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Capital market (blackbook)
Management Studies (K. J. Somaiya Institute of Management)
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Capital market (blackbook)
Management Studies (K. J. Somaiya Institute of Management)
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"A STUDY OF CAPITAL MARKET IN INDIA"
A PROJECT SUBMITTED TO UNIVERSITY OF MUMBAI FOR
PARTIAL COMPLETION OF THE DEGREE OF
BACHELOR OF MANAGEMENT
STUDIES UNDER THE FACULTY OF
COMMERCE (2021 - 2022)
SEMESTER VI
SUBMITTED BY-
AYUSHI PANCHAL
ROLLNO- 197
UNDER THE GUIDANCE
OF
DR. MEGHNA VYAS
S.K SOMAIYA DEGREE COLLEGE OF ARTS, SCIENCE
&COMMERCE
VIDYAVIHAR, MUMBAI, MAHARASHTRA, 400077
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ACKNOWLEDGEMENT
The success and final outcome of this project required a lot of guidance and
assistancefrom many people and I am extremely privileged to have got this all
along the completion of my project. All that I have done is only due to such
supervision and assistance and I would not forget to thank them.
I take this opportunity to thank the University of Mumbai for giving me a chance
to do this project.
I would also like to thank my Principal, Dr. Manali Londhe for providing the
necessary facilities required for completion of this project.
I am extremely thankful to our Course Coordinator, Dr. Meghana Vyas for
providing such a moral support and guidance.
I owe my deep gratitude to our Project Guide Dr Meghna Vyas who took keen
interest on our project work and guided us all along, till the completion of our
project work by providing all the necessary information.
I would also like to thank my parents without whose support this would not have
beenpossible.
Lastly, I would like to thank each and every person who directly or indirectly
helped me in the completion of the project especially my parents and peers who
supported methroughout my project.
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Executive summary
The purpose of choosing this topic was to understand the capital market of India in
detail, how it was before independence, who are the regulators, etc. The paper gives
detailed information about the capital market of India. Capital markets are where
savings and investments are channelled between suppliers—people or institutions
with capital to lend or invest—and those in need. Suppliers typically include banks
and investors while those who seek capital are businesses, governments, and
individuals. Capital markets are composed of primary and secondary markets. The
most common capital markets are the stock market and the bond market.
This paper discusses the various features, functions, types of capital market etc in
detail. The 1st
chapter of this project is about the meaning definition, various capital
market instruments covid 19 impacts on the market, etc. The 2nd
chapter shows the
research design, objectives, sampling method, data collection method, etc. In this
particular project I have collected primary data as well as secondary data.
With the help of the primary data, the depictions of pie chart and bar graphs give us
and idea about whether the respondents are aware about the capital market or not.
This research paper contains the records of the responses.
In the conclusion, people should be made more aware about the capital market and its
benefits. There should be awareness programs, webinars, seminar, etc to make people
more aware about the capital market.
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Index
Sr no topic Page no
1 Chapter 1 -
introduction
1-36
1.1 Meaning of
capital market
1
1.1.2 Definition of
capital market
1
1.1.3 Capital market 2
1.1.4 Features of
capital market
4
1.1.5 Functions of
capital market
4
1.1.6 Nature and
participants of
capital market
5
1.1.7 Capital market
instruments
6
1.1.8 Types of capital
market
13
1.2 Capital market in
India
20
1.2.1 Formation of
capital market in
India
22
1.2.2 History of Indian
capital market
22
1.2.3 Indian capital
market before
independence
23
1.2.4 Indian capital
market after
independence
23
1.2.5 Acts governing
the capital
market
25
1.2.6 Role of Indian
capital market
26
1.2.7 Role of foreign
investors in
Indian capital
market
29
1.2.8 Regulators of
Indian capital
market
31
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1.2.9 Importance of
capital market on
Indian economy
32
1.2.10 Impact of covid-
19 on Indian
capital market
35
2 Chapter 2-
Research
methodology
37-43
2.1 Meaning and
definition
37
2.2 Research
objectives
40
2.3 Research design 40
2.4 Data collection
method
42
2.5 Sampling 43
2.6 Statistical tools
used
43
3 Chapter 3 -
review of
literature
44-53
4 Chapter 4- data
analysis and
interpretation
54-74
5 Chapter 5-
conclusion
75-77
5.1 Findings 75
5.2 Suggestions 76
5.3 Conclusion 76
References 78
Webliography 79
appendix 80
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CHAPTER 1 – INTRODUCTION
1.1-Meaning of capital market-
Capital markets are financial markets for the buying and selling of long-term debt or
long-term securities having a maturity-period (age) of one year or more. These markets
channel the wealth of savers to those who can put it to long-term useful use, such as
companies or governments making long-term investments/capital spending. Financial
regulators such as the Securities and Exchange Board of India (SEBI), direct the capital
markets in their areas to protect investors against fraud among other duties.
1.1.2- Definitions of capital market-
Capital markets help channelise surplus funds from savers to institutions which then
invest them into productive use. Generally, this market trades mostly in long-term
securities.
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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 is defined by W.H Husband and J.C Dockerbay as “the capital market
is used to designate activities in long term credit, which is characterized mainly by
securities of investment type”
According to V.K Bhalla “capital market is defined as the mechanism which
channelizes savings into investments or productive use. Capital market allocates the
resources amongst alternative uses. It intermediates flow of savings of those who save
a part of their income from those who want to invest it into productive assets”
1.1.3- Capital market-
The capital market is the place where the financial are made in financial instruments
which result in either direct or indirect formation of the capital. The capital market
includes various financial institutions and operational mechanisms where the funds
from investments are pooled to meet the short term, medium term and long-term
requirements of the governments, corporate, business firms, individuals etc. Capital
market provides the venue for both the suppliers and receivers of the capital such that
a balance is attained among these diverse market participants. Capital market are the
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places where the outstanding securities are passed onto the investors. The investment
investments are independent of the individual savings capacity and investment time
period but the returns on the investments are dependent on these factors. There are
instruments where the present consumption is more in the yield bearing securities in
comparison with the future consumption. The composition of saving changes when held
less in the form of the unused money or fruitless assets, mainly because of the
availability of the diversified and liquid assets for investment for the users. Capital
market is crucial in supporting economic development through technical advancements.
The capital markets are liquid in nature and helps in funding the long-term capital-
intensive projects.
The major function of the capital market is that it assists the mobilization of the savings
of multiple individuals and pools into capital formation which is subsequently utilized
towards the economic development of the nation. The success of the capital market
depends on the utilizing of the pooled resources by the corporate sector for the
economic development and at the same time protects the interest and investments of
the individual investors in these corporate securities. An efficient capital market strikes
the balance and the required mechanism between the capital formation for the economic
activities and the protection of the investors. It may not be possible for the corporate
sector to raise the capital for their business activities if the interests of the investors are
not taken cared.
The major characteristics and functions of capital market include the factors like:
pooling of funds towards capital formation, provision of capital for the corporate
through procurement of equities, ensuring adequate liquidity to the investor while
selling the assets, adoption of pricing mechanism which improves the competence of
capital formation and allocation, enables the mechanism towards the valuation of the
securities, channelize the available funds through investments followed by
disinvestment and reinvestments, creates a mechanism for integration of financial
sectors and its financial instruments through long term, medium term and short-term
funds, provide the effective information for the participants in the market about the
avenues for investment, disinvestment and reinvestment of the funds, ensures that there
is operational efficiency through simplified procedures, reduced transaction costs,
reduced settlement times, and provides protection to the investors through investment
protection fund along with the trading of derivatives in the market.
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1.1.4- Features of capital market-
1-Link between savers and investment opportunities-
The capital market serves as a crucial link between the saving and investment process
as it transfers money from savers to entrepreneurial borrowers.
2-Deals in long term investment-
It helps the investors to invest in long-term investments.
3-Helps intermediaries-
While transferring shares and money from one investor to another, it takes help from
intermediaries like brokers, banks, etc. thus helping them in conducting their business.
4-Determinant of capital formation-
The capital market offers opportunities for those investors who have a surplus amount
of money and want to park their money In some type of investment and also take the
benefit of the power of compounding.
5-Government rules and regulations-
The capital markets operate under the rules and regulations of the government thus
making it a safe place to trade.
1.1.5-Functions of capital market-
While from a broader perspective, capital markets are viewed as market of financial
assets with long or infinite maturity, it actually plays a very important role in mobilizing
resources and allocating them to productive channels. So, it can be said that the process
of economic growth of a country is facilitated by the capital markets. The important
functions of capital market are discussed below.
1-Economic growth-
Capital markets help to accelerate the process of economic growth. It reflects the
general condition of the economy. The capital market helps in the proper allocation of
resources from the people who have surplus capital to the people who are in need of
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capital, so we can say that it helps in the expansion of industry and trade of both public
and private sectors leading to balanced economy in the country.
2-Promotes saving habits-
After the development of capital markets, the taxation system and the banking
institutions provide facilities and provisions to the investors to save more. In the
absence of capital markets, they might have invested in unproductive assets like land
or gold or might have indulged in unnecessary spending.
