Final Cap Market

8/8/2019 Final Cap Market

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Chapter 1 - Capital Market in India

Introduction:-

The capital market is the market for securities, where companies and governments can

raise long term funds. Selling stock and selling bonds are two ways to generate capitaland long term funds. Thus bond markets and stock markets are considered capital

markets. The capital markets consist of the primary market, where new issues are

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

.The Indian Equity Markets and the Indian Debt markets together form the Indian

Capital markets

Indian Equity Market at present is a lucrative field for investors. Indian stocks are

profitable not only for long and medium-term investors but also the position traders,

short-term swing traders and also very short term intra-day traders. In India as on

December 30 2007, market capitalisation (BSE 500) at US$ 1638 billion was 150 per cent of

GDP, matching well with other emerging economies and selected matured markets.

For a developing economy like India, debt markets are crucial sources of capital funds.

The debt market in India is amongst the largest in Asia. It includes government securities,

public sector undertakings, other government bodies, financial institutions, banks and

companies.

Indian Capital Market

Debt MarketEquity Market

Primary

Market

Secondary

Market

Primary

Market

Secondary

Market


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R E V I E W O F L I T E R A T U R E

y C A P I T A L M A R K E T S :

DEFINITION:

THE TERM CAPITAL MARKETS CAN BE A CAUSE OF MUCH CONFUSION. CAPITALMARKETS COULD MEAN:

1. Organizations that facilitate the trade in financial products. i.e. Stock exchanges

facilitate the trade in stocks, bonds and warrants.

2. The coming together of buyers and sellers to trade financial products. i.e. stocks and

shares are traded between buyers and sellers in a number of ways including: The use of

stock exchanges; directly between buyers and sellers etc. In academia, students of finance

will use both meanings but students of economics will only use the second meaning.

Financial markets can be domestic or they can be international.


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Equity market in India:-

Stock is the type of equity security with which most people are familiar. When

investors (savers) buy stock, they become owners of a "share" of a company's assets and

earnings. If a company is successful, the price that investors are willing to pay for its stock

will often rise and shareholders who bought stock at a lower price then stand to make a

capital profit. If a company does not do well, however, its stock may decrease in value and

shareholders can lose money. Stock prices are also subject to both general economic and

industry-specific market factors.

The equity market is classified as :-

(a) Primary market

(b) Secondary market

(a) Primary market:-

The primary market provides the channel for creation of new securities through

the issuance of financial instruments by public companies as well as government

companies , bodies and agencies.

Features of primary markets are:

This is the market for new long term capital. The primary market is the marketwhere the securities are sold for the first time. Therefore it is also called the New

Issue Market (NIM).

In a primary issue, the securities are issued by the company directly to investors.

The company receives the money and issues new security certificates to the

investors.

Primary issues are used by companies for the purpose of setting up new business

or for expanding or modernizing the existing business.

The primary market performs the crucial function of facilitating capital formation

in the economy.

The primary market issuance is done either through public issue or private placement

. A public issue does not limit any entity in investing while in private placement , the


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issuance is done to select people. In terms of Indian Companies Act , 1956 as issue

becomes public if it results in allotment to more than 50 persons. This means an issue

resulting in allotment to less than 50 persons is private placement .

An IPO is the first sale of stock by a company to the public. In this market company can

raise money by issuing equity. If the company has never issued equity to the public, it's

known as an IPO. Mostly public companies go for IPO. But large privately-owned

companies may also go for an IPO to become publicly traded. In an IPO the company

offloads a certain percentage of its total shares to the public at a certain` price In an IPO,

the issuer obtains the assistance of an underwriting firm, which helps it determine what

type of security to issue (common or preferred), best offering price and time to bring it to

market.. Most IPOS these days do not have a fixed offer price. Instead they follow a

method called BOOK BUILDIN PROCESS, where the offer price is placed in a band or a

range with the highest and the lowest value (refer to the newspaper clipping on the page).

The public can bid for the shares at any price in the band specified. Once the bids comein, the company evaluates all the bids and decides on an offer price in that range. After

the offer price is fixed, the company allots its shares to the people who had applied for its

shares or returns them their money in case of non allotment of shares.


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Advantages of going public

Increased Capital

A public offering will allow a company to raise capital to use for various corporate

purposes such as working capital, acquisitions, research and development, marketing,and expanding plant and equipment.

Liquidity

Once shares of a company are issue through an IPO & traded on a public exchange, those

shares have a market value and can be resold. This allows a company to attract and retain

employees by offering stock incentive packages to those employees. Moreover, it also

provides investors in the company the option to trade their shares thus enhancing

investor confidence.

Increased Prestige

Public companies often are better known and more visible than private companies, this

enables them to obtain a larger market for their goods or services. Public companies are

able to have access to larger pools of capital as well as different types of capital.

Valuation

Public trading of a company's shares sets a value for the company that is set by the public

market and not through more subjective standards set by a private valuator. This is

helpful for a company that is looking for a merger or acquisition. It also allows the

shareholders to know the value of the shares.

Increased wealth

The founders of the company often have the sense of increased wealth as a result of the

IPO. Prior to the IPO these shares were illiquid and had a more subjective price. These

shares now have an ascertainable price and after any lockup period these shares may be

sold to the public, subject to limitations of law.


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Disadvantages of going Public

Time and Expense

Conducting an IPO is time consuming and expensive. A successful IPO can take up to a

year or more to complete and a company can expect to spend large amount of money onattorneys, accountants, and printers. In addition, the underwriter's fees can range from

3% to 10% of the value of the offering. Due to the time and expense of preparation of the

IPO, many companies simply cannot afford the time or spare the expense of preparing

the IPO.

Disclosure

Once a company goes public it comes under the purview of SEBI . It is supposed to file

quarterly results with SEBI and follow other regulations as per SEBI guidelines. .

Decisions based upon Stock Price

Management's decisions may be affected by the market price of the shares and the feeling

that they must get market recognition for the company's stock. They may give more

consideration to market price of the share and as a consequence may take a decision

which is not prudent & sound .

Regulatory Review

The Company will be open to review by the SEBI to ensure that the company is making

the appropriate filings with all relevant disclosures.

Falling Stock Price

If the shares of the company's stock fall, the company may lose market confidence,

decreased valuation of the company may affect lines of credits, secondary offering pricing,

the company's ability to maintain employees, and the personal wealth of insiders and

investors.

Vulnerability

If a large portion of the company's shares are sold to the public, the company may

become a target for a takeover, causing insiders to lose control. A takeover bid may be the

result of shareholders being upset with management or corporate raiders looking for an

opportunity. Defending a hostile bid can be both expensive and time consuming.


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Parameters to judge an IPO

Good investing principles demand that you study the minutes of details prior to investing

in an IPO. Here are some parameters you should evaluate:-

Promoters

Is the company a family run business or is it professionally owned? Even with a

family run business what are the credibility and professional qualifications of those

managing the company? Do the top level managers have enough experience (of at least 5

years) in the specific type of business?

Industry Outlook

The products or services of the company should have a good demand and scope

for profit.

Business Plans

Check the progress made in terms of land acquisition, clearances from various

departments, purchase of machinery, letter of credits etc. A higher initial investment

from the promoters will lead to a higher faith in the organization.

Financials

Why does the company require the money? Is the company floating more equity

than required? What is the debt component? Keep a track on the profits, growth andmargins of the previous years. A steady growth rate is the quality of a fundamentally

sound company. Check the assumptions the promoters are making and whether these

assumptions or expectations sound feasible.

Risk Factors

The offer documents will list our specific risk factors such as the companys

liabilities, court cases or other litigations. Examine how these factors will affect the

operations of the company.

Key Names

Every IPO will have lead managers and merchant bankers. You can figure out the

track record of the merchant banker through the SEBI website.


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Pricing

Compare the companys PER with that of similar companies. With this you can

find out the P/E Growth ratio and examine whether its earning projections seem viable.

Listing

You should have access to the brokers of the stock exchanges where the company

will be listing itself.

Secondary market:-

Secondary market is the market for buying and selling securities of the existing

companies. Under this, securities are traded after being initially offered to the public in

the primary market and/or listed on the stock exchange. The stock exchanges are the

exclusive centres for trading of securities. It is a sensitive barometer and reflects the

trends in the economy through fluctuations in the prices of various securities. It been

defined as, "a body of individuals, whether incorporated or not, constituted for the

purpose of assisting, regulating and controlling the business of buying, selling and dealing

in securities". There are 23 stock exchanges in India. Listing on stock exchanges enables

the shareholders to monitor the movement of the share prices in an effective manner.

