Indian Capital Markets

Since 2003, Indian capital markets have been receiving global attention, especially from sound investors, due to the improving macroeconomic fundamentals. The presence of a great pool of skilled labour and the rapid integration with the world economy increased India’s global competitiveness. No wonder, the global ratings agencies Moody’s and Fitch have awarded India with investment grade ratings, indicating comparatively lower sovereign risks.
The Securities and Exchange Board of India (SEBI), the regulatory authority for Indian securities market, was established in 1992 to protect investors and improve the microstructure of capital markets. In the same year, Controller of Capital Issues (CCI) was abolished, removing its administrative controls over the pricing of new equity issues. In less than a decade later, the Indian financial markets acknowledged the use of technology (National Stock Exchange started online trading in 2000), increasing the trading volumes by many folds and leading to the emergence of new financial instruments. With this, market activity experienced a sharp surge and rapid progress was made in further strengthening and streamlining risk management, market regulation, and supervision.
The securities market is divided into two interdependent segments:

• The primary market provides the channel for creation of funds through issuance of new securities by companies, governments, or public institutions. In the case of new stock issue, the sale is known as Initial Public Offering (IPO).
• The secondary market is the financial market where previously issued securities and financial instruments such as stocks, bonds, options, and futures are traded.

In the recent past, the Indian securities market has seen multi-faceted growth in terms of:

• The products traded in the market,  viz. equities and bonds issued by the government and companies, futures on benchmark indices as well as stocks, options on benchmark indices as well as stocks, and futures on interest rate products such as Notional 91-Day T-Bills, 10-Year Notional Zero Coupon Bond, and 6% Notional 10-Year Bond.
• The amount raised from the market, number of stock exchanges and other intermediaries, the number of listed stocks, market capitalization, trading volumes and turnover on stock exchanges, and investor population.
• The profiles of the investors, issuers, and intermediaries.

Broad Constituents in the Indian Capital Markets
Fund Raisers are companies that raise funds from domestic and foreign sources, both public and private. The following sources help companies raise funds:
Fund Providers are the entities that invest in the capital markets. These can be categorized as domestic and foreign investors, institutional and retail investors. The list includes subscribers to primary market issues, investors who buy in the secondary market, traders, speculators, FIIs/ sub accounts, mutual funds, venture capital funds, NRIs, ADR/GDR investors, etc.
Intermediaries are service providers in the market, including stock brokers, sub-brokers, financiers, merchant bankers, underwriters, depository participants, registrar and transfer agents, FIIs/ sub accounts, mutual Funds, venture capital funds, portfolio managers, custodians, etc.
Organizations include various entities such as BSE, NSE, other regional stock exchanges, and the two depositories National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CSDL).
Market Regulators include the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and the Department of Company Affairs (DCA).

Appellate Authority: The Securities Appellate Tribunal (SAT)
Participants in the Securities Market
SAT, regulators (SEBI, RBI, DCA, DEA), depositories, stock exchanges (with equity trading, debt market segment, derivative trading), brokers, corporate brokers, sub-brokers, FIIs, portfolio managers, custodians, share transfer agents, primary dealers, merchant bankers, bankers to an issue, debenture trustees, underwriters, venture capital funds, foreign venture capital investors, mutual funds, collective investment schemes.
EQUITY MARKET
History of the Market
With the onset of globalization and the subsequent policy reforms, significant improvements have been made in the area of securities market in India. Dematerialization of shares was one of the revolutionary steps that the government implemented. This led to faster and cheaper transactions, and increased the volumes traded by many folds. The adoption of the market-oriented economic policies and online trading facility transformed Indian equity markets from a broker-regulated market to a mass market. This boosted the sentiment of investors in and outside India and elevated the Indian equity markets to the standards of the major global equity markets.
The 1990s witnessed the emergence of the securities market as a major source of finance for trade and industry. Equity markets provided the required platform for companies and start-up businesses to raise money through IPOs, VC, PE, and finance from HNIs. As a result, stock markets became a people’s market, flooded with primary issues. In the first 11 months of 2007, the new capital raised in the global public equity markets through IPOs accounted for $107 billion in 382 deals out of the total of $255 billion raised by the four BRIC countries. This was a sizeable growth from $90 billion raised in 302 deals in 2006. Today, the corporate sector prefers external sources for meeting its funding requirements rather than acquiring loans from financial institutions or banks.

