INDIAN CAPITAL MARKET AND REFORMS

Presented By Ashok Prasad Sah (109) K P Presanth Nair (075)

Indian Financial System

Financial Institutions

Financial Markets

Financial Instruments

Financial Services

Money Market

Capital Market

Capital Market
It is an organized mechanism for effective and efficient transfer of Money capital/Financial resources from the investing parties to the entrepreneurs engaged in industry or commerce.
It refers to institutional arrangements for facilitating the borrowing and lending of long-term funds.

Objectives and Importance

Directs the flow of savings into most profitable channels and thereby ensures optimum utilization of financial resources.

Securing the foreign capital and know how to fill up the deficit in the required resources for economic growth at a faster rate.

Capital Market

Primary Market

Secondary Market

Derivatives Market

Primary Market
Financial instruments are listed for the first time Does not involve share trading Investors here earn money either through future dividends (if any) or if company wants to repurchase its shares On an average these markets generate reliable long-term returns Also called Money Raising Market

Instruments of Primary Market

IPO
Bought-Out-Deals Private Placements Rights Issue

Secondary Markets
The market where the financial instruments are traded for their lifetime, once they are created in primary markets This is what we commonly know as Stock Markets Provide liquidity to investors Price Discovery: Current Price is defined by stream of future dividends expected Zero sum game between two parties Only a third party (broker) makes commission on each trade Examples New York Stock Exchange (NYSE) NASDAQ (National Association of Securities Dealers Automated Quotation System) Bombay Stock Exchange (BSE)

Bombay Stock Exchange.

Bombay Stock Exchange (BSE) was incorporated in 1875 with the name Native Share & Stock Brokers Association.

NSE
The Capital Market Segment of the NSE commenced operations on 3rd November, 1992. The NSE is a screen-based exchange without a trading floor, providing greater transparency in transactions in securities. The NSE is expected to operate as a strongly automated stock exchange with member brokers all over the country eventually trading in the exchange through modern telecommunication facilities.

Over the counter (OTC) markets

OTCEI was incorporated in 1990 as a Section 25 company under the Companies Act 1956 and is recognized as a stock exchange under Section 4 of the Securities Contracts Regulation Act, 1956. Constitutes a network of brokers and dealers that trade stocks and bonds that are not listed on an Exchange Involves buying and selling securities outside the organized stock exchange Why would a stock be traded over-the-counter? The company is small, making it unable to meet exchange listing requirements A companys unwillingness to abide by the information disclosure rules of an exchange The volume of share trading is low Investor interest is low

Broker: Broker is an individual/firm who facilitates trade between clients They charge a commission for executing buy and sell orders submitted by an investor Broker is under a legal obligation to make sure that you get the best execution for your order

Dealer: Dealer is a individual/firm that buys and sells for his or her own inventory of securities and for others Broker/dealer must register with the SEC

Derivative Market

FUTURES

OPTIONS

Put

Call

Derivatives
Derivatives are financial instruments whose value is based on the market value of an underlying asset such as stocks, bonds or a commodity.

Examples of derivatives are futures contracts, options and forward contracts

The structured derivative market in India is relatively new (about 7 years old)

Future
Futures are essentially deferred spot contracts

Spot is the immediate delivery for settlement of a bond or stock

Futures are purchase or sale contracted for settlement for a later date Futures are exchange traded derivatives

Forwards are the OTC version of futures

Futures are traded on margin

In India futures contracts have a maximum tenor of three months

Futures can also lead to large gains or losses without any floor or ceiling
How? An example If I buy 10 contracts of Nifty index near month futures at Rs 2900 For every 1 point move in the index I stand to lose or gain Rs 1000 (10*100) If index falls 100 points, then I have lost Rs 100,000. My investment for 10 contracts was Rs 400,000 (margin money)

Options
Options give the right but not the obligation to buy or sell an asset at a future date Options are either call or put options Call options give the holder the right to buy an asset at a future date Put options give the holder the right to sell an asset at a future date

Options can be American or European American options allow the buyer to exercise the option before expiry date European options give the buyer the right to exercise the option only on expiry date Index options in India are European options while stock options are American options

The buyer of the option limits losses to the premium paid on the purchase of the options Eg. If I buy a nifty 2900 put at Rs 34, my loss is limited to Rs 34 while gain potential is limitless

If the price goes above Rs 2900 I do not exercise the option limiting my loss to the premium paid

Reforms in Capital Market

Capital Issues (Control) Act of 1947 repealed in 1992; control over price and premium of shares removed. Companies now free to raise funds from securities markets after filing prospectus with the Securities and Exchange Board of India (SEBI).

Dematerialisation of Securities-1997
Disclosure and Investor Protection Guidelines-2000 It contains instructions regarding the eligibility of companies issuing securities and describes the information that should be included in offer documents to the public, like a prospectus, abridged prospectus, and letter of offer.

Derivative Trading 2000 June 2000 Commencement of Derivatives Trading (Index Futures) June 2001 Commencement of trading in Index Options
Trading Cycle-Uniform Rolling Settlement-2001 The trading and settlement cycles were initially shortened from 14 days to 7 days. Subsequently, to further enhance the efficiency of the secondary market, rolling settlement was introduced on a T+5 basis. With effect from April 1, 2002, the settlement cycle was further shortened to T+3 for all listed securities. The settlement cycle is now T+2.

2:30 Wed. NSCCL (National Securities

Clearing Corporation Limited )

SMC

SMC Bank A/c upto 10.30 A.M. (Wed.)

KOTAK Pool A/c AnkitMumbai sold 1000 Rel. shares

RAVI DELHI purchased 1000 Rel. shares on Monday

Screen based trading-2003 Bombay Stock Exchange (BSE) introduces screen-based trading replacing outcry system Globalisation on Raising Resources- ADR/GDR/FCCB AND ECB,MF can set up offshore funds for investing in equities. Straight Through Processing (STP) 2002, enables orders to be processed, confirmed, cleared and settled in a shorter time period, more cost effectively and with fewer errors

Demutualisation and Corporatisation-2004 Historically most exchanges were not-for-profit organizations, transformation of the exchange into a for-profit shareholderowned company is referred to as "demutualisation & Corporatisation"
RBI introduced Real Time Gross Settlement system (RTGS) in 2004. Several measures have been undertaken/strengthened to ensure the safety and integrity of the market. These are: margining system, intra-day trading limit, exposure limit and setting up of trade/settlement guarantee fund.

SCRA (Securities contract & regulatory Act) was amended in 2004 to provide that a stock exchange may delist securities, after recording reasons like

Voluntary delisting Minimum level of public shareholding

Investor Protection Fund under the aegis of SEBI- 2007,

Funded by fines and penalties recovered by SEBI The Fund shall be used for the purpose of protection of investors and for educating the investors

Short selling by retail & institutional investors was reopened in 2007 after a six year ban (2001).

PAN mandatory-2007 :As the sole identification number for all participants in the securities market.
ADR/GDR/FCCB-Foreign Capital Moblisation

1992-93 - allowed the Indian corporate sector to have access to global capital markets through issue of Foreign Currency Convertible Bonds (FCCBs)/Equity Shares under the Global Depository Mechanism. June, 2006- Government permitted unlisted companies to sponsor an issue of ADRs / GDRs.

National Institute of Securities Markets (NISM) has been set up in 2006 for teaching and training intermediaries in the securities markets and promoting research.