This assist them to take prudent decisions on whether to retain their holdings or sell off

or even accumulate further. However, to list the securities on a stock exchange, the

issuing company has to go through set norms and procedures.

Various aspects of secondary/ stock market in India :-

(a) Corporate Securities:The stock exchanges are the exclusive centres for trading of securities. Though the area of

operation/jurisdiction of an exchange is specified at the time of its recognition, they have

been allowed recently to set up trading terminals anywhere in the country. The threenewly set up exchanges (OTCEI, NSE and ICSE) were permitted since their inception

to have nation wide trading. The trading platforms of a few exchanges are now

accessible from many locations. Further, with extensive use of information

technology, the trading platforms of a few exchanges are also accessible from

anywhere through the Internet and mobile devices. This made a huge difference in

a geographically vast country like India.


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(b) Exchange Management:

Most of the stock exchanges in the country are organised as Mutuals which was

considered beneficial in terms of tax benefits and matters of compliance. The

trading members, who provide brokering services, also own,control and manage the

exchanges. This is not an effective model for self -regulatory organisations as the

regulatory and public interest of the exchange conflicts with private interests.

Efforts are on to demutualise the exchanges whereby ownership, management and

trading membership would be segregated from one another. Two exchanges viz.

OTCEI and NSE are demutualised from inception, where ownership, management

and trading are in the hands of three different sets of people. This model eliminates

conflict of interest and helps the exchange to pursue market efficiency and

investor interest aggressively.

(c) Membership:

The trading platform of an exchange is accessible only to brokers. The broker enters

into trades in exchanges either on his own account or on behalf of clients. No stock

broker or sub-broker is allowed to buy, sell or deal in securities, unless he or she holds a

certificate of registration granted by SEBI. A broker/sub-broker complies with the

code of conduct prescribed by SEBI. Over time, a number of brokers - proprietor firms

and partnership firms - have converted themselves into corporates. The standards

for admission of members stress on factors, such as corporate structure, capital

adequacy, track record, education, experience, etc. and reflect a conscious endeavour to

ensure quality broking services.

(d) Listing:

A company seeking listing satisfies the exchange that at least 10% of the securities,

subject to a minimum of 20 lakh securities, were offered to public for subscription, and

the size of the net offer to the public (i.e. the offer price multiplied by the

number of securities offered to the public, excluding reservations, firm allotment

and promoters' contribution) was not less than Rs. 100 crore, and the issue is made

only through book building method with allocation of 60% of the issue size to the

qualified institutional buyers. In the alternative, it is required to offer at least

25% of the securities to public.

The company is also required to maintain the minimum level of non - promoter

holding on a continuous basis. In order to provide an opportunity to investors to

invest/trade in the securities of local companies, it is mandatory for the companies,

wishing to list their securities, to list on the regional stock exchange nearest to


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their registered office. If they so wish, they can seek listing on other exchanges as

well. Monopoly of the exchanges within their allocated area, regional aspirations of

the people and mandatory listing on the regional stock exchange resulted in

multiplicity of exchanges. The basic norms for listing of securities on the stock exchanges

are uniform for all the exchanges. These norms are specified in the listingagreement entered into between the company and the concerned exchange. The listing

agreement prescribes a number of requirements to be continuously complied with by

the issuers for continued listing and such compliance is monitored by the

exchanges. It also stipulates the disclosures to be made by the companies and the

corporate governance practices to be followed by them. SEBI has been issuing

guidelines/circulars prescribing certain norms to be included in the listing

agreement and to be complied with by the companies.

A listed security is available for trading on the exchange. The stock exchanges

levy listing fees - initial fees and annual fees - from the listed companies. It is a majorsource of income for many exchanges. A security listed on other exchanges is

also permitted for trading. A listed company can voluntary delist its securities from

non-regional stock exchanges after providing an exit opportunity to holders of

securities in the region where the concerned exchange is located. An exchange

can, however, delist the securities compulsorily following a very stringent procedure.

(e) Trading Mechanism:

The exchanges provide an on-line fully-automated Screen Based Trading

System (SBTS) where a member can punch into the computer quantities of

securities and the prices at which he likes to transact and the transaction is

executed as soon as it finds a matching order from a counter party. SBTS

electronically matches orders on a strict price/time priority and hence cuts down

on time, cost and risk of error, as well as on fraud resulting in improved operational

efficiency. It allows faster incorporation of price sensitive information into prevailing

prices, thus increasing the informational efficiency of markets. It enables market

participants to see the full market on real-time, making the market transparent.

It allows a large number of participants, irrespective of their geographical

locations, to trade with one another simultaneously, improving the depth and

liquidity of the market. It provides full anonymity by accepting orders, big or small, from

members without revealing their identity, thus providing equal access to everybody.

It also provides a perfect audit trail, which helps to resolve disputes by logging in

the trade execution process in entirety.


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(f) Trading Rules:Regulations have been framed to prevent insider trading as well as unfair trade

practices. The acquisitions and takeovers are permitted in a well- defined and

orderly manner. The companies are permitted to buy back their securities to

improve liquidity and enhance the shareholders' wealth.

(g) Price Bands:

Stock market volatility is generally a cause of concern for both policy

makers as well as investors. To curb excessive volatility, SEBI has prescribed a

system of price bands. The price bands or circuit breakers bring about a

coordinated trading halt in all equity and equity derivatives markets nation-wide.

An index-based market-wide circuit breaker system at three stages of the index

movement either way at 10%, 15% and 20% has been prescribed. The movement of

either S&P CNX Nifty or Sensex, whichever is breached earlier, triggers the

breakers. As an additional measure of safety, individual scrip-wise price bands of

20% either way have been imposed for all securities except those available for stock

options.

(h) Demat Trading:

The Depositories Act, 1996 was passed to proved for the establishment

of depositories in securities with the objective of ensuring free transferability of

securities with speed, accuracy and security by :-

(i) making securities of public limited companies freely transferable subject to

certain exceptions;

(ii) dematerialising the securities in the depository mode; and

(iii) providing for maintenance of ownership records in a book entry form.

In order to streamline both the stages of settlement process, the Act envisages

transfer of ownership of securities electronically by book entry without making the

securities move from person to person. Two depositories, viz. NSDL and CDSL, have

come up to provide instantaneous electronic transfer of securities. At the end of March

2002, 4,172 and 4,284 companies were connected to NSDL and CDSL respectively.

The number of dematerialised securities increased to 56.5 billion at the end of

March 2002. As on the same date, the value of dematerialsied securities was Rs.

4,669 billion and the number of investor accounts was 4,605,588. All actively traded


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

over 99% of turnover settled by delivery. This has almost eliminated the bad deliveries

and associated problems. To prevent physical certificates from sneaking into circulation,

it has been mandatory for all new IPOs to be compulsorily traded in

dematerialised form. The admission to a depository for dematerialisation of securities hasbeen made a prerequisite for making a public or rights issue or an offer for sale. It has

also been made compulsory for public listed companies making IPO of any security for

Rs. 10 crore or more to do the same only in dematerialised form.

(i) Charges:

A stock broker is required to pay a registration fee of Rs.5, 000 every financial

year, if his annual turnover does not exceed Rs. 1 crore. If the turnover exceeds Rs.

1 crore during any financial year, he has to pay Rs. 5,000 plus one-hundredth of 1% of

the turnover in excess of Rs.1 crore. After the expiry of five years from the date ofinitial registration as a broker, he has to pay Rs. 5,000 for a block of five financial

years. Besides, the exchanges collect transaction charges from its trading members.

NSE levies Rs. 4 per lakh of turnover.

The maximum brokerage a trading member can levy in respect of securities

transactions is 2.5% of the contract price, exclusive of statutory levies like SEBI turnover

fee, service tax and stamp duty. However, brokerage charges as low as 0.15% are also

observed in the market.

(j) Trading Cycle:

Rolling settlement on T+3 basis gave way to T+2 from April 2003. The

market has moved close to spot/cash market.

