An Introduction To The Indian Stock Market

November 13 2011| Filed Under Bombay Stock Exchange, Capital Market, Emerging Markets, ETFs, ETNs, Foreign Investment, Foreign Investor, Fundamental Analysis, India, International Markets, National Stock Exchange, New York Stock Exchange Mark Twain once divided the world into two kinds of people: those who have seen the famous Indian monument, the Taj Mahal, and those who haven't. The same could be said about investors. There are two kinds of investors: those who know about the investment opportunities in India and those who don't. India may look like a small dot to someone in the U.S., but upon closer inspection, you will find the same things you would expect from any promising market. Here we'll provide an overview of the Indian stock market and how interested investors can gain exposure. Tutorial: Major Investment Industries The BSE and NSE Most of the trading in the Indian stock market takes place on its two stock exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE has been in existence since 1875. The NSE, on the other hand, was founded in 1992 and started trading in 1994. However, both exchanges follow the same trading mechanism, trading hours, settlement process, etc. At the last count, the BSE had about 4,700 listed firms, whereas the rival NSE had about 1,200. Out of all the listed firms on the BSE, only about 500 firms constitute more than 90% of its market capitalization; the rest of the crowd consists of highly illiquid shares. Almost all the significant firms of India are listed on both the exchanges. NSE enjoys a dominant share in spot trading, with about 70% of the market share, as of 2009, and almost a complete monopoly in derivatives trading, with about a 98% share in this market, also as of 2009. Both exchanges compete for the order flow that leads to reduced costs, market efficiency and innovation. The presence of arbitrageurs keeps the prices on the two stock exchanges within a very tight range. (To learn more, see The Birth Of Stock Exchanges.) Trading Mechanism Trading at both the exchanges takes place through an open electronic limit order book, in which order matching is done by the trading computer. There are no market makers or specialists and the entire process is order-driven, which means that market orders placed by investors are automatically matched with the best limit orders. As a result, buyers and sellers remain anonymous. The advantage of an order driven market is that it brings more transparency, by displaying all buy and sell orders in the trading system. However, in the absence of market makers, there is no guarantee that orders will be executed. All orders in the trading system need to be placed through brokers, many of which provide online trading facility to retail customers. Institutional investors can also take advantage of the direct market access (DMA) option, in which they use trading terminals provided by brokers for placing orders directly into the stock market trading system. (For more, read Brokers And Online Trading: Accounts And Orders.) Settlement Cycle and Trading Hours

Equity spot markets follow a T+2 rolling settlement. This means that any trade taking place on Monday, gets settled by Wednesday. All trading on stock exchanges takes place between 9:55 am and 3:30 pm, Indian Standard Time (+ 5.5 hours GMT), Monday through Friday. Delivery of shares must be made in dematerialized form, and each exchange has its own clearing house, which assumes all settlement risk, by serving as a central counterparty. Market Indexes The two prominent Indian market indexes are Sensex and Nifty. Sensex is the oldest market index for equities; it includes shares of 30 firms listed on the BSE, which represent about 45% of the index's free-float market capitalization. It was created in 1986 and provides time series data from April 1979, onward. Another index is the S&P CNX Nifty; it includes 50 shares listed on the NSE, which represent about 62% of its free-float market capitalization. It was created in 1996 and provides time series data from July 1990, onward. (To learn more about Indian stock exchanges please go to http://www.bseindia.com/ and http://www.nse-india.com/.) Market Regulation The overall responsibility of development, regulation and supervision of the stock market rests with the Securities & Exchange Board of India (SEBI), which was formed in 1992 as an independent authority. Since then, SEBI has consistently tried to lay down market rules in line with the best market practices. It enjoys vast powers of imposing penalties on market participants, in case of a breach. (For more insight, see http://www.sebi.gov.in/. ) Who Can Invest In India? India started permitting outside investments only in the 1990s. Foreign investments are classified into two categories: foreign direct investment (FDI) and foreign portfolio investment (FPI). All investments in which an investor takes part in the day-to-day management and operations of the company, are treated as FDI, whereas investments in shares without any control over management and operations, are treated as FPI. For making portfolio investment in India, one should be registered either as a foreign institutional investor (FII) or as one of the sub-accounts of one of the registered FIIs. Both registrations are granted by the market regulator, SEBI. Foreign institutional investors mainly consist of mutual funds, pension funds, endowments, sovereign wealth funds, insurance companies, banks, asset management companies etc. At present, India does not allow foreign individuals to invest directly into its stock market. However, high-net-worth individuals (those with a net worth of at least $US50 million) can be registered as sub-accounts of an FII. Foreign institutional investors and their sub accounts can invest directly into any of the stocks listed on any of the stock exchanges. Most portfolio investments consist of investment in securities in the primary and secondary markets, including shares, debentures and warrants of companies listed or to be listed on a recognized stock exchange in India. FIIs can also invest in unlisted securities outside stock exchanges, subject to approval of the price by the Reserve Bank of India. Finally, they can invest in units of mutual funds and derivatives traded on any stock exchange.

An FII registered as a debt-only FII can invest 100% of its investment into debt instruments. Other FIIs must invest a minimum of 70% of their investments in equity. The balance of 30% can be invested in debt. FIIs must use special non-resident rupee bank accounts, in order to move money in and out of India. The balances held in such an account can be fully repatriated. (For related reading, see Re-evaluating Emerging Markets. ) Restrictions/Investment Ceilings The government of India prescribes the FDI limit and different ceilings have been prescribed for different sectors. Over a period of time, the government has been progressively increasing the ceilings. FDI ceilings mostly fall in the range of 26-100%. By default, the maximum limit for portfolio investment in a particular listed firm, is decided by the FDI limit prescribed for the sector to which the firm belongs. However, there are two additional restrictions on portfolio investment. First, the aggregate limit of investment by all FIIs, inclusive of their sub-accounts in any particular firm, has been fixed at 24% of the paid-up capital. However, the same can be raised up to the sector cap, with the approval of the company's boards and shareholders. Secondly, investment by any single FII in any particular firm should not exceed 10% of the paidup capital of the company. Regulations permit a separate 10% ceiling on investment for each of the sub-accounts of an FII, in any particular firm. However, in case of foreign corporations or individuals investing as a sub-account, the same ceiling is only 5%. Regulations also impose limits for investment in equity-based derivatives trading on stock exchanges. (For restrictions and investment ceilings go to http://www.fiilist.rbi.org.in/) Investment Opportunities for Retail Foreign Investors Foreign entities and individuals can gain exposure to Indian stocks through institutional investors. Many India-focused mutual funds are becoming popular among retail investors. Investments could also be made through some of the offshore instruments, like participatory notes (PNs) and depositary receipts, such as American depositary receipts (ADRs), global depositary receipts (GDRs), and exchange traded funds (ETFs) and exchange-traded notes (ETNs). (To learn about these investments, see 20 Investments You Should Know.) As per Indian regulations, participatory notes representing underlying Indian stocks can be issued offshore by FIIs, only to regulated entities. However, even small investors can invest in American depositary receipts representing the underlying stocks of some of the well-known Indian firms, listed on the New York Stock Exchange and Nasdaq. ADRs are denominated in dollars and subject to the regulations of the U.S. Securities and Exchange Commission (SEC). Likewise, global depositary receipts are listed on European stock exchanges. However, many promising Indian firms are not yet using ADRs or GDRs to access offshore investors. Retail investors also have the option of investing in ETFs and ETNs, based on Indian stocks. India ETFs mostly make investments in indexes made up of Indian stocks. Most of the stocks included in the index are the ones already listed on NYSE and Nasdaq. As of 2009, the two most prominent ETFs based on Indian stocks are the Wisdom-Tree India Earnings Fund (NYSE: EPI) and the PowerShares India Portfolio Fund (NYSE:PIN). The most prominent ETN is the MSCI

India Index Exchange Traded Note (NYSE:INP). Both ETFs and ETNs provide good investment opportunity for outside investors. The Bottom Line Emerging markets like India, are fast becoming engines for future growth. Currently, only a very low percentage of the household savings of Indians are invested in the domestic stock market, but with GDP growing at 7-8% annually and a stable financial market, we might see more money joining the race. Maybe it's the right time for outside investors to seriously think about joining the India bandwagon.
Referece: http://www.investopedia.com/articles/stocks/09/indian-stock-market.asp

What is India Financial Market?

What does the India Financial market comprise of? It talks about the primary market, FDIs, alternative investment options, banking and insurance and the pension sectors, asset management segment as well. With all these elements in the India Financial market, it happens to be one of the oldest across the globe and is definitely the fastest growing and best among all the financial markets of the emerging economies. The history of Indian capital markets spans back 200 years, around the end of the 18th century. It was at this time that India was under the rule of the East India Company. The capital market of India initially developed around Mumbai; with around 200 to 250 securities brokers participating in active trade during the second half of the 19th century.

Scope of the India Financial Market -

The financial market in India at present is more advanced than many other sectors as it became organized as early as the 19th century with the securities exchanges in Mumbai, Ahmedabad and Kolkata. In the early 1960s, the number of securities exchanges in India became eight - including Mumbai, Ahmedabad and Kolkata. Apart from these three exchanges, there was the Madras, Kanpur, Delhi, Bangalore and Pune exchanges as well. Today there are 23 regional securities exchanges in India. The Indian stock markets till date have remained stagnant due to the rigid economic controls. It was only in 1991, after the liberalization process that the India securities market witnessed a flurry of IPOs serially. The market saw many new companies spanning across different industry segments and business began to flourish. The launch of the NSE (National Stock Exchange) and the OTCEI (Over the Counter Exchange of India) in the mid 1990s helped in regulating a smooth and transparent form of securities trading.

The regulatory body for the Indian capital markets was the SEBI (Securities and Exchange Board of India). The capital markets in India experienced turbulence after which the SEBI came into prominence. The market loopholes had to be bridged by taking drastic measures. Potential of the India Financial Market -

India Financial Market helps in promoting the savings of the economy - helping to adopt an effective channel to transmit various financial policies. The Indian financial sector is well-developed, competitive, efficient and integrated to face all shocks. In the India financial market there are various types of financial products whose prices are determined by the numerous buyers and sellers in the market. The other determinant factor of the prices of the financial products is the market forces of demand and supply. The various other types of Indian markets help in the functioning of the wide India financial sector. Features of the Financial Market in India:

India Financial Indices - BSE 30 Index, various sector indexes, stock quotes, Sensex charts, bond prices, foreign exchange, Rupee & Dollar Chart Indian Financial market news Stock News - Bombay Stock Exchange, BSE Sensex 30 index, S&P CNX-Nifty, company information, issues on market capitalization, corporate earning statements Fixed Income - Corporate Bond Prices, Corporate Debt details, Debt trading activities, Interest Rates, Money Market, Government Securities, Public Sector Debt, External Debt Service Foreign Investment - Foreign Debt Database composed by BIS, IMF, OECD,& World Bank, Investments in India & Abroad Global Equity Indexes - Dow Jones Global indexes, Morgan Stanley Equity Indexes Currency Indexes - FX & Gold Chart Plotter, J. P. Morgan Currency Indexes National and Global Market Relations Mutual Funds Insurance Loans Forex and Bullion

If an investor has a clear understanding of the India financial market, then formulating investing strategies and tips would be easier. Reference: http://business.mapsofindia.com/india-market/financial.html

Scope of India Money Market

The India money market is a monetary system that involves the lending and borrowing of short-term funds. India money market has seen exponential growth just after the globalization initiative in 1992. It has been observed that financial institutions do employ money market instruments for financing shortterm monetary requirements of various sectors such as agriculture, finance and manufacturing. The performance of the India money market has been outstanding in the past 20 years. Central bank of the country - the Reserve Bank of India (RBI) has always been playing the major role in regulating and controlling the India money market. The intervention of RBI is varied - curbing crisis situations by reducing the cash reserve ratio (CRR) or infusing more money in the economy.

Types of Money Market instruments in India -

Money market instruments take care of the borrowers' short-term needs and render the required liquidity to the lenders. The varied types of India money market instruments are treasury bills, repurchase agreements, commercial papers, certificate of deposit, and banker's acceptance.

Treasury Bills (T-Bills) - Treasury bills were first issued by the Indian government in 1917. Treasury bills are short-term financial instruments that are issued by the Central Bank of the country. It is one of the safest money market instruments as it is void of market risks, though the return on investments is not that huge. Treasury bills are circulated by the primary as well as the secondary markets. The maturity periods for treasury bills are respectively 3-month, 6month and 1-year. The price with which treasury bills are issued comes separate from that of the face value, and the face value is achieved upon maturity. On maturity, one gets the interest on the buy value as well. To be specific, the buy value is determined by a bidding process, that too in auctions.

Repurchase Agreements - Repurchase agreements are also called repos. Repos are short-term loans that buyers and sellers agree upon for selling and repurchasing. Repo transactions are allowed only among RBI-approved securities like state and central government securities, T-bills, PSU bonds, FI bonds and corporate bonds. Repurchase agreements, on the other hand, are sold off by sellers, held back with a promise to purchase them back at a certain price and that too would happen on a specific date. The same is the procedure with that of the buyer, who purchases the securities and other instruments and promises to sell them back to the seller at the same time. Commercial Papers - Commercial papers are usually known as promissory notes which are unsecured and are generally issued by companies and financial institutions, at a discounted rate from their face value. The fixed maturity for commercial papers is 1 to 270 days. The purposes with which they are issued are - for financing of inventories, accounts receivables, and settling short-term liabilities or loans. The return on commercial papers is always higher than that of T-bills. Companies which have a strong credit rating, usually issue CPs as they are not backed by collateral securities. Corporations issue CPs for raising working capital and they participate in active trade in

the secondary market. It was in 1990 that Commercial papers were first issued in the Indian money market. Certificate of Deposit - A certificate of deposit is a borrowing note for the short-term just similar to that of a promissory note. The bearer of a certificate of deposit receives interest. The maturity date, fixed rate of interest and a fixed value - are the three components of a certificate of deposit. The term is generally between 3 months to 5 years. The funds cannot be withdrawn instantaneously on demand, but has the facility of being liquidated, if a certain amount of penalty is paid. The risk associated with certificate of deposit is higher and so is the return (compared to T-bills). It was in 1989 that the certificate of deposit was first brought into the Indian money market. Banker's Acceptance - A banker's acceptance is also a short-term investment plan that comes from a company or a firm backed by a guarantee from the bank. This guarantee states that the buyer will pay the seller at a future date. One who draws the bill should have a sound credit rating. 90 days is the usual term for these instruments. The term for these instruments can also vary between 30 and 180 days. It is used as time draft to finance imports, exports.

