11

Capital Market in the Post-Liberalization Period: Reforms and Emerging Trends

V. K. Vijayakumar

11.1 Introduction: The Central Issue of Resource Allocation

The central problem of every economy is that of resource allocation. To reap the gains of economic efficiency, the resources have to be mobilized and made available for the most productive uses. In every market economy, the major part of the savings comes from the households. However, the investment is made by business firms. Mobilizing the idle resources of the households and making it available to the firms, for productive uses, is the function of the financial system. The economic efficiency and growth are crucially related to the efficiency with which the financial system performs this allocative role.

11.1.1 Gains of Efficient Resource Allocation

If the allocative function is performed efficiently, some of the desirable economic consequences follow. These are:

1. The households receive the best returns.
2. The resources go into the most productive uses, benefiting efficient firms.
3. The economy reaps efficiency gains via the optimum resource allocation and favourable changes in the capital—output ratio.

The central issue, therefore, is one of efficient resource allocation. The crucial questions are:

1. How can optimum resource allocation be achieved?
2. Which mode or system of resource allocation is more efficient?

11.2 Stock Market and Economic Growth

The capital market has two segments, viz., the primary market and the secondary market. The primary marker is the market for the Initial Public Offerings (IPOs). Once the securities are offered to the public, they are listed and traded in the stock exchanges. The stock market, where the securities are traded, is the secondary market. The secondary market is more conspicuous of the two, and is widely regarded as the barometer of the economy. Of course, the growth of the primary market is crucially dependent on the performance of the stock market. Therefore, it would be meaningful to examine the role of the stock market.

11.2.1 The Role of Stock Market

The most important function of the stock markets is that of resource mobilization for the firms. In the present context of liberalization and privatization, which imply a huge demand for capital by the private sector, this role assumes added significance. Well functioning stock markets facilitate efficient resource mobilization by the firms.

From the investors’ point of view, the stock markets enable them to diversify their investment across a wide variety of the asset class. This helps in risk minimization and achievement of optimum returns from the investment.

The stock markets can substantially contribute to improving corporate governance. The stock prices reflect the judgement of a large number of market participants. The performance of firms and changes in the profit potential are immediately reflected in the stock prices. This screening and monitoring of role facilitates improved corporate governance.

Even though the capital market and the banking system compete in resource mobilization, they are complementary in certain respects. The stock market together with the banking system enables the firms to achieve the right equity—debt mix. Seen from this perspective, the stock market development contributes to the development of the banking system.

It is often claimed by the votaries of the stock markets that it is a leading indicator of the economy. This is a controversial issue, since there are evidences in support of and contrary to this claim. However, there are evidences for positive correlation between the stock market development and economic growth. It can also be argued that the capital market is a better allocator of resources than the banking system.

The argument in favour of the capital market is that the banking system, particularly in the developing economies, constrained as it is by the complex regulatory framework and structural deficiencies, fails in quality information processing. On the contrary, the capital market, if it functions efficiently, reflects price signals, which provide adequate information. Therefore, the firms that perform well (firms with attractive stock prices) find it easy to mobilize the resources for their expansion and growth. This further means, the denial of funds for the less productive (poor performing) firms, industries and segments. Furthermore, the performance of the firms is continuously screened, monitored and evaluated through their stock prices. Along with this continuous evaluation, the threat of takeovers (facilitated by the laws relating to acquisitions and mergers) disciplines the firms. Thus, the market efficiency, in addition to resource allocation, ensures efficient resource utilization also. This facilitates achievement of a higher economic growth.

This argument is supported by an empirical evidence. An exhaustive and authoritative study on the relationship between the stock market growth and economic development came from the World Bank Research Group. The study came in the form of six research papers in a symposium issue on ‘Stock Markets and Economic Development’.¹ The empirical evidence on the positive correlation between the stock market growth and economic development came from Levine and Zervos (1996). Levine and Zervos found that the stock markets impart and facilitate liquidity, risk diversification, information about firms, corporate control and savings mobilization. By changing the quality of these services, the stock markets alter the rate of economic growth.

Liquidity is a major factor that can influence economic activity. It is a fact that many projects with a high profitability potential require a long-term capital commitment. However, generally the investors would be reluctant to part with their savings for long periods. The capital market solves this problem by providing liquidity to the investors. This facilitates the investment in high-return projects, which would not materialize in the absence of capital markets that provide liquidity. Obviously, this has a favourable impact on the economic growth.

