lakshmiaurora
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PROJECT REPORT
To Study the INDIAN STOCK MARKET TRENDS and to analyze in detail the stock trends of
CIPLA, BHARTI TELEVENTURES,
ICICI BANK & MARUTI UDYOG
Project report submitted in the partial fulfillment of requirement for the
Master’s In Business Administration
SUBMITTED BY: (student name)
(Institute logo and name)
EXECUTIVE SUMMARY
“Our approach shall be value based as a responsible member of the society, contributing to its growth & development”
The booming Indian market has started showing it’s increasing development in the investment cycle.An economy after years of waiting, watching and belt tightning, now witnessing the desired change. India companies in various sectors ranging from cement to steel are building their blue prints throughout the globe. The long term capital expenditure has been forecasted for next five to seven years.
At this juncture of economic development, a project on analyzing the trends of Indian stock Market is a timely decision. The analysis started with the search of history and evolution of modernization drive. The next phase of the project went o searching four different sectors, which are performing well with their significant presence in this country’s economic life. The selected areas were banking, auto, pharma & telecom. Before starting with company specific analysis, we found out the relevant areas of fundamental and technical analysis practiced in Indian secondary stock market while evaluating a stocks performance.
Our fundamental analysis showed us there is a stiff competition in the sector of automobile and pharma. The stocks, which we had chosen in these two sectors, were performing less than the banking and telecom sector. The explanation of a stocks performance has been done through its financial results, sector specific description and special moves taken by the company. Nevertheless we were limited to fundamental analysis as Technical analysis was not possible for us, the reason being, it required a large chunk of data to be analyzed.
The findings of our analysis showed us the three major reasons for the extraordinary performance of Indian Stock Market. The first reason being the good quarterly result by most of the companies. Secondly,
The entire exercise in this organization leaves very minor place for improvement. All most every aspect of an employee’s life is being covered from health and hygiene to efficiency till the care for their children.
This project report expects to change a very common concept about H.R. practices in Indian manufacturing sector. We invite you through the journey, which enlightens about how an organization actively takes part in contributing growth and development of a society.
ACKNOWLEDGEMENT
At the outset, I would like to express my gratitude to (Professor name), HOD of (College name) for permitting me to take up this project.
My sincere thanks to (name), Faculty Member in the Business Management Department for his valuable co-operation and suggestions at every stage of this project without whom this would have not been completed.
I am grateful to my parents, family and all my friends for their help and co-operation.
(Student name)
TABLE OF CONTENTS
TABLE OF CONTENTS 5
CHAPTER 1 7
INTRODUCTION TO STOCK MARKET 7
CHAPTER 2 9
EVOLUTION OF INDIAN CAPITAL MARKET 9
2.1 OTHER LEADING CITIES IN STOCK MARKET OPERATIONS 9
2.2 INDIAN STOCK EXCHANGES - AN UMBRELLA GROWTH 10
2.3 POST-INDEPENDENCE SCENARIO 11
2.4 GROWTH PATTERN OF THE INDIAN STOCK MARKET 13
2.5 AUTHORITY REGULATING CAPITAL MARKET 13
CHAPTER 3 14
A HISTORICAL PERSPECTIVE OF THE SECURITIES MARKET REFORMS IN INDIA 14
3.1 MAIN COURSE – FAST FORWARD TO 1990S 14
3.2 PROBLEMS AS OF 1992 16
3.3 SEBI 19
3.4 NSE 19
3.5 NSCC 20
3.6 NSDL 21
3.7 MAJOR REFORMS 22
3.8 IMPACT OF REFORMS 25
3.9 DESERTS - ROAD AHEAD 27
CHAPTER 4 29
FACTORS AFFECTING THE SHARE MARKET 29
4.1 FUNDAMENTAL ANALYSIS 29
4.2 GENERAL STEPS FOLLOWED FOR FUNDAMENTAL EVOLUTION 30
4.3 STRENGTH OF FUNDAMENTAL ANALYSIS 34
4.4 WEAKNESSES OF FUNDAMENTAL ANALYSIS 35
4.5 INTRINSIC VALUE OF A STOCK 36
4.6 TECHNICAL ANALYSIS 38
CHAPTER 5 46
STOCK MARKET 2003-2005 46
CHAPTER 6 48
SELECTED STOCKS AND THEIR ANALYSIS 48
6.1 AUTMOBILE SECTOR 48
6.1.1 MARUTI UDYOG – ANALYSIS AND PERFORMANCE 52
6.2 BANKING SECTOR 54
6.2.1 ICICIBANK – ANALYSIS AND PERFORMANCE 58
6.3 PHARMACEUTICAL SECTOR 66
6.3.1 CIPLA – ANALYSIS AND PERFORMANCE 70
6.4 TELECOM SECTOR 77
6.4.1 BHARTI TELE VENTURES – ANALYSIS & PERFORMANCE 81
CHAPTER 7 86
Chapter 1
INTRODUCTION TO STOCK MARKET
A stock market (also known as a stock exchange) is intricately interwoven in the fabric of a nation’s economic life. Without a stock exchange the savings of the community, the signs of the economic progress and productive efficiency would remain underutilized. The task of mobilization and allocation of savings could be attempted in the old days by a much less specialized institution than the stock exchange. But as businesses and industry expanded and the economy assumed more complex nature, the need for permanent finance arose. Entrepreneurs needed money for long term whereas investors demanded liquidity ie. the facility to convert their investments into cash at any given time. The answer was a ready market for investments and this was how the stock exchange came into existence.
