Since 2003, Indian capital markets have been receiving global attention, especially from sound investors, due to the improving macroeconomic fundamentals. The presence of a great pool of skilled labour and the rapid integration with the world economy increased India’s global competitiveness. No wonder, the global ratings agencies Moody’s and Fitch have awarded India with investment grade ratings, indicating comparatively lower sovereign risks. The Securities and Exchange Board of India (SEBI), the regulatory authority for Indian securities market, was established in 1992 to protect investors and improve the microstructure of capital markets. In the same year, Controller of Capital Issues (CCI) was abolished, removing its administrative controls over the pricing of new equity issues. In less than a decade later, the Indian financial markets acknowledged the use of technology (National Stock Exchange started online trading in 2000), increasing the trading volumes by many folds and leading to the emergence of new financial instruments. With this, market activity experienced a sharp surge and rapid progress was made in further strengthening and streamlining risk management, market regulation, and supervision.

1. Masters of commerce
(Banking and finance)
2013-2014
Semester I (Part 2)
To
Prof. Anita Singh
By
Miss. Nevia Singhal
Roll no.-82
Project report on
“CAPITAL MARKETS IN INDIA”
University of Mumbai
Sydenham College of commerce and economics
Churchgate, Mumbai- 400020

2. CERTIFICATE
I, Prof. Anita Singh, hereby, certify that Miss Nevia Singhal
of Sydenham college of commerce and economics, M.com
part II, has completed the project on “CAPITAL MARKETS
IN INDIA” for the academic year 2013-2014(semester I).
The Information submitted is true and original to the best of
my knowledge.
Signature of the project Guide.
(Prof. Anita Singh)

3. ACKNOWLEDGMENT
I would like to express my special thanks of gratitude to my
professor, Mrs. Anita Singh as well as our principal Dr. M.V
kagalkar who gave me the golden opportunity to do this
wonderful project on this topic which also helped me in
doing a lot of Research and i came to know about so many
new things.
I am really thankful to them.
Secondly i would also like to thank my parents and friends
who helped me a lot in finishing this project within the
limited time.
I am making this project not only for marks but to also
increase my knowledge.
THANKS AGAIN TO ALL WHO HELPED ME.

4. UNDERTAKING
I, Nevia Singhal, hereby declare that my project on “CAPITAL
MARKETS IN INDIA” is made by myself. The data used is true
and it is use not used for submitting in any other degree.
Nevia Singhal

5. INDEX
 Research methodology
 Introduction to Capital markets
 Capital market instruments
 Equity market
 IRDs
 Derivative markets
o Important distinctions
o Benefits of derivatives
 Exchange platforms
 International Exchanges
 Regulatory Authority

6. RESEARCH METHODOLOGY
My research methodology requires gathering relevant data from the specified
documents and compiling databases in order to analyze the material and arrive
at a more complete understanding of “Capital markets in India”.
The data used is secondary and is collected through various Books and articles
by various notable authors.

7. INTODUCTION TO CAPITAL MARKETS
Indian Capital Markets
Since 2003, Indian capital markets have been receiving global attention,
especially from sound investors, due to the improving macroeconomic
fundamentals. The presence of a great pool of skilled labour and the rapid
integration with the world economy increased India’s global competitiveness.
No wonder, the global ratings agencies Moody’s and Fitch have awarded India
with investment grade ratings, indicating comparatively lower sovereign risks.
The Securities and Exchange Board of India (SEBI), the regulatory authority
for Indian securities market, was established in 1992 to protect investors and
improve the microstructure of capital markets. In the same year, Controller of
Capital Issues (CCI) was abolished, removing its administrative controls over
the pricing of new equity issues. In less than a decade later, the Indian
financial markets acknowledged the use of technology (National Stock
Exchange started online trading in 2000), increasing the trading volumes by
many folds and leading to the emergence of new financial instruments. With
this, market activity experienced a sharp surge and rapid progress was made in
further strengthening and streamlining risk management, market regulation,
and supervision.
The securities market is divided into two interdependent segments:


The primary market provides the channel for creation of funds through
issuance of new securities by companies, governments, or public
institutions. In the case of new stock issue, the sale is known as Initial
Public Offering (IPO).
The secondary market is the financial market where previously issued
securities and financial instruments such as stocks, bonds, options, and
futures are traded.

