the early 17
th
century. The Dutch were the pioneers in capital markets and they
successfully leveraged the power of capital markets to withstand the British and won three wars against them, despite being a
smaller nation in all aspects. Finally, British collaborated with the Dutch and became an expert in leveraging Capital Markets that
led to the rise of the British Empire. One major reason for the success of British Empire over the French, despite France having
population three times that of the British, was that they were able to raise capital from public at low interest rates, whereas its
counter parts, such as French didnt have superior financial markets and their cost of raising the capital from public was very
high.
In the United States of America, the stabilization of securities market begun with the passing of the Blue Sky Law in 1911 in
the Kansas State to protect investors through anti-fraud provisions, regulation of brokers, dealers and registration of securities.
The technology innovation in United States made them the biggest economy in the world. Information Technology led to
paradigm shift and revolutionized the structure and functioning of Capital Markets by reducing information asymmetry and
assisting faster settlements of transactions. The most significant development in Capital Markets is the way the technology has
erased the geographical boundaries.
The story of Capital Markets in India dates back to the 18
th
century when trading shares of East India commenced. The real story
of Indias Capital Markets started in July 1875 with the formation of Stock Exchange in Mumbai by the brokers. Indias Capital
Market in terms of GDP raised from 75 percent in 1995 to 130 percent of GDP in 2005. But the relative growth compared to US,
Malaysia and South Korea remains low, indicating immense untapped potential.

Significance of Capital Markets
Allocation of Capital: One of the major economic benefits generated by development of the Capital Markets is improved
allocation of capital. The prices of Equity and Debt respond immediately to change in market conditions and quickly embodied in
current asset prices. The signal created by the price change encourages or discourages capital inflow to an industry/company.
Allocation of Risk: The other major economic benefit generated by development of the Capital Markets is improved allocation
of Risk. Capital Markets facilitates investors to earn returns based on their risk taking ability. Investors invest in high-risk
instruments either because they are less risk averse or because the new risk is unaffected or negatively correlated with other
investments in the portfolio.
Mobilization of Savings: Capital Markets is a good channel to move idle savings to most productive units in the economy. In
any economy savings are moved to borrowers through Capital Markets or through Banking Financial Corporations/ Non-Banking
Financial Corporations. In the first case the transaction occurs through the exchange of securities. In case of common stock the
transfer results in ownership and in case of debt there is a contractual obligation to pay interest rate and debt. The advantage of
investing in Capital Markets is the price of the securities fluctuates in response to change in supply and demand and can be
brought and sold to third parties. As a result, the investor usually has a good idea of what the securities are worth and can obtain
liquid funds by selling the securities. On the other hand, in the second case the investor doesnt have claim over the ultimate
beneficiary of the funds and the price of the claim doesnt fluctuate in response to shift in supply and demand.
Policy Making: Capital Markets play an important role in improving policy framework of a country. This is because when policy
makers embark on bad policies the equity and bond prices tend to fall. Capital markets anticipate the future prospects of a country
thus they reduce politicians incentives to do things that provide short-term gains, but that brings long-term costs that will hurt the
economy.
The postponement of new GAAR proposal and Retrospective taxation amendments shows how Capital Markets impact policy
making. After amendment of GAAR and Retrospective taxation amendments in budget last year (2012) both FDI and FII inflows
dropped and stock market fell down that led to fall in rupee value and credit rating by top rating agencies.
Micro, Small and Medium Enterprises (MSME): Traditionally MSME are the ones that faced difficulty in obtaining capital at
low interest rate, but MSME sector contributes 8% of the country's GDP, 45% of the manufactured output and 40% of our
exports. It provides employment to about 6 crore people and are the largest generator of employment in Indian Economy.
Apart from the facts mentioned above, about the significance of Capital Markets, there is a vast amount of empirical data that
supports the importance of Capital Markets facilitating economic growth. The view that Capital Markets is associated with
superior economic performance can be verified by looking the correlation between Real GDP VS performance of Capital
Markets in developed economies. Below is the list of superior economic performance in five major respects in countries with
good Capital Market environment.
Higher productivity growth
Higher real-wage growth
Greater employment opportunities
Greater macroeconomic stability
Greater homeownership
Conclusion
If one looks into history and traces back the reasons for flourishing of economies such as Dutch and United Kingdom the reasons
for the success of these economies lies in piping the public saving in to long-term investments. The Dutch were the first to
procure funds from public; they raised capital to trade and maintain battle ships in order to protect their ships from the pirates.
British had replicated the Dutch financial system and became an Empire and eventually the countries that replicated good Capital
Market practices, like United States, also flourished.
The Capital Markets play a significant role in any economy from allocation of Capital and Risk to Policy Making. If there is any
single factor that makes a huge impact in improving the GDP of a country, it is the effective allocation of capital to the Industry
and Government. Capital Market is the best channel to route the savings into long-term productive use. If we look in to the
economy and find the enterprises that were hit by high cost of capital, one can observe that MSME that provides highest number
of employment opportunities were worst hit by it. If a country develops and adopts best Capital Market practices they create
multiple effects and helps in reviving the economy. The SME Exchange is a welcome move for the Small and Medium Scale
Enterprises, but it is alone not enough to revive MSME.
Capital market is the heart of any economy through which the savings are channelized into effective long-term investments. A
developed and vibrant Capital Market will immensely contribute towards speedy economic growth and development.















