Copy Of Project

STUDY OF RELATIONSHIP BETWEEN INDIAN STOCK MARKET & ASIAN STOCK MARKET By • ANUJ GOEL • BIJAN SAHOO • JINESH AGGARWAL • KARAN MITTAL • PARESH AGARWAL • PAVANA v ISSAC

NATIONAL INSTITUTE FOR FINANCIAL MANAGEMENT FARIDABAD

THE INSTITUTE OF CHARTERED ACCONTANTS OF INDIA

(A STATUTORY BODY CONSTITUTED UNDER THE ACT OF PARLIAMENT)

Study of Relationship Between Indian Stock Market and Asian Stock Markets

ABOUT THE STUDY GROUP Unity in diversity is the foremost highlight of our nation INDIA and similarly we have our group members for this study from six different states of the country relaying the richness of six different fortes.

Starting with the group:•

Anuj Goel from New Delhi

•

Bijan Sahoo from Cuttack-orissa

•

Jinesh aggarwal from Rewari-Haryana

•

Karan Mittal from Jaipur-Rajasthan

•

Paresh Agarwal from Galgoan- MAHARASTRA

•

Pavana V Issac from Palakkad-Kerala

Study of Relationship Between Indian Stock Market and Asian Stock Markets

Acknowledgment

We would like to express our sincere gratitude to all the distinguished personalities who have helped us a lot during this project work and without their help our project would not have been completed. We are thankful to Dr. A.M.Sherry and Mr.Shaleen Suneja who have always guided us on various occasions. A special thanks to Cmdr.Ranjan Seth who has directed us to conclude this project in a disciplined manner. We gratefully appreciate the inspiration and encouragement offered by all other faculties and staffs of NIFM, all along this three months residential training programme. The facilities and services provided by the National Institute of Financial Management, Faridabad have always resided as an endorsement throughout this tenure. Also we have a handle on the support and amity cheered upon us by all of our batch mates. At the end we cordially convey our thankfulness to the Institute of Chartered Accountants of India who gave us the opportunity to be a part of a premier institute like NIFM and we feel proud to present this project and we hope that we are able to cover all the aspects of this study to the finest extent.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

Preface The stock market is witnessing heightened activities and is increasingly gaining importance. In the current context of globalization and the subsequent integration of the global markets this paper captures the trends, similarities and patterns in the activities and movements of the Indian Stock Market in comparison to its Asian counterparts. The Indian stock market is one of the oldest and fastest growing financial markets in the world and considered to the best among the markets of the emerging economies. Much of the organized sector in India have been affected by high growth and the stock markets played an all-inclusive role in sustaining that growth. Many PSUs (Public Sector Undertakings) that decided to offload part of their equity were also helped by the well-organized stock market in India. This study covers major stock exchanges in China, Japan, Singapore, Taiwan, Israel, Philippines, Indonesia, South Korea and Srilanka. 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 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 Asian counterparts and its reaction are in tandem with them. Sincere efforts have been made for preparation of project. It is expected that this study would enable the readers in understanding the relationship between Indian stock market and Various Asian Stock markets and its impact for gaining conceptual Clarity. Thank you, Study Group Study of Relationship Between Indian Stock Market and Asian Stock Markets

CONTENTS 1.0 1.1 1.2 1.3 1.4 2 3 4.0 4.1 4.2 4.3 4.4 5 6 7.0 7.1 7.1.1 7.1.2 7.1.3 7.1.4 7.1.5 7.2 7.2.1 7.2.2 7.2.3 7.2.4 7.2.5 7.2.6 7.2.7 8 9 10 11

INTRODUCTION TITLE OBJECTIVE OF STUDY RELEVANCE OF THE STUDY LIMITATION MAJOR STOCK EXCHANGES IN ASIA NAMES OF THE INDICES INDIAN STOCK MARKET HISTORIC BACK GROUND SECURITIES LAWS IN INDIA THE PRESENT SCENARIO IMPACT OF STOCK MARKET ON ECONOMY PAST STUDIES ON STOCK MARKETS ORIGIN OF VARIOUS STOCK EXCHANGES COMPARATIVE ANALYISIS QUALITATIVE ANALYSIS MARKET CAPITILIZATION LISTED SECURITIES LISTING AGREEMENTS CIRCUIT FILTERS TRADING AND SETTLEMENT CYCLE QUANTITATIVE ANALYISIS PRICE RELATIONSHIP NSE Vs. HANG SENG NSE Vs. KOREA STOCK EXCHANGE STOCK PRICE CORRELATION AMONG STOCK EXCHANGES EXPONENTIAL TREND RISK AND RETURN RISK RETURN COMPARISON OTHER FACTORS INFLUENCING STOCK MARKETS RELEVANCE OF STOCK MARKET ANALYSIS IN C.A PROFESSION CONCLUSIONS REFERENCES

Study of Relationship Between Indian Stock Market and Asian Stock Markets

1.0 INTRODUCTION

In the current scenario the terms like Capital market, BSE (Bombay stock exchange),NSE (National Stock Exchange),Shares are not strange to us. There are many more Asian markets such as Shanghai Stock Exchange, Tokyo Stock Exchange, Korea Exchange, Colombo Stock Exchange, Singapore Exchange, and Korea Exchange which have great Impact on Indian markets.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

Herewith We try to analyze the basic relationship between Indian stock market and Various Asian Stock Markets.

1.1

Title

The study group has been named as “Relationship Between Indian Stock Market and Asian Stock Market”. We have analyzed this topic in detail and tried to cover each and every aspect of this study.

1.2

Objective of Study

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 Asian counterparts. The aim is to help the investors (current and potential) understand the impact of important happenings on the Indian Stock exchange. This is especially relevant in the current scenario when the financial markets across Asia are getting integrated into one big market and the impact of one exchange on the other exchanges. In other words, the intention is to test the hypothesis, ‘whether various stock exchanges in Asia have any impact on each other’ or they are correlated in any way with regard to their movements and, if so, to what extent. Arising out of the main hypothesis is the question - given the above context: What impact would the result have on the understanding that international diversification of investment is desirable and profitable with regard to both risk and return?

1.3

Relevance of the Study

Study of Relationship Between Indian Stock Market and Asian Stock Markets

Presently, the fluctuations in the Indian market are attributed heavily to cross border capital flows in the form of FDI, FII and to reaction of Indian market to global market cues. In this context, understanding the relationship and influence of various exchanges on each other is very important. This study that compares major exchanges in Asia. With the cross border movements of capital like never before in the form of FDI and FII, coupled with the easing of restrictions bringing various stock exchanges at par in terms of system and regulations, it can be assumed reasonably that a particular stock exchange will have some impact on other exchanges.

1.4

Research Methodology

For the comparative analysis of the different stock exchanges, the period chosen is from 1st January 1995 to 31st October, 2009. This period is divided into different sets of years, like 1995-97, 1999-01, 2001-03, 2003-06 and 2006-09 in order to capture the effect and movement of stock exchanges with each other during different periods. The economic situation changes during different times. 19951997 period represents the East Asian miracle and crisis period, 1999- 2001 represents technology boom and tech bubble bursting period, 2001-2003 represents the slow global recovery from the recession, 2003-2006 period represents the investment boom period especially in the developing and emerging markets. For the purpose of study and preparation of the report we have taken the analysis of various news items, Press releases by SEBI, Diagrams & Articles in the Magazines and the Internet and various other means of acquiring secondary data has been used.

1.5

Limitation

Study of Relationship Between Indian Stock Market and Asian Stock Markets

We Believe that sincere efforts has been made to study and analyze the whole topic to present the same in a comprehensive manner. But due to different constraints the study can be limited to a certain extent.

2 MAJOR STOCK EXCHANGES IN ASIA CHINA • Hong Kong Stock Exchange It is the 7th largest and one of the most active stock exchanges in the world. The Stock Exchange of Hong Kong Limited, Hong Kong Futures Exchanges Limited and Hong Kong Securities Clearing Company Limited –these companies are the property of Hong Kong Exchanges and Clearing Limited, which is enrolled on its own exchange. • Shanghai Stock Exchange The Shanghai Stock Exchange can stake a claim to fame to being both the first and largest stock exchange on mainland China. The exchange has a total of eight hundred and seventy-eight listed companies. The main indices used on the exchange are: • SSE 50 index • SSE 180 Index • SSE Composite Inde • SHSE- SZSE 300 Index.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

The Shanghai Stock Exchange works as a non profit institution administered by the China Securities Regulatory Commission. The exchange lists two different kinds of stocks: A and B shares. The difference between the two stocks is the currency that they are traded in. The A shares is traded in the local Renminbi yuan currency, whereas the B shares are traded in U.S. dollars. Traditionally A shares were only traded within the country, but now both A and B shares may be traded world wide. The majority of the stocks listed on the exchange are A shares. There are eight hundred twenty-four A shares and fifty-four B shares listed on the market. JAPAN • Tokyo Stock Exchange Located in Tokyo, Japan, is the second largest stock exchange in the world by aggregate market capitalization of its listed companies, second only to the New York Stock Exchange. As of 31 December 2007, the Tokyo Stock Exchange had 2,414 listed companies with a combined market capitalization of $4.3 trillion. SINGAPORE • Singapore Exchange With Singapore now a leading financial center in the Asia-Pacific, the Singapore Exchange has become one of the premier exchanges in its region. It is a highly international exchange, with 40 percent of its market capitalization coming from foreign companies. The SGX divides its company listings into the SGX Mainboard and the SGX SESDAQ. The Mainboard lists companies that meet certain requirements including market capitalization, pre-tax profits, and operating track record. The SESDAQ, on the other hand, is for newer companies and there are no quantitative requirements for listing. Companies listed on the SESDAQ may apply to be Study of Relationship Between Indian Stock Market and Asian Stock Markets

moved to the Mainboard if they have been listed for at least two years and meet the minimum quantitative requirements. The Singapore Exchange is a fully electronic exchange, using the Central Limit Order Book (CLOB). Brokers place orders online and when a buy and sell order match, the system automatically executes the order and notifies the brokers. Trades that are not executed by the end of the day are terminated. Shares are typically traded in lots of 1000. The Singapore Exchange is also well known for its trading in a variety of derivative securities via SGX-DT. It was the first exchange in Asia to offer equity index futures, and now offers the world's widest range of Asian index futures. SOUTH KOREA • Korea Exchange The South Korea Stock Exchange is one of the oldest stock markets in Asia. The South Korea Stock Exchange determines the economy of the country of South Korea. The South Korea Stock Exchange falls under the category of the stock market of the stock exchange market of Korea division. The South Korea Stock Exchange market provides an extensive field of opportunities to the stock brokers and the traders who deal with the share market in South Korea. The South Korea Stock Exchange market also gives out numerous offers to the companies and financial organizations that invest their money in the South Korea Stock Market. The South Korea Stock Exchange is an accumulation of all the stock exchanges operating in south Korea. All these exchanges have been brought together under certain rules and regulations as put forward by the Korea Stock and Futures Exchange Act. All the issues related to the security and the operation of the business divisions in the exchange market are controlled by the South Korea Stock Exchange. The South Korea Stock Exchange stands in the 15th position in the Study of Relationship Between Indian Stock Market and Asian Stock Markets

world as far as dealing with the financial market within the nation is concerned. The trading capacity and the techniques of the South Korea Stock Exchange is also admired all over the world for its expertise and precision. The South Korea Stock Exchange deals with the largest number of financial transaction in the world stock market scenario. One who is not a South Korean citizen might have to go through long procedures if he wants to buy stocks in the South Korea Stock Exchange. The South Korea Stock Exchange market has different norms of working a thus, there is a huge difference in the working method of the South Korea Stock Exchange than the other stock exchange markets in the world. TAIWAN • Taiwan Stock Exchange The Taiwan Stock Exchange Corporation is a financial institution, located in in Taipei, Taiwan. The TSEC was established in 1961 and began operating as a stock exchange on 9 February 1962. It is regulated by the Financial Supervisory Commission. The exchange has normal trading sessions from 09:00am to 01:30pm and postmarket sessions from 02:00pm to 02:30pm on all days of the week except Saturdays, Sundays and holidays declared by the Exchange in advance. The current chairman of the TSEC is Mr. Sean Chen. INDONESIA • Indonesia Stock Exchange

Study of Relationship Between Indian Stock Market and Asian Stock Markets

Indonesia Stock Exchange (IDX) or in Indonesian Bursa Efek Indonesia (BEI) is a stock exchange based in Jakarta, Indonesia. It was previously known as Jakarta Stock Exchange (JSX) before its name changed in 2007 after merging with Surabaya Stock Exchange (SSX). As of 31 December 2007, the Indonesia Stock Exchange had 383 listed companies with a combined market capitalization of $212 billion.[1] ISRAEL • Tel-Aviv Stock Exchange The Tel Aviv Stock Exchange colloquially known as the Boursa) in Tel Aviv is Israel's only stock exchange.The TASE is the only public market for trading securities in Israel. It plays a major role in the Israeli economy. TASE lists some 660 companies, about 60 of which are also listed on stock exchanges in other countries. TASE also lists some 180 exchange-traded funds (ETFs), 60 government bonds, 500 corporate bonds, and more than 1000 mutual funds. There are 29 members that make up TASE. SRILANKA • Colombo Stock Exchange The Colombo Stock Exchange (CSE) is the main stock exchange in Sri Lanka. As of 31st May 2005, the exchange has 243 listed companies, and 20 business sectors are represented. It has a market capitalization of over 497 billion rupees (over US $ 4.9 billion) and this corresponds to approximately 24% of the country's GDP. Two indices currently exist in the CSE - The All Share Price Index ( ASPI) and The Milanka Price Index (MPI). It became the first South Asian member of the

Study of Relationship Between Indian Stock Market and Asian Stock Markets

World Federation of Stock Exchanges in 1998 and it is also a founding member of the South Asian Federation of Exchanges (SAFE). The Colombo Stock Exchange is organised in the form of limited liability company under the Companies Act, and it functions as a non-profit organisation. It has a mutual ownership structure and to date, has a membership of 15. All members are corporate bodies, and each is licensed to carry out the duties as a stock broker. The Board of Directors is the policy making body of the CSE, which consists of 9 directors, and amongst the 9, one is elected as the Chairman. Of the nine directors, five are elected by the members, and the Minister of Finance appoints the other four. The CSE has proven itself to be one of the top Emerging Markets stock exchange in the world, with a recorded consistent annual growth of over 30% in 2002-2004, and in 2006, an annual growth of 41.6% was attained. It continued to achieve strong growth in 2007, which saw the stock exchange achieve a historic milestone - ASPI surpassed the 3000 mark for the first time in history. The excellent performance of CSE has been attributed to its advanced infrastructure of a fully automated trading platform, therefore enhancing its competitive edge and efficiency among the modern exchanges today. PHILIPPINES • Philippine Stock Exchange The Philippine Stock exchange is the only existing stock exchange in the Philippines and is one of the largest in Southeast Asia. The PSE Composite Index (made up of 30 stocks) is the key indicator of share price movement in the market six sub indices: Financials Index, the Industrial Index, the Holding Firms index, the Property Indez, the Services Index, and the Mining & Oil Index. Study of Relationship Between Indian Stock Market and Asian Stock Markets

