CHAPTER-1 INTRODUCTION TO FINANCIAL MARKET

A financial market is a market in which people and entities can trade financial securities,
commodities, and other fungible items of value at low transaction costs and at prices that reflect
supply and demand. Securities include stocks and bonds, and commodities include precious
metals or agricultural goods.
There are both general markets (where many commodities are traded) and specialized
markets (where only one commodity is traded). Markets work by placing many interested buyers
and sellers, including households, firms, and government agencies, in one "place", thus making it
easier for them to find each other. An economy which relies primarily on interactions between
buyers and sellers to allocate resources is known as a market economy in contrast either to a
command economy or to a non-market economy such as a gift economy.

 In Finance, Financial Markets Facilitate:

o The raising of capital (in the capital markets)
o The transfer of risk (in the derivatives markets)
o Price discovery
o Global transactions with integration of financial markets
o The transfer of liquidity (in the money markets)
o International trade (in the currency markets)

DEFINITION:
In economics, typically, the term market means the aggregate of possible buyers and
sellers of a certain good or service and the transactions between them.
The term "market" is sometimes used for what are more strictly exchanges, organizations
that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange.
This may be a physical location (like the NYSE, BSE, and NSE) or an electronic system (like
NASDAQ). Much trading of stocks takes place on an exchange; still, corporate actions (merger,
spinoff) are outside an exchange, while any two companies or people, for whatever reason, may
agree to sell stock from the one to the other without using an exchange.
Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade
on a stock exchange, and people are building electronic systems for these as well, similar to
stock exchanges.
Financial markets can be domestic or they can be international.
BASIC ROLES OF THE FINANCIAL MARKET:

In a very simple economy, there are two sets of economic agents: households and firms.
Households save and the firms invest. It is the role of the financial sector to ensure that the
savings of the household sector reaches the firms, which need the resources for investment. In
reality the economy is of course much more complex than this overly simplified system. In a real
economy, savers include not only households but also firms and government. Similarly,
investments can be made by not only firms, but also households and the government. However,
even in a more complex economy, the main function of the financial system essentially involves
the mobilization of resources from those who have surplus and allocation of these resources to
those who face deficit.
In other words, the financial sector plays the role of an intermediary by ensuring smooth
flow of resources from those who have surplus funds to those who have a shortage of funds.
The second important role of the financial system is that of risk management. Every
business enterprise involves risk. The financial institutions provide a framework for evaluating
these risks. The financial market allows sharing, trading and transferring of risk among different
economic agents.
The third role of the financial markets is to pool and communicate information
efficiently, so that market prices reflect available information.
One of the important requisite for the accelerated development of an economy is the
existence of a dynamic financial market. A financial market helps the economy in the following
manner.
o Saving Mobilization:

Obtaining funds from the savers or surplus units such as household individuals,
business firms, public sector units, central government, state governments etc. is an
important role played by financial markets.
o Investment:
Financial markets play a crucial role in arranging to invest funds thus collected in
those units which are in need of the same.
o National Growth:
An important role played by financial market is that, they contributed to a nations
growth by ensuring unfettered flow of surplus funds to deficit units. Flow of funds for
productive purposed is also made possible.
o Entrepreneurship Growth:
Financial market contributes to the development of the entrepreneurial claw by
making available the necessary financial resources.
o Industrial Development:
The different components of financial markets help an accelerated growth of
industrial and economic development of a country, thus contributing to raising the
standard of living and the society of well-being.

CHAPTER 2 -INDIAN FINANCIAL MARKET

 WHAT IS INDIA FINANCIAL MARKET?

What does the India Financial market comprise of? It talks about the primary market,
FDIs, alternative investment options, banking and insurance and the pension sectors, asset
management segment as well. With all these elements in the India Financial market, it
happens to be one of the oldest across the globe and is definitely the fastest growing and best
among all the financial markets of the emerging economies. The history of Indian capital
markets spans back 200 years, around the end of the 18th century. It was at this time that
India was under the rule of the East India Company. The capital market of India initially
developed around Mumbai; with around 200 to 250 securities brokers participating in active
trade during the second half of the 19th century.
SCOPE OF THE INDIA FINANCIAL MARKET:
The financial market in India at present is more advanced than many other sectors as
it became organized as early as the 19th century with the securities exchanges in Mumbai,
Ahmadabad and Kolkata. In the early 1960s, the number of securities exchanges in India
became eight - including Mumbai, Ahmadabad and Kolkata. Apart from these three
exchanges, there was the Madras, Kanpur, Delhi, Bangalore and Pune exchanges as well.
Today there are 23 regional securities exchanges in India.
The Indian stock markets till date have remained stagnant due to the rigid economic
controls. It was only in 1991, after the liberalization process that the India securities market
witnessed a flurry of IPOs serially. The market saw many new companies spanning across
different industry segments and business began to flourish.

The launch of the NSE (National Stock Exchange) and the OTCEI (Over the Counter
Exchange of India) in the mid 1990s helped in regulating a smooth and transparent form of
securities trading.
The regulatory body for the Indian capital markets was the SEBI (Securities and
Exchange Board of India). The capital markets in India experienced turbulence after which
the SEBI came into prominence. The market loopholes had to be bridged by taking drastic
measures.

POTENTIAL OF THE INDIA FINANCIAL MARKET:

India Financial Market helps in promoting the savings of the economy - helping to
adopt an effective channel to transmit various financial policies. The Indian financial sector
is well-developed, competitive, efficient and integrated to face all shocks. In the India
financial market there are various types of financial products whose prices are determined by
the numerous buyers and sellers in the market. The other determinant factor of the prices of
the financial products is the market forces of demand and supply. The various other types of
Indian markets help in the functioning of the wide India financial sector.

