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Published by Enhelion, 2019-11-18 00:28:54





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A robust financial system plays a vital role in the capital to a business for a certain amount of interest.
economic development of a country. It provides the To put it in layman’s terms, capital is the money that a
financial resources that are required to produce company raises by issuing securities.
goods and services, which in turn raise the standard
of living of the people. Under company law, capital means the ‘share capital’
of a company. This is classified as follows:
▪ Authorized capital: It is the maximum
In a general sense, capital means an asset that is amount of share capital that is authorized by
capable of enhancing an individual’s power to the memorandum of the company.i
perform economically valuable work. There can be
different types of capital- financial capital, natural ▪ Issued capital: It refers to that part of the
capital, social capital or human capital. The capital authorized capital which the company issues
that is employed in the capital markets is the financial from time to time for subscription.ii
capital (hereinafter referred to as simply ‘capital’). It
refers to any economic resource that can be ▪ Subscribed capital: It means the capital that
measured in monetary terms. It is used by business is, for the time being, subscribed by members
entities to generate money and buy what they of the company. The entire issued capital may
require to produce various goods and provide or may not be subscribed capital.
services relevant to their sector of industry.
▪ Called-up capital: It is that part of the capital
Capital means the internal retained earnings that has been called for payment.iii
generated by a business or funds provided to it by its
lenders and investors. These are required to sustain ▪ Paid-up share capital: It is the aggregate
the business. The lenders and investors provide amount of money that is actually paid by the
subscribers of shares of the company.

▪ Preference and Equity share capital: These
reflect the kind of capital of a company limited

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by shares and are given under section 43 of authorities. It can further be divided into
the Companies Act, 2013. capital market and money market.


In layman’s language, a market is a set-up where one Capital market is the market where financial assets
can buy goods or avail services that s/he requires having mid-term or long-term maturity (more than
after paying a certain price for it. With reference to one year) are traded. It is an ideal source of procuring
capital as discussed above, market means a external finance. It offers an efficient mechanism to
framework where financial assets and liabilities are transfer idle resources from the ones who have them
bought and sold. It helps in the flow of funds from to those who need them. This is done in the form of
savers, who have an excess of funds, to spenders, who investment. People with idle resources (savings)
have a shortage of funds.iv This movement of funds invest them in entities (spenders) according to their
from savers, who have no productive investment needs and understanding. Such investment is done
opportunities to spenders, who have such investment through financial instruments called securities. These
opportunities, aids in the economic development of a can be issued by the governments (Central and state)
society and increases economic efficiency.v as well as corporates. Corporates issue securities
that are mainly in the nature of equity or debt. The
Financial markets can be divided into two categories- governments issue debt securities. People invest in
unorganised and organised. them with the help of intermediaries who act as a
bridge between the investors and issuers. Thus, the
▪ Unorganised market: This kind of market capital market essentially has three participants- the
includes moneylenders, indigenous bankers, issuer of securities, the investor in securities and the
traders, chit funds who lend money to the intermediaries.
public. They are not regulated by any
authority. In a developing country, to facilitate a command over
the capital to ensure optimum yield and economic
▪ Organised market: Dealings in this market development, it is the capital market which plays a
are governed by standard rules of procedure. determining role. The capital market, therefore, via
There are institutional mechanisms in place to its power of stabilization plays a crucial role in
ensure smooth operations in the market. It is
highly monitored and regulated by regulatory

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efficient working and stabilization of the economy. 1.4. TYPES OF CAPITAL MARKETS

Capital market plays a very significant role in the Capital market can further be divided into primary
economic development of a nation. It mobilises and secondary market.
resources for investment, facilitates buying and
selling of securities and settlement of transactions In primary market, fresh securities are issued either
with pre-decided time schedules. through public issue or private placement. In essence,
securities in the primary market are issued for the
The meaning of capital market can therefore now be first time to investors. It enables corporates or
briefed as follows: government to raise funds to meet their investment
requirements or discharge some obligations. These
▪ Capital market is a market of securities which securities may be issued at face value or at a
the government and corporations use as a premium/discount in the domestic or international
platform to raise long term funds. market.

