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301 | Transfer of Resources: Financial markets facilitate the transfer of real economic resources from lenders to ultimate borrowers.Enhancing income: Financial markets allow lenders to earn interest or dividend on their surplus invisible funds, thus contributing to the enhancement of the individual and the national income.Productive usage: Financial markets allow for the productive use of the funds borrowed.Capital Formation: Financial markets provide a channel through which new savings flow to aid capital formation of a country.Price determination: Financial markets allow for the determination of price of the traded financial assets through the interaction of buyers and sellers. They provide a sign for the allocation of funds in the economy based on the demand and supply through the mechanism called price discovery process. |
302 | Enhancing income: Financial markets allow lenders to earn interest or dividend on their surplus invisible funds, thus contributing to the enhancement of the individual and the national income.Productive usage: Financial markets allow for the productive use of the funds borrowed.Capital Formation: Financial markets provide a channel through which new savings flow to aid capital formation of a country.Price determination: Financial markets allow for the determination of price of the traded financial assets through the interaction of buyers and sellers. They provide a sign for the allocation of funds in the economy based on the demand and supply through the mechanism called price discovery process.Sale Mechanism: Financial markets provide a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets. |
303 | Productive usage: Financial markets allow for the productive use of the funds borrowed.Capital Formation: Financial markets provide a channel through which new savings flow to aid capital formation of a country.Price determination: Financial markets allow for the determination of price of the traded financial assets through the interaction of buyers and sellers. They provide a sign for the allocation of funds in the economy based on the demand and supply through the mechanism called price discovery process.Sale Mechanism: Financial markets provide a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets.Information: The activities of the participants in the financial market result in the generation and the consequent dissemination of information to the various segments of the market.Financial Functions –Providing the borrower with funds so as to enable them to carry out their investment plans. |
304 | Sale Mechanism: Financial markets provide a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets.Information: The activities of the participants in the financial market result in the generation and the consequent dissemination of information to the various segments of the market.Financial Functions –Providing the borrower with funds so as to enable them to carry out their investment plans.Providing the lenders with earning assets so as to enable them to earn wealth by deploying the assets in production debentures.Providing liquidity in the market so as to facilitate trading offunds.it provides liquidity to commercial bankit facilitates credit creationit promotes savingsit promotes investmentit facilitates balance economic growthit improves trading floorsInternational scope of financial markets |
305 | it facilitates balance economic growthit improves trading floorsInternational scope of financial marketsFinancial markets are increasingly becoming international in scope. Integration of transatlantic financial markets began early in the nineteenth century and accelerated after the mid-nineteenth-century introduction of the transoceanic telegraph systems. The process reversed early in the twentieth century due to World Wars I and II and the cold war; the demise of the gold standard; and the rise of the Bretton Woods system of fixed exchange rates, discretionary monetary policy, and capital immobility. With the end of the Bretton Woods arrangement in the early 1970s and the cold war in the late 1980s/early 1990s, financial globalization reversed course once again. Today, governments, corporations, and other securities issuers (borrowers) can sell bonds, called foreign bonds, in a foreign country denominated in that foreign country’s currency. (For example, the Mexican government can sell dollar-denominated bonds in U.S. markets.) Issuers can also sell Eurobonds or Eurocurrencies, bonds issued (created and sold) in foreign countries but denominated in the home country’s currency. For example, U.S. companies can sell dollar denominated bonds in London and U.S. dollars can be deposited in non-U.S. banks. It now also quite easy to invest in foreign stock exchanges, many of which have grown in size and importance in the last few years. |
306 | it improves trading floorsInternational scope of financial marketsFinancial markets are increasingly becoming international in scope. Integration of transatlantic financial markets began early in the nineteenth century and accelerated after the mid-nineteenth-century introduction of the transoceanic telegraph systems. The process reversed early in the twentieth century due to World Wars I and II and the cold war; the demise of the gold standard; and the rise of the Bretton Woods system of fixed exchange rates, discretionary monetary policy, and capital immobility. With the end of the Bretton Woods arrangement in the early 1970s and the cold war in the late 1980s/early 1990s, financial globalization reversed course once again. Today, governments, corporations, and other securities issuers (borrowers) can sell bonds, called foreign bonds, in a foreign country denominated in that foreign country’s currency. (For example, the Mexican government can sell dollar-denominated bonds in U.S. markets.) Issuers can also sell Eurobonds or Eurocurrencies, bonds issued (created and sold) in foreign countries but denominated in the home country’s currency. For example, U.S. companies can sell dollar denominated bonds in London and U.S. dollars can be deposited in non-U.S. banks. It now also quite easy to invest in foreign stock exchanges, many of which have grown in size and importance in the last few years. |
307 | International scope of financial marketsFinancial markets are increasingly becoming international in scope. Integration of transatlantic financial markets began early in the nineteenth century and accelerated after the mid-nineteenth-century introduction of the transoceanic telegraph systems. The process reversed early in the twentieth century due to World Wars I and II and the cold war; the demise of the gold standard; and the rise of the Bretton Woods system of fixed exchange rates, discretionary monetary policy, and capital immobility. With the end of the Bretton Woods arrangement in the early 1970s and the cold war in the late 1980s/early 1990s, financial globalization reversed course once again. Today, governments, corporations, and other securities issuers (borrowers) can sell bonds, called foreign bonds, in a foreign country denominated in that foreign country’s currency. (For example, the Mexican government can sell dollar-denominated bonds in U.S. markets.) Issuers can also sell Eurobonds or Eurocurrencies, bonds issued (created and sold) in foreign countries but denominated in the home country’s currency. For example, U.S. companies can sell dollar denominated bonds in London and U.S. dollars can be deposited in non-U.S. banks. It now also quite easy to invest in foreign stock exchanges, many of which have grown in size and importance in the last few years.WHAT IS CAPITAL MARKET? |
308 | Financial markets are increasingly becoming international in scope. Integration of transatlantic financial markets began early in the nineteenth century and accelerated after the mid-nineteenth-century introduction of the transoceanic telegraph systems. The process reversed early in the twentieth century due to World Wars I and II and the cold war; the demise of the gold standard; and the rise of the Bretton Woods system of fixed exchange rates, discretionary monetary policy, and capital immobility. With the end of the Bretton Woods arrangement in the early 1970s and the cold war in the late 1980s/early 1990s, financial globalization reversed course once again. Today, governments, corporations, and other securities issuers (borrowers) can sell bonds, called foreign bonds, in a foreign country denominated in that foreign country’s currency. (For example, the Mexican government can sell dollar-denominated bonds in U.S. markets.) Issuers can also sell Eurobonds or Eurocurrencies, bonds issued (created and sold) in foreign countries but denominated in the home country’s currency. For example, U.S. companies can sell dollar denominated bonds in London and U.S. dollars can be deposited in non-U.S. banks. It now also quite easy to invest in foreign stock exchanges, many of which have grown in size and importance in the last few years.WHAT IS CAPITAL MARKET?Capital market is one of the most important segments of the Indian financial system. It is the market available to the companies for meeting their requirements of the long-term funds. |
309 | Financial markets are increasingly becoming international in scope. Integration of transatlantic financial markets began early in the nineteenth century and accelerated after the mid-nineteenth-century introduction of the transoceanic telegraph systems. The process reversed early in the twentieth century due to World Wars I and II and the cold war; the demise of the gold standard; and the rise of the Bretton Woods system of fixed exchange rates, discretionary monetary policy, and capital immobility. With the end of the Bretton Woods arrangement in the early 1970s and the cold war in the late 1980s/early 1990s, financial globalization reversed course once again. Today, governments, corporations, and other securities issuers (borrowers) can sell bonds, called foreign bonds, in a foreign country denominated in that foreign country’s currency. (For example, the Mexican government can sell dollar-denominated bonds in U.S. markets.) Issuers can also sell Eurobonds or Eurocurrencies, bonds issued (created and sold) in foreign countries but denominated in the home country’s currency. For example, U.S. companies can sell dollar denominated bonds in London and U.S. dollars can be deposited in non-U.S. banks. It now also quite easy to invest in foreign stock exchanges, many of which have grown in size and importance in the last few years.WHAT IS CAPITAL MARKET?Capital market is one of the most important segments of the Indian financial system. It is the market available to the companies for meeting their requirements of the long-term funds. |
310 | WHAT IS CAPITAL MARKET?Capital market is one of the most important segments of the Indian financial system. It is the market available to the companies for meeting their requirements of the long-term funds.The term capital market means institutional arrangements for facilitating the borrowing and lending of long term funds. In other words, it consists of a series of channels through which the savings of the community are made available for industrial and commercial enterprises.Capital market is the market for long term funds, just as the money market is the market for short term funds. It refers to all the facilities and the institutional arrangements for borrowing and lending term funds (medium-term and long-term funds). It does not deal in capital goods but is concerned with the raising of money capital for purposes of investment. |
311 | The term capital market means institutional arrangements for facilitating the borrowing and lending of long term funds. In other words, it consists of a series of channels through which the savings of the community are made available for industrial and commercial enterprises.Capital market is the market for long term funds, just as the money market is the market for short term funds. It refers to all the facilities and the institutional arrangements for borrowing and lending term funds (medium-term and long-term funds). It does not deal in capital goods but is concerned with the raising of money capital for purposes of investment.The market consists of a number of individuals and institutions (including the Government) that canalize the supply and demand for long -term capital and claims on it. The demand for long term capital comes predominantly from private sector manufacturing industries, agriculture sector, trade and the Government agencies. While, the supply of funds for the capital market comes largely from individual and corporate savings, banks, insurance companies, specialised financing agencies and the surplus of Governments. |
312 | Capital market is the market for long term funds, just as the money market is the market for short term funds. It refers to all the facilities and the institutional arrangements for borrowing and lending term funds (medium-term and long-term funds). It does not deal in capital goods but is concerned with the raising of money capital for purposes of investment.The market consists of a number of individuals and institutions (including the Government) that canalize the supply and demand for long -term capital and claims on it. The demand for long term capital comes predominantly from private sector manufacturing industries, agriculture sector, trade and the Government agencies. While, the supply of funds for the capital market comes largely from individual and corporate savings, banks, insurance companies, specialised financing agencies and the surplus of Governments.Among the institutions, we may refer to the following: |
313 | The market consists of a number of individuals and institutions (including the Government) that canalize the supply and demand for long -term capital and claims on it. The demand for long term capital comes predominantly from private sector manufacturing industries, agriculture sector, trade and the Government agencies. While, the supply of funds for the capital market comes largely from individual and corporate savings, banks, insurance companies, specialised financing agencies and the surplus of Governments.Among the institutions, we may refer to the following:Commercial banks are important investors, but are largely interested in govt. securities and to a small extent, debentures of companies;LIC and GIC are of growing importance in the Indian capital market, though their major interest is in government securities;Provident funds constitute a major medium of savings but their investment too are mostly in govt. securities; and |
314 | Among the institutions, we may refer to the following:Commercial banks are important investors, but are largely interested in govt. securities and to a small extent, debentures of companies;LIC and GIC are of growing importance in the Indian capital market, though their major interest is in government securities;Provident funds constitute a major medium of savings but their investment too are mostly in govt. securities; andSpecial institutions set up since independence, viz., IFCI, ICICI, IDBI, UTI, etc. –generally called development financial institutions (DFIs) –aim at supplying long term capital to the private sector.There are financial intermediaries in the capital market, such as merchant bankers, mutual funds leasing companies etc. whichhelp in mobilizing savings and supplying funds to investors. |
315 | Special institutions set up since independence, viz., IFCI, ICICI, IDBI, UTI, etc. –generally called development financial institutions (DFIs) –aim at supplying long term capital to the private sector.There are financial intermediaries in the capital market, such as merchant bankers, mutual funds leasing companies etc. whichhelp in mobilizing savings and supplying funds to investors.Like all markets, the capital market is also composed of those who demand funds (borrowers) and those who supply funds (lenders). An ideal capital attempts to provide adequate capital at reasonable rate of return for any business which offers a prospective yield high enough to make borrowing worthwhile. |
