CAPITAL MARKET AND ORGANS OF CAPITAL MARKET, DIFFERENCE

BETWEEN CAPITAL MARKET AND MONEY MARKET

GARIMA YADAV
Ist year LLM
2017-18 BATCH
NUSRL RANCHI

History of capital market:-

The history of the capital market in India dates back to the eighteenth century when East India
Company securities were traded in the country. Until the end of the nineteenth century securities
trading was unorganized and the main trading centers were Bombay (now Mumbai) and Calcutta
(now Kolkata). Of the two, Bombay was the chief trading center wherein bank shares were the
major trading stock During the American Civil War (1860-61). Bombay was an important source
of supply for cotton. Hence, trading activities flourished during the period, resulting in a boom in
share prices. This boom, the first in the history of the Indian capital market lasted for a half a
decade. The bubble burst on July 1, 1865 when there was tremendous slump in share prices.1

Trading was at that time limited to a dozen brokers; their trading place was under a banyan tree
in front of the Town hall in Bombay. These stock brokers organized informal association in 1897
Native Shares and Stock Brokers Association, Bombay. The Stock exchanges in Calcutta and
Ahmadabad also industrial and trading centers came up later. The Bombay Stock Exchange was
recognized in May 1927 under the Bombay Securities Contracts Control Act, 19252.

The capital market was not well organized and developed during the British rule because the
British government was not interested in the economic growth of the country. As a result many

1
Icsi.edu
2
Matthew Josephson The robber baron, pg.15-19

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foreign companies depended on the London capital market for funds rather than in the Indian
capital market.

In the post independence period also, the size the capital market remained small. During the first
and second five year plans, the governments emphasis was on the development of the
agricultural sector and public sector undertakings. Moreover, the Controller of Capital Issues
(CI) closely supervised and controlled the timing, composition interest rates pricing allotment
and floatation consist of new issues. In the 1950s, Century textiles, Tata Steel, Bombay Dyeing,
National Rayon, Kohinoor mills were the favorite scripts of speculators. As speculation became
rampant, the stock market came to be known as Satta Bazaar. Despite speculation non-payment
or defaults were very frequent. The government enacted the Securities Contracts (regulation) Act
in 1956 to regulate stock markets. The Companies Act, 1956 was also enacted. The decade of the
1950s was also characterized by the establishment of a network for the development of financial
institutions and state financial corporations.

In the 1970s Badla trading was resumed under the disguised forms of hand delivery contracts
A group. This revived the market. However, the capital market received another severe setback
on July 6, 1974, this lead to a slump in market capitalism at the BSE by about 20 per cent
overnight and the stock market did not open for nearly a fortnight. When the government
promulgated the Dividend Restriction ordinance, restricting the payment of dividend by
companies to 12 per cent of the face value or one-third of the profit of the companies. Then in
1977, a little known entrepreneur, Dhirubhai Ambani tapped the capital market. The scrip
Reliance Textiles is still a hot favorite and dominates trading at all stock exchanges.

International perspective on capital market:-

In 1969 The Association of International Bond Dealers (AIBD) is established as an

association under Swiss law in February 1969 in Zurich, where it is entered in the commercial
register. In 1970s AIBD oversees the formation of a series of rules and recommendations
governing trading and settlement in the international securities market; establishes a regional

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structure to reflect the geographic composition of the Associations global membership; creates
the AIBD Certificate and the Operations Certificate Programme (OCP).In 1980s3

In the UK AIBD is approved as an International Securities Self-Regulating Organization

(ISSRO) and recognized as a Designated Investment Exchange (DIE).

Effective January 1, 1992, AIBD changes its name to International Securities Market
Association (ISMA). Effective July 1, 2005 ISMA and the International Primary Market
Association (IPMA) merge. As a result, the Association changes its name to International
Capital Market Association (ICMA). The Regulatory Policy team is built up to provide services
and expertise for members. In January 2016 the Swiss Federal Financial Market Infrastructure
Act (FMIA) enters into force which no longer provides for an institution similar to an
exchange as one of the types of regulated institution. As a result, effective January 1, 2017
ICMA does not retain this status and is no longer subject to supervision in Switzerland. At the
same time, ICMA is one of FINMAs national stakeholders with which FINMA maintains
contact and liaises on regulatory and market matters.

Capital market:-

A type of financial market where the government or company securities are created and traded
for the purpose of raising long-term finance to meet the capital requirement is known as Capital
Market.4

The securities which are traded includes stocks, bonds, debentures, euro issues, etc. whose
maturity period is not limited up to one year or sometimes the securities are irredeemable (no
maturity). The market plays a revolutionary role in circulating the capital in the economy
between the suppliers of money and the users. The Capital Market works under full control of
Securities and Exchange Board to protect the interest of the investors.5

Functions of capital market:-The major objectives of capital market are:-

- To mobilize resources for investments.

3
www.icmagroup.org, accessed on 11.09.2017, 10.12 PM
4
Executive Programme,The institute of company secretaries of India, Module II, Paper 6, pg 3,
5
Robinson, I. Roland, Money and Capital Markets, (1964) McGraw-Hill Book Company, New York, p. 65

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 - To facilitate buying and selling of securities.
- To facilitate the process of efficient price discovery6.

