ankitwalia.doc

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A

SUMMER TRAINING PROJECT

ON

ANALYSIS OF EQUITY

CAPITAL MARKET

SUBMITTED TO:

Reliance securities

Fulfillment for the degree ofMASTER OF BUSINESS ADMINISTRATION

(Session 2011 2013)-MBA 3RD Semester

Under Supervision of: Submitted by:

MR. MANISH GUPTA ANKIT WALIA


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PREFACE

The conceptual knowledge acquired by management students is best manifested in the projects

and training they undergo. As a part of curriculum of MBA, I have got a chance to undergo

practical training in the stock broking company(Reliance securities limited). The present project

give a perfect vent to my understanding of the EQUITY CAPITAL MARKET functioning.

The report will provide all the information regarding the EQUITY CAPITAL MARKET so

hope that this report will be beneficial for my next batches and for those who are related to this

topic.

ANKIT WALIA

Univ. Roll No. 1208111


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ACKNOWLEDGEMENT

This project involves many helping hands first of all I would like to thank all those, who help me

in completion the project and bringing out the timely submission of the report. First and foremost

I due a profound gratitude to Mr. VINEET PANDOH (BRANCH MANAGER) RELIANCE

SECURITIES LTD. for their hard work, enthusiasm and meticulous attention to detail to every

stage of this project.

I am extremely grateful to Mr. MANISH GUPTA and other staff members for their whole

hearted co-operation.

At the last but not the least I would thank all employees of RELIANCE SECURITIES

LIMITED for their corporation. Above all no words can express feeling of gratitude for my

guardians, parents and my friends, who supported me all through my project report. On the

whole this achievement is entirely due to the moral support and blessing at my parents and

teachers.

ANKIT WALIA

Univ. Roll No. 1208111


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DECLARATION

I ANKIT WALIA MBA (3rd Semester) of the MAHARISHI MARKANDESHWAR

INSTITUTE OF MANAGEMENT, MULLANA hereby declare that the Summer Training

Report entitled ANALYTICAL STUDY OF EQUITY CAPITAL MARKET is an original

work and the same has not been submitted to any other Institute for the award of any other

degree.

.

ANKIT WALIA


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TABLE OF CONTENTS

1) Executive Summary

2) Introductioni) Profile of the study (Area\Organization)

ii) Justification of the Study

iii) Organizational Structure

3) Objectives of the Study

4) Literature Review

5) Research Methodology and Analytical tools

a. Sampling and Sampling Design

b. Analytical Tools

Statistical Tools

c. Data Collection

d. Hypothesis Testing

e. Limitations of the Study

6) Results and Discussions/ Findings

7) Recommendations/Suggestions.

8) Policy Implications

9) Bibliography

10) Annexure:


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COMPANY PROFILE

Reliance Capital Ltd, a part of the Reliance Anil Dhirubhai Ambani Group, is one of India's

leading and most valuable financial services companies in the private sector. The company has

interests in asset management and mutual fund; life and general insurance; consumer finance andindustrial finance; stock broking; depository services; private equity and proprietary investments;

exchanges, asset reconstruction; distribution of financial products and other activities in financial

services. They have operations in Singapore, Malaysia, the United Kingdom, and the United

Arab Emirates. Reliance Capital Ltd was incorporated in year 1986 at Ahmedabad in Gujarat

with the name Reliance Capital & Finance Trust Ltd. The company entered the capital market

with the maiden issue in the year 1990. Initially, the company engaged in steady annuity yielding

businesses such as leasing, bill discounting, and inter-corporate deposits. In the year 1993, the

company diversified their business in the areas of portfolio investment, lending against

securities, custodial services, money market operations, project finance advisory services, and

investment banking. In January 5, 1995, the company changed their name from Reliance Capital

& Finance Trust Ltd to Reliance Capital Ltd. In December 1998, they obtained their registration

as a Non-banking Finance Company (NBFC). During the year 2001-02, the company took a new

strategic initiative by entering into the life insurance and general insurance business. They made

investments in Reliance General Insurance Company Ltd and Reliance Life Insurance Company

Ltd, by virtue of which the said two companies became the subsidiaries of the company. Also,

they divested their holding in Observer Network Pvt Ltd and Reliance Net Ltd and thus the said

two companies ceased to be the subsidiaries of the company. The company shifted their

registered office to Jamnagar in Gujarat. During the year 2005-06, Reliance Asset Management

(Mauritius) Ltd and Reliance Asset Management (Singapore) Pte Ltd became subsidiaries of the

company. The company along with their affiliate Reliance Land Pvt Ltd, acquired the controlling

stake in Adlabs Films Ltd, a leading company engaged in the entertainment sector. Pursuant to

such acquisition, the company and Reliance Land Pvt Ltd became Promoters of Adlabs FilmsLtd. During the year, the company acquired AMP Sanmar Life Insurance Company Limited,

with the approval of Insurance Regulatory and Development Authority (IRDA), which enabled

the company to enter the exciting growth area of life insurance. Pursuant to the acquisition, AMP

Sanmar Life Insurance was renamed as Reliance Life Insurance Company Ltd. They shifted their

registered office to Mumbai in Maharashtra. During the year 2006-07, Reliance Venture Asset


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Management Pvt Ltd, Travelmate Services (India) Pvt Ltd, Medybiz Pvt Ltd, Net Logistics Pvt

Ltd, Reliance Capital Research Pvt Ltd and Reliance Technology Ventures Pvt Ltd became

subsidiaries of the company. As per the scheme of amalgamation, Reliance Capital Ventures Ltd

was amalgamated with the company. Reliance Mutual Fund launched 6 new schemes and they

increased the number of braches from 81 to 123. In the Reliance Life Insurance, the distribution

network was increased to 217 branches as against 153 branches. Also, Reliance Life Insurance

Company Ltd secured the approval of the Insurance Regulatory & Development Authority

(IRDA) to start an additional 130 branches. Reliance Asset Management (Singapore) Pte Ltd, a

wholly owned subsidiary of company received approval from the SEBI and the Monetary

Authority of Singapore to commence operations. In February 2007, the first fund of this

subsidiary, India Equity Growth Fund, commenced operations. In April 2007, the company

formally launched Reliance securities, a comprehensive online financial services and solutions

portal, which provides the customers with investment and trading access to equities, equity

options, commodities futures, mutual funds, IPOs, life and general insurance products, offshore

investments and credit cards. The range of offerings, the ease of access and the sheer

technological edge which Reliance securities brings is unparalleled in the history of the Indian

financial and capital markets. During the year 2007-08, Reliance Capital Markets Pvt. Ltd. and

Reliance Asset Management (UK) Plc became subsidiaries of the company. Reliance Mutual

Fund launched 6 new schemes Reliance Auto Invest Plan, Reliance Secure Child Plan (unit

linked plan), Reliance Wealth + Health Plan (unit linked plan) and Reliance Total Investment

Plan Series (Retirement and unit linked insurance plan) and Group Leave encashment plan.

