INVESTMENT IN FINANCIAL SECURITIES IN INDIA SINCE
GLOBALISATION
INTRODUCTION
Globalisation of financial markets occupies a significant place in the economic
development of any country as it promotes faster economic growth. The past two decades
have witnessed a process of accelerating changes in the global financial markets.
Experiences showed that countries which were globalised their financial markets
improved their economic performance in a much faster pace. The most vibrant aspect of
financial sector reforms is the liberalisation of stock markets.
After independence, though we have given more importance to industries, most of
the public sector units were financed by government and banks. Bank intermediation was
very strong. Stock market trading was lacking professionalism. In 1990s due to the
deterioration of foreign exchange reserves and economic instability, we were forced to
devalue our currency and we have gone for liberalization, privatization and globalisation
measures especially in the financial sector. Industrial licensing was made easy. Foreign
Institutional Investors (FIIs) were allowed to participate in the equity market.
Notwithstanding two security scams in India, we established the SEBI on par with
Securities Exchange Commission (SEC) of the USA. The policies of liberalization,
structural changes and industrial policy reforms, abolition of government control on
pricing of securities and the exemption of dividend income from income tax, have made
the Indian stock market more dynamic. The setting up of regulatory bodies like
SEBI, credit rating agencies, step towards scrip less trading systems, computerization of
dealings, a National Stock Exchange System (NSE), quicker settlement system (now T +
2), and setting up of NSDL and CSDL depositories are making it more efficient,
transparent and investor friendly.
With the objective of bringing about a highly competitive system and promoting
efficiency in the real sectors of the Indian economy, many reforms in the areas of trade,
industry and exchange rate systems have been undertaken to correct economic imbalances
and bring about structural adjustments. The liberalization policies of the government have
made drastic development with major plans of diversification, expansion and
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modernization of industrial sector in the country. This has led to increased demand for
funds and encouraged authorities to find ways to get alternative source of finance for
industry. This has resulted in heavy reliance of the Corporate and Government sectors on
capital market which is perennial source of cheap finance. The liberalization measures
introduced in the Indian stock market in the post reform period have made drastic
improvements in the financial sector of the economy. In this context, an attempt is made to
perceive the impact of globalisation on Indian stock market.
SIGNIFICANCE OF THE STUDY
Since the publication of the seminal work of McKinnon (1973) and Shaw (1973),
the relationship between domestic financial markets and economic growth in developing
countries has become a lively agenda of academic researchers interested in Development
Economics. The adverse experiences of the international debt crisis as happened in 1982
with the Mexican Moratorium, stimulated strong interest in domestic capital
mobilisation. The debt crisis and the related domestic economic stagnation in many less
developed countries emphasized the importance of mobilizing domestic financial
resources, instead of being dependent on financial inflows to finance growth. With large
external debts, developing countries appeared to be very vulnerable to outside economic
shocks.
The importance of financial markets in the process of economic growth is
conditioned on its functions and services. First of all, the financial markets create an
accepted medium of exchange which facilitates trade among agents and contributes to
increased specialization in the economy. Secondly, they provide various services related
to stimulating the volume of scrips and transferring the services to the most efficient
investment projects. Obviously the financial markets do make a valuable contribution to
economic growth.
It is widely acknowledged that economic growth without well developed domestic
financial markets would be detrimental to long run growth prospects of developing
countries. This view was underlined by the World Bank study of 1989. As a reaction,
several developing countries designed and carried out economic reform programmes
during the 1980s in which financial market reforms received a prominent role. The most
important work in this line was that of Levine Ross (World Bank,1996) and this was a
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landmark in the history of globalisaion of stock markets and consequent growth in many
economies.
Indian capital market is an emerging market. The capital market has undergone
drastic transformation in 1990 due to economic reforms, macro-economic changes and the
regulation on securities market. This has led to qualitative and quantative changes in the
Indian capital market. The Indian capital market has experienced momentous institutional
evolution viz., open electronic limit order book market, nation wide integrated market,
establishment of clearing corporation that guarantees trade, establishment of depositories,
indexation, derivative trading, IPO market, book building mechanism, debt market trading
and foreign portfolio inflows. The institutional changes have increased liquidity,
decreased transaction cost and increased market efficiency contributing to overall
economic improvements. This has increased capital market acumen and confidence of the
people, ultimately resulted in corporate business expansion, more job creation and higher
labour productivity. The wealth creation has also taken place. Since liquidity has
increased, people have no fear to invest in stocks because they can alter their portfolio at
any time. This has ultimately made growth in the Indian Economy.
