Project On Performance of Capital Market Final

PERFORMANCE OF CAPITAL MARKETS
CHAPTER-I Introduction and Research methodology
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1.1 INTRODUCTION:
Indian Capital market has witnessed a paradigm shift at par with the advanced markets of the world in the last 10 years or so. Business process, functionality, monitoring / regulating mechanisms, hardware, software etc., are all revamped to compete with the global leaders. The current stand of Indian capital market has a long history in its back. The history of the capital market in India dates back to the eighteenth century when East India Company securities were traded in the country. In 1850s, the trading was limited to a dozen brokers and their trading place was under a banyan tree in front of the Town Hall in Bombay. The location of trading changed many times, as the number of brokers constantly increased. The group eventually moved to Dalal Street in 1874 and in 1875 became an official organization known as The Native Share & Stock Brokers Association. In 1895, this association acquired a premise in the Dalal Street and it was inaugurated in 1899. Thus, the Stock exchange at Bombay was consolidated. And, the orderly growth of the capital market in India began. The Bombay stock exchange got recognition in May 1927 under the Bombay Securities Contracts Control Act, 1925. The constitution of India came into being on 26th January, 1950. The constitution put the stock exchanges and the forward markets under the exclusive authority of the Government of India. In 1956, the BSE became the first stock exchange to be recognized by the Indian Government under the Securities Contracts (Regulation) Act. The 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 governments liberalization process initiated during the mid-1980s, spurred this growth. The Bombay Stock Exchange developed the BSE Sensex in 1986, giving the BSE a means to measure overall performance of the exchange. The 1990s will go down as the most important decade in the history of the capital market of India. The Capital Issues (Control) Act, 1947 was repealed in May 1992. The decade was characterized by a new industrial policy, emergence of SEBI as a regulator of capital market, advent of foreign institutional investors, euro-issues, free pricing, new trading practices, new stock exchanges, entry of new players such as
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PERFORMANCE OF CAPITAL MARKETS private sector mutual funds and private sector banks, and primary market boom and bust. The 1991-92 securities scam revealed the inadequacies of and inefficiencies in the financial system. It was the scam, which prompted a reform of the equity market. The Indian stock market witnessed a sea change in terms of technology and market prices. Technology brought radical changes in the trading mechanism. The Bombay Stock Exchange (BSE) was subject to nationwide competition by two new stock exchanges the National Stock Exchange (NSE), set up in 1994, and Over the Counter Exchange of India (OTCEI), set up in 1992. The National Securities Clearing Corporation (NSCC) and National Securities Depository Limited (NSDL) were set up in April 1995 and November 1996 respectively form improved clearing and settlement and dematerialized trading. The Securities Contracts (Regulation) Act, 1956 was amended in 1995-96 for introduction of options trading. Moreover, rolling settlement was introduced in January 1998 for the dematerialized segment of all companies. With automation and geographical spread, stock market participation increased. In 1996, the National Stock Exchange of India launched S&P CNX Nifty and CNX Junior Indices that make up 100 most liquid stocks in India. CNX Nifty is a diversified index of 50 stocks from 25 different economy sectors. The Indices are owned and managed by India Index Services and Products Ltd (IISL) that has a consulting and licensing agreement with Standard & Poors. In 1998, the National Stock Exchange of India launched its web-site and was the first exchange in India that started trading stock on the Internet in 2000. The NSE has also proved its leadership in the Indian financial market by gaining many awards such as Best IT Usage Award by Computer Society in India (in 1996 and 1997) and CHIP Web Award by CHIP magazine (1999). In 2000 the BSE used the sensitive index, i.e., Sensex to open its derivatives market, trading Sensex futures contracts. The development of Sensex options along with equity derivatives followed in 2001 and 2002, expanding the BSEs trading platform. The introduction of rolling settlement system in all scrips and electronic fund transfer in 2003 reduced the settlement cycle to T+2.
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PERFORMANCE OF CAPITAL MARKETS Indian capital market in 2007-08, thus, features a developed regulatory environment, a modern market infrastructure, a steadily increasing market capitalization and liquidity, better allocation and mobilization of resources, a rapidly developing derivatives market, a robust mutual fund industry, and increased issuer transparency. However, in the last quarter of 2008 and up to the first quarter of 2009, the capital market went through a phase of downsizing due to the direct impact of global financial crisis that originated from the USA sub-prime mortgage market. Indian capital market has seen its worst time with the global financial crisis. The most popular stock index, i.e., Sensex declined to its levels attained in December 2005. Similar decline has also been noticed for S & P CNX Nifty index. Despite the scale down of popular capital market indices up to the first quarter of 2009, Indian stock markets now provide the evidence of strong resistance to global financial contagion. This infers the strong investor confidence and well risks diversification in Indian capital markets. The figures below clarify the trend of these index movements from January 2007 to July 2009.
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1.2 Objectives OF THE STUDY
To understand and analyze the functioning of the capital markets. To understand the importance of capital markets. To understand the evolution of capital markets. To understand the new developments and challenges faced in the capital markets
To understand the recent reforms in the capital markets. To understand the background of capital markets in brief. To identify the factors influencing capital markets. To understand the impact of capital markets on economic growth.
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1.3 SCOPE OF THE STUDY
In this report the broadest and simplest limitation of the boundaries of the capital market has been used. It covers all financial assets and liabilities and all transactions in such assets except those which involve the exchange of money for a nonfinancial consideration, i.e., except monetary payments in exchange for commodities and for labour and capital services. For statistical convenience, gross transactions in money and money market instruments (Treasury bills, bankers' acceptances, commercial and finance company paper),though not the holdings or net changes in them, will be disregarded. The report so defined includes transactions not only in organized marketssecurities exchanges or the over-the-counter markets but also in nonmonetary financial assets effected among financial institutions, between a financial institution and a member of another sector of the economy, or among members of nonfinancial sectors. The capital market also covers imputed transactions of a financial character, the most important of which are retained earnings (internal saving) accruals and capital consumption allowances, and interest accrued. These are sometimes called nonmarket capital fund flows to distinguish them from actual capital market transactions. This definition of the capital market entirely ignores the distinction often made between the capital market and the money market, i.e., the separation of liquid shortterm claims and liabilities from other financial assets. There seems to be no sound reason for making this distinction as no sharp boundary &lists between short-term claims, on the one hand, and long-term claims and equities, on the other. The capital market has two aspectsflows of financial transactions and stocks of financial assets and liabilitieswhich are closely related because stocks may be looked upon as the sum of net previous flows and net flows can be regarded as first differences in stocks.
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1.4 SIGNIFICANCE OF THE STUDY:

This project has attempted to demonstrate an important role played by capital market in economic growth and development. Capital market enhances efficient financial intermediation. It increases mobilization of savings and therefore improves efficiency and volume of investments, economic growth and development. It has been shown that development of capital market in India will play a significant role in promoting growth and development within the country. It will increase the level of financial intermediation, leading to increased volume and quality of investments, and therefore economic growth. Effective bond market will free up capital for investment in private sector; allow the Government access to finance and therefore pursue development objectives and fuel economic growth. It will also increase investments and flow of money within the country; and support the development of other financial markets like stock exchange. In short, it will increase sources of investment funds for the domestic economy. Development of a countrys capital market can be seen as an important step in deepening the financial sector and extending access to longer term finance (bonds and equity) for private sector and public sector business. However attempts to kick start this by simply providing market infrastructures such as stock exchanges, trading platforms and efficient registration and settlement systems are not sufficient. Many of the building blocks for well-rounded capital markets need to be developed in tandem. For example, rapid development of potential institutional investors such as pension funds, life insurance companies and some collective investment schemes in a market where there is a lack of suitable investment product may lead to asset bubbles or investment in higher risk assets.
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1.5 Research Methodology
1.5.1 FORMATION OF A PROBLEM:Indian capital market is truly an emerging market as it is significant in terms of the degree of development, volumes of trading and in terms of its tremendous growth potential. Thus, analysis of the parameters like market size, market liquidity and market turnover should be done to gauge the performance of Indian capital market.
1.5.2 DATA COLLECTION:

Secondary Data :- Data have been gathered from the publications of RBI, NSE India, and SEBI and from the websites of BSE India, NSE India, RBI, and SEBI.
1.5.3 RESEARCH INSTRUMENTS:Analysis of the parameters like Market size, market liquidity, market turnover.
1.5.4 SAMPLING PLAN:

Sample Size: 2 leading stock markets of India. Sample Unit: Bombay Stock Exchange and National Stock Exchange have been taken as sample unit as the proxies for Indian Capital market. Sampling Area: Mumbai. Sampling Technique: Analysis of the parameters like market size, market liquidity, market turnover over the sample period of 2004-11 by examining the annual, and the daily data.
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1.5.5 Research Limitations
Data collection :- The most important constraint in this study will be data
collection as secondary data will be selected for study. Secondary data refers to data which have already been collected and analysed by someone else.
Reliability :- The data collected in research work puts a question mark on
reliability of the data, which is a very important factor of this study as conclusion will be derived from this secondary data only.
Accuracy :- The facts and findings of the data cannot be accepted as accurate
to some extent.
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CHAPTER-II Review of literature
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2. REVIEW OF LITERATURE:
1. European Journal of Economics, Finance and Administrative SciencesIssue 23 ISSN 1450-2275 Issue 23 (2010) By P K Mishra, M Malla http://www.eurojournals.com/ejefas_23_04.pdf Abstract: In last decade or so, it has been observed that there has been a paradigm shift in Indian capital market. The applications of technology in the payment and settlement systems have made the Indian capital market comparable with the international capital markets. Now, the market features a developed regulatory mechanism and a modern market infrastructure with growing market capitalization, market liquidity, and mobilisation of resources. However, the market has witnessed its worst time with the recent global financial crisis that originated from the US sub-prime mortgage market and spread over to the entire world as a contagion. The capital market of India delivered a sluggish performance. In this context, it is imperative to conduct empirical analysis to study the performance of Indian capital market. It is with this backdrop, this paper is an attempt to analyse the key market parameters such as market size, market liquidity, market turnover ratio, market volatility, and market efficiency of Indian capital market over a period from 2002 to 2009 so as to assess its performance. The application of time series econometrics provides the evidence of greater volatility and weak form inefficiency of the market. However, the market shows strong potential for greater market size, more liquidity and reasonable market turnover ratio. Therefore, the growth of Indian capital market happens to contribute to the sustainable development of Indian economy.
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2. The journal of the Indian Institute of Management, Ahmedabad By Samir K. Barua, V. Raghunathan, Jayanth R. http://www.iimahd.ernet.in/~jrvarma/papers/Vik19-1.htm Abstract: In this paper we present a review of research done in the field of Indian capital markets during the fifteen years from 1977 to 1992. The research works included in the survey were identified by two search procedures. Firstly, we wrote to 118 Indian university departments and research institutions requesting information on the works done in this field in their department/institution. After three reminders, we obtained responses from 53 institutions. Simultaneously, we searched through various Indian journals in our library, located books listed in the library catalogue and traced through the list of references provided in various research works. Considering the size, vintage and development of the Indian capital market, the total volume of research on it appears to be woefully modest - about 0.1 unit of work per institution per year! Moreover, a large number of works are merely descriptive or prescriptive without rigorous analysis. Certain areas such as arbitrage pricing theory, option pricing theory, agency theory, and signalling theory are virtually unresearched in the Indian context. Besides, very little theoretical work has been done by researchers in India. However, with improved availability of databases and computing resources, and with increasing global interest in Indian markets, we expect an explosion of work in the near future.
3. The Critical Role of the African Stock Exchanges in Mobilizing Capital for African Private Enterprises. (Nairobi: 1993) By Peter G. Rwelamira
http://repository01.lib.tufts.edu:8080/fedora/get/tufts:UA015.012.DO.00089/bd ef:TuftsPDF/getPDF
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Abstract: Over the past two decades, capital markets in developing countries have experienced a rapid evolution. The aggregate market capitalization of countries classified by the IFC as emerging markets rose from $488 billion in 1988 to $2,225 billion in 1996. Trading on these stock markets rose in similar magnitude, growing from $411 billion to $1,586 billion in that period. International donors, governments in developed countries and international financial institutions seem to pay more attention to the Asian and Latin American emerging capital markets in contrast to the African markets (particularly in Sub-Saharan Africa) as evidenced by few studies and literature on the development of capital markets in Sub-Saharan Africa. This study will, therefore, focus on capital market development in Africa, with the Nairobi Stock Exchange (NSE) as a case study. The NSE has continued to increase in importance in economic growth and capital market development in Kenya and the East Africa region. The study will, therefore, explore the path of its development with an emphasis on its structure and organization; rules, regulations and practice; trend in market performance; recent developments; challenges to development; and the way forward in the new millennium. The lessons from this study as well as the recommendations for the future will contribute to the understanding of the development of other capital markets in Africa and other developing regions of the world. 4. Vilakshan, XIMB Journal of Management Article-09-10 By JK Nayak www.ximb.ac.in/ximb_journal/Publications/Article-09-10.pdf Abstract: The new issue market, also known as primary market, has undergone an exponential growth in the last decade or so. The paid up capital as well as the number of listed companies has risen sharply. Undoubtedly, this is an indication of a healthy trend in the development of the nation. But the moot question to be answered is whether the growth of the new issue market has witnessed a decline in investor grievances in comparison to the past i.e., before liberalization or it has been on the rise. In this
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paper an attempt has been made to find out the common grievances and the regulatory measures undertaken to provide protection. An empirical approach has been established in this paper. 5. The Journal of Business Perspective: Integration of Indian Capital Markets with Global Markets: An Empirical Study July 2002 vol. 6 no. 2 73-79 By Partha De Sarkar, Surendra S yadav, DK Banwet Abstract: From 1997 onwards, the effect of globalization is becoming evident in the Indian capital markets. The stock prices of Indian companies and the stock market indices have been driven not just by the macro and micro factors of the Indian economy. Events in other parts of the world have also increasingly started having an impact. This is in stark contrast to the situation in the insular days prior to 1991, when major policy changes were made by the Indian government to open up the economy. The increased volatility of stock markets and reduction in controls over capital movements across borders has reflected in the stock prices in India. This paper aims at validating that indeed globalization has found its way into the Indian capital markets. It estimates the extent of correlation between the major world stock markets in USA, UK, Japan and Hong Kong with the Indian Stock Market Index like the BSE Sensex and also how portfolio fund flows have affected its movement. The study restricts itself to the period between January 1997 and June 2000. In brief, this paper seeks to: establish the relationship between the Bombay 30 Stock Sensitivity Index (SENSEX) and the global indices mentioned above like Dow Jones Industrial Average, NASDAQ Composite of USA, FTSE100 of UK, Nikkei 225 of Japan and the Hang Seng of Hong Kong. look at how portfolio funds flows have been affecting the Indian stock market.
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6. The International journals Research journal of commerce and behavioural science ISSN : 2251-1547 By Anuradha Reddy Malipatel
http://www.theinternationaljournal.org/ojs/index.php?journal=rjcbs&page=article&op =view&path%5B%5D=355
Abstract: Capital market is the backbone of any countrys economy. It facilitates conversion of savings to investments. Capital market can be classified as primary and secondary market. The fresh issue of securities takes place in primary market and trading among investors takes place in secondary market. Primary market is also known as new issues market. Equity investors first enter capital market though investment in primary market. In India, common investors participating in the equity primary market is massive. The number of companies offering equity through primary markets increased continuously in the post independence period till the year 1995. After 1995, there is a continuous slump experienced by the primary market offering equity. The main reason for slump is lack of investor confidence in the primary market. So it is important to understand the causes and measures of revival of investor confidence leading to capital mobilization and investment in right avenues creating, economic growth in the country. The retail investors play important role in the capital market. Though, their individual contribution may be small but, when it is summed it will become a huge amount/fund. The economic disparities can be reduced by encouraging these retail investors. A survey results says that only 12 per cent of the savings amount is coming to capital market. The present paper is a modest attempt to study the retail investors in Indian capital market.
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7. An Empirical Evaluation of Indian Capital Market in the Global Perspective January 9, 2010 By P.K. Mishra http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1533760
Abstract:
Since last decade or so capital market of India has shown tremendous growth among leading emerging and developed capital markets in the world. Indian capital market has been really boosted up after the reforms of early 1990s, which opened the door for the international investments. The market is on the path of maturity and attained a phenomenal height in spite of its volatility. Now the market is comparable with developed markets. Thus, this paper attempts to frame an empirical evaluation of the Indian capital market in the light of various financial and international aspects over a period from 2001 to 2007. The result provides the evidence of modest degree of integration of Indian capital market with international capital markets and a very strong growth potential.
8. Journal of Finance, Accounting and Management, Financial Crisis and its Impact on Indian Capital Market
1(1), 12-26, July 2010, By Asst. Prof. ANLI SURESH Madras Christian College India http://gsmi-jfam.com/Documents/V1%20N1%20JFAM%20P02%20Anli%20Suresh%20Financial%20Crisis%20and%20Its%20Impact%20on%20Indian %20Capital%20Market.pdf
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Abstract: India, like most other emerging market economies, has so far, not been seriously affected by the recent financial turmoil in developed economies. Because, India adapted financial innovations along with strong regulations. Hence, capital inflows in the past few years increased sharply and have been well above the current account deficit, which has largely remained modest. The objective of the study is based on the impact of financial crisis 2008 and the role of regulations and policy implications spurred by financial innovations to safeguard the Indian capital market and investors confidence. The methodology is based on the hypothesis that the legal framework is a hindrance to financial innovation and does not comply with the changing economic condition and investors expectations. This paper elaborates on various aspects of current financial crisis and its impact on Indian capital market in the arena of financial innovations and global best practices and their policy implications. The concluding observation is that financial stability in India has been achieved through perseverance of prudential policies which prevent institutions from excessive risk taking and financial markets from becoming extremely volatile and turbulent which boosted investors confidence.
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CHAPTER-III Introduction to the topic
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3.1 CAPITAL MARKETS IN BRIEF