 FEATURES OF THE FINANCIAL MARKET IN INDIA:

o India Financial Indices - BSE 30 Index, various sector indexes, stock quotes, Sensex
charts, bond prices, foreign exchange, Rupee & Dollar Chart
o Indian Financial market news
o Stock News - Bombay Stock Exchange, BSE Sensex 30 index, S&P CNX-Nifty,
company information, issues on market capitalization, corporate earnings statements
o Fixed Income - Corporate Bond Prices, Corporate Debt details, Debt trading activities,
Interest Rates, Money Market, Government Securities, Public Sector Debt, External
Debt Service
o Foreign Investment - Foreign Debt Database composed by BIS, IMF, OECD,& World
o
o
o
o
o
o

Bank, Investments in India & Abroad

Global Equity Indexes - Dow Jones Global indexes, Morgan Stanley Equity Indexes
Currency Indexes - FX & Gold Chart Plotter, J. P. Morgan Currency Indexes
National and Global Market Relations
Mutual Funds, Insurance
Loans
Forex and Bullion.

CHAPTER-3 TYPES OF FINANCIAL MARKET

CAPITAL MARKET:
Capital markets provide for the buying and selling of long term debt or equity backed
securities. When they work well, the capital markets channel the wealth of savers to those who
can put it to long term productive use, such as companies or governments making long term
investments. Financial regulators, such as the UK's Financial Services Authority (FSA) or the
U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated
jurisdictions to ensure that investors are protected against fraud, among other duties.
It Consists Of:
i.

Stock markets, which provide financing through the issuance of shares or

ii.

common stock, and enable the subsequent trading thereof.

Bond markets, which provide financing through the issuance of bonds, and
enable the subsequent trading thereof.

The Capital Market Is Subdivided Into:

PRIMARY MARKET
The primary market is that part of the capital markets that deals with the issuance of new
securities. Companies, governments or public sector institutions can obtain funding through the
sale of a new stock or bond issue. This is typically done through a syndicate [disambiguation
needed] of securities dealers. The process of selling new issues to investors is called
underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers
earn a commission that is built into the price of the security offering, though it can be found in
the prospectus. Primary markets create long term instruments through which corporate entities
borrow from capital market.
Features Of Primary Markets Are:
o This is the market for new long term equity capital. The primary market is the market
where the securities are sold for the first time. Therefore it is also called the new issue
market (NIM).
o In a primary issue, the securities are issued by the company directly to investors.
o The company receives the money and issues new security certificates to the investors.
o Primary issues are used by companies for the purpose of setting up new business or
for expanding or modernizing the existing business.
o The primary market performs the crucial function of facilitating capital formation in
the economy.
o The new issue market does not include certain other sources of new long term
external finance, such as loans from financial institutions. Borrowers in the new issue
market may be raising capital for converting private capital into public capital; this is
known as "going public."
o The financial assets sold can only be redeemed by the original holder.

 Methods Of Issuing Securities In The Primary Market Are:

o Public issuance, including initial public offering;
o Rights issue (for existing companies);
o Preferential issue.

SECONDARY MARKET:
The secondary market, also called aftermarket, is the financial market in which
previously issued financial instruments such as stock, bonds, options, and futures are bought and
sold. Another frequent usage of "secondary market" is to refer to loans which are sold by a
mortgage bank to investors such as Fannie Mae and Freddie Mac.
The term "secondary market" is also used to refer to the market for any used goods or
assets, or an alternative use for an existing product or asset where the customer base is the
second market (for example, corn has been traditionally used primarily for food production and
feedstock, but a "second" or "third" market has developed for use in ethanol production).
With primary issuances of securities or financial instruments, or the primary market,
investors purchase these securities directly from issuers such as corporations issuing shares in an
IPO or private placement, or directly from the federal government in the case of treasuries. After
the initial issuance, investors can purchase from other investors in the secondary market.
The secondary market for a variety of assets can vary from loans to stocks, from
fragmented to centralized, and from illiquid to very liquid. The major stock exchanges are the
most visible example of liquid secondary markets - in this case, for stocks of publicly traded
companies. Exchanges such as the New York Stock Exchange, London Stock Exchange and
NASDAQ provide a centralized, liquid secondary market for the investors who own stocks that
10

trade on those exchanges. Most bonds and structured products trade over the counter, or by
phoning the bond desk of ones broker-dealer. Loans sometimes trade online using a Loan
Exchange.

o Function Of Secondary Market:

In the secondary market, securities are sold by and transferred from one investor or
speculator to another. It is therefore important that the secondary market be highly liquid
(originally, the only way to create this liquidity was for investors and speculators to meet at a
fixed place regularly; this is how stock exchanges originated, see History of the Stock
Exchange). As a general rule, the greater the number of investors that participate in a given
market place and the greater the centralization of that market place, the more liquid the market.
Fundamentally, secondary markets mesh the investor's preference for liquidity (i.e., the
investor's desire not to tie up his or her money for a long period of time, in case the investor
needs it to deal with unforeseen circumstances) with the capital user's preference to be able to
use the capital for an extended period of time.
Accurate share price allocates scarce capital more efficiently when new projects are
financed through a new primary market offering, but accuracy may also matter in the secondary
market because:
1) Price accuracy can reduce the agency costs of management, and make hostile takeover
a less risky proposition and thus move capital into the hands of better managers,

11

2) Accurate share price aids the efficient allocation of debt finance whether debt offerings
or institutional borrowing.
Capital Market
Primary Market

Secondary Market

New stock or bond issues are sold

to investors, often via a mechanism

bought among investors or traders,

known as underwriting.

usually on a securities exchange,

The main entities seeking to raise

over-the-counter, or elsewhere.
The existence of secondary

long term funds on the primary

markets increases the willingness

capital markets are governments

of investors in primary markets, as

(which may be municipal, local or

they know they are likely to be

national) and business enterprises

able to swiftly cash out their

(companies).
Governments tend to issue only

investments if the need arises.

bonds, whereas companies often

issue either equity or bonds.