It depends on the economic trends and market situation that RBI takes a step forward to ease out the disparities in the market. Whenever there is a liquidity crunch, the RBI opts either to reduce the Cash Reserve Ratio (CRR) or infuse more money in the economic system. In a recent initiative, for overcoming the liquidity crunch in the Indian money market, the RBI infused more than Rs 75,000 crore along with reductions in the CRR.

Indian Share Market

A Share market/stock markets is an open market for fiscal operations such as trading of a firm's share and derivatives at a fixed cost. These securities are further listed on a stock exchange. A Share market does not offer any corporeal service and is not a separately owned business entity. It was in 1875 that the Indian Share Market first started functioning. The first share trading association in India was known as the Native Share and Stock Broker's Association, only to become the Bombay Stock Exchange (BSE) later on. This trading association started off its operations with around 318 members.

Main components of Indian Share Market

Bombay Stock Exchange (BSE)

Bombay Stock Exchange is known to be the oldest stock exchange in the entire Asian region. If someone wants to know about the history of the India share market, it becomes synonymous with the history of the Bombay Stock Exchange. It started functioning in 1875 with the name 'The Native Share and Stock Broker's Association'. Under the Securities Contracts (Regulation) Act, 1956, the association got its

recognition as a stock exchange in 1956. When it started, it was just an association of persons but with the recognition it got transferred to a corporate and demutualised entity.

Trading items in Bombay Stock Exchange Equity or Shares Derivatives (Futures and Options) Debt Instruments

The main index of BSE is known as the BSE SENSEX or simply SENSEX (Sensitivity Index). It is an index which comprises of 30 financially sound company scrips, with an option to be reviewed and modified from time-to-time. The index calculation is based on the 'Free-float Market Capitalization' methodology. Leading bourses like the Dow-Jones also follow this methodology. Currently the Sensex is hovering around the 17,000 mark, all expected to touch 20K by 2010. But then volatility has its important role to spoil the entire game. National Stock Exchange (NSE)

National Stock Exchange (NSE) is considered to be the leader in the stock exchange scenario in terms of the total volume traded. The market capitalisation the National Stock Exchange touched about $921.31 billion at the end of May 2009. The National Stock Exchange received the recognition of a stock exchange in July 1993 under Securities Contracts (Regulation) Act, 1956. The products that are traded in the National Stock Exchange are:

Equity or Share Futures (both index and stock) Options (Call and Put) Wholesale Debt Market Retail Debt Market

NSE has a fully automated screen based trading system which is known as the NEAT system. The transactions are carried on with speed, efficiency, and are all transparent. The risk management system of the National Stock Exchange is world class and can be considered as the benchmark for other bourses. The leading index of NSE is known as Nifty 50 or just Nifty. It comprises of 50 diversified benchmark Indian company scrips and is constructed on the basis of weighted average market capitalization method.

Regulatory Authority of Indian Share Market

SEBI or Securities and Exchange Board of India is the market watchdog and has the responsibility of protecting the investors' interests, develops regulatory norms and helps in the development of the securities market in India. Why to invest in Indian share market ?

An investor does not require a lot of money to start investing in India share market unlike buying property and paying off a monthly mortgage. Time of trading involved spans from small to big. One can trade for a short period of time or even a lengthy span. It helps you to see 'fast' cash if the market is in robust mood and helps in fast liquidation.

Essential rules of Indian Share Market

Whenever share market is at its crest it is bound to dip at some point of time. If the share market is down, it will only increase if there are no external aspects influencing it. Unlike the common belief of investing in booming share market, it is advisable not to block your hard earned money in already flourishing Sensex and NIFTY. It is better to wait for market bottom trend and then purchase shares at lower cost in order to trade it later. The excellent time for investment is when the market is low keeping the basics in consideration. Seek the advice of professionals who will not only provide you tips on best investment options but also on favorable market conditions. Update yourself on the prevailing market conditions Whenever market witness an upward trend always purchase first and then sell the securities, and when the market dips always buy later and sell first.

Tips on investing intelligently in Indian Share Market

Consider selling the shares which you have bought long time back and are indicating gains. Even if they are not willing to offer you considerable gains then its time to get rid of them are invest your money in productive schemes. Diversify your shares buy investing in different sectors. Also consider investing in equity funds and to stabilize your equity investments invest a part in fixed income options like the bonds, Public Provident Fund, National Savings Certificates and post office deposits. You can also consider a balanced or debt fund if you have restrained budget. Do not consider the shares based on layman's advice. Stride carefully and invest in shares that you are comfortable investing in. Judge the firm by its past records and assess it personally. Take the advice of the fund manager who manages that specific fund. If you have allocated more than half of your investments in equity, then stick to your plan. Do not surpass that pre-decided perimeter and believe in the performance of the market.

India commodity market consists of both the retail and the wholesale market in the country. The
commodity market in India facilitates multi commodity exchange within and outside the country based on requirements. Commodity trading is one facility that investors can explore for investing their money. The India Commodity market has undergone lots of changes due to the changing global economic scenario; thus throwing up many opportunities in the process. Demand for commodities both in the domestic and global market is estimated to grow by four times than the demand currently is by the next five years.

Commodity Trading

Commodity trading is an interesting option for those who wish to diversify from the traditional options like shares, bonds and portfolios. The Government has made almost all commodities entitled for futures trading. Three multi commodity exchanges have been set up in the country to facilitate this for the retail investors. The three national exchanges in India are:

Multi Commodity Exchange (MCX) National Commodity and Derivatives Exchange (NCDEX) National Multi-Commodity Exchange (NMCE)

Commodity trading in India is still at its early days and thus requires an aggressive growth plan with innovative ideas. Liberal policies in commodity trading will definitely boost the commodity trading. The commodities and future market in the country is regulated by Forward Markets commission (FMC).

Wholesale Market

The wholesale market in India, an important component of the India commodity market, traditionally dealt with framers and manufacturers of goods. However, in the present scenario, their roles have changed to a large extent due to the enormous growth that the economy has witnessed. The lengthy process of wholesalers buying from manufacturers; then selling it to retailers who in turn sold it to consumers does not seem feasible today. An improvement in the transport facility has made the interaction between the retailer and manufacturer easier; the need for a wholesale market is gradually diminishing. Retail Market

The retail market in India is currently witnessing a boom. The growth in the India commodity market is largely attributed to this boom in the retail market. Policy reforms and liberal government policies have ensured that this sector is growing at a good pace. Some of the reasons attributed to the growth of retail sector in India include the large population of the country who has an increased purchasing power

in their hand. Another factor is the heavy inflow of foreign direct investment in this sector. More than 80% of the retail industry in the country is concentrated in large cities. India Commodity Market - Global Scenario

Despite having a robust economy, India's share in the global commodity market is not as big as estimated. Except gold the share in other sectors of the commodity market is not very significant. India accounts for 3% of the global oil demands and 2% of global copper demands. In agriculture India's contribution to international trade volume is rather less compared to the huge production base available. Various infrastructure development projects that are being undertaken in India are being seen as a key growth driver in the coming days. India Debt market refers to the financial market where investors buy and sell debt securities, mostly in the form of bonds. These markets are important source of funds, especially in a developing economy like India. India debt market is one of the largest in Asia. Like all other countries, debt market in India is also considered a useful substitute to banking channels for finance. The most distinguishing feature of the debt instruments of Indian debt market is that the return is fixed. This means, returns are almost risk-free. This fixed return on the bond is often termed as the 'coupon rate' or the 'interest rate'. Therefore, the buyer (of bond) is giving the seller a loan at a fixed interest rate, which equals to the coupon rate.

Classification of Indian Debt Market

Indian debt market can be classified into two categories: Government Securities Market (G-Sec Market): It consists of central and state government securities. It means that, loans are being taken by the central and state government. It is also the most dominant category in the India debt market. Bond Market: It consists of Financial Institutions bonds, Corporate bonds and debentures and Public Sector Units bonds. These bonds are issued to meet financial requirements at a fixed cost and hence remove uncertainty in financial costs.

Advantages

The biggest advantage of investing in Indian debt market is its assured returns. The returns that the market offer is almost risk-free (though there is always certain amount of risks, however the trend says that return is almost assured). Safer are the government securities. On the other hand, there are certain

amounts of risks in the corporate, FI and PSU debt instruments. However, investors can take help from the credit rating agencies which rate those debt instruments. The interest in the instruments may vary depending upon the ratings. Another advantage of investing in India debt market is its high liquidity. Banks offer easy loans to the investors against government securities. Disadvantages

As there are several advantages of investing in India debt market, there are certain disadvantages as well. As the returns here are risk free, those are not as high as the equities market at the same time. So, at one hand you are getting assured returns, but on the other hand, you are getting less return at the same time. Retail participation is also very less here, though increased recently. There are also some issues of liquidity and price discovery as the retail debt market is not yet quite well developed. Debt Instruments

There are various types of debt instruments available that one can find in Indian debt market. Government Securities It is the Reserve Bank of India that issues Government Securities or G-Secs on behalf of the Government of India. These securities have a maturity period of 1 to 30 years. G-Secs offer fixed interest rate, where interests are payable semi-annually. For shorter term, there are Treasury Bills or T-Bills, which are issued by the RBI for 91 days, 182 days and 364 days. Corporate Bonds These bonds come from PSUs and private corporations and are offered for an extensive range of tenures up to 15 years. There are also some perpetual bonds. Comparing to G-Secs, corporate bonds carry higher risks, which depend upon the corporation, the industry where the corporation is currently operating, the current market conditions, and the rating of the corporation. However, these bonds also give higher returns than the G-Secs. Certificate of Deposit These are negotiable money market instruments. Certificate of Deposits (CDs), which usually offer higher returns than Bank term deposits, are issued in demat form and also as a Usance Promissory

Notes. There are several institutions that can issue CDs. Banks can offer CDs which have maturity between 7 days and 1 year. CDs from financial institutions have maturity between 1 and 3 years. There are some agencies like ICRA, FITCH, CARE, CRISIL etc. that offer ratings of CDs. CDs are available in the denominations of ` 1 Lac and in multiple of that. Commercial Papers There are short term securities with maturity of 7 to 365 days. CPs are issued by corporate entities at a discount to face value. The Indian Equity Market is more popularly known as the Indian Stock Market. The Indian equity market has become the third biggest after China and Hong Kong in the Asian region. According to the latest report by ADB, it has a market capitalization of nearly $600 billion. As of March 2009, the market capitalization was around $598.3 billion (Rs 30.13 lakh crore) which is one-tenth of the combined valuation of the Asia region. The market was slow since early 2007 and continued till the first quarter of 2009.

A stock exchange has been defined by the Securities Contract (Regulation) Act, 1956 as an organization, association or body of individuals established for regulating, and controlling of securities. The Indian equity market depends on three factors

Funding into equity from all over the world Corporate houses performance Monsoons

The stock market in India does business with two types of fund namely private equity fund and venture capital fund. It also deals in transactions which are based on the two major indices Bombay Stock Exchange (BSE) and National Stock Exchange of India Ltd. (NSE). The market also includes the debt market which is controlled by wholesale dealers, primary dealers and banks. The equity indexes are allied to countries beyond the border as common calamities affect markets. E.g. Indian and Bangladesh stock markets are affected by monsoons. The equity market is also affected through trade integration policy. The country has advanced both in foreign institutional investment (FII) and trade integration since 1995. This is a very attractive field for making profit for medium and long term investors, short-term swing and position traders and very intra day traders. The Indian market has 22 stock exchanges. The larger companies are enlisted with BSE and NSE. The smaller and medium companies are listed with OTCEI (Over The counter Exchange of

India). The functions of the Equity Market in India are supervised by SEBI (Securities Exchange Board of India). History of Indian Equity Market The history of the Indian equity market goes back to the 18th century when securities of the East India Company were traded. Till the end of the 19th century, the trading of securities was unorganized and the main trading centers were Calcutta (now Kolkata) and Bombay (now Mumbai). Trade activities prospered with an increase in share price in India with Bombay becoming the main source of cotton supply during the American Civil War (1860-61). In 1865, there was drop in share prices. The stockbroker association established the Native Shares and Stock Brokers Association in 1875 to organize their activities. In 1927, the BSE recognized this association, under the Bombay Securities Contracts Control Act, 1925. The Indian Equity Market was not well organized or developed before independence. After independence, new issues were supervised. The timing, floatation costs, pricing, interest rates were strictly controlled by the Controller of Capital Issue (CII). For four and half decades, companies were demoralized and not motivated from going public due to the rigid rules of the Government. In the 1950s, there was uncontrollable speculation and the market was known as 'Satta Bazaar'. Speculators aimed at companies like Tata Steel, Kohinoor Mills, Century Textiles, Bombay Dyeing and National Rayon. The Securities Contracts (Regulation) Act, 1956 was enacted by the Government of India. Financial institutions and state financial corporation were developed through an established network. In the 60s, the market was bearish due to massive wars and drought. Forward trading transactions and 'Contracts for Clearing' or 'badla' were banned by the Government. With financial institutions such as LIC, GIC, some revival in the markets could be seen. Then in 1964, UTI, the first mutual fund of India was formed. In the 70's, the trading of 'badla' resumed in a different form of 'hand delivery contract'. But the Government of India passed the Dividend Restriction Ordinance on 6th July, 1974. According to the ordinance, the dividend was fixed to 12% of Face Value or 1/3 rd of the profit under Section 369 of The Companies Act, 1956 whichever is lower. This resulted in a drop by 20% in market capitalization at BSE (Bombay Stock Exchange) overnight. The stock market was closed for nearly a fortnight. Numerous multinational companies were pulled out of India as they had to dissolve their majority stocks in India ventures for the Indian public under FERA, 1973.