Reliance securities made tie ups with global partners like Reuters, Vasco, Valcambi, Webaroo,

World Gold Council and Wincor Nixdorf, to provide the customers better access and wider

choice of quality global products. In May 2007, Reliance Consumer Finance commenced

operations. Thus, the company entered into the fast-expanding consumer finance segment with a

wide range of products which includes personal loans, vehicle loans (cars and commercial

vehicles), home loans, loans against property and SME loans. In November 2007, Global fund

management house Eton Park bought 4.76% equity stake in the Asset Management Company. In

January 2008, RCAM launched a new fund - Reliance Natural Resources Fund. In February

2008, the company received approval from Reserve Bank of India to commence the business of

asset reconstruction. During the year 2008-09, Reliance Consultants (Mauritius) Ltd, Reliance


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Equities International Pvt Ltd, Reliance Home Finance Pvt Ltd, Reliance Capital Services Pvt

Ltd, Reliance Capital (Singapore) Pte Ltd, Reliance Consumer Finance Pvt Ltd, Reliance

Securities Ltd, Reliance Prime International Ltd, Reliance Commodities Ltd, Reliance Financial

Ltd, Reliance Alternative Investments Services Pvt Ltd and Reliance Capital Pension Fund Ltd

became subsidiaries of the company. In January 2009, Reliance ARC acquired 2 NPAs from

Dena Bank for an aggregate acquisition price of over Rs 2 crore. During the year, Reliance

Capital Asset Management received approval from Malaysian Authorities to start operations in

Malaysia. Also, RCAM received approval from the Financial Services Authority in United

Kingdom to commence investment advisory operations in the United Kingdom. Reliance Life

Insurance launched 89 new life insurance policies, namely Reliance Super Invest Assure plan,

Reliance Super Invest Assure Plus Plan , Reliance Guaranteed Return Plan Series I Insurance ,

Reliance Guaranteed Return Plan Series I Pension , Reliance Group Savings Linked Insurance

Plan , Reliance Group Credit Shield Plan, Reliance Imaan Investment Plan and Reliance Savings

Linked Insurance Plan. During the year 2009-10, Reliance Asset Management (Malaysia) SDN

BHD became subsidiary of the company. Reliance Mutual Fund launched a new product feature

- 'Reliance Smart Step'. Reliance Life Insurance launched five new life insurance policies,

namely Reliance Jan Samriddhi Plan, Reliance Traditional Group Gratuity Plan, Reliance

Traditional Super Invest Assure Plan, Reliance Life Highest NAV Guarantee Plan and Reliance

Life Super Golden Years Senior Citizen Term 10 plans. In May 2009, Reliance Mutual Fund

launched a new fund - Reliance Infrastructure Fund. Reliance Spot Exchange is a new initiative

of the company in the exchange space by setting up modern exchanges, in various segments.

They commenced operations by launching Reliance Spot Exchange (RSX) in October 2009. In

June 2010, the company transferred their Consumer Finance Division (CFD) business to two of

their wholly owned subsidiaries, namely Reliance Home Finance Pvt Ltd (RHFPL) and Reliance

Consumer Finance Pvt Ltd (RCFPL) with effect from April 01, 2010. During the year 2010-11,

Reliance Exchangenext Ltd, Reliance Spot Exchange Infrastructure Ltd, Quant Capital Pvt Ltd,

Quant Broking Pvt Ltd, Quant Securities Pvt Ltd, Quant Commodities Pvt Ltd, Quant

Commodity Broking Pvt Ltd, Quant Capital Advisors Pvt Ltd, Quant Capital Finance and

Investments Pvt Ltd, Reliance Wealth Management Ltd, Quant Investment Services Pvt Ltd,

Qoppa Trading Pvt Ltd and Valankulam Investments &Trading Pvt Ltd became subsidiaries of

the company. Also, Medybiz Pvt Ltd, Net Logistics Pvt Ltd and Reliance Capital Services Pvt


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Ltd ceased to be subsidiaries of the company. During the year, Reliance Commercial Finance Pvt

Ltd (RCFPL), a wholly owned subsidiary of the company, was amalgamated with the company

with effect from April 1, 2010. In June 2010, the Brokerage and Financial Services Business of

Reliance Equities International Pvt Ltd was demerged into Quant Broking Pvt Ltd with effect

from April 1, 2009. In February 2011, the Infrastructure Division of Reliance securities

Infrastructure Pvt Ltd was demerged into Reliance Capital Asset Management Company Ltd. In

October 2011, the company completed the sale of a 26% stake in Reliance Life Insurance to

Nippon Life Insurance Company for a consideration of Rs 30.62 million. In February 2012, the

Company, through their wholly owned subsidiary, Sun International (South Africa) Ltd, acquired

additional interest in Real Africa Holdings Ltd, subsequently increasing their ownership to 99%.

In March 2012, Nippon Life Insurance Company signed final agreements with the company to

acquire 26% stake in Reliance Capital Asset Management (RCAM), India's profitable Asset

Management Company (AMC).

Chairman Profile

Regarded as one of the foremost corporate leaders of contemporary India, Shri Anil D Ambani,

50, is the chairman of all listed companies of the Reliance Group, namely, Reliance

Communications, Reliance Capital, Reliance Infrastructure, Reliance Natural Resources and

Reliance Power.


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RELIANCE SECURITIES LTD.

Reliance Securities Limited is a Reliance Capital company and part of the Reliance Anil

Dhirubhai Ambani Group. Reliance Securities is a permitted user of the brand "Reliance

securities" for promoting its various products and services.

Reliance Securities endeavors to change the way investors transact in equities markets and avails

services. It provides customers with access to Equity, Derivatives, Portfolio Management

Services, Investment Banking, Mutual Funds & IPOs. It also offers secured online share trading

platform and investment activities in secure, cost effective and convienent manner. To enable

wider participation, it also provides the convenience of trading offline through variety of means,

including Call & Trade,Branch dealing Desk and its network of affiliates.

Reliance securities through its pan India presence with 6,233 outlets, has more than 3.5 million

customers.

Reliance Capital is one of India's leading and fastest growing private sector financial services

companies, and ranks among the top 3 private sector financial services and banking groups, in

terms of net worth.

Awards and Achievements

India's largest e-broking house and Best Equity House 2009 - Awarded by Dun and

Bradstreet 2009.

Reliance securities has been rated no. 1 by Starcom Worldwide for online security and

cost effectiveness in 2007.

Reliance securities has been awarded Debutant Franchisor of the Year 2007 by Franchise

India Holdings Ltd.

Reliance Securities comes from the house of Reliance Capital, one of Indias leading &

prominent financial houses.


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Founded in 1986, Reliance Capital has come a long way from being into steady annuity yielding

businesses such as leasing, bill discounting, and inter-corporate deposits to diversifying its

activities in the areas of asset management and mutual fund; life and general insurance;

consumer finance and industrial finance; stock broking; depository services; private equity and

proprietary investments; exchanges, asset reconstruction; distribution of financial products and

other activities in financial services.

Reliance Capital, a constituent of S&P CNX Nifty and MSCI India, is a part of the Reliance

Group . It is one of India's leading and amongst most valuable financial services companies in

the private sector.

Reliance Capital has interests in asset management and mutual funds; life and general insurance;commercial finance; equities and commodities broking; investment banking; wealth management

services; distribution of financial products; exchanges; private equity; asset reconstruction;

proprietary investments and other activities in financial services.

Reliance Mutual Fund is India's largest Mutual Fund with over seven million investor folios.

Reliance Life Insurance and Reliance General Insurance are amongst the leading private sector

insurers in India. Reliance Securities is one of Indias leading retail broking houses. Reliance

securities is one of Indias leading distributors of financial products and services. Reliance

Capital has a net worth of Rs. 7,887 crore (US$ 2 billion) and total assets of Rs. 32,419 crore

(US$ 7 billion) as on June 30, 2011.

Business mix of Reliance Capital

Asset Management Mutual Fund, Offshore Fund, Pension fund, Portfolio

ManagementInsurance Life Insurance, General Insurance

Commercial Finance Mortgages, Loans against Property , SME Loans, Loans for

Commercial Vehicles, Loans for Construction Equipment,

Auto Loans, Business Loans, Loans against Securities,

Infrastructure financing


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Broking and Distribution Equities, Commodities and Derivatives, Wealth Management

Services, Portfolio Management Services, Investment Banking,

Foreign Exchange and Offshore Investment, Third Party

Products

Other Businesses Exchanges, Private Equity, Institutional Broking, Asset

Reconstruction, Venture Capital

Reliance Securities Product offering:

1. Trading Portal (with almost negligible brokerage)

Equity broking

Commodity Broking

Derivatives (Future & Options)

Offshore Investment (Contract for differences)

D-mat Account

2. Finance Products

(i) Mutual Funds

Life Insurance

ULIP Plan

Term Plan

Money Back plan

1. General Insurance

Vehicle/Motor Insurance

Health Insurance

House Insurance

1. IPOs

2. NFOs

3. Value Added Services

Retirement Planning

Financial Planning

Tax Savings


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Children Future Planning

5. Credit Cards

6. Gold Coins Retailing


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STOCK MARKET

A stock market is a market for the trading of company stock, and derivatives of same; both of

these are securities listed on a stock exchange as well as those only traded privately.