Existing securities are sold and

The main entities purchasing the

bonds or stock include pension
funds,

hedge

funds,

sovereign

wealth funds, and less commonly

wealthy individuals and investment
banks trading on their own behalf.
12

MONEY MARKET:
The money market is a market for short-term funds, which deals in financial assets whose period
of maturity is upto one year. It should be noted that money market does not deal in cash or
money as such but simply provides a market for credit instruments such as bills of exchange,
promissory notes, commercial paper, treasury bills, etc. These financial instruments are close
substitute of money. These instruments help the business units, other organisations and the
Government to borrow the funds to meet their short-term requirement. Money market does not
imply to any specific market place. Rather it refers to the whole networks of financial institutions
dealing in short-term funds, which provides an outlet to lenders and a source of supply for such
funds to borrowers. Most of the money market transactions are taken place on telephone, fax or
Internet. The Indian money market consists of Reserve Bank of India, Commercial banks, Co13

operative banks, and other specialized financial institutions. The Reserve Bank of India is the
leader of the money market in India. Some Non-Banking Financial Companies (NBFCs) and
financial institutions like LIC, GIC, UTI, etc. also operate in the Indian money market.

o Functions of the money market:

o Transfer of large sums of money.
o Transfer from parties with surplus funds to parties with a deficit.
o Allow governments to raise funds.
o Help to implement monetary policy.
o Determine short-term interest rates.

o Participants:
The money market consists of financial institutions and dealers in money or credit who
wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up
to thirteen months. Money market trades in short-term financial instruments commonly called
"paper." This contrasts with the capital market for longer-term funding, which is supplied by
bonds and equity.
The core of the money market consists of interbank lending--banks borrowing and
lending to each other using commercial paper, repurchase agreements and similar instruments.
These instruments are often benchmarked to (i.e. priced by reference to) the London Interbank
Offered Rate (LIBOR) for the appropriate term and currency.
Finance companies typically fund themselves by issuing large amounts of asset-backed
commercial paper (ABCP) which is secured by the pledge of eligible assets into an ABCP

14

conduit. Examples of eligible assets include auto loans, credit card receivables,
residential/commercial mortgage loans, mortgage-backed securities and similar financial assets.
Certain large corporations with strong credit ratings, such as General Electric, issue
commercial paper on their own credit. Other large corporations arrange for banks to issue
commercial paper on their behalf via commercial paper lines.
o Trading companies often purchase bankers' acceptances to be tendered for payment to
overseas suppliers.
o Retail and institutional money market funds
o Banks
o Central banks
o Cash management programs
o Merchant Banks

o Money Market Instruments:

Money Market Instruments
Certificate Of Deposit

Time

deposit,

commonly offered

to

consumers by banks, thrift institutions,

Repurchase Agreements

and credit unions.

Short-term loansnormally for less than
two weeks and frequently for one day
arranged by selling securities to an
investor with an agreement to repurchase
them at a fixed price on a fixed date.

15

Commercial Paper

Unsecured promissory notes with a fixed

maturity of one to 270 days; usually sold
at a discount from face value.

Eurodollar Deposit

Deposits made in U.S. dollars at a bank or

bank branch located outside the United

Federal Agency Short-Term Securities

States.
(In the U.S.). Short-term securities issued
by government sponsored enterprises such
as the Farm Credit System, the Federal
Home Loan Banks and the Federal

Federal Funds

National Mortgage Association.

(In the U.S.). Interest-bearing deposits
held by banks and other depository
institutions at the Federal Reserve; these
are immediately available funds that
institutions borrow or lend, usually on an
overnight basis. They are lent for the

Municipal Notes

federal funds rate.

(In the U.S.). Short-term notes issued by
municipalities in anticipation of tax
receipts or other revenues.

Treasury Bills

Short-term debt obligations of a national

government that are issued to mature in
three to twelve months.

16

Money Funds

Pooled

short

maturity,

high

quality

investments which buy money market

securities
Foreign Exchange Swaps

on

behalf

of

retail

or

institutional investors.
Exchanging a set of currencies in spot date
and the reversal of the exchange of
currencies at a predetermined time in the
future.

o Difference Between Money Markets And Capital Markets:

The Money markets are used for the raising of short term finance, sometimes for loans
that are expected to be paid back as early as overnight. Whereas the Capital markets are used for
the raising of long term finance, such as the purchase of shares or for loans that are not expected
to be fully paid back for at least a year.
Funds borrowed from the money markets are typically used for general operating
expenses, to cover brief periods of illiquidity. For example a company may have inbound
payments from customers that have not yet cleared, but may wish to immediately pay out cash
for its payroll. When a company borrows from the primary capital markets, often the purpose is
to invest in additional physical capital goods, which will be used to help increase its income. It
can take many months or years before the investment generate sufficient return to pay back its
cost, and hence the finance is long term.

17

Together, money markets and capital markets form the financial markets as the term is
narrowly understood.

OTHER TYPES OF FINANCIAL MARKET

COMMODITY MARKETS

DERIVATIVES MARKETS

FUTURES MARKETS

INSURANCE MARKETS
FOREIGN EXCHANGE MARKETS

A. COMMODITY MARKET:
Commodity markets are markets where raw or primary products are exchanged. These
raw commodities are traded on regulated commodities exchanges, in which they are bought and
sold in standardized contracts.
This article focuses on the history and current debates regarding global commodity markets. It
covers physical product (food, metals, and electricity) markets but not the ways that services,
18

including those of governments, nor investment, nor debt, can be seen as a commodity. Articles
on reinsurance markets, stock markets, bond markets and currency markets cover those concerns
separately and in more depth. One focus of this article is the relationship between simple
commodity money and the more complex instruments offered in the commodity markets.
B. DERIVATIVES MARKET:
The derivatives market is the financial market for derivatives, financial instruments like
futures contracts or options, which are derived from other forms of assets.
The market can be divided into two, that for exchange-traded derivatives and that for
over-the-counter derivatives. The legal nature of these products is very different as well as the
way they are traded, though many market participants are active in both.

Types

of

Derivatives:

The

most

commonly

used

derivatives

contracts

are

forwards,

futures

and options, which

we

shall

discuss

these in detail in the FMM-II later. Here we take a brief look at various derivatives contracts that
have come to be used.

19

Forwards: A forward contract is a customized contract between two entities, where

settlement takes place on a specific date in the future at todays pre-agreed price.

Futures: A futures contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. Futures contracts are special types of forward
contracts in the sense that the former are standardized exchange-traded contracts.

Options: Options are of two types - calls and puts. Calls give the buyer the right but not the
obligation to buy a given quantity of the underlying asset, at a given price on or before a
given future date. Puts give the buyer the right, but not the obligation to sell a given
quantity of the underlying asset at a given price on or before a given date.