▪ Capital market is a market wherein securities Secondary market is a market where securities are
in the nature of corporate equity and loner traded after having been initially offered to the public
term debts, which are maturing or are in the primary market or listed on the stock exchange.
deemed to be maturing in excess of a year are Majority of trading takes place in the secondary
issued and traded. market. It allows holders of securities to adjust their
investments based on their risk assessment. It also
▪ Capital market is a market wherein capital allows them to sell their securities for cash to meet
funds, in the nature of both equity and debt their liquidity requirements.
are issued and traded.
▪ Capital market is a market for stocks, bonds
and other long-term securities (sometimes While capital market is a market for assets having
mid-term securities also form a part of capital mid/long term maturity, money market deals with
market). financial assets of a short-term nature up to one year.

▪ Capital market is inclusive of governmental,
semi-governmental and financial securities.

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Prominent characteristics of money market include Preference Shares
liquidity and low transaction costs. Excess funds are
invested in the money market and can be converted Preference shares are those shares that are given
to cash to meet short-term shortages and other preference over equity shares as far as distribution of
obligations. Numerous transactions take place in the dividend and distribution of surplus in case of winding
money market on a daily basis. It is one of the primary up of a company are concerned.
mechanisms through which the Reserve Bank of India
(RBI) maintains liquidity and other interest rates in Debentures
the economy.
These are debt instruments issued by a company in
Money market serves as a wholesale debt market for the form of a document of indebtedness. These are
highly liquid, short-term instruments. It is mostly redeemed at a certain date. The document also
dominated by government securities and banks. provides for the dates of repayment of principal and
Major players include commercial banks, mutual payment of interest. The holder of this document
funds, financial institutions and the RBI. becomes a lender of the company.


Instruments in the capital market include shares, Bonds are also debt securities where the issuer of the
preference shares, debentures, bonds, derivatives bond is bound to pay the bond-holder a specific rate
etc. These are briefly explained below: of interest as per the agreed terms. The principal
amount is to be repaid at a later date. The bond- Shares holders are generally like a creditor where a company
is obliged to pay them.vii There are different kinds of
Shares (also called equity shares) represent fractional bonds based on the issuing entity such as government
ownership in which a shareholder, as a fractional bonds, corporate bonds and banks and financial
owner, undertakes the maximum entrepreneurial institutions bonds. Other kinds of bonds based on
risk associated with a Such shareholder is their nature include, inter alia, disaster bonds, easy
a member of the company and has voting rights. exit bonds, option bonds and pay in kind bonds.

Page | 5 Derivatives Government Securities

Derivatives are instruments that derive their value These are issued by the RBI on behalf of the central
from an underlying asset. The underlying asset can be and state governments. The different types of
equity, commodity, forex or any other asset. government securities are dated securities, zero
Derivatives are defined under Section 2(ac) of the coupon bonds, partly paid stock, floating rate bonds
Securities Contracts (Regulation) Act, 1956 to and capital indexed bonds.
include: Call Money and Notice Money
“A) a security derived from a debt instrument,
share, loan, whether secured or unsecured, risk Call money is an instrument where funds are
instrument or contract for differences or any borrowed/lent for a period of one-day overnight
other form of security; (excluding Sundays and holidays). Notice money is an
instrument where the tenor is more than one day but
(B) a contract which derives its value from the less than fifteen days. The borrower/lender must
prices, or index of prices, of underlying notify, within 24 hours, his intention to repay/recall
securities; the amount that he has borrowed/lent.

