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 Table of Contents

Introduction 2

Capital Market in Indian Context 2

Saving and Investment in India: Backdrop 3

Pre-Reform Capital Market in India 3

Post-Reform Capital Market in India 4

Role of Capital Market in India’s Industrial growth 6

Foreign Investments in India 7

Capital Market Instruments 8

Components of Capital Market 14

Primary Market

Secondary Market

Mutual Fund

Regulatory Framework 16

SEBI

General Market Indices 18

BSE

NSE

Conclusion 20

References 21

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Introduction

A capital market is a market for securities (debt or equity), where business enterprises
(companies) and governments can raise long-term funds. It is defined as a market in which
money is provided for periods longer than a year, as the raising of short-term funds takes place
on other markets (e.g., the money market). The capital market includes the stock market (equity
securities) and the bond market (debt).

Capital Market - Indian Context

There are 22 stock exchanges in India, the first being the Bombay Stock Exchange
(BSE), which began formal trading in 1875, making it one of the oldest in Asia. Over the last
few years, there has been a rapid change in the Indian securities market, especially in the
secondary market. The number of listed companies increased from 5,968 in March 1990 to about
10,000 by May 1998 and market capitalization has grown almost 11 times during the same
period. The debt market, however, is almost nonexistent in India even though there has been a
large volume of Government bonds traded. Banks and financial institutions have been holding a
substantial part of these bonds as statutory liquidity requirement. The portfolio restrictions on
financial institutions’ statutory liquidity requirement are still in place.

Before 1992, many factors obstructed the expansion of equity trading. Fresh capital
issues were con- trolled through the Capital Issues Control Act. Trading practices were not
transparent, and there was a large amount of insider trading. Recognizing the importance of
increasing investor protection, several measures were enacted to improve the fairness of the
capital market. The Securities and Exchange Board of India (SEBI) was established in 1988.
Despite the rules it set, problems continued to exist, including those relating to disclosure
criteria, lack of broker capital adequacy, and poor regulation of merchant bankers and
underwriters.
There have been significant reforms in the regulation of the securities market since 1992
in conjunction with overall economic and financial reforms. In 1992, the SEBI Act was enacted
giving SEBI statutory status as an apex regulatory body. And a series of re- forms was
introduced to improve investor protection, automation of stock trading, integration of national
markets, and efficiency of market operations.
India has seen a tremendous change in the secondary market for equity. Its equity market will
most likely be comparable with the world’s most advanced secondary markets within a year or
two. The key ingredients that underlie market quality in India’s equity market are:

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  Exchanges based on open electronic limit order book.
 Nationwide integrated market with a large number of informed traders and fluency of
short or long positions; and
 No counterparty risk.

Capital markets may be classified as primary markets and secondary markets. In primary
markets, new stock or bond issues are sold to investors via a mechanism known as underwriting.
In the secondary markets, existing securities are sold and bought among investors or traders,
usually on a securities exchange, over-the-counter, or elsewhere.

Saving and Investment in India: Backdrop

India has a high savings rate. It averaged 20 percent of GDP in the 1980s and increased to 25
percent during 1993–97. The share of savings invested in financial assets is still relatively small
but has been increasing rapidly rising from 3 percent in 1971 to 6 percent in 1981 and 10 percent
from 1991 through 1996. While the increase in financial assets is impressive, most savings are
still held in the form of physical assets: gold, land, buildings, or commodities

Market liberalization has been slower in the banking sector than in most of the rest of the
economy. Most banks are state owned and face a number of management and organizational
impediments, including strong and militant labor unions. Banks have generally offered savers
low interest rates. As a result, the banking system has been receiving a declining share of
incremental savings. Households have been shifting their savings away from banks and other
forms of interest-paying assets and into equity markets. In 1990 (before financial re- form), 75
percent of incremental financial savings went to banks and 25 percent to equity markets. In 1996,
banks received 47 percent and equity markets 53 percent. The change in share of assets
intermediated by the equity market is dramatic, but so is the absolute magnitude. Total assets
intermediated (by both banks and equity markets) quadrupled. Even correcting for inflation, the
dollar equivalent increase in total assets intermediated doubled over the period 1990–96. Indian
corporations raised domestic debt and equity totaling $6.4 billion equivalent in 1994–95, $8.5
billion in 1995–96, and $9.3 billion in1996–97. Indian companies have also been raising
substantial sums on the international capital markets—$4.7 billion in 1994–95, $2.3 billion in
1995–96, and $4.7 billion in 1996–97.

There has been a recent and dramatic shift toward increased issuance of debt instruments. The
equity/debt split was 97 percent to 3 percent in 1994–95; by 1996–97 it was 23 percent to 77
percent.

Pre-Reform Capital Market in India (Before 1992)

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 The Indian securities market before 1992 had the following characteristics:

 Fragmented regulation; multiplicity of administration.

