INTRODUCTION AND RESEARCH DESIGN

Chapter I INTRODUCTION AND RESEARCH DESIGN 1.1 Introduction A stock exchange is a living and growing economic organisation; it is dynamic and not static. 1 In the economic conditions of today, a stock exchange has been found to be necessary for maintaining progress and ensuring prosperity of the country. The stock exchange is many a times described as the mart of the world, the nerve centre of politics and finance of its nations and barometer of their adversity and prosperity. 2 Stock market is an organised market for industrial, financial and government securities, where shares and debentures of different companies are purchased and sold. Stock market channelises household savings to the corporate sector and allocates funds to firms, which in turn facilitates economic development. Thus, transactions in secondary market reflect the investment climate in the economy. The stock market in India is more than a century old and it has functioned continuously through the medium of organised stock exchange. At present, there are 23 stock exchanges in India, 3 in which Bombay Stock Exchange is one of the oldest stock exchange not only in India but also in Asia as well. The NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) are the leaders of Indian securities market. Indian economy, prior to the eighties was more of a controlled economy with emphasis on the public sector and private sector, playing a secondary role with several controls. With industrial development, rapid growth took place since mid eighties in our country. Economic crises of 1990-91 liberalized the policy environment and added vigour to the activities in securities market. Thus, Indian capital market started undergoing a fast change since economic and financial reforms were started from July 1991 1 Barodia K. U. (1943):The Bombay Stock Exchange: Its History, Organisation and Function, Thesis Submitted to University of Mumbai, p. II. 2 Killick, S :The Work of the Stock Exchange, p.1. 3 Indian Securities Market A Review, Vol.xii, p.09. 1

onwards. With the industrial liberalisation and financial deregulation, a new era was ushered in for the capital market. This process was further accelerated with the trend towards the globalisation of the economy and the market privatisation, free and unfettered inflow and outflows of funds following the rupee convertibility in current account since 1994 has added a new dimension to the growth of capital market. The permission granted to the FIIs to enter the Indian capital market and for Indian companies to borrow abroad has opened up new vistas for expansion and growth of the Indian capital market. The stock market in India had to readjust their functioning according to the requirement of the changing situation and to accept a new discipline. The reforms in stock market, aided by technical changes, aimed at improving the procedure and making them more transparent. 1.2 Statement of the Problem: This study titled as A Study of Bombay Stock Exchange during Economic Reform Period has been undertaken to analyse the performance of Bombay Stock Exchange (BSE) and to study market efficiency of BSE at the time of structural changes. Returns and volatility, influences the investor to buy and sell the securities in the stock exchange, therefore returns and volatility are also analysed in the given study. The present study also analyses the correlation of BSE indices with international stock markets, and analyses effect of FIIs in Indian stock market. The quantitative and qualitative parameters have also grown exponentially in BSE. These changes have greatly improved the efficiency, transparency, depth and safety of the market. To enhance transparency, to prevent unfair trade practices and bring the BSE up to international standards, BSE has joined hands with SEBI and has implemented dematerialisation, rolling settlement and derivative trading. Globalisation is increasing at a faster pace and capital markets across the globe are getting integrated. Thus, deregulations and market liberalisation measures, rapid development in communication technology and computerised trading systems has accelerated the growth of the Indian capital market. 2

1.3 Significance of the Study Economic development to a great extent depends on the rate of investment or capital formation, which in turn depends on whether finance is made available in time, quantity, and the terms on which it is made available. As stock market deals mainly in corporate securities. The purpose of these securities is to raise long term funds for companies engaged in production. Share market channalises household savings to the corporate sector and allocate funds to firms. It also plays a significant role in promoting economic development in the following sense It mobilises savings and accelerates capital formations, It promotes industrial growth, It raises long term capital, It ensures proper utilisation of funds, The stock exchange provides a continuous and permanent & a convenient place for buyers and sellers to purchase and sell securities. The purpose of shares is not only to mobilise resources but also to utilise these resources to promote economic development. Hence, the Bombay Stock Exchange being one of the oldest and biggest exchanges is selected to examine its role and performance of stock market during economic reforms. 1.4 Stock Market : Highly sensitive Market Generally markets are classified into Product Market (i.e. Commodity Market), Factor Market and Financial Market. Product and Factor market are subjected to the same basic influences of economic variables. But there are some different types of markets which have been functioning differently and common product and factor market theories are not applicable to such market. Stock market which comes under financial market is an example of such type of market where product & factor market mechanism have limited applicability. Therefore, what type of competition prevails in stock market is an interesting subject matter and can attract the attention of an academician. 3