8. In the recent past, the Indian securities market has seen multi-faceted growth
in terms of:



The products traded in the market, viz. equities and bonds issued by the
government and companies, futures on benchmark indices as well as
stocks, options on benchmark indices as well as stocks, and futures on
interest rate products such as Notional 91-Day T-Bills, 10-Year
Notional Zero Coupon Bond, and 6% Notional 10-Year Bond.
The amount raised from the market, number of stock exchanges and
other intermediaries, the number of listed stocks, market capitalization,
trading volumes and turnover on stock exchanges, and investor
population.
The profiles of the investors, issuers, and intermediaries.

9. CAPITAL MARKET INSTRUMENTS
•
•
•
•
•
Equity
Preference shares
Debenture/ Bonds
ADRs/ GDRs
Derivatives
Shares
The total capital of a company may be divided into small units called
shares. For example, if the required capital of a company is US $5,00,000
and is divided into 50,000 units of US $10 each, each unit is called a share
of face value US $10. A share may be of any face value depending upon the
capital required and the number of shares into which it is divided. The
holders of the shares are called share holders. The shares can be
purchased or sold only in integral multiples.
Equity shares signify ownership in a corporation and represent claim over
the financial assets and earnings of the corporation. Shareholders enjoy
voting rights and the right to receive dividends; however in case of
liquidation they will receive residuals, after all the Creditors of the company
are settled in full. A company may invite investors to subscribe for the
shares by the way of:
• Public issue through prospectus
• Tender/ book building process
• Offer for sale
• Placement method
• Rights issue

10. Stocks
The word stock refers to the old English law tradition where a share
capital of the company was not divided into “shares” of
denomination but was issued as one chunk. This concept is no
prevalent, but the word “stock” continues. The word “joint
companies” also refers to this tradition.
in the
fixed
more
stock
Debt Instruments
A contractual arrangement in which the issuer agrees to pay interest and
repay the borrowed amount after a specified period of time is a debt
instrument. Certain features common to all debt instruments are:
Maturity – the number of years over which the issuer agrees to meet
the contractual obligations is the term to maturity. Debt instruments
are classified on the basis of the time remaining to maturity
• Par value – the face value or principal value of the debt instrument
is called the par value.
• Coupon rate – agreed rate of interest that is paid periodically to the
investor and is calculated as a percentage of the face value. Some of
the debt instruments may not have an explicit coupon rate, for
instance zero coupon bonds. These bonds are issued on discount and
redeemed at par. Thus the difference between the investor’s
investment and return is the interest earned. Coupon rates may be
fixed for the term or may be variable.
• Call option – option available to the issuer, specified in the trust
indenture, to ‘call in’ the bonds and repay them at pre determined
price before maturity. Call feature acts like a ceiling f or payments.
The issuer may call the bonds before the stated maturity as it may
recognize that the interest rates may fall below the coupon rate and
redeeming the bonds and replacing them with securities of lower
coupon rates will be economically beneficial. It is the same as the
prepayment option, where the borrower prepays before scheduled
payments or slated maturity
•

11. o Some bonds are issued with ‘call protection feature, i.e they
would not be called for a specified period of time
o Similar to the call option of the issuer there is a put option for
the investor, to sell the securities back to the issuer at a
predetermined price and date.
The investor may do so anticipating rise in the interest rates
wherein the investor would liquidate the funds and
alternatively invest in place of higher interest
• Refunding provisions – in case where the issuer may not have cash to
redeem the debt instruments the issuer may issue new debt instrument
and use the proceeds to repay the securities or to exercise the call
option.
Debt instruments may be of various kinds depending on the repayment:
• Bullet payment – instruments where the issuer agrees to repay the
entire amount at the maturity date, i.e lumpsum payment is called
bullet payment
• Sinking fund payment – instruments where the issuer agrees to retire
a specified portion of the debt each year is called sinking fund
requirement
• Amortization – instruments where there are scheduled principal
repayments before maturity date are called amortizing
instruments
Debentures/ Bonds
The term Debenture is derived from the Latin word ‘debere’ which
means ‘to owe a debt’. A debenture is an acknowledgment of debt, taken
either from the public or a particular source. A debenture may be
viewed as a loan, represented as marketable security. The word “bond”
may be used interchangeably with debentures.
Debt instruments with maturity more than 5 years are called ‘bonds’

12. Yields
Most common method of calculating the yields on debt instrument is the
‘yield to maturity’ method, the formula is as under:
YTM = coupon rate + prorated discount / (face value + purchase price)/2
Main differences between shares and debentures
•
•
•
•
•
•
•
Share money forms a part of the capital of the company. The share
holders are part proprietors of the company, whereas debentures are
mere debt, and debenture holders are just creditors.
Share holders get dividend only out of profits and in case of
insufficient or no profits they get nothing and debenture holders
being creditors get guaranteed interest, as agreed, whether the
company makes profit or not.
Share holders are paid after the debenture holders are paid their due first
The dividend on shares depends upon the profit of the company but
the interest on debentures is very well fixed at the time of issue itself.
Shares are not to be paid back by the company whereas debentures
have to be paid back at the end of a fixed period.
In case the company is wound up, the share holders may lose a part or
full of their capital but he debenture holders invariably get back their
investment.
Investment in shares is riskier, as it represents residual interest in the
company. Debenture, being debt, is senior.

