CAPITAL MARKET SCENARIO

CAPITAL MARKET SCENARIO

CHAPTER 3 THE INDIAN CAPITAL MARKET SCENARIO The capital market constitutes a vital segment of the Indian economy, along with the financial institutions that finance the economic development of the country, channelizing savings to investments and thereby decoupling the two activities. In the light of the above, it can be said that an investor is never determined in his power to exploit the opportunities available in the economy, which mobilizes and saves so as to enhance the wealth of the investors. This in turn would increase the savings and shall also progressively improve the investment ability which would further boost economic growth through the capital market. The financial markets and financial institutions are two competing mechanisms to channelize savings to investment. The financial markets score over financial institutions in the allocation efficiency, as they allocate savings to those investments, which have the potential to yield higher returns. This inevitably leads to higher returns. The process would ensure that the saving class in the economy would generate higher returns on their disposable income. This is as a result of the activity of increasing the productivity of the investment to its enterprises. Hence it is deduced that economic growth is related to the rate of return (ROR) on investment which is catalyzed by the capital market. Against this backdrop, an attempt has been made in this chapter to review the functions of the capital market, and its role and significance in the growth of an economy. How does the capital market in a free market economy contribute to economic growth? What is its role in the growth and development of the Indian economy? are the subject matter of study in this section. 71

3.1 Role of the Capital Market The capital market essentially plays the role of an intermediary so as to facilitate the investors to find alternative uses for their savings. The capital market goes a step further to equip the incoming investors to make better use of their ideas, thereby increasing the wealth of their disposable income. The capital market is a channel for the savers and their preferred investments across various corporate entities. The function of the financial system is to mobilize the savings in the economy and also channelizing the same to investment avenues which are feasible to the savers based on their investment objectives. The capital market would necessarily equip the population, irrespective of their source of income or status, to channelize their disposable income and increasing wealth to prospective avenues of investment. The capital market is thus entrusted with a task to assist those individuals who do not have the means or resources to start up an enterprise or business to put their limited resources into those channels which would help their investments grow and flourish. This is in a way a source for those who have ideas and expertise to start enterprises, but limited by resource. The capital market also provides a market for the purchase and sale of securities and thereby ensures transferability of securities, which is the foundation for the joint stock enterprise system. The liquidity available to investors does not bring inconvenience to the enterprises that originally came forth the securities to advance finances. The capital market through its presence ensures that it bridges the gap that exists between investors and borrowers, bringing profits for the borrowers and returns for the investors. It also 72

ensures that the capital so borrowed is put into effective use by providing the required liquidity to the investors, when they want to liquidate their investments. The liquidity the market confers and the yield promised or anticipated on security encourages people to create additional savings out of current income. In the absence of the capital market, the extra savings would have been consumed otherwise. Therefore, the supply of capital market results in net savings. The capital market enables an individual to allocate his savings among a number of investments. This aids him to diversify risks among many initiatives, which increases the likelihood of long term overall gains. 3.2 Factors of Capital Market Development Stock market development like the economic development is a complex and multifaceted concept and no single measure will capture all views of stock market growth. It thus necessitates the study of a wide array of stock market growth indicators like stock market size, market liquidity, and regulatory and institutional growth. The market capitalization ratio is mostly considered as a measure of stock market size, but of late, the number of listed companies on a stock market is also considered as a measure. The term liquidity refers to the power of the market to purchase or trade securities. Two bars are more often than not applied to measure liquidity. They are turnover (total value traded) in the stock market place as a ratio of: GDP and stock market capitalization. The second measure is also called turnover ratio. The high turnover ratio is associated with low transaction cost. It also denotes the degree of activity in a stock market. 73

