CHAPTER - 1

INTRODUCTION & RESEARCH

METHODOLOGY
1.1 INTRODUCTION

Indian Economy

The Indian Economy is rightly characterized as an underdeveloped

economy. Though it no longer suffers from stagnation as it did under the

British, the development since independence has not been spectacular. In

fact, what has emerged as a result of growth efforts in this country is a

dualistic economy. Further, having missed the opportunity to develop along

the traditional capitalist path during the last two centuries, India opted for a

planned capitalist development, and accordingly built up a mixed economy.

There are four main characteristic features of the Indian Economy. In the

first place the Indian economy still remains underdeveloped. Secondly,

having succeeded in coming out of the 'low level equilibrium trap', it has

been growing both in terms of an increase in its per capita income and in

term of structural changes. Thirdly, the dualistic nature of the Indian

Economy implies that a modern sector coexists in this country side by side

1
with the traditional primitive economy. Finally, from its precapitalist form

the Indian economy has evolved into a mixed economy.

Economic Growth

Economic growth may be defined as a rate of expansion that can move an

underdeveloped country from a near subsistence mode of living to

substantially higher levels in a comparatively short period of time, i.e., in

decades rather than centuries.

Indian Economy : A historical perspective

Jawaharlal Nehru once quoted that:

"Indeed some kind of chart might be drawn up to indicate the close

connection between length of British rule and progressive growth of

poverty. That rule began with outright plunder and a land revenue system

that extracted the uttermost farthing not only from the living but also from

the dead cultivators. It was a pure loot".

Why Foreign Investment?

Lack of capital is a serious handicap in the way of economic development

of under developed and developing economies. The internal resources are

2
not sufficient, so they have to rely on foreign capital in the initial stages of

their development.

We want foreign investment, as our savings are low. It will bring in good

technology. Pressure for earning foreign exchange will reduce as will

reduce the need for it. Exports are likely to be raised. It will give

employment to the people as growth effect and substitution effect on

balance will generate some additional job opportunities.

They want to invest here precisely for the fact that the rate of return is

comparatively low in their respective home countries. The differential is

large enough to allow even some risk involved in investment in a

developing country. They are loosing their own barriers to expand the

market. Yet they find that tomorrow ours are the markets that will rescue

their capitalists.

Even the foreign capital is required to

1) Sustaining a high level of investment.

2) To technological gap.

3) Exploitation of natural resources.

4) Undertaking the initial risk.

5) Development of basic economic infrastructure.

6) Improvement in the balance of payment position.

3
 7) Encouragement of domestic saving.

8) Solution to unemployment problem.

9) Establishment of basic and key industries.

10) Control over inflation.

11) Helpful in accelerating the pace of economic development.

Capital Market

Capital market is the market for long-term funds, just as the money market

is the market for short-term funds. It refers to all the facilities and the

institutional arrangements for borrowing and lending terms funds. It does

not deal in capital goods but is concerned with the raising of money capital

for purpose of investment.

The Indian capital market is divided into the giltedged market and the

industrial securities market. The gilt-edged market refers to the market for

government and semi government securities, backed by the Reserve Bank

of India. The Industrial Securities market refers to the market of shares and

debentures of old and new companies.

The capital market is also classified into primary capital market and

secondary capital market. The primary market refers to the new issue

market that relates to issue of shares, preference shares and debentures of

nongovernmental public limited companies and also to the raising of fresh

4
capital by government companies and the issue of public sector bonds. The

secondary capital market, on the other hand, is the market for old or

already issued securities. The secondary capital market is composed of

industrial security market or the stock exchange in which industrial

securities are bought and sold, and the gilt-edged market in which the

government and semi government securities are traded.

1.2 Importance of the study

Indian government needs money to finance industry and trade. There has

been a shift in the approach of government from mixed economy to open

economy that was adopted in post independence era. The foreign inflow has

given a new Philip to Indian Entrepreneurship which has been rapidly

spreading it arms. The foreign investments see a good return in booming

Indian Economy and have therefore preferred to invest in Indian stock

market which is giving them a good return. And as a result we see that

Indian stock market is booming and scaling new heights.

Even the study is important to assess the impact of foreign investment on

the growth of Indian Economy. This study will help to know about the

present position where right now Indian Economy is standing on the path.

of progress. It will help to evaluate the performance of foreign capital. The

study will also help to know about the factors, which will help in overall

5
growth of Indian Economy. And will also suggest the remedies or steps

that can be taken in future to remove the obstacles and hurdles from the

path of success, growth and progress.

In nutshell, the study is important for the overall of performance of Indian

Economy and role of foreign investment in it.

1.3 Object of the study

The main objectives of the study are as follows

1) Analysizing role of SEBI in protecting the investors.

2) The role of SEBI in monitoring and governing the stock.

3) To assess the impact of foreign investment on stock market activities.

4) To evaluate performance of foreign capital.

5) To know the factors of Indian Stock Markets through which

developing Economy like India can become a developed Economy.

1.4 Hypothesis

This research is done by keeping following hypothesis in mind

1) SEBI is protecting the interest of the investors and is regularly

monitoring stock market activities.

2) FIIs have invested heavily after 2001.

6
1.5 Research Methodology

Every research is based upon facts and figure. All these facts and figures

together form the data of the study. Every study is incomplete without

obtaining or collecting these data. The research will be based on primary

data and secondary data. The researcher has collected primary data through

following methods:

(1) Personal interviews, which are of

 Share Brokers.

 Employees and authorities of various stock exchange.

 Investor dealing in shares.

(2) By filing questionnaire Information is collected by the investor and

other concerned persons through questionnaire. The researcher has

collected secondary data through different books, magazines

booklets, different newspapers, websites and dissertation work

already done on the related subject. The data collected has been

tabulated, classified, analyzed and interpretation made by adopting

different statistical methods like average, percentage, correlation etc.

wherever required accordingly.

7
1.6 Scope and Limitation

As the Indian Stock Market and its activities are very wide, so the scope of

the study is also very wide. There are many factors, which are helping in the

growth of Indian Economy. Foreign Investment is one of them. Therefore, it

has been limited to stock traded on BSE and NSE. Because if wide area will

be considered then there will be problem in collecting data helpful in the

study.

Few major limitations are as follows:

1) As the "Stock Market Activities" are very wide therefore activities of

stock market between the years 2Q01 to 2006 are considered.

2) Lack of exact information given by people and concerned

persons may mislead the results.

3) Too much help of secondary data may create a doubt on accuracy of

study and results.

4) Again we have concluded over average data, thus it may have

standard and probable errors also.

5) Government policies are amended from time to time; therefore it may

affect the conclusion adversely.

8
6) Foreign investment has wide scope but as per the need of the study

only foreign investment through mutual fund and stock market is

explained.

9
 CHAPTER - 2
INDIAN ECONOMY

2.1 Early Indian Economy

Indian economy in the early period was a self sufficient economy

comprising of several villages. Indian villages produced and met their

requirement according to division of labour and their economic activity

was restricted to village economy. Barter system prevailed as an exchange

mechanism. Basically, the primary activity was agriculture. Other services

like carpentry, weaving, hair dressing, etc. were offered by labourers who

extended their services based on hereditary. They received their wages as

food products. In short, Indian villages functioned as an independent

republics and the only interference was from the King for whom they paid

taxes in kind. Thus, India had happy villages.

Prior to the British rule, religion, system of the society and king's law

influenced the economy to a great extent. There prevailed caste system

which decided the division of labour for the benefit of the society's

economy. Further, the prevalence of joint family system helped them to

pool their resources for their individual family benefit and also for the

10
benefit of the society. Another advantage of the joint family system was

that the cultivable lands were not fragmented, yielding to better economic

gains.

Another influencer of early Indian economy was the Hindu religion. The

religious centers also functioned as Indian trade centers. For example, major

pilgrimage spots like Nasik, Allahabad, Varanasi, etc. also functioned as

centers of commerce and trade. Many trade and commerce activities were

linked to the religious festivals and functions. In short, the Hindu religion

acted as an indirect catalyst for the Indian economy.

One of the major industries in early India was textile. Handicrafts were also

part of the Indian industrial activity. Indian textile products like shawls,

dhotis, dupattas, woolen products, cotton goods, etc. and handicraft

products were exported to overseas markets, such as Egypt, South East

Asia, Greece, etc. It is worth noting that when Europe (birth place of

modern industrialism) was /inhabited by uncivilized people, India was very

popular for its craftsmanship and rich economy.

By 2025 the Indian economy is projected to be about 60 per cent the size

of the US economy. The transformation into a tripolar economy will be

complete by 2035, with the Indian economy only a little smaller than the

US economy but larger than that of Western Europe. By 2035, India is

11
likely to be a larger growth driver than the six largest countries in the EU,

though its impact will be a little over half that of the US.

India, which is now the fourth largest economy in terms of purchasing

power parity, will overtake Japan and become third major economic power

within 10 years.

2.2 Characteristics of a Developing Economy

Some basis characteristics of developing Indian economy are as follows

1. Rise in net national product.

2. Rise in per capita income.

3. Slow changing sectoral distribution of domestic product.

4. Stability in the occupational distribution of population.

5. Growth of basic capital good industries.

6. Expansion in social overhead capital.

7. Progress in the banking & financial sector.

8. Building human capital.

12
2.3 Indian Economy in the Pre-British Period

After the Battle of Plessey, the British East Indian Company had

succeeded in establishing its rule over the major part of India and with it

began the period of colonial exploitation of the country. In this period there

was massive drain of wealth from India to England and it resulted in

pauperization of this country. Even the transfer of power from the East

India Company to the British Crown did not materially alter the situation.

