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CAPITAL MARKET – CONCEPTUAL FRAMEWORK

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The relationship between finance capital and industry dates back to the origin of
modern industrialization and has been shaped by the way investment patterns and
financial systems evolved. The nature of the latter two, in turn, is influenced by the socio-
economic and political attributes prevalent in a country. While each economy does have
its own ‘unique financial system’, two broad systems of industrial financing are identified
in the literature namely, credit-based systems and capital market-based systems. Across
the world, there was a transformation in financial intermediation from the eighties
onwards. This movement, even if marginal in some of the developing countries, was
away from a credit-based financial system to a capital market-based system, and was
partly due to a shift in policies from ‘financial repression’ (credit controls and other
modes of priority sector promotion) to ‘financial liberalisation’. This led to an increasing
significance of capital markets in the allocation of financial resources.

Sound and vibrant Capital Market is a prerequisite of sustainable economic
development of a country. The term "Capital Market" refers to the facilities and
Institutional arrangements for the borrowing and lending of long-term funds. It consist
series of channels through which the saving of community are made available for
industrial and commercial enterprises and for public. The capital market implies a
number of individuals and institutions (including Govt.) that chanalise the supply and
demand for long-term capital and claims on capital. The stock exchanges, commercial
banks, insurance companies, co-operative banks, saving banks, development banks,
investment companies or trust etc. are important constituents of the capital market. The
capital market has three important components namely the suppliers of loanable funds,
the borrowers and the intermediaries who deal with the lenders on one hand and the
borrowers on the other hand. It embraces not only the system by which the public take up
long-term securities directly or through intermediaries but also elaborate network or
institutions responsible for short-term and medium term lending.

marketability.. The attainment of planned economic development needs a well regulated.1). London 1934. This process of mobilizations of resources is carried out under the supervision and overview of the regulators. These intermediaries perform functions to help both the issuers and investors to achieve their respective goals.No. The intermediaries' are the agents who match the needs of users and suppliers of funds for a commission. thereby increasing productive capacity and swelling the National Dividend”1. The investors. Table 1-1: Market Participants in Securities Market S. The regulator ensures a high service standard from the intermediaries and supply of quality securities and non-manipulated demand for them in the market. safety and price continuity to the long-term securities. The regulators develop fair market practices and regulate the conduct of issuers of securities and the intermediaries. P – The English Capital Market. who are surplus savers. Mathien & Company. and chanalising the funds in the proper direction as laid in the national objective. organised. efficient and effective capital market for the saving from the households. . In the words of Livingston “It is the business of the capital market to facilitate the movement of the stream of command over capital to the points of highest yield. viz. By so doing it enables control over resources to pass into the hands of those who can employ them most effectively. A sound Capital market implies the essential attributes of liquidity. Name 2005 2006 1 Livingston. commercial undertakings etc. the investors in the securities and the intermediaries. The issuers are the borrowers or deficit savers. deploy their savings by subscribing to these securities. the issuer of securities. They are also in charge of protecting the interests of the investors. The securities market has essentially three categories of participants. who issue securities to raise funds. There are large variety and number of intermediaries providing various services in the Indian securities market (Table 1.

Collective Investment Schemes -. Mutual Funds 39 38 23. Merchant Bankers 128 130 17. Functions & Framework: The Corporate Sector draws its capital needs from the following sources: .128 9. Corporate Brokers 3. With Derivative Trading 2 2 8. With Debt Market Segment 1 1 7. FIIs 685 882 12.933 10. Depositories 2 2 4. Stock Exchanges 5. Securities Appellate Tribunal 1 1 2. Primary Dealers 17 17 16. Portfolio Managers 84 132 13. -- Source: ISMR 2006: a NSE publication Capital Market Structure. Underwriters 59 57 20.684 23. Venture Capital Funds 50 80 21. Regulators* 4 4 3. Brokers 9. Bankers to an Issue 59 60 18. 1.479 11. Custodians 11 11 14. Sub-brokers 13.733 3. With Equities Trading 23 23 6. Share Transfer Agents 83 83 15. Debenture Trustees 35 32 19.339 9. Foreign Venture Capital Investors 14 39 22.

