PERFORMANCE OF INDIAN CAPITAL MARKETS

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					TABLE OF CONTENT

1. CAPITAL MARKETS IN BRIEF             2

2. FACTORS AFFECTING CAPITAL MARKETS    3

ECONOMIC GROWTH                         3
INFLATION                               5
UNION BUDGETS                           6
BUDGET 07-08                            7
REGULATORY POLICIES                    10
SECTORIAL ANALYSIS                     14
SAVINGS BY HOUSEHOLDS                  17
CORPORATE PERFORMANCE                  17
INTERNATIONAL MARKETS AND ECONOMIES    19
OTHER FACTORS                          22

3. IMPACT ANAYLSIS                     25

CAPITAL MARKET                         25
PRIMARY MARKET: IPO’S                  26
SECONDARY MARKET                       30
FII’S AND MUTUAL FUNDS                 35
MARKET CAPITALISATION                  39
LIQUIDITY                              41
DEBT MARKET                            41
CORPORATE ANALYSIS                     43

4. CONCLUSION                          46




                             1
1.     CAPITAL MARKETS IN BRIEF

India has a long tradition of functioning capital markets. The Bombay stock exchange is
over a hundred years old and the volume of activity has increased in the recent years. The
process of capital market reform started in 1992 and aimed at removing direct
government control and replacing it by a regulatory framework based on transparency
and disclosure. The first step was taken in 1992 when SEBI was elevated as a full- fledged
capital market regulator.


An important policy initiative in 1993 was the opening of capital markets for foreign
institutional investors (‗FII‘) and allowing Indian companies to raise capital abroad. FII
registrations in the country have gone up significantly over the years. The number of
registered FIIs has gone up from 823 in December 2005 to 972 in October 2006. FIIs had
made $10.7 billion worth of investment (Rs. 47,181 crore) in calendar 2005. The FIIs
have been rewarded well by attractive valuations and increasing returns. The depository
and share dematerialization systems have been introduced to enhance the efficiency of
the transaction cycle. A number of significant reforms have been implemented in the spot
equity and related exchange traded derivatives markets since the early 1990s. For
instance, spot prices are mostly market-determined, trading volumes in the derivatives
market exceed those in spot markets and market practices such as speed of settlement and
dematerialization are close to international best practices.


For the past three years, the stock market has seen an unprecented rise. From languishing
in the 4000s, the stock market has risen to more than 12000. Simultaneously, the Indian
economy had been growing consistently at a rate of more than 8%. Different reports
indicated that India and China would be the drivers o f growth of the world economy.
Indian Capital markets remained generally orderly d uring most part of 2006-07. There
were, however, some spells of volatility at different points of time during the year
reflecting developments in liquidity conditions on account of large and sudden changes in
capital flows and cash balances of the Governments


                                              2
2.     FACTORS AFFECTING CAP ITAL MARKETS

Many experts claim that the change in stock market is an indicator of the growing
economy, inflation, regulatory changes, budgets, etc. The factors affecting the capital
markets moments in the year 2006-07 are as follows:

ECONOMIC GROWTH
Indian economy expectedly grew by 9.2% in 2006-07. The overall macroeconomic
fundamentals are robust, particularly with tangible progress towards fiscal consolidation
and a strong balance of payments position. Government has set a 9% annual growth rate
in 11th five year plan over and above the 8% level in the 10th five year plan.


The Gross domestic capital formation (GDCF) in FY 2004-05 was 30.1% which
improved to 31.5% in FY 2005-06. The sharp rise in investment rate reflects a high
degree of business optimism. Lackluster performance by agriculture in FY 2006-07 can
be attributed to low investment, imbalance in fertilizer use, low seeds replacement rate, a
distorted incentive system and low post-harvest value addition. With more than half of
the population directly depending on this sector, low agricultural growth has serious
implications on the momentum of growth.


During the current financial year, so far, industrial growth showed an impressive growth
on account of robust growth in the manufacturing sector. The industrial growth showed a
rise of 10.6% in the first nine months of 2006-07, the highest record since 1995-
96.Manufacturing sector continues to remain the main driver to the industrial growth
posting a high 11.9% growth against the growth of 9.0% in the previous year. The other
two sectors, mining and electricity were found to have recorded high growths of 4.5%
and 7.6% during the period of this fiscal in contrast to the low growth in the previous
year. The overall growth in 2006/07 is projected to be in the narrow range of 7.8%-8.0%.




                                             3
GDP at Factor Cost (current prices) Q3 of 2006- US$ 231.463 billion
07

GDP at Factor Cost (constant prices-1999-2000) US$ 174.785 billion
Q3 of 2006-07

Composition of GDP                              Services:       55.1%
                                                Industry:       26.4%
                                                Agriculture:
                                                18.5%

Industrial Growth (April- February 2007)        11.1 per cent

Inflation (for the week ended March 31, 2007)   5.74 per cent

Broad Money (M3) growth (y-o-y) as on           22.0 per cent
March 16th 2007




                                           4
INFLATION
The latest numbers on the WPI show inflation reigning at around 6.5% in February
2007;this is much above tolerance threshold of 5.5% set by the RBI for 2006-07.There
was a rise in the price index of primary food articles and manufactured items, primarily
pushing up the overall price index. The sharp rise in inflation was seen on account of a
sharp rise in the prices of primary commodities, mainly food. Wheat, pulses, edible oils,
fruits and vegetables, and condiments and spices have been the major contributors to the
high inflation rate. As much as 39.4% of the overall inflation in WPI on February 3, 2007
came from the primary group of commodities. It is likely that the inflation will now
continue to remain at the present level in the coming months despite the recent correction
measures.

The suppressed inflation is a matter of concern as retail inflation could touch double
digits by the festival season. The corresponding increase in interest rates will also be
more pronounced the identified factors responsible for the inflationary pressures are
constraints on the supply side and rise in the credit off take. The government attempted to
address the concerns of inflation by maintaining and increasing the supply of the items
that have shown a price rise in the past weeks. The measures used were banning exports
of items such as sugar and wheat. This was followed by further liberalization on the
imports of wheat and pulses and ban on the forward trading of wheat and rice. Monetary
tightening measures have also been brought into use. Policy rate hikes have been done on
three occasions outside the policy review dates. The recent hike was done in the end of
March that will be effective from April 14th in two stages.

With inflation being far above its threshold limit of 5.5%, the impact of same on markets
is completely visible. The weekly inflation data declared has a immediate effect on major
indices of India. The corrective measures by RBI i.e. increasing the CRR and Repo rates
have made the available capital expensive and it makes difficult for markets to attract the
investors as there are other higher returns giving investment opportunities available.




                                             5
UNION BUDGETS
Following are the changes proposed in budget 2006-07 for the capital market.
Budget 06-07
       limit on FII investment in Government securities to be increased from $ 1.75
        billion to $ 2 billion
       the limit on FII investment in corporate debt from $ 0.5 billion to $ 1.5 billion;
        ceiling on aggregate investment by mutual funds in overseas instruments to be
        raised from $ 1 billion to $ 2 billion with removal of requirement of 10 per cent
        reciprocal share holding;
       limited number of qualified Indian mutual funds to be allowed to invest,
        cumulatively up to $ 1 billion, in overseas exchange traded funds; an investor
        protection fund to be setup under the aegis of SEBI;
        RBI's anonymous electronic order matching trading module (NDS-OM) on its
        Negotiated Dealing System to be extended to qualified mutual funds, provident
        funds and pension funds;
        Steps to be taken to create a single, unified exchange-traded market for corporate
        bonds.
       Increase of 25 per cent, across the board, on all rates of STT.
        Definition of open-ended equity-oriented schemes of mutual funds in the Income
        tax Act aligned with the definition adopted by SEBI;
        Open-ended equity-oriented schemes and close-ended equity oriented schemes
        to be treated on par for exemption from dividend distribution tax.
        Registrars, share transfer agents under service tax net
       Service tax raised to 12% from 10%


Increasing the limit on FII investment in Government securities from $ 1.75 billion to $ 2
billion and the limit on FII investment in corporate debt from $ 0.5 billion to $ 1.5 billion
would improve trading volumes and spur activity in Corporate Bonds. Higher rated
companies, in particular, would find it easier to launch debt issuances and this measure
could marginally improve liquidity.




                                             6
The extension of the NDS Order Matching system to all market players would enable fair
play in maintaining anonymity in trading and also help better price discovery in the
markets in the medium term. However, this measure in the current sentiment scenario
would not impact markets much as the bigger expectations of market participants for
allowing short selling to hedge against rising interest rates have not been factored in the
budget announcements.


