A PROJECT REPORT ON SECURITIES MARKET IN INDIA MASTER IN BUSINESS ADMINISTRATION ( FINANCE )

SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR AWARD OF MASTER IN BUSINESS ADMINISTRATION OF

TILAK MAHARASHTRA UNIVERSITY, PUNE. SUBMITTED BY Mr. SANDEEP RAMAKANT GIRNARKAR PRN No.07408100844 OF PINGES TUTION CLASSES, DADAR , MUMBAI. GUIDED BY PROF. R. SUBRAMANIYAN

TILAK MAHARASHTRA UNIVERSITY GULTEKDI, PUNE 411037.

Tilak Maharashtra University, Pune 411037

( Deemed under section 3 of UGC Act 1956 Vide notification No. F.9 U3 dated 24th April 1987 By Government of India)

Vidyapeeth Bhavan, Gultekdi, Pune 411037.

CERTIFICATE

This is to certify that the project titled SECURITIES MARKET IN INDIA is a bonafied work carried out by Mr. SANDEEP R. GIRNARKAR a student of Master of Business Administration Semester 5th, Specialization Finance, PRN No. 07408100844 under Tilak Maharashtra University, in the year 2010.

Head of the Department External

Examiner Internal

Examiner

Date : Place : University Seal

CERTIFICATE OF INTERNAL GUIDE

This is to certify that the project titled SECUITIES MARKET IN INDIA is a bonafied work carried out by Mr. SANDEEP R GIRNARKAR a candidate for the award of Master of Business Administration of Tilak Maharashtra University, Pune under my guidance and direction.

Signature of guide

Date : Place : Mumbai.

Name : Designation : Institute :

CERTIFICATE
TO WHOMSOEVER IT MAY CONCERN

This is to certify that Mr. Sandeep R. Girnarkar MBA student of Tilak Maharashtra University, Pune has successfully completed his project work for the award of Master Degree in Business Administration.

He has done the project on SECURITIES MARKETS IN INDIA

Company Name : Life Insurance Corporation of India Investment Department, Mumbai

Signature :

Company Seal

Designation: Dy. Secretary ( Investment)

ACKNOWLEDGEMENT
I owe a great many thanks to a great many people who helped and supported me in successful completion of my project. I thank my friends and colleagues for their suggestions they provided to me from time to time.

My deepest thanks to Lecturer Mr. R. Subramaniyan the guide of the project for guiding and correcting various documents of mine with attention and care. He has taken pain to go through the project and make necessary corrections as and when needed.

I also wish to express sincere gratitude to all respondents of the project without the kind co- operation of whom this work would not have been possible.

My deep sense of gratitude to Madam Anjali N. Desai, Manager, Investment department of Life Insurance Corporation of India. For her support and guidance. Thanks and appreciation to the people at Life Insurance Corporation Of India for their support.

I would also thank my Institution and my faculty members without whom this project would have been a distant reality. I also extend my heartfelt thanks to my family and well wishers.

INDEX
SR. NO.

TOPIC
RATIONALE OF THE STUDY OBJECTIVE OF STUDY PROFILE OF COMPANY HISTORY OF SECURITIES MARKET THEOROTICAL PERCEPTIVE MACROECONOMIC INDICATORS SECURITIES MATHAMATICS REGULATORS FOR THE SECURITY MARKETS RESEARCH METHODOLOGY DATA ANALYSIS AND INTERRPRETATION FINDINGS RECOMMENDATIONS LIMITATIONS EXPECTED CONTRIBUTION FROM THE STUDY

PAGE NOS.

1 2 3 4 5 5 6 7 9 10 11 12 13 14

7-8 9 10 11-17 18-32 33-36 37-43 44-45 46-47 48-51 52 53-54 55 56

APPENDIX Copies of Questionnaire Bibliography

RATIONALE OF THE STUDY

A robust financial system requires multiple channels of financing, wherein Securities Markets plays a significant role. It is the largest of all the financial markets in the world today.

Basically, Securities Markets provide a channel for allocation of savings by an individual or an organization to those who have a productive need for them. Indias fixed income securities market has been evolving steadily since the economic reforms. It has witnessed several policy initiatives, which has refined the market micro-structure, modernized operations and broadened investment choices for the investors. With the implementation of the Narasimham Committee recommendations on banking sector reforms market determined interest rates replaced administered interest rates with few exceptions. Debt market analysts working in the Indian banking sector need to understand background of banking sector, interest rate cycles, and volatility in the interest rates that pose new challenges. It is therefore very much required to understand the securities market in India. The study relates to estimating the number of institutions and population of individual investors who have invested in equity market and debt market directly or indirectly through mutual funds. The study also relates to improvement in the service given by Brokers/subbrokers, various electronic modules boosting the investors confidence in the securities market. The study gives more emphasis on Government securities market as the people are more fascinated to equity market than Debt market. A lot of awareness is seen these days about equity market in India as compared to Debt market. Therefore there is need to understand debt market more than equity market.

OBJECTIVE OF STUDY
Main Objective :
The main objective of the study is to know Government securities market with brief study of stock market.

Some other secondary objectives are as under :

1. The major characteristics of securities are their transferability and marketability. The objective is to understand the process of trading and investment in them. 2. Through the study of securities market , the objective is understand the financial systems in India. 3. Since the 1960s, there has been a surge of significant financial innovations, many of them are in bond market. The objective of the study is to understand these innovations. 4. To know the influencing force behind the decision making while investing in currently available investment options. 5. To understand the various electronic modules available for transactions in securities market. 6. To understand the impact of macroeconomic factors on securities market. 7. To understand the issuance of securities in India. 8. Attempt to understand the concept of Yield To Maturity, Gross Current Yield etc. 9. To draw a profile of Institutional Investors and describe their demographic, financial and equity ownership characteristics.

COMPANYS PROFILE
Life Insurance Corporation of India The Life Insurance Corporation (LIC) was established about 44 years ago with a view to provide an insurance cover against various risks in life. A monolith then, the corporation, enjoyed a monopoly status and became synonymous with life insurance.

