CAPITAL MARKET

Capital market may be defined as a market for borrowing and lending long term capital funds required by business enterprises. Capital market offers an ideal source of external finance. Thus capital market represents all the facilities and the institutional arrangement for borrowing and lending medium and long term funds. It composed of those who demand funds and those who supply funds.

CHARACTERISTIC FEATURES OF A CAPITAL MARKET:

 Securities market: The dealing in a capital market is done through the securities like shares, debentures, etc. The capital market is thus known as securities market.  Securities Prices: The prices of securities that are dealt with in the capital market is determined through general laws of demand and supply. The equilibrium in demand and supply of securities is brought about by the prices. The prices depend on different factors such as following: Yield on securities Extent of funds available from public savings Level of demand for funds Flow of funds from the banking system Price situation in general  Participants: there are many players in the capital market. The capital funds are either directly supplied or arranged through financial intermediaries. The participants in the capital market includes: Financial intermediaries like insurance companies, investment companies, pension funds etc. Non- financial business enterprises Ultimate economic units like hous eholds and governments.  Location: The capital market is not confined to certain specific locations, although it is true that parts of the market are concentrated in certain well known centres known as stock exchanges.

FUNCTION OF CAPITAL MARKET:

 Allocation function: capital market allows for channelization of the saving of innumerable investors into various productive avenues of investment. It allocates and rations funds by a system of incentives and penalties.  Liquidity function: capital market provides a mean whereby buyers and sellers can exchange securities at mutually satisfactory prices. This allows better liquidity for the securities that are traded.  Indicative function: A capital market acts as a barometer showing not only the progress of the company, but also the economies as a whole through price movement of securities.  Saving and investment function : capital market provides a mean of quickly converting long term investment into liquid funds, thereby generating confidence among investors and speeding up the process of savings and investments.  Transfer function: Capital market facilitates the transfer of existing assets, tangible and intangible, among individual economics units or groups.  Merger function: Capital market encourages voluntary or coercive take-over mechanism to put the management of inefficient companies into more competent hands.

INDIAN CAPITAL MARKET EVOLUTION AND GROWTH:

IN the mid-eighties, a metamorphic transformation involving multidimensional growth has taken place in an otherwise dormant Indian financial system. The magnitude of growth could be gauged in massive jumps in funds mobilization, the turnover on the stock exchanges, the amount of market capitalisation and the expansion of investor population. The evaluation in the realm of capital market in India could be broadly discussed as follows: Infrastructure stage: The period between 1947 and 1973 was the period of the development of infrastructure for capital market. The stage saw the process of strengthening of capital market through the establishment of a network of development financial institution such as IFCI (1948), ICICI (1955), IDBI and UTI (1946), SFC and SIDCs (during the sixties and early

seventies). Capital market functions were legislated during this period. This include: Capital issues (control) Act 1947, Securities contract (regulation) Act 1956 and companies Act 1956. New Issues Stage: This stage heralded the enactment of the foreign exchange regulation Act (FERA) between the period 1973 and 1980. Under this Act, shareholding of foreign firms in joint ventures was restricted to 40 percent if company want to be recognised as Indian companies. Multinational companies offering their equities to the public at a relatively low price. This encouraged a large number of domestic public limited companies to come out with the offer of new capital issues for public subscriptions. The SEBI stage: This stage of development during the period between 1980 and 1992 brought about rapid changes in the Indian capital market. This period marked a period of change , signifying the widening and deepening of the market. Debenture emerged as powerful instrument of resources mobilization in the primary market. There is a phenomenal increase in the listed companies with a quantum jump in their paid up capital and market capitalization. New financial services such as credit rating, etc come to introduced. Several credit rating institution such as CRISIL, CARE AND ICRA were set up in order to hel p investor to make a right choice of investment. Similarly, stock Holding Corporation of India, TDICI, RCTC and TFCI were also constituted as specialised financial institutions. During this period was the constitution of a number of committees in order to suggest measures to revamp and restructure the working of the secondary market and cause buoyancy in the primary market. These include the following:

 A committee on organisation and management of stock exchange, 1986 under the chairmanship of Mr.G.S.Patel  A working group on the development of the capital market, 1989 under the chairmanship of Dr. Abid Hussain.  A study group for guidelines relating to valuation and new instruments, 1991 under the chairmanship of Mr.M.J.Pherwani.  A committee on trading in pub lic sector bonds and units of mutual funds, 1992 under the chairmanship of Mr. S.S.Nadkarni.
A number of recommendations of the above committee were implemented to help streamline the operation of the capital market. SEBI has been forcing its attention on policymaking, based on wider consultation through the mechanism of a number of committees to examine the various aspects/segment of the capital market.

