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1. INTRODUCTION
1.1 Introduction of Capital Market

The capital market is the market for securities, where Companies and
governments can raise long-term funds. It is a market in which money is lent for periods
longer than a year. A nation's capital market includes such financial institutions as banks,
insurance companies, and stock exchanges that channel long-term investment funds to
commercial and industrial borrowers. Unlike the money market, on which lending is
ordinarily short term, the capital market typically finances fixed investments like those in
buildings and machinery.
To earn wealth is natural phenomena of every person for his future necessity side by side
it should help the growth of country’s economy. As much as skills are required to earn
money, it is required in equal measure in spending it wisely. Proper financial knowledge
can improve person’s ability to save for his long term goals and prevent himself and his
family from financial exigencies. Generally, savings is in the form of savings bank
account and in cash. It is very safe in savings account, earning a small rate of interest and
gets back money as and when need it (high liquidity). However, prudent investments can
earn a lot more than in savings account.
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There are various Investment Related Products in market as (i) fixed deposit
scheme offered by (manufacturing) companies. They are similar to bank fixed deposits
but entail lesser liquidity and usually carry higher risk and return. (ii) Capital market
offers products like equity, debt, hybrid instruments and various mutual fund schemes.
Each of this investment class carries different risk-return profile and is covered separately
under ‘products available in capital markets’. As a shareholder, a person is part owner of
the company and entitled to all the benefits of ownership, including dividend (company’s
profit distributed to owners). Debentures or bonds are debt instruments which pay interest
over their life time and are used by corporate to raise medium or long term debt capital. If
one has constraints like time, wherewithal, small amount etc. to invest in the market
directly, Mutual Funds (MFs), which are regulated entities, provide an alternative avenue.
They collect money from many investors and invest the aggregate amount in the markets
in a professional and transparent manner. The returns from these investments net of
management fees are available to you as a MF unit holder. However, there should be
statutory regulatory measures for investors and shareholder, which can protect them from
fraud and other malpractices as they may not be expert in securities market. Before going
in details of regulatory measures taken by government 2 since nineteenth century, let’s
have a look on the origin of joint stock companies, an overview of financial system and
the concept of capital market.

1.2 Definition of capital market

Capital market is an oraganised market mechanism for effective and efficient transfer of
money capital or financial resources front me investing class to the entrepreneur class in
the private and public sector of the economy.
H.T. Parikh states, ‘By capital market I mean the market for all financial instruments,
short-term and long-term as also commercial industrial and government paper’.
Capital market is generally understood as the market for long-term funds. The capital
market provides long term debt and equity finance for the government and corporate
sector.
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1.3 History Of Capital Market

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. Sir
Premchand Roychand remained a kingpin for many years. Sir Phiroze Jeejeebhoy was
another who dominated the stock market scene from 1946 to 1980. His word was law and
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he had a great deal of influence over both brokers and the government. He was a good
regulator and many crises were averted due to his wisdom and practicality. The BSE
building, icon of the Indian capital markets, is called P.J. Tower in his memory.

The planning process started in India in 1951, with importance being given to the
formation of institutions and markets The Securities Contract Regulation Act 1956
became the parent regulation after the Indian Contract Act 1872, a basic law to be
followed by security markets in India. To regulate the issue of share prices, the controller
of capital issues Act (CCI) was passed in 1947.

The stock markets have had many turbulent times in the last 140 years of their existence.
The imposition of wealth and expenditure tax in 1957 by Mr. T.T. Krishnamachari, the
then finance minister, led to a huge fall in the markets. The dividend freeze and tax on
bonus issues in 1958-59 also had a negative impact. War with China in 1962 was another
memorably bad year, with the resultant shortages increasing prices all round. This led to a
ban on forward trading in commodity markets in 1966, which was again a very bad
period, together with the introduction of the Gold Control Act in 1963.

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 share holding 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.

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.
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Mr. V.P. Singh’s fiscal budget in 1984 was pathbreaking 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. Mr. Manmohan Singh as
Finance Minister came with a reform agenda in 1991and this led to a resurgence of
interest in the capital markets, only to be punctured by the Harshad Mehta scam in 1992.
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 end1990s 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 melt down 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 13000.

Several systemic changes have taken place during the short history of modern capital
markets. The setting up of the Securities and Exchange Board (SEBI) in 1992 was a
landmark development. It got its act together, obtained the requisite powers and became
effective in early 2000. The setting up of the National Stock Exchange in 1984, the
introduction of online trading in 1995, the establishment of the depository in 1996, trade
guarantee funds and derivatives trading in 2000, have made the markets safer. The
introduction of the Fraudulent Trade Practices Act, Prevention of Insider Trading Act,
Takeover Code and Corporate Governance Norms, are major developments in the capital
markets over the last few years that has made the markets attractive to foreign
institutional investors.

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.
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1.4 Types of capital market

1.4.1 Primary Market:-

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1.4.1.a) Introduction

Primary market also called the new issue market, is the market for issuing new
securities. Many companies, especially small and medium scale, enter the primary market
to raise money from the public to expand their businesses. They sell their securities to the
public through an initial public offering. The securities can be directly bought from the
shareholders, which is not the case for the secondary market. The primary market is a
market for new capitals that will be traded over a longer period. In the primary market,
securities are issued on an exchange basis. The underwriters, that is, the investment
banks, play an important role in this market: they set the initial price range for a
particular share and then supervise the selling of that share. Investors can obtain news of
upcoming shares only on the primary market. The issuing firm collects money, which is
then used to finance its operations or expand business, by selling its shares. Before selling
a security on the primary market, the firm must fulfill all the requirements regarding the
exchange.
After trading in the primary market the security will then enter the secondary
market, where numerous trades happen every day. The primary market accelerates the
process of capital formation in a country's economy. The primary market categorically
excludes several other new long-term finance sources, such as loans from financial
institutions. Many companies have entered the primary market to earn profit by
converting its capital, which is basically a private capital, into a public one, releasing
securities to the public. This phenomena is known as "public issue" or "going public."
There are three methods though which securities can be issued on the primary market:
rights issue, Initial Public Offer (IPO), and preferential issue. A company's new offering
is placed on the primary market through an initial public offer.
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1.4.1.b) Functioning of Primary Market:-

1. Primary Mortgage Market :-

The primary mortgage market is the market where borrowers and mortgage
originators come together to negotiate terms and effectuate mortgage transaction.
Mortgage brokers, mortgage bankers, credit unions and banks are all part of the primary
mortgage market.

2.Primary Target Market :-

A primary target market is the segment of a marketplace a business believes will give
it the best chance to sell. A primary target market may not be the largest segment of a
marketplace. For example, the majority of people who play golf may be men under age
50. The primary target market for a company that makes women's golf clothing for
seniors would be women age 50 and older.

3.Transaction Costs In Primary Market:-

There are many transaction costs in primary market, which are incurred for various
activities pertaining to the capital markets. Whether keeping the transaction costs low
serve the purpose or not is outlined in the article below. Various other features of the
transaction costs are also provided in the article.Transaction costs are of different types
depending on the nature of activity in the primary markets. Some of the commonly
known transaction costs are listed below.

4.PL in Primary Market:-

A primary market issues new securities on an exchange for companies, governments

and other groups to obtain financing through debt-based or equity-based
securities. Primary markets are facilitated by underwriting groups consisting of
investment banks that set a beginning price range for a given security and oversee its sale
to investors.
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5.Revival Of Indian Primary Market:-

primary market for corporate securities in India, both equity and debt, while
the primary market for government securities is discussed separately in Chapter 6. After a
long period of subdued activity, there were signs of revival in the public issues in 2003-
04. This was due to the offers made by quality issuers evoking buoyant investors.

6.primary Securities Market:-

Primary capital markets are those security markets where the equities and bonds of
several companies and corporations are offered to the investors for the first time.The
primary market securities are known as IPO and underwriting.
These are related to the primary equity market. On the other hand, primary bond market
is also there.In the primary bond market the company bonds are offered to the investors
to generate funds for different business purposes. These bonds are offered directly to the
investors by the issuers and the money goes to the issuer.

7.Problems Of Indian Primary Market:-

There are several problems of the Indian primary market. But these problems can be
overcome too by mere application of simple rules( end of the article). These remedies
have been suggested by experts. Withdrawal of IPOs:
Another problem lies in the fact that these days, IPOs are increasingly being withdrawn.
An expert has rightly said that there is no point expressing disappointment in the
withdrawal of the IPOs because it may be taken not as an indication of failure of the
company and hence the primary market but it may be considered as a disagreement of
price between the seller and the buyer.

The primary markets are undulating the world over. The incidents occurring in the
primary markets are reflections of what is actually happening in the secondary markets.
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8.Investment In Primary Market:-

Investing in the primary market of listing should be prioritized. It is a common

assumption that companies originates from the country where they are listed in. The
answer is no. Most of time, companies will list on the stock exchange of their countries,
such as Singapore Airlines on Singapore Stock Exchange. However, companies can
choose to list on a foreign market. An example would be listing as ADR in the US
markets.

9. Primary Money market:-

In finance, the place where the shares sell for the very first time is called the primary
market. The primary market is an important part of the capital markets. It gives young
companies access to money to fund operations. It also helps the economy by creating new
jobs and bringing in additional tax revenue.

10. International Primary Market Association:-

The International Primary Market Association (IPMA) is the organization that

represents the lead managers of equity and debt securities in the international capital
market. The prime objective of the association is to achieve a harmonized primary capital
market in Europe.
Providing an appropriate level of protection to the investors of Europe is another
objective of the association.The association is based in Europe and takes care of the
primary capital market in Europe. The working document that is presented by the
association takes care of the instructions given by CESR’s level 2 advices.
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1.4.1.c) Primary Market Reforms In India

A number of measures has been taken in India especially since 1991 to develop
primary market in India. These measures are discussed below:

1. Abolition of Controller of Capital Issues:

The Capital Issues (Control) Act, 1947 governed capital issues in India. The capital
issues control was administered by the Controller of Capital Issues (CCI). The
Narasimham Committee (1991) had recommended the abolition of CCI and wanted SEBI
to protect investors and take over the regulatory function of CCI. Thus, government
replaced the Capital Issues (Control) Act and abolished the post of CCI. Companies are
allowed to approach the capital market without prior government permission subject to
getting their offer documents cleared by SEBI.

2. Securities and Exchange Board of India (SEBI):

SEBI was set up as a non-statutory body in 1988 and was made a statutory body in
January 1992. SEBI has introduced various guidelines for capital issues in the primary
market. They are explained below.

3. Disclosure Standards:

Companies are required to disclose all material facts and specific risk factors associated
with their projects. SEBI has also introduced a code of advertisement for public issues for
ensuring fair and truthful disclosures.

