Discuss the features of ‘Capital Market in India’.

  Like the money market, capital market in India is dichotomised into organised and unorganised components.

The organised sector of the capital market comprises all the term-lending financial institutions (or development banks or non banking financial institutions, like 1DB1, ICICI, etc.), banks with their medium-term and their merchant banking divisions or subsidiaries, LIC, GIC, UTI and the stock exchanges (an essential component of the capital market).The unorganised sector comprises low-lying indigenous bankers and moneylenders in rural and urban areas, chit funds, nidhis, etc.

The institution of stock exchange is an important component of the capital market through which  both new issues of securities are made and old issues of securities are purchased and sold. The  former is called the ‘new issues market’ and the latter is the ‘old issues market’.

The stock exchange is, thus, a specialist market place to facilitate the exchanges of old securities.  It is known as a ‘secondary market’ for securities. The stock exchange dealings for ‘listed’  securities are made in an open auction market where buyers and sellers from all over the country  meet. There is a well-defined code of bye-laws according to which these dealings take place and  complete publicity is given to every transaction.

As far as the primary market or new issues market is concerned, it is the public limited companies  instead of stock market that deals in ‘old issues’ that raises funds through the issuance of shares, bonds, debentures, etc. However, to conduct this business, the services of specialised institutions like underwriters and stockbrokers, merchant banks are required.

Since the new issues are not ‘quoted’ or ‘listed’ or ‘approved’ in the register of the stock exchange in the organised stock exchanges, these new securities (of small companies whose prices are determined not through open bidding or auction but through direct negotiation) are dealt in ‘over-the-counter market’ or the ‘auction market’.

Government securities market for both ‘old’ and ‘new’ issues has been on ‘over-the- counter market’ where securities of the Union Government and State Governments are issued. State Governments’ securities are issued by government undertakings, municipalities and corporations, etc. The gilt-edged market in India is of two types; the treasury bill market and the government bond market.

As the RBI manages entirely the public debt operations of both Central and State Governments, it is responsible for the new issue of loans. Further, in this gilt-edged market, financial institutions like commercial banks, the RBI itself, LIC, GIC, the provident fund organisations are the statutory holders of such government securities. This is what is called the ‘captive market’ for government securities.

Growth of Capital Market in India:

Capital market occupies an important role in shaping resource allocation. In addition, well-developed and well-functioning moneyand capital markets can cope up as well as prevent (localised) liquidity shocks that may cause serious havoc in the economy. Further, capital market enables financial institutions and non-banking financial companies to access funds on medium and long-term basis.

In fact, India’s organised component of the capital market till independence exhibited backwardness. With the passage of time, India’s capital market has attained a greater degree of maturity as the government took various measures to tone up the capital market.

The important factors that removed the deficiencies of India’s capital market before 1991 are:

Firstly, to protect the interests of investors, elaborate legislative measures have been taken by the Government from time to time. These are the issues like the Companies Act, 1956, the Capital Issues (Control) Act, 1947, the Securities Contracts (Regulation) Act, 1956.All these Acts empowered the Government to regulate the activities of the capital market (such as, by the prevention of investment in non-essential activities, listing of securities in a stock exchange). The main objectives of these Acts were to promote a strong and healthy investment market, to protect the interests of genuine investors and to ensure an efficient utilisation of financial resources, etc.

Secondly, immediately after independence, the Government felt the need for establishing a number of financial institutions to cater to the financial needs of the industries. These are: Industrial Finance Corporation of India (1948), State Financial Corporations (1951), Industrial Credit and Investment Corporation of India (1955), Industrial Development Bank of India (1964), Industrial Reconstruction Bank of India (1971), Unit Trust of India (1964), Life Insurance Corporation of India (1956), and many non-banking financial companies (governed by the 1956 Companies Act) like ‘Equipment Leasing Company’, ‘Investment Company’, ‘Loan Company’, ‘Hire-Purchase Finance Company’, ‘Mutual Benefit Financial Company’, ‘Infrastructure Leasing and Financial Services’ (1988), establishment of SEB1 (1988), etc.

Thirdly, the underwriting business has grown substantially over the years—mainly due to the initiative taken by the host of financial institution, including commercial banks, insurance companies and stockbrokers.

In view of these developments (prior to 1991), the base of the capital market has been widened. Large number of people park their savings in corporate securities. However, Indian capital market remained subdued for quite a long time since the 1960s. From the beginning of 1980s, there has been a marked improvement in the health of the market following various innovations all-round revival as a necessity to enable industry to undertake the required investment and achieve the desired growth.

However, the year 1988 saw a boom in the capital market that reflected the growing strength of the Indian economy consequent upon measures taken by the Government to boost the capital market. But, as far as institution-building in the liberalised regime is concerned and the necessary changes thereof in the security market—we had to wait till July-August 1991.

As India progresses on in the on new millennium, much has changed, but still it suffers from problems. It is argued that these measures described above, although useful for reducing systemic risks, may prove inadequate against the backdrop of a variety of structural distortions, flawed practices, and ‘soft’ enforcement or intervention.

The first week of January 2009 saw a biggest ever corporate fraud in India made by the Satyam Computers’ founder-chairman Ramlinga Raju. The scamp showed financial irregularities to the tune of Rs. 7,800 crore over a period of several years by manipulating the balance sheets of the Company in connivance with the Company’s audit firm, the Price water-house Coopers.

It is a tragic that being a regulator of the country’s capital market, SEBI remained a silent spectator over the years even when it came to light that the World Bank had banned the company for adopting unfair practices earlier. It has now come to the light that nearly 94 p.c. of the total shown on Satyam’s books was fake.

This means that further reforms are needed in both the banking and equity sectors to ensure a higher growth rate. Most importantly, the Indian capital market has now been enjoying an international status. But we are afraid that external shocks may spill over the Indian capital market—destabilising the market.

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