The colonial exploitation had continued: only its form had changed.

Britain had exploited India over a period of two centuries of its colonial

rule, but the form of exploitation was not the same throughout the period.

On the basis of the form of colonial exploitation economic historians have

divided the whole period into three phases:

(1 ) The period of merchant capital starting from the battle of ,plassey

and continuing till the end of 18th century.

(2) The period of industrial capital Starting from the beginning of 19th

century and continuing till the end of this century.

(3) The period of finance capital Starting from the late 19th century and

continuing till the independence. '

13
2.4 Indian Economy in the Post-British period (After Independence)

Indian economy suffered a lot during the British period. In this period the

Indian Economy consisted of isolated and self-sustaining villages on the

one hand, and towns, which were the seats of administration, pilgrimage,

commerce and handicrafts on the other. Means of transport and

communication were highly underdeveloped and so the size of the market

was very small. The Indian economy suffered all types of problems during

this period. Our economy was sick economy at that time. But gradually

time passed and our country got freedom in 1947.' Then after the time

came when everyone started to think about the development of the

country. All necessary steps were started to taken to make the growth and

progress of the country. Then the era came when our leaders thought for

the planning of the country. The rapid advances registered by some

socialist economies in the 1950s and 1960s had thoroughly convinced our

leaders of the necessity of planning, and the planning process initiated in

1951 has been continued in the country for more than four decades.

The first step towards planning was taken in 1950 when the Government of
India appointed a Planning Commission. The planning process itself was
initiated in April 1951 when the first five-year plan was launched. Since
then nine five year plans have been completed. When it is said that

14
particular plan had failed or was not a success, it only means that the
targets fixed during a given plan were not achieved fully. But it should be
remembered that with every five-year plan, India could start at a higher
level of growth and development.

15
 CHAPTER - 3

INDIAN STOCK MARKET

3.1 lndian Stock Market-An Evolution

Indian: Stock Markets are one of the oldest in Asia. Its history dates back to

nearly 200 years ago. The earliest records of security dealings in India are

meagre and obscure. The East India Company was the dominant institution

in those days and business in its loan securities used to be transacted

towards the close of the eighteenth century.

By 1830ls business on corporate stocks and shares in Bank and Cotton

presses took place in Bombay. Though the trading list was broader in 1839,

there were only half a dozen brokers recognized by banks and merchants

during 1840 and 1850.

The 1850's witnessed a rapid development of commercial enterprise and

brokerage business attracted many men into the field and by 1860 the

number of brokers increased into 60.

In 186061 the American Civil War broke out and cotton supply from United

States of Europe was stopped; thus, the 'Share Mania' in India begun. The

16
number of brokers increased to about 200 to 250. However, at the end of the

American Civil War, in 1865, a disastrous slump began (for example, Bank

of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87).

At the end of the American Civil War, the brokers who thrived out of Civil

War in 1874, found a place in a street (now appropriately called as Dalal

Street) where they would conveniently assemble and transact business. In

1887, they formally established in Bombay, the "Native Share and Stock

Brokers' Association" (which is alternatively known as "The Stock

Exchange "). In 1895, the Stock Exchange acquired a premise in the same

street and it was inaugurated in 1899. Thus, the Stock Exchange at

Bombay was consolidated.

Other leading cities in stock market operations

Ahmedabad gained importance next to Bombay with respect to cotton

textile industry. After 1880, many mills originated from Ahmedabad and

rapidly forged ahead. As new mills were floated, the need for a Stock

Exchange at Ahmedabad was realized and in 1894 the brokers formed "The

Ahmedabad Share and Stock Brokers' Association".

What the cotton textile industry was to Bombay and Ahmedabad, the jute

industry was to Calcutta. Also tea and coal industries were the other major

industrial groups in Calcutta. After the Share Mania in 186165, in the

17
1870's there was a sharp boom in jute shares, which was followed by a

boom in tea shares in the 1880's and 1890's; and a coal boom between 1904

and 1908. On June 1908, some leading brokers formed 'The Calcutta Stock

Exchange Association".

In the beginning of the twentieth century, the industrial revolution was on

the way in India with the Swadeshi Movement; and with the inauguration of

the Tata Iron and Steel Company Limited in 1907, an important stage in

industrial advancement under Indian enterprise was reached.

Indian cotton and jute textiles, steel, sugar, paper and flour mills and all

companies generally enjoyed phenomenal prosperity, due to the First World

War.

In 1920, the then demure city of Madras had the maiden thrill of a stock

exchange functioning in its midst, under the name and style of "The Madras

Stock Exchange" with 100 members. However, when boom faded, the

number of members stood reduced from 100 to 3, by 1923, and so it went

out of existence.

In 1935, the stock market activity improved, especially in South India

where there was a rapid increase in the number of textile mills .and many

plantation companies were floated. In 1937, a stock exchange was once

again organized in Madras Madras Stock Exchange Association (Pvt)

18
Limited. (In 1957 the name was changed to Madras Stock Exchange

Limited).

Lahore Stock Exchange was formed in 1934 and it had a brief life. It was

merged with the Punjab Stock Exchange Limited, which was incorporated

in 1936.

Indian Stock Exchanges-An Umbrella Growth

The Second World War broke out in 1939. It gave a sharp boom which was

followed by a slump. But, in 1943, the situation changed radically, when

India was fully mobilized as a supply base.

On account of the restrictive controls on cotton, bullion, seeds and other

commodities, those dealing in them found in the stock market as the only

outlet for their activities. They were anxious to join the trade and their

number was swelled by numerous others.

Many new associations were constituted for the purpose and Stock

Exchanges in all parts of the country were floated.

The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange

Limited (1940) and Hyderabad Stock Exchange Limited (1944) were

incorporated.

19
In Delhi two stock exchanges Delhi Stock and Share Brokers' Association

Limited and the Delhi Stocks and Shares Exchange Limited were floated

and later in June 1947, amalgamated into the Delhi Stock Exchange

Association Limited.

Post-Independence Scenario

Most of the exchanges suffered almost a total eclipse during depression.

Lahore Exchange was closed during partition of the country and later

migrated to Delhi and merged with Delhi Stock Exchange.

Bangalore Stock Exchange Limited was registered in 1957 and recognized

in 1963.

Most of the other exchanges languished till 1957 when they applied to the

Central Government for recognition under the Securities Contracts

(Regulation) Act, 1956. Only Bombay, Calcutta, Madras, Ahmedabad,

Delhi, Hyderabad and Indore, the well established exchanges, were

recognized under the Act. Some of the members of the other Associations

were required to be admitted by the recognized stock exchanges on a

concessional basis, but acting on the principle of unitary control, all these

pseudo stock exchanges were refused recognition by the Government of

India and they thereupon ceased to function.

20
Thus, during early sixties there were eight recognized stock exchanges in

India (mentioned above). The number virtually remained unchanged, for

nearly two decades. During eighties, however, many stock exchanges were

established: Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange

Association Limited (at Kanpur, 1982), and Pune Stock Exchange Limited

(1982), .Ludhiana Stock Exchange Association Limited (1983), Gauhati

Stock Exchange Limited (1984), Kanara Stock Exchange Limited (at

Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986),

Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange

Association Limited (1989), Saurashtra Kutch Stock Exchange Limited (at

Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990) and

recently established exchanges Coimbatore and Meerut. Thus, at present,

there are totally twenty one recognized stock exchanges in India excluding

the Over the Counter Exchange of India Limited (OTCEI) and the National

Stock Exchange of India Limited (NSEIL).

3.2 Growth pattern of Indian Stock Market

The Table given below portrays the overall growth pattern of Indian stock

markets since independence. It is quite evident from the Table that Indian

stock markets have not only grown just in number of exchanges, but also in

number of listed companies and in capital of listed companies. The

remarkable growth after 1947 can be clearly seen from the Table, and this

21
was due to the favoring government policies towards security market

industry.

Growth Pattern of the Indian Stock Market

As on 31st 1947 1961 1971 1975 1980 1985 1991 1995
December
No. of 7 7 8 8 9 14 20 22
Stock Exchanges
No. of 1125 1203 1599 1552 2265 4344 6229 8593
Listed Cos.
No. of Stock 1506 2111 2838 3230 3697 6174 8967 11784
Issues of
Listed Cos.
Capital of Listed 270 753 1812 2614 3973 9723 32041 59583
Cos. (Cr. Rs.)
Market value of 971 1292 2675 3273 6750 25302 110279 478121
Capital of Listed
Cos. (Cr. Rs.)
Capital per 24 63 113 168 175 224 514 693
Listed Cos. (4/2)
(Lakh Rs.)
Market Value of 86 107 167 211 298 582 1770 5564
Capital per Listed
Cos. (Lakh Rs.)
(5/2)
Appreciated value 358 170 148 126 170 260 344 803
of Capital per
Listed Cos. (Lak Rs.)

3.2 Trading Pattern of Indian Stock Market

22
Trading in Indian stock exchanges is limited to listed securities of public

limited companies. They are broadly divided into two categories, namely,

specified securities (forward list) and no specified securities (cash list).