Nonetheless this level playing measure this would aid better price discovery and greater
participation in the post auction trades going forward. In reaction to the budget
announcements, the yield on the 10 year Government benchmark bond initially dropped
by 3 basis points to 7.34%. However the yields have retraced levels and shot up to 7.40%.

BUDGET 07-08
The Finance Minister made the following proposals related to the capital markets in the
Union Budget 2007-08:
      Made PAN card central for all capital market transactions.
      Distribution tax on dividends distributed by money market mutual funds & liquid
       mutual funds increased from the current 12.5 per cent to 25 per cent. Now, the
       effective DDT levy, including education cess would be 28.3 per cent.
      Increased dividend distribution tax for corporates increased from the current 12.5
       per cent to 15 per cent. Now, the effective DDT levy, including education cess
       would be 17 per cent.
      Ceiling for investment in "long term specified bonds" for claiming exemptions
       from long term capital gains fixed at Rs. 5 million.
      Permission for short selling settled by delivery and the securities lending and
       borrowings to facilitate delivery by institution.




                                             7
The impact of budget announcements on major indices

Pre-Budget & Post-Budget Values - Market Benchmarks


Index Name                                    Pre-Budget       Post-Budget       % change
                                           Closing Index     Closing Index     between Pre
                                            Value on Feb      Value on Feb        and Post
                                                27, 2007          28, 2007   Budget on Feb
                                                                                  28, 2007

Market Benchmarks
S&P C NX NIFTY                                     3893.90         3745.30          -3.82%

S&P C NX 500 EQUITY INDEX                          3223.80         3107.75          -3.60%


Key Industries Impacted - S&P CNX Industry Indices : Top Gainers & Losers


S&P CNX Industry Indices – Top          % S&P CNX Industry Indices - Top         % Change
gainers                             Change losers

C IGARETTES                           3.77% C ONSTRUC TION                          -7.63%
DETERGENTS                            1.46% MINING                                  -7.57%

SUGAR                                 0.50% C OMPUTERS – HARDWARE                   -6.77%

GAS                                   0.34% C EMENT AND C EMENT PRODUC TS           -6.02%

PAINTS                                0.21% METALS                                  -5.85%


Key Industries Impacted - S&P CNX Industry Indices : Market Capitalisation


                              Mkt Cap in                                         Mkt Cap in
S&P CNX Industry Gainers          Rs Mn S&P CNX Industry Losers                      Rs Mn

C IGARETTES                      663896.9 C ONSTRUC TION                          847989.2

DETERGENTS                        26792.3 MINING                                    92152.0

SUGAR                             73614.9 C OMPUTERS – HARDWARE                     98567.9
GAS                              378456.7 C EMENT AND C EMENT PRODUC TS           829689.3

PAINTS                           119152.3 METALS                                  272554.5


Impact analysi s on market

The debt market gave mixed reactions to the budget announcements. The yields on
government securities rose after the Finance Minister expressed discomfort with the
existing inflation scenario, signalling a hawkish stance on taming inflation. Further,
an increase in the ceiling on market stabilisation bond issues to Rs 800 billion to
absorb excess cash in the banking system also signaled tight liquidity situation in the
economy. The borrowing target for next fiscal is benchmarked at Rs 1,095.79
billion moderately up from Rs 1,074.5 billion raised in 2006-07. While the government


                                           8
aims to increase spending on infrastructure, health and the education sectors, a
borrowing target well within the market expectations together with a contained
fiscal deficit target is a key positive to the market. After the budgetar y
announcements, the yield on the benchmark 10-year G-Sec closed almost flat at
7.80 per cent from its previous close of 7.8 per cent. In conclusion, it could be seen
that   the budget was neutral budget on the market. While the agriculture sector was
highlighted in the budget, significant actions to tame inflationary pressures were missing
from the budget. Given the hawkish stance of the Finance Minister on the existing
inflationary situation, the expectations are that the central bank will target inflation
through monetary measures. The impact of the reasonable borrowing target has
been moderated down by an increased limit on the market stabilisatio n issuance. In
balance, 10-year G-secs will remain in the range of 7.8-8.0 per cent by the year-end,
with an upward bias in case of further monetary tightening.




                                             9
REGULATORY POLICIES
In the Primary Market the following policy initiatives were undertaken during
2006-07:
      SEBI notified the disclosures and other related requirements for companies
       desirous of issuing Indian Depository Receipts in India. It was mandated that
       the issuer must be listed in its home country, must not have been barred by any
       regulatory body, and should have a good track record of compliance of securities
       market regulations. SEBI stipulated the requirements of issue size, subscription to
       the issue and disclosures to be made in the prospectus of the issue such as general
       information, disclaimer clause, offering details, risk factors and financial
       information among other requirements.


      As a condition of continuous listing, listed companies have to maintain a
       minimum level of public shareholding at 25 per cent of the total shares issued.
       The exemptions include companies which are required to maintain more than 10
       per cent, but less than 25 per cent in accordance with the Rule 19 2(b) of the
       Securities Contracts (Regulation) Rules, 1957 and the companies, that have two
       crore or more of listed shares and Rs. 1,000 crore or more of market
       capitalisation. SEBI has also provided a transparent mechanism to graduate to
       compliance of the continuous listing requirements for companies which are
       currently non-compliant or companies which might become non-compliant in
       future.


      SEBI has specified that s hareholding pattern will be indicated by listed
       companies under three categories, viz., ―shares held by promoter and promoter
       group‖, ―shares held by public‖ and ―shares held by custodians and against which
       Depository Receipts have been issued‖.


      In accordance with the guidelines issued by SEBI, the issuers are required to state
       on the cover page of the offer document whether they have opted for an IPO
       grading from the rating agencies. In case the issuers opt for a grading, they are



                                           10
       required to disclose the grades including the unaccepted grades in the prospectus
       and abridged prospectus.


      SEBI facilitated a quick and cost effective method of raising funds termed as
       Qualified Institutional Placement (QIP) from the Indian securities market by
       way of the private placement of securities or convertible Bonds (but not warrants)
       with the Qualified Institutional Buyers. Listed companies having equity shares of
       same class listed on a stock exchange having nation-wide trading terminals and
       complying with the minimum public shareholding under continuous listing
       requirement are eligible to raise funds through the QIP route. SEBI stipulated that
       the benefit of ‗no lock-in‘ on the pre-issue shares of an unlisted company making
       an IPO, currently available to the shares held by Venture Capital Funds
       (VCFs)/Foreign Venture Capital Investors (FVCIs), shall be limited to :
           o the shares held by VCFs or FVCIs registered with SEBI for a period of at
               least one year as on the date of filing draft prospectus with SEBI and
           o the shares issued to SEBI registered VCFs/FVCIs upon conversion of
               convertible instruments during the period of one year prior to the date of
               filing draft prospectus with SEBI provided that the period of holding such
               convertible instruments as fully paid- up, together with the period of
               holding shares resulting from conversion by the VCFs and FVCIs is at
               least one year as on the date of filing the draft prospectus with SEBI.


      In order to regulate pre- issue publicity by companies which are planning to make
       an issue of securities, SEBI amended the Disclosure and Investor Protection
       Guidelines to introduce ―Restrictions on Preissue Publicity‖ from the time the
       issuer company‘s Board approves the issue till the actual allotment of shares of
       the issue.
Measures undertaken in the area of secondary market
      In continuation of the comprehensive risk management system put in place since
       May 13, 2005 in T+2 rolling settlement scenario for the cash market, the stock
       exchanges were advised to update the applicable Value at Risk (VaR) margin at


                                            11
    least 5 times in a day by taking the closing price of the previous day at the start of
    trading and the prices at 11:00 a.m., 12:30 p.m., 2:00 p.m. and at the end of the
    trading session. This has been done to align the risk management framework
    across the cash and derivative markets.
   In order to strengthen the ‗Know Your Client’ norms and to have sound audit
    trail of the transactions in the securities market, PAN has been made mandatory
    with effect from January 1, 2007 for operating a Beneficiary Owner account and
    for trading in the cash segment similar to transactions in the futures and options
    segment of the stock exchanges.
   In order to implement the Union Budget proposal on creation of a unified
    platform for trading of corporate bonds, SEBI stipulated that the BSE Limited
    would set up and maintain the corporate bond reporting platform. The reporting
    shall be made for all trades in listed debt securities issued by all institutions such
    as banks, public sector undertakings, municipal corporations, corporate bodies
    and companies. Also, SEBI and RBI have set up an internal Working Group to
    implement the Budget 2006-07 announcement of creating a single, unified
    exchange-traded market for corporate bonds
   In line with the Government of India‘s policy on foreign investments in
    infrastructure companies in the Indian securities market, the limits for foreign
    investment in stock exchanges, depositories and clearing corporations, have been
    specified as follows:
    o Foreign investment up to 49 per cent will be allowed in these companies with
       a separate Foreign Direct Investment (FDI) cap of 26 per cent and cap of 23
       per cent on FII investment;
    o FDI will be allowed with specific prior approval of FIPB;
    o FII will be allowed only through purchases in the secondary market;
    o FII shall not seek and will not get representation on the Board of Directors;
       and
    o No foreign investor, including persons acting in concert, will hold more than 5
       per cent of the equity in these companies.




