This article has been written by Navaneeth sarma M S pursuing a Training Program to Crack the Independent Directors’ Exam from Skill Arbitrage.

This article has been edited and published by Shashwat Kaushik.

Overview of capital markets in India

The capital market plays an important role in the economic development of any country by channelling savings and investment between capital suppliers (individual investors, institutional investors) and users (businesses, government). This article provides an overview of the capital market in India, key concepts, and regulatory framework. And related important tools meaning and structure of the capital market, long-term financial market.

Definition of capital market

A capital market is a financial market through which long-term debt or equity and other debt or equity-backed securities are traded. It primarily consists of two segments:

Primary market

In the primary market for the first time, securities are offered and sold on the same marketplace. Businesses access funds here by presenting their stocks or bonds to the public. Before moving to the subsequent modules, it is important to recall some well-known examples of capital sales such as Initial Public Offerings (IPOs).

Secondary market

After the issue of the securities, they are bought and sold between buyers and sellers in the secondary market. BSE and NSE are two significant stock exchanges, which are located in India, where most of these trades are carried out.

Key instruments in the capital market

Equity: This is ownership in a firm and is traded out in the form of shares. The over-the-counter market has expanded remarkably; the number of retail investors in the Indian equity market is escalating rapidly. Equity involves the sale of ownership rights in organisations to the public to obtain funds. 

Debt Instruments: These are loans and include bonds and debentures, which involve the issuance of bonds or debentures to the concerned borrower. Bonds pay fixed or floating interest to the investor at predetermined intervals and the repayment of the face value at the bond’s maturity. Fixed-income securities that dominate the capital markets of India are as follows: government bonds and corporate bonds.

Derivatives: A derivative is a financial product, the payoff of which hinges on an underlying asset or a set of assets. Derivative products that are traded on the Indian capital markets include futures and options. 

Mutual Funds: Stocks or securities are acquired by a mutual fund through contributions from different investors who invest in it. This is among the widely embraced investment instruments in India, providing a chance for small investors to diversify their investment portfolios. 

Foreign Institutional Investors (FIIs): Foreign Institutional Investors have keeping importance in the Indian capital market. The impact of their investments helps in increasing liquidity and market depth and thus caters to a higher capital inflow in the Indian markets.

Regulatory framework 

Indian capital market is controlled mainly by the Securities and Exchange Board of India (SEBI) which was established in 1992 with its main objectives of safeguarding investor’s interests and maintaining fair trade practices in the capital market. SEBI regulates the market and has rules and regulations for all the participants, like issuing companies, brokers, and institutional investors.

SEBI’s role

The Securities and Exchange Board of India (SEBI) plays a crucial role in the Indian capital market. Its primary responsibilities include:

• Regulation of securities issuance: SEBI oversees the process of issuing securities to the public, ensuring compliance with regulations and protecting investors.
• Supervision of stock exchanges: SEBI regulates and supervises the operations of stock exchanges in India, ensuring fair and transparent trading practices. It sets listing requirements, monitors trading activities, and takes action against any irregularities.
• Market surveillance: SEBI monitors the market for any fraudulent or manipulative activities, such as insider trading, market manipulation, and price rigging. It investigates suspicious trading patterns, conducts enquiries, and takes enforcement action against violators.
• Investor protection: SEBI works to protect the interests of investors by promoting investor education, facilitating investor grievance redressal, and ensuring fair treatment by market intermediaries.
• Promoting corporate integrity: SEBI encourages ethical business practices and corporate governance among listed companies. It mandates disclosures, promotes transparency, and takes action against companies that violate regulations.

SEBI’s efforts have been instrumental in curbing market malpractices, enhancing investor confidence, and fostering a healthy capital market in India.

Reserve Bank of India (RBI):

While primarily known as the central bank of India, the Reserve Bank of India (RBI) also plays an important role in the capital market, mainly in areas of debt securities and foreign exchange.

• Regulation of debt securities: RBI regulates the issuance and trading of government securities, corporate bonds, and other debt instruments. It sets guidelines for issuers, monitors market activity, and ensures the smooth functioning of the debt market.
• Management of foreign exchange: RBI manages the country’s foreign exchange reserves and regulates foreign exchange transactions. It sets exchange rate policies, monitors capital flows, and intervenes in the market to maintain stability.