4. Freedom of Determine the Par Value of Shares:

The requirement to issue shares at a par value of Rs.10 and Rs.100 was withdrawn. SEBI
has allowed the companies to determine the par value of shares issued by them. SEBI has
allowed issues of IPOs through “book building” process.
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5. Underwriting Optional:

To reduce the cost of issue, underwriting by the issuer is made optional. It is subject to
the condition that if an issue was not underwritten and was not able to collect 90% of the
amount offered to the public, the entire amount collected would be refunded to the
investors.

6. FIIs Permitted to Operate in the Indian Market:

Foreign institutional investors such as mutual funds and pension funds are allowed to
invest in equity shares as well as in debt market, including dated government securities
and treasury bills.

7. Accessing Global Funds Market:

Indian companies are allowed to aces global finance market and benefit from the lower
cost of funds. They have been permitted to raise resources through issue of American
Depository Receipts (ADRs), Global Depository Receipts (GDRs), Foreign Currency
Convertible Bonds (FCCBs) and External Commercial Borrowings (ECBs). Indian
companies can list their securities on foreign stock exchanges through ADR./GDR issues.

8. Intermediaries under the Purview of SEBI:

Merchant bankers, and other intermediaries such as mutual funds including UTI,
portfolio managers, registrars to an issue, share transfer agents, underwriters, debenture
trustees, bankers to an issue, custodian of securities, and venture capital funds have been
brought under the purview of SEBI.

9. Credit Rating Agencies:

Various credit rating agencies such as Credit Rating Information Services of India Ltd.
(CRISIL – 1988), Investment Information and Credit Rating Agency of India Ltd. (ICRA
– 1991). Cost Analysis and Research Ltd. (CARE – 1993) and so on were set up to meet
the emerging needs of capital market.
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1.4.2 Secondary Market:-

1.4.2.a) .introduction

It is the market where, unlike the primary market, an investor can buy a security
directly from another investor in lieu of the issuer. It is also referred as "after market".
The securities initially are issued in the primary market, and then they enter into the
secondary market. All the securities are first created in the primary market and then, they
enter into the secondary market. In the New York Stock Exchange, all the stocks belong
to the secondary market. In other words, secondary market is a place where any type of
used goods is available. In the secondary market shares are maneuvered from one
investor to other, that is, one investor buys an asset from another investor instead of an
issuing corporation. So, the secondary market should be liquid.
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1.4.2b) Functioning of secondary market:-

1. Provide a market placing:-

A stock exchange provides a market place for purchasing and selling securities in
the secondary markets. Investors would be able to buy and sell securities at any
time, as stock exchange provides the facility for the continuous trading in
securities like shares, bonds, debentures etc.

2. Continuous/active trading

Secondary market maintain active trading so that investors can buy or sell
immediately at a price that varies little from transaction to transaction. A
continuous trading increasing liquidity of the assets traded in the secondary
market.

3. Providing liquidity

An organized stock exchange provide the investors with a place to liquidate their
holdings meaning that securities can be sold in the stock exchange at any time.

4. Media of assets pricing

Security price is determined by the transaction that flow from investor demand
and supply preferences. This market usually makes their transaction prices public
that helps investors make better decision.

5. Simulate new financing

If the investors can trade their securities in a liquid secondary market, they will be
encouraged to invest in IPOs that will directly help the issuing authority to collect
new finance.
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6. Monitoring activities

Being self-regulatory organization a secondary market can monitor the integrity

of member, employees, listed firms, clients, and other related person.

7. Provide risk premium

Without an active secondary market, the issuers would have to provide a much
higher rate of return to compensate investors for the substantial liquidity risk.

8. An indicator of the economy

An organized stock plays the role as an indicator of the state of health of the
economy of a nation as a whole.

9. Savings investment linkage

Providing the linkage between savings and investments, stock exchanges help in
mobilizing savings and channelizing them into the corporate secto. as securities.

1.4.2.c) Importance of Secondary Market:-

Secondary Market has an important role to play behind the developments of an efficient
capital market. Secondary market connects investors' favoritism for liquidity with the
capital users' wish of using their capital for a longer period. For example, in a traditional
partnership, a partner cannot access the other partner's investment but only his or her
investment in that partnership, even on an emergency basis. Then if he or she may breaks
the ownership of equity into parts and sell his or her respective proportion to another
investor. This kind of trading is facilitated only by the secondary market.
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1.4.2.c) SECONDARY MARKET REFORMS

A number of measures have been taken by the government and SEBI for the growth of
secondary capital market in India. The important reforms or measures are explained
below.

1. Setting up of National Stock Exchange (NSE):

NSE was set up in November 1992 and started its operations in 1994. It is sponsored by
the IDBI and co-sponsored by other development finance institutions, LIC, GIC,
Commercial banks and other financial institutions.

2. Over the Counter Exchange of India (OTCEI):

It was set in 1992. It was promoted by a consortium of leading financial institutions of

India including UTI, ICICI, IDBI, IFCI, LIC and others. It is an electronic national stock
exchange listing an entirely new set of companies which will not be listed on other stock
exchanges.

3. Disclosure and Investor Protection (DIP) Guidelines for New Issues:

In order to remove inadequacies and systematic deficiencies, to protect the interests of

investors and for the orderly growth and development of the securities market, the SEBI
has put in place DIP guidelines to govern the new issue activities. Companies issuing
capital in the primary market are now required to disclose all material facts and specify
risk factors with their projects.

4. Screen Based Trading:

The Indian stock exchanges were modernized in the 90s, with Computerised Screen
Based Trading System (SBTS). It electronically matches orders on a strict price / time
priority. It cuts down time, cost, risk of error and fraud, and therefore leads to improved
operational efficiency.
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5. Depository System:

A major reform in the Indian Stock Market has been the introduction of depository
system and scripless trading mechanism since 1996. Before this, the trading system was
based on physical transfer of securities. A depository is an organization which holds the
securities of shareholders in electronic form, transfers securities between account holders,
facilitates transfer of ownership without handling securities and facilitates their
safekeeping.

6. Rolling Settlement:

Rolling settlement is an important measure to enhance the efficiency and integrity of the
securities market. Under rolling settlement all trades executed on a trading day are settled
after certain days.

7. The National Securities Clearing Corporation Ltd. (NSCL):

The NSCL was set up in 1996. It has started guaranteeing all trades in NSE since July
1996. The NSCL is responsible for post-trade activities of the NSE. Clearing and
settlement of trades and risk management are its central functions.

8. Trading in Central Government Securities:

In order to encourage wider participation of all classes of investors, including retail

investors, across the country, trading in government securities has been introduced from
January 2003. Trading in government securities can be carried out through a nationwide,
anonymous, order-driver, screen-based trading system of stock exchanges in the same
way in which trading takes place in equities.

9. Mutual Funds:

Emergency of diversified mutual funds is one of the most important development of

Indian capital market. Their main function is to mobilize the savings of general public
and invest them in stock market securities. Mutual funds are an important avenue through
which households participate in the securities market.
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1.5. CAPITAL MARKET INSTRUMENTS

Classification of Instruments can be classified into three categories:
1. pure,
2. Hybrid, and
3. Derivatives.

1.5.1. Pure instruments:

Pure instruments can be classified into Equity Shares, preference shares and debentures/
bonds which were issued with their basic characteristics in tact without mixing features
of other classes of instruments are called Pure instruments.

5.1.1 Equity shares- equity shares commonly referred to as ordinary share also
represents the form of fractional ownership in which a shareholder, as a fractional owner,
undertake the maximum entrepreneurial risk associated with business a business venture.
The holder of such shares is member of the company and has voting rights. A company
may issue shares with differential rights as to voting, payment of dividend etc.

5.1.2 Preference shares- Owners of this kind of shares are entitled to a fixed dividend or
dividend calculated at a fixed rate to be paid regularly before dividend can be paid in
respect of equity shares. They also enjoyed privacy over the equity shareholders in
payment of surplus. But in the event of liquidation their claims rank below the claims of
company's creditors, bondholders/ debenture holders. Following kinds of preference
shares are dealt with by the companies

5.1.2.(a). Cumulative preference shares- In the case of this type of share the dividend
payable every year becomes a first claim while declaring dividend by the company. In
case the company does not want to pay preference dividend, it gets accumulated for being
paid subsequently.

5.1.2.(b). Non cumulative preference shares- In the case of these shares, dividend does
not accumulate. If there are no profits or the profits are inadequate in any year, the shares
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are not entitled to any dividend for that year. Unless there is a specific provision in the
Articles of Association of the company.

5.1.2.(c). Convertible preference share- If the term of issue of preference shares

includes a right for converting them into equity shares at the end of a specified period
they are called convertible preference shares.

5.1.2.(d). Redeemable preference shares- If the articles of a company so authorize,

redeemable preference shares can be issued. This in contrast to the principle that the
company normally can not redeem or buy back its own shares vide section 77 of the
companies act, 1956, except by following the procedure for reduction of capital and
getting the sanction of the high court in pursuance of sections 100 to 104 or section 402
of the companies act.

5.1.2.(e). Irredeemable preference shares- If the terms of issue provide that the
preference shares are not redeemable except on the happening of certain specified events
which may not happen for an indefinite period such as winding up, these are called
irredeemable preference shares.

5.1.2.(f). Participating preference shares- Preference shareholders are not entitled to

dividend more than what has been indicated as part of the terms of issue, even in a year in
which the company has mad huge profits. Subjects to provision in the terms of issue these
shares can be entitled to participate in the surplus profits left, after payment of dividend
to the preference and the equity shareholders to the extent provided therein.

5.1.2.(g). Non participating preference shares- Unless the terms of issue indicate
specifically otherwise, all preference shares are to be regarded as non participating
preference shares.

5.1.3 Debentures- Debenture includes debenture stock, bonds and any other securities of
a company, whether constituting a charge on the assets of the company or not. Debenture
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is a documents evidencing a debt or acknowledging it. Debentures are issued in the

following forms:-

5.1.3.(a) Naked or unsecured debentures – Debentures of this kind do not carry any
charge on the assets of the company.

5.1.3.(b). Secured Debentures- Debentures that are secured by a mortgage of the whole
or part of the assets of the company are called mortgage debentures of secured
debentures.

5.1.3.(c). Redeemable Debentures- Debentures that are redeemable on expiry of certain

period are called redeemable debentures. Such debentures after redemption can be
reissued in accordance with the provisions of section 121 of the Companies act 1956.

5.1.3.(d). Perpetual Debentures- If the debentures are issued subject to redemption on

the happening of specified events which may not happen or an indefinite period, i.e.
winding up, they are called perpetual debentures.

