Tanuj Report

7/28/2019 Tanuj Report

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Chapter 1

Introduction


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Capital Markets In India An Introduction:

Capital is often defined as wealth used in the production of further wealth. In simple

words, it comprises the money value invested in a business unit. Market is that place where

buyer and sellers are contact to each other and when these two words are merging together make

capital market A business enterprise can raise capital from various sources long-term funds can

be raised either through issue of securities or by borrowing from certain institutions. Short-

term funds can also be borrowed from various agencies. Thus business units can raise capital

from issue of securities or by borrowings (long-term and short-term).The borrowers and lenders

are brought together through the financial markets. The term financial marketcollectively

refers to all those organizations and institutions which lend funds to business enterprises and

public authorities. It is composed of two constituents.

(i) The money market,

(ii) The capital market.

While the money marketdeals with the provision ofshort-term credit, the capital marketdeals in

the lending and borrowing ofmedium-term and long-term and long-term credit.

Structure of the capital market------------ two constituents.

Broadly describe, the capital market can be divided into two constituents.

(1)The financial institution:- e.g., IFCI, IDBI, SFCs, LIC, UTI etc. provide long-term and

medium-term loan facilities.

(2) The Securities Market:- The securities market is divided into (A) the gilt edged market and

(B) the corporate securities market.


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A) Gilt-Edged Market

The gilt edged market is the market in government securities or the securities guaranteed (as to

both principle and interest) by the government. Since the government cannot default on its

payment obligations, the government securities are risk free and hence are known as gilt-edged

(which means of the best quality).

1. It is a risk free market and returns are guaranteed. Accordingly, there is no uncertainty

regarding yield, payment on time, etc. and there is no scope for speculation and manipulation ')

of the market.

2. The government securities market consists of two parts - the new issues market and the

secondary market. Since it is the Reserve Bank of India that manages entirely the public debt

operations of the Central as well as the State governments, it is responsible for all the new issues

of government loans. The secondary market deals in old issues of government loans and operates

largely through a few large stockbrokers who keep in touch with the Reserve Bank and other

prospective buyers and sellers.

3. Reserve Bank of India plays a dominant role in the government securities market. As noted by

S.B. Gupta, "there are only brokers or investors in the market and no dealers or jobbers (other

than the RBI) who would make a market in government loans by standing ready to buy and sell

any amount of government securities on their own account."2

4. Government securities are the most liquid debt instruments.

5. The transactions in the government securities market are very large and each transaction may

run into several crores of rupees.
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B) Corporate Securities Market

Corporate securities market is a market where securities issued by corporate firms (Le. shares,

bonds and debentures) can be bought and sold freely. It consists of the new issues market (the

primary market) and the stock exchange (the secondary market).

The New Issues Market. The new issues market is also known the primary market. The new

issues market is that part of the capital market which is concerned with the issue of new

securities, i.e. bonds, debentures, shares, and so on.

1. By prospectus. Capital can be raised from the general public by the issue of prospectus.

The prospectus is an invitation to the general public for subscribing to the capital. The prospectusmust contain various details regarding particulars of the company, its financial position, etc.

2. By offer for sale. This method is almost similar to the prospectus method except with a

difference that initially shares are taken up by a third party in bulk. Later, a statement like

prospectus is issued for sale of shares to the public.

3. By private placing. Under this arrangement, the shares are sold to individuals or institutions

directly by making a private appeal to them. This results in substantial saving as the cost ofraising capital in this method is less than the cost of raising capital via other methods.

4. By offering rights issue. Companies may also raise capital from the existing shareholders by

making a rights issue. Under a rights issue, the shareholders have the right to a certain number of

shares in proportion to the shares held by them.

The Stock Exchange. The stock exchange (or the secondary market) is a highly organised

market for the purchase and sale of second-hand quoted or listed securities 'Quoting' or 'listing'of a particular security implies incorporating that security in the register of the stock exchange so

that it can be bought and sold there. The Securities Contracts (Regulation) Act, 1956 defines a

stock exchange as "an association, organization or body of individuals, whether incorporated or

not, established for the purpose of assisting, regulating and controlling business in buying,

selling and dealing in securities."


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Indian Capital Market

The capital market is the place where finance is raised by the companies government and their

agencies for meeting their requirements of funds for new projects , modernization ,expansion and

diversification programs ,long term working capital requirements ,repayment of loans and

various other purposes and projects . The capital market mobilizes the long term savings of

individuals for investment in shares , debentures ,bonds ,units of the mutual fund and other

financial instruments , which are ultimately deployed for productive purposes in various sectors

of economy.

A capital market may be defined as an organized mechanism for effective and efficient

transfer of money capital or financial resources from the investing public i.e. individuals orinstitutional savers to entrepreneurs engaged in industry or commerce .

Capital market thus plays a vital role in channelizing the savings of individuals for investment in

the economic development of the country .as a result the investors are not constrained by their

individual abilities, but by the abilities of the companies , which in turn enhance the savings and

investments in the country.

Capital market involves the following:

Raising of capital by issue of new shares . Raising of borrowings by issue of new debentures. Raising of long term borrowings by inland and foreign banks and financial institutions.

Components of Indian Capital Market

The following are the main components of the Indian capital market:

1. New Issues Market.

2. Stock Market.

3. Financial Institutions.


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1. New Issues Market:

The new issues market represents the primary market where new shares or bonds are offered.

Both the new companies and the existing ones can raise capital on the new issue market. The

prime function of the new issues market is to facilitate the transfer of funds from the willing

investors to the entrepreneurs setting up new corporate enterprises, going in for expansion,

diversification, growth or modernization. Besides, helping the corporate enterprises in securing

their funds, then issues market channelizes the savings of individuals and others into

investments. The availability of financial resources for corporate enterprises, to a great extent,

depends upon the status of the new issues market of the country. Successful issues of new

securities is a highly specialized activity and requires both experience and skill. There are a

number of methods of marketing new issues of securities.

2. Secondary Market or Stock Market:

Stock market represents the secondary market where existing shares and debentures are traded.

Stock exchange provides an organised mechanism of purchase and sale of existing securities.

The stock exchanges enable free purchase and sale of existing securities. The stock-exchanges

enable free purchase and sale of securities as commodity exchange allow trading in commodities.

3.Financial Institutions:

Special financial institutions are the most active constituents of the Indian capital market. Such

organisations provide medium and long-term loans repayable on easy installments to big

business houses. Such institutions help in promoting new companies, expansion and

development ofexisting companies and meeting the financial requirements of companies during

economic depression. After independence, a number of financial institutions have been set up at

all India and regional levels for accelerating the growth of industries by providing financial and

other assistance. The following are the main financial institutions that are most activeconstituents of the Indian capital market:

(a) The Industrial Finance Corporation of India Ltd.

(b) The Industrial Credit and Investment Corporation of India.

(c) State Financial Corporations.

(d) The Industrial Development Bank of India.


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(e) National Industrial Development Corporations.

(f) Unit Trust of India.

(g) Life Insurance Corporation of India.

(h) Nationalised Commercial Banks.

(i) Merchant Banking Institutions.

(j) The Credit Guarantee Corporation of India.

Growth of Capital Market in India

A) Government securities market

Since 1991, the investor base for government securities has expanded rapidly. Besides banks andinsurance corporations, finance companies, corporates and financial institutions have also begun

to invest in government securities. The maturity structure of debt has significantly shifted in

favour of medium-term and short-term borrowings. The amount of market - based primary

issuance of government securities which was about Rs. 12.000 crore in 1991-92 rose to as high

as Rs. 99,630 crore in 1999-2000. The gross market borrowings of the Central and State

governments rose to Rs. 1,81,747crore during 2005-06.

As far as secondary market is concerned, a deep, wide and vibrant gilt-edged market has

emerged as a result of a series of structural and institutional reforms. The secondary market

turnover of government securities registered spectacular increase since mid-1990s.2 This is due

to a substantial rally in the government securities market.3

B) Corporate Securities Market

Consequent upon the policy of liberalisation adopted by the government in July 1991 and the

subsequent abolition of Capital Issues Control with effect form May 29, 1992, the corporate

securities market got a tremendous boost in the first three-four years of the post-liberalisation

phase.

