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History of Capital Markets
History of Capital Markets
Abstract
Capit a l is one o f t he import ant fact ors of produc t ion in any econo my. I n
econo my, a well organized financial syst em provides adequat e capit a l
for mat io n t hrough savings, finance and invest ment s 1. An invest ment
depends upon S avings and in t urn Savings depends upon ear nings o f a n
individual or profit s o f t he organizat ion. This syst em may be viewed as a
set of sub- syst ems wit h so many ele ment s which are int erdependent and
int er linking wit h each ot her t o produce the purposeful r esu lt wit h in t he
boundar y. Hence, t he t er m s yst em in t he cont ext of finance means a set of
co mplex and closely connect ed financial inst it ut io ns, inst rument s, agent s,
market s and so on which are int erdependent and int er linking wit h eac h
ot her t o produce t he econo mic growt h wit h in t he count r y. Transfer
process is effect ively fulfilled by t he financial syst em t o facilit at e
econo mic growt h t hrough t he channel of finance. This st udy aims at
analys ing t he st ruct ure and funct ions o f Capit a l Market in I ndia.
1
L. M. Bhole, Financial Institutions and Markets: Structure, Growth and Innovation. (New Delhi, Tata
McGraw-Hill, 2007) pp. 6-14.
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1. Introduction
St art ing fro m a co nt rolled eco no my, I ndia has mo ved t owards a wor l d
where pr ices fluct uat e ever y day. T he int roduct ion o f r isk management
inst rument s in I ndia ga ined mo ment um in t he last few years due t o
liber alisat ion process and Reser ve Bank of I ndia‟s (RBI) effort s in
creat ing currency forward market . Derivat ives are an int egr al part of
liber alisat ion process to manage r isk. NSE gauging t he market
requir ement s init iat ed t he process o f sett ing up der ivat ive market s in
India. I n July 1999, der ivat ives t rading commenced in I ndia. 2
2
Susan, Thomas (ed), Derivative Markets in India, (New Delhi, Tata McGraw-Hill 2003), p. 15
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There remain major areas o f co ncer n for Indian der ivat ive s user s. Large
gaps exist in t he range o f der ivat ives product s t hat are t raded act ively. I n
equit y der ivat ives, NSE figur es show t hat almo st 90% o f act ivit y is due t o
st ock fut ures or index fut ures, whereas t rading in opt ions is limit ed t o a
few st ocks, part ly because t hey are set t led in cash and not t he under lying
st ocks. Exchange-t raded der ivat ives based on int erest rat es and currencie s
are virt ually absent .
Objectives of study:
Research Methodology
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International Journal of Business Administration and Management. ISSN 2278-3660 Volume 7, Number 1 (2017),
© Research India Publications http://www.ripublication.com
Financia l syst em is a co mplex set up for any count y, which inc ludes
financial inst it ut ions like banks, NBFCs (No n Banking Financia l
Co mpanies), regu lat ors, product s et c. Bro adly t he I ndian Financia l S yst em
can be classified in t o t wo heads, viz, t he inst it ut ions and regulat ors in
t he filed o f banking and allied ser vices and t he inst it ut ion and regulat ors
in t he filed o f financial mar ket . Banking sect or inst it ut ions include
Reser ve Bank o f I ndia, Pubic Sect or Banks, Pr ivat e Sect or Banks, Co -
operat ive Banks, and Foreign Banks. NBFCs and organizat ions like LI C,
GIC et c also play a major ro le in t he financial syst em. Ther e are many
nat ional level organizat ions like ICICI, IDBI, IF CI et c and st at e level
organizat io ns like St at e Financial Corporat io ns (S FCc) provide lo ng t er m
finance t o t he require ment s of indust r y. Specialized organizat ions like
NABARD, EXIM Bank et c also jo in in providing lo ng t er m as well short
t erm finance t o spe cific sect or of indust ry. 3 Financia l Market co nst it ut es
t he next major co mponent of t he financial syst em. Financia l market can be
classified in t o money market and capit al market .
Money market is t he market for financial inst rument s having a life o f less
t han one year. Money market includes Tr easur y Bills, Co mmer cial P aper,
Cert ificat e o f Deposit and Call Money. Pr imar y Market and Secondar y
Market const it ut es t he secondar y market . Pr imar y market , which is also
called IPO market is t he market for rais ing ow ner‟s equit y and fr es h
shares ar e issued in t he pr imar y market . The issued shares are t raded in
t he secondar y market or stock exchange. NSE (Nat io nal St ock Exchange)
and BSE (Bo mbay St ock Exchange) are t he t wo major st ock exchanges in
India for t rading in financia l inst rument s. Screen based t rading and
co mpet it io n killed major it y o f o ld exchanges in I ndia and now major share
of t rading vo lume is co nt r ibut ed by NSE and BSE.
