Deep Education Society

SaS institute of management studies

subject :- Financial Accounting

Project report on
Capital Market
Submitted by,
SUPRIYA .B. THETE
DEEPALI. V. AHHIRAO
LEKHA .R. PATIL
VRUSHALI S. PATIL
SNEHANKA K. PATIL

What is capital market?

 Buyers and sellers interacting in a common space use wealth to create more wealth
essentially
Capital is wealth, usually in the form of money or property. Capital markets exist when
two groups interact: those who are seeking capital and those who have capital to provide. The
capital seekers are the businesses and governments who want to finance their projects and
enterprises by borrowing or selling equity stakes. The capital providers are the people and
institutions who are willing to lend or buy, expecting to realize a profit.
A capital market is a market for securities (debt or equity), where business enterprises
(companies) and governments can raise long-term funds. It is defined as a market in which
money is provided for periods longer than a year, as the raising of short-term funds takes place
on other markets (e.g., the money market). The capital market includes the stock market (equity
securities) and the bond market (debt). Financial regulators, such as the UK's Financial Services
Authority (FSA) or the U.S. Securities and Exchange Commission (SEC), oversee the capital
markets in their designated jurisdictions to ensure that investors are protected against fraud,
among other duties
Capital markets may be classified as primary markets and secondary markets. In primary
markets, new stock or bond issues are sold to investors via a mechanism known as underwriting.
In the secondary markets, existing securities are sold and bought among investors or traders,
usually on a securities exchange, over-the-counter, or elsewhere

Meaning and Concept of Capital Market

 Capital Market is one of the significant aspects of every financial market. Hence it is
necessary to study its correct meaning. Broadly speaking the capital market is a market for
financial assets which have a long or indefinite maturity. Unlike money market instruments the
capital market instruments become mature for the period above one year. It is an institutional
arrangement to borrow and lend money for a longer period of time. It consists of financial
institutions like IDBI, ICICI, UTI, LIC, etc. These institutions play the role of lenders in the
capital market. Business units and corporate are the borrowers in the capital market. Capital
market involves various instruments which can be used for financial transactions. Capital market
provides long term debt and equity finance for the government and the corporate sector. Capital
market can be classified into primary and secondary markets. The primary market is a market for
new shares, where as in the secondary market the existing securities are traded. Capital market
institutions provide rupee loans, foreign exchange loans, consultancy services and underwriting.

A CAPITAL IDEA
 Investment capital is wealth that you put to work. You might invest your capital in business
enterprises of your own. But there’s another way to achieve the same goal: Let someone else do
the investing for you. By participating in the stock and bond markets, which are the pillars of the
capital markets, you commit your capital by investing in the equity or debt of issuers that you
believe have a viable plan for using that capital. Because so many investors participate in the
capital markets, they make it possible for enter prises to raise substantial sums—enough to carry
out much larger projects than might be possible otherwise.

Types of Capital Market:

• Primary market (new issue market):- deals with 'new securities', that is,
securities which were not previously available and are offered to the investing
public for the first time. It is the market for raising fresh capital in the form of
shares and debentures. It provides the issuing company with additional funds for
starting a new enterprise or for either expansion or diversification of an existing
one, and thus its contribution to company financing is direct. The new offerings
by the companies are made either as an initial public offering (IPO) or rights
issue.

• Secondary market/ stock market (old issues market or stock exchange):- is

the market for buying and selling securities of the existing companies. Under this,
securities are traded after being initially offered to the public in the primary
market and/or listed on the stock exchange. The stock exchanges are the exclusive
centres for trading of securities. It is a sensitive barometer and reflects the trends
in the economy through fluctuations in the prices of various securities. It been
defined as, "a body of individuals, whether incorporated or not, constituted for the
purpose of assisting, regulating and controlling the business of buying, selling and
dealing in securities". Listing on stock exchanges enables the shareholders to
monitor the movement of the share prices in an effective manner. This assist them
to take prudent decisions on whether to retain their holdings or sell off or even
accumulate further. However, to list the securities on a stock exchange, the
issuing company has to go through set norms and procedures.
 Capital markets may be classified as primary markets and secondary markets. In primary
markets, new stock or bond issues are sold to investors via a mechanism known as underwriting.
In the secondary markets, existing securities are sold and bought among investors or traders,
usually on a securities exchange, over-the-counter, or elsewhere. purchases. Occasionally, this
trust is abused. But during the last half century, the federal government has played an
increasingly important role in ensuring honest and equitable dealing. As a result, markets have
thrived as continuing sources of investment funds that keep the economy growing and as devices
for letting many Americans share in the nation's wealth.

