42

Chapter – III

DEVELOPMENT OF INDIAN SECURITIES MARKET

DURING POST ECONOMIC REFORMS (1991 TO 2009)

3.1 Introduction

Indian stock market has known to be world class in terms of trading

architecture. It developed in terms of quantitative and qualitative perspectives,

quantitative parameters like amount raised from the market, the number of

listed stocks, market capitalization, trading volume and turnover and other

intermediaries. Qualitative parameters such as establishment of national wide

screen based trading system; dematerialization and electronic transfer of

securities, rolling settlements, and sophisticated risk management have also

been introduced in the stock market.

Stock market in India has a long history. Its history dates back to the

18th century when the securities of East India Company were traded in

Mumbai and Kolkata. The brokers used to gather under a Bayan tree and in

Mumbai and under a Neem tree in Kolkata for this purpose. However, the real

beginning came in the 1850s with the introduction of joint stock companies

with limited liability and first formally organised stock exchange was

established in 1875, viz. the Stock Exchange, Mumbai.

Since last two decades, the Indian stock market has undergone sea

changes. The economic reforms started since 1991 and a revolutionary

change in Information Technology (IT) has changed the entire face of Indian

capital market. In this chapter, an attempt has been made to study the

development of Indian securities market from 1991 to 2009.

3.2 Prior to Reform

Prior to economic reforms initiated in 1991, Indian financial system was

characterised by barriers to entry, control over pricing of financial assets, high

transaction costs and restrictions on movement of funds from one market

segment to another. During this period trading of stock exchange was through

'Open out cry' on the trading floors and there was no price time priority, so

43

users of the market were not assured that a trade was executed at best

possible price. There was inefficiency in cleaning and settlement procedure.

In short, following brief description depicts true picture of the Indian

security market.

• Fragmented regulation : Multiplicity of administration.

• Primary markets were not into the main stream of financial system.

• Poor disclosure in prospectus& balance sheet was not made available to

investors.

• Stock exchanges were run as 'brokers club' : management dominated by

brokers.

• There was no inspection of stock exchanges undertaken.

• There were no regulation on merchant bankers and other intermediaries.

• No concept of capital adequacy.

• Mutual funds – virtually unregulated and there was poor disclosure by

mutual funds.

• Takeovers regulated only through listing agreements between the stock

exchanges and the company.

• No prohibition of insider trading and fraudulent and unfair trade practices.

• There was no transparency in trading.

3.3 The Era of Structural Transformation (1991-92 o nwards)

The Indian economic crisis in 1991 accompanied by a steep fall in

foreign exchange reserve, inflation rate was in double digit, serious fiscal

deficit, a sharp downgrading of India's credit rating, balance of payment

position was a matter of concern. In this situation the then Prime Minister P.

V. Narhasiham and Finance Minister Dr. Manmohan Singh declared structural

adjustment programme under the title of New Economic Policy. Stabilization

of economy was necessary so that that balance of payment and inflationary

pressure could be kept under control.

44

• Deregulation of the real as well as financial sector, removal of licence and

permit system.

• Accelerated investment growth & employment.

• Liberalization of international trade in various sectors to promote

competition and efficiency.

• Globalization to attract international capital as well as modern technology.

In addition to make our financial sector a vibrant, competitive,

diversified, transparent and efficient it was suggested to apply corporate

governance norms to financial sector. Since 1991 reforms has ended four

decades of a state planning and set in motion, a quite economic revolution.

3.4 Review of Capital Market Reforms

Capital market reforms can be classified into two parts i.e. Primary

capital market reform and secondary capital market reform.

3.4.1 Reforms in Primary Capital Market

Following are major reforms in primary market in India.

3.4.1.1 Abolition of Capital Issues Control Act (CI A) 1947

The rising of capital from the capital issues were controlled by the

office of capital issues (CII) under the Capital Issues control Act (CIA) 1947.

The firms were required to obtain approval from the controller of capital issues

for raising resources in the market. In 1991-92 Finance Minister announced

the repeal of the act and transfer of power from CCI to SEBI from control to

disclosure based regulation.1 Since then the issuers of securities could raise

capital from the market without requiring any consent from any authority,

either for making the issue or for pricing it. Restrictions on rights and bonus

issue have also been removed. New as well as established companies are

now able to price their issues according to their assessment of market

conditions. However, issuers of capital are required to meet the guidelines of

SEBI on disclosure and investors protection.

1 A. Satish Kumar & B. Anusha (2011): Reforms in Primary Market –A Review, Indian Journal of commerce & Management Studies, ISSN 2229-5674, pp.269-274.

45

Companies issuing capital are required to make sufficient disclosure,

including justification of the issue price and also material disclosure about the

risk factors in their offer prospectus. These guidelines have an important

measure for protecting investors’ interest and promoting the development of

the primary market along with sound lines.

3.4.1.2 Book Building Process

In 1998, SEBI introduced guidelines for issuing shares through the

book building process based on the recommendations of the Malegam

Committee, 1995. The issuing company should disclose either the floor price

of the securities offered through it or a price band along with a range within

which the price can move. In case the price band is disclosed, the lead books

runner should ensure that the cap of the price band should not exceed 20

percent of the floor. The price band can be revised during the bidding period.

The maximum revision on either side should not exceed 20 percent. The book

shall be open for a minimum period of five days and not more than ten days

subject to a maximum of bidding period of 13 days in the case of the price

band is revised. Therefore, it appears a little restrictive but book building gives

ample opportunities for price discovery.

3.4.1.3 Green Shoe Option

The company shall appoint one of the lead book runners, amongst the

issue management team, as the Stabilizing Agent (SA), who will be

responsible for the price stabilization process, if required.

3.4.1.4 Application Supported by Blocked Amount (AS BA)

When investors apply for an Initial Public Offering, they have to pay the

entire money upfront to the banker and hence stand to lose returns on the

money that is locked until the shares are allotted This process enables the

banker to block the money in investors' account when they bid for an initial

public offerings and the money is released on the basis of number of shares

being allotted. The remaining money will be unblocked by the banks. As a

result, the initial public offering process is expected to be completed within 15

days of the closing date of the issue.

46

Apart from all these, primary market also has the experience of reforms

regarding transparency, financial instruments and compulsory demat.

3.5 Reforms in Indian Securities Markets

There have been substantial regulatory, structural, institutional and

operational changes in the securities industry. These have been brought in

with the objective of improving market efficiency, enhancing transparency,

preventing unfair trade practices and bringing the Indian market upto the

international standards. The following are the principal reform measures

undertaken since 1992.

3.5.1 Stronger SEBI

The Securities and Exchange Board of India (SEBI) was setup in 1988

as an administrative arrangement. In 1992, the SEBI Act was enacted, which

gave it the statutory status. The SEBI operates within the legal framework of

the SEBI Act, 1992. This act provides enormous power to SEBI to control and

regulate the Indian stock market. Basically SEBI has been working for

protection of investors, promotion of the development of the security market

and regulating the stock market. Thus, establishment and empowerment of

SEBI is a significant step in development of stock market in India.

3.5.2 Establishment of CRISIL

Credit Rating and Information Services of India Ltd. was promoted in

1987 by the Industrial Credit and Investment Corporation of India Limited

(ICICI) and Unit Trust of India (UTI). Its other shareholders include Asian

Development Bank, Life Insurance Corporation of India, State Bank of India,

HDFC etc. The principal objective of CRISIL is to rate debt obligations of

Indian companies. The rating provides a guide to the investors as to the

degree of certainty of timely payment of interest and principal on a particular

debt instrument.

Thus, corporate borrower with good rating can raise funds at

comparative rates in the capital market.

47

3.5.3 Establishment of NSE

As per the recommendation of Peherwani Committee National Stock

Exchange Ltd. was incorporated in 1992 which was given recognition as a

stock exchange in April 1993.2 NSE was setup with objectives of: (a)

establishing a national wide trading facility for all types of securities, (b)

ensuring equal access to all investors all over the country through an

appropriate communication network, (c) providing fair, efficient and

transparent securities market using electronic trading system, (d) enabling

shorter settlement cycle and book entry settlements. NSE is the first

exchange in the world to use satellite communication technology for trading. It

uses satellite communication technology to energize participation from about

2800 VSATs from nearly 358 cities spread all over the country. Its trading

system, is called National Exchange for Automated Trading (NEAT). National

Stock Exchange can handle upto 2.5 million trades per day. NSE has also put

in place NIBIS (NSE's Internet Based Information System) for on-line real-time

dissemination of trading information over the Internet. Today, NSE is world's

fourth largest stock exchange in term of volume of trades undertaken.

3.5.4 Setting Up of OTCEI

The Over the Counter Exchange of India, recognised as a stock

exchange under section 4 of the Securities Contract Regulation Act, 1957 is

promoted by the all India financial institutions, insurance companies and

merchant banking subsidiaries of banks. It was promoted jointly by many

financial institutions like ICICI, UTI, LIC, GIC, IDBI, IFCI, SBI capital etc. OTC

operations are supervised by SEBI and government of India. Trading began in

January 1993 with only two scrips but now OTC exchange is making its

presence nearly felt on the capital market scene.

3.5.5 Internet Trading

As per SBI Committee on Internet Trading and Services in January

2000, SEBI has proposed internet trading system under limited order rating

system (ORS) through registered stockbrokers on behalf of clients for

execution of trades on stock exchanges. Thus, a client (buyer/seller) in any

2 Gupta Saloni (2010): Stock Market In India, New Century Publication, New Delhi, p.99.

48

part of the country would be able execute trade on their computer by the

brokers filter. The systems used by brokers have provision for security,

reliability and confidentiality of data through the use of encryption technology.