The stock market development influences economic growth through risk diversification also. The projects with a high profit potential are inherently risky. Risk diversification through the internationally integrated stock markets via the foreign portfolio investment can promote investment in projects with higher returns.

The stock markets can stimulate acquisition of information about the firms. The information will enable the investors and traders to trade and make profits. The scope for making profits from information will encourage research into the firms’ performance. This better information, in turn, facilitates better resource allocation leading to higher economic growth. Another influence of the stock markets is via the corporate control. According to Jenson and Murphy (1990), efficient stock markets couple manager compensation with stock performance. This aligns the interests of managers and owners, thereby, promoting a better corporate performance. A better performance, higher profits, higher stock prices and a better manager compensation moves in a circular cumulative causation.

Yet another interesting influence of the stock market is its ability to discipline the management and maximize a firm’s stock price through the takeover threats. The efficient stock markets can promote an efficient resource allocation and growth via better management achieved through the takeover threat.

11.2.2 Securities Market in India: A Profile

The securities market in India has a long history. It made its humble beginnings with trading in the securities of the East India Company in Mumbai and Calcutta in the 18th century. It is said that the brokers used to gather under a banyan tree in Mumbai and under a neem tree in Calcutta for trading. The major breakthrough for the securities market was the introduction of the joint stock companies with a limited liability in the 1850s. The 1860s witnessed a brisk trading and speculation in the securities. This paved the way for the formation of the first formal and organized stock exchange in the country—The Bombay Stock Exchange in July 1875. The Ahmedabad and Calcutta Stock Exchanges were formed in 1894 and 1908, respectively, and 21 other stock exchanges followed in the 20th century.

Even though the stock market in India has a history of more than a century, it remained in a state of insignificant low profile, in the first three decades following independence. The adoption of the principle of ‘commanding heights’, the socialist bias in the economic policy and planning, lack of trust in markets and the strategy of ‘state-led growth’ created an economic and financial environment, where the capital market was secondary, if not insignificant. The lengthening shadow of the ‘Control Raj’ in the early 1970s had its repercussions in the stock market, too. The dividend freeze of 1974 sent the market into a limbo culminating in its closure for three months. The total amount raised from the capital market by the non-government public limited companies during the decade of 1970s was a mere Rs 883 crores, the annual average being Rs 88.3 crores only.²

11.2.3 Resource Allocation in the Pre-Reform Period

Consequent to the cumulative effect of the above mentioned factors, the banking system, particularly the term-lending financial institutions like the IDBI, IFCI and ICICI dominated the capital market in capital mobilization. While the total amount mobilized by the nongovernment public companies, through IPOs (primary market) rose only modestly from Rs 66.4 crores in 1970 to Rs 163.9 crores in 1980 (147 per cent increase) the financial assistance disbursed by all financial institutions (banking system) rose from Rs 159.9 crores in 1970–71 to Rs 1847.9 crores in 1980–81. This is a phenomenal increase of 1056 per cent.³

11.2.4 Resource Mobilization in the Post-Reform Period: Structural Changes

The reforms of the 1980s were half-hearted; they addressed mainly the constraints experienced by the domestic entrepreneurs. Compared to the half-hearted reforms of the 1980s, the Structural Adjustment Programme of the 1990s was a ‘Big Bang’. The major policy initiatives, encompassing all the major segments of the economy, transformed the economic environment. Along with internal liberalization, external liberalization and competition were also ushered in, through a drastic reduction in the import tariffs and liberalization of imports. The dramatic change in the economic environment and great expectations about the future potential led to a boom in the capital markets. Even though the decade of the 1990s witnessed a major stock market scam and high volatility in the stock prices, the capital market as a whole experienced a steady secular growth trend. For the first time in the Indian economic experience, the resource mobilization from the primary market exceeded the assistance disbursed by all the financial institutions. The resource mobilization through the issue of corporate securities in the primary market rose to Rs 68,963 crores (excluding Euro issues) during 1990–2000 while the assistance disbursed by all the financial institutions rose to Rs 68478 crores during the same period.⁴ Clearly, the capital market had arrived.

11.2.5 Reforms in the Indian Capital Market: Post 1991

The year 1991 marks a watershed in the Indian economic history. The reforms initiated in 1991, as a response to the BoP crisis of 1991, were sweeping in their scope and were revolutionary in content. The Structural Adjustment Programme initiated in 1991 transformed many segments and markets in the economy, beyond recognition. One market that was subjected to sweeping the reforms has been the capital market. These reforms, led to a spectacular growth in the Indian capital market, two scams notwithstanding.

