EQUITY SHARE MARKET

INDIAN CAPITAL MARKET

The capital market deals with capital. Capital Market is generally understood as a
market for long term funds and investments in long term instruments available in this market.
However now this market also includes short-term funds. Capital markets mean the market
for all the financial instruments, short term and long term as so commercial industrial and
government paper.

The capital market is a market where borrowing and lending of long term funds takes
place. Capital market deals in both, debt and equity. In these markets productive capital is
raised and made available to the corporate. The governments both central and state raise
money in the capital market through the issue of government securities. Capital market refers
to all the institutes and mechanisms of raising medium and long-term funds, through various
instruments available like shares, debentures, bonds etc.

Thus the capital market plays a very important role in promoting economic growth
through the mobilization of long-term savings and the savings get invested in the economy
for productive purpose. The capital market in India is a well integrated structure and its
components include stock exchanges, developed banks investment trusts, insurance
corporations and provident fund organization. It caters to the varied needs for capital of
agriculture, industrial and trading sectors of the economy. There are two important operations
carried on in these markets. The raising the new capital and Trading in the securities already
issued by the companies.

With the pace of economic reforms followed in India, the importance of capital
markets has grown in the last ten years. Corporate both in the private sector as well as in the
public sector raise thousands of crores of rupees in these markets. The governments, through
Reserve Bank of India, as well as financial institutes also raise a lot of money

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from these markets. The capital market serves a very useful purpose by pooling the savings.

The capital markets encourage capital formation in the country. The capital markets
mobilize savings of the households and of the industrial concerns. Such savings are then
invested for productive purposes. Capital markets also facilitate the growth of the industrial
sector, as well as the other sectors of the economy. The capital markets provide funds for the
projects in backward areas. Thus, Capital markets generate employment in the country.

They also facilitate the development of stock markets. Due to capital markets, the
public has alternative sources of investment. The public can invest not only in bank deposits,
but also in shares and debentures issued by public companies. The commercial banks and FIs
provide timely financial assistance to viable sick units to overcome their industrial sickness.
The banks and FIs may also write off a part of loan, or they re-schedule the loan, so as to
offer payment flexibility to the weak units, which in turn helps the weak units to overcome
financial crisis.

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INTERMEDIARIES IN CAPITAL MARKET

Capital market requires many intermediaries who are responsible to transfer funds
from those who save to those who require these funds for investments. The efficiency of the
markets is dependent on the specialization attained by these intermediaries. Some of them are
as follows:

1. Stock Exchanges.
2. Banks.
3. Investment Trusts and Companies.
4. Specialized Financial Institutions or Development Banks.
5. Mutual Funds.
6. Non-Banking Financial Institutions.
7. International Financial Investors and Institutions.

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INVESTORS IN CAPITAL MARKET

The supply in this market comes from savings from different sectors of the economy.
These savings accrue from the following sources:

1. Individuals.
2. Corporate.
3. Governments.
4. Foreign countries.
5. Banks.
6. Provident Funds.
7. Financial Institutions.

All these entities contribute to savings in the economy part of these savings naturally
flow in the capital markets. Individuals invest in these markets directly by investing in shares
or debentures of companies through bond issues of public sector units or through mutual
funds. Corporate who have more savings than their requirement for funds also are
participants in this market.

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GROWTH OF CAPITAL MARKET IN INDIA

There has been considerable growth in the capital markets in India. The following are
the factors responsible for the growth of capital markets in India.

1. Growth of Stock Exchanges in India

2. Growth of Financial Institutions
3. Growth of Mutual Funds
4. Growth of Merchant Banking in India
5. Growth of Multinationals Growing Public Confidence
6. Growth of Entrepreneurs
7. Development of Venture Capital Funds
8. Development of Credit Rating Agencies
9. Setting up of SEBI
10. Setting up of National Securities Clearing Corporation
11. Setting up of Corporate Governance
12. Setting up of Clearing Corporation of India Limited
13. General Awareness

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SCENARIO OF INDIAN CAPITAL MARKET

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200
years ago. The earliest records of security dealings in India are meagre and obscure. The East
India Company was the dominant institution in those days and business in its loan securities
used to be transacted towards the close of the eighteenth century. By 1830's business on
corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the
trading list was broader in 1839, there were only half a dozen brokers recognized by banks
and merchants during 1840 and 1850.The 1850's witnessed a rapid development of
commercial enterprise and brokerage business attracted many men into the field and by 1860
the number of brokers increased into 60.