 Primary markets not in the mainstream of the financial system.
 Poor disclosure in prospectus. Prospectus and balance sheet not made available to
investors.
 Investors faced problems of delays (refund, transfer, etc.)
 Stock exchanges regulated through the Securities Contracts (Regulations) Act. No
inspection of stock exchanges undertaken.
 FIIs also permitted to invest in unlisted securities and corporate and Government debt.
 The Depositories Act enacted to facilitate the electronic book entry transfer of securities
through depositories.
 Guidelines for Offshore Venture Capital Funds announced. SEBI regulations for venture
capital funds become effective.
 Stock Exchanges run as brokers clubs; management dominated by brokers.
 Merchant bankers and other intermediaries un- regulated.
 No concept of capital adequacy.
 Mutual funds—virtually unregulated with potential for conflicts of interest in structure.
 Poor disclosures by mutual funds; net asset value (NAV) not published; no valuation
norms.
 Private sector mutual funds not permitted.
 Takeovers regulated only through listing agreement between the stock exchange and the
company.
 No prohibition of insider trading, or fraudulent and unfair trade practices.

Post-Reform Capital Market in India – (Since 1992)

The development in Indian securities market since 1992 can be summarized as follows:

 Capital Issues (Control) Act of 1947 repealed and the office of Controller of Capital
Issues abolished; control over price and premium of shares removed. Companies now
free to raise funds from securities markets after filing prospectus with the Securities and
Exchange Board of India (SEBI).
 The power to regulate stock exchanges delegated to SEBI by the Government.
 SEBI introduces regulations for primary and other secondary market intermediaries,
bringing them within the regulatory framework.
 Reforms by SEBI in the primary market include improved disclosure standards,
introduction of prudential norms, and simplification of issue procedures. Companies
required disclosing all material facts and specific risk factors associated with their
projects while making public issues.

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  Listing agreements of stock exchanges amended to require listed companies to furnish
annual statement to the exchanges showing variations between financial projections and
projected utilization of funds in the offer document and actual figures. This is to enable
shareholders to make comparisons between performance and promises.
 SEBI introduces a code of advertisement for public issues to ensure fair and truthful
disclosures.
 Disclosure norms further strengthened by introducing cash flow statements.
 New issue procedures introduced—book building for institutional investors—aimed at
reducing costs of issue.
 SEBI introduces regulations governing substantial acquisition of shares and takeovers
and lays down conditions under which disclosures and mandatory public offers are to be
made to the shareholders. Regulations further revised and strengthened in 1996.
 SEBI reconstitutes the governing boards of the stock exchanges and introduces capital
adequacy norms for broker accounts.
 Private mutual funds permitted and several such funds already set up. All mutual funds
allowed to apply for firm allotment in public issues—also aimed at reducing issue costs.
 Regulations for mutual funds revised in 1996, giving more flexibility to fund managers
while increasing transparency, disclosure, and account- ability.
 Over-the-Counter Exchange of India formed.
 National Stock Exchange (NSE) establishment as a stock exchange with nationwide
electronic trading.
 Bombay Stock Exchange (BSE) introduces screen-based trading; 15 stock exchanges
now have screened-based trading. BSE granted per- mission to expand its trading
network to other centers.
 Capital adequacy requirement for brokers enforced.
 System of mark-to-market margins introduced in the stock exchanges.
 Stock lending scheme introduced.
 Transparency brought out in short selling.
 National Securities Clearing Corporation, Ltd. set up by NSE.
 BSE in the process of implementing a trade guarantee scheme.
 SEBI strengthens surveillance mechanisms and directs all stock exchanges to have
separate surveillance departments.
 SEBI strengthens enforcement of its regulations. Begins the process of prosecuting
companies for misstatements and ensures refunds of application money in several issues
on account of misstatements in the prospectus.

The market capitalization post the reforms can be viewed in the below diagram.

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Role of Capital Market in India’s Industrial growth
1. Raising long-term capital

The presence of stock exchange has enable companies to raise permanent capital.
The investors cannot commit their funds for a permanent period, but companies require
funds permanently for its operations and growth. This clash of interest is resolved by the
stock exchange, by providing opportunity to investors to buy or sell their securities while
permanent capital with the company remains unaffected.

2. Promotion of Industrial growth

Capital market is the central market through which resources are transferred to
industrial sector of the economy. This kind of setup encourages people to invest in
productive channels rather than in unproductive channels like real estate, etc. Thus it
simulates industrial growth and economic development.

3. Mobilization of savings and acceleration of capital

In developing countries like India with paucity of resources and increasing
demand for investment, the importance of such a setup is evident. The features of
reasonable return and liquidity in the stock exchange are definite incentives for people to
invest in securities. This accelerates capital formation in the country.
4. Proper channelization of funds
The pricing mechanism assures usage of funds for the most efficient industries.
The prevailing market price of security and the relative yield directs the people to invest
in a particular company. This ensures effective use of capital to public interest.
5. Ready and continuous market
The system provides a convenient place where buyers and sellers can easily
transact the securities. Thus making the securities more liquid compared to other asset.