In the secondary market the original investors can sell the securities they have just bought. The trading of the
securities is opened up to all the participants in a particular market. Short-term funds are raised in the money
markets.


capital markets in the news
In September 2013, Jamie Dimon, the JP Morgan chief executive, told staff he was simplifying the bank's structure in
response to the regulatory probes. He also said the business continued to be strong and cited "groundbreaking
transactions" in capital markets, which included a role in managing the sale of Verizon's giant bond offering.
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Q. 1 : What is Capital Market ? Explain the structure and constituents of Capital Market in India.
Ans. A) CAPITAL MARKET :-
Capital market deals with medium term and long term funds. It refers to all facilities and
the institutional arrangements for borrowing and lending term funds (medium term and long
term). The demand for long term funds comes from private business corporations, public
corporations and the government. The supply of funds comes largely from individual and
institutional investors, banks and special industrial financial institutions and Government.
B) STRUCTURE I CONSTITUENTS I CLASSIFICATION OF CAPITAL MARKET :-
Capital market is classified in two ways
1) CAPITAL MARKET IN INDIA



Gild Edged Industrial Development Financial
Market Securities Financial intermediaries
Market Institutions (DFIs)
a) Gilt - Edged Market :-
Gilt - Edged market refers to the market for government and semi-government securities,
which carry fixed rates of interest. RBI plays an important role in this market.
b) Industrial Securities Market :-
It deals with equities and debentures in which shares and debentures of existing
companies are traded and shares and debentures of new companies are bought and sold.
c) Development Financial Institutions :-
Development financial institutions were set up to meet the medium and long-term
requirements of industry, trade and agriculture. These are IFCI, ICICI, IDBI, SIDBI, IRBI, UTI,
LIC, GIC etc. All These institutions have been called Public Sector Financial Institutions.
d) Financial Intermediaries :-
Financial Intermediaries include merchant banks, Mutual Fund, Leasing companies etc.
they help in mobilizing savings and supplying funds to capital market.
2) The Second way in which capital market is classified is as follows :-
CAPITAL MARKET IN INDIA

Primary market Secondary market
a) Primary Market :-
Primary market is the new issue market of shares, preference shares and debentures of
non-government public limited companies and issue of public sector bonds.
b) Secondary Market
This refers to old or already issued securities. It is composed of industrial security market
or stock exchange market and gilt-edged market.

Q. 2: Explain the role and importance of capital market in India. (Mar. 11) OR
Write note on Importance I Significance of Capital Market in Economic Development.
Ans. A) 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. Mobilisation 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 mobilise 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 mobilising 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
corporates, and thereby promotes efficiency.
7. Proper Channelisation Of Funds :-
The prevailing market price of a security and relative yield are the guiding factors for the people
to channelise their funds in a particular company. This ensures effective utilisation 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
liberalised 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.
12. Revival Of Sick Units :-
The Commercial and Financial Institutions provide timely financial assistance to viable sick units
to overcome their industrial sickness. To help the weak units to overcome their financial
industrial sickness banks and FIs may write off a part of their loan.
Q. 3: Discuss / Explain the growth of Capital Market in India.