The size of the capital market and growth over the past decade is shown in Table 3.1. The table includes figures on market capitalization, turnover ratio and number of listed companies. Table 3.1 Capital Market Development (1992-93 to 2012-13) Financial Year Market Capitalization (Rs. Billion) Turnover (Rs. Billion) Turnover Ratio No. of Listed Companies 1992-93 4169.26 1013.13 24.30 2861 1993-94 7681.48 1766.74 23.00 3585 1994-95 9088.3 1317.80 14.50 4837 1995-96 10987.33 2823.74 25.70 6025 1996-97 9522.47 9046.35 95.00 6382 1997-98 11501.41 12628.55 109.80 6465 1999-00 11194.25 15067.46 134.60 6497 2000-01 21054.72 33140.13 157.40 6535 2001-02 13404.16 50748.15 378.60 6654 2002-03 13614.72 17808.05 130.80 6575 2003-04 12041.19 20470.02 170.00 6468 2004-05 25200.02 35280.03 140.00 6437 2005-06 33992.27 34808.08 102.40 5701 2006-07 69123.91 58617.08 84.80 5850 2007-08 99961.36 103759.89 103.80 6049 2008-09 59822.69 78128.43 130.60 6268 2009-10 121747.92 111155.85 91.30 6361 2010-11 135417 94250.23 69.60 6445 2011-12 123114.59 69929.09 56.80 6641 2012-13 105809.18 55020.77 52.00 6779 Source: SEBI, Handbook of Statistics, 2005, 2012 Thus, a small but active stock market has a small size, but a high turnover ratio. Indicators of stock market development for one of the oldest and premier stock 74

exchanges in India, namely, the Bombay Stock Exchange is presented in Table 3.1 above and Figure 3.1 below. Data reveal that the stock market size, as measured by the number of listed companies and market capitalization has increased during the year from 1992-93 to 1998-99 and it has decreased by 1 per cent in 2002-03 till 2004-05. In 2005-06 there was a substantial fall in the number of listed companies to 11 Per cent. Since then the numbers have shown an upward trend till 2012-13. But the liquidity in the stock market as measured by turnover has shown a progressive growth from 24 Per cent in 1992-93 to 378 Per cent in 2001-02. As on 2012-13 it stood at 52 Per cent. Figure 3.1 Capital Market Developments 205000 Rs. In Billion 155000 105000 55000 5000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 6654 6049 6361 Years Market Capitalisation (Rs. Billion) Turnover Ratio Turnover (Rs. Billion) No. of Listed Companies Source: SEBI, Handbook of Statistics, 2005, 2012 75

3.3 Capital Market and Economic Growth The efficiency of the capital market is a direct determinant of economic growth. Many organizations and researchers have contributed from their study and have indicated that, there exists a very strong relationship between the growth of the capital market and the economy. Stock Market Development is statistically significant in forecasting the future growth of per capita GDP (Levine & S, 1996) The catalyst for economic growth is the capital market, which mobilizes the savings in the economy, which is in turn a constituent to national income. The Capital inflow in the form of investment from abroad raises the productivity and has been successful in providing higher returns at lower capital cost. The capital market is necessarily the window to the international economy, helping the nation to bridge the divide with the rest of the world. The inflow of foreign investment into the country both as institutional investment and portfolio investment is an evidence for the same. The total inflow of foreign funds in India during 2012-13 stood at Rs. 1,865 billion (SEBI, 2012-13). The trend of Foreign Institutional Investment (FIIs) has aggregated to Rs. 1,00,001 crores (SEBI, 2012-13). The opening up of the economy and the infusion of competition in the various sectors of the economy has helped to increase productivity and efficiency of these sectors. The much needed diversification in innovation in the investment avenues has also emerged as a result of foreign participation. The confidence of the domestic investors has also grown over the years owing to the steady growth exhibited by the stock market. The investor confidence is indicated with a high efficiency exhibited in grievances handled by the regulator and 76

intermediaries. The rate of investor grievance handling was as high as 95.3 Per cent. The result has led to the overall increase in the market efficiency with which the capital employed has been able to give higher returns on investment. As the capital market grows in size, the financial sector, which promotes the additional sources of financing has also become specialized, increasing their income and also been successful in providing better employment opportunities in the country. The increased efficiency of these institutions has also helped in reducing the financial cost associated with intimidation. The total assets managed by the financial intermediaries stood at Rs. 43, 32,211 crores by the end of 2012-13 (SEBI, 2012-13) The capital market in this growth journey has also opened up the platform to help the investing class to earn higher returns and also to help the borrowers reduce cost of capital. The liquidity of the investment is also ensured by providing a convenient marketplace for the investors to trade their investments to suitable counterparts who are also participants in the market. The stock exchanges facilitate the trade of securities by standardizing the products, reducing the cost of transactions. The market intermediaries work in tandem to help operations on a large scale with standardized operations. The development of capital markets has provided better skills for the investors and intermediaries to have informed judgments. The aspects of risk, portfolio construction and management are professionalized, so as to ensure that the capital market is vibrant and has been integrated with the larger financial system. This has in turn led to 77

