ROLE OF STOCK MARKETS IN ECONOMIC GROWTH WITH SPECIAL REFERENCE TO INDIA

  

                                                                                                                - Dr. S. Vijay Kumar

    The Securities Contracts (Regulation) Act, 1956, has defined Stock Exchange as an "association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business of buying, selling and dealing in Securities". Stock exchange as an organized security market provides marketability and price continuity for shares and helps in a fair evaluation of securities in terms of their intrinsic worth. Thus it helps orderly flow and distribution of savings between different types of investments. This institution performs an important part in the economic life of a country, acting as a free market for securities where prices are determined by the forces of supply and demand. Apart from the above basic function it also assists in mobilizing funds for the Government and the Industry and to supply a channel for the investment of savings in the performance of its functions.

       The Stock Exchanges in India as elsewhere have a vital role to play in the development of the country in general and industrial growth of companies in the private sector in particular and helps the Government to raise internal resources for the implementation of various development programmes in the public sector. As a segment of the capital market it performs an important function in mobilizing and canalizing resources which remain otherwise scattered. Thus the Stock Exchanges tap the new resources and stimulate a broad based investment in the capital structure of industries.

      A well developed and healthy stock exchange can be and should be an important institution in building up a property base along with a socialist in India with broader distribution of wealth and income. Thus Stock Exchange is a vital organ in a modern society. Without a stock exchange a modern democratic economy cannot exist. The system of joint stock companies financed through the public investment as emerged has put the vast means of finances almost to entrepreneurs' needs.

     Finance from external sources mainly from the investing public can become possible only when an institute like Stock Exchange provides opportunities for the conversion of scattered savings into profitable investments with the promises of a reasonable yield and minimum element of risk. Such a mechanism as provided by Stock Exchanges is not merely a source of capital but also a conduit which channelizes the savings into investment along with a free movement of capital. 

      

     With the probable exception of a totalitarian state no Government will be able to mobilize resources from the public if the money market in the form of stock exchange does not exist. The Stock Exchange benefits the entire community in a variety of way. It enables the producers to raise capital which directly and indirectly gives gainful employment to millions of people on the one hand and helps consumers to get; the variety of goods needed by them on the other. It provides opportunities to savers to store the value either as temporary abode of purchasing power or as a permanent abode of purchasing power in the form of financial assets. It also helps the segments of the savers who put their savings in commercial firms and non-banking financial intermediaries because these institutions avail themselves of the services of Stock Exchange to invest the money thus collected.

    The Stock Exchange comes close enough to a perfectly competitive market allowing the forces of demand and supply a reasonable degree of freedom to operate as compared to other markets specially the commodity markets. This segment of the factor market can be considered as a perfect or a nearly perfect market. Apart from providing a mechanism for transacting business in stock and shares it generates genuine potential for a new entrepreneur to take up initiative in the private sector enterprises and allows the expansion of investing community by offering gainful development of their otherwise sluggish or shy capital.

       Stock Market (or stock exchange) is a place where stock (or shares as we call in India) is traded between investors at a particular price that is purely determined by the demand and supply of the shares. For example, if the demand of the share is greater than the supply, the price of the share will keep rising until the demand is equal to supply. As a result the price of the share goes up. Alternatively, if the supply of the share is more than the demand, the price of the share falls till it equals demand. Normally one would want to buy the shares of company that are performing good. This would result in a rise in demand for the shares and the price will start rising. The price will rise until the investors feel that the share price correctly co relates with the good performance of the company. Similarly one would try to sell shares of a company that is performing poorly and so the supply will rise. The price will continue to fall till investors feel that the price correctly correlates with the performance. It is worth noting that any news that has an effect on the performance of the company will be reflected in the price movement of the share. For example, if the government announces that there is an upward revision in the price of petrol, the most likely gainers will be companies like Indian Oil, BPCL, HPCL, ONGC, Reliance etc. Therefore, their stocks (share prices) will start rising. Alternatively if the government announces that there is no revision in the price of petrol even though the price of crude is rising in the international market, the share prices of these companies will be under pressure and will probably fall. 

     Now days shares are held in dematerialized or demat form (i.e. in electronic form without any paperwork involved) with a share broker who is registered with the stock exchange. In India, there are two main stock exchanges viz.

