The document discusses the history and development of capital markets in India from the 18th century to present day. It notes that capital markets were not well organized under British rule but have developed significantly since independence and the introduction of regulatory bodies like SEBI. The capital market helps channel funds into productive long-term investments and is composed of primary markets for new issues and secondary markets for existing securities. It plays an important role in India's economic growth and development.

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ABSTRACT:
In India, the history of capital markets dates back to the 18th century when East India Company
securities traded the country. The present study is largely based on the available secondary
data. The statistical data regarding growth of the capital markets was available from various
websites. Capital markets help to channelize surplus funds into productive use. Generally, this
market trades mostly in long-term securities. The important divisions of the capital market are
stock market, bond market and primary, secondary markets. Primary markets deal with the
trade of new issues of stocks and other securities, whereas secondary market deals with the
exchange of existing or previously-issued securities. Our finding is that during the first and
second five year plans, the Government emphasized on the development of agriculture and
public undertakings. The Public sector undertaking was healthier than Private undertakings, but
shares were not listed in the stock exchange. More over controller of Capital Issue (CCI) closely
supervised everything. A number of investors were interested to invest their savings in
debentures instead of company deposits. We conclude that Capital markets were not well
organized and developed during the British rule. But in the present scenario, we find that
Capital markets are well developed after the introduction of SEBI. Through provision of long
term loans, the capital market brings about effective functioning of various sectors of the
economy. A sound and efficient capital market is one of the most instrumental factors in the
economic development of a nation.
Keywords--- Capital Markets, Long-term Securities, Stock Exchange, CCI, SEBI
INTRODUCTION:
HISTORY of the capital market in India dates back to the 18 century when east India co.
Securities was traded in country. Until the end of the 19th century securities trading was
unorganized and the main trading centers were Bombay and Calcutta. Indian capital markets
are one of the oldest markets in Asia as well as in the world. Under the British Companies Act,
the Stock Exchange, Mumbai, came into existence in 1875. It was an unincorporated body of
stockbrokers, which started doing business in the city under a banyan tree, in front of the town
hall in Bombay. A small group of stock brokers in Bombay joined together in 1875 to form an
association called Native Shares and Stock Brokers Association Bombay. The stock exchanges in
Calcutta and Ahmadabad also industrial and trading centers came up later. There has been
much fluctuation in the stock market on account of the American war and the battles in Europe.
Sir Phiroze Jeejeebhoy was dominated the stock market from 1946 to 1980. His word was law
and he had a great deal of influence over both brokers and the government. The Bombay stock
exchange was recognized in May 1927 under Bombay securities Contract Control Act 1925. The
capital market was not well organized and developed during the British rule because the British
government was not interested in economic growth of the country. As a result many foreign co.
depended on London capital market for fund.
In the post-independence period also the size of capital market is small. The planning process
started in India in 1951, with importance being given to the formation of institutions and
markets The Securities Contract Regulation Act 1956 became the parent regulation after the
Indian Contract Act 1872, a basic law to be followed by security markets in India. To regulate
the issue of share prices, the Controller of Capital Issues Act (CCI) was passed in 1947. During
the first and second five year plan, the Govt emphasis was on the development of the

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agricultural and public undertakings. The public undertakings were healthier than Pvt.
Undertakings in terms of paid up share capital, but shares were not listed on the stock
exchange. More over Controller of Capital Issue (CCI) closely supervised everything. These strict
regulations demotivated many company. In the 1950‟s Century textiles, Tata steel co.,
Kohinoor mills were the favorite script of speculations. As speculation become rampant, the
stock market came to be known as Satta Bazar. The decade of 1950‟s was also characterized by
the establishment of a network for the development of financial institutions like LIC, GIC and
state financial corporations.
Capital market in any country plays a pivotal role in the growth of economy and meeting
country’s socio economic goals. They are an important constituent of the financial system,
given their role in the financial intermediation process and capital formation of the country.
The importance of the capital market cannot be underemphasized for developing economy like
India which needs significant amount of capital for the development of strong infrastructure.
The entire paper is divided into three parts. In the first part we have discussed the conceptual
framework of the capital market and in the next section, we have focused on the trends in the
capital market in India. In the third section, we have discussed various issues and challenges of
the capital market in India.
CAPITAL MARKETS IN INDIA
Definition: Capital market is a market where buyers and sellers engage in trade of financial
securities like bonds, stocks, etc. The buying and selling is undertaken by participants such as
individuals and institutions.
Capital market consists of primary markets and secondary markets. Primary markets deal with
trade of new issues of stocks and other securities, whereas secondary market deals with the
exchange of existing or previously-issued securities. Another important division in the capital
market is made on the basis of the nature of security traded, i.e. stock market and bond
market.
Capital market deals with medium term and long term funds. It refers to all facilities and the
institutional arrangements for borrowing and lending term funds (medium term and long term).
The demand for long term funds comes from private business corporations, public corporations
and the government. The supply of funds comes largely from individual and institutional
investors, banks and special industrial financial institutions and Government.
Capital market is the financial market for the buying and selling of the long term debt or equity
backed securities . The market channels the wealth of savers to those who can put it to long
term productive use. Modern capital markets are hosted on computer based electronic trading
system which can be accessed by entities within the financial sector.
MEMBERS OF THE INDIAN CAPITAL MARKETS :
In order function properly the Indian capital markets operate through the following entities: (a)
India Capital Markets Pvt. Ltd.- Members NSE, BSE and NSDL, ICM Commodities Pvt Ltd. –
Members MCX, NCDEX
(b) SEBI Registered PMS
OBJECTIVES OF THE STUDY

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1.To review the process of growth of capital markets, their evolving structure and their
functioning through stock exchanges in India.
2. To examine existing technical analysis for investment decision making and to suggest
modifications, if any, with special emphasize on recent development after the implementation
of New Economic Policy.
3. To examine the evolution of regulatory mechanism for capital market in India.
4. To find out constraints in smooth functioning of capital market.
RESEARCH METHODOLOGY
The present study is largely based on the available secondary data. The statistical data
regarding growth of the capital markets was available from various websites, books and
journals.
SCOPE OF THE STUDY
1.Evolution and growth of Indian capital market.
2. Examination of the present trading system with a view to pin point potential improvements.
3. Study of the problems faced by capital markets and suggests suitable remedies.
LIMITATIONS OF THE STUDY
1. The study is restricted to the evolution of Indian Capital Market only.
2. Lack of proper control over the brokers and sub brokers
3. Absence of the control over the fair of disclosure of financial information .
INDIAN CAPITAL MARKET: A REVIEW
India’s financial market is multi-facet but not balanced. It has state of art equity market but
relatively less developed and immature corporate bond market. Corporate bond market is less
than 10 per cent of the total bond market. A study of the World Bank Financial Structure
database (May 2009) revealed that private bond capitalization in India was only 2.67% of GDP in
2007, whereas it was 58.81% in South Korea, 38.79% in Japan and 24.46% in China. India has a narrow
corporate bond due to low yield and absence of hedging opportunities. However, government bonds are
highly marketable and traded freely. The derivatives market is still at infant stage where trading in only
selected equity, currency and commodity derivative is allowed. These sophisticated financial
instruments are used mainly by professional investors and high net worth clients. The cascading effect
of Sub-Prime Crisis, 2008 was comparatively less on India as it is has less exposure to sub-prime credit
and structured credit products. The extent of leverage in India has been subject to prudential limit. In
India, retail intermediation is mainly through the banking system. Housing mortgages in India require
the borrower to come up with margin money. Stock brokers are subject to limits on margin financing
and conservative valuation of the collateral. Indian households are yet not highly geared and the savings
habit is strong. Other important characteristics of Indian financial markets are
as follows.
Access of credit and nancial services for SMEs, agriculture and rural household are limited with
imbalanced geographical outreach and sectorial distribution.
There are very few nancial ins tu ons like India Infrastructure Corporation Ltd. (IIFCL) to fund
infrastructure project by issue of local currency bond.
Repos for corporate bond, interest rate and currency future are a missing link in the process of
maturing financial market.
The absence of wide range of ins tu onal investors like underwriting companies, endowment funds,
pension funds, municipals, hedge funds and private equity funds in India creates a natural demand for

