FINANCIAL ANALYSIS OF HCL INFOTECH

LIMITED

A Major Project Report

Submitted in partial fulfillment of the requirements for BBA(Banking &

Insurance) Semester VI Programme of G.G.S.Indraprstha University, Delhi.

Submitted by
Raunak Chandra Prasad
BBA (B&I)-Semester VI
Enrl. No.0781221807

Delhi College of Advanced Studies

Shanker Garden, Vikaspuri
New Delhi-110018
 Preface

Every possible effort on my part has been made to maintain a progressive

view on the agenda in question by the way of using accurate and updated
facts with my own prospective on the issue. All constructive suggestions for
improvement of this report will be highly appreciated.

No task can be achieved alone particular while attempting to finish a project

of such magnitude. It took many special people to facilitate it and support it.

Hence, I would like to acknowledge all of their valuable support and convey
humble gratitude to them.

I extend my sincere gratitude to my project supervisor, Mr. D.K.

Shrivastava, for her help and valuable support throughout the term of the
project. It was a learning experience to work under her guidance.

I would also like to thanks our respected Director Sir Dr. Narinder Mohan
and the faculty member and staff member of Delhi college of advance
studies for their kind support and help during the project work.
 DECLARATION

I declare that the project entitled “ Financial Analysis of HCL

Infotech limited” is originally done by me and no part of the
project is taken by any other part of the project or material
published or submitted earlier to any other college or university.

However, the sources used for the project is mentioned in the

project.

Counter Sign: Signature:

Mr. D.K. Shrivastava Raunak Chandra Prasad

(Supervisor) (Candidate)
 METHODOLOGY

There are two methods generally being adopted to collect the data i.e. from
the Primary sources or from the Secondary sources. Data can be of two
types:
Primary sources: Any data which have been gathered earlier for some
other purpose are secondary data in the hands of the researchers. In contrast,
those data collected at first hand either by the researcher or by someone else
especially are for the purpose of study are known as primary data.
Thus, primary data collected by one person may become the secondary data
for another.

Secondary sources: In some cases the researcher may realise the need for
collecting first hand information. As in the case of everyday life, if we want
to have first hand information or any happening or event, we either ask
someone who knows about it or we observe it ourselves, we do the both.
Thus, the two methods by which primary data can be collected are
Observation and Communication.

The data collected for this project has been taken from secondary
sources. Various books of some famous authors have been uses to make this
project. Also we have taken help of some websites concern this project.
 Limitations
1. Though it has been tried to provide all the information required, all

could not be gathered given the time constraint.

2. The study is of descriptive nature.

3. Given the topic the information available was very vast and hence to
determine the appropriate information was very difficult given the
specific requirements.
Introduction Of Financial Market And Capital Market

Capital Market

The capital market is the market for securities, where companies and
governments can raise long term funds. Selling stock and selling bonds are
two ways to generate capital and long term funds. Thus bond markets and
stock markets are considered capital markets. The capital markets consist of
the primary market, where new issues are distributed to investors, and the
secondary market, where existing securities are traded .The Indian Equity
Markets and the Indian Debt markets together form the Indian Capital
markets Indian Equity Market at present is a lucrative field for investors.
Indian stocks are profitable not only for long and medium-term investors but
also the position traders, short-term swing traders and also very short term
intra-day traders. In India as on December 30 2007, market capitalization
(BSE 500) at US$ 1638 billion was 150 per cent of GDP, matching well
with other emerging economies and selected matured markets. For a
developing economy like India, debt markets are crucial sources of capital
funds. The debt market in India is amongst the largest in Asia. It includes
government securities, public sector undertakings, other government bodies,
financial institutions, banks and companies.
Financial Market

In economics, a financial market is a mechanism that allows people to buy

and sell (trade) financial securities (such as stocks and
bonds), commodities (such as precious metals or agricultural goods), and
other fungible items of value at low transaction costs and at prices that
reflect the efficient-market hypothesis. Financial markets have evolved
significantly over several hundred years and are undergoing constant
innovation to improve liquidity.

Both general markets (where many commodities are traded) and specialized
markets (where only one commodity is traded) exist. Markets work by
placing many interested buyers and sellers in one "place", thus making
easier for them to find each other. An economy which relies primarily on
interactions between buyers and sellers to allocate resources is known as
a market economy in contrast either to a command economy or to a non-
market economy such as a gift economy.

In finance, financial markets facilitate:

• The raising of capital (in the capital markets)

• The transfer of risk (in the derivatives markets)
• International trade(in the currency markets)
– and are used to match those who want capital to those who have it.

Typically a borrower issues a receipt to the lender promising to pay back the
capital. These receipts are securities which may be freely bought or sold. In
return for lending money to the borrower, the lender will expect some
compensation in the form of interest or dividends.

In mathematical finance, the concept of a financial market is defined in

terms of a continuous-time Brownian motion stochastic process.

In economics, typically, the term market means the aggregate of possible

buyers and sellers of a thing and the transactions between them.

The term "market" is sometimes used for what are more strictly exchanges,
organizations that facilitate the trade in financial securities, e.g., a stock
exchange or commodity. This may be a physical location (like the NYSE) or
an electronic system (like NASDAQ). Much trading of stocks takes place on
an exchange; still, corporate actions (merger, spinoff) are outside an
exchange, while any two companies or people, for whatever reason, may
agree to sell stock from the one to the other without using an exchange.

Trading of currencies and bonds is largely on a bilateral basis, although

some bonds trade on a stock exchange, and people are building electronic
systems for these as well, similar to stock exchanges.

Financial markets can be domestic or they can be international.

Types of Financial Markets

STOCK MARKET

A stock market / share market is a public market (a loose network of

economic transactions not a physical facility or discrete entity) for
the trading of company stock and derivatives at an agreed price; these
are securities listed on a stock exchange as well as those only traded
privately.

The size of the world stock market was estimated at about $36.6 trillion US
at the beginning of October 2008. The total world derivatives market has
been estimated at about $791 trillion face or nominal value, 11 times the
size of the entire world economy. The value of the derivatives market,
because it is stated in terms of notional values, cannot be directly compared
to a stock or a fixed income security, which traditionally refers to an actual
value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e.,
a derivative 'bet' on an event occurring is offset by a comparable derivative
'bet' on the event not occurring.). Many such relatively illiquid securities are
valued as marked to model, rather than an actual market price.

The stocks are listed and traded on stock exchanges which are entities of a
corporation or mutual organization specialized in the business of bringing
buyers and sellers of the organizations to a listing of stocks and securities
together. The stock market in the United States is NYSE while in Canada, it
is the Toronto Stock Exchange. Major European examples of stock
exchanges include the London Stock Exchange, Paris Bourse, and
the Deutsche Börse. Asian examples include the Tokyo Stock Exchange,
the Exchange, the Bombay Stock Exchange and the Karachi Stock
Exchange. In Latin America, there are such exchanges as the BM&F
Bovespa and the BMV

Trading

Participants in the stock market range from small individual stock

investors to large hedge fund traders, who can be based anywhere. Their
orders usually end up with a professional at a stock exchange, who executes
the order.

Some exchanges are physical locations where transactions are carried out on
a trading floor, by a method known as open outcry. This type of auction is
used in stock exchanges and commodity exchanges where traders may enter
"verbal" bids and offers simultaneously. The other type of stock exchange is
a virtual kind, composed of a network of computers where trades are made
electronically via traders.

Actual trades are based on an auction market model where a potential

buyer bids a specific price for a stock and a potential seller asks a specific
price for the stock. (Buying or selling at market means you will
accept any ask price or bid price for the stock, respectively.) When the bid
and ask prices match, a sale takes place, on a first-come-first-served basis if
there are multiple bidders or askers at a given price.

The purpose of a stock exchange is to facilitate the exchange of securities

between buyers and sellers, thus providing a marketplace (virtual or real).
The exchanges provide real-time trading information on the listed securities,
facilitating price discovery. The New York Stock Exchange is a physical
exchange, also referred to as a listed exchange — only stocks listed with the
exchange may be traded. Orders enter by way of exchange members and
flow down to a floor broker, who goes to the floor trading post specialist for
that stock to trade the order. The specialist's job is to match buy and sell
orders using open outcry. If a spread exists, no trade immediately takes
place--in this case the specialist should use his/her own resources (money or
stock) to close the difference after his/her judged time.

Once a trade has been made the details are reported on the "tape" and sent
back to the brokerage firm, which then notifies the investor who placed the
order. Although there is a significant amount of human contact in this
process, computers play an important role, especially for so-called "program
trading".

The NASDAQ is a virtual listed exchange, where all of the trading is done
over a computer network. The process is similar to the New York Stock
Exchange. However, buyers and sellers are electronically matched. One or
more NASDAQ market makers will always provide a bid and ask price at
which they will always purchase or sell 'their' stock.

The Paris Bourse, now part of Euro next, is an order-driven, electronic stock
exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted
of an open outcry exchange. Stockbrokers met on the trading floor or the
Palais Brongniart. In 1986, the CATS trading system was introduced, and
the order matching process was fully automated.

From time to time, active trading (especially in large blocks of securities)

have moved away from the 'active' exchanges. Securities firms, led by UBS
AG, Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12
percent of U.S. security trades away from the exchanges to their internal
systems. That share probably will increase to 18 percent by 2010 as more
investment banks bypass the NYSE and NASDAQ and pair buyers and
sellers of securities themselves, according to data compiled by Boston-based
Aite Group LLC, a brokerage-industry consultant.

Now that computers have eliminated the need for trading floors like
the Big Board's, the balance of power in equity markets is shifting.
By bringing more orders in-house, where clients can move big
blocks of stock anonymously, brokers pay the exchanges less in fees
and capture a bigger share of the $11 billion a year that
institutional investors pay in trading commissions as well as the
surplus of the century had taken place.

Importance Of Stock Market

The stock market is one of the most important sources for companies to
raise money. This allows businesses to be publicly traded, or raise
additional capital for expansion by selling shares of ownership of
the company in a public market. The liquidity that an exchange
provides affords investors the ability to quickly and easily sell
securities. This is an attractive feature of investing in stocks,
compared to other less liquid investments such as real estate.

History has shown that the price of shares and other assets is an
important part of the dynamics of economic activity, and can
influence or be an indicator of social mood. An economy where the
stock market is on the rise is considered to be an up and coming
economy. In fact, the stock market is often considered the primary
 indicator of a country's economic strength and development.
Rising share prices, for instance, tend to be associated with
increased business investment and vice versa. Share prices also
affect the wealth of households and their consumption.
Therefore ,central banks tend to keep an eye on the control and
behavior of the stock market and, in general, on the smooth
operation of financial system functions. Exchanges also act as the
clearinghouse for each transaction, meaning that they collect and
deliver the shares, and guarantee payment to the seller of a
security. This eliminates the risk to an individual buyer or seller
that the counterparty could default on the transaction. The smooth
functioning of all these activities facilitates economic growth in that
lower costs and enterprise risks promote the production of goods
and services as well as employment. In this way the financial
system contributes to increased prosperity. An important aspect of
modern financial markets, however, including the stock markets, is
absolute discretion. For example, American stock markets see
more unrestrained acceptance of any firm than in smaller markets.

However these companies accrue no intrinsic value to the long-term

stability of the American economy, but rather only short-term
profits to American business men and the Chinese; although, when
the foreign company has a presence in the new market, this can
benefit the market's citizens. Conversely, there are very few large
foreign corporations listed on the Toronto Stock Exchange TSX,
Canada's largest stock exchange. This discretion has insulated
Canada to some degree to worldwide financial conditions. In order
 for the stock markets to truly facilitate economic growth via lower
costs and better employment, great attention must be given to the
foreign participants being allowed in.

The financial system in most western countries has undergone a

remarkable transformation. One feature of this development
is disintermediation. A portion of the funds involved in saving and
financing flows directly to the financial markets instead of being
routed via the traditional bank lending and deposit operations. The
general public's heightened interest in investing in the stock
market, either directly or through mutual funds, has been an
important component of this process. Statistics show that in recent
decades shares have made up an increasingly large proportion of
households' financial assets in many countries. In the 1970s,
in Sweden, deposit accounts and other very liquid assets with little
risk made up almost 60 percent of households' financial wealth,
compared to less than 20 percent in the 2000s. The major part of
this adjustment in financial portfolios has gone directly to shares
but a good deal now takes the form of various kinds of institutional
investment for groups of individuals, e.g., pension funds, mutual
funds, hedge funds, insurance investment of premiums, etc. The
trend towards forms of saving with a higher risk has been
accentuated by new rules for most funds and insurance, permitting
a higher proportion of shares to bonds. Similar tendencies are to be
found in other industrialized countries. In all developed economic
systems, such as the European Union, the United States, Japan and
other developed nations, the trend has been the same: saving has
 moved away from traditional (government insured) bank deposits
to more risky securities of one sort or another.

The stock market, individual investors, and financial risk

Riskier long-term saving requires that an individual possess the ability

to manage the associated increased risks. Stock prices fluctuate
widely, in marked contrast to the stability of (government insured)
bank deposits or bonds. This is something that could affect not only
the individual investor or household, but also the economy on a
large scale. The following deals with some of the risks of the
financial sector in general and the stock market in particular. This
is certainly more important now that so many newcomers have
entered the stock market, or have acquired other 'risky'
investments (such as 'investment' property, i.e., real estate
and collectables).