316 | help in mobilizing savings and supplying funds to investors.Like all markets, the capital market is also composed of those who demand funds (borrowers) and those who supply funds (lenders). An ideal capital attempts to provide adequate capital at reasonable rate of return for any business which offers a prospective yield high enough to make borrowing worthwhile.The size of a nation’s capital markets is directly proportional to the size of its economy. The United States, the world’s largest economy, has the biggest and deepest capital markets. Capital markets are increasingly interconnected in a globalized economy, which means that ripples in one corner can cause major waves elsewhere. The drawback of this interconnection is best illustrated by the global credit crisis of 2007- 09, which was triggered by the collapse in U.S. mortgage-backed securities. The effects of this meltdown were globally transmitted by capital markets since banks and institutions in Europe and Asia held trillions of dollars of these securities. |
317 | help in mobilizing savings and supplying funds to investors.Like all markets, the capital market is also composed of those who demand funds (borrowers) and those who supply funds (lenders). An ideal capital attempts to provide adequate capital at reasonable rate of return for any business which offers a prospective yield high enough to make borrowing worthwhile.The size of a nation’s capital markets is directly proportional to the size of its economy. The United States, the world’s largest economy, has the biggest and deepest capital markets. Capital markets are increasingly interconnected in a globalized economy, which means that ripples in one corner can cause major waves elsewhere. The drawback of this interconnection is best illustrated by the global credit crisis of 2007- 09, which was triggered by the collapse in U.S. mortgage-backed securities. The effects of this meltdown were globally transmitted by capital markets since banks and institutions in Europe and Asia held trillions of dollars of these securities. |
318 | Like all markets, the capital market is also composed of those who demand funds (borrowers) and those who supply funds (lenders). An ideal capital attempts to provide adequate capital at reasonable rate of return for any business which offers a prospective yield high enough to make borrowing worthwhile.The size of a nation’s capital markets is directly proportional to the size of its economy. The United States, the world’s largest economy, has the biggest and deepest capital markets. Capital markets are increasingly interconnected in a globalized economy, which means that ripples in one corner can cause major waves elsewhere. The drawback of this interconnection is best illustrated by the global credit crisis of 2007- 09, which was triggered by the collapse in U.S. mortgage-backed securities. The effects of this meltdown were globally transmitted by capital markets since banks and institutions in Europe and Asia held trillions of dollars of these securities.Division of Capital Market - |
319 | The size of a nation’s capital markets is directly proportional to the size of its economy. The United States, the world’s largest economy, has the biggest and deepest capital markets. Capital markets are increasingly interconnected in a globalized economy, which means that ripples in one corner can cause major waves elsewhere. The drawback of this interconnection is best illustrated by the global credit crisis of 2007- 09, which was triggered by the collapse in U.S. mortgage-backed securities. The effects of this meltdown were globally transmitted by capital markets since banks and institutions in Europe and Asia held trillions of dollars of these securities.Division of Capital Market -Financial institutionsSecurities marketGilt-edged marketCorporate securities marketPrimary marketSecondary marketThe Indian capital market is broadly divided into the gilt-edged market and the securities market. |
320 | Primary marketSecondary marketThe Indian capital market is broadly divided into the gilt-edged market and the securities market.The gilt-edged market refers to the market for Government and semi-government securities, backed by the Reserve Bank of India (RBI). Government securities are tradeable debt instruments issued by the Government for meeting its financial requirements. The term gilt-edged means ‘of the best quality’. This is because the Government securities do not suffer from risk of default and are highly liquid (as they can be easily sold in the market at their current price). The open market operations of the RBI are also conducted in such securities.The securities market refers to the market which deals in equities and debentures of the corporates. It is further divided into primarymarket and secondary market. |
321 | The gilt-edged market refers to the market for Government and semi-government securities, backed by the Reserve Bank of India (RBI). Government securities are tradeable debt instruments issued by the Government for meeting its financial requirements. The term gilt-edged means ‘of the best quality’. This is because the Government securities do not suffer from risk of default and are highly liquid (as they can be easily sold in the market at their current price). The open market operations of the RBI are also conducted in such securities.The securities market refers to the market which deals in equities and debentures of the corporates. It is further divided into primarymarket and secondary market.Primary market (new issue market):- deals with ‘new securities’, that is, securities which were not previously available and are offered to the investing public for the first time. |
322 | The securities market refers to the market which deals in equities and debentures of the corporates. It is further divided into primarymarket and secondary market.Primary market (new issue market):- deals with ‘new securities’, that is, securities which were not previously available and are offered to the investing public for the first time.The issuer may be a new company or an existing company. These issues may be of new type or the security used in the past. In the primary market the issuer can be considered as a manufacturer. The issuing houses, investment bankers and brokers act as the channel of distribution for the new issues. They take the responsibility of selling the stocks to the public. |
323 | market and secondary market.Primary market (new issue market):- deals with ‘new securities’, that is, securities which were not previously available and are offered to the investing public for the first time.The issuer may be a new company or an existing company. These issues may be of new type or the security used in the past. In the primary market the issuer can be considered as a manufacturer. The issuing houses, investment bankers and brokers act as the channel of distribution for the new issues. They take the responsibility of selling the stocks to the public.The main service functions of the primary market are origination, under writing and distribution. Origination deals with the origin of the new issue. The proposal is analyzed in terms of the nature of the security, the size of the issue, timing of the issue and floatation method of the issue. Underwriting contract makes the share predictable and removes the element of uncertainty in the subscription. Distribution refers to the sale of securities to the investors. This is carried out with the help of the lead managers and brokers to the issue. |
324 | market and secondary market.Primary market (new issue market):- deals with ‘new securities’, that is, securities which were not previously available and are offered to the investing public for the first time.The issuer may be a new company or an existing company. These issues may be of new type or the security used in the past. In the primary market the issuer can be considered as a manufacturer. The issuing houses, investment bankers and brokers act as the channel of distribution for the new issues. They take the responsibility of selling the stocks to the public.The main service functions of the primary market are origination, under writing and distribution. Origination deals with the origin of the new issue. The proposal is analyzed in terms of the nature of the security, the size of the issue, timing of the issue and floatation method of the issue. Underwriting contract makes the share predictable and removes the element of uncertainty in the subscription. Distribution refers to the sale of securities to the investors. This is carried out with the help of the lead managers and brokers to the issue.Secondary market/ stock market (old issues market or stock exchange):- is the market for buying and selling securities of the existing companies. Under this, securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange. The stock exchanges are the exclusive centres for trading of securities. It is a sensitive barometer and reflects the trends in the economy through fluctuations in the prices of various securities. It has been defined as, “a body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating and controlling the business of buying, selling and dealing in securities”. Listing on stock exchanges enables the shareholders to monitor the movement of the share prices in an effective manner. This assists those to take prudent decisions on whether to retain their holdings or sell off or even accumulate further. However, to list the securities on a stock exchange, the issuing company has to go through set norms and procedures. |
325 | Primary market (new issue market):- deals with ‘new securities’, that is, securities which were not previously available and are offered to the investing public for the first time.The issuer may be a new company or an existing company. These issues may be of new type or the security used in the past. In the primary market the issuer can be considered as a manufacturer. The issuing houses, investment bankers and brokers act as the channel of distribution for the new issues. They take the responsibility of selling the stocks to the public.The main service functions of the primary market are origination, under writing and distribution. Origination deals with the origin of the new issue. The proposal is analyzed in terms of the nature of the security, the size of the issue, timing of the issue and floatation method of the issue. Underwriting contract makes the share predictable and removes the element of uncertainty in the subscription. Distribution refers to the sale of securities to the investors. This is carried out with the help of the lead managers and brokers to the issue.Secondary market/ stock market (old issues market or stock exchange):- is the market for buying and selling securities of the existing companies. Under this, securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange. The stock exchanges are the exclusive centres for trading of securities. It is a sensitive barometer and reflects the trends in the economy through fluctuations in the prices of various securities. It has been defined as, “a body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating and controlling the business of buying, selling and dealing in securities”. Listing on stock exchanges enables the shareholders to monitor the movement of the share prices in an effective manner. This assists those to take prudent decisions on whether to retain their holdings or sell off or even accumulate further. However, to list the securities on a stock exchange, the issuing company has to go through set norms and procedures.Features of Capital Market - |
326 | The issuer may be a new company or an existing company. These issues may be of new type or the security used in the past. In the primary market the issuer can be considered as a manufacturer. The issuing houses, investment bankers and brokers act as the channel of distribution for the new issues. They take the responsibility of selling the stocks to the public.The main service functions of the primary market are origination, under writing and distribution. Origination deals with the origin of the new issue. The proposal is analyzed in terms of the nature of the security, the size of the issue, timing of the issue and floatation method of the issue. Underwriting contract makes the share predictable and removes the element of uncertainty in the subscription. Distribution refers to the sale of securities to the investors. This is carried out with the help of the lead managers and brokers to the issue.Secondary market/ stock market (old issues market or stock exchange):- is the market for buying and selling securities of the existing companies. Under this, securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange. The stock exchanges are the exclusive centres for trading of securities. It is a sensitive barometer and reflects the trends in the economy through fluctuations in the prices of various securities. It has been defined as, “a body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating and controlling the business of buying, selling and dealing in securities”. Listing on stock exchanges enables the shareholders to monitor the movement of the share prices in an effective manner. This assists those to take prudent decisions on whether to retain their holdings or sell off or even accumulate further. However, to list the securities on a stock exchange, the issuing company has to go through set norms and procedures.Features of Capital Market -Link between Savers and Investment Opportunities: |
327 | The main service functions of the primary market are origination, under writing and distribution. Origination deals with the origin of the new issue. The proposal is analyzed in terms of the nature of the security, the size of the issue, timing of the issue and floatation method of the issue. Underwriting contract makes the share predictable and removes the element of uncertainty in the subscription. Distribution refers to the sale of securities to the investors. This is carried out with the help of the lead managers and brokers to the issue.Secondary market/ stock market (old issues market or stock exchange):- is the market for buying and selling securities of the existing companies. Under this, securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange. The stock exchanges are the exclusive centres for trading of securities. It is a sensitive barometer and reflects the trends in the economy through fluctuations in the prices of various securities. It has been defined as, “a body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating and controlling the business of buying, selling and dealing in securities”. Listing on stock exchanges enables the shareholders to monitor the movement of the share prices in an effective manner. This assists those to take prudent decisions on whether to retain their holdings or sell off or even accumulate further. However, to list the securities on a stock exchange, the issuing company has to go through set norms and procedures.Features of Capital Market -Link between Savers and Investment Opportunities:Capital market is a crucial link between saving and investment process. The capital market transfers money from savers to |
328 | Secondary market/ stock market (old issues market or stock exchange):- is the market for buying and selling securities of the existing companies. Under this, securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange. The stock exchanges are the exclusive centres for trading of securities. It is a sensitive barometer and reflects the trends in the economy through fluctuations in the prices of various securities. It has been defined as, “a body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating and controlling the business of buying, selling and dealing in securities”. Listing on stock exchanges enables the shareholders to monitor the movement of the share prices in an effective manner. This assists those to take prudent decisions on whether to retain their holdings or sell off or even accumulate further. However, to list the securities on a stock exchange, the issuing company has to go through set norms and procedures.Features of Capital Market -Link between Savers and Investment Opportunities:Capital market is a crucial link between saving and investment process. The capital market transfers money from savers to |