(k) Risk Management:

To pre-empt market failures and protect investors, the

regulator/exchanges have developed a comprehensive risk management system, which is

constantly monitored and upgraded. It encompasses capital adequacy of members,

adequate margin requirements, limits on exposure and turnover, indemnityinsurance, on-line position monitoring and automatic disablement, etc. They also

administer an efficient market surveillance system to curb excessive volatility, detect

and prevent price manipulations. A clearing corporation assures the counterparty risk

of each member and guarantees financial settlement in respect of trades executed

on NSE.


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Thus in a nutshell the following diagram explains what all is discussed above


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Debt Market in India:-

For a developing economy like India, debt markets are crucial sources of capital

funds. The debt market in India is amongst the largest in Asia. It includes government

securities, public sector undertakings, other government bodies, financial institutions,

banks and companies. The debt markets in India is divided into three segments, viz.,

Government Securities, Public Sector Units (PSU) bonds, and corporate securities.

The market for Government Securities comprises the Centre, State and State-sponsored

securities. Government securities (G-secs) or gilts are sovereign securities, which are

issued by the Reserve Bank of India (RBI) on behalf of the Government of India (GOI).

The GOI uses these funds to meet its expenditure commitments. The PSU bonds are

generally treated as surrogates of sovereign paper, sometimes due to explicit guaranteeand often due to the comfort of public ownership. Some of the PSU bonds are tax free,

while most bonds including government securities are not tax-free. The RBI also issues

tax-free bonds, called the 6.5% RBI relief bonds, which is a popular category of tax-free

bonds in the market. Corporate bond markets comprise of commercial paper and bonds.

These bonds typically are structured to suit the requirements of investors and the issuing

corporate, and include a variety of tailor- made features with respect to interest payments

and redemption.

Debt Market Segments

Corporate BondsPSU BondsGovernment Securities


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PARTICIPANTS IN THEDEBT MARKETS

1. Central Government:-

Central government raises money through bond issuances, to fund budgetary

deficits and other short and long term funding requirements.

2. Reserve Bank of India:-

Reserve Bank Of India (RBI), the central bank of the country, acts as investment banker

to the government, raises funds for the government through bond and T-bill issues, and

also participates in the market through open- market operations, in the course of conduct

of monetary policy.

3. Primary dealers:-

Primary dealers are market intermediaries appointed by the Reserve Bank of India who

underwrite and make market in government securities

4. State Governments, municipalities and local bodies :-


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State governments , municipalities and local bodies issue securities in the debt

markets to fund their developmental projects, as well as to finance their budgetary

deficits.

5. Public sector units (PSU):-

Public Sector Units are large issuers of debt securities, for raising funds to meet

the long term and working capital needs.

6. Corporate treasuries:-

Corporate treasuries issue short and long term paper to meet the financial

requirements of the corporate sector.

7. Banks:-

Commercial banks are the largest investors in the debt markets, particularly the treasurybill and G-sec markets. They have a statutory requirement to hold a certain percentage of

their deposits (currently the mandatory requirement is 24% of deposits) in approved

securities (all government bonds qualify) to satisfy the statutory liquidity requirements.

8. Mutual funds :-

Mutual Funds have emerged as another important player in the debt markets, owing

primarily to the growing number of bond funds that have mobilised significant amounts

from the investors.

9. Foreign Institutional Investors:-

Foreign Institutional Investors are permitted to invest in Dated Government Securities

and Treasury Bills within certain specified limits.

10. Provident funds:-

Provident funds are large investors in the bond markets, as the prudential regulations

governing the deployment of the funds they mobilise, mandate investments pre-

dominantly in treasury and PSU bonds.


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Primary market/ New Issue Market:-

As in the case of equity primary market , this is the market in which debt

instruments government securities, PSU Bonds & corporate bonds are issued for the

first time .

Government Securities:-

In case of government securities , it is the RBI which issues securities on behalf of the

government (both state as well as central government). Thus RBI periodically conducts

auction of GOI/SDL under Central/State borrowing Treasury program as per the auction

calendar and also under MSS for GOI Securities.

The Primary issuance process involves:-

AUCTION TYPE:

Yield-based auction Price-based auction.

In this, successful bids are decided byfilling up the notified amount from the

lowest bid upwards.

In this, successful bids are filled up interms of prices that are bid by

participants from the highest price

downward.

This auction creates a new security,

every time an auction is completed & the

name of the security is the cut-off yield

This auction facilitates the re-issue of an

existing security


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The two choices in treasury auctions, which are widely known andused, are:

Discriminatory Price Auctions (French Auction)

Uniform Price Auctions (DutchAuction)

In both these kinds of auctions, the winning bids are those that exhaust the amount on

offer, beginning at the highest quoted price (or lowest quoted yield). In the Indian

markets, discriminatory price auction as well as uniform price auction is used for all bond

issuances. Whether an auction will be Dutch or French is announced in the notificationof the auction.

If all the successful bidders have to pay the cut-off price of Rs. 111.2, the auction is called a

Dutch auction, or a uniform price auction. If the successful bidders have to pay the prices

they have actually bid, the auction fills up the notified amounts, in various prices at

which each of the successful bidders bid. This is called a French auction, or a

discriminatory price auction. Each successful bidder pays the actual price bid by him.

BID TYPE

1. Competitive Bid: Participants having SGL a/c & current a/c

2. Non-Competitive Bid: Participants not having SGL a/c & current a/c

For example, the G-sec 10.3% 2010

derives its name from the cut-off yield at

the auction, which in this case was

10.3%, which also becomes the coupon

payable on the bond.

For example, in March 2001, RBI

auctioned the 11.43% 2015 security. This

was a G-sec, which had been earlier

issued and trading in the market. The

auction was for an additional issue ofthis existing security. The coupon rate

and the dates of payment of coupons

and redemption are already known.

The additional issue increases the gross

cash flows only on these dates.


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COMPETITIVE BIDDING PROCESS:

Non-Competitive Bidding in Government Securities

To enable medium and small investors to participate in the auction process without

taking the price risk in auctions, the Reserve Bank of India has introduced a facility of

non-competitive bidding in dated government securities auctions for select set of

investors. Non-competitive bidding means that a person would be able to participate in

the auctions of dated government securities without having to quote the yield or price in

the bid. Thus, he will not have to worry about whether his bid will be on or off-the-mark;

RBI announces the auction of G-sec through a press notification, and invites bids.

Front office takes a view about Bank's participation in the auction, taking into

consideration the market factors, Bank's liquidity and the existing portfolio.

Accordingly, proposal is placed before the Investment Committee

Investment committee consists of GM, AGM of different departments & CMD.

Proposal for investment is placed before the Investment Committee. Decision is

taken. EndNO

Yes

Bids are submitted through NDS_OM platform giving details of the quantum and

expected price/yield of securities. Report is generated.

Result of the auction is declared by RBI on the same day evening on NDS.

If bid is accepted either partially or fully, the same is entered and authorized in bank

system.

Back-Office Operation:Duly authorized Deal Slip is verified by the back office. On

the day of allotment/settlement back office will settle the deal in the system &

categorising securities in HTM, AFS & HFT.


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as long as he bids in accordance with the scheme, he will be allotted securities fully or

partially.

Participants in the Scheme:

Participation in the Scheme of non-competitive bidding is open to any person includingfirms, companies, corporate bodies, institutions, provident funds, trusts and any other

entity as prescribed by RBI. As the focus is on the small investors lacking market

expertise, the Scheme will be open to those who do not have current account (CA) or

Subsidiary General Ledger (SGL) account with the Reserve Bank of India. As an exception,

Regional Rural Banks (RRBs) and Urban Cooperative Banks (UCBs) can also apply under

this Scheme in view of their statutory obligations.

Amount offered for non-competitive bidding:

Non-competitive bids will be allowed up to 5 per cent of the notified amount in the

specified auctions of dated securities, within the notified amount. That is, if the notified

amount is Ra.1000 crore, the amount reserved for non-competitive bidders would be

Rs.50 crore and the remaining Rs.950 crore will be put up for competitive auctions. The

minimum amount for bidding will be Rs.10, 000 (face value) and in multiples in Rs.10,000.

Corporate Bonds :-

The corporate bond market has been in existence in India for a long time. However,

despite a long history, the size of the public issue segment of the corporate bond market

in India has remained quite insignificant.

Secondary Market :-

Like in the case of equity secondary market, the secondary debt market involves

buying and selling of debt instruments which are already issued in the primary market or

listed on the exchanges.

