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Captail Maket related

  1. 1. Indian Capital Markets is Undeveloped (Project present scenario )
  2. 2. Capital Market <ul><li>Capital market is a wide term used to comprise all operations in the new issues and stock market. </li></ul><ul><li>A Capital market is a market for securities (debt or equity), where business enterprises or companies and Governments can raise long term funds. </li></ul><ul><li>It is defined as a market in which money is provided for period longer than a year, as the raising of short term funds takes place on other markets, eg the money market. </li></ul>
  3. 3. Capital Market Classification In the secondary markets, existing securities are sold and bought among investors or traders. Usually on a securities exchange Capital Market In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting Primary Market Secondary Market
  4. 4. Financial Markets <ul><li>Primary Market </li></ul><ul><ul><li>Instruments issued for first time </li></ul></ul><ul><ul><li>Used by </li></ul></ul><ul><ul><ul><li>Government/Corporates/PSU’s </li></ul></ul></ul><ul><ul><li>IPO </li></ul></ul><ul><ul><ul><li>Initial Public Offering </li></ul></ul></ul><ul><li>Secondary Market </li></ul><ul><ul><li>Trading of already issued </li></ul></ul><ul><ul><ul><li>Stocks </li></ul></ul></ul><ul><ul><ul><li>Bonds </li></ul></ul></ul><ul><ul><li>Stock Exchange </li></ul></ul>
  5. 5. MAJOR PARTICIPANTS OF CAPITAL MARKETS <ul><li>FINANCE MINISTRY </li></ul><ul><li>CENTRAL BANK </li></ul><ul><li>ROLE OF FINANCE MINISTRY: </li></ul><ul><li>It governs the entire fiscal system of GOI </li></ul><ul><li>It centralizes around all the issues in India pertaining to economy and finance. </li></ul>
  6. 6. Role of Central Bank : <ul><li>RBI is a monetary authority and a banking institution which has been granted the exclusive privilege to lend a government its currency. </li></ul><ul><li>It is bank that lends money to other banks in times of need. </li></ul><ul><li>Its primary function is to provide nations money supply but more active duties include controlling subsidized loan interest rates and active as a lender of last resort to the banking sector during times of financial crisis. </li></ul>
  7. 7. Reasons for Unorganized capital market <ul><li>Illiteracy </li></ul><ul><li>Lack analytical approach </li></ul><ul><li>Poverty </li></ul><ul><li>Unemployment </li></ul><ul><li>Underworld </li></ul><ul><li>Intermediaries </li></ul><ul><li>Lack of knowledge and unawareness of share markets. </li></ul>
  8. 8. Examples : <ul><li>Andheri </li></ul><ul><li>Gujarat (Ahmadabad) </li></ul><ul><li>Dalal Street </li></ul><ul><li>Trading is done on tips and others names </li></ul><ul><li>Trading on minors name </li></ul>
  9. 9. Illegal Trading System : <ul><li>Dabba System </li></ul><ul><li>Private Karb System </li></ul><ul><li>Patiya System </li></ul><ul><li>Badla System </li></ul>
  10. 10. Chronology of the Indian Capital Market <ul><li>1830s: Trading of corporate shares and stocks in Bank and cotton Presses in Bombay </li></ul><ul><li>1850s: Sharp increase in the capital market brokers owing to the rapid development of commercial enterprise. </li></ul><ul><li>1860-61: Outbreak of the American Civil War and ' Share Mania ' in India. </li></ul><ul><li>1894: Formation of the Ahmadabad Shares and Stock Brokers Association </li></ul><ul><li>1908: Formation of the Calcutta Stock Exchange Association </li></ul>The Indian Capital Market is one of the oldest capital markets in Asia which evolved around 200 years ago
  11. 11. <ul><li>The capital market in India dates back to the eighteenth century when East India Company securities were traded in the country. </li></ul><ul><li>End of the nineteenth century, securities’ trading was unorganized and the main trading canters were Bombay (now Mumbai) and Calcutta (now Kolkata) </li></ul><ul><li>Bombay was the chief trading centre wherein bank shares were the major trading stock. During the American Civil War (1860-61) </li></ul>History of the Indian Capital Market
  12. 12. History of the Indian Capital Market <ul><li>Bombay was an important source of supply for cotton. Hence, trading activities flourished during the period, resulting in a boom in share prices. </li></ul><ul><li>This boom, the first in the history of the Indian capital market, lasted for a half a decade. The bubble burst on July 1, 1865, when there was tremendous slump in share prices </li></ul><ul><li>Trading was at that time limited to a dozen brokers: their trading place was under a banyan tree in front of the Town Hall in Bombay. </li></ul><ul><li>These stockbrokers organized an informal association in 1875-Native Shares and Stock Brokers Association, Bombay. </li></ul>
