CAPITAL MARKET

The capital market is the market for securities, where Companies and governments can raise long-term funds. It is a market in which money is lent for periods longer than a year. A nation's capital market includes such financial institutions as banks, insurance companies, and stock exchanges that channel long-term investment funds to commercial and industrial borrowers. Unlike the money market, on which lending is ordinarily short term, the capital market typically finances fixed investments like those in buildings and machinery.

Debt or Bond market

The bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds.

STOCK OR EQUITY MARKET

A stock market or equity market is a public market (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.

Primary Market

Also called the new issue market is the market for issuing new securities. Many companies, especially small and medium scale, enter the primary market to raise money from the public to expand their businesses. They sell their securities to the public through an initial public offering. The securities can be directly bought from the shareholders, which is not the case for the secondary market. The primary market is a market for new capitals that will be traded over a longer period.

Secondary Market

Debt or Bond Market

Equity or Stock Market

Capital Market

Is the market where, unlike the primary market, an investor can buy a security directly from another investor in lieu of the issuer? It is also referred as "after market". The securities initially are issued in the primary market, and then they enter into the secondary market.

Role of Capital Market

The primary role of the capital market is to raise long-term funds for governments, banks, and corporations while providing a platform for the trading of securities. This fundraising is regulated by the performance of the stock and bond markets within the capital market. The member organizations of the capital market may issue stocks and bonds in order to raise funds. Investors can then invest in the capital market by purchasing those stocks and bonds. The capital market, however, is not without risk. It is important for investors to understand market trends before fully investing in the capital market. To that end, there are various market indices available to investors that reflect the present performance of the market.

Table 1: New capital raised from the market by public limited companiesS.L.No Period Capital raised

(Rs. Crore)Yearly average Growth rate

(Per Cent)1 1951-60 285 28.5 155.42. 1961-70 728 72.8 36.33. 1971-80 992 99.2 2254.54. 1981-90 23,357 2,335.70 457.25. 1991-99 1,06,799 13,349.80

Source: based on data in the The Report on Currency and Finance, RBI, India, various years

Recently the government and SEBI have initiated a number of healthy measures to develop the capital market.

• Grant of legal status to SEBI for protecting investor’s interest and regulating the market.• Pricing of issues was left free.• Permission to FII’s (foreign institutional investors) to enter the primary and secondary market.• Equity issue in foreign markets by Indian companies through ADR’s and GDR’s.• Dematerialization of shares.• Compulsory credit rating.• Promotion of the concept of corporate governance.• Permission for buy back of shares.• Participation of foreign partners with equity in all industries.• Reduction in interest rates.The outcome of the revamping of the capital market on the new issue market is that the total amount of proposed investments through the NIM in the 1980’s increased to Rs. 23,357 crore from Rs. 992 crore in 1970’s and a mere Rs.285 crore in the 1950’s (See Table 1)

The year 2010-11 witnessed a strong recovery of Indian capital markets. This has set the pace for steady growth in the coming months. The vigour of the Indian capital markets reflects strong investor confidence and an increasing appetite for risk. Growth of the Indian economy was 8.6% during 2010-11, supporting the increased activity in the capital markets in full measure. Net capital inflows increased to US$123.2 billion in April 2011 as compared to US$92.1 billion reported in April 2010. The composition of these capital inflows was dominated by (Foreign Institutional Investor) FII investments and trade credits, inflows from Foreign Direct Investment (FDI) being on the lower side.

2003-04 2004-05 2005-06 2006-07 2007-2008 2008-2009 2009-10

43.4

54.3

84.4 85.5

109.5

55.4

100

40.550.7

78.6 81.2

103.5

52

97.5

Market Capitalisation to GDP ratio (in %)BSE Market Cap to GDP ratio NSE Market Cap to GDP Ratio

Source: SEBI Annual Report 2010

Data released by SEBI indicates that companies raised ` 21.3 crore through corporate bonds in 2009-10, up 22.7% from ` 17.3 crore in 2008-09.

Regulatory jurisdiction over the corporate bond market has been clearly defined and placed under SEBI. SEBI (Issue and Listing of Debt Securities) Regulations, 2008 simplified disclosures and listing requirements. A minimum market criterion has been reduced from ` 10 lakh to ` 1 lakh to encourage retail investors.

• The limit of FIIs investment in corporate bonds has been increased to USD 20 billion from the existing limit of USD 15 billion and the incremental limit of USD 5 billion has to be invested in corporate bonds with residual maturity of over five years.

• BSE, NSE and FIMMDA have set up reporting platforms. Aggregate data reported on these platforms is disseminated to the public. Summary data is available on the SEBI website. Repos in corporate bonds have been permitted, following RBI guidelines, since March 2010. Exchange traded interest rates futures were introduced in August 2009.

• Draft Credit Default Swap (CDS) guidelines were released by the Reserve Bank of India in July, 2010. The Finance Act, 2008 (with effect from June 1, 2008) mandated that no TDS (tax deduction at source) would be deducted from any interest payable on any security issued by a company, where

such security is issued in dematerialised form and is listed on a recognised stock exchange in India. The stamp duty on items in central list (debentures and bonds in the nature of promissory note) have been brought down and made uniform.

• Clearing and settlement through clearing corporations have been mandated for trades between specified entities namely mutual funds, foresight institutional investors, venture capital funds etc. Clearing and settlement is on DvP I basis.( Delivery versus payment)

Source: SEBI