The PSE is composed of two trading floors: one in Makati City; the other in Pasig City. Despite this, it is still capable of achieving one stock price and one Market Exchange through the MakTrade system. This single order book system warrants that a customer's order is matched with the best bid/offer, irrespective of which floor it was placed through. MakTrade facilitates the trading of securities through a broker to broker market with automatic order, trade routing, and confirmation. The stock exchange corporation is overseen by a Board of Directors. It consists of 15 members elected annually by stockholders. Additionally, at least 51% of the members must always remain non-brokers as set out by the Securities Regulation Code. The remaining Board members are broker-directors who represent brokerage firms. The management of the Exchange is composed of the President/CEO and a few other professional managers who ensure that the policies and resolutions of the Board are carried out. They are also responsible for the daily activities and operations of the Exchange and that the public's investments and transactions are protected.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

3 NAMES OF THE INDICES In this paper, the names of the countries and the names of the indices of those countries have been used interchangeably. Thus, the names of the countries represent the indices for the purpose of analysis and they need to be interpreted that way. Again, all the analyses have been done with the closing prices. The following table gives the country and the exchange with the name of its indices. Country India India China China Japan Singapore South Korea Taiwan Indonesia Israel Srilanka Philippines

Stock Exchange Name Bombay Stock Exchange National Stock Exchange Hong Kong Stock Exchange Shanghai Stock Exchange Tokyo Stock Exchange Singapore Exchange Korea Exchange Taiwan Stock Exchange Indonesia Stock Exchange Tel-Aviv Stock Exchange Colombo Stock Exchange Philippine Stock Exchange

Indices Name Sensex S & P Nifty Hang Seng SSE Composite TOPIX STI KRX 100 TAIEX IDX TA-25 ASPI PSEi

Study of Relationship Between Indian Stock Market and Asian Stock Markets

4.0 The Indian Stock Market The Indian stock exchanges hold a place of prominence not only in Asia but also at the global stage. The Bombay Stock Exchange (BSE) is one of the oldest exchanges across the world, while the National Stock Exchange (NSE) is among the best in terms of sophistication and advancement of technology. The working of stock exchanges in India started in 1875. BSE is the oldest stock market in India. The history of Indian stock trading starts with 318 persons taking membership in Native Share and Stock Brokers Association, which we now know by the name Bombay Stock Exchange or BSE in short. In 1965, BSE got permanent recognition from the Government of India. National Stock Exchange comes second to BSE in terms of popularity. BSE and NSE represent themselves as synonyms of Indian stock market. The Indian stock market is the world third largest stock market on the basis of investor base and has a collective pool of about 20 million investors. There are over 9,000 companies listed on the stock exchanges of the country.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

4.1 Historic background The Indian Stock Market has a long and rich history. Originally based on what would become the London Stock Exchange, traders gathered to trade local stock and talk business. Eventually the Indian Stock Market became not just another financial arena in southern Asia, but the most important financial arena outside of Japan. Today the Indian Stock Market still holds prominence in the region Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. The earliest records of security dealings in India are meager and obscure. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century. By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader there but were only

half a dozen brokers recognized by banks and merchants. Study of Relationship Between Indian Stock Market and Asian Stock Markets

The 1850's witnessed a rapid development of commercial enterprise and brokerage businesses were attracted. The number of brokers increased to about 200 to 250. At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street (now appropriately called as Dalal Street) where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively known as “The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated. a more recent establishment which came into existence in 1992, is the largest and most advanced stock market in India is also the third biggest stock exchange in Asia in terms of transactions. It is among the 5 biggest stock exchanges in the world in terms of transactions volume

4.2 SECURITIES LAWS IN INDIA 4.2.01 (a): The Securities Transactions in India at present are mainly governed by two Acts. 1. The Securities Contracts (Regulation) Act, 1956, and 2. The Securities & Exchange Board of India Act, 1992. 4.2.01 (b): THE DEPOSITORIES ACT, 1996: The paper based ownership and transfer of securities has been a major drawback of the Indian Securities Markets since it often resulted in delay in settlement and transfer of securities and also lead to "bad delivery", theft, forgery etc. The

Study of Relationship Between Indian Stock Market and Asian Stock Markets

Depositories Act, 1996 was therefore enacted to pave the way for smooth and free transfer of securities. 4.2.01 (c): The other relevant laws which affect the capital market are :1. The Foreign Exchange Regulations Act, 1973; 2. Arbitration and Conciliation Act, 1996; 3. Companies Act, 1956; 4. Debt Recovery Act (Bank and Financial Institutions Recovery of Dues Act, 1993); 5. Banking Regulation Act; 6. Benami Prohibition Act; 7. Indian Penal Code; 8. Indian Evidence Act, 1872 and; 9. Indian Telegraph Act, 1885. 4.2.02: THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 4.2.02 (a): The Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as the "Act"), containing a mere 31 sections, keeps a tight vigil over all the Stock Exchanges of India since 20th February, 1957. The provisions of the Act were formally administered by the Central Government. However, since the enactment of The Securities and Exchange Board of India Act, 1992 the Board established under it (SEBI) is concurrently having powers to administer almost all the provisions of the Act. Study of Relationship Between Indian Stock Market and Asian Stock Markets

4.2.02 (b): By virtue of the provisions of the Act, carrying on the business of dealing in securities without a license from SEBI is prohibited. Any Stock Exchange which is desirous of being recognized has to make an application under Section 3 of the Act to SEBI who is empowered to grant recognition and prescribe conditions including that of having SEBI'S representation (maximum three persons) on the Stock Exchange and prohibiting the Stock Exchange from amending its rules without the SEBI's prior approval. The recognition can be withdrawn in the interest of trade or public. SEBI is authorized to call for periodical returns from the recognized Stock Exchanges and to make enquiries in relation to their affairs. Every Stock Exchange is obliged to furnish annual reports to SEBI. Stock Exchanges are allowed to make rules only with the prior approval of SEBI. The Central Government and SEBI can direct Stock Exchanges to frame rules. Recognized stock exchanges are allowed to make bye-laws for the regulation and control of contracts but subject to the previous approval of SEBI and SEBI has the power to amend these bye-laws. The Central Government and SEBI have the power to supersede the governing body of any recognized stock exchange and to suspend its business. 4.2.02 (c): A public limited company in India, has no obligation to have its shares listed on a recognized Stock Exchange. But if a company intends to offer its shares or debentures to the public for subscription by issue of a prospectus, it must, before issuing such prospectus apply to one or more of the recognized stock exchanges for permission to have the shares or debentures intended to be so offered to the public to be dealt with in each of such stock exchange in terms of Section 73 of the Companies Act, 1956. SEBI can however under the provisions of Section 21 of the Securities Contracts (Regulation) Act, 1956 compel the listing of securities by public companies if it is of an opinion that it is necessary or expedient in the interest of trade or public. In the event of the Stock Exchange

Study of Relationship Between Indian Stock Market and Asian Stock Markets

refusing to list the securities of any public company an appeal to SEBI is provided under the Act. 4.2.02 (d): A company on the grounds specified in Section 22A of the Act is entitled to refuse to register transfer of any of its securities, notwithstanding anything contained in its articles or Section 82 or Section 111 of the Companies Act, 1956. 4.2.03: The Securities and Exchange Board of India Act, 1992. 4.2.03 (a): The Securities and Exchange Board of India Act, 1992 (hereinafter referred as "The SEBI Act") is deemed to have come into force on January 30, 1992. Relatively a brief act containing only 35 sections, the SEBI Act governs all the Stock Exchanges and the Securities Transactions in India. 4.2.03 (b): A Board by the name of the Securities and Exchange Board of India (SEBI) consisting of one Chairman and five members, two from the department of the Finance and Law of the Central Government, one from the Reserve Bank of India and two other persons and having its head office in Bombay and regional offices in Delhi, Calcutta and Madras has been constituted under the SEBI Act to administer its provisions. The Central Government has the right to terminate the services of the Chairman or any member of the Board. The Board decides all questions in its meeting by majority vote with the Chairman having a second or casting vote. 4.2.03 (c): Section 11 of the SEBI Act provides that it shall the duty of the Board to protect the interest of investors in securities and to promote the development of and to regulate the securities market by such measures as it thinks fit. It empowers the Board to regulate the business in Stock Exchanges, to register and regulate the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, Study of Relationship Between Indian Stock Market and Asian Stock Markets

portfolio managers, investment advisers, etc., to register and regulate the working of collective investment schemes including mutual funds, to prohibit fraudulent and unfair trade practices and insider trading, to regulate take-overs, to conduct enquiries and audits of the stock exchanges, etc. 4.2.03 (d): As all Stock Exchanges are required to be registered with SEBI under the provisions of the Act, under Section 12 of the SEBI Act all the stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediary who may be associated with the Securities Markets are obliged to register with the Board and the Board has the power to suspend or cancel such registration. The Board is bound by the directions given by the Central Government from time to time on questions of policy and the Central Government has the right to supersede the Board. The Board is also obliged to submit a report to the Central Government every year, giving true and full account of its activities, policies and programmes. Any one aggrieved by the Board's decision is entitled to appeal to the Central Government. 4.2.03 (e): The Central Government up till now has framed ten Rules by virtue of Section 29 of the SEBI Act. 4.2.03 (f): The Board empowered by Section 30 of the SEBI Act has till now with the previous approval of the Central Government made twelve regulations. 4.2.04: THE DEPOSITORIES ACT, 1996 AND REGULATIONS. 4.2.04 (a): With effect from 20th September 1995 an Act, to provide regulation of Depositories in securities and for matters connected therewith and/or incidental thereto has been enacted in India which is titled as "The Depositories Act, 1996". It extends to the whole of India. As per the definition provided in Section 2(e) of the said Act, a "Depository" means a company formed and registered under the Study of Relationship Between Indian Stock Market and Asian Stock Markets

Companies Act, 1956 and which has been granted certificate of registration under sub-Section (1A) of Section 12 of the Securities & Exchange Board of India Act, 1992. 4.2.04 (b): The Securities & Exchange Board of India have in exercise of the powers conferred upon it made Regulations which are called "The Securities & Exchange Board of India (Depositories & Participants) Regulations, 1996". 4.2.04 (c): Regulation 3 of the said Regulations provides as follows: (1) An application for the grant of a certificate of registration as a Depository shall be made to the Board by the sponsor in Form A, shall be accompanied by the fee specified in Part A of the Second Schedule and be paid in the manner specified in Part B thereof. (2) The application shall be accompanied by draft bye-laws of the Depository that is proposed to be set up. 4.2.04 (d): Regulation 6 provides that the Board shall not consider an application under Regulation 3 for grant of a certificate for registration as a Depository unless the sponsor belongs to one of the categories mentioned in Regulation 6. Regulation 7 provides that after considering the application under Section 3 with regard to the clarification specified in Regulation 6 if the Board is satisfied with the company established by the sponsor being eligible to act as Depository, it may grant a certificate of registration subject to the conditions mentioned in Regulation 7. A Depository which has been granted a certificate of registration under Regulation 7 is obliged to make an application to the Board within one year from the date of issue of the certificate of registration for commencement of business in a prescribed form. Regulation 12 empowers the Board to ask the Depository to furnish further information and/or clarification regarding the matters relevant for the grant of certificate of commencement of business and Regulation 13 lays down Study of Relationship Between Indian Stock Market and Asian Stock Markets

the matters which are relevant for considering grant of certificate for commencement of business. 4.2.04 (e): The rights and obligations of Depository are provided in Chapter V of the said Regulations. They inter alia provide for securities eligible for dematerialization, Agreement between Depository and Issuer, internal and external monitoring, review and evaluation of systems and controls, insurance against risks, manner of keeping records, records to be maintained, prohibition of assignment, agreement by participant, opening of separate accounts, transfer or withdrawal by beneficial owner, reconciliation, manner of surrender of certificate of security, manner of creating pledge or hypothecation, etc. 4.2.05: Take Over Code: 4.2.05 (a): SEBI under the provisions of Section 11 of the Securities Exchange Board of India Act 1992 is inter alia empowered to regulate the securities market by such measures as it may deem fit. One of the matters specified under that Section is "regulating substantial acquisition of shares and take over of companies". Section 30 of the same Act empowers SEBI to make regulations to carry out the purposes of this Act. Empowered by these provisions of the Act SEBI enacted "The Securities & Exchange Board of India (Substantial Acquisition of Shares and Take Overs) Regulations, 1997. They came into effect on 20th February 1997. and comprised of 47 Regulations. 4.2.05 (b): The Regulations, after defining, inter alia, as to what the terms "acquirer" means, who could be called as "person acting in consort", what is meant by "offer period", who is a "promoter", which is a "target company", etc. go to provide: (i) provisions of disclosures of shareholding and control in a listed company,

Study of Relationship Between Indian Stock Market and Asian Stock Markets

(ii) provisions for substantial acquisition of shares or voting rights in an acquisition of control over a listed company, (iii) provisions for bail out takeovers applicable to substantial acquisition of shares in a financially weak company, not being a sick industrial company, in pursuance to a scheme of rehabilitation approved by a public financial institution or a scheduled bank.