Regulatory Framework :

In India, the capital market is regulated by the Capital Markets Division of the Department of
Economic Affairs, Ministry of Finance. The division is responsible for formulating the policies
related to the orderly growth and development of the securities markets (i.e. share, debt and
derivatives) as well as protecting the interest of the investors. In particular, it is responsible for
(i) institutional reforms in the securities markets, (ii) building regulatory and market institutions,
(iii) strengthening investor protection mechanism, and (iv) providing efficient legislative
framework for securities markets, such as Securities and Exchange Board of India Act, 1992
(SEBI Act 1992); Securities Contracts (Regulation) Act, 1956; and the Depositories Act, 1996.
The division administers these legislations and the rules framed thereunder.

The Securities and Exchange Board of India (SEBI) is the regulatory authority established under
the SEBI Act 1992, in order to protect the interests of the investors in securities as well as
promote the development of the capital market. It involves regulating the business in stock
exchanges; supervising the working of stock brokers, share transfer agents, merchant bankers,
underwriters, etc; as well as prohibiting unfair trade practices in the securities market. The
following departments of SEBI take care of the activities in the secondary market:-

 Market Intermediaries Registration and Supervision Department (MIRSD) - concerned

with the registration, supervision, compliance monitoring and inspections of all market
 intermediaries in respect of all segments of the markets, such as equity, equity
derivatives, debt and debt related derivatives.

 Market Regulation Department (MRD) - concerned with formulation of new policies as

well as supervising the functioning and operations (except relating to derivatives) of
securities exchanges, their subsidiaries, and market institutions such as Clearing and
settlement organizations and Depositories.

 Derivatives and New Products Departments (DNPD) - concerned with supervising

trading at derivatives segments of stock exchanges, introducing new products to be traded
and consequent policy changes.

Raising Capital

Companies typically need capital infusions at several stages in their lives: at birth, as they
grow, and if they’re facing financial problems. Fortunately, they can seek capital from several
sources, though availability may vary depending on the age and size of the company. And each
source has some advantages as well as potential drawbacks.

CAPITALIZING A START-UP Imagine for a moment that you want to start a company.
You’ll need capital to buy equipment, set up an office, hire employees, and attract clients, among
other things. Most of the start-up capital—also known as seed capital—may be your own
money. You may liquidate your investments, tap your bank accounts, or maybe even mortgage
your home to get the capital you need. The good thing about using your own capital to finance
your enterprise is that you don’t incur any obligations to others, and you maintain control
because you’re the only one with a stake. The risk, of course, is that if your business fails, all the
money you lose is your own. And unless you’re unusually wealthy, there’s probably a limited
amount of money you can—or are willing to—invest. A second major source for raising seed
capital is friends and family or other early stage investors who are willing and able to commit
money, either buying an equity interest or providing favorable-rate loans. As a group, the

VENTURING OUT Private companies may seek funding from venture capital firms—
often referred to as VCs—that specialize in investing large sums at a particular stage of a
company’s development. While some venture firms may assume the risk of backing start-ups,
the majority invest in companies that seem poised for significant growth or that operate in a
particular industry in which the VC firm specializes. Venture capitalists are willing to take
bigger risks than most other suppliers of capital because they have enough resources to make
substantial investments in several companies at the same time. While each business by itself may
pose a significant risk, if even a few succeed, the venture capital firm may realize large profit .

REVIEW OF REGULATORY ENVIRONMENT

SEBI : Securities and Exchange Board of India (SEBI) was set up as an administrative
arrangement in 1988.In 1992, the SEBI Act was enacted, which gave statutory status to SEBI. It
mandates SEBI to perform a dual function: investor protection through regulation of the
securities market and fostering the development of this market. SEBI has been vested most of the
functions and powers under the Securities Contract Regulation (SCR) Act, which brought stock
exchanges, their members, as well as contracts in securities which could be traded under the
regulations of the Ministry of Finance. It has also been delegated certain powers under the
Companies Act. In addition to registering and regulating intermediaries, service providers ,
mutual funds, collective investment schemes, venture capital funds and takeovers, SEBI is also
vested with the power to issue directives to any person(s) related to the securities market or to
companies in areas of issue of capital, transfer of securities and disclosures. It also has powers to
inspect books and records, suspend registered entities and cancel registration.

