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ResourceMobilization2:CapitalMarkets
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Resourcescanbemobilizedeitherforshorttermorforlongterm.Economyconsistsofhugenumberof
enterprisesandindividuals,requirementsofallofthemdiffer.Somehavesurpluscashtosave,whilesome
otherneedscash.Somefirms/individualswantstomakegoodthereshorttermliquidityrequirements,some
wantsmoneyforlongtermcapitalinvestment.Sodistinctioncanbemadeastoperiodforwhichoneintendsto
lendorborrow.Inthissensefinancialmarketiscategorizedintomoneymarketandcapitalmarkets.InMoney
market,periodinvolved(forfundsmovement)is1yearorless,whileincapitalmarketsperiodisgenerallymore
than1year.Banksbasicallycaterstomoneymarketandmobilizesresourcesfromsaverstoborrowers(thisis
becausedistinguishingfeatureofabankistoacceptdepositsandopencurrentaccounts).But,itplays
significantroleincapitalmarketstoo,asitlendsforcapitalinvestmentpurposes.Aseconomyofthecountry
grows,highlyspecializedinstitutionscomesupwhichcatersexclusivelytocapitalneedsandbankscontinues
itsmoneymarketbusiness.TheseinstitutionsareknownasCapitalMarketintermediaries.
Theseareintermediarieslikeinsurancecompanies,housingfinancecompanies,pensionfunds,andinvestment
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fundsetc.whichmobilizesavingsandfundlongterminvestments.
Nowagain,personhavingsurplusmoneyforlongtermmaybewillingtolendortoinvest.Thisforms
distinctionbetweendebtandequity.Informer,lenderwillgetfixedreturnandinlatterinvestorwillgetshareof
hisprofit.Theseareinvestedthroughdifferenttypeofintermediariesasperinterestoflender,maybemutual
fund,debtfund,stockmarketetc.
Infinancialmarket,financialassetsarecreatedsuchasdebenture,shares,bondsetc.FinancialAssets
representclaimoftheirholderovercertainassetwithcertainquantity.Thisclaimarisesbecauseofacontract
betweentwopartiese.g.lenderandborrowerorbuyerandseller.Inthefirstplace,thesearecreatedwhen
freshmoneyisraisedinthemarket(eitherthroughdebtorequity).Theseinstruments,afterbeingissuedcould
betradedlikeanythingelseandtheyhavetheirmarket.Nowthereareagaindistinctionsbetweenprimaryand
secondarymarkets.Marketsinwhichfreshfundsareraisedareprimaryandinwhichfinancialassetsare
tradedarecalledSecondarymarkets.
WhatareFinancialMarkets?
Financialmarketisamarketwherefinancialinstrumentsareexchangedortradedandhelpsindeterminingthe
pricesoftheassetsthataretraded(alsocalledthepricediscoveryprocess).Thesefacilitatetradeinfinancial
assetsbyprovidingplatformforcomingtogetherofbuyersandsellersorBorrowersorLenders.
Financialmarketsmaybeclassifiedonthebasisof
1. debtandequitymarkets
2. moneymarketandcapitalmarket
3. primarymarketandsecondarymarket

IndianFinancialMarketconsistsofthefollowingmarkets:
CapitalMarkets
Primarycapitalmarket
Wheneveracompanyraisesfreshcapitalordebt,itdoessobyinitialpublicoffer(IPO).Alreadylisted
companycanagainraisecapitalbyfollowonpublicoffer(FPO).
Secondarycapitalmarket
Shareswhichwereissuedinprimarymarketremainslistedonstockexchangesandaretraded.Shareprices
moveinaccordancewithMarketSentiment,EconomicandPoliticalstability,andfundamentalsofparticular
company.
StockExchanges
BoththeseactivitiesarefacilitatedbyStockexchanges.Inlaymantermsstockexchangesaremarkets(or
mandis)whereprospectivebuyerandsellermeetsanditemtradedisShares,debentures,bondsetc.Inearly
days,therewasphysicalinterfacebetweentwopartiesthereweremediatorsinstockexchanges,whichfora
commissionusedtonegotiatethedeal.Lotofbuyerswouldcomeandmakebidsforpurchaseandonother
handtherewouldbesellerswithfinancialassets,attemptingtosellathighestpossibleprice.Whendifference
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betweensellingandbuyingbidiseliminated,dealisdone.Mediatorsusedtoshoutbidsfortheirclients.This
wasknownasopenoutcrysystem.
TheBombayStockExchange(BSE),theoldestandthelargeststockexchangeinIndia.Historically,ittraded
fortwohoursinadaywithanopenoutcrysystem.Theexchangewasmanagedintheinterestsofindividual
members,amajorityofwhomhadinheritedtheirseats.Alargeproportionofstockslistedontheexchangewere
notactivelytraded.Therewasminimumsupervisionfromtheexchangesandspeculation(satta)wasrampant.
Itwasin1992thatinpursuanceofLPGreformsthattheStockExchangeswerereformed.Thesereformswere
onthebackofLegalprovisionsandtechnology.