THE STRUCTURAL TRANSFORMATION: IN 1992 many technological innovation on par with the develope d countries of the world began to be introduced in the realm of trading operations in the Indian stock market. Some of the significant forces/ happening that were responsible for the structural transformation were:

         

Financial sector liberalisation Computerised online trading Constitution of a depository Disinvestment by government Opening up of the market for portfolio investment Global recessionary trend Entry of new institution Growth in saving of households Introduction of innovative financial instruments Measures initiated by the government

SEBI issued separate set of guidelines for different categories of intermediaries such as brokers/sub-brokers, merchant bankers, registrars to issues, portfolio managers, underwriters to issues, mutual funds, bankers t o issues debenture trustees and venture capital funds.

CONSTITUENTS OF INDIAN CAPITAL MARKET:

The Indian capital market is composed of: 1) The government securities market 2) The industrial securities market Government Securities market: It is the market for government and semi-government securities. An important features of the securities traded in this market is that they are stable in value and are much sought after by banks. Some of the features of government securities m arket are as follows: Guaranteed return on investments No speculation in securities Institutional based investor which are compelled by law to invest a portion of their funds in these securities.

Predominated by such institutions as LIC, GIC, the provident funds and the commercial banks INDUSTRIAL SECURITIES MARKET: The market of industrial securities is known as industrial securities market. It offers an ideal market for corporate securities such as bonds and equities. Industrial securities market compromises of the following segments: Primary market Secondary market PRIMARY MARKET: Primary market also known as new issues market (NIM) is a market of raising fresh capital in the form of shares and debentures. Corporate enterprises wh ich are desirous of raising capital funds through the issue of securities, approach the primary market. The primary market allows for the formation of capital in the country and accelerated industrial and economic development. Modes of raising capital in the primary market are as follow: 1) Public issues: where the securities are issued to the member of the general public, it takes the form of public issue. It is most popular method of raising long term funds 2) Right issues: where the issue of equity share s of a body corporate is made to the existing shareholders as a pre-emptive right, it takes the form of right issue . Under this method additional securities are offered for subscription to the existing shareholders. 3) Private placement: where the shares of a body corporate are sold to a group of small investors, it takes the form of private placement . SECONDARY MARKET: A market, which deals in securities that have been already issued by companies, is known as the secondary market. It is also called the stock exchange or the share market. The importance of the secondary market springs from the fact that it acts as the basis upon which rests the edifice of the primary market. This is because the secondary market offers an important facility of transfer of securities. Stock Exchanges: The activities of buying and selling of securities in the secondary market are carried out through the mechanism of stock exchanges. Stock exchanges form an integral part of the secondary market in India. There are 24 stock exchanges in India recognized by the government. Stock market operating at the national level known as Over the counter exchange of India (OTCEI) which has been established to give a major fillip to

the capital market. It aims at helping small and start-up companies to overcome the problem of raising capital through public issues at exorbitant cost. It also helps investors to overcome the problems of illiquidity, inaccessibility, delayed settlement and transfers that are abound with the traditio nal stock exchanges.

REGULATION OF INDIAN CAPITAL MARKET:

Indian capital market has been regulated under a regulatory framework. The regulatory of capital market are discussed below: Under SEBI Act: Securities Exchange Board of India was set up on April 12, 1988 as a non statutory body with the chief objective of protecting the interest of investors in securities and for prompting the development and the regulation of the securities market in India. Some of the SEBI function is follow ing:

 Regulating the business in stock exchange and any other securities markets.  Promoting and regulating self regulatory organisation  Registering and regulating the working of collective investment schemes including
mutual funds.

 Promoting investor s education and training of intermediaries of securities market  Conducting research of the market.  Regulating substantial acquisition of shares and takeover of companies.  Prohibiting fraudulent and unfair trade practices relating to securities market

SEBI has identified the following areas for focusing its attention for the overall growth and the development of the stock market in India. The activities are pointed below :

 Registration of brokers  Authorization of merchant bankers  Control over mutual funds  Issue of insider trading regulations  Issue of portfolio managers regulations  Issues of guidelines for disclosure and protection  Surveillance  Clearing house.

