DATA ANALYSIS OF MARKET

INTERMEDIARIES/INSTITUTIONS OF

THE BOMBAY STOCK EXCHANGE

The Indian securities market, considered one of the most promising emerging

markets, is one of the top eight markets of the world. The market comprises of equity, debt

and derivative segments and has a large investor base. The investor base comprises of

individuals, corporate and foreign institutional investors and has been rapidly rising over the

past decade after financial market deregulation and economic liberalization. The BSE Index,

SENSEX, is India's first and most popular Stock Market benchmark index. Exchange traded

funds (ETF) on SENSEX, are listed on BSE and in Hong Kong. Futures and options on the

index are also traded at BSE. At the end of March 2010, there were 4975 companies listed at

BSE. The Spot Market segment of BSE reported a trading volume of Rs 1378808.61 crore

during 2009-10 with an Y-O-Y increase of 25.34% and at the end of March 2010, the BSE

Market Capitalization was Rs. 6164157.00 crore. The debt markets in India comprise of

markets for central government, state government and corporate debt securities. Several

reforms have taken place in the debt markets as well in the past decade. Apart from

modification of settlement systems, trading infrastructure and clearing mechanism has been

created to make it easier for participants to undertake transaction in efficient and transparent

manner. This segment has seen an increased activity in the stock exchanges over the past few

years. The stock exchanges provide facilities for trading in securities. Securities markets

provide a common platform for transfer of funds from those who have them in excess to

those in need of them. Securities markets in India is regulated by SEBI.

In India, trading in derivatives started in June 2000 with the launch of futures

contracts in the BSE Sensex on the Bombay Stock Exchange (BSE). Options trading

commenced in June 2001 in the Indian market. Since then, the futures and options (F&O)

segment has been growing continuously in terms of new products, contracts, traded volume

and value. Rahman (2001)i examined the impact of index futures trading on the volatility of

component stocks for the Dow Jones Industrial Average (DJIA). The study used a simple

GARCH (1, 1) model to estimate the conditional volatility of intra-day returns. The empirical

results confirm that there is no change in conditional volatility from pre- to post-futures

periods. Figuerola-Ferretti and Gilbert (2001) used error-correction models and the GARCH

(1, 1) regression model to study the effect of futures trading on volatility. In addition, they

reported the results of a VAR model and presented an impulse response analysis to track the

effects of a shock to each of the volatilities. The results show that volatility decreases in the

post-futures period. Bologna and Cavallo (2002)ii examined the effect of the introduction of

stock index futures for the Italian market. Their empirical results show that the introduction

of stock index futures affects the volatility of the spot market. In addition, the results from

various GARCH (1, 1) models for pre-futures and post-futures sub-periods suggest that the

index futures market reduces volatility. Chiang and Wang (2002)iii

examined the impact of

futures trading on Taiwan spot index volatility. Their study also discussed the

macroeconomic and asymmetric effects of futures trading on spot price volatility behaviour.

They used an asymmetric time-varying GJR volatility model. Their empirical results showed

that the trading of futures on the Taiwan Index has stabilising impacts on spot price volatility,

while the trading of MSCI Taiwan futures has no effects, except asymmetric response

behaviour. Pilar and Rafael (2002)iv

analysed the effect of the introduction of derivatives on

the Ibex-35 Index using a dummy variable and a GJR model to test the impact of the

introduction of derivative markets on the conditional volatility of the underlying asset. They

found that although the asymmetry coefficient increased, the conditional volatility of the

underlying index declined after derivatives were introduced. Robert and Michael (2002)v

investigated the impact of the introduction of stock index futures trading on the seasonality of

daily returns of the underlying index for seven national markets. The results indicate reduced

seasonality with respect to mean returns, thus leading to more efficiency in these markets.

Shembagaraman (2003)vi

explored the impact of the introduction of derivative trading on

cash market volatility using data on stock index futures and options contracts traded on the

Nifty Index. The results suggest that futures and options trading has not led to a change in the

volatility of the underlying stock index, but the nature of volatility seems to have changed in

the post-futures market. The study also examined whether greater futures trading activity in

terms of volume and open interest was associated with greater spot market volatility. It found

no evidence of any link between trading activity variables in the futures market and spot

market volatility. Sung, Taek and Park (2004)vii

studied the effect of the introduction of

index futures trading in the Korean markets on spot price volatility and market efficiency of

the underlying KOSPI 200 stocks relative to the carefully matched non-KOSPI 200 stocks;

they found evidence that market volatility was not affected by futures trading, while market

efficiency was improved. Taylor (2004) tried to uncover the determinants of trading intensity

in futures markets. In particular, the time between adjacent transactions on the FTSE 100

index futures market was modelled using various augmentations of the basic autoregressive

conditional duration (ACD). As predicted by various market microstructure theories, he

found that the bid-ask spread and transaction volume have a significant impact on subsequent

trading intensity. However, there was evidence that a large (small) difference between the

market price and the theoretical price of the futures contract, which is known as pricing error,

leads to high (low) levels of trading intensity in the subsequent period. Boyer and Popiela

(2004)viii

looked into whether the introduction of futures to the S&P500 Index altered the

effect of addition to, or removal from, the S&P500 Index. This study used the S&P500 price

effect to show that overall. In India, liberalization measures in the financial sector have

been in vogue since the 1990s. This has led to considerable development of the capital

market. The movement of some variables related to the stock market clearly points to this

development. For example, during the financial years between 1992/93 and 2008/09, the

number of trading days in the Bombay Stock Exchange (BSE) increased from 192 to 243,

turnover from Rs. 456,960,000,000 to Rs. 11,000,740,000,000 and market capitalization on

BSE from Rs. 188,146 to Rs. 30,860,750,000, implying a sixteen-fold increase. The stock

market index (BSE Sensex) has also shown a phenomenal rise, especially in the past few

years. For example, from June 2004 to January 2008, the Sensex jumped from 4,835 to

20,873, indicating a growth of more than 300 per cent. The improvement can also be

observed in terms of stock returns. The average daily return on BSE was 0.23 in 2003,

compared to 0.08. In this process of gradual liberalization, the Indian equity market has also

become more integrated with other developed and emerging markets in Asia. For example,

Bekaert and others (1998)ix

shows that free international capital mobility and growing

financial integration are directly related to the movements of stock prices of various national

markets. Using data on 20 emerging markets, including India, it is shown that stock market

returns within these countries are mirroring the world market return. This is a result of the

introduction of liberalization measures in the relevant financial sectors. Brooks and Catao

(2000)x, in a March 1986 through August 2000 study involving 21 developed and 19

emerging countries, including India, found evidence of stock market integration operating

through the channel of information technology (IT) industry. Literature on the co-movement

of stock returns, concerning the emerging markets in the Asia-Pacific region, has mixed

evidences. Most of the work suggests that post-Asian crisis, some markets have co integrated

with the United States and some have co integrated with Japan, while a few others have not

co integrated with either (Ghosh and others, 1999xi

; Yang and Lim, 2002xii

; Choudhry and

Lin, 2004xiii

). In general, the studies conclude that markets can be said to have only partially

converged. As a result, researchers are claiming that financial markets in the rice volatility

did not show any significant increase for added stocks after trading began on the S&P500

Index futures.

Calado, Garcia and Pereira (2005)xiv

used data for eight derivative products to study

the volatility effect of the initial exchange listing of options and futures on the Portuguese

capital market. They did not find significant differences in the unadjusted and adjusted

variance and beta for the underlying stocks after the listing of derivatives. However, some of

the underlying stocks taken individually have experienced significant increases or decreases

in variance after derivatives listing. Finally, they concluded that the introduction of a

derivatives market in the Portuguese case has not had the average stabilisation effect on risk

as detected in other markets. Gannon (2005) tested contemporaneous transmission effects

across volatilities of the Hong Kong stock and index futures markets and futures volume of

trade by employing a structural systems approach. Competing measures of volatility

spillover, constructed from the overnight S&P500 Index futures, were tested and found to

impact asset return volatility and volume of trade patterns in Hong Kong. Antoniou, Floros

and Vougas (2006) examined the effect of futures trading on the volatility of the underlying

spot market taking the FTSE/ASE-20 and FTSE/ASE Mid 40 Indices in Greece. The results

for the FTSE/ASE-20 Index suggest that futures trading has led to decreased stock market

volatility, but the results for the FTSE/ASE Mid 40 Index indicate that the introduction of

stock index futures has led to increased volatility, while the estimations of the unconditional

variances indicate a lower market volatility after the introduction of stock index futures.