Government bonds are deemed to be listed as soon as they are issued. Markets forgovernment securities are pre-dominantly wholesale markets, with trades done on

telephonic negotiation. NSE WDM provides a trading platform for Government bonds,

and reports over 65% of all secondary market trades in government securities.

Currently, transactions in government securities are required to be settled on the trade

date or next working day unless the transaction is through a broker of a permitted stock


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exchange in which case settlement can be on T+2 basis. In NDS, all trades between

members of NDS have to be reported immediately. The settlement is routed through

CCIL for all NDS members.

The lack of market infrastructure and comprehensive regulatory framework coupled with

low issuance leading to low liquidity in the secondary market, narrow investor base,

inadequate credit assessment skills, high cost of issuance and lack of transparency in

trades are some of the major factors that hindered the growth of the private corporate

debt market.

Factors affecting bond interest rates :

The key variables having a bearing on interest rate outlook are:-

US 10 year government bond yields :

The correlation between Indian 10 yr G-sec has held reasonably well in the recent

past. Although, the correlation might not hold on a day to day basis, but over a

slightly longer period, the direction of the movement of the Indian 10 yr bond is quite

similar to that of the US 10 yr bond.

The yields of the bonds have increased as the green shoots of recovery in the global

economy has led to an increase in risk taking behaviour among the investors who are

selling bonds to enter other asset classes which are relatively more risky and offershigher yields. The S&Ps decision to lower ratings outlook on US sovereign debt to

negative from stable led to sell off in the US treasuries.

Similarly in India, the rally in equity markets since the election results on 18 th May

might have led to some sell off in the bond markets which have pushed the Indian 10

yr bond yields to 6.70% levels from 6.22% in Mid May, in line with the sharp rise in the

US 10 yr bonds .

Inflation / crude oil prices :

Inflation arises as the purchasing power of people increases, the value of Rupee

increases. To control the inflation and to suck excess liquidity from the system the

bonds are issued t higher yield.


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Political stability / sovereign rating outlook :

The sense of political stability following election results has reduced the risk of an

outright sovereign rating downgrade by international credit rating agencies in the

near future . Although , the fiscal deficit concerns remain, the continuity of the

political regime will abate the risk of runaway fiscal deficits. The reduced risk of

sovereign rating downgrade due to a stable government and a likely controllable

fiscal deficit scenario will therefore provide support to the bond market

sentiments.

RBI policy stance / liquidity outlook:-

The bond interest rate is also affected by the RBI policy stance. If the RBI goes for

an expansionary monetary policy , then the bond coupon rate will come down , as

there will be ample liquidity in the system which easily would meet the demand

for the same. It is a reverse situation when the RBI goes for a contractionary

monetary policy. This is because then the money supply in the economy would be

less as compared to the demand for the same and the consequence would be

hardening of the bond coupon rate.


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Chapter 2- FrequentlyAsked Questions (FAQs)

1. What are the Sensex & the Nifty?

ANS:-The Sensex is an "index". An index is basically an indicator. It gives you a general

idea about whether most of the stocks have gone up or most of the stocks have gonedown. The Sensex is an indicator of all the major companies of the BSE. The Nifty is an

indicator of all the major companies of the NSE. The sensex is calculated taking into

consideration the top 30 companies of Bombay Stock Exchange (BSE).In case of National

Stock Exchange (NSE) , top 50 companies are taken into consideration to calculating

nifty.

If the Sensex goes up, it means that the prices of the stocks of most of the major

companies on the BSE have gone up. If the Sensex goes down, this tells you that the stock

price of most of the major stocks on the BSE have gone down.

Just like the Sensex represents the top stocks of the BSE, the Nifty represents the topstocks of the NSE.

2. Which are the top 30 companies of BSE & top 50 companies of NSE,

which are used to calculate sensex & nifty ?

ANS:- The following is the list of top 30 companies of BSE :-

The sensex 30 includes the following companies (As on 24th July 2009)

SENSEX SEPTEMBER-2010

CompanyName

Industry Mkt Cap Weight

(Rs cr)

ACC Cement - Major 18,988.52 0.62

Bharti Airtel Telecommunications - Service 141,685.85 4.65BHEL Engineering - Heavy 120,806.19 3.97

Cipla Pharmaceuticals 25,785.82 0.85

DLF Construction & Contracting - Real

Estate

62,676.61 2.06

HDFC Finance - Housing 106,268.22 3.49

HDFC Bank Banks - Private Sector 112,116.26 3.68

Hero Honda Auto - 2 & 3 Wheelers 37,094.95 1.22


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Hindalco Aluminium 37,743.32

HUL Personal Care 67,335.48 2.21

ICICI Bank Banks - Private Sector 124,386.52 4.09

Infosys Computers - Software 173,375.52 5.69

ITC Cigarettes 136,675.25 4.49

Jaiprakash Asso Construction & Contracting - Civil 25,909.92 0.85Jindal Steel Steel - Sponge Iron 65,338.65 2.15

Larsen Engineering - Heavy 122,213.72 4.01

Mahand Mah Auto - Cars & Jeeps 40,152.03 1.32

Maruti Suzuki Auto - Cars & Jeeps 42,705.24 1.4

NTPC Power - Generation/Distribution 176,865.21 5.81

ONGC Oil Drilling And Exploration 311,740.67 10.24

Reliance Refineries 330,247.80 10.85

Reliance Comm Telecommunications - Service 35,005.90 1.15

Reliance Infra Power - Generation/Distribution 26,475.37 0.87

SBI Banks - Public Sector 201,923.05 6.63

Sterlite Ind Metals - Non Ferrous 59,769.28 1.96

Tata Motors Auto - LCVs/HCVs 61,835.92 2.03

Tata Power Power - Generation/Distribution 31,840.70 1.05

Tata Steel Steel - Large 57,295.63 1.88

TCS Computers - Software 181,493.10 5.96

Wipro Computers - Software 108,892.52 3.58

The 30 companies that make up the Sensex are selected and reviewed from time to time

by an index committee. This index committee is made up of academicians, mutual

fund managers, finance journalists, independent governing board members and otherparticipants in the financial markets.

The Nifty50 Companies as on 24th July 2009 are as follows :-

List of NIFTY 50 stocks in NSE along with Equity Capital

Sl NSE Code Company Industry Equity Capital

(In Rs.)

1 ABB ABB Ltd. ELECTRICAL EQUIPMENT 423,816,750

2 ACC ACC Ltd. CEMENT AND CEMENTPRODUCTS

1,877,402,020

3 AMBUJACEM

Ambuja Cements Ltd. CEMENT AND CEMENTPRODUCTS

3,046,612,130

4 AXISBANK Axis Bank Ltd. BANKS 4,032,084,690


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5 BHARTIARTL

Bharti Airtel Ltd. TELECOMMUNICATION SERVICES

37,969,519,800

6 BHEL Bharat Heavy ElectricalsLtd.

ELECTRICAL EQUIPMENT 4,895,200,000

7 BPCL Bharat PetroleumCorporation Ltd.

REFINERIES 3,615,421,240

8 CAIRN Cairn India Ltd. OIL EXPLORATION/PRODUCTION 18,966,678,160

9 CIPLA Cipla Ltd. PHARMACEUTICALS 1,605,842,714

10 DLF DLF Ltd. CONSTRUCTION 3,394,502,566

11 GAIL GAIL (India) Ltd. GAS 12,684,774,000

12 GRASIM Grasim Industries Ltd. CEMENT AND CEMENTPRODUCTS

916,820,010

13 HCLTECH HCL Technologies Ltd. COMPUTERS SOFTWARE 1,346,219,552

14 HDFC Housing DevelopmentFinance Corporation Ltd.

FINANCE HOUSING 2,858,553,370

15 HDFCBANK HDFC Bank Ltd. BANKS 4,552,365,640

16 HEROHONDA

Hero Honda Motors Ltd. AUTOMOBILES 2 AND 3WHEELERS

399,375,000

17 HINDALCO Hindalco Industries Ltd. ALUMINIUM 1,913,433,052

18 HINDUNILVR

Hindustan Unilever Ltd. DIVERSIFIED 2,181,441,805

19 ICICIBANK ICICI Bank Ltd. BANKS 11,137,408,530

20 IDEA Idea Cellular Ltd. TELECOMMUNICATION SERVICES

31,000,952,090

21 IDFC Infrastructure DevelopmentFinance Co. Ltd.

FINANCIAL INSTITUTION 12,960,901,040

22 INFOSYSTCH

Infosys Technologies Ltd. COMPUTERS SOFTWARE 2,867,676,165

23 ITC I T C Ltd. CIGARETTES 3,795,325,160

24 JINDALSTEL

Jindal Steel & Power Ltd. STEEL AND STEEL PRODUCTS 930,781,836

25 JPASSOCIAT

Jaiprakash Associates Ltd. DIVERSIFIED 4,243,681,902

26 LT Larsen & Toubro Ltd. ENGINEERING 1,200,545,626

27 M&M Mahindra & Mahindra Ltd. AUTOMOBILES 4 WHEELERS 2,798,212,650

28 MARUTI Maruti Suzuki India Ltd. AUTOMOBILES 4 WHEELERS 1,444,550,300

29 NTPC NTPC Ltd. POWER 82,454,644,000


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30 ONGC Oil & Natural GasCorporation Ltd.

