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a) Stock Markets: Stock Market is a market where the trading of company stock,
both listed securities and unlisted takes place. It is different from stock exchange
because it includes all the national stock exchanges of the country. For example, we
use the term, "the stock market was up today" or "the stock market bubble."

b) Stock Exchanges: Stock Exchanges are an organized marketplace, either

corporation or mutual organization, where members of the organization gather to
trade company stocks or other securities. The members may act either as agents for
their customers, or as principals for their own accounts. Stock exchanges also
facilitates for the issue and redemption of securities and other financial instruments
including the payment of income and dividends. The record keeping is central but
trade is linked to such physical place because modern markets are computerized. The
trade on an exchange is only by members and stock broker do have a seat on the

Indian stock market marks to be one of the oldest stock market in Asia. It dates back
to the close of 18th century when the East India Company used to transact loan
securities. In the 1830s, trading on corporate stocks and shares in Bank and Cotton
presses took place in Bombay. Though the trading was broad but the brokers were
hardly half dozen during 1840 and 1850. An informal group of 22 stockbrokers began
trading under a banyan tree opposite the Town Hall of Bombay from the mid-1850s,
each investing a (then) princely amount of Rupee 1. In 1860, the exchange flourished
with 60 brokers. In fact the 'Share Mania' in India began with the American Civil War
broke and the cotton supply from the US to Europe stopped. Further the brokers
increased to 250. The informal group of stockbrokers organized themselves as the The
Native Share and Stockbrokers Association which, in 1875, was formally organized
as the Bombay Stock Exchange (BSE).

Premchand Roychand was a leading stockbroker of that time, and he assisted in

setting out traditions, conventions, and procedures for the trading of stocks at Bombay
Stock Exchange and they are still being followed.

Several stock broking firms in Mumbai were family run enterprises, and were named
after the heads of the family.

The following is the list of some of the initial members of the exchange, and who are
still running their respective business:

• D.S. Prabhudas & Company (now known as DSP, and a joint venture partner
with Merrill Lynch)
• Jamnadas Morarjee (now known as JM)
• Champaklal Devidas (now called Cifco Finance)
In Indian Stock Market NSE and BSE are the main stock exchanges
in India are as follows:


The National Stock Exchange (NSE) is a stock exchange located at
Mumbai, Maharashtra, India. It is the 9th largest stock exchange in the
world by market capitalization and largest in India by daily turnover and
number of trades, for both equities and derivative trading. NSE has a
market capitalization of around US$1.59 trillion and over 1,552 listings
as of December 2010. Though a number of other exchanges exist, NSE
and the Bombay Stock Exchange are the two most significant stock
exchanges in India and between them are responsible for the vast
majority of share transactions. The NSE's key index is the S&P CNX
Nifty, known as the NSE NIFTY (National Stock Exchange Fifty), an
index of fifty major stocks weighted by market capitalization.NSE is
mutually-owned by a set of leading financial institutions, banks,insurance
companies and other financial intermediaries in India but its ownership
and management operate as separate entities. There are at least 2 foreign
investors NYSE Euronext and Goldman Sachs who have taken a stake in
the NSE. As of 2006, the NSE VSAT terminals, 2799 in total, cover more
than 1500 cities across India. NSE is the third largest Stock Exchange in
the world in terms of the number of trades in equities. It is the second
fastest growing stock exchange in the world with a recorded growth of

Type National Stock Exchange

Location Mumbai, India
Coordinates 19°3'37N 72°51'35E
Founded 1992
Owner National Stock Exchange of India Limited
Key people Ravi Narain (MD)
Currency Indian rupee ()
No. of listings 1,552
Market Cap US$1.59 trillion (Dec 2010)
Indexes S&P CNX Nifty
CNX Nifty Junior
S&P CNX 500

NSE's mission is setting the agenda for change in the securities markets in India. The
NSE was set-up with the main objectives of:

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


• ensuring equal access to investors all over the country through an appropriate
communication network.

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

electronic trading systems,

• enabling shorter settlement cycles and book entry settlements systems, and
meeting the current international standards of securities markets.

• The standards set by NSE in terms of market practices and technology have
become industry benchmarks and are being emulated by other market
participants. NSE is more than a mere market facilitator. It's that force which
is guiding the industry towards new horizons and greater opportunities.

National Securities Clearing Corporation Ltd. (NSCCL)

The National Securities Clearing Corporation Ltd. (NSCCL), a wholly owned
subsidiary of NSE, was incorporated in August 1995. It was set up to bring and
sustain confidence in clearing and settlement of securities; to promote and maintain,
short and consistent settlement cycles; to provide counter-party risk guarantee, and to
operate a tight risk containment system. NSCCL commenced clearing operations in
April 1996. NSCCL carries out the clearing and settlement of the trades executed in
the Equities and Derivatives segments and operates Subsidiary General Ledger (SGL)
for settlement of trades in government securities. It assumes the counterparty risk of
each member and guarantees financial settlement. It also undertakes settlement of
transactions on other stock exchanges like, the Over the Counter Exchange of India.
NSCCL has successfully brought about an up-gradation of the clearing and settlement
procedures and has brought Indian financial markets in line with international
The Standard & Poor's CNX Nifty stock index is endorsed by Standard & Poor's and
composed of 50 of the largest and most liquid stocks found on the National Stock
Exchange (NSE) of India. It is commonly used to represent the market for
benchmarking Indian investments. Similar to other major stock indexes like the S&P
500, companies must meet certain requirements in terms of market capitalization and
liquidity before they can be considered for inclusion in the index.


Nifty is simply a trade mark or market index used by National Stock Exchange of
India. Nifty covers fifty stocks from various segments of the market. This is the
reason why nifty is highly versatile and diversified. Nifty is calculated using the –
“FREE FLOAT MARKET CAPITALIZATION“ methodology. In this methodology
or technique, nifty level at any point of time reflects the free-float market. The base
period of NIFTY is 1995 and the base value is 1000 index points. The mathematical
formula for calculating nifty is-:

NIFTY50 = (sum of free flow market capital of 50 most liquid stocks)*index factor

Index factor = 1000/market capital value in 1995

For instance,

Suppose nifty has only two stocks namely ABC and XYZ. Total stocks in ABC are
600 out of which 200 are held by promoters and 400 are available for public trading.
Similarly, let the total stocks of XYZ are 400 out of which 100 are held by the
promoters and 300 are available for public trading. Assume price of ABC stock is Rs.
100 and that of XYZ stock be Rs. 200. Then, the free floating market capital of these
two companies will be-:

(400*100+300*200) = 40,000 + 60,000 = Rs. 1,00,000

Let the market capital in year 1995 be Rs. 90,000.


NIFTY= 1,00,000*1000/90,000 = 1111.

