Indian Capital Market:

Current Scenario & Road Ahead

Prof Mahesh Kumar

Amity Business School
profmaheshkumar@rediffmail.com
Real Assets V/s Financial Assets
 Real Assets are the assets used to produce
goods and include land, buildings, knowledge,
machines, workers whose skills are necessary
to use those resources. They represent material
wealth of the country.
 Financial Assets are like bonds and stocks. They
do not represent material wealth of the country.
 Real Assets produce goods and services
whereas financial assets define allocation of
income or wealth among investors.
Real Assets V/s Financial Assets
 Individuals when invest for future they may
choose to hold financial assets.
 Financial Assets can be viewed as a means by
which individuals hold their claim on real assets
in well developed economies.
 Real Assets appear on the asset side of the
balance sheet whereas financial assets appear
on both sides of the balance sheet.
 When we aggregate over all balance sheets,
financial assets will cancel out, leaving only the
sum of the real assets as the net wealth of the
aggregate economy.
Real Assets V/s Financial Assets
 Financial Assets are created and destroyed in
ordinary course of doing business e.g. when a
loan is paid off. In contrast real assets are
destroyed only by accident or by wearing out
over time.
 One way to store your wealth is through
financial assets. In high earning periods, you
can invest your savings in financial assets and
in low-earning periods you can sell these assets
to provide funds for your consumption needs.
By doing so, one can shift his consumption
over the course of his life time.
Real Assets V/s Financial Assets
 Allocation of risk: Virtually all real assets
involve some risk. Financial markets and the
diverse financial instruments traded in those
markets allow investors with the greatest taste
of risk to bear that risk, while other less-risk-
tolerant individuals can, to a greater extent,
stay on the sidelines.
 When investors can self-select into security-
type with risk-return characteristics that best
suit their preferences, each security can be
sold for the best possible price.
Properties of Financial Assets
1) Money ness
2) Divisibility & Denomination
3) Reversibility
4) Term to maturity
5) Liquidity
6) Convertibility
7) Currency
8) Cash flow and return predictability
9) Complexity
10) Tax Status
Classification of Financial Markets by
Type of Claim
Fixed amount claim Residual equity claim

Debt Instrument Preferred Stock Common Stock

Fixed Income Market Equity (Stock) Market

Debt Market Common Stock Market

Features of Preferred Stocks
Preferred stock, also called preferred shares,
preference shares, or simply preferreds, is a
special equity security that resembles properties of
both an equity and a debt instrument and
generally considered a hybrid instrument.
Preferreds are senior (i.e. higher ranking) to
common stock, but are subordinate to bonds.
 Preference of dividends.
 Preference to assets in event of liquidation.
 Convertible into common stock.
 Callable at the option of the corporation.
 Nonvoting.
Classification of Financial Markets by
Maturity of Claim
Debt Instrument Common Stock & Preferred Stock

Maturity of 1 Maturity greater

year or less than 1 year

Money Market Capital Market

Market Segmentation as per their
nature of Financial Operations
1) Money Market: Exchange or exchange related
transactions.
2) Credit Market: Deposit taking and lending.
3) Capital Market: Issuance of securities.
4) Equities Market: Issuance of international
securities.
5) Financial Markets: A mechanism comprising all
the above market activities.
Markets and Market Structure
Four types of markets:
1. Direct search market: Least organized market.
Buyers and sellers seek each other out directly.
Characterized by sporadic participation and low-
priced, non-standard goods.
2. Brokered Markets: Trading in a good is
sufficiently active & brokers can find it profitable to
offer search services to buyers and sellers. Brokers
develop specialized knowledge on valuing assets
traded in that given market. Primary markets and
block transactions of stocks are the examples of
brokered markets.
Markets and Market Structure
3. Dealer Markets: Dealers specialize in various
assets, purchasing them for their own
inventory and selling them for a profit from
their inventory. Profit margin is the ‘bid-asked’
spread. These markets save on search cost for
the market participants. OTC securities market
is one example of dealer market.
4. Auction Market: This is the most integrated
market in which all transaction in a good
converge at one place to bid on or offer a
good. BSE & NSE are the examples of auction
market.
Financial Markets-Functions and Classification.

