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Indian Capital Market


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Organized Indian Financial System

Money MarketInstrument

Capital MarketInstrument

Forex

Market

Capital

Market

Money

Market

Credit

Market

Primary Market

FinancialInstruments FinancialMarkets FinancialIntermediaries

Secondary Market

Regulators


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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.


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Conti..

These instruments do not have

secondary market.

Transactions are on over phoneand no formal place

Transaction without the help of

broker.

These instruments have

secondary market.

Transactions are at formalplace. Eg stock market.

Transaction have to be

conducted with the help of

broker.


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Why Capital Markets Exist

Capital markets facilitate the transfer ofcapital (i.e. financial) assets from one owner to

another. They provide liquidity.

Liquidity refers to how easily an asset canbe transferred without loss of value.

A side benefit of capital markets is that thetransaction price provides a measure of thevalue of the asset.


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Role of Capital Markets

Mobilization of Savings & acceleration ofCapital Formation

Promotion of Industrial Growth Raising of long term Capital

Ready & Continuous Markets

Proper Channelisation of Funds

Provision of a variety of Services


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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


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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


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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


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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


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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


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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


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CAPITAL MARKET REFORMS IN

INDIA

The 1990s have witnessed the emergenceof 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 financialinstitutions / banks.

The corporate sector is increasinglydepending on external sources for meeting

its funding requirements.


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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


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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


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Market Instruments Intermediaries

Primary Secondary

Equity DebtHybrid

Regulator

BrokersInvestment BankersStock ExchangesUnderwriters

SEBI

Players

Corporate IntermediariesCRA Banks/FI FDI /FIIIndividual


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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 StockExchange (NEW)

Madras Stock Exchange

Bombay Stock Exchange

Madhya Pradesh StockExchange

Vadodara Stock Exchange

The Ahmedabad StockExchange

Magadh Stock Exchange

Gauhati Stock Exchange

Bhubaneswar StockExchange

Jaipur Stock Exchange

Delhi Stock Exchange Assoc

Ludhiana Stock Exchange

Growth Pattern of the Indian Stock Market


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Growth Pattern of the Indian Stock MarketSl.No.

As on 31stDecember

1946 1961 1971 1975 1980 1985 1991 1995

1 No. ofStock Exchanges

7 7 8 8 9 14 20 22

2 No. ofListed Cos. 1125 1203 1599 1552 2265 4344 6229 8593

3No. of StockIssues ofListed Cos.

1506 2111 2838 3230 3697 6174 8967 11784

4 Capital of Listed

Cos. (Cr. Rs.)270 753 1812 2614 3973 9723 32041 59583

5Market value ofCapital of ListedCos. (Cr. Rs.)

971 1292 2675 3273 6750 25302 110279

478121

6Capital perListed Cos. (4/2)(Lakh Rs.)

24 63 113 168 175 224 514 693

7Market Value ofCapital per ListedCos. (Lakh Rs.)(5/2)

86 107 167 211 298 582 1770 5564

8 Appreciated valueof Capital per

358 170 148 126 170 260 344 803


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Primary Market

Market for new issues/fresh capital(IPOs)

New issues mkt. Participants

issuer

investorsintermediaries


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Mobilization of funds

- Prospectus

- Right issues and

- Private placement


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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 thecontroller

New co.s can issue shares only at par

Existing companies with substantial reserves could issue sharesat premium

Fixed price mechanism resulted in under pricing of many issues

After 1992, promoter and merchant banker together decide theprice of the issue.


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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 wasnt considered while

setting offer price Long time lag among the date of pricing, the

date the issue opens ,and the date whentrading commences

Raises possibility of price fluctuations inintervening period


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Book Building-A new issue

mechanism in India mechanism through which an offer

price for IPOs based on investorsdemand is determined .

Auction of shares

B k b ildi


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Book building process1. Appointment of book runner i.e. merchant

banker2. Preparation and submission of draft

documents to SEBI and obtaining of anacknowledgement card.

3. A specified price band (range) is to bedetermined by issuer and book runner

4. Different price levels are invited fromsyndicate members .Adv. Should mentionopening and closing dates for the bids

5. Issuer arrives at a final cut-off rate & finalallocation in consultation with book runnerand lead manager


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Contd..

6.Issuer and book runner may imposerestrictions on number of shares thatcan be allotted to each client

7. Final prospectus is filed with the (ROC)

along with procurement agreement8.Placement portion opens for

subscription9.Placement portion closes a day before

the opening of public issue portion


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Book building options

75% book building

Issue can be categorized into

-placement portion

- Public portion (net offer to the public)

100% book building


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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 stocks liquidity Volatility may increase due to bulk offloading


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Distinction between Primary

and Secondary Market Functional differences

Organizational differences

Nature of contributions to industrialfinance


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Secondary Market

Secondary/Stock

market!!!!


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JARGON OF EQUITY MARKET: SECURITY

BOND

STOCK

1)COMMON STOCKS2)PREFERRED STOCKS

SHARE

MUTUAL FUNDS.

PAR VALUE vs. MARKET VALUE

BULLISH vs. BEARISH

How does the stock market function?


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How does the stock market function?

Stock exchangesBrokers

RegistrarsDepositories and their participantsSecurities and Exchange Board of India (SEBI)

Financial RegulatorsSEBIRBIMinistry of finance


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The role of the stock exchange

Corporate governance

Creates investment opportunities for smallinvestors

Government raises capital for development

projects

Barometer of the economy


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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


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Functions Of RBIMonetary Authority:

Issuer of currency:

Regulator and supervisor of the financial system:

Authority On Foreign Exchange:

Developmental role:

Related Functions:


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WHY STOCK PRICE RISES?

The price of every stock increases or decreases for thefollowing possible reasons:

News about company. News about the country. Exchange rate regime. Depends on demand and supply for that stock.


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HOW TO MAKE MONEY


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HOW TO MAKE MONEYFROM CAITAL MARKET?

patience, profound knowledge.

Best guess.Diversification .

Portfolio

management.


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deficiencies Lack of transparency

Physical settlement Variety of manipulative practices

Institutional deficiencies

Insider trading


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