OIL EXPLORATION/PRODUCTION 21,388,725,300

31 PNB Punjab National Bank BANKS 3,153,025,000

32 POWERGRID

Power Grid Corporation ofIndia Ltd.

POWER 42,088,412,300

33 RANBAXY Ranbaxy Laboratories Ltd. PHARMACEUTICALS 2,102,086,790

34 RCOM Reliance CommunicationsLtd.

TELECOMMUNICATION SERVICES

10,320,134,405

35 RELCAPITAL

Reliance Capital Ltd. FINANCE 2,456,328,000

36 RELIANCE Reliance Industries Ltd. REFINERIES 32,864,135,810

37 RELINFRA Reliance Infrastructure Ltd. POWER 2,252,702,620

38 RPOWER Reliance Power Ltd. POWER 23,968,000,000

39 SAIL Steel Authority of India Ltd STEEL AND STEEL PRODUCTS 41,304,005,450

40 SBIN State Bank of India BANKS 6,348,802,220

41 SIEMENS Siemens Ltd. ELECTRICAL EQUIPMENT 674,320,400

42 STER Sterlite Industries (India)Ltd.

METALS 1,680,783,722

43 SUNPHARMA

Sun PharmaceuticalIndustries Ltd.

PHARMACEUTICALS 1,035,581,955

44 SUZLON Suzlon Energy Ltd. ELECTRICAL EQUIPMENT 3,113,463,486

45 TATAMOTORS

Tata Motors Ltd. AUTOMOBILES 4 WHEELERS 4,798,380,830

46 TATAPOWER

Tata Power Co. Ltd. POWER 2,371,886,650

47 TATASTEEL Tata Steel Ltd. STEEL AND STEEL PRODUCTS 8,873,890,170

48 TCS Tata Consultancy ServicesLtd.

COMPUTERS SOFTWARE 1,957,220,996

49 UNITECH Unitech Ltd. CONSTRUCTION 4,777,602,094

50 WIPRO Wipro Ltd. COMPUTERS SOFTWARE 2,935,144,164


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3. What is market capitalisation ( Market cap ) ?

ANS:- Market cap or market capitalization is simply the worth of a company in terms of

its shares. To calculate the market cap of a particular company, simply multiply the

current share price by the number of shares issued by the company. Thus,

Depending on the value of the market cap, the company will either be a mid-cap or

large-cap or small-cap company

4.What do we mean by Free Float Market Capitalisation ?

ANS:- Many different types of investors hold the shares of a company. These include

government, founders( promoters ) or directors of the company, FDIs , retail investors,

etc. Only the open market shares that are free for trading by anyone, are called the

free-float shares.A particular company, may have certain shares in the open market and

certain shares that are not available for trading in the open market.

According the BSE, any shares that DO NOT fall under the following criteria, can be

considered to be open market shares:

Holdings by founders/directors/ acquirers which has control element

Holdings by persons/ bodies with "controlling interest"

Government holding as promoter/acquirer

Holdings through the FDI Route

Strategic stakes by private corporate bodies/ individuals

Equity held by associate/group companies (cross-holdings)

Equity held by employee welfare trusts

Market Cap= Current Share Price X no. of shares issued by the company.


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Locked-in shares and shares which would not be sold in the open market in normal

course.

A company has to submit a complete report about who has how many of the companys

shares to the BSE. On the basis of this, the BSE will decide the free-float factor of the

company. The free-float factor is a very valuable number. If you multiply the "free-float

factor" with the market cap of that company, you will get the free-float market cap

,which is the value of the shares of the company in the open market

5.What is the criteria for selecting top 30 and 50 stocks in case of BSE &

NSE respectively ?

ANS:- The following are the criteria for selecting the top 30 and 50 Stocks for BSE &

NSE respectively:-

(a)Market capitalization: -The company should have a market capitalization in the Top

100 market capitalizations of the BSE. Also the market capitalization of each company

should be more than 0.5% of the total market capitalization of the Index.

(b)Trading frequency: -The company to be included should have been traded on each

and every trading day for the last one year. Exceptions can be made for extreme reasons

like share suspension etc.

(c) Number of trades: -The scrip should be among the top 150 companies listed by

average number of trades per day for the last one year.

(d)Industry representation: -The companies should be leaders in their industry group.

(e)Listed history:- The companies should have a listing history of at least one year on

BSE.

(f)Track record:- In the opinion of the index committee, the company should have an

acceptable track record.


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6.How to calculate the value of sensex at a particular point ?

ANS:- The following are the steps to calculate sensex at a particular point of time:-

First: Find out the free-float market cap of all the 30 companies that make up the

Sensex.

Second: Add all the free-float market caps of all the 30 companies.

Third: Make all this relative to the Sensex base. The value you get is the Sensex value. To

understand the third step let us take an example .

Example:-Suppose, the free float market cap of all the 30 companies was Rs. 100,000,000

at the end of one trading day and the value of sensex is 12500. The market cap at the end

of next trading day becomes Rs.120,000,000, then the sensex value at the end of that day

is

Sensex value = 120,000,000 x12500 = 15000

100,000,000

Thus the sensex value at the end of next trading day is 15000.

Please note that every time one of the 30 companies has a stock split or a "bonus" etc.appropriate changes are made in the market cap calculations.

7. What is price earnings ratio ( P/E ratio) ?

ANS: - PE Ratio is a short form for Price to Earnings Ratio. This is the ratio of the market

price of a stock and its EPS. It is used to judge the valuation of a company. This ratio

shows how much the investors are willing to pay for a company for each rupee of profit.

As a rule of thumb, companies in mature industries / markets having stable growth have

a low to moderate PE ratio. Companies in high-growth industries / markets having rapid

growth have a moderate to high P E ratio.

Price Earnings ratio = Market price per shareEarnings Per Share


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8. Who are the participants in the capital market ?

ANS:- The following are the market participants in the capital market :-

(a) Foreign institutional Investors

(b) Non- Resident Indians

(c) Persons of Indian Origin

(d) Retail investors

(e) Venture capital funds

(f) Mutual Funds

(g) Private Equity

(h) High Net worth Individuals (HNIs)

(i)Financial Institutions

(j)Insurance companies

(k) Pension funds , etc.

9. What are Mutual Funds, Pension Funds and Financial Institutions ?

ANS:-The meaning of above terms is as follows:-

Pension Fund

A pension fund is a pool of assets forming an independent legal entity that are boughtwith the contributions to a pension plan for the exclusive purpose of financing pensionplan benefits.

Mutual fund

A mutual fund is a professionally managed type of collective investment scheme thatpools money from many investors and invests it in stocks, bonds, short-term moneymarket instruments, and/or other securities. The mutual fund will have a fundmanager that trades the pooled money on a regular basis. The net proceeds or losses arethen typically distributed to the investors annually.


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Financial Institution

A financial institution is an institution that provides financial services for its clients ormembers. Probably the most important financial service provided by financial institutionsis acting as financial intermediaries. Most financial institutions are

highly regulated by government bodies. Broadly speaking, there are three major types offinancial institution :-

1) Deposit-taking institutions that accept and manage deposits and make loans (thiscategory includes banks, credit unions, trust companies, and mortgageloan companies);

2) Insurance companies and pension funds; and3) Brokers, underwriters and investment funds.

10. What is the difference between FDI and FII? Which Form of

Investment is good for the economy?

ANS:-Foreign Direct Investment (FDI ) is the investment made by the foreign companies

/ investors in a company with a strategic perspective. The investment is not only made to

gain return but also made to have a say in the management of the affairs of the company.

