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CHAPTER-1.

INTRODUCTION

Capital Market is a sine-quo-non_ for speedy growth and development


of a country's economy and India is no exception to it. Capital market is
generally known for long-term funds as distinct from the money market
which deals in short-term funds. Capital market has two components - (i)
Primary Market and (ii) Secondary Market. Since 1991, due to adoption
of liberalization measures, the capital market in our country has been
witnessing a number of legal, structural and procedural changes. The
process of capital market reforms in our country has been aimed at
moving towards a market that is modern in terms of infrastructure and
practices, and globally competitive. Among v&rious changes the most
important and remarkable changes during the post-liberalization period in
our capital market are as under.
The Securities and Exchange Board of India (SEBI) has been given
statutory power. The age-long practice of pre-determined fixed pricing of
the public issues by the issuers [which was widely used by the Companies
in the era of Controller of Capital Issues (CCI)] has not been dispensed
with but side by side a new one named Book Building Process has been
introduced. Under Book Building Process the .issue price of shares is
determined by demand and supply, and now most of the companies are
resorting to this process for their public issues. Through modification of
SEBI (Disclosure and Investor Protection) guidelines entry norms for
Initial Public Offers have been tightened. The reforms pertaining to
secondary market include online trading; trading of shares in
dematerialized form, abolition of badla trading, introduction of rolling
settlement, commencement of derivatives trading on NSE and BSE,
commencement of internet based trading services and allowing FII entry
in the Indian capital market.
Consequent to changes made by SEBI, the Indian Capital Market,
during the past several years has witnessed a rise in the number of listed
shares, number of traded shares, value of traded shares, market
capitalization of shares, number of investors, number of stock exchanges,
amount of Foreign Direct Investment (FDI), amount of investment by
Fils (Foreign Institutional Investors) etc. All these indicate that growth of
Indian Capital Market during the past several years has been phenomenal.
And obviously, such growth of Indian Capital Market indicates the

growth of our economy. Hence the area of the growth of the Indian
Capital Market, in my opinion, is a most important topic, which requires
further in-depth study. I think, there is enough research scope in the area.
From the review of literatures also it appears that though a number of
write ups are there in the area of capital market focusing different aspects
of capital market, none of them finds the analysis of Growth of Capital
Market in India. The present research study attempts to fill this gap. This
is the reason behind the choice of this topic for the purpose of research
work.
1.1 OBJECTIVES OF THE STUDY

The objectives of ,the study are varied. The present study is mainly
aimed at evaluating and analyzing the growth achieved in Indian Capital
Market during the study period. The other objectives of the study are:
(l)to study and analyze the major reforms in the area of capital market
leading to the achieved growth ;
(2) to make statistical analysis of growth of Indian capital market
during the study period by using some selected parameters of
Indian economy and some other parameters ;
(3) to compare the growth of Indian capital market with the same in
some selected countries ( both developed as well as developing ) ;
and finally
(4) to make some concluding remarks on the growth of Indian capital
market, and on the basis of observations of the study to give some
suggestions for further improvement and growth of Indian capital
market.
1.2 PERIOD OF THE STUDY

For the purpose of the research work a study period of ten years i.e.
from 1995-96 to 2004-05 has been taken.
1.3 SOURCES OF DATA

The data used in the study are all secondary data. The data have been
collected from Annual Reports for different years of SEBI, BSE and

NSE, from vanous authoritative books like SEBI' s Handbook of


Statistics on the Indian Securities Market, Economic Survey of the
Government of India (for different years), various authoritative Journals
like the Chartered Secretary and the Indian Journal of Commerce and
from various websites through internet.
1.4 RESEARCH METHODOLOGY

The present research study is a combination of both theoretical as


well as analytical works. The whole research work is to some extent
narrative and to a greater extent it is analytical.
In the research work the procured data have been analyzed by using
various statistical tools and techniques with a view to evaluating the
growth of Indian capital market during the period of the study. To
analyze the data, various arithmetical and statistical tools like Percentage,
Mean and Standard Deviation have been used to have an idea on the
general profile of the variables.
To measure the growth achieved by the Indian capital market during
the period of the study, the simple as well as compound growth rates have
been computed.
For computation of compounded growth rate, among various formula
in use, the National Stock Exchange of India (NSE) approved Geometric
Mean Method 1 has been used. As per this Geometric Mean Method,
Compounded Growth Rate is computed as the nth root of the product of
"n" items. If there are two items the square root is taken, if there are three
items the cube root is taken, and so on. Example: The price of a
particular security increased@ 14% in 1999,@ 5% in 2000 and@ 2% in
2001. In this case, cube --./ of 1.14 x 1.05 x 1.02 = 1.0688 = 106.88 %,
indicating a compounded annual growth rate of 6.88% {i.e. (1 06.88100)%} in the price ofthe security.

NCFM -Capital Market (Dealers) Module Work Book, National Stock Exchange of
India limited pp. 207-208
4

In appropriate places, necessary correlation and regression analyses


have been made. While making correlation analyses both Bivariate and
Partial Correlation tests have been carried out. Karl Pearson's Correlation
Coefficients have been used. To establish inter-relationship among
various variables, the Correlation Matrix Analyses have been done.
Analyses have been done to know whether various correlation
coefficients are statistically significant or not. Depending on the need of
the research study, in a number of cases, Multiple Regression Analyses
have been made to assess the relationship between one dependent
variable and several independent variables (predictor variables), where
the value of R2 tells us up to what percentage the variation in the
dependent variable is explained by the independent variables taken in the
regression model. For all these statistical computations, SPSS 15.0
version software has been used.
1.5 LIMITATION OF THE STUDY
In spite of the maximum care taken by the researcher, the present
research study is subject to the following limitations.
(a) The growth of capital market in any country is a dynamic subject.
As the study period taken in our research study covers a period of
ten years i.e. from 1995-96 to 2004-05, the findings of the study
relate to this period only.
(b)The study is based on secondary data only.
(c) For the purpose of evaluation of growth, so many methods and
techniques are in use but in our research study sirriple growth
rates, average growth rates and compounded growth rates have
been computed.
(d) As the area of capital market is a vast one, in the present research
study it was not possible to concentrate on all the aspects of Indian
capital market with equal importance. However, best efforts have
been made by the researcher to cover the major areas of Indian
capital market so that important conclusion can be drawn.

