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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

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.

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

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.

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


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


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.

Global trends in recent years have seen a blur- ring of borders between financial market segments.The
traditional wall between banks and the securi-ties market is being eliminated, leaving banks with greater
investment flexibility. Banks are also in-creasingly providing long-term loans and entering the capital market to
raise resources through eq-uity capital and subordinated debt. India is experi-encing the same trends and they
are expected to increase the competitiveness of its capital market.However, the country should pursue further
expan-sion of banking activities in conjunction with fur-ther efforts to liberalize the banking system, and
enhance asset quality to encourage sound competi-tion between the banking sector and the capital market.

Globalisation has ensured that the Indian economy and financial markets cannot stay insulated from the present
financial crisis in the developed economies. In the light of the fact that the Indian economy is linked to global
markets through a full float in current account (trade and services) and partial float in capital account (debt and
equity), we need to analyze the impact based on three critical factors: Availability of global liquidity; demand for
India investment and cost thereof and decreased consumer demand affecting Indian exports.

The concerted intervention by central banks of developed countries in injecting liquidity is expected to reduce
the unwinding of India investments held by foreign entities, but fresh investment flows into India are in doubt.
The impact of this will be three-fold: The element of GDP growth driven by off-shore flows (along with skills and
technology) will be diluted; correction in the asset prices which were hitherto pushed by foreign investors and
demand for domestic liquidity putting pressure on interest rates

Talking about exporting, importing and manufacturing business, India goes ahead in all of these areas. India's
skilled talent manufactures and exports a great array of products, which make a huge marketplace offshore.

Agriculture Industry - India's financial system is different from others, with farming being its foundation. India
exports a huge hunk from its agriculture stock, and various stuffs are heartily valued in the international bazaar.
A few goods that reach out to international audience directly from nations farms are Sugar, Tea, Spices, Wheat,
Rice, Tobacco, etc.

Textile and Apparel Industry - Apparel industry has a unique place in India's export import data bank. After
agriculture, textile industry sees India possibly, as the 2nd largest center of exporting to other country. If
reviews are to be believed, Indian textile trade creates about 30% of the total exports! Specialist orate that
keeping in view the constantly increasing demand of Indian textile and apparel industry, the position of this
sector is bound to raise.

Home Furnishing goods - Indian Jewelry - Indian jewelry region is completely attributed to the ancient Indian
society and civilization. The outstanding gems and jewels that India has under its lap, clubbed with the
astonishing artwork, makes it renowned in the international market. India trade jewelry and gems to U.S, UAE,
U.K, Hong Kong, Singapore, Belgium, among others nations.Like any other nation, a big part of India's economy
is reliant on its exporting.

The foreign exchange market India is growing very rapidly. The annual turnover of the market is more than
$400 billion.
This transaction does not include the inter-bank transactions. According to the record of transactions released
by RBI, the average monthly turnover in the merchant segment was $40.5 billion in 2003-04 and the inter-bank
transaction was $134.2 for the same period. The average total monthly turnover was about $174.7 billion for
the same period. The transactions are made on spot and also on forward basis, which include currency swaps
and interest rate swaps.
The Indian foreign exchange market consists of the buyers, sellers,market intermediaries and the monetary
authority of India. The main center of foreign exchange transactions in India is Mumbai, the commercial capital
of the country. There are several other centers for foreign exchange transactions in the country including
Kolkata, New Delhi, Chennai, Bangalore, Pondicherry and Cochin. In past, due to lack of communication facilities
all these markets were not linked. But with the development of technologies, all the foreign exchange markets
of India are working collectively.
The foreign exchange market India is regulated by the reserve bank of India through the Exchange Control
Department. At the same time, Foreign Exchange Dealers Association (voluntary association) also provides
some help in regulating the market. The Authorized Dealers (Authorized by the RBI) and the accredited brokers
are eligible to participate in the foreign Exchange market in India. When the foreign exchange trade is going on
between Authorized Dealers and RBI or between the Authorized Dealers and the Overseas banks, the brokers
have no role to play.
Apart from the Authorized Dealers and brokers, there are some others who are provided with the restricted
rights to accept the foreign currency or travelers cheque. Among these, there are the authorized money
changers, travel agents, certain hotels and government shops. The IDBI and Exim bank are also permitted
conditionally to hold foreign currency.
The whole foreign exchange market in India is regulated by the Foreign Exchange Management Act, 1999 or
FEMA. Before this act was introduced, the market was regulated by the FERA or Foreign Exchange Regulation
Act ,1947. After independence, FERA was introduced as a temporary measure to regulate the inflow of the
foreign capital. But with the economic and industrial development, the need for conservation of foreign currency
was felt and on the recommendation of the Public Accounts Committee, the Indian government passed the
Foreign Exchange Regulation Act,1973 and gradually, this act became famous as FEMA.
Liquidity in bank
CNX Nifty Junior (Junior Nifty) is an index comprised of the next rung of 50 most liquid stocks after
S&P CNX Nifty. In
fact S&P CNX Nifty and Junior Nifty may be regarded as a basket of 100 most liquid stocks in India.
Stocks in Junior Nifty are filtered on their liquidity characterized by their impact cost and market value
represented by
their market capitalization. The stocks comprising S&P CNX Nifty and Junior Nifty are mutually exclusive i.e. a
stock will
never appear in both indexes at the same time.
Junior Nifty may also be considered an incubator for stocks entering Nifty.
The index is professionally managed by India Index Services and Products Limited (IISL), which is India’s first
company dedicated to providing investors in Indian equity markets with Indexes and Index services.
IISL is a joint venture between two entities who have immensely contributed to the Indian Capital Markets - the
Stock Exchange of India Limited (NSE), India’s largest stock exchange and the Credit Rating Information
of India Limited (CRISIL), India’s leading credit rating agency. IISL also has a consulting and licensing agreement
Standard & Poor’s (S&P).
Index Maintenance plays a crucial role in ensuring stability of the Index as well as in meeting its objective of
being a
consistent benchmark of the equity markets. IISL has constituted an Index Policy Committee (IPC), which is
involved in
formulating policies and guidelines for managing the Indexes. The committee is a blend of academics and
practitioners – comprising of eminent persons from the Mutual Fund industry, Economists, National Stock
CRISIL and S&P to ensure that indexes are constructed on sound principles. The committee determines macro
with respect to construction and maintenance of indexes. The selection criteria specified by the Index Policy
for various indexes are transparent and published by IISL.
A separate Index Maintenance Sub-Committee comprising of officials of NSE, CRISIL and IISL takes all decisions
addition/ deletion of companies in any Index. The Index Maintenance Sub-committee ensures that Index review
maintenance is carried out in accordance with the policies developed by IPC and includes:
• Monitoring and completing adjustments in a timely manner on account of corporate actions
•Reviewing according to laid down criteria
Index Reviews are normally carried out every quarter. At the time of review, a Replacement Pool comprising
companies that meet all criteria for candidacy to the Index are analysed.