On the other hand, Foreign Institutional Investments (FIIs) , also called as portfolio

investments are made by foreign investors primarily to get a healthy return on theirinvestment.

FDI is preferred overFII investments since it is considered to be the most beneficial form

of foreign investment for the economy as a whole. Direct investment targets a specific

enterprise, with the aim of increasing its capacity/productivity or changing its

management control. Direct investment to create or augment capacity ensures that the

capital inflow translates into additional production. In the case of FII investment that

flows into the secondary market, the effect is to increase capital availability in general,

rather than availability of capital to a particular enterprise. Translating an FII inflow into

additional production depends on production decisions by someone other than the

foreign investor some local investor has to draw upon the additional capital made

available via FII inflows to augment production. In the case of FDI that flows in for the

purpose of acquiring an existing asset, no addition to production capacity takes place as a

direct result of the FDI inflow. Just like in the case of FII inflows, in this case too, addition

to production capacity does not result from the action of the foreign investor the


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domestic seller has to invest the proceeds of the sale in a manner that augments capacity

or productivity for the foreign capital inflow to boost domestic production. There is a

widespread notion that FII inflows are hot money that it comes and goes, creating

volatility in the stock market and exchange rates. While this might be true of individual

funds, cumulatively, FII inflows have only provided net inflows of capital.

FDI tends to be much more stable than FII inflows. Moreover, FDI brings not just

capital but also better management and governance practices and, often, technology

transfer. The know-how thus transferred along with FDI is often more crucial than the

capital per se. No such benefit accrues in the case of FII inflows, although the search by

FIIs for credible investment options has tended to improve accounting and governance

practices among listed Indian companies.

The following graph shows the FDI & FII inflows in India during the last 5 years


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Chapter 3- Capital Market in India - Impact & Factors

Impact of capital market on Indian Economy:-

1. Long term finance for corporate and government :-

The capital market is the market for securities, where companies and governments can

raise long term funds. Selling stock and selling bonds are two ways to generate capital

and long term funds. It provides a new avenue to corporate and government to raise

funds for long term.

At present the central government has a large fiscal deficit of 6.8% of GDP, which comes

to around Rs. 4,00,000 cr. To finance this large deficit the government would look to

capital market . Corporates at the moment are also looking at raising funds throughcapital market.

2. Helps to bridge investment savings gap:-

It is seen mostly in case of developing countries that they suffer from investment

savings gap . This gap means that funds available fall far short of the amount needed to

stimulate economic development.Thus this gap hinders the economic growth of a

developing country like India.In such a situation capital market plays an important role .Capital market expand the investment options available in the country , which attracts

portfolio investments from abroad. Domestic savings are also facilitated by the

availability of additional investment options. This enables to bridge the gap between

investment and savings and paves the way for economic development .

Indias improving macroeconomic fundamentals, a sizeable skilled labour force and

greater integration with the world economy have increased Indias global

competitiveness, placing the country on the radar screens of investors the world over. The

global ratings agencies Moodys and Fitch have awarded India investment grade ratings,

indicating comparatively low sovereign risks. These positive dynamics have led to a

sustained surge in Indias equity markets since 2003 ,attracting sizeable capital from

foreign investors. The net cumulative portfolio flows from 2003-2006 ( bonds & equities)

amounted to $35 billion. In current year (from Jan to July) the Foreign Institutional

Investors have pumped in over $6 billion or around Rs . 29,940 cr.


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3. Cost effective mode of raising finance :-

Capital market in any country provides the corporate and government to raise long term

finance at a low cost as compared to other modes of raising finance .Therefore capital

market is important, more so for India as it embarks on the path of becoming a

developed country.

4. Provides an avenue for investors to park their surplus funds :-

Capital market provides the investors both domestic as well as foreign ,various

instruments to invest their surplus funds. Not only it provides an avenue to park surplus

funds but it also helps the investors to reap decent rewards on their investment. This

realisation has resulted in increased investments in capital market both from domestic as

well as foreign investors in Indian capital market.

Also there is an opportunity for investors to diversify their investment portfolio, as wide

range of instruments for investment are available in capital market.

5. Conducive to implementation of Monetary Policy:-

Through open Market Operation (OMO), the Reserve Bank of India controls the cost and

availability of money supply in the Indian economy.Thus when RBI follows expansionary

monetary policy it purchases government securities from the Bond market and when it

intends to contract the money supply in the economy it sells the securities from the

secondary bond market . Because of these operation there is also an impact on the

interest rates , which in turn impacts the cost of the funds in the economy. Thus capital

market helps the RBI to check the cost and availability of funds in the economy.

6.Indicates the state of the economy:-

Capital market also indicate the state of the economy. It is said to be the face of the

economy. This is so because when capital market is stable , investments flow into capital

market from within as well as outside the country , which indicates that the future

prospects of the economy are good.


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Factors affecting capital market in India :-

The capital market is affected by a range of factors . Some of the factors which influence

capital market are as follows:-

a)Performance of domestic companies:-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country. Weak corporate

earnings indicate that the demand for goods and services in the economy is less due to

slow growth in per capita income of people . Because of slow growth in demand there is

slow growth in employment which means slow growth in demand in the near future.

Thus weak corporate earnings indicate average or not so good prospects for the economy

as a whole in the near term. In such a scenario the investors ( both domestic as well asforeign ) would be wary to invest in the capital market and thus there is bear market like

situation. The opposite case of it would be robust corporate earnings and its positive

impact on the capital market.

The corporate earnings for the April June quarter for the current fiscal has been

good. The companies like TCS, Infosys,Maruti Suzuki, Bharti Airtel, ACC, ITC,

Wipro,HDFC,Binani cement, IDEA, Marico Canara Bank, Piramal Health, India cements ,

Ultra Tech, L&T, Coca- Cola, Yes Bank, Dr. Reddys Laboratories, Oriental Bank of

Commerce, Ranbaxy, Fortis, Shree Cement ,etc have registered growth in net profit

compared to the corresponding quarter a year ago. Thus we see companies from

Infrastructure sector, Financial Services, Pharmaceutical sector, IT Sector, Automobile

sector, etc. doing well . This across the sector growth indicates that the Indian economy is

on the path of recovery which has been positively reflected in the stock market( rise in

sensex & nifty) in the last two weeks. (July 13-July 24).

b)Environmental Factors :-

Environmental Factor in Indias context primarily means- Monsoon . In India around 60

% of agricultural production is dependent on monsoon. Thus there is heavy dependence

on monsoon. The major chunk of agricultural production comes from the states of

Punjab , Haryana & Uttar Pradesh. Thus deficient or delayed monsoon in this part of the

country would directly affect the agricultural output in the country. Apart from monsoon


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other natural calamities like Floods, tsunami, drought, earthquake, etc. also have an

impact on the capital market of a country.

The Indian Met Department (IMD) on 24thJune stated that India would receive only 93 %

rainfall of Long Period Average (LPA). This piece of news directly had an impact on

Indian capital market with BSE Sensex falling by0.5 % on the 25th June . The major losers

were automakers and consumer goods firms since the below normal monsoon forecast

triggered concerns that demand in the crucial rural heartland would take a hit. This is

because a deficient monsoon could seriously squeeze rural incomes, reduce the demand

for everything from motorbikes to soaps and worsen a slowing economy.

c)Macro Economic Numbers :-

The macro economic numbers also influence the capital market. It includes Index ofIndustrial Production (IIP) which is released every month, annual Inflation number

indicated by Wholesale Price Index (WPI) which is released every week, Export Import

numbers which are declared every month, Core Industries growth rate ( It includes Six

Core infrastructure industries Coal, Crude oil, refining, power, cement and finished

steel) which comes out every month, etc. This macro economic indicators indicate the

state of the economy and the direction in which the economy is headed and therefore

impacts the capital market in India.

A case in the point was declaration of core industries growth figure. The six Core

Infrastructure Industries Coal, Crude oil, refining, finished steel, power & cement grew

6.5% in June , the figure came on the 23 rd of July and had a positive impact on the

capital market with the sensex and nifty rising by388 points & 125 points respectively.

d)Global Cues :-

In this world of globalisation various economies are interdependent and interconnected.

An event in one part of the world is bound to affect other parts of the world , however

the magnitude and intensity of impact would vary.

Thus capital market in India is also affected by developments in other parts of the world

i.e. U.S. , Europe, Japan , etc.