Foreign Investments in India

FIIs have been allowed to invest in the Indian securities market since September 1992
when the Guidelines for Foreign Institutional Investment were issued by the Government. The
SEBI (Foreign Institutional Investors) Regulations were enforced in November1995, largely
based on these Guidelines. The regulations require FIIs to register with SEBI and to obtain
approval from the Reserve Bank of India (RBI) under the Foreign Exchange Regulation Act to
buy and sell securities, open foreign currency and rupee bank accounts, and to remit and
repatriate funds. Once SEBI registration has been obtained, an FII does not require any further
permission to buy or sell securities or to transfer funds in and out of the country, subject to
payment of applicable tax.

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 Foreign investors, whether registered as FIIs or not, may also invest in Indian securities
outside the FII process. Such investment requires case-by-case approval from the Foreign
Investment Promotion Board (FIPB) in the Ministry of Industry and RBI, or only from RBI
depending on the size of investment and the industry in which the investment is to be made.
Investment in Indian securities is also possible through the purchase of GDRs. Foreign currency
convertible bonds and foreign currency bonds issued by Indians that are listed, traded, and settled
overseas are mainly denominated in dollars. Foreign financial service institutions have also been
allowed to set up joint ventures in stock broking, asset management companies, merchant
banking, and other financial services firms along with Indian partners.

Foreign portfolio investments in Indian companies are limited to individual foreign

ownership at 10 per- cent of the total issued capital of any one company and to aggregate foreign
ownership at 30 percent of the total issued capital of any one company. FIIs’ net investment was
positive until October 1997 and their cumulative investments reached $9.1 billion in the same
month. But since then, it has turned negative due to the Asian financial crisis. As of Dec 2010
the FII investments in India are about $ 30.36 Billion.

The FII investment over years are given below in the table
Indicator Units Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00
FII investment: Purchase Rs.crore 5592.7 7631.1 9693.5 15554 18695 16727 57930
FII investment: Sales Rs.crore 466.5 2834.6 2751.7 6979.6 12737 18092 47287
FII investment: Net investment Rs.crore 5126.5 4796.3 6942 8574.5 5957.2 -1365 10644
FII investment: Net investment in dollars Mln. USD 1634.1 1528.3 2035.7 2432.1 1650.1 -334.9 2579.7

Indicator Units Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10
FII investment: Purchase Rs.crore 73747 50557 47395 149352 215146 350663 533764 947771 613595 844456
FII investment: Sales Rs.crore 64108 41785 44314 100435 172163 309040 500900 882699 659977 701238
FII investment: Net investment Rs.crore 9638.9 8771.7 3081.3 48918 42983 41624 32865 65073 -46382 143218
FII investment: Net investment in dollars Mln. USD 2091.1 1841.3 648 10723 9694.6 9397 7273.8 16188 -9950 30361

The data shows that the FIIs were varying over years and even it were negative in a
couple of years. Comparison of the FIIs over the years with the Secondary market BSE-100
shows that the current and recent past seeing lot of FIIs coming into India.

Capital Market Instruments

The capital market is characterized by a large variety of financial instruments: equity and
preference shares, fully convertible debentures (FCDs), non-convertible debentures (NCDs) and
partly convertible debentures (PCDs) currently dominate the capital market, however new
instruments are being introduced such as debentures bundled with warrants, participating
preference shares, zero-coupon bonds, secured premium notes, etc.

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1. SECURED PREMIUM NOTES

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

warrant, redeemable after a notice period, say four to seven years. The warrants attached to
SPN gives the holder the right to apply and get allotted equity shares; provided the SPN is
fully paid. There is a lock-in period for SPN during which no interest will be paid for an
invested amount. The SPN holder has an option to sell back the SPN to the company at par
value after the lock in period. If the holder exercises this option, no interest/ premium will be
paid on redemption. In case the SPN holder holds it further, the holder will be repaid the
principal amount along with the additional amount of interest/ premium on redemption in
installments as decided by the company. The conversion of detachable warrants into equity
shares will have to be done within the time limit notified by the company. Ex: TISCO issued
warrants for the first time in India in the year 1992 to raise 1212 crore.

2. DEEP DISCOUNT BONDS

Are bonds that sell at a significant discount from par value and has no coupon rate or
lower coupon rate than the prevailing rates of fixed-income securities with a similar risk
profile. They are designed to meet the long term funds requirements of the issuer and
investors who are not looking for immediate return. Ex: IDBI deep discount bonds for Rs 1
lac repayable after 25 years were sold at a discount price of Rs. 2,700.

