A

SUMMER TRAINING
REPORT ON
CAPITAL MARKET
AT
MOTHERSON
IN PARTIAL FULFILMENT FOR THE AWARD OF THE DEGREE OF
BACHELOR OF BUSINESS ADMINISTRATION

SUBMITTED BY
MANISH SAINI
ROLL NO: 201211106008
SESSION: 2020-2023
UNDER THE GUIDANCE OF
Dr. GEETA YADAV
DEPARTMENT OF BACHELOR OF BUSINESS ADMINISTRATION

INDIRA GANDHI UNIVERSITY , MEERPUR REWARI

( HARYANA )
 DECLARATION

I am Manish Saini student of Ahir College , Rewari , 20202023

Batch declare that every part of the Summer Training Report
“CAPITAL MARKET AT MOTHERSON” that I have submitted is
original.

I was in regular contact with the nominated guide and contacted

several times for discussing the project.

Date:
Place:

( Signature of the student )

 GUIDE CERTIFICATE

This is to certify that the project work done on “CAPITAL

MARKET” is a confide work carried out by Manish Saini under the
guidance of Dr. Geeta Yadav. To the best of my knowledge and
belief , this is his original work and this , wholly or partially , has
not been submitted for any degree of this or any other university.

Dr. Geeta Yadav

( Project guide )
 PREFACE

The successful completion of this project was a unique

experience for us because by visiting many place and interacting
various person, I achieved a better knowledge about this
project. The experience which I gained by doing this project was
essential at this turning point of my carrier this project is being
submitted which content detailed analysis of the research under
taken by me. The research provides an opportunity to the
student to devote her skills knowledge and competencies
required during the technical session. The research is on the
topic "capital market ”.
 ACKNOWLEDGEMENT

I take this opportunity to thank MOTHERSON for giving me the

opportunity to work for this project and I would like to express
my sincere thanks to Miss Vandana who helped, inspired and
mentored me and without their help this project report would
not have taken its current shape. Under their brilliant untiring
guidance, I could complete the project being undertaken on the
“CAPITAL MARKET” successfully in time. Their meticulous
attention and invaluable suggestions have helped me in
simplifying the problem involved in the work. I would also like to
thank the overwhelming support of all the people who gave me
an opportunity to learn and gain knowledge about the various
aspects of the industry.
I once again express my heartfelt in deftness to all-aforesaid.
Any omission or error in acknowledgement is inadvertent. For
such oversights and lapses, I tender unconditional apology.

Manish Saini
 TABLE OF CONTENT
Sl no. particulars Page no.

1 Company profile

Capital market

Debt or Bond market

Stock or equity market

Role of capital market

Role of capital market in India

Factors affecting in capital market

Indian stock market overview

Trading pattern of Indian stock market

Bibliography
 CAPITAL MARKET

The capital market is the market for securities, where Companies and
governments can raise long-term funds. It is a market in which money is lent
for periods longer than a year. A nation's capital market includes such
financial institutions as banks, insurance companies, and stock exchanges
that channel long-term investment funds to commercial and industrial
borrowers. Unlike the money market, on which lending is ordinarily short
term, the capital market typically finances fixed investments like those in
buildings and machinery.

Nature and Constituents:

The capital market consists of number of individuals and institutions
(Including the government) that canalize the supply and demand for
longterm capital and claims on capital. The stock exchange, commercial
banks, co-operative banks, saving banks, development banks, insurance
companies, investment trust or companies, etc., are important constituents
of the capital markets. The capital market, like the money market, has three
important Components, namely the suppliers of loanable funds, the
borrowers and the Intermediaries who deal with the leaders on the one hand
and the Borrowers on the other. The demand for capital comes mostly from
agriculture, industry, trade The government. The predominant form of
industrial organization developed Capital Market becomes a necessary
infrastructure for fast industrialization. Capital market not concerned solely
with the issue of new claims on capital, But also with dealing in existing
claims.
 Debt or Bond market

The bond market (also known as the debt, credit, or fixed income market) is
a financial market where participants buy and sell debt securities, usually in
the form of bonds. As of 2009, the size of the worldwide bond market (total
debt outstanding) is an estimated $82.2 trillion [1], of which the size of the
outstanding U.S. bond market debt was $31.2 trillion according to BIS (or
alternatively $34.3 trillion according to SIFMA). Nearly all of the $822 billion
average daily trading volume in the U.S. bond market takes place between
broker-dealers and large institutions in a decentralized, over-the-counter
(OTC) market. However, a small number of bonds, primarily corporate, are
listed on exchanges. References to the "bond market" usually refer to the
government bond market, because of its size, liquidity, lack of credit risk and,
therefore, sensitivity to interest rates. Because of the inverse relationship
between bond valuation and interest rates, the bond market is often used to
indicate changes in interest rates or the shape of the yield curve.
Contents

• Market structure
• Types of bond markets
• Bond market participants
• Bond market size
• Bond market volatility
• Bond market influence
• Bond investments
• Bond indices