Consequent to the reforms, the market has grown in size and improved in efficiency. As measured in terms of the capital raised from the market, the number of stock exchanges and other intermediaries, the number of listed stocks, market capitalization, investor population, trading ratios and trading volumes, turnover in stock exchanges and technological sophistication, and the growth of the capital market has been truly remarkable. The fundamental institutional changes brought about a drastic reduction in the transaction cost and a considerable improvement in the market efficiency, safety and transparency. Particularly, the setting up of institutions like the SEBI, the NSE and the Clearing House Corporation, the market pricing of issues, countrywide screen-based trading, dematerialization of securities, rolling settlement, modern risk-management systems, derivatives trading, foreign portfolio investment and disclosure, and investor protection measures, transformed the Indian capital market from an oligopolistic broker controlled, technologically backward, inefficient market, to a sophisticated, transparent market with a high level of market efficiency. It would be meaningful to revisit these reforms and examine their impact on the market efficiency.

11.2.6 Market Pricing of Issues

The abolition of the office of the Controller of Capital Issues (CCI), and the decision to leave pricing of the issues to the market were the major steps taken in 1991. This reform replaced the bureaucratic price administration with market pricing, thereby, facilitating a better price discovery.

11.2.7 Empowering the Regulatory Body, SEBI

The regulatory body Securities and Exchange Board of India (SEBI), set up in 1989, was empowered in 1992, with the responsibility of protecting the interests of investors and promoting and regulating the development of the securities market. All the market intermediaries are registered and regulated by SEBI. The SEBI lays down the rules of the game for all the market intermediaries and participants. The Disclosure and Investor Protection (DIP) guidelines are issued by the SEBI to protect the interests of the investors.

11.2.8 Open Electronic Limit Order Book Market and Screen-Based Trading

A major reform was the replacement of the ‘open outcry’ system, with the modern open electronic order book market. The open outcry system is similar to auctioning vegetables in a local market. The brokers assemble in a trading floor and trade through shouting and hand signalling. The deficiency of this system is that its liquidity is limited to the ability of the market intermediaries to hold the inventory of securities. Also, the price signals emanating from such a market reflect the information set of the market intermediaries confined to that market.

The Open Electronic Limit Order Book (ELOB) system is a countrywide computer-based matching system. The advantage of this system is that it facilitates the discovery of prices that reflect the combined resources and information of all the traders. This boosts liquidity substantially. Furthermore, it facilitates a transparent screen-based trading. The exchange that started ELOB and screen-based trading was the newly set up—1994—National Stock Exchange (NSE). The NSE started trading equity and debt instruments in 1994. The BSE followed suit in 1995.

11.2.9 Extension of Markets: Countrywide Integrated Markets

Under the open outcry system that was dominated by the BSE, traders including the investors had to route their orders to Bombay through the intermediaries. The multiplication of intermediaries pushed up the transaction costs. Also, variations in the prices between Bombay and other markets were common. The system did not provide scope for exploiting the arbitrage opportunities.

This major deficiency was removed when the NSE established satellite communications system, paving way for nationwide connectivity. This led to the emergence of an integrated national market. An order placed from any part of the country through computers, can be matched with any order from any part of the country. Consequently, price variations are removed by arbitrageurs, who exploit the pricing discrepancies.

The ELOB system and the consequent countrywide integration of markets, succeeded in substantially reducing the number of intermediaries, thus reducing transactions costs; this removed price discrepancies between the markets, thereby contributing to the market efficiency.

11.2.10 Clearinghouse System

Another major deficiency of the Indian capital market has been the possibility of counterparty risk implied in the earlier system. Counter-party risk arises when one of the parties to a contract declares bankruptcy, and reneges with the contract. A high volatility in stock prices adds to the possibility of counter-party risk. The danger of counter-party risk is that a default at the level of one or a few traders can lead to a default at the entire market level, and a systemic collapse through cascading effects. This happened in April 1995, when the BSE had to be closed down for three days due to cascading defaults in connection with the ‘M.S. Shoes’⁵ stock trading.

The problem of counter-party risk has been removed through a major reform—the establishment of the Clearinghouse Corporation that guarantees each trade. From July 1996 onwards, the National Securities Clearing House Corporation (NSCC) guarantees each trade, thereby, removing counter-party risk and its cascading consequences.

