Capital Market

DEFINITIONS OF FINANCIAL MARKET
In economics, a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds Attributive form of financial market, noun A generic term for the markets in which financial securities are traded – eg. stock exchanges, futures exchanges, currency markets. A market for a financial instrument, in which buyers and sellers find each other and create or exchange financial assets. ..

In economics, a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient-market hypothesis.

Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidity. Both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded) exist. Markets work by placing many interested buyers and sellers in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy. In finance, financial markets facilitate – The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); International trade (in the currency markets) Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends. The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. This may be a physical location (like the NYSE) or an electronic system (like NASDAQ). Much trading of stocks takes place on an exchange; still, corporate actions (merger, spinoff) are outside an exchange, while any two companies or people, for whatever reason, may agree to sell stock from the one to the other without using an exchange. Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock exchange, and people are building electronic systems for these as well, similar to stock exchanges. Financial markets can be domestic or they can be international.

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Capital Market
Types of financial markets
The financial markets can be divided into different subtypes: Capital markets which consist of: Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof. Commodity markets, which facilitate the trading of commodities. Money markets, which provide short term debt financing and investment. Derivatives markets, which provide instruments for the management of financial risk. Futures markets, which provide standardized forward contracts for trading products at some future date; see also forward market. Insurance markets, which facilitate the redistribution of various risks. Foreign exchange markets, which facilitate the trading of foreign exchange The capital markets consist of primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets. Secondary markets allow investors to sell securities that they hold or buy existing securities.

Individuals
Many individuals are not aware that they are lenders, but almost everybody does lend money in many ways. A person lends money when he or she: Puts money in a savings account at a bank; Contributes to a pension plan; Pays premiums to an insurance company; Invests in government bonds; or Invests in company shares.

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

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Capital Market
Borrowers
Individuals borrow money via bankers' loans for short term needs or longer term mortgages to help finance a house purchase. Companies borrow money to aid short term or long term cash flows. They also borrow to fund modernization or future business expansion. Governments often find their spending requirements exceed their tax revenues. To make up this difference, they need to borrow. Governments also borrow on behalf of nationalized industries, municipalities, local authorities and other public sector bodies. In the UK, the total borrowing requirement is often referred to as the Public sector net cash requirement (PSNCR). Governments borrow by issuing bonds. In the UK, the government also borrows from individuals by offering bank accounts and Premium Bonds. Government debt seems to be permanent. Indeed the debt seemingly expands rather than being paid off. One strategy used by governments to reduce the value of the debt is to influence inflation. Municipalities and local authorities may borrow in their own name as well as receiving funding from national governments. In the UK, this would cover an authority like Hampshire County Council. Public Corporations typically include nationalized industries. These may include the postal services, railway companies and utility companies. Many borrowers have difficulty raising money locally. They need to borrow internationally with the aid of Foreign exchange markets

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Capital Market DEFINITIONS OF CAPITAL MARKET
The capital market is the market for securities, where companies and governments can raise long-term fund The market in which corporate equity and longer-term debt securities (those maturing in more than one year) are issued and traded. Includes all financial transactions between users of funds and suppliers of funds. The market for long- and medium-term financing, ie more than a year. The market from which companies raise capital by selling medium and long-term financial instruments including bonds, notes, swaps and equities Debt and equity securities with maturities greater than one year. A financial market in which long-term debt obligations and equity securities are bought and sold. There are two broad types of securities traded in the capital market: debt and equity. Buying stock allows investors to gain an equity interest in the company and become part owner. ... Is a market for long-term debt and equity shares? In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. ... The supply and demand for resources to invest in real estate and other investments.

The capital market is the market for securities, where companies and governments can raise long term funds. It is a market in which money is lent for periods longer than a year. The capital market includes the stock market and the bond market. Financial regulators, such as the U.S. Securities and Exchange Commission, oversee the capital markets in their designated countries to ensure that investors are protected against fraud. The capital markets consist of the primary market and the secondary market. The primary market is where new stock and bonds issues are sold (underwriting) to investors. The secondary markets are where existing securities are sold and bought from one investor or speculator to another, usually on an exchange (e.g.- New York Stock Exchange).

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the 'Share Mania' in India begun. 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. However.Capital Market INDIAN CAPITAL MARKET: AN OVERVIEW Evolution Indian Stock Markets are one of the oldest in Asia. at the end of the American Civil War. Its history dates back to nearly 200 years ago. thus. a disastrous slump began (for example. 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. Thus. The earliest records of security dealings in India are meagre and obscure. 5 . In 1887. they formally established in Bombay. there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850. By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. the "Native Share and Stock Brokers' Association" (which is alternatively known as “The Stock Exchange "). Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87). Though the trading list was broader in 1839. In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped. At the end of the American Civil War. the Stock Exchange at Bombay was consolidated. 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. The number of brokers increased to about 200 to 250. In 1895. in 1865. the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899.

100 million and having more than 20.000 shareholders are. namely. Two types of transactions can be carried out on the Indian stock exchanges: (a) spot delivery transactions "for delivery and payment within the time or on the date stipulated when entering into the contract which shall not be more than 14 days following the date of the contract" : and (b) forward transactions "delivery and payment can be extended by further period of 14 days each so that the overall period does not exceed 90 days from the date of the contract". buy and sell securities for his clients on a commission basis and also can act as a trader or dealer as a principal. there is a great amount of effort to modernize the Indian stock exchanges in the very recent times. in contrast with the practice prevailing on New York and London Stock Exchanges. The brokers who carry over the outstandings pay carry over charges (cantango or backwardation) which are usually determined by the rates of interest prevailing. specified securities (forward list) and nonspecified securities (cash list). They are broadly divided into two categories. However. growth-oriented companies with a paid-up capital of atleast Rs. 6 . buy and sell securities on his own account and risk. normally. The latter is permitted only in the case of specified shares. Equity shares of dividend paying.50 million and a market capitalization of atleast Rs. where a member can act as a jobber or a broker only. put in the specified group and the balance in non-specified group. The nature of trading on Indian Stock Exchanges are that of age old conventional style of face-toface trading with bids and offers being made by open outcry.Capital Market TRADING PATTERN OF THE INDIAN STOCK MARKET Trading in Indian stock exchanges are limited to listed securities of public limited companies. A member broker in an Indian stock exchange can act as an agent.

Registering and regulating the working of stock brokers. sub–brokers etc. The regulator ensures that the market participants behave in a desired manner so that securities market continues to be a major source of finance for corporate and government and the interest of investors are protected. SEBI aims at maintaining liquidity. trade practices. OBJECTIVES 1) Conducive Environment SEBI aims at creating a proper and conducive environment required for raising money from the capital market through the rules. customs and relations among institutions. especially the interest of the small investors. safety and profitability of the securities in the market that are crucial for any investment. undertaking inspection. SEBI has been obligated to perform the aforesaid functions by such measures as it thinks fit. brokers. it has powers for: Regulating the business in stock exchanges and any other securities markets. Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI). in addition to all intermediaries and persons associated with securities market. Promoting and regulating self-regulatory organizations Prohibiting fraudulent and unfair trade practices Calling for information from. Investors and companies. 1992. 1992 provides for establishment of Securities and Exchange Board of India (SEBI) with statutory powers for (a) protecting the interests of investors in securities (b) promoting the development of the securities market and (c) regulating the securities market. In particular.Capital Market NEED FOR REGULATORS The absence of conditions of perfect competition in the securities market makes the role of the Regulator extremely important. mutual funds and other persons associated with the securities market. Department of Company Affairs (DCA). SEBI Act. efficiently and at affordable minimum cost. 2) Investor Education SEBI aims at educating investors so as to make them aware of their rights in clear and specific terms by providing them with information. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities. It also aims at endeavoring to restore and safeguard the trust of investors. A 7 . self–regulatory organizations. conducting inquiries and audits of the stock exchanges. ROLE OF SEBI The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under Section 3 of SEBI Act. regulations. WHO REGULATES THE SECURITIES MARKET? The responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA). This way. intermediaries. SEBI works for creating proper investment climate to enable corporate sector to float industrial securities easily.

Capital Market
high degree of protection of investor rights and interest is made possible by providing adequate, accurate and authentic information on a continuous basis. 3) Infrastructure SEBI aims at developing a proper infrastructure for facilitating automatic expansion and growth of business of middlemen like brokers, jobbers, commercial banks, merchant bankers, mutual funds, etc. 4) Others In addition to the above mentioned objectives, SEBI would also make efforts to bring about necessary enactments for regulating business of intermediaries such as mutual funds, NBFCs and chit funds, etc. SEBI would also work towards creating a Framework for more open, orderly and unprejudiced conduct in relation to takeover and mergers in the corporate sector so as to ensure fair and equal treatment to all the security holders.

FUNCTIONS OF SEBI
1. Prohibition of Fraudulent and Unfair Trade Practices : SEBI notified regulations on Prohibitions of fraudulent and Unfair Trade Practices which have imposed prohibition against market manipulators and unfair practices relating to securities. 2. Penal Margins : SEBI introduced imposition of penal margin on net undelivered portion at the end of the settlement, special margin on buyers in case of rise in share prices. 3. Entry Norms : It issued various guidelines for tightening the entry norms for companies accessing capital market. 4. Screen-Based Trading : SEBI decided to allow stock exchanges to expand their online screen based trading terminals to locations outside their jurisdiction subject to certain conditions and to reduce the minimum application size for subscribing to a public issue of Rs.2000 from Rs.5000 to encourage small investors and to boost activity in the capital market. 5. Risk Management : SEBI Group on risk management for equity market discussed the issues, concerning risk management in rolling settlement and took following decisions: For newly added 266 scrips the stock exchange will calculate scrips-wise variance and index based variance and will apply the higher of the two as the margin percentage. For 148 scrips already rolling in settlement, the margin is three times the daily index variance. The minimum daily index variance has been fixed at 5 percent as in the index futures market.

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Capital Market
6. Investor Protection : Mitra Committee on investor protection submitted its report to SEBI and its main recommendations are as follows: Provisions relating to Investors Education and Protection Fund (IEPF) are removed from the Companies Act and included in the SEBI Act, 1992; IEPF should be administered by SEBI. SEBI should be the only regulator of capital market; it should be given powers for investigation; it must also have powers to attach public funds and all converted assets to prevent misappropriation; but it cannot have powers to award compensation, which is the job of the judicial forum. SEBI Act be amended to provide for statutory standing committees on investor’s protection, market operation and standard setting. 7. Prevention of Insider Trading : To prevent price manipulation, SEBI issued Insider Trading Regulations in 1992 prohibiting insider trading. For ensuring greater market transparency, negotiated and cross deals (where Both the seller and the buyer operate through the same broker), which are allowed earlier, have also been banned. 8. Stricter Norms for Share Transfer : SEBI has appointed Bhagwati Panel on SEBI takeover code to suggest a set of change including tightening of the norms for transfer of shares among group companies and stiff action against violation of takeover code. The panel has suggested the following: i. NRIs and foreigners will have to take prior approval from company board for acquiring more than 5 percent through creeping acquisition. ii. Companies may transfer shares between themselves if they can prove that they belong to the same group. iii. Under takeover code, it will be made mandatory to inform the company if any one pledges the company shares. The panel will formulate disclosure rules in the code under which acquires will have to inform the company and stock exchanges when they reach 5, 10, 14 percent stake in the company. 9. Online Real – time Information System : SEBI has been planning to launch an online real –time information system which would improve the information flow into the market in a more orderly manner. The system would be similar to Edgar online, US – based provider of information services. 10. Raising Funds from Abroad : The Indian companies were allowed to raise funds from abroad, through American / Global Depository Receipts (ADRs/GDRs), Foreign Currency Convertible Bonds (FCCBs) and external Commercial Borrowings (ECBs). The Reserve Bank allowed two way fungibility of ADR’s /GDR’s in February 2002. Foreign institutional investors are allowed to participate in the capital market.

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Capital Market
THE COMPANIES ACT, 1956
PUBLIC COMPANY Minimum Paid-up Capital : Rs. 5,00,000 Minimum number of members : 7 members Transfer of shares : Easily transferable IPO: It invites public to subscribe shares in the company. Special privileges: Enjoy no such privileges. Restriction on appointment of directors : Directors must file with the registrar consent to act as directors PRIVATE COMPANY Minimum Paid-up Capital: Rs. 1,00,000 Minimum number of members 2 members Transfer of shares : Restricts the right to transfer its shares IPO : prohibits any invitation to the public to subscribe for any shares in or debentures of the company Special privileges: Enjoys some special privileges. Restriction on appointment of directors: The directors of private company need not do so.

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Capital Market
PRIMARY MARKET
The primary market provides the channel for sale of new securities. Primary market provides opportunity to issuers of securities; Government as well as corporates, to raise resources to meet their requirements of investment and/or discharge some obligation. They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc. They may issue the securities in domestic market and/or international market.

FACE VALUE, PREMIUM AND DISCOUNT OF SHARES IN A SECURITY MARKET Face Value is the nominal or stated amount (in Rs.) assigned to a security by the issuer. For an equity share, the face value is usually a very small amount (Rs. 5, Rs. 10) and does not have much bearing on the price of the share, which may quote higher in the market, at Rs. 100 or Rs. 1000 or any other price. For a debt security, face value is the amount repaid to the investor when the bond matures (usually, Government securities and corporate bonds have a face value of Rs. 100). When a security is sold above its face value, it is said to be issued at a Premium and if it is sold at less than its face value, then it is said to be issued at a Discount.

FEATURES OF PRIMARY MARKET This is the market for new long term capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called New Issue Market (NIM). In a primary issue, the securities are issued by the company directly to investors. The company receives the money and issues new security certificates to the investors. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. The primary market performs the crucial function of facilitating capital formation in the economy. The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as ‘going public’. The financial assets sold can only be redeemed by the original holder.

Methods of issuing securities in the primary market
Initial public offering, Rights issue (for existing companies), and Preferential issue.

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thinking that the new company or the newly public company will be the next big thing with a huge profit margin. The way to invite share capital from the public is through a ‘Public Issue’. The more investors wish to invest in a company. However. What is the difference between public issue and private placement? When an issue is not made to only a select set of people but is open to the general public and any other investor at large. So companies invite the public to contribute towards the equity and issue shares to individual investors. IPOs are attractive mainly because they may be undervalued. They also can take a business to the next level. It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. it is a public issue. an issue becomes public if it results in allotment to 50 persons or more. This paves way for listing and trading of the issuer’s securities. But if the issue is made to a select set of people. stocks and shares are a fast way to raise revenue for business expansion and growth. Initially. What are the Benefits of IPOs? For businesses. 1956. larger opportunities and can start working towards incorporation and even worldwide expansion. Simply stated. early investors stand to make a lot of profit -.Capital Market INITIAL PUBLIC OFFER (IPO) An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. it is called private placement. a public issue is an offer to the public to subscribe to the share capital of a company. This means an issue can be privately placed where an allotment is made to less than 50 persons. By becoming a publicly traded company a business can take advantage of new. the promoters’ capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. the more the company stands to or from IPOs and other stock offerings. Once this is done. As per Companies Act. 12 . Even though public offering can be costly and time consuming. and investors will often buy IPOs. IPOs are also a relatively low risk for businesses and have the potential for huge gains and for huge opportunities. As prices grow and demand for the IPOs grows. For the investor. to make IPOs more attractive.and very quickly. Why do companies need to issue shares to the public? Most companies are usually started privately by their promoter(s). the company allots shares to the applicants as per the prescribed rules and regulations laid down by SEBI. This helps to encourage investors. IPO gives a company fast access to public capital. many companies will offer their initial public offering at a low rate. the tradeoffs are very appealing to companies.