329 | Features of Capital Market -Link between Savers and Investment Opportunities:Capital market is a crucial link between saving and investment process. The capital market transfers money from savers toentrepreneurial borrowers.Deals in Long Term Investment:Capital market provides funds for long and medium term. It does not deal with channelizing saving for less than one year.Utilizes Intermediaries:Capital market makes use of different intermediaries such as brokers, underwriters, depositories etc. These intermediaries act as working organs of capital market and are very important elements of capital market.Determinant of Capital Formation:The activities of capital market determine the rate of capital formation in an economy. Capital market offers attractive opportunities to those who have surplus funds so that they invest more and more in capital market and are encouraged to save more for profitable opportunities.Government Rules and Regulations: |
330 | Capital market makes use of different intermediaries such as brokers, underwriters, depositories etc. These intermediaries act as working organs of capital market and are very important elements of capital market.Determinant of Capital Formation:The activities of capital market determine the rate of capital formation in an economy. Capital market offers attractive opportunities to those who have surplus funds so that they invest more and more in capital market and are encouraged to save more for profitable opportunities.Government Rules and Regulations:The capital market operates freely but under the guidance of government policies. These markets function within the framework of government rules and regulations, e.g., stock exchange works under the regulations of SEBI which is a government body.An ideal capital market is one:Where finance is available at reasonable cost.Which facilitates economic growth.Where market operations are free, fair, competitive and transparent. |
331 | An ideal capital market is one:Where finance is available at reasonable cost.Which facilitates economic growth.Where market operations are free, fair, competitive and transparent.Must provide sufficient information to investors.Must allocate capital productively.History of Capital Market in IndiaThe history of capital market system in India could be divided into two eras – pre-independence era and post-independence era.Pre-independence EraBefore independence, the capital market of India was ill developed. India during the British rule exhibited most of the fundamental characteristics |
332 | Pre-independence EraBefore independence, the capital market of India was ill developed. India during the British rule exhibited most of the fundamental characteristicsof an underdeveloped economy in a distinct manner. Before the arrival of British in India, the economy of India had lost momentum and was fast settling down to a semi-static equilibrium condition. Two basic characteristics were prominent in the period before British rule started in India - a high degree of income inequality and conspicuous consumption (i.e. consumption of luxury items) by the wealthy class. The tendency of wasting the potential surplus of the country in conspicuous consumption by the richer class in the form of gold and silver hoards instead of investing it for creating bigger surplus for economic development persisted even after the British came to India. |
333 | Before independence, the capital market of India was ill developed. India during the British rule exhibited most of the fundamental characteristicsof an underdeveloped economy in a distinct manner. Before the arrival of British in India, the economy of India had lost momentum and was fast settling down to a semi-static equilibrium condition. Two basic characteristics were prominent in the period before British rule started in India - a high degree of income inequality and conspicuous consumption (i.e. consumption of luxury items) by the wealthy class. The tendency of wasting the potential surplus of the country in conspicuous consumption by the richer class in the form of gold and silver hoards instead of investing it for creating bigger surplus for economic development persisted even after the British came to India.British were not keen in bringing out an all-round economic growth of India. Its main task was to make India complementary to Britain’s own economy and the maintenance of political control. In short, India’s lack of economic development must be attributed, in considerable measure, to her political subordinacy to Great Britain. With political subordinacy went economic subordinacy. From the beginning almost until the end of British ascendancy, India was regarded as a kind of economic complement to Britain. Accordingly, the development of an economically rounded and strong India was never a basic objective of British policy. The result was an automatic suppression of this stimulus to economic growth. A vast number of people were in a state of appalling poverty. The rate of savings in the economy was hopelessly low and the advances made in communications, trade and industry were scarcely enough to meet the pressure of population. The capital market in India suffered from certain defects in the pre-independence days – |
334 | of an underdeveloped economy in a distinct manner. Before the arrival of British in India, the economy of India had lost momentum and was fast settling down to a semi-static equilibrium condition. Two basic characteristics were prominent in the period before British rule started in India - a high degree of income inequality and conspicuous consumption (i.e. consumption of luxury items) by the wealthy class. The tendency of wasting the potential surplus of the country in conspicuous consumption by the richer class in the form of gold and silver hoards instead of investing it for creating bigger surplus for economic development persisted even after the British came to India.British were not keen in bringing out an all-round economic growth of India. Its main task was to make India complementary to Britain’s own economy and the maintenance of political control. In short, India’s lack of economic development must be attributed, in considerable measure, to her political subordinacy to Great Britain. With political subordinacy went economic subordinacy. From the beginning almost until the end of British ascendancy, India was regarded as a kind of economic complement to Britain. Accordingly, the development of an economically rounded and strong India was never a basic objective of British policy. The result was an automatic suppression of this stimulus to economic growth. A vast number of people were in a state of appalling poverty. The rate of savings in the economy was hopelessly low and the advances made in communications, trade and industry were scarcely enough to meet the pressure of population. The capital market in India suffered from certain defects in the pre-independence days – |
335 | of an underdeveloped economy in a distinct manner. Before the arrival of British in India, the economy of India had lost momentum and was fast settling down to a semi-static equilibrium condition. Two basic characteristics were prominent in the period before British rule started in India - a high degree of income inequality and conspicuous consumption (i.e. consumption of luxury items) by the wealthy class. The tendency of wasting the potential surplus of the country in conspicuous consumption by the richer class in the form of gold and silver hoards instead of investing it for creating bigger surplus for economic development persisted even after the British came to India.British were not keen in bringing out an all-round economic growth of India. Its main task was to make India complementary to Britain’s own economy and the maintenance of political control. In short, India’s lack of economic development must be attributed, in considerable measure, to her political subordinacy to Great Britain. With political subordinacy went economic subordinacy. From the beginning almost until the end of British ascendancy, India was regarded as a kind of economic complement to Britain. Accordingly, the development of an economically rounded and strong India was never a basic objective of British policy. The result was an automatic suppression of this stimulus to economic growth. A vast number of people were in a state of appalling poverty. The rate of savings in the economy was hopelessly low and the advances made in communications, trade and industry were scarcely enough to meet the pressure of population. The capital market in India suffered from certain defects in the pre-independence days –Agriculture, constituting the main occupation did not lend itself to the floatation of securities. Moreover, in the industrial sector itself production on small scale by sole trading and partnership firms did not leave much scope for the emergence of an organized securities market. |
336 | British were not keen in bringing out an all-round economic growth of India. Its main task was to make India complementary to Britain’s own economy and the maintenance of political control. In short, India’s lack of economic development must be attributed, in considerable measure, to her political subordinacy to Great Britain. With political subordinacy went economic subordinacy. From the beginning almost until the end of British ascendancy, India was regarded as a kind of economic complement to Britain. Accordingly, the development of an economically rounded and strong India was never a basic objective of British policy. The result was an automatic suppression of this stimulus to economic growth. A vast number of people were in a state of appalling poverty. The rate of savings in the economy was hopelessly low and the advances made in communications, trade and industry were scarcely enough to meet the pressure of population. The capital market in India suffered from certain defects in the pre-independence days –Agriculture, constituting the main occupation did not lend itself to the floatation of securities. Moreover, in the industrial sector itself production on small scale by sole trading and partnership firms did not leave much scope for the emergence of an organized securities market.The growth of securities market was hampered because the foreign business enterprises, which accounted for the greater part of industrial development in the past, depended on the London Capital Market rather than on the Indian market. |
337 | British were not keen in bringing out an all-round economic growth of India. Its main task was to make India complementary to Britain’s own economy and the maintenance of political control. In short, India’s lack of economic development must be attributed, in considerable measure, to her political subordinacy to Great Britain. With political subordinacy went economic subordinacy. From the beginning almost until the end of British ascendancy, India was regarded as a kind of economic complement to Britain. Accordingly, the development of an economically rounded and strong India was never a basic objective of British policy. The result was an automatic suppression of this stimulus to economic growth. A vast number of people were in a state of appalling poverty. The rate of savings in the economy was hopelessly low and the advances made in communications, trade and industry were scarcely enough to meet the pressure of population. The capital market in India suffered from certain defects in the pre-independence days –Agriculture, constituting the main occupation did not lend itself to the floatation of securities. Moreover, in the industrial sector itself production on small scale by sole trading and partnership firms did not leave much scope for the emergence of an organized securities market.The growth of securities market was hampered because the foreign business enterprises, which accounted for the greater part of industrial development in the past, depended on the London Capital Market rather than on the Indian market.The managing agency system, which was abolished after independence, to a large extent, was also responsible for the non-development of the capital market, for the managing agents acted both as promoting and marketing agencies and the capital market was characterized by an absence of special institutions to float new issues. |
338 | Agriculture, constituting the main occupation did not lend itself to the floatation of securities. Moreover, in the industrial sector itself production on small scale by sole trading and partnership firms did not leave much scope for the emergence of an organized securities market.The growth of securities market was hampered because the foreign business enterprises, which accounted for the greater part of industrial development in the past, depended on the London Capital Market rather than on the Indian market.The managing agency system, which was abolished after independence, to a large extent, was also responsible for the non-development of the capital market, for the managing agents acted both as promoting and marketing agencies and the capital market was characterized by an absence of special institutions to float new issues. |
339 | Agriculture, constituting the main occupation did not lend itself to the floatation of securities. Moreover, in the industrial sector itself production on small scale by sole trading and partnership firms did not leave much scope for the emergence of an organized securities market.The growth of securities market was hampered because the foreign business enterprises, which accounted for the greater part of industrial development in the past, depended on the London Capital Market rather than on the Indian market.The managing agency system, which was abolished after independence, to a large extent, was also responsible for the non-development of the capital market, for the managing agents acted both as promoting and marketing agencies and the capital market was characterized by an absence of special institutions to float new issues.Due to underdevelopment of industries the total number of securities which were traded in on stock exchanges was not large. Government securities accounted for nearly half the total volume of issues in the capital market. Ordinary shares were the predominant type of security, while debentures and preference shares, whose price movements usually showed a close correlation with those of government securities, occupied a limited place. |
340 | The growth of securities market was hampered because the foreign business enterprises, which accounted for the greater part of industrial development in the past, depended on the London Capital Market rather than on the Indian market.The managing agency system, which was abolished after independence, to a large extent, was also responsible for the non-development of the capital market, for the managing agents acted both as promoting and marketing agencies and the capital market was characterized by an absence of special institutions to float new issues.Due to underdevelopment of industries the total number of securities which were traded in on stock exchanges was not large. Government securities accounted for nearly half the total volume of issues in the capital market. Ordinary shares were the predominant type of security, while debentures and preference shares, whose price movements usually showed a close correlation with those of government securities, occupied a limited place.The poor investment habits of the individuals and the restrictions imposed on the investment patterns of the various financial institutions circumscribed the capital market. The institutional investors primarily invested in Government and semi-Government securities. Further, the speculators were mostly interested in a short list of speculative shares. As a result, the class of investors to purchase industrial securities on a wide basis was small and there was absence of continuous dealings in a large range of securities. |
