Financial Market
A Financial Market can be defined as “the market in which financial assets are created or transferred”.
The Capital Market (Securities Markets) is the market for securities, where companies and the government can raise long-term funds.
Securities markets provide a channel for allocation of savings to those who have productive need for them. As a result, the savers and investors are not constrained by their individual abilities, but by the economy’s abilities to invest and save respectively, which inevitably enhances savings and investment in the economy.
There are 22 stock exchanges in India, the first being The Bombay Stock Exchange (BSE), which began Formal trading in 1875, making it one of the oldest In Asia. Over the last few years, there has been A rapid change in the Indian securities market, especially In the secondary market. Advanced technology And online-based transactions have modernized the stock exchanges.
In terms of the number of companies Listed and total market capitalization, the Indian Equity market is considered large relative to the Country’s stage of economic development. The number Of listed companies increased from 5,968 in March 1990 to about 10,000 by May 1998 and market capitalization Has grown almost 11 times during the same Period.
The debt market, however, is almost nonexistent in India even though there has been a large volume of Government bonds traded. Banks and financial institutions have been holding a substantial part of these bonds as statutory liquidity requirement. The portfolio restrictions on financial institutions’ statutory liquidity requirement are still in place.
A primary auction market for Government securities has been created and a primary dealer system was introduced in 1995. There are six authorized primary dealers. Currently, there are 31 mutual funds, out of which 21 are in the private sector. Mutual funds were opened to the private sector in 1992. Earlier, in 1987, banks were allowed to enter this business, breaking the monopoly of the Unit Trust of India (UTI), which maintains a dominant position.
Before 1992, many factors obstructed the expansion of equity trading. Fresh capital issues were controlled through the Capital Issues Control Act. Trading practices were not transparent, and there was a large amount of insider trading. Recognizing the importance of increasing investor protection, several measures were enacted to improve the fairness of the capital market. The Securities and Exchange Board of India (SEBI) was established in 1988. Despite the rules it set, problems continued to exist, including those relating to disclosure criteria, lack of broker capital adequacy, and poor regulation of merchant bankers and underwriters.
There have been significant reforms in the regulation of the securities market since 1992 in conjunction with overall economic and financial reforms. In 1992, the SEBI Act was enacted giving SEBI statutory status as an apex regulatory body. And a series of reforms was introduced to improve investor protection, automation of stock trading, integration of national markets, and efficiency of market operations.
India has seen a tremendous change in the secondary market for equity. Its equity market will most likely be comparable with the world’s most advanced secondary markets within a year or two. The key ingredients that underlie market quality in India’s equity market are:
Exchanges based on open electronic limit order book;
Nationwide integrated market with a large number of informed traders and fluency of short or long positions; and
No counterparty risk.
Among the processes that have already started and are soon to be fully implemented are electronic settlement trade and exchange-traded derivatives. Before 1995, markets in India used open outcry, a trading process in which traders shouted and handsignaled from within a pit. One major policy initiated by SEBI from 1993 involved the shift of all exchanges to screen-based trading, motivated primarily by the need for greater transparency.
The first exchange to be based on an open electronic limit order book was the National Stock Exchange (NSE), which started trading debt instruments in June 1994 and equity in November 1994. In March 1995, BSE shifted from open outcry to a limit order book market. Currently, 17 of India’s stock exchanges have adopted open electronic limit order.
Before 1994, India’s stock markets were dominated by BSE. In other parts of the country, the financial industry did not have equal access to markets and was unable to participate in forming prices, compared with market participants in Mumbai (Bombay). As a result, the prices in markets outside Mumbai were often different from prices in Mumbai. These pricing errors limited order flow to these markets. Explicit nationwide connectivity and implicit movement toward one national market has changed this situation (Shah and Thomas, 1997).
NSE has established satellite communications which give all trading members of NSE equal access to the market. Similarly, BSE and the Delhi Stock Exchange are both expanding the number of trading terminals located all over the country. The arbitrages are eliminating pricing discrepancies between markets.
Despite these big improvements in microstructure, the Indian capital market has been in decline during the last three years. The amount of capital issued has dropped from the level of its peak year,1994/95, and so have equity prices. In 1994/95, Rs276 billion was raised in the primary equity market. This figure fell to Rs208 billion in 1995/96 and to Rs142 billion in 1996/97. The BSE-30 index or Sensex, the sensitive index of equity prices, peaked at 4,361 in September 1994 and fell during the following years.