Under the BSCC Act: In January 1926, the Bombay Securities control (BSCC) Ac t 1926 was enacted. The Act provides the government, power to grant recognition to a stock exchange or withdraw recognition as it thought fit. The BSCC Act 1926, remained in force until the securities contract regulation act was promulgated in 1957, but it has no significant effect on securities trading. Under the Capital Issues control Act, 1947: Its objectives were as follows:

 To channelize the balanced investment of resources in accordance with objectives of the five year plan.  To direct and distribute public issues of capital in a balanced manner  To regulates the capital organization plans of companies including mergers and amalgamations necessitating issue of capital.
Under the Securities Contracts (Regulation) Act, 1956: The act provides the following power:

 Granting recognition of stock exchange  Furnishing periodical returns  Power of recognized stock exchange to make rules restricting voting right.  Power of central government to direct rules to be made or to make rules.  Power to prohibit mem bers to act as principal in certain circumstances.  The Act provided license to dealers in securities in certain areas.

Under the Securities contract(Regulation)Rules, 1957: These were the rules framed for facilitating efficient and safe trading at the st ock exchanges. The rules pertain to the following:

 Procedures to be followed for the recognition of stock exchanges  Requirement of listing of securities  Inquiry into the affairs of recognized stock exchange and their members  Submission of periodical return s and annual returns by recognized stock exchange.

Under the companies Act,1956: The companies Act is voluminous and was enacted with the explicit objectives of controlling and regulating every conceivable facet of the corporate sector. The co mpanies Act of 1956 consist of thirteen parts and fourteen schedules, part VI has eight chapters while part VII has five chapters. Some of the important provisions as pertaining to the Indian capital market are Part I, Part II, Part III, Section 55 to 68, section 77 etc.

There are some committees has formed for regulatory framework in the Indian capital market. The committee are as follow;

 The G.S.Patel committee  The Narasimham committee  The M.J.Pherwani committee (1991)  The Malegam committee (1995)

RECENT TRENDS IN CAPITAL MARKET:

The recent years witnessed significant reforms in the capital market. It is well known that trading platform has become automatic, electronic, anonymous, order -driven, nationwide and screen-based. Shouting and gesticulations have yielded place to punching and clicking. Speed and efficiency are the hallmark of the current system. Across the system, multitude of market participants trade with one another anonymously and simultaneously. On any trading day, more than 10,000 terminals come alive, in 400 towns and cities; information is flashed on real time basis. Equal opportunity is provided for all concerned to access the information. Transparency is ensured in respect of dissemination of information, price and quantum of the order; but, member s identity is sought to be hidden to prevent any bias in response. Today, a trading member need not wend his way to the Jeejeebhoy Tower in Dalal Street, Mumbai or to any stock exchange building elsewhere; he can comfortably sit at his computer terminal and execute the order. Laptops, palmtops and hand mobiles, in fact, challenge the relevance of the brick and mortar. An investor, today, need not wait, with his fingers crossed, for a fortnight or more, for getting crossed cheques or crisp notes for the sale proceeds of his securities. The trading cycle has been shortened to T+2. This shortening of the cycle has been done in a phased manner but in a rapid succession from T+5 to T+3 to T+2, all in a matter of two years.

Another material development, which proved to be of immense relief to the investors, was dematerialisation of the scrips. Now 99% of the scrips in the market are dematerialised. Almost 100% of the trades are in D-mat form. Inconvenience of physical custody and transfer, tedium of intimating change of address and problems of bad delivery, late delivery, non delivery and the risks of forgery and frauds have virtually disappeared or shall I say have been dematerialised! The benefit is relished but not the cost. We should bear in mind the maxim no cost, no benefit. There is no free lunch in this world. Still, there is no denying the fact that there could be a possibility for reduction in the cost; such possibilities are explored. At the stock exchanges, robust risk management system has been put in place, Value-at-risk margining and exposure limits, on-line monitoring of margins and positions, Clearing Corporation and Settlement Guarantee Fund mechanism for trade settlement all these have made Indian capital market now arguably world class, in terms of transparency, efficiency and safety. Antiquated and abused badla system or ALBM stands abolished. In its place, for hedging and trading purposes, a number of derivatives in the form of futures and options, both in dexbased and stocks-specific have been introduced. The sophistication of these products have not scared away our brokers and investors. Instead, with their native intelligence, they are as comfortable in the F&O Quarter as a fish in the water. The vibranc y of F&O segment has surpassed the cash segment in terms of daily turnover within a short period. Corporate bonds and Government Securities used to be traded via telephone exchange. A beginning has been made for their trading on the stock exchange now. As is natural, the weaning takes time! Our accounting standards are already principle-based; they have been aligned with international standards almost in all aspects, barring one or two. Our disclosure requirements, both initial and continuing, are on par w ith global practices. The corporate governance and corporate performance do reflect and get reflected in the conditions of capital market. As a market regulator and protector, SEBI is concerned with corporate governance practice on an ongoing basis. Accor ding to the Economic Intelligence Unit Survey of 2003 regarding corporate governance across the countries, Top of the country class, as might be expected, was Singapore followed by Hongkong and, somewhat surprisingly, India. It is significant to note tha t Singapore and Hongkong claiming the top positions, was not a matter of surprise, but India coming as third, surprised the world! It shall be our collective endeavour to eliminate the surprise element . As part of its endeavour towards continual improvement, SEBI has got corporate governance code and practice reviewed, by Narayana Murthy Committee. The Committee s recommendations for