Mallikarjunappa and Afsal (2007)xv

studied the volatility behaviour of the Indian market by

focusing on the CNX IT Index, which is a sectoral index, and found that underlying volatility

increases with the onset of futures trading. Their result contradict many other studies carried

out in India, and it is reasoned that the sectoral index showed different behaviour in terms of

returns and volatility, especially during the 2001 period of market scam in India. They

attributed these results to a sharp decrease in the prices of IT stocks after the stock market

scam broke out in 2001

Components of Securities

The major components of the securities markets are listed below:

Securities: Shares, Bonds, Debentures, Derivatives, Mutual Fund Units

Intermediaries: Brokers, Sub-brokers, Custodians, Share Transfer Agents, Depository

Participants, Credit Rating Agencies, Merchant Bankers

Issuers of Securities: Companies, Bodies Corporate, Government, Financial

Institutions, Mutual Funds, Banks

Investors in Securities: Individuals, Associations of Persons, Companies, Mutual

Funds, Financial Institutions, Foreign Institutional Investors

Regulators: SEBI, RBI (to a certain extent), Department of Economic Affairs (DEA),

Department of Company Affairs (DCA) Each component of the securities markets is

discussed in later sections.

Securities

The Securities Contract (Regulation) Act, 1956 defines "Securities" to include shares,

scrips, stocks, bonds, debentures, debenture stock or other marketable securities of like nature

in or of any incorporated company or body corporate, derivative, units or any other

instrument issued by any collective investment scheme to the investors in such schemes,

government securities, or any other instruments so declared by the central government to be

securities, rights and interest in securities, and security receipt. In any economy, there are

investors who have surplus funds and seek returns by investing these funds and there are

issuers who need funds and who seek to provide a profitable return on these funds to those

investors. These issues of securities provide initial fuel to the economy and to securities

markets. Having issued securities, there are other players who seek to buy these issued

securities from the original holder and generate a higher return on them by seeking to sell

them later at a higher price. This demand generates a continuous need for a secondary

market, which apart from price discovery also creates a market place, provides liquidity to

investors and issuers and finally acts a barometer for the entire economy.

Intermediaries

Intermediaries provide various services to investors and issuers and have grown to

become among both powerful and knowledgeable due to substantial growth of securities

markets over the last century. A large variety and number of intermediaries provide

intermediation services in the Indian securities market. The major ones are listed below in

Table 1.

Table - 1

Market Participants in Securities Market

Market Participants Number as on March 31

2009 2010 2011

Securities Appellate Tribunal 1 1 1

Regulators 4 4 4

Depositories 2 2 2

Stock Exchanges

With Equities Trading 19 19 19

With Debt Market Segment 2 2 2

With Derivative Trading 3 4 4

Brokers 8652 8804 9,235

Corporate Brokers 4,079 4,197 4,563

Sub-brokers 62,471 75,378 83,952

Brokers(Derivative) 1,770 1,899 2,301

Brokers(Currency

Derivatives) 1,202 1,450 1,894

Foreign Institutional

Investors 1,635 1,713 1,722

Portfolio Managers 232 243 267

Custodians 16 17 19

Primary Dealers

Merchant Bankers 134 164 192

Bankers to an Issue 51 48 55

Debenture Trustees 30 30 29

Underwriters 19 5 3

Venture Capital Funds 132 158 184

Foreign Venture Capital Investors 129 143 153

Mutual Funds 44 47 51

Source : SEBI.

Issuers of Securities

Every organization, whether it is a company, institution or a Government body needs

funds for various operations. Organizations issue securities in the primary market depending

on their needs. The Securities market in India is an important source for corporate and

government. The corporate sector depends significantly on equity and debt markets for

meeting its funding requirements and equity has become the preferred mode of financing for

companies today.

Table - 2

Securities and Capital Issues

Settlement Cycle T+2

Number of Listed Companies (BSE) 5,067

Number of Listed Sricps (BSE) 7,561

Ratio of Traded Sricps /Listed Sricps (BSE) 34.9%

Share of Top 5 Sricps to Total Turnover (BSE) 15.3%

Share of Top 10 Sricps to Total Turnover (BSE) 23.9%

Delivery/Turnover Ratio (BSE) 31.1%

Capital Issues (Rs. Cr.) 33,508

• Public Sector (Rs. Cr.) 1,779

• Private Sector (Rs. Cr.) 31,728

• GDRs/ADRs Floatation (US$ million) 2011 2,049

Foreign Capital Inflows (net) (US $ billion) 3,776

External Commercial Borrowings (US$ million) 46.2

NRI Deposits (US$ million) 16,084

FDI (US $ million) 3,895

FII Investments (US $ million net) 19,531

BSE Sensex (1979=100) March end 2011 21109

PE Ratio 20.3

PB Ratio 5.1

Yield (% p.a.) 1.3

Source : SEBI Bulletin.

Investors

Investors are those who have excess funds with them and want to employ it for

returns. Indian securities market has more than 10 million investors, comprising Individuals,

Association of Persons, Companies, Mutual funds, Financial Institutions, Foreign

Institutional Investors.

Foreign direct investment has more than doubled from US$ 37,763 million in 2009 –

10 to US$ 30,380 million in 2006-07. Portfolio Investment has increased from US$ 32,376

million in 2009 - 10 to US$ 31,447 million in 2010-11.

Table – 3

Investors

Year A. Direct B. Portfolio Total (A+B)

Investment (US $

million) Investment

(US $ million) (US $ million)

2009-10 37,763 32,376 70,139

2010-11 30,380 31,471 61,851

Source : RBI.

Types of Securities Markets

In the context of equity products, which this publication seeks to cover in depth, the

following markets could be defined:

Primary Market

Secondary Market

Derivative Market

Primary Markets

Fresh issues of shares and other securities are affected though the Primary market. It

provides issuers opportunity to issue securities, to raise resources to meet their requirements

of business. Equity issues can be effected at face value or at discount/premium. Issues at

discounts are rare and almost unheard of. Issuers can issue the securities in domestic market

and/or international market through ADR/GDR/ECB route. Resources raised from domestic

as well as international markets by issuers have gone up significantly over the years. During

2006-07, a total of Rs. 33,508 crore was mobilized by the government and corporate sector

from the primary market through public issues. Capital raised from the primary market

through public, rights & follow-on offerings have aggregated Rs. 67,609 crore during FY

2010-11, as compared to Rs. 57,555 crore during the previous fiscal year. The number of

issuances from the primary market in fact reduced from 76 to 91 over the same period

because of a larger per issue size. During 2010-11, the regulator introduced a new product

called a "Qualified Institutional Placement ("QIP"). QIP enables a listed company to offer

shares to qualified institutional buyers through a private placement mechanism and is a

landmark introduction in the Indian Capital Markets. The banking/finance, construction, IT &

Telecom sectors dominated the primary market issuances during 2010-11.

Table – 4

Capital Raised from the Primary Market Year Total Public Category-wise Issuer-type

Rights Listed IPOs

No. Amount No. Amount No. Amount No. Amount No. Amount

2009-

10

76 57,555 47 49,236 29 8,319 37 32,859 39 24,696

2010-

11

91 67,609 68 58,105 23 9,503 38 32,049 53 35,559

Source: SEBI Bulletin.

Table – 5

Industry-wise Classification of Capital Raised

Industry 2009-10 2010-11

No. Amount

(Rs. Crore) No. Amount

(Rs. Crore)

Banking/FIs 6 3,138 18 17,248

Cement & Construction 8 2,780 3 2,841

Chemical 1 36 5 247

Electronics 1 1,156 0 0

Engineering 1 50 5 1,394

Entertainment 9 2,461 4 715

Finance 2 1,826 3 2,210

Food Processing 2 443 1 1,245

Healthcare 3 1,059 3 292

Information Technology 6 540 1 170

Paper & Pulp 1 35 0 0

Plastic 1 39 0 0

Power 6 25,293 4 9,469

Printing 0 0 1 52

Telecommunication 0 0 0 0

Textile 3 237 3 207

Others 26 18,461 40 31,519

Total 76 57,555 91 67,609

Source: SEBI Bulletin.

Secondary Market

Investors can buy and sell securities in secondary market from/to other investors. The

securities are traded, cleared and settled through intermediaries as per prescribed regulatory

framework under the supervision of the Exchanges and oversight of SEBI.The regulatory

framework has prohibited trading of securities outside the exchanges. There are 19 exchanges

today recognized over a period of time to enable investors across the length and breadth of

the country to access the market.

