TERM PAPER:

Capital Market of India vs. USA

PESTEL Analysis of Both

SUBMITTED TO: SUBMITTED BY:

Mr.Mohammad Abbas Neetu Singh

RS1904

A09
INDEX
 Money market of india
 Capital market of india
 Capital market of USA
 PESTAL analysis of Indian capital market
 PESTAL analysis of USA capital market
 Executive summary
 Biblography
ACKNOWDLEDGEMENT

This term paper is dedicated to, my parents, my teacher, my friends and Godwho
helped me to complete this term paper. I am thankful to my mentor for her
support. I tried my best to make this paper unbiased and effective.

I have used primary as well as secondary data to make this report.

I pay vote of thanks to the people who helped me to understand the topic:

CAPITAL MARKET OF INDIA VS CAPITAL MARKET OF USA AND

PESTEL ANALYSIS OF BOTH

I am thankful to the gratitude for all those who helped me to prepare this report.
INDIAN FINANCIAL SYSTEM: MONEY AND CAPITAL
MARKET IN INDIA:-
A money market is not a market for money but it is a market for near ‘money’; or
it is the market for lending and borrowing of short-term funds. It is the market
where the short –term surplus investible funds of banks & other financial
institutions are demanded by borrowers comprising individual companies and
government. Commercial banks are both suppliers of funds in the money market
and borrowers.

The Indian money market consists of two parts: the unorganized and the organized
sectors. The unorganized sector consists of indigenous bankers who pursue the
banking business on traditional lines and non-banking financial
institutions(NBFCs) .the organized sector comprises the reserve bank, the state
bank of India and its associates banks, both Indian and foreign.

The organized money market in India has a number of sub markets such as the
treasury bills market, the commercial bills market and the inter-bank call money
market.

The Indian money market is not a single homogenous market but is composed of
several sub-markets, each one of which deals in a particular type of short term
credit.

CALL MONEY MARKET:

The market is also known as money at call and short notice. The market has
actually two segments viz. (a) the call market or overnight market, and (b) short
notice market. The rate at which funds are borrowed and lent in this market is call
money rate.

Call money rates are market determined i.e. by demand for and supply of short
term funds. The public sector banks for about 75 percent for the demand (that is,
borrowings) and foreign banks and Indian private sector banks accounts for the
balance for the balance of 20 percent of borrowings. Non-banking financial

Institutions such as IDBI, LIC, GIC, etc enter the call money market as lenders and
supply up to 80 percent of the short-term funds. The balance of 20 percent of the
funds is supplied by the banking system .while some banks operates both as
lenders and borrowers, others are either’s only borrowers or only borrowers or only
lenders in the call money market.

Bill Market in India:

The bill market or the discount market is the most important part of the money
market where short-term bills-normally up to 90 days-are brought & sold. The bill
market is further subdivided into commercial bill market and Treasury bill market.

The market for commercial bills has not become popular in India. Unlike in
London & other international money markets where commercial bills are
extensively bought and sold (i.e. discounted).

The 91 days treasury bills are the most common way the government of India
raises funds for the short period. Some years ago, the government had introduced
the 182 day treasury bills which were later converted into 364-day treasury bills;
the government introduced the 14-day intermediate treasury bills.

Features & defects of Indian money market:

• Existence of unorganized money market
 • Absence of integration

• Diversity in money rates of interest

• Seasonal stringency of money

• Absence of the bill market

• Highly volatile call money market

• Absence of a well organized banking system

• Availability of credit instrument.

Composition of Indian capital market:

Capital market is the market for long term funds, just as the money market is
the market for short term funds. It refers to all the facilities and the institutional
arrangements for borrowing and lending term funds (medium-term and long-term
funds).it does not deal in capital goods but is concerned with the raising of money
capital for purposes of investment.

The demand for long-term memory capital comes predominantly from private
sector manufacturing industries and agriculture and from the government largely
for the purpose of economic development. As the central and state governments are
investing not only on economic overheads like transport, irrigation and power
development but also on basic industries and sometimes even in consumer goods
industries, they require substantial sums from the capital market.

