Project Report on the Indian Capital Market (2023)


An exclusive project report on the Indian Capital Market. This report will help you to learn about:- 1. Meaning of Capital Market 2. Featurtes of Indian Capital Market 3. Instruments 4. Working 5. Reforms 6. Importance or Functions 7. Defects 8. Suggestions for Improvement.


  1. Project Report on the Meaning of Capital Market
  2. Project Report on the Features of Indian Capital Market
  3. Project Report on the Instruments of Indian Capital Market
  4. Project Report on the Working of Indian Capital Market
  5. Project Report on the Reforms of Indian Capital Market
  6. Project Report on the Importance or Functions of Capital Market
  7. Project Report on the Defects of Indian Capital Market
  8. Project Report on the Suggestions for Improvement of Indian Capital Market

1. Project Report on the Meaning of Capital Market:

The capital market is a market which deals in long-term loans. It supplies industry with fixed and working capital and finances medium-term and long-term borrowings of the central, state and local governments. The capital market deals in ordinary stock is, shares and debentures of corporations, and bonds and securities of governments.


The funds which flow into the capital market come from individuals who have savings to invest, the merchant banks, the commercial banks and non-bank financial intermediaries, such as insurance companies, finance houses, unit trusts, investment trusts, venture capital, leasing finance, mutual funds, building societies, etc.

Further, there are the issuing houses which do not provide capital but underwrite the shares and debentures of companies and help in selling their new issues of shares and debentures. The demand for funds comes from joint stock companies for working and fixed capital assets and inventories and from local, state and central governments, improvement trusts, port trusts, etc. to finance a variety of expenditures and assets.

The capital market functions through the stock exchange market. A stock exchange is a market which facilitates buying and selling of shares, stocks, bonds, securities and debentures. It is not only a market for old securities and shares but also for new issues shares and securities.

In fact, the capital market is related to the supply and demand for new capital, and the stock exchange facilitates such transactions. Thus the capital market comprises the complex of institutions and mechanisms through which medium-term funds and long- term funds are pooled and made available to individuals, business and governments. It also encompasses the process by which securities already outstanding are transferred.

2. Project Report on the Features of Indian Capital Market:

The capital market in India consists of unorganised and organised markets. The unorganised sector, also known as the informal sector, comprises indigenous bankers, moneylenders, etc. who operate in the small industry sector, in trade and agriculture.


A large part of private savings are invested by people in their own businesses. Many people invest in the enterprises of their relatives and friends. Large chunks of black money and wealth flow freely between the unorganised and organised sectors. Thus the unorganised capital market in India is unsystematic with no uniform policy relating to interest rate charged, maturity of financial assets, etc.

It is free from any regulation and control though efforts have been made towards this direction by the Government of India and the Reserve Bank. On the other hand, the organised capital market comprises a variety of financial institutions which mobilise private savings in various ways and provide long-term funds to the capital market.

They are – UTI, IFCI, ICICI, IDBI, IRBI, LIC, GIC, SIDBI, State Financial Corporations, State Industrial Development Corporations, commercial banks, merchant bankers, leasing companies, venture capital companies, mutual funds, housing finance banks, Stock Holding Corporation of India, and Discount and Finance House of India. The organised sector of the Indian capital market is regulated by the Securities and Exchange Board of India (SEBI).

3. Project Report on the Instruments of Indian Capital Market:

The Indian capital market deals in a variety of securities or instruments to serve the requirements of borrowers and investors of funds. These differ in nature, maturity, interest rate, dividend, liability, ownership, voting’ right, etc.


The various capital market instruments are the following:

(1) Corporate securities which include preference, bonus and rights issue shares, stocks, bonds, convertible and nonconvertible debentures, etc., and PSULs (public sector undertaking) bonds.

(2) Shares issued by mutual funds under their income, growth and tax planning schemes such as UTI Master Shares, UTI Master Growth, Canshare, Cangrowth, SBI Magnums, GIC Growth Plus, Gold share, Starshare, etc.


(3) Government bonds and securities issued by the Central and State Governments and local bodies. They are also known as gilt-edged securities. Recently, a variety of innovative and hybrid instruments have been introduced to attract more investors for new issues like warrants attached to convertible and non- convertible debentures, secured premium notes attached with warrants, deep discount bonds, accident insurance attached with warrants and non-convertible debentures with sale of khokhas to banks, zero-coupon bonds, zero-Interest bonds, etc.

Security Market:

On the basis of instruments or securities, the capital market in India is divided into the gilt-edged market and industrial security market.