In 1860-61 the American Civil War broke out and cotton supply from United States
of Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers
increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a
disastrous slump began (for example, Bank of Bombay Share, which had touched Rs2850/-,
could only be sold at Rs.87/-).

At the end of the American Civil War, the brokers who thrived out of Civil War in
1874, found a place in a street (now appropriately called as Dalal Street) where they would
conveniently assemble and transact business. In 1887, they formally established in Bombay,
the "Native Share and Stock Brokers' Association" (which is alternatively known as “The
Stock Exchange"). In 1895, the Stock Exchange acquired a premise in the same street and it
was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.

In the era of globalization and liberalization, the capital market assumes a greater
importance. The smooth functioning of the capital market depends on the regulators,

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participants and investors. The past decade has been a golden age for capital markets in India.
It is now a far more important source of finance than traditional financial intermediaries for
corporate sector. It is poised to dominate the future of corporate finance in India. Over the
past several years the capital market has witnessed a sea change. The market has become
more in terms of infrastructure, adoption of best international practices and introduction of
competition.

Reforms in the capital market, particularly the establishment empowerment of SEBI,

market determined allocation of resources, screen based nation-trading, dematerialization and
electronic transfer of securities, rolling settlement and ban on deferral products, sophisticated
risk management and derivatives trading, have greatly improved the regulatory framework
and efficiency of trading and settlement. Indian market is now comparable to many
developed markets in terms of a number of quantitative parameters.

The process of reforms has led to a pace of growth of markets almost unparalleled in
the history of any country. Capital market in India has grown exponentially as measured in
terms of amounts raised from the market, number of stock exchanges and intermediaries; the
number of listed stocks, market capitalization, trading volumes and turnover on stock
exchanges and investors population. Along with this, the profiles of the investors, issuers and
intermediaries have changed significantly. The market has witnessed fundamental
institutional changes resulting in drastic reduction in transaction cost and significant
improvements in efficiency, transparency and safety. Indian market is now comparable to
many developed markets. There are few countries, which have higher turnover ratio than
India, market capitalization as percentage of GNP compares favorably even with advanced
countries and is much better than emerging market.

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INTERNET IN INDIAN CAPITAL MARKET

The Internet Revolution has effectively opened up a universal distribution channel for
both products and services. Given the level of market sophistication, Indian Capital Markets
have very quickly taken to the Internet for trading and product distribution. There are a good
number of e-brokerage houses that allow transactions on the net (online trading). The bond
market too has seen winds of technological revolution blowing through them. As a pioneer,
in the primary placement of wholesale corporate debt, a platform promoted by IL&FS and
NSE, debtonnetindia.com commenced operations in April 2000. Another portal,
riskxpress.com also entered the same market segment later in September 2000. The Internet
could prove to be the answer to RBI's effort at broad-basing the ownership pattern of G-Secs.
However, for a truly successful and seamless integration of securities transaction on the
Internet facilities, like electronic payment gateways, D-mat and security issues shall have to
be put in place.

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ROLE OF CAPITAL MARKET IN INDIA

1. CAPITAL FORMATION
The capital market encourages capital formation in the country. Rate of capital
formation depends upon savings in the country. Though the banks mobilize savings, they are
not sufficient to match the requirements of the industrial sector. The capital market mobilizes
savings of households and of the industrial concern. Such savings are then invested for
productive purposes. Thus savings and investment leads to capital formation in country.

2. ECONOMIC GROWTH
Capital market facilitates the growth of the industrial sector as well as other sectors of
the economy. The main function of the capital market is to transfer resources (funds) from
masses to the industrial sector. The capital market makes it possible to lend funds to various
projects, both in the private as well as public sector.