The 80's saw a growth in the Indian Equity Market. With liberalized policies of the government, it became lucrative for investors. The market saw an increase of stock exchanges, there was a surge in market capitalization rate and the paid up capital of the listed companies. The 90s was the most crucial in the stock market's history. Indians became aware of 'liberalization' and 'globalization'. In May 1992, the Capital Issues (Control) Act, 1947 was abolished. SEBI which was the Indian Capital Market's regulator was given the power and overlook new trading policies, entry of private sector mutual funds and private sector banks, free prices, new stock exchanges, foreign institutional investors, and market boom and bust. In 1990, there was a major capital market scam where bankers and brokers were involved. With this, many investors left the market. Later there was a securities scam in 1991-92 which revealed the inefficiencies and inadequacies of the Indian financial system and called for reforms in the Indian Equity Market. Two new stock exchanges, NSE (National Stock Exchange of India) established in 1994 and OTCEI (Over the Counter Exchange of India) established in 1992 gave BSE a nationwide competition. In 1995-96, an amendment was made to the Securities Contracts (Regulation) Act, 1956 for introducing options trading. In April 1995, the National Securities Clearing Corporation (NSCC) and in November 1996, the National Securities Depository Limited (NSDL) were set up for demutualised trading, clearing and settlement. Information Technology scrips were the major players in the late 90s with companies like Wipro, Satyam, and Infosys. In the 21st century, there was the Ketan Parekh Scam. From 1st July 2001, 'Badla' was discontinued and there was introduction of rolling settlement in all scrips. In February 2000, permission was given for internet trading and from June, 2000, futures trading started.

What is India Market Research?

India Market Research provides an idea of the business and the consumer market pattern. They pave the way to economic and business development and help to generate profit for the country. An extensive Market Research in India takes care of all the queries of the marketers - giving them the required information for a smooth marketing journey. Market research involves giving insight to all the categories of marketing - valuation, distribution, promotion of product and services. For betterment and improvement, market research is absolutely essential.

There are loads of Market Research agencies and consulting firms that gives excellent report, provides a helping hand to the Indian and international companies. Out of the lot, IMRB International is the ground breaker in Indian Market Research. Others following the lead are

Delphi Research services ORG-MARG MRUC NFO Nielson India

The market research agencies pan India; cover all the main areas of marketing - spanning B2B and industrial research, social research, media research, brand research, corporate and employee research, channel and retail research, product and packaging research, pricing research and business-specialized consumer research. Focus of the India market research agencies are

Understanding consumers - The trends of the customers are tracked by the market research agencies. Their needs, perceptions, projected demands are all studied and marketing strategies are formed accordingly. Investigating market - This method helps in mapping the market conditions and demands are estimated. Conceptualizing product development - Positioning strategies, product and service strategies are formed accordingly after taking into consideration the marketing research results.

India Market research reports give an insight of the actual status of the economy as well as the projected growth figures for the economy.

Gross Domestic Product slipped from an average of over 9% in the previous three fiscal years to 6.7% during 2008-09 Wholesale price index (WPI) rose to around 13% in August 2008 and had faced an equally sharp fall to zero percent in March 2009 Projections state that the real GDP will grow by 6% in 2009-10 For the year 2009-10, the forecast for agriculture sector has been revised downwards from 2.5% to (-) 1.4% For industrial sector, the forecasts have been revised upwards from 4.8% to 6.3% The profit growth of corporate sector in 2009-10 is revised upwards to 10.0% from 7.5% Domestic savings to GDP is slated to be 33.6% in 2009-10, this is a revised figure downwards from 35.0% WPI inflation would be approx 5.5% which is revised upwards from 5.3%

The India market research statistics lessens the risk of market investment. The analysis of the market is important to undertake any marketing procedures. Go ahead to take the benefits of the India Market Research.

The Indian retail market is the fifth largest retail destination all across the globe. It has been ranked as the most attractive emerging market for investment in the retail sector in 2009. In the entire Gross Domestic Product of India, the share of retail trade was between 8-10% in 2007, where presently it has touched around 12%, and in all probability will touch 22% by the end of 2010. Consumerism is on the rise with the rising trend of middle class segment in the country. The Indian consumer (retail) market, in all probability, will grow four times by 2025. The value of India's retail market has touched US$ 511 billion in 2008. India has escalated up to the 39th most preferred retail destination globally in 2009 (in 2008, they ranked 44th).

Components of the Indian retail Market

Banks, capital goods, engineering, fast moving consumer goods (FMCG), software services, oil marketing, power, two-wheelers and telecom companies - they are the main driving force in the retail growth of India. Global retailers still now find India to be among the most attractive destination. On July 2009, the foreign direct investment (FDI) inflows, in single-brand retail trading, touched approximately US$ 46.60 million.

Size of Indian retail market

India's retail sector is estimated to touch US$ 833 billion by 2013 and US$ 1.3 trillion by 2018, with a compound annual growth rate (CAGR) of 10% - which is quite lucrative. Al these estimations are due to the fact that the consumer spending has seen a rise of around 75%, in the past four years. The organized Indian retail market is slated to grow at a CAGR of 40%, touching US$ 107 billion by 2013. 5% of the Indian retail market is occupied by the organized retail sector, which is all slated to witness the majority number of large format malls and branded retail stores. The increase in the number of such malls would be first seen in South India, followed by North, West and the East over the coming two years. Another latest research shows that more than 100 malls spanning a space of over 30 million sq feet is estimated to open in India between 2009 and 2010 end. Investment in the organized retail market would be around US$ 503.2 million in 2009. This could go further up to US$ 1.26 billion in the next four to five years, at a CAGR of 40%. India has emerged as the third most attractive market destination for apparel retailers over the years. In India, apparel is the second largest retail category and will have a 12-15% growth rate every year. Apparel, food and grocery is expected to lead the organized retail sector in India. The Indian retail market has been witnessing exponential growth with developments taking place not only in major cities and metros but tier-II and tier-III cities in India are also on the focus.

Developments in the Indian retail market

Marks & Spencer Reliance India has plans to open 35 stores over the next five years. The 51:49 joint venture between UK's Marks and Spencer and Reliance Retail Ltd. already has 15 stores spanning India. Carrefour SA, the largest retailer of Europe, is expected to start wholesale operations in India by 2010 and also has shared its plan for setting up the first cash-and-carry outlet in the National Capital Region. The present status looks alluring with Carrefour exporting goods valued US$ 170 million from India to Europe, UAE, Indonesia, Europe, Thailand, Singapore and Malaysia. Jewellery manufacturer and retailer, Gitanjali Group and MMTC will set up a chain of exclusive retail outlets jointly known as Shuddi-Sampurna Vishwas. This joint venture will see 60 stores across India by end of 2009. They will retail hallmarked gold and diamond Jewellery. Mahindra Retail, a part of the Mahindra Group, is hopeful about its investment plans to the tune of US$ 19.8 million. This investment will help them come out with a specialty retail concept by 2010 known as 'Mom and Me'. Pantaloon Retail India (PRIL) has investment plans of more than US$ 103.3 million for expanding its seamless mall Central and the value fashion format Brand Factory in the next two years. Bharti Retail has launched eight Wal-Mart private labels-including two large labels 'Great Value' and 'George'- in its supermarket chain Easyday. It is all set to attract more consumers because of their international design and packaging. Italian sportswear brand Lotto is all set to launch two new footwear brands Sabots and Calcetto in India very soon. By March 2010, they will have at least 50 exclusive outlets. Steel players such as JSW Steel and Essar Steel are focusing on opening up more retail outlets across the Indian market. JSW Steel presently has 50 steel retail outlets known as JSW Shoppe and the target is to increase the number to around 200 by March 2010. Similarly, Essar Steel has retail outlets known as Essar hypermarts. With around 150 such outlets, this segment is responsible for about 20-25% to the Essar's total revenue. Expansion mode for the large retailers - Aditya Birla Retail, Reliance Retail and Shoppers Stop, and food chains like McDonald's as the rentals are dropping sharply. Few of the major international brands are aiming to establish a strong foothold in India. Few of such brands are The Pizza Company and Spicchio Pizza (from Thailand), Coffee Club from Australia, Japanese brand Lolita Fashion, Revive Juice Bars from the UK, Mrs Fields Cookies and Jamba Juice from the US, and French fashion brand Jules. Retail brands like United Colors of Benetton, Tommy Hilfiger and Puma have been opening up factory outlets for selling excess stock. This step is always an interesting method for wooing the price-conscious buyers.

India Market Size has enormous potential to become a major global force to reckon with the credit for having a huge market size in India is largely attributed to the fact that the India is the second most populated country in the world. Owing to the liberal government policies, the India Market Size has increased of late as it has witnessed the entry of new players to the Indian market scene. It is very difficult to gauge the full extent of India Market Size due to the extremely heterogeneous nature of the various elements within the country. The Indian market size can be broadly classified into four components:

Labor market Money Market Commodity Market Capital Market

The Labor Market in India is among one of the cheapest in the world. Besides, there are a large number of English knowing technically qualified workforce in the country. This increases the India Market Size vastly and also makes India one of the favorite destinations for overseas companies to set up branches. The labor market consists of workforce in the entire three sectors primary, secondary and tertiary sector. The Money Market in India deals with all the aspects related to the lending and borrowing of funds. Since the India market size is huge, performance in the country's money market depends on a variety of factors. The money market is closely connected to the foreign exchange market. The Commodity Market comprises of exchange of goods that is estimated in terms of the domestic currency. The wholesale market and the retail market are important components of the commodity market. Capital Market deals with all the assets of the country. Here both the government and public companies can raise short term and long term funds, depending on their requirements. The bond market and the share market come under the capital market.

Demand for consumer goods (figures in '000)

1995-96 2001-02 2005-06 2009-10 (Estimated) Cars 276 788 2599 4580 3006 6024 1560 4663 6295 4335 8727 3466 8369 9957 6774 13149

Motorcycles 760 CTV Regular 1785 Refrigerators 1850 White Goods 3437

An increase in the demand for consumer goods means that the production requirement naturally increases. The rapid rise in the income patters of the population in India has ensured that the demand for consumer good increased at an even faster pace. Today, the numbers of people who own consumer goods are far larger than they were a decade ago. India market size has witnessed tremendous change over the last few years due to this.

EMERGING MARKET INDIA

India ranks among the well known emerging markets in the global economic scenario. Since the economic liberalization policies were undertaken in the 1990s, emerging market India has really prospered which has helped to boost the Indian economy to a great extent.

Factors behind the favorable emerging market in India

In simple terms, emerging market is used to evaluate the socio economic scenario of the country in terms of the growth of the market and industrial development. According to the recent survey, there are around 28 emerging markets in the world out of which India ranks in the second place. The main factors behind this booming emerging market are the economic liberalization and the perfect competition market, the high standard of living and per capita income, the development of medical facilities and infrastructure, the increase in foreign investments and so on. Over the few years, there has been a significant growth of the Indian market which has resulted in the high Gross Domestic Product (GDP). The average annual growth rate ranges between 6 to 7 %. The growth rate of GDP was around 6.7 % during the financial year 2008-09. To boost the emerging market India, the government is also taking some positive steps. The main aim is to increase the growth rate to around 9 %. Due to the favorable emerging market, more and more industries are being set up and the customer base is also increasing. Currently, India is the 4th largest economic system in the world in terms of the purchasing power parity. The recent economic development has also put a positive impact on the various sectors. There has been a significant development in the agricultural, service and industrial sector in the country. Today, to complement the rapid pace of economic growth, the service sector contributes around 54 % of the annual Gross Domestic Product.

Foreign investment and emerging market India

The increase in foreign investment has also cast a favorable effect on the emerging market in India. Due to the increase in demand, well known global companies are investing in the Indian market. The foreign institutional investments (FII) amount has reached around US$ 10 billion mark. In case of the Foreign direct investments (FDI, there has been a significant increase of around 85.1 % from US$ 25.1 billion to US$ 46.5 billion.

Indian Gold Market

Indians have a huge fascination for gold. This is evident in the fact that India is the largest consumer as well as importer of gold in the world. Gold plays a very important role in the social, religious and cultural life of Indians. India Gold Market looks poised to achieve greater heights given the fascination for gold in the country. India consumes about 800 MT of gold which accounts to about 20% consumption of gold globally. More than 50% of this is used for making gold jewelry. Size of India Gold Market

The domestic India gold market is estimated to be more than US$15 billion and is expected to rise significantly in the coming years. During April 2008 to February 2009, gems and jewelry worth US$ 17.79 billion was exported from the country. United Arab Emirates imported more than 30% of gems and jewelry from India, making it the largest importer from the country. Hong Kong was the second largest importer with 25% followed by United States with 20%. The gem and jewelry industry accounts for more than 10% of India's total commodities exports.

Gold certification in India

The government has taken steps to protect the public from buying adulterated gold; Hallmarking of gold jewelry is one such step. Hallmarking of gold jewelry indicates the accurate finding out and official recording of the proportionate content of precious metals present in gold. The marking is done either by laser marking machine or by punches. Hallmark is the official mark used in several countries across the world as an assurance of purity or fineness of gold jewelry. The Bureau of Indian Standard or BIS was named by the Government as the lone agency in the country for providing hallmarking of gold jewelry under the provisions of the BIS Act, 1986. Indian Standard on Gold and Gold alloys

IS 1417 Grades of gold and gold alloys, Jewelry/Artefacts-Fineness and Marking IS 1418 Assaying of Gold in Gold Bullion, Gold alloys and Gold Jewelry/ Artefacts - Cupellation (Fire Assay Method) IS 2790 Guidelines for manufacture of 23, 22,21,18,14 and 9 carat gold alloys IS 3095 Gold Solders for use in manufacture of Jewelry

Features of India Gold Market

Though India is the leading consumer of gold in the world, the gold market in India is largely fragmented and unorganized. Due to the non availability of a benchmark price, the gold prices in India vary very much from region to region. The festive and the wedding season in the country witnesses a heavy demand for gold. Despite the global economic recession, the gold consumption in the country during these times has not abetted. Factors affecting India Gold Market

The monsoons and the harvest of the country have a significant affect on the sale and purchase of gold in the country. Both these factors determine the amount of purchasing power that people will have, which in turn decides on the amount of gold consumption and other consumptions as well. Purchasing gold and other precious metals on occasions like Akshaya Tritiya is considered to be auspicious. Recent Hike in Excise and Import Duty India is the largest importer of gold in the world. India has imported $45.5 billion worth of gold and silver in first three quarters of FY12 itself, which is 53.8% over the year-ago period. A government notification said customs and excise duties would be levied on the value of gold and silver instead of a fixed amount in January 2012. The move is aimed at reducing the negative balance of payments position as gold and silver imports have grown tremendously in-spite of rise in its prices. Import Duty Status Gold Silver Excise Duty Gold Silver

Current 2% of the value 6% of the value 1.5% of the value 4% of the value Earlier Rs 300/10 gm. Rs. 1500/kg. Rs 200/10 gm. Rs 1,000/kg.

