The capital market facilitates the pooling and allocation of long-term funds from various sectors, including individuals, businesses, and governments. It plays a crucial role in mobilizing savings, aiding capital formation, and supporting economic growth by providing diverse investment instruments and services. Key players in this market include stock exchanges, merchant bankers, underwriters, and foreign institutional investors, all of which contribute to its functioning and regulatory framework.

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In the financial sense, the capital market is the market for
the instruments representing long-term funds
requirement of the corporation.
It consists of a sprawling complex of institutions and
mechanism whereby intermediate-term funds and long-
term funds are pooled and made available to business,
government, and individuals.

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Characteristics of
Capital Market

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◘ Debt and equities instruments traded in
the capital markets are intermediate or
longer-term in maturity.
The scope of the market is very wide.
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The supply of the new funds comes from the
◘
same sectors although it is funneled within the
markets through financial institutions.

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◘ The demand for the capital market
instruments comes from five categories like
individuals and households, business and
financial corporation, central government,
local government, and foreign government.
Transactions in open markets influence the
◘
prices and yields of longer-term instruments
immediately

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Function of Capital Market
• Mobilization of Savings : Capital market is an important
source for mobilizing idle savings from the economy. It
mobilizes funds from people for further investments in
the productive channels of an economy. In that sense it
activate the ideal monetary resources and puts them in
proper investments.
• Capital Formation : Capital market helps in capital
formation. Capital formation is net addition to the
existing stock of capital in the economy. Through
mobilization of ideal resources it generates savings; the
mobilized savings are made available to various segments
such as agriculture, industry, etc. This helps in increasing
capital formation.

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• Speed up Economic Growth and Development :
Capital market enhances production and productivity in
the national economy. As it makes funds available for long
period of time, the financial requirements of business
houses are met by the capital market. It helps in research
and development. This helps in, increasing production
and productivity in economy by generation of
employment and development of infrastructure.
• Proper Regulation of Funds : Capital markets not only
helps in fund mobilization, but it also helps in proper
allocation of these resources. It can have regulation over
the resources so that it can direct funds in a qualitative
manner.

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• Service Provision : As an important financial set up capital market provides
various types of services. It includes long term and medium term loans to
industry, underwriting services, consultancy services, export finance, etc.
These services help the manufacturing sector in a large spectrum.
• Continuous Availability of Funds : Capital market is place where the
investment avenue is continuously available for long term investment. This
is a liquid market as it makes fund available on continues basis. Both
buyers and seller can easily buy and sell securities as they are continuously
available. Basically capital market transactions are related to the
stock exchanges. Thus marketability in the capital market becomes easy.
• Provision of Investment Avenue : Capital market raises resources for longer
periods of time. Thus it provides an investment avenue for people who
wish to invest resources for a long period of time. It provides suitable
interest rate returns also to investors. Instruments such as bonds, equities,
units of mutual funds, insurance policies, etc. definitely provides diverse
investment avenue for the public.

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PLAYERS OF CAPITAL MARKET
• Stock Exchange- It is a place where shares of pubic listed
companies are traded. The primary market is where companies
float shares to the general public in an initial public offering (IPO)
to raise capital.
• Merchant Banker- It is a place where shares of pubic listed
companies are traded. The primary market is where companies
float shares to the general public in an initial public offering (IPO)
to raise capital. The SEBI issued guideline for the merchant
bankers in April 1990.
• Underwriters- An underwriter is a company or other entity that
administers the public issuance and distribution of securities from
a corporation or other issuing body. An underwriter works closely
with the issuing body to determine the offering price of the
securities, buys them from the issuer, and sells them to investors
via the underwriter's distribution network. Underwriters generally
receive underwriting fees from their issuing clients, but they also
can earn profits when selling the underwritten shares to investors.

