Types of Capital Market

Types of Capital Market

  • These also known as the government securities market
  • As the securities are risk free, they are known as gilt-edged i.e. the best quality securities
  • The investors in the gilt-edged market are predominantly institutions such as commercial banks, LIC, GIC, and the provident funds
  • The transactions in the government securities market are very large. Each transaction may run into several crores or even hundred crores of rupees
  • RBI plays a dominant role in the gilt-edged market through its ‘Open Market Operations’

This market is divided into two categories:

Primary Market

      • It is also known as new issue market; as in this market securities are sold for the first timee. new securities are issued from the company
      • The common securities issued in primary market are equity shares, debentures, bonds, preference shares and other innovative securities

Secondary Market (Stock Exchange)

      • The secondary market is the market for the sale and purchase of previously issued or second hand securities
      • Here, securities are not directly issued by the company to investors; instead the securities are sold by existing investors to other investors

The requirement of project financing made India to go for a number of Financial Institutions(FI) from time to time

    • All India Financial Institutions (AIFIs)
      • The all India FIs are IFCI (1948); ICICI (1955); IDBI (1964); SIDBI (1990) & IIBI (1997)
      • By 1980s, all Indian banks acquired wider capital base and by early 1990s when the stock market became popular, it became easier for the corporate world to tap cheaper capital from these segments of the capital market
      • The AIFIs had more or less fixed rate of interest as compared to the banks which could mobilise cheaper deposits to lend cheaper—the AIFIs seemed to become irrelevant
      • At this juncture the government decided to convert them into Development Banks (suggested by the Narasimhan Committee-I) to be known as the All India Development Banks (AIDBs)
      • Meanwhile, at present, there are only four financial institutions operating in the country as AIFIs regulated by the RBI, viz., the NABARD, SIDBI, Exim Bank and the NHB

Banking Industry

    • With the passage of time, the industry saw its nationalisation (1969 and 1980) and again opening up for private sector entry (1993–94) to emerge as the most dependable segment of Indian financial system—in a way its mainstay
    • By April 2020, there were a total of 163 scheduled commercial banks operating in India—18 public sector banks (PSBs), 53 RRBs (with over 13 under consideration for amalgamation with their parent PSBs), 41 Indian private sector banks (including 10 Small Banks, 7 Payment Banks and 3 Local Area Banks), 46 foreign banks except the scheduled and non-scheduled state co-operative banks—with 74 per cent foreign direct investment (FDI) allowed in the private sector banks (49 per cent under automatic route and above 49 per cent under non-automatic route)

Insurance Industry

    • After Independence, these did serve the purpose by providing safety net and nation-building
    • In the wake of the process of economic reforms a restructuring of the sector was started and the industry was opened for entry of private players in 1999 and an independent regulator was set up—the IRDA (domestic and foreign—with an FDI cap of 49 per cent).
    • By April 2020, a total of 57 insurance companies were operating in India