In contrast to the money market, which deals in short-term funds, the Indian capital market deals in long-term loanable funds. It refers to the borrowing and lending facilities and institutional arrangements for ‘term funds,’ medium-term, and long-term funds. In general, industries employ capital market loans primarily for fixed investment. It is not concerned with capital products, but rather with raising money capital for investment purposes.
CLASSIFICATION
The following institutions make up India’s capital market (i.e., they supply the majority of funds to the capital markets); Commercial banks; insurance companies (LIC and GIC); specialised financial institutions (IFCI, IDBI, ICICI, SIDCS, SFCS, UTI, and others); provident fund societies; merchant banking agencies; credit guarantee corporations Individuals who invest in stocks on their own are also fund suppliers to the capital market.
As with all markets, the capital market is made up of individuals who seek funds (borrowers) and those who supply funds (sellers) (lenders). An ideal capital market tempts to give sufficient cash at a suitable rate of return for every commercial or industrial initiative that promises a high enough return to make borrowing profitable.[1]
The Indian capital market is separated into two categories: gilt-edged and industrial securities. The gilt-edged market is the market for RBI-backed government and semi-government securities. The securities traded in this market have a consistent value and are in high demand among banks and other financial institutions.
The market for old and new company shares and debentures is known as the industrial securities market. The new issues market and the old capital market, which includes the stock exchange, are two subsets of this market.[2] The new issue market deals with corporations generating new capital in the form of shares and debentures, whereas the old capital market deals with securities that have previously been issued.
There are two types of capital markets: primary capital markets and secondary capital markets. The primary market refers to the new issue market, which includes the issue of non-government public limited company shares, preference shares, and debentures, as well as the realisation of fresh capital by government enterprises and the issuance of public sector bonds.
The secondary market, on the other hand, is the market for securities that have already been issued. The industrial security market, or stock exchange, where industrial securities are bought and sold, and the gilt-edged market, where government and semi-government securities are traded, make up the secondary capital market.
GROWTH OF INDIAN CAPITAL MARKETS
Indian Capital Markets: Before Independence
Prior to independence, the Indian capital market was virtually non-existent. Agriculture was the economy’s backbone, but the sector received very little long-term financing. Similarly, the growth of the industrial securities market was impeded by the fact that there were few enterprises and even fewer securities traded on stock exchanges.[3]
The gilt-edged market for government and semi-government securities dominated the Indian capital market. Individual investors were in little supply, and those who did exist were mostly from the wealthier classes in both urban and rural areas. Last but not least, there were no specialised mediators or institutions in place to mobilise and channel public funds into investment.
Indian Capital Markets: After Independence
The Indian capital market has had significant growth in all areas since independence, as evidenced by rising savings and investments.[4] In 1951, there were 28,500 joint stock firms (including public and private limited companies) with a paid-up capital of Rs. 775 crores, compared to 50,000 companies with a paid-up capital of Rs. 20,000 crores in 1990. In recent years, the rate of investment growth has been remarkable, in line with the increased pace of expansion of the Indian economy under the auspices of the five-year plans.
[1] Barua, S. K., Raghunathan, V., & Varma, J. R. (1994). Research on the Indian capital market: a review. Vikalpa, 19(1), 15-32.
[2] Vaidyanathan, R., & Gali, K. K. (1994). Efficiency of the Indian capital market. Indian journal of finance and research, 5(2), 35-38.
[3] Barua, S. K., & Raghunathan, V. (1987). Inefficiency and speculation in the Indian Capital Market. Vikalpa, 12(3), 53-58.
[4] Barua, S. K., Raghunathan, V., & Varma, J. R. (1994). Research on the Indian capital market: a review. Vikalpa, 19(1), 15-32.
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