Wadhwa with an aim to know the role of capital market in India. This paper deals with and highlights the process of capital market reforms, Role of capital market, Importance and growth of capital market in India.
The capital market is the source of funds for corporates, governments and provides opportunities to savers to park their long-term savings. The capital market comprises of two segments- the primary and the secondary markets. The primary market allows the flow of long-term funds from the surplus sector to governments, corporates, banks and NBFCs.
It helps in the creation of net fixed assets. Initial public offers IPOs , private placements, rights issues, preferential issues are the important instruments of the primary market. In recent years, there is a considerable widening and deepening of the primary market with PSBs, financial institutions, PSUs, mutual funds entering the markets as borrowers and the merchant banks, investment and consulting agencies and registrars to the issues as the managers.
Broad term describing any market place where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial Markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees and market forces determining the prices of securities that trade. In economics, typically, the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them.
The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in financial securities, e. The regulators financial institutions and most importantly the investors keep trade of the development in the global capital markets. It is observed that the United States, Europe and Japan are the major contributors to the global financial stock.
Due to the increasing depth in financial markets, both businessmen and investors are enthusiastic to enter capital markets and make profits. The U. S led the race with 37 percent share followed by the U. K, Japan and Vol. Capital market is a market for long term funds.
The demand for long term capital comes mainly from private sector industries. Capital markets have observed volatility of capital flows, contributing of financial developments in India have played a critical role is promoting industrialization, facilitating the mobilization of capital for large investments. A financial market consists of investors or buyers, sellers, dealers and brokers and does not refer to physical location.
The participants are linked with formal trading rules and communication networks for originating and trading of financial services. Financial investments can be used to raise resources in the capital market. To know the Factors Responsible for Growth and Development of capital market 3.
The information is collected from libraries and websites. The literature is cross checked and validated to gives the latest information.
For a speedy economic development adequate capital formation is necessary. The significance of capital market in economic development is explained below:- Mobilisation of Savings and Acceleration of Capital Formation In developing countries like India the importance of capital market is self-evident. In this market, various types of securities helps to mobilise savings from various sectors of population. The twin features of reasonable return and liquidity in stock exchange are Vol.
This accelerates the capital formation in the country. Ready and Continuous Market The stock exchange provides a central convenient place where buyers and sellers can easily purchase and sell securities. Easy marketability makes investment in securities more liquid as compared to other assets. Technical Assistance An important shortage faced by entrepreneurs in developing countries is technical assistance. By offering advisory services relating to preparation of feasibility reports, identifying growth potential and training entrepreneurs in project management, the financial intermediaries in capital market play an important role.
Raising Long - Term Capital The existence of a stock exchange enables companies to raise permanent capital. The investors cannot commit their funds for a permanent period but companies require funds permanently. The stock exchange resolves this dash of interests by offering an opportunity to investors to buy or sell their securities, while permanent capital with the company remains unaffected.
Foreign Capital Capital markets makes possible to generate foreign capital. Indian firms are able to generate capital funds from overseas markets by way of bonds and other securities. This not only brings in foreign capital but also foreign technology which is important for economic development of the country. Easy Liquidity With the help of secondary market investors can sell off their holdings and convert them into liquid cash.
Commercial banks also allow investors to withdraw their deposits, as and when they are in need of funds. Revival of Sick Units The Commercial and Financial Institutions provide timely financial assistance to viable sick units to overcome their industrial sickness. To help the weak units to overcome their financial industrial sickness banks and FIs may write off a part of their loan.
The existence of such an institution encourages people to invest in productive channels. Thus it stimulates industrial growth and economic development of the country by mobilising funds for investment in the corporate securities. Reliable Guide to Performance The capital market serves as a reliable guide to the performance and financial position of corporates, and thereby promotes efficiency. Proper Channelization of Funds The prevailing market price of a security and relative yield are the guiding factors for the people to channelize their funds in a particular company.
This ensures effective utilisation of funds in the public interest. Provision of Variety of Services The financial institutions functioning in the capital market provide a variety of services such as grant of long term and medium term loans to entrepreneurs, provision of underwriting facilities, assistance in promotion of companies, participation in equity capital, giving expert advice etc.
Development of Backward Areas Capital Markets provide funds for projects in backward areas. This facilitates economic development of backward areas. Long term funds are also provided for development projects in backward and rural areas.
In , 14 major commercial banks were Vol. Another 6 banks were nationalised in These financial institutions and banks have contributed in widening and strengthening of capital market in India. Increasing Awareness During the last few years there have been increasing awareness of investment opportunities among the public. Growing Public Confidence A large number of big corporations have shown impressive growth. This has helped in building up the confidence of the public. The small investors who were not interested to buy securities from the market are now showing preference in favour of shares and debentures.
As a result, public issues of most of the good companies are now over-subscribed many times. ICRA was set up in These agencies are likely to help the development of capital market in future. Growth of Mutual Funds The mutual funds collects funds from public and other investors and channelize them into corporate investment in the primary and secondary markets.