11.2.11 Depository Services

Till 1996, the share transfers in the market required a physical movement of shares. The physical shares are beset with problems like bad delivery (arising from non-compliance of rules, signature differences, etc.). This resulted in a lot of back office work arising from filling in the transfer deeds, affixing share transfer stamps, sending certificates to the company through post offices, etc. This led to high transactions costs. Further, the delay in getting a share transferred to the buyer’s name (it used to take around 45 days on an average), adversely affected the liquidity of the stock.

The problems arising from physical certificates have been solved through the system of depositories (Depository Act, 1996). The depositories are institutions that dematerialize securities. Dematerialization is the process of converting securities from physical form into the electronic form. Depositories maintain an electronic record of ownership of shares, thereby, eliminating the need for the storage and handling of securities. This reduces costs, substantially. Furthermore, the possibilities of forgery, counterfeiting and theft of securities are eliminated. The significance of depositories is that they reduce transaction costs, improve liquidity and help in better price realization (demat securities always command a premium over physical securities), thereby, contributing to market efficiency. India now has two depositories, viz., the National Securities Depository Limited (NSDL)—promoted by the NSE, and the Central Depository Services Limited (CDSL)—promoted by the BSE.

11.2.12 Rolling Settlement

In the pre-reform period, the settlement cycles on the stock exchanges were for long resulting in long open positions with their inherent volatility risk. The trading cycle varied from 14 days, for specified securities, to 30 days, for others, with carry-over facilities under badla⁶ system. The actual delivery of securities and the payment of cash after the settlement date, took another 10 days or more. Such long periods between entering into a contract and its final settlement, often caused defaults and settlement problems. To overcome these problems, the settlement cycle was later reduced to one week. However, this could not solve the problem, since different exchanges had different settlement periods resulting in the transfer of positions from one exchange to the other.

The reform of the trading cycle and settlement system was effected through the introduction of the T+n rolling settlement. Here, T refers to the trading day and n refers to the number of days after the trading day, when the actual settlement takes place. The rolling settlement on T+5 basis was introduced, reducing the trading cycle to just one day. Under T+5 rolling settlement, all the trades outstanding at the end of the day T will be settled on the fifth day. All the stocks were compulsorily moved to rolling settlement from December 2001. All exchanges were moved to the same settlement day. Later T+5 was replaced with T+ 3 and T+ 2. The most advanced T+ 1 mode is planned to be introduced in 2004.

The rolling settlement substantially reduces the risk of large open positions with their high volatility potential. The stock market booms and crashes of 1992 and 2000–01, were to a large extent, caused by the huge open positions built by the speculators exploiting the lengthy settlement periods and carry-forward mechanisms.

11.2.13 Derivatives Trading

An important reform in the recent times has been the introduction of derivatives trading. The derivatives like futures and options are financial contracts, which derive their value from ‘the underlying’. The ‘underlying’, refers to the spot market price of the product concerned. Trading in derivatives was introduced in June 2000. The market presently offers index futures and options, and stock futures and options in selected securities. The Clearing Corporation guarantees all trades in the derivatives market. The advantage of derivatives is that they allow a better risk management. Trading in derivatives enables risk minimization through hedging and arbitrage.

11.2.14 Capital from Abroad: GDRs and ADRs

Till 1994, Indian corporate sector could raise resources only from within the domestic market. The gross domestic corporate capital formation was thus constrained by the availability of domestic savings. This situation changed in 1994 when the Indian companies were allowed to raise capital abroad through the issue of the Global Depository Receipts (GDRs) and the American Depository Receipts (ADRs). This enabled the Indian corporate sector to mobilize foreign savings for capital formation in India.

11.2.15 Foreign Portfolio Investment (FPI)

Yet another landmark reform was the opening up of the Indian stock market for foreign portfolio investment in 1993. The Foreign Institutional Investors (FIIs) were allowed to invest in the Indian stock market. This gave a big boost to the secondary market.

The FPI played a significant role in boosting India’s foreign exchange reserves at a time when the country’s reserves position was precarious, after the BoP crisis of 1991. The FPI boosted the sagging morale of the market that was dented by the crash of 1992. The FPI also has a positive effect from the macro-economic perspective. An increase in the capital flows through the FPI reduces the interest rate (via increase in money supply). A reduction in the cost of the capital (interest rate) has a favourable impact on investment and growth. On the flip side, FPI is a hot money. During times of disturbances and instability, FPI flows out quickly causing major macro-economic crisis.

