4.

1 OVERVIEW OF CAPITAL MARKET Capital Market is a wide term used to comprise all operations in the New Issues and Stock Market. New Issues made by companies constitute the Primary Market, while trading in theexisting securities relates to the Secondary Market. While we can only buy in the PrimaryMarket, we can buy and sell securities in the Secondary Market. Capital Market encompassesall operations of F.I.I., Banks etc., at the long end of spectrum of maturities. It is concernedwith those private savings that are turned into investments through new capital issues andalso new public loans floated by government and semi-government bodies.Capital Market is a market for borrowing and lending of funds of more than one year.This market supplies funds for financing the fixed capital requirements of trade andcommerce as well as the long-term requirements of the government. Developing banks andInsurance companies play a dominant role in the capital market. Transactions in the capitalmarket have to be conducted only through authorized dealers. Primary Market: Primary market is a market for new issues or new financial claims. Hence, it is alsocalled Initial Public Offering (IPO). Primary market deals with those securities, which areissued to the public for the first time. In the primary market, the borrower exchange newfinancial securities for long-term funds. Thus primary market facilitates capital formation.There are three ways by which a company may raise capital in the primary market. They are: Primary issue, Rights issue, & Private placement.The most common method of raising capital by new companies is through sale of securities to the public. It is called public issue or Initial Public Offering (IPO).

When an existing company wants to raise additional capital, securities are first offeredto the existing shareholders on a pre-emptive basis. It is called rights issue. Private placementis a way of selling securities privately to a small group of investors. Secondary Market: Secondary market is a market for secondary sale of securities. Securities that arealready traded in the new issue market are traded in this market. Generally such securities arequoted in the Stock Exchanges

and it provides a continuous and regular market for buyingand selling of securities. This market consists of all stock exchanges recognized by theGovernment of India.The stock exchanges in India are regulated under the Securities Contracts(Regulation) Act, 1956. The Bombay Stock Exchange is the principal stock exchange inIndia, which sets the tone of the other stock markets. Structure of the Market: There are various sub-markets in the Capital Market in India. The structure has undergonevast changes in recent years. New instruments and new institutions have emerged on thescene. The sub-markets in the Capital Market are-1.Market for Corporate securities-for new issues and old securities,2.Market for Government securities,3.Market for Debt instruments-debentures and bonds of private corporate sector, bond of public sector undertakings, public financial institutions, etc.4. Mutual fund schemes and UTI schemes, etc.So far as the individual investors are concerned, the market for Corporate securitiesand Mutual funds schemes are more relevant. They satisfy requirements of investors namely,appreciation of capital, safety, liquidity and hedge against inflation. Importance of Capital Market: Absence of a capital market acts as a hindrance to the capital formation and economicgrowth. Resources would remain idle if finances were not funneled through capital market.The importance of capital market can be briefly summarized as The capital market serves as an important source for the productive use of the economyssavings. It mobilizes the savings of the people for further investment and thus avoidstheir wastage in unproductive uses. It provides incentives to savings and facilitates capital formation by offering suitablerates of interest as per the price of capital. It provides an avenue for investors, particularly the household sector to invest if financialassets which are more productive then physical assets. It facilitates increase in production and productivity in the economy and thus enhancesthe economic welfare of the society. Thus, it facilitates the movement of stream of command over capital to the point of highest yield towards those who can apply them productively and profitably to enhance the national income in the aggregate.

 The operations of different institutions in the capital market induce economic growth.They give qualitative and quantitative directions to the flow of funds and bring aboutrational allocation of scarce resources. A healthy capital market consisting of expert intermediaries promotes stability in valuesof securities representing capital funds. Capital Market Instruments: The main capital market instruments one can invest in and include in his portfolio are:1.Equity Shares,2.Preference Shares,3.Debentures (convertible and nonconvertible),4.Secured Premium Notes,5.Zero Coupon Bonds, &6.Discount Bonds and Deep Discount Bonds.7.Mutual Funds. 4.2 STOCK EXCHANGE: A stock exchange or share market is a corporation or mutual organizationwhich provides facilities for stock brokers and traders, to trade company stocks andother securities. Stock exchanges also provide facilities for the issue and redemptionof securities, as well as, other financial instruments and capital events including the payment of income and dividends.The securities traded on a stock exchange include: shares issued bycompanies, unit trusts and other pooled investment products and bonds. To be able totrade a security on a certain stock exchange, it has to be listed there. Usually there is alocal & central location at least for recordkeeping, but trade is less and less linked tosuch a physical place, as modern markets are electronic networks, which gives themadvantages of speed and cost of transactions.Trade on an exchange is by members only & stock & share holders. The initialoffering of stocks and bonds to investors is by definition done in the primary marketand subsequent trading is done in the secondary market.A stock exchange is often the most important component of a stock market.Supply and demand in stock markets is driven by various factors which, as in all freemarkets, affect the price of stocks (see stock valuation).There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is

said to be

off exchange or over-the-counter. This is the usual way that bonds are traded.Increasingly, stock exchanges are part of a global market for securities Objectives:

Create a single integrated national level solution with access to multiple markets for providing high cost-effective service to millions of investors across the country.

