CHAPTER -1

CAPITAL MARKET STRUCTURE

AND FUNCTIONS
 CHAPTER-I
CAPITAL MARKET STRUCTURE AND FUNCTIONS
1.1 Introduction-importance of capital market
The financial market are the centres that made provisions for buying
and selling offinancialclaims and services. Financial markets are classified
as money markets and capital markets money market deal in short term
finance with a period of maturiety of one year or less. Capital market in a
market for long term securities. It contains financial instruments of
maturity period exceeding one year. It involves in long term nature of
transaction. It is a growing element of the financial system in the Indian
economy. It differs from the money market in terms of maturity period
and liquidity. It is the financial pillar of industrialized economy. The
development of nation depends upon the functions and capabilities of the
capital market
Capital market mobilises and allocate these resources in produc-
tive way. The success of country depends upon the financial architecture
of the strong capital market. A strong capital market is required for the
process of economic growth in the country. A developed and competitive
market tends to establish equalization between saving and investment.
The borrowers of the capital market raise founds through various instru-
ments like equity. Prefrance. Bond and mortgages.

1.2. Functions of Capital market

The capital market involves various functions and significance. They
are presented below :-
(a) Coordination : - It plays a vital role in transferring the surplus
resources to deficit sectors. It mobilieses the savings from those
who have surplus fund and divert them to needy persons or
organisations.
(b) Motivation of savings :- Capital market provides a wide range of
financial instruments for all times. India has a vast members of
individual savers and croses of rupees are available with them the
resources can be attracted by the capital market with nature.
(c) • Transformation of Investment:- The capital Market is a place where
the savings are mobilised from various sources is at the disposal of

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 businessman and the government. It facilitates lending to the
corporate sector and the goverment. It diverts the savings amount
towards capital formation of the corporate sector.
(d) Enhances economic Growt:- The development of the capital market
is influencedby many factors like the level of savings with the public
percapita income, purchasing capacity and the general condition of
the economy.
(e) Stability :- The capital market provides a stable security prices in
the stock market. It tends to stabilise the value of stocks and
securities, it reduces the fluctuations in the prices to the minimum
level.
(f) Advantages to the investors :- The investors those who have surplus
funds can invest in long term financial investments. In the capital
market, a member of long terms financial instruments are available
to the investors at any time. Hence investor can lend their money in
the capital market at seasonable rate of interest.
(g) Borometer:- The development of the capital market is the indicator
of the develpment of nation. The prosperity and wealth of a nation
depends upon the dynamic capital market. It not only reflects him
general condition of the economy but also smoothens and
accelerate the process of economic growth. Capital market is the
market where transactions are made in long term securities such as
share and debentures, so the capital market is market for relatively
long terms financial instruments.

1.3 Kinds of capital supplied by capital market

Capital Market supplies following type of capital:
(a) Long term capital
(b) Venture capital
(c) Export capital

(a) Long term capital is also known as fixed capital. Heavy amount of
capital is required by the companies when they are going for
modernisation or expansion or diversification. The efficient capi-
tal market reduces the cost of estabilistment.

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 (a) Venture capital is the capital invested in highly risky ventures. It is
also known as seed capital. It is a quite recent entrant in the capital
market. It has great significance in helping technocrat entrepre-
neurs at the commencement stage of the concern.
(c) Export capital refers for making payment in international trade. The
payment of international trade involves in bills of exchange and
other instruments.

