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SEMESTER V (20012-13)





SEMESTER V (20012-13)





This is to certify that Ms. ______________________________ of B.Com – Financial Markets – Semester V (2012-13) has successfully completed the project on ___________________ under the guidance of ________________________.

Course Coordinator


Internal Examiner / Project guide

External Examiner



I, _________________________________ the student of B.Com Financial markets Semester V (2012-13) hereby declare that I have completed this project on __________________________ .

The information submitted is true & original to the best of my knowledge.



No project of such magnitude can be complete without the support of various people whom I would like to express my sincere gratitude. This project bears on imprint of many peoples. I sincerely thank to my project guide MRS MINAL GANDHI, for guidance and encouragement in carrying out this project work. And ensured that we would do the best in the project. I also wish to express my gratitude to Faculty’s supervisor of

gave us her valuable suggestions and support whenever required for this report. I would also like to thank the teaching and the non teaching staff Who rendered their help during the period of my project work Last but not least I wish to avail myself of this opportunity, express a sense of gratitude to my beloved parents for their manual support, strength and help and to my friends. I deem it my privilege to acknowledge and remain indebted to them due to their undefined contribution for the accomplishment of my success of my final report.




The purpose of the study is to provide depth information on the INDIAN CAPITAL MARKET. Various factors contributing to the growth of the capital market in India. And the various products available in the market to the market participants including the FII’S. And providing knowledge of the functioning of the capital market.

The objective of this study is to show the present status of INDIAN SECURITIES MARKET and how it is gaining world wide acceptance. In the age of stiff competition gaining its momentum to the world financial markets in the race of highly regulated markets around the glode.







In last decade or so, it has been observed that there has been a paradigm shift in Indian capital market. The applications of technology in the payment and settlement systems have made the Indian capital market comparable with the international capital markets. Now, the market features a developed regulatory mechanism and a modern market infrastructure with growing market capitalization, market liquidity, and mobilisation of resources. However, the market has witnessed its worst time with the recent global financial crisis that originated from the US sub-prime mortgage market and spread over to the entire world as a contagion. The capital market of India delivered a sluggish performance. In this context, it is imperative to conduct empirical analysis to study the performance of Indian capital market. It is with this backdrop, this paper is an attempt to analyze the key market parameters such as market size, market liquidity, market turnover ratio, market volatility, and market efficiency of Indian capital market The Securities and Exchange Board of India is now widely perceived as a robust institution, a role model for regulators in emerging markets. Impressive though these achievements are, there are several areas where the market still falls short of international benchmarks. Less than one-fifth of equity is owned by retail investors. In a country of over 1 billion people, less than 25 million individuals participate directly or indirectly in the market. Therefore, the growth of Indian capital market happens to contribute to the sustainable development of Indian economy.


Indian securities markets have undergone many changes during the last decade There have been a Far-reaching developments taken place in the secondary market also over the past decade. The number of recognized stock exchanges increased to 24. Diverse forms of organizational structures The study of Indian capital begins with the introduction of the Indian financial system. And this study shows that the capital market is the backbone of the Indian economy. The capital market is important to a country‟s economic and social system. It plays the crucial roles of capital raising for both public and private sectors, promoting balance and stability in the financial system, decreasing dependency on the banking sector, driving the economy forward and creating jobs, as well as being an alternative method for savings. A strong capital market will lessen the impact of economic fluctuations which can be compounded by the fast-flowing nature of capital. Corporate earnings are growing at healthy pace and the markets are a reflection of the health of the Indian economy The efforts of the last decade in developing an efficient market infrastructure have created a market that has made transactions transparent and settlements safer. The new derivative market has provided a transparent avenue for managing risk to a wide variety of investors. SEBI‟s objective has been to encourage the development of the market while protecting the interests of investors. The task is however only partly done.


Rapidly expanding markets require the industry and regulators to continually shore up their skills and resources. The establishment of the National Institute of Securities Markets is an effort to develop securities market skills and knowledge across the board for investors, students, market intermediaries and professionals and regulators. Now days, a significant portion of Indian corporate sector's securities are held by Foreign Institutional Investors, such as pension funds, mutual funds and insurance companies. The immediate impact of market opening to FIIs is the surge in trading volume and capital inflows to domestic stock markets, result of which the boom in stock prices. In all the equity investors only don‟t play a vital role in the imbursement of the Indian economy playing as participants in the capital markets but foreign institutional investors drive the Indian market to a higher difference and contribution as a major driving force to the economy in all.


Chapter no. 1 1.1 1.2 1.3 1.4 1.5 2 2.1 2.2 2.3 2.4 2.5 2.6
3 3.1

Subjects Covered

Page No.


3.2 3.3 3.4 3.5 3.6 3.7 3.8 4 4.1 5 5.1 6 6.1 6.2 6.3 7

Evolution Of Capital Market Post-independence Scenario Structure of Indian Capital Market Capital Market Instruments Significance, Role Or Function Of Capital Market Role Of Capital Market In India‟s Industrial Growth Factors Contributing To The Growth Of Capital Market In India REFORMS IN INDIAN CAPITAL MARKETS Development in India‟s securities market Financial Regulatory Body In India SEBI Regulates Indian Capital Market FOREIGN INSTITUTIONAL INVESTORS IN INDIAN CAPITAL MARKET INTRODUCTION. WHY FIIS REQUIRED? History Of FII CONCLUSION




Economic growth and development of any country depends upon a well-knit financial system. Financial system comprises a set of sub-systems of financial institutions financial markets, financial instruments and services which help in the formation of capital. Thus a financial system provides a mechanism by which savings are transformed into investments and it can be said that financial system play an significant role in economic growth of the country by mobilizing surplus funds and utilizing them effectively for productive purpose.

The financial system is characterized by the presence of integrated, organized and regulated financial markets, and institutions that meet the short term and long term financial needs of both the household and corporate sector. Both financial markets and financial institutions play an important role in the financial system by rendering various financial services to the community. They operate in close combination with each other.

Financial System The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediation


Pre-reforms Phase Until the early 1990s, the role of the financial system in India was primarily restricted to the function of channeling resources from the surplus to deficit sectors. Whereas the financial system performed this role reasonably well, its operations came to be marked by some serious deficiencies over the years. The banking sector suffered from lack of competition, low capital base, low Productivity and high intermediation cost. After the nationalization of large banks in 1969 and 1980, the Government-owned banks dominated the banking sector. The role of technology was minimal and the quality of service was not given adequate importance. Banks also did not follow proper risk management systems and the prudential standards were weak. All these resulted in poor asset quality and low profitability. Among non-banking

financial intermediaries, development finance institutions (DFIs) operated in an over-protected environment with most of the funding coming from assured sources at concessional terms. In the insurance sector, there was little competition. The mutual fund industry also suffered from lack of competition and was dominated for long by one institution, viz., the Unit Trust of India. Non-banking financial companies (NBFCs) grew rapidly, but there was no regulation of their asset side. Financial markets were characterized by control over pricing of financial assets, barriers to entry, high transaction costs and restrictions on movement of funds/participants between the market segments. This apart from inhibiting the development of the markets also affected their efficiency.