341 | The managing agency system, which was abolished after independence, to a large extent, was also responsible for the non-development of the capital market, for the managing agents acted both as promoting and marketing agencies and the capital market was characterized by an absence of special institutions to float new issues.Due to underdevelopment of industries the total number of securities which were traded in on stock exchanges was not large. Government securities accounted for nearly half the total volume of issues in the capital market. Ordinary shares were the predominant type of security, while debentures and preference shares, whose price movements usually showed a close correlation with those of government securities, occupied a limited place.The poor investment habits of the individuals and the restrictions imposed on the investment patterns of the various financial institutions circumscribed the capital market. The institutional investors primarily invested in Government and semi-Government securities. Further, the speculators were mostly interested in a short list of speculative shares. As a result, the class of investors to purchase industrial securities on a wide basis was small and there was absence of continuous dealings in a large range of securities.In the unorganized sector of the capital market indigenous banking as different from the modern western banking had been organized in the form of family or individual business. The indigenous bankers have been variously called as Shroffs, Seths, Sahukars, Mahajans, Chettis etc. in different parts of the country. They vary in their size from petty moneylenders to substantial shroffs who carry on large and specialized business, which at times exceeds that of the scheduled banks. Despite the predominant role played by the indigenous bankers in India’s economic life, they have always remained outside the pale of organized banking. In 1935, when Reserve Bank of India had started many attempts to bring the indigenous bankers under its orbit and issued a draft scheme for direct linking of these bankers, RBI suggested that the indigenous bankers should give-up their trading and commission business, switch over to western system of accounting, develop the deposit side of banking activities, have their accounts audited by certified accountants, submit to RBI periodical statements of their affairs etc. RBI desired that the ambiguous character of the Hundi should cease and that it should become a negotiable instrument representing a genuine trade transaction. RBI also desired that the indigenous bankers should act as discount houses, (to buy and sell bills of exchange etc) and against these obligations, RBI promised to provide them with all the privileges enjoyed by scheduled banks. They would then be allowed to borrow from or rediscount bills of exchange at RBI on similar terms and conditions as available to scheduled banks. |
342 | Due to underdevelopment of industries the total number of securities which were traded in on stock exchanges was not large. Government securities accounted for nearly half the total volume of issues in the capital market. Ordinary shares were the predominant type of security, while debentures and preference shares, whose price movements usually showed a close correlation with those of government securities, occupied a limited place.The poor investment habits of the individuals and the restrictions imposed on the investment patterns of the various financial institutions circumscribed the capital market. The institutional investors primarily invested in Government and semi-Government securities. Further, the speculators were mostly interested in a short list of speculative shares. As a result, the class of investors to purchase industrial securities on a wide basis was small and there was absence of continuous dealings in a large range of securities.In the unorganized sector of the capital market indigenous banking as different from the modern western banking had been organized in the form of family or individual business. The indigenous bankers have been variously called as Shroffs, Seths, Sahukars, Mahajans, Chettis etc. in different parts of the country. They vary in their size from petty moneylenders to substantial shroffs who carry on large and specialized business, which at times exceeds that of the scheduled banks. Despite the predominant role played by the indigenous bankers in India’s economic life, they have always remained outside the pale of organized banking. In 1935, when Reserve Bank of India had started many attempts to bring the indigenous bankers under its orbit and issued a draft scheme for direct linking of these bankers, RBI suggested that the indigenous bankers should give-up their trading and commission business, switch over to western system of accounting, develop the deposit side of banking activities, have their accounts audited by certified accountants, submit to RBI periodical statements of their affairs etc. RBI desired that the ambiguous character of the Hundi should cease and that it should become a negotiable instrument representing a genuine trade transaction. RBI also desired that the indigenous bankers should act as discount houses, (to buy and sell bills of exchange etc) and against these obligations, RBI promised to provide them with all the privileges enjoyed by scheduled banks. They would then be allowed to borrow from or rediscount bills of exchange at RBI on similar terms and conditions as available to scheduled banks. |
343 | Due to underdevelopment of industries the total number of securities which were traded in on stock exchanges was not large. Government securities accounted for nearly half the total volume of issues in the capital market. Ordinary shares were the predominant type of security, while debentures and preference shares, whose price movements usually showed a close correlation with those of government securities, occupied a limited place.The poor investment habits of the individuals and the restrictions imposed on the investment patterns of the various financial institutions circumscribed the capital market. The institutional investors primarily invested in Government and semi-Government securities. Further, the speculators were mostly interested in a short list of speculative shares. As a result, the class of investors to purchase industrial securities on a wide basis was small and there was absence of continuous dealings in a large range of securities.In the unorganized sector of the capital market indigenous banking as different from the modern western banking had been organized in the form of family or individual business. The indigenous bankers have been variously called as Shroffs, Seths, Sahukars, Mahajans, Chettis etc. in different parts of the country. They vary in their size from petty moneylenders to substantial shroffs who carry on large and specialized business, which at times exceeds that of the scheduled banks. Despite the predominant role played by the indigenous bankers in India’s economic life, they have always remained outside the pale of organized banking. In 1935, when Reserve Bank of India had started many attempts to bring the indigenous bankers under its orbit and issued a draft scheme for direct linking of these bankers, RBI suggested that the indigenous bankers should give-up their trading and commission business, switch over to western system of accounting, develop the deposit side of banking activities, have their accounts audited by certified accountants, submit to RBI periodical statements of their affairs etc. RBI desired that the ambiguous character of the Hundi should cease and that it should become a negotiable instrument representing a genuine trade transaction. RBI also desired that the indigenous bankers should act as discount houses, (to buy and sell bills of exchange etc) and against these obligations, RBI promised to provide them with all the privileges enjoyed by scheduled banks. They would then be allowed to borrow from or rediscount bills of exchange at RBI on similar terms and conditions as available to scheduled banks.But the indigenous bankers, with their age-old traditions of independence, |
344 | The poor investment habits of the individuals and the restrictions imposed on the investment patterns of the various financial institutions circumscribed the capital market. The institutional investors primarily invested in Government and semi-Government securities. Further, the speculators were mostly interested in a short list of speculative shares. As a result, the class of investors to purchase industrial securities on a wide basis was small and there was absence of continuous dealings in a large range of securities.In the unorganized sector of the capital market indigenous banking as different from the modern western banking had been organized in the form of family or individual business. The indigenous bankers have been variously called as Shroffs, Seths, Sahukars, Mahajans, Chettis etc. in different parts of the country. They vary in their size from petty moneylenders to substantial shroffs who carry on large and specialized business, which at times exceeds that of the scheduled banks. Despite the predominant role played by the indigenous bankers in India’s economic life, they have always remained outside the pale of organized banking. In 1935, when Reserve Bank of India had started many attempts to bring the indigenous bankers under its orbit and issued a draft scheme for direct linking of these bankers, RBI suggested that the indigenous bankers should give-up their trading and commission business, switch over to western system of accounting, develop the deposit side of banking activities, have their accounts audited by certified accountants, submit to RBI periodical statements of their affairs etc. RBI desired that the ambiguous character of the Hundi should cease and that it should become a negotiable instrument representing a genuine trade transaction. RBI also desired that the indigenous bankers should act as discount houses, (to buy and sell bills of exchange etc) and against these obligations, RBI promised to provide them with all the privileges enjoyed by scheduled banks. They would then be allowed to borrow from or rediscount bills of exchange at RBI on similar terms and conditions as available to scheduled banks.But the indigenous bankers, with their age-old traditions of independence, |
345 | In the unorganized sector of the capital market indigenous banking as different from the modern western banking had been organized in the form of family or individual business. The indigenous bankers have been variously called as Shroffs, Seths, Sahukars, Mahajans, Chettis etc. in different parts of the country. They vary in their size from petty moneylenders to substantial shroffs who carry on large and specialized business, which at times exceeds that of the scheduled banks. Despite the predominant role played by the indigenous bankers in India’s economic life, they have always remained outside the pale of organized banking. In 1935, when Reserve Bank of India had started many attempts to bring the indigenous bankers under its orbit and issued a draft scheme for direct linking of these bankers, RBI suggested that the indigenous bankers should give-up their trading and commission business, switch over to western system of accounting, develop the deposit side of banking activities, have their accounts audited by certified accountants, submit to RBI periodical statements of their affairs etc. RBI desired that the ambiguous character of the Hundi should cease and that it should become a negotiable instrument representing a genuine trade transaction. RBI also desired that the indigenous bankers should act as discount houses, (to buy and sell bills of exchange etc) and against these obligations, RBI promised to provide them with all the privileges enjoyed by scheduled banks. They would then be allowed to borrow from or rediscount bills of exchange at RBI on similar terms and conditions as available to scheduled banks.But the indigenous bankers, with their age-old traditions of independence,declined to accept the restrictions as well as the compensating benefits of securing accommodation from RBI on favorable terms. They disagreed to give up their trading and commission business and accept deposits, thereby confining themselves to banking business only. They were also unwilling to give wide publicity to their accounts and their state of affairs. They did not consider that the privileges offered by RBI were adequate enough to compensate for the loss of their non-banking business. As a result, the scheme proposed by RBI to bring the indigenous bankers under its direct influence fell through. |
346 | But the indigenous bankers, with their age-old traditions of independence,declined to accept the restrictions as well as the compensating benefits of securing accommodation from RBI on favorable terms. They disagreed to give up their trading and commission business and accept deposits, thereby confining themselves to banking business only. They were also unwilling to give wide publicity to their accounts and their state of affairs. They did not consider that the privileges offered by RBI were adequate enough to compensate for the loss of their non-banking business. As a result, the scheme proposed by RBI to bring the indigenous bankers under its direct influence fell through.In spite of all these defects, they occupy a very prominent position in the capital market in the country and at one time they were estimated to meet at least 90% of the financial requirements of the farmers and a substantial portion of the needs of the industry and trade. |
347 | declined to accept the restrictions as well as the compensating benefits of securing accommodation from RBI on favorable terms. They disagreed to give up their trading and commission business and accept deposits, thereby confining themselves to banking business only. They were also unwilling to give wide publicity to their accounts and their state of affairs. They did not consider that the privileges offered by RBI were adequate enough to compensate for the loss of their non-banking business. As a result, the scheme proposed by RBI to bring the indigenous bankers under its direct influence fell through.In spite of all these defects, they occupy a very prominent position in the capital market in the country and at one time they were estimated to meet at least 90% of the financial requirements of the farmers and a substantial portion of the needs of the industry and trade.Post-Independence Era In recent years since independence, the capital market of India has substantially changed and has been changing for the better. The concentrated efforts on the part of the government and the growth of investment-mindedness of the people have made this possible. Capital market in India till the recent past, had all the characteristics of an underdeveloped economy. It was characterized by the conspicuous absence of institutions like, professional promoters, investment or issue houses, underwriting agencies and financial intermediaries. As a result, free flow of savings to industrial investment was impeded resulting in the stagnant character of our economy. Thus, serious flaws existed in the structure of capital market in India. However, the achievement of independence in 1947 marked a trend towards an organized growth of capital market. After achieving political independence, government took over the responsibility of giving shape to those coveted ideals of our economy, which were enshrined in our Constitution by way of the Directive Principles of state policy. When the Constitution was framed, the government defined its basic economic and social goals that were later on summed up in the expression “socialist pattern of society”. These ideals directed the government to promote the welfare of the society by securing and promoting a social order in which justice, equality and fraternity could prevail. The resolution was adopted at the Avadhi Session of Congress in 1954 to build the society on the socialistic pattern. “Ever since then this has been the light house of our economic policy”, “Growth with social justice” and “Social Gain not private Profit”, have been the major planks of our plan policies. These basic objectives had a significant bearing on the organization of the Capital Market. But it required effective control on government over the distribution of credit and finance and thus it could not be isolated |