4.2.05 (c): The Regulations also provide for SEBI's right to investigate into the complaints on matters having a bearing on the substantial acquisition of shares and take overs and provide for penalties for violation of any of the provisions of the regulations. Adequate provisions have been made in the 1997 Regulations for: a) Equality of treatment and opportunity to all shareholders b) Protection of shareholders interest c) Fair & truthful disclosure of all material information by the acquirer in all public announcements and offer documents d) Prohibiting the acquirer and other parties for furnishing information concerning offer exclusively to one group of shareholders e) Allowing sufficient time to shareholders for making uniform decisions f) Announcing the offer only after most careful and responsible consideration g) Highest standard of care and accuracy to be utilized in preparing offer documents by the acquirer and all other intermediaries professionally involved in the offer Study of Relationship Between Indian Stock Market and Asian Stock Markets

h) Refraining from creating a false market in securities by all parties to an offer i) Target company not to take any action to frustrate an offer without the approval of the shareholders, etc. The 1997 regulations repeal the earlier regulations. 4.2.06: FOREIGN EXCHANGE MANAGEMENT BILL 1998 (FEMA): 4.2.06 (a): As a part of the on going process of economic liberalization relating to foreign investments and foreign trade in India and as a measure for closer interaction with the world economy the Foreign Exchange Regulation Act, 1973 (FERA) was reviewed in the year 1993 and several amendments were made therein. Further review of the FERA was undertaken by the Central Government of India in the light of subsequent developments and on account of the experience in relation to foreign trade and investment in India, the Central Government felt that instead of further amending the FERA, the better course would be to repeal the existing Act and to enact a new legislation in its place. In view of the same, the RBI was asked to suggest a new legislation based on the report submitted by a task force constituted for this purpose by the RBI recommending substantial changes in FERA. 4.2.06 (b): There has been a substantial increase in the Foreign Exchange Reserves of India. Since the year 1993, Foreign trade has grown up. Development has taken place such as current account convertibility, liberalization in investments abroad, increased access to external commercial borrowings by Indian Companies and participation by foreign institutional investors in securities markets in India. Keeping in view these changes the Central Government of India has introduced the FEMA to repeal FERA.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

4.2.06 (c): A marked digression from the general rule that the Accused is presumed to be innocent until proved guilty beyond reasonable doubt, is found in the FEMA. A presumption regarding documents, contained in this Bill is contrary to the general rules of evidence. For example, when documents pertaining to a crime under FEMA are discovered the Court will presume that the contents of the documents are true and correct and will not go into the question whether the incriminating documents may have been forged. Thus, it becomes the responsibility of the Accused to prove, in case that the documents are fabricated. The main change between FERA and FEMA is in the approach. FERA seeks to regulate

almost

all

the

transactions

involving

foreign

exchange

and

inbound/outbound investments. In FERA every provision is restrictive and starts with a negative proposition stating that whatever is mentioned in that section is prohibited unless the prior permission either general or special, as may be required in the specific case, of RBI is obtained. FERA provides that nothing can be done without RBI's permission. In comparison to this existing negative piece of legislation, the provisions of the proposed Bill has a positive approach. This can be found from the provisions of FEMA dealing with capital account transactions which are to be regulated. Unlike FERA which provides that these transactions cannot be entered into without prior permission of RBI, FEMA provides that any person may sell or draw foreign exchange for such transactions and then specifies the powers of the RBI to regulate the class or limits of such capital account transactions. Thus the basic proposition in the proposed FEMA Bill is positive. FEMA classifies foreign exchange transactions into capital account transactions and current account transactions and amongst the two regulates the former more closely. Under FEMA residential status will not depend upon the intent of the person to reside in India but would depend upon the exact period of his stay in India.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

4.2.06 (d): The provisions of the FEMA Bill aims at consolidating and amending the law relating to foreign exchange with the object of facilitating external trade and payments and for promoting the orderly payment and amendments in foreign exchange markets in India. The FEMA Bill empowers the RBI to authorize persons to deal in foreign securities specifying the conditions for the same. It also provides for a person resident in India in holding, owning, transferring or investing in foreign security and for a person resident out side India in holding, owning, transferring or investing in Indian Securities.

4.3 The Present Scenario Current condition of Indian markets has drastically improved. There is absolute transparency and instant transactions. All Indian Stock markets are now computerized and Internet Trading has become a common phenomenon. Indian stock markets have also developed a dynamic nature and can change from a bullish temperament to a bearish slide. Any small bit of information or even a rumor from any part of the country can affect the market and is a fairly accurate indicator of the prevalent atmosphere in the region or country. People from across the country and globe get in touch with minute wise readings on the stock market and gain a lot of trading aptitude after daily seeing BSE Stock Gainers or BSE top losers list which does a world of good to their investment portfolio.

4.4 Impact of stock market ON Economy Study of Relationship Between Indian Stock Market and Asian Stock Markets

The stock market has both positive and negative effects on the Indian Economy. Some of which are listed below  Provides a source of funding for organizations  An investment avenue  A source of income for investors

 A source of revenue for the government in the form of taxes  A source of employment opportunities  Meeting place for investors and organizations  Idle funds of common investors can be used for profitable purposes

The Indian Stock Markets can be a very rewarding avenue of investment but the constant changes and the inherent dynamic nature of the markets can wipe out your funds or savings within a minute. Thus, the key word for every retail investor is to be constantly alert and very observant. Don't always rely on the daily list of BSE top gainers or BSE top losers as it only takes a minute to get the things changed here. Keeping ones eyes and ears open can insure the investor of any major losses. Following such rules and with some experience and practice, one can emerge victorious and can churn out a fortune for himself as well. Hence, it is a way to turn your savings into a fortune.

5 Past Studies on Stock Markets Study of Relationship Between Indian Stock Market and Asian Stock Markets

Poshakwale, Sunil (2002) examined the random walk hypothesis in the emerging Indian stock market by testing for the nonlinear dependence using a large disaggregated daily data from the Indian stock market. The sample used was 38 actively traded stocks in the BSE National Index. He found that the daily returns from the Indian market do not conform to a random walk. Daily returns from most individual stocks and the equally weighted portfolio exhibit significant non-linear dependence. This is largely consistent with previous research that has shown evidence of non-linear dependence in returns from the stock market indexes and individual stocks in the US and the UK. Noor, Azuddin Yakob, Diana Beal and Delpachitra, Sarath (2006) studied the stock market seasonality in terms of day-of-the-week, month-of-the year, monthly and holiday effects in ten Asian stock markets, namely, Australia, China, Hong Kong, Japan, India, Indonesia, Malaysia, Singapore, South Korea and Taiwan. He concluded that the existence of seasonality in stock markets and also suggested that this is a global phenomenon. Linkage patterns: Masih, M.M. Abul and Masih, Rumi (1997) examined the dynamic linkage patterns among national stock exchange prices of four Asian newly industrializing countries Taiwan, South Korea, Singapore and Hong Kong. The sample used comprised end-of-the-month closing share price indices of the four NIC stock markets from January 1982 to June 1994. They concluded that the study of these markets are not mutually exclusive of each other and significant shortrun linkages appear to run among them. Lau, S T and Diltz, J.D. (1994) studied the transfer of information among Tokyo and New York stock exchanges.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

Agarwal, R N (2000) examined the financial integration of capital markets in developing nations gave insight with regards to the methodology and the area of study followed. In a similar study by Bae, K, Cha, B, and Cheung, Y (1999) the researchers tried to show the information transmission mechanism that operates for stocks which are dually listed. This has helped in understanding the channel of transmission of information that makes the exchanges dependant on each other.

6 .0 Origin of Various stock Exchanges Study of Relationship Between Indian Stock Market and Asian Stock Markets

Hong Kong Stock Exchange Accounts of securities trading in Hong Kong go back to the middle of the 19th century and fast economic development of Hong Kong directed to the formation of three other exchanges, namely-in 1969,the Far East Exchange; in 1971,the Kam Ngan Stock Exchange; in 1972, the Kowloon Stock Exchange. Stress to reinforce market control and to unite the four exchanges directed the integration of the Stock Exchange of Hong Kong Limited in 1980.On 27th March 1986, the trading opearated by the four exchanges came to an end and on 2nd April 1986, the new exchange started trading with a computerized system.In March 2000, the unified stock exchange had 570 participating associations. Hang Senge is the major index for trading share which comprise of the 33 largest companies trading on the Hong Kong Stock Exchange and it symbolizes about 70% of the value of all stocks that purchased and sold on this exchange.This index divided into four sub-indices-commerce, property, finance, utilities.

Shanghai Stock Exchange The formation of the International Settlement (foreign concession areas) in Shanghai as a result of the Treaty of Nanking of 1842 (which ended the First Opium War) and subsequent agreements between the Chinese and foreign governments are crucial to the development of foreign trade in China and of the foreign community in Shanghai. The market for securities trading in Shanghai begins in the late 1860s. The first share list appeared in June 1866 and by then Shanghai's International Settlement had developed the conditions conducive to the emergence of a share market:

several

companies,

and

banks, an

a

legal

interest

in

framework

for

diversification

joint-stock among

Study of Relationship Between Indian Stock Market and Asian Stock Markets

the

established

trading

houses

(although

the

trading

houses

themselves remained partnerships). In 1891 during the boom in mining shares, foreign businessmen founded the "Shanghai Sharebrokers' Association" headquartered in Shanghai as China's first stock exchange. In 1904 the Association applied for registration in Hong Kong under the provision of the Companies ordinance and was renamed as "Shanghai Stock Exchange". The supply of securities came primarily from local companies. In the early days, banks dominated private shares but, by 1880, only the Hong Kong and Shanghai local banks remained. Later in 1920 and 1921, "Shanghai Securities & Commodities Exchange" and "Shanghai Chinese Merchant Exchange" started operation respectively. An amalgamation eventually took place in 1929, and the combined markets operated thereafter as the "Shanghai Stock Exchange". Shipping, insurance, and docks persisted to 1940 but were overshadowed by industrial shares after the Treaty of Shimonoseki of 1895, which permitted Japan, and by extension other nations who had treaties with China, to establish factories in Shanghai and other treaty ports. Rubber plantations became the staple of stock trading beginning in the second decade of the 20th century. By the 1930s, Shanghai had emerged as the financial center of the Far East, where both Chinese and foreign investors could trade stocks, debentures, government bonds, and futures. The operation of Shanghai Stock Exchange came to an abrupt halt after Japanese troops occupied the Shanghai International Settlement on December 8, 1941. In 1946, Shanghai Stock Exchange resumed its operations before closing again 3 years later in 1949, after the Communist revolution took place.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

After the Cultural Revolution ended and Deng Xiaoping rose to power, China was re-opened to the outside world in 1978. During the 1980s, China's securities market evolved in tandem with the country's economic reform and opening up and the development of socialist market economy. On 26 November 1990, Shanghai Stock Exchange was established again and began operation a few weeks later on 19 December.

Tokyo Stock Exchange In the 1870's, a securities system was introduced in Japan and public bond negotiation began. This resulted in the request for a public trading institution; and, the "Stock Exchange Ordinance" was enacted in May 1878. Based on this ordinance, the "Tokyo Stock Exchange Co., Ltd." was established on May 15, 1878; and trading began on June 1st. In March 1943, the "Japan Securities Exchange Law" was enacted to reorganize the Stock Exchange as a war-time controlled institution. On June 30, 1943, 11 stock exchanges throughout Japan were unified and a quasi-public corporation, the "Japan Securities Exchange", was established (dissolved in April, 1947). With worsening war conditions and air-raids on the main island of Japan, the securities market was forced to suspend trading sessions on all securities markets from August 10, 1945. It was difficult to re-open the Stock Exchange by a Memorandum of Supreme Commander of Allied Powers (SCAP) in September 1945; however, trading was restarted by unofficial group transactions in December of 1945. The Securities and Exchange Law was enacted in March of 1947, and entirely revised in April of 1948. On April 1, 1949, three stock exchanges were established in Tokyo, Osaka and Nagoya. Trading on these exchanges began on May 16. In July of that same year, five additional stock exchanges were established in Kyoto (merged into Osaka Securities Exchange in March 2001), Kobe (dissolved in October 1967), Hiroshima (merged into Tokyo Stock Exchange in March 2000), Study of Relationship Between Indian Stock Market and Asian Stock Markets

Fukuoka, and Niigata (merged with Tokyo Stock Exchange in March 2000). In addition, the Sapporo Securities Exchange was established in April 1950. Consequently, Japan now has five stock exchange

Singapore Exchange The Singapore Exchange was created in 1999, when the Stock Exchange of Singapore (SES) and the Singapore International Monetary Exchange (SIMEX) merged into one. The SIMEX had been a futures exchange, started in 1984, while the SES had traded in stocks. At the end of 1998, the SES listed 307 companies and had a total market capitalization of S$263 billion. Before the merger, both companies were privately owned by the member firms of the exchanges. In 2000, the Singapore Exchange became the first publicly held stock exchange in the Asia-Pacific, and listed its shares on its own exchange.

Korea Exchange Korea Exchange (KRX) was created through the integration of the three existing Korean spot & futures exchanges (Korea Stock Exchange, Korea Futures Exchange and KOSDAQ) under the Korea Stock & Futures Exchange Act.The securities and futures markets of former exchanges are now operated as the business divisions of the KRX: the Stock Market Division, KOSDAQ Market Division and Derivatives Market Division. As of 31 December 2007, the Korea Exchange had 1,757 listed companies with a combined market capitalization of $1.1 trillion. The exchange has normal trading sessions from 09:00am to 03:00pm on all days of the week except Saturdays, Sundays and holidays declared by the Exchange in advance.

Taiwan Stock Exchange Study of Relationship Between Indian Stock Market and Asian Stock Markets

With a view to establishing a sound capital market to encourage savings for the formation of capital, the government of the Republic of China initiated a Stock Market Research Task Force in 1959. The Securities and Exchange Commission was set up in 1960 and the Taiwan Stock Exchange (TWSE) was incorporated in 1961. TWSE, funded by various private and state-owned enterprises, began operation on February 9, 1962. This is the sole centralized securities market in Taiwan. Under the Financial Supervisory Commission of the Executive Yuan, TWSE aims to achieve four goals, namely, accelerating t h e internationalization o f t h e s e c u r i t i e s mar k et , promot ing professionalism and innovation, maintaining a n d i m p r o v i n g market operational mechanisms, and enhancing efficiency and risk management. In accordance with government policy, TWSE provides a fair, efficient and safe trading environment, and aims to lead the Taiwan securities market into a new era of internationalization.

Indonesia Stock Exchange Originally opened in 1912 under the Dutch colonial government, it was re-opened in 1977 after several closures during World War I and World War II. After being reopened in 1977, the exchange was under the management of the newly created Capital Market Supervisory Agency (Badan Pengawas Pasar Modal, or Bapepam), which answered to the Ministry of Finance. Trading activity and market

capitalization

grew

alongside

the

development

of

Indonesia's financial markets and private sector - highlighted by a major bull run in 1990. On July 13, 1992, the exchange was privatized under the ownership of Jakarta Exchange Inc. As a result, the functions of Bapepam changed to become the Capital Market Supervisory Agency. On March 22, 1995 JSX launched the Jakarta Automated Trading System (JATS). In September 2007, Study of Relationship Between Indian Stock Market and Asian Stock Markets

Jakarta Stock Exchange and Surabaya Stock Exchange merged and named Indonesian Stock Exchange by Indonesian Minister of Finance. The current location of the Indonesian Stock Exchange is located in the IDX building in the Sudirman Central Business District, South Jakarta, near the current site of the Pacific Place Jakarta.