FINANCIAL SECTOR REFORMS IN INDIA It was in this backdrop that wide-ranging financial sector reforms in India were introduced as an integral part of the economic reforms initiated in the early 1990s with a view to improving the macroeconomic performance of the economy. The reforms in the financial sector focused on creating efficient and stable financial institutions and markets. The approach to financial sector reforms in India was one of gradual and non-disruptive progress through a consultative process. The Reserve Bank has been consistently working towards setting an enabling regulatory framework with prompt and effective supervision, development of technological and institutional infrastructure, as well as changing the interface with the market participants through a consultative process. Persistent efforts have been made towards adoption of international benchmarks as appropriate to Indian conditions. While certain changes in the legal infrastructure are yet to be

effected, the developments so far have brought the Indian financial system closer to global standards. The Indian financial system has undergone structural transformation over the past decade. The financial sector has acquired strength, efficiency and stability by the combined effect of competition, regulatory measures, and policy environment. While competition, consolidation and convergence have been recognized as the key drivers of the banking sector in the coming years

Constituents of Indian Financial system Indian financial system consists of financial market, financial instruments and financial intermediation.







Financial institutions are intermediaries that mobilize savings and facilitate allocation of funds in an efficient manner. Financial Institutions can be classified as banking and non-banking financial institutions. Banking institutions are creators of credit while non-banking financial institutions are purveyors of credit. In India non-banking financial institutions are the Developmental Financial institutions (DFIs) and Non-Banking Financial Companies (NBFCs) as well as housing finance companies (HFCs) are the major institutional purveyors of credit. Financial institutions can also be classified as term finance institutions such as Industrial Development Bank of India (IDBI), Industrial credit and Investment Corporation of India (ICICI), Industrial Finance Corporation of India (IFCI), Small Industries Development bank of India (SIDBI) and Industrial Investment bank of India (IIBI). Financial institutions can be specialized finance institutions like the Export Import Bank of India (EXIM), Tourism Finance Corporation of India (TFCI), ICICI Venture, Infrastructure development Finance Company (IDFC) and sectoral such as the National Bank for Agricultural and Rural Development (NABARD) and National Housing Bank (NHB). Investment institutions in the business of Mutual Funds (UTI, Public Sector and Private Sector Mutual Funds) and Insurance activity (LIC, GC and its subsidiaries) are also classified as financial institutions


Financial markets are a mechanism enabling participants to deal in financial claims. The markets also provide a facility in which their demands and requirements interact to set a price for such claims. The main organized finance markets in India are the Money Market and Capital Market. Money market is for short-term securities while the Capital Market is for long-term securities. Financial Markets are also classified as primary and secondary markets. While primary market deals in new issues, the secondary market is meant for trading in outstanding or existing securities. It's through financial markets the financial system of an economy works. The main functions of financial markets are: 1. to facilitate creation and allocation of credit and liquidity; 2. to serve as intermediaries for mobilization of savings; 3. to assist process of balanced economic growth; 4. to provide financial convenience



A Financial instrument is a claim against a person or an institution for the payment at a future date a sum of money and/or a periodic payment in the form of interest or dividend. The term „and/or‟ implies that either of the payments will be sufficient but both of them may be promised. Financial securities may be primary or secondary securities. Primary securities are also termed as direct securities as they are directly issued by the ultimate borrowers of funds to the ultimate savers. Primary securities include equity shares and debentures. Secondary securities are also referred to as indirect securities, as they are issued by the financial intermediaries to the ultimate savers. Bank deposits, mutual fund units and insurance policies are secondary securities. Financial instruments differ in terms of marketability, liquidity, reversibility, type of options, return, risk and transaction costs. Financial instruments help the financial markets and the financial intermediaries to perform the important role of channelizing funds from lenders to borrowers



Efficiency of emerging financial system largely depends upon the quality and variety of financial services provided by financial intermediaries. The term financial services can be defined as "activities, benefits and

satisfaction connected with sale of money that offers to users and customers, financial related value". Financial intermediaries

provide key financial services such as merchant banking,

leasing, and hire purchase, creditrating and so on. Financial services rendered by financial intermediary‟s bridge the gap between lack of knowledge on the part of investors and increasing sophistication of financial instruments and markets. These financial services are vital for creation of firms, expansion and economic growth. The financial services sector includes broking firms, investment services, national banks, private banks, mutual funds, car and home loans, and equity market




In Simple terms, “Financial Markets refers to as those centers and arrangement which facilitate buying and selling of financial claims, assets and services”. Typically, in other words, Financial Markets are defined, “By having transparent pricing, basic regulations on trading, cost, fees & market forces determining the price of securities that are traded”. Financial market is a market where financial instruments are exchanged or traded and helps in determining the prices of the assets that are traded in and is also called the price discovery process The arrangement that provide facilities for buying and selling of financial claims and services are called as Financial Markets. As in India organized Financial Markets play a vital role as because it facilitates the exchange of liquid assets. As it attains the equilibrium position when the demand and supply are equal to each other. It includes Issue of Equity shares, Granting of loans by term lending

institutions, Deposit of Money into banks, sale of shares and debentures so on. Financial markets provide the following three major economic functions: 1) Price discovery 2) Liquidity 3) Reduction of transaction costs

1) Price discovery function means that transactions between buyers and sellers of financial instruments in a financial market determine the price of the traded asset. At the same time the required return from the investment of funds is determined by the participants in a financial market. The motivation for those seeking funds (deficit units) depends on the required return that investors demand. It is these functions of financial markets that signal how the funds available from those who


want to lend or invest funds will be allocated among those needing funds and raise those funds by issuing financial instruments.

2) Liquidity function provides an opportunity for investors to sell a financial instrument, since it is referred to as a measure of the ability to sell an asset at its fair market value at any time. Without liquidity, an investor would be forced to hold a financial instrument until conditions arise to sell it or the issuer is contractually obligated to pay it off. Debt instrument is liquidated when it matures, and equity instrument is until the company is either voluntarily or involuntarily liquidated. All financial markets provide some form of liquidity. However, different financial markets are characterized by the degree of liquidity.