The stock exchange means anybody of individuals, whether incorporated or not, constituted for purpose of regulating or controlling the business of buying, selling or dealing in securities. The securities include
a) Shares, scrips, stocks, bonds, debentures stock or other marketable securities of a like nature in or of any incorporated company or other body corporate.
b) Government securities.
c) Rights or interests in securities.
In your neighborhood, you probably have a supermarket that sells groceries. The reason you go the supermarket is because everything you need to run your home is available under one roof. It's far more convenient than having to make 10 stops at different stores. The Stock Exchange is a supermarket for stocks. The stock exchange is like a big room where everyone who wants to buy and sell shares can go to conduct their transactions.
The Exchange makes buying and selling easy. You do not have to actually travel to the Stock Exchange; rather, you can call a stock broker who does business with the Exchange, and he or she will go there on your behalf to buy or sell your stock. With an Exchange in place, you can buy and sell shares instantly.
The Stock Exchange has an interesting side effect. Because all the buying and selling is concentrated in one place, it allows the price of a stock to be known every second of the day. Therefore, investors can watch as a stock's price fluctuates based on news from the company, media reports, economic news and a range of other factors. Smart buyers and sellers take all of these factors into account before making decisions.
The stock exchange has two main functions.
o The first function is to provide companies with a way of issuing shares to people who want to invest in the company. This can be illustrated by an example: Suppose a company has a mining lease over an area with some rich ore deposits. It wants to exploit these deposits, but it doesn’t have any equipment. To buy the equipment it needs money. One way to raise money is through the stock market. The company issues a prospectus, which is a sort of advertisement informing people about the prospects of the company and inviting them to invest some money in it. When the company is ‘floated’ (established) on the stock market, interested investors can become part owners of the company by buying ‘shares’. If the company operates at a profit, shareholders benefit in two ways – through the issuing of dividends in the form of cash or more shares, and through growth in the value of the shares. On the other hand, if the company does not operate at a profit (e.g., if the price of the product dips), the shareholders will probably lose money.
o The second function of the stock market, related to the first, is to provide a venue for the buying and selling of shares.
Chapter 2
EVOLUTION OF INDIAN CAPITAL MARKET
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 meager 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.
2.1 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 realized 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 flourmills 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.
2.2 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 Exchange Association Limited.
2.3 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 concession 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).
At present there are 23 stock exchanges across the country, which are as follows:
1. Ahmedabad Stock Exchange Association Ltd.
2. Bangalore Stock Exchange
3. Bhubaneshwar Stock Exchange Association
4. Calcutta Stock Exchange
5. Cochin Stock Exchnage Ltd.
6. Coimbatore Stock Exchange
7. Delhi Stock Exchange Association
8. Guwahati Stock Exchange Ltd.
9. Hyberabad Stock Exchange Ltd.
10. Jaipur Stock Exchange Ltd
11. Kanara Stock Exchange Ltd
12. Ludhiana Stock Exchange Association Ltd
13. Madras Stock Exchange
14. Madhya Pradesh Stock Exchange Ltd.
15. Mangalore Stock Exchange Limited
16. Meerut Stock Exchange Ltd.
17. Mumbai Stock Exchange
18. National Stock Exchange of India
19. OTC Exchange of India
20. Pune Stock Exchange Ltd.
21. Saurashtra Kutch Stock Exchange Ltd.
22. Uttar Pradesh Stock Exchange Association Ltd.
23. Vadodara Stock Exchange Ltd.
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 favoring government policies towards security market industry.
2.4 GROWTH PATTERN OF THE INDIAN STOCK MARKET
Sl.
No. As On 31st
December 1946 1961 1971 1975 1980 1985 1991 1995 2005
1 No. Of Stock Ex. 7 7 8 8 9 14 20 22 23
2 No. Of Listed Co. 1125 1203 1599 1552 2265 4344 6229 8593
3 No. Of Stock Issues Of Listed Co. 1506 2111 2838 3230 3697 6174 8967 11784
4 Capital Of Listed Co.
(Cr. Rs.) 270 753 1892 2614 3973 9723 32041 59583
5 Mkt. Value Of Capital Of Listed Co. 971 1292 2675 3273 6750 25302 110279 478121
6 Capital per Listed Co. 24 63 113 168 175 224 514 693
7 Mkt. Value Of Capital Per Listed Co. 86 107 167 211 298 582 1770 5564
8 Appreciated Value Of Capital Per Listed Co. 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.
2.5 AUTHORITY REGULATING CAPITAL MARKET
The Capital Markets division of the Department of Economic Affairs regulates capital markets and securities transactions. The Indian Financial system is regulated and supervised by two government agencies under the Ministry of Finance - They are:
o The Reserve Bank of India [RBI] and
o The Securities Exchange Board of India [SEBI]
All parts of the financial system are interconnected with one another and the jurisdictions of the RBI and the SEBI overlap in many fields.