At a 2% rate, the import duty on gold will double to over Rs 540 per 10 grams at current prices.

============= INDIAN BULLION MARKET

The bullion reserve of a country is the indicator of the amount of wealth a country possesses. Bullion is defined as a bulk quantity of precious metals consisting of gold, silver and others that can be assessed by weight and cast as a lump. Bullion is valued by its purity and mass rather than its face value which is applicable in the case of money. India Bullion Market is a recognizable index that highlights the economic growth of the nation.

Bullion Purchase and Forex

In 2009, the government of India purchased 200 metric ton of gold from the International Monetary Fund (IMF) at $6.7 billion. This purchase has propelled the India Bullion Market to the tenth position among the top global gold holders. This purchase signals that the economy of the country has come full circle and is also a way of spreading its assets. The current foreign exchange or forex reserve of India is nearly $285 billion. The share of foreign currency in the forex is $268.3 billion, followed by gold at $10.3 billion, IMFs special drawing rights accounts for $5.2 billion while the reserve position in the IMF accounts for $1.59 billion.

Bullion in India

Trading of gold is known as bullion trading. India is the leading consumer and importer of gold in the world. Due to this, the potential of the India bullion market is very promising. Owing to the weak price of Dollar in the global market, the price of bullion is soaring. The gem and jewelry industry of India is one of the fastest growing sectors of the economy at an approximate rate of 15%. The India Bullion market is under the strict supervision of the Government as bullion is one of the major indicators of the wealth of the country. India is the largest investor in gold jewelry as a large number of people believe that investing in gold is beneficial. The domestic consumption of gold depends on factors like the wedding season, festive season, the performance of the harvest and the monsoon of the country. Country Bullion (in tons)

United States 8133.5 France Germany Italy 2445.1 3408.5 2451.8

Netherlands 612.5 Switzerland ECB India 1041.5 501.4 557.7

Russia Japan China

568.4 765.2 1054.0

Indian Bullion Market Association

IBMA or the Indian Bullion Market Association is a national level body that represents the Indian Bullion Trade and Industry. This body is an association of all leading bullion dealers and jewelry merchants who have tied up with the National Spot Exchange Limited. The idea of this association is to promote a professional organizational dedication towards the development and growth of the bullion industry in India.

Problems of the Bullion Industry

There are a number of restrictions imposed on the import and export of gold as compared to any other commodities. The bullion market of the country is very fragmented and unorganized. The price of bullion varies very much in different parts of the country. The main reason for this is the lack of a benchmark that is valid throughout the country. INVESTING IN INDIAN STOCK MARKET The Indian stock market is home to the oldest exchange in Asia. In India, the Bombay Stock Exchange (BSE) is the most powerful and largest trading center. The exchange includes numerous smaller exchanges with recognition of regional parity. So it is better to have some knowledge on the Indian economy and the BSE before effectively investing in Indian Stock Market. The Indian stock markets were very volatile from mid June to mid July 2009. SENSEX is the benchmark index of stocks observed by the regulatory authorities according to the criteria fixed by the authorities. The Indian benchmark index is around 13,500 to 14,000 points. Market analysts believe that the benchmark index can touch 21,000 in the 8 to 15 months which is an increase of 40%. This is the reason why institutional investors are getting interested in the stock market. The market was influenced by the elections and budget during May and June 2009. But it is expected that the market will be positive and gradually reach the 21,000 level. Investment in the Indian Stock Market is quite easy. However, you will need an Indian Demat Account first. Many banks and private agencies offer this service and will open an account with NSDL. After your account gets opened, you can start investing.

It may not be an easy task while investing in Indian Stock Market as there are over 5000 companies listed in the BSE and NSE (National Stock Exchange). Making a choice of the company for buying shares is an important thing to do. There have been consistent better returns from stocks listed in the Indian stock market than other world stock markets. After deciding on the stocks, you should have a keen sense of the pulse of the markets. Or you can invest in long term stocks for a good return on the investment. You need to select the stock carefully for investment and know the valuations at which you can buy and sell a stock. You should not think much about losses and profits. Growth stocks can provide consistent returns while rumors and tips may not be of much help. Only research and news can help you.

Steps for Indian Stock Market investments

First you can register yourself with an investment firm or stockbroker who has links to the Indian stock market. The main thing to remember is that the financial assistant should have market experience where you are investing the money. Though stockbrokers can be expensive, they can respond to individual stocks queries quickly. To know about your investment strength in India, check the BSE 200 index. The index deals with the 200 best-performing Indian businesses on a regular basis. Check the individual businesses in your choice of industrial sector for potential investments. You can even go for a technology stock from the BSE TECk index. India has a booming computer development and biotechnology sector which is very helpful for investors. Through the BSE Small-Cap Index, you can search for growing companies having small capital. The index has numerous new companies having a low fund and seeking investors to grow. There is a lesser risk, if you can invest in a company with a lower share price. You can keep a track of your stock progress online through the Bombay Stock Exchange. The BSE index provides information every 15 seconds to business-television networks, local brokers and international websites. You should be wise in investing in the Bankex index which checks India's top 12 banks' progress and you can make investments in their growth. The strength of the Bombay exchange can be determined by studying the free-float market capitalization measure. It takes 30 stocks which represent the Indian economy and multiplies the stock numbers with stock prices and a predetermined index number.

If you are thinking of investing in the Indian stock markets, you can try the oil and gas exploration segment as you will be benefitted with the rise in oil prices. You should select certain segments and fields which will have the best growth and not be negatively affected by inflation and recession. Oil and gas, healthcare, infrastructure and cement are some of the industries which will be benefitted in a few years.

Presentation Transcript

By. Prof.Dhananjay Pashte, M.A.B.Ed,GDC&A,MBA(HR): BUSINESS ECONOMICS III Indian Financial Markets By. Prof.Dhananjay Pashte, M.A.B.Ed,GDC&A,MBA(HR )

Contents: Contents Financial Markets Shares and Stocks Regulatory Environment in India SEBI RBI

Financial Markets: Financial Markets A Market is a place where buyers and sellers come together to exchange something Financial Markets are where financial Instruments/products are exchanged. A Financial Market is known by type of product traded in it

Different Financial Markets: Different Financial Markets FINANCIAL MARKET Money Market Debt Market Forex Market Capital Market

Money Market: Money Market Markets for short term Borrowing Lending Primarily used by Banks Typical Financial Instruments Bankers Acceptance Certificate of Deposit (CD) Treasury Bills Repos

Debt Market: Debt Market Debt Contract One Party lends to another Party Predetermined Interest Rates and Term Participants Banks Financial Institutions Mutual Funds Insurance Companies etc. Instruments Government Securities (G-Secs) Public Sector Units Bonds Corporate Securities

Foreign Exchange Market: Foreign Exchange Market Foreign Goods Payments in Foreign Currency Forex Market Participants Government Payments for Imports Repayment of Loans Importers Exchange Rates One Currency in terms of other (Eg. 1 US Dollar = 45 Rupees) Bid Rate Offer Rate

Capital Market: Capital Market Long Term Funds Raised by Government Corporates Trading Instruments used Shares Derivatives Units of Mutual Funds

Financial Markets: Financial Markets Primary Market Instruments issued for first time Used by Government/Corporates/PSUs IPO Initial Public Offering Secondary Market Trading of already issued Stocks Bonds Stock Exchange

Investment Basics: Investment Basics Using savings to get returns in future is known as Investment Why should I invest?? I want to earn return on my idle money A good bank balance before I retire I intend to own a Mansion and Ferrari When should I invest As soon as possible

Where to invest???: Where to invest??? Physical Assets Real Estate ,Gold/jewellery Requires huge capital Financial Assets Savings Bank Account Fixed Deposits Post office Government Bonds Provident Funds

PowerPoint Presentation: But .. All these are fixed return instruments Lets learn to take some risks and earn more Welcome to the Exciting world of Stocks !!

Stock and Shares: Stock and Shares Stock Capital raised by corporations Through issue and distribution of shares Share Signifies ownership in the company A company might have thousands of Shareholders Which company issued shares for the first time in the world??? The Dutch East India Company in 1602

Stock Exchange: Stock Exchange Place where the shares are traded BSE NSE BSE Bombay Stock Exchange Oldest Stock Exchange in Asia Sensex Sensitive Index Index of 30 Actively traded Companies NSE National Stock Exchange Incorporated in 1992 Nifty Index of 50 Actively traded Companies

A Few Jargons!!!: A Few Jargons!!! Types of Shares Common/Equity Preferred Face Value Market Value Market Capitalization Dividend

A few more Jargons!!!: A few more Jargons!!! Stock Broker Mutual Funds Annual Report Prospectus Liquidity

Regulatory Environment in India: Regulatory Environment in India Pre 1991 Tight Control of Government Post 1991 Liberalization Opening of the Economy Need for Supervision Regulation Regulatory Bodies

Regulatory Environment in India: Regulatory Environment in India RBI Reserve Bank of India Established in 1935 Bankers Bank Regulates Indian Financial Markets SEBI Securities and Exchange Board of India Incorporated in 1992 Regulation of Securities Market Protecting the interests of Investors

So want something more???: So want something more??? Whats more in Store?? Mutual Funds Stock Valuation Derivatives Supply Chain Management Contents : Contents Financial Markets Shares and Stocks Regulatory Environment in India SEBI RBI

Financial Markets : Financial Markets A Market is a place where buyers and sellers come together to exchange something Financial Markets are where financial Instruments/products are exchanged. A Financial Market is known by type of product traded in it

Different Financial Markets : Different Financial Markets FINANCIAL MARKET Money Market Debt Market Forex Market Capital Market

Money Market : Money Market Markets for short term Borrowing Lending Primarily used by Banks Typical Financial Instruments Bankers Acceptance Certificate of Deposit (CD) Treasury Bills Repos

Debt Market : Debt Market Debt Contract One Party lends to another Party Predetermined Interest Rates and Term Participants Banks Financial Institutions Mutual Funds Insurance Companies etc. Instruments Government Securities (G-Secs) Public Sector Units Bonds Corporate Securities

Foreign Exchange Market : Foreign Exchange Market Foreign Goods Payments in Foreign Currency Forex Market Participants Government Payments for Imports Repayment of Loans Importers Exchange Rates One Currency in terms of other (Eg. 1 US Dollar = 45 Rupees) Bid Rate Offer Rate

Capital Market : Capital Market Long Term Funds Raised by Government Corporates Trading Instruments used Shares Derivatives Units of Mutual Funds

Financial Markets : Financial Markets Primary Market Instruments issued for first time Used by Government/Corporates/PSUs IPO Initial Public Offering Secondary Market Trading of already issued Stocks Bonds Stock Exchange

Investment Basics : Investment Basics Using savings to get returns in future is known as Investment Why should I invest?? I want to earn return on my idle money A good bank balance before I retire I intend to own a Mansion and Ferrari When should I invest As soon as possible

Where to invest??? : Where to invest??? Physical Assets Real Estate ,Gold/jewellery Requires huge capital Financial Assets Savings Bank Account Fixed Deposits Post office Government Bonds Provident Funds

Slide 12: But .. All these are fixed return instruments Lets learn to take some risks and earn more Welcome to the Exciting world of Stocks !!

Stock and Shares : Stock and Shares Stock Capital raised by corporations Through issue and distribution of shares Share Signifies ownership in the company A company might have thousands of Shareholders Which company issued shares for the first time in the world??? The Dutch East India Company in 1602

Stock Exchange : Stock Exchange Place where the shares are traded BSE NSE BSE Bombay Stock Exchange Oldest Stock Exchange in Asia Sensex Sensitive Index Index of 30 Actively traded Companies NSE National Stock Exchange Incorporated in 1992 Nifty Index of 50 Actively traded Companies

A Few Jargons!!! : A Few Jargons!!! Types of Shares Common/Equity Preferred Face Value Market Value Market Capitalization Dividend

A few more Jargons!!! : A few more Jargons!!! Stock Broker Mutual Funds Annual Report Prospectus Liquidity

Regulatory Environment in India : Regulatory Environment in India Pre 1991 Tight Control of Government Post 1991 Liberalization Opening of the Economy Need for Supervision Regulation Regulatory Bodies

Regulatory Environment in India : Regulatory Environment in India RBI Reserve Bank of India Established in 1935 Bankers Bank Regulates Indian Financial Markets SEBI Securities and Exchange Board of India Incorporated in 1992 Regulation of Securities Market Protecting the interests of Investors

So want something more??? : So want something more??? Hmm. Stay tuned to BIZ 101 Lecture Series Whats more in Store?? Mutual Funds Stock Valuation Derivatives Supply Chain Management

Sources : Sources www.wikipedia.org www.rbi.org.in www.sebi.gov.in www.nseindia.com www.bseindia.com www.moneycontrol.com And, !!!

Contact Us : Contact Us Atul Bansal MBA Second Year atulb@iitk.ac.in Gaurav Sharma MBA Second Year sharmag@iitk.ac.in Pratyush B Tech Final Year praty@iitk.ac.in

Slide 22: Thank you !!

