Chapter 1245667856y5r65.docx

CHAPTER 1

1.1 INTRODUCTION TO STOCK MARKET AND STOCK EXCHANGES:

a) Stock Markets: Stock Market is a market where the trading of company stock, both listed securities and unlisted takes place. It is different from stock exchange because it includes all the national stock exchanges of the country. For example, we use the term, "the stock market was up today" or "the stock market bubble."

b) Stock Exchanges:

Stock Exchanges are an organized marketplace, either

corporation or mutual organization, where members of the organization gather to trade company stocks or other securities. The members may act either as agents for their customers, or as principals for their own accounts.

Stock exchanges also

facilitates for the issue and redemption of securities and other financial instruments including the payment of income and dividends. The record keeping is central but trade is linked to such physical place because modern markets are computerized. The trade on an exchange is only by members and stock broker do have a seat on the exchange.

1.2 HISTORY OF INDIAN STOCK MARKET:

Indian stock market marks to be one of the oldest stock market in Asia. It dates back to the close of 18th century when the East India Company used to transact loan securities. In the 1830s, trading on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading was broad but the brokers were hardly half dozen during 1840 and 1850. An informal group of 22 stockbrokers began trading under a banyan tree opposite the Town Hall of Bombay from the mid-1850s, each investing a (then) princely amount of Rupee 1. In 1860, the exchange flourished with 60 brokers. In fact the 'Share Mania' in India began with the American Civil War broke and the cotton supply from the US to Europe stopped. Further the brokers increased to 250. The informal group of stockbrokers organized themselves as the The Native Share and Stockbrokers Association which, in 1875, was formally organized as the Bombay Stock Exchange (BSE). Premchand Roychand was a leading stockbroker of that time, and he assisted in setting out traditions, conventions, and procedures for the trading of stocks at Bombay Stock Exchange and they are still being followed. Several stock broking firms in Mumbai were family run enterprises, and were named after the heads of the family. The following is the list of some of the initial members of the exchange, and who are still running their respective business: •

D.S. Prabhudas & Company (now known as DSP, and a joint venture partner with Merrill Lynch)

•

Jamnadas Morarjee (now known as JM)

•

Champaklal Devidas (now called Cifco Finance)

In Indian Stock Market NSE and BSE are the main stock exchanges in India are as follows:

NATIONAL STOCK EXCHANGE OF INDIA The National Stock Exchange (NSE) is a stock exchange located at Mumbai, Maharashtra, India. It is the 9th largest stock exchange in the world by market capitalization and largest in India by daily turnover and number of trades, for both equities and derivative trading. NSE has a market capitalization of around US$1.59 trillion and over 1,552 listings as of December 2010. Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are the two most significant stock exchanges in India and between them are responsible for the vast majority of share transactions. 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.NSE is mutually-owned by a set of leading financial institutions, banks,insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities. There are at least 2 foreign investors NYSE Euronext and Goldman Sachs who have taken a stake in the NSE. As of 2006, the NSE VSAT terminals, 2799 in total, cover more than 1500 cities across India. NSE is the third largest Stock Exchange in the world in terms of the number of trades in equities. It is the second fastest growing stock exchange in the world with a recorded growth of 16.6percent.

Type

National Stock Exchange

Location

Mumbai, India

Coordinates

19°3'37N 72°51'35E

Founded

1992

Owner

National Stock Exchange of India Limited

Key people

Ravi Narain (MD)

Currency

Indian rupee ()

No. of listings

1,552

Market Cap

US$1.59 trillion (Dec 2010)

Indexes

S&P CNX Nifty CNX Nifty Junior S&P CNX 500

Website

Mission

www.nse-india.com

NSE's mission is setting the agenda for change in the securities markets in India. The NSE was set-up with the main objectives of: •

establishing a nation-wide trading facility for equities, debt instruments and hybrids,

•

ensuring equal access to investors all over the country through an appropriate communication network.

•

providing a fair, efficient and transparent securities market to investors using electronic trading systems,

•

enabling shorter settlement cycles and book entry settlements systems, and meeting the current international standards of securities markets.

•

The standards set by NSE in terms of market practices and technology have become industry benchmarks and are being emulated by other market participants. NSE is more than a mere market facilitator. It's that force which is guiding the industry towards new horizons and greater opportunities.

National Securities Clearing Corporation Ltd. (NSCCL) The National Securities Clearing Corporation Ltd. (NSCCL), a wholly owned subsidiary of NSE, was incorporated in August 1995. It was set up to bring and sustain confidence in clearing and settlement of securities; to promote and maintain, short and consistent settlement cycles; to provide counter-party risk guarantee, and to operate a tight risk containment system. NSCCL commenced clearing operations in April 1996. NSCCL carries out the clearing and settlement of the trades executed in the Equities and Derivatives segments and operates Subsidiary General Ledger (SGL) for settlement of trades in government securities. It assumes the counterparty risk of each member and guarantees financial settlement. It also undertakes settlement of transactions on other stock exchanges like, the Over the Counter Exchange of India. NSCCL has successfully brought about an up-gradation of the clearing and settlement procedures and has brought Indian financial markets in line with international markets.

S&P NIFTY: The Standard & Poor's CNX Nifty stock index is endorsed by Standard & Poor's and composed of 50 of the largest and most liquid stocks found on the National Stock Exchange (NSE) of India. It is commonly used to represent the market for benchmarking Indian investments. Similar to other major stock indexes like the S&P 500, companies must meet certain requirements in terms of market capitalization and liquidity before they can be considered for inclusion in the index.

HOW NIFTY50 IS CALCULATED ? Nifty is simply a trade mark or market index used by National Stock Exchange of India. Nifty covers fifty stocks from various segments of the market. This is the reason why nifty is highly versatile and diversified. Nifty is calculated using the – “FREE FLOAT MARKET CAPITALIZATION“ methodology. In this methodology or technique, nifty level at any point of time reflects the free-float market. The base period of NIFTY is 1995 and the base value is 1000 index points. The mathematical formula for calculating nifty is-: NIFTY50 = (sum of free flow market capital of 50 most liquid stocks)*index factor

Where, Index factor = 1000/market capital value in 1995 For instance, Suppose nifty has only two stocks namely ABC and XYZ. Total stocks in ABC are 600 out of which 200 are held by promoters and 400 are available for public trading. Similarly, let the total stocks of XYZ are 400 out of which 100 are held by the promoters and 300 are available for public trading. Assume price of ABC stock is Rs. 100 and that of XYZ stock be Rs. 200. Then, the free floating market capital of these two companies will be-: (400*100+300*200) = 40,000 + 60,000 = Rs. 1,00,000 Let the market capital in year 1995 be Rs. 90,000. Then, NIFTY= 1,00,000*1000/90,000 = 1111. This is exactly the same how NIFTY is calculated except the fact that it has an inclusion of fifty stocks.