Its main asset is its staff strength of 1.24 lakh employees and 2,048 branches and over six lakh agency force. LIC has hundred divisional offices and has established extensive training facilities at all levels. At the apex, is the Management Development Institute, seven Zonal Training Centres and 35 Sales Training Centres. At the industry level, along with the Government and the GIC, it has helped establish the National Insurance Academy. It presently transacts individual life insurance businesses, group insurance businesses, social security schemes and pensions, grants housing loans through its subsidiary; and markets savings and investment products through its mutual fund. It pays off about Rs 6,000 crore annually to 5.6 million policyholders. Keeping in mind the primary obligation of the Corporation to its policyholders, as enshrined in the objectives of nationalization, the funds of the Corporation are deployed to the best advantage of the policyholders as well as the community as a whole. While investing these monies which are held in trust, the Corporation has to keep in view the national priorities and obligation of reasonable returns.

HISTORY OF SECURITIES MARKET

Evolution of Stock market & Govt. securities market in India :
Stock Market :

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Indian stock markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. By 1830s business on corporate stocks and shares in Bank and cotton presses took place in Mumbai. The 1850s 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. At the end of American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street ( Dalal Street)where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, 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. The Second World War broke in 1939. It gave a sharp boom which was followed by a slump. But, in 1943, the situation changed radically , when India was fully mobilized as supply base. During the early sixties there were eight recognized stock exchanges in India. The number virtually remained unchanged for nearly two decades. During eighties, however, many stock exchanges were established. At present there are totally twenty two recognized stock exchanges in India excluding OTCEI and NSEIL. Indian Stock Market have not only grown just in number of exchanges, but also in number of listed companies and in capital of listed companies. Growth of Market Structure :
Particulars Stock Exchanges Cash Market 23 23 23 23 23 22 22 22 22 22 22 200 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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Derivative Market Brokers Cash Market Derivative Market Foreign Institutional Investors Custodians Depositories

919 2 506

9782 519 527

9687 705 490

9519 795 502

9368 829 540

9128 994 685

9335 1120 882

9368 1210 885

9381 1285 890

9402 1361 921

9478 1382 936

15 2

14 2

12 2

11 2

11 2

11 2

11 2

11 2

19 2

26 2

32 2

RECENT DEVELOPMENTS IN INDIAN STOCK MARKET Many steps have been taken in recent years to reform the Stock Market such as : Regulation of Intermediaries. Changes in Management Structure. Prohibition of Insider Trading. Transparency of Accounting Processes. Strict supervision of Stock Market Operations. Prevention of Price Rigging. Encouragement of Market Making. Discouragement of Price Manipulations. Derivative Trading. International Listing.

BSE ( THE STOCK EXCHANGE OF MUMBAI )

The Stock Exchange, Mumbai, popularly known as BSE was established in 1875 as The Native Share and Stock Brokers Association. It is the oldest in the Asia, even older than Tokyo

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Stock Exchange. It is voluntary non-profit making Association of Persons and is currently engaged in the process of converting itself into demutualised and corporate entity. It has evolved over the years into its present status as the premier Stock Exchange in the country. It is the first Stock Exchange in the country to have obtained permanent recognition in 1956 from Govt. of India under the Securities Contracts (Regulation) Act,1956. The Exchange, while providing an efficient and transparent market for trading in Securities, debt and derivatives upholds the interest of the investors and ensures redressal of their grievances whether against the companies or its own member brokers. It also strives to educate and enlighten the investors by conducting investor education program and making available to them necessary informative inputs. A Governing Board having 20 directors is the apex body, which decides the policies and regulates the affairs of the Exchange. The Governing Board consists of 9 elected directors, who are from the broking community, 3 SEBI nominees, 6 public representatives and an Executive Director & Chief Executive Officer and a Chief Operating Officer.

NSE ( NATIONAL STOCK EXCHANGE)

NSE was incorporated in 1992 and was given recognition as a stock exchange in April 1993. It started operations in June 1994, with trading on Wholesale Debt Market Segment. Subsequently it launched the Capital Market Segment in November 1994 as a

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trading platform for equities and Futures and Options Segment in June 2000 for various derivatives instruments. NSE has been able to take the stock market to the doorsteps of the investors. The technology has been harnessed to deliver the service to the investors across the country at the cheapest possible cost. It provides a nation-wide, screen-based, automated trading system, with high degree of transparency and equal access to investors irrespective of geographical location. The high level of information dissemination through on-line system has helped in integrating retail investors on a nation-wide basis. The standards set by the exchange in terms of market practices, products, technology and service standards have become industry benchmarks and are being replicated by other market participants. Within a very short span of time, NSE has been able to achieve all the objectives for which it was set up. It has been playing a leading role as a change agent in transforming the Indian Capital Markets to its present form. The India Capital Markets are a far cry from what they used to be a decade ago in terms of market practices, infrastructure, technology, risk management, clearing and settlement and investor service.

NCDEX ( NATIONAL COMMODITIES AND DERIVATIVES EXCHANGE) NCDEX started working on 15th December, 2003. This exchange provides facilities to their trading and clearing member at different 130 centres for contract. In commodity market the main participants are speculators, hedgers and arbitrageurs.

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Promoters of NCDEX are National Stock Exchange (NSE) ICICI Bank Life Insurance Corporation of India (LIC) NABARD IFFICO Punjab National Bank (PNB) CRISIL

GOVT. SECURITIES / DEBT MARKET :

The government spends more than its income by borrowing from various sources to meet growing needs of defence, social services and planned development. Since 1951, the importance of public borrowing as a source of financing government expenditure has increased enormously and public debt began to grow by leaps and bound due to the increasing planned expenditure under various five year plans. In terms of provisions of the Public Debt Act, 1944, the administration of public debt of Centre and States is entrusted to the RBI. Public Debt management is concerned with the raising of finance for government through market loans, treasury bills and other methods. The required finance in any year is governed by the budgetary considerations of their revenue and expenditure. The amount of finance to be raised, the time, the rate of interest and terms of loan are all decided by the Ministry of Finance in consultation with RBI. The RBI acts as an underwriter for government debt , particularly of the Central Government. In respect of State Government loans, RBI uses its moral

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influence on the market to see that full subscription takes place for the loans floated. The role of RBI in debt management is To keep the cost of financing to the minimum. To maintain the market stable and smooth. To meet the portfolio requirements of all investors to the extent possible. To maintain a minimum level of activity in the market with a view to providing liquidity to the securities in the market for purpose of developing the market.