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more sophisticated financial instruments in the Over-the-Counter (OTC) market.
Indian has large pool of saving into investable funds for long term financing. This calls for innovation by
our regulatory agencies and service providers to channelize funds for productive economic activity. The
following Figure 1 depicts percentage of cash saving preferred by location which need to be tapped in
the right direction.
Figure 1. Percentage of cash saving preferred by location
Technology framework
The advent of technology to the markets has been largely attributed to the National Stock
Exchange (NSE). NSE introduced the screen based trading and settlement system, supported by
a state-of-the –art technology platform. To fulfill the commitment to adopt global best
practices and bring about more transparency to the capital markets functioning, SEBI also
assumed the responsibility of monitoring the markets and stock exchanges. A significant step
towards that initiative was the launch of the Integrated Market Surveillance System (IMSS) in
2006.
The IMSS equipped the regulator to identify doubtful market activity. The IMSS’s primary
objective is to monitor the market activities across various stock exchanges and market
segments including both equities and derivatives. IMSS collects and analyses data not only from
the stock exchanges but also from National Securities Depository, Limited. (NSDL), Central
Depository Services (India) Limited. (CDSL), clearinghouses, and clearing corporations.
The RBI introduced the electronic funds transfer system, “The Reserve Bank of India National
Electronic Funds Transfer System" (referred to as "NEFT System" or "System"). The objective of
the system is two-fold. First, is to establish an electronic funds transfer system to facilitate an
efficient, reliable, secure and economical system to funds transfer and clearing in the banking
sector throughout India. Second, is to relieve the stress on the paper based funds transfer and
clearing system.
The Functions and Main Institutions of the Indian Capital Market
(1) The functions of the Indian Capital Market are as follows:
I. Disseminate information efficiently for enabling participants to develop an informed
opinion about investment, disinvestments, reinvestment, or holding a particular
financial asset.
II. Enabling quick valuation of financial instruments-both equity and debt.

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III. Providing insurance against market risk or price risk through derivative trading and
default risk through investment protection fund.
IV. Enable wider participation by enhancing the width of the market by encouraging
participation through networking institutions and associating individuals.
V. Provide operational efficiency through:
(a) simplified transaction procedure,
(b) lowering settlement timings, and
(c) lowering transaction costs.
viDevelop integration among:
(a) Real sector and financial sector,
(b) Equity and debt instruments,
(c) Long-term and short-term funds,
(d) Long-term and short-term interest costs,
(e) Private sector and government sector, and
(f) Domestic funds and external funds.
(vii) Direct the flow of funds into efficient channels through investment, disinvestments, and
reinvestment
(2) The Main Members of the Indian Capital Market
The capital market aids economic growth by mobilizing the savings o the economic sectors and directing
the same towards channels of productive uses. This is facilitated through the following:
(a) The Industrial Financial Corporation of India (IFC).
(b) The Industrial Credit and Investment Corporation of India (ICICI).
(c ) The Refinance Corporation of India (RFC).
(d) The State Financial Development Corporations (SFCs).
(e) National Industrial Development Corporation (NIDC).
(f) The State Industrial Development Corporation (SIDCs).
(g) National Small Industries Corporation (NSIC).
(h) Industrial Development Bank of India (IDBI).
(i) Life Insurance Corporation of India (LIC).
(j) Nationalized Commercial Banks (NCBs).
(k) Merchant Banking Institutions (MBIs).
(l) National Industrial Reconstruction Corporation of India (NIRC).
(m) The Credit Guarantee Corporation of India (CGC).
(n) Unit Trust of India (UTI). These members are mainly financial institutions which provide the liquidity
that is needed to propel the machinery of the Capital Market. The financial power of the Capital Market
is in their hands. SEBI has the responsibility to oversee their proper functioning as well as the other
members.
(3) Products and Services of the Capital Market
(a) Equity Broking - BSE and NSE
(b) Derivatives Futures and Options
(c) Internet Broking- Online Trading
(d) Commodities Trading - NCDEX and MCX
(e) Mutual Fund Investment
(f) Initial Public Offerings (IPO)

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(g) Institutional Broking
(h) Depository Services - NSDL and CDSL
(i) Portfolio Management Services
(j) NRI Investments
(k) Arbitrage
ROLE AND IMPORTANCE OF CAPITAL MARKET IN INDIA
Capital market has a crucial significance to capital formation. For a speedy economic
development adequate capital formation is necessary. The significance of capital market in
economic development is explained below:-
1.Mobilization of Savings and Acceleration of Capital Formation:
In developing countries like India the importance of capital market is self-evident. In this
market, various types of securities help to mobilize savings from various sectors of population.
The twin features of reasonable return and liquidity in stock exchange are definite incentives to
the people to invest in securities. This accelerates the capital formation in the country.
2. Raising Long - Term Capital
The existence of a stock exchange enables companies to raise permanent capital. The investors
cannot commit their funds for a permanent period but companies require funds permanently.
The stock exchange resolves this dash of interests by offering an opportunity to investors to buy
or sell their securities, while permanent capital with the company remains unaffected.
3. Promotion of Industrial Growth
The stock exchange is a central market through which resources are transferred to the
industrial sector of the economy. The existence of such an institution encourages people to
invest in productive channels. Thus it stimulates industrial growth and economic development
of the country by mobilizing funds for investment in the corporate securities.
4. Ready and Continuous Market
The stock exchange provides a central convenient place where buyers and sellers can easily
purchase and sell securities. Easy marketability makes investment in securities more liquid as
compared to other assets.
5. Technical Assistance
An important shortage faced by entrepreneurs in developing countries is technical assistance.
By offering advisory services relating to preparation of feasibility reports, identifying growth
potential and training entrepreneurs in project management, the financial intermediaries in
capital market play an important role.
6. Reliable Guide to Performance
The capital market serves as a reliable guide to the performance and financial position of
corporate, and thereby promotes efficiency.
7. Proper Channelization of Funds
The prevailing market price of a security and relative yield are the guiding factors for the people
to channelize their funds in a particular company. This ensures effective utilization of funds in
the public interest.
8. Provision of Variety of Services
The financial institutions functioning in the capital market provide a variety of services such as
grant of long term and medium term loans to entrepreneurs, provision of underwriting

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facilities, assistance in promotion of companies, participation in equity capital, giving expert
advice etc.
9. Development of Backward Areas
Capital Markets provide funds for projects in backward areas. This facilitates economic
development of backward areas. Long term funds are also provided for development projects in
backward and rural areas.
10. Foreign Capital
Capital markets makes possible to generate foreign capital. Indian firms are able to generate
capital funds from overseas markets by way of bonds and other securities. Government has
liberalized Foreign Direct Investment (FDI) in the country. This not only brings in foreign capital
but also foreign technology which is important for economic development of the country.
11. Easy Liquidity
With the help of secondary market investors can sell off their holdings and convert them into
liquid cash. Commercial banks also allow investors to withdraw their deposits, as and when
they are in need of funds.
12. Revival of Sick Units
The Commercial and Financial Institutions provide timely. The Commercial and Financial
Institutions provide timely financial assistance to viable sick units to overcome their industrial
sickness. To help the weak units to overcome their financial industrial sickness banks and FIs
may write off a part of their loan.
GROWTH OF CAPITAL MARKET IN INDIA:
After Independence capital market has shown a remarkable progress. The first organized stock
exchange was established in India at Bombay in 1875. When the Securities Contracts
(Regulation) Act 1956 was passed, only 7 Stock exchanges Viz. Mumbai, Ahmadabad, Kolkata,
Chennai, Delhi, Hyderabad and Indore were started.
Table 01: Chart Showing the Growth of Capital Market
Source: Tata Services Ltd.,statistical outline of India 2005-06. Ministry of statistics India 2013-14
FACTORS CONTRIBUTING TO THE DEVELOPMENT OF CAPITAL MARKET : 1. Growth
of Development Banks and Financial Institutions
For providing long term funds to industry, the government set up Industrial Finance
Corporation in India (IFCI) in 1948. This was followed by a number of other development banks
and institutions like the Industrial Credit and Investment Corporation of India (ICICI) in 1955,
Industrial Development Bank of India (IDBI) in 1964, Industrial Reconstruction Corporation of

