Role of Capital Markets for the Development of an Indian

Economy
Mr P. Satya Balaram,
M.Com, MBA, M.Phil., PGDFM
Associate. Professor,
Aditya P.G college , Kakinada.
E- Mail: balaramfinance007@gmail.com

Phone: 9000072443

Abstract
Taking into account the apart role in the market economy, the capital market occupies an
important place, through their specific mechanisms, succeeding to give its contribution to the
economic development of the society. In consequence, the public authorities must notice the
importance of the capital market in the national economy and, on the other hand, to make the
efforts for insuring the necessary framework for the normal functioning of its specific
mechanisms. The valences of the capital could be even more interesting in the case of
emerging markets like the Romanian capital market being well-known its contribution in
reorienting financial resources to efficient activities, contributing to the economic reform, but
also being interesting in the privatization process.
Key words: Capital market, direct and indirect financing, primary and secondary market,
role of capital market.

Introduction
Capital Market is a channel through which the wealth of savers is put into long-term
productive use. Both the Equity and Bond markets are parts of Capital Markets. Governments
and Companies use Capital Markets to raise money for their long-term investments. The
capital is raised through debt and equity instruments. Capital Markets are of two types:
Primary market is a market for new shares and secondary market is a market for trading
existing securities.
History of Capital Markets
The origin of Capital Markets goes back to the early 17 th century. The Dutch were the
pioneers in capital markets and they successfully leveraged the power of capital markets to
withstand the British and won three wars against them, despite being a smaller nation in all
aspects. Finally, British collaborated with the Dutch and became an expert in leveraging
Capital Markets that led to the rise of the British Empire. One major reason for the success of
British Empire over the French, despite France having population three times that of the
British, was that they were able to raise capital from public at low interest rates, whereas its
counter parts, such as French didnt have superior financial markets and their cost of raising
the capital from public was very high.
In the United States of America, the stabilization of securities market begun with the passing
of the Blue Sky Law in 1911 in the Kansas State to protect investors through anti-fraud
provisions, regulation of brokers, dealers and registration of securities. The technology
innovation in United States made them the biggest economy in the world. Information
Technology led to paradigm shift and revolutionized the structure and functioning of Capital
Markets by reducing information asymmetry and assisting faster settlements of transactions.
The most significant development in Capital Markets is the way the technology has erased
the geographical boundaries.
The story of Capital Markets in India dates back to the 18 th century when trading shares of
East India commenced. The real story of Indias Capital Markets started in July 1875 with the
formation of Stock Exchange in Mumbai by the brokers.

Role of Capital Markets in India

The role of capital markets is vital for inclusive growth in terms of wealth distribution and
making capital safer for investors. Capital markets can create greater financial inclusion by
introducing new products and services tailored to suit investors preference for risk and return
as well as borrowers project needs and risk appetite. Innovation, credit counseling, financial
education and proper segment identification constitute the possible strategies to achieve this.
A well-developed capital market creates a sustainable low-cost distribution mechanism for
multiple financial products and services across the country. Indeed, India as an emerging
economy has seen a spate of innovations in the area of financial engineering. These financial
innovations are a result of number of Government regulations, tax policies, globalization,
liberalization, privatization, integration with the international financial market and increasing
risk in the domestic financial market. With the increased volatility in the capital market, the
need for new financial innovations to hedge risk and increase returns cannot be overstated.
The financial innovations in India has led to various derivative products, index based
derivativesetc.
Matching the cross border expansion of Indian Companies, the Indian Capital Markets have
also grown exponentially in the last few years. The growth has been in every sphere - the
amount of capital raised through primary issuances, exchange trading turnovers, the market
indices and market capitalization, mutual fund assets, access to foreign markets for raising
funds, foreign listing and foreign institutional investment. In fact, none of this would have
been possible if the Indian markets had not developed a world class market and regulatory
infrastructure. The efforts of the last decade in developing an efficient market infrastructure
have created a market that has made transactions transparent and settlements safer. The
Indian Capital Market has come a long way from trading under the Banyan tree to internet
trading. A significant development in Indian Capital Markets have been coining by setting up
of SME exchange. The SME Exchange is a welcome move for the Small and Medium Scale
Enterprises. In India BSE and NSE have created SME exchanges BSESME and EMERGE
respectively. Setting up of SME platform by two leading Stock Exchanges, have opened
avenues for SMEs to raise funds from the market. It is an effective booster for Small and
Medium Enterprises where raising of capital is a primary concern. Creating a trading
platform for SMEs would enable the growth of SMEs and thereby the growth of Economy.