Equity shares of dividend paying, growth oriented companies with a paid-

up capital of at least RS.50 million and a market capitalization of at least

RS.100 million and having more than 20,000 shareholders are, normally,

put in the specified group and the balance in no specified group.

Two types of transactions can be carried out on the Indian stock

exchanges: (a) spot delivery transactions "for delivery and payment within

the time or on the date stipulated when entering into the contract which

shall not be more than 14 days following the date of the contract": and (b)

forward transactions "delivery and payment can be extended by further

period of 14 days each so that the overall period does not exceed 90 days

from the date of the contract". The latter is permitted only in the case of

specified shares. The brokers who carry over the outstanding pay carry

over charges (can tango or backwardation) which are usually determined

by the rates of interest prevailing.

A member broker in an Indian stock exchange can act as an agent, buy and

sell securities for his clients on a commission basis and also can act as a

trader or dealer as a principal, buy and sell securities on his own account

23
and risk, in contrast with the practice prevailing on New York and London

Stock Exchanges, where a member can act as a jobber or a broker only.

The nature of trading on Indian Stock Exchanges are that of age old

conventional style of face-to-face trading with bids and offers being made

by open outcry. However, there is a great amount of effort to modernize the

Indian stock exchanges in the very recent times.

24
 CHAPTER - 4
STOCK EXCHANGES IN INDIA
4.1 Different stock exchanges in India

Ahmedabad Stock Exchange Ahmedabad 1894

Bangalore Stock Exchange Bangalore 1963
Bhubaneshwar Stock Exchange Bhubaneshwar 1956
Bombay Stock Exchange Mumbai 1875
Calcutta Stock Exchange Kolkata 1830
Cochin Stock Exchange Kochi 1989
Coimbatore Stock Exchange Coimbatore 1998
Delhi Stock Exchange New Delhi 1947
Guwahati Stock Exchange Guwahati 1983
Hyderabad Stock Exchange Hyderabad 1943
Interconnected Stock Exchange of India Kolkata
Jaipur Stock Exchange Jaipur 1989
Kanara Stock Exchange Mangalore
Ludhiana Stock Exchange Association Ludhiana 1983
Madhya Pradesh Stock Exchange Indore

Mangalore Stock Exchange Mangalore 1984

Meerut Stock Exchange Meerut 1956
National Stock Exchange of India Mumbai 1992
GTC Exchange of India Mumbai 1990
Pune Stock Exchange Pune 1982
Saurashtra-Kutch Stock Exchange Raikot 1989
Uttar Pradesh Stock Association Kanpur 1982
Vadodara Stock Exchange Vadodara/Baroda 1990

4.2 Functioning of major stock exchanges

25
Bombay Stock Exchange The Stock Exchange, Mumbai, popularly

known as "BSE" was established in 1875 as "The Native Share and

Stock Brokers Association". It is the oldest one in Asia, even older than

the Tokyo Stock Exchange, which was established in 1878. It is a

voluntary nonprofit making

Association of Persons (AOP) and is currently engaged in the process of

converting itself into demutualised and corporate entity. It has evolved over

the years into its present status as the premier Stock Exchange in the

country. It is the first Stock Exchange in the Country to have obtained

permanent recognition in 1956 from the Govt. of India under the Securities

Contracts (Regulation) Act, 1956.

The Exchange, while providing an efficient and transparent market for

trading in securities, debt and derivatives upholds, the interests of the

investors and ensures redressed of their grievances whether against the

companies or its own member brokers., It also strives to educate and

enlighten the investors by conducting investor education programmes and

making available to them necessary informative inputs.

A Governing Board having 20 directors is the apex body, which decides the

policies and regulates the affairs of the Exchange. The Governing Board

consists of 9 elected directors, who are from the broking community (one

26
third of them retire ever year by rotation), three SEBI nominees, six public

representatives and an Executive Director & Chief Executive Officer and a

Chief Operating Officer.

The Executive Director as the Chief Executive Officer is responsible for

the day-to-day administration of the Exchange and he is assisted by the

Chief Operating Officer and other Heads of Departments.

The Exchange has inserted new Rule NO.126 A in its Rules, Byelaws &

Regulations pertaining to constitution of the Executive Committee of the

Exchange. Accordingly, an Executive Committee, consisting of three

elected directors, three SEBI nominees or public representatives, Executive

Director & CEO and Chief. Operating Officer has been constituted. The

Committee considers judicial & quasi matters in which the Governing

Board has powers as an Appellate Authority, matters regarding annulment

of transactions, admission, continuance and suspension of member brokers,

declaration of a member broker as defaulter, norms, procedures and other

matters relating to arbitration, fees, deposits, margins and other monies

payable by the member brokers to the Exchange, etc.

Turnover on the Exchange

27
  The average daily turnover of the Exchange during the financial

year 20002001 (April-March), was RS.3984.19 crores and the

average number of daily trades was 5.69 lakhs.

 The average daily turnover of the Exchange in the subsequent two

financial years, Le., 200102 & 200203, has declined considerably to

Rs. 1248.15 crores and Rs. 1251.29 crores respectively.

 The average number of daily trades recorded during 200102 and

200203 numbered 5.17 lakhs and 5.63 lakhs respectively.

The average daily turnover and average number of daily trades during the

quarter AprilJune 2003 were Rs. 1101.05 crores and 5.70 lakhs

respectively.

The ban on all deferral products like Borrowing & Lending of Securities

Scheme (BLESS) and Automated Lending & Borrowing Mechanism

(ALBM) in the Indian capital markets by SEBI w.e.f. July 2, 2001, abolition

of account period settlements, introduction of Compulsory Rolling

Settlements in all scrips traded on the Exchanges w.e.f. December 31, 2001,

etc. have adversely impacted the liquidity in the market and consequently

there is a considerable decline in the average daily turnover at the

Exchange as reflected in above statistics. Listing of securities.

28
Listing means admission of the securities to dealings on a recognized stock

exchange, The securities may be of any public limited company, Central or

State Government, quasi governmental and other financial

institutions/corporations, municipalities, etc.

The objectives of listing are mainly to:

 Provide liquidity to securities;

 Mobilize savings for economic development;

 Protect interest of investors by ensuring full disclosures.

The Exchange has a separate Listing Department to grant approval for

listing of securities of companies in accordance with the provisions of the

Securities Contracts (Regulation) Act, 1956, Securities Contracts

(Regulation) Rules, 1957, Companies Act, 1956, Guidelines issued by

SEBI and Rules, Byelaws and Regulations of the Exchange.

A company intending to have its securities listed on the Exchange has to

comply with the listing requirements prescribed by the Exchange. Some of

the requirements are as under:

 Minimum Listing Requirements for new companies

29
  Minimum Listing Requirements for companies listed on other stock

exchanges

 Minimum Requirements for companies delisted by this Exchange

seeking relisting of this Exchange

 Permission to use the name of the Exchange in an Issuer IV

 Company's prospectus Submission of Letter of Application

 Allotment of Securities

 Trading Permission

 Requirement of 1 % Security

 Payment of Listing Fees

 Compliance with Listing Agreement

 Group

 Cash Management Services (CMS) Collection of Listing Fees

National Stock Exchange

The National Stock Exchange of India Limited (NSE) is a Mumbaibased

stock exchange. It is the largest stock exchange in India and the third largest

30
in the world in terms of volume of transactions. NSE is mutually owned a

set of leading financial institutions, banks, insurance companies and other

financial intermediaries in India but its ownership and management operate

as separate entities. As of 2006, the NSE VSA T terminals, 2799 in total,

cover more than 1500 cities across India. In March 2006, the NSE had a

total market capitalization of 4,380,774 crore INR making it the

secondlargest stock market in South Asia in terms of marketcapitalization.

The National Stock Exchange of India was promoted by leading financial

institutions at the behest of the Government of India, and was incorporated

in November 1992 as a taxpaying company. In April 1993, it was

recognized as a stock exchange under the Securities Contracts (Regulation)

Act, 1956; NSE commenced operations in the Wholesale Debt Market

(WDM) segment in June 1994. The Capital Market (Equities) segment of

the NSE commenced operations in November 1994, while operations in

the Derivatives.

Over the Counter Exchange of India

The OTGEI allows listing of small and medium sized companies. The first

issue listed on the OTGEI was in July 1992. The minimum issued share

capital required of a company that wants to be listed on OTCEI is Rs.3

million and the maximum Rs.250 million.

31
Listing on OTCEI is advantageous to companies because of the high

liquidity of these securities, which is a result of compulsory market making,

improved access and speed of transactions resulting from the extensive

network of electronically interlinked counters.

Companies engaged in investment, leasing, finance, hire purchase,

amusement parks etc., and companies listed on any other recognized stock

exchange in India are not eligible for listing on OTCEI. Also, listing is

granted only if the issue is fully subscribed to by the public and sponsor.

An electronic stock exchange based in India that is comprised of small and

medium sized firms looking to gain access to the capital markets. Like

electronic exchanges in the U.S. such as the NASDAQ, there is no central

place of exchange and all trading is done through electronic networks.

Investopedia Says: The first electronic GTC stock exchange in India was

established in 1990 to provide investors and companies with an additional

way to trade and issue securities. This was the first exchange in India to

introduce market makers, which are firms that hold shares in companies

and facilitate the trading of securities by buying and selling from other

participants.

