Reform's in capital Market & its impact on Indian Capital Market

Indian Capital Market Historical perspective

Stock Market was for a privileged few Archaic systems - Out cry method Lack of Transparency - High tones costs No use of Technology Outdated banking system Volumes - less than Rs. 300 cr per day No settlement guarantee mechanism - High risks

1994-Equity Trading commences on NSE

Indian Capital markets Chronology

1995-All Trading goes Electronic

1996- Depository comes in to existence

1999- FIIs Participation- Globalisation

2000- over 80% trades in Demat form

2001- Major Stocks move to Rolling Sett

2003- T+2 settlements in all stocks

2003 - Demutualisation of Exchanges

Why Capital Markets Exist

Capital markets facilitate the transfer of capital (i.e. financial) assets from one owner to another. They provide liquidity.

Liquidity refers to how easily an asset can be transferred without loss of value. A side benefit of capital markets is that the transaction price provides a measure of the value of the asset.

Role of Capital Markets

Mobilization of Savings & acceleration of Capital Formation

Promotion of Industrial Growth

Raising of long term Capital Ready & Continuous Markets Proper Channelisation of Funds

Provision of a variety of Services

Disseminate information efficiently Enable quick valuation of financial instruments both equity and debt

Functions of a Capital Market

Provide insurance against market risk or price risk Enable wider participation Provide operational efficiency through Simplified transaction procedure lowering settlement timings and lowering transaction costs Develop integration among Real sector and financial sector Equity and debt instruments Long term and short term funds Private sector and government sector and Domestic funds and external funds Direct the flow of funds into efficient channels through Investment Disinvestment Reinvestment

Factors contributing to growth of Indian Capital Market

Establishment of Development banks & Industrial financial institution. Legislative measures Growing public confidence

Increasing awareness of investment opportunities

Growth of underwriting business Setting up of SEBI Mutual Funds Credit Rating Agencies
7

Growth Pattern of the Indian Stock Market

Sr. No.

As on 31st December

1946

1961

1971

1975

1980

1985

1991

1995

No. of Stock Exchanges

14

20

22

No. of Listed Cos.

1125

1203

1599

1552

2265

4344

6229

8593

No. of Stock Issues of Listed Cos.

1506

2111

2838

3230

3697

6174

8967

11784

Capital of Listed Cos. (Cr. Rs.)

270

753

1812

2614

3973

9723

32041

59583

Market value of Capital of Listed Cos. (Cr. Rs.) Capital per Listed Cos. (4/2) (Lakh Rs.) Market Value of Capital per Listed Cos. (Lakh Rs.) (5/2) Appreciated value of Capital per Listed Cos. (Lak Rs.)

971

1292

2675

3273

6750

25302

110279

478121

24

63

113

168

175

224

514

693

86

107

167

211

298

582

1770

5564

358

170

148

126

170

260

344

803

Capital Markets - Reforms

Each scam has brought in reforms - 1992 / 2001 Screen based Trading through NSE Capital adequacy norms stipulated Dematerialization of Shares - risks of fraudulent paper eliminated Entry of Foreign Investors Investor awareness programs Rolling settlements Inter-action between banking and exchanges

CAPITAL MARKET REFORMS IN INDIA

The 1990s have witnessed the emergence of the securities market as a major source of finance for trade and industry in India. A growing number of companies have been accessing the securities market rather than depending on loans from financial institutions / banks.
The corporate sector is increasingly depending on external sources for meeting its funding requirements.

Reforms / Initiatives post 2000 Corporatisation of exchange

memberships Banning of Badla / ALBM

Introduction of Derivative products Index / Stock Futures & Options

Reforms/Changes in the margining system

STP - electronic contracts

Margin Lending

Securities Lending

22 Stock Exchanges,

MARKET STRUCTURE (JULY 31, 2005)

Over 10000 Electronic Terminals at over 400 locations all over India. 9108 Stock Brokers and 14582 Sub brokers 9644 Listed Companies 2 Depositories and 483 Depository Participants 128 Merchant Bankers, 59 Underwriters 34 Debenture Trustees, 96 Portfolio Managers 83 Registrars & Transfer Agents, 59 Bankers to Issue 4 Credit Rating Agencies

National Stock Exchange Bombay Stock Exchange Inter-connected Stock Exchange (NEW) Mangalore Stock Exchange Hyderabad Stock Exchange Uttar Pradesh Stock Exchange Coimbatore Stock Exchange Cochin Stock Exchange Bangalore Stock Exchange Saurashtra Kutch Stock Exchange Pune Stock Exchange

Stock Exchanges in India

OTC Exchange of India Calcutta Stock Exchange Madras Stock Exchangea Madhya Pradesh Stock Exchange Vadodara Stock Exchange The Ahmedabad Stock Exchange Magadh Stock Exchange Gauhati Stock Exchange

Primary Market
Market for new issues/fresh capital (IPOs)

New issues mkt.

Participants Issuer Investors Intermediaries

Mobilization of funds
Prospectus Right issues and Private placement

Free pricing regime

Before 1992,Regulator of new issues was CCI (Controller of Capital Issues) Approval from CCI for raising funds in primary mkt. Timing, quantum ,and pricing of the issue were decided by the controller New Cos can issue shares only at par Existing companies with substantial reserves could issue shares at premium Fixed price mechanism resulted in under pricing of many issues After 1992, promoter and merchant banker together decide the price of the issue.

The role of the Stock Exchange

Corporate governance Creates investment opportunities for small investors Government raises capital for development projects

Barometer of the economy

Functions Of SEBI
Regulates Capital Market. Checks Trading of securities. Checks the malpractices in securities market. It enhances investor's knowledge on market by providing education. It regulates the stockbrokers and sub-brokers. To promote Research and Investigation

DRAWBACKS OF INDIAN STOCK MARKET:

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

HOW TO MAKE MONEY FROM CAPITAL MARKET?

Patience, profound knowledge Best guess

Diversification
Portfolio management

Indian Capital Market deficiencies

Lack of transparency Physical settlement Variety of manipulative practices Institutional deficiencies Insider trading

Money Market Vs Capital Market

It is for short term Supplies funds for Working Capital Instruments are Treasury bill, CM, etc Each single instrument is of large amount Central bank and Commercial banks are major. These instruments do not have secondary market. Transactions are on over phone and there are no formal place It is for long termSupplies funds for fixed capital requirementInstruments are shares, debentures, etc.Each single instrument is of small amountDevelopment bank and insurance companies are major.These instruments have secondary market.Transactions are at formal place. Eg stock market.Transaction have to be conducted with the help of broker.

Transaction without the help of broker.

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