This is exactly the same how NIFTY is calculated except the fact that it has an
inclusion of fifty stocks.


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

Asia's first & the Fastest Stock Exchange in world with the speed of 6 micro seconds
and one of India's leading exchange groups. 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). The BSE Ltd, the oldest stock exchange in
Asia had a very humble beginning under a Banyan Tree in Mumbai’s town hall. The
stock exchange was started by four Gujaratis and one Parsi and gradually the group
grew. As the number of brokers was continuing increasing the venue of their meeting
changed many times. In 1874, the group finally moved to Dalal Street and in 1875 the
group became an official organization known as The Native Share and Stockbrokers

By 1956, the BSE became the first stock exchange to be recognized by the
government of India under the Securities Contracts Regulation Act. By 1986, the BSE
had developed the BSE SENSEX which made it easy for the BSE to measure the
overall performance of the exchange. In 2000, the BSE used this index to open its
derivatives markets, trading SENSEX futures contracts. The development of
SENSEX options along with equity derivatives in 2001 and 2002 expanded the BSE’s
trading options. Since its inception in 1857, the BSE was an open-floor trading
exchange, the BSE switched to an electronic trading system in 1995. BSE is the first
exchange in India and second in the world to obtain an ISO 9001:2000 certifications.

Sensex, otherwise known as the S&P BSE Sensex index, is the benchmark index of
the Bombay Stock Exchange (BSE) in India. Sensex is composed of 30 of the largest
and most actively-traded stocks on the BSE, providing an accurate gauge of India's
economy. Initially compiled in 1986, the Sensex is the oldest stock index in India.
Analysts and investors use the Sensex to observe the overall growth, development of
particular industries, and booms and busts of the Indian economy.
How SENSEX is calculated ?

The formula for calculating the SENSEX = (Sum of free flow market cap of 30
benchmark stock)* Index Factor

Index Factor = 100/Market Cap Value in 1978-79.

100 is the Index value during 1978-79.

Example: Assume SENSEX has only 2 stocks namely SBI and RELIANCE. Total
shares in SBI are 500 out of which 200 are held by Government and only 300 are
available for public trading. RELIANCE has 1000 shares out of which 500 are held
by promoters and 500 are available for trading. Assume price of SBI Stock is Rs.100
and Reliance is Rs.200. Then "free-Floating Market Cap" of these 2 companies
=(300*100+500*200) = 30000+100000 = Rs. 130000
Assume Market Cap during the year 1978-79 was Rs.25000
Then SENSEX = 130000*100/25000 = 520.
The methodology in the example is exactly followed to calculate the SENSEX, only
difference being the inclusion of 30 stocks.


OTC Exchange of India (OTCEI) also known as Over-the-Counter

Exchange of India based in Mumbai, Maharashtra. It is the first exchange
for small companies. It is the first screen based nationwide stock
exchange in India. It was set up to access high-technology enterprising
promoters in raising finance for new product development in a cost
effective manner and to provide transparent and efficient trading system
to the investors.OTCEI is promoted by the Unit Trust of India, the
Industrial Credit and Investment Corporation of India, the Industrial
Development Bank of India, the Industrial Finance Corporation of India
and others and is a recognized stock exchange under the SCR Act.

Type Stock Exchange

Location Mumbai, India
Founded 1990
Owner OTC Exchange of India
Key people Mr. Praveen Mohnot, MD
Currency Indian rupee


The Madras Stock Exchange is a stock exchange in Madras, (Chennai),
and India. The Madras Stock Exchange (MSE) is the fourth Stock
Exchange to be established in the country, and the first in South India. It
had a turnover (2001) of Rs 109 crores (25 million USD), but is a fraction
(below 0.1percent) of the turnover generated by the Bombay Stock
Exchange and National Stock Exchange of India.
In 1996, the MSE was fully computerized and online trading became
operational, as the MSE was connected to 120 broking offices in and
around Chennai through Wide Area Networking. The MSE has about 120
live members and 1,785 companies listed. The exchange follows the
Rolling Settlement system, as per the January 2000 SEBI (Securities
Exchange Board of India) Guidelines and a proactive Grievance Cell is
operational. By this system, investors can log in their complaints, for
which a number will be given for further reference, through which
investors can keep track of the action taken by the exchange as regards
their complaint.A subsidiary company - MSE Financial Services Ltd, has
been established. A member of the Bombay Stock Exchange, MSE
Financial Services will help create greater broker and investor flexibility
through multi-market access. Hereafter the members will be able to trade
in both BSE and MSE. This will be followed up with National Stock
Exchange (NSE) membership. Live trading at the MSE takes place from
10.00 am to 3.30 pm.


Ahmedabad Stock Exchange or ASE is the second oldest exchange of

India located in the city of Ahmedabad in the western part of the country.
It is recognized by Securities Contract (Regulations) Act, 1956 as
permanent stock exchange. It has adopted a Swastika in its logo which is
one of the most auspicious symbols of Hinduism depicting wealth and
prosperity. Ahmedabad Stock Exchange Limited is a premier national
equities exchange that plays a key role in the Indian securities markets.
Serving individual and institutional investors from around the world, its
primary business is the trading of approximately 2000 nationally listed
equities. The Exchange also trades over 200 high growth companies that
are solely listed on the ASE or dually listed with another exchange.

1.4Evolution of Stock Exchanges in India

Stock exchange Year of

Bombay stock exchange 1894
Calcutta stock exchange 1908
Madras stock exchange 1920
Bengal share and stock 1937
exchange Ltd.
Indian stock exchange Ltd. 1938
Uttar Pradesh stock 1940
Nagpur stock exchange 1940
Hyderabad stock exchange 1944
Bangalore stock exchange 1963
National stock exchange 1992


The economy of India had undergone significant policy shifts in the beginning of the
1990s. This new model of economic reforms is commonly known as the LPG or
Liberalisation, Privatisation and Globalisation model. The primary objective of this
model was to make the economy of India the fastest developing economy in the globe
with capabilities that help it match up with the biggest economies of the world.The
chain of reforms that took place with regards to business, manufacturing, and
financial services industries targeted at lifting the economy of the country to a more
proficient level. These economic reforms had influenced the overall economic growth
of the country in a significant manner.


Liberalisation refers to the slackening of government regulations. The economic

liberalisation in India denotes the continuing financial reforms which began since July
24, 1991. The basic aim of liberalization was to put an end to those restrictions which
became hindrances in the development and growth of the nation. The loosening of
government control in a country and when private sector companies’ start working
without or with fewer restrictions and government allow private players to expand for the
growth of the country depicts liberalization in a country.
Objectives of Liberalization Policy
• To increase competition amongst domestic industries.