32
 CHAPTER - 5
SECURITY EXCHANGE, BOARD
OF INDIA (SEBI)
5.1 Introduction

In 1988 the Securities and Exchange Board of India (SEBI) was

established by the Government of India through an executive resolution,

and was subsequently upgraded as a fully autonomous body (a statutory

Board) in the year 1992 with the passing of the Securities and Exchange

Board of India Act (SEBI Act) on 30th January 1992. In place of

Government Control, a statutory and autonomous regulatory board with

defined responsibilities, to cover both development & regulation of the

market, and independent powers have been set up. Paradoxically this is a

positive outcome of the Securities Scam of 1990-91.

The basic objectives of the Board were identified as:

1. to protect the interests of investors in securities;

2. to promote the development of Securities Market;

3. to regulate the securities market and

33
4. for matters connected therewith or incidental thereto.

Since its inception SEBI has been working targeting the securities and is

attending to the fulfillment of its objectives with commendable zeal and

dexterity. The improvements in the securities markets like capitalization

requirements, margining, establishment of clearing corporations etc.

reduced the risk of credit and also reduced the market.

SEBI has introduced the comprehensive regulatory measures, prescribed

registration norms, the eligibility criteria, the code of obligations and the

code of conduct for different intermediaries like, bankers to issue,

merchant bankers, brokers and sub-brokers, registrars, portfolio managers,

credit rating agencies, underwriters and others. It has framed bye-laws, risk

identification and risk management systems for Clearing houses of stock

exchanges, surveillance system etc. which has made dealing in securities

both safe and transparent to the end investor.

Another significant event is the approval of trading in stock indices (like

S&P CNX Nifty & Sensex) in 2000. A market Index is a convenient and

effective product because of the following reasons:

1. It acts as a barometer for market behavior;

2. It is used to benchmark portfolio performance;

34
3. It is used in derivative instruments like index futures and index options;

4. It can be used for passive fund management as in case of Index Funds.

Two broad approaches of SEBI is to integrate the securities market at the

national level, and also to diversify the trading products, so that there is an

increase in number of traders including banks, financial institutions,

insurance companies, mutual funds, primary dealers etc. to transact

through the Exchanges. In this context the introduction of derivatives

trading through Indian Stock Exchanges permitted by SEBI in 2000 AD is

a real landmark.

SEBI appointed the L. C. Gupta Committee in 1998 to recommend the

regulatory framework for derivatives trading and suggest bye-laws for

Regulation and Control of Trading and Settlement of Derivatives

Contracts. The Board of SEBI in its meeting held on May 11, 1998

accepted the recommendations of the committee and approved the phased

introduction of derivatives trading in India beginning with Stock Index

Futures. The Board also approved the "Suggestive Bye-laws" as

recommended by the Dr LC Gupta Committee for Regulation and Control

of Trading and Settlement of Derivatives Contracts.

35
SEBI then appointed the J. R. Verma Committee to recommend Risk

Containment Measures (RCM) in the Indian Stock Index Futures Market.

The report was submitted in November 1998.

However the Securities Contracts (Regulation) Act, 1956 (SCRA) required

amendment to include "derivatives" in the definition of securities to enable

SEBI to introduce trading in derivatives. The necessary amendment was

then carried out by the Government in 1999. The Securities Laws

(Amendment) Bill, 1999 was introduced. In December 1999 the new

framework was approved.

Derivatives have been accorded the status of `Securities'. The ban imposed

on trading in derivatives in 1969 under a notification issued by the Central

Government was revoked. Thereafter SEBI formulated the necessary

regulations/bye-laws and intimated the Stock Exchanges in the year 2001.

5.2 Role of the stock exchanges

The secondary market i.e. the stock exchange is an open auction market,

where the buyers and sellers meet to deal in securities. The importance of

stock exchanges can be well depicted from the fact that

1. It imparts liquidity to the scrip held.

2. It provides price continuity to the shares traded on stock exchanges.

36
3. The market price of share reflects the intrinsic value of the security.

4. The trading is conducted under the supervision of the stock exchange

authorities.

5.3 Pre issue obligation

The obligation required to be fulfilled before the issues of shares are as

follows:

1. The lead merchant banker shall exercise due diligence.

2. Documents to be submitted along with offer document by the lead

manager.

3. Appointment of intermediaries

4. Underwriting

5. Offer document to be made public

6. Dispatch of issue material

7. No complaints certificate

8. Mandatory collection centre

9. Authorized collection agents

10. Advertisement for right post issue

11. Appointment of compliance officer

12. Abridged prospectus

13. Agreement with depositories

37
5.4 Post issue obligation

The post issue obligations are as follows:

1. Post issue monitoring reports

2. Redressal of investors

3. Coordination with intermediaries

4. Post issue advertisement 5. Basis of allotment

6. Certificate regarding realization of stock invest

5.5 SEBI guidelines for IPO's

Guidelines for IPO's are as follows:

1. Promoters should contribute a minimum of 20% of the total issued

capital, if the company is unlisted one.

2. Net offer to the general public has to be at least 25% of the total issue

size for listing on a stock exchange.

3. Minimum of 50% of the net offer to the public has to be reserved for

investors applying for 10 or less than 10 marketable lots of shares.

38
4. In an issue of more than rs 100crores the issuer is allowed to place

the whole issue by book building.

5. There should be at least 5 investors for every 1 lakh of equity

offered.

6. Allotment has to be made within 30 days of the closure of the public

issue and 42 days in case of a right issue.

7. All the listing formalities for a public issue have to be completed

within 70 days from the date of closure of the subscription list.

8. Indian Development Financial Institutions and Mutual Funds can be

allotted securities up to 75°10 of the issue amount.

9. Allotment to the cateGDRies of FII's and NRl's/OCB's is up to a

maximum of 24% which can be further extended to 30°10 by an

application to the RBI supported by a resolution passed in General

Meeting.

10.10% individual ceiling for each cateGDRy (a) Permanent employees

(b) Shareholding of the promoting companies.

[Link] issued to the promoter, his group companies by way of

firm allotment and reservation have a lockin period of 3 years.

39
 However shares allotted to FII's and certain Indian and Multilateral

Development Financial Institutions and Indian Mutual Funds are not

subject to Lock - in periods.

[Link] minimum period for which a Public Issue has to be kept open is

3 working days and the maximum for which it can be kept open is 10

working days. The minimum period for a Rights Issues is 15 working

days and the maximum is 60 working days.

13.A public issue is affected if the issue is able to procure 90 % of the

total issue size within 60 days from the date of earliest closure of the

public issue. In case of over subscription the company may have the

right to retain the excess application money and allot shares more

than the proposed issue which is referred to as the' green-shoe' option.

14.A rights issue has to procure 90 % subscription in 60 days of the

opening of the issue.

40
 CHAPTER - 6
FOREIGN INVESTMENT IN
INDIA
6.1 Foreign Investment in India

Foreign investment policy:

The Ministry of Industry has expanded the list of industries eligible for

automatic approval of foreign investments and, in certain cases, raised the

upper level of foreign ownership from 51 percent to 74 percent and further

in certain cases to 100 percent. In January 1998, the RBI announced

simplified procedures for automatic FDI approvals. The announcement

further provided that Indian companies will no longer require prior

clearances from the RBI for inward remittances of foreign exchange or for

the issuance of shares to foreign investors.

Facilitating foreign investment

In the recent budget, the finance minister announced the government's

commitment to a 90 day period for approving all foreign investments.

Government officers will be assigned to larger foreign investment proposals

and will facilitate Central and State clearances in a time-bound manner.

41
Unlisted companies with a good 3 year track record have been permitted to

raise funds in international markets through the issue of Global Depository

Receipts (GDRs) and American Depository Receipts (ADRs).

A number of recent policy changes have reduced the discriminatory

bias against foreign firms.

 The government has amended exchange control regulations

previously applicable to companies with significant foreign

participation.

 The ban against using foreign brand names/trademarks has been

lifted.

 The. FY 1994/95 budget reduced the corporate tax rate for foreign

companies from 65 percent to 55 percent. The tax rate for domestic

companies was lowered to 40 percent.

 The long-term capital gains rate for foreign companies was lowered

to 20 percent; a 30 percent rate applies to domestic companies.

 The Indian Income Tax Act exempts export earnings from corporate

income tax for both Indian and foreign firms.

42
Other policy changes have been introduced to encourage foreign direct

and foreign institutional investment.

For instance, the Securities and Exchange Board of India (SEBI) recently

formulated guidelines to facilitate the operations of foreign brokers in India

on behalf of registered Foreign Institutional Investors (Fil's). These brokers

can now open foreign currencydenominated or rupee accounts for crediting

inward remittances, commissions and brokerage fees.

Relaxation

The condition of dividend balancing (offsetting the outflow of foreign

exchange for dividend payments against export earnings) has been

eliminated for all but 22 consumer goods industries. A 5year tax holiday is

extended to enterprises engaged in development of infrastructural facilities.

Even without a registered office in India, foreign companies are allowed to

start multimodal transport services in India.

The Reserve Bank of India (RBI) now permits 100 percent foreign

investment in the construction of roads/bridges. The peak custom duty rate

was reduced to 50 percent from 65 percent in the March 1995 budget.

Import regime changes included enhancement of the scope of Special

Import License (SIL) programs, and the expansion of. Freely importable

43
items on the Open General License (OGL) list to include some consumer

goods.

