This article was written by Navaneeth Sarma MS, who a Training program to pass the independent director exam out of Capability arbitrage.
This article was edited and published by Shashwat Kaushik.
Overview of Capital Markets in India
The capital market plays an important role in the economic development of any country by channeling savings and investments between providers of capital (individual investors, institutional investors) and users (corporations, government). This article provides an overview of the capital market in India, key concepts and regulatory framework. And associated important instruments Meaning and structure of the capital market, long-term financial market.
Definition of the capital market
A capital market is a financial market through which long-term debt or equity and other debt or equity-backed securities are traded. It essentially consists of two segments:
Primary market
In the primary market, securities are offered and sold on the same marketplace for the first time. Companies resort to this by presenting their shares or bonds to the public. Before we move on to the following modules, it is important to recall some well-known examples of capital sales such as Initial Public Offerings (IPOs).
Secondary market
After the securities are issued, they are bought and sold on the secondary market between buyers and sellers. BSE and NSE are two major stock exchanges based in India where most of these trades are conducted.
Key instruments on the capital market
Equity: This is ownership in a company that is traded in the form of shares. The over-the-counter market has grown remarkably; The number of retail investors in the Indian stock market is increasing rapidly. Equity is the sale of ownership rights in organizations to the public to obtain funds.
Debt Instruments: These are loans, including bonds and debentures, which involve the issuance of bonds or debentures to the relevant borrower. Bonds pay the investor fixed or variable interest at set intervals and repayment of the face value when the bond matures. The following fixed income securities dominate the capital markets in India: government bonds and corporate bonds.
Derivatives: A derivative is a financial product whose payout depends on an underlying asset or set of assets. Derivative products traded in Indian capital markets include futures and options.
Mutual Funds: Stocks or securities are acquired by a mutual fund through contributions from various investors who invest in it. This is one of the most widely used investment vehicles in India and offers retail investors an opportunity to diversify their investment portfolios.
Foreign Institutional Investors (FIIs): Foreign institutional investors have continued importance in the Indian capital market. The impact of their investments helps increase liquidity and market depth, thereby ensuring greater capital inflow into the Indian markets.
Regulatory framework
The Indian capital market is primarily controlled by the Securities and Exchange Board of India (SEBI), which was established in 1992 with the primary objective of protecting the interests of investors and maintaining fair trading practices in the capital market. SEBI regulates the market and has rules and regulations for all participants such as underwriters, brokers and institutional investors.
SEBI’s role
The Securities and Exchange Board of India (SEBI) plays a crucial role in the Indian capital market. His main tasks include:
- Regulation of securities issuance: SEBI monitors the process of public securities issuance, ensuring compliance and protecting investors.
- Supervision of stock exchanges: SEBI regulates and monitors the operations of stock exchanges in India, ensuring fair and transparent trading practices. It sets listing requirements, monitors trading activities and takes action against irregularities.
- Market surveillance: SEBI monitors the market for fraudulent or manipulative activities such as insider trading, market manipulation and price manipulation. It investigates suspicious trading patterns, conducts investigations and takes enforcement action against violators.
- Investor protection: SEBI is committed to protecting the interests of investors by promoting investor education, facilitating resolution of investor complaints and ensuring fair treatment by market intermediaries.
- Promoting corporate integrity: SEBI promotes ethical business practices and corporate governance in listed companies. It mandates disclosures, promotes transparency and takes action against companies that violate regulations.
SEBI’s efforts have been instrumental in curbing market malpractices, enhancing investor confidence and promoting a healthy capital market in India.
Reserve Bank of India (RBI):
Although the Reserve Bank of India (RBI) is primarily known as India’s central bank, it also plays an important role in the capital market, particularly in debt and foreign exchange.
- Regulation of Debt Instruments: The RBI regulates the issuance and trading of government securities, corporate bonds and other debt instruments. It sets guidelines for issuers, monitors market activity and ensures the smooth functioning of the debt market.
- Foreign exchange management: The RBI manages the country’s foreign exchange reserves and regulates foreign exchange transactions. It sets exchange rate policy, monitors capital flows and intervenes in the market to maintain stability.