Global cues includes corporate earnings of MNCs, consumer confidence index in

developed countries, jobless claims in developed countries, global growth outlook given


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by various agencies like IMF, economic growth of major economies, price of crude oil,

credit rating of various economies given by Moodys, S & P, etc.

An obvious example at this point in time would be that of subprime crisis & recession .

Recession started in U.S. and some parts of the Europe in early 2008 .Since then it has

impacted all the countries of the world- developed, developing , less- developed and even

emerging economies.

e)Political stability and government policies:-

For any economy to achieve and sustain growth it has to have political stability and pro-

growth government policies. This is because when there is political stability there is

stability and consistency in governments attitude which is communicated through

various government policies. The vice- versa is the case when there is no politicalstability .So capital market also reacts to the nature of government , attitude of

government, and various policies of the government.

The above statement can be substantiated by the fact the when the mandate came in

UPA governments favour ( Without the baggage of left party) on May 16 2009, the stock

markets on Monday , 18th May had a bullish rally with sensex closing 800 point higher

over the previous days close. The reason was political stability. Also without the baggage

of left party government can go ahead with reforms.

f)Growth prospectus of an economy:-

When the national income of the country increases and per capita income of people

increases it is said that the economy is growing . Higher income also means higher

expenditure and higher savings.This augurs well for the economy as higher expenditure

means higher demand and higher savings means higher investment. Thus when an

economy is growing at a good pace capital market of the country attracts more money

from investors, both from within and outside the country and vice -versa. So we can say

that growth prospects of an economy does have an impact on capital markets.


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g)Investor Sentiment and risk appetite :-

Another factor which influences capital market is investor sentiment and their risk

appetite .Even if the investors have the money to invest but if they are not confident

about the returns from their investment , they may stay away from investment for some

time.At the same time if the investors have low risk appetite , which they were having in

global and Indian capital market some four to five months back due to global financial

meltdown and recessionary situation in U.S. & some parts of Europe , they may stay away

from investment and wait for the right time to come.

Chapter 4 Equity Reserarch

If a particular investor buys the same securities as other people, he will have the same

results as other people. It is impossible to produce a superior performance unless that

investor does something different from the majority. To buy when others are

despondently selling and to sell when others are greedily buying requires the greatest

fortitude and pays the greatest reward. Bear markets have always been temporary. And so

have bull markets. Share prices usually turn upward from one to twelve months before

the bottom of the business cycle and vice versa. If a particular industry or type of security

becomes popular with investors, that popularity will always prove temporary and, when

lost, may not return for many years.

The investor should bear in mind that while he makes investment decision, he

should have idea of the companys break-even point and companys position in the stock

exchange. For this EQUITY RESEARCH is done. Equity Research does the research of

companys income and growth. In the process, it uses the various sources of financial

information available in the country and accordingly advises in which company an

investor should invest.


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Thus Equity Research Involves:-

FUNDAMENTALANALYSIS :-

The investor while buying stock has the primary purpose of gain. If he invests for a

short period of time it is speculative but when he holds it for a fairly long period of timethe anticipation is that he would receive some return on his investment. Fundamental

analysis is a method of finding out the future price of a stock, which an investor wishes to

buy. The method for forecasting the future behavior of investments and the rate of return

on them is clearly through an analysis of the broad economic forces in which they

operate. The kind of industry to which they belong and the analysis of the company's

internal working through statements like income statement, balance sheet and statement

of changes of income. The fundamental analysis involves

(a) CompanyAnalysis

(b) IndustryAnalysis

(C) EconomicAnalysis.

Equity Research

Fundamental Analysis TechnicalAnalysis

EconomicAnalysisCompanyAnalysis IndustrialAnalysis


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(a) CompanyAnalysis:-

Company analysis is a study of the variables that influence the future of a firm

both qualitatively and quantitatively. It is a method of assessing the competitive position

of a firm earning and profitability, the efficiency with which it operates and its financial

position with respect to the earning to its shareholders. The fundamental nature of this

analysis is that each share of a company has an intrinsic value, which is dependent on the

company's financial performance, quality of management and record of its earnings and

dividend. They believe that the market price of share in a period of time will move

towards its intrinsic value. If the market price of a share is lower than the intrinsic value,

as evaluated by the fundamental analysis, then the share is supposed to be undervalued

and it should be purchased but if the current market price shows that it is more than

intrinsic value then according to the theory the share should be sold. This basic approach

is analyzed through the financial statements of an organization. The basic financial

statements, which are required as tools of the fundamental analyst, are the income

statement, the balance sheet, and the statement of changes in financial position. These

statements are useful for investors, creditors as well as internal management of a firm and

on the basis these statements the future course of action may be taken by the investors of

the firm.

While evaluating a company, its statement must be carefully judged to find out that they

are:

i) Correct,

ii) Complete,

iii) Consistent and

iv) Comparable.

(b)IndustryAnalysis:-

The industry has been defined as homogeneous groups of people doing a similar kind of

activity or similar work. In India, the broad classification of industry is made according to

stock exchange list, which is published. This gives a distinct classification to industry to

industry in different forms such as:

Engineering,

Banking and Insurance,


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Textiles,

Cement,

Steel Mills and Alloys,

Chemicals and Pharmaceuticals,

Retail,

Sugar,

Information Technology,

Automobiles and Ancillary,

Telecommunications,

FMCG,

Miscellaneous.

Industry should also be evaluated or analyzed through its life cycle. Industry life cycle

may also be studied through the industrial life cycle state.

There are generally three stages of an industry. These stages are pioneering stage,

expansion stage and stagnation stage.

1. THE PIONEERING STAGE: -

The industrial life cycle has a pioneering stage when the new inventions and

technological developments take place. During this time the investor will notice great

increase in the activity of the firm. Production will rise and in relation to production,

there will be a great demand for the product. At this stage, the profits are also very high

as the technology is new. Taking a look at the profit many new firms enter into the same

field till the market becomes competitive. The market competitive pressures keep on

increasing with the entry of new-firms and the prices keep on declining and then

ultimately profits fall. At this stage all firms compete with each other and only a few

efficient firms are left to run the business and most of the other firms are wiped out in the

pioneering stage itself.


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demand like refrigerators and cars. Likewise, investors should prefer to invest in

industries, which have a large amount of labor force because in the future such industries

will bring better rates of return.

2. RESEARCHAND TECHNOLOGICAL DEVELOPMENTS: -

The economic forces relating to investments would be depending on the amount

of resources spent by the government on the particular technological development

affecting the future. Broadly the investor should invest in those industries which are

getting a large amount of share in the funds of the development of the country. For

example, in India in the present context automobile industries and spaces technology are

receiving a greater attention. These may be areas, which the investor may consider for

investments.

3. CAPITAL FORMATION: -

Another consideration of the investor should be the kind of investment that a

company makes in capital goods and the capital it invests in modernization and

replacement of assets. A particular industry or a particular company which an investor

would like to invest can also be viewed at with the help of the economic indicators such

as the place, value and property position of the industry, group to which it belongs and

the year-to-year returns through corporate profits.

4. NATURAL RESOURCESAND RAW MATERIALS: -

The natural resources are to a large extent are responsible for a country's economicdevelopment and overall improvement in the condition of corporate growth. In India,

technological discoveries recycling of materials, nuclear and solar energy and new

synthetics should give the investor an opportunity to invest in untapped or recently

tapped resources which would also produce higher investment opportunity.


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TECHNICALANALYSIS

Technical analysis is simply the study of prices as reflected on price charts. Technical

analysis assumes that current prices should represent all known information about the

markets. Prices not only reflect intrinsic facts, they also represent human emotion and

the pervasive mass psychology and mood of the moment. Prices are, in the end, a

function of supply and demand. However, on a moment to moment basis, human

emotions,fear, greed, panic, hysteria, elation, etc. also dramatically affect prices. Markets

may move based upon peoples expectations, not necessarily facts. A market "technician"

attempts to disregard the emotional component of trading by making his decisions based

upon chart formations, assuming that prices reflect both facts and emotion. Analysts use

their technical research to decide whether the current market is a BULL MARKET or a

BEAR MARKET.