The supply of funds for the capital market comes largely from individual savers,
corporate savings, banks, insurance companies specialized financing agencies and
the government. Among the institutions, we may refer to the following:

(a) Commercial banks are important investors, but are largely interested in govt.
securities and, to a small extent, debentures of companies;
(b) LIC and GIC are of growing importance in the Indian capital market, though
their major interest is in government securities;

(c) Provident funds constitute a major medium of savings but their investment
too are mostly in govt. securities; and

(d) Specialinstitutions set up since independence , viz, IFCI, ICICI, IDBI, UTI,
etc. –generally called development financial institutions (DFIs) –aim at
supplying long term capital to the private sector.

(e) Thereare financial intermediaries in the capital market, such as merchant

bankers, mutual funds leasing companies etc. which help in mobilizing
savings and supplying funds to investors.

Like all markets, the capital market is also composed of those who demand
funds (borrowers) and those who supply funds (lenders).an ideal capital
attempts to provide adequate capital at reasonable rate of return for any
business which offers a prospective yield high enough to make borrowing
worthwhile.

The capital market is broadly divided into two the gilt-edged market and the
industrial securities market. The gilt-edged market refers to the market for
government and semi govt. securities, backed by the RBI. The securities
traded in this market are stable in value and are much sought after by banks
and other institutions.

The industrial securities market refers to the market for shares and
debentures of old and new companies. This market is further divided into the
new issue market and old capital market meaning the stock exchange.
 The new issue market –often referred to as primary market- refers to raising
of new capital in the form of shares and debentures whereas the old issue
market –commonly known as stock exchange or stock market-deals with
securities already issued by the companies. It is also known as the secondary
market. Both markets are equally important, but often the issue market IS
MUCH MORE IMPORTANT from the point of view of economic growth.

DFIs supply funds for investment: financial intermediaries like merchant

bankers help the corporate sector to raise funds in the capital market.

SPECIAL FINANCIAL INSTITUTIONS & THE

CAPITAL MARKET:
Soon after independence, the govt. of India set up a series of financial
institutions to be of special help to the private sector industries. IFCI was the
first of these institutions (1948).it was followed by SFCs (set up by state
govt. with cooperation of RBI & other banks) to provide long term finance
to small and medium industries.

ICICI (1955), IDBI (1964) & UTI (1964) followed soon after.LIC was set up in
1956 to mobilize individual savings and to invest part of savings in the capital
market.

Commercial banks & the capital market:

The operations of commercial banks have so far been confined to the purchase and
sell of govt. and other trust securities. Their holdings of industrial securities viz.
shares and debentures are very small.
But in recent years, banks have been increasingly participating in term through
subscribing to the shares & debentures of special financial institutions. They are
also setting up financial subsidiaries, known as merchant houses, mutual funds,
venture capital companies, leasing companies, etc. to mobilize funds.

Non banking financial companies (NBFCs):

In recent years ,NBFCs, variously called as “finance corporation” “loan

company”,” finance company “ etc. have mushroomed all over the country. These
companies, with a very little capital of their own have been raising deposits from
the public by offering attractive rate of interest & other incentives. They advance
loans to wholesale and retail traders, small scale industries and self- employed
person. Bulk of their loans is given to parties which don’t either approach
commercial banks or which are denied credit facilities. The finance companies
give loans which are generally unsecured. Besides giving loans and advances to
small sector, they run chit funds, purchase and discount hundies and have also
taken up merchant banking, mutual funds, leasing etc.

Essentially, these finance cos. are banks, since they perform the basic twin
functions of attracting deposits from the public and making loans.RBI say

“The rapid growth of NBFC’s especially in the nineties, has led to a gradual
blurring of dividing lines between banks and NBFCs.”

Since NBFC are not regarded as banking companies they didn’t come under the
control of RBI. There is no minimum liquidity ratio or cash ratio between their
own funds and deposits.
The RBI has mentioned 5 kinds of NBFCs

(a)Leasing Financing Companies

(b) Hire purchase finance companies

(c) Loan finance companies

(d)Investment finance companies

(e) Residuary non-banking companies (RNBCs)

Future of NBCs:

The NBFCs are now emerging as a growing segment of the Indian financial system
& both the government and RBI appreciate the need for their orderly and healthy
development with appropriate prudential safeguards. It is to regulate NBFCs and to
improve their financial health that amendment to RBI act, 1934 was carried out.

Mutual Funds:
In recent years, mutual funds are the most important among newer capital market
institutions. Several public sector banks and financial institutions have set up
mutual funds on a tax-exempt basis. Their main function is to mobilize the savings
of general people & invest them in stock market securities.