Ans. A) GROWTH OF CAPITAL MARKET IN INDIA:-
GROWTH OF CAPITAL MARKET

End of December 1975-76 2004-05
i) Stock Exchanges (No.) 8 23
ii) Market Value of Capital ( in Crore) 3,273 16,98,428
iii) Capital Issues (Rs. in Crore) 98 60,502
iv) Capital raised as % of gross domestic

saying(%) 0.7 7.0
Source: - Tata Services Ltd., statistiscal outline of India 2005-06.










After Independence capital market has shown a remarkable progress. The first organised stock
exchange was established in India at Bombay in 1887. When the Securities Contracts
(Regulation) Act 1956 was passed, only 7 Stock exchanges Viz. Mumbai, Ahmedabad, Kolkata,
Chennai, Delhi, Hyderabad and Indore, received recognition. By end of March 2004, the number
of stock exchanges increased to 23.

1) Primary I New Issues Market :-
After liberalisation policy of 1991 and the abolition of capital issues control with effect from May
29,1992, the primary market got a tremendous , boost. This can be seen from following points :-
a) New Capital Issues by Private Sector :-
The number of new capital issues by private sector was only 364 in 1990-91 and the amount
raised by them was `.4,312 crore. The number of new capital issues rose to 1,678 in 1994-95
and the amount raised by them was `. 26,418 crore. Since 1995 the capital market was sluggish
and the resources raised fell to `.. 10,409 crores in 1996-97. In 2003-04, the amount raised from
new capital issues was only `.3,210 crores. In 2004 it increased again to `.33,475 crore and in
2005`.30,325 crore of resources were raised on this market. The primary issues of debt
securities felt a low of around `. 66 crore in 2005.

b) Public Sector Bonds :-
The resources raised by issuing bonds by Public Sector undertakings rose from `.354 crores in
1985-86 to 7,491 crore in 2004-05.
c) Mutual Funds :-
In 1997-98, the total number of mutual funds in the country was 34.
In 1997-98, the mutual funds were able to mobilise `.4,064 crore. In 1999-2000 mutual funds
mobilised a record of `.22,117 crore. There was a massive resource mobilisation of `..41,570
crore by private sector mutual funds in 2003-04, pushing up the total resource mobilisation by all
mutual funds to as high as `.47,873 crore. In 2004-05, resource mobilisation once again
declined to `.3,015 crore.
2) Secondary Market :-
a) Industrial Securities Market :-
In 1991-92, there was an huge rise in the share prices. The RBI All India Index Number of
Ordinary Share Prices rose to 1,485.4 in 1991-92 (base year 1980-81), showing a gain of
181.4%. In 1992-93 due to irregularities the Stock Market declined. The years 1993 and 1994
saw increased activity in stock market due to :- Better performance of companies, Improvement
in Balance of Payment position, Increasing investment by Foreign Institutional investors etc.
India enjoys 2nd.largest investor population in the world next to U.S.A.
b) Bombay Stock Exchange (BSE) :-
The scrip movements In Bombay Stock Exchange reflected the same trend as the RBI index
(BSE sensitive index with base 1978-79 = 100). Market capitalisation of Bombay Stock
Exchange was`.12, 01,207 crore in 2003-04. It rose to `.30, 66,076 crore in 2008-09.
c) National Stock Exchange (NSE) :-
The NSE of India was set up in 1992 and started its operations in 1994. It provides facility for
trading of equity investments, warrants, debentures, preference shares etc. The market
capitalisation of NSE reached to `.28, 96,194 crore in 2008-09.
d) Over The Counter Of Exchange Of India :-
It was set in August 1989 and started .operating since 1992.
e) Financial Intermediaries :-
Financial Intermediaries are the latest trend in Indian Capital Market. They have to play an
important role in field of venture capital, credit rating etc.