5.1.3.(e).Bearer Debentures – Such debentures are payable to bearer and are

transferable by mere delivery. The name of the debenture holder is not registered the
books of the company, but the holder is entitled to claim interest and principal as and
when due.

5.1.3.(f). Registered debentures- Such debentures are payable to the registered holders
whose name appears on the debentures certificate / letter of allotment and is registered on
the companies register of debenture holder maintained as per section 152 of the
Companies Act, 1956. Based on convertibility, debentures can be classified under three
categories

5.1.3 (g). Fully convertible debentures (FCDs)- These are converted into equity shares
of the company with or without premium as per terms of the issue on the expiry of
specified period or periods.
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5.1.3 (h).Non-Convertible Debentures (NCDs) – These debentures do not carry the

option of conversion into equity shares and are therefore redeemed on the expiry of the
specified period or periods.

5.1.3.(i) Partly Convertible Debentures (PCDs)- These may consist of two kinds
namely- convertible and non-convertible. The convertible portion is to be converted into
equity shares at the expiry of specified period.\

1.5.2 Hybrid Instruments- Hybrid instruments are those which are created by
combining the features of equity with bond, preference and equity etc. Examples of
hybrid instruments are : Convertible Preference shares, Cumulative convertible
preference shares, non convertible debentures with equity warrants, partly convertible
debentures, partly convertible with Khokha (buy back arrangement) , optionally
convertible debenture, warrants convertible into debentures or shares, secured premium
notes with warrants etc.

5.2.1. Secured premium notes- These instruments are issued with detachable warrants
and are redeemable after a notified period say 4 to 7 years. The warrants enable the
holder to get equity shares allotted provided the secured premium notes are fully paid.
During the lock in period no interest is paid. The holder has an option to sell back the
SPN to the company at par value after the lock in period.

5.2.2. Equity shares with Detachable Warrants- Essar Gujarat, Ranbaxy and Reliance
issued this type of instrument. The holder of the warrant is eligible to apply for the
specified number of shares on the appointed date at the predetermined price. These
warrants are separately registered with the stock exchanges and traded separately. The
practice of issuing non convertible debentures with detachable warrants also exists in the
Indian market. Reliance has used this method.
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5.2.3 Deep Discount bond- IDBI and SIDBI had issued this type of instrument. For a
deep discount price of Rs. 2700/- in IDBI the investor got a bond with face value of Rs.
100000/-. The bond appreciates to its face value over the maturity period of 25 years.
Alternatively, the investor can withdraw from the investment periodically after 5 years.

5.2.4 Tracking Stocks – Dr. JJ Irani Expert Committee constituted by the Government to
make recommendation on the Concept Paper on Company Law has recommended in its
report for the introduction of ‘Tracking Stocks’ in the Indian Capital Market. A Tracking
stock is a type of common stock that “tracks” or depends on the financial performance of
a specific business unit or operating division of a company, rather than the operations of
the company as a whole. As a result, if the unit or division performs well, the value of the
tracking stocks may increase, even if the company’s performance as a whole is not up to
mark or satisfactory. The opposite may also be true.

5.2.5 BONDS- Following kinds of bonds may be issued:-

(a) Disaster Bonds- These are issued by companies and institutions to share the risk and
expand the capital to link investors return with the size of insurer losses. The bigger the
losses, the smaller the return and vice versa. The coupon rate and the principal of the
bonds are decided by the occurrence of the casualty of disaster and by the possibility of
borrower defaults.

(b) Option bonds- This instrument covers those cumulative and non cumulative bonds
where interest is payable on maturity or periodically and redemption premium is offered
to attract investors.

(c) Easy Exit Bonds- This instrument covers both bonds which provide liquidity and an
easy exit route to the investor by way of redemption or buy back where investors can get
ready encashment in case of need to withdraw before maturity.
23

(d) Pay in Kind Bonds- This refers to bonds wherein interest for the first time three to
five years is paid through issue of additional bonds, which are called baby bonds as they
are derived from parent bond.

(e) Split Coupon Debentures- This instrument is issued at a discounted price and
interest accrues in the first two years for subsequent payment in cash. This instrument
helps better management of cash outflows in a new project depending upon cash
generating capacity.
Other bonds like floating rate bonds and notes, clip and strip bonds, Dual
convertible Bonds, Debt Instruments with Debt warrants, Indexed Rate Notes, Stepped
coupon Bonds, Dual Option Warrants, Extendable notes, Level pay floating rate notes,
Industrial Revenue Bonds, Commodity bonds, Zero Coupon Convertible Notes, Foreign
Currency Convertible Bonds (FCCBs), are issued by the companies.

1.5.3 Derivatives- Future and option belong to the categories of derivatives.

Derivatives- Derivatives are contracts which derive their value from the value of one or
more of others assets. Some of the most commonly traded derivatives are futures,
forward, options and swaps.

5.4 New schemes of Funds-

5.4.1. Hedge Fund :-Hedge funds including fund of funds are unregistered private
investment partnership, funds or pools that may invest and trade in many different
markets, strategies and instruments (including securities, non securities and derivatives)
and are not subject to the same regulatory requirements as mutual funds, including
mutual fund requirements to provide certain periodic and standardized pricing and
valuation information to investors. Hedge funds are sometime called as rich man’s
mutual funds.

5.4.2 Gold Exchange Trade funds- SEBI (Mutual Funds) Amendment Regulations
dated January 24, 2006 permitted introduction of Gold Exchange Traded Fund schemes
by Mutual Fund. Gold Exchange Traded Fund (GETF) schemes are permitted to invest
24

primarily in Gold and Gold related instruments i.e. such instruments having gold as
underlying as are specified by SEBI from time to time.

The above list of Capital Market is not exhaustive but inclusive. Other instruments may
be created with the approval of capital market regulator depending upon the requirement
of the economy and industry.
The instruments used by the corporate sector to raise funds are selected on the basis of –
(i) investor preference for a given instrument and
(ii) the regulatory framework, whereunder the company has to issue the security.
The corporate sector and financial / investment institutions has been issuing new
instruments to attract investors. The attraction for the instrument for both the corporate
sector and the investor lies in –
(a) the investor gets a reasonable return during the initial years, followed by equity
participation on conversion, and
(b) the issue involves lower post tax cost of capital, thereby entailing a lesser strain on
liquidity
25

1.6 NATURE AND CONSTITUENTS:

The capital market consists of number of individuals and institutions (including

the government) that canalize the supply and demand for longterm capital and claims on
capital. The stock exchange, commercial banks, co-operative banks, saving banks,
development banks, insurance companies, investment trust or companies, etc., are
important constituents of the capital markets.

The capital market, like the money market, has three important Components, namely the
suppliers of loanable funds, the borrowers and the Intermediaries who deal with the
leaders on the one hand and the Borrowers on the other.

The demand for capital comes mostly from agriculture, industry, trade The government.
The predominant form of industrial organization developed Capital Market becomes a
necessary infrastructure for fast industrialization. Capital market not concerned solely
with the issue of new claims on capital, But also with dealing in existing claims.

DEBT OR
BOND
MARKET

CAPITAL
MARKET
EQUITY
OR STOCK
MARKET
26

1.6.1 Debt or Bond market

The bond market (also known as the debt, credit, or fixed income market) is a financial
market where participants buy and sell debt securities, usually in the form of bonds. As of
2009, the size of the worldwide bond market (total debt outstanding) is an estimated
$82.2 trillion [1], of which the size of the outstanding U.S. bond market debt was $31.2
trillion according to BIS (or alternatively $34.3 trillion according to SIFMA).

Nearly all of the $822 billion average daily trading volume in the U.S. bond market takes
place between broker-dealers and large institutions in a decentralized, over-the-counter
(OTC) market. However, a small number of bonds, primarily corporate, are listed on
exchanges.

References to the "bond market" usually refer to the government bond market, because of
its size, liquidity, lack of credit risk and, therefore, sensitivity to interest rates. Because of
the inverse relationship between bond valuation and interest rates, the bond market is
often used to indicate changes in interest rates or the shape of the yield curve.
27

1.6.1.a) Market structure

Bond markets in most countries remain decentralized and lack common exchanges like
stock, future and commodity markets. This has occurred, in part, because no two bond
issues are exactly alike, and the variety of bond securities outstanding greatly exceeds
that of stocks.

However, the New York Stock Exchange (NYSE) is the largest centralized bond market,
representing mostly corporate bonds. The NYSE migrated from the Automated Bond
System (ABS) to the NYSE Bonds trading system in April 2007 and expects the number
of traded issues to increase from 1000 to 6000.

Besides other causes, the decentralized market structure of the corporate and municipal
bond markets, as distinguished from the stock market structure, results in higher
transaction costs and less liquidity. A study performed by Profs Harris and Piwowar in
2004, Secondary Trading Costs in the Municipal Bond Market, reached the following
conclusions: (1) "Municipal bond trades are also substantially more expensive than
similar sized equity trades. We attribute these results to the lack of price transparency in
the bond markets. Additional cross-sectional analyses show that bond trading costs
decrease with credit quality and increase with instrument complexity, time to maturity,
and time since issuance." (2) "Our results show that municipal bond trades are
significantly more expensive than equivalent sized equity trades. Effective spreads in
municipal bonds average about two percent of price for retail size trades of 20,000 dollars
and about one percent for institutional trade size trades of 200,000 dollars."
28

1.6.1.b) Types of bond markets

The Securities Industry and Financial Markets Association (SIFMA) classifies the
broader bond market into five specific bond markets.

• Corporate
• Government & agency
• Municipal
• Mortgage backed, asset backed, and collateralized debt obligation
• Funding

1.6.1.c) Bond market participants

Bond market participants are similar to participants in most financial markets and are
essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often
both.

Participants include:

• Institutional investors
• Governments
• Traders
• Individuals

Because of the specificity of individual bond issues, and the lack of liquidity in many
smaller issues, the majority of outstanding bonds are held by institutions like pension
funds, banks and mutual funds. In the United States, approximately 10% of the market is
currently held by private individual.
29

1.6.1.d) Bond market size

Amounts outstanding on the global bond market increased 10% in 2009 to a record $91
trillion. Domestic bonds accounted for 70% of the total and international bonds for the
remainder. The US was the largest market with 39% of the total followed by Japan
(18%). Mortgage-backed bonds accounted for around a quarter of outstanding bonds in
the US in 2009 or some $9.2 trillion. The sub-prime portion of this market is variously
estimated at between $500bn and $1.4 trillion. Treasury bonds and corporate bonds each
accounted for a fifth of US domestic bonds. In Europe, public sector debt is substantial in
Italy (93% of GDP), Belgium (63%) and France (63%). Concerns about the ability of
some countries to continue to finance their debt came to the forefront in late 2009. This
was partly a result of large debt taken on by some governments to reverse the economic
downturn and finance bank bailouts. The outstanding value of international bonds
increased by 13% in 2009 to $27 trillion. The $2.3 trillion issued during the year was
down 4% on the 2008 total, with activity declining in the second half of the year.

