A PROJECT ON CAPITAL MARKET

Punjab Technical University, Jalandhar.

In partial fullfilment of the degree in Master of Business dministration

!MB ".
Project submitted to#

$ubmitted By# $helly jumba

MB (rd semester

Pooja M. %ohli &'ecutive director

)udhiana stoc* e'change

+oll no,-.(/00(1233

)se code no# ,-0 (Session 2009-2010) CT institute of m n !ement n" te#$no%o!&' J % n"$ (

)*I+E CERTI,ICATE

It is hereby certified that the project report on 4CAPITAL MARKET5, being submitted by $helly jumba student of the degree of Master of Business dministration !(rd $em" of 6T Institute of Management and Information Technology, Jalandhar 7hich affiliated to Punjab Technical University, Jalandhar is an original 7or* carried out successfully under my guidance and supervision and that no part of this project has been submitted for any other degree8 diploma. The sincerely efforts put in during the course of investigation is hereby ac*no7ledged.

Project guide Miss $hivani jagneja )ect. 6TIM9 IT

+ECLARATION
This project entitled &mpirical $tudy on 46 PIT ) M +%&T5 is submitted in partial fulfilment of the re:uirement for the a7ard of degree of master of business administration of Punjab technical university, Jalandhar.
This research 7or* is done by $;&))< JUMB , .This research 7or* has been done only for MB only and none of this research 7or* has been submitted for any other degree. The assistance and help during the e'ecution of the project has been fully ac*no7ledged.

S-ELL. J*M/A M/A 0(" SEM ROLL NO-91022203411

ACKNO5LE+)EMENT

=e ta*e this opportunity to e'press my deep sense of gratitude to all our friends and seniors 7ho helped and guide me to complete this project successfully. I am highly grateful and indebted to our project guide )ect. Miss $hivani jagneja, Mr. %uber *ansal !guide 9 co,ordinator" and

Mr

tul chi*ersal !guide 9 co,ordinator" for their e'cellent and e'pert guidance in

helping us in completion of project report.

$helly jumba

PRE,ACE
The successful completion of this project 7as a uni:ue e'perience for us because by visiting many place and interacting various person, I achieved a better *no7ledge about this project. The e'perience 7hich I gained by doing this project 7as essential at this turning point of my carrier this project is being submitted 7hich content detailed analysis of the research under ta*en by me. The research provides an opportunity to the student to devote her s*ills *no7ledge and competencies re:uired during the technical session. The research is on the topic 46apital mar*et5.

In"e6
Se(i % No7 3 6apital mar*et P (ti#u% (s P !e No7

+ole of capital mar*et in India

>actors affecting capital mar*et in India

India stoc* e'change overvie7

6apital mar*et efficiency

Bibliography

CAPITAL MARKET

The capital mar*et is the mae*et for securities 7here 6ompanies and governments can raise long,term funds. It is a mar*et in 7hich money is lent for periods longer than a year. nation?s capital mar*et includes such financial

institutions as ban*s, insurance companies, and stoc* e'changes that channel long, term investment funds to commercial and industrial borro7ers. Unli*e the money mar*et, on 7hich lending is ordinarily short term, the capital mar*et typically finances fi'ed investments li*e those in buildings and machinery. @ature and 6onstituents# The capital mar*et consists of number of individuals and institutions !including the government" that canaliAe the supply and demand for long,term capital and claims on capital. The stoc* e'change, commercial ban*s, co,operative ban*s, saving ban*s, development ban*s, insurance companies, investment trust or companies, etc., are important constituents of the capital mar*ets.

The capital mar*et, li*e the money mar*et, has three important 6omponents, namely the suppliers of loanable funds, the borro7ers and the Intermediaries 7ho deal 7ith the leaders on the one hand and the Borro7ers on the other. The demand for capital comes mostly from agriculture, industry, trade The government. The predominant form of industrial organiAation developed 6apital Mar*et becomes a necessary infrastructure for fast industrialiAation. 6apital mar*et not concerned solely 7ith the issue of ne7 claims on capital, But also 7ith dealing in e'isting claims.

+e8t o( /on" m (9et

The bond mar*et !also *no7n as the debt, credit, or fi'ed income mar*et" is a financial mar*et 7here participants buy and sell debt securities, usually in the form of bonds. s of 0BB-, the siAe of the 7orld7ide bond mar*et !total debt outstanding" is an estimated CD0.0 trillion
E3F

, of 7hich the siAe of the outstanding U.$. bond mar*et debt 7as C(3.0 trillion

according to BI$ !or alternatively C(..( trillion according to $I>M ".

@early all of the CD00 billion average daily trading volume in the U.$. bond mar*et ta*es place bet7een bro*er,dealers and large institutions in a decentraliAed, over,the,counter !GT6"

mar*et. ;o7ever, a small number of bonds, primarily corporate, are listed on e'changes. +eferences to the Hbond mar*etH usually refer to the government bond mar*et, because of its siAe, li:uidity, lac* of credit ris* and, therefore, sensitivity to interest rates. Because of the inverse relationship bet7een bond valuation and interest rates, the bond mar*et is often used to indicate changes in interest rates or the shape of the yield curve.

Contents 3 Mar*et structure 0 Types of bond mar*ets ( Bond mar*et participants . Bond mar*et siAe 2 Bond mar*et volatility 1 Bond mar*et influence / Bond investments D Bond indices

M (9et st(u#tu(e
Bond mar*ets in most countries remain decentraliAed and lac* common e'changes li*e stoc*, future and commodity mar*ets. This has occurred, in part, because no t7o bond issues are e'actly ali*e, and the variety of bond securities outstanding greatly e'ceeds that of stoc*s.

;o7ever, the

@e7 <or* $toc* &'change !@<$&" is the largest centraliAed bond pril 0BB/ and e'pects the

mar*et, representing mostly corporate bonds. The @<$& migrated from the utomated Bond $ystem ! B$" to the @<$& Bonds trading system in number of traded issues to increase from 3BBB to 1BBB.
Besides other causes, the decentraliAed mar*et structure of the corporate and municipal bond mar*ets, as distinguished from the stoc* mar*et structure, results in higher transaction costs and less li:uidity. study performed by Profs ;arris and Pi7o7ar in 0BB., $econdary Trading 6osts in

the Municipal Bond Mar*et, reached the follo7ing conclusions# !3" HMunicipal bond trades are also substantially more e'pensive than similar siAed e:uity trades. =e attribute these results to the lac* of price transparency in the bond mar*ets. dditional cross,sectional analyses sho7 that bond

trading costs decrease 7ith credit :uality and increase 7ith instrument comple'ity, time to maturity, and time since issuance.H !0" HGur results sho7 that municipal bond trades are significantly more e'pensive than e:uivalent siAed e:uity trades. &ffective spreads in municipal

bonds average about t7o percent of price for retail siAe trades of 0B,BBB dollars and about one percent for institutional trade siAe trades of 0BB,BBB dollars.H T&:es of 8on" m (9ets The $ecurities Industry and >inancial Mar*ets ssociation !$I>M " classifies the

broader bond mar*et into five specific bond mar*ets. 6orporate Iovernment 9 agency Municipal Mortgage bac*ed, asset bac*ed, and collateraliAed debt obligation >unding /on" m (9et : (ti#i: nts
Bond mar*et participants are similar to participants in most financial mar*ets and are

essentially either buyers !debt issuer" of funds or sellers !institution" of funds and often both.

P (ti#i: nts in#%u"e; Institutional investors Iovernments Traders Individuals Because of the specificity of individual bond issues, and the lac* of li:uidity in many smaller issues, the majority of outstanding bonds are held by institutions li*e pension funds, ban*s and mutual funds. In the United $tates, appro'imately 3BJ of the mar*et is currently held by private individuals.

/on" m (9et si<e

mounts outstanding on the global bond mar*et increased 3BJ in 0BB- to a record C-3 trillion. Komestic bonds accounted for /BJ of the total and international bonds for the remainder. The U$ 7as the largest mar*et 7ith (-J of the total follo7ed by Japan !3DJ". Mortgage,bac*ed bonds accounted for around a :uarter of outstanding bonds in the U$ in 0BB- or some C-.0 trillion. The sub,prime portion of this mar*et is variously estimated at bet7een C2BBbn and C3.. trillion. Treasury bonds and corporate bonds each accounted for a fifth of U$ domestic bonds. In &urope, public sector debt is substantial in Italy !-(J of IKP", Belgium !1(J" and >rance !1(J". 6oncerns about the ability of some countries to continue to finance their debt came to the forefront in late 0BB-. This 7as partly a result of large debt ta*en on by some governments to reverse the economic do7nturn and finance ban* bailouts. The outstanding value of international bonds increased by 3(J in 0BB- to C0/ trillion. The C0.( trillion issued during the year 7as do7n .J on the 0BBD total, 7ith activity declining in the second half of the year.

/on" m (9et =o% ti%it&

>or mar*et participants 7ho o7n a bond, collect the coupon and hold it to maturity, mar*et volatility is irrelevantL principal and interest are received according to a pre,determined schedule.