1) The Bombay Stock Exchange (BSE)
2) The National Stock Exchange (NSE)

The Bombay Stock Exchange (BSE):

Bombay Stock Exchange, commonly referred to as the BSE is located at  Mumbai. It is the 10th largest exchanges in the world by market capitalization. Established in 1875, BSE formerly known as Bombay Stock Exchange Ltd. is Asia’s first Stock Exchange and one of India’s leading exchange groups. Over the past 137 years, BSE has facilitated the growth of the Indian corporate sector by providing it an efficient capital raising platform. BSE was also formerly known as  "The Native Share & Stock Brokers' Association."

The National Stock Exchange (NSE):

National Stock Exchange of India or in short NSE happens to be India’s largest Stock Exchange and world’s third largest stock exchange in terms of transaction and 11th largest world's stock exchange in terms of market capitalization. It is located in Mumbai and was incorporated in November 1992 as a tax-paying company. It was in April 1993 that NSE was recognized as stock exchange under the Securities Contract Act 1956.

Sensex and Nify:

The Sensex is an "index". It gives a general idea about whether most of the stocks have gone up or down. It is an indicator of all the major companies of the BSE. The Nifty is an indicator of all the major companies of the NSE.  Sensex consists of Big 30 Companies. Nifty consists of consists of 50 Big companies. There are lot  of other companies besides the above said number. 

             

     Both the exchanges headquarters are at Mumbai. A broker can be a member of either of the two or both. Time to time, the BSE allocates weightage to different stocks that reflect their importance in the stock markets. Take an example of two stocks RELAINCE and TATA POWER where both are included in the Sensex. If the share price of Reliance goes up by Rs 10 and the share price of TATA POWER falls by Rs 10, does it mean that they will balance each other? The answer is no. This is because the weight of the Reliance share is much more than Tata Power. In such a case the rise in the Reliance share will out weigh the loss in Tata Power's share and the Sensex will rise (assuming other stocks remain where they are). It is to be noted that the Sensex will either move upwards or downwards only on the performance of these 30 stocks (30 Companies shares value). Since the general mood of the market is reflected by the movement in the Sensex, it remains in the news all the time.

Characteristics or features of stock exchange:

1.   Market for securities: Stock exchange is a market, where securities of corporate bodies, government and semi-government bodies are bought and sold.

2.   Deals in second hand securities: It deals with shares, debentures bonds and such securities already issued by the companies. In short it deals with existing or second hand securities and hence it is called secondary market.

3.   Regulates trade in securities: Stock exchange does not buy or sell any securities on its own account. It merely provides the necessary infrastructure and facilities for trade in securities to its members and brokers who trade in securities. It regulates the trade activities so as to ensure free and fair trade.

4.   Allows dealings only in listed securities: In fact, stock exchanges maintain an official list of securities that could be purchased and sold on its floor. Securities which do not figure in the official list of stock exchange are called unlisted securities. Such unlisted securities cannot be traded in the stock exchange.

5.Transactions effected only through members: All the transactions in securities at the stock exchange are affected only through its authorized brokers and members. Outsiders or direct investors are not allowed to enter in the trading circles of the stock exchange. Investors have to buy or sell the securities at the stock exchange through the authorized brokers only. 

Functions of Stock Exchange: 

1. Continuous and ready market for securities:

Stock exchange provides a ready and continuous market for purchase and sale of securities. It provides ready outlet for buying and selling of securities. Stock exchange also acts as an outlet/counter for the sale of listed securities.

2. Facilitates evaluation of securities:

Stock exchange is useful for the evaluation of industrial securities. This enables investors to know the true worth of their holdings at any time. Comparison of companies in the same industry is possible through stock exchange quotations (i.e. price list).

3. Encourages capital formation:

Stock exchange accelerates the process of capital formation. It creates the habit of saving, investing and risk taking among the investing class and converts their savings into profitable investment. It acts as an instrument of capital formation. In addition, it also acts as a channel for right (safe and profitable) investment.

4. Provides safety and security in dealings:

Stock exchange provides safety, security and equity (justice) in dealings as transactions are conducted as per well defined rules and regulations. The managing body of the exchange keeps control on the members. Fraudulent practices are also checked effectively. Due to various rules and regulations, stock exchange functions as the custodian of funds of genuine investors.

5. Regulates company management:

Listed companies have to comply with rules and regulations of concerned stock exchange and work under the vigilance (i.e. supervision) of stock exchange authorities.

6. Facilitates public borrowing:

Stock exchange serves as a platform for marketing Government securities. It enables government to raise public debt easily and quickly.