6.2 Foreign direct investment

Foreign direct investment (FDI) is defined as "investment made to acquire

lasting interest in enterprises operating outside of the economy of the

investor." The FDI relationship consists of a parent enterprise and a foreign

affiliate which together form a transnational corporation (TNC). In order to

qualify as FDI the investment must afford the parent enterprise control

over its foreign affiliate. The UN defines control in this case as owning

10% or more of the ordinary shares or voting power of an incorporated

firm or its equivalent for an unincorporated firm.

Types of FDI based on the motives of the investing firm

FDI can also be cateGDRized based on the motive behind the investment

from the perspective of the investing firm:

Resource Seeking:

Investments which seek to acquire factors of production those are more

efficient than those obtainable in the home economy of the firm. In some

cases, these resources may not be available in the home economy at all (e.g.

cheap labor and natural resources). This typifies FDI into developing

44
countries, for example seeking natural resources in the Middle East and

Africa, or cheap labor in Southeast Asia and Eastern Europe.

Market Seeking:

Investments which aim at either penetrating new markets or maintaining

existing ones. FDI of this kind may also be employed as defensive strategy;

it is argued that businesses are more likely to be pushed towards this type of

investment out of fear of losing a market rather than discovering a new one.

This type of FDI can be characterized by the foreign Mergers and

Acquisitions in the 1980's by Accounting, Advertising and Law firms.

Efficiency Seeking:

Investments which firms hope will increase their efficiency by exploiting

the benefits of economies of scale and scope, and also those of common

ownership. It is suggested that this type of FDI comes after either resource

or market seeking investments have been realized, with the expectation that

it further increases the profitability of the firm. Typically, this type of 'FDI

is mostly widely practiced between developed economies; especially those

within closely integrated markets (e.g. the EU).

45
Strategic Asset Seeking:

A tactical investment to prevent the loss of resource to a competitor. Easily

compared to that of the oil producers, whom may not need the oil at present,

but look to prevent their competitors from having it.

6.3 Foreign institutional investment

An investor or investment fund that is from or registered in a country

outside of the one in which it is currently investing. Institutional investors

include hedge funds, companies, pension funds and mutual funds.

Notes:

The term is used most commonly in India to refer to outside companies

investing in the financial markets of India. International institutional

investors must register with the Securities and Exchange Board of India to

participate in the market. One of the major market regulations pertaining to

FIIs involves placing limits on FII ownership in Indian compares.

One who propose to invest their proprietary funds or on behalf of "broad

based" funds or of foreign corporate and individuals and belong to any of

the under given cateGDRies can be registered for FII.

46
  Pension Funds

 Mutual Funds

 Investment Trust

 Insurance or reinsurance companies

 Endowment Funds

 University Funds

 Foundations or Charitable Trusts or Charitable Societies who propose

to invest on their own behalf, and

 Asset Management Companies

 Nominee Companies

 Institutional Portfolio Managers

 Trustees

 Power of Attorney Holders

 Bank

An application for registration has to be made in Form A, the format of

which is provided in the SEBI(FII) Regulations, 1995 and submitted with

under mentioned documents in duplicate addressed to SEBI as well as to

47
Reserve Bank of India (RBI) and sent to the following address within 10 to

12 days of receipt of application.

Supporting documents required are

 Application in Form A duly signed by the authorized signatory of the

applicant.

 Certified copy of the relevant clauses or articles of the Memorandum

and Articles of Association or the agreement authorizing the

applicant to invest on behalf of its clients.

 Audited financial statements and annual reports for the last one year,

provided that the period covered shall not be less than twelve months.

 A declaration by the applicant with registration number and other

particulars in support of its registration or regulation by a Securities

Commission or Self Regulatory Organization or any other

appropriate regulatory authority with whom the applicant is

registered in its home country.

 A declaration by the applicant that it has entered into a custodian

agreement with a domestic custodian together with particulars of the

domestic custodian.

48
  A signed declaration statement that appears at the end of the Form.

 Declaration regarding fit & proper entity.

The eligibility criteria for applicant seeking FII registration

As per Regulation 6 of SEBI (FII) Regulations, 1995, Foreign Institutional

Investors are required to fulfill the following conditions to qualify for grant

of registration:

 Applicant should have track record, professional competence,

financial soundness, experience, general reputation of fairness and

integrity.

 The applicant should be regulated by an appropriate foreign

regulatory authority in the same capacity/cateGDRy where

registration is sought from SEBI. Registration with authorities, which

are responsible for incorporation, is not adequate to qualify as

Foreign Institutional Investor.

 The applicant is required to have the permission under the provisions

of the Foreign Exchange Management Act, 1999 from the Reserve

Bank of India.

49
 Applicant must be legally permitted to invest in securities outside the

country or its incorporation / establishment.

 The applicant must be a "fit and proper" person.

 The applicant has to appoint a local custodian and enter into an

agreement with the custodian. Besides it also has to appoint a

designated bank to route its transactions.

 Payment of registration fee of US $ 5,000.00

50
 CHAPTER - 7
FOREIGN INVESTMENT IN
INDIAN STOCK MARKET
7.1 Foreign investment in India

IT was inevitable, yet it took many by surprise. In May, the Bombay

Sensex, the benchmark index for India's stock markets, fell by more than

1,800 points or by close to 15 per cent of its value, after experiencing a

near relentless climb over the preceding months. The decline began after

May 10, when the market closed with the Sensex at an alltime high of

12,612. The decline from that day to June 1 amounted to 2,541 points or

more than 20 per cent. A fifth of paper wealth created from nothing

disappeared in a matter of three weeks.

Any disinterested observer, not influenced by those talking the market up,

would see this decline as inevitable. In the preceding rise, moderated

occasionally by limited yolatility, the Bombay Sensex had moved from

5054 on July 22, 2004 to 7,077 on June 21, 2005, 9,067 on December 9,

2005, and 12,612 on May 10, 2006. This implies an increase of 35 per A

1cent in the second half of 2004, a smaller 8 per cent in the first half of 05,

51
31 per cent in the second half of 2005 and 33 per cent in the period between

January 1 and May 10, 2006.

This persistent and rapid rise had taken the price-earnings (PIE) ratio of

Sensex companies from 14.5 on July 1, 2004 to 22.2 on May 10, 2006. If

investors expect a reasonable return of 15 per cent on their investments and

the price to earnings ratio reflects expected earnings from holding equity,

PIE ratios in May would indicate that investors believed that average

returns from holding shares would rise by more than 300 per cent. Since

this was unlikely, investments that triggered the boom must have been

driven by expectations of capital gains from share price appreciation, and

therefore, been largely speculative.

Yet, the euphoria generated by this rise in stock prices spawned a number

of arguments on the implications of the rise. The first was that the stock

market was merely reflecting the confidence generated by the robust

performance of the Indian economy, with growth rates moving to the 89

per cent range. Second that this economy-wide performance was leading to

much better corporate performance, so that the appreciation in the share

prices of individual companies was warranted by their expected

profitability. Third, that these features made the Indian stock market

experience different from that in other emerging market countries, in that

the boom was warranted and should provide no cause for concern. And,

52
finally, that all this suggests that financial liberalization has taken the

Indian stock market to maturity, making it a good indicator of the health of

the economy.

What the substantial volatility and downturn in May proves is that none of

these arguments is valid. It is indeed true that the rate of growth of the

Indian economy has improved, though the extent of the improvement may

be exaggerated by modifications in methods of computation. But in

explaining this improvement, what needs to be taken into account is the

rise in government expenditures supported by increased receipts, the

change in the composition of government expenditure and an improvement

of exports of both goods and services.

Table Showing Monthly Gross Purchases, Gross Sales and Net Investment of FII from

Jan. 2000 to Oct. 2007

REPORTIN DEBT/EQUIT GROSS GROS NET

G Y PURCHASE S INVESTMEN
PERIOD S SALES T

[Link]. [Link]. [Link].

Jan 2000 Equity 148.4 59.3 89.1
Debt 16.9 0 16.9
Feb 2000 Equity 298.9 207.2 91.7
Debt 21.4 0 21.4
Mar 2000 Equity 388.5 382.1 6.3
Debt 27 0 27
Apr 2000 Equity 820.7 387.9 432.8
Debt 50 0 50
May 2000 Equity 399.5 285.9 113.6

53
 Debt 61.8 78.8 -17
Jun 2000 Equity  451  363.9  87.1
  Debt  46.4  0  46.4
Jul 04,2000 Equity  94  80.4  13.6
  Debt  26.3  0  26.3
Aug 2000 Equity 158.2 236 -77.8
Debt 0 0 0
Sep 2000 Equity 364.4 206.4 158.1
Debt 15.3 0 15.3
Oct 2000 Equity 215.6 390.3 -174.7
Debt 35 0 35
Nov 2000 Equity 104.4 97.2 7.2
Debt 10.2 0 10.2
Dec 2000 Equity 336.2 167.2 169
Debt 0 10.2 -10.2
Jan 2001 Equity 522.4 189.5 332.9
Debt 0 0 0
Feb 2001 Equity 133.2 329.9 -196.7
Debt 48.5 32.4 16.2
Mar 2001 Equity 401.5 528.9 -127.5
Debt 0 31.3 -31.3
Apr 2001 Equity 305.9 172.5 133.4
Debt 10.6 10.8 -0.2
May 2001 Equity 265.9 127.2 138.7
Debt 32.4 84.9 -52.5
Jun 2001 Equity 177.1 68.7 108.4
Debt 0 0 0
Jul 2001 Equity 89.9 76.5 13.4
Debt 0 50.1 -50.1
Aug 2001 Equity 165.9 135.5 30.4
Debt 0 11.4 -11.4
Sep 2001 Equity 159.3 96.7 62.6
Debt 0 78.5 -78.5
Oct 2001 Equity 98 52.3 45.7
Debt 0 0 0
Nov 2001 Equity 231.7 225.1 6.6
Debt 120.7 64.7 56
Dec 2001 Equity 276.2 230.2 46
Debt 0 0 0