• Securities and Exchange Board of India
• Stock Exchanges of India
Chapter 3
A HISTORICAL PERSPECTIVE OF THE SECURITIES MARKET REFORMS IN INDIA
The importance of the securities market in our life and our economy, as stated so far, did not happen overnight. Countless people have slogged for over two centuries to bring the market to the center stage.
This also occurs today at regular intervals. Little seems to have changed since then; the bubbles and burst continue to be a perennial feature of the securities market world over.
Let us look at the legal developments. Control of capital issues was introduced through the Defence of India Rules in 1943 under the Defence of India Act, 1939 to channel resources to support the war effort. The control was retained after the war with some modifications as a means of controlling the raising of capital by companies and to ensure that national resources were channeled to serve the goals and priorities of the government, and to protect the interests of investors. The relevant provisions in the Defence of India Rules were replaced by the Capital Issues (Continuance of Control) Act in April 1947.
Though the stock exchanges were in operation, there was no legislation for their regulation till the Bombay Securities Contracts Control Act was enacted in 1925. This was, however, deficient in many respects. Under the constitution, which came into force on January 26, 1950, stock exchanges and forward markets came under the exclusive authority of the central government. Following the recommendations of the A. D. Gorwala Committee in 1951, the Securities Contracts (Regulation) Act, 1956 was enacted to provide for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges and to prevent undesirable transactions in securities.
3.1 Main Course – Fast Forward to 1990s
In 1980s and 1990s, it was increasingly realized that an efficient and well-developed securities market is essential for sustained economic growth. The securities market fosters economic growth to the extent it augments the quantities of real savings and capital formation from a given level of national income and it raises productivity of investment by improving allocation of investable funds. The extent depends on the quality of the securities market. In order to improve the quality of the market, that is, to improve market efficiency, enhance transparency, prevent unfair trade practices and bring the Indian market up to international standards, a package of reforms consisting of measures to liberalize, regulate and develop the securities market is being implemented since early 1990s. To explain it academically we first need to answer certain questions.
Why liberalization?
The more liberalized a securities market is, the better is its impact on economic growth. Interventions in the securities market were originally designed to help governments expropriate much of the seignior age and control and direct the flow of funds for favored uses. These helped governments to tap savings on a low or even no-cost basis. Besides, government used to allocate funds from the securities market to competing enterprises and decide the terms of allocation. The result was channelization of resources to favored uses rather than sound projects. In such circumstances accumulation of capital per se meant little, where rate of return on some investments were negative while extremely remunerative investment opportunities were foregone. This kept the average rate of return from investment lower than it would otherwise have been and, given the cost of savings, the resulting investment was less than optimum. Hence, it was necessary to do away interventions hindering optimum allocation of resources.
Why Regulation?
Our laws provide an inclusive definition of ‘securities’. It says that ‘securities’ include shares, bonds, debentures, units of CIS, etc. It does not define in terms of ingredients an instrument must have to be considered as ‘securities’. There is no such ingredient type definition of ‘securities’ in any other jurisdiction. It is precisely because ‘securities’ are most insecure instruments. The only ingredient common to all types of securities is its associated ‘insecurity’. It is like a blind man named padmalochan. If it is a market for such insecure instruments, market would collapse if some body does not regulate away the insecurities.
of regulation and development. Besides, some developmental We need regulations to correct for identified market imperfections, which produce sub-optimal outcomes, and to prevent market failures. In the absence of regulation by a specialized agency, each participant would do its own due diligence before undertaking any transaction in the market. This imposes huge social costs. Besides, regulations signal minimum standards of quality and hence enhance confidence in markets. With a known asymmetric information problem, risk averse investors may exit the market altogether if such minimum standards are not signaled. In its extreme form the market breaks down completely.
There is an apparent contradiction that the reforms aim at liberalization while regulations appear to restrict liberalization. Liberalization does not mean scrapping of all codes and statutes, as some market participants may wish. It rather means replacement of one set by another set of more liberal code / statute, which allow full freedom to economic agents, but influence or prescribe the way they should carry out their activities, so that the liberalized markets operate in an efficient and fair manner and the risks of systemic failure are minimized. It is, however, desirable to keep in mind the contradiction to ensure that we do not resort to excessive regulation and regulations are designed and implemented properly. Otherwise the costs of regulation would exceed the benefits from regulation.
Why development?
Unless you develop market, what do you regulate? Unless there is regulation, how does the market develop? It is a chicken and egg issue. Regulation is necessary to develop market and once the market develops, it needs to be regulated. That is why many of the reform initiatives combine the elements measures are introduced as a part of general programme for economic and political development. The macro economic policies relating to interest rate, prices, etc can have salubrious effect on the growth and development of the securities market. Other developmental measures include provision of reliable payment system and clearing mechanism, standardized accounting procedure, good corporate governance, skilled manpower etc, which improve the efficiency and transparency of the market.