In most of the countries, the debt market is more popular than the equity market. This is due to sophisticated bond instruments that have return reaping assets as their underlying. However, in India, equity markets are more popular than debt markets due to dominance of government securities in debt markets. Moreover, the government is borrowing at a pre-announced coupon rate targeting a captive group of investors such as Banks, Financial Institutions, Insurance Companies etc. This coupled with automatic monetization of fiscal deficit, prevented the emergence of a deep and vibrant government securities market. The bond markets exhibit a much lower volatility than equities, and all bonds are priced based on same macroeconomic information. The bond market liquidity is normally much higher than the stock market liquidity in most of the countries. The performance of the market for debt is directly related to the interest rate movement as it is reflected in

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the yields of government bonds, corporate debentures, MIBOR-related commercial papers and non-convertible debentures. The Indian debt market is composed of government bonds and corporate bonds. However, the Central Government bonds are predominant and they form most liquid component of bond market. In 2003, the National Stock Exchange (NSE) introduced Interest Rate Derivatives. The trading platforms for government securities are Negotiated Dealing System (NDS) and Wholesale Debt Market (WDM) segment of NSE and BSE. In negotiated market, the trades are normally decided by the seller and the buyer, and are reported to the exchange through the broker, whereas the WDM trading system, know as NEAT, is fully automated screen based trading system, which enables members across the country to trade simultaneously with enormous ease and efficiency.

THEORETICAL PERCEPTIVE
TRADING PATTERN OF THE INDIAN STOCK MARKET

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Trading in Indian stock exchanges are limited to listed securities of public limited companies. They are broadly divided into two categories namely, specified securities (forward list) and non-specified securities (cash list). Equity shares of dividend paying, growth oriented companies with a paid up capital of at least Rs. 50 million and a market capitalization of at least Rs.100 million and having more than 20,000 shareholders are, normally, put in the specified group and balance in non specified group.

Two types of transactions can be carried out on the Indian stock exchanges : (a) spot delivery transactions for delivery and payment within the time or on the date stipulated when entering into the contract which shall not be more than 14 days following the date of contract and (b) forward transactions delivery and payment can be extended by further period of 14 days each so that the overall period does not exceed 90 days from date of contract. The latter is permitted only in case of specified shares. A member broker in an Indian stock exchange can act as an agent, buy and sell securities for his clients on a commission basis and also can act as a trader or dealer as a principal, buy and sell securities on his own account and risk, in contrast with practice prevailing on New York and London Stock Exchanges, where a member can act as a jobber or broker only. The nature of trading on Indian Stock Exchanges are that of age old conventional style of face-to-face trading with bids and offers being made by open outcry. However, there is a great amount of effort to modernize the Indian Stock Exchanges in the very recent times.

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To provide improved service to investors, the countrys first ring less, scrip less, electronic stock exchange OTCEI was created in 1992. Trading at OTCEI is done over the centres spread across the country. Securities traded on OTCEI are classified into : o Listed securities The shares and debentures of the companies listed on the OTC can be bought or sold at any OTC counter all over the country and they should not be listed anywhere else. o Permitted securities Certain shares and debentures listed on other exchange and units of mutual funds are allowed to be traded. o Initiated debentures Any equity holding at least one lakh debentures of a particular scrip can offer tem for trading on OTC. OTC has unique feature of trading compared to other traditional exchanges. That is, certificate of listed securities and initiated debentures are not traded at OTC. The original certificate will be safely with custodian. But, a counter receipt is generated out at the counter which substitutes the share certificate and is used for all transactions. In case of permitted securities, the system is similar to a traditional stock exchange. The difference is that the delivery and payment procedure will be completed within 14 days.

Trading at NSE can be classified under two broad categories : (a) Wholesale Debt Market (b) Capital Market.

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Wholesale Debt Market operations are similar to money market operations institutions and corporate bodies enter into high value transactions in financial instruments such as government securities, treasury bills, public sector unit bonds, commercial paper, certificate of deposit etc. There are two kinds of players in NSE, trading members and participants. Recognized members of NSE are called trading members who trade on behalf of themselves and their clients. Participants include trading members and large players like banks who takes direct settlement responsibility. Trading at NSE takes place through fully automated screen-based trading mechanism which adopts the principle of an order driven market. Trading members can stay at their offices and execute the trading, since they are linked through a communication network. The prices at which buyers and sellers are willing to transact will appear on the screen. When prices match the transaction will be completed and confirmation slip will be printed at the office of the trading member.

INDIAN FIXED INCOME SECURITIES MARKET

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Government Securities Government securities(G-secs) are sovereign securities which are issued by the Reserve Bank of India on behalf of Government of India, in lieu of the Central Government's market borrowing programme. The term Government Securities includes:

Central Government Securities State Government Securities Treasury bills

The Central Government borrows funds to finance its 'fiscal deficit'. The market borrowing of the Central Government is raised through the issue of dated securities and 364 days treasury bills either by auction or by floatation of loans. In addition to the above, treasury bills of 91 days are issued for managing the temporary cash mismatches of the Government. These do not form part of the borrowing programme of the Central Government. Types of Government Securities Government Securities are of the following types:Dated Securities : are generally fixed maturity and fixed coupon securities usually carrying semi-annual coupon. These are called dated securities because these are identified by their date of maturity and the coupon, e.g., 11.03% GOI 2012 is a Central Government security maturing in 2012, which carries a coupon of 11.03% payable half yearly.