3-Stable and unsystematic security prices-
Apart from the mobilization of funds, capital markets help to stabilize the prices of
stocks. Reduction in speculative activities and providing capital to borrowers at a lower
interest rate help in the stabilization of the security prices.
4-Availability of funds-
Investments are made in capital markets on a continues basis. Both the buyers and
sellers interact and trade their capital and assets.
1.1.6- Nature and participants of capital market-
The nature of the capital market is wider. The capital market consists of a number of
individuals and institution. The government is also an important player in capital
market. The constituents of exchange, commercial banks, co-operative banks, savings
banks, insurance companies, investment trust and companies etc.
Individuals invest in these markets directly by investing in shares or debentures of
companies through bond issues of public sector units or through mutual funds.
Corporate who has more savings than their requirements for funds also are participants
in this market.
Capital Market Participants –
1. Individuals
2. Corporate
3. Government
4. Foreign countries
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5. Banks
6. Provident funds
7. Financial institutions
1.1.7- Capital market instruments-
Financial instruments that are used for raising capital resources in the capital market
are known as capital market instruments. The changes that are sweeping across the
Indian capital especially in the recent past are something phenomenal. It has been
experiencing metamorphic in the last decade, thanks to a host of measures of
liberalization, globalization and privatization that have been initiated by the
government.
Articulated changes have happened in the domain of modern arrangement, Licensing
approach, money related administrations industry, loan costs, and so on. The challenge
has gotten extraordinary and genuine in both mechanical division and money related
administrations industry. Because of these changes, the budgetary administrations
industry has come to present various instruments so as to encourage obtaining from
participants.
Capital Market comprise of Primary Capital Market and Secondary Capital Market
where the financial instruments are traded. Some of the significant capital market
instruments are listed below:
1-Equity Shares – Rights Shares, Bonus Shares, Blue chip Shares.
Equity shares are long-term financing sources for any company. These shares are issued
to the general public and are non-redeemable in nature. Investors in such shares the
right vote, share profits and claim assets of a company. The value in case of equity
shares can be expressed in various terms like par value, face value, book value and so
on.
Bonus Shares -
These types of equity shares are issued out of retained earnings of a business, wherein
the profits are distributed among investors in the form of an additional stake in a
company. Contrary to other types of equity instruments, bonus shares do not increase
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total market capitalisation value of a company. It just represents capitalisation of excess
funds generated from production.
Rights Shares -
These shares are issued by a company to premium investors at a discounted price as an
invitation to increase its stake in the respective business. A firm only sells shares to
rights for a stipulated time to raise the required finances to meet its expenditures
incurred.
2-Preference Shares-
Preference shares are a long-term source of finance for a company. They are neither
completely similar to equity nor equivalent to debt. The law treats them as shares but
they have elements of both equity shares and debt. For this reason, they are also called
‘hybrid financing instruments. These are also known as preferred stock, preferred
shares, or only preferred in a different part of the world. There are various types of
preference shares used as a source of finance.
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3-Debentures –
Debenture is used to issue the loan by government and companies. The loan is issued
at the fixed interest depending upon the reputation of the companies. When companies
need to borrow some money to expand themselves, they take the help of debentures.
There are various types of debentures that company can issue
1-Secured Debentures-
These are debentures that are secured against an asset of the company. This means a
charge is created on such an asset in case of default in repayment of such debentures.
So, in case, the company does not have enough funds to repay such debentures, the said
asset will be sold to pay such a loan. The charge may be fixed, i.e., against a specific
asset or floating, i.e. against all assets of the firm.
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2. Unsecured Debentures-
These are not secured by any charge against the assets of the company, neither fixed
nor floating. Normally such kinds of debentures are not issued by companies in India.
3-Redeemable Debentures-
These debentures are payable at the expiry of their term. Which means at the end of a
specified period they are payable, either in the lump sum or in instalments over a time
period. Such debentures can be redeemable at par, premium or at a discount.
4. Irredeemable Debentures-
Such debentures are perpetual in nature. There is no fixed date at which they become
payable. They are redeemable when the company goes into the liquidation process. Or
they can be redeemable after an unspecified long-time interval.
5- Fully Convertible Debentures-
These shares can be converted to equity shares at the option of the debenture holder.
So, if he wishes then after a specified time interval all his shares will be converted to
equity shares and he will become a shareholder.
6- Partly Convertible Debentures-
Here the holders of such debentures are given the option to partially convert their
debentures to shares. If he opts for the conversion, he will be both a creditor and a
shareholder of the company.
7-Non-Convertible Debentures-
As the name suggests such debentures do not have an option to be converted to shares
or any kind of equity. These debentures will remain so till their maturity, no conversion
will take place. These are the most common type of debentures
4-Derivatives –
Index Futures, Index Options, Stock Futures, Stock Options, Currency Futures,
Currency Options, Commodity Futures, Commodity Options.
A derivative is a financial instrument whose characteristics and value depend upon the
characteristics and value of some underlying asset typically commodity, bond, equity,
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currency, index, event etc. Advanced investors sometimes purchase or sell derivatives
to manage the risk associated with the underlying security, to protect against
fluctuations in value, or to profit from periods of inactivity or decline. Derivatives are
often leveraged, such that a small movement in the underlying value can cause a large
difference in the value of the derivative.
Derivatives are usually broadly categorised by:
• The relationship between the underlying and the derivative (e.g., forward, option,
swap)
• The type of underlying (e.g., equity derivatives, foreign exchange derivatives and
credit derivatives)
• The market in which they trade (e.g., exchange traded or over-the-counter)
5- Mutual funds-
Mutual funds are financial intermediaries, which collect the savings of small investors
and invest them in a diversified portfolio of securities to minimise risk and maximise
returns for their participants. Mutual funds have given a major fillip to the capital
market - both primary as well as secondary. The units of mutual funds, in turn, are also
tradable securities. Their price is determined by their net asset value (NAV) which is
declared periodically.
The operations of the private mutual funds are regulated by SEBI with regard to their
registration, operations, administration and issue as well as trading.
There are various types of mutual funds, depending on whether they are open ended or
close ended and what their end use of funds is. An open-ended fund provides for easy
liquidity and is a perennial fund, as its very name suggests. A closed-ended fund has a
stipulated maturity period, generally five years. A growth fund has a higher percentage
of its corpus invested in equity than in fixed income securities, hence the chances of
capital appreciation (growth) are higher. In growth funds, the dividend accrued, if any,
is reinvested in the fund for the capital appreciation of investments made by the
investor.
An Income fund on the other hand invests a larger portion of its corpus in fixed income
securities in order to pay out a portion of its earnings to the investor at regular intervals.
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A balanced fund invests equally in fixed income and equity in order to earn a minimum
return to the investors. Some mutual funds are limited to a particular industry; others
invest exclusively in certain kinds of short-term instruments like money market or
government securities. These are called money market funds or liquid funds. To prevent
processes like dividend stripping or to ensure that the funds are available to the
managers for a minimum period so that they can be deployed to at least cover the
administrative costs of the asset management company, mutual funds prescribe an entry
load or an exit load for the investors. If investors want to withdraw their investments
earlier than the stipulated period, an exit load is chargeable. To prevent profligacy,
SEBI has prescribed the maximum that can be charged to the investors by the fund
managers
6- Bonds – Convertible Bonds, Non-Convertible Bonds, Redeemable Bonds,
Irredeemable Bonds, Fully Convertible Bonds, Partially Convertible Bonds.
Bonds are issued by organizations generally for a period of more than one year to raise
money by borrowing.
Organizations in order to raise capital issue bond to investors which is nothing but a
financial contract, where the organization promises to pay the principal amount and
interest (in the form of coupons) to the holder of the bond after a certain date. (Also
called maturity date). Some Bonds do not pay interest to the investors; however, it is
mandatory for the issuers to pay the principal amount to the investors.
Types of Bonds
Following are the types of bonds:
1-Fixed Rate Bonds-
In Fixed Rate Bonds, the interest remains fixed throughout the tenure of the bond.
Owing to a constant interest rate, fixed rate bonds are resistant to changes and
fluctuations in the market.
2-Floating Rate Bonds-
Floating rate bonds have a fluctuating interest rate (coupons) as per the current market
reference rate.
3-Zero Interest Rate Bonds-
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Zero Interest Rate Bonds do not pay any regular interest to the investors. In such types
of bonds, issuers only pay the principal amount to the bond holders.
4-Inflation Linked Bonds-
Bonds linked to inflation are called inflation linked bonds. The interest rate of Inflation
linked bonds is generally lower than fixed rate bonds.
5-Perpetual Bonds-
Bonds with no maturity dates are called perpetual bonds. Holders of perpetual bonds
enjoy interest throughout.
6-Subordinated Bonds-
Bonds which are given less priority as compared to other bonds of the company in cases
of a close down are called subordinated bonds. In cases of liquidation, subordinated
bonds are given less importance as compared to senior bonds which are paid first.
