An Overview of Indian Capital Market – History of Indian Capital Market

The capital market in India is a market for securities, where companies and governments can raise long term funds. It is a market designed for the selling and buying of stocks and bonds. Stocks and bonds are the two major ways to generate capital and long term funds. Thus, the bond markets and stock markets are considered as capital markets.  The Indian securities market consists of primary (new securities) market and secondary (stock) market in both equity and debt. The primary market provides channel for sale of new securities while the secondary market deals in trading of previously issued securities. The issuers of securities issue new securities in the primary market to raise funds for investment. They do either through the public issue or private placement. There are mainly two types of issuer who issue securities. The corporate entities mainly issue equity and debt instruments (Shares and debentures) while the Government (Central/State) issue debt securities. The secondary market enables participants who hold securities to adjust their holding (Portfolio) in response to changes of their assessment of risk & return.

The Indian Equity Market depends mainly on monsoons, global funds flowing into equities and the performance of various companies. The Indian Equity Market is almost wholly dominated by two major stock exchanges -National Stock Exchange of India Ltd. (NSE) and The Bombay Stock Exchange (BSE). The benchmark indices of the two exchanges – Nifty of NSE and Sensex of BSE are closely monitored by the investors. The two exchanges also have an F and O (Futures and options) segment for trading in equity derivatives including the indices.

The major players in the Indian Equity Market are Mutual Funds, Financial Institutions and FIIs representing mainly Venture Capital Funds and Private Equity Funds. The Indian Equity Market at present is a lucrative field for investors. The Indian stocks are profitable not only for long and medium-term investors, but also for the position traders, short-term swing traders and also very short term intra-day traders and speculators. In India as on December 30 2007, market capitalization (BSE 500) at US$ 1638 billion was 150 per cent of GDP,  matching well with other emerging economies and selected matured markets.

In a developing economy like India, the debt markets are very important sources of raising capital funds. The debt markets in India are amongst the largest in Asia. Their dealings included government securities, public sector undertakings, other government bodies, financial institutions, banks and companies. The debt markets play a role of increasing funds for implementation of government development plans. This means that government can raise funds at lower costs by issuing government securities. They are very conducive for the proper implementation of government’s monetary policy. They provided a less risky investment environment compared to the equity markets, encouraging low-risk investments. This leads to foreign inflow of funds into the economy. They provide high liquidity and proper control over credit. They provided opportunity for investors to diversify their investment portfolio in a way to minimize risk. They promoted very stringent disclosure norms and auditing requirements, hence there was improved transparency and better implementation of corporate governance principles.

History of Indian Capital Market

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. The earliest records of security dealings in India are meager and obscure. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century. The history of the Indian capital markets and the stock market, in particular can be traced back to 1861 when the American Civil War began. The opening of the Suez Canal during the 1860s led to a tremendous increase in Exports to the United Kingdom and United States, Several companies were formed during this period and many banks came to the fore to handle the finances relating to these trades. With many of these registered under the British Companies Act, the Stock Exchange, Mumbai, came into existence in 1875. It was an unincorporated body of stockbrokers, which started doing business in the city under a banyan tree. Business was essentially confined to company owners and brokers, with very little interest evinced by the general public. There had been much fluctuation in the stock market on account of the American war and the battles in Europe. Sir
Premchand Roychand remained a kingpin for many years.

Indian Capital Market before Independence

The Indian capital market was not properly developed before Independence. The growth of the industrial securities market was very much hampered since there were very few companies and the number of securities traded in the stock exchanges was still smaller. Most of the British enterprises in India looked to the London capital market for funds than to the Indian capital market. A large part of the capital market consisted of the gilt-edged marker for government and semi-government securities.

Indian Capital Market after Independence

Since Independence and particularly after 1951, the Indian capital market has been broadening significantly and the volume of saving and investment has shown steady improvement. All types of encouragement and tax relief exist in the country to promote savings. Besides, many steps have been taken to protect the interests of investors. A very important indicator of the growth of the capital market is the growth of joint stock companies or corporate enterprises. In 1951 there were about 28,500 companies both public limited and private limited companies with a paid-up capital of Rs. 775 crores.

In the 1950s, Century Textiles, Tata Steel, Bombay Dyeing, National Rayon, and Kohinoor Mills were the favorite scrips of speculators. As speculation became rampant, the stock market came to know as the satta bazaar. The planning process started in India in 1951, with importance being given to the formation of institutions and markets. The Securities Contract Regulation Act 1956 became the parent regulation after the Indian Contract Act 1872, a basic law to be followed by security markets in India. To regulate the issue of share prices, Controller of Capital Issues Act (CCI) was passed in 1947.

In the 1960-70s was characterized by was and droughts in the country with led to bearish trends. These trends were aggravated on forward trading its call badla, technically called ‘contracts for clearing’. Financial institutions such as LIC and GIC helped revive the sentiment by emerging as the most important group of investors. The markets have witnessed several golden times too. Retail investors began participating in the stock markets in a small way with the dilution of the FERA in 1978. Multinational companies, with operations in India, were forced to reduce foreign share holding to below a certain percentage, which led to a compulsory sale of shares or issuance of fresh stock. Indian investors, who applied for these shares, encountered a real lottery because those were the days when the CCI decided the price at which the shares could be issued. There was no free pricing and their formula was very conservative.

In the 1980s emerged an explosive growth of the securities market in India, with millions of investor suddenly discovering lucrative opportunities. Many investors come in to the stock market. The next big boom and mass participation by retail investors happened in 1980, with the entry of Mr. Dhirubhai Ambani. Dhirubhai can be said to be the father of modern capital markets. The Reliance public issue and subsequent issues on various Reliance companies generated huge interest. The general public was so unfamiliar with share certificates that Dhirubhai is rumored to have distributed them to educate people.