(1) Gilt-edged Market:

It is the market for Government securities. Central and State Governments and local bodies sell long-term bonds or securities to the public, banks and financial institutions. These bonds are backed by the Reserve Bank. They carry lower interest rates than bonds issued by companies. But they attract more investors because they carry a variety of tax incentives and rebates on income tax and wealth tax. They are less risky, more safer and more liquid than industrial securities.


(2) Industrial Security Market:

This market deals in a variety of new and old shares and debentures of commercial, financial and industrial concerns. It is divided into the primary market and the secondary market.

(a) The Primary or New Issues Market:

The primary capital market is for new issues by public limited companies in the form of new capital issues directly to the public in the form of shares, fully convertible debentures, non-convertible debentures, preferential issues of shares and debentures, and rights issues at par or at a premium.


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Capital is also raised by companies in the primary market by private placement whereby shares are sold to specific group of investors such as relatives, friends, and holders of shares of the same industrial group or house. Merchant bankers, mutual funds, commercial banks and other financial institutions operate as underwriters and lead managers. They help in mobilising the savings of the public in new issues market and channelising them into productive uses by trade and industry.

(b) The Secondary Market:

It is the market which deals in shares and debentures at the stock exchanges. Such a market is also known as the stock market where various types of shares and debentures are actively traded by brokers, mutual funds and NBFIs like the UTI, GCI, etc. Presently, there are 22 recognised stock exchanges operating in the secondary market in India.

4. Project Report on the Working of Indian Capital Market:

India is one of the few countries among the developing nations where the Bombay Stock Exchange began to function as early as in 1874, where the Government securities and bonds issued by Port Trust Municipal Corporation, etc. were traded. At the time of partition in 1947, there were nine stock exchanges on the Indian side at Mumbai, Kolkata, Chennai, Ahmedabad, Delhi, Kanpur, Hyderabad and Bangalore. They traded in ordinary and preference shares of the British Managing Agency houses and of Indian companies such as the Tata Iron and Steel Company, in addition to Government securities.


In the early 1950s, the capital market in India helped to mobilise financial resources for the corporate sector. But with the nationalisation of insurance companies in 1956, the State Bank of India in 1955, the establishment of development banks like IDBI, ICICI, IFCI, etc., and the nationalisation of 14 commercial banks in 1969, the capital market suffered a setback, because subsidized credit was available to trade and industry from these institutions. Consequently, companies had to issue equities at a discount substantially below market value.

With the amendment of the Foreign Exchange Regulation Act (FERA), the expansion of foreign owned and controlled companies was limited. Accordingly, the FERA companies were required to dilute their capital by issuing new capital either at par or at an approved premium to the Indian shareholders. This led to the issue of 40 per cent of their shares at low prices to Indians.

The capital market continued to grow substantially during the 1980s as various measures were taken to stimulate both demand and supply in the capital market. The Government gave a number of incentives to equity and debenture issues such as reducing the corporate tax rate for listed companies and allowing higher interest rate for debentures above that for fixed deposits but below that for bank loans. Besides, the companies were authorised to use cumulative and convertible preference shares and equity-linked debentures, and investors were given tax incentives in new issues.

Thus the Indian capital market was undeveloped till the 1970s. For instance, during the Fifth Plan (1974-79), Rs. 551 crores were raised from the primary market. The secondary market was also very small with only 8 stock exchanges, 1203 listed companies, Rs.2600 crores of market capitalisation which was 7.6 per cent of GDP and with less than one million investors. Since the 1980s both the primary and secondary capital markets have been showing remarkable growth. In 1995-96, 1704 companies raised Rs. 22,918 crores from the primary market.

The secondary market had a phenomenal growth. At present there are 22 stock exchanges in India with over 6,500 listed companies, thus putting India a little behind the United States. There are 15 million shareholders, the second largest in the world after the United States.

The total market capitalisation of the Indian stock market is $ 138.6 billion. The Indian capital market has thus emerged as one of the important markets in the world. It has been identified as the primary source of finance for the private and public sectors in the Eighth Five-Year Plan, in which it was estimated to raise Rs. 50,000 crores.


Despite the rapid growth of the capital market in the 1980s, a number of abuses existed such as insider trading, price rigging, inadequate, vague and misleading prospectuses of companies, delays in share allocation and in issuing refund orders and manipulation of prices in stock exchanges. The capital market was less liquid and lacked in transparency thereby providing little protection to investors.

5. Project Report on the Reforms of Indian Capital Market:

On the recommendations of the Narasimham Committee and other committees and groups appointed by the Government of India from time to time, a number of measures have been taken up to reform the Indian capital market.

