Indian Financial System

REPORT
ON
INTRODUCTION TO THE INDIAN CAPITAL
MARKET,
EQUITY MARKET,
AND
BOND MARKET
By
G. Sathwik
20FMUCHH010165

Distributor: Prof. Shree Jyoti

Subject: Indian Financial System

A report submitted in partial fulfilment of the requirements of course BBA program of

IBS Hyderabad.

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CHAPTERS PARTICULARS PAGE

NO
TITLE PAGE 01

TABLE OF CONTENTS 02

1 INTRODUCTION TO INDIAN CAPITAL MARKETS

a. History of Indian Capital Market
b. Globalisation and the Indian Capital Markets
c. Growth and recent Trend of the Indian Capital Markets
d. Conclusion
2 EQUITY MARKETS
a. Introduction
b. Recent Trends and Growth in Equity Market
c. Impact of Covid-19 on Equity Market
d. Conclusion
3 BOND MARKETS
a. Introduction
b. Classification of Indian Bond Market and Recent
Trends
c. Conclusion

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1) INTRODUCION TO INDIAN CAPITAL MARKETS

A. History of Indian Capital Markets:
The history of the capital market in India dates to the eighteenth century when East India
Company securities were traded in the country. Until the end of the nineteenth century
securities trading was unorganized and the main trading centres were Bombay (now Mumbai)
and Calcutta (now Kolkata). Bombay was an important source of supply for cotton. Hence,
trading activities flourished during the period, resulting in a boom in share prices. This boom,
the first in the history of the Indian capital market lasted for a half a decade. The bubble burst
on July 1, 1865, when there was tremendous slump in share prices. Trading was at that time
limited to a dozen brokers; their trading place was under a banyan tree in front of the Town
hall in Bombay. These stockbrokers organized informal association in 1897 – Native Shares
and Stockbrokers Association, Bombay. The Stock exchanges in Calcutta ad Ahmedabad also
industrial and trading centers, came up later. The Bombay Stock Exchange was recognized in
May 1927 under the Bombay Securities Contracts Control Act, 1925.

In the post-independence period also, the size the capital market remained small. During the
first and second five-year plans, the government’s emphasis was on the development of the
agricultural sector and public sector undertakings. The public sector undertakings were
healthier than the private undertakings in terms of paid-up capital, but shares were not listed
on the stock exchanges. Moreover, the Controller of Capital Issues (CI) closely supervised
and controlled the timing, composition, interest rates pricing allotment and floatation consist
of new issues. These strict regulations de-motivated many companies from going public for
almost four and a half decades.

The 1960s was characterized by the wars and droughts in the country which led bearish
trends. These trends were aggravated by the ban in 1969 on forward trading and Badla
technically called contracts for clearing Badla provided a mechanism for carrying forward
positions as well as for borrowing funds. Financial institutions such as LIC and GIC helped to
revive the sentiment by emerging as the most important group of investors. The first mutual
fund of India, the Unit Trust of India (UTI) came into existence in 1964

Later came buoyancy in the stock markets when the multinational companies (MNCs) were
forced to dilute their majority stocks in their Indian ventures in favour of the Indian public
under FERA 1973. Several MNCs opted out of India. One hundred and twenty-three MNCs

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offered shares worth Rs 150 crore, creating 1.8 million shareholders within four years. The
offer prices of FERA shares were lower than their intrinsic worth. Hence, for the first the
FERA dilution created an equity cult in India. It was the spate of FERA issues that gave a
real fillip to the Indian stock markets. For the first time, many investors got an opportunity to
invest in the stocks of such MNCs as Colagte and Hindustan Liver Limited. Then in 1977, a
little-known entrepreneur, Dhirubhai Ambani tapped the capital market. The scrip Reliance
Textiles is still a hot favourite and dominates trading at all stock exchanges.

