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Capital Market in India
Market Structure, Functions & Framework

Table of Contents
  1. Capital Market in India - Market Structure, Functions & Framework

  2. Significance of Securities Market in the Growth of an Economy: An Indian Context
    [Extracted from S. D. Gupte Memorial Lecture delivered by Shri G. N. Bajpai, Chairman, SEBI at Mumbai on March 13, 2003]

  3. Liberalised Securities Market and Economic Growth - Speech as above contd

  4. Resource Mobilisation from the Primary Market - Speech as above contd

  5. Reforms in Securities Market - Speech as above contd

The Corporate Sector draws its capital needs from the following sources:

  1. Promoters Contribution,

  2. Equity & Preference Capital raised from the shareholders (generally referred to as equity capital),

  3. Bonds/Debentures raised from the Public (generally referred to as Debt Capital),

  4. Term Loans from Banks & Financial Institutions,

  5. Short-term Working Capital from Banks,

  6. Unsecured Loans & Deposits, and

  7. Internal generation of Funds (Profits/surpluses re-ploughed).

Of the sources enumerated above, item No.1 and 2 are held permanently and form the risk capital. These are not repayable. Item No.3 is raised from the market for duration of 10 to 15 years or more, but this has to be eventually repaid. We call the source as Corporate Debt Market, and funds raised as II Tier Capital. The debt market consists of such corporate debt and also public debt (government securities & Treasury Bills) Managed by the RBI. The others sources at item 4 to 6 are supplementary or stand-by sources and these are all to be repaid as per contracted terms. Item No.4 is negotiated & raised for 3 to 7 years from Banks/FIs, but normally not exceeding 10 years. Short-term working capital Loan is generally a revolving facility and held over the years subject to satisfactory dealings and abiding by the terms & conditions stipulated by the lending Institution. Unsecured Loans & Deposits are at best supplementary sources, but these are not very dependable. Internal generation of funds (profits & surpluses are used to eventually redeem the debt borrowings mentioned at item No.3 to 6.

The basic capital edifice of a corporate body is built from item 1 to 3 above. With the strength of this edifice it is possible to raise the remaining sources at item No.4 to 6. This introduces us to the Capital Market (covering equity and corporate debt capital). Promoters equity constitutes a comparatively a smaller portion, and hence the primary source of capital for a large Corporate Institutions is from the Capital Market (providing the equity capital & debt capital to business, trade & industry)

Composition of Equity/Corporate Debt Market

This is the market consisting of large number of individual investors, household savers, professionals, agriculturists, who are able to a retain a part of their current earnings. They form the class of capital providers. On the other side the Corporate bodies engaged in Industry, trade and other business ventures are the productive users of significant amount of capital. It is the Capital market that transforms the savings of large number of individuals to productive channel to meet the demands of capital for Industry, trade and business.

The individual savers are not organised. They can invest if they could secure the trust and confidence that the funds invested would be prudently employed and they could normally expect to get a fair return/reward on their hard-earned savings. This is the function of organised capital market to regulate market forces to ensure fair dealings, to motivate savings on the part of the investors and to secure smooth flow of savings/capital from investors to capital seekers for productive needs.

Stock market is also referred to as the Corporate Debt or Capital Market. While the money market, which deals with short-term financial needs of business and industry is restricted to funds needed for a period of one year or less, instruments of the debt/capital markets are raised for medium or long term needs. Indian Stock Market consists of three distinct segments:

  1. The Public Debt Market i.e. the market for Government securities (also called Gilt-edged Market). These are interest bearing and dated securities. This market is regulated by RBI, the Central Bank of the country and banker to the Government.

  2. PSU Bonds Market i.e. Bonds floated by public Sector units, nationalised banks and financial Institutions for raising Tier-II capital and also debentures floated by corporates. This is represented as the Corporate Debt Market.

  3. The Equity Market for raising of equity or preference share capital by all corporates. Money invested in company shares is not refundable, but if the shares are listed in a stock exchange these can be sold or purchased, thus providing liquidity to such investments. Shares do not carry interest, but shareholders can participate in sharing the profits of the corporate body declared by way of dividends, bonus shares etc. While the hope of receiving attractive dividends motivates the public to subscribe to the share capital, declaring dividend is not a legal obligation on the part of the companies, and hence not a right on the part of the shareholders. But shareholders enjoy various other rights as conferred by the Indian Companies Act, 1956. Indian Public companies generally follow the objective of increasing shareholders wealth as the prime goal of financial management.

At this context it is relevant to mention about two categories of stock market, i.e.

  • Primary market covering new public issues of all categories of securities, including G-sec, bonds and equity/preference capital.

  • Secondary market, which deals with already issued securities of all types. Transactions of the secondary market are carried out through one of the authorised stock exchanges, where the traded security is listed.