348 | In spite of all these defects, they occupy a very prominent position in the capital market in the country and at one time they were estimated to meet at least 90% of the financial requirements of the farmers and a substantial portion of the needs of the industry and trade.Post-Independence Era In recent years since independence, the capital market of India has substantially changed and has been changing for the better. The concentrated efforts on the part of the government and the growth of investment-mindedness of the people have made this possible. Capital market in India till the recent past, had all the characteristics of an underdeveloped economy. It was characterized by the conspicuous absence of institutions like, professional promoters, investment or issue houses, underwriting agencies and financial intermediaries. As a result, free flow of savings to industrial investment was impeded resulting in the stagnant character of our economy. Thus, serious flaws existed in the structure of capital market in India. However, the achievement of independence in 1947 marked a trend towards an organized growth of capital market. After achieving political independence, government took over the responsibility of giving shape to those coveted ideals of our economy, which were enshrined in our Constitution by way of the Directive Principles of state policy. When the Constitution was framed, the government defined its basic economic and social goals that were later on summed up in the expression “socialist pattern of society”. These ideals directed the government to promote the welfare of the society by securing and promoting a social order in which justice, equality and fraternity could prevail. The resolution was adopted at the Avadhi Session of Congress in 1954 to build the society on the socialistic pattern. “Ever since then this has been the light house of our economic policy”, “Growth with social justice” and “Social Gain not private Profit”, have been the major planks of our plan policies. These basic objectives had a significant bearing on the organization of the Capital Market. But it required effective control on government over the distribution of credit and finance and thus it could not be isolated |
349 | In spite of all these defects, they occupy a very prominent position in the capital market in the country and at one time they were estimated to meet at least 90% of the financial requirements of the farmers and a substantial portion of the needs of the industry and trade.Post-Independence Era In recent years since independence, the capital market of India has substantially changed and has been changing for the better. The concentrated efforts on the part of the government and the growth of investment-mindedness of the people have made this possible. Capital market in India till the recent past, had all the characteristics of an underdeveloped economy. It was characterized by the conspicuous absence of institutions like, professional promoters, investment or issue houses, underwriting agencies and financial intermediaries. As a result, free flow of savings to industrial investment was impeded resulting in the stagnant character of our economy. Thus, serious flaws existed in the structure of capital market in India. However, the achievement of independence in 1947 marked a trend towards an organized growth of capital market. After achieving political independence, government took over the responsibility of giving shape to those coveted ideals of our economy, which were enshrined in our Constitution by way of the Directive Principles of state policy. When the Constitution was framed, the government defined its basic economic and social goals that were later on summed up in the expression “socialist pattern of society”. These ideals directed the government to promote the welfare of the society by securing and promoting a social order in which justice, equality and fraternity could prevail. The resolution was adopted at the Avadhi Session of Congress in 1954 to build the society on the socialistic pattern. “Ever since then this has been the light house of our economic policy”, “Growth with social justice” and “Social Gain not private Profit”, have been the major planks of our plan policies. These basic objectives had a significant bearing on the organization of the Capital Market. But it required effective control on government over the distribution of credit and finance and thus it could not be isolatedfrom the strategy of economic development. |
350 | Post-Independence Era In recent years since independence, the capital market of India has substantially changed and has been changing for the better. The concentrated efforts on the part of the government and the growth of investment-mindedness of the people have made this possible. Capital market in India till the recent past, had all the characteristics of an underdeveloped economy. It was characterized by the conspicuous absence of institutions like, professional promoters, investment or issue houses, underwriting agencies and financial intermediaries. As a result, free flow of savings to industrial investment was impeded resulting in the stagnant character of our economy. Thus, serious flaws existed in the structure of capital market in India. However, the achievement of independence in 1947 marked a trend towards an organized growth of capital market. After achieving political independence, government took over the responsibility of giving shape to those coveted ideals of our economy, which were enshrined in our Constitution by way of the Directive Principles of state policy. When the Constitution was framed, the government defined its basic economic and social goals that were later on summed up in the expression “socialist pattern of society”. These ideals directed the government to promote the welfare of the society by securing and promoting a social order in which justice, equality and fraternity could prevail. The resolution was adopted at the Avadhi Session of Congress in 1954 to build the society on the socialistic pattern. “Ever since then this has been the light house of our economic policy”, “Growth with social justice” and “Social Gain not private Profit”, have been the major planks of our plan policies. These basic objectives had a significant bearing on the organization of the Capital Market. But it required effective control on government over the distribution of credit and finance and thus it could not be isolatedfrom the strategy of economic development. |
351 | Post-Independence Era In recent years since independence, the capital market of India has substantially changed and has been changing for the better. The concentrated efforts on the part of the government and the growth of investment-mindedness of the people have made this possible. Capital market in India till the recent past, had all the characteristics of an underdeveloped economy. It was characterized by the conspicuous absence of institutions like, professional promoters, investment or issue houses, underwriting agencies and financial intermediaries. As a result, free flow of savings to industrial investment was impeded resulting in the stagnant character of our economy. Thus, serious flaws existed in the structure of capital market in India. However, the achievement of independence in 1947 marked a trend towards an organized growth of capital market. After achieving political independence, government took over the responsibility of giving shape to those coveted ideals of our economy, which were enshrined in our Constitution by way of the Directive Principles of state policy. When the Constitution was framed, the government defined its basic economic and social goals that were later on summed up in the expression “socialist pattern of society”. These ideals directed the government to promote the welfare of the society by securing and promoting a social order in which justice, equality and fraternity could prevail. The resolution was adopted at the Avadhi Session of Congress in 1954 to build the society on the socialistic pattern. “Ever since then this has been the light house of our economic policy”, “Growth with social justice” and “Social Gain not private Profit”, have been the major planks of our plan policies. These basic objectives had a significant bearing on the organization of the Capital Market. But it required effective control on government over the distribution of credit and finance and thus it could not be isolatedfrom the strategy of economic development.In the post independence days, the government had committed itself to reorganize the Indian Capital Market. The government’s commitments towards industrialization also required the removal of basic deficiencies of the capital market. The existing financial institutions could only partly meet the financial requirements of industries. Priority now shifted from private ownership to public control. The first amongst these actions was the nationalization of RBI in 1948. The setting up of the SBI followed this, by taking over the Imperial Bank of India in 1956. In the same year the government also took a drastic action by rationalizing and merging as many as 245 life insurance companies into a state owned monolithic LIC of India. The year 1969 represents a landmark in the history of public control of private financial institutions when the 14 major Commercial Banks were nationalized. |
352 | from the strategy of economic development.In the post independence days, the government had committed itself to reorganize the Indian Capital Market. The government’s commitments towards industrialization also required the removal of basic deficiencies of the capital market. The existing financial institutions could only partly meet the financial requirements of industries. Priority now shifted from private ownership to public control. The first amongst these actions was the nationalization of RBI in 1948. The setting up of the SBI followed this, by taking over the Imperial Bank of India in 1956. In the same year the government also took a drastic action by rationalizing and merging as many as 245 life insurance companies into a state owned monolithic LIC of India. The year 1969 represents a landmark in the history of public control of private financial institutions when the 14 major Commercial Banks were nationalized. |
353 | from the strategy of economic development.In the post independence days, the government had committed itself to reorganize the Indian Capital Market. The government’s commitments towards industrialization also required the removal of basic deficiencies of the capital market. The existing financial institutions could only partly meet the financial requirements of industries. Priority now shifted from private ownership to public control. The first amongst these actions was the nationalization of RBI in 1948. The setting up of the SBI followed this, by taking over the Imperial Bank of India in 1956. In the same year the government also took a drastic action by rationalizing and merging as many as 245 life insurance companies into a state owned monolithic LIC of India. The year 1969 represents a landmark in the history of public control of private financial institutions when the 14 major Commercial Banks were nationalized.Setting up of Unit Trust of India, July 1, 1964 for mobilizing the small savings for investment in corporate securities and investment of life insurance funds and provident funds in industrial securities would help in strengthening the base of capital market. The changes in the growth of capital market in India can be analyzed also by a reference to the data relating to new issues of capital formation and working of corporate sectors. Various developments in the Indian capital market, removing its basic deficiencies, since independence can be reviewed as follows: |
354 | In the post independence days, the government had committed itself to reorganize the Indian Capital Market. The government’s commitments towards industrialization also required the removal of basic deficiencies of the capital market. The existing financial institutions could only partly meet the financial requirements of industries. Priority now shifted from private ownership to public control. The first amongst these actions was the nationalization of RBI in 1948. The setting up of the SBI followed this, by taking over the Imperial Bank of India in 1956. In the same year the government also took a drastic action by rationalizing and merging as many as 245 life insurance companies into a state owned monolithic LIC of India. The year 1969 represents a landmark in the history of public control of private financial institutions when the 14 major Commercial Banks were nationalized.Setting up of Unit Trust of India, July 1, 1964 for mobilizing the small savings for investment in corporate securities and investment of life insurance funds and provident funds in industrial securities would help in strengthening the base of capital market. The changes in the growth of capital market in India can be analyzed also by a reference to the data relating to new issues of capital formation and working of corporate sectors. Various developments in the Indian capital market, removing its basic deficiencies, since independence can be reviewed as follows: |
355 | In the post independence days, the government had committed itself to reorganize the Indian Capital Market. The government’s commitments towards industrialization also required the removal of basic deficiencies of the capital market. The existing financial institutions could only partly meet the financial requirements of industries. Priority now shifted from private ownership to public control. The first amongst these actions was the nationalization of RBI in 1948. The setting up of the SBI followed this, by taking over the Imperial Bank of India in 1956. In the same year the government also took a drastic action by rationalizing and merging as many as 245 life insurance companies into a state owned monolithic LIC of India. The year 1969 represents a landmark in the history of public control of private financial institutions when the 14 major Commercial Banks were nationalized.Setting up of Unit Trust of India, July 1, 1964 for mobilizing the small savings for investment in corporate securities and investment of life insurance funds and provident funds in industrial securities would help in strengthening the base of capital market. The changes in the growth of capital market in India can be analyzed also by a reference to the data relating to new issues of capital formation and working of corporate sectors. Various developments in the Indian capital market, removing its basic deficiencies, since independence can be reviewed as follows:The adoption of an elaborate legislative code to protect the investor’s interest has offered a salutary effect in the development of capital market. The Companies Act 1956, designed to safeguard the interest of shareholders, the Capital Issues (Control) Act to discourage undesirable practices like issue of shares with disproportionate voting rights and to prevent investment in non- essential enterprises, the Securities Contract (Regulations) Act 1956, to provide reforms in stock exchange trading methods and practices against undesirable manipulations, are some of the steps introduced to have a strong and healthy investment market having full confidence of the public. |
356 | Setting up of Unit Trust of India, July 1, 1964 for mobilizing the small savings for investment in corporate securities and investment of life insurance funds and provident funds in industrial securities would help in strengthening the base of capital market. The changes in the growth of capital market in India can be analyzed also by a reference to the data relating to new issues of capital formation and working of corporate sectors. Various developments in the Indian capital market, removing its basic deficiencies, since independence can be reviewed as follows:The adoption of an elaborate legislative code to protect the investor’s interest has offered a salutary effect in the development of capital market. The Companies Act 1956, designed to safeguard the interest of shareholders, the Capital Issues (Control) Act to discourage undesirable practices like issue of shares with disproportionate voting rights and to prevent investment in non- essential enterprises, the Securities Contract (Regulations) Act 1956, to provide reforms in stock exchange trading methods and practices against undesirable manipulations, are some of the steps introduced to have a strong and healthy investment market having full confidence of the public.The striking success of several industrial issues, home and foreign, indicate that in recent years more and more people have become investment conscious and ready to put their savings in corporate securities. |