13. •
Debentures are quite often secured, that is, a security interest is
created on some assets to back up debentures. There is no
question of any security in case of shares.
• Share holders have a right to attend and vote at the meetings of the
share holders whereas debenture holders have no such rights.
Preference shares
Preference shares are different from ordinary equity shares. Preference share
holders have the following preferential rights
(i) The right to get a fixed rate of dividend before the payment of dividend
to the equity holders.
(ii) The right to get back their capital before the equity holders in case of
winding up of the company.
IPO
Conditions for IPO: (all conditions listed below to be satisfied)
•
•
•
•
•
Net tangible assets of 3 crore in each of the preceding 3 full years,
of which not more than 50% are held in monetary assets:
Track record of distributable profits for 3 out of the immediately
preceding 5 years:
Net worth of 1 crore in each of the preceding three full years;
Issue size of proposed issue + all previous issues made in the same
financial year does not exceed 5 times its pre-issue net worth as per
the audited balance sheet of the preceding financial year;
In case of change of name within the last one year, 50% of the
revenue for the preceding 1 full year earned by it from the activity
indicated by the new name.

14. Broad Constituents in the Indian Capital Markets
Fund Raisers are companies that raise funds from domestic and foreign
sources, both public and private. The following sources help companies raise
funds:
Fund Providers are the entities that invest in the capital markets. These can be
categorized as domestic and foreign investors, institutional and retail investors.
The list includes subscribers to primary market issues, investors who buy in the
secondary market, traders, speculators, FIIs/ sub accounts, mutual funds,
venture capital funds, NRIs, ADR/GDR investors, etc.
Intermediaries are service providers in the market, including stock brokers,
sub-brokers, financiers, merchant bankers, underwriters, depository participants,
registrar and transfer agents, FIIs/ sub accounts, mutual Funds, venture capital
funds, portfolio managers, custodians, etc.
Organizations include various entities such as MCX-SX, BSE, NSE, other
regional stock exchanges, and the two depositories National Securities
Depository Limited (NSDL) and Central Securities Depository Limited
(CSDL).
Market Regulators include the Securities and Exchange Board of India
(SEBI), the Reserve Bank of India (RBI), and the Department of Company
Affairs (DCA).
Appellate Authority: The Securities Appellate Tribunal (SAT)
Participants in the Securities Market
SAT, regulators (SEBI, RBI, DCA, DEA), depositories, stock exchanges (with
equity trading, debt market segment, derivative trading), brokers, corporate
brokers, sub-brokers, FIIs, portfolio managers, custodians, share transfer agents,
primary dealers, merchant bankers, bankers to an issue, debenture trustees,
underwriters, venture capital funds, foreign venture capital investors, mutual
funds, collective investment schemes.

16. EQUITY MARKET
History of the Market
With the onset of globalization and the subsequent policy reforms, significant
improvements have been made in the area of securities market in India.
Dematerialization of shares was one of the revolutionary steps that the
government implemented. This led to faster and cheaper transactions, and
increased the volumes traded by many folds. The adoption of the marketoriented economic policies and online trading facility transformed Indian equity
markets from a broker-regulated market to a mass market. This boosted the
sentiment of investors in and outside India and elevated the Indian equity
markets to the standards of the major global equity markets.
The 1990s witnessed the emergence of the securities market as a major source
of finance for trade and industry. Equity markets provided the required platform
for companies and start-up businesses to raise money through IPOs, VC, PE,
and finance from HNIs. As a result, stock markets became a people’s market,
flooded with primary issues. In the first 11 months of 2007, the new capital
raised in the global public equity markets through IPOs accounted for $107
billion in 382 deals out of the total of $255 billion raised by the four BRIC
countries. This was a sizeable growth from $90 billion raised in 302 deals in
2006. Today, the corporate sector prefers external sources for meeting its
funding requirements rather than acquiring loans from financial institutions or
banks.

