PROJECT ON

INDIAN CAPITAL MARKET

BACHELOR OF COMMERCE
FINANCIAL MARKETS

SEMESTER V
(20012-13)

SUBMITTED BY:
SUDHA TANGRAJ DEVENDRAN
ROLL NO. 07

V.E.S. COLLEGE OF ARTS, SCIENCE & COMMERCE,

SINDHI SOCIETY, CHEMBUR, MUMBAI – 400071

1
 INDIAN CAPITAL MARKET

BACHELOR OF COMMERCE
FINANCIAL MARKETS

SEMESTER V
(20012-13)

SUBMITTED
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS
FOR THE AWARD OF THE DEGREE OF
BACHELOR OF COMMERCE – FINANCIAL MARKETS

BY
SUDHA TANGRAJ DEVENDRAN
ROLL NO. 07
V.E.S. COLLEGE OF ARTS, SCIENCE & COMMERCE,
SINDHI SOCIETY, CHEMBUR, MUMBAI – 400071

V.E.S. COLLEGE OF ARTS, SCIENCE & COMMERCE,

SINDHI SOCIETY, CHEMBUR, MUMBAI – 400071
2
 C E R T I F I C A T E

This is to certify that Ms. ______________________________

of B.Com – Financial Markets – Semester V (2012-13) has
successfully completed the project on ___________________ under
the guidance of ________________________.

Course Coordinator Principal

Internal Examiner / Project guide

External Examiner

3
 DECLARATION

I, _________________________________ the student of B.Com

Financial markets Semester V (2012-13) hereby declare that I
have completed this project on __________________________ .

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

knowledge.

SUDHA T DEVENDRAN
Roll No.07

4
 ACKNOWLEDGEMENT

No project of such magnitude can be complete without the support

of various people whom I would like to express my sincere
gratitude.
This project bears on imprint of many peoples. I sincerely thank to
my project guide MRS MINAL GANDHI, for guidance and
encouragement in carrying out this project work. And ensured that
we would do the best in the project.
I also wish to express my gratitude to Faculty’s supervisor of
V.E.S.COLLEGE OF ARTS SCIENCE AND COMMERCE, who
gave us her valuable suggestions and support whenever required for
this report.
I would also like to thank the teaching and the non teaching staff
Who rendered their help during the period of my project work  Last
but not least I wish to avail myself of this opportunity, express a
sense of gratitude to my beloved parents for their manual support,
strength and help and to my friends. I deem it my privilege to
acknowledge and remain indebted to them due to their undefined
contribution for the accomplishment of my success of my final
report.

5
 RESEARCH
DESIGN

PURPOSE OF STUDY
The purpose of the study is to provide depth information on the INDIAN CAPITAL
MARKET. Various factors contributing to the growth of the capital market in India.
And the various products available in the market to the market participants
including the FII’S. And providing knowledge of the functioning of the capital
market.
OBJECTIVES OF THE STUDY
The objective of this study is to show the present status of INDIAN
SECURITIES MARKET and how it is gaining world wide acceptance. In the
age of stiff competition gaining its momentum to the world financial markets
in the race of highly regulated markets around the glode.

6
 RESEARCH METHODOLOGY

INFORMATION
RESEARCH

SECONDARY
DATA

INETERNET BOOKS

7
 PREFACE
In last decade or so, it has been observed that there has been a paradigm shift in
Indian capital market. The applications of technology in the payment and
settlement systems have made the Indian capital market comparable with the
international capital markets. Now, the market features a developed regulatory
mechanism and a modern market infrastructure with growing market
capitalization, market liquidity, and mobilisation of resources.
However, the market has witnessed its worst time with the recent global financial
crisis that originated from the US sub-prime mortgage market and spread over to
the entire world as a contagion. The capital market of India delivered a sluggish
performance. In this context, it is imperative to conduct empirical analysis to study
the performance of Indian capital market. It is with this backdrop, this paper is an
attempt to analyze the key market parameters such as market size, market liquidity,
market turnover ratio, market volatility, and market efficiency of Indian capital
market
The Securities and Exchange Board of India is now widely perceived as a robust
institution, a role model for regulators in emerging markets.
Impressive though these achievements are, there are several areas where the
market still falls short of international benchmarks. Less than one-fifth of equity is
owned by retail investors. In a country of over 1 billion people, less than 25
million individuals participate directly or indirectly in the market.
Therefore, the growth of Indian capital market happens to contribute to the
sustainable development of Indian economy.

8
 EXECUTIVE SUMMARY
Indian securities markets have undergone many changes during the last decade
There have been a Far-reaching developments taken place in the secondary market
also over the past decade. The number of recognized stock exchanges increased to
24. Diverse forms of organizational structures
The study of Indian capital begins with the introduction of the Indian financial
system. And this study shows that the capital market is the backbone of the Indian
economy.
The capital market is important to a country’s economic and social system. It plays
the crucial roles of capital raising for both public and private sectors, promoting
balance and stability in the financial system, decreasing dependency on the
banking sector, driving the economy forward and creating jobs, as well as being an
alternative method for savings. A strong capital market will lessen the impact of
economic fluctuations which can be compounded by the fast-flowing nature of
capital.
Corporate earnings are growing at healthy pace and the markets are a reflection of
the health of the Indian economy
The efforts of the last decade in developing an efficient market infrastructure have
created a market that has made transactions transparent and settlements safer. The
new derivative market has provided a transparent avenue for managing risk to a
wide variety of investors.
SEBI’s objective has been to encourage the development of the market while
protecting the interests of investors. The task is however only partly done.

9
Rapidly expanding markets require the industry and regulators to continually shore
up their skills and resources. The establishment of the National Institute of
Securities Markets is an effort to develop securities market skills and knowledge
across the board for investors, students, market intermediaries and professionals
and regulators.
Now days, a significant portion of Indian corporate sector's securities are held by
Foreign Institutional Investors, such as pension funds, mutual funds and insurance
companies.
The immediate impact of market opening to FIIs is the surge in trading volume and
capital inflows to domestic stock markets, result of which the boom in stock prices.
In all the equity investors only don’t play a vital role in the imbursement of the
Indian economy playing as participants in the capital markets but foreign
institutional investors drive the Indian market to a higher difference and
contribution as a major driving force to the economy in all.