357 | Setting up of Unit Trust of India, July 1, 1964 for mobilizing the small savings for investment in corporate securities and investment of life insurance funds and provident funds in industrial securities would help in strengthening the base of capital market. The changes in the growth of capital market in India can be analyzed also by a reference to the data relating to new issues of capital formation and working of corporate sectors. Various developments in the Indian capital market, removing its basic deficiencies, since independence can be reviewed as follows:The adoption of an elaborate legislative code to protect the investor’s interest has offered a salutary effect in the development of capital market. The Companies Act 1956, designed to safeguard the interest of shareholders, the Capital Issues (Control) Act to discourage undesirable practices like issue of shares with disproportionate voting rights and to prevent investment in non- essential enterprises, the Securities Contract (Regulations) Act 1956, to provide reforms in stock exchange trading methods and practices against undesirable manipulations, are some of the steps introduced to have a strong and healthy investment market having full confidence of the public.The striking success of several industrial issues, home and foreign, indicate that in recent years more and more people have become investment conscious and ready to put their savings in corporate securities.There was no institutionalized system of underwriting in the country before independence. But during the post independence |
358 | The adoption of an elaborate legislative code to protect the investor’s interest has offered a salutary effect in the development of capital market. The Companies Act 1956, designed to safeguard the interest of shareholders, the Capital Issues (Control) Act to discourage undesirable practices like issue of shares with disproportionate voting rights and to prevent investment in non- essential enterprises, the Securities Contract (Regulations) Act 1956, to provide reforms in stock exchange trading methods and practices against undesirable manipulations, are some of the steps introduced to have a strong and healthy investment market having full confidence of the public.The striking success of several industrial issues, home and foreign, indicate that in recent years more and more people have become investment conscious and ready to put their savings in corporate securities.There was no institutionalized system of underwriting in the country before independence. But during the post independence |
359 | The adoption of an elaborate legislative code to protect the investor’s interest has offered a salutary effect in the development of capital market. The Companies Act 1956, designed to safeguard the interest of shareholders, the Capital Issues (Control) Act to discourage undesirable practices like issue of shares with disproportionate voting rights and to prevent investment in non- essential enterprises, the Securities Contract (Regulations) Act 1956, to provide reforms in stock exchange trading methods and practices against undesirable manipulations, are some of the steps introduced to have a strong and healthy investment market having full confidence of the public.The striking success of several industrial issues, home and foreign, indicate that in recent years more and more people have become investment conscious and ready to put their savings in corporate securities.There was no institutionalized system of underwriting in the country before independence. But during the post independenceperiod the under-writing activity made satisfactory progress with the establishment of specialized institutions of industrial finance. The underwriting operations got impetus by the establishment of strong underwriting organizations like, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, Life Insurance Corporation of India, Unit Trust of India and Industrial Finance Corporation of India, Life Insurance Corporation of India, Unit Trust of India and Industrial Development Bank of India. The emergence of this institutionalized underwriting structure is of crucial importance for the efficient operation of the new issue market in the country. |
360 | The striking success of several industrial issues, home and foreign, indicate that in recent years more and more people have become investment conscious and ready to put their savings in corporate securities.There was no institutionalized system of underwriting in the country before independence. But during the post independenceperiod the under-writing activity made satisfactory progress with the establishment of specialized institutions of industrial finance. The underwriting operations got impetus by the establishment of strong underwriting organizations like, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, Life Insurance Corporation of India, Unit Trust of India and Industrial Finance Corporation of India, Life Insurance Corporation of India, Unit Trust of India and Industrial Development Bank of India. The emergence of this institutionalized underwriting structure is of crucial importance for the efficient operation of the new issue market in the country.The growth of capital market was indirectly influenced by the activities of Commercial Banks, which provided advances essentially for working capital against shares, and debentures, which thereby encouraged investment in industrial securities. Further, by providing funds to finance corporations through the purchase of their shares and debentures and by underwriting either singly or in association with other banks and institutions. Commercial Banks have greatly influenced the growth of capital market. |
361 | There was no institutionalized system of underwriting in the country before independence. But during the post independenceperiod the under-writing activity made satisfactory progress with the establishment of specialized institutions of industrial finance. The underwriting operations got impetus by the establishment of strong underwriting organizations like, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, Life Insurance Corporation of India, Unit Trust of India and Industrial Finance Corporation of India, Life Insurance Corporation of India, Unit Trust of India and Industrial Development Bank of India. The emergence of this institutionalized underwriting structure is of crucial importance for the efficient operation of the new issue market in the country.The growth of capital market was indirectly influenced by the activities of Commercial Banks, which provided advances essentially for working capital against shares, and debentures, which thereby encouraged investment in industrial securities. Further, by providing funds to finance corporations through the purchase of their shares and debentures and by underwriting either singly or in association with other banks and institutions. Commercial Banks have greatly influenced the growth of capital market.Immediately after independence in 1947, the ardent need for large- scale industrial development paved the way for the establishment of several special finance and development corporations. |
362 | period the under-writing activity made satisfactory progress with the establishment of specialized institutions of industrial finance. The underwriting operations got impetus by the establishment of strong underwriting organizations like, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, Life Insurance Corporation of India, Unit Trust of India and Industrial Finance Corporation of India, Life Insurance Corporation of India, Unit Trust of India and Industrial Development Bank of India. The emergence of this institutionalized underwriting structure is of crucial importance for the efficient operation of the new issue market in the country.The growth of capital market was indirectly influenced by the activities of Commercial Banks, which provided advances essentially for working capital against shares, and debentures, which thereby encouraged investment in industrial securities. Further, by providing funds to finance corporations through the purchase of their shares and debentures and by underwriting either singly or in association with other banks and institutions. Commercial Banks have greatly influenced the growth of capital market.Immediately after independence in 1947, the ardent need for large- scale industrial development paved the way for the establishment of several special finance and development corporations.The most striking change in the capital market is the integration of the organized and unorganized sectors of the capital market on the one hand and the money and the capital market on the other. The integration has been proceeding steadily due to the growth of joint stock form of business, the expanding role of the Reserve Bank in the sphere of rural credit, the extension of banking facilities into the interior of the country, the diversification of the functions of commercial bank and government assistance to industry have all been the contributive factors to this integration. |
363 | period the under-writing activity made satisfactory progress with the establishment of specialized institutions of industrial finance. The underwriting operations got impetus by the establishment of strong underwriting organizations like, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, Life Insurance Corporation of India, Unit Trust of India and Industrial Finance Corporation of India, Life Insurance Corporation of India, Unit Trust of India and Industrial Development Bank of India. The emergence of this institutionalized underwriting structure is of crucial importance for the efficient operation of the new issue market in the country.The growth of capital market was indirectly influenced by the activities of Commercial Banks, which provided advances essentially for working capital against shares, and debentures, which thereby encouraged investment in industrial securities. Further, by providing funds to finance corporations through the purchase of their shares and debentures and by underwriting either singly or in association with other banks and institutions. Commercial Banks have greatly influenced the growth of capital market.Immediately after independence in 1947, the ardent need for large- scale industrial development paved the way for the establishment of several special finance and development corporations.The most striking change in the capital market is the integration of the organized and unorganized sectors of the capital market on the one hand and the money and the capital market on the other. The integration has been proceeding steadily due to the growth of joint stock form of business, the expanding role of the Reserve Bank in the sphere of rural credit, the extension of banking facilities into the interior of the country, the diversification of the functions of commercial bank and government assistance to industry have all been the contributive factors to this integration.The establishment of Unit Trust of India (which started its public operations from July 1, 1964) and the Industrial Development Bank of India under the auspices of the Reserve Bank of India had a combining effect in strengthening and broadening the framework of the capital market in India as the source for the supply of funds to industry. |
364 | The growth of capital market was indirectly influenced by the activities of Commercial Banks, which provided advances essentially for working capital against shares, and debentures, which thereby encouraged investment in industrial securities. Further, by providing funds to finance corporations through the purchase of their shares and debentures and by underwriting either singly or in association with other banks and institutions. Commercial Banks have greatly influenced the growth of capital market.Immediately after independence in 1947, the ardent need for large- scale industrial development paved the way for the establishment of several special finance and development corporations.The most striking change in the capital market is the integration of the organized and unorganized sectors of the capital market on the one hand and the money and the capital market on the other. The integration has been proceeding steadily due to the growth of joint stock form of business, the expanding role of the Reserve Bank in the sphere of rural credit, the extension of banking facilities into the interior of the country, the diversification of the functions of commercial bank and government assistance to industry have all been the contributive factors to this integration.The establishment of Unit Trust of India (which started its public operations from July 1, 1964) and the Industrial Development Bank of India under the auspices of the Reserve Bank of India had a combining effect in strengthening and broadening the framework of the capital market in India as the source for the supply of funds to industry.Securities market in India |
365 | Immediately after independence in 1947, the ardent need for large- scale industrial development paved the way for the establishment of several special finance and development corporations.The most striking change in the capital market is the integration of the organized and unorganized sectors of the capital market on the one hand and the money and the capital market on the other. The integration has been proceeding steadily due to the growth of joint stock form of business, the expanding role of the Reserve Bank in the sphere of rural credit, the extension of banking facilities into the interior of the country, the diversification of the functions of commercial bank and government assistance to industry have all been the contributive factors to this integration.The establishment of Unit Trust of India (which started its public operations from July 1, 1964) and the Industrial Development Bank of India under the auspices of the Reserve Bank of India had a combining effect in strengthening and broadening the framework of the capital market in India as the source for the supply of funds to industry.Securities market in IndiaThe corporate securities market in India dates back to the 18th century |
366 | The most striking change in the capital market is the integration of the organized and unorganized sectors of the capital market on the one hand and the money and the capital market on the other. The integration has been proceeding steadily due to the growth of joint stock form of business, the expanding role of the Reserve Bank in the sphere of rural credit, the extension of banking facilities into the interior of the country, the diversification of the functions of commercial bank and government assistance to industry have all been the contributive factors to this integration.The establishment of Unit Trust of India (which started its public operations from July 1, 1964) and the Industrial Development Bank of India under the auspices of the Reserve Bank of India had a combining effect in strengthening and broadening the framework of the capital market in India as the source for the supply of funds to industry.Securities market in IndiaThe corporate securities market in India dates back to the 18th century |
367 | The establishment of Unit Trust of India (which started its public operations from July 1, 1964) and the Industrial Development Bank of India under the auspices of the Reserve Bank of India had a combining effect in strengthening and broadening the framework of the capital market in India as the source for the supply of funds to industry.Securities market in IndiaThe corporate securities market in India dates back to the 18th centurywhen the securities of the East India Company were traded in Mumbai and Kolkotta. The brokers used to gather under a Banyan tree in Mumbai and under a Neem tree in Kolkata for the purpose of trading those securities. However the real beginning came in the 1850’s with the introduction of joint stock companies with limited liability. The 1860’s witnessed feverish dealings in securities and reckless speculation. This brought brokers in Mumbai together in July 1875 to form the first formally organized stock exchange in the country viz. The Stock Exchange, Mumbai. Ahmedabad stock exchange in 1894 and 22 others followed this in the 20th century. |