(C) commodity derivatives; and Term Money

(D) such other instruments as may be declared It is the money lent for a fixed period of fifteen days.
by the Central Government to be derivatives” This instrument can be cancelled prematurely after
fourteen days after mutual agreement by the parties.
As stated above, since the money market is
dominated by government and banks, most if the These bills are issued by the RBI on a short-term (up
instruments include government securities and to 364 days) basis to meet the requirements of the
securities issued by banks and other private Central Government. They are issued at a discount to
institutions. These instruments have a maturity their face value at a pre-determined date for a fixed
period of less than one year. Some of them are value. Three types of treasury bills are operative in
discussed below. the money market based on their maturity period-

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91-day treasury bills, 182-day treasury bills and 364- 1.6. ROLE AND IMPORTANCE OF CAPITAL
day treasury bills. MARKET IN INDIA Certificate of Deposit The Indian capital market plays a major and crucial
role towards the development, promotion and
These are issued by banks to the depositors for a sustenance of the economy. The capital markets
specific period of time, which is less than one year. serve as a platform for channelization and
They can be negotiated and traded in the money mobilization of funds to enterprises, by means of
market. inculcating a habit of saving or capital formation and
subsequent investment in the economy. The basis of Commercial Paper mobilization of funds into enterprises is a means to
achieve the long-term development prospects of the
It is an unsecured money market instrument issued as economy. Capital market therefore plays the role of a
a promissory note. It is issued by those corporates, synergist towards the development of a more
private dealers and all India financial institutions that efficient, dynamic and competitive marketplace free
meet the criteria laid down by RBI for the purpose. Its from anti-competitive encumbrances within such
maturity ranges from a minimum of 7 days to a economy. The contributions of the capital market are
maximum of one year from the date of issue. far reached out and contribute largely towards
raising the per-capita income and subsequent
Thus, we can differentiate between capital and decrease in levels of unemployment due to
money markets on the basis of factors such as the investment in sectors of capital markets which are
instruments and institutions involved, maturity financially distressed and require capital inflows by
period and the purpose of investment in respective means of long-term orientations.
The involvement of the capital market promotes the
The Companies Act, 2013 provides that no offer of concept of capital formation within the economy. It
buy-back shall be made within one year from the date acts as a guiding tool towards inculcating the habit of
of closure of the preceding offer to buy-back. Thus, saving within the economy, as increased savings is
every enterprise is now bound by a one year “cooling
off” period between two buy-backs.

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directly proportional to the level of capital formation areas, poses as a facilitator for development in such
in the economy. The capital market plays a major role backward areas, thereby contributing in overall
in mobilization of the savings at both the household economic development as well.
and the industrial level. Thus, capital market serves as
a platform towards the mobilization of savings and 1.6.5. DEVELOPMENTAL ROLE OF FINANCIAL
subsequent capital formation in the economy. INSTITUTIONS

1.6.2. GENERATION OF EMPLOYMENT Industrial Financial Corporation of India (IFCI), State
Financial Corporation (SFC), Industrial Development
The mobilization of savings from the household and Bank of India (IDBI), Unit Trust of India (UTI), Life
industrial sector lead to direct employment in the Insurance of Corporation of India (LIC) and other
capital markets in the form of stock markets, financial agencies of the capital market facilitate the growth of
institutions and indirect employment in sectors industries by means of rendering their financial,
wherein funds have been allocated for supporting and underwriting services towards their
developmental projects. efficient functioning.


The capital market ensures smooth progress of The use of bonds and securities serve as valuable
various sectors of the economy. It is a source of instruments for generation of foreign capital and
transferring the resources in the form of savings at an thereby subsequent development of foreign
household level to the industrial sector in the form of exchange funds in India which help in subsequent
investments via the capital market. Thus, the capital economic development.
market poses as a platform for efficient lending of
funds for both the private and the public sector. Thus, Capital Market as we see has a major role to
play towards the development of the economy and its
1.6.4. DEVELOPMENT OF BACKWARD AREAS economic sustenance.

The allocation of funds for projects in backward

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i Companies Act, 2013, s 2(8). <
ii Ibid, s 2(50). 20CC&MM.pdf>
v Ibid.
iii Ibid, s 2(15). vi Ibid.
iv ‘Capital, Commodity and Money Market’ The Institute of vii Ibid.
Company Secretaries of India, available at

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