SEBI mainly scrutinizes the issue for seeing that adequate disclosures are made by the issuing company in the prospectus or offer document. the company has to open its issue within three months period. which are above or equal to the floor price. SEBI does not play any role in price fixation. In other words. Who decides the price of an issue? Indian primary market ushered in an era of free pricing in 1992. The investors should make an informed decision purely by themselves based on the contents disclosed in the offer documents. the guidelines have provided that the issuer in consultation with Merchant Banker shall decide the price. There is no price formula stipulated by SEBI. The validity period of SEBI’s observation letter is three months only i.Capital Market ROLE OF SEBI IN ISSUE OF SHARES Any company making a public issue or a listed company making a rights issue of value of more than Rs 50 lakh is required to file a draft offer document with SEBI for its observations. It is a mechanism where. the investors are generally advised to study all the material facts pertaining to the issue including the risk factors before considering any investment. SEBI does not associate itself with any issue/issuer and should in no way be construed as a guarantee for the funds that the investor proposes to invest through the issue. However. one where company and Lead Merchant Banker fix a price (called fixed price) and other. They are strongly warned against relying on any ‘tips’ or news through unofficial means. What is a Price Band in a book built IPO? The prospectus may contain either the floor price for the securities or a price band within which the investors can bid. during the period for which the IPO is open. by issuing a press release and also indicating the 13 . Following this. The company can proceed further on the issue only after getting observations from SEBI. bids are collected from investors at various prices.e. The price band can have a revision and such a revision in the price band shall be widely disseminated by informing the stock exchanges. What does ‘price discovery through Book Building Process’ mean? Book Building is basically a process used in IPOs for efficient price discovery. where the company and the Lead Manager (LM) stipulate a floor price or a price band and leave it to market forces to determine the final price (price discovery through book building process). SEBI does not recommend any issue nor does take any responsibility either for the financial soundness of any scheme or the project for which the issue is proposed to be made or for the correctness of the statements made or opinions expressed in the offer document. The company and merchant banker are however required to give full disclosures of the parameters which they had considered while deciding the issue price. The offer price is determined after the bid closing date. There are two types of issues. Floor price is the minimum price at which bids can be made. The spread between the floor and the cap of the price band shall not be more than 20%. it means that the cap should not be more than 120% of the floor price.

SEBI may specify changes. subject to the total bidding period not exceeding ten days. Prospectus A large number of new companies float public issues. It accompanies the application form of public issues. it is very important that an investor before applying for any issue identifies future potential of a company. quite a few may want to exploit the investors. the promoters. This disclosure includes information like the reason for raising the money. Who decides the Price Band? It may be understood that the regulatory mechanism does not play a role in setting the price for issues. What is an ‘Abridged Prospectus’? ‘Abridged Prospectus’ is a shorter version of the Prospectus and contains all the salient features of a Prospectus. What does ‘Draft Offer document’ mean? ‘Offer document’ means Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a rights issue which is filed with the Registrar of Companies (ROC) and Stock Exchanges (SEs). 14 . This helps investors to evaluate short term and long term prospects of the company. The Draft Offer Document is available on the SEBI website for public comments for a period of 21 days from the filing of the Draft Offer Document with SEBI. means of financing.Capital Market change on the relevant website and the terminals of the trading members participating in the book building process. in the draft Offer Document and the issuer or the lead merchant banker shall carry out such changes in the draft offer document before filing the Offer Document with ROC/SEs. In case the price band is revised. This information is in the form of ‘Prospectus’ which also includes information regarding the size of the issue. its current and past performance. the current status of the company. its equity capital. A part of the guidelines issued by SEBI (Securities and Exchange Board of India) is the disclosure of information to the public. It is up to the company to decide on the price or the price band. the project. product and capacity etc. the bidding period shall be extended for a further period of three days. ‘Draft Offer document’ means the offer document in draft stage. cost of the project. in consultation with Merchant Bankers. It also contains lot of mandatory information regarding underwriting and statutory compliances. the return expected on the money etc. While a large number of these companies are genuine. An offer document covers all the relevant information to help an investor to make his/her investment decision. the way money is proposed to be spent. The draft offer documents are filed with SEBI. if any. Therefore. atleast 21 days prior to the filing of the Offer Document with ROC/SEs.

Resolve grievances of debenture holders. The other branches which act as collection centres are called as Collecting Branches. The underwriter exposed to the risk of under subscription & for assuming the risk they are remunerated by underwriting commission which comprise of the face value + premium of the issue. Bankers There are no restrictions on the number of banks that can be associated with an issue. finalizing the cost of the project. 2) Refund of application money to unsuccessful applicants. Assist the Lead Manager in obtaining stock exchange approval for the basis of allotment. A category II Registrar can act as either as Registrar to the Issue or as a Share Transfer Agent. Parties to the issue Registrar to the issue Registration with SEBI is mandatory for acting as Registrar & Share Transfer Agent. profitability estimates and for preparing of ‘Prospectus’. Data entry of the contents of all the application forms. Send stock invests of successful applicants for collection.Capital Market Who prepares the ‘Prospectus’/‘Offer Documents’? Generally. Ensure that refund orders & debentures certificates are despatched on time. The ‘Prospectus’ is submitted to SEBI for its approval. the public issues of companies are handled by ‘Merchant Bankers’ who are responsible for getting the project appraised. A category I Registrar can act as both Registrar to the Issue & as a Share Transfer Agent. To ensure continuous listing of debentures. then the underwriter agrees to subscribe a specified number of securities in an issue. Each Banker to the issue designated one particular branch as the Controlling Branch. Underwriters When an existing shareholder of body corporate/public don’t subscribe to the securities offered to them. 15 . Functions: 1) 2) 3) 4) Take possession of trust property in accordance to the provisions of trust deed. All the issue proceeds are transferred only to this account. The company can’t withdraw the money from this account till the entire process of allotment & listing is completed. Functions: 1) 2) 3) 4) Assist the Lead Manger in selection of Bankers & Collection Centres. 20 lakhs & total outstanding underwriting obligation at any point of time can’t exceed 20 times of underwriter’s net worth. An underwriter should have minimum net worth of Rs. 3) Acceptance of money payable on allotment & on calls. Debenture trustees Debenture trustees are required to obtain a certificate of Registration from SEBI. Functions: 1) Open Share Application Money Account of company.

Legal Advisor Legal Advisors are generally appointed to ensure compliance of all legal & regulatory provisions related to the public offering. The information regarding the brokers to the issue & the rate of brokerage payable is to be mentioned in the prospectus. Functions: 1) Layout & designing of offer document. Drafting & distribution of press releases. Functions: 1) Scrutinize the offer document to ensure that there is no legally incorrect statement. brochures. Designing the corporate brochure & publicity material. 3) Extend underwriting support to the issue. etc. Arranging press conferences & road shows. 3) Ensure that the offer document is drawn up in accordance with the provisions of the Companies Act. Auditor The regular auditor of the company acts as the auditor for the purpose of public offer. application forms. Functions: 1) Tax benefits report. posters. 2) Disseminate information to the investors about the issue. Printers The printers are involved in the process of printing & distribution of issue related stationery. 3) Printing of offer documents. 16 . Functions: 1) Offer marketing support for the issue. The primary criteria in selection of printers are the cost factor & the quality of service. Advertising agencies The success of many public issues can be attributed to savvy advertising campaign. The auditor is has to prepare the reports for the company. 1956. 2) Provide legal advice to the company on other legal matters related to public offering. 2) Certificate stating the entire amount of reservation. Functions: 1) 2) 3) 4) Devising of advertising & publicity strategy. 3) Certificate stating the promoter’s contribution. 2) Designing of Form 2A (application form). SEBI guidelines & the other statutory provisions related to public offering. The role of advertising agency is of crucial importance in determining the fate of the issue.Capital Market Brokers Any member of any recognised stock exchanges can be appointed as Broker to the issue.

Undertaking. within 2 working days the details of credit to demat account / allotment advice and dispatch of refund order needs to be completed. processing of the applications and other matters till the basis of allotment is finalized. the country has been divided into four regions i. Due Diligence & Inter se Allocation of Responsibilities. Southern. How long does it take to get the shares listed after issue? It would take around 3 weeks after the closure of the book built issue. How does one know if shares are allotted in an IPO/offer for sale? What is the timeframe for getting refund if shares not allotted? As per SEBI guidelines. At all such places where stock exchange is located & in the region where the registered office of company is situated. the Basis of Allotment should be completed with 15 days from the issue close date.e. Mandatory Collection Centres The minimum number of collection centres for an issue of capital shall be four metropolitan cities. POST – ISSUE ACTIVITIES Post – issue activities commence with the collection of subscription figures & go on till the securities are listed on the stock exchange. What is the role of a ‘Registrar’ to an issue? The Registrar finalizes the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent. So an investor should know in about 15 day’s time from the closure of issue. As soon as the basis of allotment is completed. For this purpose. What is meant by ‘Listing of Securities’? Listing means admission of securities of an issuer to trading privileges (dealings) on a stock exchange through a formal agreement. Northern. Eastern. The Lead Manager coordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank branches. whether shares are allotted to him or not.Capital Market PRE – ISSUE ACTIVITIES Registration of the offer document 10 copies of the draft prospectus have to be filed with SEBI accompanied by the documents like MOU. SEBI charges registration fees for the same. Western. The prime objective of admission to dealings on the 17 . dispatch security certificates and refund orders completed and securities listed.

the securities of that company would no longer be traded at that stock exchange. The listing agreement specifies the terms and conditions of listing and the disclosures that shall be made by a company on a continuous basis to the exchange. the company is required to enter into a listing agreement with the exchange. as also to provide a mechanism for effective control and supervision of trading. 18 .Capital Market exchange is to provide liquidity and marketability to securities. What is a ‘Listing Agreement’? At the time of listing securities of a company on a stock exchange. What does ‘Delisting of securities’ mean? The term ‘Delisting of securities’ means permanent removal of securities of a listed company from a stock exchange. As a consequence of delisting.

Capital Market SECONDARY MARKET DEFINITION OF SECONDARY MARKET Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. when compared to other investment options. Secondary market is an equity trading venue in which already existing/pre-issued securities are traded among investors. enabling implementation of incentive-based management contracts. The Nifty value as of end December 2005 was 2836. This may be illustrated with the help of following examples: a) Over a 15 year period between 1990 to 2005. Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities.17% and Reliance 281. Investment in shares of ONGC Ltd for the same period gave a return of 465. SBI 301. Shares are also known as Equities. ROLE OF SECONDARY MARKET For the general investor. EQUITY INVESTMENT Reason one should invest in equities in particular: When you buy a share of a company you become a shareholder in that company. While stock exchange is the part of an auction market. 2000 (index value 1592. Therefore. Secondary market comprises of equity markets and the debt markets. b) Mr. Research studies have proved that investments in some shares with a longer tenure of investment have yielded far superior returns than any other investment. Holding this investment over this period Jan 2000 to Dec 2005 he gets a return of 78. the secondary market provides an efficient platform for trading of his securities. Equities are considered the most challenging and the rewarding. It also provides your portfolio with the growth necessary to reach your long term investment goals.86%. 19 . securities are offered to public for subscription for the purpose of raising capital or fund.90). Raju invests in Nifty on January 1. Equities have the potential to increase in value over time. Over-the-Counter (OTC) is a part of the dealer market. and aggregating information (via price discovery) that guides management decisions. For the management of the company. Majority of the trading is done in the secondary market.55.42%. Nifty has given an annualized return of 17%. Secondary market could be either auction or dealer market.07%. DIFFERENCE BETWEEN PRIMARY MARKET & SECONDARY MARKET In the primary market. Research studies have proved that the equities have outperformed most other forms of investments in the long term.

investing in equity shares offers the highest rate of return. the effect of market-specific factor is generally short-term. Despite ups and downs. communal riots. friendly budget. can fuel euphoria in the investors. Besides that on average stocks have paid 1. Therefore. Equities are high risk investments. its future earnings capacity. This factor depends on the environment rather than the performance of any particular company. if invested over a longer duration. Dividend is a percentage of the face value of a share that a company returns to its shareholders from its annual profits. However. Compared to most other forms of investments. economic crisis. a prudent advice to all investors is to analyze and invest and not speculate in shares. Indian stock market has returned about 17% to investors on an average in terms of increase in share prices or capital appreciation annually. unfavorable events like war. stable government etc. 20 . financial health and management. One needs to study them carefully before investing. political or regulatory environment like high economic growth. depress the market irrespective of certain companies performing well. AVERAGE RETURN ON EQUITIES IN INDIA Since 1990 till date. Events favorable to an economy. this does not mean all equity investments would guarantee similar high returns. resulting in a boom in the market. price of a stock in the long run gets stabilized based on the stock specific factors.Capital Market However.5% dividend annually. minority government etc. The market specific factor is influenced by the investor’s sentiment towards the stock market as a whole. The stock-specific factor is related to people’s expectations about the company. On the other hand. FACTORS INFLUENCING THE PRICE OF STOCK Broadly there are two factors: (1) stock specific and (2) market specific. level of technology and marketing skills.

or may be in an industry that's not fancied by most investors. resources are mobilized by the corporates through fresh public issues (IPOs) or through private placements. whose potential for growth in sales and earnings are excellent. Value 38 investors look to buy stocks that are undervalued. Value stocks etc. Alternately. real estate. inventories. you may purchase shares from the secondary market. subsidiaries. These companies may have been beaten down in price because of some bad event. yet that value may not be reflected in the stock's price. even a company that has seen its stock price decline still has assets to its name .Capital Market TERMS GROWTH STOCK In the investment world we come across terms such as Growth stocks. or market value etc. The value investors tend to purchase a company's stock usually based on relationships between the current market price of the company and certain business fundamentals. To buy and sell securities you should approach a SEBI registered trading member (broker) of a recognized stock exchange. are growing faster than other companies in the market or other stocks in the same industry are called the Growth Stocks. Total sales at a certain level relative to the company's market capitalization. Companies. 21 . and so on. VALUE STOCK The task here is to look for stocks that have been overlooked by other investors and which may have a ‘hidden value’. In the primary market. Many of these assets still have value. and then hold those stocks until the rest of the market realizes the real value of the company's assets. dividend yields above a certain absolute limit.buildings. They like P/E ratio being below a certain absolute limit. However. These companies usually pay little or no dividends and instead prefer to reinvest their profits in their business for further expansions. ACQUISITION OF EQUITY SHARES You may subscribe to issues made by corporates in the primary market.

Capital Market DEBT INSTRUMENT DEFINITION Debt instrument represents a contract whereby one party lends money to another on predetermined terms with regards to rate and periodicity of interest.. and include a variety of tailor. In Indian securities markets. repayment of principal amount by the borrower to the lender. a GS CG2008 11. 22 . this bond will pay Rs. Coupon: Coupon refers to the periodic interest payments that are made by the borrower (who is also the issuer of the bond) to the lender (the subscriber of the bond). coupon and principal. viz. Some of the PSU bonds are tax free. For example. Maturity: Maturity of a bond refers to the date. The coupon is the product of the principal and the coupon rate. and is also called the par value or face value of the bond. FEATURES Each debt instrument has three features: Maturity.monthly coupon.40%.40% bond refers to a Central Government bond maturing in the year 2008 and paying a coupon of 11.made features with respect to interest payments and redemption. Corporate bond markets comprise of commercial paper and bonds. It is also called the term or the tenure of the bond. The market for Government Securities comprises the Centre. (1) Government Securities. The name of the bond itself conveys the key features of a bond. Coupon rate is the rate at which interest is paid. These bonds typically are structured to suit the requirements of investors and the issuing corporate. In the recent past. The term to maturity of a bond can be calculated on any date. which is the date on which the borrower has agreed to repay the principal. while most bonds including government securities are not tax-free. 5. and is usually represented as a percentage of the par value of a bond. as the distance between such a date and the date of maturity. local bodies such as municipalities have also begun to tap the debt markets for funds.100 and normally pay coupon semi-annually. until maturity. on which the bond matures. from date of issue of the bond until its maturity. Term-to-Maturity refers to the number of years remaining for the bond to mature. State a State-sponsored securities. SEGMENTS IN THE DEBT MARKET IN INDIA There are three main segments in the debt markets in India. and (3) Corporate securities. The Term-to-Maturity changes everyday. (2) Public Sector Units (PSU) bonds. Since Central Government bonds have a face value of Rs.70 as six. Principal: Principal is the amount that has been borrowed. the term ‘bond’ is used for debt instruments issued by the Central and State governments and public sector organizations and the term ‘debenture’ is used for instruments issued by private corporate sector.