• To encourage foreign trade with other countries with regulated imports and

• Enhancement of foreign capital and technology.

• To expand global market frontiers of the country.

• To diminish the debt burden of the country.


This is the second of the three policies of LPG. It is the increment of the dominating role
of private sector companies and the reduced role of public sector companies. In other
words, it is the reduction of ownership of the management of a government-owned
enterprise. Government companies can be converted into private companies in two

• By disinvestment

• By withdrawal of governmental ownership and management of public sector


Objectives of Privatization:
• Improve the financial situation of the government.

• Reduce the workload of public sector companies.

• Raise funds from disinvestment.

• Increase the efficiency of government organizations.

• Provide better and improved goods and services to the consumer.

• Create healthy competition in the society.


It means to integrate the economy of one country with the global economy. During
Globalization the main focus is on foreign trade & private and institutional foreign
investment. It is the last policy of LPG to be implemented.

Globalization as a term has a very complex phenomenon. The main aim is to transform
the world towards independence and integration of the world as a whole by setting
various strategic policies. Globalization is attempting to create a borderless world,
wherein the need of one country can be driven from across the globe and turning into
one large economy.

Outsourcing as an Outcome of Globalization:

The most important outcome of the globalization process is Outsourcing. During the
outsourcing model, a company of a country hires a professional from some other country
to get their work done, which was earlier conducted by their internal resource of their
own country. The best part of outsourcing is that the work can be done at a lower rate
and from the superior source available anywhere in the world. Services like legal advice,
marketing, technical support, etc. As Information Technology has grown in the past few
years, the outsourcing of contractual work from one country to another has grown
tremendously. As a mode of communication has widened their reach, all economic
activities have expanded globally.


Before liberalization, Privatization and Globalization Indian economy was tightly

controlled and protected by number of measures like licensing system, high tariffs and
rates, limited investment in core sectors only. During 1980’s, growth of economy was
highly unsustainable because of its dependence on borrowings to correct the current
account deficit. To reduce the imbalances, the government of India introduced
economic policy in 1991 to implement structural reforms. The financial sector at that
time was much unstructured and its scope was limited only to bonds, equity,
insurance, commodity markets, mutual and pension funds. In order to structure the
security market, a regulatory authority named as SEBI (Security Exchange Board of
India) was introduced and first electronic exchange National Stock Exchange also set
up. The purpose behind this was to regularize investments, mobilization of resources
and to give credit. The Indian stock market mainly functions on two major stock
exchanges, the BSE (Bombay Stock Exchange) and NSE (National Stock Exchange).
In terms of market capitalization, BSE and NSE have a place in top five stock
exchanges of developing economies of the world. Out of total fourteen stock
exchanges of emerging economies, BSE stood at fourth position 2 with market
capitalization of $1,101.87b as on June, 2012 and NSE at fifth position with market
capitalization of $1079.39b as on June, 2012.




Due to continuous increase in government expenditure, high growth of imports,

insufficiency of foreign exchange reserves and high level of inflations, India decides
to take a historical step of changing trade in 1991. It embarked on a comprehensive
reform of the economy Out of Liberalization, Privatization and Globalization the first
two are policy strategies and the third one is the outcome of these strategies. These
three expressions are the supporting pillars, on which the structure of New Economic
Policy of the government has been erected and implemented since 1991. Therefore,
we have to understand the positive and negative impacts of these and find out the
ways and challenges of adopting new economic policy and how to overcome from its

Background and reasons for economic reforms of 1991

The economic condition of India in the year 1991 was miserable. It was due to the
cumulative effects of number of reasons. Therefore economic reforms were
introduced in India as 1991 was the year of crises for the Indian economy. The main
reasons were as follows:-

i) National income was growing just at a rate of 0.8%,

ii) Inflation reaches the height from 6.7% to 16.8%,

iii) Balance of payment crises was to the extent of 10,000 crores. Balance of payments
deficit was estimates at Rs 2,214 crore in 1980-81, which rose to high level of Rs
17,367 crore in 1990-91,

iv) India was highly indebted country. It was paying 30,000 crores interest charging
per year,

v) Foreign exchange reserves were only 1.8 billion dollars which were sufficient for
three weeks. Forex reserves that were Rs 8,151 crore in 1986-87, decline sharply to
Rs 6,252 crore in 1989-90,

vi) India sold large amount of gold to Bank of England,

vii) India applied for the loan from World Bank and IMF (International Monetary
Fund) to avail this loan, Indian government also agree to the conditions of World
Bank and IMF (International Monetary Fund) and announced the New Economic

viii) Fiscal deficit was more than 7.5%,

ix) Deficit financing was around 3%,

x) Trade relations with soviet block had broken down,

xi) India used to receive huge amount of remittance from gulf countries in foreign
exchange. But, remittance from non-residence Indians stopped due to war in gulf

xii) Prices of petroleum products was very high on account of Iraq war in 1990-91,
xiii) The PSU’s (Public Sector Undertakings) in India were facing the problem of low
productivity and poor rates of return. In 1951, there were just 5 enterprises in public
sector in India which rose to 232 in 1991. Several thousand crores of rupees were
invested in their growth and development. In the initial 15 years their performance
was quite satisfactory but thereafter most of these started recording losses. Because of
their poor performances, public sector undertaking degenerates into a liability.

On account of these factors it became imperative for the government to adopt New
Economic Policy or initiate reforms policies. The government was left with no option
but to approach World Bank and IMF (International Monetary Fund) for economic
asylum. To manage the crises, India was granted a loan for 7 billion dollars. But,
before granting loan to India, World Bank and IMF (International Monetary Fund)
expected India to liberalize and open up the economy by removing restrictions on the
private sector, reducing the role of the government in many areas and removing trade
restrictions, Liberalization, Privatization and Globalization were three basic elements
of the New Economic Policy (NEP, 1991) or New Economic Reforms. Out of
Liberalization, Privatization and Globalization the first two are policy strategies and
the third one is the outcome of these strategies. These three expressions are the
supporting pillars, on which the structure of New Economic Policy of the government
has been erected and implemented since 1991. This is popularly known as LPG model
of growth.