But participants 7ho buy and sell bonds before maturity are e'posed to many ris*s, most importantly changes in interest rates. =hen interest rates increase, the value of e'isting bonds fall, since ne7 issues pay a higher yield. )i*e7ise, 7hen interest rates decrease, the value of e'isting bonds rise, since ne7 issues pay a lo7er yield. This is the fundamental concept of bond mar*et volatility# changes in bond prices are inverse to changes in interest rates. >luctuating interest rates are part of a country?s monetary policy and bond mar*et volatility is a response to e'pected monetary policy and economic changes.
&conomists? vie7s of volatility. economic indicators versus actual released data contribute to mar*et

tight consensus is generally reflected in bond prices and there is little price movement

in the mar*et after the release of Hin,lineH data. If the economic release differs from the consensus vie7 the mar*et usually undergoes rapid price movement as participants interpret the data. Uncertainty !as measured by a 7ide consensus" generally brings more volatility before

and after an economic release. &conomic releases vary in importance and impact depending on 7here the economy is in the business cycle. /on" m (9et inf%uen#e
Bond mar*ets determine the price in terms of yield that a borro7er must pay in able to receive funding. In one notable instance, 7hen President 6linton attempted to increase the U$ budget deficit in the 3--Bs, it led to such a sell,off !decreasing pricesL increasing yields" that he 7as forced to abandon the strategy and instead balance the budget. 4 I used to thin* that if there 7as reincarnation, I 7anted to come bac* as the president or the pope or as a ..BB baseball hitter. But no7 I 7ould li*e to come bac* as the bond
mar*et. <ou can intimidate everybody. M James 6arville, political advisor to President 6linton, Bloomberg E1F

/on" in=estments Investment companies allo7 individual investors the ability to participate in the bond mar*ets through bond funds, closed,end funds and unit,investment trusts. In 0BB1 total bond fund net inflo7s increased -/J from C(B.D billion in 0BB2 to C1B.D billion in 0BB1.&'change ,traded funds !&T>s" are another alternative to trading or investing directly in a bond issue. These securities allo7 individual investors the ability to overcome large initial and incremental trading siAes. /on" in"i#es Main article# Bond mar*et inde' number of bond indices e'ist for the purposes of managing portfolios and measuring performance, similar to the $9P 2BB or +ussell Inde'es for stoc*s. The most common merican benchmar*s are the Barclays ggregate, 6itigroup BII and Merrill )ynch Komestic Master. Most indices are parts of families of broader indices that can be used to measure global bond portfolios, or may be further subdivided by maturity and8or sector for managing specialiAed portfolios.

STOCK OR E>*IT. MARKET

sto#9 m (9et or e?uit& m (9et is a public mar*et !a loose net7or* of economic transactions, not a physical facility or discrete entity" for the trading of company stoc* and derivatives at an agreed priceL these are securities listed on a stoc* e'change as 7ell as those only traded privately.
The siAe of the 7orld stoc* mar*et 7as estimated at about C(1.1 trillion U$ at the beginning of Gctober 0BBD. The total 7orld derivatives mar*et has been estimated at about C/-3 trillion face or nominal value, 33 times the siAe of the entire 7orld economy. The value of the derivatives mar*et, because it is stated in terms of notional values, cannot be directly compared to a stoc* or a fi'ed income security, 7hich traditionally refers to an actual value. Moreover, the vast majority of derivatives ?cancel? each other out !i.e., a derivative ?bet? on an event occurring is offset by a comparable derivative ?bet? on the event not occurring". Many such relatively illi:uid securities are valued as mar*ed to model, rather than an actual mar*et price.
The stoc*s are listed and traded on stoc* e'changes 7hich are entities of a corporation or mutual organiAation specialiAed in the business of bringing buyers and sellers of the organiAations to a listing of stoc*s and securities together. The largest stoc* mar*et in the United $tates, by mar*et cap is the @e7 <or* $toc* &'change, @<$&, 7hile in 6anada, it is the Toronto $toc* &'change. Major &uropean e'amples of stoc* e'changes include the )ondon $toc* &'change, Paris Bourse, and the Keutsche BNrse. sian e'amples include the To*yo $toc* &'change, the ;ong %ong $toc* merica,

&'change, the $hanghai $toc* &'change, and the Bombay $toc* &'change. In )atin there are such e'changes as the BM9> Bovespa and the BMO.

Contents
o o o 3 Trading 0 Mar*et participants ( ;istory . Importance of stoc* mar*et ..3 >unction and purpose ..0 +elation of the stoc* mar*et to the modern financial system ..( The stoc* mar*et, individual investors, and financial ris*

T( "in!
Participants in the stoc* mar*et range from small individual stoc* investors to large hedge fund traders, 7ho can be based any7here. Their orders usually end up 7ith a professional at a stoc* e'change, 7ho e'ecutes the order. $ome e'changes are physical locations 7here transactions are carried out on a trading floor, by a method *no7n as open outcry. This type of auction is used in stoc* e'changes and commodity e'changes 7here traders may enter HverbalH bids and offers simultaneously. The other type of stoc* e'change is a virtual *ind, composed of a net7or* of computers 7here trades are made electronically via traders.
ctual trades are based on an auction mar*et model 7here a potential buyer bids a specific price for a stoc* and a potential seller asks a specific price for the stoc*. !Buying or selling at market means you 7ill accept any as* price or bid price for the stoc*, respectively." =hen the bid and

as* prices match, a sale ta*es place, on a first,come,first,served basis if there are multiple bidders or as*ers at a given price.
The purpose of a stoc* e'change is to facilitate the e'change of securities bet7een buyers and sellers, thus providing a mar*etplace !virtual or real". The e'changes

provide real,time trading information on the listed securities, facilitating price discovery. The @e7 <or* $toc* &'change is a physical e'change, also referred to as a listed

e'change M only stoc*s listed 7ith the e'change may be traded. Grders enter by 7ay of e'change members and flo7 do7n to a floor bro*er, 7ho goes to the floor trading post specialist for that stoc* to trade the order. The specialist?s job is to match buy and sell orders using open outcry. If a spread e'ists, no trade immediately ta*es place,,in this case the specialist should use his8her o7n resources !money or stoc*" to close the difference after his8her judged time. Gnce a trade has been made the details are reported on the HtapeH and sent bac* to the bro*erage firm, 7hich then notifies the investor 7ho placed the order. lthough there is a significant amount of human contact in this process, computers

play an important role, especially for so,called Hprogram tradingH. The @ $K P is a virtual listed e'change, 7here all of the trading is done over a computer net7or*. The process is similar to the @e7 <or* $toc* &'change. ;o7ever, buyers and sellers are electronically matched. Gne or more @ $K P mar*et ma*ers 7ill al7ays

provide a bid and as* price at 7hich they 7ill al7ays purchase or sell ?their? stoc*.
The Paris Bourse, no7 part of &urone't, is an order,driven, electronic stoc* e'change. It 7as automated in the late 3-DBs. Prior to the 3-DBs, it consisted of an open outcry e'change. $toc*bro*ers met on the trading floor or the Palais Brongniart. In 3-D1, the system 7as introduced, and the order matching process 7as fully automated. 6 T$ trading

>rom time to time, active trading !especially in large bloc*s of securities" have moved a7ay from the ?active? e'changes. $ecurities firms, led by UB$ I, Ioldman $achs Iroup Inc. and

6redit $uisse Iroup, already steer 30 percent of U.$. security trades a7ay from the e'changes to their internal systems. That share probably 7ill increase to 3D percent by 0B3B as more investment ban*s bypass the @<$& and @ $K P and pair buyers and sellers of securities

themselves, according to data compiled by Boston,based bro*erage,industry consultant.

ite Iroup ))6, a

@o7 that computers have eliminated the need for trading floors li*e the Big Board?s, the balance of po7er in e:uity mar*ets is shifting. By bringing more orders in,house, 7here clients can move big bloc*s of stoc* anonymously, bro*ers pay the e'changes less in fees and capture a bigger share of the C33 billion a year that institutional investors pay in trading commissions as 7ell as the surplus of the century had ta*en place.

M (9et : (ti#i: nts

fe7 decades ago, 7orld7ide, buyers and sellers 7ere individual investors, such as 7ealthy businessmen, 7ith long family histories !and emotional ties" to particular corporations. Gver time, mar*ets have become more HinstitutionaliAedHL buyers and sellers are largely institutions !e.g., pension funds, insurance companies, mutual funds, inde' funds, e'change,traded funds, hedge funds, investor groups, ban*s and various other financial institutions". The rise of the institutional investor has brought 7ith it some improvements in mar*et operations. Thus, the government 7as responsible for Hfi'edH !and e'orbitant" fees being mar*edly reduced for the ?small? investor, but only after the large institutions had managed to brea* the bro*ers? solid front on fees. !They then 7ent to ?negotiated? fees, but only for large institutions.

;o7ever, corporate governance !at least in the =est" has been very much adversely affected by the rise of !largely ?absentee?" institutional ?o7ners?.

-isto(&
&stablished in 3D/2, the Bombay $toc* &'change is sia?s first stoc* e'change.