Alternatively.Capital Market PARTICIPANTS IN THE DEBT MARKET Given the large size of the trades. mutual funds. 23 . financial institutions. provident funds. you may purchase the same from the secondary market through the stock exchanges. ACQUIRING SECURITIES IN THE DEBT MARKET You may subscribe to issues made by the government/corporates in the primary market. insurance companies and corporates. Debt market is predominantly a wholesale market. with dominant institutional investor participation. The investors in the debt markets are mainly banks.

either corporation or mutual organization. The trade on an exchange is only by members and stock broker who have a seat on the exchange. It is an organized market place. Stock Exchange also facilitates for the issue and redemption of securities and other financial instruments including the payment of income and dividends.Capital Market STOCK EXCHANGE A STOCK EXCHANGE is a marketplace where brokers and dealers meet to buy and sell stocks of publicly traded companies on behalf of investors. where members of the organization gather to trade company stocks or other securities. STOCK EXCHANGES IN INDIA There are twenty three stock exchanges in India Bombay Stock Exchange (BSE) National Stock Exchange (NSE) Regional Stock Exchanges Ahmedabad Stock Exchange Bangalore Stock Exchange Bhubaneswar Stock Exchange Calcutta Stock Exchange (Kolkata) Cochin Stock Exchange Coimbatore Stock Exchange Delhi Stock Exchange Guwahati Stock Exchange Hyderabad Stock Exchange Jaipur Stock Exchange Ludhina Stock Exchange Madhya Pradesh Stock Exchange (Indore) Madras Stock Exchange Magadh Stock Exchange (Patna) Mangalore Stock Exchange Meerut Stock Exchange OTC Exchange of India Pune Stock Exchange Saurashtra Kutch Stock Exchange Uttar Pradesh Stock Exchange (Kanpur) Vadodara Stock Exchange (Baroda) 24 .

It has a nation-wide reach with a presence in more than 450 cities and towns of India. now spanning three centuries in its 133 years of existence. The BSE Index. In 2006. it has become the first national level stock exchange to launch its website in Gujarati and Hindi to reach out to a larger number of investors. BSE is the world's number 1 exchange in terms of the number of listed companies and the world's 5th in transaction numbers. BSE's pivotal and pre-eminent role in the development of the Indian capital market is widely recognized. BSE has always been at par with the international standards. is India's first stock market index that enjoys an iconic stature. What is now popularly known as BSE was established as "The Native Share & Stock Brokers' Association" in 1875. While the Directors Database provides a single-point access to information on the boards of directors of listed companies. BSE has facilitated the growth of the Indian corporate sector by providing it with an efficient access to resources. and is tracked worldwide. BSE launched the Directors Database and ICERS (Indian Corporate Electronic Reporting System) to facilitate information flow and increase transparency in the Indian capital market. B.Capital Market BOMBAY STOCK EXCHANGE Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage. Today. debt instruments and derivatives. and is sensitive to market sentiments and market realities. BSE offers 21 indices. BSE is the first stock exchange in the country which obtained permanent recognition (in 1956) from the Government of India under the Securities Contracts (Regulation) Act 1956.79 trillion . Over the past 133 years. 2006 and March 31 2007 have been awarded the ICAI awards for excellence in financial reporting. The Annual Reports and Accounts of BSE for the year ended March 31. There is perhaps no major corporate in India which has not sourced BSE's services in raising resources from the capital market. Awards The World Council of Corporate Governance has awarded the Golden Peacock Global CSR Award for BSE's initiatives in Corporate Social Responsibility (CSR). This agreement has made SENSEX and other BSE indices available to investors in Europe and America. including 12 sectoral indices. are classified into A. The systems and processes are designed to safeguard market integrity and enhance transparency in operations. BSE continues to innovate. 25 . BSE is the first exchange in India and the second in the world to obtain an ISO 9001:2000 certification. It is an index of 30 stocks representing 12 major sectors. It is also the first exchange in the country and second in the world to receive Information Security Management System Standard BS 7799-2-2002 certification for its BSE On-line Trading System (BOLT). It migrated from the open outcry system to an online screen based order driven trading system in 1995. the ICERS facilitates the corporates in sharing with BSE their corporate announcements. BSE has entered into an index cooperation agreement with Deutsche Börse. SENSEX. The SENSEX is constructed on a 'free-float' methodology. The market capitalization as on December 31. T and Z groups. An investor can choose from more than 4. In recent times. which for easy reference.700 listed companies. S. BSE provides an efficient and transparent market for trading in equity. 2007 stood at USD 1. Apart from the SENSEX.

‘Unlisted company’ therefore means a company whose securities are not listed on any of recognized stock exchanges in India. Listing of the companies on Stock Exchange ‘Listed Company’ means a public ltd Co which is Listed on any one or more recognized stock exchanges in India. Helps in obtaining loans from Banks/Institutions. 26 . Image. Public awareness. health management at work and excellence in HR through technology Functions of BSE The Stock Market is a pivotal institution in the financial system. Easy availability of prices of securities. Helps in marketing its Products.Pacific HRM awards for its efforts in employer branding through talent management at work.Capital Market The Human Resource Management at BSE has won the Asia . Reputation. It induces companies to raise their standard of performance. Why Companies get listed with Stock Exchange? Companies get listed with Stock Exchange for following reasons: Securities are freely transferable. Securities (shares: debentures) of such company are traded on such stock exchanges. A well-ordered stock market performs several economic functions: It ensures the measure of safety and fair dealing It performs an ‘act of magic’ by translating short-term investments into long-term funds for companies. More transparency. Goodwill. It offers guidance to management about the cost of capital. It directs the flow of capital in the most profitable channels. Easy liquidity of securities.

10 Crores atleast. Sensex "Sensitive Index" and is generally associated with the stock market indices. it provides the time series data over a fairly long period of time (From 1979 onwards). The Nifty is an indicator of all the major companies of the NSE.Capital Market In order to list securities of a company & get its shares traded on any recognized stock exchanges. If the Sensex goes down.g. the Public Ltd Company may either come out wit ha public issue (i. As the oldest index in the country. This can be done by issuing of Prospectus & Complying with all The Provinces of Company Act 1956. Right from early nineties the stock market witnessed heightened activity in terms of various bull and bear runs. company is listed and securities are thereafter traded on such stock exchange. Mumbai post issue capital (paid up capital after proposed public issue) of such companies should be Rs. this tells you that the stock price of most of the major stocks on the BSE have gone down. The growth of equity markets in India has been phenomenal in the decade gone by. value of the Index is calculated and disseminated every 15 seconds. This is done automatically on the basis of prices at which trades in Index constituents are executed. to offer further securities to public) or make an offer for sale of existing securities to public. The base value of the Sensex is 100 on April 1. The oldest stock index in India Index of 30 stocks representing 12 major sectors During trading hours. Small wonder.e. Index Basically an indicator Measures the change in the prices of the underlying asset with respect to the prices in the base year The Sensex is an indicator of all the major companies of the BSE. it means that the prices of the stocks of most of the major companies on the BSE have gone up. If the Sensex goes up. E. the Sensex has over the years become one of the most prominent brands in the country. 1979 and the base year of BSE-SENSEX is 1978-79. 27 . The Company enters into a listing agreement with concerned stock exchange & on receipt of permission from concerned Stock Exchange. Each stock exchange has its own criteria for listing securities which should also be met.: If company intends to get listed its securities in Bombay Stock Exchange.

Subsequently all BSE indices with the exception of BSE-PSU index have adopted the free-float methodology. first compiled in 1986.Capital Market The Sensex captured all these events in the most judicial manner. finance journalists. independent governing board members and other participants in the financial markets. mutual fund managers. One can identify the booms and busts of the Indian stock market through Sensex. well-established and financially sound companies across key sectors. Criteria to selects 30 stocks for SENSEX To be selected the stock should have been traded on each and every trading day for the past one year. The stock should be among the top 150 companies listed by average number of trades and the average value of the trades per day over the past one year. government holding. strategic holding and other locked-in shares that will not come to the market for trading in the normal course. 2003. SENSEX is calculated using the "Free-float Market Capitalization" methodology. Index Committee consists of academicians. was calculated on a "Market Capitalization-Weighted" methodology of 30 component stocks representing large. Free-float methodology refers to an index construction methodology that takes into consideration only the free-float market capitalization of a company for the purpose of index calculation and assigning weight to stocks in the index. SENSEX CALCULATION METHODOLOGY SENSEX. the level of index at any point of time reflects the free-float market value of 30 component stocks relative to a base period. wherein. The stock must have been listed on the BSE (Bombay stock exchange) for at least one year. Since September 1. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization. Selection of 30 stocks for SENSEX The index committee selects the list of 30 stocks which should be be included in SENSEX. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. In other words. 28 . It is scientifically designed and is based on globally accepted construction and review methodology. The base year of SENSEX was taken as 1978-79. It generally excludes promoters' holding. SENSEX is being calculated on a free-float market capitalization methodology. the market capitalization of each company in a free-float index is reduced to the extent of its readily available shares in the market. Free-float market capitalization takes into consideration only those shares issued by the company that are readily available for trading in the market. SENSEX today is widely reported in both domestic and international markets through print as well as electronic media.

SENSEX is widely used to describe the mood in the Indian Stock markets. For index based derivative products Institutional investors. Index-Futures was launched on SENSEX. The objectives of the index are: To measure market movements Given its long history and its wide acceptance. no other index matches the SENSEX in reflecting market movements and sentiments. The country's first derivative product i.e. 29 . money managers and small investors all refer to the SENSEX for their specific purposes The SENSEX is in effect the proxy for the Indian stock markets. foreign investors and fund managers. institutional investors.Capital Market OBJECTIVES OF SENSEX The SENSEX is the benchmark index of the Indian Capital Markets with wide acceptance among individual investors. Benchmark for funds performance The inclusion of blue chip companies and the wide and balanced industry representation in the SENSEX makes it the ideal benchmark for fund managers to compare the performance of their funds.

Year 1999 is selected as the base year because of its proximity to the current period and the base value is 1000. It was also based on the free float methodology. Companies are short listed on the basis of their current market capitalization and certain fundamental factors like the market performance of the company. ideally said to represent the total market. As the companies listed in BSE 500 index represents the 93% of total market capitalization. BSE 200 Launched in 1994. Delhi. Mumbai. BSE 500 comprising 500 scrips. later on free float methodology replaced the full market capitalization. Initially calculated on the basis of full market capitalization methodology. BSE SMALL CAP BSE Small Cap Index was introduced to track the performance of the small cap companies listed on the stock exchange.Capital Market DIFFERENT TYPES OF INDICES BSE 100 BSE 100 index is called as BSE National Index as it works as broad-based index reflecting the stock market at national level. Calcutta. Base year chosen is 2002-2003 and the base index value is 1000 for each indices. in 1989 BSE started BSE 100 index. Year 1983-1984 was chosen as the base year due to the market stability that year.With Mid.Cap index it was easy to represent the mid cap companies listed on the stock exchange. BSE MIDCAP BSE midcap index was introduced by BSE to make sure the unbiased movement of the market. BSE 500 was launched on August 16 2005. Due to its limited effect. volumes of the company turnover etc. BSE 500 Due to the changing pattern of the economy. compiled of 100 companies from "Specified" and the "Non-Specified" list of the five major stock exchanges. Bombay Stock Exchange coined a new index as. The index represents about 93% of the total market capitalizations. Year 1989-90 was chosen as the base year due to its price stability during the year. BSE 200 index comprises of the 200 selected companies and their equity shares from the specified and non specified lists of the major exchanges. Midcap index track the performance of the companies with relatively small market capitalization. Initially Sense was compiled of only 30 most effective stocks of the market. viz. Ahmedabad and Madras. Bse Small indices truly helped the investing community as they capture 30 .

BSE PSU Index is composed of all Public Sector Undertakings stocks in BSE 500 Index. BSE Metal Index. BSE BANKEX BankEx was launched by BSE to track the performance of the leading banking sectors as bank stocks are emerging as a major segment of the stock market. BSE FMCG INDEX Products that shows a sudden shelf turnover.Capital Market the movement of the mid and small segments of the market. BSE Mid Cap Index. BSE Capital Goods Index. BSE CONSUMER GOODS Consumer goods index is a part of the BSE sectoral Indices. BSE AUTO In August 2004 BSE launched a new Sector Series (90/FF) indices comprising BSE Auto Index. Eatables. and cleaning materials fall in FMCG category. Base year is 2002-2003 and the base index value is 1000. BSE IT Index. BSE Consumer Durables Index. The base date chosen is April 2. It serves as a quality benchmark for the investment community in these knowledge based sectors. at comparatively low cost are classified as Fast Moving Consumer Goods. 31 . BSE PSU Launched in June 2001 OR 2004. The objective behind the launch of this Index was to track the performance of listed equity of PSU companies. BSE Oil & Gas Index. BSE TECk index is composed of 21 quality stocks from the IT. To track the performance of companies dealing with the consumer goods it was necessary to list them in a new index named CG Index. CG Index comprises the companies occupying 90% market capitalization in the field of consumer goods. & Telecom sectors are emerging as the major dominating sectors of the economy. BSE Health care Index. BSE Auto Index comprises all the major auto stocks in the BSE 500 Index. Media. Media and Telecom sectors. BSE FMCG Index. 2001 and the base value for BSE TECk Index is 1000 points. PSU Index is displayed on-line on the BOLT trading terminals nationwide. Base value has been set at 1000 and the base date is 1st February 1999. soft drinks. BSE introduced the TECk index. BSE Small Cap Index. BSE TECK As Information Technology. BSE BANKEX. BankEx Index includes 12 selected major stocks which represent total 90% market capitalization of all the banking sector stocks listed on the BSE. The base date for BANKEX is 1st January 2002 and base value for BANKEX is 1000 points.

