INTRODUCTION TO Indian capital Market The capital market deals with capital.

Capital Market is generally understood as a market for long term funds and investments in long term instruments available in this market. However now this includes short-term funds. Capital markets mean the market for all the financial instruments, short term and long term as so commercial industrial and government paper. The capital market is a market where borrowing and lending of long term funds takes place. Capital market deals in both, debt and equity. In these markets productive capital is raised and made available to the corporate. The governments both central and state raise money in the capital market through the issue of government securities. Capital market refers to all the institutes and mechanisms of raising medium and long-term funds, through various instruments available like shares, debentures, bonds etc. Thus the capital market plays a very important role in promoting economic growth through the mobilization of long-term savings and the savings get invested in the economy for productive purpose. The capital market in India is a well integrated structure and its components include stock exchanges, developed banks investment trusts, insurance corporations and provident fund organization. It caters to the varied needs for capital of agriculture, industrial and trading sectors of the economy. There are two important operations carried on in these markets. The raising the new capital and Trading in the securities already issued by the companies. With the pace of economic reforms followed in India, the importance of capital markets has grown in the last ten years. Corporate both in the private sector as well as in the public sector raise thousands of crorers of rupees in these markets. The governments, through Reserve Bank of India, as well as financial institutes also raise a lot of money from these markets, The capital market serves a very useful purpose by pooling the savings. The capital markets encourage capital formation in the country. The capital markets mobilize savings of the households and the industrial concerns. Capital markets also facilitate the growth of the industrial sector, as well as the other sectors of the economy.

ADVANTAGES OF CAPITAL MARKET The capital markets provide funds for the projects in backward areas. Thus, Capital markets generate employment in the country. They also facilitate the development of stock markets. Due to capital markets, the public has alternative sources of investment. The public can invest not only in bank deposits, but also in shares and debentures issued by public companies. The banks and FIs may also write off a part of loan, or they re-schedule the loan, so as to offer payment flexibility to the weak units, which in turn help the weak units to overcome financial crisis. INTERMEDIARIES IN CAPITAL MARKET Capital market requires many intermediaries who are responsible to transfer funds from those who save to those who require these funds for investments. The efficiency of the markets is dependent on the specialization attained by these intermediaries. Some of them are as follows: 1. 2. 3. 4. 5. 6. 7. Stock Exchanges. Banks. Investment Trusts and Companies. Specialized Financial Institutions or Development banks. Mutual Funds. Non-Banking Financial Institutions. International Financial Investors and Institutions.

Investors in capital market The supply in this market comes from savings from different sectors of the economy. These savings accrue from the following sources: 1. 2. 3. 4. 5. 6. 7. Individuals. Corporate. Governments. Foreign countries. Banks. Provident Funds. Financial Institutions.

All these entities contribute to savings in the economy part of these savings naturally flow in the capital markets. Individuals invest in these markets directly by investing in shares or debentures of companies through bond issues of public sector units or through mutual funds. Corporate who have more savings than their requirement for funds also are participants in this market. There has been considerable growth in the capital markets in India. The following are the factors responsible for the growth of capital markets in India. Growth of Stock Exchanges in India Growth of Financial Institutions Growth of Mutual Funds Growth of Merchant banking in India Growth of Multinationals Growing Public Confidence Growth of Entrepreneurs Development of Venture Capital Funds Development of Credit Rating Agencies Setting up of SEBI Setting up of Clearing Corporation Setting up of National Securities Clearing Corporation Setting up of Corporate Governance of India Limited

SCENARIO OF INDIAN CAPITAL MARKET In the era of globalization and liberalization, the capital market assumes a grater importance, The smooth functioning of the capital market depends on the regulators, and investors. The past decade has been a golden age for capital markets in India. It is now a far more important source of finance than traditional financial intermediaries for corporate sector. Reforms in the capital market, particularly the establishment empowerment of SEBI, market determined allocation of resources, screen based nation-trading, dematerialization and electronic transfer of securities, rolling settlement and ban on deferral products, sophisticated risk management and derivatives trading, have greatly improved the regulatory framework and efficiency of trading and settlement. Indian market is now comparable to many developed markets in terms of a number of quantitative parameters. The process of reforms has led to a pace of growth of markets almost unparalleled in the history of any country. Capital market in India has grown exponentially as measured in terms of amounts raised from the market, number of stock exchanges and intermediaries;

