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Indian capital market


Industry raises finance from the Indian capital market with the help of a number of instruments. Corporate have a choice of (1) equity finance, and (2) debt finance. Experience in the different countries has varied.

Substituting equity finance for debt finance makes domestic firms less vulnerable to fluctuations in earnings or increases in interest rates. During the last decade, more than a third of the increase in net assets of large firms in Chile, South Korea, Malaysia, Mexico, Taiwan and Thailand has been secured through equity issuance. This pattern contrasts sharply with that of the industrial countries, in which equity financing during the same period has accounted for less than 5 percent of the growth in net assets.

Future of the capital market

In the liberalized economic environment, the capital market is all set to play a highly critical role in the process of economic development. The Indian capital market has to arrange funds to meet the financial needs of both domestic and foreign resources. What is more critical is that the changed environment is characterized by cutthroat competition. Ability of enterprises to mobilize funds at cheap cost will determine their competitiveness vis-à-vis their rivals.

Changes in the capital market

Four sets of changes in the Indian capital market can be identified which set the market of the twenty-first century different from what obtained earlier. These can be categorized as follows:

»Introduction of new institutions

»Introduction of new instruments

»Changes in administrative control and regulatory framework

»Some recent initiatives

Introduction of New Institutions

The composition of the Indian capital market has undergone a total change. Till very recent times, Bombay Stock Exchange dominated the capital market in India. The daily turnover on the Bombay Stock Exchange (BSE) alone exceeded the total turnover of all other exchanges put together. The BSE with the monopolistic claw like control over the market was posing a severe constraint on the spread and diversification of the capital market culture. It was content with practicing non-transparent time and resource consuming trading practices that failed to evoke confidence among new investors, both in primary and secondary market. Its trading practices were becoming somewhat totally out of tune with the ongoing communication revolution in India and worldwide. In response to this, the most important are the OTCEI and NSE. What is more important is that the NSE has worked as a catalyst of change for other exchanges, which are introducing on-line trading systems.

Along with NSE, mutual funds have also emerged in the country. Different types of mutual funds catering to the needs of different types of investors have been set up in the country. The increasing growth of the capital market has witnessed the mergence of foreign institutional investors (FIIs) as significant players. Their sale and purchase decisions are already having a significant impact on the market conditions.

Along with these new players, a set of new supporting institutions have also emerged on the horizon such as the Discount and Finance House of India, Securities Trading Corporation of India, Stock Holding Corporation of India, settlement and depository systems, etc.

Introduction of New Instruments

Along with new institutions, new instruments have emerged on the capital market. These encompass both the domestic instruments and foreign instruments. Many new instruments of finance have already been introduced in recent years. Still, the current intensity of the Indian financial market reveals that there is a tremendous scope to deploy new financing instruments connected to equity, debentures, bonds, add-on products and derivatives. This may require appropriate changes in certain economic legislations and the will on the part of the Indian corporate enterprises to take risks and tune their decision-making to the investor psychology and market preferences.

Changes in Rules and Regulations

Responding to the changes in the environment, the administrative framework has also undergone a total overhaul. The earlier chains have been totally removed. The Controller of Capital Issues has been done away with. The Indian capital market has been left free to find its own depth and strength. However, it is a paradox of a free market economy that whenever chains are removed effective watchdogs have to be employed. This latter function has now been entrusted to the Securities and Exchange Board of India. The SEBI in turn has been laying down guidelines to be followed by different players in the different segments of the market.

Some Recent Initiatives

»Buy-back of shares by corporate has been permitted; this will enable the promoters of Indian companies to consolidate their positions.

»Ceiling on inter-corporate investments has been raised to 60 percent by doing away with the concept of ?same management? and ?same group?; this will provide some leeway to companies in managing their investments.

»Disclosure of end use of funds raised in public issue in annual statements; it will impart transparency to the manner in which the funds raised from the public are deployed. This will also impose greater accountability on companies.

»One-time waiver of capital gains tax for corporatisation of stock broking tickets; this will result in speeding up the pace of professionalisation of stock broking operations, which will benefit investors.

»Provision of nomination facility in share certificates; this will ease procedures for transfer of shares in the names of the nominee in case of death of the shareholder.

In short, the capital market has witnessed metamorphic changes in recent past and is all set to meet the varied needs of the changed liberalized economic environment.

Globalization and teh indian capital market

With the gradual opening up of the Indian economy, increasing importance of foreign portfolio investment in the Indian markets and drastic reduction in import tariffs that has exposed Indian companies to foreign competition, Indian capital market is acquiring a global image. Till recently, participants in the Indian capital market could largely afford to ignore what happened in other parts of the world. Share prices largely behaved as if the rest of the world just did not exist.

At present, in sharp contrast to recent past, Indian capital market responds to all types of external developments, like US bond yields, the value of the peso or for that matter of any other currency, the political situation in China, or new petrochemical capacity in South Korea, etc.

In short, the Indian capital market is on threshold of a new era. Gradual globalization of the market will mean four things, as follows:

»The market will be more sensitive to developments that take place abroad.

»There will be a power shift as domestic institutions are forced to compete with the FIIs who control the floating stock and are in control of the GDR market.

»Structural issues will come to the fore with a plain message: reform or despair.

»The individual investor in his own interest will refrain from both primary and secondary market; he will be better off investing in mutual funds.

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