These are listed below:

(A) Securities and Exchange Board of India (SEBI):

On 31 March, 1992, the Securities and Exchange Board of India was established as an autonomous and statutory body. With the repeal of the Capital Issues Control Act, 1947 in May 1992, the office of the Controller of Issues was abolished from 29 May, 1992.

The SEBI is the regulatory authority to oversee the new issues, protect the interests of investors, promote the development of the capital market and to regulate the working of stock exchanges. It has initiated a number of measures in these directions such as registration of intermediaries, strict disclosure norms, regulations on insider trading and inspection of the functioning of the stock exchanges and mutual funds, etc.

These and other measures explained below are Likely to impart confidence in investors.

(B) Primary Market Reforms:


The following measures have been taken up to reform the primary or new issues capital market in order to remove the inadequacies and deficiencies in the issue procedures.

(1) The control over price and premium of shares has been removed. Companies are now free to fix the price and premia of shares and debentures after clearance from the SEBI. Vetting of offer documents is not done by the SEBI.

(2) Companies issuing shares and debentures in the primary market are required to disclose all material facts and specific risk factors associated with their projects. They are also required to disclose the basis of calculation of premium on equity issues.

(3) The minimum percentage of securities to be issued to the public has been fixed at 25 per cent.

(4) Minimum subscription for public issue has been fixed at Rs. 2000 in the case of an individual w.e.f. 1.11.1996.

(5) The SEBI has ensured through an advertisement code that advertisements do not contain such statements which may mislead the investors.


(6) The allotment procedure requires that shares are allotted on a pro-rata basis and mutual funds and foreign institutional investors (FIIs) are allowed firm allotment in public issues.

(7) A SEBI representative supervises the allotment process in the case of oversubscribed public issues.

(8) Bonds of Public Sector Undertakings (PSUs) have been brought under the regulatory authority of the SEBI.

(9) NRIs and overseas companies are free to invest in the Indian capital market without the prior approval of the RBI.

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(10) FIIs have been allowed to invest in the capital market on registration with the SEBI and foreign brokers are allowed to assist them on the same condition.

(11) The stock exchanges have been directed by the SEBI to collect from companies making public issues a deposit of one per cent of the issue amount which is liable to forfeiture in case the companies do not comply with the listing agreement, and do not despatch the refund orders and share certificates by registered post within 3 months of allotment.


(12) The company is required to complete the allotment of shares within 30 days of the closure of the issue. Thereafter it is required to pay interest at the rate of 15 per cent per annum.

(13) Banks have been permitted to operate in the secondary market since November 1996.

(C) Secondary Market Reforms:

The SEBI has also introduced a number of regulatory and supervisory measures for intermediaries in the secondary market. Specific rules and regulations have been laid down for intermediaries in the secondary market. They are the merchant bankers, portfolio managers, underwriters, registrars, brokers and sub-brokers, and share transfer agents.

They are required to adhere to specific capital adequacy norms, meet certain eligibility criteria and follow a code of conduct towards investors.

They also provide for action by the SEBI in case of default. Some of these are as under:

(1) All brokers are required to register themselves with the stock exchange in which they wish to operate.


(2) The capital adequacy norms laid down by the SEBI for stock brokers are: 3 per cent for individual brokers and 6 per cent for corporate members.

(3) Stock Exchanges have been directed to ensure that contract notes are issued by brokers to clients within 24 hours of dealings. Time limit has been laid down for payment of sale proceeds and deliveries by brokers and payment of margins by clients to brokers. Penalties have been provided for default.

(4) To control rigging of prices and other malpractices in the stock exchanges, the SEBI has introduced such measures as penal margin on net undelivered portion at the end of the settlement, special margin for buyers in case of rise in share prices, joint suspension of trading by stock exchanges in case of price stipulation, etc.

(5) To bring greater transparency in transactions, Brokers are required to maintain separate accounts for clients and for themselves. The contract notes issued to clients must contain the transaction price and brokerage separately.

(6) Share jobbers have been introduced in the stock exchanges who simultaneously display buying- selling rates of scrips in which they are doing jobbing.

(7) Stock brokers are required to have their books audited, and audit reports are required to be filed with the SEBI every year.

(8) The SEBI has broad-based the governing boards of the stock exchanges and has changed the composition of their arbitration, default and disciplinary committees.

(9) The SEBI has started the inspection of the working of stock exchanges.

(10) The trading in the stock exchanges has been fixed for three hours instead of the earlier two-and-a- half hours.