1. Of the sources enumerated above. The debt market consists of such corporate debt and also public debt (government securities & Treasury Bills) Managed by the RBI. 2. Item No. Promoters equity constitutes a comparatively a smaller portion. but these are not very dependable. Term Loans from Banks & Financial Institutions. and 7. The basic capital edifice of a corporate body is built from item 1 to 3 above. These are not repayable. Short-term working capital Loan is generally a revolving facility and held over the years subject to satisfactory dealings and abiding by the terms & conditions stipulated by the lending Institution. 3. Internal generation of funds (profits & surpluses are used to eventually redeem the debt borrowings mentioned at item No. but this has to be eventually repaid. but normally not exceeding 10 years. Bonds/Debentures raised from the Public (generally referred to as Debt Capital). 5. and funds raised as II Tier Capital. Internal generation of Funds (Profits/surpluses re-ploughed).1 and 2 are held permanently and form the risk capital. 6. The others sources at item 4 to 6 are supplementary or stand-by sources and these are all to be repaid as per contracted terms. Promoters Contribution. Short-term Working Capital from Banks.4 to 6. Equity & Preference Capital raised from the shareholders (generally referred to as equity capital). We call the source as Corporate Debt Market. and hence the primary .4 is negotiated & raised for 3 to 7 years from Banks/FIs. With the strength of this edifice it is possible to raise the remaining sources at item No.3 to 6.3 is raised from the market for duration of 10 to 15 years or more. Item No. Unsecured Loans & Deposits are at best supplementary sources. Unsecured Loans & Deposits. 4. item No. This introduces us to the Capital Market (covering equity and corporate debt capital).

2. trade and other business ventures are the productive users of significant amount of capital. nationalised banks and financial Institutions for raising Tier-II capital and also debentures floated by corporates. the Central Bank of the country and banker to the Government. Indian Stock Market consists of three distinct segments: 1. PSU Bonds Market i. which deals with short-term financial needs of business and industry. This is the function of organised capital market to regulate market forces to ensure fair dealings. household savers. Stock market is also referred to as the Corporate Debt or Capital Market. to motivate savings on the part of the investors and to secure smooth flow of savings/capital from investors to capital seekers for productive needs. agriculturists. While the money market. Bonds floated by public Sector units. professionals. It is the Capital market that transforms the savings of large number of individuals to productive channel to meet the demands of capital for Industry. is restricted to funds needed for a period of one year or less. These are interest bearing and dated securities. trade and business. This market is regulated by RBI.e.source of capital for a large Corporate Institutions is from the Capital Market (providing the equity capital & debt capital to business. trade & industry) Composition of Equity/Corporate Debt Market This is the market consisting of large number of individual investors. The Public Debt Market i. The individual savers are not organised. They form the class of capital providers. This is represented as the Corporate Debt Market.e. the market for Government securities (also called Gilt- edged Market). instruments of the debt/capital markets are raised for medium or long term needs. They can invest if they could secure the trust and confidence that the funds invested would be prudently employed and they could normally expect to get a fair return/reward on their hard-earned savings. who are able to retain a part of their current earnings. . On the other side the corporate bodies engaged in Industry.

Primary market covering new public issues of all categories of securities. but if the shares are listed in a stock exchange these can be sold or purchased. When equity shares are exclusively offered to the existing shareholders. thus providing liquidity to such investments. bonds and equity/preference capital.3. Here it is relevant to mention about two categories of stock market. The Equity Market for rising of equity or preference share capital by all corporates. it is called "Rights Issue". declaring dividend is not a legal obligation on the part of the companies. Successful floating of a new issue requires careful planning. which deals with already issued securities of all types. Underwriters are financial . The Primary Stock Market It is also called the market for public issues. This market refers to the raising of new capital (equity or debt i. Transactions of the secondary market are carried out through one of the authorised stock exchanges. equity shares. bonus shares etc. where the traded security is listed. But shareholders enjoy various other rights as conferred by the Indian Companies Act. i. debentures or Rights Issues) by corporate. preference shares.e. merchant bankers and registrars to the issue are available for the corporate body to handle this specialised job. Secondary market. including G-sec. 2. and hence not a right on the part of the shareholders. 1. like underwriters. The services of specialised institutions. Money invested in company shares is not refundable. Indian Public companies generally follow the objective of increasing shareholders wealth as the prime goal of financial management. Shares do not carry interest. 1956. but shareholders can participate in sharing the profits of the corporate body declared by way of dividends. When a Company after incorporation initially approaches the public for the first time for subscription of its public issue it is called Initial Public Officer (IPO). While the hope of receiving attractive dividends motivates the public to subscribe to the share capital. timing of the issue and comprehensive marketing efforts.e. Newly floated companies or existing companies may tap the equity market by offering public issues.