B. Globalization and the Indian Capital Markets:

The Indian capital markets have since the beginning of the process of liberalization in the
country in the early nineties have become increasingly integrated with the global markets.
This has resulted in significant gains for the economy by superior allocation of resources and
better specialization of labour. Indian capital markets have off late shown signs of maturing
with the gradual adoption of globally accepted procedures and practices. Several companies
have adopted the US Generally Accepted Accounting Practices (“GAAP”) which ensures
greater transparency in financial statements. Corporate Governance is being given impetus by
limited companies as part of their efforts in greater disclosures as well as protecting
shareholder value. The Securities and Exchange Board of India (“SEBI”) has played an
extremely important role in the development of a vibrant and well-regulated capital markets.
It has introduced stringent disclosure and entry norms for corporate issuers by making it
mandatory for issuers to place at least 60% of the issue to Qualified Institutional Investors
(“QIBs”) thereby ensuring that only quality issues are listed. Further, regular disclosure
standards have been given a greater impetus with quarterly reporting and half yearly results
with limited audit review. Today international financial trends have a much greater impact on
the domestic stock exchanges. Accordingly, for example, market participants in India keenly
watch the steps being taken by the Federal Reserve Chairman Mr. Alan Greenspan to soft
land the US economy through a series of interest rate hikes or the periodic numbers
indicating the movement of unemployment and inflation in the US markets, as these would
have an impact on the domestic stock movements. This in turn indicates that the Indian
economy and the capital markets can no longer isolate itself and escape the impact of the
changes affecting the US and other leading markets.

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C. Growth and Recent Trends of Indian Capital Markets:

Some of the changes in the Indian capital market that have helped India compete
with developed countries across the world are listed below.
1. Economic Liberalization due to Indian Capital Market:
In India, economic liberalization has resulted in increasing deregulation,
liberalization, and privatization of public sector enterprises. As a result, several public
sector companies' shares have been made accessible to the public. Individuals
and the private sector were not allowed to invest in the core industry under the
previous government's industrial strategy. However, with the privatization of several
public-sector enterprises, the shares are now accessible for public investment. India's
Steel Authority is one example (SAIL). Some of the Navarathna firms, which include large
public sector undertakings like ONGC, BHEL, Oil India Ltd, Gas Authority,
and others, have yet to be privatized. TATAs just purchased the shares of VSNL.
2. Promoting more private sector banks:
As more private sector banks open, the public has begun to invest in these banks'
stock on the Indian capital market. The government has stated that foreigners will be
allowed to own 74 percent of private sector banks in India. This has aided the
formation of new banks as well as the merger of existing banks with others. The
combination of Bank of Madura with ICICI Bank is an example.
3. Promotion of Mutual Funds:
The Indian capital market has also benefited from the marketing of mutual funds
by both nationalized and non-nationalized institutions. They aided the public by
offering tax-saving opportunities. The monthly income programme at UTI is an
example. Investments in mutual funds promoted by nationalized banks have surged.
SEBI has controlled mutual fund operations, and banks are required to declare them
net asset value every week by publishing the information in key publications. Some
mutual funds are currently in very bad shape, with the value of their investments
falling below the face value of the securities. As a result, there's a good chance that
the public may lose faith in mutual funds. Unit Trust of India, for example.
4. Educating Public:
The press and media have played an important role in popularizing the Indian
capital market, and they continue to spotlight the prices of securities daily.

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Mutual funds and merchant banks have been encouraged to set aside a percentage of
their assets to educate the public about the Indian capital market's developments.
5. Direct Foreign Investment:
The Foreign Investment Promotion Board, which consists of the Secretaries of
Industry, Finance, and Foreign Affairs, has approved greater direct foreign
investment in the core sector, particularly in power. 6. FERA Companies:
A FERA corporation, as defined by the Foreign Exchange Regulation Act, is one
in which foreigners own 40% of the stock. This restriction has been lifted, and foreign
businesses can now own up to 51 percent of the company. Colgate Palmolive, for
example, has boosted its foreign ownership stake from 40% to 51%. As a result, we
are in a better position to attract more foreign investments into the Indian capital
market. Since then, the FERA Act has been renamed the Foreign Exchange
Management Act (FEMA).
7. Online Trading in Indian Capital Market:
Some of India's most important stock exchanges have used computerized trading
systems. Brokers can connect to the internet and trade on a real-time basis. The public
and brokers will be able to see the current market price at any moment thanks to the
computer terminals. This will put a stop to conjecture.
8. Transparency through Online trading:
The introduction of internet trading through computer has increased the
transparency of market activities. People may obtain information about market prices
at any moment, therefore, brokers cannot rob their clients of their earnings. It is no
longer feasible for market brokers to manipulate the starting and closing prices of shares.
9. Market Makers in Indian Capital Market:
The market forces of supply and demand will determine the price of a company's
stock. There are market makers who guarantee that firms' stocks are available and at a
reasonable price. The installation of these market makers prevents brokers from
manipulating share prices.
10. Government Securities Market:
Following the stock fraud, the central government de-linked government
securities from corporate securities to prevent them from being traded
together. To put it another way, government securities will have their own market and

