Overview of Indian Capital Market

The Indian capital market is more than a century old. Its history goes back to 1875, when
22 brokers formed the Bombay Stock Exchange (BSE). Over the period, the Indian
securities market has evolved continuously to become one o the most dynamic, modern,
and efficient securities markets in Asia. Today,

Indian market confirms to best international practices and standards both in terms of
structure and in terms of operating efficiency .Indian securities markets are mainly
governed by a) The Company’s Act1956, b) the Securities Contracts (Regulation) Act
1956 (SCRA Act), and c) the Securities and Exchange Board of India (SEBI) Act, 1992.
A brief background of these above regulations are given below

a) The Companies Act 1956 deals with issue, allotment and transfer of securities and
various aspects relating to company management. It provides norms for disclosures in the
public issues, regulations for underwriting, and the issues pertaining to use of premium
and discount on various issues.

b) SCRA provides regulations for direct and indirect control of stock exchanges with an
aim to prevent undesirable transactions in securities. It provides regulatory jurisdiction to
Central Government over stock exchanges, contracts in securities and listing of securities
on stock exchanges.

c) The SEBI Act empowers SEBI to protect the interest of investors in the securities
market, to promote the development of securities market and to regulate the security
market.

The Indian securities market consists of primary (new issues) as well as secondary
(stock) market in both equity and debt. The primary market provides the channel for sale
of new securities, while the secondary market deals in trading of securities previously
issued. The issuers of securities issue (create and sell) new securities in the primary
market to raise funds for investment. They do so either through public issues or private
placement. There are two major types of issuers who issue securities. The corporate
entities issue mainly debt and equity instruments (shares, debentures, etc.), while the
governments (central and state governments) issue debt securities (dated securities,
treasury bills). The secondary market enables participants who hold securities to adjust
their holdings in response to changes in their assessment of risk and return. A variant of
secondary market is the forward market, where securities are traded for future delivery
and payment in the form of futures and options. The futures and options can be on
individual stocks or basket of stocks like index. Two exchanges, namely National Stock
Exchange (NSE) and the Stock Exchange, Mumbai (BSE) provide trading of derivatives
in single stock futures, index futures, single stock options and index options. Derivatives
trading commenced in India in June 2000

Friday, September 11, 2009

Other leading cities in stock market operations

Ahmadabad gained importance next to Bombay with respect to cotton textile industry.
After 1880, many mills originated from Ahmadabad and rapidly forged ahead. As new
mills were floated, the need for a Stock Exchange at Ahmadabad was realized and in
1894 the brokers formed “The Ahmadabad Share and Stock Brokers’ Association”.

What the cotton textile industry was to Bombay and Ahmadabad, the jute industry was to
Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta.
After the Share Mania in 1861-65, in the 1870’s there was a sharp boom in jute shares,
which was followed by a boom in tea shares in the 1880’s and 1890’s; and a coal boom
between 1904 and 1908. On June 1908, some leading brokers formed “The Calcutta
Stock Exchange Association”.

In the beginning of the twentieth century, the industrial revolution was on the way in
India with the Swadeshi Movement; and with the inauguration of the Tata Iron and Steel
Company Limited in 1907, an important stage in industrial advancement under Indian
enterprise was reached.

Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies
generally enjoyed phenomenal prosperity, due to the First World War.

In 1920, the then demure city of Madras had the maiden thrill of a stock exchange
functioning in its midst, under the name and style of “The Madras Stock Exchange” with
100 members. However, when boom faded, the number of members stood reduced from
100 to 3, by 1923, and so it went out of existence.

In 1935, the stock market activity improved, especially in South India where there was a
rapid increase in the number of textile mills and many plantation companies were floated.
In 1937, a stock exchange was once again organized in Madras – Madras Stock Exchange
Association (Pvt) Limited. (In 1957 the name was changed to Madras Stock Exchange
Limited).

Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with
the Punjab Stock Exchange Limited, which was incorporated in 1936.