C) Debt Market. The Indian debt market is composed of government bonds and corporate

bonds. Debt Market is however dominated by government bonds. Bonds issued by the Central

government, i.e., the Government of India are the predominant and most liquid component of the
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bond market. Government bonds are usually much less volatile than equities and far more liquid

than equities.

Table Issuance of Bonds

2006 2007 2008 2009 2010

Government

of India

bonds

1,20,213 1,13,000 1,19,600 1,29,350 1,47,000

Corporate

Bonds

4,549 5,284 2,383 66 389

Source: Economic Survey 2010, pp.68 and 74 and Economic Survey 2009, pp. 70 and 76.

Mutual Funds. The mutual funds (MFs) have proved to be important conduits of mobilising

resources particularly since 1987-88 when the public sector banks were allowed to set up

subsidiaries to undertake mutual fund business. At present this country has four types of mutual

funds - Unit Trust of India, MF subsidiaries of public sector banks, MF subsidiaries of

investment institutions like LlC and GIC, and private sector MFs. In 2004-05 there was a steep

fall in resources mobilisation through mutual funds. It was as low as Rs. 2,201 crore. The year

2005-06 recorded the highest ever resource mobilisation of Rs. 52,780 crare by mutual funds (ofthis, as many as 81.4 per cent resources were mobilised by the private sector mutual funds).

NSE AND SSE. The biggest stock exchange of India is the National Stock Exchange (NSE)

which was set up in November 1992. It started its trading operations effective June 30, 1994.

Only the debt market segment of the NSE was put into operation initially

The second largest stock exchange in India is the Bombay Stock Exchange (BSE). It was the first

organised stock exchange established in India at Mumbai as far back as 1887. Presently NSE andBSE account for almost the entire trading of scrips on Indian stock markets and most of the

regional stock exchanges have been rendered redundant.


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International Comparison. In 2007, 2008 and 2009 NSE and BSE ranked third and fifth

respectively in the world on the basis of the number of transactions. In 2009, BSE slipped by one

position to sixth while NSE retained its third position.


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Capital market efficiency

An analysis of the efficiency ofcapital markets. This looks at how faircurrent marketprices are

for an asset given current market situations. For example, if major news breaks out for a

company, an analysis would occur on the stock'sprice to see how it should be valued given the

news. Capital market efficiency measures the extent of the accuracy of the stock's An efficient

capital market is a market where the share prices reflect new information accurately and in real

time. Capital market efficiency is judged by its success in incorporating and inducting

information, generally about the basic value of securities, into the price of securities. This basic

or fundamental value of securities is the present value of the cash flows expected in the future by

the person owning the securities. The fluctuation in the value of stocks encourage traders to trade

in a competitive manner with the objective of maximum profit. This results in price movements

towards the current value of the cash flows in the future. The information is very easily available

at cheap rates because of the presence of organized markets and various technological

innovations. An efficient capital market incorporates information quickly and accurately into the

prices of securities. In the weak-form efficient capital market, information about the history of

previous returns and prices are reflected fully in the security prices; the returns from stocks in

this type of market are unpredictable. In the semi strong-form efficient market, the public

information is completely reflected insecurity prices; in this market, those traders who have non-

public information access can earn excess profits. In the strong-form efficient market, under no

circumstances can investors earn excess profits because all of the information is incorporated

into the security prices. The funds that are flowing in capital markets, from savers to the firms

with the aim of financing projects, must flow into the best and top valued projects and, therefore,

informational efficiency is of supreme importance. Stocks must be efficiently priced, because if

the securities are priced accurately, then those investors who do not have time for market

analysis would feel confident about making investments in the capital market. Eugene Fama was

one of the earliest to theorize capital market efficiency, but empirical tests of capital market

efficiency had begun even before that.
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CAPITAL MARKET SEGMENTS

CAPITAL

MARKET

primary

market

secondary

market


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PRIMARY MARKET

Many companies, especially small and medium scale, enter the primary market to raise money

from the public to expand their businesses. They sell their securities to the public through an

initial public offering. The securities can be directly bought from the shareholders, which is notthe case for the secondary market. The primary market is a market for new capitals that will be

traded over a longer period. In the primary market, securities are issued on an exchange basis.

The underwriters, that is, the investment banks, play an important role in this market: they set the

initial price range for a particular share and then supervise the selling of that share. Investors can

obtain news of upcoming shares only on the primary market. The issuing firm collects money,

which is then used to finance its operations or expand business, by selling its shares. Before

selling a security on the primary market, the firm must fulfill all the requirements regarding the

exchange. After trading in the primary market the security will then enter the secondary market,

where numerous trades happen every day. The primary market accelerates the process of capital

formation in a country's economy. The primary market categorically excludes several other new

long-term finance sources, such as loans from financial institutions. Many companies have

entered the primary market to earn profit by converting its capital, which is basically a private

capital, into a public one, releasing securities to the public. This phenomena is known as "public

issue" or "going public."There are three methods though which securities can be issued on the

primary market: right issue, Initial Public Offer (IPO), and preferential issue. A company's new

offering is placed on the primary market through an initial public offer.


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Functioning of Primary Market

Primary Mortgage Market

Primary Target Market

Transaction Costs in Primary Market

PL in Primary Market

Revival Of Indian Primary Market

Primary Securities Market

Problems of Indian Primary Market

Investment in Primary Market

Primary Money market

International Primary Market Association

IPO Primary Market

Primary Capital Market


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Secondary Market

is the market where, unlike the primary market, an investor can buy a security directly from

another investor in lieu of the issuer. It is also referred as "after market". The securities initially

are issued in the primary market, and then they enter into the secondary market. All the securities

are first created in the primary market and then, they enter into the secondary market. In the New

York Stock Exchange, all the stocks belong to the secondary market. In other words, secondary

market is a place where any type of used goods is available. In the secondary market shares are

maneuvered from one investor to other, that is, one investor buys an asset from another investor

instead of an issuing corporation. So, the secondary market should be liquid. Example of

Secondary market: In the New York Stock Exchange, in the United States of America, all the

securities belong to the secondary market

Importance of Secondary Market

Secondary Market has an important role to play behind the developments of an efficient capital

market. Secondary market connects investors' favoritism for liquidity with the capital users' wish

of using their capital for a longer period. For example, in a traditional partnership, a partner

cannot access the other partner's investment but only his or her investment in that partnership,

even on an emergency basis. Then if he or she may breaks the ownership of equity into parts and

sell his or her respective proportion to another investor. This kind of trading is facilitated only by

the secondary market.


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STOCK EXCHANGE

Stock Exchange

The origin of the stock market in India goes back to the end of the eighteenth century when long-term negotiable securities were first issued. However, for all practical purposes, the real

beginning occurred in the middle of the nineteenth century after the enactment of the companies

Act in 1850, which introduced the features of limited liability and generated investor interest in

corporate securities.

An important early event in the development of the stock market in India was the formation of

the native share and stock brokers 'Association at Bombay in 1875, the precursor of the present

day Bombay Stock Exchange. This was followed by the formation of associations/exchanges in

Ahmedabad (1894), Calcutta (1908), and Madras (1937). In addition, a large number of

ephemeral exchanges emerged mainly in buoyant periods to recede into oblivion during

depressing times subsequently. Stock exchanges are intricacy inter-woven in the fabric of a

nation's economic life. Without a stock exchange, the saving of the community- the sinews of

economic progress and productive efficiency- would remain underutilized. The task of

mobilization and allocation of savings could be attempted in the old days by a much less

specialized institution than the stock exchanges. But as business and industry expanded and the

economy assumed more complex nature, the need for 'permanent finance' arose. Entrepreneurs

needed money for long term whereas investors demanded liquidity the facility to convert their

investment into cash at any given time. The answer was a ready market for investments and this

was how the stock exchange came into being. Stock exchange means any body of individuals,

whether incorporated or not, constituted for the purpose of regulating or controlling the business

of buying, selling or dealing in securities. These securities include:

(i) Shares, scrip, stocks, bonds, debentures stock or other marketable securities of a like nature in

or of any incorporated company or other body corporate;

(ii) Government securities; and

(iii) Rights or interest in securities.

