Emerging Scenario of Capital Market in India Final

EMERGING SCENARIO OF CAPITAL MARKET IN INDIA

by

Mr. Rajiv Kumar Maheshwary

Asst Professor & HOD, School of Management

Khalsa Institute of Mgmt & Tech for Women, Ludhiana

THE CURRENT GLOBALIZATION FEATURES 4 UNPRECEDENTED

TRENDS

The movement of capital and other market

instruments around the globe The movement of Human beings across

borders, 100 million immigrants at any one

time around the world The movement of information through cyberspace The movement of popular culture (clothing, Food)

across borders

CHANGE IS THE LAW OF NATURE AND THE VARIABLE THAT REMAINS

CONSTANT IS CHANGE …………

World has changed

So has India

Region around us has also changed

There is a need to realign to emerging global and regional realities

THE INDIAN STORY…………….THE FASTEST GROWING FREE MARKET

DEMOCRACY !!!!!

GDP Growth Forex FII Flow FDI Per Capita

1990 4.9 percent < USD 1 billion USD 1 million (1993)

USD 97 million USD 390

2008* 8.7 percent USD 309 billion as on Mar 28, 2008

USD 16.1 billion in 2007-08

USD 12.7 billion in 2007-08 till December (USD 16 billion in 2006-07)

USD 740

Source: Times of India, RBI, DIPP, Indian Budget, Rediff

5

BRIC Report, Goldman SachsBRIC Report,

Goldman Sachs

“I have never seen India so

dynamic, vibrant and full

of business opportunities”.

- Dan Scheinman, Cisco System Inc.

as told to Business Week, August 2005

- Dan Scheinman, Cisco System Inc.

as told to Business Week, August 2005

“We came to India for the costs, stayed for the quality and are

now investing for innovation”.

John RedwoodEconomic

Competitiveness Policy Group, UK

John RedwoodEconomic

Competitiveness Policy Group, UK

“India is now truly a land of opportunity”.

Jack WelchGeneral Electric

Jack WelchGeneral Electric

“India is a developed

country as far as intellectual

capital is concerned”.

Peter Loescher President and

Chief Executive Siemens

Peter Loescher President and

Chief Executive Siemens

By 2032, India will be among the

three largest economies in the

world.

Why India? – Quote Unquote

Travyn Rhall,

ACNielsen

Travyn Rhall,

ACNielsen

“The Indian market has two core advantages - an

increasing presence of multinationals and an

upswing in the IT exports”.

Craig BarrettIntel

Corporation

Craig BarrettIntel

Corporation

“India has evolved into one of the world's leading technology centers“.

Mr Paul de Voijs MDVolvo Car India

Mr Paul de Voijs MDVolvo Car India

“India is a very exciting market

and the luxury car segment is

growing exponentially

here”.

India: Pacing Ahead to Emerge as a Major Economy in the World

Projected GDP Growth Rates for Select Upcoming Economies

0

2

4

6

8

2005-10 2010-15 2015-20 2020-25 2025-30 2030-35 2035-40 2040-45 2045-50

GD

P G

row

th R

ate

(%

)

Brazil China India Russia

0

20

40

60

80

100

India Russia Vietnam Ukraine China Chile Latvia

GR

DI S

core

2007 Global Retail Development Index (GRDI)

2007 Global Services Location Index

3.3

2.6

3.2

2.8

2.9

3.2

1.5

1.8

1.2

1.3

2.3

2.3

1.1

1.5

1.6

2

1.4

1.4

Indonesia

Brazil

Thailand

Malaysia

China

India

Financial structure People and skill availablityBusiness environment

AT Kearney has placed India as the most preferable destination for Services sector (2007)…

Services sector attracted interest of major global players and large investments are pumped in it

India is expected to outperform its rivals in the BRIC, in terms of GDP growth rate, from 2015 onwards… Source: AT Kearney, BRIC Report

… India is the top destination in the AT Kearney Global Retail Development Index (2007)

What is the India story?