7-Bearer Bonds-
Bearer Bonds do not carry the name of the bond holder and anyone who possesses the
bond certificate can claim the amount. If the bond certificate gets stolen or misplaced
by the bond holder, anyone else with the paper can claim the bond amount.
8-War Bonds-
War Bonds are issued by any government to raise funds in cases of war.
9-Serial Bonds-
Bonds maturing over a period of time in instalments are called serial bonds.
10-Climate Bonds-
Climate Bonds are issued by any government to raise funds when the country concerned
faces any adverse changes in climatic conditions.
7- Euro Convertible Bonds, Euro Equities-
Euro-convertible Bonds (ECBs) are bonds that are issued and sold outside the home
country of the currency. Hence, an ECB issued by an Indian company refers to bonds
issued in any country other than India.
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Euro equity is newly-issued stock that is simultaneously sold to investors in more than
one national market, rather than just in the country where the company is domiciled, as
part of an initial public offering (IPO).
8- American Depository Receipt, Global Depository Receipt, European Depository
Receipt, International Depository-
A negotiable certificate held in the bank of one country (depository) representing a
specific number of shares of a stock traded on an exchange of another country. GDR
facilitate trade of shares, and are commonly used to invest in companies from
developing or emerging markets. GDR prices are often close to values of related shares,
but they are traded and settled independently of the underlying share.
Listing on a foreign stock exchange requires compliance with the policies of those stock
exchanges. Many times, the policies of the foreign exchanges are much more stringent
than the policies of domestic stock exchange. However, a company may get listed on
these stock exchanges indirectly – using ADRs and GDRs.
If the depository receipt is traded in the United States of America (USA), it is called an
American Depository Receipt, or an ADR. If the depository receipt is traded in a
country other than USA, it is called a Global Depository Receipt, or a GDR.
But the ADRs and GDRs are an excellent means of investment for NRIs and foreign
nationals wanting to invest in India. By buying these, they can invest directly in Indian
companies without going through the hassle of understanding the rules and working of
the Indian financial market – since ADRs and GDRs are traded like any other stock,
NRIs and foreigners can buy these using their regular equity trading accounts! Ex-
HDFC Bank, ICICI Bank, Infosys have issued both ADR and GDR
1.1.8- Types of capital market-
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1-Primary Market-
The primary market is also known as the new issues market. It deals with new securities
being issued for the first time. The functions of Primary market is to facilitate the
transfer of investible funds savers to entrepreneurs seeking to establish new enterprise
or to expand existing ones through the issue of securities for the first time. The investors
in this market are banks, financial institutions, insurance companies, mutual funds and
individuals. Methods of floatation new issue in the primary market are offer through
Prospectus, Offer for Sale, Private Placement, Right issue etc.
Companies issue securities from time to time to raise funds in order to meet their
financial requirements for modernization, expansions and diversification programs.
These securities are issued directly to the investors (both individuals as well as
institutional) through the mechanism called primary market or new issue market. The
primary market refers to the set-up, which helps the industry to raise the funds by
issuing different types of securities. This set-up consists of the type of securities
institutions framework. available, the primary financial regulatory market and the
discharges the important function of transfer of savings especially of the individuals to
the companies, the mutual funds, and the public sector undertakings. Individuals or
other investors with surplus money invest their savings in exchange for shares,
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debentures and other securities. In the primary market the new IPO issue of securities
are presented in the form of public issues, right issues or private placement.
Firms that seek financing, exchange their financial liabilities, such as shares and
debentures, in return for the money provided by the financial intermediaries or the
investors directly. These firms then convert these funds into real capital such as plant
and machinery etc. The structure of the capital market where the firms exchange their
financial liabilities for long-term financing is called the primary market. The primary
market has two distinguishing features:
1- It is the segment of the capital market where capital formation occurs; and
2-In order to obtain required financing, new issues of shares, debentures securities are
sold in the primary market. Subsequent trading in these securities occurs in other
segment of the capital market, known as secondary market.
The securities that are often resorted for raising funds are equity shares, preference
shares, bonds, debentures, warrants, cumulative convertible preference shares, zero
interest convertible debentures, etc. Public issues of securities may be made through:
1-Prospectus,
2- Offer for sale,
3-Book building process and
4- Private placement
The investors directly subscribe the securities offered to public through a prospectus.
The company through different media generally makes wide publicity about the public
offer.
Activities in the Primary Market
1-Appointment of merchant bankers
2-Collection of money.
3- Pricing of securities being issued
4- Minimum subscription
5- Communication/ Marketing of the issue
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6- Listing on the stock exchange(s) » Information on credit risk
7- Allotment of securities in demat/ physical mode
8-Making public issues
9- Record keeping
Functions of Primary Market
1-Organization- Deals with the origin of the new issue. The proposal is analysed in
terms of the nature of the security, the size of the issued timings of the issue and
flotation method of the issue.
2-Underwriting -Underwriting is a kind of guarantee undertaken by an institution or
firm of brokers ensuring the marketability of an issue. it is a method whereby the
guarantor makes a promise to the stock issuing company that he would purchase a
certain specific number of shares in the event of their not being invested by the public.
3-Distribution: The third function is that of distribution of shares. Distribution means
the function of sale of shares and debentures to the investors. This is performed by
brokers and agents. They maintain regular lists of clients and directly contact them for
purchase and sale of securities.
Role of Primary Market
1-Capital formation It provides attractive issue to the potential investors and with this
company can raise capital at lower costs.
2-Liquidity - As the securities issued in primary market can be immediately sold in
secondary market the rate of liquidity is higher.
3-Diversification - Many financial intermediaries invest i there is less risk if there is
failure primary market; therefore. investment as the company does not depend on a
single investor. The diversification of investment reduces the overall risk.
4-Reduction in cost - Prospectus containing all details about the securities are given to
the investors hence reducing the cost is searching and assessing the individual
securities.
Features of Primary Market.
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1-It is the new issue market for the new long-term capital.
2- Here company issues the securities directly to the investors and not through any
intermediaries.
3- On receiving the money from the new issues, the company will issue the security
certificates to the investors.
4-The amount obtained by the company after the new issues are utilized for expansion
of the present business or for setting up new ventures.
5- External finance for longer term such as loans from financial institutions is not
included in primary market. There is an option called 'going public' in which the
borrowers in new issue market raise capital for converting private capital into public
capital.
Types of issues
Primary market Issues can be classified into four types.
1- Initial Public Offer (IPO)-
When an unlisted company makes either a fresh issue of securities or an offer for sale
of its existing securities or both, for the first time to the public, the issue is called as an
Initial Public Offer.
2-Follow on Public Offer (FPO):
When an already listed company makes either a fresh issue of securities to the public
or an offer for sale of existing shares to the public, through an offer document, it is
referred to as Follow on Offer (FPO).
3-Rights Issue-
When a listed company proposes to issue fresh securities to its existing shareholders,
as on a record date, it is called as a rights issue. The rights are normally offered in a
particular ratio to the number of securities held prior to the issue. This route is best
suited for companies who would like to raise capital without diluting stake of its
existing shareholders.
4-A Preferential issue-
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A Preferential Issue is an issue of shares or of convertible securities by listed.
companies to a select group of persons under Section 81 of the Companies Act, 1956,
that is neither a rights issue nor a public issue. This is a faster way for a company to
raise equity capital. The issuer company has to comply with the Companies Act and the
requirements contained in the chapter, pertaining to preferential allotment in SEBI
guidelines, which inter alia include pricing, disclosures in notice etc.
2-Secondary Market-
The secondary market is also known as the stock market or stock exchange. It is a
market for the purchase and sale of existing securities. It helps existing investors to
disinvest and fresh investors to enter the market. It also provides liquidity and
marketability to existing securities.
Secondary market refers to the network/system for the subsequent sale and purchase
of securities. An investor can apply and get allotted a specified number of securities by
the issuing company in the primary market. However, once allotted the securities can
thereafter be sold and purchased in the secondary market only. An investor who wants
to purchase the securities can buy these securities in the secondary market. The
secondary market is market for subsequent sale/purchase and trading in the securities.
A security emerges or takes birth in the primary market but its subsequent movements
take place in secondary market. The secondary market consists of that portion of the
capital market where the previously issued securities are transacted. The firms do not
obtain any new financing from secondary market. The secondary market provides the
life-blood to any financial system in general, and to the capital market in particular.
The secondary market is represented by the stock exchanges in any capital market. The
stock exchanges provide an organized market place for the investors to trade in the
securities. This may be the most important function of stock exchanges. The stock
exchanges. theoretically speaking, is a perfectly competitive market, as a large number
of sellers and buyers participate in it and the information regarding the securities is
publicly available to all the investors. A stock exchange permits the security prices to
be determined by the competitive forces. They are not set by negotiations off the floor,
where one party might have a bargaining advantage. The bidding process flows from
the demand and supply underlying each security. This means that the specific price of
a security is determined, more or less, in the manner of an auction. The stock exchanges
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provide market in which the members of the stock exchanges (the share brokers) and
the investors participate to ensure liquidity to the latter.
In India, the secondary market, represented by the stock exchanges network, is more
than 100 years old when in 1875, the first stock exchange started operations in Mumbai.