1. Market structure

Bond markets in most countries remain decentralized and lack common

exchanges like stock, future and commodity markets. This has occurred, in
part, because no two bond issues are exactly alike, and the variety of bond
securities outstanding greatly exceeds that of stocks. However, the New York
Stock Exchange (NYSE) is the largest centralized bond market, Representing
mostly corporate bonds..
2. Types of bond markets

The Securities Industry and Financial Markets Association (SIFMA) classifies

the broader bond
Market into five specific bond markets.
• Corporate
• Government & agency
• Municipal
• Mortgage backed, asset backed, and collateralized debt obligation
Funding

3. Bond market participants

Bond market participants are similar to participants in most financial
markets and are essentially either buyers (debt issuer) of funds or sellers
(institution) of funds or often both. Participants include:
• Institutional investors
• Governments
• Traders
• Individuals

4. Bond market size

Amounts outstanding on the global bond market increased 10% in 2009 to

a record $91 trillion. Domestic bonds accounted for 70% of the total and
international bonds for the remainder. The US was the largest market with
39% of the total followed by Japan (18%). Mortgage-backed bonds
accounted for around a quarter of outstanding bonds in the US in 2009 or
some $9.2 trillion. The sub-prime portion of this market is variously
estimated at between $500bn and $1.4 trillion. Treasury bonds and
corporate bonds each accounted for a fifth of US domestic bonds. In Europe,
public sector debt is substantial in Italy (93% of GDP), Belgium (63%) and
France (63%). Concerns about the ability of some countries to continue to
finance their debt came to the forefront in late 2009. This was partly a result
of large debt taken on by some governments to reverse the economic
downturn and finance bank bailouts. The outstanding value of international
Bonds increased by 13% in 2009 to $27 trillion. The $2.3 trillion issued
during the year was down 4% on the 2008 total, with activity declining in
the second half of the year.
5. Bond market volatility

For market participants who own a bond, collect the coupon and hold it to
maturity, market volatility is irrelevant; principal and interest are received
according to a pre-determined schedule. But participants who buy and sell
bonds before maturity are exposed to many risks, most importantly changes
in interest rates. When interest rates increase, the value of existing bonds
falls, since new issues pay a higher yield. Likewise, when interest rates
decrease, the value of existing bonds rise, since new issues pay a lower yield.
This is the fundamental concept of bond market volatility: changes in bond
prices are inverse to changes in interest rates. Fluctuating interest rates are
part of a country's monetary policy and bond market volatility is a response
to expected monetary policy and economic changes. Economists' views of
economic indicators versus actual released data contribute to market
volatility. A tight consensus is generally reflected in bond prices and there is
little price movement in the market after the release of "in-line" data. If the
economic release differs from the consensus view the market usually
undergoes rapid price movement as participants interpret the data.
Uncertainty (as measured by a wide consensus) generally brings more
volatility before and after an economic release. Economic releases vary in
importance and impact depending on where the economy is in the business
cycle.

6. Bond market influence

Bond markets determine the price in terms of yield that a borrower must
pay in able to receive funding. In one notable instance, when President
Clinton attempted to increase the US budget deficit in the 1990s, it led to
such a sell-off (decreasing prices; increasing yields) that he was forced to
abandon the strategy and instead balance the budget

7. Bond investments

Investment companies allow individual investors the ability to participate in

the bond markets through bond funds, closed-end funds and unitinvestment
trusts. In 2006 total bond fund net inflows increased 97% from $30.8 billion
in 2005 to $60.8 billion in 2006.Exchange-traded funds (ETFs) are another
alternative to trading or investing directly in a bond issue. These securities
allow individual investors the ability to overcome large initial and
incremental trading sizes.
8. Bond indices

Main article: Bond market index A number of bond indices exist for the
purposes of managing portfolios and measuring performance, similar to the
S&P 500 or Russell Indexes for stocks. The most common American
benchmarks are the Barclays Aggregate, Citigroup BIG and Merrill Lynch
Domestic Master. Most indices are parts of families of broader indices that
can be used to measure global bond portfolios, or may be further subdivided
by maturity and/or sector for managing specialized portfolios.

STOCK OR EQUITY MARKET

A stock market or equity market is a public market (a loose network of

economic transactions, not a physical facility or discrete entity) for the
trading of company stock and derivatives at an agreed price; these are
securities listed on a stock exchange as well as those only traded privately.
The size of the world stock market was estimated at about $36.6 trillion US
at the beginning of October 2008. The total world derivatives market has
been estimated at about $791 trillion face or nominal value, 11 times the size
of the entire world economy. The value of the derivatives market, because it
is stated in terms of notional values, cannot be directly compared to a stock
or a fixed income security, which traditionally refers to an actual value.
Moreover, the vast majority of derivatives 'cancel' each other out(i.e., a
derivative 'bet' on an event occurring is offset by a comparable derivative
'bet' on the event not occurring). Many such relatively illiquid securities are
valued as marked to model, rather than an actual market price. The stocks
are listed and traded on stock exchanges which are entities of a corporation
or mutual organization specialized in the business of bringing buyers and
sellers of the organizations to a listing of stocks and securities together. The
largest stock market in the United States, by market cap is the New York
Stock Exchange, NYSE, while in Canada, it is the Toronto Stock Exchange.
Major European examples of stock exchanges include the London Stock
Exchange, Paris Bourse, and the Deutsche Borse. Asian examples include the
Tokyo Stock Exchange, the Hong Kong Stock Exchange, the Shanghai Stock
Exchange, and the Bombay Stock Exchange. In Latin America, there are such
exchanges as the BM&F Bovespa and the BMV.

