Indian Capital Market Read Up

Pratik Gupta 1
Indian Economy for IAS by Pratik Gupta 2016-17
CAPITAL MARKET
Capital market is a market in which individuals and institutions trade financial securities.
Organizations/institutions in the public and private sectors also often sell securities on the capital markets
in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets.
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Both the stock and bond markets are parts of the capital markets. For example, when a
company conducts an IPO, it is tapping the investing public for capital and is therefore using the capital
markets. This is also true when a country's government issues Treasury bonds in the bond market to fund
its spending initiatives.
STRUCTURE OF INDIAN CAPITAL MARKET
Why Capital Market Exist:

 Capital Market facilitate the transfer of capital (e.g. finance) assets from one owner to another.
 They provide Liquidity: Liquidity refers to how easily an asset can be transferred without loss of
value.
 A set benefit of capital market is that the transaction price provides measures of the value of asset.
Role of Capital Markets:
 Mobilization of savings & acceleration of Capital Formation
 Promotion of Economic Growth and Development
 Proper Regulation of Funds
 Provision of Investment Avenue
 Raising of Long Term Capital
 Ready and continues market
 Provision of variety of Services
ROLE OF CAPITAL MARKET

Capital market plays an extremely important role in promoting and sustaining the growth of an
economy. It is an important and efficient conduit to channel and mobilize funds to enterprises, and provide
an effective source of investment in the economy. It plays a critical role in mobilizing savings for
investment in productive assets, with a view to enhancing a country's long-term growth prospects, and
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thus acts as a major catalyst in transforming the economy into a more efficient, innovative and competitive
marketplace within the global arena.
In addition to resource allocation, capital markets also provide a medium for risk management by
allowing the diversification of risk in the economy. A well-functioning capital market tends to improve
information quality as it plays a major role in encouraging the adoption of stronger corporate governance
principles, thus supporting a trading environment, which is founded on integrity.
Capital market has played a crucial role in supporting periods of technological progress and
economic development throughout history. Among other things, liquid markets make it possible to obtain
financing for capital-intensive projects with long gestation periods. This certainly held true during the
industrial revolution in the 18th century and continues to apply even as we move towards the so-called
"New Economy".
The existence of deep and broad capital market is absolutely crucial and critical in spurring the
growth our country. An essential imperative for India has been to develop its capital market to provide
alternative sources of funding for companies and in doing so, achieve more effective mobilization of
investors' savings. Capital market also provides a valuable source of external finance.
For a long time, the Indian market was considered too small to warrant much attention. However, this view
has changed rapidly as vast amounts of international investment have poured into our markets over the
last decade. The Indian market is no longer viewed as a static universe but as a constantly evolving market
providing attractive opportunities to the global investing community.
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Money Market Capital Market
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1. Money market is a place where 1. Capital market is a place where brokers deal in long
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banks deal in short term loans in ou
term debt and equity capital in the form of
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the form of commercial bills and debenture, shares and public deposits.
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treasury bills.
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2. In capital market, loans are given for 5 to 20 years

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2. In money market maturity date of and if issue of shares by co., its amount will repay at
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repayment may after one hour to 1 winding of company. But investors have right to sell
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Year. it to other investors if they need the money.

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3. Rate of interest in money market is 3. Capital market’s interest and dividend rate depends
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controlled by RBI or central bank of on demand and supply of securities and stock
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any country. market’s Sensex conditions. Stock market regulator is

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in the hand of SEBI.

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4. Main dealers are all the public and private ltd. Co.
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4. Main dealer of money market are

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commercial banks like SBI, ICICI and more than 30 million investors. It is increasing
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Bank, UTI and LIC and other trend due to opening of online capital market.
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financial institutions. 5. But capital market in USA is famous with New York
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stock exchange and stock regulator is Security

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5. In USA, money market is famous

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with dealing of money fund and exchange commission (SEC).

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bankers’ acceptance instruments.

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PRIMARY MARKET AND SECONDARY MARKET

 Primary Market: In the primary market, securities are offered to public for subscription for the purpose
of raising capital or fund. (IPO, FPO)
 Secondary Market: Secondary market is an equity trading avenue in which already existing/pre- issued
securities are traded amongst investors. Secondary market could be either auction or dealer market.
While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer
market.
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SECONDARY MARKET ORGANIZATION IN INDIA

BOMBAY STOCK EXCHANGE (BSE)
 Established in 1875, BSE Ltd. (formerly known as Bombay Stock Exchange Ltd.), is Asia’s first Stock
Exchange and one of India’s leading exchange groups. Over the past 137 years, BSE has facilitated
the growth of the Indian corporate sector by providing it an efficient capital-raising platform.
Popularly known as BSE, the bourse was established as "The Native Share & Stock Brokers'
Association" in 1875.
 BSE is a corporatized and demutualized entity, with a broad shareholder-base which includes two
leading global exchanges, Deutsche Bourse and Singapore Exchange as strategic partners.
 The BSE is the world's 11th largest stock exchange with an overall market capitalization of $1.43
Trillion as of March, 2016. More than 5500 companies are publicly listed on the BSE.
 BSE also provides depository services through its Central Depository Services Ltd. (CDSL) arm.
 BSE’s popular equity index - the SENSEX - is India's most widely tracked stock market benchmark
index.
 The BSE is also a Partner Exchange of the United Nations Sustainable Stock Exchange initiative,
joining in September 2012.
Major Stock Exchanges of the World (by Market Capitalization on 31st Jan 2015)
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There are 16 stock exchanges (bourse) in the world that have a market capitalization of over US$ 1 trillion
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each. They are sometimes referred to as the "$1 Trillion Club". These 16 exchanges accounted for 87% of
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global market capitalization in 2015.
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Stock Exchanges Country Headquarters Index Name Market Cap (USD bn)
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NYSE USA New York Dow Jones 19,223

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NASDAQ USA New York NASDAQ 6,831

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Tokyo St. Exch. Japan Tokyo Nikkei 4,485

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London St. Exch. UK London FTSE 6,187

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Euronext France, Amsterdam Euro STOXX 3,321

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Netherland
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Belgium and Portugal

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BSE (11th Place) India Mumbai Sensex 1,682

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NSE (12th Place) India Mumbai Nifty 1,642

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BM&F Bovespa (20th) Brazil Sao Paulo Ibovespa 824

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NATIONAL STOCK EXCHANGE (NSE)

