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A new phase in the Indian stock markets began in the 1970s, with the introduction

of Foreign

Exchange Regulation Act (FERA) that led to divestment of foreign equity by the

multinational

companies, which created a surge in retail investing. The early 1980s witnessed

another surge instock markets when major companies such as Reliance accessed equity markets for

resource

mobilisation that evinced huge interest from retail investors.

A new set of economic and financial sector reforms that began in the early 1990s

gave further

impetus to the growth of the stock markets in India. As a part of the reform process,

it became

imperative to strengthen the role of the capital markets that could play an important

role in

efficient mobilisation and allocation of financial resources to the real economy.

Towards thisend, several measures were taken to streamline the processes and systems

including setting up an

efficient market infrastructure to enable Indian finance to grow further and mature.

The

importance of an efficient micro market infrastructure came into focus following the

incidence of

market abuses in securities and banking markets in 1991 and 2001 that led to

extensive

investigations by two respective Joint Parliamentary Committees.

The Securities and Exchange Board of India (SEBI), which was set up in 1988 as an

administrative arrangement, was given statutory powers with the enactment of theSEBI Act,

1992. The broad objectives of the SEBI include

to protect the interests of the investors in securities

to promote the development of securities markets and to regulate the securities

markets

The scope and functioning of the SEBI has greatly expanded with the rapid growth

of securities

markets in India in the last fifteen years.

Following the recommendations of the High Powered Study Group on Establishmentof New

Stock Exchanges, the National Stock Exchange of India (NSE) was promoted by

financial

institutions with an aim to provide access to investors all over the country. NSE was

incorporated

in Nov 1992 as a tax paying company, the first of such stock exchanges in India,

since stock


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exchanges earlier were trusts, being run on no-profit basis. NSE was recognized as a

stock

exchange under the Securities Contracts (Regulations) Act 1956 in Apr 1993. It

commenced

operations in wholesale debt segment in Jun 1994 and capital market segment

(equities) in Nov1994. The setting up of the National Stock Exchange brought to Indian capital

markets several

innovations and modern practices and procedures such as nationwide trading

network, electronic

trading, greater transparency in price discovery and process driven operations that

had significant

bearing on further growth of the stock markets in India.

Faster and efficient securities settlement system is an important ingredient of a

successful stock

market. To speed the securities settlement process, The Depositories Act 1996 was

passed thatallowed for dematerialisation (and rematerialisation) of securities in depositories

and the transfer

of securities through electronic book entry. The National Securities Depository

Limited (NSDL)

set up by leading financial institutions, commenced operations in Oct 1996.

Regulations

governing selection of various types of market intermediaries as depository

participations were

made. Subsequently, Central Depository Services (India) Limited promoted by

Bombay Stock

Exchange and other financial institutions came into being.

Rapid Growth

The last decade has been exceptionally good for the stock markets in India. In the

back of wide

ranging reforms in regulation and market practice as also the growing participationof foreign

institutional investment, stock markets in India have showed phenomenal growth in

the early

1990s. The stock market capitalization in mid-2007 is nearly the same size as that of

the gross

domestic product as compared to about 25 percent of the latter in the early 2000s.

Investor base


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continued to grow from domestic and international markets. The value of share

trading witnessed

a sharp jump too. Foreign institutional investment in Indian stock markets showed

continuous

rise reaching about USD10 bn in each of these years between FY04 to FY06. Stock

marketsbecame intensely technology and process driven, giving little scope for manual

intervention that

has been the source of market abuse in the past. Electronic trading, digital

certification, straight

through processing, electronic contract notes, online broking have emerged as

major trends in

technology. Risk management became robust reducing the recurrence of payment

defaults.

Product expansion took place in a speedy manner. Indian equity markets now offer,

in addition

to trading in equities, opportunities in trading of derivatives in futures and optionsin index and

stocks. ETFs are showing gradual growth. Within five years of introduction of

derivatives,

Indian stock markets now are ranked first in stock futures and fourth in index

futures. Indian

stock markets are transaction intensive and thus rank among the top five markets in

this regard.

Stock exchange reforms brought in professional management separating conflicts of

interest

between brokers as owners of the exchanges and traders/dealers. The

demutualisation andcorporatisation of all stock exchanges is nearing completion and the boards of the

stock

exchanges now have majority of independent directors. Foreign institutions took

stake in Indias

two leading domestic stock exchanges. While NYSE Group led consortium took stake

in the

National Stock Exchange, Deutsche Borse and Singapore Stock Exchange bought

equity in the

Bombay Stock Exchange Ltd.


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1. Macro-Economic Scenario

The Indian economy, which witnessed robust growth up to the second quarter of

FY09, recorded

sharp deceleration thereafter in the wake of persistent global economic slowdown.

India's real

GDP grew 6.7% during Financial Year (FY) 09 as compared with 9% during thecorresponding

period of FY08. Though India's growth trajectory has been impacted both by the

financial crisis

and the global economic downturn, the structural drivers of the Indian economy

continue to be

intact, sustaining overall growth at a level much higher than most other economies

in the world.

2. Capital Markets

Index Movement

The BSE Sensex saw an unprecedented swing in Calendar Year (CY) 08 - from

20,873 inJanuary 2008 to 8,451 in November 2008. The key negatives that drove down

Indian markets

were weakness in global financial markets, slowdown in the domestic economy,

tight monetary

policy in 1 HFY09, and heavy selling by Foreign Institutional Investors (FII). All

these factors

contributed to a series of large downgrades in corporate sector earnings. Another

highlight of

FY09 has been a 27% depreciation in the Indian rupee v/s the US dollar, which has

also had a

negative impact on earnings.FII & MF Activity in Equity Markets

FY09 was the first fiscal in India's history when FIIs were net sellers in Indian

equities;

secondary market FII outflows for the year were Rs. 479 billion. Interestingly, FY08

was the

year of record net FII inflows of Rs. 517 billion. However, mutual funds continued to

be net

buyers for the sixth consecutive year. In FY09, mutual funds were net buyers to the

tune of Rs.

66 billion, which is a 52% drop from Rs. 137 billion of net buying in FY08.


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3. Broking Industry

Equity Market Volumes:

The average daily equity market volumes for FY09 were Rs. 612 billion, down 16%

from Rs.

726 billion in FY08. However, during the six years beginning FY03, the year when

cash andderivatives were fully active on both the exchanges, total market volumes have

grown by 50%

compounded annually. During this period, volumes in the derivatives and cash

segments have

grown at a compounded annual growth rate (CAGR) of 72% and 27%, respectively.

The notable

trends in customer segmental volume mix that influence market volumes are as

follows:

1.The contribution of retail volumes has declined from 61% in FY08 to 55% FY09;

the

retail contribution ratio has been more volatile than the other two market segments.2.The contribution of institutional volumes, i.e. volumes from FII and domestic

institutional investors (DIIs) such as mutual funds, banks and insurance companies

has

remained stable at 15% for FY08 and FY09.

3.The contribution of proprietary volumes, which include arbitrage and other

proprietary

volumes of stock brokers, has increased from 24% in FY08 to 30% in FY09.

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