16th Dec, 2011, Ashish Pandey-Intelivisto
Indian financial system can be broadly categorized into Money Market and Capital Market. Capital market is the market for securities (debt or equity), where business enterprises can raise long term funds. A table giving an idea of Indian financial system and its constituents is presented below:
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Indian Financial System
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Money Market
Governed & regulated by Govt. of India through R.B.I
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Capital Market
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Non-Securities Market
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Securities Market
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Mutual Funds
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Portfolio Management Services
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Insurance
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Fixed Deposits
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Primary Market
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Secondary Market
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IPO
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Private Placement
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Book Building
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Equity Market
(Capital Market)
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Derivatives Market
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Spot Market (Cash Market)
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Futures
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Options
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The main difference between money market and capital market is that the money market provides short term funds, usually for a year or less, whereas capital market provides long term funds for longer periods. RBI regulates the money market, whereas capital market is regulated mainly by SEBI in harmony with AMFI (for mutual fund matters) & IRDA (insurance regulatory authority).
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Regulatory Scenario
SEBI was established as a statutory body in 1992 to regulate and promote the development of the securities market and protect the interest of investors. SEBI has proactively introduced measures to improve the integrity of the secondary as well as primary markets through better governance. SEBI has also introduced reporting requirements for the various capital market participants to enable increased transparency.
Dealings in securities are also governed by the provisions of The Securities Contracts (Regulation) Act, 1956.
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Indian capital market has made significant progress over the last decade which spans several dimensions of development such as accessibility, regulatory framework, market infrastructure, transparency, liquidity and the types of instruments available. All these factors have culminated into the emergence of much deeper and resilient non-securities as well as securities markets in India, which further has been evolved into efficient primary and secondary markets.
Considering the size of Indian economy/market, money market instruments are inadequate in supply, whereas capital market has witnessed innovative products series; ranging from equity shares, preference shares, convertible/non-convertible preference shares, debentures, bonds, mutual funds to equity derivatives, currency derivatives, interest rate derivatives and hybrid instruments.
We can easily gauge the role of capital markets in the growth of India, just by taking these facts into account that:
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During the pre-liberalization period of 1947-91, when Indian capital market is very much in control and restriction of Govt. of India, our economy never recorded the growth of even 5%, it always remains below than that.
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But after facing balance of payment (BoP) crisis and in consequence adopting liberalized economic policy in 1991 onwards, our economy has every year registered the growth more than 5% barring a few exceptions. Even in the time, when world faced the heat of global credit crunch in 2007-08 followed by its after-effect in 2009; Indian economy grew by 6.8%.
Growth in India has generally not experienced very steep declines since the process of financial reforms began. It was slightly negative during the dotcom bust of 2001 and in 2007-08 when it was affected by the contagion effect of the financial crisis. The constant high growth rates in output has been achieved as a result of financial deepening due to financial sector reforms and this is clearly evident by high growth rates and development of capital markets in India.
Demand for financial services in India is taking off. Noteworthy is the fact that International financial institutions are playing an increasing role in the expansion of India’s large corporations. Great opportunity lies in the SME segment, which remains largely untapped. On the retail side, India already has more middle-class people on a purchasing power parity basis than the entire population of the US, and a consumer credit market that is rising by more than 40 per cent per annum. The sector has huge growth potential, and with government considering steps to liberalise it further, the capital markets segment with its core investment avenues like mutual funds, primary and secondary markets is poised to play significant role in the growth of the Indian economy.
