PROJECT REPORT

ON
CAPITAL MARKET

PREPARED BY:-

PAYAL JAIN
REGISTRATION NO: ERO232001/02/2006

CAPITAL MARKET

INTRODUCTION

Capital market is the broad term for the market where investment products such as stocks and
bonds are bought and sold. It includes all the people and organizations that support the process.

The capital market can also be defined as the market for long term loans and equity capital.
Companies and the government can raise funds for long term investments via this market. The
capital market includes the stock market, the bond market, and the primary market. The
government monitors securities trading on organized capital markets; new issues are approved by
authorities of financial supervision and monitored by participating banks.

There are two broad types of securities traded in the capital market: Debt and Equity. This market
brings together all the providers and users of capital. Financial products such as stocks, bonds,
mutual funds, and insurance make the transfer of capital possible. Financial intermediaries, such
as banks, brokerage firms, and insurance companies facilitate the transfer of capital.

Therefore capital market is a system or framework, which facilitates savings and investment. The
securities markets provide channels for the allocation of savings to investments. Through the
capital market:

Companies can raise resources from the people (investors); and

Households can invest their savings in industrial or commercial activities to earn a return on their
investments.

Hence, the capital market is a mechanism by which capital moves from those with surplus funds
i.e. the investors to those in need of funds i.e. the companies. Savings are linked to investments
through a range of financial products called securities.

Origin:

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago.
The earliest records of security dealings in India are meager and obscure. The East India Company
was the dominant institution in those days and business of its loan securities used to be transacted
towards the close of the eighteenth century. By 1830, the 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 1887, the
first formal stock exchange was 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.

During early 1960’s, there were eight recognized stock exchanges in India. The number virtually
remained unchanged, for nearly two decades. During eighties, however, many stock exchanges
were established: Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange Association
Limited (at Kanpur, 1982), Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange
Association Limited (1983), Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange
Limited (at Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986), Jaipur Stock
Exchange Limited (1989), Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra
Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda,
1990) and recently established exchanges Coimbatore and Meerut. India boasts of the oldest stock
exchange in Asia, The Bombay Stock Exchange which is 125 years old. There are 23 recognised
exchanges in India excluding the Over The Counter Exchange of India Limited (OTCEI) and the
National Stock Exchange of India Limited (NSEIL), spread across the country, but a process of
consolidation is now under way. Many of the regional stock exchanges have started aligning
themselves with one or both of the two large exchanges (The Bombay Stock Exchange Limited and
the National Stock Exchange of India Limited) both of which have VSAT networks that has given
them a nation wide reach.

AN OVERVIEW OF THE CAPITAL MARKET

India: Crouching Tiger Unleashed

Boosted by a broad surge of economic self confidence, India is basking in its moment in the
international spotlight. Certainly, it has been successful in re branding itself in the West. In the
1970s, kids in the U.S. were told to finish the food on their plate because people are starving in
India. Today, they are told to finish their homework, because kids in India are studying harder
and may take their jobs.

India owes its entry onto the world economic stage in 1991 to the economic reforms of then
Finance Minister (and current Prime Minister) Manmohan Singh. By all outward indications, the
reforms have been a spectacular success. In the last three years, India s growth rate had accelerated
to 7.5% hitting a China like 9.3% last quarter and thereby taking its rightful place alongside
the other fast growth BRIC economies.

India s stock market has been on fire, with the benchmark BSE Sensex index rising above 12,000 for
the first time in April. And even after the recent correction, investors were up 60% over the past
year. India has been a star among the red hot global markets, outperforming the MSCI emerging
markets index by 45% over the last three years. Compare that to the money you made in choppy
U.S. markets over the same period and you see why India generates so much excitement among
investors.

With mainstream funds such as Fidelity Magellan investing up to 25% of their assets in global
markets, U.S. investors became more aware of global gyrations than ever before. Did anybody
make money in May? Not really except for investors in the Japanese Utilities Index, which was
up 2.6% for the month.

The New India in Perspective

Recent stock market wobbles notwithstanding, India s economy is booming. Five million mobile
phone subscribers are being added each month. One third of India s office space has been built in
the last 18 months. And the heads of the outsourcing giants are complaining that the price of land
in high tech center Bangalore has almost tripled in the last year.

But it s important to not get carried away with India s current economic exuberance. In real terms,
today s India is still an economic midget, less than half the size of California. Put another way, the
U.S. economy grows by the equivalent of one entire India every 18 months. Only one in 50
households has a credit card. Only one family in six has a refrigerator. What about India s much
vaunted middle class of 300 million? A narrower definition families making more than $4,400
per year puts that figure at just 58 million. India is still a very poor country, where 260 million
people that s close to the entire U.S. population live on less than $1 a day.