  13. 13. History of the Indian Capital Market <ul><li>These stockbrokers organized an informal association in 1875-Native Shares and Stock Brokers Association, Bombay. </li></ul><ul><li>The stock exchanges in Calcutta and Ahmadabad, also industrial and trading centres, came up later. </li></ul><ul><li>The Bombay Stock Exchange was recognized in May 1927 under the Bombay Securities Contracts Control Act, 1925. </li></ul><ul><li>The capital market was not well organized and developed during the British rule because the British government was not interested in the economic growth of the country. </li></ul>
  14. 14. History of the Indian Capital Market <ul><li>As a result, many foreign companies depended on the London capital market for funds rather than on the Indian capital market. </li></ul><ul><li>In the post-independence period also, the size of the capital market remained small. </li></ul><ul><li>During the first and second five-year plans, the government's emphasis was on the development of the agricultural sector and public sector undertakings. </li></ul><ul><li>The public sector undertakings were healthier than the private undertakings in terms of paid-up capital but their shares were not listed on the stock exchanges. </li></ul>
  15. 15. History of the Indian Capital Market <ul><li>The Controller of Capital Issues (CCI) closely supervised and controlled the timing, composition, interest rates, pricing, allotment, and floatation costs of new issues. </li></ul><ul><li>These strict regulations demotivated many companies from going public for almost four and a half decades. </li></ul><ul><li>In the 1950s, Century Textiles, Tata Steel, Bombay Dyeing, National Rayon, and Kohinoor Mills were the favorite scrips of speculators. </li></ul><ul><li>As speculation became rempant, the stock market came to be known as 'Satta Bazaar'. Despite speculation, non-payment or defaults were not very frequent. </li></ul>
  16. 16. History of the Indian Capital Market <ul><li>The government enacted the Securities Contracts (Regulation) Act in 1956s was also characterized by the establishment of a network for the development of financial institutions and state financial corporations. </li></ul><ul><li>The 1960s was characterized by wars and droughts in the country which led to bearish trends. </li></ul><ul><li>Trends were aggravated by the ban in 1969 on forward trading and 'badla', technically called 'contracts for clearing.' 'Badla' provided a mechanism for carrying forward positions as well as borrowing funds. </li></ul>
  17. 17. History of the Indian Capital Market <ul><li>Financial institutions such as LIC and GIC helped to revive the sentiment by emerging as the most important group of investors. </li></ul><ul><li>The first Mutual fund of India, the Unit Trust of India (UTI) came into existence in 1964 </li></ul><ul><li>In the 1970s, Badla trading was resumed under the disguised form of 'hand-delivery contracts-A group.' This revived the market. </li></ul><ul><li>The capital market received another severe setback on July 6, 1974, when the government promulgated the Dividend Restriction Ordinance, </li></ul>
  18. 18. History of the Indian Capital Market <ul><li>Restricting the payment of dividend by companies to 12% of the face value or one-third of the profits of the companies that can be distributed as computed under section 369 of the Companies Act, whichever was lower. </li></ul><ul><li>This led to a slump in market capitalization at the BSE by about 20 per cent overnight and the stock market did not open for nearly a fortnight. </li></ul><ul><li>Later came a buoyancy in the stock markets when the multinational companies (MNCs) were forced to dilute their majority stocks in their Indian ventures in favour of the Indian public under FERA, 1973. Several MNCs opted out of India. </li></ul>
  19. 19. History of the Indian Capital Market <ul><li>23 MNCs offered shares were lower than their intrinsic worth. Hence, for the first time, the FERA dilution created an equity cult in India. </li></ul><ul><li>It was the spate of FERA issues that gave a real fillip to the Indian stock markets. </li></ul><ul><li>For the first time, many investors got an opportunity to invest in the stocks of such MNCs as Colgate, and Hindustan Liver Limited. </li></ul><ul><li>Then, in 1977, a little-known entrepreneur, Dhirubhai Ambani, tapped the capital market. The scrip, Reliance Textiles, is still a hot favourite and dominates trading at all stock exchanges. </li></ul>
  20. 20. History of the Indian Capital Market <ul><li>The 1980s witnessed an explosive growth of the securities market in India, with millions of investors suddenly discovering lucrative opportunities. Many investors jumped into the stock markets for the first time. </li></ul><ul><li>The government's liberalization process initiated during the mid-1980s, spurred this growth. </li></ul><ul><li>Participation by small investors, speculation, defaults, ban on Badla , and resumption of badla continued. </li></ul><ul><li>Convertible debentures emerged as a popular instrument of resource mobilization in the primary market. </li></ul>