Capital Market Examples of FMCG brands are Coca-Cola. Scrips having a minimum of 90% trading frequency in preceding six months are eligible to be included in the FMCG Index. Top stock performers in the health care sector are listed in the BSE Health Care Index. BSE Capital Goods. 90% coverage in health care sector is given from the universe of BSE-500 index constituents. BSE FMCG. On August 23. BSE HEALTH CARE Health Care and Pharma sector are emerging as strong effectors on the economy of India. 2004. The stocks from oil and gas sectors have lot to effect on the stock market movement. BSE METAL INDEX BSE Metal Index was launched on August 23. BSE Consumer Durables and BSE Health care were shifted to Free-Float methodology and joined the Sector Series (90/FF). 2004 five sectoral Indices viz. FMCG Index monitors the performance of the major brands in the FMCG category. BSE OIL & GAS INDEX Oil and Gas sector is gaining its own weight-age in the economy. monitoring the health care sector performance individually. The index covers 90% of the sectoral market capitalization and is based on the Free-Float methodology 32 . 2004 as part of the new series "90/FF". BSE launched a new Health Care Index. Kleenex and Mars. BSE IT. Metal stocks performing well in the economy are indexed in the BSE metal index. Oil and Gas index was launched effective August 23.

and has witnessed several innovations in products & services viz. a wide range of securities like equity. compression of settlement cycles. NSE upholds its position as the largest stock exchange in the country. demutualization of stock exchange governance. emergence of clearing corporations to assume counterparty risks. securities lending and borrowing. debt warrants. market practices and trading volumes.55 % during the fiscal 2007-08 as compared to 2006-07. dematerialization and electronic transfer of securities.Capital Market NATIONAL STOCK EXCHANGE The National Stock Exchange (NSE) is India's leading stock exchange covering various cities and towns across the country. NSE has played a catalytic role in reforming the Indian securities market in terms of microstructure. preference shares. The Exchange has brought about unparalleled transparency. The market today uses state-of-art information technology to provide an efficient and transparent trading. The trading volumes jumped by 82. professionalization of trading members. 33 . screen based trading. fine-tuned risk management systems. market of debt and derivative instruments and intensive use of information technology. NSE was set up by leading institutions to provide a modern. speed & efficiency. exchange traded funds as well as retail government securities. fully automated screen-based trading system with national reach. 1995 has been witnessing a substantial growth over the years. efficient and transparent trading platform. With the increase in volumes. It has set up facilities that serve as a model for the securities industry in terms of systems. practices and procedures. CAPITAL MARKET SEGMENT The Trading on NSE’s capital market segment which commenced on November 04. clearing and settlement mechanism. safety and market integrity.

Capital Market 34 .

Further. the process of transfer took much longer than stipulated in the then regulations. It has the credit of continuously upgrading the clearing and settlement procedures and has also brought Indian financial markets in line with international markets. NSDL Prior to trading in a dematerialized environment. NSCCL currently settles trades under T+2 rolling settlement. In many cases. was set up in August 1995. to provide counter-party risk guarantee.Capital Market NSE FAMILY NSCCL National Securities Clearing Corporation Ltd. It commenced clearing operations in April 1996. restricted liquidity. mutilation of certificates and other irregularities were rampant. and to operate a tight risk containment system. settlement of trades required moving the securities physically from the seller to the ultimate buyer. It has been set up to bring and sustain confidence in clearing and settlement of securities. to promote and maintain short and consistent settlement cycles. It has put in place online real-time monitoring and surveillance system to keep track of the trading and clearing members’ outstanding positions and each member is allowed to trade/operate within the pre-set limits fixed according to the funds available with the Exchange on behalf of the member. which involved lot of time and the risk of delay somewhere along the chain. 35 . through the seller’s broker and buyer’s broker. NSE to promote dematerialization of securities joined hands with UTI and IDBI to set up the first depository in India called the “National Securities Depository Limited” (NSDL). The depository system gained quick acceptance and in a very short span of time it was able to achieve the objective of eradicating the paper from the trading and settlement of securities. and was also able to get rid of the risks associated with fake/forged/stolen/bad paper. with the change of ownership being evidenced by an endorsement on the security certificate. Dematerialized delivery today constitutes almost 100% of total of the total delivery based settlement. Theft. It was the first clearing corporation in the country to provide settlement guarantee that revolutionized the entire concept of settlement system in India. the system of transfer of ownership was grossly inefficient as every transfer involved physical movement of paper to the issuer for registration. It carries out the clearing and settlement of the trades executed in the equities and derivatives segments of the NSE. To obviate these problems. (NSCCL). a wholly-owned subsidiary of NSE. All these added to the costs and delays in settlement. The online surveillance mechanism also generates various alerts/reports on any price/volume movements of securities not in line with the trends/patterns. forgery.

was set up in May 1998 to provide indices and index services.IT are NEAT XS. clearing and risk management systems. running and the success of National Stock Exchange of India Limited (NSE). within India and abroad.IT NSE. risk and collateral management services in the commodities market including funds settlement with multiple clearing banks. was incorporated in October 1999 to provide thrust to NSE’s technology edge. NSE. NSE Infotech Services Limited (NSETECH) was incorporated to cater to the needs of NSE and all it’s group companies exclusively. India’s first exchange traded fund. concomitant with its overall goal of harnessing latest technology for optimum business use. and Licensing of the Index for various structured products NCCL National Commodity Clearing Limited (NCCL) is a company promoted by National Stock Exchange of India Limited (NSEIL). These include index based derivatives on NSE and on Singapore Exchange. NEAT iXS.IT provides consultancy services in the areas of data warehousing. sectoral indices and customized indices. formation. It provides a broad range of services. a Computer-To-Computer Link (CTCL) order routing system. internet and business continuity plans.IT Limited. professional broker’s back office system. a 100% technology subsidiary of NSE. a joint venture of CRISIL and NSE. Currently NCCL is providing clearing and settlement services to NCDEX. It was important to give a special thrust and focus on Information Technology to retain the primacy in the market. an internet trading system and Probos. It maintains over 96 equity indices comprising broad-based benchmark indices. It has a licensing and marketing agreement with Standard and Poor’s (S&P). Towards this a wholly owned subsidiary M/s. IISL is India’s first specialized company focusing upon the index as a core product. the world’s leading provider of investible equity indices. for cobranding equity indices. 36 . products and professional index services. NCCL is having the requisite experience and exposure in providing clearing and settlement facility. Amongst various products launched by NSE. a number of index funds. One of the objectives of NCCL is to provide and manage clearing and settlement.Capital Market NSE INFOTECH SERVICES LTD NSE Infotech Services Ltd Information Technology has been the back bone of conceptualization. risk management and collateral management services to commodity exchanges. NSE. Many investment and risk management products based on IISL indices have developed in the recent past. It provides the securities industry with technology that ensures transparency and efficiency in the trading. IISL India Index Services and Products Limited (IISL). Additionally. It was incorporated in the year 2006. NSE has been at the forefront in spearheading technology changes in the securities market.

Impact cost of the S&P CNX Nifty for a portfolio size of Rs. The average total traded value for the last six months of all Nifty stocks is approximately 62. 2009. IISL is India's first specialised company focused upon the index as a core product.16% S&P CNX Nifty is professionally maintained and is ideal for derivatives trading 37 . which is a joint venture between NSE and CRISIL. index based derivatives and index funds.98% of the total market capitalization as on Jan. 30. IISL has a marketing and licensing agreement with Standard & Poor's (S&P). S&P CNX Nifty is owned and managed by India Index Services and Products Ltd.2 crore is 0. It is used for a variety of purposes such as benchmarking fund portfolios. who are world leaders in index services.Capital Market NSE INDICES S&P CNX NIFTY S&P CNX Nifty is a well diversified 50 stock index accounting for 22 sectors of the economy.45% of the traded value of all stocks on the NSE Nifty stocks represent about 63. (IISL).

Cairn India Ltd.e. Ambuja Cements Ltd. CNX Nifty Junior represents about 9. Bharti Airtel Ltd. Tata Motors Ltd. so they are the most liquid of the stocks excluded from the S&P CNX Nifty. Ltd. HDFC Bank Ltd. The average traded value for the last six months of all Junior Nifty stocks is approximately 16. Reliance Capital Ltd. ACC Ltd. Hindalco Industries Ltd. Zee Entertainment Enterprises Ltd. Mahindra & Mahindra Ltd. Power Grid Corporation of India Ltd. Siemens Ltd. i. Tata Steel Ltd. Maruti Suzuki India Ltd. Bharat Petroleum Corporation Ltd. Reliance Industries Ltd. HCL Technologies Ltd. The maintenance of the S&P CNX Nifty and the CNX Nifty Junior are synchronised so that the two indices will always be disjoint sets. Wipro Ltd.23% National Aluminium Co. Hence it is always meaningful to pool the S&P CNX Nifty and the CNX Nifty Junior into a composite 100 stock index or portfolio. Larsen & Toubro Ltd. Reliance Petroleum Ltd. I T C Ltd. CNX NIFTY JUNIOR The next rung of liquid securities after S&P CNX Nifty is the CNX Nifty Junior. Cipla Ltd. Reliance Communications Ltd. Ltd. Sterlite Industries (India) Ltd.Capital Market COMPANY NAME ABB Ltd. Sun Pharmaceutical Industries Ltd.62 % of the total market capitalization as on Jan 30. Grasim Industries Ltd. Punjab National Bank Ranbaxy Laboratories Ltd.86% of the traded value of all stocks on the NSE Impact cost for CNX Nifty Junior for a portfolio size of Rs. Tata Power Co. 2009. Reliance Power Ltd. State Bank of India Steel Authority of India Ltd. As with the S&P CNX Nifty. DLF Ltd. Hero Honda Motors Ltd. Suzlon Energy Ltd. stocks in the CNX Nifty Junior are filtered for liquidity.50 lakhs is 0. Unitech Ltd. 38 . It may be useful to think of the S&P CNX Nifty and the CNX Nifty Junior as making up the 100 most liquid stocks in India.kn GAIL (India) Ltd. Reliance Infrastructure Ltd. Idea Cellular Ltd. Bharat Heavy Electricals Ltd. Tata Communications Ltd. Housing Development Finance Corporation Ltd. Infosys Technologies Ltd. ICICI Bank Ltd. Oil & Natural Gas Corporation Ltd. a stock will never appear in both indices at the same time. Hindustan Unilever Ltd. NTPC Ltd. Tata Consultancy Services Ltd.

54% of the traded value of the IT sector. 3 crore is 0. IT Education and Software Training . A number of large. 2009. Software Development. The average total traded value for the last six months of CNX IT Index stocks is approximately 84. • S&P CNX DEFTY Almost every institutional investor and off-shore fund enterprise with an equity exposure in India would like to have an instrument for measuring returns on their equity investment in dollar terms.60% of the total market capitalization as on Jan 30.92% of the total market capitalization as on January 30. 2009 The average traded value for the last six months of all CNX100 stocks is approximately 79. • • CNX 100 represents about 73.Capital Market CNX IT INDEX Information Technology (IT) industry has played a major role in the Indian economy during the last few years. Support and Maintenance. 39 . IISL is India’s first specialized company focused upon the index as a core products. Which is a joint venture between CRISIL & NSE. a new index the S&P CNX Defty-Dollar Denominated S&P CNX Nifty has been developed. CNX IT Index stocks represent about 91.31 % of the traded value of all stocks on the NSE Impact cost for CNX 100 for a portfolio size of Rs. To facilitate this. IISL has developed the CNX IT sector index. Hardware Manufacturer’s. S&P CNX Defty is S&P CNX Nifty. CNX 100 is owned and managed by India Index Services & Products Ltd. Vending. Telecommunication Services and Networking Infrastructure. IISL has a licensing & marketing agreement with Standard & Poor’s (S&P).18%. CNX IT Index constituents represent about 6. profitable Indian companies today belong to the IT sector and a great deal of investment interest is now focused on the IT sector.92% of the total market capitalization of the IT sector as on January 30. CNX 100 CNX 100 is a diversified 100 stock index accounting for 35 sector of the economy. (IISL). Companies in this index are those that have more than 50% of their turnover from IT related activities like IT Infrastructure . CNX IT provides investors and market intermediaries with an appropriate benchmark that captures the performance of the IT segment of the market. who are leader’s in index services.90% of the traded value of all stocks on the NSE. measured in dollars. In order to have a good benchmark of the Indian IT sector. 2009. The average total traded value for the last six months of all CNX IT Index constituents is approximately 7.

banking stocks in the index would also have an approx.20% of the total turnover on the NSE as on January 30.g. S&P CNX Defty = S&P CNX Nifty at time t * Exchange rate as on base date Exchange rate at time t CALCULATION OF CLOSING VALUE OF S&P CNX DEFTY Closing value of S&P CNX Defty is computed by considering average of INR-USD polled data values (exchange rate) of last 30 minutes of the market. Industry weightages in the index reflect the industry weightages in the market. Impact cost of the S&P CNX Nifty for a portfolio size of Rs. NIFTY MIDCAP 50 The medium capitalized segment of the stock market is being increasingly perceived as an attractive investment segment with high growth potential. representation of 5% in the index. Provides an effective tool for hedging Indian equity exposure. The primary objective of the Nifty Midcap 50 Index is to capture the movement of the midcap segment of the market.Capital Market SALIENT FEATURES • • • • Performance indicator to foreign institutional investors. CALCULATION OF S&P CNX DEFTY Computations are done using the S&P CNX Nifty index calculated on the NEAT trading system of NSE and INR-USD exchange rate that is based on the real time polled data feed. 40 . off-shore funds. For e. The S&P CNX 500 represents about 93. It can also be used for index-based derivatives trading. Closing value of = Closing value of S&P CNX Nifty * Exchange rate as on base date S&P CNX Defty Average of exchange rate of last 30 minutes of the market S&P CNX 500 The S&P CNX 500 is India’s first broadbased benchmark of the Indian capital market.2 crore is 0.95% of total market capitalisation and about 93. S&P CNX Industry Indices. etc.2009.16% Provides fund managers an instrument for measuring returns on their equity investment in dollar terms. if the banking sector has a 5% weightage in the universe of stocks traded on NSE. The S&P CNX 500 companies are disaggregated into 72 industry indices viz.

The average traded volume for the last six months of all Nifty Midcap 50 stocks is approximately 6.27 % of the traded volume of all stocks on the NSE. etc without affecting the index value. Stocks which are forming part of the S&P CNX NIFTY index are excluded. 2009. Stocks which are not part of the derivatives segment are excluded. 2004 and a base value of 1000. The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits. CNX MIDCAP The medium capitalised segment of the stock market is being increasingly perceived as an attractive investment segment with high growth potential.5000 Crore at the time of selection. etc without affecting the index value. rights. rights. Selection of the index set is. The primary objective of the CNX Midcap Index is to capture the movement and be a benchmark of the midcap segment of the market. wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period.1000 Crore to Rs. based on the following criteria: Stocks with average market capitalization ranging from Rs.78 % of the total market capitalization as on January 30.Capital Market Method of computation Nifty Midcap 50 is computed using market capitalisation weighted method. 41 . Base Date and Value The Nifty Midcap 50 Index has a base date of Jan 1. wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. inter alia. The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits. Criteria for Selection of Constituent Stocks The constituents and the criteria for the selection judge the effectiveness of the index. Other statistics: Nifty Midcap 50 stocks represent about 3. Method of Computation CNX Midcap is computed using market capitalisation weighted method.

all candidates for the Index are also evaluated for trading interest. Financial Performance All companies in the CNX Midcap Index have a minimum track record of three years of operations with a positive net worth. After step (a).e. first 100 companies in terms of highest market capitalization. 75th percent and above. in terms of volumes and trading frequency. After. the weightages of the remaining stocks in the universe is determined again. shall be excluded in order to reduce the skewness in the weightages of the stocks in the universe. After step (b). 2003 and a base value of 1000 Criteria for Selection of Constituent Stocks The constituents and the criteria for the selection judge the effectiveness of the index.Capital Market Base Date and Value The CNX Midcap Index has a base date of Jan 1. upto to 74. 42 . all the constituents of S&P CNX Nifty shall be ignored. the cumulative weightage is calculated. shall constitute the CNX Midcap Index subject to fulfillment of the criteria mentioned below. In addition. which constitute more than 5% market capitalization of the universe (after sorting the securities in descending order of market capitalization). step (d).99 percent) of the revised universe shall be ignored. Others A company which comes out with a IPO will be eligible for inclusion in the index. Selection of the index set is based on the following criteria : All the stocks. After step (c) companies which form part of the cumulative percentage in ascending order unto first 75 percent (i.e. Trading Interest All constituents of the CNX Midcap Index must have a minimum listing record of 6 months. if it fulfills the normal eligibility criteria for the index for a 3 month period instead of a 6 month period. From the universe of companies remaining after step (e) i.