1.6 LITERATURE REVIEW .


Osborne, M.(1959), a physicist, in his article, Brownian Motions in the
Stock Market, Operation research, 7(2): 145-173, examined stock prices
to test whether they conformed to certain laws governing the motion of
physical objects - the "Brownian Motion". The study concludes that
changes in stock prices were random.
Kendall, M.G.(l953), in his article, The Analysis of Economic Time
Series, part: Prices, Journal of the Royal Statistical Society, 16 (99): 1125; Moore, A (1963) in his article, Some Characteristics of Changes in
Common Stock Price, Kyklos, 16, 1-27; Fama, E. (1965), in the article,
Random Walks in Stock Market Prices, Financial Analysis Journal,
21(5): 55-59; King, H.(l966), in the article, Market and Industry Factors
in Stock Price Behaviour, Journal of Business, 39 (supplement): 139-190
and Niarchos, N. (1972), in an analysis under title "The Stock Market in
Greece; A Statistical Analysis" studied the behaviour of stock prices by
using serial correlation technique. These studies found no evidence of
serial dependence in stock prices and the security prices were random.
Jenergreen, L. and P. Korsvold. (1975), in their study, The Non-random
. Character of Norwegian and Swedish Stock Prices, Reprinted in Elton
and Gruber, Modem Portfolio Theory and Investment Analysis, 1994
analyzed daily price changes by means of serial correlation and runs
analysis. They found relatively high correlation coefficients in some
securities. As per their study, the relatively high correlation coefficients
s~ggest that those securities were prime candidates for profitable filter
rules.
Barna, S. K.(1981), in his study, The Short Run Price Behaviour of
Securities - Some Evidence on Efficiency of Indian Capital Market,
Vikalpa, 6(2): 93.-100; Gupta, 0. P. (1985), in his study, Behaviour of
Share Prices in India: A Test of Market Efficiency, National Publishing
House, New Delhi; Srinivasan, S. P. Mahapatra and K. Sahu (1988), in
their study, Weak Form Efficiency in Indian Stock Market - No Excess
Return for Investors, Modern Management, 5(2); ObaiduJJah, M. (1990),
in the article, Stock Market Efficiency: A Statistical Inquiry, Chartered

Financial Analyst; Chaudhary, S.. K. (1991), in the study, Short Run


Share Price Behaviour; New Evidence on Weak Fonn Market Efficiency,
Vikalpa,16(4): 17-21; Dhankar, R. S. (1994), in his article, Emperical
Tests of Efficiency of the Indian Stock market, Journal of Financial
Management and Analysis, 4: 37-43; Gupta, 0. P. and A. Gupta (1991),
in their study, Emperical Study of Weak Level Efficiency in India,
Finance India, 5: 505-517, and Rao, K. C. S. and C. K. Jayarajan (1991),
in their article, Behaviour of Equity Prices in India : An Emperical
Evaluation, Finance India, 5: 349, 357 examined the serial dependence
and randomness in share prices using serial correlation and runs tests. The
results of these studies supported the weak form of efficiency in Indian
stock market.
Dhankar, R. S. (1994, in his article, Emperical tests of efficiency of the
Indian stock market: A Study of Non-specified Shares, Journal of
Financial management and Analysis, 7(2) examined the week-end prices
of non-specified group of companies. The study concluded that there was
definite pattern in successive price changes and, RWH did not seem to
hold good for non-specified group of shares.
Belgauma, M. S. (1995), in his study, Efficiency of the Indian Stock
Market: An Emperical Study, Vikalpa, 20(2); Mittal, R. K .(1994), in his
article, Weak Form Market Efficiency: Emperical Tests on the Indian
Capital Market, Pranjan, 23(3), and Gupta, 0. P. and V. Gupta (1997), in
their article, A Re-examination of Weak Form Efficiency of Indian Stock
Market, Finance India,11(3): 619-632 tested the weak form of EMH
using serial correlation and runs tests. These results showed that the
Indian stock market was efficient in the weak form.
Ray, D. (1976), in his study, Analysis of Security Press in India, Sankya,
38 (Series C, part 4): 149-164 studied seven daily index series by
applying serial correlation, runs tests and spectral analysis. The study
concluded that the random walk hypothesis was valid.
Rao, N. K. (1988), in his book "Stock Market Efficiency: The Indian
Experience, Anmol Publications, New Delhi studied the weak form of

efficiency of Indian stock market by applying serial correlation test, runs


t~sts and filter rules. The study supported the random walk hypothesis.
Fama, E. and M. Blumet (1996), in the study, Filter Rules and Stock
Market Trading, Journal of Business, 39(1): 226-241; Jensen, M. (1967),
in the article, Random Walk; Reality and Myth-comment, Financial
Analysts Journal, 23(6); Jenergreen, L. (1975), in his article Filter Tests
of Swedish Share Price, Reprinted in Elton and Gruber, Modem
Portfolio Theory and Investment Analysis, 1994, and Broca, D. (1992), in
the article, Bay of the Weak Patterns in the Indian Stock Market,
decision, 19(2) applied filter rules test in their analysis. These studies
found no evidence that trading on the basis of historical prices could lead
to an excess profit. The results showed that the random walk model is an
adequate description of price behaviour.
Fama, E., L. Fisher, M. Jensen, and R. Roll (1969), in their article, The
Adjustment of Stock Prices to New Information, International Economic
Review, 10(1): 1-21 examined the return series rather than the price
change series. They used the capital asset pricing model to estimate the
expected return on a security. They then examined the correlation of
excess returns (actual return minus expected return) and found virtually
no relation.
Granger, C. W. and 0. Morgenstern (1963), in their study, Spectral
Analysis of New York Stock Market Prices, kykos, 16: 23-49 found that
short-run movements in stock prices followed a simple random walk
model and long-run movements are not adequately explained by this
model.
Rao, N. K. and K. Mukherjee (1971), in their study, Random Walk
Hypothesis: An Empirical Study, Arthaniti, 4 (1 and 2): 53-58, and
Sharma, J. L. and R. E. Kennedy (1977), in their study, A Comparative
Analysis of Stock Price Behaviour on the Bombay, London and New
York Stock Exchanges, Journal of Financial and Quantitative Analysis,
pp. 391-413 applied the method of spectral analysis to test the random
walk model. They found no evidence contrary to the random walk
hypothesis.