  21. 21. History of the Indian Capital Market <ul><li>Convertible debentures emerged as a popular instrument of resource mobilization in the primary market. </li></ul><ul><li>The introduction of public sector bonds and the successful mega issues of Reliance Petrochemicals and Larsen and Toubro gave a new lease of life to the primary market. </li></ul><ul><li>This, in turn, enlarged volumes in the secondary market. The decade of the 1980s was characterized by an increase in the number of stock exchanges, listed companies, paid up-capital, and market capitalization. </li></ul><ul><li>The 1990s will go down as the most important decade in the history of the capital market of India. </li></ul>
  22. 22. History of the Indian Capital Market <ul><li>Liberalisation and globalization were the new terms coined and marketed during this decade. </li></ul><ul><li>The Capital Issues (Control) Act, 1947 was repealed in May 1992. </li></ul><ul><li>  </li></ul><ul><li>The decade was characterized by a new industrial policy, emergence of SEBI as a regulator of capital market, advent of foreign institutional investors, euro-issues, free pricing, new trading practices, new stock exchanges, entry of new players such as private sector mutual funds and private sector banks, and primary market boom and bust. </li></ul><ul><li>Major capital market scams took place in the 1990s. </li></ul>
  23. 23. History of the Indian Capital Market <ul><li>These shook the capital market and drove away small investors from the market. </li></ul><ul><li>The securities scam of March 1992 involving brokers as well as bankers was one of the biggest scams in the history of the capital market. In the subsequent years owing to free pricing, many unscrupulous promoters, who raised money from the capital market, proved to be fly-by-night operators. This led to an erosion in the investors' confidence. </li></ul><ul><li>The M S Shoes case, one such scam which took place in March 1995, put a break on new issue activity. </li></ul>
  24. 24. History of the Indian Capital Market <ul><li>The 1991-92 securities scam revealed the inadequacies of and inefficiencies in the financial system. It was the scam, which prompted a reform of the equity market. </li></ul><ul><li>The Indian stock market witnessed a sea change in terms of technology and market prices. Technology brought radical changes in the trading mechanism. </li></ul><ul><li>The Bombay Stock Exchange was subject to nationwide competition by two new stock exchanges-the National Stock Exchange, set up in 1994, and Over the Counter Exchange of India, set up in 1992. </li></ul>
  25. 25. History of the Indian Capital Market <ul><li>The National Securities Clearing Corporation (NSCC) and National Securities Depository Limited (NSDL) were set up in April 1995 and November 1996 respectively form improved clearing and settlement and dematerialized trading. </li></ul><ul><li>The Securities Contracts (Regulation) Act, 1956 was amended in 1995-96 for introduction of options trading. Moreover, rolling settlement was introduced in January 1998 for the dematerialized segment of all companies. With automation and geographical spread, stock market participation increased. </li></ul>
  26. 26. History of the Indian Capital Market <ul><li>In the late 1990s, the Information Technology (IT) scrips were dominant on the Indian bourses. These scrips included Infosys, Wipro, and Satyam. They were a part of the favourite scrips of the period, also known as 'New Economy' scrips, alongwith telecommunications and media scrips. </li></ul><ul><li>The Indian capital market entered the twenty-first century with the Ketan Parekh scam. </li></ul><ul><li>As a result of this scam, Badla was discontinued from July 2001 and rolling settlement was introduced in all scrips. </li></ul><ul><li>Trading of futures commenced from June 2000, and Internet trading was permitted in February 2000 </li></ul>
  27. 27. History of the Indian Capital Market <ul><li>On July 2, 2001, the Unit Trust of India announced suspension of the sale and repurchase of its flagship US-64 scheme due to heavy redemption leading to panic on the bourses. </li></ul><ul><li>The Government's decision to privatize oil PSUs in 2003 fuelled stock prices. One big divestment of international telephony major VSNL took place in early February 2002. </li></ul><ul><li>Foreign institutional investors have emerged as major players on the Indian bourses. NSE has an upper hand over its rival BSE in terms of volumes not only in the equity markets but also in the derivatives market. </li></ul>
  28. 28. History of the Indian Capital Market <ul><li>Now the capital market is organized, fairly integrated, mature, more global and modernized. </li></ul><ul><li>The Indian equity market is one of the best in the world in terms of technology. Advances in computer and communications technology, coming together on Internet are shattering geographic boundaries and enlarging the investor class. </li></ul><ul><li>Internet trading has become a global phenomenon. The Indian stock markets are now getting integrated with global markets. </li></ul>It has been a long journey for the Indian capital market.