Contents
1. Trading
2. Market participants
3. History
4. Importance of stock market
5. Function and purpose
6. Relation of the stock market to the modern financial system
7. The stock market, individual investors, and financial risk

1.Trading

Participants in the stock market range from small individual stock investors
to large hedge fund traders, who can be based anywhere. Their orders
usually end up with a professional at a stock exchange, who executes the
order. Some exchanges are physical locations where transactions are carried
out on a trading floor, by a method known as open outcry. This type of
auction is used in stock exchanges and commodityexchanges where traders
may enter "verbal" bids and offers simultaneously. The other type of stock
exchange is a virtual kind, composed of a network of computers where
trades are made electronically via traders. Actual trades are based on an
auction market model where a potential buyer bids a specific price for a
stock and a potential seller asks a specific price for the stock. (Buying or
selling at market means you will accept any ask price or bid price for the
stock, respectively.) When the bid and ask prices match, a sale takes place,
on a first-come-first-served basis if there are multiple bidders or askers at a
given price. The purpose of a stock exchange is to facilitate the exchange of
securities between buyers and sellers, thus providing a marketplace (virtual
or real). The exchanges provide real-time trading information on the listed
securities, facilitating price discovery.
The New York Stock Exchange is a physical exchange, also referred to as a
listed exchange —only stocks listed with the exchange may be traded. Orders
enter by way of exchange members and flow down to a floor broker, who
goes to the floor trading post specialist for that stock to trade the order. The
specialist's job is to match buy and sell orders using open outcry. If a spread
exists, no trade immediately takes place--in this case the specialist should
use his/her own resources (money or stock) to close the difference after
his/her judged time. Once a trade has been made the details are reported on
the "tape" and sent back to the brokerage firm, which then notifies the
investor who placed the order. Although there is a significant amount of
human contact in this process, computers play an important role, especially
for so-called "program trading".

The NASDAQ is a virtual listed exchange, where all of the trading is done over
a computer network. The process is similar to the New York Stock Exchange.
However, buyers and sellers are electronically matched. One or more
NASDAQ market makers will always provide a bid and ask price at which
they will always purchase or sell 'their' stock. The Paris Bourse, now part of
Euronext, is an order-driven, electronic stock exchange. It was automated in
the late 1980s. Prior to the 1980s, it consisted of an open outcry exchange.
Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the
CATS trading system was introduced, and the order matching process was
fully automated. From time to time, active trading (especially in large blocks
of securities) have moved away from the 'active' exchanges. Securities firms,
led by UBS AG, Goldman Sachs Group Inc. And Credit Suisse Group, already
steer 12 percent of U.S. security trades away from the exchanges to their
internal systems. That share probably will increase to 18 percent by 2010 as
more investment banks bypass the NYSE and NASDAQ and pair buyers and
sellers of securities themselves, according to data compiled by Boston-based
Aite Group LLC, a brokerage-industry consultant. Now that computers have
eliminated the need for trading floors like the Big Board's, the balance of
power in equity markets is shifting. By bringing more orders in-house,
where clients can move big blocks of stock anonymously, brokers pay the
exchanges less in fees and capture a bigger share of the $11 billion a year
that institutional investors pay in trading commissions as well as the surplus
of the century had taken place.

2. Market participants

A few decades ago, worldwide, buyers and sellers were individual investors,
such as wealthy businessmen, with long family histories (and emotional ties)
to particular corporations. Over time, markets have become more
"institutionalized"; buyers and sellers are largely institutions (e.g., pension
funds, insurance companies, mutual funds, index funds, exchangetraded
funds, hedge funds, investor groups, banks and various other financial
institutions). The rise of the institutional investor has brought with it some
improvements in market operations. Thus, the government was responsible
for "fixed" (and exorbitant) fees being markedly reduced for the 'small'
investor, but only after the large institutions had managed to break the
brokers' solid front on fees. (They then went to 'negotiated' fees, but only for
large institutions. However, corporate governance (at least in the West) has
been very much adversely affected by the rise of (largely 'absentee')
institutional 'owners'.

