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Industry Profile

Introduction to Capital Markets Transfer of resources from those with idle resources to others who have a productive need for them is perhaps most efficiently achieved through the securities markets. Stated formally, securities markets provide channels for allocation of savings to investments and thereby decouple these two activities. As a result, the savers and investors are not constrained by their individual abilities, but by the economys abilities to invest and save respectively, which inevitably enhances savings and investment in the economy. Market Segments The securities market has two interdependent and inseparable segments, the new issues (primary market) and the stock (secondary) market. The primary market provides the channel for sale of new securities while the secondary market deals in securities previously issued. The price signals, which subsume all information about the issuer and his business including associated risk, generated in the secondary market, help the primary market in allocation of funds. The issuers of securities issue (create and sell) new securities in the primary market to raise funds for investment and/or to discharge some obligation. They do so either through public issues or private placement. There are two major types of issuers who issue securities. The corporate entities issue mainly debt and equity instruments (shares, debentures, etc.), while the governments (central and state governments) issue debt securities (dated securities, treasury bills). The secondary market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risk and return. They also sell securities for cash to meet their liquidity needs. A variant of secondary market is the forward market, where securities are traded for future delivery and payment. Pure forward is out side the formal market. The versions of forward in formal market are futures and options. In futures market, standardized securities are traded for future delivery and settlement. These futures can be on a basket of securities like an index or an individual security. In case of options, securities are traded for conditional future delivery. There are two types of options a put option permits the owner to sell a security to the

writer of options at a predetermined price while a call option permits the owner to purchase a security from the writer of the option at a predetermined price. These options can also be on individual stocks or basket of stocks like index. Two exchanges, namely NSE and BSE provide trading of derivatives of securities. Products and Participants Savings are linked to investments by a variety of intermediaries through a range of complex financial products called securities which is defined in the Securities Contracts (Regulation) Act, 1956. Which includes shares, scrips, stocks, bonds, debentures, debenture stock, or other marketable securities of like nature in or of any incorporate company or body corporate, government securities, derivatives of securities, units of collective investment scheme, security receipts, interest and rights in securities, or any other instruments so declared by the central government These demand for and supply of securities and funds determine, under competitive market conditions in goods and securities market, the prices of securities. Securities Market and Economic Growth A well functioning securities market is conducive to sustained economic growth. There have been a number of studies, starting from World Bank and IMF to various scholars, which have established robust relationship not only one way, but also the both ways, between the development in the securities market and the economic growth. The securities market fosters economic growth to the extent that it Augments the quantities of real savings and capital formation from any given level of national income, Increases net capital inflow from abroad, Raises the productivity of investment by improving allocation of investible funds, and (d) Reduces the cost of capital. International Linkage The securities market facilitates the internationalization of an economy by linking it with the rest of the world. This linkage assists through the inflow of capital in the form of portfolio investment. Moreover, a strong domestic stock market performance forms the

basis for well performing domestic corporate to raise capital in the international market. This implies that the domestic economy is opened up to international competitive pressures, which help to raise efficiency. It is also very likely that existence of a domestic securities market will deter capital outflow by providing attractive investment opportunities within domestic economy. There are also other developmental benefits associated with the existence of a securities market. The securities market provides a fast-rate breeding ground for the skills and judgment needed for entrepreneurship, risk bearing, portfolio selection and management. An active securities market serves as an engine of general financial development and may, in particular, accelerate the integration of informal financial systems with the institutional financial sector. Securities directly displace traditional assets such as gold and stocks of produce or, indirectly, may provide portfolio assets for unit trusts, pension funds and similar FIIs that raise savings from the traditional sector. The existence of securities market enhances the scope, and provides institutional mechanisms, for the operation of monetary and financial policy A Profile of Indian Securities Market The past decade in many ways has been remarkable for securities market in India. It has grown exponentially as measured in terms of amount raised from the market, number of stock exchanges and other intermediaries, the number of listed stocks, market capitalization, trading volumes and turnover on stock exchanges, and investor population. The market has witnessed fundamental institutional changes resulting in drastic reduction in transaction costs and significant improvements in efficiency, transparency and safety. Securities and Exchange Board of India (SEBI) With the objectives of improving market efficiency, enhancing transparency, checking unfair trade practices and bringing the Indian market up to international standards, a package of reforms consisting of measures to liberalize, regulate and develop the securities market was introduced during the 1990s. This has changed corporate securities market beyond recognition in this decade. The practice of allocation of resources among different competing entities as well as its terms by a central authority was discontinued. The secondary market overcame the geographical barriers by moving to screen-based trading. Trades enjoy counterparty guarantee.