have changed significantly. The market has witnessed fundamental institutional changes resulting in drastic reduction in transaction cost and significant improvements in efficiency, transparency and safety, Indian market is now comparable to many developed markets, There are few countries, which have higher turnover ratio than India, market capitalization as percentage of GNP compares favorable even with advanced countries and is much better than emerging market. Role of Capital Market in India 1. CAPITAL FORMATION The capital market encourages capital formation in the country. Rate of capital formation depends upon savings in the country. Though the banks mobilize savings, they are not sufficient to match the requirements of the industrial sector. The capital market mobilizes savings of households and of the industrial concern. Such savings are then invested for productive purposes. Thus savings and investment leads to capital formation in country. 2. ECONOMIC GROWTH Capital market facilitates the growth of the industrial sector as well as other sectors of the economy. The main function of the capital market is to transfer resources (funds) from masses to the industrial sector. The capital market makes it possible to lend funds to various projects, both in the private as well as public sector. 3. DEVELOPMENT OF BACKWARD AREAS The capital markets provide funds for the projects in backward areas, This facilitates the economic development of backward areas. 4. GENERATES EMPLOYMENT Capital market generates employment in the country: i) ii) Direct employment in the capital markets such as stock markets, financial institutions etc. Indirect employment in all sectors of the economy, because of the funds provided for developmental projects.

5. LONG TERM CAPITAL TO INDUSTIRAL SECTOR The capital market provides a permanent long-term capital for the companies. Once, the funds are collected through issues, the money

remains with the company. The company is left free with the funds while investors exchange securities among remains with the company. The company is left free with the funds while investors exchange securities among themselves. 6. GENERATION OF FOREIGN CAPITAL The capital market makes possible to generate foreign capital, Indian firms are able to generate capital from overseas markets by way of bonds and other securities. Such foreign exchange funds are vital for the economic development of the nation. 7. DEVELOPING ROLE OF FINANCIAL INSTITUTIONS The various agencies of capital market such as Industrial Financial Corporation of India (IFCL), State Finance Corporations (SFC), Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), Unit Trust of India (UTI), Life Insurance Corporation of India (LIC), etc. Have been rendering useful services to the growth of industries. They have been financing, promoting and underwriting the functions of the capital market. 8. INVESTMENT OPPORTUNITIES Capital markets provide excellent investment opportunities to the members of the public. The public can have alternative source of investment i.e. in bonds, shares and debentures etc. MUTUAL FUNDS The mutual fund industry in India has come into existence in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and RBI. Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. MF seems to be the most suitable vehicle of investment for the common people as it offers opportunity to invest in a

diversified, professionally managed basket of securities as a relatively low cost. There are number of schemes of Mutual fund and all of them have different character and objective. It is the skill of the investor to keep in view the objective and then take decision where to invest. For e.g. in the wake of boom in the software sector, the Indian Mutual Fund launched various sector specific schemes that entailed investment only in software stocks for that period. 1. 2. 3. 4. 5. 6. 7. 8. 9. Dept-Oriented Schemes Equity-Oriented Schemes Open-Ended Vs Close-Ended Schemes Pure Growth Schemes Pure Income Schemes Balances Schemes Tax Saving Scheme Sector Funds Money Market Mutual Funds

DEBT MARKET The debt market is one of the most critical components in the financial system of any economy and act as the fulcrum of a modern financial system. The debt market in most developed countries is many times bigger than the other financial markets including the equity market. The debt markets in advanced countries are significantly larger and deeper than equity markets. But in India, the trend is just the opposite. The development of debt market in India has not been as remarkable as in the equity market. However, it has undergone considerable changes in the last few years. The debt market in India can be divided into two categories Government securities market consisting of Central Government and State Government securities; and bond market consisting of FI bonds, PSU bonds and corporate bonds/debentures. The government securities segment is the most dominant category in the debt market. The participants in the debt market are a small number of large players, which has resulted in the debt market evolving into a wholesale market. Most primary debt issues are privately placed or auctioned to the

participants while secondary market dealings are negotiated on telephone, The debt market has become more diversified with the entry of new participants. The major participants in the debt market are as follows: 1. 2. 3. 4. 5. 6. 7. 8. 9. Central And State Government Primary Dealers Public Sector Undertakings (PSUs) Corporate Banks Mutual funds (MF) Foreign Institutional Investors (FIIs) Provident funds (PFs) Charitable Institutions And Trusts