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will not be traded alongside business securities on the stock exchange. When
Dr. Manmohan Singh was the finance minister, he took this step.
D. Conclusion: Indian Capital market has faced many challenges over the years. There
has been a massive revolutionary Changes over years. s. The established capital market also
allows domestic industry to access overseas capital. As a result, the capital market plays an
important part in an economy's overall development.

2)EQUITY MARKETS

A. Introduction: An equity market is a market in which shares of companies are issued

and traded, either through exchanges or over-the-counter markets. Also known as the stock
market, it is one of the most vital areas of a market economy. It gives companies access to
capital to grow their business, and investors a piece of ownership in a company with the
potential to realize gains in their investment based on the company's future performance.

• Equity markets are meeting points for issuers and buyers of stocks in a market economy.

• Equity markets are a method for companies to raise capital and investors to own a piece of
a company.

• Stocks can be issued in public markets or private markets. Depending on the type of issue,
the venue for trading changes.

• Most equity markets are stock exchanges that can be found around the world, such as the
New York Stock Exchange and the Tokyo Stock Exchange.

B. Recent Trends and Growth in Equity Markets:

1.IPO season listing of new companies

In India, we have seen the listing of many traditional businesses with handsome listing gains
in the last couple of years. 2020 was a very volatile year for the stock markets. During Mar-
Apr 2021, we saw a big fall due to COVID-19 and the resulting lockdowns. But, in the
second half of the year, we saw the markets bouncing back equally sharply using IPOs. the
IPO euphoria continues in 2021, and now start-ups have also started participating. Zomato

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and Car Trade have already come out with IPOs. Zomato received a very good response from
investors, and the issue was oversubscribed heavily. It listed with an excellent gain of around
50%. Many other start-ups like Paytm, Nykaa, Delhi very, Policy Bazaar, Urban Company,
etc. are also planning their IPO. Some of these companies have already filed the DRHP with
SEBI for IPO approval. Indian investors are finally getting to invest in Indian start-up IPOs

2. Growth of penetration of demat accounts

In the last few years, the penetration of demat accounts has been rising fast due to the factors:
(a) Increase in retail investors who are investing directly in stocks, and (b) The deluge of
IPOs and the listing gains on Day 1.the number of demat accounts in India has also been
increasing exotically in the year 2013 it was 21 million accounts and in year 2020 it was 41
million and in year 2021 it is 52 million leaving in a huge growth.

3. Growth in average daily turnover

The massive participation by retail investors in the IPO market and direct investing in the
secondary market has led to a big increase in average daily turnover in Indian stock
exchanges the average daily turnover in India for the year 2021 is 70000cr which is a huge
growth from 2020 which was 36000cr.

4. Growth in index investing

Investors are opening demat accounts participating in ipos and investing in mutual funds but
investors these days are investing more in low-cost passive funds (index funds and etfs)
rather than active funds. The last six years have seen a massive investing in index in India.
The assets under management of index mutual funds have increased tenfold from rs2452cr to
24920cr. Two major benefits of investing in index funds are low cost and diversification.
Some start-ups like navi mutual fund have launched the navi nifty 50 index funds with the
lowest expense ratio 0.06.

C. Impact of COVID-19 on Equity Markets:

The rapid spread of the COVID‐19 pandemic has put the world in jeopardy and changed the
global outlook unexpectedly. COVID‐19 outbreak triggered in Wuhan city, Hubei province
of China in December 2019, and with time it spread all over the globe. This pandemic is not
only a global health emergency but also a significant global economic downturn too. As
many countries adopt strict quarantine policies to fight the unseen pandemic, their economic
activities are suddenly shut down. Transports being limited and even restricted among

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countries have slowed down global economic activities. Most importantly, consumers and
firms have prevented their usual consumption patterns due to the creation of panic among
them and created market abnormality. Uncertainty and risk created due to this pandemic,
causing significant economic impact all over the globe affecting both advanced and emerging
economies such as the United States, Spain, Italy, Brazil, and India. In this context, the
financial market has responded with dramatic movement and adversely affected. Economic
turmoil associated with COVID‐19 has affected the financial market severely which includes
both stock and bond markets. Due to this pandemic, there is a large fall in the price of oil and
a large increase in the price of gold.