Derivative Markets
The emergence of the market for derivative products such as futures and forwards can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of price fluctuations in various asset classes. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking in asset prices. However, by locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. This instrument is used by all sections of businesses, such as corporates, SMEs, banks, financial institutions, retail investors, etc. According to the International Swaps and Derivatives Association, more than 90 percent of the global 500 corporations use derivatives for hedging risks in interest rates, foreign exchange, and equities. In the over-the-counter (OTC) markets, interest rates (78.5%), foreign exchange (11.4%), and credit form the major derivatives, whereas in the exchange-traded segment, interest rates, government debt, equity index, and stock futures form the major chunk of the derivatives.
What are futures contracts?
Futures contracts are standardized derivative instruments. The instrument has an underlying product (tangible or intangible) and is impacted by the developments witnessed in the underlying product. The quality and quantity of the underlying asset are standardized. Futures contracts are transferable in nature. Three broad categories of participants—hedgers, speculators, and arbitragers—trade in the derivatives market.

• Hedgers face risk associated with the price of an asset. They belong to the business community dealing with the underlying asset to a future instrument on a regular basis. They use futures or options markets to reduce or eliminate this risk.
• Speculators have a particular mindset with regard to an asset and bet on future movements in the asset’s price. Futures and options contracts can give them an extra leverage due to margining system.
• Arbitragers are in business to take advantage of a discrepancy between prices in two different markets. For example, when they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit.

Important Distinctions
Exchange-Traded Vs. OTC Contracts: A significant bifurcation in the instrument is whether the derivative is traded on the exchange or over the counter. Exchange-traded contracts are standardized (futures). It is easy to buy and sell contracts (to reverse positions) and no negotiation is required. The OTC market is largely a direct market between two parties who know and trust each other. Most common example for OTC is the forward contract. Forward contracts are directly negotiated, tailor-made for the needs of the parties, and are often not easily reversed.
Distinction between Forward and Futures Contracts:

Futures Contracts	Forward Contracts
Meaning: A futures contract is a contractual agreement between two parties to buy or sell a standardized quantity and quality of asset on a specific future date on a futures exchange.	A forward contract is a contractual agreement between two parties to buy or sell an asset at a future date for a predetermined mutually agreed price while entering into the contract. A forward contract is not traded on an exchange.
Trading place: A futures contract is traded on the centralized trading platform of an exchange.	A forward contract is traded in an OTC market.
Transparency in contract price: The contract price of a futures contract is transparent as it is available on the centralized trading screen of the exchange.	The contract price of a forward contract is not transparent, as it is not publicly disclosed.
Valuations of open position and margin requirement: In a futures contract, valuation of open position is calculated as per the official closing price on a daily basis and mark-to-market (MTM) margin requirement exists.	In a forward contract, valuation of open position is not calculated on a daily basis and there is no requirement of MTM on daily basis since the settlement of contract is only on the maturity date of the contract.
Liquidity: Liquidity is the measure of frequency of trades that occur in a particular futures contract. A futures contract is more liquid as it is traded on the exchange.	A forward contract is less liquid due to its customized nature.
Counterparty default risk: In futures contracts, the exchange clearinghouse provides trade guarantee. Therefore, counterparty risk is almost eliminated.	In forward contracts, counterparty risk is high due to the customized nature of the transaction.
Regulations: A regulatory authority and the exchange regulate a futures contract.	A forward contract is not regulated by any exchange.

Benefits of Derivatives

1. Price Risk Management: The derivative instrument is the best way to hedge risk that arises from its underlying. Suppose, ‘A’ has bought 100 shares of a real estate company with a bullish view but, unfortunately, the stock starts showing bearish trends after the subprime crisis. To avoid loss, ‘A’ can sell the same quantity of futures of the script for the time period he plans to stay invested in the script. This activity is called hedging. It helps in risk minimization, profit maximization, and reaching a satisfactory risk-return trade-off, with the use of a portfolio. The major beneficiaries of the futures instrument have been mutual funds and other institutional investors.
2. Price Discovery: The new information disseminated in the marketplace is interpreted by the market participants and immediately reflected in spot and futures prices by triggering the trading activity in one or both the markets. This process of price adjustment is often termed as price discovery and is one of the major benefits of trading in futures. Apart from this, futures help in improving efficiency of the markets.
3. Asset Class: Derivatives, especially futures, offer an exclusive asset class for not only large investors like corporates and financial institutions but also for retail investors like high networth individuals. Equity futures offer the advantage of portfolio risk diversification for all business entities. This is due to the fact that historically it has been witnessed that there lies an inverse correlation of daily returns in equities as compared to commodities.
4. High Financial Leverage: Futures offer a great opportunity to invest even with a small sum of money. It is an instrument that requires only the margin on a contract to be paid in order to commence trading. This is also called leverage buying/selling.
5. Transparency: Futures instruments are highly transparent because the underlying product (equity scripts/index) are generally traded across the country or even traded globally. This reduces the chances of manipulation of prices of those scripts. Secondly, the regulatory authorities act as watchdogs regarding the day-to-day activities taking place in the securities markets, taking care of the illegal transactions.
6. Predictable Pricing: Futures trading is useful for the genuine investor class because they get an idea of the price at which a stock or index would be available at a future point of time.