10
11
 INDEX
CONTENTS
Chapter Subjects Covered Page
no. No.
1 INDIAN FINANCIAL SYSTEM
1.1 INTRODUCTION
1.2 FINANCIAL SYSTEM
1.3 PRE-REFORMS PHASE
1.4 FINANCIAL SECTOR REFORMS IN INDIA
1.5 CONSTITUENTS OF INDIAN FINANCIAL SYSTEM
2 INDIAN FINACIAL MARKETS
2.1 INTRODUCTION:-FINANCIAL MARKETS
2.2 HISTORY OF FINANCIAL MARKETS IN INDIA.
2.3 DEVELOPMENT OF FINANCIAL MARKETS
2.4 TYPES OF FINANCIAL MARKETS
2.5 FUNCTIONS OF FINANCIAL MARKETS
2.6 FINANCIAL ENGINEERING
3 INDIAN CAPITAL MARKET

3.1 What is Capital Market?

3.2 Evolution Of Capital Market

3.3 Post-independence Scenario

3.4 Structure of Indian Capital Market

3.5 Capital Market Instruments

3.6 Significance, Role Or Function Of Capital Market

3.7 Role Of Capital Market In India’s Industrial Growth

3.8 Factors Contributing To The Growth Of Capital Market In

12
 India
4 REFORMS IN INDIAN CAPITAL MARKETS

4.1 Development in India’s securities market

5 Financial Regulatory Body In India

5.1 SEBI Regulates Indian Capital Market

6 FOREIGN INSTITUTIONAL INVESTORS IN

INDIAN CAPITAL MARKET
6.1 INTRODUCTION.

6.2 WHY FIIS REQUIRED?

6.3 History Of FII

7 CONCLUSION

13
 CHAPTER 1
INDIAN FINANCIAL SYSTEM

INTRODUCTION.
14
Economic growth and development of any country depends upon a well-knit
financial system. Financial system comprises a set of sub-systems of financial
institutions financial markets, financial instruments and services which help in the
formation of capital. Thus a financial system provides a mechanism by which
savings are transformed into investments and it can be said that financial system
play an significant role in economic growth of the country by mobilizing surplus
funds and utilizing them effectively for productive purpose.

The financial system is characterized by the presence of integrated, organized and

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

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

15
Pre-reforms Phase
Until the early 1990s, the role of the financial system in India was primarily
restricted to the function of channeling resources from the surplus to deficit
sectors. Whereas the financial system performed this role reasonably well, its
operations came to be marked by some serious deficiencies over the years.
The banking sector suffered from lack of competition, low capital base, low
Productivity and high intermediation cost.
After the nationalization of large banks in 1969 and 1980, the Government-owned
banks dominated the banking sector. The role of technology was minimal and the
quality of service was not given adequate importance. Banks also did not follow
proper risk management systems and the prudential standards were weak. All
these resulted in poor asset quality and low profitability. Among non-banking

16
financial intermediaries, development finance institutions (DFIs) operated in an
over-protected environment with most of the funding coming from assured
sources at concessional terms. In the insurance sector, there was little
competition.
The mutual fund industry also suffered from lack of competition and was
dominated for long by one institution, viz., the Unit Trust of India. Non-banking
financial companies (NBFCs) grew rapidly, but there was no regulation of their
asset side. Financial markets were characterized by control over pricing of
financial assets, barriers to entry, high transaction costs and restrictions on
movement of funds/participants between the market segments. This apart from
inhibiting the development of the markets also affected their efficiency.

FINANCIAL SECTOR REFORMS IN INDIA

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

17
effected, the developments so far have brought the Indian financial system closer
to global standards.
The Indian financial system has undergone structural transformation over the
past decade. The financial sector has acquired strength, efficiency and stability by
the combined effect of competition, regulatory measures, and policy
environment. While competition, consolidation and convergence have been
recognized as the key drivers of the banking sector in the coming years

Constituents of Indian Financial system

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

FINANCIAL
INSTITUTIONS

THE
FINANCIAL INDIAN FINANCIAL
SERVICES
FINANCIAL MARKETS

SYSTEM

FINANCIAL
INTSTRUMENTS

18
 1) FINANCIAL INSTITUTIONS
Financial institutions are intermediaries that mobilize savings and facilitate
allocation of funds in an efficient manner.
Financial Institutions can be classified as banking and non-banking financial
institutions. Banking institutions are creators of credit while non-banking financial
institutions are purveyors of credit. In India non-banking financial institutions are
the Developmental Financial institutions (DFIs) and Non-Banking Financial
Companies (NBFCs) as well as housing finance companies (HFCs) are the major
institutional purveyors of credit.
Financial institutions can also be classified as term finance institutions such as
Industrial Development Bank of India (IDBI), Industrial credit and Investment
Corporation of India (ICICI), Industrial Finance Corporation of India (IFCI), Small
Industries Development bank of India (SIDBI) and Industrial Investment bank of
India (IIBI).
Financial institutions can be specialized finance institutions like the Export
Import Bank of India (EXIM), Tourism Finance Corporation of India (TFCI),
ICICI Venture, Infrastructure development Finance Company (IDFC) and sectoral
such as the National Bank for Agricultural and Rural Development (NABARD)
and National Housing Bank (NHB).
Investment institutions in the business of Mutual Funds (UTI, Public Sector and
Private Sector Mutual Funds) and Insurance activity (LIC, GC and its subsidiaries)
are also classified as financial institutions

19
 2)FINANCIAL MARKETS
Financial markets are a mechanism
enabling participants to deal in
financial claims. The markets also
provide a facility in which their
demands and requirements interact to
set a price for such claims.
The main organized finance markets in
India are the Money Market and Capital
Market. Money market is for short-term securities while the Capital Market is for
long-term securities.
Financial Markets are also classified as primary and secondary markets. While
primary market deals in new issues, the secondary market is meant for trading in
outstanding or existing securities.
It's through financial markets the financial system of an economy works. The main
functions of financial markets are:
1. to facilitate creation and allocation of credit  and liquidity;
2. to serve as intermediaries for mobilization of savings;
3. to assist process of balanced economic growth;
4. to provide financial convenience 