                                         12
   The application process of FII investment was simplified and new categories of
    investment (insurance and reinsurance companies, foreign central banks,
    investment managers, international organizations) were included under FII.
    o   GOI raised the cumulative debt investment limits from US$1.75 billion to
        US$2 billion and US$0.5 billion to US$1.5 billion for FII/sub account
        investments in Government securities and corporate debt, respectively.
    o RBI, in its mid-term review of monetary policy, further enhanced the limit of
        FII investment on Central and State Government Securities to US$2.6 billion
        by December 31, 2006 and further to US$3.2 billion by March 31, 2007.
   Initial Issue Expenses and Dividend Distribution Procedure for Mutual
    Funds were rationalized.
    o In compliance with the proposal made in Budget 2005-06, Mutual Funds were
        permitted to introduce Gold Exchange Traded Funds.
    o Pursuant to the Union Budget 2006-07, the aggregate ceiling for the mutual
        fund industry to invest in ADRs/GDRs issued by Indian companies, equity of
        overseas companies listed on recognized stock exchanges overseas and rated
        debt securities was raised from US$1 billion to US$3 billion.
   In the Government Securities market, the RBI ceased to participate in primary
    issues of Central Government Securities from April 1, 2006 in line with the
    provisions of FRBM Act. Intra-day short sale in Government Securities was also
    permitted with effect from February 28, 2006. ‗When Issued‘ transactions in
    Government Securities have been allowed with effect from August 1, 2006.
   Demutualisation of BSE, the oldest stock exchange in Asia, is well under way in
    accordance with the provisions of SEBI scheme for demutualisation. The
    exchange ceased to be an Association of Persons and became a company under
    the Companies Act in August 2005. A public issue in the first half of 2007 will
    ensure that at least 51 per cent of equity is held by public other than trading
    members. The change in the ownership structure is in keeping with the evolution
    of BSE as a modern, professionally managed, transparent, competitive and
    efficient stock exchange .Foreign institutional investors have been allowed to
    invest in security receipts.


                                        13
SECTORIAL ANALYSIS
During the April-January period of 2006-07 out of the main 16 industry sectors, 11
industry sectors registered growths higher than what was posted during the same period
of previous year. Among the performers were basic chemicals, machinery and equipment,
transport equipment, cotton textiles, paper products, food products, non- metallic mineral
products, rubber plastic petrol and coal, wood, manmade textiles and metal products.
However, the three laggards sectors were textile, beverages and tobacco, and basic
chemicals. Leather and jute industry sectors continued to be low performers registering a
fall in production in the April- January 2006-07 periods as compared to the previous year.


Going by the use-based classification it is witnessed that basic and intermediate goods
registered growths much higher than what was posted a year before. During, the April-
January period of 2006-07 basic goods and intermediate goods have grown at the rate of
10.0% and 11.4% respectively against the growth of 6.2% and 2.4% in the corresponding
period of previous year respectively. During the 10 month period of 2006-07 capital
goods, nevertheless, maintained the growth momentum at 16.8%. There has been a
slowdown in the production of consumer goods in the period April- January 2006-07.
Output of consumer goods decelerated at 9.8% compared to 11.9%. This slowdown was
on account of both the consumer durables and non-durables. The output of the six core
infrastructure industries continues to maintain the growth momentum. Overall
infrastructure industries clocked a growth of 8.4% in the April – January period of 2006-
07 against 5.8% growth in the same period of last year. The infrastructure industries that
revved past the growth posted in the same period of 2005- 06 were crude petroleum,
petroleum refinery and power at 5.9%, 12.2% and 7.6% in contrast to a negative 5.8%,
1.0% and 4.9% respectively. Production of the other three sectors namely finished steel,
cement and coal however grew at a slow pace as compared to the growth seen in the
corresponding period of last year.




                                            14
GROWTH OF INDUSTRY: Recent Trends - April- January (in %) Source: CSO
                                                        Weights          2006-07
 Industry                                                          100              11
 Mining                                                           10.2              4.5
 Manufacturing                                                    79.4             11.9
 Electricity                                                      10.5              7.6
 Basic                                                            35.6              10
 Intermediate                                                     26.5             11.4
 Capit al                                                          9.3             16.8
 Cons umer Goods                                                  28.7              9.8
 Cons umer non Durables                                           23.3              9.4
 Cons umer Durables                                                5.4             10.9
 Textile Products                                                  2.5             10.9
 Beverages & Tobacco                                               2.4             10.8
 Basic Metals                                                      7.5             22.3
 Basic Chemicals                                                    14              9.1
 Machinery & Equipment                                             9.6             13.4
 Trans port Equipment                                              3.9             15.5
 Cotton Textiles                                                   5.5             14.7
 Leather                                                           1.1             -0.1
 Paper                                                             2.6              8.8
 Food Products                                                     9.1              6.1
 Non metallic mineral products                                     2.8             13.4
 Rubber , Plastic , Petrol and coal                                9.1             12.2
 Jute and Other fibre textiles                                     0.6             -7.8
 Wood                                                              2.7             12.9
 Manmade textiles, wool and silk                                   2.3                8
 Metal Products and parts                                          2.8              8.5

Services contributed as much as 68.6 per cent of the overall average growth in GDP in
the last five years between 2002-03 and 2006-07. Practically, the entire residual
contribution came from industry. As a result, the share of industry and services in the
GDP improved to 26.4 per cent and 55.1 per cent respectively.


Services sector growth has continued to be broad based. The three sub-sectors of
services- trade, hotels, transport and communication - have continued to boost the sector
by growing at double digit rates for the fourth successive year. Impressive progress in
information technology (IT) and IT-enabled services, both rail and road traffic, and fast


                                           15
addition to existing stock of telephone connections, particularly mobiles, played a key
role in such growth. Growth in financial services (comprising banking, insurance, real
estate and business services) after dipping to 5.6 per cent in 2003-04 bounced back to 8.7
per cent in 2004-05 and 10.9 per cent in 2005-06. The momentum has been maintained
with a growth of 11.1 per cent in 2006-07.


Growth of agriculture at only 2.7 per cent in 2006-07, on a base of 6.0 per cent growth
in the previous year, is a cause of concern. Low investment, imbalance in fertilizer use,
low seeds replacement rate, a distorted incentive system and low post- harvest value
addition continued to be a drag on the sector‘s performance. Given its low share, a
mechanical calculation of the adverse impact of low growth in agriculture on overall
GDP can be misleading. With more than half the population directly depending on this
sector, low agricultural growth has serious implications for the ‗inclusiveness‘ of growth.
Furthermore, poor agricultural performance, as the current year has demonstrated, can
complicate maintenance of price stability with supply-side problems in essential
commodities of day-to-day consumption. The recent spurt of activity in food processing
and integration of the supply chain from the farm gate to the consumer‘s plate has the
potential of redressing some of the root causes such as low investment, poor quality
seeds, and little post-harvest processing.




                                             16
SAVINGS BY HOUSEHOLDS
GDP growth in India in the post reform period was driven mostly by private final
consumption expenditure (PFCE) (i.e. consumption driven). PFCE contributed more than
one half of the growth almost every year until 2003-04. But, this pattern appeared to have
undergone a virtuous transformation with investment rather than private consumption
being the main source of GDP growth in the latest two years of 2004-05 and 2005-06.
Gross domestic savings as a proportion of GDP continued with its upward trend. The
savings ratio increased to 32.4% in FY2006 compared to 31.1% in FY2005. Savings from
private corporate and household sector led the surge in domestic savings rate whereas
public sector savings witnessed a marginal fall. The savings rate for 2005-06, as per the
quick estimates, has been placed at 8.1%. In tandem with the rise in the rate of gross
domestic savings, there was a step up in the rate of gross domestic capital formation
(GDCF) or investment to 33.8% of GDP. GDCF exceeded the domestic savings,
widening savings investment gap to 1.4% of GDP with its implications for the current
account of the balance of payments.