The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd (NSE) are

the two primary exchanges in India. In addition, there are 22 Regional Stock Exchanges.

However, the BSE and NSE have established themselves as the two leading exchanges and


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account for about 80 per cent of the equity volume traded in India. The NSE and BSE are equal

in size in terms of daily traded volume. The average daily turnover at the exchanges has

increased from Rs 851 crore in 1997-98 to Rs 1,284 crore in 1998-99 and further to Rs 2,273

crore in 1999-2000 (April - August 1999). NSE has around 1500 shares listed with a total market

capitalization of around Rs 9, 21,500 crore.

The BSE has over 6000 stocks listed and has a market capitalization of around Rs 9, 68,000

crore. Most key stocks are traded on both the exchanges and hence the investor could buy them

on either exchange. Both exchanges have a different settlement cycle, which allows investors to

shift their positions on the bourses. The primary index of BSE is BSE Sensex comprising 30

stocks. NSE has the S&P NSE 50 Index (Nifty) which consists of fifty stocks. The BSE Sensex

is the older and more widely followed index.

Both these indices are calculated on the basis of market capitalization and contain the heavily

traded shares from key sectors. The markets are closed on Saturdays and Sundays. Both the

exchanges have switched over from the open outcry trading system to a fully automated

computerized mode of trading known as BOLT (BSE on Line Trading) and NEAT (National

Exchange Automated Trading) System. It facilitates more efficient processing, automatic order

matching, faster execution of trades and transparency; the scrip's traded on the BSE have been

classified into 'A', 'B1', 'B2', 'C', 'F' and 'Z' groups. The 'A' group shares represent those, which

are in the carry forward system (Badla). The 'F' group represents the debt market (fixed income

securities) segment. The 'Z' group scrip's are the blacklisted companies. The 'C' group covers the

odd lot securities in 'A', 'B1' & 'B2' groups and Rights renunciations. The key regulator

governing Stock Exchanges, Brokers, Depositories, Depository participants, Mutual Funds, FIIs

and other participants in Indian secondary and primary market is the Securities and Exchange

Board of India (SEBI) Ltd.

Securities contract (regulation) act, 1956.stock exchange means any body of individuals ,

whether incorporated or not, constituted for the purpose of assisting, Regulating or

controlling the business of buying and selling in securities.


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Features of Stock Exchange

Characteristics or features of stock exchange are:

1. Market for securities : Stock exchange is a market, where securities of corporate bodies,government and semi-government bodies are bought and sold.

2. Deals in second hand securities : It deals with shares, debentures bonds and such securitiesalready issued by the companies. In short it deals with existing or second hand securities and

hence it is called secondary market.

3. Regulates trade in securities : Stock exchange does not buy or sell any securities on its ownaccount. It merely provides the necessary infrastructure and facilities for trade in securities to

its members and brokers who trade in securities. It regulates the trade activities so as to

ensure free and fair trade

4. Allows dealings only in listed securities : In fact, stock exchanges maintain an official list ofsecurities that could be purchased and sold on its floor. Securities which do not figure in the

official list of stock exchange are called unlisted securities. Such unlisted securities cannot be

traded in the stock exchange.

5. Transactions effected only through members : All the transactions in securities at the stockexchange are effected only through its authorised brokers and members. Outsiders or direct

investors are not allowed to enter in the trading circles of the stock exchange. Investors have

to buy or sell the securities at the stock exchange through the authorised brokers only.

6. Association of persons : A stock exchange is an association of persons or body of individualswhich may be registered or unregistered.

7. Recognition from Central Government : Stock exchange is an organised market. It requiresrecognition from the Central Government.

8. Working as per rules : Buying and selling transactions in securities at the stock exchange aregoverned by the rules and regulations of stock exchange as well as SEBI Guidelines. No

deviation from the rules and guidelines is allowed in any case.

9. Specific location : Stock exchange is a particular market place where authorised brokerscome together daily (i.e. on working days) on the floor of market called trading circles and

conduct trading activities. The prices of different securities traded are shown on electronic

boards. After the working hours market is closed. All the working of stock exchanges is

conducted and controlled through computers and electronic system.


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10.Financial Barometers : Stock exchanges are the financial barometers and developmentindicators of national economy of the country. Industrial growth and stability is reflected in

the index of stock exchange

List of Stock Exchanges In India

1. Ahmedabad Stock Exchange Association Ltd.

2. Bangalore Stock Exchange Ltd. (Served by India on Internet)

3. Bhubaneshwar Stock Exchange Association

4. Calcutta Stock Exchange Ltd.

5. Cochin Stock Exchange Ltd.

6. Coimbatore Stock Exchange Ltd.

7. Delhi Stock Exchange Association

8. Guwahati Stock Exchange Ltd.

9. Hyderabad Stock Exchange Ltd.

10. Indore Stock Exchange Ltd.

11. Jaipur Stock Exchange Ltd.

12. Kanara Stock Exchange Ltd. (Mangalore)

13. Ludhiana Stock Exchange Association Ltd.14. Madras Stock Exchange Ltd.

15. Madhya Pradesh Stock Exchange Ltd.

16. Magadh Stock Exchange Ltd.

17. Meerut Stock Exchange Ltd.

18. Mumbai Stock Exchange

19. Pune Stock Exchange Ltd.

20. Saurashtra Kutch Stock Exchange Ltd. (Rajkot)

21. Utter Pardesh Stock Exchange Association Ltd. Kanpur

22. Vadodara Stock Exchange Ltd


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National Stock Exchange

National Stock The Exchange (NSE) is India's leading stock exchange covering various cities

and towns across the country. NSE was set up by leading institutions to providemodern fully

automated screen-based trading system with national reach. The Exchangeange has brought

about unparalleled transparency, speed & efficiency, safety and market integrity. It has set up

facilities that serve as a model for the securities industry in terms of systems, practices and

procedures.

NSE has played a catalytic role in reforming the Indian securities market in terms of

microstructure, market practices and trading volumes. The market today uses state-of-art

information technology to provide an efficient and transparent trading, clearing and settlement

mechanism, and has witnessed several innovations in products & services viz. demutualization ofstock exchange governance, screen based trading, compression of settlement cycles,

dematerialization and electronic transfer of securities, securities lending and borrowing,

professionalization of trading members, fine-tuned risk management systems, emergence of

clearing corporations to assume counterparty risks, market of debt and derivative instruments

and intensive use of information technology.


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Bombay Stock Exchange

Established in 1875, BSE Ltd. (formerly known as Bombay Stock Exchange Ltd.), is Asias first

Stock Exchange and one of Indias leading exchange groups. Over the past 137 years, BSE has

facilitated the growth of the Indian corporate sector by providing it an efficient capital-raising

platform. Popularly known as BSE, the bourse was established as "The Native Share & Stock

Brokers' Association" in 1875.

BSE is a corporatized and demutualised entity, with a broad shareholder-base which includes

two leading global exchanges, Deutsche Bourse and Singapore Exchange as strategic partners.

BSE provides an efficient and transparent market for trading in equity, debt instruments,

derivatives, mutual funds. It also has a platform for trading in equities of small-and-medium

enterprises (SME). Around 5000 companies are listed on BSE making it world's No. 1 exchangein terms of listed members. The companies listed on BSE Ltd command a total market

capitalization of USD Trillion 1.06 as of May 15, 2012. BSE Ltd is world's fifth most active

exchange in terms of number of transactions handled through its electronic trading system. It is

also one of the worlds leading exchanges (5th largest in May 2012) for Index options trading

(Source: World Federation of Exchanges).

