Capital Market Essay

~ Capital market is the market for leading and borrowing of medium and long term funds. ~ The demand for long-term funds comes from industry, trade, agriculture and government (central and state). ~ The supply for funds comes from individual savers, corporate savings, banks, insurance companies, specialized financial institutions and government. *SIGNIFICANCE: ~ A sound and efficient capital market is extremely vital for the economic development of a nation. ~ So, the significance of capital market has increased. ~ The following points clearly bring out the role and significance of capital market in India. i)CAPITAL FORMATION: ~ Capital market encourages capital formation as it ensures speedy economic development. The process of capital formation includes collection of saving effective mobilisation of these savings for productive investment. ~ Thus three distinctive inter-related activities i.e. collection of savings, mobilisation of savings and investment lead to capital formation in the country. ~ The volume of capital formation depend s on the efficiency and intensity with which these activities are carried on. ii) ECONOMIC GROWTH: ~ Capital market plays a vital role in the growth and development of an economy by channelising funds in developmental and productive investments. ~ The financial intermediaries channel funds into those investments that are more important for economic development. iii) INDUSTRIAL DEVELOPMENT: ~ Capital market promotes industrial development and motivates industrial entrepreneurship. ~ It provides cheap, adequate and diversified funds for industrial purposes such as expansion, modernisation, technological upgradation, establishment of new units, etc. ~ It also provides services like provision of underwriting facilities, participation in equity capital, credit-rating, consultancy services, etc. vi) MODERNISATION AND REHABILITATION OF INDUSTRIES: ~ Capital markets also contribute towards modernisation and rehabilitation of industries. ~ Developmental financial institutions like IDBI, IFCI, ICICI, etc provide finance to industries to adopt modern techniques and new upgraded machinery. ~ They also participate in the equity capital of industries. v) RIVIVAL OF SICK UNITS: ~ Commercial and financial institutions provide adequate funds to viable sick unit to overcome their industrial sickness. ~ Bank and FIs may also write off a part of the loan or re-schedule the loan to offer payment flexibility to weak units. vi) TECHNICAL ASSISTANCE: ~ The financial intermediaries in the capital market stimulate industrial entrepreneurship by providing technical and advisory services like preparation of feasibility reports, identifying growth potential, and training entrepreneurs in project management. ~ This promotes industrial investment and leads to economic development. vii) DEVELOPMENT OF BACKWARD AREAS: ~ Capital markets provide funds for projects in backward area and facilitate their economic development. ~ Long-term funds are also provided for development projects in backward / rural areas. viii) EMPLOYMENT GENERATION: ~ Capital markets provide Direct Employment in capital market related activities like stock markets, banks and financial institutions. ~ Indirect Employment is provided in all the sectors of the economy through various funds disbursed for developmental projects. ix) FOREIGN CAPITAL: ~ Capital markets make it possible to generate foreign capital by enabling Indian firms to raise capital from overseas market through bonds and other securities. ~ Such foreign exchange funds have a great impact on the economic development of the nation. ~ Moreover, foreign direct investments (FDIs) also bring in foreign capital as well as foreign technology that leads to greater economic development. x) DEVELOPMENT OF STOCK MARKETS: ~ Capital markets lead to development of stock markets by encouraging investors to invest in shares and debentures and to trade in stocks. ~ FIIs are also allowed to deal in Indian stock exchange. xi) FINANCIAL INSTITUTIONS: ~ Financial institutions play a major role in capital markets. ~ They provide medium / long term loan to industrial and other sectors and also undertake project feasibility studies and surveys. ~ They refinance commercial banks and rediscount their bills of exchange. ~ They provide merchant banking services. ~ They subscribe to equity capital of the firms. xii) INVESTMENT OPPORTUNITY: ~ Capital markets provide various alternative sources of investment to the people. ~ People can invest in shares and debentures of public companies and earn good returns. xiii) INVESTMENT IN INDUSTRIAL SECURITIES: ~ Secondary market in securities encourage investors to invest in industrial securities by providing facilities for continuous, regular and ready buying and selling of these securities. ~ This facilitates industries to raise substantial funds from various sectors of the economy. xiv) RELIABLE GUIDE TO PERFORMANCE: ~ Capital market serves as a reliable guide to the performance of corporate institutions. ~ It values companies accurately and thus promotes efficiency. ~ This leads to efficient resource allocation and economic development. *CONCLUSION: ~ Thus we can say that capital markets play a crucial role in the economic development of a nation. ~ A sound and efficient capital market is one of the most instrumental factors in the development of a nation.