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Transcript of Tanuj Report
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Chapter 1
Introduction
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Capital Markets In India An Introduction:
Capital is often defined as wealth used in the production of further wealth. In simple
words, it comprises the money value invested in a business unit. Market is that place where
buyer and sellers are contact to each other and when these two words are merging together make
capital market A business enterprise can raise capital from various sources long-term funds can
be raised either through issue of securities or by borrowing from certain institutions. Short-
term funds can also be borrowed from various agencies. Thus business units can raise capital
from issue of securities or by borrowings (long-term and short-term).The borrowers and lenders
are brought together through the financial markets. The term financial marketcollectively
refers to all those organizations and institutions which lend funds to business enterprises and
public authorities. It is composed of two constituents.
(i) The money market,
(ii) The capital market.
While the money marketdeals with the provision ofshort-term credit, the capital marketdeals in
the lending and borrowing ofmedium-term and long-term and long-term credit.
Structure of the capital market------------ two constituents.
Broadly describe, the capital market can be divided into two constituents.
(1)The financial institution:- e.g., IFCI, IDBI, SFCs, LIC, UTI etc. provide long-term and
medium-term loan facilities.
(2) The Securities Market:- The securities market is divided into (A) the gilt edged market and
(B) the corporate securities market.
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A) Gilt-Edged Market
The gilt edged market is the market in government securities or the securities guaranteed (as to
both principle and interest) by the government. Since the government cannot default on its
payment obligations, the government securities are risk free and hence are known as gilt-edged
(which means of the best quality).
1. It is a risk free market and returns are guaranteed. Accordingly, there is no uncertainty
regarding yield, payment on time, etc. and there is no scope for speculation and manipulation ')
of the market.
2. The government securities market consists of two parts - the new issues market and the
secondary market. Since it is the Reserve Bank of India that manages entirely the public debt
operations of the Central as well as the State governments, it is responsible for all the new issues
of government loans. The secondary market deals in old issues of government loans and operates
largely through a few large stockbrokers who keep in touch with the Reserve Bank and other
prospective buyers and sellers.
3. Reserve Bank of India plays a dominant role in the government securities market. As noted by
S.B. Gupta, "there are only brokers or investors in the market and no dealers or jobbers (other
than the RBI) who would make a market in government loans by standing ready to buy and sell
any amount of government securities on their own account."2
4. Government securities are the most liquid debt instruments.
5. The transactions in the government securities market are very large and each transaction may
run into several crores of rupees.
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B) Corporate Securities Market
Corporate securities market is a market where securities issued by corporate firms (Le. shares,
bonds and debentures) can be bought and sold freely. It consists of the new issues market (the
primary market) and the stock exchange (the secondary market).
The New Issues Market. The new issues market is also known the primary market. The new
issues market is that part of the capital market which is concerned with the issue of new
securities, i.e. bonds, debentures, shares, and so on.
1. By prospectus. Capital can be raised from the general public by the issue of prospectus.
The prospectus is an invitation to the general public for subscribing to the capital. The prospectusmust contain various details regarding particulars of the company, its financial position, etc.
2. By offer for sale. This method is almost similar to the prospectus method except with a
difference that initially shares are taken up by a third party in bulk. Later, a statement like
prospectus is issued for sale of shares to the public.
3. By private placing. Under this arrangement, the shares are sold to individuals or institutions
directly by making a private appeal to them. This results in substantial saving as the cost ofraising capital in this method is less than the cost of raising capital via other methods.
4. By offering rights issue. Companies may also raise capital from the existing shareholders by
making a rights issue. Under a rights issue, the shareholders have the right to a certain number of
shares in proportion to the shares held by them.
The Stock Exchange. The stock exchange (or the secondary market) is a highly organised
market for the purchase and sale of second-hand quoted or listed securities 'Quoting' or 'listing'of a particular security implies incorporating that security in the register of the stock exchange so
that it can be bought and sold there. The Securities Contracts (Regulation) Act, 1956 defines a
stock exchange as "an association, organization or body of individuals, whether incorporated or
not, established for the purpose of assisting, regulating and controlling business in buying,
selling and dealing in securities."
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Indian Capital Market
The capital market is the place where finance is raised by the companies government and their
agencies for meeting their requirements of funds for new projects , modernization ,expansion and
diversification programs ,long term working capital requirements ,repayment of loans and
various other purposes and projects . The capital market mobilizes the long term savings of
individuals for investment in shares , debentures ,bonds ,units of the mutual fund and other
financial instruments , which are ultimately deployed for productive purposes in various sectors
of economy.
A capital market may be defined as an organized mechanism for effective and efficient
transfer of money capital or financial resources from the investing public i.e. individuals orinstitutional savers to entrepreneurs engaged in industry or commerce .
Capital market thus plays a vital role in channelizing the savings of individuals for investment in
the economic development of the country .as a result the investors are not constrained by their
individual abilities, but by the abilities of the companies , which in turn enhance the savings and
investments in the country.
Capital market involves the following:
Raising of capital by issue of new shares . Raising of borrowings by issue of new debentures. Raising of long term borrowings by inland and foreign banks and financial institutions.
Components of Indian Capital Market
The following are the main components of the Indian capital market:
1. New Issues Market.
2. Stock Market.
3. Financial Institutions.
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1. New Issues Market:
The new issues market represents the primary market where new shares or bonds are offered.
Both the new companies and the existing ones can raise capital on the new issue market. The
prime function of the new issues market is to facilitate the transfer of funds from the willing
investors to the entrepreneurs setting up new corporate enterprises, going in for expansion,
diversification, growth or modernization. Besides, helping the corporate enterprises in securing
their funds, then issues market channelizes the savings of individuals and others into
investments. The availability of financial resources for corporate enterprises, to a great extent,
depends upon the status of the new issues market of the country. Successful issues of new
securities is a highly specialized activity and requires both experience and skill. There are a
number of methods of marketing new issues of securities.
2. Secondary Market or Stock Market:
Stock market represents the secondary market where existing shares and debentures are traded.
Stock exchange provides an organised mechanism of purchase and sale of existing securities.
The stock exchanges enable free purchase and sale of existing securities. The stock-exchanges
enable free purchase and sale of securities as commodity exchange allow trading in commodities.
3.Financial Institutions:
Special financial institutions are the most active constituents of the Indian capital market. Such
organisations provide medium and long-term loans repayable on easy installments to big
business houses. Such institutions help in promoting new companies, expansion and
development ofexisting companies and meeting the financial requirements of companies during
economic depression. After independence, a number of financial institutions have been set up at
all India and regional levels for accelerating the growth of industries by providing financial and
other assistance. The following are the main financial institutions that are most activeconstituents of the Indian capital market:
(a) The Industrial Finance Corporation of India Ltd.
(b) The Industrial Credit and Investment Corporation of India.
(c) State Financial Corporations.
(d) The Industrial Development Bank of India.
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(e) National Industrial Development Corporations.
(f) Unit Trust of India.
(g) Life Insurance Corporation of India.
(h) Nationalised Commercial Banks.
(i) Merchant Banking Institutions.
(j) The Credit Guarantee Corporation of India.