accelerated growth of the stock market. Securities have today been successful in standardizing traditional investments like gold and other commodities. Better management of assets has emerged in the form of mutual fund units for portfolio management. The mutual fund was able to raise Rs. 1,20,269 during 2012-13 (SEBI, 2012-13) The insurance sector has specialized the area of risk management. This has also helped the traditional sectors to grow with the economy. The existence of capital market has also helped the administrator like the central bank and regulators to correctly gauge the developments and adopt suitable monetary and financial policy. Thus the relationship between the capital market and economy is established. 3.4 Importance of Capital Market in Indian Economy Economic growth is always triggered by the existence of three sections, namely the corporate bodies and government (borrowers), household investors (savers) and the financial intermediaries (facilitators). The borrowers various obligations are met from the capital market, which are met by the savers. The cost of capital has been substantially reduced over the years owing to the increase in the volume of transactions in the capital market. The volume of funds raised by the corporate sector and government together amounted to Rs. 227160 million in 2012-13. The significance of capital market in the Indian economy is shown in Table 3.2 and Figure 3.2 and Table 3.3. 78

Year Table 3.2 Support of the Securities Market on Indian Economy External Finance of Corporates Fiscal Deficit of Central Government Source: CMIE -2012-13 Share (%) of Securities Market Fiscal Deficit of State Government Financial Savings of Households 1990-91 19.35 17.93 13.61 14.40 1991-92 19.17 20.67 17.49 22.90 1992-93 33.38 9.15 16.75 17.20 1993-94 53.23 48.01 17.78 13.90 1994-95 44.99 35.23 14.92 12.10 1995-96 21.67 56.44 19.07 7.70 1996-97 21.83 28.61 17.82 7.00 1997-98 27.85 36.54 16.75 4.50 1998-99 27.49 60.86 14.28 4.10 1999-00 33.63 59.28 14.06 8.40 2000-01 30.17 61.80 14.24 5.80 2001-02 38.71 64.43 18.30 8.30 2002-03 -17.99 71.78 28.56 1.70 2003-04 N.A 72.09 39.20 0.13 2004-05 N.A 40.49 32.07 1.11 2005-06 N.A 72.55 16.99 5.72 2006-07 N.A 80.52 16.88 6.61 2007-08 N.A 102.91 71.47 9.58 2008-09 N.A 73.29 77.30-0.70 2009-10 N.A 94.24 59.66 4.53 2010-11 N.A 87.37 54.98 0.16 2011-12 N.A 93.82 80.42-0.30 2012-13 N.A 103.52 72.14 4.20 79

Figure 3.2 Support of the Securities Market on Indian Economy Percentage (%) 200 150 100 50 0-50 9.58 72.14 0.13 7.70 103.52 14.40 1.11 73.29 35.23 53.23 38.71 40.49 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Year Share (%) of Securities Market External Finance of Corporates Share (%) of Securities Market Fiscal Deficit of Central Government Share (%) of Securities Market Fiscal Deficit of State Government Share (%) of Securities Market Financial Savings of Households The Indian economy witnessed a decent growth of 5 Per cent. There has been a fall of 1 Per cent in comparison to the previous growth rate of 6 Per cent. The fall was due to the poor performance exhibited by the farm, manufacturing and mining sectors. The economic growth or Gross Domestic Product (GDP) has expanded by 5.1 Per cent during the last quarter of 2012-13, showing a positive growth of 1 Per cent from the previous quarter in 2002-2003 (Central Statistical Organization, 2013). The growth of the Indian economy from 3.5 Per cent (Hindu Growth Rate) in 1900 to 5 Per cent in 2012-13 was contributed by the industrial and service sector. The growth of the economy has been slowed down, which is reflected in the level of activity in the economy. 80

