CapitaI Market in Indian

Recent DeveIopments and PoIicy Issues

INTRODUCTION

1.1-Meaning of Capital Market

There are 22 stock exchanges in India, the Iirst being the Bombay Stock
Exchange (BSE), which began Iormal trading in 1875, making it one oI the oldest
in Asia. Over the last Iew years, there has been a rapid change in the Indian
securities market, especially in the secondary market. Advanced technology and
online-based transactions have modernized the stock exchanges. In terms oI the
number oI companies listed and total market capitalization, the Indian equity
market is considered large relative to the country`s stage oI economic
development. The number oI listed companies increased Irom 5,968 in March 1990
to about 10,000 by May 1998 and market capitalization has grown almost 11 times
during the same period. The debt market, however, is almost nonexistent in India
even though there has been a large volume oI Government bonds traded. Banks
and Iinancial institutions have been holding a substantial part oI these bonds as
statutory liquidity requirement. The portIolio restrictions on Iinancial institutions`
statutory liquidity requirement are still in place. A primary auction market Ior
Government securities has been created and a primary dealer system was
introduced in 1995. There are six authorized primary dealers. Currently, there are
31 mutual Iunds, out oI which 21 are in the private sector. Mutual Iunds were
opened to the private sector in 1992. Earlier, in 1987, banks were allowed to enter
this business, breaking the monopoly oI the Unit Trust oI India (UTI), which
maintains a dominant position. BeIore 1992, many Iactors obstructed the
expansion oI equity trading. Fresh capital issues were controlled through the

Capital Issues Control Act. Trading practices were not transparent, and there was a
large amount oI insider trading. Recognizing the importance oI increasing investor
protection, several measures were enacted to improve the Iairness oI the capital
market. The Securities and Exchange Board oI India (SEBI) was established in
1988. Despite the rules it set, problems continued to exist, including those relating
to disclosure criteria, lack oI broker capital adequacy, and poor regulation oI
merchant bankers and underwriters. There have been signiIicant reIorms in the
regulation oI the securities market since 1992 in conjunction with overall economic
and Iinancial reIorms. In 1992, the SEBI Act was enacted giving SEBI statutory
status as an apex regulatory body. And a series oI reIorms was introduced to
improve investor protection, automation oI stock trading, integration oI national
markets, and eIIiciency oI market operations. India has seen a tremendous change
in the secondary market Ior equity. Its equity market will most likely be
comparable with the world`s most advanced secondary markets within a year or
two. The key ingredients that underlie market quality in India`s equity market are:
O exchanges based on open electronic limit order book;
O nationwide integrated market with a large number oI inIormed traders and
Iluency oI short or long positions; and
O no counterparty risk.
Among the processes that have already started and are soon to be Iully
implemented are electronic settlement trade and exchange-traded derivatives.
BeIore 1995, markets in India used open outcry, a trading process in which traders
shouted and handsignaled Irom within a pit. One major policy initiated by SEBI
Irom 1993 involved the shiIt oI all exchanges to screen-based trading, motivated
primarily by the need Ior greater transparency. The Iirst exchange to be based on
an open electronic limit order book was the National Stock Exchange (NSE),
which started trading debt instruments in June 1994 and equity in November 1994.

In March 1995, BSE shiIted Irom open outcry to a limit order book market.
Currently, 17 oI India`s stock exchanges have adopted open electronic limit order.
BeIore 1994, India`s stock markets were dominated by BSE. In other parts oI the
country, the Ii-
1.2- Relevance of the study
The scope oI the study is to know the marketing strategies adopted by
Capital Markets in India .It`s not easy Ior covering all the boundaries Ior
collecting the data. So, this research study is covering some Important aspect. In
this research study analysis the marketing strategies oI Capital Markets in India.
The research project evaluation oI the Capital Market sector in India has
primal importance due to intense competition, and changing Capital Market
reIorms. This research project is very important because in today scenario there is
strong competition in public and private sector Share Market . It`s very important
Ior us to know which sector is perIorming well and what are the marketing
strategies adopted by share market (public sector or private sector).
1.3- Ob]ective of the study
O To study the Capital Share Market in India Iinancial implication oI the
accounting entries.
O To gain Iamiliarity with the soItware used by organizations oI Capital Share
Market in India society Developments .
O To apply the theoretical knowledge acquired by me to the practical
Situation in Capital Market in India.
O To know how an organization and its diIIerent Iunctional departments
In Capital Market in India works.
O To know how a team works and achieves the targets together

1.4-Research Design and Methodology

Research means a search Ior knowledge or gains some new knowledge and
methodology can properly reIer to the theoretical analysis oI the methods
appropriate to a Iield oI study or to the body oI methods and principles particular to
a branch oI knowledge. A Research methodology has a speciIied Iramework Ior
collecting the data in an eIIective manner. Research methodology means a
deIining a problem, deIining the research objectives, developing the research plan,
collecting the inIormation, analyzing the inIormation and presentation oI Iinding`.
1-5-Limitations of the study
It is important to critically evaluate the results and the whole study. The
present study has certain limitations that need to be taken into capital markets
when considering the study and its contributions.
This study has Iocused on a phenomenon that is a very extensive and major
one, i.e. the capital market. Clearly, this represents a challenging task Ior research
regardless oI the more speciIic interests that the study may have. In this study, this
extensive and complex phenomenon has been studied Irom a rather narrow
empirical perspective. The selection oI the single case study design naturally
brings Iorth many limitations as Iar as the generalization oI the results oI the study
is concerned.. On the other hand, this also represents the whole idea oI making a
case study. By understanding something about this particular case more in depth,
we might eventually also learn something about more general phenomena.
Research challenges in this topic. Multiple case study design would enable us to
test the conceptual Iramework oI the study Iurther. However, as the theme oI this
study has been related to emerging capital markets, it can oI course be seen that

eventually the soItware component market are likely to develop so that their
emergence, even through multiple case studies becomes diIIerent, i.e. the
emergence needs to be studied retrospective.
1.6- Chapter Plan
1. Meaning of Capital Market (Introduction)
2. Profile OF Capital Market
3. Capital Market Overview
4. Function and Importance of Capital Market in Economic
5 . Conclusion &Executive Summary