 The National Stock Exchange of India was set up by Government of India on the recommendation
of Pherwani Committee in 1991.
 Promoted by leading financial institutions essentially led by IDBI at the behest of the Government
of India, it was incorporated in November 1992 as a tax-paying company.
 In April 1993, it was recognized as a stock exchange under the Securities Contracts (Regulation)
Act, 1956.
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 NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994.
The Capital market (Equities) segment of the NSE commenced operations in November 1994, while
operations in the Derivatives segment commenced in June 2000.
 It is in the top 20 largest stock exchanges in the world by market capitalization and largest in India
by daily turnover and number of trades, for both equities and derivative trading.
 National Stock Exchange has a total market capitalization of more than US$1.41 trillion, making it
the world’s 12th-largest stock exchange as of March 2016.
 The NSE's key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock Exchange Fifty),
an index of fifty major stocks weighted by market capitalization.
OVER-THE-COUNTER EXCHANGE OF INDIA (OTCEI)
 OTCEI was incorporated in 1990 as a Section 25 company under the Companies Act 1956 and is
recognized as a stock exchange under Section 4 of the Securities Contracts Regulation Act, 1956. The
Exchange was set up to aid enterprising promoters in raising finance for new projects in a cost effective
manner and to provide investors with a transparent & efficient mode of trading.
 Modeled along the lines of the NASDAQ market of USA, OTCEI introduced many novel concepts to the
Indian capital markets such as screen-based nationwide trading, sponsorship of companies, market
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making and scrip-less trading. As a measure of success of these efforts, the Exchange today has 115
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listings and has assisted in providing capital for enterprises that have gone on to build successful
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brands for themselves
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 OTCEI was started with the objective of providing a market for smaller companies that could not afford
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the listing fees of the large exchanges and did not fulfill minimum requirement for listing.
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 OTCEI is promoted by the Unit Trust of India (UTI), the Industrial Credit and Investment Corporation of
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India, the Industrial Development Bank of India, the Industrial Finance Corporation of India and others
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and is a recognized stock exchange under the SCR Act.

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 The OTCEI is no longer a functional exchange as the same has been de-recognised by SEBI vide its order
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dated 31st Mar 2015.

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MULTI COMMODITY EXCHANGE OF INDIA LTD (MCX)

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 Headquartered in Mumbai, Multi Commodity Exchange of India Ltd (MCX) is a state-of-the-art

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electronic commodity futures exchange. The demutualised Exchange has permanent recognition from
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the Government of India to facilitate online trading, and clearing and settlement operations for
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commodity futures across the country.

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 It is India's largest commodity futures exchange and the turnover of the exchange for the year 2015
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was 55.52 trillion rupees (865.55 billion US dollars). MCX offers futures trading in bullion, non-ferrous
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metals, energy, and a number of agricultural commodities (mentha oil, cardamom, crude palm oil,
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cotton and others).

 MCX offers more than 40 commodities across various segments such as bullion, ferrous and non-
ferrous metals, energy, and a number of agri-commodities on its platform.
 The Exchange is the world's largest exchange in Silver and Gold, second largest in Natural Gas and the
third largest in Crude Oil with respect to the number of futures contracts traded.
 In June 2005, MCX launched MCXCOMDEX, India’s first real time composite commodity futures index,
which provides our members with valuable information regarding market movements in the key
commodities, as determined by physical market size in India, which are actively traded on our
Exchange.
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 We have introduced several other indices, including MCX Agri (agricultural commodities index), MCX
Energy (energy commodities index) and MCX Metal (metal commodities index). We also have three
rain indices, namely RAINDEXMUM (Mumbai), RAINDEXIDR (Indore), and RAINDEXJAI (Jaipur) which
track the progress of monsoon rains in their respective geographic locations.
 In 2015, MCX was sixth among the global commodity bourses in terms of the number of futures
contracts traded, the latest yearly data from Futures Industry Association (FIA) showed.
 From September 28, 2015, MCX is being regulated by the Securities and Exchange Board of India (SEBI).
Earlier MCX was regulated by the Forward Markets Commission (FMC), which got merged with the SEBI
on September 28, 2015.
 Multi-Commodity Exchange appointed of Mrugank Paranjape as MD & CEO of the exchange on
February 29, 2016 for a period of three years. Mrugank Paranjape has earlier working with Deutsche
Bank for last 14 years. Last he was heading DB Center of the bank.
 During the quarter ended June 30, 2016, the average daily turnover of MCX was 245.91 billion rupees
(3.67 billion US dollars)
MCX STOCK EXCHANGE LIMITED (MCX-SX)
 India’s new stock exchange, commenced operations in the Currency Derivatives (CD) segment on
October 7, 2008 under the regulatory framework of Securities & Exchange Board of India (SEBI)
and Reserve Bank of India (RBI). The Exchange is recognized by SEBI under Section 4 of Securities
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Contracts (Regulation) Act, 1956.
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 MCX-SX, which had started operations in Currency Futures segment, has been witnessing a steady
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and significant growth in average daily turnover and open interest ever since its inception.
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 The currency derivatives segment at MCX-SX is supported by a strong membership base and
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witnesses a nation-wide participation. At the end of October 2012, MCX-SX had 750 members and
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saw participation from 745 towns and cities across India.

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 MCX-SX received permissions to deal in Interest Rate Derivatives, Equity, Futures & Options on
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Equity and Wholesale Debt Segment, vide SEBI’s letter dated July 10, 2012.
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SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

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 It was formed officially by the Government of India in 1992 with SEBI Act 1992 being passed by
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the Indian Parliament.

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 Initially SEBI was a non-statutory body without any statutory power. However in 1995, the SEBI was
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given additional statutory power by the Government of India through an amendment to the Securities
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and Exchange Board of India Act 1992. In April, 1998 the SEBI was constituted as the regulator of
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capital markets in India under a resolution of the Government of India.

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 The SEBI is managed by its members, which consists of following:

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a) The chairman who is nominated by central government. (Currently U K Sinha is the Chairman)
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b) Two members, i.e. officers of central ministry.

c) One member from the RBI.
d) The remaining five members are nominated by the central government, out of whom at least
three shall be whole-time members.
 SEBI has to be responsive to the needs of three groups, which constitute the market:
 the issuers of securities
 the investors
 the market intermediaries.
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SEBI has three functions rolled into one body:

 quasi-legislative: it drafts regulations in its legislative capacity
 quasi-judicial: it passes rulings and orders in its judicial capacity
 quasi-executive: it conducts investigation and enforcement action in its executive function
Though this makes it very powerful, there is an appeals process to create accountability. There is a
Securities Appellate Tribunal which is a three-member tribunal and is presently headed by a former Chief
Justice of a High court - Mr. Justice NK Sodhi. A second appeal lies directly to the Supreme Court of India.
POWER OF SEBI
For the discharge of its functions efficiently, SEBI has been invested with the necessary powers which are:
1. to approve by-laws of stock exchanges,
2. to require the stock exchange to amend their by-laws,
3. inspect the books of accounts and call for periodical returns from recognized stock exchanges,
4. inspect the books of accounts of a financial intermediaries,
5. compel certain companies to list their shares in one or more stock exchanges,
6. levy fees and other charges on the intermediaries for performing its functions,
7. grant license to any person for the purpose of dealing in certain areas,
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8. delegate powers exercisable by it,
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9. prosecute and judge directly the violation of certain provisions of the Companies Act, and
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10. Power to impose monetary penalties.
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FORWARD MARKET COMMISSION (FMC)

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 FMC headquartered at Mumbai, is a regulatory authority for commodity futures market in India. It
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is a statutory body set up under Forward Contracts (Regulation) Act, 1952.