Kulkarni, S. N. (1978), in his study, Share Price Behaviour in India: A


Spectral Analysis of Random Walk Hypothesis, Sankhya, 40 (Series D,
Part 2): 135-162, and Ranganathan, M. and V. Subramanian (1993), in
their study, Weak Form of Efficient Market Hypothesis: A Spectral
Analytic Investigation, Decision, 18(2): 25-30 concluded that the share
price behaviour in India violated the random walk hypothesis.
Jensen, M. and G. Bennington (1970), in their study, Random Walks and
Technical Theories: Some Additional Evidence, Journal of Finance, 25
(2): 469-482, using the relative strength method, found that, after
allowing for transaction costs, the trading rules did not, on an average,
earn significantly more than the buy-and-hold strategy.
Sharma, J. L. (1983), in the article, Efficient Capital Markets and
Random Character of Stock Price Behaviour in a Developing Economy,
Indian Economic Journal, 31(2): 53-70 examined the weekly share price
behaviour using the integrated moving average method (Box-Jenkins
technique) to test the random walk hypothesis. The study concluded that
the random walk hypothesis was valid.
Barman, R. B. and T. P. Madhusoodanan (1993), in their article,
Permanent and Temporary Components of Indian Stock Market returns,
RBI Occasional Papers, 14(2): 81-132 examined the market efficiency
using the variance ration. The results showed that the market was not
efficient and, hence, the random walk hypothesis was rejected ..
Yalawar, Y. S. (1986), In his research study titled "Rates of Return and
Efficiency on Bombay Stock Exchange, Research Monograph, Indian
Institute of Management, Bangalore, examined the monthly rates of
return available on equity investment in the stock market .He applied
Spearman's rank correlation coefficient to test independence and runs
analysis to test randomness. Both tests supported the validity of random
walk hypothesis.
Rajeswari, T. S. and V.E. Rama Moorthy (2001), in their paper
"Conceptual Awareness and Performance Perception of Mutual Funds

Among Potential Retail Investors - A Prognostic Approach", Indian


Journal of Commerce, October-December, attempted to measure the
mutual fund concept awareness level of a sample of 350 potential retail
investors and their perception level of the future performance of mutual
fund industry. They have also attempted to identify the demographic and
financial factors which influence their awareness and perception levels.
The authors used Chi Square Test in their study. Their study concluded
with the remark that with a proper concept formulation and understanding
among the vulnerable potential investors group, MFs can bring about a
change in the investment pattern of the individuals which will lead to the
growth of a strong institutional framework that will support the capital
market in the long run. The study suggested that the mutual fund industry
should now take steps to transform the expectation of potential investors
in favour of Mutual Funds.
A study made by NCAER in 1996 analyzed the structure of the capital
market and presented the views and attitudes of individual shareholders.
SEBI-NCAER Survey (2000) was carried out to estimate the number of
households and the populations of individual investors, their economic
and demographic profile, portfolio size, and investment preference for
equity as well as other savings instruments. This is a unique and
comprehensive study of Indian investors, as the data was collected from
3, 00,000 geographically dispersed rural and urban households. Some of
the relevant findings of the study are: households preference for
instruments match their risk perception; bank deposit has appeal across
all income class; 43% of the non-investor households equivalent to
around 60 million households (estimated) apparently lack awareness
about stock markets; and, compared with low income groups, the higher
income groups have higher share of investments in mutual funds
signifying that MFs have still not become truly the investment vehicle for
small investors. Nevertheless, the study predicts that in the next two years
(2000 hence) the investment of households in MFs is likely to increase.
Gupta, L. C. (1994), in his study, Mutual Funds and Asset Preference,
Society for Capital Market Research and Development, Delhi presented a
household investor survey with the objective of providing data on the
investor preferences on MFs and other financial assets. The findings of

10

the study were more appropriate at that time for the policy makers and
mutual funds to design the financial products for the future.
Madhusudhan V. Jambodekar (1996) conducted a study, Marketing
Strategies of mutual Funds - Current Practices and Future Directions,
Working Paper, UTI-liMB Center for Capital Markets Education and
Research, Bangalore, to assess the awareness of MFs among investors
and reported the need for investor education.
Sujit Sikidar and Amrit Pal Singh (1996), in "Financial Services:
Investment in Equity And Mutual Funds - A Behavioural Study, in
Bhatia B. S., and Batra G. S., ed., Management and Financial Services,
Deep and Deep Publications, New Delhi, Chapter 10: 136-145 carried out
a survey with an objective to understand the behavioural aspects of the
investors of the North Eastern region towards equity and mutual funds
investment portfolio. The survey revealed that the salaried and self
employeds constituted the major investor group in mutual funds primarily
due to tax concessions. UTI and SBI schemes were popular in that part of
the country and other funds had not proved to be a big hit during the time
when the survey was done.
Raja Raj an ( 1997), in his article "Investment Size Based Segmentation of
Individual Investors", Management researcher, 3 (3&4): 21-28, while
dealing with the basic concept of mutual funds and their importance in
the Indian capital market environment, highlighted segmentation of
investors on the basis of their characteristics. Further the same author in
1998, in his article "Stages in Life Cycle and Investment Pattern", The
Indian Journal of Commerce, 51 (2&3): 27-36 studied investors'
characteristics on the basis of their investment size, and the relationship
between stage in life cycle of the investors and their investment pattern
(in respect of mutual fund investments).
Malodia, G. L. of J. N. Vyas University, Jodhpur, Rajasthan (2001), in his
article, Rules and Regulations To Curb Insider Trading in Indian Stock
Market, The Indian Journal of Commerce, 54 (4): October-December, 4853 evaluated critically the legal provisions to curb the insider trading in