Although common, the term 'the stock market' is a somewhat abstract concept for the mechanism

that enables the trading of company stocks. It is also used to describe the totality of all stocks and

sometimes other securities, with the exception of bonds, commodities, and derivatives. The term

is used especially to apply within one country as, for example, in the phrase "the stock market

was up today", or in the term "stock market bubble". Bonds are still traditionally traded in an

informal, over-the-counter market known as the bond market. Commodities are traded incommodities markets, and derivatives are traded in a variety of markets (but, like bonds, mostly

'over-the-counter'). The size of the worldwide 'bond market' is estimated at $45 trillion; the size

of the 'stock market' is estimated as about half that. The world derivatives market has been

estimated at about $300 trillion. It must be noted though that the derivatives market, because it is

stated in terms of notional outstanding amounts, can not be directly compared to a stock or fixed

income market, which refers to actual value.

The stock market is distinct from a stock exchange, which is an entity (a corporation or mutual

organization) in the business of bringing buyers and sellers of stocks and securities together. For

example, 'the stock market' in the bombay includes the trading of all securities listed on the bse,

as well as on the many regional exchanges.The stock market handles different function which are

as follows:-

Where stocks and shares are bought and sold.

A general term used to refer to the organized trading of securities through various

exchanges and through the over-the-counter market. A "stock exchange" is a specific

form of a stock market, a physical location where stocks and bonds are bought and sold,

such as the bombay stock exchange, nasdaq or american stock exchange.


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The set of institutions that facilitate the exchange of stocks between buyers and sellers. A

stock market can be an actual place, but with the growth of electronic transactions a large

fraction of stock market transactions are not centrally located in a particular location.

A market in which the shares of corporations are traded.

TRADING

Participants in the stock market range from small individual stock investors to large hedge fund

traders, who can be based anywhere. Their orders usually end up with a professional at a stock

exchange, who executes the order.

Most stocks are traded on exchanges, which are places where buyers and sellers meet and decideon a price. Some exchanges are physical locations where transactions are carried out on a trading

floor, by a method known as open outcry. (You've probably seen pictures of a trading floor, in

which traders are wildly throwing their arms up, waving, yelling, and signaling to each other.)

This type of auction is used in stock exchanges and commodity exchanges where traders may

enter "verbal" bids and offers simultaneously. The other type of exchange is a virtual kind,

composed of a network of computers where trades are made electronically via traders at

computer terminals

Actual trades are based on an auction market paradigm where a potential buyerbids a specific

price for a stock and a potential sellerasks a specific price for the stock. (Buying or selling at

market means you will accept any bid or ask price for the stock.) When the bid and ask prices

match, a sale takes place on a first come first serve basis if there are multiple bidders or askers at

a given price.

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

sellers, thus providing a marketplace (virtual or real). Just imagine how difficult it would be to

sell shares (and what a disadvantage you would be at with respect to the buyer) if you had to call

around trying to locate a buyer, as when selling a house. Really, a stock exchange is nothing

more than a super-sophisticated farmers' market providing a meeting place for buyers and sellers.


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IMPORTANCE OF STOCK MARKETS

Accelerate Economic Growth

Financial markets constitute an important part of the total infrastructure for every society that has

passed the stage of largely domestic economies.

The financial system performs three main tasks: first, it handles transfer of payments; second, it

channels savings to investments with a good return for future consumption; and third, it spreads

and reduces (local enterprise) economic risks in relation to the players' targeted returns (but note

that systemic risk is not thereby reduced it merely becomes less concentrated and uneven).

Moreover, unforeseen risks, or catastrophic risks (such as the complete collapse of the financial

system or government institutions), may not be capable of being spread, or insured against.

The smooth functioning of all these activities facilitates economic growth in that lower costs and

enterprise risks promote the production of goods and services as well as employment. In this way

the financial system contributes to increased prosperity.


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SOURCES FOR COMPANIES TO RAISE MONEY

The stock market is one of the most important sources for companies to raise money.

Experience has shown that the price of shares and other assets is an important part of the

dynamics of economic growth. Rising share prices, for instance, tend to be associated with

increased business investment and vice versa. Share prices also affect the wealth of households

and their consumption. Therefore, central banks tend to keep an Argus eye on the control and

behavior of the stock market and, in general, on the smooth operation of financial system

functions..

INVESTORS

It provides them liquidity, marketability, safety etc. of the investment also it provides

ready market to them for the sale & purchase of their securities.

BROKERS

They receive commission in lieu of their services to investors.

TECHNOLOGICAL DEVELOPMENT

It is the time of computers & technology & in stock market this regulates the whole set

up. So, this fact wants more & more development day by day. The recognition accorded

to a Stock Exchange is normally valid for the period of five years subject to the

satisfactory performance of Stock Exchange during this period. However the Stock

Exchange of Bombay, Delhi, Madras, and Hyderabad & Bangalore have been granted

permanent recognition.


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VARIOUS EXCHANGES IN INDIA

Ahmedabad Stock Exchange

Bangalore Stock Exchange

Bhubaneswar Stock Exchange Association

Bombay Stock Exchange (BSE)

Calcutta Stock Exchange

Cochin Stock Exchange

Coimbatore Stock Exchange

Delhi Stock Exchange Association

Gauhati Stock Exchange

Hyderabad Stock Exchange

Inter-connected Stock Exchange of India

Jaipur Stock Exchange

Ludhiana Stock Exchange Association

Madhya Pradesh Stock Exchange

Madras Stock Exchange

Mangalore Stock Exchange

Mumbai Stock Exchange

National Stock Exchange of India (NSE)

OTC Exchange of India

Pune Stock Exchange

Saurashtra-Kutch Stock Exchange

Uttar Pradesh Stock Association

Vadodara Stock Exchange


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BOMBAY STOCK EXCHANGE(BSE)

INTRODUCTION TO BSE

The Bombay Stock Exchange Limited (formerly, The Stock Exchange, Mumbai; popularly

called The Bombay Stock Exchange, or BSE) is the oldest stock exchange in Asia. It is located at

Dalal Street, Mumbai, India

Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich heritage. 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. Earlier an Association of Persons

(AOP), the Exchange is now a demutualised and corporatised entity incorporated under the

provisions of the Companies Act, 1956, pursuant to the BSE(Corporatisation and

Demutualisation) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI).

With demutualisation, 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 Board is inclusive and is designed to benefit from theparticipation

of market intermediaries.

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 Exchangeshowed 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


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of the Exchange and is BS 7799-2-2002 certified. The surveillance and clearing & settlement

functions of the Exchange are ISO 9001:2000 certified.

SENSEX - THE BAROMETER OF INDIAN CAPITAL MARKETS

For the premier Stock Exchange that pioneered the stock broking activity in India, 128 years of

experience seems to be a proud milestone. A lot has changed since 1875 when 318 persons

became members of what today is called "The Stock Exchange, Mumbai" by paying a princely

amount of Re1.

Since then, the country's capital markets have passed through both good and bad periods. The

journey in the 20th century has not been an easy one. Till the decade of eighties, there was no

scale to measure the ups and downs in the Indian stock market. The Stock Exchange, Mumbai(BSE) in 1986 came out with a stock index that subsequently became the barometer of the Indian

stock market.

SENSEX is not only scientifically designed but also based on globally accepted construction and

review methodology. First compiled in 1986, SENSEX is a basket of 30 constituent stocks

representing a sample of large, liquid and representative companies. The base year of SENSEX

is 1978-79 and the base value is 100. The index is widely reported in both domestic and

international markets through print as well as electronic media.

The growth of equity markets in India has been phenomenal in the decade gone by. Right from

early nineties the stock market witnessed heightened activity in terms of various bull and bear

runs. The SENSEX captured all these events in the most judicial manner. One can identify the

booms and busts of the Indian stock market through SENSEX.

BSE - other Indices

Apart from BSE SENSEX, which is the most popular stock index in India, BSE uses other stock

indices as well:

BSE 500

BSEPSU

BSEMIDCAP


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BSESMLCAP

BSEBANKEX

NATIONAL STOCK EXCHANGE(NSE)

INTRODUCTION OF 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 (FIs) 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.