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India (IRCI) in 1971, Foreign Investment Promotion Board in 1991, Over the Counter Exchange
of India (OTCEI) in 1992 etc. In 1969, 14 major commercial banks were nationalized. Another 6
banks were nationalized in 1980. These financial institutions and banks have contributed in
widening and strengthening of capital market in India.
2. Setting up of SEBI
The Securities Exchange Board of India (SEBI) was set up in 1988 and was given statutory
recognition in 1992.
3. Credit Rating Agencies
Credit rating agencies provide guidance to investors / creditors for determining the credit risk.
The Credit Rating Information Services of India Limited (CRISIL) was set up in 1988 and
Investment Information and Credit Rating Agency of India Ltd. (ICRA) was set up in 1991. These
agencies are likely to help the development of capital market in future.
4. Growth of Mutual Funds
The mutual funds collect funds from public and other investors and channelize them into
corporate investment in the primary and secondary markets. The first mutual fund to be set up
in India was Unit Trust of India in 1964. In 2007-08 resources mobilized by mutual funds were
Rs. 1, 53,802 crores.
5. Increasing Awareness
During the last few years there has been increasing awareness of investment opportunities
among the public. Business newspapers and financial journals (The Economic Times, The
Financial Express, Business India, and Money etc.) have made the people aware of new long-
term investment opportunities in the security market.
6. Growing Public Confidence
A large number of big corporations have shown impressive growth. This has helped in building
up the confidence of the public. The small investors who were not interested to buy securities
from the market are now showing preference in favor of shares and debentures. As a result,
public issues of most of the good companies are now over-subscribed many times.
7. Legislative Measures
The government passed the companies Act in 1956. The Act gave powers to government to
control and direct the development of the corporate enterprises in the country. The capital
Issues (control) Act was passed in 1947 to regulate investment in different enterprises, prevent
diversion of funds to non-essential activities and to protect the interest of investors. The Act
was replaced in 1992.
8. Growth of Underwriting Business
The growing underwriting business has contributed significantly to the development of capital
market.
9. Development of Venture Capital Funds
Venture capital represents financial investment in highly risky projects with a hope of earning
high returns After 1991, economic liberalization has made possible to provide medium and long
term funds to those firms, which find it difficult to raise funds from primary markets and by way
of loans from FIs and banks.
10. Growth of Multinationals (MNCs)
The MNCs require medium and long term funds for setting up new projects or for expansion
and modernization. For this purpose, MNCs raise funds through loans from banks and FIs. Due

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to the presence of MNCs, the capital market gets a boost.
11. Growth of Entrepreneur
Since 1980s, there has been a remarkable growth in the number of entrepreneurs. This created
more demand for short term and long term funds. FIs, banks and stock markets enable the
entrepreneurs to raise the required funds. This has led to the growth of capital market in India.
12. Growth of Merchant Banking
The credit for initiating merchant banking services in India goes to Grindlays Bank in 1967,
followed by Citibank in 1970. Apart from capital issue management, merchant banking divisions
provide a number of other services including provision of consultancy services relating to
promotion of projects, corporate restructuring etc.
INDIAN CAPITAL MARKET: EMPIRICAL EVIDENCES:
Indian Capital Market is multi-facet. Thus, empirical studies of current status could be studies
under following subheads.
Details in Primary Market:
Regulatory Framework for the Primary Market :
The regulatory framework for primary markets in Indian comprises of the SEBI Act, 1992. SEBI
regulations and rules for various intermediaries, for the issue of capital by management tie up with
certain provisions of the companies Act, 1956. The following are the important enactments relating to
the primary market in India .
Table 02: Enactments Relating to the Indian Primary Market
Serial Details
A a SEBI (Disclosure and Investor Protection) Guidelines, 2000
B SEBI (Merchant Bankers) Rules and Regulations, 1992
C SEBI (Banker to the Issue) Rules and Regulations, 1994
D SEBI (Registrar to an Issue) Rules and Regulations, 1993
e SEBI (Underwriters) Rules and Regulations, 1993
Source: SEBI (2008).
Primary Market Reforms
For the fulfillment of the basic task of Securities Market to help in process of capital formation
in the economy, this can only be possible by series of systematic measures which would build
their confidence in the systems and processes and protect their interest fully. The raising of
Capital Issues was controlled by the office of the Controller of Capital Issues (CCI) established
under the Capital Issues Control Act-1947.
The Capital Issues Control Act-1947 was repealed and the office of the controller of Capital
Issues abolished and the process of the initial share pricing decontrolled. In 1991-92 the
Finance Ministry announced the repeal of the Act and transferred all powers from CCI to SEBI
and from control to disclosure based regulations.
SEBI, the Capital Market Regulator, was established in 1992. The primary function of SEBI is to
regulate the Capital Market and protect the interest of the investors. The other important
functions of SEBI are:
1. Regulating the business in Stock Exchanges and any other Securities Markets.

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2. Registering and regulating the working of collective investment schemes, including mutual
funds.
3. Prohibiting fraudulent and unfair trade practices relating to Securities Markets.
Therefore SEBI formulated the following guidelines:
a. Disclosure and Investor Protection (DIP) guidelines: as per this regulation all the information
pertaining to and available with an issuer is provided so as the investor takes an informed
decision whether to invest or not to invest.
b. Eligibility Criteria for issuers (DIP-2000): Companies eligible to make an issue can decide on
their standard denomination and price of a security. Some parameters that need to be in offer
documents are minimum holding by promoters, size of public issue, issue expenses,
information disclosure and advertisement etc.
c. Transparency: SEBI makes available all the offer documents filed with it on its website and
also through process release. Companies are invited from the public within 21 days of filing.
d. Free Pricing of Securities: issuer is free to determine the level of security price. The process of
Book-building helps discover price and assist small investor to take an investment decision.
e. Number of Financial Instruments: issuer would like to have an optimum capital structure
that reduces cost of capital. Today Indian Capital Market consists of almost all financial
products available in most of the developed Capital Market, thus the choice to both issuer and
investor has become wider.
f. Issue process: the following process is used in the Indian Capital Market:
(i) Public issue – an invitation by a company to the public to subscribe to the securities offered
through prospects. It is an Initial Public Offer (IPO).
(ii) Rights Issue - issue of capital under Sec-I (81) Companies Act 1956 to be offered to existing
shareholders.
(iii) Offer for Sale - It is a public invitation by a sponsoring intermediary, such as bank or broker,
to buy new or existing securities. It contrasts with an offer for subscription which is an
invitation to subscribe direct from the issuer.
(iv)Book-building - it refers to a process of ascertaining demand for and price of securities
through bids, before the Actual issue. Book building process is mandatory when the company
does not have track record for three out of preceding five years. 60% allotment to qualified
institutional buyers is mandatory under the book building process.
(v) Compulsory Demat - All Initial public offerings was compulsory traded in dematerialized
form. But the investors have been allowed to exercise option of either subscribing to securities
in its physical or dematerialized form.
(vi) Employee stock option – means option given to the whole time employee of a company
right to purchase or subscribe securities at a future date.
(vii) Buy-back – section 77 (A) Companies Act and SEBI regulation allow companies to buy back
shares to enhance the wealth of shareholder.
g. Prohibiting insider trading in securities, with the imposition of monetary penalties, on
defaulter market intermediaries.
h. Foreign Institutional Investors are allowed to invest in Indian Capital Markets after
registration with the SEBI.
i. Indian companies permitted to access international Capital Markets through Euro issues.