Tel-Aviv Stock Exchange The precursor to the TASE was the Exchange Bureau for Securities, founded by the Anglo-Palestine Bank (which became Bank Leumi) in 1935. With rapid growth of the Israeli economy after the founding of the state, a formal stock exchange was incorporated and began operations in Tel Aviv in 1953. In 1983 the exchange moved to its current location in Tel Aviv. In 1993 TASE had the third largest number of IPOs of all the world stock exchanges. In 1999 the exchange completed its turnover to fully computerized trading, with the change orchestrated by Esther Levanon, who came to the exchange in January 1986 after 12 years with the Shin Bet, having set up and run the security agency's computer department after her PhD work at the Technion. She later became CEO of the exchange. In 2005, non-Israeli investment in TASE reached an all-time high of NIS 2 billion. Average daily share volume reached a record high of NIS 1 billion, double that of 2000 and 50% more than in 2004. The bond market saw a record high of NIS 1.3 billion daily average turnover, 40% more than in 2004. Non-governmental bonds reached a daily average of NIS 220 million. Share issuance volume reached NIS 12.2 billion, around the same level of 2000 and 70% above the level of 2004. The Study of Relationship Between Indian Stock Market and Asian Stock Markets

TA-25 increased 34%. By end of year foreign investment banks UBS, Deutsche Bank, and HSBC had become members of TASE. In September 2006, TASE bought out the shares of TASE Clearing House from TASE members, making it a fully-owned subsidiary. The TASE Clearing House maintained a NIS 620 million risk fund at the time as a primary cushion of protection from potential risks, in addition to the NIS 30 million in shareholders equity. In February 2007 TASE and the London Stock Exchange and signed a memorandum of understanding to formalise existing ties between the two organisations, establish regular meetings between senior executives, and information in order to facilitate orderly trading of the shares of companies admitted to both markets. At the time, 50 Israeli companies were listed on the London Stock Exchange's Main Market and Alternative Investment Market (AIM). Of these, 36 had joined in the prior two years. In November 2007 TASE and The Nasdaq Stock Market signed a memorandum of understanding to formalize the relationship between the two markets developing channels of communication between the two markets and working to facilitate stronger trading of company shares admitted on both markets.NASDAQ at the time had 70 Israeli companies listed on the exchange, with a combined global market cap of over US$60 billion. In 2007, 56 new companies raised more than $2.5 billion in initial public offerings on the exchange, among them 20 hi-tech firms. Average daily share trading volume set new records, averaging $500 million a day, a 55% jump over 2006. Bond trading volume increased more than 100% from 2006 levels, to $800 million. Over 2007, the market for exchange-traded funds (ETFs) grew with the addition of 150, bringing the total number of listed ETFs to 240, representing 18% Study of Relationship Between Indian Stock Market and Asian Stock Markets

of the trading volume in shares and 10% of the trading volume in non-government bonds. The public's holdings in ETFs reached more than $6 billion. The Tel Bond20 index was also launced, with the value of index products totalling $900 million.For the four years 2004-07, the TA-25 rose 175% -- more than four times the figure for New York's markets for that timeframe. In May 2008 Northern Trust started the first US exchange-traded fund on the NYSE based on TASE's benchmark, the TA-25 Index. In July 2008 TASE and NYSE Euronext entered into a memorandum of understanding to increase the number of companies listed in both the US and Israel, and boost trading. At the time seven Israeli companies traded on the NYSE. Dual listings trading volume of NYSE Israeli companies had increased 31% annually since 2001. In November 2008 TASE and the Shanghai Stock Exchange signed a memorandum of understanding, pursuant to which they agreed to exchange delegations, to deepen Israeli businessmens' knowledge of the Chinese market and Shanghai Stock Exchange, and vice versa.

Colombo Stock Exchange The history of share trading in Sri Lanka dates back to 1896 with the inception of share trading in limited liability companies under the the Colombo Brokers Association. In 1985, the Colombo Stock Exchange(CSE) took over the Stock Market from the Colombo Shares Brokers Association, which administered the activities of the Colombo Stock Market from 1896 to 1985. It was established as a non-profit making limited liability company under the Companies Act of Sri Lanka. In the following year, CSE became a Study of Relationship Between Indian Stock Market and Asian Stock Markets

member of The International Federation of Stock Exchanges (FIBV). In 1991, the Central Depository System (CDS) was established, which introduced the automation of the Clearing House of the Stock Exchange. An electronic and settlement system for share transactions was also introduced together with the CDS. In 1997, the stock exchange took another step forward towards a more efficient market with the installation of the Automated Screen-Based Trading System (ATS), which saw the automation of trading activity. Within 17 years of establishment, a state-of-the-art technological infrastructure was developed, and it significantly increased the competitiveness and efficiency of the market. In 1996, a two-tier system - Board "A" and Board "B" was introduced. Board "A" comprises of major companies while medium and small companies made up Board "B". The stock exchange experienced an unprecedented surge in growth in both indices after the ceasefire agreement was signed in 2001 by the Sri Lankan government. This signified the end of a 20 year civil war which was highly responsible for the rather sluggish performance of the market during the 1990s. This led to a huge increase in foreign investment and over the years, the CSE has seen a vast improvement in its performance, which saw the All Share Price Index (ASPI) surpassing the 3000 mark this year for the first time in history on February 13. Fortune Magazine has recently highlighted the CSE as the second best Emerging Markets stock exchange in the world.

Philippine Stock Exchange The current Philippine Stock Exchange is a conjunction of the Manila Stock Exchange (1927) and the Makati Stock Exchange (1963). The Manila Stock Exchange, when in existence, was the first exchange in Manila and the oldest in the Far East. Despite Study of Relationship Between Indian Stock Market and Asian Stock Markets

having existed separately for nearly three decades, the two bourses unified in 1992 under President Fidel Ramos. Unification was deemed appropriate because the two exchanges essentially traded the same listings. Ramos also aimed for a more efficient capital market. In 1994, its operations were in full swing with two trading floors - one in Pasig City; the other in Makati City. On January 4 1993, the PSE incorporated the Stratus Trading System - a computerized approach for their operations. Six months later, on June 15, they also adopted the MakTrade trading system. Although the two systems were linked on March 25 1994 to allow for the same opening and closing prices, it was not until November 13 1995 that the systems were unified under the Unified Trading System - operating under the MakTrade. In 1998 the Philippine Securities and Exchange Commission named the PSE a self regulating organization, which allowed it to implement its own policies and regulations. By 2001, the PSE had formed into a stock-shareholder based organisation by taking the shape of a profit earning corporation. It also began trading bonds. By 2003, in an effort to be more publicly held, the exchange only allowed shares to be listed through an introduction, rather than an initial public offering. Thus, in 2004 the PSE sold 6,077,505 shares of its un-issued capital to five investors: PLDT Beneficial Trust Fund, SMC Retirement Fund, Government Service Insurance System, Kim Eng Investment Ltd. and KE Strategic Pte Ltd.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

7.0 Comparative Analysis This is the main part of the study wherein the various stock exchanges have been compared on certain parameters, both qualitatively and quantitatively.

7.1 QUALITATIVE ANALYSIS In this section the various stock exchanges have been compared on the following parameters; 1. Market Capitalization 2. number of listed securities 3. listing agreements 4. circuit filters 5. settlement These parameters are used to look at selected important aspects of any stock exchange, viz., the market capitalization gives an idea about the size of the respective exchanges; whereas the number of listed securities acts as an indicator for the volume and liquidity of any exchange. The listing agreements take care of the governance issue, while circuit filters give an insight into the risk management framework of the said exchange. Finally, the efficiency of a stock exchange has been measured in terms of its settlement process.

7.1.1 Market Capitalization Study of Relationship Between Indian Stock Market and Asian Stock Markets

Market capitalization is the measure of corporate size of a country. It shows the current stock price multiplied by the number of outstanding shares. It is commonly referred to as Market cap. It is calculated by multiplying the number of common shares with the current price of those shares. This term is often confused with capitalization, which is the total amount of funds used to finance a firm's balance sheet and is calculated as market capitalization plus debt (book or market value) plus preferred stock. While there are no strong definitions for market cap categorizations, a few terms are frequently used to group companies based on its capitalization. The table below shows the market capitalization of various stock markets in Asia as of October 2009 Country

Market

Bombay Stock Exchange National Stock Exchange Hong Kong Stock Exchange Shanghai Stock Exchange Tokyo Stock Exchange Singapore Exchange Korea Exchange Taiwan Stock Exchange Indonesia Stock Exchange Tel-Aviv Stock Exchange Colombo Stock Exchange Philippine Stock Exchange Others Total

million) 1144375 1069909 2180399 2430281 3335316 442174 765867 575827 196179 210185 8351 79074 31394312 43832252

Cap

(US

$ % of World 2.61 2.44 4.97 5.54 7.609 1.008 1.747 1.31 0.447 0.479 0.019 0.18 71.62 100

(Source :www.world-exchanges.org) Based on the above study, it can be observed that India is 13th in the world ranking of Market capitalization. This is in spite of having the third largest investor base, after Japan and USA, and having the largest number of companies listed. Study of Relationship Between Indian Stock Market and Asian Stock Markets

7.1.2 Listed Securities Listing in a stock exchange refers to the admission of the securities of the company for trade dealings in a recognized stock exchange. The securities may be of any public limited company, Central or State Government, quasi-governmental and other financial institutions/corporations, municipalities, etc. Securities of any company are listed in a stock exchange to provide liquidity to the securities, to mobilize savings and to protect the interests of the investors. India has the highest number of companies listed in the stock market. Out of this, about 75 % of the companies are listed with the Bombay Stock Exchange. Indices Name Sensex S & P Nifty Hang Seng SSE Composite TOPIX STI KRX 100 TAIEX IDX TA-25 ASPI PSEi

No. of Companies 4951 1439 1297 868 2340 769 1774 739 402 627 231 248

7.1.3 Listing Agreements 7.1.3.1 Bomabay Stock Exchange Eligibility Criteria for IPOs/FPOs: Companies have been classified as large cap companies and small cap companies. Company with a minimum issue size of Rs. 10 crores and market capitalization small cap company is a company other than a large cap company. Study of Relationship Between Indian Stock Market and Asian Stock Markets

Parameters

Small Cap

Large Cap Companies

Min post issue paid up

Companies 3 Crores

3 Crores

capital Min Issue size Min market capitalization Min public shareholders Min turnover

3 Crores 5 Crores

10 Crores 25 Crores 1000 3 Crores in preceding 3 years

7.1.3.2 National Stock Exchange Eligibility Criteria for New companies (IPOs) Paid Up capital: Not less than 10 Crores Market Capitalisation: Not less than 25 Crores At least three years track record: • The company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR). • The networth of the company has not been wiped out by the accumulated losses resulting in a negative networth. • The company has not received any winding up petition accepted by a court. • ‘Promoters’ mean one or more persons with a minimum 3 years’ experience of each of them in the same line of business and shall be holding at least 20% of the post issue equity share capital individually or severally • No disciplinary action by other stock exchanges and regulatory authorities in past three years. Existing Companies listed on other stock exchanges Study of Relationship Between Indian Stock Market and Asian Stock Markets

Paid up Capital: Not less than 10 Crores Market Capitalization: Not less than 25 crores. Minimum Listing Requirements for companies listed on other stock exchanges. The company should have minimum issued and paid up equity capital of Rs. 3 crores. The Company should have profit making track record for last three years. Minimum net worth of Rs. 20 crores Minimum market capitalization of the listed capital should be at least two times of the paid up capital.

7.1.3.3 Hong Kong Stock Exchange Basic Listing Requirements for Equities • Profit attributable to shareholders: At least HK$50 million in the last three financial years • Market Capitalisation: At least HK$200 million at the time of listing • Revenue: At least HK$500 million for the most recent audited financial year • Cashflow: Positive cashflow from operating activities of at least HK$100 million in aggregate for the three preceding financial years Spread of Shareholders: • 100 shareholders for issuers with 24 months of active business pursuits. • 300 shareholders for issuers with 12 months of active business pursuits. Public float: • At least 25% of the issuer's total issued share capital must at all times be held by the public.

7.1.3.4 Shanghai Stock Exchange According to the regulations of Securities Law of the People’s Republic of China and Company Law of the People’s Republic of China, limited companies applying for the listing of shares must meet the following criteria: Study of Relationship Between Indian Stock Market and Asian Stock Markets

The shares must have been publicly issued following approval of the State Council Securities Management Department. The company’s total share capital must not be less than RMB 30 million. The company must have been in business for more than 3 years and have made profits over the last three consecutive years. This requirement also applies to former state-owned enterprises reincorporating as private or public enterprises. In the case of former state-owned enterprises re-established according to the law or founded after implementation of the law and if their issuers are large and medium state owned enterprises, it can be calculated consecutively. The number of shareholders with holdings of values reaching in excess of RMB 1,000 must not be less than 1,000 persons. Publicly offered shares must be more than 25% of the company’s total share capital. For company whose total share capital exceeds RMB 400 million, the ratio of publicly offered shares must be more than 15%. The company must not have committed any major illegal activities or false accounting records in the last three years. Other conditions stipulated by the State Council. China currently has a preference for domestic firms only to list onto their stock exchanges; India has similar rules. However, China is considering opening up their capital markets to foreign firms in 2010. The conditions for applications for the listing of shares by limited companies involved in high and new technology are set out separately by the State Council.

7.1.3.5 Tokyo Stock Exchange Criteria for Listing The number of shareholders: • In case where the number of shares to be listed is less than 10 thousand units; 800 persons. • In case where the number of shares to be listed is 10 thousand units or more but less than 20 thousand units; 1,000 persons, Study of Relationship Between Indian Stock Market and Asian Stock Markets

• In case where the number of shares to be listed is 20 thousand units or more; 1,200 persons. Number of years since incorporation: 3 years or more have elapsed by the last day of a business year immediately prior to the day of listing application Amount of profit: The amount of profit for the first year of the latest 2 years was 100 million yen or more; and 400 million yen or more for the latest year, or The amount of profit for the first year of the latest 3 years was 100 million yen or more; 400 million yen or more for the latest one year of the latest 3 years; and the aggregate amount of profits for all of the latest 3 years was 600 million yen or more.