BSE also provides a host of other services to capital market participants including risk

management, clearing, settlement, market data services and education. It has a global reach with

customers around the world and a nation-wide presence. BSE systems and processes are

designed to safeguard market integrity, drive the growth of the Indian capital market and

stimulate innovation and competition across all market segments. BSE is the first exchange

in India and second in the world to obtain an ISO 9001:2000 certification. It is also the first

Exchange in the country and second in the world to receive Information Security Management

System Standard BS 7799-2-2002 certification for its On-Line trading System (BOLT).

It operates one of the most respected capital market educational institutes in the country (the

BSE Institute Ltd.). BSE also provides depository services through its Central Depository

Services Ltd. (CDSL) arm.


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BSEs popular equity index - the SENSEX - is India's most widely tracked stock market

benchmark index. It is traded internationally on the EUREX as well as leading exchanges of the

BRCS nations (Brazil, Russia, China and South Africa).
http://beta.bseindia.com/


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Role of Capital Market In Economic Development

1. Mobilization of Savings:

Capital market is an important source for mobilizing idle savings from the economy. It

mobilizes funds from people for further investments in the productive channels of an economy.

In that sense it activate the ideal monetary resources and puts them in proper investments.

2. Capital Formation:

Capital market helps in capital formation. Capital formation is net addition to the existing stock

of capital in the economy. Through mobilization of ideal resources it generates savings; the

mobilized savings are made available to various segments such as agriculture, industry, etc. This

helps in increasing capital formation.

3. Provision of Investment Avenue:

Capital market raises resources for longer periods of time. Thus it provides an investment avenue

for people who wish to invest resources for a long period of time. It provides suitable interest

rate returns also to investors. Instruments such as bonds, equities, units of mutual funds,

insurance policies, etc. definitely provides diverse investment avenue for the public.

4. Speed up Economic Growth and Development:

Capital market enhances production and productivity in the national economy. As it makes funds

available for long period of time, the financial requirements of business houses are met by the

capital market. It helps in research and development. This helps in, increasing production and

productivity in economy by generation of employment and development of infrastructure.

5. Proper Regulation of Funds:

Capital markets not only helps in fund mobilization, but it also helps in proper allocation of these

resources. It can have regulation over the resources so that it can direct funds in a qualitative

manner.


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6. Service Provision:

As an important financial set up capital market provides various types of services. It includes

long term and medium term loans to industry, underwriting services, consultancy services,

export finance, etc. These services help the manufacturing sector in a large spectrum.

7. Continuous Availability of Funds:

Capital market is place where the investment avenue is continuously available for long term

investment. This is a liquid market as it makes fund available on continues basis. Both buyers

and easily buy and sell securities as they are continuously available. Basically capital market

transactions are related to the stock exchanges. Thus marketability in the capital market becomes

easy.

Thus the success of the economy depends upon the quantum of finance raised from the

household investors and its rightful application.


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SOME FACTORS AFFECTING CAPITAL MARKET

Correlation between Sensex and FII Flow in Indian capital market

YEAR SENSEX NET

INVESTMENT

FII (CR)

2001 3990.65 6,370.08

2002 3262.01 13,128.20

2003 3383.85 3,629.60

2004 5872.48 30,459.002005 6626.49 47,181.90

2006 9422.49 36,540.20

2007 13827.77 71,486.30

2008 20325.27 -52,987.40

2009 9720.55 83,424.20

2010 17473.45 133,266.80

2011 20621.61 -2,714.20

R=0.018503

Source :- www.bse.co.in

Above table describe the positive correlation between SENSEX and FII Flow in Indian

capital market .whenever FII Flow in Indian capital market increase SENSEX will go up

and whenever FII Flow in Indian capital market decrease SENSEX will go down.


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Correlation between Sensex and India GDP rate

Year sensex GDP

rate

2001 3990.65 3.9

2002 3262.01 4.6

2003 3383.85 6.9

2004 5872.48 8.1

2005 6626.49 9.2

2006 9422.49 9.7

2007 13827.77 9.9

2008 20325.27 6.22009 9720.55 6.6

2010 17473.45 10.6

2011 20621.61 7.2

2012 15534.67 6.9

R=0.323773


Above table describes a positive correlation between SENSEX and GDP, if GDP increases

SENSEX also increases and if it decreases SENSEX will go down.


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Correlation between Sensex and Gold price

Year Sensex Traded

Contracts

(in Lots)

2003 3383.85 3802

2004 5872.48 724236

2005 6626.49 2773381

2006 9422.49 11988919

2007 13827.77 10366705

2008 20325.27 26001228

2009 9720.55 30423657

2010 17473.45 31581365

2011 20621.61 79354310

2012 15534.67 53642729

R=0.767935


Above table shows a positive correlation between SENSEX and GOLD PRICE , if GOLD

PRICE increases SENSEX also increases and if it decreases SENSEX will go down.


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Other Factors

Some of the other factors which influence capital market are as follows:-

A) Performance of domestic companies:-

The performance of the companies or rather corporate earnings is one of the factors which has

direct impact or effect on capital market in a country. Weak corporate earnings indicate that the

demand for goods and services in the economy is less due to slow growth in per capita income of

people . Because of slow growth in demand there is slow growth in employment which means

slow growth in demand in the near future. Thus weak corporate earnings indicate average or not

so good prospects for the economy as a whole in the near term. In such a scenario the investors (

both domestic as well as foreign ) would be wary to invest inthe capital market and thus there isbear market like situation. The opposite case of it would berobust corporate earnings and its

positive impact on the capital market. The corporate earnings for the AprilJune quarter for the

current fiscal has been good. The companies like TCS, Infosys, Maruti Suzuki, BhartiAirtel,

ACC, ITC, Wipro, HDFC, Binani Cement, IDEA, Marico Canara Bank, Piramal Health, India

cements , Ultra Tech, L&T, Coca-Cola, Yes Bank, Dr. Reddys Laboratories, Oriental Bank of

Commerce, Ranbaxy, Fortis, Shree Cement ,etc have registered growth in net profit compared to

the corresponding quarter a year ago. Thus we see companies from Infrastructure sector,

Financial Services, Pharmaceutical sector, IT Sector, Automobile sector, etc. doing well. This

across the sector growth indicates that the Indian economy is on the path of recovery which has

been positively reflected in the stock market (rise in Sensex & nifty) in the last two weeks. (July

13-July 24).


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B) Environmental Factors:-

Environmental Factor in Indias context primarily means- Monsoon. In India around 60 % of

Agricultural production is dependent on monsoon. Thus there is heavy dependence on monsoon.

The major chunk of agricultural production comes from the states of Punjab, Haryana & Uttar

Pradesh. Thus deficient or delayed monsoon in this part of the country would directly affect the

agricultural output in the country. Apart from monsoon other natural calamities like Floods,

tsunami, drought, earthquake, etc. also have an impact on the capital market of a country. The

Indian Met Department (IMD) on 24th June stated that India would receive only 93 %rainfall of

Long Period Average (LPA). This piece of news directly had an impact on Indian capital market

with BSE Sensex falling by 0.5 % on the 25th June. The major losers were automakers and

consumer goods firms since the below normal monsoon forecast triggered concerns that demand

in the crucial rural heartland would take a hit. This is because deficient monsoon could seriously

squeeze rural incomes, reduce the demand for every Thing from motorbikes to soaps and worsen

a slowing economy.

C) Macro Economic Numbers:-The macroeconomic numbers also influence the capital market.

It includes Index of Industrial Production (IIP) which is released every month, annual Inflation

number indicated by Wholesale Price Index (WPI) which is released every week, Export

Import numbers which are declared every month, Core Industries growth rate (It includes Six

Core infrastructure industries Coal, Crude oil, refining, power, cement and finished steel)

which comes out every month, etc. This macro economic indicators indicate the state of the

economy and the direction in which the economy is headed and therefore impacts the capital

market in India. A case in the point was declaration of core industries growth figure. The six

Core Infrastructure IndustriesCoal, Crude oil, refining, finished steel, power & cementgrew

6.5% in June, the figure came on the 23 rd of July and had a positive impact on the capital

market with the Sensex and nifty rising by 388 points & 125 points respectively.