3.5 Corporate Sector in India Since 1990, India has witnessed the growth of the capital market. It eventually became the most important source of funding for commerce, trade and Industry. There was a trend wherein a growing number of companies started to access the capital market for raising financial resources for their operations and obligations. The trend among the corporate to depend on banks and financial institutions for loans started to decline. There is a growing demand for equity and debt financing. As the statistical figure shown by CMIE (CMIE, 2012-13), the share of capital market based instruments used for raising funds increased to 53.23 Per cent of the total securities issued in 1993-94. There was a sharp decline in the share 37.81 Per cent in 2001-02. There was a sharp decline showing a negative growth of 17.99 Per cent in 2002-03. The average amount of capital raised from the primary market, was at Rs. 70 million in 1960s and about 70 million in the 1970s. The increase during the 1980s was manifold, with the amount raised in 1990-91 being Rs. 43,120 million. There was a further boost during the 1990s with the capital raised by the non-government public limited companies raising sharply to Rs. 2,64,170 million in 1994-95. The upward movement continued to touch Rs. 3,76,000 million. There was a sharp decline to Rs. 1,29,000 million in the year 2012-13. The market dried up owing to the financial crisis and the interplay of many other factors. The shift made by the corporate to other avenues for raising funds was evident with the growth of private placement. The data presented below in Table 3.3 would indicate that the private placement as a source of capital has increased from Rs. 42,440 million to Rs.6, 78,360 million by 2000-01 and further to Rs. 21,89,420 million by 2012-13. The corporate sector raised a total of Rs. 23,36,000 million in 2011-12. The market during the last decade has 81

become institutionalized, with the preference of the household shifting towards mutual funds as their investment avenue. The mutual fund markets were properly regulated. The net funds raised by the mutual funds were Rs. 78,54,500 million by 2009-10. There was sharp decline too in the funds mobilized by the end of 2011-12 to Rs (43,74,400) million. The growth of the mutual funds can be traced to 1964, where it started with a small amount of Rs. 250 million, wherein the total assets managed by the mutual funds amounted to Rs. 61,14,020 million by the end of 2012. 3.6 Government Fiscal deficits of the government were always on the increase owing to the budgetary deficits. The mode of financing opted by the government were in relation to the open market. The dependence of the government on external finances for the deficit is shown in Table 3.2 above. During the year 1990-91, the central government and state government financed their deficits from the securities market to the tune of 17.93 per cent and 13.93 per cent respectively.though the state governments showed only a steady increase, the central government depended more on the securities market. The percentage of deficit financing from the securities market increased to 64.43 per cent during 2001-02 and further increased to 103.52 per cent in 2012-13. The graphical representation above in Figure 3.2 clearly shows that the financing arrangement by the corporate and government show the same trend. The issues made by the central government reached Rs 6,00,004 million in 2012, while the issues by the state government also increased to Rs. 1,58,600 million during the same period.. The total resource mobilization from the primary market by the end of 2012 stood at Rs. 7,59,000 million. 82

3.7 Development of Primary Securities Market Evidences from various studies have proved that an efficient primary market is critical in mobilization of resources for the corporate to meet their growth and expansion plans. The pattern of development of primary market in India is unique. The number of issues in the early 1990s was very high at 1000, but the amount raised was not significant. There was a reversal in the trend and situation in the 21 st century that the number of issues remained low (less than 200) but the amount mobilized increased significantly. In 2007-08 Rs. 8,70,290 million was mobilized through 124 public and right issues, the statistics showed a fall in 2008-09 to Rs. 1,62,200 million from 47 issues. The market regained confidence and an amount of Rs. 5,75,550 million was raised through 76 issues. 83

