EXECUTIVE SUMMARY

The capital market is important to a countries economic and social system. It plays the
crucialroles of capital raising for both public and private sectors, promoting balance and
stability in the financial system, decreasing dependency on the banking sector, driving the
economy forward and creating jobs, as well as being an alternative method for savings. A
strong capital market will lessen the impact of economic fluctuations which can be
compounded by the fast-flowing nature of capital.

However, there are still many issues besetting the Thai capital market: few institutional
investors, small retail investor base, limited financial products, high transaction costs, and lack
of efficient regulatory enforcement are some examples. Moreover, Thailands capital markets in
recent times have grown at a very slow pace. The size of the stock market compared to GDP is
only 51% (as of June 2009) which is smaller than other countries in the region such as Hong
Kong (845%), Singapore (202%), Malaysia (104%) and South Korea (66%). Should this trend
continue, Thailand capital market will stagnate and become increasingly marginalized.
Various studies have shown that inadequate development of the capital markets will impact its
ability to raise, channel and monitor resources efficiently.

In recognizing the importance of the capital market, Prime Minister Abhisit Vejjajiva has
appointed the Capital Market Development Committee (The Committee) on January 27, 2009.
This appointment is a continuation from the last but one government which has appointed the
first Committee on March 25, 2008. The Committee is tasked with formulating an overall
master plan for the development of Thai capital market as well as monitoring the
implementation of such plan. The Committee comprises of the Minister of Finance as the
chairperson and experts from public and private sectors.

In formulating the Capital Market Development Master plan (The Master-plan), the
Committee has solicited inputs and opinions from all stakeholders and has formed the vision
and the 5-yeardevelopment objectives (2009-2013) as follow: The Thai capital market is the
primary mechanism for aggregating, channeling, and monitoring economic resources. The goal
of the capital market is to perform these tasks efficiently to increase overall competitiveness of
SR.NO. TITLE PG. NO.
1 INTRODUCTION 1

1.1 INTRODUCTION TO CAPITAL MARKETS 1-5

1.2 CLASSIFICATION OF CAPITAL MARKETS 6-12
1.3 PARTICIPANTS OF INDIAN CAPITAL MARKETS 13-25
1.4 INSTRUMENTS IN INDIAN CAPITAL MARKETS 26-29
1.5 TYPES OF CAPITAL MARKETS 30-38
1.6 EQUITY MARKET IN INDIA 39-42
1.7 DERIVATIVE MARKET IN INDIA 43-45
1.8 MUTUAL FUNDS AS A PART OF CAPITAL MARKET 46-50
1.9 SECURITIES EXCAHNGE BOARD OF INDIA [SEBI] 51-52

2 RESEARCH METHODLOGY 53-55

3 REVIEW OF LITERATURE 56-57
4 NEED, SCOPE & OBJECTIVE OF THE STUDY 58
5 DATA ANALYSIS 59-68
6 CONCLUSION 69
7 BIBLOGRAPHY 70
 CHAPTER 1 : INTRODUCTION
1.1 : INTRODUCTION TO CAPITAL MARKETS

Generally, the personal savings of an entrepreneur along with contributions from friends
and relatives are the source of fund to start new or to expand existing business. This may
not be feasible in case of large projects as the required contribution from the entrepreneur
(promoter) would be very large even after availing term loan; the promoter may not be
able to bring his / her share (equity capital). Thus availability of capital can be a major
constraint in setting up or expanding business on a large scale. However, instead of
depending upon a limited pool of savings of a small circle of friends and relatives, the
promoter has the option of raising money from the public across the country by selling
(issuing) shares of the company. For this purpose, the promoter can invite investment to
his or her venture by issuing offer document which gives full details about track record,
the company, the nature of the project, the business model, the expected profitability etc.
If you are comfortable with this proposed venture, you may invest and thus become a
shareholder of the company. Through aggregation, even small amounts available with a
very large number of individuals translate into usable capital for corporates. Your small
savings of, say, even ` 5,000 can contribute in setting up, say, a ` 5,000 crore Cement or
Steel plant. This mechanism by which corporates raise money from public is called the
primary markets.

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Importantly, when you, as a shareholder, need your money back, you can sell these shares to
other or new investors. Such trades do not reduce or alter the company‘s capital. Stock
exchanges bring such sellers and buyers together and facilitate trading. Therefore, companies
raising money from public are required to list their shares on the stock exchange. This
mechanism of buying and selling shares through stock exchange is known as the secondary
markets. As a shareholder, you are part owner of the company and entitled to all the benefits of
ownership, including dividend (company‘s profit distributed to owners). Over the years if the
company performs well, other investors would like to become owners of this performing
company by buying its shares. This increase in demand for shares leads to increase in its price.
You then have the option of selling your shares at a higher price than at which you purchased it.
You can thus increase your wealth, provided you make the right choice. The reverse is also true!
Apart from shares, there are many other financial instruments (securities) used for raising capital.
Debentures or bonds are debt instruments that pay interest over their lifetime and are used by
corporates to raise medium or long-term debt capital. If you prefer fixed income, you may invest
in these instruments, which may give you higher rate of interest than bank fixed deposit, because
of the higher risk. Besides, equity and debt, a combination of these instruments, like convertible
debentures, preference shares are also issued to raise capital. If you have constraints like time,
wherewithal, small amount etc. to invest in the market directly, Mutual Funds (MFs), which are
regulated entities, provide an alternative avenue. They collect money from many investors and
invest the aggregate amount in the markets in a professional and transparent manner. The returns
from these investments net of management fees are available to you as a MF unit holder. MFs
offer various schemes, like those investing only in equity or debt, index funds, gold funds, etc. to
cater to risk appetite of various investors. Even with very small amounts, you can invest in MF
schemes through monthly systematic investment plans (SIP). The institutions, players and
mechanism that bring suppliers and users of capital together, is known as capital market. It
allows people to do more with their savings by providing variety of assets thereby enhancing the
wealth of investors who make the right choice. Simultaneously, it enables entrepreneurs to do
more with their ideas and talent, facilitating capital formation.

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Thus capital market mobilizes savings and channelizes it, through securities, into
preferred entrepreneurs. It is not that the providers of funds meet the user of and
exchange funds for securities. It is because the securities offered by the users may not
match the preference of the providers of funds. There are a large variety of intermediaries
who bring the providers and user of funds together to facilitate the transactions. The
market is supervised by SEBI. It ensures supply of quality securities and nonmanipulated
demand for them. It develops best market practices and takes enforcement actions against
the miscreants. It essentially maintains discipline in the market so that the participants
can undertake transaction safely.

1.1 Definition of Capital Market

Capital markets are financial markets for the buying and selling of long-term debt or
equity-backed securities. These markets channel the wealth of savers to those who can
put it to long-term productive use, such as companies or governments making long-term
investments.

1.1 .A. Major Objectives of Indian Capital Market

» To mobilize resources for investments. » To facilitate buying and selling of securities.

» To facilitate the process of efficient price discovery. » To facilitate settlement of
transactions in accordance with the predetermined time schedules.

1.1.B. Reforms in Capital Market of India The major reform undertaken in capital market
of India includes:

»Establishment of SEBI: The Securities and Exchange Board of India (SEBI) was
established in 1988. It got a legal status in 1992. SEBI was primarily set up to regulate
the activities of the merchant banks, to control the operations of mutual funds, to work as
a promoter of the stock exchange activities and to act as a regulatory authority of new
issue activities of companies

»Establishment of Creditors Rating Agencies: Three creditors rating agencies viz. The
Credit Rating Information Services of India Limited (CRISIL - 1988), the Investment
Information and Credit Rating Agency of India Limited (ICRA - 1991) and Credit
Analysis and Research Limited (CARE) were set up in order to assess the financial health
of different financial institutions and agencies related to the stock market activities. It is a
guide for the investors also in evaluating the risk of their investments.

»Increasing of Merchant Banking Activities: Many Indian and foreign commercial banks
have set up their merchant banking divisions in the last few years. These divisions
provide financial services such as underwriting facilities, issue organizing, consultancy
services, etc.

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» Rising Electronic Transactions: Due to technological development in the last few years,
the physical transaction with more paper work is reduced. It saves money, time and
energy of investors. Thus it has made investing safer and hassle free encouraging more
people to join the capital market.

» Growing Mutual Fund Industry: The growing of mutual funds in India has certainly
helped the capital market to grow. Public sector banks, foreign banks, financial
institutions and joint mutual funds between the Indian and foreign firms have launched
many new funds. A big diversification in terms of schemes, maturity, etc. has taken place
in mutual funds in India. It has given a wide choice for the common investors to enter the
capital market.

» Growing Stock Exchanges: The numbers of various Stock Exchanges in India are
increasing. Initially the BSE was the main exchange, but now after the setting up of the
NSE and the OTCEI, stock exchanges have spread across the country. Recently a new
Inter-connected Stock Exchange of India has joined the existing stock exchanges.

» Investor's Protection: Under the purview of the SEBI the Central Government of India
has set up the Investors Education and Protection Fund (IEPF) in 2001. It works in
educating and guiding investors. It tries to protect the interest of the small investors from
frauds and malpractices in the capital market.

» Growth of Derivative Transactions: Since June 2000, the NSE has introduced the
derivatives trading in the equities. In November 2001 it also introduced the future and
options transactions. These innovative products have given variety for the investment
leading to the expansion of the capital market.

» Commodity Trading: Along with the trading of ordinary securities, the trading in
commodities is also recently encouraged. The Multi Commodity Exchange (MCX) is set
up. The volume of such transactions is growing at a splendid rate. These reforms have
resulted into the tremendous growth of Indian capital market.

1.1.C. Factors Affecting Capital Market in India

A range of factors affects the capital market. Some of the factors that influence capital
market are as follows: -

» Performance of domestic Companies: - The performance of the companies‘ or rather

corporate earnings is one of the factors that have direct impact or effect on capital market
in a country. Weak corporate earnings indicate that the demand for goods and services in
the economy is less due to slow growth in per capita income of people. Because of slow
growth in demand there is slow growth in employment that means slow growth in
demand in the near future. Thus weak corporate earnings indicate average or not so good
prospects for the economy as a whole in the near term. In such a scenario the investors
(both domestic as well as foreign) would be wary to invest in the capital market and thus
there is bear market like situation. The opposite case of it would be robust corporate
earnings and its positive impact on the capital market.

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» Environmental Factors: - Environmental Factor in India‘s context primarily means-
Monsoon. In India around 60 % of agricultural production is dependent on monsoon.
Thus there is heavy dependence on monsoon. The major chunk of agricultural production
comes from the states of Punjab, Haryana & Uttar Pradesh. Thus deficient or delayed
monsoon in this part of the country would directly affect the agricultural output in the
country. Apart from monsoon other natural calamities like Floods, tsunami, drought,
earthquake, etc. also have an impact on the capital market of a country.

»Macro Economic Numbers: - The macroeconomic numbers also influence the capital
market. It includes Index of Industrial Production (IIP) which is released every month,
annual Inflation number indicated by Wholesale Price Index (WPI) which is released
every week, Export – Import numbers which are declared every month, Core Industries
growth rate (It includes Six Core infrastructure industries – Coal, Crude oil, refining,
power, cement and finished steel) which comes out every month, etc. This macro –
economic indicators indicate the state of the economy and the direction in which the
economy is headed and therefore impacts the capital market in India.

» Global Cues : - In this world of globalization various economies are interdependent and
interconnected. An event in one part of the world is bound to affect other parts of the
world; however the magnitude and intensity of impact would vary. Thus capital market in
India is also affected by developments in other parts of the world i.e. U.S., Europe, Japan,
etc. Global cues includes corporate earnings of MNC‘s, consumer confidence index in
developed countries, jobless claims in developed countries, global growth outlook given
by various agencies like IMF, economic growth of major economies, price of crude –oil,
credit rating of various economies given by Moody‘s, S & P, etc.