1.4 Factors play important role in growth of capital market

(a) A Strong and powerful central Government,
(b). Financial dyanamics
(c) Speedy Industrialisation
(d) At attracting foreign investment
(e) Investments from NRIs
(f) Regulatory changes
(g) Globalisation
(h) The level of savings investment pattern of the household.sector,
(i) Development of financial theories,
(j) Sophisticated technological advances

7.5 Players in the capital market

(a) Companies :- A public limited company can access the capital
market the companies can moblise the resources for their long term
needs such as project cost expansion and diversification of projects
and other expenditure. In India companies should get the prize
permission from the securities and exchange board of India to raise
the capital from the market. SEBI classifies the comanies for the
issue of share capital as new companies, existing unlisted companies
and exhaustive listed companies.
(b) Financial intermediaries :- Financial Intermediaries are those
who assist in the process of converting savings into capital formation
in the country. A strong capital formation process is the oxygen to
the corporate sector. The major intermediaries in the capital market
are :- . .
(a) Brokers
(b) Stock Brokers and sub brokers
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 (d) Merchant Bankers
(d) Underwriters
(e) Registrars
(f) Mutual/ Funds
(g) Collecting Agents
(h) Depositories
(i) Agents
(i) Advertising Agencies
(c) Investors :- The capital market consists many number of inves-
tors. All types of investors have objective is to get good return on
their investment safety is the most important factor while
consedering the investment proposal. The investors conspire the
financial and investment conspires and the general public compa-
nies usually, individual severs are also treated as investors. Risk
and return are the maindeterminent of investment actively. The main
objectives of any type of investors are safety, profitability, liquid-
ity and capital operation.

1.6 Structure of capital market in India.

Government Equity Market Debt Market Specialised Financial

securities Financial Intermediarises
mdrliet Institutions
Nlarchani
Banking
Mutual Funds

Merchant Stock UTI Leasing

Bankers exchange
Registrars NSE Lie I ^Venmre capital
Over the
Underwriters counter - • SCICI
exchange

Publib

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/. 7 Components of the capital market:- Potentiality of Indian capital Market
can be measured by following quality of Indian economy :-
(a) Most powerful avenue for household savings.
(b) India has a vast middle class families potential they occupy a
donimentrole in mobilisation of resources.
(c) The corporate sector has been attracted 10% House hold savings
of the community. In the developed countries more then 20 to 25%
of house hold saving are tapped by their capital markets.
(d) • In the developed countries 25% of population go for share hold-
ings but in India such percentage is just less than 5%
(e) Society for capital market reseals conducted a share holders sur-
vey and declared that 90-100 lakh share owners.
(f) The total number of total share owner at the end of 1997 in India is
at around 2 crores. Most of the growth after 1990 took place dur-
ing the bom years 1991-94. The alysis showed that the growth of
the share owners tapering of since 1995 had come to half in 1997
due to persistent depression in the share market and investor had
experiences with many scrupulous company promoters
management's

1.8 Primary Market or New issue market:

Primary market is a new issues market the funds are raised through the
sale of new securities flow from the buyers of securities to the issuer of
securities. The financial institutions play a key important role in moving
funds from saving sector to the investment sector,
public issue is an important part of primary market. Public issue can be
diffident as "Sale of bonds of stocks for general public. The securities are
sold to the lakhs of investors under a formal contract over seen by the
government authorities. The required funds could be raised privately to a
limited member of investor this process is known private placements.

1.9 Objectives of capital issue

(a) Promofion of New project
(b) Expansion of the existing capacity
(c) Diversification
(d) Capitalization of reserves
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 (e) Regular working capital requirement

1.10. Sources of Raising funds

The corporate sector usally raises funds from the market for their
needs and convenience. They can procure their funds through the following.
(a) Issue of equity at par or premium
(b) Issue of bones shares
(c). Issue of debentures
(d) Issue of bonds by public sector undertaking
(e) Issue of cumulative preference shares

1.11 Features ofNIM- the Majorfeatures of the Primary market as follows :-

(1) The capital market is freely accessible by any company for raising
funds from the public.
(2) The corporates have freedom infixing of issue price of a share
subject to some SEBI guidelines
(3) The companies approaches capital market racher throw banks and
financial institutions for rasing of funds.
(4) The mushroom growth of companies and spate of new issue by both
new companies as well as existing companies.

