The well-established corporate enterprises may be in a position to finance their operations out of past Accumulated savings or reserves but

the new enterprises have to sell their securities to raise capital. There Are various financial instruments available for this purpose, i.e. shares and debentures, but they are merely Means to an end. Success in raising capital is essential otherwise the securities issued by a company will only be legal abstractions and the capitalization merely a blueprint of financial planning. The savings or the surplus of income over expenditure of an individual constitute the main source capital Under the capitalistic form of economy. Varied types of financial institutions, such as investment banks, Investment trusts, insurance companies, finance companies, stock exchanges, commercial banks are Engaged in the mobilization of savings of individuals. But individual capitalism has been one of the Casualties of World War 11. With egalitarian ideas rapidly spreading, savings have become diffused over a wide range of population and they can be gathered through institutions such as investment trusts, Investment banks, insurance companies and commercial banks. Another form in which savings are created is the ploughing back of profits by corporations. The institutional investment may tend to equalize the bargaining position of the capital supply and demand but there is still need for recognizing the importance of saving of individuals because it is the ultimate source of capital.

CLASSIFICATION OF SECURITY BUYERS The surpluses of individual and institutions constitute the ultimate source of investment in corporate securities. The investors may be classified as 1) institutional 2) individual

INSTITUTIONAL INVESTORS They may further be divided into two categories. First the private institutional investors which consist of two types of investors and they can be differentiated on the basis of investment of their funds. 1) Private institutional investors which invest on their own account, such as commercial banks, life Insurance companies, investment trusts, and commercial and industrial concerns possessing surplus, i.e. corporate savings and 2) Private institutional investors which invest of behalf of their clients and/or do not purchase corporate securities on a permanent investment basis, such as underwriting houses, issue houses and investment bankers or trustee companies, secondly, the public institutional investors which include various governmental agencies engaged directly or indirectly in the financing of private enterprises such as the Industrial Finance Corporation of India, State Financial Corporations, National Industrial Development Corporation, etc. INDIVIDUAL INVESTORS Individual investors of securities are legion but they may be classified into three broad categories; they may be its old shareholders, creditors, customers and employees.

Secondly, individuals who are not affiliated with the issuing corporation are usually those who have a surplus of income over Expenditure or who are in possession of accumulated funds which they wish to use as a basis for income They may be regarded as real investors. Thirdly, speculators who buy shares with an idea to gain by Probable capital appreciation or depreciation in the value of shares PRIVILEGED INVESTORS A privileged subscription applies to the purchase of shares issued by a corporation to existing shareholders. The term privilege implies two things; a)That only those who are already shareholders are Permitted to buy the shares of the new issue, and b) that special inducements are offered by the Corporation to ensure the sale of the new issue. Privileged subscriptions are usually associated with Business expansion or redemption of outstanding liabilities. Usually they are offered during prosperity Stages of business cycle. The company law committee popularly known as the Bhabha Committee, Recommended that additional issues of capital by a company should be offered to the holders of equity capital in proportion to their holdings of such capital with right to renounce the whole or part of this offer in favour of a third party. In other words, equity holders possessing voting rights and equity in surplus have a common law right--- a preemptive right to subscribe to any additional stock which the Corporation may issue. The justification for this rule is that only by subscribing for new stock in proportion to the amount already held, a shareholder can retain his voting position and his share. In the surplus, Pre-emptive rights apply only to stock that has voting rights and a claim against the Surplus of the company. Preference shareholders are thus excluded from this right. It is interesting to note that section 81 of the Indian companies act, 1956, provides that where at any time Subsequent to the first allotment of shares in a company, it is proposed to increase the subscribed capital Of the company by the issue of new shares, then subject to any directions to the contrary which may be Given by the company in general meeting, and subject only to those directions1) such new shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in Proportion, as nearly as circumstances admit, to the capital paid up on those shares at the date, 2) the offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being Less than fifteen days from the date of offer within which the offer if not accepted, will be deemed to have been declined, 3) Unless the Articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person, 4)after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered the Board of Directors may dispose them in such manner as they think most beneficial to the company.

The success of privileged subscription depends on the condition that 1) The existing shareholders are Optimistic about their present investment before they risk more capital in the shares of the same company, 2) The offer of new share bears a reasonable relation to the amount of shares already held. The right to have one share for each ten shares held is likely to prove more successful than an offer to subscribe on a one to one basis 3) The current price of the old shares is higher than demanded by the corporation for new shares in order to give an opportunity to the shareholders to think that they have purchased shares from the company cheaper than they can purchase them in the open market, 4) The wider the existing distribution of the old shares, the greater are the chances of success in distributing the new issue and the existence of one or a few large shareholders who may not choose to exercise their rights may ruin the chances of success, and 5) The company is ordinarily able to convince the shareholders of the desirability of the expansion programme with a clear explanation as to how the new funds are to be utilized.

The advantages of selling securities to the old shareholders are that a) The cost of marketing the securities is reduced on account of a group of ready buyers, b) Speculative manipulations in the value of shares are reduced to the minimum as the old shareholders cannot take such risk, and c) The old shareholders maintain their equity in surplus and voting.

As compared with a newly organized company, an established concern can make an effective investment appeal for its securities to its customers. Public utility corporations particularly have found the sale of securities to their consumers both an economical method of obtaining capital and a means of accomplishing other objectives as well. Consumers of the services of public utilities have dual role They are consumers of electricity, water, gas, etc., and they are also voters who help to determine Public attitude towards public utility regulations. Outside the field of public utilities relatively little use has been made of this form of marketing.

The advantages of customer ownership are that 1) The ownership or part ownersip of the company by many small customer owners minimizes the seriousness of price or rate reduction campaigns and in timesmof labour troubles the sympathy of the public for the cause of labour is not so great, 2) The patronage of its customer-owners is certainly assured and disagreement on the fixation of prices is comparatively less.

3) Wide distribution of securities is possible a situation that has a distinct Economic and social significance. 4) There is reduced speculation in the corporations securities if they are held by the consumers. Consequently stability of the enterprise is increased. And 5) It leads to the Adoption of a conservative financial policy. The corporation acan build good reserves without any Opposition from the customer-owners, Customers ownership, however, is not an unmixed blessing. Certain disadvantages accompany the Merits of this type of marketing of securities. Payment of dividends to the consumers may take the form Of a fixed charge. In the absence of declaration of dividend or grant of interest on securities, the dissatisfaction of the customers owners will be of a high magnitude and it may create chaos for the management. The force in the public demand for reducing the rate or price of products or service is Decreased. Moreover, rigidity in the financial structure is sacrificed at the cost of customer-ownership Creditors are considered as good prospects for raising capital at the time of reorganization of an corporation. When a company goes into liquidation and a new company is formed the company May issue shares to creditors in full settlement of their loans or advances. Hence this method of marketing of securities is rarely utilized in normal times.

METHODS OF MARKETING SECURITIES The sale of securities involves many considerations like the sale of goods and services. But this fact cannot minimize the importance of skill and experience required in the highly specialized activity of marketing securities. The selling methods used depend to a large extent on the character and habits of the group in the community to which the selling appeal is directed. Where the security purchasers consist of one or a limited number of institutional investors, private or public, there is little need for the corporation to seek outside assistance because of the certainty of getting Funds from them. It can effect saving in the cost of advertisement, publicity and underwriting commission. But if the funds are to be obtained from the investors of moderate means spread over A wide area, the corporation will have to organize an advertising campaign to mobilize their funds or Engage intermediaries usually on commission basis for the collection of funds in exchange of securities or entrust the task to issue houses, underwriters or investment bankers. Under the first method the corporation makes a direct appeal to the investors by organizing advertising campaign. Prospectus (for inviting subscriptions from the public) is drafted by financial experts as it is the Main source of information to the investors about the future prospects and success of the corporation. It must convince the prospective security holders that their invested funds will be safe and secured. The certainty and stability of return on investment must also be assured by the contents of the Prospectus Statutory regulations are usually incorporated in the company legislation for protection of uninformed Shareholders. Inclusion of false statement or misrepresentation of material of facts in the Prospectus is

legally prohibited. Certain safeguards are also provided to shareholders for protecting their Interests against the promoters or management of the company. Direct selling of securities is not only successful but also economical provided security purchasers Consist of a limited number of institutional investors. Moreover, there is a greater ease and convenience in dealing with a limited number of investors. Where the market for securities is spread over a Wide area and consists of investors of varied means and temperaments it is really a hazardous task to deal With such investors, specially for a corporation which is yet to see the light of the day. An established Enterprise can accomplish its objective or raising funds from the past and advance a promise of surety Of return in the future based on past records. A newly promoted corporation is not in a position to convince the prospective shareholders by presenting an account of its past achievements at best It can only paint a rosy picture. The direct selling of securities may enable a company to save underwriting commission but at the same time its limitations cannot be ignored.