» Political stability and government policies: - For any economy to achieve and sustain
growth it has to have political stability and pro- growth government policies. This is
because when there is political stability there is stability and consistency in government‘s
attitude that is communicated through various government policies. The vice- versa is the
case when there is no political stability .So capital market also reacts to the nature of
government, attitude of government, and various policies of the government.

» Growth prospectus of an economy: - When the national income of the country increases
and per capita income of people increases it is said that the economy is growing. Higher
income also means higher expenditure and higher savings. This augurs well for the
economy as higher expenditure means higher demand and higher savings means higher
investment. Thus when an economy is growing at a good pace capital market of the
country attracts more money from investors, both from within and outside the country
and vice -versa. So we can say that growth prospects of an economy do have an impact
on capital markets.

5
 1.2 : CLASSIFICATION OF CAPITAL MARKET
2.1 Primary Market

Companies issue securities from time to time to raise funds in order to meet their
financial requirements for modernization, expansions and diversification programs.
These securities are issued directly to the investors (both individuals as well as
institutional) through the mechanism called primary market or new issue market. The
primary market refers to the set-up, which helps the industry to raise the funds by issuing
different types of securities. This set-up consists of the type of securities available,
financial institutions and the regulatory framework. The primary market discharges the
important function of transfer of savings especially of the individuals to the companies,
the mutual funds, and the public sector undertakings. Individuals or other investors with
surplus money invest their savings in exchange for shares, debentures and other
securities. In the primary market the new issue of securities are presented in the form of
public issues, right issues or private placement. Firms that seek financing, exchange their
financial liabilities, such as shares and debentures, in return for the money provided by
the financial intermediaries or the investors directly. These firms then convert these funds
into real capital such as plant and machinery etc. The structure of the capital market
where the firms exchange their financial liabilities for long-term financing is called the
primary market.

The primary market has two distinguishing features:

» It is the segment of the capital market where capital formation occurs; and » In order to
obtain required financing, new issues of shares, debentures securities are sold in the
primary market. Subsequent trading in these securities occurs in other segment of the
capital market, known as secondary market.

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The securities that are often resorted for raising funds are equity shares, preference
shares, bonds, debentures, warrants, cumulative convertible preference shares, zero
interest convertible debentures, etc. Public issues of securities may be made through:

» Prospectus, » Offer for sale, » Book building process and » Private placement

The investors directly subscribe the securities offered to public through a prospectus. The
company through different media generally makes wide publicity about the public offer.

2.1.A. Activities in the Primary Market

» Appointment of merchant bankers

» Collection of money

» Pricing of securities being issued

» Minimum subscription

» Communication/ Marketing of the issue

» Listing on the stock exchange(s)

» Information on credit risk

» Allotment of securities in demat/ physical mode

» Making public issues

» Record keeping,

2.1.B. Function of Primary Market

» Organization: Deals with the origin of the new issue. The proposal is analyzed in terms
of the nature of the security, the size of the issued timings of the issue and flotation
method of the issue.

» Underwriting: Underwriting is a kind of guarantee undertaken by an institution or firm

of brokers ensuring the marketability of an issue. it is a method whereby the guarantor
makes a promise to the stock issuing company that he would purchase a certain specific
number of shares in the event of their not being invested by the public.

» Distribution: The third function is that of distribution of shares. Distribution means the
function of sale of shares and debentures to the investors. This is performed by brokers
and agents. They maintain regular lists of clients and directly contact them for purchase
and sale of securities.

2.1.C. Role of Primary Market

» Capital formation –

It provides attractive issue to the potential investors and with this company can raise
capital at lower costs.

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» Liquidity –

As the securities issued in primary market can be immediately sold in secondary market
the rate of liquidity is higher.

» Diversification –

Many financial intermediaries invest in primary market; therefore there is less risk if
there is failure in investment as the company does not depend on a single investor. The
diversification of investment reduces the overall risk.

» Reduction in cost –

Prospectus containing all details about the securities are given to the investors hence
reducing the cost is searching and assessing the individual securities.

2.1.D. Features of Primary Market

» It is the new issue market for the new long-term capital. » Here company issues the
securities directly to the investors and not through any intermediaries. » On receiving the
money from the new issues, the company will issue the security certificates to the
investors. » The amount obtained by the company after the new issues are utilized for
expansion of the present business or for setting up new ventures. » External finance for
longer term such as loans from financial institutions is not included in primary market.
There is an option called ‗going public‘ in which the borrowers in new issue market raise
capital for converting private capital into public capital.

2.1.E. Types of issues

Primary market Issues can be classified into four types.

» Initial Public Offer (IPO):

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, the issue is called as an
Initial Public Offer.

» Follow On Public Offer (FPO):

When an already listed company makes either a fresh issue of securities to the public or
an offer for sale of existing shares to the public, through an offer document, it is referred
to as Follow on Offer (FPO).

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» Rights Issue:

When a listed company proposes to issue fresh securities to its existing shareholders, as
on a record date, it is called as a rights issue. The rights are normally offered in a
particular ratio to the number of securities held prior to the issue. This route is best suited
for companies who would like to raise capital without diluting stake of its existing
shareholders.

» A Preferential issue:

A Preferential Issue is an issue of shares or of convertible securities by listed companies

to a select group of persons under Section 81 of the Companies Act, 1956, that is neither
a rights issue nor a public issue. This is a faster way for a company to raise equity capital.
The issuer company has to comply with the Companies Act and the requirements
contained in the chapter, pertaining to preferential allotment in SEBI guidelines, which
interalia include pricing, disclosures in notice etc.

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2.2 SECONDARY MARKET

Secondary market refers to the network/system for the subsequent sale and purchase of
securities. An investor can apply and get allotted a specified number of securities by the
issuing company in the primary market. However, once allotted the securities can
thereafter be sold and purchased in the secondary market only. An investor who wants to
purchase the securities can buy these securities in the secondary market. The secondary
market is market for subsequent sale/purchase and trading in the securities. A security
emerges or takes birth in the primary market but its subsequent movements take place in
secondary market. The secondary market consists of that portion of the capital market
where the previously issued securities are transacted. The firms do not obtain any new
financing from secondary market. The secondary market provides the life-blood to any
financial system in general, and to the capital market in particular. The secondary market
is represented by the stock exchanges in any capital market. The stock exchanges provide
an organized market place for the investors to trade in the securities. This may be the
most important function of stock exchanges. The stock exchange, theoretically speaking,
is a perfectly competitive market, as a large number of sellers and buyers participate in it
and the information regarding the securities is publicly available to all the investors. A
stock exchange permits the security prices to be determined by the competitive forces.
They are not set by negotiations off the floor, where one party might have a bargaining
advantage. The bidding process flows from the demand and supply underlying each
security. This means that the specific price of a security is determined, more or less, in
the manner of an auction. The stock exchanges provide market in which the members of
the stock exchanges (the share brokers) and the investors participate to ensure liquidity to
the latter.

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In India, the secondary market, represented by the stock exchanges network, is more than
100 years old when in 1875, the first stock exchange started operations in Mumbai.
Gradually, stock exchanges at other places have also been established and at present,
there are 23 stock exchanges operating in India. The secondary market in India got a
boost when the Over the Counter Exchange of India (OTCEI) and the National Stock
Exchange (NSE) were established. Out of the 23 stock exchanges, 20 stock exchanges
are operating at Mumbai (BSE), Kolkata, Chennai, Ahmadabad, Delhi, and Indore.
Bangalore, Hyderabad, Cochin, Kanpur, Pune, Ludhiana, Guwahati, Mangalore, Patna,
Jaipur, Bhubaneswar, Rajkot, Vadodara and Coimbatore. Besides, there is one ICSE
established by 14 Regional Stock Exchanges. It may be noted that out of 23 stock
exchanges, only 2, i.e., the NSE and the Over the Counter Exchange of India (OTCEI)
have been established by the All India Financial Institutions while other stock exchanges
are operating as associations or limited companies. In order to protect and safeguard the
interest of the investors, the operations, functioning and working of the stock exchanges
and their members (i.e., share brokers) are supervised and regulated by the Securities
Contracts (Regulations) Act, 1956 and the SEBI Act, 1992.

2.2.A. Activities in the Secondary Market

» Trading of securities » Risk management » Clearing and settlement of trades » Delivery

of securities and funds

2.2.B. Importance of Secondary Market:

» Providing liquidity and marketability to existing securities » Pricing of securities »

Safety of transaction » Contribution to economic growth » Providing scope for
speculation

2.2.C. Role of Secondary Market

For the general investor, the secondary market provides an efficient platform for trading
of his securities. For the management of the company, Secondary equity markets serve as
a monitoring and control conduit—by facilitating value-enhancing control activities,
enabling implementation of incentive-based management contracts, and aggregating
information (via price discovery) that guides management decisions.

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2.2.D. Products in secondary markets

» Equity Shares

» Rights Issue/ Rights Shares

» Bonus Shares

» Preferred Stock/ Preference shares

» Cumulative Preference Shares

» Cumulative Convertible Preference Shares

» Participating Preference Share

» Bond

» Zero Coupon Bond

» Convertible Bond

» Debentures

» Commercial Paper

» Coupons

» Treasury Bills

2.2.E. The OTC Market

Sometimes you'll hear a dealer market referred to as an over-the-counter (OTC) market.

The term originally meant a relatively unorganized system where trading did not occur at
a physical place, as we described above, but rather through dealer networks. The term
was most likely derived from the off-Wall Street trading that boomed during the great
bull market of the 1920s, in which shares were sold "over-the-counter" in stock shops. In
other words, the stocks were not listed on a stock exchange - they were "unlisted".

2.2.F. Third and Fourth Markets

You might also hear the terms "third" and "fourth markets". These don't concern
individual investors because they involve significant volumes of shares to be transacted
per trade. These markets deal with transactions between broker-dealers and large
institutions through over-the-counter electronic networks. The third market comprises
OTC transactions between broker-dealers and large institutions. The fourth market is
made up of transactions that take place between large institutions. The main reason these
third and fourth market transactions occur is to avoid placing these orders through the
main exchange, which could greatly affect the price of the security.

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 1.3 : PARTICIPANTS OF INDIAN CAPITAL MARKET

There are several major players in the primary market. These include the merchant
bankers, mutual funds, financial institutions, foreign institutional investors (FIIs) and
individual investors. In the secondary market, there are the stock exchanges, stock
brokers (who are members of the stock exchanges), the mutual funds, financial
institutions, foreign institutional investors (FIIs), and individual investors. Registrars and
Transfer Agents, Custodians and Depositories are capital market intermediaries that
provide important infrastructure services for both primary and secondary markets.

I. Custodians

In the earliest phase of capital market reforms, to get over the problems associated with
paper-based securities, large holding by institutions and banks were sought to be
immobilized. Immobilization of securities is done by storing or lodging the physical
security certificates with an organization that acts as a custodian - a securities depository.
All subsequent transactions in such immobilized securities take place through book
entries. The actual owners have the right to withdraw the physical securities from the
custodial agent whenever required by them. In the case of IPO, a jumbo certificate is
issued in the name of the beneficiary owners based on which the depository gives credit
to the account of beneficiary owners. The Stock Holding Corporation of India Limited
was set up to act as a custodian for securities of a large number of banks and institutions
who were mainly in the public sector. Some of the banks and financial institutions also
started providing "Custodial" services to smaller investors for a fee. With the
introduction of dematerialisation of securities there has been a shift in the role and
business operations of Custodians. But they still remain an important intermediary
providing services to the investors who still hold securities in physical form.