2000. A company which comes out with a IPO will be eligible for inclusion in the index. 43 . Company should have a positive networth. establishment of asset reconstruction companies. reflecting a number of underlying developments. The average total traded value for the last six months of all the CNX Bank Index constituents is approximately 14. 2009. ATM Network. Advancement in communication and information technology has facilitated growth in internet-banking.86% of the traded value of all stocks on the NSE. indexed to a base value of 1000.The index will have 12 stocks from the banking sector which trade on the National Stock Exchange. Company's turnover rank in the universe should be less than 500 3. CNX Bank Index is an index comprised of the most liquid and large capitalised Indian Banking stocks.85% of the traded value of the banking sector. Electronic transfer of funds and quick dissemination of information. Selection Criteria Selection of the index set is based on the following criteria: 1. The average total traded value for the last six months of CNX Bank Index stocks is approximately 95. Company's trading frequency should be at least 90% in the last six months. 2009. initiatives on improving recoveries from Non-performing Assets (NPAs) and change in the basis of income recognition has raised transparency and efficiency in the banking system.06% of the total market capitalization of the banking sector as on January 30. Structural reforms in the banking sector have improved the health of the banking sector.63% of the total market capitalization as on January 30. The reforms recently introduced include the enactment of the Securitization Act to step up loan recoveries.Capital Market CNX BANK INDEX The Indian banking Industry has been undergoing major changes. Company's market capitalization rank in the universe should be less than 500 2. CNX Bank Index constituents represent about 8. 4. Spurt in treasury income and improvement in loan recoveries has helped Indian Banks to record better profitability. Methodology The index is a market capitalization weighted index with base date of January 01. It provides investors and market intermediaries with a benchmark that captures the capital market performance of Indian Banks. if it fulfills the normal eligibility criteria for the index for a 3 month period instead of a 6 month period. CNX Bank Index stocks represent about 86. In order to have a good benchmark of the Indian banking sector. India Index Service and Product Limited (IISL) has developed the CNX Bank Index. 5.

44 . Launch of Futures & Options on Nifty Midcap 50 Launch of Mini Nifty derivative contracts Launch of long term option contracts on S&P CNX Nifty Index.Exchange Traded Fund (ETF) Launch of Futures & Options on CNX 100 and CNX Nifty Junior contracts.The Volatility Index Setting up of Power Exchange India Ltd.India VIX .com Launch of Gold BeES. Launch of Securities Lending & Borrowing Scheme Launch of . CRISIL announce launch of India Bond Watch.Capital Market ACHIEVEMENTS OF NSE IN LAST YEAR January 2007 March 2007 March 2007 June 2007 October 2007 January 2008 March 2008 April 2008 April 2008 June 2008 Launch of NSE – CNBC TV 18 media centre NSE.

The benefits of listing on NSE are as enumerated below: NSE provides a trading platform that extends across the length and breadth of the country. It uses satellite communication technology to energise participation from about 2. The issuer wishing to have trading privileges for its securities satisfies listing requirements prescribed in the relevant statutes and in the listing regulations of the Exchange. At the server end. Listing means formal admission of a security to the trading platform of the Exchange.7%. is a state of-the-art client server based application. Its trading system.5 seconds. As part of its business continuity plan. NSE has been continuously undertaking capacity enhancement measures so as to effectively meet the requirements of increased users and associated trading loads. It has uptime record of 99. This site at Chennai is a replica of the production environment at Mumbai. called National Exchange for Automated Trading (NEAT). NSE has also put in place NIBIS (NSE’s Internet Based Information System) for on-line real-time dissemination of trading information over the Internet. This in turn reduces the cost of trading to the investor. the securities trade at low impact cost and are highly liquid. NSE being the largest stock exchange in terms of trading volumes. All the issuers who list their securities have to satisfy the corporate governance requirement framed by regulators. NSE is the first exchange in the world to use satellite communication technology for trading. It provides liquidity to investors without compromising the need of the issuer for capital and ensures effective monitoring of conduct of the issuer and trading of the securities in the interest of investors. enables issuers to reach and service investors across the country. It believes that technology provides the necessary impetus for the organization to retain its competitive edge and ensure timeliness and satisfaction in customer service.Capital Market TECHNOLOGY Technology has been the backbone of the Exchange. In recognition of the fact that technology will continue to redefine the shape of the securities industry.956 VSATs from nearly 245 cities spread all over the country. It also agrees to pay the listing fees and comply with listing requirements on a continuous basis. bonds and other securities issued by issuers require listing for providing liquidity to investors. NSE has established a disaster back-up site at Chennai along with its entire infrastructure. LISTING OF SECURITIES ON NSE The stocks. NSE chose to harness technology in creating a new market design. all trading information is stored in an in-memory database to achieve minimum response time and maximum system availability for users. Providing the services to the investing community and the market participants using technology at the cheapest possible cost has been its main thrust. NSE stresses on innovation and sustained investment in technology to remain ahead of competition. there is uniform response time of less than 1. including the satellite earth station and the high-speed optical fibre link with its main site at Mumbai. Listing on NSE thus. 45 . The transaction data is backed up on near real time basis from the main site to the disaster back-up site through the 2 mbps high-speed link to keep both the sites all the time synchronized with each other. For all trades entered into NEAT system.

This helps the investor to know the depth of the market. Further. corporate announcements. results in significant reduction in cost and time of issues. The listing fee is nominal. The facility of making initial public offers (IPOs). The best 5 buy and sell orders are displayed on the trading system and the total number of securities available for buying and selling is also displayed.nseindia.Capital Market The trading system of NSE provides unparallel level of trade and post-trade information. thus reducing scope for price manipulation or misuse. results. 46 . corporate actions etc are also available on the trading system.com provides a link to the web-sites of the companies that are listed on NSE. using NSE’s network and software. Listed companies are provided with monthly trade statistics for the securities of the company listed on the Exchange. NSE’s web-site www. so that visitors interested in any company can visit that company’s web-site from the NSE site.

these generally do not influence the fluctuations in the underlying asset prices. loan whether secured or unsecured. DERIVATIVES DEFINED “Derivative is a product whose value is derived from the value of one or more basic variables. risk instrument or contract for differences or any other form of security. futures and options. or index of prices. However. The following three broad categories of participants . In the Indian context the Securities Contracts (Regulation) Act. the financial markets are marked by a very high degree of volatility. • 47 . options and swaps. Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. 2. forex. PRODUCTS. called bases (underlying asset. of underlying securities.Capital Market INTRODUCTION TO DERIVATIVES The emergence of the market for derivative products. most notably forwards. in a contractual manner.hedgers. it is possible to partially or fully transfer price risks by locking-in asset prices. commodity or any other asset. futures. As instruments of risk management. 1956 (SC(R) A) defines “derivative” to include 1. they see the futures price of an asset getting out of line with the cash price. index. and arbitrageurs trade in the derivatives market. share. Futures and options contracts can give them an extra leverage. The most common variants are forwards. The price of this derivative is driven by the spot price of wheat which is the “underlying”.” The underlying asset can be equity. they will take offsetting positions in the two markets to lock in a profit. for example. They use futures or options markets to reduce or eliminate this risk. wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. speculators. For example. By their very nature. Such a transaction is an example of a derivative. If. • • Hedgers face risk associated with the price of an asset. derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. A contract which derives its value from the prices. or reference rate). that is. Speculators wish to bet on future movements in the price of an asset. by locking-in asset prices. can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. they can increase both the potential gains and potential losses in a speculative venture. A security derived from a debt instrument. PARTICIPANTS AND FUNCTIONS Derivative contracts have several variants. Through the use of derivative products.

where settlement takes place on a specific date in the future at today’s pre-agreed price. Here we take a brief look at various derivatives contracts that have come to be used. but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset.Capital Market TYPES OF DERIVATIVES The most commonly used derivatives contracts are forwards. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts.calls and puts. futures and options which we shall discuss in detail later. at a given price on or before a given future date. Puts give the buyer the right. • • Forwards: A forward contract is a customized contract between two entities. 48 . • Options: Options are of two types . Futures: 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.

• • • There are two basic types of options. Other contract details like delivery date. derivatives have become increasingly important in the field of finance. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction.Capital Market INTRODUCTION TO FUTURES & OPTIONS In recent years. Options are fundamentally different from forward and futures contracts. price and quantity are negotiated bilaterally by the parties to the contract. In contrast. call options and put options. the two parties have committed themselves to doing something. Put option: A put option gives the holder the right but not the obligation to sell an asset by a certain date for a certain price. forward contracts are popular on the OTC market. (or which can be used for reference purposes in settlement) and a standard timing of such settlement. To facilitate liquidity in the futures contracts. 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. INTRODUCTION TO OPTIONS In this section. FORWARD CONTRACTS A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. Whereas it costs nothing (except margin requirements) to enter into a futures contract. we look at the next derivative product to be traded on the NSE. 49 . a standard quantity and quality of the underlying instrument that can be delivered. But unlike forward contracts. in a forward or futures contract. While futures and options are now actively traded on many exchanges. the exchange specifies certain standard features of the contract. • • 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 futures contracts are standardized and exchange traded. More than 99% of futures transactions are offset this way. Call option: A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price. namely options. • INTRODUCTION TO FUTURES Futures markets were designed to solve the problems that exist in forward markets. The holder does not have to exercise this right. An option gives the holder of the option the right to do something. the purchase of an option requires an up-front payment. It is a standardized contract with standard underlying instrument. The other party assumes a short position and agrees to sell the asset on the same date for the same price. The forward contracts are normally traded outside the exchanges.

Capital Market MUTUAL FUND A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The flow chart below describes broadly the working of a mutual fund: Mutual Fund Operation Flow Chart ADVANTAGES AND DISADVANTAGES OF MUTUAL FUND Advantages: Portfolio Diversification Professional Management Reduction / Diversification of Risk Liquidity Flexibility & Convenience Reduction in Transaction cost Safety of regulated environment Disadvantages: No Control over Cost No Tailor-made Portfolios Managing a Portfolio Funds 50 . The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. The money thus collected is then invested in capital market instruments such as shares. debentures and other securities. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified. professionally managed basket of securities at a relatively low cost.

Capital Market STRUCTURE OF A MUTUAL FUND TYPES OF MUTUAL FUND Mutual Funds can be structurally classified as: Close ended / Open-ended Funds Load Fund / No-Load Funds Tax-exempt / Non-Tax exempt Funds Mutual Funds can be classified based on asset class as: Equity Funds Bond Funds Money Market Funds Balanced Funds Mutual Funds can be classified based on investment objective: Growth Income Value 51 .

Oil & Oil Seeds. Silver.84 trillion) The exchange's competitor is National Commodity & Derivatives Exchange Ltd Globally. a state-of-the-art nationwide.MCX. Steel. Black Pepper.42 Trillion ($29 Billion) MCX has 10 strategic alliances with leading commodity exchange across the globe The average daily turnover of MCX is about US$ 2. Agri Commodities. Cotton. It is now regulated by forward market commission.49 Million barrels on January 3. no. MCX ranks no. 3 in crude oil and gold in futures trading The crude volume touched 23. 2009 The highest traded item is gold with an average monthly turnover of Rs 1. Pulses and Soft commodities The turnover of the exchange for the period Apr-Dec 2008 was INR 32 Trillion MCX has also setup in joint venture the National Spot Exchange a purely agricultural commodity exchange and National Bulk Handling Corporation (NBHC) which provides bulk storage and handling of agricultural products. (MCX) an independent and de-mutualized multi commodity exchange. 2 in natural gas. digital exchange facilitates online trading.MCX is led by an expert management team with deep domain knowledge of the commodity futures markets and has successfully established a thriving digital market for trading in Gold. 1 commodity exchange with 84% Market share in 2008($0.Capital Market MULTI COMMODITY EXCHANGE Multi Commodity Exchange of India Ltd. no. Rubber. It was established in 2003 and is based in Mumbai.4 billion MCX now reaches out to about 500 cities in India with the help of about 10. clearing and settlement operations for a commodities futures trading. Kapas. Ferrous and NonFerrous Metals.000 trading terminals MCX COMDEX is India's first and only composite commodity futures price index 52 . 1 in silver. MCX is India's No. has permanent recognition from the Government of India.

000 lb 5000 bu 10 tons 37.2 Sugar No.000 lb BO W CC KC CT SB SE LIVESTOCK & MEAT Commodity Lean Hogs Contract Size Currency Bourse Ticker 40.000 lb (20 tons) USD ($) Live Cattle Feeder Cattle 40.Capital Market AGRICULTURAL (GRAINS.000 lb (20 tons) USD ($) 50.000 lb 112.000 lb 112.14 CBOT CBOT NYBOT NYBOT NYBOT NYBOT NYBOT 100 short tons SM 60.000 lb (20 tons) USD ($) Chicago Mercantile Exchange LH Chicago Mercantile Exchange PB Chicago Mercantile Exchange LC Chicago Mercantile Exchange FC Frozen Pork Bellies 40.11 Sugar No. AND FOOD AND FIBER) Commodity Corn Oats Rough Rice Soybeans Main Exchange Contract Size Trading Symbol CBOT CBOT CBOT CBOT 5000 bu 5000 bu 2000 cwt 5000 bu C O RR S Soybean Meal CBOT Soybean Oil Wheat Cocoa Coffee C Cotton No.500 lb 50.000 lb (25 tons) USD ($) 53 .

gal) 29.000 U.27 Bourse CBOT NYMEX NYMEX CBOT troy ounce USD ($) troy ounce USD ($) troy ounce USD ($) troy ounce USD ($) 54 .000 U. ICE Contract Size 1000 bbl (42.000 U.000 mm BTU 1000 bbl (42.S.000 U.000 U.S. gal) 1000 bbl (42.Capital Market ENERGY Commodity WTI Crude Oil Main Exchanges NYMEX.00 $13.S. gal) 250 lbs Trading Symbol CL (NYMEX).S. gal) 1000 bbl (42.S.000 U.000 U.00 $2025.S.00 $443. gal) 1000 bbl (42. gal) 1000 bbl (42. WTI (ICE) IB AC (Open Auction) ZE (Electronic) NG HO Brent Crude Ethanol Natural Gas Heating Oil ICE CBOT NYMEX NYMEX Gulf Coast Gasoline RBOB Gasoline (reformulated gasoline blend stock for oxygen blending) NYMEX LR NYMEX RB Propane Uranium NYMEX NYMEX PN UX PRECIOUS METALS Commodity Gold Platinum Palladium Silver Unit Currency Price (20th August 2008) $822.S. gal 10.

Gypsum.665 $1. among others. at present (2008). New York London Metal Exchange London Metal Exchange London Metal Exchange Rotterdam Rare metals The following metals are not. such as the London Metal Exchange (LME). Lithium.226 $7. 55 . Carbon Dioxide. consumers and traders. and Beryllium. Fluorspar.310 Bourse London Metal Exchange.595 $15. Wolframite. Fluoride. traded on any exchange. therefore. therefore. traded on any exchange. where producers. Germanium. Asbestos. Arsenic.595 2.670 1.675 2. New York London Metal Exchange London Metal Exchange London Metal Exchange London Metal Exchange. Tellurium. Bromine. the London Metal Bulletin and is based on information from producers. Asphalt. The only price information that is available globally is published by. and.Capital Market INDUSTRIAL METALS Commodity Copper Lead Zinc Tin Aluminium Aluminium alloy Nickel Aluminium alloy Recycled steel Unit Metric Ton Metric Ton Metric Ton Metric Ton Metric Ton Metric Ton Metric Ton Metric Ton Metric Ton Currency USD ($) USD ($) USD ($) USD ($) USD ($) USD ($) USD ($) USD ($) USD ($) Price (2004) $3. Other Minerals and Materials The following minerals and materials are not. Boron. Chromium. Aggregate. Chlorine. Manganese. Selenium.515 4. Cadmium. Sulfuric Acid. Rhodium. the London Metal Bulletin and is based on information from producers. Niobium. and Titanium Dioxide. Indium. Cement. Borax. Generally the only price information that is available globally is published privately by. at present (2008).190 30. Silicon. no spot or futures market where producers. consumers and traders can fix an official or settlement price exists for these metals.200 $990 $1. Cobalt. no spot or futures market. Gallium. and. among others. Tantalum. Vanadium. consumers and traders can fix an official or settlement price exists for these minerals. Titanium.947 Price (2006) 6. consumers and traders.050 2. Magnesium. Molybdenum.110 9.