There are many defects of direct selling of securities 1) Uncertainty of the market is its main defect. The corporation cannot be sure of the market and due to that reason it cannot enter into contracts with the suppliers of plant and machinery, material, technical personnel, etc. Even the minimum subscription may not be had by the company and it will have to return the money of a few investors who might have applied for shares. 2) Investors, specially in highly advanced countries, have developed a bias towards the direct purchase of securities. They prefer to buy securities bearing the approval of some specialized body like underwriters firm or issue houses or investment bankers or investment corporations. The decision of the investor to become a security holder in a particular corporation is governed more by the prestige of these bodies than that of the issuing corporation. This prejudice has got justification into the affairs of the issuing corporations. 3)A company engaged in the manufacturing business is apt to be wholly inexperienced in the marketing of securities. It has no clientele for ready and prompt response for its securities. It is not acquitted with the likes and dislikes of the capital market. If it tries to perform the same services as are offered by specialized bodies, it is highly doubtful that it can compete with them for such services. 4)In case of direct selling, the time element which is so essential in marketing and maintaining the market is absent. The offer of the whole lot of securities to the market for the security is required not only at the time of its first offer but later on as well. Besides introducing the factor of timing the securities, the active support given by the specialized bodies helps immensely in the maintenance of the market because it involves regulation of the market by creating artificial demand or bv other means.

PRIVATE PLACEMENT OF SECURITIES

A private placement market financing is the direct sale by a company of its securities to a particular class of investors. The issue is sold mainly to institutional investors--- domestic or foreign. The issuers include public limited companies, private limited companies of private as well as public sectors. In fact private Limited companies, closely held public limited companies of private sector and private limited companies of public sector are not allowed access to resources from the capital market. The Investors included institutional investors like UTI, LIC, GIC, Army Group Insurance, State level financial corporations etc. SEBI guidelines stipulate that listed companies can make private placements of shares with registered foreign institutional investors after obtaining the shareholders consent in a General body meeting under section 81 of the companies act. The allotment should not exceed 5 percent to a single FII and be subject to a maximum of 24 percent (including NRI AND OCB) of the issued capital. Further the shares should not be placed with the FIIs at a lower than the highest price during the preceding 26 weeks in the domestic markets.

WHY CORPORATES USE THE PRIVATE PLACEMENT MARKET? The private placement market accommodates private companies that do not wish to disclose information to the public. Many private limited companies and closely held public limited companies do not want to make public issues because of fear of take-over, wealth tax payment, institutional interference, etc. Secondly access to public issue market is costly due to various statutory and non-statutory expenses. Statutory expenses are underwriting, brokerage, mangersfee, prospectus announcement, advertisement, listing expenses, mailing allotment, registrars expenses. The Non-statutory expenses include printing of prospectus, application forms, brochure, etc. Small companies Can hardly afford to raise resources from public issue where the cost of raising exceeds normally 10 percent. They may choose to go to private market. Thirdly PPM offers excess to capital more quickly than the public issue market. The time frame required for public offering may range between 5 months and 1year to mobilize funds. The PPM may provide Funds within a maximum of 2 to 3 months. Fourthly, response to public issue depends on swings in the secondary market. If the secondary market Is in boom condition, chances of good response to the issue are high. On the other hand, if the secondary Market is in bearish condition, response will be poor. Securities suited to PPM. Products marketed in the private placement market are equity shares, preference shares, cumulative preference shares, debentures-convertible and non-onvertcible. Most widely used product is non-convertible debentures because secondary market for NCDs is hardly present. Therefore private placement for NCDs has increased phenomenally.

GROWTH OF PPM IN INDIA A study published in the Chartered Accountant gives the details of private placement market in India Vis--vis public issue market and rights issue market. The public issues market continuously declined During this period in terms of market share/.Its share was 70% in 1987 but declined to 28% in 1991. Whereas rights issue market was more or less stable in the study period ranging between 24% and 26%. The market share of private placement market increased from 6% in 1987 to 46% in 1991 PRIVATE PLACEMENT OF SHARES WITH FII Ever since SEBI gave companies the go ahead to make preferential allotments of shares to FIIs registered With it, theyt have been weighing the pros and cons of private placement with FIIs as against the issue Of GDRs. The companies were understandably eager to cash in on high premiums that investors abroad Were willing to pay. Several companies showed preference to the private placement route over the GDR Route particularly those raising relatively small amounts of $25 million to $50 million.For bigger issues Of $100 million and above, the GDR route was preferred as it woul provide larger base of investors. Essentially the cost of raising funds through the private route was far lower around 1.5 to 2 percent against 5 to 7 percent for Euro issues. The private placement route does not involve Roadshows at different centres in international markets which account for a large portion of the cost.A Major portion of the cost in the private placement route is the payment of brokerage which could be paid To Indian brokers in rupee terms unlike fees for lead and co-lead managers in dollar payments to International merchant bankers. The private placement route would also lead to accretion of resources To the government by way of capital gains tax, stamp duty and other levies. Investors obtain funds from two main sources: debt and equity market . The debt market is the money Market which comprises the financial institutions such as banks and equity market is where stocks are Traded. Investors obtain funds from the debt market at a cost referred to as interest rate. At the equity Market subscribers are co-owners, hence the stocks are offered at par value to the ownership of the Firms assets. The basis of the distinction between the money market and capital market lies in the Degree of tenor of instruments bought and sold in each of these markets. Onyido stated that the money Market primarily exists as a means of liquidity adjustment while the capital market provides the bridge By which the savings of surplus units may be transformed into medium and long-term investsments In deficit units. The capital market affords business firms and governments the opportunity to sell Stocks and bonds, to raise long-term funds from the savings of other economic agents. The sourcing Of long-term finance through the capital market is essential for sustainable economic growth. It is imperative that monetary policy should endeavor to maintain growth and or stability of returns On investment in the stock market. There is a clear indication that the pain of an economic recession Is deeply felt if there is a severe downturn or persistent fall in stock prices which culminates into lower Earnings per share. A stock market crash reduces aggregate demand, putting downward pressure on

Output and employment. The standard response is for the Central Bank to lower interest rates by Increasing money supply. However, for monetary policy to permeate into the financial market and affect Stock prices it must pass through one or more of the known channels of transmission. The effect of monetary policy on equity prices and interest rates is relevant to several possible Transmission mechanisms from central bank actions to the real economy. For example, the Central bank Controls the minimum rediscount rate, which purportedly affects market determined interest rates and Asset prices and in turn real variables through various possible investment and consumption channels. Nevertheless our emphasis here is to know whether variations in stock market performance can be linked To changes in monetary policy variables. In this paper the issues for determination are as follows:(a) Id monetary policy a veritable tool towards improving the performance of the stock market?

(b) What is the relationship between variations in stock prices and money supply?

(c) What is the relationship between stock price movements and exchange rate?

(d) What is the effect of changes in consumer prices on stock performance? This paper therefore investigates the impact of monetary policy variables on the performance of the Stock market using quarterly data for twenty four years. The primary motivation for this study is to Enable policy makers understand the growing need to formulate monetary policies that will be Responsive to changes in stock prices, since the stock market is a veritable source of long-term Capital. The effectiveness of monetary policy should therefore be anchored on the potency of its Instruments on stock market performance. Ibrahim used real output, aggregate price level, money supply, and exchange rate as explanatory Variables for the variations in stock price movements. The findings of this study were in two folds: First, stock price index is positively related to money supply consumer price index, and industrial Production. Second that stock price index is negatively related to the movement of exchange rates. One of the most intriguing facts in financial market literature is the poor performance of the stock Market during periods of inflation. The failure of equities to maintain their value during times of Inflation is considered anomalous as stocks representing claims to real assets,. Should provide A good hedge against inflation. Some studies have documented the inverse relationship between Real common stock returns and various measures of both actual and expected inflation. Ely and Robinson have examined two main arguments that have been advanced as possible explanations For this anomaly especially for the United States stock market. First they examined the so-called tax effect hypothesis-which focuses on the treatment of depreciation and the valuation of