20
 3)FINANCIAL INSTRUMENTS

A Financial instrument is a claim

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

21
 4)FINANCIAL SERVICES

Efficiency of emerging financial system largely depends upon the quality and
variety of financial services provided by financial intermediaries. The term
financial services can be defined
as "activities, benefits and
satisfaction connected with sale
of money that offers to users and
customers, financial related
value".
Financial intermediaries
provide key financial services
such as merchant banking,
leasing, and hire purchase, credit-
rating and so on. Financial
services rendered by financial intermediary’s bridge the gap between lack of
knowledge on the part of investors and increasing sophistication of financial
instruments and markets. These financial services are vital for creation of firms,
expansion and economic growth.
The financial services sector includes broking firms, investment services,
national banks, private banks, mutual funds, car and home loans, and equity
market

22
Chapter 2
INDIAN FINANCIAL
MARKETS

23
INTRODUCTION:-FINANCIAL MARKETS
In Simple terms, “Financial Markets refers to as those centers and arrangement
which facilitate buying and selling of financial claims, assets and services”.
Typically, in other words, Financial Markets are defined, “By having transparent
pricing, basic regulations on trading, cost, fees & market forces determining the
price of securities that are traded”.
Financial market is a market where financial instruments are exchanged or traded
and helps in determining the prices of the assets that are traded in and is also called
the price discovery process
The arrangement that provide facilities for buying and selling of financial claims
and services are called as Financial Markets. As in India organized Financial
Markets play a vital role as because it facilitates the exchange of liquid assets. As it
attains the equilibrium position when the demand and supply are equal to each
other. It includes Issue of Equity shares, Granting of loans by term lending
institutions, Deposit of Money into banks, sale of shares and debentures so on.
Financial markets provide the following three major economic functions:
1) Price discovery
2) Liquidity
3) Reduction of transaction costs

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

24
want to lend or invest funds will be allocated among those needing funds and raise
those funds by issuing financial instruments.

2) Liquidity function provides an opportunity for investors to sell a financial

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

3) The function of reduction of transaction costs is performed, when financial

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

HISTORY OF FINANCIAL MARKETS IN INDIA

India Financial market is one of the oldest in the world and is considered to be the
fastest growing and best among all the markets of the emerging economies. The
history of Indian capital markets dates back 200 years toward the end of the 18th
century when India was under the rule of the East India Company.
The development of the capital market in India concentrated around Mumbai
where no less than 200 to 250 securities brokers were active during the second half
of the 19th century. The financial market in

25
India today is more developed than many other sectors because it was organized
long before with the securities exchanges of Mumbai, Ahmadabad and Kolkata
were established as early as the 19th century. 

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

Today there are 21 regional securities exchanges in India in addition to the

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

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

A remarkable feature of the growth

of the Indian economy in recent years has been the role played by its securities

26
markets in assisting and fuelling that growth with money rose within the economy.
This was in marked contrast to the initial phase of growth in many of the fast
growing economies of East Asia that witnessed huge doses of FDI spurring growth
in their initial days of market decontrol. During this phase in India much of the
organized sector has been affected by high growth as the financial markets played
an all-inclusive role in sustaining financial resource mobilization. Many Public
Sector Undertakings that decided to offload part of their equity were also helped by
the well-organized securities market in India. 
Before 1990’s there were very few stock exchanges existing in India. Then in
1994, India’s stock market was dominated by Bombay Stock Exchange. It was
the oldest stock exchange in India introduced in year 1875 which began formal
trading. BSE hold all the securities transaction under it. Earlier in 1987 banks
were allowed to enter into the business by breaking the monopoly of UTI and
maintained a dominant position in market. Before 1992 many factors obstructed
the expansion of Equity Trading. As all the fresh capital issues were controlled
under Capital Issue Control Act.
The integration of IT into the capital market infrastructure has been particularly
smooth in India due to the country’s world class IT industry. This has pushed up
the operational efficiency of the Indian stock market to global standards and as a
result the country has been able to capitalize
on its high growth and attract foreign capital
like never before. 
The regulating authority for capital markets in
India is the SEBI (Securities and Exchange
Board of India). SEBI came into prominence
in the 1990s after the capital markets
experienced some turbulence. It had to take
27
drastic measures to plug many loopholes that were exploited by certain market
forces to advance their vested interests. After this initial phase of struggle SEBI
has grown in strength as the regulator of Indian’s capital markets and as one of the
country’s most important institution.

DEVELOPMENT OF FINANCIAL MARKETS

Well-developed securities markets are the backbone of any financial system. Apart
from providing the medium for channelizing funds for investment purposes, they
aid in pricing of assets and serve as a
barometer of the financial health of the
economy. The Indian securities markets have
witnessed far reaching reforms in the post-
liberalization era in terms of market design,
Technological developments, settlement
practices and introduction of new
instruments.
The markets have achieved tremendous
stability and as a result, have attracted huge investments by foreign investors.
There still is tremendous scope for improvement in both the equity market and the
government securities market. However, it is the corporate debt market, which
needs to be given particular emphasis given its importance for providing long-term
finance for development.
The main impulse for developing securities markets, including both equity and
debt segments, depends on country-specific histories and more specifically, in the
context of the financial system, it relates to creating more complete financial

28
markets, avoiding banks from taking on excessive credit, risk diversification in the
financial system, financing government deficit, conducting monetary policy,
sterilizing capital inflows and providing a range of long-term assets.
After the Reforms made by SEBI there are many changes seen in the
Financial Markets over the last few years. Due to the rapid changes taken place
there has been great development in Indian Securities Markets especially in the
secondary market by having advancement in Technology, Online based
transactions have modernized the stock exchange.
Indian equity markets are considered to be relatively large in terms of
listed companies and total market capitalization. Number of Listed companies
has also increased from 5968 in March 1990 to about 25000 by May 2011.
Market capitalization has also grown 15 times during the same period. Paperless
Transaction took place.
Even banks and other Financial Institutions started dealing with
securities as they also have become a part of the Financial Markets. Primary
Dealers were introduced in 1955. All the transaction can be taken place online
without the help of brokers or intermediaries.