368 | Securities market in IndiaThe corporate securities market in India dates back to the 18th centurywhen the securities of the East India Company were traded in Mumbai and Kolkotta. The brokers used to gather under a Banyan tree in Mumbai and under a Neem tree in Kolkata for the purpose of trading those securities. However the real beginning came in the 1850’s with the introduction of joint stock companies with limited liability. The 1860’s witnessed feverish dealings in securities and reckless speculation. This brought brokers in Mumbai together in July 1875 to form the first formally organized stock exchange in the country viz. The Stock Exchange, Mumbai. Ahmedabad stock exchange in 1894 and 22 others followed this in the 20th century. |
369 | The corporate securities market in India dates back to the 18th centurywhen the securities of the East India Company were traded in Mumbai and Kolkotta. The brokers used to gather under a Banyan tree in Mumbai and under a Neem tree in Kolkata for the purpose of trading those securities. However the real beginning came in the 1850’s with the introduction of joint stock companies with limited liability. The 1860’s witnessed feverish dealings in securities and reckless speculation. This brought brokers in Mumbai together in July 1875 to form the first formally organized stock exchange in the country viz. The Stock Exchange, Mumbai. Ahmedabad stock exchange in 1894 and 22 others followed this in the 20th century.The process of reforms has led to a pace of growth almost unparalleled in the history of any country. The process of economic reforms and liberalization was set in motion in the mid-eighties and its pace was accelerated in 1991 when the economy suffered severely from a precariously low foreign exchange reserve, burgeoning imbalance on the external account, declining industrial production, galloping inflation and a rising fiscal deficit. The economic reforms, being an integrated process, included deregulation of industry, liberalization in foreign investment, regime, restructuring and liberalization of trade, exchange rate, and tax policies, partial disinvestments of government holding in public sector companies and financial sector reforms. The reforms in the real sectors such as trade, industry and fiscal policy were initiated first in order to create the necessary macroeconomic stability for launching financial sector reforms, which sought to improve the functioning of banking and financial institutions (FIs) and strengthen money and capital markets including securities market. The securities market reforms specifically included: |
370 | when the securities of the East India Company were traded in Mumbai and Kolkotta. The brokers used to gather under a Banyan tree in Mumbai and under a Neem tree in Kolkata for the purpose of trading those securities. However the real beginning came in the 1850’s with the introduction of joint stock companies with limited liability. The 1860’s witnessed feverish dealings in securities and reckless speculation. This brought brokers in Mumbai together in July 1875 to form the first formally organized stock exchange in the country viz. The Stock Exchange, Mumbai. Ahmedabad stock exchange in 1894 and 22 others followed this in the 20th century.The process of reforms has led to a pace of growth almost unparalleled in the history of any country. The process of economic reforms and liberalization was set in motion in the mid-eighties and its pace was accelerated in 1991 when the economy suffered severely from a precariously low foreign exchange reserve, burgeoning imbalance on the external account, declining industrial production, galloping inflation and a rising fiscal deficit. The economic reforms, being an integrated process, included deregulation of industry, liberalization in foreign investment, regime, restructuring and liberalization of trade, exchange rate, and tax policies, partial disinvestments of government holding in public sector companies and financial sector reforms. The reforms in the real sectors such as trade, industry and fiscal policy were initiated first in order to create the necessary macroeconomic stability for launching financial sector reforms, which sought to improve the functioning of banking and financial institutions (FIs) and strengthen money and capital markets including securities market. The securities market reforms specifically included: |
371 | when the securities of the East India Company were traded in Mumbai and Kolkotta. The brokers used to gather under a Banyan tree in Mumbai and under a Neem tree in Kolkata for the purpose of trading those securities. However the real beginning came in the 1850’s with the introduction of joint stock companies with limited liability. The 1860’s witnessed feverish dealings in securities and reckless speculation. This brought brokers in Mumbai together in July 1875 to form the first formally organized stock exchange in the country viz. The Stock Exchange, Mumbai. Ahmedabad stock exchange in 1894 and 22 others followed this in the 20th century.The process of reforms has led to a pace of growth almost unparalleled in the history of any country. The process of economic reforms and liberalization was set in motion in the mid-eighties and its pace was accelerated in 1991 when the economy suffered severely from a precariously low foreign exchange reserve, burgeoning imbalance on the external account, declining industrial production, galloping inflation and a rising fiscal deficit. The economic reforms, being an integrated process, included deregulation of industry, liberalization in foreign investment, regime, restructuring and liberalization of trade, exchange rate, and tax policies, partial disinvestments of government holding in public sector companies and financial sector reforms. The reforms in the real sectors such as trade, industry and fiscal policy were initiated first in order to create the necessary macroeconomic stability for launching financial sector reforms, which sought to improve the functioning of banking and financial institutions (FIs) and strengthen money and capital markets including securities market. The securities market reforms specifically included:Repeal of the Capital Issues (Control) Act, 1947 through which Government used to expropriate and allocate resources from capital market for favored uses; |
372 | The process of reforms has led to a pace of growth almost unparalleled in the history of any country. The process of economic reforms and liberalization was set in motion in the mid-eighties and its pace was accelerated in 1991 when the economy suffered severely from a precariously low foreign exchange reserve, burgeoning imbalance on the external account, declining industrial production, galloping inflation and a rising fiscal deficit. The economic reforms, being an integrated process, included deregulation of industry, liberalization in foreign investment, regime, restructuring and liberalization of trade, exchange rate, and tax policies, partial disinvestments of government holding in public sector companies and financial sector reforms. The reforms in the real sectors such as trade, industry and fiscal policy were initiated first in order to create the necessary macroeconomic stability for launching financial sector reforms, which sought to improve the functioning of banking and financial institutions (FIs) and strengthen money and capital markets including securities market. The securities market reforms specifically included:Repeal of the Capital Issues (Control) Act, 1947 through which Government used to expropriate and allocate resources from capital market for favored uses;Enactment of the Securities and Exchange Board of India Act, 1992 to provide for the establishment of the Securities and Exchange Board of India (SEBI) to regulate and promote development of securities market; |
373 | The process of reforms has led to a pace of growth almost unparalleled in the history of any country. The process of economic reforms and liberalization was set in motion in the mid-eighties and its pace was accelerated in 1991 when the economy suffered severely from a precariously low foreign exchange reserve, burgeoning imbalance on the external account, declining industrial production, galloping inflation and a rising fiscal deficit. The economic reforms, being an integrated process, included deregulation of industry, liberalization in foreign investment, regime, restructuring and liberalization of trade, exchange rate, and tax policies, partial disinvestments of government holding in public sector companies and financial sector reforms. The reforms in the real sectors such as trade, industry and fiscal policy were initiated first in order to create the necessary macroeconomic stability for launching financial sector reforms, which sought to improve the functioning of banking and financial institutions (FIs) and strengthen money and capital markets including securities market. The securities market reforms specifically included:Repeal of the Capital Issues (Control) Act, 1947 through which Government used to expropriate and allocate resources from capital market for favored uses;Enactment of the Securities and Exchange Board of India Act, 1992 to provide for the establishment of the Securities and Exchange Board of India (SEBI) to regulate and promote development of securities market;Setting up of NSE in 1993, passing of the Depositories Act, 1996 to provide for the maintenance and transfer of ownership of securities in book entry form; |
374 | Repeal of the Capital Issues (Control) Act, 1947 through which Government used to expropriate and allocate resources from capital market for favored uses;Enactment of the Securities and Exchange Board of India Act, 1992 to provide for the establishment of the Securities and Exchange Board of India (SEBI) to regulate and promote development of securities market;Setting up of NSE in 1993, passing of the Depositories Act, 1996 to provide for the maintenance and transfer of ownership of securities in book entry form;Amendments to the Securities Contracts (Regulation) Act, 1956 in 1999 to provide for the introduction of futures and option.Other measures included free pricing of securities, investorprotection measures, use of information technology, dematerialization of securities, improvement in trading practices, evolution of an efficient and transparent regulatory framework, emergence of several innovative financial products and services and specialized FIs etc. |
375 | Amendments to the Securities Contracts (Regulation) Act, 1956 in 1999 to provide for the introduction of futures and option.Other measures included free pricing of securities, investorprotection measures, use of information technology, dematerialization of securities, improvement in trading practices, evolution of an efficient and transparent regulatory framework, emergence of several innovative financial products and services and specialized FIs etc.These reforms were aimed at creating efficient and competitive securities market subject to effective regulation by SEBI, which would ensure investor protection. |
376 | protection measures, use of information technology, dematerialization of securities, improvement in trading practices, evolution of an efficient and transparent regulatory framework, emergence of several innovative financial products and services and specialized FIs etc.These reforms were aimed at creating efficient and competitive securities market subject to effective regulation by SEBI, which would ensure investor protection.Securities market in India has grown exponentially as measured in terms of amount raised from the market, number of stock exchanges and other intermediaries, the number of listed stocks, market capitalization, trading volumes and turnover on stock exchanges, investor population and price indices. Along with this, the profiles of the investors, issuers and intermediaries have changed significantly. The market has witnessed fundamental institutional changes resulting in drastic reduction in transaction costs and significant improvements in efficiency, transparency and safety, thanks to the National Stock Exchange. Indian market is now comparable to many developed markets in terms of a number of parameters. |
377 | protection measures, use of information technology, dematerialization of securities, improvement in trading practices, evolution of an efficient and transparent regulatory framework, emergence of several innovative financial products and services and specialized FIs etc.These reforms were aimed at creating efficient and competitive securities market subject to effective regulation by SEBI, which would ensure investor protection.Securities market in India has grown exponentially as measured in terms of amount raised from the market, number of stock exchanges and other intermediaries, the number of listed stocks, market capitalization, trading volumes and turnover on stock exchanges, investor population and price indices. Along with this, the profiles of the investors, issuers and intermediaries have changed significantly. The market has witnessed fundamental institutional changes resulting in drastic reduction in transaction costs and significant improvements in efficiency, transparency and safety, thanks to the National Stock Exchange. Indian market is now comparable to many developed markets in terms of a number of parameters. |
378 | These reforms were aimed at creating efficient and competitive securities market subject to effective regulation by SEBI, which would ensure investor protection.Securities market in India has grown exponentially as measured in terms of amount raised from the market, number of stock exchanges and other intermediaries, the number of listed stocks, market capitalization, trading volumes and turnover on stock exchanges, investor population and price indices. Along with this, the profiles of the investors, issuers and intermediaries have changed significantly. The market has witnessed fundamental institutional changes resulting in drastic reduction in transaction costs and significant improvements in efficiency, transparency and safety, thanks to the National Stock Exchange. Indian market is now comparable to many developed markets in terms of a number of parameters.Developments in Securities Markets, before 1992 and present scenario |
379 | (Source: ADBI Working Paper – Financial development in Emerging Markets: the Indian experience)MONEY MARKETOne of the sections of a financial market where securities and financial instruments with short-term maturities are traded is called the money market. It deals in funds and financial instruments having a maturity period of one day to one year.Financial assets like treasury bills, certificates of deposits, commercial paper and bankers’ acceptance are some of the short-term debt securities traded in the money market.RBI being the main constituent in the money market aims at ensuring that liquidity and short term interest rates are consistent with the monetary policy objectives. RBI describes money market as “the centre for dealings, mainly of a short-term character, in monetary assets, it meets the short-term requirements of borrowers and provides liquidity or cash to lenders”.The money market functions are -Transfer of large sums of money |
380 | The money market functions are -Transfer of large sums of moneyTransfer from parties with surplus funds to parties with a deficitAllow governments to raise fundsHelp to implement monetary policyDetermine short-term interest ratesThe Indian money market consists of the unorganised sector: moneylenders, indigenous bankers, chit funds; organised sector: Reserve Bank of India, private banks, public sector banks, development banks and other non-banking financial companies (NBFCs) such as Life Insurance Corporation of India (LIC), the International Finance Corporation, IDBI, and the co-operative sector.Money market and Capital Market |
381 | Determine short-term interest ratesThe Indian money market consists of the unorganised sector: moneylenders, indigenous bankers, chit funds; organised sector: Reserve Bank of India, private banks, public sector banks, development banks and other non-banking financial companies (NBFCs) such as Life Insurance Corporation of India (LIC), the International Finance Corporation, IDBI, and the co-operative sector.Money market and Capital MarketMoney Market is a place for short term lending and borrowing, typically within a year. It deals in short term debt financing and investments. On the other hand, Capital Market refers to stock market, which refers to trading in shares and bonds of companies on recognized stock exchanges. Individual players cannot invest in money market as the value of investments is large, on the other hand, in capital market, anybody can make investments through a broker. Stock Market is |