A leading cause was that financial irregularities and overvaluations of equity prices in the earlier years had eroded public confidence in corporate shares. Also, there was a reduced inflow of foreign investment after the Mexican and Asian financial crises. In a sense, the market is now undergoing a period of adjustment. Thus, it is time for regulatory authorities to make greater efforts to recover investors’ confidence and to further improve the efficiency and transparency of market operations.
The Indian capital market still faces many challenges if it is to promote more efficient allocation and mobilization of capital in the economy. First, market infrastructure has to be improved as it hinders the efficient flow of information and effective corporate governance. Accounting standards will have to adapt to internationally accepted accounting practices.
The court system and legal mechanism should be enhanced to better protect small shareholders’ rights and their capacity to monitor corporate
activities.
Second, the trading system has to be made more transparent. Market information is a crucial public good that should be disclosed or made available to all participants to achieve market efficiency. SEBI should also monitor more closely cases of insider trading. Third, India may need further integration of the national capital market through consolidation of stock exchanges.
The trend all over the world is to consolidate and merge existing stock exchanges. Not all of India’s 22 stock exchanges may be able to justify their existence. There is a pressing need to develop a uniform settlement cycle and common clearing system that will bring an end to unnecessary speculation based on arbitrage opportunities. Fourth, the payment system has to be improved to better link the banking and securities industries.
India’s banking system has yet to come up with good electronic funds transfer (EFT) solutions. EFT is important for problems such as direct payments of dividends through bank accounts, eliminating counterparty risk, and facilitating foreign institutional investment. The capital market cannot thrive alone; it has to be integrated with the other segments of the financial system. The global trend is for the elimination of the traditional wall between banks and the securities market.
Securities market development has to be supported by overall macroeconomic and financial sector environments.
Further liberalization of interest rates, reduced fiscal deficits, fully market-based issuance of Government securities, and a more competitive banking sector will help in the development of a sounder and a more efficient capital market in India.
A Financial Market can be defined as “the market in which financial assets are created or transferred”.
The Capital Market (Securities Markets) is the market for securities, where companies and the government can raise long-term funds.
Securities markets provide a channel for allocation of savings to those who have productive need for them. As a result, the savers and investors are not constrained by their individual abilities, but by the economy’s abilities to invest and save respectively, which inevitably enhances savings and investment in the economy.
There are 22 stock exchanges in India, the first being The Bombay Stock Exchange (BSE), which began Formal trading in 1875, making it one of the oldest In Asia. Over the last few years, there has been A rapid change in the Indian securities market, especially In the secondary market. Advanced technology And online-based transactions have modernized the stock exchanges.
In terms of the number of companies Listed and total market capitalization, the Indian Equity market is considered large relative to the Country’s stage of economic development. The number Of listed companies increased from 5,968 in March 1990 to about 10,000 by May 1998 and market capitalization Has grown almost 11 times during the same Period.
The debt market, however, is almost nonexistent in India even though there has been a large volume of Government bonds traded. Banks and financial institutions have been holding a substantial part of these bonds as statutory liquidity requirement. The portfolio restrictions on financial institutions’ statutory liquidity requirement are still in place.
A primary auction market for Government securities has been created and a primary dealer system was introduced in 1995. There are six authorized primary dealers. Currently, there are 31 mutual funds, out of which 21 are in the private sector. Mutual funds were opened to the private sector in 1992. Earlier, in 1987, banks were allowed to enter this business, breaking the monopoly of the Unit Trust of India (UTI), which maintains a dominant position.
Before 1992, many factors obstructed the expansion of equity trading. Fresh capital issues were controlled through the Capital Issues Control Act. Trading practices were not transparent, and there was a large amount of insider trading. Recognizing the importance of increasing investor protection, several measures were enacted to improve the fairness of the capital market. The Securities and Exchange Board of India (SEBI) was established in 1988. Despite the rules it set, problems continued to exist, including those relating to disclosure criteria, lack of broker capital adequacy, and poor regulation of merchant bankers and underwriters.
