CAPITAL MARKET AND

INSTITUTIONAL FINANCING
Dr. Sajal Jana
Assistant Professor
Dinabandhu Andrews College
Kolkata

INDIAN
ECONOMY II
Paper – 2
Unit -1
Module - 12
The objective of the Present module is to discuss the following
topics.
Structure of Capital Market in India
Role of Capital Market to achieve Industrial Growth in India
Classification of Development Financial Institutions (DFI)
Operations of All India Development Financial Institutions
Measures to strength Capital Market during Post Reform Period
SEBI & Capital Market Growth
 What is Financial Market?

• Financial market collectively refers to all those organisations and Institutions

which lend fund to the business enterprises and public authorities. The business
units can raise capital from issue of securities and borrowings (long term and short
term).
• Major borrowers of funds Business units, Public Corporations and governments
(the Central government, the state and local governments)
• The lenders of funds the household sector, the Institutional Investors, Banks
and Special Industrial Financing Institutions
• A Financial market consists of both money market and capital market. The money
market deals with provision of short-term credit and the capital market deals in
the lending and borrowing of medium term and long-term credit.
 INDIRECT FINANCE
Flow of Funds through Financial System

Financial
FUNDS FUNDS
Intermediaries

FUNDS
Lender-Service Borrower-Spenders
1. Households Financial 1. Business firms
FUNDS FUNDS
2. Business firms Markets 2. Government
3. Government 3. Households
4. Foreigners 4. Foreigners

DIRECT FINANCE
 Meaning of Capital in Economics
• It is well known that money is invested into a business, or in
land, building, machinery or equipment which is used by an
entrepreneur in production. All these resources together
constitute capital. Money invested in a capital unit is called
capital. In economics, capital is described as a wealth that
produces further wealth.
• As a nation grows, it requires a systematic growth and
structure of different financial Institutions which can pool
capital resources and further lend them to business
enterprises and governments. By financial capital we mean
securities including equities or shares, bonds, currencies and
derivatives.
Structure of Capital
Market in India
Participants in the Capital Market
• The issuer of securities generally the corporate sector
• The investors in securities retail investors (Indian public), mutual funds, foreign
institutional investors (FIIs), financial institutions (LIC, GIC, IDBI, and IFCI) & Banks
• The intermediaries provide various services in the Indian securities market.
• Broadly, the capital market is divided into two constituents:
 Security market
 Development financial institutions (DFIs)
 Capital Market Classification
Capital Market

Development Financial
Security Market
Institutions

All-India DFIs
Gilt Edged
Security Market
Market
Specialized FIs

Primary Market Investment

Or Institutions
New Issue Market
Refinance
Institutions
Secondary Market
Or State Level
Stock Market Institutions
Security Market
 Gilt-edged market
 Corporate security market.
 
Gilt-Edged
Market
 It is also called government security market. A government
security is a tradable instrument issued by the Central
Government or the State Governments.
 A government security will be money market instrument if it is
of short-term nature (usually called treasury bills, with original
maturities of less than 1 year). It will be a capital market
instrument if it is of longer duration (usually called government
bonds or dated securities with original maturity of 1 year or
more).
 Since the government cannot default on its payment obligation,
government securities carry practically no risk of default and,
hence, are called risk-free gilt-edged instruments.
 Corporate Security Market
• The market where securities of
corporate firms(shares, debentures,
and bonds) are bought and sold. The
corporate securities are traded both in
primary as well as secondary market.
 Secondary Market or Stock Exchange

• Secondary market is a financial market where previously traded

financial instruments such as shares, debentures, bonds, options,
and future are bought and sold. The importance of secondary
market lies in the fact that it provides exit route to the investors.
• Secondary market provides marketability to securities that
encourages savers to take risk and make investment in the
existing securities.
• The secondary market thus channelizes the savings of households
which become available to public and private corporate houses
that stimulates country’s gross domestic product (GDP).
 The New Issue Market (Primary Market)
Companies sell new stocks and bonds to the public for the first time, such as with an initial public offering (IPO).