Growth of mutual fund:

In the 1990s.MFs found it hard to attract investors, the competition for funds was
hotting up from banks and the government was offering 14% interest on medium
term securities, banks-12%, HDFC-14%, IDBI-15.75%.

Under these conditions, it was difficult for mutual funds to rival such high yields
on debt instruments. They also found it hard to meet high expectations of investors
who were yet to break out of the get-rich-quick syndrome. Accordingly, the first
wave of mutual funds failed.

During 1998-99 and 1999-00, however the mutual fund sector registered
significant growth. Economic conditions were good; stock exchanges were
booming and the govt. had given tax concessions. All these help in the return of
faith of people in mutual funds.

The revival of mutual funds since 1995-96 was due to the entry of corporate
majors-TATA, BIRLA, and RELIANCE & SBI. Many other followed with
products designed for investor specific need. Investors left the banking system and
flocked to mutual fund.

STOCK EXCHANGE IN INDIA:

In a modern capitalist economy, almost all commodities are produced on a large

scale; and large scale production means large scale of capital. The public firms
issues stocks and bonds and enable those with surplus funds to invest them
profitability in them.

The stock market is a place where stocks and shares & other long term
commitments or investments are bought and sold.
History of Stock Exchange in India:
The first organized stock exchange in India was started in Bombay when the
Native Share Stock Brokers’ Association known as Bombay stock exchange (BSE)
was formed by the brokers in Bombay.BSE was Asia’s oldest stock exchange. In
1894 Ahmadabad stock exchange was started to deal in the shares of textile miles
there the Calcutta stock exchange was started in 1908 to deal in shares of
plantation and jute miles besides these there were a number of unorganized and
unrecognized exchanges known as KERB markets. There were also illegal
DABBA markets in which stock and shares also bought and sold

SEBI:
The functioning of stock exchanges in India has shown many weaknesses, lack of
transparency. to counter these problems and regulate capital market the
government of India set up the SECURITIES AND EXCHANGE BOARD OF
INDIA in 1988.SEBI was a non statutory body but in January 1992 it was made a
statutory body. SEBI , in consultation with govt. of India has taken a lot of steps to
introduce improved practices and greater transparency for the interest of the
investing public and healthy development of capital markets

SEBI has advised stock exchanges to amend the listing agreements to ensure the
listed companies furnishes annual statements to the stock exchanges

All the guidelines and regulatory measures of capital issues are meant to promote
healthy and efficient functioning of the issue market

In January 1995 the government amended SEBI ACT 1992, so as to arm SEBI
with additional powers for ensuring the orderly development of capital market and
to enhance its ability to protect the interest of investors. It was thought that SEBI
has all necessary powers to control the capital market on one hand and effectively
protect interest of the shareholders on the other. But it has failed miserably to
prevent a small by scams like HARSHAD MEHTA scam.
Capital Market of USA:
USA has a very strong and developed capital market. Many other countries
such as Germany have a very powerful and firm banking sector but the
capital market of Germany is not so strong. There is a very agile
financial market that is present in USA and is playing very
important part in making and implementing the policies of
the government. If agile market in financial instrument were
not present, the govt. will not be able to open market
operations. The capital market covers a big range of tools for borrowing
and lending. The borrowers are businesses houses, retail investors, and
government Institutes which have needs for funding. Lenders are businesses
and Individuals with savings or excess money to invest. Financial
institutions viz. commercial banks, investment Firms, and insurance
companies, act as both borrowers and lenders. In addition, a wide variety of
financial instruments have been developed that permit borrowers to sell their
own securities and their own securities and earn interest and profits. The
market in which the maturities and trading are for a short period is called a
money market; the money market is a market for short-term credit. The
money market helps the players to deal with routine financial uncertainties.
Borrowers trade it for mollify or Short-term cash. Markets that deal in
instruments with maturities more than one year are known as capital
markets, since credit for investments for new venture will be required for
more than one year.
There is a difference between primary and secondary market. The “primary
market” applies to the original issuing of a credit market instrument. After a debt
instrument has been issued, the purchaser may be able to resell the instrument
before its maturity in a “secondary market. These include different types of formal
exchanges, and electronic trading through bids and offers.