The key features of these securities are:

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 They are issued at face value. Coupon or interest rate is fixed at the time of issuance, and remains constant till redemption of the security. The tenor of the security is also fixed. Interest /Coupon payment is made on a half yearly basis on its face value. The security is redeemed at par (face value) on its maturity date. Zero Coupon bonds : are bonds issued at discount to face value and redeemed at par. These were issued first on January 19, 1994 and were followed by two subsequent issues in 1994-95 and 1995-96 respectively. The key features of these securities are: They are issued at a discount to the face value. The tenor of the security is fixed. The securities do not carry any coupon or interest rate. The difference between the issue price (discounted price) and face value is the return on this security. Partly Paid Stock : is stock where payment of principal amount is made in installments over a given time frame. It meets the needs of investors with regular flow of funds and the need of Government when it does not need funds immediately. The first issue of such stock of eight year maturity was made on November 15, 1994 for Rs. 2000 crore. Such stocks have been issued a few more times thereafter. The key features of these securities are: They are issued at face value, but this amount is paid in installments over a specified period.

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 Coupon or interest rate is fixed at the time of issuance, and remains constant till redemption of the security. The tenor of the security is also fixed. Interest /Coupon payment is made on a half yearly basis on its face value. The security is redeemed at par (face value) on its maturity date. Floating Rate Bonds : are bonds with variable interest rate with a fixed percentage over a benchmark rate. There may be a cap and a floor rate attached thereby fixing a maximum and minimum interest rate payable on it. Floating rate bonds of four year maturity were first issued on September 29, 1995, followed by another issue on December 5, 1995. Recently RBI issued a floating rate bond, the coupon of which is benchmarked against average yield on 364 Days Treasury Bills for last six months. The coupon is reset every six months . The key features of these securities are: They are issued at face value. Coupon or interest rate is fixed as a percentage over a predefined benchmark rate at the time of issuance. The benchmark rate may be Treasury bill rate, bank rate etc. Though the benchmark does not change, the rate of interest may vary according to the change in the benchmark rate till redemption. The tenor of the security is also fixed. Interest /Coupon payment is made on a half yearly basis on its face value. The security is redeemed at par (face value) on its maturity date.

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Bonds with Call/Put Option: First time in the history of Government Securities market RBI issued a bond with call and put option this year. This bond is due for redemption in 2012 and carries a coupon of 6.72%. However the bond has call and put option after five years i.e. in year 2007. In other words it means that holder of bond can sell back (put option) bond to Government in 2007 or Government can buy back (call option) bond from holder in 2007. This bond has been priced in line with 5 year bonds. Capital indexed Bonds: are bonds where interest rate is a fixed percentage over the wholesale price index. These provide investors with an effective hedge against inflation. These bonds were floated on December 29, 1997 on tap basis. They were of five year maturity with a coupon rate of 6 per cent over the wholesale price index. The principal redemption is linked to the Wholesale Price Index. The key features of these securities are: They are issued at face value. Coupon or interest rate is fixed as a percentage over the wholesale price index at the time of issuance. Therefore the actual amount of interest paid varies according to the change in the Wholesale Price Index. The tenor of the security is fixed. Interest /Coupon payment is made on a half yearly basis on its face value. The principal redemption is linked to the Wholesale Price Index.

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Features of Government Securities

Nomenclature The coupon rate and year of maturity identifies the government security. Example: 12.25% GOI 2008 indicates the following: 12.25% is the coupon rate, GOI denotes Government of India, which is the borrower, 2008 is the year of maturity. Eligibility All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies, funds, corporate Foreign bodies, partnership Investors, firms, State institutions, mutual Institutional

Governments, Provident Funds, trusts, research organisations and even individuals are eligible to purchase Government Securities. Availability Government securities are highly liquid instruments available both in the primary and secondary market. They can be purchased from Primary Dealers. PNB Gilts Ltd., is a leading Primary Dealer in the government securities market, and is actively involved in the trading of government securities. Forms of Issuance of Government Securities Banks, Primary Dealers and Financial Institutions have been allowed to hold these securities with the Public Debt Office of Reserve Bank of India in dematerialized form in accounts known as Subsidiary General Ledger (SGL) Accounts. Entities having a Gilt Account with Banks or Primary Dealers can hold these securities with them in dematerialized form.

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In addition government securities can also be held in dematerialized form in demat accounts maintained with the Depository Participants of NSDL. Minimum Amount In terms of RBI regulations, government dated securities can be purchased for a minimum amount of Rs. 10,000/-only.Treasury bills can be purchased for a minimum amount of Rs 25000/- only and in multiples thereof. State Government Securities can be purchased for a minimum amount of Rs 1,000/- only. Repayment Government securities are repaid at par on the expiry of their tenor. The different repayment methods are as follows : For SGL account holders, the maturity proceeds would be credited to their current accounts with the Reserve Bank of India. For Gilt Account Holders, the Bank/Primary Dealers, would receive the maturity proceeds and they would pay the Gilt Account Holders. For entities having a demat account with NSDL, the maturity proceeds would be collected by their DP's and they in turn would pay the demat Account Holders

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Day Count For government dated securities and state government securities the day count is taken as 360 days for a year and 30 days for every completed month. However for Treasury bills it is 365 days for a year. Example : A client purchases 7.40% GOI 2012 for face value of Rs. 10 lacs.@ Rs.101.80, i.e. the client pays Rs.101.80 for every unit of government security having a face value of Rs. 100/- The settlement is due on October 3, 2002. What is the amount to be paid by the client? The security is 7.40% GOI 2012 for which the interest payment dates are 3rd May, and 3 rd November every year. The last interest payment date for the current year is 3 rd May 2002. The calculation would be made as follows: Face value of Rs. 10 lacs.@ Rs.101.80%. Therefore the principal amount payable is Rs.10 lacs X 101.80% =10,18,000 Last interest payment date was May 3, 2002 and settlement date is October 3, 2002. Therefore the interest has to be paid for 150 days (including 3 rd May, and excluding October 3, 2002) (28 days of May, including 3 rd May, up to 30 th May + 30 days of June, July, August and September + 2 days of October). Since the settlement is on October 3, 2002, that date is excluded. Interest payable = 10 lacs X 7.40% X 150 / 360 X 100 = Rs. 30833.33.