3) The function of reduction of transaction costs is performed, when financial market participants are charged and/or bear the costs of trading a financial instrument. In market economies the economic rationale for the existence of institutions and instruments is related to transaction costs, thus the surviving institutions and instruments are those that have the lowest transaction costs.

India Financial market is one of the oldest in the world and is considered to be the fastest growing and best among all the markets of the emerging economies. The history of Indian capital markets dates back 200 years toward the end of the 18th century when India was under the rule of the East India Company.


The development of the capital market in India concentrated around Mumbai where no less than 200 to 250 securities brokers were active during the second half of the 19th century. The financial market in India today is more developed than many other sectors because it was organized long before with the securities exchanges of Mumbai, Ahmadabad and Kolkata were established as early as the 19th century.

By the early 1960s the total number of securities exchanges in India rose to eight, including Mumbai, Ahmadabad and Kolkata apart from Madras, Kanpur, Delhi, Bangalore and Pune.

Today there are 21 regional securities exchanges in India in addition to the centralized NSE (National Stock Exchange) and OTCEI (Over the Counter Exchange of India). However the stock markets in India remained stagnant due to stringent controls on the market economy The corporate sector wasn't allowed into many industry segments, which were dominated by the state controlled public sector resulting in stagnation of the economy right up to the early 1990s.

Thereafter when the Indian economy began liberalizing and the controls began to be dismantled or eased out, the securities markets witnessed a flurry of IPOs that were launched. This resulted in many new companies across different industry


segments to come up with newer products and services.

A remarkable feature of the growth of the Indian economy in recent years has been the role played by its

securities markets in assisting and fuelling that growth with money rose within the economy. This was in marked contrast to the initial phase of growth in many of the fast growing economies of East Asia that witnessed huge doses of FDI spurring growth in their initial days of market decontrol. During this phase in India much of the organized sector has been affected by high growth as the financial markets played an all-inclusive role in sustaining financial resource mobilization. Many Public Sector Undertakings that decided to offload part of their equity were also helped by the well-organized securities market in India. Before 1990‟s there were very few stock exchanges existing in India. Then in 1994, India‟s stock market was dominated by Bombay Stock Exchange. It was

the oldest stock exchange in India introduced in year 1875 which began formal trading. BSE hold all the securities transaction under it. Earlier in 1987 banks were allowed to enter into the business by breaking the monopoly of UTI and

maintained a dominant position in market. Before 1992 many factors obstructed the expansion of Equity Trading. As all the fresh capital issues were controlled under Capital Issue Control Act. The integration of IT into the capital market infrastructure has been particularly smooth in India due to the country‟s world class IT industry. This has pushed up the operational efficiency of the Indian stock market to global standards and as a


result the country has been able to capitalize on its high growth and attract foreign capital like never before. The regulating authority for capital markets in India is the SEBI (Securities and Exchange Board of India). SEBI came into prominence in the 1990s after the capital markets experienced some turbulence. It had to take drastic measures to plug many loopholes that were exploited by certain market forces to advance their vested interests. After this initial phase of struggle SEBI has grown in strength as the regulator of Indian‟s capital markets and as one of the country‟s most important institution.

Well-developed securities markets are the backbone of any financial system. Apart from providing the medium for channelizing funds for investment purposes, they aid in pricing of assets and serve as a barometer of the financial health of the economy. The Indian securities markets have witnessed far reaching reforms in the postliberalization era in terms of market design, Technological practices instruments. The markets have achieved tremendous

developments, introduction

settlement of new


stability and as a result, have attracted huge investments by foreign investors. There still is tremendous scope for improvement in both the equity market and the government securities market. However, it is the corporate debt market, which needs to be given particular emphasis given its importance for providing long-term finance for development. The main impulse for developing securities markets, including both equity and debt segments, depends on country-specific histories and more specifically, in the context of the financial system, it relates to creating more complete financial markets, avoiding banks from taking on excessive credit, risk diversification in the financial system, financing government deficit, conducting monetary policy, sterilizing capital inflows and providing a range of long-term assets. After the Reforms made by SEBI there are many changes seen in the Financial Markets over the last few years. Due to the rapid changes taken place there has been great development in Indian Securities Markets especially in the secondary market by having advancement in Technology, Online based transactions have modernized the stock exchange. Indian equity markets are considered to be relatively large in terms of listed companies and total market capitalization. Number of Listed companies has also increased from 5968 in March 1990 to about 25000 by May 2011. Market capitalization has also grown 15 times during the same period. Paperless Transaction took place. Even banks and other Financial Institutions started dealing with securities as they also have become a part of the Financial Markets. Primary Dealers were introduced in 1955. All the transaction can be taken place online without the help of brokers or intermediaries.


Each financial instrument is created to satisfy particular preferences of market participants. For example, some participants may want to invest funds for a short-term period, whereas others want to invest for a long-term period. Some participants are willing to tolerate a high level of risk when investing, whereas others need to avoid risks. Some participants that need funds prefer to borrow, whereas others prefer to issue stock. There are many different type of financial markets, and each market can be distinguished by maturity structure and trading structure of its securities.



Organized Market

Unorganized Market

Capital Market Money Market

Foreign Exchange Market

Moneylenders, Indigenous Bankers etc


I. Unorganized Market. In these markets there are a number of money lenders, indigenous bankers, traders and brokers etc. who lend money to the public. There are also private finance companies, chit funds etc. whose activities are not controlled by RBI. Recently RBI has taken various steps to bring the unorganized sector into organized fold but they were not successful in it as because regulation in financial dealings is still inadequate and their financial instruments had not been standardized. II. Organized Markets Organized System represent the structure or nationalized banking, cooperative banks & development banks set by the government through various enactments and regulations. This includes private sector also the government/ RBI controls this sector. The organized Market is further classified into various types:  Capital Market  Money Market  Foreign Exchange Market


Capital Market
Capital Market may be defined as a market for borrowing and lending

long- term capital funds required by business enterprises. Capital markets deal in the long- term claims (with a maturity period of more than one year). E.g. equity shares, Preference shares, derivatives, swaps, future, options, Government securities, bonds etc. the capital market can classified into Industrial Securities, Gilt Edged Market, Financial Intermediaries etc.



Money market
Money market is a market for dealing with Financial Assets and

Securities which have a maturity period of up to one year. In other words, it is a market for purely short term funds. The money market is subdivided into various types: i. ii. iii. iv. Call Money Market Commercial Bill Market Treasury Bill Market Short term Loan Market etc.