BOMBAY STOCK EXCHANGE:

Established in 1875, BSE (formerly known as Bombay Stock Exchange Ltd.), is Asia's first & the Fastest Stock Exchange in world with the speed of 6 micro seconds and one of India's leading exchange groups. Popularly known as BSE, the bourse was

established as "The Native Share & Stock Brokers' Association" in 1875. BSE is a corporatized and demutualised entity, with a broad shareholder-base which includes two leading global exchanges, Deutsche Bourse and Singapore Exchange as strategic partners. BSE provides an efficient and transparent market for trading in equity, debt instruments, derivatives, mutual funds. It also has a platform for trading in equities of small-and-medium enterprises (SME). The BSE Ltd, the oldest stock exchange in Asia had a very humble beginning under a Banyan Tree in Mumbai’s town hall. The stock exchange was started by four Gujaratis and one Parsi and gradually the group grew. As the number of brokers was continuing increasing the venue of their meeting changed many times. In 1874, the group finally moved to Dalal Street and in 1875 the group became an official organization known as The Native Share and Stockbrokers Association. By 1956, the BSE became the first stock exchange to be recognized by the government of India under the Securities Contracts Regulation Act. By 1986, the BSE had developed the BSE SENSEX which made it easy for the BSE to measure the overall performance of the exchange. In 2000, the BSE used this index to open its derivatives markets, trading SENSEX futures contracts. The development of SENSEX options along with equity derivatives in 2001 and 2002 expanded the BSE’s trading options. Since its inception in 1857, the BSE was an open-floor trading exchange, the BSE switched to an electronic trading system in 1995. BSE is the first exchange in India and second in the world to obtain an ISO 9001:2000 certifications.

WHAT IS SENSEX ? Sensex, otherwise known as the S&P BSE Sensex index, is the benchmark index of the Bombay Stock Exchange (BSE) in India. Sensex is composed of 30 of the largest and most actively-traded stocks on the BSE, providing an accurate gauge of India's economy. Initially compiled in 1986, the Sensex is the oldest stock index in India. Analysts and investors use the Sensex to observe the overall growth, development of particular industries, and booms and busts of the Indian economy.

How SENSEX is calculated ? The formula for calculating the SENSEX = (Sum of free flow market cap of 30 benchmark stock)* Index Factor where, Index Factor = 100/Market Cap Value in 1978-79. 100 is the Index value during 1978-79. Example: Assume SENSEX has only 2 stocks namely SBI and RELIANCE. Total shares in SBI are 500 out of which 200 are held by Government and only 300 are available for public trading. RELIANCE has 1000 shares out of which 500 are held by promoters and 500 are available for trading. Assume price of SBI Stock is Rs.100 and Reliance is Rs.200. Then "free-Floating Market Cap" of these 2 companies =(300*100+500*200) Assume Then

Market

= Cap

SENSEX

30000+100000 during =

the

year

= 1978-79

130000*100/25000

Rs.

130000

was

Rs.25000

=

520.

The methodology in the example is exactly followed to calculate the SENSEX, only difference being the inclusion of 30 stocks.

OTC EXCHANGE OF INDIA OTC Exchange of India (OTCEI) also known as Over-the-Counter Exchange of India based in Mumbai, Maharashtra. It is the first exchange for small companies. It is the first screen based nationwide stock exchange in India. It was set up to access high-technology enterprising promoters in raising finance for new product development in a cost effective manner and to provide transparent and efficient trading system to the investors.OTCEI is promoted by the Unit Trust of India, the Industrial Credit and Investment Corporation of India, the Industrial Development Bank of India, the Industrial Finance Corporation of India and others and is a recognized stock exchange under the SCR Act.

Type

Stock Exchange

Location

Mumbai, India

Founded

1990

Owner

OTC Exchange of India

Key people Mr. Praveen Mohnot, MD Currency

Indian rupee

MADRAS STOCK EXCHANGE The Madras Stock Exchange is a stock exchange in Madras, (Chennai), and India. The Madras Stock Exchange (MSE) is the fourth Stock Exchange to be established in the country, and the first in South India. It had a turnover (2001) of Rs 109 crores (25 million USD), but is a fraction

(below 0.1percent) of the turnover generated by the Bombay Stock Exchange and National Stock Exchange of India. In 1996, the MSE was fully computerized and online trading became operational, as the MSE was connected to 120 broking offices in and around Chennai through Wide Area Networking. The MSE has about 120 live members and 1,785 companies listed. The exchange follows the Rolling Settlement system, as per the January 2000 SEBI (Securities Exchange Board of India) Guidelines and a proactive Grievance Cell is operational. By this system, investors can log in their complaints, for which a number will be given for further reference, through which investors can keep track of the action taken by the exchange as regards their complaint.A subsidiary company - MSE Financial Services Ltd, has been established. A member of the Bombay Stock Exchange, MSE Financial Services will help create greater broker and investor flexibility through multi-market access. Hereafter the members will be able to trade in both BSE and MSE. This will be followed up with National Stock Exchange (NSE) membership. Live trading at the MSE takes place from 10.00 am to 3.30 pm.

AHMEDABAD EXCHANGE STOCK Ahmedabad Stock Exchange or ASE is the second oldest exchange of India located in the city of Ahmedabad in the western part of the country. It is recognized by Securities Contract (Regulations) Act, 1956 as permanent stock exchange. It has adopted a Swastika in its logo which is one of the most auspicious symbols of Hinduism depicting wealth and

prosperity. Ahmedabad Stock Exchange Limited is a premier national equities exchange that plays a key role in the Indian securities markets. Serving individual and institutional investors from around the world, its primary business is the trading of approximately 2000 nationally listed equities. The Exchange also trades over 200 high growth companies that are solely listed on the ASE or dually listed with another exchange.

1.4Evolution of Stock Exchanges in India

Stock exchange

Year incorporation

Bombay stock exchange

1894

Calcutta stock exchange

1908

Madras stock exchange

1920

Bengal

share

and

stock 1937

exchange Ltd. Indian stock exchange Ltd. Uttar

Pradesh

1938

stock 1940

exchange Nagpur stock exchange

1940

of

Hyderabad stock exchange 1944 Ltd. Bangalore stock exchange

1963

National stock exchange

1992

1.5 LPG IN INDIAN STOCK MARKET: The economy of India had undergone significant policy shifts in the beginning of the 1990s. This new model of economic reforms is commonly known as the LPG or Liberalisation, Privatisation and Globalisation model. The primary objective of this model was to make the economy of India the fastest developing economy in the globe with capabilities that help it match up with the biggest economies of the world.The chain of reforms that took place with regards to business, manufacturing, and financial services industries targeted at lifting the economy of the country to a more proficient level. These economic reforms had influenced the overall economic growth of the country in a significant manner.

Liberalization:

Liberalisation refers to the slackening of government regulations. The economic liberalisation in India denotes the continuing financial reforms which began since July 24, 1991. The basic aim of liberalization was to put an end to those restrictions which became hindrances in the development and growth of the nation. The loosening of government control in a country and when private sector companies’ start working without or with fewer restrictions and government allow private players to expand for the growth of the country depicts liberalization in a country.