Q. 4: Explain the factors contributing I responsible for the growth and development of Capital
Market in India.
Ans. A) FACTORS CONTRIBUTING TO THE GROWTH AND DEVELOPMENT OF CAPITAL
MARKET :-
1) Growth Of Development Banks And Financial Institutions :-
For providing long term funds to industry, the government set up Industrial Finance Corporation
in India (IFCI) in 1948. This was followed by a number of other development banks and
institutions like the Industrial Credit and Investment Corporation of India (ICICI) in 1955,
Industrial Development Bank of India (IDBI) in 1964, Industrial Reconstruction Corporation of
India (IRCI) in 1971, Foreign Investment Promotion Board in 1991, Over the Counter Exchange
of India (OTCEI) in 1992 etc. In 1969, 14 major commercial banks were nationalised. Another 6
banks were nationalised in 1980. These financial institutions and banks have contributed in
widening and strengthening of capital market in India.
2) Setting Up Of SEBI :-
The Securities Exchange Board of India (SEBI) was set up in 1988 and was given statutory
recognition in 1992.
3) Credit Rating Agencies :-
Credit rating agencies provide guidance to investors / creditors for determining the credit risk.
The Credit Rating Information Services of India Limited (CRISIL) was set up in 1988 and
Investment Information and Credit Rating Agency of India Ltd. (ICRA) was set up in 1991.
These agencies are likely to help the development of capital market in future.
4) Growth Of Mutual Funds :-
The mutual funds collects funds from public and other investors and channelise them into
corporate investment in the primary and secondary markets. The first mutual fund to be set up
in India was Unit Trust of India in 1964. In 2007-08 resources mobilised by mutual funds were
Rs. 1,53,802 crores.
5) Increasing Awareness :-
During the last few years there have been increasing awareness of investment opportunities
among the public. Business newspapers and financial journals (The Economic Times, The
Financial Express, Business India, Money etc.) have made the people aware of new long-term
investment opportunities in the security market.
6) Growing Public Confidence
A large number of big corporations have shown impressive growth. This has helped in building
up the confidence of the public. The small investors who were not interested to buy securities
from the market are now showing preference in favour of shares and debentures. As a result,
public issues of most of the good companies are now over-subscribed many times.
7) Legislative Measures :-
The government passed the companies Act in 1956. The Act gave powers to government to
control and direct the development of the corporate enterprises in the country. The capital
Issues (control) Act was passed in 1947 to regulate investment in different enterprises, prevent
diversion of funds to non-essential activities and to protect the interest of investors. The Act was
replaced in 1992.
8) Growth Of Underwriting Business :-
The growing underwriting business has contributed significantly to the development of capital
market.
9) Development Of Venture Capital Funds :-
Venture capital represents financial investment in highly risky projects with a hope of earning
high returns After 1991, economic liberalisation has made possible to provide medium and long
term funds to those firms, which find it difficult to raise funds from primary markets and by way
of loans from FIs and banks.
10) Growth Of Multinationals (MNCs) :-
The MNCs require medium and long term funds for setting up new projects or for expansion and
modernisation. For this purpose, MNCs raise funds through loans from banks and FIs. Due to
the presence of MNCs, the capital market get a boost.
11) Growth Of Entrepreneurs :-
Since 1980s, there has been a remarkable growth in the number of entrepreneurs. This created
more demand for short term and long term funds. FIs, banks and stock markets enable the
entrepreneurs to raise the required funds. This has led to the growth of capital market in India.
12) Growth Of Merchant Banking :-
The credit for initiating merchant banking services in India goes to Grindlays Bank in
1967,followed by Citibank in 1970. Apart from capital issue management, merchant banking
divisions provide a number of other services including provision of consultancy services relating
to promotion of projects, corporate restructuring etc.