  29. 29. DABBA TRADING : <ul><li>The illegal practice of buy/sale of securities outside the exchange mechanism without any documentary evidence to relate such transactions. </li></ul><ul><li> &quot;Dabba Trading&quot; also known as &quot;Bucketing&quot; is the process used by brokers to route their client’s trades outside the Stock/Commodity exchange. </li></ul><ul><li>In such trading, the broker either does not execute any trade or matches and execute trades on its own terminal. </li></ul>
  30. 30. DABBA TRADING : <ul><li>&quot;Dabba&quot; has its origin in the developed markets where a system called bucketing prevails. </li></ul><ul><li>Bucketing is an illegal practice where a stockbroker executes a customer’s trade without taking it to a stock exchange with the hope of making some gains at a future date. </li></ul><ul><li>The broking house that engages in this activity are called bucket shops. </li></ul><ul><li>Dabba trading operates essentially like the American bucket shops of the 1920s that </li></ul>
  31. 31. DABBA TRADING : <ul><li>existed before the Securities and Exchange Commission (SEC) was set up. </li></ul><ul><li>The &quot;Dabba&quot; means box and in modern context, a computer. A Dabba operator in the securities market’s parlance is the trader/operator who executes &quot;Dabba Transactions&quot;. </li></ul><ul><li>His office is the replica of any broker office having number of customers executing the trade on the terminals linked to the exchange showing market rates/trades. </li></ul>
  32. 32. DABBA TRADING : <ul><li>Earlier, the &quot;Dabba Operator&quot; does not execute the investor’s trade on the exchange but in his books. </li></ul><ul><li>But now, the NSE & BSE has provided the facility for the investors to verify their trades on the NSE/BSE websites. </li></ul><ul><li>This facility has made the broker vulnerable to be exposed to the investor’s and can made him liable for civil & criminal remedy. </li></ul>
  33. 33. DABBA TRADING : <ul><li>Now as the investor is sitting in the trading room of the broker or verifying the trades on the website of NSE/BSE using order/ trade number, the operators have developed a new and sophisticated view of doing &quot;Dabba Trade&quot;. </li></ul><ul><li>In this process, they develop a program which is embedded with the existing trading software whereby, the operator executes a transaction on the trading terminal where the client is sitting but the embedded software immediately execute the reverse transaction. </li></ul>
  34. 34. DABBA TRADING : <ul><li>A practice mushrooming in several tier II towns like Rajkot, Vadodara, Jaipur, Jalgaon, Ludhiana along with metros like Kolkata, Mumbai and Delhi. </li></ul><ul><li>It is a trade where daily transactions touch a whopping Rs 40,000 crores. </li></ul><ul><li>This kind of operation, where trade is kept within the books of the operator is called “dabba” in the popular market terms. </li></ul><ul><li>According to estimates, about 30-40% of the total transactions taking place in BSE and NSE are struck through dabba trade. </li></ul>
  35. 35. How they do Dabba Trade : <ul><li>Dabba Trading in simple sense means, </li></ul><ul><li>“ You put money to get 100 shares, but the software will register only 10 shares officially in the market, and you will see 100 in your screen, which makes you believe that you really purchased 100 stocks, which is specious”. It is not the investor who makes money, the broker who involves in trading on behalf of an investor makes the money, with 10% of cash put in their pockets illegally and unknown to the investor. </li></ul>
  36. 36. Caught DABBA TRADING : Pradeep Kumar Bansal, who was the target of the Sebi-NSE operation, was a fairly big fish in the dabba trade. He operates from a non-descript address at Byculla in central Mumbai, but his office, packed with sophisticated equipment and gadgetry, acts as the hub for his nationwide operations. His firm, Bansal Sharevest Securities Pvt Ltd has multiple trading memberships on Indian stock exchanges including: the National Stock Exchange (derivatives segment), the Interconnected Stock Exchange of India and the Calcutta Stock Exchange. He is also a sub-broker to his own broking firm, earning commissions on its deals. (Sebi has now banned promoters/directors from acting as sub-brokers to their own brokerage firm after a separate investigation).
