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Indian Capital Market

Organized Indian Financial System

Regulators Financial Financial Financial


Instruments Markets Intermediaries

Forex Capital Money Credit


Market Market Market Market

Primary Market

Secondary Market

Money Market Capital Market


Instrument Instrument
Money Market Vs Capital
Market
• It is for short term • It is for long term
• Supplies funds for • Supplies funds for
WC fixed capital
requirement
• Instruments are T-
• Instruments are
bill, CM, etc
shares, debentures,
• Each single etc.
instrument is of • Each single
large amount instrument is of
• Central bank and small amount
Commercial banks • Development bank
are major. and insurance
Conti..
• These • These
instruments do instruments have
not have secondary
secondary market.
market. • Transactions are
• Transactions are at formal place.
on over phone Eg stock market.
and no formal • Transaction have
place to be conducted
• Transaction with the help of
Why Capital Markets Exist
• Capital markets facilitate the transfer of
capital (i.e. financial) assets from one owner
to another.
• They provide liquidity.
– Liquidity refers to how easily an asset can

be transferred without loss of value.


• A side benefit of capital markets is that the
transaction price provides a measure of the
value of the asset.
Role of Capital Markets
• Mobilization of Savings & acceleration of
Capital Formation
• Promotion of Industrial Growth
• Raising of long term Capital
• Ready & Continuous Markets
• Proper Channelisation of Funds
• Provision of a variety of Services
Functions of a capital

market
Disseminate information efficiently
• Enable quick valuation of financial
instruments –both equity and debt
• Provide insurance against market
risk or price risk
• Enable wider participation
• Provide operational efficiency
through
-simplified transaction procedure
- lowering settlement timings and
- lowering transaction costs
•Develop integration among
-real sector and financial sector
-equity and debt instruments
-long term and short term funds
-Private sector and government sector and
-Domestic funds and external funds

•Direct the flow of funds into efficient channels through


-investment
-disinvestment
-reinvestment
Factors contributing to growth
of Indian Capital Market
• Establishment of Development banks & Industrial
financial institution.
• Legislative measures
• Growing public confidence
• Increasing awareness of investment opportunities
• Growth of underwriting business
• Setting up of SEBI
• Mutual Funds
• Credit Rating Agencies
Indian Capital Market -
Historical perspective
• Stock Market was for a privileged few
• Archaic systems - Out cry method
• Lack of Transparency - High tones costs
• No use of Technology
• Outdated banking system
• Volumes - less than Rs. 300 cr per day
• No settlement guarantee mechanism - High
risks
Indian Capital markets -
Chronology
• 1994-Equity Trading commences on NSE
• 1995-All Trading goes Electronic
• 1996- Depository comes in to existence
• 1999- FIIs Participation- Globalisation
• 2000- over 80% trades in Demat form
• 2001- Major Stocks move to Rolling Sett
• 2003- T+2 settlements in all stocks
• 2003 - Demutualisation of Exchanges
Capital Markets - Reforms
• Each scam has brought in reforms - 1992 / 2001
• Screen based Trading through NSE
• Capital adequacy norms stipulated
• Dematerialization of Shares - risks of fraudulent
paper eliminated
• Entry of Foreign Investors
• Investor awareness programs
• Rolling settlements
• Inter-action between banking and exchanges
CAPITAL MARKET REFORMS
IN INDIA
• The 1990s have witnessed the
emergence of the securities
market as a major source of
finance for trade and industry in
India.
• A growing number of companies
have been accessing the securities
market rather than depending on
loans from financial institutions /
banks.
Reforms / Initiatives post
2000
• Corporatisation of exchange memberships
• Banning of Badla / ALBM
• Introduction of Derivative products - Index /
Stock Futures & Options
• Reforms/Changes in the margining system
• STP - electronic contracts
• Margin Lending
• Securities Lending
MARKET STRUCTURE
(JULY 31, 2005)
• 22 Stock Exchanges,
• Over 10000 Electronic Terminals at over 400 locations all
over India.
• 9108 Stock Brokers and 14582 Sub brokers
• 9644 Listed Companies
• 2 Depositories and 483 Depository Participants
• 128 Merchant Bankers, 59 Underwriters
• 34 Debenture Trustees, 96 Portfolio Managers
• 83 Registrars & Transfer Agents, 59 Bankers to Issue
• 4 Credit Rating Agencies
Indian Capital Market

Market Instruments Intermediaries Regulator

SEBI
•Brokers
•Investment Bankers
Primary Secondary •Stock Exchanges
•Underwriters