Indian Stock Exchanges – An Umbrella Growth

The Second World War broke out in 1939. It gave a sharp boom which was followed by a
slump. But, in 1943, the situation changed radically, when India was fully mobilized as a
supply base.

On account of the restrictive controls on cotton, bullion, seeds and other commodities,
those dealing in them found in the stock market as the only outlet for their activities.
They were anxious to join the trade and their number was swelled by numerous others.
Many new associations were constituted for the purpose and Stock Exchanges in all parts
of the country were floated.

The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited
(1940) and Hyderabad Stock Exchange Limited (1944) were incorporated.

In Delhi two stock exchanges – Delhi Stock and Share Brokers’ Association Limited and
the Delhi Stocks and Shares Exchange Limited – were floated and later in June 1947,
amalgamated into the Delhi Stock Exchange Association Limited.

There are two major indicators of Indian capital market- SENSEX & NIFTY:

What are the Sensex & the Nifty?

The Sensex is an “index”. What is an index? An index is basically an indicator. It gives

you a general idea about whether most of the stocks have gone up or most of the stocks
have gone down. The Sensex is an indicator of all the major companies of the BSE. The
Nifty is an indicator of all the major companies of the NSE. If the Sensex goes up, it
means that the prices of the stocks of most of the major companies on the BSE have gone
up. If the Sensex goes down, this tells you that the stock price of most of the major stocks
on the BSE have gone down. Just like the Sensex represents the top stocks of the BSE,
the Nifty represents the top stocks of the NSE. Just in case you are confused, the BSE, is
the Bombay Stock Exchange and the NSE is the National Stock Exchange. The BSE is
situated at Bombay and the NSE is situated at Delhi. These are the major stock exchanges
in the country. There are other stock exchanges like the Calcutta Stock Exchange etc. but
they are not as popular as the BSE and the NSE. Most of the stock trading in the country
is done though the BSE & the NSE . Besides Sensex and the Nifty there are many other
indexes. There is an index that gives you an idea about whether the mid-cap stocks go up
and down. This is called the “BSE Mid-cap Index”. There are many other types of
index.Unless stock markets provide professionalized service, small investors and foreign
investors will not be interested in capital market operations. And capital market being one
of the major source of long-term finance for industrial projects, India cannot afford to
damage the capital market path. In this regard NSE gains vital importance in the Indian
capital market but if we see the sensex & nifty graph there is a great variation.

Down fall or variability in returns. To measure all these crisis FM (Finance minister) of
India has done some measures which are following :

FM says state-run banks ready to provide credit to small, medium business sectors

RBI to keep a close watch on liquidity

Finance Minister P Chidambaram today said the Reserve Bank of India (RBI) will keep a
close watch on liquidity and state-run banks are ready to provide credit to the small and
medium business sectors. The finance minister today met the chiefs of state-run banks.
Exports growth slumps to 10.4% in September 2008

Exports up by 30.9% in April-September 2008

Indian merchandise exports during September 2008, recorded meager 10.4% growth at
US $ 13.75 billion, taking the toll from recessionary tendencies in major export
destination in US and Europe. On the other hand import growth remaining buoyant
surged 43.34% to US $ 24.38 billion, causing the trade deficit to more than double to US
$ 10.63 billion in September 2008 compared to US $ 4.55 billion in September 2007.
Global financial crisis and recessionary tendencies in major economies have severely
impacted India’s export growth, though import surged rampantly.

Soaring crude oil prices placed immense pressure on import bill during the month of
September 2008. The share of oil import in total imports surged to 37.31% in September
2008 compared to 34.05% in the corresponding period last year. Oil imports during
September 2008 surged 57.1% to US $ 9.1 billion, whereas non-oil import increased
36.2% to US $ 15.28 billion. Cumulative oil import during April-September 2008 stood
59.2% higher at US $ 55.06 billion, while non-oil imports surged 29.3% to US$ 99.68
billion over corresponding period last year.