TYPES OF FINANCIAL MARKETS

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

29
markets, and each market can be distinguished by maturity structure and trading
structure of its securities.

CLASSIFICATION OF FINANCIAL MARKETS

FINANCIAL MARKET

Organized Market Unorganized Market

Capital Market Money Market Foreign Exchange Market

Moneylenders,
Indigenous
Bankers etc

I. Unorganized Market.
In these markets there are a number of money lenders, indigenous bankers,
traders and brokers etc. who lend money to the public. There are also private
finance companies, chit funds etc. whose activities are not controlled by RBI.
Recently RBI has taken various steps to bring the unorganized sector into
organized fold but they were not successful in it as because regulation in financial
dealings is still inadequate and their financial instruments had not been
standardized.
30
 II. Organized Markets
Organized System represent the structure or nationalized banking, co-
operative banks & development banks set by the government through various
enactments and regulations. This includes private sector also the government/ RBI
controls this sector.
The organized Market is further classified into various types:
 Capital Market
 Money Market
 Foreign Exchange Market

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

II. Money market

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

31
 iv. Short term Loan Market etc.

III. Foreign Exchange Market

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

FUNCTIONS OF FINANCIAL MARKETS.

There are various functions which are followed by the Financial Markets for
the smooth functioning of the organization. So the various functions of Financial
Markets are as follows:
1. Liquidity in the Market:
It allows the investors to sell their Financial Assets and convert them into
cash by providing liquidity in the market.
2. Use of Funds Productively:
32
 Financial Markets allow using the funds in a productive manner as those funds
are borrowed from the lenders.
3. Helps to Sell Financial Assets:
The Financial Markets not only use the funds of the borrowers but also
provides mechanism for selling the financial assets of the investor.
4. Earns Interest or Dividend:
Financial Markets allows lenders to earn interest or dividend on their surplus
investible funds.
5. Provide Funds to Borrowers:
Financial Markets provides funds to the borrowers to enable them to carry out
their investment plans.
6. Lower Transaction cost:
Financial Markets save a market player from the transaction cost that is the
cost locating the counter party of the business

FINANCIAL ENGINEERING.
Financial engineering is a multidisciplinary field of creating new financial
instruments and strategies
Financial engineering is a process that utilizes existing financial instruments to
create a new and enhanced product of some type. Just about any combination
of financial instruments and products can be used in financial engineering. The
process may involve a simple union between two products, or make use of several

33
different products to create a new product that provides benefits that none of the
other instruments could manage on their own.
One excellent example of financial engineering is financial reinsurance.
Companies that offer reinsurance options essentially provide a way for the ceding
insurer to minimize a drain on available resources when a major shift in premium
growth or reduction is taking place. In this scenario, the process
of financial engineering helps to create a stable environment that will allow the
insurer to remain solvent and stable even when extreme conditions exist.
For the consumer, the work of a financial engineer to create new finance product
offerings can be a great advantage. In some instances, the new and improved
product is simply a repackage of several independent but complimentary products
made available at a lower price. For example, the consumer may find that
purchasing insurance coverage that provides dental, hospital, and prescription
coverage may be significantly less expensive than purchasing individual plans.

CHAPTER 3
INDIAN CAPITAL
MARKET
34
35
What is Capital Market?
Capital markets are like any other markets, but differ in terms of the products
traded and their organization. Capital markets deal with the trading of securities.
Capital markets provide avenue where companies can raise funds to expand on
their businesses or establish new ones by issuing securities owned by the
companies. Like businesses in the private sector, Government issue its securities to
raise funds in capital markets to build electricity damn, construct new roads,
bridges by issues.
It is an organized market mechanism for
effective and efficient transfer of money
capital or financial resources from the
investing class i.e. from (individual or
institutional savers) to the entrepreneur class
(individual engaged in business or services) in
the private or public sectors of the economy.

In a broader sense, According to Goldsmith “ The capital market of a

modern economy has two basic functions first the allocation of savings among
users and investment; second the facilitation of the transfer of existing assets,
tangible and intangible among individual economic units”.
Capital Market is generally understood as the market for long term funds. It
provides long term debt and equity finance for the government and the corporate
sector. It is a best performing markets in the world since last few years. It
facilitates the transfer of capital i.e. financial assets from one owner to another.

36
The rapid growth in Indian capital markets and the spread of “Equity culture” has
doubtlessly strained its infrastructure and regulatory resources. Nevertheless
securities market is a watchdog as SEBI plays a vital role in redressing investors’
grievances.

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

Evolution Of Capital Market

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

37
of brokers increased to about 200 to 250. However, at the end of the American
Civil War, in 1865, a disastrous slump.
At the end of the American Civil War, the brokers who thrived out of Civil War in
1874, found a place in a street now appropriately called as Dalal Street where they
would conveniently assemble and transact business. In 1887, they formally
established in Bombay, the "Native Share and Stock Brokers' Association" which
is alternatively known as “The Stock Exchange ". In 1895, the Stock Exchange
acquired a premise in the same street and it was inaugurated in 1899. Thus, the
Stock Exchange at Bombay was consolidated.
There have been many fluctuations in stock market due to American war and
battles in Europe. Then there were dealing of brokers and government started.
Controller of Capital Issues Act was passed in 1947.
During such period the wealth and expenditure tax was in hands of Mr. T. T.
Krishnamachari in 1957 who was the finance minister. During such period war was
occurred in China has occurred a great fall in price of capital market. The BSE
building, icon of Indian Capital Market is called the P.J. tower in the memory.
Then the planning process started in India in 1951which gave importance to
formation of institutions and markets through securities Regulation Act 1956.After
this act basic law was followed by securities markets to regulate the share price in
the market. After such regulations of SEBI scams of Harshad Mehta had occurred
in the year 1992 due to which shares in market fall down. Then to uplift the stock
market mid in -1990 Gujarat stock exchange got listed in BSE. Then in end of
1990 emergence of Ketan Parekh and information companies and entertainment
companies came into the limelight. This period stock of software companies were
most favored stock in US. Then there was a meltdown in software stock in early
2000.

