Growth and Sustainability of Indian Capital markets
a myth or realty


Sridhar Kotyada
Ramesh Inkula
II Year MBA Students
Gayatri Vidya Parishad College for Degree and PG Courses
Rushikonda, Visakhapatnam-530 045

As every country today is aiming at reaching the status of developed country, the most important input they require is the investment. Where do they get their investments? Capital Market is the place where the economy can pool up funds required for their investment needs. In the modern scenario of globalization Capital Market plays a vital role in any economy. The strong presence of Capital Market resembles the strength of the economy.

We can define Capital market as a place where longer maturity financial assets are traded.


The term "emerging market" refers to the securities markets of a developing country and the use that country makes of international capital markets.


Coming to Indian context, the term capital market refers to only stock markets as per the common man's ideology, but the capital markets have a much broader sense. Where as in global scenario, it consists of various markets such as:

1. Government securities market
2. Municipal bond market
3. Corporate debt market
4. Stock market
5. Depository receipts market
6. Mortagate and asset-backed securities market
7. Financial derivates market
8. Foreign exchange market


In India, many of the above markets are not developed to the required extent, and some does not even exist.

A capital market can provide huge impetus to the development of any economy .so, it can be said that the growth and sustainability of capital markets plays an important role towards the development of the economy.

It is being observed that huge fluctuations are happening in Indian capital market in recent past, but with the help of proper mechanism, which is being observed in India and after examining various risk factors involved in capital markets, we attempt to say that the growth which has been observed in Indian capital market in recent past is a realty, but not a myth.

In India the capital market consists of

1. Stock market
2. Bonds, convertible debentures and debt market
3. New issue market and merchant banking

There are no special markets for the trading of municipal bonds, asset backed securities, foreign exchange market and depository receipts market.

Right from the independence, thanks to steps initiated by the Indian government especially after the post liberalization era. A huge growth has been observed in the aspects of quality and quantity. Huge increase has been observed in the volumes of trade.


As we know that capital markets play a vital role in Indian economy, the growth of capital markets will be helpful in raising the per-capita income of the individuals, decrease the levels of un-employment, and thus reducing the number of people who lie below the poverty line. With the increasing awareness in the people they start investing in capital markets with long-term orientations, which would provide capital inflows to the sectors requiring financial assistance.

Any individual investor considers the following factors of risk while investing in the capital markets: -

1. VOLATILITY RISK AND RISK OF CONTAGIONS: High volatality is the characteristic of any capital market, especially in emerging markets. They are immature and sometimes vulnerable to scandal. They often lack legal and judicial infrastructure to enforce the law. Accounting disclosure, trading and settlement practices may at times seem overly arbitrary and na´ve. Against this backdrop, many emerging markets have had to cope with unprecedented inflows and outflows of capital. The sudden withdrawal of highly speculative, short-term capital has the potential of taking with it much of a market's price support. Such sudden flights of capital triggered by events in one emerging market can spread instantly to other markets through contagion effects even when those markets have quite different conditions.

2. LIQUIDITY RISK: Many emerging markets are small and illiquid. Volumes of trade are quite low. This kind of thin trading often leads to higher costs because large transactions have a significant impact on the market. Thus, buyers of large blocks of shares may have to pay more to complete the transaction, and sellers may receive a lower price.

3. CLEARANCE AND SETTLEMENT RISK: Inadequate settlement procedures still exist in many of the emerging markets. They lead to high FAIL rates. A Fail occurs when a trade fails to settle on the settlement date.

4. POLITICAL RISK: In most of the developing countries the political systems are less stable comparative to the developed countries. This scenario does not give the political system to concentrate more on the capital market happenings and restrict any kind of malfunctions or practices.

5. CURRENCY RISK: The trade in capital markets will be highly impacted by the fluctuations in the foreign exchange rates. The currencies of the emerging countries are not stable enough to compete with those of the developed countries. This leads towards unexpected losses for the investors in the markets.

6. LIMITED DISCLOSURE AND INSUFFICIENT LEGAL INFRASTRUCTURE: As it is already mentioned earlier that disclosure levels will not be up to the required extent in emerging markets, the investors will not have a bright picture of the company in which they are investing, and this may lead towards losses. 

Coming to the Indian context, we can say that a proper mechanism has been devised to face and sustain with all the above risks, after facing each of them in a practical way. Thus the growth, which has been seen in India capital market, can be said as a "sustainable growth"


1. As Financial institutional investors plays a vital role in the capital market funds and it is a fact that no FII'S is long term oriented and really have a concurrent opinion of investing in the core sectors of the economy and their ultimate motto is to gain more profits in short term, this makes the FII'S to with draw their funds all of sudden when there is a chance of comparatively more profits in other capital markets. Quite a number of occasions it has created a situation of panic in Indian capital markets, but with the timely involvement of Government, RBI and SEBI (which are the directive bodies to capital markets in India), the capital markets have come up from the disastrous situations.

