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A capital market may be defined as an organised mechanism meant for effective and smooth transfer of money capital or financial investors from the investors to the entrepreneurs. It is the market for long term funds. It is market from where productive capital is raised or made available for industrial purposes. It is consists of series of a channels through which the savings of the community are made available for industrial purposes and commercial enterprises, and public authorities. It involves those private savings, individual and corporate, which turned into investments through capital issues and new public loans floated by governments and nongovernment bodies.
The secondary market is that segment of the capital market where outstanding securities are traded. From the investors point of view this markets imparts liquidity of long term securities held by them by providing an auction market for these securities. It operates through the medium of stock exchanges which regulate the trading activities in this market and ensures a measure of safety and fair dealing to the investors.
Debt Market
The debt market, however, is almost nonexistent in India even though there has been a large volume of Government bonds traded. Banks and financial institutions have been holding a substantial part of these bonds as statutory liquidity requirement. The portfolio restrictions on financial institutions statutory liquidity requirement are still in place. A primary auction market for Government securities has been created and a primary dealer system was introduced in 1995. There are six authorized primary dealers. Currently, there are 31 mutual funds, out of which 21 are in the private sector. Mutual funds were opened to the private sector in1992. Earlier, in 1987, banks were allowed to enter this business, breaking the monopoly of the Unit Trust of India (UTI), which maintains a dominant position.
Central Government securities State Government securities Securities guaranteed by Central government for all Indian financial institutions such as IDBI, ICICI and IFCI.
Securities guaranteed by State government for state institutions, such as state electricity boards and housing boards.
A foreign exchange market has following functions: Transferring purchasing power from one country to another; Promoting international trade by arranging credit card facilities; Acting as intermediary between buyers and sellers; and Helping to cover exchange risk by enabling the importers and exporters to enter into a future transaction in the forward markets;
The securities and exchange board of India(SEBI) was set up in early 1988 as a nonstatutory body under an administrative arrangement. It was given statutory powers in January 1992 through the enactment of the SEBI Act, 1992 for regulating the securities market.
Merchant bankers are prohibited from carrying on fund-based activities other than those related exclusively to the capital market. Multiple categories of merchant bankers have been abolished and there is only one entity, the merchant banker.
To assist the retail investors, SEBI gave in-principle approval for grading of IPOs by the rating agencies at the option of the issuers. SEBI will not certify the assessment made by the rating agencies.
T he SEBI introduced the green-shoe option facility in IPO as a stabilization tool for the post listing price of newly issued shares. Shares will now be allotted on a proportionate basis within the specified categories, with the predetermined minimum application size.
The SEBI prescribed new guidelines for regulating private placements of debt securities issued by the corporate. These guidelines aim to enhance transparency and protect the interest of investors in the debt securities.
Corporate Scenario
There are more than 2 lakh companies registered in India which shows strong upswing. More than 6000 companies are listed on all exchanges in India. Their market capitalization at end March 2007 was Rs.35, 45,041 crores, for companies listed on the BSE. Since 1995-96, NSE emerged with a larger trade turnover than the BSE. Private corporate sector recorded a gross capital Formation of 8% of GDP, during the quinquennium of 2002-2007 which was higher than public investment at about 3% of GDP during the same period.
Secondary Market
The number of recognized stock exchanges has risen from 8 in 1980-81 to a total of 23 in 2004, excluding OTCEI and NSE. The listed companies of all stock exchanges stood at more than 6000 in 2007. The value of turnover of trade has also increased nearly ten-fold over the twelve years to around Rs. 10 lakh crores on the BSE and Rs. 19 lakh crores on the NSE, in 2006-07.
Narasimham Committee
A high level committee on the financial system with Shri M. Narasimham as the Chairman was set up in 1991, which made far-reaching recommendations for banking sector and non-banking financial sector to improve the flexibility and operational efficiency of the market and the institutions, namely, banks and financial institutions. It also emphasized the need for strengthening the SEBI powers, vesting of CCI powers in the SEBI.
Liberalization Measures
Interest rates on debentures and on P.S.U. bonds were freed in August 1991 with the result that they can now offer any rate to public depending on their credit rating. All debt instruments are to be compulsorily credit rated by a credit rating agency. According, many private and joint sector mutual funds, venture funds, and private banks have started operating since 1993-94. Nearly, 100 venture funds were cleared by the RBI until 2008, to operate in India. The ceiling rate if interest on lending by financial institutions was replaced by a minimum lending rate of 15%. In 2003-04, only 27 issues were made for Rs.3210 crores and in 2006-07, the amount was Rs. 31,600 crores.
SEBI Guidelines
The SEBI set up originally in April 1988, became a legal entity in March 1992 and has since acquired larger and sweeping powers early in 1995. SEBI has issued Regulation for controlling Insider Trading, frauds and malpractices, for Takeovers and Acquisitions, central depositories and practices of brokers in particular of all Stock Exchanges. The SEBI guidelines have also provided for market who will specialize in buying and selling of securities by offering two way quotes. Regulations of underwriters of capital issues and capital adequacy norms for the stock brokers in the recognized Stock Exchanges were announced in October 1993. Merchant bankers are allowed a quota of 5% of post issue equity since October 1995.
Institutional strengthening
The reforms, included the setting up of OTCEI in August 1989,which started operations in October 1992. The National Stock Exchange (NSE) was recognize by the govt. in 1993 and started operations in 1994 and equity market which was launched in November 1994. In debt segment, Money market instruments, PSU bonds, and Govt. securities are traded, while in the equity segment there are presently 909 companies with a trading value of Rs. 4000- 6000 crores or more per day on an average.
Electronic Trading
The OTCEI has started a new tier in the Stock trading operations, through the electronic media. It is meant for smaller companies of Rs. 30 lakhs to Rs. 25 crores of paid up capital and companies, which are venturesome and risky, due to new entrepreneurs, new products, long gestation projects etc. are eligible to be listed here. With the introduction of BOLT, and its becoming operational in May 1995, by the BSE and subsequent expansion to other centres with terminals, a new era of electronic trading started, with NSE and BSE competing to set up on-line trading terminals throughout the country.
Banking
Prudential Measures: Measures to strengthen risk management through recognition of different components of risk, assignment of risk-weights to various asset classes, norms on connected lending, risk concentration, application of marked-to-market principle for investment portfolio and limits on deployment of fund in sensitive activities. Competition Enhancing Measures: Granting of operation autonomy to public sector banks, reduction of public ownership in public sector banks by allowing them to raise capital from equity market up to 49% of paid-up capital. Measures Enhancing Role of Market Forces: Sharp reduction in pre-emption through reserve requirement, market determined pricing for government securities, disbanding of administered interest rates with a few exception and enhanced transparency and disclosure norms to facilitate market discipline. Institutional and Legal Measures: Setting up of Lok Adalats, debt recovery tribunals, asset reconstruction companies, settlement advisory committees, corporate debt restructuring mechanism, etc. for quicker recovery/restructuring. Setting up of Credit Information Bureau for information sharing on defaulters as also other borrowers. Setting up Credit Information Bureau for information sharing on defaulters as also other borrowers. Supervisory Measures: Establishment of the Board for Financial Supervision as the apex supervisory authority for commercial banks, financial institutions and non-banking financial companies. Recasting of the role of statutory auditors, increased internal control through strengthening of internal audit. Technology Related Measures: Setting up of INFINET as the communication backbone for the financial sector, introduction of Negotiated Dealing System (NDS) for screen-based trading in government securities and Real Time Gross Settlement (RTGS) system.