DEVELOPMENT OF INDIAN SECURITIES MARKET DURING POST...
Transcript of DEVELOPMENT OF INDIAN SECURITIES MARKET DURING POST...
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
77
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.