11

India and some other countries. The. study has made some suggestions for
effective control of insider trading.
Gupta, Arindam and Joydeep Biswas (2006), in their article "Financial
Linearization and Indian Capital Market", The Indian Journal of Capital
market, April-June, pp.53-64, examined the development and efficiency
of the Indian Capital market in the post-liberalization period. As per the
study, both market capitalization and turnover are lower in Indian market.
The reason for India's low turnover and market capitalization ratio may
be because of the presence of huge number of illiquid stocks, excessive
volatility and speculative noise trading in the Indian market. The low
market capitalization and turnover ratios indicate a narrow market size
and low liquidity in the Indian stock market. The study commented that
to arrest the volatility of the stock market there is a need to develop
appropriate regulatory and legislative fran1ework to curb the speculative
activities of both domestic and foreign investors. The study further
commented that there is a need to foster the investor confidence by
making the market more "news" oriented rather than "noise" driven. The
study concluded with the remark that if the Indian stock market behaves
irrationally on the basis of noise, the basic objectives of stock market
liberalization i.e. efficient mobilization and allocation of the scarce
resources would face a big jolt.
Biswas, Joydeep (2006), in his artide, Indian Stock Market in
Comparison, Economic And Political Weekly, May 6-12, pp.1747-1752
evaluates the impact of financial liberalization on the growth,
development and efficiency of the Indian stock market vis-a-vis other
select Asian Markets. Though the expansion of the Indian stock market in
the post liberalization period is truly impressive, in terms of quality there
has been a regress. Trading has become increasingly concentrated in
some sectors and companies, and the higher volatility in the market,
without a corresponding higher return, portends greater risk and more
instability of investors.
Chattopadhyay Arup, Ex-Reader, Department of Commerce, the
University of Burdwan, West Bengal and Banerjee Pradipta (2002), a
Research Scholar, department of Commerce, the University of Burdwan,

12

West Bengal in their article "Stock Returns, Inflation and Foreign


Exchange Rate Changes in India: An Empirical Examination of Their
Inter-relations", The Management Accountant, The Institute of Costs And
Works Accountants of India, Kolkata, August 2002, pp. 618-621, have
examined the state of hedging against domestic inflation and forex
inflation by way of stock return. As per this paper, in the present days'
system of open economy and globalization, the health of the stock market
in our economy is no more solely dependent on the pattern of investment
of the domestic investors; that also depends on the flow of the portfolio
investment of the foreign investors. For the growth of stock market which
is also necessary for the overall growth of the economy, the interests of
the domestic as well as foreign investors in the stock market in general
must be protected. But the sustained rise in prices of the commodities and
the continuous upward movement of the foreign exchange rare (measured
in terms of indirect quote i.e. the rupee value of one unit of foreign
currency) are two common features of the Indian economy. Due to the
occurrence of the former the domestic value of the money decreases
(which is known as domestic inflation) and in the later case the value of
home currency falls in terms of foreign currency (which may be coined as
forex inflation instead of currency depreciation, to keep parity with the
former term). Therefore, to protect the general interests of the domestic
and foreign investors, inter alia, the stock returns should be a hedge
against domestic inflation and forex inflation respectively. The state of
these two types of hedging, at present in Indian stock market, has been
examined in this study empirically through aggregative macro-economic
approach.
Rakshit, Dr. Dhananjoy (2002), in his article, Buy Back of Shares and the
Fate of Small Investors, Chartered Secretary, The Institute of Company
Secretaries of India, New Delhi, August 2002, pp.ll64-ll68 analyzed,
with examples, the existing legal provisions for buy back of shares and he
found that those provisions are not investor-friendly i.e. the provisions are
not in favour of the non-promoter general equity holders. At the end of
the article the author suggested some remedial measures to be adopted by
the Government to protect the interest of the small shareholders.

13

Rakshit, Dr. Dhananjoy (2003), in his article, Investor Awareness in


Stock Market, Chartered Secretary, The Institute of Company Secretaries
of India, New Delhi, March 2003, pp. 315-319 dealt with the process of
trading and settlement in secondary market, modus operandi of stock
prices and codes of conduct for brokers/sub-brokers regarding their duties
to the investors. The author emphasized that idea about all these are basic
requirements for an investor for making successful trading in shares on
stock exchanges. The study commented that investors' education and
awareness on stock trading system are need of the hour. The study said
that small investors should be very careful before selecting any scrip for
buying and care should be taken both at entry as well as exit point. At the
end he has given a check list for small investors and advised the investors
to follow the cautions of some DO'S and DON'TS.
Rakshit, Dr. Dhananjoy (2007), in his article, Fundamentals of Futures
and Options Trading on Indian Bourses, Chartered Secretary, The
Institute of Company Secretaries of India, New Delhi, January 2007, pp.
34-43, by way of "frequently asked questions" (FAQs) along with
answers, has discussed in details about various derivatives products now
allowed to trade on BSE and NSE and the procedures of trading these
instruments. Eighty five questions have been answered in this article. The
article is found to be very useful for the ordinary investors who are
interested in trading in various derivatives products on Indian bourses.
Raju M. T. (2004), in his 29 page long paper "Capital Market Reforms in
India; An Evaluation", The Indian Journal of Commerce, OctoberDecember 2004, has made an attempt to list, explain and assess some of
the major policy reforms initiated by SEBI and to measure their impact
on capital market in general and on investor in particular. His study
covers Primary Market Reforms and Secondary Market Reforms
including Mutual Fund investments, Venture Capital investments and FII
investments .The study concludes with the remark that today Indian
capital market is one of the most modem, transparent, safe, and efficient
and highly investor centric in the world. Investors, issuers, stock
exchanges, mutual funds, foreign institutional investors, intermediaries
and other constituents of the market are all committed to promote and
develop sustainable capital market. The regulator, SEBI over the past one