Foreign Exchange Market
The term Foreign Exchange refers to the process of converting home

currencies into foreign currencies & vice versa. According to, Dr.Paul Einzing “Foreign Exchange is a system or process of converting one national currency into another and of transferring money from one country to another.” The market where foreign exchange transactions take place is called a Foreign Exchange Market. It consists of number of dealers like banks, brokers which are engaged in the business of buying and selling foreign exchange. Those dealers which are engaged in Foreign exchange business are been controlled by Foreign Exchange Maintenance Act (FEMA).


There are various functions which are followed by the Financial Markets for the smooth functioning of the organization. So the various functions of Financial Markets are as follows: 1. Liquidity in the Market: It allows the investors to sell their Financial Assets and convert them into cash by providing liquidity in the market. 2. Use of Funds Productively: Financial Markets allow using the funds in a productive manner as those funds are borrowed from the lenders. 3. Helps to Sell Financial Assets: The Financial Markets not only use the funds of the borrowers but also provides mechanism for selling the financial assets of the investor. 4. Earns Interest or Dividend: Financial Markets allows lenders to earn interest or dividend on their surplus investible funds. 5. Provide Funds to Borrowers: Financial Markets provides funds to the borrowers to enable them to carry out their investment plans. 6. Lower Transaction cost: Financial Markets save a market player from the transaction cost that is the cost locating the counter party of the business


Financial engineering is a multidisciplinary field of creating new financial instruments and strategies Financial engineering is a process that utilizes existing financial instruments to create a new and enhanced product of some type. Just about any combination of financial instruments and products can be used in financial engineering. The process may involve a simple union between two products, or make use of several different products to create a new product that provides benefits that none of the other instruments could manage on their own. One excellent example of financial engineering is financial reinsurance.

Companies that offer reinsurance options essentially provide a way for the ceding insurer to minimize a drain on available resources when a major shift in premium growth or reduction is taking place. In this scenario, the process

of financial engineering helps to create a stable environment that will allow the insurer to remain solvent and stable even when extreme conditions exist. For the consumer, the work of a financial engineer to create new finance product offerings can be a great advantage. In some instances, the new and improved product is simply a repackage of several independent but complimentary products made available at a lower price. For example, the consumer may find that purchasing insurance coverage that provides dental, hospital, and prescription coverage may be significantly less expensive than purchasing individual plans.




What is Capital Market?
Capital markets are like any other markets, but differ in terms of the products traded and their organization. Capital markets deal with the trading of securities. Capital markets provide avenue where companies can raise funds to expand on their businesses or establish new ones by issuing securities owned by the companies. Like businesses in the private sector, Government issue its securities to raise funds in capital markets to build electricity damn, construct new roads, bridges by issues. It is an organized market mechanism for effective and efficient transfer of money capital or financial resources from the investing class i.e. from (individual or institutional savers) to the entrepreneur class (individual engaged in business or services) in the private or public sectors of the economy. In a broader sense, According to Goldsmith “ The capital market of a modern economy has two basic functions first the allocation of savings among users and investment; second the facilitation of the transfer of existing assets, tangible and intangible among individual economic units”. Capital Market is generally understood as the market for long term funds. It provides long term debt and equity finance for the government and the corporate sector. It is a best performing markets in the world since last few years. It facilitates the transfer of capital i.e. financial assets from one owner to another.


The rapid growth in Indian capital markets and the spread of “Equity culture” has doubtlessly strained its infrastructure and regulatory resources. Nevertheless securities market is a watchdog as SEBI plays a vital role in redressing investors‟ grievances.

Capital Markets are mainly leaded by two major Indian exchanges BSE and NSE which 16th & 17th rank among all the exchanges around the world in terms of market capitalization. In terms of risk and returns the Indian those in industrialized nations. Due to such strong stock exchanges there is a strong economic growth and a large inflow of foreign institutional investors (FIIs) was developed truly great explosive growth rising over 3 times during last 5 years.

Evolution Of Capital Market
Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. The earliest records of security dealings in India are meagre and obscure. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century. By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850. The 1850's witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60. In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The number

of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump. At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street now appropriately called as Dalal Street where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, the "Native Share and Stock Brokers' Association" which is alternatively known as “The Stock Exchange ". In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated. There have been many fluctuations in stock market due to American war and battles in Europe. Then there were dealing of brokers and government started. Controller of Capital Issues Act was passed in 1947. During such period the wealth and expenditure tax was in hands of Mr. T. T. Krishnamachari in 1957 who was the finance minister. During such period war was occurred in China has occurred a great fall in price of capital market. The BSE building, icon of Indian Capital Market is called the P.J. tower in the memory. Then the planning process started in India in 1951which gave importance to formation of institutions and markets through securities Regulation Act 1956.After this act basic law was followed by securities markets to regulate the share price in the market. After such regulations of SEBI scams of Harshad Mehta had occurred in the year 1992 due to which shares in market fall down. Then to uplift the stock market mid in -1990 Gujarat stock exchange got listed in BSE. Then in end of 1990 emergence of Ketan Parekh and information companies and entertainment companies came into the limelight. This period stock of software companies were most favored stock in US. Then there was a meltdown in software stock in early 2000.


Even Multinational companies were in operation with Indian stock market this lead to sale of fresh stock in Indian markets due to which the shares of other companies were down. The next big boom and mass retail investors happened in 1980, with the entry of Mr. Dhirubhai Ambani who was said to be the father of modern capital markets. Reliance public issue and subsequent issues on various reliance companies generated huge interest. Due to reliance shares people were aware of the share certificate that were not educated. Mr. Dhirubhai Ambani really gave a helping hand to stock market in India.

Post-independence Scenario
Most of the exchanges suffered almost a total eclipse during depression. Lahore Exchange was closed during partition of the country and later migrated to Delhi and merged with Delhi Stock Exchange. Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963. Most of the other exchanges languished till 1957 when they applied to the Central Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only Bombay, Calcutta, Madras, Ahmadabad, Delhi, Hyderabad and Indore, the well established exchanges, were recognized under the Act. Some of the members of the other Associations were required to be admitted by the recognized stock exchanges on a concessional basis, but acting on the principle of unitary control, all these pseudo stock exchanges were refused recognition by the Government of India and they thereupon ceased to function. Thus, during early sixties there were eight recognized stock exchanges in India (mentioned above). The number virtually remained unchanged, for nearly two decades. During eighties, however, many stock exchanges were established: Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982), and Pune Stock Exchange Limited (1982), Ludhiana

Stock Exchange Association Limited (1983), Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadha Stock Exchange Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990) and recently established exchanges - Coimbatore and Meerut. Thus, at present, there are totally twenty one recognized stock exchanges in India excluding the Over the Counter Exchange of India Limited (OTCEI) and the
Sr.No. As on December 31st 1946 1961 1971 1975 1980 1985 1991 1995

1 2 3

4 5




No. of Stock Exchanges No. of Listed Cos. No. of Stock Issues of Listed Cos. Capital of Listed Cos. (Cr. Rs.) Market value of Capital of Listed Cos. (Cr. Rs.) Capital per Listed Cos. (4/2) (Lakh Rs.) Market Value of Capital per Listed Cos. (Lakh Rs.) (5/2) Appreciated value of Capital per Listed Cos. (Lak Rs.)