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 The Commodity Futures market in India dates back to more than a century. The first organized
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futures market was established in 1875, under the name of ’Bombay Cotton Trade Association’ to
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trade in cotton derivative contracts.

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 Currently 5 national exchanges, viz. Multi Commodity Exchange, Mumbai; National Commodity and
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Derivatives Exchange, Mumbai and National Multi Commodity Exchange, Ahmadabad, Indian
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Commodity Exchange Ltd., Mumbai (ICEX) and ACE Derivatives and Commodity Exchange, regulate
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forward trading in 113 commodities. Besides, there are 16 Commodity specific exchanges
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recognized for regulating trading in various commodities approved by the Commission under the
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Forward Contracts (Regulation) Act, 1952.

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 The commodities traded at these exchanges comprise the following:

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 Edible oilseeds complexes like Groundnut, Mustard-seed, Cottonseed, Sunflower, Rice bran
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oil, Soy oil etc.

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 Food grains – Wheat, Gram, Dals, Bajra, Maize etc.

 Metals – Gold, Silver, Copper, Zinc etc.
 Spices – Turmeric, Pepper, Jeera etc.
 Fibres – Cotton, Jute etc.
 Others – Gur, Rubber, Natural Gas, Crude Oil etc.
 The Forward Markets Commission (FMC) is the chief regulator of commodity futures markets in
India. As of July 2014, it regulated Rs. 17 trillion worth of commodity trades in India. It is
headquartered in Mumbai and this financial regulatory agency is overseen by the Ministry of
Finance. The Commission allows commodity trading in 22 exchanges in India, of which 6 are
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national. On 28 September 2015 the FMC was merged with the Securities and Exchange Board of
India (SEBI).
REGULATORY TOOLS IN THE HANDS OF FMC

 The Commission has been keeping the commodity futures markets well regulated. In order to
protect market integrity, the Commission has prescribed the following measures:
 Limit on open position of an individual members as well as client to prevent over trading;
 Limit on price fluctuation (daily/weekly) to prevent abrupt upswing or downswing in prices;
 Special margin deposits to be collected on outstanding purchases or sales to curb excessive
speculative activity through financial restraints;
 During shortages, extreme steps like skipping trading in certain deliveries of the contract, closing
the markets for a specified period and even closing out the contract to overcome emergency
situations are taken. In addition to the above measures, the regulator calls for daily reports from
the Exchanges and takes other pro-active steps to ensure that there is no misuse of the market and
that the prices reflected on the Exchange platform are governed by the demand and supply factors
in the physical markets. Thus, to check excessive speculation and price volatility, the futures
market in commodities is kept under constant watch and surveillance.
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SECURITIES CONTRACTS (REGULATION) ACT-1956
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 The Securities Contracts (Regulation) Act, 1956 [SC(R)A] provides for direct and indirect control of
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virtually all aspects of securities trading and the running of stock exchanges and aims to prevent
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undesirable transactions in securities.
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 It gives Central Government regulatory jurisdiction over (a) stock exchanges through a process of
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recognition and continued supervision, (b) contracts in securities, and (c) listing of securities on
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stock exchanges. All the three are discussed subsequently in this section.
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 The SC(R) A, 1956 was enacted to prevent undesirable transactions in securities by regulating the
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business of dealing therein and by providing for certain other matters connected therewith. This is
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the principal Act, which governs the trading of securities in India. As a condition of recognition, a
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stock exchange complies with conditions prescribed by Central Government. Organised trading
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activity in securities takes place on a recognized stock exchange.

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 Required amendments were made in the year 2007 and the Act known as “THE SECURITIES
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CONTRACTS (REGULATION) AMENDMENT ACT, 2007”.

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 Key definitions:
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1. Recognized Stock Exchange: ‘recognized stock exchange’ means a stock exchange which is for the time
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being recognized by the Central Government under Section 4 of the SC(R)A.

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2. Stock Exchange: ‘Stock Exchange’ means anybody of individuals, whether incorporated or not,
constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing
in securities.
3. Securities: As per Section 2(h), the term 'securities' include: (i) shares, scrips, stocks, bonds, debentures,
debenture stock or other marketable securities of a like nature in or of any incorporated company or other
body corporate, (ii) derivative, (iii) units or any other instrument issued by any collective investment
scheme to the investors in such schemes, (iv) Government securities, (v) such other instruments as may be
declared by the Central Government to be securities, and (vi) rights or interests in securities.
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4. Derivatives: As per section 2 (aa), ‘Derivative’ includes:

A. security derived from a debt instrument, share, loan whether secured or unsecured, risk
instrument or contract for differences or any other form of security;
B. contract which derives its value from the prices, or index of prices, of underlying securities.
Further, Section 18A provides that notwithstanding anything contained in any other law for the
time being in force, contracts in derivative shall be legal and valid if such contracts are (i) traded on
a recognized stock exchange; and (ii) settled on the clearing house of the recognized stock
exchange, in accordance with the rules and bye-laws of such stock exchange.
5. Spot delivery contract: has been defined in Section 2(i) to mean a contract which provides for-
(a) actual delivery of securities and the payment of a price either on the same day as the date of the
contract or on the next day, the actual periods taken for the dispatch of the securities or the remittance of
money through the post being excluded from the computation of the period aforesaid if the parties to the
contract do not reside in the same town or locality;
(b) transfer of the securities by the depository from the account of a beneficial owner to the account of
another beneficial owner when such securities are dealt with by a depository.‘
INDIAN DEPOSITORY ACT, 1996

 The Depository Act, 1996 defines a Depository to mean “a Company formed and registered under
the Companies Act, 1956 and which has been granted a certificate of registration under sub-section
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(1A) of the Section 12 of the SEBI Act, 1992.
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 The principal function of Depository is to dematerialize securities and enable their transaction in
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book-entry form. The securities are transferred by debiting the transferor’s account and crediting
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the transferee’s account.
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 A Depository facilitates holding of securities in the electronic form and enables securities
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transactions to be processed by book entry by a Depository Participant (DP), who is an agent of the
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depository, offers depository services to investors. According to SEBI guidelines, financial

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institutions, banks, custodians, stockbrokers, etc. are eligible to act as DPs. The investor who is
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known as beneficial owner (BO) has to open a Demat account through any DP for dematerialization
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of his holdings and transferring securities.

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 The Depositories Act, 1996 was enacted with the objective of ensuring free transferability of
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securities with speed, accuracy, and security, by making securities of public companies freely
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transferable subject to certain exceptions by restricting company’s right to use discretion in

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effecting the transfer securities and dispensing with the transfer deed and other procedural
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requirements under the Companies Act.