Stock Exchanges : SEBI issued directives that require that half the members of the governing
boards of the stock exchanges should be non broker public representatives and include a SEBI
nominee. To avoid conflicts of interest, stock brokers are a minority in the committees of stock
exchanges set up to handle matters of discipline, default and investor-broker disputes. The
exchanges are required to appoint a professional, non member executive director who is
accountable to SEBI for the implementation of its directives on the regulation of stock
exchanges. SEBI has introduced a mechanism to redress investor grievances against brokers.
Further, all issues are regulated through a series of disclosure norms as prescribed by SEBI and
respective stock exchanges through their listing agreement. After a security is issued to the
public and subsequently listed on a stock exchange, the issuing company is required under the
listing agreement to continue to disclose in a timely manner to the exchange, to the holders of the
listed securities and to the public any information necessary to enable the holders of the listed
securities to appraise its position and to avoid the establishment of a false market in such listed
securities.

EMERGING CHALLENGES & ISSUES:

Despite these significant developments, the Indian capital market has been in decline in the
recent past. However, currently the market has recovered substantially and hopefully, the upward
trend is expected to remain. The Indian security market still faces many challenges and issues
that need to be resolved.
Market infrastructure and investor awareness has to be improved as it obstructs the efficient
flow of information and effective corporate governance.
The legal mechanism should be activated to protect small shareholders by giving them
speedy grievance redressal mechanism.
The trading system has to be made more transparent. Market information is a crucial public
good that should be made available to all participants to achieve market efficiency.
Further, SEBI need to monitor more closely cases of insider trading and price manipulation
and to meet the challenges of possible roles of market makers.
There is a need for integration of the security market through consolidation of stock
exchanges. The trend all over the world is to consolidate and merge existing stock exchanges.
Need for integration of security markets with banks so as to improve the payment situation
and to reduce the risks of scams.
Issues relating to market performance : Over the years the turnover of big exchanges has
increased but only at the cost of small exchange. The turn over of NSE and BSE were
Rs.1339510 crores and Rs.1000032 crores respectively for the year 2000-2001. Further, the top
six exchanges of India out of a total of 23 accounted for over 99% of the total turnover of all
exchanges.
Another important issue is that turnover in our exchanges are dominated mainly by few
securities. This is clear because top 100 traded securities on BSE had a share of 95% in the total
turnover on BSE for the year 2000-2001, while the listed securities on BSE are approximately
10000. So this brings us to the conclusion that most of the securities on Indian Stock Exchanges
are either not traded or very thinly traded .This also indicates that there is a problem of liquidity
in our exchanges.
Further, on the one hand the object of circuit breaker is to prevent volatility but on the other
hand many feel that the breaker distorts the basic price discovery process of scrip. This is again a
matter of debate and whether the breaker should stay or be done away with depends upon what is
more important for stock exchange, i.e. price discovery which should be independent or
controlled volatility.
Significance, Role or Functions of Capital Market

Like the money market capital market is also very important. It 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. Mobilization of Savings : Capital market is an important source for mobilizing idle

savings from the economy. It mobilizes funds from people for further investments in the
productive channels of an economy. In that sense it activate the ideal monetary resources and
puts them in proper investments.
2. Capital Formation : Capital market helps in capital formation. Capital formation is net
addition to the existing stock of capital in the economy. Through mobilization of ideal
resources it generates savings; the mobilized savings are made available to various segments
such as agriculture, industry, etc. This helps in increasing capital formation.
3. Provision of Investment Avenue : Capital market raises resources for longer periods of
time. Thus it provides an investment avenue for people who wish to invest resources for a long
period of time. It provides suitable interest rate returns also to investors. Instruments such as
bonds, equities, units of mutual funds, insurance policies, etc. definitely provides diverse
investment avenue for the public.
4. Speed up Economic Growth and Development : Capital market enhances production and
productivity in the national economy. As it makes funds available for long period of time, the
financial requirements of business houses are met by the capital market. It helps in research
and development. This helps in, increasing production and productivity in economy by
generation of employment and development of infrastructure.
5. Proper Regulation of Funds: Capital markets not only helps in fund mobilization, but it
also helps in proper allocation of these resources. It can have regulation over the resources so
that it can direct funds in a qualitative manner.
 6. Service Provision: As an important financial set up capital market provides various types
of services. It includes long term and medium term loans to industry, underwriting services,
consultancy services, export finance, etc. These services help the manufacturing sector in a
large spectrum.
7. Continuous Availability of Funds: Capital market is place where the investment avenue is
continuously available for long term investment. This is a liquid market as it makes fund
available on continues basis. Both buyers and seller can easily buy and sell securities as they
are continuously available. Basically capital market transactions are related to the stock
exchanges. Thus marketability in the capital market becomes easy.

