The health of an economy and its growth is strongly dependant on its capital market. In order to ensure the demand and supply of funds in an economy the financial market plays a crucial role as it helps the businesses to raise the debts by issuing securities, debentures, bonds, shares etc. Nevertheless, the formation of capital in an economy is quite significant for its economic development. For that purpose capital market comes into picture as it is well advanced for raising debts in the market through its primary and secondary components. However, it is also imperative that the expansion is in sync with the rules and regulations so as to maintain the transparency in its operations and curb the evil practices that operates in the financial market.
Investing in the securities market facilitates the twin returns as the investors are getting the interest and the borrowers are getting the capital to expand their business. This process of lending and borrowing involves huge risk which can be minimised by deep research into the company’s Memorandum of Association and Article of Association prior to investing in its shares. Thus, it accelerates the capital in an economy and also ensures that the funds are mobilised for the industrial sector which stimulates the domestic growth of Indian industries.
The channels for the investments in our country are wide so ensuring that an institution that keep an eye on such activities is mandatory. In India we have National Stock Exchange and Bombay Stock Exchange which keep an eye over such transactions. In addition to that the SEBI and RBI also plays a pivotal role in formulating the nano structure of the Indian Capital Markets..
The sources of finance are vital for any industry or company to expand its business and even for the startups. This segment of capital market is always considered as a boom for the investors from where they can raise the fixed capital. Unlike, the banks which have stricter rules for debt recovery in case the default is made by the borrower. Moreover, after the 2019 amendment to the IBC even the Personal Guarantors insolvency can be initiated in the NCLT in case the default is made by the Corporate Debtor. Considering the scenario, the Capital Markets are considered as the feasible method for raising the long term debts.
It is also believed that the effective utilisation of the financial resources enhances the efficiency of the financial system of the country. One such method of raising debt is through equity, where the company sell a stake in order to ensure financial backing. On the other hand debt financing involves borrowing the money directly. Although, raising funds through equity is considered little risky. However, it is also regarded that without equity it is mere to impossible to conceive any project. As a result a strengthen equity market is always considered a pre requisite for a floating capital market.
Seemingly, the capital markets also provides the helping hand to the banking sector of the economy by raising the debts through various components. Also, these markets attracts the foreign investments which in turn provides the domestic employment and generates the working opportunity in the country.
For a developing country like India FDI plays an influential role in the process of industrialisation as well as to maintain the balance in payments. Additionally it also helps in increasing the liquidity of the market by expanding the investor base. Therefore, such investments promotes the balanced growth between the two nations as the inflow of cash in the domestic country would promote employment and the services provided by the employees will help the investors in increasing their productivity.
Mobilising of the funds is considered as a significant element for any company to run its business. Since independence, it has been seen that infinite number of companies raises funds by issuing IPOs in the capital primary market. Although, investing through IPO’s sounds glittery due to good rate of interest. However, the risk factor involved is also high due to the fact that companies sometimes invest in the felonious projects and went bankrupt.
On the other hand, in the debt market of India a large domination can be seen by the Securities issued by the Government. Even though, the predominant source for businesses to raise funds is through conventional bank loans still a sharp surge was seen in the bond market for raising the capital. The Bonds issued are also through :
PRIVATE PLACEMENTS
Public Issuance
The dominance of Private Placements is seen in the Corporate Bond market of India which also leads to lower participation of the retails in the market. Furthermore lack of transparency can also be seen in the Bond Market as transactions are generally between the large players.
When it comes to the Indian debt market the biggest drawback is the lack of liquidity and transparency in the transactions. Subsequently, it acts as an inhibiting factor for the development of the economy at large. Also, the dominance by the banks, insurance companies also leads to lack of liquidity in the market. The lack of liquidity and the deepening of the same in the financial market works in parallel with each other. Chronically, less liquid markets grapple with other self-reinforced issues such as narrow investor base, insufficient infrastructure and low transparency levels.
Apart from liquidity and transparency certain other factors like restrictions by the Regulatory Authorities also restricts the pool of investments in India. For instance, the banks and financial institutions are not allowed to invest in the below investment grade securities. Thus, limits the investments options acts as a drawback for the companies who can raise capital through them.
Availability of funds and the business idea are two major components through which the economy runs. A single individual is not equipped with both these factors. That initiates the need of capital formation so the one who have a business idea or wants to expand his business can borrow from the market so as to carry on his business and from the profit deriving from it can be used as an interest to be paid to the lenders. Thus, it is a two way process through which the economy works and the developments projects take place. On the other hand, the business usually works on the principle of “Higher the risk, higher the chances of Profit”. Therefore, making the investors vulnerable to excessive risk aversion.
CONCLUSION
The development of the economy in the long run is highly dependant on the capital market of the country. All the segments of the capital market in India had encountered a remarkable magnification due to its long term debt feature. Although, the financial sector of the economy is primarily dominated by the equity. However, the Government securities also plays a magnificent role on raising the debts for the company. Also, the financial shell of the economy has been uplifted due to the growth of the equity market. Thus, all these aspects contributed towards the economic development of the country the epitome of which is yet to be seen in the coming era.