Characteristics of Stock Market :

There are some most important characteristics of Stock market which are as below:
i) Stock Market is a market, where securities of corporate bodies, government and
semi-government bodies are bought and sold.
ii) This market deals with shares, debentures bonds and such securityes already issued
by the companies. It also deals with existing or second hand securities and hence it is
called secondary market.
iii) Stock Exchange does not buy or sell any securities on its own account. It merely
provided the necessary infranstructure and facilities for trade in securities to its
members and brokers who trade in securities. It also regulates the trade activities so as
to ensure free and fair trade.
iv) NSE maintain an official list of securities that could be purchased and sold on its
floor. Securities which do not figure in the official list of stock market or exchange
are called unlisted securities. Such unlisted securities cannot be traded in the stock
v) All the transactions in securities at the stock exchange are affected only through its
authorised brokers and members. Outsiders or direct investors are not allowed to enter
in the leading circles of the stock exchange. Investors have to buy or sell the securities
at the stock exchange through the authorised brokers only.
vi) A stock exchange is an association of persons or body of individuals which may
be registered or unregistered.
vii) Stock Market is an organised market and requires recognition from the Central
viii) Buying and selling transactions in securities at the stock market are governed by
the rules and regulations of stock market as well as SEBI Guidelines. No deviation
from the rules and guidelines is allowed in any case.
ix) This market is a particular market place where authorised brokers come together
daily 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.
x) NSEs are the financial barometer and development indicators of national economy
of the country. Industrial growth and stability is reflected in the Index of Stock
Exchange (ISE).


The data used for the analysis of stock market development after liberalisation period
has been collected from hand book of statistics on Indian Economy by SEBI.
Economy wide data has been collected from the annual reports and other publications
of RBI. Besides this other information regarding stock market development has been
obtained from NIC, economic surveys and other published reports of Government
organisations. BSE 100 index2 has been used as a proxy for market for calculating
vola-tility of the Indian stock market. To avoid factors such as temporal stability and
business cycle influencing our study, a longer time frame of study of 17 years period
i.e., 1990-91 to 2006-07 has been used. This period is chosen to correspond with the
period when changes in trade policy were taking place and Indian economy went
through a phase of increasing competition, deregulation, and restructuring. Further
three sub periods are chosen within this period, 1990-91, 1997-98 and 2002-03 to
study the impact of reforms announced by government in phases. While 1990-91
signified the beginning of the reforms after liberalisation, 1997-98 was chosen so that
it would capture the changes initiated in the reforms I and the beginning of reforms II.
The end-year 2002-03 comes five years after the process of second phase of reforms
was initiated in 1997-98, and is chosen so as to capture any changes that may have
taken place as a consequence. Ratio analysis technique of financial management has
been used to analyse the movements over the period. The average of each ratio is
computed and tabulated to study the indicators of stock market development in post
liberalisation scenario and over sub-periods. The data has been analysed by using
Statistical Package for Social Sciences (SPSS).
In order to meet the objectives of the study, a measure of stock market size, Market
Capitalization Ratio (MCR) is used. The size of the stock market depends on the
activity of the primary market because it is only when more entities come into the
market and raise funds, that more instruments are available in the secondary market.
Therefore, a two way causal relationship exists between stock market size and primary market
activities. As a measure of stock market size, Market Capitalization Ratio (MCR) is
used which is defined as the value of listed shares divided by Gross Domestic Product
(GDP). Market capitalization is computed using the value of the equity securities
only. The stock market price per share is multiplied by the number of shares that are
outstanding. Market capitalization as a proxy for market size is positively related to
the ability to mobilise capital and diversify risk. Liquidity is the ease and speed at
which economic agents can buy and sell securities. With a liquid market, the initial
investors do not lose access to their savings for the duration of the investment project
because they can easily, quickly, and cheaply, sell their stake in the company. Thus,
more liquid markets could ease investment in long term, potentially more profitable
projects, thereby improving the allocation of capital and enhancing prospects for long
term growth. The more liquid the stock market, the larger the amount of savings that
are channelled through the stock market. Liquidity is key to a successful securities
market. Therefore, we expect a more liquid stock market to lead to higher stock
market development. For market liquidity, two measures are used:
(1) Value traded ratio,
(2) Turnover ratio.
Value traded ratio equals the total value of traded share in the stock market divided by
GDP. The total value traded ratio (VTR) measures the organised trading of the
equities as a share of national input and should, therefore, positively reflect liquidity
on an economy-wide basis. The second measure of the liquidity is the turnover ratio
which equals the value of total shares traded divided by the market capitalisation.
High turnover is often used as an indicator of low transaction cost. Turnover ratio also
complements total value traded ratio. According to Levine and Zervos (1998) Value
traded ratio does not directly measure how easily investors can buy and sell shares at
posted prices. However, it does measure the degree of trading relative to the size of
the economy. It, therefore, reflects stock market liquidity on an economy wide basis.
The value traded ratio complements the market capitalisation. Although a market may
be large, there may be little trading. Thus, taken, MCR and VTR together provide
more information about a stock market than if one uses only a single indicator. The
second measure of the liquidity is the turnover ratio which equals the value of total
shares traded divided by the market capitalisation. High turnover is often used as an
indicator of low transaction cost. Turnover ratio also complements total value traded
ratio. Although VTR captures trading compared with the size of the economy,
turnover measures the trading relative to the size of the stock market. Thus, the
complete information on the total VTR and turnover ratio provides a more
comprehensive picture of liquidity of a stock market. As shown by Levine (1991) and
Bencivenga et al. (1996), stock markets may affect economic activity through the
creation of liquidity. Many profitable investments require a long-term commitment of
capital, but investors are often reluctant to relinquish control of their savings for long
periods. Liquid equity markets make investment less risky and more attractive
because they allow savers to acquire an asset-equity and to sell it quickly and cheaply
if they need access to their savings or want to alter their portfolios. At the same time,
companies enjoy permanent access to capital raised through equity issues. By
facilitating longer-term, more profitable investments, liquid markets improve the
allocation of capital and enhance prospects for long-term economic growth. Further,
by making investment less risky and more profitable, stock market liquidity can also
lead to more savings and investment. According to Hicks (1969), more liquid
financial markets made it possible to develop projects that required large capital
injections for long periods before the projects ultimately yielded profits. Without
liquid capital markets, savers would have been less willing to invest in the large, long-
term projects.


1. The main objective was to plunge Indian economy in to the arena of ‘Globalization
and to give it a new thrust on market orientation.

2. The NEP intended to bring down the rate of inflation

3. It intended to move towards higher economic growth rate and to build sufficient
foreign exchange reserves.

4. It wanted to achieve economic stabilization and to convert the economy into a

market economy by removing all kinds of un-necessary restrictions.

5. It wanted to permit the international flow of goods, services, capital, human

resources and technology, without many restrictions.

6. It wanted to increase the participation of private players in the all sectors of the
economy. That is why the reserved numbers of sectors for government were reduced.