1.12. Transactions of primary market :

The general function of NIM can be split from operated view into
three services :
(a) Investigation
(b) Underwritting
(c) Distribution

(A) Investigation : The specialised agency rounder the following ser-

vices for improving the quality of capital issue. These serves in-
cludes advice on such aspects of capital tissue as :-
(a) Determination of the class of security and the price of the
issue in the light of market conditions.
(b) Tioning and magnitnde of issues.

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 (c) Method of flotation
(d) Technique of selling
(B) Underwitting:- Underwriting is a guarantee about the sucess of an
issue. The issuing company can eliminate the uncertainities of the
public issues by making an agreement with the underwriter.
(C) Distribution:- The success of a public issue depend upon following
factors :-
(a) The sate of securities to the ultimate investor is called as
distribution
(b) These spcialised jobs can be handled by highly specialised
person. The specialised persons are called as brokers and
dealers insecurities.
(c) Broker and dealer guide, direct and motivate the ultimate
investors in taking a desecrate with regard to investment
decisions.
1.13 Issue process:- The issue of shaves can be made by any one of the following
method:-
(a) Public issue through prospectus
(b)' Book building method.
(c) Private placement
(d) Offer for salte
(e) Right issue

(a) Public issue through prospectus :- In this method, the issuing

company invite the public by issue of prospectus, the prospectus is
the base for investing money into a company by the ultimate investor.
Therefore the contents of the memorandum shall contain the
information, according to the companies act. The disclosure of the
information the prospectus shall be legal aspects of the companies
acts the additional information also be furnished according to the
SEBI guidelines the prospectus shall contain the following
information.
(1) Company name and Registered office address.
(2) Present activities and proposed activities.
(3) Location of industry.

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 (4) Particulars regarding capital such as authorised capital
subscribed and proposed issue of capital to public.
(5) Date of opening and closing of Subscription list
(6) Minimum amount of subscription.
(7) Name of Broker, Underwriters and others
(8) Name of underwriters along with directors openion
regarding underwriters capabilities.
(9) A Statement regarding the listing arrangement to the
concerned stock exchanges.
(10) Other legal information about the company.
(b) Book building method :- The book building is one of the sale
procedure of fresh equity. In this method the price of the issue is
left to the investors. It is alos on par with the system of public issue
public issue refers to issue of share to the public, but in this method
the issuing company incorporates all the information of the issue
proposal in the offer document Your offered document will be
purchased on the line of public issue method which includes for
reserve or minimum price. The investors are required to Quote the
member of shares and the price at which they are willing to acquire.
(c) Private placement:- Private placement is another method of new
issue of capital. In this method the shares are offered privately to
the investor or to the issue houses. Placing of securities which are
unquoted has private placing. This method of selling new issues
made by the companies are cheap.
(d) Offer for sale-offer for salmones, the showers are offered thorugh
the intermediaries, i.e. merchant bank. Investment Banks, Stock,
Broekers Issue houses. In this method they will following the pro-
cess of public issue by drafting the prosecution. The prospectus
contain about the perscribed minimum counters which is the basis
for sale of securities. The shaver are distributed to the applicatns in
a non diserminatory manner. The offer for sale is performed in
two stages firstly issuing company sale securities to the financial
intermediary. The difference between purchase and sale in the
"Turn", the financial intermidiaries will sell these securities to
general public.

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 (e) Right Issue :- The existed companies shares are already listed and
widly held shares can be offered to existing share holders. This
method is known as rights issues.The companies act see 81 reveals
that a company shall issue right shares in proposition of share hold-
ing in following situation :-
(a) Company can issue rights offer aftre two years of it's formation.
(b) After one year of first issue of shares.