84 Table 3.3 Resource Mobilization from primary Market (Rs. In Crores) Issues 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 Corporate Securities 14,219 16,366 23,537 44,498 48,084 36,689 37,147 42,125 60,192 Domestic Issues 14,219 16,366 23,286 37,044 41,974 36,193 33,872 37,738 59,044 Non-Govt. Public Companies 4,312 6,193 19,803 19,330 26,417 16,075 10,410 3,138 5,013 PSU Bonds 5,663 5,710 1,062 5,586 3,070 2,292 3,394 2,982 - Govt. Companies - - 430 819 888 1,000 650 43 - Banks & FIs - - 356 3,843 425 3,465 4,352 1,476 4,352 Private Placement 4,244 4,463 1,635 7,466 11,174 13,361 15,066 30,099 49,679 Euro Issues - - 702 7,898 6,743 1,297 5,594 4,009 1,148 Government Securities 11,558 12,284 17,690 54,533 43,231 46,783 42,688 67,386 106,067 Central Government 8,989 8,919 13,885 50,388 38,108 40,509 36,152 59,637 93,953 State Governments 2,569 3,364 3,805 4,145 5,123 6,274 6,536 7,749 12,114 Total 25,777 28,650 41,227 99,031 91,315 83,472 79,835 109,511 166,259 Issues 1999-00 2000-01 2001-02 2008-09 2009-10 2010-11 2011-12 Corporate Securities 72,450 78,396 74,403 2,23,516.1 3,84,725.6 2,85,500 2,33,600 Domestic Issues 68,963 74,199 72,061 2,18,728.1 3,68,758.6 2,76,000 2,30,800 Non-Govt. Public Companies 5,153 4,890 5,692 37,600 12,900 PSU Bonds - - 148166 401198 605274 593783 Govt. Companies - - 350 Banks & FIs 2,551 1,472 1,070 10,444 14,726-15,684-2,044 Private Placement 61,259 67,836 64,950 2,04,057 3,43,280 2,38,396 2,18,249 Euro Issues 3,487 4,197 2,342 1,540 2,200 2,800 700 Government Securities 113,336 128,483 152,508 436,688 623,619 583,521 682321 Central Government 99,630 115,183 133,801 318,550 492,497 479,482 State Governments 13,706 13,300 18,707 118,138 131,122 104,039 Total 185,786 206,879 226,911 1,033,526 1,665,362 1797032 1287660 Source: SEBI Handbook of statistics 2002, 2005, 2011, 2012 84

Table 3.4 Capital mobilized through Public and Rights Issues (Amt in Rs. Million) Year Public Rights Total Number Amount Number Amount Number Amount 1991-92 206 23580 257 38570 463 62150 1992-93 546 75600 488 108950 1034 184550 1993-94 773 154490 370 89230 1143 243720 1994-95 1342 210450 350 65880 1692 276330 1995-96 1426 142400 299 65640 1725 208040 1996-97 751 115570 131 27190 882 142760 1997-98 62 28620 49 17080 111 45700 1998-99 32 50190 26 5680 58 55860 1999-00 65 62570 28 15600 93 78170 2000-01 124 53780 27 7290 151 61080 2001-02 20 65020 15 10410 35 75430 2002-03 14 36390 12 4310 26 40700 2003-04 35 222650 22 10070 57 232720 2004-05 34 246400 26 36160 60 282560 2005-06 103 232940 36 40880 139 273820 2006-07 85 297960 39 37100 124 335060 2007-08 92 545110 32 325180 124 870290 2008-09 22 35820 25 126370 47 162200 2009-1 0 47 492360 29 83190 76 575550 Total 5779 30,91,880 2,261 11,14,780 8,040 42,06,660 Source: SEBI-NCEAR Report, 2011 85

Figure 3.3 Capital Raised from Primary Market in India 1000000 900000 1725 870290 2000 1800 800000 1600 Rs. In Million 700000 600000 500000 400000 300000 276330 1400 575550 1200 1000 800 600 Number 200000 100000 61080 400 200 0 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 year Total Number Total Amount Source: SEBI-NCEAR Report, 2011 3.8 Households Investment The Household investment in India has shown an erratic movement over the years. According to the data released by the RBI, household sector accounted for 89 per cent of the Gross Domestic Savings during 2000-01. They invested only 4 per cent in securities, including the government securities and mutual funds during 2000-01. The per centage of investment in securities market was withdrawn showing a negative investment of 0.8 per cent in 2011-12. Even mutual funds were not selected as a source by the investors as they too declined negatively to 1.1per cent. Much of the confidence of the household investors over the traditional investment avenues continue with large percentage of savings being channelized to fixed deposits of banks (52.8 per cent). 86