Inventories in periods of inflation, particularly that share prices fail to keep pace with inflation Inflation increases corporate tax liabilities and thus reduces after tax earnings. In this case Inflation can be said to cause movements in stock prices. Secondly, the proxy-effect hypothesis is The alternative explanation for why real stock returns are negatively correlated with inflation. This hypothesis involves two main assumptions- one that cyclical variations in earnings and output Growth are positively correlated, and the other that monetary policy is counter cyclical. Consequently in considering the impact of inflation on stock prices as proposed in this study we Shall ignore the tax effect hypothesis, this limitation is because we have set out to consider inflation As a monetary phenomenon and its effect can only be adequately observed with a view to the Proxy effect hypothesis mentioned below. The proxy effect hypothesis was first introduced by Eugene Fama. Famas explanation for the inverse Relationship between expected economic activity and current inflation follows two main assumptions That individuals are rational in the sense of making use of all available current information relevant To their money is related to future real economic activity and current interest rates. Assuming that The money supply real economic activity, and interest rates are exogenous, the demand for money will become a means for the transmission of expected future inflation to current inflation. Furthermore the lowering in expected future output growth leads to a lowering is expected future Dividends and has the direct and immediate effect of reducing current stock returns. But also the Decline in expected future output growth leads to a decrease in money demand currently and excess Supply .of money. Following Famas assumption that interest rates and the money supply are exogenous, the excess supply of money is accompanied by an increase in the price level to restore Monetary equilibrium. Essentially the forward looking nature individuals money demand Generates an inverse relationship between current inflation and expected future growth in national Output. This enables a decrease in future output growth to cause both a decline in current stock Returns an increase in current inflation. Benderly and Zwick agree with Fama that the relationship between stock returns and inflation is Spurious. Unlike Fama, Benderly and Zwick argue that the relationship runs from inflation to expected output growth. They base their conclusion on a real balance model of output in which Changes in aggregate demand are related to changes in real money balances. Geske and Roll relaxed the assumption of an exogenous money supply, and suggested an extension Of Famas argument. They posit that a reverse causality actually drives the inverse relationship between stock returns and inflation. Their model involves the central bank. When deficit begins to Grow because of a decrease in output, outstanding government debt increases. The central bank Chooses to monetize a portion of this debt, thus leading to inflation. Since this debt monetization is Anticipated by rational individuals a decline in the stock market will cause an increase in expected\

Future inflation. Therefore stock returns are inversely correlated with expected future inflation. The sequence of events as viewed by Kaul occurs as follows: First, expected future output decline Is signaled by a fall in stock prices. The central bank then responds with a countercyclical policy Which results in an increase in the money supply.This causes both an increase in current inflation And an upward revision in inflation expectations. As a result, there is an observed inverse Relationship between stock returns and both actual and expected inflation. Kauls version of the proxy effect hypothesis thus incorporates two commonly accepted effects Of a perceived reduction in future national output growth. For one, the anticipated slowing lowers Current stock returns. For another, the anticipated slowing causes a current monetary expansion and Thus inflation. These two conditions are however sufficient to generate the inverse relationship often Found between stock returns and inflation. The inverse relationship between expected future national Output growth and current inflation is the result of the equilibrium process in the monetary sector. One of the earliest underlining theories of monetary phenomenon on macroeconomics factors Which include return on equity is in the restatement of the quantity theory by Friedman where he Proposed a general money demand function in the form:Md=f(Yp, rb, re, rm, IT to the power of e) Where money demand is positively related to permanent income Yp, negatively related to expected Interest rates on bonds rb, the expected rate of return on equity re, expected market interest rate rm, and inflation rate IT to the power of e The rate of return on bonds and equity represent the opportunity costs of holding money. The rate of Return on money is the services provided by holding money as well as any interest payments on money deposits at banks. Expected inflation ITe represents the return on holding goods. This element Is the distinctive relationship that agents hold goods as assets and substitution them for money if they Expect a price to rise that is capital gains on holding goods. This illustration is governed by the flow constraint: (wd ws)+ dV=0------------------------(2) Where wd is aggregate demand and ws is aggregate supply and dV is the change in inventory holdings. On the other hand, the asset allocation decision can be viewed from Walrass Law stock Constraint (Md Ms)+(Bd-Bs)=0 Where Md and Ms is the stock level of money demand and supply and Bd and Bs is the stock Level of bond demand and supply refers to all alternative interest bearing financial assets which Equities. Considering a condition of full equilibrium if there is an increase in money supply Ms, the left hand Equation will be negative, which is a situation of excess money supply which will make the term

On the right to be positive for excess bond demand . Hence the price of bonds or equity will Increase and necessarily interest rate will fall bringing the equity market into equilibrium, and by Walras Law the money market as well will be in equilibrium. A generalized portfolio constraint can be stated by relating the money demand to conditions in the Goods market to create a direct channel of aggregate demad to output: (Md-Ms)+(Bd-Bs)+ (wd-ws)=0---------------------------------(4) In an expansionary monetary policy, Ms will increase hence the money market that is the term on the Left will be negative. In any case because of the goods market there may not necessarily be an excess Demand for bonds, since the disequilibrium in the money market can be offset by an excess demand For goods i.e. Md-Ms<0, Bd-Bs=0, wd-ws>0. By the Keynesian multiplier, as there is excess Aggregate demand, then output ws will rise and money demand Md will rise so that the goods market And money market are brought into equilibrium. Therefore Friedmans proposition is that an increase In money supply does not necessarily imply an excess demand for equity or bonds but may be offset by an increase in the demand for durable household goods such as a house or an automobile . This Proposition is one that we wish to prove or rebut in this study, to know whether changes in money Supply actually leads to proportionate changes in stock prices or otherwise. A MODEL OF STOCK PRICE DETERMINATION Mishkin stated that monetary policy effects on stock market performance is based on the following Conditions; if the central bank reduces interest rate, the return on bods will fall, and investors will be Willing to accept a lower return on an investment in equity which is an alternative asset. The resulting Decline in the required rate of return would lower the denominator in the Gordon growth model which will raise stock prices. Secondly, a reduction in interest rates is likely to stimulate the economy, so that the growth rate in dividends is likely to increase. The rise in dividend growth rate Also causes the denominator in the Gordon growth model to decrease, which will also lead to a rise In stock prices. In general the price of a firms stock today can be expressed as the present discounted value of Expected future dividends That is Vt = SIGMA DIVto the power of e divided (1+R) to the power of i----------------eq 5 Where Vt is the money value of the firms stock today. DIV t + i to the power of e equals the firms nominal expected future dividend at period t+i R is the nominal rate at which market participants discount these expected future cash flows or the Rate of return required by investors. The above equation is analogous to Gordon growth model. Consider first the numerator of above equation. There are essentially two ways that expected dividends can grow over time. One of these is through growth in expected real earnings, and the other Is through inflation. That is, DIVt+1 to the power of e is equal to divt+1 to the power of e multiplied

by Pt+1 to the power of e where divt+1 to the power of e represents real earnings of the firm in period T+1 and Pt+1 to the power of e is the expected price level in period t+1. One major aspect of this Study is to investigate the relationship between inflation and stock prices, hence both actual and Expected real earnings will be treated as constant over time. This allows divt+1 to the power of e To be expressed as div in all the periods. It is also assumed that inflation, pie, is constant over and fully anticipated. Under these assumptions, Pt+1 to the power of e can be written as Pt(1+pie) to the power of i. This makes it possible to separate expected nominal dividend to two basic components; real dividends And the general level of prices , hence DIVt+ii to the power of e = div multiplied by Pt(1+pie) to the power of i------------------eq. 6 Consider now the denominator of equation 5, the nominal rate of discount can be separated into Two components inflation and the constant real rate of discount(r) - - by making use of the Fisher Relationship. That is, 1+R = (1+r)(1+pie)----------------------------------eq. 7 From equation 7, the value of a firms stock can be expressed as: Vt = SIGMA div multiplied by Pt(1+pie) to the power of i divided by (1+r) to the power of i multiplied by (1+pie) to the power of i------------------------eq. 8 Equation 8 reduces to Vt = div multiplied by Pt divided by r -----------------------------eq.9 Equation 9 makes it clear that stock prices follow a random walk and will not increase Proportionately with an increase in the general price level if inflation is associated with either A reduction in real dividends of the firm, or an increase in individuals discount rate. Equation 9 explains both the tax-effect hypothesis and the proxy-effect hypothesis. The tax effect Hypothesis is represented in the case where either div is reduced, or r is increased due to an increase In Pt. The proxy-effect hypothesis on the other hand is represented as the case where an anticipated Reduction in national output growth causes a reduction in div and Vt which is associated with an Increase in Pt. This strictly adheres to the conditions expounded by Mish kin on monetary effects on Stock prices. This analogy also corroborates rational expectations theory and the approximate Efficient market hypothesis that postulates the dependence of future expectations on the maximum Likelihood estimate of past performance. In view of the above theoretical underpinnings it is obvious that stock price movements can be Determined by changes in monetary variables and inflation consequences, therefore our analysis Of the statistical relationship of these variables on stock prices can be established hitherto. We observe that the general error correction model is a best fit for the linear combination of stock