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DEPOSITORIES IN INDIA
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National Securities Depository Limited (NSDL): It is the first and largest depository in India. The
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enactment of Depositories Act in August 1996 paved the way for establishment of NSDL. It is promoted
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by institutions of national stature responsible for economic development of the country has since
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established a national infrastructure of international standards that handles most of the securities held
and settled in dematerialized form in the Indian capital market.
Central Depository Services (India) Limited (CDSL): It is the second Indian central securities
depository based in Mumbai. Its main function is the holding securities either in certificated or un-
certificated (dematerialized) form, to enable book entry transfer of securities. CDSL is promoted
by Bombay Stock Exchange Limited (BSE) jointly with State Bank of India, Bank of India, Bank of Baroda,
HDFC Bank, Standard Chartered Bank, Union Bank of India and Centurion Bank
CORPORATIZATION AND DEMUTUALIZATION OF STOCK EXCHANGE
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Demutualization means converting such mutual non-profit body into a corporate body where
management and trading activities are separated. This is necessary to ensure that stock brokers do not
have access to sensitive information and do not misuse their position. Hence, SEBI had issued directions on
10/1/2002 that no stock broker shall be an office bearer of stock exchange i.e. President, Vice-president,
Treasure etc. All stock exchanges were asked to amend their rules. Since some stock exchanges did not
amend their rules within two months, SEBI issued notification on 17/4/2002 amending their rules.
Corporatization means stock exchange should be organized as a company. The idea is to separate
ownership, management and trading rights from each other. A committee under M.H Kania had
recommended corporatization and demutualization of stock exchanges. This report was accepted by SEBI,
vice circular no SMD/POLICY/CIR3 dated 30/1/2003, SEBI had asked all stock exchanges to submit a scheme
within 6 months to implement the scheme. It seems stoke exchanges did not submit any scheme. Hence,
SCRA had been amended on 12/10/2004 to compel stock exchanges to corporatize and demutualize.
BENEFITS OF CORPORATIZATION AND DEMUTUALIZATION OF STOCK EXCHANGE

 Broadly speaking demutualization would lessen the conflicts visible in a mutualized set-up.
 It leads to improvement in the governance structure, segregation of regulatory functions from
commercial functions and separation of trading rights and ownership rights.
 Demutualization/corporatization would also assist in attracting international strategic partners and
good quality issuers. As such institutional investors prefer to invest in markets where the exchange
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demonstrates strong corporate governance, market surveillance and enforcement in the belief that
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such markets are less likely to experience endemic market speculation and manipulation or be
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threatened by systemic failure.
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 Greater competition among brokers, broader participation by investors, and rising turnover shall
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improve liquidity and price discovery without a parallel increase in trading costs.
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 Demutualization will also facilitate consolidation of brokers leading to financially strong entities. As
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such demutualization serves in the interest of all stakeholders including the broking community who
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stand to gain from increased market liquidity that comes from better governance of the exchange and
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improved reputation.
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MERCHANT BANKING
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 Merchant banking is a much desired innovative step undertaken by the commercial banks in India.
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 The need for merchant banking was vehemently stressed by the Banking Commission (1972).
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 In fact, merchant banking implies a wider range of specialist services, such as:
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(i) Loan syndication,

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(ii) Financial and management consultancy,

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(iii) Project counseling,

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(iv) Portfolio management,

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(v) Formulation of schemes of rehabilitation,

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(vi) Guidance on foreign trade financing,

(vii) Guidance to non-resident Indians for investment in India.
MERCHANT BANKING IN INDIA

 The National & Grindlays Banks was the first to introduce merchant banking services in 1967, followed
by the First National City Bank in 1970.
 Among the Indian banks, however, the State Bank of India is the pioneer in starting Merchant Banking
Division in 1972. Other public sector banks such as the Bank of Baroda, Canara Bank, Bank of India,
UCO Bank etc., entered into merchant banking in the late seventies and early eighties.
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 In general, merchant bank provides expert knowledge and help in the floatation of new companies, the
preparation, planning and execution of new projects, and the management and promotion of industrial
enterprises as well as their financing. Basically, however, merchant banks are more service-oriented.
 Their main function is to guide the preparation, planning, evaluation and execution of projects which
are helpful to the growth of industries.
Following functions have been specified for the merchant banking division of State Bank of India.
 To furnish advice, assist and liaison in meeting with allied government formalities, required in
establishing or expanding industrial projects.
 To prepare economic, technical and financial feasibility reports and survey reports for setting up new
industrial projects.
 To render assistance in raising rupee loans from term lending institutions, development banks,
commercial banks and such other institutions.
 To give assistance in raising foreign exchange resources.
 To provide assistance and advice in determining the capital structure, in obtaining official consent and
in handling and floating capital issues and such other activities as are engaged in by the registrars or
issues houses.
 To advise and assist in restructuring of capital, amalgamation, mergers, etc.
 To advise and assist in adopting the best form of industrial Organisation.
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 To help in financing foreign trade.
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In general, however, the merchant banking activities of the Indian banks have been largely confined to the
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management of public issues and loan syndications. 6@
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QUALIFIED INSTITUTIONAL BUYER

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Qualified Institutional Buyers are those institutional investors who are generally perceived to possess
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expertise and the financial muscle to evaluate and invest in the capital markets. In terms of clause 2.2.2B
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(v) of DIP Guidelines, a 'Qualified Institutional Buyer' shall mean:

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 Public financial institution as defined in section 4A of the Companies Act, 1956;

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 Scheduled commercial banks;

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Mutual funds;
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Foreign institutional investor registered with SEBI;

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Multilateral and bilateral development financial institutions;

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 Venture capital funds registered with SEBI.

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 Foreign Venture capital investors registered with SEBI.

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 State Industrial Development Corporations.

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 Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA).
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 Provident Funds with minimum corpus of Rs.25 Crores.

 Pension Funds with minimum corpus of Rs. 25 Crores.
These entities are not required to be registered with SEBI as QIBs. Any entities falling under the categories
specified above are considered as QIBs for the purpose of participating in primary issuance process.
DERIVATIVES
A derivative is a financial instrument whose value is based on one or more underlying assets.
Pratik Gupta 11
Future, Option and SWAP

 Futures: Futures are contracts to buy or sell an asset on or before a future date at a price specified
today. A futures contract differs from a forward contract in that the futures contract is a
standardized contract written by a clearing house that operates an exchange where the contract
can be bought and sold; the forward contract is a non-standardized contract written by the parties
themselves.
 Options: Options are contracts that give the owner the right, but not the obligation, to buy (in the
case of a call option) or sell (in the case of a put option) an asset. The price at which the sale takes
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place is known as the strike price, and is specified at the time the parties enter into the option. The
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option contract also specifies a maturity date. If the owner of the contract exercises this right, the
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counter-party has the obligation to carry out the transaction. Options are of two types: call
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option and put option. The buyer of a Call option has a right to buy a certain quantity of the
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underlying asset, at a specified price on or before a given date in the future, he however has no
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obligation whatsoever to carry out this right. Similarly, the buyer of a Put option has the right to
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sell a certain quantity of an underlying asset, at a specified price on or before a given date in the
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future, he however has no obligation whatsoever to carry out this right.

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 SWAP: Traditionally, the exchange of one security for another to change the maturity (bonds),
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quality of issues (stocks or bonds), or because investment objectives have changed. Recently,
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swaps have grown to include currency swaps and interest rate swaps.
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AMERICAN DEPOSITORY RECIPTS (ADR) AND GLOBAL DEPOSITORY RECIPTS (GDR)

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 Both ADR and GDR are depository receipts, and represent a claim on the underlying shares. The only
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difference is the location where they are traded.