Table – 6

The broad structure of the secondary market as on March 31, 2011

Stock Exchanges Cash Market 19

National Stock Exchanges 2

Stock Exchanges (Currency Derivatives) 4

With Corporate Debt Market Segment 2

With Derivative Trading 2

With Clearing Corporation 2

Registered Corporate Members 4,563

Registered Sub-Brokers 38,124

Registered FIIs 1,722

Listed Companies 5,067

Market Capitalization of BSE 2010-11 68,39,084

Turnover on BSE during 2010-11 11,05,027

Source: SEBI Bulletin.

Derivatives Market

Derivatives are contracts that are based on or derived from some underlying asset,

reference rate, or index. Most common financial derivatives are: forwards, futures, options

and swaps. Currently, the Indian markets provide equity derivatives of the following types:

- 3 Indices From a market-oriented perspective, derivatives offer the free

trading of financial risks.

Financial derivatives have changed the face of finance by creating new ways to

understand, measure, and manage financial risks. Ultimately, derivatives offer organizations

the opportunity to break financial risks into smaller components and then to buy and sell

those components to best meet specific risk-management objectives.

Moreover, under a market-oriented philosophy, derivatives allow for the free trading

of individual risk components, thereby improving market efficiency. Using financial

derivatives should be considered a part of any business's risk-management strategy to ensure

that value-enhancing investment opportunity can be pursued.

Derivatives include:

(a) A security derived from a debt instrument, share, loan whether secured or unsecured,

risk instrument or contract for differences or any other form of security, and

(b) A contract which derives its value from the prices, or index of prices, or underlying

securities. The Act also made it clear that derivatives shall be legal and valid only if

such contracts are traded on a recognized stock exchange. The Government also

rescinded in March 2000 an old notification, which had banned forward trading in

securities in the 1960s.

Equity & Debt Markets

Markets can also be broadly classified into: Equity Market & Debt Market. Debt

markets are currently classified by a large institutional presence, though attempts are being

made to attract retail investors. Debt markets trade in Government Securities, Treasury Bills,

Corporate Bonds and other debt instruments while Equity markets deal mainly in equity

shares and to a limited extent in preference shares and company debentures. Futures and

Options in indices and equity shares are of a relatively recent origin and form part of equity

markets.

Equity Market

Publicly traded equities form a significant source of capital for firms, and equity

markets are a key part of the process of allocating capital among competing uses in our

economy. Through issuance of equities, companies enable a broad set of investors to share in

the risk and reward of economic activities. A company's value is often measured by the price

of its equity share. Equity offerings could take the form of shares, ADRs, GDRs & QIPs.

Equity shares are traded on the secondary market through cash & derivative segments.

Debit Market

The Indian debt markets play an important role in the capital formation process. It

comprises of two main segments, viz., the government securities market and the corporate

securities market, besides a small emerging market for interest rate derivatives. The market

for government securities is the most dominant part of the debt market in terms of

outstanding securities, market capitalization, trading volume and number of participants. It

sets benchmark for the rest of the market. Major investors in

Debt Market are shown in table Participants and Products in Debt Market. There are

two broad methods by which an Indian corporate can raise term debt from the capital market.

The first is the private placement market where the issuer invites a select group of qualified

institutional investors to subscribe to bonds/debentures issued: The second method is a Public

offer where securities are offered to the Public at large including retail investors. Government

mobilizes funds mainly through issue of dated securities and T-bills, while State

Governments rely solely on State Development Loans. The major investors in sovereign

papers are banks, insurance companies and financial institutions, which generally do so to

meet statutory requirements.

The Indian corporate sector relies, to a great extent, on raising capital through debt

issues, which comprise of bonds and CPs. Of late, most of the bond issues are being

placed through the private placement route. These bonds are structured to suit the

requirements of investors and the issuers, and include a variety of tailor-made features

with respect to interest payments and redemption. Corporate bond market has seen a lot

of innovations, including securitized products, corporate bond strips, and a variety of

floating rate instruments with floors and caps. In the recent years, there has been an

increase in issuance of corporate bonds with embedded put and call options. While

some of these securities are traded on the stock exchanges, the secondary market for

corporate debt securities is yet to fully develop.

Bonds issued by government-sponsored institutions like DFIs, infrastructure related

institutions and the PSUs, also constitute a major part of the debt market. The preferred

mode of raising capital by these institutions has been private placement, barring an

occasional public issue. Banks, financial institutions and other corporate have been the

major subscribers to these issues.

In addition to above, there is another segment, which comprises of short-term paper

issued by banks, mostly in the form of certificates of deposit (CDs). This segment is,

however, comparatively less dominant.

The Indian debt market also has a large non-securitized, transactions-based segment,

where players are able to lend and borrow amongst themselves. This segment

comprises of call and notice money markets, inter-bank market for term money, market

for inter-corporate loans, and market for ready forward deals (repos). Typically, short-

term instruments are traded in this segment.

The market for interest rate derivatives like FRAs, IRSs is emerging to enable banks,

PDs and FIIs to hedge interest rate risks.

Exchange Traded Funds

An exchange-traded fund, or ETF, is a type of Investment Company whose

investment objective is to achieve the same return as a particular market index. An ETF is

similar to an index fund in that it will primarily invest in the securities of companies that are

included in a selected market index. An ETF will invest in either all of the securities or a

representative sample of the securities included in the index. For example, one type of ETF,

known as Spiders or SPDRs, invests in all of the stocks contained in the S&P 500 Composite

Stock Price Index.

Exchange traded fund has qualities of an Index fund viz. Constructed to track the

Index, Open ended Mutual fund, Low Expense ratio, Low Turnover and also those of a stock

viz. Trading flexibility intraday on the exchange, Real time price. Units of exchange traded

fund can be bought and sold with cash through trading members on respective stock

exchange. The First ETF - SPDR (S&P 500 depository receipts) was launched in the year

1993. The role of stock exchange in case of launch of any ETF is Index Licensor. Some of

the ETF's traded on BSE SENSEX are SPICE, Kodak MF, etc. Value of one unit of exchange

traded fund SPICE (ETF on SENSEX) is typically 1/100th of SENSEX. SPICE was

alternatives for entering orders and executing trades. Some of the new trading mechanisms

also offer speedier executions or greater anonymity, which are important to some type of

investors.

At the BSE, a new initiative WebEx allows investors to trade directly through the

Internet. The investor is required to quote a broker code, but the transaction is put through

directly through the Internet. Further, all investors (whether trading through the WebEx or

otherwise) have a facility to confirm their trades through the website:

www.bseindia.com. They can punch in their transaction details to know what time their

trade was executed and at what price.

Trading Cycle

Earlier, settlement was done at the end of the settlement period which varied from 14

days to 30 days, depending on the securities traded. The introduction of the rolling settlement

in 2001, led to the settlement being carried out in T+5 days, i.e., the 5th day after the trade.

This settlement time reduced to T+3 in 2002 and T+2 in 2003. This is in accordance with

international standards.

Demutualization

Stock exchanges were owned, controlled and managed by brokers. This led to a

conflict of interest over the settlement of disputes as self got precedence over regulations.

The regulators advised the stock exchanges for 51% representation by non-broker members,

51% of the equity share capital of the BSE was placed with Indian Corporate, non-broker

members, private equity funds etc.

Bombay Stock Exchange Sensitive Index: A value . weighted stock market index,

which tracks the performance of the 30 largest stocks on the Bombay Stock Exchange. The

30 stocks are chosen at random times, whenever the market has significantly changed enough

to warrant the changes, and are chosen by their value of free- float shares. Although the index

only tracks a very small percentage of the total stocks traded at the BSE, the index typically

comprises about one- fifth of the market capitalization of the entire stock exchange.

Table – 7

Listed companies on BSE SENSEX

Name Sector Adj. Factor Weight in

Index (%) ACC Housing Related 0.55 0.77 BHEL Capitals Goods 0.35 3.26 Bharti Airtel Telecom 0.35 3 DLF Universal Limited Housing Related 0.25 1.02 Grasim Industries Diversified 0.75 1.5 HDFC Finance 0.90 5.21 HDFC Bank Finance 0.85 5.03 Hero Honda Motors

Ltd. Transport Equipments 0.50 1.43

Hindalco Industries

Ltd. Metal, Metal Product &

mining 0.7 1.75

Hindustan Lever

Limited FMCG 0.50 2.08

ICICI Bank Finance 1.00 7.86 Infosys Information Technology 0.85 10.26 ITC Limited FMCG 0.70 4.99 Jaiprakash Associates Housing Related 0.55 1.25 Larsen & Toubro Capital Goods 0.90 6.85 Mahindra & Mahindra

Ltd. Transport Equipments 0.75 1.71

Maruti Suzuki Transport Equipments 0.50 1.71 NIIT Technologies Information Technology 0.15 2.03 NTPC Power 0.15 2.03 NIIT Information Technology 0.15 2.03 ONGC Oil & Gas 0.20 3.87 Reliance

Communications Telecom 0.35 0.92

Reliance Industries Oil & gas 0.50 12.94 Reliance Infrastructure Power 0.65 1.19 State Bank of India Finance 0.45 4.57 Starlight Industries Metal, Metal Products, and

Mining 0.45 2.39

Sun Pharma Industries Healthcare 0.40 1.03 Tata Consultancy

Services Information Technology 0.25 3.61

Tata Motors Transport Equipments 0.55 1.66

Tata Power Power 0.70 1.63 Tata Steel Metal, Metal Products&

Mining 0.70 2.88

Wipro Information Technology 0.20 1.61 Source: www .bseindia.com.