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j. The National Stock Exchanges, (NSE) with nationwide stock trading and electronic display,
clearing and settlement facilities, established several regional Stock Exchanges change over
from floor based grading to screen based trading.
k. Private Mutual Funds permitted.
l. The practice of making preferential allotment of shares at prices unrelated to the prevailing
market prices stopped and fresh guidelines are issued by SEBI.
m. Badla System was been abolished.
n. A system of rolling settlements introduced and SEBI is thinking about the introduction of T+1
settlement plan for the Capital Market
56
o. The SEBI (credit rating Agencies) Regulations, 1999 issued for regulating new credit rating
agencies as well as introducing a code of conduct for all credit rating agencies operating in
India.
Table 03: Major Reforms in the Primary Market
S.N Type of Reform
1 Merit-based regime to disclosure-based regime. Disclosure and Investor Protection.
Guidelines issued.
2 Pricing of public issues determined by the market.
3 System of proportional allotment of shares introduced.
4 Banks and public sector undertakings allowed to raise funds from the primary
market.
5 Accounting standards close to international standards
6 Corporate Governance Guidelines issued.
7 Discretionary allotment system to QIBs has been withdrawn
8 Mutual funds are encouraged in both the public and private sectors and have been
given permission to invest overseas and Guidelines were issued for private
placement of debt.
9 Securities and Exchange Board of India promotes Self-Regulatory Organizations.
10 Allocation to retail investors increased from 25 percent to 35 percent.
11 Separate allocation of 5 percent to domestic mutual funds within the QIB
category.
12 Freedom to fix face value of shares below Rs. 10 per share only in cases where
the issue price is Rs. 50 or more.
13 Shares allotted on a preferential basis as well as the pre-allotment holding are
subjected to lock-in period of six months to prevent sale of shares.
Further Primary Market Reforms
(i) The improved disclosure standards, introduction of prudential norms, and
simplification of issue procedures.
(ii) Companies required disclosing all material facts and specific risk factors associated with
their projects while making public issues.
(iii) Listing agreements of stock exchanges amended to require listed companies to furnish
annual statement to the exchanges showing variations between financial projections
and projected utilization of funds in the offer document and actual figures. This is to
enable shareholders to make comparisons between performance and promises.

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(iv) SEBI introduces a code of advertisement for public issues to ensure fair and truthful
disclosures.
(v) Disclosure norms further strengthened by introducing cash flow statements.
(vi) New issue procedures introduced—book building for institutional investors—aimed at
reducing costs of issuing shares.
(vii) SEBI introduces regulations governing substantial acquisition of shares and takeovers
and lays down conditions under which disclosures and mandatory public offers are to
be made to the shareholders.
Performance of Primary Market:
Primary market facilitates government as well corporate in raising capital to meet their
requirements of capital expenditure and/or discharge of other obligation such as exit
opportunity for venture capitalist/ Private Equity firm. The most common primary mechanism
for raising capital is an Initial Public Offer (IPO), under which shares are offered to common
public as a precursor to the trading in secondary market of an exchange. When securities are
exclusively offered to the existing shareholders of company, as opposed to the general public it
is called Rights Issue. Another mechanism whereby a listed company can issue equity shares,
fully and partly convertible debentures which can be converted into equity shares later on, to a
Qualified Institutional Buyer (QIB) is termed as Qualified Institutional Placement.
TABLE04. RESOURECE MOBILIZATION THROUGH PRIMARY MARKET
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012
Debt 1603 1500 2500 2245 4791
Equity 54511 2082 46737 46678 11647
Private
placement
118485 173281 212635 147400 156634
(Source: SEBI)
The Indian capital primary market showed a skewed growth. The heat of the financial crisis
2008 was also felt by the primary market when companies put public offer on hold and
preferred private as important source of funds mobilization which accounted for about 95% of
the total funds. The negative impact of current recession and much awaited reforms could also
be observed for the financial year 2011-12. It could be observed that primary debt market in
India is not yet mature which range between 1 to 2%. Private placement has been the most
popular source of raising funds from the primary market by the companies in India which
account for about average 76%
Secondary Market Reforms
Several reforms were introduced into the Stock Exchange administration, security trading,
settlement, delivery Vs Payment, security transfer, trading in derivatives, investor protection
fund etc. are explained in the following paragraphs:

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(a) Stock Exchanges: Membership of governing boards of Stock Exchanges, were changed to
include 50% outside (non-broker) representatives. SEBI had constituted a group which reviewed
and examined the structure of Stock Exchanges and examined the legal and financial issues
involved in demutualizing Stock Exchanges.
(b) Depth and Breadth in the market: India has a unique distinction of having highest number
of companies listed on the Stock Exchanges. But all companies’ shares are not traded. Policy
makers have to explore new options to increase depths and breadth in the Indian Stock
Exchanges.
(c) Dematerialization :Power was granted to SEBI to register and regulate depositories and
custodians through an amendment to SEBI Act in 1995. There has been substantial progress in
dematerialization. Number of companies available for demat with NSDL has increased from 23
in 1997 to 4172 in 2002.
(d) Institutionalization :The Indian Capital Market was dominated by individual investors, till
the early part of the 1990’s. Earlier institutional investors like LIC, GIC, DFIs, banks etc. used to
take minor roles. SEBI permitted private funds, Non-resident Indians, NBFCs and overseas
corporate bodies to trade in securities. Of the above mentioned, only three classes of investors
are very active, individuals, mutual funds and FIIs.
(e) Development of Financial infrastructure: It involves the development of informed investor
class, legal and regulatory environment, institutional investors, world class security trading and
payment and settlement systems. It also includes promoting investor associations, self-
regulatory organizations (SROs), and setting up of depository’s surveillance system. As another
step towards this, SEBI has introduced new financial instruments (derivatives) into the Capital
Market.
(f) Derivatives :Derivatives are financial contracts, or financial instruments, whose prices are
derived from the price of something else (known as the underlying). The underlying price on
which a derivative is based can be that of an asset (e.g., commodities, equities (stocks),
residential mortgages, commercial real estate, loans, bonds), an index (e.g., interest rates,
exchange rates, stock market indices, consumer price index (CPI), or other items. Credit
derivatives are based on loans, bonds or other forms of credit. Futures and options belong to
the family of derivative financial products. The name is coined from the fact that the price of
these products can be derived from the price of a so called underlying product. Derivative
products of BSE are futures and options contracts. These can play a vital role in promoting
market efficiency through better price discovery and risk transfer. SEBI granted approval to NSE
and BSE to start trading in index futures contract in April 2000 and May 2000 respectively. SEBI
also approved the proposal of NSE and BSE to start trading in index options contracts in June
2001.
Table 05: Major Reforms in the Secondary Market
S.N Type of Reform
1 Registration of market intermediaries made mandatory.
2 Capital adequacy norms specified for brokers and sub-brokers of Stock Exchanges.
3 Guidelines issued on Listing Agreement between Stock Exchanges and corporates.

14. 14 | P a g e
4 Settlement cycle shortened to T+2.
5 Stock Exchanges and other intermediaries, including mutual funds, inspected.
6 Regulation of Substantial Acquisition of Shares and Takeovers, 1997.
7 Foreign institutional investors (FIIs) allowed to invest in Indian Capital Market, 1992.
8 Order-driven, fully automatic, anonymous screen-based trading introduced.
9 Depositories Act, 1996, enacted.
10 Guidelines issued on Corporate Governance.
11 Fraudulent and unfair trade practices, including insider trading, prohibited by Securities
and Exchange Board of India.
12 Straight-through processing introduced and made mandatory for institutional trades.
13 Margin trading and securities lending and borrowing schemes introduced.
14 Separate trading platform, Indonext, for small and medium-sized enterprises (SME) sector
launched.
15 Notification of corporatization and demutualization of Stock Exchanges.
16 Settlement and trade guarantee fund and investor protection fund set up.
17 Comprehensive risk management system (capital adequacy, trading and exposure limit,
margin requirement, index-based market-wide circuit breaker, online position monitoring,
automatic disablement of terminals) put in place.
18 Comprehensive surveillance system put in place.
19 Securities Appellate Tribunal set up July 28, 1997.
20 Mutual funds and FIIs to begin entering the unique client code (UCC) pertaining to the
parent entity at the order-entry level and entered UCCs for individual schemes and sub-
accounts for the post-closing session.
21 Introduction of exchange traded derivatives in India in June 2000.
Source: Securities and Exchange Board of India (SEBI).
Performance of Secondary Market
Sensex and Nifty are the barometer of India’s feel-good factor was at 21,000 marks prior to
Global Financial Crisis followed Great recession worldwide. However, in recent years both the
index witnessed volatile trends due to global and domestic factors.
TABLE 06. TREND OF MARKET CAPITALIZATION, P/E RATIO, P/B RATIO IN NSE FOR 2007-2013
2007-
2008
2008-
2009
2009-
2010
2010-
2011
2011-
2012
2012-
2013
2013-
2014
Market
Capitalizati
on
5138015.
26
30860
76
6165620.
14
6839083.
61
6214911.
83
6387886.
87
7415296.
09
P/E ratio - - - - 16.75 17.09 17.38
P/B Ratio - - - - 2.76 2.97 2.78

