Capital is one of the important key factors of production in any economy. In the economy, a well organized financial system provides adequate capital formation through savings, finance and investments. Investment depends upon Savings and in turn, Savings depends upon earnings of an individual or profits of the organization as well. This system may be viewed as a set of sub-systems with so many elements which are interdependent and interlinking with each other to produce the purposeful result within the boundary. Hence, the term system in the context of finance means a set of complex and closely connected financial institutions, instruments, agents, markets and so on which are interdependent and interlinking with each other to produce the economic growth within the country. The transfer process is effectively fulfilled by the financial system to facilitate economic growth through the channel of finance. This study aims at analyzing the structure and functions of the Capital Market in India and will especially analyze the paradigm shift of First Issue Market or Primary Market in India.
Starting from a controlled economy, India has moved towards a world where prices fluctuate every day, every moment. The introduction of risk management instruments in India gained momentum within the previous few years thanks to the relief method and banking company of India (RBI) efforts in making currency futures exchange. NSE gauging the market Necessities initiated the method of fixing spinoff markets in India. In July 1999, derivatives trading commenced in India. Some foreign investors also invest in Indian markets by issuing Participatory Notes to an off-shore investor.
Among exchange-traded derivative markets in Asia, India was ranked second behind South Korea for the first quarter of 2005. It has recently entered into joint ventures with the leading United States futures exchanges. It has taken steps to loosen currency controls, and therefore the financial institution has allowed domestic and foreign banks to trade Yuan forward and swaps contracts on behalf of purchasers. However, in contrast to Bharat, China has not fully implemented necessary reforms of its stock markets, which is likely to hamper the growth of its derivatives markets. The Indian market has equalled or exceeded several alternative regional markets whereas the expansion is being spearheaded chiefly by retail investors, private sector institutions and large corporations, smaller companies and state-owned institutions are gradually getting into the act. Foreign brokers like JP Morgan Chase square measure boosting their presence in Bharat in reaction to the expansion in derivatives.
The variety of derivatives instruments obtainable for commercialism is additionally increasing. Large gaps exist within the vary of derivatives product that square measure listed actively. In equity derivatives, NSE figures show that almost 90% of the activity is due to stock futures or index futures, whereas trading in options is limited to a few stocks, partly because they are settled in cash and not the underlying stocks. Exchange-traded derivatives supported interest rates and currencies square measure nearly absent.
The financial market may be a market wherever money instruments square measure changed or listed and helps in deciding the costs of the assets that square measure listed in and is additionally known as the price discovery process:
- Organizations that facilitate trade in financial products.
For example- Stock exchanges (NSE, BSE) facilitate the trade in stocks, bonds and warrants.
- Coming together of buyer and sellers at a common platform to trade financial products is termed as financial markets.
For example- Stocks and shares square measure listed between patrons and sellers in a very variety of the way including, the utilization of stock exchanges; directly between patrons and sellers etc.
Financial markets are also classified on the premise of sorts of claims – debt and equity markets, Maturity – money market and capital market, Trade – spot market and delivery market, Deals in money claims – primary market and secondary market.
Indian Financial Market consists of the following markets as Capital Market/ Securities Market, primary capital market, Secondary capital market, Money Market, Debt Market etc. Functions of Stock Exchanges square measure as following, like; Liquidity and marketability of securities, truthful value determination, the supply of long funds, Helps in capital formation, Reflects the general state of the economy.
Structure of Financial Market
Indian financial system can be broadly grouped into followings including financial market, financial intermediaries, financial instruments, financial services, financial Intermediaries. Financial Intermediaries also termed as Financial Institutions. We can classify the financial intermediaries into two groups: one is organized financial intermediaries and another one is unorganized financial intermediaries. Organized financial intermediaries come under the purview of regulating authorities namely Reserve Bank of India, Securities Exchange Board of India, Companies Act, Securities Contract (Regulation) Act and so on. Whereas unorganized financial institutions are not covered under the purview of these regulating authorities, such type of institutions are called local money lenders, pawn brokers etc. These financial intermediaries play a vital role in capital formation by means of mobilizing savings and facilitating the allocation of funds in an effective manner. These intermediaries provide the convenience to the small investors by mobilizing their savings in the form of divisibility and distribute the claims at the time of maturity or redemption. Financial instruments: Financial instruments can be categorized into various parts namely equity shares, preference shares, debt instruments and various combinations of these, time deposits, Mutual Funds and insurance policies, futures, options etc.