7 1125 1506

7 1203 2111

8 1599 2838

8 1552 3230

9 2265 3697

14 4344 6174

20 6229 8967

22 8593 11784

270 971

753 1292

1812 2675

2614 3273

3973 6750

9723 25302

32041 110279

59583 478121

























National Stock Exchange of India Limited (NSEIL). The Table given below portrays the overall growth pattern of Indian stock markets since independence. It is quite evident from the Table that Indian stock markets

have not only grown just in number of exchanges, but also in number of listed companies and in capital of listed companies. The remarkable growth after 1985 can be clearly seen from the Table, and this was due to the favouring government

Structure of Indian Capital Market
Broadly speaking the capital market is classified in to two categories. They are the Primary market (New Issues Market) and the Secondary market (Old (Existing) Issues Market). This classification is done on the basis of the nature of the instrument brought in the market. However on the basis of the types of institutions involved in capital market, it can be classified into various categories such as the Government Securities market or Gilt-edged market, Industrial Securities market, Development Financial Institutions (DFIs) and financial intermediaries. All of these components have specific features to mention. The structure of the Indian capital market has its distinct features. These different segments of the capital market help to develop the institution of capital market in many dimensions. The


primary market helps to raise fresh capital in the market. In the secondary market, the buying and selling (trading) of capital market instruments takes place. The following chart will help us in understanding the organizational structure of the Indian Capital market. 1) Government Securities Market : This is also known as the Gilt-edged market. This refers to the market for government and semi-government securities backed by the Reserve Bank of India (RBI). There is no speculation in securities. Huge volume of transaction can take place as because it is obligated under Banking Regulation Act 1949.

2) Industrial Securities Market

New securities issued

Issued Securities Trade

This is a market for industrial securities i.e. market for shares and debentures of the existing and new corporate firms. Buying and selling of such instruments take place in this market. This market is further classified into two types such as the New Issues Market (Primary) and the Old (Existing) Issues Market (secondary).

In primary market fresh capital is raised by companies by issuing new shares, bonds, units of mutual funds and debentures. However in the secondary market already existing that is old shares and debentures are traded. This trading takes place through the registered stock exchanges. In India we have three prominent stock exchanges. They are the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE) and Over the Counter Exchange of India (OTCEI) I. Primary market Primary market provides an opportunity to the issuers of securities, both Government and corporations, to raise funds through issue of securities. The securities may be issued in the domestic or international markets, at face value, or at a discount (i.e. below their face value) or at a premium (i.e. above their face value). II. Secondary market Secondary market refers to a market, where securities that are already issued by the Government or corporations, are traded between buyers and sellers of those securities. The securities traded in the secondary market could be in the nature of equity, debt, derivatives etc. 3) Development Financial Institutions (DFIs) : This is yet another important segment of Indian capital market. This Comprises various financial institutions. These can be special purpose institutions like IFCI, ICICI, SFCs, IDBI, IIBI, UTI, etc. These financial institutions provide long term finance for those purposes for which they are set up.







4) Financial Intermediaries The fourth important segment of the Indian capital market is the financial intermediaries. An institution that acts as the middleman between investors and firms raising funds, often referred to as financial institutions. Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. As such, financial intermediaries channel funds from people who have extra money (savers) to those who do not have enough money to carry out a desired activity (borrowers). This comprises various merchant banking institutions, mutual funds, leasing finance companies, venture capital companies and other financial institutions. These are important institutions and segments in the Indian capital market.

1) Equity (instrument of ownership) Equity shares are instruments issued by companies to raise capital and it represents the title to the ownership of a company. You become an owner of a company by subscribing to its equity capital (whereby you will be allotted shares) or by buying its shares from its existing owner(s). As a shareholder, you bear the entrepreneurial risk of the business venture and are entitled to benefits of ownership like share in the distributed profit (dividend) etc. The returns earned in equity depend upon the profits made by the company. Company‟s future growth etc.

2. Debt (loan instruments) A. Corporate debt

I) Debentures are instrument issued by companies to raise debt capital. As An investor, you lend you money to the company, in return for its promise To pay you interest at a fixed rate (usually payable half yearly on specific Dates) and to repay the loan amount on a specified maturity date say after 5/7/10 years (redemption). Normally specific asset(s) of the company are held (secured) in favour of Debenture holders. This can be liquidated, if the company is unable to pay The interest or principal amount. Unlike loans, you can buy or sell these Instruments in the market.

Types of debentures that are offered are as follows:  Non convertible debentures (NCD) – Total amount is redeemed by the Issuer  Partially convertible debentures (PCD) – Part of it is redeemed and the Remaining is converted to equity shares as per the specified terms  Fully convertible debentures (FCD) – Whole value is converted into Equity at a specified price

II) Bonds are broadly similar to debentures. They are issued by companies, Financial institutions, municipalities or government companies and are Normally not secured by any assets of the company (unsecured).

Types of bonds Regular Income Bonds provide a stable source of income at regular, predetermined intervals -Tax-Saving Bonds offer tax exemption up to a specified amount of investment, depending on the scheme and the Government notification.

Examples are: -Infrastructure Bonds under Section 88 of the Income Tax Act, 1961 • NABARD/ NHAI/REC Bonds under Section 54EC of the Income Tax Act, 1961 • RBI Tax Relief Bonds

B. Government debt: • Government securities (G-Secs) are instruments issued by Government of India to raise money. G Secs pays interest at fixed rate on specific dates on half-yearly basis. It is available in wide range of maturity, from short dated (one year) to long dated (up to thirty years). Since it is Sovereign borrowing, it is free from risk of default (credit risk). You can Subscribe to these bonds through RBI or buy it in stock exchange.

D. Money Market instruments (loan instruments up to one year tenure) • Treasury Bills (T-bills) are short term instruments issued by the Government for its cash management. It is issued at discount to face Value and has maturity ranging from 14 to 365 days. Illustratively, a T-bill Issued at Rs. 98.50 matures to Rs. 100 in 91 days, offering an yield of 6.25% p.a. • Commercial Papers (CPs) are short term unsecured instruments issued By the companies for their cash management. It is issued at discount to face value and has maturity ranging from 90 to 365 days. • Certificate of Deposits (CDs) are short term unsecured instruments issued by the banks for their cash management. It is issued at discount to face value and has maturity ranging from 90 to 365 days.


