Economics - Capital Market - Notes - Economics, Study notes of Economics

Download Economics - Capital Market - Notes - Economics and more Study notes Economics in PDF only on Docsity! CAPITAL MARKET Introduction As money market is the market of short-term finance, capital market is for long- term finance. It is known for all facilities and the institutional arrangements for borrowing and lending term funds(medium and long term funds are known as term funds).Capital market does not deal in capital goods but is concerned with the raising with money capital for the purpose of investment. For the cause of economic development all, the government, the private sector manufacturing industries and agriculturists demand long term capital from the capital market. On the other hand, individual savings, corporate saving, banks, insurance companies and the government are the main suppliers of the fund in capital market. In recent times, provident funds, development financial institutions like IFCI, ICICI, IDBI, UTI etc and financial intermediaries such as merchant bankers, mutual funds, leasing companies, have become the major suppliers of funds to the capital market. In capital market too, like any other market, there are borrowers and lenders. An ideal capital market is that which provide sufficient capital at reasonable rate of return for business or industrial purpose, to make the borrowing worth. The structure of Indian capital market can the explain through the following chart Capital Market in India Govt. Securities Industrial securities Development Financial Financial (guilt edge market) Market Institutions Intermediaries New Issue Market Old Issue Market (Stock Exchange) IFCI ICICI IDBI IIBI UTI Merchant Banks Mutual Funds Leasing Companies Venture Capital Others companies Objectives Study of this lesson will enable the students to know the structure, functioning, organization and control mechanism of the Indian capital market. They will also be in a position to make an analysis of the role of SEBI in bringing a level playing field in the capital market. Guilt-edge Market: government and others trust securities. But in recent years, banks have increased their participation in term lending through subscribing to the shares and debentures of special financial institutions. They are also setting up financial intermediaries as merchant houses, mutual funds, venture capital companies, leasing companies etc. to mobilize funds for investment in industrial securities. Non- Banking Financial Companies(NBFCs) In recent years non-banking financial companies have grown tremendously. They advance loans to whole sale and retail traders, small scale industries and self-employed persons. The loans are generally unsecured and the rate of interest charged by then may range between 24-36% per annum. NBFCs run chit funds, purchase and discount hundis and also undertake the work of merchant banking mutual funds, higher purchase and leasing etc. The R.B.I has classified NBFCs into the following categories. Non-banking financial company.(NBFCs) of which the principal business is to receive deposit from the public under any scheme and lending in any manner. Equipment leasing company of which the principal business is to equip leasing or financing. Hire purchase finance company of which the principal business is to hire purchase transactions or financing. Investment Company of which the principal business is to buy sell securities. These include primary dealers who deal under writing and market making for government securities. Loan Company provides loans or advances for an activity other than its own. Residuary Non- Banking Company(RNBC), receives deposits from the public under any scheme but it does not belong to any of the categories of NBFC. Mutual Benefit Financial Company(MBFC), is a company which is notified by the central government as a Nidhi company under section 620A of the companies Act 1956. Miscellaneous Non Banking Company(MNBC) manages, conducts and supervise chit funds. There is no specific legislation to government the NBFCs instead they come under there different agencies. There are- NBFCs are governed by the companies Act 1956 because they are limited liability companies and they don’t even come under the definition of a finance company. With regards to its deposit, NBFCs are governed by Non Banking Financial Companies(Reserve Bank) Directions 1997. Some of the NBFCs are governed by SEBI who are engaged in merchant banking and portfolio management. But the government of India enacted the Reserve Bank of India (Amendment) Act, 1997, which confers wide ranging powers on R.B.I for controlling the functioning of non banking financial companies. Merchant Banking The concept of merchant banking is relatively new in India in the area of financial services. It caters to the needs of trade and industry by acting as intermediary, consultant, financial and liaison agency initially, commercial banks setup merchant banking divisions, which later became separate merchant banking subsidiaries. Merchant banks in India manage and underwrite new issue, undertake syndication of credit, they advise corporate clients on fund raising and other financial aspects. They don’t under take banking business like deposit banking, lending and foreign exchange services like foreign merchant banks. The merchant banks in India were subject to two types of authorities- 1. The SEBI( The Securities and Exchange Board of India ) sought to authorize and regulated all merchant banks on issue activity and portfolio management of their business and , 2. Merchant banks, who were subsidiaries or affiliates of commercial banks were supervised by the R.B.I. If the merchant banks were to raise deposits, they would have to the subject to guidelines issued by the R.B.I 3. Merchant banks have been statutorily brought under the under the regulatory frame work of SEBI. Accordingly merchant banks have to adopt the stipulated capital adequacy norms. They are also subject to abide by a code of conduct which specifies a high degree of responsibility towards investors in respect of pricing and premium fixation of issues and debentures in the prospectus or offer letters for fresh issue of capital. Leasing and Hire Purchase Companies Leasing is a popular way of financing method for acquiring plant and machinery especially for small and median sized enterprises. They have grown very high and the reason being speed, informality and flexibility to suit individual needs. Narasimham committee has recognized the importance of leasing and hire purchase companies and has recommended the following:- A minimum capital requirement should be stipulated. Prudential norms and guidelines in respect of conduct of business should be laid down and Supervision should be based on periodic structure returns by a unified supervisory authority. Summary Capital market is a market for long-term finance. It provides term finances for the cause of economic development. The Indian capital market comprises of – gilt edged market, industrial securities market, development financial institutions, financial intermediaries. Industrial market is comprised of new issue market and old issue market (Stock Exchange). Development financial institutions are – IFCI, ICICI, SFCS, IDBI, IIBI AND UTI. The financial