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II. Depositories

The depositories are important intermediaries in the securities market that is scripless or
moving towards such a state. In India, the Depositories Act defines a depository to mean
"a company formed and registered under the Companies Act, 1956 and which has been
granted a certificate of registration under sub-section (IA) of section 12 of the Securities
and Exchange Board of India Act, 1992." The principal function of a depository is to
dematerialise securities and enable their transactions in book-entry form.
Dematerialisation of securities occurs when securities issued in physical form is
destroyed and an equivalent number of securities are credited into the beneficiary owner's
account. In a depository system, the investors stand to gain by way of lower costs and
lower risks of theft or forgery, etc. They also benefit in terms of efficiency of the process.
But the implementation of the system has to be secure and well governed. All the players
have to be conversant with the rules and regulations as well as with the technology for
processing. The intermediaries in this system have to play strictly by the rules. A
depository established under the Depositories Act can provide any service connected
with recording of allotment of securities or transfer of ownership of securities in the
record of a depository. A depository cannot directly open accounts and provide services
to clients. Any person willing to avail of the services of the depository can do so by
entering into an agreement with the depository through any of its Depository Participants.
The services, functions, rights and obligations of depositories, with special reference to
NSDL are provided in the second section of this Workbook.

III. Depository Participants

A Depository Participant (DP) is described as an agent of the depository. They are the
intermediaries between the depository and the investors. The relationship between the
DPs and the depository is governed by an agreement made between the two under the
depositories Act, 1996. In a strictly legal sense, a DP is an entity who is registered as
such with SEBI under the provisions of the SEBI Act. As per the provisions of this Act, a
DP can offer depository related services only after obtaining a certificate of registration
from SEBI. SEBI (D&P) Regulations, 1996 prescribe a minimum net worth of Rs. 50
lakh for the applicants who are stockbrokers or non-banking finance companies
(NBFCs), for granting a certificate of registration to act as a DP. For R & T Agents a
minimum net worth of Rs. 10 crore is prescribed in addition to a grant of certificate of
registration by SEBI. If a stockbroker seeks to act as a DP in more than one depository,
he should comply with the specified net worth criterion separately for each such
depository. If an NBFC seeks to act as a DP on behalf of any other person, it needs to
have a networth of Rs. 50 cr. in addition to the networth specified by any other authority.
No minimum net worth criterion has been prescribed for other categories of DPs.
However, depositories can fix a higher net worth criterion for their DPs.

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IV. Merchant Bankers

Among the important financial intermediaries are the merchant bankers. The services of
merchant bankers have been identified in India with just issue management. It is quite
common to come across reference to merchant banking and financial services as though
they are distinct categories. The services provided by merchant banks depend on their
inclination and resources - technical and financial. Merchant bankers (Category I) are
mandated by SEBI to manage public issues (as lead managers) and open offers in take-
overs. These two activities have major implications for the integrity of the market. They
affect investors' interest and, therefore, transparency has to be ensured. These are also
areas where compliance can be monitored and enforced. Merchant banks are rendering
diverse services and functions. These include organising and extending finance for
investment in projects, assistance in financial management, raising Eurodollar loans and
issue of foreign currency bonds. Different merchant bankers specialise in different
services. However, since they are one of the major intermediaries between the issuers and
the investors, their activities are regulated by:

» SEBI (Merchant Bankers) Regulations, 1992.

» Guidelines of SEBI and Ministry of Finance.

» Companies Act, 1956

. » Securities Contracts (Regulation) Act, 1956.

Merchant banking activities, especially those covering issue and underwriting of shares
and debentures, are regulated by the Merchant Bankers Regulations of Securities and
Exchange Board of India (SEBI). SEBI has made the quality of manpower as one of the
criteria for renewal of merchant banking registration. These skills should not be
concentrated in issue management and underwriting alone. The criteria for authorisation
takes into account several parameters.

These include:

» Professional qualification in finance, law or business management,

» Infrastructure like adequate office space, equipment and manpower,

» Employment of two persons who have the experience to conduct the business of
merchant bankers,

» Capital adequacy and

» Past track record, experience, general reputation and fairness in all their transactions.

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SEBI authorises merchant bankers (Category I) for an initial period of three years, if they
have a minimum net worth of Rs. 5 crore. An initial authorisation fee, an annual fee and
renewal fee is collected by SEBI. According to SEBI, all issues should be managed by at
least one authorised merchant banker functioning as the sole manager or lead manager.
The lead manager should not agree to manage any issue unless his responsibilities
relating to the issue, mainly disclosures, allotment and refund, are clearly defined. A
statement specifying such responsibilities has to be furnished to SEBI. SEBI prescribes
the process of due diligence that a merchant banker has to complete before a prospectus
is cleared. It also insists on submission of all the documents disclosing the details of
account and the clearances obtained from the ROC and other government agencies for
tapping peoples' savings. The responsibilities of lead manager, underwriting obligations,
capital adequacy, due diligence certification, etc., are laid down in detail by SEBI. The
objective is to facilitate the investors to take an informed decision regarding their
investments and not expose them to unknown risks.

V. Registrar

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. The
Lead manager coordinates with the Registrar to ensure follow up so that that the flow of
applications from collecting bank branches, processing of the applications and other
matters till the basis of allotment is finalized, dispatch security certificates and refund
orders completed and securities listed.

VI. Bankers to the issue

Bankers to the issue, as the name suggests, carries out all the activities of ensuring that
the funds are collected and transferred to the Escrow accounts. The Lead Merchant
Banker shall ensure that Bankers to the Issue are appointed in all the mandatory
collection centers as specified in DIP Guidelines. The LM also ensures follow-up with
bankers to the issue to get quick estimates of collection and advising the issuer about
closure of the issue, based on the correct figures.

16
VII. Underwriters

Underwriting is an agreement, entered into by a company with a financial agency, in

order to ensure that the public will subscribe for the entire issue of shares or debentures
made by the company. The financial agency is known as the underwriter and it agrees to
buy that part of the company issues which are not subscribed to by the public in
consideration of a specified underwriting commission. The underwriting agreement,
among others, must provide for the period during which the agreement is in force, the
amount of underwriting obligations, the period within which the underwriter has to
subscribe to the issue after being intimated by the issuer, the amount of commission and
details of arrangements, if any, made by the underwriter for fulfilling the underwriting
obligations. The underwriting commission may not exceed 5 percent on shares and 2.5
percent in case of debentures. Underwriters get their commission irrespective of whether
they have to buy a single security or not.

Types of underwriting :

» Syndicate Underwriting: - is one in which, two or more agencies or underwriters jointly

underwrite an issue of securities. Such an arrangement is entered into when the total issue
is beyond the resources of one underwriter or when he does not want to block up large
amount of funds in one issue.

» Sub-Underwriting:- is one in which an underwriter gets a part of the issue further

underwritten by another agency. This is done to diffuse the risk involved in underwriting.

The name of every under-writer is mentioned in the prospectus along with the amount of
securities underwritten by him.

» Firm Underwriting: - is one in which the underwriters apply for a block of securities.
Under it, the underwriters agree to take up and pay for this block of securities as ordinary
subscribers in addition to their commitment as underwriters. The underwriter need not
take up the whole of the securities underwritten by him. For example, if the underwriter
has underwritten the entire issue of 5 lakh shares offered by a company and has in
addition applied for 1 lakh shares for firm allotment. If the public subscribes to the entire
issue, the underwriter would be allotted 1 lakh shares even though he is not required to
take up any of the shares

17
Types of underwriters :

Underwriting of capital issues has become very popular due to the development of the
capital market and special financial institutions. The lead taken by public financial
institutions has encouraged banks, insurance companies and stock brokers to underwrite
on a regular basis. The various types of underwriters differ in their approach and attitude
towards underwriting:-

» Development banks like IFCI, ICICI and IDBI: - they follow an entirely objective
approach. They stress upon the long-term viability of the enterprise rather than
immediate profitability of the capital issue. They attempt to encourage public response to
new issues of securities. » Institutional investors like LIC and AXIS: - their underwriting
policy is governed by their investment policy. » Financial and development corporations:
- they also follow an objective policy while underwriting capital issues. » Investment and
insurance companies and stock-brokers: - they put primary emphasis on the short term
prospects of the issuing company as they cannot afford to block large amount of money
for long periods of time.

To act as an underwriter, a certificate of registration must be obtained from Securities

and Exchange Board of India (SEBI). The certificate is granted by SEBI under the
Securities and Exchanges Board of India (Underwriters) Regulations, 1993. These
regulations deal primarily with issues such as registration, capital adequacy, obligation
and responsibilities of the underwriters. Under it, an underwriter is required to enter into
a valid agreement with the issuer entity and the said agreement among other things
should define the allocation of duties and responsibilities between him and the issuer
entity. These regulations have been further amended by the Securities and Exchange
Board of India (Underwriters) (Amendment) Regulations, 2006

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VIII. Credit Rating Agencies

The 1990s saw the emergence of a number of rating agencies in the Indian market. These
agencies appraise the performance of issuers of debt instruments like bonds or fixed
deposits. The rating of an instrument depends on parameters like business risk, market
position, operating efficiency, adequacy of cash flows, financial risk, financial flexibility,
and management and industry environment. The objective and utility of this exercise is
two-fold. From the point of view of the issuer, by assigning a particular grade to an
instrument, the rating agencies enable the issuer to get the best price. Since all financial
markets are based on the principle of risk/reward, the less risky the profile of the issuer of
a debt security, the lower the price at which it can be issued. Thus, for the issuer, a
favorable rating can reduce the cost of borrowed capital. From the viewpoint of the
investor, the grade assigned by the rating agencies depends on the capacity of the issuer
to service the debt. It is based on the past performance as well as an analysis of the
expected cash flows of a company, when viewed on the industry parameters and
performance of the company. Hence, the investor can judge for himself whether he wants
to place his savings in a "safe" instrument and get a lower return or he wants to take a
risk and get a higher return. The 1990s saw an increase in activity in the primary debt
market. Under the SEBI guidelines all issuers of debt have to get the instruments rated.
They also have to prominently display the ratings in all that marketing literature and
advertisements. The rating agencies have thus become an important part of the
institutional framework of the Indian securities market.

IX. Collective Investment Schemes

Collective Investment Scheme is a scheme in whatever form, including an openended

investment company, in pursuance of which members of the public are invited or
permitted to invest money or other assets in a portfolio, and in terms of which:

» Two or more investors contribute money or other assets to and hold a participatory
interest; » The investors share the risk and benefit of investment in proportion to their
participatory interest in a portfolio of a scheme or on any other basis determined in the
deed.

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X. Unit Trust

A Unit Trust Scheme is a Fund into which small sums of monies from individual
investors are collected to form a ―pool‖ for the purpose of investing in stocks, shares and
money market instrument by professional fund managers on behalf of the contributors
called unit holders [subscribers]. By investing in a unit trust scheme, the unit holders
enjoy the benefits of diversification and professional management of their fund at low
cost. The total fund of a unit trust scheme is divided into units of exactly equal monetary
value e.g. If one unit is N1.00, any person investing N100 will get 100 units. Unit Trust
Funds are invested in highly-rated securities on behalf of the unit holders by the
management company. There are two types of Unit Trust Schemes, viz;

» Open-Ended This is a Fund that continuously creates issues and redeems units after the
initial public offering. The price is based on the Net Asset Value (NAV), which is total
asset of the fund minus liabilities as at date of purchase or redemption.

» Closed-Ended In a Closed–Ended Fund, there is no additional issue of new units or

redemption of units. The Fund is usually listed and traded on the Stock Exchange and its
price will be determined by the market forces of supply and demand. A unit holder who
wants to redeem his unit will therefore have to go through his Stockbroker.