United States Stock Market Returns

Over a sixty-year period, for year ended 2009, on a Total Return Basis,
the S&P 500 Index year-to-year grew at an average annualized rate
of 9.2%; on a compounded basis an average annualized rate of
5.6%.

The behavior of the stock market

From experience we know that investors may 'temporarily' move

financial prices away from their long term aggregate price 'trends'.
(Positive or up trends are referred to as bull markets; negative or
down trends are referred to as bear markets.) Over-reactions may
occur—so that excessive optimism (euphoria) may drive prices
 unduly high or excessive pessimism may drive prices unduly low.
Economists continue to debate whether financial markets are
'generally' efficient.

According to one interpretation of the efficient market

hypothesis (EMH), only changes in fundamental factors, such as
the outlook for margins, profits or dividends, ought to affect share
prices beyond the short term, where random 'noise' in the system
may prevail. The 'hard' efficient-market hypothesis is sorely tested
by such events as the stock market crash in 1987, when the Dow
Jones index plummeted 22.6 percent—the largest-ever one-day fall
in the United States. This event demonstrated that share prices can
fall dramatically even though, to this day, it is impossible to fix a
generally agreed upon definite cause: a thorough search failed to
detect any 'reasonable' development that might have accounted for
the crash. (But note that such events are predicted to occur strictly
by chance , although very rarely.) It seems also to be the case more
generally that many price movements (beyond that which are
predicted to occur 'randomly') are not occasioned by new
information; a study of the fifty largest one-day share price
movements in the United States in the post-war period seems to
confirm this.

Irrational Behavior

Sometimes the market seems to react irrationally to economic or

financial news, even if that news is likely to have no real effect on
the technical value of securities itself. But this may be more
apparent than real, since often such news has been anticipated, and
 a counter reaction may occur if the news is better (or worse) than
expected. Therefore, the stock market may be swayed in either
direction by press releases, rumors, euphoria and mass panic; but
generally only briefly, as more experienced investors (especially
the hedge funds) quickly rally to take advantage of even the
slightest, momentary hysteria.

Over the short-term, stocks and other securities can be battered or

buoyed by any number of fast market-changing events, making the
stock market behavior difficult to predict. Emotions can drive
prices up and down, people are generally not as rational as they
think, and the reasons for buying and selling are generally obscure.
Behaviorists argue that investors often behave 'irrationally' when
making investment decisions thereby incorrectly pricing securities,
which causes market inefficiencies, which, in turn, are
opportunities to make money. However, the whole notion of EMH
is that these non-rational reactions to information cancel out,
leaving the prices of stocks rationally determined.

The Dow Jones Industrial Average biggest gain in one day was 936.42
points or 11 percent, this occurred on October 13, 2008.

Crashes

A stock market crash is often defined as a sharp dip in share

prices of equities listed on the stock exchanges. In parallel with
various economic factors, a reason for stock market crashes is also
due to panic and investing public's loss of confidence. Often, stock
market crashes end speculative economic bubbles.
There have been famous stock market crashes that have ended in the
loss of billions of dollars and wealth destruction on a massive scale.
An increasing number of people are involved in the stock market,
especially since the social security and retirement plans are being
increasingly privatized and linked to stocks and bonds and other
elements of the market. There have been a number of famous stock
market crashes like the Wall Street Crash of 1929, the stock
market crash of 1973–4, the Black Monday of 1987, the Dot-com
bubble of 2000, and the Stock One of the most famous stock
market crashes started October 24, 1929 on Black Thursday.
The Dow Jones Industrial lost 50% during this stock market crash.
It was the beginning of the Great Depression. Another famous
crash took place on October 19, 1987 – Black Monday. On Black
Monday itself, the Dow Jones fell by 22.6% after completing a 5
year continuous rise in share prices. This event not only shook the
USA, but quickly spread across the world. Thus, by the end of
October, stock exchanges in Australia lost 41.8%, in Canada lost
22.5%, in Hong Kong lost 45.8%, and in Great Britain lost 26.4%.
The names “Black Monday” and “Black Tuesday” are also used
for October 28-29, 1929, which followed Terrible Thursday--the
starting day of the stock market crash in 1929. The crash in 1987
raised some puzzles-–main news and events did not predict the
catastrophe and visible reasons for the collapse were not identified.
This event raised questions about many important assumptions of
modern economics, namely, the theory of rational human conduct,
the theory of market equilibrium and the hypothesis of market
efficiency. For some time after the crash, trading in stock
 exchanges worldwide was halted, since the exchange computers did
not perform well owing to enormous quantity of trades being
received at one time. This halt in trading allowed the Federal
Reserve system and central banks of other countries to take
measures to control the spreading of worldwide financial crisis. In
the United States the SEC introduced several new measures of
control into the stock market in an attempt to prevent a re-
occurrence of the events of Black Monday. Computer systems were
upgraded in the stock exchanges to handle larger trading volumes
in a more accurate and controlled manner. The SEC modified the
margin requirements in an attempt to lower the volatility of
common stocks, stock options and the futures market. The New
York Stock Exchange and the Chicago Mercantile
Exchange introduced the concept of a circuit breaker. The circuit
breaker halts trading if the Dow declines a prescribed number of
points for a prescribed amount of time.

Stock Market Index

The movements of the prices in a market or section of a market are

captured in price indices called stock market indices, of which
there are many, e.g., the S&P, the FTSE and the Euro next indices.
Such indices are usually market capitalization weighted, with the
weights reflecting the contribution of the stock to the index. The
constituents of the index are reviewed frequently to include/exclude
stocks in order to reflect the changing business environment.

LEVERAGE STRATEGY
Stock that a trader does not actually own may be traded using short
selling; margin buying may be used to purchase stock with
borrowed funds; or, derivatives may be used to control large
blocks of stocks for a much smaller amount of money than would
be required by outright purchase or sale.

BOND MARKET :The bond market (also known as the debt, credit,
or fixed income market) is a financial market where participants
buy and sell debt securities, usually in the form of bonds. As of
2009, the size of the worldwide bond market (total debt
outstanding) is an estimated $82.2 trillion , of which the size of the
outstanding U.S. bond market debt was $31.2 trillion according to
BIS (or alternatively $34.3 trillion according to SIFMA). Nearly all
of the $822 billion average daily trading volume in the U.S. bond
market takes place between broker-dealers and large institutions
in a decentralized, over the counter market(OTC).

BOND MARKET SIZE

Amounts outstanding on the global bond market increased 6% in 2008

to $83 trillion. Domestic bonds accounted for 71% of this and
international bonds the remainder. Domestic bond market stocks
increased 7% during the year, largely due to an increase in
government bonds. The US was the largest market for domestic
bonds in 2008 accounting for 43% of amounts outstanding followed
by Japan with 16%. A quarter of amounts outstanding in the US
were in mortgage backed bonds, a fifth in corporate debt and 18%
 in Treasury bonds with most of the remainder in Federal Agency
securities and municipal bonds. In Europe, public sector debt is
substantial in Italy (103% of GDP), Germany (61%), and France
(58%) with government borrowing set to increase in the next few
years. International bond issuance fell 19% in 2008 with
international mortgage-backed bond issuance hitting record levels.
The UK overtook the US in 2008 to become the leading centre
globally for amounts issued with 30% of the global total. Amounts
outstanding on the international bond market increased 5% in
2008 to $23.9 trillion.

Bond market influence :Bond markets determine the price in terms of

yield that a borrower must pay in able to receive funding. In one
notable instance, when President Clinton attempted to increase the
US budget deficit in the 1990s, it led to such a sell-off (decreasing
prices; increasing yields) that he was forced to abandon the
strategy and instead balance the budget.

Bond Investment

Investment companies allow individual investors the ability to

participate in the bond markets through bond funds, closed-end
funds and unit-investment trusts. In 2006 total bond fund net
inflows increased 97% from $30.8 billion in 2005 to $60.8 billion in
2006. Exchange-traded funds (ETFs) are another alternative to
trading or investing directly in a bond issue. These securities allow
 individual investors the ability to overcome large initial and
incremental trading sizes.

A number of bond indices exist for the purposes of managing portfolios

and measuring performance, similar to the S&P 500 or Russell
Indexes for stocks. The most common American benchmarks are
the Barclays Aggregate, Citigroup BIG and Merrill Lynch
Domestic Master. Most indices are parts of families of broader
indices that can be used to measure global bond portfolios, or may
be further subdivided by maturity and/or sector for managing
specialized portfolios.

Bond (finance): In finance, a bond is a debt security, in which the

authorized issuer owes the holders a debt and, depending on the
terms of the bond, is obliged to pay interest (the coupon) and/or to
repay the principal at a later date, termed maturity. A bond is a
formal contract to repay borrowed money with interest at fixed
intervals.

Thus a bond is like a loan: the issuer is the borrower (debtor),

the holder is the lender (creditor), and the coupon is the interest.
Bonds provide the borrower with external funds to finance long-
term investments, or, in the case of government bonds, to finance
current expenditure. Certificates of deposit (CDs) or
commercial are considered to be money market instruments and
not bonds. Bonds must be repaid at fixed intervals over a period of
time.
Bonds and stocks are both securities, but the major difference between
the two is that stockholders have an equity stake in the company
(i.e., they are owners), whereas bondholders have a creditor stake
in the company (i.e., they are lenders). Another difference is that
bonds usually have a defined term, or maturity, after which the
bond is redeemed, whereas stocks may be outstanding indefinitely.
An exception is a consol bond, which is a perpetuity (i.e., bond with
no maturity).

Issuing bonds: Bonds are issued by public authorities, credit

institutions, companies and supranational institutions in
the primary markets. The most common process of issuing bonds is
through underwriting. In underwriting, one or more securities
firms or banks, forming a syndicate, buy an entire issue of bonds
from an issuer and re-sell them to investors. The security firm
takes the risk of being unable to sell on the issue to end investors.
However, government bonds are instead typically auctioned. In
reality, the financial crisis tested the willingness of the securities
firms to actually perform underwriting. Primary issuance is
arranged by book runners who arrange the bond issue, have the
direct contact with investors and act as advisors to the bond issuer
in terms of timing and price of the bond issue.
 COMMODITY MARKET

Commodity markets are markets where raw or primary products are

exchanged. The trading of commodities consists of direct physical
trading and derivatives trading. The commodities markets have
seen an upturn in the volume of trading in recent years. In the five
years up to 2007, the value of global physical exports of
commodities increased by 17% while the notional value
outstanding of commodity OTC (over the counter) derivatives
increased more than 500% and commodity derivative trading on
exchanges more than 200%. The notional value outstanding of
banks’ OTC commodities’ derivatives contracts increased 27% in
2007 to $9.0 trillion. OTC trading accounts for the majority of
trading in gold and silver. Overall, precious metals accounted for
8% of OTC commodities derivatives trading in 2007, down from
 their 55% share a decade earlier as trading in energy derivatives
rose. Global physical and derivative trading of commodities on
exchanges increased more than a third in 2007 to reach 1,684
million contracts. Agricultural contracts trading grew by 32% in
2007, energy 29% and industrial metals by 30%. Precious metals
trading grew by 3%, with higher volume in New York being
partially offset by declining volume in Tokyo. Over 40% of
commodities trading on exchanges was conducted on US exchanges
and a quarter in China. Trading on exchanges in China and India
has gained in importance in recent years due to their emergence as
some input costs, partly offsetting the decline in downstream
demands.

It is generally agreed that commodities have an expected return of 5%

in real terms which is based on the risk premium for 116 different
commodities weighted equally since 1888 (Source Report 219171-
Wharton Business School). Investment professionals often too
mistakenly claim there is no risk premium in commodities.

Spot Trading

Spot trading is any transaction where delivery either takes place

immediately, or with a minimum lag between the trade and
delivery due to technical constraints. Spot trading normally
involves visual inspection of the commodity or a sample of the
commodity, and is carried out in markets such as wholesale
markets. Commodity markets, on the other hand, require the
existence of agreed standards so that trades can be made without
visual inspection.
Forward contracts

A forward contract is an agreement between two parties to exchange at

some fixed future date a given quantity of a commodity for a price
defined today. The fixed price today is known as the forward price.
Futures contracts: A futures contract has the same general features
as a forward contract but is transacted through a futures exchange.
Commodity and Futures contracts are based on what’s termed
"Forward" Contracts. Early on these "forward" contracts
(agreements to buy now, pay and deliver later) were used as a way
of getting products from producer to the consumer. These typically
were only for food and agricultural Products. Forward contracts
have evolved and have been standardized into what we know today
as futures contracts. Although more complex today, early
“Forward” contracts for example, were used for rice in seventeenth
century Japan. Modern "forward", or futures agreements, began
in Chicago in the 1840s, with the appearance of the railroads.
Chicago, being centrally located, emerged as the hub between
Midwestern farmers and producers and the east coast consumer
population centers.