Objectives of Liberalization Policy •

To increase competition amongst domestic industries.

•

To encourage foreign trade with other countries with regulated imports and exports.

•

Enhancement of foreign capital and technology.

•

To expand global market frontiers of the country.

•

To diminish the debt burden of the country.

Privatization: This is the second of the three policies of LPG. It is the increment of the dominating role of private sector companies and the reduced role of public sector companies. In other words, it is the reduction of ownership of the management of a government-owned enterprise. Government companies can be converted into private companies in two ways: •

By disinvestment

•

By withdrawal of governmental ownership and management of public sector companies.

Objectives of Privatization: • Improve the financial situation of the government. • Reduce the workload of public sector companies. • Raise funds from disinvestment. •

Increase the efficiency of government organizations. • Provide better and improved goods and services to the consumer. • Create healthy competition in the society.

Globalization: It means to integrate the economy of one country with the global economy. During Globalization the main focus is on foreign trade & private and institutional foreign investment. It is the last policy of LPG to be implemented.

Globalization as a term has a very complex phenomenon. The main aim is to transform the world towards independence and integration of the world as a whole by setting various strategic policies. Globalization is attempting to create a borderless world, wherein the need of one country can be driven from across the globe and turning into one large economy.

Outsourcing as an Outcome of Globalization: The most important outcome of the globalization process is Outsourcing. During the outsourcing model, a company of a country hires a professional from some other country to get their work done, which was earlier conducted by their internal resource of their own country. The best part of outsourcing is that the work can be done at a lower rate and from the superior source available anywhere in the world. Services like legal advice, marketing, technical support, etc. As Information Technology has grown in the past few years, the outsourcing of contractual work from one country to another has grown tremendously. As a mode of communication has widened their reach, all economic activities have expanded globally.

INDIAN STOCK MARKET BEFORE LPG

Before liberalization, Privatization and Globalization Indian economy was tightly controlled and protected by number of measures like licensing system, high tariffs and rates, limited investment in core sectors only. During 1980’s, growth of economy was

highly unsustainable because of its dependence on borrowings to correct the current account deficit. To reduce the imbalances, the government of India introduced economic policy in 1991 to implement structural reforms. The financial sector at that time was much unstructured and its scope was limited only to bonds, equity, insurance, commodity markets, mutual and pension funds. In order to structure the security market, a regulatory authority named as SEBI (Security Exchange Board of India) was introduced and first electronic exchange National Stock Exchange also set up. The purpose behind this was to regularize investments, mobilization of resources and to give credit. The Indian stock market mainly functions on two major stock exchanges, the BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). In terms of market capitalization, BSE and NSE have a place in top five stock exchanges of developing economies of the world. Out of total fourteen stock exchanges of emerging economies, BSE stood at fourth position 2 with market capitalization of $1,101.87b as on June, 2012 and NSE at fifth position with market capitalization of $1079.39b as on June, 2012.

NEED AND IMPACT OF NEW ECONOMIC POLICY, 1991 IN INDIA: Introduction Due to continuous increase in government expenditure, high growth of imports, insufficiency of foreign exchange reserves and high level of inflations, India decides to take a historical step of changing trade in 1991. It embarked on a comprehensive reform of the economy Out of Liberalization, Privatization and Globalization the first two are policy strategies and the third one is the outcome of these strategies. These three expressions are the supporting pillars, on which the structure of New Economic Policy of the government has been erected and implemented since 1991. Therefore, we have to understand the positive and negative impacts of these and find out the ways and challenges of adopting new economic policy and how to overcome from its demerits.

Background and reasons for economic reforms of 1991

The economic condition of India in the year 1991 was miserable. It was due to the cumulative effects of number of reasons. Therefore economic reforms were introduced in India as 1991 was the year of crises for the Indian economy. The main reasons were as follows:i) National income was growing just at a rate of 0.8%, ii) Inflation reaches the height from 6.7% to 16.8%, iii) Balance of payment crises was to the extent of 10,000 crores. Balance of payments deficit was estimates at Rs 2,214 crore in 1980-81, which rose to high level of Rs 17,367 crore in 1990-91, iv) India was highly indebted country. It was paying 30,000 crores interest charging per year, v) Foreign exchange reserves were only 1.8 billion dollars which were sufficient for three weeks. Forex reserves that were Rs 8,151 crore in 1986-87, decline sharply to Rs 6,252 crore in 1989-90, vi) India sold large amount of gold to Bank of England, vii) India applied for the loan from World Bank and IMF (International Monetary Fund) to avail this loan, Indian government also agree to the conditions of World Bank and IMF (International Monetary Fund) and announced the New Economic Policy, viii) Fiscal deficit was more than 7.5%, ix) Deficit financing was around 3%, x) Trade relations with soviet block had broken down, xi) India used to receive huge amount of remittance from gulf countries in foreign exchange. But, remittance from non-residence Indians stopped due to war in gulf countries, xii) Prices of petroleum products was very high on account of Iraq war in 1990-91, xiii) The PSU’s (Public Sector Undertakings) in India were facing the problem of low productivity and poor rates of return. In 1951, there were just 5 enterprises in public

sector in India which rose to 232 in 1991. Several thousand crores of rupees were invested in their growth and development. In the initial 15 years their performance was quite satisfactory but thereafter most of these started recording losses. Because of their poor performances, public sector undertaking degenerates into a liability. On account of these factors it became imperative for the government to adopt New Economic Policy or initiate reforms policies. The government was left with no option but to approach World Bank and IMF (International Monetary Fund) for economic asylum. To manage the crises, India was granted a loan for 7 billion dollars. But, before granting loan to India, World Bank and IMF (International Monetary Fund) expected India to liberalize and open up the economy by removing restrictions on the private sector, reducing the role of the government in many areas and removing trade restrictions, Liberalization, Privatization and Globalization were three basic elements of the New Economic Policy (NEP, 1991) or New Economic Reforms. Out of Liberalization, Privatization and Globalization the first two are policy strategies and the third one is the outcome of these strategies. These three expressions are the supporting pillars, on which the structure of New Economic Policy of the government has been erected and implemented since 1991. This is popularly known as LPG model of growth.