Mr. V.P. Singh’s fiscal budget in 1984 was path breaking for it started the era of liberalization. The removal of estate duty and reduction of taxes led to a swell in the new issue market and there was a deluge of companies in 1985. Dr. Manmohan Singh as Finance Minister came with a reform agenda in 1991. Liberalization and globalization were the new terms coined and marketed during this decade. The mid-1990s saw a rise in leasing company shares, and hundreds of companies, mainly listed in Gujarat, and got listed in the BSE. The 1991-92 securities scam revealed the inadequacies of and inefficiencies in the financial system. It was the scam which prompted a reform of the equity market. The Indian stock market has change in terms of technology and market price.

In the 2000s saw the emergence of Ketan Parekh and the information; communication and entertainment companies came into the limelight. This period also coincided with the dotcom bubble in the US, with software companies being the most favored stocks. There was a melt down in software stock in early 2000. Mr. P Chidambaram continued the liberalization and reform process, opening up of the companies, lifting taxes on long-term gains and introducing short-term turnover tax. The markets have recovered since then and we have witnessed a sustained rally that has taken the index over 21000 during the year 2008.

This history shows us that retail investors are yet to play a substantial role in the market as long-term investors. Retail participation in India is very limited considering the overall savings of households. Investors who hold shares in limited companies and mutual fund units are about 20-30 million. Those who participated in secondary markets are 2-3 million. Capital markets will change completely if they grow beyond the cities and stock exchange centers reach the Indian villages. Both SEBI and retail participants should be active in spreading market wisdom and empowering investors in planning their finances and understanding the markets.

It has been a drastic long journey for the Indian capital market. Recent time’s capital market is performed very well, fairly integrated, mature, more globally. The Indian capital market is one of the best in the world in terms of technology. There are many business news channels, news paper, magazines, are issued in India. Online trading is become a global phenomenon. Indian capital market would be an integrated with international market.

Role of Indian Capital Market

Capital market plays an extremely important role in promoting and sustaining the growth of an economy. It is an important and efficient conduit to channel and mobilize funds to enterprises, and provide an effective source of investment in the economy. It plays a critical role in mobilizing savings for investment in productive assets, with a view to enhancing a country’s long-term growth prospects. It thus acts as a major catalyst in transforming the economy into a more efficient, innovative and competitive marketplace within the global arena.

Capital markets play a vital role in indian economy, the growth of capital markets will be helpful in raising the per-capita income of the individuals, decrease the levels of un-employment, and thus reducing the number of people who lie below the poverty line. With the increasing awareness in the people they start investing in capital markets with long-term orientations, which would provide capital inflows to the sectors requiring financial assistance.

  • Capital arrangement: The capital market promotes capital formation in the country. Rate of capital formation depends upon savings in the country. Though the banks mobilize savings, they are not adequate to match the requirements of the industrial sector. The capital market mobilizes savings of households and of the industrial concern. Such savings are then invested for productive purposes. Thus savings and investment leads to capital arrangement in country.
  • Economic growth: Capital market smooths the progress of the growth of the industrial sector as well as other sectors of the economy. The main purpose of the capital market is to transfer resources from masses to the industrial sector. The capital market makes it possible to lend funds to various projects, both in the private as well as public sector.
  • Development of backward areas: The capital markets provide funds for the projects in backward areas. This facilitates the economic development of backward areas.
  • Generates employment: Capital market generates employment in the country: i) Direct employment in the capital markets such as stock markets, financial institutions etc. and ii) Indirect employment in all sectors of the economy, because of the funds provided for developmental projects.
  • Long term capital to industrial sector: The capital market provides a stable long-term capital for the companies. Once, the funds are collected through issues, the money remains with the company. The company is left free with the funds while investors exchange securities among themselves.
  • Generation of foreign capital: The capital market makes possible to generate foreign capital. Indian firms are able to generate capital from overseas markets by way of bonds and other securities. Such foreign exchange funds are vital for the economic development of the nation.
  • Developing role of financial institutions: The various agencies of capital market such as industrial financial corporation of India (IFCI), state finance corporations (SFC), industrial development bank of India (IDBI), industrial credit and investment corporation of India (ICICI), unit trust of India (UTI), life insurance corporation of India (LIC), etc. there have been rendering useful services to the growth of industries. They have been financing, promoting and underwriting the functions of the capital market.
  • Investment opportunities: Capital markets provide excellent investment opportunities to the members of the public. The public can have alternative source of investment i.e. In bonds, shares and debentures etc.

The capital market play very important role in Indian financial system as follow:

  1. To mobilize long-term savings to finance long term investments.
  2. To inspirations broader ownership of productive assets.
  3. To improve the efficiency of capital allocation through a competitive pricing mechanism.
  4. To provide liquidity with mechanism enabling the investor to see financial assets.
  5. To make lower the costs of transactions and information.
  6. To make bridge between investors and companies.
  7. To make quick valuation of financial instruments both equity and debt.
  8. To security against market risk or price risk trough derivative trading and default risk through investment protection fund.
  9. To provide operational efficiency.
  10. To direct the flow of funds into efficient channels through investment, disinvestment, and reinvestment.
  11. To make integration between financial sectors and non-financial sectors, Long term fund and short term fund.
  12. To give opportunities to risk taker in term of equity and return taker in term of debt.

Thus, a capital market serves as an important link between those who save and those who aspire to invest their savings.