17. IRDs
Interest Rate Derivatives (IRD) are derivatives where the underlying risk
interest rates. Hence, depending on the type of the transaction, parties either
swap interest at a fixed or floating rate on a notional amount, or trade in
interest rate futures, or engage in forward rate agreements. As in case of
all derivatives, the contract is mostly settled by net settlement, that is
payment of difference amount.
Types:
The basic IRDs are simple and mostly liquid and are called vanilla
products, whereas derivatives belonging to the least liquid category are
termed as exotic interest rate derivatives. Some vanilla products are:
1) Interest Rate Swaps
2) Interest Rate Futures
3) Forward Rate Agreements
4) Interest rate caps/floors
Interest Rate Swaps – These are derivatives where one party exchanges or
swaps the fixed or the floating rates of interest with the other party. The
interest rates are calculated on the notional principal amount which is not
exchanged but used to determine the quantum of cashflow in the
transaction. Interest rate swaps are typically used by corporations to typically
alter the exposure to fluctuations on interest rates by swapping fixed rate
obligations for floating and vice-a-versa or to obtain lower rates of interest
than otherwise available.
Interest rate swaps can be
a) fixed-for-fixed rate swap,
b) fixed-for-floating rate swap,
c)floating-for-floating rate swap and so on.

18. As the names suggest interest rates are being swapped, either in the same
currency or different currency and there could be as many customized
variations of the swaps, as desired.
This can be further explained simply. For instance if there are two
borrowers in the market where Borrower A has borrowed at a fixed rate
but wants a floating rate of interest and Borrower B has borrowed with
floating and wants a fixed rate of interest. IN such a scenario they can swap
their existing interest rates without any further borrowing. This would make
the transaction of the two borrowers independent of the underlying
borrowings. For instance if a company has investments with a floating rate of
interest of 4.7% and can obtain fixed interest rate of 4.5% then the company
may enter into a fixed- for-floating swap and earn a profit of 20 basis points.
Forward Rate Agreements (FRAs) – These are cash settled for ward contracts
on interest rate traded among international banks active in the Eurodollar
market.
These are contracts between two parties where the interest rates are to be
paid/ received on an obligation at a future date. The rate of interest, notional
amount and expiry date is fixed at the time of entering the contract and
only difference in the amount is paid/ received at the end of the period.
The principal is called notional because while it determines the amount of
payment, actual exchange of principal never takes place. For instance if A
enters an FRA with B and receives a fixed rate of interest say 6% on
principal, say P for three years and B receives floating rate on P. If at the end
of contract period of C the LIBOR rate is 6.5% then A will make a
payment of the differential amount, (that is .5% on the principal P) to B.
The settlement mechanism can be further explained as follows:
For instance at a notional principal of USD 1 million where the borrower
buys an FRA for 3 months that carries an interest rate of 6% and the
contract run is 6 months. At the settlement date the settlement rate is at
6.5%. Then the settlement amount will be calculated in the following manner:

19. Settlement amount = [(Difference between settlement rate and agreed
rate)* contract run* principal amount]/[(36,000 or 36500) +
(settlement rate*contract period)]
That is, in the above problem
Settlement amount = [(6.5-6)*180*USD 1 million]/[36,000 + (6.5%* 90)
(Note: 36,000 is used for currencies where the basis of calculation is
actual/360 days and 36,500 is used for currencies where the basis of
calculation of interest is actual/365 days)
Interest Rate Caps/Floors: Interest rate caps/floors are basically hedging
instruments that can give the investor both benefits of fixed rate interest and
fluctuating rate interest. The person providing an interest rate cap is the
protection seller. The seller assures the borrower or the buyer that in case of
high volatility in the interest rates, if interest rate moves beyond the cap the
borrower will be paid amount beyond the cap. In case the market rates do
not go beyond the cap limit, the seller need not pay anything to the
borrower. In such a situation as long as the interest rates are within the cap
limit borrower enjoys the floating rates and if rates move above the cap
limit he will be compensated with the requisite amount by the protection
seller and the borrower will pay fixed to the capped rate of interest. The
same is the case when a person enters a Interest Rate Floor transaction.
In case of Interest Rate Cap transaction the borrower is expects the market
interest rates to go up in the future and hedge against the movement of the
market rates. Interest Rate Caps/Floors transactions are ideally of one, two,
five or ten years and the desired level of protection the buyer seeks are 6%,
8% or 10%.