(11) Failure to comply with the instructions issued by the SEBI on the working of stock exchanges, will invite penalties including fines and suspension from trading.

(12) Screen-based on-line trading has been introduced by NSE, OTCEI, and major stock exchanges like Mumbai, Delhi, etc.

(13) Efforts are being made to revamp the operations of stock exchanges in India. The lead has been given by the Bombay Stock Exchange which has introduced several changes to revamp its operations such as making the BOLT system operational for all the scrips, regrouping of shares, and introduction of weekly settlements for A and B group shares, dealing in odd lot shares, etc.

(D) Institutional and Market Development:

Besides the establishment of SEBI, the Government has initiated the following steps for institutional and market development.

(i) Market Makers:

Steps have been taken to promote the emergence of market makers. Since in the stock exchanges not more than 20 per cent of the scrips are actively traded, the holders of the majority of other scrips do not find sufficient liquidity. The institution of market makers is meant to rectify this lacuna.

The market maker is required to make a market for a minimum of, say, five scrips (equity shares) which are not included in group A traded shares at a stock exchange. Market makers are required to offer two-way quotes for a minimum period of 18 months from the date on which the securities (shares) are admitted for dealing.

The minimum quantity offered or bid for at any price has to be three times the market lot (either 50 or 100). Moreover, the bid-ask spread (difference between quotations for sale and purchase) cannot exceed 10 per cent. Unlisted companies planning public issues below Rs5 crores are required to appoint market makers on all stock exchanges where the share is proposed to be listed.

To ensure that market makers are able to impart liquidity to scrips and reduce volatile movements in share prices, the RBI issued guidelines on 5 August, 1993 regarding bank financing of their operations. Market makers require financial support from banks like other traders.

Banks have been permitted by the RBI to exercise their commercial judgement in determining the working capital requirements of market makers which are different from those laid down for traders. Market makers are approved by the SEBI on the recommendations of the stock exchanges.

(ii) Foreign Institutional Investors (FIIs):

FIIs such as pension funds, mutual funds, asset management companies, investment trusts, nominee companies, and incorporated or institutional portfolio managers have been allowed to operate in the Indian capital market. The SEBI has simplified the common application forms for registration with it by FIIs. Foreign brokers have also been allowed to assist FIIs and operate on their behalf to buy and sell scrips in the Indian stock exchanges.

They have been permitted to open bank and custodial accounts. Foreign firms have also been allowed to set up joint ventures in the financial sector. Portfolio investments by FIIs are subject to a ceiling of 24 per cent of issued share capital for the total holdings of all registered FIIs in one company. To attract FIIs to participate in the Indian capital market, a number of concessions have been provided to them.

They have the right of repatriation of capital, capital gains, dividends, and income received by way of interest. They have been given tax concessions at a flat rate of 20 per cent on dividend and tax rate of 10 per cent on capital gains. The cumulative net FII investment was more than 47 billion on 31 March, 2003

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(iii) Selling in Global Markets:

There has been globalisation of Indian equity with the selling of scrips by Indian companies in the international capital markets. During 2002-03, Indian companies had raised Rs. $ 600 million by issuing foreign currency convertible bonds and shares through the global depository receipts (GDRs) mechanism. The selling of scrips in global markets and the entry of FIIs in the Indian capital market reflect the confidence of international business community in India’s sound financial system.

(iv) Over-the-Counter Exchange of India (OTCEI):

Over-the-counter exchange of India has been promoted jointly by ICICI, UTI, IDBI, IFCI, GIC, L1C, SB1 Capital Markets, and Canbank Financial Services. It has been registered as a stock exchange with the SEBI and has commenced its operations from 6 October, 1992.

Its main aim is to provide small and medium companies an access to capital market in order to raise capital in a cost effective manner. It is also meant to provide a convenient and efficient avenue for investors in the capital market. OTCEI is a ring-less, electronic and national exchange which trades in selected scrips and debt instruments. It is a regulatory body which supervises, monitors and controls the trading activity at OTC (over-the-counter).

It is a national stock exchange in the sense that all the scrips listed with the OTCEI are traded over its counter throughout the country. No separate listing at different places is needed unlike the regular stock exchange. Companies can make public offer in two ways. In the case of a new issue, a company can offer its shares directly to the public through a sponsor. But in the case of a secondary issue, the company may first offer its shares to the sponsor who can make a public offer later on at a convenient time. This is the “indirect offer” where the pricing of the shares is done by the sponsor as per SEBI guidelines.

The OTCEI listed share-issue application forms are similar to the normal public issue forms of companies. But it has the name of the sponsor who is solely responsible for appraising the company, to its listing and to trading. In the event of under-subscription, he is responsible for putting in the required money.

