Introduction to the Indian Stock Market

(Group – 1)
Stock Exchanges
Indian Stock market is old Stock Market in Asia. The Indian Stock Market became more formalized with
the recognition of Bombay Stock Exchange as the country’s first Stock Exchange in the year 1956,
though BSE has been in existence since 1875. Eventually, Securities and Exchange Board of India came
into existence in the year 1988 as a step to modernize the financial system. When in April 1992, BSE
crashed due to the Harshad Mehta Scam, the need for another Stock Exchange as a competitor to BSE
came into consideration and as a result, National Stock Exchange was established in November 1992.
After the establishment of NSE, it rapidly exceeded the turnover of BSE. Today, NSE has about 66% of
equity spot turnover and almost 100% of the equity derivatives turnover.

Trading Mechanism
The trading in the Indian Stock Market happens electronically through matching orders with the open
electronic order book. There are no market makers as such and all orders are placed through brokers on
behalf of buyers and sellers.

Stock Indexes
Sensex and Nifty are the two major Stock Indexes in the Indian Market. Sensex is the oldest index and
represents about 45% of the index’s free-float market capitalization. It includes 30 shares listed on BSE.
Whereas, Nifty which includes 50 shares listed on NSE, represents about 62% of the same.

Some insights-
1. The chart above depicts the India’s Equity Market Index from January 1, 1990 to September 1,
2019. The all-time high of 39,714 points in May 2019, whereas the lowest was of 676.2 points in
February 1990.
2. India’s SENSEX P/E Ratio reached an all-time high of 57.42 in April 1992 and a record low of 9.83
in November 1998.
 3. An investment in SENSEX around 40 years back, would have led to higher returns than gold and
fixed deposits.

4. After the boom during the early years of Liberalization, the Primary market almost dried up as
the investors lost confidence.

Recent Regulatory Changes-

1. Cyber Security & Cyber Resilience framework for Stock Brokers / Depository Participants: Due to
rapid technological advancements in the Indian Stock Market dealings, the need for cyber
security is also high to avoid breach of privacy and avoid any misuse of data.
2. Early Warning Mechanism to prevent diversion of client securities: To prevent any diversions of
client securities and detecting them timely, this reform has come into existence.
Historic Measures

Introduction of Online Trading

Trading through physical means had been scrapped and online trading was introduced which is done with
the help of a demat account. The online mode has increased transparency and liquidity in stock market
and has reduced overall transaction cost. Shares can now be sold within seconds with full ease. The shares
of any company are now reflected on real time basis to almost everyone which has put the management
in a position to perform best without any malpractice. Thus, this move has economic as well as managerial
implications

Settlement on T+2 basis

The badla system had been banned and, in its place, the rolling settlement has been introduced where
the transaction is executed in T+2 basis. This ensures transparency and safety to investors.

Opening to foreigner investors and accessing international capital markets

The capital market opened itself to foreign institutional investors (FII). This allows the inflow of foreign
capital to shares and debentures of private Indian companies and investment in govt. securities.

Recent Measures

Managerial impacts

More Accountable Independent Director

SEBI has emphasised on the role of corporate governance to improve coporate governance and
transperancy. It has tweaded the definition of independent director as this role has often been
questioned in the wake of several scams. Also no person can be independent director for more than 7
companies.

Apart from that the position of chairperson is going to be separate from managing director or CEO to
make company run more professionally. Also there has to be a disclosure of related party transaction on
the listed companies’ website.

Ease of eligibility and KYC norms for FPI

SEBI has relaxed the eligibility and KYC norms for FPIs and has allowed them to comply with such norms
for a period of 2 years. The has made easy to invest in India and reduces the restrictions.

Changes in norms for IPO

Minimum 50% is for retail investors and remaining to individual applicants as well as investors including
corporate bodies or institutions.
The requirement for financial disclosures has been cut to 3 to 5 and broadened the anchor investor
category by including insurance companies, private equity funds and venture capital funds.
Announcement of the price band can now be made two days before the issue opens from five now.