Stock prices provide signal for the efficient allocation of investment in the economy. It becomes necessary, therefore to examine some sort of important aspect of the process of price formation on stock market and the extent to which structure and composition of stock prices reflect in them. In market analysis, markets are divided into two parts i.e. Perfect competition and second one is Imperfect competition. Now, which competition prevails in the stock market? 1.4.1 Distinction between Stock Exchanges and Commodity Exchanges Both stock exchanges and commodity exchanges are organized markets for forward trading; while stock exchanges are market for trading in securities. The produce exchanges are market for trading in commodities. The fact that there is usually an interval between production and consumption of commodity, it involves price risks and the commodity exchanges offers protection against these unforeseen risks of price changes, stemming from changes in supply and demand. Stock exchange an organized type of market has negligible carrying cost, is imperishable and is completely standardized. One characteristic of commodity market, is that the bulk of supply is extinguished through consumption every year. In case of securities, there is hardly any diminution in supply, except to the companies that go liquidation. New securities are issued every year so there is continuously growing volume of outstanding securities available for trading and consequently rising volume of transactions. The stock and commodities exchanges accounts for differences in the nature of contracts and transactions, the organizational setup the apparatus of regulations and control. Stock market also differs from other markets in perishable goods and in real property in certain important respect, which have also a direct bearing on the process of price formation. The volumes of securities actually entering the market at a time is usually just small fraction of the total number of securities in existence. The potential supply consists of the entire mass of the existing securities which exerts pressure on the current prices. 4

1.4.2 Stock Market as a Market A Stock Market is a market in the Wicksteedian sense. It is a mechanism through which a seller of a security on whose scale of preference the security is relatively low is brought into contact with a buyer of that security on whose scale of preference, it is relatively high. The exchange is of mutual benefit to both. Like product market, this market involves buyer and seller in which shares of firms are traded. In this market, firms in the line of business offer their shares to potential buyers. There need not be direct contact between buyer and sellers. But the behaviour of buyer and sellers in such market is equally predictable. Stock Market is the money making platform that involves certain stages i.e. come, watch, buy, wait, sell and exit. If stock stays more in any of these stages, a buyer/seller may suffer because every stage contains a specific time value for the profit making. Stock markets being essentially a two-way auction market, those bidding to sell at the highest price have always a floor price below which they refrain from selling the scrips. This market is more informational sensitive. Buyer and Sellers are aware about market situation. Stock market is a liquid market in which securities can be readily converted into cash. Stock market is made up of four major components that are buyers, sellers, and a widget being bought and sold i.e. shares and regulators. 1.4.3 Features/Characteristics 1. Larger Number of Buyers and Sellers: In stock market, number of buyer and sellers is a large. A larger number of buyers and sellers ensure that purchase or sell of any one individual buyer or seller in the stock market will not affect the market price. Each buyer and seller is small relative to the total market for the security and exerts no perceptible influence on the market. 5

Now question arises is there any type of collusion among buyers and sellers? But due to the large number of buyer and sellers there is no possibility of collusion. Yet there are also some examples of collusion. All buyers and sellers in this market are rationally motivated. The level of intelligence of buyers and sellers is more in this market. 2. The number is so large that no single seller is in a position to influence the price of the product in the market. The reason is that he is one amongst many sellers. He will be selling a small proportion of the total output sold in the stock market. Therefore, each seller in the stock market has to take the price of the product as given. Thus, he is a price taker & not a price maker. Similarly, when there are many buyers, no single buyer can alter the price by his own action. Each buyer takes a very small proportion of the total sales in the market, like seller, he is also one amongst a large number of buyers. Hence, he cannot influence the price at all. He has to accept the price as given in the market. Thus, both the seller and the buyer in the stock market are price takers. The individual buyer or seller of the stock must take price as given, or one can say that individual buyers and sellers of stock have little effect on price. However, when there is institutional trading which involves the purchase or sale of large blocks of shares by institutions such as pension funds, mutual funds and insurance companies, these traders are not an insignificant part of the total market and hence do have some influence over price. 3. Homogenous Product: The nature of commodity (Shares) is homogeneous. There is no technical difference or any difference in the services associated with the product (Stock). In other words, the product is not differentiated. Therefore, buyer can buy the stock from any seller and broker. Securities market deal with more or less homogeneous products within each particular category. On an active market, where the stock is traded, they 6