Gradually, stock exchanges at other places have also been established and at present,
there are 23 stock exchanges operating in India. The secondary market in India got a
boost when. the Over-the-Counter Exchange of India (OTCEI) and the National Stock
Exchange (NSE) were established. Out of the 23 stock exchanges, 20 stock exchanges
are operating at Mumbai (BSE), Kolkata, Chennai, Ahmadabad, Delhi, and Indore.
Bangalore, Hyderabad, Cochin, Kanpur, Pune, Ludhiana, Guwahati, Mangalore, Patna,
Jaipur, Bhubaneswar, Rajkot, Vadodara and Coimbatore. Besides, there is one ICSE
established by 14 Regional Stock Exchanges. It may be noted that out of 23 stock
exchanges, only 2, i.e., the NSE and the Over-the-Counter Exchange of India (OTCEI)
have been established by the All-India Financial Institutions while other stock
exchanges are operating as associations or limited companies. In order to protect and
safeguard the interest of the investors, the operations, functioning and working of the
stock exchanges and their members (i.e., share brokers) are supervised and regulated
by the Securities Contracts (Regulations) Act, 1956 and the SEBI Act, 1992.
Activities in the Secondary Market
1- Trading of securities
2- Risk management
3-Clearing and settlement of trades
4- Delivery of securities and funds
Importance of Secondary Market-
1-Providing liquidity and marketability to existing securities
2- Pricing of securities
3-Safety of transaction
4-Contribution to economic growth
5- Providing scope for speculation
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Role of Secondary Market
For the general investor, the secondary market provides an efficient platform for trading
of his securities. For the management of the company, Secondary equity markets serve
as a monitoring and control conduit by facilitating value-enhancing control activities,
enabling implementation of incentive-based management contracts, and aggregating
information (via price discovery) that guides management decisions.
Products in secondary markets
1-Equity Shares
Sometimes you'll hear a dealer market referred to as an over-the-counter (OTC) market.
The term originally meant a relatively unorganized system where trading did not occur
at a physical place, as we described above, but rather through dealer networks. The term
was most likely derived from the off-Wall Street trading that boomed during the great
bull market of the 1920s, in which shares were sold "over-the-counter" in stock shops.
In other words, the stocks were not listed on a stock exchange - they were "unlisted".
2- Third and Fourth Markets-
You might also hear the terms "third" and "fourth markets". These don't concern.
individual investors because they involve significant volumes of shares to be transacted
per trade. These markets deal with transactions between broker-dealers and large
institutions through over-the-counter electronic networks. The third market comprises
OTC transactions. between broker-dealers and large institutions. The fourth market is
made up of transactions that take place between large institutions. The main reason
these third and fourth market transactions occur is to avoid placing these orders through
the main exchange, which could greatly affect the price of the security. Because access
to the third and fourth markets is limited, their activities have little effect on the average
investor.
1.2- Capital market in India-
The capital markets are the avenues for corporate to raise funds to meet their medium-
and long-term financial requirements. The funds are required for both the public and
private manufacturing companies, trading organisations, central and state governments
to meet them financial long term as well as medium term requirements. The
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significance of the capital markets is self-evident particularly in the developing
countries like India.
An efficient capital market is the barometer of the economic performance of any
country. The developing economy like India, the financial institutions and
intermediaries are vital in pooling the savings from the investors which are in turn
channelized into productive investments. Investor confidence is significant for the
overall development of the market as well as the economy of the country. Capital
markets have a significant role in the economic development of the country along with
the strengthening of the financial system. Among the emerging markets across the
world, India had its own image and bright focus on it. Indian stock exchanges were in
existence for over a century but their presence was felt in the late70s and early 80s,
where their role of channelizing the mobilised savings into productive investments were
undertaken. Government had taken several initiatives and reforms were implemented
from time to time such that the overall financial sector and capital market in particular
had undergone several changes and acquired greater depth which is vital for the
sustained growth of the economy. With the implementation of the economic reforms,
by 90sthe capital markets had witnessed considerable growth along with the
identification as the important source for capital formation and mobilisation.
Some of the significant statistics of the capital markets are depicted for a period of time
where it was observed that in 1972, the banking sector received banking sector received
63% while capital market received 37% of the household savings; while in 1996 the
banking sector received 47% while capital market received 53% of household savings;
and in 2017 the banking sector received 34% while capital market received 64% of the
household savings. This indicates that there is a continuous shift of the investments
from the traditional banking system to capital markets. Over the period of time along
with the infusion of the household savings into the capital markets the foreign investors
are also investing in the Indian capital markets thereby increasing the trade volumes in
the stock exchanges. With the implementation of the advanced technologies in the
operations of the capital markets, the environment had become user friendly for the
investors and conducive for performing the activities which in turn helped the markets
to grow in terms of resource mobilizations, market capitalizations, stock exchanges
which are listed for performing the activities, investor base which helped in improved
volumes traded in the market.
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The important components of the Indian Capital Markets are the Fund Raisers, Fund
Providers, Financial Intermediaries, Organizations and Market Regulators. Fund
Providers are the one who invest in Capital markets through financial instruments.
Retail investors, Domestic Institutional Investors, Foreign Institutional Investors, and
Foreign Investors are those who invest in the capital markets through subscription of
primary issues, trading in secondary market, mutual funds, ADRs, GDRs, venture
capital funds, commodities, currency trading etc. Fund Raisers are the one who are in
need of funds to meet their medium- and long-term financial requirements. They raise
the desired funds from both the domestic as well as foreign sources. The fund raisers
include the public and private firms, trading organizations and also include the central
and state governments. Organizations are the one where the financial activities take
place. They include the primary stock exchanges like Bombay Stock Exchange,
National Stock Exchange along with regional stock exchanges. Besides them there is
Multiple Commodities Exchange of India Limited, two depositories namely National
Securities Depository Limited and Central Securities Depository Limited. The
participants in the organizations are termed as Intermediaries who act as service
providers in the capital markets. Some of the intermediaries include the stock brokers,
merchant bankers, sub-brokers, depository participants, venture capitalists, mutual
funds agents, under-writers, transfer agents, portfolio managers, registrars, FII sub
accounts, custodians etc. Market Regulators are the ones who regulate the activities
undertaken in the market by the various participants and organizations. Some of the
market regulators are the Securities and Exchange Board of India (SEBI), Insurance
Regulatory and Development Authority (IRDA), Reserve Bank of India (RBI),
Department of Company Affairs (DCA).
1.2.1- Formation of capital market in India-
The formal regulation of India's capital market can thus be said to have begun in 1992,
when a four-year-old regulatory authority, the Securities and Exchange Board of India
(SEBI), was empowered by statute to regulate market intermediaries.
1.2.2-History of Indian capital market-
Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200
years ago. The earliest records of security dealings in India are pitiful and obscure. The
East India Company was the dominant institution in those days and business in its loan
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securities used to be transacted towards the close of the eighteenth century. The history
of the Indian capital markets and the stock market, in particular can be traced back to
1861 when the American Civil War began. The opening of the Suez Canal during the
1860s led to a tremendous increase in Exports to the United Kingdom and United States,
several companies were formed during this period and many banks came to the fore to
handle the finances relating to these trades. With many of these registered 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. Business was essentially confined to company owners and brokers,
with very little interest evinced by the general public. There had been much fluctuation
in the stock market on account of the American war and the battles in Europe.
1.2.3- Indian capital market before independence-
The Indian capital market was not properly developed before Independence. The
growth of the industrial securities market was very much hampered since there were
very few companies and the number of securities traded in the stock exchanges was still
smaller. Most of the British enterprises in India looked to the London capital market
for funds than to the Indian capital market. A large part of the capital market consisted
of the gilt-edged marker for government and semi-government securities.
1.2.4- Indian capital market after independence-
Since Independence and particularly after 1951, the Indian capital market has been
broadening significantly and the volume of saving and investment has shown steady
improvement. All types of encouragement and tax relief exist in the country to promote
savings. Besides, many steps have been taken to protect the interests of investors. A
very important indicator of the growth of the capital market is the growth of joint stock
companies or corporate enterprises. In 1951 there were about 28,500 companies both
public limited and private limited companies with a paid-up capital of Rs. 775 crores.
In the 1950s, Century Textiles, Tata Steel, Bombay Dyeing, National Rayon, and
Kohinoor Mills were the favourite scrips of speculators. As speculation became
rampant, the stock market came to know as the satta bazaar. 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
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after the Indian Contract Act 1872, a basic law to be followed by security markets in
India. To regulate the issue of share prices, Controller of Capital Issues Act (CCI) was
passed in 1947.
In the 1960-70s was characterized by was and droughts in the country with led to
bearish trends. These trends were aggravated on forward trading its call badla,
technically called ‘contracts for clearing’. Financial institutions such as LIC and GIC
helped revive the sentiment by emerging as the most important group of investors. The
markets have witnessed several golden times too. Retail investors began participating
in the stock markets in a small way with the dilution of the FERA in 1978.