54
Jan 2002 Equity 412.2 161.7 250.5
Debt 54.5 36.6 17.9
Feb 2002 Equity 316.8 83.8 233
Debt 0 0 0
Mar 2002 Equity 273.7 277.6 -3.9
Debt 0 0 0
Apr 2002 Equity 306.9 227.9 79.1
Debt 123.4 94.7 28.7
May 2002 Equity 271.2 228.9 42.3
Debt 0 0 0
Jun 2002 Equity 238.9 139.3 99.6
Debt 0 0 0
Jul 2002 Equity 158.8 123.4 35.4
Debt 0 0 0
Aug 2002 Equity 172.5 176.1 -3.6
Debt 0 0 0
Sep 2002 Equity 128.8 130.1 -1.3
Debt 0 0 0
Oct 2002 Equity 62.5 159.6 -97.1
Debt 0 0 0
Nov 2002 Equity 235.2 145.7 89.5
Debt 0 0 0
Dec 2002 Equity 78.2 121 -42.8
Debt 0 0 0
Jan 2003 Equity 64.1 120.8 -56.7
Debt 0 0 0
Feb 2003 Equity 173 103.7 69.2
Debt 24.7 0 24.7
Mar 2003 Equity 362.3 187.5 174.8
Debt 26.7 0.1 26.7
Apr 2003 Equity 139.2 81.7 57.5
Debt 0 0 0
May 2003 Equity 304.6 169 135.5
Debt 0 0 0
Jun 2003 Equity 563.2 439.6 123.6
Debt 53.5 0 53.5
Jul 2003 Equity 361.3 291.6 69.8
Debt 0 198.9 -198.9
Aug 2003 Equity 291.3 206.6 84.7

55
 Debt 207.7 69.2 138.5
Sep 2003 Equity 511.2 199.6 311.6
Debt 71.9 0.3 71.6
Oct 2003 Equity 353.9 231.8 122.1
Debt 0 0 0
Nov 2003 Equity 1011.5 503 508.5
Debt 471.6 0 471.6
Dec 2003 Equity 1349.6 786.2 563.4
Debt 191.9 0 191.9
Jan 2004 Equity 943 779.5 163.5
Debt 0 0 0
Feb 2004 Equity 789.3 538.5 250.8
Debt 215.6 0.4 215.2
Mar 2004 Equity 916 582.6 333.4
Debt 93.1 50 43.1
Apr 2004 Equity 1365.4 610 755.4
Debt 0 0 0
May 2004 Equity 530.6 464.1 66.5
Debt 0 0 0
May 2004 Equity 819.5 630.4 189.1
Debt 0 45.5 -45.5
Jun 2004 Equity 614.8 392.6 222.3
Debt 0 95 -95
Jul 2004 Equity 729.5 581.9 147.6
Debt 0 1.1 -1.1
Aug 2004 Equity 440 467.6 -27.7
Debt 0 0 0
Sep 2004 Equity 474.3 318.8 155.6
Debt 74.2 0 74.2
Oct 2004 Equity 833 590.2 242.8
Debt 0 0 0
Nov 2004 Equity 678.2 607.4 70.9
Debt 534.4 149.4 384.9
Dec 2004 Equity 774.7 592.3 182.4
Debt 0 0 0
Jan 2005 Equity 628 660.1 -32
Debt 15 0 15
Feb 2005 Equity 1880.4 985.1 895.3
Debt 86 0 86

56
Mar 2005 Equity 1458.3 904 554.3
Debt 0 0 0
Apr 2005 Equity 834.3 739.2 95.1
Debt 0 0 0
May 2005 Equity 940 812.7 127.3
Debt 0 7.5 -7.5
Jun 2005 Equity 858.8 560.3 298.5
Debt 0 0 0
Jul 2005 Equity 662 466 196
Debt 0 96.9 -96.9
Aug 2005 Equity 1338.2 695.5 642.7
Debt 0 100 -100
Sep 2005 Equity 1938 1394.8 543.3
Debt 0 60.1 -60.1
Oct 2005 Equity 1033.6 959.3 74.4
Debt 0 49.6 -49.6
Nov 2005 Equity 123.9 73.3 50.6
Debt 0 0 0
Dec 2005 Equity 1671.9 1246.8 425.1
Debt 0 0 0
Jan 2006 Equity 1432.5 1345.6 86.9
Debt 74.7 172.4 -97.7
Feb 2006 Equity 2510.6 1896.2 614.4
Debt 0 20 -20
Mar 2006 Equity 1699.9 1310.1 389.8
Debt 0 0 0
Apr 2006 Equity 3538.5 3965.5 -427.1
Debt 143.8 131.1 12.7
May 2006 Equity 2845.4 1737.3 1108.1
Debt 0 0 0
Jun 2006 Equity 2106.3 1597.5 508.9
Debt 0 0 0
Jul 2006 Equity 2117.1 1561.2 556
Debt 151.6 25 126.6
Aug 2006 Equity 987.5 1034.5 -47
Debt 0 0 0
Sep 2006 Equity 1186.8 735.7 451.1
Debt 52.7 0 52.7
Oct 2006 Equity 2580 1486.2 1093.8

57
 Debt 0 0 0
Nov 2006 Equity 1683.1 1455.7 227.4
Debt 0 0 0
Dec 2006 Equity 3088.4 2993.2 95.2
Debt 109.6 107.1 2.4
Jan 2007 Equity 1385.3 4461 -3075.7
Debt 0 170.1 -170.1
Feb 2007 Equity 3104.9 2448.9 656
Debt 49.7 166.4 -116.7
Mar 2007 Equity 2757.2 2361.5 395.7
Debt 542.4 235.2 307.2
Apr 2007 Equity 1714.5 1659.3 55.2
Debt 0 0 0
May 2007 Equity 1974.1 1950.8 23.3
Debt 35.8 0 35.8
Jun 2007 Equity 2118.7 2156.5 -37.8
Debt 0 0 0
Jul 2007 Equity 7952 2114.9 5837.1
Debt 0 0 0
Aug 2007 Equity 3853.6 4836.3 -982.7
Debt 197.4 59.7 137.7
Sep 2007 Equity 3019.5 2342.2 677.3
Debt 19.4 58 -38.6
Oct 2007 Equity 8184 4325.6 3858.5
Debt 5 0 5

The contribution of the stock market to these factors is virtually nil: market

players are more beneficiaries of tax concessions rather than contributors to

government receipts; market sentiment is in favour of reduced rather than

increased government expenditures and there is no direct way in which

stock market activity can influence export performance.

That there is no relationship between growth performance and stock market

activity was demonstrated amply by the fact that the revised estimates of

58
GDP (gross domestic product), released on May 31, showing a creditable

8.4 per cent growth during 200506 and a remarkable 9.3 per cent during the

first quarter of 2006, did little to stop the market's decline. Expectations that

drive the market seem to have little to do with the actual performance of the

economy.

If it is not growth in the real economy but speculation that triggered the

boom, it is not surprising that the downturn did occur in Indian markets, as

it did in other emerging markets that have experienced speculative booms

in the past. This, contrary to what was argued, makes the experience in

India similar to that in other liberalized "emerging markets". In fact, what

is striking about the recent slump in the Indian market is that though

steeper it was synchronized with similar declines in markets worldwide.

Led by the United States, the downturn occurred in a number of emerging

markets, including Russia, Turkey, Indonesia South Korea and Taiwan.

India is as vulnerable as these countries to periodic booms and busts.

The most quoted reason why global investors have gone bearish on all

markets, resulting in the generalized downturn, is the expectation of a rise

in interest rates led by rates in the U.S. This is indeed surprising since, in

the past, a rise in interest rates in the U.S. was seen as a factor that would

direct capital flows to and generate a boom in U.S. financial markets, while

inducing sluggishness elsewhere. The reason why this has not happened this

59
time is that investments during the recent speculative boom have been

financed with borrowing. As Financial Times of May 30 reported: "Low

interest rates in the developed world would have allowed investors to

leverage, borrowing cheaply to pick up the higher returns on offer

elsewhere. It is these investors who are likely to have unwound trades over

the past fortnight, weakening stocks and local bonds. II Thus, it is not

speculation alone that is at issue, but leveraged speculation, which makes

expectations of a rise in interest rates the cause for a global downturn.

In the circumstances, the only way in which damaging financial crises can

be avoided is to regulate the market and limit the presence and activity of

speculative investors. There have been too many instances in East Asia,

Latin America, and Turkey and elsewhere where a financial crisis was

preceded by a surge in capital flows other than foreign direct investment

(FDI) and a simultaneous boom in stock and/or real estate markets.

Independent of their inclinations, the exact causal mechanisms they

identify and where they place the burden of blame, analysts of those

periodic crises have accepted the reality that liberalized financial markets

are prone to boombust cycles. Hence, there was little reason to view the

Indiaboom as being "different" and "warranted by fundamentals",

justifying further financial liberalization in the process. Financial

60
liberalization driven by the belief that a boom was a sign of strength rather

than vulnerability inevitably went bust.