3. EQUITY SHARES WITH DETACHABLE WARRANTS

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

4. FULLY CONVERTIBLE DEBENTURES WITH INTEREST

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

5. EQUIPREF

They are fully convertible cumulative preference shares. This instrument is divided
into 2 parts namely Part A & Part B. Part A is convertible into equity shares automatically/

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compulsorily on date of allotment without any application by the allottee. Part B is redeemed
at par or converted into equity after a lock in period at the option of the investor, at a price
30% lower than the average market price.

6. SWEAT EQUITY SHARES

The phrase `sweat equity' refers to equity shares given to the company's employees on
favorable terms, in recognition of their work. Sweat equity usually takes the form of giving
options to employees to buy shares of the company, so they become part owners and
participate in the profits, apart from earning salary. This gives a boost to the sentiments of
employees and motivates them to work harder towards the goals of the company.

7. TRACKING STOCKS

A tracking stock is a security issued by a parent company to track the results of one of
its subsidiaries or lines of business; without having claim on the assets of the division or the
parent company. It is also known as "designer stock". Ex: QQQQ, which is an exchange-
traded fund that mirrors the returns of the Nasdaq 100 index

8. DISASTER BONDS

Also known as Catastrophe or CAT Bonds, Disaster Bond is a high-yield debt

instrument that is usually linked with insurance and meant to raise money in case of a
catastrophe. It has a special condition that states that if the issuer (insurance or Reinsurance
Company) suffers a loss from a particular pre-defined catastrophe, then the issuer's obligation
to pay interest and/or repay the principal is either deferred or completely forgiven. Ex:
Mexico sold $290 million in catastrophe bonds, becoming the first country to use a World
Bank program that passes the cost of natural disasters to investors. Goldman Sachs Group
Inc. and Swiss Reinsurance Co. managed the bond sale, which will pay investors unless an
earthquake or hurricane triggers a transfer of the funds to the Mexican government.

9. MORTGAGE BACKED SECURITIES (MBS)

MBS is a type of asset-backed security, basically a debt obligation that represents a

claim on the cash flows from mortgage loans, most commonly on residential property.
Mortgage- backed securities represent claims and derive their ultimate values from the
principal and payments on the loans in the pool. These payments can be further broken down
into different classes of securities, depending on the riskiness of different mortgages as they
are classified under the MBS.

 Mortgage originators to refill their investments

 New instruments to collect funds from the market, very economic and more effective
 Conversion of assets into funds

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  Financial companies save on the costs of maintenance of the assets and other costs
related to assets, reducing overheads and increasing profit ratio.

Kinds of Mortgage Backed Securities:

 Commercial mortgage backed securities: backed by mortgages on commercial

property.
 Collateralized mortgage obligation: a more complex MBS in which the
mortgages are ordered into tranches by some quality (such as repayment time), with
each tranche sold as a separate security.
 Stripped mortgage backed securities: Each mortgage payment is partly used to pay
down the loan's principal and partly used to pay the interest on it
 Residential mortgage backed securities: backed by mortgages on residential property

1. GLOBAL DEPOSITORY RECEIPTS/ AMERICAN DEPOSITORY RECEIPTS

A negotiable certificate held in the bank of one country (depository) representing a

specific number of shares of a stock traded on an exchange of another country. GDR
facilitate trade of shares, and are commonly used to invest in companies from developing or
emerging markets. GDR prices are often close to values of related shares, but they are traded
and settled independently of the underlying share. If the depository receipt is traded in the
United States of America (USA), it is called an American Depository Receipt, or an ADR. If
the depository receipt is traded in a country other than USA, it is called a Global Depository
Receipt, or a GDR.

financial market – since ADRs and GDRs are traded like any other stock, NRIs and
foreigners can buy these using their regular equity trading accounts. Ex: HDFC Bank, ICICI
Bank, Infosys have issued both ADR and GDR

2. FOREIGN CURRENCY CONVERTIBLE BONDS(FCCBs)

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

3. DERIVATIVES

A derivative is a financial instrument whose characteristics and value depend upon

the characteristics and value of some underlying asset typically commodity, bond,
equity, currency, index, event etc. Advanced investors sometimes purchase or sell

1
derivatives to manage the risk associated with the underlying security, to protect against
fluctuations in value, or to profit from periods of inactivity or decline. Derivatives are often
leveraged, such that a small movement in the underlying value can cause a large difference in
the value of the derivative.