EXCHANGE PLATFORM
Domestic Exchanges
Indian equities are traded on two major exchanges: Bombay Stock Exchange Limited (BSE) and National Stock Exchange of India Limited (NSE).
Bombay Stock Exchange (BSE)
BSE is the oldest stock exchange in Asia. The extensiveness of the indigenous equity broking industry in India led to the formation of the Native Share Brokers Association in 1875, which later became Bombay Stock Exchange Limited (BSE).
BSE is widely recognized due to its pivotal and pre-eminent role in the development of the Indian capital market.

• In 1995, the trading system transformed from open outcry system to an online screen-based order-driven trading system.
• The exchange opened up for foreign ownership (foreign institutional investment).
• Allowed Indian companies to raise capital from abroad through ADRs and GDRs.
• Expanded the product range (equities/derivatives/debt).
• Introduced the book building process and brought in transparency in IPO issuance.
• T+2 settlement cycle (payments and settlements).
• Depositories for share custody (dematerialization of shares).
• Internet trading (e-broking).
• Governance of the stock exchanges (demutualization and corporatization of stock exchanges) and internet trading (e-broking).

BSE has a nation-wide reach with a presence in more than 450 cities and towns of India. BSE has always been at par with the international standards. It is the first exchange in India and the second in the world to obtain an ISO 9001:2000 certification. It is also the first exchange in the country and second in the world to receive Information Security Management System Standard BS 7799-2-2002 certification for its BSE Online Trading System (BOLT).
Benchmark Indices futures: BSE 30 SENSEX, BSE 100, BSE TECK, BSE Oil and Gas, BSE Metal, BSE FMCG

http://www.bseindia.com/
National Stock Exchange (NSE)
NSE was recognised as a stock exchange in April 1993 under the Securities Contracts (Regulation) Act. It commenced its operations in Wholesale Debt Market in June 1994. The capital market segment commenced its operations in November 1994, whereas the derivative segment started in 2000. NSE introduced a fully automated trading system called NEAT (National Exchange for Automated Trading) that operated on a strict price/time priority. This system enabled efficient trade and the ease with which trade was done. NEAT had lent considerable depth in the market by enabling large number of members all over the country to trade simultaneously, narrowing the spreads significantly.
The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The futures contract on NSE is based on S&P CNX Nifty Index. The Futures and Options trading system of NSE, called NEAT-F&O trading system, provides a fully automated screen based trading for S&P CNX Nifty futures on a nationwide basis and an online monitoring and surveillance mechanism. It supports an order-driven market and provides complete transparency of trading operations.
Benchmark Indices futures: Nifty Midcap 50 futures, S&P CNX Nifty futures, CNX Nifty Junior, CNX IT futures, CNX 100 futures, Bank Nifty futures
http://nseindia.com/
International Exchanges
Due to increasing globalization, the development at macro and micro levels in international markets is compulsorily incorporated in the performance of domestic indices and individual stock performance, directly or indirectly. Therefore, it is important to keep track of international financial markets for better perspective and intelligent investment.

1. NASDAQ (National Association of Securities Dealers Automated Quotations) NASDAQ is an American stock exchange. It is an electronic screen-based equity securities trading market in the US. It was founded in 1971 by the National Association of Securities Dealers (NASD). However, it is owned and operated by NASDAQ OMX group, the stock of which was listed on its own stock exchange in 2002. The exchange is monitored by the Securities and Exchange Commission (SEC), the regulatory authority for the securities markets in the United States.
   NASDAQ is the world leader in the arena of securities trading, with 3,900 companies (NASDAQ site) being listed. There are four major indices of NASDAQ that are followed closely by the investor class, internationally.
   
