Indian Capital

Markets
 Organized Indian Financial System

Regulators Financial Financial Financial

Instruments Markets Intermediaries

Forex Capital Money Credit

Market Market Market Market

Primary Market

Secondary Market

Money Market Capital Market

Instrument Instrument
Money Market Vs Capital Market
• It is for short term
• Supplies funds for WC
• Instruments are T-bill,
CM, etc
• Each single instrument
is of large amount
• Central bank and
Commercial banks are
major.
• It is for long term
• Supplies funds for fixed
capital requirement
• Instruments are shares,
debentures, etc.
• Each single instrument
is of small amount
• Development bank and
insurance companies
are major.
 Conti..
• These instruments • These instruments
do not have have secondary
secondary market. market.
• Transactions are on • Transactions are at
over phone and no formal place. Eg
formal place stock market.
• Transaction without • Transaction have to
the help of broker. be conducted with
the help of broker.
 Why Capital Markets Exist
• Capital markets facilitate the transfer of
capital (i.e. financial) assets from one owner to
another.
• They provide liquidity.
– Liquidity refers to how easily an asset can
be transferred without loss of value.
• A side benefit of capital markets is that the
transaction price provides a measure of the
value of the asset.
 Role of Capital Markets
• Mobilization of Savings & acceleration of
Capital Formation
• Promotion of Industrial Growth
• Raising of long term Capital
• Ready & Continuous Markets
• Proper Channelisation of Funds
• Provision of a variety of Services
 Functions of a capital market
• Disseminate information efficiently
• Enable quick valuation of financial
instruments –both equity and debt
• Provide insurance against market risk or
price risk
• Enable wider participation
• Provide operational efficiency through
-simplified transaction procedure
- lowering settlement timings and
- lowering transaction costs
•Develop integration among
-real sector and financial sector
-equity and debt instruments
-long term and short term funds
-Private sector and government sector and
-Domestic funds and external funds

•Direct the flow of funds into efficient channels through

-investment
-disinvestment
-reinvestment
 Factors contributing to growth
of Indian Capital Market
• Establishment of Development banks & Industrial
financial institution.
• Legislative measures
• Growing public confidence
• Increasing awareness of investment opportunities
• Growth of underwriting business
• Setting up of SEBI
• Mutual Funds
• Credit Rating Agencies
 Indian Capital Market -
Historical perspective
• Stock Market was for a privileged few
• Archaic systems - Out cry method
• Lack of Transparency - High tones costs
• No use of Technology
• Outdated banking system
• Volumes - less than Rs. 300 cr per day
• No settlement guarantee mechanism - High
risks
 Indian Capital markets -
Chronology
• 1994-Equity Trading commences on NSE
• 1995-All Trading goes Electronic
• 1996- Depository comes in to existence
• 1999- FIIs Participation- Globalisation
• 2000- over 80% trades in Demat form
• 2001- Major Stocks move to Rolling Sett
• 2003- T+2 settlements in all stocks
• 2003 - Demutualisation of Exchanges
 Capital Markets - Reforms
• Each scam has brought in reforms - 1992 / 2001
• Screen based Trading through NSE
• Capital adequacy norms stipulated
• Dematerialization of Shares - risks of fraudulent
paper eliminated
• Entry of Foreign Investors
• Investor awareness programs
• Rolling settlements
• Inter-action between banking and exchanges
 CAPITAL MARKET REFORMS IN
INDIA

• The 1990s have witnessed the emergence

of the securities market as a major source
of finance for trade and industry in India.
• A growing number of companies have
been accessing the securities market rather
than depending on loans from financial
institutions / banks.
• The corporate sector is increasingly
depending on external sources for meeting
its funding requirements.
 Reforms / Initiatives post
2000
• Corporatisation of exchange memberships
• Banning of Badla / ALBM
• Introduction of Derivative products - Index /
Stock Futures & Options
• Reforms/Changes in the margining system
• STP - electronic contracts
• Margin Lending
• Securities Lending
 MARKET STRUCTURE
(JULY 31, 2005)
• 22 Stock Exchanges,
• Over 10000 Electronic Terminals at over 400 locations all
over India.
• 9108 Stock Brokers and 14582 Sub brokers
• 9644 Listed Companies
• 2 Depositories and 483 Depository Participants
• 128 Merchant Bankers, 59 Underwriters
• 34 Debenture Trustees, 96 Portfolio Managers
• 83 Registrars & Transfer Agents, 59 Bankers to Issue
• 4 Credit Rating Agencies
 Indian Capital Market

Market Instruments Intermediaries Regulator

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

Equity Hybrid Debt

Players

CRA Corporate Intermediaries Individual Banks/FI FDI /FII

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

• Market for new issues/fresh capital

(IPO’s)
• New issues mkt.
• Participants
issuer
investors
intermediaries
 Mobilization of funds
- Prospectus
- Right issues and
- Private placement
 Free pricing regime
• Before 1992,Regulator of new issues was CCI (Controller of
Capital Issues)

• Approval from CCI for raising funds in primary mkt.

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

controller

• New co.s can issue shares only at par

• Existing companies with substantial reserves could issue shares

at premium

• Fixed price mechanism resulted in under pricing of many issues

• After 1992, promoter and merchant banker together decide the

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

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

• BOND

• STOCK
1)COMMON STOCKS
2)PREFERRED STOCKS

• SHARE

• MUTUAL FUNDS.

• PAR VALUE vs. MARKET VALUE

• BULLISH vs. BEARISH

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

• Creates investment opportunities for small

investors

• Government raises capital for development

projects

• Barometer of the economy

 Functions Of SEBI
• Regulates Capital Market.

• Checks Trading of securities.

• Checks the malpractices in securities market.

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

• It regulates the stockbrokers and sub-brokers.

• To promote Research and Investigation

 Functions Of RBI
Monetary Authority:
Issuer of currency:

Regulator and supervisor of the financial system:

Authority On Foreign Exchange:

Developmental role:

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

• News about company.

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

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

patience, profound knowledge.

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