Multinational companies, with operations in India, were forced to reduce foreign
shareholding to below a certain percentage, which led to a compulsory sale of shares or
issuance of fresh stock. Indian investors, who applied for these shares, encountered a
real lottery because those were the days when the CCI decided the price at which the
shares could be issued. There was no free pricing and their formula was very
conservative.
In the 1980s emerged an explosive growth of the securities market in India, with
millions of investors suddenly discovering lucrative opportunities. Many investors
come in to the stock market. The next big boom and mass participation by retail
investors happened in 1980, with the entry of Mr Dhirubhai Ambani. Dhirubhai can be
said to be the father of modern capital markets. The Reliance public issue and
subsequent issues on various Reliance companies generated huge interest. The general
public was so unfamiliar with share certificates that Dhirubhai is rumoured to have
distributed them to educate people.
Mr. V.P. Singh’s fiscal budget in 1984 was path breaking for it started the era of
liberalization. The removal of estate duty and reduction of taxes led to a swell in the
new issue market and there was a deluge of companies in 1985. Dr Manmohan Singh
as Finance Minister came with a reform agenda in 1991. Liberalization
and globalization were the new terms coined and marketed during this decade. The mid-
1990s saw a rise in leasing company shares, and hundreds of companies, mainly listed
in Gujarat, and got listed in the BSE. The 1991-92 securities scam revealed the
inadequacies of and inefficiencies in the financial system. It was the scam which
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prompted a reform of the equity market. The Indian stock market has change in terms
of technology and market price.
The 2000s saw the emergence of Ketan Parekh and the information; communication
and entertainment companies came into the limelight. This period also coincided with
the dotcom bubble in the US, with software companies being the most favoured stocks.
There was a meltdown in software stock in early 2000. Mr. P Chidambaram continued
the liberalization and reform process, opening up of the companies, lifting taxes on
long-term gains and introducing short-term turnover tax. The markets have recovered
since then and we have witnessed a sustained rally that has taken the index over 21000
during the year 2008.
This history shows us that retail investors are yet to play a substantial role in the market
as long-term investors. Retail participation in India is very limited considering the
overall savings of households. Investors who hold shares in limited companies and
mutual fund units are about 20-30 million. Those who participated in secondary markets
are 2-3 million. Capital markets will change completely if they grow beyond the cities
and stock exchange centres reach the Indian villages. Both SEBI and retail participants
should be active in spreading market wisdom and empowering investors in planning
their finances and understanding the markets.
It has been a drastic long journey for the Indian capital market. Recent time’s capital
market is performed very well, fairly integrated, mature, more globally. The Indian
capital market is one of the best in the world in terms of technology. There are many
businesses news channels, newspaper, magazines, are issued in India. Online trading is
become a global phenomenon. Indian capital market would be an integrated with
international market.
1.2.5-Acts governing the capital market-
1-The Depositories Act,1996-
The Act regulates the depositories in Securities. The primary objective of this Act is to
ensure free transferability of securities with speed, accuracy and security. The Act eases
the ownership of transferability of ownership from one person to another in a
convenient way. It has made the securities freely transferable in case of Public limited
companies along with the securities.
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2-Securities Contract (Regulation) Act, 1956-
The regulatory Act deals in all types of issues related to Stock trading. The Act aims
at smooth functioning of the stock exchanges. It prevents any kind of defective
transactions. It especially deals in listing of stock exchanges and contracts in securities.
3-Security and Exchange Board of India Act,1992-
This Act provides the statutory powers to the SEBI organisation. The governing body
regulates the market in a multifarious manner by protecting the interest of the
shareholders, preventing any kind of malpractices in the market and promoting the
development of the Securities Market. The Act provides wide powers and scope to the
SEBI in order to effectively and efficiently run the capital market.
1.2.6- Role of Indian capital market-
Capital market plays an extremely important role in promoting and sustaining the
growth of an economy. It is an important and efficient conduit to channel and mobilize
funds to enterprises, and provide an effective source of investment in the economy. It
plays a critical role in mobilizing savings for investment in productive assets, with a
view to enhancing a country’s long-term growth prospects. It thus acts as a major
catalyst in transforming the economy into a more efficient, innovative and competitive
marketplace within the global arena.
Capital markets play a vital role in Indian economy, the growth of capital markets will
be helpful in raising the per-capita income of the individuals, decrease the levels of un-
employment, and thus reducing the number of people who lie below the poverty line.
With the increasing awareness in the people, they start investing in capital markets with
long-term orientations, which would provide capital inflows to the sectors requiring
financial assistance.
1-Capital arrangement-
The capital market promotes capital formation in the country. Rate of capital formation
depends upon savings in the country. Though the banks mobilize savings, they are not
adequate to match the requirements of the industrial sector. The capital market
mobilizes savings of households and of the industrial concern. Such savings are then
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invested for productive purposes. Thus, savings and investment lead to capital
arrangement in country.
2-Economic growth-
Capital market smooths the progress of the growth of the industrial sector as well as
other sectors of the economy. The main purpose of the capital market is to transfer
resources from masses to the industrial sector. The capital market makes it possible to
lend funds to various projects, both in the private as well as public sector.
3-Development of backward areas-
The capital markets provide funds for the projects in backward areas. This facilitates
the economic development of backward areas.
4-Generates employment-
Capital market generates employment in the country
i) Direct employment in the capital markets such as stock markets, financial
institutions etc. and
ii) ii) Indirect employment in all sectors of the economy, because of the funds
provided for developmental projects.
5-Long term capital to industrial sector-
The capital market provides a stable long-term capital for the companies. Once, the
funds are collected through issues, the money remains with the company. The company
is left free with the funds while investors exchange securities among themselves.
6-Generation of foreign capital-
The capital market makes possible to generate foreign capital. Indian firms are able to
generate capital from overseas markets by way of bonds and other securities. Such
foreign exchange funds are vital for the economic development of the nation.
7-Developing role of financial institutions-
The various agencies of capital market such as industrial financial corporation of India
(IFCI), state finance corporations (SFC), industrial development bank of India (IDBI),
industrial credit and investment corporation of India (ICICI), unit trust of India
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(UTI), life insurance corporation of India (LIC), etc. there have been rendering useful
services to the growth of industries. They have been financing, promoting and
underwriting the functions of the capital market.
8-Investment opportunities-
Capital markets provide excellent investment opportunities to the members of the
public. The public can have alternative source of investment i.e. In bonds, shares and
debentures etc.
The capital market plays very important role in Indian financial system as follow:
1. To mobilize long-term savings to finance long term investments.
2. To inspirations broader ownership of productive assets.
3. To improve the efficiency of capital allocation through a competitive pricing
mechanism.
4. To provide liquidity with mechanism enabling the investor to see financial
assets.
5. To make lower the costs of transactions and information.
6. To make bridge between investors and companies.
7. To make quick valuation of financial instruments both equity and debt.
8. To security against market risk or price risk trough derivative trading and
default risk through investment protection fund.
9. To provide operational efficiency.
10. To direct the flow of funds into efficient channels through investment,
disinvestment, and reinvestment.
11. To make integration between financial sectors and non-financial sectors, long
term fund and short-term fund.
12. To give opportunities to risk taker in term of equity and return taker in term of
debt.
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Thus, a capital market serves as an important link between those who save and those
who aspire to invest their savings.
1.2.7- Role of foreign investors in Indian capital market-
Foreign Institutional Investor is an investor or an investment fund that does financial
activities in countries other than the one in which it is registered. These are large type
of investors which include Hedge Funds, Sovereign Wealth Funds, Pension Funds,
Foreign Mutual Funds, Insurance Companies, University Funds, Asset Management
Companies, Trusts, Mutual Funds, and Endowments etc. FIIs take financial market
position in other countries capital market on behalf of native country where they are
registered. There are other organisations like the banking corporations, large corporate
buyers who invest in other countries capital market. FIIs are the outside companies
investing in the Indian financial markets and these institutions are interested in the
developing economies which provide higher rate of returns than the matured markets.
These types of investors are commonly found in India and the term FIIs is popularly
used in India and these institutions are permitted to participate in the market after being
registered under the Securities and Exchange Board of India.
Indian economy with vigorous growth is attracting foreign investments to surmount
trade deficit, current account deficit, develop infrastructure, enhance technological
advancements, promote innovations, and generate employment opportunities which
will promote economic development. The government had designed policies which are
important for attracting the foreign investments for the development of the nation.
Foreign Direct Investments are either positively or negatively affected due to the
foreign investment policies, trade barriers towards the contribution of the economy and
state of the GDP in the country. FDI are vital in the capital formation and in turn
enhance the employment opportunities, innovations, skills, technical assistance for the
company to expertise in their field. FDIs are permitted to invest in the company and
control its operations and influence the business activities while the FIIs are confined
to the stock exchange operations. FDI promotes the gathering of the capital along with
the infusion of the required essentials for the smooth operations of the business along
with the creation of employment opportunities for the skilled in the country. Foreign
investments are attracted by providing concessions such that these are invested in the
creation and development of infrastructure such as roads, ports, telecommunications,
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power etc. Some of the other areas where the foreign investments improve the economic
development such as: reduction of inflation, availability of economic and social
overheads, helpful in export promotion, supply of food grains, increase in employment,
availability of capital goods, availability of modern technology, availability of risk
capital, proper exploitation of natural resources.