THE CAPITAL MARKET OF USA

INSTRUMENT MATURITY PRINCIPAL SECONDARY

 BORROWERS MARKET

US treasury 2-10 years Government Very active

Notes

Bonds 30 years Government Very active

Corporate 2-30 years Financial & Business Active

Bonds Firms

Municipal
Bond 2-30 years State & Local govt. Active

Debentures 2-30 years Federal National Loan Active

Association

NEW YORK STOCK EXCHANGE:

The New York stock exchange is the largest stock exchange in the world. It is
operated by NYSE Euro next (it is the company that is formed by all the
companies listed in the NYSE that came into existence in April 2007).the CEO of
the company is Duncan L. Niederauer .

Its origin started on may 1792, when 24 stock brokers signed the Buttonwood
agreement. It was renamed NEWYORK STOCK AND EXCHANE BOARD on
March 1817.The first president was Anthony Stockholm.

Its composite index was created with a base value of 50 points and base year as
1965.after a gap of 38 years the base value was 5000 points and the base year was
2005.

The list of stock exchanges of USA is given below:

• New York Stock Exchange

• NASDAQ
• Philadelphia
• Boston Stock Exchange
 • National Stock Exchange
• American Stock Exchange

• Chicago Stock Exchange

• New York Board of Trade

• NYSE Arca

U.S. Securities and Exchange Commission:

It is an organization of USA government which regulates all the stock exchanges
mentioned above. The primary responsibility of this commission is to enforce all
the securities laws of investors and industries. It was created by SECURITIES
EXCHANGE ACT; 1934.This act is also called FEDRAL SECURITIES ACT.

The main motive of the commission is to increase public faith in the capital
markets by disclosure of information about public securities offerings.

This commission divided in several offices. They are:

• The Office of General Counsel

• The Office of the Chief Accountant
• The Office of Compliance, Inspections and Examinations
• The Office of International Affairs

PESTEL ANALYSIS OF CAPITAL

MARKET OF INDIA:
POLITICAL:
THE capital market of India is very vulnerable. India has been politically
instable in the past but it is a little politically stable now-a-days.the
political instability of the country has a very strong impact on the capital
market. The share market of India changes as the political changes took
place.

The sensex goes up and down with any kind of small and big political news, like,
if there is news that a particular political party has withdrawn its support from
the ruling party, and then the capital market will go down with a bang. The
capital market of India is too weak and is based on speculations. The political
stability of the country is very important for the stability and growth of capital
market in India. The political imbalance or balance of the country is the major
factor in deciding the capital market of India. The political factors include:

• employment laws
• tax policy
• trade restrictions and tariffs
• political stability

ECONOMICAL:
THE economical measures taken by the government of India has a very
strong relationship with the capital market. Whenever the annual budget is
announced the capital market goes up and down with the economical
policies of the government .If the policies are supportive to the companies
then the capital market takes it positively and if there is any other policy
that is not supportive and it is not welcomed then the capital market goes
down. Like, in the case of allocation of 3-G spectrum, those companies
that got the license for 3-G, they witnessed sharp growth in their share
values so the economic policies play a major part in the growth and
decline of the capital market and again if there is relaxation on any kind of
taxes on items of automobile industry then the share of automobile sector
goes up and virtually strengthen the capital market .The economical
 factors include:

• inflation rate
• economic growth
• exchange rates
• interest rates

SOCIAL:
India is a country of unity in diversity .India is socially rich but the capital
market is not very attached with the social factors .Yes, there is some relation
between the social factors with the capital market. If there is any big social factor
then to some extent it affects the capital market but small social factors don’t
impact at all.

Like, there was opposition of reliance fresh in many cities and many stores were
closed. The share prices of the reliance fresh went down but the impact was on
and individual firm there was not much impact on the capital market on a whole
the social factors have not much of impact on the capital market in India. The
social factors include:

• emphasis on safety
• career attitudes
• population growth rate
• age distribution
• health consciousness

TECHNOLOGICAL:
The technological factors have not that much effect on the capital market. India
is technological backward country. Same as social factors, technological factor
can have an effect on an individual form but it cannot have a big impact on a
whole of capital market. The Bajaj got a patent on its dts-i technology, and
launched it in its new bike but it does not effect on capital market. The
technological change in India is always on a lower basis and it doesn’t effect on
country as a whole. The technological factors include:
 • R&D activity
• technology incentives
• rate of technological change
• automation

Environmental factors:
Initially The environmental factors don’t play a vital role in the capital market.
But the time has changed and people are more eco-friendly. This is really
bothering them that if any firm or industry is environment friendly or not. An
increasing number of people, investors, corporate executives are paying
importance to these facts, the capital markets still see the environment as a
liability. They belie that it is of no use for their strategy. The environmental
performance is even under-valued by the markets.