PowerPoint Presentation: The major reforms that took place in the Indian Financial Markets, which could be staged into two phases. The first was Pre-1992 stage where the financial instruments were controlled in terms of its product, price and size by the Controller of Capital Issues Act, 1946. And the second was Post-1992 in which the companies had freedom to design the product, price the product and raise any amount by coming out with a financial instrument.

some of the innovative financial instruments used by the companies in the Indian Financial Markets. These included the following financial instruments: : some of the innovative financial instruments used by the companies in the Indian Financial Markets. These included the following financial instruments: Triple Option Convertible Debentures (TOCD) Deep Discount Bonds Floating Rate Notes Zero Coupon Bonds

PowerPoint Presentation: Convertible and Zero Coupon Convertible Bonds Secured Premium Notes (SPNS) Equity with Differential Voting Rights

Triple Option Convertible Debentures (TOCD): Triple Option Convertible Debentures (TOCD) * First Issued by Reliance Power Limited with an issue size of Rs. 2,172 Cr. * There was no outflow of interest for first five years. * Equity increase was in phases. * No put option to investors and no takeover threat. * Reduced dependence on the financial institutions. * The expenses for floating the issue was just 2.62% of the issue size which was very less when compared to the 10-12% for a general public issue

Deep Discount Bonds: Deep Discount Bonds The investor got a tax advantage and could eliminate the re-investment risk. From the issuers point of view also, the issue cost was saved as it involved no immediate service cost and lower effective cost. The refinancing risk was also eliminated.

Floating Rate Notes: Floating Rate Notes First issued by Tata Sons with a floor rate of 12.5% and a cap of 15.5% and a reference rate of 364 T-Bill yield, which was 9.85% at the time of issue. The investors would get a minimum return of the floor rate and the maximum return was the cap rate. They would get higher than floor rate depending upon the fluctuations in the reference rate.

Zero Coupon Bonds: Zero Coupon Bonds It did not involve any annual interest on the bonds. But it had a higher maturity value on the initial investment for a particular time period.

Convertible and Zero Coupon Convertible Bonds:: Convertible and Zero Coupon Convertible Bonds: Similar to the zero coupon bonds except that the effective interest was lower because of the convertibility.

Secured Premium Notes (SPNS): Secured Premium Notes (SPNS) First issued by TISCO in July, 1992. These financial instruments were secured against the assets of the company but the investors had to pay a premium over the market price for these types of instruments.

Equity with Differential Voting Rights: Equity with Differential Voting Rights Issued by Tata Motors, in which the shares were classified as Ordinary Shares and A Ordinary Shares.

The new face of Banking: The new face of Banking An industry that's tightly protected by regulations has finally opened up. But this has introduced many new challenges. Here's a look at how technology can help overcome these challenges and address the new set of issues associated with modern day banking .

The tipping point: The tipping point The opening up of the Indian banking sector to private players acted as 'the tipping point' for this transformation. The deregulatory efforts prompted many financial institutions (like HDFC and ICICI) and non-financial institutions enter the banking arena

PowerPoint Presentation: The entry of private players combined with new RBI guidelines forced nationalized banks to redefine their core banking strategy. And technology was central to this change.

Pressing issues: Pressing issues Today banks have to look much beyond just providing a multi-channel service platform for its customers. There are other pressing issues that banks need to address in order to chalk-out a roadmap for the future.

Here are the top three concerns in the mind of every bank's CEO. : Here are the top three concerns in the mind of every bank's CEO. Customer retention Cost pressures Increased competition

New entrants with strategies such as these make the banking game tougher.: New entrants with strategies such as these make the banking game tougher. Redefining objectives Cost reduction Product differentiation Customer-centric services

IT is pivotal: IT is pivotal IT is central to banking. This is one of the major reasons why new private and multi-national banks have been able to survive, thrive, and adapt in an increasingly competitive space.

PowerPoint Presentation: These banks were able to leverage on low-cost channels such as ATMs and Net banking to the optimum levels contributing to reduced operating costs. Banks have realized that shifting customer access to lower cost channels can help bring down operating costs.

PowerPoint Presentation: " These channels are used not only to improve customer service but also to divert traffic from the branches. It is a fact that the cost of transactions over these channels is lower than doing this through the branches,"

PowerPoint Presentation: Thank you for not questioningwe really appreciate it !!

CHAPTER- 6 CAPITAL MARKET IN INDIA

CHAPTER- 6

CAPITAL MARKET IN INDIA

Q. 1 : What is Capital Market ? Explain the structure and constituents of Capital Market in India. Ans. A) CAPITAL MARKET :Capital market deals with medium term and long term funds. It refers to all facilities and the institutional arrangements for borrowing and lending term funds (medium term and long term). The demand for long term funds comes from private business corporations, public corporations and the government. The supply of funds comes largely from individual and institutional investors, banks and special industrial financial institutions and Government. B) STRUCTURE I CONSTITUENTS I CLASSIFICATION OF CAPITAL MARKET :Capital market is classified in two ways 1) CAPITAL MARKET IN INDIA

Gild Edged Market

Industrial Securities Market

Development Financial Institutions (DFIs)

Financial intermediaries

a)

Gilt - Edged Market :Gilt - Edged market refers to the market for government and semi-government securities, which carry fixed rates of interest. RBI plays an important role in this market.

b)

Industrial Securities Market :It deals with equities and debentures in which shares and debentures of existing companies are traded and shares and debentures of new companies are bought and sold.

c)

Development Financial Institutions :Development financial institutions were set up to meet the medium and long-term requirements of industry, trade and agriculture. These are IFCI, ICICI, IDBI, SIDBI, IRBI, UTI, LIC, GIC etc. All These institutions have been called Public Sector Financial Institutions.

d)

Financial Intermediaries :Financial Intermediaries include merchant banks, Mutual Fund, Leasing companies etc. they help in mobilizing savings and supplying funds to capital market.

2)

The Second way in which capital market is classified is as follows :CAPITAL MARKET IN INDIA

Primary market a) Primary Market :-

Secondary market

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

Q. 2: Explain the role and importance of capital market in India. (Mar. 11) OR
Write note on Importance I Significance of Capital Market in Economic Development.

Ans. A) ROLE AND IMPORTANCE OF CAPITAL MARKET IN INDIA :Capital market has a crucial significance to capital formation. For a speedy economic development adequate capital formation is necessary. The significance of capital market in economic development is explained below :-

1. Mobilisation Of Savings And Acceleration Of Capital Formation :In developing countries like India the importance of capital market is self evident. In this market, various types of securities helps to mobilise savings from various sectors of population. The twin features of reasonable return and liquidity in stock exchange are definite incentives to the people to invest in securities. This accelerates the capital formation in the country. 2. Raising Long - Term Capital :The existence of a stock exchange enables companies to raise permanent capital. The investors cannot commit their funds for a permanent period but companies require funds permanently. The stock exchange resolves this dash of interests by offering an opportunity to investors to buy or sell their securities, while permanent capital with the company remains unaffected. 3. Promotion Of Industrial Growth :The stock exchange is a central market through which resources are transferred to the industrial sector of the economy. The existence of such an institution encourages people to invest in productive channels. Thus it stimulates industrial growth and economic development of the country by mobilising funds for investment in the corporate securities. 4. Ready And Continuous Market :The stock exchange provides a central convenient place where buyers and sellers can easily purchase and sell securities. Easy marketability makes investment in securities more liquid as compared to other assets. 5. Technical Assistance :An important shortage faced by entrepreneurs in developing countries is technical assistance. By offering advisory services relating to preparation of feasibility reports, identifying growth potential and training entrepreneurs in project management, the financial intermediaries in capital market play an important role. 6. Reliable Guide To Performance :The capital market serves as a reliable guide to the performance and financial position of corporates, and thereby promotes efficiency. 7. Proper Channelisation Of Funds :-

The prevailing market price of a security and relative yield are the guiding factors for the people to channelise their funds in a particular company. This ensures effective utilisation of funds in the public interest. 8. Provision Of Variety Of Services :The financial institutions functioning in the capital market provide a variety of services such as grant of long term and medium term loans to entrepreneurs, provision of underwriting facilities, assistance in promotion of companies, participation in equity capital, giving expert advice etc. 9. Development Of Backward Areas :Capital Markets provide funds for projects in backward areas. This facilitates economic development of backward areas. Long term funds are also provided for development projects in backward and rural areas. 10. Foreign Capital :Capital markets makes possible to generate foreign capital. Indian firms are able to generate capital funds from overseas markets by way of bonds and other securities. Government has liberalised Foreign Direct Investment (FDI) in the country. This not only brings in foreign capital but also foreign technology which is important for economic development of the country. 11. Easy Liquidity :With the help of secondary market investors can sell off their holdings and convert them into liquid cash. Commercial banks also allow investors to withdraw their deposits, as and when they are in need of funds. 12. Revival Of Sick Units :The Commercial and Financial Institutions provide timely financial assistance to viable sick units to overcome their industrial sickness. To help the weak units to overcome their financial industrial sickness banks and FIs may write off a part of their loan. Q. 3: Discuss / Explain the growth of Capital Market in India.

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

After Independence capital market has shown a remarkable progress. The first organised stock exchange was established in India at Bombay in 1887. When the Securities Contracts (Regulation) Act 1956 was passed, only 7 Stock exchanges Viz. Mumbai, Ahmedabad, Kolkata, Chennai, Delhi, Hyderabad and GROWTH OF CAPITAL MARKET

End of December i) Stock Exchanges (No.) ii) Market Value of Capital ( in Crore) iii) Capital Issues (Rs. in Crore) iv) Capital raised as % of gross domestic saying(%)

1975-76 8 3,273 98 0.7

2004-05 23 16,98,428 60,502 7.0

Source: - Tata Services Ltd., statistiscal outline India 2005-06. Indore, received recognition. By end of March 2004,of the number of stock exchanges increased to 23.

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

b ) Public Sector Bonds :The resources raised by issuing bonds by Public Sector undertakings rose from `.354 crores in 1985-86 to 7,491 crore in 2004-05. c) Mutual Funds :In 1997-98, the total number of mutual funds in the country was 34.

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

Q. 4: Explain the factors contributing I responsible for the growth and development of Capital Market in India. Ans. A) FACTORS CONTRIBUTING TO THE GROWTH AND DEVELOPMENT OF CAPITAL MARKET :1) Growth Of Development Banks And Financial Institutions :For providing long term funds to industry, the government set up Industrial Finance Corporation in India (IFCI) in 1948. This was followed by a number of other development banks and institutions like the

Industrial Credit and Investment Corporation of India (ICICI) in 1955, Industrial Development Bank of India (IDBI) in 1964, Industrial Reconstruction Corporation of India (IRCI) in 1971, Foreign Investment Promotion Board in 1991, Over the Counter Exchange of India (OTCEI) in 1992 etc. In 1969, 14 major commercial banks were nationalised. Another 6 banks were nationalised in 1980. These financial institutions and banks have contributed in widening and strengthening of capital market in India. 2) Setting Up Of SEBI :The Securities Exchange Board of India (SEBI) was set up in 1988 and was given statutory recognition in 1992. 3) Credit Rating Agencies :Credit rating agencies provide guidance to investors / creditors for determining the credit risk. The Credit Rating Information Services of India Limited (CRISIL) was set up in 1988 and Investment Information and Credit Rating Agency of India Ltd. (ICRA) was set up in 1991. These agencies are likely to help the development of capital market in future. 4) Growth Of Mutual Funds :The mutual funds collects funds from public and other investors and channelise them into corporate investment in the primary and secondary markets. The first mutual fund to be set up in India was Unit Trust of India in 1964. In 2007-08 resources mobilised by mutual funds were Rs. 1,53,802 crores. 5) Increasing Awareness :During the last few years there have been increasing awareness of investment opportunities among the public. Business newspapers and financial journals (The Economic Times, The Financial Express, Business India, Money etc.) have made the people aware of new long-term investment opportunities in the security market. 6) Growing Public Confidence A large number of big corporations have shown impressive growth. This has helped in building up the confidence of the public. The small investors who were not interested to buy securities from the market are now showing preference in favour of shares and debentures. As a result, public issues of most of the good companies are now over-subscribed many times. 7) Legislative Measures :The government passed the companies Act in 1956. The Act gave powers to government to control and direct the development of the corporate enterprises in the country. The capital Issues (control) Act was passed in 1947 to regulate investment in different enterprises, prevent diversion of funds to nonessential activities and to protect the interest of investors. The Act was replaced in 1992. 8) Growth Of Underwriting Business :-

The growing underwriting business has contributed significantly to the development of capital market. 9) Development Of Venture Capital Funds :Venture capital represents financial investment in highly risky projects with a hope of earning high returns After 1991, economic liberalisation has made possible to provide medium and long term funds to those firms, which find it difficult to raise funds from primary markets and by way of loans from FIs and banks. 10) Growth Of Multinationals (MNCs) :The MNCs require medium and long term funds for setting up new projects or for expansion and modernisation. For this purpose, MNCs raise funds through loans from banks and FIs. Due to the presence of MNCs, the capital market get a boost. 11) Growth Of Entrepreneurs :Since 1980s, there has been a remarkable growth in the number of entrepreneurs. This created more demand for short term and long term funds. FIs, banks and stock markets enable the entrepreneurs to raise the required funds. This has led to the growth of capital market in India. 12) Growth Of Merchant Banking :The credit for initiating merchant banking services in India goes to Grindlays Bank in 1967,followed by Citibank in 1970. Apart from capital issue management, merchant banking divisions provide a number of other services including provision of consultancy services relating to promotion of projects, corporate restructuring etc.

Q.5: Explain the recent reforms introduced in Indian Capital Market. What measures have been initiated by Government of India to strengthen the capital market ? Ans. A) REFORMS I DEVELOPMENTS IN CAPITAL MARKET SINCE 1991:-

or

The government has taken several measures to develop capital market in post-reform period, with which the capital market reached new heights. Some of the important measures are 1) Securities And Exchange Board Of India (SEBI) :SEBI became operational since 1992. It was set with necessary powers to regulate the activities connected with marketing of securities and investments in the stock exchanges, merchant banking, portfolio management, stock brokers and others in India. The objective of SEBI is to protect the interest of investors in primary and secondary stock markets in the country.