1. Rising GDP growth ( % average annual GDP growth) 1900 – 1950 1.0 1950 – 1980 3.5 1980 – 2002 6.0 2002 – 2006 8.0 2006 – 2012 8.35

Recently projected as 10% for 2010 as per news on TV India Story

2. Population growth is slowing 1901 – 1950 1.0 1951 – 1980 2.2 1981 – 1990 2.1 1991 – 2000 1.8

2001 – 2010 1.5

Sources: 1900-1990: Angus Madison (1995), Monitoring the World Economy, 1990-2000:Census of India (2001), 2000-2005 MoF

What is the India story ?......... Cont’d

3. Literacy is rising: 1950 17% 1990 52% 2000 65% 2010 (projected) 80%

4. Middle class is exploding: 1980 8% 65 Million

2000 22% 220 Million 2010 (projected) 32% 368 Million

5. Poverty is declining: 1980 46% 2000 26% 2010 (projected) 16%

Sources: 1900-1990: Angus Madison (1995), Monitoring the World Economy, 1990-2000:Census of India (2001), 2000-2005, MoF, The Consuming Class, National Council of Applied Economic Research, 2002

What is the India story ?........... Cont’d

6. Productivity is rising: 30% to 40% of GDP growth is

due to rising productivity

7. Per capita income: 1980 $1178 (US$ PPP) 2009 $3275

India is now the 4th largest economy of the World and will cross Japan between 2012 and 2014 to become the 3rd

largest

Source: Census of India (2001), World Bank

INDIA IS CHANGING AND EMERGING AS A STRONGER

NATION OF THE WORLD AND

ITS SUCCESS IS MARKET LEAD

THE BANKS AND SECURITIES MARKETS ARE TWO COMPETING MECHANISMS TO

CHANNEL SAVINGS TO INVESTMENT.

THE SECURITIES MARKETS SCORE OVER BANKS IN THE ALLOCATIONAL

EFFICIENCY, AS IT ALLOCATES SAVINGS TO THOSE INVESTMENTS WHICH HAVE

POTENTIAL TO YIELD HIGHER RETURNS BUT ARE RISKY AS WELL.

HENCE, INVESTMENTS IN CAPITAL MARKET ARE PREFERRED OVER THOSE

IN THE BANKS.

Vibrant Capital Market- a reflection of market lead economy

India is among the major destinations across the globe for inflow of US Dollar

Sensex – The Bombay Stock Exchange index rise 20 times from 1990s to reach 20,000 mark in November 2007.

FIIs have infused large

investments into the Indian stock

market

Encouraging industry

performance

Increased local investors’ confidence

Emergence of industry and confidence of local investors along with the FIIs has led to upsurge of the Sensex 0

5000

10000

15000

20000

2500011 December 2007 Crossed 20,000 mark

07 February 2006Crossed 10,000 mark30 December 1999

Crossed 5,000 mark

A WELL FUNCTIONING SECURITIES MARKET IS CONDUCIVE TO THE

SUSTAINED ECONOMIC GROWTH OF AN ECONOMY AS IT:

(A) AUGMENTS THE REAL SAVINGS AND CAPITAL FORMATION FROM ANY GIVEN LEVEL OF

NATIONAL INCOME,

(B) INCREASES NET CAPITAL INFLOW FROM ABROAD,

(C) RAISES THE PRODUCTIVITY OF INVESTMENT BY IMPROVING ALLOCATION OF INVESTIBLE

FUNDS, AND

(D) REDUCES THE COST OF CAPITAL.

THE INDIAN SECURITIES MARKET BEFORE 1992

FRAGMENTED REGULATION;

MULTIPLICITY OF ADMINISTRATION;

STOCK EXCHANGES REGULATED THROUGH THE SECURITIES

CONTRACTS (REGULATIONS) ACT;

TRADING WAS LIMITED TO EQUITY SHARES OPEN OUTCRY

TRADING SYSTEM (FLOOR BASED TRADING);

LONGER SETTLEMENT PERIOD;

PRIMARY MARKETS NOT IN THE MAINSTREAM OF THE

FINANCIAL SYSTEM;

THE INDIAN SECURITIES MARKET BEFORE 1992 CONT’D…..

POOR DISCLOSURE IN PROSPECTUS.

PROSPECTUS AND BALANCE SHEET NOT MADE AVAILABLE TO INVESTORS.

INVESTORS FACED PROBLEMS OF DELAYS (REFUND, TRANSFER,

ETC.)