In 30th century

>rance the courratiers de change 7ere concerned 7ith managing and

regulating the debts of agricultural communities on behalf of the ban*s. Because these men also traded 7ith debts, they could be called the first bro*ers. common misbelief is that in late

3(th century Bruges commodity traders gathered inside the house of a man called Van der Beurze, and in 3(B- they became the HBrugse BeurseH, institutionaliAing 7hat had been, until then, an informal meeting, but actually, the family Oan der BeurAe had a building in 7here those gatherings occurredL the Oan der BeurAe had nt7erp

nt7erp, as most of the merchants

of that period, as their primary place for trading. The idea :uic*ly spread around >landers and neighboring counties and HBeurAenH soon opened in Ihent and msterdam.

In the middle of the 3(th century, Oenetian ban*ers began to trade in government securities. In 3(23 the Oenetian government outla7ed spreading rumors intended to lo7er the price of government funds. Ban*ers in Pisa, Oerona, Ienoa and >lorence also began trading in

government securities during the 3.th century. This 7as only possible because these 7ere independent city states not ruled by a du*e but a council of influential citiAens. The Kutch later started joint stoc* companies, 7hich let shareholders invest in business ventures and get a share of their profits , or losses. In 31B0, the Kutch &ast India 6ompany issued the first share on the msterdam $toc* &'change. It 7as the first company to issue stoc*s and bonds.

The

msterdam $toc* &'change !or msterdam Beurs" is also said to have been the first

stoc* e'change to introduce continuous trade in the early 3/th century. The Kutch Hpioneered short selling, option trading, debt,e:uity s7aps, merchant ban*ing, unit

trusts and other speculative instruments, much as 7e *no7 themH There are no7 stoc* mar*ets in virtually every developed and most developing economies, 7ith the 7orld?s biggest mar*ets being in the United $tates, United %ingdom, Japan, India, 6hina,

6anada, Iermany, >rance, $outh %orea and the @etherlands.

IMPORTANCE O, STOCK MARKET

,un#tion n" :u(:ose

The main trading room of the To*yo $toc* &'change, 7here trading is currently completed through computers.
The sto#9 m (9et is one of the most important sources for companies to raise money. This allo7s businesses to be publicly traded, or raise additional capital for e'pansion by selling shares of o7nership of the company in a public mar*et. The li:uidity that an e'change provides affords investors the ability to :uic*ly and easily sell securities. This is an attractive feature of investing in stoc*s, compared to other less li:uid investments such as real estate. ;istory has sho7n that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. n

economy 7here the stoc* mar*et is on the rise is considered to be an up,and,coming economy. In fact, the stoc* mar*et is often considered the primary indicator of a country?s economic strength and development. +ising share prices, for instance, tend to be associated 7ith increased business investment and vice versa. $hare prices also affect the 7ealth of households and their consumption. Therefore, central ban*s tend to *eep an eye on the control and behavior of the stoc* mar*et and, in general, on the smooth operation of financial system functions. >inancial stability is the raison d?Qtre of central ban*s. &'changes also act as the clearinghouse for each transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a security. This eliminates the ris* to an individual buyer or seller that the counterparty could default on the transaction.
The smooth functioning of all these activities facilitates economic gro7th in that lo7er costs and enterprise ris*s promote the production of goods and services as 7ell as employment. In this 7ay the financial system contributes to increased prosperity. n important aspect of modern financial

mar*ets, ho7ever, including the stoc* mar*ets, is absolute discretion. >or e'ample, merican stoc* mar*ets see more unrestrained acceptance of any firm than in smaller mar*ets. >or e'ample, 6hinese firms that possess little or no perceived value to merican society profit merican ban*ers

on =all $treet, as they reap large commissions from the placement, as 7ell as the 6hinese company 7hich yields funds to invest in 6hina. ;o7ever, these companies accrue

no intrinsic value to the long,term stability of the merican economy, but rather only short,term profits to merican business men and the 6hineseL although, 7hen the foreign company has a presence in the ne7 mar*et, this can benefit the mar*et?s citiAens. 6onversely, there are very fe7 large foreign corporations listed on the Toronto $toc* &'change T$R, 6anada?s largest stoc* e'change. This discretion has insulated 6anada to some degree to 7orld7ide financial conditions. In order for the stoc* mar*ets to truly facilitate economic gro7th via lo7er costs and better employment, great attention must be given to the foreign participants being allo7ed in.

Re% tion of t$e sto#9 m (9et to t$e mo"e(n fin n#i % s&stem
The financial systems in most 7estern countries has undergone a remar*able transformation. Gne feature of this development is disintermediation. portion of the funds involved in saving and financing, flo7s directly to the financial mar*ets instead of being routed via the traditional ban* lending and deposit operations. The general public?s heightened interest in investing in the stoc* mar*et, either directly or through mutual funds, has been an important component of this process.
$tatistics sho7 that in recent decades shares have made up an increasingly large proportion of households? financial assets in many countries. In the 3-/Bs, in $7eden, deposit accounts and other very li:uid assets 7ith little ris* made up almost 1B percent of households? financial 7ealth, compared to less than 0B percent in the 0BBBs. The major part of this adjustment in financial portfolios has gone directly to shares but a good deal no7 ta*es the form of various *inds of institutional investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds, insurance investment of premiums, etc.

The trend to7ards forms of saving 7ith a higher ris* has been accentuated by ne7 rules for most funds and insurance, permitting a higher proportion of shares to bonds. $imilar tendencies are to be found in other industrialiAed countries. In all developed economic systems, such as the &uropean Union, the United $tates, Japan and other developed nations, the trend has been the same# saving has moved a7ay from traditional !government insured" ban* deposits to more ris*y securities of one sort or another.

T$e sto#9 m (9et' in"i=i"u % in=esto(s' n" fin n#i % (is9

+is*ier long,term saving re:uires that an individual possess the ability to manage the associated increased ris*s. $toc* prices fluctuate 7idely, in mar*ed contrast to the stability of !government insured" ban* deposits or bonds. This is something that could affect not only the individual investor or household, but also the economy on a large scale. The follo7ing deals 7ith some of the ris*s of the financial sector in general and the stoc* mar*et in particular. This is certainly more important no7 that so many ne7comers have entered the stoc* mar*et, or have ac:uired other ?ris*y? investments !such as ?investment? property, i.e., real estate and collectables".

With each passing year, the noise level in the stock market rises. Television commentators, financial writers, analysts, and market strategists are all overtaking each other to get investors' attention. t the same time, individual investors, immersed in chat rooms and

message boards, are e!changing "uestionable and often misleading tips. #et, despite all this available information, investors find it increasingly difficult to profit. $tock prices skyrocket with little reason, then plummet %ust as "uickly, and people who have turned to investing for their children's education and their own retirement become frightened. $ometimes there appears to be no rhyme or reason to the market, only folly.
This is a :uote from the preface to a published biography about the long,term value,oriented stoc* investor =arren Buffett.E-F Buffett began his career 7ith C3BB, and C3BB,BBB from seven limited partners consisting of Buffett?s family and friends. Gver the years he has built himself a multi,billion,dollar fortune. The :uote illustrates some of 7hat has been happening in the stoc* mar*et during the end of the 0Bth century and the beginning of the 03st century.

P(im (& M (9et

, also called the ne7 issue mar*et, is the mar*et for issuing ne7 securities. Many companies, especially small and medium scale, enter the primary mar*et to raise money from the public to e'pand their businesses. They sell their securities to the public through an initial public offering. The securities can be directly bought from the shareholders, 7hich is not the case for the secondary mar*et. The primary mar*et is a mar*et for ne7 capitals that 7ill be traded over a longer period. In the primary mar*et, securities are issued on an e'change basis. The under7riters, that is, the investment ban*s, play an important role in this mar*et# they set the initial price range for a particular share and then supervise the selling of that share.

Investors can obtain ne7s of upcoming shares only on the primary mar*et. The issuing firm collects money, 7hich is then used to finance its operations or e'pand business, by selling its shares. Before selling a security on the primary mar*et, the firm must fulfill all the re:uirements

regarding the e'change.

fter trading in the primary mar*et the security 7ill then enter the secondary mar*et, 7here numerous trades happen every day. The primary mar*et accelerates the process of capital formation in a country?s economy.
The primary mar*et categorically e'cludes several other ne7 long,term finance sources, such as loans from financial institutions. Many companies have entered the primary mar*et to earn profit by converting its capital, 7hich is basically a private capital, into a public one, releasing securities to the public. This phenomena is *no7n as Hpublic issueH or Hgoing public.H

There are three methods though 7hich securities can be issued on the primary mar*et# rights issue, Initial Public Gffer !IPG", and preferential issue. ne7 offering is placed on the primary mar*et through an initial public offer. company?s

,un#tionin! of P(im (& M (9et

P(im (& Mo(t! !e M (9et

P(o8%ems In=estment M (9et m (9et

Of In

In"i n P(im (& Mone&

P(im (& T (!et M (9et

T( ns #tion Costs In P(im (&

P(im (& M (9et P(im (&

M (9et

PL in P(im (& M (9et

Re=i= % Of In"i n P(im (&

Inte(n tion %

P(im (& M (9et Asso#i tion

M (9et

IPO P(im (& M (9et

P(im (& C :it %

:(im (& Se#u(ities M (9et

M (9et

Se#on" (& M (9et

is the mar*et 7here, unli*e the primary mar*et, an investor can buy a security directly from another investor in lieu of the issuer. It is also referred as Hafter mar*etH. The securities initially are issued in the primary mar*et, and then they enter into the secondary mar*et.
ll the securities are first created in the primary mar*et and then, they enter into the secondary mar*et. In the @e7 <or* $toc* &'change, all the stoc*s belong to the secondary mar*et.