  37. 37. Constituents of the Capital Market <ul><li>The Stock exchanges </li></ul><ul><li>Banks </li></ul><ul><li>The investment trusts and companies </li></ul><ul><li>Specialised financial institutions or </li></ul><ul><li>development banks. </li></ul><ul><li>Mutual funds </li></ul><ul><li>Post office saving banks </li></ul><ul><li>Non banking financial institutions </li></ul><ul><li>International financial investors and institutions </li></ul>
  38. 38. Supply in the Capital Market <ul><li>Individuals </li></ul><ul><li>Corporates </li></ul><ul><li>Governments </li></ul><ul><li>Foreign countries </li></ul><ul><li>Banks </li></ul><ul><li>Provident funds </li></ul><ul><li>Financial institutions </li></ul>
  39. 39. Structure of Capital Market <ul><li>Market for corporate securities </li></ul><ul><li>Market for Government Securities </li></ul><ul><li>Market for Debt instruments </li></ul><ul><li>Mutual Fund schemes </li></ul>
  40. 40. Capital Market Players <ul><li>Merchant bankers </li></ul><ul><li>Registrars </li></ul><ul><li>Collecting and coordinating bankers </li></ul><ul><li>Underwriters and brokers </li></ul><ul><li>Lead managers </li></ul><ul><li>Book runners </li></ul><ul><li>Regulators </li></ul><ul><li>Stock Exchange </li></ul><ul><li>Listed Securities </li></ul><ul><li>Depositories and Dps </li></ul><ul><li>FIIs and MFs </li></ul><ul><li>Custodians </li></ul>
  41. 41. Capital Market Intermediaries <ul><li>Commission brokers </li></ul><ul><li>Floor Brokers </li></ul><ul><li>Taraniwala – Jobber </li></ul><ul><li>Securities Dealers </li></ul>
  42. 42. Stock Exchange <ul><li>Place where the shares are traded </li></ul><ul><ul><li>BSE </li></ul></ul><ul><ul><li>NSE </li></ul></ul><ul><li>BSE – Bombay Stock Exchange </li></ul><ul><ul><li>Oldest Stock Exchange in Asia </li></ul></ul><ul><ul><li>Sensex – Sensitive Index </li></ul></ul><ul><ul><ul><li>Index of 30 Actively traded Companies </li></ul></ul></ul><ul><li>NSE – National Stock Exchange </li></ul><ul><ul><li>Incorporated in 1992 </li></ul></ul><ul><ul><ul><li>Index of 50 Actively traded Companies </li></ul></ul></ul>
  43. 43. Role of Stock Exchange <ul><li>Raising capital for businesses </li></ul><ul><li>Mobilizing savings for investment </li></ul><ul><li>Facilitating company growth </li></ul><ul><li>Profit sharing </li></ul><ul><li>Corporate governance </li></ul><ul><li>Creating investment opportunities for </li></ul><ul><li>small investors </li></ul><ul><li>Government capital-raising for </li></ul><ul><li>development projects </li></ul>
  44. 44. Investment Basics <ul><li>Using savings to get returns in future is known as Investment </li></ul><ul><li>Why should Invest? </li></ul><ul><ul><li>We want to earn return on our idle money </li></ul></ul><ul><ul><li>A good bank balance before I retire </li></ul></ul><ul><li>When should I invest ? </li></ul><ul><ul><li>As soon as possible </li></ul></ul>
  45. 45. Where to invest? <ul><li>Physical Assets </li></ul><ul><ul><li>Real Estate, Gold/ jewellery </li></ul></ul><ul><ul><li>Requires huge capital </li></ul></ul><ul><li>Financial Assets </li></ul><ul><ul><li>Savings Bank Account </li></ul></ul><ul><ul><li>Fixed Deposits </li></ul></ul><ul><ul><li>Post office </li></ul></ul><ul><ul><li>Government Bonds </li></ul></ul><ul><ul><li>Provident Funds </li></ul></ul>
  46. 46. Stock and Shares <ul><li>Stock </li></ul><ul><ul><li>Capital raised by corporations </li></ul></ul><ul><ul><li>through issue and distribution of shares </li></ul></ul><ul><li>Share </li></ul><ul><ul><li>Signifies ownership in the company </li></ul></ul><ul><ul><li>A company might have thousands of Shareholders </li></ul></ul><ul><li>Which company issued shares for the first time in the world??? </li></ul><ul><ul><li>The Dutch East India Company in 1602 </li></ul></ul>
  47. 47. Regulatory Environment in India <ul><li>Pre 1991 </li></ul><ul><ul><li>Tight Control of Government </li></ul></ul><ul><li>Post 1991 </li></ul><ul><ul><li>Liberalization </li></ul></ul><ul><ul><li>Opening of the Economy </li></ul></ul><ul><ul><li>Need for Supervision </li></ul></ul><ul><ul><ul><li>Regulation </li></ul></ul></ul><ul><ul><li>Regulatory Bodies </li></ul></ul>
  48. 48. Regulatory Environment in India <ul><li>RBI – Reserve Bank of India </li></ul><ul><ul><li>Established in 1935 </li></ul></ul><ul><ul><li>Bankers Bank </li></ul></ul><ul><ul><li>Regulates Indian Financial Markets </li></ul></ul><ul><li>SEBI –Securities and Exchange Board of India </li></ul><ul><ul><li>Incorporated in 1992 </li></ul></ul><ul><ul><li>Regulation of Securities Market </li></ul></ul><ul><ul><li>Protecting the interests of Investors </li></ul></ul>
  49. 49. BADLA SYSTEM : The Badla system a position is carried forward, either a short sale or a long purchase. The Badla system serves an important need of the stock market. In the event of a long purchase, the investor may want to carry forward the transaction to the next settlement cycle and for doing so he has to compensate the seller who has sold with an intention of getting cash.