DELIVERY AND GAURANTEE OF PRODUCTS:

In addition, delivery day, method of settlement and delivery point must

all be specified. Typically, trading must end two (or more) business
days prior to the delivery day, so that the routing of the shipment
can be finalized via ship or rail, and payment can be settled when
the contract arrives at any delivery point.
REGULATION OF COMMODITY MARKET

Cotton, kilowatt-hours of electricity, board feet of wood, long distance

minutes, royalty payments due on artists' works, and other
products and services have been traded on markets of varying
scale, with varying degrees of success. Generally, commodities' spot
and forward prices are solely dependent on the financial return of
the instrument, and do not factor into the price any societal costs,
e.g. smog, pollution, water contamination, etc. Nonetheless, new
markets and instruments have been created in order to address the
external costs of using these commodities such as man-made global
warming, deforestation, and general pollution. For instance, many
utilities now trade regularly on the emissions markets, buying and
selling renewable emissions credits and emissions allowances in
order to offset the output of their generation facilities. While many
have criticized this as a band-aid solution, others point out that the
utility industry is the first to publicly address its external costs.
Many industries, including the tech industry and auto industry,
have done nothing of the sort. In the United States, the principal
regulator of commodity and futures markets is the Commodity
Futures Trading Commission.

Proliferation of contracts, terms, and derivatives

However, if there are two or more standards of risk or quality, as there

seem to be for electricity or soybeans, it is relatively easy to
establish two different contracts to trade in the more and less
desirable deliverable separately. If the consumer acceptance and
 liability problems can be solved, the product can be made
interchangeable, and trading in such units can begin.

Since the detailed concerns of industrial and consumer markets vary

widely, so do the contracts, and "grades" tend to vary significantly
from country to country. A proliferation of contract units, terms,
and futures contracts have evolved, combined into an extremely
sophisticated range of financial instruments. These are more than
one-to-one representations of units of a given type of commodity,
and represent more than simple futures contracts for future
deliveries. These serve a variety of purposes from simple gambling
to price insurance.

Oil

Building on the infrastructure and credit and settlement networks

established for food and precious metals, many such markets have
proliferated drastically in the late 20th century. Oil was the first
form of energy so widely traded, and the fluctuations in the oil
markets are of particular political interest.

Some commodity market speculation is directly related to the stability

of certain states, e.g. during the Persian Gulf War, speculation on
the survival of the regime of Saddam Hussein in Iraq. Similar
political stability concerns have from time to time driven the price
of oil.
The oil market is an exception. Most markets are not so tied to the
politics of volatile regions - even natural gas tends to be more
stable, as it is not traded across oceans by tanker as extensively.

Commodity Markets and Protectionism

Developing countries (democratic or not) have been moved to harden

their currencies, accept IMF rules, join the WTO, and submit to a
broad regime of reforms that amount to a "hedge" against being
isolated. China's entry into the WTO signaled the end of truly
isolated nations entirely managing their own currency and affairs.
The need for stable currency and predictable clearing and rules-
based handling of trade disputes, has led to a global trade
hegemony - many nations "hedging" on a global scale against each
other's anticipated "protectionism", were they to fail to join
the WTO.

There are signs, however, that this regime is far from perfect. U.S. trade
sanctions against Canadian softwood lumber (within NAFTA) and
foreign steel (except for NAFTA partners Canada and Mexico) in
2002 signaled a shift in policy towards a tougher regime perhaps
more driven by political concerns - jobs, industrial policy, even
sustainable forestry and logging practices.

Money Market
The money market is a component of the financial markets for assets
involved in short-term borrowing and lending with original
maturities of one year or shorter time frames. Trading in the
money markets involves Treasury bills, commercial
paper, bankers' acceptances, certificates of deposit, federal funds,
and short-lived mortgage-backed and asset-backed securities. It
provides liquidity funding for the global financial system.

The money market consists of financial institutions and dealers in

money or credit who wish to either borrow or lend. Participants
borrow and lend for short periods of time, typically up to thirteen
months. Money market trades in short-term financial
instruments commonly called "paper." This contrasts with
the capital market for longer-term funding, which is supplied by
bonds and equity. The core of the money market consists of banks
borrowing and lending to each other, using commercial
paper, repurchase agreements and similar instruments. These
instruments are often benchmarked to (i.e. priced by reference to)
the London Interbank Offered Rate (LIBOR) for the appropriate
term and currency. Finance companies, such as GMAC, typically
fund themselves by issuing large amounts of asset-
backed commercial paper (ABCP) which is secured by
the pledge of eligible assets into an ABCP conduit. Examples of
eligible assets include auto loans, credit card receivables,
residential/commercial mortgage loans, mortgage-backed
securities and similar financial assets. Certain large corporations
with strong credit ratings, such as General Electric, issue
 commercial paper on their own credit. Other large corporations
arrange for banks to issue commercial paper on their behalf via
commercial paper lines.

In the United States, federal, state and local governments all issue paper
to meet funding needs. States and local governments
issue municipal paper, while the US Treasury issues Treasury
bills to fund the US public debt. Trading companies often
purchase bankers' acceptances to be tendered for payment to
overseas suppliers.

Futures Markets

Futures exchanges, such as Euro next .life and the Chicago Mercantile
Exchange, trade in standardized derivative contracts. These
are options contract sand futures contracts on a whole range
of underlying products. The members of the exchange hold
positions in these contracts with the exchange, who acts as
central counterparty. When one party goes long (buys) a futures
contract, another goes short (sells). When a new contract is
introduced, the total position in the contract is zero. Therefore, the
sum of all the long positions must be equal to the sum of all the
short positions. In other words, risk is transferred from one party
to another. The total notional amount of all the outstanding
positions at the end of June 2004 stood at $53 trillion.

Insurance

Insurance, in law and economics, is a form of risk

management primarily used to hedge against the risk of a
 contingent loss. Insurance is defined as the equitable transfer of the
risk of a loss, from one entity to another, in exchange for
a premium, and can be thought of as a guaranteed and known
small loss to prevent a large, possibly devastating loss.
An insurer is a company selling the insurance;
an insured or policyholder is the person or entity buying the
insurance. The insurance rate is a factor used to determine the
amount to be charged for a certain amount of insurance coverage,
called the premium. Risk management, the practice
of appraising and controlling risk, has evolved as a discrete field of
study and practice.

Foreign Exchange Market

The foreign exchange market (forex, FX, or currency market) is a

worldwide decentralized over-the-counter financial market for the
trading of currencies.

The purpose of the foreign exchange market 'Forex' is to assist

international trade and investment. The foreign exchange market
allows businesses to convert one currency to another foreign
currency. For example, it permits a U.S. business to import
European goods and pay Euros, even though the business's income
is in U.S. dollars. Some experts, however, believe that the
unchecked speculative movement of currencies by large financial
institutions such as hedge funds impedes the markets from
correcting global current account imbalances. In a typical foreign
exchange transaction a party purchases a quantity of one currency
by paying a quantity of another currency. The modern foreign
 exchange market started forming during the 1970s when countries
gradually switched to floating exchange rates from the
previous exchange rate regime, which remained fixed as per
the Bretton Woods system.

The Foreign Exchange Market is unique because of

 trading volume results in market liquidity

 geographical dispersion
 continuous operation: 24 hours a day except weekends, i.e. trading
from 20:15 UTC on Sunday until 22:00 UTC Friday
 the variety of factors that affect exchange rates
 the low margins of relative profit compared with other markets of
fixed income
 the use of leverage to enhance profit margins with respect to account
size

As such, it has been referred to as the market closest to the ideal perfect
competition, notwithstanding market manipulation by central banks.[citation
needed] According to the Bank for International Settlements, average daily
turnover in global foreign exchange markets is estimated at $3.98 trillion as
of April 2007. Trading in the world's main financial markets accounted for
$3.21 trillion of this. This approximately $3.21 trillion in main foreign
exchange market turnover was broken down as follows:

 $1.005 trillion in spot transactions

 $362 billion in outright forwards
 $1.714 trillion in foreign exchange swaps
  $129 billion estimated gaps in reporting

DETERMINENTS OF FX RATES: The following theories explain the

fluctuations in FX rates in a floating exchange rate regime (In
a fixed exchange rate regime, FX rates are decided by its
government):

(a) International parity conditions: Relative Purchasing Power

Parity, interest rate parity, Domestic Fisher effect, International
Fisher effect. Though to some extent the above theories provide
logical explanation for the fluctuations in exchange rates, yet these
theories falter as they are based on challengeable assumptions [e.g.,
free flow of goods, services and capital] which seldom hold true in
the real world.

(b) Balance of payments model: This model, however, focuses largely

on tradable goods and services, ignoring the increasing role of
global capital flows. It failed to provide any explanation for
continuous appreciation of dollar during 1980s and most part of
1990s in face of soaring US current account deficit.

(C) Asset market model: views currencies as an important asset class for
constructing investment portfolios. Assets prices are influenced
mostly by people’s willingness to hold the existing quantities of
assets, which in turn depends on their expectations on the future
worth of these assets.

CAPITAL MARKET AND ITS TYPES

Meaning:

Capital markets are markets where people, companies, and governments

with more funds than they need (because they save some of their
income) transfer those funds to people, companies, or governments
who have a shortage of funds (because they spend more than their
income). Stock and bond markets are two major capital markets.
Capital markets promote economic efficiency by channeling money
from those who do not have an immediate productive use for it to those
who do. Capital markets carry out the desirable economic function of
directing capital to productive uses. The savers (governments,
businesses, and people who save some portion of their income) invest
their money in capital markets like stocks and bonds. The borrowers
(governments, businesses, and people who spend more than their
income) borrow the savers' investments that have been entrusted to the
capital markets.

For example, suppose A and B make Rs. 50,000 in one year, but they only
spend Rs.40,000 that year. They can invest the 10,000 - their savings -
in a mutual fund investing in stocks and bonds all over the world. They
know that making such an investment is riskier than keeping the 10,000
at home or in a savings account. But they hope that over the long-term
the investment will yield greater returns than cash holdings or interest
on a savings account. The borrowers in this example are the companies
that issued the stocks or bonds that are part of the mutual fund
portfolio. Because the companies have spending needs that exceeds
their income, they finance their spending needs by issuing securities in
the capital markets.
The Structure of Capital Markets

Primary markets:

The primary market is where new securities (stocks and bonds are the most
common) are issued. The corporation or government agency that needs
funds (the borrower) issues securities to purchasers in the primary
market. Big investment banks assist in this issuing process. The banks
underwrite the securities. That is, they guarantee a minimum price for a
business's securities and sell them to the public. Since the primary
market is limited to issuing new securities only, it is of lesser
importance than the secondary market.

The primary market is that part of the capital markets that deals with
the issuance of new securities. Companies, governments or public
sector institutions can obtain funding through the sale of a
new stock or bond issue. This is typically done through a syndicate
of securities dealers. The process of selling new issues to investors is
called underwriting. In the case of a new stock issue, this sale is
an initial public offering (IPO). Dealers earn a commission that is
built into the price of the security offering, though it can be found
in the prospectus.

Performance of Primary Market : Primary market is a market where fresh

securities are issued whether debt or equity. Primary market for equities
are further divided in public issues and rights issues. Public issues can
be from existing listed companies or those companies which are
approaching public for the first time which are popularly known as
IPOs. 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.
In1991/92, Rs.62.15 billion was raised in the primary market. This
figure rose to Rs.276.21 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. More recently, the number of companies that approached
public through IPOs have almost vanished in the first quarter of 2000-
2001. The declining trend of IPOs continued in 2001-2002 and also in
2002-2003 only after the success of Maruti IPO, a number of IPOs are
scheduled for the current financial year.

Some research studies have shown the performance of the primary

market for equities is very often linked to the performance of equities
on secondary markets. If the stocks in the market are booming there
will be a rush to issue fresh shares in primary market and vice versa.
The impact of the fall in stock markets on primary issues can be clearly
seen on the listing price of the IPOs from April 2000 to March 2001.
During this period the statistics revealed that as many as 15 issues [out
of total of 25] listed on NSE traded during the same period, were well
below its issue price on the first day of listing. Even some mega issues
are no exception during the same period. This result can be
interpreted that the Corporate enterprises started using the private
placement market for tapping their resources.
In case of government securities , it is the RBI which issues securities
on behalf of the government (both state as well as central government).
A mutual fund is a professionally managed type of collective
 investment scheme that pools money from many investors and invests
it in stocks, bonds, short-term money market instruments, and/or other
securities. The mutual fund will have a fund manager that trades the
pooled money on a regular basis. The net proceeds or losses are then
typically distributed to the investors annually.

Financial Institution

A financial institution is an institution that provides financial services for its

clients or members. Probably the most important financial service
provided by financial institutions is acting as financial intermediaries.
Most financial institutions are highly regulated by government bodies.
Broadly speaking, there are three major types of financial institution :-

1) Deposit -taking institutions that accept and manage deposits and make
loans (this category includes banks, credit unions, trust companies, and
mortgage loan companies);

2) Insurance companies and pension funds; and

3) Brokers , underwriters and investment funds.

Secondary market:

The vast majority of capital transactions, take place in the secondary market.
The secondary market includes stock exchanges (like the New York
Stock Exchange and the Tokyo Nikkei), bond markets, and futures and
options markets, among others. All of these secondary markets deal in
the trade of securities.
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. 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; 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.

SECURITIES

The term "securities" encompasses a broad range of investment

instruments. Investors have essentially two broad categories of
securities available to them:

1. Equity securities (which represent ownership of a part of a company)

2. Debt securities (which represent a loan from the investor to a

company or government entity).

Equity Security: When investors (savers) buy stock, they become owners
of a "share" of a company's assets and earnings. If a company is
 successful, the price that investors are willing to pay for its stock will
often rise and shareholders who bought stock at a lower price then
stand to make a profit. If a company does not do well, however, its
stock may decrease in value and shareholders can lose money. Stock
prices are also subject to both general economic and industry-specific
market factors. In our example, if Carlos and Anna put their money in
stocks, they are buying equity in the company that issued the stock.
Conversely, the company can issue stock to obtain extra funds. It must
then share its cash flows with the stock purchasers, known as
stockholders.