CHAPTFR-2
2. PR0FllF 0F CAPlTAl HARKFT

2.1-STRUCTURE OF CAPITAL MARKET IN INDIA

Capital market reIers to all the Iacilities and institutional arrangements Ior
borrowing and lending oI term Iunds. Capital market does not deal in capital
goods, but is concerned with the raising oI money capital

2.2-INDIAN CAPITAL MARKET: RECENT DEVELOPMENTS
AND POLICY ISSUES

Financial industry did not have equal access to markets and was unable to
participate in Iorming prices, compared with market participants in Mumbai
(Bombay). As a result, the prices in markets outside Mumbai were oIten diIIerent
Irom prices in Mumbai. These pricing errors limited order Ilow to these markets.
Explicit nationwide connectivity and implicit movement toward one national

market has changed this situation (Shah and Thomas, 1997). NSE has established
satellite communications which give all trading members oI NSE equal access to
the market. Similarly, BSE and the Delhi Stock Exchange are both expanding the
number oI trading terminals located all over the country. The arbitrages are
eliminating pricing discrepancies between markets. Despite these big
improvements in microstructure, the Indian capital market has been in decline
during the last three years. The amount oI capital issued has dropped Irom the level
oI its peak year,1994/95, and so have equity prices. In 1994/95, Rs276 billion was
raised in the primary equity market. This Iigure Iell to Rs208 billion in 1995/96
and to Rs142 billion in 1996/97. The BSE-30 index or Sensex, the sensitive index
oI equity prices, peaked at 4,361 in September 1994 and Iell during the Iollowing
years. A leading cause was that Iinancial irregularities and overvaluations oI equity
prices in the earlier years had eroded public conIidence in corporate shares. Also,
there was a reduced inIlow oI Ioreign investment aIter the Mexican and Asian
Iinancial crises. In a sense, the market is now undergoing a period oI adjustment.
Thus, it is time Ior regulatory authorities to make greater eIIorts to recover
investors` conIidence and to Iurther improve the eIIiciency and transparency oI
market operations. The Indian capital market still Iaces many challenges iI it is to
promote more eIIicient allocation and mobilization oI capital in the economy. First,
market inIrastructure has to be improved as it hinders the eIIicient Ilow oI
inIormation and eIIective corporate governance. Accounting standards will have to
adapt to internationally accepted accounting practices. The court system and legal
mechanism should be enhanced to better protect small shareholders` rights and
their capacity to monitor corporate activities. Second, the trading system has to be
made more transparent. Market inIormation is a crucial public good that should be
disclosed or made available to all participants to achieve market eIIiciency. SEBI
should also monitor more closely cases oI insider trading. Third, India may need

Iurther integration oI the national capital market through consolidation oI stock

exchanges. The trend all over the world is to consolidate and merge existing stock
exchanges. Not all oI India`s 22 stock exchanges may be able to justiIy their
existence. There is a pressing need to develop a uniIorm settlement cycle and
common clearing system that will bring an end to unnecessary speculation based
on arbitrage opportunities. Fourth, the payment system has to be improved to better
link the banking and securities industries. India`s banking system has yet to come
up with good electronic Iunds transIer (EFT) solutions. EFT is important Ior
problems such as direct payments oI dividends through bank accounts, eliminating
counterparty risk, and Iacilitating Ioreign institutional investment. The capital
market cannot thrive alone; it has to be integrated with the other segments oI the
Iinancial system. The global trend is Ior the elimination oI the traditional wall
between banks and the securities market. Securities market development has to be
supported by overall macroeconomic and Iinancial sector environments. Further
liberalization oI interest rates, reduced Iiscal deIicits, Iully market-based issuance
oI Government securities, and a more competitive banking sector will help in the
development oI a sounder and a more eIIicient capital market in India.
2.3-Capital Market Reforms and Developments
Reforms in the Capital Market
Over the last Iew years, SEBI has announced severalIar - reaching reIorms
to promote the capital 114 a study oI Iinancial markets. Market and protect
investor interests. ReIorms in the secondary market have Iocused on three main
areas: structure and Iunctioning oI stock exchanges, automation oI trading and post
trade systems, and the introduction oI surveillance and monitoring systems. (See
Appendix 1 Ior a listing oI reIorms since 1992). Computerized online trading oI
securities, and setting up oI clearing houses or settlement guarantee Iunds were
made compulsory Ior stock exchanges. Stock exchanges were permitted to expand

their trading to locations outside their jurisdiction through computer terminals.