A monetary asset/Instrument/security could be a claim against another economic unit and is control as a store important and for the come back that’s expected. While the worth of a tangible/physical quality depends on its physical properties like buildings, machines, furniture’s, vehicles and then on, a monetary quality represents a claim to future cash flows in the form of interest, dividends and so on.
The entity/economic unit that offers the future cash flows is the issuer of the financial instrument and the owner of the security is the investor. Depending upon the character of claim/return, an instrument may be:
- Debt (security) such as bonds, debentures, term loans,
- Equity (security) shares and
- Hybrid security such as preference shares and convertibles
indirect assets are claims against financial intermediaries (example: units of mutual funds). The derivative instruments include options and futures.
The prevalence of a range of securities to suit the investment needs of heterogeneous investors offers differentiated investment option to them and is a crucial part within the maturity and sophistication of the financial system Financial Services. Financial services have been growing rapidly with the emergence of new investment flows. Trade and investment flow in financial services have been growing rapidly with the emergence of new and growing markets in developing and transition economies, with modernization, rapid technological change, use of recent monetary instruments, and financial and trade liberalization.
The monetary services sector is additionally quite massive and complicated and covers a good vary of activities and instruments, including for instance, corporate banking, derivatives, factoring, foreign exchange trading, pensions and investment fund management, advisory and consultancy services, insurance broking and underwriting, project finance, securities trading, venture capital, and wholesale and retail banking services. Given the range of instruments and activities that fall under the purview of the financial services sector, there are also a large number of players. The Indian Financial Market promotes the enormous savings of the economy, by providing an effective channel of returns to the investors from whom the savings are mobilized. Hence, the term monetary Markets are often outlined as a marketplace for the exchange of capital and credit together with the money markets and therefore the capital markets. Financial Markets are facilitating tools for procurement of funds and invest into various assets. The main activities of Financial Markets can be viewed as sale or purchase of shares or stocks, bonds, bills of exchange, commodities, future and options, foreign currency etc.
Financial market are often loosely classified into (i) Money Market (ii) Capital market.
The Money Market refers to the marketplace for short term document that has maturity but one year which provides the borrower to borrow the funds for a shorter period with the lowest cost of funds. At the same time, it also facilitates to the investor a platform to invest his savings which can generate interest thereon. Money Markets do not have an organized trading market place such as the stock exchange for its primary issue and secondary market trades. The participants within the market are banks, primary dealers, and financial institutions, mutual funds, and non-bank financial companies, manufacturing companies, State Governments, provident funds, non-resident Indians, overseas corporate bodies, foreign institutional investors and trusts. The RBI and Securities and Exchange Board of India (SEBI) regulate the participants and use of instruments in the money market depending upon their respective roles in the financial system. For instance, financial institutions and mutual funds are allowed only as lenders in the call money market but are permitted to buy and sell Commercial Paper in Capital Market.
Capital Market is that the marketplace for long run finance with the maturity amount quite one year. The Capital Market deals with the stock markets which provide financing through the issuance of shares or common stock in the primary market and enable the subsequent trading in the secondary market. Capital Markets also deals with Bond Market which provides financing through the issuance of Bonds in the primary market and subsequent trading thereof in the secondary market.
What is a primary market or New Issue Market?
Generally, the non-public savings of the bourgeois together with contributions from friends and relatives are pooled in to begin new business ventures or to expand existing ones. However, this might not be possible within the case of capital intensive or massive comes because the promoter might not be ready to usher in his share of contribution (equity), which may be sizable, even after availing term loan from Financial Institutions/Banks. Thus availableness of capital could be a major constraint for the putting in or increasing ventures on an oversized scale rather than relying upon a restricted pool of savings of a small circle of friends and relatives, the promoter has the option of raising money from the public across the country/world by issuing) shares of the company. For this purpose, the promoter can invite investment to his or her venture by issuing offer document which gives full details about track record, the company, the nature of the project, the business model etc.