And before it takes on the mantle of global economic champion, India must overcome many
challenges. Its Achilles heel? Poor infrastructure. There are pockets of excellence in India, such as
the gleaming Silicon Valley style campuses built by the big software development firms. But even
Bangalore suffers from traffic jams, overflowing hotels, power cuts and an inadequate airport. A
1,340 mile trip between major urban centers like Kolkata (Calcutta) and Mumbai (Bombay) takes
eight days with an average speed of 7 mph and 32 hours waiting at toll roads and booths.

And Indian red tape and bureaucracy is legendary. A new shop must get, on average, 15 licenses
from 11 government bodies, and securing them takes six months. The International Finance
Corporation (IFC) lists India 116th out of 155 countries in terms of ease of doing business. That s 25
places below China and two behind war torn Iraq.
Finally, the old style policies still weigh heavily on growth. Foreign investors are limited to
minority stakes in key industries like insurance and the media and are banned altogether in retail.
The All India Trade Union Congress opposes all foreign investment in retail on the ground that
the Western concept of maximizing output and minimizing labor does not suit India. Not exactly
a capitalist paradise.

Main Participants in the Indian Capital Market

The capital market framework consists of the following participants:

 Stock Markets
 Market intermediaries, such as Stock Brokers and Mutual Funds
 Investors
 Regulatory Institutions (e.g. SEBI)

Stock Markets

Stock market is also referred to as the Corporate Debt or Capital Market. While the money market,
which deals with short term financial needs of business and industry is restricted to funds needed
for a period of one year or less, instruments of the debt/capital markets are raised for medium or
long term needs. Indian Stock Market consists of three distinct segments:
The Public Debt Market i.e. the market for Government securities (also called Gilt edged Market).
These are interest bearing and dated securities. RBI, the Central Bank of the country and banker to
the Government, regulates this market.

PSU Bonds Market i.e. Bonds floated by public sector units, nationalized banks and Financial
Institutions for raising Tier II capital and also debentures floated by corporates. This is
represented as the Corporate Debt Market.

The Equity Market for raising of equity or preference share capital by all corporates. Money
invested in company shares is not refundable, but if the shares are listed in a stock exchange these
can be sold or purchased, thus providing liquidity to such investments. Shares do not carry
interest, but shareholders can participate in sharing the profits of the corporate body declared by
way of dividends, bonus shares etc. While the hope of receiving attractive dividends motivates the
public to subscribe to the share capital, declaring dividend is not a legal obligation on the part of
the companies, and hence not a right on the part of the shareholders. But shareholders enjoy
various other rights as conferred by the Indian Companies Act, 1956. Indian Public companies
generally follow the objective of increasing shareholders wealth as the prime goal of financial
management.

At this context it is relevant to mention about two categories of stock market, i.e.
Primary market covering new public issues of all categories of securities, including G sec, bonds
and equity/preference capital.

Secondary market, which deals with already issued securities of all types. Transactions of the
secondary market are carried out through one of the authorized stock exchanges, where the traded
security is listed.

PRIMARY MARKET

Primary Market also referred to as the market for Public Issue is a market for raising of new capital
(equity or debt i.e. equity shares, preference shares, debentures or Rights Issues) by corporates.
Newly floated companies or existing companies may tap the equity market by offering public
issues. When equity shares are exclusively offered to the existing shareholders, it is called Rights
Issue . When a Company after incorporation initially approaches the public for the first time for
subscription of its public issue it is called Initial Public Officer (IPO). Successful floating of a new
issue requires careful planning, timing of the issue and comprehensive marketing efforts. The
services of specialized institutions, like underwriters, merchant bankers and registrars to the issue
are available for the corporate body to handle this specialized job. Underwriters are financial
institutions, which undertake to secure a committed quantum of equity/debt subscribed by the
public, failing which they accept these shares/bonds as their own investment. The transactions
relating to the primary market i.e. public/rights issues are not carried out through stock exchanges.
However there is effective regulation of SEBI at every stage of a public issue. This is done through
merchant bankers, underwriters and registrars to the issue each acting at different points.
Subscriptions to the new issue are collected at specific branches of one or more collecting banks
within a prescribed span of time, represented by the dates of opening of the issue and closing of
the issue.

SECONDARY MARKET

The Secondary Market deals with the sale/purchase of already issued equity/debts by the
corporates and others. The sale/purchase of these securities are carried out at the specific stock
exchange (s), where the companies get their public issues listed for trading. The main function of
the secondary market is to provide liquidity to the listed securities by enabling a holder to easily
convert the securities into cash through the stock exchanges. An individual or an Institution can
either hold a portfolio of securities as a permanent investment, or he can hold a basket of securities
for short periods and engage in buying and selling them to gain from market fluctuations. The
secondary market also acts as an important indicator of the investment climate in the economy.
When prices of existing securities are rising and there is large trading in the existing shares, such a
boom in the secondary market correspondingly signifies that new issues if floated at that point of
time would be successfully subscribed.