38
 Even Multinational companies were in operation with Indian stock market
this lead to sale of fresh stock in Indian markets due to which the shares of other
companies were down. The next big boom and mass retail investors happened in
1980, with the entry of Mr. Dhirubhai Ambani who was said to be the father of
modern capital markets. Reliance public issue and subsequent issues on various
reliance companies generated huge interest. Due to reliance shares people were
aware of the share certificate that were not educated. Mr. Dhirubhai Ambani
really gave a helping hand to stock market in India.

Post-independence Scenario
Most of the exchanges suffered almost a total eclipse during depression. Lahore
Exchange was closed during partition of the country and later migrated to Delhi
and merged with Delhi Stock Exchange.
Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963.
Most of the other exchanges languished till 1957 when they applied to the Central
Government for recognition under the Securities Contracts (Regulation) Act, 1956.
Only Bombay, Calcutta, Madras, Ahmadabad, Delhi, Hyderabad and Indore, the
well established exchanges, were recognized under the Act. Some of the members
of the other Associations were required to be admitted by the recognized stock
exchanges on a concessional basis, but acting on the principle of unitary control,
all these pseudo stock exchanges were refused recognition by the Government of
India and they thereupon ceased to function.
Thus, during early sixties there were eight recognized stock exchanges in India
(mentioned above). The number virtually remained unchanged, for nearly two
decades. During eighties, however, many stock exchanges were established:
Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange Association
Limited (at Kanpur, 1982), and Pune Stock Exchange Limited (1982), Ludhiana
39
Stock Exchange Association Limited (1983), Gauhati Stock Exchange Limited
(1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadha Stock
Exchange Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989),
Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra Kutch Stock
Exchange Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at
Baroda, 1990) and recently established exchanges - Coimbatore and Meerut. Thus,
at present, there are totally twenty one recognized stock exchanges in India
Sr.No. As on 31st 1946 1961 1971 1975 1980 1985 1991 1995
December
1 No. of 7 7 8 8 9 14 20 22
Stock Exchanges
2 No. of  1125 1203 1599 1552 2265 4344 6229 8593
Listed Cos.
3 No. of Stock 1506 2111 2838 3230 3697 6174 8967 11784
Issues of 
Listed Cos.
4 Capital of Listed 270 753 1812 2614 3973 9723 32041 59583
Cos. (Cr. Rs.)
5 Market value of 971 1292 2675 3273 6750 25302 110279 478121
Capital of Listed
Cos. (Cr. Rs.)
6 Capital per 24 63 113 168 175 224 514 693
Listed Cos. (4/2)
(Lakh Rs.)
7 Market Value of 86 107 167 211 298 582 1770 5564
Capital per Listed
Cos. (Lakh Rs.)
(5/2)
8 Appreciated value  358 170 148 126 170 260 344 803
of Capital per
Listed Cos. (Lak Rs.)
excluding the Over the Counter Exchange of India Limited (OTCEI) and the

National Stock Exchange of India Limited (NSEIL).

The Table given below portrays the overall growth pattern of Indian stock markets
since independence. It is quite evident from the Table that Indian stock markets
have not only grown just in number of exchanges, but also in number of listed

40
companies and in capital of listed companies. The remarkable growth after 1985
can be clearly seen from the Table, and this was due to the favouring government

Structure of Indian Capital Market

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

41
primary market helps to raise fresh capital in the market. In the secondary market,
the buying and selling (trading) of capital market instruments takes place. The
following chart will help us in understanding the organizational structure of the
Indian Capital market.
1) Government Securities Market :
This is also known as the Gilt-edged market. This refers to the market for
government and semi-government securities backed by the Reserve Bank of India
(RBI). There is no speculation in securities. Huge volume of transaction can take
place as because it is obligated under Banking Regulation Act 1949.

2) Industrial Securities Market

New securities INDUSTRIAL Issued Securities

issued
SECURITIES Trade
MARKET

PRIMARY MARKET SECONDARY MARKET

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

42
 In primary market fresh capital is raised by companies by issuing new shares,
bonds, units of mutual funds and debentures. However in the secondary market
already existing that is old shares and debentures are traded.
This trading takes place through the registered stock exchanges. In India we have
three prominent stock exchanges. They are the Bombay Stock Exchange (BSE),
the National Stock Exchange (NSE) and Over the Counter Exchange of India
(OTCEI)

I. Primary market
Primary market provides an opportunity to the issuers of securities, both
Government and corporations, to raise funds through issue of securities. The
securities may be issued in the domestic or international markets, at face value, or
at a discount (i.e. below their face value) or at a premium (i.e. above their face
value).
II. Secondary market
Secondary market refers to a market, where securities that are already issued by the
Government or corporations, are traded between buyers and sellers of those
securities. The securities traded in the secondary market could be in the nature of
equity, debt, derivatives etc.

3) Development Financial Institutions (DFIs) :

This is yet another important segment of Indian capital market. This
Comprises various financial institutions. These can be special purpose
institutions like IFCI, ICICI, SFCs, IDBI, IIBI, UTI, etc. These financial
institutions provide long term finance for those purposes for which they are set
up.

43
 ICICI
BANK
SFCI IFCI
BANK
DEVELOPMENT
BANKS

EXIM
NABARD
BANK
SDBI
BANK

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

44
CAPITAL MARKET INSTRUMENTS.
1) Equity (instrument of ownership)
Equity shares are instruments issued by companies to raise capital and it
represents the title to the ownership of a company. You become an owner of a
company by subscribing to its equity capital (whereby you will be allotted shares)
or by buying its shares from its existing owner(s).
As a shareholder, you bear the entrepreneurial risk of the business venture and are
entitled to benefits of ownership like share in the distributed profit (dividend) etc.
The returns earned in equity depend upon the profits made by the company.
Company’s future growth etc.