The ranking of the various investment avenues show that households prefer fixed deposits to other forms of investment. Financial Assets Table 3.5 Savings of Household sector in Financial Assets 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 R 2009-10 R 2011-12 Currency 11.2 8.5 8.7 8.6 10.9 12.5 9.8 13.8 11.3 Fixed Income Investments 81.6 85.4 83.9 84.5 80.5 89.5 85.5 85.9 89.2 Deposits 38.8 37 47.4 55.3 56.5 58.5 41.9 45.6 52.8 Insurance/Provide nt and Pension funds 27.3 28.9 24.2 24.1 25.7 29.6 39.3 36.3 38.7 Small Savings 15.5 19.5 12.3 5.1-1.7 1.4 4.3 4-2.3 Securities Market 7.5 6 7.2 6.9 8.5-1.9 4.2-0.3-0.8 Mutual Funds 1.2 0.4 3.6 5.2 7.7 1.8 3.3-1.2-1.1 Government Securities 7.5 4.9 2.4 0.2-2 -4.5 0 0 0 Other Securities -1.2 0.7 1.2 1.5 2.8 4.4 0.9 0.9 0.3 Total 100 100 100 100 100 100 100 100 100 Source: RBI Annual Report 2011-12. 3.9 Investor Population Many research studies in the past have tried to bring out results on the pattern of investment made by the investors in the country. The society for Capital Market Research and Development is one such institution which has carried out periodical surveys to estimate the number of households actively involved in investments. The first survey carried out in 1990 placed the number of investors at 90-100 lakh. Their second survey estimated the number of shareowners at around 140-150 lakh as of mid 1993. Their third survey estimates the number of shareowners at around 2 million at 1997 end. According 87

to the SEBI-NCAER 1 survey of Indian Investors conducted in early 1999, an estimated 12.8 million, or 7.6 per cent, of all Indian households representing 19 million individuals had directly invested in equity shares and or debentures at the end of financial year 1998-99. An estimated 15 million, or nearly 9 per cent, of all households representing 23 million unit holders had invested in units of mutual funds. The estimations of the study carried out by NCAER in 2011 reveal that investor households have increased to 24.5 million investors, representing 11 per cent of the households. The preference of the households was still towards mutual funds (43 per cent) and secondary markets (22 per cent). The confidence in small saving schemes (post office savings) has not deterred, with 11 to 25 per cent investing in the same. Household income is relatively a minor determinant of participation in financial markets (SEBI-NCAER, 2011). Factors such as education, information, as well as quality of information influence the magnitude and extent of participation to a greater extent 2. The study has also revealed that the household investors supply a pool of capital that creates liquidity in the market and make it dynamic. Thus it is deduced that the household income, its consumption and its distribution are fundamental to any economic analysis. The nature and rate of savings in the economy are related to the rate of economic growth. 3.10 Recent Capital Market Reforms: Policy Initiatives and Developments The Indian Capital market, having a history of more than 150 years is currently passing through a radical change. The Bombay Stock Exchange, The Ahmedabad Stock Exchange and the Calcutta Stock Exchange are among the Asia s oldest stock exchanges. 1 Cited by Gupta L.C., Jain Naveen and Choudhury Utpal in Why Ordinary Investors Remain Dienchnated Society for Captial Market Research and Development, New Delhi. 2 SEBI-NCEAR, 2011, How Households save and invest: Evidence from NCEAR Household Survey, pp. xiv. 88

Although the Indian capital market witnessed some significant changes during the eighties, both the primary and secondary segments continued to suffer from serious deficiencies. The modern era in the Indian securities market and its transformation began with the economic reforms in the early 1990s, when the government initiated a systemic shift to a more open economy with more confidence laid on the market forces in which the private sector plays an important role. The disinvestment program in India was successful owing to the existence of an efficient and vibrant capital market. The result was that the Government was able to disinvest to the tune of over Rs. 31000 million. The problems that plagued the capital market continued to hinder the prosperity of the market in relation to efficiency and instill confidence among the investors. The unhealthy practices prevailing in the primary market failed to attract the retail investors. The high cost of new issues also sent the retail investors on the back foot. Several intermediating institutions emerged during the same period to offer different types of services, but they too failed to oversee the activities. The Indian securities market gained greater importance and the SEBI Act, 1992 established the Securities and Exchange Board of India (SEBI) as a statutory authority to oversee the securities market in India. Before the establishment of SEBI, activities in securities markets lacked a comprehensive regulatory framework and were opaque. Since the establishment of SEBI, the securities market in India has developed significantly. It led to a successful transition from a highly controlled merit- based regulatory regime to market-oriented disclosurebased regulatory regime. SEBI's focus has been on developing a well-regulated modern 89