3.5.6 Stock Market Operation with Fully Electronic Trading Platforms

In India, the first step towards automation of stock exchange was taken

with the establishment of OTCEI, which initiated screen based trading to

increase liquidity for small capital companies. This was followed by NSE in

March 1994. This was followed by BSE with its BSE online trading (BOLT).

Thus, introduction of automation, trading rings are being replaced with screen

based trading. This has not only reduced the per transactions cost but also

increased volumes of trading and brought transparency in trading.

NSE was the first exchange in the world to use satellite communication

technology for trading. It has helped in shifting the trade platform from the

trading hall in the premise of the exchange to the computer terminals at the

premises of trading members.

3.5.7 Modified Forward Trading

SEBI has banned traditional carry forward system on the Indian stock

exchange with effect from December 1993. But the modified forward trading

was only introduced in January 1996 based on G. S. Patel Committee

recommendations.

In this system, SEBI has stipulated that the brokerwise outstanding

position on any day in respect of carry forward transaction should not exceed

25% of a brokers total transactions on that day. Also for a broker, to carry

forward the business from one settlement to another, the overall limit of Rs. 5

crores has been imposed, which has Rs. 3 crores sub limit for purchase and

Rs. 3 crores for sales.

SEBI's rational behind elimination of the traditional system was that it

leads to excessive speculation and increased market risk.

3.5.8 Policy Initiatives for Derivatives

For the development of derivatives market, SEBI decided to come up

with three new products i.e. mini contract, option contracts with longer life and

49

volatility index. The three products would provide investors more flexibility in

term of executing their trading strategies.

Derivatives Market Review Committee (DMRC) was setup on April 3,

2007 under the chairmanship of Professor M. Rammohan Rao to carryout a

comprehensive review of the development in the derivative market in India &

to suggest the future course of action. SEBI on November 2007 approved

interim recommendations on new products for future and option segment.

It is expected that these derivative products will provide investors with

a wide range of risk, mitigation products and create more activity in the Indian

derivatives markets. The four products are as follows:

A) Mini Contracts in Equity Indices

B) Options Contract with Longer Life/Tenure

C) Volatility Index and F & Q Contracts

D) Bond Index and F & Q Contracts

3.5.9 Demutualization

The Securities Contracts (Regulation) Act, 1956 was amended in

October 2004 to facilitate the corporatization of stock exchanges.

Demutualization in a nutshell is a process of converting a stock exchange

from a 'non-profit' member owned organization to a 'for profit', shareholder

owned corporation.3

Historically, brokers owned, controlled and managed the stock

exchanges. In case of disputes, integrity of the exchange suffered. Therefore,

regulators focused on reducing the dominance of trading members in the

management of stock exchanges and advised them to reconstitute their

governing councils to provide for at least 50% non-broker representation,

management and trading membership would be segregated from one

another. A few exchanges have already initiated demutualization process.

NSE, however, adopted a pure demutualised governance structure where

ownership, management and trading are with three different sets of people.

3 Venkatesh & Basu Puraba (2004): Emerging Trends In Capital Market, ICFAI University Press, Hydrabad, p.49.

50

This completely eliminates any conflict of interest and helped NSE to

aggressively pursue policies. As of 2008, there are 19 demutualised stock

exchanges in India.4

3.5.10 Screen Based Trading (SBT)

Before 1994, the trading on stock exchanges in India used to take

place through an open outcry system. In the open outcry system, traders

shout and resort to signals on the trading floor of the exchange, which consist

of several notional trading posts of different securities. A member (or his

representative) wishing to buy or sell a certain security reaches the trading

post where the security is traded. Here he comes in contact with others

interest in transacting in that security. Buyers make their bids and sellers

make their offers and bargains are closed at mutually agreed upon prices.

This system did not allow immediate matching or recording of trades. This

was time consuming and imposed limits on trading.

This was followed by BSE with BSE online trading (BOLT). The SBT

replaced the trading ring by the computer screen and distant participants,

geographically separated, can trade simultaneously at high speeds. As a

result, open out-cry system has disappeared from India. Today, India can

boast that almost 100% trading takes place through electronic order matching.

Technology has been harnessed to carry the trading platform to the

premises of brokers. NSE carried the trading platform further to the PCs in the

residence of investors through the internet and to hand-held devices through

WAP (Wireless Application Protocol) for the convenience of mobile investors.

This has made a huge difference in terms of equal access to investors in a

geographically vast country like India.

3.5.11Trading and Settlement Cycle

The account period of settlement mechanism was being followed in the

stock exchanges before the introduction of rolling settlement provided for

settlement of transactions on a fixed day only, irrespective of when the

transaction took place.

4 Machiraju H.R (2009): The Working of Stock Exchanges, New Age Publication, New Delhi, p.41.

51

Initially, the trading cycle varied from 14 days for specified securities to

30 days for other and settlement took another fortnight. The exchanges,

however, continued to have different weekly trading cycles, which enabled

shifting of positions from one exchange to another. Rolling settlement on T+5

basis was introduced in respect of specified scrips reducing the trading cycle

to one day. It was made mandatory for all exchanges to follow a uniform

weekly trading cycle in respect of scrips not under rolling settlement. All scrips

moved to rolling settlement from December 2001. The settlement period has

been reduced progressively from T+5 to T+3 days. Currently T+2 day

settlement cycle is being followed. 'Shorter Settlement Cycles lower the

trading costs for market participants and reduce the risk of counter-party

failure.5

3.5.12 Depositories Act

The establishment of depository system is one of the significant steps

taken by SEBI. The earlier settlement system gave rise to settlement risk.

This was due to the time taken for settlement and due to the physical

movement of paper. Further, the transfer of shares in favour of the purchaser

by the company also consumed considerable amount of time. To obviate

these problems, the Depositories Act, 1996 was passed to provide for the

establishment of depositories in securities with the objective of ensuring free

transferability of securities with speed and accuracy.

The stamp duty on transfer of demat securities has been waived. There

are two depositories in India, viz. NSDL and CDSL. They have been setup to

provide instantaneous electronic transfer of securities. All actively traded

scrips are held, traded and settled in demat form. Demat settlement accounts

for over 99.9% of turnover settled by delivery. This has eliminated the bad

deliveries and associated problems.

To prevent physical certificates from sneaking into circulation, it has

been mandatory for all new securities issued should be compulsorily traded in

dematerialized form. Dematerialization of securities has been made a

prerequisite for making a public or right issue or an offer for sale. Thus,

5Gupta Saloni (2009): Stock Market in India, New Century publication, New Delhi, p.111.

52

depository works like a bank where instead of money; shares are

electronically transferred through network of agents called Depositaries

Participants (DP).

3.5.13 Derivatives Trading

To assist market participants to manage risks better through hedging,

speculation and arbitrage, SC(R) A was amended in 1995 to lift the ban on

options in securities. However, trading in derivatives took off much later after

the suitable legal and regulatory framework was out in place. The market

presently offers index futures and index options on the benchmark indices of

BSE and NSE and various other indices and single stock futures and options.

3.5.14 Risk Management

With a view to avoid any kind of market failures, the regulator &

exchanges have developed a comprehensive risk management system. This

system is constantly monitored and upgraded. It encompasses capital

adequacy of members, adequate margin requirements, limits on exposure

and turnover, indemnity insurance, on-line position monitoring and automatic

disablement etc. They also administer an efficient market surveillance system

to detect and prevent price manipulations. The clearing corporation has also

put in place a system which tracks online real time client level portfolio based

upfront margining. Exchanges have set up trade/settlement guarantee funds

for meeting shortages arising out of non-fulfillment/partial fulfillment of funds

obligations by the members in a settlement. As a part of the risk management

system, index based market wide circuit breakers have also been put in place.

NSE had set up the first clearing corporation, viz. National Securities

Clearing Corporation Ltd. (NSCCL), which commenced its operations in April

1996. The NSCCL assured the counterparty risk of each member and

guaranteed financial settlement. NSCCL established a Settlement Guarantee

Fund (SGF). The SGF provides a cushion for any residual risk and operates

like a self-insurance mechanism wherein members contribute to the extent

required for successful completion of the settlement. This has eliminated

counterparty risk of trading on the Exchange.

53

3.5.15 Investor Protection

The SEBI Act established SEBI with the primary objective of protecting

the interests of investors in securities and empowers it to achieve this

objective. SEBI specified that critical data should be disclosed in the specified

formats regarding all the concerned market participants. The Central

Government has established a fund called Investor Education and Protection

Fund (IEPF) in October 2001 for the promotion of awareness amongst

investors and protection of the interest of investors.

DEA, DCA, the SEBI and the stock exchanges have set up investor

grievance cells for redressal of investor grievance. The exchanges maintain

investor protection funds to take care of investor claims. The DCA has also

set up an investor education and protection fund for the promotion of

investor’s awareness and protection of interest of investors. All these

agencies and investor associations are organizing investor education and

awareness programmes. In January 2003, SEBI launched a nationwide

Securities Market Awareness Campaign that aims at educating investors

about the risks associated with the market as well as the rights and

obligations of investors. The NSE and BSE has also taken special measures

for educating the investors i.e. it conducts seminars, workshops and comes

out with advertisement both in print and electronic media to communicate to

the investors.