Growth of Capital Market in India
A) Government securities market
Since 1991, the investor base for government securities has expanded rapidly. Besides banks andinsurance corporations, finance companies, corporates and financial institutions have also begun
to invest in government securities. The maturity structure of debt has significantly shifted in
favour of medium-term and short-term borrowings. The amount of market - based primary
issuance of government securities which was about Rs. 12.000 crore in 1991-92 rose to as high
as Rs. 99,630 crore in 1999-2000. The gross market borrowings of the Central and State
governments rose to Rs. 1,81,747crore during 2005-06.
As far as secondary market is concerned, a deep, wide and vibrant gilt-edged market has
emerged as a result of a series of structural and institutional reforms. The secondary market
turnover of government securities registered spectacular increase since mid-1990s.2 This is due
to a substantial rally in the government securities market.3
B) Corporate Securities Market
Consequent upon the policy of liberalisation adopted by the government in July 1991 and the
subsequent abolition of Capital Issues Control with effect form May 29, 1992, the corporate
securities market got a tremendous boost in the first three-four years of the post-liberalisation
phase.
C) Debt Market. The Indian debt market is composed of government bonds and corporate
bonds. Debt Market is however dominated by government bonds. Bonds issued by the Central
government, i.e., the Government of India are the predominant and most liquid component of the
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bond market. Government bonds are usually much less volatile than equities and far more liquid
than equities.
Table Issuance of Bonds
2006 2007 2008 2009 2010
Government
of India
bonds
1,20,213 1,13,000 1,19,600 1,29,350 1,47,000
Corporate
Bonds
4,549 5,284 2,383 66 389
Source: Economic Survey 2010, pp.68 and 74 and Economic Survey 2009, pp. 70 and 76.
Mutual Funds. The mutual funds (MFs) have proved to be important conduits of mobilising
resources particularly since 1987-88 when the public sector banks were allowed to set up
subsidiaries to undertake mutual fund business. At present this country has four types of mutual
funds - Unit Trust of India, MF subsidiaries of public sector banks, MF subsidiaries of
investment institutions like LlC and GIC, and private sector MFs. In 2004-05 there was a steep
fall in resources mobilisation through mutual funds. It was as low as Rs. 2,201 crore. The year
2005-06 recorded the highest ever resource mobilisation of Rs. 52,780 crare by mutual funds (ofthis, as many as 81.4 per cent resources were mobilised by the private sector mutual funds).
NSE AND SSE. The biggest stock exchange of India is the National Stock Exchange (NSE)
which was set up in November 1992. It started its trading operations effective June 30, 1994.
Only the debt market segment of the NSE was put into operation initially
The second largest stock exchange in India is the Bombay Stock Exchange (BSE). It was the first
organised stock exchange established in India at Mumbai as far back as 1887. Presently NSE andBSE account for almost the entire trading of scrips on Indian stock markets and most of the
regional stock exchanges have been rendered redundant.
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International Comparison. In 2007, 2008 and 2009 NSE and BSE ranked third and fifth
respectively in the world on the basis of the number of transactions. In 2009, BSE slipped by one
position to sixth while NSE retained its third position.
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Capital market efficiency
An analysis of the efficiency ofcapital markets. This looks at how faircurrent marketprices are
for an asset given current market situations. For example, if major news breaks out for a
company, an analysis would occur on the stock'sprice to see how it should be valued given the
news. Capital market efficiency measures the extent of the accuracy of the stock's 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 insecurity 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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CAPITAL MARKET SEGMENTS
CAPITAL
MARKET
primary
market
secondary
market
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PRIMARY MARKET
Many companies, especially small and medium scale, enter the primary market to raise money
from the public to expand their businesses. They sell their securities to the public through an
initial public offering. The securities can be directly bought from the shareholders, which is notthe case for the secondary market. The primary market is a market for new capitals that will be
traded over a longer period. In the primary market, securities are issued on an exchange basis.
The underwriters, that is, the investment banks, play an important role in this market: they set the
initial price range for a particular share and then supervise the selling of that share. Investors can
obtain news of upcoming shares only on the primary market. The issuing firm collects money,
which is then used to finance its operations or expand business, by selling its shares. Before
selling a security on the primary market, the firm must fulfill all the requirements regarding the
exchange. After trading in the primary market the security will then enter the secondary market,
where numerous trades happen every day. The primary market accelerates the process of capital
formation in a country's economy. The primary market categorically excludes several other new
long-term finance sources, such as loans from financial institutions. Many companies have
entered the primary market to earn profit by converting its capital, which is basically a private
capital, into a public one, releasing securities to the public. This phenomena is known as "public
issue" or "going public."There are three methods though which securities can be issued on the
primary market: right issue, Initial Public Offer (IPO), and preferential issue. A company's new
offering is placed on the primary market through an initial public offer.
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Functioning of Primary Market
Primary Mortgage Market
Primary Target Market
Transaction Costs in Primary Market
PL in Primary Market
Revival Of Indian Primary Market
Primary Securities Market
Problems of Indian Primary Market
Investment in Primary Market
Primary Money market
International Primary Market Association
IPO Primary Market
Primary Capital Market
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Secondary Market
is the market where, unlike the primary market, an investor can buy a security directly from
another investor in lieu of the issuer. It is also referred as "after market". The securities initially
are issued in the primary market, and then they enter into the secondary market. All the securities
are first created in the primary market and then, they enter into the secondary market. In the New
York Stock Exchange, all the stocks belong to the secondary market. In other words, secondary
market is a place where any type of used goods is available. In the secondary market shares are
maneuvered from one investor to other, that is, one investor buys an asset from another investor
instead of an issuing corporation. So, the secondary market should be liquid. Example of
Secondary market: In the New York Stock Exchange, in the United States of America, all the
securities belong to the secondary market
Importance of Secondary Market
Secondary Market has an important role to play behind the developments of an efficient capital
market. Secondary market connects investors' favoritism for liquidity with the capital users' wish
of using their capital for a longer period. For example, in a traditional partnership, a partner
cannot access the other partner's investment but only his or her investment in that partnership,
even on an emergency basis. Then if he or she may breaks the ownership of equity into parts and
sell his or her respective proportion to another investor. This kind of trading is facilitated only by
the secondary market.
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STOCK EXCHANGE
Stock Exchange
The origin of the stock market in India goes back to the end of the eighteenth century when long-term negotiable securities were first issued. However, for all practical purposes, the real
beginning occurred in the middle of the nineteenth century after the enactment of the companies
Act in 1850, which introduced the features of limited liability and generated investor interest in
corporate securities.
An important early event in the development of the stock market in India was the formation of
the native share and stock brokers 'Association at Bombay in 1875, the precursor of the present
day Bombay Stock Exchange. This was followed by the formation of associations/exchanges in
Ahmedabad (1894), Calcutta (1908), and Madras (1937). In addition, a large number of
ephemeral exchanges emerged mainly in buoyant periods to recede into oblivion during
depressing times subsequently. Stock exchanges are intricacy inter-woven in the fabric of a
nation's economic life. Without a stock exchange, the saving of the community- the sinews of
economic progress and productive efficiency- would remain underutilized. The task of
mobilization and allocation of savings could be attempted in the old days by a much less
specialized institution than the stock exchanges. But as business and industry expanded and the
economy assumed more complex nature, the need for 'permanent finance' arose. Entrepreneurs
needed money for long term whereas investors demanded liquidity the facility to convert their
investment into cash at any given time. The answer was a ready market for investments and this
was how the stock exchange came into being. Stock exchange means any body of individuals,
whether incorporated or not, constituted for the purpose of regulating or controlling the business
of buying, selling or dealing in securities. These securities include:
(i) Shares, scrip, stocks, bonds, debentures stock or other marketable securities of a like nature in
or of any incorporated company or other body corporate;
(ii) Government securities; and
(iii) Rights or interest in securities.