1.6.1.e) Bond market volatility

For market participants who own a bond, collect the coupon and hold it to maturity,
market volatility is irrelevant; principal and interest are received according to a pre-
determined schedule.

But participants who buy and sell bonds before maturity are exposed to many risks, most
importantly changes in interest rates. When interest rates increase, the value of existing
bonds fall, since new issues pay a higher yield. Likewise, when interest rates decrease,
the value of existing bonds rise, since new issues pay a lower yield. This is the
fundamental concept of bond market volatility: changes in bond prices are inverse to
changes in interest rates. Fluctuating interest rates are part of a country's monetary policy
and bond market volatility is a response to expected monetary policy and economic
changes.
30

1.6.1.f) Bond market influence

Bond markets determine the price in terms of yield that a borrower must pay in able to
receive funding. In one notable instance, when President Clinton attempted to increase
the US budget deficit in the 1990s, it led to such a sell-off (decreasing prices; increasing
yields) that he was forced to abandon the strategy and instead balance the budget. “ I used
to think that if there was reincarnation, I wanted to come back as the president or the
pope or as a .400 baseball hitter. But now I would like to come back as the bond market.
You can intimidate everybody. ” — James Carville, political advisor to President Clinton,
Bloomberg [6]

1.6.1.g) Bond investments

Investment companies allow individual investors the ability to participate in the bond
markets through bond funds, closed-end funds and unit-investment trusts. In 2006 total
bond fund net inflows increased 97% from $30.8 billion in 2005 to $60.8 billion in
2006.Exchange-traded funds (ETFs) are another alternative to trading or investing
directly in a bond issue. These securities allow individual investors the ability to
overcome large initial and incremental trading sizes.

1.6.1.h) Bond indices

A number of bond indices exist for the purposes of managing portfolios and measuring
performance, similar to the S&P 500 or Russell Indexes for stocks. The most common
American benchmarks are the Barclays Aggregate, Citigroup BIG and Merrill Lynch
Domestic Master. Most indices are parts of families of broader indices that can be used to
measure global bond portfolios, or may be further subdivided by maturity and/or sector
for managing specialized portfolios.
31

1.6.2 STOCK OR EQUITY MARKET

A STOCK MARKET or EQUITY MARKET is a public market (a loose network

of economic transactions, not a physical facility or discrete entity) for the trading of
company stock and derivatives at an agreed price; these are securities listed on a stock
exchange as well as those only traded privately.

The size of the world stock market was estimated at about $36.6 trillion US at the
beginning of October 2008. The total world derivatives market has been estimated at
about $791 trillion face or nominal value, 11 times the size of the entire world economy.
The value of the derivatives market, because it is stated in terms of notional values,
cannot be directly compared to a stock or a fixed income security, which traditionally
refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each other
out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet'
on the event not occurring). Many such relatively illiquid securities are valued as marked
to model, rather than an actual market price.

The stocks are listed and traded on stock exchanges which are entities of a corporation or
mutual organization specialized in the business of bringing buyers and sellers of the
organizations to a listing of stocks and securities together. The largest stock market in the
United States, by market cap is the New York Stock Exchange, NYSE, while in Canada,
32

1.6.2.a) Trading

Participants in the stock market range from small individual stock investors to large
hedge fund traders, who can be based anywhere. Their orders usually end up with a
professional at a stock exchange, who executes the order.

Some exchanges are physical locations where transactions are carried out on a trading
floor, by a method known as open outcry. This type of auction is used in stock exchanges
and commodity exchanges where traders may enter "verbal" bids and offers
simultaneously. The other type of stock exchange is a virtual kind, composed of a
network of computers where trades are made electronically via traders.

Actual trades are based on an auction market model where a potential buyer bids a
specific price for a stock and a potential seller asks a specific price for the stock. (Buying
or selling at market means you will accept any ask price or bid price for the stock,
respectively.) When the bid and ask prices match, a sale takes place, on a first-come-first-
served basis if there are multiple bidders or askers at a given price.

The purpose of a stock exchange is to facilitate the exchange of securities between

buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide
real-time trading information on the listed securities, facilitating price discovery.

The New York Stock Exchange is a physical exchange, also referred to as a listed
exchange — only stocks listed with the exchange may be traded. Orders enter by way of
exchange members and flow down to a floor broker, who goes to the floor trading post
specialist for that stock to trade the order. The specialist's job is to match buy and sell
orders using open outcry. If a spread exists, no trade immediately takes place--in this case
the specialist should use his/her own resources (money or stock) to close the difference
after his/her judged time. Once a trade has been made the details are reported on the
"tape" and sent back to the brokerage firm, which then notifies the investor who placed
33

the order. Although there is a significant amount of human contact in this process,
computers play an important role, especially for so-called "program trading".

The NASDAQ is a virtual listed exchange, where all of the trading is done over a
computer network. The process is similar to the New York Stock Exchange. However,
buyers and sellers are electronically matched. One or more NASDAQ market makers will
always provide a bid and ask price at which they will always purchase or sell 'their' stock.

The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange. It
was automated in the late 1980s. Prior to the 1980s, it consisted of an open outcry
exchange. Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the
CATS trading system was introduced, and the order matching process was fully
automated.

From time to time, active trading (especially in large blocks of securities) have moved
away from the 'active' exchanges. Securities firms, led by UBS AG, Goldman Sachs
Group Inc. and Credit Suisse Group, already steer 12 percent of U.S. security trades away
from the exchanges to their internal systems. That share probably will increase to 18
percent by 2010 as more investment banks bypass the NYSE and NASDAQ and pair
buyers and sellers of securities themselves, according to data compiled by Boston-based
Aite Group LLC, a brokerage-industry consultant.

Now that computers have eliminated the need for trading floors like the Big Board's, the
balance of power in equity markets is shifting. By bringing more orders in-house, where
clients can move big blocks of stock anonymously, brokers pay the exchanges less in fees
and capture a bigger share of the $11 billion a year that institutional investors pay in
trading commissions as well as the surplus of the century had taken place.
34

1.6.2.b) Market participants

A few decades ago, worldwide, buyers and sellers were individual investors, such as
wealthy businessmen, with long family histories (and emotional ties) to particular
corporations. Over time, markets have become more "institutionalized"; buyers and
sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds,
index funds, exchange-traded funds, hedge funds, investor groups, banks and various
other financial institutions). The rise of the institutional investor has brought with it some
improvements in market operations. Thus, the government was responsible for "fixed"
(and exorbitant) fees being markedly reduced for the 'small' investor, but only after the
large institutions had managed to break the brokers' solid front on fees. (They then went
to 'negotiated' fees, but only for large institutions.

However, corporate governance (at least in the West) has been very much adversely
affected by the rise of (largely 'absentee') institutional 'owners'.
35

1.2.6.c) History

Established in 1875, the Bombay Stock Exchange is Asia's first stock exchange.
In 12th century France the courratiers de change were concerned with managing and
regulating the debts of agricultural communities on behalf of the banks. Because these
men also traded with debts, they could be called the first brokers. A common misbelief is
that in late 13th century Bruges commodity traders gathered inside the house of a man
called Van der Beurze, and in 1309 they became the "Brugse Beurse", institutionalizing
what had been, until then, an informal meeting, but actually, the family Van der Beurze
had a building in Antwerp where those gatherings occurred; the Van der Beurze had
Antwerp, as most of the merchants of that period, as their primary place for trading. The
idea quickly spread around Flanders and neighboring counties and "Beurzen" soon
opened in Ghent and Amsterdam.

In the middle of the 13th century, Venetian bankers began to trade in government
securities. In 1351 the Venetian government outlawed spreading rumors intended to
lower the price of government funds. Bankers in Pisa, Verona, Genoa and Florence also
began trading in government securities during the 14th century. This was only possible
because these were independent city states not ruled by a duke but a council of influential
citizens. The Dutch later started joint stock companies, which let shareholders invest in
business ventures and get a share of their profits - or losses. In 1602, the Dutch East India
Company issued the first share on the Amsterdam Stock Exchange. It was the first
company to issue stocks and bonds.

The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first
stock exchange to introduce continuous trade in the early 17th century. The Dutch
"pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trusts
and other speculative instruments, much as we know them" There are now stock markets
in virtually every developed and most developing economies, with the world's biggest
markets being in the United States, United Kingdom, Japan, India, China, Canada,
Germany, France, South Korea and the Netherlands.
36

1.2.6.d) Function and purpose

The main trading room of the Tokyo Stock Exchange, where trading is currently
completed through computers. The stock market is one of the most important sources for
companies to raise money. This allows businesses to be publicly traded, or raise
additional capital for expansion by selling shares of ownership of the company in a public
market. The liquidity that an exchange provides affords investors the ability to quickly
and easily sell securities. This is an attractive feature of investing in stocks, compared to
other less liquid investments such as real estate.

History has shown that the price of shares and other assets is an important part of the
dynamics of economic activity, and can influence or be an indicator of social mood. An
economy where the stock market is on the rise is considered to be an up-and-coming
economy. In fact, the stock market is often considered the primary indicator of a
country's economic strength and development. Rising share prices, for instance, tend to
be associated with increased business investment and vice versa. Share prices also affect
the wealth of households and their consumption. Therefore, central banks tend to keep an
eye on the control and behavior of the stock market and, in general, on the smooth
operation of financial system functions. Financial stability is the raison d'être of central
banks.

Exchanges also act as the clearinghouse for each transaction, meaning that they collect
and deliver the shares, and guarantee payment to the seller of a security. This eliminates
the risk to an individual buyer or seller that the counterparty could default on the
transaction.

The smooth functioning of all these activities facilitates economic growth in that lower
costs and enterprise risks promote the production of goods and services as well as
employment. In this way the financial system contributes to increased prosperity. An
important aspect of modern financial markets, however, including the stock markets, is
absolute discretion. For example, American stock markets see more unrestrained
37

acceptance of any firm than in smaller markets. For example, Chinese firms that possess
little or no perceived value to American society profit American bankers on Wall Street,
as they reap large commissions from the placement, as well as the Chinese company
which yields funds to invest in China. However, these companies accrue no intrinsic
value to the long-term stability of the American economy, but rather only short-term
profits to American business men and the Chinese; although, when the foreign company
has a presence in the new market, this can benefit the market's citizens. Conversely, there
are very few large foreign corporations listed on the Toronto Stock Exchange TSX,
Canada's largest stock exchange. This discretion has insulated Canada to some degree to
worldwide financial conditions. In order for the stock markets to truly facilitate economic
growth via lower costs and better employment, great attention must be given to the
foreign participants being allowed in.
38

1.2.6.e) Relation of the stock market to the modern financial system

The financial systems in most western countries has undergone a remarkable

transformation. One feature of this development is disintermediation. A portion of the
funds involved in saving and financing, flows directly to the financial markets instead of
being routed via the traditional bank lending and deposit operations. The general public's
heightened interest in investing in the stock market, either directly or through mutual
funds, has been an important component of this process.