3.5.16 Foreign Investment in Stock Exchanges

For all practical purpose, foreign investment was not welcomed into

India until 1991. The policy framework for inflow of capital was liberalized in

pieces through the 1990s.

Foreign investment upto 49% has been allowed, from December, 2006,

in infrastructure companies, in the securities markets, viz. stock exchanges,

depositories and clearing corporations, with separate Foreign Direct

Investment (FDI) cap of 26% and Foreign Institutional Investment (FII) cap of

23%.

54

3.5.17 PAN as the Sole Identification Number

The need for a Unique Identification Number (UIN) for market

participants in the securities markets was felt in the interest of enforcement

action. Presently, a person has variety of identification numbers such as

Permanent Account Number (PAN) from CBDT(Central Board of Direct Tax),

Depository Account Numbers from respective depositories, bank account

Numbers from respective banks, MAPIN from SEBI, Unique Client Code from

Exchanges, Director Identification Number from MCA(Ministry of Corporate

Affairs), etc. and there is no arrangement to link these numbers.

3.5.18 New Derivative Products

Derivatives have gained popularity as instrument of risk management.

The Mini Derivative Futures & Options contract was introduced for trading on

S & P CNX Nifty on January 1, 2008 while the long-term option contracts on S

& P CNX Nifty were introduced for trading on March 3, 2008. It has been

found that globally overall market liquidity and participation generally

increases with introduction of mini contracts days.

3.5.19 Securities Lending & Borrowing Scheme

A Securities Lending & Borrowing mechanism allows market

participants to take short positions effectively with less cost. It also provides

the holder of idle securities with an alternative to earn a return on such

holdings without risk.

The Exchange launched a Securities Lending & Borrowing Scheme

(SLBS) on April 21, 2008. The Exchange provides automated, screen based,

order matching platform to participants to execute lending and borrowing

transactions. Securities available for trading in F & O segment of the

Exchange have been initially permitted to trade in this segment. The SLBS

was revised from December 22, 2008 to increase the trading time and the

lending/borrowing period.

3.5.20 Launch of Currency Futures in India

On August 29, 2008, NSE launched trading on currency future

contracts for the first time in India followed by BSE on October 1, 2008 and

55

MCX-SX on October 7, 2008. To start with 12 monthly future contracts on the

USD-INR, pairs have been made available for trading. The minimum lot size

has been kept small at USD 1000 and applicable margins are also

comparably very low due to the less volatile nature of the underlying.

3.5.21 Direct Market Access

During April 2008, Securities & Exchange Board of India (SEBI)

allowed the direct market access (DMA) facility to the institutional investors.

DMA allows brokers to offer clients direct access to the exchange trading

system through the broker's infrastructure without manual intervention by the

broker. DMA facility gives clients direct control over orders, helps in faster

execution of orders, reduce the risk of errors from manual order entry and

lend greater transparency and liquidity. DMA also leads to lower impact cost

for large orders, better audit trails and better use of hedging and arbitrage

opportunities through the use of decision support tools/algorithms for trading.

3.5.22 Cross Margining

Many trading members undertake transactions on both the cash and

derivative segments of an Exchange. They keep separate deposits with the

exchange for taking positions in two different segments. In order to improve

the efficiency of the use of the margin capital by market participants and as in

initial step towards cross margining across cash and derivatives markets,

SEBI allowed Cross Margining benefit in May 2008. In December 2008, SEBI

extended the cross margin facility across Cash and F & O segment to all the

market participants. On February 9, 2009, Cross Margining was made

available for positions across index futures to stock/stock futures and stock

futures to stocks. It is available to all categories of market participant and

benefit is computed on online real time basis.

3.5.23 Corporate Bond Markets

The Government and regulators have well recognised that a well-

developed corporate bond market is essential for financial system efficiency,

stability and overall economic growth. A well functioning bond market provides

for financial diversification and facilitates necessary financing not only for

AAA-rated corporate but also less well known, sub-investment grade

56

corporate and infrastructure developers. Considering that this market is not

well developed in the country, the Government had set up a High Level Expert

Committee on Corporate Bonds and Securitization (Patil Committee) to look

into legal, regulatory, tax and market design issues in the development of the

corporate bond market. The Committee submitted its report to the

Government in December 2005. The Budget of 2006-07 announced that the

Government has accepted the recommendations of the Report and that steps

would be taken to create a single, unified exchange traded market to

corporate bonds. The measures already taken in respect of implementation of

the recommendations of the Patil Committee include:

a) Enhancement of limit of FII Investment in corporate debt from

US$ 0.5 Bn to US$ 1.5 Bn and further to US$ 3 Bn.

b) Operationalising of trade reporting and trading platforms for

corporate bonds at the major exchanges.

3.6 Securities Market Development since 1991 onward s

Reforms in Regulatory Framework

Features In 1991 Post Reform Period

Regulator Central Government oversight

A separate Regulator for securities market – SEBI

Disclosure Voluntary, vague and non-standardize

Standardized, systematic and a dedicated website for disclosures by listed companies

Mode of Access Public issues at fixed prices Public issues at market determined prices, private placement, qualified institutional investors

Pricing of Securities

Determined by central government

Determined by market

Structure of Stock Exchanges

Mutual not for profit entities Demutualised, for profit corporate entities

Forms of Securities

Physical Dematerialized

Derivative Trading Absent Exchange traded derivatives on Futures & Options

Cont….

57

Cont….

Trading Mechanism

Open outcry Screen based online trading system

Settlement Cycle 14 day account period settlement

Rolling settlement on T+2 basis

Form of Settlement

Physical Electronic

Risk Management No focus on risk management

Comprehensive risk management system

Transfer of Securities

Cumbersome Securities are freely transferable electronically

Enforcement Inadequate provision of penalty and time consuming process

Speedy disposal of investigation cases by enhancing the power of SEBI

Foreign Investment in Capital Market

Restrictions on entry of foreign investment

Opened up for investment by FIIs

Source: Compiled by Researcher

3.7 Trends in Savings of Household in Financial Ass ets in India

The Gross Domestic Saving as a proportion of GDP are positively

correlated to the capital market development. Larger saving in the economy

with the household will also imply larger availability of funds for investment in

the primary and secondary market. Thus, domestic saving pattern and their

relative weightage is significant for the development of capital market.

Following Table No. 3.1 shows trends in saving of household in financial

assets in India.

Table No. 3.1: Trends in Savings of Household in Fi nancial Assets in India

Financial Assets 1990-91 1995-96 2000-01 2005-06 20 07-08

A) Currency 10.6 13.4 6.4 8.78 11.20

B) Fixed Income Investment

74.9 78.9 89.4 83.02 78.23

C) Securities Market 14.4 7.8 4.3 8.19 10.2

I) Mutual Fund 9.1 0.5 1.3 3.74 7.83

II) Government Securities 0.2 0.4 1.6 2.78 -3.90

III) Other Securities 5.2 6.9 1.4 2.07 445

Total 100 100 100 100 100

Source: CMIE Report on Capital Market, 2007, 2009, p.34

58

The Table No. 3.1 shows that during the year 1990-91 share of fixed

income investment to the total saving of household in financial assets was

74.9% (Fixed income investments includes deposits, insurance,

provident/pension fund, in which share of deposits is higher than other

instruments) Share of securities market investment to the total household

saving in financial assets was 14.4% in which share of mutual fund is higher

i.e. 9.1% whereas share of currency saving to the financial assets was 10.6%.

In 1995-96, share of fixed income investment increased to 78.9%, investment

in securities market decreased to 7.8% whereas share of currency saving

increased to 13.4%. During the year 2000-01 share of fixed income

investment increased to 89.4%, share of investment in securities market

further declined to 4.3%, share of currency saving also declined to 6.4%,

Percentage of fixed income investment was declined to 83.02% in the year

2005-06, percentage share of securities market investment increased to

8.19% and share of currency saving increased to 8.78% in the year 2005-06.

In the year 2007-08 percentage share of fixed income investment

declined to 78.23% and percentage share of investment in securities market

increased to 10.23% in which mutual funds contributes 7.83%, share of

government securities was – 3.90%.

3.8 Share Owning Population in India (Investor Popu lation)

Since 1991, the activity of stock market has been rising significantly,

but there has not been rise in the participation rate of individual investor's

stock market in India. Till today, income schemes i.e. fixed deposits, provident

funds; pension funds became Major Avenue of investor's preference for their

investment.

3.8.1 SEBI – NCAER Survey of Indian Investors in 20 036

According to SEBI-NCAER Survey of Indian Investors (2003), only 13.1

million i.e. 7.4% of all India households representing 21 million individuals

directly invested in equity shares or debentures or both during the financial

year 2000-01. The percentage of households owing equity shares or

debentures of both was substantially higher in urban area than in rural area.

6 Securities Market (Basic), Module Work Book, p.3. (http://www.sebi.com)

59

About 65% of all households and 76% of investor's households have graded

bank fixed deposits being very safe for investment.