The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd (NSE) are
the two primary exchanges in India. In addition, there are 22 Regional Stock Exchanges.
However, the BSE and NSE have established themselves as the two leading exchanges and
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account for about 80 per cent of the equity volume traded in India. The NSE and BSE are equal
in size in terms of daily traded volume. The average daily turnover at the exchanges has
increased from Rs 851 crore in 1997-98 to Rs 1,284 crore in 1998-99 and further to Rs 2,273
crore in 1999-2000 (April - August 1999). NSE has around 1500 shares listed with a total market
capitalization of around Rs 9, 21,500 crore.
The BSE has over 6000 stocks listed and has a market capitalization of around Rs 9, 68,000
crore. Most key stocks are traded on both the exchanges and hence the investor could buy them
on either exchange. Both exchanges have a different settlement cycle, which allows investors to
shift their positions on the bourses. The primary index of BSE is BSE Sensex comprising 30
stocks. NSE has the S&P NSE 50 Index (Nifty) which consists of fifty stocks. The BSE Sensex
is the older and more widely followed index.
Both these indices are calculated on the basis of market capitalization and contain the heavily
traded shares from key sectors. The markets are closed on Saturdays and Sundays. Both the
exchanges have switched over from the open outcry trading system to a fully automated
computerized mode of trading known as BOLT (BSE on Line Trading) and NEAT (National
Exchange Automated Trading) System. It facilitates more efficient processing, automatic order
matching, faster execution of trades and transparency; the scrip's traded on the BSE have been
classified into 'A', 'B1', 'B2', 'C', 'F' and 'Z' groups. The 'A' group shares represent those, which
are in the carry forward system (Badla). The 'F' group represents the debt market (fixed income
securities) segment. The 'Z' group scrip's are the blacklisted companies. The 'C' group covers the
odd lot securities in 'A', 'B1' & 'B2' groups and Rights renunciations. The key regulator
governing Stock Exchanges, Brokers, Depositories, Depository participants, Mutual Funds, FIIs
and other participants in Indian secondary and primary market is the Securities and Exchange
Board of India (SEBI) Ltd.
Securities contract (regulation) act, 1956.stock exchange means any body of individuals ,
whether incorporated or not, constituted for the purpose of assisting, Regulating or
controlling the business of buying and selling in securities.
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Features of Stock Exchange
Characteristics or features of stock exchange are:
1. Market for securities : Stock exchange is a market, where securities of corporate bodies,government and semi-government bodies are bought and sold.
2. Deals in second hand securities : It deals with shares, debentures bonds and such securitiesalready issued by the companies. In short it deals with existing or second hand securities and
hence it is called secondary market.
3. Regulates trade in securities : Stock exchange does not buy or sell any securities on its ownaccount. It merely provides the necessary infrastructure and facilities for trade in securities to
its members and brokers who trade in securities. It regulates the trade activities so as to
ensure free and fair trade
4. Allows dealings only in listed securities : In fact, stock exchanges maintain an official list ofsecurities that could be purchased and sold on its floor. Securities which do not figure in the
official list of stock exchange are called unlisted securities. Such unlisted securities cannot be
traded in the stock exchange.
5. Transactions effected only through members : All the transactions in securities at the stockexchange are effected only through its authorised brokers and members. Outsiders or direct
investors are not allowed to enter in the trading circles of the stock exchange. Investors have
to buy or sell the securities at the stock exchange through the authorised brokers only.
6. Association of persons : A stock exchange is an association of persons or body of individualswhich may be registered or unregistered.
7. Recognition from Central Government : Stock exchange is an organised market. It requiresrecognition from the Central Government.
8. Working as per rules : Buying and selling transactions in securities at the stock exchange aregoverned by the rules and regulations of stock exchange as well as SEBI Guidelines. No
deviation from the rules and guidelines is allowed in any case.
9. Specific location : Stock exchange is a particular market place where authorised brokerscome together daily (i.e. on working days) on the floor of market called trading circles and
conduct trading activities. The prices of different securities traded are shown on electronic
boards. After the working hours market is closed. All the working of stock exchanges is
conducted and controlled through computers and electronic system.
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10.Financial Barometers : Stock exchanges are the financial barometers and developmentindicators of national economy of the country. Industrial growth and stability is reflected in
the index of stock exchange
List of Stock Exchanges In India
1. Ahmedabad Stock Exchange Association Ltd.
2. Bangalore Stock Exchange Ltd. (Served by India on Internet)
3. Bhubaneshwar Stock Exchange Association
4. Calcutta Stock Exchange Ltd.
5. Cochin Stock Exchange Ltd.
6. Coimbatore Stock Exchange Ltd.
7. Delhi Stock Exchange Association
8. Guwahati Stock Exchange Ltd.
9. Hyderabad Stock Exchange Ltd.
10. Indore Stock Exchange Ltd.
11. Jaipur Stock Exchange Ltd.
12. Kanara Stock Exchange Ltd. (Mangalore)
13. Ludhiana Stock Exchange Association Ltd.14. Madras Stock Exchange Ltd.
15. Madhya Pradesh Stock Exchange Ltd.
16. Magadh Stock Exchange Ltd.
17. Meerut Stock Exchange Ltd.
18. Mumbai Stock Exchange
19. Pune Stock Exchange Ltd.
20. Saurashtra Kutch Stock Exchange Ltd. (Rajkot)
21. Utter Pardesh Stock Exchange Association Ltd. Kanpur
22. Vadodara Stock Exchange Ltd
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National Stock Exchange
National Stock The Exchange (NSE) is India's leading stock exchange covering various cities
and towns across the country. NSE was set up by leading institutions to providemodern fully
automated screen-based trading system with national reach. The Exchangeange has brought
about unparalleled transparency, speed & efficiency, safety and market integrity. It has set up
facilities that serve as a model for the securities industry in terms of systems, practices and
procedures.
NSE has played a catalytic role in reforming the Indian securities market in terms of
microstructure, market practices and trading volumes. The market today uses state-of-art
information technology to provide an efficient and transparent trading, clearing and settlement
mechanism, and has witnessed several innovations in products & services viz. demutualization ofstock exchange governance, screen based trading, compression of settlement cycles,
dematerialization and electronic transfer of securities, securities lending and borrowing,
professionalization of trading members, fine-tuned risk management systems, emergence of
clearing corporations to assume counterparty risks, market of debt and derivative instruments
and intensive use of information technology.
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Bombay Stock Exchange
Established in 1875, BSE Ltd. (formerly known as Bombay Stock Exchange Ltd.), is Asias first
Stock Exchange and one of Indias leading exchange groups. Over the past 137 years, BSE has
facilitated the growth of the Indian corporate sector by providing it an efficient capital-raising
platform. Popularly known as BSE, the bourse was established as "The Native Share & Stock
Brokers' Association" in 1875.