In many countries, businesses are highly indebted, weak companies are further destabilized,
and corporate debt stands at a very high level. The global financial market risk has increased
substantially in response to the pandemic. Investors are suffering sufficient losses due to fear
and uncertainty.

There are two major stock indices in India—Bombay Stock Exchange (BSE),
Sensex, and National Stock Exchange (NSE), Nifty. If we look at the Bombay Stock
Exchange there is a drop in the Sensex index to 13.2% on March 23, 2020. It was the highest
single fall. Nifty has also declined to almost 29% during this period. Some economists have
considered the impact of COVID‐19 on the Indian stock market as a “black swan event,” that
is, the occurrence of a highly unanticipated event with an extremely bad impact. Due to the
lockdown policy adopted by the government, the factories have reduced the size of their
labour force as well as production level which disrupted the supply chain. Again, because of
the uncertainty prevailing among mankind, people also reduce their consumption habits
leading to demand‐side shock. Studies have also found that the entire previous pandemic had
affected only the demand chain. But this COVID‐19 pandemic has affected both the demand
chain and supply chain.

D. Conclusion:

After the impact of COVID‐19 on the Indian stock market as a “black swan event,” that is,
the occurrence of a highly unanticipated event with an extremely bad impact on stock market.
the stock markets has recovered in 2021 because of vaccinations , reduce in COVID cases ,
the massive participation by retail investors in the initial public offering market and direct
investing in the secondary market has led to a big increase in average daily turnover in Indian
stock exchanges the average daily turnover in India for the year 2021 is 70000cr which is a

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huge growth from 2020 which was 36000cr and also government of India has taken various
measures to aid businesses during COVID-19 lockdown.

3)BOND MARKET
A. Introduction:

The bond market (also debt market or credit market) is a financial market where participants
can issue new debt, known as the primary market, or buy and sell debt securities, known as
the secondary market. This is usually in the form of bonds, but it may include notes, bills, and
so for public and private expenditures.

Bonds and bank loans form what is known as the credit market. The global credit market in
aggregate is about three times the size of the global equity market. Bank loans are not
securities under the Securities and Exchange Act, but bonds typically are and are therefore
more highly regulated. Unlike bank loans, bonds may be held by retail investors. Bonds are
more frequently traded than loans, although not as often as equity.

An important part of the bond market is the government bond market, because of its size and
liquidity. Government bonds are often used to compare other bonds to measure credit risk.
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, the
measure of “cost of funding”.

Types of bond market:

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The Securities Industry and Financial Markets Association (SIFMA)

classifies the broader bond market into five specific bond markets.
Corporate bonds. Are debt securities issued by private and public corporations.
Investment-grade. These bonds have a higher credit rating, implying less credit risk,
than high-yield corporate bonds.
High-yield. These bonds have a lower credit rating, implying higher credit risk, than
investment-grade bonds and, therefore, offer higher interest rates in return for the
increased risk.
Municipal bonds, called “Munis,” are debt securities issued by states, cities, counties,
and other government entities. Types of “Munis” include:
o General obligation bonds. These bonds are not secured by any assets; instead,
they are backed by the “full faith and credit” of the issuer, which has the power
to tax residents to pay bondholders.
o Revenue bonds. Instead of taxes, these bonds are backed by revenues from a
specific project or source, such as highway tolls or lease fees. Some revenue
bonds are “non-recourse,” meaning that if the revenue stream dries up, the
bondholders do not have a claim on the underlying revenue source.
o Conduit bonds. Governments sometimes issue municipal bonds on behalf of
private entities such as non-profit colleges or hospitals. These “conduit”
borrowers typically agree to repay the issuer, who pays the interest and
principal on the bonds. If the conduit borrower fails to make a payment, the
issuer usually is not required to pay the bondholders.

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Participants of bond market:

Bond market participants are like participants in most financial markets and are
essentially either buyers of funds or sellers of funds and often both.
Participants include:
o Institutional investors-
o Governments
o Traders
o Individuals
Because of the specificity of individual bond issues, and the lack of liquidity in many
smaller issues, many outstanding bonds are held by institutions like pension funds,
banks, and mutual funds.

