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1. Macroeconomic Developments and Securities Markets

Section-I: Macroeconomic Developments
Global Economic Environment
Following the slowdown witnessed in 2011, the global growth outlook has deteriorated further in 2012. According to the latest available IMF forecast (released in October 2012), the global output growth is expected to decline from 3.8 percent in 2011 to 3.3 percent in 2012 (Chart 1-1), mainly reflecting a sharp downward revision in growth projections in some of the euro area advanced economies (such as, Germany, France, Italy and Spain) and BRIC 1 economies. Furthermore, the outlook for income growth in 2012 for almost all countries across the globe has deteriorated in successive forecasts. For 2012, while the growth projection fell from 1.9 percent in the September 2011 forecast to 1.3 percent in the October 2012 forecast, the projection for emerging economies fell from 6.1 percent to 5.3 percent between these two forecasts. The only bright spot is that between these two forecasts for output growth in 2012, the projection for the US economy has improved from 1.8 percent to 2.2 percent. Chart 1-1: Global Growth Projections for 2012 by IMF

Source: WEO database, IMF

The reasons for the pessimism in growth outlook mainly relate to the continued sovereign debt overhang and the financial market uncertainties in the euro area. Euro area risks have affected business confidence and have also caused world trade to decelerate. Consequently, several emerging and developing economies (EDEs) face weaker external demand on top of an already slowing domestic demand. Further downside risks to global growth may stem from a possible fiscal cliff2 leading to sudden and sharp fiscal consolidation in the US, notwithstanding the open-ended quantitative easing (QE)3 announced by the Federal
An acronym for a group of four countries (Brazil, Russia, India and China) which are deemed to be at a comparable stage of economic development. 2 The fiscal cliff refers to a possible large reduction in the federal budget deficit in 2013 on account of expiry of both tax and expenditure cuts, becoming effective from January 2013. 3 QE is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy becomes ineffective. The Federal Reserve announced the QE 3 in September 2012 to buy US$ 40 billion worth of bonds every month.
1

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Reserve. The US Congressional Budget Office (CBO) forecasts that the US fiscal deficit will decline by 3.3 percentage points to 4 percent of GDP in 2013 due to the looming fiscal cliff. There are fears that such a sharp fiscal consolidation in the US, the largest economy of the world may have adverse impact on the global growth prospects. The developments in the euro area deserve some explanation. The euro area is basically finding it difficult to get out of the troubled situation, being caught in a deep structural and multifaceted crisis characterized by large fiscal deficit, enormous public debt and banking problems. Beginning with the peripheral euro area in 2009, the sovereign debt crisis has of late spread to engulf core euro area economies, such as France and Austria, which were downgraded in January 2012 from their AAA rating status. The sovereign debt crisis has also raised the probability of Greece exiting from the euro and has resulted in a spillover to a banking crisis in Spain and Portugal. The main problem is that as countries in a currency union, the individual affected economies do not have the liberty of using exchange rate and monetary policy as stabilization measures. The policy measures taken to alleviate the euro zone crisis have been mainly fourfold: (i) regional financial arrangements and euro-IMF joint provision of resources, (ii) exceptional liquidity facility provided by ECB, (iii) measures to recapitalize and strengthen prudential norms in the European banking system and (iv) structural measures to correct a distorted fiscal system.4 These policy measures, however, have not proved to be effective in debt crisis resolution. Concerns over fiscal sustainability and solvency of these economies still remain. For example, in June 2012, Spains economic condition worsened necessitating bail-out packages for its banks. These measures appear to be aimed at staving off the crisis rather than addressing its structural issues. The economic activities in Emerging and Developing Economies (EDEs) have been affected by the slowdown in advanced economies as well as some domestic constraints. The BRIC economies, for example, continued to slow. Chinas growth has decelerated for the seventh consecutive quarter to 7.6 percent (y-o-y) in Q3 of 2012. Russias growth weakened further to 4.1 percent in Q2 of 2012, decelerating continuously for three successive quarters. Brazils growth fell for the tenth successive quarter to 0.5 percent in Q2 of 2012. The growth rate of the Indian economy was 5.4 percent in the first-half of the year 2012-13 as compared to 7.3 percent in the corresponding period of the previous fiscal. With continuing risks to global growth and trade, near-term improvement in growth prospects for EDEs, including India, seems unlikely. How has the slowdown affected the global capital flows? After having surged to unprecedented levels in 2007 and first half of 2008, the net private capital flows 5 to emerging markets and developing countries slowed down from US$ 604.7 billion in 2010 to US$ 503 billion in 2011; it is projected to slump further to US$ 268.3 billion in 2012. (Table 1-1) Further, faltering growth in the developed economies hit exports from emerging and developing economies. As per IMF's World Economic Outlook (WEO) update of October 2012, World Trade Volume (goods & services) is projected to grow by 3.2 percent in 2012 as compared to 12.6 per cent in 2010 and 5.8 per cent in 2011. Partially reflecting a slowdown in the imports of advanced economies to 1.7 per cent (projected) in 2012 from 4.4 per cent in 2011, the projected growth for emerging and developing economies is 4.0 per cent for 2012 as compared to 6.5 per cent in 2011. (Table 1-1)

4 5

Reserve Bank of India Annual Report, 2012. Private capital flows cover direct investment, portfolio investment and other investment.