Indian Equity Investors Survey 2010

Table No. 3.2 : Direct Participation in Equity Mar ket (Demat Shareholder as on 2009)

Country Demat

Accounts in Million

Population in Million

Demat/Population (in %)

India 16.8 1773 1.4

Source: Indian Equity Investor Survey 2010

It is clear from the above table no 3.2 that, the direct participation of the

retail investors in Indian equity market is still low i.e. only 1.4% of the

population. There are some 1 crore 65 lakh depository accounts that

individuals hold. That is barely 1% of India's population.7

3.9 An Overview of Indian Stock Market (As on 31 st March)

Table No. 3.3 : An Overview of Indian Stock Market (As on 31 st March)

Market Participants 1995 2000 2005 2009

A) SAT 01 01 01 01

B) Regulators 04 04 04 04

C) Depositories - 02 02 02

D) Stock Exchanges

With Equity Trading 22 23 23 20

With Debt Market Segment

01 01 02 02

With Derivative Trading 0 02 02 02

With Currency Derivatives - - - 03

E) Investors

i) FIIs 308 506 685 1635

ii) Mutual Fund 22 38 39 44 Source: Compiled from 1) SEBI Handbook of Statistics on Indian Economy, 2009, p. 12 2) Indian securities Market A Review,vol xii,2009 page no. 06.

7 DNA Daily Newspaper, dated on Jan 17, (2011), p.8.

60

Table No. 3.3 depicts the overview of Indians securities market from

1995 to 2009. To redress grievances relating to the securities market, SEBI

Act 1992 framed regulations and pursuant to S15K of the Act, SEBI

established the Securities Appellate Tribunal (SAT). Since 1995, all cases

concerning securities laws which were to be appealed against came to be

dealt by SAT only. Thus, SAT acts as a watchdog to ensure justice. Stock

market includes DCA (Department of Company Affairs), DEA (Department of

Economic Affairs), RBI and SEBI. The activities of these agencies are co-

ordinated by a High Level Committee on Capital Market. The orders of SEBI

under the securities laws are applicable before a securities tribunal. These are

four regulators to regulate securities market. The number of equity trading

stock exchanges was 22 in 1995. It was 23 in 2000 and 2005, but three stock

exchanges i.e. Magadh, HKSE, Hydrabad were derecognised during 2007-08.

At present there are 20 equity trading stock exchanges of which 2 stock

exchanges are of debt market segment and 2 are of derivative trading and 3

are of currency derivative along with equity trading.

Foreign institutional investors (FIIs) increased five fold from 1995 to

2009. Mutual fund also increased two fold from 1995 to 2009. There are two

depositories namely NSDL and CDSL functioning in Indian securities market.

3.10 Growth in Traders Population in Securities Mar ket

Traders stock market are classified into brokers, corporate brokers and

sub-brokers. Table No. 3.5 shows growth in traders population in securities

market during 1995 to 2009.

Table No. 3.4: Growth in Traders Population

Traders 1995 2000 2005 2009

Brokers (Cash Segment) 6711 9192 9062 8652

Corporate Brokers (Cash Segment) 616 3316 3764 4079

Sub Brokers (Cash Segment) 876 5675 13683 62471

Brokers (Derivative Market) - 519* 994 1587 Source : SEBI Handbook of Statistics on Indian Securities Market, 2009, p. 12 Note : *Figures given in 2001.

Table No. 3.4 reveals the growth of trader’s population from 1995 to

2009. Total brokers of cash market segment have increased from 6711 in

61

1995 to 8652 in 2009, total brokers of cash segment have increased from 616

in 1995 to 4079 in 2001, and numbers of sub brokers have increased from

876 to 62471 during the same period. The number of brokers in derivative

was 519 in 2000 increased to 1587 in 2009.

3.11 Growth in Service Providers in Securities Mark et

Table No. 3.5 : Growth in Service Providers in Secu rities Market

Service Providers 1995 2000 2005 2009 Custodians - 15 11 16 Merchant Bankers 790 186 128 134 Bankers to an Issuers 70 68 59 51 Underwriters 36 42 59 19 Debentures Trustee 20 38 35 30 Credit Rating Agency 4 4 4 5 Venture Capital Fund - 35 50 132 Foreign Venture Capital Investor

- 1 14 129

Register to an Issue & Shares Transfer Agents 264 242 83 71

Portfolio Managers 1 23 84 232 Source : SEBI Handbook of Statistics on Indian Securities Market, 2009, p. 12

Table No. 3.5 presents growth in service providers in securities market.

The number of custodian was 15 in the year 2000; it increased to 16 in the

year 2009. The number of merchant bankers decreased from 790 in 1995 to

134 in 2009. The number of bankers to an issuers and underwriters also

decreased from 70 and 36 in 1995, respectively to 51 and 19 in 2009

respectively. The number of debentures trustee increased from 20 in 1995 to

30 in 2009.

The credit rating agencies includes CRISIL, ICRA, CARE, FITCH and

BRICK works. The number of venture capital funds increases from 35 in the

year 2000 to 132 in the year 2009. The foreign venture capital investors also

increased significantly from 1 in 2000 to 129 in 2009. The number of registrars

to an issue and share transfer agents decreased from 264 in 1995 to 71 in

2009. It is seen that the number of portfolio managers increased by more than

four times i.e. 1(one) in 1995 to 234 in 2009.

62

3.12 Distribution of Turnover and Regional Stock Ex changes in India

The stock exchanges are classified into national stock exchanges and

regional stock exchanges. A regional stock exchange is recognized by the

Central Government or Securities and Exchange Board of India (SEBI) under

section 4 of the Securities Contracts Regulation Act, 1955.8 Regional stock

exchanges have flourished in the pre-liberalization period but not so in the

post-liberalization era. Many of them are virtually non-operational. In India,

NSE, BSE, OTCEI and ICSE, MCX these are national level stock exchanges.

Whereas rest of stock exchanges are regional stock exchanges. Following

table no 3.6(A) & (B) shows distribution of turnover on cash segment of stock

exchanges in India.

Today, several regional stock exchanges face an uncertain future

ahead, while stock exchanges like Calcutta, Uttar Pradesh are struggling for

existence. The top 2 exchanges NSE and BSE accounted for 99.99% of

turnover while the rest 19 stock exchanges had negligible volume during

2009-10.9 Table no 3.6 (A & B) depicts the growth & distribution of turnover

among stock exchanges in India.

8 V.Gangadhar & Naresh Reddy(2006): Regional Stock Exchange Losing the Luster, an Article Published In Book Edited by Arindam Banerjee:Indian Capital Market Trends & Reform, ICFAI University Press, Hydrabad, p.129. 9 Indian Securities Market A Review, Vol. xiii, 2010 p.11.

63

+

Table No 3.6 (A) : Growth & Distribution Of Turnov er On stock exchanges in India (1991-92 to 1999-2000) (Rs. Crores)

Stock Exchange

Years 1992-

93 1993-

94 1994-

95 1995-

96 1996-

97 1997-

98 1998-

99 1999- 2000

NSE N.A. N.A. 1728 (1)

68141 (27)

294504 (44)

369934 (41)

414383 (41)

839052 (41)

Mumbai 45696 (49)

852536 (40)

67759 (38)

50064 (20)

124284 (19)

207383 (23)

311999 (30)

685028 (33)

Calcutta N.A. 57641 (27)

52872 (29)

62128 (25)

105664 (16)

178778 (20)

171780 (17)

357165 (17)

Delhi 7413(8) 12098

(6) 9083 (5)

10076 (4)

48631 (7)

67840 (7)

51759 (5)

93288 (5)

Ahmedabad 22183 (24)

23540 (11)

5651 (7)

8786 (8)

20533 (6)

30771 (3)

29734 (3)

37565 (3)

Uttar Pradesh

5508 (2)

6889 (2)

7823 (2)

7373 (1)

16070 (1)

15390 (1)

18626 (0)

24047 (0)

Ludhiana 1050 (1)

1620 (1)

2488 (1)

4859 (1)

5272 (1)

8315 (1)

5977 (1)

7740 (1)

Pune 752(1) 3459(2) 2672 (2)

7071 (3)

9903(2) 8624(1) 7452 (0)

6086 (0)

Bangalore 730(1) 2316(1) 712(0) 890(0) 4398(1) 8636(1) 6778(1) 0(0) Hyderabad* 676(1) 984(0) 1375(1) 1285(0) 480(0) 1860(0) 1275(0) 1236(0)

ICSE 0 0 545(0) Cochin 65(0) 2(0) 597(0) 1803(0) 1401(0) 1783(0) 773(0) 0(0) OTCEI 02(0) 39(0) 365(0) 218(0) 221(0) 125(0) 142(0) 3587(0) Madras 3407(4) 2299(2) 3033(3) -1 2315(1) 1228(0) 369(0) 250(0) Madhya Pradesh

365(0) 134(0) 118(0) 1594(0) 12(0) 01(0) 01(0) 9(0)

Magadha* 797(0) 1629(1) 2755(0) 323(0) 0(0) 8(0) Vadodara 1681(2) 1938(1) 1621(2) 1259(1) 4268(1) 4576(1) 1749(0) 159(0) Guwahati 443(0) 452(0) 285(0) 619(0) 484(0) 20(0) 30(0) 0(0)

Bhubneshwar 1899(2) 420(0) 143(0) 226(0) 231(0) 202 77(0) 70(0) Coimbatore 27(0) 1026(1) 1310(2) 2503(2) 2398(1) 2136(0) 394(0) 38(0)

Jaipur* 296(0) 616(0) 879(00 1047(0) 1529(0) 431(0) 64(0) 2(0) Mangalore 12(0) 107(0) 62(0) 39(0) 373(0) 308(0) 6778(0) 0(0)

SKSE* 265(0) 302(0) 545(0) 564(0) 398(0) 17(0) 0(0) 0(0) Total 92470 968418 161918 232173 646124 908681 1030 140 2055875