Capital Market Agricultural Products The following Agricultural Products are not.165 1. steel started to be traded as a commodity in the London Metal Exchange Environmental Commodities In the last decade. These include carbon offsets. a number of environmental commodities have been created. traded on any exchange. Melons. Grapes. at present (2008). Potatoes. Milk.070 Price (2004) Price (2006) Bourse Ethanol CBOT Singapore Commodity Exchange Bursa Malaysia ASX London Metal Exchange London Metal Exchange Rubber Palm Oil Wool Polypropylene Linear Low Density Polyethylene (LL) 1000 kg 1 kg 1000 kg 1000 kg In 2007. therefore. and Figs. Generally the only price information that is available is based on information from producers.000 US gallon (110 m³) 1 kg Currency USD ($) EU cents (¢) Malaysian Ringgit (RM) AUD (p) USD ($) USD ($) 1. 56 . Gum Arabic. no spot or futures market where producers. Renewable Energy Certificates. Eggs. and white certificates (energy efficiency credits). consumers and traders. Lemons. Tung Oil. and. Tomatoes. Cut Flowers. Fresh Flowers. Xanthan. consumers and traders can fix an official or settlement price exists for these minerals. OTHER Commodity Unit 29. Pine Oil.

Merrill Lynch Other Commodity Exchanges & Regulators Chicago Board of Trade Chicago Mercantile Exchange Commodity Futures Trading Commission London International Financial Futures and Options Exchange National Futures Association New York Mercantile Exchange Kansas City Board of Trade New York Board of Trade 57 . Ltd. Fid Fund (Mauritius) Ltd. IL&FS. Corporation Bank. Union Bank of India. HDFC Bank and SBI Life Insurance Co..Capital Market Key shareholders Financial Technologies (I) Ltd State Bank of India and its associates National Bank for Agriculture and Rural Development (NABARD) National Stock Exchange of India Ltd. Bank of India. .an affiliate of Fidelity International. Bank of Baroda. (NSE). Canara Bank. ICICI ventures.

it is initiating a process that will bring actual change to its stock. so a stock split does not directly change the value or net assets of a company. and can indicate that existing shareholders are being offered a chance to take advantage of a promising new development. The existing shareholders are given the right to purchase or receive these shares before they are offered to the public. an 11 for 10 rights issue gives the existing holder the chance to buy eleven new shares for every ten held. the price per share will drop by half. is a non-event. So if the pre-split price was $100 per share. The price of the new shares is set at a price between the Nominal Value and the market value of the existing shares. RIGHTS ISSUES A company implementing a rights issue is offering additional and/or new shares but only to already existing shareholders. an investor can have a clearer picture of what a corporate action indicates about a company's financial affairs and how that action will influence the company's share price and performance. it will have 100 after the stock split. so the total shares outstanding will double. This knowledge. If the company had 50 shares outstanding. The right to subscribe allows shareholders to retain their percentage holding in the company. shareholders are permitted to vote on some events as well. both common and preferred. The term "corporate action" refers to the distribution of benefits to existing shareholders or bondholders.Capital Market CORPORATE ACTION DEFINITION When a publicly-traded company issues a corporate action. A company announcing a 2-for-1 (2:1) stock split.the market will adjust the price on the day the action is implemented. At the same time. Only the number of shares outstanding change. Corporate action entails risks for organizations in the securities industry Any event that brings material change to a company and affects its stakeholders. however. Current shareholders will be allotted rights (Nil Paid shares) in accordance with the ratio set by the company. as well as bondholders. This includes shareholders. 58 . Stock Splits: As the name implies. These events are generally approved by the company's board of directors. will aid the investor in determining whether to buy or sell the stock in question. or its market capitalization. thereby lowering the price per share . A stock split. It will generally be at a lower price than the existing market price so the issue is attractive to shareholders. By understanding these different types of processes and their effects. because the value of the company and its shares did not change. the new price will be $50 per share. Thus. a stock split (also referred to as a bonus share) divides each of the outstanding shares of a company. Rights Issue: An issue of new shares by a Company in the market to raise funds. will distribute an additional share for every one outstanding share. in turn. for example. A rights issue regularly takes place in the form of a stock split. meaning that it does not affect a company's equity. or a change in structure to an existing security.

buybacks increase the proportion of shares a company owns. and (2) the increase in available shares outstanding on the stock exchange will make the stock more available to interested buyers. or its market capitalization (shares outstanding x market price/share). they aren't obliged to actually undertake the buyback. ABC announces that it's splitting its stock two for one as of July 1. So do keep in mind that the value of the company. Nancy will own 40 shares of ABC stock rather than 20 shares. increasing internal control of the company. Also known as a Capitalization Issue. but the greater liquidity and higher demand on the share will typically drive the share price up. thereby increasing the company's market capitalization and value. When a company's shareholders vote to authorize a buyback. Assuming that the stock is still trading on the market for $10 per share as of June 30. 59 . as a result of a Re-arrangement of a Company's capital structure. This is usually considered a sign that the company's management is optimistic about the future and believes that the current share price is undervalued. As of July 1. By reducing the number of shares outstanding on the market. Therefore.Capital Market So why would a firm issue such an action? a stock split in order to increase the liquidity of the share on the market. On June 1. Bonus Issue A benefit distribution in which additional shares are issued to qualifying shareholders (at no cost) in proportion to their existing holdings. Nancy still owns $200 worth of ABC stock (40 shares x $5 per share = $200) even though she now owns 40 shares rather than 20 shares. on July 1 each share will be trading for $5 per share. Reasons for buybacks include putting unused cash to use. The result of the 2-for-1 stock split in our example above is two-fold: (1) the drop in share price will make the stock more attractive to a wider pool of investors. does not change. Example of a stock split: Nancy buys 20 shares of ABC Corporation on April 1 for $200 ($10 per share). Buy back What Does Buyback Mean? The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. No new funds are raised for the company. raising earnings per share.

For example. This is mainly attributed to the buyback offer made at higher prices. Recently the prices of RIL and REL have not fallen. Eg. the lifetime of a warrant is often measured in years Occasionally. despite the spat between the promoters. Warrants can be traded on the market. . pocketing a profit of ($100 . Warrant v/s call options Warrants are issued by private parties. IBM et al have come out with buyback offers worth billions of dollars at prices higher than the prevailing rates thus stemming the fall.000. Warrant A Company may issue Warrants. companies offer warrants for direct sale or give them to employees as incentive.$20) x 100 shares = $8. If Company XYZ shares rose to $100 during that time. A warrant's lifetime is measured in years (as long as 15 years). 60 . Warrants are often included in a new debt issue as a "sweetener" to entice investors. SEBI permitted FIIs to register and participate in the Indian stock market in 1992. Participatory notes (PNs / P-Notes) are instruments used by investors or hedge funds that are not registered with the SEBI (Securities & Exchange Board of India) to invest in Indian securities. Market perception By buying their shares at a price higher than prevailing market price company signals that its share valuation should be higher.Capital Market Why companies buyback? Unused Cash: If they have huge cash reserves with not many new profitable projects to invest in and if the company thinks the market price of its share is undervalued. Any dividends or capital gains collected from the underlying securities go back to the investors. 'derivative instruments'. consider the warrants to purchase 100 shares of Company XYZ for $20 per share anytime in the next five years. rather than a public options exchange. the warrant holder could purchase the shares for $20 each. Eg: In October 1987 stock prices in US started crashing. Exit option If a company wants to exit a particular country or wants to close the company. typically the corporation on which a warrant is based. The company does not pay Dividends on Warrants. the word. but the vast majority of warrants are "attached" to newly issued bonds or preferred stock. Thus. Participatory notes are instruments that derive their value from an underlying financial instrument such as an equity share and. as expected. which entitle the holder to a right to take up Ordinary shares at a set price within a defined time period. Indian based brokerages buy Indian-based securities and then issue PNs to foreign investors. the minimum value of each warrant is $80. and immediately sell them for $100 on the open market. Bajaj Auto went on a massive buy back in 2000 and Reliance's recent buyback. Expecting further fall many companies like Citigroup. while options are typically measured in months. hence. Warrants are issued and guaranteed by the company.

What Does Coupon Mean? The interest rate stated on a bond when it's issued. SEBI was not happy with P-Notes because it is not possible to know who owns the underlying securities and hedge funds acting through PNs might therefore cause volatility in the Indian markets. Most bonds also require that the issuer pay the investor a specific amount of interest on a semi-annual basis. However the proposals of SEBI were not clear and this led to a knee-jerk crash when the markets opened on the following day (October 17. What are participatory notes or PNs? Participatory notes are instruments used by foreign funds which are not registered to trade in domestic Indian Capital Markets. This is also referred to as the "coupon rate" or "coupon percent rate". 61 . Any entity investing in participatory notes is not required to register with SEBI (Securities and Exchange Board of India).the biggest intra-day fall in Indian stockmarkets in absolute terms. Tax officials fear that PNs are becoming a favorite with a host of Indian money launderers who use them to first take funds out of country through hawala and then get it back using PNs. also known as fixed-income securities.000 bond with a coupon of 7% will pay $70 a year. Thirdly. which enables large hedge funds to carry out their operations without disclosing their identity. Bonds Bonds. That is why they are also called offshore derivative instruments. Why do investors use PNs? Reason for using PNs is to keep investor name anonymous. whereas all FIIs have to compulsorily get registered. Within a minute of opening trade. participatory notes are popular because they provide a high degree of anonymity. Participatory Notes Crisis of 2007 On the 16th of October. 2007). SEBI (Securities & Exchange Board of India) proposed curbs on participatory notes which accounted for roughly 50% of FII investment in 2007. Secondly. are debt instruments created for the purpose of raising capital. they are not used within the country. Trading through participatory notes is easy because participatory notes are like contract notes transferable by endorsement and delivery. For example: a $1. some investors have used them to save transaction and overhead costs.Capital Market Participatory notes are instruments used for making investments in the stock markets. This led to automatic suspension of trade for 1 hour. 2007. the terms of a bond obligate the issuer to repay the amount of principal at maturity. How does it work? Investors who buy PNs deposit their funds in US or European operations of Foreign Institutional Investors (FII) operating in India. The coupon is typically paid semiannually. The FII uses its proprietary account to buy stocks. some of the entities route their investment through participatory notes to take advantage of the tax laws of certain preferred countries. PNs are derivative instruments issued against an underlying security permitting holders to get a share in the income from the security. They are used outside India for making investments in shares listed in that country. the Sensex crashed by 1744 points or about 9% of its value . Essentially loan agreements between an issuer and an investor. However.

say LIBOR +0. The spread is a rate that remains constant.20%. For tax purposes.00). a deep-discount bond will have a market price of 20% or more below its face value. which is redeemed at face value on a specified maturity date. Holders receive interest by stripping off the coupons and redeeming them. plus a spread. At the beginning of each coupon period. Because of this interpretation. Zero Coupon Bonds A zero coupon bond is a corporate bond that makes no periodic interest payments. at that time the principal amount (and any outstanding interest) of the bond is paid off to the bond holder and the bond cancelled.25%. the IRS maintains that the holder of a zero coupon bond owes income tax on the interest that has accrued each year. a dealer would then make a market of 27 / 62 . and are most often issued with a par value of $1. zero coupon bonds are often used in retirement accounts where they remain tax-sheltered Deep-Discount Bond A bond that is selling at a discount from par value and has a coupon rate significantly less than the prevailing rates of fixed-income securities with a similar risk profile.000. Corporate bonds usually pay a higher rate of interest than government bonds. equal to a money market reference rate. Therefore. If the perception of the credit-worthiness of the issuer goes down. and is issued at par (100. Example Suppose a new 5 year FRN pays a coupon of 3 months LIBOR +0. but is sold at a deep discount from face value. A typical coupon would look like 3 months USD LIBOR +0. like LIBOR or federal funds rate.e. they pay out interest every three months. called the maturity date. Floating rate notes (FRNs) Floating rate notes (FRNs) are bonds that have a variable coupon. This is less common today as more records are kept electronically. though counter examples do exist. The buyer of the bond receives the rate of return by the gradual appreciation of the security.20%. Corporate Bonds Corporate bonds are fully taxable debt instruments issued by private corporations rather than government entities. These low-coupon bonds are typically long term and issued with call provisions. Almost all FRNs have quarterly coupons. 2. i. investors will demand a higher interest rate. Investors are attracted to these discounted bonds because of their high return or minimal chance of being called before maturity. even though the bondholder does not actually receive the cash until maturity. The IRS calls this “imputed interest”. These bonds are perceived to be riskier than similar bonds and are thus priced accordingly. Typically. the coupon is calculated by taking the fixing of the reference rate for that day and adding the spread. 1. Fixed rate bond A Fixed-rate bond is a security issued by a government or a business corporation that pays a fixed amount of interest (coupon rate) on the face value (principal/par value) of the bond periodically (often every six months or annually) to the owner until a date certain.Capital Market It is called a "coupon" because some bonds literally have coupons attached to them.