Q.5: Explain the recent reforms introduced in Indian Capital Market. or
What measures have been initiated by Government of India to
strengthen the capital market ?
Ans. A) REFORMS I DEVELOPMENTS IN CAPITAL MARKET SINCE 1991:-
The government has taken several measures to develop capital market in post-reform period,
with which the capital market reached new heights. Some of the important measures are
1) Securities And Exchange Board Of India (SEBI) :-
SEBI became operational since 1992. It was set with necessary powers to regulate the activities
connected with marketing of securities and investments in the stock exchanges, merchant
banking, portfolio management, stock brokers and others in India. The objective of SEBI is to
protect the interest of investors in primary and secondary stock markets in the country.
2) National Stock Exchange (NSE) :-
The setting up to NSE is a landmark in Indian capital markets. At present, NSE is the largest
stock market in the country. Trading on NSE can be done throughout the country through the
network of satellite terminals. NSE has introduced inter-regional clearing facilities.
3) Dematerialisation Of Shares :-
Demat of shares has been introduced in all the shares traded on the secondary stock markets
as well as those issued to the public in the primary markets. Even bonds
and debentures are allowed in demat form. The advantage of demat trade is that it involves
Paperless trading.
4) Screen Based Trading :-
The Indian stock exchanges were modernised in 90s, with Computerised Screen Based Trading
System (SBTS), It cuts down time, cost, risk of error and fraud and there by leads to improved
operational efficiency. The trading system also provides complete online market information
through various inquiry facilities.
5) Investor Protection :-
The Central Government notified the establishment of Investor Education and Protection Fund
(IEPF) with effect from 1st Oct. 2001: The IEPF shall be credited with amounts in unpaid
dividend accounts of companies, application moneys received by companies for allotment of
any securities and due for refund, matured deposits and debentures with companies and
interest accrued there on, if they have remained unclaimed and unpaid for a period of seven
years from the due date of payment. The IEPF will be utilised for promotion of awareness
amongst investors and protection of their interests.
6) Rolling Settlement :-
Rolling settlement is an important measure to enhance the efficiency and integrity of the
securities market. Under rolling settlement all trades executed on a trading day (T) are settled
after certain days (N). This is called T + N rolling settlement. Since April 1, 2002 trades are
settled' under T + 3 rolling settlement. In April 2003, the trading cycle has been reduced to T + 2
days. The shortening of trading cycle has reduced undue speculation on stock
markets. ?
7) The Clearing Corporation Of India Limited (CCIL) :-
The CCIL was registered in 2001, under the Companies Act, 1956 with the State Bank of India
as the Chief Promoter. The CCIL clears all transactions in government securities and repos and
also Rupee / US $ forex spot and forward deals All trades in government securities below Rs.
20 crores would be mandatorily settled through CCIL, white those above Rs. 20 crores would
have the option for settlement through the RBI or CCIL.
8) The National Securities Clearing Corporation Limited (NSCL) :-
The NSCL was set up in 1996. It has started guaranteeing all trades in NSE since July 1996.
The NSCL is responsible for post-trade activities of NSE. It has put in place a comprehensive
risk management system, which is constantly monitored and upgraded to pre-expect market
failures.
9) Trading In Central Government Securities :-
In order to encourage wider participation of all classes of investors, Including retail investors,
across the country, trading in government securities has been introduced from January 2003.
Trading in government securities can be carried out through a nation wide, anonymous, order-
driver, screen-based trading system of stock exchanges in the same way in which trading takes
place in equities.
10) Credit Rating Agencies :-
Various credit rating agencies such as Credit Rating Information services of India Ltd. (CRISIL
1988), Investment Information and credit Rating Agency of India Ltd. (ICRA 1991), etc. were
set up to meet the emerging needs of capital market. They also help merchant bankers,
brokers, regulatory authorities, etc. in discharging their functions related to debt issues.
11) Accessing Global Funds Market :-
Indian companies are allowed to access global finance market and benefit from the lower cost
of funds. They have been permitted to raise resources through issue of American Depository
Receipts (ADRs), Global Depository Receipts (GDRs), Foreign Currency Convertible Bonds
(FCCBs) and External Commercial Borrowings (ECBs). Further Indian financial system is
opened up for investments of foreign funds through Non-Resident Indians (NRIs), Foreign
Institutional investors (FIls), and Overseas Corporate Bodies (OCBs).
12) Mutual Funds :-
Mutual Funds are an important avenue through which households participate in the securities
market. As an investment intermediary, mutual funds offer a variety of services / advantages to
small investors. SEBI has the authority to lay down guidelines and supervise and regulate the
working of mutual funds.
13) Internet Trading :-
Trading on stock exchanges is allowed through internet, investors can place orders with
registered stock brokers through internet. This enables the stock brokers to execute the orders
at a greater pace.
14) Buy Back Of Shares :-
Since 1999, companies are allowed to buy back of shares. Through buy back, promoters
reduce the floating equity stock in market. Buy back of shares help companies to overcome the
problem of hostile takeover by rival firms and others.
15) Derivatives Trading :-
Derivatives trading in equities started in June 2000. At present, there are four equity derivative
products in India Stock Futures, Stock Options, Index Futures, Index Options.
Derivative trading is permitted on two stock exchanges in India i.e. NSE and BSE. At present in
India, derivatives market turnover is more than cash market.