Statistics show that in recent decades shares have made up an increasingly large
proportion of households' financial assets in many countries. In the 1970s, in Sweden,
deposit accounts and other very liquid assets with little risk made up almost 60 percent of
households' financial wealth, compared to less than 20 percent in the 2000s. The major
part of this adjustment in financial portfolios has gone directly to shares but a good deal
now takes the form of various kinds of institutional investment for groups of individuals,
e.g., pension funds, mutual funds, hedge funds, insurance investment of premiums, etc.

The trend towards forms of saving with a higher risk has been accentuated by new rules
for most funds and insurance, permitting a higher proportion of shares to bonds. Similar
tendencies are to be found in other industrialized countries. In all developed economic
systems, such as the European Union, the United States, Japan and other developed
nations, the trend has been the same: saving has moved away from traditional
(government insured) bank deposits to more risky securities of one sort or another.
39

1.2.6.f) The stock market, individual investors, and financial risk

Riskier long-term saving requires that an individual possess the ability to manage
the associated increased risks. Stock prices fluctuate widely, in marked contrast to the
stability of (government insured) bank deposits or bonds. This is something that could
affect not only the individual investor or household, but also the economy on a large
scale. The following deals with some of the risks of the financial sector in general and the
stock market in particular. This is certainly more important now that so many newcomers
have entered the stock market, or have acquired other 'risky' investments (such as
'investment' property, i.e., real estate and collectables).

With each passing year, the noise level in the stock market rises. Television
commentators, financial writers, analysts, and market strategists are all overtaking each
other to get investors' attention. At the same time, individual investors, immersed in chat
rooms and message boards, are exchanging questionable and often misleading tips. Yet,
despite all this available information, investors find it increasingly difficult to profit.
Stock prices skyrocket with little reason, then plummet just as quickly, and people who
have turned to investing for their children's education and their own retirement become
frightened. Sometimes there appears to be no rhyme or reason to the market, only folly.

This is a quote from the preface to a published biography about the long-term value-
oriented stock investor Warren Buffett. Buffett began his career with $100, and $100,000
from seven limited partners consisting of Buffett's family and friends. Over the years he
has built himself a multi-billion-dollar fortune. The quote illustrates some of what has
been happening in the stock market during the end of the 20th century and the beginning
of the 21st century.
40

1.7 Affecting Factors Of Capital Market

The capital market is affected by a range of factors . Some of the factors which influence
capital market are as follows:-

1.7.1 Performance of domestic companies:-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country. Weak corporate
earnings indicate that the demand for goods and services in the economy is less due to
slow growth in per capita income of people . Because of slow growth in demand there is
slow growth in employment which means slow growth in demand in the near future.
Thus weak corporate earnings indicate average or not so good prospects for the economy
as a whole in the near term. In such a scenario the investors ( both domestic as well as
foreign ) would be wary to invest in the capital market and thus there is bear market like
situation. The opposite case of it would be robust corporate earnings and it’s positive
impact on the capital market. The corporate earnings for the April – June quarter for the
current fiscal has been good. The companies like TCS, Infosys,Maruti Suzuki, Bharti
Airtel, ACC, ITC, Wipro,HDFC,Binani cement, IDEA, Marico Canara Bank, Piramal
Health, India cements , Ultra Tech, L&T, CocaCola, Yes Bank, Dr. Reddy’s
Laboratories, Oriental Bank of Commerce, Ranbaxy, Fortis, Shree Cement ,etc have
registered growth in net profit compared to the corresponding quarter a year ago. Thus
we see companies from Infrastructure sector, Financial Services, Pharmaceutical sector,
IT Sector, Automobile sector, etc. doing well . This across the sector growth indicates
that the Indian economy is on the path of recovery which has been positively reflected in
the stock market( rise in sensex & nifty) in the last two weeks. (July 13-July 24).
41

1.7.2 Environmental Factors :-

Environmental Factor in India’s context primarily means- Monsoon . In India
around 60 % of agricultural production is dependent on monsoon. Thus there is heavy
dependence on monsoon. The major chunk of agricultural production comes from the
states of Punjab , Haryana & Uttar Pradesh. Thus deficient or delayed monsoon in this
part of the country would directly affect the agricultural output in the country. Apart from
monsoon other natural calamities like Floods, tsunami, drought, earthquake, etc. also
have an impact on the capital market of a country. The Indian Met Department (IMD) on
24th June stated that India would receive only 93 % rainfall of Long Period Average
(LPA). This piece of news directly had an impact on Indian capital market with BSE
Sensex falling by 0.5 % on the 25th June . The major losers were automakers and
consumer goods firms since the below normal monsoon forecast triggered concerns that
demand in the crucial rural heartland would take a hit. This is because a deficient
monsoon could seriously squeeze rural incomes, reduce the demand for everything from
motorbikes to soaps and worsen a slowing economy.

1.7.3 Macro Economic Numbers :-

The macro economic numbers also influence the capital market. It includes Index
of Industrial Production (IIP) which is released every month, annual Inflation number
indicated by Wholesale Price Index (WPI) which is released every week, Export – Import
numbers which are declared every month, Core Industries growth rate ( It includes Six
Core infrastructure industries – Coal, Crude oil, refining, power, cement and finished
steel) which comes out every month, etc. This macro –economic indicators indicate the
state of the economy and the direction in which the economy is headed and therefore
impacts the capital market in India. A case in the point was declaration of core industries
growth figure. The six Core Infrastructure Industries – Coal, Crude oil, refining, finished
steel, power & cement –grew 6.5% in June , the figure came on the 23 rd of July and had
a positive impact on the capital market with the Sensex and nifty rising by 388 points &
125 points respectively.
42

1.7.4 Global Cues :-

In this world of globalization various economies are interdependent and
interconnected. An event in one part of the world is bound to affect other parts of the
world , however the magnitude and intensity of impact would vary. Thus capital market
in India is also affected by developments in other parts of the world i.e. U.S. , Europe,
Japan , etc. Global cues includes corporate earnings of MNC’s, consumer confidence
index in developed countries, jobless claims in developed countries, global growth
outlook given by various agencies like IMF, economic growth of major economies, price
of crude –oil, credit rating of various economies given by Moody’s, S & P, etc. An
obvious example at this point in time would be that of subprime crisis & recession.
Recession started in U.S. and some parts of the Europe in early 2008 .Since then it has
impacted all the countries of the world- developed, developing, less- developed and even
emerging economies.

1.7.5 Political stability and government policies:-

For any economy to achieve and sustain growth it has to have political stability
and pro- growth government policies. This is because when there is political stability
there is stability and consistency in government’s attitude which is communicated
through various government policies. The vice- versa is the case when there is no
political stability .So capital market also reacts to the nature of government, attitude of
government, and various policies of the government. The above statement can be
substantiated by the fact the when the mandate came in UPA government’s favor (
Without the baggage of left party) on May 16 2009, the stock markets on Monday , 18th
May had a bullish rally with Sensex closing 800 point higher over the previous day’s
close. The reason was political stability. Also without the baggage of left party
government can go ahead with reforms.
43

1.7.6 Growth prospectus of an economy:-

When the national income of the country increases and per capita income of
people increases it is said that the economy is growing. Higher income also means higher
expenditure and higher savings. This augurs well for the economy as higher expenditure
means higher demand and higher savings means higher investment. Thus when an
economy is growing at a good pace capital market of the country attracts more money
from investors, both from within and outside the country and vice -versa. So we can say
that growth prospects of an economy do have an impact on capital markets.

1.7.7 Investor Sentiment and risk appetite :-

Another factor which influences capital market is investor sentiment and their risk
appetite .Even if the investors have the money to invest but if they are not confident
about the returns from their investment , they may stay away from investment for some
time.At the same time if the investors have low risk appetite , which they were having in
global and Indian capital market some four to five months back due to global financial
meltdown and recessionary situation in U.S. & some parts of Europe , they may stay
away from investment and wait for the right time to come.
44

1.8 ADVANTAGES OF CAPITAL MARKET:-

1.Capital markets provide both new and existing businesses with access to cash or
capital. Businesses use this capital to cover day-to-day operating costs and to finance
expansions.

2.The advantages of capital markets include job creation, economic growthand

technological innovation.
In many instances, capital markets take the form of stock exchanges on which firms
market debt securities such as bonds, and equity securities like stocks.

3. Bondholders are creditors who lend money to institutions for a set period of time in
exchange for interest payments. Stockholders are the owners of publicly listed companies
and the funds from stock purchases are reinvested in the firm. Most firms issue both stock
and bonds; these securities are typically marketable, which means that the original
purchaser of the security can sell it on to another investor at a later date.

4. The advantages of capital markets such as stock exchanges include the fact that these
locations provide a venue where those seeking finance can be connected to
prospective lenders and investors.
45

1.9 DISADVANTAGES OF CAPITAL MARKET:-

1. Protection is not automatically provided by no-par stock.

2. The management in the absence of standard value may split up the price received into
two parts. i.e. nominal amount may be credited to the stated paid up capital and the
reminder credited to capital surplus which may later on be utilized in distributing the
dividends.

3.The existence of a sizable surplus may lead the board of directors to think that the
surplus is the result of accumulated earnings and is available for distribution as dividends.
But, in reality, it may be the sale proceed of no par stock.

4.The flexible of setting up the capital account may be responsible for the under payment
for the promoters’ services and for goodwill.

5.the declaration for no par stock dividend may divide the capital amount into a large no
of shares.
46

1.10 CLASSIFICATION OF CAPITAL MARKET:-

The capital market in India includes the following institutions (i.e., supply of funds tor
capital markets comes largely from these); (i) Commercial Banks; (ii) Insurance
Companies (LIC and GIC); (iii) Specialised financial institutions like IFCI, IDBI, ICICI,
SIDCS, SFCS, UTI etc.; (iv) Provident Fund Societies; (v) Merchant Banking Agencies;
(vi) Credit Guarantee Corporations. Individuals who invest directly on their own in
securities are also suppliers of fund to the capital market.

