CHAPTER 1

INTRODUCTION TO CAPITAL MARKET

Capital markets are like any other markets, but differ in terms of the products traded and
their organization. Capital markets deal with the trading of securities. Capital markets
provide avenue where companies can raise funds to expand on their businesses or establish
new ones by issuing securities owned by the companies. Like businesses in the private
sector, Government issue its securities to raise funds in capital markets to build electricity
damn, construct new roads, bridges by issues.
It is an organized market mechanism for effective and efficient transfer of money
capital or financial resources from the investing class i.e.
from (individual or institutional savers) to the
entrepreneur class (individual engaged in business or
services) in the private or public sectors of the economy.

In a broader sense, According to Goldsmith “

The capital market of a modern economy has two basic
functions first the allocation of savings among users and investment; second the facilitation
of the transfer of existing assets, tangible and intangible among individual economic
units”.
Capital Market is generally understood as the market for long term funds. It provides
long term debt and equity finance for the government and the corporate sector. It is a best
performing markets in the world since last few years. It facilitates the transfer of capital
i.e. financial assets from one owner to another.

The rapid growth in Indian capital markets and the spread of “Equity culture” has
doubtlessly strained its infrastructure and regulatory resources. Nevertheless securities
market is a watchdog as SEBI plays a vital role in redressing investors’ grievances.
Capital Markets are mainly leaded by two major Indian exchanges BSE and NSE which
16th & 17th rank among all the exchanges around the world in terms of market
capitalization. In terms of risk and returns the Indian those in industrialized nations. Due to
such strong stock exchanges there is a strong economic growth and a large inflow of
foreign institutional investors (FIIs) was developed truly great explosive growth rising
over 3 times during last 5 years.

History of Capital Market in India

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. The earliest records
of security dealings in India are meager and obscure. The East India Company was the dominant institution in those
days and business in its loan securities used to be transacted towards the close of the eighteenth century.

By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the
trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during
1840 and 1850.The 1850's witnessed a rapid development of commercial enterprise and brokerage business attracted
many men into the field and by 1860 the number of brokers increased into 60.In 1860-61 the American Civil War
broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The
number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous
slump began (for example, Bank of Bombay Share which had touched Rs. 2850 could only be sold at Rs. 87).

At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street
(now appropriately called as Dalal Street) where they would conveniently assemble and transact business. In 1887,
they formally established in Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively
known as “The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in the same street and it was
inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.

Cities in Stock Market Operations

Ahmadabad gained importance next to Bombay with respect to cotton textile industry. After 1880, many mills
originated from Ahmadabad and rapidly forged ahead. As new mills were floated, the need for a Stock Exchange at
Ahmadabad was realized and in 1894 the brokers formed "The Ahmadabad Share and Stock Brokers' Association".

What the cotton textile industry was to Bombay and Ahmadabad, the jute industry was to Calcutta. Also tea and coal
industries were the other major industrial groups in Calcutta. After the Share Mania in 1861-65, in the 1870's there
was a sharp boom in jute shares, which was followed by a boom in tea shares in the 1880's and 1890's; and a coal
boom between 1904 and 1908. On June 1908, some leading brokers formed "The Calcutta Stock Exchange
Association".

In the beginning of the twentieth century, the industrial revolution was on the way in India with the Swedishi
Movement; and with the inauguration of the Tata Iron and Steel Company Limited in 1907, an important stage in
industrial advancement under Indian enterprise was reached.

Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies generally enjoyed phenomenal
prosperity, due to the First World War.

In 1920, the then demure city of Madras had the maiden thrill of a stock exchange functioning in its midst, under the
name and style of "The Madras Stock Exchange" with 100 members. However, when boom faded, the number of
members stood reduced from 100 to 3, by 1923, and so it went out of existence.

In 1935, the stock market activity improved, especially in South India where there was a rapid increase in the number
of textile mills and many plantation companies were floated. In 1937, a stock exchange was once again organized in
Madras - Madras Stock Exchange Association (Pvt) Limited. (In 1957 the name was changed to Madras Stock
Exchange Limited).

Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with the Punjab Stock Exchange
Limited, which was incorporated in 1936.

Indian Stock Exchanges - An Umbrella Growth

The Second World War broke out in 1939. It gave a sharp boom which was followed by a slump. But, in 1943, the
situation changed radically, when India was fully mobilized as a supply base.

On account of the restrictive controls on cotton, bullion, seeds and other commodities, those dealing in them found
in the stock market as the only outlet for their activities. They were anxious to join the trade and their number was
swelled by numerous others. Many new associations were constituted for the purpose and Stock Exchanges in all
parts of the country were floated.

The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited (1940) and Hyderabad Stock
Exchange Limited (1944) were incorporated.

In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited and the Delhi Stocks and Shares
Exchange Limited - were floated and later in June 1947, amalgamated into the Delhi Stock Exchange Association
Limited.