BSE is a corporatized and demutualised entity, with a broad shareholder-base which includes
two leading global exchanges, Deutsche Bourse and Singapore Exchange as strategic partners.
BSE provides an efficient and transparent market for trading in equity, debt instruments,
derivatives, mutual funds. It also has a platform for trading in equities of small-and-medium
enterprises (SME). Around 5000 companies are listed on BSE making it world's No. 1 exchangein terms of listed members. The companies listed on BSE Ltd command a total market
capitalization of USD Trillion 1.06 as of May 15, 2012. BSE Ltd is world's fifth most active
exchange in terms of number of transactions handled through its electronic trading system. It is
also one of the worlds leading exchanges (5th largest in May 2012) for Index options trading
(Source: World Federation of Exchanges).
BSE also provides a host of other services to capital market participants including risk
management, clearing, settlement, market data services and education. It has a global reach with
customers around the world and a nation-wide presence. BSE systems and processes are
designed to safeguard market integrity, drive the growth of the Indian capital market and
stimulate innovation and competition across all market segments. BSE is the first exchange
in India and second in the world to obtain an ISO 9001:2000 certification. It is also the first
Exchange in the country and second in the world to receive Information Security Management
System Standard BS 7799-2-2002 certification for its On-Line trading System (BOLT).
It operates one of the most respected capital market educational institutes in the country (the
BSE Institute Ltd.). BSE also provides depository services through its Central Depository
Services Ltd. (CDSL) arm.
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BSEs popular equity index - the SENSEX - is India's most widely tracked stock market
benchmark index. It is traded internationally on the EUREX as well as leading exchanges of the
BRCS nations (Brazil, Russia, China and South Africa).
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Role of Capital Market In Economic Development
1. Mobilization of Savings:
Capital market is an important source for mobilizing idle savings from the economy. It
mobilizes funds from people for further investments in the productive channels of an economy.
In that sense it activate the ideal monetary resources and puts them in proper investments.
2. Capital Formation:
Capital market helps in capital formation. Capital formation is net addition to the existing stock
of capital in the economy. Through mobilization of ideal resources it generates savings; the
mobilized savings are made available to various segments such as agriculture, industry, etc. This
helps in increasing capital formation.
3. Provision of Investment Avenue:
Capital market raises resources for longer periods of time. Thus it provides an investment avenue
for people who wish to invest resources for a long period of time. It provides suitable interest
rate returns also to investors. Instruments such as bonds, equities, units of mutual funds,
insurance policies, etc. definitely provides diverse investment avenue for the public.
4. Speed up Economic Growth and Development:
Capital market enhances production and productivity in the national economy. As it makes funds
available for long period of time, the financial requirements of business houses are met by the
capital market. It helps in research and development. This helps in, increasing production and
productivity in economy by generation of employment and development of infrastructure.
5. Proper Regulation of Funds:
Capital markets not only helps in fund mobilization, but it also helps in proper allocation of these
resources. It can have regulation over the resources so that it can direct funds in a qualitative
manner.
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6. Service Provision:
As an important financial set up capital market provides various types of services. It includes
long term and medium term loans to industry, underwriting services, consultancy services,
export finance, etc. These services help the manufacturing sector in a large spectrum.
7. Continuous Availability of Funds:
Capital market is place where the investment avenue is continuously available for long term
investment. This is a liquid market as it makes fund available on continues basis. Both buyers
and easily buy and sell securities as they are continuously available. Basically capital market
transactions are related to the stock exchanges. Thus marketability in the capital market becomes
easy.
Thus the success of the economy depends upon the quantum of finance raised from the
household investors and its rightful application.
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SOME FACTORS AFFECTING CAPITAL MARKET
Correlation between Sensex and FII Flow in Indian capital market
YEAR SENSEX NET
INVESTMENT
FII (CR)
2001 3990.65 6,370.08
2002 3262.01 13,128.20
2003 3383.85 3,629.60
2004 5872.48 30,459.002005 6626.49 47,181.90
2006 9422.49 36,540.20
2007 13827.77 71,486.30
2008 20325.27 -52,987.40
2009 9720.55 83,424.20
2010 17473.45 133,266.80
2011 20621.61 -2,714.20
R=0.018503
Source :- www.bse.co.in
Above table describe the positive correlation between SENSEX and FII Flow in Indian
capital market .whenever FII Flow in Indian capital market increase SENSEX will go up
and whenever FII Flow in Indian capital market decrease SENSEX will go down.
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Correlation between Sensex and India GDP rate
Year sensex GDP
rate
2001 3990.65 3.9
2002 3262.01 4.6
2003 3383.85 6.9
2004 5872.48 8.1
2005 6626.49 9.2
2006 9422.49 9.7
2007 13827.77 9.9
2008 20325.27 6.22009 9720.55 6.6
2010 17473.45 10.6
2011 20621.61 7.2
2012 15534.67 6.9
R=0.323773
Source :- www.bse.co.in
Above table describes a positive correlation between SENSEX and GDP, if GDP increases
SENSEX also increases and if it decreases SENSEX will go down.
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Correlation between Sensex and Gold price
Year Sensex Traded
Contracts
(in Lots)
2003 3383.85 3802
2004 5872.48 724236
2005 6626.49 2773381
2006 9422.49 11988919
2007 13827.77 10366705
2008 20325.27 26001228
2009 9720.55 30423657
2010 17473.45 31581365
2011 20621.61 79354310
2012 15534.67 53642729
R=0.767935
Source :- www.bse.co.in
Above table shows a positive correlation between SENSEX and GOLD PRICE , if GOLD
PRICE increases SENSEX also increases and if it decreases SENSEX will go down.
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Other Factors
Some of the other factors which influence capital market are as follows:-
A) 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 inthe capital market and thus there isbear market like situation. The opposite case of it would berobust corporate earnings and its
positive impact on the capital market. The corporate earnings for the AprilJune quarter for the
current fiscal has been good. The companies like TCS, Infosys, Maruti Suzuki, BhartiAirtel,
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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B) 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 deficient monsoon could seriously
squeeze rural incomes, reduce the demand for every Thing from motorbikes to soaps and worsen
a slowing economy.
C) Macro Economic Numbers:-The macroeconomic 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 IndustriesCoal, Crude oil, refining, finished steel, power & cementgrew
6.5% in June, the figure came on the 23 rd 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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D) Global Cues: In this world of globalization 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 impact all the countries of the world- developed, developing, and less-
developed and even emerging economies.
E) 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 favor ( Without the baggage of left
party) on May 16 2009, the stock markets on Monday , 18th May had a bullish rally with Sense
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.
F) 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 higherexpenditure 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 do have an impact on capital markets.
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G) 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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Role of SEBI
Securities and exchange Board of India was set up in 1988 and became a statutory organization
from January 1992. It was given a statutory status for healthy regulation of capital markets.
Office of Capital Issues (OCI) was abolished and the companies were to approach market
directly subject to SEBI guidelines relating to disclosures and other measures of investors
protection. This led to removal of hurdles i.e., getting permission from CCI, MRTP
commissioner, Company Law Board, Ministry of Finance, Industrial, Registrar of companies etc.
The Securities and Exchange Board of India Act (SEBI) empowers SEBI to:
1. Regulate the business of stock exchanges.
2. Register and regulate intermediaries associated with the securities market as
well as working of mutual funds.