Trading Pattern of the Indian Stock Market

India’s stock exchanges are fully computerised order driven or order cum quote driven systems.
The country has made rapid strides towards a dematerialised trading environment on the basis of
a competing depositories model. Investors have the choice of holding their stocks in physical or
dematerialised form, but trading in the exchanges is in mandatory dematerialised mode in almost
all stocks. India has put in place a regulatory regime for Internet trading of stocks. A large number
of brokers are dealing online in shares and securities.

National Stock Exchange Of India Limited (NSE)

With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock
market trading system on par with the international standards. On the basis of the
recommendations of high powered Pherwani Committee, Industrial Development Bank of India,
Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all
Insurance Corporations, selected commercial banks and others incorporated the NSE in 1992.

Trading at NSE can be classified under two broad categories:

 Wholesale debt market and
 Capital market.

Wholesale debt market operations are similar to money market operations institutions and
corporate bodies enter into high value transactions in financial instruments such as government
securities, treasury bills, public sector unit bonds, commercial paper, certificate of Deposit, etc.

There are two kinds of players in NSE:

1. Trading members and

2. Participants.

Recognized members of NSE are called trading members who trade on behalf of themselves and
their clients. Participants include trading members and large players like banks who take direct
settlement responsibility. Trading at NSE takes place through a fully automated screen based
trading mechanism, which adopts the principle of an order driven market. Trading members can
stay at their offices and execute the trading, since they are linked through a communication
network. The prices at which the buyer and seller are willing to transact will appear on the screen.
When the prices match the transaction will be completed and a confirmation slip will be printed at
the office of the trading member.
Bombay Stock Exchange Limited (BSE)
Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich heritage.
Popularly known as BSE , it was established as The Native Share & Stock Brokers Association in
1875. It is the first stock exchange in the country to obtain permanent recognition in 1956 from the
Government of India under the Securities Contracts (Regulation) Act, 1956.The Exchange s pivotal
and pre eminent role in the development of the Indian capital market is widely recognized and its
index, SENSEX, is tracked worldwide. The Exchange is professionally managed under the overall
direction of the Board of Directors. The Board comprises eminent professionals, representatives of
Trading Members and the Managing Director of the Exchange. In terms of organization structure,
the Board formulates larger policy issues and exercises over all control. The committees
constituted by the Board are broad based. The Managing Director and a management team of
professionals manage the day to day operations of the Exchange.

The Exchange has a nation wide reach with a presence in 417 cities and towns of India. The
systems and processes of the Exchange are designed to safeguard market integrity and enhance
transparency in operations. During the year 2004 2005, the trading volumes on the Exchange
showed robust growth.

The Exchange provides an efficient and transparent market for trading in equity, debt instruments
and derivatives. The BSE s On Line Trading System (BOLT) is a proprietary system of the
Exchange and is BS 7799 2 2002 certified. The surveillance and clearing & settlement functions of
the Exchange are ISO 9001:2000 certified.

Over The Counter Exchange of India (OTCEI)

The traditional trading mechanism prevailed in the Indian stock markets gave way to many
functional inefficiencies, such as, absence of liquidity, lack of transparency, unduly long settlement
periods and benami transactions, which affected the small investors to a great extent. To provide
improved services to investors, the country’s first ringless, scripless, electronic stock exchange
OTCEI was created in 1992 by country’s premier financial institutions Unit Trust of India,
Industrial Credit and Investment Corporation of India, Industrial Development Bank of India, SBI
Capital Markets, Industrial Finance Corporation of India, General Insurance Corporation and its
subsidiaries and Can Bank Financial Services. Trading at OTCEI is done over the centers spread
across the country. Securities traded on the OTCEI are classified into:
Listed Securities The shares and debentures of the companies listed on the OTC can be bought or
sold at any OTC counter all over the country and they should not be listed anywhere else.

Permitted Securities Certain shares and debentures listed on other exchanges and units of mutual
funds are to be allowed to be traded.
Initiated debentures Any equity shareholder holding at least one lakh debentures of particular
scrip can offer them for trading on the OTC. OTC has a unique feature of trading compared to
other traditional exchanges. That is, certificates of listed securities and initiated debentures are not
traded at OTC. The original certificate will be kept with the custodian. But, a counter receipt is
generated out at the counter, which substitutes the share certificate and is used for all transactions.
In the case of permitted securities, the system is similar to a traditional stock exchange. The
difference is that the delivery and payment procedure will be completed within 14 days.

Inter connected Stock Exchange of India Limited (ISE)

Inter connected Stock Exchange of India Limited (ISE) has been promoted by 14 Regional Stock
Exchanges to provide cost effective trading linkage/ connectivity to all members of the
Participating Exchanges, with the objective of widening the market for the securities listed on
these Exchanges. ISE is a national level stock exchange and provides trading, clearing, settlement,
risk management and surveillance support to its Traders and Dealers. ISE aims to address the
needs of small companies and retail investors with the guiding principle of optimizing the existing
infrastructure and harnessing the potential of regional markets, so as to transform these into liquid
and vibrant market trough the use of state of the art technology and networking.