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• FII- A foreign institutional investor (FII) is an investor or investment
fund registered in a country outside of the one in which it is
investing. Institutional investors most notably include hedge funds,
insurance companies, pension funds and mutual funds.
• Credit Rating Agencies- A credit rating agency (CRA, also called a
ratings service) is a company that assigns credit ratings, which rate a
debtor's ability to pay back debt by making timely interest payments
and the likelihood of default.
• Venture Capital Fund - Venture capital is financing that investors
provide to startup companies and small businesses that are believed
to have long-term growth potential. For startups without access to
capital markets, venture capital is an essential source of money. Risk
is typically high for investors, but the downside for the startup is
that these venture capitalists usually get a say in company decisions.

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• Brokers - A broker is an individual or firm that
charges a fee or commission for executing buy
and sell orders submitted by an investor.
• Portfolio Managers - A portfolio manager is a
person or group of people responsible for
investing a mutual, exchange-traded or closed-
end fund's assets, implementing its investment
strategy and managing day-to-
day portfolio trading. A portfolio manager is
one of the most important factors to consider
when looking at fund investing.

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Types of Capital
Market
Primary Market
Secondary Market

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Primary
Market
• It is that market in which shares,
debentures and other securities are sold
for the first time for collecting long term
capital.
• This market is concerned with new issues.
Therefore, the primary market is also
called “New Issue Market”.
• The money collected from this market is
generally used by the companies to
modernize the plant, machinery and

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Secondary
Market
• The secondary market is that
market in which the buying and
selling of the previously issued
securities is done.
• The transaction of the secondary
market are generally done
through the medium of stock
market.
• The chief purpose of the

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Importance/Role of Capital
Market
• Mobilization of savings- in this
market, various types of securities
helps to mobilize savings from
various sectors of population. The
twin features of reasonable return
and liquidity in stock exchange are
definite incentives to the people to
invest in securities.
• Ready to continuous market- the

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• Easy liquidity- with the help of secondary
market investors can sell off their holdings and
convert them into liquidity cash. Commercial
banks also allow investors to withdraw their
deposits, as and when they are in need f funds.
• Foreign capital-it makes possible to generate
foreign capital. Indian firms are able to
generate capital funds from overseas market by
way of bonds and other securities. Government
has liberalized “Foreign Direct Investment”
(FDI) in the country. This is not brings in foreign
capital but also foreign technology which is
important for economic development of the
country.

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Important Factors Affecting the Choice
of Capital Structure
Under the capital structure, decision the
proportion of long-term sources of capital is
determined. Most favorable proportion
determines the optimum capital structure.
That happens to be the need of the company
because EPS happens to be the maximum on
it. Some of the chief factors affecting the
choice of the capital structure are the
following:

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(1) Cash Flow Position:
While making a choice of the capital structure the future cash
flow position should be kept in mind. Debt capital should be used
only if the cash flow position is really good because a lot of cash
is needed in order to make payment of interest and refund of
capital.
(2) Interest Coverage Ratio-ICR:
With the help of this ratio an effort is made to find out how many
times the EBIT is available to the payment of interest. The capacity
of the company to use debt capital will be in direct proportion to this
ratio.
It is possible that in spite of better ICR the cash flow position of the
company may be weak. Therefore, this ratio is not a proper or
appropriate measure of the capacity of the company to pay interest. It
is equally important to take into consideration the cash flow position.

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(3) Debt Service Coverage Ratio-DSCR:
This ratio removes the weakness of ICR. This shows
the cash flow position of the company. This ratio tells
us about the cash payments to be made (e.g.,
preference dividend, interest and debt capital
repayment) and the amount of cash available. Better
ratio means the better capacity of the company for
debt payment. Consequently, more debt can be
utilized in the capital structure.
(4) Return on Investment-ROI:
The greater return on investment of a company
increases its capacity to utilize more debt capital.