Bombay Stock Exchange (BSE) Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich heritage. Popularly known as "BSE", it was established as "The Native Share & Stock Brokers Association" in 1875. It is the first stock exchange in the country to obtain permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation) Act, 1956.The Exchange's pivotal and pre-eminent role in the development of the Indian capital market is widely recognized and its index, SENSEX, is tracked worldwide. With Demutualization, the trading rights and ownership rights have been de-linked effectively addressing concerns regarding perceived and real conflicts of interest. The Exchange is professionally managed under the overall direction of the Board of Directors. The Board comprises eminent professionals, representatives of Trading Members and the Managing Director of the Exchange. The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. The systems and processes of the Exchange are designed to safeguard market integrity and enhance transparency in operations. During the year 2004-2005, the trading volumes on the Exchange showed robust growth. The Exchange provides an efficient and transparent market for trading in equity, debt instruments and derivatives. The BSE's On Line Trading System (BOLT) is a proprietary system of the Exchange and is BS 7799-2-2002 certified. The surveillance and clearing & settlement functions of the Exchange are ISO 9001:2000 certified. BSE as a brand is synonymous with capital markets in India. The BSE SENSEX is the benchmark equity index that reflects the robustness of the economy and finance. At par with international standards, First in India to introduce Equity Derivatives First in India to launch a Free Float Index First in India to launch US$ version of BSE Sensex

First in India to launch Exchange Enabled Internet Trading Platform First in India to obtain ISO certification for Surveillance, Clearing & Settlement 'BSE On-Line Trading System (BOLT) has been awarded the globally recognized the Information Security Management System standard

First to have an exclusive facility for financial training Moved from Open Outcry to Electronic Trading within just 50 days An equally important accomplishment of BSE is the launch of a nationwide investor awareness campaign - Safe Investing in the Stock Market In 2002, the name The Stock Exchange, Mumbai, was changed to BSE.

National Stock Exchange (NSE) The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000. NSE has been promoted by leading financial institutions, banks, insurance companies and other financial intermediaries. NSE is one of the first de-mutualised stock exchanges in the country, where the ownership and management of the Exchange is completely divorced from the right to trade on it. Though the impetus for its establishment came from policy makers in the country, it has been set up as a public limited company, owned by the leading institutional investors in the country. The NSE model however, does not preclude, but in fact accommodates involvement, support and contribution of trading members in a variety of ways. Its Board comprises of senior executives from promoter institutions, eminent professionals in the fields of law, economics, accountancy, finance, taxation, etc, public representatives. Depository System

The Depositories Act, 1996 was passed with the objective of ensuring free transferability of securities with speed, accuracy and security. It does so by Making securities of public limited companies freely transferable subject to certain exceptions Dematerializing the securities in the depository mode Providing for maintenance of ownership records in a book entry form.

In order to streamline both the stages of settlement process, the Act envisages transfer ownership of securities electronically by book entry without making the securities move from person to person. The Act has made the securities of all public limited companies freely transferable, restricting the company's right to use discretion in effecting the transfer of securities, and the transfer deed and other procedural requirements under the Companies Act have been dispensed with. Two depositories, viz., NSDL and CDSL, have come up to provide instantaneous electronic transfer of securities. Capital Market Intermediaries There are several institutions, which facilitate the smooth functioning of the securities market. They enable the issuers of securities to interact with the investors in the primary as well as the secondary arena. Merchant Bankers Credit Rating Agencies R& T Agents - Registrars to Issue Stock Brokers Custodians Mutual Funds Depositories Depository Participants

Players (investors) in securities market Individual investors

Institutional investors FIIs Mutual fund investor

Capital Market Instruments The changes in the regulatory framework of the capital market and fiscal policies have also resulted in newer kinds of financial instruments (securities) being introduced in the market. Also, a lot of financial innovation by companies who are now permitted to undertake treasury operations, has resulted in newer kinds of instruments - all of which can be traded being introduced. The variations in all these instruments depend on the tenure, the nature of security, the interest rate, the collateral security offered and the trading features, etc. Debentures Bonds Preference Shares Equity Shares Government securities