14

decade, brought in several reforms to tmprove and strengthen the


functioning of Indian capital market.
Amilan S. (2004) in his paper "Consistency of Equity Returns with
Corporate Fundamentals in India", The Indian Journal of Commerce,
October-December 2004, has analyzed the influence of corporate
fundamentals on the equity returns by testing the year wise consistency of
equity returns with the corporate fundamentals in selected industries. For
this purpose the researcher has considered four industries namely, textile,
chemical, electrical equipment and computer & software. In each industry
equity returns of the sample companies were regressed on the values of
corporate fundamentals of the companies with one year lag. Based on the
values of the regression coefficients of the independent variables the
consistency of equity returns with the corporate fundamentals was tested.
The regression results proved that in general the equity returns are not
consistent with the corporate fundamentals in the selected industries in
India.
Kaur Harvinder (2004), in his paper "Stock Market Volatility in India",
The Indian Journal of Commerce, October-December 2004, describes the
e,xtent and pattern of stock return volatility of the Indian stock market
during the period from 1990 to 2000. In the study the market is
represented by the two most prominent spot price indices viz. BSE
Sensex and S&P CNX Nifty. It is found that the stock market volatility
was the highest during 1992 followed by 1990 and 2000, in that order. It
fell sharply after 1992 until 1995, after which it started increasing again.
Among the months, April has been the most volatile followed by March
and February. This could probably be due to the occurrence of the most
significant economic event in the year, namely, the presentation of the
Union Budget, which is usually presented on the last day of February.
Singh Gurcharan (2004), in his paper "Illiquidity in Stock Exchanges:
Some Issues", The Indian Journal of Commerce, October-December
2004, examined the liquidity scenario of Indian stock exchanges, with the
help of data on BSE, NSE and other stock exchanges of our country for
the period from 1997-98 to 2002-03, and raised the issues related to
illiquidity. The author has thrown some light on the probable reasons for

15

lack of liquidity. He has given some suggestions to generate liquidity in


illiquid scrips. The study said that illiquid scrips prevailing at the Indian
stock exchanges assumes special significance in the present era as most
of the regional stock exchanges are facing this problem of illiquid scrips.
Today, there is a need to review regional stock exchanges and improve
the liquidity position of various scrips listed on them.
Pandey Manas (2004 ), in his paper "Contribution of Domestic Saving in
the Growth of New Issue Market", The Indian Journal of Commerce,
October-December 2004, examined, with the help of data for the period
from 1980-81 to 2000-01, the contribution of domestic savingin the
growth of new issue market .He used data in respect of Net Domestic
Savings at current price in the various sectors of the Indian economy,
Investment of Savings of Household Sector in Financial and Physical
Assets at current prices, Savings of the Household Sector in the form of
Financial Assets at current prices and Pattern of Resource Mobilization
from the New Issue Market.
Tamboli, Dr. R. L. (2004), in his paper "Analysis of Accounting
Disclosure and Investor Protection", The Indian Journal of Commerce,
October-December 2004, analyzed impacts of disclosure and regulatory
authorities' efforts on investor protection. The study discussed
philosophy, concepts, accounting disclosure norms and actual practices.
Based on the information collected from 100 respondents, the study
concluded that the individual investors relied highly upon 'Materials on
Financial Products' followed by 'Annual Reports' and 'Verbal Advice'.
Investors preferred small saving schemes than corporate securities
followed by consumer durables and real estates. Personal lending
remained at last and least preference. The investors faced grievances on
corporate investments remaining unknown about the right authorities to
be approached.
Singh, Dr. Shrawan Kumar (2004), in his article "Foreign Portfolio
Investment in India", The Indian Journal of Commerce, OctoberDecember 2004, analyzed the policy towards foreign institutional
investment, briefly highlighted the nature of FII f1ows, explored some
determinants of FII flows, and examined if the overall experience had

16

been stabilizing for Indian capital market. In the study the author used
data in respect of GDRs/ADRs, Investment by the Fils, Investment by
Offshore funds (in terms of US $ million) for the period from 1992-93 to
2002-03 and Average Portfolio Flows and their volatility (1995-2002) in
the countries namely India, Malaysia, Philippines, Korea, Mexico and
Indonesia. As per the study, the volatility of cross-border portfolio
investment flows into India has been less than that in respect of other
emerging market economies. Empirical estimates indicate that FII flows
are positively related to returns on BSE Sensex. FII inflows to India
display seasonality, with inflows being significantly higher in the first
few months of the calendar year, particularly in the month of February.
Machiraju, H. R. (2002), in his book "INDIAN FINANCIAL SYSTEM"
(Second Edition), Vikash publishing House Pvt. Ltd, New Delhi, in
different chapters, studied theoretically almost all areas of Indian Capital
Market. In this book, the author opined that the financial system consists
of the Money Market and Capital Market as found elsewhere in the
world. The capital market consists of Primary Market and Secondary
Market. The book also covers various Regulations and Guidelines of the
market regulator, SEBI on Primary and Secondary Market.
Khan, Y. M. (2005), in his book "INDIAN FINANCIAL SYSTEM", has
discussed in details about various issues of Capital Market. According to
the author, the main function of capital market is the collection of savings
and their distribution to productive units, thereby stimulating the capital
formation and to that extent, accelerating the process of economic
growth. Indian financial system comprises of three interdependent
components: (i) financial markets, (ii) financial institutions/
intermediaries, and (iii) financial assets/instruments/securities. The
financial markets are classified into (i) Money Market and (ii)
Capital/Securities Market. The Capital/Securities Market has two
segments - Primary Market and Secondary Market. According to the
author, Capital Market is not a source of long-term finance, it is only a
media where savors and investors meet each other and securities are only
documents containing their terms and conditions for fund transfer.

