Impact of global crisis and the role of Financial market in fostering the economic growth

Focus
To know about the main cause of global economic crisis. Impact of global crisis in India. Policy response to slow down. Introduction to Securities market. Role of Capital and Money Market in fostering the economic growth.

Is Securitization the reason for the current economic recession?

 Securitization is the process of pooling and repackaging of homogenous illiquid financial assets into marketable securities that can be sold to investors

 A typical securitization transaction consists of the following steps: 1. Creation of a special purpose vehicle to hold the financial assets underlying the securities. 2. Sale of the financial assets by the originator or holder of the assets to the special purpose vehicle, which will hold the assets and realize the assets. 3. Issuance of securities by the SPV, to investors, against the financial assets held by it

Reasons for the breakdown:

Mixing of poor quality assets with good quality assets Very high ratings of structured financial products by the Credit Rating Agencies Difficulty in pricing of complex financial products Persistent incentives created excessive risk by top executives and generated crises.

Impact of global crisis on India

Positive shock: Net FIIs flows was increased to US$ 22.5 billion from sept 2007-jan2008. End of positive shock: Reversal of capital flows was US$ 15.8 billion from feb -june 2008. Drying up of liquidity (contraction in the reserve money by more than 15% between Aug and Nov 2008) Risk aversion of banks Effects to Indian exporters and manufacturing sectors.

Impact of global crisis

The first half of 2008-09 saw the Indian economy recording the growth rate of 7.8 percent in GDP. In the second half of 2008-09 the GDP growth declined to 5.8 percent. The overall GDP for 2008-09 is 6.7 percent

Policy response to slowdown

Coordination of monetary and fiscal policy Government announce a fiscal expansion The net result was an increase in fiscal deficit from 2.7 percent in 2007-08 to 6.2 percent in 2008-09

For liquidity enhancing measures RBI took number of measures including reduction in CRR ,SLR and key policy rates

Cash Reserve Ratio (CRR is reduced from 9% to5%) Statutory Liquidity Ratio (SLR is reduced from 25% to 24%) Repo rate is reduced from( 5% to 4.75%) Reverse repo rate is reduced from (4%to 3.25%)

SECURITIES MARKET

STRUCTURE OF THE SECURITIES MARKET

Securities Market

Equity Market

Debt Market

Derivatives Market

Government Securities Market

Corporate Debt Market

Money Market

Options Market

Futures Market

Role of the capital market

Fosters economic growth Enhance the efficiency of a financial system Improves market efficiency Diversify the credit risk across the economy Enlarge the financial sector

PARTICIPANTS IN THE SECURITIES MARKET

Regulators Stock Exchanges Listed Securities Depositories Brokers FIIs Merchant Bankers or Investment Bankers Mutual Funds Custodians Registrars Underwriters Bankers to an issue Debenture trustees Venture capital funds. Credit rating agencies

EQUITY MARKET
Primary Market Secondary Market

PRIMARY

EQUITY MARKET
PUBLIC ISSUE(IPO) RIGHTS ISSUE

PRIVATE PLACEMENT
BONUS/STOCK SPLIT

BOOK BUILDING Book building is a method of offering shares to investors in

which the issue price is not fixed in advance (as is done in a

fixed price offer) but is determined through a bidding process.

Secondary Market
STOCK EXCHANGES DEMUTUALIZATION OF STOCK EXCHANGE MARKET SEGMENT: Rolling settlements Limited physical market Institutional segments Trade for trade segments

NATIONAL STOCK EXCHANGE (NSE)

The NSE is a ringless, national, computerised exchange.

The NSE has two segments: The Capital Market Segment and the Wholesale Debt Market Segment. Trading members in the Capital Market Segment are linked through VSATs. The trading members in the Wholesale Debt Market are linked through leased lines. The NSE has opted for an order-driven system. All trades on NSE are guaranteed by the National Securities Clearing Corporation.

BOMBAY STOCK EXCHANGE (BSE)

The BSE switched from the open outcry system to the screen-based system in 1995. Jobbers play an important role on the BSE. A jobber is a broker who offers a two-way quote or a bid-ask quote. Since both jobbers and brokers feed their orders, the BSE has adopted a quote-driven system and an orderdriven system.

SCREEN BASED SYSTEM

The kind of screen based system adopted in India is referred to as the open electronic order (ELOB) market system.
ELOB

Buyers and sellers place their orders on the computer Limit order Market order

Computer instantly tries to match mutually compatible orders

on a price-time priority The limit order book, the list of unmatched limit orders is displayed on the screen

LIMIT ORDER BOOK

Shares

Buyside

Sellside

500 501 502 503 504

505

506 507 508

509 510 511 512

Limit Price

SETTLEMENT Security transactions are settled through electronic delivery facilitated by depositories Presently, the settlement of all trades is a rolling

settlement on a T+2 basis

TRANSACTION COSTS
Thanks to the introduction of screen-based trading and electronic delivery transaction costs have fallen sharply in India.
MID - 1993 TODAY