   1. NASDAQ Composite: It is an index of common stocks and similar stocks like ADRs, tracking stocks and limited partnership interests listed on the NASDAQ stock market. It is estimated that the total components count of the Index is over 3,000 stocks and it includes stocks of US and non-US companies, which makes it an international index. It is highly followed in the US and is an indicator of performance of technology and growth companies. When launched in 1971, the index was set at a base value of 100 points. Over the years, it saw new highs; for instance, in July 1995, it closed above 1,000-mark and in March 2000, it touched 5048.62. The decline from this peak signalled the end of the dotcom stock market bubble. The Index never reached the 2000 level afterwards. It was trading at 1316.12 on November 20, 2008.
   2. NASDAQ 100: It is an Index of 100 of the largest domestic and international non-financial companies listed on NASDAQ. The component companies’ weight in the index is based on their market capitalization, with certain rules controlling the influence of the largest components. The index doesn’t contain financial companies. However, it includes the companies that are incorporated outside the US. Both these aspects of NASDAQ 100 differentiate it from S&P 500 and Dow Jones Industrial Average (DJIA). The index includes companies from the industrial, technology, biotechnology, healthcare, transportation, media, and service sectors.
   3. Dow Jones Industrial Average (DJIA): DJIA was formed for the first time by Charles Henry Dow. He formed a financial company with Edward Jones in 1882, called Dow Jones & Co. In 1884, they formed the first index including 11 stocks (two manufacturing companies and nine railroad companies). Today, the index contains 30 blue-chip industrial companies operating in America. The Dow Jones Industrial Average is calculated through the simple average, i.e., the sum of the prices of all stocks divided by the number of stocks (30).
   4. S&P 500: The S&P 500 Index was introduced by McGraw Hill's Standard and Poor's unit in 1957 to further improve tracking of American stock market performance. In 1968, the US Department of Commerce added S&P 500 to its index of leading economic indicators. S&P 500 is intended to be consisting of the 500 largest publically-traded companies in the US by market capitalization (in contrast to the FORTUNE 500, which is the largest 500 companies in terms of sales revenue). The S&P 500 Index comprises about three-fourths of total American capitalization.
   http://www.nasdaq.com/
   
2. LSE (London Stock Exchange) The London Stock Exchange was founded in 1801 with British as well as overseas companies listed on the exchange. The LSE has four core areas:
   
   1. Equity markets: The LSE enables companies from around the world to raise capital. There are four primary markets; Main Market, Alternative Investment Market (AIM), Professional Securities Market (PSM), and Specialist Fund Market (SFM).
   2. Trading services: Highly active market for trading in a range of securities, including UK and international equities, debt, covered warrants, exchange-traded funds (ETFs), exchange-traded commodities (ETCs), REITs, fixed interest, contracts for difference (CFDs), and depositary receipts.
   3. Market data information: The LSE provides real-time prices, news, and other financial information to the global financial community.
   4. Derivatives: A major contributor to derivatives business is EDX London, created in 2003 to bring the cash, equity, and derivatives markets closer together. It combines the strength and liquidity of LSE and equity derivatives technology of NASDAQ OMX group.
   The exchange offers a range of products in derivatives segment with underlying from Russian, Nordic, and Baltic markets. Internationally, it offers products with underlying from Kazakhstan, India, Egypt, and Korea.
   http://www.londonstockexchange.com/en-gb/
   
3. Frankfurt Stock Exchange It is situated in Frankfurt, Germany. It is owned and operated by Deutsche Börse. The Frankfurt Stock Exchange has over 90 percent of turnover in the German market and a big share in the European market. The exchange has a few well-known trading indices of the exchange, such as DAX, DAXplus, CDAX, DivDAX, LDAX, MDAX, SDAX, TecDAX, VDAX, and EuroStoxx 50. 
   DAX is a blue-chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. Prices are taken from the electronic Xetra trading system of the Frankfurt Stock Exchange.
   http://deutsche-boerse.com/
   

REGULATORY AUTHORITY
There are four main legislations governing the securities market:

1. The SEBI Act, 1992 establishes SEBI to protect investors and develop and regulate the securities market.
2. The Companies Act, 1956 sets out the code of conduct for the corporate sector in relation to issue, allotment, and transfer of securities, and disclosures to be made in public issues.
3. The Securities Contracts (Regulation) Act, 1956 provides for regulation of transactions in securities through control over stock exchanges.
4. The Depositories Act, 1996 provides for electronic maintenance and transfer of ownership of demat securities.

