The Role of Capital Market
in The Economic Development of Anation : -
*INTRODUCTION :~ 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.~
Capital market has three different categories:-i) Government securities
market:^ It is also called Gilt-edged market.^ It deals in interest bearing and
dated government securities.^ This market is regulated by the RBI. ii)
Corporate Debt Market This market deals in :^ Binds floated by public sector
units, nationalized banks and financial institutions.^ Debentures floated by
corporates.iii) The Equity Market:^ Corporate raise preference / equity share
capital in this market.^ These shares can be sold / purchased and thus provide
liquidity to markets.*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 mobilization
of these savings for productive investment.~ Thus three distinctive
inter-related activities i.e. collection of savings, mobilization 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 channelizing 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, modernization, technological up gradation,
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 modernization 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
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