BSE 100 Index

As BSE Sensex has only 30 scrips, a need was felt for a more broad-based index,

which could also reflect the movement of stock prices on a national scale. In 1989, Bombay

Stock Exchange Limited, started compilation and publication of an index series called "BSE

National Index". The BSE National Index is now known as BSE 100 and since April 5, 2004

it is calculated on the basis of free-float market capitalization methodology. The equity

shares of 100 companies from the "Specified" and the "Non-Specified" list of the five major

stock exchanges, viz. Mumbai, Calcutta, Delhi, Ahmadabad and Madras have been selected

for the purpose of compiling the BSE 100. The shares have been selected on the basis of

market activity, due representation to various industry-groups and representation of trading

activity on major stock exchanges. The financial year 1983-84 is the base year of BSE 100

Index because of the price stability during that year and its proximity to the index series. The

base value has been fixed at 100 points. Scrip Selection Criteria for BSE 100 Index Trading

Frequency: The scrip should have been traded for at least 95% of the trading days in the last

three months. There can be exceptions in case of extreme reasons like scrip suspension etc.

Final Rank: The scrip should rank among the top 200 companies listed by final rank. For the

purpose of calculation of final rank, 75% weight age is assigned to the rank obtained on the

basis of three-month average full market capitalization and 25% weight age to the liquidity

rank based on three-month average daily turnover & three-month average impact cost.

Industry/Sector Representation: Scrip is generally selected taking into account a balanced

sect oral representation of the listed companies in the BSE. Track Record: The company

should have an acceptable track record.

BSE SENSEX

SENSEX, India's first and most popular bellwether increase of 3.25% in the index

value in the month of February, 2012 a low of 17061.55 on 1st February, 2012. The average

intra index, closed at 17752.68 points on 29th

February, 2012. This represents an 2012. The

SENSEX hit a high of 18523.78 . intra-day volatility during the month was 1.47%

SENSEX’s movement in February, 2012 (Sources for Events: Reuters, Bloomberg

and Economic Times. Most of the under developed countries suffer from low level of income

and capital accumulation. Though, despite this shortage of investment, these countries have

developed a strong urge for industrialization and economic development. As we know the

need for Foreign capital arises due to shortage from domestic side and other reasons. Indian

economy has experienced the problem of capital in many instances. While planning to start

the steel companies under government control, due to shortage of resources it has taken the

aid of foreign countries. Likewise we have received aid from Russia, Britain and Germany

for establishing Bhilai, Rourkela and Durgapur steel plants.xvi

An investor or investment

fund that is from or registered in a country outside of the one in which it is currently investing

is known as Foreign Institutional Investment and investors are known as Foreign Institutional

Investors. Institutional investors include hedge funds, insurance companies, pension funds

and mutual funds. The term is used most commonly in India to refer to outside companies

investing in the financial markets of India. International institutional investors must register

with the Securities and Exchange Board of India to participate in the market. Foreign

Institutional Investors (FIIs) are allowed to invest in the primary and secondary capital

markets in India through the portfolio investment scheme (PIS). shares/debentures of Indian

companies through the stock exchanges in India. The ceiling for overall investment for FIIs is

24 percent of the paid up capital of the Indian company. The limit is 20 per cent of the paid

up capital in the case of public sector banks, including the State Bank of India. The ceiling of

24 per cent for FII investment can be raised up to sect oral cap/statutory ceiling, subject to the

approval of the board and the general body of the company passing a special resolution to

that effect. And the ceiling of 10 per cent for NRIs/PIOs can be raised to 24 per cent subject

to the approval of the general body of the company passing a resolution to that effect. The

ceiling for FIIs is independent of the ceiling of 10/24 per cent for NRIs/PIOs. The Reserve

Bank of India monitors the ceilings on FII/NRI/PIO investments in Indian companies on a

daily basis. For effective monitoring of foreign investment ceiling limits, the Reserve Bank

has fixed cut-off points that are two percentage points lower than the actual ceilings. The cut-

off point, for instance, is fixed at 8 per cent for companies in which NRIs/PIOs can invest up

to 10 per cent of the company's paid up capital. The cut-off limit for companies with 24 per

cent ceiling is 22 per cent and for companies with 30 per cent ceiling, is 28 per cent and so

on. Similarly, the cut-off limit for public sector banks (including State Bank of India) is 18

per cent. Once the aggregate net purchases of equity shares of the company by FIIs/NRIs/

PIOs reach the cut-off point, which is 2% below the overall limit, the Reserve Bank cautions

all designated bank branches so as not to purchase any more equity shares of the respective

company on behalf of FIIs/NRIs/PIOs without prior approval of the Reserve Bank. The link

offices are then required to intimate the Reserve Bank about the total number and value of

equity shares/convertible debentures of the company they propose to buy on behalf of FIIs/

NRIs/PIOs. On receipt of such proposals, the Reserve Bank gives clearances on a first-come

first served basis till such investments in companies reach 10 / 24 / 30 / 40/ 49 per cent limit

or the sect oral caps/statutory ceilings as applicable. On reaching the aggregate ceiling limit,

the Reserve Bank advises all designated bank branches to stop purchases on behalf of their

FIIs/NRIs/PIOs clients. The Reserve

Bank also informs the general public about the .caution. and the .stop purchase. in these

companies through a press release. Need For Foreign Capital The need of foreign investment/

foreign capital arises due to the following reasons:

1. Development of basic infrastructure: The development of any economy depends on

the available infrastructure in that country. The infrastructure facilities such as Roads,

Railways, sea ports, warehouses banking services and insurance services are the

prominent players. Due to long gestation period naturally individuals will not come

forward to invest in infrastructure industries. Government of India could not able to

raise necessary investments. To fill the gap foreign capital is highly suitable.

2. Rapid industrialization: The need for foreign capital arises due to the policy initiatives

of the Government to intensify the process of industrialization. For instance the

government of India is gradually opening the sectors to foreign capital to expand the

industrial sector.

3. To undertake the initial risk: many developing countries suffer from severe scarcity of

private investors. The risk problem can be diverted to the foreign capitalists by

allowing them to invest. As we know the Indians are comparatively risk averse. The

same risk can be transferred to foreign investors by allowing their investment where

risk is more.

4. Global imperatives: Globalization is the order of the day. The international

agreements between countries are also the reason for the foreign capital. The

multinational companies are expanding their presence to many countries; while they

are entering into the foreign countries they will bring their capital. The principles of

WTO and other regional associations are trap in which they are caught. This raises the

necessity for importing technology from the advanced countries. That technology

usually comes with foreign capital when it assumes the form of private foreign

investment or foreign collaboration.

Table – 8

Annual Averages of Share Price Indices and Market Capitalisation

Year BSE Sensex Market Capitalisation

(Crore Rupees)

1990-91 1,050 90,836

1991-92 1,842 3,23,363

1992-93 2,896 1,88,146

1993-94 2,892 3,68,071

1994-95 3,977 4,35,481

1995-96 3,289 5,26,476

1996-97 3,468 4,63,915

1997-98 3,812 5,60,325

1998-99 3,295 5,45,361

1999-2000 4,659 9,12,842

2000-01 4,270 5,71,553

2001-02 3,332 6,12,224

2002-03 3,206 5,72,198

2003-04 4,492 12,01,207

2004-05 5,741 16,98,428

2005-06 8,280 30,22,191

2006-07 12,277 35,45,041

2007-08 16,569 51,38,014

2008-09 12,366 30,86,075

2009-10 15,585 61,65,619

2010-11 18,605 68,39,084

Source: BSE.

The above table and chart is the indicator of the annual average calculated in respect

of the Share Indices and market capitalization over the period of 20 years.