In India, the responsibility of regulating the securities market is shared by DCA (the Department of Company Affairs), DEA (the Department of Economic Affairs), RBI (the Reserve bank of India), and SEBI (the Securities and Exchange Board of India).
The DCA is now called the ministry of company affairs, which is under the ministry of finance. The ministry is primarily concerned with the administration of the Companies Act, 1956, and other allied Acts and rules & regulations framed there-under mainly for regulating the functioning of the corporate sector in accordance with the law. 
The ministry exercises supervision over the three professional bodies, namely Institute of Chartered Accountants of India (ICAI), Institute of Company Secretaries of India (ICSI), and the Institute of Cost and Works Accountants of India (ICWAI), which are constituted under three separate Acts of Parliament for the proper and orderly growth of professions of chartered accountants, company secretaries, and cost accountants in the country.
http://www.mca.gov.in/
SEBI protects the interests of investors in securities and promotes the development of the securities market. The board helps in regulating the business of stock exchanges and any other securities market. SEBI is also responsible for registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, and such other intermediaries who may be associated with securities markets in any manner.
The board registers the venture capitalists and collective investments like mutual funds. SEBI helps in promoting and regulating self regulatory organizations.
http://www.sebi.gov.in
RBI is also known as the banker’s bank. The central bank has some very important objectives and functions such as:
Objectives

• Maintain price stability and ensure adequate flow of credit to productive sectors.
• Maintain public confidence in the system, protect depositors' interest, and provide cost-effective banking services to the public.
• Facilitate external trade and payment and promote orderly development and maintenance of the foreign exchange market in India.
• Give the public adequate quantity of supplies of currency notes and coins in good quality.

 Functions

• Formulate implements and monitor the monetary policy.
• Prescribe broad parameters of banking operations within which the country's banking and financial system functions.
• Manage the Foreign Exchange Management Act, 1999.
• Issue new currency and coins and exchange/destroy currency and coins not fit for circulation.
• Perform a wide range of promotional functions to support national objectives.

The IDEA is the nodal agency of the Union government to formulate and monitor the country's economic policies and programmes that have a bearing on domestic and international aspects of economic management. Apart from forming the Union Budget every year, it has other important functions like:

1. Formulation and monitoring of macro-economic policies, including issues relating to fiscal policy and public finance, inflation, public debt management, and the functioning of capital market, including stock exchanges. In this context, it looks at ways and means to raise internal resources through taxation, market borrowings, and mobilization of small savings.
2. Monitoring and raising of external resources through multilateral and bilateral development assistance, sovereign borrowings abroad, foreign investments, and monitoring foreign exchange resources, including balance of payments.
3. Production of bank notes and coins of various denominations, postal stationery, postal stamps, cadre management, career planning, and training of the Indian Economic Service (IES)

Evolution
Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. The earliest records of security dealings in India are meagre and obscure. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century.
By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850.
The 1850's witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60.
In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87).
At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street (now appropriately called as Dalal Street) where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively known as " The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.
Other leading cities in stock market operations
Ahmedabad gained importance next to Bombay with respect to cotton textile industry. After 1880, many mills originated from Ahmedabad and rapidly forged ahead. As new mills were floated, the need for a Stock Exchange at Ahmedabad was realised and in 1894 the brokers formed "The Ahmedabad Share and Stock Brokers' Association".
What the cotton textile industry was to Bombay and Ahmedabad, the jute industry was to Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta. After the Share Mania in 1861-65, in the 1870's there was a sharp boom in jute shares, which was followed by a boom in tea shares in the 1880's and 1890's; and a coal boom between 1904 and 1908. On June 1908, some leading brokers formed "The Calcutta Stock Exchange Association".
In the beginning of the twentieth century, the industrial revolution was on the way in India with the Swadeshi Movement; and with the inauguration of the Tata Iron and Steel Company Limited in 1907, an important stage in industrial advancement under Indian enterprise was reached.
Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies generally enjoyed phenomenal prosperity, due to the First World War.
In 1920, the then demure city of Madras had the maiden thrill of a stock exchange functioning in its midst, under the name and style of "The Madras Stock Exchange" with 100 members. However, when boom faded, the number of members stood reduced from 100 to 3, by 1923, and so it went out of existence.
In 1935, the stock market activity improved, especially in South India where there was a rapid increase in the number of textile mills and many plantation companies were floated. In 1937, a stock exchange was once again organized in Madras - Madras Stock Exchange Association (Pvt) Limited. (In 1957 the name was changed to Madras Stock Exchange Limited).
Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with the Punjab Stock Exchange Limited, which was incorporated in 1936.
Indian Stock Exchanges - An Umbrella Growth
The Second World War broke out in 1939. It gave a sharp boom which was followed by a slump. But, in 1943, the situation changed radically, when India was fully mobilized as a supply base.
On account of the restrictive controls on cotton, bullion, seeds and other commodities, those dealing in them found in the stock market as the only outlet for their activities. They were anxious to join the trade and their number was swelled by numerous others. Many new associations were constituted for the purpose and Stock Exchanges in all parts of the country were floated.
The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited (1940) and Hyderabad Stock Exchange Limited (1944) were incorporated.
In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited and the Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947, amalgamated into the Delhi Stock Exchnage Association Limited.
Post-independence Scenario
Most of the exchanges suffered almost a total eclipse during depression. Lahore Exchange was closed during partition of the country and later migrated to Delhi and merged with Delhi Stock Exchange.
Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963.
Most of the other exchanges languished till 1957 when they applied to the Central Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad and Indore, the well established exchanges, were recognized under the Act. Some of the members of the other Associations were required to be admitted by the recognized stock exchanges on a concessional basis, but acting on the principle of unitary control, all these pseudo stock exchanges were refused recognition by the Government of India and they thereupon ceased to function.
Thus, during early sixties there were eight recognized stock exchanges in India (mentioned above). The number virtually remained unchanged, for nearly two decades. During eighties, however, many stock exchanges were established: Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982), and Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange Association Limited (1983), Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990) and recently established exchanges - Coimbatore and Meerut. Thus, at present, there are totally twenty one recognized stock exchanges in India excluding the Over The Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL).
The Table given below portrays the overall growth pattern of Indian stock markets since independence. It is quite evident from the Table that Indian stock markets have not only grown just in number of exchanges, but also in number of listed companies and in capital of listed companies. The remarkable growth after 1985 can be clearly seen from the Table, and this was due to the favouring government policies towards security market industry.

