CAPITAL MARKETS

GAURAV SHARMA 4112009008 SEMESTER III

Definations

Capital markets

A market in which individuals and institutions trade financial securities. Organizations/institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets.

Foreign Institutional Investor - FII

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, insurance companies, pension funds and mutual funds.

Stock Exchange

A stock exchange is a form of exchange which provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and dividends. Securities traded on a stock exchange include shares issued by companies, unit trusts, derivatives, pooled investment products and bonds.

Market Capitalization
total value of the issued shares of a publicly traded number of shares outstanding. As outstanding stock is could be used as a proxy for the public opinion of a in some forms of stock valuation. Preferred shares are the calculation.

Market capitalization (or market cap) is the company; it is equal to the share price times the bought and sold in public markets, capitalization company's net worth and is a determining factor included in

Derivatives Market

The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets.

Derivatives

A derivative is a broad term covering a variety of financial instruments whose values are derived from one or more underlying assets, market securities or indices. In practice, it is a contract between two parties that specifies conditions (especially the dates, resulting values and definitions of the underlying variables, the parties' contractual obligations, and the notional amount) under which payments are to be made between the parties. The most common underlying assets include: commodities, stocks, bonds, interest rates and currencies.

Venture Capital Funds

An investment fund that manages money from investors seeking private equity stakes in start-up and small- and medium-size enterprises with strong growth potential. These investments are generally characterized as high-risk/high-return opportunities.

Rolling Statement

The process of settling security trades on successive dates so that trades executed today will have a settlement date one business day later than trades executed yesterday. This contrasts with account settlement, in which all trades are settled once in a set period of days, regardless of when the trade took place.

Gilt funds

A mutual fund that invests in several different types of medium and long-term government securities in addition to top quality corporate debt. Gilts originated in Britain.

Liquid Funds

Liquid funds are simply debt mutual funds that invest your money in very short-term market instruments such as treasury bills, government securities and call money that hold least amount of risk. These funds can invest in instruments up to a maturity of 91 days. The maturity is mostly much lower than that.

History of Capital Markets in India

One of the best performing markets in the world. Fuelled by strong economic growth and a large inflow of foreign institutional investors (FIIs) as well as the development of the domestic mutual funds industry. Two major Indian exchanges, namely: a) b) Bombay Stock Exchange National Stock Exchange

The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) ranked 16th and 17th respectively among exchanges around the world in terms of market capitalization. NSE has over 30% higher turnover in terms of value and almost 2.5 times BSEs turnover in terms of number of trades. There are 20 regional stock exchanges in India. In March 2006, the BSE market capitalization accounted for about 86% of Indian GDP while that of the NSE accounted for about 80%. Indian markets are more volatile as in industrialized nations. A new derivative market had emerged from scratch, increasing FIIs & venture capital funds. The Securities and Exchanges Board of India (SEBI) has maintained a rate of around 95% in redressing investor grievances reported to it.

Institutional Features

Transactions in secondary markets need to go through clearing at clearing corporations (National Securities Clearing Corporation Limited, NSCCL). Securities are being traded and settled under T+2 rolling settlement. Paper-less trading using electronic accounts, now accounts for virtually all equity transactions. Exchanges in India administer price bands and also maintain strict surveillance over market activities in illiquid and volatile stocks. On-line monitoring and surveillance system and monitors members on a real time basis had been put. Regulatory requirement by SEBI that 20% of the active trading members being inspected every year to verify their level of compliance with various rules.

Debt Market

Remained predominantly a wholesale market.

During 2005-2006, the government and corporate sector collectively has mobilized Rs 2.6 trillion from the primary debt market.
At the end of March 2006, the total market capitalization of securities available for trading at the WDM segment stood at over Rs 15 trillion. Government of India, public sector units and corporations together comprise as dominant issuer of debt markets in India. The Central Government mobilizes funds mainly through issue of dated securities, bonds and T- bills. The major part of debt is privately placed with tenors of 1-12 years.

The secondary market trades are negotiated between participants with SGL (Subsidiary General Ledger) accounts with RBI. The Negotiated Delivery System (NDS) of RBI provides electronic platform for negotiating trades. The difference between trading of government securities and corporate debt market securities is that the latter are traded on the electronic limit order book like equities.

Mutual funds have emerged as an important investor class in the debt market.

Most mutual funds have specialized debt funds such as gilt funds and liquid funds.
Other investors are: a) b) FIIs Provident & Pension Funds

Derivatives Market

NSE started its operation in derivatives contracts and introduced futures contracts on the Nifty index in the year 2000. The total exchange traded derivatives volume witnessed an increase 88.14% during 2005-06 as against the preceding year.

Two types of products are offered that is Stock and Index Futures.
In 2005, the NSE of India ranked first in the single stock future category with 68,911,754 contracts. For equity derivatives, contracts with one month, two month and three months to expiry are available for trading.

These contracts expire on the last Thursday of the respective expiry months.
Interest rate Futures rate contracts are also available. In the case of futures, contracts usually have two types of settlements, MTM settlement which happen on a continuous basis at the end of each day and final settlement, which is on the last trading day of the futures contract. Options contracts have three types of settlements, daily premium settlement; interim exercise settlement in the case of option contracts on securities; and final settlement.

Effect of FII Flow

At the end of June 2006, the cumulative FII flows to India accounted for a little over 9% of the Bombay Stock Exchange market capitalization.

FII is regarded as hot money.

FII has been blamed for exacerbating small economic problems as they withdraw money from markets making economy weak. International capital flows and capital controls have emerged as important policy issue for this.

The government has been making strong efforts to increase FII flows in India.
FII equity investments and the stock market performance in India are interlinked. FII flows are routinely depicted as a major driver of Indian stock market returns in the financial press. Liberalizing policy changes have had an expansionary effect on FII flows while restrictive measures aimed at giving regulators greater control over FII flows do not necessarily dampen them.