The equity market was high on the reforms agenda after the scam of 1992.
3.2 PROBLEMS AS OF 1992
The problems of the equity market, at the time, may be summarized as follows:
1. As of 1992, the Bombay Stock Exchange (BSE) was a monopoly. It was an association of brokers, and imposed entry barriers, which led to elevated costs of intermediation. Membership was limited to individuals; limited liability firms could not become brokerage firms.
2. Trading took place by ‘open outcry’ on the trading floor, which was inaccessible to users. It was routine for brokers to charge the investor a price that was different from that actually transacted at. In fact, the normal market practice involved brokers charging users one single consolidated price, instead of unbundling the trade price and the brokerage fee.
3. As with all trading floors, there was no price-time priority, so users of the market were not assured that a trade was executed at the best possible price.
4. A variety of manipulative practices abounded, so that external users of a market often found themselves at the losing end of price movements. The BSE was run by brokers, which limits the quality of enforcement which can be undertaken against errant brokers.
5. Floor-based trading, the inefficiencies in clearing and settlement (described ahead), entry barriers into brokerage, and the low standards of technology and organizational complexity that accompanied the ban upon corporate membership of the BSE led to an environment where order execution was unreliable and costly. It was typical for below 50 per cent of orders to obtain execution on a given day.
6. Retail investors, and particularly users of the market outside Bombay, accessed market liquidity through a chain of intermediaries called ‘sub-brokers’. Each sub-broker in the chain introduced a mark-up in the price, in the absence of the unbundling of professional fees from the trade price. It was not uncommon for investors in small towns to face four intermediaries before their order reached the BSE floor, and to face mark-ups in excess of 10 per cent as compared with the actual trade price.
7. The market used ‘futures-style settlement’ with fortnightly settlement. This means that trading was supposed to take place for a fortnight until a predetermined ‘expiration date’. Open positions on the expiration date only would go into actual settlement, where funds and securities were exchanged. In practice, there was little discipline on ensuring a reliable fortnightly settlement cycle.
8. A peculiar market practice called badla allowed brokers to carry positions across settlement periods. In other words, even open positions at the end of the fortnight did not always have to be settled.
9. The efficiencies of the exchange clearinghouse only applied for the largest 100 stocks. For other stocks, clearing and settlement were done bilaterally, which introduced further inefficiencies and costs.
10. The use of futures-style trading for a fortnight (or more), coupled with badla, is fraught with counter party risk. Normally, collateral (margin) requirements are used to ensure capital adequacy, and reduce the fragility of the clearing system. Primitive notions of margins existed at the BSE on paper, but they were not enforced. A critical feature of the modern approach to clearing is ‘novation’ at a clearing corporation; the BSE has neither a clearing corporation nor novation. The BSE clearinghouse functioned on a best-efforts basis – if shares or funds appeared at one end, they would be delivered to the other; the clearinghouse itself took no interest in measuring and containing counter party risk. Small-scale problems of partial or delayed payments took place on every settlement, and major crises, which required closing down the exchange while a compromise was worked out, took place once every two to three years. A recent and prominent example was seen in April 1995 in the context of shares of the firm ‘M S Shoes’, where a default involving a total exposure of Rs 180 million, and losses of around one-fifth of this, led to a payments crisis on the BSE which halted the functioning of the exchange for three days.
11. The final leg of the trade was physical settlement, where share certificates were printed on paper. This was intrinsically vulnerable to theft, counterfeiting, inaccurate signature verification, administrative inefficiencies, and a variety of other malpractice. Involuntary and deliberate delays in settlement could take place both at the BSE and at the firm. Many firms used the power of delaying settlement as a tool to support manipulation of their own stock. The problems were somewhat simpler for investors in Bombay, who could physically visit the BSE broker, the BSE clearinghouse, or the company’s registrar, and accelerate transfer. For investors outside Bombay, who lacked this recourse and were crippled by the exorbitantly expensive telephone system, delays of six months between purchasing a stock and the transfer of legal title were common. If stock splits, rights issues, or dividend pay-outs took place during this period, it was common for the purchaser to not obtain the benefits.
These problems led to an extremely poorly functioning equity market. From late 1993 onwards, the Indian State embarked on a radical reforms programme which completely transformed market institutions. This programme consisted of creating four new securities market institutions: the Securities and Exchanges Board of India (SEBI), the National Stock Exchange (NSE), the National Securities Clearing Corporation (NSCC) and the National Securities Depository (NSDL).
3.3 SEBI
The Securities and Exchanges Board of India (SEBI) was formed in 1988. It has gradually adopted many important roles in the area of policy formulation, regulation, enforcement and market development. This is in contrast with conditions prior to SEBI, where exchanges underwent little scrutiny or enforcement.
Today, SEBI vets every element of market design in India’s securities markets; it attempts enforcement against problems such as market manipulation and payments crises, and performs oversight of market intermediaries. In late 1993, SEBI banned badla. This was a major milestone in two respects – this marked the commencement of a major role for SEBI, and it curtailed the market manipulation and systemic risk that accompanied badla. However, these reforms were reversed in 1995 and late 1997 through efforts by SEBI to resuscitate badla.