17

An edited book on the theme of Investment Management and


Stock Market edited by Prof. A. K. Vashisht and Prof. R. K. Gupta (both
of Punjab University, Chandigarh) was published by Deep & Deep
Publications Private Limited, New Delhi in 2005. For this purpose
articles/research papers were invited from the experts and the
academicians on the subject from all parts of the country, and in all 29
contributions dealing with different aspects of investment management
and stock market were selected to be included in this edited book. The
researcher has gone through all these papers. The main recommendations
and comments contained in these papers are as follows:
R. K. Gupta in his paper titled Investment management Strategies for Successful Investing discusses various strategies for
successful investment. He concludes his paper with a remark that a good
investor never speculates. He buys and sells basically to adjust his
portfolio to fall in line with the change in investment market. In stock
markets one has to make prompt decisions. In the present market, shares
with sound fundamentals should be one's choice. The long-term investors
should be cautious in making large investments in equity shares in the
hope of a buoyant stock market.
A. K. Vashisht in his paper titled Measurement of Risk and
Return opines that the computation of risk and rettm, which an investor
expects to earn from an investment opportunity, is the first step in the
investment decision-making process. Therefore, understanding and
measuring risk and return is fundamental to the investment process. This
task must be performed very carefully. A wrong calculation of risk and
return may lead to a wrong and unprofitable investment. On the other
hand, if expected risk and return were computed fairly and accurately
then the investor would make right investment and safeguard his
interests. Once the investor has computed expected risk and return he can
proceed with the investment process and construct his portfolio of
investment by following an appropriate portfolio construction model.
A. K. Vashisht in his paper titled Portfolio Construction and
Evaluation expresses the opinion that an investor should not invest all
his funds in a single security. He should construct a portfolio of his

18

investment. The modem portfolio theory tries to incorporate risk return


analysis in the process of portfolio construction and evaluation. A number
of portfolio selection models have been recommended for portfolio
selection and evaluation. These models can be relied upon for
maximizing return keeping the risk within manageable limits.
A. K. Vashisht and S. V. Malhotra in their paper titled
Organization and Structure of Stock Market in India give a detailed
account of the different constituents of stock market in India. They are of
the opinion that efficient stock markets are essential component of the
success story of the development and growth of any country. They have
stressed that for the efficient functioning of .the stock market it is
necessary that they are made transparent, professional, fair and resilient.
Protection of the interest of the investor should be given primary
importance. A satisfied investor is necessary for the long-term growth of
the stock market.
M. Sheikh Mohamed and M. Kalaiselvi in their paper titled Recent
Changes in Stock Market in India are of the opinion that capital
markets have taken .a prominent place in the financial systems of the
developing countries in the last decade. Driven by an interacting force of
liberalization and innovations, controls and regulations have been
removed. New financial products have emerged and old boundaries
between financial intermediaries have blurred. Global economy has found
new ways to mobilize domestic and international savings. In their paper
they have discussed the developments in Indian financial system and
Indian stock exchanges. They conclude their paper with the remark that
these reforms and developments in the stock market which support
corporate initiative and facilitate management of financial risk hold out
necessary impetus for growth, development and strength of the emerging
economy of India.
Ravi K. Gupta and S. K. Sharma in their paper on Weather of
Stock Market in India have given a detailed account of the present
conditions prevailing in the stock market in India. It includes the primary
market rally in bariking and petroleum sectors. They indicate that as long

19

as FIT flows continue to be strong, stock market should continue to surge


ahead.
T. Satyanarayana Chary and B. Kishore in their paper Changing
Scepario of Stock Market in India have highlighted the changes which
have taken place in the stock market in India since inception. In their
paper they have recommended upon the concepts of screen-based trading,
OTCEI, NSE, rolling settlement, depository system, BOLT and
derivatives trading. They have suggested the role SEBI should play to
rationalize the stock market in India so that it can face the global
challenges.
Swami Prasad in his paper on Indian Stock Market: At Cross
Roads has tried to cover the role of SEBI in Indian stock market. He
points out that Indian Stock Market is at cross roads because Index of
Indian Stock Market is very sensitive and is affected by a mere minute
changes at world level. He has provided an insight into the historical
events and their impact on stock market from time to time. He has
suggested that some government interventions should be conjured up to
make stock prices up. We should be extremely careful to avoid interfering
with the price discovery of the market.
Lalit K. Bansal in his paper on Rejuvenating Stock Exchanges:
Indian Experiment has discussed the concepts of demutualization and
corporatization in the Indian context. He is of the opinion that stock
,exchanges should not give an impression of public sector exchanges. Self
:-listing is desirable but such listing should be regulated by independent
agency. Professionals should look after the operations. Authorities should
not use their powers for forcing such conversion. Inefficient mutualised
exchanges will be automatically collapse of their own weight. Past
performance should be the criterion of the conversion of mutualised
exchanges. Only justifiable exchanges should be demutualised.
H. S. Sidhu in his paper titled Present Status of Stock Market in
India has given a detailed account of strengths and weaknesses of stock
exchanges in India. He has commented upon legislative framework,
Securities Contracts Regulations Act, 1956, and capital market reforms