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D) Global Cues: In this world of globalization various economies are interdependent and

interconnected. An event in one part of the world is bound to affect other parts of the world;

however the magnitude and intensity of impact would vary. Thus capital market in India is also

affected by developments in other parts of the world i.e. U.S., Europe, Japan, etc. Global cues

includes corporate earnings of MNCs, consumer confidence index in developed countries,

jobless claims in developed countries, global growth outlook given by various agencies like IMF,

economic growth of major economies, price of crude oil, credit rating of various economies

given by Moodys, S & P, etc. An obvious example at this point in time would be that of

subprime crisis & recession. Recession started in U.S. and some parts of the Europe in early

2008 .Since then it has impact all the countries of the world- developed, developing, and less-

developed and even emerging economies.

E) Political stability and government policies:-For any economy to achieve and sustain growth

it has to have political stability and pro- growth government policies. This is because when there

is political stability there is stability and consistency in governments attitude which is

communicated through various government policies. The vice- versa is the case when there is no

political stability .So capital market also reacts to the nature of government, attitude of

government, and various policies of the government. The above statement can be substantiated

by the fact the when the mandate came in UPA governments favor ( Without the baggage of left

party) on May 16 2009, the stock markets on Monday , 18th May had a bullish rally with Sense

closing 800 point higher over the previous days close. The reason was political stability. Also

without the baggage of left party government can go ahead with reforms.

F) Growth prospectus of an economy:-When the national income of the country increases and

per capita income of people increases it is said that the economy is growing. Higher income also

means higher expenditure and higher savings. This augurs well for the economy as higherexpenditure means higher demand and higher savings means higher investment. Thus when an

economy is growing at a good pace capital market of the country attracts more money from

investors, both from within and outside the country and vice -versa. So we can say that growth

prospects of an economy do have an impact on capital markets.


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G) Investor Sentiment and risk appetite:-Another factor which influences capital market is

investor sentiment and their risk appetite. Even if the investors have the money to invest but if

they are not confident about the returns from their investment, they may stay away from

investment for some time. At the same time if the investors have low risk appetite, which they

were having in global and Indian capital market some four to five months back due to global

financial meltdown and recessionary situation in U.S. & some parts of Europe, they may stay

away from investment and wait for the right time to come


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Role of SEBI

Securities and exchange Board of India was set up in 1988 and became a statutory organization

from January 1992. It was given a statutory status for healthy regulation of capital markets.

Office of Capital Issues (OCI) was abolished and the companies were to approach market

directly subject to SEBI guidelines relating to disclosures and other measures of investors

protection. This led to removal of hurdles i.e., getting permission from CCI, MRTP

commissioner, Company Law Board, Ministry of Finance, Industrial, Registrar of companies etc.

The Securities and Exchange Board of India Act (SEBI) empowers SEBI to:

1. Regulate the business of stock exchanges.

2. Register and regulate intermediaries associated with the securities market as

well as working of mutual funds.

3. Promote and regulate self Regulatory organizations.

4. Prohibit fraudulent and unfair trade practices relating to securities transactions.

SEBI directed that all Stock Exchanges should computerize their operations to have better

transparency and. efficient screen based trading system and also permitted most of the stock

exchanges to have their additional trading floors at different places

through VSATS or WAN/LAN systems to suit their requirements. This has facilitated members

and investors to do their trading activities in a more and competitive way.

The system of insurance of brokers was made mandatory; the norms for bad deliveries were

standardized.


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Online Trading

In India first fully automated stock exchange was formed in the year 1994 with fully automated

trading system called screen based trading or Online tradingbasing on computers this system has

brought revolutionary changes in the secondary markets in India. This system is mainly helpful

for the purpose of protecting the investors from the brokers in the price rigging. The NSE has

used the software called NEAT (National Exchange for Automated Trading). After NSE starting

the Online trading the Indias premier stock exchanges followed the way of NSE and BSE.

Objectives of Online Trading:

Providing a Nationwide trading facility for all type of securities. Ensuring equal access to investors to all over the country through communication

network.

Providing a fair, efficient and transparent securities market using an electronic tradingsystem.

Enabling the use of shorter settlement cycles and book entry settlement system.


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Outcry System

Trading on stock exchanges used to take place through open outcry without use of technology

for immediate matching or recording of trades. This was a time consuming and inefficient

system. The practice of physical trading imposed limits on trading volumes and hence the slow

speed with which new information was incorporated into price.

NSE is the first exchange in the world to use satellite communication technology for trading. Its

trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art

client server based application. At the server end all trading information is stored in an in

memory database to achieve minimum response time and maximum system availability for

users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform

response time of less than one second.


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Demateralisation

The decade of Lhe9Os witnessed a revolution in the clearing and settlements functions in the

Indian securities market. Promulgation of the Depositories Ordinance in 1995 and establishment

in this revolution which sought to eliminate the ills associated with paper base securities system

such as delay in transfer, bad delivery, theft, fake and forged shares, and synchronize the

settlement of trade transfer of securities irrespective of geographical locations. Although in the

first phase, SEB1 has made Demat trading for selected scripts, efforts should be made to bring in

all major exchanges within a well defined time frame for acceptance of Demat Trading. With

SEBI allowing Demat delivery even in the fiscal segment more and more retail investor are

likely to get in to the system which ultimately encourage more brokers also to become to become

depository participants and educate the retail investor. The advantage of script less trading and

the need for such Demat trading compulsorily could also be explored. Apart from this the

banking network in the country could be used for this purpose by providing tow way quotes to

take up this work.

\


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Introduction of Ludhiana Stock Exchange

The Ludhiana Stock Exchange Limited (LSE was established in 1981, by Sh. S.P. Oswal of

Vardhman Group and Sh. B.M. Munjal of Hero Group, leading industrial luminaries, to fulfill a

vital need of having a Stock Exchange in the region of Punjab, Himachal Pradesh, Jammu &

Kashmir and Union territory of Chandigarh. Since its inception, the stock exchange has grown

phenomenally.

The stock Exchange has played an important role in channelising savings into capital for the

various industrial and commercial units of the state of Punjab and other parts of the company.

The Exchange has facilitated the mobilization of funds by entrepreneurs from the public and

thereby contributed in the overall, economic, industrial and social development of the state under

its jurisdiction.

Ludhiana Stock Exchange is one of the leading Regional Stock Exchange and has been in the

forefront of other stock exchange in every spheres, whether it is formation of subsidiary for

providing the platform of trading to investors, for brokers etc. in the era of Screen based trading

introduced by national Stock exchange and Bombay stock Exchange, entering into the field of

Commodities trading or imparting education to the Public at large by way of starting Certificate

Programmes in Capital Market.

The vision and mission of stock Exchange is:

Reaching small investors by providing services relating to Capital market including Trading

Depository operations etc and creating Mass Awareness by way of education and training in the

field of Capital market.

To create educated investors and fulfilling the gap of skilled work force in the domain in Capital

Market.

Further, the exchange has 295 members out of which 171 are registered with national Stock

exchange as Sub- broker and 124 with Bombay Stock exchange as sub- brokers through our

subsidiary.


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Infrastructure And Assets Base At Ludhiana Stock Exchange

The Exchange building is situated at Feroze Gandhi Market, Ferozepur Road, Ludhiana. It is a

six storeyed building, which is centrally air-conditioned. The building has 262 rooms, which are

located on various floors ranging from second to fifth. The first floor of the building houses the

administrative office and rooms from second to fifth floors have been leased out to brokers. The

first floor also has canteen facility. Investor Service Centre is also located at first floor which

houses a well-equipped library and view-terminals to provide live rates of NSE and BSE to

investors. Investors are also provided with Cable TV for the purpose of viewing the latest

happenings in the Capital Market and around. Basement of the building has air-conditioning

plant and Generators to provide air-conditioned environment and twenty-four hours power back

up. The Exchange has also an additional plot of land measuring 2333 sq. yards in the primelocation of city, to enhance its infrastructure and source of income.