CORPORATE PERFORMANCE
The FY07‘s fourth quarter results will be similarly positive. Overall revenue growth is
expected to be between 20 and 25 per cent, while profits should grow around 35 per cent.
All the sectors will see expected growth, with power, capital goods and infrastructure
sectors doing well


The numbers below indicate how different sized companies fared in FY07. Year-on- year
(YoY) growth, in the past three quarters, has been impressive across all the categories.
Bottom lines have also grown considerably this third quarter when compared to the same
period last year. While FY07 was the fourth consecutive year with positive returns, the
Indian market was de-rated by investors. The (Nifty‘s) CNX midcap index, for instance,
delivered a mere 1 per cent return in the 12 months ending March 2007. Investments
from domestic mutual funds reduced by 41 per cent — from $3.2 billion (Rs 14080 crore)
in FY06 to $1.9 billion (Rs 836 crore) in FY07. Also, investments from foreign



                                           17
institutional investors in equities fell by 48 per cent YoY, from $10.9 billion (Rs. 47,960
crore) in secondary markets in FY06 to just $5.7 billion (Rs 25,080 crore) in FY07.




EBITDA (earnings before interest, tax, depreciation and amortisation) for Sensex
companies are expected to grow at 26 per cent and 30 per cent respectively, YoY. While
impressive, this growth is lower by at least 6 per cent and 8 per cent respectively, when
compared the previous quarter‘s growth. Moreover, growth is expected to further slow
down in Q1 FY08 due to the government‘s restrictions on the sugar and cement
industries, and the interest rate hike by the RBI and others in the banking sector. It is
becoming increasingly apparent that the market‘s best times are behind it.




                                            18
INTERNATIONAL MARKETS AND ECONOMIES
Global markets had taken investors on a roller coaster ride in the last week of February
and first week of March, with Asia‘s exchanges playing a major role. When the Shanghai
Composite Index fell 9 per cent on 27 February, its biggest fall in almost a decade, many
of the world‘s markets posted the worst one-day declines in years. It was a painful
reminder that global markets are more integrated now than ever before, leaving no safe
havens where ripples won‘t wipe out investor wealth. The global stock market meltdown
erased an estimated $2.4 trillion of market value. Initial fingers pointed everywhere.


Chinese self posed sell out: Many pointed to China, where a sell-out of ‗A‘ shares
triggered a global response. China is important in today‘s global economy. The Chinese
government has been trying to slow down the breakneck pace of growth and stamp out
speculation. The Shanghai crash was the result of these fears. The 9 per cent plunge has
been blamed mostly on speculation that the chairman of the China Securities Regulatory
Commission (CSRC) was leaving, and an interest rate hike and capital gains tax were in
the offing. These fears were allayed quickly as officials denied any such plans. Rising
130 per cent in 2006, the Chinese market continued its bull run into 2007, causing
officials to warn of overheating. The markets were entering a euphoric phase. Bank
shares were trading at unrealistic valuations. Valuations of Shanghai A shares were
stretched. Portfolio inflows to China had been strong, and there was also substantial
exposure to Chinese equities via the big-ticket IPOs that were lapped up so eagerly last
year. There was a room for correction in these China stocks.


Japanese yen carry trade : The carry trade phenomenon, which involves taking out yen-
denominated loans to re- invest in markets with higher interest rates, has been worrying
analysts for some time now. Hedge funds looking to benefit from the interest-rate spread
between Japan and world markets have poured substantial amounts of cheap borrowed
yen into high- yielding markets. Destabilized by China‘s collapse and worried about the
US recession, Asian markets saw the potential of the unwinding of the carry trade,
prompting some investors to cut bets on higher-yield assets funded by borrowing in




                                            19
Japan. This pushed the yen up sharply, advancing 3.5 per cent against the dollar and 4 per
cent versus the Euro since 27 February.


Slow Down In Us Economy
Fears of a slowdown in the US economy had been present for more than a year. The
biggest worry was the housing market, with prices falling sharply. This market had been
a big driver of consumption, because rising home prices allowed owners to use their
properties as a line of credit, and housing activity accounted for many jobs. With house
prices falling, the worry was that the indefatigable US consumer, who had played a big
role in shoring up global growth, would start tiring. But the more important worry had
been the sub-prime mortgage market, which, as the name implies, lent money to people
whose credit was not very good. Those loans, made by banks competing with each other
to dole out money in a saturated credit market, were now coming home to roost.
Estimates showed that defaults on sub-prime mortgages were close to 10 per cent. HSBC,
for example, had to take an extra $1.76 billion bad debt charge last month after its sub-
prime loans went sour. Moreover, US data has been mixed recently. For instance, there
was a sharp downward revision of the December quarte r‘s GDP growth rate and sales of
new homes had plunged, but the Consumer Confidence Index improved in February. And
while Greenspan spoke about the possibility of recession, (later refining that to a one-
third possibility), his successor, Ben Bernanke spoke about reasonable chances of
economy strengthing.


Strong Fundame ntals
Despite the meltdown, market experts had reposed faith in the Asian economic growth
story. But in the short term, markets were expected to continue their choppy ride. Caution
was the catchword for the period. A steep correction could also lead to a steep rebound.
There could be uncertainty and volatility in the market coup led with trading
opportunities. While increased risk aversion may still have some room to go, the
correction is unlikely to turn into a serious meltdown. The ongoing currency sell-off
offers opportunities to eventually re-establish long positions even though heightened risk
aversion could fuel more shakeouts in high-carry favourites such as the Indonesian



                                           20
rupiah, Indian rupee and Philippine peso. The sell-off is probably more due to profit-
taking than a signal that the global economy is entering a recession. At its mildest, it
could simply blow away the speculative froth. The correction had little to do with any
major shifts in economic fundamentals. Says Song: ―Companies may report slower
growth but that poses no huge risk to earnings. US consumers are still buying Asian
goods and the economic scenario is still conducive for profit and income growth. Asian
economies have the fundamental strength to withstand any impact of the US demand
cycles. While it is a truism that Asian economies are dependent on US demand, several
countries within Asia have been raising their growth forecasts for 2007, including
Singapore, India and Indonesia.




                                          21
OTHER FACTORS
Skewed market
India's markets are highly skewed and shallow and thus the role of foreign institutional
investors assumes importance. Though, in aggregate terms, they constitute a small
portion of our market, at the margin the influence of the FIIs is considerable. Institutional
investors, particularly the FIIs, are constantly in search of better returns. The fund
manager is paid based on his performance and his job is to move funds on a continuous
basis. Global funds have to think of geographical allocation and then asset allocation
between risky shares and risk- less government securities, and the portfolio allocation


The fund manager is accountable only through his profits and is not emotional about
choosing between a developing or a developed country, or between European and Asian
markets. If parking funds in Antarctica can fetch gains he will do so with as much vigor
as he would in Wall Street or Dalal Street. A substantial portion of the transactions
between individuals and brokers is financed by the non-banking financial sector,
including moneylenders. Millions of individuals have lost heavily in the recent fall of t he
market, as they would have borrowed from non-corporate institutions at exorbitant rates.


In the Indian market, though the listed stocks number over 8,000, only around 250 are
actively traded. Of these, the top ten securities constitute nearly one-third of the traded
value, indicating the level of skew. In most mature markets, normally no single security
has more than one per cent of the traded value. This skew makes the market illiquid as
everybody wants these ten or so scrips and, when people exit, they also exit from these
ten. The India story has been good and, hence, there was much enthusiasm about the
market. When the market touched 12,000, there was so much euphoria that ministers and
ruling party managers began to talk about the achievements of the Government. But,
unfortunately, markets are more concerned about the future than the past and start getting
jittery when politics dominates economic thinking.




                                             22
POLITICAL FACTORS
Self-goal by gove rnment
In April 2006, the Human Resource Development Minister, Mr Arjun Singh, announced
reservation of up to 50 per cent in such institutions as IITs and IIMs. After crying from
the rooftops that these are premier institutes representing Brand India, this was a bolt
from the blue, like an FMCG company downgrading its premium brand. The callous way
the decisions were made and the debate was closed would have shocked international
investors. This apart, the Minister for Social Justice and Empowerment, Ms Meira
Kumar, was talking about reservations in the private sector. Again, nobody in the
Government was very clear on this issue. Fund managers were not sure if this a good
move. In the absence of clarity, they prefer to believe the captains of industry that the
policy may be harmful to business rather than creating and promoting equity.


The second and most important issue pertains to massive investments in infrastructure —
power, water, steel, etc. These are getting blocked due to apathy or antagonism of the
governments, both at the Centre and in the States. The NGOs add to the confusion.
Classic examples are the Bangalore-Mysore Corridor project, which has become a street
brawl between the State Government and the promoters, and the Kalinga project in
Orissa, where highways have been blocked for months now.


Naxal threat
And then there is the Prime Minister mentioning that Naxalism is the biggest threat to
India. More than 60 districts are affected by it, and these are districts where massive
infrastructure investments are expected. Given the precarious position in Nepal, if it falls
to Maoists — then many parts of the Naxal corridor are going to be volatile and almost
all the new mega projects expected to come up there will be affected. There is a three-
way tug-of-war being played by the UPA, the NDA and the Left, and the market does not
appreciate such confused polity.
It will be argued that the market had already factored in these variables. But the level of
procrastination and the increased domination over economics by politics has been more
visible from the end of April.



