Capital Market in India - UPSC Economy Notes - Blog (2024)

The capital market in India encompasses the market for funds with a maturity of one year and above, commonly referred to as term funds. This market facilitates the flow of medium and long-term funds, catering to the needs of both the government and the private sector. Key participants in the capital market include banks, public financial institutions (such as LIC and GIC), development financial institutions, merchant banks, angel investors, private equity firms, venture capital firms, and mutual funds. Here are some components of the capital market in India:

1. Government Securities/Bonds:
   • These are debt instruments issued by the government to raise funds for various purposes. They include bonds and other fixed-income securities.
2. Corporate Securities:
   • This category includes shares and debentures issued by Indian companies. The capital market encompasses both the primary market, where new securities are issued, and the secondary market, where existing securities are bought and sold.
3. Development Financial Institutions (DFIs):
   • DFIs play a crucial role in providing long-term financing for industrial and infrastructure projects. They contribute to the capital market by channelizing funds toward development initiatives.
4. Merchant Banks:
   • Merchant banks engage in various financial activities, including underwriting, advisory services, and facilitating the issuance of securities. They play a vital role in the functioning of the capital market.
5. Angel Investors:
   • Angel investors are individuals who provide capital to startups or small businesses in exchange for ownership equity. They contribute to the capital market by supporting early-stage enterprises.
6. Private Equity:
   • Private equity firms invest in private companies, usually through equity stakes, with the aim of generating returns. Private equity plays a role in funding businesses and fostering their growth.
7. Venture Capital:
   • Venture capital firms invest in startups and small businesses that show high growth potential. They contribute to the capital market by providing risk capital to innovative ventures.
8. Mutual Funds:
   • Mutual funds pool funds from various investors to invest in a diversified portfolio of securities. They play a crucial role in mobilizing savings and investing them in different asset classes.

The capital market, with its diverse components, plays a pivotal role in supporting economic development and growth by facilitating the efficient allocation of funds for various projects and ventures.

Government Securities/Bonds:

Government securities, commonly known as bonds or dated securities, are financial instruments with an original maturity of one year or more. These securities are issued by either the Central Government or the State Governments (in the form of State Development Loans or SDLs). The term “gilt-edged instruments” is often used to describe these securities, with the term “gilt-edged” historically referring to the golden border found on the original bonds issued by the British government. Here are some key points about government securities/bonds:

1. Issuers:
   • Government securities can be issued by the Central Government or State Governments. The Central Government securities are issued and marketed by the Reserve Bank of India (RBI).
2. Types of Government Securities:
   • Dated Securities: These are bonds with an original maturity of one year or more. They are long-term instruments and form a significant part of the government’s borrowing program.
   • State Development Loans (SDLs): Issued by State Governments, SDLs serve as a means for states to raise funds for various development projects.
3. Gilt-Edged Instruments:
   • The term “gilt-edged” is a historical reference to the golden border that adorned the original bonds issued by the British government. It signifies the high creditworthiness and security associated with these instruments.
4. Issuing and Marketing:
   • Central Government securities are issued and marketed by the RBI. The RBI plays a central role in managing the issuance, auctioning, and redemption of these securities.
5. Other Government Savings Instruments:
   • In addition to traditional government securities, the Government of India issues various savings instruments such as Savings Bonds, National Savings Certificates (NSCs), etc. These instruments cater to retail investors and promote savings.
6. Special Securities:
   • The government may issue special securities for specific purposes, such as oil bonds, Food Corporation of India bonds, fertilizer bonds, power bonds, recapitalization bonds, etc. These securities serve targeted financial objectives.
7. Tradability and SLR Eligibility:
   • While traditional government securities are tradable in the secondary market, other savings instruments may not be tradable. Additionally, not all government securities are eligible to be included in the Statutory Liquidity Ratio (SLR) requirements of banks.
8. Issuance Process:
   • Government securities are typically issued through auctions conducted by the RBI. Investors, including banks, financial institutions, and individuals, participate in these auctions.

Government securities play a crucial role in the financial markets, serving as a secure investment option and a key source of funds for the government’s expenditure and development initiatives.

Government Securities/Bonds:

Government bonds, also known as dated securities, are financial instruments issued by either the Central Government or State Governments. These securities have an original maturity of one year or more. Here are key points about government securities:

1. Gilt-Edged Instruments:
   • Government securities are often referred to as gilt-edged instruments. The term “gilt-edged” originated from the golden border that adorned the original bonds issued by the British government, symbolizing their high creditworthiness and security.
2. Issuance and Marketing:
   • These securities are issued and marketed by the Reserve Bank of India (RBI), and they play a crucial role in government financing.
3. Types of Government Securities:
   • Dated Securities: These securities have a fixed maturity and fixed coupon rates payable half-yearly. They can have tenures of up to 30 years.
   • Floating Rate Bonds: Bonds with variable interest rates based on a benchmark rate, with a fixed percentage over the benchmark. There may be a cap and floor rate, setting maximum and minimum interest rates.
   • Capital Indexed Bonds: Bonds where the interest rate is a fixed percentage over the inflation rate, either WPI or CPI, depending on the terms.
4. Investors Eligible to Hold Government Securities:
   • Individuals, firms, companies, corporate bodies, institutions, State Governments, Provident Funds, and Trusts are eligible to invest in government securities.
   • Non-Resident Indians (NRIs), overseas corporate bodies predominantly owned by NRIs, and Foreign Institutional Investors (FII) registered with SEBI and approved by the RBI can also invest.
5. Minimum Investment:
   • The minimum investment in Government Securities is typically set at ₹10,000.
6. Foreign Portfolio Investors (FPI):
   • Foreign Portfolio Investors are allowed to buy government bonds. However, the RBI imposes limits on FPI investment in Government of India (GOI) securities, State Development Loans (SDLs), and corporate bonds.
7. Other Government Savings Instruments:
   • In addition to traditional government securities, the Government of India issues savings instruments such as Savings Bonds, National Saving Certificates (NSCs), and special securities like oil bonds, Food Corporation of India bonds, fertiliser bonds, power bonds, recapitalization bonds, etc.
8. Tradability and SLR Eligibility:
   • Some government securities may not be tradable, and not all are eligible to be included in the Statutory Liquidity Ratio (SLR) requirements of banks.

Government securities serve as important investment options, offering a secure avenue for various categories of investors and playing a significant role in the financial markets.

FAQs

Q1: What is the capital market in India?

A: The capital market in India refers to the market for long-term funds, where individuals and institutions trade financial securities like stocks, bonds, and derivatives. It comprises the primary market (where new securities are issued) and the secondary market (where existing securities are traded).

Q2: Who regulates the capital market in India?

A: The Securities and Exchange Board of India (SEBI) regulates the capital market in India. It oversees stock exchanges, brokers, merchant banks, and other intermediaries to ensure fair and transparent trading practices.

Q3: What are the key participants in the Indian capital market?

A: The key participants in the Indian capital market include investors (individuals and institutions), issuers (companies and governments issuing securities), intermediaries (stockbrokers, investment bankers), and regulators (SEBI, RBI).

Q4: What are the major stock exchanges in India?

A: The major stock exchanges in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). These exchanges facilitate trading of equities, derivatives, and other securities.

Q5: How does the capital market contribute to India’s economy?

A: The capital market plays a crucial role in India’s economy by channeling funds from investors to businesses and government entities for growth and development. It enables companies to raise capital for expansion, infrastructure projects, and innovation, thereby fostering economic growth and job creation. Additionally, it provides investment opportunities for individuals to grow their wealth and savings.

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