Characteristics of Stock Market :

There are some most important characteristics of Stock market which are as below: i) Stock Market is a market, where securities of corporate bodies, government and semi-government bodies are bought and sold. ii) This market deals with shares, debentures bonds and such securityes already issued by the companies. It also deals with existing or second hand securities and hence it is called secondary market. iii) Stock Exchange does not buy or sell any securities on its own account. It merely provided the necessary infranstructure and facilities for trade in securities to its

members and brokers who trade in securities. It also regulates the trade activities so as to ensure free and fair trade. iv) NSE maintain an official list of securities that could be purchased and sold on its floor. Securities which do not figure in the official list of stock market or exchange are called unlisted securities. Such unlisted securities cannot be traded in the stock exchange. v) All the transactions in securities at the stock exchange are affected only through its authorised brokers and members. Outsiders or direct investors are not allowed to enter in the leading circles of the stock exchange. Investors have to buy or sell the securities at the stock exchange through the authorised brokers only. vi) A stock exchange is an association of persons or body of individuals which may be registered or unregistered. vii) Stock Market is an organised market and requires recognition from the Central Government. viii) Buying and selling transactions in securities at the stock market are governed by the rules and regulations of stock market as well as SEBI Guidelines. No deviation from the rules and guidelines is allowed in any case. ix) This market is a particular market place where authorised brokers come together daily on the floor of market called trading circles and conduct trading activities. The prices of different securities traded are shown on electronic boards. After the working hours market is closed. All the working of stock exchanges is conducted and controlled through computers and electronic system. x) NSEs are the financial barometer and development indicators of national economy of the country. Industrial growth and stability is reflected in the Index of Stock Exchange (ISE).

CHAPTER 2 RESEARCH & METHODOLOGY

The data used for the analysis of stock market development after liberalisation period has been collected from hand book of statistics on Indian Economy by SEBI. Economy wide data has been collected from the annual reports and other publications of RBI. Besides this other information regarding stock market development has been obtained from NIC, economic surveys and other published reports of Government organisations. BSE 100 index2 has been used as a proxy for market for calculating vola-tility of the Indian stock market. To avoid factors such as temporal stability and business cycle influencing our study, a longer time frame of study of 17 years period i.e., 1990-91 to 2006-07 has been used. This period is chosen to correspond with the period when changes in trade policy were taking place and Indian economy went through a phase of increasing competition, deregulation, and restructuring. Further three sub periods are chosen within this period, 1990-91, 1997-98 and 2002-03 to study the impact of reforms announced by government in phases. While 1990-91 signified the beginning of the reforms after liberalisation, 1997-98 was chosen so that it would capture the changes initiated in the reforms I and the beginning of reforms II. The end-year 2002-03 comes five years after the process of second phase of reforms was initiated in 1997-98, and is chosen so as to capture any changes that may have taken place as a consequence. Ratio analysis technique of financial management has been used to analyse the movements over the period. The average of each ratio is computed and tabulated to study the indicators of stock market development in post liberalisation scenario and over sub-periods. The data has been analysed by using Statistical Package for Social Sciences (SPSS).

In order to meet the objectives of the study, a measure of stock market size, Market Capitalization Ratio (MCR) is used. The size of the stock market depends on the activity of the primary market because it is only when more entities come into the market and raise funds, that more instruments are available in the secondary market. Therefore, a two way causal relationship exists between

stock market size and primary market

activities. As a measure of stock market size, Market Capitalization Ratio (MCR) is used which is defined as the value of listed shares divided by Gross Domestic Product (GDP). Market capitalization is computed using the value of the equity securities only. The stock market price per share is multiplied by the number of shares that are outstanding. Market capitalization as a proxy for market size is positively related to the ability to mobilise capital and diversify risk. Liquidity is the ease and speed at which economic agents can buy and sell securities. With a liquid market, the initial investors do not lose access to their savings for the duration of the investment project because they can easily, quickly, and cheaply, sell their stake in the company. Thus, more liquid markets could ease investment in long term, potentially more profitable projects, thereby improving the allocation of capital and enhancing prospects for long term growth. The more liquid the stock market, the larger the amount of savings that are channelled through the stock market. Liquidity is key to a successful securities market. Therefore, we expect a more liquid stock market to lead to higher stock market development. For market liquidity, two measures are used: (1) Value traded ratio, (2) Turnover ratio. Value traded ratio equals the total value of traded share in the stock market divided by GDP. The total value traded ratio (VTR) measures the organised trading of the equities as a share of national input and should, therefore, positively reflect liquidity on an economy-wide basis. The second measure of the liquidity is the turnover ratio which equals the value of total shares traded divided by the market capitalisation. High turnover is often used as an indicator of low transaction cost. Turnover ratio also complements total value traded ratio. According to Levine and Zervos (1998) Value traded ratio does not directly measure how easily investors can buy and sell shares at posted prices. However, it does measure the degree of trading relative to the size of the economy. It, therefore, reflects stock market liquidity on an economy wide basis. The value traded ratio complements the market capitalisation. Although a market may be large, there may be little trading. Thus, taken, MCR and VTR together provide

more information about a stock market than if one uses only a single indicator. The second measure of the liquidity is the turnover ratio which equals the value of total shares traded divided by the market capitalisation. High turnover is often used as an indicator of low transaction cost. Turnover ratio also complements total value traded ratio. Although VTR captures trading compared with the size of the economy, turnover measures the trading relative to the size of the stock market. Thus, the complete information on the total VTR and turnover ratio provides a more comprehensive picture of liquidity of a stock market. As shown by Levine (1991) and Bencivenga et al. (1996), stock markets may affect economic activity through the creation of liquidity. Many profitable investments require a long-term commitment of capital, but investors are often reluctant to relinquish control of their savings for long periods. Liquid equity markets make investment less risky and more attractive because they allow savers to acquire an asset-equity and to sell it quickly and cheaply if they need access to their savings or want to alter their portfolios. At the same time, companies enjoy permanent access to capital raised through equity issues. By facilitating longer-term, more profitable investments, liquid markets improve the allocation of capital and enhance prospects for long-term economic growth. Further, by making investment less risky and more profitable, stock market liquidity can also lead to more savings and investment. According to Hicks (1969), more liquid financial markets made it possible to develop projects that required large capital injections for long periods before the projects ultimately yielded profits. Without liquid capital markets, savers would have been less willing to invest in the large, longterm projects.

OBJECTIVE OF STUDY: 1. The main objective was to plunge Indian economy in to the arena of ‘Globalization and to give it a new thrust on market orientation. 2. The NEP intended to bring down the rate of inflation

3. It intended to move towards higher economic growth rate and to build sufficient foreign exchange reserves. 4. It wanted to achieve economic stabilization and to convert the economy into a market economy by removing all kinds of un-necessary restrictions. 5. It wanted to permit the international flow of goods, services, capital, human resources and technology, without many restrictions. 6. It wanted to increase the participation of private players in the all sectors of the economy. That is why the reserved numbers of sectors for government were reduced.

SCOPE OF STUDY The scope of the project during the research and study will be focused on the following parameters: • To know the customer prefrence towards the Investment Alternatives in money market. •How the market climate could impair money market fund shareholders. •To fi n d m e ch ani sm s t o r est or e l i qu i di t y a n d or d erl y f un ct i oni n g t o t he m o n e y market. •To h el p wi t h t he n at u r e an d d et ai l s of t he U.S . D e pa rt m e nt o f t h e Tr e as ur y’ s Temporary Guarantee Program for Money Market Funds. • To develop recommendations to improve the functioning of the money market and the operation and regulation of funds investing in that market. When I complete the assign project research then I finds some important points in this report these are given as follows; • There are capital require (paid up) must be minimum 10 crore for listing in NSE or BSE for a particular company. • Initial listing fees for a particular company in national stock exchange are much lower then on Bombay stock exchange.