Functions:
a) Facilitate price discovery.
b) Provide liquidity.
c) Reduce the cost of transaction.

Classification:
Debt Market Equity Market
Money Market Capital Market
Primary Market Secondary Market
Cash/Spot Market Forward /Futures Market
Exch Traded Mkt OTC Market
Emerging Trends in Financial Markets
 Globalization
 Securitization
 Financial Engineering
 Advances in Computer Network and
Communication
Structure of the Securities Market
Securities Market

Derivatives
Equity Market Debt Market
Market

Govt. Securities Corporate Debt Options Futures

Primary Market Secondary Market
Market Market Market Market

Money Market
Definition of Investment
Investment is a sacrifice of current
money or other resources for future
benefits. Related to saving or
deferred consumption.
Criteria for Investment
 Rate of Return-Gain
 Risk-Variability of its rate of return
 Marketability-How easily it can be transacted,
transaction cost and price volatility between
two transactions
 Tax Shelter- Whether initial, continual or
Terminal tax benefits.
 Convenience-Whether investment can be made
easily and looked after easily.
Types of Investment
Non Marketing FA Equity Shares
Bonds Money Market
Mutual Funds Life Insurance
Real Estate Precious objects
 Investment V/s Speculation

Investment Speculation

Planning Horizon Longer Shorter

Risk disposition Moderate risk High risk
Return expectation Moderate High
Basis of decisions Fundamental factors Relies more on
& careful evaluation hearsay and market
of prospects of the psy. believe in pools,
company. churning, runs,
ramping, bear raid.
Leverage Uses his own funds Borrows heavily.
What is equity?
 Equity represents ownership
 Equity shares represent ownership capital
 Equity shares have both investment and
speculative characteristic. Their investment
value tend to increase irregularly but
persistently over decades as their net worth
builds up through the re-investment of
undistributed earnings.
Common Terminologies
 Authorized Capital: The amount of capital company can
raise as per its memorandum.
 Issued Capital: The amount offered by the company to
the investors.
 Subscribed Capital: That part of the issued capital that
has been subscribed to by the investors.
 Paid up Capital: The actual amount paid by the
investors.
 Par Value: Face value of the share as stated in the
memorandum and written on the share scrip. It is
usually Rs.10 or Re.1
 Share Premium: When the issue price exceeds the par
value, the difference is referred to as share premium.
Types of Shares
 Bluechip Shares: Shares of large, well established and
financially strong companies with an impressive record of
earnings and dividends.
 Growth Shares: Shares of companies that have a fairly
entrenched position in a growing market and which enjoy
an above average rate of growth as well as profitability.
 Income Shares :Shares of companies that have fairly
stable operations, relatively limited growth opportunities
and high dividend payout ratios.
 Cyclical Shares: Shares of companies that have a
pronounce cyclicality in their operation.
 Defensive Shares: Shares of companies that are
relatively unaffected by the ups and downs in general
business conditions.
 Speculative Shares: Shares that tend to fluctuate widely
because there is lot of speculative trading in them.
Market Participants in Equity Market
Main market participants in stock market are:

1. There are 23 stock exchanges in India. NSE & BSE being the important ones.
2. Regulators like SEBI, CLB,RBI,DEA & DCA.
3. Listed securities-more than 10000
4. Depositories-NSDL & CSDL
5. Brokers
6. FIIs-more than 600
7. Merchant Bankers-Manage the issue of securities.
8. Primary Dealers
9. Mutual Funds
10. Custodians-Look after inv back off of MFs
11. Registrars-Investor related services
12. Underwriters
13. Bankers to the issue.
14. Venture Capital Funds-Inv in equity shares or equity linked instruments of
unlisted companies.
15. Credit Rating Agencies
Types of Equity Markets
 Primary Equity Market: Deal in the issuance of
new securities. E.g. Public Issue, Rights Issue
& Preferential allotment.
 Secondary Equity Market : Where outstanding
securities are traded.
Primary Equity Market
Used by company to raise capital . There are 4 ways to it:
a) Public Issue-Concept of Stock Invest and Book building.
b) Rights Issue-Selling securities in primary market by
issuing rights to the existing shareholders.
c) Private Placements- Sale of securities to a limited no of
investors like FIs, MFs, VCFs, banks etc. For listed and
unlisted companies and the identity of investor not
known when offer document is prepared.
d) Preferential Allotment: Sale of securities to a limited no
of investors like FIs, MFs, VCFs, banks etc. For listed
and the identity of investor known when offer
document is prepared.
Secondary Equity Market ( Stock
Market )-History & Background
1. Stock Markets in existence since 18th century.
2. Real beginning after the enactment of the Co.
Act 1850 with feature of limited liability.
3. Native Share and Stock Brokers’ Association at
Bombay in 1875 is the first stock exchange
and is a precursor to BSE.
4. 23 stock exchanges . Main being NSE & BSE.
Stock Market- Definition and Advantages
Definition: Stock Market is a private or public
market for trading of company stock &
security (fungible negotiable instrument
representing financial value) as well as those
derivatives of company stock at an agreed
price.

Advantages:
 Important source to raise capital.
 Provides liquidity.
 Allows businesses to be traded publicly which
enhances customer confidence.
National Stock Exchange (NSE)
Formed by FIs & started trading in 1994.

Purpose:
a) Provide nation wide trading facilities for debt,
equity and hybrids.
b) Facilitate equal access to investors across the
country.
c) Impart fairness , efficiency and transparency
to security trading.
d) Reduce settlement cycle.
e) Meet international security standards.
NSE (Contd)
Features:
a) Ring less, national computerized exchange.
b) Two segments- Capital Market Segment which deals
in equities & convertible debentures. Wholesale debt
segment (WDS) which deals in high value txns in
govt. securities, PSU bonds, commercial papers &
other debt instruments.
c) Order driven system.
d) Trade confirmation slip is printed after each trade.
e) Identity of traders not revealed.
f) Members are required to deliver security & cash by a
certain day. Pay out is in the following day.
g) All trades in NSE are guaranteed by NSCC ( National
Securities Clearing Corporation.)
Bombay Stock Exchange (BSE)
Established in 1875 .
a) Switched from outcry system to screen based system in
1995.
b) Jobbers play an important role In BSE. They are brokers
who trade on their own account and hence offer a two way
(bid- ask rate) rate quote.
c) BSE has adopted both quote driven and order driven
system.
d) World’s no 1 exchange in terms of numbers of listed
securities (more than 4700) and 5th in terms of transactions.
e) Sensex is an index of 30 stocks representing 12 major
sectors is tracked worldwide and is sensitive to market
sentiments as well as market realities. Sensex is free float
weighted i.e. the weights of constituents reflect the relative
market values of the free floats of the cos. Other indices
include BSE 100, BSE 200 BSE Midcap etc.
Trading in Stock Market
Participants vary from small individual stock brokers to large
hedge fund traders.
Open outcry
Trading
Screen based trading
Screen based system a) enhances the no of trades as
more no of participants can trade. b) market participants
get overview of the market which enhances investor
confidence. c) establishes transparent audit trails.
Electronic Limit Order Book (ELOB) market system
adopted for trading. Two types of orders- Limit Order &
Market Order. Matching is done on a price-time
priority. Limit order book is displayed on the screen i.e.
it is open to trade audit.
Settlement
Seller Seller broker Buyer broker Buyer
Concept of depositories.
Concept of Rolling Settlement.