The scope of the project during the research and study will be focused on
the following parameters:
• To know the customer prefrence towards the Investment Alternatives in
money market.
•How the market climate could impair money market fund shareholders.
•To fi n d m e ch ani sm s t o r est or e l i qu i di t y a n d or d erl y f un ct i oni n g t o
t he m o n e y market.
•To h el p wi t h t he n at u r e an d d et ai l s of t he U.S . D e pa rt m e nt o f t h e
Tr e as ur y’ s Temporary Guarantee Program for Money Market Funds.
• To develop recommendations to improve the functioning of the money
market and the operation and regulation of funds investing in that market. When I
complete the assign project research then I finds some important points in this report
these are given as follows;
• There are capital require (paid up) must be minimum 10 crore for listing in NSE or
BSE for a particular company.
• Initial listing fees for a particular company in national stock exchange are much
lower then on Bombay stock exchange.
• Market capitalization of the Bombay stock exchange is more then national stock
exchange. The daily turnover of national stock exchange is more then Bombay stock
exchange on daily basis.


The study has academic and practical significance. It would help the academicians
and researchers to develop new idea for future study. The study focuses on the
volatility in Indian stock market, which will act as a guide to investors in their
investment decisions. The analytical sophistication of the financial market has lent
increasing importance to volatility. Since it is a standard measure of financial
vulnerability, it plays a key role in assessing risk/return trade off. This study
undertakes to measure and model the stock market volatility which would become a
widespread concern of the exchange management, brokers and investors, as effective
mechanism put in place which would help in accordance of volatility episodes in


The major limitations of the study are:

1. The analyses were based on the secondary data any limitations pertaining to them
would significantly affect the accuracy of the results.
2. The extent and pattern of stock market volatility in India is studied only for the post
liberalization period, the comparison is not made before the preliberalisation period.
3. The effect of macro-economic variables on the stock market volatility has been
considered only for few variables.
4. Only the quantitative macro economic variables that effect the stock market
volatility are considered for the study, the data which are qualitative in nature that
affect the stock market volatility are not considered for the current study.


Following are the hypotheses that are framed for the study:
H0(1):There is no significant difference in the mean daily returns of Spikes (1) for
BSE Sensex during the First and Second decade of the study period.

H0(2):There is no significant difference in the mean daily returns of Spikes (1) for
NSE CNX Nifty during the First and Second decade of the study period.

H0(3):There is no significant difference in the mean daily returns of Spikes (2) for
BSE Sensex during the First and Second decade of the study period.

H0(4):There is no significant difference in the mean daily returns of Spikes (2) for
NSE CNX Nifty during the First and Second decade of the study period.

H0(5) :There is no significant difference in the mean daily returns of Spikes (3) for
BSE Sensex during the First and Second decade of the study period.

H0(6):There is no significant difference in the mean daily returns of Spikes (3) for
NSE CNX Nifty during the First and Second decade of the study period.


The capital market in India has witnessed tremendous growth since the
beginning of 1990s when the process of liberalization initially was started. Under the
impact of liberalization the industrial and financial policies were restructured.
Resource mobilization in the stock markets was started increasing significantly. The
liberalized investment policy of the Government, streamlining of industrial licensing
policies and fiscal incentive to industry have led to the growth of the capital market
significantly. With ever expanding response of investors and growing stock exchange
operations, several malpractices started taking place on the part of Companies,
brokers, investment consultants. Some of the undesirable practices like insider
trading, delay in allotment of shares, inadequate information to investors started
disturbing the smooth functioning of the market. This has started discouraging the
common investor from investing into securities. Hence, there felt the need to set up an
exclusive monitoring institution which would regulate the working of stock exchange.

The Government of India established the market watchdog SEBI i.e. Securities and
Exchange Board of India (SEBI) in April 1988. SEBI as security exchange board of
India became a statutory body under SEBI Act 1992, and its head office is located at
Mumbai. At present SEBI have offices in Mumbai, Calcutta, New Delhi and Chennai.

Objectives of SEBI
The main objectives of SEBI are as under

• To promote fair dealing by the issuers of securities and to ensure a market

place where companies or institutions can raise funds at a relatively low cost.

• To provide protection to the investors and protect their rights and interests so
that there is a steady flow of savings into the market.

• Το regulate and develop a code of conduct and fair practice by intermediaries

like brokers etc. with a view to make them competitive and professional.

Functions of SEBI
• Regulating the business in stock exchanges and any other securities market.

• Registering and regulating the working of stock brokers, share transfer agents,
Sub brokers, bankers to an "issue, etc.

• Promoting and regulating self regulatory organizations.

• Prohibiting fraudulent and unfair trade practices relating to securities market.

• Registering and regulating the working of venture capital funds and collective
investment schemes including mutual funds.

• Promoting investors education and training of intermediaries of securities


• Prohibiting insider trading in securities.

• Conducting research and carrying out publications,

• Calling for information from undertaking inspection, Conducting inquiries and

audits of stock exchanges and market intermediaries.

Powers of SEBI

SEBI has been given wide powers; some of them are as follows.

• SEBI can ask stock exchanges to maintain the prescribed documents and

• SEBI may ask a stock exchange or any member to furnish information and
explanation concerning its affairs.

• SEBI can approve and amend bye-laws of stock exchanges. It can call
periodical returns from stock exchanges,

• SEBI can license dealers in securities in some areas.

• It can ask a public limited Company to list its shares and play supportive role
when share market-is bearish. When an individual investor and even
Speculators try to play shy in stock market (it means to hesitate to transact) it
is the institutional investor who often accounts for bulk of trade. This helps
sustaining for stock exchanges.



Gupta (1972) in his book has studied the working of stock exchanges in India and has
given a number of suggestions to improve its working. The study highlights the' need
to regulate the volume of speculation so as to serve the needs of liquidity and price
continuity. It suggests the enlistment of corporate securities in more than one stock
exchange at the same time to improve liquidity. The study also wishes the cost of
issues to be low, in order to protect small investors

Panda (1980) has studied the role of stock exchanges in India before and after
independence. The study reveals that listed stocks covered four-fifths of the joint
stock sector companies. Investment in securities was no longer the monopoly of any
particular class or of a small group of people. It attracted the attention of a large
number of small and middle class individuals. It was observed that a large proportion
of savings went in the first instance into purchase of securities already issued.

Gupta (1981) in an extensive study titled `Return on New Equity Issues' states that the
investment performance of new issues of equity shares, especially those of new
companies, deserves separate analysis. The factor significantly influencing the rate of
return on new issues to the original buyers is the `fixed price' at which they are issued.
The return on equities includes dividends and capital appreciation. This study presents
sound estimates of rates of return on equities, and examines the variability of such
returns over time.

Jawahar Lal (1992) presents a profile of Indian investors and evaluates their
investment decisions. He made an effort to study their familiarity with, and
comprehension of financial information, and the extent to which this is put to use. The
information that the companies provide generally fails to meet the needs of a variety
of individual investors and there is a general impression that the company's Annual
Report and other statements are not well received by them.