Post-independence Scenario
Most of the exchanges suffered almost a total eclipse during depression. Lahore Exchange was closed during partition
of the country and later migrated to Delhi and merged with Delhi Stock Exchange.

Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963.

Most of the other exchanges languished till 1957 when they applied to the Central Government for recognition under
the Securities Contracts (Regulation) Act, 1956. Only Bombay, Calcutta, Madras, Ahmadabad, Delhi, Hyderabad
and Indore, the well established exchanges, were recognized under the Act. Some of the members of the other
Associations were required to be admitted by the recognized stock exchanges on a confessionals basis, but acting on
the principle of unitary control, all these pseudo stock exchanges were refused recognition by the Government of
India and they thereupon ceased to function.

Thus, during early sixties there were eight recognized stock exchanges in India (mentioned above). The number
virtually remained unchanged, for nearly two decades. During eighties, however, many stock exchanges were
established: Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982),
and Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange Association Limited (1983), Gauhati Stock
Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadh Stock Exchange
Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange Association
Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at
Baroda, 1990) and recently established exchanges - Coimbatore and Meerut. Thus, at present, there are totally twenty
one recognized stock exchanges in India excluding the Over the Counter Exchange of India Limited (OTCEI) and
the National Stock Exchange of India Limited (NSEIL).

CHAPTER 2
 METHODOLOGY

Research methodology is a way to systemaztically solve the research problem. Research methodology constitutes of
research methods, selection criterion of research methods, used in context of research study and explanation of using
of a particular method or technique so that research results are capable of being evaluated either by researcher himself
or by others. Why a research study has been undertaken. How the research problem has been formulated, why data
have been collected and what particular technique of analyzing data has been used and a best of similar other question
are usually answered when we talk of research methodology concerning a research problem of study. The main aim
of research is to find out the truth which is hidden and which has not been discovered as yet.

Objectives of study:-
The objectives of the study are as follows:

 To review role of capital market in India

 To analyze capital market of India
 To summarize the study and offer suggestions wherever found necessary
Research Design:-
This is case study role of capital market in india and in order to make research fruitful
descriptive research method has been used. It entails objectives of research, analysis and
interpretation of collected data, plan of the study and limitations.

Data collection method:-

The study is fully depend upon secondary data. It is collected through different websites,
newspapers.

Analysis and Interpretation:-

The collected data from various sources have been analyzed with suitable tools and
techniques of statistics and results have also been shown with the help of different graphs
and charts.

Plan of the study:-

 The study has been divided into six chapters. These are

1. Introduction
2. Methodology
3. Role of capital market in India
4. Structure of Indian capital market
5. REGULATORS
6. Analysis and interpretation
7. Summary and suggestions
8. Bibliography

Research limitations/Implications:-

 The primary limitation of this study is based on quality and originality of secondary
data taken via the official website of State Bank Of India and other websites.
 The duration of the project work was short enough to allow the full exposure.
 The process of lead identification to the final completion of the documentation
requires more than just two months of time.
 Thus the project was limited to either negotiation of the deals or carrying on with an
existing lead.
 Some of the persons were not so responsive.
 Possibility of error in data collection because many of investors may have not given actual
answers of my questionnaire
 CHAPTER 3
ROLE OF CAPITEL MARKET IN INDIA

India’s growth story has important implications for the capital market, which has grown sharply
with respect to several parameters — amounts raised number of stock exchanges and other
intermediaries, listed stocks, market capitalization, trading volumes and turnover, market
instruments, investor population, issuer and intermediary profiles.

The capital market consists primarily of the debt and equity markets. Historically, it contributed
significantly to mobilizing funds to meet public and private companies’ financing requirements.
The introduction of exchange-traded derivative instruments such as options and futures has
enabled investors to better hedge their positions and reduce risks.

India’s debt and equity markets rose from 75 per cent in 1995 to 130 per cent of GDP in 2005.
But the growth relative to the US, Malaysia and South Korea remains low and largely skewed,
indicating immense latent potential. India’s debt markets comprise government bonds and the
corporate bond market (comprising PSUs, corporates, financial institutions and banks).

India compares well with other emerging economies in terms of sophisticated market design of
equity spot and derivatives market, widespread retail participation and resilient liquidity.

SEBI’s measures such as submission of quarterly compliance reports, and company valuation on
the lines of the Sarbanes-Oxley Act have enhanced corporate governance. But enforcement
continues to be a problem because of limited trained staff and companies not being subjected to
substantial fines or legal sanctions.

Given the booming economy, large skilled labour force, reliable business community, continued
reforms and greater global integration vindicated by the investment-grade ratings of Moody’
and Fitch, the net cumulative portfolio flows from 2003-06 (bonds and equities) amounted to
$35 billion.

The number of foreign institutional investors registered with SEBI rose from none in 1992-93 to
528 in 2000-01, to about 1,000 in 2006-07.

India’s stock market rose five-fold since mid-2003 and outperformed world indices with returns
far outstripping other emerging markets, such as Mexico (52 per cent), Brazil (43 per cent) or
GCC economies such as Kuwait (26 per cent) in FY-06.