Warrants: Options generally have lives of up to one year, the majority of options traded on
options exchanges having a maximum maturity of nine months. Longer-dated options are
called warrants and are generally traded over-the-counter.

LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are
options having a maturity of up to three years.

Baskets: Basket options are options on portfolios of underlying assets. The underlying
asset is usually a moving average or a basket of assets. Equity index options are a form of
basket options.

Swaps: Swaps are private agreements between two parties to exchange cash flows in the
future according to a prearranged formula. They can be regarded as portfolios of forward
contracts. The two commonly used swaps are:
Interest rate swaps: These entail swapping only the interest related cash flows between
the parties in the same currency and

20

Currency swaps: These entail swapping both principal and interest between the parties,
with the cash flows in one direction being in a different currency than those in the opposite
direction.

Swaptions: Swaptions are options to buy or sell a swap that will become operative at the
expiry of the options. Thus a swaption is an option on a forward swap. Rather than have
calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver
swaption is an option to receive fixed and pay floating. A payer swaption is an option to
pay fixed and receive floating.

C. FUTURES EXCHANGE:
A futures exchange or futures market is a central financial exchange where people can trade
standardized futures contracts; that is, a contract to buy specific quantities of a commodity or
financial instrument at a specified price with delivery set at a specified time in the future. These
types of contracts fall into the category of derivatives. Such instruments are priced according to
the movement of the underlying asset (stock, physical commodity, index, etc.). The
aforementioned category is named "derivatives" because the value of these instruments is
derived from another asset class.
D. INSURANCE:
Insurance is a form of risk management primarily used to hedge against the risk of a contingent,
uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity
to another, in exchange for payment. An insurer, or insurance carrier, is a company selling the
insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The
21

amount to be charged for a certain amount of insurance coverage is called the premium. Risk
management, the practice of appraising and controlling risk, has evolved as a discrete field of
study and practice.
The transaction involves the insured assuming a guaranteed and known relatively small
loss in the form of payment to the insurer in exchange for the insurer's promise to compensate
(indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract,
called the insurance policy, which details the conditions and circumstances under which the
insured will be financially compensated.
E. FOREIGN EXCHANGE MARKET:
The foreign exchange market (forex, FX, or currency market) is a form of exchange for the
global decentralized trading of international currencies. Financial centers around the world
function as anchors of trading between a wide range of different types of buyers and sellers
around the clock, with the exception of weekends. EBS and Reuters' dealing 3000 are two main
interbank FX trading platforms. The foreign exchange market determines the relative values of
different currencies.
The foreign exchange market assists international trade and investment by enabling
currency conversion. For example, it permits a business in the United States to import goods
from the European Union member states especially Euro zone members and pay Euros, even
though its income is in United States dollars. It also supports direct speculation in the value of
currencies, and the carry trade, speculation based on the interest rate differential between two
currencies.

22

In a typical foreign exchange transaction, a party purchases some quantity of one

currency by paying some quantity of another currency. The modern foreign exchange market
began forming during the 1970s after three decades of government restrictions on foreign
exchange transactions (the Bretton Woods system of monetary management established the rules
for commercial and financial relations among the world's major industrial states after World War
II), when countries gradually switched to floating exchange rates from the previous exchange
rate regime, which remained fixed as per the Bretton Woods system.
The foreign exchange market is unique because of the following characteristics:
o Its huge trading volume representing the largest asset class in the world leading to high
liquidity;
o Its geographical dispersion;
o Its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT
on Sunday until 22:00 GMT Friday;
o The variety of factors that affect exchange rates;
o The low margins of relative profit compared with other markets of fixed income; and
o The use of leverage to enhance profit and loss margins and with respect to account size.

CHAPTER 4- INDIAN EQUITY MARKET/DEBT MARKET

23

The Indian Equity Market is more popularly known as the Indian Stock Market. The Indian
equity market has become the third biggest after China and Hong Kong in the Asian region.
According to the latest report by ADB, it has a market capitalization of nearly $600 billion. As of
March 2009, the market capitalization was around $598.3 billion (Rs 30.13 lakh crore) which is
one-tenth of the combined valuation of the Asia region. The market was slow since early 2007
and continued till the first quarter of 2009.
A stock exchange has been defined by the Securities Contract (Regulation) Act, 1956 as an
organization, association or body of individuals established for regulating, and controlling of
securities.

The Indian equity market depends on three factors

Funding into equity from all over the world

Corporate houses performance
Monsoons

The stock market in India does business with two types of fund namely private equity fund and
venture capital fund. It also deals in transactions which are based on the two major indices Bombay Stock Exchange (BSE) and National Stock Exchange of India Ltd. (NSE).
The market also includes the debt market which is controlled by wholesale dealers, primary
dealers and banks. The equity indexes are allied to countries beyond the border as common
calamities affect markets. E.g. Indian and Bangladesh stock markets are affected by monsoons.
The equity market is also affected through trade integration policy. The country has advanced
both in foreign institutional investment (FII) and trade integration since 1995. This is a very
24

attractive field for making profit for medium and long term investors, short-term swing and
position traders and very intra day traders.
The Indian market has 22 stock exchanges. The larger companies are enlisted with BSE and
NSE. The smaller and medium companies are listed with OTCEI (Over The counter Exchange of
India). The functions of the Equity Market in India are supervised by SEBI (Securities Exchange
Board of India).
History of Indian Equity Market The history of the Indian equity market goes back to the 18th
century when securities of the East India Company were traded. Till the end of the 19th century,
the trading of securities was unorganized and the main trading centers were Calcutta (now
Kolkata) and Bombay (now Mumbai).
Trade activities prospered with an increase in share price in India with Bombay becoming the
main source of cotton supply during the American Civil War (1860-61). In 1865, there was drop
in share prices. The stockbroker association established the Native Shares and Stock Brokers
Association in 1875 to organize their activities. In 1927, the BSE recognized this association,
under the Bombay Securities Contracts Control Act, 1925.
The Indian Equity Market was not well organized or developed before independence. After
independence, new issues were supervised. The timing, floatation costs, pricing, interest rates
were strictly controlled by the Controller of Capital Issue (CII). For four and half decades,
companies were demoralized and not motivated from going public due to the rigid rules of the
Government.
In the 1950s, there was uncontrollable speculation and the market was known as 'Satta Bazaar'.
Speculators aimed at companies like Tata Steel, Kohinoor Mills, Century Textiles, Bombay
25