• Market capitalization of the Bombay stock exchange is more then national stock exchange. The daily turnover of national stock exchange is more then Bombay stock exchange on daily basis.

SIGNIFICANCE OF THE STUDY The study has academic and practical significance. It would help the academicians and researchers to develop new idea for future study. The study focuses on the volatility in Indian stock market, which will act as a guide to investors in their investment decisions. The analytical sophistication of the financial market has lent increasing importance to volatility. Since it is a standard measure of financial vulnerability, it plays a key role in assessing risk/return trade off. This study undertakes to measure and model the stock market volatility which would become a widespread concern of the exchange management, brokers and investors, as effective mechanism put in place which would help in accordance of volatility episodes in future.

LIMITATIONS OF THE STUDY The major limitations of the study are: 1. The analyses were based on the secondary data any limitations pertaining to them would significantly affect the accuracy of the results. 2. The extent and pattern of stock market volatility in India is studied only for the post liberalization period, the comparison is not made before the preliberalisation period. 3. The effect of macro-economic variables on the stock market volatility has been considered only for few variables. 4. Only the quantitative macro economic variables that effect the stock market volatility are considered for the study, the data which are qualitative in nature that affect the stock market volatility are not considered for the current study.

HYPOTHESES OF THE STUDY

Following are the hypotheses that are framed for the study: H0(1):There is no significant difference in the mean daily returns of Spikes (1) for BSE Sensex during the First and Second decade of the study period.

H0(2):There is no significant difference in the mean daily returns of Spikes (1) for NSE CNX Nifty during the First and Second decade of the study period.

H0(3):There is no significant difference in the mean daily returns of Spikes (2) for BSE Sensex during the First and Second decade of the study period.

H0(4):There is no significant difference in the mean daily returns of Spikes (2) for NSE CNX Nifty during the First and Second decade of the study period.

H0(5) :There is no significant difference in the mean daily returns of Spikes (3) for BSE Sensex during the First and Second decade of the study period.

H0(6):There is no significant difference in the mean daily returns of Spikes (3) for NSE CNX Nifty during the First and Second decade of the study period.

8 SECURITIES EXCHANGE BOARD OF INDIA (SEBI)

The capital market in India has witnessed tremendous growth since the beginning of 1990s when the process of liberalization initially was started. Under the impact of liberalization the industrial and financial policies were restructured. Resource mobilization in the stock markets was started increasing significantly. The liberalized investment policy of the Government, streamlining of industrial licensing policies and fiscal incentive to industry have led to the growth of the capital market significantly. With ever expanding response of investors and growing stock exchange operations, several malpractices started taking place on the part of Companies,

brokers, investment consultants. Some of the undesirable practices like insider trading, delay in allotment of shares, inadequate information to investors started disturbing the smooth functioning of the market. This has started discouraging the common investor from investing into securities. Hence, there felt the need to set up an exclusive monitoring institution which would regulate the working of stock exchange. The Government of India established the market watchdog SEBI i.e. Securities and Exchange Board of India (SEBI) in April 1988. SEBI as security exchange board of India became a statutory body under SEBI Act 1992, and its head office is located at Mumbai. At present SEBI have offices in Mumbai, Calcutta, New Delhi and Chennai.

Objectives of SEBI The main objectives of SEBI are as under •

To promote fair dealing by the issuers of securities and to ensure a

market

place where companies or institutions can raise funds at a relatively low cost. •

To provide protection to the investors and protect their rights and interests so that there is a steady flow of savings into the market.

•

Το regulate and develop a code of conduct and fair practice by intermediaries like brokers etc. with a view to make them competitive and professional.

Functions of SEBI •

Regulating the business in stock exchanges and any other securities market.

•

Registering and regulating the working of stock brokers, share transfer agents, Sub brokers, bankers to an "issue, etc.

•

Promoting and regulating self regulatory organizations.

•

Prohibiting fraudulent and unfair trade practices relating to securities market.

•

Registering and regulating the working of venture capital funds and collective investment schemes including mutual funds.

•

Promoting investors education and training of intermediaries of securities market.

•

Prohibiting insider trading in securities.

•

Conducting research and carrying out publications,

•

Calling for information from undertaking inspection, Conducting inquiries and audits of stock exchanges and market intermediaries.

Powers of SEBI SEBI has been given wide powers; some of them are as follows. •

SEBI can ask stock exchanges to maintain the prescribed documents

and

records.

•

SEBI may ask a stock exchange or any member to furnish information and explanation concerning its affairs.

•

SEBI can approve and amend bye-laws of stock exchanges. It can call periodical returns from stock exchanges,

•

SEBI can license dealers in securities in some areas.

•

It can ask a public limited Company to list its shares and play supportive role when share market-is bearish. When an individual investor and even Speculators try to play shy in stock market (it means to hesitate to transact) it is the institutional investor who often accounts for bulk of trade. This helps sustaining for stock exchanges.

CHAPTER 3 REVIEW LITRATURE

Gupta (1972) in his book has studied the working of stock exchanges in India and has given a number of suggestions to improve its working. The study highlights the' need

to regulate the volume of speculation so as to serve the needs of liquidity and price continuity. It suggests the enlistment of corporate securities in more than one stock exchange at the same time to improve liquidity. The study also wishes the cost of issues to be low, in order to protect small investors Panda (1980) has studied the role of stock exchanges in India before and after independence. The study reveals that listed stocks covered four-fifths of the joint stock sector companies. Investment in securities was no longer the monopoly of any particular class or of a small group of people. It attracted the attention of a large number of small and middle class individuals. It was observed that a large proportion of savings went in the first instance into purchase of securities already issued. Gupta (1981) in an extensive study titled `Return on New Equity Issues' states that the investment performance of new issues of equity shares, especially those of new companies, deserves separate analysis. The factor significantly influencing the rate of return on new issues to the original buyers is the `fixed price' at which they are issued. The return on equities includes dividends and capital appreciation. This study presents sound estimates of rates of return on equities, and examines the variability of such returns over time. Jawahar Lal (1992) presents a profile of Indian investors and evaluates their investment decisions. He made an effort to study their familiarity with, and comprehension of financial information, and the extent to which this is put to use. The information that the companies provide generally fails to meet the needs of a variety of individual investors and there is a general impression that the company's Annual Report and other statements are not well received by them. L.C.Gupta (1992) revealed the findings of his study that there is existence of wild speculation in the Indian stock market. The over speculative character of the Indian stock market is reflected in extremely high concentration of the market activity in a handful of shares to the neglect of the remaining shares and absolutely high trading velocities of the speculative counters. He opined that, short- term speculation, if excessive, could lead to "artificial price". An artificial price is one which is not justified by prospective earnings, dividends, financial strength and assets or which is brought about by speculators through rumours, manipulations, etc. He concluded that