Since its establishment, Bombay Stock Exchange has played a vital role in the growth

of capital markets in India. Another great truth about BSE is that it is the world's fifth largest

stock exchange, with a market capitalization of $466 billion. It makes use of BSE SENSEX,

which is an index of 30 big and developed stocks. The index provides an evaluation of the

comprehensive performance of BSE and is very much tracked throughout the world.

Table – 9

Distribution of Turnover at Cash Segment -BSE

Year Turnover (Rs. crore) Average Daily Turnover

(Rs. crore)

1992-93 45,696 238

1993- 94 84,536 388

1994 - 95 67,749 293

1995-96 50,064 216

1996- 97 1,24,284 517

1997- 98 2,07,383 849

1998- 99 3,11,999 1,279

1999- 2000 6,85,028 2,735

2000- 01 10,00,032 3,984

2001- 02 3,07,392 1,244

2002- 03 3,14,073 1,251

2003- 04 5,02,618 1,981

2004- 05 5,18,717 2,050

2005- 06 8,16,074 3,251

2006- 07 9,56,185 3,840

2007-08 15,78,857 6,290

2008-09 11,00,075 4,527

2009-10 13,78,809 5,651

2010-11 11,05,027 4,333

Source: BSE.

Distribution of turnover at cash segment is being indicated in the above table and

graph.

Table – 10

Trading Statistics of Bombay Stock Exchange

Year Quantity of Shares

Traded (Lakh) Value of Shares

Delivered (Rs

crore)

2001- 02 1,82,196 59,980

2002- 03 2,21,403 50308

2003- 04 3,88,748 1,29,312

2004- 05 4,77,174 1,40,056

2005- 06 6,64,467 2,71,227

2006- 07 5,60,780 2,97,660

2007-08 9,86,005 4,76,196

2008-09 7,39,600 2,30,332

2009-10 11,36,513 3,11,364

2010-11 9,90,776 3,02,126

Source: BSE.

Table – 11

Trading Statistics of Bombay Stock Exchanges

(Quantity of Shares Delivered)

Year Quantity of Shares Delivered (Lakh)

2001- 02 57668

2002- 03 71,131

2003- 04 1,44,531

2004- 05 1,87,519

2005- 06 3,00,653

2006- 07 2,29,685

2007-08 3,61,628

2008-09 1,96,330

2009-10 3,63,578

2010-11 3,76,710

Source: BSE.

Above is the table and chart for the number of shares delivered (in lakhs) in BSE

The Bombay stock exchange is home to about 5,067 (FY 2010-11) listed companies,

with a total market capitalization of around 59 trillion Rupees, or nearly $1.3 trillion (USD)

as of September 2011. The BSE is also one of the busiest stock exchanges in the world,

currently ranking around number four in terms of annual transactions. The exchange has

experienced explosive growth, with a four-fold increase in trading volume over the last 15

years.

The following are some of the facts and figures that can help you get a better feel for the

volume of trading that occurs on the Bombay Stock Exchange:

In 2011, the average volume of business conducted on the BSE was approximately

$15 billion USD each month.

The number of shares traded each month on the BSE is in the range of 30 to 35

million.

The total market capitalization for the 5,100 companies traded on the BSE is in the

area of $1.4 trillion. All of the above dollar values are stated in USD.

Table – 12

Number of Companies Listed in Bombay Stock Exchange

Year No. of Companies Listed No. of Companies

Permitted

1992-93 2,861 0

1993- 94 3,585 0

1994 - 95 4,702 0

1995-96 5,603 0

1996- 97 5,832 0

1997- 98 5,853 0

1998- 99 5,849 0

1999- 00 5,815 0

2000- 01 5,869 0

2001- 02 5,782 0

2002- 03 5,650 12

2003- 04 5,528 12

2004- 05 4,731 36

2005- 06 4,781 42

2006- 07 4,821 60

2007-08 4,887 63

2008-09 4,929 66

2009-10 4,975 86

2010-11 5,067 91

Source: BSE.

At the end of March 2010-11, there were 5067 companies listed at BSE. The BSE

Index, SENSEX, is the most popular stock market benchmark attracting investors from across

the globe.

SENSEX Calculation Methodology

SENSEX is calculated using the "Free-float Market Capitalization" methodology,

wherein, the level of index at any point of time reflects the free-float market value of 30

component stocks relative to a base period. The market capitalization of a company is

determined by multiplying the price of its stock by the number of shares issued by the

company. This market capitalization is further multiplied by the free-float factor to determine

the free-float market capitalization. The base period of SENSEX is 1978-79 and the base

value is 100 index points. This is often indicated by the notation 1978-79=100. The

calculation of SENSEX involves dividing the free-float market capitalization of 30

companies in the Index by a number called the Index Divisor. The Divisor is the only link to

the original base period value of the SENSEX. It keeps the Index comparable over time and

is the adjustment point for all Index adjustments arising out of corporate actions, replacement

of scrips etc. During market hours, prices of the index scrips, at which latest trades are

executed, are used by the trading system to calculate SENSEX on a continuous basis.

Table – 13

Trends in Cash Segment Bombay Stock Exchange Sensex, 100 Index

Year BSE Sensex BSE-100 Index

High Low Close High Low Close

1992-93 4547 2185 2281 2049 989 1021

1993- 94 4299 1980 3779 2073 912 1830

1994 - 95 4643 3229 3261 2193 1570 1606

1995-96 3612 2820 3367 1692 1298 1549

1996- 97 4131 2713 3361 1865 1203 1464

1997- 98 4605 3165 3893 2007 1382 1697

1998- 99 4322 2741 3740 1909 1227 1651

1999-00 6151 3183 5001 3906 1380 2902

2000- 01 5543 3437 3604 3055 1634 1692

2001- 02 3760 2595 3469 1831 1210 1716

2002- 03 3538 2828 3049 1763 1411 1501

2003- 04 6250 2904 5591 3373 1447 2966

2004- 05 6955 4228 6493 3756 2226 3482

2005- 06 11357 6141 11280 5943 3303 5904

2006- 07 14324 8799 13072 7276 4472 6587

2007-08 21207 12426 15644 11656 6271 8233

2008-09 17736 7697 9709 9433 3949 4943

2009-10 17793 9546 17528 9447 4871 9300

2010-11 21109 15960 19445 11193 8510 10096

Source: BSE.

Table – 14

City-wise Distribution of Turnover of Cash Segment at BSE

(Percentage share in Turnover)

City 2001

-02

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09

2009-

10

2010-

11

Ahmadabad 1.0 2.3 3.4 3.1 2.9 4.4 4.6 7.3 9.9 9.4

Bangalore 0.3 0.4 0.7 0.7 0.9 0.5 0.4 0.3 0.4 0.4

Baroda 0.5 0.8 0.0 0.0 0.0 2.1 2.1 2.4 2.1 2.1

Bhubaneswar - 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Chennai 0.2 0.3 0.3 0.4 0.5 0.4 0.4 0.4 0.3 0.4

Cochin 0.3 0.1 0.1 0.1 0.2 0.0 0.0 0.0 0.0 0.0

Coimbatore 0.0 0.0 0.0 0.1 0.1 0.0 0.1 0.1 0.0 0.0

Delhi 1.3 2.1 2.6 3.1 3.8 8.3 10.5 11.4 12.8 12.8

Gauhati - 0.0 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0

Hyderabad 0.1 0.1 0.2 0.2 0.4 0.5 0.5 0.5 0.5 0.5

Indore 0.2 0.6 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.6

Jaipur 0.2 0.7 0.8 0.7 0.8 0.9 1.0 1.1 1.1 1.0

Kanpur 0.3 0.4 0.4 0.4 0.3 0.5 0.4 0.4 0.6 0.7

Kolkata 0.8 1.4 1.1 1.0 1.4 2.3 2.1 1.7 1.6 2.0

Ludhiana 0.0 0.2 0.4 0.3 0.3 0.3 0.3 0.2 0.3 0.2

Mumbai 84.0 77.6 74.5 75.3 75.1 49.3 45.2 38.6 36.0 36.3

Patna - 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Pune 0.6 0.4 0.5 0.6 0.7 0.8 0.7 0.6 0.7 0.7

Mangalore - 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0

Rajkot 0.3 1.4 1.7 1.7 1.3 1.5 2.4 4.8 5.1 4.8

Others 9.8 10.9 12.6 11.4 10.7 27.6 28.4 29.7 27.9 28.0

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: BSE.

Almost 36% of the terminals in the sample are based in the Western region where

Mumbai holds maximum representation, followed by Ahmedabad at 9%. In the southern

region Hyderabad 1% of the terminals, whereas in the North, Delhi has maximum share at

13%, followed by Kolkata at 2% in the eastern region. Other cities such as Baroda, Jaipur and

Pune have 1% shares respectively. Turnover of cash segment in BSE in different cities has

been elaborated in terms of percentage in the above table over the period of 10 years.