/. 14 Factors to be considered for Investment in primary Market - The inves-

tors should assess the situation and should look in to the following matters.
(a) Promoter's History
(b) Objectives of the present issue
(c) Project information
(d) Product or market observation.
(e) Financial Information
(f) Forecasting
(g) Pricing of issue
(h) Litigation
(i) Risk factors
(j) Auditor's report
(k) Statutory dues.
(1) Statutory clearances,
(m) Carefiil obdervation
(n) Problems of new issue market
(o) Regulatory frame work.
1.15 Secondary Market:- In the stock exchange the trading is carried on by
the member of the exchange. The stock exchange is an association, or
organisation of members to carry on trade in the securities. The scurities
are traded under certain set of rules and regulation.
According to Securities contract Reulation Act, 1956 "Stock,
Exhcnage means an association, organisation or body of individuals,
whether in corporate or not, estabilised for the purpose of assisting,
regulating and controlling the business in buying selling and dealing the
securities."

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 Security exchange are market places where securities that have been
listed thereon may be bought and sold for either investment or speculation.
1.16 The first stock exchange was set up in Indian under the name Native share
and. stock brokers association of Bombay in 1875. At present there are 23
recognised stock exchanges under the SCRA, 1956. All the stock exchanges
operate under the rules, by laws and regulations duly approved by the gov-
ernment.
The objectives of securities contract act 1956 are as follows :-
(1) To control the mal practices in stock exchanges.
(2) To regulate the stock market
(3) To protect the investor's interest
(4) To improve the working conditions of exchanges.
(5) To create an efficient securities market. The stock exchanges in
India should work with in the from work of the act. They are in-
volved in accordance with the following laws :-
(1) Companies Act, 1956
(2) Income Tax Act, 1961
(3) Foreign Exchange Regulations

ORGANISATION PATTERN OF THE STOCK EXCHANGES IN INDIA

S.NO. Name of Stock Exchange Year of Typeof

Establishment Association
1. Bombay 1875 Voluntary
2. Ahmedabad 1894 -do-
3. Calcutta 1908 Public Ltd. Co.
4. Madras 1908 -do-
5. Indore 1930 Voluntary
6. Hyderabad 1943 Ltd. by Guarantee
7. Delhi 1947 Public Ltd. Co.
8. Banglore 1957 -do-

' •
Cochin 1978 1 -do-

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10. Kanpur 1982 -do-
11. Pune 1982 -do-
12. Ludhiana 1983 -do-
13. Guhuwathi 1983 -do-
14. Jaipur 1984 -do-
15. Kanara 1985 -do-
16. Magadh 1986 -do-
17. Bhubaneshwar 1989 Ltd. by Guarantee
18. Saurashtra, Rajkot 1989 Ltd. by Guarantee
19. OTC 1989 -do-
20. Vadodara 1990 -do-
21. Coimbatora 1991 -do-
22. Meerut 1991 -do-
23. NSE 1992 -do-

Stock exchanges are self regulatory organisations supervised by

the ministry of Finance under SCRA, Stock regulation cover the entire
operations they are-
(a) Enrolment of members
(b) Listing of securities
(c) The disciplinary actions
Regulations on trading are largely confirmed to some specified
shares. The specified shares transactions could be forwarded from one
settlement period to another committees examined and recommendations
reform the organisations of the stock exchanges :-
(1) G. S. Patel Committee (1985)
(2) L. C. Gupta Committee (1991)
(3) Pherwani Committee (1991)
(4) Varma Committee (1997)

1.17 Bombay stock exchange :- The fist stock exchange was setup in India
under the Name of Native and stock Broker association of Bombay in
1875. It was established as a voluntary non profit organisation. It is
managedt by an executive or the governing body. It is the premier stock,
exchange in India it is the oldest market and has been recognised perma-
nently. It is business is note confinest to mumbai alone there are 100 other
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 cities in which it has steup business. Membership of BSEI 3 Rs. 2 cores.
The BSE hs introduced online trading system on 19.1.1995. It provides a
qutoe driver authomated trading facility to the investors.
1.18 Market Index : The economists and statisticians use the Index to study
the trend of growth patterns in the economy. The investors use various
indexes for their analytical purpose.
The indexes are equal weighting index approach or price weighted or value
weighted approaches. All these methods are used in the calculation of index.