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Table 1-1: Global Economic Prospects (in terms of Capital Flows and International Trade) Item I Net Capital Flows to Emerging Market and Developing Countries (US$ billion) i Net Private Capital Flows (a+b+c) a) Net Private Direct Investment b) Net Private Portfolio Investment c) Net Other Private Capital Flows ii Net Official Flows II World Trade in Goods and Services @ (percent) i Trade Volume (exports and imports) ii Export Volume a) Advanced Economies b) Emerging Market & developing Countries 12.0 13.7 5.3 6.5 2.2 4.0 3.6 5.7 12.6 5.8 3.2 4.5 2010 2011 2012 P 2013 P

604.7 392.0 240.8 -28.1 62.8

503.0 462.4 129.7 -89.1 -108.3

268.2 393.8 133.0 -258.6 -51.8

399.7 409.0 150.9 -160.2 -89.2

Note: P - Projections, @ - Annual percentage change for world trade of goods and services. Source: Ministry of Finance, Govt. of India

Against this backdrop, most currencies experienced huge exchange rate volatility vis--vis the US dollar, which continues to function as the world's key reserve currency. Due to weakening foreign equity inflows and widening trade deficits, developing country currencies continued to depreciate in 2012, with major currencies such as the South African rand, Indian rupee, Brazilian real, Turkish lire and Mexican peso losing 15 percent or more against the US dollar in the one year up to August 2012. The sudden reversal in flows and weakening currencies prompted several countries to intervene by selling off foreign currency reserves in support of their currencies.

Macroeconomic Developments in India

While greater integration with the world economy and global financial markets have benefited India in several ways over the years, it has also made India become vulnerable to global shocks, as evidenced by the global financial crisis of 2008. More recently, the European debt crisis and global slowdown have been posing serious challenges to the Indian economy. After a recovery from the global financial crisis with two successive years (2009-10 and 2010-11) of robust growth of 8.4 percent, the GDP growth decelerated sharply to a nine-year low of 6.5 percent in 2011-12. The slowdown in the Indian economy began in Q2 of 2011-12, when the growth rate declined from a level of 8.0 percent in the first quarter to 6.7 percent. The slowdown continued in subsequent quarters and growth has been in the range of 5.3-5.5 percent in the last three quarters (from Q4 of 2011-12 to Q2 of 2012-13). The deceleration in the Indian economy in 2011-12 was on account of all round fall in demand consumption (both private and government), investment and external (net exports).6 The slowdown was also reflected in all the three sectors of the economy but industrial sector suffered the sharpest deceleration (Chart 1-2). While the slowdown in agriculture sector growth was on account of the strong base effect, the growth in the industrial sector declined mainly due to sharp moderation in manufacturing sector growth. The slowdown was on account of moderation in demand (both domestic and external), hardening of interest rates, slowdown in consumption expenditure (especially in interest-rate sensitive commodities), subdued business confidence and persistent global economic uncertainty. The moderation in the services sector growth was led by sharp deceleration in construction and trade, hotels, transport and communication. Despite the moderation, however, the predominance of the services sector remains a unique feature of the overall growth story and the process of structural change in India. 7
6 7

Reserve Bank of India Annual Report, 2012. Ibid.

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Chart 1-2: Sectoral Contribution and Growth to Indias GDP

Source: CSO

The sluggish growth of the economy has been accompanied by high inflation. The high inflation phase that started in Q4 of 2009-10 has persisted, although it has somewhat moderated in the recent months. Inflation remained high at over 9 percent in the first eight months of 2011-12, before softening moderately in December. It has since remained sticky in the range of 7.2-8.1 percent, a level much higher than RBIs comfort level of 5.5-6.0 percent. Food inflation rebounded sharply since beginning of the year: from negative zone to the double digit level in April 2012 and has since been hovering around the same level. The non-food manufactured products inflation moderated from a high of 8.4 percent in November 2011 to below 5 percent by March 2012. The reasons behind the high inflation in recent months are (a) higher international prices of crude, precious metals etc. (b) revision in MSP prices for some of the essential commodities and (c) revision in petroleum prices in September 2012, among others. The persistence of high inflation, even as growth is slowing, has emerged as a major challenge for monetary policy. On the fiscal sector, there was a considerable slippage from the central governments budgeted fiscal deficit (4.6 percent of GDP) in 2011-12 to the realized fiscal deficit (5.8 percent of GDP). The slippage was due to many factors, both domestic and external. The firming up of international crude oil prices and the resultant increase in fuel subsidies, the reduction in indirect taxes on petroleum products, shortfall in revenue due to more than anticipated slowdown in economic growth and lower than budgeted disinvestment receipts contributed to the fiscal slippage in 2011-12. With the central government already accounting for 65 percent of the budgeted fiscal deficit in the first-half of 2012-13 itself, there could be another considerable slippage in 2012-13 unless immediate remedial measures are undertaken. Against this backdrop, the government has announced some policy measures since the second week of September 2012 towards scal consolidation such as reducing fuel subsidies and clearing stake sales in select public enterprises. On the external front, the year 2011-12 was characterized by a burgeoning trade and current account deficit (CAD), subdued equity inflows, depletion of foreign exchange reserves, rising external debt and deteriorating international investment position. These indicators reflect the weakening external sector resilience of the Indian economy and thus, present a formidable challenge for policy makers. Indias trade deficit increased in absolute terms to US$ 189.8 billion (10.3 percent of GDP) in 2011-12 as compared to US$ 130.6 billion (7.8 percent of GDP) in 2010-11. Economic slowdown in advanced countries and its spill-over effects in EMEs coupled with rising crude oil and gold prices were responsible for the sharp increase in trade deficit. During April September 2012, exports recorded a sharper decline of 7.4 percent relative to the imports (4.3 percent). The current account deficit (CAD) increased both in absolute terms as well as a proportion of GDP in 2011-12, reflecting widening trade deficit on account of subdued external demand, relatively inelastic imports of petroleum, oil and lubricant (POL) and higher imports of gold & silver. The CAD in 2011-12 was US$ 78.2 billion (4.2 percent of GDP) as compared