2) National Stock Exchange (NSE) :The setting up to NSE is a landmark in Indian capital markets. At present, NSE is the largest stock market in the country. Trading on NSE can be done throughout the country through the network of satellite terminals. NSE has introduced inter-regional clearing facilities. 3) Dematerialisation Of Shares :Demat of shares has been introduced in all the shares traded on the secondary stock markets as well as those issued to the public in the primary markets. Even bonds and debentures are allowed in demat form. The advantage of demat trade is that it involves Paperless trading. 4) Screen Based Trading :The Indian stock exchanges were modernised in 90s, with Computerised Screen Based Trading System (SBTS), It cuts down time, cost, risk of error and fraud and there by leads to improved operational efficiency. The trading system also provides complete online market information through various inquiry facilities. 5) Investor Protection :The Central Government notified the establishment of Investor Education and Protection Fund (IEPF) with effect from 1st Oct. 2001: The IEPF shall be credited with amounts in unpaid dividend accounts of companies, application moneys received by companies for allotment of any securities and due for refund, matured deposits and debentures with companies and interest accrued there on, if they have remained unclaimed and unpaid for a period of seven years from the due date of payment. The IEPF will be utilised for promotion of awareness amongst investors and protection of their interests. 6) Rolling Settlement :Rolling settlement is an important measure to enhance the efficiency and integrity of the securities market. Under rolling settlement all trades executed on a trading day (T) are settled after certain days (N). This is called T + N rolling settlement. Since April 1, 2002 trades are settled' under T + 3 rolling settlement. In April 2003, the trading cycle has been reduced to T + 2 days. The shortening of trading cycle has reduced undue speculation on stock markets. ? 7) The Clearing Corporation Of India Limited (CCIL) :The CCIL was registered in 2001, under the Companies Act, 1956 with the State Bank of India as the Chief Promoter. The CCIL clears all transactions in government securities and repos and also Rupee / US $ forex spot and forward deals All trades in government securities below Rs. 20 crores would be mandatorily settled through CCIL, white those above Rs. 20 crores would have the option for settlement through the RBI or CCIL.

8) The National Securities Clearing Corporation Limited (NSCL) :The NSCL was set up in 1996. It has started guaranteeing all trades in NSE since July 1996. The NSCL is responsible for post-trade activities of NSE. It has put in place a comprehensive risk management system, which is constantly monitored and upgraded to pre-expect market failures. 9) Trading In Central Government Securities :In order to encourage wider participation of all classes of investors, Including retail investors, across the country, trading in government securities has been introduced from January 2003. Trading in government securities can be carried out through a nation wide, anonymous, order-driver, screen-based trading system of stock exchanges in the same way in which trading takes place in equities. 10) Credit Rating Agencies :Various credit rating agencies such as Credit Rating Information services of India Ltd. (CRISIL 1988), Investment Information and credit Rating Agency of India Ltd. (ICRA 1991), etc. were set up to meet the emerging needs of capital market. They also help merchant bankers, brokers, regulatory authorities, etc. in discharging their functions related to debt issues. 11) Accessing Global Funds Market :Indian companies are allowed to access global finance market and benefit from the lower cost of funds. They have been permitted to raise resources through issue of American Depository Receipts (ADRs), Global Depository Receipts (GDRs), Foreign Currency Convertible Bonds (FCCBs) and External Commercial Borrowings (ECBs). Further Indian financial system is opened up for investments of foreign funds through Non-Resident Indians (NRIs), Foreign Institutional investors (FIls), and Overseas Corporate Bodies (OCBs). 12) Mutual Funds :Mutual Funds are an important avenue through which households participate in the securities market. As an investment intermediary, mutual funds offer a variety of services / advantages to small investors. SEBI has the authority to lay down guidelines and supervise and regulate the working of mutual funds. 13) Internet Trading :Trading on stock exchanges is allowed through internet, investors can place orders with registered stock brokers through internet. This enables the stock brokers to execute the orders at a greater pace. 14) Buy Back Of Shares :Since 1999, companies are allowed to buy back of shares. Through buy back, promoters reduce the floating equity stock in market. Buy back of shares help companies to overcome the problem of hostile takeover by rival firms and others. 15) Derivatives Trading :-

Derivatives trading in equities started in June 2000. At present, there are four equity derivative products in India Stock Futures, Stock Options, Index Futures, Index Options. Derivative trading is permitted on two stock exchanges in India i.e. NSE and BSE. At present in India, derivatives market turnover is more than cash market. 16) PAN Made Mandatory :In order to strengthen the Know your client" norms and to have sound audit trail of transactions in securities market, PAN has been made mandatory with effect from January 1, 2007. Q.6: Explain the role of SEBI in developing capital market. Evaluate the role and performance of SEBI. Write note on SEBI. (Mar. 11). Ans. A. SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) :SEBI was established as a non-statutory board in 1988 and in January 1992 it was made a Statutory body. The main objectives of SEBI are 1) To protect the interest of investors. 2) To bring professionalism in the working of intermediaries in capital markets (brokers, mutual funds, stock exchanges, demat depositories etc.). 3) To create a good financial climate, so that companies can raise long term funds through issue of securities (shares and debentures). In 2002, SEBI is further empowered to do the following:1. To file complaints in courts and to notify its regulations without prior approval of government. 2. To regulate issue of capital and transfer of securities. 3. To impose monetary penalties on various intermediaries and other participants for a specified range of violations. 4. To issue direction to and to call for documents from all intermediaries. B. ROLE I POWERS AND FUNCTIONS OF SEBI :1. Protection Of Investor's Interest :SEBI frames rules and regulations to protect the interest of investors. OR OR

It monitors whether the rules and regulations are being followed by the concerned parties i.e., issuing companies, mutual funds, brokers and others. It handles investor grievances or complaints against brokers, securities issuing companies and others. 2. Restriction On Insider Trading :SEBI restricts insider trading activity. It prohibits dealing, communication or counselling on matters relating to insider trading. SEBIs regulation states that no insider (connected with the company) shall either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange on the basis of any unpublished price sensitive information. 3. Regulates Stock Brokers Activities :SEBI has also laid down regulations in respect of brokers and sub-broker. No brokers or sub-broker can buy, sell or deal in securities without being a registered member of SEBI. It has also made compulsory for brokers to maintain separate accounts for their clients and for themselves. They must also have their books audited and audit reports filed with SEBI. 4. Regulates Merchant Banking :SEBI has laid down regulations in respect of merchant banking activities in India. The regulations are in respect of registration, code of conduct to be followed, submission of half-yearly results and so on 5. Dematerialisation Of Shares :Demat of shares has been introduced in all the shares traded on secondary stock markets as well as those issued to public in prirriary markets. Even bonds and debentures are allowed in demat form. 6. Guidelines On Capital Issues :SEBI has framed necessary guidelines in connection with capital issues. The guidelines are applicable to :- First Public Issue of New Companies, First Public Issue by Existing Private / Closely held Companies, Public Issue by Existing Listed Companies. 7. Regulates Working Of Mutual Funds :SEBI regulates the working of mutual funds. SEBI has laid down rules and regulations that are to be followed by mutual funds. SEBI may cancel the registration of a mutual fund, if it fails to comply with the regulations. 8. Monitoring Of Stock Exchanges:To improve the working of stock markets, SEBI plays an important role in monitoring stock exchanges. Every recognised stock exchange has to furnish to SEBI annually with a report about its activities during the previous year. 9. Secondary Market Policy :-

SEBI is responsible for all policy and regulatory issues for secondary market and new investments products. It is responsible for registration and monitoring of members of stock exchanges, administration of some of stock exchanges and monitoring of price movements and insider trading. 10. Investors Grievances Redressal :SEBI has introduced an automated complaints handling system to deal with investor complaints. It assist investors who want to make complaints to SEBI against listed companies. 11. Institutional Investment Policy :SEBI looks after institutional investment policy with respect to domestic mutual funds and Foreign Institutional Investors (FIIs). It also looks after registration, regulation and monitoring of FIls and domestic mutual funds. 12. Takeovers And Mergers :To protect the interest of investors in case of takeovers and mergers SEBI has issued a set of guidelines. These guidelines are to be followed by corporations at the time of takeovers and mergers. 13. Reforms In Capital Market :SEBI has introduced many reforms in Capital Market. Some of them are :a) Demat of shares b) PAN made compulsory. c) Buy back of shares allowed. d) Corporate Governance introduced e) Transparency rules in Brokers Transactions. 14. Other Functions :a) It promotes investors education, and also training of intermediaries in securities market. b) It performs functions and exercise powers under provisions of Capital Issues (Control) Act 1947, Securities Contracts Act 1956 etc. c) It promotes and regulates self-regulatory organisations. d) It prohibits fraudulent and unfair trade practices in securities Market e) It promotes investors education and training in securities market. B) APPRAISAL OF SEBI'S WORK :-

1) Large Number Of Rules :There are large .number of rules prescribed by SEBI. These have also been changing from time to time. This has created a high level of uncertainty and confusion. It is very difficult to determine what rules are currently in operation. 2) Less Protection To Small Investors :SEBI is not really serious about reforming the system and protecting the individual and small investors. It has failed to penalise the people responsible for causing abnormal price fluctuations on stock market. 3) False Claim On High Success Rate :SEBIs Annual Report, in 1995-96 claims, a very high success rale in resolving investor complaints. But in reality it is not so.

4) Insufficient Power :SEBI has often complained of having insufficient authority and power. It should become more effective, efficient, socially-accountable and small - investor - friendly. working is quite good. Liquidity in market has improved various segments have also become interlinked. It provides a world class trading and settlement system. 5) Corporate Friendly regulation :The regulatory ineffectiveness of SEBI in certain areas has been due to its concentration on symptoms rather than the root causes. Q. 7 : Explain policy measures introduced by SEBI? Ans. A) POLICY MEASURES BY SEBI :1) Entry Norms :SEBI has issued various guidelines for tightening the entry norms for companies accessing capital market. 2) Norms For Share Transfer :SEBI has tightened the norms for transfer of shares among group companies and takeover of companies. 3) Penal Margins :SEBI has introduced imposition of penal margin on net undelivered portion at the end of settlement. 4) Screen Based Trading :-

SEBI allowed stock exchanges to expand their online screen based trading terminals to-locations outside their jurisdiction subject to conditions. 5) Intermediaries :SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents, trustee of trust funds, registrars to an issue, merchant banks, underwriters and other intermediaries who may be associated with securities market. 6) Prohibition Of Fraudulent And Unfair Practices :SEBI regulates prohibition of Fraudulent and unfair trade practices which have imposed prohibition against market manipulators and unfair practices relating to securities. 7) Steps To Improve Corporate Governance :Sufficient disclosures are made mandatory for companies at the stage of public issue. Listed companies are required to make disclosures on continuing basis on dividend, bonus etc. 8) Comprehensive Risk Management And Improvement In Disclosure :In July 2002, SEB| set up a system EDIFAR (Electronic Data Information Filing And Retrieval) through which firms would electronically file mandatory disclosures to SEBI and these documents would be available to individuals across the country over the Internet, with a near-zero delay. 9) Raising Funds From Abroad :Indian companies are allowed to raise funds from abroad, through American / Global Depository Receipts, Foreign Currency Convertible Bonds.and External Commercial Borrowings. 10) Norms For Custodian Of Securities And Depositories :SEBI notified two regulations namely, Custodian of Securities Regulation, and Depositories and Participant Regulations.

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Introduction - Types Of Financial Markets And Their Roles

A financial market is a broad term describing any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees, and market forces determining the prices of securities that trade.

Financial markets can be found in nearly every nation in the world. Some are very small, with only a few participants, while others - like the New York Stock Exchange (NYSE) and the forex markets - trade trillions of dollars daily. Investors have access to a large number of financial markets and exchanges representing a vast array of financial products. Some of these markets have always been open to private investors; others remained the exclusive domain of major international banks and financial professionals until the very end of the twentieth century. Capital Markets A capital market is one in which individuals and institutions trade financial securities. Organizations and institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets. Any government or corporation requires capital (funds) to finance its operations and to engage in its own long-term investments. To do this, a company raises money through the sale of securities - stocks and bonds in the company's name. These are bought and sold in the capital markets. Stock Markets Stock markets allow investors to buy and sell shares in publicly traded companies. They are one of the most vital areas of a market economy as they provide companies with access to capital and investors with a slice of ownership in the company and the potential of gains based on the company's future performance. This market can be split into two main sections: the primary market and the secondary market. The primary market is where new issues are first offered, with any subsequent trading going on in the secondary market. Bond Markets A bond is a debt investment in which an investor loans money to an entity (corporate or governmental), which borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. Bonds can be bought and sold by investors on credit markets around the world. This market is alternatively referred to as the debt, credit or fixed-income market. It is much larger in nominal terms that the world's stock markets. The main categories of bonds are corporate bonds, municipal bonds, and U.S. Treasury bonds, notes and bills, which are collectively referred to as simply "Treasuries." (For more, see the Bond Basics Tutorial.) Money Market The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for

borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), banker's acceptances, U.S. Treasury bills, commercial paper, municipal notes, eurodollars, federal funds and repurchase agreements (repos). Money market investments are also called cash investments because of their short maturities. The money market is used by a wide array of participants, from a company raising money by selling commercial paper into the market to an investor purchasing CDs as a safe place to park money in the short term. The money market is typically seen as a safe place to put money due the highly liquid nature of the securities and short maturities. Because they are extremely conservative, money market securities offer significantly lower returns than most other securities. However, there are risks in the money market that any investor needs to be aware of, including the risk of default on securities such as commercial paper. (To learn more, read our Money Market Tutorial.) Cash or Spot Market Investing in the cash or "spot" market is highly sophisticated, with opportunities for both big losses and big gains. In the cash market, goods are sold for cash and are delivered immediately. By the same token, contracts bought and sold on the spot market are immediately effective. Prices are settled in cash "on the spot" at current market prices. This is notably different from other markets, in which trades are determined at forward prices. The cash market is complex and delicate, and generally not suitable for inexperienced traders. The cash markets tend to be dominated by so-called institutional market players such as hedge funds, limited partnerships and corporate investors. The very nature of the products traded requires access to farreaching, detailed information and a high level of macroeconomic analysis and trading skills. Derivatives Markets The derivative is named so for a reason: its value is derived from its underlying asset or assets. A derivative is a contract, but in this case the contract price is determined by the market price of the core asset. If that sounds complicated, it's because it is. The derivatives market adds yet another layer of complexity and is therefore not ideal for inexperienced traders looking to speculate. However, it can be used quite effectively as part of a risk management program. (To get to know derivatives, read The Barnyard Basics Of Derivatives.) Examples of common derivatives are forwards, futures, options, swaps and contracts-for-difference (CFDs). Not only are these instruments complex but so too are the strategies deployed by this market's participants. There are also many derivatives, structured products and collateralized obligations available, mainly in the over-the-counter (non-exchange) market, that professional investors, institutions and hedge fund managers use to varying degrees but that play an insignificant role in private investing. Forex and the Interbank Market