To Study the INDIAN STOCK MARKET TRENDS and to analyze in detail the stock trends of
CIPLA, BHARTI TELEVENTURES,
ICICI BANK & MARUTI UDYOG
Project report submitted in the partial fulfillment of requirement for the
Master’s In Business Administration
SUBMITTED BY: (student name)
(Institute logo and name)
EXECUTIVE SUMMARY
“Our approach shall be value based as a responsible member of the society, contributing to its growth & development”
The booming Indian market has started showing it’s increasing development in the investment cycle.An economy after years of waiting, watching and belt tightning, now witnessing the desired change. India companies in various sectors ranging from cement to steel are building their blue prints throughout the globe. The long term capital expenditure has been forecasted for next five to seven years.
At this juncture of economic development, a project on analyzing the trends of Indian stock Market is a timely decision. The analysis started with the search of history and evolution of modernization drive. The next phase of the project went o searching four different sectors, which are performing well with their significant presence in this country’s economic life. The selected areas were banking, auto, pharma & telecom. Before starting with company specific analysis, we found out the relevant areas of fundamental and technical analysis practiced in Indian secondary stock market while evaluating a stocks performance.
Our fundamental analysis showed us there is a stiff competition in the sector of automobile and pharma. The stocks, which we had chosen in these two sectors, were performing less than the banking and telecom sector. The explanation of a stocks performance has been done through its financial results, sector specific description and special moves taken by the company. Nevertheless we were limited to fundamental analysis as Technical analysis was not possible for us, the reason being, it required a large chunk of data to be analyzed.
The findings of our analysis showed us the three major reasons for the extraordinary performance of Indian Stock Market. The first reason being the good quarterly result by most of the companies. Secondly,
The entire exercise in this organization leaves very minor place for improvement. All most every aspect of an employee’s life is being covered from health and hygiene to efficiency till the care for their children.
This project report expects to change a very common concept about H.R. practices in Indian manufacturing sector. We invite you through the journey, which enlightens about how an organization actively takes part in contributing growth and development of a society.
ACKNOWLEDGEMENT
At the outset, I would like to express my gratitude to (Professor name), HOD of (College name) for permitting me to take up this project.
My sincere thanks to (name), Faculty Member in the Business Management Department for his valuable co-operation and suggestions at every stage of this project without whom this would have not been completed.
I am grateful to my parents, family and all my friends for their help and co-operation.
(Student name)
TABLE OF CONTENTS
TABLE OF CONTENTS 5
CHAPTER 1 7
INTRODUCTION TO STOCK MARKET 7
CHAPTER 2 9
EVOLUTION OF INDIAN CAPITAL MARKET 9
2.1 OTHER LEADING CITIES IN STOCK MARKET OPERATIONS 9
2.2 INDIAN STOCK EXCHANGES - AN UMBRELLA GROWTH 10
2.3 POST-INDEPENDENCE SCENARIO 11
2.4 GROWTH PATTERN OF THE INDIAN STOCK MARKET 13
2.5 AUTHORITY REGULATING CAPITAL MARKET 13
CHAPTER 3 14
A HISTORICAL PERSPECTIVE OF THE SECURITIES MARKET REFORMS IN INDIA 14
3.1 MAIN COURSE – FAST FORWARD TO 1990S 14
3.2 PROBLEMS AS OF 1992 16
3.3 SEBI 19
3.4 NSE 19
3.5 NSCC 20
3.6 NSDL 21
3.7 MAJOR REFORMS 22
3.8 IMPACT OF REFORMS 25
3.9 DESERTS - ROAD AHEAD 27
CHAPTER 4 29
FACTORS AFFECTING THE SHARE MARKET 29
4.1 FUNDAMENTAL ANALYSIS 29
4.2 GENERAL STEPS FOLLOWED FOR FUNDAMENTAL EVOLUTION 30
4.3 STRENGTH OF FUNDAMENTAL ANALYSIS 34
4.4 WEAKNESSES OF FUNDAMENTAL ANALYSIS 35
4.5 INTRINSIC VALUE OF A STOCK 36
4.6 TECHNICAL ANALYSIS 38
CHAPTER 5 46
STOCK MARKET 2003-2005 46
CHAPTER 6 48
SELECTED STOCKS AND THEIR ANALYSIS 48
6.1 AUTMOBILE SECTOR 48
6.1.1 MARUTI UDYOG – ANALYSIS AND PERFORMANCE 52
6.2 BANKING SECTOR 54
6.2.1 ICICIBANK – ANALYSIS AND PERFORMANCE 58
6.3 PHARMACEUTICAL SECTOR 66
6.3.1 CIPLA – ANALYSIS AND PERFORMANCE 70
6.4 TELECOM SECTOR 77
6.4.1 BHARTI TELE VENTURES – ANALYSIS & PERFORMANCE 81
CHAPTER 7 86
Chapter 1
INTRODUCTION TO STOCK MARKET
A stock market (also known as a stock exchange) is intricately interwoven in the fabric of a nation’s economic life. Without a stock exchange the savings of the community, the signs of the economic progress and productive efficiency would remain underutilized. The task of mobilization and allocation of savings could be attempted in the old days by a much less specialized institution than the stock exchange. But as businesses and industry expanded and the economy assumed more complex nature, the need for permanent finance arose. Entrepreneurs needed money for long term whereas investors demanded liquidity ie. the facility to convert their investments into cash at any given time. The answer was a ready market for investments and this was how the stock exchange came into existence.