List Of Board Of Directors Of LSE

Sr. No. Name of Director Category

1. Prof. Padam Parkash Kansal Chairman

2. Sh. Joginder Kumar Vice Chairman

3. Sh. Vikas Batra Shareholder Director

4. Sh. Rajinder Mohan Singla Shareholder Director

5. Sh. Ashok Kumar Shareholder Director

6. Sh. Satish Nagpal Shareholder Director

7. Sh. Ashwani Kumar Public Interest Director

8. Sh. V.P. Gaur Public Interest Director

9. Dr. Raj Singh, RoC Public Interest Director

10. Sh. Sanjay Anand Trading Member Director

11. Sh. Sunil Gupta Trading Member Director

12. Sh. Jaspal Singh Trading Member Director


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Strengths of LSE Group

1. LSE brand is popular among masses. The brand image of LSE can be capitalized.

2. We have requisite infrastructure for the Capital Market activities which includes a multi-

storeyed, centrally air conditioned building situated in the financial hub of the city i.e. Feroze

Gandhi Market.

3. We have well experienced staff handling operations of Stock Exchange.

4. We have competent Board and professional management.

5. We have much needed networking of sub brokers in the entire region, who are having rich

experience in Stock Market operations for the last 31 years.

6. We have more than 46,000 clients spread across Punjab, Himachal Pardesh, Jammu &

Kashmir and adjoining areas of Haryana and Rajasthan.

7. The turnover of our subsidiary is the highest amongst all subsidiaries of Regional Stock

Exchanges in India.

Listing Of Securities of Companies At Ludhiana Stock Exchange

At present, Ludhiana Stock Exchange has 324 listed companies, out of which 211 are regional

and 113 are Non-regional. The total listed capital of aforesaid companies is Rs. 3063.56 Crores

appx. The market capitalization of the said companies is more than Rs. 1890.53 crores. The

Stock Exchange is covering the vast investor base through the listing of above said companies,

which are situated in the region comprising of Punjab, Himachal Pradesh, Jammu & Kashmir,

and Chandigarh.

Ludhiana Stock Exchange has facilitated the capital generation for agro based industries as

Punjab is a agricultural led economy. It will continue to do so, once it gets approval for a tie up

with bigger Exchanges for commencing trading operations.


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Investor Related Services

The Exchange has been providing a variety of services for the benefit of investing public. The

services include Investor Service Centres, Investor Protection fund and Investor Educational

Seminars.

(I) Investor service centres

The Exchange has set-up Investor Service Centre at LSE Building for providing information

relating to Capital Market to the general public. The Centres subscribe to leading economic,

financial dailies and periodicals. They also store the Annual Reports of the companies listed at

the Stock Exchange. The Investor Service Centres are also equipped with a Terminal for

providing live rates of trading at NSE and BSE. A large number of the investors visit the

centre to utilize the services being provided by the Exchange.

(II) Investor awareness seminars

The Exchange has been organizing Investor Awareness Seminars for the benefit of Investors of

the region comprising State of Punjab, Himachal Pradesh, Jammu & Kashmir, Chandigarh and

adjoining areas of Haryana and Rajasthan. This massive exercise of organizing Investor

Awareness Seminars has been launched as a part of Securities Market Awareness Campaign

launched by SEBI in January, 2003. The Exchange apprises the investors about Dos and Donts

to be observed while dealing in Securities Market. During 2011-2012, till date, Exchange hasorganized more than 83 workshops in the region mentioned above.

(III) Website of exchange

www.lse.co.in The Exchange has its own website with the domain name www.lse.co.in. The

website provides valuable information about the latest market commentary, research reports

about companies, daily status of International markets, a separate module for Internet trading,

information about listed companies and brokers and sub-brokers of the Exchange and its

subsidiary. The website also contains many useful links on portfolio management, investor

education, frequently asked questions about various topics relating to Primary and Secondary

Market, information about Mutual Funds, Financials of the Company including Quarterly

Results, Share Prices, Profit and Loss Accounts, Balance Sheet and Many More. The website

also contains daily Technical Charts of various scrips being traded in BSE and NSE.


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LSE Securities Limited

LSE Securities Ltd., was incorporated in 07th January, 2000 with a view to revive the capital

market in the region and for taking full advantage of the emerging opportunities being provided

by expansion of bigger stock exchanges like NSE and BSE. The company since its inception has

marched forward rapidly and has maintained consistent growth record.

LSE Securities Limited is a subsidiary of the Ludhiana Stock Exchange has presence at various

locations to effectively service its large base of individual clients. The clients of the company

greatly benefit from strong research capability, which encompasses fundamentals as well as

technicals of LSE Securities Ltd, besides its wide reach in this part of the country.

LSE SECURITIES LIMITED (LSESL) is a subsidiary of the Ludhiana Stock Exchange Limited

under the policy formulated by the Securities and Exchange Board of India (SEBI) for Revival

of Small Stock Exchanges. The policy enunciated by the SEBI permits a stock exchange to float

a subsidiary, which can take up membership of larger stock exchanges, such as the National

Stock Exchange of India Ltd. (NSE), and Bombay Stock Exchange Ltd. (BSE). LSESL has been

registered by SEBI as a Trading-cum-Clearing Member in the Capital Market segment and

Futures & Options segment of NSE and Capital Market segment of BSE and Trading member of

MCX-Stock Exchange Limited. Trading Members of LSE can access NSE and BSE by

registering themselves with SEBI as Sub-brokers of LSESL.

Objectives of The Company

LSE Securities Limited is a subsidiary of the Ludhiana Stock Exchange, which was formed with

an objective to enhance business and investment opportunities for the investors and members of

Ludhiana Stock Exchange at large, through innovative products by encompassing a variety of

activities related to the capital market. The company has a paid-up capital of Rs 5.55 crores.


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List of Board Of Directors Of LSE Securities Limited

Governing Council

The Council of the management of the Company comprises of 10 directors of which 3are brokermembers and 7non-brokers. Five non broker members are Independent Directors of eminent

status from the field of finance, law and management and remaining two are Chief Executive

Officer of LSE Securities Limited and Executive Director of the holding company (Ludhiana

Stock Exchange), who are on the Board of the company as ex-officio Directors. Thus the council

of management has representation of sub-brokers as well as professionals and subject specialists

representing various fields of business activities. Operations of the company are run in a

professional, transparent and fair manner keeping in view of the interest of investors as well as

other stake-holders.

Sr.No. Name Designation

1. Sh. Vishal Goombhir Chairman

2. Sh. Vijay Singhania Vice-Chairman

3. Sh. Rajesh K. Sharma Chief Executive Officer

4. Sh. Lalit Kishor Member-Director

5. Sh. Sukhjivan Rai Member-Director

6. Sh. Munish Sood Member-Director

7. Sh. Ashish Aggarwal Public Representative Director- Independent Director

8. Sh. Ajay Chowdhary Public Representative Director- Independent Director

9. Dr. Prem Kumar Public Representative Director- Independent Director

10. Sh. Vinesh Kumar Public Representative Director- Independent Director

11. Sh. Rakesh Gupta Public Representative Director- Independent Director

12. Mrs. Pooja M. Kohli LSE-Representative Director


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Corporate Membership of NSE & BSE

SEBI, at the initiative of LSE, permitted smaller Stock Exchanges, to trade on bigger Stock

Exchanges through their subsidiary companies. The Ludhiana Stock Exchange floated its

subsidiary company, the LSE Securities Limited, with the objective of obtaining trading rights

on bigger Stock Exchanges. It has obtained corporate membership of both NSE and BSE in the

first half of year 2000.

Trading At NSE And BSE

The LSE Securities Ltd. commenced trading operations in Capital Market Segments of BSE and

NSE in September, 2000 and December 2000 respectively. The turnover of the Company at NSE

and BSE is growing by leaps and bounds ever since in incorporation. There was encouragingresponse from the sub-brokers specially at NSE counters. During the financial year 2005-06, the

Company recorded a turnover of Rs. 7975 crores and Rs.3834 crores in "Capital Market"

segments of NSE and BSE respectively. For the year ended 2005-2006, there were 128 sub-

brokers registered for NSE and 68 for BSE.