Effectively managed and regulated capital markets are attractive destinations of Foreign
Institutional/Portfolio Investors (FII/FPI), and these foreign investors are the biggest
drivers of Indian capital market with over Rs. 12.51 trillion being invested in the market
between 2002 and 2018. In the financial year 2017-18, the market capitalisation of the
BSE listed companies had reached Rs. 142.25 trillion. Financial activities of FIIs are
regulated by SEBI and the limitations on the investments are monitored by RBI.
Foreign investors are permitted to invest in the Portfolio Investment Scheme (PIS) as
part of participation in the primary and secondary capital market. There are certain
regulations levied on the investments such as ceiling of investment up to 20% of the
paid-up capital in public sector banks and 24% in other companies. RBI is equipped
with the powers to monitor the ceilings levels of FIIs investment by marking a cut-off
point at 2% below the maximum permissible investment levels. Caution is flagged by
the regulator to the company before accepting the final 2% of the remaining amount to
be invested. There are chances for the FIIs to increase the stake above permissible levels
when the board of the investment receiving company passes a special resolution to
receive the additional investments.
The recent surge in the Indian capital market is mainly due to the global liquidity, in
addition to the low interest rates enabling the foreign investors to invest in fresh
avenues. FIIs view Indian capital market as a good destination for their investment to
earn profits due to the economic reforms undertaken by the Indian government and the
tremendous capacity of the economy to grow. The investments by the foreign investors
in India are consistent and expected to surge moving ahead mainly due to the
demographic advantage, long term economic growth potential, increased productivity,
increased competitiveness among the Indian companies etc. The appreciation of Indian
currency is found attractive when compared to falling dollar value against other
currencies. The Indian economy had grown by over 7.5% making some of the sectors
like Banking, Telecom, Infrastructure etc more attractive for the foreign investors to
invest their money which will in turn help for the economic development of the country
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1.2.8- Regulators of Indian capital market-
Indian Capital Markets are regulated and monitored by the Ministry of Finance, The
Securities and Exchange Board of India and The Reserve Bank of India.
The Ministry of Finance regulates through the Department of Economic Affairs -
Capital Markets Division. The division is responsible for formulating the policies
related to the orderly growth and development of the securities markets (i.e., shares,
debt and derivatives) as well as protecting the interest of the investors. In particular, it
is responsible for
• institutional reforms in the securities markets,
• building regulatory and market institutions,
• strengthening investor protection mechanism, and
• providing efficient legislative framework for securities markets.
1-Securities & Exchange Board of India (SEBI)
The Securities and Exchange Board of India (SEBI) is the regulatory authority
established under the SEBI Act 1992 and is the principal regulator for Stock Exchanges
in India. SEBI’s primary functions include protecting investor interests, promoting and
regulating the Indian securities markets. All financial intermediaries permitted by their
respective regulators to participate in the Indian securities markets are governed by
SEBI regulations, whether domestic or foreign. Foreign Portfolio Investors are required
to register with DDPs in order to participate in the Indian securities markets.
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.
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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.
2-Reserve Bank of India (RBI)
The Reserve Bank of India (RBI) is governed by the Reserve Bank of India Act, 1934.
The RBI is responsible for implementing monetary and credit policies, issuing currency
notes, being banker to the government, regulator of the banking system, manager of
foreign exchange, and regulator of payment & settlement systems while continuously
working towards the development of Indian financial markets. The RBI regulates
financial markets and systems through different legislations. It regulates the foreign
exchange markets through the Foreign Exchange Management Act, 1999.
3-National Stock Exchange (NSE) – Rules and Regulations
In the role of a securities market participant, NSE is required to set out and implement
rules and regulations to govern the securities market. These rules and regulations extend
to member registration, securities listing, transaction monitoring, compliance by
members to SEBI / RBI regulations, investor protection etc. NSE has a set of Rules and
Regulations specifically applicable to each of its trading segments. NSE as an entity
regulated by SEBI undergoes regular inspections by them to ensure compliance.
1.2.9- Importance of capital market on Indian economy-
The primary function of capital market is to provide long term funds for executing the
projects at competitive cost of capital. Banks also provide funds for executing the
projects but for a short period of time. There are very few banks which provide credit
to the corporate for long period of time. There is responsibility on part of the banks
which are accountable to the creditors and the stakeholders to generate profits and this
inculcates aversion towards the long-term risk inherent projects. Banks normally
distribute credit to the projects which are less risky, generate cash flow and deemed to
be profitable. The banking industry is liable for its creditors and is normally less risk-
taking industry. Contrary to the banking industry, the capital markets institutions are
not accountable to the creditors / investors in the case of any default. This concept of
non-liability to the investors does make the capital market attractive for the fund raisers
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and these funds are used for long-term risk involved projects. Some of the important
influences of the capital market on the economy include:
1-Mobilization of Savings-
With the effective capital markets environment, the scope of pooling the savings from
various segments is easy. With reasonable return and liquidity of the capital market
instruments enable the investor in these markets. In the absence of effective capital
market system, the savings may be invested in unproductive, conspicuous consumption
and wasteful instruments.
2-Proper channelization of Capital Formation-
With the advancements in the capital formations, there is a proper system where the
mobilized capital is allocated towards the institutions where the investors feel that they
can derive fruitful profits in the future. The capital market is quick to respond to the
fluctuations in the market to reflect the real price of the financial instruments which is
beneficial for the investors as well the corporate by either encouraging or discouraging
capital inflows to any organization.
3-Liquid and Continuous Market-
The capital markets are the places where the sellers and buyers of the securities are
moved to one place to perform the transactions. The holdings can be easily converted
into cash as these marketable securities are more liquid when compared to other
instruments.
4-Raising Capital-
Capital markets enable to raise permanent capital by the corporate. Some investors
mayn’t hold the funds for such long duration so that markets enable various investors
to sell and buy securities such that the company maintains permanent capital. In
addition to the domestic funds, the capital markets generate funds from overseas in the
form of securities, bonds etc. Along with the capital infusion by foreign investors,
technology from foreign countries can be imported which is helpful for the nation’s
economic development.
5-Revival of sick units and Backwards Areas-
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Capital markets provide sick units with timely financial assistance to revive their
operations. The funds raised through capital markets can be utilized for the long-term
projects to be implemented in the rural and backward areas. This helps the economic
development of the rural and backward areas.
6-Provision of diversified services-
Capital markets enable the financial institutions to perform various services such as
providing expertise advice, grant of loans to entrepreneurs, promotion of organizations,
underwriting facilities, guidance towards participation in the equity markets, technical
assistance etc. They also assist during the preparation of feasibility reports, training to
the corporate, identification of growth potentials in the sector.
7-Promotion of reliable industrial growth-
Capital market assess the financial status of the corporate which promotes efficiency
and encourages the investors to invest in productive industrial sector. The funds are
mobilized towards corporate securities for investments. This process kindles the
industry growth followed by the sector and economic development of the country.
8-Encouragement for investment and stability of prices-
Capital markets encourages investment to corporate, government organisations etc
through various financial instruments by the savers. Capital formation and allocation
are portable as the investment increases and reduction in the interest rates. The markets
are effective in operations and nature which forces the stability of the financial
instruments with the reduction in the fluctuations of the security prices. The stability to
the instruments is obtained due to the provision of capital at minimum rate of interest,
allocation of funds to productive projects, and reduction of speculative activities etc.
9-Allocation of Risk-
Capital markets provide returns to the investors based on their risk appetite. Higher risk
instruments provide high returns and at the same time higher losses to the investor.
There is a perception that the new risks are inversely correlated to the high-risk
instruments.
10-Payback to the investors-
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Capital markets guarantees the marketability of investments, publicizes the movement
of the financial instruments which enables the investors to monitor their investments
and alter their investment decisions towards profitable lines, if required. The market is
so equipped that the interests of the investors are safeguarded with the establishment of
Stock Exchange Compensating Fund in case of any default or fraud by the institutions
/ companies.
1.2.10-Impact of covid-19 on Indian capital market
The role of the Indian capital market has always been crucial for all economies in the
world as the capital market facilitates governments and companies to raise long term
funds and aids in channelizing funds or savings for various sections of the society. For
the Indian economy, capital market has proven to be vital for ensuring inclusive growth
in the context of wealth distribution, investors’ safety and efficient financial
intermediation. Notably, capital market plays a dominant role for any economy to
prosper and sustainability of long-term growth. The Indian capital market, especially
the equity segment has witnessed significant growth and development over the years
and is at par with markets in advanced economies in terms of efficiency, tradability,
stability, resilience and maturity. This is very evident with the fact that Indian markets
have sailed through periods of stress that have impacted global markets such as Asian
financial crisis of 1998, global financial crisis of 2008 and COVID-19 pandemic in
2020.