Exports during April- September 2008 expanded 30.90% to US $ 94.97 billion (36.7% to
Rs.405118 crore) while imports advanced 38.6% to US $ 154.74 billion (44.9% to Rs
661208 crore).

In rupee terms, exports scaled up 24.7% to Rs.62641 crore, while imports increased by
61.9% to Rs 111085 crore, in September 2008 compared corresponding period last year.

Trade deficit in April-September was estimated at $59.77 billion as against $39.1 billion
in the same period the last fiscal.

PM says govt will take all steps to protect growth

Govt working closely with other countries for coordinated policy action

Prime Minister Manmohan Singh told top business leaders on Monday, 3 November
2008, that the government will take all the necessary monetary and fiscal policy measures
to protect growth. The Prime Minister also said the government was working closely with
other countries to ensure coordinated policy action for the containment of the global
financial crisis.

RBI slashes CRR and SLR by 100 bps each and Repo rate by 50 bps

CRR revised to 5.5%, Repo rates to 7.5% while SLR stands reduced to 24%

RBI has cut CRR by 100 basis points to 5.5%, SLR by100 basis points to 24% and repo
rate by 50 basis points to 7.5%, in a surprise move on 1st November 2008. Though the
market was expecting a cut, the market is surprised by strong dose of cut in all the three
rates in one go.

The cut in CRR will be implemented in two phases of 50 basis points each. CRR will
come down to 6.0% effective from the fortnight beginning 25th October 2008 and further
down to 5.5% effective from the fortnight beginning 8th November 2008. Incidentally,
this is in addition to 250 basis points cut in CRR effective from the fortnight beginning
11th October 2008. Thus, in October 2008 alone, we are seeing 300 bps cut and another
50 bps cut in November 2008. The latest 100 basis point cut in CRR will bring in Rs
40000 crore into the banking system. Together, the 350 basis points cut across October
and November 2008 will bring in Rs 140000 crore into the banking system

Since 16 September RBI has been offering an additional liquidity support for banks to the
extent of 1% of NDTL under the Liquidity Adjustment Facility (LAF) along with waiver
of penal interest. Now, RBI making this reduction permanent has reduced the Statutory
Liquidity Ratio (SLR) by 100 bps to 24% of NDTL effective from the fortnight
beginning 8th November 2008.

Other Measures

RBI has also introduced a special refinance facility for all scheduled commercial banks
(excluding RRBs) to provide refinance up to 1% of the relevant bank’s NDTL as of 24th
October 2008 at the LAF repo rate up to a maximum period of 90 days. RBI said that
during this period, refinance could be flexibly drawn and repaid.

In addition to the cut in SLR and special refinance facility, RBI also extended the limit of
liquidity support for banks from 0.5% to 1.5% of NDTL under LAF through relaxation in
the maintenance of SLR and the coverage is extended to NBFCs also. Further, RBI said
that banks can apportion the total accommodation allowed between Mutual funds and
NBFCs flexibly as per their business needs. But RBI directed that this relaxation in SLR
should be exclusively used for the purpose of meeting the funding requirement of NBFCs
and Mutual funds.

RBI has asked the entities with bulk forex requirements to approach it through their
banks. Accordingly, RBI will sell foreign exchange through agent banks to augment
supply in the domestic foreign exchange market or intervene directly to meet any demand
supply gaps.

RBI has also allowed non-deposit taking NBFCs (NBFCs-ND-SI), as a temporary

measure, to raise short-term foreign currency borrowings under the approval route.
However, this will be subject to their compliance with prudential norms on capital
adequacy and exposure norms.

Further, in the context of forex outflows in the recent period, RBI has decided to conduct
buy back of MSS dated securities so as to provide another avenue for injecting liquidity
of a more durable nature into the banking system. RBI indicated that this would be
calibrated with the market-borrowing programme of the Government of India.