7. Provides clearing house facility:

Stock exchange provides a clearing house facility to members. It settles the transactions among the members quickly and with ease. The members have to pay or receive only the net dues (balance amounts) because of the clearing house facility.

8. Facilitates healthy speculation:

Healthy speculation, keeps the exchange active. Normal speculation is not dangerous but provides more business to the exchange. However, excessive speculation is undesirable as it is dangerous to investors & the growth of corporate sector.

9. Serves as Economic Barometer:

Stock exchange indicates the state of health of companies and the national economy. It acts as a barometer of the economic situation / conditions.

10. Facilitates Bank Lending:

Banks easily know the prices of quoted securities. They offer loans to customers against corporate securities. This gives convenience to the owners of securities.

Relation of the stock market to the modern financial system:

   The financial system in most western countries has undergone a remarkable transformation. One feature of this development is disinter-mediation  A portion of the funds involved in saving and financing, flows directly to the financial markets instead of being routed via the traditional bank lending and deposit operations. The general public interest in investing in the stock market, either directly or through mutual funds has been an important component of this process. 

    Statistics show that in recent decades shares have made up an increasingly large proportion of households' financial assets in many countries. In the 1970s, in Sweden, deposit accounts and other very liquid assets with little risk made up almost 60 percent of households' financial wealth, compared to less than 20 percent in the 2000s. The major part of this adjustment is that financial portfolios (portfolio means grouping of financial assets such as stocks, bonds and cash equivalents, as well as their mutual, exchange-traded and closed-fund counterparts) have gone directly to shares but a good deal now takes the form of various kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds (Hedge funds are most often set up as private investment partnerships that are open to a limited number of investors (for super rich) and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies), insurance investment of premiums, etc.  Portfolios are held directly by investors and/or managed by financial professionals. 

     The trend towards forms of saving with a higher risk has been accentuated by new rules for most funds and insurance, permitting a higher proportion of shares to bonds. Similar tendencies are to be found in other industrialized countries. In all developed economic systems, such as the European Union, the United States, Japan and other developed nations, the trend has been the same: saving has moved away from traditional (government insured) bank deposits to more risky securities of one sort or another.

Behavior of the stock market

      From experience it is known that investors may 'temporarily' move financial prices away from their long term aggregate price 'trends'. (Positive or up trends are referred to as bull markets; negative or down trends are referred to as bear markets). Over-reactions may occur—so that excessive optimism (euphoria) may drive prices unduly high or excessive pessimism may drive prices unduly low. Economists continue to debate whether financial markets are 'generally' efficient.

  According to one interpretation of the efficient market hypothesis (EMH), only changes in fundamental factors, such as the outlook for margins, profits or dividends, ought to affect share prices beyond the short term, where random'noise' in the system may prevail. For example, The stock market crash in 1987, when the Dow Jones Index plummeted 22.6 percent—the largest-ever one-day fall in the United States demonstrated that share prices can fall dramatically even though, to this day, it is impossible to fix a generally agreed upon definite cause: a thorough search failed to detect any 'reasonable' development that might have accounted for the crash. (But, such events are predicted to occur strictly by chance, although very rarely.) It seems also to be the case more generally that many price movements (beyond that which are predicted to occur 'randomly') are not occasioned by new information; a study of the fifty largest one-day share price movements in the United States in the post-war period seems to confirm this.

  Other research has shown that psychological factors may result in exaggerated (statistically anomalous) stock price movements (contrary to EMH which assumes such behaviors 'cancel out'). For example - succession of good news items about a company may lead investors to overreact positively (unjustifiably driving the price up). A period of good returns also boosts the investor's self-confidence, reducing his (psychological) risk threshold.

  Another phenomenon—also from psychology—that works against an objective assessment is group thinking. As social animals, it is not easy to stick to an opinion that differs markedly from that of a majority of the group. An example with which one may be familiar is the reluctance to enter a restaurant that is empty; people generally prefer to have their opinion validated by those of others in the group.