If the capitalist is snug with this planned venture, he may invest and thus become a shareholder of the company. Through aggregation, even small amounts available with a very large number of individuals translate into usable capital for corporate. The primary market is a market wherein corporate issue new securities for raising funds generally for long term capital requirement. The companies that issue their shares are called issuers and the process of issuing shares to the public is known as a public issue. This entire method involves varied intermediaries like businessperson Banker, Bankers to the Issue, Underwriters, and Registrars to the Issue etc. All these intermediaries are registered with SEBI and are needed to abide by the prescribed norms to shield the capitalist.
The Primary Market is, hence, the market that has a channel for the issue of recent securities by issuers (Government corporations or corporate) to boost capital.
Types of issues in Primary market
- Initial public supply(IPO) (in case of AN unlisted company),
- Follow-on public offer (FPO),
- Rights supply such securities square measure offered to exist shareholders,
- Preferential issue/ bonus issue/ QIB placement
- The composite issue, that is, a mixture of rights and public offer, or offers for sale (offer of securities by existing shareholders to the public for subscription).
Features of primary markets include:
- The securities are issued by the company directly to the investors.
- The company receives the money and issues of new securities to the investors.
- The primary markets are used by companies for the purpose of setting up new ventures/ business or for expanding or modernizing the existing business.
- Primary market performs the crucial function of facilitating capital formation in the economy
Difference between Primary market & Secondary market
|Primary Market||Secondary Market|
|Investors buy directly from the issuing company.||Investors trade securities among themselves.|
|New stocks and bonds are created and sold to investors in the primary capital market.||Securities are traded by investors in the secondary capital market.|
|Intermediaries are Investment Banks.||Intermediaries are Brokers.|
|Sale of Securities directly by companies to investors.||Sale of securities is sold & purchased amongst investors and traders.|
The Status of the Primary Market in the Pre-liberalization Period
The Indian economy adopted the route of planned economic development after independence and realized that economic growth could only be achieved through large scale industrialization. The role of the financial system was restricted to the channelling of resources from the savers to the users in line with the socially productive pattern of resource allocation, in other words, adoption of bank-based financing model as against market-based financing model.
During the pre-liberalization period, the Indian capital market was also not well organized. The industrial securities market was narrow and semi-organized and there was a lack of participation by intermediary financial institutions in long-term financing of the industry. As a result, the corporate sector had no easy access to raise capital and was unable to sustain the growth of new and innovative enterprises.
The growth of investment activity and new issue market depends on the degree of investor’s protection. During this period, the primary capital market was highly regulated under the provisions of the Controller of Capital Issues Act, 1947. This Act was passed in April 1947, with a view to facilitating the post war industrial expansion and provides protection to the investors Industrial securities, as form of savings, were not popular in India before 1951, because of the inability of the securities market and the corporate laws to provide adequate protection to the holders of industrial securities. Controller of Capital Issues (CCI) became the potent instrument for regulating the investment in accordance with the objectives of planning. Despite the commencement of economic planning in 1951-52, the new issue market could not make any remarkable growth until 1955. In the post-independence period, the new issue market suffered from structural gaps. There was particularly no specialist institutional arrangement for the origination of issues of capital. Another serious drawback of the system was the absence of inbuilt provisions for distributing the securities to the investing public.
Role of Primary Securities Market in Economic Development
Organizationally primary securities market is different from the secondary securities market, but they are an integral part of a single market and both these markets act and re-act upon each other. It is the effect of such interdependence, inter-connection and inter-action that price movement on the secondary securities market and volume of activity on the primary securities market are directly and closely related. Issue of new securities tends to increase when the secondary securities market is in boom stage and tends to decline when it is in bearing stage. Secondary securities markets are usually the first to realize the impact of a change in the economic climate, but the effect is quickly transmitted to the primary securities market. Apart from the extreme sensitivity of the secondary market to change in the economic climate, the quantitative predominance of the old securities in the market usually fix the tone of the acceptability of new issue of securities and also manage the price. Primary securities market as an integral part of the capital market accelerates the pace of economic development. The most significant way through which the primary securities market accelerates the rate of economic development is its role in mobilizing savings for investment in productive assets, with a view to enhancing a country’s long-term growth prospects, and thus acts as a major catalyst in transforming the economy into a more efficient, innovative and competitive market place. Primary securities market not only helps in mobilization of the investable fund, but its operations also stimulate the generation of savings by enhancing the propensity to save. A well-functioning primary market tends to improve information quality through the adoption of stronger corporate governance principles. It also supports periods of technological progress and economic development. The role of the primary securities market for the development of the economy includes.