In 2006, Indian companies raised more than $6 billion on the BSE, NSE and other regional stock
exchanges. Buoyed by internal economic factors and foreign capital flows, Indian markets are
globally competitive, even in terms of pricing, efficiency and liquidity.

US sub prime crisis:

The financial crisis facing the Wall Street is the worst since the Great Depression and will have a
major impact on the US and global economy. The ongoing global financial crisis will have a
‘domino’ effect and spill over all aspects of the economy. Due to the Western world’s messianic
faith in the market forces and deregulation, the market friendly governments have no choice but
to step in.

The top five investment banks in the US have ceased to exist in their previous forms. Bears
Stearns was taken over some time ago. Fannie Mae and Freddie Mac are nationalised to prevent
their collapse. Fannie and Freddie together underwrite half of the home loans in the United
States, and the sum involved is of $ 3 trillion—about double the entire annual output of the
British economy. This is the biggest rescue operation since the credit crunch began. Lehman
Brothers, an investment bank with a 158 year-old history, was declared bankrupt; Merrill Lynch,
another Wall Street icon, chose to pre-empt a similar fate by deciding to sell to the Bank of
America; and Goldman Sachs and Morgan Stanley have decided to transform themselves into
ordinary deposit banks. AIG, the world’s largest insurance company, has survived through the
injection of funds worth $ 85 billion from the US Government.
The question arises: why has this happened?

Besides the cyclical crisis of capitalism, there are some recent factors which have contributed
towards this crisis. Under the so-called “innovative” approach, financial institutions
systematically underestimated risks during the boom in property prices, which makes such boom
more prolonged. This relates to the shortsightedness of speculators and their unrestrained greed,
and they, during the asset price boom, believed that it would stay forever. This resulted in
keeping the risk aspects at a minimum and thus resorting to more and more risk taking financial
activities. Loans were made on the basis of collateral whose value was inflated by a bubble. And
the collateral is now worth less than the loan. Credit was available up to full value of the
property which was assessed at inflated market prices. Credits were given in anticipation that
rising property prices will continue. Under looming recession and uncertainty, to pay back their
mortgage many of those who engaged in such an exercise are forced to sell their houses, at a
time when the banks are reluctant to lend and buyers would like to wait in the hope that property
prices will further come down. All these factors would lead to a further decline in property
prices.

Effect of the subprime crisis on India:

Globalization has ensured that the Indian economy and financial markets cannot stay insulated
from the present financial crisis in the developed economies.

In the light of the fact that the Indian economy is linked to global markets through a full float in
current account (trade and services) and partial float in capital account (debt and equity), we need
to analyze the impact based on three critical factors: Availability of global liquidity; demand for
India investment and cost thereof and decreased consumer demand affecting Indian exports.

The concerted intervention by central banks of developed countries in injecting liquidity is

expected to reduce the unwinding of India investments held by foreign entities, but fresh
investment flows into India are in doubt.

The impact of this will be three-fold: The element of GDP growth driven by off-shore flows (along
with skills and technology) will be diluted; correction in the asset prices which were hitherto
pushed by foreign investors and demand for domestic liquidity putting pressure on interest rates

While the global financial system takes time to “nurse its wounds” leading to low demand for
investments in emerging markets, the impact will be on the cost and related risk premium. The
impact will be felt both in the trade and capital account.
Indian companies which had access to cheap foreign currency funds for financing their import
and export will be the worst hit. Also, foreign funds (through debt and equity) will be available
at huge premium and would be limited to blue-chip companies.

The impact of which, again, will be three-fold: Reduced capacity expansion leading to supply
side pressure; increased interest expenses to affect corporate profitability and increased demand
for domestic liquidity putting pressure on the interest rates.

Consumer demand in developed economies is certain to be hurt by the present crisis, leading to
lower demand for Indian goods and services, thus affecting the Indian exports.

The impact of which, once again, will be three-fold: Export-oriented units will be the worst hit
impacting employment; reduced exports will further widen the trade gap to put pressure on rupee
exchange rate and intervention leading to sucking out liquidity and pressure on interest rates.

The impact on the financial markets will be the following: Equity market will continue to
remain in bearish mood with reduced off-shore flows, limited domestic appetite due to liquidity
pressure and pressure on corporate earnings; while the inflation would stay under control,
increased demand for domestic liquidity will push interest rates higher and we are likely to
witness gradual rupee depreciation and depleted currency reserves. Overall, while RBI would
inject liquidity through CRR/SLR cuts, maintaining growth beyond 7% will be a struggle.

The banking sector will have the least impact as high interest rates, increased demand for rupee
loans and reduced statutory reserves will lead to improved NIM while, on the other hand, other
income from cross-border business flows and distribution of investment products will take a hit.

Banks with capabilities to generate low cost CASA and zero cost float funds will gain the most
as revenues from financial intermediation will drive the banks’ profitability.