Thus, major stock exchanges in India have started locating computer terminals in
Iar-Ilung areas, while smaller regional exchanges are planning to consolidate by
using centralized trading under a Iederated structure. Online trading systems have
been introduced in almost all stock exchanges. Trading is much more transparent
and quicker than in the past. Until the early 1990s, the trading and settlement
inIrastructure oI the Indian capital market was poor. Trading on all stock
exchanges was through open outcry, settlement systems were paper-based, and
market intermediaries were largely unregulated. The regulatory structure was
Iragmented and there was neither comprehensive registration nor an apex body oI
regulation oI the securities market. Stock exchanges were run as 'brokers clubs as
their management was largely composed oI brokers. There was no prohibition on
insider trading, or Iraudulent and unIair trade practices (see Appendix 2). Since
1992, there has been intensiIied market reIorm, resulting in a big improvement in
securities trading, especially in the secondary market Ior equity. Most stock
exchanges have introduced online trading and set up clearing houses/corporations.
A depository has become operational Ior scrip less trading and the regulatory
structure has been overhauled with most oI the powers Ior regulating the capital
market vested with SEBI. The Indian capital market has experienced a process oI
structural transIormation with operations conducted to standards equivalent to
those in the developed markets. It was opened up Ior investment by Ioreign
institutional investors (FIIs) in 1992 and Indian companies were allowed to raise
resources abroad through Global Depository Receipts (GDRs) and Foreign
Currency Convertible Bonds (FCCBs). The primary and secondary segments oI the
capital market expanded rapidly, with greater institutionalization and wider
participation oI individual investors accompanying this growth. However, many
problems, including lack oI conIidence in stock investments, institutional overlaps,

and other governance issues, remain as obstacles to the improvement oI Indian

capital market eIIiciency.
2.4- Capital Market Analysis of Growing Chart
Since 1991/92, the primary market has grown Iast as a result oI the removal
oI investment restrictions in the overall economy and a repeal oI the restrictions
imposed by the Capital Issues Control Act. In 1991/92, Rs62.15 billion was raised
in the primary market. This Iigure rose to Rs276.21 billion in 2006/ 07. Since
2009/2010, however, smaller amounts have been raised due to the overall
downtrend in the market and tighter entry barriers introduced by SEBI Ior investor
protection (Table 1).

Total market capitalization as oI 2009/10 was Rs5,898 billion (Table 2), equivalent
to about halI oI India`s annual gross domestic product (GDP) Ior the same Iiscal
year. India compares Iavorably with other emerging markets in this respect. The
market capitalization- GDP ratio at end-1995 was 22.4 percent Ior Brazil; 12.6
percent Ior Hong Kong, China; 40 percent Ior Indonesia; 41 percent Ior Korea;
and 37.1 percent Ior Mexico.1 It was higher however, in Malaysia (281.9 percent),
Philippines (81.3), Singapore (233 percent), and Thailand

2.5 - CAPITAL MARKET OF EQUITY PRICE
For the past 12 years, equity prices have seen two extended periods oI
declining prices and two periods oI rising prices. Between April 1986 and March
1988, Sensex decreased Irom 589 to 398, or by 32 percent. Prices also Iell between
March 1992, when the monthly closing level oI Sensex was 4,258, and April 1993,
when the level was 2,122, a decline oI 50.5 percent. Prices generally rose Ior
2004 2003 2006 2007 2008 2009 2010
200607
200708
200809
200910

extended periods Irom March 1988 to March 1992 and Irom May 1993 to August
1994. The monthly closing level oI Sensex climbed Irom 398 in March 1988 to
4,285 in March 1992, an increase oI more than 10 times. In the second period oI
extended rising equity prices, Sensex increased 1.16 times. Since 1995, it has
Iluctuated around the 3,000-4,000 mark (see Figure 1). In April 1998, it hovered
around 3,000. In the period oI declining prices, Irom August 1994 to March 1998,
the price-earnings (P/E) ratio Iell more sharply than prices (Figure 1). In March
1998, the monthly average Sensex P/E ratio was 15.65 while the Iigure Ior October
1993 was 38.76.
2.6-RISK MANAGEMENT SYSTEM
SEBI has taken several measures to improve the integrity oI the secondary
market. Legislative and regulatory changes have Iacilitated the corporatization oI
stockbrokers. Capital adequacy norms have been prescribed and are being
enIorced. A mark-to-market margin and intraday trading limit have also been
imposed. Further, the stock exchanges have put in place circuit breakers, which are
applied in times oI excessive volatility. The disclosure oI short sales and long
purchases is now required at the end oI the day to reduce price volatility and
Iurther enhance the integrity oI the secondary market.
2.7-MARK-TO-MARKET MARGIN AND INTRADAY LIMIT
Under the current clearing and settlement system, iI an Indian investor buys
and subsequently sells the same number oI shares oI stock during a settlement
period, or sells and subsequently buys, it is not necessary to take or deliver the
shares. The diIIerence between the selling and buying prices can be paid or
received. In other words, the squaring-oII oI the trading position during the same
settlement period results in non-delivery oI the shares that the investor traded. A
short-term and speculative investment is A STUDY OF FINANCIAL

MARKETS thus possible at a relatively low cost. FIIs and domestic institutional
investors are, however, not permitted to trade without delivery, since non-delivery
transactions are limited only to individual investors. One oI SEBI`s primary
concerns is the risk oI settlement chaos that may be caused by an increasing
number oI non-delivery transactions as the stock market becomes excessively
speculative. Accordingly, SEBI has introduced a daily mark-to-market margin and
intraday trading limit. The daily mark-to market margin is a margin on a broker`s
daily position. The intraday trading limit is the limit to a broker`s intraday trading
volume. Every broker is subject to these requirements. Each stock exchange may
take any other measures to ensure the saIety oI the market. BSE and NSE impose
on members a more stringent daily margin, including one based on concentration
oI business. A daily mark-to-market margin is 100 percent oI the notional loss oI
the stockbroker Ior every stock, calculated as the diIIerence between buying or
selling price and the closing price oI that stock at the end oI that day. However,
there is a threshold limit oI 25 percent oI the base minimum capital plus additional
capital kept with the stock exchange or Rs1 million, whichever is lower. Until the
notional loss exceeds the threshold limit, the margin is not payable. This margin is
payable by a stockbroker to the stock exchange in cash or as a bank guarantee Irom
a scheduled commercial bank, on a net basis. It will be released on the pay-in day
Ior the settlement period. The margin money is held by the exchange Ior 6-12 days.
This costs the broker about 0.4-1.2 percent oI the notional loss, assuming that the
broker`s Iunding cost is about 24-36 percent (Endo 1998). Thus, speculative
trading without the delivery oI shares is no longer cost-Iree. Each broker`s trading
volume during a day is not allowed to exceed the intraday trading limit. This limit
is 33.3 times the base minimum capital deposited with the exchange on a gross
basis, i.e., purchase plus sale. In the event oI brokers wishing to exceed this limit,