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with US$ 45.9 billion (2.7 percent of GDP) in 2010-11. In April September 2012, the CAD has worsened further rising sharply to 4.6 percent as compared to 4.0 percent in the corresponding period of the previous fiscal. Although the CAD widened in 2011-12, India was fortunate to receive larger net capital flows. The net capital inflows were higher at US$ 67.8 billion in 2011-12 as compared to US$ 62.0 billion in 2010-11, mainly due to higher FDI inflows and NRI deposits. Though the capital inflows increased, they fell short of financing current account deficit, resulting in some reserve drawdown in 2011-12. The large twin deficits (CAD and fiscal deficit) pose significant risks to macroeconomic stability and growth sustainability. Financing the huge fiscal deficit from internal domestic savings would potentially crowd out private investment, thus lowering growth prospects. This, in turn, will deter capital inflows, making it more difficult to finance the increasing CAD which in a sense is a result of global slowdown. As India is structurally a current account deficit country, capital inflows play a very important role in financing the CAD and it is very important to have a very high and sustainable net capital inflows. Further, increase in external debt, contributed by a marked increase in commercial borrowings and short-term debt has led to a deterioration of the external sector vulnerability indicators during 2011-12. Key external sector vulnerability indicators, such as the reserve cover of imports, the ratio of short-term debt to total external debt, the ratio of foreign exchange reserves to total debt, and the debt service ratio deteriorated during the year (Table 1-2).
Table 1-2: Indias Key External Debt Indicators Year External Debt (US$ billion) External Debt Service Debt to GDP Ratio (percent) (percent) Foreign Exchange Reserves as percent of Total External Debt 109.0 115.6 138.0 112.1 106.8 99.6 85.1 80.7 Short-Term Debt as percent of Foreign Exchange Reserves 12.9 14.1 14.8 17.2 18.8 21.3 26.6 28.7 Short-Term Debt as percent of Total External Debt 14.0 16.3 20.4 19.3 20.0 21.2 22.6 23.1 Reserves Cover of Imports (in months)

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 (PR) 2012-13 (Apr-Sep) QE

139.1 172.4 224.4 224.5 260.9 305.9 345.8 365.3

16.8 17.5 18.0 20.3 18.3 17.8 20.0 21.4

10.1 4.7 4.8 4.4 5.8 4.3 6.0 -

11.6 12.5 14.4 9.8 11.1 9.6 7.1 7.6

Source: Ministry of Finance, Govt. of India

Against the backdrop, a number of policy measures have been undertaken to augment the capital flows into India. With deregulation of interest rates on rupee denominated non-resident Indian (NRI), greater NRI deposit flows have been facilitated: in 2011-12, NRI deposit flows witnessed a sharp rise at US$ 11.9 billion compared to an inflow of US$ 3.2 billion in the previous fiscal. In addition, remittances facilities for Indian expatriates have been streamlined. Such flows have huge beneficial impact for bridging the CAD. There has been enhancement in the investment limits for the FIIs in sovereign and corporate bonds. The limit on FII investment in G-Secs has been enhanced to US$ 20 billion from US$ 15 billion. Long term investors like Sovereign Wealth Funds (SWFs), multi-lateral agencies, endowment funds, insurance funds, pension funds and foreign central banks have now been permitted to invest in Government securities. Similarly, the limit on investment in corporate bonds has been enhanced to US$ 45 billion from US$ 40 billion and the holding period

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and residual maturity requirements for bonds in the infrastructure sector have been reduced. A new scheme allowing the Qualified Foreign Investors (QFIs) to invest up to US$ 1 billion in corporate bonds has been introduced. Further, a number of measures such as increasing the limit for availing of external commercial borrowing (ECB) under the automatic route, increasing the limit for refinancing the Rupee loans out of ECBs, new US$ 10 billion scheme of ECBs for export earners, etc. have been taken to rationalize the regulatory framework for ECBs.

Indias financial marketsparticularly securities markets--were also affected by the global slowdown as reflected in some of the following indicators. In the primary market, the resource mobilized through public and rights issues has fallen from about Rs 144 billion in the first half of 2011-12 to Rs 100 billion during the same period in 2012-13. The secondary market has been affected too. While the market-cap to GDP ratio has fallen marginally to 64.3 percent in September 2012 from 65.7 percent a year ago, the average daily market turnover during the first half of 2012-13 has fallen by 9 percent from the level prevailing in the corresponding period of 2011-12. Amidst these gloomy trends, there were some green shoots in the securities market. Net FII investment stood at US$ 8.4 billion in the first half of 2012-13 compared to US$ 2.1 billion in the corresponding period of the previous year. Volatility in the equity market has fallen as reflected in a decrease in the volatility of the benchmark index S&P CNX Nifty 50, from 1.4 percent in September 2011 to 0.9 in September 2012.

References: Government of India (2012), Mid-Year Economic Analysis 2012-13, Ministry of Finance, Department of Economic Affairs, December. IMF (2012), World Economic Outlook, October. IMF (2011), Global Financial Stability Report, October. RBI (2012), Annual Report, June. RBI (2012), Financial Stability Report, June. RBI (2012), Second Quarter Monetary Policy Review, October. World Bank (2012), India Economic Update, September.