International Equity Markets:

Funds can be raised in the primary market from the domestic market as well
as from international markets. After the reforms were initiated in 1991,
one of the major policy changes was allowing Indian companies to
raise resources by way of equity issues in the international markets.
Earlier, only debt was allowed to be raised from international markets.
In the early 1990s foreign exchange reserves had depleted and the
country’s rating had been downgraded. This resulted in a foreign
exchange crunch and the government was unable to meet the import
requirement of Indian companies. Hence allowing companies to tap the
equity and bond market In Europe seemed a more sensible option. This
permission encourages Indian companies to become global.

1. Global depository receipts (GDRs)

2. American Depository Receipts (ADRs)

3. Foreign Currency Convertible Bonds (FCCBs)

4. External Commercial Borrowings (ECBs).

Introduction:

ADR stands for American Depository Receipt. Similarly, GDR stands for
Global Depository Receipt. Every publicly traded company issues
shares – and these shares are listed and traded on various stock
exchanges. Thus, companies in India issue shares which are traded on
Indian stock exchanges like BSE (The Stock Exchange, Mumbai), NSE
(National Stock Exchange), etc. These shares are sometimes also listed
and traded on foreign stock exchanges like NYSE(New York Stock
Exchange) or NASDAQ (National Association of Securities Dealers
Automated Quotation).But to list on a foreign stock exchange, the
company has to comply with the policies of those stock exchanges.
Many times, the policies of these exchanges in US or Europe are much
more stringent than the policies of the exchanges in India. This deters
these companies from listing on foreign stock exchanges directly. But
many good companies get listed on these stock exchanges indirectly –
using ADRs and GDRs.

Process of issue of ADR/GDR:

1. The company deposits a large number of its shares with a bank located in
the country where it wants to list indirectly. The bank issues receipts
against these shares, each receipt having a fixed number of shares as an
underlying (Usually 2 or 4).

2. These receipts are then sold to the people of this foreign country (and
anyone who are allowed to buy shares in that country). These receipts
are listed on the stock exchanges.
 3. They behave exactly like regular stocks – their prices fluctuate
depending on their demand and supply, and depending on the
fundamentals of the underlying company.

4. These receipts, which are traded like ordinary stocks, are called
Depository Receipts. Each receipt amounts to a claim on the predefined
number of shares of that company. The issuing bank acts as a
depository for these shares – that is, it stores the shares on behalf of the
receipt holders.

1. ADR - American Depositary Receipt

Definitions:

 It is a receipt for shares bought in the US of a foreign-based corporation

in an overseas market. The receipt is held by a US bank, but
shareholders are entitled to any dividends and capital gains.

 Security representing the ownership interest in a foreign company's

common stock. ADRs allow foreign shares to be traded in the United
States

 Certificates issued by a US depository bank, representing foreign shares

held by the bank, usually by a branch or correspondent in the country
of issue.

One ADR may represent a portion of a foreign share, one share or a bundle
of shares of a foreign corporation.

Meaning: American Depository Receipts (ADRs) are certificates that

represent shares of a foreign stock owned and issued by a U.S. bank.
The foreign shares are usually held in custody overseas, but the
 certificates trade in the U.S. Through this system, a large number of
foreign-based companies are actively traded on one of the three major
U.S. equity markets (the NYSE, AMEX or Nasdaq).

An American Depositary Receipt (ADR) is how the stock of most foreign

companies trades in United States stock markets. Each ADR is issued
by a U.S.depositary bank and represents one or more shares of a
foreign stock or a fraction of a share. If investors own an ADR they
have the right to obtain the foreign stock it represents, but U.S.
investors usually find it more convenient to own the ADR. The price of
an ADR is often close to the price of the foreign stock in its home
market, adjusted for the ratio of ADRs to foreign company shares.

Depository banks have numerous responsibilities to the holders of ADRs

and to the non-U.S. company the ADRs represent. The largest
depositary bank is The Bank of New York. Individual shares of a
foreign corporation represented by an ADR are called American
Depositary Shares (ADS).

Pricing of ADR:

The prices of ADRs in the secondary market are, of course, determined by

supply and demand, but the price will not deviate too much from the
price of the underlying stock. If the ADR is trading at a higher price
than the equivalent foreign shares of the company, then more shares of
the company will be bought and held in the custodian bank, and more
ADRs will be created. If the ADR trades below the equivalent price,
then some ADRs will be canceled, and the corresponding shares of the
company will be released by the custodian bank. This maintains parity
 between the price of the ADR and the foreign shares, after accounting
for the currency exchange rate.

Dividend payments:

When dividends are paid, the custodian bank receives it and withholds any
foreign taxes, exchanges it for U.S. dollars, then sends it to the
depositary bank, which then sends it to the investors. The depositary
bank, being a U.S. bank, handles most of the interaction with the U.S.
investors, such as rights offerings, stock splits, and stock dividends, but
sponsored ADR investors may receive communications, such as
financial statements, directly from the company.

Risks involved:

Although ADR transactions are in U.S. currency, there still is a currency

exchange risk. If the dollar falls, for instance, then the amount of
dividend in U.S. dollars will be reduced, and the market price of the
ADR will drop. There is also political risk because the ADR still
derives its value from the foreign stock, which could be adversely
affected by unfavorable changes in politics or the law of the country.

Debt securities:

Savers who purchase debt instruments are creditors. Creditors, or debt

holders, receive future income or assets in return for their investment.
The most common example of a debt instrument is a bond. When
investors buy bonds, they are lending the issuers of the bonds their
money. In return, they will receive interest payments (usually at a fixed
rate) for the life of the bond and receive the principal when the bond
expires. National governments, local governments, water districts,
global, national, and local companies, and many other types of
institutions sell bonds.
Debt Market in India:-

For a developing economy like India, debt markets are crucial sources of
capital funds. The debt market in India is amongst the largest in Asia. It
includes government securities, public sector undertakings, other
government bodies, financial institutions, banks and companies. The
debt markets in India is divided into three segments, viz., Government
Securities, Public Sector Units (PSU) bonds, and corporate securities.
The market for Government Securities comprises the Centre, State and
State-sponsored securities. Government securities (G-secs) or gilts are
sovereign securities, which are issued by the Reserve Bank of India
(RBI) on behalf of the Government of India (GOI). The GOI uses these
funds to meet its expenditure commitments. The PSU bonds are
generally treated as surrogates of sovereign paper, sometimes due to
explicit guarantee and often due to the comfort of public ownership.
Some of the PSU bonds are tax free, while most bonds including
government securities are not tax-free. The RBI also issues tax-free
bonds, called the 6.5% RBI relief bonds, which is a popular category of
tax-free bonds in the market. Corporate bond markets comprise of
commercial paper and bonds.

These bonds typically are structured to suit the requirements of investors and
the issuing corporate, and include a variety of tailor- made features
with respect to interest payments and redemption.
 PARTICIPANTS IN THE DEBT MARKETS

1. Central Government:-

Central government raises money through bond issuances, to fund budgetary

deficits and other short and long term funding requirements.

2. Reserve Bank of India:-

Reserve Bank Of India (RBI), the central bank of the country, acts as
investment banker to the government, raises funds for the government
through bond and T-bill issues, and also participates in the market
through open- market operations, in the course of conduct of monetary
policy.

3. Primary dealers:-

Primary dealers are market intermediaries appointed by the Reserve Bank of

India who underwrite and make market in government securities

4. State Governments, municipalities and local bodies :-

State governments , municipalities and local bodies issue securities in the

debt markets to fund their developmental projects, as well as to finance
their budgetary deficits.

5. Public sector units (PSU):-

Public Sector Units are large issuers of debt securities, for raising funds to
meet the long term and working capital needs.

6. Corporate treasuries:-
Corporate treasuries issue short and long term paper to meet the financial
requirements of the corporate sector.

7. Banks:-

Commercial banks are the largest investors in the debt markets, particularly
the treasury bill and G-sec markets. They have a statutory requirement
to hold a certain percentage of their deposits (currently the mandatory
requirement is 24% of deposits) in approved securities (all government
bonds qualify) to satisfy the statutory liquidity requirements.

8. Mutual funds :-
Mutual Funds have emerged as another important player in the debt markets,
owing primarily to the growing number of bond funds that have mobilized
significant amounts from the investors.
9. Foreign Institutional Investors:-
Foreign Institutional Investors are permitted to invest in Dated Government
Securities and Treasury Bills within certain specified limits.
10. Provident funds:-
Provident funds are large investors in the bond markets, as the prudential
regulations governing the deployment of the funds they mobilize, mandate
investments pre-dominantly in treasury and PSU bonds.
FEATURES OF CAPITAL MARKET
This is the market for new long term equity capital. The primary
market is the market where the securities are sold for the first time.
Therefore it is also called the new issue market (NIM).
In a primary issue, the securities are issued by the company directly to
investors.
The company receives the money and issues new security certificates to
the investors.
Primary issues are used by companies for the purpose of setting up new
business or for expanding or modernizing the existing business.
The primary market performs the crucial function of facilitating capital
formation in the economy.
The new issue market does not include certain other sources of new long
term external finance, such as loans from financial institutions.
Borrowers in the new issue market may be raising capital for
converting private capital into public capital; this is known as
"going public."
The financial assets sold can only be redeemed by the original holder.
 The following table illustrates where financial markets fit in the
relationship between lenders and borrowers:

Relationship between lenders and borrowers

Lenders Financial Intermediaries Financial Markets Borrowers

Interbank Individuals
Banks
Stock Exchange Companies
Individuals Insurance Companies
Money Market Central Government
Companies Pension Funds
Bond Market Municipalities
Mutual Funds
Foreign Exchange Public Corporations
Individuals

Many individuals are not aware that they are lenders, but almost everybody
does lend money in many ways. A person lends money when he or she:

• puts money in a savings account at a bank;

• contributes to a pension plan;
• pays premiums to an insurance company;
• invests in government bonds; or
• invests in company shares.

Companies

Companies tend to be borrowers of capital. When companies have surplus

cash that is not needed for a short period of time, they may seek to make
money from their cash surplus by lending it via short term markets
called money markets.

There are a few companies that have very strong cash flows. These
companies tend to be lenders rather than borrowers. Such companies may
decide to return cash to lenders (e.g. via a share buyback.) Alternatively,
they may seek to make more money on their cash by lending it (e.g.
investing in bonds and stocks.)

Borrowers
Individuals borrow money via bankers' loans for short term needs or longer
term mortgages to help finance a house purchase.

Companies borrow money to aid short term or long term cash flows. They
also borrow to fund modernisation or future business expansion.

Governments often find their spending requirements exceed their tax

revenues. To make up this difference, they need to borrow. Governments
also borrow on behalf of nationalised industries, municipalities, local
authorities and other public sector bodies. In the UK, the total borrowing
requirement is often referred to as the Public sector net cash
requirement (PSNCR).

Governments borrow by issuing bonds. In the UK, the government also

borrows from individuals by offering bank accounts and Premium Bonds.
Government debt seems to be permanent. Indeed the debt seemingly
expands rather than being paid off. One strategy used by governments to
reduce the value of the debt is to influence inflation.

Municipalities and local authorities may borrow in their own name as well
as receiving funding from national governments. In the UK, this would
cover an authority like Hampshire County Council.

Public Corporations typically include nationalised industries. These may

include the postal services, railway companies and utility companies.

Many borrowers have difficulty raising money locally. They need to borrow
internationally with the aid of Foreign exchange markets.

Derivative products
During the 1980s and 1990s, a major growth sector in financial markets is
the trade in so called derivative products, or derivatives for short.

In the financial markets, stock prices, bond prices, currency rates, interest
rates and dividends go up and down, creating risk. Derivative products are
financial products which are used to control risk or
paradoxically exploit risk. It is also called financial economics.

Currency markets

Seemingly, the most obvious buyers and sellers of currency are importers
and exporters of goods. While this may have been true in the distant past,
when international trade created the demand for currency markets, importers
and exporters now represent only 1/32 of foreign exchange dealing,
according to the Bank for International Settlements.

The picture of foreign currency transactions today shows:

• Banks/Institutions
• Speculators
• Government spending (for example, military bases abroad)
• Importers/Exporters
• Tourists

Importance of Capital Market:

1. The capital market serves as an important source for the productive use of
economy’s savings. It mobilizes the saving of the people for further
investment and thus avoids their wastage in unproductive uses.
2. It provides incentives to saving and facilitates capital formation by
offering suitable rates of interest as the price of capital.
3. It provides an avenue for investors, particularly the household sector to
invest in financial assets which are more productive than physical assets.
4. It facilitates increase in production and productivity in the economy and
thus, enhances the economic welfare of the society. Thus it facilitates “the
movement of stream of command over capital to the point of highest yield”
towards those who can apply them productively and profitably to enhance
the national income in the aggregate.
5. The operations of different institutions in the capital market induce
economic growth. They give quantitative and qualitative directions to the
flow of funds and bring about rational allocation of scarce resources.
6. A healthy capital market consisting of expert intermediaries promotes
stability in values of securities representing capital funds.
7. Moreover, it serves as an important source for technological up gradation
in the industrial sector by utilizing the funds invested by the public. Thus, a
capital market serves as an important link between those who save and those
who aspire to invest their savings.