TRADING BROKERAGE COST MARKET IMPACT COST CLEARING COUNTERPARTY RISK

SETTLEMENT PAPERWORK COST BADPAPER RISK TOTAL

3.75% 3.00%
0.75% PRESENT 1.25% 0.75% 0.50% 5.00% (+RISK) 0.50%

0.40% 0.25%
0.15% ABSENT 0.10% 0.10% 0.00%

BUYING AND SELLING OF SHARES Locating a Broker

Placement of Order
Execution of Order Internet Trading

TYPES OF ORDER Limit Order Those who place limit order supply liquidity Market Order Those who place market order demand liquidity

INDIVIDUAL STOCK QUOTATIONS

Co., (Prev.Cl.), Open, High, Low,Close [Vol.,Val. Rs000s, Trades] Bajaj Auto (932.65), 937, 948, 931, 932.85 [46436, 43591.29, 1384] (932.80), 940, 949, 931, 933.20 [138630, 130216.84, 4404]

P/E

M Cap.

52-Wk H/L

12.7

(9438.6)

1200/692

12.7

(9438.6)

1200/692

NIFTY

The Nifty reflects the price movement of 50 stocks selected). The base period for Nifty is the close of price on November 3, 1995. The base value of the index has been set at 1000. From 27th june 2009 NIFTY is being constructed on the basis of Free float method.

SENSEX
The Bombay Stock Exchange Sensitive Index, popularly called the Sensex reflects the movement of 30 sensitive shares from

specified and non-specified groups.

From September 1, 2003, Sensex is being constructed on the

basis of Free float market cap rather than full market cap.

Index Specification:
Base Year:1978-79 Base Index Value:100 Date of Launch:01-01-1986 Method of calculation: Free Float market capitalization Number of scrips:30 Index calculation frequency:15 seconds

Objective
To measure market movements Benchmark for funds performance

Scrip selection criteria

Listed History

Trading Frequency
Final Rank

Market Capitalization Weightage

Industry Representation: Track Record

 Who selects these 30 stocks?.

Calculation of Sensex
Free float shares: shares the open market shares that are free for trading by anyone, are called the free-float shares.

According the BSE, any shares that DO NOT fall under the following criteria, can be considered to be open market shares: Holdings by founders/directors/ acquirers which has control element Holdings by persons/ bodies with "controlling interest" Government holding as promoter/acquirer Holdings through the FDI Route Strategic stakes by private corporate bodies/ individuals Equity held by associate/group companies (crossholdings) Equity held by employee welfare trusts Locked-in shares and shares which would not be sold in the open market in normal course.

Major advantages of Free-float Methodology

A Free-float index reflects the market trends more rationally Free-float Methodology makes the index more broad-based Free-float Methodology improves index flexibility in terms of including any stock from the universe of listed stocks.. Globally, the Free-float Methodology of index construction is considered to be an industry best practice and all major index providers like MSCI, FTSE, S&P and STOXX have adopted the same.

Steps in calculation of Sensex

First: Find out the free-float market cap of all the 30 companies that make up the Sensex! Second: Add all the free-float market caps of all the 30 companies! Third: Make all this relative to the Sensex base. The value you get is the Sensex value!

Free-float Bands
% Free-Float Free-Float Factor % Free-Float Free-Float Factor

>0 - 5% >5 - 10% >10 - 15% >15 - 20% >20 - 25% >25 - 30% >30 - 35% >35 - 40% >40 - 45% >45 - 50%

0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50

>50 - 55% >55 - 60% >60 - 65% >65 - 70% >70 - 75% >75 - 80% >80 - 85% >85 - 90% >90 - 95% >95 - 100%

0.55 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00

How SENSEX is calculated?

The formula for calculating the SENSEX = (Sum of free flow market cap of 30 benchmark stocks)*Index Factor Index Factor = 100/Market Cap Value in 197879. Where, 100 is the Index value during 1978-79.

MONEY MARKET

Money market is the market for short-term debt funds.

Role of money market:

Development of trade and industry

Development of capital market

Formulation of suitable monetary policy

Effective central bank control

Smooth functioning of commercial banks

Instruments of money market:

1)Treasury bill market 2)Repo market 3)Commercial paper 4)Certificate of deposits 5)Call money market 6)Commercial Bills market

SECONDARY MARKET FOR G-SECS

As soon as they are issued G-secs are deemed to be listed and eligible for trading. The NSE has a wholesale Debt Market (WDM) for high value debt transactions. Two kinds of trades occur on the WDM : Repo trades and Non-repos trades. Despite the WDM, the wholesale market in G-secs is by and large a telephone market. After a deal is done, it is reported on the Negotiated Dealing System (NDS) of NSE

i BEX i SEC BOND INDEX (i BEX) is the most popular bond market index in India. There are two versions of i-BEX. Total return index This tracks the total returns. It captures interest payment (accrued and actual) and

capital gains/losses
Principal return index This index reflects movements of net prices in the market, that is prices quoted in the market exclusive of accrued interest

concepts
QIPs Hedge Funds Stock invest Intrinsic value Derivatives Exchange Traded funds