Outlook

On the growth front, it is important to ensure that credit requirements for productive
purposes are adequately met so as to support the growth momentum of the economy.
However, the global financial turmoil has had knock-on effects on our financial markets;
this has reinforced the importance of focusing on preserving financial stability. The
Reserve Bank has reviewed the current and evolving macroeconomic situation and
liquidity conditions in the global and domestic financial markets. Based on this review,
RBI has taken slew of above measures, including cut in CRR, SLR and repo rate. The
total liquidity support provided through the latest reductions in the CRR, SLR and
temporary accommodation under the SLR is likely to be in the order of Rs.1,40,481
crore. With RBI announcing slew of liquidity boosting measures overall interest regime
in the country is likely to ease in the near term. Some of the banks have already
announced interest rate reduction and more are likely to follow soon. The reduction in
SLR would release much needed liquidity into the system and signals reduction in the
interest rates.

The Reserve Bank will continue to closely monitor the developments in the global and
domestic financial markets and will take swift and effective action as appropriate.

Rate cuts at corner

In the wake of the stress on our financial markets as a result of the global financial crisis,
the Reserve Bank announced a series of measures starting mid-September 2008 to ease
both domestic and foreign exchange liquidity. The task of monetary policy has always
centered on managing a judicious balance between price stability, sustaining the growth
momentum and maintaining financial stability. The relative emphasis across these
objectives has varied from time to time depending on the underlying macroeconomic
conditions. At this juncture, the apex bank of the country has focused on financial
stability thanks to ease in inflation.

India witnesses the effects global meltdown through liquidity crunch, which reflected in
significant growth in call rates- the rate at which banks borrows from each other. The
month started with 16.51% weighted call rates which further moved up to18.53% as on
10 October 2008. On review of the liquidity situation, the RBI announced a reduction in
CRR by 250 bps to 6.5% effective from fortnight beginning on 11 October 2008. As
result of reduction of the reduction in the CRR around Rs 1,00,000 crore was expected to
be released into the banking system. The RBI also decided to open a special 14-day fixed
rate repo window for a notified amount of Rs 20000 crore with a view to enabling banks
to meet the liquidity requirement of mutual funds.

Reflecting the impact of these measures, the average call rate declined to 9.92% as on 13
October 2008 and further tanked to 6.6% as on 17 October and slipped below reverse
repo rate to 4.16% on 18 October 2008. However we have seen pressure mounting on
inter bank call money rates since 25 October, as banks scrambled to borrow at call money
market to meet funding requirements in a holiday-shortened week, while fresh debt
auctions also weighed. The RBI has conducted the auctions of Rs 7000 crore worth of
treasury bills on 29 October, while Rs 10000 crore worth of securities will be auctioned
on 31 October. As result call rates surged to 8.56% on 25 October and further up to
9.35% and 11.26%, as on 27 and 29 October 2008, respectively. The RBI is committed to
maintain close watch on the entire financial system to prevent pressures building up in
the financial markets and it may take appropriate steps if pressures persist.

The sharp dip in the crude oil prices, RBI aims liquidity boosting measures and easing
inflation has compounded bullish sentiments in the bonds market, raising the bond prices
incessantly. The yield on 10- year benchmark government securities (g-sec 8.24% 22
April 2018) eased substantially to its 8 months low level 7.5% on 29 October 2008 from
8.44% on 1 October 2008. Bond yield and inflation has a positive co-relation, whereas
bonds trade transmits an inverse price-yield relationship. During the week ended 18
October 2008, general price index popularly called inflation has down to 10.68%. It was
the fifth sequential week were the inflation has declined on week on week basis. The
downtrend in inflation will give leverage to the apex bank of the country to act
aggressively on financial stability with further cut in interest rates.

Along with inflation, we have seen slight deceleration in money supply growth.
According to the latest data released by RBI, the annual growth rate in broad money or
M3 has below 20% mark. However it is still above the comfort zone of the apex bank
(RBI holding 17% target for the current financial year).