Foreign Institutional Investors' (FIIs) net investment in the Indian stock markets in calendar year 2005 crossed US$ 10 billion in the 2005 calendar, the highest ever by the foreign funds in a single year after FIIs were allowed to make portfolio investments in the country's stock markets in the early 90s.

India's popularity among investors can be gauged from the fact that the number of FIIs registered with SEBI has increased from none in 1992-93 to 528 in 2000-01 to 803 in 2005-06. In 2005 alone, 145 new FIIs registered themselves, taking the total registered FIIs to 803 (as on October 31, 2005) from 685 in 2004-05.

A number of these investors are Japanese and European funds aiming to cash in on the rising equity markets in India. In addition, there was increased registration by non-traditional countries like Denmark, Italy, Belgium, Canada and Sweden.

India has the third largest investor base in the world. India has one of the world's lowest transaction costs based on screen based transactions, paperless trading and a T+2 settlements cycle.

India has the distinction of consistent returns from the equities. Indian equities are highest across emerging Asia for the fiscal year (April 2005-March 2006). The returns from Indian equity markets have been far ahead of other emerging markets such as Mexico (52%), Brazil (43%) or gulf co-operation council (GCC) economies such as Kuwait (26%). Indian equities have delivered the highest returns in the world.

2. The Price Earning Ratios of the companies were always in a positive direction and rapid increase has been observed over a period of time.

3. The levels of inflation were staying at a comfortable level

4. The incorporation of SEBI (1992) various practices have been devised and the companies are being asked to comply with strict, stringent measures of corporate governance and the levels of disclosure are raised to a huge extent.

a. Previously there was no compulsion for QIB's to deposit any amount at the time of subscribing for an IPO. But with a recent amendment of SEBI, now it is must to deposit 10% of the total subscription quoted in advance, which leads to reduce the level of defaults of QIBs in IPOs.

b. With effect from 1st April 2003, the activity settlement cycle scheduled in the stock markets has been shortened to T+2 days.

c. In addition to provide quarterly, half yearly, annual results the companies are now bound to get revised their accounts half yearly by auditors or CAs. SEBI has made   required changes to the listing agreement to bring this directive into affect.

d. Not only getting their accounts revised, the promoters of the companies should also disclose details of their holding on a continuous basis to investors through a website for which SEBI has considered creating an EDGAR DATABASE for the Indian market and is going into disclosure of capital market related data on its website.


When there was a boom seen in the Indian capital market, number of companies have collected funds from the investors through capital markets and vanished in no time. In order to protect the small investor from this kind of vanishing companies SEBI has drafted a bill clarifying the role of the "Department of Company Affairs" and acquiring the power to debar the directors and trace and attach the assets of those companies.

NET BROKING: -With affect from March 2000 SEBI framed guidelines to start Internet broking on Indian securities, which could increase the transparency in the operations, and reduce flaws and loopholes in the transactions of Indian capital markets.


The government of India has notified the establishment of investor protection fund in October 2001 under sec 205c of the Companies Act, according to which a fund will be created with amounts such as amounts in unpaid dividend accounts of companies etc, which have remained, unclaimed and unpaid for 7 years from the date they became due for payment. The creation of this fund shows that the Indian capital markets have reached to a sustainable level ensuring the investors to get back their investments in case of any default of the companies.


Number of government norms and legislations had been imposed for keeping the market free from trickery and deception. In spite of these norms and regulations Indian capital markets could not be perfectly sterilized from scams, even then their performance is quite noticeable and the market has really boosted up.

Various measures have been taken up and policies have been framed from time to time to contain these scams and to reoccur in future. In spite of these scams, the markets stood at a comfortable level and in fact have been positive in nature, which can be said as a symbol of sustainability.


As it is a known fact that in India SENSEX is considered as the yardstick of the capital market, and the following observations speak about the growth and sustainability of the capital markets in India.


Month, date



July 25



Jan 15



Feb 29



March 30



Oct 8



Feb 11



June 20



Sept 8



Nov 28



Feb 6



 March 21



April 20



From the above table we can observe that the time being taken to rise from thousand to thousand is getting reduced at a great pace. Even though huge sea-saws are being seen, the index is gaining in a remarkable manner, and on and over the time it resembles the Sustained position.


In this we can concentrate on two aspects, one is In-ward FDI and the other is Out-ward FDI. India being one of the favorite destinations for the investors throughout the world is attracting huge amounts of FDIs, which will be helpful in further strengthening the roots of the Indian Capital Markets. In the other context we can say that some Indian firms rose to the level of investing in foreign countries, which shows the strength of the companies. The presence of these companies in Indian Capital markets would definitely enhance the expectations of foreign investors investing in India.

