capital mrkt

8/4/2019 Capital Mrkt

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Session 3Part II The Economic Markets

Topic 3 -The Capital Market & its Variability

20thJanuary, 2011.


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Contents:

Concept of Capital Market

Structure of Capital Market

Role of Capital Market in Indias Industrial Growth

Factors Contributing to the Growth of Capital Market

in India

Problems of Indian Capital Market: The Pre-ReformPhase

Strengthening The Capital Market: The Post-Reform

Phase


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Introduction

For starting any Business, an entrepreneur needs investments inthe form of capital.

Depending on the size of the project, the amount of capitalvaries.

Entrepreneur cannot go for investing his own money in thebusiness, so he has to go for borrowing.Borrowing has many problem such as paying interest monthly,that too if it is a long term project, he wont be able to giveinterest regularly.

Paying Interest has some advantage over taxation.

Banks/Financial Institution may demand a security for theirloans in the form of collaterals, the promoter may choose toraise the capital by issuing shares to public making them aoffering on future.


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Concept of Capital Market

Capital is often defined as wealth used in the productionof further wealth.

Capital Marketing is defined as the process of increasing

the major part of financial capital required for starting a

business through issue of shares topublic.

The issue may be Shares, Debentures , Bonds etc.

It comprises the money and the money value invested in a

business unit.

Market for long-term capital. Demand comes from the

industrial, service sector and government.

Supply comes from individuals, corporate, banks,

financial institutions, etc.


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Structure of the Capital Market

Capital Market is divided into two constituents:

Gilt-Edged market

Corporate Securities Market (new issues and stockmarket)


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Contd.,

A. Gilt-Edged marketThe gilt-edged market (of the best quality) is the market in

government securities or the securities guaranteed by the

government.

1. It is risk free market & returns are guaranteed.2. The government securities market consists of two parts-

New Issues Market

Stock Market

3. RBI plays a dominant role in the government securities market.In fact its position is that of a monopolist. In other countries likeUSA & UK The Central Bank of the country is not the sole dealerin government securities.


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Contd.,4.The investors in the gilt-edged market are predominantly

institutions like LIC, Provident funds & Commercial banks which

are required statutorily to invest a certain portion of their funds in

government securities.

5. Government securities are the most liquid debt instruments.6.The transactions in the government securities market are very

large and each transaction may run into several crores of rupees.


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Contd.,

B. Corporate Securities Market

Corporate securities market is a market where securities issued by

firms (i.e. shares, bonds and debentures) can be bought and sold

freely. It consists of :

I. The New Issues Market(the primary market) - refers to raising of

new capital in the form of shares and debentures.

The Public Ltd. Companies often raise funds through the primary

market.

The various methods of capital raising can be done through-

By Prospectus invitation to the general public for subscribing

to the capital.

By offer for sale Initially shares are taken by a third party in

bulk.


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Contd.,

By private placingshares are directly sold to individualsor institutions directly by making a private appeal to them.

By offering rights issueCompanies may also raise capitalfrom the existing shareholders by making a rights issue. The

shareholders have the right to a certain number of shares in

proportion to the shares held by them.


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Contd.,

II. The Stock Exchange (the secondary market) highly organized market for the purchase and sale of second-

hand quoted or listed securities.

Deals in old issues of government loans & operates largelythrough few large stockbrokers.

The Securities Contracts (Regulation) Act, 1956 defines a stock

exchange as an association, organisation or body of

individuals, whether incorporated or not, established for thepurpose of assisting, regulating and controlling business in

buying, selling and dealing in securities.


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Role of Capital Market in Indias Industrial

Growth

1. For Financing Five Year Plans

2. Mobilisation of saving and acceleration of capital

formation.

3. Promotion of industrial growth

4. Raising long-term capital

5. Ready and continuous market

6. Proper channelisation of funds

7. Provision of a variety of services


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Factors Contributing to the Growth of Capital

Market in India

Establishment of development banks and industrial

financing institutions (IFCI1948, ICICI1955, IDBI1964, IRCI1971, SFCs at state level, UTI 1964, LIC, 14

commercial banks nationalised in 1969, another 6 banks in1980)

Legislative measuresThe Companies Act passed in 1956,The Capital Issues (Control)Act was passed in 1947 to regulate

investment in different enterprises & to prevent diversion offunds to non-essential activities.

Growth of underwriting businessdue to the efforts of thepublic financial institutions & the commercial banks.


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Contd.,

Growing public confidencepreference towards shares &

debentures, investment in gilt-edged market which is risk free.

Increasing awareness of investment opportunitiesthroughbusiness newspapers & financial journals awareness is beingcreated for long-term investment opportunities.

Setting up of SEBIset up in 1988 got recognition in 1992,exist to facilitate mobilisation of adequate resources throughthe securities market 7 its efficient allocation.

Mutual FundsIn 1997-98 34 mutual funds (including UTI ).Out of these 9 were public sector & 25 in the private sector.

UTI contributes around 7685% of total resourcemobilisation.

Credit rating agenciesThey are CRISIL1988, ICRA1991,CARE1993 who provides guidance to the investors & creditrisk associated with a debt instruments.


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Problems of Indian Capital Market: The Pre-Reform Phase

Problems of the Equity Market

1. Bombay Stock Exchange (BSE) was a monopoly in 1992.It was an association of brokers & imposed entry barrierswhich led to increased costs of intermediation.

2. Trading was inaccessible to users, brokers to charge theinvestor a much higher price from that actually traded at.

3. No price-time priority, trade was not executed at he bestpossible price.

4. Variety of manipulative practices prevailed, no strictactions against errant brokers.

5. Lack of discipline in the trading of fortnightly settlement.

6. Lack of efficiency in exchange clearing house.


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Contd.,

Problems of the Debt Market

In 1992 personal & political influences impacted upon trade prices.

The problem of credit risk.

The debt market relied on dealers , obtaining best price, owing tothe absence of price-time priority.

The debt market effectively restricted to Mumbai.

Trade prices were not centrally reported and observed.

Serious problems with the settlement of traders. The RBI tracksownership of government securities in a database called the SGL(Subsidiary General Ledger)

Participants faced the risk of an SGL bouncing. Suppose A soldto B & then B sold to C. When B sent the change of title to SGL,there was a risk that this request would bounce if the first trade hadnot yet taken effect.(B buying from A)

Delay in settlements.


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Strengthening the Capital Market: ThePost-Reform Phase

The auction system for the sale of medium & long-term

securities was introduced June3, 1992.

Treasury Bills were being introduced from April 1992 onwards.

The Government of India set up the Securities TradingCorporation of India (STCI) in June 1994 to develop a

institutional structure for secondary markets.

A proper system of Primary Dealers was established in March

1995. The new scheme of Ways and Means Advance (WMA).

The Delivery versus Payment System(D v/s P) was introduced in

1995 for the settlement of transactions in government securities.


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Contd.,

The Negotiated Dealing System (NDS) was operationalised in

February 2002 to enable on-line electronic bidding facility

auctions of Central/State government securities.

Transparency of operations and data dissemination.

The practice of pre-announcing a calendar of treasury bills and

government securities auctions to be the markets introduced.

Foreign institutional investors were allowed to set up 100% debt

funds to invest in government dated securities in both primaryand secondary markets.

Retail trading in government securities at select stock exchanges

commenced in January 2003.


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THANK YOU

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