Central banks across the globe are trying to curb an economic slowdown as the financial
crisis weighs on consumer sentiment and business spending. The Federal Reserve’s
reduced interest rates by 50 bps to 1% on 29 October in order to stimulate economic
growth by encouraging consumer and business spending. In Asia, China’s central bank
announced it’s third reduction by 27 basis points to 6.93%, while Taiwan’s central
bank surprised with a 25 bps cut in lending rates to 3%, its fourth easing in two and a half
months. Similarly the market expects rate cut to be announced in Japan on Friday, while
European Central Bank and Britain may add to monetary easing in the ensuing weak to
restrict the adverse impact of what could be the worst financial crisis in 80 years and its
impact in terms of a long global recession. Against the backdrop of these global and
domestic developments and in the light of measures taken by the Reserve Bank over the
last month, we are excepting further dose of medicine from the apex bank of the country.

RBI prefers to buy time and leaves all rates unchanged

But cuts GDP growth projections to 7.5 to 8.0% for FY 2008-09

RBI has declared mid-term policy review with stable interest rates. Effective from the
fortnight beginning 11th October 2008, the CRR was already cut by 250 basis points to
6.5% while repo rate was cut by 100 bps effective form20th October 2008. But still select
Industry associations were expecting further cut in repo / CRR. Instead, RBI has decided
to wait and watch, before taking further monetary measures.

However the Reserve Bank has revised the projection of overall real GDP growth for
2008-09 to a range of 7.5-8.0 per cent, down from its own projection of around 8.0% in
July 2008, thanks to global and domestic development.

Highlights

1)The Bank Rate has been kept unchanged at 6.0 per cent.

2)The repo rate under the LAF has been kept unchanged at 8.0 per cent.

3)The reverse repo rate under the LAF has been kept unchanged at 6.0 per cent.

4)The cash reserve ratio (CRR) of scheduled banks is currently at 6.5 per cent of net
demand and time liabilities (NDTL). On a review of the current liquidity situation, it has
been decided to keep the CRR unchanged at 6.5 per cent of NDTL.

The market reaction on the policy was negative as market participants had expected
further rate cut. However there is no change in any rate of interest as well as in CRR and
SLR.

The apex bank of the country has already taken slew of measures in response to the
developments in the global and domestic market in the last few weeks. Hence, RBI has
preferred to observe the impact of these measures rather than rushing with additional
dose of medicine.

Meanwhile, for four consecutive weeks, inflation rate has been coming down on week on
week basis. Nevertheless, RBI has unchanged the inflation target for the remaining year,
evidencing its discomfort on the underlying pressure on price level. At the same time we
have not seen any change in target for money supply. With the reference of the recent
date published by RBI, the growth in money supply was slightly down, but still far away
from the target of the RBI (17%).

The recent measures taken by the apex bank (CRR and Repo cut) will boost the liquidity
in the market along with the relaxation in ECB norms will play critical role in overall
monetary assessments for the remaining financial year.

To sum up, the unchanged interest rate , and the downward revision in GDP growth
target together indicate that apex bank has tried to maintain the balance between growth
and inflation. However this is one of the most critical challenge for policy makers
worldwide to make a choice between stable inflation or growth. At home ground, RBI
preferred to buy the time to see the impact of the measures that has already placed.

No change in the policy rates or CRR in the Mid Term Review

RBI’s Mid Term Review of Annual Policy keeps all rates unchanged

Dr D Subbarao, Governor, Reserve Bank of India, unveiled the Mid Term Review of
Annual Policy for the Year 2008-09 on 24th October 2008.

RBI has kept the Bank Rate, Repo Rate, Reverse Repo Rate and Cash Reserve Ratio
unchanged. In effect, no major monetary measures have been taken in the Mid Term
review on 24th October 2008.