Create a liquid and vibrant national level market for all listed companies in general andsmall capital companies in particular.

Optimally utilize the existing infrastructure and other resources of Participating Stock Exchanges, which are under-utilized now.

Provide a level playing field to small Traders and Dealers by offering an opportunity to participate in a national market having investment-oriented business.

Reduce transaction cost.

Provide clearing and settlement facilities to the Traders and Dealers across the Countryat their doorstep in a decentralized mode. Spread demat trading across the Country. The Role Of Stock Exchanges Stock exchanges have multiple roles in the economy, this may include the following:

Raising capital for businesses: The Stock Exchange provides companies with the facility to raise capital for expansionthrough selling shares to the investing public. Mobilizing savings for investment:

When people draw their savings and invest in shares, it leads to a more rationalallocation of resources because funds, which could have been consumed, or kept in idledeposits with banks, are mobilized and redirected to promote business activity with benefitsfor several economic sectors such as agriculture, commerce and industry, resulting in astronger economic growth and higher productivity levels. Facilitating company growth: Companies view acquisitions as an opportunity to expand product lines, increasedistribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market isone of the simplest and most common ways for a company to grow by acquisition or fusion. Redistribution of wealth: Stocks exchanges do not exist to redistribute wealth although casual and professionalstock investors through stock price increases and dividends get a chance to share in thewealth of profitable businesses. Corporate governance:

By having a wide and varied scope of owners, companies generally tend to improve ontheir management standards and efficiency in order to satisfy the demands of theseshareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government.Consequently, it is alleged that public companies (companies that are owned byshareholder s who are members of the general public and trade shares on public exchanges)tend to have better management records than privately-held companies (those companieswhere shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, some well-documented cases are known where it is alleged that there has been considerable slippage incorporate governance on the part of some public companies (e.g. Enron Corporation, MCIWorldCom, Pets.com, Webvan, or Parmalat). Creating investment opportunities for small investors: As opposed to other businesses that require huge capital outlay, investing in shares isopen to both the large and small stock investors because a person buys the number of sharesthey can afford. Therefore the Stock Exchange provides the opportunity for small investors toown shares of the same companies as large investors, and to enjoy similar rates of return. Barometer of the economy:

At the stock exchange, share prices rise and fall depending, largely, on market forces.Share prices tend to rise or remain stable when companies and the economy in general showsigns of stability and growth.

An economic recession, depression, or financial crisis couldeventually lead to a stock market crash. Therefore the movement of share prices and ingeneral of the stock indexes can be an indicator of the general trend in the economy. Stock Market: Indian stock market marks to be one of the oldest stock market in Asia. Stock Market,which is a market where the trading of company stock, both listed company securities andunlisted takes place. It is different from stock exchange because it also put all stock indicesand stock index movements on the same platform. For example, we use the term, "the stock market was up today" or "the stock market bubble." The National Stock Exchange: The National Stock Exchange of India Limited has genesis in the report of the HighPowered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access toinvestors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of Indiaand was incorporated in November 1992 as a taxpaying company unlike other stock exchanges in the country. On its recognition as a stock exchange und er the SecuritiesContracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in theWhole sale Debt Market (WDM) segment in June 1994. The Capital Market (Equities)segment commenced operations in November 1994 and operations in Derivatives segmentcommenced in June 2000. Mission of NSE : NSE's mission is setting the agenda for change in the securities markets in India. The NSEwas set-up with the main objectives of:

establishing a nation-wide trading facility for equities, debt instruments and hybrids,

ensuring equal access to investors all over the country through an appropriatecommunication network,

providing a fair, efficient and transparent securities market to investors using electronictrading systems,

enabling shorter settlement cycles and book entry settlements systems, and

meeting the current international standards of securities markets. Promoters : NSE has been promoted by leading financial institutions, banks, insurance companies andother financial intermediaries:

Industrial Development Bank of India Limited

Industrial Finance Corporation of India Limited

Life Insurance Corporation of India

State Bank of India

ICICI Bank Limited

IL & FS Trust Company Limited

Stock Holding Corporation of India Limited

SBI Capital Markets Limited

Bank of Baroda

Canara Bank

General Insurance Corporation of India

National Insurance Company Limited

The New India Assurance Company Limited

The Oriental Insurance Company Limited

United India Insurance Company Limited

Punjab National Bank

Oriental Bank of Commerce

Corporation Bank

Indian Bank

Union Bank of India

Infrastructure Development Finance Company Ltd. Corporate Structure

: NSE is one of the first de-mutualized stock exchanges in the country, where theownership and management of the Exchange is completely divorced from the right to trade onit. Though the impetus for its establishment came from policy makers in the country, it has