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. He opined that, short- term speculation, if
excessive, could lead to "artificial price". An artificial price is one which is not
justified by prospective earnings, dividends, financial strength and assets or which is
brought about by speculators through rumours, manipulations, etc. He concluded that
such artificial prices are bound to crash sometime or other as history has repeated and

Nabhi Kumar Jain (1992) specified certain tips for buying shares for holding and also
for selling shares. He advised the investors to buy shares of a growing company of a
growing industry. Buy shares by diversifying in a number of growth companies
operating in a different but equally fast growing sector of the economy. He suggested
selling the shares the moment company has or almost reached the peak of its growth.
Also, sell the shares the moment you realise you have made a mistake in the initial
selection of the shares. The only option to decide when to buy and sell high priced
shares is to identify the individual merit or demerit of each of the shares in the
portfolio and arrive at a decision.

Pyare Lal Singh (1993) in the study titled, Indian Capital Market - A Functional
Analysis, depicts the primary market as a perennial source of supply of funds. It
mobilises the savings from the different sectors of the economy like households,
public and private corporate sectors. The number of investors increased from 20 lakhs
in 1980 to 150 lakhs in 1990 (7. 5 times). In financing of the project costs of the
companies with different sources of financing, the contribution of the securities has
risen from 35.01% in 1981 to 52.94% in 1989. In the total volume of the securities
issued, the contribution of debentures / bonds in recent years has increased
significantly from 16. 21% to 30.14%.

Sunil Damodar (1993) evaluated the 'Derivatives' especially the 'futures' as a tool for
short-term risk control. He opined that derivatives have become an indispensable tool
for finance managers whose prime objective is to manage or reduce the risk inherent
in their portfolios. He disclosed that the over-riding feature of 'financial futures' in
risk management is that these instruments tend to be most valuable when risk control
is needed for a short- term, i.e., for a year or less. They tend to be cheapest and easily
available for protecting against or benefiting from short term price. Their low
execution costs also make them very suitable for frequent and short term trading to
manage risk, more effectively.

R.Venkataramani (l994) disclosed the uses and dangers of derivatives. The derivative
products can lead us to a dangerous position if its full implications are not clearly
understood. Being off balance sheet in nature, more and more derivative products are
traded than the cash market products and they suffer heavily due to their sensitive
nature. He brought to the notice of the investors the 'Over the counter product' (OTC)
which are traded across the counters of a bank. OTC products (e.g. Options and
futures) are tailor made for the particular need of a customer and serve as a perfect
hedge. He emphasised the use of futures as an instrument of hedge, for it is of low

Amanulla & Kamaiah (1995) conducted a study to examine the Indian stock market
efficiency by using Ravallion co integration and error correction market integration
approaches. The data used are the RBI monthly aggregate share indices relating five
regional stock exchanges in India, viz Bombay, Calcutta, Madras, Delhi, Ahmedabad
during 1980-1983. According to the authors, the co integration results exhibited a
long-run equilibrium relation between the price indices of five stock exchanges and
error correction models indicated short run deviation between the five regional stock
exchanges. The study found that there is no evidence in favour of market efficiency of
Bombay, Madras, and Calcutta stock exchanges while contrary evidence is found in
case of Delhi and Ahmedabad.

Pattabhi Ram.V. (1995) emphasised the need for doing fundamental analysis and
doing Equity Research (ER) before selecting shares for investment. He opined that the
investor should look for value with a margin of safety in relation to price. The margin
of safety is the gap between price and value. He revealed that the Indian stock market
is an inefficient market because of the absence of good communication network,
rampant price rigging, and the absence of free and instantaneous flow of information,
professional broking and so on. He concluded that in such inefficient market, equity
research will produce better results as there will be frequent mismatch between price
and value that provides opportunities to the long-term value oriented investor. He
added that in the Indian stock market investment returns would improve only through
quality equity research.

Karajazyk (1995) investigated one measure of financial integration between equity

markets. He used a multifactor equilibrium Arbitrage pricing theory to define risk and
to measure deviations from the “Law of one price”. He applied the integration
measure to equities traded in 24 countries (four developed and 20 emerging). He
found that the measure of market segmentation tends to be much larger for emerging
markets than for developed markets, which flows into or out of the emerging markets.
The measure tends to decrease over time, which is consistent with growing levels of
integration. Large values of adjusted mis-pricing occur around periods in which
capital controls change significantly. Finally, he found asymmetric integration
relationship; stock markets of developed nations are more integrated than those of
emerging nations.

Debjit Chakraborty (1997) in his study attempts to establish a relationship between

major economic indicators and stock market behaviour. It also analyses the stock
market reactions to changes in the economic climate. The factors considered are
inflation, money supply, and growth in GDP, fiscal deficit and credit deposit ratio. To
find the trend in the stock markets, the BSE National Index of Equity Prices (Natex)
which comprises 100 companies was taken as the index. The study shows that stock
market movements are largely influenced by, broad money supply, inflation, C/D
ratio and fiscal deficit apart from political stability.

Redel (1997) concentrated on the capital market integration in developing Asia

during the period 1970 to 1994 taking into variables such as net capital flows, FDI,
portfolio equity flows and bond flows. He observed that capital market integration in
Asian developing countries in the 1990‟s was a consequence of broad-based
economic reforms, especially in the trade and financial sectors, which is the critical
reason for economic crises which followed the increased capital market integration in
the 1970s in many countries will not be repeated in the 1990s. He concluded that
deepening and strengthening the process of economic liberalization in the Asian
developing countries is essential for minimizing the risks and maximizing the benefits
from increased international capital market integration.

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. He observed that the Fundamental Analysis could
never forecast the M.P. of a stock at any particular point of time. Technical Analysis
removes this weakness. Technical Analysis detects the most appropriate time to buy
or sell the stock. It aims to avoid the pitfalls of wrong timing in the investment
decisions. He also stated that the modern portfolio literature suggests 'beta' value p as
the most acceptable measure of risk of scrip. The securities having low P should be
selected for constructing a portfolio in order to minimise the risks.

Madhusudan (1998) found that BSE sensitivity and national indices did not follow
random walk by using correlation analysis on monthly stock returns data over the
period January 1981 to December 1992.

