Page 283 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 21: Capital Market in India and Working of SEBI

crores. In case, the amount collected falls short by the prescribed minimum, the subscription Notes
amount must be refunded within a period of six weeks;
(e) the advertisement code prescribes norms for fair and truthful disclosure by the mutual funds in
advertisements and publicity materials.
Growth of Mutual Funds
In the 1990s, MFs found it hard to attract investors. The competition for funds was hotting up from
banks and the Government. With the Government offering interest rates of nearly 14 per cent for
medium term securities — the Government of India proposed to offer 10-year paper on tap with a
coupon rate of 14% — and banks pegging short term rates at 12 per cent, investors were focusing on
debt instruments which were gaining popularity over equity. HDFC, leading housing finance company
was offering 14% interest on fixed deposits; IDBI had decided on a 15.75% for a twin-bond issue.
Under these conditions, it was difficult for mutual funds to rival such high yields on debt instruments.
They also found it hard to meet the high expectations of investors who were yet to break out of the
get-rich-quick syndrome. Accordingly, the first wave of mutend funds failed.
The performance of mutual funds was not encouraging for many years. Investor confidence in mutual
funds was low. This could be attributed partly to lack of confidence and partly to stock market
conditions which had affected the perception of investors.
The revival of the MF market since 1995-96 was due to the entry of corporate majors—the Tatas,
Birlas, Reliance and SBI. Many others followed with products designed for investor specific needs.
They also offered improved liquidity, easy exit routes and regular income flows. All these changes
coincided with the revival of the stock market. Sensex, for instance, crossed 6,000 mark in February
2000. Investors left the banking system and flocked to the mutual funds. This period of booming
stock exchanges and mutual funds was, however, short lived.
After Ketan Parekh incident, the stock market crashed with sensex touching 2,600 (with 1974-75 =
100) during 2001 -02. This led to a two-year period of recession in the MF market. In the mean time,
the Unit Trust of India (UTI), the public sector mutual fund went through a crisis and had to be
restructured. As a result, the share of the private sector MF companies increased considerably.
The overall assets under management (AUM) declined from 1,02,830 crores to ` 89,240 crores between
April 2002 and 2003. but later rose rapidly to ` 3,26,290 crores by March, 2007. The Mutual Fund
companies are now mobilising about ` 90,000 crores annually.
21.4 Stock Exchange in India

In a modern capitalist economy, almost all commodities, even the smallest, are produced on a large
scale; and large-scale production implies large amounts of capital. The joint stock company or the
corporate form of organisation is ideally suited to secure large amounts of capital from all those who
have surplus funds and who are willing to take risks in investing in companies. It issues stocks and
bonds and enables those with surplus funds to invest them profitably in either of them, according to
their convenience and temperament. An investor who puts his savings in a company by buying its
securities cannot get the amount back from the company directly. The only way the capital invested
in stocks and shares of a joint stock company may be realised by its owner is through the sale of those
stocks and shares to others. The stock market or exchange is a place where stocks and shares and
other long-term commitments or investments are bought and sold. For the existence of the capitalist
system of economy and for the smooth functioning of the corporate form of organisation, the stock
exchange is, therefore, an essential institution.
History of Stock Exchanges in India
The first organised stock exchange in India was started in Bombay when the Native Share Stock
Brokers’ Association known as the Bombay Stock Exchange (BSE) was formed by the brokers in
Bombay. BSE was Asia’s oldest stock exchange. In 1894, the Ahmedabad Stock Exchange was started
to facilitate dealings in the shares of textile mills there. The Calcutta Stock Exchange was started in

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