Notably, domestic bourses witnessed steep corrections in Feb’20 (Nifty plunged from
11,200 in February beginning to 8,600 by the end of month) led by intensifying
concerns from spread of COVID-19 globally. However, index witnessed a V-shaped
rally from March 2020 in the backdrop of stimulus measures announced by
governments across the globe and ultra-loose monetary policy of global central bankers.
Additionally, sustained recovery in domestic bourses supported by influx of liquidity
and resultant quick money from markets offered a big relief for large numbers of
individuals whose savings / incomes were hit due to disruption in the economy. This is
also testimony of the fact that a record ~14.2mn demat accounts were opened in FY21
vs. 4.9mn in FY20. Going forward, given physical assets still account for over 55% of
total household savings, we believe capital markets will continue to play a pivotal role
for channelizing funds from physical assets to financial assets in subsequent years.
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Additionally, flush of liquidity sloshing around the world led by soft monetary policies
and stimulus measures of governments aided India to witness a massive Rs1.7 trillion
FPIs investment into equities during 2020, which was the highest in the last two
decades. Huge FPIs inflow technically offered support to INR, which is imperative for
our huge import bill and government’s fiscal deficit in dollar terms. Further, buoyancy
in the equity market, intended capacity expansion programme amid expectations of
strong demand recovery post pandemic and debt reduction plan through fundraising via
equities propelled the number of corporates to raise funds through primary markets.
Notably, 43 IPOs were launched with cumulative issue size of US$4bn in 2020 (ranked
9th globally) and an equal number of IPOs worth over US$12bn were launched in 2021
so far. These IPOs not only aided companies to meet their funding requirements; but
also aided India to widen its market base and surpassed France recently by becoming
the fifth largest country of the world in terms of market capitalization. Our analysis on
BSE 500 companies shows that a conducive capital market along with strong OCF
generation enabled BSE 500 companies (excluding BFSIs) to reduce net debt
positioning by whopping Rs4 trillion in FY21, which is heartening.
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CHAPTER 2- RESEARCH METHODOLOGY
2.1- Meaning and definition-
Research methodology is the specific procedures or techniques used to identify, select,
process, and analyse information about a topic. In a research paper, the methodology
section allows the reader to critically evaluate a study's overall validity and reliability.
The techniques or the specific procedure which helps the students to identify, choose,
process, and analyse information about a subject is called Research Methodology.
Methodology is the systematic analysis of the methods applied to a field of study. It
comprises the theoretical analysis of the body of methods and principles associated with
a branch of knowledge. A methodology does not set out to provide solutions. It offers
the theoretical base for understanding which method can be applied to a certain case.
Webster dictionary defines research methodology as “The systematic study of methods
that are, can be or have been applied within a discipline”
Features of research methodology-
1- Systematic process
2- Reliance on empirical evidence
3- Commitment to objectivity
4- Verifiability
5- Ethical neutrality
6- Development of principles and theories
7- Multipurpose activity
Types of research methodology-
1-Qualititative research methodology-
The qualitative research methodology is descriptive and subjective irrespective of facts.
Observation and description are more important in this type of Methodology. The main
aim of this type of Methodology is to evaluate knowledge, attitudes, behaviours, and
opinions of people about the Research’s topic. The method works using grounded
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Research, case study, action research, disclosure analysis, ethnography, etc. The
qualitative research methodology is based on the quality of the phenomenon.
In qualitative methods, intensity, amount or frequency of Data is immaterial. It focuses
on non-rigorous examination or measurement of data. For qualitative Research, size
doesn’t matter. It understands feelings, viewpoints, and impressions. The useful
qualitative method encompasses highly focused, flexible, and provides quick results.
However, there is a scope of misunderstanding and misuse of qualitative methods.
2-Quantitative research methodology-
This type of research methodology tests the importance of the Hypothesis of Research.
This is a systematic research methodology and is in numbers. The quantitative research
methodology includes laboratory experiments, econometric, mathematical calculations,
surveys, simulation etc. The measurement, quantity or amount is the critical factor in
Quantitative research methodology.
In quantitative research methodology, the analysis and measurement of data and
relationship between variables are essential. It involves number-based Research which
measures attitude, behaviour, and performance in numbers. This method makes data
easier to interpret. It requires those techniques which can apply to a larger view. The
data received for the purpose to use in quantitative research methodology can
effectively convert into graphs or charts. So, there will be a difficulty for an interpreter
to influence it.
In this method, the data concerned can be analysed in numbers. The results obtained
from this research method are analysed and interpreted easily. As the term suggests, the
quantitative way is the collection and analysis of data which can be found in numeric
form. Large-scale and representative sets of data are required for adopting this type of
Research Methodology. This method is comparatively expensive.
3-Applied research-
To solve real-life problems, the applied research method is best suited. Unlike basic
research methods, used research methods solve practical problems which require
scientific methods to incorporate.
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A researcher solves problems with already known and proved theories when they apply
applied research methods. The Research which provides immediate outcomes and helps
basic Research as well is involved Research. Case studies, experimental Research, and
interdisciplinary Research are applied Research. This type of Research is of practical
use such as Research on pollution control, inventing vaccines for a new disease,
increasing efficiency and production of machinery.
For instance: To find a specific cure for a disease. The study of medical science teaches
students to take care of humans.
4-Analytical Research-
Analytical research is undertaken to collect facts or data, or the facts that are readily
available. The researcher attempts to critically evaluate such facts and data so as to
arrive at a conclusion. This type of research establishes the cause-and-effect
relationship. It also helps to focus on those variables that have greater positive effect
and to eliminate those variables that have negative effect on the situation.
5-Empirical Research-
Empirical research can be defined as “research based on experimentation or
observations”.it is a way of gaining knowledge by means of direct and indirect
observation or experiment. Such research is conducted to test a hypothesis.
6- Descriptive research-
Descriptive research provides data about the population or data being studies. But it
can only describe the” who, what, when, where, and how” of a situation. It does not
describe what caused a particular situation. Therefore, descriptive research is used when
the objective is to provide a systematic description that is as factual and accurate as
possible.
5- Basic research-
Basic research is also called as pure or fundamental research. It is undertaken to develop
a theory or a body of knowledge. The main goal of basic research is to expand man’s
knowledge. Basic research advances fundamental knowledge about the world. It
focuses on refuting or supporting theories that explains observed phenomena.
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2.2- Research objectives-
The main objective of research is to identify the awareness utilization patterns of the
people. About what they think about capital markets and are they aware about its
benefits or not. The objective of present study can be accomplished by conducting
systematic research.
The following are the objectives of the study-
1-To understand different types of capital market.
2-To find out the situation of Indian capital market in covid-19 pandemic.
3-To study about various capital market instruments.
4- To study features and functions of capital market.
5- To study the history of Indian capital market.
2.3-Research design-
Research design refers to the framework of market research methods and techniques
that are chosen by a researcher. The design that is chosen by the researchers allow them
to utilise the methods that are suitable for the study and to set up their studies
successfully in the future as well.
According to Kerlinger F.N., “research design is the plan, structure and the strategy of the
investigations conceived so as to obtain answer of research questions and to control
variance.”
According to David & Nachmias, “Research design actually constitutes the blue print for
the collection, measurement and analysis of the data”
According to Phillips Bernard Research design is defined as “A logical and systematic plan
prepared for directing a research study. It specifies the objectives of the study; the
methodology and techniques to be adopted for achieving the objectives”
The sketch of how research should be conducted can be prepared using research design.
Hence, the market research study will be carried out on the basis of research design.
The design of a research topic is used to explain the type of research (experimental,
survey, correlational, semi-experimental, review) and also its sub-type (experimental
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design, research problem, and descriptive case-study). There are three main sections of
research design: Data collection, measurement, and analysis.
The type of research problem an organization is facing will determine the research
design and not vice-versa. Variables, designated tools to gather information, how will
the tools be used to collect and analyse data and other factors are decided in research
design on the basis of a research technique is decided.
An impactful research design usually creates minimum bias in data and increases trust
on the collected and analysed research information. Research design which produces
the least margin of error in experimental research can be touted as the best.
This research project is analytical in nature.
Factors affecting research design-
1.Availability of scientific information
2. Availability of sufficient data
3. Time availability
4. Proper exposure to the data source
5. Availability of the money
6. Manpower availability
7. Magnitude of the management problem
8. Degree of Top management’ s support
9. Ability, knowledge, skill, technical understanding and technical background of the
researcher
10. Controllable variables
11. Un – controllable variables
12. Internal variables
13. External variables
Advantages of research design
1. Consumes less time.
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2. Ensures project time schedule.
3. Helps researcher to prepare himself to carry out research in a proper and a
systematic way.
4. Better documentation of the various activities while the project work is going on.
5. Helps in proper planning of the resources and their procurement in right time.
6. Provides satisfaction and confidence, accompanied with a sense of success from the
beginning of the work of the research project.
2.4-Data collection method-
1-Primary data-
A primary data source is an original data source, that is, one in which the data are
collected first-hand by the researcher for a specific research purpose or project. Primary
data can be collected in a number of ways. However, the most common techniques are
self-administered surveys, interviews, field observation, and experiments. Primary data
collection is quite expensive and time consuming compared to secondary data
collection. Notwithstanding, primary data collection may be the only suitable method
for some types of research.