In other 7ords, secondary mar*et

is a place 7here any type of used goods is available. In the secondary mar*et shares are maneuvered from one investor to other, that is, one investor buys an asset from another investor instead of an issuing corporation. $o, the secondary mar*et should be li:uid.

E6 m:%e of Se#on" (& m (9et; In the @e7 <or* $toc* &'change, in the United $tates of belong to the secondary mar*et . merica, all the securities

Im:o(t n#e of Se#on" (& M (9et;

Se#on" (& M (9et has an important role to play behind the developments of an efficient capital mar*et. $econdary mar*et connects investors? favoritism for li:uidity 7ith the capital users? 7ish of using their capital for a longer period. >or e'ample, in a traditional partnership, a partner can not access the other partner?s investment but only his or her investment in that partnership, even on an emergency basis. Then if he or she may brea*s the o7nership of e:uity into parts and sell his or her respective proportion to another investor. This *ind of trading is facilitated only by the secondary mar*et

ROLE O, CAPITAL MARKET

The primary role of the capital mar*et is to raise long,term funds for governments, ban*s, and corporations 7hile providing a platform for the trading of securities.

This fundraising is regulated by the performance of the stoc* and bond mar*ets 7ithin the capital mar*et. The member organiAations of the capital mar*et may issue stoc*s and bonds in order to raise funds. Investors can then invest in the capital mar*et by purchasing those stoc*s and bonds.
The capital mar*et, ho7ever, is not 7ithout ris*. It is important for investors to understand mar*et trends before fully investing in the capital mar*et. To that end, there are various mar*et indices available to investors that reflect the present performance of the mar*et.

Re!u% tion of t$e C :it % M (9et

&very capital mar*et in the 7orld is monitored by financial regulators and their respective governance organiAation. The purpose of such regulation is to protect investors from fraud and deception. >inancial regulatory bodies are also charged 7ith minimiAing financial losses, issuing licenses to financial service providers, and enforcing applicable la7s.

T$e C :it % M (9et@s Inf%uen#e on Inte(n tion % T( "e 6apital mar*et investment is no longer confined to the boundaries of a single nation. TodaySs corporations and individuals are able, under some regulation, to invest in the capital mar*et of any country in the 7orld. Investment in foreign capital mar*ets has caused substantial enhancement to the business of international trade. T$e P(im (& n" Se#on" (& M (9ets
The capital mar*et is also dependent on t7o sub,mar*ets T the primary mar*et and the secondary mar*et. The primary mar*et deals 7ith ne7ly issued securities and is responsible for generating ne7 long,term capital. The secondary mar*et handles the trading of previously,issued securities, and must remain highly li:uid in nature because most of the securities are sold by investors.

capital mar*et 7ith high li:uidity and high transparency is predicated upon a secondary mar*et 7ith the same :ualities.

ROLE O, CAPITAL MARKET IN IN+IA#

IndiaSs gro7th story has important implications for the capital mar*et, 7hich has gro7n sharply 7ith respect to several parameters M amounts raised number of stoc* e'changes and other intermediaries, listed stoc*s, mar*et capitaliAation, trading volumes and turnover, mar*et instruments, investor population, issuer and intermediary profiles.
The capital mar*et consists primarily of the debt and e:uity mar*ets. ;istorically, it contributed significantly to mobiliAing funds to meet public and private companiesS financing re:uirements. The introduction of e'change,traded derivative instruments such as options and futures has enabled investors to better hedge their positions and reduce ris*s.
IndiaSs debt and e:uity mar*ets rose from /2 per cent in 3--2 to 3(B per cent of IKP in 0BB2. But the gro7th relative to the U$, Malaysia and $outh %orea remains lo7 and largely s*e7ed, indicating immense latent potential. IndiaSs debt mar*ets comprise government bonds and the corporate bond mar*et !comprising P$Us, corporates, financial institutions and ban*s".

India compares 7ell 7ith other emerging economies in terms of sophisticated mar*et design of e:uity spot and derivatives mar*et, 7idespread retail participation and resilient li:uidity.

$&BISs measures such as submission of :uarterly compliance reports, and company valuation on the lines of the $arbanes,G'ley ct have enhanced corporate governance. But enforcement continues to be a problem because of limited trained staff and companies not being subjected to substantial fines or legal sanctions.
Iiven the booming economy, large s*illed labour force, reliable business community, continued reforms and greater global integration vindicated by the investment,grade ratings of MoodySs

and >itch, the net cumulative portfolio flo7s from 0BB(,B1 !bonds and e:uities" amounted to C(2 billion. The number of foreign institutional investors registered 7ith $&BI rose from none in 3--0,-( to 20D in 0BBB,B3, to about 3,BBB in 0BB1,B/. IndiaSs stoc* mar*et rose five,fold since mid,0BB( and outperformed 7orld indices 7ith returns far outstripping other emerging mar*ets, such as Me'ico !20 per cent", BraAil !.( per cent" or I66 economies such as %u7ait !01 per cent" in ><,B1.
In 0BB1, Indian companies raised more than C1 billion on the B$&, @$& and other regional stoc* e'changes. Buoyed by internal economic factors and foreign capital flo7s, Indian mar*ets are globally competitive, even in terms of pricing, efficiency and li:uidity.

*S su8 :(ime #(isis# The financial crisis facing the =all $treet is the 7orst since the Ireat Kepression and 7ill have a major impact on the U$ and global economy. The ongoing global financial crisis 7ill have a UdominoS effect and spill over all aspects of the economy. Kue to the =estern 7orldSs messianic faith in the mar*et forces and deregulation, the mar*et friendly governments have no choice but to step in.
The top five investment ban*s in the U$ have ceased to e'ist in their previous forms. Bears $tearns 7as ta*en over some time ago. >annie Mae and >reddie Mac are nationalised to prevent their collapse. >annie and >reddie together under7rite half of the home loans in the United $tates, and the sum involved is of C ( trillionMabout double the entire annual output of the British economy. This is the biggest rescue operation since the credit crunch began. )ehman Brothers, an investment ban* 7ith a 32D year,old history, 7as declared ban*ruptL Merrill )ynch, another =all $treet icon, chose to pre,empt a similar fate by deciding to sell to the Ban* of mericaL and Ioldman $achs and Morgan $tanley have decided to transform II, the 7orldSs largest insurance company, has

themselves into ordinary deposit ban*s.

survived through the injection of funds 7orth C D2 billion from the U$ Iovernment.

T$e ?uestion (ises; A$& $ s t$is $ ::ene"B

Besides the cyclical crisis of capitalism, there are some recent factors 7hich have contributed to7ards this crisis. Under the so,called 4innovative5 approach, financial institutions systematically underestimated ris*s during the boom in property prices, 7hich ma*es such boom more prolonged. This relates to the shortsightedness of speculators and their unrestrained greed, and they, during the asset price boom, believed that it 7ould stay forever. This resulted in *eeping the ris* aspects at a minimum and thus resorting to more and more ris* ta*ing financial activities. )oans 7ere made on the basis of collateral 7hose value 7as inflated by a bubble. nd the collateral is no7 7orth less than the loan. 6redit

7as available up to full value of the property 7hich 7as assessed at inflated mar*et prices. 6redits 7ere given in anticipation that rising property prices 7ill continue. Under looming recession and uncertainty, to pay bac* their mortgage many of those 7ho engaged in such an e'ercise are forced to sell their houses, at a time 7hen the ban*s are reluctant to lend and buyers 7ould li*e to 7ait in the hope that property prices 7ill further come do7n. these factors 7ould lead to a further decline in property prices. ll

Effe#t of t$e su8:(ime #(isis on In"i ; IlobaliAation has ensured that the Indian economy and financial mar*ets cannot stay insulated from the present financial crisis in the developed economies. In the light of the fact that the Indian economy is lin*ed to global mar*ets through a full float in current account ! trade and services" and partial float in capital account !debt and e:uity", 7e need to analyAe the impact based on three critical factors# vailability of global li:uidityL demand for India investment and cost thereof and decreased consumer demand affecting Indian e'ports.
The concerted intervention by central ban*s of developed countries in injecting li:uidity is e'pected to reduce the un7inding of India investments held by foreign entities, but fresh

investment

flo7s

into

India

are

in

doubt.