3
U. R. Bhat, ‘The Market Needs A Make Over’, The Economic Times, (December 13 2004), 8
186
International Journal of Business Administration and Management. ISSN 2278-3660 Volume 7, Number 1 (2017),
© Research India Publications http://www.ripublication.com
Capit a l is one o f t he import ant fact ors of product ion in any econo my. I n
econo my, a well organized financial syst em provides adequat e capit a l
for mat io n t hrough savings, finance and invest ment s 4. An invest ment
depends upon S avings and in t urn Savings depends upon ear nings o f a n
individual or profit s o f t he organizat ion. This syst em may be v iewed as a
set of sub- syst ems wit h so many ele ment s which are int erdependent and
int er linking wit h each ot her t o produce the purposeful r esu lt wit h in t he
boundar y. Hence, t he t er m s yst em in t he cont ext of finance means a set of
co mplex and closely connect ed financial inst it ut io ns, inst rument s, agent s,
market s and so on which are int erdependent and int er linking wit h eac h
ot her t o produce t he econo mic growt h wit h in t he count r y. Transfer
process is effect ively fulfilled by t he financial syst em t o facilit at e
econo mic growt h t hrough t he channel o f finance.
187
International Journal of Business Administration and Management. ISSN 2278-3660 Volume 7, Number 1 (2017),
© Research India Publications http://www.ripublication.com
purview of regulat ing aut hor it ies namely Reser ve Bank of India,
Secur it ies Exchange Board of I ndia, Companies Act , Secur it ies Co nt ract
(Regulat io n) Act and so on. Whereas unorganized financial inst it ut ions
are not cover under t he pur view o f t hese regulat ing aut hor it ies, such t ype
of inst it ut ions are called local mo ney len ders, pawn brokers et c. Our st udy
is ma inly focusing on for mal or organized financial int er mediar ies‟ only. 5
These financial int er mediar ies plays vit al role in t he capit al for mat ion by
means of mo biliz ing savings and facilit at ing t he allocat io n of funds in an
effect ive manner. T hese int er mediar ies provide t he convenience t o t he
small invest or s by mo bilizing t heir savings in t he for m o f divisibilit y and
dist r ibut e t he claims at t he t ime o f mat ur it y or redempt io n.
Financial inst rument s can be cat egor ized int o var io us part s namel y
equit y shares, prefer ence shares, debt inst rument s and var io us
co mbinat io ns o f t hese, t ime deposit s, Mut ual Funds and insurance po lices,
fut ures, opt ions et c.
A financ ial asset /Inst rument /secur it y is a claim against anot her econo mic
unit and is held as a st ore of value and for t he ret u r n t hat is expect ed 6.
While t he value o f a t angible/phys ica l asset depends on it s physical
propert ies such as buildings, machines, furnit ur e's, vehicles and so on, a
financial asset represent s a cla im t o fut ure cash flows in t he for m o f
int erest , dividends and so on. T hey are a claim o n a st ream o f inco me
5
Ajit Singh, ‘Financial Liberalization, Stock Markets and Economic Development.’ The Economic Journal, vol.
107 (May 1997), pp. 607-12.
6
Bimal, Jalan,, ‘Finance and Development’, RBI bulletin, (June 2000), pp. 29-45
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and/or part icular asset s.. The ent it y/econo mic unit t hat offer t he fut ure
cash flows are t he issuer o f t he financ ial inst rument ‟ and t he owner o f t he
secur it y is t he invest or‟.
Depend ing upon t he nat ure of claim/ret urn, an inst rument may be
Based o n t he t ype o f issuer, t he secur it y may be (1) direct (2) indir ect
and (3) der ivat ive. T he secur it ies issued by manufact ur ing co mpanies are
direct asset s (e.g. shares/debent ures). I ndirect asset s are cla ims against
financial int er mediar ies (e.g. unit s o f mut ual funds). The der ivat ive
inst rument s include opt ions and fu t ures. The prevalence of a var iet y o f
secur it ies t o suit t he invest ment requirement s o f het erogeneous invest ors
offer s different iat ed invest ment cho ice t o t hem and is an import ant
element in t he mat ur it y and sophist icat io n of t he financia l syst em.