XI. Venture Capital Funds

It is early stage financing of new and young companies seeking to grow rapidly. It is
defined as a profit seeking venture by an entrepreneur, whose primary objective is to
provide fund not otherwise available to new and growing business venture for the
purpose of making profit in the long term. For a Venture Capital Fund to exist there must
be the presence of the following:-

» Risk-Takers, who are prepared to invest in Venture Capital Fund and wait for long term
gains rather than short term profits (Venture Capitalist).

» There must be a Venture Capital Company to collect the money from the risk-takers
and offer them shares in return with a promise of high return in future.

» There must be a viable business venture whether new or young into which the Venture
Capital Company could invest part of its equity.

» There must be an entrepreneur with a good business under taking yearning for
expansion capital.

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The process for a Venture Capital activity involves:

» Fund raising

» Real flow/investment

» Monitoring/value enhancement

» Exit stage

XII. Foreign direct investment

Foreign direct investment pertains to international investment in which the investor

obtains a lasting interest in an enterprise in another country. Mostly it takes the form of
buying or constructing a factory in a foreign country or adding improvements to such a
facility in form of property, plants or equipments and thus is generally long term in
nature.

XIII.Private equity investment

Private equity investment is one made by foreign investors in Indian Venture Capital
Undertakings (VCU) and Venture Capital Funds (VCF).

XIV. Foreign portfolio investment

It is a short-term to medium- term investment mostly in the financial markets and is

commonly made through foreign Institutional Investors (FIIs), non resident Indian (NRI)
and persons of Indian origin (PIO).

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XV. Foreign Institutional Investors

The term FII‗s used to denote an investor, mostly in the form of an institution or entity
which invests money in the financial markets of a country different from the one where
in the institution or the entity is originally incorporated. According to Securities and
Exchange Board of India (SEBI) it is ―an institution that is a legal entity established or
incorporated outside India proposing to make investments in India only in securities‖.
These can invest their own funds or invest funds on behalf of their overseas clients
registered with SEBI. The client accounts are known as sub - accounts‗. A domestic
portfolio manager can also register as FII to manage the funds of the sub-accounts. From
the early 1990s, India has developed a framework through which foreign investors
participate in the Indian capital market. A foreign investor can either come into India as
a FII or as a sub-account. As on March 31, 2011, there were 1,722 FIIs registered with
SEBI and 5,686 sub-accounts registered with SEBI as on March 31, 2011 Basically FIIs
have a huge financial strength and invest for the purpose of income and capital
appreciation. They are no interested in taking control of a company. Some of the big
American mutual funds are fidelity, vanguard, Merrill lynch, capital research etc. They
are permitted to trade in securities in primary as well as secondary markets and can trade
also in dated government securities, listed equity shares, listed non convertible
debentures/bonds issued by Indian company and schemes of mutual funds but the sale
should be only through recognized stock exchange. These also include domestic asset
management companies or domestic portfolio managers who manage funds raised or
collected or bought from outside India for the purpose of making investment in India on
behalf of foreign corporate or foreign individuals. In the Indian context, foreign
institutional investors (FIIs) and their sub-accounts mostly use these instruments for
facilitating the participation of their overseas clients, who are not interested in
participating directly in the Indian stock market.

FIIs contribute to the foreign exchange inflow as the funds from multilateral finance
institutions and FDI are insufficient.

» It lowers cost of capital, access to cheap global credit.

» It supplements domestic savings and investments.

» It leads to higher asset prices in the Indian market.

» And has also led to considerable amount of reforms in capital market and financial
sector.

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XVI. R&T Agents - Registrars to Issue

R&T Agents form an important link between the investors and issuers in the securities
market. A company, whose securities are issued and traded in the market, is known as the
Issuer. The R&T Agent is appointed by the Issuer to act on its behalf to service the
investors in respect of all corporate actions like sending out notices and other
communications to the investors as well as despatch of dividends and other non-cash
benefits. R&T Agents perform an equally important role in the depository system as well.
These are described in detail in the second section of this Workbook.

XVII. Stock Brokers

Stockbrokers are the intermediaries who are allowed to trade in securities on the
exchange of which they are members. They buy and sell on their own behalf as well as
on behalf of their clients. Traditionally in India, partnership firms with unlimited
liabilities and individually owned firms provided brokerage services.With increasing
volumes in trading as well as in the number of small investors, lack of adequate
capitalisation of these firms exposed investors to the risks of these firms going bust and
the investors would have no recourse to recovering their dues. With the legal changes
being effected in the membership rules of stock exchanges as well as in the capital gains
structure for stock-broking firms, a number of brokerage firms have converted
themselves into corporate entities. In fact, NSE encouraged the setting up of corporate
broking members and has today only 10% of its members who are not corporate entities.

XVIII. The Stock Exchanges

A stock exchange is the marketplace where companies are listed and where the trading
happens. They provide a transparent and safe (risk-free) forum of a market for investors
to transact and invest their funds. There are 23 Stock Exchanges registered with SEBI
and under its regulation. National Stock Exchange (NSE) and the Bombay Stock
Exchange (BSE) are the pre-dominant ones.

XIX. Insurance Companies

Insurance companies receive premium in exchange for insurance policies and use these
funds to purchase a variety of securities. Thus, they invest the proceeds received from
insurance in stocks and bonds.

XX. Saving Banks:

Like commercial banks, savings banks also accumulate the scattered savings of the
country and then create investment friendly funds and lastly channelize these funds into
productive investments. Most savings banks are mutual in nature.

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XXI. Mutual Funds

Mutual funds are financial intermediaries, which collect the savings of small investors
and invest them in a diversified portfolio of securities to minimise risk and maximise
returns for their participants. Mutual funds have given a major fillip to the capital market
- both primary as well as secondary. The units of mutual funds, in turn, are also tradable
securities. Their price is determined by their net asset value (NAV) which is declared
periodically. The operations of the private mutual funds are regulated by SEBI with
regard to their registration, operations, administration and issue as well as trading. There
are various types of mutual funds, depending on whether they are open ended or close
ended and what their end use of funds is. An open-ended fund provides for easy liquidity
and is a perennial fund, as its very name suggests. A closed-ended fund has a stipulated
maturity period, generally five years. A growth fund has a higher percentage of its corpus
invested in equity than in fixed income securities, hence the chances of capital
appreciation (growth) are higher. In growth funds, the dividend accrued, if any, is
reinvested in the fund for the capital appreciation of investments made by the investor.
An Income fund on the other hand invests a larger portion of its corpus in fixed income
securities in order to pay out a portion of its earnings to the investor at regular intervals.
A balanced fund invests equally in fixed income and equity in order to earn a minimum
return to the investors. Some mutual funds are limited to a particular industry; others
invest exclusively in certain kinds of short-term instruments like money market or
government securities. These are called money market funds or liquid funds. To prevent
processes like dividend stripping or to ensure that the funds are available to the managers
for a minimum period so that they can be deployed to at least cover the administrative
costs of the asset management company, mutual funds prescribe an entry load or an exit
load for the investors. If investors want to withdraw their investments earlier than the
stipulated period, an exit load is chargeable. To prevent profligacy, SEBI has prescribed
the maximum that can be charged to the investors by the fund managers.

XXII. Commercial Banks

Commercial banks are those companies which are engage in accepting deposits from
savers and lending it back to deficit groups who are demanding loans and advances in
order to invest business. Commercial banks are a major source of deposits collectors
among the all other kinds of financial institutions. They mobilize their depository funds
in many forms for example, lending to individuals and corporations, invest in stock
market and participate other forms of investment.

XXIII. Pension funds

Many companies, corporations and government organizations and agencies offer pension
plans to their employers their employers or both periodically contribute funds to such
plans. The funds contributed are invested in securities until they are withdrawn by the
employees upon their retirement.

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XXIV. Credit Unions

Credit union differs from commercial savings banks in that they are not profit oriented
company and restrict their business to the main members only. They use most of their
funds to provide loans to their internal members.

XXV. Finance Companies

Most finance companies obtain funds by issuing securities and then lend the funds to
individuals and small businesses.

XXVI. Developmental Financial Institutions

DFIs play the significant role as the source of long-term funds mainly for the corporate
firms. They supply fixed capital to the investors for investment in fixed capital
expenditures. They also perform the underwriting functions relating to shares and
debentures of the corporate firms.

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 1.4 : INSTRUMENTS IN INDIAN CAPITAL MARKET

I. Secured Premium Notes

SPN is a secured debenture redeemable at premium issued along with a detachable

warrant, redeemable after a notice period, say four to seven years. The warrants attached
to SPN gives the holder the right to apply and get allotted equity shares; provided the
SPN is fully paid. There is a lock-in period for SPN during which no interest will be paid
for an invested amount.

II. Deep Discount Bonds

A bond that sells at a significant discount from par value and has no coupon rate or lower
coupon rate than the prevailing rates of fixed-income securities with a similar risk profile.
They are designed to meet the long term funds requirements of the issuer and investors
who are not looking for immediate return and can be sold with a long maturity of 25-30
years at adept discount on the face value of debentures.

III. Equity Shares With Detachable Warrants

A warrant is a security issued by company entitling the holder to buy a given number of
shares of stock at a stipulated price during a specified period. These warrants are
separately registered with the stock exchanges and traded separately. Warrants are
frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay
lower interest rates or dividends.

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IV. Fully Convertible Debentures With Interest

This is a debt instrument that is fully converted over a specified period into equity shares.
The conversion can be in one or several phases. When the instrument is a pure debt
instrument, interest is paid to the investor. After conversion, interest payments cease on
the portion that is converted. If project finance is raised through an FCD issue, the
investor can earn interest even when the project is under implementation. Once the
project is operational, the investor can participate in the profits through share price
appreciation and dividend payments.

V. Disaster Bonds

Also known as Catastrophe or CAT Bonds, Disaster Bond is a high-yield debt instrument
that is usually insurance linked and meant to raise money in case of a catastrophe.

VI. Mortgage Backed Securities(MBS)

MBS is a type of asset-backed security, basically a debt obligation that represents a claim
on the cash flows from mortgage loans, most commonly on residential property. Kinds
of Mortgage Backed Securities:

» Commercial mortgage backed securities: backed by mortgages on commercial property

» Collateralized mortgage obligation: a more complex MBS in which the mortgages are
ordered into tranches by some quality (such as repayment time), with each tranche sold
as a separate security.

» Stripped mortgage backed securities: Each mortgage payment is partly used to pay
down the loan‘s principal and partly used to pay the interest on it

» Residential mortgage backed securities: backed by mortgages on residential property.

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VII.Indian Depository Receipts :

As per the definition given in the Companies (Issue of Indian Depository Receipts)
Rules, 2004, IDR is an instrument in the form of a Depository Receipt created by the
Indian depository in India against the underlying equity shares of the issuing company. In
an IDR, foreign companies would issue shares, to an Indian Depository (say National
Security Depository Limited – NSDL), which would in turn issue depository receipts to
investors in India. The actual shares underlying the IDRs would be held by an Overseas
Custodian, which shall authorize the Indian Depository to issue the IDRs. The IDRs
would have following features: Overseas Custodian: It is a foreign bank having branches
in India and requires approval from Finance Ministry for acting as custodian and Indian
depository has to be registered with SEBI. Approvals for issue of IDRs: IDR issue will
require approval from SEBI and application can be made for this purpose 90 days before
the issue opening date. Listing: These IDRs would be listed on stock exchanges in India
and would be freely transferable. Eligibility conditions for overseas companies to issue
IDRs: Capital: The overseas company intending to issue IDRs should have paid up
capital and free reserve of at least $100 million. Sales turnover: It should have an
average turnover of $ 500 million during the last three years. Profits/dividend: Such
company should also have earned profits in the last 5 years and should have declared
dividend of at least 10% each year during this period. Debt equity ratio: The pre-issue
debt equity ratio of such company should not be more than 2:1. Extent of issue: The
issue during a particular year should not exceed 15% of the paid up capital plus free
reserves. Redemption: IDRs would not be redeemable into underlying equity shares
before one year from date of issue. Denomination: IDRs would be denominated in
Indian rupees, irrespective of the denomination of underlying shares.