3. Promote and regulate self Regulatory organizations.
4. Prohibit fraudulent and unfair trade practices relating to securities transactions.
SEBI directed that all Stock Exchanges should computerize their operations to have better
transparency and. efficient screen based trading system and also permitted most of the stock
exchanges to have their additional trading floors at different places
through VSATS or WAN/LAN systems to suit their requirements. This has facilitated members
and investors to do their trading activities in a more and competitive way.
The system of insurance of brokers was made mandatory; the norms for bad deliveries were
standardized.
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Online Trading
In India first fully automated stock exchange was formed in the year 1994 with fully automated
trading system called screen based trading or Online tradingbasing on computers this system has
brought revolutionary changes in the secondary markets in India. This system is mainly helpful
for the purpose of protecting the investors from the brokers in the price rigging. The NSE has
used the software called NEAT (National Exchange for Automated Trading). After NSE starting
the Online trading the Indias premier stock exchanges followed the way of NSE and BSE.
Objectives of Online Trading:
Providing a Nationwide trading facility for all type of securities. Ensuring equal access to investors to all over the country through communication
network.
Providing a fair, efficient and transparent securities market using an electronic tradingsystem.
Enabling the use of shorter settlement cycles and book entry settlement system.
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Outcry System
Trading on stock exchanges used to take place through open outcry without use of technology
for immediate matching or recording of trades. This was a time consuming and inefficient
system. The practice of physical trading imposed limits on trading volumes and hence the slow
speed with which new information was incorporated into price.
NSE is the first exchange in the world to use satellite communication technology for trading. Its
trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art
client server based application. At the server end all trading information is stored in an in
memory database to achieve minimum response time and maximum system availability for
users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform
response time of less than one second.
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Demateralisation
The decade of Lhe9Os witnessed a revolution in the clearing and settlements functions in the
Indian securities market. Promulgation of the Depositories Ordinance in 1995 and establishment
in this revolution which sought to eliminate the ills associated with paper base securities system
such as delay in transfer, bad delivery, theft, fake and forged shares, and synchronize the
settlement of trade transfer of securities irrespective of geographical locations. Although in the
first phase, SEB1 has made Demat trading for selected scripts, efforts should be made to bring in
all major exchanges within a well defined time frame for acceptance of Demat Trading. With
SEBI allowing Demat delivery even in the fiscal segment more and more retail investor are
likely to get in to the system which ultimately encourage more brokers also to become to become
depository participants and educate the retail investor. The advantage of script less trading and
the need for such Demat trading compulsorily could also be explored. Apart from this the
banking network in the country could be used for this purpose by providing tow way quotes to
take up this work.
\
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Introduction of Ludhiana Stock Exchange
The Ludhiana Stock Exchange Limited (LSE was established in 1981, by Sh. S.P. Oswal of
Vardhman Group and Sh. B.M. Munjal of Hero Group, leading industrial luminaries, to fulfill a
vital need of having a Stock Exchange in the region of Punjab, Himachal Pradesh, Jammu &
Kashmir and Union territory of Chandigarh. Since its inception, the stock exchange has grown
phenomenally.
The stock Exchange has played an important role in channelising savings into capital for the
various industrial and commercial units of the state of Punjab and other parts of the company.
The Exchange has facilitated the mobilization of funds by entrepreneurs from the public and
thereby contributed in the overall, economic, industrial and social development of the state under
its jurisdiction.
Ludhiana Stock Exchange is one of the leading Regional Stock Exchange and has been in the
forefront of other stock exchange in every spheres, whether it is formation of subsidiary for
providing the platform of trading to investors, for brokers etc. in the era of Screen based trading
introduced by national Stock exchange and Bombay stock Exchange, entering into the field of
Commodities trading or imparting education to the Public at large by way of starting Certificate
Programmes in Capital Market.
The vision and mission of stock Exchange is:
Reaching small investors by providing services relating to Capital market including Trading
Depository operations etc and creating Mass Awareness by way of education and training in the
field of Capital market.
To create educated investors and fulfilling the gap of skilled work force in the domain in Capital
Market.
Further, the exchange has 295 members out of which 171 are registered with national Stock
exchange as Sub- broker and 124 with Bombay Stock exchange as sub- brokers through our
subsidiary.
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Infrastructure And Assets Base At Ludhiana Stock Exchange
The Exchange building is situated at Feroze Gandhi Market, Ferozepur Road, Ludhiana. It is a
six storeyed building, which is centrally air-conditioned. The building has 262 rooms, which are
located on various floors ranging from second to fifth. The first floor of the building houses the
administrative office and rooms from second to fifth floors have been leased out to brokers. The
first floor also has canteen facility. Investor Service Centre is also located at first floor which
houses a well-equipped library and view-terminals to provide live rates of NSE and BSE to
investors. Investors are also provided with Cable TV for the purpose of viewing the latest
happenings in the Capital Market and around. Basement of the building has air-conditioning
plant and Generators to provide air-conditioned environment and twenty-four hours power back
up. The Exchange has also an additional plot of land measuring 2333 sq. yards in the primelocation of city, to enhance its infrastructure and source of income.
List Of Board Of Directors Of LSE
Sr. No. Name of Director Category
1. Prof. Padam Parkash Kansal Chairman
2. Sh. Joginder Kumar Vice Chairman
3. Sh. Vikas Batra Shareholder Director
4. Sh. Rajinder Mohan Singla Shareholder Director
5. Sh. Ashok Kumar Shareholder Director
6. Sh. Satish Nagpal Shareholder Director
7. Sh. Ashwani Kumar Public Interest Director
8. Sh. V.P. Gaur Public Interest Director
9. Dr. Raj Singh, RoC Public Interest Director
10. Sh. Sanjay Anand Trading Member Director
11. Sh. Sunil Gupta Trading Member Director
12. Sh. Jaspal Singh Trading Member Director
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Strengths of LSE Group
1. LSE brand is popular among masses. The brand image of LSE can be capitalized.
2. We have requisite infrastructure for the Capital Market activities which includes a multi-
storeyed, centrally air conditioned building situated in the financial hub of the city i.e. Feroze
Gandhi Market.
3. We have well experienced staff handling operations of Stock Exchange.
4. We have competent Board and professional management.
5. We have much needed networking of sub brokers in the entire region, who are having rich
experience in Stock Market operations for the last 31 years.
6. We have more than 46,000 clients spread across Punjab, Himachal Pardesh, Jammu &
Kashmir and adjoining areas of Haryana and Rajasthan.
7. The turnover of our subsidiary is the highest amongst all subsidiaries of Regional Stock
Exchanges in India.
Listing Of Securities of Companies At Ludhiana Stock Exchange
At present, Ludhiana Stock Exchange has 324 listed companies, out of which 211 are regional
and 113 are Non-regional. The total listed capital of aforesaid companies is Rs. 3063.56 Crores
appx. The market capitalization of the said companies is more than Rs. 1890.53 crores. The
Stock Exchange is covering the vast investor base through the listing of above said companies,
which are situated in the region comprising of Punjab, Himachal Pradesh, Jammu & Kashmir,
and Chandigarh.
Ludhiana Stock Exchange has facilitated the capital generation for agro based industries as
Punjab is a agricultural led economy. It will continue to do so, once it gets approval for a tie up
with bigger Exchanges for commencing trading operations.