Comparitive Analysis

For comparative analysis, we took various stock exchanges and compared them on the following
parameters:

 Market Capitalization
 Number of Listed Securities
 Listing agreements
 Settlement

Market Capitalization
These parameters are evaluated to look at a selected and essential aspect of a stock exchange, viz., market
capitalization will give us an idea about the size of the overall market. The number of listed securities will
provide us with an estimate of the volume and liquidity of an exchange. The listing agreements will tell us
the governance issue, and the last settlement will tell us the overall efficiency of the market.

S. No. Exchange Market Cap (US$ Trillion)

1 NYSE, United States 23.21
2 NASDAQ, United States 11.22
3 Japan Exchange Group 5.61
4 Shanghai Stock Exchange, China 5.01
5 Hong Kong Exchanges 4.31
6 Euronext Europe 4.27
7 London Stock Exchange Group, UK & Italy 3.97
8 Shenzen Stock Exchange, China 3.36
9 TMX Group, Canada 2.22
10 Bombay Stock Exchange 2.18
Source: www.statista.com

Market capitalization is the measurement of the corporate size of a country. It shows the present stock
prices multiplied by the number of shares in the market. Based on the above table, we can say the Indian
Stock Exchange; BSE is ranked 10th in the world among other major stock exchanges. BSE ranked 10th
despite having the largest number of listed companies and 3rd most extensive investor base in India after
America and Japan. The USA dominates other markets heavily in terms of market capitalization.

Number of Listed Securities

Listing securities on stock exchanges means opening them for public trading, i.e., buying and selling.
Listing security on any stock exchange helps increase the liquidity of that security, and it also protects the
investor’s interest. India has the highest number of listed securities in the stock market. Out of this,
approximately 75% of the companies are listed in BSE alone. After India, the USA has the highest number
of listed companies. From the below graph we can also see that China has seen the highest growth of
123% in terms of the number of listed companies.

Change is Total no. of listed Comapnies

6000 140.00%

123.44% 5056 120.00%

4921
5000 4666
4397 100.00%

4000 3836 80.00%

3584 3652
3330
60.00%
3000 53.83%
2374 40.00%
19242004
2000 1604 20.00%

4.16% 2.74% 0.00%

1000 -5.77%
673 -13.19%
457 -20.00%
-32.10%
0 -40.00%
France Australia Canada China Japan United States India
1 2 3 4 5 6 7

Number of Listed Securities (2008) Number of Listed Securities (2018) 10 year Growth

Source: www.worldbank.org

Listing Agreements
Bombay Stock Exchange

Eligibility criteria for new companies: Companies are classified into large-cap and small-cap companies.

Parameters Small-Cap Companies Large-Cap Companies

Min Post issue paid-up capital Rs. 3 Crores Rs. 3 Crores
Min Issue size Rs. 3 Crores Rs. 10 Crores
Min Market Capitalization Rs. 5 Crores Rs. 25 Crores
Min Public shareholders 1000
Min Turnover Rs. 3 Crores in preceding 3 yrs
Source: www.bseindia.org

National Stock Exchange

The paid-up capital of the applying company shall not be less than Rs. 10 crores and the capitalization of
the company’s’ equity shall not be less than Rs. 25 crores
At least three years tract record:

 The company has not been referred to the Board for Industrial and Financial Reconstruction
(BIFR).
 The net worth of the company has not been wiped out by the accumulated losses resulting in
negative net worth.
 The company has not received any winding up petition accepted by a court.
 ‘Promoters’ mean one or more persons with a minimum three years’ experience of each of them
in the same line of business and shall be held at least 20% of the post issue equity share capital
individually or severally
 No disciplinary action by other stock exchanges and regulatory authorities in the past three years.

New York Stock Exchange

The domestic listing requires specific minimum standards to be met.

