Capital Market And Industrial Finance In India
A business enterprise can raise capital from various sources. Long-term funds can be raised either through an issue of securities or by borrowing from certain institutions. Short-term funds can also be borrowed from various agencies. Thus business units can raise capital from the issue of securities and borrowings (long-term and short-term). In addition to business units, the public, corporations and governments (the Central government, the State and local governments), are the other major borrowers of funds. The lenders of funds include individual investors (the household sector), institutional investors, banks, and special industrial financing institutions. The borrowers and lenders are brought together through the financial markets. The term ‘financial market’ collectively refers to all those organisations and institutions which lend funds to business enterprises and public authorities. It is composed of two constituents – the money market and the capital market. While the former deals with the provision of short-term credit, the latter deals with the grant of medium-term and long-term credit.
The capital market in India includes the following institutions:
Specialised financial institutions like the Industrial Finance Corporation of India. (IFCI), Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), State Industrial Development Corporations (SIDCs), State Financial Corporations (SFCs), Unit Trust of India (UTI) etc. Provident funds societies Merchant banking agencies; and Credit Guarantee Corporation
The financial institutions, e.g., IFCI, ICICI, IDBI, SFCS, LIC, UTI etc. provide long-term and medium-term loan facilities. The securities market is a market where securities can be bought and sold freely. It consists of the new issues market (the primary market) and the stock exchange (the secondary market).
Role of capital market in India’s industrial growth: •
- Mobilisation of savings and acceleration of the capital formation
- Promotion of industrial growth
- Raising long-term capital
- Ready and continuous market
- Proper channelisation of funds
- Provision of a variety of services
Growth Of Capital Market In India
Since 1991, the investor base for government securities has expanded rapidly. Besides banks and insurance corporations, finance companies, corporates and financial institutions have also begun to invest in governmenť securities. The maturity structure of debt has significantly shifted in favour of medium-term and short-term borrowings. As far as the secondary market is concerned, a deep, wide and vibrant gilt-edged market has emerged as a result of a series of structural and institutional reforms.
The secondary market turnover of government securities registered a spectacular increase since the mid-1990s. This is due to a substantial rally in the government securities market. Over the years, the turnover in the Government securities market and yield have generally witnessed an inverse relationship. During the period of rising yields, the turnover tended to be subdued, while during the period of softening in the yields, the turnover increased sharply.
Corporate Securities Market
Consequent to the policy of liberalisation adopted by the government in July 1991 and the subsequent abolition of Capital Issues Control with effect from May 29, 1992, the corporate securities market got a tremendous boost in the first three-four. years of the post-liberalisation phase.
Primary Market Or The New Issues Market
The number of new capital issues by the private sector was only 364 in 1990-91 and the amount raised by them was Rs. 4312 crores. In 2007-08 resource mobilisation through capital issues rose to Rs. 63,638 crore. Resource mobilisation by the private sector through capital issues stood at Rs 17,056 crore in 2014-15 and Rs. 26,716 Crore in 2015-16. Capital issues consist of two parts – Shares and Debentures. Before 1992-93, debentures were a more popular means of raising long-term funds and provided almost 70 per cent or more resources raised through new capital issues.
For instance, they provided 69 per cent of resources raised through this means in 1991-92. In 1992-93 and 1993-94, shares provided a little more resources than debentures. However, thereafter, for three years there was distinct bias in favour of shares. The year 1997-98 again saw a reversal in the preference order of the investors as only 37 per cent of resources were raised through shares. Shares accounted for a mere 12 per cent of the resources raised through new capital issues in 200102 while as much as 88 per cent of resources were raised through debentures.
In 2014-15, 54.6% were raised through shares and 45.4% through debentures. In 2015-16 almost entire resources were raised through shares, The persons who hold shares are known as shareholders or members and are part owners of the company. So, they enjoy certain rights like voting power, receipt of profits in the form of dividends etc. A company can issue two types of shares, namely equity shares and preference shares.
The preference shares carry a fixed rate of dividend and enjoy preference in respect of payment of dividend and repayment of capital in the event of the company being wound up. Unlike preference shares, Therefore equity shareholders face maximum risk in the company. However, equity shares have a chance of earning more than preference shares in years of prosperity. Equity shares have now become a much-favoured form of investment in our country.
Here are the notes for Debentures And Secondary Market