The impact of this 7ill be three,fold# The element of IKP gro7th driven by off,shore flo7s !along 7ith s*ills and technology" 7ill be dilutedL correction in the asset prices 7hich 7ere hitherto pushed by foreign investors and demand for domestic li:uidity putting pressure on interest rates . =hile the global financial system ta*es time to 4nurse its 7ounds5 leading to lo7 demand for investments in emerging mar*ets, the impact 7ill be on the cost and related ris* premium. The impact 7ill be felt both in the trade and capital account.
Indian companies 7hich had access to cheap foreign currency funds for financing their import and e'port 7ill be the 7orst hit. lso, foreign funds !through debt and e:uity" 7ill

be available at huge premium and 7ould be limited to blue,chip companies.

The impact of 7hich, again, 7ill be three,fold# +educed capacity e'pansion leading to supply side pressureL increased interest e'penses to affect corporate profitability and increased demand for domestic li:uidity putting pressure on the interest rates.
6onsumer demand in developed economies is certain to be hurt by the present crisis, leading to lo7er demand for Indian goods and services, thus affecting the Indian e'ports.
The impact of 7hich, once again, 7ill be three,fold# &'port,oriented units 7ill be the 7orst hit impacting employmentL reduced e'ports 7ill further 7iden the trade gap to put pressure on rupee e'change rate and intervention leading to suc*ing out li:uidity and pressure on interest rates.

T$e im: #t on t$e fin n#i % m (9ets Ai%% 8e t$e fo%%oAin!# &:uity mar*et 7ill continue to remain in bearish mood 7ith reduced off,shore flo7s, limited domestic appetite due to li:uidity pressure and pressure on corporate earningsL 7hile the inflation 7ould stay under control, increased demand for domestic li:uidity 7ill push interest rates higher and 7e are li*ely to 7itness gradual rupee depreciation and depleted currency reserves. Gverall, 7hile +BI 7ould

inject li:uidity through 6++8$)+ cuts, maintaining gro7th beyond /J 7ill be a struggle.
The ban*ing sector 7ill have the least impact as high interest rates, increased demand for rupee loans and reduced statutory reserves 7ill lead to improved @IM 7hile, on the other hand, other income from cross,border business flo7s and distribution of investment products 7ill ta*e a hit.

Ban*s 7ith capabilities to generate lo7 cost 6 $ and Aero cost float funds 7ill gain the most as revenues from financial intermediation 7ill drive the ban*sS profitability. Iiven the dependence on foreign funds and off,shore consumer demand for the India gro7th story, India cannot 7ish a7ay from the negative impact of the present global financial crisis but should :uic*ly focus on alternative remedial measures to limit damage and loo* in,7ards to sustain gro7thV Ro%e of # :it % m (9et "u(in! t$e :(esent #(isis; In addition to resource allocation, capital mar*ets also provided a medium for ris* management by allo7ing the diversification of ris* in the economy. The 7ell, functioning capital mar*et improved information :uality as it played a major role in encouraging the adoption of stronger corporate governance principles, thus supporting a trading environment, 7hich is founded on integrity. li:uid mar*ets ma*e it possible to obtain financing for capital,intensive projects 7ith long gestation periods..
>or a long time, the Indian mar*et 7as considered too small to 7arrant much attention. ;o7ever, this vie7 has changed rapidly as vast amounts of international investment have poured into our mar*ets over the last decade. The Indian mar*et is no longer vie7ed as a static universe but as a constantly evolving mar*et providing attractive opportunities to the global investing community. @o7 during the present financial crisis, 7e sa7 ho7 capital mar*et stood still as the symbol of better ris* management practices adopted by the Indians. Though 7e observed a huge fall in the

sense' and other stoc* mar*et indicators but that 7as all due to lo7 confidence among the investors. Because balance sheet of most of the Indian companies listed in the sense' 7ere reflecting profit even then people *ept on 7ithdra7ing money. =hile there 7as a panic in the capital mar*et due to 7ithdra7al by the >IIs, 7e sa7 Indian institutional investors li*e insurance and mutual funds coming for the rescue under $&BI guidelines so that the confidence of the investors doesnSt go lo7.
$&BI also came up 7ith various norms including more liberal policies regarding participatory notes, restricting the e'it from close ended mutual funds etc. to boost the investment.

=hile tal*ing about currency crisis, the rupee *ept on depreciating against the dollar mainly due to the 7ithdra7als by >IIs. $o , the capital mar*et tried to attract >IIs once again. $&BI came up 7ith many revolutionary reforms to attract the foreign investors so that the depreciation of rupee could be put to hault.

,ACTORS A,,ECTIN) CAPITAL MARKET IN IN+IA

The capital mar*et is affected by a range of factors . $ome of the factors 7hich influence capital mar*et are as follo7s#, A)Pe(fo(m n#e of "omesti# #om: nies;The performance of the companies or rather corporate earnings is one of the factors 7hich has direct impact or effect on capital mar*et in a country. =ea* corporate earnings indicate that the demand for goods and services in the economy is less due to slo7 gro7th in per capita income of people . Because of slo7 gro7th in demand there is slo7 gro7th in employment 7hich means slo7 gro7th in demand in the near future. Thus 7ea* corporate earnings indicate average or not so good prospects for the economy as a 7hole in the near term. In such a scenario the investors ! both domestic as 7ell as foreign " 7ould be 7ary to invest in the capital mar*et and thus there is bear mar*et li*e situation. The opposite case of it 7ould be robust corporate earnings and itSs positive impact on the capital mar*et.
The corporate earnings for the pril T June :uarter for the current fiscal has been good. The companies li*e T6$, Infosys,Maruti $uAu*i, Bharti irtel, 66, IT6, =ipro,;K>6,Binani

cement, IK& , Marico 6anara Ban*, Piramal ;ealth, India cements , Ultra Tech, )9T, 6oca, 6ola, <es Ban*, Kr. +eddySs )aboratories, Griental Ban* of 6ommerce, +anba'y, >ortis, $hree 6ement ,etc have registered gro7th in net profit compared to the corresponding :uarter a year ago. Thus 7e see companies from Infrastructure sector, >inancial $ervices, Pharmaceutical sector, IT $ector, utomobile sector, etc. doing 7ell . This across the sector gro7th indicates

that the Indian economy is on the path of recovery 7hich has been positively reflected in the stoc* mar*et! rise in sense' 9 nifty" in the last t7o 7ee*s. !July 3(,July 0.".

/) En=i(onment % , #to(s ;&nvironmental >actor in IndiaSs conte't primarily means, Monsoon . In India around 1B J of agricultural production is dependent on monsoon. Thus there is heavy dependence on monsoon. The major chun* of agricultural production comes from the states of Punjab , ;aryana 9 Uttar Pradesh. Thus deficient or delayed monsoon in this part of the country 7ould directly affect the agricultural output in the country. part from monsoon other natural calamities li*e >loods, tsunami,

drought, earth:ua*e, etc. also have an impact on the capital mar*et of a country.

The Indian Met Kepartment !IMK" on 0.th June stated that India 7ould receive only -( J rainfall of )ong Period verage !)P ". This piece of ne7s directly had an impact on Indian capital mar*et 7ith B$& $ense' falling by B.2 J on the 02 th June . The major losers 7ere automa*ers and consumer goods firms since the belo7 normal monsoon forecast triggered concerns that demand in the crucial rural heartland 7ould ta*e a hit. This is because a deficient monsoon could seriously s:ueeAe rural incomes, reduce the demand for everything from motorbi*es to soaps and 7orsen a slo7ing economy. C) M #(o E#onomi# Num8e(s ;The macro economic numbers also influence the capital mar*et. It includes Inde' of Industrial Production !IIP" 7hich is released every month, annual Inflation number indicated by =holesale Price Inde' !=PI" 7hich is released every 7ee*, &'port T Import numbers 7hich are declared every month, 6ore Industries gro7th rate ! It includes $i' 6ore infrastructure industries T 6oal, 6rude oil, refining, po7er, cement and finished steel" 7hich comes out every month, etc. This macro Teconomic indicators indicate the state of the economy and the direction in 7hich the economy is headed and therefore impacts the capital mar*et in India. case in the point 7as declaration of core industries gro7th figure. The si' 6ore Infrastructure

Industries T 6oal, 6rude oil, refining, finished steel, po7er 9 cement Tgre7 1.2J in June , the figure came on the 0( rd of July had and a positive impact on the capital mar*et 7ith the $ense' and nifty risingby (DD points 9 302 points respectively. +) )%o8 % Cues ;In this 7orld of globaliAation various economies are interdependent and interconnected. n event in one part of the 7orld is bound to affect other parts of the 7orld , ho7ever the magnitude and intensity of impact 7ould vary. Thus capital mar*et in India is also affected by developments in other parts of the 7orld i.e. U.$. , &urope, Japan , etc.
Ilobal cues includes corporate earnings of M@6Ss, consumer confidence inde' in developed countries, jobless claims in developed countries, global gro7th outloo* given by various

agencies li*e IM>, economic gro7th of major economies, price of crude Toil, credit rating of various economies given by MoodySs, $ 9 P, etc. n obvious e'ample at this point in time 7ould be that of subprime crisis 9 recession. +ecession started in U.$. and some parts of the &urope in early 0BBD .$ince then it has impacted all the countries of the 7orld, developed, developing, less, developed and even emerging economies. E) Po%iti# % st 8i%it& n" !o=e(nment :o%i#ies;>or any economy to achieve and sustain gro7th it has to have political stability and pro, gro7th government policies. This is because 7hen there is political stability there is stability and consistency in governmentSs attitude 7hich is communicated through various government policies. The vice, versa is the case 7hen there is no political stability .$o capital mar*et also reacts to the nature of government, attitude of government, and various policies of the government. The above statement can be substantiated by the fact the 7hen the mandate came in UP governmentSs favor ! =ithout the baggage of left party" on May 31 0BB-, the stoc* mar*ets on Monday , 3Dth May had a bullish rally 7ith $ense' closing DBB point higher over the previous daySs close. The reason 7as political stability. baggage of left party government can go ahead 7ith reforms. ,) )(oAt$ :(os:e#tus of n e#onom&;=hen the national income of the country increases and per capita income of people increases it

lso 7ithout the

is said that the economy is gro7ing. ;igher income also means higher e'penditure and higher savings. This augurs 7ell for the economy as higher e'penditure means higher demand and higher savings means higher investment. Thus 7hen an economy is gro7ing at a good pace capital mar*et of the country attracts more money from investors, both from 7ithin and outside the country and vice ,versa. $o 7e can say that gro7th prospects of an economy do have an impact on capital mar*ets.