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 If the depository receipt is traded in the United States of America (USA), it is called an American
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Depository Receipt, or an ADR.

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 If the depository receipt is traded in a country other than USA, it is called a Global Depository Receipt,
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or a GDR.
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 A global depository receipt (GDR) is a certificate issued by a depository bank, which

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purchases shares of foreign companies and deposits it on the account. GDRs represent ownership of an
underlying number of shares.
 An American depositary receipt (ADR) is a negotiable security that represents securities of a non-US
company that trade in the US financial markets. Securities of a foreign company that are represented
by an ADR are called American depositary shares (ADSs).
MUTUAL FUNDS
 An investment vehicle that is made up of a pool of funds collected from many investors for the purpose
of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual
Pratik Gupta 12
funds are operated by money managers, who invest the fund's capital and attempt to produce capital
gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained
to match the investment objectives stated in its prospectus.
 One of the main advantages of mutual funds is that they give small investors access to professionally
managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult
(if not impossible) to create with a small amount of capital. Each shareholder participates
proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can typically
be purchased or redeemed as needed at the fund's current net asset value (NAV) per share, which is
sometimes expressed as NAVPS.
CLOSE AND OPEN ENDED MUTUAL FUNDS

Open Ended Mutual Fund
 Open ended MFs are more common compared to close ended MFs.
 In open ended MFs, the fund house continuously buys and sells units from investors. New units are
created and issued if there is demand, and old units are eliminated if there is redemption pressure.
 There is no fixed date on which the units would be permanently redeemed or terminated.
 If you want to invest in an open ended fund, you buy units from the fund house. Similarly, when you
redeem your units, the fund house directly pays you the value of the units.
 The valuation of this type of funds is done on the basis of Net Asset Value.
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Close Ended Mutual Fund
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 The units of a close-ended mutual fund are very similar to individual shares.
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 The units of a close ended scheme are issued only at the time of the New Fund Offer (NFO). These units
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are issued with a fixed tenure or duration, for example, 5 years. New units are not issued on an
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ongoing basis, and existing units are not eliminated before the term of the fund ends.
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 At the time of an NFO, you can buy the units from the fund house, and at the time of the closure of the
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scheme (and at some other pre-defined intervals, like once every six months), you can redeem the
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units with the fund house.

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 But if you want to buy or sell the units of a close ended scheme during the lifetime of the units, you
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have to do that on a stock exchange. The units of such schemes are listed on the stock exchanges just
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like ordinary shares, and can be bought and sold through a broker.
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 Here, the valuation of the fund is done on the basis of buying and selling pattern of the funds on the
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stock exchange.
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MUTUAL FUNDS VALUATION BY NET ASSET VALUE

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Net asset value (NAV) represents a fund's per share market value. This is the price at which
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investors buy ("bid price") fund shares from a fund company and sell them ("redemption price") to a fund
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company. It is derived by dividing the total value of all the cash and securities in a fund's portfolio, less any
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liabilities, by the number of shares outstanding. An NAV computation is undertaken once at the end of
each trading day based on the closing market prices of the portfolio's securities.
For example, if a fund has assets of $50 million and liabilities of $10 million, it would have a NAV of
$40 million.
This number is important to investors, because it is from NAV that the price per unit of a fund is
calculated. By dividing the NAV of a fund by the number of outstanding units, you are left with the price
per unit. In our example, if the fund had 4 million shares outstanding, the price-per-share value would be
$40 million divided by 4 million, which equals $10.
HEDGE FUNDS
Pratik Gupta 13
An aggressively managed portfolio of investments that uses advanced investment strategies such
as leveraged, long, short and derivative positions in both domestic and international markets with the goal
of generating high returns (either in an absolute sense or over a specified market benchmark).
Legally, hedge funds are most often set up as private investment partnerships that are open to a limited
number of investors and require a very large initial minimum investment. Investments in hedge funds
are illiquid as they often require investors keep their money in the fund for at least one year.
For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to
sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited.
That is, they must earn a minimum amount of money annually and have a net worth of more than $1
million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual
funds for the super-rich. They are similar to mutual funds in that investments are pooled and professionally
managed, but differ in that the fund has far more flexibility in its investment strategies.
It is important to note that hedging is actually the practice of attempting to reduce risk, but the
goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first
hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual
funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use
dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact,
because hedge fund managers make speculative investments, these funds can carry more risk than the
overall market.
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PARTICIPATORY NOTES
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What are participatory notes?
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Participatory notes are offshore derivative instruments issued by foreign institutional investors with Indian
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shares as underlying to other overseas investors.
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These instruments aid investors who do not want to register with SEBI and reveal their identities to take
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positions in the Indian market.

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How much of foreign investments come through this route?

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At its peak, P-note investing accounted for a third of FII trading volumes in India, But SEBI clamped down in
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2007 forcing many investors to wind down their positions. Though rules have since been relaxed, share of
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P-notes has hovered around 10-15% of the total FII holdings in India.
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OFFSHORE DERIVATIVE INSTRUMENTS

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In the context of the Indian market, offshore derivatives instruments (ODIs) are investment vehicles
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used by overseas investors for an exposure in Indian equities or equity derivatives. These investors are not
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registered with SEBI, either because they do not want to, or due to regulatory restrictions.
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These investors approach a foreign institutional investor (FII), who is already registered with SEBI. The
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FII makes purchases on behalf of those investors and the FII's affiliate issues them ODIs. The underlying
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asset for the ODI could be either stocks or equity derivatives like Nifty futures.
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IMPORTANT STOCK MARKET INDEXES

 Bombay Stock Exchange(BSE) – Sensex (30 Companies)
 National Stock Exchange of India(NSE) – Nifty (50 Companies)
 Tokyo Stock Exchange: Nikkei 225 and TOPIX
 Shanghai Stock Exchange: SSE Composite Index
 Paris Bourse or Euronext Paris: CAC 40
 Frankfurt Stock Exchange: DAX (30 Companies)
 Borsa Italiana: FTSE MIB (Milano Italia Borsa) (30 Companies)
Pratik Gupta 14
 Karachi Stock Exchange: KSE 100 Index

 Moscow Exchange: RTS Index (50 Companies)
 Korea Stock Exchange: KOSPI (all common Stock)
 London Stock Exchange: FTSE 100 Index, FTSE 350 Index
 Singapore Stock Exchange: FTSE SGX Asia Shariah 100
 Various USA Exchanges: Dow Jones, GSTI, MSCI, Russell, S &P 500, Wilshire, etc.
 Hong Kong Stock Exchange: Hang Seng Index
DEBT MARKET (G-SEC MARKET AND CORPORATE BOND MARKET)

WHAT IS A DEBT MARKET?
The Debt Market is the market where fixed income securities of various types and features are
issued and traded. Debt Markets are therefore, markets for fixed income securities issued by Central and
State Governments, Municipal Corporations, Govt. bodies and commercial entities like Financial
Institutions, Banks, Public Sector Units, Public Ltd. companies and also structured finance instruments.
WHAT ARE CORPORATE BONDS?