The OTCEI approves the allotment of shares with the Registrar to the issue and takes it for listing with itself. All refund/allotment letters are issued to subscribers within 28 days of the closing of the issue. All share certificates remain with the Registrar and are not sent to the shareholders. The shareholders are issued Counter Receipt (CR) which is a tradeable document.

The shareholder wanting to sell his shares has to give the CR and the transfer deed at the OTC. He receives in exchange a sales confirmation slip. After verification from the Registrar, the seller receives the sale note and the cheque from the OTC. The OTCEI operates at Bombay with regional windows at other metropolitan cities and representative offices in a few major cities.

The OTC scan screens display selling and buying prices of OTCEI listed shares and debentures at which market makers are willing to buy and sell. The exact transaction price is displayed at the OTC computer. The Infrastructure Leasing and Financial Services (ILFS) is the compulsory market maker for debt instruments in which the OTCEI deals in. For scrips, there are separate market makers appointed by it.

(v) National Stock Exchange of India (NSEI):

The NSEI has been jointly promoted by IDBI, ICICI, IFCI, GIC, LIC, SBI Capital Markets, SHCIL (Stock Holding Corporation of India Limited) and ILFS as a limited company. It has been recognised by the Government of India from 26 April, 1993. Its main objective is to have a comprehensive nationwide trading facility in scrips, debentures and PSUs bonds to investors through electronic screen-based trading, post-trade clearing and settlement.

It is an order-driven system where there are neither jobbers nor market makers. It operates in two segments: in wholesale debt instruments and in capital market instruments. In the first segment are included such instruments as Government securities, PSUs bonds. Units 64 of UTI, CDs, CPs by banks, institutions and brokerage houses, etc. The second segment includes equity and corporate debt instruments traded by the financial companies and individuals.

The capital market segment follows a weekly settlement cycle with all settlements completed within seven days of the last trading day of the cycle. The NSEI is an on-line, screen-based and scrip-less trading exchange which enables buyers and sellers to operate from anywhere in India. In its effort to further improve the settlement system and minimise risks associated therein, the NSEI has set up a subsidiary, the National Securities Clearing Corporation (NSCC). It guarantees settlement of trades executed and settled through it.

(vi) National Securities Depository Ltd. (NSDL):

On 8 November, 1996, India’s first depository, the National Securities Depository Ltd. (NSDL) was started. It has been jointly promoted by the IDBI, UTI and NSEI. Initially, it will start dematerializing the shares of ten companies. They are ACC, BPCL, Cnsil, LML. HDFC, ICICI, L&T, RIL, TISCO and Siemens. The depository participants of the NSDL are SCHIL, NSCC, IDBI, ILFS, Global Trust Bank, HDFC Bank, IIT Trust Corporate Services, Citibank, Morgan Stanley Custodial, SBI, and Standard Chartered Bank.

A depository is a bank for share certificates. The investor operates his account in the depository in the same way as a bank account. Shareholders have the choice of continuing with the share certificates or opt for the depository mode. Those opting for the latter will send the share certificates through the “participants” which will be “dematerialized” and the names of the owners would be registered in the electronically operated registers of the depository or participants.

The NSDL will enable investors to settle “paperless” transactions through electronic book entry adjustment. It will, thus provide an alternative to the paper-based system of settling of shares.

It will do away with risks associated with paper-based settlements such as delays in transfers, loss or theft of shares in transit and fear of certificates tearing or catching fire. The transfer of ownership of shares through the depository will be exempt from payment of stamp duty. The companies, investors, transfer agents and brokers will be able to save on space in the depository system because there will be no need to store share certificates.

It will take 15 days for the registrar to dematerialise the shares before they can be sold whereas it takes 40 days at present. The Depository will charge a nominal custodial fee for holding the share certificates. Thus in the paperless depository system, settlement problems will be simplified, trading costs will be reduced, and the volume of trade and returns will improve. Moreover, it will encourage FIIs to participate more in the Indian capital market.

6. Project Report on the Importance or Functions of Capital Market:

The capital market plays an important role immobilizing saving and channel is in them into productive investments for the development of commerce and industry. As such, the capital market helps in capital formation and economic growth of the country. We discuss below the importance of capital market.

The capital market acts as an important link between savers and investors. The savers are lenders of funds while investors are borrowers of funds. The savers who do not spend all their income are called. “Surplus units” and the borrowers are known as “deficit units”.