Total amount payable by client = 10,18,000+30833.33 = Rs. 10,48,833.33

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Benefits of Investing in Government Securities

No tax deducted at source Additional Income Tax benefit u/s 80L of the Income Tax Act for Individuals Qualifies for SLR purpose Zero default risk being sovereign paper Highly liquid. Transparency in transactions and simplified settlement procedures through CSGL/NSDL.

Methods of Issuance of Government Securities

Government securities are issued by various methods, which are as follows: Auctions: Auctions for government securities are either yield based or price based. The basic features of the auctions are given below: In an yield based auction, the Reserve Bank of India announces the issue size(or notified amount) and the tenor of the paper to be auctioned. The bidders submit bids in terms of the yield at which they are ready to buy the security. In a price based auction, the Reserve Bank of India announces the issue size(or notified amount), the tenor of the paper to be auctioned, as well as the coupon rate. The bidders submit bids in terms of the price. This method of auction is normally used in case of reissue of existing government securities.

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Method of auction: There are two methods of auction which are followedUniform price Based or Dutch Auction procedure is used in auctions of dated government securities. The bids are accepted at the same prices as decided in cut off.

Multiple/variable Price Based or French Auction procedure is used in auctions of Government dated securities and treasury bills. Bids are accepted at different prices / yields quoted in the individual bids. Bids: Bids are to be submitted in terms of yields to maturity/prices as announced at the time of auction. Cut off yield: is the rate at which bids are accepted. Bids at yields higher than the cut-off yield is rejected and those lower than the cut-off are accepted. Cut-off yield is set as the coupon rate for the security. Bidders who have bid at lower than the cut-off yield pay a premium on the security, since the auction is a multiple price auction. Cut off price: It is the minimum price accepted for the security. Bids at prices lower than the cut-off are rejected and at higher than the cut-off are accepted. Coupon rate for the security remains unchanged. Bidders who have bid at higher than the cut-off price pay a premium on the security, thereby getting a lower yield. Price based auctions lead to finer price discovery than yield based auctions. Notified amount: The amount of security to be issued is notified' prior to the auction date, for information of the public.

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The Reserve Bank of India (RBI) may participate as a non-competitor in the auctions. The unsubscribed portion devolves on RBI or on the Primary Dealers if the auction has been underwritten by PDs. The devolvement is at the cut-off price/yield. Underwriting in Auctions For the purpose of auctions, bids are invited from the Primary Dealers one day before the auction wherein they indicate the amount to be underwritten by them and the underwriting fee expected by them. The auction committee of Reserve Bank of India examines the bids and based on the market conditions, takes a decision in respect of the amount to be underwritten and the fee to be paid to the underwriters. Underwriting fee is paid at the rates bid by PDs , for the underwriting which has been accepted. In case of the auction being fully subscribed, the underwriters do not have to subscribe to the issue necessarily unless they have bid for it. If there is a devolvement, the successful bids put in by the Primary Dealers are set-off against the amount underwritten by them while deciding the amount of devolvement. On-tap issue This is a reissue of existing Government securities having pre-determined yields/prices by Reserve Bank of India. After the initial primary auction of a security, the issue remains open to further subscription by the investors as and when considered appropriate by RBI. The period for which the issue is kept open may be time specific or volume specific. The coupon rate, the interest dates and the date of maturity remain the same as determined in

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the initial primary auction. Reserve Bank of India may sell government securities through on tap issue at lower or higher prices than the prevailing market prices. Such an action on the part of the Reserve Bank of India leads to a realignment of the market prices of government securities. Tap stock provides an opportunity to unsuccessful bidders in auctions to acquire the security at the market determined rate. Fixed coupon issue Government Securities may also be issued for a notified amount at a fixed coupon. Most State Development Loans or State Government Securities are issued on this basis. Private Placement The Central Government may also privately place government securities with Reserve Bank of India. This is usually done when the Ways and Means Advance (WMA) is near the sanctioned limit and the market conditions are not conducive to an issue. The issue is priced at market related yields. Reserve Bank of India may later offload these securities to the market through Open Market Operations (OMO). After having auctioned a loan whereby the coupon rate has been arrived at and if still the government feels the need for funds for similar tenure, it may privately place an amount with the Reserve Bank of India. RBI in turn may decide upon further selling of the security so purchased under the Open Market Operations window albeit at a different yield. Open Market Operations (OMO) Government securities that are privately placed with the Reserve Bank of India are sold in the market through open market operations of the Reserve Bank of India. The yield at which these securities are sold may

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differ from the yield at which they were privately placed with Reserve Bank of India. Open market operations are used by the Reserve Bank of India to infuse or suck liquidity from the system. Whenever the Reserve Bank of India wishes to infuse the liquidity in the system, it purchases government securities from the market, and whenever it wishes to suck out the liquidity from the system, it sells government securities in the market.

State Government Securities

State Government Securities are securities/loans issued by the Reserve Bank of India on behalf of various state governments for financing their developmental needs. These securities are auctioned by the Reserve Bank of India from time to time. These auctions are of fixed coupon, with pre announced notified amounts for different states. Approved Securities Approved securities are the securities, which are eligible for SLR purposes under Section 24 of the Banking Regulation Act.

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MACROECONOMIC INDICATORS
Securities markets are affected by many factors, mainly macroeconomic indicators. Growth Indicators : The most important growth indicators are Gross Domestic Product (GDP), Gross Domestic Savings (GDS) and Gross Domestic Capital Formation (GDCF). Economic growth is the single most important macroeconomic variable. It can be defined as the rate at which the real national product of a countrys economy has grown during a specific time period. Gross Domestic Product ( GDP) The Gross Domestic Product represents the money value of all final goods and services produced in the country during the given time period, generally during one year. Index of Industrial Production ( IIP) Broadly, an economy can be classified into three sectors, Agriculture, Industry and Services. Over a period of time each sector contributes to the GDP growth in the economy. The growth in the industrial activity of an economy is measured by Index of Industrial Production (IIP) with reference to base year.