Benefits: In addition to other avenues, IDR is an additional investment opportunity for

Indian investors for overseas investment.

VIII. FOREIGN CURRENCY CONVERTIBLE BONDS (FCCBs)

A convertible bond is a mix between a debt and equity instrument. It is a bond having
regular coupon and principal payments, but these bonds also give the bondholder the
option to convert the bond into stock. FCCB is issued in a currency different than the
issuer's domestic currency. 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. Due to the equity side of the bond, which adds value, the coupon
payments on the bond are lower for the company, thereby reducing its debt-financing
costs.

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IX. Derivatives

A derivative is a financial instrument whose characteristics and value depend upon the
characteristics and value of some underlying asset typically commodity, bond, equity,
currency, index, event etc. Advanced investors sometimes purchase or sell derivatives to
manage the risk associated with the underlying security, to protect against fluctuations in
value, or to profit from periods of inactivity or decline. Derivatives are often leveraged,
such that a small movement in the underlying value can cause a large difference in the
value of the derivative.

X. Exchange Traded Funds

An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges,

much like stocks. An ETF holds assets such as stocks or bonds and trades at
approximately the same price as the net asset value of its underlying assets over the
course of the trading day. Most ETFs track an index, such as the S&P 500 or Sensex.
ETFs may be attractive as investments because of their low costs, tax efficiency, and
stock-like features, and single security can track the performance of a growing number of
different index funds (currently the NSE Nifty)

XI. Gold ETF

A Gold Exchange Traded Fund (ETF) is a financial instrument like a mutual fund whose
value depends on the price of gold. In most cases, the price of one unit of gold ETF
approximately reflects the price of 1 gram of gold. As the price of gold rises, the price of
the ETF is also expected to rise by the same amount. Gold exchange-traded funds are
traded on the major stock exchanges including Zurich, Mumbai, London, Paris and New
York There are also closed-end funds (CEF's) and exchange-traded notes (ETN's) that
aim to track the gold price.

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 1.5: TYPES OF CAPITAL MARKET

5. INTRODUCTION

Any government or corporation requires capital (funds) to finance its operations and to
engage in its own long-term investments. To do this, a company raises money through
the sale of securities - stocks and bonds in the company's name. These are bought and
sold in the capital markets. Thus there are two types of capital market as follows:

» Debt or Bond Market » Stock or Equity Market

5.1.A. Debt or Bond Market

The bond market (also known as the debt, credit, or fixed income market) is a financial
market where participants buy and sell debt securities, usually in the form of bonds.
References to the "bond market" usually refer to the government bond market, because of
its size, liquidity, lack of credit risk and, therefore, sensitivity to interest rates.

Because of the inverse relationship between bond valuation and interest rates, the bond
market is often used to indicate changes in interest rates or the shape of the yield curve.
Besides other causes, the decentralized market structure of the corporate and municipal
bond markets, as distinguished from the stock market structure, results in higher
transaction costs and less liquidity.

30
Bond markets in most countries remain decentralized and lack common exchanges like
stock, future and commodity markets. This has occurred, in part, because no two bond
issues are exactly alike, and the variety of bond securities outstanding greatly exceeds
that of stocks. With a large section of population underprivileged, the welfare
commitments of the Indian state have to be supported by a large government borrowing
program. The outstanding marketable government debt has grown from 4.3 trillion in
2000–01 to 29.9 trillion in 2012–13. The size of the annual borrowing of the central
government through dated securities has grown from 1.0 trillion to 5.6 trillion during this
period. It is no mean achievement to manage such large issuances in a non-disruptive
manner in the post Fiscal Responsibility & Budget Management (FRBM) regime and
declining SLR. The liquidity in the secondary market has also increased significantly
from a daily average trading volume of 9 billion in February 2002 to 344 billion in
March, 2013. The development of the debt and the derivatives market in India needs to
be seen from the perspective of a central bank and a financial sector regulator which has
a mandate to facilitate development of debt markets of the country. In many countries,
debt market (both sovereign and corporate) is larger than equity markets. In fact, in
matured economies, the debt market is three times the size of the equity market.
However, in India like in emerging economies, the equity market has been more active,
developed and has been the centre of attention be it in media or otherwise. Nevertheless,
the Indian debt market has transformed itself into a much more vibrant trading field for
debt instruments from the elementary market about a decade ago. Further, the corporate
debt market in developed economies like US is almost 20% of their total debt market. In
contrast, the corporate bond market (i.e. private corporate sector raising debt through
public issuance in capital market), is only an insignificant part of the Indian debt market.
Amongst the most important reforms is the development and deepening of the nonpublic
debt capital market (DCM), where growth has been lack lustre in contrast to a soaring
equity market.

The stock of listed non-public-sector debt in India is currently estimated at about USD 21
billion, or about 2% of GDP, just a fraction of the public-sector debt outstanding (around
35% of GDP), or the equity market capitalisation (now close to 100% of GDP). To
strengthen the Indian financial systems it is now pertinent to develop the environment for
corporate debt market in India. The limitations of public finances as well as the systemic
risk awareness of the banking systems in developing countries have led to a growing
interest in developing bond markets. It is believed that well run and liquid corporate bond
markets can play a critical role in supporting economic development in developing
countries, both at the macroeconomic and microeconomic levels. Though the corporate
debt market in India has been in existence since the Independence in 1947; it was only
after 198586, following some debt market reforms that the state owned public enterprises
(PSUs) began issuing PSU bonds. However, in the absence of a well functioning
secondary market, such debt instruments remained highly illiquid and unpopular among
the investing population at large.

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5.1.B. Types of Bond Market in India

» Corporate Bond Market » Municipal Bond Market » Government and Agency Bond
Market » Funding Bond Market » Mortgage Backed and Collateral Debt Obligation
Bond Market

5.1.C. Types of Debt Instruments

There are various types of debt instruments available that one can find in Indian debt
market.

» Government Securities: It is the Reserve Bank of India that issues Government

Securities or G-Secs on behalf of the Government of India. These securities have a
maturity period of 1 to 30 years. G-Secs offer fixed interest rate, where interests are
payable semi-annually.

» Corporate Bonds: These bonds come from PSUs and private corporations and are
offered for an extensive range of tenures up to 15 years. Comparing to G-Secs, corporate
bonds carry higher risks, which depend upon the corporation, the industry where the
corporation is currently operating, the current market conditions, and the rating of the
corporation. However, these bonds also give higher returns than the G-Secs.

» Certificate of Deposit: These are negotiable money market instruments. Certificate of

Deposits (CDs), which usually offer higher returns than Bank term deposits, are issued in
Demat form and also as a Usance Promissory Notes. There are several institutions that
can issue CDs. Banks can offer CDs which have maturity between 7 days and 1 year.
CDs from financial institutions have maturity between 1 and 3 years. There are some
agencies like ICRA, FITCH, CARE, CRISIL etc. that offer ratings of CDs. CDs are
available in the denominations of ` 1 Lac and in multiple of that.

» Commercial Papers: There are short term securities with maturity of 7 to 365 days.
CPs is issued by corporate entities at a discount to face value.

» Zero Coupon bonds (ZCBs): ZCBs are available at a discount to their face value. There
is no interest paid on these instruments but on maturity the face value is redeemed from
the RBI. A bond of face value 100 will be available at a discount say at Rs 80 and the
date of maturity is after two years. This implies an interest rate on the instrument. When
the bonds are redeemed Rs 100 will be paid. The securities do not carry any coupon or
interest rate i.e. unlike dated securities no interest is paid out every year. When the bond
matures the face value is returned. The difference between the issue price (discounted
price) and face value is the return on this security.

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5.1.D. Recent developments in the corporate debt market in India

In the recent past, the corporate debt market has seen a high growth of innovative asset-
backed securities. The servicing of debt and related obligations for such instruments is
backed by some sort of financial assets and/or credit support from a third party. Over the
years greater innovation has been witnessed in the corporate bond issuances, like floating
rate instruments, zero coupon bonds, convertible bonds, callable (put-able) bonds and
stepredemption bonds. These innovative issues have provided a gamut of securities that
caters to a wider segment of investors in terms of maintaining a desirable risk-return
balance. Over the last five years, corporate issuers have shown a distinct preference for
private placements over public issues. This has further cramped the liquidity in the
market. The dominance of private placement in total issuances is attributable to a number
of factors.

» Lengthy issuance procedure for public issues, in particular, the information disclosure
requirements

» Costs of a public issue are considerably higher than those for a private placement

» The quantum of money raised through private placements is typically larger than those
that can be garnered through a public issue. Also, a corporate can expect to raise debt
from the market at finer rates than the prime-lending rate of banks and financial
institutions only with an AAA rated paper. This limits the number of entities that would
find it profitable to enter the market directly.

5.1.E. Advantages of debt market

The biggest advantage of investing in Indian debt market is its assured returns. The
returns that the market offer is almost risk-free (though there is always certain amount of
risks, however the trend says that return is almost assured). Safer are the government
securities. On the other hand, there are certain amounts of risks in the corporate, FI and
PSU debt instruments. However, investors can take help from the credit rating agencies
which rate those debt instruments. Another advantage of investing in India debt market
is its high liquidity. Banks offer easy loans to the investors against government securities.

5.1.G. Disadvantages of debt market

As the returns here are risk free, those are not as high as the equities market at the same
time. So, at one hand we are getting assured returns, but on the other hand, we are getting
less return at the same time. Retail participation is also very less here, though increased
recently.

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5.1.F. Different types of risks with regard to debt securities :

» Default Risk: This can be defined as the risk that an issuer of a bond may be unable to
make timely payment of interest or principal on a debt security or to otherwise comply
with the provisions of a bond indenture and is also referred to as credit risk.

» Interest Rate Risk: It can be defined as the risk emerging from an adverse change in the
interest rate prevalent in the market so as to affect the yield on the existing instruments.
A good case would be an upswing in the prevailing interest rate scenario leading to a
situation where the investors‘ money is locked at lower rates whereas if he had waited
and invested in the changed interest rate scenario, he would have earned more.

» Reinvestment Rate Risk: It can be defined as the probability of a fall in the interest rate
resulting in a lack of options to invest the interest received at regular intervals at higher
rates at comparable rates in the market.

» Counter Party Risk: It is the normal risk associated with any transaction and refers to
the failure or inability of the opposite party to the contract to deliver either the promised
security or the sale value at the time of settlement.

» Price Risk: Refers to the possibility of not being able to receive the expected price on
any order due to an adverse movement in the prices.

5.1.H. Bond market participants

Bond market participants are similar to participants in most financial markets and are
essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often
both. Participants include:

» Institutional investors » Governments

» Traders » Individuals

Because of the specificity of individual bond issues, and the lack of liquidity in many
smaller issues, the majority of outstanding bonds are held by institutions like pension
funds, banks and mutual funds. In the India, approximately 10% of the market is
currently held by private individuals. Mortgage-backed bonds accounted for around a
quarter of outstanding bonds in the US in 2009 or some $9.2 trillion. The sub-prime
portion of this market is variously estimated at between $500bn and $1.4 trillion.
Treasury bonds and corporate bonds each accounted for a fifth of US domestic bonds.
The outstanding value of international bonds increased by 13% in 2009 to $27 trillion.