Volatility

Volatility is the most basic statistical risk measure. It can be used to measure the

market risk of a single instrument or an entire portfolio of instruments. While volatility can

be expressed in different ways, statistically, volatility of a random variable is its standard

deviation. In day-to-day practice, volatility is calculated for all sorts of random financial

variables such as stock returns, interest rates, the market value of a portfolio, etc. Stock return

volatility measures the random variability of the stock returns. Simply put, stock return

volatility is the variation of the stock returns in time. More specifically, it is the standard

deviation of daily stock returns around the mean value and the stock market volatility is the

return volatility of the aggregate market portfolio.xvii

Stock market volatility indicates the

degree of price variation between the share prices during a particular period. A certain degree

of market volatility is unavoidable, even desirable, as the stock price fluctuation indicates

changing values across economic activities and it facilitates better resource allocation. But

frequent and wide stock market variations cause uncertainty about the value of an asset and

affect the confidence of the investor. The risk averse and the risk neutral investors may

withdraw from a market at sharp price movements. Extreme volatility disrupts the smooth

functioning of the stock market. The literature on stock market volatility is voluminous, but,

some general conclusions on common stock risk have emerged from this research. The

overall stock market volatility has fluctuated over the time with no discernible trend and

some authors have argued that volatility is higher during the bear markets.

Stock prices are changed every day by the market. Buyers and sellers cause prices to

change as they decide how valuable each stock is. Basically, share prices change because of

supply and demand. If more people want to buy a stock than sell it - the price moves up.

Conversely, if more people want to sell a stock, there would be more supply (sellers) than

demand (buyers) - the price would start to fall. Volatility in the stock return is an integral part

of stock market with the alternating bull and bear phases. In the bullish market, the share

prices soar high and in the bearish market share prices fall down and these ups and downs

determine the return and volatility of the stock market. Volatility is a symptom of a highly

liquid stock market. Pricing of securities depends on volatility of each asset. An increase in

stock market volatility brings a large stock price change of advances or declines. Investors

interpret a raise in stock market volatility as an increase in the risk of equity investment and

consequently they shift their funds to less risky assets. It has an impact on business

investment spending and economic growth through a number of channels. Changes in local or

global economic and political environment influence the share price movements and show the

state of stock market to the general public. The issues of return and volatility have become

increasingly important in recent times to the Indian investors, regulators, brokers, policy

makers, dealers and researchers with the increase in the FIIs investment. Hence in this study

an attempt has been made to analyses

- the return

- volatilityxviii

The Indian stock market is represented by two most prominent stock indices, viz.,

Bombay Stock Exchange’s (BSE) Sensitive Index (Sensex) and NSE’s S&P CNX Nifty

(Nifty). The Sensex is generally considered to be the bellwether of the Indian stock market. It

is the older and the more often quoted index.

The Return

Return is the motivating factor that induces the investors to invest money in shares.

Return means the profit earned as a result of rise in share prices. Return helps the investor to

compare the benefits available in the alternative investment avenue. Return is calculated

using logarithmic method as follows.

where

rt = Market return at the period t

Pt = Price index at day t

Pt-1 = Price index at day t–1 and

log = Natural log

Table – 15

Daily Return of BSE-Sensex (1997-98 to 2010-11)

Year Return

1992 0.1

1993 0.1

1994 0.1

1995 -0.2

1996 0.0

1997 0.0

1998 -0.1

1999 0.2

2000 -0.1

2001 -0.1

2002 0.0

2003 0.2

2004 0.0

2005 0.1

2006 0.2

2007 0.2

2008 -0.2

2009 0.2

2010 0.0

2011 -0.2

Mean 0.025

The amount of daily return of BSE Sensex during the years 1992 to2011 is presented

in above table and chart. The value of daily return varies from -0.2 to 0.2. The negative daily

return was observed in the year 1995, 1998, 2000, 2008 and 2011 while in other years it

varied from 0 to 0.2. the mean daily return of Bombay Stock Exchange – Sensex was 0.025.

Inter–day Volatility

The variation in share price return between the two trading days is called inter day

volatility. Inter–day volatility is computed by close to close and open to open value of any

index level on a daily basis. Standard deviation is used to calculate inter–day volatility. The

inter–day volatility is calculated by close to close and open to open volatility method.

Close to close volatility

For computing close to close volatility, the closing values of the Nifty and Sensex are

taken. Close to close volatility (standard estimation volatility) is measured with the following

formula-

Where

n = The number of trading days

rt = Close to close return (in natural log)

r = Average of the close to close return

Open to open volatility

Open to open volatility is considered necessary for many market participants because opening

prices of shares and the index value reflect any positive or negative information that arrives

after the close of the market and before the start of the next day’s trading .The following

formula is used to calculate open-to-open volatility:

Where

n = The number of trading days

rt = Open to open return (in natural log)

r= Average of the open to open return

Inter–day volatility takes into account only close to close and open to open index

value and it is measured by standard deviation of returns.

Intra–day Volatility

The variation in share price return within the trading day is called intra–day volatility.

It indicates how the indices and shares behave in a particular day. Intra–day volatility is

calculated with the help of Parkinson Model and Garman and Klass model.

Parkinson Model

High–low volatility is calculated with the following formula:

Where

σ = High–Low volatility

k = 0.601

Ht = High price on the day

Lt = Low price on the day

n = Number of trading days

Garman and Klass Model

The Garman and Klass model is used to calculate the open–close volatility. The formula for

Garman and Klass model (1980) takes the following form.

Where

Ht = High price on the day

Lt = Low price on the day

Ct = Closing price on the day

Ot = Opening price on the day

n = Number of trading days

σ = Intra-day volatility for the period

Table – 16

Volatility of Bombay Stock Exchange - Sensex (1997-98 to 2010-11)

Year Volatility

1997- 98 2.3

1998- 99 1.8

1999- 00 1.7

2000- 01 2.2

2001- 02 1.5

2002- 03 1.0

2003- 04 1.4

2004- 05 1.5

2005- 06 1.0

2006- 07 1.8

2007-08 1.9

2008-09 2.8

2009-10 1.9

2010-11 1.1

Mean 1.7

* Volatility is calculated as the standard deviation of the natural log of returns in indices for

the respective period.

The volatility of Bombay Stock Exchange – Sensex during the period 1997-98 to

2010-11 is shown above table and chart. The findings suggest that there is no regular trend in

volatility. The maximum volatility 2.8 was observed in the year 2008-09, followed by 2.3 in

the year 1997-98. In the years 2002-03 and 2005-06 the volatility were 1.00 for each which

was minimum. The mean of volatility during the period of study was 1.7.

Table – 17

Volatility of Bombay Stock Exchange -100 (1997-98 to 2010-11)

Year Volatility

1997- 98 1.4

1998- 99 2.0

1999- 2000 2.2

2000- 01 2.4

2001- 02 1.6

2002- 03 1.0

2003- 04 1.5

2004- 05 1.5

2005- 06 1.0

2006- 07 1.8

2007-08 2.0

2008-09 2.7

2009-10 1.8

2010-11 1.1

Mean 1.7

The volatility of Bombay Stock Exchange – 100 during the period 1997-98 to2010-11

is presented in above table and chart. During the first four years i.e. from 1997-98 to2000-01,

increasing trend was observed in the volatility and after this no regular trend was observed.

The maximum volatility 2.7 was observed in the year 2008-09 while it was minimum in the

years 2002-03 and 2005-06 each. The overall mean volatility was 1.7 during the entire period

of study.

Table – 18

Volatility of Bombay Stock Exchange -500 (1997-98 to 2010-11)

Year Volatility

1997- 98 -

1998- 99 0.0

1999- 2000 2.1

2000- 01 2.4

2001- 02 1.6

2002- 03 1.0

2003- 04 1.5

2004- 05 1.6

2005- 06 1.0

2006- 07 1.7

2007-08 2.0

2008-09 2.6

2009-10 1.8

2010-11 1.1

Mean 1.6

The distribution of volatility of Bombay Stock Exchange – 100 during the period

1997-98 to2010-11 is presented in table no. 18 and above chart, indicates that there was no

regular trend was observed during the study period. The minimum volatility of 1.0 was

observed in the years2002-03 and 2005-06 each where as it was maximum2.6 in the year

2008-09. The mean volatility during the study periods was found 1.6.