7.1.3.6 Singapore Exchange Highlights of listing requirements - Mainboard Criteria 1

Criteria 2

Criteria 3

Income

Cumulative consolidated pretax profit of at least S$7.5 million for the last 3 years, with a pre-tax profit of at least S$1 million in each of those 3 years

Cumulative N/A consolidated pretax profit of at least S$10 million for the latest 1 or 2 years

Market capitalisation

N/A

N/A

At least S$80 million at the time of the initial public offering, based on the issue price and post invitation

Study of Relationship Between Indian Stock Market and Asian Stock Markets

issued share capital Shareholding spread

• • •

•

Market capitalisation less than S$300 million : 25% of enlarged share capital in public hand Market capitalisation between S$300 million - S$400 million : 20% of enlarged share capital in public hand Market capitalisation between S$400 million - S$1 billion : 15% of enlarged share capital in public hand Market capitalisation more than S$1 billion : 12% of enlarged share capital in public hand

No of shareholders At least 5,000 Moratorium

•

Promoters' entire shareholding at the point of listing for first 6 months after listing (Criteria 1 & 2)

•

Promoters' entire shareholdings at the point of listing for first 6 months after listing and at least 50% of original shareholdings for the next 6 months (Criterion 3)

Financial position Healthy financial position with positive cash flow operating and liquidity activities. All debts owing by directors, substantial shareholders and companies controlled by directors and substantial shareholders must be settled except subsidiaries and associated companies of the issuer Directors and management

•

•

•

•

•

Financial reporting

Directors and executive officers should have appropriate experience and expertise to manage the group's business The character and integrity of the directors, management and controlling shareholders of the issuer will be a relevant factor for consideration At least 2 non-executive directors who are independent and free of any material business or financial connection with the issuer A foreign issuer must have at least two independent directors, resident in Singapore Audit committee is required

Singapore Financial Reporting Standards, U.S. Generally Accepted Accounting Principles or International Financial Reporting Standards

Study of Relationship Between Indian Stock Market and Asian Stock Markets

7.1.3.7 Korea Exchange Quantitative Requirement No of Shares: At least 1million shares as of application date. Net Worth: At least KRW 10 billion as of application date. Sales Amount: At least KRW 30 billion for the latest fiscal year and the average for the latest three fiscal years should be at least KRW 20 billion. Financial Requirement Profit: Must show operating profits, ordinary profits and net profits. Profits for the latest fiscal year should be at least KRW 2.5 billion and the sum for the latest three fiscal years should be KRW 5 billion. Reserve Ratio: At least 50% (25% for large corporations) according to the balance sheet of the latest fiscal year. Reserve ratio = [(Net worth - Paid-in Capital) / Paid-in Capital] * 100 No of years since establishment: Have been operating without interruption for at least 3 years since establishment.

7.1.3.8 Taiwan Stock Exchange Where an issuing company applying for the listing of its stock meets the criteria listed below, the TWSE will agree to list its stock: 1. Duration of corporate existence: It shall have been incorporated and registered under the Company Act for at least three years at the time of the application for listing; provided, this restriction shall not apply to public (state-owned) enterprises or to privatized public enterprises. 2. Amount of capital stock: The amount of its paid-in capital shall be NT$600 million or more at the time when it applies for listing. 3. Profitability: The operating income and income before tax in its separate financial statements, or in its consolidated financial statements prepared in Study of Relationship Between Indian Stock Market and Asian Stock Markets

accordance with the Statement of Financial Accounting Standards No. 7, meet either of the following criteria, and it does not have any accumulated deficit in the final accounting for the most recent fiscal year. However, if it has prepared a consolidated financial statement, the following criteria are not applicable to the operating income stated in its separate financial statements: (1) Each of the operating income and income before tax for the most recent two fiscal years represents 6 percent or greater of the share capital stated on the financial report for the annual final accounts, or the average operating income and income before tax for the most recent two (2) fiscal years represent 6 percent or greater [of the amount of paid-in capital in its final accounts] and the profitability for the most recent fiscal year is greater than that for the immediately preceding fiscal year; or (2) Each of the operating income and income before tax for the most recent five years represents 3 percent or greater of the share capital stated on the financial report for the annual final accounts. 4. Dispersion of shareholdings: The number of registered shareholders shall be 1,000 or more. Excluding company insiders and any juristic persons in which such insiders hold more than 50 percent of the shares, the number of registered shareholders shall be at least 500, and the total number of shares they hold shall be 20 percent or greater of the total issued shares, or at least 10 million. For the profitability in the consolidated financial statements referred to in subparagraph 3 of the preceding paragraph, the influence of net profit (loss) of minority

interest

on

it

shall

not

be

taken

into

account.

A state-owned enterprise applying for listing of its stock shall have its financial report for the most recent fiscal year audited and attested by a certified public accountant, and shall prepare it in the form of a two-year comparative report. For other fiscal years if the stock was not yet publicly issued, the audit report issued by the auditing agency may be used instead.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

7.1.3.9 Indonesia Stock Exchange Stock listed in the Indonesia Stock Exchange is classified into 2 listing boards: Main Board and Development Board. The placement of the Issuer and prospective Issuer’s Listing depends on the fulfillment of the initial listing requirements on each Board. Main Board is intended for listed big companies that have track records, while the Development Board is intended for companies that have not yet fulfill the listing requirements of the Main Board, including prospective companies that have not produce any profits, and companies that are on the state of reorganization. General Requirement Listing on the Jakarta Stock Exchange Issuers can list their stocks in the Exchange if they have already fulfilled the following requirements: 1. Registration statement has been stated effective by the Bapepam 2. The issuer is not in lawsuit that could influence the existence of the company 3. Its business field is directly or indirectly not prohibited by the prevailing law of Indonesia 4. Particularly for issuers in manufacturing field, they are not in pollution problem (this is proved by the AMDAL certificate) and for issuers in forestry field must have ecolabelling certificate 5. Especially for issuer in mining field, it must have a managing license that is still valid at least for 15 years; have at least 1 Mining Authority Contract or Regional Mining License; one director with technical skill and experience in mining field; and have had a proven deposit or equivalent 6. Especially for business that needs managing license (like highway construction, forestry), it must own the license at least for 15 years. Study of Relationship Between Indian Stock Market and Asian Stock Markets

7. Subsidiary and/or holding company of a listed company in Jakarta Stock Exchange that contribute 50% of its consolidation income to the listed company cannot be listed in the Exchange 8. Financially related requirements of the initial listing must base on the last audited annual financial report.

Criteria of Initial Listing on the Main Board Prospective issuers will be listed for the first time in the Main Board if they have fulfilled the requirements below: No Criteria 1. Have fulfilled general requirements for stock listing 2. Until the proposal of listing, the company has been running its operational activities in the same core business for at least 36 months in sequent 3. Have audited the last three years Financial Reports, and have received Proper Opinion Without Exception for the last 2 years audited financial report and Interim Audited Income Statement (if exists) 4. Based on the last Audited Financial Report, the company must have at least an amount of Rp 100,000,000,000 (one hundred billion rupiah) as Net Tangible Asset 5. The amount of shares owned by the minority shareholders after public offering is at least 100,000,000 (a hundred million) shares or 35% of paid up capital (depends on which one is smaller) 6. The number of shareholders is at least 1.000 (a thousand) shareholders, who already have accounts in one of the Exchange Memberss, with the provisions below:  For issuer that performs public offering, the number of its shareholders is the number of shareholders after the initial public offering.  For issuer that comes from a public company, the number of its shareholders is the last number of shareholders at least 1 month before proposing the listing application.  For issuer listed in another Bourse, the number of its Study of Relationship Between Indian Stock Market and Asian Stock Markets

shareholders is counted based on the average of the last six months.

Criteria of Initial Listing on the Development Board No Criteria 1. Have fulfilled general requirements for stock listing 2. Until the proposal of listing, the company has been running its operational activities in the same core business for at least 12 months in sequent 3. Until the proposal of listing, the company has been running its operational activities in the same core business for at least 12 months in sequent 4. Have net tangible assets of at least Rp 5,000,000,000 (five billions Rupiah) 5. If issuer experiences operating loss or does not produce any profit yet or operates less than 2 years, it is obligated to: 

achieve profit and net income on the end of the second book year based on the financial projection announced in the Exchange.

Especially for issuer, whose field of business needs longer time to reach break event point (such as infrastructures, agricultures of hard plants, Forest Managing Right concession or Industry Plan Forestry or others business field related to public services) shoul achieve profit and net income at least at the end of the sixth year since the listing The amount of shares owned by the minority shareholders after public offering of five days before the listing proposal (for public company which shares have not been listed) is at least 50,000,000 (fifty million) shares or 35% of paid up capital (depends on which one is smaller) 

6.

7.

The number of shareholders is at least 500 (five hundred) shareholders, who already have accounts in one of the Exchange Members, with the provisions below: 



For issuer that performs public offering, the number of its shareholders is the number of shareholders after the initial public offering For issuer that comes from a public company, the number of its shareholders is the last number of shareholders at least 1 month

Study of Relationship Between Indian Stock Market and Asian Stock Markets

before proposing the listing application For issuer listed in another Bourse, the number of its shareholders is counted based on the average of the last six months Especially for issuer who is going tohold an IPO, the Underwriter has to use the principle of full commitment 

8.

7.1.3.10 Tel-Aviv Stock Exchange Listing requirements excluding R&D companies Companies choosing to list on the TASE may qualify from among the following criteria: (numbers are in NIS millions)

Shareholders’ equity after listing Public-float value Period of activity Added value in the 12 months preceding listing * Value of issue Value of the company’s shares

Procedure Procedure Procedure 1 2 3 25 35 20 30 80 12 months 12 months 4 -

-

80 200

*Added value: Profit (loss) before taxes, plus payroll expenses, depreciation, and financing expenses, less financing income. Public float for newly listed companies excluding R&D companies The public float rate in a newly listed company must be equal to, or higher than, one of the following: The public float rateWhen the public float value Study of Relationship Between Indian Stock Market and Asian Stock Markets

(%) must be at least 25 20 15 10 7.5

(in NIS m) is greater than 20 30 40 50 200

Special listing rules for R&D companies An R&D company is a company that has invested at least NIS 3 million in R&D over the last three years, including investments of funds received from the Office of the Chief Scientist at the Ministry of Industry and Trade. The applicant company's main area of activity must be R&D, or the production and marketing of products resulting from its own R&D. The public float rate in a newly listed R&D company must meet the following: The public float rateWhen the public float value (%) must be at least (in NIS m) is greater than 10 16 7.5 50 Following an initial public offering, shareholder’s equity must be a minimum of NIS 8 million.

7.1.3.11 Colombo Stock Exchange Eligibility to be listed on the Main Board (i) an issued and paid up capital of Rs 75,000,000.00 (Seventy Five Million) or where the Company is incorporated/established outside Sri Lanka a value equivalent thereto (ii) a profit before tax for three consecutive years immediately preceding the date of application. (iii) 25% of the issued capital must be held by/ offered to the public. Study of Relationship Between Indian Stock Market and Asian Stock Markets

Eligibility to be listed on the Second Board (i) an issued and paid up capital of Rs 5,000,000.00 (five million) or where the Company is incorporated/ established/ situated outside Sri Lanka a value equivalent thereto (ii) at the time of listing 10% of the issued capital must be held by the public

7.1.3.12 Philippine Stock Exchange GENERAL CRITERIA FIRST BOARD

SECOND BOARD

A track record of profitable operations for three (3) full fiscal years; or b. A market capitalization of P500 m, provided that it has a fiveyear operating history; or

a. The applicant company must demonstrate its potential for superior growth to the Exchange; b. It must have an operating history of at least one (1) year prior to its listing; and

a.

c. Net tangible assets At listing, the of P500 m, provided that c. market capitalization of it has a five-year the company must be at operating history. least P250 m.

SME BOARD The applicant company shall be evaluated based on the following: a. The integrity and capability of the company’s management and its controlling stockholders; b. The company’s prospects of further growth and profitability; c. The viability of the business and sustainability of the projected earning stream; and d. The company’s lack of existing material conflicts of interest.

TRACK RECORD REQUIREMENT Study of Relationship Between Indian Stock Market and Asian Stock Markets

FIRST BOARD

SECOND BOARD

SME BOARD

A company must have a cumulative consolidated pre-tax profit of at least at least P50 Million and a minimum pre-tax profit of P10 Million for each of the three (3) full fiscal years immediately preceding the application for listing. For purposes of this rule, pre-tax profit shall not include nonrecurring and extraordinary income, nor shall it be reduced by non-recurring and extraordinary loss. The applicant must further be engaged in materially the same businesses and must have a proven track record of management throughout the last three (3) years prior to the filing of the application.

None, but must demonstrate a potential for superior growth, through the submission of Statement of Active Business Pursuits and Objectives.

The applicant company should have been operational for at least one (1) year with positive net operating income (income before interest, taxes, depreciation and amortization-EBITDA) during the last financial year.

Exceptions to the 3 year track record rule: a. The applicant company has been operating for at least Ten (10) years prior to the filing of the application. The applicant company shall have a cumulative pre-tax profit of at least P50 Million, excluding non-recurring and extraordinary income and/or loss, for the last Study of Relationship Between Indian Stock Market and Asian Stock Markets

Three (3) fiscal years immediately preceding the application for listing. No net operating loss must have been registered in the fiscal year immediately preceding the filing of the application; b. The applicant company is a newly formed holding company which uses the operational track record of its subsidiary(ies). The company, however, is prohibited from divesting its shareholdings in the said subsidiary(ies) for a period of three (3) years from the listing of its securities. The prohibition shall not apply if a divestment plan is approved by majority of the applicant company’s stockholders.

NUMERICAL CRITERIA FIRST BOARD

SECOND BOARD

SME BOARD

Authorized Capital Stock- Authorized Capital Stock- Authorized Capital MinimumP400,000,000.00 Subscription & Paid-upMinimum-

MinimumP 100,000,000.00 Subscription & Paid-upMinimum-

StockMinimumP 20,000,000.00 MaximumP 100,000,000.00 Subscription & Paid-

Study of Relationship Between Indian Stock Market and Asian Stock Markets

P100,000,000.00

P 25,000,000.00 Condition on Paid-up: at least 75% of the paid-up must have already been disbursed to the project, venture or business referred to in the business plan

upMinimum25% of the ACS * The applicant company should have net tangible assets of at least Five Million Pesos (P 5,000,000.00). The net tangible assets requirement is not applicable to information technology companies.