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Section-II: Structure and Trends of the Indian Securities Markets in 2011-2012

In this section, the basic structure of the Indian securities market as it exists now, together with the broad trends in different segments of the market in 2011-12 have been outlined. The securities market has essentially three categories of participantsthe issuer of the securities, the investors in the securities, and the intermediaries. The issuers are the borrowers or deficit savers, who issue securities to raise funds. The investors, who are surplus savers, deploy their savings by subscribing to these securities. The intermediaries are the agents who match the needs of the users and the suppliers of funds for a commission. These intermediaries function to help both the issuers and the investors to achieve their respective goals. There are a large variety and number of intermediaries providing various services in the Indian securities market (Table 1-3). This process of mobilizing the resources is carried out under the supervision and overview of the regulators. The regulators develop fair market practices and regulate the conduct of the issuers of securities and the intermediaries. They are also in charge of protecting the interests of the investors. The regulator ensures a high service standard from the intermediaries, as well as the supply of quality securities and non-manipulated demand for them in the market.
Table 1-3: Market Participants in Securities Market Market Participants Securities Appellate Tribunal (SAT) Regulators* Depositories Stock Exchanges With Equities Trading With Debt Market Segment With Derivative Trading With Currency Derivatives 19 2 2 4 10,203 4,774 2,111 2,008 83,808 1,722 267 17 19 2 2 4 10,268 4,877 2,337 2,173 77,141 1,765 250 19 19 2 2 4 10,165 4,827 2,416 2,201 74,224 1,753 251 19 FY 2011 1 4 2 FY 2012 1 4 2 As on Sep 30, 2012 1 4 2

Brokers (Cash Segment) ** Corporate Brokers (Cash Segment) Brokers (Equity Derivatives) Brokers (Currency Derivatives) Sub-brokers FIIs Portfolio Managers Custodians

Contd.

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Contd.
Market Participants Registrars to an issue & Share Transfer Agents Merchant Bankers Bankers to an Issue Debenture Trustees Underwriters Venture Capital Funds Foreign Venture Capital Investors Mutual Funds Collective Investment Schemes KYC Registration Agency (KYC)

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FY 2011 73 192 55 29 3 184 153 51 1 --

FY 2012 74 200 57 31 3 212 176 49 1 --

As on Sep 30, 2012 75 202 57 31 3 211 182 49 1 4

* DCA, DEA, RBI & SEBI. **Including brokers on Mangalore SE (58), HSE (303), Magadh SE (197), SKSE (399). Source: SEBI

Market Segments
The securities market has two interdependent and inseparable segments, namely, the new issues (primary) market and the stock (secondary) market. The primary market provides the channel for the creation and sale of new securities, while the secondary market deals in the securities that were issued previously. The securities issued in the primary market are issued by public limited companies or by government agencies. The resources in this kind of market are mobilized either through a public issue or through a private placement route. If anybody can subscribe for the issue, it is a public issue; if the issue is made available only to a select group of people, it is known as private placement. There are two major types of issuers of securitiescorporate entities, who issue mainly debt and equity instruments, and the government (central as well as state), which issues debt securities (dated securities and treasury bills). The secondary market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risks and returns. Once new securities are issued in the primary market, they are traded in the stock (secondary) market. The secondary market operates through two mediums, namely, the over-the-counter (OTC) market and the exchange-traded market. The OTC markets are informal markets where trades are negotiated. Most of the trades in government securities take place in the OTC market. All the spot trades where securities are traded for immediate delivery and payment occur in the OTC market. The other option is to trade using the infrastructure provided by the stock exchanges. The exchanges in India follow a systematic settlement period. All the trades taking place over a trading cycle (day = T) are settled together after a certain time (T + 2 day). The trades executed on exchanges are cleared and settled by a clearing corporation. The clearing corporation acts as a counterparty and guarantees settlement. A variant of the secondary market is the forward market, where securities are traded for future delivery and payment. A variant of the forward market is the Futures and Options market. Presently, only two exchanges in Indiathe National Stock Exchange of India Ltd. (NSE) and the Bombay Stock Exchange (BSE)provide trading in Futures and Options.

International Scenario
Global integrationthe widening and intensifying of linksbetween high-income and developing countries has accelerated over the years. Over the past few years, the financial markets have become increasingly global. The Indian market has gained from foreign inflows through the investment of Foreign Institutional Investors (FIIs). Following the implementation of reforms in the securities industry in the past few years, Indian stock markets have stood out in the world ranking. As per Standard and Poors Fact Book 2012, India ranked 11th in terms of market capitalization, 17th in

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terms of total value traded in stock exchanges, and 30th in terms of turnover ratio, as of December 2011. The turnover of all the markets taken together has increased from US $ 65 trillion in 2010 to US $ 66.4 trillion in 2011. Significantly, the US alone accounted for about 46.3 percent of the worldwide turnover in 2011. Despite having a large number of companies listed on its exchanges, India accounted for a meager 1.1 percent of the total world turnover in 2011. As can be observed from Table 1-4, the market capitalization of all the listed companies taken together across all the markets stood at US $ 45.08 trillion in 2011 (US $ 54.51 trillion in 2010). The share of the US in worldwide market capitalization increased from 31.4 percent at the end of 2010 to 34.7 percent at the end of 2011, while the Indian listed companies accounted for 2.3 percent of the total market capitalization at the end of 2011. The stock market capitalization for some developed and emerging countries is shown in Chart 1-3.
Table 1-4: International Comparison of Global Stock Markets International Comparison Markets Developed Market Australia France Germany Japan Korea Singapore UK USA Emerging Markets China India Russia Brazil Indonesia Malaysia Mexico World Total USA as percent of World India as percent of World Market Capitalisation (US $ mn) 2009 33,531,413 1,258,456 1,972,040 1,297,568 3,377,892 836,462 310,766 2,796,444 15,077,286 13,848,456 5,007,646 1,179,235 861,424 1,167,335 178,191 255,952 340,565 47,379,869 31.8 2.5 2010 39,309,690 1,454,547 1,926,488 1,429,707 4,099,591 1,089,217 370,091 3,107,038 17,138,978 15,201,722 4,762,837 1,615,860 1,004,525 1,545,566 360,388 410,534 454,345 54,511,412 31.4 3.0 2011 33,169,049 1,198,164 1,568,730 1,184,459 3,540,685 994,302 308,320 1,202,031 15,640,707 11,913,772 3,389,098 1,015,370 796,376 1,228,969 390,107 395,083 408,691 45,082,821 34.7 2.3 100.46 90.01 69.99 74.26 32.98 133.59 38.93 ---95.55 123.33 81.62 98.32 66.70 214.27 51.93 ---68.42 63.81 46.37 47.13 21.04 91.85 29.48 ---136.07 74.43 38.77 66.66 100.47 170.53 128.60 105.76 157.28 72.71 42.72 80.90 130.83 203.09 142.88 120.22 87.34 56.57 33.17 60.35 89.08 128.63 49.43 103.62 Market Capitalisation Ratio (in percent) 2009 2010 2011 No. of listed Companies 2009 24,635 1,882 941 601 3,208 1,778 459 2,179 4,401 24,073 1,700 4,955 279 377 398 960 125 48,732 9.03 10.17 2010 27,024 1,913 901 571 3,553 1,781 461 2,056 4,279 21,675 2,063 4,987 345 373 420 957 130 48,782 8.77 10.22 2011 27,497 1,922 893 670 3,961 1,792 462 2,001 4,171 22,056 2,342 5,112 327 366 440 941 128 49,553 8.42 10.32