                                            23
MERGERS AND ACQUISITIONS
With every big-ticket acquisition, the market reacted in a violent manner. The all-cash
acquisition worth about USD44.93 a share would crown Hindalco as the largest rolled-
aluminum products manufacturer in the world. But the very expensive deal had sent the
confident markets into uncertainity once again, leading to a crash of over 300 points in
the morning trade. When the markets opened on Monday, Hindalco was one of the
biggest losers on the Sensex. It was trading down over 11% and all Sensex stocks were in
red except Wipro and ONGC.


The Hindalco takeover came less than two weeks after Tata Steel won a bidding war for
European steel maker Corus Group. At that time too, the markets reacted violently. The
stock tanked 10.5% after the deal was announced and another 1.6% the next day.The
stock market seems to recoil each time a big-ticket acquisition is announced. It is
believed that investors get worried about the financial risks of such a costly deal. Stock
price of Hindalco fell to a low of 153.05 rupees on concerns of strained cash flows after it
announced the acquistion of Novelis in deal valued at $5.9 billion including debt. Thus
with every new and big merger and acquisition deal the faith of the stock depends on the
perception of the of the investor about the value paid for the acquisition.




                                             24
3.     IMPACT ANAYLSIS
CAPITAL MARKET
Progress on developing India‘s capital market, which is already more competitive, deep
and developed by international markets standards, continued. Business in the country‘s
oldest stock exchange, namely the Bombay Stock Exchange (BSE) dating back to 1875,
which is also one of the oldest stock exchanges in the world, continued to thrive.


The National Stock Exchange (NSE), which emerged in the mid-1990s and catalysed
improvements in trading systems to provide the necessary depth and choice to investors,
made sustained progress. With the BSE and NSE emerging as the two apex institutions of
the country‘s capital market, restructuring of o ther stock exchanges went apace. Overseen
by Securities and Exchange Board of India (SEBI), an independent statutory regulatory
authority, the country‘s capital market dealt in scrips of a large number of listed
companies with a wide geographical outreach, providing a world class trading and
settlement system, a wide range of product availability with a fast growing derivatives
market, and well laid down corporate governance and investor protection measures. As a
part of the on- going financial and regulatory reforms of the primary and secondary
market segments of the capital market, a number of initiatives were taken in 2005-06 and
the current year so far. These measures, together with accelerated economic growth and
macroeconomic stability, sustained the co nfidence of investors (both domestic and
foreign) in the country‘s capital market. The stock market scaled new peaks year after
year since 2003, with the BSE and NSE indices crossing the 14,000 and 4,000 marks,
respectively, in January 2007.




                                            25
PRIMARY MARKET: IPO’S
With the robust growth in economy, manufacturing and service sector, corporate raised
huge amount if capital in the primary markets. As the corporate performance improved to
maintain the profitability and growth they banked on both retained earnings and IPO.s
The primary capital market has remained upbeat during 2006-07 so far. The aggregate
resource mobilisation in the market, especially through Initial Public Offerings (IPOs)
and private placements, was much higher in the year 2006 than during the previous year
Resources raised through the public issues increased by 20.2 per cent to Rs.32,382 crore
during 2006-07. The average size of issues increased to Rs.272 crore from Rs.195 crore
during the corresponding period of the previous year. All issues, except one, during 2006-
07 were by non-Government public limited companies (private sector) and mostly by
non- financial companies. Out of 119 issues during the year, 75 issues were initial public
offerings (IPOs) constituting 85.0 per cent of total resource mobilisation.


Mobilisation of resources through private placement increased by 50.8 per cent to
Rs.1,03,169 crore during April- December 2006 over the corresponding period of the
previous year. This was mainly on account of a near doubling of resources mobilised by
private sector entities to Rs.59,796 crore. Resources raised by public sector entities
increased by only 11.4 per cent. Private sector entities, thus, raised more resources than
public sector entities in contrast to the trend in 2005-06. Financial intermediaries (both
from public sector and private sector) continued to account for the bulk of resource
mobilisation from the private placement market (69.4 per cent of the total during April-
December 2006 as compared with 64.1 per cent during April-December 2005).




                                             26
           Mobilisation of Resources from the Primary Market
                                                         (Amount in Rupees crore)
        Item                    No. of Issues         Amount    No. of        Amount
                                                                Issues
                 1                           2          3         4             5
                                        2005-06                 2006-07
A. Prospectus and Rights Issues*
   1. Private Sector (a+b)                       131 21,154           118      31,600
      a) Financial                               11    7,746              9     2,420
      b) Non-financial                           120 13,408           109      29,180
   2. Public Sector (a+b+c)                       7    5,786              1      782
      a) Public Sector                            –         –             –          –
         Undertakings
      b) Government Companies                     1      373              –          –
      c) Banks/Financial                          6    5,413              1      782
         Institutions
   3. Total (1+2)                                138 26,940           119      32,382
      Of which: (i)      Equity                  136 26,695           116      31,535
         (ii)            Debt                     2      245              3      847
B. Private Place ment@
   1. Private Sector                             673 29,501        1,111       59,796
      a) Financial                               281 18,191           450      35,887
      b) Non-financial                           392 11,310           661      23,909
   2. Public Sector                              108 38,926            84      43,373
      a) Financial                               84 25,677             71      35,734
      b) Non-financial                           24 13,249             13       7,639
   3. Total (1+2)                                781 68,427        1,195 1,03,169
      Of which: (i)      Equity                   1      150              1         57
         (ii)            Debt                    780 68,277        1,194 1,03,112
C. Euro Issues                                   48 11,352             40      17,005




                                        27
POST LISTING PERFORMANCE
Over 60 per cent of initial public offerings (IPOs) that have hit the market during 2006-
07 have burned a hole in the pockets of investors. The co mpanies having raised about Rs
25,000 crore during the financial year, back of the envelope calculations put the notional
loss for investors in underperforming IPOs at Rs 3,600 crore.Of the 75 IPOs that hit the
market during the 2006-07 and have been listed so far, 29 issues (38.66 per cent of those
listed) have given positive returns, while 46 of them (61.33 per cent) have given negative
returns on their issue prices.


Uttam Sugars led the companies that heaped up losses, with investors in its IPO losing
59.31 per cent of its IPO price of Rs 340 a share. Tech Mahindra has topped the charts for
issues turning in gains by returning 276 per cent on its issue price at April 5 closing
prices. Among the prominent losers are Deccan Aviation, Unity Infraprojects, C&C
Construction, Blue Bird India, House of Pearl, Abhshek Mills and Lanco Infratech.


Sector-wise, textile IPOs were among the top losers. Issues of House of Pearl, Richa
Knits and Abhishek Mills were perceived to be expensive. They were issued at higher
price-earnings ratios than well- established players like Vardhman, Welspun and
Gokaldas Exports. These companies are reaching their fair values later after listing.Some
of the infrastructure companies that have priced their issues higher also suffered the same
fate. These include Unity Infra Projects, Lanco Infratech, Marg Construction, Cairn
Energy, Akruti Nirman Gayatri Projects, which are all trading at least 20 per cent below
their issue prices.


However, medium and small infotech companies that have tapped the market in the last
financial year have performed well, with seven of them giving positive returns. Media
companies have given overall positive returns with seven of them in the positive list. But
Broadcast Initiative and Raj Television have underperformed by over 20 per cent.




                                            28
      Mutual funds:

                        Resource Mobilisation by Mutual Funds
                                                                           (Rupees crore)
    Mutual Fund                           2005-06                        2006-07

                                     Net              Net           Net             Net
                               Mobilisation @       Assets     Mobilisation @      Assets
                1                     2                3             4               5


    Private Sector                        42,977 1,81,515                79,038 2,62,079
    Public Sector                          6,379      20,829              7,621     28,725
    UTI                                    3,424      29,519              7,326     35,488
    Total                                 52,780 2,31,862                93,985 3,26,292
    @: Net of redemptions.
    Source: Securities and Exchange Board of India.


The resources raised through Euro issues - American Depository Receipts (ADRs) and
Global Depository Receipts (GDRs) - by Indian corporates increased by 49.8 per cent to
Rs.17,005 crore during 2006-07.During 2006-07, net mobilisation of resources by mutual
funds increased substantially by 78.1 per cent to Rs.93,985 c rore over the corresponding
period of previous year . Bulk of the net mobilisation of funds (68.2 per cent of total) was
under income/debt-oriented schemes, while growth/equity-oriented schemes accounted
for 30.0 per cent of the net mobilisation of funds.