The BSE SENSEX that is also called the "BSE 30” is made of thirty scripts. The

index is followed extensively in Indian capital market and it is regarded as the index of the

Indian capital market. The Bombay Stock Exchange is the eminent stock exchange in India

and the SENSEX of this exchange is recognized and followed all over the world. The

exchange has played a pivotal role in shaping the capital market in India. The companies that

are listed in the BSE index have been changed only a few times and they account for about

one-fifth of the total market capitalization of the Bombay Stock Exchange. Though the

SENSEX is the primary and the most widely accept index of BSE there are few indices as

well, including BSE 500, BSE 100, BSE 200, BSE PSU, BSE MIDCAP, BSE SMLCAP,

BSE BANKEX, BSE Tech, BSE Auto, BSE Pharma, BSE FMCG, BSE Consumer Durables

and BSE Metal.

The BSE Sensex is a value-weighted index composed of 30 companies with the base

April 1979 = 100. It has grown by more than four times from January 1990 to Jan. 2011. The

set of companies in the index is essentially fixed. These companies account for around one-

fifth of the market capitalization of the BSE. We can use information from April 1979

onwards in estimating the long-run rate of return on the BSE Sensex and that comes to 0.52%

per week (continuously compounded) with a standard deviation of 3.67%. This translates to

27% per annum, which translates to roughly 18% per annum after compensating for

inflation.xix

Table – 19

Daily Volatility of BSE-Sensex (1997-98 to 2010-11)

Year Volatility

1992 3.3

1993 1.8

1994 1.4

1995 1.3

1996 1.5

1997 1.6

1998 1.9

1999 1.8

2000 2.2

2001 1.7

2002 1.1

2003 1.2

2004 1.6

2005 1.1

2006 1.6

2007 1.5

2008 2.8

2009 2.2

2010 1.0

2011 1.3

Mean 1.695

The amount of daily volatility of BSE Sensex during the years 1992 to2011 is

presented in above table and chart. The volatility of Bombay Stock Exchange – Sensex

ranged from 1.0 to 3.3 but there was no regular trendwas found during the study period. The

maximum volatility 3.3 was observed in the year 1992 while it was minimum in the year

2010. The overall mean volatility of Bombay Stock Exchange- Sensex was 1.695.

Returns in Bull Phase and Bear Phase

A bull market is when everything in the economy is great, people are finding jobs,

gross domestic product (GDP) is growing, and stocks are rising. Things are just plain rosy!

Picking stocks during a bull market is easier because everything is going up. Bull markets

cannot last forever though, and sometimes they can lead to dangerous situations if stocks

become overvalued. If a person is optimistic and believes that stocks will go up, he or she is

called a "bull" and is said to have a "bullish outlook".

A bear market is when the economy is bad, recession is looming and stock prices are

falling. Bear markets make it tough for investors to pick profitable stocks. One solution to

this is to make money when stocks are falling using a technique called short selling. Another

strategy is to wait on the sidelines until you feel that the bear market is nearing its end, only

starting to buy in anticipation of a bull market. If a person is pessimistic, believing that stocks

are going to drop, he or she is called a "bear" and said to have a "bearish outlook".

Ups and downs in the share prices are quite natural in stock market. The bull and the

bear markets have certain characteristics and the investors adopt different strategies in the

bull and the bear markets. The rise and the fall of shares are linked to a number of conditions

such as political climate, economic cycle, economic growth, international trends, budget,

general business conditions, company profits, product demand etc. In the bull market, buy–

hold approach is adopted and in the bear market sell–move out approach is adopted by the

investors. Results of return during the bull and the bear phases are presented in the following

table.

Table – 20

Descriptive Statistics for Various Phases –Sensex

Phase Period Minimum Maximum Daily

Average

Return

BEAR -A 21 -4-1998-

3-12-98

2764.16 4280.96 -0.2556

BULL -I 04 – 12-98-

22-02-2000

2849.82 5933.56 0.2587

BEAR -B 23-02-2000-

21-09-01

2600.12 5810.17 -0.1778

OSCILLATING 24-09-2001-

25-04-2003

2617.35 3712.74 0.0315

BULL - II 28-04-2003-

14-01-2004

2936.71 6194.11 0.4205

BEAR - C 15-01-2004-

17-05-2004

4505.16

6064.10 -0.3432

BULL - III 18-05-2004-

31-03-2008

4644 20873.0 0.1183

Source : Socio - Economic Voices, indiastat.com May–June, 2009, p. 11.

Table – 21

Indicators of Liquidity of Bombay Stock Exchange (percent)

Year BSE Mcap/GDP Turnover Ratio Traded Value

1992-93 25.1 24.3 6.1

1993- 94 42.8 23.0 9.8

1994 - 95 46.3 14.5 6.7

1995-96 47.5 8.9 4.2

1996- 97 36.9 24.6 9.1

1997- 98 41.4 32.9 13.6

1998- 99 35.6 50.2 17.8

1999- 00 47.1 75.2 35.4

2000- 01 27.4 175.0 47.9

2001- 02 26.9 50.2 13.5

2002- 03 23.3 54.9 12.7

2003- 04 43.4 41.9 18.2

2004- 05 52.4 30.5 16.0

2005- 06 81.8 27.0 22.1

2006- 07 82.6 27.0 22.3

2007-08 103.0 30.7 31.7

2008-09 55.3 35.6 19.7

2009-10 94.1 22.4 21.0

2010-11 86.8 16.2 14.0

Turnover Ratio = (Turnover/ Market Capitalization).

Traded Value Ratio= (Turnover/GDP).

Source: BSE

Table – 22

Size-wise Classification of Capital Raised

(Amt in Rs. crore) Year 2010-11

Size No. Amt

< 5 crore 1 2

> 5 crore - < 10 crore 2 11

> 10 crore - < 50 crore 13 455

> 50 crore - < 100 crore 20 1,406

> 100 crore 55 65,735

Total 91 67,609

Of the 22 stock exchanges in the country, Mumbai's (earlier known as Bombay),

Bombay Stock Exchange is the largest, with over 6,000 stocks listed. The BSE accounts for

over two thirds of the total trading volume in the country.

Table – 23

Settlement Statistics for Cash Segment of BSE

Year No. of Trades (Lakh) Turnover (Rs. crore)

1992-93 126 45,696

1993- 94 123 84,536

1994 - 95 196 67,749

1995-96 171 50,064

1996- 97 155 1,24,190

1997- 98 196 2,07,113

1998- 99 354 3,10,750

1999- 00 740 6,86,428

2000- 01 1,428 10,00,032

2001- 02 1,277 3,07,292

2002- 03 1,413 3,14,073

2003- 04 2,005 5,03,053

2004- 05 2,374 5,18,716

2005- 06 2,643 8,16,074

2006- 07 3,462 9,56,185

2007-08 5,303 15,78,855

2008-09 5,408 11,00,074

2009-10 6,056 13,78,809

2010-11 5,285 11,05,027

Table – 24

Percentage Share of Top ‘N’ Securities in Turnover in Cash Segment - BSE

Year Top Securities

5 10 25 50 100

1996- 97 72.9 81.7 88.1 91.1 93.4

1997- 98 67.1 79.9 89.0 93.7 96.8

1998- 99 48.8 64.5 81.1 89.4 95.4

1999- 00 37.0 55.1 77.8 87.3 93.0

2000- 01 50.0 70.4 87.7 94.0 97.5

2001- 02 30.7 43.9 66.2 81.7 91.5

2002- 03 37.7 53.3 74.4 86.2 93.3

2003- 04 30.8 43.6 60.9 74.5 85.9

2004- 05 25.5 39.1 52.6 64.2 75.3

2005- 06 16.8 23.8 35.6 45.6 57.7

2006- 07 15.3 23.9 40.2 55.0 70.1

2007-08 16.2 25.7 41.8 55.8 70.4

2008-09 18.5 29.6 49.0 66.0 79.6

2009-10 15.3 22.2 35.3 47.8 62.4

2010-11 10.2 15.1 25.9 37.3 51.5

Approximately 70,000 deals are executed on a daily basis, giving it one of the highest

per hour rates of trading in the world. There are around 3,500 companies in the country which

are listed and have a serious trading volume. The market capitalization of the BSE is Rs.5

trillion. The BSE `Sensex' is a widely used market index for the BSE.xx

Market Capitalization

Market capitalization is the measure of corporate size of a country. It shows the

current stock price multiplied by the number of outstanding shares. It is commonly referred to

as Market cap. It is calculated by multiplying the number of common shares with the current

price of those shares. This term is often confused with capitalization, which is the total

amount of funds used to finance a firm's balance sheet and is calculated as market

capitalization plus debt (book or market value) plus preferred stock. While there are no strong

definitions for market cap categorizations, a few terms are frequently used to group

companies based on its capitalization. The table below shows the market capitalization of

various stock markets in the world.