Day Activity for the Day

T Trade
T+1 Custodial confirmation & final obligation.
T+2 Pay-in/Pay-out of funds and securities.
T+3 Auction for shortages.
T+4 -
T+5 Pay-in/Pay-out of funds and securities for auction.
Concept Check
 IPO Grading by Credit Rating Agencies
 Demutualization of stock exchanges
 Block Deals- Deals involving more than 5 lakh shares
or minimum value of Rs.5 cr. Separate window for
block deals at NSE & BSE. Take place only between
9:55 a.m. and 10:25a.m.Simultaneous large scale buy
& sell of shares at a predetermined price.
 Buying on Margin-Maintenance margin with the
brokers.
 Short selling, Depth and Breadth of the Market
 Participatory Notes
 F & O Segment- Open Interest
 Stock Quotation
Co., (Prev Cl.), Open, High, Low, Close P/E M Cap 52-Wk
[Vol.,Val.Rs’000, Trades] H/L

Bajaj Auto(932.65),937,948,931,932.85 12.7 9438.6 1200/692

[46436,43591.29,1384]

(932.80),940,949,931,933.20 12.7 9438.6 1200/692

[138630,130216.84,4404]
Stock Indices
Stock Market Indices used in practice are of three types:
1. Price Weighted Index: Assumes that investor buys one
share each of the stock included in the index.
2. Equal Weighted Index: Assumes that investor invests
an equal amount of money in each stock included in the
index.
3. Value Weighted Index: Assumes that investor allocates
money across various stocks included in the index in
such a way that the weights assigned to various stocks
are proportional to their market capitalization.

Index Valuet=Index Valuet-1*Mkt Capt/Mkt Capt-1

Stock Indices
 IISL ( India Index Services & Products Ltd )
formed by NSE & CRISIL provide variety of
indices and index related services. Main
indices being S&P CNX Nifty ( 50 stocks across
21 Sectors ), S&P CNX Nifty Junior, CNX 100,
S&P CNX Nifty 500, CNX Midcap, Nifty Midcap
50, S&P CNX Defty & CNX Midcap 200.
 Sensex, BSE 100, BSE 200 BSE Midcap etc
Stock Indices-S&P CNX Nifty
 Price movements of 50 stocks selected on the
basis of market capitalization and liquidity.
 The base date selected for NIFTY is April
1,1995 and the base value set is 1000
Stock Indices-SENSEX
 Value weighted index where stocks are
selected on the basis of free float market
capitalization (i.e. non-promoter, non strategic
shareholder market capitalization.)
 The base date for SENSEX is April 1,1979,
although SENSEX came into existence on
January 1,1986 when its value was computed
at 598.53 (the base date value being 100)
SEBI-Role and Challenges Ahead
 Came in existence in 1992 with the following
objectives:
1. Free Pricing
2. Disclosure and Investor Protection Guidelines
3. Efficient Delivery Mechanism
SEBI (Contd)
Functions:
a) Regulate business in stock exchanges and other
security market.
b) Register and regulate the working of capital market
intermediaries.
c) Register and regulate the working of MFs.
d) Promote and regulate self regulatory org.
e) Prohibit fraudulent and unfair trade practices.
f) Investor education & training of intermediaries.
g) Prohibit insider trading.
h) Regulate substantial acquisition of shares and
takeovers of the companies
SEBI (Contd)
Initiatives:
1. Freedom in designing and pricing instruments.
2. Introduction of Stock invest.
3. Ban of badla.
4. Screen based trading.
5. Electronic transfer
6. Risk Management- capital adequacy, limits on exposure and turnover,
margins based on VAR, online monitoring of positions.
7. Rolling settlement
8. Corporate governance code.
9. Change in management structure-50 percent non broker directors.
10. Registration & regulation of Intermediaries.
11. Redressal of investor grievances.
12. Regulation of Mutual Funds.
13. Regulation of foreign portfolio investment.
14. Development of a code for take over.
15. Introduction of equity derivatives.