TRADING IN NSE

NSE introduced for the first time in India, fully automated screen based trading. It uses a

modern, fully computerised trading system designed to offer investors across the length and

breadth of the country a safe and easy way to invest.

The NSE trading system called 'National Exchange for Automated Trading' (NEAT) is a fully

automated screen based trading system, which adopts the principle of an order driven market.


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SECURITIES AVAILABLE FOR TRADING

The Capital Market (Equities) segment of NSE facilitates trading in the following instruments:

A. Shares

Equity Shares

Preference Shares

B. Debentures

Partly Convertible Debentures

Fully Convertible Debentures

Non Convertible Debentures

Warrants / Coupons / Secured Premium Notes/ other Hybrids

Bonds

C. Units of Mutual Funds


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INTRODUCTION OF CAPITAL MARKET

CAPITAL MARKET

The capital market (securities markets) is the market for securities, where companies and the

government can raise long-term funds. The capital market includes the stock market and the

bond market. Financial regulators, such as the U.S. Securities and Exchange Commission and the

Financial Services Authority in the UK, oversee the markets, to ensure that investors are

protected against misselling. The capital markets consist of the primary market, where new

issues are distributed to investors, and the secondary market, where existing securities are traded.

The capital market can be contrasted with other financial markets such as the money market

which deals in short term liquid assets, and derivatives markets which deals in derivativecontracts.Both the private and the public sectors provide market makers in the capital

markets.Features of capital market are as follows:-

The market in which corporate equity and longer-term debt securities (those maturing in

more than one year) are issued and traded

A financial market in which long-term debt obligations and equity securities are bought

and sold

A market for medium to long-term financial instruments. Financial instruments traded in

the capital market include shares, and bonds issued by the Australian Government, State

governments, corporate borrowers and financial institutions

Capital market is the broad term for the market where investment products such as stocks

and bonds are bought and sold. It includes all the people and organizations which support

the process.

The market where capital funds debts and equity are traded; includes medium and

long term securities; distinct of money market which is for short term investments.


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TYPES OF CAPITAL MARKET

PRIMARY MARKET

The primary market is that part of the capital markets that deals with the issuance of new

securities. Companies, governments or public sector institutions can obtain funding through the

sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers.

The process of selling new issues to investors is called underwriting. In the case of a new stock

issue, this sale is called an initial public offering (IPO). Dealers earn a commission that is built

into the price of the security offering, though it can be found in the prospectus

An Initial public offering (IPO) is the first sale of a corporation's common shares to public

investors. The main purpose of an IPO is to raise capital for the corporation. While IPOs are

effective at raising capital, they also impose heavy legal compliance and reporting requirements.

The term only refers to the first public issuance of a company's shares; any later public issuance

of shares is referred to as a Secondary Market Offering. A shareholder selling its existing (not

new) shares to public on the Primary Market is an Offer for Sale.

SECONDARY MARKET

The Secondary Market is the financial market for trading of securities that have already been

issued in an initial private or public offering. Alternatively, secondary market can refer to the

market for any kind of used goods. The market that exists in a new security just after the new

issue, is often referred to as the aftermarket. Once a newly issued stock is listed on a stock

exchange, investors and speculators can easily trade on the exchange, as market makers provide

bids and offers in the new stock

PRODUCTS IN THE SECONDARY MARKETS

Following are the main financial products/instruments dealt in the Secondary market which may

be divided broadly into Shares and Bonds:


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o SHARES:

Equity Shares: An equity share, commonly referred to as ordinary share, represents the form of

fractional ownership in a business venture.

Rights Issue/ Rights Shares: The issue of new securities to existing Shareholders at a

ratio to those already held, at a price. For e.g. a2:3 rights issue at Rs. 125, would entitle a

shareholder to receive 2shares for every 3 shares held at a price of Rs. 125 per share.

Bonus Shares: Shares issued by the companies to their shareholders free of cost based on

the number of shares the shareholder owns.

Preference shares: Owners of these kinds of shares are entitled to affixed dividend or

dividend calculated at a fixed rate to be paid regularly before dividend can be paid in

respect of equity share. They also enjoy priority over the equity shareholders in payment

of surplus. But in the event of liquidation, their claims rank below the claims of the

companys creditors, bondholders/debenture holders.

Cumulative Preference Shares: A type of preference shares on which dividend

accumulates if remained unpaid. All arrears of preference dividend have to be paid out

before paying dividend on equity shares.

Cumulative Convertible Preference Shares: A type of preference shares where the

dividend payable on the same accumulates, if not paid. After a specified date, these

shares will be converted into equity capital of the company.

Bond: is a negotiable certificate evidencing indebtedness. It is normally unsecured. A

debt security is generally issued by a company, municipality or government agency. A

bond investor lends money to the issuer and in exchange, the issuer promises to repay the

loan amount on a specified maturity date. The issuer usually pays the bond holder

periodic interest payments over the life of the loan. The various types of Bonds are asfollows:

Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic

interest is paid. The difference between the issue price and redemption price represents

the return to the holder. The buyer of these bonds receives only one payment, at the

maturity of the bond.


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Convertible Bond: A bond giving the investor the option to convert the bond into equity

at a fixed conversion price.

Treasury Bills: Short-term (up to one year) bearer discount security issued by

government as a means of financing their cash requirements.

REGULATION IN CAPITAL MARKET

The Indian Financial system is regulated and supervised by two government agencies under the

Ministry of Finance - They are:

(a) The Reserve Bank of India [RBI] and

(b) The Securities Exchange Board of India [SEBI]

All parts of the financial system are interconnected with one another and the jurisdictions of the

RBI and the SEBI overlap in many fields.

Securities and Exchange Board of India

Stock Exchanges of India


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NEW DIRECTIONS IN THE CAPITAL MARKETS

The capital markets have seen momentous changes since 2000. What are the important new

aspects of the capital markets that the investor should know and pay attention to?

Liquidity:

While stock market liquidity is much improved in India today as compared with previous years,

it remains important for investors to be aware of the costs of trading and how to avoid them.

The word liquidity is used often and misunderstood often. The simplest way to measure liquidity

is to look at the difference between buy and sell prices. If a share quotes at 10/11, i.e. that buyers

pay Rs.11 while sellers get Rs.10, then it is quite illiquid. These quotes mean that when you buy

the shares at Rs.11, you are immediately one rupee poorer, because the sale value of the shares is

only Rs.10. This difference of one rupee is called the "bid--ask spread".

Good liquidity is now found on the bigger stocks of the country. On NSE, the spread for stocks

like Reliance and State Bank is often as small as five or ten paisa (much less than was ever

observed in the earlier days, even when badla was available). In general, we say that liquidity is

"good" when the spread is less than 0.5% of the price. Such liquidity is good for both long--term

investors and traders, but the competition in trading is very heavy in such stocks. When the

spread is small, lakhs of traders using NSE terminals around the country are competing to be first

in catching news about prospects of companies. This makes profitable trading extremely

difficult.

Inferior liquidity is present in most stocks of the country. However, these are the stocks where

competition in trading is less, with greater opportunities for identifying undervalued or

overvalued stocks. In such stocks, both traders and investors are advised to place "limit orders"insisting on a good price. For example, if a stock has quotes of 10/11, then the buyer (who would

normally pay 11) should put a limit order at Rs.10.90, and the seller (who would normally get

10) should put a limit order at Rs.10.10. This will take a little more time to execute, and might

sometimes fail to execute, but such methods will significantly improve the prices obtained when

buying or selling. Traders can also earn profits from doing "market making", e.g. placing limit


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orders at 10.10/10.90. This earns a revenue of 80 paisa on each cycle of buying and then selling

(or selling and then buying).

Depository:

The most significant development in the markets of the last two years is the depository (NSDL)

which has been started by IDBI, UTI, NSE and SBI. Especially for investors who are not in

Bombay, the costs suffered through dealing with registrars, having certificates and dividend

checks stolen, courier charges, etc. are enormous.