) Due to the equity side of the bond. FCCB What Does Foreign Currency Convertible Bond . lower then that of the stock owner. 63 . This can be calculated as par. Investing in bond is investing in a company's debt with the assurance of the company to repay the investor both the interest and the principal. It is more then possible the corporation's worth in the future will be lower. which are activated when the price of the stock reaches a certain point. In this example. that he would buy bonds at the equivalent of LIBOR +0. the coupon payments on the bond are lower for the company. The risk the investor is taking here is that of bankruptcy on the side of the company. This means. which adds value. to pay a fixed sum annually until maturity and a fixed sum to repay the Principal.Capital Market 25.25%.07%). If a trade is agreed. multiplied by the maturity (5 year). but these bonds also give the bondholder the option to convert the bond into stock. LIBOR +0. a scenario in which the company will be unable to pay it's debts. the price is calculated. of course. and sell at the equivalent of LIBOR +0. As a result of the risk taken stocks are expected to yield higher returns on investment. The corporation has not assured the investor in any way this scenario will take place. usually. The most notable difference between stock and bond is the risk involved in the investment and. minus the difference between the coupon and the price that was agreed (0. is of course. A convertible bond is a mix between a debt and equity instrument. (Bondholders take advantage of this appreciation by means warrants attached to the bonds. This risk.27%. It acts like a bond by making regular coupon and principal payments.FCCB Mean? A type of convertible bond issued in a currency different than the issuer's domestic currency.27% would be roughly equivalent to a price of 99. thereby reducing its debt-financing costs. These types of bonds are attractive to both investors and issuers.65. the money being raised by the issuing company is in the form of a foreign currency. the expected return. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock. Bond v/s stock Investing in stocks owns a part of the company while investing in bonds owns a part of the company's debt. A stock is a financial asset which a corporation issues in order to raise capital by giving up a certain percent of ownership over the corporation. In other words. A bond is a certificate of debt issued by a corporation or country which is required. As a stock holder an investor is investing in the corporation's future worth expecting it to grow.

date of birth. Who is a sub broker? A sub broker is a person who is registered with SEBI as such and is affiliated to a member of a recognized stock exchange. photograph. Who is a broker? A broker is a member of a recognized stock exchange. you have to broadly provide following information: Permanent Account Number (PAN). who is permitted to do trades on the screen-based trading system of different stock exchanges.Capital Market ROLE OF BROKER AND SUB-BROKER IN THE SECONDARY MARKET Whom should I contact for my Stock Market related transactions? You can contact a broker or a sub broker registered with SEBI for carrying out your transactions pertaining to the capital market. then the name of broker and concerned Stock exchange and Client Code Number. which has been made mandatory for all the investors participating in the securities market. There is no sub-broker in the derivatives segment. educational qualifications. He is enrolled as a member with the concerned exchange and is registered with SEBI. 64 . For the brokers of derivatives segment. What is Member –Client Agreement Form? This form is an agreement entered between client and broker in the presence of witness where the client agrees (is desirous) to trade/invest in the securities listed on the concerned Exchange through the broker after being satisfied of brokers capabilities to deal in securities. What kind of details do I have to provide in Client Registration form? The brokers have to maintain a database of their clients. the registration number begins with the letters “INF”. on the other hand agrees to be satisfied by the genuineness and financial soundness of the client and making client aware of his (broker’s) liability for the business to be conducted. A broker's registration number begins with the letters "INB" and that of a sub broker with the letters “INS". residential status(Resident Indian/ NRI/others) Bank and depository account details If you are registered with any other broker. occupation. In case of individual client registration. Your name. for which you have to fill client registration form. How do I know if the broker or sub broker is registered? You can confirm it by verifying the registration certificate issued by SEBI. address. The member.

following information has to be provided: Name. Photographs of Partners/Whole time directors. then the name of broker and concerned Stock exchange and Client Code Number. Bank and Depository Account Details Copies of the balance sheet for the last 2 financial years (copies of annual balance sheet to be submitted every year) Copy of latest share holding pattern including list of all those holding more than 5% in the share capital of the company. In case of joint names /family members. 65 . duly certified by the Company Secretary / Whole time Director/MD. partnership deed in case of a partnership firm Copy of the Resolution of board of directors' approving participation in equity / derivatives / debt trading and naming authorized persons for dealing in securities. SEBI or any government authority) Details of PAN Details of Promoters/Partners/Key managerial Personnel of the Company/Firm in specified format. Registration number(with ROC. either directly or indirectly. How do I place my orders with the broker or sub broker? You can either go to the broker’s / sub broker’s office or place an order over the phone / internet or as defined in the Model Agreement given above. In case of Corporate Client. address of the Company/Firm Date of incorporation and date of commencement of business. If registered with any other broker. in the shareholding of the company and of persons authorized to deal in securities.Capital Market For proof of address (any one of the following): Passport Voter ID Driving license Bank Passbook Rent Agreement Ration Card Flat Maintenance Bill Telephone Bill Electricity Bill Insurance Policy Each client has to use one registration form. individual promoters holding 5% or more. (copy of updated shareholding pattern to be submitted every year) Copies of the Memorandum and Articles of Association in case of a company / body corporate. a separate form has to be submitted for each person.

which is intimated by broker to his client and once the order is executed. Signature of the Stock broker/Authorized Signatory. Hence. Service tax rates and any other charges levied by the broker. Quantity and Kind of Security brought/sold by the client. b. Trade number and Trade time. upon which the broker shall ensure that the physical contract note reaches the client within the stipulated time. Unique Identification Number Contract number. Securities Transaction Tax (STT) as applicable. The contract note inter-alia should have following: Name. shall communicate the same to the broker. settlement number and time period for settlement. What documents should be obtained from broker on execution of trade? You have to ensure receipt of the following documents for any trade executed on the Exchange: a. you should insist on contract note from stock broker. What details are required to be mentioned on the Contract note issued by the Stock Broker? A broker has to issue a contract note to clients for all transactions in the form specified by the stock exchange. The broker member has also to maintain the record of time when the client has placed order and reflect the same in the contract note along with the time of execution of the order. Constituent (Client) name/Code Number. Brokerage and Purchase /Sale rate are given separately. Only the broker can issue contract notes. the clients shall ensure that the same is digitally signed and in case of inability to view the same. 66 . In the case of electronic issuance of contract notes by the brokers. Code number of the member given by the Exchange. Contract note in Form A to be given within stipulated time.Capital Market How do I know whether my order is placed? The Stock Exchanges assign a Unique Order Code Number to each transaction. date of issue of contract note. Appropriate stamps have to be affixed on the original contract note or it is mentioned that the consolidated stamp duty is paid. this order code number is printed on the contract note. Order number and order time corresponding to the trades. Name of partner /proprietor /Authorised Signatory. Dealing Office Address/Tel No/Fax no. address and SEBI Registration number of the Member broker. Contract note provides for the recourse to the system of arbitrators for settlement of disputes arising out of transactions. It is the contract note that gives rise to contractual rights and obligations of parties of the trade.

Penalties arising on specific default on behalf of client (investor) Service tax as stipulated. The brokerage. What is the pay-in day and pay.out day? Pay in day is the day when the brokers shall make payment or delivery of securities to the exchange. What is a Rolling Settlement? In a Rolling Settlement. 67 .f. pursuant to SEBI directives.5% brokerage from his clients.2) Act.Capital Market What is the maximum brokerage that a broker can charge? The maximum brokerage that can be charged by a broker has been specified in the Stock Exchange Regulations and hence. As per the BSE & NSE Bye Laws. April 01. service tax and STT are indicated separately in the contract note. The Exchanges will have to issue press release immediately after pay out. 2004. trades executed during the day are settled based on the net obligations for the day. 2002. What is an Account Period Settlement? An account period settlement is a settlement where the trades pertaining to a period stretching over more than one day are settled. 2004. Pay out day is the day when the exchange makes payment or delivery of securities to the broker. it may differ from across various exchanges. a broker cannot charge more than 2. the Government of India notified the Securities Transaction Tax Rules.e. The obligations for the account period are settled on a net basis. What is STT? Securities Transaction Tax (STT) is a tax being levied on all transactions done on the stock exchanges at rates prescribed by the Central Government from time to time. For example. Account period settlement has been discontinued since January 1. Pursuant to the enactment of the Finance (No. The funds and securities pay-in and pay-out are carried out on T+2 day. Securities Transaction Tax (STT) as applicable. The exchanges have to ensure that the pay out of funds and securities to the clients is done by the broker within 24 hours of the payout. 2004 and STT came into effect from October 1. Presently the trades pertaining to the rolling settlement are settled on a T+2 day basis where T stands for the trade day. What are the charges that can be levied on the investor by a stock broker? The trading member can charge: Brokerage charged by member broker. trades executed on a Monday are typically settled on the following Wednesday (considering 2 working days from the trade day). 2003. trades for the period Monday to Friday are settled together. Settlement cycle is on T+2 rolling settlement basis w. Hence.

when do I make payment to the broker? The payment for the shares purchased is required to be done prior to the pay in date for the relevant settlement or as otherwise provided in the Rules and Regulations of the Exchange.Capital Market What are the prescribed pay-in and pay-out days for funds and securities for Normal Settlement? The pay-in and pay-out days for funds and securities are prescribed as per the Settlement Cycle. A typical Settlement Cycle of Normal Settlement is given below: Activity Trading Clearing Settlement Post Settlement Rolling Settlement Trading Custodial Confirmation Delivery Generation Securities and Funds pay in Securities and Funds pay out Valuation Debit Auction Bad Delivery Reporting Auction settlement Close out Rectified bad delivery pay-in and pay-out Re-bad delivery reporting and pickup Close out of re-bad delivery Day T T+1 working days T+1 working days T+2 working days T+2 working days T+2 working days T+3 working days T+4 working days T+5 working days T+5 working days T+6 working days T+8 working days T+9 working days Note: The above is a typical settlement cycle for normal (regular) market segment. as settlement cycle has been reduced fromT+3 rolling settlement to T+2 w. However. The days prescribed for the above activities may change in case of factors like holidays.out day. 2003. 68 . bank closing etc.f. You may refer to scheduled dates of pay-in/pay-out notified by the Exchange for each settlement from time-to-time. April 01. when should the shares be given to the broker? The delivery of shares has to be done prior to the pay in date for the relevant settlement or as otherwise provided in the Rules and Regulations of the Exchange and agreed with the broker/sub broker in writing. In case of purchase of shares.e. How long it takes to receive my money for a sale transaction and my shares for a buy transaction? Brokers were required to make payment or give delivery within two working days of the pay . In case of sale of shares. the pay out of funds and securities to the clients by the broker will be within 24 hours of the payout.

The time taken to make an award cannot be extended beyond a maximum period of 6 months from the date of entering upon the reference. which is then liable to be recovered from the client. The guidelines stipulate that “the close out Price will be the highest price recorded in that scrip on the exchange in the settlement in which the concerned contract was entered into and up to the date of auction/close out OR 20% above the official closing price on the exchange on the day on which auction offers are called for (and in the event of there being no such closing price on that day. In case of disagreement. Investors may choose the arbitrator of their choice from the panel. The broker also has an option to choose an arbitrator. then the official closing price on the immediately preceding trading day on which there was an official closing price). in the rolling settlement the auction and the close out takes place during trading hours. Since.Capital Market What is an Auction? The Exchange purchases the requisite quantity in the Auction Market and gives them to the buying trading member. whichever is higher. 69 . The name(s) would be forwarded to the member for acceptance.e. The shortages are met through auction process and the difference in price indicated in contract note and price received through auction is paid by member to the Exchange. You can procure a form for filing arbitration from the concerned stock exchange. the reference price in the rolling settlement for close out procedures would be taken as the previous day’s closing price. the transactions are closed out as per SEBI guidelines. What is Arbitration? Arbitration is an alternative dispute resolution mechanism provided by a stock exchange for resolving disputes between the trading members and their clients in respect of trades done on the exchange. Who appoints the arbitrators? Every exchange maintains a panel of arbitrators. What is the process for preferring arbitration? The byelaws of the exchange provide the procedure for Arbitration. What happens if the shares are not bought in the auction? If the shares could not be bought in the auction i. the exchange shall decide upon the name of arbitrators. if shares are not offered for sale in the auction. The arbitral tribunal has to make the arbitral award within 3 months from the date of entering upon the reference.

bonds.) In electronic form IS DEPOSITORY SIMILAR TO A BANK? Bank Holds funds in an account. NATIONAL SECURITIES DEPOSITORY LIMITED (NSDL) Prior to trading in a dematerialized environment. Transfers securities between accounts on the instruction of the account holder. shares. The depository system gained quick acceptance and in a very short span of time it was able to achieve the objective of eradicating the paper from the trading and settlement of securities. Facilitates safekeeping of money. Dematerialized delivery today constitutes almost 100% of total of the total delivery based settlement. and was also able to get rid of the risks associated with fake/forged/stolen/bad paper. the system of transfer of ownership was grossly inefficient as every transfer involved physical movement of paper to the issuer for registration. units etc. debentures. settlement of trades required moving the securities physically from the seller to the ultimate buyer. 1. In many cases. forgery. which involved lot of time and the risk of delay somewhere along the chain. mutilation of certificates and other irregularities were rampant. the process of transfer took much longer than stipulated in the then regulations. Transfers funds between accounts on the instruction of the account holder. restricted liquidity.Capital Market DEPOSITORY A depository is like a bank wherein the deposits are securities (viz. All these added to the costs and delays in settlement. Depository Holds securities in an account. through the seller’s broker and buyer’s broker. Theft. NSE to promote dematerialization of sec utilities joined hands with UTI and IDBI to set up the first depository in India called the “National Securities Depository Limited” (NSDL). government securities. 70 . Facilitates transfers of ownership without having to handle securities. with the change of ownership being evidenced by an endorsement on the security certificate. Facilities safekeeping of share DEPOSITORIES IN INDIA There are two depositories in India which provide dematerialization of securities. Further. Facilitates transfers without having to handle money. To obviate these problems.

CENTRAL SECURITIES DEPOSITORY LIMITED (CSDL) The Depository provides its services to investors through its agents called Depository Participants (DP). fake securities. Besides safeguarding securities. i. Keeping the client informed of the actions taken or to be taken by the issue of securities.Capital Market 2. a custodian also keeps track of corporate actions on behalf of its clients: Maintaining a client’s securities account Collecting the benefits or rights accruing to the client in respect of securities. Banks. 71 . These agents are appointed by the depository with the approval of SEBI. BENEFITS OF PARTICIPATION IN A DEPOSITORY Immediate transfer of securities No stamp duty on transfer of securities Elimination of risks associated with physical certificates such as bad delivery. Financial Institution and SEBI registered trading members can become DPs. Reduction in paperwork involved in transfer of securities Reduction in transaction cost Ease of nomination facility Change in address recorded with DP gets registered electronically With all companies in which investor holds securities eliminating the need to correspond with each of them separately Transmission of securities is done directly by the DP eliminating Correspondence with companies Convenient method of consolidation of folios/accounts Holding investments in equity. arising out of split/consolidation/merger etc. debt instruments and Government securities in a single account. amongst others.e. CUSTODIAN A Custodian is basically an organization. automatic credit into demat account. which helps register and safeguard the securities of its clients. ISIN (International Securities Identification Number) is a unique identification number for a security. of shares. having a bearing on the benefits or rights accruing to the client. etc. three categories of entities. According to SEBI regulations.

emergence of clearing corporations to assume counterparty risk. physical securities one has to fill in a Demat Request Form (DRF) which is available with the DP and submit the same along with physical certificates one wishes to dematerialize. though many of these are yet to permeate the whole market. Till recently. shorter settlement cycle. etc. T+2 rolling settlement have now been introduced for all securities. the stock exchanges in India were following a system of account period settlement for cash market transactions.. 72 . fine-tuned risk management system. Given the growing volume of trades and market volatility. These include use of the state-of-art information technology. the time gap between trading and settlement gives rise to settlement risk.Capital Market DEMATERIALIZATION Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor’s account with his Depository Participant (DP). CONVERT PHYSICAL HOLDING INTO ELECTRONIC HOLDING In order to dematerialize. dematerialization and electronic transfer of securities. CLEARING AND SETTLEMENT The clearing and settlement mechanism in Indian securities market has witnessed significant changes and several innovations during the last decade. Separate DRF has to be filled for each ISIN number. The members receive the funds/securities in accordance with the pay-in/pay-out schedules notified by the respective exchanges.

it provides the time series data over a fairly long period of time (From 1979 onwards). As the oldest index in the country. The "Free-float Market Capitalization" methodology of index construction is regarded as an industry best practice globally. First compiled in 1986. SENSEX and NIFTY. STOXX. The Index was initially calculated based on the "Full Market Capitalization" methodology but was shifted to the free-float methodology with effect from September 1. SENSEX is regarded to be the pulse of the Indian stock market. The SENSEX captured all these events in the most judicial manner. One can identify the booms and busts of the Indian stock market through SENSEX.our share market has went through many phases in there 2 years. Indian economy at its height compelled the world to change its viewpoint towards India. we are going to discuss the most roaring of them i. We saw how the market rewarded the undervalued shares and how the overvalued shares fell down to demonstrate the saying “everything which rise more than expected. There was a time when India was discussed as the land of snake charmers. The magical figures displayed by our market turned all the heads on India. Due to is wide acceptance amongst the Indian investors. All major index providers like MSCI. firstly year 2007 and then year 2008. We saw the investors getting overjoyed at 21K and we saw them crying too when it crashed. S&P and Dow Jones use the Free-float methodology. And India became one of the most favoured places for investment Now we are going to deal with the ups and downs in the share market since last two years i. black magic and epidemics but the revolutionary Indian growth story changed everything. FTSE.e. The growth of equity markets in India has been phenomenal in the decade gone by. still we call BSE sensex as the barometer of our economy.e. The earlier reform procedures adopted by India gave India the two most sought after world-class brands i. liquid and representative companies. The base year of SENSEX is 1978-79 and the base value is 100. It is the most frequently used indictor while reporting on the state of the market. SENSEX is a basket of 30 constituent stocks representing a sample of large.e. Right from early nineties the stock market witnessed heightened activity in terms of various bull and bear runs.” So to analyze the saga of Indian share market. we had two indices to follow: BSE sensex and NSE nifty. Though NSE nifty is a more advanced option and has left BSE sensex far behind. Sensex is not only scientifically designed but also based on globally accepted construction and review methodology. 73 .Capital Market JOURNEY OF SENSEX BSE SENSEX is the benchmark index for the Indian stock market. That’s why we have followed the BSE sensex. since year 2007. It was not possible to track each and every day figure of the sensex since last two years. The index is widely reported in both domestic and international markets through print as well as electronic media. the SENSEX has over the years become one of the most prominent brands in the country. The performance of the sensex is analyzed with the help of data and graphs collected from various sources and some of the most talked about movements of sensex starting with the secondary market summary of each year. our share market. Small wonder. has to fall. 2003. Out of the several factors which changed the face of modern India.