The capital market is the transmission mechanism between surplus units and deficit units. It is a conduit through which surplus units lend their surplus funds to deficit units. Funds flow into the capital market from individuals and financial intermediaries which are absorbed by commerce, industry and government.

It thus facilitates the movement of stream of capital to be used more productively and profitability to increases the national income. Surplus units buy securities with their surplus funds and deficit units sells securities to raise the funds they need. Funds flow from lenders to borrowers either directly or indirectly through financial institutions such as banks, unit trusts, mutual funds, etc. The borrowers issue primary securities which are purchased by lenders either directly or indirectly through financial institutions.

The capital market prides incentives to savers in the form of interest or dividend and transfers funds to investors. Thus it leads to capital formation. In fact, the capital market provides a market mechanism for those who have savings and to those who need funds for productive investments. It diverts resources from wasteful and unproductive channels such as gold, jewellery, real estate, conspicuous consumption, etc. to productive investments.

A well-developed capital market comprising expert banking and non-banking intermediaries brings stability in the value of stocks and securities. It does so by providing capital to the needy at reasonable interest rates and helps in minimising speculative activities.

The capital market encourages economic growth. The various institutions which operate in the capital market give quantities and qualitative direction to the flow of funds and bring rational allocation of resources. They do so by converting financial assets into productive physical assets. This leads to the development of commerce and industry through the private and public sector, thereby inducing economic growth.

In an underdeveloped country where capital is scarce, the absence of a developed capital market is a greater hindrance to capital formation and economic growth. Even though the people are poor, yet they do not have any inducements to save. Others who save, they invest their savings in wasteful and unproductive channels, such as gold, jewellery, real estate, conspicuous consumption, etc. Such countries can induce people to save more by establishing banking and non-banking financial institutions for the existence of a developed capital market. Such a market can go a long way in providing a link between savers and investors, thereby leading to capital formation and economic growth.

7. Project Report on the Defects of Indian Capital Market:

Despite these reforms, there are many defects in the working of the Indian capital market which are discussed as under:

(i) Poor Liquidity:

The Indian capital market does not possess sufficient liquidity. A recent study shows that only 20 per cent of the scrips are traded everyday arid that too of Group “A”. Another 20 per cent are traded 2 to 3 times a week and 10 per cent once in a fortnight. Thus 50 per cent scrips listed on the Bombay Stock Exchange, the biggest in the country, have very poor liquidity. At other stock exchanges two-thirds of the scrips listed are not traded at all.

(ii) Delay in Delivery:

There is unusual delay in the delivery of scrips and settlement or payment of transactions. The delivery of scrips usually takes 3 to 4 months and payments range between 2 to 3 months. Bad deliveries mainly due to the verification of signatures of sellers further lengthen the period and complicate the problem.

There are also delays in payments which usually range between 1 to 2 months. Often delays in payments and deliveries lead to suspension of stock exchange operations.

(iii) Insider Trading:

The Indian capital market has been plagued with fluctuations due to insider trading. Persons working inside a company often buy or sell shares on the basis of the expected profitability or losses of the company. This brings about price fluctuations in the scrips of the company thereby adversely affecting the interests of the small investors. Some big industrial houses also resort to transactions in the shares of group companies thereby accentuating this problem of insider trading to the detriment of ordinary shareholders.

(iv) Inadequate Market Instruments:

The capital market instruments in India are confined primarily to shares and debentures which are inadequate for the proper functioning of a capital market. The newly introduced warrants, zero-coupon bonds, etc. are not yet popular with the investors.

(v) Inefficient Banking and Postal Services:

Banking and postal services are inefficient which add to the woes of the small investors. Refunds, dividend warrants and interest payments are sent by companies to the small clients by ordinary post which often do not reach them. Some dishonest postal and bank employees often collaborate and pocket such cheques through fraudulent means and dupe the small investors.

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(vi) Stock-invest not Popular:

The stock-invest instrument has been virtually cornered by big investors. The non-availability of stock-invests of small denominations, procedural difficulties and high bank charges have kept the small investors away from this instrument.

(vii) Existence of Grey Market:

The unofficial unregulated market before the listing of shares, called the grey market, attracts and misleads gullible investors. They are also led to invest in new shares by financial analysts who are neither fair nor objective in their analysis. They often mislead investors at the instance of companies. Consequently, the small investors suffer the most.

(viii) Vague Prospectus:

Despite SEBI’s guidelines, the prospectuses issued by individual companies do not contain all the information and are vague. Free pricing norms laid down by the SEBI are not strictly followed. Premium fixing is also not fair. As a result, many companies dupe the investors outright and close down without any trace.