20. Derivative Markets
The emergence of the market for derivative products such as futures and
forwards can be traced back to the willingness of risk-averse economic agents to
guard themselves against uncertainties arising out of price fluctuations in
various asset classes. By their very nature, the financial markets are marked by
a very high degree of volatility. Through the use of derivative products, it is
possible to partially or fully transfer price risks by locking in asset prices.
However, by locking in asset prices, derivative products minimize the impact of
fluctuations in asset prices on the profitability and cash flow situation of riskaverse investors. This instrument is used by all sections of businesses, such as
corporates, SMEs, banks, financial institutions, retail investors, etc. According
to the International Swaps and Derivatives Association, more than 90 percent of
the global 500 corporations use derivatives for hedging risks in interest rates,
foreign exchange, and equities. In the over-the-counter (OTC) markets, interest
rates (78.5%), foreign exchange (11.4%), and credit form the major derivatives,
whereas in the exchange-traded segment, interest rates, government debt, equity
index, and stock futures form the major chunk of the derivatives.
What are futures contracts?
Futures contracts are standardized derivative instruments. The instrument has an
underlying product (tangible or intangible) and is impacted by the developments
witnessed in the underlying product. The quality and quantity of the underlying
asset are standardized. Futures contracts are transferable in nature. Three broad
categories of participants—hedgers, speculators, and arbitragers—trade in the
derivatives market.



Hedgers face risk associated with the price of an asset. They belong to
the business community dealing with the underlying asset to a future
instrument on a regular basis. They use futures or options markets to
reduce or eliminate this risk.
Speculators have a particular mindset with regard to an asset and bet on
future movements in the asset’s price. Futures and options contracts can
give them an extra leverage due to margining system.
Arbitragers are in business to take advantage of a discrepancy between
prices in two different markets. For example, when they see the futures
price of an asset getting out of line with the cash price, they will take
offsetting positions in the two markets to lock in a profit.

21. Important Distinctions
Exchange-Traded Vs. OTC Contracts: A significant bifurcation in the
instrument is whether the derivative is traded on the exchange or over the
counter. Exchange-traded contracts are standardized (futures). It is easy to buy
and sell contracts (to reverse positions) and no negotiation is required. The OTC
market is largely a direct market between two parties who know and trust each
other. Most common example for OTC is the forward contract. Forward
contracts are directly negotiated, tailor-made for the needs of the parties, and are
often not easily reversed.
Distinction between Forward and Futures Contracts:
Futures Contracts
Meaning:
A futures contract is a
contractual agreement between
two parties to buy or sell a
standardized quantity and
quality of asset on a specific
future date on a futures
exchange.
Forward Contracts
A forward contract is a
contractual agreement between
two parties to buy or sell an
asset at a future date for a
predetermined mutually agreed
price while entering into the
contract. A forward contract is
not traded on an exchange.
Trading place:
A futures contract is traded on A forward contract is traded in
the centralized trading platform an OTC market.
of an exchange.
Transparency in contract
price: The contract price of a
futures contract is transparent
The contract price of a forward
as it is available on the
contract is not transparent, as it
centralized trading screen of the
is not publicly disclosed.
exchange.

22. valuations of open position
and margin requirement:
In a futures contract, valuation In a forward contract, valuation
of open position is calculated as of open position is not
per the official closing price on calculated on a daily basis and
a daily basis and mark-tothere is no requirement of
market (MTM) margin
MTM on daily basis since the
requirement exists.
settlement of contract is only
on the maturity date of the
contract.
Liquidity:
Liquidity is the measure of
frequency of trades that occur A forward contract is less
in a particular futures contract. liquid due to its customized
A futures contract is more
nature.
liquid as it is traded on the
exchange.
Counterparty default risk:
In futures contracts, the
In forward contracts,
exchange clearinghouse
counterparty risk is high due to
provides trade guarantee.
the customized nature of the
Therefore, counterparty risk is transaction.
almost eliminated.
Regulations:
A regulatory authority and the A forward contract is not
exchange regulate a futures
regulated by any exchange.
contract.

