GROWTH OF THE INDIAN CAPITAL MARKET

The capital market in India may be broadly classified into organised and unorganized markets. The organised capital market consists of the corporate enterprises, government and semi-government institutions requiring funds for various development activities, and the investors, namely, individual investors, corporate and institutional investors such as banks, investment trusts, life insurance companies, finance corporations, government and international financing agencies supplying funds to various industrial undertakings. The unorganized sector consists of the indigenous bankers in urban areas and the moneylenders in rural areas. There is no close contact between its different constituents. Usually, this section of the capital market finances consumption rather than production, and the interest rate charged by them is exorbitant.
In India, even the organised sector of the capital market was ill-developed till recently, to which the following reasons can be attributed:

1. Agriculture is the main occupation in India. But it failed to contribute anything to the flotation of securities.
2. Foreign business enterprises dominated the industrial development in India. They mainly depended on the London Capital Market rather than on Indian market. It hampered the growth of the securities market.
3. The managing agency system prevailed in India in the past has acted as both promoting and marketing agencies and the Indian capital market had been characterized by an absence of special institutions to float new issues.
4. The total number of securities trades in stock exchanges was not very large. Of the total number of securities, the government securities accounted for nearly half the volume. Ordinary shares were the predominant type of security traded in the stock exchange. Debentures and preferences shares had only limited place.
5. The investment habits of the individuals and the restrictions imposed on the investment patterns of the various financial institutions also affected the capital market. The institutional investors preferred to invest in government and semi-government securities.

Till recently, the Indian capital market had all the characteristics of an undeveloped capital market. The absence of professional promoters, investment or issue houses, underwriting agencies, and financial intermediaries had prevented the free flow of savings to industrial investment. However, since the Independence in 1947, a trend towards an organised growth has been seen.
Some of the important development that have taken place in the capital market after the Independence, which removed the basis deficiencies of the Indian capital market, are:
1. Some legislative measures have been taken by the Government to protect the interests of the investors. Some of the important measures are the passing of the Capital Issues (Control) Act, 1947, the Indian Companies Act, 1956, the Securities Contract (Regulation) Act, 1956, and the Monopolies and Restrictive Trade Practices Act, 1970.
2. The attitude of the people also has changed. Now they are ready to invest their savings in corporate securities. Many industrial concerns succeeded in the industrial issues. The shares of some newly started companies were issued even at a premium This encouraged the investors to take up new issues.
3. In recent years, underwriting activity in India has made satisfactory progress. Apart from some financial institutions such as ICICI, IFCI, LIC, UTI and IDBI, various stock brokers and banks also have shown interest in underwriting business.
4. Commercial banks influenced the growth of capital market indirectly by granting loans against shares and debentures. They also participated in underwriting either singly or in association with other banks and institutions.
5. After the Independence, the necessity of large-scale industrial development led to the establishment of a number of special finance and development corporations. The Industrial Finance Corporation of India (IFCI) was the first one to be thus, established in 1948. After it, SFCs, ICICI and IDBI were instituted. Now India has adequate special financial institutions to provide medium and long-term finance to industry.
6. Other factors such as the integration of organised and unorganized sectors of capital market, the money and the capital markets, growth of joint stock form of business, the expanding role of the Reserve Bank of India in the rural credit, the establishment of various finance corporations, the extension of banking into the interior, the diversification of banking functions and the government’s assistance to industry have all been contributing to the growth of capital market in India.
7. The establishment of UTI and IDBI are the two important steps taken in the direction of strengthening the capital market.
8. The market for industrial securities also has increased to a great extent as the number of shareholders in India has increased considerably.