[Module Objective: The investor to be able to put through security-buying and selling and to deal extensively in the securities market must have a thorough understanding of the structure and complexities of the securities market. It is therefore necessary to discuss about the capital market in India, its composition, and about its different components and the role, that they play through, with reference to the end-investor.]

The capital market consists of the following components:

• The scattered investors, who are regular savers and the purveyors of capital needed by business and industry. Inter-se they are not organised.

• The Corporate and Business houses who are the users or seekers of this capital, who are mutually better organised.

• The Financial Intermediaries who link the investors and the capital seekers/users, who are professionals.

• SEBI, the market developer and market regulator (the apex organisation).

This is the market consisting of large number of individual investors, household savers, professionals, and agriculturists, who are able to a preserve, a part of their current earnings to invest in securities. They form the class of capital providers. On the other side the corporate bodies engaged in Industry, trade and other business ventures are the productive users of very large amount of capital. It is the capital market that transforms the savings of large number of individuals to productive channel to meet the demands of capital for Industry, trade and business. The financial/security market intermediaries serve as the link between capital providers and capital seekers.

The individual savers are not organised. They can invest if they could secure the trust and confidence that the funds invested would be prudently employed and they could confidently expect to get a fair return/reward on their hard-earned savings. This is the function of organised capital market to regulate market forces to ensure fair dealings, to motivate savings on the part of the investors and to secure smooth flow of savings/capital from investors to capital seekers for productive needs. This supervisory and regulatory function is performed by SEBI, the market regulator and market developer

The Corporate Sector draws its capital requirements from the following sources:

• Promoters Contribution;

• Equity Capital raised from the shareholders (generally referred to as equity capital);

• Preference share capital raised from the shareholders

• Bonds/Debentures raised from the Public (generally referred to as Debt Capital);

• Term Loans from Banks & Financial Institutions;

• Short-term Working Capital from Banks;

• Unsecured Loans & Deposits; and

• Internal generation of Funds (Profits/surpluses reploughed and held as Reserves).

Of the sources enumerated above, item No.1 2 and part of 8 are held permanently and constitute the source of long term capital. These are not returnable. Item No.3 preference share capital when issued as redeemable is returnable after a long period. Item No.4 is raised from the market for duration of 10 to 15 years or more, but this has to be eventually repaid, unless the terms of issue provide for their conversion into equity. We call the source as part of corporate debt market, and funds raised as II tier capital. The debt market consists of such corporate debt and also public debt (government securities & Treasury Bills) Managed by the RBI. The other sources at item 5 to 7 are supplementary or transitory sources forming short-term provisions for working capital and these are all to be repaid as per contracted terms. Item 8 is distributed as dividends, bonus, taxes to government and part of it transferred to Reserves to rank along with item No.1 & 2.

The basic capital edifice of a corporate body is built from item 1 to 4 above along with reserves built as explained above. With the strength of this edifice it is possible to raise the remaining sources at item No.5 to 7. This introduces us to the capital market (covering equity, preference and corporate debt capital). Promoters' equity constitutes a comparatively a smaller portion, and hence the primary source of capital for a large corporate institutions is from the capital market, which provide the equity capital & debt capital to business, trade & industry.

Stock market is also referred to as the Corporate Debt or Capital Market. While the money market, which deals with short-term financial needs of business and industry is restricted to funds needed for a period of one year or less, instruments of the debt/capital markets are raised for medium or long term needs. Indian Stock Market consists of three distinct segments:

• The Public Debt Market i.e. the market for Government securities (also called Gilt-edged Market). These are interest bearing and dated securities. This market is regulated by RBI, the Central Bank of the country and banker to the Government.

• PSU Bonds Market i.e. Bonds floated by public Sector units, nationalised banks and financial Institutions for raising Tier-II capital and also debentures floated by corporates. This is represented as the Corporate Debt Market.

• The Equity Market for raising of equity or preference share capital by all corporates. Money invested in company shares is not refundable, but if the shares are listed in a stock exchange these can be sold or purchased, thus providing liquidity to such investments. Shares do not carry interest, but shareholders can participate in sharing the profits of the corporate body declared by way of dividends, bonus shares etc. While the hope of receiving attractive dividends motivates the public to subscribe to the share capital, declaring dividend is not a legal obligation on the part of the companies, and hence not a right on the part of the shareholders. But shareholders enjoy various other rights as conferred by the Indian Companies Act, 1956. Indian Public companies generally follow the objective of increasing shareholders wealth as the prime goal of financial management.