Source : SEBI Handbook of statistics on Indian securities market-2009, p.42-41. Note: N.A.= Not Available. Figures in bracket indicates % to total turnover : * 04 stock exchanges derecognized in 2007-08

64

Table no 3.6(B): Growth & Distribution of Turnover On stock exchanges in India (2000-2001 to 2008-09) (Rs Crore)

Stock Exchange

Years 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

NSE 1339511 (47)

513167 (58)

617989 (64)

109953 (31)

1140072 (68)

1569558 (66)

1945287 (67)

3551037 (69)

2752023 (70)

Mumbai 100032 (35)

307392 (35)

314073 (32)

502618 (0)

518717 (31)

816074 (34)

956185 (33)

157885 (30)

1100075 (30)

Kolkata 355035 (12)

27075 (3)

6540 (1)

19281 (0)

2715 (0)

2800 (0)

694 (0) 446(0) 393(0)

Delhi 83871(3) 5828(1) 11(0) 3(0) 0(0) 0 0 0 0

Ahmedabad 54035(2) 14844

(2) 15459

(2) 4544(2) 0(0) 0 0 0 0

Uttar Pradesh 24747(0) 25273 (0)

14763 (0)

11751 (0) 5343(0) 1486(0) 799(0) 475(0) 89(0)

Ludhiana 9732(0) 857(0) 0(0) 0(0) 0(0) 0(0) 0 0 0 Pune 6171(0) 1171(0) 2(0) 0(0) 0.3(0) 0 0 0 0 Bangalore 6033(0) 70(0) 0(0) 2(0) 0(0) 0 10 0 0 Hyderabad* 978(0) 41(0) 5(0) 0(0) 14(0) 89 92(0) 0 0 ICSE 233(0) 55(0) 65(0) 0(0) 0(0) 0 0 0 0 Cochin 187(0) 27(0) 0(0) 16(0) 0(0) 0 0 0 0 OTCEI 126(0) 4(0) 0(0) 101(0) 0.01(0) 0.01(0) 0 0 0 Madras 109(0) 24(0) 0(0) 0 27(0) 5 1.2(0) 0 0 Madhya Pradesh

2(1) 16(0) 0(0) 0 0(0) 0 0 0 0

Magadh* 2 0 1(0) 0 0 91(0) 0 0 0 Vadodara 1 10 3(0) 0 0 0 0 0 0 Guwahati 0 10 0 0 0 0 0 0 0 Bhubneshwar 0 0 0 0 0 0 0 0 0 Coimbatore 0 0 0 0 0 0 0 0 0 Jaipur* 0 0 0 0 0 0 0 0 0 Mengalore 0 0 0 0 0 0 0 0 0 SKSE* 0 0 0 0 0 0 0 0 0

Total 1980805 895864 968911 648168 1666888.31 2390103.01 2903068.2 3709843 2752516 Source : SEBI Handbook of statistics on Indian securities market -2009, p.42-41.

Note: Figures in bracket indicates % to total turnover : * 04 stock exchanges derecognized in 2007-08

During 1995-96 to 1999-2000 in these five years, Mumbai stock

exchange (BSE) accounted largest share in India stock market. A average

share to the total annual turnover was 43.3% followed by Calcutta recorded

average share of 28% whereas Ahmedabad recorded average share of 14%

to the total. While remaining stock exchanges in India accounted very less

share to the total turnover of Indian stock market.

During 1995-96 to 1999-2000 in these five years, with entry of NSE the

share of BSE declined significantly. Now NSE occupied largest share of an

average of 38.8% of total turnover. Second place goes to Mumbai Stock

Exchange which accounted average share of 25% to the total turnover.

Calcutta stock exchange accounted an average share of 19% followed by

65

Delhi stock exchange accounted 5.6% while remaining stock exchanges were

accounted very negligible share to total turnover of Indian stock market.

During 2000-01 to 2004-05, NSE continuously accounted largest

average share of 61% to total turnover followed by BSE with an average

share of 33%. During this period share of Calcutta, Delhi, Ahmedabad

declined significantly to an average share of 3.2%, 0.8%, 1.2% respectively,

while rest of stock exchanges accounted negligible share.

From 2005-06 to 2008-09. NSE continuously dominated the total

turnover of Indian stock market which accounted an average share of 68.4%,

BSE accounted an average share of 31.4% i.e. around 99.8% share is

accounted by these two stock exchanges only while rest of stock exchanges

contributed negligible to the total turnover of stock market. More preciously,

since 2002-03, stock exchanges like Ludhiana, Bangalore, Cochin, Madhya

Pradesh, Vadodara, Guahati, Bhubaneshwar, Coimbatore, Jaipur and

Mangalore accounted zero amount of turnover.

During 2009-10, turnover of all stock exchanges in India increased by

43.3% to Rs. 55,18,470 crores of which NSE registered 74.9% while BSE

accounted 24.9% to the total.910

3.13 Share Holding Pattern in India

As per Clause 35 of the listing agreement (Clause 35) the listed

domestic companies are required to file with the stock exchange the

shareholding pattern on quarterly basis within 21 days from the end of each

quarter.11 There are two broad categories of shareholders prescribed by

clause 35: i) the promoters; and ii) the public. There are two main sub-

categories under the promoters: (a) Indian and (b) Foreign. The public

shareholding has been also been sub classified into mainly two categories:

institution and non-institutions. The details on share holding pattern for 3289

listed domestic companies for the quarter ended March 31, 2010 were

obtained from BSE Ltd. and presented in the following table.

9 10 ISMR (2010): Volume XIII, p.11. 11 Taxman’s (2010): SEBI’s Manual,16th Edition P. 5.3

66

Table No. 3.7 : Shareholding Pattern in India (As o n 31st March) (%)

Sr. No. Particulars Number of

Shares

Market Capitalizati

on

I

Promoter & Promoter Group 54.46 56.35

A) Indian 48.68 48.72

B) Foreign 5.78 7.63

II

Public Shareholding 41.73 -

a) Institutional 16.43 25.07

i) Mutual Funds/UTI 2.62 3.84

ii) Financial Institutions/Banks 1.84 1.78

iii) Venture Capital Funds 0.01 0.01

iv) Insurance Companies 2.91 5.00

v) Foreign Institutional Investors 8.50 13.64

vi) Foreign Venture Capital Investors 0.12 0.03

vii) Other 0.43 0.72

b) Non Institutions 25.30 16.09

i) Bodies Corporate 6.96 4.57

ii) Individual Shareholding 14.90 8.66

iii) Any Other 3.44 2.86

iii Share represented by depository receipts

3.81 2.55

Grand Total (i+ii+iii) 100 100 Source: 'Shareholding Pattern in India' by Venkateshwaran R. in 'NSE Newsletter' on August 2010, p.46

It is clear from Table No. 3.7 that the promoters and promoters group

own the majority of total issued share capital of listed domestic companies.

The promoters and promoters group accounted 54.46% of total number of

shares issued and the market value of their holding amounted to 56.35% of

total equity market capitalization. The shareholding of foreign promoter stood

only at 5.78% of the total shares issued and 7.63% of the total equity market

capitalization.

67

The total public shareholding in listed domestic companies was about

41.73% (41.10% of the total equity market capitalization). In which institutions

accounted for 16.43% (25.02% of total equity market capitalization) and non-

institutional under public holding category held 25.30% (16.09% of the total

equity market capitalization).

In different types of institutions, foreign institutional investors, insurance

companies, the mutual funds/UTI, financial institutions/banks accounted for

8.50%, 2.62% and 1.84% respectively of the total number of shares issues.

Whereas foreign venture capital investors and venture capital funds

accounted for only 0.12% and 0.01% respectively of the total number of

shares issued. In term of the total equity market capitalization, the share

holding of the foreign institutional investors, the insurance companies, the

mutual funds, FIs/banks amounted to 13.64%, 5.00%, 3.84% and 1.78%

respectively. The foreign venture capital investors and venture capital funds

accounted for 0.03% and 0.01% respectively of the total equity market

capitalization. Thus, FIIs rank first followed by insurance companies and

mutual funds about shareholding in institutional investors.

The shareholding by depository receipt is about 3.81% (2.55% of the

total equity market capitalization).

3.14 Institutionalization of Stock Market

The Indian economic scene has undergone a metamorphosis in the

last two decade. This period has seen the emergence of large number and

variety of institutions in the capital market. This has led to institutionalization

of Indian stock market.

The major institutions in capital market are as follows:

1 Foreign institutional investors (FIIs)

2 Mutual Funds

3 Development Financial Institutions/Banks

4 Insurance Companies

68

Table No. 3.8: Shareholding of Selected Institution s in Stock

Market in India (As on 31 st March 2010)

Institutions Holding as a Percentage of Public

Shareholding Ins titutional

Holding A) Foreign Institutional Investors

33.18 54.52

B) Insurance Companies 12.17 20.00 C) Mutual Funds/UTI 9.35 15.37 D) Financial Institutions/Banks 4.34 7.12 Total 59.04 100 Source: 'Shareholding Pattern in India' by Venkateshwaran R. in 'NSE Newsletter' on August 2010, p. 47.

It is clear from the above table 3.8 that foreign institutional investors

held major share i.e. 54.52% (33.18 of public shareholding) of total

institutional holding. Followed by insurance companies holds 20% (12.17) of

total institutional holding.