RBI has revised India’s GDP growth projection for FY 2008-09 to a range of 7.5 to 8.0%
on 24th October 2008, down from its own earlier projection of around 8.0% in July 2008.

RBI cuts India’s GDP growth projection to 7.5 to 8.0% for FY 2008-09

GDP growth projection cut from 8.0% made in July 2008

RBI has revised India’s GDP growth projection for FY 2008-09 to a range of 7.5 to 8.0%
on 24th October 2008, down from its own earlier projection of around 8.0% in July 2008.

Dr D Subbarao, Governor, Reserve Bank of India, unveiled the Mid Term Review of
Annual Policy for the Year 2008-09 on 24th October 2008. The downward revision in
GDP projections were made in this review.

RBI indicated that in its First Quarter Review in July 2008, it had projected India’s
projection of real GDP growth in 2008-09 at around 8.0 per cent for policy purposes. But
RBI said that since then, there have been significant global and domestic developments
which have rendered the outlook uncertain, and have increased the downside risks
associated with this projection.

In particular, RBI highlighted that the global downturn may be deeper and more
protracted than expected earlier. Consequently, the adverse implications through trade
and financial channels for emerging economies, including India, have amplified.

RBI cautioned that if the recession is deeper and the recovery is long drawn as is the
current expectation, emerging economies have also to contend with second round effects
in the form of potential terms of trade losses, erosion of export competitiveness and
restricted external financing. These adverse developments are overlaid on the moderation
of growth in the industrial and services sectors in the first half of 2008-09.
RBI also said that the south-west monsoon conditions and water storage levels support
the prospects of maintaining the medium-term trend growth rate in agriculture in 2008-
09.

Taking these developments and prospects into account, the Reserve Bank has revised the
projection of overall real GDP growth for 2008-09 to a range of 7.5-8.0 per cent

Foreign Institutional Investment in India

The liberalization and consequent reform measures have drawn the attention of foreign
investors leading to a rise in portfolio investment in the Indian capital market. Over the
recent years, India has emerged as a major

recipient of portfolio investment among the emerging market economies. Apart from
such large inflows, reflecting the confidence of cross-border investors on the prospects of
Indian securities market, except for one year, India received positive portfolio inflows in
each year. The stability of portfolio flows towards India is in contrast with large volatility
of portfolio flows in most emerging market economies.

The Indian capital market was opened up for foreign institutional investors (FIIs) in 1992.
The FIIs started investing in Indian markets in January1993. The Indian corporate sector
has been allowed to tap international capital markets through American Depository
Receipts (ADRs), Global Depository

Receipts (GDRs), Foreign Currency Convertible Bonds (FCCBs) and External

Commercial Borrowings (ECBs).Similarly, non-resident Indians (NRIs) have been
allowed to invest in Indian companies. FIIs have been permitted in all types of securities
including Government securities and they enjoy full capital

convertibility. Mutual funds have been allowed to open offshore funds to investing
equities abroad. FII investment in India started in 1993, as FIIs were allowed to invest in
the Indian debt and equity market in line with the recommendations of the High-Level
Committee on Balance of Payments. These investment inflows have since then been
positive, with the exception of 1998-99, when capital flows to emerging market
economies were affected by contagion from the East Asian crisis. These investments
account for over 10 per cent of the total market capitalization of the Indian stock market.

Limits on Foreign Institutional Investors

Each FII (investing on its own) or sub-account cannot hold more than 10 per cent of the
paid-up capital of a company. A sub-account under the foreign corporate/individual
category cannot hold more than 5 per cent of

the paid up capital of the company. The maximum permissible investment in the shares
of a company, jointly
by all FIIs together is 24 per cent of the paid-up capital of that company. The limit is 20
per cent of the paid-up capital in the case of public sector banks. The ceiling of 24 per
cent for FII investment can be raised up to

sectoral cap/statutory ceiling, subject to the approval of the board and the general body of
the company passing a special resolution to that effect. A cap of US $1.75 billion is
applicable to FII investment in dated

Government securities and treasury bills under 100 per cent and the 70:30route. Within
this ceiling of US $1.75 billion, a sub-ceiling of US $200 million is applicable for the
70:30 route. (FIIs are required to allocate their

investment between equity and debt instruments in the ratio of 70:30.However, it is also
possible for an FII to declare itself a 100 per cent debt FII in which case it can make its
entire investment in debt instruments.)