OPERATING HISTORY FIRST BOARD

SECOND BOARD

SME BOARD

For a track record of At least one (1) year prior At least one (1) year from filing profitable operations- At to listing. least three (3) full fiscal years prior to the filing of the listing application if with track record For a market capitalization or net tangible assets of P500M - at least five (5) years.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

7.1.4 Circuit filters Stock Markets have the dubious reputation of crashing without a warning taking with the savings of numerous investors. A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a market. Crashes are driven by panic as much as by underlying economic factors. They often follow speculative stock market bubbles such as the dot-com bubble. The study is restricted to the performance of the Indian Stock market and Asian Stock exchanges. Hence we will be concentrating on the Asian Financial Crisis and Dot-Com Bubble. As a counter measure to the instability of the stock market, various measures were introduced by to avoid huge losses. One such solution is circuit breakers. Circuit Breakers are “a point at which a stock market will stop trading for a period of time in response to substantial drops in value.” They are also referred to as trading curb in certain stock markets like DJIA and NYSE. This was first introduced after Black Monday. Black Monday is the name given to Monday, October 19, 1987, when the Dow Jones Industrial Average (DJIA) fell 22.6%.(12). This was done with an aim to avert panic in the market and to avoid panic selling. The Circuit Filters operate according to the rules and requirements of the stock Market in question. Exchange

Percentage change to trigger circuit breakers

Study of Relationship Between Indian Stock Market and Asian Stock Markets

Bombay Stock Exchange

Market wide 3 stages-10%,15%,20% of index movement Individual scrips(depending upon type of scrip)

National Stock Exchange

2%,5%,10% movement of individual scrip Market wide 3 stages-10%,15%,20% of index movement Individual scrips(depending upon type of scrip) 2%,5%,10% movement of individual scrip

Hong

Kong

Stock

Exchange Shanghai Stock Exchange Tokyo Stock Exchange 2 stages-5%,10% Singapore Exchange Korea Exchange Single stage -10% Taiwan Stock Exchange Indonesia Stock Exchange Tel-Aviv Stock Exchange Colombo Stock Exchange Philippine Stock Exchange

REMARKABLE FEATURES OF CIRCUIT FILTERS IN SOME STOCK EXCHANGES Bombay Stock Exchange Scrip wise Price Bands 1. For scrips (53 scrips) on which derivative products are available and scrips which are included in indices on which derivative products are available, there is no circuit filter. However, the Exchange has imposed dummy circuit fitters on these scrips to avoid punching error, if any. 2. Other Scrips which are not included in above-mentioned category have a circuit filter limit of 20%. Study of Relationship Between Indian Stock Market and Asian Stock Markets

Market Wide Circuit Breakers In addition to the above-stated price bands on individual scrips, SEBI has decided to implement index based market wide circuit breakers system with effect from July 02, 2001.The circuit breakers are applicable at three stages of the index movement either way at 10%, 15% and 20%. These circuit breakers will bring about a coordinated trading halt in both Equity and Derivative market. The market wide circuit breakers can be triggered by movement of either BSE SENSEX or the NSE NIFTY, whichever is breached earlier. The percentage movements are calculated on the closing index value of the quarter. These percentages are translated into absolute points of index variation (rounded off to the nearest 25 points in case of SENSEX). At the end of each quarter, these absolute points of index variations are revised and made applicable for the next quarter. The absolute points of SENSEX variation triggering market wide circuit breaker for a specified time period for any day of the quarter is informed by the Exchange through Press Release from time to time.

National Stock Exchange Index-based Market-wide Circuit Breakers The index-based market-wide circuit breaker system applies at three stages of the index movement, either way viz. at 10%, 15% and 20%. These circuit breakers, when triggered, bring about a coordinated trading halt in all equity and equity derivative markets nationwide. The market-wide circuit breakers are triggered by movement of either the BSE Sensex or the NSE S&P CNX Nifty, whichever is breached earlier. • In case of a 10% movement of either of these indices, there would be a one-hour market halt if the movement takes place before 1:00 p.m. In case the movement takes place at or after 1:00 p.m. but before 2:30 p.m., there would be trading halt for ½ hour. In case movement takes place at or after 2:30 p.m., there will be no trading halt at the 10% level and market shall continue trading. Study of Relationship Between Indian Stock Market and Asian Stock Markets

• In case of a 15% movement of either index, there shall be a two-hour halt if the movement takes place before 1 p.m. If the 15% trigger is reached on or after 1:00 p.m. but before 2:00 p.m., there shall be a one hour halt. If the 15% trigger is reached on or after 2:00 p.m., the trading shall halt for the remainder of the day. • In case of a 20% movement of the index, trading shall be halted for the remainder of the day. These percentages are translated into absolute points of index variations on a quarterly basis. At the end of each quarter, these absolute points of index variations are revised for the applicability for the next quarter. The absolute points are calculated based on closing level of index on the last day of the trading in a quarter and rounded off to the nearest 10 points in case of S&P CNX Nifty. In addition to this, there are also price bands for individual securities. Daily price bands are applicable on securities as below: • Daily price bands of 2% (either way) on specified securities. • Daily price bands of 5% (either way) on specified securities. • Daily price bands of 10% (either way) on specified securities. • No price bands are applicable on scrips on which derivative products are available or scrips included in indices on which derivative products are available. • Price bands of 20% (either way) on all remaining scrips (including debentures, warrants, preference shares etc). The price bands for the securities in the Limited Physical Market are the same as those applicable for the securities in the Normal Market. For Auction market the price bands of 20% are applicable. • In order to prevent members from entering orders at non-genuine prices in such securities, the Exchange has fixed operating range of 20% for such securities.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

Hong Kong Stock Exchange Though a circuit-breaker has not been adopted yet, a two-tier circuitbreaker is being considered, under which trading would stop for half an hour in the event of a 15% fluctuation over the previous day’s close, and for one hour in the event of a 25% fluctuation. Another option being considered is an individual circuit-breaker per stock, which would cause a ten minute open-outcry auction to be initiated every time a stock price varied more than 10% over last day’s close.

Tokyo Stock Exchange There are two circuit breakers which last for only 15 minutes after the price limit is hit. The first circuit breaker takes effect when the price is 5% above or below the previous trading day’s settlement price. Another 5% change in the same direction, or a total of 10%, will trigger the second circuit breaker. Limits do not apply to the last 30 minutes of the trading day, unless the 15-minute cooling period spills into that time frame. There are no limits for the last day of trading for the contract nearest to expiry.

Korea Exchange Daily price change limit To avoid abnormal price fluctuations caused by imbalance in supply and demand, the KRXStock Market places ± 15% of limit that the prices on individual stocks can change during a day, thus preventing fall or rise of the price of individual stock more than 15 percent of the previous day’s closing price. Circuit Breakers The KSE introduced the Circuit Breakers in December 1998. In order to pacify the overreaction of investors, when the stock price drops suddenly below Study of Relationship Between Indian Stock Market and Asian Stock Markets

certain level (more than 10% of the closing price of the previous day and such situation continues for longer than one minute), the circuit breakers system was introduced on December 7, 1998. The trading, which resumes by periodic call auction where the orders submitted during the first 10 minutes after the trading halt ended, are matched at a single price. Regulation on program trading As a measure used to minimize possible impacts of futures market on cash market, thus maintaining the stability of the cash market, when the price of the most active futures contract continues to change 5 % or more than the base price for one minute, execution of all program trading orders in the cash market is delayed for 5 minutes. Trading Halt In order to protect investors, when, due to rumors or reports on the matters (e.g., bank defaults, bankruptcy, corporate restructure, etc.) that have major implication on corporate management, sudden and drastic change of trading value and volume is anticipated, the trading of such issues may be halted. In such a case, the concerned corporation is asked to make an inquiry into such rumors or reports and disclose findings.

7.1.5 Trading and Settlement Cycle Study of Relationship Between Indian Stock Market and Asian Stock Markets

This segment takes care of the efficiency issue of the said stock exchange. It basically looks into the speed at which any of the numerous transactions affected in the market gets settled. This is especially crucial given the volume. We see that Indian exchanges are at par with the best in the world when it comes to efficient settlement. It can even go one up if the proposed ‘T+1’system is put in place. Below are the various settlement cycles for the stock exchanges. Exchange Bombay Stock Exchange National Stock Exchange Hong Kong Stock Exchange Shanghai Stock Exchange Tokyo Stock Exchange Singapore Exchange

Settlement Cycle T+2 T+2 T+2 T+1 T+3, T+1 T+3(Cash)

Korea Exchange Taiwan Stock Exchange Indonesia Stock Exchange Tel-Aviv Stock Exchange Colombo Stock Exchange Philippine Stock Exchange

T+1(Derivatives) T+2, T, T+1 T+2 T+3, T1-T7, T+1 T+0, T+1 T+3, T+1 T+3

(Source :www.world-exchanges.org)

7.2 QUANTITATIVE ANALYSIS The hypothesis that the exchanges impact each other has been tested through various statistical methods with data on price, returns collected from the

Study of Relationship Between Indian Stock Market and Asian Stock Markets

exchanges. Mainly the correlation analysis, exponential trend analysis and the risk-return analysis has been used to validate the hypothesis.

7.2.1 Price Relationship Correlation is a numerical summary measure that indicates the strength of relationships between the pairs of variables. A correlation is very useful but it has its limitations. That is, it can only measure the strength of a linear relationship. The numerator of the above formula is also a measure of association between two variables X and Y which is called the covariance between X and Y. Similar to correlation, a covariance is a single number that measures the strength of the linear relationship between the two variables. It is by looking at the sign of the correlation or the covariance, i.e. positive or negative, that we can tell whether the two variables are positively or negatively related. Therefore the correlation is better because, unlike the covariance, the correlations are not affected by the units in which the variables are measured. All the correlations are between +1 and -1, inclusive. The sign determines whether the relationship is positive or negative. The strength of the relationship is measured by the absolute value or the magnitude of the correlation. The closer it is to +1 the stronger the relationship is and the closer to zero indicates that there is practically no linear relationship. At the extreme a correlation equal to1 -1 or +1 occurs only when the linear relationship is perfect. In this part the price data of NSE, Hang Seng and Korea stock exchanges are collected and subjected to a correlation test in order to find out the influence that they have on each other. In other words, an effort has been made to gain insight into how far the price movements of the exchanges are related with one another.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

7.2.2 NSE vs. Hang Seng Fig 1.1

In Fig1.1, period 1 shows that there is almost no correlation between these two exchanges. Hang Seng was rising very sharply because of the East Asian miracle. Whereas India, not part of this success story, remained almost untouched by this boom. NSE is almost constant during this period. During period 2, Hang Seng crashed 50 percent and then rose back 100 percent. Thus, it showed very high volatility during this period. NSE also rose during this period because of pervasive tech boom but the rise was not as spectacular as Hang Seng. Hang Seng might also have risen sharply because of its previous low levels. Period 3, Hang Seng was falling steadily; showing a downward trend. This might be due to the fear of global recession. But the NSE was not much affected. During Period 4, NSE was rising in almost identical manner with the Hang Seng. This shows the larger integration of the Indian economy in the foreign market. This might also be due to Study of Relationship Between Indian Stock Market and Asian Stock Markets

the fact that this boom was led by FII and other foreign investors. Hence, NSE is showing higher correlation during this period.

7.2.3 NSE vs. Korean stock exchange Fig 1.2

The above diagram shows that, during 1995, both the stock exchanges were at the same level. But due to East Asian crisis, Korean stock exchange was much more affected because its economy was more integrated with those East Asian economies. During period 2, both the stock exchanges moved in almost identical manner. The returns were almost nearly equal during this period, since both the stock exchanges rose very sharply. But, the rise in the NSE was much sharper. Still, we can say that the two exchanges were moving more or less in same fashion.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

We have tried to take a look at the impact of various stock exchanges on each other in this section. Therefore, we have divided our time period from 1995-2006 June into sub-sets depending on the happening of certain changes caused by events or policy decisions. This has the purpose of finding out the extent of impact that the markets have on each other.

7.2.5 Stock Price Correlation among Stock Exchanges Year/variables

Korean

Hong Kong

NSE

1995-1997 Korean

1.000

Hong Kong

-0.868

1.000

NSE

-0.277

0.421

1.000

1998-2000 Korean

1.000

Hong Kong

0.603

1.000

NSE

0.826

0.810

1.000

2001-2003 Korean

1.000

Hong Kong

0.171

1.000

NSE

0.395

0.789

1.000

2004-2006 Korean

1.000

Hong Kong

0.156

1.000

NSE

0.925

0.336

1.000

(This correlation figures were extracted from the study on “Comparative Analysis of Indian Stock Market with International Markets” cunducted by Debjiban Mukherjee, T. A. Pai Management Institute, Manipal, India )

The period 1995-97, characterized by the South East Asian currency crisis and other economic events, did not have integration of different markets at high Study of Relationship Between Indian Stock Market and Asian Stock Markets

levels. This is especially true in case of India. Our country was in its inception stage as a globalized economy and hence distinctly protected from foreign exposure. The capital market was slowly evolving at that point of time, putting systems in place. That is to say, India had only limited foreign exposure which somewhat insulated the country’s economy from foreign economic upheavals. This is clearly reflected in the following table of correlations which clearly shows that, in that period, very little correlation was existent among the exchanges. This signifies that the impact of other exchanges was negligible on the Indian capital markets. The almost non-existent effect of the South Asian Currency crisis, which affected Korea, on the Indian market validates our observation. The correlation shows negative for Korean exchange. During the period 1998-2000, Indian economy faced a recession as well as a period of heightened business activity. Mainly, the capital market started to consolidate across the globe. This is reflected by increasing impact of various exchanges on the New York Stock Exchange. The point to note is that it is mainly the Asian markets that have started impacting the New York Stock Exchange. The Korean market started to cast its effect along with the Hong Kong market. This maybe because a lot of MNCs made their Asian base in those two countries and they also operated in India, hence the impact. The period 2001-03 faced another major economic dampener in the form of the 9/11 attacks in USA. This left the world economy in a state of shock. As could be expected, the economies across the globe faced recessionary situation. However, this time also, except for the Hong Kong bourses, none else had any significant impact on the Indian counterpart. 2004-06 is termed as the period when the various world markets started to converge. In the global scenario also, we find that the economies facing downturn were making a comeback – Japan and USA. Our expectation to find high level of impact of other markets on Indian market gets validated as shown by the significant correlation figures in the table. However, one thing to notice is the lessened impact of the Hong Kong market on the Indian market which, going by the past trend, comes as a surprise. This maybe Study of Relationship Between Indian Stock Market and Asian Stock Markets

due to easing of restrictions which previously insulated the economy from foreign exposures. The increased cross border flow of capital also contributed to this phenomenon.