enjoy a high degree of liquidity the quantity of homogeneity would be possessed by a large majority of the listed companies. 4. High Degree of Substitutability: The various scrip s brought and sold in the market possess a high degree of substitutability, which ensure a measure of homogeneity in them. On the securities market, the investor, i.e. the buyer has a wide range of choice. He has the freedom to choose from a variety of securities which are close substitute for each other. Therefore cross elasticity of demand for stock market is high. 5. Perfect Information: Perfect information is a situation that arises when information about prices and quantities is costless to obtain, then there would be complete knowledge about market. Stock market offer perfect information to buyers and sellers. Everybody in the market has equally, free access to information about prices and quantities traded. Buyers and sellers are constantly informed about price and quantity. This market or stock prices are extremely sensitive to information about any changes that affect firm and its future prospects. 6. Freedom of Entry and Exit as well as Regulation: Stock market gives open access to all, but only authorization and creditworthiness have a role to play in this market and the limit is prescribed by regulating agency. Every player gets freedom to play within the given limit, thus, entry into the market on both sides of potential transactions is practically unrestricted. Stock market is regulated by authorized regulators. Every player in the market has to follow the rules and regulations designed by regulators. Thus, buyers and sellers have full freedom to enter into the stock market and are allowed to exist from the industry. But the initial entry in the stock market is not free in monetary sense. 7. Reserve Price: The Wicksteedian concept of reservation price is more applicable to the sellers in the stock than the sellers in any other 7

markets. Reserve price means biggest price, a buyer is going to pay for stock or the smallest price at which a seller is going to sell a stock. The market for securities being predominantly a secondary market, the volume of existing securities and minimum reserve price of the sellers have important bearing on the supply of the securities in the market at a given moment of time. 8. Independence in Price Changes: This is a distinctive feature of a highly perfect market i.e. independence in price. It is change on the stock market. One cannot anticipate price changes exclusively on the basis of the behaviour of prices in the past. Price follows a random course is quite consistent with a market in which information on the future prospects is frequently received and widely and quickly disseminated, the prices in the stock market adjust instantaneously to new information. A gradual adjustment of prices to new information would create trends in price series. Thus, stock prices are independent with respect to time (Past Prices). 9. Continuous Market and Continuity : Stock market provides a liquid and continuous market, where investors can convert their money into securities and securities into money quickly during the trading hours by making bids and offers, as it is an open auction where buyers and sellers compete among each other. This enables prices of shares and securities to find their true and fair market worth. The free market mechanism provides marketability, stability and continuity in the prices. It facilitates the transfer of ownership of securities and reduces the risk of investors. 10. Transaction Cost: The cost of doing transactions on the stock market is referred as impact cost. Impact cost also measures the liquidity. A liquid market is a friction market. High liquidity corresponds to low market cost. In this market, transaction cost is incurred at various stages of transaction of securities viz. trading, cleaning and settlement, for example brokerage, impact cost, stamp duty, fees to intermediaries, Securities Transaction Tax (STT) etc. 8