Dyeing and National Rayon. The Securities Contracts (Regulation) Act, 1956 was enacted by the
Government of India. Financial institutions and state financial corporation were developed
through an established network.
In the 60s, the market was bearish due to massive wars and drought. Forward trading
transactions and 'Contracts for Clearing' or 'badla' were banned by the Government. With
financial institutions such as LIC, GIC, some revival in the markets could be seen. Then in 1964,
UTI, the first mutual fund of India was formed.
In the 70's, the trading of 'badla' resumed in a different form of 'hand delivery contract'. But the
Government of India passed the Dividend Restriction Ordinance on 6th July, 1974. According to
the ordinance, the dividend was fixed to 12% of Face Value or 1/3 rd of the profit under Section
369 of The Companies Act, 1956 whichever is lower.
This resulted in a drop by 20% in market capitalization at BSE (Bombay Stock Exchange)
overnight. The stock market was closed for nearly a fortnight. Numerous multinational
companies were pulled out of India as they had to dissolve their majority stocks in India ventures
for the Indian public under FERA, 1973. The 80's saw a growth in the Indian Equity Market.
With liberalized policies of the government, it became lucrative for investors. The market saw an
increase of stock exchanges, there was a surge in market capitalization rate and the paid up
capital of the listed companies.
The 90s was the most crucial in the stock market's history. Indians became aware of
'liberalization' and 'globalization'. In May 1992, the Capital Issues (Control) Act, 1947 was
abolished. SEBI which was the Indian Capital Market's regulator was given the power and

26

overlook new trading policies, entry of private sector mutual funds and private sector banks, free
prices, new stock exchanges, foreign institutional investors, and market boom and bust.
In 1990, there was a major capital market scam where bankers and brokers were involved. With
this, many investors left the market. Later there was a securities scam in 1991-92 which revealed
the inefficiencies and inadequacies of the Indian financial system and called for reforms in the
Indian Equity Market.
Two new stock exchanges, NSE (National Stock Exchange of India) established in 1994 and
OTCEI (Over the Counter Exchange of India) established in 1992 gave BSE a nationwide
competition. In 1995-96, an amendment was made to the Securities Contracts (Regulation) Act,
1956 for introducing options trading. In April 1995, the National Securities Clearing Corporation
(NSCC) and in November 1996, the National Securities Depository Limited (NSDL) were set up
for demutualised trading, clearing and settlement. Information Technology scrips were the major
players in the late 90s with companies like Wipro, Satyam, and Infosys.
In the 21st century, there was the Ketan Parekh Scam. From 1st July 2001, 'Badla' was
discontinued and there was introduction of rolling settlement in all scrips. In February 2000,
permission was given for internet trading and from June, 2000, futures trading started.
India Commodity Market
India commodity market consists of both the retail and the wholesale market in the country. The
commodity market in India facilitates multi commodity exchange within and outside the country
based on requirements. Commodity trading is one facility that investors can explore for investing
their money. The India Commodity market has undergone lots of changes due to the changing
global economic scenario; thus throwing up many opportunities in the process. Demand for
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commodities both in the domestic and global market is estimated to grow by four times than the
demand currently is by the next five years.
Commodity Trading
Commodity trading is an interesting option for those who wish to diversify from the traditional
options like shares, bonds and portfolios. The Government has made almost all commodities
entitled for futures trading. Three multi commodity exchanges have been set up in the country to
facilitate this for the retail investors. The three national exchanges in India are:
Multi Commodity Exchange (MCX)
National Commodity and Derivatives Exchange (NCDEX)
National Multi-Commodity Exchange (NMCE)
Commodity trading in India is still at its early days and thus requires an aggressive growth plan
with innovative ideas. Liberal policies in commodity trading will definitely boost the commodity
trading. The commodities and future market in the country is regulated by Forward Markets
commission (FMC).
Wholesale Market
The wholesale market in India, an important component of the India commodity market,
traditionally dealt with framers and manufacturers of goods. However, in the present scenario,
their roles have changed to a large extent due to the enormous growth that the economy has
witnessed. The lengthy process of wholesalers buying from manufacturers; then selling it to
retailers who in turn sold it to consumers does not seem feasible today. An improvement in the

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transport facility has made the interaction between the retailer and manufacturer easier; the need
for a wholesale market is gradually diminishing.
Retail Market
The retail market in India is currently witnessing a boom. The growth in the India commodity
market is largely attributed to this boom in the retail market. Policy reforms and liberal
government policies have ensured that this sector is growing at a good pace. Some of the reasons
attributed to the growth of retail sector in India include the large population of the country who
has an increased purchasing power in their hand. Another factor is the heavy inflow of foreign
direct investment in this sector. More than 80% of the retail industry in the country is
concentrated in large cities.
India Commodity Market - Global Scenario
Despite having a robust economy, India's share in the global commodity market is not as big as
estimated. Except gold the share in other sectors of the commodity market is not very significant.
India accounts for 3% of the global oil demands and 2% of global copper demands. In
agriculture India's contribution to international trade volume is rather less compared to the huge
production base available. Various infrastructure development projects that are being undertaken
in India are being seen as a key growth driver in the coming days.

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INDIAN DEBT MARKET

Debt market refers to the financial market where investors buy and sell debt securities, mostly in
the form of bonds. These markets are important source of funds, especially in a developing
economy like India. India debt market is one of the largest in Asia. Like all other countries, debt
market in India is also considered a useful substitute to banking channels for finance.
The most distinguishing feature of the debt instruments of Indian debt market is that the return is
fixed. This means, returns are almost risk-free. This fixed return on the bond is often termed as
the 'coupon rate' or the 'interest rate'. Therefore, the buyer (of bond) is giving the seller a loan at a
fixed interest rate, which equals to the coupon rate.