7.2.6 Exponential Trend In contrast to a linear trend, an exponential trend is appropriate when the time series changes by a constant percentage (as opposed to a constant amount) each period. One important characteristic of exponential trend is that, if a time series exhibits an exponential trend, a plot of its logarithm should be appropriately linear. This equation can be interpreted that the coefficient b is approximately the percentage change per period. Whenever there is a time series that is increasing at an increasing rate or decreasing at a decreasing rate, an exponential trend model proves apt. In this context, the method has been used to understand the trend existing in the movement of the exchanges and whether the trends have commonality. In other words, an attempt has been made to find whether two or more exchanges follow the same pattern in their movements of price and, if so, to what extent they are related.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

Study of Relationship Between Indian Stock Market and Asian Stock Markets

Study of Relationship Between Indian Stock Market and Asian Stock Markets

In the above figures, it can be seen that NSE seemed to follow the exponential trend quite reasonably before the technology boom had hit the Indian stock market in the year 2003. After that NSE has much larger rise which could not be captured in the exponential trend. For, both the stock exchanges of Korea and Honk Kong have shown very high volatility over this period and have not risen consistently enough. Thus exponential trend line is not able to explain the price behavior of these exchanges satisfactorily. The R-square values are very low 0.07 and 0.13 for Korean and Hang Sang respectively.

7.2.7 Risk and Return This section tries to compare the various exchanges on the basis of returns and the corresponding risks associated with it, returns being, perhaps, the single most important factor affecting the performance of any index. While risk can be termed as the major factor underlying all activity, it becomes imperative to compare the exchanges based on this parameter. Table 2 exhibits the historical risk-return figures of the exchanges. NSE seems to have followed or moved in tandem with the NYSE more after year 2000. Hang Seng exchange follows long cycles. If returns turn negative, they remain negative for two or three years. Similarly if return turns positive, then they remain so again for two or more years. Year / Variables

NSE

Hong Kong

Korean

Study of Relationship Between Indian Stock Market and Asian Stock Markets

1995 1996 1997 1998 1999

Risk Return 60.1 -26% 100.4 -1% 82.4 14% 115.4 -20% 184.0 51%

Risk Return 323.5 20% 418.7 30% 905.1 -20% 637.9 -20% 784.0 54%

Risk 40 71.4 108.3 88.2 156.8

Return -14% -31% -55% 38% 56%

2000 2001 2002 2003 2004 2005 2006

157.2 129.2 67.7 254.2 159.0 263.5 252.3

521.8 659.8 336.5 654.9 371.2 278.3 335.0

143.8 48.1 80.0 84.2 53.1 136.3 60.3

-74% 29% -14% 24% 9% 43% -3%

-23% -17% 4% 54% 8% 29% 10%

-18% -21% -17% 36% 9% 7% 15%

(This risk return figures were extracted from the study on “Comparative Analysis of Indian Stock Market with International Markets” cunducted by Debjiban Mukherjee, T. A. Pai Management Institute, Manipal, India )

7.2.8 Risk Return Comparison Korean stock market is also very stable form the standard deviation angle. But this market has also not much appreciated over these years and it remains more or less range- bound. Hang Seng has shown the highest volatility as it is a much traded stock exchange. Also, the events like East Asian crisis have also affected the volatility of this exchange. But, nevertheless, the volatility has reduced in the recent years than it has in the period 1997-1999. The volatility of the NSE has risen steadily over these years as the trading and market capitalization of the companies has increased. Now the volatility of NSE is almost at par with the other exchanges.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

8

OTHER FACTORS INFLUENSING STOCK

MARKETS Impact of Terrorism on Asian Stock Markets. The prices of individual stocks reflect investors' hopes and fears about the future and taken in aggregate, stock price movements can generate a tidal wave of activity. Because of their liquidity, events like terrorist attacks, military invasions and other unforeseen disastrous occurrences can have serious implications for the prices of the stocks and bonds. The event study methodology is used to assess the effect of terrorism (September 11, 2001 terrorist attack) on Asian capital markets. In the present study, an attempt is made to examine how the Indian stock markets and their various indices (Bombay Stock Exchange and National Stock Exchange) reacted to the September 11th, 2001 terrorist attack and how the Asian stock Study of Relationship Between Indian Stock Market and Asian Stock Markets

markets reacted to it. The study found that among the Asian stock markets, Indian stock markets are more resilient than in the past and they recovered sooner from terrorist attacks than other Asian stock markets.

Impact of Global recession in India as well as Asian stock market Toronto, ON, Canada, — The United States is heading toward recession. This is no longer conjecture -- the threat is real. This was indirectly acknowledged by the White House on Jan.18 with the unveiling of an economic aid package that practically confirmed everyone's worst fears. The signs have been apparent since last June or July. The stock market has been moving sideways rather than up. There were signals that the economy, which had been hopping from one record to another for the last six years, needed a breather. Then the sub-prime loan crisis began to unfold. Banks and financial institutions began to take losses, followed by other related companies. Later the housing market began to collapse, induced by the sub-prime loan crisis. When this was followed by less-than-spectacular Christmas retail sales, the "R"' word began to be uttered. The recession will not be officially confirmed for awhile, and rapid interest rate cuts announced on Jan. 22 may reduce its impact. A near agreement between Congress and the White House on an additional aid package as unveiled on Jan. 24 may further reduce the impact of the upcoming slowdown -- yet a general slowdown is inevitable.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

Half a trillion dollars spent on the Iraq war, $200 billion in losses in the sub-prime loan crisis, and a huge trade deficit with China are structural factors that cannot be helped by any aid package. Global stock markets suffered catastrophic losses on Jan. 21. Japan's stock market dropped 6 percent, India's 8 percent, Canada's 4.5 percent and European markets fell from 4 to 6 percent. The U.S. market, closed for a holiday, was spared catastrophic losses. Luckily for U.S. markets, the Federal Reserve stepped in on the morning of Jan. 22 and cut interest rates by 75 basis points, which had the desired effect. It curbed investors' rush to sell, and a day later profiteers stepped in to buy stocks cheap, which helped reduce losses. India suffered miserably on Jan. 21, as well as a few days prior to that day of infamy. Institutional investors from abroad, who had driven the Indian stock market sky high, pulled back. As in the United States, the investors were back the next day, helping the stock market recover some of its losses. The Chinese are not immune to the worldwide financial crisis, although they are less exposed to institutional investors. Their worst nightmare may be yet to come. With reduced merchandize exports, factories will be idle. Layoffs may follow and social unrest begin -- not good for the upcoming Olympics in Beijing. When the United States goes through a slowdown, Canada is next, followed by Europe and the rest of the world. The impact of a U.S. slowdown will be: a) A fall in commodity prices; oil for example would be out of reach at US$100 a barrel;

Study of Relationship Between Indian Stock Market and Asian Stock Markets

b) Layoffs and the closure of factories will send the unemployment rate soaring, with the side effect of high benefits payments; c) With less money to spend, consumers will leave their wallets and credit cards at home, reducing retail sales. Sales of housing, cars and other big-ticket items will undergo a dramatic drop; d) Stock markets in upcoming months will perform miserably. The value of people's assets and other holdings will contract. They will be less likely to indulge in cruises or holidays or other extravagances; e) With less money all around, there will be less for the United States to spend on war on terror in Iraq and Afghanistan. It is possible that the United States may prematurely wind up and leave the war halfway; f) There may be a complete re-look at the North American Free Trade Agreement, which has moved jobs to Mexico and Canada; g) Unequal China trade, which has been a sore point for quite some time, may come under the scanner. The dollar-yuan currency relationship may be revised or, in the worst-case scenario, a few countervailing duties may be applied. In other words, a long-avoided protectionism may creep into the U.S. political thought process. Apart from whatever happens in the United States, India and China will be at the receiving end of a few unpleasant jolts. China's ever-increasing exports to the United States may find an uneven reception. India may suffer the consequences of the withdrawal of investments from the stock market. In China itself the booming real estate cum infrastructure reconstruction may cease. Cities in China are on a spending binge to boast of new infrastructure, Study of Relationship Between Indian Stock Market and Asian Stock Markets

which they finance by borrowing from the banks without adequate checks and balances. When all hell breaks loose, banks will either go insolvent or foreign reserves stashed in the United States -- now US$1.3 trillion -- will have to be transferred to keep them afloat. That is one reason China has been keeping its foreign reserves close to its chest. This will cool off the overheated Chinese economy by a few percentage points. Domestic consumption may be increased to offset the decline in exports. China may also begin investing in U.S. companies with financial troubles, like their US$5 billion investment in Morgan Stanley. A much greater U.S. buying binge by China is unlikely, however. There are domestic consequences to worry about, and cash stashed away as reserves may be urgently needed at home. The impact on India will be indirect. Globalization, in which India is a small fry, will impact it less. It is the institutional investors who will place India on the slippery slopes. In seven days including Jan. 21, the Indian stock market lost 8 percent of its value. This translates to about US$400 billion of investors' paper money wiped out, or about two years of steady gains made by the little guys in the market. The U.S. recession will thus lower expectations in India but will not have consequences as severe as in China. An already unhappy textile export sector may find it difficult to achieve its 2008 export target. Alternatively, a boom in the information technology and business processing outsourcing sector will continue. U.S. companies looking for cheaper alternatives may outsource additional work. One salient feature of India's spectacular economic performance in the last six years is that it is driven by domestic consumption. Not being dependent upon the United States makes the impact of the U.S. recession a bit more manageable. This

Study of Relationship Between Indian Stock Market and Asian Stock Markets

is completely opposite for China, where exports drive the economy and domestic life may be ruined if orders dry up. India will have to worry about rapid interest rate cuts by the U.S. Federal Reserve Board. That would widen the gap between Indian and U.S. commercial interest rates, resulting in a capital outflow from U.S. to India where interest rates are still high. The arrival of excessive cash in India would not be welcome today. India would not know what to do with a huge inflow, and would have to cut its interest rates appropriately. Combine this with a weakening dollar and it would erode any export advantage. Hence additional rapid interest rate cuts by the Fed would require an appropriate response from India. In the end the world may emerge out of this U.S. slowdown much more sober. The United States will develop a bit of a protectionist attitude. China's free reign of cheap exports may be a thing of the past. Domestic demand will keep India's growth high, though a drop by a few percentage points for miscellaneous reasons is not unexpected. India's stock market will receive a sobering lesson on overemphasizing foreign investors. Foreign investors will remain, but in a much more controlled manner. A few other countries have seen the rate of growth of GDP decrease, generally attributed to reduced liquidity, sector price inflation in food and energy, and the U.S. slowdown. These include the United Kingdom, Ireland, Canada, Japan, China, India, New Zealand and many countries within the EEA. In some, the recession has already been confirmed by experts, while others are still waiting for the fourth quarter GDP growth data to show two consecutive quarters of negative growth. India along with China is experiencing an economic slowdown but not a recession. Also Africa and South Africa are experiencing economic slowdown and Study of Relationship Between Indian Stock Market and Asian Stock Markets

global outbreak. Australia avoided a technical recession in 2009, and had positive growth against the overall global economic downturn.

Impact of Inflation in stock market inflation is a state in the economy of a country, when there is a price rise of goods as well as services. To meet the required price rise, individuals have to shell out more than is presumed. With increase in inflation, every sector of the economy is affected. Ranging from unemployment, interest rates, exchange rates, investment, stock markets, there is an aftermath of inflation in every sector. Inflation is bound to impact all sectors, either directly or indirectly. Inflation and stock market have a very close association. If there is inflation, stock markets are the worst affected. Inflation and stock market- the logistics: Prices of stocks are determined by the net earnings of a company. It depends on how much profit, the company is likely to make in the long run or the near future. If it is reckoned that a company is likely to do well in the years to come, the stock prices of the company will escalate. On the other hand, if it is observed from trends that the company may not do well in the long run, the stock prices will not be high. In other words, the price of stocks are directly proportional to the performance of the company. In the event when inflation increases, the company earnings (worth) will also subside. This will adversely affect the stock prices and eventually the returns. Effect of inflation on stock market is also evident from the fact that it increases the rates if interest. If the inflation rate is high, the interest rate is also high. In the wake of both (inflation and interest rates) being high, the creditor will have a tendency to compensate for the rise in interest rates. Therefore, the debtor has to Study of Relationship Between Indian Stock Market and Asian Stock Markets

avail of a loan at a higher rate. This plays a significant role in prohibiting funds from being invested in stock markets. When the government has enough fund to circulate in the market, the cost of goods, services usually go up. This leads to the decrease in the purchasing power of individuals. The value of money also decreases. In a nut shell, for the economy to flourish, inflation and stock market ought to be more conforming and predictable.

9 relevance of stock market analysis in c.a profession Qualified Chartered Accounts who have gone through the grill of Audit, Taxation have been playing a tremendous role in enhancement of transparency in a Corporate Structure for years. Sustaining the importance over the years and attracting best young talent to the profession itself is a proof of the effective role, which a Chartered Accountant plays in a Corporate Set up Economy has largely moved from capital intensive to knowledge driven spectrum. Chartered Accountants with the intensive training, background Institute support to Study of Relationship Between Indian Stock Market and Asian Stock Markets

knowledge development are correctly poised to take a huge advantage of the knowledge sector including financial services, KPO etc. In a typical capital market scenario of the financial services sector, Intermediaries, Investors, Issuers, Corporate and Regulatory Authority relies largely on skills of the Chartered Accountants in discharging their respective obligations to the investors. The entire field of Financial Services has opened new avenues for the Chartered Accountants to excel. Financial analyst, media expert covering the capital markets, financial advertisement, investment advisor, financial services marketing are some of the emerging avenues for the Chartered Accountants to deploy their skills effectively. Chartered Accountants play the following roles in the capital markets. •

As an advisor to the company tapping the capital markets.

•

As an auditor to the company tapping the capital markets.

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As a regulator working for SEBI or Stock Exchanges.

•

As an intermediary

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As an Investment Banker

•

As a Fund Manager

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As an Equity Trader

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As an Institutional Sales

•

As a Dealer

•

As a Research Analyst

Scope depth and range of services undertaken under all the above activities is fairly comprehensive and large. Advisory role: The advisory role has evolved from being an advisor on tax and related matters to positioning the company amongst the knowledgeable investors, advising the company on the value chain which they need to pursue etc, and continued Study of Relationship Between Indian Stock Market and Asian Stock Markets

feedback on the key acts which the Company must do to sustain its valuation, attract quality investors interest -etc g capital markets in India, the skills Audit role: With the World Com, Dabhol, vanishing companies background, increasingly the audit role has become more demanding. Independent Directors in the Board of the Company demands a whole lot of quality inputs to discharge their responsibilities effectively. This has tremendously increased the focus on the quality of the audit, approach etc Entrepreneurial Role: Chartered Accountants from the traditional practice have moved into being intermediaries in the capital market themselves. New Investment banking firms, broking entities and the Regulatory environment has encouraged professionals to be an entrepreneur by themselves. With the better understanding of the financial products, Chartered Accountants have become an effective entrepreneurs in distribution, wealth management etc.

