The Capital Market, as a crucial segment of the financial market, is integral for channeling capital between investors and borrowers. Understanding the its functioning is essential for developing a grasp of the Indian Financial System. This article of NEXT IAS aims to study in detail the Capital Market, including its meaning, components, structure, types, roles, regulations, and other related concepts.
| – Financial Market is a broad term, referring to any center or arrangement where buyers and sellers participate in the trade of financial claims such as equities, bonds, currencies, and derivatives. – The Financial Market is classified into two categories. A. Money Market – Market for trading short-term financial assets with a maturity of upto 1 year B. Capital Market – Market for borrowing and lending of medium and long-term funds, above 1 year. |
The capital market is a complex system, formed by various components. Various components and structure of capital market can be classified into the following 3 categories.
Capital Market participants include the individuals and institutions that interact within the market. These participants can be, broadly, categorized into 2 groups:
Capital Market Instruments or the Instruments of Capital Market refer to various types of financial tools used within the market. They include financial securities and derivatives that serve as mediums and facilitate the flow of money among the participants of the capital market.
Various capital market instruments can be, broadly, classified into the following types:
Each type of capital market instrument has been discussed in detail in our article Instruments of Capital Market.
Capital Market Infrastructure refers to the institutions that facilitate the smooth operation of the market. These institutions play a crucial role in connecting various participants and ensuring their regulated interactions for trading through instruments available in the market.
Major types of institutions forming part of the capital market infrastructure are as follows:
Based on the type of securities traded, the Capital Market is of 2 types:
| Primary Market | Secondary Market |
|---|---|
| New market securities are sold. | Only existing securities are traded. |
| Investors have the option of only buying the securities. | Investors can both buy and sell securities. |
| The price of securities is mostly decided by the management of the issuing company. | The price of securities is determined by the demand and supply of the market. |
| Primary Markets have no fixed geographical location. | Secondary Markets are located at specified places, known as Stock Exchange. |
| Major intermediaries – Merchant Banks, Underwriters, Debenture Trustees, Portfolio Managers, etc. | Major intermediaries – Brokers, Jobbers, etc. |
The functioning dynamics of both types of markets are discussed in detail in the sections that follow.
The issue of new securities in the Primary Market occurs through various methods as discussed below.
When an issuer makes an issue of securities to a limited group of pre-selected investors, and which is neither a rights issue nor a public issue, it is called a private placement.
Private placement can be of 2 types:
When a listed issuer issues shares or convertible securities to a select group of persons, it is called a Preferential Allotment.
When a listed issuer issues shares or convertible securities to a select group of Qualified Institutional Buyers (QIBs), it is called a Qualified Institutional Placement (QIP).
Its a method of pricing new issues wherein the issuer offers securities at a pre-fixed price.
Its is another method of pricing new issues wherein the price is not announced beforehand. Rather, the issuer, first, offers the shares and gets application from public and then based on the demand fixes the price.
It is the maximum amount authorized by Memorandum of Association of a company that can be raised by the company. The issuer can issue securities upto worth this amount only.
It is the actual amount issued by the issuer. It may be equal to or lesser than the Authorized Capital.
After the company issues shares, the public starts subscribing to those shares. The subscription can be oversubscribed (demand of shares more than the issued number of shares) or undersubscribed (demand of shares less than the issued number of shares). The actual amount subscribed is called Subscribed Capital.
A “merchant banker” means any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management.
Underwriting means an agreement with or without conditions to subscribe to the securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them.
The financial intermediary which agrees to purchase the undersubscribed portion of issued capital is called Underwriter.
The company usually collects the subscribed capital in installments. The portion of money demanded from subscriber is known as Called Up Capital.
The amount actually paid by subscribers, when the money is demanded by the issuer, is known as Paid Up Capital.
Usually, the issuer does not demand the whole amount from the subscriber. A small portion of money is left un-demanded, which is called Reserve Capital.
Based on the type of trading, the secondary market has 2 components:
It refers to markets for trading of securities through a centralized exchange, usually called Stock Exchange.
Listed Securities refer to those securities that are accepted to be traded in stock exchanges.
Its a type of trading in the Secondary Market wherein the sale and purchase of securities takes place at the prevailing price on the day of trading.
Its another type of trading in the Secondary Market wherein both buyer and seller agree to buy and sell respectively at a future date at a pre-agreed price, irrespective of the price that prevails on the day of trade.
Fourth Market refers to institution-to-institution trading directly, without using the service of broker-dealers, thus avoiding both commissions, and the bid–ask spread.
It is an index of BSE, which measures the price movement of top 30 companies’ shares.
It is an index of NSE, which measures price movement of top 50 companies.
It is an index of NSE, which measures the price movement of the next top 50 companies.
The Capital Market, as the major channel for mobilization of funds, plays very crucial role in an economy. Some of the its major roles and importance can be seen as follows:
The Capital Market serves as a vital channel for mobilizing savings into investments, and hence driving economic growth and prosperity. As India aims to grow faster in the time times to come, the role of the Capital Market is going to become even more important. Efforts should be taken to ensure its efficient functioning by focusing on transparency, fairness, and regulatory oversight to maintain investor confidence and market integrity.
Indian Capital Market is a component of Indian Financial Market which provides a market for borrowing and lending of medium and long-term funds, above 1 year.
The Indian capital market isn’t controlled by a single entity, but rather overseen by a number of regulatory bodies, including Securities and Exchange Board of India (SEBI), Union Ministry of Corporate Affairs, Reserve Bank of India (RBI), etc.
There are several bodies involved in regulation of Capital Market in India. They include – Securities and Exchange Board of India (SEBI), Union Ministry of Corporate Affairs, Reserve Bank of India (RBI), etc.
The Capital Market is the major channel for mobilization of funds from investors to borrowers.