Various aspects of Technical analysis

1. STOCK CHARTS

A stock chart is a simple two-axis (X-Y) plotted graph of price and time. Each individual

equity, market and index listed on a public exchange has a chart that illustrates this

movement of price over time. Individual data plots for charts can be made using the

CLOSING price for each day. The plots are connected together in a single line, creating

the graph. Also, a combination of the OPENING, CLOSING, HIGH and/or LOW prices for

that market session can be used for the data plots. This second type of data is called a

PRICE BAR. Individual price bars are then overlaid onto the graph, creating a dense visualdisplay of stock movement. Stock charts can be drawn in two different ways. An

ARITHMETIC chart has equal vertical distances between each unit of price. A

LOGARITHMIC chart is a percentage growth chart.

2. TRENDS

The stock chart is used to identify the current trend. A trend reflects the average rate of

change in a stock's price over time. Trends exist in all time frames and all markets. Trends

can be classified in three ways: UP, DOWN or RANGEBOUND. In an uptrend, a stock

rallies often with intermediate periods of consolidation or movement against the trend. In

doing so, it draws a series of higher highs and higher lows on the stock chart. In an

uptrend, there will be a POSITIVE rate of price change over time. In a downtrend, a stock

declines often with intermediate periods of consolidation or movement against the trend.

In doing so, it draws a series of lower highs and lower lows on the stock chart. In a

downtrend, there will be a NEGATIVE rate of price change over time. Range bound price


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swings back and forth for long periods between easily seen upper and lower limits. There

is no apparent direction to the price movement on the stock chart and there will be

LITTLE or NO rate of price change.

Trends tend to persist over time. A stock in an uptrend will continue to rise until some

change in value or a condition occurs. Declining stocks will continue to fall until some

change in value or conditions occur. Chart readers try to locate TOPS and BOTTOMS,

which are those points where a rally or a decline ends. Taking a position near a top or a

bottom can be very profitable. Trends can be measured using TRENDLINES. Very often a

straight line can be drawn UNDER three or more pullbacks from rallies or OVER

pullbacks from declines. When price bars return to that trend line, they tend to find

SUPPORT or RESISTANCE and bounce off the line in the opposite direction.

3. VOLUME:-

Volume measures the participation of the crowd. Stock charts display volume through

individual HISTOGRAMS below the price pane. Often these will show green bars for up

days and red bars for down days. Investors and traders can measure buying and selling

interest by watching how many up or down days in a row occur and how their volume

compares with days in which price moves in the opposite direction. Stocks that are

bought with greater interest than sold are said to be under ACCUMULATION. Stocks

that are sold with great interest than bought are said to be under DISTRIBUTION.

Accumulation and distribution often LEAD to price movement. In other words, stocks

under accumulation often will rise some time after the buying begins. Alternatively,

stocks under distribution will often fall some time after selling begins. It takes volume for

a stock to rise but it can fall of its own weight. Rallies require the enthusiastic

participation of the crowd. When a rally runs out of new participants, a stock can easily

fall. Investors and traders use indicators such as ON BALANCE VOLUME to see whether

participation is lagging (behind) or leading (ahead) the price action. Stocks trade daily

with an average volume that determines their LIQUIDITY. Liquid stocks are very easy for

traders to buy and sell. Liquid stocks require very high SPREADS (transaction costs) to

buy or sell and often cannot be eliminated quickly from a portfolio. Stock chart analysis

does not work well on illiquid stocks.

4.PATTERNS AND INDICATORS

Charts allow investors and traders to look at past and present price action in order to

make reasonable predictions and wise choices. It is a highly visual medium. This one fact

separates it from the colder world of value-based analysis. The stock chart activates both

left-brain and right-brain functions of logic and creativity. So it's no surprise that over the


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last century two forms of analysis have developed that focus along these lines of critical

examination. The oldest form of interpreting charts is PATTERN ANALYSIS. This method

gained popularity through both the writings of Charles Dow and Technical Analysis of

Stock Trends, a classic book written on the subject just after World War II. The newer

form of interpretation is INDICATOR ANALYSIS, a math-oriented examination in whichthe basic elements of price and volume are run through a series of calculations in order to

predict where price will go next. Pattern analysis gains its power from the tendency of

charts to repeat the same bar formations over and over again. These patterns have been

categorized over the years as having a bullish or bearish bias. Some well-known ones

include HEAD and SHOULDERS, TRIANGLES, RECTANGLES, DOUBLE TOPS, DOUBLE

BOTTOMS and FLAGS. Also, chart landscape features such as GAPS and TRENDLINES

are said to have great significance on the future course of price action. Indicator analysis

uses math calculations to measure the relationship of current price to past price action.

Almost all indicators can be categorized as TREND-FOLLOWING or OSCILLATORS.

Popular trend-following indicators include MOVING AVERAGES, ON BALANCE

VOLUME and MACD. Common oscillators include STOCHASTICS, RSI and RATE OF

CHANGE. Trend-following indicators react much more slowly than oscillators. They look

deeply into the rear view mirror to locate the future. Oscillators react very quickly to

short-term changes in price, flipping back and forth between OVERBOUGHT and

OVERSOLD levels. Both patterns and indicators measure market psychology. The core of

investors and traders that make up the market each day tend to act with a herd mentality

as price rises and falls. This "crowd" tends to develop known characteristics that repeat

themselves over and over again. Chart interpretation using these two important analysis

tools uncovers growing stress within the crowd that should eventually translate into price

change.

5. MOVING AVERAGES

The most popular technical indicator for studying stock charts is the MOVING

AVERAGE. This versatile tool has many important uses for investors and traders. Take the

sum of any number of previous CLOSE prices and then divide it by that same number.

This creates an average price for that stock in that period of time. A moving average can

be displayed by re-computing this result daily and plotting it in the same graphic pane asthe price bars. In other words, if price starts to move sharply upward or downward, it will

take some time for the moving average to "catch up". Plotting moving averages in stock

charts reveals how well current price is behaving as compared to the past. The power of

the moving average line comes from its direct interaction with the price bars. Current

price will always be above or below any moving average computation. When it is above,

conditions are "bullish". When below, conditions are "bearish". Additionally, moving


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averages will slope upward or downward over time. This adds another visual dimension

to a stock analysis. Moving averages define STOCK TRENDS. They can be computed for

any period of time. Investors and traders find them most helpful when they provide input

about the SHORT-TERM, INTERMEDIATE and LONG-TERM trends. For this reason,

using multiple moving averages that reflect these characteristics assist important decisionmaking. Commons moving average settings for daily stock charts are 20 days for short

term, 50 days for intermediate and 200 days for long-term. One of the most common buy

or sell signals in all chart analysis is the MOVING AVERAGE CROSSOVER. These occur

when two moving averages representing different trends. For example, when a short-term

average crosses BELOW a long-term one, a SELL signal is generated. Conversely, when a

short-term crosses ABOVE the long-term, a BUY signal is generated. Moving averages can

be "speeded up" through the application of further math calculations. Common averages

are known as SIMPLE or SMA. These tend to be very slow. By giving more weight to the

current changes in price rather than those many bars ago, a faster EXPONENTIAL or

EMA moving average can be created. Many technicians favor the EMA over the SMA.

Fortunately all common stock chart programs, online and offline do the difficult moving

average calculations but plot price perfectly.

6. SUPPORT AND RESISTANCE

The concept of SUPPORT AND RESISTANCE is essential to understanding and

interpreting stock charts. Just as a ball bounces when it hits the floor or drops after being

thrown to the ceiling, support and resistance defines natural boundaries for rising and

falling prices. Buyers and sellers are constantly in battle mode. Support defines that levelwhere buyers are strong enough to keep price from falling further. Resistance defines that

level where sellers are too strong to allow price to rise further. Support and resistance

play different roles in up-trends and down-trends. In an uptrend, support is where a

pullback from a rally should end. In a downtrend, resistance is where a pullback from a

decline should end. Support and resistance are created because price has memory. Those

prices where significant buyers or sellers entered the market in the past will tend to

generate a similar mix of participants when price again returns to that level. When price

pushes above resistance, it becomes a new support level. When price falls below support,

that level becomes resistance. When a level of support or resistance is penetrated, pricetends to thrust forward sharply as the crowd notices the BREAKOUT and jumps in to buy

or sell. When a level is penetrated but does not attract a crowd of buyers or sellers, it

often falls back below the old support or resistance. This failure is known as a FALSE

BREAKOUT. Support and resistance come in all varieties and strengths. They most often

manifest as horizontal price levels. But trend lines at various angles represent support and

resistance as well. The length of time that a support or resistance level exists determines


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the strength or weakness of that level. The st

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