  50. 50. Type of Badla System : <ul><li>The 'Seedha badla ' financier enters to lend money to the investor for a return. This is measured as interest on the funds made available for one settlement cycle, i.e. one week or a longer period in case of a book closure badla system. </li></ul><ul><li>The 'Undha badla' or a 'contango' charge is a return paid by the stock borrower to the stock lender. In a short sale, when the investor wants to carry forward the transaction to the next settlement cycle, he has to borrow the stocks to compensate the other party in the contract. The charges paid on the borrowed stock is called a 'contango' charge or `share badla'. </li></ul>
  51. 51. How is Badla Done <ul><li>Badla session is held on every Saturday in Mumbai, Delhi and Ahmedabad and on Thursday on Calcutta Stock Exchange. </li></ul><ul><li>The outstanding positions of various stocks in are listed along with the quantities outstanding. Depending on the demand and supply of money, the carry forward rates are determined. If the market is overbought, i.e. there is more demand for funds it results in Vyaj badla. </li></ul><ul><li>However when the market is oversold, or where in a particular stocks the short position is more the Undha badla applies. </li></ul>
  52. 52. The Use Badla to leverage one's positions? <ul><li>Suppose you purchase 100 shares of HDFC Bank for Rs250, and the stock closes at Rs260 at the end of the trading session. </li></ul><ul><li>You feel that the stock has potential to rise further in the coming days and you would like to hold the shares, however you do not have funds to pay the price and take delivery. </li></ul><ul><li>The way out is to enter into a badla transaction, which your broker will carry out on your behalf. </li></ul><ul><li>Thus on Saturday during the badla session the market will arrive at a rate at which the financiers are willing to lend you funds to carry forward your HDFC Bank position. </li></ul>The concept of badla can be works as follows:
  53. 53. The Use Badla to leverage one's positions? <ul><li>The funds that the financier supplies will be passed on the seller who is not aware that the shares he has sold in the market have not been delivered but are outstanding. </li></ul><ul><li>In any badla transaction there are two key elements namely the hawala rate and the badla charge for the scrip. </li></ul><ul><li>The badla charge is the interest payable by the investor for carrying forward the position. </li></ul><ul><li>The badla charge , as explained earlier is market determined. </li></ul><ul><li>It is fixed individually for each scrip by the market every Saturday and it is calculated on the hawala rate . </li></ul>
  54. 54. The Use Badla to leverage one's positions? <ul><li>The hawala rate is the price at which a share is squared up in the current settlement and carried forward into the next settlement in the next trading session (hawala entry is akin to a journal entry passed in double entry system of accounting). </li></ul><ul><li>The existing position you have is squared up against the hawala rate fixed and carried forward after factoring in the badla rate. </li></ul><ul><li>If the stock where you have decided to carry forward your position (either long or short) is very high you end up paying high badla charge consequently if the demand is low the badla rates are low. </li></ul>
  55. 55. The Use Badla to leverage one's positions? <ul><li>Say the 100 shares of HDFC Bank that you had purchased at Rs250 in the current settlement, which you now wish to carry forward to the next settlement. </li></ul><ul><li>The hawala rate is fixed at Rs260 and the badla rate is fixed at Rs.0.85 for the settlement, which is usually a week. </li></ul><ul><li>The badla charge works out to an annualized rate of 17%, but the badla is usually denoted in actual cash terms. </li></ul>
  56. 56. The Use Badla to leverage one's positions? <ul><li>In actual practice, broker will request you to maintain a margin for arranging the badla finance. There can be other charges too and it may vary from broker to broker. All the charges apart from the badla charges depend on your relationship with broker. </li></ul>Purchase Rate for 100 shares @ Rs 250 25,000 Hawala Rate per share @ Rs 10 26,000 Difference 1,000 Add Badla Charge @ Rs 0.85 85 Carried Forward Rate 26,085
  57. 57. Badla is Financial Terrorism <ul><li>Paleja has been fleeced by the Vyaj badla system which </li></ul><ul><li>was used to fund the now-banned in Indian stock markets. </li></ul><ul><li>Badla was a widely used system of financing stock market operations before it was banned by SEBI. </li></ul><ul><li>Prior to July 2, the market comprised two kinds of buyers-those who purchased shares and took them into possession and those who did not take delivery of the shares but carried forward the transaction to the next settlement by paying badla, or interest, on the outstanding amount. </li></ul><ul><li>How popular was badla that after it was banned, brokers across the country went on strike to protest against the decision </li></ul>