The interbank market is the financial system and trading of currencies among banks and financial institutions, excluding retail investors and smaller trading parties. While some interbank trading is performed by banks on behalf of large customers, most interbank trading takes place from the banks' own accounts. The forex market is where currencies are traded. The forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.9 trillion per day and includes all of the currencies in the world. The forex is the largest market in the world in terms of the total cash value traded, and any person, firm or country may participate in this market. There is no central marketplace for currency exchange; trade is conducted over the counter. The forex market is open 24 hours a day, five days a week and currencies are traded worldwide among the major financial centers of London, New York, Tokyo, Zrich, Frankfurt, Hong Kong, Singapore, Paris and Sydney. Until recently, forex trading in the currency market had largely been the domain of large financial institutions, corporations, central banks, hedge funds and extremely wealthy individuals. The emergence of the internet has changed all of this, and now it is possible for average investors to buy and sell currencies easily with the click of a mouse through online brokerage accounts. (For further reading, see The Foreign Exchange Interbank Market.) Primary Markets vs. Secondary Markets A primary market issues new securities on an exchange. Companies, governments and other groups obtain financing through debt or equity based securities. Primary markets, also known as "new issue markets," are facilitated by underwriting groups, which consist of investment banks that will set a beginning price range for a given security and then oversee its sale directly to investors. The primary markets are where investors have their first chance to participate in a new security issuance. The issuing company or group receives cash proceeds from the sale, which is then used to fund operations or expand the business. (For more on the primary market, see our IPO Basics Tutorial.) The secondary market is where investors purchase securities or assets from other investors, rather than from issuing companies themselves. The Securities and Exchange Commission (SEC) registers securities prior to their primary issuance, then they start trading in the secondary market on the New York Stock Exchange, Nasdaq or other venue where the securities have been accepted for listing and trading. (To learn more about the primary and secondary market, read Markets Demystified.) The secondary market is where the bulk of exchange trading occurs each day. Primary markets can see increased volatility over secondary markets because it is difficult to accurately gauge investor demand for a new security until several days of trading have occurred. In the primary market, prices are often set beforehand, whereas in the secondary market only basic forces like supply and demand determine the

price of the security. Secondary markets exist for other securities as well, such as when funds, investment banks or entities such as Fannie Mae purchase mortgages from issuing lenders. In any secondary market trade, the cash proceeds go to an investor rather than to the underlying company/entity directly. (To learn more about primary and secondary markets, read A Look at Primary and Secondary Markets.) The OTC Market The over-the-counter (OTC) market is a type of secondary market also referred to as a dealer market. The term "over-the-counter" refers to stocks that are not trading on a stock exchange such as the Nasdaq, NYSE or American Stock Exchange (AMEX). This generally means that the stock trades either on the over-the-counter bulletin board (OTCBB) or the pink sheets. Neither of these networks is an exchange; in fact, they describe themselves as providers of pricing information for securities. OTCBB and pink sheet companies have far fewer regulations to comply with than those that trade shares on a stock exchange. Most securities that trade this way are penny stocks or are from very small companies. Third and Fourth Markets You might also hear the terms "third" and "fourth markets." These don't concern individual investors because they involve significant volumes of shares to be transacted per trade. These markets deal with transactions between broker-dealers and large institutions through over-the-counter electronic networks. The third market comprises OTC transactions between broker-dealers and large institutions. The fourth market is made up of transactions that take place between large institutions. The main reason these third and fourth market transactions occur is to avoid placing these orders through the main exchange, which could greatly affect the price of the security. Because access to the third and fourth markets is limited, their activities have little effect on the average investor.

Financial institutions and financial markets help firms raise money. They can do this by taking out a loan from a bank and repaying it with interest, issuing bonds to borrow money from investors that will be repaid at a fixed interest rate, or offering investors partial ownership in the company and a claim on its residual cash flows in the form of stock.

Financial Market, in very crude terms, is a place where the savings from various sources like households, government, firms and corporates are mobilized towards those who need it. Alternatively put, financial market is an intermediary which directs funds from the savers (lenders) to the borrowers. In other words, financial market is the place where assets like equities, bonds, currencies, derivatives and stocks are traded. Some of the salient features of financial market are:

Transparent pricing Basic regulations on trading

Low transaction costs Market determined prices of traded securities

Basic Functions of Financial Market: Financial market has emerged as one of the biggest markets in the world. It is engaged in a wide range of activities that cater to a large group of people with diverse needs. Six key functions of Financial Market are 1. Borrowing & Lending: Financial market transfers fund from one economic agent (saver/lender) to another (borrower) for the purpose of either consumption or investment. 2. Determination of Prices: Prices of the new assets as well as the existing stocks of financial assets are set in financial markets. 3. Assimilation and Co-ordination of Information: It gathers and co-ordinates information regarding the value of financial assets and flow of funds in the economy. 4. Liquidity: The asset holders can sell or liquidate their assets in financial market. 5. Risk Sharing: It distributes the risk associated in any transaction among several participants in an enterprise. 6. Efficiency: It reduces the cost of transaction and acquiring information.

Major Players in Financial Market: The main participants in the financial market are as follows:

BANKS: Largest provider of funds to business houses and corporates through accepting deposits.

INSURANCE COMPANIES: Issue contracts to individuals or firms with a promise to refund them in future in case of any event and thereby invest these funds in debt, equities, properties, etc.

FINANCE COMPANIES: Engages in short to medium term financing for businesses by collecting funds by issuing debentures and borrowing from general public.

MERCHANT BANKS: Funded by short term borrowings; lend mainly to corporations for foreign currency and commercial bills financing.

COMPANIES: The surplus funds generated from business operations are majorly invested in money market instruments, commercial bills and stocks of other companies.

MUTUAL FUNDS: Acquire funds mainly from the general public and invest them in money market, commercial bills and shares.

GOVERNMENT: Authorized dealers basically look after the demand-supply operations in financial market. Also works to fill in the gap between the demand and supply of funds.

Components of Financial Market: The financial market can be classified into several sub-types. The components are: 1. CAPITAL MARKET: It consists of stock market and bond market. Works by issuing common stock or bonds.

2. COMMODITY MARKET: Provides for trading in commodities.

3. MONEY MARKET: Facilitates short-term debt financing and investment.

4. DERIVATIVES MARKET: Specializes in financial risk sharing and risk management.

5. FUTURES MARKET: Issues contracts for trading commodities at some future date.

6. INSURANCE MARKET: Also specializes in re-distribution of various risks.

7. FOREIGN EXCHANGE MARKET: Specializes in trading of foreign exchange and international currencies.

The function of financial markets in the economy

A market is a place where supply for a particular good is able to meet demand for it. In the case of financial markets, the good in question is money. In capital markets, supply agents are those with "positive savings capacity", i.e. mainly households (surprising as that may seem!), and businesses, although the latter generally prefer to reinvest profits or distribute dividends to shareholders. The demand side comes from governments, the modern welfare state having substantial cash requirements, or other companies. Such agents are said to have "financing requirements". Far from being an abstract entity, often described as both irrational and all-powerful, capital markets are in fact a driving force in the economy since they are places where the fuel, money, is made available to propel the machine forward, in other words generate wealth. This is the concept, but in practice of course the mechanism is a little more complex. The first difficulty resides in the fact that an exchange actually needs to take place between agents with savings capacity and agents with financing requirements. For a market to function, it is not enough that a good and its supply and demand exist; agents also have to want to trade it! However, agents with savings capacity, mainly households it should be recalled, are generally deeply averse to risk. An aversion furthermore which can be justified by common sense. Any book on the stock market for budding investors will begin with a warning urging readers to only invest funds in the stock market that will not be needed in the near future. Consequently, the bulk of savings generated by households are held on deposit in demand accounts or savings accounts where money is immediately available. In contrast, agents with financing needs, i.e. businesses, need to find long-term financing for development. The time horizon of agents with savings capacity is typically a few weeks (next pay day) to a few months (next tax payment date ...). The time horizon of agents with financing requirements is several years! This difference makes actual exchange in markets more complex.

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Banks
This is where a third category of economic agents comes in, the banks. Banks are the only agents that have the power to transform very short-term resources (demand deposits i.e. current accounts) into medium and long term resources: bank loans. Banks therefore establish an essential link between households and businesses; they have always played, and indeed still play, a crucial role in the financing of the economy.

Each bank has the right to distribute virtually all of the money deposited by customers on its current accounts (but not all! see below) as loans. However, loans made available in this way by banks do not cancel the deposits that were made, which continue to be available for the customer to use. Banks therefore create money. The loans, granted in the form of demand deposits, increase the cash resources of banks and thus their ability to distribute new loans etc.. Deposits create loans, which themselves create deposits, etc.. This is what is called the "credit multiplier". Fortunately, the money creation power of banks is not infinite. It is limited firstly by the fact that only part of the loans granted will remain in the form of deposits. The remainder will be converted into cash (notes) through cash withdrawals. Furthermore, to ensure that banks have the capacity to cope with withdrawals, the central bank requires them to lock-up a percentage of their deposits in the form of reserves, not available for lending. The compulsory reserves ratio is one of the instruments used by central banks to control the quantity of money in circulation. Furthermore, companies cannot finance themselves solely through loans; beyond a certain level of debt, the financial cost has an unsustainable impact on results and banks would no longer be willing to lend. Companies therefore have to find ways of obtaining even longer-term financing, only repayable in the event of dissolution of the company, or debt with very long maturities, for example bonds. The total of the capital and long-term debt of a company constitutes its "equity capital". Banks, in particular investment banks, are also involved in long-term corporate financing, but it is not their primary purpose which is to ensure that money circulates. To provide companies with equity capital, economic agents ready to lock-up large sums over long periods, obviously with the aim of generating profit, are required: investors.

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Institutional investors
The main investors in capital markets today are "institutional investors" (often referred to simply as "institutionals"), namely insurance companies, fund managers (asset managers), retirement funds and their US equivalent, the pension funds. Institutionals also drain public savings, but these savings are locked up and cannot be immediately withdrawn in the same way as sums deposited in current accounts. In addition, the institutions in question generally have a regulatory, contractual or legal obligation to build up savings in order to be able to pay, for insurance companies insurance benefits, and for retirement funds retirement benefits to policyholders. Instead of distributing loans like banks, institutional investors buy securities issued by companies requiring financing. These securities represent either equity capital: shares, or long-term borrowing: bonds. Purchases are made on the primary market, i.e. at the time the securities are issued, or on the secondary market, more commonly referred to as the "Stock Exchange".

Given the needs of companies to obtain financing from the market and institutional investors' needs to invest savings in their care, it is clear that there has to be a way for supply and demand to meet. However for this to happen, the market has to be organised appropriately to facilitate the process; a number of different players contribute to this. In this regard, banks once again play an important role. As account-keepers and liquidity providers, they assume a key intermediation role.

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The issuance of securities

Issuers wishing to raise capital from the market turn to a bank or group of banks (a "bank syndicate") which acts as an agent for the issue. The agent arranges all the economic characteristics of the issue. The agent "underwrites" the issue, in other words undertakes to buy all the securities issued and has a responsibility to find final investors willing to buy the securities issued. After the issue, and once the securities trade on the market, the paying agent of the issuer (which may be the same as the agent or another institution) will be responsible for ensuring smooth operations throughout the life of the security: payment of coupons for bond issues or dividends for shares, repayments, capital increases etc. Lastly, rating agencies are independent organisations which assess the quality of issuers and assign a rating designed to determine their reliability as debtors.

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Custodians
The agent of the issuer manages the relationship with the central custodian, a key player in securities markets. For each issue it manages, the central custodian keeps up-to-date records in its accounts of the total amount of securities that have been issued and the amount held by each institution that has a registered account with it (the total amount held by all institutions clearly has to match the total amount of the issue!). In France the central custodian for almost every issue is Euroclear France, formerly SICOVAM. Each member of Euroclear France is a local custodian. Any investor that does not have a registered account with Euroclear France must open an account with a local custodian in order to be able to hold securities. However, while investors increasingly tend to internationalise their investments, the central custodian practically only manages securities issued in its own country. As a result, the function of "global custodian" has developed. A global custodian is appointed by investors to act as account keeper for all transactions involving the purchase and sale of securities in markets worlwide. To this end, the global custodian works hand-in-hand with local

custodians in every market in the world, each one responsible for maintaining relations with the central depository in its country. To be a global or local custodian, an institution must be authorised not only to keep securities accounts on behalf of investors but also cash accounts. Such institutions are therefore usually banks.

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Market transactions
Investors typically buy securities through a broker. The broker provides a number of services to investors. Financial analysts study markets and issuers and make recommendations. Salesmen pass on the recommendations of analysts to investors and collect their orders. Lastly, traders buy or sell securities in the market. Trading between brokers is carried out either directly through an "OTC" market or organised market, a stock exchange, or through fast-growing electronic markets. Once a trade has been completed, the investor turns to a custodian to take charge of "after trade" aspects. For a transaction to be registered correctly, securities provided by the seller have to be exchanged for cash provided by the buyer. This process is referred to as settlement and delivery. The custodian is also responsible for maintaining the accounts of investor customers to take account of the many transactions that can have an impact on investment portfolios: coupon or dividend payments, repayments, but also exercise of subscription rights, takeover bids, exchange offers etc.