such artificial prices are bound to crash sometime or other as history has repeated and proved. Nabhi Kumar Jain (1992) specified certain tips for buying shares for holding and also for selling shares. He advised the investors to buy shares of a growing company of a growing industry. Buy shares by diversifying in a number of growth companies operating in a different but equally fast growing sector of the economy. He suggested selling the shares the moment company has or almost reached the peak of its growth. Also, sell the shares the moment you realise you have made a mistake in the initial selection of the shares. The only option to decide when to buy and sell high priced shares is to identify the individual merit or demerit of each of the shares in the portfolio and arrive at a decision. Pyare Lal Singh (1993) in the study titled, Indian Capital Market - A Functional Analysis, depicts the primary market as a perennial source of supply of funds. It mobilises the savings from the different sectors of the economy like households, public and private corporate sectors. The number of investors increased from 20 lakhs in 1980 to 150 lakhs in 1990 (7. 5 times). In financing of the project costs of the companies with different sources of financing, the contribution of the securities has risen from 35.01% in 1981 to 52.94% in 1989. In the total volume of the securities issued, the contribution of debentures / bonds in recent years has increased significantly from 16. 21% to 30.14%. Sunil Damodar (1993) evaluated the 'Derivatives' especially the 'futures' as a tool for short-term risk control. He opined that derivatives have become an indispensable tool for finance managers whose prime objective is to manage or reduce the risk inherent in their portfolios. He disclosed that the over-riding feature of 'financial futures' in risk management is that these instruments tend to be most valuable when risk control is needed for a short- term, i.e., for a year or less. They tend to be cheapest and easily available for protecting against or benefiting from short term price. Their low execution costs also make them very suitable for frequent and short term trading to manage risk, more effectively. R.Venkataramani (l994) disclosed the uses and dangers of derivatives. The derivative products can lead us to a dangerous position if its full implications are not clearly understood. Being off balance sheet in nature, more and more derivative products are

traded than the cash market products and they suffer heavily due to their sensitive nature. He brought to the notice of the investors the 'Over the counter product' (OTC) which are traded across the counters of a bank. OTC products (e.g. Options and futures) are tailor made for the particular need of a customer and serve as a perfect hedge. He emphasised the use of futures as an instrument of hedge, for it is of low cost. Amanulla & Kamaiah (1995) conducted a study to examine the Indian stock market efficiency by using Ravallion co integration and error correction market integration approaches. The data used are the RBI monthly aggregate share indices relating five regional stock exchanges in India, viz Bombay, Calcutta, Madras, Delhi, Ahmedabad during 1980-1983. According to the authors, the co integration results exhibited a long-run equilibrium relation between the price indices of five stock exchanges and error correction models indicated short run deviation between the five regional stock exchanges. The study found that there is no evidence in favour of market efficiency of Bombay, Madras, and Calcutta stock exchanges while contrary evidence is found in case of Delhi and Ahmedabad. Pattabhi Ram.V. (1995) emphasised the need for doing fundamental analysis and doing Equity Research (ER) before selecting shares for investment. He opined that the investor should look for value with a margin of safety in relation to price. The margin of safety is the gap between price and value. He revealed that the Indian stock market is an inefficient market because of the absence of good communication network, rampant price rigging, and the absence of free and instantaneous flow of information, professional broking and so on. He concluded that in such inefficient market, equity research will produce better results as there will be frequent mismatch between price and value that provides opportunities to the long-term value oriented investor. He added that in the Indian stock market investment returns would improve only through quality equity research. Karajazyk (1995) investigated one measure of financial integration between equity markets. He used a multifactor equilibrium Arbitrage pricing theory to define risk and to measure deviations from the “Law of one price”. He applied the integration measure to equities traded in 24 countries (four developed and 20 emerging). He found that the measure of market segmentation tends to be much larger for emerging

markets than for developed markets, which flows into or out of the emerging markets. The measure tends to decrease over time, which is consistent with growing levels of integration. Large values of adjusted mis-pricing occur around periods in which capital controls change significantly. Finally, he found asymmetric integration relationship; stock markets of developed nations are more integrated than those of emerging nations. Debjit Chakraborty (1997) in his study attempts to establish a relationship between major economic indicators and stock market behaviour. It also analyses the stock market reactions to changes in the economic climate. The factors considered are inflation, money supply, and growth in GDP, fiscal deficit and credit deposit ratio. To find the trend in the stock markets, the BSE National Index of Equity Prices (Natex) which comprises 100 companies was taken as the index. The study shows that stock market movements are largely influenced by, broad money supply, inflation, C/D ratio and fiscal deficit apart from political stability. Redel (1997) concentrated on the capital market integration in developing Asia during the period 1970 to 1994 taking into variables such as net capital flows, FDI, portfolio equity flows and bond flows. He observed that capital market integration in Asian developing countries in the 1990‟s was a consequence of broad-based economic reforms, especially in the trade and financial sectors, which is the critical reason for economic crises which followed the increased capital market integration in the 1970s in many countries will not be repeated in the 1990s. He concluded that deepening and strengthening the process of economic liberalization in the Asian developing countries is essential for minimizing the risks and maximizing the benefits from increased international capital market integration. Avijit Banerjee (1998) reviewed Fundamental Analysis and Technical Analysis to analyse the worthiness of the individual securities needed to be acquired for portfolio construction. The Fundamental Analysis aims to compare the Intrinsic Value (I.V.) with the prevailing market price (M.P) and to take decisions whether to buy, sell or hold the investments. The fundamentals of the economy, industry and company determine the value of a security. If the 1.V is greater than the M.P., the stock is under priced and should be purchased. He observed that the Fundamental Analysis could never forecast the M.P. of a stock at any particular point of time. Technical Analysis

removes this weakness. Technical Analysis detects the most appropriate time to buy or sell the stock. It aims to avoid the pitfalls of wrong timing in the investment decisions. He also stated that the modern portfolio literature suggests 'beta' value p as the most acceptable measure of risk of scrip. The securities having low P should be selected for constructing a portfolio in order to minimise the risks. Madhusudan (1998) found that BSE sensitivity and national indices did not follow random walk by using correlation analysis on monthly stock returns data over the period January 1981 to December 1992. Arun Jethmalani (1999) reviewed the existence and measurement of risk involved in investing in corporate securities of shares and debentures. He commended that risk is usually determined, based on the likely variance of returns. It is more difficult to compare 80 risks within the same class of investments. He is of the opinion that the investors accept the risk measurement made by the credit rating agencies, but it was questioned after the Asian crisis. Historically, stocks have been considered the most risky of financial instruments. He revealed that the stocks have always outperformed bonds over the long term. He also commented on the 'diversification theory' concluding that holding a small number of non-correlated stocks can provide adequate risk reduction. A debt-oriented portfolio may reduce short term uncertainty, but will definitely reduce long-term returns. He argued that the 'safe debt related investments' would never make an investor rich. He also revealed that too many diversifications tend to reduce the chances of big gains, while doing little to reduce risk. Equity investing is risky, if the money will be needed a few months down the line. He concluded his article by commenting that risk is not measurable or quantifiable. But risk is calculated on the basis of historic volatility. Returns are proportional to the risks, and investments should be based on the investors' ability to bear the risks, he advised. Suresh G Lalwani (1999) emphasised the need for risk management in the securities market with particular emphasis on the price risk. He commented that the securities market is a 'vicious animal' and there is more than a fair chance that far from improving, the situation could deteriorate. Bhanu Pant and Dr. T.R.Bishnoy (2001) analyzed the behaviour of the daily and weekly returns of five Indian stock market indices for random walk during April 1996