Derivatives are usually broadly categorized into:

 Futures: A financial contract obligating the buyer to purchase an asset, (or the seller
to sell an asset), such as a physical commodity or a financial instrument, at a
predetermined future date and price. Futures contracts detail the quality and quantity
of the underlying asset; they are standardized to facilitate trading on a futures
exchange. Some futures contracts may call for physical delivery of the asset, while
others are settled in cash. The futures markets are characterized by the ability to
use very high leverage relative to stock markets. Some of the most popular assets
on which futures contracts are available are equity stocks, indices, commodities and
currency.
 Options: A financial derivative that represents a contract sold by one party (option
writer) to another party (option holder). The contract offers the buyer the right, but
not the obligation, to buy (call) or sell (put) a security or other financial asset at an
agreed-upon price (the strike price) during a certain period of time or on a specific
date (exercise date).
A call option gives the buyer, the right to buy the asset at a given price. This
'given price' is called 'strike price'. It should be noted that while the holder of the call
option has a right to demand sale of asset from the seller, the seller has only the
obligation and not the right. For Ex: if the buyer wants to buy the asset, the seller has
to sell it. He does not have a right. Similarly a 'put' option gives the buyer a right to
sell the asset at the 'strike price' to the buyer. Here the buyer has the right to
sell and the seller has the obligation to buy. So in any options contract, the
right to exercise the option is vested with the buyer of the contract. The seller of the
contract has only the obligation and no right. As the seller of the contract bears the
obligation, he is paid a price called as 'premium'. Therefore the price that is paid for
buying an option contract is called as premium.
The primary difference between options and futures is that options give the holder
the right to buy or sell the underlying asset at expiration, while the holder of a futures
contract is obligated to fulfill the terms of his/her contract.

1. PARTICIPATORY NOTES

Also referred to as "P-Notes", are financial instruments used by investors or hedge

funds that are not registered with the Securities and Exchange Board of India to invest in
Indian securities. Indian-based brokerages buy India-based securities and then issue
participatory notes to foreign investors. Any dividends or capital gains collected from the

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underlying securities go back to the investors. These are issued by FIIs to entities that want to
invest in the Indian stock market but do not want to register themselves with the SEBI.
RBI, which had sought a ban on PNs, believes that it is tough to establish the beneficial
ownership or the identity of ultimate investors.

2. HEDGE FUND

A hedge fund is an investment fund open to a limited range of investors that

undertakes a wider range of investment and trading activities in both domestic and
international markets, and that, in general, pays a performance fee to its investment manager.
Every hedge fund has its own investment strategy that determines the type of investments
and the methods of investment it undertakes. Hedge funds, as a class, invest in a broad range
of investments including shares, debt and commodities.

3. FUND OF FUNDS

A "fund of funds" (FoF) is an investment strategy of holding a portfolio of other

investment funds rather than investing directly in shares, bonds or other securities. This type
of investing is often referred to as multi-manager investment. A fund of funds allows
investors to achieve a broad diversification and an appropriate asset allocation with
investments in a variety of fund categories that are all wrapped up into one fund.

4. EXCHANGE TRADED FUNDS

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

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

5. GOLD ETF

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

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Components of Capital Market
Primary Market

Since 1991/92, the primary market has grown fast as a result of the removal of
investment restrictions in the overall economy and a repeal of the restrictions imposed by the
Capital Issues Control Act. In 1991/92, Rs62.15 billion was raised in the primary market. This
figure rose to Rs276.21 billion in 1994/95. Since 1995/1996, however, smaller amounts have
been raised due to the overall downtrend in the market and tighter entry barriers introduced by
SEBI for investor protection. Total market capitalization as of 1997/98 was Rs5,898 billion,
equivalent to about half of India’s annual gross domestic product (GDP) for the same fiscal
year. India compares favorably with other emerging markets in this respect.

Secondary Market

The secondary market, also known as the aftermarket, is the financial market where
previously issued securities and financial instruments such as stock, bonds, options, and futures
are bought and sold. The term "secondary market" is also used to refer to the market for any used
goods or assets, or an alternative use for an existing product or asset where the customer base is
the second market (for example, corn has been traditionally used primarily for food production
and feedstock, but a "second" or "third" market has developed for use in ethanol production).
Another commonly referred to usage of secondary market term is to refer to loans which are sold
by a mortgage bank to investors such as Fannie Mae and Freddie Mac.

With primary issuances of securities or financial instruments, or the primary market,

investors purchase these securities directly from issuers such as corporations issuing shares in an
IPO or private placement, or directly from the federal government in the case of treasuries. After
the initial issuance, investors can purchase from other investors in the secondary market.

The secondary market for a variety of assets can vary from loans to stocks, from
fragmented to centralized, and from illiquid to very liquid. The major stock exchanges are the
most visible example of liquid secondary markets - in this case, for stocks of publicly traded
companies. Exchanges such as the New York Stock Exchange, Nasdaq and the American Stock
Exchange provide a centralized, liquid secondary market for the investors who own stocks that
trade on those exchanges. Most bonds and structured products trade “over the counter,” or by
phoning the bond desk of one’s broker-dealer. Loans sometimes trade online using a Loan
Exchange.

Secondary marketing is vital to an efficient and modern capital market.[citation needed]

In the secondary market, securities are sold by and transferred from one investor or speculator to
another. It is therefore important that the secondary market be highly liquid (originally, the only
way to create this liquidity was for investors and speculators to meet at a fixed place regularly;

1
this is how stock exchanges originated, see History of the Stock Exchange). As a general rule,
the greater the number of investors that participate in a given marketplace, and the greater the
centralization of that marketplace, the more liquid the market.

