Capital Market in India what is the meaning and instruments
capital market MBA Notes

Capital Market in India what is the meaning and instruments

Capital Market in India is generally meant as a market for long term fund and investment in long-term horizon available in this market. However now this market also includes short-term fund. Capital markets mean the market for all the financial instruments, short-term and long-term, as also commercial, industrial and government paper. The capital market deals with capital. The capital market in India is a market where borrowing and lending of long-term funds takes place. Capital markets deal in both, debt and equity. In these markets, productive capital is raised and made available to the corporate. The governments both central and state raise money in the capital market, through the issue of government securities. Capital market refers to all the institutes and mechanisms of raising medium and long-term funds, through various instruments available like shares, debentures, bonds etc and more about capital market meaning and green shoe option

Securities and Exchange Board of India:-

Securities and Exchange Board of India was formulated on the lines of Securities Exchange Commission of USA. The main role of SEBI is to act as a regulator of the capital markets and its constituents. These powers were initially with the Central Government Ministries like Law, Finance and Company Affairs. These powers are now given to SEBI and it has become the sole regulator of the Capital Markets.

Money Markets:-

The money market is a capital market in india for overnight to short term funds, and for short-term money and financial asset that are close substitutes for money. Short term in Indian context means a period up to one year. Close substitute for money means any financial asset, which can be quickly converted into money. The major participants in this market are the commercial banks, the other financial intermediaries, large corporates and the Reserve Bank of India. The RBI plays a major role and occupies a strategic position in these markets. It influences the availability and cost of credit. The objectives of these markets are to provide,

A mechanism for evening out short-term surpluses and deficiencies.

A focal point of central bank intervention for influencing liquidity in the economy.

A reasonable access to the users of short-term funds to meet their requirements at realistic cost. In the money market, the operations are for short duration as compared to capital markets. There is a large number of participants in money market. The depth of this market depends on the number of participants. This is a whole sale market. The volumes here are very large, and therefore, there is a need for professionals to operate in these markets. Trading here is conducted mainly on telephones, followed by written confirmation from both the parties. Money marketing important role capital market in India.

Mutual funds:-

What is a Mutual Fund? Depending upon the risk profile, one should look at investing some part of the savings or earnings in the capital market in india. But direct investing puts a person at great risk. So, the next best alternative is going for ‘mutual fund’. One can define a mutual fund as a trust that pools in the savings and funds from a large number of investors who have a common financial goal. Mutual funds issue units to investors, which represent equitable rights in the assets of the mutual fund. Mutual fund by its nature is diversified i.e. its assets are invested in many different securities. Investments in the mutual funds may be in the form of stocks, bonds or money market securities or combination of these. These are professionally managed on behalf of the shareholders and each investor holds a pro-rata share of the portfolio entitled to any profits when the securities are sold, but subject to any losses as well. There are a number of schemes of Mutual Fund and all of them have different character and objective. It is the skill of the investor to keep in view the objective and then take decision where to invest.

Merchant Banking:-

Merchant Banks are a very important factor in the capital markets in India. They have a big role to play especially, in placing equity in the primary markets, through the Initial Public Offers route. Public money or savings play a. vital role in financing many big projects. Thousands of crores are raised every year from the markets either through equity or debt from the market. The merchant banks play a crucial role in helping the corporates raise money from these markets. The SEBI issued guideline for the merchant bankers in April, 1990. With the passage of time the role of merchant bankers has enlarged to a great extent. It is mandatory for companies raising money from the capital markets (whether equity or debt) to appoint merchant bankers for this purpose. For the buy back of shares also the companies will need to appoint merchant bankers to oversee the entire process. One of the major areas where these entities will henceforth play a major role is in the space of mergers and acquisitions. They will especially play a huge role in hostile takeovers. This activity is relatively new in India but it is bound to grow in the coming years. We have already witnessed mega deals through this route. The proposed acquisition of Sahara Air by Jet Airways is one such deal. Merchant bank also play important role in the capital market in India.

Recent developments:-

we shall try and see the latest developments that have taken place in the different fields related to the capital markets in India. Rolling settlements are a new process, while bonus debentures, swat equity and ESOPs are new products that have been introduced.