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Market capitalization is the total dollar value of a company’s outstanding shares. The BSE shows
increasing trend of market capitalization except the year 2008-09 in which economy was in
recession. P/B ratio is used to compare a stock’s market value to its book value. It is calculated
by dividing the current closing price of the stock by the latest quarter’s book value per share
P/E ratio is the valuation ratio of a company’s current share price compared to its per share
earnings. Both P/E ratio and P/B ratio shows declining trend through out the period of 2011-12
to 2013-14.
TABLE 07. TREND OF MARKET CAPITALIZATION, P/E RATIO, P/B RATIO IN NSE for 2007-2013
2007 2008 2009 2010 2011 2012 2013
Market
Capitalization
4951.80 5707.75 7236.94 4945.21 3785.33 3021.71 303211
P/E ratio - - - - 16.75 18.68 18.70
P/B Ratio - - - - 2.76 3.13 2.99
(Source: SEBI)
The NSE shows fluctuating trend of market capitalization. The P/E ratio is increasing through
out the period of 2011-13. The P/B ratio is increasing in 2012 where as it shows declining trend
in 2013.
TABLE 08. TRADING STATISTIC OF BSE and NSE from 2007 to 2011
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012
BSE 986005 739600 1136513 990776 654137
NSE 1481229 1418928 2205878 1810910 1605205
(Source: SEBI)The
NSE shows increasing trend of quantity of shares delivered whereas BSE shows fluctuating
trend throughout the period of 2007-08 to 2011-12.
Regulations for mutual funds revised in 1996
(a) The giving of more flexibility to fund managers while increasing transparency, disclosure,
and accountability.
(b) Over-the-Counter Exchange of India formed.
(c) National Stock Exchange (NSE) establishment as a stock exchange with nationwide electronic
trading. (d) Bombay Stock Exchange (BSE) introduces screen-based trading; 15 stock exchanges
now have screened-based trading. BSE granted permission to expand its trading network to
other centres.
(e) The Capital adequacy requirements for brokers enforced.
(f) The System of mark-to-market margins introduced in the Stock Exchanges.
(g) The stock lending scheme introduced.
(h) Transparency brought out in short selling.
(i) National Securities Clearing Corporation, Ltd. set up by National Stock Exchange.
(j) Bombay Stock Exchange in the process of implementing a trade guarantee scheme.
(k) SEBI strengthens surveillance mechanisms and directs all stock exchanges to have separate
surveillance departments.

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Performance of Mutual Fund Industry
Mutual Funds play an important role in financial services by offering diversification, liquidity
and professional management at an affordable price. The Indian Mutual Fund industry consists
of 44 players. In addition to advance tax commitments adverse interest rate scenario, slowing
growth in India and concerns of global recession were other important reasons that led to the
downfall.
Fig02.Trend of Mutual Fund Investment in Equity and Debt Oriented scheme for the Period
2007-08 to 2013-14 (source: SEBI)
Throughout the period from 2007-08 to 2013-14, investors have shown greater confidence in
the debt oriented scheme as these are the regular source of income and investors in India are
risk averse. Also, the difference in the amount invested in the debt oriented scheme has
increased considerably from the year 2012-13 onwards.
Comparative Study of Indian Capital Index VS. Selected Global Indicators:
The data on the said table indicates that year 2010 has been strong year for Indian capital
markets due to global recovery and prompt corrective action taken by our regulators in terms
of monetary policy. Strong domestic economic fundamentals and policy measures motivated
the FIIs to pump in investments. The year 2009 was the year of recovery from the crisis. Indian
Capital Market registered a net gain of 18 per cent. Jakarta Composite in Indonesia gained the
most among indices with about 45 per cent rise; US Dow Jones and UK’s FTSE have each risen
by around 11 per cent and 9 per cent respectively. NASDAQ composite index was up 16.91 per
cent while S& P rose by 13 per cent. However, Japan’s Nikkei and China’s Shanghai
Composite dipped 3 per cent and 14 per cent respectively (Economics Survey 2010– 11)

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Table 09. Cumulative Change in Movement of global indices
Index 2004 2005 2006 2007 2008 2009 2010
BSE SENSEX India 13.1 61 136.1 247.4 65.2 199.1 251.2
Hang Seng
Sensex
Hongkong
13.2 18.3 58.8 121.2 1.1 74.2 83.2
Jakarta
composite index
Indonesia
44.5 68.1 161 296.8 35.5 264.1 435.3
Nikkei225, Japan 7.6 50.9 61.3 43.4 -22.9 -5.3 -4.2
Kospi Index
South Korea
58.7 153
Kuala lumpur
comp. Index
Malaysia
14.2 13.4 38 82 -3.3 58.7 -35.3
TSEC weighted
Index , Taiwan
4.2 11.2 32.8 44.4 -25.2 32.3 35.3
SSE Composite
Index, China
-15.4 -22.4 78.7 251.5 43.7 116.9 87.6
In terms of growth rate of both the Sensex and Nifty in terms Price Earning (P/E)
Ratio has been most promising when compared to other emerging market economies of
Asia. The P/E Ratio has been consistently rising over the past few years which have
made the Indian Capital Market an attractive destination for FIIs .
Table 10. P/E Ratio in select emerging Markets
Performance of FIIs

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Fig 03. Trend of FIIs investment in Debt and Equity market from 2007-13 (source: SEBI)
The foreign institutional investors have always favored investment in equity market over the
debt market but whenever there is crisis in the economy then they tend to prefer debt market
over the equity market. As we can see in the above figure that in 2008, investment in the equity
market was negative where as in case of bond it was low but positive but as the economy
started recovering, the investment in equity market tend to higher than the investment in the
debt market.
Performance of Derivative Market:
TABLE 11. EQUITY DERIVATIVE SEGMENT OF BSE AND NSE FROM 2007 TO 2011
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012
BSE 7453356 49652 9026 5623 32175320
NSE 315552569 644094527 665277652 100170366 1168551087
(Source: SEBI)
A derivative is a security whose price is dependent upon or derived from one or more
underlying assets. Its value is determined by fluctuations in underlying asset. Investors can use
equity derivatives to hedge the risk associated with taking a position in stock by setting limits to
the losses incurred by either a short or long position in a company’s share. The NSE shows
increasing trend in trading of equity derivatives throughout the period from 2007-08 to
2011-12.The BSE shows fluctuating trend for the same.
Derivatives markets broadly can be classified into two categories (i) Exchange trade Derivatives
and (ii) OTC Derivatives (Over The Counter). Traditionally equity derivatives have a long history
in India in the OTC market. Options of various kinds (called Teji and Mandi and Fatak) in un-
organized markets were traded as early as 1900 in Mumbai. The SCRA however banned all kind
of options in 1956. In the exchange-traded market, the biggest success story has been
derivatives on equity products. Index futures were introduced in June 2000, followed by index