3. Hybrid instruments (combination of ownership and loan instruments) • Preferred Stock / Preference shares entitle you to receive dividend at a fixed rate. Importantly, this dividend had to be paid to you before dividend can be paid to equity shareholders. In the event of liquidation of the company, your claim to the company‟s surplus will be higher than that of the equity holders, but however, below the claims of the company‟s creditors, bondholders / debenture holders. • Cumulative Preference Shares: A type of preference shares on which dividend accumulates if remains unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares. • Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company. • Participating Preference Shares gives you the right to participate in profits of the company after the specified fixed dividend is paid. Participation right is linked with the quantum of dividend paid on the equity shares over and above a particular specified level.

4. Mutual Funds Mutual funds collect money from many investors and invest this corpus in equity, debt or a combination of both, in a professional and transparent manner. In return for your investment, you receive units of mutual funds which entitle you to the benefit of the collective return earned by the fund, after reduction of management fees. Mutual funds offer different schemes to cater to the needs of the investor are regulated by securities and Exchange board of India (SEBI)

Types of Mutual Funds At the fundamental level, there are three types of mutual funds:  Equity funds (stocks)  Fixed-income funds (bonds)  Money market funds

5. Repo / Reverse Repo A repo agreement is the sale of a security with a commitment to repurchase the same security as a specified price and on specified date. The difference between the two prices is effectively the borrowing cost for the party selling the security as part of the first leg of the transaction. Reverse repo is purchase of security with a commitment to sell at predetermined price and date. The difference between the two prices is effectively interest income for the party buying the security as part of the first leg of the transaction. A repo transaction for party would mean reverse repo for the second party. As against the call money market where the lending is totally unsecured, the lending in the repo is backed by a simultaneous transfer of securities.

6. DERIVATIVES A derivative is a financial instrument, whose value depends on the values of basic underlying variable. In the sense, derivatives is a financial instrument that offers return based on the return of some other underlying asset, i.e the return is derived from another instrument. Derivative products initially emerged as a hedging device against fluctuations in commodity prices, and commodity linked derivatives remained the sole form of such products for almost three hundred years. . It was primarily used by the farmers to protect themselves against fluctuations in the price of their crops. From the time

it was sown to the time it was ready for harvest, farmers would face price uncertainties. Through the use of simple derivative products, it was possible for the farmers to partially or fully transfer price risks by locking in asset prices. From hedging devices, derivatives have grown as major trading tool. Traders may execute their views on various underlying by going long or short on derivatives of different types.

FINANCIAL DERIVATIVES: Financial derivatives are financial instruments whose prices are derived from the prices of other financial instruments. Although financial derivatives have existed for a considerable period of time, they have become a major force in financial markets only since the early 1970s. In the class of equity derivatives, futures and options on stock indices have gained more popularity especially among institutional investors.

TYPES OF DERIVATIVES 1) FORWARDS A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain

specified future date for a certain specified price. The other party assumes a short position and agrees


to sell the asset on the same date for the same price, other contract details like delivery date, price and quantity are negotiated bilaterally by the parties to the contract. The forward contracts are normally traded outside the exchange.

2) FUTURES Futures contract is a standardized transaction taking place on the futures exchange. Futures market was designed to solve the problems that exist in forward market. A futures contract is an agreement between two parties, to buy or sell an asset at a certain time in the future at a certain price, but unlike forward contracts, the futures contracts are standardized and exchange traded To facilitate liquidity in the futures contracts, the exchange specifies certain standard quantity and quality of the underlying instrument that can be delivered, and a standard time for such a settlement. Futures‟ exchange has a division or subsidiary called a clearing house that performs the specific responsibilities of paying and collecting daily gains and losses as well as guaranteeing performance of one party to other

3) OPTIONS An option is a contract, or a provision of a contract, that gives one party (the option holder) the right, but not the obligation, to perform a specified transaction with another party (the option issuer or option writer) according to the specified terms. The owner of a property might sell another party an option to purchase the property any time during the next three months at a specified price. For every buyer of an option there must be a seller. The seller is often referred to as the writer. As with futures, options are brought into existence by being traded, if none is traded, none exists; conversely, there is no limit to the number of option contracts that can be in existence at any time. As


with futures, the process of closing out options positions will cause contracts to cease to exist, diminishing the total number. Thus an option is the right to buy or sell a specified amount of a financial instrument at a pre-arranged price on or before a particular date.

4) SWAPS: Swaps are private agreement between two parties to exchange cash flows in the future according to a pre-arranged formula. They can be regarded as portfolio of forward contracts. The two commonly used Swaps are i) Interest Rate Swaps: - A interest rate

swap entails swapping only the interest related cash flows between the parties in the same currency.

ii) Currency Swaps: - A currency swap is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and after a specified period of time, to give back the original amount swapped.


Capital Market plays a significant role in the national economy. A developed, dynamic and vibrant capital market can immensely contribute for speedy economic growth and development. Let us get acquainted with the important functions and role of the capital market: 1. Provide Liquidity for Financial Instrument Capital markets provide liquidity to the Financial Instruments which are traded in the Secondary Market. It depends on the Mobilization of savings Capital market is an important source for mobilizing savings from the economy. It mobilizes funds people for further investments in the productive channels of an economy. In that sense it activates the ideal monetary resources and puts them in proper investments.

2. Provision of Investment Avenue Capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to invest resources for long period of time. It provides suitable interest rate return also to investors. Instrument such as bonds, mutual Funds, insurance policies definitely provide a diverse investment avenue for the public.

3. Proper regulation of Funds Capital market not only helps in fund mobilization, but it also help in proper allocation of their resources. It can have regulation over the resources so that it can direct funds in a qualitative manner.


4. Continuous availability of Funds Capital market is the place where the investment avenue is continuously available for long term investment. This is a liquid market as it makes fund available on continues basis. Both buyers and sellers can easily buy and sell securities as they are continuously available.

5. Raise capital for Industry Capital market helps to raise capital for the industrial sector by investing in various securities such as shares, debentures which can easily provide finance to industries.

6. Capital Formation Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. Through mobilization of savings it would generate investment in various segments such as agriculture, industry etc. this helps in capital Formation.

7. Speed up Economic growth and Development Capital market provides products and productivity in the national economy. As it makes funds available for a long period of time, the financial requirements of business houses are met by the capital market. Thus increase in production and productivity generates employment and development in infrastructure.