they have to deposit additional capital with the exchange and this cannot be
withdrawn Ior six months.
2.8-CIRCUIT BREAKER
SEBI has imposed price limits Ior stocks whose market prices are above
Rs10 up to Rs20, a daily price change limit and weekly price change limit oI 25
percent. BSE imposes price limits as a circuit breaker system to maintain the
orderly trading oI shares on the exchange (Table 3). BSE`s computerized trading
system rejects buy or sell orders oI a stock at prices outside the price limits. The
daily price limit oI a stock is measured Irom the stock`s closing price in the
previous trading session. The weekly price limit is based on its closing price oI the
last trading in the previous week, usually its closing price on the previous Friday.
2.9-SHORT SALES AND LONG PURCHASES
SEBI regulates short selling in the stock market by requiring all stock
exchanges to enIorce reporting by members oI their net short sale and long
purchase positions in each stock at the end oI each trading day.

CHAPTER -3
CAPlTAl HARKFT 0vFRvlFw
3.1-Introduction of Derivatives Trading

At present, there are no exchange traded derivatives or over-the-counter
derivative markets in the country. However, a new law has been passed permitting
the trading oI derivatives. This Iollowed recommendations Ior the establishment oI
a regulatory Iramework Ior derivatives by a committee chaired by L.C. Gupta. It is
expected that derivatives trading will soon Iorm part oI the Indian securities
market.
3.2-Indian capital market before independence:-
The capital market in India was not properly developed beIore
independence, the Iollowing are the reason Ior this
1. Agriculture was the main occupation, but there was very little oI organized
long term lending to this sector.
2. There was very little growth oI the securities market because most oI the
English enterprises in India looked to the London market rather than to the
Indian capital market.
3. The total number oI companies was small and the number oI securities
traded on stock exchanges was still smaller.
4. A large part oI capital market consisted oI the gilt-edged market Ior
government securities.
5. Individual investors were very Iew and limited to the aIIluent classes in the
urban and rural areas.

6. The government had placed many restrictions on the institutional savers

,such as banks and insurance companies ,which were Iorced to preIer
government securities.
7. The managing agency system perIormed, to some extent, the Iunctions oI
promotion oI issues and underwriting oI new issues.
8. The specialized Iinancial intermediaries have not yet been developed.
3.3-Indian capital market after independence
Since independence, particularly aIter1951, the capital market in India has
been growing signiIicantly. Many Iactors have contributed to this growth.
1. Steady Growth of Saving and investment:- The volume oI saving and
investment in the country has been increasing steadily Which is a clear indicator oI
the growth oI capital market.
a) the government provided all types oI encouragement and tax relieI to
promote savings in the country
b) many steps have been taken to promote the interest oI the investors.
c) the growth oI joint stock companies or corporate enterprises is an important
indicator oI the growth oI capital market.
d) Another indicator oI the growth oI capital market is the growth oI public
borrowings Ior investment purposes.
e) the growth oI liIe insurance also led to the promotion oI saving and supply
oI Iunds in the capital market.
I) Increase in the provident Iund collections is another Iactors promoting the
capital market in the country
g) Growth oI banks and non-banks Iinancial intermediaries encouraged
mobilization and channelisation oI country ;savings.

3.4-PRIMARY CAPITAL MARKET (New issues Market)

Primary (or direct or new issues ) market deals in new Iinancial claims or
new securities. It is a market in which newly issued credit instrument are sold and
purchased. ThereIore, primary market is also known as new issues market. Primary
market mobilizes savings and thus it supplies Iresh capital to the business units.
The main Iunction oI the new issues market is to make arrangement Ior
raising new capital by corporate enterprises. These enterprises may be new or old.
This involves attracting new investible resources into the corporate sector and their
allocation among alternative uses and users.
Types of securities
Business concern raise capital through three main types oI securities:
(1) ordinary shares :- it is an ownership security. The investment in this credit
instrument is permanent but highly liquid.
(2) preIerence Shares:- it is an ownership securities like an ordinary share, but
carries a Iixed rate oI return like a debenture. PreIerence share may be (a)
Cumulative or non-cumulative
(b) Convertible or non-convertible
(c) Redeemable or non-redeemable
(d) Participating or non-participating
(3) debenture :- unlike the Iirst two types oI securities, debenture or bond is a
creditorship security with a Iixed rate oI return, Iixed maturity period, perIect
income certainty and low capital uncertainty. Debentures may be, (a) registered (b)

redeemable (c) perpetual (d) convertible (e) right (I) non-convertible (g) partly
convertible.
3.5-SECONDARY MARKET(STOCK EXCHANGES)
Secondary (or indirect )market deals in security already issued or existing. It
is a market in which previously issued credit instruments are bought and sold.
Although secondary market does not contribute directly to the supply oI Iresh
capital, it does so indirectly by making the security issued on the primary market
more liquidity.
3.6-STOCK EXCHANGE
Stock exchange is a market where stocks, shares, and other securities
are bought and sold. It is a market where the owners oI securities can
dispose them oII as and when they desire. Stock exchange or stock
market has both primary and secondary market segments.
A stock exchange is an organization Ior systematic buying and
selling oI listed or approved existing securities. An organized stock
exchange requires (a) an associated oI persons or Iirms to regulates and
supervise the transaction
(b) rules, regulations and standard practices to govern the transactions
(c) authorized stock brokers and
(d) the exchange Iloor or a hall where the stock brokers or their agents
transact during Iixed business hours