  58. 58. Badla is Financial Terrorism <ul><li>Where did Paleja fit in? </li></ul><ul><li>In developed markets, there is limited funding from banks in India for stock market operations. In the NSE, brokers could fund operations by the Automated Lending & Borrowing Mechanism (ALBM). In the BSE there was the Borrowing & Lending of Securities Scheme. But not every broker or transaction met the prudential norms required for such funding. Besides, the demand outstripped the supply. </li></ul><ul><li>So brokers borrowed money from individuals like Paleja to bridge the gap between margin and cost of the shares and paid them good returns of 16-18 per cent annually. Lured by the high returns of an ostensibly safe investment system-the vyaj badla-he collected funds from his family and relatives and put Rs 14 lakh in Century Consultants, a stock-broking firm, in December 2000. </li></ul>
  59. 59. Badla is Financial Terrorism <ul><li>That was in the good times. When stock prices were reaching stratospheric levels. When Ketan Parekh was like King Midas, turning to gold every scrip he touched. </li></ul><ul><li>After the stock markets crashed, investors, punters and even brokers found the value of their investments eroded beyond recognition. </li></ul><ul><li>Like Paleja, hundreds of others have been sucked into the badla scam. </li></ul><ul><li>As the post-dated cheques from Century Consultants turned into rubber balls, </li></ul>
  60. 60. Badla is Financial Terrorism <ul><li>Paleja and 156 other depositors with the firm complained to the Economic Offences Wing (EOW) of the Mumbai Police. They claimed the company had cheated them of more than Rs 100 crore. </li></ul><ul><li>In the past three months, the city police have registered cases of cheating and fraud against at least six individuals or companies dealing in badla. The total amount involved: over Rs 500 crore. </li></ul><ul><li>Two brokers Ajay Thakkar and Bimal Gandhi, both of whom allegedly committed suicide after the stocks crash, and Arvind Johri, owner of the Mumbai-based Infosys & Century Finance, which has allegedly cheated 1,500 depositors of Rs 100 crore. </li></ul>
  61. 61. Scams in Capital Market Harshad Mehta He was known as the 'Big Bull'. However, his bull run did not last too long. He triggered a rise in the Bombay Stock Exchange in the year 1992 by trading in shares at a premium across many segments. Taking advantages of the loopholes in the banking system, Harshad and his associates triggered a securities scam diverting funds to the tune of Rs 4000 crore (Rs 40 billion) from the banks to stockbrokers between April 1991 to May 1992. Harshad Mehta worked with the New India Assurance Company before he moved ahead to try his luck in the stock markets. Mehta soon mastered the tricks of the trade and set out on dangerous game plan. Mehta has siphoned off huge sums of money from several banks and millions of investors were conned in the process. His scam was exposed, the markets crashed and he was arrested and banned for life from trading in the stock markets. He was later charged with 72 criminal offences. A Special Court also sentenced Sudhir Mehta, Harshad Mehta's brother, and six others, including four bank officials, to rigorous imprisonment (RI) ranging from 1 year to 10 years on the charge of duping State Bank of India to the tune of Rs 600 crore (Rs 6 billion) in connection with the securities scam that rocked the financial markets in 1992. He died in 2002 with many litigations still pending against him.
  62. 62. Scams in Capital Market Ketan Parekh Ketan Parekh followed Harshad Mehta's footsteps to swindle corers of rupees from banks. A chartered accountant he used to run a family business, NH Securities. Ketan however had bigger plans in mind. He targetted smaller exchanges like the Allahabad Stock Exchange and the Calcutta Stock Exchange, and bought shares in fictitious names. His dealings revolved around shares of ten companies like Himachal Futuristic, Global Tele-Systems, SSI Ltd, DSQ Software, Zee Telefilms, Silverline, Pentamedia Graphics and Satyam Computer (K-10 scrips). Ketan borrowed Rs 250 crore from Global Trust Bank to fuel his ambitions. Ketan alongwith his associates also managed to get Rs 1,000 crore from the Madhavpura Mercantile Co-operative Bank. According to RBI regulations, a broker is allowed a loan of only Rs 15 crore (Rs 150 million). There was evidence of price rigging in the scrips of Global Trust Bank, Zee Telefilms, HFCL, Lupin Laboratories, Aftek Infosys and Padmini Polymer.