11. Speculation/Speculative Transaction: This is one of the important features of stock market. Speculation is an inspiration that makes stock market more live. Speculation is the purchase or sale of securities at one time, with the object of making a profit by its sale and purchase of securities with a view of making profit from a short period variation in market prices. In this activity the normal practice is to square up transactions by offsetting a sale (purchase) by purchase (sale). Only differences in prices are paid, and the delivery of securities and payment of full price are very rare. But speculation is different from gambling. In the absence of speculation demand and supply may not be equal and therefore, may not lead violent price fluctuations. For instance, if demand is very much more than supply, the price will shoot up and vice versa. Thus, speculators promote the demand and supply equilibrium and stability of prices. Duck. In stock market speculators are classified as Bull, Bear, Stag and Lame 12. It is highly volatile market: It means stock market is changing or changeable market, where volatility refers to any of the several measures of instability. Volatility is a measure of the risk in financial instrument. Volatility refers to relative rate at which the price of security moves up and down. Volatility is calculating by the daily or annualized standard deviation of daily changes in stock price. In stock market, one can earn easily, that would be better an investment, but there is equal chance to incur loss. Sometimes people meet with the losses higher than the profit. 13. Manipulation: In this market, speculators manipulate the market by unfair practices, spread false rumors and give wrong and misleading information, to make profit for themselves at the expense of general investors. Manipulation activities include options, wash sales, touting, inside collusion, manipulation of fundamental corners. The purpose of manipulation is to push up demand for any particular securities in an improper way and thus push up the prices of securities. Option means speculators protect 9

himself from risk and loss. Wash sales means transactions by the manipulators with themselves, touting refers disseminating tips and rumours, manipulation of fundamentals refers to illegal practices of directors and top officials of companies to manipulate earning. Corners means buying of a higher portion of a company by one party, the purpose is to push up the prices of shares. 14. Supply and Demand Elasticity through Stock Market: In stock market, the stock prices are very sensitive to the prices they are quoted. Sometime, a slight increase in price leads to a lot of people willing to sell their stocks (increase in supply) and sometimes they become less willing to sell their stock (decrease in supply). These two cases are referred as cases of relative elastic and relative inelastic. Cross elasticity of demand for stock market is high. The forces from the side of demand for stocks are more complex and varied. In general, three motives govern an investor s decision to buy a particular security. The three major considerations in selecting scrip for investment are safety, profitability and scope for capital appreciation. A buyer s decision to go in for scrip, therefore, depends on his relative evaluation and importance to him of these three qualities possessed by a stock. Investor s investment motives thus have a decisive influence on demand schedule for securities. A change in demand schedule for a security would, therefore, occur whenever a qualitative change i.e. technical and fundamental factors in the stock market parlance. The technical factors relate to the internal organization and structure of market. The fundamental factors refer to general business and growth prospect of the economy. Beside, these, a qualitative change in relative preferences of people in the market about holding liquid cash are significant factor as well. The price determination under stock market is classified into; Short Run (Daily Stock Prices) & Long Run. The price of a particular stock is determined by its demand and supply in the stock market. A stock s price movement up and down until the end of trading day is strictly the result of supply and demand. The supply is number of shares offered for sale at any 10

point of movement. The demand is the number of shares, investors wish to buy at exactly that time; thus, supply equals the willing sellers and demand equals the willing buyers where the mutual interest, is the current price. If the buyers believe that company is not worth its current stock price, this will be manifested by decrease in demand. If the seller realises that buyers are not willing to buy at existing price they will sell to any available buyers at their price. This increases the supply, effectively pushing the price down, the reverse will happen if buyers believe the stock price is cheap and the seller realizing increasing demand, effectively pushing prices up. Thus, interaction of demand and supply affect security prices every day in the stock market. Stock market is always in one of three states: First, it can be in a state where demand exceeds supply, which means there is competition to buy and that leads to higher prices. Second, it can be in a state where supply exceeds demand, which means there is competition to sell and this leads to declining prices. Third, it can be in a state of equilibrium. At equilibrium, there is no competition to buy and sell because the market is at a price where everyone can buy and sell as much as they want. However, as the market moves away from equilibrium, competition increases which forces price back to equilibrium. In other word, competition eliminates itself by forcing market back to equilibrium. When demand and supply roughly equals, prices will bounce back and forth but it narrows the price range. It is possible for a stock to stay in this range for days before something else disrupts the demand and supply balance. Long term price determination in stock market based on fundamental factors which operate from outside the market refers to dividend policy, stock splits, general business conditions, condition in the labour market, growth prospect of the economy, industrial, fiscal and monetary policy of the government, market condition & companies strength and weakness. 1.4.5 Perfect Competition and Stock Market Perfect competition was a very popular market structure. It was considered being an ideal market structure by classical economists. Perfect 11