Marketing oI securities on the stock market can be done only

through members oI the stock exchange. The stock exchange members
act in one or more capacity as: (a) Commission broker, (b) tarvaniwala
(c) Iloor broker (d) jobber or dealer (e) badliwala or Iinancier and (I)
arbitrageur.
3.7-STOCK LENDING
A scheme Ior regulating stock lending was introduced in February 1997,
Iollowing changes in tax regulations. Stock lending can take place through an
intermediary registered Ior this purpose with SEBI, and which has a minimum
capital oI Rs500 million. Lenders and borrowers oI securities have to enter into
agreements with the intermediary. Stock lending Iacilitates the timely settlement oI
transactions on the stock exchanges, especially in an environment where physical
delivery oI certiIicates is required Ior settlement.

CHAPTER - 4
4. Function and Importance of CapitaI Market in Economic
4.1-Meaning and forms of capital market
In contrast to the money market, which deals in the very short-term loans,
the capital market deals in medium-term and long-term loans. Business Iirms need
two types oI Iinance ;(a)short term Iinance Ior purchasing raw materials. For
payment oI wage etc;(b)long term Iinance Ior purchasing capital equipment and
Iixed assets, such as machinery, Tools and implements, power plant, construction
oI Iactory building, etc. The money market meets the short-term Iinancial
requirements oI industry, where as the capital market meets the long -term
requirements.
The capital market reIers to the institutional arrangements which Iacilitate
the lending and borrowing oI long-term Iunds. It is a markets in which long period
securities(With a maturity oI one year or more ) are exchanged. Ca3pital market is
divided in to two parts (a)The new securities markets which deals with the sale oI
new securities and shares.(b)The secondary market or stock exchange which
specialise in buying and selling oI old securities, shares, stocks, bonds, debentures,
etc .the new issues attract new capital investment, while the secondary market
determines the owner ship oI existing securities, that is to whom there are
transIerred.
4.2- Role of commercial banks:- Commercial banks are important constituents oI
the capital market, but their holdings oI industrial securities shares and debentures
are very small. In the recent times banks have been increasingly participating in
term lending both directly and indirectly through subscribing to the shares and
debentures oI specialized Iinancial institutions.

4-3. Growth of special financial institutions :- Soon aIter independence, the

government oI India started a series oI Iinance institutions to assist the private
sector industries in the matter oI Iinance. The industrial Iinance corporations oI
India (IFCI) (1948)was the Iirst oI such institutions. It was Iollowed by state
Iinance Corporations (SFC), set up by state government, to provide Iinancial
assistance to small and medium industrial units trust oI India (UTI) (1964)
Iollowed soon aIter. The liIe insurance corporation (LIC) was set oI in 1956. These
institutions have been doing useIul work in subscribing to the shares and
debentures oI the new and old companies, in giving loan assistance, in under-
writing new issues, and so on. At present, they have been given the power to
convert their loans to private sector units in to equity capital and also participate in
management.
4-4 Demand and Supply of Funds
An ideal and perIect capital market aims at establishing a balance between
the demand and supply oI long term Iunds,
1.Demand for funds:- In India, the demand Ior long-term capital comes mainly
Iorm private sector manuIacturing industries and dorm the government largely Ior
meeting the needs oI economic development, and, to a very small extant, Iorm
agriculture. As the central and the state governments have to invest not only on
economic overheads as transports irrigation and power development,
2.Supply of funds :- The supply oI Iunds Ior the capital market comes largely
Iorm individuals savers, specialized Iinancial institutions and the government

Among the institutions :-

(i) Commercial banks are important investors. But they are largely interested
in government securities.
(ii) The liIe insurance corporation (LIC)is oI growing importance in the
capital market. But, its major interest is also in government securities.
(iii) Provident Iunds are the major source oI saving , but their investments too
are mostly in government securities.
(iv) A number oI special institutions set oI since independence (the industrial
Development Bank oI India (IDBI)
InstitutionaI Investors
MUTUAL FUNDS

Indian investors have been able to invest through mutual Iunds since 1964,
when UTI was established. Indian mutual Iunds have been organized through the
Indian Trust Acts, under which they have enjoyed certain tax beneIits. Between
1987 and 1992, public sector banks and insurance companies set up mutual Iunds.
Since 1993, private sector mutual Iunds have been allowed, which brought
competition to the mutual Iund industry. This has resulted in the introduction oI
new products and improvement oI services. The notiIication oI the SEBI (Mutual
Fund) Regulations oI 1993, brought about a restructuring oI the mutual Iund
industry. An arm`s length relationship is required between the Iund sponsor,
trustees, custodian, and asset management company. This is in contrast to the
previous practice where all three Iunctions, namely trusteeship, custodianship, and
asset management were oIten perIormed by one body, usually the Iund sponsor or
its subsidiary. The regulations prescribed disclosure and advertisement norms Ior
mutual Iunds, and, Ior the Iirst time, permitted the entry oI private sector mutual
Iunds. FIIs registered with SEBI may invest in domestic mutual Iunds, whether