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options in June 2001, and options and futures on individual securities in July 2001 and
November 2001, respectively. While there has been growth in financial products such as
derivatives, futures and options, corporate bond markets are still in nascent stage. Turnover in
the equity derivatives segment constituting almost 90 per cent of the overall investments. NSE
dominates BSE in equity derivates trade of both OTC and exchange trade derivatives.
Figure 04. Performance of Equity derivatives in India
Over the years the foreign exchange market in India has shown significant growth in terms of
volumes, product range, liquidity, and participation level. The average daily turnover in the
foreign exchange market in March 2007 was a whopping 33 billion USD. Due to lack of
exchange traded currency instruments, these transactions were done in over-the-counter (OTC)
market like currency forwards, swaps, and options. The exchange trading makes the transaction
more transparent. The price discovery is more efficient in case of exchange trading because of
presence of large number of market players. It also offers trading opportunity for relatively
smaller players because of small contract size compared to OTC market. Moreover, in exchange
traded products the counter-party risk is eliminated by the clearing corporation. Using
electronic trading superior risk management systems can be used for exchange trading thereby
minimizing the overall risk in the portfolio. In August 2008, RBI and SEBI allowed selected
exchanges to offer currency trading.
In India, NSE was the first stock exchange, permitted by the SEBI, to set up its separate currency
derivatives segment. Standardized currency futures trading started on 28th August, 2008 in
NSE. Similarly, the BSE and MCX started trading the currency futures from 1st and 7th October,
2008 respectively (Pandey 2011). The Indian currency futures market has experienced an
impressive growth since its introduction which is evidence by the upward trend of the volumes
in terms of number of contracts, trading value and average daily trading value for currency
futures in both NSE and MCX. However, trading of currency future at MCX is growing at a faster
rate than that of NSE. Further USE which began operations in the currency derivatives segment
on 20 September 2010, witnessed a turnover of Rs. 5,37,836 crores as on November 2010.

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Table 12. Currency Futures
Settlement Process
The normal settlement process in government securities is that the transacting banks make payments
and deliver the securities directly to each other. The broker's only function is to bring the buyer and
seller together and help them negotiate the terms, for which he earns a commission from both the
parties. The broker does not handle either the cash or the securities. During the scam, however, the
banks or at least some banks adopted an alternative settlement process which was similar to the
process used for settling transactions in the stock market. In this settlement process, deliveries of
securities and payments are made through the broker. That is, the seller hands over the securities to the
broker who passes them on to the buyer, while the buyer gives the cheque to the broker who then
makes the payment to the seller. In this settlement process, the buyer and the seller may not even know
whom they have traded with, both being known only to the broker.
There were two important reasons why the brokers’ intermediated settlement system began to be used
in the government Securities Markets:
(i). The brokers instead of merely bringing buyers and sellers together started taking positions in the
market. In other words, they started trading on their own account, and in a sense became market
makers in some securities thereby imparting greater liquidity to the markets.
(ii). When a bank wanted to conceal the fact that it was doing an RF deal, the broker came in handy. The
broker provided contract notes for this purpose with fictitious counterparties, but arranged for the
Actual settlement to take place with the correct counterparty. A broker intermediated settlement
allowed the broker to lay his hands on the cheque as it went from one bank to another through him. The
hurdle now was to find a way of crediting the cheque to his account though it was drawn in favour of a
bank and was crossed account payee.
As it happens, it is purely a matter of banking custom that an account payee cheque is paid only to the
payee mentioned on the cheque. In fact, exceptions were being made to this norm, well before the
scam came to light. Privileged (corporate) customers were routinely allowed to credit account payee
cheques in favour of a bank into their own accounts to avoid clearing delays, thereby reducing the
interest lost on the amount.
Normally, if a customer obtains a cheque in his own favour and deposits it into his own account, it may
take a day or two for the cheque to be cleared and for the funds to become available to the customer.
At 15% interest, the interest loss on a clearing delay of two days for a Rs. 100 crore cheque is about Rs. 8
lacs. On the other hand, when banks make payments to each other by writing cheques on their account
with the RBI, these cheques are cleared on the same day. The practice which thus emerged was that a
customer would obtain a cheque drawn on the RBI favouring not himself but his bank.

21. 21 | P a g e
The bank would get the money and credit his account the same day. This was the practice which the
brokers in the money market used and exploited the market to their benefit. The brokers thus found a
way of getting hold of the cheques as they went from one bank to another and crediting the amounts to
their accounts. This effectively transformed an RF into a loan to a broker rather than to a bank. But this,
by itself, would not have led to the scam, because the RF after all is a secured loan, and a secured loan
to a broker is still secured. What was necessary now was to find a way of eliminating the security itself.
Some banks (or rather their officials) were persuaded to part with cheques without actually receiving
securities in return. A simple explanation of this is that the officials concerned were bribed and/or
negligent. A more intriguing possibility is that the banks' senior/top management were aware of this and
turned a Nelson's eye to it, largely because of the benefit of the higher returns the brokers could offer
by diverting the funds to the stock market.
One must recognize that as long as the scam lasted, the banks benefited from such an arrangement. The
management of banks might have been sorely tempted to adopt this route to higher profitability.
The second route was to replace the Actual securities by a worthless piece of paper – a fake Bank
Receipt (BR). This is discussed in greater detail in the next section.
The third method was simply to forge the securities themselves. In many cases, PSU bonds were
represented only by allotment letters rather than certificates on security paper. And it is easier to forge
an allotment letter for Rs. 100 crores worth of securities than it is to forge a 100 rupee note! Outright
forgery of this kind however accounted for only a very small part of the total funds misappropriated.
Bank Receipt
In an RF deal, the borrowing bank delivers the Actual securities to the lender and takes them back on
repayment of the loan. In practice, however, this is not usually done. Instead, the borrower gives a Bank
Receipt (BR) which serves three functions:
The BR confirms the sale of securities. It Acts as a receipt for the money received by the selling bank,
hence, Bank Receipt. It promised to deliver the securities to the buyer. It also stated that in the
meantime the seller held the securities in trust for the buyer.
In short, a BR was something like an IOU (I owe you securities!), and the use of the BR de facto
converted an RF deal into an unsecured loan. The lending bank no longer had the securities; it had only
the borrower's assurance that the borrower had the securities which could/were delivered if/when the
need arose. There were several reasons why BRs came to be used in lieu of the actual securities: BRs
were very convenient for RF deals because delivery was not needed.
BRs could simply be cancelled and returned when the deals were reversed In case of PSU bonds, actual
delivery was almost impossible because of a variety of reasons, such as non-existence of certificates, or
a single certificate for investment of several hundreds of crores of rupees.
In case of government securities, the RBI had issued a directive that BRs should not be used. The reason
was that, for these securities, the RBI, through its Public Debt Office (PDO), Acts as the custodian.
Physical securities are never issued, and the holding of these securities is represented by book entries at
the PDO. The ledger in which the PDO maintains these accounts is called the Subsidiary General Ledger
(SGL), and these securities are referred to as SGL securities. When the holder of these securities sold
them and wished to transfer them to the buyer, he filled up an SGL transfer form and gave it to the
buyer. This SGL form could be compared to a cheque: the buyer deposits it into his SGL account at the
PDO, and the PDO made a book entry reducing the holding of the seller and increasing that of the buyer.
Because of this facility, the RBI did not permit use of BRs for these securities. Had the PDO functioned
efficiently and carried out its bookkeeping without delays, RBI would have been justified in not
permitting the use of BRs for government securities. Unfortunately, the PDO was very inefficient and
laggardly in its functioning. This was a very serious matter, because, like a cheque, an SGL form can also