3. History

Established in 1875, the Bombay Stock Exchange is Asia's first stock

exchange. In 12th century France the courratiers de change were concerned
with managing and regulating the debts of agricultural communities on
behalf of the banks. Because these men also traded with debts, they could be
called the first brokers. A common misbelief is that in late 13th century
Bruges commodity traders gathered inside the house of a man called Van der
Beurze, and in 1309 they became the "Brugse Beurse", institutionalizing
what had been, until then, an informal meeting, but actually, the family Van
der Beurze had a building in Antwerp where those gatherings occurred; the
Van der Beurze had Antwerp, as most of the merchants of that period, as
their primary place for trading. The idea quickly spread around Flanders and
neighboring counties and "Beurzen" soon opened in Ghent and Amsterdam.
In the middle of the 13th century, Venetian bankers began to trade in
government securities. In 1351 the Venetian government outlawed
spreading rumors intended to lower the price of government funds. Bankers
in Pisa, Verona, Genoa and Florence also began trading in government
securities during the 14th century. This was only possible because these
were independent city states not ruled by a duke but a council of influential
citizens. The Dutch later started joint stock companies, which let
shareholders invest in business ventures and get a share of their profits - or
losses. In 1602, the Dutch East India Company issued the first share on the
Amsterdam Stock Exchange. It was the first company to issue stocks and
bonds. The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to
have been the first stock exchange to introduce continuous trade in the early
17th century. The Dutch "pioneered short selling, option trading, debt-
equity swaps, merchant banking, unit trusts and other speculative
instruments, much as we know them" There are now stock markets in
virtually every developed and most developing economies, with the world's
biggest markets being in the United States, United Kingdom, Japan, India,
China, Canada, Germany, France, South Korea and the Netherlands.
4. IMPORTANCE OF STOCK MARKET

5. Function and purpose:

The main trading room of the Tokyo Stock Exchange, where trading is
currently completed through computers. The stock market is one of the
most important sources for companies to raise money. This allows
businesses to be publicly traded, or raise additional capital for expansion by
selling shares of ownership of the company in a public market. The liquidity
that an exchange provides affords investors the ability to quickly and easily
sell securities. This is an attractive feature of investing in stocks, compared
to other less liquid investments such as real estate. History has shown that
the price of shares and other assets is an important part of the dynamics of
economic activity, and can influence or be an indicator of social mood. An
economy where the stock market is on the rise is considered to be an up-
and-coming economy. In fact, the stock market is often considered the
primary indicator of a country's economic strength and development. Rising
share prices, for instance, tend to be associated with increased business
investment and vice versa. Share prices also affect the wealth of households
and their consumption. Therefore, central banks tend to keep an eye on the
control and behavior of the stock market and, in general, on the smooth
operation of financial system functions. Financial stability is the raison
d'etre of central banks. Exchanges also act as the clearinghouse for each
transaction, meaning that they collect and deliver the shares, and guarantee
payment to the seller of a security. This eliminates the risk to an individual
buyer or seller that the counterparty could default on the transaction. The
smooth functioning of all these activities facilitates economic growth in that
lower costs and enterprise risks promote the production of goods and
services as well as employment. In this way the financial system contributes
to increased prosperity. An important aspect of modern financial markets,
however, including the stock markets, is absolute discretion. For example,
American stock markets see more unrestrained acceptance of any firm than
in smaller markets. For example, Chinese firms that possess little or no
perceived value to American society profit American bankers on Wall Street,
as they reap large commissions from the placement, as well as the Chinese
company which yields funds to invest in China. However, these companies
accrue no intrinsic value to the long-term stability of the American economy,
but rather only short-term profits to American business men and the
Chinese; although, when the foreign company has a presence in the new
market, this can benefit the market's citizens. Conversely, there are very few
large foreign corporations listed on the Toronto Stock Exchange TSX,
Canada's largest stock Exchange. This discretion has insulated Canada to
some degree to worldwide financial conditions. In order for the stock
markets to truly facilitate economic growth via lower costs and better
employment, great attention must be given to the foreign participants being
allowed in.

6. Relation of the stock market to the modern financial system

The financial systems in most western countries have undergone a

remarkable transformation. One feature of this development is
disintermediation. A portion of the funds involved in saving and financing,
flows directly to the financial markets instead of being routed via the
traditional bank lending and deposit operations. The general public's
heightened interest in investing in the stock market, either directly or
through mutual funds, has been an important component of this process.
Statistics show that in recent decades shares have made up an increasingly
large proportion of households' financial assets in many countries. In the
1970s, in Sweden, deposit accounts and other very liquid assets with little
risk made up almost 60 percent of households' financial wealth, compared
to less than 20 percent in the 2000s. The major part of this adjustment in
financial portfolios has gone directly to shares but a good deal now takes the
form of various kinds of institutional investment for groups of individuals,
e.g., pension funds, mutual funds, hedge funds, insurance investment of
premiums, etc. The trend towards forms of saving with a higher risk has
been accentuated by new rules for most funds and insurance, permitting a
higher proportion of shares to bonds. Similar tendencies are to be found in
other industrialized countries. In all developed economic systems, such as
the European Union, the United States, Japan and other developed nations,
the trend has been the same: saving has moved away from traditional
(government insured) bank deposits to more risky securities of one sort or
another.