Classification of Indian Debt Market

Indian debt market can be classified into two categories:

Government Securities Market (G-Sec Market): It consists of central and state

government securities. It means that, loans are being taken by the central and state

government. It is also the most dominant category in the India debt market.
Bond Market: It consists of Financial Institutions bonds, Corporate bonds and
debentures and Public Sector Units bonds. These bonds are issued to meet financial
requirements at a fixed cost and hence remove uncertainty in financial costs.

Advantages
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The biggest advantage of investing in Indian debt market is its assured returns. The returns that
the market offer is almost risk-free (though there is always certain amount of risks, however the
trend says that return is almost assured). Safer are the government securities. On the other hand,
there are certain amounts of risks in the corporate, FI and PSU debt instruments. However,
investors can take help from the credit rating agencies which rate those debt instruments. The
interest in the instruments may vary depending upon the ratings.
Another advantage of investing in India debt market is its high liquidity. Banks offer easy loans
to the investors against government securities.
Disadvantages
As there are several advantages of investing in India debt market, there are certain disadvantages
as well. As the returns here are risk free, those are not as high as the equities market at the same
time. So, at one hand you are getting assured returns, but on the other hand, you are getting less
return at the same time. Retail participation is also very less here, though increased recently.
There are also some issues of liquidity and price discovery as the retail debt market is not yet
quite well developed.
Debt Instruments
There are various types of debt instruments available that one can find in Indian debt market.
Government Securities
It is the Reserve Bank of India that issues Government Securities or G-Secs on behalf of the
Government of India. These securities have a maturity period of 1 to 30 years. G-Secs offer fixed

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interest rate, where interests are payable semi-annually. For shorter term, there are Treasury Bills
or T-Bills, which are issued by the RBI for 91 days, 182 days and 364 days.
Corporate Bonds
These bonds come from PSUs and private corporations and are offered for an extensive range of
tenures up to 15 years. There are also some perpetual bonds. Comparing to G-Secs, corporate
bonds carry higher risks, which depend upon the corporation, the industry where the corporation
is currently operating, the current market conditions, and the rating of the corporation. However,
these bonds also give higher returns than the G-Secs.
Certificate of Deposit
These are negotiable money market instruments. Certificate of Deposits (CDs), which usually
offer higher returns than Bank term deposits, are issued in demat form and also as a Usance
Promissory Notes. There are several institutions that can issue CDs. Banks can offer CDs which
have maturity between 7 days and 1 year. CDs from financial institutions have maturity between
1 and 3 years. There are some agencies like ICRA, FITCH, CARE, CRISIL etc. that offer ratings
of CDs. CDs are available in the denominations of ` 1 Lac and in multiple of that.
Commercial Papers
There are short term securities with maturity of 7 to 365 days. CPs are issued by corporate
entities at a discount to face value.
- See more at: http://business.mapsofindia.com/india-market/debt.html#sthash.Jkrwow1P.dpuf

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CHAPTER -5 INDIAN STOCK EXCHANGES

As indicated above, stock exchange is the term commonly used for a secondary market,
which provide a place where different types of existing securities such as shares, debentures and
bonds, government securities can be bought and sold on a regular basis. A stock exchange is
generally organised as an association, a society or a company with a limited number of members.
It is open only to these members who act as brokers for the buyers and sellers. The Securities
Contract (Regulation) Act has defined stock exchange as an association, organisation or body
of individuals, whether incorporated or not, established for the purpose of assisting, regulating
and controlling business of buying, selling and dealing in securities.

THE MAIN CHARACTERISTICS OF A STOCK EXCHANGE ARE:

1. It is an organized market.
2. It provides a place where existing and approved securities can be bought and sold easily.
3. In a stock exchange, transactions take place between its members or their authorized agents.
4. All transactions are regulated by rules and by laws of the concerned stock exchange.
5. It makes complete information available to public in regard to prices and volume of
transactions taking place every day.
It may be noted that all securities are not permitted to be traded on a recognised stock
exchange. It is allowed only in those securities (called listed securities) that have been duly
approved for the purpose by the stock exchange authorities. The method of trading nowa- days,
however, is quite simple on account of the availability of on-line trading facility with the help of
computers. It is also quite fast as it takes just a few minutes to strike a deal through the brokers
who may be available close by. Similarly, on account of the system of scrip-less trading and

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rolling settlement, the delivery of securities and the payment of amount involved also take very
little time, say, 2 days.

FUNCTIONS OF A STOCK EXCHANGE

The functions of stock exchange can be enumerated as follows:
1. Provides ready and continuous market: By providing a place where listed securities can be
bought and sold regularly and conveniently, a stock exchange ensures a ready and continuous
market for various shares, debentures, bonds and government securities. This lends a high
degree of liquidity to holdings in these securities as the investor can encash their holdings as
and when they want.
2. Provides information about prices and sales: A stock exchange maintains complete record
of all transactions taking place in different securities every day and supplies regular
information on their prices and sales volumes to press and other media. In fact, now-a-days,
you can get information about minute to minute movement in prices of selected shares on TV
channels like CNBC, Zee News, NDTV and Headlines Today. This enables the investors in
taking quick decisions on purchase and sale of securities in which they are interested. Not
only that, such information helps them in ascertaining the trend in prices and the worth of
their holdings. This enables them to seek bank loans, if required.
3. Provides safety to dealings and investment: Transactions on the stock exchange are
conducted only amongst its members with adequate transparency and in strict conformity to its
rules and regulations which include the procedure and timings of delivery and payment to be
followed. This provides a high degree of safety to dealings at the stock exchange. There is little
risk of loss on account of non-payment or nondelivery. Securities and Exchange Board of India
(SEBI) also regulates the business in stock exchanges in India and the working of the stock
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brokers. Not only that, a stock exchange allows trading only in securities that have been listed
with it; and for listing any security, it satisfies itself about the genuineness and soundness of the
company and provides for disclosure of certain information on regular basis. Though this may
not guarantee the soundness and profitability of the company, it does provide some assurance on
their genuineness and enables them to keep track of their progress.
4. Helps in mobilisation of savings and capital formation: Efficient functioning of stock
market creates a conducive climate for an active and growing primary market. Good
performance and outlook for shares in the stock exchanges imparts buoyancy to the new issue
market, which helps in mobilising savings for investment in industrial and commercial
establishments. Not only that, the stock exchanges provide liquidity and profitability to dealings
and investments in shares and debentures. It also educates people on where and how to invest
their savings to get a fair return. This encourages the habit of saving, investment and risk-taking
among the common people. Thus it helps mobilising surplus savings for investment in corporate
and government securities and contributes to capital formation.
5. Barometer of economic and business conditions: Stock exchanges reflect the changing
conditions of economic health of a country, as the shares prices are highly sensitive to changing
economic, social and political conditions. It is observed that during the periods of economic
prosperity, the share prices tend to rise. Conversely, prices tend to fall when there is economic
stagnation and the business activities slow down as a result of depressions. Thus, the intensity of
trading at stock exchanges and the corresponding rise on fall in the prices of securities reflects
the investors assessment of the economic and business conditions in a country, and acts as the
barometer which indicates the general conditions of the atmosphere of business.