In banking, liquidity is the ability to meet obligations when they come due without incurring unacceptable
losses. Managing liquidity is a daily process requiring bankers to monitor and project cash flows to ensure
adequate liquidity is maintained. Maintaining a balance between short-term assets and short-term liabilities is
critical. For an individual bank, clients' deposits are its primary liabilities (in the sense that the bank is meant to
give back all client deposits on demand), whereas reserves and loans are its primary assets (in the sense that
these loans are owed to the bank, not by the bank). The investment portfolio represents a smaller portion of
assets, and serves as the primary source of liquidity. Investment securities can be liquidated to satisfy deposit
withdrawals and increased loan demand. Banks have several additional options for generating liquidity, such as
selling loans, borrowing from other banks, borrowing from a central bank, such as the US Federal Reserve bank,
and raising additional capital. In a worst case scenario, depositors may demand their funds when the bank is
unable to generate adequate cash without incurring substantial financial losses. In severe cases, this may result
in a bank run. Most banks are subject to legally-mandated requirements intended to help banks avoid a liquidity

Banks can generally maintain as much liquidity as desired because bank deposits are insured by governments
in most developed countries. A lack of liquidity can be remedied by raising deposit rates and effectively
marketing deposit products. However, an important measure of a bank's value and success is the cost of
liquidity. A bank can attract significant liquid funds, but at what cost? Lower costs generate stronger profits,
more stability, and more confidence among depositors, investors, and regulators.

Funds management involves estimating and satisfying liquidity needs in the most cost-effective way possible
and without unduly sacrificing income potential. Effective analysis and management of liquidity requires
management to measure the liquidity position of the bank on an ongoing basis and to examine how funding
requirements are likely to evolve under various scenarios, including adverse conditions.

The formality and sophistication of liquidity management depends on the size and sophistication of the bank, as
well as the nature and complexity of its activities. Regardless of the bank, good management information
systems, strong analysis of funding requirements under alternative scenarios, diversification of funding sources,
and contingency planning are crucial elements of strong liquidity management.

The adequacy of a bank's liquidity will vary. In the same bank, at different times, similar liquidity positions may
be adequate or inadequate depending on anticipated or unexpected funding needs. Likewise, a liquidity position
adequate for one bank may be inadequate for another. Determining a bank's liquidity adequacy requires an
analysis of the current liquidity position, present and anticipated asset quality, present and future earnings
capacity, historical funding requirements, anticipated future funding needs, and options for reducing funding
needs or obtaining additional funds.

Purchasing a put option and entering into a short sale transaction are the two most common ways for traders to
profit when the price of an underlying asset decreases, but the payoffs are quite different. Even though both of
these instruments appreciate in value when the price of the underlying asset decreases, the amount of loss and
pain incurred by the holder of each position when the price of the underlying asset increases is drastically

A short sale transaction consists of borrowing shares from a broker and selling them on the market in the
hope that the share price will decrease and you'll be able to buy them back at a lower price. (If you need a
refresher on this subject, see our Short Selling Tutorial.) As you can see from the diagram below, a trader who
has a short position in a stock will be severely affected by a large price increase because the losses become
larger as the price of the underlying asset increases. The reason why the short seller sustains such large losses
is that he/she does have to return the borrowed shares to the lender at some point, and when that happens, the
short seller is obligated to buy the asset at the market price, which is currently higher than where the short
seller initially sold.

In contrast, the purchase of a put option allows an investor to benefit from a decrease in the price of the
underlying asset, while also limiting the amount of loss he/she may sustain. The purchaser of a put option will
pay a premium to have the right, but not the obligation, to sell a specific number of shares at an agreed upon
strike price. If the price rises dramatically, the purchaser of the put option can choose to do nothing and just
lose the premium that he/she invested. This limited amount of loss is the factor that can be very appealing to
novice traders