Based on the above study, it can be observed that India is 15th in the world ranking of

Market capitalization. This is in spite of having the third largest investor base, after Japan and

USA, and having the largest number of companies listed. United States leads the list of

countries with the highest market capitalization. It is interesting to note that the total market

capitalization of all the companies listed on the New York Stock Exchange is greater than the

amount of money in the United States. As mentioned earlier, the above data pertain to the

year 2005. The individual and global economy has grown since then. As on March 2006, the

global market capitalization for all stock markets was $43600 billion.

Table : 25

Word stock Markets and their Market Capitalization

Worldwide Stock Markets Source: ETIG

S.No Country Market cap (US$

billions) % of world

1 USA 15,517 39.5 2 Japan 4,079 10.4 3 United Kingdom 3,067 7.8 4 France 1,828 4.7 5 Germany 1,256 3.2 6 Canada 1,239 3.2 7 Hong Kong 1,001 2.6 8 Switzerland 872 2.2 9 Italy 788 2 10 Spain 688 1.8 11 Australia 687 1.8 12 Russia 592 1.5 13 South Korea 557 1.4 14 India 506 1.3 15 Taiwan 475 1.2 16 Others 6050 15.4

Total 39,202 100

Table : 26

Market Capitalisation – BSE, 2011-12

Month Rs. crore

Apr 62,83,196

May 60,91,264

Jun 63,94,001

Jul 65,10,777

Aug 65,62,025

Sept 71,25,807

Oct 72,24,908

Nov 70,67,845

Dec 72,96,726

Jan 65,95,280

Feb 63,43,072

Mar 68,39,084

Source: BSE

Listed Securities

Listing in a stock exchange refers to the admission of the securities of the company

for trade dealings in a recognized stock exchange. The securities may be of any public limited

company, Central or State Government, quasi-governmental and other financial

institutions/corporations, municipalities, etc. Securities of any company are listed in a stock

exchange to provide liquidity to the securities, to mobilize savings and to protect the interests

of the investors. Listed Securities

Listing in a stock exchange refers to the admission of the securities of the company

for trade dealings in a recognized stock exchange. The securities may be of any public limited

company, Central or State Government, quasi-governmental and other financial

institutions/corporations, municipalities, etc. Securities of any company are listed in a stock

exchange to provide liquidity to the securities, to mobilize savings and to protect the interests

of the investors. Global market capitalization for all stock markets was $43600 billion. India

has the highest number of companies listed in the stock market. Out of this, about 75 % of the

companies are listed with the Bombay Stock Exchange. After India, United States has the

highest number of companies listed.

Table - 27

Trading Frequency in Cash Segment of BSE, 2011-12

Month No. of Companies

Listed Companies Traded Percent of Traded

to Listed

Jan 5,047 2,984 59.1

Feb 5,054 2,913 57.6

Mar 5,067 2,933 57.9

April 5,069 2,977 58.7

May 5,078 2,924 57.6

June 5,085 2,968 58.4

July 5,096 2,976 58.4

Aug 5,086 2,921 57.4

Sept 5,092 2,851 56.0

Oct 5,102 2,934 57.5

Nov 5,105 2,832 55.5

Dec 5,112 2,896 56.7

Source: BSE

Indices

Parameters

BSE` NSE NYSE Tokyo

stock

exchange

Hong Kong

stock

exchange

Korea Stock

exchange

Name SENSEX NIFTY Dow

Jones

Industrial

Average

NIKKEI-

225

Hang Seug KOSPI

No of

Companies

30 50 30 225 33

Method of

calculation

Free Float

market

capitalization

method

Weighted

Average

Weighted

Average

method

Price

Weighted

Average

Weighted

Capitalisation

stock market

method

Market

Capitalisation

bassed

method

Eligibility Criteria for IPOs/FPOs: Companies have been classified as large cap

companies and small cap companies. Company with a minimum issue size of Rs. 10 crores

and market capitalization small cap company is a company other than a large cap company.

Parameters Small Cap

Companies Large Cap Companies

Min post issue paid up 3 Crores 3 Crores

capital Min issue size 3 Crores 10 Crores Min Market capitalisation 5 Crores 25 Crores Min Public shareholders 1000

Min turnover 3 Crores in the preceding 3

yrs

Scrip wise Price Bands

1. For scrips (53 scrips) on which derivative products are available and scrips which are

included in indices on which derivative products are available, there is no circuit

filter. However, the Exchange has imposed dummy circuit fitters on these scrips to

avoid punching error, if any.

2. Other Scrips which are not included in above-mentioned category have a circuit filter

limit of 20%. Market Wide Circuit Breakers In addition to the above-stated price bands on

individual scrips, SEBI has decided to implement index based market wide circuit breakers

system with effect from July 02, 2001.The circuit breakers are applicable at three stages of

the index movement either way at 10%, 15% and 20%. These circuit breakers will bring

about a coordinated trading halt in both Equity and Derivative

References : i Rahman, S. (2001). The introduction of derivatives on the Dow Jones industrial

average and their impact on the volatility of component stocks. Journal of Futures

Markets, 21, 633–653. ii Bologna P., & Cavallo, L. (2002): effectively reduce stock market volatility? Is the

'futures effect' immediate? evidence from the Italian Stock Exchange using GARCH.

Applied Financial Economics, 12, 183–192. iii

Chiang, M. H., & Wang, C. Y. (2002). The impact of futures trading on spot index

volatility: evidence for Taiwan index futures. Applied Economics Letters, 9, 381–385. iv

Pilar, C., & Rafael, S. (2002). Does derivatives trading destabilize the underlying

assets? Evidence from the Spanish Stock Market. Applied Economics Letters, 9, 107–

110. v Robert, W. F., & Michael, D. M. (2002). The impact of stock index futures trading on

daily returns seasonality: A multicountry study.The Journal of Business, 75(1), 95–

125. vi

Shembagaraman, P. (2003). Do futures and options trading increase stock market

volatility? NSE Working Papers. http://www.nseindia.com/content/research/

Paper60.pdf (accessed on 23 April 2005). vii

Sung, C., Taek, H., & Park, J. (2004). Futures trading, spot market volatility and

market efficiency: The case of the Korean Index futures markets. Journal of Futures

Markets, 24(12), 1195–1228. viii

Boyer, C. M., & Popiela, E.M. (2004): Index Futures and Stock Price Volatility,

Derivatives Use, Trading & Regulation, 9(4), 351–364. ix

Bekaert, G., Campbell R. Harvey and Robin L. Lumsdaine (1998). “Dating the

integration of world equity markets”, Working Paper No. 6724 (Cambridge,

Massachusetts, National Bureau of Economic Research).

x Brooks, R. and L. Catao (2000). “The new economy and global stock returns”,

Working Paper No. 00/216 (Washington, D.C., International Monetary Fund). xi

Ghosh, Asim, R. Saidi and K.H. Johnson (1999). “Who moves the Asia-Pacific stock

markets: U.S. or Japan? Empirical evidence based on the theory of cointegration”,

The Financial Review, vol. 34, No. 1, pp. 159-170. xii

Yang, T. and J.J. Lim (2002). “Crisis, contagion, and East Asian stock markets”,

Working Paper Economics and Finance No. 1, (Singapore, Institute of South East

Asian Studies) xiii

Choudhry, T. and Lu Lin (2004). “Common stochastic trends among Far East stock

prices: effects of the Asian Financial Crisis.” paper presented at European Financial

Management Association 2004 Annual Meeting, Basel, Switzerland. xiv

Calado, J., Garcia, M., & Pereira, S. (2005). An empirical analysisof the effect of

options and futures listing on the underlying stock return volatility: The Portuguese

case. Applied Financial Economics, 15, 907–913. xv

Mallikarjunappa, T., & Afsal, E. M. (2007). Futures trading and market volatility in

Indian equity market: A study of CNX IT index. Asian Academy of Management

Journal of Accounting and Finance, 3(1), 59–76. xvi

Vikram K. Joshi* & Miss Richa Saxena, Analytical Study of Impact of FII on Indian

Stock Market with special reference to BSE SENSEX , Management Insight, Vol.

VII, No. 2; Dec., 2011 xvii

Vikalpa, Vol. 29, No. 4, Oct. – Dec. 2004, p. 24. xviii

Socio - Economic Voices, indiastat.com May–June, 2009, p. 1. xix

General Information - Bombay Stock Exchange, Research & Statistics Department,

Mumbai,. xx

General Information - Bombay Stock Exchange, Research & Statistics Department,

Mumbai.