(i) Primary securities market provides a proper way to the corporate sector to borrow capital to satisfy their long term investment needs.
(ii) It provides opportunities for the marketing of securities in order to raise capital and also provides opportunities to allocate the countries financial resources among seekers of capital for productive uses.
(iii) Through its mechanism primary securities market generating saving by enhancing the propensity to save, helps in capital formation and also through proper allocation it ensures effective and optimal distribution of the investable fund for economic growth.
(iv) Primary securities market helps in the privatization program of the government.
The primary market is the centre point of the capital market which brings together the two principal segments of the market, that of investors and the seekers of the capital. Regular growth of the economy of any country is possible only through a robust and vibrant primary market. The size of the primary market in India remains much smaller than many advanced economies such as Hong Kong, Australia, the UK, the US and Singapore, as also emerging market economies such as Thailand, Malaysia, Brazil and the Philippines.
Challenges Facing The Capital Market
In the primary equity market, a major challenge currently is the revival of the depressed conditions of the market. The sluggishness of the primary equity market which is continuing for over two years is attributed to various factors including investors apathy which is mainly due to the poor performance of a large number of scripts floated with a high premier during 1993-95 following freeing of the pricing. The matter was compounded by irregularities noticed in the pricing of some of the issues which imparted considerable negative influence in the minds of Investors. Further, there was a liquidity constraint in the financial system during 1995-96 and a large part of 1996-97 which led to a spurt in interest rates diverting investors’ preference from equity to debt issues in the primary market.
The continued subdued nature of the primary equity market has become an area of major concern today as it is hampering implementation of many industrial projects causing time and cost overruns and thereby affecting the industrial growth of the country. In the primary equity market, a happy development has been the successful issues of several banking industry shares which have received good investor response despite most of the issues being premium issues. This underscores the need for introducing quality issues by the corporate sector. Financial Institutions like ours are ready to provide underwriting support. What is lacking is the confidence on the part of good corporate entities to test the markets. The secondary equity market has also remained subdued over the past two years, although it has shown some revival trends, confined to a few select scripts. In a way revival of primary equity market depends crucially on the health of the secondary market. Policy reforms in the secondary market have been quite comprehensive so far as the creation of efficient and transparent infrastructure is concerned. As stated earlier, India today has NSE which provides screen based automated and transparent trading. It has set up a clearing corporation to guarantee trades done on NSE Post trading facilities have improved considerably with the setting up of National Securities Depository Ltd. Other exchanges have also now computerized their operations; settlement cycles are being rigidly followed. There is also a gradual shift towards the demat form of trading. However, Secondary markets have come to be dominated by Financial Institutions. The recent events in South-East Asia have to some extent affected their sentiments. Though it could be said that bar for a few months, there was always net inflow of FII’s investment. What is required is to make the Indian FIs participate to a much larger extent than they are doing today. UTI and other mutual funds, as well as LIC, have to be much more active on the secondary markets.