Growth Pattern of the Indian Stock Market

Sl.No.	As on 31st December	1946	1961	1971	1975	1980	1985	1991	1995
1	No. of Stock Exchanges	7	7	8	8	9	14	20	22
2	No. of Listed Cos.	1125	1203	1599	1552	2265	4344	6229	8593
3	No. of Stock Issues of Listed Cos.	1506	2111	2838	3230	3697	6174	8967	11784
4	Capital of Listed Cos. (Cr. Rs.)	270	753	1812	2614	3973	9723	32041	59583
5	Market value of Capital of Listed Cos. (Cr. Rs.)	971	1292	2675	3273	6750	25302	110279	478121
6	Capital per Listed Cos. (4/2) (Lakh Rs.)	24	63	113	168	175	224	514	693
7	Market Value of Capital per Listed Cos. (Lakh Rs.) (5/2)	86	107	167	211	298	582	1770	5564
8	Appreciated value of Capital per Listed Cos. (Lak Rs.)	358	170	148	126	170	260	344	803

Source : Various issues of the Stock Exchange Official Directory, Vol.2 (9) (iii), Bombay Stock Exchange, Bombay.
Trading Pattern of the Indian Stock Market
Trading in Indian stock exchanges are limited to listed securities of public limited companies. They are broadly divided into two categories, namely, specified securities (forward list) and non-specified securities (cash list). Equity shares of dividend paying, growth-oriented companies with a paid-up capital of atleast Rs.50 million and a market capitalization of atleast Rs.100 million and having more than 20,000 shareholders are, normally, put in the specified group and the balance in non-specified group.
Two types of transactions can be carried out on the Indian stock exchanges: (a) spot delivery transactions "for delivery and payment within the time or on the date stipulated when entering into the contract which shall not be more than 14 days following the date of the contract" : and (b) forward transactions "delivery and payment can be extended by further period of 14 days each so that the overall period does not exceed 90 days from the date of the contract". The latter is permitted only in the case of specified shares. The brokers who carry over the outstandings pay carry over charges (cantango or backwardation) which are usually determined by the rates of interest prevailing.
A member broker in an Indian stock exchange can act as an agent, buy and sell securities for his clients on a commission basis and also can act as a trader or dealer as a principal, buy and sell securities on his own account and risk, in contrast with the practice prevailing on New York and London Stock Exchanges, where a member can act as a jobber or a broker only.
The nature of trading on Indian Stock Exchanges are that of age old conventional style of face-to-face trading with bids and offers being made by open outcry. However, there is a great amount of effort to modernize the Indian stock exchanges in the very recent times.
Over The Counter Exchange of India (OTCEI)
The traditional trading mechanism prevailed in the Indian stock markets gave way to many functional inefficiencies, such as, absence of liquidity, lack of transparency, unduly long settlement periods and benami transactions, which affected the small investors to a great extent. To provide improved services to investors, the country's first ringless, scripless, electronic stock exchange - OTCEI - was created in 1992 by country's premier financial institutions - Unit Trust of India, Industrial Credit and Investment Corporation of India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance Corporation of India, General Insurance Corporation and its subsidiaries and CanBank Financial Services.
Trading at OTCEI is done over the centres spread across the country. Securities traded on the OTCEI are classified into:

• Listed Securities - The shares and debentures of the companies listed on the OTC can be bought or sold at any OTC counter all over the country and they should not be listed anywhere else

• Permitted Securities - Certain shares and debentures listed on other exchanges and units of mutual funds are allowed to be traded

• Initiated debentures - Any equity holding atleast one lakh debentures of a particular scrip can offer them for trading on the OTC.

OTC has a unique feature of trading compared to other traditional exchanges. That is, certificates of listed securities and initiated debentures are not traded at OTC. The original certificate will be safely with the custodian. But, a counter receipt is generated out at the counter which substitutes the share certificate and is used for all transactions.
In the case of permitted securities, the system is similar to a traditional stock exchange. The difference is that the delivery and payment procedure will be completed within 14 days.
Compared to the traditional Exchanges, OTC Exchange network has the following advantages:

• OTCEI has widely dispersed trading mechanism across the country which provides greater liquidity and lesser risk of intermediary charges.

• Greater transparency and accuracy of prices is obtained due to the screen-based scripless trading.

• Since the exact price of the transaction is shown on the computer screen, the investor gets to know the exact price at which s/he is trading.

• Faster settlement and transfer process compared to other exchanges.

• In the case of an OTC issue (new issue), the allotment procedure is completed in a month and trading commences after a month of the issue closure, whereas it takes a longer period for the same with respect to other exchanges.

Thus, with the superior trading mechanism coupled with information transparency investors are gradually becoming aware of the manifold advantages of the OTCEI.
National Stock Exchange (NSE)
With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock market trading system on par with the international standards. On the basis of the recommendations of high powered Pherwani Committee, the National Stock Exchange was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others.
Trading at NSE can be classified under two broad categories:
(a) Wholesale debt market and
(b) Capital market.
Wholesale debt market operations are similar to money market operations - institutions and corporate bodies enter into high value transactions in financial instruments such as government securities, treasury bills, public sector unit bonds, commercial paper, certificate of deposit, etc.
There are two kinds of players in NSE:
(a) trading members and
(b) participants.
Recognized members of NSE are called trading members who trade on behalf of themselves and their clients. Participants include trading members and large players like banks who take direct settlement responsibility.
Trading at NSE takes place through a fully automated screen-based trading mechanism which adopts the principle of an order-driven market. Trading members can stay at their offices and execute the trading, since they are linked through a communication network. The prices at which the buyer and seller are willing to transact will appear on the screen. When the prices match the transaction will be completed and a confirmation slip will be printed at the office of the trading member.
NSE has several advantages over the traditional trading exchanges. They are as follows:

• NSE brings an integrated stock market trading network across the nation.

• Investors can trade at the same price from anywhere in the country since inter-market operations are streamlined coupled with the countrywide access to the securities.

• Delays in communication, late payments and the malpractice’s prevailing in the traditional trading mechanism can be done away with greater operational efficiency and informational transparency in the stock market operations, with the support of total computerized network.

Unless stock markets provide professionalised service, small investors and foreign investors will not be interested in capital market operations. And capital market being one of the major source of long-term finance for industrial projects, India cannot afford to damage the capital market path. In this regard NSE gains vital importance in the Indian capital market system.