Equity Hybrid Debt


Players

CRA Corporate Intermediaries Individual Banks/FI FDI /FII


Stock Exchanges in INDIA
• Mangalore Stock • Bombay Stock Exchange
Exchange
• Hyderabad Stock
• Madhya Pradesh Stock
Exchange Exchange
• Uttar Pradesh Stock • Vadodara Stock
Exchange Exchange
• Coimbatore Stock • The Ahmedabad Stock
Exchange
• Cochin Stock Exchange Exchange
• Bangalore Stock • Magadh Stock Exchange
Exchange • Gauhati Stock Exchange
• Saurashtra Kutch Stock • Bhubaneswar Stock
Exchange
• Pune Stock Exchange Exchange
• National Stock Exchange • Jaipur Stock Exchange
• OTC Exchange of India • Delhi Stock Exchange
• Calcutta Stock Exchange Assoc
• Inter-connected Stock • Ludhiana Stock
Exchange (NEW)
Growth Pattern of the Indian Stock Market
Sl.N As on 31st 1946 1961 1971 1975 1980 1985 1991 1995
o. December
No. of 7 7 8 8 9 14 20 22
1
Stock Exchanges
No. of 1125 1203 1599 1552 2265 4344 6229 8593
2
Listed Cos.
No. of Stock 1506 2111 2838 3230 3697 6174 8967 11784
3 Issues of
Listed Cos.
Capital of Listed 270 753 1812 2614 3973 9723 32041 59583
4
Cos. (Cr. Rs.)
Market value of 971 1292 2675 3273 6750 25302 11027 47812
5 Capital of Listed 9 1
Cos. (Cr. Rs.)
Capital per 24 63 113 168 175 224 514 693
6 Listed Cos. (4/2)
(Lakh Rs.)
Market Value of 86 107 167 211 298 582 1770 5564
Capital per Listed
7
Cos. (Lakh Rs.)
(5/2)
Appreciated value 358 170 148 126 170 260 344 803
of Capital per
8
Primary Market
• Market for new issues/fresh
capital (IPO’s)
• New issues mkt.
• Participants
issuer
investors
intermediaries
Mobilization of funds
- Prospectus
- Right issues and
- Private placement
Free pricing regime
• Before 1992,Regulator of new issues was CCI
(Controller of Capital Issues)

• Approval from CCI for raising funds in primary mkt.

• Timing, quantum ,and pricing of the issue were decided


by the controller

• New co.s can issue shares only at par

• Existing companies with substantial reserves could


issue shares at premium

• Fixed price mechanism resulted in under pricing of


many issues

• After 1992, promoter and merchant banker together


decide the price of the issue.
Fixed price mechanism of
new issue
• CCI regime
• To offer share at a fixed price
• Firm and merchant banker decide an
offer price
• Investor opinion wasn’t considered
while setting offer price
• Long time lag among the date of
pricing, the date the issue opens ,and
the date when trading commences
• Raises possibility of price fluctuations in
intervening period
Book Building-A new issue
mechanism in India
• mechanism through which an
offer price for IPOs based on
investor’s demand is
determined .
• Auction of shares
Book building process
1. Appointment of book runner i.e.
merchant banker
2. Preparation and submission of draft
documents to SEBI and obtaining of
an acknowledgement card.
3. A specified price band (range) is to be
determined by issuer and book
runner
4. Different price levels are invited from
syndicate members .Adv. Should
mention opening and closing dates for
the bids
5. Issuer arrives at a final cut-off rate &
final allocation in consultation with
book runner and lead manager
Contd…..
6.Issuer and book runner may
impose restrictions on number of
shares that can be allotted to each
client
7. Final prospectus is filed with the
(ROC) along with procurement
agreement
8.Placement portion opens for
subscription
9.Placement portion closes a day
before the opening of public issue
portion
Book building options
• 75% book building
Issue can be categorized into
-placement portion
- Public portion (net offer to the
public)
• 100% book building
Limitations of book
building method
• No road shows done
• Still dependent on good faith
• No. of investors invited to apply are limited
• Lack of transparency
• Not proved to be good price discovery
mechanism
• Lag time of more than 60 days between issue
pricing and listing
• Issuer may have to sell cheap due to collective
bargaining
• High institution holding may affect stock’s
liquidity
• Volatility may increase due to bulk offloading
Distinction between
Primary and Secondary
Market
• Functional differences
• Organizational differences
• Nature of contributions to
industrial finance
Secondary Market

Secondary/Stock
market!!!!
JARGON OF EQUITY
MARKET:
• SECURITY

• BOND

• STOCK
1)COMMON STOCKS
2)PREFERRED STOCKS

• SHARE

• MUTUAL FUNDS.

• PAR VALUE vs. MARKET VALUE

• BULLISH vs. BEARISH


How does the stock market function?
•Stock exchanges
•Brokers
•Registrars
•Depositories and their participants
•Securities and Exchange Board of India (SEBI)
Financial Regulators
•SEBI
•RBI
•Ministry of finance
The role of the stock exchange
• Corporate governance

• Creates investment opportunities for


small investors

• Government raises capital for


development projects

• Barometer of the economy


Functions Of SEBI
• Regulates Capital Market.

• Checks Trading of securities.

• Checks the malpractices in securities market.


• It enhances investor's knowledge on market by providing
education.

• It regulates the stockbrokers and sub-brokers.

• To promote Research and Investigation


Functions Of RBI
Monetary Authority:
Issuer of currency:

Regulator and supervisor of the financial system:

Authority On Foreign Exchange:

Developmental role:

Related Functions:
WHY STOCK PRICE RISES?
The price of every stock increases or decreases for the
following possible reasons:

• News about company.


• News about the country.
• Exchange rate regime.
• Depends on demand and supply for that stock.
DRAWBACKS OF INDIAN STOCK MARKET:

•Unethical practices.
•Big irrational greed, excessive speculation.
•Lack of protection to interests of the genuine and small
investors .
•Trading is extremely thin and restricted.
•Structural and organisational imbalance in the growth of the
stock market.
•Volatility of the market has increased over the years.
HOW TO MAKE MONEY
FROM CAITAL MARKET?

patience, profound knowledge.


Best guess.
Diversification .
Portfolio
management.
Indian Capital Market
deficiencies
• Lack of transparency
• Physical settlement
• Variety of manipulative practices
• Institutional deficiencies
• Insider trading