Price index and all the identified explanatory variables this is not only as a result of the high adjusted R squared and the acceptable Durbin Watson statistic but for the least Akanke information criterion value compared to the other parsimonious error correction specifications. We observe that the Equilibrium error term is statistically different from zero, though the coefficient is positive. This Implies that changes in the stock market index depend on changes in all the monetary policy variables And the equilibrium errot term. Since the error term if non-zero, the model is out of equilibrium. To Restore equilibrium, since the sign of lagged ECM is positive therefore changes in all the explanatory Variables including the error term must be negative for equilibrium to be restored. The stock prices Adjusts to one quarter lagged changes of its own value, broad money supply, consumer price index Have a positive and very significant relationship with stock price movements. On the contrary we Observe that exchange rate movements and minimum rediscount rate and treasury bill rates have Negative relationship with stock price movements, though the coefficient of exchange rate movements Is significant at the 5% level in explaining variations in stock prices, minimum rediscount rate and Treasury bill rate are not significant in the short run. The dummy variable which has been used to Indicate the presence of deregulation is significant at the 1% level, but with a negative impact on Stock price changes in the short-run but positive in the long run. Sometimes the behavior of the variables does not deviate. All the significant explanatory variables In the short run also remained significant in the long run estimation with the adjustment of the error Correction factor. The insignificant explanatory variables minimum rediscount rate and treasury Bill rate calls for further parsimonious modeling to determine whether their behavior will change In any case. In the absence of deregulation minimum rediscount rate becomes significant at 5% Level and with the expected negative sign. When treasury bill rate drops form the estimation the Behavior of MRR imporves in the level of significance and the maintains the expected sign. Also when MRR drops from the model the behavior of TBR improves and becomes significant At the 1% level of significance with a negative and expected relationship. This implies that both Variables ---MRR and TBR serve the same purpose and pursue similar policy objective. There is A semblance of mutual exclusively on the impact on stock price changes, Short run changes in the explanatory variables have significant effect on the dependent variable and That about .55 of the difference in the actual and disequilibrium in stock price changes is adjusted Quarterly. The significance of ECM indicates that there exists a long-run equilibrium relationship Between changes in stock price movements and the explanatory variables. Another important Observation is the significance of current stock market indices and its lagged values which implies That current stock prices is largely dependent on the previous stock prices and this follows rational Expectations of market participants.

The negative relationship between exchange rate and stock price movements show that the depreciation of the local currency to the US dollar is a disincentive to investment in the stock market. A depreciating rupee reduces the performance of the stock market. Another important variable that meets apriori expectation is consumer price index that shows a Positive relationship with stock price movements both in the short and long run estimation . however Many have studies have observed negative relationship between inflation and real stock prices. This is true because the real value of returns in the upward movement of stock prices is eroded by Rapid changes in consumer prices. The minimum rediscount rate commonly referred to as the monetary policy rate is found to have A negative relationship with stock price movements both in the short and long run. This monetary Policy variable is the anchor of prime lending rate in the banking system. It meets apriori expectation And concludes statements about the quantity theory. Investors who are unwilling to borrow from the Money market due to an increase in interest rate will rather sell existing stocks in the capital market Or create new stocks through public offers. The excess supply of stocks will force down the price The relationship between treasury bill rates and stock price movements has been found to be negative In the short run and positive in the long run. Treasury bills are money market instrument and it is Acclaimed to be the most risk free asset because it is backed by the federal might. As interest rate In the money market is increasing, investors will be attracted to invest in the money market due to Higher expected returns Treasury bills are largely seen as an alternative investment portfolio to stocks. Finally we have observed the effect of deregulation to be positive in the long run and negative in The short run. This is as a result of the short run period of the dummy variable zero for the period Under regulation compared to the deregulation era. Deregulatio has a positive impact on stock Price changes. The basic general intuition behind co-integration is that certain economic variables should not diverge Substiantially in the long run . While such variables can drift apart in the short run economic forces Eventually bring them together again . An error correction specification of stock prices is perhaps Particularly appealing with respect to monetary policy, which should heve transitory effects on asset Prices. In this paper , we have assumed that asset prices such as stocks and treasure securities contain Data about expectations for inflation and real activity that might in turn inform monetary policy Decisions. Therefore this paper uses error-correction framework and treats short run changes in stock Prices as endogenous. Co-intergration methodology is particularly useful in this regard, as the Error-correction model is a useful instrument for estimating endogenous variables. We have observed in this study that a change in stock market index is largely influenced by Monetary policy variables both in the short and long run. Worthy of note is that broad money supply

Consumer price index and exchange rates ,move in the same direction , this implies that spiral increases in the quantity of money in circulation and the domestic price level s largely attributable To devaluation of the rupee relative to majr foreign currencies such as the US Dollar. It is very Obvious that the liquidity, price level and exchange rate channel of monetary policy are all Effective tools of determining changes in the performance of the stock market. Another major discovery of this study is that minimum rediscount rate and treasury bill rate Exhibit a substitutability behavior, following the insignificance when both is applied, and Significance if applied discriminately. If the central bank wishes to decrease minimum rediscount Rate in a bid to pursue an expansionary monetary policy aimed at improving the performance of the Real sector, there will be no need to buy treasury bills at the open market simultaneously Therefore, In the short and long run the interest rate channel of monetary policy transmission is not supported By empirical evidence in determining the changes in stock market index for the period under study. However, a parsimonious examination of MRR AND TBR show that they are mutually exclusive, The use of one should preclude the use of the other to achieve optimum result. There is ample evidence from this study to accept the fact that stock market investment are a good Hedge against inflation. The positive and significant relationship between consumer price index and Stock market for the period under study demonstrates that companys revenue and earnings grow With inflation over time. However, companies can react to inflation by raising their prices, but others Who compete in a global market may find it difficult to stay competitive with their foreign counterparts who do not have to raise prices due to inflation. Therefore, the aim of central bank will be to maintain inflation at a reasonably low level so that it will not erode the real value of stock gains. Finally monetary authorities should exercise restraint in the use of policy instruments indiscriminately Because it is clearly evidenced that the use of monetary policy instruments affects the performance Of the stock market to a very large extent. In the present day economy finance is defined as the provision of money at the time when it is required. Every enterprise whether big, medium or small, needs finance to carry on its operations and To achieve its targets. In fact, finance is so indispensable today that it is rightly said that it is the Lifeblood of enterprise. Without adequate finance, no enterprise can possibly accomplish its objectives. In every concern there are two methods of raising finance, viz. 1)raisig of owned capital, and 2)raising of borrowed capital. These financial requirements may be for long-term, medium term Or short term. Corporate securities can be classified under two categories: A) Ownership securities or capital stock

B) Creditorship securities or debt capital. The term ownership securities also known as capital stock represents shares. Shares is the most Universal form of raising long-term funds from the market. The capital of a company is divided into a number of equal parts known as shares. According to Farewell J, share is, the interest of a shareholder in the company, measured by a sum of money, for The purpose of liability in the first place and of interest in the second, but also aconsisting of a series Of mutual covenants entered into by all shareholders inter se. Section 2(46) of companies act, 1956, Defines it as a share in the share capital of a company, and includes stock except, where a distinction between stock and shares is expressed or implied. Ordinary shares may be regarded as the cornerstone of financial structure. They occupy a primary Position. Being the nucleus of control they carry with them the familiar range of benefits and Responsibilities which are usually associated with ownership. The holders of ordinary shares are the Residual claimant against the assets and income of the corporation. This position of the equity holder May result to his advantage in times of prosperity and to his disadvantage when the enterprise is facing depression. It suggests that their fortunes rise and fall with the affluence of their company and With the state of business psychology. Thus the ordinary shareholders provide venture capital of the company. There are many advantages of financing with ordinary shares: 1)The ordinary shares provide a cushion of safety against temporary unfavourable developments as the dividends are not payable save Out of the available profits of the company and that, too, is dependent on the discretion of the Management 2)The corporation by issuing equity shares can have the funds permanently and there is no obligation to return the creation of any charge against the assets of the company which remain available for any further financing by way of secured borrowing. Moreover, the enlargement of the residual equity increases the base of credit operation. The above mentioned advantages may give an impression of using equity shares exclusively as a source of funds, but there are certain limitations. First the control of the corporation is affected by the Issuance of equity shares and the management is under constant danger of being interfered with by the cliques of equity holders. Secondly, the exclusive use of ordinary shares as a medium of capital Eliminates the advantages likely to accrue from the policy of trading on equity. Thirdly, individual And institutional investors cannot purchase equity shares because of choice or legal restrictions. Finally the excessive issues of equity shares may result in over-capitalisation to be realized in future When the earnings capacity fails to come up to the desired level. Apparently, it may seem ridiculous to talk of safeguards for the equity holders who own and control The corporation. But a serious study of company organization will show that there is a big gulf