Capital markets are markets where people, companies, and governments with more funds than they need (because they save some of their income) transfer those funds to people, companies, or governments who have a shortage of funds (because they spend more than their income). Stock and bond markets are two major capital markets. Capital markets promote economic efficiency by channelling money from those who do not have an immediate productive use for it to those who do. Capital markets carry out the desirable economic function of directing capital to productive uses. The savers (governments, businesses, and people who save some portion of their income) invest their money in capital markets like stocks and bonds. The borrowers (governments, businesses, and people who spend more than their income) borrow the savers' investments that have been entrusted to the capital markets. For example, suppose A and B make Rs. 50,000 in one year, but they only spend Rs.40,000 that year. They can invest the 10,000 - their savings - in a mutual fund investing in stocks and bonds all over the world. They know that making such an investment is riskier than keeping the 10,000 at home or in a savings account. But they hope that over the long-term the investment will yield greater returns than cash holdings or interest on a savings account. The borrowers in this example are the companies that issued the stocks or bonds that are part of the mutual fund portfolio. Because the companies have spending needs that exceeds their income, they finance their spending needs by issuing securities in the capital markets. India has a long tradition of functioning capital markets. The Bombay stock exchange is over a hundred years old and the volume of activity has increased in the recent years. The process of capital market reform 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 as a full-fledged capital market regulator.
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An important policy initiative in 1993 was the opening of capital markets for foreign institutional investors (FII) 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. For the past three years, the stock market has seen an unprecented rise. From languishing in the 4000s, the stock market has risen to more than 12000. Simultaneously, the Indian economy had been growing consistently at a rate of more than 8%. Different reports indicated that India and China would be the drivers of growth of the world economy. Indian Capital markets remained generally orderly during most part of 2006-07. There were, however, some spells of volatility at different points of time during the year reflecting developments in liquidity conditions on account of large and sudden changes in capital flows and cash balances of the Governments.
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3.2 FINANCIAL MARKETS
The degree of integration of financial markets around the world increased significantly during the late 1980s and 1990s. A key factor underlying this process has been the increased globalization of investment seeking higher rates of return and the opportunity to diversify risk internationally. At the same time, many countries have encouraged inflows of capital by dismantling restrictions, deregulating domestic financial markets, and improving their economic environment and prospects through the introduction of market-oriented reforms. This increase in the degree of integration of world capital markets has been accompanied by a significant increase in private capital flows to developing countries. Financial openness is often regarded as providing important potential benefits. Access to world capital markets expands investors opportunities for portfolio diversification and provides a potential for achieving higher risk-adjusted rates of return. It also allows countries to borrow to smooth consumption in the face of adverse shocks, the potential growth and welfare gains resulting from such international risk sharing can be large (Obstfeld, 1994). It has also been argued that by increasing the rewards of good policies and the penalties for bad policies, free flow of capital across borders may induce countries to follow more disciplined macroeconomic policies that translate into greater macroeconomic stability. An increasingly common argument in favour of financial openness is that it may increase the depth and breadth of domestic financial markets and lead to an increase in financial intermediation process by lowering costs and excessive profits associated with monopolistic or cartelized markets, thereby lowering the cost of investment and improving resource allocation. Increasing integration of financial markets also brings in certain risks. It has been recognized that the risk of volatility and abrupt reversals in capital flows in the context of highly open capital accounts may represent a significant cost. Concerns associated with such reversals were heightened by a series of recent financial crises including the Mexican peso crisis of December 1994, the Asian crisis triggered by the collapse of the Thai Baht in July 1997, the Russia crisis of August 1998, and the collapse of the Brazilian Real in
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PERFORMANCE OF CAPITAL MARKETS January 1999. Although misaligned fundamentals of some sort played a role in all of the above crises, they have called attention to the inherent instability of financial markets and the risks that cross-border financial transactions can pose for countries with relatively fragile financial systems and not so strong regulatory and supervision structures. Pro-cyclicality of capital flows may also increase macroeconomic instability, like favourable shocks may attract large amounts of capital inflows and encourage consumption and spending at levels that are unsustainable in the longerterm, forcing countries to over-adjust to adverse shocks as a result of abrupt capital reversals. The large capital inflows induced by financial openness can have
undesirable macroeconomic effects, including rapid monetary expansion (due to the difficulty in managing and cost of pursuing aggressive sterilization policies), inflationary pressures (resulting from the effect of capital inflows on domestic spending), real exchange rate appreciation, and widening current account deficits. From this perspective, a key issue has been to identify the policy pre-requisites that may allow countries to exploit the gains, while minimizing the risks, associated with financial openness in an attempt to integrate with the world capital markets. India, too, has taken a large number of measures in the process of financial liberalization during the 1990s. The overall package of structural reform in India has been designed to enhance the productivity and efficiency of the economy as a whole and thereby make the economy internationally competitive. These reforms include, inter alia, partial deregulation of interest rates; reduction of pre-emption of resources from banks through cash reserve ratio (CRR) and statutory liquidity ratio (SLR); issue of government securities at market related rates; increasing reliance on the indirect method of monetary control; participation of the same set of players in the alternative markets; move towards universal banking; development of secondary markets for several investments; repeal of foreign exchange regulation act (FERA) ; full
convertibility of rupee on the current account ; cross-border movement of capital and adoption of liberal exchange rate policies that assure flexible exchange rates; and investors protection and curbing of speculative activities through wide ranging reforms in the capital market. An important objective of reform has been to develop the various segments of the financial markets into an integrated one, so that their inter-linkages can reduce arbitrage opportunities, help achieve a higher level of
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PERFORMANCE OF CAPITAL MARKETS efficiency in market operation and increase the effectiveness of monetary policy in the economy. We know that, money always flows from surplus sector to deficit sector. That means persons having excess of money lend it to those who need money to fulfill their requirement. Similarly, in business sectors the surplus money flows from the investors or lenders to the businessmen for the purpose of production or sale of goods and services. So, we find two different groups, one who invest money or lend money and the others, who borrow or use the money. Now you think, how these two groups meet and transact with each other. The financial markets act as a link between these two different groups. It facilitates this function by acting as an intermediary between the borrowers and lenders of money. So, financial market may be defined as a transmission mechanism between investors (or lenders) and the borrowers (or users) through which transfer of funds is facilitated. It consists of individual investors, financial institutions and other intermediaries who are linked by a formal trading rules and communication network for trading the various financial assets and credit instruments. Before reading further l let us have an idea about some of the credit instruments. A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument. To clarify the meaning let us take an example. Suppose Gopal has given a loan of Rs. 50,000 to Madan, which Madan has to return. Now, Gopal also has to give some money to Madhu. In this case, Gopal can make a document directing Madan to make payment up to Rs. 50,000 to Madhu on demand or after expiry of a specified period. This document is called a bill of exchange, which can be transferred to some other persons name by Madhu. A promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument. Suppose you take a loan of Rs. 20,000 from your friend Jagan. You can make a document stating that you will pay the money to Jagan or the bearer on demand. Or you can mention in the document that you will pay the amount after three months. This document, once signed by you, duly stamped and handed over to Jagan,
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becomes a negotiable instrument. Now Jagan can personally present it before you for payment or give this document to some other person to collect money on his behalf. He can endorse it in somebody elses name who in turn can endorse it further till the final payment is made by you to whosoever presents it before you. This type of a document is called a Promissory Note. Let us now see the main functions of financial market. It provides facilities for interaction between the investors and the borrowers.
It provides pricing information resulting from the interaction between buyers and sellers in the market when they trade the financial assets.
It provides security to dealings in financial assets.
It ensures liquidity by providing a mechanism for an investor to sell the financial assets.
It ensures low cost of transactions and information.
TYPES OF FINANCIAL MARKETS A financial market consists of two major segments: (a) Money Market; and (b) Capital Market. While the money market deals in short-term credit, the capital
market handles the medium term and long-term credit.
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3.3 STRUCTURE OF CAPITAL MARKETS
Primary markets: The primary market is where new securities (stocks and bonds are the most common) are issued. The corporation or government agency that needs funds (the borrower) issues securities to purchasers in the primary market. Big investment banks assist in this issuing process. The banks underwrite the securities. That is, they guarantee a minimum price for a business's securities and sell them to the public. Since the primary market is limited to issuing new securities only, it is of lesser importance than the secondary market. Secondary market: The vast majority of capital transactions, take place in the secondary market. The secondary market includes stock exchanges (like the New York Stock Exchange and the Tokyo Nikkei), bond markets, and futures and options markets, among others. All of these secondary markets deal in the trade of securities. Securities: The term "securities" encompasses a broad range of investment instruments. Investors have essentially two broad categories of securities available to them: 1. Equity securities (which represent ownership of a part of a company) 2. Debt securities (which represent a loan from the investor to a company or government entity).
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Equity securities: Stock is the type of equity security with which most people are familiar. When investors (savers) buy stock, they become owners of a "share" of a company's assets and earnings. If a company is successful, the price that investors are willing to pay for its stock will often rise and shareholders who bought stock at a lower price then stand to make a profit. If a company does not do well, however, its stock may decrease in value and shareholders can lose money. Stock prices are also subject to both general economic and industry-specific market factors. In our example, if Carlos and Anna put their money in stocks, they are buying equity in the company that issued the stock. Conversely, the company can issue stock to obtain extra funds. It must then share its cash flows with the stock purchasers, known as stockholders. Debt securities: Savers who purchase debt instruments are creditors. Creditors, or debt holders, receive future income or assets in return for their investment. The most common example of a debt instrument is a bond. When investors buy bonds, they are lending the issuers of the bonds their money. In return, they will receive interest payments (usually at a fixed rate) for the life of the bond and receive the principal when the bond expires. National governments, local governments, water districts, global, national, and local companies, and many other types of institutions sell bonds.
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3.4 IMPORTANCE OF CAPITAL MARKETS
Capital market plays an important role in mobilising resources, and diverting them in productive channels. In this way, it facilitates and promotes the process of economic growth in the country. Various functions and significance of capital market are discussed below: 1. Link between Savers and Investors:
The capital market functions as a link between savers and investors. It plays an important role in mobilising the savings and diverting them in productive investment. In this way, capital market plays a vital role in transferring the financial resources from surplus and wasteful areas to deficit and productive areas, thus increasing the productivity and prosperity of the country. 2. Encouragement to Saving:
With the development of capital, market, the banking and non-banking institutions provide facilities, which encourage people to save more. In the less- developed countries, in the absence of a capital market, there are very little savings and those who save often invest their savings in unproductive and wasteful directions, i.e., in real estate (like land, gold, and jewellery) and conspicuous consumption. 3. Encouragement to Investment:
The capital market facilitates lending to the businessmen and the government and thus encourages investment. It provides facilities through banks and nonbank financial institutions. Various financial assets, e.g., shares, securities, bonds, etc., induce savers to lend to the government or invest in industry. With the development of financial institutions, capital becomes more mobile, interest rate falls and investment increases.
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4. Promotes Economic Growth: The capital market not only reflects the general condition of the economy, but also smoothens and accelerates the process of economic growth. Various institutions of the capital market, like nonbank financial intermediaries, allocate the resources rationally in accordance with the development needs of the country. The proper allocation of resources results in the expansion of trade and industry in both public and private sectors, thus promoting balanced economic growth in the country. 5. Stability in Security Prices: The capital market tends to stabilise the values of stocks and securities and reduce the fluctuations in the prices to the minimum. The process of stabilisation is facilitated by providing capital to the borrowers at a lower interest rate and reducing the speculative and unproductive activities. 6. Benefits to Investors: The credit market helps the investors, i.e., those who have funds to invest in long-term financial assets, in many ways: (a) It brings together the buyers and sellers of securities and thus ensure the marketability of investments, (b) By advertising security prices, the Stock Exchange enables the investors to keep track of their investments and channelize them into most profitable lines, (c) It safeguards the interests of the investors by compensating them from the Stock Exchange Compensating Fund in the event of fraud and default.
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3.5 ROLE OF CAPITAL MARKETS

The 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. Regulation of the Capital Market Every capital market in the world is monitored by financial regulators and their respective governance organization. The purpose of such regulation is to protect investors from fraud and deception. Financial regulatory bodies are also charged with minimizing financial losses, issuing licenses to financial service providers, and enforcing applicable laws. The Capital Markets Influence on International Trade Capital market investment is no longer confined to the boundaries of a single nation. Todays corporations and individuals are able, under some regulation, to invest in the capital market of any country in the world. Investment in foreign capital markets has caused substantial enhancement to the business of international trade.
The Primary and Secondary Markets The capital market is also dependent on two sub-markets the primary market and the secondary market. The primary market deals with newly issued securities and is responsible for generating new long-term capital. The secondary market handles the trading of previously-issued securities, and must remain highly liquid in nature because most of the securities are sold by investors. A capital market with high liquidity and high transparency is predicated upon a secondary market with the same qualities.
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3.6 EVOLUTION OF CAPITAL MARKETS