3. DEVELOPMENT OF BACKWARD AREAS

The capital markets provide funds for the projects in backward areas. This facilitates
the economic development of backward areas.

4. GENERATES EMPLOYMENT
Capital market generates employment in the country:
i) Direct employment in the capital markets such as stock markets, financial
institutions etc.
ii) Indirect employment in all sectors of the economy, because of the funds provided
for developmental projects.

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5. LONG TERM CAPITAL TO INDUSTRIAL SECTOR

The capital market provides a permanent long-term capital for the companies. Once,
the funds are collected through issues, the money remains with the company. The company is
left free with the funds while investors exchange securities among themselves.

6. GENERATION OF FOREIGN CAPITAL

The capital market makes possible to generate foreign capital. Indian firms are able to
generate capital from overseas markets by way of bonds and other securities. Such foreign
exchange funds are vital for the economic development of the nation.

7. DEVELOPING ROLE OF FINANCIAL INSTITUTIONS

The various agencies of capital market such as Industrial Financial Corporation of
India (IFCI), State Finance Corporations (SFC), Industrial Development Bank of India
(IDBI), Industrial Credit and Investment Corporation of India (ICICI), Unit Trust of India
(UTI), Life Insurance Corporation of India (LIC), etc. have been rendering useful services to
the growth of industries. They have been financing, promoting and underwriting the
functions of the capital market.

8. INVESTMENT OPPORTUNITIES
Capital markets provide excellent investment opportunities to the members of the
public. The public can have alternative source of investment i.e. in bonds, shares and
debentures etc.

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CLASSIFICATION OF INDIAN CAPITAL MARKET

DEBT MARKET

COMMODITIES EQUITY MARKET

INDIAN CAPITAL MARKET

DERIVATIVES MUTUAL FUNDS

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DEBT MARKET

The debt market is one of the most critical components in the financial system of any
economy and act as the fulcrum of a modern financial system. The debt market in most
developed countries is many times bigger than the other financial markets including the
equity market. The debt markets in advanced countries are significantly larger and deeper
than equity markets. But in India, the trend is just the opposite. The development of debt
market in India has not been as remarkable as in the equity market. However, it has
undergone considerable changes in the last few years. The debt market in India can be
divided into two categories - Government securities market consisting of Central Government
and State Government securities; and Bond market consisting of FI bonds, PSU bonds and
corporate bonds/debentures. The government securities segment is the most dominant
category in the debt market.

The participants in the debt market are a small number of large players, which has
resulted in the debt market evolving into a wholesale market. Most primary debt issues are
privately placed or auctioned to the participants while secondary market dealings are
negotiated on telephone. The debt market has become more diversified with the entry of new
participants. The major participants in the debt market are as follows:
1. Central And State Government
2. Primary Dealers
3. Public Sector Undertakings (PSUs)
4. Corporate
5. Banks
6. Mutual Funds(MF)
7. Foreign Institutional Investors (FIIs)
8. Provident Funds (PFs)
9. Charitable Institutions And Trusts

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EQUITY MARKET

In financial markets, stock is the capital raised by a corporation through the issuance
and distribution of shares. A person or organization which holds shares of stocks is called a
shareholder. The aggregate value of a corporation's issued shares is its market capitalization.
When one buys a share of a company he becomes a shareholder in that company. Shares are
also known as Equities. Equities have the potential to increase in value over time. It also
provides the portfolio with the growth necessary to reach the long-term investment goals.
Research studies have proved that the equities have outperformed than most other forms of
investments in the long term. Equities are considered the most challenging and the rewarding,
when compared to other investment options.

Research studies have proved that investments in some shares with a longer tenure of
investment have yielded far superior returns than any other investment. However, this does
not mean all equity investments would guarantee similar high returns. Equities are high-risk
investments. One needs to study them carefully before investing. Since 1990 till date, Indian
stock market has returned about 17% to investors on an average in terms of increase in share
prices or capital appreciation annually. Besides that on average stocks have paid 1.5 %
dividend annually. Dividend is a percentage of the face value of a share that a company
returns to its shareholders from its annual profits. Compared to most other forms of
investments, investing in equity shares offers the highest rate of return, if invested over a
longer duration.

