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

Business Environment - MET MIM Second Year, Third Semester

Presented and Prepared by:

Group Number IV

Ajit Patel

Deepal Mehta

Niketu Shah

Vrushali D’Souza

2

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Outdated banking system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

Indian Capital markets - Chronology

1994-Equity Trading commences on NSE

1995-All Trading goes Electronic

1996- Depository comes in to existence

1999- FIIs Participation- Globalisation

2000- over 80% trades in Demat form

2001- Major Stocks move to Rolling Sett

2003- T+2 settlements in all stocks

2003 - Demutualisation of Exchanges

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

Functions of a Capital MarketDisseminate information efficiently

Enable quick valuation of financial instruments –both equity and debt

Provide insurance against market risk or price risk

Enable wider participation Provide operational efficiency throughSimplified transaction procedurelowering settlement timings andlowering 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

InvestmentDisinvestmentReinvestment

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 Agencies8

Growth Pattern of the Indian Stock MarketSr. No. As on 31st December 1946 1961 1971 1975 1980 1985 1991 1995

1No. ofStock Exchanges

7 7 8 8 9 14 20 22

2No. of Listed Cos.

1125 1203 1599 1552 2265 4344 6229 8593

3No. of StockIssues of Listed Cos.

1506 2111 2838 3230 3697 6174 8967 11784

4Capital of ListedCos. (Cr. Rs.)

270 753 1812 2614 3973 9723 32041 59583

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

971 1292 2675 3273 6750 25302 110279 478121

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

24 63 113 168 175 224 514 693

7

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

86 107 167 211 298 582 1770 5564

8Appreciated value of Capital perListed Cos. (Lak Rs.)

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 2000Corporatisation 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

MARKET STRUCTURE (JULY 31, 2005)

22 Stock Exchanges,

Over 10000 Electronic Terminals at over 400 locations all over India.

9108 Stock Brokers and 14582 Sub brokers

9644 Listed Companies

2 Depositories and 483 Depository Participants

128 Merchant Bankers, 59 Underwriters

34 Debenture Trustees, 96 Portfolio Managers

83 Registrars & Transfer Agents, 59 Bankers to Issue

4 Credit Rating Agencies

Stock Exchanges in India

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

OTC Exchange of India Calcutta Stock Exchange Madras Stock ExchangeaMadhya Pradesh Stock Exchange Vadodara Stock Exchange The Ahmedabad Stock Exchange Magadh Stock Exchange Gauhati Stock ExchangeBhubaneswar Stock ExchangeJaipur Stock Exchange Delhi Stock Exchange Assoc Ludhiana Stock Exchange

Primary Market

Market for new issues/fresh capital (IPO’s)

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 Co’s 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

•Transaction without the help of broker.

•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.

THANK YOU...