We can quote the following recent inward FDIs:

  • Mizuho Corporate Bank's decision to successfully expand base in the country has managed to convince almost 60-65 major Japanese corporates to setup manufacturing base in India.
  • Sabre Capital and Singapore's Temasek Holding have teamed up to float a fund that will invest up to US$ 5 billion in Indian equities as well as fixed income instruments over the next five years.


  • Reliance Industries Ltd. has launched US$ 300 million in US debt market by issuing 10 and 12 years tenures.

We can add the following to stress the sustainability:

* The Prime Minister of India Dr. Man Mohan Singh, on the occasion of 125 years celebrations of Bombay Stock Exchange has quoted "Capital Markets are the prerequisites to the health of the economy. Indian Capital Markets has now begun to transform rapidly in the past five years to offer world-class services to the investors".

* Deputy Chairman of Planning commission, Dr. Montek Singh Ahluwalia said, "Within the next five years India will be achieving the growth rate of 9% which is not possible without the role of Capital Markets".

* Union Minister for Commerce and Industry, Mr. Kamal Nath said "Of all the Foreign Investors in India, 77 percent are making profits, and 8 percent break-even", which shows that the players ending in losses are quite few compared to many other emerging markets.

The following reports of various surveys also show the sustainability:

A landmark survey by the Japan Bank for International Co-operation (JBIC) shows that in the next three years, India will be the third most favoured investment destination for Japanese investors in a list, which includes US and Russia.

* A survey conducted by Ernst and Young on "investors on risk", which surveyed 137 institutional investors, shows that, 23 % of investors prefer CEO taking ownership of risk and 54 % investors are risk tolerant, 18 % embrace risk. In another context, 31 % say "good risk management is worth premium price" and 53 % wants boards to play active role in risk. This could be a positive factor for India, which boosts the morale of Foreign Investors to participate in Indian Capital Markets.

* Standard and Poor, India's leading ratings, financial news, risk and policy advisory company, in partnership with its subsidiary CRISIL, provides exceptional insight into key financial trends and developments in the Indian market reveal that "India, today is one of the world's fastest growing and most dynamic economies, and a key contributor to Asia's Balance of Payments' surplus".


A separate task force has to be setup to monitor and govern the happenings in the capital markets, which should to be given an autonomous power, and should be constituted by the Constitution of India such as Election Commission and Central Vigilance Commission etc. Its role should be constituted regarding the matters such as, Governance of Companies, Disclosure Norms, investing patterns etc.

* A proper mechanism has to be derived to regulate the operations of FIIs and contain them with required regulations, but at the same time the regulations must not be in such a manner that the FIIs does not get discouraged and withdraw their investments all in sudden. The mechanism should regulate the unexpected capital flight, which could cause rapid vibrations in the capital markets.

* Government and the governing bodies such as RBI and SEBI should together take required steps to avoid the occurrence of scams, which will lead towards decreasing-morale of the investors.

* Another way of sticking to sustainability can be said as encouraging and creating open environment, which would bring in huge amounts of FDIs rather than FIIs.

* Municipal Bonds Market, Depository Receipts Market, Derivatives Market have to be developed to a greater extent so that the trading volumes in these markets will be increased substantially.

* Awareness among small investors has to be generated, and government has to take certain measures to create awareness and at the same time they must be protected from any kind of defaults.

* As the chances of risk can never be brought to zero level in any capital market, it should be seen that the risk is reduced to the minimum extent possible.

In view with the above-mentioned facts and circumstances it can be justified to say that the growth and sustainability of Indian Capital Markets is a Reality.


A steady and growing market size, reliable business community, high levels of intellectual manpower, technological expertise and a dedicated reform process that has brought about impressive economic liberalization, has made India a very attractive destination for investments in capital markets.


We are very much grateful for the cooperation and interest of the professors who supported in this phase of our presentation work. It would not have been possible with out their help. Dr.B.Madhukar Patniak and Mr.TVV Phani Kumar supported this presentation. Our sincere thanks to Mr. Murthy, the librarian of our college.

I would like to express my thanks to management of Gayatri Vidya Parishad College, School of Management Studies for their permission which helped us to develop the ideas put forward here in this paper.


Author  K.T.Liaw  Title: Capital markets
Author  N.Gopalswamy  Title: Capital markets
Author  Fabozzi and Modgiliani  Title: Capital markets


Sridhar Kotyada
Ramesh Inkula
II Year MBA Students
Gayatri Vidya Parishad College for Degree and PG Courses
Rushikonda, Visakhapatnam-530 045

Source: E-mail November 4, 2006




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