34
5.1.I. Bond market size

Amounts outstanding on the global bond market increased 10% in 2009 to a record $91
trillion. Domestic bonds accounted for 70% of the total and international bonds for the
remainder. The US was the largest market with 39% of the total followed by Japan
(18%).

5.1.J. Bond market volatility

For market participants who own a bond, collect the coupon and hold it to maturity,
market volatility is irrelevant; principal and interest are received according to a
predetermined schedule. But participants who buy and sell bonds before maturity are
exposed to many risks, most importantly changes in interest rates. When interest rates
increase, the value of existing bonds falls, since new issues pay a higher yield. Likewise,
when interest rates decrease, the value of existing bonds rise, since new issues pay a
lower yield. This is the fundamental concept of bond market volatility: changes in bond
prices are inverse to changes in interest rates. Fluctuating interest rates are part of a
country's monetary policy and bond market volatility is a response to expected monetary
policy and economic changes.

5.1.K. Bond investments

Investment companies allow individual investors the ability to participate in the bond
markets through bond funds, closed-end funds and unit-investment trusts. Exchange
traded funds (ETFs) are another alternative to trading or investing directly in a bond
issue.

These securities allow individual investors the ability to overcome large initial and
incremental trading sizes.

5.2.A. Equity or Stock Market

A stock market or equity market is a public market (a loose network of economic

transactions, not a physical facility or discrete entity) for the trading of company stock
and derivatives at an agreed price; these are securities listed on a stock exchange as
well as those only traded privately. The size of the world stock market was estimated at
about 36.6 trillion USD at the beginning of October 2012. The total world derivatives
market has been estimated at about $791 trillion face or nominal value, 11 times the size
of the entire world economy. The value of the derivatives market, because it is stated in
terms of notional values, cannot be directly compared to a stock or a fixed income
security, which traditionally refers to an actual value. Moreover, the vast majority of
derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by
a comparable derivative 'bet' on the event not occurring). Many such relatively illiquid
securities are valued as marked to model, rather than an actual market price.

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The stocks are listed and traded on stock exchanges which are entities of a corporation or
mutual organization specialized in the business of bringing buyers and sellers of the
organizations to a listing of stocks and securities together. The largest stock market in the
United States, by market cap is the New York Stock Exchange, NYSE, while in Canada,
it is the Toronto Stock Exchange. Major European examples of stock exchanges include
the London Stock Exchange, Paris Bourse, and the Deutsche Börse. Asian examples
include the Tokyo Stock Exchange, the Hong Kong Stock Exchange, the Shanghai
Stock Exchange, and the Bombay Stock Exchange. In Latin America, there are such
exchanges as the BM&F Bovespa.

5.2.B. Trading

Participants in the stock market range from small individual stock investors to large
hedge fund traders, who can be based anywhere. Their orders usually end up with a
professional at a stock exchange, who executes the order.

Some exchanges are physical locations where transactions are carried out on a trading
floor, by a method known as open outcry. This type of auction is used in stock
exchanges and commodity exchanges where traders may enter "verbal" bids and offers
simultaneously. The other type of stock exchange is a virtual kind, composed of a
network of computers where trades are made electronically via traders. Actual trades are
based on an auction market model where a potential buyer bids a specific price for a
stock and a potential seller asks a specific price for the stock. (Buying or selling at
market means you will accept any ask price or bid price for the stock, respectively.)
When the bid and ask prices match, a sale takes place, on a first-come-firstserved basis if
there are multiple bidders or askers at a given price. The purpose of a stock exchange is
to facilitate the exchange of securities between buyers and sellers, thus providing a
marketplace (virtual or real). The exchanges provide real-time trading information on the
listed securities, facilitating price discovery.

5.2.C. Market participants

A few decades ago, worldwide, buyers and sellers were individual investors, such as
wealthy businessmen, with long family histories (and emotional ties) to particular
corporations. Over time, markets have become more "institutionalized"; buyers and
sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds,
index funds, exchange-traded funds, hedge funds, investor groups, banks and various
other financial institutions). The rise of the institutional investor has brought with it
some improvements in market operations. Thus, the government was responsible for
"fixed" (and exorbitant) fees being markedly reduced for the 'small' investor, but only
after the large institutions had managed to break the brokers' solid front on fees. (They
then went to 'negotiated' fees, but only for large institutions. However, corporate
governance (at least in the West) has been very much adversely affected by the rise of
(largely 'absentee') institutional 'owners'

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5.3.D. Importance or Functions of Stock Exchange :

We discuss about major functions of stock exchange under these headings:-

» Providing a ready market: The organization of stock exchange provides a ready market
to speculators and investors in industrial enterprises. It thus, enables the public to buy and
sell securities already in issue.

» Providing a quoting market prices: It makes possible the determination of supply and
demand on price. The very sensitive pricing mechanism and the constant quoting of
market price allows investors to always be aware of values. This enables the production
of various indexes which indicate trends etc.

» Providing facilities for working: It provides opportunities to Jobbers and other

members to perform their activities with all their resources in the stock exchange.

» Safeguarding activities for investors: The stock exchange renders safeguarding

activities for investors which enables them to make a fair judgment of a securities.
Therefore directors have to disclose all material facts to their respective shareholders.
Thus innocent investors may be safeguard from the clever brokers.

» Operating a compensation fund: It also operate a compensation fund which is always

available to investors suffering loss due the speculating dealings in the stock exchange.

» Creating the discipline: Its members controlled under rigid set of rules designed to
protect the general public and its members. Thus this tendency creates the discipline
among its members in social life also.

» Checking functions: New securities checked before being approved and admitted to
listing. Thus stock exchange exercises rigid control over the activities of its members.

» Adjustment of equilibrium: The investors in the stock exchange promote the adjustment
of equilibrium of demand and supply of a particular stock and thus prevent the tendency
of fluctuation in the prices of shares.

» Maintenance of liquidity: The bank and insurance companies purchase large number of
securities from the stock exchange. These securities are marketable and can be turned
into cash at any time. Therefore banks prefer to keep securities instead of cash in their
reserve .This it facilities the banking system to maintain liquidity by procuring the
marketable securities.

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» Promotion of the habit of saving Stock exchange provide a place for saving to general
public. Thus it creates the habit of thrift and investment among the public. This habit
leads to investment of funds incorporate or government securities. The funds placed at
the disposal of companies are used by them for productive purposes.

»Refining and advancing the industry stock exchange advances the trade, commerce and
industry in the country. It provides opportunity to capital to flow into the most productive
channels. Thus the flow of capital from unproductive field to productive field helps to
refine the large scale enterprises.

» Promotion of capital formation: It plays an important part in capital formation in the

country. Its publicity regarding various industrial securities makes even disinterested
people feel interested in investment.

» Increasing Govt. Funds The govt. can undertake projects of national importance and
social value by raising funds through sale of its securities on stock exchange.

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 1.6: EQUITY MARKET IN INDIA
The Indian Equity Market is more popularly known as the Indian Stock Market. The
Indian equity market has become the third biggest after China and Hong Kong in the
Asian region. The Indian financial markets have also grown considerably. The market
capitalization of the equity market (National Stock Exchange) has grown from
approximately 6.5 trillion in2000–01 to approximately 60 trillion in 2009–10 and further
to approximately 61 trillion in 2011–12.The market was slow since early 2007 and
continued till the first quarter of 2009.

6.1.A. Importance of Equity Market in India

»Raising Capital For Businesses: The Stock Exchange provide companies with the
facility to raise capital for expansion through selling shares to the investing public.

»Facilitating Company Growth: A takeover bid or a merger agreement through the stock
market is one of the simplest and most common ways for a company to grow by
acquisition or fusion.

»Creating Investment Opportunities For Small Investors: As opposed to other businesses

that require huge capital outlay, investing in shares is open to both the large and small
stock investors because a person buys the number of shares they can afford. Therefore
the Stock Exchange provides the opportunity for small investors to own shares of the
same companies as large investors.

»Barometer of the Economy: At the stock exchange, share prices rise and fall depending,
largely, on market forces. Share prices tend to rise or remain stable when companies and
the economy in general show signs of stability and growth. An economic recession,
depression, or financial crisis could eventually lead to a stock market crash. Therefore the
movement of share prices and in general of the stock indexes can be an indicator of the
general trend in the economy.

» Speculation: The stock exchanges are also fashionable places for speculation. In a
financial context, the terms "speculation" and "investment" are actually quite specific.
For instance, although the word "investment" is typically used, in a general sense, to
mean any act of placing money in a financial vehicle with the intent of producing returns
over a period of time, most ventured money—including funds placed in the world's stock
markets—is actually not investment but speculation.

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 6.2. Major Stock Exhanges of India

6.2.A. Bombay Stock Exchange (BSE) :

BSE is the oldest stock exchange in Asia. The extensiveness of the indigenous equity
broking industry in India led to the formation of the Native Share Brokers Association in
1875, which later became Bombay Stock Exchange Limited (BSE). BSE is widely
recognized due to its pivotal and preeminent role in the development of the Indian capital
market. In 1995, the trading system transformed from open outcry system to an online
screen-based order-driven trading system. The exchange opened up for foreign
ownership (foreign institutional investment).

» Allowed Indian companies to raise capital from abroad through ADRs and GDRs. »
Expanded the product range (equities/derivatives/debt). » Introduced the book building
process and brought in transparency in IPO issuance. » Depositories for share custody
(dematerialization of shares). » Internet trading (e-broking).

BSE has a nation-wide reach with a presence in more than 450 cities and towns of India.
BSE has always been at par with the international standards. It is the first exchange in
India and the second in the world to obtain an ISO 9001:2000 certifications. The equity
market capitalization of the companies listed on the BSE was US$1.63 trillion as of
December 2011, making it the 4th largest stock exchange in Asia and the 8th largest in
the world. The BSE has the largest number of listed companies in the world. As of
December 2011, there are over 5,085 listed Indian companies and over 8,196 scrips on
the stock exchange, the Bombay Stock Exchange has a significant trading volume.
Though many other exchanges exist, BSE and the National Stock Exchange of India
account for the majority of the equity trading in India.

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 6.2.B. National Stock Exchange (NSE) :

With the liberalization of the Indian economy, it was found inevitable to lift the Indian
stock market trading system on par with the international standards. On the basis of the
recommendations of high poweredPherwani Committee, the National Stock Exchange
was incorporated in 1992 by Industrial Development Bank of India (IDBI), Industrial
Credit and Investment Corporation of India(ICICI), Industrial Finance Corporation of
India (IFCI), all Insurance Corporations, selected commercial banks and others. Trading
at NSE takes place through a fully automated screen-based trading mechanism which
adopts the principle of an order-driven market. Trading members can stay at their offices
and execute the trading, since they are linked through a communication network. The
prices at which the buyer and seller are willing to transact will appear on the screen.
When the prices match the transaction will be completed and a confirmation slip will be
printed at the office of the trading member. NSE has several advantages over the
traditional trading exchanges.

They are as follows:

» NSE brings an integrated stock market trading network across the nation.

» Investors can trade at the same price from anywhere in the country since inter-market
operations are streamlined coupled with the countrywide access to the securities.

» Delays in communication, late payments and the malpractice‘s prevailing in the

traditional trading mechanism can be done away with greater operational efficiency and
informational transparency in the stock market operations, with the support of total
computerized network.