)) In=esto( Sentiment n" (is9 ::etite ;nother factor 7hich influences capital mar*et is investor sentiment and their ris* appetite

.&ven if the investors have the money to invest but if they are not confident about the returns from their investment , they may stay a7ay from investment for some time. t the same time if the investors have lo7 ris* appetite , 7hich they 7ere having in global and Indian capital mar*et some four to five months bac* due to global financial meltdo7n and recessionary situation in U.$. 9 some parts of &urope , they may stay a7ay from investment and 7ait for the right time to come.

IN+IAN STOCK MARKET AN OCERCIE5

E=o%ution Indian $toc* Mar*ets are one of the oldest in sia. Its history dates bac* to nearly 0BB

years ago. The earliest records of security dealings in India are meagre and obscure. The &ast India 6ompany 7as the dominant institution in those days and business in its loan securities used to be transacted to7ards the close of the eighteenth century. By 3D(B?s business on corporate stoc*s and shares in Ban* and 6otton presses too* place in Bombay. Though the trading list 7as broader in 3D(-, there 7ere only half a doAen bro*ers recogniAed by ban*s and merchants during 3D.B and 3D2B.
The 3D2B?s 7itnessed a rapid development of commercial enterprise and bro*erage business attracted many men into the field and by 3D1B the number of bro*ers increased into 1B. In 3D1B,13 the merican 6ivil =ar bro*e out and cotton supply from United $tates of &urope 7as stoppedL thus, the ?$hare Mania? in India begun. The number of bro*ers increased to about 0BB to 02B. ;o7ever, at the end of the merican 6ivil =ar, in 3D12, a disastrous slump began !for

e'ample, Ban* of Bombay $hare 7hich had touched +s 0D2B could only be sold at +s. D/".

t the end of the merican 6ivil =ar, the bro*ers 7ho thrived out of 6ivil =ar in 3D/., found a place in a street !no7 appropriately called as Kalal $treet" 7here they 7ould conveniently assemble and transact business. In 3DD/, they formally established in Bombay, the H@ative $hare and $toc* Bro*ers? ssociationH !7hich is alternatively *no7n as H The $toc* &'change

H". In 3D-2, the $toc* &'change ac:uired a premise in the same street and it 7as inaugurated in 3D--. Thus, the $toc* &'change at Bombay 7as consolidated.

Ot$e( %e "in! #ities in sto#9 m (9et o:e( tions

hmedabad gained importance ne't to Bombay 7ith respect to cotton te'tile industry. fter 3DDB, many mills originated from hmedabad and rapidly forged ahead. s ne7 mills 7ere

floated, the need for a $toc* &'change at

hmedabad 7as realiAed and in 3D-.

the bro*ers formed HThe hmedabad $hare and $toc* Bro*ers? ssociationH.
=hat the cotton te'tile industry 7as to Bombay and hmedabad, the jute industry 7as to 6alcutta. lso tea and coal industries 7ere the other major industrial groups in 6alcutta. fter the $hare

Mania in 3D13,12, in the 3D/B?s there 7as a sharp boom in jute shares, 7hich 7as follo7ed by a boom in tea shares in the 3DDB?s and 3D-B?sL and a coal boom bet7een 3-B. and 3-BD. Gn June 3-BD, some leading bro*ers formed HThe 6alcutta $toc* &'change ssociationH. In the beginning of the t7entieth century, the industrial revolution 7as on the 7ay in India 7ith the $7adeshi MovementL and 7ith the inauguration of the Tata Iron and $teel 6ompany )imited in 3-B/, an important stage in industrial advancement under Indian enterprise 7as reached.

Indian cotton and jute te'tiles, steel, sugar, paper and flour mills and all companies generally enjoyed phenomenal prosperity, due to the >irst =orld =ar. In 3-0B, the then demure city of Madras had the maiden thrill of a stoc* e'change functioning in its midst, under the name and style of HThe Madras $toc* &'changeH 7ith 3BB members. ;o7ever, 7hen boom faded, the number of members stood reduced from 3BB to (, by 3-0(, and so it 7ent out of e'istence.
In 3-(2, the stoc* mar*et activity improved, especially in $outh India 7here there 7as a rapid increase in the number of te'tile mills and many plantation companies 7ere floated. In 3-(/, a stoc* e'change 7as once again organiAed in Madras , Madras $toc* &'change !Pvt" )imited. !In 3-2/ the name 7as changed to Madras $toc* &'change )imited". ssociation

)ahore $toc* &'change 7as formed in 3-(. and it had a brief life. It 7as merged 7ith the Punjab $toc* &'change )imited, 7hich 7as incorporated in 3-(1. In"i n Sto#9 E6#$ n!es - An *m8(e%% )(oAt$
The $econd =orld =ar bro*e out in 3-(-. It gave a sharp boom 7hich 7as follo7ed by a slump. But, in 3-.(, the situation changed radically, 7hen India 7as fully mobiliAed as a supply base.

Gn account of the restrictive controls on cotton, bullion, seeds and other commodities, those dealing in them found in the stoc* mar*et as the only outlet for their activities. They 7ere an'ious to join the trade and their number 7as s7elled by numerous others. Many ne7 associations 7ere constituted for the purpose and $toc* &'changes in all parts of the country 7ere floated. The Uttar Pradesh $toc* &'change )imited !3-.B", @agpur $toc* &'change )imited !3-.B" and ;yderabad $toc* &'change )imited !3-.." 7ere incorporated. In Kelhi t7o stoc* e'changes , Kelhi $toc* and $hare Bro*ers? ssociation )imited

and the Kelhi $toc*s and $hares &'change )imited , 7ere floated and later in June 3-./, amalgamated into the Kelhi $toc* &'change ssociation )imited. Post-in"e:en"en#e S#en (io Most of the e'changes suffered almost a total eclipse during depression. )ahore &'change 7as closed during partition of the country and later migrated to Kelhi and merged 7ith Kelhi $toc* &'change. Bangalore $toc* &'change )imited 7as registered in 3-2/ and recogniAed in 3-1(.
Most of the other e'changes languished till 3-2/ 7hen they applied to the 6entral Iovernment for recognition under the $ecurities 6ontracts !+egulation" Madras, ct, 3-21. Gnly Bombay, 6alcutta,

hmedabad, Kelhi, ;yderabad and Indore, the 7ell,established e'changes, 7ere

recogniAed under the ct. $ome of the members of the other ssociations 7ere re:uired to be admitted by the recogniAed stoc* e'changes on a concessional basis, but acting on the principle of unitary control, all these pseudo stoc* e'changes 7ere refused recognition by the Iovernment of India and they thereupon ceased to function.
Thus, during early si'ties there 7ere eight recogniAed stoc* e'changes in India !mentioned above". The number virtually remained unchanged, for nearly t7o decades. Kuring eighties, ho7ever, many stoc* e'changes 7ere established# 6ochin $toc* &'change !3-DB", Uttar Pradesh $toc* &'change ssociation )imited !at %anpur, 3-D0", and Pune $toc* &'change )imited

!3-D0", )udhiana $toc* &'change ssociation )imited !3-D(", Iauhati $toc* &'change )imited !3-D.", %anara $toc* &'change )imited !at Mangalore, 3-D2", Magadh $toc* &'change ssociation !at Patna, 3-D1", Jaipur $toc* &'change )imited !3-D-", Bhubanes7ar $toc* &'change ssociation )imited !3-D-", $aurashtra %utch $toc* &'change )imited !at +aj*ot,

3-D-", Oadodara $toc* &'change )imited !at Baroda, 3--B" and recently established e'changes , 6oimbatore and Meerut. Thus, at present, there are totally t7enty one recogniAed stoc* e'changes in India e'cluding the Gver The 6ounter &'change of India )imited !GT6&I" and the @ational $toc* &'change of India )imited !@$&I)". The Table given belo7 portrays the overall gro7th pattern of Indian stoc* mar*ets since independence. It is :uite evident from the Table that Indian stoc* mar*ets have not only gro7n just in number of e'changes, but also in number of listed companies and in capital of listed companies. The remar*able gro7th after 3-D2 can be clearly seen from the Table, and this 7as due to the favoring government policies to7ards security mar*et industry.