22. 22 | P a g e
bounce, if the seller does not have sufficient holding of securities in his SGL account. The buyer needs to
be informed about this promptly; else, he may resell the same securities by issuing his own SGL forms in
the belief that he has sufficient balance in his account. The inefficiency of the PDO made the SGL form
an inconvenient and unreliable instrument, and banks preferred to use BRs even for the SGL securities,
in violation of the RBI's directive. As stated earlier, a BR was supposed to imply that the issuer actually
got the securities and holds them in trust for the buyer. But in reality the issuer never got the securities
at all.
There are two reasons why a bank issued a BR which was not backed by actual securities: A bank may
short sell securities, that is, it sells securities it does not have. This would be done if the bank thinks that
the prices of these securities would decrease. Since this would be an outright sale (not an RF), the bank
issues a BR. When the securities did fall in value, the bank bought them at lower prices and discharges
the BR by delivering the securities sold. Short selling in some form was an integral part of most bond
markets. It could be argued that some amount of short selling subject to some degree of regulation was
a desirable feature of a bond market. An outright sale using a BR which was not backed by securities was
not harmful per se though it violates the RBI guidelines.
The second reason was that the bank may simply wanted an unsecured loan. It then carried out an RF
deal issuing a "fake" BR which is a BR without any securities to back them. The lending bank would be
under a mistaken impression that it is making a secured loan when it is actually advancing an unsecured
loan. Obviously, lenders should have taken measures to protect themselves from such a possibility.
During the scam, the brokers perfected the art of using fake BRs to obtain unsecured loans from the
banking system. They persuaded some small and little known banks – the Bank of Karad (BOK) and the
Metropolitan Cooperative Bank (MCB) - to issue BRs as and when required. These BRs could then be
used to do RF deals with other banks. The cheques in favour of BOK were, of course, credited into the
brokers' accounts. In effect, several large banks made huge unsecured loans to the BOK/MCB which in
turn made the money available to the brokers.
REFORMS AND DEVELOPMENTS IN CAPITAL MARKET SINCE 1991
The government has taken several measures to develop capital market in post-reform period,
with which the capital market reached new heights. Some of the important measures are
1. Securities and Exchange Board Of India (SEBI)
SEBI became operational since 1992. It was set with necessary powers to regulate the activities
connected with marketing of securities and investments in the stock exchanges, merchant
banking, portfolio management, stock brokers and others in India. The objective of SEBI is to
protect the interest of investors in primary and secondary stock markets in the country.
2. National Stock Exchange (NSE)
The setting up to NSE in 1992 is a landmark in Indian capital markets. At present, NSE is the
largest stock market covering 364 cities and towns across the country. Trading on NSE can be
done throughout the country through the network of satellite terminals (fully automated
screen-based trading system). NSE has introduced inter-regional clearing facilities.
3. Dematerialisation of Shares
Demat of shares has been introduced in all the shares traded on the secondary stock markets as
well as those issued to the public in the primary markets. Even bonds and debentures are
allowed in demat form. The advantage of demat trade is that it involves Paperless trading.
4. Screen Based Trading

23. 23 | P a g e
The Indian stock exchanges were modernized in 90s, with Computerized Screen Based Trading
System (SBTS), It cuts down time, cost, risk of error and fraud and there by leads to improved
operational efficiency. The trading system also provides complete online market information
through various inquiry facilities.
5. Investor Protection
The Central Government notified the establishment of Investor Education and Protection Fund
(IEPF) with effect from 1st Oct. 2001: The IEPF shall be credited with amounts in unpaid
dividend accounts of companies, application moneys received by companies for allotment of
any securities and due for refund, matured deposits and debentures with companies and
interest accrued there on, if they have remained unclaimed and unpaid for a period of seven
years from the due date of payment.
6. Rolling Settlement
Rolling settlement is an important measure to enhance the efficiency and integrity of the
securities market. Under rolling settlement all trades executed on a trading day (T) are settled
after certain days (N). This is called T + N rolling settlement. Since April 1, 2002 trades are
settled' under T + 3 rolling settlement. In April 2003, the trading cycle has been reduced to T + 2
days. The shortening of trading cycle has reduced undue speculation on stock markets.
7. The Clearing Corporation of India Limited (CCIL)
The CCIL was registered in 2001, under the Companies Act, 1956 with the State Bank of India as
the Chief Promoter. The CCIL clears all transactions in government securities and repos and also
Rupee / US $ forex spot and forward deals All trades in government securities below Rs. 20
crores would be mandatorily settled through CCIL, white those above Rs. 20 crores would have
the option for settlement through the RBI or CCIL.
8. The National Securities Clearing Corporation Limited (NSCL)
The NSCL was set up in 1996. It has started guaranteeing all trades in NSE since July 1996. The
NSCL is responsible for post-trade activities of NSE. It has put in place a comprehensive risk
management system, which is constantly monitored and upgraded to pre-expect market
failures.
9. Trading in Central Government Securities
In order to encourage wider participation of all classes of investors, including retail investors,
across the country, trading in government securities has been introduced from January 2003.
Trading in government securities can be carried out through a nationwide, anonymous, order-
driver, screen-based trading system of stock exchanges in the same way in which trading takes
place in equities.
10. Credit Rating Agencies
Various credit rating agencies such as Credit Rating Information services of India Ltd. (CRISIL –
1988), Investment Information and credit Rating Agency of India Ltd. (ICRA – 1991), etc. were
set up to meet the emerging needs of capital market. They also help merchant bankers,
brokers, regulatory authorities, etc. in discharging their functions related to debt issues.
11. Accessing Global Funds Market
Indian companies are allowed to access global finance market and benefit from the lower cost
of funds. They have been permitted to raise resources through issue of American Depository
Receipts (ADRs), Global Depository Receipts (GDRs), Foreign Currency Convertible Bonds
(FCCBs) and External Commercial Borrowings (ECBs). Further Indian financial system is opened

24. 24 | P a g e
up for investments of foreign funds through Non-Resident Indians (NRIs), Foreign Institutional
investors (FIls), and Overseas Corporate Bodies (OCBs).
12. Mutual Funds
Mutual Funds are an important avenue through which households participate in the securities
market. As an investment intermediary, mutual funds offer a variety of services / advantages to
small investors. SEBI has the authority to lay down guidelines and supervise and regulate the
working of mutual funds.
13. Internet Trading
Trading on stock exchanges is allowed through internet, investors can place orders with
registered stock brokers through internet. This enables the stock brokers to execute the orders
at a greater pace.
14. Buy Back of Shares
Since 1999, companies are allowed to buy back of shares. Through buy back, promoters reduce
the floating equity stock in market. Buy back of shares help companies to overcome the
problem of hostile takeover by rival firms and others.
15. Derivatives Trading
Derivatives trading in equities started in June 2000. At present, there are four equity derivative
products in India Stock Futures, Stock Options, Index Futures, and Index Options. Derivative
trading is permitted on two stock exchanges in India i.e. NSE and BSE. At present in India,
derivatives market turnover is more than cash market.
SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)
The concept of stock markets came to India in 1875, when Bombay Stock Exchange (BSE) was
established as „The Native Share and Stockbrokers Association', a voluntary nonprofit making
association. Stocks of various companies are listed on stock exchanges. Presently there are 25
stock markets In India. The Bombay Stock Exchange (BSE), the National Stock Exchange (NSE)
and the Calcutta Stock Exchange (CSE) are the three large
stock exchanges. There are many small regional exchanges located in state capitals and other
major cities. Presently Nifty and Sensex are moving around to 5900 and 19600 (July 2013). All
activities of Indian stock market are regulated and controlled by SEBI. SEBI was established as a
non-statutory board in 1988 and in 12 April 1992 it was made a statutory body. The main
objectives of SEBI are
1) To protect the interest of investors.
2) To bring professionalism in the working of intermediaries in capital markets (brokers, mutual
funds, stock exchanges, demat depositories etc.).
3) To create a good financial climate, so that companies can raise long term funds through issue
of securities (shares and debentures).
4) To file complaints in courts and to notify its regulations without prior approval of
government.
5) To regulate issue of capital and transfer of securities.
6) To impose monetary penalties on various intermediaries and other participants for a
specified range of violations.
POWERS AND FUNCTIONS OF SEBI
1. Restriction on Insider Trading