000 point rally put together took lesser trading sessions as compared to this 1.873. strong forward momentum and market players reflecting their confidence in Indian economy. The markets reached such heights primarily due expectation of excellent quarterly result. While foreign institutional investors have been aggressive buying stocks over the past few months.001 crore while local mutual funds have pumped in a net Rs 638.33 with a P/E of 28. 2006. Oil & Gas and Metal. December 5.000. There is increasing recognition of long-term growth prospects in India. it touched the day’s high at 21.Capital Market YEAR 2006 AT A GLANCE: The benchmark 30-share sensex briefly crossed the psychological 14. YEAR 2007 AT A GLANCE Indian capital market was able to set yet another milestone reflecting the long term growth story with Sensex crossing the 21.000 were Reality.000 to 21.000 mark in early trade on 8th January ’08. the response of domestic mutual funds has been guarded. Consumer Durables.000 point rally as Indian stock markets were seen being influenced by the global cues led by US stocks. It took 49 trading days for the Sensex to move from 20.000 to 21. In the last two months alone.077.07 crore. Indices which performed well during the Sensex journey from 20. Teck and IT sectors were the laggards giving negative returns. FIIs bought net stocks worth Rs 17.51. The previous 4.000 point rally 74 .53 before closing at 20. The US subprime crises has played its part in slowing down the pace of this 1.000-mark on Tuesday.

000 TO 21.Capital Market SENSEX JOURNEY (FROM 15.000 mark on 29thOctober’07 took 49 trading days in reaching the 21.000) SENSEX CLOSING VALUES AND PE The Sensex after crossing 20. MOVEMENT OF SENSEX (FROM 20. 12.000) 75 .18%.99% respectively while Sensex gave a return of 4.000 to 21.21%.00% and 24. BSE 200 and BSE 500 reaped 11.877% and 14. The Smallcap and Midcap gave a return of 44.000 BSE 100.000 mark. During this journey from 20.65% respectively.000-21.

P notes etc.000 – 21. Only fear to inflationary pressure is fund flow and curb on capital account inflow (ECB.000) BSE SECTORAL INDICES RETURNS (FROM 20. The reason for Inflation coming down is primarily due to high base effect. 76 .) which is not going to work as Fed may lower the interest rates further thus creating robust platform for inflows into India and other emerging markets across Asia and Latin America.Capital Market OTHER BSE INDICES RETURNS (FROM 20.000 – 21. The market expects the inflation to remain largely steady. Exchange rate is hurting IT stocks & exporters hence lot of job losses which centre can not afford therefore government will do arrangements for making exports cheaper.000) INFLATION AND INTEREST RATES: The inflation in India is under control and this may create favorable outlook for interest rates coming down. Low inflation would persuade RBI to ease liquidity flow but reducing CRR at this juncture was not possible due to strong fund flow to India and resultant appreciation of rupee vis-à-vis dollar. Interest rates sensitive sector like Auto and Real estate banking may do well going forward.

70 cr into Indian stocks this calendar year till 07thJanurary ’08. The U. We are likely to see more of FII investments in the days to come. Adding to the pressure on consumers are high energy prices. 2403 cr in the equity markets in duration of 49 trading days. with a barrel of crude oil still flirting with the USD100 level. Federal Reserve and other major central banks have intervened through a combination of rate cuts and money injection into the financial system.000 to 21.000 point rally except for November 2007 where in they were net sellers to the tune of Rs. Subprime mortgages.S. and gasoline prices on average 90 cents a gallon higher than a year ago. bad U. growth driven by consumption. economists worry especially about the drying-up of the easy money that has fueled the economy over the past few years. households unable to meet mortgage and possibly other payments.S. The Foreign institutional investors were Net Investors during the 1. At the root of the credit crisis remain U. 77 . 5849.Capital Market INFLATION DATA THE FIIS: US is slowing down and there is fear that this may escalate into full blown recession which can affect the money flowing into emerging market equity. home loans that have made their way into the portfolios of financial institutions worldwide.S.10 cr in Indian equity market.S. This will have very bad effect on kind of flow we may see into emerging markets. With 70% of U.000 FIIs infused Rs. government has also frozen some adjustable rate mortgages and announced measures to help distressed homeowners. The number of Registered FII's as on 07th January’08 was recorded at 1235.90 cr on account of weak global sentiments and crude prices touching new highs. 285398. According to the Securities and Exchange Board of India FIIs hold total investments to the tune of Rs. 1929. Foreign institutional investors had pumped Rs. In 1000 points rally from 20. will likely result in more losses at these firms.

40 cr in December ’07 and Rs.40 cr in 49 trading sessions after the Sensex breached 20. The calendar year 2008 has seen Mutual Funds as net buyers to the tune of Rs.50 cr in November ’07.80 cr.000 – 21. 544. Rs. 1615. 1615. MUTUAL FUND NET INVESTMENT (FROM 15. 6264.000 – 21. The MF’s were net investors in the 1. 965.3024.30 cr till 07th January ’08 where as were net sellers for 30th & 31st October ‘07 to the tune of Rs.000) MUTUAL FUNDS: The Mutual Funds in this 1000 point rally have turned to be net investors for a second time to the extent of Rs.30 cr by the time Sensex surged 21.000 – 21. 2102.000) 78 .000 mark on 9thOctober’07 continuing the trend of being Net Sellers from the last 1000 point rally where they sold equity worth Rs..Capital Market FII INFLOWS (FROM 15.000) FII NET INVESTMENT (FROM 20.000 point rally where in they invested Rs.2169.000.000 unlike the previous trends where in the Mutual Funds had been net sellers to the tune of Rs.60 cr.90 cr after the Sensex had breached 18.

000 18. Expectation of excellent quarterly result and strong forward momentum has played major role. Liberal export-import policy.000 6. 1999 Feb 11. 2007 Oct 15. Massive buying from mutual funds around Rs. Infotech boom News of the settlement between the Ambani brothers boosted investor sentiments Buying by foreign and domestic funds FIIs on buying Spree. Expectation of robust fourth quarter earnings by corporate and S&P upgrading India’s sovereign credit rating from stable to positive Fund infusion from market players. Strong FII Inflows and short covering due to easing of political tension between LEFT and UPA over the Nuclear Deal. 2000 June 20. strong FII inflows and expectations of good quarterly results. 1992 Feb 29. 2007 Sep 26. Market-friendly Budget by the then Finance Minister. indications of interest rates having peaked. healthy corporate earnings and continued strong economic data coupled with slash in petrol and diesel prices have fuelled the latest surge on the bourses.000 Oct 30.000 5. in just 19 trading sessions. BJP-led coalition won the majority.000 16. Buying from FIIs. favorable credit policy.000 21. 2007 Oct 29. Robust FII inflows and positive sentiments across the boards. The softening trend in inflation below the five per cent level. 2005 Nov 28. 2006 Dec 5.000 2. Registering of FII and P notes issue clarification has put momentum into Sensex. Robust growth in infrastructure sector.000 8.3400 cr. softening trend in inflation below the four per cent level and Good Kharif crop. 1992 Oct 8. 2006 March 21. 2006 July 6. Dr Manmohan Singh. 2006 April 20.000 10. 2006 Sensex Drivers Good monsoon and excellent corporate results. 13. 1990 Jan 3. 1992 March 30.Capital Market Sensex level 1.000 14.000 12. falling oil prices and strong second quarter results from Technology and Banking companies.000 3. 2008 79 . Local operators and retail investors Robust foreign fund inflows and a move by Government towards greater capital account convertibility. 2005 Feb6. 2007 Oct 09.000 9.000 19.000 11. US fed rate cut by 50 basis point. Strong FII buying coupled with short covering led to sharp up move. 2007 January 08. 2007 Sep 19.000 17.000 15. Dr Manmohan Singh.000 7.000 Date July 25. Liberal economic policy initiatives undertaken by the then finance Minister. strong foreign fund inflows.000 4. Strong fund flow and expectation of good quarterly result from companies has fuelled this leg of rally. 2005 Sep 8.000 20. Strong FII inflow.

The underperformance can partly be attributed to the fact that Indian markets outperformed global markets in the last two months of 2007and hence we were seeing the lagged impact of that outperformance. The Bombay Stock Exchange (BSE) Sensex fell 4. down 1408.9 percent. sensex entered year 2008 with rosy pictures. they sold in the cash market to the tune of USD 45 billion.951.35 points or 7.000 to 21.000 is dominated by domestic institutional investors. it has been domestic institutional investors which have been really putting the money.The fall was triggered as a result of weakness in global markets. the journey from 20. 31st march the last day of the financial quarter. brokers and even investors predicted new heights for the year.4 per cent. According to market analysts. but the impact of the global rout was the biggest in India. FIIs were negative sellers. The market tumbled on account of a broad based sell-off that emerged in global equity markets. Financial stocks led the Sensex slide along with IT.35. it is the longest journey which we have seen in the last 5. The skyrocketing sensex suddenly started heading south and Sensex saw the biggest absolute fall in history.000 marks. Fears over the solvency of major Western banks rattled stocks in Asia and Europe.000. It closed at 17.605. developments in the US economy and US markets continued to dominate investor sentiments globally and we saw volatility move up sharply across most markets.4%. So if one has to take out some pointers from this journey from 20. And they felt their predictions coming true when sensex touched the 21000 mark on 8th January 2008.50. as reports of rising inflation and global economic slowdown dampened market sentiments. the midcaps and smallcaps have been outperformers and in terms of flows. It’s interesting if one sees in terms of flows. It fell to a low of 16.44 percent on Monday. to end the quarter of March down 22. its biggest quarterly fall since the June 1992 quarter. shedding 2062 points intra-day. India finished the month as the second worst emerging market.000 to 21. IT stocks fell on worries about the health of the US economy. The trade pundits. After the worst January in the last 20 years for Indian equities. February turned out to be a flat month with the BSE sensex down 0. 80 . Indian IT firms depend on the US clients for a major share of their revenues. But the rosy picture soon turned gloomy.Capital Market SENSEX DURING YEAR 2008: After scaling new heights of 20000+. In the shorter term.

The only relief came in the form of weakening Indian rupees which enlightened the IT sector and most recently the UPA gaining vote of confidence.80 in the week. The sensex is dancing on the music of lifetime high inflation rates.5% to close at 17287 points.Capital Market REASONS FOR THE PRESENT SLOWDOWN (Q1. 4 June 2008. So April was the last month to close positive.68% in march 2008 as a result RBI hiked CRR by 50 bps to take the figure to 8%. historic crude prices. On 6 June 2008.572.67% at 17. Presently it is revolving around the figures of 14000 and no one knows what next? The 30-share BSE Sensex fell 117. The S&P CNX Nifty fell 242. IT stocks gained on slipping rupee.97% to 4627. a fact reinforced by the strong movement in the mid-cap and small.18 in the week ended 6 June 2008. Sometimes it surged by 600+ points. Foreign institutional investors sold close to Rs 2204 crore in the first three trading sessions of the week which accentuated the downfall.373. Then after nobody saw a stable sensex even. still emergence of retail investors was also seen.cap index that rose 16% and 18% respectively. The key benchmark indices ended lower as investors resorted to profit booking due to lack of positive triggers in the market. every forecasting has failed. tightening RBI policies. weak industrial production data. 81 . The BSE Sensex declined 843. A combination of firming global markets and technical factors like short covering were the main reasons for the up move in the markets.2%.57% against 6.01 on Tuesday. In May. The 30-share BSE Sensex declined 197. local benchmark indices underperformed their global peers. political uncertainties and obviously the sentiments of domestic as well as FIIs.572. BSE Sensex rose in two out of five trading sessions. The BSE sensex showed a gain of 10. Though inflation touched a high of 7.18. On 30th May an imminent hike in domestic retail fuel prices due to soaring crude oil prices weighed on the market last week. hit by rumours that the Reserve Bank of India (RBI) may hike cash reserve ratio (CRR) or interest rate later in the day to tame runaway inflation. 6 May 2008.54 points or 1. but very next day it plunged by some 800 odd points and this story is still continuing. triggered possibility of a surge in inflation to double digit level.89 points or 0.3 points or 4. INDIAN INFLATION STOOD AT 8. FY 08-09) The first month of the financial year 08-09 proved to be a good one for investors with the month ending on a positive note. Every prediction.39 points or 5.25% to settle at 15. However better than expected Q4 gross domestic product figures provided some relief to the bourses on Friday. The market declined sharply as a hike in fuel pr ces by about 10% announced by the Union government on Wednesday.14% to 15.

fanning fears that they will keep climbing and hurt world growth.08 points down at 15.07 points or 5. The initial jolt was caused by the Reserve Bank of India's move to hike the key lending rate. On July 15th 2008. Indian shares fell 4. we can saw market plunging after the RBI announced further hikes in Repo rate as well as CRR both increased to 9%. And above all we can't see any positive trigger that can dilute the flow of negative news. equities staged a solid rebound after touching fresh calendar 2008 lows in early trade. Oil prices surged to record levels.65 in the week. On 25 June 2008.9 per cent to their lowest close in 15 months. Bombay’s Sensex index closed 506. Equities extended losses for the fifth straight day on 24 June 2008 with the barometer index BSE Sensex falling below the psychologically important 14. A setback to stocks in Asia and US.802. An 800+ point surge was experienced in the market on the day following UPA gaining vote of confidence but the very next day market couldn’t maintain the momentum and since then its in a doldrums’ position. having earlier fallen 4.000 mark for the first time in 10 months since late August 2007.22. Central banks across the globe warned that interest rates may have to rise as they look to keep inflation under control. the serial blasts at Ahmadabad and Bangalore adding to the worries and enhancing the negative sentiments.10. joining a world equities rout as investors dumped financials on concerns about the fallout from worsening global credit turmoil.85% to 4136.Capital Market On 9th June 2008. despite the fact that economic growth is slowing in key nations such as the US and UK.28% to 13.4% and slipped below 15. 82 . The S&P CNX Nifty lost 210.On the week ending 27th June 2008 Sensex declined 769. Also.US nuclear deal rattled bourses on 27 June 2008. the global financial sector turmoil impacts sentiment in the local market and raises worries of more withdrawals by foreign funds.000 for the first time since March. Although Indian banks have no direct exposure to the US subprime mortgage sector.90 points or 4.066. sharp spurt in crude oil prices and political uncertainty due to Indo. Presently.

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