Given the dependence on foreign funds and off-shore consumer demand for the India growth
story, India cannot wish away from the negative impact of the present global financial crisis but
should quickly focus on alternative remedial measures to limit damage and look in-wards to
sustain growth!

Role of capital market during the present crisis:

In addition to resource allocation, capital markets also provided a medium for risk management
by allowing the diversification of risk in the economy. The well-functioning capital market
improved information quality as it played a major role in encouraging the adoption of stronger
corporate governance principles, thus supporting a trading environment, which is founded on
integrity.

liquid markets make it possible to obtain financing for capital-intensive projects with long
gestation periods..

For a long time, the Indian market was considered too small to warrant much attention. However,
this view has changed rapidly as vast amounts of international investment have poured into our
markets over the last decade. The Indian market is no longer viewed as a static universe but as a
constantly evolving market providing attractive opportunities to the global investing community.

Now during the present financial crisis, we saw how capital market stood still as the symbol of
better risk management practices adopted by the Indians. Though we observed a huge fall in the
 sensex and other stock market indicators but that was all due to low confidence among the
investors. Because balance sheet of most of the Indian companies listed in the sensex were
reflecting profit even then people kept on withdrawing money.

While there was a panic in the capital market due to withdrawal by the FIIs, we saw Indian
institutional investors like insurance and mutual funds coming for the rescue under SEBI
guidelines so that the confidence of the investors doesn’t go low.

SEBI also came up with various norms including more liberal policies regarding participatory
notes, restricting the exit from close ended mutual funds etc. to boost the investment.

While talking about currency crisis, the rupee kept on depreciating against the dollar mainly due to the withdrawals
by FIIs. So , the capital market tried to attract FIIs once again. SEBI came up with many revolutionary reforms to
attract the foreign investors so that the depreciation of rupee could be put to hault

SIGNIFICANCE, ROLE OR FUNCTION OF CAPITAL MARKET

Capital Market plays a significant role in the national economy. A developed,
dynamic and vibrant capital market can immensely contribute for speedy economic growth
and development.
Let us get acquainted with the important functions and role of the capital market:
1. Provide Liquidity for Financial Instrument
Capital markets provide liquidity to the Financial Instruments which are traded
in the Secondary Market. It depends on the
Mobilization of savings
Capital market is an important source for mobilizing savings from the
economy. It mobilizes funds people for further investments in the productive channels of
an economy. In that sense it activates the ideal monetary resources and puts them in proper
investments.

2. 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 long period of time. It
provides suitable interest rate return also to investors. Instrument such as bonds, mutual
Funds, insurance policies definitely provide a diverse investment avenue for the public.

3. Proper regulation of Funds

Capital market not only helps in fund mobilization, but it also help in proper
allocation of their resources. It can have regulation over the resources so that it can direct
funds in a qualitative manner.

4. Continuous availability of Funds

Capital market is the 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 sellers can easily buy and sell securities as they are
continuously available.

5. Raise capital for Industry

Capital market helps to raise capital for the industrial sector by investing in
various securities such as shares, debentures which can easily provide finance to industries.

6. 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 savings it would
generate investment in various segments such as agriculture, industry etc. this helps in
capital Formation.

7. Speed up Economic growth and Development

Capital market provides products and productivity in the national economy. As
it makes funds available for a long period of time, the financial requirements of business
houses are met by the capital market. Thus increase in production and productivity
generates employment and development in infrastructure.
ROLE OF CAPITAL MARKET IN INDIA’S INDUSTRIAL GROWTH
1. Mobilization of Savings and Acceleration of Capital Formation.
In developing countries like India plagued by paucity of resources and increasing
demand for investments by industrial organizations and governments, the importance
of the capital market is self evident.
2. Promotion of Industrial Growth.
The capital market is a central market through which resources are transferred to the
industrial sector of the economy. The existence of such an institution encourages
people to invest in productive channels rather than in the unproductive sectors like
real estate, bullion etc. Thus it stimulates industrial growth and economic
development of the country by mobilizing funds for investment in the corporate
securities.
3. Raising Long-Term Capital.
The existence of a stock exchange enables companies to raise permanent capital. The
investors cannot commit their funds for a permanent period but companies require
funds permanently. The stock exchange resolves this clash of interests by offering an
opportunity to investors to buy or sell their securities while permanent capital with
the company remains unaffected.
4. Ready and Continuous Market.
The stock exchange provides a central convenient place where buyers and sellers can
easily purchase and sell securities. The element of easy marketability makes
investment in securities more liquid as compared to other assets.
5. Proper Channelization of Funds.
An efficient capital market not only creates liquidity through its pricing mechanism
but also functions to allocate resources to the most efficient industries. The prevailing
market price of a security and relative yield are the guiding factors for the people to
channelize their funds in a particular company. This ensures effective utilization of
funds in the public interest.
6. Provision of a Variety of Services.
 The financial institutions functioning in the capital market provide a variety of
services, the more important ones being the following:
(I) Grant of long-term and medium-term loans to entrepreneurs to enable them to
establish, expand or modernize business units
(II) Provision of underwriting facilities;
(III) Assistance in the promotion of companies (this function is done by the
development banks like the idbi);
(IV) Participation in equity capital;
(V) Expert advice on management of investment in industrial securities.