Corporate bonds are debt securities issued by private and public corporations. Companies issue
corporate bonds to raise money for a variety of purposes, such as building a new plant, purchasing
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equipment, or growing the business. When one buys a corporate bond, one lends money to the "issuer,"
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the company that issued the bond. In exchange, the company promises to return the money, also known as
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"principal," on a specified maturity date. Until that date, the company usually pays you a stated rate of
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interest, generally semiannually. While a corporate bond gives an IOU from the company, it does not have
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an ownership interest in the issuing company, unlike when one purchases the company's equity stock.
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VALUATION OF CORPORATE BONDS

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Corporate bonds tend to rise in value when interest rates fall, and they fall in value when interest rates
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rise. Usually, the longer the maturity, the greater is the degree of price volatility. By holding a bond until
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maturity, one may be less concerned about these price fluctuations (which are known as interest-rate risk,
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or market risk), because one will receive the par, or face, value of the bond at maturity. The inverse
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relationship between bonds and interest rates—that is, the fact that bonds are worth less when interest
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rates rise and vice versa can be explained as follows :-

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 When interest rates rise, new issues come to market with higher yields than older securities, making
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those older ones worth less. Hence, their prices go down.

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 When interest rates decline, new bond issues come to market with lower yields than older securities,
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making those older, higher-yielding ones worth more. Hence, their prices go up.
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 As a result, if one sells a bond before maturity, it may be worth more or less than it was paid for.
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NEED FOR A WELL-DEVELOPED CORPORATE BOND MARKET IN INDIA

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1. Enables efficient allocation of funds,

2. Facilitates infrastructure financing
3. Improves the health of the corporate balance sheets
4. Promotes financial inclusion for the Small and Medium Enterprises and the retail investors,
5. Safeguards financial stability
6. Enables development of the municipal bond market.
Development of the corporate bond market has been high on the agenda for the regulators.
BOND MARKET WILL FACILITATES INFRASTRUCTURE FINANCING

Pratik Gupta 15
The Committee on Infrastructure Financing (Chairman: Shri Deepak Parekh) has estimated that Rs.
51.46 trillion would be required for infrastructure development during the 12th Five Year Plan (2012-17)
and that 47 per cent of the funds could come through the PPP route. If we add the potential financing
needs for upgrading our railways, urban and rural infrastructure, the financing needs could be much larger.
As much as the G-sec market development has provided a boost to the development of the corporate bond
market, the municipal bond market could derive similar benefits from a well-developed corporate bond
market. This would provide boost to financing the urban infrastructure in an assured and sustainable
manner. In this context, it is important to note that GoI’s capital expenditure has remained stagnant during
the last two years at around 13 per cent. Hence, the role of private sector assumes greater importance in
the context of infrastructure development.
Corporate Bond Market in India

 The size of the Indian corporate bond market at 11.8 per cent of GDP is lower than the average for
Emerging East Asia and for Japan at 17.2 and 19.8 per cent respectively.
 There are potential risks associated with this market, such as, absence of robust bankruptcy
framework, insufficient liquidity, narrow investor base, refinancing risk, lack of better market
facilities and standardization.
 India has a very advanced G-sec market; its corporate bond market is relatively under developed.
Developing a more vibrant corporate bond market has therefore become an important agenda
among the concerned stakeholders, i.e., Government of India, the Reserve Bank of India, the
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Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development
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Authority (IRDA), etc. and in the recent times they have made co-ordinated efforts to achieve this
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objective.
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 The 2008 Global Financial Crisis (GFC) highlighted the need to reduce the dominance of the
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banking system in financing corporate sector by developing a good corporate bond market.
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 India’s infrastructure funding requirements (estimated at around 10 per cent of GDP annually)
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need a robust corporate bond market for diversifying risk, enhancing financial stability, and for
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better matching of risk-return preferences of the borrowers.

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 The central bank is looking to permit brokers in corporate bond repos (or repurchases), authorize
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them to act as market makers and also allow foreign investors to directly trade in corporate bonds.
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More importantly, RBI said that it is also considering accepting corporate bonds as collateral at its
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liquidity adjustment facility (LAF) operations.

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 A corporate bond repo is where a company or a bank pledges corporate bonds with another
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company or bank to raise money. The pledger agrees to repurchase the bonds at a specified price.
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Currently, only bilateral repurchases of corporate bonds are allowed by RBI, limiting the interest in
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such bonds (and essentially making them illiquid). In contrast, it allows repurchases of government
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bonds, and consequently, such instruments are liquid.

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 “To promote development of the corporate bond market, following emerging international
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practice, RBI is actively considering corporate bonds as eligible collateral for liquidity operations.
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The process to make necessary amendments to the RBI Act has commenced”.
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FISHER EFFECT
The Fisher Effect is an economic hypothesis stating that the real interest rate is equal to the nominal rate
minus the expected rate of inflation.
How It Works/Example:
In the late 1930s, U.S. economist Irving Fisher wrote a paper which posited that a country's interest rate
level rises and falls in direct relation to its inflation rates. Fisher mathematically expressed this theory in
the following way:
Nominal Rate of Interest = Real Interest Rate + Inflation Rate
Pratik Gupta 16
The equation states that a country's current (nominal) interest rate is equal to a real interest rate
adjusted for the rate of inflation. In this sense, Fisher conceived of interest rates, as the prices of lending,
being adjusted for inflation in the same manner that prices of goods and services are adjusted for inflation.
For instance, if a country's nominal interest rate is six percent and its inflation rate is two percent, the
country's real interest rate is four percent (6% - 2% = 4%).
Why It Matters:
The Fisher effect is an important tool by which lenders can gauge whether or not they are making
money on a granted loan. Unless the rate charged is above and beyond the economy's inflation rate, a
lender will not profit from the interest. Moreover, according to Fisher's theory, even if a loan is granted at
no interest, a lending party would need to charge at least the inflation rate in order to retain purchasing
power upon repayment.
SOME IMPORTANT STOCK MARKET TERMINOLOGY