Note: Listed companies in India pertain to BSE. Market Capitalisation ratio is computed as a percentage of GDP. Korea has been classified as developed markets from 2010 onwards. Source:S&P Global Stock Market Factbook, 2012 and World Development Indicators, World Bank

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Chart 1-3: Stock Market Capitalization (as percentage of GDP)

Source:S&P Global Stock Market Factbook, 2012 and World Development Indicators, World Bank

According to the World Development Indicators 2012, World Bank, there has been an increase in the market capitalization as a percentage of Gross Domestic Product (GDP) in the high income countries, while it has remained at the same levels for middle income and low & middle income countries, as is evident from Table 1-5. The market capitalization as a percentage of GDP was 95.9 percent for the high-income countries at the end of 2010 while for middle income countries it was 72.6 percent and for low and middle income countries it was 72.1 percent. The market capitalization as a percentage of GDP in India increased from 85.6 percent at the end of 2009 to 93.6 percent in 2010. The turnover ratio, which is a measure of liquidity, was 143 percent for the high-income countries and 102.8 percent for the low and middle-income countries in 2011. The total number of listed companies stood at 30,214 for the high-income countries, 18,737 for the middle-income countries, and 19,339 for the low and middle-income countries at the end of 2011.
Table 1-5 : Select Stock Market Indicators Markets Market Capitalisation as percent of GDP 2008 High Income Middle Income Low & Middle Income East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & N. Africa South Asia Sub-Saharan Africa India World 62.9 49.5 48.9 58 44.4 31.9 55.9 47 148.5 55.7 59.2 2009 89.9 73.2 72.6 91.0 50.8 52.9 38.0 73.3 154.1 85.6 85.2 2010 95.9 72.6 72.1 79.9 51.8 57.6 34.6 81.9 149.5 93.6 88.7 Turnover Ratio (percent) 2009 187.1 213.8 213.8 229.5 68.0 46.1 28.7 88.9 76.5 116.3 -2010 128.5 101.1 100.8 146.0 91.2 46.1 27.7 73.5 37.1 75.6 122.0 2011 143.0 103.0 102.8 154.3 121.1 46.4 19.4 55.4 37.2 56.3 133.4 Listed Domestic Companies 2009 31,198 9,819 16,120 3962 3610 1417 717 6123 820 4,946 -2010 29,574 16,778 17,497 4,758 2,963 1,457 1,007 6,364 948 4,987 47,071 2011 30,214 18,737 19,339 5,181 4,368 1,446 1,012 6,400 932 5,112 49,553

* Aggregates not preserved as data for high-income economies are not available for 2008. Source: World Development Indicators 2012, World Bank

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Household Investments in India

According to the RBI data, investments in fixed income instruments accounted for 89.2 percent of the household financial savings during 20112012, which has increased in comparison to 85.9 percent in 2010-2011. In the fiscal year 2011-2012, the household sector invested 52.8 percent of financial savings in deposits, 38.7 percent in insurance/provident funds, -2.3 percent in small savings, and -0.8 percent in the securities market including government securities, units of mutual funds, and other securities (Table 1-6). To sum up, fixed-income-bearing instruments were the preferred assets of the household sector.
Table 1-6: Savings of Household Sector in Financial Assets Financial Assets Currency Fixed income investments Deposits Insurance/Provident & Pension Funds Small Savings Mutual Funds Government Securities Other Securities 2009-10 R 9.8 85.5 41.9 39.3 4.3 4.2 3.3 0.0 0.9 100 2010-11 R 13.8 85.9 45.6 36.3 4.0 -0.3 -1.2 0.0 0.9 100 2011-12 P 11.3 89.2 52.8 38.7 -2.3 -0.8 -1.1 0.0 0.3 100

Securities Market

Total

R: Revised P: Preliminary Estimates Note: Here other securities include shares and debentures of private corporate business, banking and bonds of PSUs. Mutual funds include units of UTI. Source: RBI Annual Report 2011-12

Primary Market
An aggregate of ` 9,926 billion was raised by the government and the corporate sector in 20112012, compared to ` 8,690 billion in 2010-11 (an increase of 14.2 percent). Private placement accounted for 93.3 percent of the domestic total resource mobilization by the corporate sector. Resource mobilization through Euro Issues dropped significantly by 71.3 percent to ` 27 billion in 20112012. (More details are provided in Chapter 2).