Unfortunately, the Indian government seems committed to pursuing

financial liberalization without much caution. The result has been that

while official spokesmen have listed periodically the gains that India can

make from FOI, an overwhelming share of capital flows into India has.

been contributed by portfolio investors, especially foreign institutional

investors (FIIs). The recent boom has been clearly the result of a surge in

FII investments. Having averaged $1,829 million during the period

19992000 to 200102, and fallen to $377 million in 200203, FII

investments surged thereafter. Inflows averaged $9,599 million a year

during 2003-05.

More recently, FIIs are estimated to have pumped in $10.7 billion into

India's markets in 2005 and a further $5 billion by May 11 this year. It is

widely acknowledged that the stock market surge was the direct result of

these investments, though it is true that domestic investors, including

mutual funds have rushed to the market recently to profit from the boom.

In the course of the boom, the nature of the foreign investor has also

changed with a growing presence in India of institutions such as hedge

funds, which are not regulated in their home countries and are known to

61
resort to speculation in search of quick and large returns. These hedge

funds, among other investors, exploit the route offered by subaccounts and

opaque instruments such as participatory notes to invest in the Indian

market. FIIs are permitted to invest on behalf of clients who themselves are

not registered in the country. These clients are the 'sub accounts' of

registered FIIs. Participatory notes are instruments sold by FIIs registered

in the country to unregistered clients abroad and are derivatives linked to

an underlying security traded in the domestic market.

By the end of August 2005, the value of equity and debt instruments

underlying participatory notes that had been issued by FIIs amounted to

close to half of the cumulative net FII investment. Through these routes,

entities not expected to play a role in the Indian market have had a

significant influence on market movements, even though the regulator

often does not even know of their presence in the market. And their

presence is determined by the objective of quick profit financed with

borrowing, if necessary.

The damaging effect of these investors came through when, because of

changed expectations, they decided to pull out around $2 billion between

May 11 and May 25. In the event, a sharp downturn in the Sensex ensued.

It is necessary to be clear as to why these expectations changed. They are

primarily related to developments outside India, especially expectations of

62
a rise in U.S. interest rates that could increase the cost of funds borrowed

by speculators to make their investments. This also explains the

synchronized decline in markets worldwide.

However, there is a concerted effort to divert attention from these features

of markets postliberalization by focusing on internal reasons for the decline

in stock prices. One argument advocated by protagonists of financial

liberalization is that the obstacles set by the Left and even Congress

president Sonia Gandhi to the advance of economic reform have generated

uncertainty in the markets, leading to the loss of paper wealth which should

not have been accumulated in the first place.

Thus The Wall Street Journal Europe (May 24, 2006) suggested that Sonia

Gandhi's "actions as leader of the Congress party and chairwoman of the

governing coalition are causing increasing worries among investors as to

the pace of economic reforms". It quotes one Indian market research

consultant, who is by no means a disinterested observer, as saying that "the

major obstacle to reform is Sonia Gandhi".

This response is in keeping with the overall perception that liberalization

policies that spur speculative fever of the kind seen in the markets should

not be tempered in any way, as it hurts investors and can trigger a retreat

that can be damaging.

63
The other argument, advanced in Financial Times of June 1, is that the

decline in India's markets is because of concern over the deficit in the

current account of the country's balance of payments, estimated to touch 3.6

per cent of GDP in 200607. The conclusion is that the country must attract

more foreign investment to finance that deficit and must therefore continue

with reform, including with financial liberalization that explains the recent

mayhem in the stock market. In fact, the same issue of Financial Times

approvingly quotes a study by the consulting firm McKinsey that

"calculates" that reform of India's banking sector can lift GDP growth to

99.5 per cent.

However, as the discussion above makes clear, all talk attributing stock

market volatility in India to the inadequacy of "reform" or the obstacles to

reform set by Sonia Gandhi or the Left is that much nonsense. The Indian

market is driven by global decisions, which in turn are determined by the

speculative activities of key investors the government seeks to attract. Once

we recognize that financial volatility is the result of the speculative behavior

of these firms, measures to reduce the presence and influence of these

investors seem to be the need of the day. If either the Sonia Gandhi camp in

the Congress or the Left is calling for caution and holding back policies that

feed such speculation, they are only doing the nation good.

7.2 Offshore funds-GDR/ADR

64
Global Depository Receipt (GDR) - certificate issued by international bank,

which can be subject of worldwide circulation on capital markets. GDR is

are emitted by banks, which purchase shares of foreign companies and

deposit it on the accounts. Global Depository Receipt facilitates trade of

shares, especially those from emerging markets. Prices of GDRis are often

close to values of related shares. Very similar to GDR is are ADR's. GDRis

are also spelled as Global Depositary Receipt.

American Depositary Receipt (ADR) An American Depositary Receipt is

how the stock of most foreign companies trades in United States stock

markets. Each ADR is issued by a U.S. depositary bank and represents one

or more shares of a foreign stock or a fraction of a share. If investors own

an ADR they have the right to obtain the foreign stock it represents, but

U.S. investors usually find it more convenient to own the ADR. The price

of an ADR is often close to the price of the foreign stock in its home

market, adjusted for the ratio of ADRs to foreign company shares.

Depository banks have numerous responsibilities to the holders of ADRs

and to the nonU.S. company the ADRs represent. The largest depositary

bank is The Bank of New York. Individual shares of a foreign corporation

represented by an ADR are called American Depositary Shares (ADS).

Global Depository Receipts (GDR) / American Deposit Receipts (ADR)

/ Foreign Currency Convertible Bonds (FCCB)

65
Foreign Investment through ADRs/GDRs, Foreign Currency Convertible

Bonds (FCCBs) is treated as Foreign Direct Investment. Indian companies

are allowed to raise equity capital in the international market through the

issue of GDR/ADRs/FCCBs. These are not subject to any ceilings on

investment. An applicant company seeking Government's approval in this

regard should have a consistent track record for good performance

(financial or otherwise) for a minimum period of 3 years. This condition can

be relaxed for infrastructure projects such as power generation,

telecommunication, petroleum exploration and refining, ports, airports and

roads.

There is no restriction on the number of GDRs/ADRs/FCCBs to be floated

by a company or a group of companies in a financial year. There is no such

restriction because a company engaged in the manufacture of items covered

under Automatic Route is likely to exceed the percentage limits under

Automatic Route, whose direct foreign investment after proposed

GDRs/ADRs/FCCBs is likely to exceed 50 per cent/51 per cent/74 per cent

as the case may be.

There are no end-use restrictions on GDRs/ADRs issue proceeds, except for

an express ban on investment in real estate and stock markets. The FCCB

issue proceeds need to conform to external commercial borrowing end use

66
requirements. In addition, 25 per cent of the FCCS proceeds can be used for

general corporate restructuring.

ADR, GDR norms further relaxed

 Indian bidders allowed raising funds through ADRs, GDRs and

external commercial borrowings (ECBs) for acquiring shares of PSEs

in the first stage and buying shares from the market during the open

offer in the second stage.

 Conversion and reconversion (a.k.a. twoway conversion or

fungibility) of shares of Indian companies into depository receipts

listed in foreign bourses, while extending tax incentives to

nonresident investors, allowed. The recoversion of ADRs/GDRs

would, however, be governed by the Foreign Exchange Management

Act notified by the Reserve Bank of India in March 2001.

 Permission to retain ADR/GDR proceeds abroad for future foreign

exchange requirements, removal of the existing limit of $20,000 for

remittance under the employees stock option scheme (ESOP) and

permitting remittance up to $ 1 million from proceeds of sales of

assets here.

67
 Companies have been allowed to invest 100 per cent of the proceeds

of ADR/GDR issues (as against the earlier ceiling of 50%) for

acquisitions of foreign companies and direct investments in joint

ventures and wholly-owned subsidiaries overseas.

 Any Indian company which has issued ADRs/GDRs may acquire

shares of foreign companies engaged in the same area of core activity

upto $100 million or an amount equivalent to ten times of their

exports in a year, whichever is higher. Earlier, this facility was

available only to Indian companies in certain sectors.

 FIIs can invest in a company under the portfolio investment route

upto 24 per cent of the paid-up capital of the company. It can be

increased to 40% with approval of general body of the shareholders

by a special resolution. This limit has now been increased to 49%

from the present 40%.

 Two way fungibility in ADR/GDR issues of Indian companies has

been introduced subject to sectoral caps wherever applicable. Stock

brokers in India can now purchase shares and deposit these with the

Indian custodian for issue of ADRs/GDRs by the overseas depository

to the extent of the ADRs/GDRs that have been converted into

underlying shares.

68
 CHAPTER – 8
PROBLEMS
The Bombay Stock Exchange (BSE), which is the largest stock exchange in

Asia, witnessed a profound transformation in its business operations. From

being a regional stock exchange, it has emerged as one of the important

institutions for transferring savings into investments, in the country.

Between 1990 and 2003, BSE witnessed a series of stock market scams,

which involved more than 5,000 rupee crores of investors' money. BSE

69
faced criticism from industry experts, analysts, policy makers and

politicians for being nontransparent, unregulated and taking inadequate

measures for investors' protection. To overcome these challenges, BSE

launched a series of measures in the late 1990s and with the advent of

reforms; BSE witnessed notable developments in many areas such as: (1)

trading; (2) operations; (3) management; and (4) addressing investors'

grievances. The Government of India also took steps to corporatise the

stock exchange, thereby separating trading, ownership and management.