Between the ownership and management of corporations. Theoretically, the management owes its Existence to the body of the equity holders but, in reality, they have no effective control over the Management. Because of this separation between the management and ownership of the corporations There is every justification for the requisite protection of the equity holders against the manipulations And misdeeds of the management. Usually the state through its corporate legislation seeks to safeGuard the position of the equity holders by conferring various rights on them. The rights that Ordinarily accrue to shareholders, unless subject to contractual modifications include the following: a)Right to vote: Prof W.H.Stevens has well stated that stockholders vote not merely upon one but upon many matters so that the right to vote is to all intents and purposes a bundle of rights to vote. In other words, this right to vote is not confined to mere election of directors but it covers large numbers of issues like the amendment of Memorandum of Association or alteration of Articles, removal of managing agents, adoption of the schemes of consolidations and mergers, etc. b)Right against ultra vires acts of the company: It is based on the principle that the shareholders consent to have their capital investment exposed to the risks mentioned in the Memorandum or Articles of Association but do not contemplate to assume the risks of ventures not named in these Documents. Consequently ultra vires acts are a breach of the agreement between the corporation And the stockholders. Therefore, a shareholder may properly bring legal action to prevent the Corporation from engaging in them. c)The pre-emptive right: It is a vital right which serves to protect the shareholders by giving them the first option to buy additional issues of shares in proportion to their existing holdings.The idea is to preserve and protect the interests of shareholders in the assets and the control of a corporation. In its absence, inside interests could easily sell additional stock to themselves in order to swing the Balance of control in their favour. This right was recommended by the Company Law Committee and It has been provided in the new companies act. d)Right to have knowledge of corporate affarirs: The equity shareholders have got the fundamental right of being informed about the various developments in a corporation at least once in a year. They can give proper vent to their grievances at the annual general meeting of the corporation. e)Right to transfer the shares: The shareholders are always at liberty in a public limited company to transfer their holdings to anyone. The facilities provided by the stock market for prompt purchase and sale of securities enable the dissatisfied shareholders to convert their shares into cash. f)Miscellaneous rights: Besides the above rights the shareholders have the privilege of participating in exceptional profits in proportion to their respective interests in share capital. Moreover at the time of voluntary or involuntary liquidation of the corporation they have a right to a proportionate share in the net assets available for distribution. The above list of rights is not an exhaustive one. It gives only the more important rights. But the

Mere inclusion of various rights in the corporate law does not guarantee protection to the equity Holders. No amount of legislation can ensure the safety of their interests. Besides being of theoretical Interest, the above rights can be of practical utility provided the shareholders are well enlightened And informed about the affairs of the company and take pains to be active and cautious. Eternal Vigilance is the price to be paid by the shareholders , like the Bombay Shareholders Association can Provide them an opportunity for placing their criticisms against management . Companies issue different types of shares to mop up funds from various investors. Before Companies Act 1956, public companies used to issue three types of shares i.e. preference shares and deferred shares. Companies Act 1956 has limited the type of shares to only two preference shares and equity Shares. Different types of shares are issued to suit the requirements of investors. Some investors prefer regular income though it may be low, others may prefer higher returns and they will be prepared to Take risk. So, different types of shares suit different types of investors. If only one type of shares Are issued, the company may not be able to mop up sufficient funds. The kinds of shares are Discussed as follows: 1. Preference shares: As the name suggests, these have certain preferences as compared to other Types of shares. These shares are given two preferences. There is a preference for payment of dividend. Whenever the company has distributable profits, the dividend is first paid on preference Share capital. Other shareholders are paid dividend only out of the remaining profits if any. The second preference for shares is repayment of capital at the time of liquidation of the company. After Payment of outside creditors, preference share capital is returned. Equity shareholders will be paid Only when preference share share capital is paid in full. A fixed rate of dividend is paid on preference Share capital. Preference shareholders do not have voting rights: so they have no say in the management of the company . However they can vote if their own interests are affected. Those persons who want their money to fetch a constant rate of return even if the earning is less prefer to Purchase preference shares. Preference shares are of the following types: a) Cumulative preference shares: These shares havae a right claim divided for those years also for Which there were no profits. Whenever there are divisible profits, cumulative preference shares are Paid dividend for all the previous years in which dividend could not be declared. Take for example A company which is unable to pay dividend on preference shares for the year 1981 and 1982. If in the Year 1983 the company has sufficient profits, cumulative dividend will be paid first for the year 1981 And 1982 and only then the dividend for the year 1983 will be declared. The dividend goes on Cumulating unless otherwise it is paid. b) Non cumulating preference shares: The holders of these shares have no claim for the arrears of Dividend. They are paid a dividend if there are sufficient profits. They cannot claim arrears of

dividend in subsequent years. c) Redeemable preference shares: Normally the capital of a company is repaid only at the time of Liquidation. Neither the company can return the share capital nor the shareholders can demand its Repayment. The company however can issue redeemable preferences shares if articles of association Allow such an issue. The company has a right to return redeemable preference share capital after a Certain period. The companies act has provided certain restrictions on the return of this capital. The Shares to be redeemed should be fully paid up. The company should redeem these shares either out of Profits or out of fresh issue of capital. The object of these restrictions is that the resources of the company are not depleted. d)Irredeemable preference shares: The shares which cannot be redeemed unless the company is liquidated are known as irredeemable preference shares. e)Participating preference shares: The holders of these shares participate in the surplus profits of the company. They are firstly paid a fixed rate of dividend and then a reasonable rate of dividend is paid on equity shares . If some profits remain after paying both these dividends, then preference shareholders participate in the surplus profits. The mode for dividing surplus profits bet ween preference and equity shareholders is given in the articles of association. f)Non participating preference shares: The shares on which only a fixed rate of dividend is paid are known as non-participating preference shares. The shares do not carry the additional right of sharing of profits of the company. g)Convertible preference shares: The holders of these shares may be given a right to convert their holdings into equity shares after a specified period. These are called convertible preference shares. The right of conversion must be authorized by the articles of association. h)Non convertible preference shares; The shares which cannot be converted into equity shares are known as non-convertible preference shares. Preference shares have several features. Some of them are common to all types of preference shares While others are specific to some of them. Some important features of these shares are as follows: 1) Maturity: In respect of maturity they resemble equity shares. The company is not required to pay Them before its liquidation. There are however, redeemable preference shares which can be paid back At the discretion of the company and after satisfying some condition laid down under companies law. 2)Claim on income: A fixed rate of dividend is payable on preference shares. Preference shareholders Have prior claim on income over equity shareholders. Whenever the company has distributable profits, cumulative shares is paid in later years also if the company does not have surplus profits At present. 3)Claim on assets: Preference shares have a preference in the repayment of capital at the time of Liquidation of a company. Their claims on assets are superior to those of equity shareholders. In the

Event of winding up of the company their claim is to be settled first before making any payment to the equity shareholders. 4)Control; Ordinarily preference shareholders do not have any voting rights, so they do not have any Say in management. However, preference shareholders can vote on a resolution which directly affects The rights to be attached to their preference shares. Advanatages of preference shares: 1) The rate of return is guaranteed/ Such investors who prefer safety on their capital and want to

earn income with greater certaintly always prefer to invest in preference shares.

2) Helpful in raising long term capital for a company.

3) Control of the company is vested with the management by issuing the preference shares to

4)

outsiders as preference shareholders have restricted voting rights.

5) Redeemable preference shares have the added advantage of repayment of capital whenever there Is surplus in the company. 6) There is no need to mortgage property on these shares.

7) As a fixed rate of dividend is payable on preference shares, these enable a company to adopt

8) trading on equity i.e. to increase rate of earnings on equity shares after paying a lower rate of

9) fixed dividend on preference shares. Disadvantages of preference shares: 1) Permanent burden on the company to pay a fixed rate of dividend before paying anything on

other shares.

2) Not advantageous to investors from the point of view of control and management as preference Shares do not carry voting rights 3) Compared to other fixed interest bearing securities such as debentures, usually the cost of raising The preference share capital is higher. Equity shares: Equity shares were earlier known as ordinary. The holders of these shares are the real Owners of the company. They have a voting right in the meetings of holders of the company. They

have a control over the working of the company. Equity shareholders are paid dividend after paying it To the preference shareholders. The rate of dividend on these shares depends upon the profits of the Company. They may be paid a higher rate of dividend or they may not get anything. These shareholders take more risk as compared to preference shareholders. Equity capital is paid after meeting all other claims including that of preference shareholders. They take risk both regarding Dividend and return of capital. Equity share capital cannot be redeemed during the life time of the Company. Features of equity shares: Equity shares have a number of features which distinguish them from other shares and securities. Some of these features are as follows: 1)Maturity: Equity shares provide permanent capital to the company and cannot be redeemed during the life time of the company. Even at the time liquidation equity capital is paid back after meeting

All other prior claims including that of preference shareholders. 2)Right to income: Equity shareholders have a claim on income left after paying dividend to preference shareholders. The rate of dividend on these shares is not fixed, it depends upon the earnings available after paying dividend on preference shares. If the profits are not sufficient then Equity shareholders will not get any dividend. 2) Claim on assets: Equity shareholders have a residual claim on ownership of companys assets.