Supporting services: More and more service providers like investment bankers, insurance agencies rely on the skills of the Chartered Accountant in discharging their obligations. Emerging employment role: Equity sales, research, portfolio management, media tracker, career in financial advertising and televisions, global outsourcing partners are the emerging employment opportunities for a young chartered accountant along with their interest in taxation, audit, controls

Study of Relationship Between Indian Stock Market and Asian Stock Markets

Emerging practice role: The whole approach towards risk management, controls have changed with the opening up of the economy. Managements are increasing providing a better budget for risk management and Chartered Accountants plays an important role as Chief Risk Officer, or Chief Internal Control. Knowledge of accounts, accounting finance and financial analysis and law pertaining to issue of securities with regards to provisions of the Companies Act, Securities Contracts Act, SEBI and RBI do help in achieving excellence in execution. In addition, knowledge of the client or the Issuers business helps in profiling and positioning of the business to the outside world at large. This is the key ingredient to any fund raising plan. As an Advisor and Investment Banker, a Chartered Accountant also helps in formulating financial strategy to successfully tap the capital markets and ensure success for the fund raising plan. Putting together an efficient capital structure, creating financial model, profiling business promoters and management and advising on valuation are the other key ingredients for successful capital market entry. Chartered Accountants do and certainly can help in all the above and can act as sounding boards to accomplish this. Chartered Accountants can work as a regulator either for Stock Exchange or SEBI. As a regulator, chartered accountants can be skillfully employed in policymaking, monitoring review, surveillance and investigation. Role in the IPO Process To comply with the public issue disclosure norms, SEBI specifies with the issuer company states and restates financial statements for the last five years of the company going public and Chartered Accountant must certify all figures and give a comfort letter to the Lead Manager. Undertaking Due Diligence

Study of Relationship Between Indian Stock Market and Asian Stock Markets

Initial public offerings (IPO) are often considered to be the ultimate goal for any entrepreneurial venture. An IPO is offering stock to the public on an open market for the first time. Once a company decides to go public, it needs to pick its IPO team, consisting of the lead investment bank, an accountant and a law firm. The IPO process officially begins with what is typically called a “kick-off ” meeting. All the members of the IPO team plan a timetable for going public and assign certain duties to each member. One of the most critical documents that need to be developed by this group is the prospectus. The prospectus is an offer document that is used to describe all aspects of the company - its financial data for the past five years, the management team, the target market, competitors and growth strategy. This document is all thatthe company can tell prospective investors about itself so its accuracy and in formativeness is a vital part of the IPO. The independent accountant’s role in the IPO process includes auditing the financial statements, restating them in compliance SEBI requirements, resolving accounting issues. Increasing emphasis is being placed on the scope of “comfort letters” which a company’s auditor provides to the underwriters and the company’s board as part of their due diligence. Commentary on accounting policies and problems, improper revenue recognition, changes merely for the purpose of inflating profits are few of the areas, the accountants insight are sought. In many instances, the financial statements must also be prepared in accordance with U.S. GAAP or reconciliation between the Indian GAAP and U.S GAAP is required. In many cases, auditors are required to review and offer comments on consolidated accounts. Accountants can also leverage their experience during the planning phase to help ensure that the company’s house is in order before the IPO process. Accountants play a key role in advising on/certifying the following: 1. Compliance with the corporate governance. 2. Promoter contribution in a project. 3. Amount deployed/spent on project.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

Requirements to capitalise With the expansion in the role, approach and accountability there is a tremendous responsibility cast on the Chartered Accountants to play their role effectively and stay ahead in the competition. Most of the emerging roles are not going to be a dominant field for chartered accountants alone similar to audit or taxation. It would be purely a market driven demand, which would move with the perceived value accretion with the person associated rather than the faculty, which he belongs to. While the degree and the training provides an entry into the financial service universe, how well one capitalise depends on how best he/she could capitalise the opportunity.

10 CONCLUSIONS The study brings forth some distinct conclusions many of which validate popular beliefs. The objective of the whole research was to try and compare the various stock exchanges based on certain parameters in order to understand the impact of integration of the financial world on the various entities within it especially in the context of globalization and increased interest in the capital markets fuelled by surging growth. The various research papers that have been studied traced the gradual ‘coming of age’ of the Indian stock market over the past decade without actually Study of Relationship Between Indian Stock Market and Asian Stock Markets

arriving at any conclusive evidence on the comparative position of our stock exchange with that of other global ones. The studies mainly looked at various aspects of efficiency in the stock market on a standalone basis and tried to draw conclusion regarding the state of our maturity. However, we have tried to use the comparison method to benchmark the performance of our stock market with that of a selection of asian stock exchanges on the basis of their diversity with respect to geo-sociopolitico-economy. With regard to the initial hypothesis of this study, it is clearly found that the stock markets do impact each other, more so in the recent times, i.e. post-2000. This has been due to the fact that ‘cross holdings’ are increasingly becoming common wherein the geographical barrier is dissolving with respect to investing. In India also, deliberations are on to ‘cross list’ Indian shares in Asian exchanges to start off. This will increase the degree of integration manifold. Moreover, the automation of the exchanges has played a vital role in making the financial markets integrated. In this context, the pioneer is the Swiss exchange, followed by Brussels as an early adapter. The spate of ‘ADR’s and ‘GDR’s, along with the increased opening up of various economies, increasing foreign trade and the rise of the ‘MNC’s have contributed immensely to the integration process. It leaves us with the conclusion that the strategy of globally diversifying investments is slowly losing its profitability. Especially after 2000, the markets are fast converging. It has now become a global market operating 24 hours, with opening of markets in different time zones at various points of time appearing to be seamless. Thus, in hindsight, it would not be an exaggeration to say that the impact of the South East Asian currency crisis, if happened today, would have much more drastic effect on India, as the country is more in sync with the global markets. Actually, it can be said that, in the current scenario, any apprehension about stocks in one country can escalate into a panic selling. However, a caveat needs to be put here with respect of the attractiveness of the global diversification strategy. In a way, though the attractiveness of the strategy is gradually diminishing, it can still be profitably Study of Relationship Between Indian Stock Market and Asian Stock Markets

used for investing in countries whose stock exchanges do not yet have high correlation amongst each other. Moreover, although the stocks listed in the stock exchanges of the sample in this study do impact each other and move in tandem, the magnitude of that movement as a result of reacting to global cues varies and, to that limited extent of variation, the global diversification strategy can prove useful. In short, the ‘transaction cost’ for investment is coming down as is ‘informational cost’. Qualitatively, the comparison showed that Indian stock exchange has the governance system and an efficient mechanism in place to be a world class institute, specially the requirements of Clause 49 promulgated by SEBI and the advanced trading and settlement mechanism of NSE, respectively. However, unfortunately our implementation of the same remains a problem area with almost 15-20% of the listed companies yet to align their operations as required under the law. Moreover, there are also issues regarding the extent to which the sophisticated systems of the stock exchanges (NSE, BSE) are utilized in terms of the volume and frequency of transactions and the range of instruments traded. The commodity segment, derivatives and such other segments are yet to see activities like the equity segment of the market. The reasons that can be attributed to this is the fact that it has been only 9 years (derivatives started in 2000) that the various segments, apart from equity and debt, have started operating and hence it is reasonably nascent compared to its asian counterparts. It would, therefore, not be unjustified to say that the system is still evolving and it would take some time not only to attain efficiency of operation, but also to generate increased interest and awareness about the various other segments of the market. Then only can we expect the operations to match its asian counterparts in terms of volumes, frequency and variety of instruments traded. One more reason that can be attributed for the lag between a global benchmark and BSE or NSE can be the fact that, in our country, listing of foreign Study of Relationship Between Indian Stock Market and Asian Stock Markets

companies are still not allowed on the lines of ADRs or GDRs. This can be due to lack of depth and breadth of the market. Again, as this study points out, the listing criteria differ in terms of size as well as their disclosure norms. This implies that the depth of the market judged by the total capitalization is less for the Indian markets compared to its counterparts. Moreover, the disclosure norms affect the governance aspect as also the information availability. Innovative financial instruments like CAT Bonds, or dealing in Junk Bonds as a cheap source of finance or sophisticated derivative instruments are yet to catch up in our country.This is partly because of the regulations that are gradually being eased out and also due to the risk appetite of the investors in this country. The opening up of the economy and its subsequent impact on the financial sector has only started barely in the last six years and, hence, the ‘teething problems’ of initial skepticism, lack of awareness and interest exist, besides cautious approach towards bringing about changes with keenly monitored impact of those changes. If we go to the specifics, then we find that the Clause 49, our counterpart of the famed Sarbannes-Oxley Act of USA, has brought us to the global standards. But, because of the early stages (only a year), the implementation is causing a hindrance in attaining the requisite level with regard to governance. Again the risk management system in our country is very elaborate and the mechanism in place is very efficient as also effective. It actually matches the level of a well established benchmark like Newyork Stock Exchange. However, the only difference is in terms of risk appetite of the investors which causes the level and operation of ‘circuit breakers’ to vary. However, Indian stock market is very much at the same pedestal and, in fact, better than most of its Asian counterparts especially the emerging economies. Indian system enjoys creditability even when compared with a stock exchange like Nikkei (Japan). If we look at the efficiency of trading captured by the ‘trading and Study of Relationship Between Indian Stock Market and Asian Stock Markets

settlement’ mechanism, then we can find out that the Indian mechanism is faster than the Newyork Stock Exchange and at par with the best in the world. In fact, it is one of the fastest. One problem area that came out as a possible barrier in the path of Indian stock exchanges attaining global level is the fact that India has a very low rank in terms of market capitalization (ranked 14th). This is in spite of the fact that Indian stock exchanges have the highest number of companies listed (around 9000) and BSE accounting for almost 75%. Therefore, volume-wise, Indian market is still pretty small. One more aspect that we have tried to look at in this study is the extent of influence the various stock markets cast on each other, specifically the impact of other stock exchanges on their Indian counterpart. In order to understand, we divided our study period in parts based on certain events that had economic implications. Here, we found the results validating popular belief that the markets in general and Indian market in particular became more integrated with other exchanges from 2002-03.

To sum up: Finally, we can sum up with the following observations: • The markets have indeed started to integrate and Indian market is no exception especially after 2002-03. • The regulatory authorities must remove any ambiguity that may be existing when compared to the regulations of other exchanges before they can actually make the grade. • Lastly, although it has to be accepted that the market is evolving but the Indian system has already attained the minimum level of robustness and efficiency to be counted among the best in the world and stand equipped to attain higher sophistication as well as heightened activities. As for the existence of any signals Study of Relationship Between Indian Stock Market and Asian Stock Markets

or patterns among the stock exchanges, it can safely be said that the markets do react to global cues and any happening in the global scenario be it macro economic or country specific (foreign trade channel) affect the various markets. In short, the Indian exchanges are ready to make the transition should the government decides to further relax the regulations and open up. The financial sector as a whole, with the stock markets as its indicator, has indeed come a long way and are ready for the next level with regards to efficient trading and variety in the instruments traded. Thus this study validates the popular belief that the markets in general and Indian market in particular is more integrated with other asian exchanges from 2002-03 onwards. This can very well be seen since the South Asian crisis of the mid- late nineties barely affected us particularly because we were insulated due to government policies and was just making the transition. However, in the later time periods, the influence of other stock markets increased on our BSE or NSE, but at a very low almost insignificant level. At the time of 9/11 incident, Newyork Stock Exchange had started to exert its influence on us but at lower levels and hence the economic downturn did not impact for long. The increased trend of Indian companies going for ADR and GDR issues has also contributed as a channel for information transfer between the exchanges where the particular company is listed. This has not only facilitated the integration process but also increased the sensitivity of the home country’s stock exchange to the movements of various other exchanges especially where the home company is listed. As for the existence of any signals or patterns among the stock exchanges, it can safely be said that the markets do react to global cues and any happening in the global scenario be it macro economic or country specific (foreign trade channel) affect the various markets.

Study of Relationship Between Indian Stock Market and Asian Stock Markets

11 REFERENCES Articles Masih, A. M. M. & Masih, R. (1997). A comparative analysis of the propagation of stock market fluctuations in alternative models of dynamic causal linkages. Applied Financial Economics, 7 (1), 59-74. Agarwal, R N (2000): ‘Financial Integration and Capital Markets in Developing Countries: A Study of Growth, Volatility and Efficiency in the Indian Capital Market’, mimeo, Institute of Economic Growth, Delhi.

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Bae, K, Cha, B, & Cheung, Y (1999): ‘The Transmission of Pricing Information of Dually- Listed Stocks’, Journal of Business Finance and Accounting, 26 (5) and (6), June/July,709-23. Becker, K, Finnerty, J., & Gupta, M. (1990): ‘The Intertemporal Relation between the US and Japanese Stock Markets’, Journal of Finance, 45, 1297-1306. Bennett, P., & Keller, J. (1988): ‘The International Transmission of Stock Price Disruption in October 1987’, Federal Reserve Bank of New York Quarterly Review, Summer, 17-33. Froot, K., & Dabora, E. (1999): ‘How are Stock Prices Affected by the Location of Trade?’, Journal of Financial Economics, 53, 189- 216.

Hansda, S. K., & Ray, P. (2002): ‘BSE and Nasdaq: Globalisation, Information Technology and Stock Prices’, Economic and Political Weekly, 37 (5), February 2, 459- 468. Howe, J S., & Madura, J. (1990): ‘The Impact of International Listings on Risk: The Implications for Capital Market Integration’, Journal of Banking and Finance, 14, 1133- 42. Lau, S T., & Diltz, J.D. (1994): ‘Stock Returns and the Transfer of Information Between the New York and Tokyo Stock Exchanges’, Journal of International Money and Finance, 13 (2), 211-22. Yakob, N. A., Beal, D., & Delpachitra, S. (2005) Seasonality in the Asia Pacific stock markets. Journal of Asset Management, 6 (4), 298-318.

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Poshakwale, S. (2002). The Random Walk Hypothesis in the Emerging Indian Stock Market. Journal of Business Finance & Accounting, 29 (9&10), 1275-1299. Websites Referred www.bseindia.com www.nse-india.com www.ebsco.com www.tse.or.jp/english/index.shtml www.hkex.com.hk/ www.krx.co.kr/webeng/index.jsp www.tse.or.jp/english/index.shtml www.nyse.com www.rts.ru www.kse.or.kr

Study of Relationship Between Indian Stock Market and Asian Stock Markets