Secondary Market
The exchanges in the country offer screen-based trading system. There were 10,268 trading members registered with SEBI at the end of March 2012 (Table 1-7). The market capitalization has grown over the period, indicating that more companies are using the trading platform of the stock exchange. The market capitalization across India was around ` 62,191 billion (US $ 1,215 billion) at the end of March 2012. Market capitalization ratio is defined as the market capitalization of stocks divided by the GDP. It is used as a measure that denotes the importance of equity markets relative to the GDP. It is of economic significance since the market is positively correlated with the ability to mobilize capital and diversify risk. The all-India market capitalization ratio decreased to 70.2 percent in 20112012 from 89.2 percent in 2010-11.

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Table 1-7: Select Indicators in the Secondary Market

Capital Market Segment of Stock Exchanges Sensex Market Cap- Market Market italisation Capitalisa- Capi(` mn) tion talisation (US $ mn) Ratio (percent) 7,688,630 7,492,480 6,319,212 303,940 388,212 677,469 814,134 109.3 55.4 95.6 89.2 70.2 70.4# 15,336,110 280,881 34,843,820 681,122 56.03 23.37 46,850,341 1,049,280 68.46 55,168,330 1,222,161 89.41 38,520,970 756,054 124.54 2,911,124 4,217,022 4,035,492 4,643,860 2,708,887 51,308,160 1,283,667 99.63 2,604,088 86.0 29,014,715 665,628 81.76 2,053,237 3,982,988 5,003,047 6,645,488 9,018,385 7,083,067 7,802,466 5,398,753 85.6 23,901,030 535,777 79.09 4,508,016 7,080,147 54.4 16,668,960 381,005 98.14 8,493,250 12,608,667 194,131 101,054 47,103 65,151 57,137 93,421 90,381 90,778 49,613 52.3 16,209,326 373,573 122.91 12,741,190 17,013,632 293,643 133,036 28.49 9,689,098 203,981 153.33 10,305,497 13,923,834 216,958 293,133 392,110 288,198 158,712 91,374 153,534 36.36 8,958,180 183,569 119.56 9,269,955 12,119,658 189,958 248,354 164,851 54.50 28,809,900 617,708 374.71 4,124,958 5,721,456 88,442 122,673 40,180 1,038,480 4,423,333 21,422,690 25,641,269 Turnover (` mn) Turnover Turnover On WDM (US $ mn) Ratio Segment of (percent) NSE (` mn) On SGL (`mn) On WDM On SGL Segment (US $ mn) of NSE (US $ mn) Turnover (` mn) Turnover (US $ mn) Non-Repo Government Sec Turnover Derivatives

I S MR

At the End of Financial No. of Nifty 50 Year Brokers

2000-01 3,469.4 3,048.7 5,590.6 13,187,953 6,492.8 16,984,280

9,782 1148.20

3,604.4

861 21,280 93,123 493,724 586,086

2001-02

9,687 1129.55

2002-03

9,519

978.2

2003-04

9,368

1771.9

2004-05

9,128

2035.7

2005-06

9,335

3402.6 11,280.0 30,221,900

48,242,590 1,081,430 74,152,780 1,701,142 125,170 133,327,869 3,335,698 130,432 110,227,501 2,302,643 199,787 176,638,990 3,921,825 158,635 321,582,080 7,202,286 152,521 345,720,145 6,758,088 98,878 189,293,800 3,466,919

2006-07

9,443

3821.6 13,072.1 35,488,081

2007-08 9,708.5 30,929,738 607,061

9,487

4734.5 15,644.4 51,497,010 1,288,392

2008-09

9,628

3021.0

2009-10

9,772

5249.1 17,527.8 61,704,205 1,366,952

2010-11

10,203

5833.8 19,445.2 68,430,493 1,532,598

2011-12

10,268

5295.6 17,404.2 62,191,859 1,215,718

Apr-Sep'12

10,165

5703.3 18,762.7 65,636,224 1,202,129

Note: # NSE staff estimates. For April-Sep 2012, turnover for capital market segment of stock exchanges includes only NSE and BSE. Source: SEBI, CMIE Prowess and NSE

Macroeconomic Developments and Securities Markets

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The trading volumes on the stock exchanges had picked up from 20022003 onwards. It stood at ` 9,689 billion (US $ 203 billion) in 20022003, and witnessed a year-on-year increase of 67.3 percent in 20032004, standing at ` 16,209 billion (US $ 374 billion). The upsurge continued for the next few years, and in 20062007, the turnover showed an increase of 21.4 percent, reaching ` 29,014 billion (US $ 665 billion) from ` 23,901 billion (US $ 535 billion) in 20052006. Significant increase of 76.8 percent was witnessed in trading volumes in 2007-2008 followed by a fall of 24.9 percent in 2008-2009. Trading volume, again peaked at ` 55,168 billion (US $ 1,222 billion) in 20092010. Since last two years, the turnover in all India cash market has plunged continuously. In 2010-2011, the cash market witnessed a fall of 15.1 percent to ` 46,824 billion (US $ 1,048 billion) in 20102011, while in 2011-2012, it dropped by 25.6 percent to ` 34,843 billion.

Government Securities
The aggregate trading volumes in central and state government dated securities on SGL increased from ` 4,035 billion in 20102011 to ` 4,643 billion in 20112012.

Derivatives Market
The equity derivative market turnover on the Indian exchanges increased by 7.5 percent to ` 345,720 billion in 201112 from 321,582 billion in 2010-2011. NSE has created a niche for itself in terms of derivatives trading in various instruments (this is discussed in detail with statistics in Chapter 6). The currency derivatives trading in India started in August 2008 at NSE with currency futures on the underlying USD-INR exchange rate followed by futures trading in currency pairs such as GBP-INR, EURO-INR and JPY-INR. Later in October 2010, currency options trading was allowed on USD-INR. The currency derivatives trading in India increased by 17.7 percent to ` 98,964 billion.