The Participating Exchanges of ISE have in all about 4500 stock brokers, out of which more than
200 have been currently registered a Traders on ISE. In order to leverage its infrastructure and to
expand its nationwide reach, ISE has also appointed around 450 Dealers across 70 cities other than
the Participating Exchange centers. These Dealers are administratively supported through the
regional offices of ISE at Delhi (north), Kolkata (east), Coimbatore (south) and Nagpur (central),
besides Mumbai (west). ISE has also floated a wholly owned subsidiary, ISE Securities & Services
Limited (ISS), which has taken up corporate membership of the National Stock Exchange of India
Ltd. (NSE) in both the Capital Market and Futures & Options segments and The Stock Exchange,
Mumbai in the Equities segment, so that the Traders and Dealers of ISE can access other markets
in addition to the ISE market and their local market. ISE thus provides the investors in smaller
cities a one stop solution for cost effective and efficient trading and settlement in securities. With
the objective of broadbasing the range of its services, ISE has started offering the full suite of DP
facilities to its Traders, Dealers and their clients.

CAPITAL MARKET INTERMEDIARIES

A market consists of sellers of products and buyers thereof. Obviously the securities market refers
to investors i.e. wealth savers, who mobilise their savings and search for a remunerative source of
investment thereof on the one hand, and on the other the capital seekers, that is, business, industry
or government. The two constitute the core elements of the securities/capital market.

This is the market consisting of large number of individual investors, household savers,
professionals, and agriculturists, who are able to a preserve, a part of their current earnings to
build sizeable amounts and invest in securities. They form the class of capital providers or capital
builders for the nation. On the other side the corporate entities engaged in Industry, trade or other
business ventures are the productive users and consequent seekers of very large amount of capital.
It is the function of the capital market to transform and redirect the use of the savings of large
number of individuals to productive channels to meet long term needs of capital for Industry,
trade and business. The capital/security market intermediaries serve as the bridge or necessary
link between capital providers and capital seekers. They enable a smooth flow of investible funds
from the supply to the demand points.

The individual savers are not organized. They can invest if they could secure the trust and
confidence that the funds invested would be prudently employed and they could confidently
expect to get a fair return/reward on their hard earned savings. In short in addition to a
remunerative return on their savings, they look for other pre requisites in making an investment
decision. These are security of the funds entrusted and liquidity i.e. to get back their savings in
times of their need. This is the function of organized capital market to regulate market forces to
ensure fair dealings, to motivate savings on the part of the investors and to secure smooth flow of
savings/capital from investors to capital seekers for productive needs. This supervisory and
regulatory function is performed by SEBI, the market regulator cum market developer.
The role of intermediaries makes the market vibrant, and to function smoothly and continuously.
Intermediaries possess professional expertise and play a promotional role in organizing a perfect
match between the supply and demand for capital in the market. All those, institutions or
individuals, who help to bring the savers and seekers of capital and enable a regular flow of funds
from supply to demand points are intermediaries. Thus a commercial bank, an insurance
company, a mutual fund, stock exchange or depository are as much intermediaries, as are brokers,
merchant bankers, Registrars etc. All intermediaries are service providers and are an integral part
of the Capital Market or Money Market.

The market Regulator, SEBI regulates various intermediaries in the primary and secondary
markets through its Regulations for these intermediaries. SEBI has defined the role of each of the
intermediary, the eligibility criteria for granting registration, their functions and responsibilities
and the code of conduct to which they are bound. These Regulations also empower SEBI to inspect
the functioning of these intermediaries and to collect fees from them and to impose penalties on
erring entities. Detailed information about the role and responsibilities of intermediaries are
discussed in different articles subsequently under this module. Presently we will briefly cover in a
nutshell the core functions of each one of the intermediaries operating in the Primary and the
secondary markets.

PRIMARY MARKET INTERMEDIARIES

Merchant Bankers
Merchant banker means any person who is engaged in the business of Issue Management either
by making arrangements regarding selling, buying or subscribing to securities as manager,
consultant, adviser or rendering corporate advisory service in relation to such issue management
Merchant bankers play an important role in issue management process. Lead managers have to
ensure correctness of the information furnished in the offer document. They have to ensure
compliance with SEBI rules and regulations as also Guidelines for Disclosures and Investor
Protection. To this effect, they are required to submit to SEBI a due diligence certificate confirming
that the disclosures made in the draft prospectus or letter of offer are true, fair and adequate to
enable the prospective investors to make a well informed investment decision. The role of
merchant bankers in performing their due diligence functions has become even more important
with the strengthening of disclosure requirements SEBI s various operational guidelines issued
from time to time to merchant bankers primarily addressed the need to enhance the standard of
disclosures.