The shares of more than 90 companies are available for trading through the depository, and

5,000 investors have converted Rs.9,000 crore of securities from physical shares into electronic

holdings. Every investor in the country should now go to the nearest depository participant and

open his account.

Derivatives:

The most important change expected in the next one year in the capital markets will be the

launch of derivatives trading.

Futures and options are tools which are used all over the world for both hedging (reducing risk)and trading (taking positions based on forecasts). They have been found to be safe and effective

instruments.

The risk of equity investment will come down once derivatives are available. This will help the

investment culture in the country. Derivatives will also make taking positions on the index

possible, which is currently not available.

The End of "Free" Speculation:

In the earlier days, in India, markets offered methods for "free" trading, where a person could

take positions, even very large positions, without any connection to the kind of losses that he

could bear.


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Many people would still like to go back to the old world, where they could just take positions

and not face any constraints in doing so. We have to become very clear that the days of "free"

trading are over. Markets which allow free trading will not survive, and wise regulators will not

allow such markets to exist. The new way of functioning is twofold: (1) before taking a position,

the trader will have to pay up a deposit, which is called "initial margin", and (2) the trader will

have to pay up all losses made on an open position on a day to day basis. The initial margin that

is currently used on many cash markets in India as of today is actually on the low side, and is

likely to rise in the future as the understanding of these problems improves. The upcoming

derivatives markets will also require payment of initial margin.

This discipline is used on all well--functioning markets in the world. It ensures that payments

crises do not develop on the market. It reduces the potential for market manipulation. Withoutthis discipline, the smooth functioning despite massive volumes of a market like NSE would not

be possible.

Trading in Corporate Bonds:

Many people buy corporate bonds to hold till maturity. One new feature in the country is the

increasing interest in trading corporate bonds.

When interest rates go up, bond prices go down. When bad news appears for a company, which

increases the risk of failure in servicing the bond, bond prices go down. Traders work on

forecasting interest rates and on watching the level of distress of a company and trade in

corporate bonds. Some bonds, like the TISCO SPN are already highly active in secondary market

trading.

Index Funds:

Investors in mutual funds have generally noticed that mutual funds do badly. Most mutual funds,

in all countries, deliver inferior returns to the market index after their risk is taken into account.

This approach has several benefits. The fund manager does not waste money on doing research.

He does not waste money on trying to trade actively. The investor is not worried about the kinds


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of stocks that the manager is putting into the portfolio, about the kind of brokerage firms which

the fund manager is using, etc. The investor buys the index fund in full confidence that his

interests are protected. The investor has a simple way to check whether the fund manager is

doing a good job: he has to simply compare the returns on the index fund against the returns on

the index. If the scheme is not performing as well as the index, the investor should move his

money to another index fund. This kind of day to day monitoring of the fund manager is not

possible with mutual fund schemes which are not index funds, where the investor has no way to

get day to day feedback on what the manager is doing with his money.

For these reasons, all over the world, investors have found index funds to be very valuable to

them. In countries like the US, a full 40% of the total investment in mutual funds is now in index

funds!

Several companies, including IDBI Mutual Fund, have plans to launch index funds aimed at

domestic investors. This is likely to be a very important new avenue for investment for investors.


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INTRODUCTION OF EQUITY CAPITAL

EQUITY CAPITAL

Essentially, equity capital is money that is invested into a company in exchange for an ownership

interest in that company. Traditionally, equity capitalunlike debtis not intended to be repaid

according to a specific schedule and is not secured (or guaranteed) by the company's assets.

Instead, an equity investor (i.e., the individual or entity that supplies the company with the

money) expects that, within a certain time frame, the ownership percentage she holds will be

worth more than the original amount she invested.

You may be more familiar than you think with the concept of equity capital. Millions of people

are public equity investors because they own shares in large corporations such as Microsoft and

Wal-Mart, companies whose ownership interests are priced and traded publicly. In Equity

Capital Market Landscape, however, when we say equity capital, we are referring to private

equity capital, which represents money that is invested in private companies, or those that are not

listed on the NYSE or NASDAQ exchanges.

The equity market is that in which shares are issued and traded, either through exchanges or

over-the-counter markets. Also known as the stock market, it is one of the most vital areas of a

market economy because it gives companies access to capital and investors a slice of ownership

in a company with the potential to realize gains based on its future performance.


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MARKET OVERVIEW

The month of April witnessed the Sensex scaling to a new lifetime high. The optimism that had

started building up towards the end of last fiscal got intensified as institutions and domestic

mutual funds went on a buying spree in the beginning of the new fiscal. The rally strengthened

fueled by the strong fourth quarter results, healthy earnings growth guidance by technology

bellwether Infosys and better than expected performance by Index heavyweight Reliance

Industries. The market sentiment was lifted further when the global rating agency S&P raised its

outlook on India's sovereign credit rating from stable to positive, citing better prospects of the

country handling its debt burden. On the economy front the market cheered the decision of RBI

to keep the short-term interest rates unchanged. However the markets took a breather during the

middle of the month amidst concerns over increase in interest rates by the US Fed, fall in stock

prices of other Asian markets and rise in crude oil prices. The markets witnessed extreme

volatility during the last trading week after the news trickled in that SEBI had kept in abeyance

its interim order, barring some market intermediaries from trading. The BSE Sensex ended the

month at 12,043 thereby registering a gain of 6.76% whereas the Nifty closed with a gain of

4.56% at 3,558 and CNX Midcap closed with a gain of 7.39% at 514

Non-ferrous metal stocks (Hindalco, Sterlite Ind, Hindustan Zinc) firmed up tracking firm global

prices of aluminium, copper and zinc on the London Metal Exchange. Domestic aluminium and

zinc makers like Nalco, Hindalco and Hindustan Zinc raised the aluminium and zinc prices by

more than 6% during the month. Concerns over the supply of non-ferrous metals combined with

a strong demand-pull from consumer industries are expected to keep the metal prices flying high.

Steel bellwethers Tata Steel and SAIL have hiked the steel prices by over Rs 2,000 per tonne

during the month. The BSE Metal Index gained 21.33% in April with companies like Hindustan

Zinc, Sterlite, Tisco and Hindalco gaining the most.


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The BSE Auto Index shot up by 4.25% over the month. In the two-wheeler segment, Bajaj Auto

opened the financial year with a 37% jump in motorcycle sales in April to 188,518 units,

whereas truck major Tata Motors reported a 51% increase in total vehicle sales during April

2006. The company sold 19,182 commercial vehicles in April, up 129% from the 8,368 vehicles

sold during the previous corresponding period.

The engineering stocks firmed up on the back of strong results. The sector is benefiting from

infrastructure spending by the government, rising capex cycle and increased outsourcing. The

order books of BHEL and ABB are surging on account of reforms in power and distribution

sector while L&T is benefiting from roads and oil and gas sector.


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EVOLUTION OF THE INDIAN EQUITY CAPITAL MARKETS A

SUCCESSFUL PRECEDENT

Market-oriented economic reforms in India began at the beginning of the 1990s. The removal of

many administrative controls on bank credit and the primary market for securities (mostlyequities) since then have resulted in the equity capital markets playing a much more significant

role in shaping resource allocation in India.

Till 1994, equity trading in India was dominated by floor-trading on the Bombay Stock

Exchange (BSE). The ills of floor-trading were abundant and included zero transparency and

extremely limited liquidity. These resulted in artificial pricing of securities, leaving investors

with high exposure to risk. Membership to the BSE was closed and corporate entities and foreign

brokerage firms were barred entry, resulting in high brokerage fees for investors. Further, theprimitive state of telecommunications, coupled with the floor-trading system, resulted in a

limited investor base, all concentrated in the Bombay area. This lack of market access

exacerbated the illiquidity.

The setting up of the National Securities Clearing Corporation (NSCC) in 1996 to perform the

function of a futures clearing corporation was another key development for the Indian capital

markets. NSCC performs novation, i.e. NSCC acts as the legal counterparty to the net settlement

obligations of brokerage firms. This erases any externalities relating to the possibility of defaults,

as the two parties in the transaction, the seller and the buyer, are not affected by the default risk

related to the other. Overall, the NSCC has provided a muchneeded measure of reliability to the

operations of the market process, thus giving potential investors, domestic and foreign, a greater

sense of confidence.