Fundamentally, secondary markets mesh the investor's preference for liquidity (i.e., the
investor's desire not to tie up his or her money for a long period of time, in case the investor
needs it to deal with unforeseen circumstances) with the capital user's preference to be able to
use the capital for an extended period of time.
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C e n tr a l G o v e r n m e Inntd e x8 4 5 . 4 49 4 8 . 4 8 9 9 7 9 7 4 .3 73 2 2 .3 71 7 5 . 9 51 8 4 .2 57 5 8 . 9 19 9 2 1 . 4541 3 9 . 8 1 7 5 4 9 1 0 4 4 1 .156 7 7 7 . 0 15 1 6 5 8 .277 4 9 9 . 3 7
G o v e r n m e n t s t a te I n d e x9 1 1 . 5 35 3 2 . 4 54 4 7 . 0 55 9 5 .8 1 4 0 .7 16 0 6 . 1 68 1 . 6 2 1 7 4 1 4 0 . 1 83 1 1 . 9 6 4 7 1 . 5 6 5 9 3 .7 8 7 8 . 0 5 4 6 2 .6 51 1 9 2 .5 6
P r iv a te s e c to r I n d e x7 9 8 . 5 39 8 9 . 2 57 9 0 . 51 3 5 3 .5684 3 .8 26 3 6 . 19 8 2 .7 25 1 1 2 . 3128 3 1 . 0446 8 2 . 4113 4 1 6 . 72 52 7 8 8 . 6 39 5 3 8 7 .159 0 2 0 .3510 0 3 1 . 0 2

Accurate share price allocates scarce capital more efficiently when new projects are
financed through a new primary market offering, but accuracy may also matter in the secondary
market because:

1) Price accuracy can reduce the agency costs of management, and make hostile takeover a less
risky proposition and thus move capital into the hands of better managers, and

2) Accurate share price aids the efficient allocation of debt finance whether debt offerings or
institutional borrowing.

Investments through secondary markets are formed by a mix of central government and
private sector, but the proportion of investment in private sector has been increasingly more from
year 2005 onwards.

Mutual Fund

Indian investors have been able to invest through mutual funds since 1964, when UTI
was established. Indian mutual funds have been organized through the Indian Trust Acts, under
which they have enjoyed certain tax benefits. Between 1987 and 1992, public sector banks and
insurance companies set up mutual funds. Since 1993, private sector mutual funds have been
allowed, which brought competition to the mutual fund industry. This has resulted in the
introduction of new products and improvement of services. The notification of the SEBI (Mutual
Fund) Regulations of 1993 brought about a restructuring of the mutual fund industry. An arm’s
length relationship is required between the fund sponsor, trustees, custodian, and asset
Management Company. This is in contrast to the previous practice where all three functions,
namely trusteeship, custodianship, and asset management, were often performed by one body,
usually the fund sponsor or its subsidiary. The regulations prescribed disclosure and
advertisement norms for mutual funds, and, for the first time, permitted the entry of private

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sector mutual funds. FIIs registered with SEBI may invest in domestic mutual funds, whether
listed or unlisted.

The 1993 Regulations have been revised on the basis of the recommendations of the
Mutual Funds 2000 Report prepared by SEBI. The revised regulations strongly emphasize the
governance of mutual funds and increase the responsibility of the trustees in overseeing the
functions of the asset management company. Mutual funds are now required to obtain the
consent of investors for any change in the “fundamental attributes” of a scheme, on the basis of
which unit holders have invested. The revised regulations require disclosures in terms of
portfolio com- position, transactions by schemes of mutual funds with sponsors or affiliates of
sponsors, with the as- set management company and trustees, and also with respect to personal
transactions of key personnel of asset management companies and of trustees.
Indicator Units Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10
Mutual Funds: Number of schemes launched Numbers 97 189 414 612 551 174
Mutual Funds:Sales of total schemes Rs.crore 840694 1099559 1938592 4464376 5426353 10019023
Mutual Funds: Sales of new schemes Rs.crore 25811 70583 140298 160773 103177 36166
Mutual Funds: Sales of existing schemes Rs.crore 814883 1028976 1798294 4303603 5323176 9982857
Mutual Funds: Redemption Rs.crore 837508 1045336 1844512 4310575 5454650 9935942
Mutual Funds: Resources mobilisation (net) Rs.crore 3186 54223 94080 153801 -28297 83081

Regulatory Framework
The Bombay Stock Exchange, the oldest stock exchange in the country, was founded in
1875. It is the leading exchange in the country, and until recently accounted for about 80 percent
of all stock transactions. Twenty-two other stock exchanges also operate in India, as the
government has restricted the geographical reach of each of its exchanges. There are some 7,000
listed stocks, 7,000 brokers who are members of the 23 exchanges, along with an esti- mated
100,000 sub-brokers who interface with investors, a million active traders, and perhaps 20
million citizens who hold equities in some form, usually a mutual fund.

