- Capital markets are financial markets for the buying and selling of long-term debt or equity backed securities.
- The primary role of the capital market is to raise long-term funds for governments, banks, and corporations while providing a platform for the trading of securities.This fundraising is regulated by the performance of the stock and bond markets within the capital market.
- The member organizations of the capital market may issue stocks and bonds in order to raise funds. Investors can then invest in the capital market by purchasing those stocks and bonds.
- The capital market, therefore, functions as a link between savers and investors.
- It plays an important role in mobilizing the savings and diverting them in productive investment.
- In this way, capital market plays a vital role in transferring the financial resources from surplus and wasteful areas to deficit and productive areas, thus increasing the productivity and prosperity of the country and promotes the process of economic growth in the country.
- Financial market regulators, such as the Securities Exchange Board of India (SEBI) and The Securities and Exchange Commission (SEC) in US oversee the capital markets in their jurisdictions to protect investors against fraud, among other duties.
- Capital market is the heart of any economy through which the savings are channelized into effective long-term investments.
- A developed and vibrant Capital Market will immensely contribute towards speedy economic growth and development.
- A well-developed Capital market is beneficial both for the investor as well as for the corporate sector and it is the most important parameter for evaluating the health of any economy.
- It is an engine for economic growth, providing an efficient means of resource mobilization and allocation.
- The Indian capital market is one of the oldest capital markets in the world. It dates back to the 18th century when the securities of the East India Company were traded in Mumbai and Kolkata. However, the orderly growth of the capital market began with the setting up of The Stock Exchange of Bombay in July 1875 and Ahmedabad Stock Exchange in 1884. Eventually,19 other Stock Exchanges sprang up in various parts of the country. The evolution-cum development of Indian capital market may be reviewed under two phases:
(i)
Indian Capital Market –
Before 1990’s
(ii)
Indian Capital Market –
After 1990’s
Indian
Capital Market – Before 1990’s
- India’s Capital Market was dormant till the mid – 1980’s. The long term financing needs of the corporate sector were met by the Development Financial Institutions (DFI’s) namely IDBI, IFCI, ICICI as well as by other investment institutions like LIC, UTI, GIC etc. Working capital needs were met by the Commercial Banks through an elaborate network of bank branches spread all over the country. Capital Market activities were limited, mainly due to the easy availability of loans from banks and financial institutions and administered structure of interest rates.
- However, three important legislations, namely, Capital Issues (Control) Act 1947, Securities Contracts (Regulation) Act, 1956, and Companies Act, 1956 (Now, Companies Act, 2013) were enacted to provide suitable legal framework for the development of capital market in India. The pricing of the primary issues was decided by the Office of the Controller of Capital Issues.
- A few stock exchanges, dominated by Bombay Stock Exchange (BSE), provided the trading platforms for the secondary market transactions under an open outcry system.
- Indian Capital Market – After 1990’s
- The Indian capital markets have witnessed a major transformation and structural change during the past two and a half decades, since the early 1990’s.
- The Financial Sector Reforms in general and the Capital Market Reforms in particular were initiated in India in a big way from 1991 – 1992 onward.
- These reforms have been aimed at improving market efficiency, enhancing transparency, checking unfair trade practices and bringing the Indian capital market up to the International Standards. The Capital Issues (Control) Act, 1947 was repealed in May 1992, and the office of the Controller of Capital Issues was abolished in the same year.
- The National Stock Exchange (NSE) was incorporated in 1992 and was given recognition as a Stock Exchange in April 1993. It has been playing a lead role as a change agent in transforming the Indian Capital Market to its present form.
- The Securities and Exchange Board of India (SEBI) was set up in 1988 and acquired the statutory status in 1992. Since 1992, SEBI has emerged as an autonomous and independent statutory body with definite mandate such as:
- (a) to protect the interests of investors in securities,
- (b) to promote the development of securities market, and
- (c) to regulate the securities market.
- In order to achieve these objectives, SEBI has been exercising power under:
- (a) Securities and Exchange Board of India Act, 1992,
- (b) Securities Contracts (Regulation) Act, 1956,
- (c) Depositories Act, 1996 and delegated powers under the
- (d) Companies Act, 2013. Indian Capital Market has made commendable progress since the inception of SEBI and has been transformed into one of the most dynamic capital markets of the world.
- Functions of the capital marketThe major functions of capital market are:1. To mobilize resources for investments.2. To facilitate buying and selling of securities.3. To facilitate the process of efficient price discovery.4. To facilitate settlement of transactions in accordance with the predetermined time schedules.Major constituents of the capital market1. SEBI (regulator)2. Stock exchanges3. Clearing corporations (cc)/ clearing houses (ch)4. Depositories and depository participants5. Custodians6. Stock-brokers and their sub-brokers7. Mutual funds8. Merchant bankers9. Credit rating agencies10. Financial institutions11. Foreign institutional investors12. Non-banking institutions13. Issuers/ registrar and transfer agents14. Investors
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