5 Development of Securities Markets: The Indian Experience

Figure 5.2. Turnover in Cash and Derivatives Segment of the NSE Stock Exchange
(In rupees crore)
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
Jun-2000
Sep-00Dec-00M
ar
-01
Jun-01Sep-01Dec-01M
ar
-02
Jun-02Sep-02Dec-02M
ar
-03
Jun-03Sep-03Dec-03M
ar
-04
Jun-04Sep-04Dec-04M
ar
-05
Jun-05
Derivatives
Cash

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©International Monetary Fund. Not for Redistribution
122 D
EVELOPMENT OF
S
ECURITIES
M
ARKETS
: T
HE
I
NDIAN
E
XPERIENCE
investment in equities in 2004–05 was Rs. 44,123 crore, which was one of 
the highest investments in equities in a single year by FIIs.
Corporate Securities: Debt Segment
From the perspective of developing countries, a liquid corporate bond 
market can play a critical role in supporting economic development. It 
supplements the banking system to meet the requirements of the corpo-
rate sector for long-term capital investment and asset creation. It provides 
a stable source of financing when the equity market is volatile. Further, 
with the decline in the role of DFIs, there is an increasing realization of 
the need for a well-developed corporate debt market as an alternative 
source of finance.
A number of policy initiatives were taken during the 1990s to activate 
the corporate debt market in India. The interest rate ceiling on corporate 
debentures was abolished in 1991, paving the way for market-based pric-
ing of corporate debt issues. In order to improve the quality of debt issues, 
rating was made mandatory for all publicly issued debt instruments, 
Figure 5.3. Trends in Market Capitalization
(In rupees crore)
2,000,000
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
N
ov-1994 Sep-95
Jul-96 Ma
y-97
M
ar
-98
Ja
n-99
N
ov-99
Sep-2000
Jul-01 Ma
y-02
M
ar
-03
Ja
n-04
N
ov-04
NSE Exchange
BSE Exchange

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©International Monetary Fund. Not for Redistribution
Narendra Jadhav 123
irrespective of their maturity. The role of trustees in bond and debenture 
issues has strengthened over the years. All privately placed debt issues 
are required to be listed on the stock exchanges and follow the disclosure 
requirements. However, despite the policy initiatives, corporate debt still 
constitutes a small segment of the debt market in India. Whereas the 
primary market for debt securities is dominated by the private placement 
market, the secondary market for corporate debt is characterized by poor 
liquidity, although this has improved in recent years.
The developed financial markets are characterized by a sound financial 
and legal infrastructure, which is necessary for the development of a cor-
porate bond market, supported by a well-functioning regulatory system.
The United States is, by far, the most suitable example of a country whose 
corporate bond market is deep, efficient, and liquid. The bond markets in 
the United Kingdom and euro-area countries are also reasonably devel-
oped. The markets for debt securities in Western European countries and 
Japan are much smaller than in the United States, not only in absolute 
terms but also as a percentage of GDP. Unlike the developed financial 
systems, the corporate bond market has a very short history of develop-