FACTORS CONTRIBUTING TO THE GROWTH OF CAPITAL MARKET IN

INDIA
1. Establishment of development banks and industrial financing institutions.
With a view to providing long-term funds to industry, the government set up the
Industrial Finance Corporation of India (IFCI) in 1948, i.e., soon after Independence.
This was followed by the setting up of a number of other development banks and
financial institutions like the Industrial Credit and Investment Corporation of India
(ICICI) in 1955, Industrial Development Bank of India (lOBI) in 1964, Industrial
Reconstruction Corporation of India (IRCI) in 1971, various State Financial
Corporation’s (SFCs) at the State level, Unit Trust of India (UTI) in 1964, State
Industrial Development Corporations, Life Insurance Corporations of India etc. In
addition, 14 major commercial banks were nationalized in 1969.
2. Growing public confidence.
The early post-Liberalizations’ phase witnessed increasing interest in the stock
markets. The small investor who earlier shied away from the securities market and
trusted the traditional modes of investment (deposits in commercial banks and post
offices) showed marked preference in favour of shares and debentures. As a result,
public issues of most of the good companies were over-subscribed many times.
3. Increasing awareness of investment opportunities.
 The last few years have witnessed increasing awareness of investment
opportunities among the general public. Business newspapers and financial journals,
(The Economic Times, The Financial Express, Business Line, Business Standard,
Business India, Business Today, Business World, Money Outlook etc.) have made
the people increasingly aware of new long-term investment opportunities in the
securities market.
4. Setting up of SEBI.
The Securities and Exchange Board of India (SEBI) was set up in 1988 and was
given statutory recognition in 1992. Among other things, the Board has been
mandated to create an environment which would facilitate mobilization of adequate
resources through the securities market and its efficient allocation.
5. Credit rating agencies.
There are three credit rating agencies operating in India at present CRISIL, ICRA
and CARE. CRISIL (the Credit Rating Information Services of India Limited) was
set up in 1988, ICRA Ltd. (the Investment Information and Credit Rating Agency of
India Limited) was set up in 1991 and CARE (Credit Analysis and Research Limited)
was set up in 1993.
 CHAPTER 3
Structure of Indian Capital Market
Broadly speaking the capital market is classified in to two categories. They are the Primary
market (New Issues Market) and the Secondary market (Old (Existing) Issues Market). This
classification is done on the basis of the nature of the instrument brought in the market.
However on the basis of the types of institutions involved in capital market, it can be
classified into various categories such as the Government Securities market or Gilt-edged
market, Industrial Securities market, Development Financial Institutions (DFIs) and
financial intermediaries. All of these components have specific features to mention. The
structure of the Indian capital market has its distinct features. These different segments of
the capital market help to develop the institution of capital market in many dimensions. The

primary
market
helps to
raise
fresh
capital
in the
market.
In the

secondary market, the buying and selling (trading) of capital market instruments takes place.
The following chart will help us in understanding the organizational structure of the Indian
Capital market.

1) Government Securities Market :

This is also known as the Gilt-edged market. This refers to the market for government
and semi-government securities backed by the Reserve Bank of India (RBI). There is no
speculation in securities. Huge volume of transaction can take place as because it is obligated
under Banking Regulation Act 1949.

2) Industrial Securities Market

New securities Issued Securities

issued Trade

This is a market for industrial securities i.e. market for shares and
debentures of the existing and new corporate firms. Buying and selling of such instruments
take place in this market. This market is further classified into two types such as the New
Issues Market (Primary) and the Old (Existing) Issues Market (secondary).
In primary market fresh capital is raised by companies by issuing new shares, bonds, units
of mutual funds and debentures. However in the secondary market already existing that is
old shares and debentures are traded.
This trading takes place through the registered stock exchanges. In India we have three
prominent stock exchanges. They are the Bombay Stock Exchange (BSE), the National
Stock Exchange (NSE) and Over the Counter Exchange of India (OTCEI)

 Primary market
Primary market provides an opportunity to the issuers of securities, both Government and
corporations, to raise funds through issue of securities. The securities may be issued in the
domestic or international markets, at face value, or at a discount (i.e. below their face value)
or at a premium (i.e. above their face value).
 Secondary market
Secondary market refers to a market, where securities that are already issued by the
Government or corporations, are traded between buyers and sellers of those securities. The
securities traded in the secondary market could be in the nature of equity, debt, derivatives
etc.
 Development Financial Institutions (DFIs) :
This is yet another important segment of Indian capital market. This
Comprises various financial institutions. These can be special purpose institutions like
IFCI, ICICI, SFCs, IDBI, IIBI, UTI, etc. These financial institutions provide long term
finance for those purposes for which they are set up.