11.2.16 Book Building

Yet another important reform (1995) has been the introduction of the modern book building system of the securities issue. Under the normal system, securities are issued at a fixed price. Book building is a process of offering securities based on the bids received from the investors. Bidding facilitates demand assessment and price discovery.

11.2.17 Corporatization of Stock Exchanges

It used to be said of the Indian Stock Exchanges that they were ‘institutions of the brokers, for the brokers, by the brokers’. The brokers owned, controlled and managed the stock exchanges; naturally, their interests got precedence over that of the investors. The way out of the impasse was the corporatization and demutualization of stock exchanges. This reform was introduced in 2001. Under corporatization, the ownership, management and trading membership are segregated from one another. The NSE has a demutualized governance structure. For other exchanges, the government offered many concessions and tax incentives to facilitate corporatization.

11.2.18 Risk Management

The stock markets are notorious for their volatility. To prevent volatility from degenerating into crisis, market failures and systemic collapse, market integrity is essential. This requires a comprehensive risk management system. Learning lessons from scams and market crashes, a comprehensive risk management system has been introduced. This includes capital adequacy of members, adequate margin requirements, limits on exposure and turnover, indemnity insurance, on-line position monitoring and automatic disablement. Also, there are systems for efficient market surveillance to curb excessive volatility and prevent price manipulations.

11.2.19 Other Reforms

Other reforms introduced include the following:

• Opening of the mutual fund industry to the private sector
• Code for takeovers, acquisitions and mergers
• Stock buy-back facility for companies
• Stock lending
• DIP guidelines

11.3 Impact of Reforms

The cumulative impact of the above-discussed reforms has been that the Indian capital market got transformed dramatically. The contrast between the market designs at the beginning of the reforms (1991) and at the end of a decade of reforms (2002) brings this into perspective. This is shown in Table 11.1.

The impact of reforms may be summarized as follows:

• Reduction in transaction costs
• Improved price discovery—market-determined pricing
• Efficient electronic settlement
• Better risk management—elimination of counter-party risk, possibilities of hedging
• Integration of markets within the country—removal of price discrepancies through arbitrage operations
• Global integration of the markets—Euro issues and FPI
• Substantial improvement in liquidity.

Clearly, the reforms have transformed the Indian capital market from an oligopolistic, broker-controlled, technologically backward and inefficient market to a sophisticated, technologically advanced and transparent market, with high levels of market efficiency.

11.4 Post-Reform Trends

As explained earlier, the reforms have contributed substantially to the qualitative improvement of the Indian capital market. The major trends in the market emerging as a consequence of the reforms are the following.

11.4.1 Big Leap in Resource Mobilization

The 1990s witnessed a big leap in resource mobilization from the primary market. This is clear from Table 11.2.

 

TABLE 11.1 Market Design in Indian Securities Markets, 1992 and 2008

Feature	1992	2008
Regulator	No specific regulator but central government Oversight.	A specialized regulator for securities market (SEBI) vested with powers to protect investors’ interest and to develop and regulate securities market. SROs strengthened.
Intermediaries	Some of the intermediaries like stock brokers, authorized clerks, etc. regulated by the SROs.	A variety of specialized intermediaries emerged. They are registered and regulated by the SEBI (also by SROs) They as well as their employees are required to follow a code of conduct and are subject to a number of compliances.
Access to market	Granted by the central government.	Eligible issuers access the market after complying with the issue requirements.
Pricing of securities	Determined by the central government	Determined by the market, either by the issuer through a fixed price or by the investors through book building.
Integration with the international market	No access	Corporates allowed issue of the ADRs/GDRs and raise the ECBs. The ADRs/GDRs have a two-way fungibilty. The FIIs allowed to trade in the Indian Market. The MFs were also allowed to invest overseas.
Trading mechanism	Open outcry, available at the trading rings of the exchanges, opaque, auction/negotiated deals.	A screen-based trading system. Orders are matched on price-time priority. Transparent, trading platform accessible from all over the country.
Aggregation order flow	Fragmented market through geographical distance. Order flow unobserved.	Order flow observed. Exchanges have an open electronic consolidated limit order book.
Anonymity in trading	Absent	Complete
Settlement system	Bilateral	Clearing house of the exchange or the clearing corporation is the central counter-party.
Settlement cycle	14 day account period settlement, but not adhered to always.	Rolling settlement on T+2 basis.
Counter-party risk	Present	Absent
Form of settlement	Physical	Electronic
Basis of settlement	Bilateral netting	Multilateral netting
Transfer of securities	Cumbersome. Transfer by endorsement on security and registration by issuer.	Securities are freely transferable. Transfers are recorded electronically by the depositories.
Risk management	No focus on risk management	Comprehensive risk management system encompassing capital adequacy, limits on exposure and turnover, margining, on-line position monitoring etc.