RBI’s involvement in the capital market complements the role of SEBI and contributes to the overall stability and development of the financial system. 

Growth and evolution of India’s capital markets

There has been some considerable evolution in the capital market of India over the period. In this market after independence, there was low float and low interest by the equity investors. Although there has been slow growth and limited trading floors during the early years of development, the change came from the economic liberalisation that was initiated in the 1990’s and also the formation of SEBI.

They also pointed out that India’s shift toward the use of technology has also boosted the capital markets. As a result of the dematerialisation of shares, the issues related to stock market investment have become popular among a large number of people and online trading platforms have made this possible. Algorithm trading and higher contributions by SCN and FIIs have also helped in still improving the efficiency of market depth.

Capital markets for economic growth 

Capital markets facilitate economic growth by:

• Raising capital for businesses: Capital markets are being used by the company to obtain funds that are necessary for expansion, product development, and others. It aids the firms in being able to reinvest their profits back into the company and create more jobs in the process. 
• Wealth creation for investors: Equivalent capital markets provide investors with the chance to make their riches. The stock prices, when analysed for the long term, show that they have a higher rate of inflation than the returns offered by other conventional forms of investment, such as fixed deposits in a bank.
• Resource allocation: Capital markets, which are international, help in channelling funds to the appropriate sectors in the economy; hence, better resource allocation.

Issue relating to capital markets 

In India, despite its rapid growth, India’s capital markets face several challenges:

• Market volatility: The stock market of India is very volatile to the world economy changes. Market instabilities such as shifting oil prices, increased political risk, or shifts in the exchange rates destabilise the market, resulting in decreased investors’ confidence.
• Regulatory issues: Despite SEBI’s regulatory success in maintaining market stability, regulatory overlaps a few arenas, such as algorithmic trading and non-banking financial companies (NBFCs).
• Low financial literacy: It has been seen that financial literacy is still a marginal concept in India and hence there is limited participation from the sides of the retail investors in capital markets. It reduces market depth as well as the increased involvement known to be the key to long-term growth.
• Liquidity constraints: While FIIs have brought better liquidity, thus making the markets more liquid; one cannot, however, say that segments such as corporate bond markets are very liquid. Investors in most other markets complain of a poor liquidity environment making it hard to source adequate funds from these corporations.

Recent trends and innovations 

Rise of ESG investing

ESG factors play an essential role in the investment process nowadays and are highly valued by investors. Investors, including institutional and retail investors, are now looking forward to firms and organisations that have sustainable business policies.

Increased participation of retail investors

With the help of trading platforms and applications becoming easily available, retail participation has increased in the last few years. This trend has been even more pronounced by the COVID-19 pandemic, where many people looked for new investment products.

Digital transformation

It is noteworthy that India’s capital markets are quite digitised. Bots are not highly automated now; they allow real-time trades and improved settlement processes and transparency. This has also led to the limitation of expenses and the expansion of markets.

Emergence of REITs and INVITs

REIT and INVIT are the new forms of investment products where investors can invest in real estate and infrastructure projects, respectively but without holding any physical property. Liquid securities provide systematic income besides introducing diversification in investment choices in the market.

Conclusion

The capital markets in India are one of the main important components of the country’s financial infrastructure. It assists companies to access capital and investors who invest their money by increasing their worth through the market, hence contributing significantly to the development of the economy. The challenges include fluctuations in the global markets, a strict regulatory environment, and relatively low financial awareness, and the Indian capital market is poised to continued growth with the introduction of technology, a rise in retail investors, and new financial products.

By sustaining reforms, improving the regulations, and emphasising education, India’s capital markets can explore much more from their perspectives, a fact that gives the required financial support system for the country to achieve the long-term economic goals of India.

References

• https:>http://www. nextias. com/blog/capital-market/ 
• https:// www. investopedia. Com/terms/c/capitalmarkets. asp
• Gunjan Malhotra. (n. d. ). “Indian Capital Markets: Opportunities for Development and Concerns. “ XVI International Conference on Economics”.
• yoti Mittal. (n. d. ). “Capital Markets in India: Organization and Development. ” ICSI.
• https:>www. drnishikantjha. com/booksCollection/Ch 5 The Capital Market. pdf
• https:> //www. assocham. org/uploads/files/Indias-Capital-Market. pdf