Registrars To The Issue And Share Transfer Agents

Registrars to an Issue (RTI) and Share Transfer Agents (STA) are registered and regulated under
SEBI (Registrar to an Issue and Share Transfer Agent) Rules and Regulations, 1993. Under these
regulations, registration commenced in 1993 94 and is granted under two categories: Category I to
act as both registrar to an issue and share transfer agent and Category II to act as either registrar to
an issue or share transfer agent. SEBI issued instructions to all registered RTIs and/or STAs to
appoint compliance officers who would ensure that all rules, regulations, guidelines and
directions issues by SEBI, the government and other regulatory authorities are complied with, and
any deviations there from were to be reported to SEBI.

Bankers To The Issue

Scheduled banks acting as bankers to an issue are required to be registered with SEBI in terms of
SEBI (Bankers to an Issue) Rules and Regulations, 1994. Under these regulations, registration
commenced in 1994 95 and bankers to an issue are required to comply with the guidelines issued
and submit quarterly reports of their activities.
Debenture Trustee

Debenture trustees are registered with SEBI in terms of the SEBI (Debenture Trustees) Rules and
Regulations, 1993. Since 1995 96, SEBI has been monitoring the working of debenture trustees by
calling for details regarding compliance by issuers of the terms of the debenture trust deed,
creation of security, payment of interest, redemption of debentures and redressal of complaints of
debenture holders regarding non receipt of interest/redemption proceeds on due dates.

Underwriters

Underwriters are required to register with SEBI in terms of the SEBI (Underwriters) Rules and
Regulations, 1993. In addition to underwriters registered with SEBI in terms of these regulations,
all registered merchant bankers and stockbrokers and mutual funds registered with SEBI can
function as underwriters.

Portfolio Managers

The merchant bankers are authorized to undertake the activities of portfolio managers, while the
registered portfolio managers exclusively carry on portfolio management activities.

 Secondary Market Intermediaries

 Stock Brokers

All stockbrokers dealing in securities are registered with SEBI in terms of SEBI (Stock Brokers and
Sub Brokers) Regulation 1992.

Sub Brokers

In many cases, individual investors transact in securities through sub brokers. It is therefore
absolutely imperative to regulate this class of intermediary. The main reason for the limited
success in registering large number of sub brokers is that brokers are reluctant to take
responsibility of the acts of the sub brokers. Measures initiated by SEBI for bringing sub brokers
more fully under the ambit of regulatory oversight have been described earlier in this Report.

Depository System (involving dematerialization and rematerialization)

The various participants in this system are:

 National Securities Depository Limited (NSDL) / central Depository of Shares Ltd. (CDSL).
 Depository Participants
 Registrars and Share Transfer Agents, and
 The Investors.

NSDL / CDSL

As the name suggests, it is an organization where the securities of the participating investors are
held in an electronic form (fungible form). It functions in a similar fashion as a bank. Any investor
(the beneficial owner) who wants his shares dematerialized should open an account at the
depository through a depository participant. The depository not only provides custodial services
but also legally transfers the ownership of the securities. This essentially minimizes the tedious
paper work involved in the ownership, trading and transfer of securities records. It also carries out
settlement of off market trades provided that the securities are held in electronic form. Investors
can obtain the list of Depository Participants by writing to NSDL.

Depository Participants (DPs)

They function similar to brokers in the stock exchange market. Depository Participants are the
conduits through whom one can deal with the NSDL. They maintain the investor’s securities
account balances from time to time and intimate the investor about his status of holding. This also
helps to sort out any discrepancy that arises in the due course of trading. According to SEBI
Guidelines, financial institutions, banks and stock brokers can act as Depository Participants. As
with banks, investors can open account with more than one depository participant.

Investors

Retail Investors

Also known as an individual investor or small investor” – are investors who buy and sell
securities for their personal account, and not for another company or organization.
Now retail investors will be able to invest up to Rs 1 lakh in the initial public offers of companies.
The Securities and Exchange Board of India has amended the Disclosure and Investor Protection
Guidelines to increase the value of investments by retail investors from Rs 50,000 to this new level.
Further, the market regulator had also amended the rule to increase the allocation of retail
investors in book built issues to 35 per cent from the existing 25 per cent.

Qualified Institutional Buyers

The following category of investors can apply as qualified institutional investors: Public financial
institutions as specified in Section 4A of the Companies Act, scheduled commercial banks, mutual
funds, FIIs, multi lateral and bi lateral development financial institutions, venture capital funds
registered with SEBI, foreign venture capital investors registered with SEBI and state industrial
development corporations. The allotment to the Qualified Institutional Buyers (QIBs) is on
discretionary basis. The discretion is left to the Merchant Bankers who first disclose the parameters
of judgment in the Red Herring Prospectus. There are no objective conditions stipulated as per the
DIP Guidelines. The Merchant Bankers are free to set their criteria and mention the same in the
Red Herring Prospectus.