7.The stock market, individual investors, and financial risk

Riskier long-term saving requires that an individual possess the ability to

manage the associated increased risks. Stock prices fluctuate widely, in
marked contrast to the stability of (government insured) bank deposits or
bonds. This is something that could affect not only the individual investor or
household, but also the economy on a large scale. The following deals with
some of the risks of the financial sector in general and the stock market in
particular. This is certainly more important now that so many newcomers
have entered the stock market, or have acquired other 'risky' investments
(such as 'investment' property, i.e., real estate and collectables). With each
passing year, the noise level in the stock market rises. Television
commentators, financial writers, analysts, and market strategists are all
overtaking each other to get investors' attention. At the same time,
individual investors, immersed in chat rooms and message boards, are
exchanging questionable and often misleading tips. Yet, despite all this
available information, investors find it increasingly difficult to profit. Stock
prices skyrocket with little reason, then plummet just as quickly, and people
who have turned to investing for their children's education and their own
retirement become frightened. Sometimes there appears to be no rhyme or
reason to the market, only folly. This is a quote from the preface to a
published biography about the long-term valueoriented stock investor
Warren Buffett.[9] Buffett began his career with $100, and $100,000 from
seven limited partners consisting of Buffett's family and friends. Over the
years he has built himself a multibillion-dollar fortune. The quote illustrates
some of what has been happening in the stock market during the end of the
20th century and the beginning of the 21st century.

A.Primary Market, also called the new issue market, is the market for
issuing new securities. Many companies, especially small and medium scale,
enter the primary market to raise money from the public to expand their
businesses. They sell their securities to the public through an initial public
offering. The securities can be directly bought from the shareholders, which
is not the case for the secondary market. The primary market is a market for
new capitals that will be traded over a longer period. In the primary market,
securities are issued on an exchange basis. The underwriters, that is, the
investment banks, play an important role in this market: they set the initial
price range for a particular share and then supervise the selling of that share.
Investors can obtain news of upcoming shares only on the primary market.
The issuing firm collects money, which is then used to finance its operations
or expand business, by selling its Shares. Before selling a security on the
primary market, the firm must fulfill all the requirements regarding the
exchange. After trading in the primary market the security will then enter
the secondary market, where numerous trades happen every day. The
primary market accelerates the process of capital formation in a country's
economy. The primary market categorically excludes several other new
long-term finance sources, such as loans from financial institutions. Many
companies have entered the primary market to earn profit by converting its
capital, which is basically a private capital, into a public one, releasing
securities to the public. This phenomena is known as "public issue" or "going
public." There are three methods though which securities can be issued on
the primary market: rights issue, Initial Public Offer (IPO), and preferential
issue. A company's new offering is placed on the primary market through an
initial public offer.
*Functioning of Primary Market
The main function of primary market is to facilitate transfer of recourses
from the savers to the users. The saver is individuals, commercial banks and
insurance companies etc. The users are public limited companies and
government. It plays important role in mobilising the funds from savers and
transferring them to borrowers for productive purposes. It’s not only a
platform for raising finance to establish new enterprise but also for
expansion /diversification/modernisation of existing units. Classification of
issue of share :

B.Secondary Market is the market where, unlike the primary market, an

investor can buy a security directly from another investor in lieu of the
issuer. It is also referred as "after market". The securities initially are issued
in the primary market, and then they enter into the secondary market. All
the securities are first created in the primary market and then, they enter
into the secondary market. In the New York Stock Exchange, all the stocks
belong to the secondary market. In other words, secondary market is a place
where any type of used goods is available. In the secondary market shares
are manoeuvred from one investor to other, that is, one investor buys an
asset from another investor instead of an issuing corporation. So, the
secondary market should be liquid.
Example of Secondary market:
In the New York Stock Exchange, in the United States of America, all the
securities belong to the secondary market.

*Importance of Secondary Market:

Secondary Market has an important role to play behind the developments of

an efficient capital market. Secondary market connects investors'
favouritism for liquidity with the capital users' wish of using their capital for
a longer period. For example, in a traditional partnership, a partner cannot
access the other partner's investment but only his or her investment in that
partnership, even on an emergency basis. Then if he or she may breaks the
ownership of equity into parts and sell his or her respective proportion to
another investor. This kind of trading is facilitated only by the secondary
market

ROLE OF CAPITAL MARKET

The primary role of the capital market is to raise long-term funds for
governments, banks, and corporations while providing a platform for the
trading of securities. This fundraising is regulated by the performance of the
stock and bond markets within the capital market. The member
organizations of the capital market may issue stocks and bonds in order to
raise funds. Investors can then invest in the capital market by purchasing
those stocks and bonds. The capital market, however, is not without risk. It
is important for investors to understand market trends before fully investing
in the capital market. To that end, there are various market indices available
to investors that reflect the present performance of the market.

Regulation of the Capital Market

Every capital market in the world is monitored by financial regulators and

their respective governance organization. The purpose of such regulation is
to protect investors from fraud and deception. Financial regulatory bodies
are also charged with minimizing financial losses, issuing licenses to
financial service providers, and enforcing applicable laws.

