1. Capital Market

• Capital Market: A market where long-term financial securities are traded.
• Time period: Capital raised for more than 1 year (365 days+).
• Participants: Individuals, banks, financial institutions, companies, mutual funds.
• Instruments traded: Shares, bonds, debentures, government securities.

Types of Capital Market

1. Gilt-Edged Market (Government Securities Market)

• Market for government securities (G-Secs).
• Called gilt-edged because securities are risk-free and of high quality.
• Major investors: Commercial banks, LIC, GIC, Provident Funds.
• Regulator:
• Key tool: Open Market Operations (OMO) by RBI.

2. Industrial Securities Market

Deals with securities issued by companies.

(A) Primary Market

• Also called the New Issue Market.
• Securities issued for the first time.
• Companies raise fresh capital.

Common instruments

• Equity shares
• Preference shares
• Debentures
• Corporate bonds

(B) Secondary Market

• Market for trading already issued securities.
• Securities are traded between investors.
• Companies do not receive funds directly.

Example: Stock Exchanges (NSE, BSE)

Development Financial Institutions (DFIs)

Major All-India Financial Institutions (AIFIs)

• IFCI – 1948
• ICICI – 1955
• IDBI – 1964
• SIDBI – 1990
• IIBI – 1997

Current AIFIs regulated by RBI

• NABARD
• SIDBI
• Exim Bank
• NHB

Financial Intermediaries in the Capital Market

1. Banking Sector

• Backbone of the financial system.
• Bank Nationalisation: 1969 and 1980.
• Private bank entry: 1993-94 reforms.

Categories

• Public Sector Banks
• Private Sector Banks
• Regional Rural Banks
• Foreign Banks

2. Insurance Sector

• Liberalised in 1999 reforms.
• Regulated by the Insurance Regulatory and Development Authority of India (IRDAI).
• Private and foreign companies allowed.

Regulatory Framework of the Capital Market

India has multiple financial regulators.

1. Product-wise Regulators

Important:

• Forward Markets Commission (FMC) merged with SEBI in 2015.

2. Quasi-Regulatory Institutions

These perform regulatory roles in specific sectors.

• NABARD: Supervises rural banks & cooperative banks
• SIDBI: Small industries financing
• NHB: Housing finance companies

3. Central Government Role

• The Ministry of Finance plays a major policy role.
• Representatives present on the RBI, SEBI, and IRDAI boards.

4. State Government Role

• The Registrar of Cooperative Societies regulates cooperative banks.

Financial Stability and Development Council (FSDC)

• Established: 2010
• Chairperson: Union Finance Minister
• Nature: Non-statutory body
• Functions
  • Coordination among regulators
  • Financial stability monitoring
  • Resolve inter-regulatory disputes
  • Oversight of financial conglomerates

Capital Market Reforms in India

1. Abolition of Controller of Capital Issues

• The Capital Issues Control Act, 1947 abolished.
• Recommended by Narasimham Committee (1991).
• Companies are allowed to raise capital with SEBI approval instead of government permission.

2. SEBI (Securities and Exchange Board of India)

• Established: 1988 (non-statutory)
• Statutory status: 1992

Major Functions

• Regulate the securities market
• Protect investor interests
• Regulate stock exchanges
• Regulate intermediaries

Foreign Investment in the Capital Market

Foreign investors are allowed to invest in:

• Equity shares
• Corporate bonds
• Government securities
• Treasury Bills

Foreign instruments

• ADR – American Depository Receipts
• GDR – Global Depository Receipts
• FCCB – Foreign Currency Convertible Bonds
• ECB – External Commercial Borrowings

Credit Rating Agencies in India

Important agencies:

• CRISIL (1988)
• ICRA (1991)
• CARE (1993)

Function: Assess the creditworthiness of companies and securities.

Secondary Market Reforms

1. National Stock Exchange (NSE)

• Established 1992
• Operations began 1994
• Fully electronic trading system

2. OTCEI (Over The Counter Exchange of India)

• Established 1992
• Promoted by UTI, ICICI, IDBI, IFCI, LIC

Purpose:

• Provide capital access to small companies

Depository System (1996)

• Introduced dematerialisation (Demat).
• Eliminated physical share certificates.

Major Depositories

• NSDL – National Securities Depository Limited
• CDSL – Central Depository Services Limited

NSCCL (National Securities Clearing Corporation Ltd.)

• Established in 1996.
• Handles clearing, settlement, and risk management for NSE.

Mutual Funds

• Mobilise public savings.
• Invest in equities, bonds, and other securities.
• Regulated by SEBI.

FSLRC Recommendations (2013)

Financial Sector Legislative Reforms Commission
Chairman: Justice B. N. Srikrishna

Key Recommendations

• Unified Financial Agency (UFA) – integrated regulator
• Financial Redressal Agency (FRA) – consumer complaints
• Financial Sector Appellate Tribunal (FSAT) – appeals