Capital market is an ideal one:-

1. Where finance is available at reasonable cost.

2. Which facilitates economic growth.
3. Where market operations are free, fair, competitive and transparent.
4. Must provide sufficient information to investors.
5. Must allocate capital productively.7

The Capital Market includes both dealer market and auction market. It is broadly divided into
two major categories: - Primary Market and Secondary Market.

Primary Market: -A market where fresh securities are offered to the public for subscription is
known as Primary Market. SEBI has regulated the primary market through

The regulation of issuers access to market.

Regulation of information production at the time of issue.
Regulation of processes and procedures relating to issuance of securities.8

Secondary Market: A market where already issued securities are traded among investors is
known as Secondary Market. The market where, unlike the primary market, an investor can buy
a security directly from another investor in lieu of the issuer. It is also referred as "after market".
The securities initially are issued in the primary market, and then they enter into the secondary
market.

All the securities are first created in the primary market and then, they enter into the secondary
market. In the New York Stock Exchange, all the stocks belong to the secondary market.

In other words, secondary market is a place where any type of used goods is available. In the
secondary market shares are maneuvered from one investor to other, that is, one investor buys an
asset from another investor instead of an issuing corporation. So, the secondary market should be
liquid.9

6
https://www.linkedin.com/pulse/what-main-function-capital-market-pac-group-of-colleges
7
Sanjiv Agarwal ( chartered accountant), guide to Indian capital market, Pg. 81, Bharat law house, first edition 2000
8
www.llmb.ac.in, accessed on 11.09.2017
9
Article of Indian law institute newsletter, editor manoj kumar sinha, volume (xvii)

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Example of Secondary market:

In the New York Stock Exchange, in the United States of America, all the securities belong to
the secondary market

A capital market is not a compact unit, but a highly decentralized system made up of three major
parts:

1. Stock market.
2. Money market.

It also works as an exchange for trading existing claims on capital in the form of shares.

1. Stock market:-

A stock market, equity market or share market is the aggregation of buyers and sellers that is a
loose network of economic transactions, not a physical facility or discrete entity of stocks also
called shares, which represent ownership claims on businesses; these may include securities
listed on a public stock exchange as well as those only traded privately. Examples of the latter
include shares of private companies which are sold to investors through equity crowd funding
platforms. Stock exchanges list shares of common equity and other security e.g. corporate bonds
and convertible bonds. 10

It can operate only if it is recognized by the government under the securities contract regulation
act, 1956. The recognition is granted under section 3 of the act by the central government,
ministry of finance.

India has two major stock exchanges-

National Stock Exchange of India (NSE) and

Bombay Stock Exchange of India (BSE).

Most of Indian equity share trading market takes place on these two stock exchanges.

Bombay Stock Exchange:-

10
V.A.Avadhani, Book investment and securities markets in india, Pg.241, publish himalaya publishing house, 9th
Edition, price Rs.390.

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The BSE, first stock exchange, was established in 1875. BSE is one of the world fastest stock
exchanges, with a median trade speed of 6 microseconds. Is the world 11th largest stock
exchange with an overall market capitalization of $1.83 Trillion as of

March, 2017. More than 5500 companies are publicly listed on the BSE.

National stock exchange in India:-

The NSE, on the other hand, was founded in 1992 and started trading in 1994, as the first
demutualized electronic exchange in the country. It was the first exchange in the country to
provide fully a modern, automated screen-based electronic trading system which offered easy
trading facility to the investors spread across the length and breadth of the country. The NSE has
a total market capitalization of more than US$1.41 trillion, making

It the world 12th-largest stock exchange as of March 2016. Both exchanges - BSE and

NSE - follow the same trading mechanism, trading hours, settlement process, etc.

2. Money market:-

The money market is where financial instruments with high liquidity and very short maturities
are traded. It is used by participants as a means for borrowing and lending in the short term, with
maturities that usually range from overnight to just under a year. Among the most common
money market instruments are Eurodollar deposits, negotiable certificates of deposits (CDs),
bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and
repurchase agreements.11

Money market instruments:-

a. 182 Treasury bills: - these were introduced by RBI in November, 1986.

b. Commercial bills: - commercial bill can be traded by offering bills for
rediscounting by the investors.
c. Certificate of deposit: - it is negotiable instrument issued at a discount and the
face value is payable on maturity.