SP.Q, ,^^
Paasche price index p ^ x lUU

SPO
Laspeyres price index - —i-^ x 100
SPoQo

Fishers Idfeal indexr ^55o.xioo ^^^^^0

The BSE Started publishing a index mumber of equity prices from 2-1-
1986 with base year 1978-79. It is known as BSE sensitive index. The
equity shares of 30 companies have been selected on the basis of market
activity with due representation to te Major industries. The method of com-
pilation of sensex is based on standard and poor USA. The Sand p 500 is a
value weighted index of 400 industrial stock 40 utility stocks 20 transpor-
tation stocks and 40 financial stocks.

p. IPJilQJixO
f^2 —„p. „p^.— Pit = Period of stock is period t
Qit = Number of share outstanding for stock
SPO = Price of Stocki in period0
SJO = Number of shares outstanding for
stock in base period 0
The Sensex comarents are 30 Companies from both specified and
non-specified groups. The BSE has launched 13 more Indexes and some
of these have taken some shine off the sensex.

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1.19 National stock exchange :-
Introduction :- The creation of National Stock exchagne by leading fi-
nancial institutions in 1992 led to move screen based trading for equities,
debt, and hybrid instruments The process of globalisation begain with the
Opening up of the Indian capital market for the Foreign Institutional inves-
tors in 1992. This led the foreign custodians and brokerages setting up
their base in India. They baought their best global proctice in the Indian
markets Equity reserch gained a prominence. The globalisation of mar-
kets made the Indian Financial Markets more Vulnerable to the external
events as a result of which any enviorments in the global market have a
corresponding ripple effects in India.

1.19. (a) Sponsored Institutions ofNSE

The NSE sponsored by the IDBI and Co-Sponsored by LIC, GIG, SBI,
Capital Market Stock Holding Corporation, Infrastructure Leasing and
Finance Corporation. It was set up in Mumbai in Nov. 1992 with a paid up
equity capital of Rs. 25 crores. It was recognised by the Central Govern-
ment. It started its operation in June 1994 in Debt Marketed in equity
market in Nov. 1994. There was no trading floor in stock exchange. Trad-
ing was done on computer with the help of the PC terminal in brokers
office. The NSE has a fully automated electronic screen based trading
system. It was an order driven and it was not based on quote driven market.
It allows two types of traded securities such as listed and permitted. It
pervents the price rigging and insider trading. The high powered commitee
(Pherevari) Reccommonded the estabilishment of NSE with a view to pro-
vide single market, to all types of securities.

1.19 (B) Objectives

(a) To Cover wide area geographical location.
(b) To provide an equal access and fair efficient and transparent trading
system.
(c) To provide shorter settlement cycles.
(d) To provide the book entry settlement system
(e) To provide the Indian investors with international standard service.

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 (f) To check the insider trading and price rigging.
(g) To protect the interest of the investors
(h) To protect the brokers from default.
(i) To Provide the Usting facilities to PSUS
(J) To spread investment and cult to the savers in the rural and semi
urban areas
(K) To encourage the debt market.
(1) To professionals the members to be none complaint,
(m) To crease more employment opportunities for finance professional
in the orbit of the capital market

1.20 Constitution of NSE

The NSE Offers the screen based trading with national netv^ork trans-
parency and it ensures cost effectiveness.
The investment counters are spread wide in the country under the
NSE electronic network.
NSE has three separate Segments
(a) The Wholesale Debt Market Segment (INDM) deals with banks. Financial
institutions, other institutions participants and in PSU bonds, treasusy bills
government securities, call mony commerical papers certificate of
deposite. In this segment all are big they are big deals mega players, Mega
investors.
2. The capital Market segment (CMS) deals with equities, Convertible De-
bentures. This Segment Includes the securities which are traded on other
stock, exchanges. The CMS operates from 3-11-1994. It in troduced trad-
ing in repo from 23-6-1995. The BBl has identified the NSE as the only
conduit for the inter bank, security deasl the NSE is free from all specula-
tive activities. It has become a speculators Parodies banally in the specu-
lative Market separate membership is required for each segment.
3. Institutional Market segment- The NSE provides some additional facili-
ties for its institutional investors. The institutional Market segment cat-
egorized as institutional lot segment and trade for trade segment in Insti-
tutional lot segment large volume trade takes place. Institutional lot con-
tains the multiples of 1000 shares irrespective the securities face value
Institutional investor can enter into the orders separately.