Capital Market Processes There are various processes that Issuers of securities follow or utilize in order to tap the savers for raising resources. Some of the commonly used processes and methods are described below. Initial Public Offering (IPO) Private Placement Preferential Offer/Rights Issue Internet Broking

Dependence on Securities Market Three main sets of entities depend on securities market. While the Corporates and governments raise resources from the securities market to meet their obligations, the households invest their savings in securities. While the corporate sector and governments together raised a sum of Rs. 226,911 crore during 2001-02, the household sector invested 4.3% of their financial savings through the securities market during 2000-01.

Corporate Sector The 1990s witnessed emergence of the securities market as a major source of finance for trade and industry. The share of capital market based instruments in resources raised externally increased to 53% in 1993-94, but declined thereafter to 31% by 2000-01. Governments Along with increase in fiscal deficits of the governments, the dependence on market borrowings to finance fiscal deficits has increased over the years. The state governments and the central government financed about 14% and 18% respectively of their fiscal deficit by market borrowings during 1990-91. In percentage terms, dependence of the state governments on market borrowing did not increase much during the decade 1991-2002. In case of central government, it increased to 69.4% by 2001-02. Household According to the RBI data, the household sector accounted for 84.8 % of gross domestic savings in Fixed income investment instruments during 2006-07; which has increased in comparison to 83.9% in 2005-06. In fiscal 2006-07, the household sector has invested 55.7 % of financial savings in deposits, 24.2 % in insurance/provident funds, 4.9 % in small savings, and 6.5 % in securities market including government securities , units of mutual funds and other securities. Investor population and profile According to the SEBI-NCAER survey of Indian investors conducted in early 1999, an estimated 12.8 million, or 7.6% of all Indian households representing 19 million individuals had directly invested in equity shares and/or debentures as at the end of financial year 1998-99. The investor households increased at a compound growth rate of 22% between 1985-86 and 1998-99. About 35% of investor households became investors in equity shares prior to 1991, while 47% of the investors entered the market between 1991 and 1995 and 17% after 1995. More than 156 million or 92% of all Indian households were non-investor households who did not have any investments in equity/debentures. Low per capita income, apprehension of loss of capital, and economic insecurity, which are all inter-related factors, significantly influenced the investment attitude of the households. The lack of awareness about securities market and absence of a dependable

infrastructure and distribution network coupled with aversion to risk inhibited non-investor households from investing in the securities market.

FUNDAMENTAL ANALYSIS: Fundamental analysis is the examination of the underlying forces that affect the well being of the economy, industry groups, and companies. The goal is to derive the forecasted earning growths for future price movements. Fundamental analysis is the method of evaluating securities by attempting to measure the intrinsic value of a particular stock. It is the study of everything from the overall economy and industry conditions, to the financial condition and management of specific companies (i.e., using real data to evaluate a stocks value). The method utilizes items such as revenues, earnings, return on equity and profit margins to determine a companys underlying value and potential for future growth. One of the major assumptions under fundamental analysis is that, even though things get mis priced in the market from time to time, the price of an asset will eventually gravitate toward its true value. This seems to be a reasonable bet considering the long upward march of quality stocks in general despite regular setbacks and periods of irrational exuberance. The key strategy for the

fundamentalist is to buy when prices are at or below this intrinsic value and sell when they got overpriced. Fundamental analysis consists of: For the national economy we focus on economic data to assess the present and future growth of the economy. At the industry level, there might be an examination of supply and demand forces for the products offered. At the company level, may involve examination of financial data, management, business concept and competition.

Economy analysis
The economy is the overall economic environment in which all firms operate. The key variables used to describe the state of economy are: World economy Asian economy Indian economy

1. Growth rate of GDP 2. Industry growth rate 3. Agriculture and monsoons 4. Savings and investment 5. Inflation 6. Interest rates 7. Balance of payments 8. Infrastructure

The performance of a company depends on the performance of the economy. If the economy is booming, incoming rise and demand for goodwill increase the industries and companies in the general trend to be prosperous. On the other and if the economy is in recession, the performance of the company will be generally bad.

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