ICICI
BANK
SFCI IFCI
BANK
DEVELOPM
ENT BANKS

EXIM
NABARD
BANK
SDBI
BANK
  Financial Intermediaries
The fourth important segment of the Indian capital market is the financial intermediaries.
An institution that acts as the middleman between investors and firms raising funds,
often referred to as financial institutions. Through the process of financial
intermediation, certain assets or liabilities are transformed into different assets or
liabilities. As such, financial intermediaries channel funds from people who have extra
money (savers) to those who do not have enough money to carry out a desired activity
(borrowers).
This comprises various merchant banking institutions, mutual funds, leasing finance
companies, venture capital companies and other financial institutions.
These are important institutions and segments in the Indian capital market.

CAPITAL MARKET INSTRUMENTS.

1) Equity (instrument of ownership)
 Equity shares are instruments issued by companies to raise capital and it represents the
title to the ownership of a company. You become an owner of a company by subscribing to
its equity capital (whereby you will be allotted shares) or by buying its shares from its
existing owner(s).
As a shareholder, you bear the entrepreneurial risk of the business venture and are entitled
to benefits of ownership like share in the distributed profit (dividend) etc. The returns earned
in equity depend upon the profits made by the company. Company’s future growth etc.

2. Debt (loan instruments)

A. Corporate debt
I) Debentures are instrument issued by companies to raise debt capital. As
An investor, you lend you money to the company, in return for its promise
To pay you interest at a fixed rate (usually payable half yearly on specific
Dates) and to repay the loan amount on a specified maturity date say after
5/7/10 years (redemption).
Normally specific asset(s) of the company are held (secured) in favour of
Debenture holders. This can be liquidated, if the company is unable to pay
The interest or principal amount. Unlike loans, you can buy or sell these
Instruments in the market.

Types of debentures that are offered are as follows:

 Non convertible debentures (NCD) – Total amount is redeemed by the
Issuer
 Partially convertible debentures (PCD) – Part of it is redeemed and the
Remaining is converted to equity shares as per the specified terms
 Fully convertible debentures (FCD) – Whole value is converted into Equity at
a specified price

II) Bonds are broadly similar to debentures. They are issued by companies,
Financial institutions, municipalities or government companies and are
Normally not secured by any assets of the company (unsecured).

Types of bonds
Regular Income Bonds provide a stable source of income at regular, predetermined
intervals
-Tax-Saving Bonds offer tax exemption up to a specified amount of
investment, depending on the scheme and the Government notification.
Examples are:
-Infrastructure Bonds under Section 88 of the Income Tax Act, 1961 • NABARD/
NHAI/REC Bonds under Section 54EC of the Income Tax
Act, 1961
• RBI Tax Relief Bonds

B. Government debt:
• Government securities (G-Secs) are instruments issued by Government
of India to raise money. G Secs pays interest at fixed rate on specific
dates on half-yearly basis. It is available in wide range of maturity, from
short dated (one year) to long dated (up to thirty years). Since it is
Sovereign borrowing, it is free from risk of default (credit risk). You can
Subscribe to these bonds through RBI or buy it in stock exchange.

D. Money Market instruments (loan instruments up to one year tenure)

• Treasury Bills (T-bills) are short term instruments issued by the
Government for its cash management. It is issued at discount to face
Value and has maturity ranging from 14 to 365 days. Illustratively, a T-bill
Issued at Rs. 98.50 matures to Rs. 100 in 91 days, offering an yield of
6.25% p.a.
• Commercial Papers (CPs) are short term unsecured instruments issued
By the companies for their cash management. It is issued at discount to
face value and has maturity ranging from 90 to 365 days.
• Certificate of Deposits (CDs) are short term unsecured instruments
issued by the banks for their cash management. It is issued at discount to
face value and has maturity ranging from 90 to 365 days.

3. Hybrid instruments (combination of ownership and loan instruments)

• Preferred Stock / Preference shares entitle you to receive dividend at a
fixed rate. Importantly, this dividend had to be paid to you before dividend
can be paid to equity shareholders. In the event of liquidation of the
company, your claim to the company’s surplus will be higher than that of
the equity holders, but however, below the claims of the company’s
creditors, bondholders / debenture holders.
• Cumulative Preference Shares: A type of preference shares on which
dividend accumulates if remains unpaid. All arrears of preference dividend
have to be paid out before paying dividend on equity shares.
• Cumulative Convertible Preference Shares: A type of preference
shares where the dividend payable on the same accumulates, if not paid.
After a specified date, these shares will be converted into equity capital of
the company.
• Participating Preference Shares gives you the right to participate in
profits of the company after the specified fixed dividend is paid.
Participation right is linked with the quantum of dividend paid on the equity
shares over and above a particular specified level.