The first mutual fund to be set up in India was Unit Trust of India in It suggests the enlistment of corporate securities in more than one stock exchange at the same time to improve liquidity. The study also wishes the cost of issues to be low, in order to protect small investors.
Panda has studied the role of stock exchanges in India before and after independence. The study reveals that listed stocks covered four-fifths of the joint stock sector companies. It attracted the attention of a large number of small and middle class individuals. It was observed that a large proportion of savings went in the first instance into purchase of securities already issued.
According to Levine and Zervos , stock market liquidity is a robust predictor of real per capita GDP growth only after controlling for initial income, initial investment in education, political stability, fiscal policy openness to trade, and macroeconomic stability. In Levine and Zervos study, the remaining stock market development proxies do not exhibit a robust link with long-run growth. In particular, volatility is insignificantly correlated with growth in most specifications in that study.
Similarly, market size, international integration, capita accumulation, productivity improvements, and private savings rates are not robustly linked with growth within th Levine and Zervos framework. Tuncer and Alovsat examined stock market-growth nexus and found a positive casual correlation between stock market development and economic activities.
Chen and Wong elaborated that the nexus between stock returns and output growth and the rate of stock returns is a leading indicator of output growth. Levine shed some empirical light on the ambiguous predictions about the relationship between stock market liquidity and economic growth.
The paper presents cross-country evidence on the association between one measure of stock market liquidity — the total value of stock transactions divided by GDP — and average economic growth rates over the period — The data suggest that there is a strong positive relationship exists between long-run economic growth rates and stock market liquidity.
This positive relationship is found to be robust even to various changes in the containing information set. Gupta revealed the findings of his study that there is existence of wild speculation in the Indian stock market. The over speculative character of the Indian stock market is reflected in extremely high concentration of the market activity in a handful of shares to the neglect of the remaining shares and absolutely high trading velocities of the speculative counters.
He opined that, short- term speculation, if excessive, could lead to "artificial price". An artificial price is one which is not justified by prospective earnings, dividends, financial strength and assets or which is brought about by speculators through rumours, manipulations, etc. He concluded that such artificial prices are bound to crash sometime or other as history has repeated and proved.
Pyare Lal Singh in the study titled, Indian Capital Market - A Functional Analysis, depicts the primary market as a perennial source of supply of funds. The number of investors increased from 20 lakhs in to lakhs in 7. In financing of the project costs of the companies with different sources of financing, the contribution of the securities has risen from The data used are the RBI monthly aggregate share indices relating five regional stock exchanges in India, viz Bombay, Calcutta, Madras, Delhi, Ahmedabad during According to the authors, the co integration results exhibited a long-run equilibrium relation between the price indices of five stock exchanges and error correction models indicated short run deviation between the five regional stock exchanges.
The study found that there is no evidence in favour of market efficiency of Bombay, Madras, and Calcutta stock exchanges while contrary evidence is found in case of Delhi and Ahmadabad. Debjit Chakraborty in his study attempts to establish a relationship between major economic indicators and stock market behavior. It also analyses the stock market reactions to changes in the economic climate.
The factors considered are inflation, money supply, and growth in GDP, fiscal deficit and credit deposit ratio. Redel concentrated on the capital market integration in developing Asia during the period to taking into variables such as net capital flows, FDI, portfolio equity flows and bond flows.
He concluded that deepening and strengthening the process of economic liberalization in the Asian developing countries is essential for minimizing the risks and maximizing the benefits from increased international capital market integration. Harris investigates the different effects of stock market liquidity on economic growth for developed and less developed countries using two stage least squares. The full sample used in the study covers 49 countries between and The paper finds no significant effect of stock market activity on economic growth for the full sample and for the sub-sample of less developed countries.
It does find stock market to be significant in the developed sub-sample. Rousseau and Wachtel also empirically assess the importance of stock market and banks for economic growth. They employ panel techniques to annual data over for 47 countries. As a measure of stock market liquidity they use two different proxies: value of the traded shares divided by GDP and market capitalization of all shares traded on the main stock exchange of a given country divided by GDP.
Both the value of the traded shares and market capitalization are deflated by the price index of the national stock exchange. To measure bank development they use M3 divided by GDP. First-differenced GMM estimator is used to analyze the relationship between the variables.
Using slightly different proxies to stock market liquidity and bank development from Beck and Levine and different econometric methods, they find strong evidence that liquid stock markets have a significant positive effect on growth. The objective of this study is role of Stock Market performance in economic development. In the old days, the task of mobilization and allocation of savings could be attempted by a much less specialized institution than the stock exchanges.
But as business and industry expanded and the economy assumed more complex nature, the need for 'permanent finance' arose. Entrepreneurs needed money for long term whereas investors demanded liquidity — the facility to convert their investment into cash at any given time. It encourages investors with surplus funds to invest them in additional financial instruments that better matches their liquidity preferences and risk yearning.
Better savings mobilization may increase the savings rate, and which in turn prompt investments and earns investment income to the owners of those funds.
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