23. Benefits of Derivatives
a. Price Risk Management: The derivative instrument is the best way to
hedge risk that arises from its underlying. Suppose, ‘A’ has bought 100
shares of a real estate company with a bullish view but, unfortunately, the
stock starts showing bearish trends after the subprime crisis. To avoid
loss, ‘A’ can sell the same quantity of futures of the script for the time
period he plans to stay invested in the script. This activity is called
hedging. It helps in risk minimization, profit maximization, and reaching
a satisfactory risk-return trade-off, with the use of a portfolio. The major
beneficiaries of the futures instrument have been mutual funds and other
institutional investors.
b. Price Discovery: The new information disseminated in the marketplace
is interpreted by the market participants and immediately reflected in spot
and futures prices by triggering the trading activity in one or both the
markets. This process of price adjustment is often termed as price
discovery and is one of the major benefits of trading in futures. Apart
from this, futures help in improving efficiency of the markets.
c. Asset Class: Derivatives, especially futures, offer an exclusive asset class
for not only large investors like corporates and financial institutions but
also for retail investors like high networth individuals. Equity futures
offer the advantage of portfolio risk diversification for all business
entities. This is due to the fact that historically it has been witnessed that
there lies an inverse correlation of daily returns in equities as compared to
commodities.
d. High Financial Leverage: Futures offer a great opportunity to invest
even with a small sum of money. It is an instrument that requires only the

24. margin on a contract to be paid in order to commence trading. This is also
called leverage buying/selling.
e. Transparency: Futures instruments are highly transparent because the
underlying product (equity scripts/index) are generally traded across the
country or even traded globally. This reduces the chances of manipulation
of prices of those scripts. Secondly, the regulatory authorities act as
watchdogs regarding the day-to-day activities taking place in the
securities markets, taking care of the illegal transactions.
f. Predictable Pricing: Futures trading is useful for the genuine investor
class because they get an idea of the price at which a stock or index
would be available at a future point of time.

25. EXCHANGE PLATFORM
Domestic Exchanges
Indian equities are traded on three major national exchanges: MCX Stock
Exchange Limited (MCX-SX), Bombay Stock Exchange Limited (BSE) and
National Stock Exchange of India Limited (NSE).
MCX Stock Exchange
MCX Stock Exchange Limited (MCX-SX), India’s new stock exchange, is
recognized by the Securities and Exchange Board of India (SEBI) under Section
4 of the Securities Contracts (Regulation) Act, 1956. The Exchange was granted
the status of a ‘recognized stock exchange’ by the Government of India on
December 19, 2012. In line with global best practices and regulatory
requirements, clearing and settlement of trades is conducted through a separate
clearing corporation-MCX-SX Clearing Corporation Limited (MCX-SX CCL).
MCX-SX commenced operations in Currency Futures in the Currency
Derivatives segment on October 7, 2008 under the regulatory framework of
SEBI and Reserve Bank of India (RBI). The Exchange commenced trading in
Currency Options on August 10, 2012. The Exchange received permissions to
deal in Interest Rate Derivatives, Equity, Futures and Options on Equity and
Wholesale Debt segments, vide SEBI’s letter dated July 10, 2012. The
Exchange further received permission to commence trading in these new
segments, vide SEBI’s letter dated December 19, 2012. The Exchange
commenced trading in the Equity segment on February 11, 2013.
Bombay Stock Exchange (BSE)
BSE is the oldest stock exchange in Asia. The extensiveness of the indigenous
equity broking industry in India led to the formation of the Native Share
Brokers Association in 1875, which later became Bombay Stock Exchange
Limited (BSE).
BSE is widely recognized due to its pivotal and pre-eminent role in the
development of the Indian capital market.

In 1995, the trading system transformed from open outcry system to an
online screen-based order-driven trading system.

26. 







The exchange opened up for foreign ownership (foreign institutional
investment).
Allowed Indian companies to raise capital from abroad through ADRs
and GDRs.
Expanded the product range (equities/derivatives/debt).
Introduced the book building process and brought in transparency in IPO
issuance.
T+2 settlement cycle (payments and settlements).
Depositories for share custody (dematerialization of shares).
Internet trading (e-broking).
Governance of the stock exchanges (demutualization and corporatization
of stock exchanges) and internet trading (e-broking).
BSE has a nation-wide reach with a presence in more than 450 cities and towns
of India. BSE has always been at par with the international standards. It is the
first exchange in India and the second in the world to obtain an ISO 9001:2000
certification. It is also the first exchange in the country and second in the world
to receive Information Security Management System Standard BS 7799-2-2002
certification for its BSE Online Trading System (BOLT).
National Stock Exchange (NSE)
NSE was recognised as a stock exchange in April 1993 under the Securities
Contracts (Regulation) Act. It commenced its operations in Wholesale Debt
Market in June 1994. The capital market segment commenced its operations in
November 1994, whereas the derivative segment started in 2000. NSE
introduced a fully automated trading system called NEAT (National Exchange
for Automated Trading) that operated on a strict price/time priority. This system
enabled efficient trade and the ease with which trade was done. NEAT had lent
considerable depth in the market by enabling large number of members all over
the country to trade simultaneously, narrowing the spreads significantly.
The derivatives trading on NSE commenced with S&P CNX Nifty Index futures
on June 12, 2000. The futures contract on NSE is based on S&P CNX Nifty
Index. The Futures and Options trading system of NSE, called NEAT-F&O
trading system, provides a fully automated screen based trading for S&P CNX
Nifty futures on a nationwide basis and an online monitoring and surveillance
mechanism. It supports an order-driven market and provides complete
transparency of trading operations.