Mutual Fund

A Mutual Fund is a collective savings scheme. An Asset Management Company (AMC) manages
the pool of money. The AMC usually come out with various schemes declaring the type of
investment that will be undertaken on those funds. For example if most of the money is likely to
be invested in interest bearing securities, then the scheme is called Income scheme.

A debenture represents the smallest unit of public lending to a company. A debenture holder
receives a fixed stream of interest, unlike the uncertain stream of dividends that a shareholder
receives. Payment of interest is a legal obligation on the part of the company. Also, usually a
debenture is required to be secured against the assets of a company.
Foreign Institutional Investor (FII)

Foreign Institutional Investor means an institution or Pension Fund, Mutual Fund, Investment
Trust, Asset Management Company, Bank, Nominee Company and Incorporated / Institutional
Portfolio Manager or their Power of Attorney holder established or incorporated outside India
which proposes to make investment in India in securities, it also includes domestic asset
management company or domestic portfolio manager who manages funds raised or collected or
brought from outside India for investment in India on behalf of a sub account, shall be deemed to
be a Foreign Institutional Investor. Foreign Institutional Investors have been permitted to invest in
Indian securities markets since September 1992 when the Government of India issued the
Guidelines for Foreign Institutional Investment. In November 1995, the SEBI (Foreign Institutional
Investors) Regulations 1995 have been notified based on the earlier guidelines. There are around
500 FIIs registered in India at present.

Indian Corporate & Non Corporate Entities

An ordinary share represents the form of fractional ownership of a company in which a

shareholder, as a fractional owner, undertakes maximum entrepreneurial risk associated with the
business venture... If the business fails to succeed, the claim of the ordinary shareholder on the
residual amount left comes last after all other stakeholders, such as employees, creditors, lenders,
government, preference shareholders, etc.

SEBI: The Regulator of Capital Markets

The investor faces limited risk in the secondary market, but he needs much more protection and
safeguards in the primary market. This is because in an initial public issue, except for the offer
documents/prospectus he has no other source of information about the bonafides of the issue
raisers. Instances of vanishing companies and fly by night promoters act as a deterrent to investor
confidence. Further secondary market deals are isolated transactions involving sale/purchase of
individual lots of shares/bonds, while in the primary market news issues are for very large
amounts sometimes even hundreds of Crores of rupees. Fraudulent promoters may try to dupe
the entire community of investors, who opt to invest in a new issue.

Upto 1992, the capital/primary market was controlled by the Controller of Capital Issue (CCI)
formed under the Capital Issues Control Act. During that period, the pricing of capital issues was
controlled by CCI. The premium on issue of equity shares issued through the primary markets
was done in accordance with the Capital Issues Control Act. The CCI guidelines were abolished
with the introduction of Securities & Exchange Board of India (SEBI) formed under the SEBI Act,
1992 with the prime objective of protecting the interests of investors in securities, promoting the
development of, and regulating, the securities market and for matters connected therewith or
incidental thereto. All public issues since January, 1992 are governed by the rules & regulations
issued by SEBI.
SEBI was formed to promote fair dealing in issue of securities and to ensure that the capital
markets function efficiently, transparently and economically in the better interests of both the
issuers and the investors. The promoters should be able to raise funds at a relatively low cost. At
the same time, investors must be protected from unethical practices and their rights must be
safeguarded so that there is a steady flow of savings into the market. There must be proper
regulation and code of conduct and fair practice by intermediaries to make them competitive and
professional.
The regulation of primary issues thus poses an acid test for SEBI. On the one hand in view of the
leading role of these issues in the development and economic growth of the country, SEBI in view
of its responsibility for development of the market has to do every thing to promote new issues
and make it easier for bonafide promoters to raise funds for productive ventures, and on the other
hand SEBI has to ensure that the interests of the investors are protected to the best possible extent.

To fulfill its objectives relating to responsibility for regulation and responsibility for market
development, which may not overlap at all times, SEBI while opening up the market to the Issuers,
regulates the issue process providing for full safeguards and transparency through disclosure of
all relevant information by the issuers so that the investor can make an informed decision.

Since, its formation, SEBI has been instrumental in bringing greater transparency in capital issues.
Under the umbrella of SEBI, companies issuing shares are free to fix the premium provided
adequate disclosure is made in the offer documents. Focus being the greater investor protection,
SEBI has become a vigilant watchdog. Over a period of nearly a decade of its existence, SEBI has
established itself as a regulator of consequence . Today, if the Indian economy has grown into
robust and strong economy – strong enough to successfully swim against the currents of global
competition, it is due, in no small measure, to the contribution of the Indian capital market. The
capital market has proved to be an effective medium of canalising the savings of the investors
from every hook and corner of the country, for investment needed for capital formation and
economic growth.
In keeping with the broad thrust of the ongoing programmes of economic reform, the mechanism
of administrative controls over capital issues has been dismantled and pricing of capital issues is
now essentially market determined. Regulation of the capital markets and protection of investor s
interest is now primarily the responsibility of the Securities and Exchange Board of India (SEBI),
which is located in Mumbai.
Accordingly, SEBI s functions include:

1. Regulating the business in stock exchange and any other securities markets
2. Registering and regulating the working of collective investment schemes, including
mutual funds.
3. Prohibiting fraudulent and unfair trade practices relating to securities markets
4. Promoting investor s education and training of intermediaries of securities markets.
5. Prohibiting insider trading in securities, with the imposition of monetary penalties, on
erring market intermediaries.
6. Regulating substantial acquisition of shares and takeover of companies.
7. Calling for information from, carrying out inspection, conducting inquiries and audits of
the stock exchanges and intermediaries and self regulatory organisations in the securities
market.
8. Keeping this in view, SEBI has issued a new set of comprehensive guidelines governing
issue of shares and other financial instruments, and has laid down detailed norms for
stock brokers and sub brokers, merchant bankers, portfolio managers and mutual funds.

The Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines,
2000

SEBI in the year 1992 issued detailed guidelines to standardize disclosure obligations and make it
incumbent for Corporates floating public issues to disclose all relevant information affecting
investors interest. Based on experience gained these regulations were reviewed and revised in the
year 2000 and presently The Securities and Exchange Board of India (Disclosure and Investor
Protection) Guidelines, 2000 as amended subsequently from time to time are operative and in
force now.
SEBI constantly reviews its guidelines to make them more market/ investor friendly. In this
direction, SEBI has set up two committees to deliberate on the issues pertaining to Primary
Market. One under the chairmanship of Shri Y.H.Malegam, Managing Partner, S B Billimoria &
Co. (Referred as Malegam Committee) and the other under the Chairmanship of Sh M S Varma,
Chairman, TRAI (referred as Primary Market Advisory Committee (PMAC). These committees
comprise of representatives of merchant bankers, investor associations, ICAI, ICSI etc.

The Primary Market Advisory Committee advises SEBI on various issues relating to development
of primary Market whereas the Malegam Committee mainly focuses on the disclosure
requirements in the offer documents. Besides this, various issues are examined by SEBI internally.
These reports are displayed on the website of SEBI for eliciting public comments and decision
taken by SEBI in due course based on the feedback from the market.

Recent Breakthroughs In The Capital Market

Demutualization of SE’s

Demutualization refers to corporatization of stock exchanges. It refers to conversion of “not for

profit association of persons” into “for profit share holder owned companies”. Access to a wider
option of financing is an advantage that any listed company enjoys over an unlisted company and
the same is true for a stock exchange, which has chosen to list itself. Such exchanges enjoy from a
ready availability of resources and can exploit the technological breakthrough. Secondly, the
question of governance. Normally exchanges are associations of members and their primary goal
revolves around maximizing their member’s interest. Typically, it is seen that the interests of the
members are not the same as that of the exchanges. Therefore, by introducing an agency system,
the management and exchange can think strategically in terms of maximizing the wealth of their
shareholders. Thus better governance is yet another advantage that comes with a demutualized
set up. Exchanges demutualized to adapt themselves to the fast changing macro environment.
Exchanges also want to effect an organization wide cultural change led by the senior members of
the exchange. With a demutualized setup, the exchange authorities would be answerable to the
shareholders with questions on the size of business and profitability of their exchanges.

Indian Depository Receipts

Indian Depository Receipts (IDRs) are financial instruments that allow foreign companies to
mobilise funds from Indian markets by offering equity and getting listed on Indian stock
exchanges.

This instrument is similar to the GDRs and ADRs that allow foreign companies to raise funds from
European and American markets, respectively.

The actual shares underlying the IDRs would be held by an overseas custodian, which will
authorise the Indian depository to issue the IDRs. The overseas custodian is required to be a
foreign bank having a place of business in India and needs approval from the finance ministry for
acting as a custodian. The Indian depository needs to be registered with Sebi.
The government opened this window for the foreign companies to raise funds from the country,
as part of its efforts to globalise the Indian capital market and to provide local investors exposure
in global companies.
The department of company affairs (DCA) had on February 23, ’04 issued the Issue of Indian
Depository Receipts Rules, ’04 (IDR Rules), under Section 605A of the Companies Act, 1956. Last
week, Sebi has come out with the guideline and the model listing agreement for IDRs.

Only strong overseas companies would be allowed to raise money through this route as the norms
stipulate stiff entry barriers. The company seeking to issue IDRs should be listed on the stock
exchange of its own country. Companies should have a pre issue paid up capital and free reserves
of at least $100m and an average turnover of $500m during the three financial years preceding the
issue.

Besides, the issuing company should be making profits for at least five years preceding the issue
and should have declared a dividend of not less than 10% each year for the said period. It should
have good track record with respect to compliance with securities market regulations.