Irrational behavior of the Stock Market:

    Sometimes, the market seems to react irrationally to economic or financial news, even if that news is likely to have no real effect on the fundamental value of securities itself. But, this may be more apparent than real, since often such news has been anticipated, and a counter reaction may occur if the news is better (or worse) than expected. Therefore, the stock market may be swayed in either direction by press releases, rumors, euphoria and mass panic; but generally only briefly, as more experienced investors (especially the hedge funds means fund of unregistered private investment partnerships, who invest and trade in many different markets. Strategies and instruments (including securities, non-securities and derivatives) are NOT subject to the same regulatory requirements as mutual funds)

    Over the short-term, stocks and other securities can be battered or buoyed by any number of fast market-changing events, making the stock market behavior difficult to predict. Emotions can drive prices up and down, people are generally not as rational as they think, and the reasons for buying and selling are generally obscure. Behaviorists argue that investors often behave 'irrationally' when making investment decisions thereby incorrectly pricing securities, which causes market inefficiencies, which, in turn, are opportunities to make money. However, the whole notion of EMH is that these non-rational reactions to information cancel out, leaving the prices of stocks rationally determined.

International portfolio flows: These are commonly known as Foreign Institutional Investment (FII) flows; refer to capital flows made by individual and institutional investors across national borders with a view to creating an internationally diversified portfolio. Unlike Foreign Direct Investment (FDI) flows which refer to that category of international investment aimed at obtaining a lasting interest by a resident entity in one economy in an enterprise resident in another economy by way of exercising significant control over its management, FII flows are not directed at acquiring management control over foreign companies. FII flows were almost non-existent until 1980s. Global capital flows were primarily characterized by syndicated bank loans in 1970s followed by FDI flows in 1980s. But a strong trend towards globalization leading to widespread liberalization and implementation of financial market reforms in many countries of the world had actually set the pace for FII flows during 1990s. According to Bekaert and Harvey (2000), FII investment as a proportion of a developing country's GDP increases substantially with liberalization as such integration of domestic financial markets with the global markets permits free flow of capital from 'capital-rich' to 'capital-scarce' countries in pursuit of higher rate of return and increased productivity and efficiency of capital at global level. Diversifying internationally i.e., holding a well-diversified portfolio of securities from around the world in proportion to market capitalizations, irrespective of the investor's country of residence, has long been advocated as the means to reduce overall portfolio risk and maximize risk-adjusted returns by the classical capital asset pricing model (CAPM). But a persistent 'home bias' (i.e., the tendency to hold a greater proportion of stocks from the home country vis-à-vis the foreign country) was noticed in the portfolios of investors in capital-rich industrialized countries in early 1990s. With more and more emerging market economies (EMEs) deregulating their financial markets by eliminating foreign exchange controls, reducing taxes imposed on foreign investors, relaxing the restrictions on the purchase / sale of securities by foreign investors in domestic markets etc., such 'home bias' has decreased over the years.

     Today, EMEs, by virtue of their lower correlations in stock market returns with the developed markets, offer greater scope to investors in developed countries to reduce their overall portfolio risk and effectively enhance the portfolio performance and hence have become the most preferred destinations for FII flows. Several research studies on FII flows to EMEs over the world have highlighted that financial market infrastructure such as the market size, market liquidity, trading costs, extent of information dissemination etc., legal mechanisms relating to property rights etc., harmonization of corporate governance, accounting, listing and other rules with those followed in developed markets, and strengthening of securities markets' enforcement are important determinants of foreign portfolio investments into emerging markets. Of late, the Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI) have initiated a string of measures like allowing overseas pension funds, mutual funds, investment trusts, asset management companies, banks, institutional portfolio managers, university funds, endowments, foundations or charitable trusts etc. but banning non-resident Indians (NRIs) and overseas corporate bodies (OCBs) from trading as foreign portfolio investors, raising the caps for FII from 24% to 49% of a non-bank company's issued capital subject to sectoral caps / statutory ceiling as applicable, enhancing the individual investment limit from 5% to 10% of issued capital, permitting foreign investors to trade in Government securities and derivatives, easing the norms for FII registration, reducing procedural delays, lowering fees, mandating stricter disclosure norms, improved regulatory standards etc. with a view to improving the scope, coverage and quality of FII flows into India. As a result, India, also supported by her strong economic fundamentals, has become one of the attractive destinations for FII flows in the emerging market space today. The expansionary effect of various reform measures on FII flows over the years can be gauged from the fact that net (i.e., gross purchases minus gross sales) FII flows into India have risen sharply from Rs. 5126 crore in 1993-1994 to Rs. 46,215 crore in 2004-2005, with the number of foreign institutional investors being registered with SEBI increasing from 3 in 1993-1994 to 685 in 2004-2005 (Source : SEBI website). This increasing dominance of foreign investors in Indian market has necessitated research on the implications of FII flows for the Indian stock market time and again. Although FII flows help supplement the domestic savings and augment domestic investments without increasing the foreign debt of the recipient countries, correct current account deficits in the external balance of payments' position, reduce the required rate of return for equity, and enhance stock prices of the host countries, yet there are worries about the vulnerability of recipient countries' capital markets to such flows.

