Indian capital market

Broadly speaking the capital market is a market for financial assets

which have a long or indefinite maturity. Unlike money market
instruments the capital market instruments become mature for the period
above one year. It is an institutional arrangement to borrow and lend
money for a longer period of time. It consists of financial institutions like
IDBI, ICICI, UTI, LIC, etc. These institutions play the role of lenders in the
capital market. Business units and corporate are the borrowers in the
capital market. Capital market involves various instruments which can be
used for financial transactions. Capital market provides long term debt
and equity finance for the government and the corporate sector. Capital
market can be classified into primary and secondary markets. The
primary market is a market for new shares, where as in the secondary
market the existing securities are traded. Capital market institutions
provide rupee loans, foreign exchange loans, consultancy services and
underwriting.
Importance of capital market
Mobilization Of Saving
Capital market is an important source for mobilizing idle savings
from the economy. It mobilizes funds from people for further
investments in the productive channels of an economy. In that sense it
activate the ideal monetary resources and puts them in proper
investments.
Raising Long - Term Capital

The existence of a stock exchange enables companies to raise

permanent capital. The investors cannot commit their funds for a
permanent period but companies require funds permanently. The
stock exchange resolves this dash of interests by offering an
opportunity to investors to buy or sell their securities, while
permanent capital with the company remains unaffected.
 Capital Formation
Capital market helps in capital formation. Capital formation is net addition to the
existing stock of capital in the economy. Through mobilization of ideal resources it
generates savings; the mobilized savings are made available to various segments
such as agriculture, industry, etc. This helps in increasing capital formation
Provision of Investment Avenue
Capital market raises resources for longer periods of time. Thus it provides an
investment avenue for people who wish to invest resources for a long period of
time. It provides suitable interest rate returns also to investors. Instruments such as
bonds, equities, units of mutual funds, insurance policies, etc. definitely provides
diverse investment avenue for the public.
Speed up Economic Growth and Development
Capital market enhances production and productivity in the national economy. As
it makes funds available for long period of time, the financial requirements of
business houses are met by the capital market. It helps in research and
development. This helps in, increasing production and productivity in economy by
generation of employment and development of infrastructure
 Proper Regulation of Funds
Capital markets not only helps in fund mobilization, but it also helps
in proper allocation of these resources. It can have regulation over the
resources so that it can direct funds in a qualitative manner.
Service Provision
As an important financial set up capital market provides various
types of services. It includes long term and medium term loans to
industry, underwriting services, consultancy services, export finance,
etc. These services help the manufacturing sector in a large spectrum.
Continuous Availability of Funds
Capital market is place where the investment avenue is continuously
available for long term investment. This is a liquid market as it makes
fund available on continues basis. Both buyers and seller can easily
buy and sell securities as they are continuously available. Basically
capital market transactions are related to the stock exchanges. Thus
marketability in the capital market becomes easy.
Structure of capital market
 Technical Assistance
An important shortage faced by entrepreneurs in developing
countries is technical assistance. By offering advisory services
relating to preparation of feasibility reports, identifying growth
potential and training entrepreneurs in project management, the
financial intermediaries in capital market play an important role.
Foreign Capital
Capital markets makes possible to generate foreign capital.
Indian firms are able to generate capital funds from overseas
markets by way of bonds and other securities. Government has
liberalised Foreign Direct Investment (FDI) in the country. This not
only brings in foreign capital but also foreign technology which is
important for economic development of the country.
Money market
A money market is a market for borrowing and lending of short-
term funds. It deals in funds and financial instruments having a
maturity period of one day to one year. It is a mechanism through
which short-term funds are loaned or borrowed and through which a
large part of financial transactions of a particular country or of the
world are cleared.
It is different from stock market. It is not a single market but a
collection of markets for several instruments like call money market,
Commercial bill market etc. The Reserve Bank of India is the most
important constituent of Indian money market. Thus RBI describes
money market as the centre for dealings, mainly of a short-term
character, in monetary assets, it meets the short-term requirements of
borrowers and provides liquidity or cash to lenders.
Structure of Indian Money Market
 Importance of Money Markets
Financing Industry
A well developed money market helps the industries to secure short term
loans for meeting their working capital requirements. It thus saves a
number of industrial units from becoming sick.
Financing trade
An outward and a well knit money market system play an important role in
financing the domestic as well as international trade. The traders can get
short term finance from banks by discounting bills of exchange. The
acceptance houses and discount market help in financing foreign trade.
Profitable investment
The money market helps the commercial banks to earn profit by investing
their surplus funds in purchase of treasury bills and bills of exchange,
which are not only safe but highly liquid credit instruments. The banks can
easily convert them to cash at a short notice.
 Self sufficiency of banks
The money market is useful for commercial banks themselves. If the
commercial banks are at any time in need of funds , they can meet
their requirements by recalling their old short term loans from the
money market
Effective implementation of monetary policy
A well developed money market helps the central bank in shaping
and controlling the flow of money in the country. The central bank