                                              29
SECONDARY MARKET
In the secondary market, the up trends continued in 2006-07 with BSE Sensex and NSE
Nifty indices closing above 14,000 (14,015) and 4,000 marks (4,024) for the first time,
respectively on January 3, 2007. After a somewhat dull first half, conditions on the
bourses turned buoyant during the later part of the year with large inflows from Foreign
Institutional Investors (FIIs) and larger participation of domestic investors. During 2006,
on a point-to-point basis, Sensex and Nifty Indices rose by 25.3 and 23.7 per cent,
respectively


                                                             S&P                          Average       Average
                             BSE                             CNX                         Daily BSE     daily NSE
 DATE                    SENS EX        % change           NIFTY      % Change           Turnover       turnover
 3.04.06                   11564              9.4           3473           11.2               4,860         9,854
 1.05.06                   12128              4.9           3605            3.8               4,355         9,155
 1.06.06                   10071              -17           2962          -17.8               3,261         6,828
 3.07.06                   10695              6.1           3150            6.3               2,605         5,652
 1.08.06                   10751              0.5           3147           -0.1               2,869         5,945
 1.09.06                   11778              9.5           3435            9.1               3,411         6,873
 3.10.06                   12366                5           3569            3.9               3,481         6,919
 1.11.06                   13033              5.4           3767            5.5               4,629         8,630
 1.12.06                   13844              6.2           3997            6.1               4,276         8,505
 2.01.07                   13942              0.7           4007            0.3               4,380         8,757
 1.02.07                   14267              2.3           4137            3.2               4,680         9,483
 1.03.07                   13159             -7.7           3811           -7.8               3,716         7,998



                                                BSE SENSEX

            15000
            14000
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   SENSEX




            12000
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             8000
                    6

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                                                                                                BSE SENSEX




                                                           30
                                 S&P CNX NIFTY

                     4500
   CNX NIFTY FIFTY


                     4000
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                             6

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                                              Date

                                         S&P CNX NIFTY




The BSE Sensex has continued its movement upwards in 2007 so far. It closed at 14,652
on February 8, 2007. The journey from 13,000 to 14,000 mark, achieved in just 26



                                         31
trading sessions, was one of the fastest ever climbs. The Sensex gained 4,389 points and
appreciated by 46.7 per cent during 2006. It recorded compounded returns of 33.2 per
cent per year between 2004 and 2006. BSE 500 recorded a gain of 38.9 per cent during
2006 to close at 5,271. According to the number of transactions, NSE continued to
occupy the third position among the world‘s biggest exchanges in 2006, as in the
previous three years. BSE occupied the sixth position in 2006, slipping one position from
2005. In terms of listed companies, the BSE ranks first in the world.


THE BSE JOURNEY…..
       The Sensex on April 20, 2006 crossed 12,000 and touched a life-time peak of
       12,004 points during mid-session at the Bombay Stock Exchange for the first time
      Since mid-May 2006, equity markets across the world have been negatively
       affected by a widespread re-rating of risk arising from the uncertainty on the
       extent of monetary tightening in major economies, petroleum price movements
       and intensification of conflict in the Middle East. These developments have
       reflected a big increase in risk perception which has resulted in the withdrawal of
       funds from some of these markets.
      The market began to adjust to the heightened risk perceptions soon thereafter. By
       the middle of June, volatility had reduced somewhat and some recove ry had
       materialized.
       A process that has been taken forward in July. The strength of the recovery of
       equity markets must be viewed in the context of continuing and heightened
       tensions in West Asia and its implications for oil prices. It must be noted that in
       the process of adjustment the Indian market has lost 1,400 points or little over
       11% in terms of the BSE Sensex 30, and 480 points or 13% in terms of the more
       broad-based NSE Nifty
      The Sensex on October 30, 2006 crossed 13,000 and still riding high at the
       Bombay Stock Exchange for the first time. It took 135 days to reach 13,000 from
       12,000. And 124 days to reach 13,000 from 12,500. On 30th October 2006 it
       touched a peak of 13,039.36 & closed at 13,024.26.




                                            32
   The Sensex on December 5, 2006 crossed 14,000 and touched a life-time peak of
    14028 while opening for the day December 5, 2006.
   According to a study, India has emerged as the most favoured private equity (PE)
    destination, attracting $1239.22 million worth investments in January 2007,
    surpassing China and Japan. India ranks top in terms of PE investments in
    January-February and has left behind China with $609 million and Japan with
    $980 million, according to a report by Asian Venture Capital Journal.
   Indian corporates raised US$ 1.58 billion (Rs. 6,786 crore) from the primary
    capital market in February 2007. This was 62 per cent lower than the amount
    raised in the same month a year ago. The participation of Indian companies in the
    primary market has remained low in January and February 2007 compared to the
    preceding four months, when they raised an aggregate amount of US$ 14.94
    billion (Rs. 63, 976 crore).




                                        33
THE MAY HEM
On May 22, 2006, the Sensex plunged by a whopping 1100 points during intra-day
trading, leading to the suspension of trading for the first time since May 17, 2004. The
volatility of the Sensex had caused investors to lose Rs 6 lakh crore ($131 billion) within
seven trading sessions. The Finance Minister of India, P. Chidambaram, made an
unscheduled press statement when trading was suspended to assure investors that nothing
was wrong with the fundamentals of the economy, and advised retail investors to stay
invested. When trading resumed after the reassurances of the Reserve Bank of India and
the Securities and Exchange Board of India, the Sensex managed to move up 700 points,
still 450 points in the red. This was the largest ever intra-day crash (in points terms) in the
history of the Sensex.
The Sensex eventually recovered from the volatility, and on October 16, 2006, the Sensex
closed at an all- time high of 12,928.18 with an intra-day high of 12,953.76. This was a
result of increased confidence in the economy and reports that India's manufacturing
sector grew by 11.1% in August 2006.
The markets have been driven up by FIIs (Foreign Institutional Investors) doubling the
Sensex in the past 1 year from 6,438 to a high of 12,671 two weeks ago. FIIs have
pumped in Rs 45,000 crore (Rs 450 billion) last year and about half of that in the first few
months of this year.
The reasons being given for the crash were
      the sale of Rs 7,300 crore (Rs 73 billion) shares by FIIs in the 1 week,
      an expected increase in interest rates by the US Feds,
       a crash in the international commodity prices,
    The straw which broke its back seems to be a government circular which was
   interpreted that FIIs should be taxed




                                              34
FII’S AND MUTUAL FUNDS
The Securities and Exchange Board of India (SEBI), FIIs made net purchases of
Rs.25,236 crore (US $ 6.0 billion) during 2006-07 on top of net purchases of Rs.48,542
crore (US $ 11.0 billion) during the previous year. Mutual funds also made net
investments of Rs.9,024 crore during 2006-07 as compared with net purchases of
Rs.14,302 crore during the previous year. Even in the period of volatility, foreign
institutional investors, FIIs, have not turned their back the Indian equity market. Between
February 12- March 22, FIIs have been net buyers to the tune of Rs 2522 cr.


Both FIIs and mutual funds as institutional investors remained active in the equity market
during the year. Though the net investment by FIIs in the equity spot market fell by
around 22 per cent to Rs. 36,540 crore in Jan-Dec 2006, there was a quantum increase in
gross value of buying and selling The number of FIIs rose by 27 per cent to 1,044 at the
end of 2006.The number of sub-accounts too increased by 34 per cent to 3,045. Domestic
participants accounted for the major part of the transactions in the Indian equity market
with the gross turnover including both buy and sale) by FIIs at Rs. 20.6 lakh crore
accounting for only 10.4 per cent of total gross (two-way) turnover of Rs. 198.6 lakh
crore in spot and derivatives markets in 2006.


In tandem with an increase in resource mobilisation, assets under management of mutual
funds increased by about Rs. 1.24 lakh crore to reach Rs. 3.24 lakh crore in 2006. The
transactions of mutual funds in the equity segment of Indian stock exchanges, which
amounted to net sales of Rs. 1,164 crore in 2004, turned to net purchase of Rs. 13,436
crore in 2005 and further to Rs. 15,384 crore in 2006.


Most of the mutual funds have had a sizeable portion invested in mid-cap scrips that were
volatile this year. The Sensex, on the other hand, is composed of only large, blue-chip
companies.If 2004 and 2005 were years of mid-cap-oriented funds, 2006 saw large-cap
funds staging a comeback. Diversified equity funds that tilted their portfolios towards
mid caps the past two years, sold off their mid-cap holdings and bought many large-cap
scrips. So, while these schemes returned 32.2 per cent, mid-cap funds on an average



                                            35
returned 29.6 per cent. Systematic investment plans doubled in 2006 from 75,000
accounts in December 2005 to around 150,000 accounts in November 2006. Debt funds
continued their slump on account of volatile interest rates and returned 4.7 per cent on an
average.