Dangers of FII flows: FII flows often referred to as 'hot money' (i.e., short-term and overly speculative), are extremely volatile in character compared to other forms of capital flows. Foreign portfolio investors are regarded as 'fair-weather friends' who come in when there is money to be made and leave at the first sign of impending trouble in the host country thereby destabilizing the domestic economy of the recipient country. Often, they have been blamed for exacerbating small economic problems in the host nation by making large and concerted withdrawals at the slightest hint of economic weakness. It is also alleged that as they make frequent marginal adjustments to their portfolios on the basis of a change in their perceptions of a country's solvency rather than variations in underlying asset value, they tend to spread crisis even to countries with strong fundamentals thereby causing 'contagion' in international financial markets. 

    Further, it is feared that too much of FII inflows may build up sizable surpluses on a country's balance of payments, create excess liquidity and hence exert upward pressure on the exchange rate of the domestic currency or on domestic prices. The fear of foreigners capturing a large part of the securities' market is also associated with FII flows. Accordingly, it is viewed that as securities markets in developing countries like India are narrow and shallow and as the foreign investors have command over considerable funds and occupy a dominant position in the capital market, FII flows have the potential for major capital flight out of India driving the prices down sharply and hence inducing considerable instability in the Indian stock market. The dangers of 'abrupt and sudden outflows' inherent with FII flows have been highlighted in several research studies. Capital Management crisis in September, 1998, have found evidences of a strong negative effect on global capital flows, especially to emerging markets. These crisis episodes have made the Indian policy makers all the more wary about FII flows as questions have begun to be raised about the wisdom in promoting such flows.

      However, the issue of whether FII flows affect stock market returns or the other way round is a matter of some controversy. It has been perceived in some quarters that FII flows are the major drivers of stock markets in India and hence a sudden reversal of such flows may harm the stability of its markets. Contrary to this belief, it is viewed by others that FII flows react to the existing crisis in the stock market, possibly exacerbating it rather than causing it. An analysis of the direction of causality to understand the possible devastating effect of volatility of FII flows on the Indian economy is important from the viewpoint of Indian policy makers especially when such flows have recorded a sharp rise over the last decade.

Stock market and Economy:

     Stock market is an important part of the economy of a country. The stock market plays a play a pivotal role in the growth of the industry and commerce of the country that eventually affects the economy of the country to a great extent. That is reason that the government, industry and even the central banks of the country keep a close watch on the happenings of the stock market. The stock market is important from both the industry’s point of view as well as the investor’s point of view.

      Whenever a company wants to raise funds for further expansion or settling up a new business venture, they have to either take a loan from a financial organization or they have to issue shares through the stock market. In fact the stock market is the primary source for any company to raise funds for business expansions. If a company wants to raise some capital for the business it can issue shares of the company that is basically part ownership of the company. To issue shares for the investors to invest in the stocks a company needs to get listed to a stocks exchange and through the primary market of the stock exchange they can issue the shares and get the funds for business requirements. There are certain rules and regulations for getting listed at a stock exchange and they need to fulfill some criteria to issue stocks and go public. The stock market is primarily the place where these companies get listed to issue the shares and raise the fund. In case of an already listed public company, they issue more shares to the market for collecting more funds for business expansion. For the companies which are going public for the first time, they need to start with the Initial Public Offering or the IPO. In both the cases these companies have to go through the stock market. This is the primary function of the stock exchange and thus they play the most important role of supporting the growth of the industry and commerce in the country. That is the reason that a rising stock market is the sign of a developing industrial sector and a growing economy of the country.

     Of course this is just the primary function of the stock market and just an half of the role that the stock market plays. The secondary function of the stock market is that the market plays the role of a common platform for the buyers and sellers of these stocks that are listed at the stock market. It is the secondary market of the stock exchange where retail investors and institutional investors buy and sell the stocks. In fact it is these stock market traders who raise the fund for the businesses by investing in the stocks.

