You are on page 1of 7

Development of Capital Markets

Policy issues affecting development of capital markets

Managing risks and responding to crises in Capital Markets
Capital markets and housing finance
Role of Participants in Capital Markets
Regulators, financial institutions, accountants/auditors, government
Issuers of securities in capital markets
Investors in capital markets: individuals and institutional players
Professionals: brokers, dealers, underwriters
Financial intermediaries: commercial banks, merchant banks, mutual funds, hedge funds, insurance
companies, pension funds
Initial public offerings (IPOs)
Who are the participants in the capital market?
1. Stock exchanges
2. Brokers
3. Sub brokers
4. Custodians
5. Depositories, depository participants
6. Merchant bankers
7. Bankers to the issue
8. Underwriters
9. Registrars to the issue
10. Portfolio managers
11. Mutual funds
12. FIIs
13. Debentures trustees
14. Credit rating agencies
15. Collective investment schemes
16. Venture capital funds
Direct participant in the markets
The government is a significant direct participant in capital markets. It participates in the money
markets through the issuance of Reserve Bank and Treasury bills. The DMO issues domestic
and foreign currency bonds, including the occasional issue of inflation-indexed bonds, on behalf
of the core Crown.
These entities, along with the DMO and the Reserve Bank, engage in portfolio risk
transformation activities through the use of derivatives (primarily foreign exchange and interest
rate forwards/futures and swaps).
Government departments are also able to enter into agreements to hedge specific financial risks,
usually foreign exchange exposures related to the purchase of fixed assets. Increasingly,
departments and some Crown entities transact this business with the DMO, which then chooses
whether or not to offset these exposures in the market.

Student loans advances can be interpreted as a substitute for private provision of capital,
although this is somewhat simplistic since the advances are mostly funded by Crown borrowing.

Capital controls
pital controls are measures imposed by a state's government aimed at managing capital
account transactions - in other words, capital market transactions where one of the counterparties[13] involved is in a foreign country. Whereas domestic regulatory authorities try to
ensure that capital market participants trade fairly with each other, and sometimes to ensure
institutions like banks don't take excessive risks, capital controls aim to ensure that
the macroeconomic effects of the capital markets don't have a net negative impact on the
nation in question. Most advanced nations like to use capital controls sparingly if at all, as in
theory allowing markets freedom is a win-win situation for all involved: investors are free to
seek maximum returns, and countries can benefit from investments that will develop their
industry and infrastructure. However sometimes capital market transactions can have a net
negative effect - for example, in a financial crisis, there can be a mass withdrawal of capital,
leaving a nation without sufficient foreign currency to pay for needed imports. On the other
hand, if too much capital is flowing into a country, it can push up inflation and the value of
the nation's currency, making its exports uncompetitive. Some nations such as India have
also used capital controls to ensure that their citizens' money is invested at home, rather
than abroad.

Major Categories of Investors, Issuers, and Intermediaries

Holdings of financial assets by the seven major categories of players in Q4 2004 were
as follows:
Control of Financial Assets: U.S. Capital Market
Player Category

$ trillion

% of total

1 Households



2 Fund Managers



3 Bankers and Brokers



4 Corporate Managers



5 Foreign Investors



6 Government Officials



7 Insurance Executives
Total Financial Assets of these Categories





The links, above, lead to a description of each player category, official Federal Reserve
sector definitions, flow of funds and level tables, and off-site research resources.


- Diversified pool of investment opportunities

- Better regulatory environment reduces credit risk from poor disclosure
- Ability to share and transfer risk in market
- Improve the overall pricing of credit risk
Supranational organizations as issuers

- Put local bond market in the spotlight

- Introduce international practices
- Further develop financial infrastructure
- Provide market with a globally recognized risk- free issue

Corporates as issuers

- Diversify source of financing

- Access to long-term financing
- Better risk management
- Private Sector development
- Add additional depth and liquidity to market
Government as issuers

- Source of public funding

- Set benchmark rates
- Develop local capital markets
- Contributes to sovereign ratings by international ratings agencies
- Strengthens financial regulatory environment
Capital Markets:
Main Actors in the Market

Developed financial markets like the USA have evolved a range of financial institutions. They keep
changing and innovating, while also introducing completely new institutions. The BiH financial market is

relatively under-developed and includes only certain basic types of financial institution. The main
participants in the BiH capital market are:

The Securities Commission; The Securities Register;

The investment funds (IFs);
The fund management companies (DUFs); The brokerage houses;
The depository banks; The custodian banks;
Brokers and investment advisors.