Arun Jethmalani (1999) reviewed the existence and measurement of risk involved in
investing in corporate securities of shares and debentures. He commended that risk is
usually determined, based on the likely variance of returns. It is more difficult to
compare 80 risks within the same class of investments. He is of the opinion that the
investors accept the risk measurement made by the credit rating agencies, but it was
questioned after the Asian crisis. Historically, stocks have been considered the most
risky of financial instruments. He revealed that the stocks have always outperformed
bonds over the long term. He also commented on the 'diversification theory'
concluding that holding a small number of non-correlated stocks can provide adequate
risk reduction. A debt-oriented portfolio may reduce short term uncertainty, but will
definitely reduce long-term returns. He argued that the 'safe debt related investments'
would never make an investor rich. He also revealed that too many diversifications
tend to reduce the chances of big gains, while doing little to reduce risk. Equity
investing is risky, if the money will be needed a few months down the line. He
concluded his article by commenting that risk is not measurable or quantifiable. But
risk is calculated on the basis of historic volatility. Returns are proportional to the
risks, and investments should be based on the investors' ability to bear the risks, he

Suresh G Lalwani (1999) emphasised the need for risk management in the securities
market with particular emphasis on the price risk. He commented that the securities
market is a 'vicious animal' and there is more than a fair chance that far from
improving, the situation could deteriorate.

Bhanu Pant and Dr. T.R.Bishnoy (2001) analyzed the behaviour of the daily and
weekly returns of five Indian stock market indices for random walk during April 1996
to June 2001.They found that Indian Stock Market Indices did not follow random

Nath and Verma (2003) examine the interdependence of the three major stock markets
in south Asia stock market indices namely India (NSE-Nifty) Taiwan (Taiex) and
Singapore (STI) by employing bivariate and multivariate co integration analysis to
model the linkages among the stock markets, No co -integration was found for the
entire period (daily data from January 1994 to November 2002).They concluded that
there is no long run equilibrium.

Debjiban Mukherjee (2007) made a comparative Analysis of Indian stock market with
International markets. His study covers New York Stock Exchange (NYSE), Hong
Kong Stock exchange (HSE), Tokyo Stock exchange (TSE), Russian Stock exchange
(RSE), Korean Stock exchange (KSE) from various socio- politico-economic
backgrounds. Both the Bombay Stock exchange (BSE) and the National Stock
Exchange of Indian Limited (NSE) have been used in the study as a part of Indian
Stock Market. The main objective of this study is to capture the trends, similarities
and patterns in the activities and movements of the Indian Stock Market in
comparison to its international counterparts. The time period has been divided into
various eras to test the correlation between the various exchanges to prove that the
Indian markets have become more integrated with its global counterparts and its
reaction are in tandem with that are seen globally. The various stock exchanges have
been compared on the basis of Market Capitalization, number of listed securities,
listing agreements, circuit filters, and settlement. It can safely be said that the markets
do react to global cues and any happening in the global scenario be it macroeconomic
or country specific (foreign trade channel) affect the various markets.

Juhi Ahuja (2012) presents a review of Indian Capital Market & its structure. In last
decade or so, it has been observed that there has been a paradigm shift in Indian
capital market. The application of many reforms & developments in Indian capital
market has made the Indian capital market comparable with the international capital
markets. Now, the market features a developed regulatory mechanism and a modern
market infrastructure with growing market capitalization, market liquidity, and
mobilization of resources. The emergence of Private Corporate Debt market is also a
good innovation replacing the banking mode of corporate finance. However, the
market has witnessed its worst time with the recent global financial crisis that
originated from the US sub-prime mortgage market and spread over to the entire
world as a contagion. The capital market of India delivered a sluggish performance.



Stock Market Development

The secondary market is an important constituent of the capital market. Secondary

market activities have strong influence on the performance of the primary market.
This market provides facilities for trading in securities which have already been
floated in the primary market. Thus an organised and well regulated secondary market
(stock market) provides liquidity to shares, ensures safety and fair dealing in the
selling and buying of securities. The financing decision of a firm is generally affected
by the minimisation of the weighted average cost of capital. Upward movement of
stock prices influence firms to issue equities at a high premium which reduces the cost
of capital for a firm and makes it an ideal financing choice. Another important impact
of secondary market development over primary market activities is the increase in
investment by firms. As the cost of equity reduces because of issue of equities at high
premium, investment projects that had negative NPV before are likely to transform
into positive NPV projects. Therefore, the performance of primary market is crucially
dependent on the level of activities in the secondary market.
This study considers a wide range of stock market development indicators. The
indicators selected are size, liquidity, and volatility.

Market Size
In 1980, the stock market capitalisation ratio was only 5% of GDP. As a result of
liberalization, Privatization and Globalization measures initiated in the 1980s, the
ratio had risen to 13% by 1990. Market Capitalisation ratio of Indian corporate sector
after 1991 i.e., the year of liberalisation is given in the Table:


199 7000 51503 13.59 _
199 12314 58409 21.08 75.92
199 18676 66987 27.88 51.66
199 36807 78007 47.18 97.08
199 43548 91216 47.74 18.31
199 52648 106981 49.21 20.90
199 46392 124763 37.18 -11.88
199 56033 138873 40.35 20.78
199 54536 160111 34.06 -2.67
199 91284 177109 51.54 67.38
200 57155 190228 30.05 -37.39
200 61222 207766 29.47 7.12
200 57220 224473 25.49 -6.54
200 120121 251992 47.67 109.93
200 169843 285533 59.48 41.39
200 302219 324955 93.00 77.94
200 345504 376029 94.28 17.80
Sub - Periods MGR
1990-07 44.07
1990-97 34.84
1997-02 37.09
2002-07 63.98

Above Table shows that stock market size as measured by Market Capitalisation has
grown by over 50 times during the period 1990-91 to 2006-07 whereas GDP
increased by more than 7 times over the same period. MCR has steadily increased up
to over 49% in 1995-96 and declined to around 25% in 2002-03 before spurting to
over 94% in 2006-07. The growth in size of Indian Stock Market resembles that of
other leading developing economies and is indeed very impressive.
The massive rise in the activities of the stock market, particularly in the 1990s could
be attributed to a larger participation by individuals and institutional investors in the
capital market. Since September 1992, the foreign institutional investors (FII) have
been allowed to invest in the Indian capital market. The significant impact of
liberalization is apparent in the ratio of market capitalization to GDP which was
below 10% until three years prior to liberalization, increased to 21% in the year of
liberalization, remained around 40% up to 2003-04 before increasing to 94% in 2006-
07. By the end of year 2008 market capitalization has crossed the National GDP by
more than 100%.
The average MCR over the three sub- periods also shows the constant increase in the
amount of market capitalisation in absolute terms and also in terms of ratio. The mean
value of the ratio during the study period is 44.07%. It has increased from 34.4 % in
the first sub-period to 37.09% in second period and jumped off by 70% to 63.98%.
This shows that the size of Indian corporate sector increased continuously at a faster

Stock Market Liquidity

The Turnover of Indian stock market as a percentage of GDP is given in the following


(Rs. millions) (Rs. TRADED TRADED
Millions) RATION (%change)