The stock exchange means anybody of individuals, whether incorporated or not, constituted for purpose of regulating or controlling the business of buying, selling or dealing in securities. The securities include
a) Shares, scrips, stocks, bonds, debentures stock or other marketable securities of a like nature in or of any incorporated company or other body corporate.
b) Government securities.
c) Rights or interests in securities.
In your neighborhood, you probably have a supermarket that sells groceries. The reason you go the supermarket is because everything you need to run your home is available under one roof. It's far more convenient than having to make 10 stops at different stores. The Stock Exchange is a supermarket for stocks. The stock exchange is like a big room where everyone who wants to buy and sell shares can go to conduct their transactions.
The Exchange makes buying and selling easy. You do not have to actually travel to the Stock Exchange; rather, you can call a stock broker who does business with the Exchange, and he or she will go there on your behalf to buy or sell your stock. With an Exchange in place, you can buy and sell shares instantly.
The Stock Exchange has an interesting side effect. Because all the buying and selling is concentrated in one place, it allows the price of a stock to be known every second of the day. Therefore, investors can watch as a stock's price fluctuates based on news from the company, media reports, economic news and a range of other factors. Smart buyers and sellers take all of these factors into account before making decisions.
The stock exchange has two main functions.
o The first function is to provide companies with a way of issuing shares to people who want to invest in the company. This can be illustrated by an example: Suppose a company has a mining lease over an area with some rich ore deposits. It wants to exploit these deposits, but it doesn’t have any equipment. To buy the equipment it needs money. One way to raise money is through the stock market. The company issues a prospectus, which is a sort of advertisement informing people about the prospects of the company and inviting them to invest some money in it. When the company is ‘floated’ (established) on the stock market, interested investors can become part owners of the company by buying ‘shares’. If the company operates at a profit, shareholders benefit in two ways – through the issuing of dividends in the form of cash or more shares, and through growth in the value of the shares. On the other hand, if the company does not operate at a profit (e.g., if the price of the product dips), the shareholders will probably lose money.
o The second function of the stock market, related to the first, is to provide a venue for the buying and selling of shares.
Chapter 2
EVOLUTION OF INDIAN CAPITAL MARKET
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 meager 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.
2.1 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 realized 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 flourmills 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.
2.2 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 Exchange Association Limited.
2.3 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 concession 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).
At present there are 23 stock exchanges across the country, which are as follows:
1. Ahmedabad Stock Exchange Association Ltd.
2. Bangalore Stock Exchange
3. Bhubaneshwar Stock Exchange Association
4. Calcutta Stock Exchange
5. Cochin Stock Exchnage Ltd.
6. Coimbatore Stock Exchange
7. Delhi Stock Exchange Association
8. Guwahati Stock Exchange Ltd.
9. Hyberabad Stock Exchange Ltd.
10. Jaipur Stock Exchange Ltd
11. Kanara Stock Exchange Ltd
12. Ludhiana Stock Exchange Association Ltd
13. Madras Stock Exchange
14. Madhya Pradesh Stock Exchange Ltd.
15. Mangalore Stock Exchange Limited
16. Meerut Stock Exchange Ltd.
17. Mumbai Stock Exchange
18. National Stock Exchange of India
19. OTC Exchange of India
20. Pune Stock Exchange Ltd.
21. Saurashtra Kutch Stock Exchange Ltd.
22. Uttar Pradesh Stock Exchange Association Ltd.
23. Vadodara Stock Exchange Ltd.
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 favoring government policies towards security market industry.
2.4 GROWTH PATTERN OF THE INDIAN STOCK MARKET
Sl.
No. As On 31st
December 1946 1961 1971 1975 1980 1985 1991 1995 2005
1 No. Of Stock Ex. 7 7 8 8 9 14 20 22 23
2 No. Of Listed Co. 1125 1203 1599 1552 2265 4344 6229 8593
3 No. Of Stock Issues Of Listed Co. 1506 2111 2838 3230 3697 6174 8967 11784
4 Capital Of Listed Co.
(Cr. Rs.) 270 753 1892 2614 3973 9723 32041 59583
5 Mkt. Value Of Capital Of Listed Co. 971 1292 2675 3273 6750 25302 110279 478121
6 Capital per Listed Co. 24 63 113 168 175 224 514 693
7 Mkt. Value Of Capital Per Listed Co. 86 107 167 211 298 582 1770 5564
8 Appreciated Value Of Capital Per Listed Co. 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.
2.5 AUTHORITY REGULATING CAPITAL MARKET
The Capital Markets division of the Department of Economic Affairs regulates capital markets and securities transactions. The Indian Financial system is regulated and supervised by two government agencies under the Ministry of Finance - They are:
o The Reserve Bank of India [RBI] and
o The Securities Exchange Board of India [SEBI]
All parts of the financial system are interconnected with one another and the jurisdictions of the RBI and the SEBI overlap in many fields.