listed or unlisted. The 1993 Regulations have been revised on the basis oI the
recommendations oI the Mutual Funds 2000 Report prepared by SEBI. The revised
regulations strongly emphasize the governance oI mutual Iunds and increase the
responsibility oI the trustees in overseeing the Iunctions oI the asset management
company. Mutual Iunds are now required to obtain the consent oI investors Ior any
change in the 'Iundamental attributes oI a scheme, on the basis oI which unit
holders have invested. The revised regulations require disclosures in terms oI
portIolio composition, transactions by schemes oI mutual Iunds with sponsors or
aIIiliates oI sponsors, with the asset management company and trustees, and also
with respect to personal transactions oI key personnel oI asset management
companies and oI trustees.
4.5-FOREIGN INSTITUTIONAL INVESTORS
FIIs have been allowed to invest in the Indian securities market since
September 1992 when the Guidelines Ior Foreign Institutional Investment were
issued by the Government. The SEBI (Foreign Institutional Investors) Regulations
were enIorced in November 1995, largely based on these Guidelines. The
regulations require FIIs to register with SEBI and to obtain approval Irom the
Reserve Bank oI India (RBI) under the Foreign Exchange Regulation Act to buy
and sell securities, open Ioreign currency and rupee bank accounts, and to remit
and repatriate Iunds. Once SEBI registration has been obtained, an FII does not
require any Iurther permission to buy or sell securities or to transIer Iunds in and
out oI the country, subject to payment oI applicable tax. Foreign investors, whether
registered as FIIs ornot, may also invest in Indian securities outside the FII process.
Such investment requires case-by-case approval Irom the Foreign Investment
Promotion Board (FIPB) in the Ministry oI Industry and RBI, or only Irom RBI
depending on the size oI investment and the industry in which the investment is to
be made. Investment in Indian securities is also possible through the purchase oI

GDRs. Foreign currency convertible bonds and Ioreign currency bonds issued by
Indians that are listed, traded, and settled overseas are mainly denominated in
dollars. Foreign Iinancial service institutions have also been allowed to set up joint
ventures in stock-broking, asset management companies, merchant banking, and
other Iinancial services Iirms along with Indian partners. Foreign portIolio
investments in Indian companies are limited to individual Ioreign ownership at 10
percent oI the total issued capital oI any one company and to aggregate Ioreign
ownership at 30 percent oI the total issued capital oI any one company. FIIs` net
investment was positive until October 1997 and their cumulative investments reached Rs 9.1
billion in the same month. But since then, it has turned negative due to the Asian
Iinancial crisis (Table 4). As oI May 1998, 496 FIIs were registered with SEBI,
with a cumulative net investment oI $9.2 billion in the Indian securities market.
Since 1993/94, Ioreign portIolio investment has so Iar exceeded Ioreign direct
investment, which has also increased rapidly (Table 5). Investment through FIIs
constituted the bulk oI portIolio investment. Annual inIlows have been about $1.5
billion-$2 billion Irom 1993/94 to 1996/97 through FIIs, while inIlows through
GDRs have declined aIter peaking at Rs.1.8 billion in 1994/95. In 1996/97, India
received $5.6 billion in Ioreign investment oI which $1.9 billion was through FIIs.
During 1997/98, FIIs` investment Iell while Ioreign direct investment rose.
Improvement in inIlow oI Ioreign investment raised India`s Ioreign exchange
reserves Irom $17 billion at the end oI 1994/95 to $29.3 billion at the end oI June
1997. Following the changes to the 1995 SEBI (Foreign Institutional Investors)
Regulations, an FII is allowed to set up an investment Iund to invest in Indian
bonds iI it registers the Iund with SEBI as a new separate FII or its new
subaccount. In 1996, SEBI approved nine debt Iunds with a cumulative investment
exposure oI Rs. 1.278 billion Ior investment in securities. FIIs seem to have a
strong impact on equity price movements in India. Trend analysis has shown a

signiIicantly positive relationship between BSE Sensex and the lagged net
investment by FIIs. Figure 2 suggests that monthly net investment has been taking.

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200607
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1oLal (slnce !an)2003
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4.6-Defects of Indian Stock Market:-

1he funcLlonlng of sLocks markeLs ln lndla suffers from many weakness
lmporLanL among Lhem are menLloned below
1. Imperfect and Inefficient:- stock markets in India are imperIect and
ineIIicient and are Iar Irom competitive. As a result, the movements in the
equity prices do not reIlect the true health oI the country`s economy.
2. Imbalanced Growth:- there is a structural and organizational imbalance in
the growth oI India stock markets. Only one or two stock exchanges account
Ior the major part oI the total securities business oI the country.
3. Unethical Practices:- The working oI India stock exchanges is marked by
various types oI unethical practices on the part oI the old and new
companies, brokers and other operators in these exchanges. Some such
practices are : (a) the mergers and acquisitions through malpractices; (b)
entering into unoIIicial transactions even beIore the issues open Ior
subscription; (c) ringing up premia on new issues; (d) presenting excessively
rosy picture oI new projects; (e) insider trading; etc.
4. Restricted Trading:- The trading on India stock markets is extremely small
and restricted. This is evident Irom the Iollowing Iacts: (a) the number oI
listed stocks in which transaction take place activity is very small; (b) the
number oI trading hours is Iixed and is very limited; (c) even this small
working period is Iurther reduced; (d) the markets oIten remain closed on
many days oI the week.
5. Excessive Speculation:- The determination oI prices in the stock market is
inIluenced by too much speculation. There exists very little relationship
between the movement oI share prices and the changes in the industrial
production, proIits and dividends, etc.