3) In the event of liquidation of company the assets are utilized first to meet the claims of creditors

4) and preference shareholders and everything left, thereafter, belongs to the equity shareholders.

5) Voting rights: Equity shareholders are the real owners of the company. They have voting rightsin

the meeting of the company and have a control over the working of the company.

6) Limited liabililty: Although equity shareholders are the real owners of the company their liabililty

7) Is limited to the value of shares they have purchased/ If a shareholder has already paid full priceof

the shares then he will not be required to pay anything at the time of liquidation.

8) Advantages of equity shares:

a) Equity shares do not create any obligation to pay a fixed rate of dividend

b) Equity shares can be issued without creating any charge over the assets of the company.

c) It is a permanent source f capaital and the company has to repay it except under liquidation..

d) In case of profits, equity shareholders are the real gainers by way of increased dividends and Appreciation in the value of shares. Disadvantages of equity shares: a) If only equity shares are issued the company cannot take the advantage of trading on equity.

b) As equity capital cannot be redeemed, there is a danger of over capitalization.

c) Equity shareholders can put obstacles for management by manipulation and organizing

themselves. d) During prosperous periods higher dividends have to be paid leading to increase in the value Of shares in the market and it leads to speculation. e) Investors who desire to invest in safe securities with a fixed income have no attraction for such

shares Deferred shares: These shares were earlier issued to promoters or founders for services rendered to the company. These shares were known as founder shares because they were normally issued to founders. These shares rank last so far as payment of dividend and return of capital is concerned. Preference shares and equity shares have priority as to payment of dividend. These shares were generally of a small denomination and the management of the company remained in their hands by Virtue of their voting rights. These shareholders tried to manage the company with efficiency and economy because they got dividend only at last. Now of course they cannot be issued and they are only of historical importance.According to companies act 1956 no public limited company or which Is a subsidiary of a public company can issue deferred shares. Procedure for issue and allotment of shares: Public limited companies issue prospectus informing the public about the issue of shares. An application form is also attached to the prospectus. The intending buyers fill up the forms and send Them with application money to the company. The company opens a bank account and the whole of

Application money deposited therein. Application money should be at least 5% of the nominal value of the shares. The secretary of the company prepares the list of applications along with the details.of Shares applied for and the money deposited. There lists are presented to the Board of Directors or to The committee, The board or a committee as the case may be takes a decision regarding allotment of Shares. The decision regarding allotment of shares is intimated to the applicants by the company Secretary. The shareholders are asked to send allotment money also. The company can also call For the balance money as and when it is needed. When a call is made by the company the shareholders are expected to send the required money within certain period. A notice of at least 14 days is given for sending call money. There must be a gap of at least one month between two calls. Transfer of shares. The shares of public limited companies are transferable like other negotiable instruments. The procedure for transfer of shares is normally given articles of association. A prescribed form known As shares transfer form is to be filled up by the transferor and transferee. The share certificate or Letter of allotment , if no such certificate is issued, is attached to the share transfer form and both The documents are submitted to the company. The transfer of shares is approved by the board of Directors. The board has the power to reject any transfer by giving reasons for such refusal. Whenthe transfer is approved, the name of the purchaser is entered in the Registrar of Members and the name Of the seller is removed from that register. Forfeiture of shares; When a shareholder fails to pay the call money on his holdings within a certain period the company Has the power to forfeit these shares after following a procedure. When the call is not received up to a Given time, the company gives a notice to the defaulting shareholder giving its intention to forfeit theshares if the call money is not receive d within a specified time. A minimum time of 14 days is Necessary. In case the money is not paid even after the notice, the Board of directors can pass a resolution forfeiting the shares. The names of the shareholders is struck off from the register of Members. The shareholders are informed about the forfeiture of his shares through registered post. The amount already paid by the shareholders is not returned, it is retained by the company as a capital profit . The forfeited shares can be issued again. These shares can be issued at a discountand the amount of discount allowed should not exceed the amount received on those shares beforeforfeiture and it is adjusted against the forfeited money. Transmission of shares: When transfer of shares takes place by the operations of law, it is known as transmission of shares. Transmissio of share is effected at the time of death, insolvency or lunacy of a shareholder. In all These cases the shares are transferred to the legal representative of the deceased. There is no need To sign a document of transfer and transfer is effected by the operation of law. When a person dies

And he leaves a will for the inheritance of his property, the person mentioned in it will be entitled To get the shares transferred to his name. In case the deceased has not left any will then the claimant Will have to produce succession certificate from the court. The certificate will prove him to be the Nearest relation of the deceased. In case of lunacy the shares are transferred to the guardian of the Lunatic. If a person is insolvent then his shares are transferred to the official receiver appointed by The court. A legal representative in all these cases can get his name entered in the register of members of the company. He will be entitled to all privileges to which the deceased members was Entitled. He can also transfer the shares to anybody else by following the procedure laid down for Such transfer. Surrender of shares: A company may allow the return of shares by its members. The return of shares to the company Is known as surrender of shares. Surrender of shares is allowed only under particular situations Because it amounts to reduction of share capital. A company cannot reduce its capital except with The approval of the court. However, capital reduction is permissible in four cases without the sanction of the court. These situations are; a)Forfeiture of shares b)Surrender of shares c)Cancellation of uncalled capital and d)Redemption of redeemable preference share capital. Characteristics of stock exchanges: The following characteristics or salient features of stock exchanges are derived: 1)It is a place where securities are purchased and sold. 2)A stock exchange is an association of persons whether incorporated or not. 3)The trading in an exchange is strictly regulated and rules and regulations prescribed for various Transactions. 4)Both genuine investors and speculators buy and sell shares. 5)The securities of corporations, trusts, governments, municipal corporations, etc. are allowed to be Dealt at stock exchange. Functions of stock exchange: The stock exchanges play an important role in the economic development of a country. The importance of stock exchanges will be clear from the functions they perform and are discussed below: 1)Ensure liquidity of capital: The stock exchanges provide a place where shares and stock are converted into cash. The exchanges provide a read6y market where buyers and sellers are always Available and those who are in need of hard cash can sell their holdings. Had this not been possible Then many persons would have feared of blocking their savings in securities. It is because of

exchanges that many persons invest in securities and they can gain convert them into cash. 2) Continuous market for securities: The stock exchanges provide a ready market for securities. The securities once listed continue to be traded at the exchanges irrespective of the fact that their Owners go on changing . The exchanges provide a regular market for trading in securities. 3)Evaluation of securities: The investors can evaluate the worth of their holdings from the prices Quoted at different exchanges for those securities. The securities are quoted under the free atmosphere of demand and supply and the prices are set on the basis of free market. Stock exchanges Are helpful in evaluating any type of security listed there. 4) Mobilising surplus savings: The stock exchanges provide a ready market for various securities. The investors do not have any difficulty in investing their savings by purchasinbg shares, bonds, etc. From the exchanges. If this facility is not there, then many persons who want to invest their savings Will not find avenues to do so. In this way stock exchanges play an important role in mopping up Surplus funds of investors. 5)Helpful in raising new capital: The new and existing concerns want capital for their activities. The New concerns raise capital for the first time and existing units increase their capital for expansion and Diversification purposes. The shares for new concerns are registered at stock exchanges and existing Companies also sell their shares through brokers etc. at exchanges. The exchanges are helpful in raising capital both by new and old concerns. The intending buyers also remain in touch with the Exchanges for investing money in securities. 6)Safety in dealings: The dealings at stock exchanges are governed by well defined rules and Regulations of securities contract (regulation) act, 1956. There is no scope for manipulating transactions. Every contract is done according to the procedure laid down and there is no fear in the minds of contracting parties. The safety in dealings brings confidence in the minds of all concerned Parties and helps in increasing various dealings. 7)Listing of securities; Only listed securities can be purchased and sold at stock exchanges. Every Company desirous of listing its securities will apply to the exchanges authorities. The listing is Allowed only after a critical examination of capital structure, management and prospects of the company. The listing of securities gives privileges to the company The investors can form their own Views about the securities because listing a security does not guarantee the financial stability of the Company 8)Platform for public debt: The increasing governments role in economic development has Necessitated the raising of huge amounts for this purpose. The stock exchanges provide a platform For raising public debts. The stock exchanges are also organized markets of government securities. However there is no provision for a separate counter for government securities but these are traded Through brokers dealing in these securities.