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(5) Cost of Debt:
The capacity of a company to take debt
depends on the cost of debt. In case the rate of
interest on the debt capital is less, more debt
capital can be utilized and vice versa.
(6) Tax Rate:
The rate of tax affects the cost of debt. If the
rate of tax is high, the cost of debt decreases.
The reason is the deduction of interest on the
debt capital from the profits considering it a
part of expenses and a saving in taxes.

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(7) Cost of Equity Capital:
Cost of equity capital (it means the expectations of the equity
shareholders from the company) is affected by the use of debt capital.
If the debt capital is utilized more, it will increase the cost of the
equity capital. The simple reason for this is that the greater use of
debt capital increases the risk of the equity shareholders.
Therefore, the use of the debt capital can be made only to a limited
level. If even after this level the debt capital is used further, the cost
of equity capital starts increasing rapidly. It adversely affects the
market value of the shares. This is not a good situation. Efforts
should be made to avoid it.
(8) Floatation Costs:
Floatation costs are those expenses which are incurred while issuing
securities (e.g., equity shares, preference shares, debentures, etc.).
These include commission of underwriters, brokerage, stationery
expenses, etc. Generally, the cost of issuing debt capital is less than
the share capital. This attracts the company towards debt capital.

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Structure of the Capital Market

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REFORMS AND
DEVELOPMENT
SINCE
1991

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1> Securities and exchange board of India-
The Securities and Exchange Board of India (SEBI) was
established in 1988. It got a legal status in 1992. SEBI was
primarily set up to regulate the activities of the
merchant banks, to control the operations of mutual funds, to
work as a promoter of the stock exchange activities and to act
as a regulatory authority of new issue activities of companies.
2> Establishment of Creditors Rating
Agencies - Three creditors rating agencies viz. The
Credit Rating Information Services of India Limited the
Investment Information and Credit Rating Agency of India
Limited and Credit Analysis and Research Limited were set up
in order to assess the financial health of different financial
institutions and agencies related to the stock market activities

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3> Increasing of Merchant Banking Activities-
Many Indian and foreign commercial banks have set up their
merchant banking divisions in the last few years. These divisions
provide financial services such as underwriting facilities,
issue organizing consultancy services, etc.
4> Candid Performance of Indian
Economy - In the last few years, Indian economy is growing at
a good speed. It has attracted a huge inflow of Foreign
Institutional Investments (FII).
5> Rising Electronic Transactions- Due to
technological development in the last few years. The physical
transaction with more paper work is reduced.

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6> Growing Mutual Fund Industry- The growing
of mutual funds in India has certainly helped the capital market to
grow. Public sector banks, foreign banks, financial institutions and
joint mutual funds between the Indian and foreign firms have
launched many new funds.
7> Growing Stock Exchanges - The numbers
of various stock in India are increasing. Initially the BSE was the
main exchange, but now after the setting up of the NSE and
the OTCEI, stock exchanges have spread across the country.
8> Investor's Protection- Under the purview of the
SEBI the Central Government of India has set up the Investors
Education and Protection Fund (IEPF) in 2001.

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9> Growth of Derivative Transactions- Since
June 2000, the NSE has introduced the derivatives trading in the
equities. In November 2001 it also introduced the future and
options transactions.
10> Insurance Sector Reforms- Indian insurance
sector has also witnessed massive reforms in last few years. The
Insurance Regulatory and Development Authority (IRDA) was set
up in 2000.
11> Commodity Trading- Along with the trading of
ordinary securities, the trading in commodities is also recently
encouraged. The Multi Commodity Exchange (MCX) is set up. The
volume of such transactions is growing at a splendid rate.

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Bibliography
• www.slideshare.net
• www.investopedia.com
• www.yourarticlelibrary.com
• www.economictimes.indiatimes.com

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CREDIT GOES TO-
• UTKARSH BISHT – (BBA/4560/16)
• PRATEEK PANDEY – (BBA/4561/16)
• SAKET MANGALAM – (BBA/4563/16)
• SHUBHAM KUMAR – (BBA/4566/16)
• AYUSHI GUPTA – (BBA/4567/16)

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