2. Debt (loan instruments)

A. Corporate debt
45
I) Debentures are instrument issued by companies to raise debt capital. As
An investor, you lend you money to the company, in return for its promise
To pay you interest at a fixed rate (usually payable half yearly on specific
Dates) and to repay the loan amount on a specified maturity date say after
5/7/10 years (redemption).
Normally specific asset(s) of the company are held (secured) in favour of
Debenture holders. This can be liquidated, if the company is unable to pay
The interest or principal amount. Unlike loans, you can buy or sell these
Instruments in the market.

Types of debentures that are offered are as follows:

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

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

Types of bonds
Regular Income Bonds provide a stable source of income at regular,
predetermined intervals
-Tax-Saving Bonds offer tax exemption up to a specified amount of
investment, depending on the scheme and the Government notification.
46
Examples are:
-Infrastructure Bonds under Section 88 of the Income Tax Act, 1961 •
NABARD/ NHAI/REC Bonds under Section 54EC of the Income Tax
Act, 1961
• RBI Tax Relief Bonds

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

D. Money Market instruments (loan instruments up to one year tenure)

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

47
3. Hybrid instruments (combination of ownership and loan instruments)
• Preferred Stock / Preference shares entitle you to receive dividend at a
fixed rate. Importantly, this dividend had to be paid to you before dividend
can be paid to equity shareholders. In the event of liquidation of the
company, your claim to the company’s surplus will be higher than that of
the equity holders, but however, below the claims of the company’s
creditors, bondholders / debenture holders.
• Cumulative Preference Shares: A type of preference shares on which
dividend accumulates if remains unpaid. All arrears of preference dividend
have to be paid out before paying dividend on equity shares.
• Cumulative Convertible Preference Shares: A type of preference
shares where the dividend payable on the same accumulates, if not paid.
After a specified date, these shares will be converted into equity capital of
the company.
• Participating Preference Shares gives you the right to participate in
profits of the company after the specified fixed dividend is paid.
Participation right is linked with the quantum of dividend paid on the equity
shares over and above a particular specified level.

4. Mutual Funds
Mutual funds collect money from many investors and invest this corpus in
equity, debt or a combination of both, in a professional and transparent
manner. In return for your investment, you receive units of mutual funds
which entitle you to the benefit of the collective return earned by the fund,
after reduction of management fees.
Mutual funds offer different schemes to cater to the needs of the investor are
regulated by securities and Exchange board of India (SEBI)
48
 Types of Mutual Funds
At the fundamental level, there are three types of mutual funds:
 Equity funds (stocks)
 Fixed-income funds (bonds)
 Money market funds

5. Repo / Reverse Repo

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

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

49
to protect themselves against fluctuations in the price of their crops. From the time
it was sown to the time it was ready for harvest, farmers would face price
uncertainties. Through the use of simple derivative products, it was possible for the
farmers to partially or fully transfer price risks by locking in asset prices.
From hedging devices, derivatives have grown as major trading tool. Traders may
execute their views on various underlying by going long or short on derivatives of
different types.

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

TYPES OF DERIVATIVES
1) FORWARDS
A forward contract is an agreement
to buy or sell an asset on a specified
date for a specified price. One of the
parties to the contract assumes a long
position and agrees to buy the
underlying asset on a certain
specified future date for a certain
specified price. The other party
assumes a short position and agrees
50
to sell the asset on the same date for the same price, other contract details like
delivery date, price and quantity are negotiated bilaterally by the parties to the
contract. The forward contracts are normally traded outside the exchange.

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

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

51
with futures, the process of closing out options positions will cause contracts to
cease to exist, diminishing the total number.
Thus an option is the right to buy or sell a specified amount of a financial
instrument at a pre-arranged price on or before a particular date.

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

ii) Currency Swaps: - A currency swap is a

foreign exchange agreement between two parties to exchange a given amount of
one currency for another and after a specified period of time, to give back the
original amount swapped.

52
SIGNIFICANCE, ROLE OR FUNCTION OF CAPITAL MARKET
Capital Market plays a significant role in the national economy. A
developed, dynamic and vibrant capital market can immensely contribute for
speedy economic growth and development.
Let us get acquainted with the important functions and role of the capital
market:
1. Provide Liquidity for Financial Instrument
Capital markets provide liquidity to the Financial Instruments which
are traded in the Secondary Market. It depends on the
Mobilization of savings
Capital market is an important source for mobilizing savings from the
economy. It mobilizes funds people for further investments in the productive
channels of an economy. In that sense it activates the ideal monetary resources
and puts them in proper investments.

2. Provision of Investment Avenue

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

3. Proper regulation of Funds

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

53
 4. Continuous availability of Funds
Capital market is the place where the investment avenue is
continuously available for long term investment. This is a liquid market as it
makes fund available on continues basis. Both buyers and sellers can easily buy
and sell securities as they are continuously available.

5. Raise capital for Industry

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

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

7. Speed up Economic growth and Development

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

54
ROLE OF CAPITAL MARKET IN INDIA’S INDUSTRIAL GROWTH
1. Mobilization of Savings and Acceleration of Capital Formation.
In developing countries like India plagued by paucity of resources and
increasing demand for investments by industrial organizations and
governments, the importance of the capital market is self evident.
2. Promotion of Industrial Growth.
 The capital market is a central market through which resources are
transferred to the industrial sector of the economy. The existence of such an
institution encourages people to invest in productive channels rather than in
the unproductive sectors like real estate, bullion etc. Thus it stimulates
industrial growth and economic development of the country by mobilizing
funds for investment in the corporate securities.
3. Raising Long-Term Capital. 
The existence of a stock exchange enables companies to raise permanent
capital. The investors cannot commit their funds for a permanent period but
companies require funds permanently. The stock exchange resolves this
clash of interests by offering an opportunity to investors to buy or sell their
securities while permanent capital with the company remains unaffected.
4. Ready and Continuous Market.
The stock exchange provides a central convenient place where buyers and
sellers can easily purchase and sell securities. The element of easy
marketability makes investment in securities more liquid as compared to
other assets.
5. Proper Channelization of Funds.
An efficient capital market not only creates liquidity through its pricing
mechanism but also functions to allocate resources to the most efficient
industries. The prevailing market price of a security and relative yield are the
55
 guiding factors for the people to channelize their funds in a particular
company. This ensures effective utilization of funds in the public interest.
6. Provision of a Variety of Services.
The financial institutions functioning in the capital market provide a variety
of services, the more important ones being the following:
(I) Grant of long-term and medium-term loans to entrepreneurs to enable
them to establish, expand or modernize business units
(II) Provision of underwriting facilities;
(III) Assistance in the promotion of companies (this function is done by the
development banks like the idbi);
(IV) Participation in equity capital;
(V) Expert advice on management of investment in industrial securities.