 Margin Trading: Practice of buying stock with money borrowed from the broker. In this arrangement,
the investor makes a cash down payment (called the margin) with the broker and
can purchase stocks worth about twice the cash amount. The broker charges interest on this loan (in
addition to the commission on each buy/sell trade) and the investor has to keep the
entire stockholding with the broker as collateral. Also, the investor has to put up additional cash in case
the value of the stockholding falls below a certain amount. Margin trading is a double-edged sword -
it cuts both ways. If the stock price rises, the investor makes twice as much profit as with his own cash
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only. Similarly, if the stock price falls, the investor loses twice the amount. In slang, this practice is
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called 'investing on steroids’.
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 Zero-Coupon Government Bonds: Government bonds that are purchased at a deep discount and pay
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no cash dividend, unlike regular bonds.
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 ISO 9000: International production quality standards established by ISO (International Standards
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Organisation). Certification that an exporter meets ISO 9000 manufacturing standards, for example,
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may be a minimum requirement for competing in certain markets or for certain tenders.
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 Margin/spread: The differences between the buying and selling rates of a foreign exchange quotation
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or between the borrowing and lending rates in deposits. The expression is also used with respect to
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offshore loans as being the difference between cost of borrowing and return from lending.
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 Warrant: A company-issued certificate that represents an option to buy stock shares at a given time.
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 Stop Loss: The risk management technique in which the trade is liquidated to halt any further decline
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in value.
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 Spot exchange Foreign Exchange bought and sold for immediate delivery - in practice almost invariably
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for delivery two business days after the conclusion of the deal.
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 DVR Shares: differential voting rights shares are like ordinary equity shares but with differential voting
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rights. Shares can have higher or lower voting rights as compared to the ordinary equity shares.
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However, Indian regulations do not permit companies to issue equity shares with higher voting rights.
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Hence, Indian DVR shares provide for lower voting rights as compared to ordinary equity shares.
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 Beta: A measure of the market/non-diversifiable risk associated with any given security in the market.
A ratio of an individual's stock historical returns to the historical returns of the stock market. If a stock
increased in value by 12% while the market increased by 10%, the stock's beta would be 1.2.
 Arbitrage: The simultaneous purchase and sale of two different, but closely related, securities to take
advantage of a disparity in their prices.
 Sweat Equity: Sweat equity shares are equity shares issued by a company to its employees or directors
at a discount, or as a consideration for providing know-how or a similar value to the company. A
company may issue sweat equity shares of a class of shares already issued if these conditions are met:
Pratik Gupta 17
The issue of sweat equity shares should be authorized by a special resolution passed by the
company in a general meeting. The resolution should specify the number of shares, current
market price, consideration, if any, and the section of directors /employees to whom they are to
be issued.
 As on the date of issue, a year should have elapsed since the company was entitled to commence
business.
 Right Issue: Right issue is the share that a company offers to its existing shareholders. The number of
right issue to be offered to an investor depends on the number of shares that the investor is currently
holding. While the right issue is offered to the shareholders, he or she has the right to buy a shares or
ignore the right issue offer to lapse or even sell the entitlement of the shares.
When the right issue is offered to the existing shareholders, it is offered to them at a lower price than
the existing price of the stock at the stock market. But that does not mean that the shareholders can
make huge profit from this price difference. This is because after the right issue is offered price of that
particular stock falls in the stock market.
 Green Shoe Option: A provision contained in an underwriting agreement that gives the underwriter
the right to sell investors more shares than originally planned by the issuer. This would normally be
done if the demand for a security issue proves higher than expected. Legally referred to as an over-
allotment option.
A green shoe option can provide additional price stability to a security issue because the underwriter
has the ability to increase supply and smooth out price fluctuations if demand surges.
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
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Anchor Investor: Anchor Investors shall necessarily be Qualified Institutional Buyers who make an
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application for a value of ten crore rupees or more in a public issue made through the book building
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process in accordance with the SEBI ICDR Regulations 2009. 6@
 An ANGEL INVESTOR or angel (also known as a business angel, informal investor, angel funder, private
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investor, or seed investor) is an affluent individual who provides capital for a business start-up, usually
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in exchange for convertible debt or ownership equity. A small but increasing number of angel
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investors invest online through equity crowdfunding or organize themselves into angel groups or angel
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networks to share research and pool their investment capital, as well as to provide advice to their
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portfolio companies
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 Crowdfunding: Equity crowdfunding is the online offering of private company securities to a group of
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people for investment. Because equity crowdfunding involves investment into a commercial
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enterprise, it is often subject to securities and financial regulation. Equity crowdfunding is also
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referred to as crowd-investing, investment crowdfunding, or crowd equity.

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Equity crowdfunding is a mechanism that enables broad groups of investors to fund startup
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companies and small businesses in return for equity. Investors give money to a business and receive
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ownership of a small piece of that business. If the business succeeds, then its value goes up, as well
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as the value of a share in that business—the converse is also true. Coverage of equity crowdfunding
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indicates that its potential is greatest with startup businesses that are seeking smaller investments to
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achieve establishment, while follow-on funding (required for subsequent growth) may come from
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other sources
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 NISM: National Institute of Securities Markets (NISM) is a public trust, established by the Securities and
Exchange Board of India (SEBI), the regulator for securities markets in India. It is located in Navi
Mumbai, India.
NISM seeks to add to market quality through educational initiatives. It is an autonomous body
governed by its Board of Governors. An international Advisory Council provides strategic guidance to
NISM.
 Stag: An investor or speculator who subscribes to a new issue, expecting the price of the stock to rise
immediately upon the start of trading is known as a stag. The sole aim of a stag is to sell the shares
soon after allotment to realize a quick profit.
Pratik Gupta 18
 Seed Funding: Seed money, sometimes known as seed funding or seed capital, is a form of securities
offering in which an investor invests capital in exchange for an equity stake in the company. The
term seed suggests that this is a very early investment, meant to support the business until it can
generate cash of its own (see cash flow), or until it is ready for further investments. Seed money
options include friends and family funding, angel funding, and crowdfunding.
 Super Angel: Super angel (or "super-angel") investors are a group of serial investors in early stage
ventures in Silicon Valley, California and other technology centers who are particularly sophisticated,
insightful, or well-connected in the startup business community.
Super angels share some characteristics of traditional angel investors, and venture capitalists, and have
been described as a hybrid of the two models. Unlike traditional angel investors, they are typically
professionals for whom investing is their primary occupation
EXCHANGE TRADED FUNDS

ETFs represent shares of ownership in either fund, unit investment trusts, or depository receipts
that hold portfolios of common stocks which closely track the performance and dividend yield of specific
indexes, either broad market, sector or international. ETFs give investors the opportunity to buy or sell an
entire portfolio of stocks in a single security, as easily as buying or selling a share of stock. They offer a wide
range of investment opportunities. While similar to an index mutual fund, ETFs differ from mutual funds in
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significant ways. Unlike Index mutual funds, ETFs are priced and can be bought and sold throughout the
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trading day. Furthermore, ETFs can be sold short and bought on margin.
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Advantages of ETFs
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 Trading Flexibility: One key advantage that ETFs have over traditional mutual funds is trading
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flexibility. ETFs trade throughout the day, so you can buy and sell them when you want.
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 Costs: In terms of the annual expenses charged to investors, ETFs are considerably less expensive
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than the vast majority of mutual funds.

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 Performance: Because they are shielded from investor trading, ETFs shouldn't suffer from having
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to keep cash on hand to meet redemptions, or from being forced to sell stocks into a declining
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market for the same purpose.