9)Clearig house of business information: The companies listing securities with exchanges have to Provide financial statements, annual reports and other reports to ensure maximum publicity of Corporation operations and working . The economic and other information provided at stock Exchanges help companies to decide their policies. Operators at stock exchanges: 1)Jobbers: are security merchants dealing in shares and debentures as independent operators. They Buy and sell securities on their own behalf and try to earn through price changes. Jobbers cannot Deal on behalf of public and are barred from taking commission. They directly deal with brokers Who in turn make transactions on behalf of public. Jobbers generally quote two prices one at which He is prepared to purchase and the other at which he is prepared to sell a particular security. The Difference between the two prices is the jobbers profit which is technically known as jobbers turn. 2)Brokers: Brokers are commission agents, who act as intermediaries between buyers and sellers of Securities. They do not purchase or sell securities on their behalf. They bring together buyers and Sellers and help them in making a deal. Brokers charge commission from both the parties for their Services. Brokers are experts in estimating trends of prices and can effectively advise their clients In reaching a fruitful gain. Brokers get orders from investing public and execute the orders through Jobbers and they are entitled to a prescribed scale of brokerage. The investors who do not know The technicalities of stock exchanges are greatly benefited by the expertise of brokers. 3)Tarawaniwalas: The members of Bombay Stock Exchange have uofficially divided themselves Into two catagories: a) brokers and b)tarawaniwalas. The latter act both as jobbers and brokers. A tarawaniwala makes transaction on his own behalf like a jobber but he may also act as a broker On behalf of the public. They indulge in malpractices to earn profits. They may sell their own Securities to their clients when prices are higher and vice versa. The distinction between jobbers of London exchange and tarawaniwalas of Bombay stock exchange Is that the former cannot act as broker, whereas the latter may act both as jobbers and brokers. Section 15 of the securities contract regulation act prohibits such practices. It states that no member of a recognized stock exchange shall, in respect of any securities enter into contract as a principal with Any person other than a member of a recognized stock exchange, unless he has secured of the consent Or authority of such person and disclosed in the memorandum or an agreement of sale or purchase That he is acting as principal. There are four types of speculators who are active on stock exchanges in india. They are known as bull, bear, stag and lame duck. These names have been derived from the animal world to bring out the Nature and working of speculators. Bull: A bull or tejiwala is an operator who expects a rise in prices of securities in the future. In Anticipation of price rise, he makes purchases of shares and other securities with the intention to sell

At higher prices in future. He being a speculator, he has no intention of taking delivery of securities but deals only in difference of prices. Such a speculator is called a bull because of resemblance of his Behavior with the bull. A bull tends to throw his victims up in the air. Similarly, a bull speculator tries to raise the prices of securities by placing big purchase orders. Bear: A bear or mandiwala speculator expects prices to fall in future and sells securities at present With a view to purchase them at lower prices in future. A bear does not have securities at present but Sells them at higher prices in anticipation that he will supply them by purchasing at lower prices in Future. If the prices move down as per the expectations of the bear, he will earn profits out of these Transactions. Just as a bear presses its victims down to the ground, the bear speculator tends to force Down the prices of different securities. When the bear operators start selling the securities the bearish Pressure gradually forces down the prices. A bear does not take delivery of securities but takes the difference if prices fall down. In case prices Rise then he will have to pay the difference between the prices at which he purchased the securities And the prevailing price on the date of delivery. A market is said to be bearish when it is dominated By the bear speculators. On the other hand there is strong expectations of fall in prices. Pessimism Prevails in the market. In case the prices are not falling as expected by the bears when they may start speculator rumours to pressurize prices downwards. It is known as bear raid. Stag: A stag is a cautious speculator in the stock exchange. He applies for shares in new companies And expects to sell them at a premium if he gets an allotment. He selects those companies whose shares are in more demand and are likely to carry a premium. He sells the shares before being called To pay the allotment money. A stag doen not indulge in purchase and sale of shares in the market like a bull and bear. He relies only on the allotment of securities to him. He applies for large number of shares so that he gets some Allotment even if there is heavy over subscription. Lame duck: When a bear finds it difficult to fulfil his commitment, he is called struggling like a lame Duck. A bear speculator contracts to sell securities at a later date. On the appointed terms he is not able to get the securities as the holders are not willing to part with them. In such situation he feels Cornered. Moreover the buyer is not willing to carry over the transactions. Cum dividend and ex dividend quotations: The companies pay dividend for a particular period to those persons whose names appear in their registers. The shares are freely transferable as these go on Changing hands. The companies close their registers for sometime and give notice to the public. Those persons who have purchased the shares of a company but have not got the shares transferred To their names can apply for the same before the date of close of register. The dividend warrants are Sent only to those persons who have been able to get their names registered with the company. Anybody failing to get the shares transferred by a specified date will not get dividend even if they are

In possession of shares. The dividend will be sent to that seller in whose name the shares stand in the Companys records. A seller who holds the shares for some time but later on sells them will lose dividend for the period For which he was holding those shares. For example, a seller the shares in the month of July will lose Dividend for 6 months(January to June) if the company declares dividend for the year ending 31st December. The buyer will get the whole dividend because his name will appear in the records of the Company at the end of the year. A seller may ask for some amount for dividend besides the selling Prices of shares. In such a case he will quote a higher price. The price quoted by a seller may be Inclusive or exclusive of dividend. In the former case it is termed as cum dividend and in the latter Case it is termed as ex dividend price. In case of cum dividend the price quoted includes dividend declared also. The buyer will get the Dividend at appropriate time and seller includes dividend in the quoted price. He compensates himself by quoting a higher price. Ex dividend price is quoted when there is no time left for getting The shares transferred to the buyer . Either the registers have closed or there is no time left for the Registers to close. In such situation the seller gets the dividend from the company because his name Exists in the company record. The price quoted in such circumstances will be exclusive of dividend Or ex dividend. FACTORS INFLUENCING PRICES ON STOCK EXCHANGES; 1)Financial position of the company: The financial position of a company directly influences the Prices of its shares. When a company shows good results by increasing its sales and profits then its Shares will command a better price in the market. The rate of dividend declared by a company also Influences the price of shares. A higher dividend paying company will attract more investors. If a Company fails to pay dividend then its share holders will start selling their holdings and the prices Of shares will go down. 2)Demand and supply position: Like any other commodity the prices of shares are also influenced By the demand and supply position in the market. The shares is more demand will command a Higher price. If the supply of shares is more, then their prices will go down. 3)Role of financial institutions: The financial institutions are playing an important role in influencing The prices of shares. The institution like LIC, UNIT TRUST OF INDIA, INDUSTRIAL FINANCE CORPORATION, INDUSTRIAL CREDIT AND INVESTMENT CORPORATION, etc. purchase Shares of good companies in bulk. This not only gives a good name to the company but also reduces The supply of shares. Such purchases increase the prices of shares . On the reverse when such Institutions start selling their holdings. Then prices of such shares will decline with increase in supply. 4)Lending rates; Lending rates influence the supply of money which ultimately affects prices of

shares. Reserve bank of India fixes the bank rate for rediscounting facilities to commercial banks. The bank rate governs the rate of interest charged by commercial banks. The low lending rates will Result in more supply of money and it will increase the demand for shares. The increase in demand For shares will increase their prices. On the other hand if money supply is low then prices of shares will go down. 5)Trade cycles: The stage of trade cycles at a particular period also influences share prices. In the Period of boom the prices of shares go up because of overall prosperity. The situation of depression Brings stagnation in growth and prices of shares go down. 6)Speculation activities: The speculative activities of operators at a stock exchange influence price of shares. The speculators may create artificial scarcity of some shares by purchasing available shares. Once they control the supply of a particular share then they dictate its prices. The operations of bulls, Bears and stags directly influence the prices of shares on a stock exchange 7)Government control; The policies of the government also influence the prices of shares. When The government gives encouragement and concessions to the expansion and diversification of existing unirts and setting up of new units their money market will grow. Any government policy Putting restrictions on industrial activity will depress share prices. STOCK EXCHANGES IN INDIA In India the growth of stock exchanges has been linked to the growth of corporate sector. The first Organized stock exchange was set up in Bombay in 1887. It was followed by another at Ahmedabad In 1894, Though a number of stock exchanges were set up before independent but there was no All India Legislation to regulate their working. Every stock exchange followed its own methods of working. To rectify this situation the Security Contracts(Regulation) Act was passed in 1956. Provisions of the act: Some important provisions of the act are discussed as follows.: 1)Recognition of stock exchanges: The securities can be traded only at stock exchanges recognized by central government of india in pursuance of the provisions of securities contracts regulation act. Before giving recognition the government must satisfy that: a)The rules and bye laws of the applicant stock exchange ensure fair dealings and protect the interest of genuine investors. b)It is willing to comply with any conditions that may be imposed by central government from time to time. c)It is in the interest of trade and public to grant such recognition to the stock exchange. 2)Control of central government: Under the act central government has been given wide powers to control the working of stock Exchanges. Some of the controlling powers are;