CAPITAL MARKET IN INDIA: -

Coming to Indian context, the term capital market refers to only stock
markets as per the common man's ideology, but the capital markets have a
much broader sense. Where as in global scenario, it consists of various
markets such as:
1. Government securities market
2. Municipal bond market
3. Corporate debt market
4. Stock market
5. Depository receipts market
6. Mortgage and asset-backed securities market
7. Financial derivates market
8. Foreign exchange market

India’s presence in International Markets:

India has made its presence felt in the IFMs only after 1991-92. At present
there are over 50 companies in India, which have accessed the GDR route
for raising finance. The change in situation has been due to the following
factors:
1. Improved perception of India’s economic reforms.
2. Improved export performance.
3. Healthy economic indicator.
4. Inflation at single digit.
5. Improved forex reserves.
6. Improved performance of Indian companies.
7. Improved confidence of FIIs.

Reliance was the first Indian company to issue GDR in 1992. Since 1993,
number of Indian companies successfully tapped the global capital markets
& raised capital through GDR or foreign currency bond issues. Though there
was a temporary setback due to Asian crisis in 1997. Since 1999 even IT
majors have stepped the bandwagon of international markets & raised
capital. The average size of the issue was around 75USD. And the total
amount raised was around USD 6.5billion. India has the distinction of
having the largest number of GDR/ADR issues by any country.

INTERMEDIARIES INVOLVED IN INTERNATIONAL CAPITAL

MARKET:
Lead & co-lead managers:
The responsibilities of a lead manager include undertaking due diligence &
preparing the offered document , marketing the issues , arrangement &
conducting road shows. Mandate is given by the issuer to the lead manager.
Underwriters:
The lead manager & co managers act as underwriters to the issue , taking on
the risk of interest rates /markets moving against them before they have
placed bonds/DRs. Lead Managers may also invite additional investment
banks to act as sub-underwriters , thus forming a larger underwriting group.
The underwriters undertake to subscribe to the unsubscribed portion of the
issue .

Agents & Trustees:

These intermediaries are involved in the issue of bonds/convertibles. The
issuer of bonds convertible in association with the lead manager must
appoint ‘paying agents’ in different financial centers, who will arrange for
the payment of interest \& principal due to investor under the terms of the
issue. These paying agents will be banks.
Lawyers & Auditors:
The lead manager will appoint a prominent firm of solicitors to draw up
documentation evidencing the bond/DRs issue. The various draft documents
will vetted by the solicitors acting for the issuer. Many of these documents
are prepared in standard forms with a careful review to the satisfaction of the
parties.

The legal advisors will advise the issuer pertaining to the local & foreign
laws. Similarly, Auditors are required for preparation of the financial
statements, cash flows, and audit reports. The Auditors provide a comfort
letter to the lead manager on the financial health of the company. They also
prepare the financial statement as per GAAP requirements wherever
necessary.
Listing Agents & Stock Exchanges:
The listing Agent helps facilitate the documentation & listing process for
listing on stock exchange & keep file information regarding the issuer such
as Annual reports, depository agreements, articles of association,etc. The
stock exchange reviews the issuers application for listing of bonds/GDRs &
provides comments on offering circular prior to accepting the security for
listing.

Depository Bank:
It is involved only in the issue of GDRs. It is responsible for issuing the
actual GDRs ,disseminating information from the issuer to the DR holders,
paying any dividends or other distributions & facilitating the exchange of
GDRs into underlying shares when presented for redemption.
Custodian:
The Custodian holds the shares underlying the GDRs on behalf of the
depository &is responsible for collecting rupee dividends on the underlying
shares & repatriation of the same to the depository in US dollars/foreign
currency.

Internationalization of Capital Markets in the Late 1990s

One of the most important developments since the 1970s has been the
internationalization, and now globalization, of capital markets. Let's look at
some of the basic elements of the international capital markets.

1. The International Capital Market of the Late 1990s was composed of

a Number of Closely Integrated Markets with an International
Dimension:
Basically, the international capital market includes any transaction with an
international dimension. It is not really a single market but a number of
closely integrated markets that include some type of international
component. The foreign exchange market was a very important part of the
international capital market during the late 1990s. Internationally traded
stocks and bonds have also been part of the international capital market.
Since the late 1990s, sophisticated communications systems have allowed
people all over the world to conduct business from wherever they are. The
major world financial centres include Hong Kong, Singapore, Tokyo,
London, New York, and Paris, among\ others. Foreign bonds are a typical
example of an international security. A bond sold by a Korean company in
Mexico denominated in Mexican pesos is a foreign bond. Eurobonds are
another example. Of course, the foreign exchange market, where
international currencies are traded, was a tremendously large and important
part of the international capital market in the late 1990s.

2. The Need to Reduce Risk Through Portfolio Diversification Explains

in Part the Importance of the International Capital Market During the
Late 1990s:
A major benefit of the internationalization of capital markets is the
diversification of risk. Individual investors, major corporations, and
individual countries all usually try to diversify the risks of their financial
portfolios. The reason is that people are generally risk-averse. They would
rather get returns on investments that are in a relatively narrow band than
investments that have wild fluctuations year-to-year. All portfolio investors
look at the risk of their portfolios versus their returns. Higher risk
investments generally have the potential to yield higher returns, but there is
much more variability.
3. The Principal Actors in the International Capital Markets of the Late
1990s were Banks, Non-Bank Financial Institutions, Corporations, and
Government Agencies:
Commercial banks powered their way to a place of considerable influence in
international markets during the late 1990s. Commercial banks undertook a
broad array of financial activities during the late 1990s. They granted loans
to corporations and governments, were active in the bond market, and held
deposits with maturities of varying lengths. Special asset transactions, like
underwriting were undertaken by commercial banks. Non-bank financial
institutions became another fast-rising force in international markets during
the late 1990s. Insurance companies, pension and trust funds, and mutual
funds from many countries began to diversify into international markets in
the 1990s. Together, portfolio enhancement and a widespread increase in
fund contributors have accounted for the strength these funds had in the
international marketplace. Government agencies, including central banks,
were also major players in the international marketplace during the late
1990s. Central banks and other government agencies borrowed funds from
abroad. Governments of developing countries borrowed from commercial
banks, and state-run enterprises also obtained loans from foreign commercial
banks.

4. Changes in the International Marketplace Resulted in a New Era of

Global Capital Markets during the Late 1990s, which were Critical to
Development.
Many observers say we entered an era of global capital markets in the 1990s.
The process was attributable to the existence of offshore markets, which
came into existence decades prior because corporations and investors wanted
to escape domestic regulation. The existence of offshore markets in turn
forced countries to liberalize their domestic markets (for competitive
reasons). This dynamic created greater internationalization of the capital
markets. Three primary reasons account for this phenomenon. First, citizens
around the world (and especially the Japanese) began to increase their
personal savings. Second, many governments further deregulated their
capital markets since 1980. This allowed domestic companies more
opportunities abroad, and foreign companies had the opportunity to invest in
the deregulated countries. Finally, technological advances made it easier to
access global markets. Information could be retrieved quicker, easier, and
cheaper than ever before.
Developing countries, like all countries, must encourage productive
investments to promote economic growth. Thus, foreign savings, which
many people simply call foreign investment, can benefit developing
countries.
In Indian context:
The international capital market as it has been evolving provides an
opportunity for developing countries like India to attract the required capital
inflow for accelerating their pace of development, manage their foreign
exchange assets and liabilities to their advantage and develop export
capabilities in the field of financial services. Active participation in this
market would not only improve their access to the market but also indicate
the institutional and policy framework essential for developing effective and
efficient domestic financial markets. The possibilities of such participation
would be enhanced if the developing countries like India take a constructive
stand with regard to the multilateral negotiations in respect of trade in
services under the Uruguay Round.
Recent Situation
Recent financial problems in emerging economies have led to calls for a new
international financial architecture. Some of the problems are:
1. Inflation concerns are increasingly taking hold of the international capital
markets; there are fears of a repetition of the 1970s, when industrialized
countries endured double-digit rates of inflation.
2. Higher energy and food prices, rising wages in emerging markets and the
weak US dollar which is driving up US import prices.
3. In emerging markets like India inflation is being driven above all by rising
food prices.
4. In recent months oil has breached the 130 US dollar per barrel mark, and
thus been a main driver of global inflationary pressure. Declining reserves in
the oil producing countries, and low levels of investment and political
problems could tighten the supply situation still further, countering any
efforts to improve energy efficiency and further develop alternative energy
sources. Production will not be able to keep pace with growing demand,
especially from Asia. So the oil price is likely to remain high and continue
rising in the long term."
5. Still it is believed that there may not be a recession in the USA, but a
there may not be a quick recovery either. In the Euro zone we are likely to
see a cooling-off of the economy in 2008 and 2009. Emerging markets
should be able to decouple further from the US economy and consolidate
their growth at a high level.
In the above conditions, International capital flows should not be restricted;
they benefit entrepreneurs and savers alike, with lower borrowing costs and
greater returns. The international flow of capital improves risk management,
allows consumption smoothing, improves financial-sector efficiency, and
leads to greater overall market discipline. Furthermore, capital flows have a
stabilizing effect on financial markets. Restricting international investment
denies a country those benefits; the result is slower growth and reduced
standards of living.

Circuit Breaker
Circuit breaker limit changes everyday and stock keeps moving from one
circuit breaker category to another, based on previous day’s closing price.
The intention of introducing the circuit-breaker was to reduce excessive
speculation by stopping order flow and help improve market liquidity. The
concept of circuit breaker was laid back to 1987 crash of US markets. This
crash left the surveillance system of US exchanges to introduce the concept
of circuit breakers. In India, both NSE and BSE introduced the concept of
circuit breaker. NSE has introduced it post 2000. Circuit breaker system
applies to both stocks and market as a whole.
Index wide circuit Limit
The index-based market-wide circuit breaker system applies at 3 stages of
the index movement, either way viz. at 10%, 15% and 20%. These circuit
breakers when triggered bring about a coordinated trading halt in all equity
and equity derivative markets nationwide. The market-wide circuit
breakers are triggered by movement of either the BSE Sensex or the NSE
S&P CNX Nifty, whichever is breached earlier. In case of a 10% movement
of either of these indices, there would be a one-hour market halt if the
movement takes place before 1:00 p.m. In case the movement takes place at
or after 1:00 p.m. but before 2:30 p.m. there would be trading halt for ½
hour. In case movement takes place at or after 2:30 p.m. there will be no
trading halt at the 10% level and market shall continue trading. In case if the
market hits 10% before 1 p.m. then as explained there would be a one hour
halt in trading and after resumption of trade in case if the market hits 15% in
either index, then there shall be a two-hour halt. If the 15% trigger is reached
on or after 1:00p.m. but before 2:00 p.m., there shall be a one-hour halt. If
the 15% trigger is reached on or after 2:00 p.m. the trading shall halt for the
remaining part of the day. As explained if the market fails to resume at 10%
then the next limit is placed at 15% and finally at 20%. In case if market
fails to resume from 15% and if it hits 20% irrespective of the time, the
trading shall be halt for remaining part of the day.

Stock wise circuit limits

Both NSE and BSE have implemented the circuit limit system on the stocks.
They have applied the stock wise circuit limit system at four levels i.e. 2%,
5%, 10% and 20%. Circuit limits like any other concept have both pros and
cons. On the positive side, with the presence of circuit filters, the
traders/investors’ fear of erosion of wealth is not rapid when compared to
not having circuit limits. However, it may not be true with in all the cases.
Many times, the stock might see a rise due to announcement of any
corporate action. In that case, the rise of stock beyond a limit might be
genuine but still, due to application of this limit the trading in stock is held.
The need for circuit-filters can be questioned on several grounds. For
instance, empirical evidence on the effectiveness of price limits, circuit-
breakers and trading halts is ambiguous. But in the case of specific situations
where it is clear that the equilibrium value of the asset will change, then it
makes no sense to have circuit breakers.