• Methods of raising Capital in the new issue market

By Prospectus: The prospectus is an invitation to the general public for subscribing the capital.
The prospectus contains a brief summary of the company’s financial information viz. company’s
profile, its financial position, number of shares, etc.
By Offer for Sale: The shares are sold to third parties (mainly the merchant banks) in the bulk
who further issue such shares to the public. This method is considered safe by the companies as
they already receive money from the third party.
By Private Placing: The shares are sold to individuals or institutions directly by making a private
appeal to them. The method is cost-saving as compared to the other methods as it does not
involve issuing the prospectus to the investors.
By Offering Rights Issue: A rights issue is an issue of rights to a company’s existing shareholders
that enables them to buy additional shares directly from the company in proportion to their
existing holdings. Under this, the shares are sold to them at a discount to the current market
price.
 Role of Capital Market to achieve
Industrial Growth in India

Mobilisation of Savings and Capital formation. In capital market, various types of

securities mobilise savings from different sections of the population. The reasonable
return as well as liquidity in stock exchange are definite incentives to the people to
invest in securities which in turn promotes the capital formation in the country.
Achievement of Industrial growth. The existence of capital market encourages
people to invest in productive channels which stimulated industrial growth and
economic development of a country.
Raising long term Capital. The stock exchange market offers an opportunity to
investors to buy or sell their securities and enables the companies to raise permanent
capital.
Proper Channelisation of funds. The prevailing market price of a security and relative
yield guide the people regarding their choice of investment in a particular company.
 Development Financial Structure of DFI
Institutions
• An (DFI) or assisted
institution promoted by DFIs comprise
government mainly to provide development
finance to one or more sectors or sub-sectors of • All India DFIs
the economy. • Specialized financial institutions,
• Apart from provision of long-term loans, equity • Investment institutions
capital, guarantees and underwriting functions,
Development bank normally is also expected to • Refinance institutions
upgrade the managerial and the other
• State-level Institutions and other Financial
operational pre-requisites of the assisted
projects. Institutions
 All-India Development Finance Institutions
Industrial Finance Corporation of India Ltd(IFCI), Industrial Development Bank of
India (IDBI), Small industries development bank of India(SIDBI) and industrial
Investment Bank of India(IIBI).

IDBI was converted into a bank on 2004. ICICI Ltd. has merged with ICICI bank
from March30,2002.

 The Industrial Investment Bank of India (IIBI) established in 1971 to revive the
sick industrial units was closed down in 2012.

Specialized Financial
Institutions
Specialized financial institutions provide long-term funds for
specialized services such as infrastructure, trade, or venture capital
besides provision of technical and managerial advice.
ICICI venture fund, IFCI venture capital fund, Tourism Finance
Corporation of India Ltd, Infrastructure Development Finance
Corporation, and EXIM bank.
 Investment Institutions

• Investment institutions in India mobilize savings of the people, invest them in the
capital market, and distribute the return to such small investors. The advantages
of investment institutions are diversified portfolio or pooling of risks, professional
management, and high degree of liquidity.
• Government established the Unit Trust of India (UTI) in 1964 so as to mobilize the
small savings of millions of Indian households. The flagship scheme of UTI,
popularly known as US-64 was the first scheme in India to channel public savings
into non deposit instruments like equity and corporate debt.
• Life Insurance Corporation (LIC) was set up in 1956 and provides assistance in
term loans, underwriting and direct subscription of equity and debentures, and
resource support to financial institutions.
• General Insurance Corporation (GIC) of India was set up in 1972 and had four
subsidiaries, namely (1) National Insurance Company Ltd, (2) New India Assurance
Ltd, (3) Oriental Insurance company Ltd, and (4) United India Insurance Company
Ltd. The ownership of the four erstwhile subsidiary companies and also of the
General Insurance Corporation of India has been vested with Government of
India.
Refinance Institutions

• Refinancing institutions provide loans to other

institutions who ultimately give loans to the end
customers. National Housing Bank (NHB) and National
Bank for Agriculture and Rural Development (NABARD)
are the example of refinance institutions.
• NHB was established in 1987 with headquarter at New
Delhi. It refinances those banks who give home loans.
• Similarly, NABARD established in 1982 is another
refinancing institution in the field of agricultural credit.
 State-Level
Institutions

State Financial Corporation (SFCs): State Industrial Development Corporation (SIDC):

 The SFCs have been set up to extend long term
 (SIDCs) were set up in different states to accelerate the pace of
industrial development in the country.
finance to small and medium scale industrial
undertakings organised as Public or private They promote industrialization in several ways –
companies, cooperatives, partnerships or  availability of loans on soft terms
proprietary concerns.  allotment of industrial plot/shed in one of the industrial estates or
 The first State Financial Corporation (SFC) was setindustrial parks developed by the state-level corporation;
up in Punjab in 1953. At present, there are 18 SFCs  technical assistance for the preparation of project reports
in the country.
 availability of special incentives provided by the respective state
governments for setting up of industries
 Operations performed by All India Development Financial
Institutions
Industrial Finance Corporation of India Ltd (IFCI)
• IFCI established in 1948 was the first all India DFI in the country with the objective to provide medium and
long-term loan to the industry.
• IFCI was converted into public limited company in July 1,1993 and since then known as Industrial Finance
Corporation of India Ltd.