A number of other policy and institutional changes have led the creation of a fairly efficient and

robust equity capital market in India, though clearly, there is a long way to go before it

transforms and evolves into a market that is not only global in reach and access, but also in

standardization and efficiency. Some of these other key developments in the recent past have

been: X The start of equity index futures trading in 2000

X The start of equity index options trading in 2001

X The start of the stock options market in 2001


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EQUITY CAPITAL MARKET FUNDAMENTALS

Why do they say cash is king?

The ability to secure the cashor capitalneeded to launch and grow a venture is critical to its

survival, and while the launch of a new venture is one of the most challenging endeavors a

business professional can undertake, the financing of a new venture can be even harder. In fact,

entrepreneurs say that securing capital for a business in its early stages is one the most difficult

challenges in getting a business up and running. However, with a solid business plan and the

right expertise about the financing process, securing capital may not have to be quite so tough.

Fortunately, there are a number of ways in which to fund the launch and growth of a business. In

addition to the most basic approach to funding a businessrevenue, an entrepreneur may elect to

secure capital from a variety of sources such as personal resources, other founders and managers,

friends and families, strategic partnerships, debt financing, and equity capital.

In Equity Capital Market Fundamentals, you can first determine what source of capital is best

for your business. If you determine that equity capital is the most appropriate option, you can

benefit from the virtual boot camp that we've created on how to navigate the equity capital

markets, including information on what equity capital is and how to access it. In addition,

Springboard is proud to feature the National Venture Capital Association as a valued partner in

keeping our entrepreneurs informed about the venture capital market conditions across the nation

and throughout major industries

Equity Capital Markets Equity capital is raised in many ways the major types of equity capital

are unlisted equity, listed equity and hybrids. Equity capital market practices traditionally advise

in a full range of equity, debt equity-linked, hybrid, asset-backed, credit-linked and derivative

products that are offered in capital markets

Equity can be a source of assets, either through contributed capital (the contribution of capital

resources, i.e., assets from the owners) or retained earnings (when the business increases assets

through earning activities). These retained earnings can then be distributed to the owners

(through equity draws or dividends depending on the corporate structure) or kept in the business.


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IMPORTANCE OF EQUITY MARKET

Equity markets remained largely public for quite long. Public equity has a long history dating

back to about 200 years. The first publicly issued security can be tracked back to the

14thCentury in Venice.

In 1693, King William of England raised one million pounds from the public at a fixed interest

rate of 10 percent. A year later, the Bank of England was formed. The largest company at that

time to get listed was the South Seas Company, which was listed in 1711. The company also set

what is termed as the first stock market crash. It was about 60 years ago the first steps in

promoting private equity emerged which made rapid progress that intensified in the 1990s.

The decade of 1990s has been spectacular for the equity markets. Stock Exchanges were the

major platforms through which corporates were raising sizeable portion of their financial

requirements. Stock exchanges during the period 1995-2000 together enabled corporates to raise

about US$ 4 trillion of capital through public offerings. Total public equity outstanding in the

United States has grown from US$1.5 trillion in 1980 to US$17 trillion in 1999 registering more

than a 12-fold increase.

Equalizationbecame the hallmark of international finance in the last two decades, during which

period, world market capitalization and trading turnover more than doubled as percent of the

gross domestic product and exceeded it substantially in several mature and emerging economies.

For instance, according to the World Federation of Exchanges, stock exchanges world over

reported a market capitalization of US$45 trillion, a trading volume of US$41 trillion, listings of

about 40,000 companies and mobilized capital to the tune of US$4 trillion during the period

1995 and 2002. With growing international evidence of equity market liberalization leading to a

rise in real economic growth and aided by strong policy support, equity markets showed

spectacular growth in the decade of the 1990s with world market capitalization growing by 141

percent and trading volumes by 450 percent. In a quick span of time market capitalization has

exceeded the size of the gross domestic product in several countries including the emerging

economies.


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Revival of the primary markets and resurgence of new issuance forms crucial aspects that govern

the significance of the securities markets in the immediate future. It should also form a major

agenda of the strategies and solutions that could be evolved for ensuring sustainable growthofthe

securities markets worldwide.

How do you know if equity capital is for your business?

Public equity capital is only for large proven companies, often with hundreds of millions of

dollars in revenues and profits. The opportunities for companies to secure public equity capital

for the first time, or to go public in an IPO, are extremely limited.

Private equity capital, on the other hand, can be appropriate for fast-growing, young companies.

Check out Springboard's Equity Assessment Tool to see if equity capital is appropriate for your

company. Also, please note that for those fast-growing, young companies that have (1) limited

capital needs and (2) stable cash flow or a substantial tangible asset base, debt financing may be

a better financing alternative.

Why should one invest in equities in particular?

When you buy a share of a company you become a shareholder in that company. Shares are also

known as Equities. Equities have the potential to increase in value over time. It also provides

your portfolio with the growth necessary to reach your long term investment goals. Research

studies have proved that the equities have outperformed most other forms of investments in the

long term. This may be illustrated with the help of following examples:

a) Over a 15 year period between 1990 to 2005, Nifty has given annualized return of 17%.

b) Mr. Raju invests in Nifty on January 1, 2000 (index value 1592.90).The Nifty value as ofend December 2005 was 2836.55. Holding this investment over this period Jan 2000 to

Dec 2005 he gets a return of78.07%. Investment in shares of ONGC Ltd for the same

period gave a return of 465.86%, SBI 301.17% and Reliance 281.42%.Therefore,


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Equities are considered the most challenging and the rewarding, when compared to other

investment options.

Research studies have proved that investments in some shares with longer tenure of

investment have yielded far superior returns than any other investment. However, this

does not mean all equity investments would guarantee similar high returns. Equities are

high risk investments. One needs to study them carefully before investing.

What has been the average return on equities in india?

Since 1990 till date, Indian stock market has returned about 17% to investors on an average in

terms of increase in share prices or capital appreciation annually. Besides that on average stocks

have paid 1.5%dividend annually. Dividend is a percentage of the face value of a share that

company returns to its shareholders from its annual profits. Compared to most other forms of

investments, investing in equity shares offers the highest rate of return, if invested over a longer

duration.

Which are the factors that influence the price of a stock?

Broadly there are two factors: (1) stock specific and (2) market specific. The stock-specific

factor is related to peoples expectations about the company, its future earnings capacity,

financial health and management, level of technology and marketing skills.

The market specific factor is influenced by the investors sentiment towards the stock market as

a whole. This factor depends on the environment rather than the performance of any particular

company. Events favorable to an economy, political or regulatory environment like high

economic growth, friendly budget, stable government etc. can fuel euphoria in the investors,

resulting in a boom in the market. On the other hand, unfavorable events like war, economic

crisis, communal riots, minority government etc. depress the market irrespective of certain

companies performing well. However, the effect of market-specific factor is generally short-

term. Despite ups and downs, price of a stock in the long run gets stabilized based on the stock


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specificfactors. Therefore, a prudent advice to all investors is to analyse and invest and not

speculate in shares.

How can one acquire equity shares?

You may subscribe to issues made by corporates in the primary market. In the primary market,

resources are mobilized by the corporates through fresh public issues (IPOs) or through private

placements. Alternately, you may purchase shares from the secondary market. To buy and sell

securities you should approach a SEBI registered trading member (broker) of a recognized stock

exchange.


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THE SUCCESSFUL DEVELOPMENT OF THE INDIAN EQUITY

CAPITAL MARKETS

A precedent for successful implementation of policies and infrastructure for financial sectordevelopment in India has been set during the 1990s in the process of creating a viable and

competitive equity capital market. Prior to these reforms, the equity markets suffered from many

of the ills that the debt markets suffer from today. This targeted and focused prioritization on the

part of policy makers led to a welcome and rapid turnaround in the equity capital markets. 3 We

must take heart from this success and apply the same level of commitment so that the success

can be replicated in the context of the debt markets.