F&O SEGMENT OF NSE

The LSE Securities Ltd. commenced trading operations in Future and Options Segment of NSE

in February 2002. The Company became the first subsidiary of any Regional Stock Exchange

which commenced trading in F&O Segment of NSE. Response to trading facilities in the

F&O segment of NSE has been very encouraging and volumes generated in this segment soon

exceeded those in Capital Market segment.

Trading Through V-SATS

The LSE Securities Limited has provided facility to its sub-brokers for trading on NSE and BSE

through VSAT counters which are located outside Stock Exchange Building. During 2005-2006,

27 sub-brokers of the company have been trading through VSAT on NSE and 13 on BSE.


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Certification in Financial Market

In order to provide professional services to the investors of LSE Securities Limited through its

sub-brokers, the company motivated its sub-brokers and its staff to qualify the certification in

financial markets conducted by NSE. All trading terminals for Capital Market Segment and F&O

segment are being operated by the persons after having qualified the said certification.

Depository Participant Services

1.National Securities Depository Limited (NSDL): The LSE Securities Ltd. commencedits operations as Depository Participant of NSDL in August 2000. The DP services

provided by the Company have technology edge over other DPs, as DP of the company is

the only On-line Real-Time DP in the region. As a result of efficient services and

competitive rates, the Company has been able to increase its market share in the DP

business at the cost of other DPs in the region. As on date DP of NSDL and CDSL of the

Company at Ludhiana is servicing over 35000 beneficiary accounts.

2.Central Depository Services (India) Limited (CDSL): In order to further strengthen itsservices to sub-brokers and investors, the Company applied for the DP of CDSL. It

started DP operations of CDSL in December 2001. With the operationalisation of DPServices of CDSL, the Company has been able to provide delivery of shares to sub-

brokers and investors on the day of pay-out which in turn helps the sub-brokers to give

timely deliveries to their clients. Introduction of CDSL operations has also enabled the

sub-brokers and investors of the Company to timely meet the pay-in obligations of

securities purchased by the investors on BSE and sold next day on NSE through the

Company and vice-versa.


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Chapter 2

REVIEW OF

LITERATRUE


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There exists a voluminous literature concerning the role of capital market in the process of

economic growth of a country. The most important and systematic early contribution on financial

and economic development came from Joseph Schumpeter. Schumpeter (1912) contended that

financial development causes economic developmentthat financial markets promote economic

growth by funding entrepreneurs and in particular by channelling capital to the entrepreneurs

with high return projects. However, a systematic approach to the issue has been addressed with

the empirical study by Goldsmith (1969). He demonstrated a positive correlation between

financial development (measured by the value of financial intermediary assets relative to GNP)

and economic growth.

But the seminal work of McKinnon (1973) and Shaw (1973) brought to the forefront the role of

financial development in promoting economic growth. Their argument was that the financial

liberalization and deepening in countries that suffer from shallow finance or financial

repression are critically important to the economic growth of these countries. Ever since this

pioneering contribution, the relationship between economic growth and financial development

remained an important issue of debate among academicians and policy makers (De Gregorio and

Guidotti, 1995). There is now a growing theoretical and empirical body of literature on how

financial intermediation mobilizes savings allocates resources, diversifies risks, and contributes

to economic growth (Jbili, Enders, and Treichel, 1997; Greenwood and Jovanovic, 1990).

These early works, though insightful, lacks rigor analytical structures. Starting from the

beginning of 1990s, a growing body of work builds a series of analytical frameworks which

show how the financial intermediaries and markets appear endogenously to contribute to long-

run economic growth. Levine (1996), Jacque(2001), Tufano (2003), Chou (2007), Agarwal

(2000), Mohtadi and Agarwal(1998), Sarkar (2006), Capasso(2006), Kamat, Kamat and

Murthy(2007), Agrawalla and Tuteja (2007), Deb and Mukherjee (2008), and Chakraborty

(2008) have contributed a lot to the literature in this direction.

This theoretical and empirical explanation on the nexus between capital market and economic

growth of a country has been given a new tint with the development of Efficient Market

Hypothesis (EMH) by Fama (1965). Then it has been argued that for capital market to contribute

to economic growth and development of a country, it must operate efficiently. If the market

operates efficiently, confidence will be generated in the minds of the public and thus, investors


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will be willing to part with hard earned funds and invest them in securities with the hope that in

future they will recoup their investment. On the other side, where the market is highly and

unreasonably speculative, investors will be discouraged to invest their funds. The implication is

that the entrepreneurs cannot raise additional capital for expansion. Such a situation would have

detrimental effect on economic growth of any country. Thus, it suffices to say that capital market

efficiency is a necessary condition for growth and development of a country.

L.C.Gupta (1992) revealed the findings of his study that there is existence of wild speculation in

the Indian stock market. The over speculative character of the Indian stock market is reflected in

extremely high concentration of the market activity in a handful of shares to the neglect of the

remaining shares and absolutely high trading velocities of the speculative counters.

Carter Randal (1992) offered to investors the underlying principles of winning on the stock

market. He emphasised on longterm vision and a plan to reach the goals. He advised the

investors that to be successful, they should never be pessimists. He revealed that though there

has been a major economic crisis almost every year, it remains true that patient investors have

consistently made money in the equities market. He concluded that investing in the stock market

should be an un-emotional endeavour and suggested that investors should own a stock if they

believe it would perform well.

Yasaswy N.J. (1993) disclosed how 'turnaround stocks' offer big profits to bold investors and

also the risks involved in investing in such stocks. Turnaround stocks are stocks with

extraordinary potential and are relatively under priced at a given point of time.

Avijit Banerjee (1998) reviewed Fundamental Analysis and Technical Analysis to analyse the

worthiness of the individual securities needed to be acquired for portfolio construction. The

Fundamental Analysis aims to compare the Intrinsic Value (I..V) with the prevailing market

price (M.P) and to take decisions whether to buy, sell or hold the investments. The fundamentals

of the economy, industry and company determine the value of a security. If the 1.V is greater

than the M.P., the stock is under priced and should be purchased.

Mukul Gupta (1999) described the risk management framework as the building blocks for

Enterprise Risk Management ERM is the systems and procedures designed to deal with multiple

types of risks. The objectives of E.R.M are to obtain information and analyse data so that


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uncertainty is turned into quantifiable risk and appropriate management action can be taken to

mitigate the risk.

CRISIL Report on Risk Management (2000) stated that the loss potential from market risk

will increase in the absence of strong risk management tools. The banks which adopt a pro-active

approach to upgrading risk management skills which are currently unsophisticated as compared

to internationally best practices, would have a competitive edge in future. The report commented

that in the increasingly deregulated and competitive environment, the risk management strategies

of banks would hold the key to differentiation in their credit worthiness.

Jayanth M ThakurJ"(2000) disclosed the implications of derivatives. The use of derivatives

can be for safeguarding oneself against risks. It is widely recognised by all including the SEBI

committee on derivatives that a substantial degree of speculative activity in a market for

derivatives is necessary and without this, a good market in derivatives cannot function.

Mitra.S.K." (2000) commented on the increasing volatility of the bourses, which forces an

investor to shift away from the equity market. He observed that analysts profess to the investors

the virtue of long-term time horizon for the equity investment. But sharp volatility has become a

feature of the capital market worldwide, resulting in frequent, sharp, downward corrections. In

this scenario it is proving difficult to convince the investors to think long-term.

The Economic Times Investors' year Book(2000-01) commented on the "Paperless World and

described what makes dematerialisation the preferred choice and how it reduces risk.

Thedematerialised trading was introduced in India in 1996 to reduce pains and risks in settlement

through the loss of share certificates in transit, bad deliveries, delays in transfer and

forged/fake/stoIen certificates. It helps in doing away with the risk of loss in transit by directly

crediting the account with bonus shares and rights. There is no risk of bad delivery because the

ownership status is clearly captured in the Depository's computers.

