INTRODUCTION

term instruments available in this market. However, “0w this market also includes short-term
funds. Capital markets mean the mark“

for all the financial instruments. short-term and long-term. as also comments
industrial and government paper.

The capital market deals with capital. The capital market is a mark“ when: borrowing and
lending of long-term funds takes place.

Capital markets deal in both, debt and equity. In these markets productive capital is raised
and made available to the corporates. The governments both central and state raise money
in the capital market, through the issue of government securities. Capital market refers to all
the institutes and mechanisms

of raising medium and long-term funds, through various instruments available

like shares, debentures, bonds etc.

With the pace of economic reforms followed in India, the importance of capital market has
grown in the last ten years. Corporates both in the private sector as well as in the public
sector raise thousands of crores of rupees in these markets. The governments, through
Reserve Bank of India, as well as financial institutes also raise a lot of money from these
markets. The capital market serves a very useful tool by pooling the savings of individuals
and making them available to the business world. Well-developed markets augment
resources by attracting and lending funds on a global scale. The global depository and
American depository markets perform these functions for companies across the globe. A
Well-developed capital market can solve the problem of paucity of funds for the business
enterprises. The rapid growth of corporate entities has been made possible by the growth of
these markets. This is a global phenomenon.

.2 CONSTITUENTS OF THE CAPITAL MARKETS

Capital market requires many intermediaries who are responsible to transfer

funds from those who save to those who require these funds for investment There are two
important operations carried on in these markets.

.The raising of the new capital

Trading in the securities already issued by the companies

The efficiency of the market of the is by dependent on the specialisation by intermediaries

The important constituents of the capital market are “The stock exchanges

21„ Banks

3. The investment trusts and companies

4„ Specialised financial institutions or development banks _ 5

. Mutual funds

6. Post office savings banks

Non banking financial institutions International financial investors and institutions

The SUpply in this market comes from savings from different sectors 0f the economy. These
savings accrue from the following sources l. Individuals

2, Corporates 3. Governments

Foreign countries Banks

5. 6. Provident Ends 7.

Financial institutions

All these entities contribute to savings in the economy. Part of these savings naturally Hows
in the capital markets. Individuals invest in these markets directly by investing in shares or
debentures of companies, through bond issues of public' sector units or through mutual
funds. Corporates, whc

have more savings than their requirement for funds also, are participants it these markets.

MARKETS SINCE THE [135R ALISATION O}: ”m 7 INDIAN ECONOMY

Since the liberalisation of the Indian economy. We have seen that f0rei i Financial institutions
have come to Indian capital markets in large “number ' ---These institutions have invested
close to $35 billions in Indian markets. D:

to this huge investment, these institutions have started influencing Indian stock: markets. It is
quite EVident from the amount that are inVESted that the Won

has Wed taking keen interest in Indian markets. Indian markets are als: considered as the
part of emerging markets across the world.

Till some years ago many Indians were uncomfortable With the idea of investing their money
in stock markets. The things have of course changed “W for the better. Many young Indians
now look to stock markets as a good Place to make investments. Much credit for this
transformation has rightly been given to late Mr. Dhirubhai Ambani, of Reliance Industries
Ltd. It is Reliance, Which """ was instrumental in spreading the equity culture in our country.
This is due 10

the fact that the investors of this company have over the years reaped many benefits and
thus the company has become an icon in the Indian markets.

Along With these developments the opening of mutual fund industry, fir“ for banks and then
for private players, has also helped in the spread of equity culture. By investing in mutual
funds individuals can acquire shares of various -----companies, without actually buying them.
The mutual funds pool the savings of

individuals and invest them in corporate equities and debt instruments. We shall """" discuss
the mutual funds in a separate unit later.

There have been many other developments that have taken place in the last few years.
Some of these developments like scripless trading, e-trading '"'"‟ and establishment of
securities and Exchange Board of India as the regulatory authority for these markets have
taken Indian markets to international standards. We have been trying to incorporate best
international practices of capital

markets. The establishment of National Stock Exchange was the turning point, ____ in the
working of Indian capital markets.

Many Indian companies have used the capital markets in the last decade to raise large sums
of money for their projects. Due to the vibrant markets, many a PrOJects have got funds
from these markets and investors in these companies

have g0! good returns on their investments. During the last two, three years

-the activities in the primary markets have slowed down to a great extent and

due to the recessionary conditions prevailing in the Indian economy, not many

" forporates are making capital investments. However, things were expected to

Improve considerably in the fiscal 2003-04. This has come true. The financial

years 2004-05 and 2005-06 were also exceptionally good for the markets. A

large amount of money was raised from these markets through primary issues

and follow on issues as well. The mutual funds have also been able to raise

a large amount through NFOs. This trend has continued lit; Ptge firigz„ngzh 31:: 2006*07 as
Well. The market has Just seen a successful IPO from Reliance
Petroleum Ltd and DI F is ”(meted s have raised around

1P0 some time soon. l„he mutual fund

the first Rmr months of 2006. h t Another factor that has helped the development Of these
markets ls t. a ‟ Government of India is slowly disinvesting from the PUblic 339„?“
companies. As a part of this exercise the government offers equity to retail Investors. The
government has divested its stake in Maruti Ltd. in favour of retail investors This is a
continuous process and it is expected that the government Will continue to disinvest from
PSUs. We have seen a lot of issues from PSU banks in the past

ft“ years.

The secondary markets in India are also very active and volumes on the M premier stock
exchanges National Stock Exchange and Bombay Stock Exchange have shown healthy
growth. There have been many innovations in the working of these markets. In last few
years markets have taken big strides in the Derivatives. We have moved away from the
Badla system and have adopted the derivatives trading, as is the prevailing system in most
of the developed

markets.

The stock market SENSEX which was around the level of 2900 around

April 2003 had reached the level of 12,600 in May 2006. This was the record level seen by
the SENSEX.

The combined turnover on BSE and NSE in cash and F & O has at times reached a level of
Rs.50,000 crores in a day!

Indian debt markets are also sought to be made more vibrant. Recently, the Reserve Bank
of India has allowed the participation of individuals in the government securities markets
which till now were dominated by the banks, financial institutions and mutual funds. This
move is likely to open new avenues for investment to individuals.

As is evident from the above facts these are exciting times for the Indian capital markets. In
the ensuing units, you shall get more details on the working of these markets.

Since April 2003, the stocks of banks have risen sharply on the stock exchanges. This rise
was due to good results announced by the banks on the one hand and the fact that many
PSU banks were going to return the equity of the government thereby strengthening their
balance sheets. However, there was a controversy about the price at which this equity is to
be returned. Some officials of the Finance Ministry were quoted as having said that the
equity has to be returned at today‟s market price and not at face value, the price at which the
investment was made by the government. Some officials however maintained that no
decision in this matter was taken. All this however led to confusion in