• Securities and Exchange Board of India
• Stock Exchanges of India
Chapter 3
A HISTORICAL PERSPECTIVE OF THE SECURITIES MARKET REFORMS IN INDIA
The importance of the securities market in our life and our economy, as stated so far, did not happen overnight. Countless people have slogged for over two centuries to bring the market to the center stage.
This also occurs today at regular intervals. Little seems to have changed since then; the bubbles and burst continue to be a perennial feature of the securities market world over.
Let us look at the legal developments. Control of capital issues was introduced through the Defence of India Rules in 1943 under the Defence of India Act, 1939 to channel resources to support the war effort. The control was retained after the war with some modifications as a means of controlling the raising of capital by companies and to ensure that national resources were channeled to serve the goals and priorities of the government, and to protect the interests of investors. The relevant provisions in the Defence of India Rules were replaced by the Capital Issues (Continuance of Control) Act in April 1947.
Though the stock exchanges were in operation, there was no legislation for their regulation till the Bombay Securities Contracts Control Act was enacted in 1925. This was, however, deficient in many respects. Under the constitution, which came into force on January 26, 1950, stock exchanges and forward markets came under the exclusive authority of the central government. Following the recommendations of the A. D. Gorwala Committee in 1951, the Securities Contracts (Regulation) Act, 1956 was enacted to provide for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges and to prevent undesirable transactions in securities.
3.1 Main Course – Fast Forward to 1990s
In 1980s and 1990s, it was increasingly realized that an efficient and well-developed securities market is essential for sustained economic growth. The securities market fosters economic growth to the extent it augments the quantities of real savings and capital formation from a given level of national income and it raises productivity of investment by improving allocation of investable funds. The extent depends on the quality of the securities market. In order to improve the quality of the market, that is, to improve market efficiency, enhance transparency, prevent unfair trade practices and bring the Indian market up to international standards, a package of reforms consisting of measures to liberalize, regulate and develop the securities market is being implemented since early 1990s. To explain it academically we first need to answer certain questions.
Why liberalization?
The more liberalized a securities market is, the better is its impact on economic growth. Interventions in the securities market were originally designed to help governments expropriate much of the seignior age and control and direct the flow of funds for favored uses. These helped governments to tap savings on a low or even no-cost basis. Besides, government used to allocate funds from the securities market to competing enterprises and decide the terms of allocation. The result was channelization of resources to favored uses rather than sound projects. In such circumstances accumulation of capital per se meant little, where rate of return on some investments were negative while extremely remunerative investment opportunities were foregone. This kept the average rate of return from investment lower than it would otherwise have been and, given the cost of savings, the resulting investment was less than optimum. Hence, it was necessary to do away interventions hindering optimum allocation of resources.
Why Regulation?
Our laws provide an inclusive definition of ‘securities’. It says that ‘securities’ include shares, bonds, debentures, units of CIS, etc. It does not define in terms of ingredients an instrument must have to be considered as ‘securities’. There is no such ingredient type definition of ‘securities’ in any other jurisdiction. It is precisely because ‘securities’ are most insecure instruments. The only ingredient common to all types of securities is its associated ‘insecurity’. It is like a blind man named padmalochan. If it is a market for such insecure instruments, market would collapse if some body does not regulate away the insecurities.
of regulation and development. Besides, some developmental We need regulations to correct for identified market imperfections, which produce sub-optimal outcomes, and to prevent market failures. In the absence of regulation by a specialized agency, each participant would do its own due diligence before undertaking any transaction in the market. This imposes huge social costs. Besides, regulations signal minimum standards of quality and hence enhance confidence in markets. With a known asymmetric information problem, risk averse investors may exit the market altogether if such minimum standards are not signaled. In its extreme form the market breaks down completely.
There is an apparent contradiction that the reforms aim at liberalization while regulations appear to restrict liberalization. Liberalization does not mean scrapping of all codes and statutes, as some market participants may wish. It rather means replacement of one set by another set of more liberal code / statute, which allow full freedom to economic agents, but influence or prescribe the way they should carry out their activities, so that the liberalized markets operate in an efficient and fair manner and the risks of systemic failure are minimized. It is, however, desirable to keep in mind the contradiction to ensure that we do not resort to excessive regulation and regulations are designed and implemented properly. Otherwise the costs of regulation would exceed the benefits from regulation.
Why development?
Unless you develop market, what do you regulate? Unless there is regulation, how does the market develop? It is a chicken and egg issue. Regulation is necessary to develop market and once the market develops, it needs to be regulated. That is why many of the reform initiatives combine the elements measures are introduced as a part of general programme for economic and political development. The macro economic policies relating to interest rate, prices, etc can have salubrious effect on the growth and development of the securities market. Other developmental measures include provision of reliable payment system and clearing mechanism, standardized accounting procedure, good corporate governance, skilled manpower etc, which improve the efficiency and transparency of the market.
The equity market was high on the reforms agenda after the scam of 1992.