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Investor Related Services
The Exchange has been providing a variety of services for the benefit of investing public. The
services include Investor Service Centres, Investor Protection fund and Investor Educational
Seminars.
(I) Investor service centres
The Exchange has set-up Investor Service Centre at LSE Building for providing information
relating to Capital Market to the general public. The Centres subscribe to leading economic,
financial dailies and periodicals. They also store the Annual Reports of the companies listed at
the Stock Exchange. The Investor Service Centres are also equipped with a Terminal for
providing live rates of trading at NSE and BSE. A large number of the investors visit the
centre to utilize the services being provided by the Exchange.
(II) Investor awareness seminars
The Exchange has been organizing Investor Awareness Seminars for the benefit of Investors of
the region comprising State of Punjab, Himachal Pradesh, Jammu & Kashmir, Chandigarh and
adjoining areas of Haryana and Rajasthan. This massive exercise of organizing Investor
Awareness Seminars has been launched as a part of Securities Market Awareness Campaign
launched by SEBI in January, 2003. The Exchange apprises the investors about Dos and Donts
to be observed while dealing in Securities Market. During 2011-2012, till date, Exchange hasorganized more than 83 workshops in the region mentioned above.
(III) Website of exchange
www.lse.co.in The Exchange has its own website with the domain name www.lse.co.in. The
website provides valuable information about the latest market commentary, research reports
about companies, daily status of International markets, a separate module for Internet trading,
information about listed companies and brokers and sub-brokers of the Exchange and its
subsidiary. The website also contains many useful links on portfolio management, investor
education, frequently asked questions about various topics relating to Primary and Secondary
Market, information about Mutual Funds, Financials of the Company including Quarterly
Results, Share Prices, Profit and Loss Accounts, Balance Sheet and Many More. The website
also contains daily Technical Charts of various scrips being traded in BSE and NSE.
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LSE Securities Limited
LSE Securities Ltd., was incorporated in 07th January, 2000 with a view to revive the capital
market in the region and for taking full advantage of the emerging opportunities being provided
by expansion of bigger stock exchanges like NSE and BSE. The company since its inception has
marched forward rapidly and has maintained consistent growth record.
LSE Securities Limited is a subsidiary of the Ludhiana Stock Exchange has presence at various
locations to effectively service its large base of individual clients. The clients of the company
greatly benefit from strong research capability, which encompasses fundamentals as well as
technicals of LSE Securities Ltd, besides its wide reach in this part of the country.
LSE SECURITIES LIMITED (LSESL) is a subsidiary of the Ludhiana Stock Exchange Limited
under the policy formulated by the Securities and Exchange Board of India (SEBI) for Revival
of Small Stock Exchanges. The policy enunciated by the SEBI permits a stock exchange to float
a subsidiary, which can take up membership of larger stock exchanges, such as the National
Stock Exchange of India Ltd. (NSE), and Bombay Stock Exchange Ltd. (BSE). LSESL has been
registered by SEBI as a Trading-cum-Clearing Member in the Capital Market segment and
Futures & Options segment of NSE and Capital Market segment of BSE and Trading member of
MCX-Stock Exchange Limited. Trading Members of LSE can access NSE and BSE by
registering themselves with SEBI as Sub-brokers of LSESL.
Objectives of The Company
LSE Securities Limited is a subsidiary of the Ludhiana Stock Exchange, which was formed with
an objective to enhance business and investment opportunities for the investors and members of
Ludhiana Stock Exchange at large, through innovative products by encompassing a variety of
activities related to the capital market. The company has a paid-up capital of Rs 5.55 crores.
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List of Board Of Directors Of LSE Securities Limited
Governing Council
The Council of the management of the Company comprises of 10 directors of which 3are brokermembers and 7non-brokers. Five non broker members are Independent Directors of eminent
status from the field of finance, law and management and remaining two are Chief Executive
Officer of LSE Securities Limited and Executive Director of the holding company (Ludhiana
Stock Exchange), who are on the Board of the company as ex-officio Directors. Thus the council
of management has representation of sub-brokers as well as professionals and subject specialists
representing various fields of business activities. Operations of the company are run in a
professional, transparent and fair manner keeping in view of the interest of investors as well as
other stake-holders.
Sr.No. Name Designation
1. Sh. Vishal Goombhir Chairman
2. Sh. Vijay Singhania Vice-Chairman
3. Sh. Rajesh K. Sharma Chief Executive Officer
4. Sh. Lalit Kishor Member-Director
5. Sh. Sukhjivan Rai Member-Director
6. Sh. Munish Sood Member-Director
7. Sh. Ashish Aggarwal Public Representative Director- Independent Director
8. Sh. Ajay Chowdhary Public Representative Director- Independent Director
9. Dr. Prem Kumar Public Representative Director- Independent Director
10. Sh. Vinesh Kumar Public Representative Director- Independent Director
11. Sh. Rakesh Gupta Public Representative Director- Independent Director
12. Mrs. Pooja M. Kohli LSE-Representative Director
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Corporate Membership of NSE & BSE
SEBI, at the initiative of LSE, permitted smaller Stock Exchanges, to trade on bigger Stock
Exchanges through their subsidiary companies. The Ludhiana Stock Exchange floated its
subsidiary company, the LSE Securities Limited, with the objective of obtaining trading rights
on bigger Stock Exchanges. It has obtained corporate membership of both NSE and BSE in the
first half of year 2000.
Trading At NSE And BSE
The LSE Securities Ltd. commenced trading operations in Capital Market Segments of BSE and
NSE in September, 2000 and December 2000 respectively. The turnover of the Company at NSE
and BSE is growing by leaps and bounds ever since in incorporation. There was encouragingresponse from the sub-brokers specially at NSE counters. During the financial year 2005-06, the
Company recorded a turnover of Rs. 7975 crores and Rs.3834 crores in "Capital Market"
segments of NSE and BSE respectively. For the year ended 2005-2006, there were 128 sub-
brokers registered for NSE and 68 for BSE.
F&O SEGMENT OF NSE
The LSE Securities Ltd. commenced trading operations in Future and Options Segment of NSE
in February 2002. The Company became the first subsidiary of any Regional Stock Exchange
which commenced trading in F&O Segment of NSE. Response to trading facilities in the
F&O segment of NSE has been very encouraging and volumes generated in this segment soon
exceeded those in Capital Market segment.
Trading Through V-SATS
The LSE Securities Limited has provided facility to its sub-brokers for trading on NSE and BSE
through VSAT counters which are located outside Stock Exchange Building. During 2005-2006,
27 sub-brokers of the company have been trading through VSAT on NSE and 13 on BSE.
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Certification in Financial Market
In order to provide professional services to the investors of LSE Securities Limited through its
sub-brokers, the company motivated its sub-brokers and its staff to qualify the certification in
financial markets conducted by NSE. All trading terminals for Capital Market Segment and F&O
segment are being operated by the persons after having qualified the said certification.
Depository Participant Services
1.National Securities Depository Limited (NSDL): The LSE Securities Ltd. commencedits operations as Depository Participant of NSDL in August 2000. The DP services
provided by the Company have technology edge over other DPs, as DP of the company is
the only On-line Real-Time DP in the region. As a result of efficient services and
competitive rates, the Company has been able to increase its market share in the DP
business at the cost of other DPs in the region. As on date DP of NSDL and CDSL of the
Company at Ludhiana is servicing over 35000 beneficiary accounts.