27. International Exchanges
Due to increasing globalization, the development at macro and micro levels in
international markets is compulsorily incorporated in the performance of
domestic indices and individual stock performance, directly or indirectly.
Therefore, it is important to keep track of international financial markets for
better perspective and intelligent investment.
1. NASDAQ (National Association of Securities Dealers Automated
Quotations)
NASDAQ is an American stock exchange. It is an electronic screenbased equity securities trading market in the US. It was founded in 1971
by the National Association of Securities Dealers (NASD). However, it is
owned and operated by NASDAQ OMX group, the stock of which was
listed on its own stock exchange in 2002. The exchange is monitored by
the Securities and Exchange Commission (SEC), the regulatory authority
for the securities markets in the United States.
NASDAQ is the world leader in the arena of securities trading, with
3,900 companies (NASDAQ site) being listed. There are four major
indices of NASDAQ that are followed closely by the investor class,
internationally.
i.
NASDAQ Composite: It is an index of common stocks and similar
stocks like ADRs, tracking stocks and limited partnership interests
listed on the NASDAQ stock market. It is estimated that the total
components count of the Index is over 3,000 stocks and it includes
stocks of US and non-US companies, which makes it an
international index. It is highly followed in the US and is an
indicator of performance of technology and growth companies.
When launched in 1971, the index was set at a base value of 100
points. Over the years, it saw new highs; for instance, in July 1995,
it closed above 1,000-mark and in March 2000, it touched 5048.62.
The decline from this peak signalled the end of the dotcom stock
market bubble. The Index never reached the 2000 level afterwards.
It was trading at 1316.12 on November 20, 2008.

28. ii.
iii.
iv.
NASDAQ 100: It is an Index of 100 of the largest domestic and
international non-financial companies listed on NASDAQ. The
component companies’ weight in the index is based on their market
capitalization, with certain rules controlling the influence of the
largest components. The index doesn’t contain financial
companies. However, it includes the companies that are
incorporated outside the US. Both these aspects of NASDAQ 100
differentiate it from S&P 500 and Dow Jones Industrial Average
(DJIA). The index includes companies from the industrial,
technology, biotechnology, healthcare, transportation, media, and
service sectors.
Dow Jones Industrial Average (DJIA): DJIA was formed for the
first time by Charles Henry Dow. He formed a financial company
with Edward Jones in 1882, called Dow Jones & Co. In 1884, they
formed the first index including 11 stocks (two manufacturing
companies and nine railroad companies). Today, the index contains
30 blue-chip industrial companies operating in America. The Dow
Jones Industrial Average is calculated through the simple average,
i.e., the sum of the prices of all stocks divided by the number of
stocks (30).
S&P 500: The S&P 500 Index was introduced by McGraw Hill's
Standard and Poor's unit in 1957 to further improve tracking of
American stock market performance. In 1968, the US Department
of Commerce added S&P 500 to its index of leading economic
indicators. S&P 500 is intended to be consisting of the 500 largest
publically-traded companies in the US by market capitalization (in
contrast to the FORTUNE 500, which is the largest 500 companies
in terms of sales revenue). The S&P 500 Index comprises about
three-fourths of total American capitalization.
2. LSE (London Stock Exchange)
The London Stock Exchange was founded in 1801 with British as well as
overseas companies listed on the exchange. The LSE has four core areas:

