Capital markets provide support to capitalism in a country. The two regulators of capital markets in India are the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). As the Indian economy is growing and it has a good share of the world economy, Indian capital markets are of interest to investors from around the globe.
Capital markets are of two types, namely – primary capital market and secondary capital market. In the primary capital markets, governments, or public sector organizations can raise funds through the issue of bonds. Corporate sector firms can raise funds through an initial public offering (IPO) in primary markets. Therefore, in a primary market, shares are directly bought by parties. The process of selling new shares is called underwriting.
The bonds, securities, and shares are bought and sold in the secondary capital markets. Examples of secondary markets include the Bombay Stock Exchange (BSE), and National Stock Exchange (NSE). In these markets, using real-time technology, the shares, bonds, etc., are sold and bought by parties or people.
The companies that raise funds from both public and private resources (both foreign and domestic) are called fund raisers.
Fund Providers invest funds in the capital markets. These entities can be classified as domestic and foreign investors and institutional and retail investors. The list of fund providers includes subscribers to primary market issues, the institutional and individual investors who buy shares and other securities in the secondary market, traders, FIIs/ sub-accounts, speculators, mutual funds, ADR/GDR investors, venture capital funds, NRIs, etc.
Intermediaries provide various services in the market.
The list of intermediaries includes -
stock brokers
sub-brokers
merchant bankers
financiers
underwriters
registrar and transfer agents
depository participants
FIIs/ sub-accounts
venture capital funds
mutual funds
portfolio managers
custodians, etc.
Organizations that participate in capital markets include various entities such as MCX-SX, BSE, NSE, other regional stock exchanges, etc.
Apart from these the two depositories, Central Securities Depository Limited (CSDL) and National Securities Depository Limited (NSDL) are also organizations related to capital markets.
Market Regulators include the Department of Company Affairs (DCA), the Securities and Exchange Board of India (SEBI), and the Reserve Bank of India (RBI).
Some of the key roles of the capital market in India are as stated below.
Mobilization of Savings and Acceleration of Capital Formation
In the capital market, numerous types of securities help to mobilize savings. The double features of liquidity and returns in the stock exchange are definite incentives to the people to invest in securities and it accelerates the capital formation in the country.
Raising Long-Term Capital
Stock exchanges enable organizations to raise permanent capital. The investors are unable to commit their funds permanently but companies require funds permanently. The stock exchange resolves this gap of interests.
Ready and Continuous Marketability
The stock exchange provides a central convenient place where easy marketability makes an investment in securities more liquid in comparison to other assets.
Promotion of Industrial Growth
The resources are transferred via stock exchanges to the industrial sector of the economy. The existence of capital markets encourages people to invest in productive channels. This stimulates industrial growth and the economic growth of the country.
Technical Assistance
By offering technical advisory services of feasibility reports, identifying growth potential, and training entrepreneurs, the financial intermediaries in the capital market play an important role.
The capital market promotes efficiency by acting as a reliable guide to the financial position and performance of corporate firms.
Proper Channelization of Funds − The current market price and relative yield of securities guide people to channel their funds into a particular company for effective utilization.
Development of Backward Areas − Capital Markets provide support to backward areas by funding projects. This helps the economic development of backward areas. Long-term funds are also provided for backward and rural areas.
Easy Liquidity − Investors can sell off their holdings for liquid cash in secondary markets. Commercial banks also allow investors to withdraw their deposits, which means there is ready liquidity in the market.
Foreign Capital − Capital markets make it possible to generate foreign capital. Foreign Direct Investment (FDI) not only brings in foreign capital but also foreign technology. This is important for the economic development of the country.
Provision of Variety of Services − The financial institutions in capital markets provide a variety of services such as underwriting facilities, grant of long-term and medium-term loans, assistance in the promotion of companies, participation in equity capital, giving expert advice, etc.
Financial scams have occurred in capital markets in India many times which has eroded the trust and confidence of investors.
Insider trading refers to access to information that is not publicly available and which can be used for individual benefit. It is illegal and is a big problem in capital markets.
It means increasing and/or decreasing the prices of shares by buying or selling them to certain individuals. This is also illegal and is a big problem.
Debt instruments refer to bonds, debentures, etc. Having a lack of access or inadequacy of debt instruments due to a narrow base of investors, high issuance costs, and lack of accessibility to SMEs are problems in the Indian capital market.
The regional exchanges are not as popular as BSE or NSE which leads to a lack of volume of trade. It is a problem for regional exchanges.
In an informationally efficient market, a company’s stock prices incorporate all accessible information into the current prices. This is not seen enough in Indian capital markets.
The following are the major reforms implemented in India's capital market:
The Securities and Exchange Board of India (SEBI) was established in 1988. Legal status was granted in 1992.
Three major credit rating agencies have been set up in India, namely:
The Credit Rating Information Services of India Limited (CRISIL in 1988)
The Investment Information and Credit Rating Agency of India Limited (ICRA in 1991)
The Credit Analysis and Research Limited (CARE).
A host of Indian and foreign commercial banks established merchant banking divisions.
The Indian economy has been growing at a rapid pace which has attracted a significant amount of Foreign Institutional Investment (FII).
The Indian economy has been growing at a rapid pace which has attracted a significant amount of Foreign Institutional Investment (FII).
Paperless transactions are saving investors’ money, time, and energy.
The expansion of mutual funds and stock exchanges in India has undoubtedly helped in the growth of the capital market.
The Insurance Regulatory and Development Authority (IRDA) established in 2000 oversees the insurance sector.
The Multi Commodity Exchange (MCX) for trades in commodities has been established.
The Indian capital market is one of the most important capital markets in the world. As India’s economy is growing at a rapid rate, India’s capital market is also following a similar trend. However, the problems of the market must be removed to make the capital market more efficient and inclusive.
Q1. What are the two types of capital markets?
Ans. The two types of capital markets are primary and secondary markets.
Q2. What is SEBI?
Ans. The securities and exchange board of India, SEBI, oversees the capital markets in India along with the Reserve Bank (RBI) and the Department of Company Affairs (DCA).
Q3. What is the regulatory authority for the insurance sector in India?
Ans. The Insurance Regulatory and Development Authority (IRDA) established in 2000 is the regulatory authority of the insurance sector in India.
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