4. Mutual Funds
Mutual funds collect money from many investors and invest this corpus in
equity, debt or a combination of both, in a professional and transparent
 manner. In return for your investment, you receive units of mutual funds which entitle
you to the benefit of the collective return earned by the fund, after reduction of
management fees.
Mutual funds offer different schemes to cater to the needs of the investor are
regulated by securities and Exchange board of India (SEBI)
Types of Mutual Funds
At the fundamental level, there are three types of mutual funds:
 Equity funds (stocks)
 Fixed-income funds (bonds)
 Money market funds

5. Repo / Reverse Repo

A repo agreement is the sale of a security with a commitment to repurchase the
same security as a specified price and on specified date. The difference between the two
prices is effectively the borrowing cost for the party selling the security as part of the first
leg of the transaction.
Reverse repo is purchase of security with a commitment to sell at predetermined price and
date. The difference between the two prices is effectively interest income for the party
buying the security as part of the first leg of the transaction.
A repo transaction for party would mean reverse repo for the second party. As against the
call money market where the lending is totally unsecured, the lending in the repo is backed
by a simultaneous transfer of securities.

6. DERIVATIVES
A derivative is a financial instrument, whose value depends on the values of basic underlying
variable. In the sense, derivatives is a financial instrument that offers return based on the
return of some other underlying asset, i.e the return is derived from another instrument.
Derivative products initially emerged as a hedging device against fluctuations in commodity
prices, and commodity linked derivatives remained the sole form of such products for almost
three hundred years. . It was primarily used by the farmers to protect themselves against
fluctuations in the price of their crops. From the time it was sown to the time it was ready
for harvest, farmers would face price uncertainties. Through the use of simple derivative
products, it was possible for the farmers to partially or fully transfer price risks by locking
in asset prices.
From hedging devices, derivatives have grown as major trading tool. Traders may execute
their views on various underlying by going long or short on derivatives of different types.

FINANCIAL DERIVATIVES:
Financial derivatives are financial instruments whose prices are derived from the prices of
other financial instruments. Although financial derivatives have existed for a considerable
period of time, they have become a major force in financial markets only since the early
1970s. In the class of equity derivatives, futures and options on stock indices have gained
more popularity especially among institutional investors.

TYPES OF DERIVATIVES
1) FORWARDS
A forward contract is an agreement to buy or
sell an asset on a specified date for a
specified price. One of the parties to the
contract assumes a long position and agrees
to buy the underlying asset on a certain
specified future date for a certain
specified price. The other party
assumes a short position and agrees to sell the
asset on the same date for the same price,
other contract details like delivery date,
price and quantity are negotiated
bilaterally by the parties to the contract. The forward contracts are normally traded outside
the exchange.

2) FUTURES
Futures contract is a standardized transaction taking place on the futures exchange. Futures
market was designed to solve the problems that exist in forward market. A futures contract
is an agreement between two parties, to buy or sell an asset at a certain time in the future at
a certain price, but unlike forward contracts, the futures contracts are standardized and
exchange traded To facilitate liquidity in the futures contracts, the exchange specifies certain
standard quantity and quality of the underlying instrument that can be delivered, and a
standard time for such a settlement. Futures’ exchange has a division or subsidiary called a
clearing house that performs the specific responsibilities of paying and collecting daily gains
and losses as well as guaranteeing performance of one party to other

3) OPTIONS
An option is a contract, or a provision of a contract, that gives one party (the option holder)
the right, but not the obligation, to perform a specified transaction with another party (the
option issuer or option writer) according to the specified terms. The owner of a property
might sell another party an option to purchase the property any time during the next three
months at a specified price. For every buyer of an option there must be a seller.
The seller is often referred to as the writer. As with futures, options are brought into
existence by being traded, if none is traded, none exists; conversely, there is no limit to the
number of option contracts that can be in existence at any time. As with futures, the process
of closing out options positions will cause contracts to cease to exist, diminishing the total
number.
Thus an option is the right to buy or sell a specified amount of a financial instrument at a
pre-arranged price on or before a particular date.
4) SWAPS:Swaps are private agreement between two parties to exchange cash flows in the
future according to a pre-arranged formula.
They can be regarded as portfolio of forward
contracts. The two commonly used Swaps are
i) Interest Rate Swaps: - A interest rate swap
entails swapping only the interest related
cash flows between the parties in the same
currency.

ii) Currency Swaps: - A currency swap is a

foreign exchange agreement between two parties to exchange a given amount of one
currency for another and after a specified period of time, to give back the original amount
swapped.
 CHAPTER 5
REGULATORS

1. Why does Securities Market need Regulators?

The absence of conditions of perfect competition in the securities market makes the role of the Regulator
extremely important. The regulator ensures that the market participants behave in a desired manner so
that securities market continues to be a major source of finance for corporate and government and the
interest of investors are protected.

2. Regulators of Stock Market

The responsibility for regulating the securities market is shared by

 Department of Economic Affairs (DEA),

 Department of Company Affairs (DCA),

 Reserve Bank of India (RBI) and

 Securities and Exchange Board of India (SEBI).

