Capital market

SUBMITTED TO: Dr. M. KAMESHWAR RAO ASSISTANT PROFESSOR

DEPARTMENT OF MANAGEMENT STUDIES

Prepared By: Puneet Sharma

Vinay Patidar

Viyappu Tharun

Siddharth Khandelwal Rishu Singh

Introduction to Capital market/ Financial market

Capital Market is one of the significant aspect of every financial market. Hence it is necessary to study its correct meaning. Broadly speaking the capital market is a market for financial assets which have a long or indefinite maturity.

Unlike money market instruments the capital market instruments become mature for the period above one year. It is an institutional arrangement to borrow and lend money for a longer period of time. It consists of financial institutions like IDBI, ICICI, UTI, LIC, etc. These institutions play the role of lenders in the capital market. Business units and corporate are the borrowers in the capital market. Capital market involves various instruments which can be used for financial transactions. Capital market provides long term debt and equity finance for the government and the corporate sector. Capital market can be classified into primary and secondary markets. The primary market is a market for new shares, where as in the secondary market the existing securities are traded. Capital market institutions provide rupee loans, foreign exchange loans, consultancy services and underwriting.

Difference between Money Markets and Capital Markets

• Money market is a place where banks deal in short term loans in the form of commercial bills and treasury

bills. But capital market is a place where brokers deal in long term debt and equity capital in the form of debenture, shares and public deposits.

• In money market maturity date of repayment may after one hour to 90 days. But in capital market, loans are given for 5 to 20 years and if issue of shares by co. , its amount will repay at winding of company . But investors have right to sell it to other investors if they need the money.

• Rate of interest in money market is controlled by RBI or central bank of any country. But capital market’s interest and dividend rate depends on demand and supply of securities and stock market’s sensex conditions. Stock market regulator is in the hand of SEBI.

• Main dealer of money market s are commercial banks like SBI, ICICI Bank, UTI and LIC and other financial institutions. Main dealers are all the public and private ltd. Co. and more than 30 million investors. It is increasing trend due to opening of online capital market.

• In USA, money market is famous with dealing of money fund and banker’s acceptance instruments. But capital market in USA is famous with New York stock exchange and stock regulator is Security exchange commission (SEC).

Significance, Role or Functions of Capital Market

• Like the money market capital market is also very important. It plays a significant role in the national economy. A developed, dynamic and vibrant capital market can immensely contribute for speedy economic growth and development.

• These markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments

• Let us get acquainted with the important functions and role of the capital

market.

Mobilization Of Saving

• Capital market is an important source for mobilizing idle savings from the economy. It mobilizes funds from people for further investments in the productive channels of an economy. In that sense it activate the ideal monetary resources and puts them in proper investments.

Capital Formation

Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. Through mobilization of ideal resources it generates savings; the mobilized savings are made available to various segments such as agriculture, industry, etc. This helps in increasing capital formation

• Capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to invest resources for a long period of time.

• It provides suitable interest rate returns also to investors. Instruments such as bonds, equities, units of mutual funds, insurance policies, etc. definitely provides diverse investment avenue for the public.

Provision of Investment Avenue

Capital market enhances production and productivity in the national economy. As it makes funds available for long period of time, the financial requirements of business houses are met by the capital market. It helps in research and development. This helps in, increasing production and productivity in economy by generation of employment and development of infrastructure.

Speed up Economic Growth and Development

Proper Regulation of Funds

• Capital markets not only helps in fund mobilization, but it also helps in proper allocation of these resources. It can have regulation over the resources so that it can direct funds in a qualitative manner.

Service Provision

As an important financial set up capital market provides various types of services. It includes long term and medium term loans to industry, underwriting services, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum.

Continuous Availability of Funds

• Capital market is place where the investment avenue is continuously available for long term investment. This is a liquid market as it makes fund available on continues basis. Both buyers and seller can easily buy and sell securities as they are continuously available. Basically capital market transactions are related to the stock exchanges. Thus marketability in the capital market becomes easy.

Structure of Indian Capital Market with Diagram

Broadly speaking the capital market is classified in to two categories. They are the

Primary market (New Issues Market) and the Secondary market (Old (Existing) Issues Market). This classification is done on the basis of the nature of the instrument

brought in the market. However on the basis of the types of institutions involved in capital market, it can be classified into various categories such as the Government Securities market or Gilt-edged market, Industrial Securities market, Development

Financial Institutions (DFIs) and Financial intermediaries. All of these components have specific features to mention. The structure of the Indian capital market has its distinct

features. These different segments of the capital market help to develop the institution of capital market in many dimensions. The primary market helps to raise

fresh capital in the market. In the secondary market, the buying and selling (trading) of capital market instruments takes place. The following chart will help us in understanding the organizational structure of the Indian Capital market.

Government Securities Market

• This is also known as the Gilt-edged market. This refers to the market for government and semi-government securities backed by the Reserve Bank

of India (RBI)

Industrial Securities Market

• This is a market for industrial securities i.e. market for shares and debentures of the existing and new corporate firms. Buying and selling of such instruments take place in this market. This market is further classified into two types such as the New Issues Market (Primary) and the Old (Existing) Issues Market (secondary). In primary market fresh capital is raised by companies by issuing new shares, bonds, units of mutual funds and debentures. However in the secondary market already existing i.e old shares and debentures are traded. This trading takes place through the registered stock exchanges. In India we have three prominent stock exchanges. They are the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE) and Over The Counter Exchange of India (OTCEI).