Foreign Direct Investment And Foreign Institutional Investment

Foreign Direct Investment (FDI) is the investment made by the foreign
companies / investors in a company with a strategic perspective. The
investment is not only made to gain return but also made to have a say in the
management of the affairs of the company.
On the other hand, Foreign Institutional Investments (FIIs) also called as
portfolio investments are made by foreign investors primarily to get a
healthy return on their investment. FDI is preferred over FII investments
since it is considered to be the most
beneficial form of foreign investment for the economy as a whole. Direct
investment targets a specific enterprise, with the aim of increasing its
capacity/productivity or changing its management control. Direct investment
to create or augment capacity ensures that the capital inflow translates into
additional production. In the case of FII investment that flows into the
secondary market, the effect is to increase capital availability in general,
rather than availability of capital to a particular enterprise. Translating an FII
inflow into additional production depends on production decisions by
someone other than the foreign investor — some local investor has to draw
upon the additional capital made available via FII inflows to augment
production. In the case of FDI that flows in for the purpose of acquiring an
existing asset, no addition to production capacity takes place as a direct
result of the FDI inflow. Just like in the case of FII inflows, in this case too,
addition to production capacity does not result from the action of the foreign
investor – the domestic seller has to invest the proceeds of the sale in a
manner that augments capacity or productivity for the foreign capital inflow
to boost domestic production. There is a widespread notion that FII inflows
are hot money — that it comes and goes, creating volatility in the stock
market and exchange rates. While this might be true of individual funds,
cumulatively, FII inflows have only provided net inflows of capital. FDI
tends to be much more stable than FII inflows. Moreover, FDI brings not
just capital but also better management and governance practices and, often,
technology transfer. The know-how thus transferred along with FDI is often
more crucial than the capital per se. No such benefit accrues in the case of
FII inflows, although the search by FIIs for credible investment options has
tended to improve accounting and governance practices among listed Indian
companies. The following graph shows the FDI & FII inflows in India
during the last 5 years
 Impact of capital market on Indian Economy:-

1. Long term finance for corporate and government :-

The capital market is the market for securities, where companies and
governments can raise long term funds. Selling stock and selling bonds are
two ways to generate capital and long term funds. It provides a new avenue
to corporate and government to raise funds for long term. At present the
central government has a large fiscal deficit of 6.8% of GDP, which comes
to around Rs. 4,00,000 cr. To finance this large deficit the government
would look to capital market . Corporates at the moment are also looking at
raising funds through capital market.
2. Helps to bridge investment – savings gap:-
It is seen mostly in case of developing countries that they suffer from
investment – savings gap . This gap means that funds available fall far short
of the amount needed to stimulate economic development. Thus this gap
hinders the economic growth of a developing country like India. In such a
situation capital market plays an important role . Capital market expands the
investment options available in the country , which attracts portfolio
investments from abroad. Domestic savings are also facilitated by the
availability of additional investment options. This enables to bridge the gap
between investment and savings and paves the way for economic
development . India’s improving macroeconomic fundamentals, a sizeable
skilled labour force and greater integration with the world economy have
increased India’s global competitiveness, placing the country on the radar
screens of investors the world over. The global ratings agencies Moody’s
and Fitch have awarded India investment grade ratings, indicating
comparatively low sovereign risks. These positive dynamics have led to a
sustained surge in India’s equity markets since 2003 ,attracting sizeable
capital from foreign investors. The net cumulative portfolio flows from
2003-2006 ( bonds & equities) amounted to $35 billion. In current year
(from Jan to July) the Foreign Institutional Investors have pumped in over
$6 billion or around Rs . 29,940 cr.
3. Cost – effective mode of raising finance :-
Capital market in any country provides the corporate and government to
raise long term finance at a low cost as compared to other modes of raising
finance .Therefore capital market is important, more so for India as it
embarks on the path of becoming a developed country.
4. Provides an avenue for investors to park their surplus funds :-
Capital market provides the investors both domestic as well as foreign
,various instruments to invest their surplus funds. Not only it provides an
avenue to park surplus funds but it also helps the investors to reap decent
rewards on their investment. This realization has resulted in increased
investments in capital market both from domestic as well as foreign
investors in Indian capital market. Also there is an opportunity for investors
to diversify their investment portfolio, as wide range of instruments for
investment are available in capital market.
5. Conducive to implementation of Monetary Policy:-
Through open Market Operation (OMO), the Reserve Bank of India controls
the cost and availability of money supply in the Indian economy. Thus when
RBI follows expansionary monetary policy it purchases government
securities from the Bond market and when it intends to contract the money
supply in the economy it sells the securities from the secondary bond
market. Because of these operation there is also an impact on the interest
rates , which in turn impacts the cost of the funds in the economy. Thus
capital market helps the RBI to check the cost and availability of funds in
the economy.
6.Indicates the state of the economy:-
Capital market also indicate the state of the economy. It is said to be the face
of the economy. This is so because when capital market is stable ,
investments flow into capital market from within as well as outside the
country , which indicates that the future prospects of the economy are good.

Factors affecting capital market in India :-

The capital market is affected by a range of factors . Some of the factors
which influence capital market are as follows:-
a)Performance of domestic companies:-
The performance of the companies or rather corporate earnings is one of the
factors which has direct impact or effect on capital market in a country.
Weak corporate earnings indicate that the demand for goods and services in
the economy is less due to slow growth in per capita income of people .
Because of slow growth in demand there is slow growth in employment
which means slow growth in demand in the near future. Thus weak
corporate earnings indicate average or not so good prospects for the
economy as a whole in the near term. In such a scenario the investors ( both
domestic as well as foreign ) would be wary to invest in the capital market
and thus there is bear market like situation. The opposite case of it would be
robust corporate earnings and its positive impact on the capital market. The
corporate earnings for the April – June quarter for the current fiscal has been
good. The companies like TCS, Infosys, Maruti Suzuki, Bharti Airtel, ACC,
ITC, Wipro,HDFC,Binani cement, IDEA, Marico Canara Bank, Piramal
Health, India cements , Ultra Tech, L&T, Coca- Cola, Yes Bank, Dr.
Reddy’s Laboratories, Oriental Bank of Commerce, Ranbaxy, Fortis, Shree
Cement ,etc have registered growth in net profit compared to the
corresponding quarter a year ago. Thus we see companies from
Infrastructure sector, Financial Services, Pharmaceutical sector, IT Sector,
Automobile sector, etc. doing well . This across the sector growth indicates
that the Indian economy is on the path of recovery which has been positively
reflected in the stock market( rise in sensex & nifty) in the last two weeks.
(July 13-July 24).

b)Environmental Factors :-
Environmental Factor in India’s context primarily means- Monsoon . In
India around 60 % of agricultural production is dependent on monsoon.
Thus there is heavy dependence on monsoon. The major chunk of
agricultural production comes from the states of Punjab , Haryana & Uttar
Pradesh. Thus deficient or delayed monsoon in this part of the country
would directly affect the agricultural output in the country. Apart from
monsoon other natural calamities like Floods, tsunami, drought, earthquake,
etc. also have an impact on the capital market of a country. The Indian Met
Department (IMD) on 24th June stated that India would receive only 93 %
rainfall of Long Period Average (LPA). This piece of news directly had an
impact on Indian capital market with BSE Sensex falling by 0.5 % on the
25th June . The major losers were automakers and consumer goods firms
since the below normal monsoon forecast triggered concerns that demand in
the crucial rural heartland would take a hit. This is because a deficient
monsoon could seriously squeeze rural incomes, reduce the demand for
everything from motorbikes to soaps and worsen a slowing economy.
c)Macro Economic Numbers :-
The macro economic numbers also influence the capital market. It includes
Index of Industrial Production (IIP) which is released every month, annual
Inflation number indicated by Wholesale Price Index (WPI) which is
released every week, Export – Import numbers which are declared every
month, Core Industries growth rate ( It includes Six Core infrastructure
industries – Coal, Crude oil, refining, power, cement and finished steel)
which comes out every month, etc. This macro –economic indicators
indicate the state of the economy and the direction in which the economy is
headed and therefore impacts the capital market in India. A case in the point
was declaration of core industries growth figure. The six Core Infrastructure
Industries – Coal, Crude oil, refining, finished steel, power & cement –grew
6.5% in June , the figure came on the 23 rd of July and had a positive impact
on the capital market with the sensex and nifty rising by 388 points & 125
points respectively.
d)Global Cues :-
In this world of globalization various economies are interdependent and
interconnected. An event in one part of the world is bound to affect other
parts of the world , however the magnitude and intensity of impact would
vary. Thus capital market in India is also affected by developments in other
parts of the world i.e. U.S. , Europe, Japan , etc.
Global cues includes corporate earnings of MNC’s, consumer confidence
index in developed countries, jobless claims in developed countries, global
growth outlook given by various agencies like IMF, economic growth of
major economies, price of crude –oil, credit rating of various economies
given by Moody’s, S & P, etc. An obvious example at this point in time
would be that of subprime crisis & recession . Recession started in U.S. and
some parts of the Europe in early 2008 .Since then it has impacted all the
countries of the world developed, developing , and less- developed and even
emerging economies.
e)Political stability and government policies:-
For any economy to achieve and sustain growth it has to have political
stability and pro- growth government policies. This is because when there is
political stability there is stability and consistency in government’s attitude
which is communicated through various government policies. The vice-
versa is the case when there is no political stability .So capital market also
reacts to the nature of government , attitude of government, and various
policies of the government. The above statement can be substantiated by the
fact the when the mandate came in UPA government’s favour ( Without the
baggage of left party) on May 16 2009, the stock markets on Monday , 18th
May had a bullish rally with sensex closing 800 point higher over the
previous day’s close. The reason was political stability. Also without the
baggage of left party government can go ahead with reforms.
f)Growth prospectus of an economy:-
When the national income of the country increases and per capita income of
people increases it is said that the economy is growing . Higher income also
means higher expenditure and higher savings. This augurs well for the
economy as higher expenditure means higher demand and higher savings
means higher investment. Thus when an economy is growing at a good pace
capital market of the country attracts more money from investors, both from
within and outside the country and vice -versa. So we can say that growth
prospects of an economy does have an impact on capital markets.
g)Investor Sentiment and risk appetite :-
Another factor which influences capital market is investor sentiment and
their risk appetite .Even if the investors have the money to invest but if they
are not confident about the returns from their investment , they may stay
away from investment for some time. At the same time if the investors have
low risk appetite , which they were having in global and Indian capital
market some four to five months back due to global financial meltdown and
recessionary situation in U.S. & some parts of Europe , they may stay away
from investment and wait for the right time to come.
Equity Research
If a particular investor buy’s the same securities as other people, he will
have the same results as other people. It is impossible to produce a superior
performance unless that investor does something different from the majority.
To buy when others are despondently selling and to sell when others are
greedily buying requires the greatest fortitude and pays the greatest reward.
Bear markets have always been temporary. And so have bull markets. Share
prices usually turn upward from one to twelve months before the bottom of
the business cycle and vice versa. If a particular industry or type of security
becomes popular with investors, that popularity will always prove temporary
and, when lost, may not return for many years. The investor should bear in
mind that while he makes investment decision, he should have idea of the
company’s break-even point and company’s position in the stock exchange.
For this EQUITY RESEARCH is done. Equity Research does the research
of company’s income and growth. In the process, it uses the various sources
of financial information available in the country and accordingly advises in
which company an investor should invest. Thus Equity Research Involves:-
FUNDAMENTAL ANALYSIS :-

The investor while buying stock has the primary purpose of gain. If he
invests for a short period of time it is speculative but when he holds it for a
fairly long period of time the anticipation is that he would receive some
return on his investment. Fundamental analysis is a method of finding out
the future price of a stock, which an investor wishes to buy.
The method for forecasting the future behavior of investments and the rate
of return on them is clearly through an analysis of the broad economic forces
in which they operate. The kind of industry to which they belong and the
analysis of the company's internal working through statements like income
statement, balance sheet and statement of changes of income. The
fundamental analysis involves
(a) Company Analysis
(b) Industry Analysis
(C) Economic Analysis.

(a) Company Analysis:-

Company analysis is a study of the variables that influence the future of a
firm both qualitatively and quantitatively. It is a method of assessing the
competitive position of a firm earning and profitability, the efficiency with
which it operates and its financial position with respect to the earning to its
shareholders. The fundamental nature of this analysis is that each share of a
company has an intrinsic value, which is dependent on the company's
financial performance, quality of management and record of its earnings and
dividend. They believe that the market price of share in a period of time will
move towards its intrinsic value. If the market price of a share is lower than
the intrinsic value, as evaluated by the fundamental analysis, then the share
is supposed to be undervalued and it should be purchased but if the current
market price shows that it is more than intrinsic value then according to the
theory the share should be sold. This basic approach is analyzed through the
financial statements of an organization. The basic financial statements,
which are required as tools of the fundamental analyst, are the income
statement, the balance sheet, and the statement of changes in financial
position. These statements are useful for investors, creditors as well as
internal management of a firm and on the basis these statements the future
course of action may be taken by the investors of the firm. While evaluating
a company, its statement must be carefully judged to find out that they are:
i) Correct,
ii) Complete,
iii) Consistent and
iv) Comparable.
(b)Industry Analysis:-
The industry has been defined as homogeneous groups of people doing a
similar kind of activity or similar work. In India, the broad classification of
industry is made according to stock exchange list, which is published. This
gives a distinct classification to industry to industry in different forms such
as:
• Engineering,
• Banking and Insurance,
• Textiles,
• Cement,
• Steel Mills and Alloys,
 • Chemicals and Pharmaceuticals,
• Retail,
• Sugar,
• Information Technology,
• Automobiles and Ancillary,
• Telecommunications,
• FMCG,
• Miscellaneous.
Industry should also be evaluated or analyzed through its life cycle.
Industry life cycle may also be studied through the industrial life cycle state.
There are generally three stages of an industry. These stages are pioneering
stage, expansion stage and stagnation stage.
1. THE PIONEERING STAGE: -
The industrial life cycle has a pioneering stage when the new inventions and
technological developments take place. During this time the investor will
notice great increase in the activity of the firm. Production will rise and in
relation to production, there will be a great demand for the product. At this
stage, the profits are also very high as the technology is new. Taking a look
at the profit many new firms enter into the same field till the market
becomes competitive. The market competitive pressures keep on increasing
with the entry of new-firms and the prices keep on declining and then
ultimately profits fall. At this stage all firms compete with each other and
only a few efficient firms are left to run the business and most of the other
firms are wiped out in the pioneering stage itself.