Benchmark Mutual Fund was the largest growing fund house. Its assets under
management of Rs 1,267 crore (Rs 12.67 billion) in January, grew 606 per cent to Rs
8,951 crore (Rs 89.51 billion) in November. Sahara and Canbank Mutual Funds were the
biggest losers in terms of AUM. While Sahara lost 56 per cent {from Rs 464 crore (Rs
4.64 billion) in January to Rs 203 crore (Rs 2.03 billion) in November}, Canbank
dropped 19 per cent {from Rs 2,843 crore (Rs 28.43 billion) in January to Rs 2,305 crore
(Rs 23.05 billion) in November}. Poor performance and inability to attract fund
management talent were the common evils.


Thirty-eight new equity schemes were launched in 2006 and garnered around Rs 27,400
crore (Rs 274 billion). New categories of funds, like capital protection-oriented funds and
equity derivative funds, were launched.And just when we thought we had seen the last of
sectoral funds, JM MF launched two sectoral equity schemes targeting the financial
services and telecom sectors. The response, though, was weak. The rush for equity initial
public offers saw Standard Chartered Mutual Fund launching an equity scheme that
aimed to invest in such IPOs to make listing gains.Three fund houses, OptiMix, Quantum
and Lotus Mutual Funds, made a debut in the Indian market. While OptiMix is India's
first specialised fund of funds house, Quantum is the country's first fund house to avoid
the distributor route to sell its own schemes.




                                             36
Transactions of FIIs

Trans actions                                        2005        2006
End-year number of FIIs                                823       1,044
End-year number of sub accounts                      2,273       3,045
1. Equity market activity
a. Spot
Gross Buy                                          286,021    475,623
Gross Sale                                         238,839    439,083
Net (Buy-S ale)                                     47,182     36,540
b. Derivatives activity
Gross Buy                                          254,322    564,887
Gross Sale                                         249,875    564,182
Net (Buy-S ale)                                      4,447        705
c. Total equity (a+b)
Gross Buy                                          540,343   1,040, 510
Gross Sale                                         488,714   1,003, 265
Net (Buy-S ale)                                     51,629      37,245
2. Debt
Gross Buy                                            7,015   1,040, 510
Gross Sale                                          12,533   1,003, 265
Net (Buy-S ale)                                     -5,518      37,245
3. Tot al FII investment (1+2)
Gross Buy                                          547,358      11,061
Gross Sale                                         501,247       7,012
Net (Buy-S ale)                                     46,111       4,049
Total FII Investment (Net) in US $ million^         10,467   1,051, 571




                                              37
Assets under management of mutual funds (Rs. Crore)


Schemes                                 2005            2006
Money Market                           64,711          97,757
Gilt                                    3,730           2,057
Income                                 52,903          86,350
Growth                                 67,144         119,538
Balanced                                6,833           9,170
ELSS                                    3,927           8,726
Total                                 199,248         323,598




                                38
MARKET CAPITALISATION
With the stock indices soaring, investors‘ wealth as reflected in market c apitalisation also
increased significantly during 2006. The year under review saw increased daily volatility
(as measured by standard deviation of returns) in the Indian markets partly due to a sharp
sell off in the market during the month of May in line with global markets in reaction to
the trend in global interest rates. The market soon recovered thereafter to touch new highs
reflecting the underlying strength of the fundamentals of the Indian economy


NSE S&P CNX NIFTY
                       No of         No. of
                       co. s         trading     Turnover       Market Capitalisation
 Month/ Year           listed*       days        (Rs. cr)       (Rs. cr)*
           Mar-07            1,228          21        167,954                      3,367, 350
           Feb-07            1,208          19        180,170                      3,296, 931
             Jan-07         1,185          20         175,147                      3,571, 487
             Dec-06         1,158          20         170,105                      3,426, 236
             Nov-06         1,137          22         189,863                      3,373, 652
             Oct-06         1,127          20         138,382                      3,138, 319
             Sep-06         1,116          21         144,339                      2,994, 132
             Aug-06         1,099          22         130,796                      2,777, 401
              Jul-06        1,095          21         118,698                      2,514, 261
             Jun-06         1,099          23         151,050                      2,524, 659
             May-06         1,093          22         201,409                      2,612, 639
             Apr-06         1084           18         177,372                      2,990, 200




Date                                                  P/E          P/B            Div Yield
29-A pr-06                                            20.31        5.39           1.27
31-May-06                                             17.46        4.57           1.48
30-Jun-06                                             18.44        4.66           1.49
31-Jul-06                                             17.64        4.29           1.58
31-A ug-06                                            19.15        4.55           1.47
29-S ep-06                                            20.92        4.76           1.33
31-Oct-06                                             20.37        4.84           1.32
30-Nov-06                                             21.18        5.08           1.22
29-Dec-06                                             21.26        5.07           1.22
31-Jan-07                                             19.85        5.2            1.17
28-Feb-07                                             18.01        4.77           1.27
30-Mar-07                                             18.4         4.87           1.25




                                                 39
Market capitalisation in terms of GDP indicates the relative size of the capital market,
besides investor confidence and discounted future earnings of the corporate sector. As on
January 12, 2007, market capitalisation (NSE) at US$834 billion was 91.5 per cent of
GDP. India‘s market capitalisation compares well with other emerging economies and
shows signs of catching up with some of the mature Economies. NSE and BSE spot
market turnover sadding up to Rs. 2,877,880 crore and NSE and BSE derivatives
turnover adding up to Rs. 7,050,677 crore in 2006 showed significant growth over the
previous year. At the end of 2006, as a proportion of GDP (advance estimate for 2006-
07), the turnover in the spot market was 70.2 per cent, while that in the derivatives
market was 171.9 per cent. In terms of the composition of market participants, the stock
market continued to be dominated by retail investors. The average transaction size of the
spot market indicated its continued accessibility to small investors.




                                             40
LIQUIDITY
Liquidity, which serves as a fuel for the price discovery process, is one of the main
criteria sought by the investor while investing in the stock market. Market forces of
demand and supply determine the price of any security at any point of time. Impact cost
quantifies the impact of a small change in such forces on prices. Higher the liquidity,
lower the impact cost. The impact cost for purchase or sale of Rs.50 lakh of the Nifty
portfolio and that of Rs. 25 lakh of Nifty Junior portfolio remained constant at 0.08 per
cent and 0.16 per cent, respectively, over 2005 and 2006.

DEBT MARKET
The yields in the Government securities market hardened during 2006-07. Yields moved
up from mid-April 2006 reflecting sustained credit demand, monetary policy tightening
in the US and other economies, volatile crude oil prices, apprehensions over domestic
fuel price hike, and hike in the reverse repo rate by 25 basis points effective June 9, 2006.
Reflecting these factors, yields on 10-year paper reached an intra- year peak of 8.40 per
cent on July 11, 2006, an increase of 88 basis points over end-March 2006. Subsequently,
yields softened in consonance with easing of Government bond yields in the US, the
Fed‘s decision to keep the fed funds rate target unchanged since end-June 2006, easing of
crude oil prices, increased demand for gilts from banks to meet their SLR requirements
and the announcement of the borrowing calendar of the Central Government for the
second half of 2006-07 which was in accordance with market expectations. The 10- year
yield reached a low of 7.38 per cent as on November 28, 2006. There was again some
hardening of the yields from the second half of December 2006 in tandem with tightness
in domestic liquidity conditions on the back of advance tax outflows, higher inflation and
hikes in the CRR. The 10- year yield was 7.97 per cent as on March 31, 2007, 45 basis
points higher than the level as on March 31, 2006 (7.52 per cent). The yield was 8.07 per
cent as on April 18, 2007. The yield curve flattened during 2006-07, with the spread
between 1-10 year yields narrowing down to 42 basis points at end-March 2007 from 98
basis pints at end-March 2006. The spread between 10- year and 30- year yields, however,
widened to 37 basis points at end-March 2007 from 30 basis points at end-March 2006.




                                             41
The turnover in the Government securities market continued to be influenced by trends in
yields. The turnover remained subdued during April-July 2006 as banks preferred to hold
securities, rather than trade, in an environment of hardening of yields. The turnover,
however, increased during August-November 2006 (the highest since June 2005) as
yields trended downwards. The decline in turnover in October 2006 partly reflected lower
number of trading days. The turnover again turned subdued from December 2006 as
yields started hardening.