Secondary data refer to the data that are gathered by a secondary party other than the
user himself. The common sources of the secondary data for social science include
statements, the data collected by government agencies, organisational documents, and
the data that are basically collected for other research objectives. Secondary data are
basically second-hand pieces of information. These are not gathered from the source as
the primary data. To put it in other words, the secondary data are those that are already
collected. So, these are comparatively less reliable than the primary data. These are
usually used when the time for the enquiry is compact and the exactness of the enquiry
can be settled to an extent data.
2- Secondary data-
In this particular project study, both primary and secondary data are used.
Primary data with the help of survey method. Survey method questionnaire is
conducted with the help of google form to collect the responses. Secondary data
was also used like research papers, articles, books, internet, etc.
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2.5- Sampling-
Sampling design is a plan designed to select the appropriate sample in order to
collect the right data so as to achieve research objectives. A sample is a part of the
universe that can be used as respondents to a survey or for the purpose of
experimentation, in order to collect relevant information to solve a particular
problem.
Donald Tull and Dell Hawkins define sample as "those individuals chosen from the
population of interest as subjects in an experiment or to be the respondents to a
survey.”
• Sampling method- In this particular research study, convenience sampling is
used.
• Sample unit- Individual respondents
• Sample size- 105 respondents
2.6-Statistical tools used-
The tools which are used in this study is pie chart diagram and line bar graph as
mentioned in the Google form which is prepared for the survey. Analyse the data and
interpret the result by using percentage analysis. Simple percentage analysis refers to a
ratio. With the help of absolute figures, it will be difficult to interpret any meaning from
the collected data, but when percentage are found out then it becomes easy to find the
relative difference between two or more attributes.
Percentage = No. of respondents ÷ Total number of respondents × 100
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CHAPTER 3: REVIEW OF LITERATURE
1-Sk Barua & V Raghunathan (1986):
Efficient pricing of securities and maintenance of parity between risk and return are
absolutely essential for a well-functioning capital market. In this paper (Research on
The Indian Capital Market) they discuss a clear case of observed inefficiency in the
Indian capital market. They show, taking the case of Reliance, that an investor can earn
returns incommensurate with the degree of risk assumed by operating on rights issues
of shares and convertible debentures simultaneously in forward and cash markets.
Although the government policy of granting a low premium on rights shares and
convertible debentures aids inefficiency, the market is also to be blamed since it is
unable to adjust quickly the prices of securities so that the returns earned are in line
with the risks assumed.
2-Ramesh Gupta (1987):
Based on the way the markets actually function, Ramesh Gupta questions in this article
(Is the Indian Capital Market Inefficient or Excessively Speculative?) the validity of
the assumptions used in arguing that the Indian capital market is inefficient. Far more
than inefficiency; he says that the problem with the Indian market is its excessively
speculative character, by permitting trading on low margins in carry forward
transactions. He also makes suggestions on how to restrict speculation and protect the
interest of investors.
3-Sk Barua et al (1994):
In this paper (Inefficiency of the Indian Capital Market) they present a review of
research done in the field of Indian capital markets during the fifteen years from 1977
to 1992. The research work included in the survey were identified by two search
procedures. Firstly, they wrote to 118 Indian university departments and research
institutions requesting information on the works done in this field in their
department/institution. After three reminders, they obtained responses from 53
institutions. Simultaneously, they searched through various Indian journals in their
library, located books listed in the library catalogue and traced through the list of
references provided in various research works. Considering the size, vintage and
development of the Indian capital market, the total volume of research on it appears to
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be woefully modest - about 0.1 unit of work per institution per year! Moreover, a large
number of works are merely descriptive or prescriptive without rigorous analysis.
Certain areas such as arbitrage pricing theory, option pricing theory, agency theory, and
signalling theory are virtually unresearched in the Indian context. Besides, very little
theoretical work has been done by researchers in India. However, with improved
availability of databases and computing resources, and with increasing global interest
in Indian markets, they expect an explosion of work in the near future.
4-R Vaidyanathan & Kanti Kumar Gali:
In this paper (efficiency of the Indian capital market) the researchers have tested for the
weak form efficiency of the capital market. They have tested for randomness using the
test runs, serial correlation and filter rule tests based on the daily closing prices of ten
shares actively traded on the Bombay stock exchange. The evidence from all the three
tests supports the weak form of efficient market hypothesis. However, with an
unrealistic assumption of zero transaction cost, it may be possible to identify profitable
opportunities for using filter rules provided the patterns are stable over time.
5-L M Bhole (1995):
With the objective of developing a balanced perspective on the role of industrial
securities market in India, this paper (The Indian Capital Market At Crossroads)
analyses major trends, changes, problems, and issues relating to primary and secondary
markets over a period of 40 years and suggests various reforms for restoring the health
of the capital market. However, in terms of quality, there has been a regress and the
market has tended to become dysfunctional. In this paper he says there is a need to
change our outlook on the role, importance and working of the capital market,
especially the stock market.
6-Subir Gokarn (1996):
In this paper (Indian capital market reforms,1992-96) uses conceptual framework that
draws on the theory of regulation on the one hand and the new political economy on
the other to make an assessment of the wide-ranging reforms that have been initiated in
the Indian stock market over the past four years. Based on the framework the various
reforms are classified into categories reflecting their regulatory effectiveness and their
impact of sources on market failure. He arrives at a generally positive assessment of
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the reforms, but points out three areas of concern; the lack of a fixed term appointment
for the regulators; the persistence of the non-competitive conditions in the market; and
the excessive entry of new scripts into the market, although he says in recent days some
steps have been taken to address this problem as well.
7-R Nagaraj (1996):
In this study (India’s capital market growth) he documents India’s capital market
boom, and its proximate causes. Household sector substituted its shares and debentures
for bank deposits, and corporate sector securitised its debts. He says there is no
association between growth rates of the capital market mobilisation and aggregate
saving rate, corporate physical investment and value added. Long term decline in the
contribution of internal finance to corporate fixed investment and in profitability in
1980s are noted, despite a fall in ratio of corporate tax to gross profit. In sum, India’s
capital market witnessed a rapid growth since around 1980.
8-L C Gupta (1998):
The evidence presented in this paper (what ails the Indian capital market) the
researcher suggests that an important factor underlying the withdrawal of retail
investors from the capital market is the erosion of investors’ confidence in corporate
India. The government has shown a little seriousness in creating the necessary
confidence by stricter regulation to ensure that corporate India behaves more
responsibly towards investors. On the contrary, some of the government’s proposals
incorporated in the companies’ bill pending before parliament, are bound to reduce
corporate managements’ accountability to shareholders. The researcher says that
corporate governance problem basically arises due to separation of ownership from
control.
9-Sanjay Sehgal & I Balakrishnan (2002):
The research article (contrarian and momentum strategies in the Indian capital market)
attempts to evaluate if there is any systematic pattern in stock returns for Indian market.
The empirical findings reveal that there is a reversal in long term returns, once the short-
term momentum effect has been controlled by maintain a one-year gap between
portfolio formation period and the portfolio holding period. The researcher says that a
contrarian strategy based on long term past return provides moderately positive returns.
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Further there is continuation in the short term returns and a momentum strategy based
on it provides significantly positive payoffs. The results in general are in conformity
with those for developed capital markets such as the US. The study points at probable
stock market inefficiencies especially relating to the momentum factor.
10- Sayuri Shirai (2004):
In this paper (impact of financial and capital market reforms on corporate finance in
India) India’s financial and capital market reforms since the early 1990s have had a
positive impact on both the banking sector and capital markets. Nevertheless, the capital
markets remain shallow, particularly when it comes to differentiating high quality firms
from low quality ones. While some high-quality firms have substituted bond finance
for bank loans, this has not occurred to any significant degree for many other types for
firm. This reflects that most bonds are privately placed. As a result, bank remains major
financiers for both high- and low-quality firms. The researcher argues that India should
build an infrastructure that will foster sound capital markets and strengthen bank’s
incentives for better risk management.
11-R H Patil (2006):
In this article (Current state of the Indian capital market) the journalist says that the
Indian capital market have witnessed a radical transformation in just one decade, there
is hardly any country which has witnessed such a massive change in its capital market
in such a short time. In the early 1990s India figured low in the global ranking of the
state capital markets. The adoption of sophisticated IT tools in trading and settlement
mechanisms has now placed India in the lead. The national stock exchange has played
a important role in this transformation. Shorter settlement periods and dematerialisation
have been other major developments. But all is not positive. The introduction of
individual stock futures poses a major risk and also the large inflow of funds through
participatory notes. He suggests not treat market as a rational organism.
12- P K Mishra (2009):
The capital market of India has undergone radical reforms since early 1990s. Thus, it
is no longer isolated from global economic environment. Recently India has witnessed
bouts of volatility in its market. Some of which had their origin in global events such
as US sub-prime crisis. In this paper (Indian capital market-revisiting market
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