EQUITY MARKET In financial markets, stock is the capital raised by a corporation through the issuance and distribution of shares, A person or organization which holds shares of stocks is called a shareholder. The aggregate value of a corporations issued shares is its market capitalization, When one buys a share of a company he becomes a shareholder in that company. Shares are also known as Equities. Equities have the potential to increase in value over time, It also provides the portfolio with the growth necessary to reach the long term investment goals. Research studies have proved that the equities have outperformed than most other forms of investments in the long term. Equities are considered the most challenging and the rewarding, when compared to other investment options. Research studies have proved that investments in some shares with a longer tenure of investment have yielded far superior returns than any other investment, However, this does not mean all equity investments would guarantee similar high returns, Equities are high-risk investments. One needs to study them carefully before investing. Since 1990 till date, Indian stock market has returned about 17% to investors on an average in terms of increase in share prices or capital appreciation annually. Besides that on average stocks have paid 1.5% dividend annually. Dividend is a percentage of the face value of a share that a company returns to its shareholders from its annual profits. Compared to most other forms of

investments, investing in equity shares offers the highest rate of return, if invested over a longer duration. SEBI SEBI is regulator to control Indian capital market, Since its establishment in 1992, it is doing hard work for protecting the interests of Indian investors, DEBI gets education from past cheating with nave investors of India. Now, SEBI is more strict with those who commit frauds in capital market. The role of security exchange board of India (SEBI) in regulating Indian capital market is very important because government of India can only open or take decision to open new stock exchange in India after getting advice from SEBI. If SEBI thinks that it will be against its rules and regulations, SEBI can ban on any stock exchange to trade in shares and stocks. Now, we explain role of SEBI in regulating Indian Capital Market more deeply with following points: 1. Power to make rules for controlling stock exchange : SEBI has power to make new rules for controlling stock exchange in India. For example, SEBI fixed the time of trading 9 AM and 5 PM in stock Market. 2. To provide license to dealers and brokers : SEBI has power to provide license to dealers and brokers of capital market. If SEBI sees that any financial product is of capital nature, the SEBI can also control to that product and its dealers. One of main example is ULIPs case, SEBI said, It is just like mutual funds and all banks and financial and insurance companies who want to issue it, must take permission from SEBI. 3. To stop fraud in Capital Market : SEBI has many powers for stopping fraud in capital market. It can ban on the trading of those brokers who are involved in fraudulent and unfair trade practices relating to stock market. It can impose the penalties on capital market intermediaries if they involve in insider trading

4. To Control the Merge, Acquisition and Takeover the companies: Many big companies in India want to create monopoly in capital market. So, these companies buy all other companies or deal of merging. SEBI sees whether this merge or acquisition is for development of business or to harm capital market. 5. To audit the performance of stock market : SEBI uses his powers to audit the performance of different Indian stock exchange for bringing transparency in the working of stock exchanges. 6. To make new rules on carry forward transactions : Share trading transactions carry forward can not exceed 25 % of brokers total transactions. 90 day limit for carry forward.

7. To create relationship with ICAI : ICAI is the authority for making new auditors of companies. SEBI creates good relationship with ICAI for bringing more transparency in the auditing work of company accounts because audited financial statements are mirror to see the real face of company and after this investors can decide to invest or not to invest. Moreover, investors of India can easily trust on audited financial reports. After Satyam Scam, SEBI is investigating with ICAI, whether CAs are doing their duty by ethical way or not. 8. Introduction of derivative contracts on Volatility Index : For reducing the risk of investors, SEBI has now been decided to permit Stock Exchanges to introduce derivative contracts on Volatility Index, subject to the condition that; a. The underlying Volatility Index has a track record of at least one year. b. The Exchange has in place the appropriate risk management framework for such derivative contracts.

Before introduction of such contracts, the Stock Exchanges shall submit the following: 1.Contract specifications 2.Position and Exercise Limits 3.Margins 4.The economic purpose it is intended to serve 5.Likely contribution to market development 6.The safeguards and the risk protection mechanism adopted by the exchange to ensure market integrity, protection of investors and smooth and orderly trading. 7.The infrastructure of the exchange and the surveillance system to effectively monitor trading in such contracts, and effectively monitor trading in such contracts , and details of settlement procedures & systems 8.Details of back testing of the margin calculation for a period of one year considering a call and a put option on the underlying with a delta of 0.25 & -0.25 respectively and actual value of the underlying. 9.To require report of Portfolio Management Activities: SEBI has also power to require report of portfolio management to check the capital market performance, Recently, SEBI sent the letter to all Registered Portfolio Managers of India for demanding report. 10.To educate the investors: Time to time, SEBI arranges scheduled workshops to educate the investors. On 22 May 2010 SEBI imposed workshop. If you are investor, you can get education through SEBI leaders by getting update information on the prescribed pag