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. The earliest records of security dealings in India are meagre and obscure. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century. By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850. The 1850's witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60. In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87). At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street (now appropriately called as Dalal Street) where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively known as " The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.
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Other leading cities in stock market operations Ahmedabad gained importance next to Bombay with respect to cotton textile industry. After 1880, many mills originated from Ahmedabad and rapidly forged ahead. As new mills were floated, the need for a Stock Exchange at Ahmedabad was realised and in 1894 the brokers formed "The Ahmedabad Share and Stock Brokers' Association". What the cotton textile industry was to Bombay and Ahmedabad, the jute industry was to Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta. After the Share Mania in 1861-65, in the 1870's there was a sharp boom in jute shares, which was followed by a boom in tea shares in the 1880's and 1890's; and a coal boom between 1904 and 1908. On June 1908, some leading brokers formed "The Calcutta Stock Exchange Association". In the beginning of the twentieth century, the industrial revolution was on the way in India with the Swadeshi Movement; and with the inauguration of the Tata Iron and Steel Company Limited in 1907, an important stage in industrial advancement under Indian enterprise was reached. Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies generally enjoyed phenomenal prosperity, due to the First World War. In 1920, the then demure city of Madras had the maiden thrill of a stock exchange functioning in its midst, under the name and style of "The Madras Stock Exchange" with 100 members. However, when boom faded, the number of members stood reduced from 100 to 3, by 1923, and so it went out of existence. In 1935, the stock market activity improved, especially in South India where there was a rapid increase in the number of textile mills and many plantation companies were floated. In 1937, a stock exchange was once again organized in Madras - Madras Stock Exchange Association (Pvt) Limited. (In 1957 the name was changed to Madras Stock Exchange Limited).
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Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with the Punjab Stock Exchange Limited, which was incorporated in 1936. Indian Stock Exchanges - An Umbrella Growth The Second World War broke out in 1939. It gave a sharp boom which was followed by a slump. But, in 1943, the situation changed radically, when India was fully mobilized as a supply base. On account of the restrictive controls on cotton, bullion, seeds and other commodities, those dealing in them found in the stock market as the only outlet for their activities. They were anxious to join the trade and their number was swelled by numerous others. Many new associations were constituted for the purpose and Stock Exchanges in all parts of the country were floated. The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited (1940) and Hyderabad Stock Exchange Limited (1944) were incorporated. In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited and the Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947, amalgamated into the Delhi Stock Exchnage Association Limited. Post-independence Scenario Most of the exchanges suffered almost a total eclipse during depression. Lahore Exchange was closed during partition of the country and later migrated to Delhi and merged with Delhi Stock Exchange. Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963. Most of the other exchanges languished till 1957 when they applied to the Central Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad and Indore, the well established exchanges, were recognized under the Act. Some of the members of the other Associations were required to be admitted by the recognized stock exchanges on
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a concessional basis, but acting on the principle of unitary control, all these pseudo stock exchanges were refused recognition by the Government of India and they thereupon ceased to function. Thus, during early sixties there were eight recognized stock exchanges in India (mentioned above). The number virtually remained unchanged, for nearly two decades. During eighties, however, many stock exchanges were established: Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982), and Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange Association Limited (1983), Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990) and recently established exchanges - Coimbatore and Meerut. Thus, at present, there are totally twenty one recognized stock exchanges in India excluding the Over The Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL). The Table given below portrays the overall growth pattern of Indian stock markets since independence. It is quite evident from the Table that Indian stock markets have not only grown just in number of exchanges, but also in number of listed companies and in capital of listed companies. The remarkable growth after 1985 can be clearly seen from the Table, and this was due to the favouring government policies towards security market industry.
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Growth Pattern of the Indian Stock Market

As on 31st December No. of Stock Exchanges No. of Listed Cos. No. of Stock 3 Issues of Listed Cos. 4 Capital of Listed Cos. (Cr. Rs.) Market value of 5 Capital of Listed Cos. (Cr. Rs.) Capital per 6 Listed Cos. (4/2) (Lakh Rs.) Market Value of 7 Capital per Listed Cos. (Lakh Rs.) (5/2) Appreciated value 8 of Capital per Listed Cos. (Lak Rs.) 358 170 148 126 170 260 344 803 86 107 167 211 298 582 1770 5564 24 63 113 168 175 224 514 693 971 1292 2675 3273 6750 25302 110279 478121 270 753 1812 2614 3973 9723 32041 59583 1506 2111 2838 3230 3697 6174 8967 11784 1125 1203 1599 1552 2265 4344 6229 8593 7 7 8 8 9 14 20 22 1946 1961 1971 1975 1980 1985 1991 1995
Sl.No.
Source : Various issues of the Stock Exchange Official Directory, Vol.2 (9) (iii), Bombay Stock Exchange, Bombay.
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TRADING PATTERN IN INDIAN STOCK MARKET Trading in Indian stock exchanges are limited to listed securities of public limited companies. They are broadly divided into two categories, namely, specified securities (forward list) and non-specified securities (cash list). Equity shares of dividend paying, growth-oriented companies with a paid-up capital of atleast Rs.50 million and a market capitalization of atleast Rs.100 million and having more than 20,000 shareholders are, normally, put in the specified group and the balance in non-specified group. Two types of transactions can be carried out on the Indian stock exchanges: (a) spot delivery transactions "for delivery and payment within the time or on the date stipulated when entering into the contract which shall not be more than 14 days following the date of the contract" : and (b) forward transactions "delivery and payment can be extended by further period of 14 days each so that the overall period does not exceed 90 days from the date of the contract". The latter is permitted only in the case of specified shares. The brokers who carry over the outstandings pay carry over charges (cantango or backwardation) which are usually determined by the rates of interest prevailing. A member broker in an Indian stock exchange can act as an agent, buy and sell securities for his clients on a commission basis and also can act as a trader or dealer as a principal, buy and sell securities on his own account and risk, in contrast with the practice prevailing on New York and London Stock Exchanges, where a member can act as a jobber or a broker only. The nature of trading on Indian Stock Exchanges are that of age old conventional style of face-to-face trading with bids and offers being made by open outcry. However, there is a great amount of effort to modernize the Indian stock exchanges in the very recent times.
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Over The Counter Exchange of India (OTCEI) The traditional trading mechanism prevailed in the Indian stock markets gave way to many functional inefficiencies, such as, absence of liquidity, lack of transparency, unduly long settlement periods and benami transactions, which affected the small investors to a great extent. To provide improved services to investors, the country's first ringless, scripless, electronic stock exchange - OTCEI - was created in 1992 by country's premier financial institutions - Unit Trust of India, Industrial Credit and Investment Corporation of India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance Corporation of India, General Insurance Corporation and its subsidiaries and CanBank Financial Services. Trading at OTCEI is done over the centres spread across the country. Securities traded on the OTCEI are classified into: Listed Securities - The shares and debentures of the companies listed on the OTC can be bought or sold at any OTC counter all over the country and they should not be listed anywhere else
Permitted Securities - Certain shares and debentures listed on other exchanges and units of mutual funds are allowed to be traded
Initiated debentures - Any equity holding atleast one lakh debentures of a particular scrip can offer them for trading on the OTC.
OTC has a unique feature of trading compared to other traditional exchanges. That is, certificates of listed securities and initiated debentures are not traded at OTC. The original certificate will be safely with the custodian. But, a counter receipt is generated out at the counter which substitutes the share certificate and is used for all transactions. In the case of permitted securities, the system is similar to a traditional stock exchange. The difference is that the delivery and payment procedure will be
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completed within 14 days. Compared to the traditional Exchanges, OTC Exchange network has the following advantages: OTCEI has widely dispersed trading mechanism across the country which provides greater liquidity and lesser risk of intermediary charges.
Greater transparency and accuracy of prices is obtained due to the screenbased scriptless trading.
Since the exact price of the transaction is shown on the computer screen, the investor gets to know the exact price at which s/he is trading.
Faster settlement and transfer process compared to other exchanges.
In the case of an OTC issue (new issue), the allotment procedure is completed in a month and trading commences after a month of the issue closure, whereas it takes a longer period for the same with respect to other exchanges.
Thus, with the superior trading mechanism coupled with information transparency investors are gradually becoming aware of the manifold advantages of the OTCEI.
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National Stock Exchange (NSE) With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock market trading system on par with the international standards. On the basis of the recommendations of high powered Pherwani Committee, the National Stock Exchange was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others. Trading at NSE can be classified under two broad categories: (a) Wholesale debt market and (b) Capital market. Wholesale debt market operations are similar to money market operations institutions and corporate bodies enter into high value transactions in financial instruments such as government securities, treasury bills, public sector unit bonds, commercial paper, certificate of deposit, etc. There are two kinds of players in NSE: (a) trading members and (b) participants. Recognized members of NSE are called trading members who trade on behalf of themselves and their clients. Participants include trading members and large players like banks who take direct settlement responsibility. Trading at NSE takes place through a fully automated screen-based trading mechanism which adopts the principle of an order-driven market. Trading members can stay at their offices and execute the trading, since they are linked through a communication network. The prices at which the buyer and seller are willing to
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transact will appear on the screen. When the prices match the transaction will be completed and a confirmation slip will be printed at the office of the trading member. NSE has several advantages over the traditional trading exchanges. They are as follows: NSE brings an integrated stock market trading network across the nation.
Investors can trade at the same price from anywhere in the country since intermarket operations are streamlined coupled with the countrywide access to the securities.
Delays in communication, late payments and the malpractices prevailing in the traditional trading mechanism can be done away with greater operational efficiency and informational transparency in the stock market operations, with the support of total computerized network.
Unless stock markets provide professionalised service, small investors and foreign investors will not be interested in capital market operations. And capital market being one of the major source of long-term finance for industrial projects, India cannot afford to damage the capital market path. In this regard NSE gains vital importance in the Indian capital market system.
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Nature of the Indian Capital Market
Like the money market, the Indian capital market also consists of an organized sector and an unorganised sector. In the organized market the demand for capital comes mostly from corporate enterprises and government and semi-government institutions and the supply comes from household savings, institutional investors like banks investment trusts, insurance companies, finance corporations, government and international financing agencies. Whereas, the unorganized market consists mostly of the indigenous bankers and moneylenders on the supply side.
Development of the market
The Indian capital market has undergone remarkable changes in the postindependence era. Certain steps taken by the government to place the market on a strong footing and develop it to meet the growing capital requirements of fast industrialization and development of the economy have significantly contributed to the developments that took place in the Indian capital market over the last five decades or so. The important facts that have contributed to the development of the capital marketing India are the following. 1. Legislative measures: Laws like the companies act, the securities contracts (Regulations) and the capital issues (Control). Act empowered the government to regulate the activities of the capital market with a view to assuring healthy trends in the market, protecting the interests of the investors, efficient utilization of the resources, etc.
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2. Establishment of development banks and expansion of the public sectors: Starting with the establishment of the IFCI, a number of development banks have been established at national and regional levels to provide financial and other development assistance to the entrepreneurs and enterprises. These institutions today account for a large chunk of the industrial finance. 3. Growth of underwriting business: There has been a phenomenal growth in the underwriting business thanks mainly to the public financial corporations and the commercial banks. In the last one decade the amount underwritten as percentage of total private capital issues offered to public varied between 72 per cent and 97 per cent. 4. Public confidence: Impressive performance of certain large companies encouraged public investment in industrial securities. 5. Increasing awareness of investment opportunities: The improvement in education and communication has created more public awareness about the investment opportunities in the business sector. The market for industrial securities has become broader. 6. Capital Market Reforms: A number of measures have been taken to check abuses and to promote healthy development of the capital market.
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3.7 REFORMS IN THE CAPITAL MARKETS
The major reforms undertaken in capital market of India includes:Establishment of SEBI : The Securities and Exchange Board of India (SEBI) was established in 1988. It got a legal status in 1992. SEBI was primarily set up to regulate the activities of the merchant banks, to control the operations of mutual funds, to work as a promoter of the stock exchange activities and to act as a regulatory authority of new issue activities of companies. The SEBI was set up with the fundamental objective, "to protect the interest of investors in securities market and for matters connected therewith or incidental thereto."
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The main functions of SEBI are: To regulate the business of the stock market and other securities market. To promote and regulate the self regulatory organizations. To prohibit fraudulent and unfair trade practices in securities market. To promote awareness among investors and training of intermediaries about safety of market. To prohibit insider trading in securities market. To regulate huge acquisition of shares and takeover of companies.
Establishment of Creditors Rating Agencies : Three creditors rating agencies viz. The Credit Rating Information Services of India Limited (CRISIL - 1988), the Investment Information and Credit Rating Agency of India Limited (ICRA - 1991) and Credit Analysis and Research Limited (CARE) were set up in order to assess the financial health of different financial institutions and agencies related to the stock market activities. It is a guide for the investors also in evaluating the risk of their investments. Increasing of Merchant Banking Activities : Many Indian and foreign commercial banks have set up their merchant banking divisions in the last few years. These divisions provide financial services such as underwriting facilities, issue organising, consultancy services, etc. It has proved as a helping hand to factors related to the capital market. Candid Performance of Indian Economy : In the last few years, Indian economy is growing at a good speed. It has attracted a huge inflow of Foreign Institutional Investments (FII). The massive entry of FIIs in the Indian capital market has given good appreciation for the Indian investors in recent times. Similarly many new companies are emerging on the horizon of the Indian capital market to raise capital for their expansions.
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Rising Electronic Transactions : Due to technological development in the last few years. The physical transaction with more paper work is reduced. Now paperless transactions are increasing at a rapid rate. It saves money, time and energy of investors. Thus it has made investing safer and hassle free encouraging more people to join the capital market. Growing Mutual Fund Industry : The growing of mutual funds in India has certainly helped the capital market to grow. Public sector banks, foreign banks, financial institutions and joint mutual funds between the Indian and foreign firms have launched many new funds. A big diversification in terms of schemes, maturity, etc. has taken place in mutual funds in India. It has given a wide choice for the common investors to enter the capital market. Growing Stock Exchanges : The numbers of various Stock Exchanges in India are increasing. Initially the BSE was the main exchange, but now after the setting up of the NSE and the OTCEI, stock exchanges have spread across the country. Recently a new Inter-connected Stock Exchange of India has joined the existing stock exchanges. Investor's Protection : Under the purview of the SEBI the Central Government of India has set up the Investors Education and Protection Fund (IEPF) in 2001. It works in educating and guiding investors. It tries to protect the interest of the small investors from frauds and malpractices in the capital market. Growth of Derivative Transactions : Since June 2000, the NSE has introduced the derivatives trading in the equities. In November 2001 it also introduced the future and options transactions. These innovative products have given variety for the investment leading to the expansion of the capital market.
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Insurance Sector Reforms : Indian insurance sector has also witnessed massive reforms in last few years. The Insurance Regulatory and Development Authority (IRDA) was set up in 2000. It paved the entry of the private insurance firms in India. As many insurance companies invest their money in the capital market, it has expanded. Commodity Trading : Along with the trading of ordinary securities, the trading in commodities is also recently encouraged. The Multi Commodity Exchange (MCX) is set up. The volume of such transactions is growing at a splendid rate. Apart from these reforms the setting up of Clearing Corporation of India Limited (CCIL), Venture Funds, etc., have resulted into the tremendous growth of Indian capital market.
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CHAPTER-IV Impact, Efficiency and Factors influencing Capital market.
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4.1 FACTORS INFLUENCING CAPITAL MARKET
The capital market is affected by a range of factors. Some of the factors which influence capital market are as follows:Performance of domestic companies:The performance of the companies or rather corporate earnings is one of the factors which has direct impact or effect on capital market in a country. Weak corporate earnings indicate that the demand for goods and services in the economy is less due to slow growth in per capita income of people . Because of slow growth in demand there is slow growth in employment which means slow growth in demand in the near future. Thus weak corporate earnings indicate average or not so good prospects for the economy as a whole in the near term. In such a scenario the investors ( both domestic as well as foreign ) would be wary to invest in the capital market and thus there is bear market like situation. The opposite case of it would be robust corporate earnings and its positive impact on the capital market. The corporate earnings for the April June quarter for the current fiscal has been good. The companies like TCS, Infosys, MarutiSuzuki, Bharti Airtel, ACC, ITC, Wipro, HDFC, Binani cement, IDEA, Marico Canara Bank, Piramal Health, India cements , Ultra Tech, L&T, Coca- Cola, Yes Bank, Dr. Reddys Laboratories, Oriental Bank of Commerce, Ranbaxy, Fortis, Shree Cement ,etc have registered growth in net profit compared to the corresponding quarter a year ago. Thus we see companies from Infrastructure sector, Financial Services, Pharmaceutical sector, IT Sector, Automobile sector, etc. doing well . This across the sector growth indicates that the Indian economy is on the path of recovery which has been positively reflected in the stock market( rise in sensex & nifty) in the last two weeks. (July 13-July 24).
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Environmental Factors :Environmental Factor in Indias context primarily means- Monsoon. In India around 60% of agricultural production is dependent on monsoon. Thus there is heavy dependence on monsoon. The major chunk of agricultural production comes from the states of Punjab , Haryana & Uttar Pradesh. Thus deficient or delayed monsoon in this part of the country would directly affect the agricultural output in the country. Apart from monsoon other natural calamities like Floods, tsunami, drought, earthquake, etc. also have an impact on the capital market of a country. The Indian Met Department (IMD) on 24th June stated that India would receive only 93% rainfall of Long Period Average (LPA). This piece of news directly had an impact on Indian capital market with BSE Sensex falling by 0.5% on the 25th June . The major losers were automakers and consumer goods firms since the below normal monsoon forecast triggered concerns that demand in the crucial rural heartland would take a hit. This is because a deficient monsoon could seriously squeeze rural incomes, reduce the demand for everything from motorbikes to soaps and worsen a slowing economy. Macro Economic Numbers :The macro economic numbers also influence the capital market. It includes Index of Industrial Production (IIP) which is released every month, annual Inflation number indicated by Wholesale Price Index (WPI) which is released every week, Export Import numbers which are declared every month, Core Industries growth rate ( It includes Six Core infrastructure industries Coal, Crude oil, refining, power, cement and finished steel) which comes out every month, etc. This macro economic indicators indicate the state of the economy and the direction in which the economy is headed and therefore impacts the capital market in India. A case in the point was declaration of core industries growth figure. The six Core Infrastructure Industries Coal, Crude oil, refining, finished steel, power & cement grew6.5% in June , the figure came on the 23rd of July and had a positive impact on the capital market with the sensex and nifty rising by 388 points &125 points respectively.
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Global Cues :In this world of globalisation various economies are interdependent and interconnected. An event in one part of the world is bound to affect other parts of the world, however the magnitude and intensity of impact would vary. Thus capital market in India is also affected by developments in other parts of the world i.e. U.S. , Europe, Japan , etc .Global cues includes corporate earnings of MNCs, consumer confidence index in developed countries, jobless claims in developed countries, global growth outlook given by various agencies like IMF, economic growth of major economies, price of crude oil, credit rating of various economies given by Moodys, S & P, etc. An obvious example at this point in time would be that of subprime crisis & recession. Recession started in U.S. and some parts of the Europe in early 2008 .Since then it has impacted all the countries of the world- developed, developing , less- developed and even emerging economies. Political stability and government policies:For any economy to achieve and sustain growth it has to have political stability and pro- growth government policies. This is because when there is political stability there is stability and consistency in governments attitude which is communicated through various government policies. The vice- versa is the case when there is no political stability .So capital market also reacts to the nature of government , attitude of government, and various policies of the government. The above statement can be substantiated by the fact the when the mandate came in UPA governments favour (Without the baggage of left party) on May 16 2009, the stock markets on Monday , 18th May had a bullish rally with sensex closing 800 point higher over the previous days close. The reason was political stability. Also without the baggage of left party government can go ahead with reforms.
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Growth prospectus of an economy:When the national income of the country increases and per capita income of people increases it is said that the economy is growing . Higher income also means higher expenditure and higher savings. This augurs well for the economy as higher expenditure means higher demand and higher savings means higher investment. Thus when an economy is growing at a good pace capital market of the country attracts more money from investors, both from within and outside the country and vice -versa. So we can say that growth prospects of an economy does have an impact on capital markets. Investor Sentiment and risk appetite :Another factor which influences capital market is investor sentiment and their risk appetite .Even if the investors have the money to invest but if they are not confident about the returns from their investment, they may stay away from investment for some time. At the same time if the investors have low risk appetite, which they were having in global and Indian capital market some four to five months back due to global financial meltdown and recessionary situation in U.S. & some parts of Europe , they may stay away from investment and wait for the right time to come.
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4.2 IMPACT OF CAPITAL MARKET ON ECONOMIC GROWTH