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 Interest Rates This is defined as the cost of money, which is determined by the demand and supply of money. Demand is generally related to industries and investment and supply pertain to savings. There are two aspects of interest rates nominal interest rates and real interest rates. The real interest rate is obtained by subtracting the expected inflation from the nominal interest rate. Interest rates play a role in deciding the level of investment activity in the country. Liquidity Factors These are the factors which affect the liquidity in cash markets. Debt security trading is done in cash markets and are cash settled. Cash Reserve Ratio (CRR) This represents a banks percentage of the net demand and time liabilities that it has to maintain as a balance with RBI current account. An increase in the CRR means that more reserves have to be maintained with RBI, hence leading to tight money conditions. Statutory Liquidity Reserve (SLR) Banks are required to maintain daily 25% of their net demand and time liabilities (NDT) in RBI designated securities. CRR and SLR serve as monetary policy tools used to signal interest rates and affect debt markets sentiment from policy point of view.

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Bank Rate This is the rate at which RBI rediscounts the securities held by commercial banks to finance their liquidity needs. The RBI uses the rate as an interest rate policy signal, and it lays down the basic interest rate structure. RBI Reverse Repo Rate This is the rate at which the RBI borrows the excess liquidity from the banking system. A lowered rate indicates excess liquidity and that the RBI is willing to lower the interest rates it will borrow from the inter-bank market, thereby signaling easy liquidity. RBI Repo Rate This is the rate at which the RBI lends the money to the banking system. Lowered rates indicate the RBIs preference for lower short-term rates thereby indicating a lower lifeline.

MONETARY INDICATORS There are different measures of money supply, which are defined as M1 , M2 , M3 and M4. Of these, in India M3 is widely used for indicating the true form of money supply. The four money supply measures can be defined as follows :

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M1 = Currency with public + demand deposits + other deposits with RBI M2 = M1 + Post office Savings Bank Deposits. M3 = M 2 M4 = M 3 + Time Deposits with Banks. + Total Post office Deposits.

Domestic Currency is issued by the central bank to fund investment activities. A higher than required money supply may lead to inflation as more money chases fewer goods. The money issued by central bank is known as reserve money. The banking system, through lending and relending, multiplies the reserve money, and we therefore have Money Supply = ( Real GDP x Income elasticity of money ) + ( Inflation x price elasticity of money). INFLATION Inflation refers to the sustained rise in the general price level over a given period. In India, the most important measure of inflation is the Wholesale Price Index ( WPI). Government normally conduct some periodic surveys to estimate the proportion of income spent on major goods and services during the surveyed period. Such commodities will then be given weights in proportion to the money spent on them based on sample population expenditure. The initial years value of the index of prices of a select basket of commodities is equated to 100.

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SECURITIES MATHAMATICS
Time value of Money
The concept of and measurement of the time value of money is crucial to corporate finance and investment analysis. It helps us to compare the value of the rupee at different points in time. Present Value

The present value of single or bullet cash flow is the amount that must be invested today to get a given amount at a future date. Present Value = C t / ( 1 + r ) t C t = Cash flow at time t , r = rate per period , t = number of Periods. The present value of multiple cash flows is the sum of the present values of individual cash flows as shown below : Present Value = C t / ( 1 + r ) t

Discount Rate
The money that is invested can earn a return known as the discount rate. If the investment is made on guaranteed return instruments, the discount rate is equal to risk free government securities yield, which is certain and fixed.

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 Yield Curve Analysis

Even though there are quite a number of Government securities in various maturity segments, not many papers across segments are traded on a particular trading day. This leads to a problem of estimating prices of non traded bonds. Yield curve analysis assumes significance as it help in the valuation and pricing of Government and private bonds. The modeling of the term structure of interest rates is carried out based on some assumptions. Two types of approaches are mainly adopted yield curve based and duration based. In the yield curve based approach, two methods are followed : (a) Yield to Maturity Based Yield Curve Yield to Maturity (YTM) is an application of Internal Rate of Return (IRR) discounting technique. The IRR of any series of payments is the discount rate that makes the present value of the payments equal to price of the asset that generates the cash flows. P= C (1+y) + C (1+y)2 + C (1+y)3 + + C + M (1+y)n

Where P is the price of the bond, C is the coupon payment, M is the maturity value of the bond, n is period to maturity and y is the YTM.

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The yield curve, showing the relationship between the YTM and the term to maturity is estimated based on the YTM of different instruments across maturity segments. The shape of the curve to be chosen depends on degree of polynomial to be used, Sensitivity, Number of traded securities and extent of extrapolation.
Tenor (years) 1 2 3 4 5 6 7 8 9 10 11 Yield ( %)

3.50% 4.00% 5.10% 6.00% 6.50% 6.75% 7.10% 7.25% 7.66% 7.80% 7.95%

9.00% 8.00% 7.00% Yield ( %) 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 1 2 3 4 5 6 7 8 9 10 11 TENOR ( Years) Series1

( b) Zero Coupon Yield Curve ( ZCYC)

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The main difference between the YTM and ZCYC is that although in the YTM the single rate of interest equates the discounted stream of cash flow, in the ZCYC, there are several spot interest rates for associated term to maturity. Thus, the ZCYC provides the entire set of interest rate maturity pairs that can be used to discount future payment.