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6. Better Allocation of funds: As a result of stock market transactions, funds flow from the less
profitable to more profitable enterprises and they avail of the greater potential for growth.
Financial resources of the economy are thus better allocated.

ADVANTAGES OF STOCK EXCHANGES

Having discussed the functions of stock exchanges, let us look at the advantages which can be
outlined from the point of view of (a) Companies, (b) Investors, and (c) the Society as a whole.
(a) To the Companies
(i) The companies whose securities have been listed on a stock exchange enjoy a better goodwill
and credit-standing than other companies because they are supposed to be financially sound.
(ii) The market for their securities is enlarged as the investors all over the world become aware of
such securities and have an opportunity to invest
(iii) As a result of enhanced goodwill and higher demand, the value of their securities increases
and their bargaining power in collective ventures, mergers, etc. is enhanced.
(iv) The companies have the convenience to decide upon the size, price and timing of the issue.

(b) To the Investors:

(i) The investors enjoy the ready availability of facility and convenience of buying and selling
the securities at will and at an opportune time.
(ii) Because of the assured safety in dealings at the stock exchange the investors are free from
any anxiety about the delivery and payment problems.

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(iii) Availability of regular information on prices of securities traded at the stock exchanges helps
them in deciding on the timing of their purchase and sale.
(iv) It becomes easier for them to raise loans from banks against their holdings in securities
traded at the stock exchange because banks prefer them as collateral on account of their liquidity
and convenient valuation.

(c) To the Society

(i) The availability of lucrative avenues of investment and the liquidity thereof induces people to
save and invest in long-term securities. This leads to increased capital formation in the country.
(ii) The facility for convenient purchase and sale of securities at the stock exchange provides
support to new issue market. This helps in promotion and expansion of industrial activity, which
in turn contributes, to increase in the rate of industrial growth.
(iii) The Stock exchanges facilitate realisation of financial resources to more profitable and
growing industrial units where investors can easily increase their investment substantially.
(iv) The volume of activity at the stock exchanges and the movement of share prices reflect the
changing economic health.
(v) Since government securities are also traded at the stock exchanges, the government
borrowing is highly facilitated. The bonds issued by governments, electricity boards, municipal
corporations and public sector undertakings (PSUs) are found to be on offer quite frequently and
are generally successful.

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LIMITATIONS OF STOCK EXCHANGES

Like any other institutions, the stock exchanges too have their limitations. One of the common
evils associated with stock exchange operations is the excessive speculation. You know that
speculation implies buying or selling securities to take advantage of price differential at different
times. The speculators generally do not take or give delivery and pay or receive full payment.
They settle their transactions just by paying the difference in prices. Normally, speculation is
considered a healthy practice and is necessary for successful operation of stock exchange
activity. But, when it becomes excessive, it leads to wide fluctuations in prices and various
malpractices by the vested interests. In the process, genuine investors suffer and are driven out of
the market. Another shortcoming of stock exchange operations is that security prices may
fluctuate
due to unpredictable political, social and economic factors as well as on account of rumours
spread by interested parties. This makes it difficult to assess the movement of prices in future and
build appropriate strategies for investment in securities. However, these days good amount of
vigilance is exercised by stock exchange authorities and SEBI to control activities at the stock
exchange and ensure their healthy functioning, about which you will study later.

SPECULATION IN STOCK EXCHANGES

The buyers and sellers at the stock exchange undertake two types of operations, one for
speculation and the other for investment. Those who buy securities primarily to earn a regular
income from such investment and possibly make some long-term gain on account of price rise in
future are called investors. They take delivery of the securities and make full payment of the
price. Such transactions are called investment transactions. But, when the securities are bought

38

with the sole object of selling them in future at higher prices or these are sold now with the
intention of buying at a lower price in future, are called speculation transactions. The main
objective of such transactions is to take advantage of price differential at different times. The
stock exchange also provides for settlement of such transactions even by receiving or paying, as
the case may be, just the difference in prices. For example, Rashmi bought 200 shares of Moser
Baer Ltd. at Rs. 210 per share and sold them at Rs. 235 per share. He does not take and give
delivery of the shares but settles the transactions by receiving the difference in prices amounting
to Rs. 5,000 minus brokerage. In another case, Mohit bought 200 shares of Seshasayee Papers
Ltd. at Rs. 87 per share and sold them at Rs. 69 per share. He settles these transactions by simply
paying the difference amounting to Rs. 3600 plus brokerage. However, now-a-days stock
exchanges have a system of rolling settlement. Such facility is limited only to transactions.