)(oAt$ P tte(n of t$e In"i n Sto#9 M (9et

$ l.@ o.

s on (3st 3-.1 3-13 3-/3 3-/2 3-DB

/ / D D 3.

3-D2 3--3 3--2 0B 00

Kecember 3 @o. of $toc* &'changes @o. of )isted 6os. @o. of $toc* ( Issues of )isted 6os. . 6apital of )isted 6os. !6r. +s." Mar*et value of 2 6apital of )isted 6os. !6r. +s." 6apital per 1 )isted 6os. !.80" !)a*h +s." Mar*et Oalue of / 6apital per )isted 6os. !)a*h +s." !280" ppreciated value (2D 3/B 3.D 301 3/B 01B (.. D of 6apital per )isted 6os. !)a* +s." DB( D1 3B/ 31/ 033 0-D 2D0 3//B 221. 0. 1( 33( 31D 3/2 00. 23. 1-( -/3 30-0 01/2 (0/( 1/2B 02(B0 33B0/- ./D303 0/B /2( 3D30 013. (-/( -/0( (0B.3 2-2D( 32B1 0333 0D(D (0(B (1-/ 13/. D-1/ 33/D. 3302 30B( 32-- 3220 0012 .(.. 100- D2-(

T( "in! P tte(n of t$e In"i n Sto#9 M (9et

Trading in Indian stoc* e'changes are limited to listed securities of public limited companies. They are broadly divided into t7o categories, namely, specified securities !for7ard list" and non,specified securities !cash list". &:uity shares of dividend paying, gro7th,oriented companies 7ith a paid,up capital of at least +s.2B million and a mar*et capitaliAation of at least +s.3BB million and having more than 0B,BBB shareholders are, normally, put in the specified group and the balance in non,specified group.
T7o types of transactions can be carried out on the Indian stoc* e'changes# !a" spot delivery transactions Hfor delivery and payment 7ithin the time or on the date stipulated 7hen entering into the contract 7hich shall not be more than 3. days follo7ing the date of the contractH # and

!b" for7ard transactions Hdelivery and payment can be e'tended by further period of 3. days each so that the overall period does not e'ceed -B days from the date of the contractH. The latter is permitted only in the case of specified shares. The bro*ers 7ho carry over the outstanding pay carry over charges !cantango or bac*7ardation" 7hich are usually determined by the rates of interest prevailing.
member bro*er in an Indian stoc* e'change can act as an agent, buy and sell securities for his clients on a commission basis and also can act as a trader or dealer as a principal, buy and sell securities on his o7n account and ris*, in contrast 7ith the practice prevailing on @e7 <or* and )ondon $toc* &'changes, 7here a member can act as a jobber or a bro*er only.

The nature of trading on Indian $toc* &'changes are that of age old conventional style of face,to,face trading 7ith bids and offers being made by open outcry. ;o7ever, there is a great amount of effort to moderniAe the Indian stoc* e'changes in the very recent times.

O=e( T$e Counte( E6#$ n!e of In"i (OTCEI)

The traditional trading mechanism prevailed in the Indian stoc* mar*ets gave 7ay to many functional inefficiencies, such as, absence of li:uidity, lac* of transparency, unduly long settlement periods and benami transactions, 7hich affected the small investors to a great e'tent. To provide improved services to investors, the country?s first ringless, scripless, electronic stoc* e'change , GT6&I , 7as created in 3--0 by country?s premier financial institutions , Unit Trust of India, Industrial 6redit and Investment 6orporation of India, Industrial Kevelopment Ban* of

India, $BI 6apital Mar*ets, Industrial >inance 6orporation of India, Ieneral Insurance 6orporation and its subsidiaries and 6anBan* >inancial $ervices. Trading at GT6&I is done over the centers spread across the country. $ecurities traded on the GT6&I are classified into# )isted $ecurities , The shares and debentures of the companies listed on the GT6 can be bought or sold at any GT6 counter all over the country and they should not be listed any7here else Permitted $ecurities , 6ertain shares and debentures listed on other e'changes and units of mutual funds are allo7ed to be traded Initiated debentures , ny e:uity holding at least one la*h debentures of a

particular scrip can offer them for trading on the GT6. GT6 has a uni:ue feature of trading compared to other traditional e'changes. That is, certificates of listed securities and initiated debentures are not traded at GT6. The original certificate 7ill be safely 7ith the custodian. But, a counter receipt is generated out at the counter 7hich substitutes the share certificate and is used for all transactions.
In the case of permitted securities, the system is similar to a traditional stoc* e'change. The difference is that the delivery and payment procedure 7ill be completed 7ithin 3. days.

6ompared to the traditional &'changes, GT6 &'change net7or* has the follo7ing advantages#

GT6&I has 7idely dispersed trading mechanism across the country 7hich provides greater li:uidity and lesser ris* of intermediary charges.

Ireater transparency and accuracy of prices is obtained due to the screen, based scripless trading.

$ince the e'act price of the transaction is sho7n on the computer screen, the investor gets to *no7 the e'act price at 7hich s8he is trading.

>aster settlement and transfer process compared to other e'changes. In the case of an GT6 issue !ne7 issue", the allotment procedure is completed in a month and trading commences after a month of the issue closure, 7hereas it ta*es a longer period for the same 7ith respect to other e'changes. Thus, 7ith the superior trading mechanism coupled 7ith information transparency investors are gradually becoming a7are of the manifold advantages of the GT6&I. N tion % Sto#9 E6#$ n!e (NSE) =ith the liberaliAation of the Indian economy, it 7as found inevitable to lift the Indian stoc* mar*et trading system on par 7ith the international standards. Gn the basis of the recommendations of high po7ered Pher7ani 6ommittee, the @ational $toc* &'change 7as incorporated in 3--0 by Industrial Kevelopment Ban* of India, Industrial 6redit and Investment 6orporation of India, Industrial >inance 6orporation of India, all Insurance 6orporations, selected commercial ban*s and others. Trading at @$& can be classified under t7o broad categories# !a" =holesale debt mar*et and !b" 6apital mar*et.
=holesale debt mar*et operations are similar to money mar*et operations , institutions and corporate bodies enter into high value transactions in financial instruments such as government securities, treasury bills, public sector unit bonds, commercial paper, certificate of deposit, etc.

There are t7o *inds of players in @$&# !a" trading members and

!b" participants. +ecogniAed members of @$& are called trading members 7ho trade on behalf of themselves and their clients. Participants include trading members and large players li*e ban*s 7ho ta*e direct settlement responsibility. Trading at @$& ta*es place through a fully automated screen,based trading mechanism 7hich adopts the principle of an order,driven mar*et. Trading members can stay at their offices and e'ecute the trading, since they are lin*ed through a communication net7or*. The prices at 7hich the buyer and seller are 7illing to transact 7ill appear on the screen. =hen the prices match the transaction 7ill be completed and a confirmation slip 7ill be printed at the office of the trading member.
@$& has several advantages over the traditional trading e'changes. They are as follo7s#

@$& brings an integrated stoc* mar*et trading net7or* across the nation.
Investors can trade at the same price from any7here in the country since inter,mar*et operations are streamlined coupled 7ith the country7ide access to the securities.

Kelays in communication, late payments and the malpracticeSs prevailing in the traditional trading mechanism can be done a7ay 7ith greater operational efficiency and informational transparency in the stoc* mar*et operations, 7ith the support of total computeriAed net7or*.
Unless stoc* mar*ets provide professionaliAed service, small investors and foreign investors 7ill not be interested in capital mar*et operations. nd capital mar*et being one of the major

source of long,term finance for industrial projects, India cannot afford to damage the capital mar*et path. In this regard @$& gains vital importance in the Indian capital mar*et system.

CAPITAL MARKET E,,ICIENC.

n effi#ient # :it % m (9et is a mar*et 7here the share prices reflect ne7 information accurately and in real time.

6apital mar*et efficiency is judged by its success in incorporating and inducting information, generally about the basic value of securities, into the price of securities. This basic or fundamental value of securities is the present value of the cash flo7s e'pected in the future by the person o7ning the securities.
The fluctuation in the value of stoc*s encourage traders to trade in a competitive manner 7ith the objective of ma'imum profit. This results in price movements to7ards the current value of the cash flo7s in the future. The information is very easily available at cheap rates because of the presence of organiAed mar*ets and various technological innovations. n efficient capital

mar*et incorporates information :uic*ly and accurately into the prices of securities.