2.Central Depository Services (India) Limited (CDSL): In order to further strengthen itsservices to sub-brokers and investors, the Company applied for the DP of CDSL. It
started DP operations of CDSL in December 2001. With the operationalisation of DPServices of CDSL, the Company has been able to provide delivery of shares to sub-
brokers and investors on the day of pay-out which in turn helps the sub-brokers to give
timely deliveries to their clients. Introduction of CDSL operations has also enabled the
sub-brokers and investors of the Company to timely meet the pay-in obligations of
securities purchased by the investors on BSE and sold next day on NSE through the
Company and vice-versa.
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Chapter 2
REVIEW OF
LITERATRUE
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There exists a voluminous literature concerning the role of capital market in the process of
economic growth of a country. The most important and systematic early contribution on financial
and economic development came from Joseph Schumpeter. Schumpeter (1912) contended that
financial development causes economic developmentthat financial markets promote economic
growth by funding entrepreneurs and in particular by channelling capital to the entrepreneurs
with high return projects. However, a systematic approach to the issue has been addressed with
the empirical study by Goldsmith (1969). He demonstrated a positive correlation between
financial development (measured by the value of financial intermediary assets relative to GNP)
and economic growth.
But the seminal work of McKinnon (1973) and Shaw (1973) brought to the forefront the role of
financial development in promoting economic growth. Their argument was that the financial
liberalization and deepening in countries that suffer from shallow finance or financial
repression are critically important to the economic growth of these countries. Ever since this
pioneering contribution, the relationship between economic growth and financial development
remained an important issue of debate among academicians and policy makers (De Gregorio and
Guidotti, 1995). There is now a growing theoretical and empirical body of literature on how
financial intermediation mobilizes savings allocates resources, diversifies risks, and contributes
to economic growth (Jbili, Enders, and Treichel, 1997; Greenwood and Jovanovic, 1990).
These early works, though insightful, lacks rigor analytical structures. Starting from the
beginning of 1990s, a growing body of work builds a series of analytical frameworks which
show how the financial intermediaries and markets appear endogenously to contribute to long-
run economic growth. Levine (1996), Jacque(2001), Tufano (2003), Chou (2007), Agarwal
(2000), Mohtadi and Agarwal(1998), Sarkar (2006), Capasso(2006), Kamat, Kamat and
Murthy(2007), Agrawalla and Tuteja (2007), Deb and Mukherjee (2008), and Chakraborty
(2008) have contributed a lot to the literature in this direction.
This theoretical and empirical explanation on the nexus between capital market and economic
growth of a country has been given a new tint with the development of Efficient Market
Hypothesis (EMH) by Fama (1965). Then it has been argued that for capital market to contribute
to economic growth and development of a country, it must operate efficiently. If the market
operates efficiently, confidence will be generated in the minds of the public and thus, investors
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will be willing to part with hard earned funds and invest them in securities with the hope that in
future they will recoup their investment. On the other side, where the market is highly and
unreasonably speculative, investors will be discouraged to invest their funds. The implication is
that the entrepreneurs cannot raise additional capital for expansion. Such a situation would have
detrimental effect on economic growth of any country. Thus, it suffices to say that capital market
efficiency is a necessary condition for growth and development of a country.
L.C.Gupta (1992) revealed the findings of his study that there is existence of wild speculation in
the Indian stock market. The over speculative character of the Indian stock market is reflected in
extremely high concentration of the market activity in a handful of shares to the neglect of the
remaining shares and absolutely high trading velocities of the speculative counters.
Carter Randal (1992) offered to investors the underlying principles of winning on the stock
market. He emphasised on longterm vision and a plan to reach the goals. He advised the
investors that to be successful, they should never be pessimists. He revealed that though there
has been a major economic crisis almost every year, it remains true that patient investors have
consistently made money in the equities market. He concluded that investing in the stock market
should be an un-emotional endeavour and suggested that investors should own a stock if they
believe it would perform well.
Yasaswy N.J. (1993) disclosed how 'turnaround stocks' offer big profits to bold investors and
also the risks involved in investing in such stocks. Turnaround stocks are stocks with
extraordinary potential and are relatively under priced at a given point of time.
Avijit Banerjee (1998) reviewed Fundamental Analysis and Technical Analysis to analyse the
worthiness of the individual securities needed to be acquired for portfolio construction. The
Fundamental Analysis aims to compare the Intrinsic Value (I..V) with the prevailing market
price (M.P) and to take decisions whether to buy, sell or hold the investments. The fundamentals
of the economy, industry and company determine the value of a security. If the 1.V is greater
than the M.P., the stock is under priced and should be purchased.
Mukul Gupta (1999) described the risk management framework as the building blocks for
Enterprise Risk Management ERM is the systems and procedures designed to deal with multiple
types of risks. The objectives of E.R.M are to obtain information and analyse data so that
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uncertainty is turned into quantifiable risk and appropriate management action can be taken to
mitigate the risk.
CRISIL Report on Risk Management (2000) stated that the loss potential from market risk
will increase in the absence of strong risk management tools. The banks which adopt a pro-active
approach to upgrading risk management skills which are currently unsophisticated as compared
to internationally best practices, would have a competitive edge in future. The report commented
that in the increasingly deregulated and competitive environment, the risk management strategies
of banks would hold the key to differentiation in their credit worthiness.
Jayanth M ThakurJ"(2000) disclosed the implications of derivatives. The use of derivatives
can be for safeguarding oneself against risks. It is widely recognised by all including the SEBI
committee on derivatives that a substantial degree of speculative activity in a market for
derivatives is necessary and without this, a good market in derivatives cannot function.
Mitra.S.K." (2000) commented on the increasing volatility of the bourses, which forces an
investor to shift away from the equity market. He observed that analysts profess to the investors
the virtue of long-term time horizon for the equity investment. But sharp volatility has become a
feature of the capital market worldwide, resulting in frequent, sharp, downward corrections. In
this scenario it is proving difficult to convince the investors to think long-term.
The Economic Times Investors' year Book(2000-01) commented on the "Paperless World and
described what makes dematerialisation the preferred choice and how it reduces risk.
Thedematerialised trading was introduced in India in 1996 to reduce pains and risks in settlement
through the loss of share certificates in transit, bad deliveries, delays in transfer and
forged/fake/stoIen certificates. It helps in doing away with the risk of loss in transit by directly
crediting the account with bonus shares and rights. There is no risk of bad delivery because the
ownership status is clearly captured in the Depository's computers.
Rukmani Viswanath (2001) reported that the Primary Dealers in Govt. securities are working
on a new internal risk management model suited for the Indian market conditions. The attempt is
to lay down general parameters for risk perception. The Primary Dealers Association of India
(PDAI) is formulating a set of prudential norms for 'risk management practices'. While
internationally the principles of risk management may be the same everywhere, the Association
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is of the view that they have to identify the relevant issues and apply those principles in the
Indian context. It strongly argues that it must work on a model that can help to manage liquidity
and interest rate risk. While the existing RBI guidelines on risk management cover mainly
statutory risk, the PDAI hopes that its new risk management model will be able to perceive 'real
risk'. These new norms are expected to help gauge several issues like, whether a fall in the prices
of securities or yields is a temporary or permanent situation etc.