25. 25 | P a g e
SEBI restricts insider trading activity. It prohibits dealing, communication or counselling on
matters relating to insider trading. SEBI‟s regulation states that no insider (connected with the
company) shall - either on his own behalf or on behalf of any other person, deal in securities of
a company listed on any stock exchange on the basis of any unpublished price sensitive
information.
2. Regulates Stock Brokers Activities
SEBI has also laid down regulations in respect of brokers and sub-broker. No brokers or sub-
broker can buy, sell or deal in securities without being a registered member of SEBI. It has also
made compulsory for brokers to maintain separate accounts for their clients and for
themselves. They must also have their books audited and audit reports filed with SEBI.
3. Regulates Merchant Banking
SEBI has laid down regulations in respect of merchant banking activities in India. The
regulations are in respect of registration, code of conduct to be followed, and submission of
half-yearly results and so on.
4. Dematerialization of Shares
Demat of shares has been introduced in all the shares traded on secondary stock markets as
well as those issued to public in primary markets. Even bonds and debentures are allowed in
demat form.
5. Guidelines on Capital Issues
SEBI has framed necessary guidelines in connection with capital issues. The guidelines are
applicable to :- First Public Issue of New Companies, First Public Issue by Existing Private /
Closely held Companies, Public Issue by Existing Listed Companies.
6. Regulates Working of Mutual Funds
SEBI regulates the working of mutual funds. SEBI has laid down rules and regulations that are to
be followed by mutual funds. SEBI may cancel the registration of a mutual fund, if it fails to
comply with the regulations.
7. Monitoring of Stock Exchanges
To improve the working of stock markets, SEBI plays an important role in monitoring stock
exchanges. Every recognized stock exchange has to furnish to SEBI annually with a report about
its activities during the previous year.
8. Secondary Market Policy
SEBI is responsible for all policy and regulatory issues for secondary market and new
investments products. It is responsible for registration and monitoring of members of stock
exchanges, administration of some of stock exchanges and monitoring of price movements and
insider trading.
9. Investors Grievances Redressal
SEBI has introduced an automated complaints handling system to deal with investor
complaints. It assists investors who want to make complaints to SEBI against listed companies.
Institutional Investment Policy SEBI looks after institutional investment policy with respect to
domestic mutual funds and Foreign Institutional Investors (FIIs). It also looks after registration,
regulation and monitoring of FIls and domestic mutual funds.
10. Takeovers and Mergers
To protect the interest of investors in case of takeovers and mergers SEBI has issued a set of

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guidelines. These guidelines are to be followed by corporations at the time of takeovers and
mergers.
ISSUES, CHALLENGES AND SUGGESTIONS FOR DEVELOPMENT OF CAPITAL
MARKET IN INDIA:
India has successfully implemented the first phase of reforms in 1990s which slowed
down. India needs to follow through with deeper and more wide ranging reforms which
will bring the regulatory environment and the framework of the economy to a level
which can cope with the challenges of growth. The primary objective of efficient capital market
is mobilize funds from those who have it and channelize them to those who can utilize the it in
the best possible way. Capital markets in order to be efficient and fair to the investor must 1. be
transparent, (ii) have robust systems and processes, (iii) be well regulated and (iv) be able to
tap into the savings of investors both nationally and internationally to facilitate exchange of
capital.
However, if we look at the scenario of capital markets in India we find that Indian households
have traditionally preferred safety of bank deposits and Govt. Savings Schemes and much less
than 10% of their investments in financial assets is in shares, debentures and mutual funds.
While Indian capital markets are vibrant and are an attractive destination for global capital
inflows. The delivered cost of credit to most enterprises is much above comparable
international standards; an important issue that need to addressed on priority. Innovation in
product design, promotion of functional and operation al efficiency can help in addressing this
issue in a better way. There is an urgent need of redefining regulatory architecture. gaps.
Presently there are over half a dozen of regulatory agencies viz. SEBI, IRDA, PFRDA, EPFO, RBI,
FMC besides several ministries leading to jurisdiction overlaps, narrow sectorial attitudes and
regulatory gaps, regulatory arbitrage. The most recent have been conflict between IRDA and
SEBI over Unit Linked Insurance Plans (ULIP). This overlapping regulatory body is the major
cause of ineffective regulations, inability and delay in exploring new markets and products
design etc. India needs to streamline financial market regulatory structure and move to single
window approval process. There is an urgent need to channel most efficiently increasing
amounts of domestic savings and global investment into the infrastructure sector and other
productive sectors. Initiatives required to be taken is (i) liberalizing buyback regulations to allow
vendors of major equipment’s to hold equity in initial stages and buying back such
equity when projects get operational; (ii) Allowing Private Equity Funds as bidding partners in
infrastructure projects (iii) allowing pension funds to invest a greater part of their corpus in
equities either directly or through mutual funds to infrastructure projects; and (iv) encouraged
private initiatives. Opening of the financial markets will result in competition and greater
efficiency .However, foreign participation will bring increased risk and exposure . Stability is
thus need for financial markets for which safeguarding mechanism need to be established. The
equity market in India is extremely vibrant but equity based funding solely, cannot lead the
economy to growth. The debt market remains underdeveloped with a huge potential for
increased activity. A strong hand is required to drive the long term financing of infrastructure,
housing and private sector development. The road ahead for deepening the capital market
need to be paved by the strong linkage between development of economy and the financial
system. A greater measure of transparency is also required to built regulating procedures , to

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bring in a new dimension to financial market and take it to the next level. One of the challenges
before the Indian capital market is expanding the investor base and provide them access to high
quality financial service .With a population of more than a billion, a mere 1% of population
participates in capital market and of that only a fraction is active. Investor participation is very
shallow considering the size of Indian economy .Trading volume in Indian capital market are
lower as compared to other markets such as US, China, UK, Germany etc.
Another Challenge faced by the investor is the cost involved in trading, which are comparatively
higher in India , than in developed markets . Way Forward to Capital Market
1. Investor education and regulation of mutual fund distributors.
2. Allowing AMCs to the flexibility to charge fees
3. Innovative products across different asset classes.
4. Amending tax regime to encourage domestic AMCs to manage foreign funds from India
5. Although higher investment by domestic institutional investors such as insurance companies ,
pension funds to make investment in capital markets
6. Make implementation of proposal of SME stock exchange effective
7. Allowing institutional investors to participate in commodity markets
8. Reduction in current withholding tax of 20% on income from debt securities to encourage
investment in debt market
Conclusion:
India being an emerging economy needs innovations and reforms in the financial market.
Innovation and reforms not only add value in the existing technology and system but also lead
to decrease in the cost of capital and mitigate the risk exposure of the capital market
instruments. No doubt that there is a positive correlation between the finance and the
economic growth of the country. Economic growth needs sound financial system which further
requires the well-developed financial market. So, if country wants constant economic growth it
has to develop its financial market. Emerging economies like India depends heavily on the
banking system for financing its capital needs. But banks which are highly protected in India
hardly fulfill its funding requirements. Thus, there is the need to develop its capital market
especially its bond market which is underdeveloped because of policies constraint. Also, India
has a huge market for the infrastructure which requires huge funds. The creation of deep and
innovative bond market can fill this gap. Steps have been taken up to develop the equity
market but there is lots to be done in case of the bond market development. Reforms need to
be initiated, bottlenecks need to be removed, policies need to be changed to deepen the bond
market in India and to make it as competitive as the world best bond markets.
India needs innovative financial instrument in its domestic capital market. Financial Innovation
must aim value addition in existing technologies, risk management practices, credit system,
process, and products. Financial innovation must aim at reducing cost of capital; mitigate risk
exposure, liquidity management, and broader capital excess.
There is positive correlation between finance and economic growth. Thus, economic
development is relatively impossible without quality innovation in financial market. Innovative
practices help in exploring viable opportunities propositions. There are many unexplored areas
in both domestic and corporate financial market..

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A lot of work has been done on technological innovation but innovation for holistic growth has
not been taken seriously by financial economist/service providers in India. We often go for
adopting products that are gaining popularity in foreign countries. We must recognize that
what suit foreign market may not suit domestic market. There has been growing tendency of
innovating financial products to avoid regulation rather filling the gaps of untapped market. A
balanced regulated financial market will help to fill these gaps. Crisis arising from financial
sector has a huge devastating effect. East Asian crisis and Sub-Prime Crisis has proved that risk
can be induced into any system if part of financial sector is not well developed or poorly
developed. In Indian the effect of the subprime crisis have been mainly indirect which was in
the form of higher volatility of capital market and depreciation of domestic currency (rupees)
against dollar. The exit of global investors, particularly the hedge funds from the local market
have created liquidity crisis in the economy. Lack of well-functioning local currency bond
market became the cause of over reliance on banking system which led to funding of long term
project with short term bank loan. Thus, liquidity risk was induced into the system due to
Assets-Liabilities maturities mismatch.
References
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(17)Global Financial Crisis and Its Impact on India. Journal of Social Science 21 (1): 1–5.
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