10

and other related developments. .He has recommended an effective


framework for the protection of investors and disclosure of relevant
information needed by investors. He is of the opinion that the new
developments in the stock market like online initial public offer, book
building, central clearing and settlements and rolling settlements are a
step in the right direction.
E. Mubarak Ali and A. M. Mohamed Sindhasha in their paper
titled Indian Stock Market in the New Millennium have given a
detailed account of the developments in the Indian stock market. They
have praised the steps taken by SEBI as watchdog of the stock market. In
their paper they have also commented upon the role of foreign
institutional investors, emergence of depository system, emergence of
private sector as a growth conduit, advised portfolio strategy for the small
investors, helpfulness of internet in the stock exchanges. They conclude
their paper by saying that the Indian stock market has weathered the
storm caused by national and international crisis in the form of war,
political instability, terrorism, economic offences and scams. They are of
the firm opinion that the market is heading for progress at present and in
the years to come.
Monita in her paper titled World Stock Exchanges - An
Overview makes an effort to study the evolution of stock exchanges in
the world and to provide an insight into a few major stock exchanges of
the world. She has given suggestions to improve the scenario of stock
exchanges in India.
R. K. Dixit and Bikramjit Kaur in their paper titled New Issue
Market have discussed the different aspects of the working of the new
issue market. They are of the opinion that the protection of investors'
interest in the primary market, removal of their grievances, proper pricing
of the securities in the public offer must be given the due attention.
Proper project appraisal, fair disclosures in the prospectus and the
clearance of the prospectus by the stock exchanges and the active role of
SEBI must be ensured to protect the interest of the investors in the stock
market.

21

Somesh Kumar Shukla and Sobhit in their paper on The Role of


Financial Institutions and Mutual Funds in the Stock Market have
discussed the structure of financial institutions and emergence of mutual
funds in India. They have highlighted that the role of mutual funds in the
stock market has not always been beneficial due to unhealthy speculation
and unnatural increase in share prices in the stock market. Mutual funds
are themselves responsible for major market movement. They have
suggested that the experience from the countries like U.S.A. indicates that
the growth of mutual fund investors has increased the potential of
systematic volatility.
Paramjit Kaur in her paper titled Current Position of Mutual
Funds in India in the era of Globalization opines tha~ Indian financial
market is one of the fastest growing markets in the world, thanks to the
new economic policies. The recent reforms and globalization process
have offered tremendous opportunities to the Indian mutual funds.
Although liberalization itself does not produce any guarantee for growth,
institutionalization of liberalization through changes in managerial
mindset can definitely produce the desired results. In a global market
environment, Indian mutual fund industry can emerge as one of the
strongest players by absorbing investment technology and modified
managerial practices in the regional context, while thinking. and acting
with a global vision ..
Kalyan Mukherjee in his paper titled Market Capitalization and
Multiple Listing: Its Influence on Stock Price Behaviour has made an
attempt to investigate the influences of both market capitalization and
multiple listing on stock prices. Usually volatility of stock prices are
immensely influenced by the market driven tools like Demand-Supply,
PIE Ratio, Beta Value and the like of scrip's. Other important factors like
market capitalization and multiple listing have played an important role
during recent decade. He has made an attempt in this direction to
highlight these facts in this article by using both national and
international data of bourses available. This study is based on stock price
behavior during 1991-2000.

22

R. K. Gupta and Bhavini Tejpal in their paper titled Employee


Stock Option Scheme -Some Critical Issues are of the opinion that
companies should design the stock option in such a manner that they form
a part of the long-term business strategy. The companies should define
the performance they wish to target and reward rather than just saying we
want to have ESOPs. The companies should also be sure that whether
they want to reward a performance or they want employees to create
wealth for themselves, companies and the shareholders.
Bikramjit Kaur in her paper titled Trading in Derivatives gives an
account of salient features of derivatives and their trading mechanisms.
She is of the opinion that to give a real boost to the derivative market,
participation by regional stock exchanges, retail brokers, sub-brokers and
small investors should be encouraged. Permitting settlement by delivery
in case of stock futures and options by fine tuning the settlement cycles of
cash and derivative segments, reintroduction of stock lending and
borrowing and margin trading, introduction of continuous net settlement
and amending the income tax laws to offer clarity as well as preferential
tax treatment to profits-losses in derivative trading are some of the
changes that the regulator need to focus on.
Poonam Agarwal and Vibha Mahajan in their paper titled
Emerging Trends in the Derivative Market in India trace the evolution
of derivatives and describe the merits and demerits of derivatives trading.
They conclude their paper with the remark that derivatives can work as a
double edged sword. They can result into benefits as well as increased
costs. The decision about whether to use derivatives should be driven not
by company's size but its strategic objectives. A prudent risk
management strategy that conforms to corporate goals and is complete
with market stimulations and stress tests is the most crucial requisite for
using financial derivative products.
A. Saha in his paper titled Derivative Financial Instruments Some Issues explains as to why the character of derivatives is enigmatic
with contemporary events occurring in the real world. He has concluded
his paper with a high degree of caution. There is a high possibility of

23

misuse of the derivative instruments for speculative purposes as the


recent cases like Country, Barings, Enron and Tyco have to the force.
Rajesh Marwaha in his paper on Derivatives - The Study of
Futures and Options in Composition to Cash Market has explained
the methods of trading of derivatives and their status in India. He has
pointed out that these products are much more risky than the cash market
and could lead to higher losses if used for speculative trading. He opines
that in emerging markets there is a greater need for this market for risk
reduction from the high volatility of the financial market. He advocates
the increase in the number of scrips which are being traded in the market.
Dhananjoy Rakshit in his paper titled Trading Derivatives in
Indian Stock Market states the procedures of trading in various
derivatives products and explains various terminologies used in
derivatives trading with examples, by way of 'Frequently Asked
Questions and Answers' covering as many as 85 questions, to make the
ordinary investors aware of the trading of various derivatives products
now in operation on BSE and NSE.

1.7 PLAN OF THE WORK


The whole research work has been divided into eight chapters,
including the common Introduction Chapter (i.e. Chapter - 1). The
other chapters are as follows.