                                          42
CORPORATE ANALYSIS
Analysing the performance of companies, which were trading on the stock exchanges
in both the financial years, it was seen that 76% of the total listed companies have seen a
fall in their market capitalization in this financial year as compared to the last. Out
of 1626 companies, market capitalization of 1226 companies have taken a dip. This data
clearly suggests the weak performance of India inc's in FY06-07. The weakness, as per
experts, can be attributed to factors like high inflation and interest rates. The event of
'budget', which always gives a much needed upside to the market, also did not seem to go
very well with the investors


Even when 75% of the total listed companies, that were trading on the BSE both in FY06
and FY07, have seen a fall in their market capitalization in this financial year as against
the last, there are companies that give a different story. Out of the total 2026 companies,
400 of them have beefed up their market capitalization in FY06-07 as compared to FY05-
06. The difference in their market capitalization in FY07 over FY06 is between the range
of 20002-0.18%.


Videocon Industries' market cap had beefed up 1118.39% in FY 05-06 and in this
financial year it grew by just 4.93%. Godrej Industries, one of the top leaders in the
FMCG sector, also saw the same fate. Their marketcap in this year has grown by 58.11%
and in FY 05-06 by 434.06%. Reliance Capital's marketcap, this financial year, has fallen
by 335.3% as compared to last year. Titan Industries has seen its marketcap growing by
just 0.19%, while last year there was 264.04% growth.


Glenmark Pharma's market cap has grown by 92.59% in FY07 as compared to FY06.
Essar Steel's marketcap has beefed by 44.48% over a negative return of 10.48% in FY06.
RIL's marketcap has grown by 64.63% as against 41.08% in FY06. Biocon, Essar Oil and
SAIL have also winessed a growth in their market cap. Biocon's marketcap grew by
6.85% in FY07 as against 2.3% in FY05. Essar Oil's market cap has grown by 2.46%
over FY05 marketcap.SAIL saw a 1.76% increase in their ma rketcap over FY06. Some
of the other good companies in this list are Dabur Pharma, Ceat, Alliance Capital, Aditya


                                            43
Birla Nuvo, Bank of Maharashtra, Moser Baer(I), IDBI, Natco Pharma. Quite a number
of Information technology companies have also made it to the list signifying investor
faith in them. These companies are Nuclues Software, Polaris Software, Sonata Software,
Zensar Tech and Geometric Software


There are also companies that instead of even giving moderate growth have given
negtative growth in this financial year. For example, Balrampur Chini, had given a
positive marketcap growth of 182.87% last financial year, but this financial year saw the
same company witnessing a negative retun of 66.47%. To name few, companies like
Cipla, Bajaj Auto are also sailing in the same boat. Cipla has seen a fall in their
marketcap by 10.34%, while last financial year it grew by 154.69%.


Following the global meltdown, Indian indices had opened sharply lower. The Sensex
tumbled more than 500 points and slipped below 13000 before recovering some ground.
The Nifty lost nearly 180 points in early trades and touched a low of 3675. The sharp
decline in global indices led to a very weak opening for the indices. The Sensex slipped
way below 13000 before recovering. The next day Sensex opened at 13045 and slumped
678 points from day befores closing levels to a low of 12801 before recovering.


Cement stocks were the worst hit despite the increased emphasis on infrastructure in the
budget. ACC and Gujarat Ambuja Cements were down nearly 4.5 per cent each while
Grasim had lost more than 3 per cent. HDFC Bank was the worst performer among index
stocks with losses of 5 per cent. PNB had lost over 3 per cent. SAIL was the worst
performer among metals, with losses of 4.5 per cent, while Nalco had lost nearly 4 per
cent. VSNL remained weak and had lost more than 3.5 per cent. Zee Entertainment and
Ranbaxy were the other major losers, both down more than 3 per cent each.


ITC was the best performer among index stocks with gains of 1.5 per cent following the
budget announcement of higher allocation of funds to the agri sector and rural areas. Gail
India was the other major gainer among Nifty stocks with gains of over a per cent.
Hindalco and Suzlon were trading with modest gains. Mid-caps and small caps were also



                                           44
under pressure. The NSE mid-cap index was now trading with losses of nearly 1.5 per
cent. BSE mid-cap index had lost 0.8 per cent and the BSE small-cap index was trading
with losses of nearly 0.8 per cent. Market breadth on the NSE was very negative in early
trades with more than 2.5 stocks declining for every advancing stock. Navneet
Publications had added more than 10 per cent on higher budget allocation for education
Hindustan Motors has added over 6 per cent on finalisation of a property development
scheme. Thomas Cook had added another 6.5 per cent.Dredging Corp, Khandwala
Securities, Ramco Industries, MM Forgings and TV Today were the other major mid-cap
gainers. Among the recent listings, Transwarranty Finance and Cambridge Technologies
have lost heavily.SPL, Uniphos, Eimco Electronics, TT Limited and India Infoline were
among the other major mid-cap losers.


The Dow tumbled 3.3 per cent while the S&P 500 slipped nearly 3.5 per cent.
Technology stocks were the worst hit and the NASDAQ ended more than 3.85 per cent
lower. Markets across Asia continued to decline today as well. Singapore was the biggest
loser among major indices with losses of nearly 3.75 per cent. Malaysia lost 3.3 per cent
while Japan ended 2.85 per cent lower. Hong Kong and South Korea ended with losses of
around 2.5 per cent each and Indonesia gave up 1.3 per cent. Thailand lost a per cent.
Shanghai recovered after the 9 per cent fall and closed nearly 4 per cent higher. European
markets were weak in opening trades as expected. Major indices were trading with losses
of between 0.8 and 1.15 per cent each in early afternoon trades.




                                            45
4.       CONCLUSION

Looking at the various factors affecting Indian the capital market in the year 2006-2007
and it corresponding impact on the various indices, market segments, corporate share
prices, etc we can observe following facts
        Markets have been volatile all round the year with major indices touching new
         and new heights. Major indices BSE and NSE started from 11000 level and
         moved to 140000 and 3000 moving to 4000 level respectively in 2006-07
        Market activities were in full swing all round with market capitalization
         increasing for most indices and company shares.
        FIIs have been entering and exiting the markets with every single news in Indian
         and global market. FIIs entered at every opportunity in big quantum and then
         exited them at flick of fingers washing away the markets.
        Mutual funds have performed as per the market performance. They have
         optimized every profit making opportunity in the market. Some mutual fund
         managers have successfully replicated the markets and at times outperformed
         market.
        Both FIIs and mutual funds have been considerably the navigators of the capital
         markets as they have been the major players in the market.
        Retail investors have also been substantially increasing but their volumes being
         low are market followers rather than leaders
        The market volatility has been most hurting to retail investors as they are the last
         one to receive market information.
        The two major falls i.e. may 2006 and Feb 2007 in the market was really critical
         for all segments of investors who literally lost all the ir portfolios. The biggest
         losers‘ were the midcap stock which fell even greater than the market indices.
         Even when the market recovered the midcaps were far below the original levels.
        The market movement has only endorsed the fact that Indian markets are getting
         more and more synchronized with the global markets
        Indian markets are moving exactly in tandem with foreign bourses. A single news
         in Wall Street or shanghai market has tremendous effect on BSE and NSE.


                                              46
   India and China have evolved as one of the most important markets drivers in the
    global markets as they have been growing robustly in past few years.
   Indian capital markets have been continuously improvised to meet international
    standards. Several regulatory changes have been introduced to give better
    accuracy transparency and efficiency to the markets.
   Demutualisation of BSE is one of the most awaited event in the coming year.
   Though several analysis and research are conducted but by very nature markets
    seem to be volatile and no amount of study can predict the future movements.
   It is important to remember that the market looks at the future. There is a
    continuous flow of information, both positive and negative, and when the scales
    are tipped either way, because of information asymmetry or any other reason, the
    market slides.
   The future of the market is as uncertain as ever. With growing concerns of
    inflation, sustaining growth, global slowdown, exchange rate fluctuations, erratic
    market sentiments, the market movement has become impossible to predict. In
    spite of the sea of information available the market volatility has no looking back.
    With every bullish movement, investors expect the bears to be stronger but
    market seem to out of their reach and the bulls and bears appear in a very random
    manner.
   The investment in the government securities market as influenced by the yield
    curves was not very impressive. The yield curve flattened as the spreads reduced
    resulting in declined attractiveness during the entire year.


Thus everything said and done Indian capital market 2006-07 have been as active and
exciting as any of the past few years which have laid the foundation of India turning
into a ―True Global economy‖. Now it is more important to accelerate this progress
with inclusive growth and sustainability.




                                          47
BILIOGRAPHY




     www.nseindia.com
     www.bseindia.com
     www.rbi.org.in
     www.moneycontrol.com
     www.economictimes.com
     www.indiainfoline.com
     RBI publications
     Business world
     Business standard




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