The following points highlight the top four indicators of the development of Indian Capital Market. The indicators are: 1. Term Lending Financial Institutions and the Capital Market 2. Commercial Banks and their Role in Capital Market 3. Development of New Financial Intermediaries in Capital Market 4. Regulation of the Capital Market.
Indicator # 1. Term Lending Financial Institutions and the Capital Market:
During the post-independence period the Government of India gradually set up a number of term lending financial institutions for helping the private sector industrial enterprises by advancing finance. Such term lending financial institutions includeâ€” IFCI (1948), SFCs (1951), ICICI (1955), IDBI (1964) and UTI (1964) which are advancing long term finance to small and medium scale industrial units.
Accordingly, total amount of financial assistance sanctioned by these term lending financial institutions increased from a mere Rs 230 crore in 1970-71 to Rs 2,550 crore in 1980-81 and then to Rs 42,500 crore in 1993-94.
Indicator # 2. Commercial Banks and their Role in Capital Market:
The next important constituents of Indian capital market are commercial banks. Their operations have been very much restricted to the purchase and sale of government securities and other trust securities, where they invest nearly 55 per cent of the total bank funds. The holdings of industrial securities by the commercial banks, in the form of shares and debentures are also very small in its size.
But in recent years, commercial banks have been subscribing to the shares and debentures of some special financial institutions. Moreover, they are also taking active steps to set up financial subsidiaries like merchant houses, venture capital companies, mutual funds, leasing companies etc. with sole objective to mobilise funds for investing it in industrial securities.
Indicator # 3. Development of New Financial Intermediaries in Capital Market:
In the initial period, India does not have proper specialised financial intermediaries for the promotion of companies and for issuing and underwriting of shares. Initially underwriting was done by the firms of stock brokers, bigger Scheduled banks and insurance companies. Later on ICICI, LIC, IDBI and IFCI started this underwriting business in considerable proportion.
Following are some of the new financial intermediaries developed in India.
(i) Merchant Banking:
Although the commercial banks have introduced merchant banking divisions for providing financial services but few merchant banks have been set up by private financial service companies with the association of foreign banking and money market institutions.
In India, merchant hanks normally manage and underwrite new issues, undertake syndication of credit and advise its corporate clients on fund raising issue and also on other financial aspects. Merchant banks in India are controlled and supervised by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI).
(ii) Leasing and hire-Purchase Companies:
In recent years, a number of leasing and hire-purchase companies have been floated. Leasing is considered as a suitable financing method for acquiring plant and machinery for small and medium enterprises. But due to mismanagement and under-capitalisation a good number of such companies has already become non-functional.
The Narasimham Committee has made certain recommendations for its revival recognising its importance, which includesâ€”a minimum capital requirement, prudential norms and guidelines and provision of supervision on the basis of periodic returns.
(iii) Mutual Funds:
Mutual funds are the recent developments in the Indian capital market which are considered as new financial intermediaries in the capital market. In the mean time, various public sector banks and other financial institutions have already set up mutual funds on the basis of tax exemption and has followed into the footsteps of UTI. Such funds have been able to attract strong investor support.
Recently, the Government has opened field of finance to private and joint sector mutual funds. In order to supervise and regulate the working of the mutual funds, SEBI has been given the full authority to frame the guidelines.
The Narasimham Committee in its recent report recommended:
(a) Creation of a proper regulatory framework for promoting sound, orderly and competitive growth of mutual fund;
(b) Creation of appropriate legal framework so as to govern its establishment and operation and
(c) Maintenance of equality of treatment between different mutual funds in respect of tax concessions.
(iv) Venture Capital Companies:
Another recent development in the Indian capital market is the entry of venture capital companies. The main importance of venture capital companies is to provide adequate commercial support to new ideas along with the introduction and adaptation of new technologies. A high degree of risk is involved in venture capital financing.
The Narasimham Committee observed that the guidelines for setting up such companies are too restrictive and unrealistic which obstruct its growth. In order to reduce the degree of risk involved in venture capital financing, the Narasimham Committee recommended reduction of tax on capital gains made by these companies and to give equal treatment between Venture capital companies and Mutual funds.
Moreover, the Government of India has also set up a good number of financial intermediaries for meeting the increasing needs of commerce and trade. These include:
(a) Risk capital and technology Corporation Ltd. (RCTC),
(b) Technology Development and Information Company of India Ltd. (TDICI),
(c) Infrastructure Learning and Financial services Ltd. (ILFS)
(d) The credit Rating Information Services India Ltd. (CRISIL) and
(e) Stock Holding Corporation of India Ltd. (SHCIL). All the aforesaid institutions are now in early stage but are likely to play an effective role in the Indian Capital Market in future.
Indicator # 4. Regulation of the Capital Market:
The extent of capital market has widened with the development of various financial intermediaries which needs to be actively encouraged for its further development and expansion. Moreover, in order to protect the interest of the investors, the capital market should be regulated and controlled. In India, the Controller of Capital Issues (CCI) and SEBI have been exercising controls over this market. In case of new issues, prior approval is necessary.
The Narasimham Committee in its report suggested that:
(i) In case of listed shares, CCI and SEBI should not inter-fare in its prior sanction rather in case of unlisted shares, stock exchanges should approve their entry as per the guidelines of SEBI for preventing its misuse by promoters;
(ii) In order to protect the interest of investors, SEBI should formulate a set of prudential guidelines and replace the restrictive guidelines of CCI and SEBI should also take over market regulatory functions of CCI;
(iii) SEBI should regulate the market as per its well prepared principles and guidelines without involving in the day to day functioning of the market;
(iv) General principle should be laid down for determining the regulatory framework governing different institutions in the capital market, which would regulate capital adequacy, credit concentration ratio, debt- equity ratio, accounting practices, asset valuation etc.;
(v) Multiplicity of institutions for supervising financial institutions should be removed and a self-regulation mechanism confined to off-site supervision and on-site inspection be restored, and
(vi) Indian capital market be opened up to foreign portfolio investment in a phased manner and efforts be undertaken for enlarging the depth of the market by issuing new type of equities and introducing innovative debt instruments.