The Capital Market’s Influence on International Trade

Capital market investment is no longer confined to the boundaries of a single

nation. Today’s corporations and individuals are able, under some
regulation, to invest in the capital market of any country in the world.
Investment in foreign capital markets has caused substantial enhancement
to the business of international trade.

The Primary and Secondary Markets

The capital market is also dependent on two sub-markets – the primary

market and the secondary market. The primary market deals with newly
issued securities and is responsible for generating new long-term capital.
The secondary market handles the trading of previously-issued securities,
and must remain highly liquid in nature because most of the securities are
sold by investors. A capital market with high liquidity and high transparency
is predicated upon a secondary market with the same qualities.
ROLE OF CAPITAL MARKET IN INDIA:

India’s growth story has important implications for the capital market,
which has grown sharply with respect to several parameters — amounts
raised number of stock exchanges and other intermediaries, listed stocks,
market capitalization, trading volumes and turnover, market instruments,
investor population, issuer and intermediary profiles. The capital market
consists primarily of the debt and equity markets. Historically, it contributed
significantly to mobilizing funds to meet public and private companies’
financing requirements. The introduction of exchange-traded derivative
instruments such as options and futures has enabled investors to better
hedge their positions and reduce risks. India’s debt and equity markets rose
from 75 per cent in 1995 to 130 per cent of GDP in 2005. But the growth
relative to the US, Malaysia and South Korea remains low and largely
skewed, indicating immense latent potential. India’s debt markets comprise
government bonds and the corporate bond market (comprising PSUs,
corporate, financial institutions and banks). India compares well with other
emerging economies in terms of sophisticated market design of equity spot
and derivatives market, widespread retail participation and resilient
liquidity. SEBI’s measures such as submission of quarterly compliance
reports and company valuation on the lines of the Sarbanes-Oxley Act have
enhanced corporate governance. But enforcement continues to be a problem
because of limited trained staff and companies not being subjected to
substantial fines or legal sanctions. Given the booming economy, large
skilled labour force, reliable business community, continued reforms and
greater global integration vindicated by the investment-grade ratings of
Moody’s and Fitch, the net cumulative portfolio flows from 2003-06 (bonds
and equities) amounted to $35 billion. The number of foreign institutional
investors registered with SEBI rose from none in 1992-93 to 528 in 2000-
01, to about 1,000 in 2006-07. India’s stock market rose five-fold since mid-
2003 and outperformed world indices with returns far outstripping other
emerging markets, such as Mexico (52 per cent), Brazil (43 per cent) or GCC
economies such as Kuwait (26 per cent) in FY-06. In 2006, Indian companies
raised more than $6 billion on the BSE, NSE and other regional stock
exchanges. Buoyed by internal economic factors and foreign capital flows,
Indian markets are Globally competitive, even in terms of pricing, efficiency
and liquidity.

US subprime crisis:
The financial crisis facing the Wall Street is the worst since the Great
Depression and will have a major impact on the US and global economy. The
ongoing global financial crisis will have a ‘domino’ effect and spill over all
aspects of the economy. Due to the Western world’s messianic faith in the
market forces and deregulation, the market friendly governments have no
choice but to step in. The top five investment banks in the US have ceased to
exist in their previous forms. Bears Stearns was taken over some time ago.
Fannie Mae and Freddie Mac are nationalised to prevent their collapse.
Fannie and Freddie together underwrite half of the home loans in the United
States, and the sum involved is of $ 3 trillion—about double the entire
annual output of the British economy. This is the biggest rescue operation
since the credit crunch began. Lehman Brothers, an investment bank with a
158 year-old history, was declared bankrupt; Merrill Lynch, another Wall
Street icon, chose to pre-empt a similar fate by deciding to sell to the Bank of
America; and Goldman Sachs and Morgan Stanley have decided to transform
themselves into ordinary deposit banks. AIG, the world’s largest insurance
company, has survived through the Injection of funds worth $ 85 billion from
the US Government.

The question arises: why has this happened?

Besides the cyclical crisis of capitalism, there are some recent factors which
have contributed towards this crisis. Under the so-called “innovative”
approach, financial institutions systematically underestimated risks during
the boom in property prices, which makes such boom more prolonged. This
relates to the short sightedness of speculators and their unrestrained greed,
And they, during the asset price boom, believed that it would stay forever.
This resulted in keeping the risk aspects at a minimum and thus resorting to
more and more risk taking financial activities. Loans were made on the basis
of collateral whose value was inflated by a bubble. And the collateral is now
worth less than the loan. Credit was available up to full value of the property
which was assessed at inflated market prices. Credits were given in
anticipation that rising property prices will continue. Under looming
recession and uncertainty, to pay back their mortgage many of those who
engaged in such an exercise are forced to sell their houses, at a time when
the banks are reluctant to lend and buyers would like to wait in the hope that
property prices will further come down. All these factors would lead to a
further decline in property prices.