RBI’s involvement in the capital market complements the role of SEBI and contributes to the overall stability and development of the financial system.
Growth and development of Indian capital markets
India’s capital market developed significantly during the reporting period. After independence, this market had a low free float and little interest from investors. Although there was slow growth and limited trading space in the early years of development, the change came with economic liberalization initiated in the 1990s and also with the establishment of SEBI.
They also pointed out that India’s shift towards the use of technology has also boosted capital markets. Due to the dematerialization of stocks, topics related to stock market investing have become popular among many people and online trading platforms have made this possible. Algorithm trading and higher contributions from SCN and FIIs have also helped further improve the efficiency of market depth.
Capital markets for economic growth
Capital markets promote economic growth through:
- Raising Capital for Business: Capital markets are used by the company to raise funds required for expansion, product development, etc. It helps companies invest their profits back into the business and create more jobs in the process.
- Wealth creation for investors: Equivalent capital markets offer investors the opportunity to earn their wealth. Over the long term, share prices show that they have a higher inflation rate than the returns offered by other traditional forms of investment, such as fixed-term deposits in a bank.
- Resource allocation: International capital markets help channel funds to the relevant economic sectors. hence better resource allocation.
Problem related to capital markets
Despite its rapid growth, Indian capital markets in India face several challenges:
- Market volatility: The Indian stock market reacts very volatile to the changes in the global economy. Market instabilities such as fluctuating oil prices, increased political risks or changes in exchange rates destabilize the market and lead to a decline in investor confidence.
- Regulatory Issues: Despite SEBI’s regulatory success in maintaining market stability, there are regulatory overlaps in some areas, such as algorithmic trading and non-banking financial companies (NBFCs).
- Low Financial Literacy: It has been seen that financial literacy is still a marginal concept in India and hence the participation of retail investors in capital markets is limited. This reduces market depth and increased engagement, which is known to be key to long-term growth.
- Liquidity Constraints: While FIIs have brought better liquidity thereby making the markets more liquid; However, segments such as corporate bond markets cannot be said to be very liquid. Investors in most other markets complain of a poor liquidity environment that makes it difficult to raise sufficient funds from these companies.
Current trends and innovations
Rise of ESG investing
ESG factors now play an essential role in the investment process and are highly valued by investors. Investors, including institutional investors and private investors, are now looking forward to companies and organizations with sustainable business policies.
Increased participation from private investors
With the increasing availability of trading platforms and applications, retail participation has increased in recent years. This trend was further reinforced by the COVID-19 pandemic, with many people looking for new investment products.
Digital transformation
It is noteworthy that India’s capital markets are quite digitalized. Bots are not currently highly automated; They enable real-time trading as well as improved settlement processes and transparency. This has also led to cost containment and expansion of markets.
Emergence of REITs and INVITs
REIT and INVIT are the new forms of investment products where investors can invest in real estate or infrastructure projects without owning physical real estate. Liquid securities provide systematic returns and also ensure diversification of investment options in the market.
Diploma
Capital markets in India are one of the most important components of the country’s financial infrastructure. It helps companies access capital and investors to invest their money by increasing their value through the market, thus contributing significantly to the development of the economy. Challenges include fluctuations in global markets, a strict regulatory environment and relatively low financial awareness. The Indian capital market is poised for further growth with the adoption of technology, a rise in retail investors and new financial products.
By maintaining reforms, improving regulations and emphasizing education, India’s capital markets will be able to explore much more from their perspective, a fact that will provide the country with the required financial support system to achieve India’s long-term economic goals.
References
- https:> nextias. com/blog/capital-market/
- https://www. Investopedia. Com/terms/c/capitalmarkets. asp
- Gunjan Malhotra. (n.d.). “Indian Capital Markets: Development Opportunities and Concerns. “XVI. International Economic Conference”.
- yoti Mittal. (n.d.). “Capital Markets in India: Organization and Development. “ICSI.
- https:>www. drnishikantjha. com/booksCollection/Ch. 5 The capital market. pdf
- https:> //www. Assocham. org/uploads/files/Indias-Capital-Market. pdf