refinement were evolved through consultative process, transparent deliberations and democratic approach. These were posted on SEBI s website for 21 long days. Thereafter, they were got incorporated in Clause 49 of Listing Agreement. No sooner was this done, the corporate quietitude was disturbed and a spate of representations followed. The three major aspects, which disturbed the corporate, related to definition of independent directors, their nine-year term and whistle blowing policy. In the ultimate analysis, however, more than the rules and regulations, codes and principles, the change of mindset are called for. Good Corpora te Governance is, after all, an ethical principle and value-proposition. Today, it is realised that ethics and business do mix and mix well. I am given to understand that there is empirical evidence to establish causal relationship between good Corporate G overnance and sustained corporate performance. Two Credit Rating Agencies have come up with their own methodology to rate the corporate according to their governing standards, linking it with wealth creation, management and distribution. Is rest assured, s uch a rating is not mandatory But, may be, in course of time, the market and economic compulsions would make it a preferred option. During the last one year, Indian capital market has been regaining its buoyancy. Globally recognised economic fundamentals o f the country and widely perceived robustness of the Indian Capital Market system have gradually restored the confidence of the investors, global and local, in the Indian market, to a substantial degree. During the last one year, the sensex has risen by over 75%. The Indian capital market has outperformed many in the world. More importantly, the primary market too has perked up. The depth and liquidity of the market and its absorbing capacity has been indisputably proven. The fear of failure of PSU disinvestments turned out to be unfounded. Some mistakes have occurred. To err is human and occasional systemic fault / fatigue is not uncommon. Mistakes may happen and do happen; but they should not lead to paralysis, panic and cynicism; nor should they be allowed to be exploited. Mistakes if any should be rectified and rectified quickly and their recurrence prevented. If by ignorance, one mistakes, by mistake one should learn. However sophisticated, efficacious, fail-proof a system or technology may be, human intervention is inevitable, for, the system is manned, managed or used by human beings. Human nature being what it is, and as the human ingenuity knows no bounds, constant regulatory surveillance and prompt action is necessary. That is what SEBI is trying to do. Armed with statutory authority and consumed by missionary zeal, SEBI keeps vigil, clamps down appropriate surveillance actions. Any market misconduct or manipulation are sought to be dealt with severely in the interest of the market and the investors. Investigations into allegations of manipulations etc. are getting speeded up and necessary regulatory action is taken, without bias or prejudice, with no fear or favour. At times, the action may turn out to be deterrent in nature, as circumstances warrant.

A few more things are on the anvil. Margin trading and securities lending have been introduced with adequate checks and balances. The Central Listing Authority has become operational to provide an independent entry -point scrutiny of the corporate to be li sted. Straight through Processing will get broadened market wide in another 3 month s time. The Central Registry of market intermediaries and professionals with unique identification number is under construction. And, when RTGS is being ushered in, T+1 set tlement cannot be far behind! Structural consolidation, infrastructural improvements, product -innovation, refinement of regulations, and integrated surveillance should be some of the thrust areas for planned action in the days ahead. Integrated Market Infrastructure.

With the traditional barriers for exchanges disappearing, financial markets are moving into a unique phase of consolidation and fragmentation resulting from globalized and next generation exchanges. This transformation has increased the need for better matching systems and pricing, faster executions, lower latencies and tariffs, and innovative differentiators. Technology has played a key role in providing a level playing field in markets over the last 20 years, and in making capital markets more transparent, safe and accessible. Against this background, we can say that using robust, sophisticated capital market infrastructure technology will enable financial markets to emerge stronger.