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 Conclusion: ETFs have a lot to offer. They're flexible and low-cost, and their underlying portfolios
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are protected from the impact of investor trading, making them more tax-efficient than most
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mutual funds. There are also ETFs that address specific subsectors that regular mutual funds do
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Nevertheless, look carefully before you leap. ETFs' cost advantage isn't always as large as it might
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seem, and trading costs can quickly add up. Particularly if you're in the market for a fund that tracks a
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broad index such as the NSE Nifty, or if you wish to invest regular sums of money, it's tough to make a
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case yet for choosing an ETF over one of the existing low-cost mutual-fund options.
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Attributes ETF Index Mutual Individual Stock

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Funds
Diversification Yes Yes No
Traded throughout the day Yes No Yes
Can be bought on margin Yes No Yes
Can be sold short Yes No Yes
Track an index or sector Yes Yes No
Tax efficient as turnover is low Yes Possibly No
Pratik Gupta 19
Low expense ratio Yes Sometime Not a factor

Trade at any brokerage firm Yes No Yes
CREDIT RATING (CR) AGENCIES
CR is the technique of credit risk valuation for the corporate debt instrument reflecting borrowers
expected capability and inclination to pay interest and principal in timely manner.
An independent and credible CR agency acts as a assessor, judges the credit quality of debt obligation of
different companies, and assists investors, individuals and institutions in making investment decisions. By
the dissemination of information, the agency assigns various grades/ratings which enable the investor to
identify the risk levels of their investments.
CR as financial services has come a long way, since John Moody introduces the concept in 1909. In India it
begins with the setup of CRISIL in 1988 (first country in Asia to start this service).
Some of the CR Agencies in India are-
1- ONICRA Credit Rating Agency of India Ltd.

2- Credit Rating Information Services of India Limited (CRISIL)
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3- Investment Information and Credit Rating Agency of India (ICRA)
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4- Credit Analysis & Research Limited (CARE)
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5- Duff & Phelps Credit Rating India Private Ltd. (DCR India) 6@
6- High Mark Credit Information Services
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7- SME Rating Agency of India Limited (SMERA) - It is a third party rating agency exclusively set up for
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micro, small and medium enterprises (MSME) in India for ratings on creditworthiness. It provides
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ratings which enable MSME units to raise bank loans at competitive rates of interest.
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VENTURE CAPITAL AND PRIVATE EQUITY

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Starting and growing a business always require capital. There are a number of alternative methods
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to fund growth. These include the owner or proprietor’s own capital, arranging debt finance, or seeking an
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equity partner, as is the case with private equity and venture capital.
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Private equity is a broad term that refers to any type of non-public ownership equity securities that
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are not listed on a public exchange. Private equity encompasses both early stage (venture capital) and later
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stage (buy-out, expansion) investing.

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Venture capital is a means of equity financing for rapidly-growing private companies. Finance may
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be required for the start-up, development/expansion or purchase of a company. Venture Capital firms
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invest funds on a professional basis, often focusing on a limited sector of specialization (e.g. IT,
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infrastructure, health/life sciences, clean technology, etc.).

The goal of venture capital is to build companies so that the shares become liquid (through IPO or
acquisition) and provide a rate of return to the investors (in the form of cash or shares) that is consistent
with the level of risk taken.
With venture capital financing, the venture capitalist acquires an agreed proportion of the equity
of the company in return for the funding. Equity finance offers the significant advantage of having no
interest charges. It is "patient" capital that seeks a return through long-term capital gain rather than
immediate and regular interest payments, as in the case of debt financing. Given the nature of equity
financing, venture capital investors are therefore exposed to the risk of the company failing. As a result the
Pratik Gupta 20
venture capitalist must look to invest in companies which have the ability to grow very successfully and
provide higher than average returns to compensate for the risk.
When venture capitalists invest in a business they typically require a seat on the company's board
of directors. They tend to take a minority share in the company and usually do not take day-to-day control.
Rather, professional venture capitalists act as mentors and aim to provide support and advice on a range of
management, sales and technical issues to assist the company to develop its full potential.
In 2006, total amount of private equity, including venture capital reached US$7.5 billion across 299
deals.
Some of the companies dealing in PE and VC are Research PE India, Avigo Capital, Blue River
Capital by Aditya Birla Group, Everstone, Gaja Vapital Partners, etc.
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Pratik Gupta 1

Indian Economy for IAS by Pratik Gupta 2016-17

STRUCTURE OF INDIAN CAPITAL MARKET

Why Capital Market Exist:

ROLE OF CAPITAL MARKET

2. In capital market, loans are given for 5 to 20 years

Year. it to other investors if they need the money.

any country. market’s Sensex conditions. Stock market regulator is

in the hand of SEBI.

4. Main dealer of money market are

stock exchange and stock regulator is Security

5. In USA, money market is famous

with dealing of money fund and exchange commission (SEC).

bankers’ acceptance instruments.

PRIMARY MARKET AND SECONDARY MARKET

SECONDARY MARKET ORGANIZATION IN INDIA

NYSE USA New York Dow Jones 19,223

NASDAQ USA New York NASDAQ 6,831

Tokyo St. Exch. Japan Tokyo Nikkei 4,485

London St. Exch. UK London FTSE 6,187

Euronext France, Amsterdam Euro STOXX 3,321

Belgium and Portugal

BSE (11th Place) India Mumbai Sensex 1,682

NSE (12th Place) India Mumbai Nifty 1,642

BM&F Bovespa (20th) Brazil Sao Paulo Ibovespa 824

NATIONAL STOCK EXCHANGE (NSE)

OVER-THE-COUNTER EXCHANGE OF INDIA (OTCEI)

and is a recognized stock exchange under the SCR Act.

dated 31st Mar 2015.

MULTI COMMODITY EXCHANGE OF INDIA LTD (MCX)

 Headquartered in Mumbai, Multi Commodity Exchange of India Ltd (MCX) is a state-of-the-art

commodity futures across the country.

cotton and others).

MCX STOCK EXCHANGE LIMITED (MCX-SX)

saw participation from 745 towns and cities across India.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

the Indian Parliament.

capital markets in India under a resolution of the Government of India.

 The SEBI is managed by its members, which consists of following:

b) Two members, i.e. officers of central ministry.

SEBI has three functions rolled into one body:

FORWARD MARKET COMMISSION (FMC)

is a statutory body set up under Forward Contracts (Regulation) Act, 1952.

trade in cotton derivative contracts.

Forward Contracts (Regulation) Act, 1952.

 The commodities traded at these exchanges comprise the following:

oil, Soy oil etc.

 Food grains – Wheat, Gram, Dals, Bajra, Maize etc.

REGULATORY TOOLS IN THE HANDS OF FMC

activity in securities takes place on a recognized stock exchange.

CONTRACTS (REGULATION) AMENDMENT ACT, 2007”.

being recognized by the Central Government under Section 4 of the SC(R)A.

4. Derivatives: As per section 2 (aa), ‘Derivative’ includes:

INDIAN DEPOSITORY ACT, 1996

depository, offers depository services to investors. According to SEBI guidelines, financial

of his holdings and transferring securities.

transferable subject to certain exceptions by restricting company’s right to use discretion in

requirements under the Companies Act.

CORPORATIZATION AND DEMUTUALIZATION OF STOCK EXCHANGE

BENEFITS OF CORPORATIZATION AND DEMUTUALIZATION OF STOCK EXCHANGE

(i) Loan syndication,

(ii) Financial and management consultancy,

(iii) Project counseling,

(iv) Portfolio management,