Capital Market in India

The capital market is the market for securities, where companies and governments
can raise long term funds. Selling stock and selling bonds are two ways to generate
capital and long term funds. Thus bond markets and stock markets are considered
capital markets. The capital markets consist of the primary market, where new
issues are distributed to investors, and the secondary market, where existing
securities are traded .The Indian Equity Markets and the Indian Debt markets
together form the Indian Capital markets.

Equity market in India:-

Stock is the type of equity security with which most people are familiar. When
investors (savers) buy stock, they become owners of a "share" of a company's
assets and earnings. If a company is successful, the price that investors are willing
to pay for its stock will often rise and shareholders who bought stock at a lower price
then stand to make a capital profit. If a company does not do well, however, its
stock may decrease in value and shareholders can lose money. Stock prices are also
subject to both general economic and industry-specific market factors.

The equity market is classified as :-

(a) Primary market

(b) Secondary market

(a) Primary market:-

The primary market provides the channel for creation of new securities
through the issuance of financial instruments by public companies as well as
government companies , bodies and agencies.

Features of primary markets are:

 This is the market for new long term capital. The primary market is the market
where the securities are sold for the first time. Therefore it is also called the
New Issue Market (NIM).

 In a primary issue, the securities are issued by the company directly to

investors.

 The company receives the money and issues new security certificates to the
investors.

 Primary issues are used by companies for the purpose of setting up new
business or for expanding or modernizing the existing business.

 The primary market performs the crucial function of facilitating capital

formation in the economy.

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The primary market issuance is done either through public issue or private
placement . A public issue does not limit any entity in investing while in private
placement , the issuance is done to select people. In terms of Indian Companies
Act , 1956 as issue becomes public if it results in allotment to more than 50
persons. This means an issue resulting in allotment to less than 50 persons is
private placement .

Secondary market:-
Secondary market 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
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". There are 23 stock exchanges in India. Listing on stock
exchanges enables the shareholders to monitor the movement of the share prices in
an effective manner. This assist them 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.

Debt Market in India:-

For a developing economy like India, debt markets are crucial sources of
capital funds. The debt market in India is amongst the largest in Asia. It includes
government securities, public sector undertakings, other government bodies,
financial institutions, banks and companies. The debt markets in India is divided into
three segments, viz., Government Securities, Public Sector Units (PSU) bonds, and
corporate securities

Primary market/ New Issue Market:-

As in the case of equity primary market , this is the market in which debt
instruments – government securities, PSU Bonds & corporate bonds are issued for
the first time .

Government Securities:-

The market for Government Securities comprises the Centre, State and State-
sponsored securities. Government securities (G-secs) or gilts are sovereign
securities, which are issued by the Reserve Bank of India (RBI) on behalf of the
Government of India (GOI). The GOI uses these funds to meet its expenditure
commitments

In case of government securities , it is the RBI which issues securities on behalf of

the government (both state as well as central government). Thus RBI periodically

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conducts auction of GOI/SDL under Central/State borrowing Treasury program as per
the auction calendar and also under MSS for GOI Securities.

PSU Bonds

PSU bonds are generally treated as surrogates of sovereign paper, sometimes due
to explicit guarantee and often due to the comfort of public ownership. Some of the
PSU bonds are tax free, while most bonds including government securities are not
tax-free. The RBI also issues tax-free bonds, called the 6.5% RBI relief bonds, which
is a popular category of tax-free bonds in the market.

Corporate bond

Corporate bond markets comprise of commercial paper and bonds. These bonds
typically are structured to suit the requirements of investors and the issuing
corporate, and include a variety of tailor- made features with respect to interest
payments and redemption
The corporate bond market has been in existence in India for a long time. However,
despite a long history, the size of the public issue segment of the corporate bond
market in India has remained quite insignificant.

Secondary Market :-
Like in the case of equity secondary market, the secondary debt market
involves buying and selling of debt instruments which are already issued in the
primary market or listed on the exchanges.

Government bonds are deemed to be listed as soon as they are issued. Markets for
government securities are pre-dominantly wholesale markets, with trades done on
telephonic negotiation. NSE WDM provides a trading platform for Government
bonds, and reports over 65% of all secondary market trades in government
securities.

Currently, transactions in government securities are required to be settled on the

trade date or next working day unless the transaction is through a broker of a
permitted stock exchange in which case settlement can be on T+2 basis. In NDS, all
trades between members of NDS have to be reported immediately. The settlement
is routed through CCIL for all NDS members.

The lack of market infrastructure and comprehensive regulatory framework coupled

with low issuance leading to low liquidity in the secondary market, narrow investor
base, inadequate credit assessment skills, high cost of issuance and lack of
transparency in trades are some of the major factors that hindered the growth of the
private corporate debt market.

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