3.2 PROBLEMS AS OF 1992
The problems of the equity market, at the time, may be summarized as follows:
1. As of 1992, the Bombay Stock Exchange (BSE) was a monopoly. It was an association of brokers, and imposed entry barriers, which led to elevated costs of intermediation. Membership was limited to individuals; limited liability firms could not become brokerage firms.
2. Trading took place by ‘open outcry’ on the trading floor, which was inaccessible to users. It was routine for brokers to charge the investor a price that was different from that actually transacted at. In fact, the normal market practice involved brokers charging users one single consolidated price, instead of unbundling the trade price and the brokerage fee.
3. As with all trading floors, there was no price-time priority, so users of the market were not assured that a trade was executed at the best possible price.
4. A variety of manipulative practices abounded, so that external users of a market often found themselves at the losing end of price movements. The BSE was run by brokers, which limits the quality of enforcement which can be undertaken against errant brokers.
5. Floor-based trading, the inefficiencies in clearing and settlement (described ahead), entry barriers into brokerage, and the low standards of technology and organizational complexity that accompanied the ban upon corporate membership of the BSE led to an environment where order execution was unreliable and costly. It was typical for below 50 per cent of orders to obtain execution on a given day.
6. Retail investors, and particularly users of the market outside Bombay, accessed market liquidity through a chain of intermediaries called ‘sub-brokers’. Each sub-broker in the chain introduced a mark-up in the price, in the absence of the unbundling of professional fees from the trade price. It was not uncommon for investors in small towns to face four intermediaries before their order reached the BSE floor, and to face mark-ups in excess of 10 per cent as compared with the actual trade price.
7. The market used ‘futures-style settlement’ with fortnightly settlement. This means that trading was supposed to take place for a fortnight until a predetermined ‘expiration date’. Open positions on the expiration date only would go into actual settlement, where funds and securities were exchanged. In practice, there was little discipline on ensuring a reliable fortnightly settlement cycle.
8. A peculiar market practice called badla allowed brokers to carry positions across settlement periods. In other words, even open positions at the end of the fortnight did not always have to be settled.
9. The efficiencies of the exchange clearinghouse only applied for the largest 100 stocks. For other stocks, clearing and settlement were done bilaterally, which introduced further inefficiencies and costs.
10. The use of futures-style trading for a fortnight (or more), coupled with badla, is fraught with counter party risk. Normally, collateral (margin) requirements are used to ensure capital adequacy, and reduce the fragility of the clearing system. Primitive notions of margins existed at the BSE on paper, but they were not enforced. A critical feature of the modern approach to clearing is ‘novation’ at a clearing corporation; the BSE has neither a clearing corporation nor novation. The BSE clearinghouse functioned on a best-efforts basis – if shares or funds appeared at one end, they would be delivered to the other; the clearinghouse itself took no interest in measuring and containing counter party risk. Small-scale problems of partial or delayed payments took place on every settlement, and major crises, which required closing down the exchange while a compromise was worked out, took place once every two to three years. A recent and prominent example was seen in April 1995 in the context of shares of the firm ‘M S Shoes’, where a default involving a total exposure of Rs 180 million, and losses of around one-fifth of this, led to a payments crisis on the BSE which halted the functioning of the exchange for three days.
11. The final leg of the trade was physical settlement, where share certificates were printed on paper. This was intrinsically vulnerable to theft, counterfeiting, inaccurate signature verification, administrative inefficiencies, and a variety of other malpractice. Involuntary and deliberate delays in settlement could take place both at the BSE and at the firm. Many firms used the power of delaying settlement as a tool to support manipulation of their own stock. The problems were somewhat simpler for investors in Bombay, who could physically visit the BSE broker, the BSE clearinghouse, or the company’s registrar, and accelerate transfer. For investors outside Bombay, who lacked this recourse and were crippled by the exorbitantly expensive telephone system, delays of six months between purchasing a stock and the transfer of legal title were common. If stock splits, rights issues, or dividend pay-outs took place during this period, it was common for the purchaser to not obtain the benefits.
These problems led to an extremely poorly functioning equity market. From late 1993 onwards, the Indian State embarked on a radical reforms programme which completely transformed market institutions. This programme consisted of creating four new securities market institutions: the Securities and Exchanges Board of India (SEBI), the National Stock Exchange (NSE), the National Securities Clearing Corporation (NSCC) and the National Securities Depository (NSDL).
3.3 SEBI
The Securities and Exchanges Board of India (SEBI) was formed in 1988. It has gradually adopted many important roles in the area of policy formulation, regulation, enforcement and market development. This is in contrast with conditions prior to SEBI, where exchanges underwent little scrutiny or enforcement.
Today, SEBI vets every element of market design in India’s securities markets; it attempts enforcement against problems such as market manipulation and payments crises, and performs oversight of market intermediaries. In late 1993, SEBI banned badla. This was a major milestone in two respects – this marked the commencement of a major role for SEBI, and it curtailed the market manipulation and systemic risk that accompanied badla. However, these reforms were reversed in 1995 and late 1997 through efforts by SEBI to resuscitate badla.