1990-91 3601 51503 6.99 _

1991-92 7178 58409 12.29 99.32
1992-93 4570 66987 6.82 -36.34
1993-94 8454 78007 10.84 85.00
1994-95 6775 91216 7.43 -19.86
1995-96 5006 106981 4.68 -26.11
1996-97 12428 124763 9.96 148.26
1997-98 20764 138873 14.95 67.07
1998-99 31200 160111 19.49 50.26
1999-00 68503 177109 38.68 119.56
2000-01 100003 190228 52.57 45.98
2001-02 30729 207766 14.79 -69.27
2002-03 31407 224473 13.99 2.21
2003-04 50262 251992 19.95 60.03
2004-05 51872 285533 18.17 3.20
2005-06 81607 324955 25.11 57.33
2006-07 95619 376029 25.43 17.17
Sub-Periods Va1ue Traded Ratio
1990-07 17.77
1990-97 8.43
199F-02 28.10
2002-07 20.53

The above Table 2 shows that value traded as a percentage of GDP increased from
about 7 percent of GDP in 1990-91 to roughly 25 percent of GDP in 2006-07. In
absolute terms Turnover in the market increases more than 25 times from 1991 to
2007. During 2000-2001 there were maximum activities in the market and the value
traded ratio was 52.57%. The average value of Value Traded Ratio during the study
period is 17.77%. Initially it was very low after liberalisation during the first phase at
8.43% which shows very little trading in the market as compared to economy size.
During second sub-period when the second phase of reforms started, the market has
shown signs of revival and it has increased to 28.10%. In the last period, again this
ratio comes down to 20.53% on a much higher GDP during which time the turnover
increased by more than 90% outperforming several emerging markets.
Turn Over Ration of Indian Stock Market:
(Rs. Millions) %)

1990- 3601 7000 51.44

1991- 7178 12314 58.29
1992- 4570 18676 24.47
1993- 8454 36807 22.97
1994- 6775 43548 15.56
1995- 5006 52648 9.51
1996- 12428 46392 26.79
1997- 20764 56033 37.06
1998- 31200 54536 57.21
1999- 68503 91284 75.04
2000- 100003 57155 174.97
2001- 30729 61222 50.19
2002- 31407 57220 54.89
2003- 50262 120121 41.84
2004- 51872 169843 30.54
2005- 81607 302219 27.00
2006- 95619 354504 26.97
Sub-Periods Turnover Ratio
1990-07 46.16
1990-97 29.86
1997-02 78.89
2002-07 36.25

The turnover ratio decreased from 51.44 percent in 1990-91 to about 27 percent in
2006-07. The mean value of the ratio over the whole period is 46.16. During first
period of analysis, this ratio was around 30% only and then it increased to78.9 % in
the subsequent period and again it declined to 36.25%. The reason can be security
market scam because of which the sentiments of the investors affected adversely.
After 1995 market liquidity started rising again. The SEBI has taken various
regulatory policies and initiatives to regulate the market. The liquidity again gets
affected negatively in year 2001-02 because market was hit by another set of
irregularities in the stock market. Turnover of the stock market as compare to size of
the market is at its maximum in the year 2000-01. This is the year when value traded
ratio is also at highest level. Because of these values, the ratio of value traded and
turnover is highest in the second sub-period. Thus liquidity of the stock market on an
average has not increased. Analysis of the value traded ratio and turnover ratio reveals
that the Indian stock market is less liquid in relation to the growth of the economy
than growth of the market size. Second period of study shows the highest amount of
trading in relation to size of the economy as well as in relation to growth of the
market size.

Stock Market Volatility

In this section, the volatility of the Indian stock market during 1991-2007 has been
analysed. It is examined whether there has been an increase in volatility in the Indian
stock market on account of the process of financial liberalization. Stock market
liberalization has attracted a new group of investors viz. the FIIs. An increase in the
number of traders in the market may then reduce the stock price variance. Stock
market opening may also simultaneously trigger an increase in the variance of
information sets available to the FIIs thereby implying a possibility of an increase in
the stock return volatility. The following table shows the Volatility Ratio of the Indian
corporate sector.

Year Vo1ati1ity Ratio

1990-91 3.75
1991-92 8.05
1992-93 3.86
1993-94 3.30
1994-95 2.13
1995-96 3.46
1996-97 3.26
199F-98 3.75
1998-99 3.72
1999-00 4.82
2000-01 4.31
2001-02 2.43
2002-03 3.36
2003-04 3.17
2004-05 2.75
2005-06 2.74
2006-07 2.81
Year Vo1ati1ity Ratio
1990-07 3.63
1990-97 3.97
1997-02 3.80
2002-07 2.96

Analysis of stock index volatility reveals that the period around 1991 is the most
volatile period in the stock market due to the Balance of Payment crisis and the
subsequent initiation of economic reforms in India. During 1991-92 the value of
volatility ratio is as high as 8.05 whereas Mean standard deviation of the study period
is 3.63. In the initial sub-period of liberalisation i.e., 1991-97 the ratio is at 3.97
because of the announcement of first phase of reforms. It shows a consistent fall in
second and third sub-periods to 3.80 and 2.96 respectively. There has been a marked
fall of around 25% between the volatility levels over the first and third sub-periods of
the study. The second highest volatile year was 1999-00 when the ratio was 4.82.
During the study period the volatility of the Indian stock market has not shown any
significant pattern on a year-to-year basis although it has continuously decreased over
the three sub periods. As regards the level of volatility, mean volatility in the post
liberalization period shows a temporary increase followed by a decrease on a yearly
basis in cycles even though the change in most cases is marginal. This was due to the
increase in the FII activity in the Indian stock market during the period.
Analysis also shows that stock market cycles in India have not intensified after
financial liberalization. A generalized reduction in instability in the post reform period
in India has been observed.


SR. NO. Criteria BSE NSE
1 Capital required Minimum 10 Crores Minimum 10 Crores
2 Market Capitalisation Minimum 2 Times Minimum 25 Crores
Of Paid up Capital
3 Profit Making Record At-least last 3 years N.A
4 Net Worth Minimum 20 cr The net worth of the
company has not been
wiped out by the
accumulated losses
resulting in a negative
net worth
Comparison when company/ies is/are already listed on other stock exchange/s
5 Capital Required Minimum 3 Crores Minimum 10 Crores
6 Market Capitalization Minimum 2 Times Minimum 25 Crores
Paid up of Capital
7 Profit Making Record At-least last 3 years At-least two out of
the last three financial
8 Net Worth Required Minimum 20 cr Minimum 50 cr.
9 Dividend paying track Minimum 3 years Minimum 2 out of the
record last 3 immediately
preceding financial
10 Listing Record At-least two years At-least three years
listing record with listing record with
any Regional Stock any Regional Stock
Exchange. Exchange.