a)Every stock exchange has to submit to the government periodical returns of their affairs. b)Government can appoint persons to enquire into the affairs of the exchange and submit the report in a specified period. c)Government may call upon the exchanger or members to furnish such information or explanations regarding the affairs of the exchange or transactions of the members as may be required. d)It can regulate the working hours of the exchange. e)In the event of any emergency it can suspend the working of an exchange upto a period of seven days. 3)Controlling speculation: Government can curb speculative activities of an exchange. Some Regulations in this direction are: a)Option dealings in securities have been banned. b)Kerb trading has been declared illegal. c)Life of a blank transfer has been restricted to twelve months. WEAKNESSES OF STOCK EXCHANGES IN INDIA The stock exchanges of india suffer from a number of weaknesses. Principal weakenesses are Discussed as follows: 1)Lack of professionalism: The majority of stock brokers lack professionalism. They lack property Education, business skills, infra structural facilities etc. which inhibits them to provide poor service To clients. They are not able to guide and counsel their clients in the manner expected of them. 2)Domination of financial institutions: Indian stock markets are dominated by a few financial Institutions. The UTI, LIC, GIC are the main players in Indian stock markets. The buying andselling By these institutions sets the tone in the market. The market goes bullish if financiall institutions Start buying shares. On the other hand, it becomes bearish on their selling spree. After the Liberalization process set in motion since 1991, a number of foreign financial institutions have Also entered the market but their role has so far been limited. Even though financial institutions Deal in only selected scrips but the whole market sentiment is influenced by their dealings. Under SEBI guidelines, a number of mutual funds have bee n registered but they are concentrating more on New issues(primary market). Financial institutions in developed economics too enter stock markets But their number is large and few institutions cannot influence the whole market as is done in India By three main institutions. Moreover, Indian financial institutions indulge more in buying and less in Selling. With the entry of more or more Indian and foreign institutions, their influence in stock Markets will gradually decline. 3)Poor liquidity: The Indian stock ex changes suffer from poor liquidity. A small numbe r of scraps Are regularly traded in stock exchanges. Out of over 3000 scrips less then 500 scrips are generally Traded and even out of these 90 per cent volume of trade confines to between 200-250 scrips. This

Means that other scrips have very low liquidity. A recent survey into frequency of trading showed That shares of 207 companies were traded everyday, shares of 538 companies were traded once a Week, shares of 396 companies were traded once a fortnight, shares of 954 companies were traded Once a montyh and shares of 959 companies were traded once a year. These statistics show the Poor liquidity of the shares. A seller has to wait for disposing off his holdings for a longtime. When An investor is not sure of selling his shares whenever he needs money then he will discouraged to Invest in shares. There is a huge backlog of pending deliveries also. This is due to the practice of short selling. The Scrips are not delivered for longer periods which again creates liquidity problem. SEBI is trying to Frame rules where the malpractices will be curtailed. 5) Domination by big operators: Some big operators influence the sentiment of stock exchanges in India. In Bombay stock exchange 3-4 operators used to call the shots. The case of Harshad Mehta Is well known in India. He created bullish conditions in Indian stock exchanges in the first quarter Of 1992 and BSE sensex nearly doubled in a very short period. This artificial increase in prices of Shares adversely affected the investing public and people suffered huge losses. It is the weakness Of stock exchanges working that some operators can create the sentiment as per their liking. 6)Less floating stocks: There is a scarcity of floating stock in Indian stock exchanges. The shares and Debentures offered for sale are a small portion of total stocks. The financial institutions and joint Stock companies which control over 75 per cent of the scrips do not offer them for sale. The UTI, LIC, GIC, etc indulge more in purchasing than in selling/ It creates scarcity of stocks for trading. The Marketrs tend to be volatile and amenable to manipulation in the absence of adequate floating Stocks for trading. 6)Kerb trading: The transactions between the brokers who assemble outside the stock exchange Are called kerb trading. Kerb trading is a punishable offence yet it is regularly conducted. The Brokers generally report kerb transactions alongwith regular transactions. There is no difference Between kerb trading and regular trading except that if falls outside the preview of arbitration machinery. Kerb trading brings significant price changes and helps speculators in influencing the Sentiments of the market. 7)Speculative trading: The trading in stock exchanges is mainly speculative in nature. The Operators try to derive benefit out of short-term price fluctuations. At Bombay Stock Exchange Upto 5 percent and at other exchanges upto 10 per cent transactions are genuine investment deals. The brokers try to create a sentiment in the market which will be beneficial to them. The genuine Investors try to keep away from such markets. SEBI ROLE IN A STOCK EXCHANGE The securities and exchange board of india act 1972 was passed by central government for

Establishing a board to protect the interests of investors in securities and to promote the development Of and to regulate, the securities market connected therewith or incidental thereto. Every stock exchange needs recognition from central government . Any stock exchange, which is Desirous of being recognized may make an application to the central govennment. The application Should be accompanied by a copy of the bye laws of the stock exchange for the regulation and control of conrtracts and a copy of the rules relating in general constitution of the stock exchange. If the central government is satisfied that bye laws of the exchange ensure fair dealing and protect Investors, stock exchanges is willing to comply by other conditions which central government may Impose and it is in the interest of trade and of the public to grant recognition it may recognize the stock exchange. LATEST TRENDS IN THE STOCK MARKET On May 5, 2012 the sensex falls 330 points on fear of Mauritius tax treaty rejig. Lack of clarity on the Applicabilit of a new tax rule for foreign investors, weak economic data from US and Europe and Depreciation of the rupee against the dollar together pulled the sensex below 17000 as it lost 320 Points to close at 16,831 a three month closing low . The days fall was also the biggest fall for the Sensex in more than two months. The main trigger for the days loss which wiped off investor wealth worth nearly Rs. 1.1 lakh crore, Came in the afternoon session after S S Palanimanickam minister of state for finance, said that the Government was reviewing its bilateral tax treaty with Mauritius, one of the most popular places among FIIs to route their investments into the Indian market. The statement spooked investors as they Now fer that a large number of Mauritius domiciled FIIs may be forced to limit their investments into India because of higher tax provisions in all the alternative countries from where they can route their Money into the Indian market. The comments from the minister came even as the market was awaiting some positive news on the Government;s proposed change in the tax rules by introducing General Anti-Avoidance Rule(GAAR) Aimed at targeting the foreign investors who used aggressive tax rules to pay less or no taxes GAAR proposed to be applied with retrospect effect is a major concern for FII that has led many Top foreign brokerages to change their India centric product offering to their clients. On May 9, 2012 sensex dives 367 points on FII outflow fears. Spooked by fears of fresh withDrawal of investments by foreign fund managers from the Indian market, Dalal street cracked in Tuesdays late trades with the sensex closing 367 points of at 16,546. Brokers and dealers said investor sentiment was hit by the weakness of the rupee, muted guidance By IT sectror companies the governments decision to go ahead with retrospective tax on buyouts Of Indian assets by companies based outside that RIL will see further drop in output from its KG-D6 Gas fields. On the NSE, nifty closed at 5000 mark, raising fears that a sustained close below this level

For 2-3 session would be a huge negative for the street. The slide left investors poorer by over rs. 1.05 lakh core with BSEs current market capitalization at Rs. 59.2 lakh crore . Fresh weakness in the Euro zone mainly in Greece and France after the incumbent governments were voted out., also had a negative impact on the market dealers said. End of the session data on the BSE showed that FIIs were net sellers at almost rs. 400 core, taking the Net outflow figure for the week to over rs. 1000 crore. Brokers said that the government decision to tax Vodafone on retrospective basis may deter a large Number of foreing companies from setting shop in India which in turn would hamper foreign flows into the country and thus have a negative impact on the strength of the currency. On may 17, 2012 the sharp depreciation of the rupee took its toll on the stock market also with the Sensex sliding to its lowest close in the last four months at 16030 down 298 points on the day. Investors were also jittery about the prospect of Greece exiting the Euro currency union, the Continuing weakness of the domestic economy and the two deficits the fiscal and the current Account. With the rupee losing out, 9.5% since February 21 this year, companies could end up shelling out More for forex loans in the current quarter than what they did in October December last year, When the currency depreciated shareply. The rupee was ruling at rs. 45 levels in January, 2011 And companies would have an additional burden of nearly rs. 30000 crore in servicing their Foreign currency borrowings taken in 2011 if the rupee stays at current levels, estimates showed, The rupee had appreciated by nearly 8% in January February. This came as a huge relief forcompanies with foreign currency denominated loans. The sharp rise which came on the back of Huge flows from FIIs effectively pushed down the amount companies have to pay on account of the Fluctuation in the currency since they took their forex loans by nearly half. While companies that have hedged their dollar exposure can weather this sharp rupee depreciation firms which have unhedged exposure would lose out.