Thus, like all the markets the capital market is also composed of those who demand funds
(borrowers) and those who supply funds (lenders). An ideal capital market at tempts to
provide adequate capital at reasonable rate of return for any business, or industrial
proposition which offers a prospective high yield to make borrowing worthwhile.

The Indian capital market is divided into gilt-edged market and the industrial securities
market. The gilt-edged market refers to the market for government and semi-government
securities, backed by the RBI. The securities traded in this market are stable in value and
are much sought after by banks and other institutions.

The industrial securities market refers to the market for shares and debentures of old and
new companies. This market is further divided into the new issues market and old capital
market meaning the stock exchange.

The new issue market refers to the raising of new capital in the form of shares and
debentures, whereas the old capital market deals with securities already issued by
companies.

The capital market is also divided in primary capital market and secondary capital
market. The primary market refers to the new issue market, which relates to the issue of
shares, preference shares, and debentures of non-government public limited companies
and also to the realising of fresh capital by government companies, and the issue of
public sector bonds.
47

1.11 Participants of capital market:-

The term capital market refers to facilities and institutional arrangements through which
long-term funds, both debt, and equity are raised and invested. It consists of a series of
channels through which savings of the community are made available for industrial and
commercial enterprises and for the public in general.

Participants of the capital market may be discussed in groups because of their similar
activities. Groups or clusters of the participants are discussed below:

1.12.1 Loan Providers:

These types of organizations provide loans to me capital market. Others can take the loan
from the loan providers such as savings organizations, insurance organizations etc.

1.12.2 Loan takers:

A huge number of organizations want to take a loan from the capital market. Among
them, the following are prominent as Govt. organizations, Corporate bodies, Non-profit
organizations, Small business, and Local authorities.

1.12.3 Financial intermediaries:

Financial intermediaries are media between loan providers and takers. The financial
intermediaries are Insurance organizations, Pension funds, Commercial banks, financing
companies, Savings organizations, Dealers, Brokers, Jobbers, Non-profit organizations
etc.
48

1.12.4 Service organizations:

Service organizations help to run capital market perfectly. These firms, on one hand,
help issuers or underwriters to sell their instruments with high value and in other hand
help sellers and buyers to transact easily. These are mainly service organization – invests
banks, Brokers, Dealers, Jobbers, Security Exchange Commission, Rating
service, Underwriters etc.

1.12.5 Regulatory organizations:

Regulatory organizations are mainly govt. the authority that monitors and controls this
market. It secures both the investors and corporations. It strongly protects forgery in
stock market Regulatory organization controls the margin also. The Central bank, on
behalf of govt. generally controls the financial activities in a country.

With the above-mentioned participants are involved with the capital market among
transactions in this market are done and regulated.
49

1.12 INDIAN CAPITAL MARKET REGULATORY FRAMEWORK

1.15.1 SEBI:
Securities and Exchange Board of India (SEBI) was set up as an administrative
arrangement in 1988.In 1992, the SEBI Act was enacted, which gave statutory status to
SEBI. It mandates SEBI to perform a dual function: investor protection through
regulation of the securities market and fostering the development of this market. SEBI
has been vested most of the functions and powers under the Securities Contract
Regulation (SCR) Act, which brought stock exchanges, their members, as well as
contracts in securities which could be traded under the regulations of the Ministry of
Finance. It has also been delegated certain powers under the Companies Act. In addition
to registering and regulating intermediaries, service providers, mutual funds, collective
investment schemes, venture capital funds and takeovers, SEBI is also vested with the
power to issue directives to any person(s) related to the securities market or to companies
in areas of issue of capital, transfer of securities and disclosures. It also has powers to
inspect books and records, suspend registered entities and cancel registration.
50

1.15.2 RBI:
Reserve Bank of India (RBI) has regulatory involvement in the capital market, but this
has been limited to debt management through primary dealers, foreign exchange control
and liquidity support to market participants. It is RBI and not SEBI that regulates primary
dealers in the Government securities market. RBI instituted the primary dealership of
Government securities in March 1998. Securities transactions that involve foreign
exchange transactions need the permission of RBI.

1.15.3 Stock Exchanges:

SEBI issued directives that require that half the members of the governing boards of the
stock exchanges should be non broker public representatives and include a SEBI
nominee. To avoid conflicts of interest, stock brokers are a minority in the committees of
stock exchanges set up to handle matters of discipline, default and investor-broker
disputes. The exchanges are required to appoint a professional, non member executive
director who is accountable to SEBI for the implementation of its directives on the
regulation of stock exchanges. SEBI has introduced a mechanism to redress investor
grievances against brokers. Further, all issues are regulated through a series of disclosure
norms as prescribed by SEBI and respective stock exchanges through their listing
agreement. After a security is issued to the public and subsequently listed on a stock
exchange, the issuing company is required under the listing agreement to continue to
disclose in a timely manner to the exchange, to the holders of the listed securities and to
the public any information necessary to enable the holders of the listed securities to
appraise its position and to avoid the establishment of a false market in such listed
securities.

The powers and functions of regulatory authorities for the securities market seem
to be diverse in nature. SEBI is the primary body responsible for regulation of the
securities market, deriving its powers of registration and enforcement from the SEBI Act.
There was an existing regulatory framework for the securities market provided by the
Securities Contract Regulation (SCR) Act and the Companies Act, administered by the
Ministry of Finance and the Department of Company Affairs (DCA) under the Ministry
of Law, respectively.
51

1.13 ROLE AND IMPORTANCE OF CAPITAL MARKET IN INDIA:-

Capital market has a crucial significance to capital formation. For a speedy
economic development adequate capital formation is necessary. The significance of
capital market in economic development is explained below:-

1.16.1 Mobilization Of Savings And Acceleration Of Capital Formation :-

In developing countries like India the importance of capital market is self evident. In this
market, various types of securities helps to mobilize savings from various sectors of
population. The twin features of reasonable return and liquidity in stock exchange are
definite incentives to the people to invest in securities. This accelerates the capital
formation in the country.

1.16.2 Raising Long - Term Capital:-

The existence of a stock exchange enables companies to raise permanent capital. The
investors cannot commit their funds for a permanent period but companies require funds
permanently. The stock exchange resolves this dash of interests by offering an
opportunity to investors to buy or sell their securities, while permanent capital with the
company remains unaffected.

1.16.3 Promotion of Industrial Growth:-

The stock exchange is a central market through which resources are transferred to the
industrial sector of the economy. The existence of such an institution encourages people
to invest in productive channels. Thus it stimulates industrial growth and economic
development of the country by mobilizing funds for investment in the corporate
securities.

1.16.4 Ready And Continuous Market :-

The stock exchange provides a central convenient place where buyers and sellers can
easily purchase and sell securities. Easy marketability makes investment in securities
more liquid as compared to other assets.

1.16.5 Technical Assistance:-

An important shortage faced by entrepreneurs in developing countries is technical
assistance. By offering advisory services relating to preparation of feasibility reports,
52

identifying growth potential and training entrepreneurs in project management, the

financial intermediaries in capital market play an important role.

1.16.6 Reliable Guide To Performance:-

The capital market serves as a reliable guide to the performance and financial position of
corporate, and thereby promotes efficiency.

1.16.7 Proper Channelization of Funds:-

The prevailing market price of a security and relative yield are the guiding factors for the
people to channelize their funds in a particular company. This ensures effective
utilization of funds in the public interest.

1.16.8 Provision Of Variety Of Services:-

The financial institutions functioning in the capital market provide a variety of services
such as grant of long term and medium term loans to entrepreneurs, provision of
underwriting facilities, assistance in promotion of companies, participation in equity
capital, giving expert advice etc.

1.16.9 Development Of Backward Areas:-

Capital Markets provide funds for projects in backward areas. This facilitates economic
development of backward areas. Long term funds are also provided for development
projects in backward and rural areas.

1.16.10 Foreign Capital:-

Capital markets makes possible to generate foreign capital. Indian firms are able to
generate capital funds from overseas markets by way of bonds and other securities.
Government has liberalized Foreign Direct Investment (FDI) in the country. This not
only brings in foreign capital but also foreign technology which is important for
economic development of the country.

1.16.11 Easy Liquidity:-

With the help of secondary market investors can sell off their holdings and convert them
into liquid cash. Commercial banks also allow investors to withdraw their deposits, as
and when they are in need of funds
53

2. RESEARCH METHODOLOGY
2.1 Introduction
The Capital Markets Authority (CMA) was established by an Act of Parliament in 1996
to regulate and promote the development of capital markets in Uganda. Fifteen years later
the capital markets in Uganda boosts of 14 companies, 5 corporate bonds and over 15
government bonds listed on the Uganda Securities Exchange as well as over 40,000
investors. Out of the 40,000 investors, 8,920 have so far demobilized their certificates
and opened Central Securities Depository (SCD) accounts. One of the cornerstones of
capital Markets regulation is investor protection. Therefore, if CMA is to adequately
protect the investors in Uganda’s Capital Markets, it needs to fully understand the nature
and needs of these investors. It was against this background that CMA sought to procure
the services of a consultancy firm to undertake a survey of capital markets investors in
Uganda.

2.2 Purpose of the Survey

The overall purpose of this survey was to collect adequate information from CMA
stakeholders. This information would become a basis for CMA interventions and focus
on stakeholders’ needs and concerns. The study would also provide practical
recommendations for future planning
54

2.3 Objectives of the Survey

The survey intended to achieve the following objectives.

i) Establish the profile of investors in Uganda’s capital markets

ii) Establish the levels of awareness and understanding of capital markets among
investors

iii) Establish the levels of awareness about the capital Markets Authority among
investors

iv) Establish the levels of awareness and understanding about capital markets participants
among investors.

v) Establish the levels of awareness and understanding about investors rights among
investors

vi) Establish the factors affecting investments in Uganda’s capital markets.

2.4 Approach and Methodology

The assignment was highly participatory involving a broad range of stakeholders
including but not limited to Board of Directors (BoD), Management and staff of CMA
and all relevant stakeholders. This participatory approach was instrumental in
maximizing ownership of the assignment deliverables since it made it possible for
participants to focus on facts while allowing rapid appraisals. Both quantitative and
qualitative methods of data collection were used.
55

1.4.1 Population, Sample Size and Sampling Strategies for the Study
Target Population

The study targeted:

i) The Key stakeholders’ i.e. individual and corporate investors.

ii) Board of Directors, Management and staff of CMA and USE respectively.

iii) The Market intermediaries and market participants

iv) The relevant staff of the Ministry of Finance, Planning and Economic Development.