Distribution and Size Criteria

Round-lot-Holder 2000
(No. of holders of a unit of trading, generally 100
shares)
OR
Total Shareholders 400
Average monthly trading volume 100,000 shares
OR
Total Shareholders 400 shares
Average monthly trading volume 1,100,000 Shares
Minimum Share Price $4.0
Market Value of Publicly held shares $40 Million
IPO’s Spin-offs, carve-outs
Source: www.nyse.com

Financial Criteria

Earnings
Aggregate Pre-tax earnings over the last 3 years $100 Million
Min. in each of the last 2 years $25 Million
Valuation with cash flow
Aggregate Cash flow past 3 years $100 Million
Pure Valuation
Revenue from most recent fiscal year $75 Million
Global Market Capitalization $750 Million
Funds
Net Assets $60 Million
Source: www.nyse.com
Tokyo Stock Exchange

Criteria for Listing

Criteria Regulations
Number of Shareholders 800 or more
Tradable Shares 4000 Shares
Market Capitalization 2 Billion Yen
Number of consecutive years of conducting 3 years
business
Amount of net assets 1 Billion Yen or more
Amount of profits 500 Million Yen in the last 2 years
Source: www.jpx.co.jp

Settlement
This segment caters to the efficiency of the said stock exchange by analyzing the settlement
period. Lower the settlement period; higher is the exchange efficiency and vice-versa. It looks
into the speed at which numerous transactions executed are settled. With the given amount of
trade volume, Indian exchanges NSE & BSE can be considered as the most efficient exchanges
and Russian Stock Exchange being the least.

Exchange Settlement Cycle

NSE T+2
BSE T+2
NYSE T+3
Korean Stock Exchange T+2
Tokyo Stock Exchange T+3
Hong Kong Stock Exchange T+2
Russian Stock Exchange T+4
Economic Impacts
Changes taken by SEBI

Safety in bond market and mutual funds

Sebi made it mandatory for liquid schemes to hold at least 20 per cent of the corpus in liquid assets like
cash, government securities, T-bills and repo on government securities. Debt mutual fund managers said
the norm will improve liquidity. Sebi also capped the sectoral limit in liquid funds at 20 per cent from 25
per cent. The exposure of 15 per cent to housing finance companies (HFCs) should be brought down to
10 per cent. Mutual funds is allowed to invest only in listed non convertible debentures (NCDs) and
commercial papers (CPs).

Changes taken by Government

Reduction in Corporate tax

The FM has slashed corporate tax from 25% for companies with turnover less than 400 crores and 30%
for companies having more than 400 crores turnover to flat 22% excluding surcharge and cess.

This move has resulted in more earnings (EAT) for companies which they can use for reinvestment or
declare greater dividend.

Removal of Super-rich Tax

The super-rich tax will not to apply in the hands of foreign portfolio investor on capital gains arising from
sale of any securities.
Super-rich tax will not be imposed which have announced shares buyback prior to 5 July.
This has saved companies from paying high taxes amid economy slowdown and have improved their
financial position

Regulation of NRI Investments:

The Amendment of Foreign Exchange Regulation Act (FERA) into Foreign Exchange Management Act
(FEMA) has attracted non resident investors. The percentage of NRI investment in Indian companies has
been increased from 5% to 24%. This resulted in more inflow of foreign funds into India. Foreign financial
institutions have been made to invest directly in the stock market. The lock-in period of NRIs in equity
shares in Indian companies has been reduced from 3 years to 1 year.

Way forward/future directions of the market:

Given the robust long-term gross domestic product growth outlook for India and China that consensus
estimates place between seven-membered and 8.5%, both country's equity markets have the potential
to grow considerably over the upcoming decade(s) emerging as among the world's leading capital
markets. Nearly half of global Allocation of Capital Flows to India and China by 2040. Over the long-term,
listed corporate profits correlate well with the underlying growth of the economy, and profits remain
significant drivers of long-term equity market returns. This means that macro-economic growth may be
a reasonable indicator of potential equity market growth.

The above figure calculates the expansion of countries' capital markets and the ensuing flow of value as
measured by total market capitalization, assuming constant market cap/GDP ratios in each country
(based on December 31st, 2011 levels).

The Conditions for Attracting the Funds:

1. Focus on Achieving High corporate profitability, not merely GDP Growth: GDP growth in India and
China so far translated into rising corporate profits as the primary driver of equity value has also driven
the development of the private sector. India has conventionally done better at driving its growth
through the private sector; however, this was hindered by 2012 in the face of policy impasses that are
failing to incentivize private sector investment to scale its businesses.

2. Creating a favorable Policy environment for Inward Investment and FDI flows and creating
Businesses: For persistent economic development the conditions require continued FDI flows to be
met, this includes on-going favorable conditions with respect to tax, employment law, a large pool of
competitive labor, comparative cost benefits or advantages IP development and other structural factors
that may continue to facilitate the countries attractive foreign capital for development.