Effect of the subprime crisis on India:

Globalization has ensured that the Indian economy and financial markets
cannot stay insulated from the present financial crisis in the developed
economies. In the light of the fact that the Indian economy is linked to global
markets through a full float in current account (trade and services) and
partial float in capital account (debt and equity), we need to analyze the
impact based on three critical factors: Availability of global liquidity;
demand for India investment and cost thereof and decreased consumer
demand affecting Indian exports. The concerted intervention by central
banks of developed countries in injecting liquidity is expected to reduce the
unwinding of India investments held by foreign entities, but fresh
investment flows into India are in doubt. The impact of this will be threefold:
The element of GDP growth driven by off-shore flows (along with skills and
technology) will be diluted; correction in the asset prices which were
hitherto pushed by foreign investors and demand for domestic liquidity
putting pressure on interest rates. While the global financial system takes
time to “nurse its wounds” leading to low demand for investments in
emerging markets, the impact will be on the cost and related risk premium.
The impact will be felt both in the trade and capital account. Indian
companies which had access to cheap foreign currency funds for financing
their import and export will be the worst hit. Also, foreign funds (through
debt and equity) will be available at huge premium and would be limited to
blue-chip companies. The impact of which, again, will be three-fold: Reduced
capacity expansion leading to supply side pressure; increased interest
expenses to affect corporate profitability and increased demand for
domestic liquidity putting pressure on the interest rates. Consumer demand
in developed economies is certain to be hurt by the present crisis, leading to
lower demand for Indian goods and services, thus affecting the Indian
exports. The impact of which, once again, will be three-fold: Export-oriented
units will be the worst hit impacting employment; reduced exports will
further widen the trade gap to put pressure on rupee exchange rate and
intervention leading to sucking out liquidity and pressure on interest rates.

The impact on the financial markets will be the following:

Equity market will continue to remain in bearish mood with reduced

offshore flows, limited domestic appetite due to liquidity pressure and
pressure on corporate earnings; while the inflation would stay under
control, increased demand for domestic liquidity will push interest rates
higher and we are likely to witness gradual rupee depreciation and depleted
currency reserves. Overall, while RBI would inject liquidity through
CRR/SLR cuts, maintaining growth beyond 7% will be a struggle. The
banking sector will have the least impact as high interest rates, increased
demand for rupee
Loans and reduced statutory reserves will lead to improved NIM while, on
the other hand, other income from cross-border business flows and
distribution of investment products will take a hit. Banks with capabilities to
generate low cost CASA and zero cost float funds will gain the most as
revenues from financial intermediation will drive the banks ‘profitability.
Given the dependence on foreign funds and off-shore consumer demand for
the India growth story, India cannot wish away from the negative impact of
the present global financial crisis but should quickly focus on alternative
remedial measures to limit damage and look in-wards to sustain growth!

Role of capital market during the present crisis:

In addition to resource allocation, capital markets also provided a medium

for risk management by allowing the diversification of risk in the economy.
The well-functioning capital market improved information quality as it
played a major role in encouraging the adoption of stronger corporate
governance principles, thus supporting a trading environment, which is
founded on integrity. liquid markets make it possible to obtain financing for
capital-intensive projects with long gestation periods.. For a long time, the
Indian market was considered too small to warrant much attention.
However, this view has changed rapidly as vast amounts of international
investment have poured into our markets over the last decade. The Indian
market is no longer viewed as a static universe but as a constantly evolving
market providing attractive opportunities to the global investing
community. Now during the present financial crisis, we saw how capital
market stood still as the symbol of better risk management practices
adopted by the Indians. Though we observed a huge fall in the sensex and
other stock market indicators but that was all due to low confidence among
the investors. Because balance sheet of most of the Indian companies listed
in the sensex were reflecting profit even then people kept on withdrawing
money. While there was a panic in the capital market due to withdrawal by
the FIIs, we saw Indian institutional investors like insurance and mutual
funds coming for the rescue under SEBI guidelines so that the confidence of
the investors doesn’t go low. SEBI also came up with various norms
including more liberal policies regarding participatory notes, restricting the
exit from close ended mutual funds etc. to boost the investment. While
talking about currency crisis, the rupee kept on depreciating against the
dollar mainly due to the withdrawals by FIIs. So , the capital market tried to
attract FIIs once again. SEBI came up with many revolutionary reforms to
attract the foreign investors so that the depreciation of rupee could be put
to halt.