Chapter - 2: Instruments, Concepts and Terminologies used in


Capital Market
The present chapter describes various instruments, concepts and
terminologies relating to the Indian Capital Market. At first, various
instruments of capital market have been described and analyzed. Then
various concepts and terminologies relating to issuance of shares have
been discussed and analyzed. At the end, some important concepts and
terminologies relating to derivatives trading on Indian bourses have been
discussed with explanations.

24

Chapter- 3: Major Reforms in Indian Capital Market


Several capital market reforms have been introduced by the SEBI for
the past several years. Among these, some important reforms, carried out
by the SEBI during the period of our study, have been listed, explained
and assessed in this chapter. The study in this chapter has been divided
into two parts - (a) Primary Market reforms and (b) Secondary Market
reforms.

Chapter- 4: Growth Analysis- Primary Market


This chapter looks into the growth analysis of Primary Market in
India during the period from 1995-96 to 2004-2005. The study is based
on secondary data only. The growth of the primary market has been
computed and analyzed in the areas, namely(1) Resource Mobilized from Primary Market by NonGovernment Public Limited Companies,
(2) Capital Raised from Primary Market (Industry-wise),
(3) Capital Raised from Primary Market (Sector- wise),
(4) Capital Raised throughADRs/GDRs,
(5) Capital Raised through the Private Placements,
(6) New Capital Issues by Non-Govt. Public Limited
Companies (Instrument - wise),
(7) Study of Public Equity Issue vs. Debt Issue by Corporate
Sector (Govt. Plus Non-Govt.), and
(8) Investor Population in the Capital Market. Simple as well
as Compound Growth Rates have been computed. In some
cases, movement of growth has been shown with the help
of graphical representation.

Chapter- 5: Growtb Analysis- Secondary Market


This chapter deals with computation and analysis of Mean, Standard
Deviation, percentage change, growth at average rate and growth at
compounded rate during the period of the study in the area of Secondary
Market under the following sub-heads, with also
graphical
representations in some cases:
25

( 1) SEBI Registered Market Intermediaries in different years of


the study period;
(2) Exchange-wise Brokers registered with SEBI in different
years;
(3) Growth Pattern of Listed Companies;
(4) Movement of Market Capitalization (All India, BSE &
NSE);
(5) Growth Pattern of Turnover on Indian Stock Exchanges;
(6) Progress of Dematerialization at NSDL and CDSL;
(7) Growth and Movement of Major Domestic Stock Indices;
(8) Comparative Analysis of Equity Return, Volatility and
Price-Earning Ratio on BSE and NSE;
(9) Foreign Investments in Indian Capital Market;
(10) Resource Mobilization and Transactions on Stock
Exchanges by Mutual Funds;
( 11) Growth and Movement of Futures and Options Trading on
Indian Bourses.

Chapter - 6: Statistical Analysis of Growth of

C~pital

Market Using Some Selected Parameters of Indian Economy and Others


In this Chapter, growth of Capital Market in our country, during the
period of the study (i.e. from 1995-96 to 2004-05), has been analyzed
statistically. And here for the purpose of our statistical analyses, some
related economic indicators of Indian Economy like Gross Domestic
Product (GDP), Non-Agricultural Gross Domestic Product (NAGDP),
Index of Industrial Production (liP), Household Sector Financial Savings
{HSFS) and Interest Rates on Bank Deposits {IRBD) (for deposits with
Commercial Banks) have been used. In the statistical analyses, depending
on the need, Pearson's Correlation Coefficients have been computed
(Simple or Bivariate as well as partial correlation coefficients have been
computed), Linear Multiple Regression Analyses have been made,
descriptive statistics like minimum value, maximum value, mean and
standard deviation have been computed. All these computed values have
been analyzed statistically.

26

The study in this chapter includes:


( 1) Whether success of Primary Market Issues depends on upward
movement of Sensex;
(2) Study on Movement of Indian Stock Market Development
Indicators- A Case Study on BSE;
(3)Size and Liquidity of Indian Stock Market;
(4)Correlation and Regression Analysis of the V~riables- HSFS,
liP, FII Net Investment, Sensex and Nifty;
(S)Study on Correlation Coefficients between each of the two
variables of HSFS, liP, FII Net Investment and combined
Market Capitalization of BSE and NSE and Multiple
Regression Analysis;
(6)Inter-relationship between movement of Non-Agricultural
GDP and Market Capitalization;
(7) Contribution of Changes in Investment of the Household
Sector in Bank Deposits and Shares and Debentures to The
Total Changes in Financial Assets of the Household Sector;
(8)Household Sector's Preference Areas of Investment, and
(9) Interdependence of Resource Mobilized from Primary Market
through Equity Issues, amount mobilized through
ADRs/GDRs Issues, Index of Industrial Production and Bank
Deposit Interest Rates, and Regression Analysis when
Resource Mobilized from Primary Market is taken as the
Dependent Variable.

Chapter - 7: International Comparison of Indian Capital Market


with Selected Countries

In this Chapter, an attempt has been made to make a comparative


study of the position of the Indian Capital Market with the same in some
selected countries abroad covering developed as well as emerging
markets. The study in this Chapter has been made under the following
sections:
(1) Comparison ofNumber ofTrading Days on Stock
Exchanges in India and Abroad;
(2) Comparison of International Equity Markets on the basis of

27

Number of Listed Companies;


(3) International Comparison ofRanking of Biggest Stock
Exchanges by Number of Transactions;
(4) International Comparison of Market Capitalization ; and
(5) International Comparison of PIE Ratio, Return on Index and
Volatility of select Stock Indices.
~hapter-

8: Summary of Findings, Conclusion and Suggestions

In this chapter all the observations of the study have been


summarized. On the basis of those observations some concluding remarks
have been made. Further some measures have been suggested for
achieving further sustainable growth of the Indian capital market,
improvement of functioning of the capital market and more transparency.
Some suggestions have also been given to boost investors' confidence in
the capital market and to protect investors' interest in an air-tight manner
and to make the Indian capital market at par with the capital market of the
developed countries.

28

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