to June 2001.They found that Indian Stock Market Indices did not follow random walk. Nath and Verma (2003) examine the interdependence of the three major stock markets in south Asia stock market indices namely India (NSE-Nifty) Taiwan (Taiex) and Singapore (STI) by employing bivariate and multivariate co integration analysis to model the linkages among the stock markets, No co -integration was found for the entire period (daily data from January 1994 to November 2002).They concluded that there is no long run equilibrium. Debjiban Mukherjee (2007) made a comparative Analysis of Indian stock market with International markets. His study covers New York Stock Exchange (NYSE), Hong Kong Stock exchange (HSE), Tokyo Stock exchange (TSE), Russian Stock exchange (RSE), Korean Stock exchange (KSE) from various socio- politico-economic backgrounds. Both the Bombay Stock exchange (BSE) and the National Stock Exchange of Indian Limited (NSE) have been used in the study as a part of Indian Stock Market. The main objective of this study is to capture the trends, similarities and patterns in the activities and movements of the Indian Stock Market in comparison to its international counterparts. The time period has been divided into various eras to test the correlation between the various exchanges to prove that the Indian markets have become more integrated with its global counterparts and its reaction are in tandem with that are seen globally. The various stock exchanges have been compared on the basis of Market Capitalization, number of listed securities, listing agreements, circuit filters, and settlement. It can safely be said that the markets do react to global cues and any happening in the global scenario be it macroeconomic or country specific (foreign trade channel) affect the various markets. Juhi Ahuja (2012) presents a review of Indian Capital Market & its structure. In last decade or so, it has been observed that there has been a paradigm shift in Indian capital market. The application of many reforms & developments in Indian capital market has made the Indian capital market comparable with the international capital markets. Now, the market features a developed regulatory mechanism and a modern market infrastructure with growing market capitalization, market liquidity, and mobilization of resources. The emergence of Private Corporate Debt market is also a good innovation replacing the banking mode of corporate finance. However, the

market has witnessed its worst time with the recent global financial crisis that originated from the US sub-prime mortgage market and spread over to the entire world as a contagion. The capital market of India delivered a sluggish performance.

CHAPTER 4 DATA ANALYSIS

Stock Market Development The secondary market is an important constituent of the capital market. Secondary market activities have strong influence on the performance of the primary market. This market provides facilities for trading in securities which have already been floated in the primary market. Thus an organised and well regulated secondary market (stock market) provides liquidity to shares, ensures safety and fair dealing in the selling and buying of securities. The financing decision of a firm is generally affected by the minimisation of the weighted average cost of capital. Upward movement of stock prices influence firms to issue equities at a high premium which reduces the cost

of capital for a firm and makes it an ideal financing choice. Another important impact of secondary market development over primary market activities is the increase in investment by firms. As the cost of equity reduces because of issue of equities at high premium, investment projects that had negative NPV before are likely to transform into positive NPV projects. Therefore, the performance of primary market is crucially dependent on the level of activities in the secondary market. This study considers a wide range of stock market development indicators. The indicators selected are size, liquidity, and volatility.

Market Size In 1980, the stock market capitalisation ratio was only 5% of GDP. As a result of liberalization, Privatization and Globalization measures initiated in the 1980s, the ratio had risen to 13% by 1990. Market Capitalisation ratio of Indian corporate sector after 1991 i.e., the year of liberalisation is given in the Table:

YE

GDP

RATI MARKET

AR CAPITALISATION(

(RS.MIL

O(%

CAPITALISATIO

RS.MILLIONS)

LIONS)

GDP)

N(%CHANGE)

7000

51503

13.59

12314

58409

21.08

75.92

18676

66987

27.88

51.66

36807

78007

47.18

97.08

43548

91216

47.74

18.31

52648

106981

49.21

20.90

199

MARKET

_

0-91 199 1-92 199 2-93 199 3-94 199 4-95 199 5-96

199

46392

124763

37.18

-11.88

56033

138873

40.35

20.78

54536

160111

34.06

-2.67

91284

177109

51.54

67.38

57155

190228

30.05

-37.39

61222

207766

29.47

7.12

57220

224473

25.49

-6.54

120121

251992

47.67

109.93

169843

285533

59.48

41.39

302219

324955

93.00

77.94

345504

376029

94.28

17.80

6-97 199 7-98 199 8-99 199 9-00 200 0-01 200 1-02 200 2-03 200 3-04 200 4-05 200 5-06 200 6-07 Sub - Periods

MGR

1990-07

44.07

1990-97

34.84

1997-02

37.09

2002-07

63.98

Above Table shows that stock market size as measured by Market Capitalisation has grown by over 50 times during the period 1990-91 to 2006-07 whereas GDP increased by more than 7 times over the same period. MCR has steadily increased up to over 49% in 1995-96 and declined to around 25% in 2002-03 before spurting to over 94% in 2006-07. The growth in size of Indian Stock Market resembles that of other leading developing economies and is indeed very impressive.

The massive rise in the activities of the stock market, particularly in the 1990s could be attributed to a larger participation by individuals and institutional investors in the capital market. Since September 1992, the foreign institutional investors (FII) have been allowed to invest in the Indian capital market. The significant impact of liberalization is apparent in the ratio of market capitalization to GDP which was below 10% until three years prior to liberalization, increased to 21% in the year of liberalization, remained around 40% up to 2003-04 before increasing to 94% in 200607. By the end of year 2008 market capitalization has crossed the National GDP by more than 100%. The average MCR over the three sub- periods also shows the constant increase in the amount of market capitalisation in absolute terms and also in terms of ratio. The mean value of the ratio during the study period is 44.07%. It has increased from 34.4 % in the first sub-period to 37.09% in second period and jumped off by 70% to 63.98%. This shows that the size of Indian corporate sector increased continuously at a faster rate.

Stock Market Liquidity The Turnover of Indian stock market as a percentage of GDP is given in the following Table.

YEAR

TURNOVER

GDP

VALE

VALUE

(Rs. millions)

(Rs.