29. i.
ii.
iii.
iv.
Equity markets: The LSE enables companies from around the
world to raise capital. There are four primary markets; Main
Market, Alternative Investment Market (AIM), Professional
Securities Market (PSM), and Specialist Fund Market (SFM).
Trading services: Highly active market for trading in a range of
securities, including UK and international equities, debt, covered
warrants, exchange-traded funds (ETFs), exchange-traded
commodities (ETCs), REITs, fixed interest, contracts for difference
(CFDs), and depositary receipts.
Market data information: The LSE provides real-time prices, news,
and other financial information to the global financial community.
Derivatives: A major contributor to derivatives business is EDX
London, created in 2003 to bring the cash, equity, and derivatives
markets closer together. It combines the strength and liquidity of
LSE and equity derivatives technology of NASDAQ OMX group.
The exchange offers a range of products in derivatives segment with
underlying from Russian, Nordic, and Baltic markets. Internationally, it
offers products with underlying from Kazakhstan, India, Egypt, and
Korea.
3. Frankfurt Stock Exchange
It is situated in Frankfurt, Germany. It is owned and operated by
Deutsche Börse. The Frankfurt Stock Exchange has over 90 percent of
turnover in the German market and a big share in the European market.
The exchange has a few well-known trading indices of the exchange,
such as DAX, DAXplus, CDAX, DivDAX, LDAX, MDAX, SDAX,
TecDAX, VDAX, and EuroStoxx 50.
DAX is a blue-chip stock market index consisting of the 30 major
German companies trading on the Frankfurt Stock Exchange. Prices are
taken from the electronic Xetra trading system of the Frankfurt Stock
Exchange.

30. REGULATORY AUTHORITY
There are four main legislations governing the securities market:
a. The SEBI Act, 1992 establishes SEBI to protect investors and develop
and regulate the securities market.
b. The Companies Act, 1956 sets out the code of conduct for the corporate
sector in relation to issue, allotment, and transfer of securities, and
disclosures to be made in public issues.
c. The Securities Contracts (Regulation) Act, 1956 provides for regulation
of transactions in securities through control over stock exchanges.
d. The Depositories Act, 1996 provides for electronic maintenance and
transfer of ownership of demat securities.
In India, the responsibility of regulating the securities market is shared by DCA
(the Department of Company Affairs), DEA (the Department of Economic
Affairs), RBI (the Reserve bank of India), and SEBI (the Securities and
Exchange Board of India).
The DCA is now called the ministry of company affairs, which is under the
ministry of finance. The ministry is primarily concerned with the administration
of the Companies Act, 1956, and other allied Acts and rules & regulations
framed there-under mainly for regulating the functioning of the corporate sector
in accordance with the law.
The ministry exercises supervision over the three professional bodies, namely
Institute of Chartered Accountants of India (ICAI), Institute of Company
Secretaries of India (ICSI), and the Institute of Cost and Works Accountants of
India (ICWAI), which are constituted under three separate Acts of Parliament
for the proper and orderly growth of professions of chartered accountants,
company secretaries, and cost accountants in the country.

31. SEBI protects the interests of investors in securities and promotes the
development of the securities market. The board helps in regulating the business
of stock exchanges and any other securities market. SEBI is also responsible for
registering and regulating the working of stock brokers, sub-brokers, share
transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue,
merchant bankers, underwriters, portfolio managers, investment advisers, and
such other intermediaries who may be associated with securities markets in any
manner.
The board registers the venture capitalists and collective investments like
mutual funds. SEBI helps in promoting and regulating self regulatory
organizations.
RBI is also known as the banker’s bank. The central bank has some very
important objectives and functions such as:
Objectives




Maintain price stability and ensure adequate flow of credit to productive
sectors.
Maintain public confidence in the system, protect depositors' interest, and
provide cost-effective banking services to the public.
Facilitate external trade and payment and promote orderly development
and maintenance of the foreign exchange market in India.
Give the public adequate quantity of supplies of currency notes and coins
in good quality.
Functions





Formulate implements and monitor the monetary policy.
Prescribe broad parameters of banking operations within which the
country's banking and financial system functions.
Manage the Foreign Exchange Management Act, 1999.
Issue new currency and coins and exchange/destroy currency and coins
not fit for circulation.
Perform a wide range of promotional functions to support national
objectives.

32. The DEA is the nodal agency of the Union government to formulate and
monitor the country's economic policies and programmes that have a bearing on
domestic and international aspects of economic management. Apart from
forming the Union Budget every year, it has other important functions like:
i.
ii.
iii.
Formulation and monitoring of macro-economic policies, including issues
relating to fiscal policy and public finance, inflation, public debt
management, and the functioning of capital market, including stock
exchanges. In this context, it looks at ways and means to raise internal
resources through taxation, market borrowings, and mobilization of small
savings.
Monitoring and raising of external resources through multilateral and
bilateral development assistance, sovereign borrowings abroad, foreign
investments, and monitoring foreign exchange resources, including
balance of payments.
Production of bank notes and coins of various denominations,
postal stationery, postal stamps, cadre management, career planning, and
training of the Indian Economic Service (IES).