A cumulative sub-ceiling of US $500 million outstanding has been fixed on FII

investments in corporate debt and this is over and above the sub- ceiling of US $1.75
billion for Government debt.

Recent trends in the global capital markets :

Several current trends will continue to influence the world’s financial markets long
after the present bout of turbulence ends.

FEBRUARY 2008 • Diana Farrell, Christian S. Fölster, and Susan Lund

Struggling credit markets, slumping stocks, and a sliding dollar have been generating
anxiety among executives and policy makers in early 2008. Amid the turmoil, it’s easy to
forget that long-term structural change in the world’s capital markets will probably prove
more important than short-term fluctuations, as it did after the 1987 US stock market
crash, the 1992 assault on the British pound, and the 1997 unraveling of Asia’s financial
markets.

Recent McKinsey Global Institute (MGI) research highlights several trends that look set
to continue during the years ahead, long after the present bout of market turbulence has
ended:

the continued growth and deepening of global capital markets as investors pour more
money into equities, debt securities, bank deposits, and other assets around the world

the soaring growth of financial markets in emerging economies and the growing ties
between financial markets in developed and developing countries

the shift of financial weight in Asia from Japan toward China and other fast-growing
emerging markets
the growing financial clout of the eurozone countries and the significance of the euro

the burgeoning role of oil-rich Middle Eastern countries as suppliers of capital to the
world, along with the rise of new financial hubs in the Middle East to complement the
rapidly growing hubs in London and Asia

While these trends reflect a shift in financial power from the United States toward other
parts of the world, the sheer size and depth of the US market will give it a leading role on
the international financial stage for years to come.1

The exhibits that follow track the progress of these long-term shifts. The research rests on
several proprietary MGI databases that cover the financial assets, cross-border capital
flows, and foreign investments of more than 100 countries since 1990. Most of the
analysis focuses on developments through 2006, the most recent year for which
comprehensive data are available. But some data also show that many of the broad trends
continued through late 2007 and will probably persist in years to come.

The continued growth of global financial assets

The full fallout from the credit market volatility of 2007 remains to be seen. But over the
longer term, the volume of global financial assets (the value of all bank deposits,
government debt securities, corporate debt securities, and equity securities) will continue
to expand. Over the past 25 years, through stable and stormy times alike, financial assets
have grown robustly. In 2006, their value rose to $167 trillion, from $142 trillion the year
before—a 17 percent increase, more than double the average annual growth rate (8
percent) from 1995 through 2005.2

For many years, as equity and bond markets thrived, bank deposits have accounted for a
shrinking share of total financial assets. That trend continued in 2006, but the rate of
decline slowed because the absolute value of bank deposits around the world jumped by
$5.6 trillion—twice the average increase of the previous three years.3 The largest
contributor to this rise was the United States, thanks largely to strong income growth and
the housing boom, which enabled many households to tap their home equity for quick
cash. This source of growth was shaky by 2007. Looking forward, the growth of deposits
will depend to a large degree on China, where they are the primary savings vehicle.