16) PAN Made Mandatory :-
In order to strengthen the Know your client" norms and to have sound audit trail of transactions
in securities market, PAN has been made mandatory with effect from January 1, 2007.
Q.6: Explain the role of SEBI in developing capital market. OR
Evaluate the role and performance of SEBI. OR
Write note on SEBI. (Mar. 11).
Ans. A. SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) :-
SEBI was established as a non-statutory board in 1988 and in January 1992 it was made a
Statutory body. The main objectives of SEBI are
1) To protect the interest of investors.
2) To bring professionalism in the working of intermediaries in capital markets (brokers, mutual
funds, stock exchanges, demat depositories etc.).
3) To create a good financial climate, so that companies can raise long term funds through issue of
securities (shares and debentures).
In 2002, SEBI is further empowered to do the following:-
1. To file complaints in courts and to notify its regulations without prior approval of government.
2. To regulate issue of capital and transfer of securities.
3. To impose monetary penalties on various intermediaries and other participants for a specified
range of violations.
4. To issue direction to and to call for documents from all intermediaries.
B.
ROLE I POWERS AND FUNCTIONS OF SEBI :-
1. Protection Of Investor's Interest :-
SEBI frames rules and regulations to protect the interest of investors.
It monitors whether the rules and regulations are being followed by the concerned parties i.e.,
issuing companies, mutual funds, brokers and others. It handles investor grievances or
complaints against brokers, securities issuing companies and others.
2. Restriction On Insider Trading :-
SEBI restricts insider trading activity. It prohibits dealing, communication or counselling on
matters relating to insider trading. SEBIs regulation states that no insider (connected with the
company) shall - either on his own behalf or on behalf of any other person, deal in securities of
a company listed on any stock exchange on the basis of any unpublished price sensitive
information.
3. Regulates Stock Brokers Activities :-
SEBI has also laid down regulations in respect of brokers and sub-broker. No brokers or sub-
broker can buy, sell or deal in securities without being a registered member of SEBI. It has also
made compulsory for brokers to maintain separate accounts for their clients and for themselves.
They must also have their books audited and audit reports filed with SEBI.
4. Regulates Merchant Banking :-
SEBI has laid down regulations in respect of merchant banking activities in India. The
regulations are in respect of registration, code of conduct to be followed, submission of half-
yearly results and so on
5. Dematerialisation Of Shares :-
Demat of shares has been introduced in all the shares traded on secondary stock markets as
well as those issued to public in prirriary markets. Even bonds and debentures are allowed in
demat form.
6. Guidelines On Capital Issues :-
SEBI has framed necessary guidelines in connection with capital issues. The guidelines are
applicable to :- First Public Issue of New Companies, First Public Issue by Existing Private /
Closely held Companies, Public Issue by Existing Listed Companies.
7. Regulates Working Of Mutual Funds :-
SEBI regulates the working of mutual funds. SEBI has laid down rules and regulations that are
to be followed by mutual funds. SEBI may cancel the registration of a mutual fund, if it fails to
comply with the regulations.
8. Monitoring Of Stock Exchanges:-
To improve the working of stock markets, SEBI plays an important role in monitoring stock
exchanges. Every recognised stock exchange has to furnish to SEBI annually with a report
about its activities during the previous year.
9. Secondary Market Policy :-
SEBI is responsible for all policy and regulatory issues for secondary market and new
investments products. It is responsible for registration and monitoring of members of stock
exchanges, administration of some of stock exchanges and monitoring of price movements and
insider trading.
10. Investors Grievances Redressal :-
SEBI has introduced an automated complaints handling system to deal with investor complaints.
It assist investors who want to make complaints to SEBI against listed companies.
11. Institutional Investment Policy :-
SEBI looks after institutional investment policy with respect to domestic mutual funds and
Foreign Institutional Investors (FIIs). It also looks after registration, regulation and monitoring of
FIls and domestic mutual funds.
12. Takeovers And Mergers :-
To protect the interest of investors in case of takeovers and mergers SEBI has issued a set of
guidelines. These guidelines are to be followed by corporations at the time of takeovers and
mergers.
13. Reforms In Capital Market :-
SEBI has introduced many reforms in Capital Market. Some of them are :-
a) Demat of shares
b) PAN made compulsory.
c) Buy back of shares allowed.
d) Corporate Governance introduced
e) Transparency rules in Brokers Transactions.
14. Other Functions :-
a) It promotes investors education, and also training of intermediaries in securities market.
b) It performs functions and exercise powers under provisions of Capital Issues (Control) Act 1947,
Securities Contracts Act 1956 etc.
c) It promotes and regulates self-regulatory organisations.
d) It prohibits fraudulent and unfair trade practices in securities Market
e) It promotes investors education and training in securities market.
B) APPRAISAL OF SEBI'S WORK :-
1) Large Number Of Rules :-
There are large .number of rules prescribed by SEBI. These have also been changing from time
to time. This has created a high level of uncertainty and confusion. It is very difficult to
determine what rules are currently in operation.
2) Less Protection To Small Investors :-
SEBI is not really serious about reforming the system and protecting the individual and small
investors. It has failed to penalise the people responsible for causing abnormal price fluctuations
on stock market.
3) False Claim On High Success Rate :-
SEBIs Annual Report, in 1995-96 claims, a very high success rale in resolving investor
complaints. But in reality it is not so.