Legal factors:
Legal factors play an important role in the development and sustain the capital
market. Legal issues relating to any industry or firm decides the fate of the
capital market. If the govt. of India or the parliament introduces a new law that
can affect the running of the industry then the industry will be demotivated and
this demonization will lead to the demonization of the investors and will result in
the fall of capital market. Like after the Hardhat Mehta scam, new rules and
regulations were introduced like PAN card was made necessary for trading, if
any investor was investing too much money in a small firm, then the investors
were questioned,etc. These regulations were meant to maintain transparency in
the capital market, but at that time, investment was discouraged. Legal factors
are necessary for the improvement and stability of the capital market.

PESTEL Analysis Of The capital market of

USA:

Political factors:
The political state of USA is very stable as compared to the India and trading
there is done not on speculations but on hard and proven facts. They don’t invest
on feelings as we Indian investors do. It is a well known fact that the political
factors play an important role in the capital market, but in USA due to its strong
democracy and almost 100% employment the capital market. The investors there
don’t mix emotions with their professions so even if there is some kind of
political disturbance that doesn’t show much impact on the capital market there.

ECONOMICAL:
The economical factors of any country are very important for the capital market
of that country and USA is no exception. For example: the great depression of
1931.the USA stock market crash on October 29,1929.it is also known as
BLACK TUESDAY. This crash led to Hugh loss for investors and the capital
market was on its knees. Thus the economical factors are a very important and
unavoidable factor .it will be suicidal to overlook the various economical factors
like inflation, GDP, income tax structure etc.

SOCIAL:
Social factors almost don’t affect the capital market in the USA. Because, the
country is very rigid in its social roots. They are very less emotionally attached to
each other especially in terms of business. The investors are least bothered about
the social issues that prevail in their surroundings. Their social system is of that
kind that it is too difficult to disturb the capital market there. Their social pattern
is very much developed. Factors like emphasis on safety, health consciousness,
career attitudes, population growth rate; age distribution etc. doesn’t affect them
at all.

Technological factors:
USA is a technologically developed country and the companies spend lot of
money on the R& D of any product. They don’t bother about the cost incurring
on it. And the investors there are very active in technological changes. Any new
technological improvement in the industry will see a growth in the capital
market. The rate of change of technology is very swift in USA,so it creates a
major wave in the market if there is an automation. Like the introduction of the i-
pod,it changed the music industry in the USA,and virtually its impact was seen
on its capital market to, as the trading in music company increased.
Legal:
Legal factors are one of the most important factors the affect the capital market.
It encourages or discourages the investors depending upon the nature of law
passed. Like after the doom of AIG,LEHMAN BROTHERS, the USA govt.
provided them funds and passed anew law. This encouraged the investors to
regain faith in the capital market and the investment was increased. The legal
system of any country can be a huge factor in its improvement of primary and
secondary market.

Executive summary:
There is a lot of difference between the capital market of India and the capital
market of USA.

• In India the investment is done on the basis of emotions and speculation

but in USA the business is much more practical and information driven.
• USA investors are very much risk taking and Indian investors tend to keep
low risk.
• The US capital market is much more regulated and transparent the capital
market of India.
• The governing body of capital market of both the countries are trying to
regulate it with much more efficiency but the US SEC is more efficient
has more powers in compare to SEBI.
• Here in India people still feels it is a gamble to invest the money in the
capital market because apart from big firms the retail investors aren’t well
equipped with the ample knowledge of the market. On a contrary the retail
investors in the US is willing to take risk because the investment rate is
highest in that country.
• Also the govt. of the USA provides full monetary support to the
companies and investors in their country in case of any big
• BIBILOGRAPHY:
• www.wikipedia.com
• www.moneycontrol.com
• www.financeindia.com

• Magazines:
• India Today
• Frontline
• People
• NEWSPAPER
• The Times OF india
• The economic times