(ix) Stock Broking System Defective:

The system of stock broking continues to be defective. The brokers have their sub-brokers and sub-brokers, in turn, have their own sub-sub-brokers who manipulate prices and cheat the sellers and buyers of shares and debentures in the secondary market.

(x) Lacks Transparency:

Trading transactions in stock exchanges still lack transparency. Buyers and sellers of scrips are at the mercy of brokers and sub-brokers who often quote the lowest traded rate of a scrip to the sellers and the highest to the buyers. Thus they pocket the maximum fraudulent gain on both the transactions besides their brokerage.

There is also no uniformity in charging brokerage from clients by them. They do not maintain proper accounts and manipulate them.

(xi) Inadequate Protection to Investors:

The protection given to clients in case of default by brokers and sub-brokers is inadequate. The protection given to an individual shareholder under the Consumers’ Protection Fund set up at each stock exchange is limited to Rs.40,000 in case of a defaulting broker. This limit is very low because it may be the cost of one lot of a high priced share.

(xii) Odd Lot Shares Problem:

Despite SEBI’s instructions regarding the non-issuing of odd lot shares by the companies, bonus shares and rights issue shares are being allotted in odd lots. Nothing has also been done for small investors who already hold odd lot shares issued prior to the instructions of the SEBI.

The holders of odd lots have to pay brokerage up to 15 per cent while buying and selling odd lot shares. The efforts of the BSE, UTI and GIC to buy and sell odd lots at fair brokerage are limited only to selective and good scrips.

(xiii) Defective Operations of Stock Exchanges:

The stock exchanges in India continue to be defective in their operations. They do not have proper infrastructure. They lack adequate space for the stock brokers to operate efficiently. They do not possess adequate telecommunication and computerisation facilities. Old trading practices are still followed.

All these defects deter trading of listed shares in the majority of stock exchanges in India. This has led to great rush at the Bombay Stock Exchange with its consequent delays in transactions, deliveries and payments.

(xiv) Inadequate Stock Exchanges:

With the phenomenal increase in the number of companies being listed every month and in the number of shareholders, the existing stock exchanges numbering 22 with Mumbai having three, are inadequate. This has resulted in the mushrooming of un-authorised and unregistered private stock exchanges all over the South. These share trading “houses” and “associations” indulge in speculative transactions.

(xv) Fragmented Market:

The secondary capital market is fragmented into the ring operated stock exchanges and ring-less OTCEI. It has further fragmented with the operation of the on-line, screen-based and scrip-less NSEI. All this has confused the ordinary buyers and sellers of scrips with the multiplicity of brokers and sub- brokers already duping them. This has the effect of reducing liquidity.

8. Project Report on the Suggestions for Improvement of Indian Capital Market:

In the light of the defects noted above and the reform measures already adopted by the Government to streamline the working of stock exchanges and to rectify the defects of the Indian capital market, the following suggestions are made to improve upon them:

(i) Improving Liquidity:

The distinction between Group A and Group B shares should be removed in order to enhance liquidity in the capital market. There should be limited carry-forward of shares and all sales should be for delivery.

(ii) Streamlining the Working of Stock Exchanges:

For removing delays in transactions, delivery of scrips and transfer of shares, to increase liquidity further, and to improve the working of stock exchanges, a number of suggestions have been made.

First, there should be computerisation at all stock exchanges so that trading becomes automatic and transparent. This step will also help in removing other defects of stock exchanges and streamlining their operations.

Second, the transfer of scrips and debentures should be done through book entry without the movement of share/debenture certificates.

Third, the shareholders should be issued Counter Receipts (CR) in lieu of share certificates, as has been done by the OTCEI. The share certificates should remain with the Registrars. Fourth, to eliminate trading by illegal trading houses, registration of spot transactions should be made compulsory.

(iii) Controlling Insider Trading:

To control insider trading and manipulation of prices, strict regulatory and punitive measures should be adopted by the SEBI and stock exchanges. Companies and brokers engaged in unlawful activities should be severely punished by fines and legal actions.

(iv) Devising New Market Instruments:

New market instruments should be devised to mobilise larger capital resources. They should have liquidity, safety and fair return. They should attract rural investors, be of small lots, be able to buy goods and services, and banks and post offices should deal in them.

Besides, such instruments as convertible cumulative preference shares, non-voting shares for NRIs, risk-free instruments by banks and merchant bankers, etc. should be introduced. The recently introduced new instruments like warrants of a variety of types, deep discount bonds, zero-interest bonds, etc. should be made popular for investors by highlighting their merits in comparison to traditional instruments.