4) Insufficient Power :-
SEBI has often complained of having insufficient authority and power. It should become more
effective, efficient, socially-accountable and small - investor - friendly.
working is quite good. Liquidity in market has improved various segments have also become
interlinked. It provides a world class trading and settlement system.
5) Corporate Friendly regulation :-
The regulatory ineffectiveness of SEBI in certain areas has been due to its concentration on
symptoms rather than the root causes.
Q. 7 : Explain policy measures introduced by SEBI?
Ans. A) POLICY MEASURES BY SEBI :-
1) Entry Norms :-
SEBI has issued various guidelines for tightening the entry norms for companies accessing
capital market.
2) Norms For Share Transfer :-
SEBI has tightened the norms for transfer of shares among group companies and takeover of
companies.
3) Penal Margins :-
SEBI has introduced imposition of penal margin on net undelivered portion at the end of
settlement.
4) Screen Based Trading :-
SEBI allowed stock exchanges to expand their online screen based trading terminals to-
locations outside their jurisdiction subject to conditions.
5) Intermediaries :-
SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents,
trustee of trust funds, registrars to an issue, merchant banks, underwriters and other
intermediaries who may be associated with securities market.
6) Prohibition Of Fraudulent And Unfair Practices :-
SEBI regulates prohibition of Fraudulent and unfair trade practices which have imposed
prohibition against market manipulators and unfair practices relating to securities.
7) Steps To Improve Corporate Governance :-
Sufficient disclosures are made mandatory for companies at the stage of public issue. Listed
companies are required to make disclosures on continuing basis on dividend, bonus etc.
8) Comprehensive Risk Management And Improvement In Disclosure :-
In July 2002, SEB| set up a system EDIFAR (Electronic Data Information Filing And Retrieval)
through which firms would electronically file mandatory disclosures to SEBI and these
documents would be available to individuals across the country over the Internet, with a near-
zero delay.
9) Raising Funds From Abroad :-
Indian companies are allowed to raise funds from abroad, through American / Global Depository
Receipts, Foreign Currency Convertible Bonds.and External Commercial Borrowings.
10) Norms For Custodian Of Securities And Depositories :-
SEBI notified two regulations namely, Custodian of Securities Regulation, and Depositories and
Participant Regulations.