3.15 Mutual Funds (MFs)

In Indian Stock Market, mutual funds also play a significant role in the

purchase and sale of equity shares and debt in the secondary market. The

details of their yearly purchase and sales are presented in table below.

Table No. 3.9 : Transactions on Stock Exchanges by Mutual Funds

Year

Net Investment in Total Investment of

Mutual Funds(Rs)

Equity(Rs) Debt(Rs)

2000-01 -2767 5023 2257 2001-02 -3796 10959 7161 2002-03 2067 12604 10538 2003-04 1308 22701 24009 2004-05 448 16987 17435 2005-06 14307 36801 51104 2006-07 9024 52546 61606 2007-08 16306 73790 90095 2008-09 6984 81803 88787

Source : SEBI Handbook of Statistics on Indian Securities Market 2009-10, p.73

It is clear from the table no 3.9 that the total the net investment (net

combined investment) is positive and shows increasing trend. It was Rs. 2257

crores in 2000-01 increased to Rs. 88787 crores in 2008-09. A close

examination at disaggregate level provides no clear cut pattern in equity

69

segment. There is some amount of random behavior in their purchase & sale

of equity shares, whereas mutual fund invests more amounts in debt segment

of stock exchanges and their investment hold positive and increasing trends

over a period of time. In 2000-01, net investment by mutual fund in debt was

Rs. 5023 crores increased to Rs. 81803 crores in 2008-09.

3.16 Development of Depositories in India

The Depository Act 1996 paved way of the establishment of

depositories for the purpose of electronic trading. It introduced 'Depository' as

the main organisation where securities of the investors are held in an

electronic form and where the securities transaction is carried out by book

entry. It interacts with its clients through a 'Depository Participants'. The main

objective of depository is to provide maintenance or transfer of ownership

records of securities in an electronic book entry form resulting in scrip less

trading rather than paper based trading and to ensure free transferability of

securities with speed, accuracy and security.

Presently, there are two depositories in India namely, NSDL (National

Securities Depository Limited), CSDL (Central Depository Service Limited)

which function through about 200 DPs.

3.16.1 National Securities Depository Limited (NSD L)

It is an organisation promoted by Industrial Development Bank of India

(IDBI), Unit Trust of India (UTI) and National Stock Exchange Limited (NSE).

Subsequently, State Bank of India (SBI) has also acquired a stake in NSDL.

SEBI has registered NSDL on June 7, 1996 as India's first depository to

facilitate settlement of securities in a dematerialized form. It commenced its

operations on November 6, 1996.

70

Table No. 3.10 : Progress of Dematerialization at N SDL

Year

Parameters of Prog ress

Companies Agreement

Signed

Companies Available for Demat

Number of DPs

Number of Depository Locations

Demat Quantity

(in shares cr.)

1996-97 40 23 24 24 02 1997-98 191 171 49 200 176 1998-99 375 365 84 750 711 1999-2000 918 821 124 1425 1550

2000-01 2821 2786 186 1896 3721 2001-02 4210 4172 212 1648 5167 2002-03 4803 4161 213 1718 6876 2003-04 5216 5212 214 1719 8369 2004-05 5536 5536 216 2819 12866 2005-06 6022 6022 223 3017 17472 2006-07 6483 6483 240 5599 20270 2007-08 7354 7354 251 7204 23690 2008-09 7801 7801 275 8777 28287

Source : NSDL, SEBI Handbook of Statistics, 2009-10, p. 69

Table No. 3.10 depicts the progress of dematerialization at NSDL. At

the end of March 1996-97, the number of companies connected to NSDL was

40 of which companies available for demat was 23, the number of depository

participants was 24 and the number of dematerialized securities was only 2

crores.

SEBI introduced dematerialized system only for institutional investors

and was later extended to all investors. At the end of March 2008-09 the

number of companies connected to NSDL increased to 7801, number of

depository participants increased to 275 and number of dematerialized

securities and number of depository locations has increased to 28287 and

8777 respectively. It is clear that dematerialization has been progressing at a

fast pace in the country.

3.16.2 Central Depository Service Limited (CDSL)

CDSL is the second depository in India. SEBI granted it the

commencement certificate on February 8, 1999 and it started its operations

on July 15, 1999. CSDL is an organisation promoted by Bombay Stock

71

Exchange (BSE), in association with the Bank of India, Bank of Baroda,

Housing Development Financial Corporation (HDFC) Bank and SBI. The

progress of dematerialization at CDSL has been presented in table below.

Table No. 3.11 : Progress of Dematerialization at C DSL

Year

Parameters of Progress

Companies Agreement

Signed

Companies Available for Demat

Number of DPs

Number of Depository Locations

Demat Quantity

(in shares cr.)

1998-99 15 15 6 7 NA 1999-00 541 541 56 NA NA 2000-01 2723 2703 128 132 192 2001-02 4393 4284 148 181 482 2002-03 4628 4628 177 212 821 2003-04 4810 4810 200 219 1401 2004-05 5068 5068 254 1530 1908 2005-06 5479 5479 304 2577 2722 2006-07 5589 5589 358 4178 3125 2007-08 5943 5943 410 6372 4982 2008-09 6213 6213 461 6934 7082

Source : CDSL, SEBI Handbook of Statistics, 2009-10, p. 69

It is clear from the above table no. 3.11 that number of companies

connected to CDSL was 15 in 1998-99, it increased to 6213 in 2008-09. The

number of depository participants was 6 in 1998-99 it increased to 461 in

2008-09, number of depository locations increased from 7 in 1998-99 to 6934

in 2008-09. The numbers of dematerialized securities have increased from

192 at the end of 2001-02 to 7082 at the end of 2008-09.

3.17 Secondary Market Development Indicators

Development of Secondary market development can be studied into

three parts i.e.: A) Capital Market Segment B) Government Securities

Segment and C) Derivative Segment.

A) Capital Market Segment of Stock Exchanges

72

Table No. 3.12 : Capital Market Segment of Stock Ex changes

Year No. of Listed

Companies

Turnover (Rs. Crores)

Market Capital

(Rs. Crores)

BSE Sensex

(Average)

S & P CNX Nifty

1991-92 6480 - 354105 4285.00 -

1992-93 69251 - 228780

(-35) 2288.52 -

1993-94 7811 203703

- 400077 (74.87) 3778.99 -

1994-95 9077 162905

(-20) 473349 (18.31) 3266.96 -

1995-96 9100 227368 (39.6)

572257 (20.9)

3366.61 985.30

1996-97 9890 646118 (184.17)

488332 (14.7)

3360.89 968.85

1997-98 9833 908681 (40.64)

589816 ( -20.8)

3892.75 1116.65

1998-99 9877 1023382 (12.62)

574064 ( -2.7)

3739.96 1078.05

1999-00 9871 2067031 (101.98)

1192630 160.8 5001.28 1528.45

2000-01 9954 288099 (-86.06)

768863 (-35) 3604.30 1148.20

2001-02 9644 895829 (210.94)

749248 (-2.51) 3469.35 1129.55

2002-03 9413 968909 (8016)

631921 (-16)

3048.72 978.20

2003-04 5650 1620932 (67.29)

1318795 (108.6)

5590.62 1771.90

2004-05 5528 1666896 (2.84)

1702136 (29.06)

6492.82 2035.65

2005-06 4731 2390103 (43.39)

3022190 (77.55)

11280.06 3402.55

2006-07 4781 2901471 (21.40)

3548808 (17.42) 13072.10 3821.55

2007-08 4821 5130816 (76.83)

5149701 (45.1) 15644.44 4734.50

2008-09 - 3852097 (-24.92)

3092973 (-40) 9708.56 3020.95

Source: 1) ISMR- NSE, Volume XII, 2009, p. 15 Note : Figures related to number of listed companies on stock exchanges is not available after

2003-04 onwards. Therefore, figures of listed companies on BSE are presented. : Figures in brackets indicates % change

73

1) Stock Market Turnover

Stock market turnover means total value of transaction of securities in

equity market segment of an exchange. The turnover figures reflect the

transaction activity of the market players. The turnover figures demonstrate

not only changes in prices of shares but also variation in volume traded. It is

also sign of size of market.

Turnover on various stock exchanges in India was Rs. 203703 crores

in 1993-94. Even though it declined in 1994-95 by 20%, it rose steadily

thereafter. During 1996-97 and 1999-2000, there was sharp increase in the

turnover i.e. 184% and 101% respectively.

The trading volumes on stock exchanges in equity segment have been

witnessing phenomenal growth over the past years. The trading volume,

which peaked and in 1999-2000 recorded 101.98% over the previous year,

posted a substantial fall of 86.06% in 2000-01. However, from 2001-02

onwards trading volumes picked up. It stood at Rs968909 crores in 2002-03

and further witnessed a year on year increase of 67.29% in 2003-04. The

upsurge continued in 2006-07, in which the turnover showed an increase of

21.40% in 2005-06. During 2006-07 and 2007-08, the trading volumes on the

CM segment of exchanges increased significantly by 76.83%. Then during

2008-09, the all India turnover dipped by 24.91% for the equity segment.

2) Market Capitalization

Market capitalization is a major indicator that determines the size of

stock market. A higher market capitalization reflects growing stock market

activities. It is total market value of all companies outstanding. Market

capitalization is a measure of total value of an equity market. It is calculated

by multiplying a company’s shares outstanding by current prices of one share.

Market capitalization of an exchange is a summation of all the

individual stocks listed on the exchange.12 Thus, by taking the market

12 SEBI, Annual Report 2006-07, p.42.

74

capitalization of all companies in the equity market and adding them together

to arrive at the capitalization for the market as a whole.