Since last few decades the importance of the capital market as an efficient channel of financial intermediation has been well recognized by the researchers, academicians, and policy makers as a primary determinant of the economic growth of a country, both developed and developing. Some evidence from cross-country studies supports the view that efficient financial intermediation is crucial to economic development and positively influences growth (e.g., King and Levine 1993a and 1993b; Beck, Levine and Loayza 2000; Levine, Loayza and Beck 2000). In his classic, Lombard Street, published in 1873, Walter Bagehot argued that it was Englands efficient capital markets that made the industrial revolution possible. Economic growth in a modern economy hinges on an efficient financial sector that pools domestic savings and mobilizes foreign capital for productive investments. Underdeveloped or poorly functioning capital markets typically are illiquid and expensive which deters foreign investors. Furthermore, illiquid and high transactions costs also hinder the capital raising efforts of lager domestic enterprises and may push them to foreign markets. Recent theoretical literature on financial development and growth identifies three fundamental channels through which capital markets and economic growth may be linked (Pagano, 1993): capital market development increases the proportion of savings that is funnelled to investments; capital market development may change the savings rate and hence, affect investments; capital market development increases the efficiency of capital allocation. In compliance to these channels, introducing an efficient capital market to link between the net savers (households) and net investors (entrepreneurs) results in reduction of transactions costs associated with funnelling savings, making the household savings highly liquid, enabling selection of efficient investments by gathering information on investment returns efficiently, and providing markets for diversification of risks by households and corporate.
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If the capital markets are not efficient, the public offering largely disappears as a result of high transaction costs or the uncertainty of getting a fair price in the stock market. Thus, inefficient capital markets may reduce the incentive to enter new ventures, reducing overall long-term productivity of the economy. On the other hand, an efficient capital market reduces the transaction costs of trading the ownership of the physical assets and thereby paves the way for the emergence of an optimal ownership structure. Thus, efficient and liquid capital markets provide avenues for the effective utilization of funds for long-term investment purposes by mobilizing them from the surplus spending economic units to the deficit spending economic units (Ekineh, 1996). In short, an efficient capital market is essential for long-term growth in capital formation (Osaze, 2000). Ekundayo (2002) argues that a nation requires a lot of local and foreign investments to attain sustainable economic growth and development. The capital market provides a means through which this is made possible. In addition, capital markets provide the opportunities for the purchase and sale of existing securities among investors thereby encouraging the populace to invest in securities and fostering economic growth (Ewah, et al 2009). Therefore, efficiently functioning capital market affects liquidity, acquisition of information about firms, risk diversification, savings mobilization and corporate control (Anyanwu 1998). Hence, by altering the quality of these services, the functioning of stock markets can alter the rate of economic growth (Equakun 2005).
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The role of the Indian capital market in the development of the economy includes: it provides opportunities for companies to borrow funds needed for long-term investment purposes; it provides avenue for the marketing of shares and other securities in order to raise fresh funds for expansion of operations leading to increase in output; it provides a means of allocating the nations real and financial resources between various industries and companies. Through the capital formation and allocation mechanism the capital market ensures an efficient and effective distribution of the scarce resources for the optimal benefit to the economy; it reduces the over reliance of the corporate sector on short-term financing for long-term projects and also provides opportunities for government to finance projects aimed at providing essential amenities for socioeconomic development; it can aid the government in its privatization programme by offering her shares in the public enterprises to members of the public through the stock exchange; it also encourages the inflow of foreign capital when foreign companies or investors invest in domestic securities, provides needed seed money for creative capital development and acts as a reliable medium for broadening the ownership base of family-owned and dominated firms.
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4.3 CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new information accurately and in real time. Capital market efficiency is judged by its success in incorporating and inducting information, generally about the basic value of securities, into the price of securities. This basic or fundamental value of securities is the present value of the cash flows expected in the future by the person owning the securities. The fluctuation in the value of stocks encourage traders to trade in a competitive manner with the objective of maximum profit. This results in price movements towards the current value of the cash flows in the future. The information is very easily available at cheap rates because of the presence of organized markets and various technological innovations. An efficient capital market incorporates information quickly and accurately into the prices of securities. In the weak-form efficient capital market, information about the history of previous returns and prices are reflected fully in the security prices; the returns from stocks in this type of market are unpredictable. In the semi strong-form efficient market, the public information is completely reflected in security prices; in this market, those traders who have non-public information access can earn excess profits. In the strong-form efficient market, under no circumstances can investors earn excess profits because all of the information is incorporated into the security prices. The funds that are flowing in capital markets, from savers to the firms with the aim of financing projects, must flow into the best and top valued projects and, therefore, informational efficiency is of supreme importance. Stocks must be efficiently priced, because if the securities are priced accurately, then those investors who do not have time for market analysis would feel confident about making investments in the capital market. Eugene Fama was one of the earliest to theorize capital market efficiency, but empirical tests of capital market efficiency had begun even before that.
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CHAPTER-V Instruments of capital market
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5.1 INSTRUMENTS IN CAPITAL MARKET
Instruments in International Capital Markets: International Bond Market International Equity Markets
FOREIGN BOND
GDRs
EURO BOND
ADRs
FCCB
ECB
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5.2 BOND MARKET
What is a bond? Bonds are debt. They are debt because when an investor buys a bond they are effectively loaning the bonds issuer a sum of money and that issuer is incurring a debt. So the issuer or seller of the bond - is a borrower and the investor - or buyer of the bond - is a lender.
The price paid for the bond is the money the investor is loaning the issuer. And, like most other loans, when you buy a bond the borrower pays you interest for as long as the loan is outstanding and then at the end of the agreed period of the loan pays you the loan back.
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The Bond Market The bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. As of 2006, the size of the international bond market is an estimated $45 trillion, of which the size of the outstanding U.S. bond market debt was $25.2 trillion. Average daily trading volume in the U.S. bond market takes place between brokerdealers and large institutions in a decentralized, over-the-counter (OTC) market. However, a small number of bonds, primarily corporate, are listed on exchanges.
The bonds can be broadly classified as: 1. Foreign bonds:
These bonds are issued within a particular country and denominated in the currency of that country, but the issuer is a non-resident. Dollar denominated bonds issued in US domestic markets by non US companies are known as Yankee bonds Yen denominated bonds issued in Japanese domestic markets by non Japanese companies are known as Samurai bonds. Pound denominated bonds issued in UK domestic markets by non UK companies are known as Bulldog bonds 2. Eurobonds:
These are bonds issued outside the country of the currency in which such bonds are denominated. For instance US dollars denominated bonds issued in Europe, called as Eurodollar Bonds.
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What is the difference between Eurobonds and foreign bonds? Eurobonds are bonds which are underwritten by a multinational syndicate of banks and sold simultaneously in many countries other than the country of the issuing entity. Foreign bonds are bonds which are sold in a particular country by a foreign borrower, and underwritten by a syndicate of members from that country; foreign bonds are denominated in the currency of that country.
International Equity Markets:
Funds can be raised in the primary market from the domestic market as well as from international markets. After the reforms were initiated in 1991, one of the major policy changes was allowing Indian companies to raise resources by way of equity issues in the international markets. Earlier, only debt was allowed to be raised from international markets. In the early 1990s foreign exchange reserves had depleted and the countrys rating had been downgraded. This resulted in a foreign exchange crunch and the government was unable to meet the import requirement of Indian companies. Hence allowing companies to tap the equity and bond market In Europe seemed a more sensible option. This permission encourages Indian companies to become global. India companies have raised resources from international capital markets through 1. Global depository receipts (GDRs) / 2. American Depository Receipts (ADRs) 3. Foreign Currency Convertible Bonds (FCCBs) 4. External Commercial Borrowings (ECBs).
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Depository Receipts (GDRs and ADRs) Global Depositary Receipts mean any instrument in the form of a depositary receipt or certificate (by whatever name it is called) created by the Overseas Depositary Bank outside India and issued to non-resident investors against the issue of ordinary shares or Foreign Currency Convertible Bonds of issuing company. A GDR issued in America is an American Depositary Receipt (ADR). Issue of equity in the form of GDR/ADR is possible only for the few top notch corporates of the country. Among the Indian companies, Reliance Industries Limited was the first company to raise funds through a GDR issue. Introduction: ADR stands for American Depository Receipt. Similarly, GDR stands for Global Depository Receipt. Every publicly traded company issues shares and these shares are listed and traded on various stock exchanges. Thus, companies in India issue shares which are traded on Indian stock exchanges like BSE (The Stock Exchange, Mumbai), NSE (National Stock Exchange), etc. These shares are sometimes also listed and traded on foreign stock exchanges like NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities Dealers Automated Quotation).But to list on a foreign stock exchange, the company has to comply with the policies of those stock exchanges. Many times, the policies of these exchanges in US or Europe are much more stringent than the policies of the exchanges in India. This deters these companies from listing on foreign stock exchanges directly. But many good companies get listed on these stock exchanges indirectly using ADRs and GDRs. 1. ADR - American Depositary Receipt American Depository Receipts (ADRs) are certificates that represent shares of a foreign stock owned and issued by a U.S. bank. The foreign shares are usually held in custody overseas, but the certificates trade in the U.S. Through this system, a large number of foreign-based companies are actively traded on one of the three major U.S.
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equity markets (the NYSE, AMEX or Nasdaq). An American Depositary Receipt (ADR) is how the stock of most foreign companies trades in United States stock markets. Each ADR is issued by a U.S. depositary bank and represents one or more shares of a foreign stock or a fraction of a share. If investors own an ADR they have the right to obtain the foreign stock it represents, but U.S. investors usually find it more convenient to own the ADR. The price of an ADR is often close to the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares
2. GDRs Global Depository Receipts
A Global Depository Receipt or GDR is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. GDRs represent ownership of an underlying number of shares. Global Depository Receipts facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets - especially RUSSIA. Prices of GDRs are often close to values of related shares, but they are traded and settled independently of the underlying share. Normally 1 GDR = 10 Shares Several international banks issue GDRs, such as JP Morgan Chase, Citigroup, Deutsche Bank, Bank of New York. They trade on the International Order Book (IOB) of the London Stock Exchange. 3. FCCB (Foreign Currency Convertible Bonds): FCCBs are quasi-debt instruments issued by a company to the investors of some other country denominated in a currency different from that of domestic country. Principal and interest both are payable in the foreign currency. They carry an option for the investor to convert them into ordinary equity shares of the company at a later stage in accordance with the terms of the issue. In India FCCB are issued in accordance with guidelines and regulations framed under FEMA Act by the RBI and schemes notified by the Ministry of Finance, Government of India. An FCCB issue by a company is governed by FEM (Transfer or Issue of any Foreign Security) Regulations, 2004 (hereinafter Regulations) and Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt
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Mechanism) Scheme, 1993 (hereinafter the Scheme). The comprehensive guidelines issued on External Commercial Borrowings (ECB) vide A.P. (DIR Series) Circular No. 5 dated August 1, 2005 (hereinafter ECB Guidelines) are also applicable to FCCB issue. In other words the FCCB are required to be issued in accordance with the Scheme. They will also have to adhere to the Regulations. Further they must be meeting the requirements of the ECB guidelines. 4. External Commercial Borrowings (ECBs): Indian corporate companies are allowed to raise foreign loans for financing infrastructure projects. The last are used as a residual source after exhausting external equity as a main source of finance for large value projects.
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5.3 NEED FOR THE DEVELOPMENT OF BOND MARKETS
The Indian financial system is changing fast, marked by strong economic growth, more robust markets, and considerably greater efficiency. But to add to its worldclass equity markets, and growing banking sector, the country needs to improve its bond markets. While the government and corporate bond markets have grown in size, they remain illiquid. The corporate market, in addition, restricts participants and is largely arbitrage-driven. To meet the needs of its firms and investors, the bond market must therefore evolve. This will mean creating new market sectors such as exchange traded interest rate and foreign exchange derivatives contracts. It will need a relaxation of exchange restrictions and an easing of investment mandates on contractual savings institutions to attract a greater variety of investors (including foreign) and to boost liquidity. Tax reforms, particularly stamp duties, and a revamping of disclosure requirements for corporate public offers, could help develop the corporate bond market. And streamlining the regulatory and supervisory structure of the local currency bond market could substantially increase efficiency, spurring innovation, economies of scale, liquidity and competition. Such reforms will help level the playing field for investors. In deciding the course for reform, however, the innovations and experiences of markets in the region are also important. Developing markets often mimic more advanced European and North American markets. But complex structures designed for diverse developed markets are sometimes ill-suited to less-developed economies. Instead, looking to neighbouring, emerging markets at similar stages of development can be more useful. For example, Indias unique collateralized borrowing and lending obligations (CBLO) system and its successful electronic trading platform could usefully be studied by its neighbours, many of which suffer from limited repo markets or which have (like India) tried unsuccessfully to move bonds on to electronic platforms. India could benefit, by contrast, from the lessons of its neighbors in developing its corporate bond market.
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5.4 DEVELOPMENTS IN THE BOND MARKET