       For investing in the stocks or to trade in the stock the investors have to go through the brokers of the stock market. Brokers actually execute the buy and sell orders of the investors and settle the deals to keep the stock trading alive. The brokers basically act as a middle man between the buyers and sellers. Once the buyer places a buy order in the stock market the brokers finds a seller of the stock and thus the deal is closed. All these take place at the stock market and it is the demand and supply of the stock of a company that determines the price of the stock of that particular company.

    So the stock market is not only providing the much required funds for boosting the business, but also providing a common place for stock trading. It is the stock market that makes the stocks a liquid asset unlike the real estate investment. It is the stock market that makes it possible to sell the stocks at any point of time and get back the investment along with the profit. This makes the stocks much more liquid in nature and thereby attracting investors to invest in the stock market.

Role of Stock Markets in Economic Growth:

    Dose the Stock market development play an important role for economic growth in the developed and developing countries? Shahbaz et. al. (2008) argues that stock market development is an important factor for economic growth as there is a long-run relationship between stock market development and economic growth. Stock market development has the direct impact in corporate finance and economic development. Gerald (2006) states that stock market development is important because financial intermediation supports the investment process by mobilizing household and foreign savings for investment by firms. It ensures that these funds are allocated to the most productive ways and spreading risk and providing liquidity so that firms can operate the new capacity efficiently. A growing body of literature has expressed the importance of financial system to economic growth. Mish kin (2001) states that an organized and managed stock market stimulate investment opportunities by recognizing and financing productive projects and lead to economic activity, mobilize domestic savings, allocate capital proficiency, help to diversify risks, and facilitate exchange  of goods and services. From the view point of Sharpe, et al (1999) stock market is a mechanism through which the transaction of financial assets with life span of greater than one year takes place. Financial assets may take different forms ranging from the long-term government bonds to ordinary shares of various companies. Stock markets are the most important institutions in the capital market where the shares of various companies are traded. Trading of the shares may take place in two different forms of stock market. When the issuing company sells its shares to the investors, the transaction is said to have taken place in the primary market, when already issued shares of companies are traded among investors the transaction is said to have taken place in the secondary market.

      Stock markets are very important because they play a significant role in the economy by changing investment where it is needed and can be putted to best (Liberman and Fergusson 1988). The stock markets are working as the channel through which the public savings are mobilized to industries and business enterprises. Mobilization of such resources for investment is certainly a necessary condition for economic take off, but quality of their allocation to various investment projects is an important factor for economic growth. This is precisely what an efficient stock market does to the economy (Berthelemy and Varoudaks 1996). 

        

    During nineteenth and twenty century, Bagehot (1973) and Schumpeter (1912) had focused on the constructive assistance of financial sector to economic growth. In the study, the direction of causality between the higher growth in financial sector and country‘s economic growth rate was not clear (Robinson, 1952 and Lucas, 1988). Also, most of the traditional growth theorists believed that there is no correlation between stock market development and economic growth because of the presence of level effect not the rate effect. Similarly Singh (1997) contended that stock markets are not necessary institutions for achieving high levels of economic development. Many viewed stock market as a agent that harm economic development due to their susceptibility to market failure, which is often manifest in the volatile nature of stock markets in many developing countries (Singh, 1997; Singh and Weis, 1999). So, the traditional assessment model of stock prices and the wealth effect provide hypothetical explanation for stock process to be proceeded as an indicator of output (Comincioli, 1996).

     According to wealth effect, however, changes in stock prices cause the variation in real economy (Bhide, 1993; and Obstfeld, 1994). Contrary to traditional views; a large number of theoretical and empirical works have been done in order to understanding the strong positive linkage between stock market development and economic growth. See for example likes Shahbaz, Ahmed and Ali (2008) has found a long run relationship between stock market development and economic growth. Stock market development has the direct impact in corporate finance and economic development. Deb and Mukherjee (2008) have found a bi-directional causality between real GDP growth rate and real market capitalization ratio in the Indian Economy. Adjasi and Biekpe (2005) found a significant positive impact of stock market development on economic growth in countries classified as upper middle income economies. In the same way, Chen et al (2004) elaborated that the nexus between stock returns and output growth and the rate  of stock returns is a leading indicator of output growth. Arestic et al (2001) using time series on five industrialized countries also indicate that stock markets play an important role for economic growth.

Conclusion: In the present LPG (Liberalization, Privatization and Globalization) regime the stock market has been assigned to play an important role in promoting capital accumulation and growth. But, the Stock Exchange must assume the responsibility of protecting the rights of investors specially the small investors in the Joint Stock Companies.