STOCK EXCHANGES RUN AS BROKERS CLUBS, MANAGEMENT

DOMINATED BY BROKERS.

MERCHANT BANKERS AND OTHER INTERMEDIARIES UNREGULATED.

NO CONCEPT OF CAPITAL ADEQUACY.

THE INDIAN SECURITIES MARKET BEFORE 1992 CONT’D…..

MUTUAL FUNDS—VIRTUALLY UNREGULATED WITH POTENTIAL FOR CONFLICTS OF INTEREST IN

STRUCTURE

POOR DISCLOSURES BY MUTUAL FUNDS; NAV NOT PUBLISHED; NO VALUATION NORMS

PRIVATE SECTOR MUTUAL FUNDS NOT PERMITTED

TAKEOVERS REGULATED ONLY THROUGH LISTING AGREEMENT BETWEEN THE STOCK EXCHANGE AND

THE COMPANY

NO REGULATION OF INSIDER TRADING, OR FRAUDULENT AND UNFAIR TRADE PRACTICES

CHANGES IN INDIAN CAPITAL MARKET SINCE 1992

STRATEGY OF LIBERALISATION, PRIVATISATION AND GLOBALISATION WAS THE CATALYST THAT LEAD TO

FINANCIAL SECTOR REFORMS

EMERGENCE OF INFORMATION TECHNOLOGY AS A STRATEGIC TOOL TO ENHANCE SPEED, EFFICIENCY AND

TRANSPARENCY IN OPERATIONS

POWER TO REGULATE THE STOCK EXCHANGES DELEGATED BY GOVERNMENT TO SEBI

IRRELEVANCE OF REGIONAL STOCK EXCHANGES

USE OF INNOVATION AND CREATIVITY

CHANGES IN INDIAN CAPITAL MARKET SINCE 1992 CONT’D ………

Capital adequacy norms for broker accounts

Shift from Floor based trading to a fully computerized automated trading known as BOLT (BSE On Line Trading) and NEAT (National Exchange Automated Trading) System

Introduction of Rolling Settlement – reducing the cycle to T+2

Dematerialization of securities - The Depositories Act enacted to facilitate the electronic book entry transfer of securities through depositories

Free pricing of securities - Capital Issues (Control) Act of 1947 repealed and the office of Controller of Capital Issues abolished. Introduction of book building

Introduction of trading in Derivatives instruments: Index Futures, Stock Futures, Interest Rate Futures, Currency Futures, Index Options Index Options

CHANGES IN INDIAN CAPITAL MARKET SINCE 1992 CONT’D ………

# Internationalization of Indian Capital market: Foreign direct investment allowed in stock broking, asset management companies, merchant banking, and other nonbank finance companies

# Foreign institutional investors (FIIs) allowed access to Indian capital markets on registration with SEBI

# Indian companies permitted to access international capital markets through Euro issues and ADRs

# Improved disclosure standards and introduction of prudential listing norms

# Simplification of procedures for IPO And FPO

CHANGES IN INDIAN CAPITAL MARKET SINCE 1992 CONT’D……

Mutual Funds emerging as an important segment of Indian Capital market

Introduction of Venture Capital Funds regulated by Venture Capital Regulations 1996

Emergence of Wholesale Debt Market platform

Introduction of ETFs

Financial Ratings and Corporate Governance ratings for IPOs and

financial instruments.

CHANGES IN INDIAN CAPITAL MARKET SINCE 1992 CONT’D……

A national platform named BSE IndoNext launched on 7th Jan. 2005

for SMEs to raise equity / debt and facilitate trading in such Cos.

United Stock Exchange of India Ltd. (USE) launched on 20th Sept’ 2010. Currently currency futures are available on USE in 4 currency pairs - USD-INR, EUR-INR, GBP-INR and JPY-INR.

Introduction of Interest rate derivatives present a unique opportunity that shall change the business landscape in India.

However, the above financial products are the least understood. Recognizing this need, USE has initiated a knowledge centre through which it aims to educate Indian businesses and traders about the benefits of derivatives and trading.