The Primary Stock Market

It is also called the market for public issues. This market refers to the raising of new capital (equity or debt i.e. equity shares, preference shares, debentures or Rights Issues) by corporates. Newly floated companies or existing companies may tap the equity market by offering public issues. When equity shares are exclusively offered to the existing shareholders, it is called "Rights Issue". When a Company after incorporation initially approaches the public for the first time for subscription of its public issue it is called Initial Public Officer (IPO). Successful floating of a new issue requires careful planning, timing of the issue and comprehensive marketing efforts. The services of specialised institutions, like underwriters, merchant bankers and registrars to the issue are available for the corporate body to handle this specialised job. Underwriters are financial institutions, which undertake to secure a committed quantum of equity/debt subscribed by the public, failing which they accept these shares/bonds as their own investment. It is referred to as the issue or that part of getting devolved on the underwriters. The transactions relating to the primary market i.e. public/rights issues are not carried out through stock exchanges. However there is effective regulation of SEBI at every stage of a public issue. This is done through merchant bankers, underwriters and registrars to the issue each acting at different points. Subscriptions to the new issue are collected at specific branches of one or more collecting banks within a prescribed span of time, represented by the dates of opening of the issue and closing of the issue.

Secondary Stock Market

The Secondary Market deals with the sale/purchase of already issued equity/debts by the corporates and others. The sale/purchase of these securities are carried out at the specific Stock Exchange(s), where the companies get their public issues listed for trading. The main function of the secondary market is to provide liquidity to the listed securities by enabling a holder to easily convert the securities into cash through the stock exchanges. An individual or an Institution can either hold a portfolio of securities as a permanent investment, or he can hold a basket of securities for short-periods and engage in buying and selling them to gain from market fluctuations. The secondary market also acts as an important indicator of the investment climate in the economy. When prices of existing securities are rising and there is large trading in the existing shares, such a boom in the secondary market correspondingly signifies that new issues if floated at that point of time would be successfully subscribed.

Functions of the Capital Market

  1. The organised and regulated capital market motivates individual to save and invest funds. The availability of safe and profitable source of investment is an essential criteria to create propensity to save and invest on the part of the earning public.

  2. It provides for the investors a safe and productive channels for investment of savings and secure the recurring benefit of return thereon, as long as the savings are retained.

  3. It provides liquidity to the savings of the investors, by developing a secondary capital market, and thus makes even short term savings, consistently available for long-term users

  4. It thus mobilises savings of large number of individuals, families and associations and make the same available for meeting the large capital needs of organised industry, trade and business and for progress and development of the country as a whole and its economy.

To discharge these functions, the organised capital market accepts a dual responsibility

  • To develop the market and to promote savings & Investment;

  • To regulate the players in the market vis-a-vis the investor and to enforce market discipline, through market regulators and registered intermediaries. Such that the unorganised small man is able to deal through these regulatory bodies and the intermediaries, and need not necessarily has to come into direct contact with the ultimate seekers of his savings.

To understand the regulatory and control systems in-built in the market, we must study the structural framework of the capital market. The capital market consist of the following elements.

  1. One the one hand are the innumerable, but not organised savers, and

  2. At the other end are those seeking capital from the capital market;

  3. Regulatory Body:
    SEBI (the Securities & Exchange Board of India) an autonomous and statutory body acts as the market regulator and market developer. It regulates and controls the capital users and all functionaries between the users and the investors.

  4. The Stock Exchanges:
    There are 23 Stock Exchanges registered with SEBI and under its regulation. They provide a transparent and safe (risk-free) forum of a market for investors to transact and invest their funds

  5. The Depositories:
    The depositories are innovative institutions, who are able to render the market paperless by holdings securities electronically, providing ease and speed for those transacting in the market

  6. The Registered Intermediaries:
    They consist of brokers, sub-brokers, Trading and Clearing Members, portfolio managers, Bankers to Issue, merchant bankers, registrars, underwriters and credit rating agencies. They all provide a basket of services to the investors to lesson risk and make transacting earlier and smooth. They are all registered with SEBI and act under the regulation of SAEBI abiding by the Code of Conduct prescribed for each of them governing their respective roles.

So vast and well established is the market that the daily turn over in the main Stock Exchange in the Country National Stock Exchange of India averages Rs.2000 Crores presently and bound to multiply further in the coming future.

Objectives of this project on Capital Market

The project on Capital Market seeks to bring out basic facts about the functions, the institutional and regulatory frame work of the market in India, and how its activities are carried on day to day basis. Those who wish to learn to trade and transact in the market are advised to carefully study information in the website of SEBI and those of NSE & BSE and guide themselves properly.The gist of a speech by chairman SEBI, Mr.G.N.Bajpai titlled "Significance of Securities Market in the Growth of an Economy: An Indian Context" delivered during the occasion of S. D. Gupte Memorial Lecture at Mumbai on March 13, 2003 is given in the following pages. The contents of this speech form an authoritative source from the most competent person on the present role of SEBI and the stock Exchanges, contribute to the growth of Indian Economy.

For a proper understanding of the content description of the project please refer to the Project Map

The modules in this project are by way of an educational initiative to convey the basics of the capital market and are not intended to equip you to deal with the capital market or to make investments. Those who are interested to know more about investment in securities market may prefer to read another project in Students corner titled "Investment in Securities Market" also sourced from website of SEBI covering information as part of " Securities Market Awareness Campaign Empowering Investors Through Education". As per disclaimer note printed by SEBI - "The information has been compiled to present the reader with a broad understanding of the subject and is general in nature. The contents do not purport to explain or interpret Acts, Circulars, Rules, Regulations and Guidelines. The booklet is published by SEBI for investor education". This gist is extracted on this website for information of students and young bank officers driven by the same spirit.

- - - : ( Significance of Securities Market in the Growth of an Economy: An Indian Context ) : - - -

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