11
Institutional structure of capital market in india,Sharma,k.s.,pg.16

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 d. Commercial papers: - the issue of commercial papers is governed by RBI and its
guidelines change from time to time as per prevailing monetary policy. All
money,
e. term money and notice money:- call and short notice money deal with One day or
14 days money at a market rate of interest. Overned by Reserve Bank of India Act
1934.12

Key Differences between Money Market and Capital Market13:-

The following points are substantial, as far as the difference between money market and capital
market is concerned:-

1. The place where short-term marketable securities are traded is known as Money Market.
Unlike Capital Market, where long-term securities are created and traded is known as
Capital Market.
2. Capital Market is well organized which Money Market lacks.
3. The instruments traded in money market carry low risk, hence, they are safer
investments, but capital market instruments carry high risk.
4. The liquidity is high in the money market, but in the case of the capital market, liquidity
is comparatively less.
5. The major institutions that work in money market are the central bank, commercial bank,
non-financial institutions and acceptance houses. On the contrary, the major institutions
which operate in the money market are stock exchange, commercial bank, non-banking
institutions etc.
6. Money market fulfills short term credit requirements of the companies such as providing
working capital to them. As against this, the capital market tends to fulfill long term
credit requirements of the companies, like providing fixed capital to purchase land,
building or machinery.
7. Capital Market Instruments give higher returns as compared to money market
instruments.

12
Sanjiv Agarwal ( chartered accountant), guide to Indian capital market, Pg.100, Bharat law house, first edition
2000
13
Mahbub hossain mazumdar, Basics of capital market, (FCMA)

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 8. Redemption of Money Market instruments is done within a year,but Capital Market
instruments have a life of more than a year as well as some of them is perpetual in nature.

Market Regulation

It is important to ensure smooth working of capital market, as it is the arena for the players
associated with the economic growth of the country. Various laws have been passed from time to
time to meet this objective. The financial market in India was highly segmented until the
initiation of reforms in 1992-93 on account of a variety of regulations and administered prices
including barriers to entry. The reform process was initiated with the establishment of Securities
and Exchange Board of India14.

The main legislations governing the Capital Market are:

1. The SEBI Act, 1992 which establishes SEBI to protect investors and develop and
regulate securities market.
2. The Securities Contracts (Regulation) Act, 1956, which regulates transactions in
securities through control over stock exchanges.
3. The Depositories Act, 1996 which provides for electronic maintenance and transfer of
ownership of demat securities. 4.The Companies Act, 2013, which sets out the code of
conduct for the corporate sector in relation to issue, allotment and transfer of securities
and disclosures to be made in public issues.

SEBI ACT, 1992

The SEBI Act, 1992 establishes SEBI with statutory powers for (a) protecting the interests of
investors in securities, (b) promoting the development of the securities market, and (c) regulating
the securities market. Its regulatory jurisdiction extends over corporate in the issuance of capital
and transfer of securities, in addition to all intermediaries and persons associated with securities
market. It can conduct enquiries, audits and inspection of all concerned and adjudicate offences
under the Act. It has powers to register and regulate all market intermediaries and also to
penalise them in case of violations of the provisions of the Act, Rules and Regulations made
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securities and financial mrket regulation, by niamh moloney

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there under. SEBI has full autonomy and authority to regulate and develop an orderly securities
market.

SECURITIES CONTRACTS (REGULATION) ACT, 1956

It provides for direct and indirect control of virtually all aspects of securities trading and the
running of stock exchanges and aims to prevent undesirable transactions in securities. It gives
central government/SEBI regulatory jurisdiction over (a) stock exchanges through a process of
recognition and continued supervision, (b) contracts in securities, and (c) listing of securities on
stock exchanges. As a condition of recognition, a stock exchange complies with prescribed
conditions of Central Government. Organised trading activity in securities takes place on a
specified recognised stock exchange. The stock exchanges determine their own listing
regulations which have to conform to the minimum listing criteria set out in the Rules.

DEPOSITORIES ACT, 1996

The Depositories Act, 1996 provides for the establishment of depositories in securities with the
objective of ensuring free transferability of securities with speed, accuracy and security by
making securities of public limited companies freely transferable subject to certain exceptions.
Dematerializing the securities in the depository mode providing for maintenance of ownership
records in a book entry form.

In order to streamline the settlement process, the Act envisages transfer of ownership of
securities electronically by book entry without making the securities move from person to
person. The Act has made the securities of all public limited companies freely transferable,
restricting the companys right to use discretion in effecting the transfer of securities, and the
transfer deed and other procedural requirements under the Companies Act have been dispensed
with.

COMPANIES ACT, 2013

The Companies Act, 2013 has replaced the Companies Act, 1956. The new Companies Act,
2013 envisage to strengthen the existing regulatory framework on Corporate Governance. It

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deals with issue, allotment and transfer of securities and various aspects relating to company
management. It provides for standard of disclosure in public issues of capital, particularly in the
fields of company management and projects, information about other listed companies under the
same management, and management perception of risk factors. It also regulates underwriting, the
use of premium and discounts on issues, rights and bonus issues, payment of interest and
dividends, supply of annual report and other information.15

CONCLUSION:-

The main aim of the financial market is to channelize the money between parties in which
Money Market and Capital Market helps by taking surplus money from the lenders and giving
them to the borrower who needs it. Millions of transactions take place around the world on a
daily basis.

Both of them work for the betterment of the global economy. They fulfill the long term and short
term capital requirements of the individual, firms, corporate and government. They provide good
returns which encourage investments.

15
A comprehensive text book on companies act 2013, Dr.G.k KAPOOR (20th edition), pg. 312

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