2.5 Sample Size determination and Selection procedures

2.5.1 Sample size determination

A sample frame of all individual investors has opened Central Securities Depository
(SCD) accounts were used to randomly select study participants. Given that 10,000
investors had opened accounts with SCD, 10,000 were used as the study population.
Using a confidence of level of 95% with marginal error of 5% a sample size of sample
size of 370 respondents was generated. By applying a confidence level of 95% with a
marginal error of 5% for a 10,000 population on a Random Sampling Table in Appendix
2 generated a sample size of 370 respondents. This sample was increased by 10%, to
cater for non-response. This increased the sample size to 407(adjusted to 410). Therefore,
the study had a sample size of 410 individual investors.
56

1.5.2 The Methods of Data Collection

The methods to be used will include among others the following:

i) Pilot Survey
The pretest of the tools was conducted to determine the effectiveness of survey tools.
Pretesting also helped to determine the strengths and weaknesses of survey concerning
question format, wording and order and other deficiencies that needed to corrected before
the actual survey commenced.

ii) Structured and Semi-structured Face to Face Questionnaire Interview.

The Questionnaire was administered to the investors selected from the sample frame. The
questionnaire covered the thematic areas spelt out in the terms of reference and
objectives, targets and expected outputs.

iii) Key Informant Interviews

Key informant interviews/In-depth interviews were conducted with the BoD CMA and
USE, relevant officials in MEMD, development Partners and other stakeholders using a
key informant interview guide.

iv) Literature Review/Secondary data or Desk Review:

A desk review of relevant documents of in regard to CMA and USE and other umbrella
organisations including concept papers, planning documents, MOUs, agreements,
financial and progress reports, budgets, work plans, logical framework, M & E systems,
baseline data, policy documents and sector guidelines was conducted. A checklist was
used to summarise the required information according to the different indicators that were
being studied. Data from documents was analyzed using content analysis.
57

1.4.3 Data Processing, Analysis and Management

i) Data Editing, Coding and Cleaning

Data collected using the questionnaire and other tools mentioned above, was edited,
coded, and cleaned by well-trained data managers. Both qualitative and quantitative data
obtained from the field was entered via a data entry interface customized to the layout of
the field data forms. Further, data entry, verification; screen editing and system
development were done sequentially to enable the preparation of Draft Report of the
preliminary findings.

ii) Data Analysis Package

The quantitative data were analyzed using EpiData, and exported to SPSS. Other MS
office Processing Programs (MS Word, MS Excel) were used to synthesis the findings.
Qualitative data on the other hand was categorised, summarised, and analysed along the
themes of the major variables. A sequential and content analysis was undertaken to
provide a much deeper insight into data collected.
58

2.6 Questionnaire

Instructor Name

Results Age

Gender

Annual income

1. What is your highest level of education you attend?

Primary

Secondary

Post-secondary vocational/technical training

Diploma

Bachelor’s University Degree

Master’s University Degree

Doctorate

Never been to school

Don’t know

Other
59

2. Level of income per month?

Less than 100000

1,00,001-5,00,000

5,00,000-10,00,000

10,00,001-50,00,000

50,00,001-1,00,00,000

1,00,00,000 +

3. What was your source of knowledge of capital markets?

Personal study/research

Learn about capital market in school/university/vocational school

Internet

Newspapers

Radio

Television

Seminars/talks/presentation of capital markets authority

Brochures/Pamphlets of capital markets Authority

Broker/dealers

Investment advisors

Friends & family members

60

4. How much money have you so far invested in the capital market?

Less than 100000

1,00,001-5,00,000

5,00,000-10,00,000

10,00,001-50,00,000

50,00,001-1,00,00,000

1,00,00,000 +

5. How much risk can you take while investing in capital market?

No risk at all

Low risk

Low to moderate risk

Moderate Risk

Moderate to high risk

High risk
61

6. How frequently do you invest in the capital markets?

Everyday

At least once a week, but not every day

At least once a fortnight (i.e. two weeks), but not once in a week

At least once a month, but not once a fortnight (i.e. two weeks)

Less than once a month

I have never invested in the capital markets since I bought shares/bonds at the
IPO.

7. How confident are you that the capital market is effectively regulated by capital market
authority?

Very confident

Fairly confident

Neither confident nor unconfident

Fairly confident

Very confident

Do not know
62

3. REVIEW OF LITERATURE
Anand Pandey (2003) in his thesis entitled “Efficiency of Indian Stock Market”
made an analysis of three popular stock indices to test the efficiency level and random
walk nature of Indian equity market. The study presented the evidence for inefficient
form of Indian market. Autocorrelation analysis and runs test concluded that the series of
stock indices in India are biased random time series.

Selvam M (2008) inhis research paper “Efficiency of Indian Capital Market to react
adequately to the announcement of quarterly earnings: A study in Capital goods
Industry” has stated that an efficient and integrated capital market, is an important
infrastructure that facilitates capital formation. The efficiency with which the
capital formation is carried out depends on the efficiency of the capital markets
and financial institutions. A capital market is said to be efficient with respect to an
information item if the prices of securities fully impound the returns implications of that
item. The present study has empirically examined the informational efficiency of
Indian capital market with regard to quarterly earnings released by the automobile
sector companies in the semi-strong form of EMH. The study found that the Indian
Capital market is near efficient in the semi- strong form of EMH, which can be used by
the investors to make abnormal returns.

Jumba Shelly (2010) in her report “A project on Capital Market” has ascertainedthatthe
performance of the company’s or corporate earnings is one of the factors which have
direct impact or effect on capital market in a country. Weak corporate earnings indicate
that the demand for goods and services in the economy is less due to slow growth in per
capita income of people. Because of slow growth in demand there is slow growth in
employment which means slow growth in demand in the near future. Thus weak
corporate earnings indicate average or not so good prospects for the economy as a
whole in the near term. In such a scenario the investors (both domestic as well as
foreign) would vary to invest in the capital market and thus there is bear market
like situation. The opposite case of it would be robust corporate earnings and its positive
63

impact on the capital market.The researcher has also added thatthe macroeconomic
numbers also influence the capital market. It includes Index of Industrial
Production (IIP) which is released every month, annual Inflation number indicated by
Wholesale Price Index (WPI) which is released every week, Export – Import numbers
which are declared every month, Core Industries growth rate (It includes Six Core
infrastructure industries – Coal, Crude oil, refining, power, cement and finished steel)
which comes out every month etc. This macro –economic indicators indicate the state of
the economy and the direction in which the economy is headed and therefore
impacts the capital market in India.

Ahuja Juhi (2012) in her research paper entitled “Indian Capital Market: An Overview
with Its Growth” has examined that there has been a paradigm shift in Indian capital
market. The application of many reforms & developments in Indian capital market has
made the Indian capital market comparable with the international capital markets. Now,
the market features a developed regulatory mechanism and a modern market
infrastructure with growing market capitalization, market liquidity, and mobilization of
resources. The emergence of Private Corporate Debt market is also a good
innovation replacing the banking mode of corporate finance. However, the market has
witnessed its worst time with the recent global financial crisis that originated from the
US sub-prime mortgage market and spread over to the entire world as a contagion. The
Capital Market in India delivered a sluggish performance.
64

Geetha et al (2012) in their research paper titled “Capital Market in India: A Sectorial
Analysis” had made an attempt to compare and contrast the risk return characteristics of
ten major industrial sectors which account for 88.74% of the economy’s industrial
production. A comparative analysis is done on the annual returns, total risk, systematic
risk, abnormal returns and correlation of each sectoral index. It was observed that the
sectoral indices exhibited significant difference in their risk return characteristics and
they also followed business cycles of recession, recovery and boom in their
performance. Indian economy has emerged as one of the most attractive
destinations for business and investmentopportunities due to huge manpower base,
diversified natural resources and strong macro-economic fundamentals. Indian
economy in the world market is explained in terms of statistical information
provided by the various economic parameters. Such indicators include Gross Domestic
Product (GDP), Gross National Product (GNP), Per Capita Income, Whole sale Price
Index (WPI), Consumer Price Index (CPI), etc. The economic indicators as
mentioned are recently enhanced with a new indicator – the capital market index,
which had for years proved to be a measure of the investor sentiment in an
economy. It had been one of the leading indicators of economic performance in many
countries and India also views it with substantial importance as an indicator of market
sentiment. The stock market indexes thus prove to be efficient tools to measure the
performance of Indian capital market and hence present an overall idea of the economy as
a whole. In this paper an attempt has been made for making an analysis of the
performance of major industrial sectors operating in the stock market. While
concluding it have been stated the Indian Capital Market is highly diversified with
numerous industrial sectors operating within it. The study provides an overview of the
risk return characteristics of ten major industrial sectors in the Indian market.
Investment decisions are generally made on the basis of performance of a stock and
the expectations of the investor – capital gain, regular income, liquidity etc.; in addition
there are some other indicators that investors would attach importance are return, risk and
volatility.
65

4. DATA ANALYSIS
1. What is your highest level of education you attend?

LEVEL OF EDUCATION PERCENTAGE

Primary 1%
Secondary 7%
Technical Training 4%
Diploma 11%
Bachelor's University Degree 52%
Master's University Degree 22%
Doctorate 3%

1%
3% 7% primary
4%
22% secondary

11%
technical training

diploma

bachelor's university
degree
52% master's university
degree

Interpretation:

From the above graph we can see that 1% of respondents are from primary school. 7% of
respondents are from secondary school. 11% of respondents are from technical training.
52% of respondents are from bachelor’s university degree. 22% of respondents are from
master’s university degree and 3% of respondents are from doctorate.
66

2. Level of income per month?

LEVEL OF INCOME PERCENTAGE

less than 100000 6%
1,00,001-5,00,000 21%
5,00,001-10,00,000 22%
10,00,001-50,00,000 33%
50,00,001-1,00,00,000 9%
1,00,00,000 + 4%
unemployed 5%

33%
35%
30%
25% 21% 22%

20%
15%
9%
10% 6%
4% 5%
5%
0%

Interpretation:

From the above we can see that 6% of investor in capital market earn income less than
1,00,000. 21% of investor earn income between 1,00,001-5,00,000. 22% of earn income
between 5,00,000-10,00,000. 33% of investor earn income between 10,00,001-50,00,000.
9% of investor earn income between 50,00,001-1,00,00,000. 4% of investor earn income
greater than 1,00,00,000. 5% of investor are unemployed.
67

3. What was your source of knowledge of capital markets?

PERCENTAG
SOURCE OF KNOWLEDGE E
Personal Study/Research 61%
Learn About Capital Market In School/University/Vocational School 18%
Internet 4%
Newspapers 8%
Radio 1%
Television 2%
Seminars/Talks/Presentation Of Capital Markets Authority 2%
Brochures/Pamphlets Of Capital Markets Authority 0%
Broker/Dealers 3%
Investment Advisors 0%
Friends & Family Members 1%