  63. 63. Scams in Capital Market C R Bhansali The Bhansali scam resulted in a loss of over Rs 1,200 crore (Rs 12 billion). He first launched the finance company CRB Capital Markets, followed by CRB Mutual Fund and CRB Share Custodial Services. He ruled like a financial wizard 1992 to 1996 collecting money from the public through fixed deposits, bonds and debentures. The money was transferred to companies that never existed. CRB Capital Markets raised a whopping Rs 176 crore in three years. In 1994 CRB Mutual Funds raised Rs 230 crore and Rs 180 crore came via fixed deposits. Bhansali also succeeded to to raise about Rs 900 crore from the markets. However, his good days did not last long, after 1995 he received several jolts. Bhansali tried borrowing more money from the market. This led to a financial crisis. It became difficult for Bhansali to sustain himself. The Reserve Bank of India (RBI) refused banking status to CRB and he was in the dock. SBI was one of the banks to be hit by his huge defaults.
  64. 64. Scams in Capital Market The UTI Scam Former UTI chairman P S Subramanyam and two executive directors -- M M Kapur and S K Basu -- and a stockbroker Rakesh G Mehta, were arrested in connection with the 'UTI scam'. UTI had purchased 40,000 shares of Cyberspace for about Rs 3.33 crore (Rs 33.3 million) from Rakesh Mehta when there were no buyers for the scrip. The market price was around Rs 830. The CBI said it was the conspiracy of these four people which resulted in the loss of Rs 32 crore (Rs 320 million). Subramanyam, Kapur and Basu had changed their stance on an investment advice of the equities research cell of UTI. The promoter of Cyberspace Infosys, Arvind Johari was arrested in connection with the case. The officals were paid Rs 50 lakh (Rs 5 million) by Cyberspace to promote its shares. He also received Rs 1.18 crore (Rs 11.8 million) from the company through a circuitous route for possible rigging the Cyberspace counter.
  65. 65. PRESENT SCENARIO : <ul><li>The role of capital market in India’s development can be understood in the following ways: </li></ul><ul><li>New issues in primary segments </li></ul><ul><li>Signals to other providers of capital such as banks </li></ul><ul><li>The risk of lending the companies </li></ul><ul><li>Opportunities for investors. </li></ul><ul><li>Invest in companies of future. </li></ul>
  66. 66. PRESENT SCENARIO : <ul><li>Mobilize savings </li></ul><ul><li>Efficient Investments </li></ul><ul><li>Increased foreign savings </li></ul>
  67. 67. Capital Market Institutions Securities and Exchange Board of India - SEBI BSE or Regional Stock Exchange NSE NSDL Foreign Institutional Investors (FIIs)
  68. 68. STOCK INDICES <ul><li>Two main objectives of stock indices are </li></ul><ul><ul><li>To reflect market direction </li></ul></ul><ul><ul><li>To indicate day to day fluctuations in The prices of Scrips. </li></ul></ul>
  69. 69. USES of Stock Market Indices: <ul><li>Historical comparison between money, gold or debt. </li></ul><ul><li>Standard to compare the performance of an equity fund. </li></ul><ul><li>Lead indicator of the performance of the overall economy. </li></ul><ul><li>Reflect highly up to date information </li></ul><ul><li>Financial investments & Risk Management </li></ul>
  70. 70. BSE SENSEX & OTHER INDEX NUMBERS <ul><li>OBJECTIVES : </li></ul><ul><li>To measure market movements </li></ul><ul><li>Benchmark for funds performance </li></ul><ul><li>For index based derivative products </li></ul>
  71. 71. Criteria for selection of Scrips in SENSEX <ul><li>Market Capitalization </li></ul><ul><li>Liquidity and Trading Frequencies </li></ul><ul><li>No. of Trades </li></ul><ul><li>Value of Shares Traded </li></ul><ul><li>Trading Activity </li></ul>
  72. 72. NIFTY & NSE INDEX NUMBERS <ul><li>Criteria for selection of companies included in NIFTY </li></ul><ul><li>Market Capitalisation </li></ul><ul><li>Liquidity impact cost </li></ul><ul><li>Base, date & Value </li></ul><ul><li>Industry Representation </li></ul>
  73. 73. INDIAN SCENARIO: <ul><li>Development and expansion of derivatives </li></ul><ul><li>High depth and liquidity </li></ul><ul><li>Management Strategies </li></ul><ul><li>Fraction of the cost </li></ul>
  74. 74. References: <ul><li>A article in Times of India </li></ul><ul><li>SEBI </li></ul><ul><li>A article in India Today </li></ul><ul><li> </li></ul>
  75. 75. Thank you !! Developed By: SMBA04, Group-2
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