competition is a condition of market in which there exists very large number of buyers and sellers of homogenous products having no control over price. In this market, price of a product is determined by the free play of market forces demand and supply. Perfect competition is the hypothetical market condition. It normally does not exist in reality. However, some market like stock market, market for agricultural products like food grains, fruits, foreign market are quite close to Perfect Competition. Like perfect competition, in stock market, there are larger number of buyers and sellers of stock. No individual or seller can affect price in the stock market, price of particular stock is determined by its demand and supply in the stock market. Both the functionaries are well informed of market situation, both present and expected. The product is homogeneous in the sense that stocks belong to a particular company, say Reliance Industries Ltd. One point needs to be noted carefully. Despite, the fact that the stock market is little close to being a perfect competitive market, imperfections occur even here. For example, the sale of Rs. 10 crores worth of stocks by RIL or any other large corporation will certainly affect (depress) the price of its stocks. Further stock prices can sometimes be grossly overvalued (i.e. we could have bubble market) and thus subject to a subsequent steep correction (fall). There may be sudden pricing of a large volume of shares of a company and which leads to artificially pushing up of price of a particular share. This was seen when stock market scams were unearthed first in 1992 and then in 2001 i.e. in case of big bull Harshad Mehta, the flamboyant Ketan Parekh. Another recent example is when record overseas purchases had stoked a 'bubble' in Indian stock during 2007. These are examples of imperfections that creep up occasionally. To sum up, product market and factor market mechanism have limited applicability in financial market such as stock market. Like product market there are some unique features of stock market such as larger number of buyers and sellers but have little effect on price, high degree of substitutability, perfect knowledge, reserve price, independence in price changes, speculation, manipulation etc. Though the functioning of the stock market is as close as to a perfect competitive market, at times certain 12

imperfections make their inroads. Therefore, the stock market, rather than representing a floating financial Dias game, is one of the most efficient and a highly sensitive & competitive market imaginable. 1.4.6 Role and Significance of Stock Market in the Growth of Economy In union of India vs Allied International Product Ltd. [1971) 41 comp (as 127 SC]: (1970) 3 SCC (5941), the Supreme Court of India has enunciated the role of stock exchange in these word: "A stock exchange fulfills a vital function in the economic development of a nation : Its main function is to 'liquidly' capital by enabling a person who has invested money in, say a factory or railway, to convert it into cash by disposing off his shares in the enterprise to someone else investment in joint stock companies is attractive to the public, because the value of the shares is announced day after day in the stock exchanges and shares quoted on the exchange are capable of almost immediate conversion into money. In recent tunes, a company stands little chance of inducing the public to subscribe to its capital, unless its shares are quoted in an approved stock exchange. All public companies are anxious to obtain permission & quotations of their shares and management of a company is anxious to inform the investing public that the shares of the company will be quoted on the stock exchange." The stock market is not a gambling tank. It is necessary and an integral part of present economic scenario. Thus, stock exchange is really an essential pillar of the private sector corporate economy. The finance minister of India Mr. C. D. Deshmukh while placing an, on security contracts (Regulation) Bill in November 1958 stated that economic services which a well constituted and efficiently run securities market can render to a country with large private sector under normal incentives and impulses of private enterprises are considerable. "In first place, it is only an organised security market which can provide sufficient marketability and price continuity for shares so necessary for the need of investors. Secondly, it is only such a market that can provide a reasonable measure of safety and fair dealing in buying and selling of securities. Thirdly, through the interplay of demand and supply of securities, a proper organised stock exchange assist in a reasonably 13