There have been significant reforms in the regulation of the securities market since 1992 in conjunction with overall economic and financial reforms. In 1992, the SEBI Act was enacted giving SEBI statutory status as an apex regulatory body. And a series of reforms was introduced to improve investor protection, automation of stock trading, integration of national markets, and efficiency of market operations.
India has seen a tremendous change in the secondary market for equity. Its equity market will most likely be comparable with the world’s most advanced secondary markets within a year or two. The key ingredients that underlie market quality in India’s equity market are:
Exchanges based on open electronic limit order book;
Nationwide integrated market with a large number of informed traders and fluency of short or long positions; and
No counterparty risk.
Among the processes that have already started and are soon to be fully implemented are electronic settlement trade and exchange-traded derivatives. Before 1995, markets in India used open outcry, a trading process in which traders shouted and handsignaled from within a pit. One major policy initiated by SEBI from 1993 involved the shift of all exchanges to screen-based trading, motivated primarily by the need for greater transparency.
The first exchange to be based on an open electronic limit order book was the National Stock Exchange (NSE), which started trading debt instruments in June 1994 and equity in November 1994. In March 1995, BSE shifted from open outcry to a limit order book market. Currently, 17 of India’s stock exchanges have adopted open electronic limit order.
Before 1994, India’s stock markets were dominated by BSE. In other parts of the country, the financial industry did not have equal access to markets and was unable to participate in forming prices, compared with market participants in Mumbai (Bombay). As a result, the prices in markets outside Mumbai were often different from prices in Mumbai. These pricing errors limited order flow to these markets. Explicit nationwide connectivity and implicit movement toward one national market has changed this situation (Shah and Thomas, 1997).
NSE has established satellite communications which give all trading members of NSE equal access to the market. Similarly, BSE and the Delhi Stock Exchange are both expanding the number of trading terminals located all over the country. The arbitrages are eliminating pricing discrepancies between markets.
Despite these big improvements in microstructure, the Indian capital market has been in decline during the last three years. The amount of capital issued has dropped from the level of its peak year,1994/95, and so have equity prices. In 1994/95, Rs276 billion was raised in the primary equity market. This figure fell to Rs208 billion in 1995/96 and to Rs142 billion in 1996/97. The BSE-30 index or Sensex, the sensitive index of equity prices, peaked at 4,361 in September 1994 and fell during the following years.
A leading cause was that financial irregularities and overvaluations of equity prices in the earlier years had eroded public confidence in corporate shares. Also, there was a reduced inflow of foreign investment after the Mexican and Asian financial crises. In a sense, the market is now undergoing a period of adjustment. Thus, it is time for regulatory authorities to make greater efforts to recover investors’ confidence and to further improve the efficiency and transparency of market operations.
The Indian capital market still faces many challenges if it is to promote more efficient allocation and mobilization of capital in the economy. First, market infrastructure has to be improved as it hinders the efficient flow of information and effective corporate governance. Accounting standards will have to adapt to internationally accepted accounting practices.
The court system and legal mechanism should be enhanced to better protect small shareholders’ rights and their capacity to monitor corporate
activities.
Second, the trading system has to be made more transparent. Market information is a crucial public good that should be disclosed or made available to all participants to achieve market efficiency. SEBI should also monitor more closely cases of insider trading. Third, India may need further integration of the national capital market through consolidation of stock exchanges.
The trend all over the world is to consolidate and merge existing stock exchanges. Not all of India’s 22 stock exchanges may be able to justify their existence. There is a pressing need to develop a uniform settlement cycle and common clearing system that will bring an end to unnecessary speculation based on arbitrage opportunities. Fourth, the payment system has to be improved to better link the banking and securities industries.
India’s banking system has yet to come up with good electronic funds transfer (EFT) solutions. EFT is important for problems such as direct payments of dividends through bank accounts, eliminating counterparty risk, and facilitating foreign institutional investment. The capital market cannot thrive alone; it has to be integrated with the other segments of the financial system. The global trend is for the elimination of the traditional wall between banks and the securities market.
Securities market development has to be supported by overall macroeconomic and financial sector environments.
Further liberalization of interest rates, reduced fiscal deficits, fully market-based issuance of Government securities, and a more competitive banking sector will help in the development of a sounder and a more efficient capital market in India.