Finally, on the August 9th 2005, BSE created history by converting itself

into a corporate entity, thereby forming BSE Limited.

70
Few more areas of concentration are as follows:

i) Most important of them is liquidity. Though India claims that it has

second largest number of listed companies in the world, the liquidity or

trading is restricted to handful of stocks. About 70% of volume is accounted

by 3 to 5 stocks. About 90% trading is accounted by another 20 stocks. This

in turn affects several small investors who are generally attracted to market

during IPO times.

ii) The second major concern is FIl's investment. Though FIIs bring capital

for the country, they play critical role in the price movements. Their buying

and selling behavior affect the stock market significantly.

iii) The third important concern is on insider trading.

iv) Another concern is quality of financial reporting.

71
 CHAPTER - 9
SUGGESTIONS & CONCLUSION
9.1 Suggestions

Our market has been notorious as a "Satta Bazaar", prone to frequent crises,

and characterized by high volatility and manipulative practices. The twin

tax changes will make the Indian stock market a more sober place for long-

term investors It will also help to align share prices more closely with the

fundamental long-term values and reduce the market's volatility.

"Daytrading" is overwhelming us:

Our studies show that "daytrading" is estimated to be as high as 8090

percent of total trading volume in the case of both the cash market and

thefutures market. As a result, the percentage of delivery-based trading is

only around 20 per cent of the total traded value even after the adoption of

rolling settlement system.

The volume of day-trading has come to dominate the stock market in the

same way as the erstwhile badla system in the olden days. This is because

day-trading is free from the kind of salutary regulatory restrictions placed

on it in the US in order to limit it severely and prevent its degeneration into

gambling on a mass scale, based on intraday price movements.

72
Because day-trading in India, is, more or less, free from regulation, day-

trading "parlours" have proliferated not only in metros but also in a large

number of small towns all over the country. Excessive short-term

speculation has been the bane of the Indian stock market. In fact,

speculative domination of the market has become more pronounced after

the introduction of single stock futures. The total value of futures trading

now exceeds that of cash market trading. The single stock futures are still

not being settled by physical delivery, as they ought to be. A sound system

of single stock futures (or any deliverable asset) requires settlement by

delivery in order to maintain the market's link with the real economy. It

may be mentioned here that the US introduced single stock futures in early

2003 and required settlement by physical delivery from the very first day

of such trading.

Volatility and manipulation:

Excessive short-term speculation always makes the market more volatile.

Intraday volatility in India, even in the case of blue chips, is frequently as

high as 56 per cent. This makes nonsense of the argument, often advanced

by brokers and market operators, that increased liquidity arising from

short-term speculative trading, promotes efficient pricing. Pricing is

efficient only if it is linked closely to fundamental factors.

73
The high intraday volatility exposes the hollowness of the claim, often

made by the Indian stock exchange administrations, that the "impact" cost

of executing a fairly large-sized order is only around 0.10.2 per cent in

India. What solace can such low impact cost provide to the genuine

investors who may often find that, at the end of the day, they have lost 56

per cent of the value of stocks purchased by them during the day?

The preliminary results of an all-India Household Investor Survey2004,

being conducted by us, reveal that the two most important worries of retail

investors about the stock market are too much volatility and too much price

manipulation. Both these are facilitated and aggravated by excessive short-

term speculation.

The debt markets in India comprise basically three segments, viz.,

Government Securities Market, which is oldest and most dominant; PSU

Bonds Market, which is basically a development since late' eighties; and

Corporate Securities Market, which is growing fast after liberalization,

especially in the last two years. The major focus in the development of debt

markets has been the Government Securities Market for three reasons. First,

it constitutes the principal segment of our debt market. Second, as a market

for sovereign paper, it has a role in setting benchmarks in the financial

markets as a whole. Third, it is critical in bringing about an effective and

74
reliable transmission channel for the use of indirect instruments of monetary

control.

The outstanding securities of the Central and State Governments as on

March 31, 1998 amounted to over Rs. 4,000 billion and a significant part

of it is held by commercial banks that have statutory obligations in holding

such securities in their portfolio. Reflecting the increasing depth in the

Government Securities market, the aggregate volume of transactions in

Central and State Government securities and Treasury Bills (outright and

repos) was significantly higher at Rs.1,857 billion in 199798 as compared

with RS.1 ,229 billion in 199697. The average monthly volume of outright

transactions in Government dated securities during 199798 was higher at

RS.100 billion than that of RS.50 billion during 199697.

Outstanding corporate debt as at end March 1998 (inclusive of private

placement) is estimated to be around Rs.1, 100 billion. The Wholesale Debt

Market (WDM) at National Stock Exchange' (NSE) continued to witness

sharp expansion during 1997 98 as the number of securities listed on the

WDM segment rose to 418 from 307 during 199697. The number of active

securities rose from 525 to 719 while the number of active participants also

increased to 79 from 73 during 199697. The average daily turnover during

199798 was Rs.4 billion as compared with RS.1.5 billion during 199697.

75
Several new instruments such as deep discount bond, securitized debt, PSU

infrastructure bond, Government index bond, corporate floating rate bond

and institutional tax free bonds were added to the debt segment in the recent

past.

9.2 Testing of Hypothesis

Testing of Hypothesis

1. The over expanding investor’s population and market capitalization

led to a variety of malpractices on the part of companies, brokers,
merchant bankers, investment consultants and others involved in new
issues and stock in India. These malpractices and unfair trading
practices have eroded investor’s confidence. It multiplied the
investor’s grievances. The Government and the stock exchanges were
rather helpless in redressing the investor’s problems because of lack
of proper penal provisions in the existing legislation. Thus, SEBI was
constituted by the Government in April, 1998 as a supervisory body
to regulate and promote the securities market. The objectives of the
Board were as under:

 To promote fair dealings by the issuers of securities and ensure a

market place where they can raise funds at a relatively low cost.

76
 To provide a degree of protection to the investors and safeguard
their rights and interests so that there is a steady flow of savings
into the market.

 To regulate and develop a code of conduct and fair practices by

intermediaries like brokers, merchant brokers etc., with a view to
making them competitive and professional.

The regulatory functions of the stock exchanges were to continue but

the SEBI would supervise, oversee and control the operations of the
stock exchanges on the one hand, and the practices of companies, on
the other. The basic objective remains, i.e., to protect the investor’s
rights and enforce an orderly growth of the markets.

Since then, SEBI is pre-dominantly playing the role of an anchor and

is pro-actively taking initiative to protect investor’s interest and is
also regularly monitoring stock market activities. The achievements
of SEBI are as follows:

 Guidelines on disclosure and investor protection issued and

clarified from time to time.

 Proper disclosure to investors through prospectus made

obligatory.

77
 Guidelines for merchant bankers issued.

 Advertising code for mutual funds.

 Mutual funds required to publish balance sheets.

 Finalization of takeover code.

 Draft guidelines on share transfer agents and registrars to an issue.

 Portfolio management service rules and regulations.

 Insider trading regulations.

 Stock invest scheme to eliminate delayed refunds.

 Bombay Stock Exchange persuaded to pass a resolution admitting

corporate members.

 Proposed that the exchanges take a percentage of the issue amount

as deposit from companies seeking listing.

 BSE made to publicize outstanding trading position on some

scrips.

78
  Suggested retailing brokerage/commission in contract notes.

 Registered a number of investor associations.

 Set up self-regulatory organizations like the Association of

Merchant Bankers of India.

 Commenced registration of intermediaries associated with the

Stock Exchange.

 Regulations for Foreign Institutional Investors for portfolio

investments in India.

This shows that the first hypothesis ‘SEBI is protecting the interest
of investors and is regularly monitoring stock market activities’ is
proved and accepted.

2. Globalization and liberalization have brought dramatic change in the

financial sector of Indian economy. India has emerged as an
important destination for global investment. The Indian stock market
has also developed over the years. An important feature of the
development of stock market in India in the last 15 years has been the
growing participation of institutional investors, both foreign investors
and the Indian mutual funds. The increasing role of institutional
investors has brought both quantitative and qualitative developments

79
 in the stock market viz., expansion of securities business; increased
depth and breadth of the market, and above all their dominant
investment philosophy of emphasizing the fundamentals have
rendered efficient pricing of the stocks.
Thus, it shows that the second hypothesis ‘FIIs have invested
heavily after 2001’ is proved and accepted.

9.3 Conclusion

Although the present stock market scenario appears dismal, it was due to

the transitional phase, it was going through. The policy reforms were adhoc

and unplanned, but the trend appears irreversible. The growing strong

investor base, entry of middle class as investors and public awareness of the

stock and capital markets have made it imperative for the reforms to

continue. The offshoot of the economic and financial reforms is the greater

responsibility thrust on the companies to improve their competitive

efficiency and productivity. The greater role given to the private sector and

increasing dependence on the capital market for both private and public

sectors would force the companies to prove their ability through

performance and stock exchanges to be better windows and transparent

media of measuring the corporate and industrial performance. The

regulatory framework of Securities and Exchange Board of India is

increasing and spreading its tentacles in quantitative terms instead of

80
confining to qualitative aspects, as in foreign markets. The ultimate

objective of all regulations is maintenance of standards and quality and if

that is to be achieved, deregulation can succeed and all the moves of the

government and stock exchanges should be in that direction.

81