Regulators
The absence of conditions for perfect competition in the securities market makes the role of the regulator extremely important. The regulator ensures that the market participants behave in a certain manner so that the securities markets continue to be a major source of finance for the corporate sector and the government while protecting the interests of investors. In India, the responsibility for regulating the securities market is shared by the Department of Economic Affairs (DEA), the Ministry of Company Affairs (MCA), the Reserve Bank of India (RBI), and SEBI. The orders of SEBI under the securities laws are appealable before a Securities Appellate Tribunal (SAT). Most of the powers under the Securities Contracts (Regulation) Act, 1956 (SCRA) can be exercised by the DEA while a few others can be exercised by SEBI. The powers of the DEA under the SCRA are also concurrently exercised by SEBI. The powers in respect of the contracts for sale and purchase of securities, gold-related securities, money market securities and securities derived from these securities, and ready forward contracts in debt securities are exercised concurrently by the RBI. The SEBI Act and the Depositories Act are mostly administered by SEBI. The rules under the securities laws are framed by the government and the regulations by SEBI. All these rules are administered by SEBI. The powers under the Companies Act relating to the issue and transfer of securities and the non-payment of dividend are administered by SEBI in the case of listed public companies and public companies proposing to get their securities listed. The SROs ensure compliance with their own rules as well as with the rules relevant to them under the securities laws.

Regulatory Framework
At present, the five main Acts governing the securities markets are (a) the SEBI Act, 1992; (b) the Companies Act, 1956, which sets the code of conduct for the corporate sector in relation to issuance, allotment, and transfer of securities, and disclosures to be made in public issues; (c) the Securities Contracts (Regulation) Act, 1956, which provides for the regulation of transactions in securities through control over stock exchanges; (d) the Depositories Act, 1996 which provides for electronic maintenance and transfer of ownership of demat (dematerialized) shares; and (e) the Prevention of Money Laundering Act, 2002.

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The SEBI Act, 1992: The SEBI Act, 1992 was enacted to empower SEBI with statutory powers for (a) protecting the interests of investors in securities, (b) promoting the development of the securities market, and (c) regulating the securities market. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with the securities market. It can conduct enquiries, audits, and inspection of all concerned, and adjudicate offences under the Act. It has the powers to register and regulate all market intermediaries, as well as to penalize them in case of violations of the provisions of the Act, Rules, and Regulations made thereunder. SEBI has full autonomy and the authority to regulate and develop an orderly securities market. Securities Contracts (Regulation) Act, 1956: This Act provides for the direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges, and aims to prevent undesirable transactions in securities. It gives the Central Government regulatory jurisdiction over (a) stock exchanges through a process of recognition and continued supervision, (b) contracts in securities, and (c) the listing of securities on the stock exchanges. As a condition of recognition, a stock exchange complies with the conditions prescribed by the Central Government. Organized trading activity in securities takes place on a specified recognized stock exchange. The stock exchanges determine their own listing regulations, which have to conform to the minimum listing criteria set out in the Rules. Depositories Act, 1996: The Depositories Act, 1996 provides for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy, and security by (a) making securities of public limited companies freely transferable, subject to certain exceptions; (b) dematerializing the securities in the depository mode; and (c) providing for the maintenance of ownership records in a book entry form. In order to streamline the settlement process, the Act envisages the transfer of ownership of securities electronically by book entry, without making the securities move from person to person. The Act has made the securities of all public limited companies freely transferable, restricting the companys right to use discretion in effecting the transfer of securities, and the transfer deed and other procedural requirements under the Companies Act have been dispensed with. Companies Act, 1956: It deals with the issue, allotment, and transfer of securities, as well as various aspects relating to company management. It provides the standard of disclosure in public issues of capital, particularly in the fields of company management and projects, information about other listed companies under the same management, and the managements perception of risk factors. It also regulates underwriting, the use of premium and discounts on issues, rights, and bonus issues, the payment of interest and dividends, the supply of annual reports, and other information. Prevention of Money Laundering Act, 2002: The primary objective of this Act is to prevent money laundering, and to allow the confiscation of property derived from or involved in money laundering. According to the definition of money laundering, anyone who acquires, owns, possess, or transfers any proceeds of crime, or knowingly enters into any transaction that is related to the proceeds of crime either directly or indirectly, or conceals or aids in the concealment of the proceeds or gains of crime within India or outside India commits the offence of money laundering. Besides prescribing the punishment for this offence, the Act provides other measures for the prevention of money laundering. The Act also casts an obligation on the intermediaries, the banking companies, etc. to furnish information of such prescribed transactions to the Financial Intelligence Unit-India, to appoint a principal officer, to maintain certain records, etc.

Rules and Regulations

The Government has framed rules under the SCRA, the SEBI Act, and the Depositories Act. SEBI has framed regulations under the SEBI Act and the Depositories Act for the registration and regulation of all market intermediaries, and for the prevention of unfair trade practices, insider trading, etc. Under these Acts, the Government and SEBI issue notifications, guidelines, and circulars that the market participants need to comply with. The SROs, like the stock exchanges, have also laid down their own rules and regulations.

