Composition of the Indian Capital Market, Indian Economy | Business Economics for CA Foundation PDF Download

The components are:
1. New Issue Market 
2. Secondary Market 
3. Financial Institutions.

Capital Market: Component # 1. New Issue Market:

The new issue market represents the primary market where new securities, i.e., shares or bonds that have never been previously issued, are offered. Both the new companies and the existing ones can raise capital on the new issue market.

The prime function of the new issue market is to facilitate the transfer of funds from the willing investors to the entrepreneurs setting up new corporate enterprises or going in for expansion. Diversification, growth or modernisation. Besides, helping corporate enterprises in securing their funds, the new issue market canalizes the savings of individuals and others into investments.

The two facets of this market, i.e. supply and demand, are represented by the issuing companies and the investors respectively. But then the organisation of the new issue market is not complete without the specialised agencies, intermediaries and institutions, etc., which promote issues of new securities and help in selling, transferring, underwriting etc.

These agencies include financial institutions, underwriters, brokers, merchant bankers, etc.

As the new issue market directs the flow of savings into long-term investments, it is of paramount importance for the economic growth and industrial development of a country. The availability of financial resources for corporate enterprises, to a great extent, depends upon the status of the new issue market of the country.

It must also be noted that although the functions and organisation of the new issue market are quite different from that of the secondary (stock) market, the sentiment in the stock market influences the activity in the new issue market.

The stock market is more sensitive and reacts fast to the changes in the economic, political and business conditions of a country. But then this affects the new issue market also. The historical study of the activity in the two markets show that whenever there has been boom in the stock market, there has been increased activity in the new issue market also.

Capital Market Instruments:

Primary market is a market for raising long-term finance by the issue of new corporate securities.

The corporate securities that are dealt in primary market can be classified under two categories:

1. Ownership Securities or Capital Stock, and 

2. Creditorship Securities or Debt Capital.

 Capital Market: Component # 2. Secondary Market:

The secondary market is a market where existing securities are purchased and sold. Stock market represents the secondary market where existing securities (shares and debentures) are traded; Stock exchange provides an organised mechanism for purchase and sale of existing securities. By now, we have 23 stock approved stock exchanges in our country.

The investors want liquidity for their investments. The securities which they hold should easily be sold when they need cash. Similarly there are others who want to invest in new securities. There should be a place where the securities may be purchased and sold.

Stock exchanges provide such a place where securities of different companies can be purchased and sold. Stock exchange is a body of persons, whether incorporated or not, formed with a view to helping, regulating and controlling the business of buying and selling of securities.

Stock exchanges are organised and regulated markets for various securities issued by corporate sector and other institutions. The stock exchanges enable free purchase and sale of securities as commodity exchange allow trading in commodities. The following definitions explain the meaning and scope of stock exchanges.

Definitions of Stock Exchange:

Pyle. “Security exchanges are market places where securities that have been listed thereon may be bought and sold for either investment or speculation.”

Stock exchanges allow trading in securities both to the genuine investors and speculators.

Securities Contract (Regulation) Act, 1956. “Stock exchange means anybody of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling in securities.”

According to this definition, the stock exchange allows trading in securities under certain rules and regulations.

Hartely Withers “A Stock Exchange is something like a vast warehouse where securities are taken away from the shelves and sold across the countries at a fixed price in a catalogue which is called the official list.”

Hartley calls stock exchange a warehouse where all securities are kept and traded on specified prices. It may not always be that every type of security is purchased for sale; there may be investors who do not bring their securities to the market but keep them only as investments.

Husband and Dockeray “Securities or stock exchanges are privately organised markets which are used to facilitate trading in securities.” As per this definition the stock exchanges are the organised places where securities are purchases and sold.

Capital Market: Component # 3. Financial Institutions:

Special Financial institutions are the most active constituent of the Indian capital market. Such organisations provide medium and long-term loans on easy installments to big business houses Such institutions help in promoting new companies; expansion and development of existing companies and meeting the financial requirement of companies during economic depression.

The need for establishing financial institutions was felt in many countries immediately after the Second World War in order to re-establish their war-shattered economies. In underdeveloped countries, the need for such institutions was much more due to a large number of organisational and financial problems inherent in the process of industrialisation.

After independence, a number of financial institutions have been set up at all India and regional levels for accelerating the growth of industries by providing financial and other assistance.

The following are the main special institutions that are most active constituents of the Indian capital market:

i. The Industrial Finance Corporation of India (I.F.C.I.)

ii. The Industrial Credit and Investment Corporation of India (I.C.I.C.I.)

iii. The Refinance Corporation of India (R.F.C.)

iv. State Financial Development Corporations (S.F.Cs.)

v. National Industrial Development Corporation (N.I.D.C.)

vi. State Industrial Development Corporation (S.I.D.Cs)

vii. National Small Industries Corporation (N.S.I.C )

viii. Industrial Development Bank of India (1.D.B.I.)

ix. Unit Trust of India (U.T.I.)

x. Life Insurance Corporation of India (L.I.C.)

xi. Nationalised Commercial Banks (N.C.Bs)

xii. Merchant Banking Institutions (M.B.Is.)

xiii. National Industrial Reconstruction Corporation of India (N.I.R.C.)

xiv. The Credit Guarantee Corporation of India (C.G.C.)