TRADED

TRADED

Millions)

RATION

(%change)

(%GDP) 1990-91

3601

51503

6.99

_

1991-92

7178

58409

12.29

99.32

1992-93

4570

66987

6.82

-36.34

1993-94

8454

78007

10.84

85.00

1994-95

6775

91216

7.43

-19.86

1995-96

5006

106981

4.68

-26.11

1996-97

12428

124763

9.96

148.26

1997-98

20764

138873

14.95

67.07

1998-99

31200

160111

19.49

50.26

1999-00

68503

177109

38.68

119.56

190228

52.57

45.98

2000-01

100003

2001-02

30729

207766

14.79

-69.27

2002-03

31407

224473

13.99

2.21

2003-04

50262

251992

19.95

60.03

2004-05

51872

285533

18.17

3.20

2005-06

81607

324955

25.11

57.33

2006-07

95619

376029

25.43

17.17

Sub-Periods 1990-07

Va1ue Traded Ratio 17.77

1990-97

8.43

199F-02

28.10

2002-07

20.53

The above Table 2 shows that value traded as a percentage of GDP increased from about 7 percent of GDP in 1990-91 to roughly 25 percent of GDP in 2006-07. In absolute terms Turnover in the market increases more than 25 times from 1991 to 2007. During 2000-2001 there were maximum activities in the market and the value traded ratio was 52.57%. The average value of Value Traded Ratio during the study period is 17.77%. Initially it was very low after liberalisation during the first phase at 8.43% which shows very little trading in the market as compared to economy size. During second sub-period when the second phase of reforms started, the market has shown signs of revival and it has increased to 28.10%. In the last period, again this ratio comes down to 20.53% on a much higher GDP during which time the turnover increased by more than 90% outperforming several emerging markets.

Turn Over Ration of Indian Stock Market: YEAR TURNOVER (Rs. Millions)

1990-

MARKET

TURNOVER

CAPITALISATION

RATIO(in

(Rs. Millions)

%)

3601

7000

51.44

7178

12314

58.29

4570

18676

24.47

8454

36807

22.97

6775

43548

15.56

5006

52648

9.51

12428

46392

26.79

20764

56033

37.06

31200

54536

57.21

68503

91284

75.04

57155

174.97

30729

61222

50.19

31407

57220

54.89

50262

120121

41.84

91 199192 199293 199394 199495 199596 199697 199798 199899 199900 2000-

100003

01 200102 200203 200304

2004-

51872

169843

30.54

81607

302219

27.00

95619

354504

26.97

05 200506 200607 Sub-Periods

Turnover Ratio

1990-07

46.16

1990-97

29.86

1997-02

78.89

2002-07

36.25

The turnover ratio decreased from 51.44 percent in 1990-91 to about 27 percent in 2006-07. The mean value of the ratio over the whole period is 46.16. During first period of analysis, this ratio was around 30% only and then it increased to78.9 % in the subsequent period and again it declined to 36.25%. The reason can be security market scam because of which the sentiments of the investors affected adversely. After 1995 market liquidity started rising again. The SEBI has taken various regulatory policies and initiatives to regulate the market. The liquidity again gets affected negatively in year 2001-02 because market was hit by another set of irregularities in the stock market. Turnover of the stock market as compare to size of the market is at its maximum in the year 2000-01. This is the year when value traded ratio is also at highest level. Because of these values, the ratio of value traded and turnover is highest in the second sub-period. Thus liquidity of the stock market on an average has not increased. Analysis of the value traded ratio and turnover ratio reveals that the Indian stock market is less liquid in relation to the growth of the economy than growth of the market size. Second period of study shows the highest amount of trading in relation to size of the economy as well as in relation to growth of the market size.

Stock Market Volatility

In this section, the volatility of the Indian stock market during 1991-2007 has been analysed. It is examined whether there has been an increase in volatility in the Indian stock market on account of the process of financial liberalization. Stock market liberalization has attracted a new group of investors viz. the FIIs. An increase in the number of traders in the market may then reduce the stock price variance. Stock market opening may also simultaneously trigger an increase in the variance of information sets available to the FIIs thereby implying a possibility of an increase in the stock return volatility. The following table shows the Volatility Ratio of the Indian corporate sector.

Year

Vo1ati1ity Ratio (%)

1990-91

3.75

1991-92

8.05

1992-93

3.86

1993-94

3.30

1994-95

2.13

1995-96

3.46

1996-97

3.26

199F-98

3.75

1998-99

3.72

1999-00

4.82

2000-01

4.31

2001-02

2.43

2002-03

3.36

2003-04

3.17

2004-05

2.75

2005-06

2.74

2006-07

2.81

Year

Vo1ati1ity Ratio

1990-07

3.63

1990-97

3.97

1997-02

3.80

2002-07

2.96

Analysis of stock index volatility reveals that the period around 1991 is the most volatile period in the stock market due to the Balance of Payment crisis and the subsequent initiation of economic reforms in India. During 1991-92 the value of volatility ratio is as high as 8.05 whereas Mean standard deviation of the study period is 3.63. In the initial sub-period of liberalisation i.e., 1991-97 the ratio is at 3.97 because of the announcement of first phase of reforms. It shows a consistent fall in second and third sub-periods to 3.80 and 2.96 respectively. There has been a marked fall of around 25% between the volatility levels over the first and third sub-periods of the study. The second highest volatile year was 1999-00 when the ratio was 4.82. During the study period the volatility of the Indian stock market has not shown any significant pattern on a year-to-year basis although it has continuously decreased over the three sub periods. As regards the level of volatility, mean volatility in the post liberalization period shows a temporary increase followed by a decrease on a yearly basis in cycles even though the change in most cases is marginal. This was due to the increase in the FII activity in the Indian stock market during the period. Analysis also shows that stock market cycles in India have not intensified after financial liberalization. A generalized reduction in instability in the post reform period in India has been observed.

CAPITAL REQUIREMENT IN BSE AND NSE:

SR. NO.

Criteria

BSE

NSE

1

Capital required

Minimum 10 Crores

Minimum 10 Crores

2

Market Capitalisation

Minimum 2 Times

Minimum 25 Crores

Of Paid up Capital 3

Profit Making Record

At-least last 3 years

N.A

4

Net Worth

Minimum 20 cr

The net worth of the company has not been wiped out by the accumulated losses resulting in a negative net worth

Comparison when company/ies is/are already listed on other stock exchange/s 5

Capital Required

Minimum 3 Crores

Minimum 10 Crores

Minimum 2 Times

Minimum 25 Crores

(Paid-Up) 6

Market Capitalization

Paid up of Capital 7

Profit Making Record

At-least last 3 years

At-least two out of the last three financial years

8

Net Worth Required

Minimum 20 cr

Minimum 50 cr.

9

Dividend paying track

Minimum 3 years

Minimum 2 out of the

record

last 3 immediately preceding financial years

10

Listing Record

At-least two years

At-least three years

listing record with

listing record with

any Regional Stock

any Regional Stock

Exchange.

Exchange.