Gobalisation has done much to the economy and the Indian stock market now
stands on par with international standards. Studies have proved that globalisation of stock
markets can enhance GDP growth rate to the tune of 2.5 per cent per annum, there by
enhancing the standard of living of the people. There are only a few attempts (Ajay
Shah and Susan Thomas) to seriously examine the relationships between Indian
economic development and stock market development. Hence, there is enough
justification for conducting a fresh study and this work is the outcome of such a need.
The general objective is to examine the macro-economic impact of stock market
development in India since the introduction of Economic Reforms. It also tries to find out
the problems faced by the Indian stock market. The study is restricted only to shares and
mutual funds.
OBJECTIVES OF THE STUDY
The specific objectives of the study are the following:
1. To analyze the structure and pattern of investment in financial securities in India.
2. To assess the impact of investment in financial securities on the macro
performance of the economy.
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3. To analyse the extent of market capitalisation and performance of selected
companies since globalization, and,
4. To identify the constraints for growth of financial securities in India.
HYPOTHESES OF THE STUDY
The following hypotheses have been formulated on the basis of the objectives of
the study
1. Liberalisation and globalisation have significant impact on Indian stock market.
2. There is a significant relationship between macro-economic variables and
economic growth.
3. Stock market index is having significant impact on economic growth.
4. Firm level performance is a good indicator for economic prosperity of the country.
In order to test these hypotheses, the researcher has constructed an index
(SINDEX), which was originally developed by Levine Ross (World Bank, 1996)
DATA BASE AND METHODOLOGY
The study is primarily based on secondary data. Secondary data have been
collected in two stages. In the first stage, data from publications of Government of
India, Central Statistical Organization (CSO), Reserve Bank of India (RBI), Stock
Exchanges, Securities and Exchange Board of India (SEBI) and from relevant reports,
periodicals, and news papers are collected and analysed. In the second stage, firm level
data have been collected from prowess, CMIE publications and annual report of
companies.
For collecting the firm level data, the listed companies are divided into five sectors
viz., Manufacturing and Construction, Information Technology (I.T), Health Care, Fast
Moving Consumer Goods (FMCG), and Banks. Two companies are selected from each
sector on the basis of the highest market capitalisation and performance as indicated by the
Sensex. Firm level data have been collected from the annual reports of the selected
companies and the analysis is done for 10 years.
Discussions have also been held with the share brokers, portfolio managers,
officials of SEBI, officials of BSE, NSE, UTI capital market, professors of leading
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business schools and other experts in the field to get an insight in to the problems of stock
market investment...
In order to measure the stock market development, three methods have been made
use of. They are:
(i) Market Capitalisation Ratio (MCR). It is considered as a measure of stock market
size. The MCR is defined as the total value of the listed shares divided by the GDP.
Market capitalisation is computed using the value of the equity shares only i.e., the stock
market price per share is multiplied by the number of shares that are outstanding (that is,
by the number of listed shares not held by the company itself). In economic sense, market
capitalisation as a proxy for market size is positively related to the ability to mobilize
capital and diversify risk.
(ii) Liquidity Ratios: We use two measures for market liquidity viz., the value traded
ratio and turnover ratio. The value traded ratio equals the total value of traded shares in
the stock market divided by GDP. The total value traded ratio measures the organised
trading of the equities as a share of national out put and should therefore positively reflect
liquidity on an economy wide basis. The turnover ratio which equals the value of total
shares traded divided by the market capitalization. High turnover is often used as an
indicator of low transaction cost. Turnover ratio also complements total value traded ratio.
Although total value traded ratio captures trading compared with size of the economy,
turnover measures the trading relative to the size of the stock market. A small liquid
market will have a better turnover ratio, but a small total value traded ratio. Thus,
incorporating information on total value traded ratio and turnover ratio provide a more
comprehensive picture of liquidity of a stock market.
(iii) The third indicator used to measure the stock market development is the volatility
parameter which conceptualizes the asset price movement in a stock market. This
conveys the important signal for development. Less volatility in the market shows greater
market efficiency and development.