Stock Exchanges:-

we are going to learn about the working of stock exchanges. We shall learn about the capital market in india indices, the process of dematerialisation, the role and functions of a depository etc. and we will also study about the different processes that are followed in these markets.

Securities Contract Regulation Act

Section 4 of the Securities contracts (Regulation) Act, 1956 defines the tern Stock Exchange as an association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting and controlling the business of buying, selling and dealing in securities. A stock market can operate only if it is recognised by the government under the SCRA. The recognition is granted under Section 3 of the Act by the Central government, Ministry of Finance, Stock Exchange Division. The government has far-reaching powers under this Act. It can grant and withdraw the recognition, approval or change of by-laws. Call for periodical returns Conduct inquiries against the members when required. Directing the stock exchange to make certain rules. Supersede or suspend the Governing Board of the Exchange. Impose any other conditions or regulations for trading.

Venture Capital:-

Venture Capital means start up and first stage financing and funding the expansion of companies that have already demonstrated their business potential but do not have access to the public securities markets or to credit-oriented institutional funding sources. Venture Capitalists also provide management/leveraged buyout financing. The process is of investing of risk capital in an enterprise in which the venture investor shares ownership as well as Board of Directors level management responsibilities with the funding management team. It is a risk finance for entrepreneurial growth-oriented companies. It is an investment for the medium or long term, seeking to maximize medium or long term return for both the parties. The investor can add value to the company because of his knowledge, experience and contact base. It is an actual or potential equity investment in companies through the purchase of stock, warrants, options or convertible securities. Venture Capital is an equity, equity featured capital seeking investment in new ideas, new companies, new products, new processes or new services, that offer the potential of high returns on investment. It may also include investment in turnaround situations.

Credit Rating:-

The system of rating got institutionalised following the Great Depression in 1933, when the US Controller of Currency enacted a rule that banks could only purchase securities, which have minimum investment rating. The need for credit rating is different for different parties depending on the benefits it offers to the various parties utilising these services viz. Investors, issuers, intermediaries and the regulatory authority.


Rating will supplement the investors’ credit evaluation process.

It facilitates comparison of relative value between competing securities.

It helps in recognising the risk involved in the investment.


A company with highly rated instrument has the opportunity to reduce the cost of borrowing by quoting less interest rates.

A company with rating can approach a wider section of investors for resource mobilisation.

Companies with rated instruments can avail of the rating as a marketing tool to create better image in dealing with its customers, lenders and creditors.

Rating encourages the companies to come out with more disclosures about their accounting system, financial reporting and management pattern.

Share Buy-Back:-

From October 1998, the public limited companies in India are allowed to buy-back their shares from the shareholders. A company can buy-back their own shares or other specified securities including employees’ stock option from out of

1. Its free reserves

2. The securities premium account

3. The proceeds of an earlier issue other than fresh issue of shares made specifically for buy-back purpose. The share buy-back falls under Section 77 of Companies’ Act.

However, a company can purchase its own shares only if following conditions are fulfilled in

1. The articles permit such buy-back.

2. A special resolution in general meeting authorising buy-back. The company in the notice to shareholders must give an explanatory statement about the need for buy-back, the amount required for it, the time limit and completion of the process.

Following conditions have to be met in the process of buy-back:

1. The buy-back has to be completed within 12 months of passing the special resolution.

2. Buy-back cannot exceed 25% of the total paid capital plus free reserves of the company.

3. Post buy-back the debt equity ratio shall not exceed 2:1.

4. Shares that are eligible for buy-back have to be fully paid.

5. Before making purchases under this scheme companies have to file with the Registrar of Companies and SERI a declaration of solvency.

6. The securities purchased under the buy-back arrangement should be extinguished and physically destroyed within seven days of the last date of the completion of the buy-back. Buyback of shares is very beneficial in capital market in india.

Portolio Management and Financial Engineering:-

A portfolio is a collection of assets. In portfolio management, these assets are financial in nature. The portfolio manager invests the money in diverse assets with the aim of maximizing return and minimizing the risk. According to SEBI, portfolio means the total holdings of securities belonging to one person. Portfolio manager means any person who, pursuant to a contract with a client, undertakes the management of a portfolio of securities or the funds of the client.