ROLE OF CAPITAL MARKET IN INDIA’S INDUSTRIAL GROWTH 1. Mobilization of Savings and Acceleration of Capital Formation. In developing countries like India plagued by paucity of resources and increasing demand for investments by industrial organizations and governments, the importance of the capital market is self evident. 2. Promotion of Industrial Growth. The capital market is a central market through which resources are transferred to the industrial sector of the economy. The existence of such an institution encourages people to invest in productive channels rather than in the unproductive sectors like real estate, bullion etc. Thus it stimulates industrial growth and economic development of the country by mobilizing funds for investment in the corporate securities. 3. Raising Long-Term Capital. The existence of a stock exchange enables companies to raise permanent capital. The investors cannot commit their funds for a permanent period but companies require funds permanently. The stock exchange resolves this clash of interests by offering an opportunity to investors to buy or sell their securities while permanent capital with the company remains unaffected. 4. Ready and Continuous Market. The stock exchange provides a central convenient place where buyers and sellers can easily purchase and sell securities. The element of easy marketability makes investment in securities more liquid as compared to other assets. 5. Proper Channelization of Funds. An efficient capital market not only creates liquidity through its pricing mechanism but also functions to allocate resources to the most efficient industries. The prevailing market price of a security and relative yield are the

guiding factors for the people to channelize their funds in a particular company. This ensures effective utilization of funds in the public interest. 6. Provision of a Variety of Services. The financial institutions functioning in the capital market provide a variety of services, the more important ones being the following: (I) Grant of long-term and medium-term loans to entrepreneurs to enable them to establish, expand or modernize business units (II) Provision of underwriting facilities;

(III) Assistance in the promotion of companies (this function is done by the development banks like the idbi); (IV) Participation in equity capital; (V) Expert advice on management of investment in industrial securities.


Establishment institutions.







With a view to providing long-term funds to industry, the government set up the Industrial Finance Corporation of India (IFCI) in 1948, i.e., soon after Independence. This was followed by the setting up of a number of other development banks and financial institutions like the Industrial Credit and Investment Corporation of India (ICICI) in 1955, Industrial Development Bank of India (lOBI) in 1964, Industrial Reconstruction Corporation of India (IRCI) in 1971, various State Financial Corporation‟s (SFCs) at the State level, Unit Trust of India (UTI) in 1964, State Industrial Development Corporations, Life Insurance Corporations of India etc. In addition, 14 major commercial banks were nationalized in 1969.


Growing public confidence. The early post-Liberalizations‟ phase witnessed increasing interest in the stock markets. The small investor who earlier shied away from the securities market and trusted the traditional modes of investment (deposits in commercial banks and post offices) showed marked preference in favour of shares and debentures. As a result, public issues of most of the good companies were over-subscribed many times.


Increasing awareness of investment opportunities. The last few years have witnessed increasing awareness of investment opportunities among the general public. Business newspapers and financial journals, (The Economic Times, The Financial Express, Business Line, Business Standard, Business India, Business Today, Business World, Money Outlook etc.) have made the people increasingly aware of new long-term investment opportunities in the securities market.


Setting up of SEBI. The Securities and Exchange Board of India (SEBI) was set up in 1988 and was given statutory recognition in 1992. Among other things, the Board has been mandated to create an environment which would facilitate mobilization of adequate resources through the securities market and its efficient allocation.


Credit rating agencies. There are three credit rating agencies operating in India at present CRISIL, ICRA and CARE. CRISIL (the Credit Rating Information Services of India Limited) was set up in 1988, ICRA Ltd. (the Investment Information and Credit Rating Agency of India Limited) was set up in 1991 and CARE (Credit Analysis and Research Limited) was set up in 1993.



DEVELOPMENT IN INDIAN SECURITIES MARKET Over a period, the Indian securities market has undergone remarkable changes and grown exponentially, particularly in terms of resource mobilisation, intermediaries, the number of listed stocks, market capitalisation, and turnover and investor population. The following paragraphs list the principal reform measures undertaken since 1992. 1) Creation of Market Regulator Securities and Exchange Board of India (SEBI), the securities market regulator in India, was established under SEBI Act 1992, with the main objective and responsibility for (i) protecting the interests of investors insecurities,(ii) promoting the development of the securities market, and (iii) regulating the securities market. 2) Demutualization

Historically, stock exchanges were owned, controlled and managed by the brokers. In case of disputes, integrity of the stock exchange suffered. NSE, however, was set up with a pure demutualised governance structure, having ownership, management and trading with three different sets of people. Currently, all the stock exchanges in India have a demutualised set up. 3) Clearing Corporation The anonymous electronic order book ushered in by the NSE did not permit members to assess credit risk of the counter-party and thus necessitated some innovation in this area. To address this concern, NSE had set up the first clearing corporation, viz. National Securities Clearing Corporation Ltd.(NSCCL), which commenced its operations in April 1996. 3. Growing Merchant banking Activities Many Indian and foreign commercial banks have set up their merchant banking divisions in the last few years. These divisions provide financial services like underwriting facilities, issue organizing, consultancy services etc 4. Investor Protection In order to protect the interest of the investors and promote Awareness, the Central Government (Ministry of Corporate Affairs

established the Investor Education and Protection Fund (IEPF) in October 2001. With the similar objectives, the


Exchanges and SEBI also maintain investor protection funds to take care of investor claims. SEBI and the stock exchanges have also set up investor

grievance / service cells for redress of investor grievance. All these agencies and investor associations also organise investor education and awareness

programmes. 5. Screen Based Trading Prior to setting up of NSE, the trading on stock exchanges in India was based on an open outcry system. The system was inefficient and time Consuming because of its inability to provide immediate matching or recording of trades. In order to provide efficiency, liquidity and transparency, NSE

introduced a nation-wide on-line fully automated screen based trading system (SBTS) on the on November 3, 1994.

Growth of Derivative Transaction Since June 2000, the NSE has introduced the derivatives trading in the

equities. In November 2001 it has introduced the future and options transactions. These innovative products have given variety for investment in capital market.