correct evaluation of securities in term of their real worth. Lastly, through such evaluation of securities the stock exchange helps in the orderly flow of distribution of saving as between different types of competitive instruments." 4 There have a number of studies, starting from World Bank and IMF to various scholars, which have established robust (strong) relationship not only one way, but also the both the ways, between the development in securities market and economic growth. An important study by Ross Levin & Sara Zervos (1996) found that the stock market development is highly significant statistically in forecasting future growth of per capita GDP. Their regression forecast that if Mexico or Brazil were to obtain stock market as advanced as Malaysia, then they might obtain an additional per capita GDP growth per year of 1.6%. This happens, when markets get disciplined/developed/efficient, they avoid the allocation of scare saving to low yielded enterprises. 5 The security market foster economic growth to the extent that it : Augments the quantities of real saving and capital formation from any given level of national income. Increase net capital inflow from abroad. Raises the productivity of investment by improving allocation of investible funds. Reduce the cost of capital. Securities market provides a bridge between ultimate savers and ultimate investors and creates the opportunity to put the savings of cautious at disposal of the enterprising, thus promising to raise the total level of investment and hence, growth. The securities market facilitates the internationalisation of an economy by linking it with the rest of the world. This linkage assists through the inflow of capital in the form of portfolio investments. A strong domestic stock market performance forms the basis for well performing domestic corporate to raise capital in the international market. 4 Jadhav K. (1991): Development of Capital Market in India, A.J. Enterprises, pp. 53-54. 5 S.G. Gupta lecture delivered by Shri G.N. Bajpai, Chairman, SEBI at Mumbai on March 2003. 14

Thus, an active securities market serves as an engine of general financial development and may in particular accelerate the integration of informal financial systems with institutional financial sector. It provides institutional mechanisms for the operation of monetary and fiscal policy. 1.5 Economic Functions of Stock Exchange The Securities Contract (Regulation) Act 1956 "Stock exchange means an association, organisation or body of individuals whether incorporated or not; established for the purpose of assisting, regulating and controlling the business in buying and selling the securities." 6 According to J. F. Pyle, "Security exchanges are market place where the securities that have been listed there on may be bought and sold for either investment or speculation."7 Thus, the stock exchange is an organised place, where the securities are purchased and sold. The securities are traded under certain rules and regulations. Stock exchange has multiple functions in the economy. This may include the following Since an organised stock exchange works under a code of well defined rules and regulations, it minimises the dangers inherent in speculative dealing and manipulations. It provides a readily and continuous market for buying and selling of securities. Stock exchange brings about the fairest and the most accurate price for shares and debentures. It plays a very important role in capital formation, surplus funds which either remain idle or would have been locked up in commercial portfolio. 6 The Securities Contacts (Regulation) Act 1956, Section 2(3). 7 Ramesh Babu (2006): Financial Market & Institutions, Concept Publishing Company, New Delhi, p.108. 15

The equity market not only mobilises the surplus funds of community but also facilitate distribution of funds between different firms and industries. Liquidity (Securities can converted into cash easily) Price continuity Smooth flow of funds Economic Functions of Stock Market Provide speculation Provide progressive index Lessens the risk Continuous evaluation of scrip's Safety to investors Capital flow centre 1.6 Objectives of the Study Following are some objectives of the present study. 1 To study the development of Indian Securities Market after the initiation of economic reforms. 2 To analyse the market performance and financial efficiency of the BSE. 3 To study the market efficiency at the time of introduction of : a. Compulsory Dematerialization and b. Rolling settlement of T+5, T+3 and T+2 4 To measure the returns of the stock indices of BSE. 5 To study the returns and volatility in bear and bull phases. 6 To study the volatility of BSE indices. 16

7 To examine correlation between BSE and international stock market returns. 8 To study correlation between FII investment and returns of BSE indices. 9 To study correlation between FII investment and BSE turnover. 10 To study comparative analysis of BSE & NSE. 11 To study advances & declines ratio of BSE. 1.7 Scope of the Study The Bombay Stock Exchange provides a trading platform for all types of securities: equity, debt, (corporate and government) and derivatives transactions. The capital market segment of stock exchange is the largest and the fastest moving than others segments. In 1991, the market capitalization and turnover in the capital market segment was Rs. 188146 crores and Rs. 45696 crores respectively and which increased to Rs. 30860751 and Rs. 11000741 crores in 2009. 8 The present study focuses solely on the capital market segment of BSE & it consider only four indices such as : BSE- 30(SENSEX), BSE-100, BSE-200 & BSE-500. 1.8 Hypothesis 1. BSE is efficient in absorbing structural changes of compulsory dematerialization and rolling settlement of T+5, T+3 and T+2. 2. FII net investment has significant impact on the net Sensex. 3. There is a relationship between the monthly return of BSE and monthly FII investment. 4. There is a relationship between monthly BSE's turnover and FII investment. 5. BSE s stock prices and returns are correlated with international stock market. 1.9 Period of the Study 8 Handbook of Statistics on Indian Securities Market 2009, p. 36. 17