 

It can be seen from the table that capital mobilization through the primary market by non-government public companies rose from Rs 4312 crores in 1990–91 to Rs 26,417 crores in 1994–95. The massive volatility in the stock price movements during the 1990s caused spectacular ebbs and flows in the public issue market also. This led to certain structural changes in the primary market. The public issue market slowed down substantially, but the private placement market leapfrogged. The public issues by the non-government companies declined from a peak of Rs 26,417 crores in 1994–95 to Rs 5153 crores in 1999–2000. But, as can be seen from the table, resource mobilization through the private placement route shot up from Rs 11,174 crores in 1994–95 to Rs 61,259 crores in 1999–2000. These structural changes apart, the primary market as a whole witnessed a substantial growth in the 1990s, with the total resource mobilization through domestic issues rising from Rs 14,219 crores in 1990–91 to Rs 68,963 crores in 1999–2000, a growth of 385 per cent.

11.4.2 Stock Market Efficiency: Reduction in Transaction Costs

The efficiency of the stock market is measured by transaction costs. The post-1991 reform initiatives have drastically reduced transaction costs in the Indian capital market. Now, India’s transaction costs are almost at par with the best in the world. This is evident from Table 11.3.

Consequent to a drastic reduction in the trading fee, paper work, charges in connection with bad delivery and stamp duty, transaction costs have declined from 4.75 per cent in 1994 to 0.6 per cent in 1999; this is close to the world’s best standards.

 

11.4.3 Efficient Risk Management

The reforms have improved the risk management in the market. The setting up of institutions like the SEBI, NSE, Depositories and NSCC; the ELOB and rolling system of trading; the introduction of derivatives trading and demutualization of stock exchanges; the introduction of capital adequacy for members, adequate margin requirements, limits on exposure and turnover, indemnity insurance, the on-line position monitoring and automatic disablement have succeeded in substantially reducing the market risk and systemic failure.

11.4.4 Excessive Volatility

The stock markets are notorious for their volatility. This is to a large extent unavoidable since economic growth and corporate profitability are cyclical. The Indian stock markets have been excessively volatile due to oligopolistic manipulations and scams. Two scams, in 1992 and 2000, engineered by the stockbrokers Harshad Mehtha and Kethan Parekh, respectively, led to a loss of credibility in the market. However, recent reforms have made the possibility of such scams remote. The volatility in stock prices in the post-reform period is evident from Table 11.4.

11.4.5 Domination by FIIs

An important feature of the Indian stock market today is the domination by the FIIs. The FIIs are the modern day market movers and are holding a sizeable chunk of the equity shares of the blue chip companies. As on June 2010, the cumulative FII investment in India has crossed $75 billion. Even though FII investment has helped India in tiding over the BoP crisis and in reducing interest rates via increase in money supply, it has to be recognized that FII investment is ‘hot money’ which can flow out quickly causing macroeconomic disturbances. This calls for an astute management of the capital flows.

 

TABLE 11.4 Stock Price Movements

Year	BSE Sensex (annual average7)
1978–79	100
1979–80	122.32
1984–85	266.19
1989–90	729.49
1992–93	2895.67
1994–95	3974.91
1999–2000	4658.63
31 December 2004	6602.69
December 2005	9000 (Monthly figures)
May 2006	12,600 (Monthly figures)
February 2007	14,000 (Monthly figures)
October 2007	20,000
January 2008	21,000
March 2009	8160
June 2010	17,700

11.5 Conclusion

The Indian capital market today is a far cry from what it was during the pre-reform period; sweeping reforms have changed the Indian capital market beyond recognition. The reforms have substantially improved the market efficiency through a drastic reduction in the transaction costs. The institutional and trading reforms along with the modern systems of demutualization and risk management have transformed the market from an oligopolistic broker controlled system to a modern transparent system incorporating the world’s best standards.

References

Jensen, M. C., and Murphy, K. J. (1990). Performance pay and top management incentives. Journal of Political Economy, 98(April), 225–64.

Levine R., and Zervos, S. (1996). Stock market development and long run economic growth. The World Bank Economic Review, May, 323–339.