INDIAN CAPITAL MARKETz

Evolution

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 meagre 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.

HISTORY OF THE INDIAN CAPITAL MARKET

• The history of the capital market in India dates back to the eighteenth century when East
India Company securities were traded in the country. Until the end of the nineteenth
century, securities’ trading was unorganized and the main trading centers were Bombay
(now Mumbai) and Calcutta (now Kolkata). Of the two, Bombay was the chief trading
centre wherein bank shares were the major trading stock. During the American Civil War
(1860-61), Bombay was an important source of supply for cotton. Hence, trading
activities flourished during the period, resulting in a boom in share prices. This boom, the
first in the history of the Indian capital market, lasted for a half a decade. The bubble
burst on July 1, 1865, when there was tremendous slump in share prices.
• Trading was at that time limited to a dozen brokers: their trading place was under a
banyan tree in front of the Town Hall in Bombay. These stockbrokers organized an
informal association in 1875-Native Shares and Stock Brokers Association, Bombay. The
stock exchanges in Calcutta and Ahmadabad, also industrial and trading centers, came up
later. The Bombay Stock Exchange was recognized in May 1927 under the Bombay
Securities Contracts Control Act, 1925.
• The capital market was not well organized and developed during the British rule because
the British government was not interested in the economic growth of the country. As a
result, many foreign companies depended on the London capital market for funds rather
than on the Indian capital market.
• In the post-independence period also, the size of the capital market remained small.
During the first and second five-year plans, the government's emphasis was on the
 development of the agricultural sector and public sector undertakings. The public sector
undertakings were healthier than the private undertakings in terms of paid-up capital but
their shares were not listed on the stock exchanges. Moreover, the Controller of Capital
Issues (CCI) closely supervised and controlled the timing, composition, interest rates,
pricing, allotment, and floatation costs of new issues. These strict regulations
demotivated many companies from going public for almost four and a half decades.
• In the 1950s, Century Textiles, Tata Steel, Bombay Dyeing, National Rayon, and
Kohinoor Mills were the favorite scrips of speculators. As speculation became rampant,
the stock market came to be known as 'Satta Bazaar'. Despite speculation, non-payment
or defaults were not very frequent. The government enacted the Securities Contracts
(Regulation) Act in 1956s was also characterized by the establishment of a network for
the development of financial institutions and state financial corporations.
• The 1960s was characterized by wars and droughts in the country which led to bearish
trends. These trends were aggravated by the ban in 1969 on forward trading and 'badla',
technically called 'contracts for clearing.' 'Badla' provided a mechanism for carrying
forward positions as well as borrowing funds. Financial institutions such as LIC and GIC
helped to revive the sentiment by emerging as the most important group of investors. The
first mutual fund of India ,the Unit Trust of India (UTI) came into existence in 1964.
• In the 1970s, badla trading was resumed under the disguised form of 'hand-delivery
contracts-A group.' This revived the market. However, the capital market received
another severe setback on July 6, 1974, when the government promulgated the Dividend
Restriction Ordinance, restricting the payment of dividend by companies to 12 per cent of
the face value or one-third of the profits of the companies that can be distributed as
computed under section 369 of the Companies Act, whichever was lower. This led to a
slump in market capitalization at the BSE by about 20 per cent overnight and the stock
market did not open for nearly a fortnight. Later came a buoyancy in the stock markets
when the multinational companies (MNCs) were forced to dilute their majority stocks in
their Indian ventures in favor of the Indian public under FERA, 1973. Several MNCs
opted out of India. One hundred and twenty-three MNCs offered shares were lower than
their intrinsic worth. Hence, for the first time, the FERA dilution created an equity cult in
India. It was the spate of FERA issues that gave a real fillip to the Indian stock markets.
 For the first time, many investors got an opportunity to invest in the stocks of such MNCs
as Colgate, and Hindustan Liver Limited. Then, in 1977, a little-known entrepreneur,
Dhirubhai Ambani, tapped the capital market. The scrip, Reliance Textiles, is still a hot
favorite and dominates trading at all stock exchanges.
• The 1980s witnessed an explosive growth of the securities market in India, with
millions of investors suddenly discovering lucrative opportunities. Many investors
jumped into the stock markets for the first time. The government's liberalization process
initiated during the mid-1980s, spurred this growth. Participation by small investors,
speculation, defaults, ban on badla, and resumption of badla continued. Convertible
debentures emerged as a popular instrument of resource mobilization in the primary
market. The introduction of public sector bonds and the successful mega issues of
Reliance Petrochemicals and Larsen and Toubro gave a new lease of life to the primary
market. This, in turn, enlarged volumes in the secondary market. The decade of the
1980s was characterized by an increase in the number of stock exchanges, listed
companies, paid up-capital, and market capitalization.