In the 7ea*,form efficient capital mar*et, information about the history of previous returns and prices are reflected fully in the security pricesL the returns from stoc*s in this type of mar*et are unpredictable. In the semi strong,form efficient mar*et, the public information is completely reflected in security pricesL in this mar*et, those traders 7ho have non,public information access can earn e'cess profits. In the strong,form efficient mar*et, under no circumstances can investors earn e'cess profits because all of the information is incorporated into the security prices.
The funds that are flo7ing in capital mar*ets, from savers to the firms 7ith the aim of financing projects, must flo7 into the best and top valued projects and, therefore, informational efficiency is of supreme importance. $toc*s must be efficiently priced, because if the securities are priced accurately, then those investors 7ho do not have time for mar*et analysis 7ould feel confident about ma*ing investments in the capital mar*et.

&ugene >ama 7as one of the earliest to theoriAe capital mar*et efficiency, but empirical tests of capital mar*et efficiency had begun even before that.

Effi#ient-m (9et $&:ot$esis

In finance, the effi#ient-m (9et $&:ot$esis !EM-" asserts that financial mar*ets are Hinformationally efficientH. That is, one cannot consistently achieve returns in e'cess of average mar*et returns on a ris*,adjusted basis, given the information publicly available at the time the investment is made. There are three major versions of the hypothesis# H7ea*H, Hsemi,strongH, and HstrongH. =ea* &M; claims that prices on traded assets !e.g., stoc*s, bonds, or property" already reflect all past publicly available information. $emi,strong &M; claims both that prices reflect all publicly available information and that prices instantly change to reflect ne7 public information. $trong &M; additionally claims that prices instantly reflect even hidden or HinsiderH information. There is evidence for and against the 7ea* and semi,strong &M;s, 7hile there is po7erful evidence against strong &M;. The validity of the hypothesis has been :uestioned by critics 7ho blame the belief in rational mar*ets for much of the financial crisis of 0BB/T0B3B. Kefenders of the &M; caution that conflating mar*et stability 7ith the &M; is un7arrantedL 7hen publicly available information is unstable, the mar*et can be just as unstable.

-isto(i# % 8 #9!(oun"
The efficient,mar*et hypothesis 7as first e'pressed by )ouis Bachelier, a >rench mathematician, in his 3-BB dissertation, HThe Theory of $peculationH. ;is 7or* 7as largely ignored until the 3-2BsL ho7ever beginning in the (Bs scattered, independent 7or* corroborated his thesis. small number

of studies indicated that U$ stoc* prices and related financial series follo7ed a random 7al* model.
E2F

+esearch by

lfred 6o7les in the S(Bs and S.Bs suggested that professional investors 7ere in

general unable to outperform the mar*et. The efficient,mar*et hypothesis 7as developed by Professor &ugene >ama at the University of 6hicago Booth $chool of Business as an academic concept of study through his published Ph.K. thesis in the early 3-1Bs at the same school. It 7as 7idely accepted up until the 3--Bs, 7hen behavioral finance economists, 7ho 7ere a fringe element, became mainstream. &mpirical

analyses have consistently found problems 7ith the efficient,mar*et hypothesis, the most consistent being that stoc*s 7ith lo7 price to earnings !and similarly, lo7 price to cash,flo7 or boo* value" outperform other stoc*s. that overpriced gro7th stoc*s rather than lternative theories have proposed lthough the efficient,mar*et cognitive biases cause these inefficiencies, leading investors to purchase value stoc*s.

hypothesis has become controversial because substantial and lasting inefficiencies are observed, Beechey et al. !0BBB" consider that it remains a 7orth7hile starting point.
The efficient,mar*et hypothesis emerged as a prominent theory in the mid,3-1Bs. Paul

$amuelson had begun to circulate Bachelier?s 7or* among economists. In 3-1. Bachelier?s dissertation along 7ith the empirical studies mentioned above 7ere published in an anthology edited by Paul 6ootner. In 3-12 &ugene >ama published his dissertation arguing for the random 7al* hypothesis, and $amuelson published a proof for a version of the efficient,mar*et hypothesis. In 3-/B >ama published a revie7 of both the theory and the evidence for the hypothesis. The paper e'tended and refined the theory, included the definitions for three forms of financial mar*et efficiency# 7ea*, semi,strong and strong !see belo7".
>urther to this evidence that the U% stoc* mar*et is 7ea*,form efficient, other studies of capital mar*ets have pointed to7ard their being semi,strong,form efficient. study by %han of the grain

futures mar*et indicated semi,strong form efficiency follo7ing the release of large trader position information !%han, 3-D1". $tudies by >irth !3-/1, 3-/-, and 3-DB" in the United %ingdom have compared the share prices e'isting after a ta*eover announcement 7ith the bid offer. >irth found that the share prices 7ere fully and instantaneously adjusted to their correct levels, thus concluding that the U% stoc* mar*et 7as semi,strong,form efficient. ;o7ever, the mar*et?s ability to efficiently respond to a short term, 7idely publiciAed event such as a ta*eover announcement does not necessarily prove mar*et efficiency related to other more long term, amorphous factors. Kavid Kreman has criticiAed the evidence provided by this instant HefficientH response, pointing out that an immediate response is not necessarily efficient, and that the long,term performance of the stoc* in response to certain movements is better indications. study on stoc*s response to dividend cuts or

increases over three years found that after an announcement of a dividend cut, stoc*s underperformed the mar*et by 32.(J for the three,year period, 7hile stoc*s outperformed 0..DJ for the three years after7ard after a dividend increase announcement.

T$eo(eti# % 8 #9!(oun"
Beyond the normal utility ma'imiAing agents, the efficient,mar*et hypothesis re:uires that agents have rational e'pectationsL that on average the population is correct !even if no one person is" and 7henever ne7 relevant information appears, the agents update their e'pectations appropriately. @ote that it is not re:uired that the agents be rational. &M; allo7s that 7hen faced 7ith ne7 information, some investors may overreact and some may underreact. ll that is re:uired by the

&M; is that investors? reactions be random and follo7 a normal distribution pattern so that the net effect on mar*et prices cannot be reliably e'ploited to ma*e an abnormal profit, especially 7hen considering transaction costs !including commissions and spreads". Thus, any one person can be 7rong about the mar*etMindeed, everyone can beMbut the mar*et as a 7hole is al7ays right. There are three common forms in 7hich the efficient,mar*et hypothesis is commonly statedM Ae 9fo(m effi#ien#&, semi-st(on!-fo(m effi#ien#& and st(on!-fo(m effi#ien#&, each of 7hich has different implications for ho7 mar*ets 7or*.

In Ae 9-fo(m effi#ien#&, future prices cannot be predicted by analyAing price from the past. &'cess returns cannot be earned in the long run by using investment strategies based on historical share prices or other historical data. Technical analysis techni:ues 7ill not be able to consistently produce e'cess returns, though some forms of fundamental analysis may still provide e'cess returns. $hare prices e'hibit no serial dependencies, meaning that there are no HpatternsH to asset prices. This implies that future price movements are determined entirely by information not contained in the price series. ;ence, prices must follo7 a random 7al*. This ?soft? &M; does not re:uire that prices remain at or near e:uilibrium, but only that mar*et participants not be able to systematically profit from mar*et ?inefficiencies?. ;o7ever, 7hile &M; predicts that all price movement !in the absence of change in fundamental information" is random !i.e., non,trending", many studies have sho7n a mar*ed tendency for the stoc* mar*ets to trend over time periods of 7ee*s or longer and that, moreover, there is a positive correlation bet7een degree of trending and length of time period studied !but note that over long time periods, the trending is sinusoidal in appearance". Oarious e'planations for such large and apparently non,random price movements have been promulgated. But the best e'planation seems to be that the distribution of stoc* mar*et prices is non,Iaussian !in 7hich case &M;, in any of its current forms, 7ould not be strictly applicable".

The problem of algorithmically constructing prices 7hich reflect all available information has been studied e'tensively in the field of computer science. >or e'ample, the comple'ity of finding the arbitrage opportunities in pair betting mar*ets has been sho7n to be @P,hard. In semi-st(on!-fo(m effi#ien#&, it is implied that share prices adjust to publicly available ne7 information very rapidly and in an unbiased fashion, such that no e'cess returns can be earned by trading on that information. $emi,strong,form efficiency implies that neither fundamental analysis nor technical analysis techni:ues 7ill be able to reliably produce e'cess returns. To test for semi,strong,form efficiency, the adjustments to previously un*no7n ne7s must be of a reasonable siAe and must be instantaneous. To test for this, consistent up7ard or do7n7ard adjustments after the initial change must be loo*ed for. If there are any such adjustments it 7ould suggest that investors had interpreted the information in a biased fashion and hence in an inefficient manner. In st(on!-fo(m effi#ien#&, share prices reflect all information, public and private, and no one can earn e'cess returns. If there are legal barriers to private information becoming public, as 7ith insider trading la7s, strong,form efficiency is impossible, e'cept in the case 7here the la7s are universally ignored. To test for strong,form efficiency, a mar*et needs to e'ist 7here investors cannot consistently earn e'cess returns over a long period of time. &ven if some money managers are consistently observed to beat the mar*et, no refutation even of strong,form efficiency follo7s# 7ith hundreds of thousands of fund managers 7orld7ide, even a normal distribution of returns !as efficiency predicts" should be e'pected to produce a fe7 doAen HstarH performers.

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