The IDR issue should not be less than Rs 50 crore. If the company issuing the IDRs does not
receive the minimum subscription of 90% of the issued amount, the company shall forthwith
refund the entire subscription amount received.

All IDR issuance should have the prior nod of Sebi. The rules do not require listing of the IDRs in a
foreign bourse. An issuing company would only require listing of IDRs in recognised stock
exchanges in India.

The rules also stipulate that IDRs shouldn’t be redeemed into underlying equity shares before the
expiry of the one year period from the issue date. Further, the IDRs issued by any issuing
company in any financial year should not exceed 15% of its paid up capital and free reserves.

Only qualified institutional investors are allowed to invest in IDRs. NRIs and FIIs cannot purchase
or possess IDRs unless special permission of the RBI is taken. The minimum investment in IDRs is
Rs 2 lakh. Indian companies can also invest in IDRs but it should not exceed the investment limits
fixed by their board.

Green Shoe Option (GSO)

A major change brought about by SEBI in the IPO market was the introduction of GSO, a new
phenomenon for Indian investors. The name comes from the fact that the green shoe company,
USA was the first to introduce this type of option. A company making an IPO through the book
building mechanism, can hold the GSO. This is an option that allows the underwriter of an IPO to
sell additional shares to the public. The maximum permissible over allotment is 15% of the total
issue size.

The GSO was introduced at a time when primary market in India was going through a bad phase.
The objective of introducing GSO by SEBI is to create a safety net for investors who participate in
the IPO of a company. It is to be used as a mechanism to stabilize the post listing share price. For
this purpose the co. appoints a stabilizing agent (SA). The SA borrows the shares to be over
allotted from the promoters. The shares thus borrowed are allotted to applicants on a prorata
basis. Within 30 days from the date on which trading on the shares being, the SA purchases the
shares from the market and returns them to the promoters. The demand for the company’s shares
created by purchase of shares by the SA is expected to arrest a possible decline in the post listing
share price.
 A Global Bull Market Champion Between Now and 2020?

Yet there are plenty of reasons to think that India will continue to generate big profits for investors
over the next 15 years, much like Japan did during the decades following World War II.

First, the Indian government remains firmly committed to the 15 year old process of economic
reforms. Just before the World Economic Forum in Davos in January, it relaxed the rules on
foreign direct investment. With a young population and a high savings rate, India s Finance
Ministry has recently targeted 10% annual growth, and is now within striking distance of that
number.

Second, India has become synonymous with outsourcing, commanding some 85% of the global
outsourcing business. Indeed, the outsourcing industry could become for India what the
automotive industry was for Japan and oil was for Saudi Arabia. Even U.S. based outsourcing
companies focusing on India like this week s Global Bull Market Alert pick are building fast
growth, highly profitable businesses on the back of this trend. Last year, over 500,000 U.S. tax
returns were completed by Indians. By 2010, Indian companies engaged in information technology
(IT) and outsourcing, together will earn $60 billion. That s 50% more than Microsoft earns today.

Third, debilitating bureaucracy and ubiquitous poverty notwithstanding, Indian elites have a
strong work ethic and emphasis on education. Combine this motivation with common law based
legal traditions and institutions, and you have factors that oil the wheels of commerce in ways that
don t show up in economics textbooks. And this work ethic still comes cheap. An Indian engineer
earns about $5000, with MBAs earning $7500 about 1/10th the American equivalents.

Compared with BRIC rival China s frenetic pace of change, India s reforms are much less sleek and
visible to the naked eye. But India s openness to technology, favorable demography, tradition of
democracy, and the high caliber of its top leadership may yet allow it to overtake its larger Asian
rival.

Conclusion

The Indian capital market has taken giant strides over the past few years; it is now time to move to
the next level of growth. While capital market reforms have seen governance structures at the
stock exchanges improve dramatically and risk management measures strengthened considerably,
the next phase of growth would necessarily have to be driven by domestic investment institutions
and the stock broking community itself. The National Stock Exchange of India Limited and the
Bombay Stock Exchange Limited has been demutualised for better operation, efficiency and
transparency. The Securities and Exchange Board of India (SEBI), the apex regulator of the capital
market has regulations that regulate the operations of the Indian Capital Market and the Stock
Exchanges of India.
One of the key steps is for the equity market to be able to mobilize a much greater part of
household financial savings than it is able to now. In the current market scenario a target of
getting 10% of household savings into the capital market wouldn’t be too ambitious. Currently,
even the apparently mighty domestic investment institutions and mutual funds put together are
no match for foreign institutional investors (FIIs). This, typically, skews positions in the market
and tilts the scales in favour of FIIs.

PAYAL JAIN (ERO232001/02/2006)

B-4/8, CMDA HOUSING COMPLEX, 39A,

PGM SHAH ROAD, KOLKATA -700095 (WB)