(v) Banning Grey Market Operations:

To stop operations in the unofficial and unregulated grey market, the publication of unofficial quotations in newspapers and magazines should be declared illegal and the sale of shares before acquisition by buyers should be banned. The SEBI should also lay down guidelines and a code of conduct for financial analysts.

(vi) Transparency in Prospectus:

Companies which do not follow the guidelines in supplying the required information in their prospectuses at the time of public issue should be penalized through legal action against them. There should be full transparency in the prospectus for the benefit of investors before the SEBI gives its permission for the public issue.

(vii) Streamlining the Stock Broking System:

‘The system of appointing sub-brokers should be dispensed with. But this is not possible till the offices of brokers and stock exchanges are fully computerised and automatic trading is introduced, till then, the activities of sub-brokers should also be regulated by the SEBI and the stock exchanges should be authorised to deal with them as in the case of brokers. The operation of illegal trading houses should be declared illegal.

(viii) Protecting Investors and Brokers:

To protect the interests of small investors from the fraudulent devices of some dishonest postal and bank employees, the SEBI has already instructed the companies to ask for the bank account numbers of the share/debenture holders to be indicated on the refund orders, dividends and interest warrants.

The companies should be instructed to strictly adhere to them. The best course would be for the companies to direct the Registrars to deposit the amount direct into the bank accounts of investors under intimation to them.

This will also discourage benami or bogus deals. The maximum limit of Rs. 40,000 to be paid to an individual client in the case of a defaulting broker out of the Customers’ Protection Fund at the stock exchanges should be raised to Rs.1 lakh. A similar fund should be created for the brokers when some clients default by not making payments for deals to brokers.

(ix) Disposal of Odd Lots:

A separate trust should be formed to dispose off odd lots held by millions of shareholders in India. It should purchase odd lot shares from holders, get them converted into marketable lots from the companies and then sell them in the market at a profit. To solve the problem of odd lots permanently, companies should be instructed by the SEBI not to issue rights and bonus shares to small shareholders in odd lots but compensate them by offering cash incentives.

(x) Opening More Stock Exchanges:

Keeping in view of the large number of listed shares and listing of fresh shares every month at the stock exchanges, their number should be increased in the country. This is essential to deal with a large number of operators in stock trading and to enhance liquidity in the capital market. This will also eliminate to some extent the mushroom growth of illegal trading houses.

(xi) Regulating the Activities of Intermediaries:

For the proper functioning of the secondary capital market, the operations of such intermediaries as sub-brokers, underwriters, registrars, transfer agents, portfolio managers, merchant bankers and other intermediaries should be regulated by the SEBI. It should lay down rules for their proper functioning in the capital market.

(xii) Coordinating the Activities of Stock Exchanges:

To avoid confusion among the investors, there should be proper coordination among the three types of stock exchanges in India, viz. the traditional stock exchanges, the OTCEI and the NSEI. There should not be any overlapping in their areas of operations.

(xiii) Giving Tax Concessions:

To encourage the market, more tax concessions should be given to investors by abolishing double tax on dividends and by increasing the minimum tax-free levels of dividends and capital gains.

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What is capital market very short answer? ›

Capital market is a place where buyers and sellers indulge in trade (buying/selling) of financial securities like bonds, stocks, etc. The trading is undertaken by participants such as individuals and institutions. Capital market trades mostly in long-term securities.

What is the importance of capital market in Indian economy? ›

Importance or Functions of Capital Market: The capital market plays an important role in mobilizing saving and channel them into productive investments for the development of commerce and industry. As such, the capital market helps in capital formation and economic growth of the country.

What is capital market conclusion? ›

A developed capital market contributes to the growth of wealth, for example, through more profitable investments. Moreover, it enables a more efficient flow of funds between operating entities. The market exists because of the savings that can be invested on it.

What is the Indian capital market? ›

Capital Market in India: An Overview

Any location or system that gives buyers and sellers the ability to exchange and trade in financial assets, such as bonds, shares, different international currencies, and derivatives, is referred to as a financial market.

Who controls the capital market in India? ›

The Securities and Exchange Board of India (SEBI) is the regulatory authority established under the SEBI Act 1992 and is the principal regulator for Stock Exchanges in India. SEBI's primary functions include protecting investor interests, promoting and regulating the Indian securities markets.

Why is capital market important? ›

Capital markets are important because they finance the economy, allocate risk, and support economic growth and financial stability. In the U.S., capital markets fund 72% of all economic activity, in terms of equity and debt financing of non-financial corporations.


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