382 | Money market and Capital MarketMoney Market is a place for short term lending and borrowing, typically within a year. It deals in short term debt financing and investments. On the other hand, Capital Market refers to stock market, which refers to trading in shares and bonds of companies on recognized stock exchanges. Individual players cannot invest in money market as the value of investments is large, on the other hand, in capital market, anybody can make investments through a broker. Stock Market isassociated with high risk and high return as against money market which is more secure. Further, in case of money market, deals are transacted on phone or through electronic systems as against capital market where trading is through recognized stock exchanges.Money Market InstrumentsTreasury Bills (T-Bills) |
383 | associated with high risk and high return as against money market which is more secure. Further, in case of money market, deals are transacted on phone or through electronic systems as against capital market where trading is through recognized stock exchanges.Money Market InstrumentsTreasury Bills (T-Bills)Treasury bills (T-bills) offer short-term investment opportunities, generally up to one year. They are thus useful in managing short-term liquidity. At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State Governments.Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a discount and are redeemed at par. Treasury bills are also issued under the Market Stabilization Scheme (MSS).Repurchase Agreements |
384 | Treasury Bills (T-Bills)Treasury bills (T-bills) offer short-term investment opportunities, generally up to one year. They are thus useful in managing short-term liquidity. At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State Governments.Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a discount and are redeemed at par. Treasury bills are also issued under the Market Stabilization Scheme (MSS).Repurchase AgreementsRepurchase transactions, called Repo or Reverse Repo are transactions or short term loans in which two parties agree to sell and repurchase the same security. They are usually used for overnight borrowing. Repo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities viz. Government Of India and State Government Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc. Under repurchase agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date at a predetermined price. Such a transaction is called a Repo when viewed from the perspective of the seller of the securities and Reverse Repo when viewed from the perspective of the buyer of the securities. |
385 | Treasury bills (T-bills) offer short-term investment opportunities, generally up to one year. They are thus useful in managing short-term liquidity. At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State Governments.Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a discount and are redeemed at par. Treasury bills are also issued under the Market Stabilization Scheme (MSS).Repurchase AgreementsRepurchase transactions, called Repo or Reverse Repo are transactions or short term loans in which two parties agree to sell and repurchase the same security. They are usually used for overnight borrowing. Repo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities viz. Government Of India and State Government Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc. Under repurchase agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date at a predetermined price. Such a transaction is called a Repo when viewed from the perspective of the seller of the securities and Reverse Repo when viewed from the perspective of the buyer of the securities.Commercial Papers (CP) |
386 | Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a discount and are redeemed at par. Treasury bills are also issued under the Market Stabilization Scheme (MSS).Repurchase AgreementsRepurchase transactions, called Repo or Reverse Repo are transactions or short term loans in which two parties agree to sell and repurchase the same security. They are usually used for overnight borrowing. Repo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities viz. Government Of India and State Government Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc. Under repurchase agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date at a predetermined price. Such a transaction is called a Repo when viewed from the perspective of the seller of the securities and Reverse Repo when viewed from the perspective of the buyer of the securities.Commercial Papers (CP)Commercial Papers were introduced in January 1990. Commercial Papers can be issued by a listed company which have working capital of not less than Rs. 5 crores. They can be issued in multiple of Rs. 25 lakhs and the minimum size of issue being Rs. 1 crore. At present the maturity period of CPs ranges between 7 days to 1 year. CPs are issued at a discount to its face value and |
387 | Repurchase AgreementsRepurchase transactions, called Repo or Reverse Repo are transactions or short term loans in which two parties agree to sell and repurchase the same security. They are usually used for overnight borrowing. Repo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities viz. Government Of India and State Government Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc. Under repurchase agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date at a predetermined price. Such a transaction is called a Repo when viewed from the perspective of the seller of the securities and Reverse Repo when viewed from the perspective of the buyer of the securities.Commercial Papers (CP)Commercial Papers were introduced in January 1990. Commercial Papers can be issued by a listed company which have working capital of not less than Rs. 5 crores. They can be issued in multiple of Rs. 25 lakhs and the minimum size of issue being Rs. 1 crore. At present the maturity period of CPs ranges between 7 days to 1 year. CPs are issued at a discount to its face value and |
388 | Repurchase transactions, called Repo or Reverse Repo are transactions or short term loans in which two parties agree to sell and repurchase the same security. They are usually used for overnight borrowing. Repo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities viz. Government Of India and State Government Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc. Under repurchase agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date at a predetermined price. Such a transaction is called a Repo when viewed from the perspective of the seller of the securities and Reverse Repo when viewed from the perspective of the buyer of the securities.Commercial Papers (CP)Commercial Papers were introduced in January 1990. Commercial Papers can be issued by a listed company which have working capital of not less than Rs. 5 crores. They can be issued in multiple of Rs. 25 lakhs and the minimum size of issue being Rs. 1 crore. At present the maturity period of CPs ranges between 7 days to 1 year. CPs are issued at a discount to its face value andredeemed at its face value. |
389 | Commercial Papers (CP)Commercial Papers were introduced in January 1990. Commercial Papers can be issued by a listed company which have working capital of not less than Rs. 5 crores. They can be issued in multiple of Rs. 25 lakhs and the minimum size of issue being Rs. 1 crore. At present the maturity period of CPs ranges between 7 days to 1 year. CPs are issued at a discount to its face value andredeemed at its face value.Certificate of Deposit (CD)Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note against funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India (RBI), as amended from time to time. |
390 | redeemed at its face value.Certificate of Deposit (CD)Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note against funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India (RBI), as amended from time to time.Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs. 1 lakh thereafter. The maturity period of CDs issued by banks should not be less than 7 days and not more than one year, from the date of issue. The FIs (financial institutions) can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue.Banker’s Acceptance |
391 | Certificate of Deposit (CD)Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note against funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India (RBI), as amended from time to time.Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs. 1 lakh thereafter. The maturity period of CDs issued by banks should not be less than 7 days and not more than one year, from the date of issue. The FIs (financial institutions) can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue.Banker’s AcceptanceA banker’s acceptance is a short-term investment plan created by a company or firm with a guarantee from a bank. It is a guarantee from the bank that a buyer will pay the seller at a future date. A good credit rating is required by the company or firm drawing the bill. The terms for these instruments are usually 90 days, but this period can vary between 30 and 180 days. Companies use the acceptance as a time draft for financing imports, exports and other trade |
392 | Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note against funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India (RBI), as amended from time to time.Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs. 1 lakh thereafter. The maturity period of CDs issued by banks should not be less than 7 days and not more than one year, from the date of issue. The FIs (financial institutions) can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue.Banker’s AcceptanceA banker’s acceptance is a short-term investment plan created by a company or firm with a guarantee from a bank. It is a guarantee from the bank that a buyer will pay the seller at a future date. A good credit rating is required by the company or firm drawing the bill. The terms for these instruments are usually 90 days, but this period can vary between 30 and 180 days. Companies use the acceptance as a time draft for financing imports, exports and other tradeCommercial Bill |
393 | Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs. 1 lakh thereafter. The maturity period of CDs issued by banks should not be less than 7 days and not more than one year, from the date of issue. The FIs (financial institutions) can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue.Banker’s AcceptanceA banker’s acceptance is a short-term investment plan created by a company or firm with a guarantee from a bank. It is a guarantee from the bank that a buyer will pay the seller at a future date. A good credit rating is required by the company or firm drawing the bill. The terms for these instruments are usually 90 days, but this period can vary between 30 and 180 days. Companies use the acceptance as a time draft for financing imports, exports and other tradeCommercial BillCommercial bills are short term, negotiable and self liquidating money market instruments with low risk. A bill of exchange is drawn by a seller on the buyer to make payment within a certain period of time. Generally, the maturity period is of three months. Commercial bill can be resold a number of times during the usance period of bill. The commercial bills are purchased and discounted by commercial banks and are rediscounted by financial institutions. |
394 | Banker’s AcceptanceA banker’s acceptance is a short-term investment plan created by a company or firm with a guarantee from a bank. It is a guarantee from the bank that a buyer will pay the seller at a future date. A good credit rating is required by the company or firm drawing the bill. The terms for these instruments are usually 90 days, but this period can vary between 30 and 180 days. Companies use the acceptance as a time draft for financing imports, exports and other tradeCommercial BillCommercial bills are short term, negotiable and self liquidating money market instruments with low risk. A bill of exchange is drawn by a seller on the buyer to make payment within a certain period of time. Generally, the maturity period is of three months. Commercial bill can be resold a number of times during the usance period of bill. The commercial bills are purchased and discounted by commercial banks and are rediscounted by financial institutions.COMMODITY MARKET |
395 | Commercial BillCommercial bills are short term, negotiable and self liquidating money market instruments with low risk. A bill of exchange is drawn by a seller on the buyer to make payment within a certain period of time. Generally, the maturity period is of three months. Commercial bill can be resold a number of times during the usance period of bill. The commercial bills are purchased and discounted by commercial banks and are rediscounted by financial institutions.COMMODITY MARKETCommodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market. |
396 | COMMODITY MARKETCommodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.Investors access about 50 major commodity markets worldwide with purely financial transactions increasingly outnumbering physical trades in which goods are delivered. Futures contracts are the oldest way of investing in commodities. Futures are secured by physical assets. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management. |
397 | COMMODITY MARKETCommodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.Investors access about 50 major commodity markets worldwide with purely financial transactions increasingly outnumbering physical trades in which goods are delivered. Futures contracts are the oldest way of investing in commodities. Futures are secured by physical assets. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management. |
398 | Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.Investors access about 50 major commodity markets worldwide with purely financial transactions increasingly outnumbering physical trades in which goods are delivered. Futures contracts are the oldest way of investing in commodities. Futures are secured by physical assets. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management.Derivatives such as futures contracts, Swaps, Exchange-traded Commodities, forward contracts etc. have become the primary trading instruments in commodity markets. Futures are traded on regulated commodities exchanges. |
399 | Investors access about 50 major commodity markets worldwide with purely financial transactions increasingly outnumbering physical trades in which goods are delivered. Futures contracts are the oldest way of investing in commodities. Futures are secured by physical assets. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management.Derivatives such as futures contracts, Swaps, Exchange-traded Commodities, forward contracts etc. have become the primary trading instruments in commodity markets. Futures are traded on regulated commodities exchanges.The regulatory body for commodity trading in India is the Forward Markets Commission.History of the Commodity Futures Market in India |
400 | The regulatory body for commodity trading in India is the Forward Markets Commission.History of the Commodity Futures Market in IndiaThe Commodity Futures market in India dates back to more than a century. The first organized futures market was established in 1875, under the name of ’Bombay Cotton Trade Association’ to trade in cotton derivative contracts. This was followed by institutions for futures trading in oilseeds, foodgrains, etc. The futures market in India underwent rapid growth between the period of First and Second World War. As a result, before the outbreak of the Second World War, a large number of commodity exchanges trading futures contracts in several commodities like cotton, groundnut, groundnut oil, raw jute, jute goods, castorseed, wheat, rice, sugar, precious metals like gold and silver were flourishing throughout the country. In view of the delicate supply situation of major commodities in the backdrop of war efforts mobilization, futures trading came to be prohibited during the Second World War under the Defence of India Act. After Independence, especially in the second half of the |
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