Despite its long history and large number of listed stocks, the equity market has had
major problems. The exchanges operated with high commissions, a lack of disclosure of actual
transaction prices, serious paperwork problems, and unreliable clearing and settlement.

The issue of new stocks was controlled by a government agency, the Comptroller of
Capital Issues. With a mission to ensure the quality of new IPOs, the CCI reviewed the financial
situation and prospects of the issuing company, and approved the price at which the new issue
could be offered. Because of its conservative approach, new issues frequently were sharply
underpriced. This created great demand for new issues. A refinery offering by the Birla group
was oversubscribed 20-fold, and its price rose quickly from 10 to 65 rupees per share after the
IPO. Another offering by the Tata group was 80-fold oversubscribed. A lottery was used in such

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cases, with the lucky bidders winning the right to buy shares that would immediately rise
sharply in price.

SEBI

The transformation of the Indian securities markets was initiated with the establishment
of the Securities and Exchange Board of India (SEBI) in 1989, initially as a informal body and
in 1992 as a statutory autonomous regulator with the twin objectives of protecting the interests
of the investors and developing and regulating the securities markets over a period of time.
SEBI has been empowered to investigate, examine, visit company premises, summon records
and persons and enquire and impose penalties commensurate with misconduct. The first and
foremost challenge for the fledgling regulator was to create a regulatory and supervisory
framework for the market, a job that proved formidable, because vested interests resisted every
new step.
However, with the designing and notification of 32 regulations/guidelines (amended many
times over), during a decade and half of its existence, the apparatus steadily evolved and has
come to grips with the situation.
SEBI has instituted a consultative process of framing regulations. All reports / concept
papers / policy proposals are posted on SEBI web site www.sebi.gov.in for comments from
market participants and the public. The comments are compiled and considered before finalizing
regulations. Even the draft regulations are put on the website before notification for legal pundits
to comment if the law framed is in consonance with the spirit of initiatives. This has a profound
impact not only in terms of receiving valuable input and building public opinion before
framing regulations / guidelines but also in improving the quality, acceptability and
implementability. SEBI has formed a number of committees comprising of eminent experts
and market practitioners to support it in the design of reforms for different aspects of the
markets. The regulator posts all its orders, including those delivered on appeals against its orders,
on its website. On request, it provides informal guidance on payments of nominal fees and
issues no action letter so that the participants can seek clarity on any aspect and adopt
appropriate business strategy in consonance with the applicable regulations.

General Market Indices

BSE

The Bombay Stock Exchange is the oldest exchange in Asia. It traces its history to the
1850s, when 4 Gujarati and 1 Parsi stockbroker would gather under banyan trees in front of
Mumbai's Town Hall. The location of these meetings changed many times, as the number of
brokers constantly increased. The group eventually moved to Dalal Street in 1874 and in 1875
became an official organization known as 'The Native Share & Stock Brokers Association'. In

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1956, the BSE became the first stock exchange to be recognized by the Indian Government under
the Securities Contracts Regulation Act. The Bombay Stock Exchange developed the BSE
Sensex in 1986, giving the BSE a means to measure overall performance of the exchange. In
2000 the BSE used this index to open its derivatives market, trading Sensex futures contracts.
The development of Sensex options along with equity derivatives followed in 2001 and 2002,
expanding the BSE's trading platform. Historically an open outcry floor trading exchange, the
Bombay Stock Exchange switched to an electronic trading system in 1995. It took the exchange
only fifty days to make this transition. This automated, screen-based trading platform called BSE
On-line trading (BOLT) currently has a capacity of 8 million orders per day. The BSE has also
introduced the world's first centralized exchange-based internet trading system, BSEWEBx.co.in
to enable investors anywhere in the world to trade on the BSE platform. The BSE is currently
housed in Phiroze Jeejeebhoy Towers at Dalal Street, Fort area.

The Bombay Stock Exchange (BSE) formerly, The Stock Exchange, Bombay is the
oldest stock exchange in Asia and has the largest number of listed companies in the world, with
4990 listed as of August 2010. It is located at Dalal Street, Mumbai, India. On Aug, 2010, the
equity market capitalization of the companies listed on the BSE was US$1.78 trillion, making it
the 4th largest stock exchange in Asia and the 11th largest in the world. It also been rated as
world’s best performing stock market.

With over 4,996 Indian companies listed & over 7700 scripts on the stock exchange, it
has a significant trading volume. The BSE SENSEX (SENSitive indEX), also called the "BSE
30", is a widely used market index in India and Asia. Though many other exchanges exist, BSE
and the National Stock Exchange of India account for most of the trading in shares in India.