Gabriel (2002) as enunciated by Nyong (2003) lay emphasis on the Romanian capital market
and conclude that the market is inefficient and hence, it has not contributed to economic growth
of Romania.
In a more recent study, Ewah et al (2009) appraise the impact of the capital market efficiency on
the economic growth of Nigeria using time series data from 1961 to 2004.The study found that
the capital market in Nigeria has the potential of growth inducing, but it has not contributed
meaningfully to the economic growth of Nigeria because of low market capitalization, low
absorptive capitalization, illiquidity, misappropriation of funds among others.
As inferred, the empirical financial economics literature is very thin on the issue that capital
market efficiency can exert an impact on the economic growth of a country. And, the studies for
an emerging market economy like India are almost non-existent in the literature. Therefore, this
paper is, perhaps the first kind of attempt in this direction.
Shaik Abudl Majeeb Pasha & R.Vamsi Krishna & Hemantha Gopi Kiran(2010) report
indicate that the SEBI is a regulatory body which is eighteen years old and the capital market
system is more than 100 years old. This matured capital market system requires monitoring
rather than over-regulation. The SEBI should supervise this capital market system in such a
manner that all sub-systems become self-regulatory organisations (SROs) gradually. The SEBI
should lay down the boundaries within which these sub-systems should operate. Moreover, the
fundamental infrastructure for regulation, disclosure, surveillance and trading are all in place.
Hence, the SEBI should stop being pre-occupied with day-to-day regulations and become more
of a visionary. The SEBI can ensure a free and fair market and take India into league of major
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global capital markets in the next round of reforms. To enable this, it has to thoroughly review its
structure and functioning. The SEBI has to balance between the costs of regulation and market
development. There should be cross-border cooperation between various regulators and between
regulators and industry.
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Chapter 3
RESEARCH
METHODOLOGY
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Research is common parlance refers to research for Knowledge one can also define research is a
scientific and systematic search for pertinent information and specific topic. The advance learner
dictionary of current English lays down the meaning of research as:
A Careful Investigation or enquiry especially through search for new fact in any branch
of Knowledge
Some People consider search as a moment from not to not so:
Research Always start with the problems Its purpose is to find answer or solution of the Problem through application of scientific
method.
It is a systematic and Intensive study Directive towards a more complete knowledge ofthe subject studies.
The Purpose of search is to discover answers to Questions through the Applications ofScientific procedures. The main aim of search is to find out the truth which is hidden and
which has not been discovered as yet.
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Objectives of the study
To find out investors behavior in the stock market and their perception about it.
To study the factors influencing the investment decisions by the investors. To study the nature of relationship between stock market indices with economic,
financial and commodity market.ss
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Nature of the Study
This research is Descriptive in nature.Descriptive Research is designed todescribecharacteristicsofa population or aphenomenon.
Descriptive Research
Objective Objective are formalized and structure with
clearly stated hypothesis or investigative
questions
Characteristic Descriptors of phenomenon or characteristic
associated with subject population (the Who,
What, When, Where & How Of A
Topic);Describe market characteristics or
function; preplanned & structured design.
Methods Primary data, Observation ,Secondary data
Data Collection
In dealing with any real life problem is often found that data at hand are in adequate and hence it
becomes necessary to collect data that are appropriate. There are several ways of collecting the
appropriate data which differ considerable in context of money cost time and other resources at
the disposable of Researcher. Data collection sources are as follow:-
Primary source:
Questionnaires filled by respondentsSecondary source:
Internet website Journals Books Publication and report
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Sample size:
50 investors have been contacted in this regard. The research is carried out in Ludhiana city.
Sampling techniques:The sampling technique used in this research Convenience sampling technique.
Convenience sampling (sometimes known as grab or opportunity sampling) is a type of non-
probability sampling which involves the sample being drawn from that part of the population
which is close to hand. That is, a sample population selected because it is readily available and
convenient.
Data has been represented through:-
Bar charts and Pie Charts:-After the data has been collected, it has been analyzed in the short form that it has been
converted with the help of coding, tabulation and drawing various graphs.
Limitations of the Project
Time constraint was a major limiting factor. Forty five days were insufficient to even grasp the theoretical concepts. Some of the persons were not so responsive. Possibility of error in data collection because many of investors may have not given true
replies to my questionnaire.
Sample size is limited to 100 investors The sample size may not adequately represent thewhole market.
Some respondents were reluctant to divulge personal information which can affect thevalidity of all responses.
The research is confined to Ludhiana only.
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Chapter 4
DATA ANALYSIS &
INTERPRETATION
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1. (A) Age distribution of the Investors of Ludhiana.
Age group Below25 25-35 35-45 Above45
No. of
investors
12 20 13 5
Interpretation:
According to this chart out of 50 - the most are in the age group of 25-35 yrs. i.e.40% the
second most investors are in the age group of 35-45 yrs. i.e. 26 %and the least investors are in
the age group of above 45 yrs.
Below25
24%
25-35
40%
35-45
26%
Above45
10%
No. of investors
AGE GROUP OF THE INVESTORS
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B). Occupation of the investors of Ludhiana
occupation student Self
employed
Service Retired
No. of
investors
15 17 10 8
.
interpretation
In Occupation group out of 50 investors, 30% are students, 34% are self employed, 20% are
service and 16% are in retired
student
30%
Self employed
34%
Service
20%
Retired
16%
No. of investors
OCCUPATIONS OF THE CUSTOMERS
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C) Investors invested in different kinds of the market
Kinds of
the
investment
Cash
market
Currency
market
Derivative
market
others
No. of
respondents
30 8 9 3
Interpretation:
From the above graph it can be inferred that out of 50 people, 30 people have invested in capital
market, 8 in currency market, 9 in derivative market and 3 in others.
0
5
10
15
20
25
30
35
Cash market Currency
market
Derivative
market
others
Series2
Kind of the investments
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D) mode of the investment preferred by investors
Interpretation
From the above graph it can be inferred that out of 50 people, 22 people have preferred mode of
the investment in monthly, 18 in weekly, 9 in daily basis.
0
5
10
15
20
25
daily weekly monthly yearly
No. of respondents
Mode of
investments
daily weekly monthly yearly
No. of
respondents
9 18 22 0
Mode of investments
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E) investment objective
Investment
objective
Income and
capital
preservation
Long term
growth
Short
term
growth
Growth
and
incomes
No. of
respondents
5 30 10 5
Interpretation
From the above graph it can be inferred that out of 50 people, 5 people have invested in capital
and income preservation, 30 in long term growth, 10 in short term growth and 5 in others
0
5
10
15
20
25
30
35
Income and
capital
preservation
Long term
growth
Short term
growth
Growth and
incomes
No. of respondents
Investment objective
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F) before investing from where you take advice
Take advice Expert
opinion
On friend
advise
Broker
advice
Other
No. of
respondents
15 7 18 10
Interpretation
From the above graph it can be inferred that out of 50 people, 30% people have taken the advise
from expert opinion, 14% from friend advice, 36%from broker and 20% from others.
Take advice
0%
Expert opinion
30%
On friend
advise
14%
Broker advice