Development Financial Institutions (DFIs)

• This is yet another important segment of Indian capital market. This comprises various financial institutions. These can be special purpose institutions like IFCI, ICICI, SFCs, IDBI, IIBI, UTI, etc. These financial institutions provide long term finance for those purposes for which they are set up.

International Financial Institutes

Financial Intermediaries

• The fourth important segment of the Indian capital market is the financial intermediaries. This comprises various merchant banking institutions, mutual funds, leasing finance companies, venture capital companies and other financial institutions.

SEBI Regulates Indian Capital Market

• For the smooth functioning of the capital market a proper coordination among above organizations and segments is a prerequisite. In order to regulate, promote and direct the progress of the Indian Capital Market, the government has set up 'Securities and Exchange Board of India' (SEBI). SEBI is the supreme authority governing and regulating the Capital Market of India.

Recent Developments in Capital Market of India

• The Indian capital market has witnessed major reforms in the decade of

1990s and there after. It is on the verge of the growth.

• Thus, the Government of India and SEBI has taken a number of measures in order to improve the working of the Indian stock exchanges and to make it more progressive and vibrant.

Reforms in Capital Market of India The major reforms undertaken in capital market of India includes:-

• Establishment of SEBI : The Securities and Exchange Board of India (SEBI) was established in 1988. It got a legal status in 1992. SEBI was primarily set up to regulate the activities of the merchant banks, to control the operations of mutual funds, to work as a promoter of the stock exchange activities and to act as a regulatory authority of new issue activities of companies. The SEBI was set up with the fundamental objective, "to protect the interest of investors in securities market and for matters connected therewith or incidental thereto."

– The main functions of SEBI are:-To regulate the business of the stock market and other securities market.

– To promote and regulate the self regulatory organizations.

– To prohibit fraudulent and unfair trade practices in securities market.

– To promote awareness among investors and training of intermediaries about safety of market.

– To prohibit insider trading in securities market.

– To regulate huge acquisition of shares and takeover of companies.

• Establishment of Creditors Rating Agencies : Three creditors rating agencies viz. The Credit Rating Information Services of India Limited (CRISIL - 1988), the Investment Information and Credit Rating Agency of India Limited (ICRA - 1991) and Credit Analysis and Research Limited (CARE) were set up in order to assess the financial health of different financial institutions and agencies related to the stock market activities. It is a guide for the investors also in evaluating the risk of their investments.

• Increasing of Merchant Banking Activities : Many Indian and foreign commercial banks have set up their merchant banking divisions in the last few years. These divisions provide financial services such as underwriting facilities, issue organising, consultancy services, etc. It has proved as a helping hand to factors related to the capital market.

• Candid Performance of Indian Economy : In the last few years, Indian economy is growing at a good speed. It has attracted a huge inflow of Foreign Institutional Investments (FII). The massive entry of FIIs in the Indian capital market has given good appreciation for the Indian investors in recent times. Similarly many new companies are emerging on the horizon of the Indian capital market to raise capital for their expansions.

• Rising Electronic Transactions : Due to technological development in the last few years. The physical transaction with more paper work is reduced. Now paperless transactions are increasing at a rapid rate. It saves money, time and energy of investors. Thus it has made investing safer and hassle free encouraging more people to join the capital market.

• Growing Mutual Fund Industry : The growing of mutual funds in India has certainly helped the capital market to grow. Public sector banks, foreign banks, financial institutions and joint mutual funds between the Indian and foreign firms have launched many new funds. A big diversification in terms of schemes, maturity, etc. has taken place in mutual funds in India. It has given a wide choice for the common investors to enter the capital market.

• Growing Stock Exchanges : The numbers of various Stock Exchanges in India are increasing. Initially the BSE was the main exchange, but now after the setting up of the NSE and the OTCEI, stock exchanges have spread across the country. Recently a new Inter-connected Stock Exchange of India has joined the existing stock exchanges.

• Investor's Protection : Under the purview of the SEBI the Central Government of India has set up the Investors Education and Protection Fund (IEPF) in 2001. It works in educating and guiding investors. It tries to protect the interest of the small investors from frauds and malpractices in the capital market.

• Growth of Derivative Transactions : Since June 2000, the NSE has introduced the derivatives trading in the equities. In November 2001 it also introduced the future and options transactions. These innovative products have given variety for the investment leading to the expansion of the capital market.

• Insurance Sector Reforms : Indian insurance sector has also witnessed massive reforms in last few years. The Insurance Regulatory and Development Authority (IRDA) was set up in 2000. It paved the entry of the private insurance firms in India. As many insurance companies invest their money in the capital market, it has expanded.

• Commodity Trading : Along with the trading of ordinary securities, the trading in commodities is also recently encouraged. The Multi Commodity Exchange (MCX) is set up. The volume of such transactions is growing at a splendid rate.

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