7. Indian Capital Market Chronology 1994: 1995: 1996: 1999: 2000: 2001: Equity Trading Commences on NSE All Trading goes Electronic Depository comes into Existence Foreign institutional Investors participate in Globalization Over 80% Trades in Demat Form Major Stock Settlement

2003: T+3 Settlement in all stock 2003: Demutualization of Exchanges




SEBI Regulates Indian Capital Market
Financial sector in India has experienced a better environment to grow with the presence of higher competition. The financial system in India is regulated by independent regulators in the field of banking, insurance, and mortgage and capital market. Government of India plays a significant role in controlling the financial market in India. For the smooth functioning of the capital market a proper coordination among above organizations and segments is a prerequisite. In order to regulate, promote and direct the progress of the Indian Capital Market, the government has set up 'Securities and Exchange Board of India' (SEBI). SEBI is the supreme authority governing and regulating the Capital Market of India. The securities market enables capital formation in the economy and enhances wealth of investors who make the right choices. The investor confidence is the key prerequisite for the emergence of a vibrant and deep capital market. The role of regulator in creating and enhancing investor confidence is, therefore, paramount. Accordingly, Securities and Exchange Board of India (SEBI) was set up by an Act of Parliament of India in April, 1992 with a mandate to • Protect the interest of investors • Promote the development of and • Regulate the securities market

Market regulation
SEBI prescribes the conditions for issuer companies to raise capital from the pubic so as to protect the interest of the suppliers of capital (investors). The extensive disclosures prescribed for issuers facilitate informed investment decision making by investors while simultaneously ensuring quality of the issuer.


Further, it has prescribed norms for such corporates on „on going‟ basis and also during their restructuring (like substantial acquisition, buy back and delisting of shares) to safeguard the interest of investors. To ensure fair and high standards of service to investors, SEBI allows only fit and proper entities to operate in the capital markets as intermediaries. In this regard, it has prescribed detailed and uniform norms of their registration. Further, to ensure market integrity, it has prescribed norms for fair market practices including prohibiting fraudulent and unfair trade practices and insider trading. Detailed norms for safeguarding the interest of investors in secondary markets have also been prescribed. SEBI also prescribes conditions for operation of collective investor schemes, including Mutual Funds.

Market development:
On an ongoing basis, SEBI initiates measures to widen and deepen the Securities markets by bringing changes in market micro and macrostructure. The major market development measures undertaken by SEBI include shift from the non transparent open outcry system to the transparent screen based on line trading system, elimination of problems of physical certificates by shifting to electronic mode (demat), implementing robust risk management framework in stock market trading etc. In the recent past SEBI has initiated ASBA (application supported by blocked amount) to eliminate problems pertaining to refunds in public issues. SEBI‟s major policy decisions are formulated through a consultative process involving expert committees with representation from industry, academia, and investors‟ associations. Further, public comments are invited before

implementation of major changes, rendering the whole process participative.


Investor protection:
The above mentioned regulatory framework and the market development measures of SEBI are invariably geared towards protecting the interest of investors. Besides, SEBI also has a comprehensive mechanism to facilitate redressal of investor‟s grievances. Further, in keeping with its belief that an informed investor is a protected investor, SEBI promotes education and awareness of investors. Moreover, mechanisms for dispute redressal (arbitration at stock exchanges) and to compensate investors have also been provided.





FOREIGN INSTITUTIONAL INVESTOR: The term Foreign Institutional Investor is defined By SEBI as under: "Means an institution established or incorporated outside India which proposes to make investment in India in securities. Provided that a domestic asset management company or domestic portfolio manager who manages funds raised or collected or brought from outside India for investment in India on behalf of a sub-account, shall be deemed to be a Foreign Institutional Investor." Foreign Investment refers to investments made by residents of a country in financial assets and production process of another country Entities covered by the term „FII‟ include “Overseas pension funds, mutual funds, investment trust, asset Management Company, Nominee Company, bank, institutional portfolio manager, university funds, endowments, foundations, charitable trusts, charitable societies etc. The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with Securities & Exchange Board of India (SEBI) to participate in the market. One of the major market regulations pertaining to FII involves placing limits on FII ownership in Indian companies. They actually evaluate the shares and deposits in a portfolio.


WHY FIIS REQUIRED? FIIs contribute to the foreign exchange inflow as the funds from multilateral finance institutions and FDI (Foreign direct investment) are insufficient. Following are the some advantages of FIIs. • It lowers cost of capital, access to cheap global credit. • It supplements domestic savings and investments. • It leads to higher asset prices in the Indian market. • And has also led to considerable amount of reforms in capital market and financial sector.

HISTORY OF FII India opened its stock market to foreign investors in September 1992, and in 1993, received portfolio investment from foreigners in the form of foreign institutional investment in equities. This has become one of the main channels of FII in India for foreigners. Initially, there were terms and conditions which restricted many FIIs to invest in India. But in the course of time, in order to attract more investors, SEBI has simplified many terms such as:• The ceiling for overall investment of FII was increased 24% of the paid up capital of Indian company. • Allowed foreign individuals and hedge funds to directly register as FII. • Investment in government securities was increased to US$5 billion. • Simplified registration norms.

INFLUENCE OF FII ON INDIAN MARKET Positive fundamentals combined with fast growing markets have made India an attractive destination for foreign institutional investors (FIIs). Portfolio investments

brought in by FIIs have been the most dynamic source of capital to emerging markets in 1990s. At the same time there is unease over the volatility in foreign institutional investment flows and its impact on the stock market and the Indian economy. Apart from the impact they create on the market, their holdings will influence firm performance. Some major impact of FII on stock market: • They increased depth and breadth of the market. • They played major role in expanding securities business. • Their policy on focusing on fundamentals of share had caused efficient pricing of share.


Financial markets facilitate effective implementation of monetary policy by serving as a link in the transmission mechanism between monetary policy and the real economy. In India, although financial markets have existed for a long time, they remained relatively underdeveloped. Concerted efforts to develop the financial markets towards global standards began in the early 1990s as a part of broader financial sector reforms The Indian capital market has witnessed a radical transformation within a period of just over one decade. During the early part of 1990s the ranking of Indian capital market with reference to global standards of efficiency, safety, market integrity etc., was low. With reference to the risk indices, in particular, the Indian capital market was regarded as one of the worst as it figured almost at the bottom of the league. However, the scenario has now completely changed. Because of extensive capital market reforms carried out over the period of the last one decade or so, the setting up and extension of activities of NSE. And steps taken by SEBI, the Indian capital market is now ranked in the top league. In fact, it is now considered to be way ahead of many developed country capital markets. The lack of an advanced and vibrant capital market can lead to underutilization of financial resources. The developed capital market also provides access to the foreign capital for domestic industry. Thus capital market definitely plays a constructive role in the overall development of an economy. The Indian financial system has undergone structural transformation over the past decade. The financial sector has acquired strength, efficiency and stability by the combined effect of competition, regulatory measures, and policy environment.


While competition, consolidation and convergence have been recognized as the key drivers of the banking sector in the coming years



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