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Role of NSE in the Indian Securities Market

The National Stock Exchange of India (NSE) was recognized as a stock exchange in April 1993. NSE was set up with the objectives of (a) establishing a nationwide trading facility for all types of securities; (b) ensuring equal access to all investors across the country through an appropriate communication network; (c) providing a fair, efficient, and transparent securities market using an electronic trading system, (d) enabling shorter settlement cycles and book entry settlements; and (e) meeting the international benchmarks and standards. Within a short span of time, these objectives have been realized, and the Exchange has played a leading role in transforming the Indian Capital Market to its present form. NSE has set up an infrastructure that serves as a role model for the securities industry in terms of trading systems, and clearing and settlement practices and procedures. The standards set by NSE in terms of market practices, products, technology, and service standards have become industry benchmarks, and are being replicated by other market participants. It provides a screen-based automated trading system with a high degree of transparency and equal access to investors irrespective of geographical location. The high level of information dissemination through its online system has helped in integrating retail investors on a national basis. NSE has been playing the role of a catalytic agent in reforming the market in terms of microstructure and market practices. Right from its inception, the Exchange has adopted the purest form of a demutualized setup, whereby the ownership, management, and trading rights are in the hands of three different sets of people. This has completely eliminated any conflicts of interest and has helped NSE to aggressively pursue policies and practices within a public interest framework. It has helped in shifting the trading platform from the trading hall in the premises of the exchange to the computer terminals at the premises of the trading members located across the country, and subsequently, to the personal computers in the homes of investors. Settlement risks have been eliminated with NSEs innovative endeavors in the area of clearing and settlement, namely, the reduction of the settlement cycle, professionalization of the trading members, a fine-tuned risk management system, the dematerialization and electronic transfer of securities, and the establishment of a clearing corporation. Consequently, the market today uses state-of-the-art technology to provide an efficient and transparent trading, clearing, and settlement mechanism. NSE provides a trading platform for of all types of securitiesequity, debt, and derivatives. Following its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, it commenced operations in the Wholesale Debt Market (WDM) segment in June 1994, in the Capital Market (CM) segment in November 1994, and in the Equity Derivatives segment in June 2000. The Exchange started providing trading in retail debt of government securities in January 2003, and trading in currency futures in August 2008. NSE started providing trading in currency option in October 2010. Derivatives on global indices such as S&P 500, Dow Jones Industrial Average and FTSE 100 have been introduced for trading on the NSE. The future contracts for trading on Dow Jones Industrial Average (DJIA) and futures and options contracts on S&P 500 were introduced on August 29, 2011. The futures and options contracts on FTSE 100 were introduced on May 3, 2012. The WDM segment provides the trading platform for the trading of a wide range of debt securities. Its product, the FIMMDA NSE MIBID/MIBORwhich is now disseminated jointly with the FIMMDAis used as a benchmark rate for the majority of the deals struck for Interest Rate Swaps, Forwards Rate Agreements, Floating Rate Debentures, and Term Deposits in the country. Its Zero Coupon Yield Curve as well as the NSE-VaR for Fixed Income Securities have also become very popular for the valuation of sovereign securities across all maturities irrespective of liquidity, and have facilitated the pricing of corporate papers and the GOI Bond Index. NSEs Capital Market segment offers a fully automated screen-based trading system, known as the National Exchange for Automated Trading (NEAT) system, which operates on a strict price/time priority. It enables members from across the country to trade simultaneously with enormous ease and efficiency. NSEs Equity Derivatives segment provides the trading of a wide range of derivatives such as Index Futures, Index Options, Stock Options, Stock Futures, and futures on global indices such as S&P 500 and DJIA and S&P 500.

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NSEs Currency Derivatives segment provides the trading of currency futures contracts on the USD-INR, which commenced on August 29, 2008. In February 2010, trading in additional pairs such as the GBP-INR, the EUR-INR, and the JPY-INR was allowed, while USD-INR currency options were allowed for trading on October 29, 2010. The interest rate futures trade on the currency derivatives segment of the NSE, and they were allowed for trading on August 31, 2009. Once again, the NSE registered as the market leader, with 80.9 percent of total turnover (volumes in cash market, equity derivatives, and currency derivatives) in 20112012. NSE proved itself the market leader, contributing a share of 80.7 percent in equity trading and nearly 90.7 percent share in the equity derivatives segment in 20112012 (Table 1-8).
Table 1-8: Market Segments on NSE for 2011-12 (Select Indicators) Segments Market Capitalisation as of March 2012 ` mn CM Equity F&O Currency F&O Total Source: NSE 60,965,176 60,965,176 1,191,739 US $ mn 1,191,739 Trading Value for 2011-12 ` mn 28,108,932 313,497,318 46,749,899 388,356,149 US$ mn 549,469 6,128,201 1,047,030 7,724,701 80.7 90.7 47.2 81.0 Market Share (in percent)

Technology and Application Systems in NSE

Technology has been the backbone of the NSE. Providing the services to the investor community and the market participants using technology at the cheapest possible cost has been its main thrust. NSE chose to harness technology to create a new market design. The exchange believes that technology provides the necessary impetus for an organization to retain its competitive edge and to ensure timeliness and satisfaction in customer service. In recognition of the fact that technology will continue to redefine the shape of the securities industry, NSE stresses on innovation and sustained investment in technology to remain ahead of competition. The NSE is the first exchange in the world to use satellite communication technology for trading. It uses satellite communication technology to energize participation from about 1,800+ VSATs from nearly 159 cities spread across the country. NSEs trading system, called the National Exchange for Automated Trading (NEAT), is a state-of-the-art client-serverbased application. At the server end, all trading information is stored in an in-memory database to achieve minimum response time and maximum system availability for users. It has an uptime record of 99.999 percent. For all trades entered into the NEAT system, there is a uniform response time in the range of milliseconds. NSE has been continuously undertaking capacity enhancement measures in order to effectively meet the requirements of the increasing number of users and the associated trading loads. NSEs Internet Based Information System (NIBIS) has also been put in place for online real-time dissemination of trading information over the Internet. As part of its business continuity plan, the NSE has established a disaster back-up site at along with its entire infrastructure, including the satellite earth station and a high-speed optical fiber link with its main site at Mumbai. This site is a replica of the production environment at Mumbai. The transaction data is backed up on near-real-time basis from the main site to the disaster back-up site through the 4 STM-4 (2.4 GB) high-speed links to keep both the sites synchronized with each other all the time.

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