mops up excess short term liquidity through sale of treasury bills and
injects liquidity by purchase of treasury bills.
Encourages economic growth
If the money market is well organized, it safeguards the liquidity
and safety of financial assets. This encourages the twin functions of
economic growth , savings and investments.
Stock Exchanges
A stock exchange is an organized market for the
purchase and sale listed securities. It is the place where
one who wants to buy a particular security may find an
immediate seller, and one who wants to sell his holdings
may find a buyer at a reasonable and fair price
provided the security has been included in the official
list of the market for purposes of trading.
The Securities Contracts Act 1956 defines a stock
exchange as an association, organization or body of
individuals whether incorporated or not, established for
the purpose of assisting, regulating, and controlling
business in buying, selling and dealing in securities.
 Functions of stock exchange
Ready Market: The stock exchange is essentially a market for existing securities.
This market is continuously available for conversion of securities into cash and
vice versa. This means increased liquidity and better marketability for securities.
A stock exchange encourages investment by providing a ready and continuous
market to investors of capital in industrial enterprises.
Evaluation of securities: A share acquires liquidity because of being traded on
the stock exchange. The stock exchanges insist that the prices at which bargains
are made are recorded and made public. These prices become market
quotations. On the basis of these quotations, every investor knows the worth of
his holdings at any one time. Any amount borrowed on the security of such shares
will also be procured on the strength of market quotations for them.
Safeguards for investors: The stock exchange protects the interests of investors
through strict enforcement of their rules and regulations. In the absence of
organized stock exchanges, The innocent investors may easily be deceived by the
clever brokers dealing in securities.
Regulation of company management: A company which wants its securities to be
quoted and traded on a stock exchange has to get it enlisted n the official
trading list of the particular stock exchange. For this, it has to follow the rules
framed by thre stock exchange in this regard
 Proper canalization of capital: It offers capital opportunities to flow
into the most profitable channels.
Agency of capital formation: Stock exchange plays a very active
part in capital formation in a country. The publicity which it provides
to the various industrial and government securities and their prices
makes even disinterested people feel interested in investment. In
other words a stock exchange creates the habit of saving, investing
and risk taking among members of general public. This habit leads
to investment of funds in corporate government securities. The funds
placed at the disposal of companies or government are utilized by
them for meeting their capital requirements. The dividend or interest
on such investments is also usually invested back in industrial
enterprises or government projects.
Facilities for speculation
METHODS OF TRADING
CHOICE OF BROKER
ENGAGING A BROKER
PLACING THE ORDER
a) At best or at the market order price
b) Fixed price or at limit order
c) Immediate or cancel order
d) Stop-loss order
e) Discretionary order
f) Open order
MAKING THE CONTRACT
PREPARATION OF CONTRACT NOTE
SETTLEMENT
a) Ready delivery contract
ROLE OF FINANCIAL INSTITUTIONS
Need for promotion services
Higher capital formation
Replacement finance
Organized capital market
Long term finance
Economic development
Finance for small business
IFCI LIMITED
Established in 1948 under Industrial Finance Corporation Act. Converted to
limited company under Companies Act 1956.From 1993 it is known as IFCI
Limited
The main objective of the Corporation is to render financial assistance to
large scale industrial corporations
It ca extend a loan of max 2cr or 10% of paid up share capital for a
maximum period of 25 years. Proper security like mortgage on company's
property, hypothecation, or assignment of shares, debentures etc is to be
taken before issuing any loan
If the corporation is called to upon to subscribe to shares underwritten by it
such shares must be disposed off within 7 years.
Main purpose is establishment of new undertakings, expansion,
modernization and rehabilitation of existing ones.
Interest is charged on the amount actually withdrawn. A commitment fee of
1% is charged on amount sanctioned but not wuthdrawn.
STATE FINANCIAL CORPORATION
State Financial Corporation Act was passed in 1951, with a
view to met the requirements of small concerns.
Under this act state government is empowered to establish a
Finance Corporation to operate within its area.
Maximum capital allowed for a corporation is 5cr.
In order to ensure there is no overlapping of the functions of
IFCI and SFC, it has been agreed that assistance up to 30
lakh would be granted only by the SFCs.
Capital of SFCs is contributed by State Governments, RBI,
Scheduled banks, Insurance corporations etc and also by
members of the public , with the provision that the members
of public cannot hold more than 28% of the shares.
 INDUSTRIAL DEVELOPMENT BANK OF
INDIA
It was set up in 1964 as a wholly owned subsidiary of the RBI under a
separate act of the Parliament.
It was assigned the role of the apex bank in the field of long term
industrial finance.
It provided both direct finance to industries and indirect finance through
other institutions
In 1976 it was delinked from RBI and its entire share capital was
transferred to the central government.
In 1990 SIDBI was established as a wholly owned subsidiary of the of
IDBI and took over the entire financing activities from relating to small
scale businesses.
In 2000 SIDBI wasdelinked from IDBI and was designated as the apex
bank in the field of financing small industries.
After ammendment of IDBI Act in 1994, IDBI was empowered to issue its
equity to the public provided the government holding would not fall
below 51%.
SIDBI
It was set up as a wholly owned subsidiary of IDBI under the SIDBI
Act of 1989 and commenced operations on 2nd April 1990 with
initial capital of 250cr and after taking over the outstanding
portfolio of IDBI relating to small scale businesses of 4200 cr
Subsequently its authorized and paid up capital was raised to
500cr and 450 cr respectively.
Its major activities are:
1. Refinance of loans and advances
2. Discounting and rediscounting of bills
3. Extension of seed capital
4. Granting direct assistance
5. Providing services like leasing and factoring