The all India market capitalization of listed companies grew by 17 folds

between1991 to 2009. At the end of 1991, all India market capitalization was

estimated at Rs. 354106 crores increased to Rs. 3092973 crores at the end of

March 2009. The market capitalization has grown over the period indicating

more companies using the trading platform of the stock exchange.

As seen from Table No. 3.12 the all India market capitalization of listed

companies amounted to Rs. 354106 crores during 1991-92, there was no

significant increase in it till 1998-99. However, during 1999-2000 it doubled to

Rs. 1192630 crores a year on year increase of 160.08% (from 2000-01 to

2002-03) for three consecutive years market capitalization it decreased

significantly a year on year decrease of -35%, -2.5%, -16% respectively.

Thereafter market capitalization increases significantly till 2007-08. The all

India market capitalization decrease by -40% on a year on year basis in 2008-

09 & stood at Rs. 30929773 crores at the end of March 2009.

3) Number of Listed Companies

The number of companies listed on stock exchanges gives an

additional measure of market size. From the table No. 3.12, it is evident that

there was 6480 companies listed in the all the stock exchanges during 1991-

92 which rose to 9954 in 2001-02. In 2003-04, listed number of companies

was declined to 5650 it further declined to 4821 in 2007-08.

It is also seen that out of total listed companies 71.87% companies

listed on BSE only, while 26.99% companies are listed on both exchanges i.e.

BSE and NSE & 1.14% on NSE only* .

4) Trends in Sensex and Nifty

During 1990, India witnessed immoderate changes in its policies. As a

part of liberalization policy in 1990, the BSE-Sensex crossed the 1000 mark

for the first time .It crossed 2000 & 4000 marks in 1992. But upbeat mood of

the market suddenly vanished with Harshad Mehta scam. From 1993-94 to

1998-99 BSE Sensex oscillating between the average range of 3000 to 5000

marks. The tight liquidity condition, high interest rate, poor results of corporate

75

sector & tussle over US-64 scheme were some of the main reasons of the

depressed sentiment in the stock market. Another major day was on Oct 8,

1999, which saw the Sensex crossing the 5000 marks.

The boom in information technology helped the stock market to cross

the level of 6000 mark & hit all time high of 6006 on February 11, 2000.

Thereafter it went on sliding down slowly. The bearish movement further

receipted by stock market crash in USA following the terrorist attack on

September 11, 2001 & massive sale by FII in sep 2001. Thus, from 2000 to

2004 Sensex & Nifty fluctuated between on an average of 3000 to 5000 & 900

TO 2000 mark respectively. During this period SEBI introduced several

reforms such as rolling settlement contract to T+2 To T+3 from 2003.

Amazingly, it crossed 7000 points on June 21, 2005 mainly because of the

settlement between the Ambani brothers. Then on September 8, 2005 it

crossed 8000 point & December 09, 2005 saw the Sensex crossing 9000

points. During this period strong macro economic outlook, encouraging

corporate results, high & sustained portfolio investment by FII contributed to

sustained rally in the stock market. In this period (2004-05) stock market in

India affected by rising crude oil prices & rise in interest rate also adversely

affected to the stock market sentiments.

During 2005-06 Sensex close above the 10,000 mark & touched the

height of 12,000 points for the first time. In the year 2006-07 Indian stock

Market witnessed a mixed trend, in this period, Sensex & Nifty recorded an

average of 13072.10 & 3821.55 points respectively. Another most important

date in the history of stock market was October 29, 2007 on which the Sensex

crossed the 20,000 mark & achieved a major growth of 734.4 point. Thus,

during 2007-08 BSE–Sensex & NSE’s Nifty recorded on an average of

15644.44 & 4734.50 points respectively. However, in mid-December, 2007

the declined trend in developed equity market due to subprime crises, fear of

credit squeeze & global recession in Indian equity market. Further increasing

crude oil prices & depreciation of USA dollars against major currencies also

contributed to declining in major equity market.

Indian equity market witnessed downward trend & volatility during

2008-09. The Sensex saw its highest ever loss of 1408 points as on January

76

21, 2008 as investors panicked by following weak global cues, amid fears of

the US recession. During this period, BSE-Sensex recorded an average of

9708.50 & 3220.95 points respectively.

3.18 Development of Government Securities Market in India

Indian debt market is one of the largest markets in Asia and this also

includes the public sector debt instruments. The Indian debt market mainly

comprises of central and state government securities as well as public

securities and private sector bonds, which are issued by various companies.

Indian debt market can be classified into two categories i.e.

government securities market (G-Sec Market) and bond market. Government

securities markets consist of central and state government securities. While

bond market consist of financial institutions bonds, corporate bonds, public

sector unit bonds. Government (G-Securities) securities market deals with

tradable debt instruments issued by the government for meeting its financial

requirements. Government issued short-term maturity securities as well as

long-term maturity securities. Typically, short term maturity up to one year viz.

Treasury Bills and long term instruments includes bonds whose maturity

period is more than one year facilitate is medium to long-term financial

requirements.

Thus, government securities market is a dominant category in Indian

debt market and it plays crucial role in monetary policy transmission

mechanism. Like equity market G-sec market has two segments, primary

market and secondary market. Primary market consist of the issuers of

securities viz. central and state government, buyers includes commercial

banks, primary dealers, financial institutions whereas secondary market for

government securities provides a platform for original investors to trade their

holding before maturity.

The Indian debt market and particularly the government securities

market have undergone a significant change since the advent of reform to

financial market in 1991-92. The primary objective behind the reforms has

been to moderate liquidity, growth, contain inflationary pressure and conduct

public debt management in a cost effective manner. In 1995, deliveries versus

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payment (DVP) system were introduced to mitigate settlement risk, promote

greater transparency of prices. Post 1996 reforms have focused mainly on

market microstructure.

Table No. 3.13 : Government Securities Turnover

Year Non Repo Government Securities Turnover

On WDM Segment of NSE(Rs cr) On SGL(Rs cr)

1995-96 9243 29530 (-) 1996-97 38102 (312.2) 93921(218.0) 1997-98 97515(155.9) 161090(71.5) 1998-99 90415 (-7.2) 187531(16.4)

1999-2000 291591 (222.5) 456491(143.4) 2000-01 412495 (41.4) 572145(25.3) 2001-02 926995 (124.7) 1211965(111.8) 2002-03 1030549(11.1) 1392383(14.8) 2003-04 1274119 (23.63) 1701363(22.1) 2004-05 849325 (-33.3) 1260866(-25.8) 2005-06 450801(-46.9) 708014(35.46) 2006-07 205323 (-54.4) 398298(-43.7) 2007-08 260408 (26.82) 500304(25.6) 2008-09 291112 (11.79) 664548(32.8)

Source: Indian Securities Market A Review, Vol xii,2009 page no. 15 SGL = Subsidiary General Ledger

Table No. 3.13 presents government securities turnover from 1995-96

to 2008-09 It is clear that trading in non repo government securities on WDM

segment of NSE was 9243 crores in 1995-96 which increased by 312.2% and

155.9% in 1996-97 and 1997-98 respectively. Even though it declined in

1998-99 by -7.2%, thereafter it rose significantly during 1999-2000 to 2003-

04. It declined by – 33.3%, - 46.9% & -54.4% in 2004-05, 2005-06 & 2006-07

respectively.

The aggregate trading volumes in central and state government dated

securities on SGL was Rs. 29530 crores in 1995-96 & it rose significantly by

218.0% during 1996-97, thereafter it rose steadily till 2003-04. Even though it

declined by –25.8% in 2004-05 & -43.0% in 2006-07 it rose steadily thereafter

during 2008-09 it stood at Rs. 664548 crores.

78

Table No. 3.14: Holding Pattern of Government Secur ities

Year Commer

cial Banks

Insurance Compani

es

Others incl. MFs, FIIs, FIs

RBI Primary Dealers

Provident

Funds Total

End June 2009

39.29 23.07 12.28 11.06 7.89 6.41 100

Source : Compiled from RBI Handbook of Statistics on Indian Economy 2010.

End June 2009

39.29

23.07

12.28

11.06

7.896.41

Commercial Banks

Insurance Companies

Others incl. MFs, FIIs, FIs

RBI

Primary Dealers

Provident Funds

As it can be seen from the above table 3.14 the major investors in G-

Secs are banks, life insurance companies, general insurance companies,

pension funds and EPFO. Banks are required to keep a minimum of 24

percent as a statutory preemption in government securities whereas life

insurance companies are required to invest 50 percent of their total

investment in G-Secs. Interestingly, from the above table no. 3.14, it can be

observed that the share of commercial bank in ownership of G-securities was

larger i.e. 39.29%, followed by Insurance companies with 23.07%, MFs & FII

with 12.28%.The share of RBI stood at 11.06% whereas Primary Dealers &

PF’s holding was very small i.e. 7.89% & 6.41% respectively.

3.19 Development of Derivatives Market

Derivatives are financial instrument, which are derived from equity,

bonds, currencies and commodities. Value of derivatives derived from

underlying instruments such as stock index (future and options based on

them), currency or interest rates. Derivatives are leveraged instruments & are

used as vehicle for transferring risk. Trading in equity derivatives in India

began in June 2000 after the SEBI granted permission to the derivatives

79

segments of two stock exchanges viz. NSE and BSE. Regulatory framework

under the SCRA (Securities Contracts (Regulation) Act of 1956 governs the

trading of derivatives. Thus, derivatives are investment as well as risk

mitigating instruments.