The present study covers a period of 19 (nineteen) years from 1991 to 2009. In 1992, SEBI Act was enacted, which gave it the statutory status. During the study period in January 2001, SEBI announced compulsory trading of listed securities in demat form and in June 2001 rolling settlement (T+5) was introduced, later it reduced to T+3 and T+2 in April 2002 and in April 2003 respectively. The economic reforms started since 1991 along with development in Information Technology (IT) has changed the face of Indian capital market. Hence the year 1991 is taken for a standing point for the present study. 1.10 Research Methodology and Database of the Study Present study is based on secondary data only. The secondary data consist of daily series of BSE SENSEX, BSE 100, BSE 200 & BSE 500. This data is obtained from BSE website (i.e. www.bseindia.com), NSE website (i.e. www.nseindia.com). SEBI (www.sebi.gov.in). The data related to BSE is also obtained from various annual reports of BSE & various issues of BSE review from 1991 to 2009. To study the relation between returns & stock prices of BSE with international markets three markets are selected i.e. NASDAQ which is world ranking number one for market capitalization, followed by NIKKEI which holds second rank for market capitalization, HKSE (all three are developed markets) & NSE. For correlation analysis data taken from www.ecostat.com of various indices of international markets namely NASDAQ (USA), NIKKEI (Japan), HKSE (Hong Kong) & NSE (India) daily closing prices of these are taken. FII s monthly data is calculated from BSE s annual reports of various yearly & annual reports of SEBI. Besides, data related to Indian stock market & Bombay Stock exchange is collected from SEBI; handbook of statistics on Indian securities market 2009, Report on currency & Finance, RBI ; Handbook of statistics on Indian Economy, Economy survey & various issues of Economic & Political Weekly are referred. For the comparative study of BSE & NSE a paired comparison approach is used & data is collected from CMIE reports -2007 & 2009, varies issues of Indian Securities Market Review (ISMR). 18

1.11 Processing of Data and Quantitative Techniques Used The collected data is processed by SPSS package & analysed with the help of statistical tools. To examine the market efficiency of BSE in relation with structural changes Autocorrelation test & Ljung Box statistics have been used. To measure returns of stock indices logarithmic difference of price method have been used. To measure volatility of BSE indices the Parkinson & the Garman Klass estimators used. To study the financial position of BSE, ratio analysis such as solvency ratio (liquidity ratios) & current ratio has been computed. To Study the correlation among BSE indices & international stock market Karl Pearson s correlation coefficient method has been used. The time series techniques such as Simple Moving Average (SMA) have been used to estimate Bull & Bear phases during study period. To find out relationship between FII investment & BSE s turnover, monthly return of BSE & monthly FII investment correlation analysis have been used. A further, statistical technique like growth rate also has been used. Moreover graphical devices like pie-charts, bar-diagrams, etc. are also used. 1.12 Chapter Scheme The present study has been organised and presented in eight chapters. The introduction, significance of study, characteristics, objectives of the study, scope of the study, hypothesis, period of study, research methodology and database of the study, processing of data & quantitative techniques are presented in chapter first. In second chapter, an attempt has been made to take review of the studies related stock market. Development of Indian stock market, major reforms in stock market is studied in chapter third. Profile of Bombay Stock Exchange is presented in the chapter fourth. 19

Market efficiency at the time of dematerialization and rolling settlement & a comparative study of BSE& NSE is presented in the chapter fifth. The returns and volatility in the BSE are studied in the chapter sixth. The comparative analysis of BSE with other stock exchanges and role of FII in Indian stock market is studied in the chapter seventh. Conclusion, major findings & suggestions of the study are provided in the chapter eight. 20