FACTORS CONTRIBUTING TO THE GROWTH OF CAPITAL MARKET

IN INDIA
1. Establishment of development banks and industrial financing
institutions. 
With a view to providing long-term funds to industry, the government
set up the Industrial Finance Corporation of India (IFCI) in 1948, i.e., soon
after Independence. This was followed by the setting up of a number of
other development banks and financial institutions like the Industrial Credit
and Investment Corporation of India (ICICI) in 1955, Industrial
Development Bank of India (lOBI) in 1964, Industrial Reconstruction
Corporation of India (IRCI) in 1971, various State Financial Corporation’s
(SFCs) at the State level, Unit Trust of India (UTI) in 1964, State Industrial
Development Corporations, Life Insurance Corporations of India etc. In
addition, 14 major commercial banks were nationalized in 1969.
56
2. Growing public confidence. 
The early post-Liberalizations’ phase witnessed increasing interest in
the stock markets. The small investor who earlier shied away from the
securities market and trusted the traditional modes of investment (deposits in
commercial banks and post offices) showed marked preference in favour of
shares and debentures. As a result, public issues of most of the good
companies were over-subscribed many times.
3. Increasing awareness of investment opportunities. 
The last few years have witnessed increasing awareness of investment
opportunities among the general public. Business newspapers and financial
journals, (The Economic Times, The Financial Express, Business Line,
Business Standard, Business India, Business Today, Business World, Money
Outlook etc.) have made the people increasingly aware of new long-term
investment opportunities in the securities market.
4. Setting up of SEBI. 
The Securities and Exchange Board of India (SEBI) was set up in 1988
and was given statutory recognition in 1992. Among other things, the Board
has been mandated to create an environment which would facilitate
mobilization of adequate resources through the securities market and its
efficient allocation.
5. Credit rating agencies. 
There are three credit rating agencies operating in India at present
CRISIL, ICRA and CARE. CRISIL (the Credit Rating Information Services
of India Limited) was set up in 1988, ICRA Ltd. (the Investment
Information and Credit Rating Agency of India Limited) was set up in 1991
and CARE (Credit Analysis and Research Limited) was set up in 1993.

57
CHAPTER 4
REFORMS IN INDIAN CAPITAL
MARKETS

DEVELOPMENT IN INDIAN SECURITIES MARKET

Over a period, the Indian securities market has undergone remarkable changes
and grown exponentially, particularly in terms of resource mobilisation,
intermediaries, the number of listed stocks, market capitalisation, and turnover and
investor population. The following paragraphs list the principal reform measures
undertaken since 1992.
1) Creation of Market Regulator
Securities and Exchange Board of India (SEBI), the securities market regulator
in India, was established under SEBI Act 1992, with the main objective and
responsibility for (i) protecting the interests of investors insecurities,(ii) promoting
the development of the securities market, and (iii) regulating the securities market.
2) Demutualization
58
 Historically, stock exchanges were owned, controlled and managed by the
brokers. In case of disputes, integrity of the stock exchange suffered. NSE,
however, was set up with a pure demutualised governance structure, having
ownership, management and trading with three different sets of people. Currently,
all the stock exchanges in India have a demutualised set up.
3) Clearing Corporation
The anonymous electronic order book
ushered in by the NSE did not permit
members to assess credit risk of the
counter-party and thus necessitated some
innovation in this area. To address this
concern, NSE had set up the first clearing
corporation, viz. National Securities
Clearing Corporation Ltd.(NSCCL), which commenced its operations in April
1996.
3. Growing Merchant banking Activities
Many Indian and foreign commercial banks have set up their merchant
banking divisions in the last few years. These divisions provide financial services
like underwriting facilities, issue organizing, consultancy services etc
4. Investor Protection
In order to protect the interest
of the investors and promote
Awareness, the Central Government
(Ministry of Corporate Affairs
established the Investor Education and
Protection Fund (IEPF) in October
2001. With the similar objectives, the
59
Exchanges and SEBI also maintain investor protection funds to take care of
investor claims. SEBI and the stock exchanges have also set up investor
grievance / service cells for redress of investor grievance. All these agencies and
investor associations also organise investor education and awareness
programmes.
5. Screen Based Trading
Prior to setting up of NSE, the trading on stock exchanges in India was
based on an open outcry system. The system was inefficient and time
Consuming because of its inability to provide immediate matching or recording
of trades. In order to provide efficiency, liquidity and transparency, NSE
introduced a nation-wide on-line fully automated screen based trading system
(SBTS) on the on November 3, 1994.
6. Growth of Derivative Transaction
Since June 2000, the NSE has introduced the derivatives trading in the
equities. In November 2001 it has introduced the future and options transactions.
These innovative products have given variety for investment in capital market.

7. Indian Capital Market Chronology

1994: Equity Trading Commences on NSE
1995: All Trading goes Electronic
1996: Depository comes into Existence
1999: Foreign institutional Investors participate in Globalization
2000: Over 80% Trades in Demat Form
2001: Major Stock Settlement
2003: T+3 Settlement in all stock
2003: Demutualization of Exchanges

60
CHAPTER 5
FINANCIAL REGULATORY BODY
IN INDIA.

61
SEBI Regulates Indian Capital Market
Financial sector in India has experienced a better environment to grow with the
presence of higher competition. The financial system in India is regulated by
independent regulators in the field of banking, insurance, and mortgage and capital
market. Government of India plays a significant role in controlling the financial
market in India.
For the smooth functioning of the capital market a proper coordination among
above organizations and segments is a prerequisite. In order to regulate, promote
and direct the progress of the Indian Capital Market, the government has set up
'Securities and Exchange Board of India' (SEBI). SEBI is the supreme authority
governing and regulating the Capital Market of India.
The securities market enables capital formation in the economy and enhances
wealth of investors who make the right choices. The investor confidence is the key
prerequisite for the emergence of a vibrant and deep capital market. The role of
regulator in creating and enhancing investor confidence is, therefore, paramount.
Accordingly, Securities and Exchange Board of India (SEBI) was set up by an Act
of Parliament of India in April, 1992 with a mandate to
• Protect the interest of investors
• Promote the development of and
• Regulate the securities market
Market regulation
SEBI prescribes the conditions for issuer companies to raise capital from the pubic
so as to protect the interest of the suppliers of capital (investors). The extensive
disclosures prescribed for issuers facilitate informed investment decision making
by investors while simultaneously ensuring quality of the issuer.