Growing cross-border investment links financial markets

The rising level of foreign investment is making the world more financially inter-
dependent than it was even a few years ago. By the end of 2006, the outstanding stock of
cross-border investments reached the highest level, in real terms, in history—$74.5
trillion of assets. This sum includes the foreign investments of multinational corporations,
purchases of foreign debt and equity securities by investors around the world, and foreign
lending and deposits. Preliminary data indicate that the total grew to another record level
in 2007, despite the disruptions in European and US credit markets during the second half
of the year.
What’s more, the source and direction of cross-border investment flows are shifting. In
1999, the United States was the dominant hub of the global financial system. By 2006, it
remained the largest single foreign investor and a major hub in global capital markets—
but the eurozone countries together had as many financial links with other parts of the
world, including emerging markets. The United Kingdom too has become a more
significant global financial hub, and Middle Eastern countries are now major investors in
global financial markets, thanks to the windfall generated by rising oil prices. In 2006, for
the first time since the 1970s, the oil-exporting countries joined those of East Asia as the
world’s largest net suppliers of capital.

Conclusion:

The Indian financial system has undergone structural transformation over the past decade.
The financial sector has acquired strength, efficiency and stability by the combined effect
of competition, regulatory measures, and policy environment. While competition,
consolidation and convergence have been recognized as the key drivers of the banking
sector in the coming years, consolidation of the domestic banking system in both public
and private sectors is being combined with gradual enhancement of the presence of
foreign banks in a calibrated manner. There has been improvement in banks’ capital
position and asset quality as reflected in the overall increase in their capital adequacy
ratio and declining NPLs, respectively. Significant improvement in various parameters of
efficiency, especially intermediation costs, suggests that competition in the banking
industry has intensified. The efficiency of various segments of the financial system also
increased. The major challenges facing the banking sector are the judicious deployment
of funds and the management of revenues and costs. Concurrently, the issues of corporate
governance and appropriate disclosures for enhancing market discipline have received
increased attention for ensuring transparency and greater accountability. Financial sector
supervision is increasingly becoming risk based with the emphasis on quality of risk
management and adequacy of risk containment. Consolidation, competition and risk
management are no doubt critical to the future of Indian banking, but governance and
financial inclusion have also emerged as the key issues for the Indian financial system.
The capital market in India has become efficient and modern over the years. It has also
become much safer. However, some of the issues would need to be addressed. Corporate
governance needs to be strengthened. Retail investors continue to remain away from the
market. The private corporate debt market continues to lag behind the equity segment.
What is diffrence between IPO & FPO?
and What is diffrence between Equity
& Derivatives?
IPO is raising funds from public for the very first time(by sharing the ownership with
them) while issuing more shares in the public for the want of more funds is called FPO.
ICICI Bank's recent FPO is a case in point. promoter'ds stake comes down after each
IPO/FPO.
equity is an asset class which refers to shares of a company. derivarives on the other hand
are only contracts
>to be executed on a later date and
>derive their value from the underlying asset i.e. shares, commodities etc.

for example: you go to a maruti showroom and book a car for rs 5000/-. now the
underlying asset is the car. the booking contract is a derivative which derives its value
from car's value.

in case the car value rises beyond the current level the dealer is bound to sell it to you at
the current price only. you on the other hand have an option to buy it or leave it in case
the dealer also hikes the price.

FPO (Follow on Public Offer)

The basic difference between Initial Public Offer (IPO) and Follow on Public Offer
(FPO) is as the names suggest IPO is for the companies which have not listed on an
exchange and FPO is for the companies which have already listed on exchange but want
to raise funds by issuing some more equity shares.

Companies usually go to debt market for raising their short term needs. Either they issue
bonds or get loans. But if they have massive expansion plans they may not raise sufficient
funds in the debt market and even if they could it costs more. Companies come up with
follow on offer to restructure their business or to raise funds for new business or to
expand the existing business.
Similar to an IPO a price band is fixed (usually with the help of Investment banks) for the
issue and interested investors can apply for it. Unlike the corporate actions (such as
bonus, rights issue which are applicable only to the existing stake holders) FPO is open to
all investors. The price band for the FPO depends on the market value of the existing
company shares and the reason for raising funds.

In an FPO shares are issued in any of the ways listed below.

1. Promoters dilute their stake by offering some of their shares to the public.

2. Company issue fresh shares.

3. A combination of the above two approaches