Functions of Portfolio Management

1. To frame investment strategy and select an investment mix.

2. To provide a balanced portfolio, this will hedge against inflation and also optimise returns.

3. To make timely decisions regarding sale and purchase of securities.

4. To maximise after tax return by investing part of the portfolio in tax savings investments. Portfolio management can be institutional in nature. The mutual funds are a kind of portfolio schemes. Recently, many new Pension funds have been launched. These funds also have to build a portfolio so that a return can be generated for the participants.

Corporate Governance:-

How does one define CORPORATE GOVERNANCE? Essentially it covers the gamut of activities having a direct or indirect effect on the health of the entity. Nobel Laureate MILTON FRIEDMAN stated “Corporate Governance is to conduct business in accordance with Shareholders’ desire while confirming to local laws and customs. Corporate Governance is all about promoting Corporate Fairness, Transparency and Accountability”. How much of this is pertinent and is really followed today remains to be seen.

Historical Perspective


Lack of proper internal controls

Absence of independent audits (internal as well as external)

Mergers and Takeovers:-

In the liberalised economy of our country, Mergers and Takeovers are destined to play a very important role in the coming years. If one looks at the developed economies around the world, it will be clear that these countries allow these activities freely. In India, this phenomenon is still new and hence there is a need for a good regulation to oversee this. SEBI therefore, had appointed a committee under the Chairmanship of the Retired Chief Justice of the Supreme Court of India, Justice P. N. Bhagwati, to devise a code for mergers and the hostile takeovers. The guidelines issued for this activity are from the recommendations made by this committee. Recently, SEBI has taken overview of these recommendations and has incorporated certain changes based on the experience so far. The takeover of Saurashtra cement by Autorider in March 1998, involving an open offer of Rs. 18 crs, was the first hostile take over under the new take over code. This was followed by the take over of Rassi cement by India Cement for Rs. 100 crores. The other prominent instances were the take over of BSES by Reliance, Indal by Hindalco. Many other managements were caught unawares by raiders who tried to raid their companies. Bombay Dyeing and Ballarpur Industries Ltd. were sought to be raided by Ann Bajoria. The shares of East India Hotels were picked up by archrivals ITC Hotels.

Lease and Hire Purchase:-

An equipment lease can be defined as a contractual arrangement where the lessor of equipment transfers the right to use the equipment to the lessee for an agreed period of time in return for rental. At the end of the period, the asset reverts back to the lessor unless there is a provision for the renewal of the contract or there is a provision for transfer of ownership to the lessee. At the end of each accounting period, the higher purchase price less the installments received is shown as receivable (stock on hire) and the finance income component of these installments is shown as a current liability. Advantages of Lease Flexibility User-oriented variants Tax Benefits Less Paperwork and Expeditious Disbursement Convenience 100% Financing Better utilization of own funds Off Balance-sheet financing.

Housing Finance:-

Housing Finance is in the limelight these days. Not long ago the Housing Finance meant HDFC which is no more so. Virtually, all banks led by New Private Sector Banks and even Public Sector Banks have become extremely active in this field. There is no doubt whatsoever that there is a tremendous shortage of housing in our country. With the interest on housing loans at historical low, many people are willing to take loans today. The banks on the other hand are flush with funds due to less off take of credit by the corporate sector, due to the recessionary conditions prevailing for the past few years. Secondly, the rate of default in this sector is pretty low, making these loans very attractive for the banks. With the new thrust in the retail segment by the banking community on the whole, Capital Market in India has become attractive both for the lenders and the borrowers. What has also helped is that the real estate rates seem to have stabilized.

In the last quarter of 05, we have witnessed something different. The rates on housing finance have actually gone up. There has been an increase in the real estate prices. In spite of this the demand for houses seems to be on the upside. It is due to the booming economy that the people are probably making more money than ever. At least in the urban areas this seems to be the fact. The boom in IT sector and the increase in corporate sector as a whole have contributed to the increasing demand in this sector.

I hope now you have all answer of your question about Capital market in india meaning and definition and it will help to learn trading in Capital Market in India and don’t think too much star investing today in Capital Market in India.


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