NSE:

The National Stock Exchange (NSE) is a stock exchange located at Mumbai, India. It is
the largest stock exchange in India in terms of daily turnover and number of trades, for both
equities and derivative trading. NSE has a market capitalization of around Indian Rupee
7,262,507 crore (US$ 1,605.01 billion) (October 2010) and was expected to become the biggest
stock exchange in India in terms of market capitalization by 2009 end, although this has not yet
occurred. Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are
the two most significant stock exchanges in India, and between them are responsible for the vast
majority of share transactions. The NSE's key index is the S&P CNX Nifty, known as the NSE
NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by market
capitalization.

NSE is mutually-owned by a set of leading financial institutions, banks, insurance

companies and other financial intermediaries in India but its ownership and management operate

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as separate entities. There are at least 2 foreign investors NYSE Euronext and Goldman Sachs
who have taken a stake in the NSE. As of 2006, the NSE VSAT terminals, 2799 in total, cover
more than 1500 cities across India. In October 2007, the equity market capitalization of the
companies listed on the NSE was US$ 1.46 trillion, making it the second largest stock exchange
in South Asia. NSE is the third largest Stock Exchange in the world in terms of the number of
trades in equities. It is the second fastest growing stock exchange in the world with a recorded
growth of 16.6%.

The National Stock Exchange. NSE was established in 1994 as a competitor to the
Bombay Stock Exchange (BSE). NSE was backed by major financial institutions, led by the
Indus- trial Development Bank of India. The exchange introduced nationwide screen-based
trading with a dish-to-satellite data transmission sys- tem that provides instant trading access to
brokers anywhere in India. It spent more than $100 million developing its system, which now
has instantaneous access through more than 1,500 locations throughout the country. NSE forced
BSE and other exchanges to adapt by upgrading to computerized systems and by reform- ing
trading rules and procedures, which included increased surveillance over the capital adequacy of
brokers. BSE shifted from an “open outcry” trading system to a screen-based sys- tem, making
major investments in equipment, and revised its own procedures to provide transparency for
investors. As a result of these reforms, total transactions costs on India’s equity markets dropped
from 5 percent in mid-1993 to roughly 2.5 percent in 1997. This is still approximately double
transactions costs on the New York Stock Exchange, but procedural changes in process, such as
the use of a depository where securities are held in dematerialized form, are expected to reduce
transactions costs further in the next several years.

Conclusion
However, It would not be right to say that everything in the Indian capital markets is
hunky dory and needs no improvement, polishing or refurbishing. In fact, dynamics of the
global environment dictate that those charged with the responsibility of bringing about changes
must always seek out new learning by experience, criticism and judgments. The market depth
needs to be supplemented with further product diversification-mortgage and asset backed
securities, warrants, and disinvestment in the public sector. The debt market of India, though
large and next only to Japan, in Asia lacks vibrancy and does not provide adequate options for
meeting medium to long term funds, required for green field projects, in particular. Infrastructure
funding (essential for continued high economic growth) has become an issue in the absence of a
vibrant debt market. There is no market for below investment - grade paper or what is called junk
bonds.

The agenda, includes making the corporate debt market vibrant : cash and future,
operationalization of Indian Deposit Receipts (IDRs), and corporatization and demutualization of
remaining stock exchanges (has already begun with Stock Exchange Mumbai) where the

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ownership, management and trading rights resides with three different sets of people in order to
avoid conflict of interest. The settlement cycle has to migrate to T+1. New products are to be
introduced to meet the needs of all kinds of market participants. MAPIN (unique identification)
has to be extended to cover entirety of market participants. National training and skill delivery
institute has to be commissioned quickly to build a cadre of professionals to man the specialized
functions in the capital market. There is a need to spread equity cult and build institutions like
pension funds to enlarge the size of the market and balance volatility. The regulation of listed
companies, a job performed in a fragmented manner by SEBI and Ministry of Company Affairs,
needs to be consolidated to eliminate regulatory arbitrage, shooting out from the kinks of
regulatory jointing by unscrupulous operators, and blurring of regulatory accountability. Further,
regulation is an evolutionary process and has to be refined on an ongoing basis. Thus, SEBI
would and should continue to travel on the learning curve with a view to reorient and reconfigure
ground rules (regulations), its investigating abilities and investor protection measures.

India will do well because it is fully convinced that capital markets allow people to do more with
their savings and ideas and talents than would otherwise be possible. In the process, it would also
facilitate increasingly larger number of citizens participating in the capital market in some form
or other and share the opportunity of profiting from economic gains. Let me conclude with a
recent opinion expressed by Mr. Steeve Vickers, President International Risk ‘FINANCE
ASIA published in Finance Asia.com on Sept , 29th 2005, “ The stock market has been
transformed from proverbial den of thieves to one of the most transparent automated and well
regulated in the world – with record foreign institutional investment inflows a testimony to this.”

References
– www.wikipedia.org
– www.investopedia.com
– www.sbidfhi.com
– Business Beacon
– www.indiastat.com