Capital Market Institutions and Characteristics

The Bombay Stock Exchange

The oldest stock exchange in the country, was founded in 1875.It is the leading
exchange in the country, and until recently accounted for about 80 percent of all stock
transactions. Twenty-two other stock exchanges also operate in India, as the government has
restricted the geographical reach of each of its exchanges. There are some7000 listed stocks,
 7,000 brokers who are members of the 23 exchanges, along with an estimated100,000 sub
brokers who interface with investors, a million active traders, and perhaps20 million citizens
who hold equities in some form, usually a mutual fund .Despite its long history and large
number of listed stocks, the equity market has had major problems. The exchanges operated
with high commissions, a lack of disclosure of actual transaction prices, serious paperwork
problems, and unreliable clearing and settlement. The issue of new stocks was controlled by
a government agency.

Comptroller of Capital Issues

With a mission to ensure the quality of new IPOs, the CCI reviewed the financial
situation and prospects of the issuing company, and approved the price at which the new
issue could be offered. Because of its conservative approach, new issues frequently were
sharply underpriced. This created great demand for new issues. A refinery offering by the
Birla group was oversubscribed 20-fold, and its price rose quickly from 10 to 65 rupees per
share after the IPO. Another offering by the Tata group was 80-fold oversubscribed. A lottery
was used in such cases, with the lucky bidders winning the right to buy shares that would
immediately rise sharply in price. A number of changes since 1993 have strengthened the
capital markets. One source characterizes the changes as moving the Indian equity market
“from being amongst the backward of the world [as of mid-1993 or so] to one the most
modern in the world.”* Four in particular have been of critical importance:

The Securities and Exchange Board of India

Established in 1992, SEBI has a dual mandate of regulating capital markets and
promoting their development. Since its creation, SEBI has sought to improve the structure and
functioning of stock exchanges and to ensure disclosure and investor protection. It has grown
rapidly from an initial staff of 10 to a current level of 150 Securities and Exchange Board of
India (SEBI) was first established in the year 1988 as a non-statutory body for regulating the
securities market. It became an autonomous body in 1992 and more powers were given through
an ordinance. Since then it regulates the market through its independent powers.

Objectives of SEBI:
 As an important entity in the market it works with following objectives:

1. It tries to develop the securities market.

2. Promotes Investors Interest.
3. Makes rules and regulations for the securities market.

Functions Of SEBI:

Find below SEBI's important functions:

1. Regulates Capital Market

2. Checks Trading of securities.

3. Checks the malpractices in securities market.
4. It enhances investor's knowledge on market by providing education.
5. It regulates the stockbrokers and sub-brokers.

SEBI In India's Capital Market:

SEBI from time to time have adopted many rules and regulations for enhancing the Indian
capital market. The recent initiatives undertaken are as follows:

The National Stock Exchange

NSE was established in 1994 as a competitor to the Bombay Stock Exchange (BSE).
NSE was backed by major financial institutions, led by the Industrial Development Bank of
India. The exchange introduced nationwide screen-based trading with a dish-to-satellite data
transmission system that provides instant trading access to brokers anywhere in India. It
spent more than $100 million developing its system, which now has instantaneous access
through more than 1,500 locations throughout the country. NSE forced BSE and other
exchanges to adapt by upgrading

Global capital market:

 When companies open business operations abroad, or form joint partnerships with
companies based in other countries, they become players in an international capital marketplace.
The same is true when individual or institutional investors put their capital to work outside their
national borders.

Conclusion

How to manage capital inflows remains an important policy issue for many emerging market
economies. The issue has assumed even greater importance in recent years as the volume of
capital flows picked up against the background of increasing global financial integration. In this
environment, even countries without a fully open capital account can no longer consider
themselves immune from the risks of capital inflows as they liberalize their trade regime and
domestic financial system