Securities Market in India – an Overview ISMR

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Securities Market in India – an Overview ISMR 1 Securities Market in India – An Overview ISMR Securities Market in India – An Overview Introduction We are living in exciting times, witnessing a process of ever-increasing globalization and innovation in the fi nancial markets. This is bringing with it sophistication and thus a need to better understand fi nancial risks and develop tools to manage them. The fi nancial markets and institutions have undergone signifi cant changes keeping pace with the changing needs of market participants. Along side the rise of private fi nance, the fi nancial markets are seeing an enhanced role of National Governments through Sovereign Wealth Funds. Venture capital funds and hedge funds have added new dimension to the market dynamics. India has not remained untouched by these developments worldwide. With its growing and increasingly complex market-oriented economy and increasing integration with global trade and fi nance, India’s fi nancial system has also innovated. In the securities markets, organisational innovation has been witnessed with corporatisation and demutualization of all the stock exchanges; institutional innovations in the form of emergence of regulators, Self Regulatory Organizations and clearing corporations and more recently, market innovations through a short selling and Securities Lending and Borrowing Scheme, Direct Market Access, addressing of the legal, regulatory, tax and market design issues in the development of the corporate bond market in the country, provision of a legal framework for trading of securitized debt, quicker procedures for registration and operation by FIIs, making PAN as the sole identifi cation number for all transactions in securities market and new derivative products such as currency futures. Market Segments The securities market has two interdependent and inseparable segments, the new issues (primary) market and the stock (secondary) market. The primary market provides the channel for creation and sale of new securities, while the secondary market deals in securities previously issued. 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 the public issue or through private placement route. It is a public issue if anybody and everybody can subscribe for it, whereas if the issue is made available to a selected group of persons it is termed as private placement. There are two major types of issuers of securities, the corporate entities who issue mainly debt and equity instruments and the government (central as well as state) who issue 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 the 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. OTC markets are informal markets where trades are negotiated. Most of the trades in the government securities are in the OTC market. All the spot trades where securities are traded for immediate delivery and payment take place 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 www.nseindia.com ISMR Securities Market in India – An Overview 2 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 Futures and Options market. Presently only two exchanges viz., National Stock Exchange of India Ltd. (NSE) and Bombay Stock Exchange (BSE) provides trading in the Futures & Options. International Scenario Following the implementation of reforms in the securities industry in the past years, Indian stock markets have stood out in the world ranking. India has the distinction of having the second largest number of listed companies after the USA. As per Standard and Poor’s Fact Book 2007, India ranked 8th in terms of market capitalization and 15th in terms of turnover ratio as of December 2007. India posted a turnover ratio of 84% at end 2007. Table 1-1 below present India’s position vis-a-vis major international markets. Table 1-1: International Comparison: end December 2007 Particulars USA UK Japan Germany Singapore Hongkong China India No. of listed Companies 5,130 2,588 3,844 658 472 1,029 1,530 4,887* Market Capitalisation (US $ bn.) 19,947 3,859 4,453 2,106 353 1,163 6,226 1,819 Market Capitalisation Ratio (%) 149.01 157.13 90.25 69.43 274.41 583.89 237.56 200.09 Turnover ( US $ bn.) 42,613 10,324 6,497 3,363 384 917 7,792 1,108 Turnover Ratio (%) 216.5 270.1 141.6 179.7 122.0 89.1 180.1 84.0 *Listed companies in India pertains to BSE. Market Capitalisation Ratio is computed as a percentage of GNI 2006 Source:S&P Global Stock Market Factbook, 2008 A comparative study of concentration of market indices and index stocks in different world markets is presented in the (Table 1-2). It is seen that the index stocks share of total market capitalization in India is 77.5% whereas US index accounted for 78.1% as on end 2007. The concentration levels in index stocks in 2006 were 81.6% for India and 89.5% for US. Thus, there is a decline in concentration in 2007. The ten largest index stocks share of total market capitalization is 26.8% in India and 12.4% in case of US. Table 1-2: Market Concentration in the World Index as on End 2007 (in percent) Index Stocks Share of Total 10 largest Index Stocks’ Share of total Market Market Capitalisation Market Capitalisation Japan 73.9 14.8 Singapore 63.4 32.8 France 60.4 29.7 Germany 71.1 41.8 Italy 65.7 44.6 United Kingdom 89.7 36.0 United States 78.1 12.4 India 77.5 26.8 Source: S&P Global Stock Market Factbook, 2008 The stock markets worldwide have grown in size as well as depth over the years. As can be observed from (Table 1-3), the turnover of all markets taken together have grown from US $ 47.39 trillion in 2005 to US $ 98.82 trillion in 2007. US alone accounted for about 43.12 % of worldwide turnover in 2007. The share of India in the total world turnover increased from 0.95% in 2006 to 1.12% in 2007. www.nseindia.com 3 Securities Market in India – An Overview ISMR Table 1-3: Market Capitalisation and Turnover for Major Markets (US $ million) Market Capitalisation (end of period) Turnover Country/Region 2005 2006 2007 2005 2006 2007 Developed Markets 36,183,389 42,916,705 46,300,864 41,693,067 59,258,415 82,455,174 Australia 804,074 1,095,858 1,298,429 616,115 826,285 1,322,822 Japan 4,736,513 4,726,269 4,453,475 4,997,414 6,252,470 6,497,193 UK 3,058,182 3,794,310 3,858,505 4,167,020 4,242,082 10,324,477 USA 16,970,865 19,425,855 19,947,284 21,509,979 33,267,643 42,613,206 All Emerging Markets 7,135,963 10,458,582 18,262,550 5,692,906 8,226,944 16,361,131 China 780,763 2,426,326 6,226,305 586,301 1,635,121 7,791,702 India 553,074 818,879 1,819,101 433,900 638,484 1,107,550 Indonesia 81,428 138,886 211,693 41,900 48,831 112,851 Korea 718,180 835,188 1,123,633 1,202,976 1,340,122 1,974,015 Malaysia 181,236 235,356 325,663 49,976 66,904 150,002 Philippines 40,153 68,382 103,224 6,951 11,243 29,251 Taiwan 515,980 654,858 723,687 716,471 894,553 1,272,432 World Total 43,319,352 53,375,287 64,563,414 47,385,973 67,485,359 98,816,305 US as % of World 39.18 36.39 30.90 45.39 49.30 43.12 India as % of World 1.28 1.53 2.82 0.92 0.95 1.12 Source: S&P Global Stock Market Factbook, 2008 The market capitalization of all listed companies taken together on all markets stood at US $ 64.56 trillion in 2007 up from US $ 53.38 trillion in 2006. The share of US in worldwide market capitalization decreased from 36.39 % as at end-2006 to 30.90 % at end 2007, while Indian listed companies accounted for 2.82% of total market capitalization as at end 2007 (an increase from 1.53% at end of 2006). According to the ‘World Development Indicators 2008’, World Bank there has been an increase in market capitalization as percentage of Gross Domestic Product (GDP) in some of the major country groups as is evident from (Table 1-4). The increase, however, has not been uniform across countries. The market capitalization as a percentage of GDP was the highest at 126.1% for the high income countries as at end 2006 and lowest for low income countries at 67%. The Middle income countries have shown a remarkable improvement in market capitalization to GDP ratio from 49.5% in 2005 to 74.2% in 2006.
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