2. THE EXPANSION STAGE: -

The efficient firms, which have been in the market now, find that it is time to
stabilize them. Although competition is there, the, number of firms have
gone down during pioneering stage itself and there are a large number of
firms left to run the business in the industry. This is the time when each one
has to show competitive strength and superiority. The investor will find that
this is the best time to make an investment. At the pioneering stage it was
difficult to find out which of the firm to invest in, but having waited for the
stability period there has been a dynamic selection process and a few of the
large number of firms are left in the industry. This is the period of security
and safety and this is also called period of maturity for the firm. This stage
lasts from five years to fifty years of a firm depending on the potential and
productivity and also the capability to meet the change in competition and
rapid change in customer habit.
3. STAGNATION STAGE: -
During the stagnation stage the investor will find that although there is
increase in sales of an organization, this is not in relation to the profits
earned by the company. Profits are also there but the growth in the firm is
lower than it was in the expansion stage. The industry finds that it is at a loss
of power and cannot expand. During this stage most of the firms who have
realized the competitive nature of the industry , begin to change their course
of action and start on a new venture . Investor should make a continuous
evaluation of their investments. In firms in which investors have received
profits for large number of years and have reached stagnation stage, they
should sell off their investment in those firms and find better avenues in
those firms where the expansion stage has set in, many be in another
industry.
(c) ECONOMIC ANALYSIS :-
Investors are concerned with those forces in the economy, which affect the
performance of organizations in which they wish to participate, through
purchase of stock. A study of the economic forces would give an idea about
future corporate earnings and the payment of dividends and interest to
investors. Some of the broad forces within which the factors of investment
operate are:
1. POPULATION: -
Population gives an idea of the kind of labor force in a country. In some
countries the population growth has slowed down whereas in India and some
other third world countries there has been a population explosion.
Population explosion will give demand for more industries like hotels,
residences, service industries like health, consumer demand like refrigerators
and cars. Likewise, investors should prefer to invest in industries, which
have a large amount of labor force because in the future such industries will
bring better rates of return.
2. RESEARCH AND TECHNOLOGICAL DEVELOPMENTS: -
The economic forces relating to investments would be depending on the
amount of resources spent by the government on the particular technological
development affecting the future. Broadly the investor should invest in those
industries which are getting a large amount of share in the funds of the
development of the country. For example, in India
in the present context automobile industries and spaces technology are
receiving a greater attention. These may be areas, which the investor may
consider for investments.

3. CAPITAL FORMATION: -
Another consideration of the investor should be the kind of investment that a
company makes in capital goods and the capital it invests in modernization
and replacement of assets. A particular industry or a particular company
which an investor would like to invest can also be viewed at with the help of
the economic indicators such as the place,
value and property position of the industry, group to which it belongs and
the year-to-year returns through corporate profits.
4. NATURAL RESOURCES AND RAW MATERIALS: -
The natural resources are to a large extent are responsible for a country's
economic development and overall improvement in the condition of
corporate growth. In India, technological discoveries recycling of materials,
nuclear and solar energy and new synthetics should give the investor an
opportunity to invest in untapped or recently tapped resources which would
also produce higher investment opportunity.
TECHNICAL ANALYSIS
Technical analysis is simply the study of prices as reflected on price charts.
Technical analysis assumes that current prices should represent all known
information about the markets. Prices not only reflect intrinsic facts, they
also represent human emotion and the pervasive mass psychology and mood
of the moment. Prices are, in the end, a function of supply and demand.
However, on a moment to moment basis, human emotions, fear, greed,
panic, hysteria, elation, etc. also dramatically affect prices. Markets may
move based upon people’s expectations, not necessarily facts. A market
"technician" attempts to disregard the emotional component of trading by
making his decisions based upon chart formations, assuming that prices
reflect both facts and emotion.
CAPITAL MARKET REFORMS

The Indian regulatory and supervisory framework of securities market has

been adequately strengthened through the legislative and administrative
measures in the recent past. The regulatory framework for securities market
is consistent with the best international benchmarks, such as, standards
prescribed by International Organization of Securities Commissions
(IOSCO).

Capital Market Reforms

 Extensive Capital Market Reforms were undertaken

during the 1990s encompassing legislative regulatory and
institutional reforms. Statutory market regulator, which was
created in 1992, was suitably empowered to regulate the collective
investment schemes and plantation schemes through an
amendment in 1999. Further, the organization strengthening of
SEBI and suitable empowerment through compliance and
enforcement powers including search and seizure powers were
given through an amendment in SEBI Act in 2002. Although
dematerialization started in 1997 after the legal foundations for
electronic book keeping were provided and depositories created
the regulator mandated gradually that trading in most of the stocks
take place only in dematerialized form.
 Till 2001 India was the only sophisticated market having
account period settlement alongside the derivatives products.
From middle of 2001 uniform rolling settlement and same
settlement cycles were prescribed creating a true spot market.
 After the legal framework for derivatives trading was
provided by the amendment of SCRA in 1999 derivatives trading
started in a gradual manner with stock index futures in June
2000. Later on options and single stock futures were introduced in
2000-2001 and now India ’s derivatives market turnover is more
than the cash market and India is one of the largest single stock
futures markets in the world.
 India ’s risk management systems have always been very
modern and effective. The VaR based margining system was
introduced in mid 2001 and the risk management systems have
withstood huge volatility experienced in May 2003 and May 2004.
This included real time exposure monitoring, disablement of
broker terminals, VaR based margining etc.
 India is one of the few countries to have started the
screen based trading of government securities in January 2003.
 In June 2003 the interest rate futures contracts on the
screen based trading platform were introduced.
 India is one of the few countries to have started the
Straight Through Processing (STP), which will completely
automate the process of order flow and clearing and settlement on
the stock exchanges.
 RBI has introduced the Real Time Gross Settlement
system (RTGS) in 2004 on experimental basis. RTGS will allow
real delivery v/s. payment which is the international norm
recognized by BIS and IOSCO.
INDIAN CAPITAL MARKET AND REGULATORY
FRAMEWORK : BACKGROUND, PERFORMANCE AND
EMERGING ISSUES

BACKDROP

The wave of economic reforms initiated by the government has

influenced the functioning and governance of the capital market. The Indian
capital market is also undergoing structural transformation since
liberalization. The chief aim of the reforms exercise is to improve market
efficiency, make stock market transactions more transparent, curb unfair
trade practices and to bring our financial markets up to international
standards. Further, the consistent reforms in Indian capital market, especially
in the secondary market resulting in modern technology and online trading
have revolutionized the stock exchanges. The number of listed companies
increased from 5,968 in March1990 to about 10,000 by 1999 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 trading. Banks and financial institutions
have been holding a substantial part of these bonds as a statutory liquidity
requirement. A primary auction market for Government securities has been
created and a primary dealer system was introduced in 1995. Currently, there
are 31 mutual funds, out of which 21are in the private sector. Mutual funds
were opened to the private sector in 1992. Earlier, in 1987, banks were
allowed to enter this business, breaking the monopoly of the Unit Trust of
India (UTI), which maintains a dominant position. Recognizing the
importance of increasing investor protection, several measures were enacted
to improve the fairness of the capital market. 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 powers as an apex regulator. And a series of
reforms were introduced to improve investor protection, automation of stock
trading, integration of national markets and efficiency of market operations.
SEBI in 1993 initiated a significant move which involved the shift of all
exchanges to screen-based trading being motivated primarily by the need for
greater transparency. The first exchange to be based on an open electronic
limit order book was the National Stock Exchange (NSE), which started
trading debt instruments in June 1994 and equity in November 1994. In
March 1995, Bombay Stock Exchange (BSE) shifted from open outcry to a
limit order book market.

REVIEW OF REGULATORY ENVIRONMENT

SEBI : Securities and Exchange Board of India (SEBI) was set up as an

administrative arrangement in 1988.In 1992, the SEBI Act was enacted,
which gave statutory status to SEBI. It mandates SEBI to perform a dual
function: investor protection through regulation of the securities market and
fostering the development of this market. SEBI has been vested most of the
functions and powers under the Securities Contract Regulation (SCR) Act,
which brought stock exchanges, their members, as well as contracts in
securities which could be traded under the regulations of the Ministry of
Finance. It has also been delegated certain powers under the Companies Act.
In addition to registering and regulating intermediaries, service providers ,
mutual funds, collective investment schemes, venture capital funds and
takeovers, SEBI is also vested with the power to issue directives to any
person(s) related to the securities market or to companies in areas of issue of
capital, transfer of securities and disclosures. It also has powers to inspect
books and records, suspend registered entities and cancel registration.
RBI : Reserve Bank of India (RBI) has regulatory involvement in the capital
market, but this has been limited to debt management through primary
dealers, foreign exchange control and liquidity support to market
participants. It is RBI and not SEBI that regulates primary dealers in the
Government securities market. RBI instituted the primary dealership of
Government securities in March 1998. Securities transactions that involve a
foreign exchange transactions need the permission of RBI.

Stock Exchanges : SEBI issued directives that require that half the
members of the governing boards of the stock exchanges should be non
broker public representatives and include a SEBI nominee. To avoid
conflicts of interest, stock brokers are a minority in the committees of stock
exchanges set up to handle matters of discipline, default and investor-broker
disputes. The exchanges are required to appoint a professional, non member
executive director who is accountable to SEBI for the implementation of its
directives on the regulation of stock exchanges. SEBI has introduced a
mechanism to redress investor grievances against brokers. Further, all issues
are regulated through a series of disclosure norms as prescribed by SEBI and
respective stock exchanges through their listing agreement. After a security
is issued to the public and subsequently listed on a stock exchange, the
issuing company is required under the listing agreement to continue to
disclose in a timely manner to the exchange, to the holders of the listed
securities and to the public any information necessary to enable the holders
of the listed securities to appraise its position and to avoid the establishment
of a false market in such listed securities.

The powers and functions of regulatory authorities for the securities

market seem to be diverse in nature. SEBI is the primary body responsible
for regulation of the securities market, deriving its powers of registration and
enforcement from the SEBI Act. There was an existing regulatory
framework for the securities market provided by the Securities Contract
Regulation (SCR) Act and the Companies Act, administered by the Ministry
of Finance and the Department of Company Affairs (DCA) under the
Ministry of Law, respectively. SEBI has been delegated most of the
functions and powers under the SCR Act and shares the rest with the
Ministry of Finance. It has also been delegated certain powers under the
Companies Act. RBI also has regulatory involvement in the capital markets
regarding foreign exchange control, liquidity support to market participants
and debt management through primary dealers. It is RBI and not SEBI that
regulates primary dealers in the Government securities market. However,
securities transactions that involve a foreign exchange transaction need the
permission of RBI. So far, fragmentation of the regulatory authorities has
not been a major obstacle to effective regulation of the securities market.
Rather, lack of enforcement capacity by SEBI has been a more significant
cause of poor regulation. But since the Indian stock markets are rapidly
being integrated, the authorities may follow the global trend of consolidation
of regulatory authorities or better coordination among them.
After introduction of SEBI Act, participants in the Indian capital market
are required to register with SEBI to carry out their businesses. These
include: stock brokers, sub brokers, share transfer agents, bankers to an
issue, trustees of a trust deed, registrars to an issue, merchant bankers,
underwriters, portfolio managers, and investment advisers. Stockbrokers are
not allowed to buy, sell, or deal in securities, unless they hold a certificate
granted by SEBI. Each stockbroker is subject to capital adequacy
requirements consisting of two components: basic minimum capital and
additional or optional capital relating to volume of business. The basic
minimum capital requirements varies from one exchange to another. The
additional or optional capital and the basic minimum capital combined have
to be maintained at 8 percent or more of the gross outstanding business in
the exchange (the gross outstanding business means the cumulative amount
of sales and purchases by a stock broker in all securities at any point during
the settlement period). Sales and purchases on behalf of customers may not
be netted but may be included to those of the broker.
Most stockbrokers in India are still relatively small. They cannot afford
to directly cover every retail investor in a geographically vast country and in
such a complex society. Thus, they are permitted to transact with sub
brokers as the latter play an indispensable role in intermediating between
investors and the stock market. An applicant for a sub broker certificate must
be affiliated with a stockbroker of a recognized stock exchange. There are
two major issues which need to be addressed concerning sub brokers in the
Indian capital market; majority of sub brokers are not registered with SEBI;
and the function of the sub broker is not clearly defined. No sub broker is
permitted to buy, sell, or deal in securities, without a certificate granted by
SEBI. SEBI enforced the following measures in March 1997 to regulate
unregistered sub brokers :
 [a] initiation of criminal actions on complaints received against
unregistered sub-brokers in suitable cases;

[b] prohibition of stockbrokers in dealing with unregistered sub

brokers.
In spite of these actions, the problem is still at large. There is a need to
address the basic issue of clarifying the role of the sub brokers and to
educate the investors about their role.

SEBI Act of 1992 has introduced self-regulatory organizations [SROs]

for regulating various participants in the securities market. But they are not
yet operational. A clear regulatory framework has yet to be set up, and
relevant market participants are not ready to regulate themselves for
professional purposes. The only market related SROs in India whose
regulatory frameworks have been well established and which are actually
functioning are the recognized stock exchanges.

Recent Developments & Performance.

In brief the major reforms which have taken place in Indian markets include
screen based trading, electronic transfer of securities, dematerialization,
rolling settlement., risk management practices and introduction of derivative
trading and so on. The net result of these initiatives can be seen in the form
of efficient and transparent trading & settlement processes in our exchanges.
If we compare Indian markets today with some of the internationally
developed markets we find that we are not lagging behind. This judgment is
primarily based on the comparative study of two important ratios, that is
market capitalization ratio and the turnover ratio.
EMERGING CHALLENGES & ISSUES

Despite these significant developments, the Indian capital market has been
in decline in the recent past. However, currently the market has recovered
substantially and hopefully, the upward trend is expected to remain. The
Indian security market still faces many challenges and issues that need to be
resolved.