P=

C (1+r1)

C (1+r2)2

C (1+r3)3

+ + C + M (1+rn)n

ri denotes the spot rate of maturity

Duration
This is a measure of how long on an average the holder of the bond has to wait before receiving cash payments as is calculated as follows : n D= i=1 Consider a 3 year 10% coupon bond with a face value of Rs.100. Suppose the yield is 12% p.a. Payment of Rs 5 made every six months. Present Value of cash flows using the yield as discount rate is, 5 e-.012*0.5 = 4.709 t i C i e yi / B

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Time 0.05 1.0 1.5 2.0 2.5 3.0 Total

Cash Flow 5 5 5 5 5 105 130

PV a 4.709 4.435 4.176 3.933 3.704 73.256 94.213

Weight a/94.213 0.050 0.047 0.044 0.042 0.039 0.778 1.00

Time * Weight 0.025 0.047 0.066 .083 0.098 2.333 2.652

Thus duration of security is 2.652 years. Macaulay Duration The weighted average time to maturity of a bond is known as the Macaulay Duration. The weights are the present value of the cash flows. Larger cash flows get more weight than smaller cash flows. The Macaulay Duration is defined for a bond with annual cash flow C t , yield to maturity y and a maturity T as follows : D mac = { t * PV ( C t ) } / { PV ( Ct ) } Modified Duration Macaulays Duration can be modified slightly to give better risk measure known as Modified Duration. Modified Duration = D mac / ( 1 + y/k ) * k Where k is frequency of compounding and y is yield to maturity. Modified Duration directly gives the percentage change in price with a unit change in yield and also be explained as follows :

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If one holds a bond and the interest rate moves up, the following two effects can occur : The price of the bond goes down The reinvestment income of the coupon goes up.

Similarly, vice versa when interest rate moves down. If this is plotted on a graph in which the x axis shows the time and y axis shows interest rates, different cash flows occur. The graph will be plotted for the changes in price and reinvestment income at various interest rates. Thus the Modified Duration denotes the point where both meet on the x axis. Modified Duration as Interest Rate Sensitivity For a bond, the basic pricing equation is as follows : P=Ct / (1+y)t Differentiating price with respect to yield y, dP / dy = - C t * t / ( 1 + y) ( t + 1) Using the formula for duration, dP / dy = - (MD) * P MD = - ( dP /P) / dy

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Thus Modified Duration is equal to the negative value of the percentage change in price for a unit change in the yield. Hence, MD can be used as an interest rate risk measure for bonds. Convexity

Duration is accurate measure only for small yield changes, whereas convexity is a measure that ( combined with duration ) allows us to do a better approximation of the price than using just duration alone. Convexity measures how duration changes with interest rates and is second derivative of price with respect to yield. C= 1 P d 2P dy2

REGULATORS FOR THE SECURITY MARKETS

SECURITIES EXCHANGE BOARD OF INDIA ( SEBI)

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The rise in number of investors was leading to an increase in malpractices on part of the companies, brokers, merchant bankers, investment consultants and various other agencies involved in new issues. This led to erosion of investor confidence in equity market. The Government and the stock exchanges were helpless as the existing legal framework was just not enough. Realizing this, Securities Exchange Board of India (SEBI) was constituted by the Government of India in April 1988.

The major functions of SEBI are : 1. To promote fair dealings by the issuers of securities and ensure a market place where funds can be raised at relatively low costs. 2. To provide protection to the investors and safeguard their rights and interests such that there is steady flow of savings into the market. 3. To regulate and develop a code of conduct and fair practices by the intermediaries involved in the stock market.

The regulator for the Indian corporate debt market is also Securities and Exchange Board of India (SEBI). SEBI controls bond market in cases where entities especially Corporates raise money from public through public issues. It regulates the manner in which money is raised and to ensure a fair play for the retail investor. It forces the issuer to make the retail investor aware of the risks inherent in the investment and its disclosure norms. SEBI is also a regulator for the mutual funds and regulates the entry of new mutual

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funds in the industry. It also regulates the instruments in which these mutual funds can invest. SEBI also regulates the investments of FIIs.

RESERVE BANK OF INDIA (RBI) : The Reserve Bank of India is the main regulator for the money market. It controls and regulates the G-Secs market. Apart from its role as a regulator, it has to simultaneously fulfill several other important objectives, such as managing the borrowing programme for the Government of India, controlling inflation, ensuring adequate credit at reasonable costs to various sectors of the economy, managing the foreign exchange reserves of the country and ensuring a stable currency environment. The RBI controls the issuance of new banking licenses to banks. It controls the manner in which various scheduled banks raise money from depositors. Further, it controls the deployment of money through its policies on CRR, SLR, priority sector lending, export refinancing, guidelines on investment assets, etc. The RBI also administers the interest rate policy. Earlier, it used to strictly control interest rates through a directed system of interest rates. Each type of lending activity was supposed to be carried out at a pre-specified interest rate. Over the years, the RBI has moved slowly towards a regime of market-determined controls.

RESEARCH METHODOLOGY
Research Design : Exploratory

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 Research Approach Research Instrument Information Need Area of Survey Sample Size Sampling unit Interview method

: : : : : : :

Online Training Questionnaire Primary / Secondary Data Mumbai 10 Dealers in Equity &Debt Individual Personal Interview

Research Design : The research design used for the study was exploratory in nature. So as to identify and explore the participation in security market in India. Coverage : Mainly Life Insurance Corporation of Indias equity and Debt dealing room was covered apart from few visits to Primary Dealer ISECs dealing room. Data Collection Methods / Sources : Sources of Data : Data collected for this project study is inclusive of both primary as well as secondary data. Primary Data : The primary data for this project has been gathered first hand with the help of a well structured questionnaire and also with the help of personal interview.

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Secondary Data : Secondary data information is taken from websites, books, journals, magazines and newspapers etc. Sampling Design : Sample Size : The sample size is selected 25 respondents. Sampling Units : People working in equity dealing room, Debt dealing room , Back office and Mid Office.

Data Analysis and Interpretation

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Almost entire team of Equity dealing room and Debt dealing room of two organizations were interviewed through pre tested questionnaire.

Debt dealing was observed on line. Strategies adopted during different situations were studied.

Use of technical analysis for taking decisions of buy or sell were studied.

Use various packages like Newswire 18, Reuters were handled for various news related to Debt Market and Equity Market.

Impact of release of economic data on market was studied in detail. Various segments of Government securities like short term, medium term and long term were studied to understand yield movement.

FIMMDA valuation of securities was studied to understand yield curve of illiquid securities.