securities market in India by adopting global standards and international practices. With the implementation of various rules and regulations prescribed by SEBI, access to information has increased, the risk of defaults has gone down and overall governance and ambience have become conducive for the protection of investors' interests and the development of the securities market in India. The problems were even more serious in the secondary market. The general functioning of the stock exchanges was not satisfactory. The exchanges were governed by their internal byelaws and managed by their Governing Bodies, which were dominated by an elected member-broker. Trading members were also not adequately capitalized. Insider trading was rampant and was one of the major causes of excessive speculative activity leading to default by stock brokers, frequent payment crises and disruption of market activity. The stock exchanges followed inefficient and outdated trading systems. This, in turn, led, to lack of transparency in trading operations, besides resulting in long and uncertain settlement cycles. The risk management system in the market was also not satisfactory. Though the margin systems were operative, the margins were inadequate and the system of collection of margins was inadequate and was not enforced strictly. Post-trade settlement procedures also suffered from serious drawbacks such as, high share of bad deliveries, delayed settlements, and sometimes clubbing of settlements. The procedures relating to investor protection were also not satisfactory. With the objective of improving market efficiency, enhancing transparency, preventing unfair trade practices and bringing the Indian capital market up to the international standards, a package of reforms consisting of measures to liberalize, regulate and develop the capital market was introduced in the SEBI board meeting held 90

on August 2012. The main emphasis was laid on revitalizing the mutual fund sector and also the refining the capital raising exercise in the country. The investment advisors or intermediaries were also regulated by SEBI. SEBI made it mandatory for all intermediaries to register themselves with SEBI to function in the capital market. Some measures were initiated to reform the capital market in the 21 st century. The developments relating to the primary market and secondary segments of the capital market may not be mutually exclusive in all cases. Some of them are those introduced or announced before the commencement of the current financial year, but have far reaching implications for the capital market. 3.11 The Road ahead for the Capital Market The need for competition and greater efficiency was indeed on the cards with the opening up of the financial markets. The much needed stability, in the light of the developments, was to be established in an extremely vibrant capital market. The equity market was highly active in India, but equity based funding, solely could not lead to economic growth. The condition of the debt market remains to be underdeveloped with huge potential for increased activity. The long term financing of infrastructure, housing and private sector was demanding. Hence, the road for widening the capital market along with strong bonding between the economy and financial system. The first step forward would be to ensure transparency in regulatory procedures, so as to bring new dimensions to financial markets. The investor base which has been sluggish over many decades needs to be expanded. With a population of over a billion, only 1.1 per cent of it participating in the capital market, only a small fraction of the population is active. Given the size of the 91

Indian economy, investor participation is very shallow in comparison to other developed markets like the US, Europe, and China, The cost of transactions in India has come down over the years, but still in comparison to other developed markets, it is comparatively high. Conclusion The innovations and reforms in the capital market are invited for an emerging economy like India, which would not only add value to the existing technology and system, but shall also reduce the cost of capital and help mitigate exposure of the capital market instruments to risk. The establishment of a positive correlation between the capital market and the economy established beyond doubt that economic growth would need a sound financial system, which is directly dependent on the development of the capital market. The dependence of the economy on banking system for financing capital needs cannot be negated, but the banking system in the country, which is highly regulated, can seldom fulfill the ever growing funding needs of the capital market. Thus the immediate need is to revive the existing sluggish bond market, which is underdeveloped due to policy constraints. The infrastructural requirements of a developing economy like India are high and hence only a deep and innovative bond market would only be able to bridge the gap that exists between the demand and supply. Bottlenecks need to be removed from the bond market so as to allow the bond market to nurture the growth of the equity market and make the bond market competitive in the international bond markets in other developed nations. 92

References 1. Central Statistical Organization. (2013, May). Capital Market review. Times of India. 2. CMIE. (2012-13). corporate sector in India. 3. Levine, R., & S, Z. (1996). Stock Market Development and Long-Run Growth (Vol. 10). 4. SEBI. (2012-13). Statistical Handbook. Mumbai. 93