Risk Associated with Bonds:

• Default Risk
• Interest Rate Risk
• Reinvestment Rate Risk
• Inflation Risk

B. Classification of Indian Bond Market and Recent Trends

Classification of Indian Debt Market:
Indian Debt Market bis Classified into 2 types, they are.
1) Government Securities Market
2) Bond Market
1) Government Securities Market:
G-sec market consists of central and state government securities. It means that, loans are
being taken by the central and state government to raise capital It is also the most dominant
category in the India debt market.

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2). Bond Market:

It consists of Financial Institutions bonds, corporate bonds and debentures and Public Sector
Units bonds. These bonds are issued to meet financial requirements at a fixed cost and hence
remove uncertainty in financial costs.

Debt Instruments
A contractual or written assurance that enables the issuing part to raise funds by promising to
repay a lender in accordance with terms of a contract.
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. For shorter term, there are
Treasury Bills or T-Bills, which are issued by the RBI for 91 days, 182 days and 364 days.
Corporate Bonds
These bonds come from PSUs and private corporations and are offered for an extensive range
of tenures up to 15 years. There are also some perpetual bonds. 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 demit form and 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 are issued by corporate
entities at a discount to face value.

Recent trends:
India Is Opening its $1.1 Trillion Bond Market to Retail Buyers

India is set to open its sovereign bond market to individual buyers on Friday as it seeks to
widen the investor base to fund the government’s massive borrowing program.

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Prime Minister Narendra Modi will launch the so-called ‘RBI Retail Direct Scheme’ for
investors on Friday, the Reserve Bank of India said in a media invite. Retail investors can
open and maintain their government securities account with the RBI free of cost, it said.

RBI Governor Shaktikanta Das had first flagged this initiative in a February policy review
while calling it a “major structural reform”. In July, the central bank said investors will have
access to bidding in primary auctions as well as the central bank’s trading platform for
government securities called Negotiated Dealing System-Order Matching Segment, or NDS-
OM.

The move comes at a time when rising inflation adds pressure on the RBI to lift rates. Tighter
monetary policy is likely to weaken the demand for bonds, making it challenging for the
government to execute its near-record borrowing program. Other emerging-market nations in
Asia like the Philippines have also sought to raise funds from citizens to battle the pandemic.

“Given low rates on bank fixed deposits and perception of low risk on government bonds,
retail investors may be inclined to venture into direct investing in gilts,” said Pankaj Pathak,
fund manager at Quantum Asset Management Co. “However, investors should be cautious of
the market risk associated with long-term gilts.”

Yields on India’s benchmark 10-year government bonds have risen in the past five months
amid surging crude prices. They’ve eased in November after New Delhi cut tax on retail
fuels. A report on Friday is expected to show consumer inflation accelerated to 4.40% in
October from 4.35% in the previous month, according to a Bloomberg survey.

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C. Conclusion:
A vibrant corporate bond market provides a suitable alternative to conventional bank
finances and mitigates the vulnerability of foreign currency sources of funds. In india, the
regulators have taken proactive steps and provides the market with tools of risk management.
Efforts are on to enable wider participation the market and create scope for market making.
However, development of debt market is not a one-off affair. We have been able to foster the
development of a deep and liquid G-Sec market in india; and there are issues that need
continued coordination and cooperation between the market participants and the regulator to
develop private bond market for making India’s bond market truly global debt market.

References:
 https://www.mbaknol.com/financial-management/an-overview-of-indian-
capitalmarket/
 http://www.primedatabase.com/Article/dir-00ar2.pdf
 https://1drv.ms/w/s!AgFbk-ap2UGGgRE-lJi3siQRNkPt
 https://www.tomorrowmakers.com/stocks/indian-stock-market-what-are-
newchanges-expected-future-research-article?amp
 https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7995228/
 https://www.investopedia.com/terms/b/bondmarket.asp
 https://www.youtube.com/watch?v=nMLVn_n1hb8&t=574s
 https://tradingeconomics.com/india/government-bond-yield
 https://www.thehindubusinessline.com/opinion/we-need-a-vibrant-corporate-
bondmarket/article37403478.ece
 https://www.financialexpress.com/money/bond-markets-invest-in-g-secs-with-
rbiretail-direct-gilt/2376199

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