62
Further, it has prescribed norms for such corporates on ‘on going’ basis and also
during their restructuring (like substantial acquisition, buy back and delisting of
shares) to safeguard the interest of investors.
To ensure fair and high standards of service to investors, SEBI allows only fit and
proper entities to operate in the capital markets as intermediaries. In this regard, it
has prescribed detailed and uniform norms of their registration. Further, to ensure
market integrity, it has prescribed norms for fair market practices including
prohibiting fraudulent and unfair trade practices and insider trading. Detailed
norms for safeguarding the interest of investors in secondary markets have also
been prescribed. SEBI also prescribes conditions for operation of collective
investor schemes, including Mutual Funds.

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

Investor protection:
63
 The above mentioned regulatory framework and the market development
measures of SEBI are invariably geared towards protecting the interest of
investors. Besides, SEBI also has a comprehensive mechanism to facilitate
redressal of investor’s grievances. Further, in keeping with its belief that an
informed investor is a protected investor, SEBI promotes education and awareness
of investors. Moreover, mechanisms for dispute redressal (arbitration at stock
exchanges) and to compensate investors have also been provided.

64
CHAPTER 6
FOREIGN INSTITUTIONAL
INVESTORS IN INDIAN CAPITAL
MARKET

65
INTRODUCTION.
FOREIGN INSTITUTIONAL INVESTOR: The term Foreign Institutional
Investor is defined
By SEBI as under:
"Means an institution established or incorporated outside India which proposes to
make investment in India in securities. Provided that a domestic asset management
company or domestic portfolio manager who manages funds raised or collected or
brought from outside India for investment in India on behalf of a sub-account, shall
be deemed to be a Foreign Institutional Investor."
Foreign Investment refers to investments made by residents of a country in
financial assets and production process of another country
Entities covered by the term ‘FII’ include “Overseas pension funds, mutual funds,
investment trust, asset Management Company, Nominee Company, bank,
institutional portfolio manager, university funds, endowments, foundations,
charitable trusts, charitable societies etc.
The term is used most commonly in India to refer to outside companies investing
in the financial markets of India. International institutional investors must register
with Securities & Exchange Board of India (SEBI) to participate in the market.
One of the major market regulations pertaining to FII involves placing limits on FII
ownership in Indian companies. They actually evaluate the shares and deposits in a
portfolio.

66
WHY FIIS REQUIRED?
FIIs contribute to the foreign exchange inflow as the funds from multilateral
finance institutions and FDI (Foreign direct investment) are insufficient. Following
are the some advantages of FIIs.
• It lowers cost of capital, access to cheap global credit.
• It supplements domestic savings and investments.
• It leads to higher asset prices in the Indian market.
• And has also led to considerable amount of reforms in capital market and
financial sector.

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

INFLUENCE OF FII ON INDIAN MARKET

Positive fundamentals combined with fast growing markets have made India an
attractive destination for foreign institutional investors (FIIs). Portfolio investments
67
brought in by FIIs have been the most dynamic source of capital to emerging
markets in 1990s. At the same time there is unease over the volatility in foreign
institutional investment flows and its impact on the stock market and the Indian
economy.
Apart from the impact they create on the market, their holdings will influence firm
performance.
Some major impact of FII on stock market:
• They increased depth and breadth of the market.
• They played major role in expanding securities business.
• Their policy on focusing on fundamentals of share had caused efficient pricing of
share.

68
CONCLUSION
Financial markets facilitate effective implementation of monetary policy by
serving as a link in the transmission mechanism between monetary policy and the
real economy.  In India, although financial markets have existed for a long time,
they remained relatively underdeveloped. Concerted efforts to develop
the financial markets towards global standards began in the early 1990s as a part of
broader financial sector reforms
The Indian capital market has witnessed a radical transformation within a period of
just over one decade. During the early part of 1990s the ranking of Indian capital
market with reference to global standards of efficiency, safety, market integrity
etc., was low. With reference to the risk indices, in particular, the Indian capital
market was regarded as one of the worst as it figured almost at the bottom of the
league. However, the scenario has now completely changed. Because of extensive
capital market reforms carried out over the period of the last one decade or so, the
setting up and extension of activities of NSE. And steps taken by SEBI, the Indian
capital market is now ranked in the top league. In fact, it is now considered to be
way ahead of many developed country capital markets.
The lack of an advanced and vibrant capital market can lead to underutilization of
financial resources. The developed capital market also provides access to the
foreign capital for domestic industry. Thus capital market definitely plays a
constructive role in the overall development of an economy.
The Indian financial system has undergone structural transformation over the past
decade. The financial sector has acquired strength, efficiency and stability by the
combined effect of competition, regulatory measures, and policy environment.
While competition, consolidation and convergence have been recognized as the
key drivers of the banking sector in the coming years

69
70
BIBLIOGRAPHY

SEARCH ENGINES:
• GOOGLE
• WIKIPEDIA

SITES:
 www.scribd.com
 www.investopedia.com
 www.economictimes.com
• www.sebi.gov.in
• www.rbi.org.in
• www.bseindia.com

BOOKS:
• INDIAN FINANCIAL SYSTEM – BHARTI.V.PATHAK
• MONETARY ECONOMICS: INSTITUTIONS, S.B.GUPTA,
• THEORY AND POLICY
• CAPITAL MARKET R.H. PATIL

71