3. Transparency of rules and Tax Necessary: Tied to the generation of corporate profits higher than its
translation into value for investors, particularly the potential to realize value. This includes favorable tax
treatment and also the ability for foreign investors to repatriate profits. India's new general anti-
avoidance rules (GARR) that may probably result in increased capital gains for investors are recognized
domestically and internationally as a step in the wrong direction in this regard.
4. Easing the Flow of Domestic Savings into Investments: Growth of the equity market and an increase
in the flow of value implies the allocation of significant new capital from domestic and international
sources. For the previous to be tapped, India and China may need to reallocate growing pools of
domestic savings into equity markets. In India these days, only 8% 1945 of India's US$800bn of
household wealth is held in equity markets, compared to 14% in China and 42% in the United States.

5. Liquidity of Capital Markets to attract FII: Further, a growing flow valuable to India will require large
net inflows from foreign investors. This may solely happen if the Indian and Chinese capital markets
have the liquidity to enable efficient exits. In Indian and Chinese markets, the liquidity is incredibly low
as compared to the United States and the United Kingdom. The daily trading of the average stock on the
Sensex index is below US$3m in volume as compared to over US$164m for the average company on the
DJIA and US$44m to the average company on the SSE. Today over 53 of the top 10 companies in India by
market cap are held by founders, against less than 100 percent within the United States (with Wal-Mart
and Berkshire Hathaway being outliers and most companies having small or no founder stakes). For the
flow of funds to India and China being similar to the United States within the past decade, investing in
either market needs to be as simple to enter and exit as it is in the United States for global investors
nowadays.

6. Connectivity to Major trading Markets: Indian capital markets need to be linked seamlessly into
world markets, permitting without restrictions both domestic and international investors and domestic
companies in and out of the markets with broad-based investor market participation.

7. Depth of capital markets: As the capital markets grow, Indian equity markets will also require
increasing levels of depth, outlined as the ability to deploy and transfer large amounts quickly, valuable
in and out of markets. Although average daily trading volumes on the DJIA is over 50x higher than on the
SENSEX, the average volatility within the United States during 2011 was nearly the same as the other
markets, with average ninety-day volatility during 2011 for the three indexes all between 18.7% and
19.7%. India nowadays has less than 50 companies with average daily trading volumes of more than
US$10m. A new generation of various large-cap companies will need to develop for increasing the
projected levels of the flow of value to the equity market in India.

8. Breadth of capital markets: Further, capital markets in India will need to increase considerably in
breadth to still attract value, offering investors an extensive range of investment options across
industries, company sizes, and business models. Broad capital markets imply vital diversification for
investors. Value is highly concentrated in large companies in India, with the highest fifty companies
representing 61.4% of the whole market capitalization, vs. 39.3% within the United States.

Conclusion

Indian stock market is constantly growing along with periods of correction and recovery. Sensex has
provided approximately 17% returns over the last 40 years. It has been seen as reflection of economy
growth of India. Harshad Mehta scam lead to many corrective measures improving its efficiency.
This year have seen correction in a lot of stocks pries and investment is lucrative. When FII started
pulling out their money support to markets is provided by domestic investors.

Currently only small percentage of Indians are investing in this market as compared to other nations, if
this percentage increases we will have more bigger and stable market.

Coorporate governance measures are being constantly improved to support the market and latest one is
to have exam for the independent board of directors to check their suitability in the board. This will lead
to better functioning of board and committess and dummy board members entery will be very difficult,
this will help in reducing principal-agent problem.

Many reforms by government and regulatory bodies like Ease of eligibility and KYC norms for
FPI,Changes in norms for IPO,Safety in bond market and mutual funds,Reduction in Corporate tax,
Removal of Super-rich Tax, Regulation of NRI Investments will pave a way solid way for sensex to move
ahead.

Government measures like reduction in corporate tax rates is welcomed by market and it has increased
bottom line earnings for many companies and will attract more companies to India for greater
investments which will further strebgthen the equity market in India. RBI is also reducing repo rates to
increase liquidity in market which in turn will results in cheap money and more investments which
means more returns in longer term.