Investment funds are financial institutions that issue securities to raise capital and invest in other
companies. Under the FBiH and RS Acts on Funds, they also include any legal entity, company, or several
property where, regardless of the legal form, participation is offered on the basis of shares or similar
security with the aim of collecting deposits in cash and the express purpose of investing over 60% of
these investments in a securities portfolio, money deposits, or other assets, so that investors do not
supervise decisions on investment on a day to day basis and the basic aim is to secure a return on
for investors,
whether in profit
or other form of benefit.
In practice, these funds are organized as open-ended or closed investment funds. The key point about
open-ended investment funds is that monies can be paid in or withdrawn at will. This mechanism involves
changeable capital, e.g. when investors deposit monies, the fund capital (assets) increases, and vice versa,
when they withdraw their monies, fund assets decrease. Closed investment funds have fixed capital
deposited in the course of formation, i.e. establishment. This fixed capital does not change
during the closed investment fund operations.
A fund management company is a legal entity established as a limited-liability company or joint-stock
company, whose activities include establishing and managing investment funds, i.e. investing funds for
themselves and for the holders of share in open or closed investment funds, as well as
other tasks set out in the law.

Brokering houses (brokerages) are legal entities licensed to perform brokerage tasks. These tasks include
selling and buying
oneself or
client for

Depositary banks are institutions that perform the tasks of issuing securities and monetary transactions
related to trading

Custodian banks are institutions that provide the services of safekeeping securities, settling transactions,
collecting revenues, representing clients, reporting on transactions, buying and safekeeping foreign
treasury or corporate bonds, and providing information on local capital markets, etc. Custodial services
are generally used by investment funds, insurance
banks, brokerages,
major companies.

Brokers are individuals who have passed the professional brokerage exam and have a license to perform
brokering tasks. A broker is an authorized intermediary in securities trading acting in his own name for a
client (commission agent) or in the client's name (agent). They mediate between the investor (buyer of
goods or securities) and holder-owner (i.e. of goods or securities). Brokers charge a fee for their services,
which is paid upon closing a transaction. Brokers are often confused with dealers, who perform the tasks
of buying and selling securities for themselves in
order to
benefit from the

Investment advisors are individuals who have passed the professional exam for investment advisors. They
perform provide advisory services to clients related to securities trading, investment in securities, and
other securities-related transactions

Other important actors on the capital markets include the Securities Commission and the Securities
Register, for which see above.

The Stock Exchange

The Stock Exchange is a place where debt and equity securities of varying types are traded

It is a market that facilitates capital mobilization and allocation, as both governments and
companies can raise funds through the market on long and most prudent terms through the offer
of shares (by companies) and bonds (by companies and governments).

The facility, which the stock exchange provides for trading in existing securities, removes the
restriction that would have prevented individuals from investing their savings in securities.

The opportunity it offers for subsequent trading in existing securities has made it a decisive factor
in the success or otherwise of many corporate issues -

The availability of a secondary market that is, daily trading of securities on the stock
exchange - engenders capital formation and socio-economic development.

Sets Rules and Regulations for Dealing Members

Licenses Dealing members

Listing Requirements for issuers of securities

Facilitates the secondary trading of securities

Mechanism for dispute resolution

Stock exchange

A market in which securities are bought and sold.

Makes it easy for investors to buy and sell securities in secondary markets.

Freeze active shares and debentures certificates in the safe custody.

Computerise trading

Credit dividend payment directly to the account of the shareholders in the bank through electronic
clearing mechanism.

To act as a bank for shares .

Merchant banker

Merchant Banks are a very important factor in the capital markets. They have a big role to play
especially, in placing equity in the primary market, through the Initial Public Offers route.

The SEBI issued guideline for the merchant bankers in April 1990.

Merchant banker play major role is in the space of mergers and acquisitions

They will especially play a huge role in the hostile takeovers.


Underwriting is like insurance against the failure of an issue .

For the risk that the underwriter takes, he is paid commission

Underwriting is a device that ensures the success of new issues

The SEBI has made it mandatory for issuing companies to underwrite all issues .

Venture capital

Venture capital means funds made available for start-up firms and small business with
exceptional growth potential.

Venture capital is the financial support to young , rapidly growing companies/individuals that
have potential to develop into significant economic contributors by the business man group to
create a product or service which has a unique idea

It helps to bridge the gap between capital and knowledge

Capital market intermediary

Currently, these services or regulated activities include dealing in securities; trading in futures contracts;
leveraged foreign exchange trading; advising on corporate finance; fund management; real estate
investment trust management; securities financing; providing custodial services for securities; and providing
credit rating services.