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 6.2.C. Over The Counter Exchange of India (OTCEI) :

The traditional trading mechanism prevailed in the Indian stock markets gave way to
many functional inefficiencies, such as, absence of liquidity, lack of transparency, unduly
long settlement periods and benami transactions, which affected the small investors to a
great extent. To provide improved services to investors, the country's first ring less, scrip
less, electronic stock exchange -OTCEI - was created in 1992 by country's premier
financial institutions - Unit Trust of India (UTI), Industrial Credit and Investment
Corporation of India (ICICI), Industrial Development Bank of India (IDBI), SBI Capital
Markets, Industrial Finance Corporation of India (IFCI), General Insurance Corporation
and its subsidiaries and CanBank Financial Services. Compared to the traditional
Exchanges, OTC Exchange network has the following advantages :

» OTCEI has widely dispersed trading mechanism across the country which provides
greater liquidity and lesser risk of intermediary charges. » Greater transparency and
accuracy of prices is obtained due to the screen-based scrip less trading. » Since the
exact price of the transaction is shown on the computer screen, the investor gets to know
the exact price at which she/he is trading. » Faster settlement and transfer process
compared to other exchanges.

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 1.7: DERIVATIVE MARKETS IN INDIA

The emergence of the market for derivative products such as futures and forwards can be
traced back to the willingness of risk-averse economic agents to guard themselves against
uncertainties arising out of price fluctuations in various asset classes. This instrument is
used by all sections of businesses, such as corporate, SMEs, banks, financial institutions,
retail investors, etc.

7.1.A. Participants Of Derivative Markets

» Hedgers face risk associated with the price of an asset. They belong to the business
community dealing with the underlying asset to a future instrument on a regular basis.
They use futures or options markets to reduce or eliminate this risk. » Speculators have a
particular mindset with regard to an asset and bet on future movements in the asset‘s
price. Futures and options contracts can give them an extra leverage due to margining
system. » Arbitragers are in business to take advantage of a discrepancy between prices
in two different markets. For example, when they see the futures price of an asset getting
out of line with the cash price, they will take offsetting positions in the two markets to
lock in a profit.

7.1.B. Major types of derivatives:

I. Forwards:

A forward contract is an agreement to buy or sell an asset on a specified date for a

specified price. One of the parties to the contract assumes a long position and agrees to
buy the underlying asset on a certain specified future date for a certain specified price.
The other party assumes a short position and agrees to sell the asset on the same date for
the same price, other contract details like delivery date, price and quantity are negotiated
bilaterally by the parties to the contract. The forward contracts are normally traded
outside the exchange. The salient features of forward contracts are:

» They are bilateral contracts and hence exposed to counter-party risk.

»Each contract is custom designed, and hence is unique in terms of contract size,
expiration date and the asset type and quality.

»The contract price is generally not available in public domain

. »On the expiration date, the contract has to be settled by delivery of the asset, or net
settlement.

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II. Futures:

Futures contract is a standardized transaction taking place on the futures exchange.

Futures market was designed to solve the problems that exist in forward market. A
futures contract is an agreement between two parties, to buy or sell an asset at a certain
time in the future at a certain price, but unlike forward contracts, the futures contracts are
standardized and exchange traded To facilitate liquidity in the futures contracts, the
exchange specifies certain standard quantity and quality of the underlying instrument that
can be delivered, and a standard time for such a settlement. Futures‘ exchange has a
division or subsidiary called a clearing house that performs the specific responsibilities of
paying and collecting daily gains and losses as well as guaranteeing performance of one
party to other. A futures' contract can be offset prior to maturity by entering into an equal
and opposite transaction. More than 99% of futures transactions are offset this way. Yet
another feature is that in a futures contract gains and losses on each party‘s position is
credited or charged on a daily basis, this process is called daily settlement or marking to
market. Any person entering into a futures contract assumes a long or short position, by a
small amount to the clearing house called the margin money The standardized items in a
futures contract are:

» Quantity of the underlying

» Quality of the underlying

» The date and month of delivery

» The units of price quotation and minimum price change

» Location of settlement

Futures Terminology

» Spot Price: The price at which an asset trades in the spot market.

» Futures Price: The price at which the futures contract trades in the futures market.

» Contract Cycle: The period over which a contract trades. The index futures contracts on
the NSE have one month, two months and three months expiry cycles that expires on the
last Thursday of the month. Thus a contract which is to expire in January will expire on
the last Thursday of January.

» Expiry Date: It is the date specified in the futures contract. This is the last day on
which the contract will be traded, at the end of which it will cease to exist.

» Contract Size: It is the quantity of asset that has to be delivered under one contract. For
instance, the contract size on NSE‘s futures market is 200 Nifties.

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» Basis: In the context of financial futures, basis can be defined as the futures price
minus the spot price. There will be different basis for each delivery month, for each
contract. In a normal market, basis will be positive; this reflects that the futures price
exceeds the spot prices.

» Cost Of Carry: The relationship between futures price and spot price can be
summarized in terms of what is known as the cost of carry. This measures the storage
cost plus the interest paid to finance the asset less the income earned on the asset.

» Initial Margin: The amount that must be deposited in the margin account at the time
when a futures contract is first entered into is known as initial margin.

» Mark To Market: In the futures market, at the end of each trading day, the margin
account is adjusted to reflect the investor‘s gain or loss depending upon the futures
closing price. This is called Marking-to-market.

» Maintenance Margin: This is somewhat lower than the initial margin. This is set to
ensure that the balance in the margin account never becomes negative. If the balance in
the margin account falls below the maintenance margin, the investor receives a margin
call and is expected to top up the margin account to the initial margin level before trading
commences on the next day. Advantages Of Stock Futures Trading:

» Investing in futures is less costly as there is only initial margin money to be deposited.
» A large array of strategies can be used to hedge and speculate; with smaller cash outlay
there is greater liquidity.

III. Options:

An option is a contract, or a provision of a contract, that gives one party (the option
holder) the right, but not the obligation, to perform a specified transaction with another
party (the option issuer or option writer) according to the specified terms. The owner of a
property might sell another party an option to purchase the property any time during the
next three months at a specified price. For every buyer of an option there must be a seller.
The seller is often referred to as the writer. As with futures, options are brought into
existence by being traded, if none is traded, none exists; conversely, there is no limit to
the number of option contracts that can be in existence at any time. As with futures, the
process of closing out options positions will cause contracts to cease to exist, diminishing
the total number. Thus an option is the right to buy or sell a specified amount of a
financial instrument at a pre-arranged price on or before a particular date. There are two
options which can be exercised:

» Call option, the right to buy is referred to as a call option.

» Put option, the right to sell is referred as a put option.

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 1.8 : MUTUAL FUNDS AS A PART OF CAPITAL
MARKET
INTRODUCTION TO MUTUAL FUND AND ITS VARIOUS ASPECTS :
Mutual fund is a trust that pools the savings of a number of investors who share a
common financial goal. This pool of money is invested in accordance with a stated
objective. The joint ownership of the fund is thus “Mutual”, i.e. the fund belongs to all
investors. The money thus collected is then invested in capital market instruments such
as shares, debentures and other securities. The income earned through these
investments and the capital appreciations realized are shared by its unit holders in
proportion the number of units owned by them. 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. A
Mutual Fund is an investment tool that allows small investors access to a well-
diversified portfolio of equities, bonds and other securities. Each shareholder
participates in the gain or loss of the fund. Units are issued and can be redeemed as
needed. The fund’s Net Asset value (NAV) is determined each day. Investments in
securities are spread across a wide cross-section of industries and sectors and thus the
risk is reduced. Diversification reduces the risk because all stocks may not move in the
same direction in the same proportion at the same time. Mutual fund issues units to the
investors in accordance with quantum of money invested by them. Investors of mutual
funds are known as unit holders.

When an investor subscribes for the units of a mutual fund, he becomes part owner of
the assets of the fund in the same proportion as his contribution amount put up with
the corpus (the total amount of the fund). Mutual Fund investor is also known as a
mutual fund shareholder or a unit holder. Any change in the value of the investments
made into capital market instruments (such as shares, debentures etc) is reflected in the
Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual
Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the
market value of scheme's assets by the total number of units issued to the investors.

46
47
ADVANTAGES OF MUTUAL FUND:

• Portfolio Diversification

• Professional management

• Reduction / Diversification of Risk

• Liquidity

• Flexibility & Convenience

• Reduction in Transaction cost

• Safety of regulated environment

• Choice of schemes

• Transparency

DISADVANTAGE OF MUTUAL FUND :

• No control over Cost in the Hands of an Investor

• No tailor-made Portfolios

• Managing a Portfolio Funds

• Difficulty in selecting a Suitable Fund Scheme

Based on their investment objective:

Equity funds:

These funds invest in equities and equity related instruments. With fluctuating share
prices, such funds show volatile performance, even losses. However, short term
fluctuations in the market, generally smoothens out in the long term, thereby offering
higher returns at relatively lower volatility. At the same time, such funds can yield great
capital appreciation as, historically, equities have outperformed all asset classes in the
long term. Hence, investment in equity funds should be considered for a period of at
least 3-5 years.

48
Balanced fund:
Their investment portfolio includes both debt and equity. As a result, on the risk-return
ladder, they fall between equity and debt funds. Balanced funds are the ideal mutual
funds vehicle for investors who prefer spreading their risk across various instruments.
Following are balanced funds classes:

i) Debt-oriented funds -Investment below 65% in equities.

ii) Equity-oriented funds -Invest at least 65% in equities, remaining in debt. Debt fund:
They invest only in debt instruments, and are a good option for investors averse to idea
of taking risk associated with equities. Therefore, they invest exclusively in fixed-income
instruments like bonds, debentures, Government of India securities; and money market
instruments such as certificates of deposit (CD), commercial paper (CP) and call money.

Put your money into any of these debt funds depending on your investment horizon
and needs.

i) Liquid funds- These funds invest 100% in money market instruments, a large portion
being invested in call money market.

ii) Gilt funds ST- They invest 100% of their portfolio in government securities of and T-
bills.

iii) Floating rate funds - Invest in short-term debt papers. Floaters invest in debt
instruments which have variable coupon rate.

iv) Arbitrage fund- They generate income through arbitrage opportunities due to mis-
pricing between cash market and derivatives market. Funds are allocated to equities,
derivatives and money markets. Higher proportion (around 75%) is put in money
markets, in the absence of arbitrage opportunities.

v) Gilt funds LT- They invest 100% of their portfolio in long-term government securities.

vi) Income funds LT- Typically, such funds invest a major portion of the portfolio in long-
term debt papers.

vii) MIPs- Monthly Income Plans have an exposure of 70%-90% to debt and an exposure
of 10%-30% to equities.

viii) FMPs- fixed monthly plans invest in debt papers whose maturity is in line with that
of the fund.

viii) FMPs - fixed monthly plans invest in debt papers whose maturity is in line with that
of the fund.

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RISK V/S. RETURN:

50
 9: SECURITIES EXCHANGE BOARD OF INDIA

9.1.A. History

Initially SEBI was a non statutory body without any statutory power. However in 1995,
the SEBI was given additional statutory power by the Government of India through an
amendment to the securities and Exchange Board of India Act 1992. In April, 1998 the
SEBI was constituted as the regulator of capital market in India under a resolution of the
Government of India.

9.1.B. Introduction

Securities and Exchange Board of India (SEBI) has been established with the prime
mandate to protect the interest of investors in securities. The Securities and Exchange
Board of India (SEBI) is the regulatory authority established under the SEBI Act 1992, in
order to protect the interests of the investors in securities as well as promote the
development of the capital market. It involves regulating the business in stock exchanges;
supervising the working of stock brokers, share transfer agents, merchant bankers,
underwriters, etc; as well as prohibiting unfair trade practices in the securities market. An
investor enjoys investing, if

» He knows how to invest;

» He has full knowledge of the market;

» The market is safe and there are no miscreants; and

» There are arrangements for redressal in case of grievances.

