Capital Market

Understanding Capital Market: A Foundation for Long-Term Growth

• The capital market is the segment of the financial market that deals with the mobilization and investment of long-term funds, typically those maturing beyond one year.
• It serves as a crucial link between investors (savers) and entrepreneurs (businesses and governments) by providing a platform for raising and allocating financial resources productively.
• Unlike the money market, which deals with short-term instruments like Treasury Bills and Commercial Paper, the capital market is oriented towards funding long-term infrastructure, industrial development, housing, education, and innovation.
• Eg: When LIC invests in a 10-year corporate bond issued by a power company, it’s a capital market transaction aimed at financing long-term energy infrastructure.

Key Functions of the Capital Market

• Capital Formation: It converts savings into investments, thereby helping in economic development.
• Efficient Allocation of Resources: It ensures that capital flows to sectors with the highest productivity and returns.
• Liquidity to Investments: Through the secondary market, investors can convert their holdings into cash when required.
• Facilitates Industrial Growth: By providing funds for capacity expansion, R&D, and innovation.
• Pricing of Securities: The stock market, through demand and supply dynamics, helps discover fair prices of shares and bonds.
• Encouragement of Savings: It offers diverse instruments like equities, mutual funds, debentures that attract household and institutional investors.

Major Segments of the Capital Market

(A) Primary Market – The New Issue Market

• The primary market is where new securities are issued by companies or governments to raise capital for the first time.
• This is also known as the “New Issue Market”.
• Companies raise funds for:
  • Setting up new projects (greenfield projects)
  • Expansion of existing units
  • Debt restructuring or acquisitions
  • Eg: When Zomato launched its IPO in 2021 to raise ₹9,000 crore, it did so in the primary market.

Methods of Raising Capital:

• Initial Public Offering (IPO): When a company sells shares to the public for the first time.
• Follow-on Public Offer (FPO): Additional share issuance by a listed company.
• Private Placement: Sale of securities to a small group of institutional investors.
• Rights Issue: Offer to existing shareholders to buy more shares at a concessional rate.
• Regulation: The primary market is regulated by SEBI (Securities and Exchange Board of India) which ensures transparency, investor protection, and disclosure norms.

(B) Secondary Market – The Stock Exchange

• The secondary market is where existing securities are bought and sold among investors.
• It provides liquidity to investments made in the primary market.
• Major Indian stock exchanges:
  • Bombay Stock Exchange (BSE) – oldest in Asia, established in 1875.
  • National Stock Exchange (NSE) – launched in 1992, known for electronic trading.
  • Eg: Buying Reliance Industries shares on NSE is a secondary market transaction.
• Features:
  • Facilitates price discovery based on supply and demand.
  • Reflects the health of the economy through indices like Sensex and Nifty.
  • Allows investors to exit investments at any time.

Participants in the Capital Market

• Retail Investors: Individual savers who invest in stocks, bonds, mutual funds.
• Institutional Investors:
  • Domestic: LIC, GIC, Mutual Funds, Pension Funds.
  • Foreign: FIIs and FPIs who invest in Indian securities.
• Corporate Sector: As issuers of securities.
• Government: Issues bonds through RBI to fund fiscal deficit.
• Intermediaries: Merchant bankers, brokers, underwriters, registrars who facilitate issuance and trading.
• Regulators: SEBI ensures orderly development and investor protection.

Instruments of Capital Market

• Equity Shares: Ownership instruments; high return, high risk.
• Debentures and Bonds: Debt instruments with fixed interest; issued by companies or government.
• Mutual Funds: Pooling of investor money by Asset Management Companies (AMCs) into diversified portfolios.
• Derivatives: Futures and options based on underlying assets.
• Preference Shares: Fixed dividend, priority over equity in liquidation.
• Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs): Allow investment in infrastructure and real estate projects.

Regulatory Framework – SEBI’s Role

• SEBI (est. 1992) is the statutory regulator of the capital market under SEBI Act, 1992.
• It aims to:
  • Protect investor interests
  • Regulate stock exchanges and intermediaries
  • Prevent insider trading and unfair practices
  • Promote the development of capital market

Eg: SEBI mandates companies to file DRHP (Draft Red Herring Prospectus) before launching an IPO.

Recent Reforms and Developments in Indian Capital Market

• T+1 Settlement: India became the first major economy to implement faster trade settlements (Transaction + 1 day).
• Dematerialization: Electronic holding of shares through NSDL and CDSL, reducing fraud and paperwork.
• Increasing Retail Participation: Record number of Demat accounts opened post-2020; youth and Tier-2 cities joining in.
• Digital Platforms: Growth of apps like Zerodha, Groww has made stock market more accessible.
• ESG Investing: Rising trend of investing in companies with good Environmental, Social, and Governance practices.

Challenges of Capital Market in India

• Low Financial Literacy: Most Indian households prefer fixed deposits or gold over capital market.
• Market Volatility: Over-dependence on FIIs makes the market vulnerable to global shocks.
• Lack of Depth: Few quality stocks dominate trading volumes; mid-caps and small-caps remain underdeveloped.
• Corporate Governance Issues: Fraudulent accounting, insider trading cases hurt investor trust.
• Under-penetration: Only a small percentage of India’s population directly invests in equities.

Government & SEBI Initiatives to Strengthen Capital Market

• Investor Awareness Programs: Through SEBI, NSE, BSE, and Ministry of Finance.
• Startup Listing Platform (NSE Emerge): To help small firms raise capital.
• Ease of Doing IPO: Simplified norms, faster approvals, greater transparency.
• FDI Reforms: Encouraging long-term foreign portfolio investments.
• Unified Regulatory Framework: Bringing all market intermediaries under SEBI’s watch.

Capital Market & Indian Economy

• Strong capital markets help fund India’s infrastructure goals, Make in India, Digital India, and Startup India missions.
• The stock market serves as a barometer of the economy — when GDP outlook is positive, markets perform better.
• Greater capital inflow through markets reduces dependency on bank loans, improving credit-debt dynamics.
• A vibrant capital market encourages innovation, entrepreneurship, and financial inclusion.

Way Forward

• Promote financial literacy at school and college levels.
• Strengthen regulatory oversight to curb insider trading and frauds.
• Encourage more institutional and retail participation from rural and semi-urban areas.
• Deepen the corporate bond market to reduce over-reliance on banking system.
• Focus on green bonds, ESG financing, and tech-enabled compliance for future sustainability.

Conclusion

The capital market is not just a platform for trading stocks; it is the lifeblood of India’s economic engine, enabling long-term funding for development, infrastructure, innovation, and entrepreneurship. With continued reforms, awareness, and inclusiveness, India can transform its capital market into a global financial powerhouse.

“A vibrant capital market is not just a sign of a growing economy; it is the foundation on which aspirations of millions are built.”

---

PDF File:

No PDF attached

---

Subject: Economics

← Back