STOCK EXCHANGES IN INDIA

The first organised stock exchange in India was started in Mumbai known as Bombay Stock
Exchange (BSE). It was followed by Ahmedabad Stock Exchange in 1894 and Kolkata Stock
Exchange in 1908. The number of stock exchanges in India went upto 7 by 1939 and it increased
to 21 by 1945 on account of heavy speculation activity during Second World War. A number of
unorganised stock exchanges also functioned in the country without any formal set-up and were
known as kerb market. The Security Contracts (Regulation) Act was passed in 1956 for
recognition and regulation of Stock Exchanges in India. At present we have 23 stock exchanges
in the country. Of these, the most prominent stock exchange that came up is National Stock
Exchange (NSE). It is also based in Mumbai and was promoted by the leading financial
institutions in India. It was incorporated in 1992 and commenced operations in 1994. This stock

39

exchange has a corporate structure, fully automated screen-based trading and nation-wide
coverage. Another stock exchange that needs special mention is Over The Counter Exchange of
India (OTCEI). It was also promoted by the financial institutions like UTI, ICICI, IDBI, IFCI,
LIC etc. in September 1992 specially to cater to small and medium sized companies with equity
capital of more than Rs.30 lakh and less than Rs.25 crore. It helps entrepreneurs in raising
finances for their new projects in a cost effective manner. It provides for nationwide online
ringless trading with 20 plus representative offices in all major cities of the country. On this stock
exchange, securities of those companies can be traded which are exclusively listed on OTCEI
only. In addition, certain shares and debentures listed with other stock exchanges in India and the
units of UTI and other mutual funds are also allowed to be traded on OTCEI as permitted
securities. It has been noticed that, of late, the turnover at this stock exchange has considerably
reduced and steps have been afoot to revitalise it. In fact, as of now, BSE and NSE are the two
Stock Exchanges, which enjoy nation-wide coverage and handle most of the business in
securities in the country.
REGULATIONS OF STOCK EXCHANGES
As indicated earlier, the stock exchanges suffer from certain limitations and require strict
control over their activities in order to ensure safety in dealings thereon. Hence, as early as 1956,
the Securities Contracts (Regulation) Act was passed which provided for recognition of stock
exchanges by the central Government. It has also the provision of framing of proper bylaws by
every stock exchange for regulation and control of their functioning subject to the approval by
the Government. All stock exchanges are required submit information relating to its affairs as
required by the Government from time to time. The Government was given wide powers relating
to listing of securities, make or amend bylaws, withdraw recognition to, or supersede the

40

governing bodies of stock exchange in extraordinary/abnormal situations. Under the Act, the
Government promulgated the
Securities Regulations (Rules) 1957, which provided inter alia for the procedures to be followed
for recognition of the stock exchanges, submission of periodical returns and annual returns by
recognised stock exchanges, inquiry into the affairs of recognised stock exchanges and their
members, and requirements for listing of securities.

ROLE OF SEBI
As part of economic reforms programme started in June 1991, the Government of India initiated
several capital market reforms, which included the abolition of the office of the Controller of
Capital Issues (CCI) and granting statutory recognition to Securities Exchange Board of India
(SEBI) in 1992 for
(a) protecting the interest of investors in securities;
(b) promoting the development of securities market;
(c) regulating the securities market; and
(d) matters connected there with or incidental thereto.
SEBI has been vested with necessary powers concerning various aspects of capital market
such as:
(i)

Regulating the business in stock exchanges and any other securities market;

(ii) Registering and regulating the working of various intermediaries and mutual funds;
(iii) Promoting and regulating self regulatory organizations;
(iv) Promoting investors education and training of intermediaries;
(v) Prohibiting insider trading and unfair trade practices;

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(vi) Regulating substantial acquisition of shares and takeover of companies;

(vii) Calling for information, undertaking inspection, conducting inquiries and audit of stock
Exchanges, and intermediaries and self regulation organizations in the stock market;
(viii) Performing such functions and exercising such powers under the provisions of the
Capital Issues (Control) Act, 1947 and the Securities Contracts (Regulation) Act,
1956 as may be delegated to it by the Central Government. As part of its efforts to protect
investors interests, SEBI has initiated many primary market reforms, which include improved
disclosure standards in public issue documents, introduction of prudential norms and
simplification of issue procedures. Companies are now required to disclose all material facts and
risk factors associated with their projects while making public issue. All issue documents are to
be vetted by SEBI to ensure that the disclosures are not only adequate but also authentic and
accurate. SEBI has also introduced a code of advertisement for public issues for ensuring fair and
truthful disclosures. Merchant bankers and all mutual funds including UTI have been brought
under the regulatory framework of SEBI. A code of conduct has been issued specifying a high
degree of responsibility towards investors in respect of pricing and premium fixation of issues.
To reduce cost of issue, underwriting of issues has been made optional subject to the condition
that the issue is not under-subscribed. In case the issue is under-subscribed i.e., it was not able to
collect 90% of the amount offered to the public, the entire amount would be refunded to the
investors. The practice of preferential allotment of shares to promoters at prices unrelated to the
prevailing market prices has been stopped and private placements have been made more
restrictive. All primary issues have now to be made through depository mode. The initial public
offers (IPOs) can go for book building for which the price band and issue size have to be
disclosed. Companies with dematerialized shares can alter the par value as and when they so

42

desire.As for measures in the secondary market, it should be noted that all statutory powers to
regulate stock exchanges under the Securities Contracts (Regulation) Act have now been vested
with SEBI through the passage of securities law (Amendment) Act in 1995. SEBI has duly
notified rules and a code of conduct to regulate the activities of intermediaries in the securities
market and then registration in the securities market and then registration with SEBI is made
compulsory. It has issued guidelines for composition of the governing bodies of stock exchanges
so as to include more public representatives. Corporate membership has also been introduced at
the stock exchanges. It has notified the regulations on insider trading to protect and preserve the
integrity of stock markets and issued guidelines for mergers and acquisitions. SEBI has
constantly reviewed the traditional trading systems of Indian stock exchanges and tried to
simplify the procedure, achieve transparency in transactions and reduce their costs. To prevent
excessive speculations and volatility in the market, it has done away with badla system, and
introduced rolling settlement and trading in derivatives. All stock exchanges have been advised
to set-up Clearing Corporation / settlement guarantee fund to ensure timely settlements. SEBI
organizes training programmers for intermediaries in the securities market and conferences for
investor education all over the country from time to time.

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CONCLUSION
A financial market helps in raising capital and managing the monetary risks of an economy. The
global financial transactions of a nation can be easily cleared because of the existence of
financial markets. These markets have also encouraged and developed international trade over
the years. It has greatly contributed in bringing the economies close together and reducing the
trade barriers across the globe.

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