Need for Secondary Market in Debt Instruments
Another major challenge facing the Indian capital market is the creation of a secondary market in debt instruments, particularly in corporate debt. The growth of long term corporate debt market is an essential requirement as a private corporate sector in India has been assigned a prime role in the development of infrastructure and other projects. In India, corporate sector accesses debt mainly by way of term loans from financial institutions. However, with the reforms in the capital market, the role of securitized assets is likely to acquire considerable importance in future. There is a large agenda for the development of the corporate debt market in India comparable to international standards. There are several issues which merit attention for the development of a vibrant debt market. I strongly feel that to activate the long term corporate debt market in India, there is a need for further liberalisation in use of contractual savings like pension, provident fund and insurance, which provide a large source of long term funds in the economy. Also, there is an urgent need for market making in corporate debt on the lines of Government securities. A distributive network of brokers and sub-brokers does not exist for debt instruments as it does in the equity segment. As a result, although a part of household savings is channelized into long term debt, it is largely in non-marketable forms. Debt securitization has also to develop for which changes in the Stamp Act and Contracts Act need to be made. Another important challenge before Indian capital market is the development of market for derivative products. Developed capital markets have all introduced derivative products in financial markets In India, this is a new and evolving concept. NSE has taken the lead in spearheading the demand for introduction of futures and options markets SEBI had set up an Expert Committee on Derivatives under the Chairmanship of Prof L C Gupta which has recommended the introduction of derivatives trading in India. This has been accepted by the SEBI Board a couple of weeks back. The matter is awaiting Government of India’s approval for amendment of the Securities Contract Act. NSE has already made the preparatory arrangements for commencing the trading as soon as the approval comes. There is thus every likelihood of derivatives trading starting sooner than later. The introduction of financial derivatives in the form of traded futures, including equity futures, currency futures and interest rate futures, would be a giant step towards the further development of the Indian financial markets.
Prior to the globalization of the Indian economy, the stock markets were somewhat insulated from international influence. This is not the case anymore. The recent Asian crisis has shown that due to a high degree of integration or linkage among financial markets, the crisis can be quickly transmitted to other financial markets India came out rather unscathed and did not experience the trauma faced by other countries. Partly it was due to the fact that full CAC has not been adopted and partly. Indian Regulatory mechanism turned out to be far more effective than in other countries. In an integrated global economy, I feel it is imperative to take steps to regulate the markets effectively so as to retain investor confidence in a country’s economy and particularly the stock market.
Recent developments & its impact India is the second most populated country with favourable demographics, however, for optimum utilization of the young population, proper growth measures for skill development and employability need to be implemented. With a clear majority in the centre, implementation of the reforms seem to be on track and considering the 2017 state election results, the future Central elections may also follow the trend. The passage of the products and Services Tax Acts may be a step within the direction of up the convenience of doing business. This is doubtless to alter the business setting within the country.
As the biggest tax reform since independence, implementing the landmark Goods and Services Tax (GST) will promote the competitiveness and productivity of Indian companies which would again contribute to a growing market. One Nation One Market would allow seamless flow and accounting of funds and transactions which will result in the positive outlook towards the Indian market by the global players. The International Financial Services Centre set up in the state of Gujarat has registered 400 per cent jump in business volume to USD 4 billion covering banking, insurance and capital market services in the last six months.
In the recent past, the Indian Financial System has undergone sea changes and invented many new channels of financial sub-systems through the process of financial reforms. The past decade has witnessed the multiple growths within the volume of international trade and business thanks to the wave of globalization and relaxation everywhere the planet. As a result, the demand for international money and financial instruments increased significantly at the global level. In this respect, changes in the interest rates, exchange rates and stock market prices at the different financial markets have increased the financial risks to the corporate world. Adverse changes have even vulnerable the terribly survival of the business world. The existence of deep and broad primary securities market is absolutely crucial for the growth of our country. It is essential for India to develop its primary securities market and make it transparent to provide alternative sources of funding for companies and in doing so, achieve more effective mobilization of investors’ savings. Indian capital market should mature to introduce derivative products for risk management in the capital market. The recent South East Asian crisis needs to be carefully studied. A market-oriented system with appropriate regulation leads to growth with stability otherwise there may be shocks both external and internal which might destabilize the economy. Another important challenge before the Indian capital market is the development of market for derivative products. Developed capital markets have all introduced derivative products in financial markets In India; this is a new and evolving concept. The Primary Market is, hence, the market that gives a channel for the issue of recent securities by issuers (Government corporations or corporate) to boost capital. The securities (financial instruments) may be issued at face value, or at a discount or premium in various forms such as equity, debt etc. They may be issued in the domestic and international market.