Market infrastructure and investor awareness has to be improved as it

obstructs the efficient flow of information and effective corporate
governance.

The legal mechanism should be activated to protect small shareholders by

giving them speedy grievance redressal mechanism.

The trading system has to be made more transparent. Market information is a

crucial public good that should be made available to all participants to
achieve market efficiency.

Further, SEBI need to monitor more closely cases of insider trading and
price manipulation and to meet the challenges of possible roles of market
makers.

There is a need for integration of the security market through consolidation

of stock exchanges. The trend all over the world is to consolidate and merge
existing stock exchanges.

Need for integration of security markets with banks so as to improve the

payment situation and to reduce the risks of scams.

Issues relating to market performance : Over the years the turnover of big
exchanges has increased but only at the cost of small exchange. The turnover
of NSE and BSE were Rs.1339510 crores and Rs.1000032 crores
respectively for the year 2000-2001. Further, the top six exchanges of India
out of a total of 23 accounted for over 99% of the total turnover of all
exchanges.

Another important issue is that turnover in our exchanges are dominated

mainly by few securities. This is clear because top 100 traded securities on
BSE had a share of 95% in the total turnover on BSE for the year 2000-
2001, while the listed securities on BSE are approximately 10000. So this
brings us to the conclusion that most of the securities on Indian Stock
Exchanges are either not traded or very thinly traded .This also indicates that
there is a problem of liquidity in our exchanges.

Further, on the one hand the object of circuit breaker is to prevent volatility
but on the other hand many feel that the breaker distorts the basic price
discovery process of scrip. This is again a matter of debate and whether the
breaker should stay or be done away with depends upon what is more
important for stock exchange, i.e. price discovery which should be
independent or controlled volatility.

Issues relating to regional stock exchanges: Regional stock exchanges of

late have witnessed shrinking volumes and are thus in poor financial health.
Their inability to attract business is clear if we look at the total incomes of
the various exchanges as split between business and non business incomes.
Business incomes include membership fees, transaction based service
charges and other miscellaneous income whereas non business income
includes listing fees, interest and rent. With the government initiating
further reforms like, central listing authority to avoid multiplicity problems
of listing for companies and centralized monitoring and compliance of
obligations, it seems the end of regional exchanges is not very far and it is
only a matter of time when these regional exchanges close their shops.

Attempts can however be made to revive the regional exchanges through

mergers & acquisitions, consolidations, diversification of the business of
stock exchanges to areas like, investment banking, insurance etc. Some
attempts are already made when Inter connected stock exchange of India
was launched which was to provide a separate market among member
exchanges. However, the exchange could not do much business in 2000-
2001

Issues relating to regulatory framework : It is more than a decade since

SEBI started to put in place a regulatory framework for the capital market.
Despite a plethora of disclosure requirements, there are still key areas where
investors get precious little information of value. This relates to mergers and
acquisitions, asset sell-off, intra-company, intra-group transactions and inter
corporate investments. In these cases the minimum legal requirement under
Companies Act is met. Though, we have a full fledged market for corporate
control yet the disclosure levels are not up to the mark. A lot of information
is also made available on financial performance and other synergistic areas
of mergers and acquisitions. However, the manner in which the swap ratio
is fixed, pricing of offers and the managerial perception is largely missing.
The valuations of two companies and swap ratio are key aspects in any
merger no doubt valuation reports are available for inspection however,
access is not easy for investors. A comprehensive and mandated list of
disclosures like, the ones that accompanies IPO’s or a rights offer, should be
made available to all investors.
The effectiveness of any regulatory body is judged by the quality of
implementation in general and the rate of convictions in particular achieved
in cases where there are violations. What is worrying is the poor rate of
conviction in major cases. The judgments of SEBI involving Sterlite, BPL,
Videocon, Anand Rathi and Hindustan Liver have been overruled by SAT
[Securities Appellate Tribunal]. There is something seriously amiss if the
SAT can overturn SEBI orders by pointing to lacunas on almost every
possible ground, ranging from technical aspects to substantive issues
involving the regulator’s subjective judgment.

Role of Capital Market in India:

India’s growth story has important implications for the capital market,
which has grown sharply with respect to several parameters — amounts
raised number of stock exchanges and other intermediaries, listed stocks,
market capitalization, trading volumes and turnover, market instruments,
investor population, issuer and intermediary profiles.
The capital market consists primarily of the debt and equity markets.
Historically, it contributed significantly to mobilizing funds to meet public
and private companies’ financing requirements. The introduction of
exchange-traded derivative instruments such as options and futures has
enabled investors to better hedge their positions and reduce risks.
India’s debt and equity markets rose from 75 per cent in 1995 to 130 per
cent of GDP in 2005. But the growth relative to the US, Malaysia and South
Korea remains low and largely skewed, indicating immense latent potential.
India’s debt markets comprise government bonds and the corporate bond
market (comprising PSUs, corporates, financial institutions and banks).
India compares well with other emerging economies in terms of
sophisticated market design of equity spot and derivatives market,
widespread retail participation and resilient liquidity. SEBI’s measures such
as submission of quarterly compliance reports, and company
valuation on the lines of the Sarbanes-Oxley Act have enhanced corporate
governance. But enforcement continues to be a problem because of limited
trained staff and companies not being subjected to substantial fines or legal
sanctions. Given the booming economy, large skilled labour force, reliable
business community, continued reforms and greater global integration
vindicated by the investment-grade ratings of Moody’s and Fitch, the net
cumulative portfolio flows from 2003-06 (bonds and equities) amounted to
$35 billion. The number of foreign institutional investors registered with
SEBI rose from none in 1992-93 to 528 in 2000-01, to about 1,000 in 2006-
07. India’s stock market rose five-fold since mid-2003 and outperformed
world indices with returns far outstripping other emerging markets, such as
Mexico (52 per cent), Brazil (43 per cent) or GCC economies such as
Kuwait (26 per cent) in FY-06. In 2006, Indian companies raised more than
$6 billion on the BSE, NSE and other regional stock exchanges. Buoyed by
internal economic factors and foreign capital flows, Indian markets are
globally competitive, even in terms of pricing, efficiency and liquidity.

US sub prime crisis:

The financial crisis facing the Wall Street is the worst since the Great
Depression and will have a major impact on the US and global economy.
The ongoing global financial crisis will have a ‘domino’ effect and spill over
all aspects of the economy. Due to the Western world’s messianic faith in
the market forces and deregulation, the market friendly governments have no
choice but to step in. The top five investment banks in the US have ceased to
exist in their previous forms. Bears Stearns was taken over some time ago.
Fannie Mae and Freddie Mac are nationalised to prevent their collapse.
Fannie and Freddie together underwrite half of the home loans in the United
States, and the sum involved is of $ 3 trillion—about double the entire
annual output of the British economy. This is the biggest rescue operation
since the credit crunch began. Lehman Brothers, an investment bank with a
158 year-old history, was declared bankrupt; Merrill Lynch, another Wall
Street icon, chose to pre-empt a similar fate by deciding to sell to the Bank
of America; and Goldman Sachs and Morgan Stanley have decided to
transform themselves into ordinary deposit banks. AIG, the world’s largest
insurance company, has survived through the injection of funds worth $
85 billion from the US Government. Besides the cyclical crisis of capitalism,
there are some recent factors which have contributed towards this crisis.
Under the so-called “innovative” approach, financial institutions
systematically underestimated risks during the boom in property prices,
which makes such boom more prolonged. This relates to the
shortsightedness of speculators and their unrestrained greed, and they,
during the asset price boom, believed that it would stay forever. This
resulted in keeping the risk aspects at a minimum and thus resorting to more
and more risk taking financial activities. Loans were made on the basis
of collateral whose value was inflated by a bubble. And the collateral is now
worth less than the loan. Credit was available up to full value of the property
which was assessed at inflated market prices. Credits were given in
anticipation that rising property prices will continue. Under looming
recession and uncertainty, to pay back their mortgage many of those who
engaged in such an exercise are forced to sell their houses, at a time when
the banks are reluctant to lend and buyers would like to wait in the hope that
property prices will further come down. All these factors would lead to a
further decline in property prices.

Effect of the subprime crisis on India:

Globalisation has ensured that the Indian economy and financial markets
cannot stay insulated from the present financial crisis in the developed
economies. In the light of the fact that the Indian economy is linked to
global markets through a full float in current account (trade and services)
and partial float in capital account (debt and equity), we need to analyze the
impact based on three critical factors: Availability of global liquidity;
demand for India investment and cost thereof and decreased consumer
demand affecting Indian exports. The concerted intervention by central
banks of developed countries in injecting liquidity is expected to reduce the
unwinding of India investments held by foreign entities, but fresh
investment flows into India are in doubt. The impact of this will be three-
fold: The element of GDP growth driven by off-shore flows (along with
skills and technology) will be diluted; correction in the asset prices which
were hitherto pushed by foreign investors and demand for domestic liquidity
putting pressure on interest rates While the global financial system takes
time to “nurse its wounds” leading to low demand for investments in
emerging markets, the impact will be on the cost and related risk premium.
The impact will be felt both in the trade and capital account. Indian
companies which had access to cheap foreign currency funds for financing
their import and export will be the worst hit. Also, foreign funds (through
debt and equity) will be available at huge premium and would be limited to
blue-chip companies. The impact of which, again, will be three-fold:
Reduced capacity expansion leading to supply side pressure; increased
interest expenses to affect corporate profitability and
increased demand for domestic liquidity putting pressure on the interest
rates. Consumer demand in developed economies is certain to be hurt by the
present crisis, leading to lower demand for Indian goods and services, thus
affecting the Indian exports. The impact of which, once again, will be three-
fold: Export-oriented units will be the worst hit impacting employment;
reduced exports will further widen the trade gap to put pressure on rupee
exchange rate and intervention leading to sucking out liquidity and
pressure on interest rates. The impact on the financial markets will be the
following: Equity market will continue to remain in bearish mood with
reduced off-shore flows, limited domestic appetite due to liquidity pressure
and pressure on corporate earnings; while the inflation would stay under
control, increased demand for domestic liquidity will push interest rates
higher and we are likely to witness gradual rupee depreciation and depleted
currency reserves. Overall, while RBI would inject liquidity through
CRR/SLR cuts, maintaining growth beyond 7% will be a struggle. The
banking sector will have the least impact as high interest rates, increased
demand for rupee loans and reduced statutory reserves will lead to improved
NIM while, on the other hand, other income from cross-border business
flows and distribution of investment products will take a hit. Banks with
capabilities to generate low cost CASA and zero cost float funds will gain
the most as revenues from financial intermediation will drive the banks’
profitability. Given the dependence on foreign funds and off-shore consumer
demand for the India growth story, India cannot wish away from the
negative impact of the present global financial crisis but should quickly
focus on alternative remedial measures to limit damage and look in-wards to
sustain growth!

Role of capital market during the present crisis:

In addition to resource allocation, capital markets also provided a medium
for risk management by allowing the diversification of risk in the economy.
The well-functioning capital market improved information quality as it
played a major role in encouraging the adoption of stronger corporate
governance principles, thus supporting a trading environment, which is
founded on integrity. liquid markets make it possible to obtain financing for
capital-intensive projects with long gestation periods.. For a long time, the
Indian market was considered too small to warrant much attention.
However, this view has changed rapidly as vast amounts of international
investment have poured into our markets over the last decade. The Indian
market is no longer viewed as a static universe but as a constantly evolving
market providing attractive opportunities to the global investing community.
Now during the present financial crisis, we saw how capital market stood
still as the symbol of better risk management practices adopted by the
Indians. Though we observed a huge fall in the sensex and other stock
market indicators but that was all due to low confidence among the
investors. Because balance sheet of most of the Indian companies listed in
the sensex were reflecting profit even then people kept on withdrawing
money. While there was a panic in the capital market due to withdrawal by
the FIIs, we saw Indian institutional investors like insurance and mutual
funds coming for the rescue under SEBI guidelines so that the confidence of
the investors doesn’t go low. SEBI also came up with various norms
including more liberal policies regarding participatory notes, restricting the
exit from close ended mutual funds etc. to boost the investment. While
talking about currency crisis, the rupee kept on depreciating against the
dollar mainly due to the withdrawals by FIIs. So , the capital market tried to
attract FIIs once again.
 CONCLUSION

The structure and pattern of securities markets in India and around the world
is undergoing many changes. The current trading environment is
charaterised by frequent regulatory interventions and competitive pressures.
Further, the proliferation of the Indian capital market, the market players ,
the trading pattern and the emerging market for corporate control, brings to
the forefront abovementioned issues which need immediate attention. As
these issues have implications for the trading strategies employed by
investors, the behavior of specialists, liquidity in the market, the
informational efficiency of prices, and ultimately the valuation of listed
companies and welfare of their shareholders.
BIBLOGRAPHY
INTERNATIONAL BANKING – K VISWANATHAN
FINANCIAL MARKETS AND INSTRUMENTS – L M BHOLE
INTERNATIONAL FINANCE – APTE
FINANCIAL MARKETS AND SERVICES – GORDAN & NATRAJAN

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