failing which they accept these shares/bonds as their own investment. which undertake to secure a committed quantum of equity/debt subscribed by the public. The secondary market also acts as an important indicator of the investment climate in the economy.e. It is referred to as the issue or that part of getting devolved on the underwriters. The organised and regulated capital market motivates individual to save and invest funds. Functions of the Capital Market 1. underwriters and registrars to the issue each acting at different points. When prices of existing securities are rising and there is large trading in the existing shares. An individual or an Institution can either hold a portfolio of securities as a permanent investment. The main function of the secondary market is to provide liquidity to the listed securities by enabling a holder to easily convert the securities into cash through the stock exchanges. However there is effective regulation of SEBI at every stage of a public issue. such a boom in the secondary market correspondingly signifies that new issues if floated at that point of time would be successfully subscribed. where the companies get their public issues listed for trading. or he can hold a basket of securities for short-periods and engage in buying and selling them to gain from market fluctuations. Secondary Stock Market The Secondary Market deals with the sale/purchase of already issued equity/debts by the corporates and others. Subscriptions to the new issue are collected at specific branches of one or more collecting banks within a prescribed span of time. public/rights issues are not carried out through stock exchanges. This is done through merchant bankers. The transactions relating to the primary market i. The availability of safe and profitable source of investment is an essential criterion to create propensity to save and invest on the part of the earning public. .institutions. The sale/purchase of these securities are carried out at the specific Stock Exchange(s). represented by the dates of opening of the issue and closing of the issue.

Regulatory Body: SEBI (the Securities & Exchange Board of India) an autonomous and statutory body acts as the market regulator and market developer. merchant bankers. 3. families and associations and make the same available for meeting the large capital needs of organised industry. To discharge these functions. Trading and Clearing Members. portfolio managers. 2. and need not necessarily has to come into direct contact with the ultimate seekers of his savings. sub-brokers. It thus mobilises savings of large number of individuals. Bankers to Issue. . by developing a secondary capital market. The Stock Exchanges: There are 23 Stock Exchanges registered with SEBI and under its regulation. through market regulators and registered intermediaries. They provide a transparent and safe (risk-free) forum of a market for investors to transact and invest their funds. who are able to render the market paperless by holdings securities electronically. consistently available for long-term users 4. and thus makes even short term savings. the organised capital market accepts a dual responsibility to develop the market and to promote savings & Investment. It regulates and controls the capital users and all functionaries between the users and the investors. and to regulate the players in the market vis-a-vis the investor and to enforce market discipline. registrars. The Depositories: The depositories are innovative institutions. Such that the unorganised small man is able to deal through these regulatory bodies and the intermediaries. providing ease and speed for those transacting in the market. It provides for the investors safe and productive channels for investment of savings and secures the recurring benefit of return thereon. as long as the savings are retained. The Registered Intermediaries: They consist of brokers. trade and business and for progress and development of the country as a whole and its economy. It provides liquidity to the savings of the investors.

They all provide a basket of services to the investors to lesson risk and make transacting earlier and smooth. The London capital Market becomes the world's second oldest capital market which was established in 1773. The emergence of capital market can be traced back to the second half of the eighteenth century when the transactions were limited to loan stock transactions of the East India Company. Stock exchange trading got a big boost during the First World War and Second World War with the incorporation of large number of joint stock companies and coming up of new stock exchanges at Chennai. Kanpur. They are all registered with SEBI and act under the regulation of SEBI abiding by the Code of Conduct prescribed for each of them governing their respective roles. Mumbai stock exchange was formalised in 1875 with the establishment of Native Share and Share Broker Association. Ahamdabad and Kolkata started functioning though without formal organisation. Delhi. The Amsterdam Bourse seems to be the world's oldest capital market where stock business has its start as early as 1585. Nagpur. Stock exchanges at Mumbai. .underwriters and credit rating agencies. Hyderabad and Bangalore. by 1830 some corporate stocks had emerged due to economic boom and establishment of textile mills.