Following equity derivative contracts mentioned in Table No. 3.15 are

traded in Indian securities market.

Table No. 3.15 : Equity Derivative Contracts

Sr. No. Contracts Year of

Launch Segment/Exchange

1 Future on S & P CNX Nifty Index 2000-01 F & O Segment of NSE

2 Future on BSE 30 Index 2000-01 Derivative Segment of BSE

3 Option on S & P CNX Nifty 2000-01 F & O Segment of NSE

4 Option on BSE 30 Index 2000-01 Derivative Segment of BSE

5 Stock Option on 31 stocks 2000-01 BSE/NSE

6 Single Stock Futures on 31 stocks

2000-01 BSE/NSE

Source : Annual Report of SEBI, 2001-02, p. 50

It is clear from table no 3.16 that equity derivative turnover of India

was Rs. 40180 Mn in 2000-01, it increase significantly in 2001-02 by 2484%.

It stood at Rs.110227501 Mn in 2008-09.

Table No. 3.16 : Trends in Equity Derivative Turnov er in India

Year Turnover (Rs. Mn) % Change 2000-01 40180 - 2001-02 1038480 2484 2002-03 4423333 325 2003-04 21422690 384 2004-05 25641269 20 2005-06 48242590 88 2006-07 74152780 54 2007-08 133327869 80 2008-09 110227501 17

Source : ISMR, Vol. XII, 2009, p. 15

80

3.20 Growth/Size and Liquidity of Indian Stock Mark et

Following are indicators of growth and liquidity of Indian stock market.

i) Market Capitalization Ratio (MR)

It is called as stock market capitalization to GDP ratio. This ratio

denotes the importance of equity market relative to GDP and determined

whether an overall market is undervalued or devalued. It is calculated as: 13

100*GDPMarket

tionCapitalizaMarket Stock Ratiotion CapitalizaMarket =

ii) Turnover Ratio (TR)

The turnover ratio, which reflects the volume of trading in relation to the

size of the market. Formula to calculate TR is:14

100*tionCapitaliza MarketTraded Shares ValueofTotal

Ratio Turnover =

It signifies the trading dept i.e. liquidity position of the stock market.

The turnover ratio includes prices in both numerator and denominator;

therefore it is not affected by movement in prices. Any increase in ratio

reflects an increase in trading activities. Exchange with higher turnover ratio

also enjoy much better lower impact cost, which is difference between deal

price and actual price at which transaction take place.

iii) Value Traded Ratio (VTR)

It is another indicator of market liquidity; it is measured by the ratio of

total value of shares traded to GDP. VTR, which equals the total value of

domestic stock, traded on domestic exchanges as a share of GDP.15 The

performance of VTR, which measures trading volume as a share of national

output, therefore it reflects liquidity on an economic wide basis.

13 ISMR, Volume XII 2009 Page No. 14. 14Mittal Anand (2003): Economic Reform & Capital in India, Galegotia Publishing House Delhi, No.91. 15 RBI Report on Currency & Finance, 2005-06, p.263.

81

Table No. 3.17: Size and Liquidity of Indian Stock Market

Year TR (%) MCR (%) VTR (%) 1994-95 50.9 45.6 6.7 1995-96 34.4 47.0 9.9 1996-97 39.7 34.6 30.6 1997-98 132.3 37.7 38.0 1998-99 154.1 34.1 41.7

1999-2000 178.3 87.7 78.1 2000-01 173.3 54.5 111.3 2001-02 374.7 36.36 36.0 2002-03 119.6 28.49 37.9 2003-04 153.3 52.25 57.9 2004-05 122.9 54.41 53.1 2005-06 98.1 85.58 66.9 2006-07 79.09 86.02 70.1 2007-08 81.79 109.29 108.7 2008-09 99.63 58.40 71.8 MEAN 126.0 59.14 51.17 STDV 79.82 25.23 32.78 %C.V. 63.33 42.67 64.07

Source : Data is compiled from1) ISMR, Vol. XII, 2009, p.15-16. 2) RBI; Report on Currency and Finance, 2005-06, p.263.

Table No. 3.17 depicts size and liquidity of Indian stock market. It is

clear that all India turnover ratio was highest in the year 2001-02 whereas it

was lowest in the year 1995-96. Thus, average turnover ratio of Indian stock

market is 126.0% during 1994-95 to 2008-09, whereas STDV of turnover ratio

was 79.82% during same period.

Market capitalization ratio of Indian stock market was highest in 2007-

08 i.e. 109-29% whereas lowest in 2002-03 i.e. 28.49%. The average MCR of

Indian stock market during 1994-95 to 2008-09 was 59.14% whereas STDV of

MCR was 25.23%.

Value traded ratio of Indian stock market was highest in 2001-02 i.e.

111.3% whereas it was lowest in 1994-95 i.e. 6.7%. The average VTR of

Indian stock market was 51.17% and STDV was 32.78% during study period.

It can be concluded that, as on 2009 India's TR was higher than

Australia (78.80) and Germany (107.20) while lower than UK (146%) and USA

(348%). Also India's TR ratio is lower than China (229.60%). As on 2009

82

MCR ratio was lower than USA (327.8%) and UK (156.47%) while higher than

France (81.55%), Germany (38.51%).16

3.21 Securities Market Scams in India :

In the study of development of stock market since 1991 nobody can

neglect securities market scams in India during the same period. In the two

decades of economic reforms, Indian capital market witnessed two major

scams in secondary market and one in the primary market .These scams

proved dangerous for the development of stock market and it destroyed the

investor’s faith & it disturbed the development of corporate sector. In India two

famous stock market scams which took place include the Harshad Mehata

scam (1992) & Ketan Parekh scam in 2001. The consequences of Harshad

Mehta scam were so serious that BSE remained closed for a month. There

were many other securities market scam such as M.S. Shoes (1994), Sesa

Goa (1995), C.R. Bansali scam (1997), BPL, Videocon & Sterlite (1998),17

Sataym scam ( 2009).

3.21.1 Harshad Mehata Scam (1991-92): The first stock market scam was

one which involved both in debt & equity market. Which in BSE. “The

multicore securities scams remain the single most incidences which rocked

the Indian economy over the year”18 manipulation was based on the

inefficiency in settlement system in debt transaction. A pricing bubble came

about in equity markets, where the market index went up by 143 % between

Sep.1991 & April 1992.The amount involved in this crisis was approximately

Rs. 54 billion. The immediate impact of the scam was a sharp fall in the share

prices. The index fell from 4500 points to 2500 representing a loss of

Rs.1000,000 Crores in the market capitalization.19

3.21.2 Ketan Parekh scam (2001) : ‘Ketan Parekh & his entities have

received substantial funds through the misuse of banking systems. These

amounts were as per the available evidence which was Rs. 1200 crore in the

last few months. There are indications that this money has been used in stock

16 ISMR, Volume XIII 2010, p.15. 17 Khan Javaid (2005 ): Operating of Stock Exchanges in India, Vista International

Publication House, Delhi, P.73. 18 Cherian V.K. (1993): The Scam & the Rajas of the Money Market, Har Anand Publication,

Edition, 1993, p.1. 19 Khan Javad (2005): Operating of Stock Exchange In India, Vista International Publication

House Delhi, P.73.

83

market operations aimed at market manipulation in certain scrip.20 Thus, all

the scamsters employed common trading ploy like price manipulation, price

rigging, insider trading, cartels, collusion & nexus among the bankers,

brokers& promoters.

Conclusion:

It is concluded that during the post economic reforms period and in the

last two decades Indian securities market developed in terms of both

quantitative and qualitative perspectives. Prior to economic reform’ Indian

stock market was characterized by barriers to entry, fragmented, non

transparent, poor disclosure, insider trading, fraudulent etc. But Indian

securities market has gone sea changes in the last 20 years. In the early

1990s, Indian figured a low in the global ranking of the state of capital market.

But with the adoption of sophisticated IT tools in trading and settlement

mechanism has now placed India in the lead. Indian stock market has

integrated with the rest of the world. Shorter settlement period and

dematerialization have been other major development areas which has

changed the face of Indian capital market. At present there are 20 stock

exchanges including two national exchanges. These top two Stock

Exchanges (BSE &NSE) hold 99.99% of total turnover while several other

regional stock exchanges face an uncertain future ahead. The direct

participation of retail investor in Indian equity market is very low (1.4% of the

population). Looking into share holding pattern in India, promoters and

promoters group own the majority of total issued share capital of listing

domestic companies. Foreign institutional investor holds a major share of total

institution holding in Indian securities market.

There are some 1 crore 65 lakh depository account that individual hold,

that is barely 1% of Indian population. The numbers of listed stock, market

capitalization and turnover of Indian stock market have also been witnessing

phenomenal growth. India has the highest number of companies listed in the

stock market; out of this about 72% of companies are listed with Bombay

Stock Exchange only. The market capitalization has grown two fold in the last

20 An article “SEBI’s First on Market Manipulation” in Business line’s Investment World

From Hindu Group of Publication, Sunday June 3, 2001.

84

two decade. The turnover ratio which reflects the volume of trading in relation

to the size of the market has been increasing by leaps and bounds after

advent of screen based trading system by the stock exchanges. The trading

volumes on stock exchanges in derivatives growth has been witnessing

phenomenal segment over the past.