6. Lack of Integration:- There are a large number oI stock exchange in the

country. But the problem is that there is no proper integration between these
exchanges. As a result, one Iinds too much variation in the share prices in
diIIerent markets.
7. Unjustified Classification:- The practice oI classiIying listed shares into
speciIied` group and unspeciIied` group has no rational basis. The shares
in the speciIied` group are given some special Iacilities like settlement
period, carry Iorward, etc.
8. Discretionary Margins:- Another deIect in the working oI India stock
exchanges is that the margins levied by them on speculative transaction are
purely discretionary in nature. These margins range between 0 to 40 and
oIten Iail to curb excessive speculation in the stock exchanges.
9. Defective Carry Over System:- The prevailing system oI carry over in the
stock exchanges has been adopted mainly to promote speculation. It
encourage a spurious kind oI trading on which neither the buyers have the
money to buy the shares at the time settlement, nor the sellers have the
shares to deliver.
10.Investor`s interest Ignored:- The trading procedures and activity in India
stock exchanges are particularly designed to beneIit the brokers, and the
interests oI the investors are generally ignored . there is a general Ieeling
among the investors that they are normally cheated by the brokers and do not
get Iair deal in their transactions.
11.Defective Management:- the management structure oI the stock exchanges
in India is also deIective. The stock exchange is regarded as a private club,
exclusive managed by and Ior the beneIit oI the stock brokers.

4.7-SEBI AND CAPITAL MARKET REFORMS :-

Securities and exchange Board of India (SEBI)
Recommendations oI the Narasimham Committee as well as oI the other
committees and groups pointed out a number oI shortcomings in the Iunctioning
oI stock markets in India, such as long delays, lack oI transparency in procedure,
vulnerability to price rigging and inside trading. To counter these shortcomings,
securities and exchange Board oI India (SEBI) was initially established as a non-
statutory body in April1998, Ior (A) dealing With all matters relating to the
development and regulations, (B) providing investor protection, and (C) advising
the government on all this matters. SEBI was given statutory status by an Act oI
Parliament on April 4, 1992. SEBI was authorized (a) to regulate all merchant
banks on issue activity, (b)to lay guidelines, and supervise and regulate the
working oI mutual Iunds and (C)to oversee the working oI stock exchange in India.
Functions:- Under the SEBI Act, SEBI has been assigned the Iollowing main
Iunctions:
i) Regulating the business in stock exchanges and other securities markets.
ii) Registration and Regulating the working oI stock brokers, sub-brokers,
share transIer agents, bankers to an issue, trustees oI trust deals, registers
to an issue, merchant bankers, underwriters, portIolio managers, and
other intermediaries associated with the securities markets.
iii) Registering and regulating oI collective investment schemes including
mutual Iunds;
iv) Promoting and regulating working oI selI-regulatory organizations;
v) Prohibiting Iraudulent and unIair trade practice relating to securities
markets.

vi) Promoting investors education and training oI intermediaries oI securities

market.
vii) Prohibiting insiders trading in securities: and
viii) Regulating substantial acquisition oI shares and takeover oI companies.
Strengthening of SEBI:- The statutory powers and Iunctions oI SEBI were Iurther
strengthened through an Ordinance promulgated on 25 January, 1995, later on
replaced by and Act oI Parliament. The main Ieatures oI the ordinance are as
Iollows:
i) SEBI has been empowered to Iile complaints in courts and to notiIy its
regulation without prior approval oI the government.
ii) SEBI is now provided with regulatory powers over companies in the
assurance oI capital, the transIer oI securities and other related matters.
iii) SEBI is now empowered to impose monetary penalties on capital market
intermediaries and other participants Ior a listed range oI violations.
iv) SEBI is now given the power to sunnon attendance oI and call Ior
document Irom all categories oI market intermediaries.
v) SEBI has now the power to issue direction to all intermediaries
connected with securities markets with a view to protect investors or
secure the orderly development oI securities market.
4.8-SEBI REGULATION:-
During 1995-96 , SEBI introduced a number oI new rules and regulation
which will improve market practice. this rules and regulation notiIied under the
SEBI act were as Iollows :
(i) rules on procedure Ior holding enquiry and imposing penalties by
adjusting oIIicer

(ii) rules on securities appellate tribunal(procedure)

(iii) regulations on prohibition oI Iraudulent and unIair trade practices relating
to securities markets.
(iv) Regulation on Ioreign institutional investors.
(v) Regulation on payment oI Iee(amendment).
4.9-RECENT TRENDS IN CAPITAL MARKET:-
In recent years, the capital market has been quite active. This is evident
Irom the developments in both primary as well as secondary markets.
Primary Market (New Issues):-
Primary new issues market has shown a rising trend since 1971. The total
consents by the controller oI capital issues (CCI) as well as the amount oI capital
actually raised by public limited companies has increased substantially during
1971 to 1990. The consents granted by the CCI rose Irom Rs 171 crore to Rs 620
crore in 1981-1982, to Rs 1784 crore in 1984-85, and Rs 4,200 crore in 1990-91.
Similarly, the annual average oI capital actually raised by the public limited
companies has increased Irom Rs 74 crore during 1971-75 to Rs 110 crore during
1975-79, to Rs 938 crore during 1981-85, and to Rs 3031 crore during 1986-90.
Then, the stock market scam oI 1992 restricted the issue oI both new and old
companies.
Since 1993, the market has again become active. For 1993-94, total number
oI 1143 issues were lunched, raising an amount oI Rs. 24372 crore Irom the
market. About 68 oI the total number oI issue launched were public issues and
the remaining 32 were rights issues. The total number oI issues increased to
1666, raising raising Rs. 27621 crore in 1994-95, and to 1725 issues, raising Rs

20805 crore in 1995-96. The portion oI public issue in the total number oI issues
rose to 81 in 1994-95 and to 83 in 1995-96.
Secondary Market (Security Prices):-
The market prices oI securities reIlect investores` assessment oI the growth
prospects oI the companies and their conIidence in those companies. The direction
oI change in these prices also represented the scope oI raising new capital in the
market and inIluences the decision oI the management oI companies. During rising
their share prices, it is easier to rise new capital.
In terms oI ordinary share prices, the industrial securities market in India has
been presenting a mixed treand. The market experience a serve set-back since July
1974, mainly because oI the restrictions on dividend distribution and rise in short
term interest rates as well as those oIIered on deposits by non-banking companies.
The index number oI all India security prices Ior ordinary shares (1970-71100),
which was 133 in July 1974, Iell to 90 by the end oI june 1975. Then the market
started witnessing a sustained upward trained . the all India index number rose to
126 in June 1978, to 203 in June 1984, to 356 in June 1985, and 640 in June 1986.
In 1987-88, the stock exchange crashed due to the crash in the Relaince shares.
From 1988-89 onwards, there was again upward swing in stock market.