been set up as a public limited company, owned by the leading institutional investors in thecountry.From day one, NSE has adopted the form of a demutualised exchange - theownership, management and trading is in the hands of three different sets of people. NSE isowned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries and is managed by professionals, who do not directly or indirectlytrade on the Exchange. This has completely eliminated any conflict of interest and helped NSE in aggressively pursuing policies and practices within a public interest framework.The NSE model however, does not preclude, but in fact accommodates involvement,support and contribution of trading members in a variety of ways. Its Board comprises of senior executives from promoter institutions, eminent professionals in the fields of law,economics, accountancy, finance, taxation, etc, public representatives, nominees of SEBI andone full time executive of the Exchange. While the Board deals with broad policy issues,decisions relating to market operations are delegated by the Board to various committeesconstituted by it. Such committees include representatives from trading members, professio nals, the public and the management. The day-to-day management of the Exchangeis delegated to the Managing. Logo of NSE:

The logo of the NSE symbolizes a single nationwide securities trading facilityensuring equal and fair access to investors, trading members and issuers all over the country.The initials of the Exchange viz., N, S and E have been etched on the logo and are distinctly visible. The logo symbolizes use of state of the art information technology and satelliteconnectivity to bring about the change within the securities industry. The logo symbolizesvibrancy and unleashing of creative energy to constantly bring about change throughinnovati on. Securities and Exchange Board of India (SEBI) : SEBI is a board (autonomous body) created by the Government of India in 1988 andgiven statutory form in 1992 with the SEBI Act 1992 with its head office at Mumbai. It ischaired by Mr. M. Damodaran a respected turnaround civil servant credited with turningaround large public sector companies from near death scenarios including the famous

UnitTrust of India. Below the Board, headed by the Chairman, the staff/officers of theorganization are led by Executive Directors. SEBI has three functions rolled into one body: legislative, judicial and executive. Itdrafts rules in its legislative capacity, it conducts enquiries and enforcement action in itsexecutive function and it passes rulings and orders in its judicial capacity. Though this makesit exceedingly powerful, there is an appeals process to create accountability. SEBI has had a mixed history in terms of its success as a regulator. Though it has pushed systemic reforms aggressively and successively (e.g. the quick movement towardsmaking the markets electronic and paperless), it seems to lack the legal expertise needed tosustain prosecutions/enforcement actions. It has often received flak from the appellate bodyknown as the Securities Appellate Tribunal (SAT). From the SAT, an appeal lies straight tothe Supreme Court of India Functions of SEBI: Its main functions are: 1.Registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries whomay be associated with securities markets in any manner.2.Registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such othe r intermediaries as the board may, by notification, specify in this behalf.3.Registering and regulating the working of venture capital funds and collective investmentschemes including mutual funds;4.Prohibiting fraudulent and unfair trade practices relating to securities markets;5.Promoting investors' education and training of intermediaries of securities markets;6.Prohibiting insider trading in securities;7.Regulating substantial acquisition of shares and takeover of companies;8.Calling for information from undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds and other persons associated with the securities marketand intermediaries and self- regulatory organisations in the securities market;9.Calling for information and record from any bank or any other authority or board or corporation established or constituted by or under any central, state or provincial act inrespect of any transaction in securities which is under investigation or inquiry by the board;1910.Performing such functions and exercising such powers under the provisions of 20securiti es contracts (regulation) act, 1956, as may be delegated to it by the centralgovernment;11.Levying fees or other charges for carrying out the purpose of this section;12.Conducting research for the above purposes;

13.Calling from or furnishing to any such agencies, as may be specified by the board, suchinformation as may be considered necessary by it for the efficient discharge of itsfunctions ,performing such other functions as may be prescribed. 4.3INVESTMENT ANALYSIS

INVESTMENT : Investment is the sacrifice of certain present values for the uncertain future reward Meaning: Investment of Investing is a word of many interpretations. There are basically two concepts of investments. 1. Economic Investment In the Economic sense, investment means net additions to the economys capital stock which consists of goods and services that are used in the production of other goods andservices. Investment in this sense implies the formation of new and productive capital in theform of new constructions, plant used machinery etc. Such investment generates physicalassets. 2. Financial Investment In the financial sense, investment is the commitment of a persons fund to derivefuture income in the turn of interest, dividend, premiums, pension benefits or appreciation inthe value of their capital. Purchasing of shares, debentures, post office saving certificates, insurance policies are all investments in the financial sense. Such investment generatesfinancial assets.

INVESTMENT ALTERNATIVES: BONDS MONEY MARKT INSTRUMENTS MUTUAL FUNDS SCHEMES

REAL ESTATE

PRECIOUS OBJECTS EQUITY SHARES

NON MARKETABLE FINANCIAL ASSETS

LIFE INSURANCE POLICIES