Financial ser vices have been growing rapidly wit h t he emergence o f new
invest ment flows in financial r econst it ute a large and growing sect or in
almost all eco no mies. Trade and invest ment flows in financia l ser vices
have been growing r ap idly wit h t he emergence o f new and growing
market s in developing and t ransit io n econo mies, wit h moder nizat ion,
rapid t echno logical change, use o f new financ ial inst rument s, and
financial and t rade liber alizat ion 7. The financial ser vices sect or is also
quit e large and co mplex and covers a wide range o f act ivit ies and
inst rument s, inc luding for inst ance, corporat e banking, der ivat ives,
fact oring, foreign exchange t rading, pensio ns and invest ment fund
management , advisor y and consult ancy ser vices, insurance br oking and
7
Bharati, Pathak, Indian Financial Systems, (Delhi, Pearson Education, 2006), pp. 4-5.
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underwr it ing, pro ject finance, secur it ies t rading, vent ure capit al, and
who lesale and ret ail banking ser vices. Given t he range o f inst rument s and
act ivit ies t hat fall under t he pur view o f t he financ ial ser vices sect or, t here
are also a large numb er o f player s.
The main act ivit ies o f Financia l Market s can be viewed as sale or
purchase o f shares or st ocks, bonds, bills o f exchange, co mmodit ies,
fut ure and opt ions, foreign currenc y et c. Financia l market can be broadl y
classified int o ( i) Mo ney market ( ii) Capit al market .
v. Money Market
The Mone y Market refer s t o t he market for short t er m debt inst rument
which has mat ur it y less t han o ne year. The Money Market provides t he
borrower t o borrow t he funds for short er per iod wit h lowest cost of funds.
At t he same t ime it also facilit at es to t he invest or a plat for m t o invest his
savings which can generat e int erest t hereon. Money Market s does not
have an organised t rading market place such as t he st ock exchange for it s
pr imar y issue and seco ndar y market t rades. The part ic ipant s in t he mo ne y
market are banks, pr imar y dealers, and financial inst it ut ions, mut ua l
funds, and no n- bank financial co mpanies, manufact ur ing co mpanies, St at e
Gover nment s, provident funds, no n-resid ent Indians, overseas corporat e
8
Bharati, Pathak, Indian Financial Systems, (Delhi, Pearson Education, 2008), pp. 42-45.
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bodies, foreign inst it ut ional invest ors and t rust s. The RBI and S ecur it ies
and Exchange Board of India (SEBI) regulat e t he part icipant s and use of
inst rument s in t he mo ney market depending upon t heir respect ive ro les in
t he financial syst em 9. For inst ance, financial inst it ut ions and mut ual funds
are allowed only as lend er s in t he call money market but are per mit t ed t o
buy and se ll Co mmer cial Paper.
9
Ibid
10
Bharati, Pathak, Indian Financial Systems, (Delhi, Pearson Education, 2008), pp. 42-45.
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iii. Encou ragement to Invest ment: The capit al market facilit at es lending
to t he businessmen and t he gover nment and t hus encourages invest ment . It
provides facilit ies t hrough banks and nonbank financial inst it ut io ns.
Var ious financ ial asset s, e.g., shares, secur it ies, bonds, et c., induce saver s
to lend t o t he gover nment or invest in indust r y. Wit h t he develop ment of
financial inst it ut io ns, capit al beco mes mo re mobile, int erest rat e falls and
invest ment increases.
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4. Conclusion
5. References
1. Ajit S ingh, „Financial Liber alizat ion, St ock Market s and Econo mic
Develo pment .‟ T he Econo mic Jour nal, vo l. 107 (May 1997), pp. 607 -
12.
193
International Journal of Business Administration and Management. ISSN 2278-3660 Volume 7, Number 1 (2017),
© Research India Publications http://www.ripublication.com
4. Bimal, Jalan,, „Finance and Development ‟, RBI bullet in, ( June 2000),
pp. 29-45.
7. Gaut ham, Kaushik, “Der ivat ives – Ris k Management Tool”, Capital
Market, ICFAI, 3-16 May 2008.
8. Graham S mit h, “St ock Index Fut ures Trading and Vo lat ilit y in
Int ernat ional Equit y Market s”, Journal of Futures Market s, Vo l.20,
2003, pp. 661-685.
9. L. M. Bho le, Financia l I nst it ut ions and Market s: St ruct ure, Growt h
and Inno vat io n. (New Delhi, Tat a McGraw -Hill, 2007) pp. 6-14.
10. L. M. Bho le, Financia l I nst it ut ions and Market s: St ruct ure, Growt h
and Inno vat io n. (New Delhi, Tat a McGr aw-Hill, 2007) pp. 6-14.
11. Susan, T ho mas (ed), Der ivat ive Market s in I nd ia, (New Delhi, Tat a
McGraw-Hill 2003), p. 15
12. U. R. Bhat , „The Market Needs A Make Over‟, The Econo mic T imes,
(December 13 2004), p. 8
194