INDIA SCENARIO

Equity markets in India used to be forward markets.

Maturity of the contracts used to be 14 days (pre-1995) and 5 days (1995 to2001).

From July 2001, there is

- Equity which is a spot market with rolling T + 2 settlement.

-Equity derivatives.

NSE ranks 3rd in the world in terms of the number of trades in the equity

Market

- Traded volume during FY06 exceeded $350 bn with average daily volume of

$1.4 bn

NSE ranks no.1 globally in terms of number of contracts traded in equity stock

futures and ranked 3rd for equity index futures.


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Domestic equity raised in last three years at Rs630 bn is twice the amount

raised during the preceding decade Rs364 bn

Problem of vanishing companies witnessed in mid nineties now well taken care of withstrict disclosure norms and regulatory supervision

- Average issue size in FY06 is Rs2321 mn compared with Rs69 mn a decade ago


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GROWTH OF INDIAN EQUITY MARKETS

Speculation and Hedging on the Equity Market. The stock market offers a most elegant

example of the distinction between speculation and hedging, and the appropriate role for each.

Today, in India, we see numerous ``speculators'' on the equity (cash) market. Enormous

speculative trading volumes are observed on NSE and BSE. We see individuals who are ``buy

ITC'' or ``sell Infosys''. It is useful to go closer to these positions and link them up with the

underlying rationale. There are exactly two cases.

1. Many times, positions on stocks like ITC or Reliance are undertaken while treating the

stock as an index proxy. A person is bullish about the ``broad market movement'' and

adopts a position in a few highly liquid stocks so as to profit from it.

In this case, the person is actually an index speculator. His positions of a few stocks are

inefficient proxies for the index. Now that index futures are available, his speculation

would be more efficiently implemented using the index futures market. The ``buy Nifty''

position is a more efficient bet on the index than a ``buy ITC'' position.

2. Alternatively, there are people who are truly stock speculators. A person may truly be

pessimistic about Infosys, because he has thought about the valuation of Infosys and


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thinks that the market price is presently too high. In this case, this ``sell Infosys'' position

is an inefficient implementation of his view. This is because Infosys could additionally

fluctuate because of broad market movements.

The analysis of Infosys could be right, but the position could yield losses because Nifty

rises! The position ``sell Infosys'' combines speculation on Infosys with gambling on

Nifty. Until today, stockpickers in India could not escape the Nifty exposure when they

worked on valuing stocks. In the absence of an index futures market, every stockpicker in

India was forced to be an index gambler.

There is a superior alternative that's now available -- the position ``sell Infosys'' coupled

with ``buy Nifty''. The buy position on the futures market strips out the index exposure

that is latent in the stock position. The position ``sell Infosys + buy Nifty'' is a case of

hedging in speculation -- the speculator has a core competence in Infosys and has hedged

away the extraneous Nifty exposure. The resulting position is less risky, which benefits

the speculator and makes the overall marketplace safer.

In this sense, every speculative position on the equity cash market can now be done more

efficiently using the index futures market. Index speculators can now directly implement

views on the index, without using inefficient proxies. Stock speculators can hedge awaytheir latent index exposure, and hence avoid gambling on the index when they speculate

on a stock. In doing so, they obtain less risky positions which are focussed on their core

competences.

Online trading, the clearing corporation, and the depository have had a tremendous

impact upon the Indian equity market. Yet, their impact has only been upon convenience

in trading. Today, trading technology is enormously advanced, but the ideas that underlie

trading are as primitive as they were in 1992. Index futures transform the very paradigm

of trading. Once a stockpicker gets used to a ``buy BSES + sell Nifty'' lifestyle, he will

look back with amazement at the Jurassic markets that existed prior to June 2000, which

forced him to buy Nifty every time he wanted to buy BSES.


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COMPARISON OF EQUITY INVESTMENT VS. RISKLESS

INVESTMENT

Why buy equity? Many individuals who have lost money on the share market in the period after

late 1994 have decided to avoid equity investment. Is that justified? If equity investment is

useful, how should retail investors harness the gains with minimum pain?

We should first distinguish speculation from investment. Speculators make bets on the securities

which they think will yield good returns. Speculators can earn spectacular profits, if the forecasts

are correct. The reality, however, is that forecasting stock prices is extremely difficult. In a world

where lakhs of intelligent people continually scan financial markets looking to profit from

mispriced securities, speculative profits are extremely hard to obtain. At the same time, whether

speculators earn profits or not, they suffer the steady bleed of transactions costs. Hence

speculative trading is rarely useful for retail investors.

We will, instead, focus upon the investment objective. This does not require active trading. Many

individuals who have suffered losses in speculation have concluded that investment in shares is

inadvisable. This conclusion is incorrect. Economic research has revealed the benefits of

investing in shares as clearly as it has revealed the difficulties of obtaining speculative profits.

What alternatives does an investor face? Instead of buying shares, investors can always place

their money in a bank or in bonds. These instruments offer near--assured returns: their rate of

return does not fluctuate much from month to month. In contrast, the value of every equity

portfolio fluctuates in synchrony with the market index from month to month. Investing in the

equity market imposes pain upon investors owing to month--to--month fluctuations in the index.

These fluctuations are the risk of equity investments. They have to be matched by higher returns

in the equity market, on average. If there was an economy in which banks gave the same average

returns as shares, there would be a stampede of investors selling off their shares and moving their

money into bank accounts! In the process, share prices would fall, and at the lower prices, shares

would once again be attractive, offering higher prospective returns.

The key is to focus on average returns, over long time--periods, on well diversified equity

portfolios. Bets made on individual stocks are extremely risky, and there is no reward for bearing


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such risks. However, when we consider equity as a class, every economy in the world yields

higher average returns on shares than on fixed return investments.

The excess surplus returns that shares yield, as compared with riskless alternatives, is called the

equity premium. In every economy in the world, over every long time--period studied, there is a

strong equity premium. Jeremy Siegel has written a marvellous book on these issues, titled

Stocks for the Long Run (Irwin, 1994). The equity premium is the reward for investors who are

willing to endure the day to day fluctuations of stock prices. There are year to year fluctuations

in the stock market, but the average returns on stocks over long time periods turn out to be much

higher than fixed return alternatives.

Inflation 4%

Riskless real rate of return 6%

Riskless nominal rate of return 10%

Equity premium 8-10 percent points

Nominal return on market index 18-20%

Average time to doubling At riskless around 7 years

This table makes guesses about rates of return in the future in India. These are different from our

historical experience in a high inflation environment. We assume that inflation in India will bearound 4%, and the riskless rate of return will be 10% (i.e. 6% in real terms). This gives us fixed

return investments which double each 7 years.

The equity premium in India lies between 8 and 10 percentage points (similar values are

observed in many other countries). This gives a prospective long--run average rate of return on

stocks between 18% and 20%, assuming reinvestment of dividends. These scenarios feature

equity investments doubling each 4 years or so (on average).


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Public Equity

Public equity is an asset class where individuals and/or organizations can buy ownership in

shares/stock of a company through a public market such as the Bombay Stock Exchange. Public

equities are also used in the insurance funds, permanent funds, prepaid college tuition, and other

state trust funds.

Key Drivers of Public Equity Markets

Growth of public equity markets was fuelled by major factors, which include;

Greater thrust on development of local securities markets in the overall financial policy

of the economies and in pursuing the agenda of economic reforms

Better performance of equity markets in respect of returns on investments. Rapid economic growth in the 1990s that resulted in a large number of corporates

accessing equity markets for financial resources.

Equity markets emerged as an important alternative to investors to expand and diversify

Risk and rewards.

Liberalization and deregulation of financial markets provided greater access to cross

border Financial flows that expanded the scope of the equity markets and enhanced their

reach.

Large-scale privatization programmes/and allowing state owned companies to access

equity markets for part of their resource mobilization programme in a large number of

mature and emerging economies that led to sizeable spurt in the equity market activity.

Rapid transformation in the operations of the stock exchanges with greater thrust on

disclosure and transparency.

Introduction of efficient processes such as book building that substantially reduces the

costs.

Rapid progress in on-line trading and electronic trading platforms, which made trading in

securities instant and more transparent.