To understand the impact of stock market on Indian economic growth during the
pre-globalisaion and post-globalisaion period, the piecemeal regression using Boyce index
have been used. Augmented Dickey Fuller (ADF) test has been used to remove the
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stationarities present in the time series data. Then with the help of co-integration
technique, hypothesis is framed. Ratios and percentages were used for the purpose of firm
level analysis
PERIOD OF STUDY
The period of the study is from 1979-80 to 2004-05. This time frame has been
considered because of two reasons: (i) The BSE started computerization and time series
data is available only from 1979 onwards. (ii) The liberalization measures have initiated
in India since 1980s and the economy has opened up in 1991.
LIMITATIONS OF THE STUDY
Like any studies in social science, this study has also some limitations. First of all,
the availability of quality data over a long period of time poses a great challenge.
Secondly, this study is a macro study and only yearly data are available for GDP. Capital
market development indices based on the three parameters viz. 1) Market Capitalisation
Ratio, 2) Value Traded Ratio and 3) Turnover Ratio can be further improved by
incorporating the measures of development of capital market like the international
integration of capital markets, etc. But, such data are not available in India. In spite of
the above limitations, the highlights of the study can help the policy makers and the
investing community at large to frame suitable policies for the better stock market
investment.
SCHEME OF THE REPORT
The study is presented in nine chapters. The first chapter introduces the topic,
discusses the importance of the study, methodology, objectives and limitations. The
second chapter reviews the relevant literature and the findings are arranged in three
sections viz. capital market and investment, stock market and economic growth (cross
country studies) and India specific studies. The third chapter examines the theoretical
frame work of the study in which technical analysis, efficient market hypothesis (EMH)
and portfolio theories are explained. The fourth chapter deals with Indian financial sector
reforms and resource allocation. An overview of Indian capital market is provided in the
fifth chapter. The analysis of the impact of stock market on macro-economy is
explained in the sixth chapter. Seventh chapter deals with financial performance and stock
markets. The firm level analysis is also presented in this chapter. The emerging issues
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and challenges of Indian securities market are discussed in the eighth chapter. The
summary of findings, policy recommendations and suggestions are displayed in the last
chapter.
HIGHLIGHTS OF REFORMS IN THE CAPITAL MARKET-THE
GLOBALISATION ERA.
The capital market witnessed sweeping reforms during 1990s and these reforms
have led to spectacular growth in Indian capital market. Some of the main highlights of
the policy reforms in India to revive the stock market are given below. The most
important reforms introduced in India, as part of globalsation is the reduction in
transaction cost. The transaction cost has come down and it is on par with international
standards. There were remarkable improvements in market efficiency, safety and
transparency. In addition to that, the setting up of institutions like the SEBI, the NSE and
the Clearing House Corporation (now NSDL is controlled by NSE and CSDL is controlled
by BSE), Book building mechanism (which is proved to be the best price discovery
mechanism in the world), Country wide screen based trading, dematerialization of
securities, rolling settlement [now (T+2)], modern risk management systems (price band
and circuit breaks), derivatives trading systems (F&O) trading, foreign portfolio
investment and disclosure and investor protection measures transformed the Indian capital
market from an oligopolistic broker controlled, technologically backward and inefficient
market to a most modern demutilised, sophisticated and technologically highly advanced
transparent market with high level of market efficiency.
MAIN FINDINGS OF THE STUDY
1) The exponential growth rate of real GDP before globalisation, say 1991 was 5.3
and post globalisation showed 6 per cent growth rate. This shows that the real
GDP has increased after globalisation.
2) M1 and Sindex are the variables having maximum significance in the model.
3) The total risk in investment in equities can be reduced by investing in diversified
portfolio.
4) Market Capitalisation ratio has touched 1.11 per cent in 2004-05 and now it is on
par with international standards.
5) The value traded ratio which was 0.01 in 1979-80, rose to 0.83 in 2000-01 and
declined to 0.34 in 2004-05.
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6) The turnover ratio which was 0.42 in 1979-80 rose to 1.75 in 2000-01 and further
declined to 0.31 in 2004-05.
7) Between 1989-90 and 1999-2000, the volatility was the highest during 1990-91.
8) The SINDEX, the average of M+V+T divided by 3, was 0.15 in 1979-80,
increased to 1.02 in 2000-2001 and declined to 0.59 in 2004-05.
9) The financial depth, as evident from the ratio, M3 /GDP, has increased from 0.13
to 1.47.
10) The openness which was 0.041 in 1979-80 has increased to 0.55 in 2004-05
MAJOR FINDINGS OF THE COMPANY ANALYSIS
1. The return on investments (ROI) in software industry is 30 to 45 per cent.
Investors are benefited maximum by investing in software companies.