IMPROVED QUALITY OF REGULATION

IMPROVED MARKET EFFICIENCIES, TRANSPARENCY, SAFETY & SPEED TRADING IN CASH, DEBT, MFS AND DERIVATIVES GROWTH IN VOLUME OF SECURITIES TRANSACTIONS

ADVANCED RISK MANAGEMENT SYSTEMS

REDUCTION IN TRANSACTION COSTS

FULLY AUTOMATED TRADING SYSTEM

COMPLIANCE WITH INTERNATIONAL STANDARDS

Strengths of Indian Capital Market

A REPORT TITLED “CAPITAL MARKETS 2020: GOING FOR 3X”, A STUDY CONDUCTED BY MCKINSEY & COMPANY RELEASED AT THE FICCI ANNUAL CAPITAL MARKETS CONFERENCE, CAPAM 2010 ON 20TH APRIL STATES;

“INCREASED MARKET PARTICIPATION, EXPANDING ISSUERS, STREAMLINING PROCESSES AND DEEPENING PRODUCT MARKETS ARE THE KEY ELEMENTS THAT WILL LEAD TO A THREE-FOLD GROWTH IN INDIA’S CAPITAL MARKETS BY 2020”

Strengths of Indian Capital Market

THE KEY CHALLENGES FOR OVERALL GROWTH OF CAPITAL MARKETS IS LOW DEPTH IN EQUITY MARKETS.

INDIAN MARKETS HAVE A LOWER TRADING VELOCITY AS COMPARED WITH OTHER MARKETS SUCH AS CHINA, JAPAN, THE UNITED STATES, THE UNITED KINGDOM AND GERMANY.

INDIAN EXCHANGES ARE SOMEWHAT UNDIVERSIFIED: EQUITIES AND COMMODITIES COMPRISE APPROXIMATELY 90% OF TRADING VOLUME. TRADING IN INTEREST RATE FUTURES, FOREIGN EXCHANGE FUTURES AND CORPORATE BONDS BEING MINUSCULE.

THEN, ONLY FOUR CITIES— MUMBAI, DELHI, AHMADABAD AND KOLKATA —ACCOUNT FOR 85% OF CASH TRADING. THE REPORT CONCLUDES THAT INDIAN HOUSEHOLDS INVEST MUCH LESS IN EQUITY MARKETS THAN THEIR DEVELOPED-MARKET COUNTERPARTS. THIS IS REFLECTED IN RETAIL EQUITY OWNERSHIP (NON-PROMOTER) BEING ONLY ABOUT 10% OF TOTAL EQUITY OWNERSHIP, AND HAS COME DOWN BY 3% OVER THE LAST SEVEN YEARS.

Report titled “Capital Markets 2020: Going for 3X” observes …….

ANALYZING EFFICIENCY OF THE SPOT AND THE DERIVATIVES MARKETS

EVALUATING THE PERFORMANCE OF IPOS STUDYING THE

VOLATILITY AT INDIAN STOCK EXCHANGES

RELATIONSHIP BETWEEN SPOT MARKET AND THE DERIVATIVES MARKET INTEGRATION OF INDIAN CAPITAL MARKET WITH THE GLOBAL CAPITAL MARKETS IMPACT OF INVESTMENTS BY FIIS ON THE INDIAN CAPITAL MARKET

Some Issues for Research in Capital Market …….

EVENT STUDIES INVOLVING THE IMPACT OF CORPORATE ANNOUNCEMENTS ON FINANCIAL INSTRUMENTS

ANALYZING THE GROWTH OF DEBT MARKET IN INDIA

STUDIES RELATED TO MUTUAL FUNDS * PERFORMANCE EVALUATION OF MUTUAL FUNDS * GROWTH OF THE MUTUAL FUNDS * INVESTORS’ PERCEPTION TOWARDS MUTUAL FUNDS

EVALUATING THE REGULATORY FRAMEWORK OF INDIAN CAPITAL MARKET

EXAMINING THE DISCLOSURE PRACTICES OF COMPANIES

CONVERGENCE OF ACCOUNTING STANDARDS TO IFRSS

Some Issues for Research in Capital Market …….

KNOWLEDGE CREATION BY

SEBI, IRDA, NSE AND BSE

I THANK THE ORGANIZERS FOR GIVING ME AN OPPORTUNITY TO LEARN

AND

THE AUDIENCE FOR GIVING ME A PATIENT HEARING