Securities settlements which shrank from anywhere up to 15 to 2 days at present (T+2)

Greater focus on better monitoring and surveillance to avoid deviances in the market

practices.


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Primary market issuance emerging as an important avenue for investment banks. For

instance, investment bank in the US earned anywhere up to $75 billion only from

underwriting alone in a good year (2000)

Public Equity Capital

Public equity markets are those where corporates raise resources through IPOs by getting listed

in the stock exchanges. Public equity markets are subjected to a wide range of governance,

disclosure, transparency and compliance norms set by the securities exchanges

commissions/government agencies and also the self-regulatory functions set by the exchanges

themselves. Institutional and retail investors mostly use this channel.

The distinct advantages of the public equity capital are:

a. Lower cost of capital for the firm

b. Provide liquidity for current stockholders

c. Shift monitoring costs for private lenders

d. Firm can learn from information contained in the stock price movements.

However, public equity capital has some costs too. These include

a. Disclosure of proprietary information

b. Agency costs of outside equity

c. Costs of reporting/filing with regulators/exchanges

d. Costs of corporate control

e. Under pricing

A few features generally observed in the respect of the IPO markets include:

Typically, IPO prices are below the level that they reach on the market few days or week

later when more public information is available (under pricing). However the extent of

under pricing will narrow with several companies coming up for listing.

Each IPO generates beneficial information externalities for other companies that are

about to go public.


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Privatized companies tend to list in public equity markets that offering better legal

protection of shareholders.

The decisions to go public are affected by firms ownership structure. When company has

only one owner or when banks holds majority shares, companies are less likely to prefer

public equity.

Deregulation of the cross border financial flows that particularly intensified the pace of portfolio

and foreign direct investment flows have greatly encouraged the growth of the public equity

capital markets worldwide. Aided by technology, design and distribution of innovative products

and services, real time data generation and dissemination enabled rapid growth of stock

exchanges. The very forces of deregulation and globalization that enabled the public equity

capital markets to grow at astounding rates have also unleashed intense competition that

generated alternatives that now pose a great challenge to their future.


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RECENT PERFORMANCE

The performance of the public equity capital markets has been adversely affected in the recent

Period due to a host of factors, which include;

General decline in the secondary market activity and equity prices owing to cyclical

downturn

A spate of investigations into the conduct of investment banks and corporates on the

processes Involved in the IPO management and share allocations.

A large number of firms that emerged in telecom and technology sectors were not able to

fit Into the framework of conventional IPO guidelines that induced them to look at

alternative Financial markets. Private equity, venture funds etc., emerged as the most

effective financing Mechanisms that eroded the scope of the public equity capital markets

in the new generation Products and services.

Stringent listing norms and regulatory compliance that made listing in the public equity

Capital markets costly and cumbersome. Recent developments such as enforcement of

Sarbanes Oxley Act that puts greater onus on the company directors responsible for the

corporate Conduct made the public equity markets more vulnerable.

Private Equity

Private Equity is the ownership of shares or other equity in the companies that do not trade

publicly on stock exchange. Usually private equity is more evident in companies with intangible

assets, expecting negative earnings for a period. Private equity markets are more suitable for

large institutional investors having holding power lasting longer durations to maximize their

investment returns. Private equity houses specializes in transactions in which they have

particular expertise or the sectors, which they are well aware of. Private equity houses work

closely with banks and mezzanine houses since most of the larger private equity transactions

involve more of debt than equity.

When equity capital is made available to companies or investors, but not quoted on a stock

market. The funds raised through private equity can be used to develop new products and


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technologies, to expand working capital, to make acquisitions, or to strengthen a company's

balance sheet.

The average individual investor will not have access to private equity because it requires a very

large investment.

Public equity is an asset class where individuals and/or organizations can buy ownership in

shares/stock of a company through a public market such as the Bombay Stock Exchange.

Private Equity

Private equities are equity securities of companies that have not gone public (in other

words, companies that have not listed their stock on a public exchange). Private equitiesare generally illiquid and thought of as a long-term investment. As they are not listed on

an exchange, any investor wishing to sell securities in private companies must find a

buyer in the absence of a marketplace. In addition, there are many transfer restrictions on

private securities. ...

This refers to the holding of stock in unlisted companies companies that are not quoted

on a stock exchange. It includes forms of venture capital and MBO financing.

Equity securities of unlisted companies. Private equities are generally illiquid and thought

of as a long-term investment. Private equity investments are not subject to the same high

level of government regulation as stock offerings to the general public. Private equity is

also far less liquid than publicly traded stock.

When equity capital is invested into a private company

Participation in a company not listed on the stock exchange


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TYPES OF INVESTMENTS

There are basically three types of private equity investments:

VENTURE CAPITAL principally in early-stage companies that are still developing

their products or services, yet have the prospect of generating revenue in a few years;

and later-stage firms generating revenue with the expectation of profits within a year

or two.

BUYOUT AND ACQUISITION FINANCING usually accompanied by a new

business plan, and occasionally with new management, to improve a company's

financial performance.

EXPANSION OR MERCHANT BANKING CAPITAL to established companies

looking to enter new markets or achieve a larger scale of operations.

Why does any company seek private equity capital?

Private equity is often the only option for a start-up company with high growth potential. For

example, TechForCash, a start-up software company, anticipates product development

expenditures of $1 million during the two years of its life. In its third year, fourth, and fifth years,

it expects to make $1 million, $2 million, and $4 million, respectively. Despite this remarkable

growth potential, TechForCash would probably not be able to get a loan to finance its launch.

However, if TechForCash has a strong business plan, an impressive management team, a pilot

product, and a couple of clients, a private equity investor may be willing give the company $1

million in development capital, in exchange for, say, 25% ownership in the company.

What are the sources of private equity capital?

There are many types of private equity investors, including angels, venture capital firms,leveraged buyout firms, and large companies, all of which are described below. Most private

equity investors, regardless of type, tend to be somewhat specialized based on factors such as

investment size, company stage, industry, and region


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PUBLIC VS. PRIVATE EQUITY

The sudden surge in the private equity raised concerns on the scope and prospects of the public

equity capital markets. Though both these segments have shown immense contraction in the last

two years, stock exchanges are increasingly concerned about the steep decline in the new

issuance in the public capital markets.The main differences are as follows:-

Share issue privatization (SIP), sale of shares in public capital markets, are more likely In

less developed capital market, to help develop the markets and for larger and more

Profitable state owned enterprises.

SIP would be more expensive in countries with greater income inequality since

Governments would have to under price share offerings. Less developed capital Markets

find it more costly to use SIP due to under pricing.

SIPs are more expensive for smaller firms where information costs are higher

Privatizing through SIP creates incentive for current regime to support market oriented

Economic policies and offers disincentives for subsequent governments to reverse the

Privatization process.

Asset sales, sales to small group of investors through private capital markets are more

Likely to occur where governments respect property rights, and are thus not expected Toexpropriate the privatized assets i.e. renationalize later. If this threat looms, then Asset

sale process will be a non-starter.

Companies with brightest futures should be divested by SIP while ones with more

questionable ones should be privatized by asset sales.


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TODAYS PRIVATE EQUITY IS PUBLIC EQUITY TOMORROW

A company with private equity today may be the company, which might want to get listed

tomorrow in the public equity markets. The ultimate option of any firm financed with private

equity is to realize the gains of its investment through public equity. Stock Exchanges may

consider suitable mechanisms that will enable them to recover a part of the gains that would have

accrued to them, if the company would have accessed public equity markets in the beginning. It

could be something like a conversion tax that would be only applicable to the companies with

private equity markets entering the public equity market.


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RESEARCH METHODOLOGY AND ANALYTICAL TOOL

Research methodology is a way to systematically solve the researchers problem or it may be

understood as a science of studying how research is done scientifically. It defines various steps

that are adopted by a researcher in studying his research problem along with logic behind them.

STEPS FOLLOWED WHILE CARRYING OUT THE RESEARCH PROCESS

Define the research problem and itsob ectives

Review concepts and theories

Collection of data survey

Research design including sample

Documents

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