Capital market is the life blood of any economy through which the savings of the society are channelised for industrial, commercial and public enterprises. Efficient capital market is an essential pre-requisite for economic development of a country.
However, the development of capital market is dependent upon certain key factors like availability of savings, proper organisation of intermediary of mutual interests, regulation of investments etc.
Of late, there has been a significant development in the Indian capital market both dimensionally and directionally.
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For the mobilisation of resources both for the public and private sector, capital market in India has assumed great importance.
With the economic environment becoming more competitive and market-oriented, capita market has assumed a critical role. Indian capital market has undergone a sea change over the last three years.
During the year, market continued to respond to increased demands for transparency, improvement in speed and efficiency of operations and sharp growth in activity levels.
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Flow of domestic funds to the capital market has increased considerably. Over Rs. 21,855 crores were raised through primary issues in 1993-94 as compared with Rs. 18,685 crore in 1992-93 and Rs. 5,562 crore in 1991-92. Excellent corporate results and liberalisation policies have contributed to the upward trend in the capital market.
Like the commodity market the capital market has got two components: (i) The supply of capital and (ii) the demand for capital. The supply of capital comes through savings and the demand for capital comes from investment.
The money market deals with short-term financial assets that are close substitutes of money while the capital market deals with long-term finance.
The capital market provides for long-term resources needed for investment purposes while the short term money market is expected to look after the working capital needs.
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Though theoretically a distinction is drawn between money market and capital market, in real life situation there is practically little difference between the two. The same financial institution, for example a commercial bank, operates in the money market as well as in the capital market.
Capital market is a wider concept which encompasses many financial services. The Stock Exchange is perhaps its most basic constituent. It has its own distinct features. It attracts and allures the investor, the speculator and the gambler.
The productive efficiency of an economy is governed to a large extent by the effective mobilisation and distribution of savings into the most productive channels of investment.
In this connection an efficient stock market is pre-requisite to the economic development and without it the economy lacks the ability to mobilise financial resources needed for investment activity.
The Indian capital market includes both organised and unorganised sectors. The unorganised sector mainly includes the indigenous bankers and moneylenders while the organised sectors consist of banking system, stock market and term lending institutions.
The Indian capital market has been a very vibrant (and growing market. It is one of the leading capital markets in the developing countries. We have the second largest number (6500) of listed companies in the world, next only to USA.
We have the largest number of exchanges in any country—21 stock exchanges. We have 15 million investors. And in the decade of the 80s, the amounts raised from the Indian capital market went up from Rs. 200 crore a year to Rs. 10,000 crore a year.
Stock exchange is closely linked with company finance and public finance under capitalism. It not only serves the financial ends of the government but also performs many economic functions without which the companies cannot function or develop.
Finance can be regarded as the lubricating oil of the process of economic development. When finance becomes available, the process of industrial development leading to new investment opportunities is initiated. Availability of funds encourages entrepreneurs to expand their horizon of conceivable opportunities.
It also attracts new entrepreneurs who may have brilliant business ideas but are inhibited for lack of capital. Ensuring availability of finance is all the more important in the case of developing countries where the technocrats and persons with novel business ideas cannot start their own ventures because they lack financial resources.
Therefore, the need for pooling together of financial resources and technical knowhow in the context of rapid industrial development can hardly be over-emphasised.
After the abolition of the managing agency system in 1970, the importance for capital market in India was strongly underlined. Since then more importance has been given to strengthen the capital market in India.
The spectacular development of the capital market in India during the last decade is evidenced by the steady growth in the quantum of fresh capital raised, as already brought out. This testifies to inherent strength and ability to adapt the capital market to the emerging needs and challenges.
The firm trend in the market is attributable mainly to the institutional support, i.e., the floatation of specially designed companies in the form of trusts under the aegis of all India Financial Institutions like the development banks, commercial banks and investment agencies in the public sector for financing, promoting and developing industries in the country by their active participation in the market with their funds mobilised from savings of the community.
In spite of capital constraints, there has been massive growth of business and trade worldwide. Various methods have been used to tap the scarce capital. After own capital and loan capital, a new form of capital known as lease capital has emerged in the capital market.
Lease capital has an edge over the borrowed capital in various respects like taxation, assurance of cent per cent capital etc.
Recent years have witnessed tremendous growth in the leasing operations in India. Presently, there are more than 350 leasing companies in the country doing business worth more than Rs. 1,000 crore.
Capital market operations such as mega issues, venture capital, and lease finance and mutual funds are the new trends.
The importance of bank deposits is declining and mutual funds and corporate securities have become more popular. The buoyancy in the capital market is impressive; hence money is coming from bullion and commodity market to the share market.
In recent years, our capital market and money market have undergone various changes. The markets are broadened and widened through the new policies followed by the Government and the Reserve Bank of India.
Thus, Indian capital market has experienced remarkable changes. The economic growth, investing habits and life style have provided greater opportunities to Indian capital market.
The powerhouse for generating resources for the economic growth is the pool of domestic savings. From the figure of Rs. 9,900 crore in 1984, quantum of capital rose to Rs. 35,000 crore in 1988.
During the nineties, merchant banking subsidiary of commercial banks—State Bank of India (SBI), Bank of India, etc. for example gave new dimensions to Indian capital market. Now Indian capital market has made a new history by starting attractive investment avenues by tapping the growing number of foreign investors and NRIs.
Major developments in the capital market during 1989 include spectacular rise in the resources mobilised through the primary market and rapid expansion in the secondary market.
With the introduction of venture capital financing and mutual funds scheme the scope of the business in the capital market has been widened.
The establishment of the Securities and Exchange Board of India in April, 1988 was to promote an orderly and healthy growth of securities market and to protect the investors’ interest.
The emerging trends indicate that the Indian capital market has developed remarkably during the last few decades.
What is urgently needed is the implementation of the investors’ protection particularly against the mismanagement of Indian companies and the malpractices prevailing in the market. To combat these evil practices, there is need to create and implement a “code of conduct” for all companies listed in the stock exchange in the country.
The Unit Trust of India (UTI) is an important constituent of the capital market of India. The UTI was established in 1964 in the public sector as one of the largest financial intermediaries, primarily to mobilise savings from common man, and invest them into the securities of the corporate sector.
It has played an active and dynamic role in mobilisation of savings and promoting the growth of the capital market by investing in various types of securities in a manner which offers to the individual investor’s advantages of a reasonable return on their savings and expert management of the investment.
Presently the UTI has its command over Rs. 10,000 crore as investible funds and the number of companies in which it has made investments exceeds 1,000. Its growth has been phenomenal and achievements impressive. It has contributed to the growth of the capital market and helped control speculation on stock exchange.