Functions of IFCI
The IFCI grants financial assistance in the following forms.
• Granting loans or advances both in Rupees and foreign currencies
repayable within 25 years
• Guaranteeing rupee loans floated in the open market by industrial
concerns
• Underwriting of shares & debentures of industrial concerns
• Guaranteeing foreign currency loans raised from financial Institutions
• Guaranteeing Rupee loans raised from scheduled banks or state
Cooperative banks by industrial concerns
 The Industrial development Bank of India (IDBI)
•The IDBI was initially set up as a wholly owned subsidiary of the Reserve Bank of India. In

February 1976 the IDBI was made an autonomous Institution and its ownership was

transferred from the Reserve Bank of India to the Government of India. The IDBI was

designated as the apex Institution in the field of development financing.

•Firstly, it provided refinance against loans granted to industrial concerns by other

development finance institutions like the IFCI, the SFCs and so on and rediscounted their

machinery bills.
•Secondly, it subscribed to the share capital and bond issues of the IFCI, the SFCs and the

IIBI( Industrial Investment Bank of India). Apart from these functions, the IDBI played the

role of a coordinator at all-India level.

•The main sources of the financial resources of the IDBI were share capital, reserves, bonds
and debenture issues, deposits from companies, certificates of deposits and borrowings
from Reseve Bank of India and the Govt. of India.
 The Industrial Investment Bank of India
mall Industrial Development Bank of India:
• Established in 1990 with headquarter at
Lucknow.
• The main objective of SIDBI is to provide
refinance facilities, short-term lending to
industries and serves as the principal
financial institution in the Micro, Small and
Medium Enterprises (MSME) sector.
• Industrial Reconstruction Corporation of India (IRCI)
was set up in 1971 to provide financial assistance as
well as technical assistance to industrially sick units.
• The government converted the IRCI into a statutory
corporation to be called the Industrial Reconstruction
Bank of India (IRBI) by issuing a notification in 1985.
• IRBI was reconstituted into a new full-fledged all-
purpose development financial Institution in 1997 with
adequate operational flexibility and functional
autonomy. The entire assets and liabilities of IRBI have
been transferred to this new company popularly known
as Industrial Investment Bank of India (IIBI).
 Measures to strength Capital Market during Post Reform Period
 The Government of India set up the securities Trading cooperation of India (STCI) to develop institutional
structure to create a vibrant secondary market for government securities.
 The auction system for sale of Govt. of India medium- and long-term securities was introduced from June3,
1992.
 The negotiated Dealing system (NDS) was operationalised in February 2002 to enable online electronic bidding
facility in the primary auctions of central/ state government securities.
 Foreign Institutional investors were allowed to set up 100 percent debt fund to invest in government dated
securities in both primary & secondary markets.
 The Securities and Exchange Board of India(SEBI) set up in 1988 was given statutory recognition in 1992 on
recommendation of the Narasimham Committee to facilitate mobilization of adequate resources through the
security market and its efficient allocation.
 National Securities clearing Corporation Limited, NSCCL, a wholly owned subsidiary of National Stock
Exchange(NSE) was established in 1996 for clearing and settlement of all trades executed on NSE and deposit
and collateral management functions.
 The Bombay stock exchange (BSE) is the Asia’s Oldest and India’s first stock exchange was established in 1875.
The reforms in BSE include introduction of rolling settlement, corporatization of BSE, Demat trading and
launching of new indices and developing as market for derivatives and future.
 Securities and Exchange Board of India (SEBI)
The SEBI was established in 1988 and was provided statutory powers in 1992
as per provisions of the SEBI Act, 1992.

Following are the functions of SEBI


Regulating the business in stock exchanges and any other securities markets


Registering and regulating the working of stock brokers, sub-brokers, share transfer agents,

merchant bankers, underwriters, portfolio managers, investment advisers


Registering and regulating the working of the depositories, custodians of securities, foreign

institutional investors, credit rating agencies


Registering and regulating the working of venture capital funds and mutual funds


Promoting and regulating self-regulatory organizations


Prohibiting fraudulent and unfair trade practices relating to securities markets


Promoting investors’ education and training of intermediaries of securities markets
Thank You