At this context it is relevant to mention about two categories of stock market, i.e.

• Primary market covering new public issues of all categories of securities, including G-sec, bonds and equity/preference capital.

• Secondary market, which deals with already issued securities of all types. Transactions of the secondary market are carried out through one of the authorised stock exchanges, where the traded security is listed.

It is also called the market for public issues. This market refers to the raising of new capital (equity or debt i.e. equity shares, preference shares, debentures or Rights Issues) by corporates. Newly floated companies or existing companies may tap the equity market by offering public issues. When equity shares are exclusively offered to the existing shareholders, it is called "Rights Issue". When a Company after incorporation initially approaches the public for the first time for subscription of its public issue it is called Initial Public Officer (IPO). Successful floating of a new issue requires careful planning, timing of the issue and comprehensive marketing efforts. The services of specialised institutions, like underwriters, merchant bankers and registrars to the issue are available for the corporate body to handle this specialised job. Underwriters are financial institutions, which undertake to secure a committed quantum of equity/debt subscribed by the public, failing which they accept these shares/bonds as their own investment. It is referred to as the issue or that part of getting devolved on the underwriters. The transactions relating to the primary market i.e. public/rights issues are not carried out through stock exchanges. However there is effective regulation of SEBI at every stage of a public issue. This is done through merchant bankers, underwriters and registrars to the issue each acting at different points. Subscriptions to the new issue are collected at specific branches of one or more collecting banks within a prescribed span of time, represented by the dates of opening of the issue and closing of the issue.

The Secondary Market deals with the sale/purchase of already issued equity/debts by the corporates and others. The sale/purchase of these securities are carried out at the specific Stock Exchange(s), where the companies get their public issues listed for trading. The main function of the secondary market is to provide liquidity to the listed securities by enabling a holder to easily convert the securities into cash through the stock exchanges. An individual or an Institution can either hold a portfolio of securities as a permanent investment, or he can hold a basket of securities for short-periods and engage in buying and selling them to gain from market fluctuations. The secondary market also acts as an important indicator of the investment climate in the economy. When prices of existing securities are rising and there is large trading in the existing shares, such a boom in the secondary market correspondingly signifies that new issues if floated at that point of time would be successfully subscribed.

• The organised and regulated capital market motivates individual to save and invest funds. The availability of safe and profitable sources of investment is an essential criterion to create propensity to save and invest on the part of the earning public;

• It provides for the investors a safe and productive channel for investment of savings and secures the recurring benefit of return thereon, as long as the savings are retained;

• t provides liquidity to the savings of the investors, by developing a secondary capital market, and thus makes even short term savings, consistently available for long-term users;

• It thus mobilises savings of large number of individuals, families and associations and makes the same available for meeting the large capital needs of organised industry, trade and business and for progress and development of the country as a whole and its economy.

To discharge these functions, the organised capital market accepts a dual responsibility

• To develop the market and to promote savings & investment;

• To regulate the players in the market vis-a-vis the investor and to enforce market discipline, through market regulators and registered intermediaries. Such that the unorganised small man is able to deal safely and conveniently through these regulatory bodies and the intermediaries, and need not necessarily has to come into direct contact with the ultimate seekers of his savings.

To understand the regulatory and control systems in-built in the market, we must study the structural framework of the capital market. The capital market consists of the following segments.

• Investors: On the one hand are the innumerable and not organised savers, and

• Capital Seekers: At the other end are those seeking capital from the capital market;

• Regulatory Body: SEBI (the Securities & Exchange Board of India) an autonomous and statutory body acts as the market regulator and market developer. It regulates and controls the capital users and all functionaries between the users and the investors.

• The Stock Exchanges: There are 23 Stock Exchanges registered with SEBI and under its regulation. They provide a transparent and safe (risk-free) forum of a market for investors to transact and invest their funds.

• The Depositories: The depositories are innovative institutions, who are able to render the market paperless by holdings securities electronically, providing ease and speed for those transacting in the market.

• The Registered Intermediaries: They consist of brokers, sub-brokers, trading and clearing members, portfolio managers, bankers to issue, merchant bankers, registrars, underwriters and credit rating agencies. They all provide a basket of services to the investors to lesson risk and make transacting easier and smooth. They are all registered with SEBI and act under the regulation of SEBI abiding by the Code of Conduct prescribed for each of them governing their respective roles.

So vast and well established is the market that the daily turn over in the main Stock Exchange in the Country National Stock Exchange of India averages Rs.10000 Crore presently (in the equities segment alone) and bound to multiply further in the coming future.