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors. Some of the factors which
influence capital Market is as follows:-

A) Performance of domestic companies:-

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

factors which has direct impact or effect on capital market in a country.
Weak corporate earnings indicate that the demand for goods and services in
the economy is less due to slow growth in per capita income of people .
Because of slow growth in demand there is slow growth in employment
which means slow growth in demand in the near future. Thus weak
corporate earnings indicate average or not so good prospects for the
economy as a whole in the near term. In such a scenario the investors (both
domestic as well as foreign) would be wary to invest in the capital market
and thus there is bear market like situation. The opposite case of it would be
robust corporate earnings and it’s positive impact on the capital market. The
corporate earnings for the April – June quarter for the current fiscal has been
good. The companies like TCS, Infosys,Maruti Suzuki, Bharti Airtel, ACC, ITC,
Wipro,HDFC,Binani cement, IDEA, Marico Canara Bank, Piramal Health,
India cements , Ultra Tech, L&T, Coca- Cola, Yes Bank, Dr. Reddy’s
Laboratories, Oriental Bank of Commerce, Ranbaxy, Fortis, Shree Cement,
etc have registered growth in net profit compared to the corresponding
quarter a year ago. Thus we see companies from
Infrastructure sector, Financial Services, Pharmaceutical sector, IT Sector,
Automobile sector, etc. doing well . This across the sector growth indicates
that the Indian economy is on the path of recovery which has been positively
reflected in the stock market (rise in sensex & nifty) in the last two weeks.
(July 13-July 24).

B) Environmental Factors :-

Environmental Factor in India’s context primarily means- Monsoon . In India

around 60 % of agricultural production is dependent on monsoon. Thus
there is heavy dependence on monsoon. The major chunk of agricultural
production comes from the states of Punjab, Haryana & Uttar Pradesh. Thus
deficient or delayed monsoon in this part of the country would directly affect
the agricultural output in the country. Apart from monsoon other natural
calamities like Floods, tsunami, drought, earthquake, etc. also have an
impact on the capital market of a country. The Indian Met Department (IMD)
on 24th June stated that India would receive only 93 % rainfall of Long
Period Average (LPA). This piece of news directly had an impact on Indian
capital market with BSE Sensex falling by 0.5 % on the 25th June . The major
losers were automakers and consumer goods firms since the below normal
monsoon forecast triggered concerns that demand in the crucial rural
heartland would take a hit. This is because a deficient monsoon could
seriously squeeze rural incomes, reduce the demand for everything from
motorbikes to soaps and worsen a slowing economy.

C) Macro Economic Numbers:-

The macroeconomic numbers also influence the capital market. It includes

Index of Industrial Production (IIP) which is released every month, annual
Inflation number indicated by Wholesale Price Index (WPI) which is
released every week, Export – Import numbers which are declared every
month, Core Industries growth rate ( It includes Six Core infrastructure
industries – Coal, Crude oil, refining, power, cement and finished steel)
which comes out every month, etc. This macro –economic indicators indicate
the state of the economy and the direction in which the economy is headed
and therefore impacts the capital market in India. A case in the point was
declaration of core industries growth figure. The six Core Infrastructure
Industries – Coal, Crude oil, refining, finished steel, power & cement –grew
6.5% in June , the figure came on the 23 rd of July and had a positive impact
on the capital market with the Sensex and nifty rising by 388 points & 125
points respectively.

D) Global Cues:-

In this world of globalization various economies are interdependent and

interconnected. An event in one part of the world is bound to affect other
parts of the world; however the magnitude and intensity of impact would
vary. Thus capital market in India is also affected by developments in other
parts of the world i.e. U.S. , Europe, Japan , etc. Global cues includes corporate
earnings of MNC’s, consumer confidence index in developed countries,
jobless claims in developed countries, global growth outlook given by
various agencies like IMF, economic growth of major economies, price of
crude –oil, credit rating of various economies given by Moody’s, S & P, etc.
An obvious example at this point in time would be that of subprime crisis &
recession. Recession started in U.S. and some parts of the Europe in early
2008 .Since then it has impacted all the countries of the world- developed,
developing, less- developed and even emerging economies.

E) Political stability and government policies:-

For any economy to achieve and sustain growth it has to have political
stability and pro- growth government policies. This is because when there is
political stability there is stability and consistency in government’s attitude
which is communicated through various government policies. The vice-
versa is the case when there is no political stability .So capital market also
reacts to the nature of government, attitude of government, and various
policies of the government. The above statement can be substantiated by the
fact the when the mandate came in UPA government’s favour ( Without the
baggage of left party) on May 16 2009, the stock markets on Monday , 18th
May had a bullish rally with Sensex closing 800 point higher over the
previous day’s close. The reason was political stability. Also without the
baggage of left party government can go ahead with reforms.

F) Growth prospectus of an economy:-

When the national income of the country increases and per capita income of
people increases it is said that the economy is growing. Higher income also
means higher expenditure and higher savings. This augurs well for the
economy as higher expenditure means higher demand and higher savings
means higher investment. Thus when an economy is growing at a good pace
capital market of the country attracts more money from investors, both from
within and outside the country and vice -versa. So we can say that growth
prospects of an economy do have an impact on capital markets.

G) Investor Sentiment and risk appetite:-

Another factor which influences capital market is investor sentiment and

their risk appetite .Even if the investors have the money to invest but if they
are not confident about the returns from their investment , they may stay
away from investment for some time.At the same time if the investors have
low risk appetite , which they were having in global and Indian capital
market some four to five months back due to global financial meltdown and
recessionary situation in U.S. & some parts of Europe , they may stay away
from investment and wait for the right time to come.

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