In nutshell, Capital market is the heart of any economy through which the savings
are channelized into effective long-term investments. A developed and vibrant Capital Market
will immensely contribute towards speedy economic growth and development. Now, Indian
capital market is well organized, fairly integrated, mature, modernized and demographically
well diversified. The Indian equity market is one of the best in the world in terms of
technology. Advances in computer and communications technology, coming together on
Internet are shattering geographic boundaries and enlarging the investor class across the
national boundaries.
SEBI Guidelines:
1. Power to make rules for controlling stock exchange:
SEBI has power to make new rules for controlling stock exchange in India. For example,
SEBI fixed the time of trading 9 AM and 5 PM in stock market.
2. To provide license to dealers and brokers:
SEBI has power to provide license to dealers and brokers of capital market. If SEBI sees that
any financial product is of capital nature, then SEBI can also control to that product and its
dealers. One of main example is ULIPs case. SEBI said, It is just like mutual funds and all
banks and financial and insurance companies who want to issue it, must take permission from
SEBI."
3. To Stop fraud in Capital Market:
(a)

SEBI

has

many

powers

for

stopping

fraud

in

capital

market.

(b) It can ban on the trading of those brokers who are involved in fraudulent and unfair trade
practices relating to stock market.
(c) It can impose the penalties on capital market intermediaries if they involve in insider
trading.
4. To Control the Merge, Acquisition and Takeover the companies :
Many big companies in India want to create monopoly in capital market. So, these companies
buy all other companies or deal of merging. SEBI sees whether this merge or acquisition is
for development of business or to harm capital market.
5. To audit the performance of stock market :
SEBI uses his powers to audit the performance of different Indian stock exchange for
bringing transparency in the working of stock exchanges.
6. To make new rules on carry - forward transactions:

Share trading transactions carry forward can not exceed 25% of broker's total transactions.
90 day limit for carry forward.
7. To create relationship with ICAI:
ICAI is the authority for making new auditors of companies. SEBI creates good relationship
with ICAI for bringing more transparency in the auditing work of company accounts because
audited financial statements are mirror to see the real face of company and after this investors
can decide to invest or not to invest. Moreover, investors of India can easily trust on audited
financial reports. After Satyam Scam, SEBI is investigating with ICAI, whether CAs are
doing their duty by ethical way or not.
8. Introduction of derivative contracts on Volatility Index :
For reducing the risk of investors, SEBI has now been decided to permit Stock Exchanges to
introduce derivative contracts on Volatility Index, subject to the condition that;
a. The underlying Volatility Index has a track record of at least one year.
b. The Exchange has in place the appropriate risk management framework for such derivative
contracts.
2. Before introduction of such contracts, the Stock Exchanges shall submit the following:
i. Contract specifications
ii. Position and Exercise Limits
iii. Margins
iv. The economic purpose it is intended to serve
v. Likely contribution to market development
vi. The safeguards and the risk protection mechanism adopted by the exchange to ensure
market

integrity,

protection

of

investors

and

smooth

and

orderly

trading.

vii. The infrastructure of the exchange and the surveillance system to effectively monitor
trading in such contracts, and
viii. Details of settlement procedures & systems
ix. Details of back testing of the margin calculation for a period of one year considering a call
and a put option on the underlying with a delta of 0.25 & -0.25 respectively and actual value
of the underlying.
9. To require report of Portfolio Management Activities:
SEBI has also power to require report of portfolio management to check the capital market
performance. Recently, SEBI sent the letter to all Registered Portfolio Managers of India for
demanding report.
10. To educate the investors:

Time to time, SEBI arranges scheduled workshops to educate the investors. On 22 may 2010
SEBI imposed workshop.
Conclusion
If one looks into history and traces back the reasons for flourishing of economies such as
Dutch and United Kingdom the reasons for the success of these economies lies in piping the
public saving in to long-term investments. The Dutch were the first to procure funds from
public; they raised capital to trade and maintain battle ships in order to protect their ships
from the pirates. British had replicated the Dutch financial system and became an Empire and
eventually the countries that replicated good Capital Market practices, like United States, also
flourished.
The Capital Markets play a significant role in any economy from allocation of Capital and
Risk to Policy Making. If there is any single factor that makes a huge impact in improving the
GDP of a country, it is the effective allocation of capital to the Industry and Government.
Capital Market is the best channel to route the savings into long-term productive use. If we
look in to the economy and find the enterprises that were hit by high cost of capital, one can
observe that MSME that provides highest number of employment opportunities were worst
hit by it. If a country develops and adopts best Capital Market practices they create multiple
effects and helps in reviving the economy.
The SME Exchange is a welcome move for the Small and Medium Scale Enterprises, but it is
alone not enough to revive MSME.
Capital market is the heart of any economy through which the savings are channelized into
effective long-term investments. A developed and vibrant Capital Market will immensely
contribute towards speedy economic growth and development.
References:
1. Adair Turner, 2010, Chapter 1 What do Banks do? Why do Credit Booms and Busts
Occur and What can Public Policy do about it,
2. The Future of Finance: The LSE Report. Assaf Hamdani, 2003, Gatekeeper Liability,
The John M. Olin Center for Law, Economics and Business, Discussion Paper no 442.
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Principles of Securities Regulation.
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-----, 2010, Effectiveness of Market Interventions in Emerging Markets.
-----, 2011, Mitigating Systemic Risk: A Role for Securities Regulators.
-----, 2011, Regulatory Implementation of the Statement of Principles Regarding the
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