3. SEBI and its role

The Securities and Exchange Board of India (SEBI) is the regulatory authority in

India established under Section 3 of SEBI Act, 1992. SEBI Act, 1992 provides for establishment of
Securities and Exchange Board of India (SEBI) with statutory powers for (a) protecting the interests of
investors in securities (b) promoting the development of the securities market and (c) regulating the
securities market. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer
of securities, in addition to all intermediaries and persons associated with securities market. SEBI has
been obligated to perform the aforesaid functions by such measures as it thinks fit. In particular, it has
powers for:

 § Regulating the business in stock exchanges and any other securities markets
 § Registering and regulating the working of stock brokers, sub–brokers etc.
 § Promoting and regulating self-regulatory organizations
 § Prohibiting fraudulent and unfair trade practices
 § Calling for information from, undertaking inspection, conducting inquiries and audits of the stock
exchanges, intermediaries, self –regulatory organizations, mutual funds and other persons
associated with the securities market.

4. ACTS governing Securities Market

 Securities Contracts (Regulation) Act, 1956

 Securities Contracts (Regulation) Rules, 1957

 Securities and Exchange Board of India Act, 1992

 SEBI (Stock Brokers & Sub-Brokers) Rules, 1992

 SEBI (Stock Brokers & Sub-Brokers) Regulations, 1992

 SEBI (Prohibition of Insider Trading) Regulations, 1992

 SEBI (Prohibition if Fraudulent and unfair Trade Practices relating to Securities

Markets) Regulations, 1995

 The Depositories Act, 1996

 Indian Contract Act, 1872

 The Companies Act, 1956

 Public Debt Act, 1944

 Income Tax Act, 1961

ANALYSIS AND INTERPRETATION OF DATA
 Conclusion
Running a successful Mutual Fund requires complete understanding of the
peculiarities of the Indian Stock Market and also the psyche of the small investors. This
study has made an attempt to understand the financial behavior of Mutual Fund investors
in connection with the preferences of Brand (AMC), Products, Channels etc. I observed that
many of people have fear of Mutual Fund. They think their money will not be secure
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BIBLIOGRAPHY

SEARCH ENGINES:
• GOOGLE
• WIKIPEDIA

SITES:
 www.investopedia.com
 www.economictimes.com
 • www.sebi.gov.in
• www.rbi.org.in
• www.bseindia.com

BOOKS:
• INDIAN FINANCIAL SYSTEM – BHARTI.V.PATHAK
• MONETARY ECONOMICS: INSTITUTIONS, S.B.GUPTA,
• THEORY AND POLICY
• CAPITAL MARKET R.H. PATIL
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in Mutual Fund. They need the knowledge of Mutual Fund and its related terms. Many of people
do not have invested in mutual fund due to lack of awareness although they have money to
invest. As the awareness and income is growing the number of mutual fund investors are also
growing.
 “Brand” plays important role for the investment. People invest in those Companies
where they have faith or they are well known with them. There are many AMCs in Punjab
but only some are performing well due to Brand awareness. Some AMCs are not performing
well although some of the schemes of them are giving good return because of not
awareness about Brand.
 Distribution channels are also important for the investment in mutual fund.
Financial Advisors are the most preferred channel for the investment in mutual fund. They
can change investors’ mind from one investment option to others. Many of investors
directly invest their money through AMC because they do not have to pay entry load. Only
those people invest directly who know well about mutual fund and its operations and those
have time.

Suggestions and Recommendations

The most vital problem spotted is of ignorance. Investors should be made aware of
the benefits. Nobody will invest until and unless he is fully convinced. Investors should be
made to realize that ignorance is no longer bliss and what they are losing by not investing.
Mutual funds offer a lot of benefit which no other single option could offer. But
most of the people are not even aware of what actually a mutual fund is? They only see it
as just another investment option. So the advisors should try to change their mindsets. The
advisors should target for more and more young investors. Young investors as well as
persons at the height of their career would like to go for advisors due to lack of expertise
and time.
 Mutual Fund Company needs to give the training of the Individual Financial
Advisors about the Fund/Scheme and its objective, because they are the main source to
influence the investors.

Before making any investment Financial Advisors should first enquire about
the risk tolerance of the investors/customers, their need and time (how long they want to
invest). By considering these three things they can take the customers into consideration.

Younger people aged under 35 will be a key new customer group into the future,
so making greater efforts with younger customers who show some interest in investing
should pay off.
Customers with graduate level education are easier to sell to and there is a large
untapped market there. To succeed however, advisors must provide sound advice and high
quality.
Systematic Investment Plan (SIP) is one the innovative products launched by
Assets Management companies very recently in the industry. SIP is easy for monthly
salaried person as it provides the facility of do the investment in EMI. Though most of the
prospects and potential investors are not aware about the SIP. There is a large scope for
the companies to tap the salaried persons.