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DERIVATIVES

Introduction of the derivatives was anticipated by the market players since long.
Contribution of derivatives is going to be defining the development of the capital market in
India, at a time, when benefit and convenience continues to be the most favorable arguments
in favor of the derivatives. How far these complicated products would be understood and
accepted by the common investor is the question that remains.

Derivatives are a common name given to a class of instruments whose value is

derived from another asset called the underlying asset. The three most popular classes of
derivative instruments are options, futures and swaps. The most important contract types are
futures and options, and the most important underlying markets are equity, treasury bills,
commodities, foreign exchange and real estate. The key motivation for such instruments is
that they are useful in reallocating risk either across time or among individuals with different
risk-bearing preferences. One kind of passing on of risk is mutual insurance between two
parties who face the opposite kind of risk. For example, in the context of currency
fluctuations, exporters face losses if the rupee appreciates and importers face losses if the
rupee depreciates. By forward contracting in the dollar-rupee forward market, they supply
insurance to each other and reduce risk. The ultimate importance of a derivatives market
hinges upon the extent to which it helps investors to reduce the risks they face. Some of the
largest derivatives markets in the world are on:
1. Treasury Bills (to help control interest rate risk),
2. The Market Index (to help control risk that is associated with fluctuations in the stock
market) and
3. Exchange Rates (to cope with currency risk).

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MUTUAL FUNDS

The mutual fund industry in India has come into existence in 1963 with the formation
of Unit Trust of India, at the initiative of the Government of India and RBI. Mutual Fund is a
trust that pools the savings of a number of investors who share a common financial goal. The
money thus collected is then invested in capital market instruments such as shares,
debentures and other securities. The income earned through these investments and the capital
appreciations realized are shared by its unit holders in proportion to the number of units
owned by them. MF seems to be the most suitable vehicle of investment for the common
people as it offers opportunity to invest in a diversified, professionally managed basket of
securities at a relatively low cost.

There are number of schemes of Mutual fund and all of them have different character
and objective. It is the skill of the investor to keep in view the objective and then take
decision where to invest. For e.g. in the wake of boom in the software sector, the Indian
Mutual fund launched various sector specific schemes that entailed investment only in
software stocks for that period.

1. Debt-Oriented Schemes
2. Equity-Oriented Schemes
3. Open-Ended Vs Close-Ended Schemes
4. Pure Growth Schemes
5. Pure Income Schemes
6. Balanced Schemes
7. Tax Saving Scheme
8. Sector Funds
9. Money Market Mutual Funds

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COMMODITIES

The commodities trade in the 18th and 19th centuries was largely influenced by the
shifts in macro economic patterns, the changes in government regulations, the advancement
in technology, and other social and political transformations around the world. The 19th
century has seen the establishment of various commodity exchanges, which paved the way
for effective transportation, financing and warehousing facilities in this arena. In a new era of
trading environment, commodities exchanges offer innumerable economic benefits by
facilitating efficient price discovery mechanisms and competent risk transfer systems.

Commodity exchange is an association, or a company or any other body corporate

organizing futures trading in commodities. Earlier, all the sellers and buyers of a commodity
used to come to a common market place for the trade. Buyer could judge the amount of
produce that year while the seller could judge the amount of demand of the commodity. Thus
they could dictate their terms and hence the counter party was left with no choice. Thus, in
order to hedge from this unfavorable price movement, need of the commodity exchange was
felt.

The National Commodity Exchanges have been recognized by the Central

Government for organizing trading in all permissible commodities which include precious
(gold & silver) and non-ferrous metals; cereals and pulses; ginned and un-ginned cotton;
oilseeds, oils and oil-cakes; raw jute and jute goods; sugar and gur; potatoes and onions;
coffee and tea; rubber and spices, etc. The MCX, NCDEX and NMCE are large commodity
exchanges in India and MCX is the biggest among them.

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