CHAPTER- 5
Conclusion &Executive Summary

5.1-FINDINGS:

The results oI the survey and Iollowing studies revealed several challenges and
gaps that need to be addressed regarding the development oI the Islamic capital
markets. Individual IOSCO members may conclude that certain pre-requisites such
as a sound regulatory Iramework, a robust accounting Iramework, a Iacilitative tax
environment and an appropriate $,7, compliance process must be in place in
order Ior there to be a Iair, eIIicient and transparent Islamic capital market. A
signiIicant Iinding Irom the survey was the consensus view that the conventional
securities regulation Iramework and principles equally apply to the Islamic capital
market, with the addition oI some Iorm oI a $,7, approval or certiIication
process. This augurs well Ior the growth oI the Islamic capital market as it implies
that there is no need to Iormulate separate regulatory principles Ior the Islamic
capital market. By extension, IOSCO`s objectives and principles oI securities
regulation can be applied to the Islamic capital market. Within this context, the
Islamic capital market may be perceived as a class oI products within the wider
securities market. However, some jurisdictions have suggested that specialised
regulation Ior Islamic capital markets may be necessary and, Irom their
perspective, this may require more in-depth examination oI the speciIic regulatory
requirements. The survey also highlighted several gaps and concerns such as the
divergent $,7, interpretations, the lack oI available and easily accessible data
on Islamic capital market statistics and a shortage oI market proIessionals well
versed in both Islamic Iinance and $,7, principles. Addressing these concerns
may require international cooperation and dialogue among interested IOSCO
members. Securities regulators involved in Islamic capital markets and other

international Islamic Iinancial institutions like AAOIFI and IFSB, are well-
positioned to play a signiIicant role in Iacilitating the exchange oI views and to
spearhead the Iormulation oI potential recommendations with the aim oI assuring
that regulations developed Ior the Islamic capital markets are compliant with
IOSCO`s Objectives and Principles.

5.2-CONCLUSION &SUGGESTIONS

Determination oI share price: In our country, share prices, are not
determined, Iollowing the standard norms as are Iollowed in the case with
company share/stock valuation. In capital market worldwide, what happens is the
eIIect oI demand and supply that determine the share price. Such a mechanism
ignoring the norms, stated hereunder, causes manipulation oI share prices. In Iact,
share price should be determined on the ingredients, used in share valuation by
company to plug the scope Ior any price manipulation in the capital market.
In economics, when too much money chases too Iew goods, there is inIlation. But
what happens iI too much money chases too Iew securities/shares? The answer is
simply price manipulation.
BeIore going to the issue oI considering various remedial measures Ior
Securities and Exchange Commission (SEC) to take, various models oI share price
determination are taken up Ior discussion.
The possible reasons Ior share price determination can be taken up Iirst: The
share price do need to be determined on the Iollowing basis.
1. Timing oI a company going Ior obtaining a stock exchange listing.
2. The time Ior a current share holder wanting to sell his or her holding as a
personal holding.
3. The need on the past oI a share holder Ior valuation Ior the purpose oI
taxation.

4. Whether shares are being used as security Ior a loan and when.
5. The time Ior assessing the values oI the shares oI a company at the time oI
its proposed an amalgamation with another one is proposed..
6. Where the current market prices are not representative Ior a number oI
shares under consideration.
5.3-CONCLUSION AND PRESENT POSITION:-
Board conclusion oI various capital market reIorms in India are summed up in
the Iollowing manner:
i) A process capital market reIorms has been initiated since 1991-92.
ii) The need Ior such reIorms arises Irom the Iact oI the impressive increases
in the quantity oI Iunds raised in the capital market since 1985-86, but
without any improvement in this market.
iii) The Iunctioning oI stock exchanges shows many shortcoming with long
delays lack oI transparency in procedures and vulnerability to price
rigging and insider trading.
iv) The key measure in this Iield is the establishment oI the Stock exchange
Boards oI India (SEBI) with eIIect Irom March 31. 1982.
v) The Capital Issue Controls Act, 1947 was replaced in May 1992 and the
oIIice oI the controller oI Capital Issues (CCI) was subsequently
abolished.
vi) Companies are now Iee to approach the capital market without prior
government permission subject to getting other documents cleared by
SEBI.
vii) Control over price and premium Iixation has also been removed and most
issuing companies are Iee to Iix the issue price oI their securities Ior the
public as well as rights issues.

viii) Indian companies have been permitted to rise capital Ior modernization
and import requirements in international capital market through Euro-
equity issues,
ix) Companies issuing capital in the primary markets are now required to
disclose all material Iacts and speciIic risk Iactors related to their
projects.
x) All restrictions on interest rates on debentures and public sector bonds
other than the tax-Iee PSU bonds were removed.
xi) To sum up, various capital markets in general intended to achieve market
Ireedom and regulation oI the market Ior investors protection.

5.4BIBLIOGRAPHY

1. www.nseindia.com
2. www.bseindia.com
3. Money & Iinancial System R.R. Paul
4. Economic Times
5. www.google.com