Use of FIMMDA spread for pricing non SLR securities was understood for different ratings like AAA, AA+, BBB etc.

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Mark to Market valuation of Govt. Securities, State Govt. Securities and Approved securities was learned practically on Excel Sheet.

Analysis of Duration, Modified Duration and Convexity for small portfolio was studied to take strategic decisions.

Use of Reuters package for plotting yield curve of various securities with historic data was learned and analysis technique for future yield projection was done.

Impact of macroeconomic indicators on security market was analyzed.

Electronic bidding system for auction of Central / State Govt. securities was understood.

Strategy of switching short term securities with long term securities adopted mostly by Insurance Companies and its impact on market was studied.

Attempt was made to understand the concept of When Issued Market and Short Selling.

Participants in Government security market and their responses to price fluctuations were studied .

Role of Brokers in Equity as well as Government security market was understood.

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Year wise volume of Government securities was studied and plotted on graph as shown below.

Year

Net Traded Value Rs. In Crore 887293 475523 219106 282317 335951 563815

2005 2006 2007 2008 2009 2010

Investment pattern of Insurance Companies was understood and their preferences for various class of investments was studied.

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Attempt was made to understand Asset Liability matching process .

Monetary Policy and its impact on market was studied.

FINDINGS
OBSERVATIONS :

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 Insurance companies invest chunk of their surplus in equity markets.

Central /

State Government securities as compared to their investment in

Government Securities market is much interesting than equity market though retail participation is very less. Technology has changed the market remarkably and helped in increased participation. Money Markets also has impact to great extent on security markets. Security market in short term segment is mostly run by traders than investors. There are good opportunities in Government securities market for profit making by creating trading portfolio. Reserve Bank of India has good control over security market. It discourage any off market deal. Non SLR market is not yet developed as SLR.

RECOMMENDATIONS :

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 Investors should undertake an analysis before investing into the stock market, as most of the investors do not undertake any systematic study before entering into any stock. Individual investors have very less knowledge of capital market. Their knowledge can be improved by conducting seminars, workshops on capital market, mainly Government securities market. There should be stability in securities market and the factors which influence the securities factors should be taken care of. market should be properly analyzed and controlled, volatility should be reduced and risk

Decisions based on only technical analysis should be avoided and fundamental analysis has to be done for proper decision making.

The regulatory authority should keep a check on market mechanism and bring about a stable guaranteed return to the retail investor. The investment should be protected. Investor should shift their focus from fixed income securities to capital market securities.

Advance technology should be used more and more vigorously to avoid frauds.

Recommendations by Respondents Only genuine company should be allowed to raise capital.

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Risk Management has to be given more importance. Investor should be taught about when to enter the market and when to exit.

No hidden cost of brokerage. Arbitrage opportunities for FII should not prevail in the market.

More transparency is required. Fair valuation of IPOs. Role of Regulator to avoid circular trading. Arrange investors meetings for guidance and knowledge sharing.

LIMITATIONS
The survey was limited to only two organization in Mumbai.3

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 Unwillingness of respondents to reveal the information due to data security purposes. Conclusions were based on small amount of data. The secondary data collected is restricted to certain contents. Recommendations and findings are purely based on primary data. Practical knowledge is more required to understand many concepts and procedures in securities market. Hands on training not possible due to severity of mistake if any in Government securities market. Much awareness is not there in respect of SLR market.

EXPECTED CONTRIBUTION FROM THE STUDY

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 A overall understanding of Equity Market and Debt Market. Investment preferences of Institutional Investors depending on market conditions. Understanding volatility in the security market. Price Yield relationship. Management of Risk in equity as well as debt market. Understanding Bond Mathematics. Strategies to be adopted in different market situations. Use of Duration, Modified Duration and Convexity as tools of portfolio management. Impact of macroeconomic factors on security markets. Efforts to be taken by regulators to increase retail participation in debt market. Understanding role of regulators to control the market.

ANNEXURE

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QUESTIONNAIRE
EQUITY MARKET : 1. Name of the Dealer : __________________________________ 2. No of years of experience in equity dealing ________ years. 3. Which exchange do you prefer to trade NSE BSE BOTH

4. How release of economic data impact the market. 5. Which industry is preferred for investment. 6. How decisions of investment in different sectors is taken.

DEBT MARKET : 1. Name of the Dealer : __________________________________ 2. No of years of experience in equity dealing ________ years. 3. How mandate for purchases is obtained.? 4. Whether trading portfolio is maintained ? 5. How decisions of investment in various segments is taken?

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7. What percentage of surplus is invested in debt market? 8. How bids / offers are put in NDS / NDS OM system ? 9. Whether NDS or NDS OM system is preferred ? 10. What percentage of deals are done through brokers? 11. Whether deals are done only through empanelled brokers? 12. What is structure of brokerage to be paid? 13. How decisions about entry and exit from the market are taken ? 14. How frequently RBI conducts Central / State Govt. security auctions?. 15. How auction bids are put in the system. 16. What are the possible actions in response to auctions results? 17. How many participants are there in government securities market? 18. Is the role of brokers in government security market significant? 19. How frequently switch deals are executed ? 20. What is the methodology used in case of switch deals.? 21. How release of economic data impact the security market ?

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22. What actions are taken before and after the release of economic data ? 23. How risk management is used in securities market ? 24. What is role of Back Office in securities market ? 25. What role is played by Mid Office in securities market ? 26. What are the market timings ? 27. Impact of decisions taken in Monetary Policy or Review of Monetary Policy on securities market? 28. How regulators play their role in securities markets? 29. How settlement of deals take place ? 30. Whether concept of margin money is applicable for settlement of deals in securities market ? 31. What are the various systems / packages used in dealing room?

BIBLIOGRAPHY

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 WEBSITES : www.moneycontrol.com www.fimmda.org.in www.nseindia.com www.bseindia.com www.rbi.org.in www.sebi.gov.in www.capitalmarket.com www.ccil.co.in

NEWSPAPERS Economic Times DNA Money Business Standard Mint

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