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 Type of orders in NSE : - Trading member can enter into varius types of
orders depending upon their requirements.

Time Related conditions:-

(a) day order :- the day order is valid for the day witch the order is placed.
(b) A good till cancelled order:- the order will remain in trading system until
it is cancelled by the member.
(c) A good till days:- the order allows the throw trading members to specify
the days, it will be kept in the system uptp that day.
(d) An immediate order or cancel means it allows a trading member to sell or
buy a particular security when the order is released into the market.

Price Condition:-
The price condition is known as "on stop", this order allows the members
to place an order and get activated only when the market price of the srcurity
exceeds a thresh hold price until this situation the order does not focuses in the
market.

Volume condition:- The NSE may set a minimum disclosed value from time to
time. In this condition the trading members may disclose only a part of the order
value in the market for example an order of 5000 with a disclosed value condition
of 500.

Over the Counter Exchange of India (O.T.C.):- The OTC was set up in 1989 as
a Company and registered 0/s 25 of companies act. The securities contract regu-
lation Act Sec. 4 recognises the OTC as a stocks exchange. It is prompted by
UTC, ICICI, IFCI, LIC,GIC, SBI capital market IDBI can bankfinancialservics.

Peculiarities of OTC:-
OTC is a floor less exchange. All the activities are computerised, it allows
the designated dealers to operate through their computors. All the quotations and
transactions are recorded and processed in the OTC exchange. The dealers are
scattered throughout the country and have the access to centeral computer the

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dealers are able to knows the best bid offers of the market markers in respect of
each script.

Document of OTC:-

(1) Cocentre Receipt:- The buyer should kept the CR. carefulUy beacouse it
is a trade able document, it is just like a share certificate.
(2) Sale Confirmation - ship :- Will be passed on the seller if the deal
materialises.

Conclusion
Capital market is a system witch transform public saving into productive
investment. Capital market maximal the retrun an investment. An efficient and
transperent system is necessary to motivate investor to invest in equity market. In
spite of all effert by BSE,NSE and OTC the number of retail have not increased in
capital market. The historical date suggests that equity has been the most reward-
ing investment avenue for long term investment. Despite this, not many investas
have taken exposure to stock market In India, We have nearly 50 million investors
but stock market investor would hardly be in the region of 10 million. The worst
part is that tribe is not inerearing in the last couple of year despite Indian equity
market offering excellent value proposition.

This analysis have main objective is that, how ingredianls of capital market
could be improved or reformed by which retail investors could participate in capital
formation process could be improved :-

1. It is analysed what is effectiveness of reforms taken place after various

scans in capital market
2. What are the facilities provided by capital market to reduce transaction
cost and other cost associated with.
3. What are role of various institution to create confidence in operations of
capital market by which number of investor could be increased.
4. Ananalysis have been also done how much retail investor in safe in capital
market operations.

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5. Analysis of policy measures which have been taken place for measuring
the effectiveness of policy changes in stock market, relaed with allotment
of share, price determination of security and sale and purchases of secuiry
in stock market.
6. How much stock market in India is successful to diversify the kinds of
securities which could be traded in capital market in India.
8. It is also measured the areas of profitable sectors which can provide maxi-
mum return in capital market.
9. An analysis have been also prepared to make conclusions about of share
split, amalgemation,Take-over and other activities on the interest of retail
investors.
10. An analysis is also made about the effectiveness of activities of
intermediaries on he interest of retail investors.

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