2. Reliance industries is the largest private sector company in India and it has the
highest investor friendly share in the market
3. Infosys is the largest provider of employment, say more than 72,000.
4. Infosys is the only company which gave maximum bonus shares and increased the
share holder’s wealth. After globalisation Infosys has become a global company
with very high potential.
5. Wipro also gave enough bonus shares to its shareholders since the inception of the
company.
6. RIL is the largest dividend distributor among all corporate securities. During
2005-06, it distributed Rs.1394 crores as dividend.
7. Indian companies have started acquiring foreign companies and Indian companies
have become highly competitive.
8. The government had taken a number of stock market friendly decisions in 2001.
As a result, the book values and market values of companies started showing
quantum jump from 2001 onwards.
FINDINGS ABOUT THE PRIMARY MARKET
• Resource mobilization through primary capital market has experienced a
substantial jump in nineties due to globalisation of stock market, spurting
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from Rs. 14219 crores in 1990-1991 to Rs.105944 crores in 2004-05. This
is a quantum jump compared to seventies and eighties.
• The pattern of resource mobilization through primary market has
undergone a sea change in the nineties, particularly, in the later half of the
nineties, with the private placement route eclipsing the Initial Public offer
(IPO) route.
• The corporate sector’s dependence on the securities market for external
financing increased from 19.35 per cent in 1990-91 to 33.58 per cent in
1999-2000.
• Due to the increase in the fiscal deficits of the Central Government, its
dependence on market borrowings to finance fiscal deficit has increased
from 17.9 per cent in 1990-91 to 69.4 per cent in 2000-01. This is because
of the cheap and perennial source of finance from investors.
FINDINGS OF FLOW OF FUNDS BASED ON FINANCIAL DEVELOPMENT IN
INDIA.
►All four ratios (finance ratio, financial inter relations ratio, new issue ratio and
intermediation ratio) have increased significantly from 1970 to 1995-96.
►The Finance Ratio increased from 0.17 to 0.49. This indicates a deepening of
the financial markets leading to a marked rise in the institutionalization of financing
investment.
►The Financial inter-relations ratio reflects the relation between financial asset
and real asset structure. It has averaged around 2.4 since 1991, though it has exhibited
year to year fluctuation. This indicates that the financial structure in India grew more
rapidly than national income.
► The New issue Ratio, the ratio of primary issues to net domestic capital
formation, was at a high of 1.62 in 1991-92, declined to 1.16 in 1994-95, before
increasing to 1.33 in 1995-96. A downward movement in the ratio (from 1992-93 to
1995-96) would reflect the continued role of financial intermediation in capital formation,
because this ratio is indicative of the extent of dependence on non-financial sector on its
own funds in financing the capital formation.
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► The Intermediation Ratio, the ratio between financial instruments issued by
non-financial units, touched a high of 0.91 in 1994-95 but declined to 0.70 in 1995-96.
This ratio also reflects the importance of banks and also other financial institutions in the
financing activities
►The Boyce index has shown that economic growth has increased after
globalisation. The results of co-integration (EG method) for the impact of macro-
economic variables on real GDP show that M1 and SINDEX have large significance. The
inference is that along with increase in money supply, Government must boost up the
activities in the stock market.
►Firm level analysis also shows that wealth creation of investors have increased
tremendously after globalisation. Many Indian companies have become globalised
companies after the introduction of globalisation in India.
OTHER IMPORTANT FINDINGS OF THE STUDY INCLUDE:
1. The transaction cost in stock market has come down from 4.75 per cent to 0.60 per
cent.
2. The sindex is the stock market development index which is more prominent
compared to sensex which is only a price index.
3. Firm level performance is a good indicator of economic prosperity of the country.
4. The liberalization and globalization has made Indian stock market on par with
international standards.
CONCLUSION
The study concludes that the financial sector reform measures and globalisation
measures adopted in India made positive impact on stock market. Wealth creation has
also taken place by way of capital appreciation, dividends, bonus shares and by way of
increase in market capitalization. The company analysis shows that strong fundamentals
are promoted by strong performance of companies that led to higher economic growth in
the country. The globalisation has helped companies to acquire maximum resources from
India and from overseas. All these are indications of the development in the Stock Market
of India. The study also suggests various measures to revamp and strengthen the Indian
stock market.