70%
60% 61%
50%
40%
30% 18%
20%
10% 4% 8% 3% 1%
1% 2% 2% 0% 0%
0%

Interpretation

From the above graph we came to know that investors of has different source to get the
knowledge of capital market. From 100% majority of investors get their knowledge by
personal study or research i.e. 61%. 18% of investor Learn about Capital Market in
School/University/Vocational School. Remaining 21% learn about from capital market
from internet, television, newspapers, radio, and
seminars/talks/presentation/brochures/pamphlets of CMA, brokers/dealers, investment
advisors and also friends and family.
68

4. How much money have you so far invested in the capital market?

INVESTMENT PERCENTAGE
Less than 100000 19%
1,00,001-5,00,000 20%
5,00,001-10,00,000 15%
10,00,001-50,00,000 17%
50,00,001-1,00,00,000 22%
1,00,00,000 + 7%

25% 22%
20%
19%
20% 17%
15%
15%

10% 7%

5%

0%

Interpretation

From the above graph we came to know how much money investors invest in capital
market. Out of 50 respondents 19% of them invest less than 100000. 20% of investors
invest between 1,00,001-5,00,000. 15% of investors invest between 5,00,000-10,00,000.
17% of investors invest between 10,00,001-50,00,000. 22% of investors invest between
50,00,001-1,00,00,000. 7% of investors invest greater than 1,00,00,000.
69

5. How much risk can you take while investing in capital market?

LEVEL OF RISK PERCENTAGE

High Risk 7%
Moderate To High Risk 10%
Moderate Risk 30%
Low To Moderate Risk 20%
Low Risk 24%
No Risk At All 9%

9% 7%
10%
high risk
moderate to high risk
24%
moderate risk
low to moderate risk
low risk
30%
no risk at all

20%

Interpretation

From the above graph 7% of investors are ready take high risk and 10% investors can
take moderate to high risk while investing in capital market. 30% of investors can take
moderate risk while 20% of investors can take low to moderate risk. 24% of investors can
take low risk. 9% of investors are not agreeing to take any risk.
70

6. How frequently do you invest in the capital markets?

FREQUENCY OF INVESTMENT PERCENTAGE

Every Day 4%
At Least Once A Week, But Not Every Day 8%
At Least Once A Fortnight (I.E. Two Weeks), But Not Once In A
8%
Week
At Least Once A Month, But Not Once A Fortnight (I.E. Two
17%
Weeks)
Less Than Once A Month 23%
I Have Never Invested In The Capital Markets Since I Bought
40%
Shares/Bonds At The IPO.

every day
40%

30%
I have never invested in the 40%
At least once a week, but not
capital markets since I bought 20% every day
shares/bonds at the IPO.
10% 4% 8%
0%
8%
23% At least once a fortnight (i.e.
Less than once a month two weeks), but not once in a
17% week

At least once a month, but not

once a fortnight (i.e. two
weeks)

Interpretation

From the above graph we came to know how frequently people invest in capital market.
4% of investors invest everyday in capital market. 8% of investors invest at least once in
a week, but not every day. 8% of investors invest in at least once a fortnight (i.e. two
weeks), but once in a week. 17% of investors invest in capital market at least once a
month, but not once a fortnight (i.e. two weeks)
71

7. How confident are you that the capital market is effectively regulated by capital market
authority?

LEVEL OF CONFIDENCE PERCENTAGE

Very Confident 21%
Fairly Confident 54%
Neither Confident Nor Unconfident 9%
Fairly Confident 5%
Very Confident 6%
Do Not Know 5%

60% 54%
50%
40%
21%
30%
20%
9%
10% 5%
0% 6%
Very Confident 5%
Fairly
Confident Neither
Confident Nor Fairly
Confident Very Confident
Unconfident Do Not Know

Interpretation

From the above graph we came to know that how much investors are confident that the
capital market is effectively regulated by capital market authority. 21% of investors are
very confident that capital market is effectively regulated by CMA and majority of
investors i.e. 54% are fairly confident. 9% are neither confident nor unconfident and 5%
are fairly confident, 6% are very confident and 5% are do not know are they satisfied are
not with the regulation of capital market by CMA.
72

Findings:

1. From the findings, it was apparent that the majority of the surveyed investors
(52%) had attained a bachelor’s degree as their highest level of education. This
implies that it would be very easy to sensitize the investors about Capital Markets
since most of the investors have attained a commendable level of education.

2. 33% of the investors (were earning 1,000,001-5,000,000 per month. Another

significant proportion (22%) was earning within the range of 500,001 – 1,
000,000 per month. It should also be noted that approximately 31% of the
surveyed investors earn 500,000 and below. It is critical that this category forms
the biggest of the segment of the population. It would be prudent to design
products that are friendly with their earnings.

3. It was established that majority of the surveyed investors (61%) acquired

information about capital markets and related terminologies from personal study
or research. A significant 18% acquired this knowledge from schools where as
8% got from newspapers. This could be attributed to limited access to such
sources of information.

4. The findings show that the big segment of investors (19%) had invested One
million and below. In addition, 15 % of the respondents had invested 5-10 million
and 7% had invested 10 million and above. It should be noted that the numbers of
investors reduced with increase in the amount of money. This means that
investment options or products that required higher amounts of money were likely
to attract few people to invest.
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5. Based on findings from respondents, 28.6% perceived that there was moderate
risk in investing in capital markets where as 23.1% perceive that there is low risk.
The investors who were risk averse would not be attracted to invest. This will
largely depend on their previous experience in the market of perception from
friends. It is therefore instrumental for investors and potential investors to know
what risks exist and how such risks can be minimized in order to increase
participation of more investors and frequency of investment.

6. The findings show that frequency in investment in capital markets was low. The
findings indicate that 40% of the respondents did not invest again in capital
markets after buying shares. Such frequency in investment is not likely to
stimulate the market and even offer bigger returns for investors. Such behavior
has been attributed to a narrow market with few products that are appealing or
affordable to investors. From a key informant interview a respondent revealed:

7. The findings also show that majority (54%) reported having fair confidence level.
In addition, 21% reported that they were very confident that licensed firms were
following laws and regulations. Such levels of confidence may be a pointer to
limited levels of knowledge on the laws and regulation that govern the capital
markets industry as well as procedure for enforcement.
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5. CONCLUSION & SUGGESTION

5.1 Conclusion
Capital market is playing its important role in the development of Indian economy.
Indian capital market suffered bruises in the last part of the nineties owing to the
manipulative trade practices of unscrupulous brokers and other participants; it has been
witnessing fine times in the recent past, thanks to many favourable conditions
contributing to it. With the kind and the quality of human skills possessed by India’s
financial Industry, it is quite imperative that there is need to provide sound capital
foundation for the stock market. However, it is important to note that the stock trading is
not a panacea for all that ails the Indian stock market if the recent experience of some of
corporate and banks abroad is of any indication. It is to be noted with happiness that
Government of India has successfully introduced the derivative trading in the stock
exchanges. There are very many issues, which require immediate and urgent attention of
the planners concerned.

As India progresses on in the on new millennium, much has changed, but still it suffers
from problems. It is argued that these measures described above, although useful for
reducing systemic risks, may prove inadequate against the backdrop of a variety of
structural distortions, flawed practices, and ‘soft’ enforcement or intervention.

The first week of January 2009 saw a biggest ever corporate fraud in India made by the
Satyam Computers’ founder-chairman Ramlinga Raju. The scamp showed financial
irregularities to the tune of Rs. 7,800 crore over a period of several years by manipulating
the balance sheets of the Company in connivance with the Company’s audit firm, the
Price water-house Coopers.

It is a tragic that being a regulator of the country’s capital market, SEBI remained a silent
spectator over the years even when it came to light that the World Bank had banned the
company for adopting unfair practices earlier. It has now come to the light that nearly 94
p.c. of the total shown on Satyam’s books was fake.
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5.2 Suggestions
Capital Market, reform measures have achieved only a partial success. The much wanted
debt market has not yet come through. Investor protection has remained a mirage.
Companies are not able to mobilize equity funds in the order they were able to do during
eighties and Nineties. The UTI muddle has cost several crore to the unfortunate investors.
More specifically, units 64 NAV has come down significantly. Even the proposed
measures already given by the Central Government may not help improve the
sluggishness in the Capital Market. The dematerialization process leaves smaller
exchanges with no purpose. Already companies have started delisting from the small
exchanges for want of fund

The following few suggestions are likely to bring the retail investor back to the market.

1) First of all, SEBI has to be reorganized completely with more powers, which at
present are with the Department of Company Affairs. Recruitments should be made
on merits having regard to the knowledge and experience in the capital markets. Even
when powers are given to them, they should make use of it and initiate action rather
than be a passive regulator. In the case of BPL, Videocon, Sterlite scams which took
place in 1998 the investigations were carried on for more than three years and have
been concluded only recently. There are many instances of
committees/subcommittees formed by SEBI to investigate matters and the
investigation goes on for years without yielding any results. Before the investigation
reaches the final stages, another scam gets unearthed and the entire attention is
diverted towards the new scam and the earlier scam loses its importance. Hence there
is a need for firm and faster investigations. Further the actions taken/penalties levied
should act as a deterrent for the other persons.

2) There should be some sort of control over the issuers proposing to come with an offer
so also on the issue price front and not leaving it entirely on disclosure i.e. there
should be some control over the pricing of issues which can be removed in a phased
manner. Even though this could tantamount to going against the process of
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BIBLIOGRAPHY
1. Gordon & Natarajan, “The Financial Markets & Services”, New-Delhi, Himalya
Publishing House, Year 2007. Pg. 9-10.

2. Bharti V. Pathak, “The Indian Financial System”, Pearson Education [India] Ltd. 2nd
Edition, Year 2006 Pg. 102-104.

3. Dr. G. Ramesh Babu, “The Financial Services In India”, New-Delhi, Concept

Publishing Company. Year 2005 Pg. 45-46.

4. Dr. S. Guruswami, “Capital Market”, The Mcgraw-Hill, Company, 2nd Edition, Year-
2010, Chapter-3, Page No 47-48.

5. Varghese Roy, “Stock Exchange In India”. Dalal Street Investment Journal 20th
Anniversary Issue, Volume- XXI Pg. 174-182

6. Bharti V. Pathak, “The Indian Financial System”, Pearson Education [India] Ltd. 2nd
Edition, Year 2006 Pg. 106-110.

7. “Market Wisdom Investor Empowerment Series”, Lesson No.25. From The House Of
Asit C. Mehata Investments.

WEBLIOGRAPHY
www.cdsl.com

www.nsdl.com

www.bseindia.com

www.wekipidia.com

www.cnbcdictionary.com

www.capitalmarket.com.