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Trading floors
Market transactions by institutional investors are not limited to the purchase and sale of securities. Given the sums involved and the large number of markets in which investors trade, additional needs arise. An investor may need to obtain foreign currency, hence the necessity to carry out transactions in currency markets. An investor may also require loans, or on the contrary need to invest liquidity on a temporary basis to optimise cash flow. Lastly, he may want to protect a portfolio against market fluctuations, giving rise to the need for derivative products. Non-financial companies ("corporates") face similar types of need: importers may require foreign currency and processing companies may have to protect themselves against fluctuations

in raw material prices. All have special cash management needs and may have to hedge against movements in prices or interest rates. Banks are able to respond to these needs; at the branch level for small and medium-sized companies or directly via the trading room for the largest customers. Total cumulative positions generated for the various products are processed by traders in the trading rooms. The activity of a trading room reflects the total amount of requests coming from all of the banks customers!

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Speculation and arbitrage

Financial institutions and funds dedicated to this type of activity use some of their resources for speculation. This aspect of trading activity, whether or not it be as extensive as many claim, nevertheless remains necessary. Speculation involves taking a position that is contrary to current market trends: it means becoming a seller when you think that prices will fall (and are therefore at their highest!), or becoming a buyer when you think they will rise. By adopting a stance, speculators provide liquidity to the market: they are the sellers for investors who want to buy and the buyers for those who want to sell. It is a risky activity, as, unlike investors or corporates, speculators bet on the future. Arbitragists also play a harmonising role: they take advantage of price differences between different markets to generate gains. For example, in currency markets they buy dollars in a market where it is cheap and sell in a market where it is most demanded, and therefore more expensive. It is a risk-free activity, since the assets purchased are immediately resold. However, this requires substantial financing as capital gains on each transaction are low. The activity of arbitragists helps eliminate marketing inconsistencies.

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Conclusion
Economic literature, after drawing a sharp distinction between the financing of companies through bank lending (debt financing) and financing through the issuance of securities (marketbased economy), now attributes a complementary role to both. Studies suggest that for an economy to grow, there is a need for both an active organised financial market and a reliable banking system. The purpose of this website is not to discuss the whys and wherefores of financial markets or their beneficial or harmful role. Instead, the content of this site focuses on "how" aspects: who are the players, how do they interact, the financial products that are traded, and the functions that they provide.

Contents

1 Definition 2 Types of financial markets 3 Raising capital o 3.1 Lenders 3.1.1 Individuals & Doubles 3.1.2 Companies o 3.2 Borrowers 4 Derivative products 5 Currency markets 6 Analysis of financial markets 7 Financial market slang 8 Role (Financial system and the economy) 9 Functions of Financial Markets 10 Constituents of Financial Market o 10.1 Based on market levels o 10.2 Based on security types 11 See also 12 Notes 13 References 14 External links

Definition
In economics, typically, the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them. The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. This may be a physical location (like the NYSE, BSE, NSE) or an electronic system (like NASDAQ). Much trading of stocks takes place on an exchange; still, corporate actions (merger, spinoff) are outside an exchange, while any two companies or people, for whatever reason, may agree to sell stock from the one to the other without using an exchange. Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock exchange, and people are building electronic systems for these as well, similar to stock exchanges. Financial markets can be domestic or they can be international.

Types of financial markets

Within the financial sector, the term "financial markets" is often used to refer just to the markets that are used to raise finance: for long term finance, the Capital markets; for short term finance,

the Money markets. Another common use of the term is as a catchall for all the markets in the financial sector, as per examples in the breakdown below.

Capital markets which consist of: o Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. o Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof. Commodity markets, which facilitate the trading of commodities. Money markets, which provide short term debt financing and investment. Derivatives markets, which provide instruments for the management of financial risk. Futures markets, which provide standardized forward contracts for trading products at some future date; see also forward market. Insurance markets, which facilitate the redistribution of various risks. Foreign exchange markets, which facilitate the trading of foreign exchange.

The capital markets may also be divided into primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets, such as during initial public offerings. Secondary markets allow investors to buy and sell existing securities. The transactions in primary markets exist between issuers and investors, while in secondary market transactions exist among investors. Liquidity is a crucial aspect of securities that are traded in secondary markets. Liquidity refers to the ease with which a security can be sold without a loss of value. Securities with an active secondary market mean that there are many buyers and sellers at a given point in time. Investors benefit from liquid securities because they can sell their assets whenever they want; an illiquid security may force the seller to get rid of their asset at a large discount. The financial market is broadly divided into 2 types: 1) Capital Market and 2) Money market. The Capital market is subdivided into 1) Primary market and 2) Secondary market.

Raising capital
Financial markets attract funds from investors and channel them to corporationsthey thus allow corporations to finance their operations and achieve growth. Money markets allow firms to borrow funds on a short term basis, while capital markets allow corporations to gain long-term funding to support expansion. Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such as banks, Investment Banks, and Boutique Investment Banks can help in this process. Banks take deposits from those who have money to save. They can then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form of loans and mortgages. More complex transactions than a simple bank deposit require markets where lenders and their agents can meet borrowers and their agents, and where existing borrowing or lending

commitments can be sold on to other parties. A good example of a financial market is a stock exchange. A company can raise money by selling shares to investors and its existing shares can be bought or sold. The following table illustrates where financial markets fit in the relationship between lenders and borrowers:

Relationship between lenders and borrowers

Lenders Financial Intermediaries Banks Insurance Companies Pension Funds Mutual Funds Financial Markets Interbank Stock Exchange Money Market Bond Market Foreign Exchange Borrowers Individuals Companies Central Government Municipalities Public Corporations

Individuals Companies

Lenders

Who have enough money to lend or to give someone money from own pocket at the condition of getting back the principal amount or with some interest or charge, is the Lender.
Individuals & Doubles

Many individuals are not aware that they are lenders, but almost everybody does lend money in many ways. A person lends money when he or she:

puts money in a savings account at a bank; contributes to a pension plan; pays premiums to an insurance company; invests in government bonds; or invests in company shares.

Companies

Companies tend to be borrowers of capital. When companies have surplus cash that is not needed for a short period of time, they may seek to make money from their cash surplus by lending it via short term markets called money markets. There are a few companies that have very strong cash flows. These companies tend to be lenders rather than borrowers. Such companies may decide to return cash to surplus (e.g. via a share buyback.) Alternatively, they may seek to make more money on their cash by lending it (e.g. investing in bonds and stocks).

Borrowers

Individuals borrow money via bankers' loans for short term needs or longer term mortgages to help finance a house purchase. Companies borrow money to aid short term or long term cash flows. They also borrow to fund modernization or future business expansion. Governments often find their spending requirements exceed their tax revenues. To make up this difference, they need to borrow. Governments also borrow on behalf of nationalized industries, municipalities, local authorities and other public sector bodies. In the UK, the total borrowing requirement is often referred to as the Public sector net cash requirement (PSNCR).

Governments borrow by issuing bonds. In the UK, the government also borrows from individuals by offering bank accounts and Premium Bonds. Government debt seems to be permanent. Indeed the debt seemingly expands rather than being paid off. One strategy used by governments to reduce the value of the debt is to influence inflation. Municipalities and local authorities may borrow in their own name as well as receiving funding from national governments. In the UK, this would cover an authority like Hampshire County Council. Public Corporations typically include nationalized industries. These may include the postal services, railway companies and utility companies. Many borrowers have difficulty raising money locally. They need to borrow internationally with the aid of Foreign exchange markets. Borrowers having similar needs can form into a group of borrowers. They can also take an organizational form like Mutual Funds. They can provide mortgage on weight basis. The main advantage is that this lowers the cost of their borrowings.

Derivative products
During the 1980s and 1990s, a major growth sector in financial markets is the trade in so called derivative products, or derivatives for short. In the financial markets, stock prices, bond prices, currency rates, interest rates and dividends go up and down, creating risk. Derivative products are financial products which are used to control risk or paradoxically exploit risk.[1] It is also called financial economics. Derivative products or instruments help the issuers to gain an unusual profit from issuing the instruments. For using the help of these products a contract has to be made. Derivative contracts are mainly 3 types: 1. Future Contracts 2. Forward Contracts 3. Option Contracts.

Currency markets
Main article: Foreign exchange market

Seemingly, the most obvious buyers and sellers of currency are importers and exporters of goods. While this may have been true in the distant past,[when?] when international trade created the demand for currency markets, importers and exporters now represent only 1/32 of foreign exchange dealing, according to the Bank for International Settlements.[2] The picture of foreign currency transactions today shows:

Banks/Institutions Speculators Government spending (for example, military bases abroad) Importers/Exporters Tourists

Analysis of financial markets

See Statistical analysis of financial markets, statistical finance

Much effort has gone into the study of financial markets and how prices vary with time. Charles Dow, one of the founders of Dow Jones & Company and The Wall Street Journal, enunciated a set of ideas on the subject which are now called Dow Theory. This is the basis of the so-called technical analysis method of attempting to predict future changes. One of the tenets of "technical analysis" is that market trends give an indication of the future, at least in the short term. The claims of the technical analysts are disputed by many academics, who claim that the evidence points rather to the random walk hypothesis, which states that the next change is not correlated to the last change. In recent years the rise of algorithmic and high-frequency program trading has seen the adoption of momentum, ultra-short term moving average and other similar strategies which are based on technical as opposed to fundamental or theoretical concepts of market Behaviour. The scale of changes in price over some unit of time is called the volatility. It was discovered by Benot Mandelbrot that changes in prices do not follow a Gaussian distribution, but are rather modeled better by Lvy stable distributions. The scale of change, or volatility, depends on the length of the time unit to a power a bit more than 1/2. Large changes up or down are more likely than what one would calculate using a Gaussian distribution with an estimated standard deviation.

Financial market slang

Poison pill, when a company issues more shares to prevent being bought out by another company, thereby increasing the number of outstanding shares to be bought by the hostile company making the bid to establish majority. Quant, a quantitative analyst with a PhD[citation needed] (and above) level of training in mathematics and statistical methods.

Rocket scientist, a financial consultant at the zenith of mathematical and computer programming skill. They are able to invent derivatives of high complexity and construct sophisticated pricing models. They generally handle the most advanced computing techniques adopted by the financial markets since the early 1980s. Typically, they are physicists and engineers by training; rocket scientists do not necessarily build rockets for a living. White Knight, a friendly party in a takeover bid. Used to describe a party that buys the shares of one organization to help prevent against a hostile takeover of that organization by another party. round-tripping smurfing, a deliberate structuring of payments or transactions to conceal it from regulators or other parties, a type of money laundering that is often illegal. Spread, the difference between the highest bid and the lowest offer.

Role (Financial system and the economy)

One of the important requisite for the accelerated development of an economy is the existence of a dynamic financial market. A financial market helps the economy in the following manner.

Saving mobilization: Obtaining funds from the savers or surplus units such as household individuals, business firms, public sector units, central government, state governments etc. is an important role played by financial markets. Investment: Financial markets play a crucial role in arranging to invest funds thus collected in those units which are in need of the same. National Growth: An important role played by financial market is that, they contributed to a nations growth by ensuring unfettered flow of surplus funds to deficit units. Flow of funds for productive purposes is also made possible. Entrepreneurship growth: Financial market contribute to the development of the entrepreneurial claw by making available the necessary financial resources. Industrial development: The different components of financial markets help an accelerated growth of industrial and economic development of a country, thus contributing to raising the standard of living and the society of well-being.

Functions of Financial Markets

Intermediary Functions: The intermediary functions of a financial markets include the following: o Transfer of Resources: Financial markets facilitate the transfer of real economic resources from lenders to ultimate borrowers. o Enhancing income: Financial markets allow lenders to earn interest or dividend on their surplus invisible funds, thus contributing to the enhancement of the individual and the national income. o Productive usage: Financial markets allow for the productive use of the funds borrowed. The enhancing the income and the gross national production. o Capital Formation: Financial markets provide a channel through which new savings flow to aid capital formation of a country. o Price determination: Financial markets allow for the determination of price of the traded financial assets through the interaction of buyers and sellers. They provide a sign

o o

for the allocation of funds in the economy based on the demand and supply through the mechanism called price discovery process. Sale Mechanism: Financial markets provide a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets. Information: The activities of the participants in the financial market result in the generation and the consequent dissemination of information to the various segments of the market. So as to reduce the cost of transaction of financial assets.

Financial Functions o Providing the borrower with funds so as to enable them to carry out their investment plans. o Providing the lenders with earning assets so as to enable them to earn wealth by deploying the assets in production debentures. o Providing liquidity in the market so as to facilitate trading of funds. o it provides liquidity to commercial bank o it facilitate credit creation o it promotes savings o it promotes investment o it facilitates balance economic growth o it improves trading floors

Constituents of Financial Market

Based on market levels

Primary market: Primary market is a market for new issues or new financial claims. Hence its also called new issue market. The primary market deals with those securities which are issued to the public for the first time. Secondary market: Its a market for secondary sale of securities. In other words, securities which have already passed through the new issue market are traded in this market. Generally, such securities are quoted in the stock exchange and it provides a continuous and regular market for buying and selling of securities.

Based on security types

Money market: Money market is a market for dealing with financial assets and securities which have a maturity period of up to one year. In other words, its a market for purely short term funds. Capital market: A capital market is a market for financial assets which have a long or indefinite maturity. Generally it deals with long term securities which have a maturity period of above one year. Capital market may be further divided into: (a) industrial securities market (b) Govt. securities market and (c) long term loans market. o Equity markets: A market where ownership of securities are issued and subscribed is known as equity market. An example of a secondary equity market for shares is the Bombay stock exchange.

Debt market: The market where funds are borrowed and lent is known as debt market. Arrangements are made in such a way that the borrowers agree to pay the lender the original amount of the loan plus some specified amount of interest.

Derivative markets: Financial service market: A market that comprises participants such as commercial banks that provide various financial services like ATM. Credit cards. Credit rating, stock broking etc. is known as financial service market. Individuals and firms use financial services markets, to purchase services that enhance the working of debt and equity markets. Depository markets: A depository market consist of depository institutions that accept deposit from individuals and firms and uses these funds to participate in the debt market, by giving loans or purchasing other debt instruments such as treasure bills. Non-Depository market: Non-depository market carry out various functions in financial markets ranging from financial intermediary to selling, insurance etc. The various constituency in nondepositary markets are mutual funds, insurance companies, pension funds, brokerage firms etc.