Indias economy has expanded an average of about 8.5% annually for the past 4 years, driven by rising productivity and investment. After rising sharply in early 2007, inflation has ebbed, and the current account deficit has moderated. Indias bright prospects have attracted record capital inflows, even amid heightened global uncertainty and slowing growth in the United States (US). The Indian financial system is now in a process of rapid transformation marked by strong economic growth, increased market robustness, and a considerable increase in efficiency. Bank and financial intermediation, however, remain undeveloped with respect to lending and deposits, and most banks remain largely controlled by public sector institutions, limiting the development of a true credit culture, the skills to assess credit risks, and a willingness to accommodate any but the lowest risk borrowers. Overseas investors bought a net USD19.5 billion of stocks and bonds during 2007, compared with the previous record of USD8.9 billion in 2006. The current year has seen net outflows in the first 9 months totalling USD6.9 billion. The bank rate is currently 6% (July 2008) and longer-term deposit rates have risen around 50 basis points (bp) to 9.55% in recent months. Real estate markets have been buoyant, although they have cooled recently, and the banking system remains sound and well capitalized. In March 2008, the capital adequacy ratio stood at 13.1%, well above the 8% minimum prescribed under the Basel I accord. Amid strong credit growth, the ratio of scheduled commercial banks gross nonperforming loans (NPLs) to advances has fallen to 2.4% in March 2008 from 10.4% in March 2002. India has developed a world-class equities market from relatively unpromising beginnings. Since 1996, the ratio of equity market capitalization to gross domestic product (GDP) has more than trebled to 108% (down from 130% in September 2007), from 32.1% in 1996 . During the same period the banking sector expanded to 74% of GDP from 46.5%. In contrast, the development of government and corporate bond markets has not been so fast: the bond market grew to a more modest 40.0% of GDP, from 21.3%. In March 2008, the government bond market represented 36.1% of GDP, compared with the corporate bond market, which amounted to just 3.9% of GDP.
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Trading in derivatives started in 2000 and the Indian market is now the tenth largest in the world for futures contracts on single stocks and indexes and the largest for futures on single stocks. Commodity markets have also developed. Three new markets were created in 2000, based on National Stock Exchange (NSE) architecture. However, of the 94 commodities traded, gold and silver account for half of turnover: by 2006 India had become home to the worlds third largest derivative market for gold. With the strong growth in equity markets, at a time when Indias GDP has itself been increasing more rapidly, it is similar in terms of % of GDP to Korea and relatively larger than other emerging East Asia equity markets, with the exception of Hong Kong, China; Singapore; and Malaysia. Equity trading languished in the early 2000s, when world equity markets were falling and Indian government debt was rising strongly, but has risen since. As is common in the region, India is a bank-dominated market, and the relative importance of bank assets as a percentage of GDP has continued to growpartly as banking penetration has deepened with financial liberalization, and partly as a result of the ongoing need for deficit financing. However, the ratio of bank assets to GDP is still low by comparison with other emerging East Asian economies, indicating that India still has some way to go before its banking sector is fully developed. The same pattern is also seen in the Peoples Republic of China (PRC), which like India has a largely state-owned/controlled financial sector. Other emerging East Asia markets have seen a decline in banking assets as a percentage of GDP since 1996, reflecting greater diversification into other forms of finance, especially for corporate borrowers. The Indian bond market is, however, less well-developed. While having seen rapid development and growth in size, the government bond market remains largely illiquid. Its corporate bond market remains restricted in regards to participants, largely arbitrage-driven (as opposed to driven by strategic needs of issuers) and also highly illiquid. The lack of development is anomalous for two reasons: First, India has developed world-class markets for equities and for equity derivatives supported by high-quality infrastructure. And second, the infrastructure for the bond market, particularly the government bond market, is similarly of high quality.
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Relatively weak development of bond markets is not unusual in the region, indeed in many ways the Indian market shows stronger progressfor example in the use of sophisticated and innovative tools such as collateralized lending and borrowing agreementsbut it is the rapid development of its other markets which is in such stark contrast to its bond markets.
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5.5 DEVELOPMENT OF THE GOVERNMENT SECURITIES MARKET
Indias government bond market has grown steadilylargely due to the need to finance the fiscal deficitand is comparable to many government bond markets in emerging East Asia. At 36% of GDP, the Indian government debt market compares well with the markets of its neighbours (Figure 4). In absolute terms, however, given Indias greater overall size, the Indian government bond market is considerably larger than most other emerging East Asian markets . The need to finance a large fiscal deficit has stimulated issuance and growth of the government bond market. Since 1992, deficit finance has relied increasingly on borrowing from the market rather than the previous policy of monetizing the deficit. The government market comprises approximately 104 issues with a total nominal value of about USD364 billion. The turnover ratio for government bonds is lower than in most markets in emerging East Asiathe corporate ratio compares well, but the small number of outstanding bonds means the secondary market is small and illiquid. The turnover ratio for Indian government bonds, in 2007 was 104%, meaning that, on average, government bonds changed hands slightly more than once a year. Although some caution is necessary when making international comparisons because of differing methodologies, government bond market turnover ratios in other emerging East Asian markets were higher . Ratios in Korea, PRC, and Indonesia were around 150% in 2007; in Malaysia the ratio exceeded 250% and Thailand over 350% (albeit an unusually high figure for Thailand reflecting unusual political circumstances). Elsewhere, the ratio in Japan is over 500%, in Australia over 600%, while the US; Canada; and Taipei, China have ratios well over 2,000%. Hong Kong, China had a ratio of over 9,000% in 2007. Government bond turnover fell away from a peak in 2003 but has since recovered and is currently rising on a strong but volatile trend. Turnover of repurchase agreements (repo) continues to increase as more borrowers use them as a financing tool and is now considerably larger than government bond market turnover by investors. Illustrating the relative illiquidity of the government bond market is the low level of
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traded bondsin the 12 months to July 2007 only 22 of the 95 bonds traded on more than 100 days and only 8 traded on more than 200 days . Liquidity is clearly concentrated in a few bonds and does not extend along the length of the yield curve, which has emerged over a spectrum of 30 years. It is highly concentrated in 10-year issues (bonds maturing in 201617 comprised 50% of all trading) and 5-year issues (bonds maturing in 201012 were 20% of all trading).
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5.6 DEVELOPMENT OF THE CORPORATE BOND MARKET
The corporate bond market is less developed than most in emerging East Asia, with private placements dominating. At 3.9% of GDP, corporate bonds are comparable to levels in the Philippines and Indonesia, where corporate finance is less welldeveloped, as well as with the Peoples Republic of China (PRC) and Viet Nam, where state-ownership remains dominant . That said, corporate bond markets remain small in much of the region with the exception of the Republic of Korea (Korea) and Hong Kong, China. Even in absolute terms Indias corporate bond market is minuscule in relation to its economic size. The role of various sources of corporate finance demonstrates that there is no single model for corporate financesome economies rely more heavily on equity finance, while others more on bank finance. However, few rely so little on corporate bonds as India does. Until 2007, information on Indian corporate bond market turnover was incomplete and largely anecdotal. In 2007, however, the Securities and Exchange Board of India (SEBI) launched initiatives to ensure more comprehensive reporting of the over-thecounter (OTC) bond market . Current volumes are running at low levelsaround 140 transactions amounting to about USD80 million per day. But corporate bond markets worldwide are typically illiquid, so it may be overly optimistic to expect India to develop a uniquely liquid corporate bond market. Nonetheless, a more liquid market should eventually contribute to lower costs of capital for issuers. Indias corporate turnover ratio is quite high at 70% in 2007, comparing favourably with most other emerging East Asian corporate bond markets . However the small total of outstanding corporate bonds in India means that the secondary market is small and relatively illiquid, irrespective of the turnover ratio. The same is also true for the PRC, which has a high turnover ratio and a very small value of corporate bonds outstanding (relative to GDP).
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CHAPTER-VI Trends, Theory, Conditions and Consultants of Capital Market
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6.1 CAPITAL MARKET THEORY:

Capital Market Theory tries to explain and predict the progression of capital (and sometimes financial) markets over time on the basis of the one or the other mathematical model. Capital market theory is a generic term for the analysis of securities. In terms of trade off between the returns sought by investors and the inherent risks involved, the capital market theory is a model that seeks to price assets, most commonly, shares. In general, whenever someone tries to formulate a financial, investment, or retirement plan, he or she (consciously or unconsciously) employs a theory such as arbitrage pricing theory, capital asset pricing model, coherent market hypothesis, efficient market hypothesis, fractal market hypothesis, or modern portfoliotheory. The most talked about model in Capital Market Theory is the Capital Asset Pricing Model. In studying the capital market theory we deal with issues like the role of the capital markets, the major capital markets in the US, the initial public offerings and the role of the venture capital in capital markets, financial innovation and markets in derivative instruments, the role of securities and the exchange commission, the role of the federal reserve system, role of the US Treasury and the regulatory requirements on the capital market. The Capital Market Theory deals with the following issues:

Importance of venture capital in the capital market Initial public offerings Role of capital market Major capital markets worldwide Markets and financial innovations in derivative instruments Role of Federal Reserve System Role of securities Capital market regulatory requirements Role of the government treasury
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Assumptions of Capital Market Theory The capital market theory builds upon the Markowitz portfolio model. The main assumptions of the capital market theory are as follows:
1. All Investors are Efficient Investors: Investors follow Markowitz idea of the efficient frontier and choose to invest in portfolios along the frontier. 2. Investors Borrow/Lend Money at the Risk-Free Rate: This rate remains static for any amount of money. 3. The Time Horizon is equal for All Investors: When choosing investments, investors have equal time horizons for the chosen investments. 4. All Assets are Infinitely Divisible: This indicates that fractional shares can be purchased and the stocks can be infinitely divisible. 5. No Taxes and Transaction Costs: It is assumed that investors results are not affected by taxes and transaction costs. 6. All Investors Have the Same Probability for Outcomes: When determining the expected return, assume that all investors have the same probability for outcomes. 7. No Inflation Exists: Returns are not affected by the inflation rate in a capital market as none exists in capital market theory. 8. There is No Mispricing within the Capital Markets: It is assumed that the markets are efficient and that no mispricings within the markets exist.
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Mortgages, equities, bonds, and other investments are traded in the capital market. The financial instruments in this market have long maturity periods. Capital market theory states that federal funds, federal agency securities, treasury bills, commercial papers, negotiable certificates of deposits, repurchase agreements, Eurocurrency loans and deposits, options and futures are merchandised in the capital market.
When one has to put a price on a security, one has to determine the risk and return of the security both for single assets, as well as a portfolio of assets. The uncertainty and variability of returns on assets and the possibilities of losses can be defined as risks.
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6.2 CAPITAL MARKET TRENDS

Capital market trends can be sub-divided into primary, secondary (short-term), and secular (long-term) trends. A technical analysis assumes the fact that movements of market prices follow a particular trend. They are periods when buyers consistently outnumber sellers; in other words, the bulls outnumber bears. Classification of Capital Market Trends: Primary Trends: They include bull markets and bear markets. The bull market is a situation where investors buy in order to increase capital gains in the future. In a bear market, on the other hand, the investors anticipate losses and therefore they are obliged to sell. Price fluctuation is an important tendency of an open market. The Gross Domestic Product (GDP) and stock prices are on the rise during a bull market. A bear market exhibits negative trends; it can also be a prelude to recession. Secondary Trends: They refer to price changes within a primary trend. These price changes are not permanent. A temporary decrease in price during a bull market is a correction. During correction, the price drop is normally 10% to 20%. The same percentage increase is experienced during the time of a bear market rally. This refers to a transient increase in price during the time of a bull market. Secular Trends: They are long-term trends. They usually remain for a period of 5 25 years. Many primary trends sequentially arranged result in a secular market trend. In such case, the bull markets are bigger and a bear market does not erase the gains of the previous bull market. In secular bear markets, the duration of a bull market is smaller.
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6.3 CAPITAL MARKET CONDITIONS:

The capital market deals with the buying and selling of securities including stocks and bonds. The capital market conditions largely depend on the prices of stocks and bonds. There are various risks involved in the capital market investment that affect the capital market conditions.
The capital market risks, also termed as systematic risks, can be either market driven, industry driven or business driven. The risks may affect the stock and bond prices gravely. The capital market investors always need to be aware of the various factors that affect the capital market conditions.
The economists suggest that behaviour of the capital market also largely depends on the whims of the investors. The investors may temporarily pull the stock prices resulting over-reaction in the financial market. The excessive optimism, or also known as euphoria, may thus pull up the stock price unduly high. On the other hand, excessive pessimism may also drive the stock price to the lowest. In order to improve the liquidity and transaction feasibility, the capital markets undergo innovations and experiments.
The major contribution of the capital markets to the financial markets is to raise the capital. The corporations, companies, banks and governments issue stocks and bonds in order to raise funds. The capital market plays the base market for this. The conditions of capital market influence the overall condition of the financial market. While the fluctuation of stocks and bonds prices affect the conditions in capital market, the vise versa is also true. Depending on the condition of the capital market, the trading trends of the stock markets and bond markets may also vary.
The capital markets may be either primary market or secondary market. On one hand when the primary market deals with the newly issued securities, the secondary market trades the securities that have already been issued. The overall market trend of issuing the securities also affects the capital market conditions heavily.
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6.4 CAPITAL MARKET CONSULTANTS:

Capital market consultants are the professionals who are involved in the strategic and transformational operations on behalf of the clients. The capital market consultants are involved in providing different types of services. These services include trading or brokerage services related to the securities and the forex market. On behalf of the clients, the capital market consultants are also involved in the asset management services that includes portfolio management, wealth management, fund management and different types of administration. The capital market consultants are the providers of several middle and back office services related to the stock, forex and money markets. Risk management, clearing, settlement, confirmation management and a lot of such activities are included in the back office and middle office services. Providing the market infrastructure services are also included in the capital market consultants service line. The global capital markets are becoming very competitive and it is tough for the companies to remain in the market without having the professional knowledge and experience behind them. Because of this, a number of companies are taking professional help from the capital market consultants.
The capital market participants share some extra amount of risk and because of this, it becomes necessary for them to take the assistance of the experts. The capital market consultants work with these participants in order to make their business secured and profitable.
There are several capital market consulting companies which are also involved in providing technical solutions to their clients. These companies use to design and maintain several systems which are very essential for the client companies to provide quality services to their customers.
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Actually the clients of the capital market consultants are coming from every corner of the globe but their demands are more or less same. The clients are always in search of new sophisticated products and customized services for the development of the business.
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CHAPTER-VII Data analysis and Interpretations
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7. DATA ANALYSIS & INTERPRETATION:

Analysis This Study embarks upon the empirical study of the performance of Indian capital market taking into account the analysis of the parameters like market size, market liquidity & market turnover over the sample period of 2004-11 by examining the annual, and the daily data. Market Size Interpretation: The size of a capital market as measured by stock market capitalization is positively correlated with the ability to mobilise capital and diversify risk on an economy-wide basis. The size of the Indian capital market can be assessed by employing the stock market capitalisation to GDP ratio. This size ratio of Indian capital market is shown in Chart 1. It is seen that the market size of Indian capital market is increasing over the years except in 2008-09. The decline in market size in the year 2008-09 is the effect of global financial crisis on Indian capital market. Thus, the overall indication is that in India the size of capital market is expanding which is the signal for strong potential of the market to mobilise capital for the economic development of the country. Chart 1: Market Size (BSE and NSE)
140.00% 120.00% 100.00% 80.00% size ratio (BSE)% 60.00% 40.00% 20.00% 0.00% 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 size ratio (NSE)%
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Market Liquidity Interpretation: Market Liquidity refers to the ability to buy and sell securities easily. Liquid capital market allows companies on the one hand, to have a permanent access to capital through equity issues and on the other hand, to allow investors to switch out of equity if they need to access funds or if they want to change the composition of their portfolios. The market liquidity is measured by the ratio of total value of shares traded to GDP. The liquidity ratio in Indian capital market is shown in Chart-2. Chart-2 infers that the market liquidity of Indian capital market is increasing over years except for the year 2008-09 due to global financial contagion. But the overall performance of the ratio indicates that the Indian capital market is liquid and in particular the liquidity of NSE India is quite higher than that of Stock Exchange, Mumbai. The ratio performance of 2010-11 is also appreciable for the National stock Exchange. Chart 2: Market Liquidity (BSE and NSE)
80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Liquidity ratio (BSE)% Liquidity ratio (NSE)%
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Market Turnover Interpretation: The market turnover gives the total value of shares traded in relation to the size of the market. It is the most important indicator of market activity. It is calculated as the ratio of total value of shares traded to the market capitalisation. The turnover ratio is also the indication of market liquidity. This ratio for Indian capital market is shown in Chart-3. It is very clear from the Chart-3 that the turnover ratio in Indian capital market is oscillatory and in 2008-09 the performance is quite disappointing. And, it is due to the US sub-prime mortgage problem that spread over to India in the third quarter of 200809. The low levels of turnover ratio in BSE can be interpreted as characterised by low levels of trading activities in comparison to NSE. High turnover ratio of NSE may be due to its transparency, technological sophistication, and after all may be due to the efficient payment and settlement framework. Chart-3: Market Turnover (BSE and NSE)
80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Turnover ratio (BSE)% Turnover ratio (NSE)%
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CHAPTER-VIII Findings
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8. FINDINGS:
It is seen that the market size of Indian capital market is increasing over the years except in 2008-09. The decline in market size in the year 2008-09 is the effect of global financial crisis on Indian capital market. Thus, the overall indication is that in India the size of capital market is expanding which is the signal for strong potential of the market to mobilise capital for the economic development of the country.
It infers that the market liquidity of Indian capital market is increasing over years except for the year 2008-09 due to global financial contagion. But the overall performance of the ratio indicates that the Indian capital market is liquid and in particular the liquidity of NSE India is quite higher than that of Stock Exchange, Mumbai.
It is very clear that the turnover ratio in Indian capital market is oscillatory and in 2008-09 the performance is quite disappointing. And, it is due to the US sub-prime mortgage problem that spread over to India in the third quarter of 2008-09.
However, the nature of size ratio and liquidity ratio indicates the repeat of the previous steady growth of the market.
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CHAPTER-IX Conclusion
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9. CONCLUSION:
Indian capital markets have been continuously improvised to meet international standards. Several regulatory changes have been introduced to give better accuracy transparency and efficiency to the markets.
Demutualisation of BSE is one of the most awaited event in the coming year. Though several analysis and research are conducted but by very nature markets seem to be volatile and no amount of study can predict the future movements.
It is important to remember that the market looks at the future. There is a continuous flow of information, both positive and negative, and when the scales are tipped either way, because of information asymmetry or any other reason, the market slides.
The future of the market is as uncertain as ever. With growing concerns of inflation, sustaining growth, global slowdown, exchange rate fluctuations, erratic market sentiments, the market movement has become impossible to predict. In spite of the sea of information available the market volatility has no looking back. With every bullish movement, investors expect the bears to be stronger but market seem to out of their reach and the bulls and bears appear in a very random manner.
The investment in the government securities market as influenced by the yield curves was not very impressive. The yield curve flattened as the spreads reduced resulting in declined attractiveness during the entire year.
The market movement has only endorsed the fact that Indian markets are getting more and more synchronized with the global markets
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Indian markets are moving exactly in tandem with foreign bourses. A single news in Wall Street or shanghai market has tremendous effect on BSE and NSE.
India and China have evolved as one of the most important markets drivers in the global markets as they have been growing robustly in past few years.
Retail investors have also been substantially increasing but their volumes being low are market followers rather than leaders
The market volatility has been most hurting to retail investors as they are the last one to receive market information.
Thus everything said and done Indian capital market have been as active and exciting as any of the past few years which have laid the foundation of India turning into a True Global economy. Now it is more important to accelerate this progress with inclusive growth and sustainability.
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CHAPTER- X Recommendations
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10. RECOMMENDATIONS:
Govt needs to rebuild mum and dad investor trust in capital markets which has been severely dented by the global recession and finance company collapses.
We want everyday investors to feel more confident about putting their savings into capital markets, through understanding the basics of investment, getting advice they can trust, and making informed choices.
Develop our capital markets to allow for business growth while ensuring that investors get proper levels of protection.
For companies, capital markets need to be more accessible and more effective at providing funding at least cost, and tailored to their growth aspirations. This requires the Government to better support the development of our capital markets, and to reduce compliance costs as far as possible.
Capital markets should be fair and efficient.
Improve risk management in the economy by supporting the development of derivatives markets in commodities and energy.
Make it easier and cheaper for companies to raise capital privately by clarifying and broadening the exemptions to the Securities Act and Takeovers Act.
Ensure the duties of fund managers and supervisors are clear and enforced.
Introduce plain English into investment statements and prospectuses, with warnings on risky or complex products.
Opportunities should be built for people to invest and to invest safely.

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PERFORMANCE OF CAPITAL MARKETS

CHAPTER-I Introduction and Research methodology

PERFORMANCE OF CAPITAL MARKETS

PERFORMANCE OF CAPITAL MARKETS

1.2 Objectives OF THE STUDY

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1.3 SCOPE OF THE STUDY

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1.4 SIGNIFICANCE OF THE STUDY:

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1.5 Research Methodology

1.5.2 DATA COLLECTION:

1.5.4 SAMPLING PLAN:

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1.5.5 Research Limitations

Reliability :- The data collected in research work puts a question mark on

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CHAPTER-II Review of literature

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CHAPTER-III Introduction to the topic

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3.1 CAPITAL MARKETS IN BRIEF

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3.2 FINANCIAL MARKETS

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It provides security to dealings in financial assets.

It ensures low cost of transactions and information.

market handles the medium term and long-term credit.

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3.3 STRUCTURE OF CAPITAL MARKETS

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3.4 IMPORTANCE OF CAPITAL MARKETS

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3.5 ROLE OF CAPITAL MARKETS

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3.6 EVOLUTION OF CAPITAL MARKETS

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Growth Pattern of the Indian Stock Market

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Faster settlement and transfer process compared to other exchanges.

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Nature of the Indian Capital Market

Development of the market

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