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9.1.C. The Basic Objectives of the Board

» To protect the interests of investors in securities; » To promote the development of

Securities Market; » To regulate the securities market and » For matters connected
therewith or incidental thereto.

9.1.D. Responsibilities

SEBI has to be responsive to the needs of three groups, which constitute the market:

» The issuers of securities » The investors » The market intermediaries.

9.1.E. Role/ Functions of SEBI

The role or functions of SEBI are discussed below:

» To protect the interests of investors through proper education and guidance as regards
their investment in securities. For this, SEBI has made rules and regulation to be
followed by the financial intermediaries such as brokers, etc. SEBI looks after the
complaints received from investors for fair settlement. It also issues booklets for the
guidance and protection of small investors.

» To regulate and control the business on stock exchanges and other security markets.
For this, SEBI keeps supervision on brokers. Registration of brokers and sub-brokers is
made compulsory and they are expected to follow certain rules and regulations. Effective
control is also maintained by SEBI on the working of stock exchanges.

» To provide suitable training to intermediaries.

» To register and regulate the working of mutual funds including UTI (Unit Trust of
India). SEBI has made rules and regulations to be followed by mutual funds. The purpose
is to maintain effective supervision on their operations & avoid their unfair and anti-
investor activities.

» To promote self-regulatory organization of intermediaries. SEBI is given wide statutory

powers. However, self regulation is better than external regulation. Here,

the function of SEBI is to encourage intermediaries to form their professional

associations and control undesirable activities of their members.

» To regulate and control the fraudulent & unfair practices which may harm the investors
and healthy growth of capital market.

» To issue guidelines to companies regarding capital issues. Separate guidelines are

prepared for first public issue of new companies, for public issue by existing listed
companies and for first public issue by existing private companies. SEBI is expected to
conduct research and publish information useful to all market players (i.e. all buyers and
sellers.

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 CHAPTER 2 : RESEARCH METHODLOGY

10.1 OBJECTIVE OF THE STUDY.

The main objective of research is to identify the awareness utilisation patterns of the

people. About what they think about Capital Markets and are they aware or not about its
benefits.

The objective of present study can be accomplished by conducting a systematic research.

The following are the objectives of the study:

» To understand the position of capital markets in India.

» To understand the different types of Capital Markets.

» To find out the future of Capital Markets in India.

» To study the need of Capital Market.

» To check the awareness among people regarding Capital Markets.

» To study about benefits provided by Capital Market.

» To find out conclusion and give Suggestions.

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The paper covers following areas:

» Capital Market scenario in India

» Capital Market for the low-income people.

» Types of Capital Market in India.

» Need of Capital Market.

» Role of Regulators in Capital Market.

» Capital Market products available in India.

10.2 SCOPE OF STUDY.

Is mostly to identify weather the customers are aware of Capital Market or not and how

much they are willing to save to invest in the markets and what are the different
perceptions

having towards Capital Markets.

Significance Of The Study.

This dissertation presents review of capital market situation in India - the opportunities it

provides, the challenges it faces and the concerns it raises. A discussion of the Capital
Market for

senior citizens and for low-income people is also done. The paper covers following areas:

» Capital Market scenario in India

» Capital Market for the low-income people.

» Types of Capital Market in India.

» Need of Capital Market.

» Role of Regulators in Capital Market.

» Capital Market products available in India.

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10.3 DATA COLLECTION

Market research requires two kinds of data that is primary data and secondary data.
Primary Sources:

Primary data is collected using a well structured questionnaire, surveys etc. Survey is

carried out in 2 steps

1) First visit

2) Appointment or

Secondary Data is data collected by someone other than the user.Common sources of

personal interview Secondary Sources: secondary data includes organizational records

and qualitative methodologies or qualitative

research.

The data for study has been collected through various sources:

» Books

» Internet sources

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 CHAPTER 3 : REVIEW OF LITERATURE

Indian capital market took rapid strides during the last decade as a result of
liberalisation, privatisation and globalisation (LPG) measures initiated in the country. It
was a comprehensive charge, which could be witnesses in every segment of the capital
market especially in the stock market. Formation of the National stock exchange,
introduction of screen based trading system in place of floor trading, establishment of
trading terminal networks, switching over from physical holding to demat system,
replacement of badla system to T + 3 rolling settlement and derivatives trading in the
capital market are prominent among them. All these resulted in increased volume of
trading in the stock exchange and increased market capitalisation of listed companies. A
review of some of the important studies in capital market investment is attempted here.

Capital Market Investment:

Ahmed Naseem1 (2000) in his study opined that bonus shares are considered a mover
of market sentiments which in turn sets an upbeat trend in equity price movement.
Amanullah and Kamaiah2 (1998) in their study attempted to test whether Capital Asset
Pricing Model (CAPM) can perform well in describing the stock return in India. They
opined that though the CAPM describes stock return well in the Indian context, it is
preferable that investor’s investment decision may be decided with the help of other
relevant factors such as P/E ratio, EPS dividend, bonus and right issues besides the
CAPM estimates. The estimation of these variables call for information on historical data
from the company’s financial statements. There is an on-going argument that the
company presents a rosy picture of financial estimates by manipulating its financial
statements such as profit and loss account and balance sheet. In such a case it is difficult
to obtain a true and fair view of its financial position and hence investment decisions
based on these statements may not provide a meaningful estimation of stock returns.
Thus investors are required to take extra care in estimating stock returns to construct
the portfolio of securities.

Belgaumi4 (1995) in his study attempted to test whether the random walk hypothesis or
weak from of efficient market hypothesis holds good in the Indian Stock Market. 70
companies were taken as sample in the A group of the Bombay Stock Exchange during
1991-92. He concluded that share price behaviour in the Indian stock market followed
the random walk model. Hence the exchanges are weakly efficient in pricing their
shares.

56
Cherian Samuel7 (1996) in his study opined that the stock market plays only a limited role
providing finance for both U.S. and Indian firms. In seeking funding a firm’s main choice is
between external and internal financing. Internal finance plays less of a role in Indian firms than
for U.S. firms and external debt a bigger role. This is in consistent with the theoretical prediction
that information and agency problems are less severe for Indian firms that for U.S. firms.

Cirvante8 (1956) in his study pointed out that capital market in India is in a process of transition.
A gradual shift in investment is taking place from the private sector investment to the public
sector. This is due to the inability of the private sector to undertake large scale investment on
account of the paucity of aggregate savings and the direction of these savings into trading and
speculative activities rather than into fixed investment.

Claessens9 in his study on equity investment in developing countries points out that the benefits
available to an investor of equity investment in emerging markets ultimately depend on a trade-
off between the expected rate of return and its associated risk. To assess this trade-off a number
of factors are important: the underlying factors driving the rate of return and its variability; the
efficiency of the domestic stock market; the regulatory, accounting and enforcement standards
in the host country etc. The risk-return trade-off should, however, be investigated from the point
of view of an internationally well diversified investor who is considering investing in emerging
markets.

Crockett Andrew10 (1998) in his study revealed that the past twenty five years have witnessed a
process of accelerating change in the world’s financial markets. Driven by an interacting process
of liberalistion and innovation, regulations have been removed, new products have emerged and
old boundaries between financial intermediaries have been blurred. Innovation has brought
many advantages. The menu of financial assets and liabilities available to end-users has been
greatly enlarged. The costs of financial intermediation have fallen. Risk management tools have
become increasingly sophisticated. Developing countries have found new ways to mobilize
domestic and international savings.

Gupta and Choudhury14 in their study pointed out that index funds have gained acceptance
among investors because it was found that fund managers often did worse than the market
average. The index fund is an admission of failure of fund management to beat the market.

Gupta and others15 (1994) in their study enquired into shareowners geographic distribution
covering a sample of 165819 shareholders and 63157 debenture holders from 80 companies.

57
 CHAPTER 4 : NEED, SCOPE & OBJECTIVE OF THE STUDY

4.1 NEED OF THE STUDY:

The need of the study was to fill the gap that was identified in the previous
researches. The
researchers conducted earlier lay emphasis on the working of Indian Stock
Market.
Considering the ample importance of this aspect, the present study was
conducted to know the
Indian Stock Market & various options available in the Stock Market to invest &
study the
behavior of investors and determine their awareness level regarding various
investment
avenues available in stock market.

4.2 SCOPE OF THE STUDY:

The scope of the study was limited to Chandigarh city.

4.3 OBJECTIVES OF THE STUDY:

The study has been undertaken in order to achieve the following objectives:

 To take an overview of the Indian Stock Market and encapsulate the various
investment avenues available.

 To know various options available in the Capital Market to invest.

 To know investor‟s perception regarding investment in stock market

 To study the investment behavior of investors and the factors that affects their
investment decision.

 To study the problems of investors and the reasons for not investing in financial
instruments.

 To know the satisfaction level of investors regarding return of different

investment avenues

58
 CHAPTER 5 : DATA ANALYSIS
QUESTIONNAIRE:

Name :

Occupation :

1. What is your age?

-40

-50

59
2. Products offered through primary and secondary markets?
» Mutual Fund

» Bonds

» Insurance

» Equity Shares s No

» Fixed Deposits

» Commodity markets

» Gold & Silver

» Real Estate

» Private equity

60
3. How do you get information regarding these capital markets?
Advertisement

Newspaper

61
4. Who is the controller of capital markets in India?

62
5. What are the factors which you consider while investing in capital
markets?

quidity

63
6. You like investing in financial products through?

market

64
7. How will you invest your money in any secondary market?

65
8. What is your annual income?

66
9. How long you prefer to keep your money when invested through
secondary market?

67
10. How much return you expect from secondary market investment?

68
 CHAPTER 6 : CONCLUSION

Reforms in the securities market, particularly establishment and empowerment of SEBI,

allocation of resources by market, screen based nation-wide trading, dematerialization
and electronic transfer of securities, availability of derivatives of securities, etc. have
greatly improved the regulatory framework and efficiency and safety of issue, trading
clearing and settlement of securities. However, efforts are on to improve working of the
securities market further. The main change which has witnessed the Indian securities
market is that earlier trading in both primary market and secondary market was done
physically and is now replaced by electronic systems available for trading. With an
strengthening of the regulatory system and introduction of various Acts has empowered
the Indian securities market and therefore has become a better option for investing the
resources, we can also see that no of people investing in securities be it Mutual Funds,
Derivatives, in Equity Market, in Debt Market is on increase and will also further
increase with more sophistication of technology and not to forget legislation authorities
protecting rights of investors. Security exchange board of India SEBI have been playing
an important role in regulating the business in stock exchanges and any other securities
markets and to protect the interests of investors. The emergence of the securities market
resulted as a major source of finance for trade and industry across India. A growing
number of companies are accessing the securities market rather than depending on loans
from FIs/banks. Moreover the Indian securities market is contributing to Indian GDP
growth immensely. The capital mobilizations in both primary market and secondary
market have been witnessing phenomenal growth over the years. Indian securities market
is getting increasingly integrated with the rest of the world. Indian companies have been
permitted to raise resources from abroad through issue of ADRs, GDRs, FCCBs and
ECBs. ADRs/GDRs have two-way fungibility. Indian companies are permitted to list
their securities on foreign stock exchanges by sponsoring ADR/GDR issues against block
shareholding.

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 CHAPTER 7 : BIBLIOGRAPHY

» www.sbimf.com

» www.moneycontrol.com

» www.amfiindia.com

» www.onlineresearchonline.com

» www.mutualfundsindia.com

» www.sebi.gov.in

» www.rbi.gov.in

» Beginners guide to capital Markets

» Capital market and securities laws (module ii paper 6)

» www.investopedia.com

» Capital Markets and NSDL-Overview National - Handbook for NSDL

Depository Operations Module

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