Rukmani Viswanath (2001) reported that the Primary Dealers in Govt. securities are working

on a new internal risk management model suited for the Indian market conditions. The attempt is

to lay down general parameters for risk perception. The Primary Dealers Association of India

(PDAI) is formulating a set of prudential norms for 'risk management practices'. While

internationally the principles of risk management may be the same everywhere, the Association


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is of the view that they have to identify the relevant issues and apply those principles in the

Indian context. It strongly argues that it must work on a model that can help to manage liquidity

and interest rate risk. While the existing RBI guidelines on risk management cover mainly

statutory risk, the PDAI hopes that its new risk management model will be able to perceive 'real

risk'. These new norms are expected to help gauge several issues like, whether a fall in the prices

of securities or yields is a temporary or permanent situation etc.

Gabriel (2002) as enunciated by Nyong (2003) lay emphasis on the Romanian capital market

and conclude that the market is inefficient and hence, it has not contributed to economic growth

of Romania.

In a more recent study, Ewah et al (2009) appraise the impact of the capital market efficiency on

the economic growth of Nigeria using time series data from 1961 to 2004.The study found that

the capital market in Nigeria has the potential of growth inducing, but it has not contributed

meaningfully to the economic growth of Nigeria because of low market capitalization, low

absorptive capitalization, illiquidity, misappropriation of funds among others.

As inferred, the empirical financial economics literature is very thin on the issue that capital

market efficiency can exert an impact on the economic growth of a country. And, the studies for

an emerging market economy like India are almost non-existent in the literature. Therefore, this

paper is, perhaps the first kind of attempt in this direction.

Shaik Abudl Majeeb Pasha & R.Vamsi Krishna & Hemantha Gopi Kiran(2010) report

indicate that the SEBI is a regulatory body which is eighteen years old and the capital market

system is more than 100 years old. This matured capital market system requires monitoring

rather than over-regulation. The SEBI should supervise this capital market system in such a

manner that all sub-systems become self-regulatory organisations (SROs) gradually. The SEBI

should lay down the boundaries within which these sub-systems should operate. Moreover, the

fundamental infrastructure for regulation, disclosure, surveillance and trading are all in place.

Hence, the SEBI should stop being pre-occupied with day-to-day regulations and become more

of a visionary. The SEBI can ensure a free and fair market and take India into league of major


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global capital markets in the next round of reforms. To enable this, it has to thoroughly review its

structure and functioning. The SEBI has to balance between the costs of regulation and market

development. There should be cross-border cooperation between various regulators and between

regulators and industry.


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Chapter 3

RESEARCH

METHODOLOGY


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Research is common parlance refers to research for Knowledge one can also define research is a

scientific and systematic search for pertinent information and specific topic. The advance learner

dictionary of current English lays down the meaning of research as:

A Careful Investigation or enquiry especially through search for new fact in any branch

of Knowledge

Some People consider search as a moment from not to not so:

Research Always start with the problems Its purpose is to find answer or solution of the Problem through application of scientific

method.

It is a systematic and Intensive study Directive towards a more complete knowledge ofthe subject studies.

The Purpose of search is to discover answers to Questions through the Applications ofScientific procedures. The main aim of search is to find out the truth which is hidden and

which has not been discovered as yet.


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Objectives of the study

To find out investors behavior in the stock market and their perception about it.

To study the factors influencing the investment decisions by the investors. To study the nature of relationship between stock market indices with economic,

financial and commodity market.ss


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Nature of the Study

This research is Descriptive in nature.Descriptive Research is designed todescribecharacteristicsofa population or aphenomenon.

Descriptive Research

Objective Objective are formalized and structure with

clearly stated hypothesis or investigative

questions

Characteristic Descriptors of phenomenon or characteristic

associated with subject population (the Who,

What, When, Where & How Of A

Topic);Describe market characteristics or

function; preplanned & structured design.

Methods Primary data, Observation ,Secondary data

Data Collection

In dealing with any real life problem is often found that data at hand are in adequate and hence it

becomes necessary to collect data that are appropriate. There are several ways of collecting the

appropriate data which differ considerable in context of money cost time and other resources at

the disposable of Researcher. Data collection sources are as follow:-

Primary source:

Questionnaires filled by respondentsSecondary source:

Internet website Journals Books Publication and report


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Sample size:

50 investors have been contacted in this regard. The research is carried out in Ludhiana city.

Sampling techniques:The sampling technique used in this research Convenience sampling technique.

Convenience sampling (sometimes known as grab or opportunity sampling) is a type of non-

probability sampling which involves the sample being drawn from that part of the population

which is close to hand. That is, a sample population selected because it is readily available and

convenient.

Data has been represented through:-

Bar charts and Pie Charts:-After the data has been collected, it has been analyzed in the short form that it has been

converted with the help of coding, tabulation and drawing various graphs.

Limitations of the Project

Time constraint was a major limiting factor. Forty five days were insufficient to even grasp the theoretical concepts. Some of the persons were not so responsive. Possibility of error in data collection because many of investors may have not given true

replies to my questionnaire.

Sample size is limited to 100 investors The sample size may not adequately represent thewhole market.

Some respondents were reluctant to divulge personal information which can affect thevalidity of all responses.

The research is confined to Ludhiana only.


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Chapter 4

DATA ANALYSIS &

INTERPRETATION


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1. (A) Age distribution of the Investors of Ludhiana.

Age group Below25 25-35 35-45 Above45

No. of

investors

12 20 13 5

Interpretation:

According to this chart out of 50 - the most are in the age group of 25-35 yrs. i.e.40% the

second most investors are in the age group of 35-45 yrs. i.e. 26 %and the least investors are in

the age group of above 45 yrs.

Below25

24%

25-35

40%

35-45

26%

Above45

10%

No. of investors

AGE GROUP OF THE INVESTORS


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B). Occupation of the investors of Ludhiana

occupation student Self

employed

Service Retired

No. of

investors

15 17 10 8

.

interpretation

In Occupation group out of 50 investors, 30% are students, 34% are self employed, 20% are

service and 16% are in retired

student

30%

Self employed

34%

Service

20%

Retired

16%

No. of investors

OCCUPATIONS OF THE CUSTOMERS


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C) Investors invested in different kinds of the market

Kinds of

the

investment

Cash

market

Currency

market

Derivative

market

others

No. of

respondents

30 8 9 3

Interpretation:

From the above graph it can be inferred that out of 50 people, 30 people have invested in capital

market, 8 in currency market, 9 in derivative market and 3 in others.

0

5

10

15

20

25

30

35

Cash market Currency

market

Derivative

market

others

Series2

Kind of the investments


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D) mode of the investment preferred by investors

Interpretation

From the above graph it can be inferred that out of 50 people, 22 people have preferred mode of

the investment in monthly, 18 in weekly, 9 in daily basis.

0

5

10

15

20

25

daily weekly monthly yearly

No. of respondents

Mode of

investments

daily weekly monthly yearly

No. of

respondents

9 18 22 0

Mode of investments


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E) investment objective

Investment

objective

Income and

capital

preservation

Long term

growth

Short

term

growth

Growth

and

incomes

No. of

respondents

5 30 10 5

Interpretation

From the above graph it can be inferred that out of 50 people, 5 people have invested in capital

and income preservation, 30 in long term growth, 10 in short term growth and 5 in others

0

5

10

15

20

25

30

35

Income and

capital

preservation

Long term

growth

Short term

growth

Growth and

incomes

No. of respondents

Investment objective


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F) before investing from where you take advice

Take advice Expert

opinion

On friend

advise

Broker

advice

Other

No. of

respondents

15 7 18 10

Interpretation

From the above graph it can be inferred that out of 50 people, 30% people have taken the advise

from expert opinion, 14% from friend advice, 36%from broker and 20% from others.

Take advice

0%

Expert opinion

30%

On friend

advise

14%

Broker advice

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