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ECONOMIC PLANNING IN INDIA

Preamble
Often, in the economic literature we find the terms ‘development’ and ‘growth’ are used interchangeably. However, there is a difference. Economic growth refers to the sustained increase in per capita or total income, while the term economic development implies sustained structural change, including all the complex effects of economic growth. In other words, growth is associated with free enterprise, where as development requires some sort of control and regulation of the forces affecting development. Thus, economic development is a process and growth is a phenomenon.
Economic planning is very critical for a nation, especially a developing country like India to take the country in the path of economic development to attain economic growth.
Why Economic Planning for India?
One of the major objective of planning in India is to increase the rate of economic development, implying that increasing the rate of capital formation by raising the levels of income, saving and investment. However, increasing the rate of capital formation in India is beset with a number of difficulties. People are poverty ridden. Their capacity to save is extremely low due to low levels of income and high propensity to consume. Therefor, the rate of investment is low which leads to capital deficiency and low productivity. Low productivity means low income and the vicious circle continues. Thus, to break this vicious economic circle, planning is inevitable for India.
The market mechanism works imperfectly in developing nations due to the ignorance and unfamiliarity with it. Therefore, to improve and strengthen market mechanism planning is very vital. In India, a large portion of the economy is non-monitised; the product, factors of production, money and capital markets are not organized properly. Thus the prevailing price mechanism fails to bring about adjustments between aggregate demand and supply of goods and services. Thus, to improve the economy, market imperfections has to be removed; available resources has to be mobilized and utilized efficiently; and structural rigidities has to be overcome. These can be attained only through planning.
In India, capital is scarce; and unemployment and disguised unemployment is prevalent. Thus, where capital being scarce and labour being abundant, providing useful employment opportunities to an increasing labour force is a difficult exercise. Only a centralized planning model can solve this macro problem of India.
Further, in a country like India where agricultural dependence is very high, one can not ignore this segment in the process of economic development. Therefore, an economic development model has to consider a balanced approach to link both agriculture and industry and lead for a paralleled growth. Not to mention, both agriculture and industry can not develop with out adequate infrastructural facilities which only a the state can provide and this is possible only through a well carved out planning strategy. The government’s role in providing infrastructure is unavoidable due to the fact that the role of private sector in infrastructural development of India is very minimal since these infrastructure projects are considered as unprofitable by the private sector.
Further, India is a clear case of income disparity. Thus, it is the duty of the state to reduce the prevailing income inequalities. This is possible only through planning.
Planning History of India
The development of planning in India began prior to the first Five Year Plan of independent India, long before independence even. The idea of central directions of resources to overcome persistent poverty gradually, because one of the main policies advocated by nationalists early in the century. The Congress Party worked out a program for economic advancement during the 1920’s, and 1930’s and by the 1938 they formed a National Planning Committee under the chairmanship of future Prime Minister Nehru. The Committee had little time to do anything but prepare programs and reports before the Second World War which put an end to it. But it was already more than an academic exercise remote from administration. Provisional government had been elected in 1938, and the Congress Party leaders held positions of responsibility. After the war, the Interim government of the pre-independence years appointed an Advisory Planning Board. The Board produced a number of some what disconnected Plans itself. But, more important in the long run, it recommended the appointment of a Planning Commission.
The Planning Commission did not start work properly until 1950. During the first three years of independent India, the state and economy scarcely had a stable structure at all, while millions of refugees crossed the newly established borders of India and Pakistan, and while ex-princely states (over 500 of them) were being merged into India or Pakistan. The Planning Commission as it now exists, was not set up until the new India had adopted its Constitution in January 1950.
Objectives of Indian Planning
The Planning Commission was set up he following Directive principles :

• To make an assessment of the material, capital and human resources of the country, including technical personnel, and investigate the possibilities of augmenting such of these resources as are found to be deficient in relation to the nation’s requirement.

• To formulate a plan for the most effective and balanced use of the country’s resources.

• Having determined the priorities, to define the stages in which the plan should be carried out, and propose the allocation of resources for the completion of each stage.

• To indicate the factors which are tending to retard economic development, and determine the conditions which, in view of the current social and political situation, should be established for the successful execution of the Plan.

• To determine the nature of the machinery which will be necessary for securing the successful implementation of each stage of Plan in all its aspects.

• To appraise from time to time the progress achieved in the execution of each stage of the Plan and recommend the adjustments of policy and measures that such appraisals may show to be necessary.

• To make such interim or auxiliary recommendations as appear to it to be appropriate either for facilitating the discharge of the duties assigned to it or on a consideration of the prevailing economic conditions, current policies, measures and development programs; or on an examination of such specific problems as may be referred to it for advice by Central or State Governments.

The long-term general objectives of Indian Planning are as follows :

• Increasing National Income

• Reducing inequalities in the distribution of income and wealth

• Elimination of poverty

• Providing additional employment; and

• Alleviating bottlenecks in the areas of : agricultural production, manufacturing capacity for producer’s goods and balance of payments.

Economic growth, as the primary objective has remained in focus in all Five Year Plans. Approximately, economic growth has been targeted at a rate of five per cent per annum. High priority to economic growth in Indian Plans looks very much justified in view of long period of stagnation during the British rule.