OnelandmarklegalreformwaspassageofSecuritiesandExchangeBoardofIndiaAct,1992,whichcreatedan
apexindependentregulatorforcapitalmarkets.Earlier,everythingwasunderFinanceministry,whichresulted
inconsistentinterference.Apartfromthis,earliercompanieshavetogettheirissuepriceapprovedbyfinance
ministry.Withreforms,thiscontrolwasalsodoneawaywith.
Apartfromthis,TransactionswerenowsettledinaseparateClearingHouse(asChequeisclearedinbanking
separately)whichearlierwasdonemutuallybetweenmembers.Perhaps,mosteffectivereformwas
dematerializationofSecuritieswhichmeansconversionofsecuritiesfromphysicaltoelectronicform.Inthose
daystherewerephysicalproofssuchasShareCertificateswhichhastobetransferredinnameofpurchaser.
Thisinvolvedlotoftime,effortsandalso,stampduty.Inelectronicform,securities(share,debenturesetc.)are
heldbydepositoriesonbehalfofactualowners.TwodepositoriesinIndiaareNSDLandCDSL.Sotradeis
handledbyStockExchangeswhichhavedesignatedbrokerslikeKarvx,Parsavnathetc.Thesebrokershave
accountwithdepositoriesandinterfacewithprospectivebuyersandsellers.Apersonwillingtotradein
securitieshastoopenademataccountinDepositorywithhelpofbroker.Assoonashebuysanysecurity,itis
transferredtothisaccount.
Nowthereishighlysophisticatedelectronicandonlinetradingsysteminplane.Thereisrealtimetransferof
market,industryandstockspecificinformationacrossthecountrywhichremovesinformationasymmetryand
ensurelevelplayingfield.
NationalStockExchange(NSE)isonlyothernationalStockexchangeapartfromBSEandtherearenumerous
otherregionalexchanges.
Ineverycountry,biggestinternationalstockexchangeislocatedinitsfinancialcapital.E.g.NewYorkStock
Exchange,LondonStockExchange,TokyoStockExchange,ShanghaiStockExchange.
Anotherimportantpointisthatinpostliberalizationperiod,thereenormousinterfaceinglobalcapitalmarkets.
IndiaallowedForeignInstitutionalInvestorstoinvestinIndianMarketsandFIIflowsnowareitsbackbone.
ManyIndiancompanieshaveraisedfundsfromoutsideIndiavia.Global/AmericanDepositoryReceipts
Inpresenttimesstockmarketsindicatehealthofaneconomy.Theyareprimarymeansofmobilizationof
longtermsavingsandinvestmentandfixedcapitalformation.Further,whenvolumeoftradeinmarketsis
significant,itleadstotransparentpricediscovery.Aswehaveread,fundscanberaisedeitherasadebtoras
equity.StockExchangesenableandfacilitatebusinessestoraisefundspredominantlythroughequity.Forcesof
market(demandandsupply)constantlyinteractandthisresultsinfluctuatingprices.Thereishugearmyof
stockanalystswhokeepeyeonpricemovement,fundamentalsofcompanyandrelatedindustry,andhealthof
nationalandworldeconomy.Thiswaytheytrytofindoutintrinsicvalueofashare.Normally,Investmentsflows
intoshareswhicharepricedlowerthantheirintrinsicvalue.

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Further,StockMarkets,byprovidingreadysecondarymarketforlongterminvestmentshares,givesinvestors
anoptionforeasyexitfromtheindustry.Atthesametimeitprovidesavenuesforentryofnewinvestors.For
example,fewyearbacksignificantsharesinEssartelecomwasacquiredbyHutchison,andthenitwassoldto
Vodafone.Listedsharesmakeiteasyfortransactionstotakeplace.
Togaugemovementinthemarketisnotaneasytask.Therearethousandsofshareslistedandtheymovein
differentquantumandmaybeindifferentdirections.Sohowwouldweknowhowoverallstockmarketis
performing?Forthisthereareindiceswhichrepresentsbroadertrendofthemarket.
StockIndexes
Sensexisonesuchindexwhichisweightedaverageof30stocks(listedonBSE),whichhavehighestmarket
capitalization(MC).MCpracticallymeansmarketvalueofequityofthecompany(no.ofequityshareissued
multiplybyMarketpriceofShare).WhenwearetoldthatSensexisup,thenitmeansthese30shareshave
goneuptogether.ItssameconceptlikedeterminingInflationrate,orIndexofIndustrialproduction.
SimilarlythereisNifty50forNSEstockswhichrepresentweightedaverageofbest50stocks.Therearealso
sectorspecificindices,suchasITsectorIndex,Cement,Iron&Steel,RealEstateetc.theseindicestells
performanceofcompaniesinthatsectorputtogether.
Confidenceoftheinvestorsinthemarketisimperativeforthegrowthanddevelopmentofthemarket.Forany
stockmarket,themarketIndicesisthebarometerofitsperformanceandreflectstheprevailingsentimentsof
theentireeconomy.Stockindexiscreatedtoprovideinvestorswiththeinformationregardingtheaverage
sharepriceinthestockmarket.Theupsanddownsintheindexrepresentthemovementoftheequitymarket.
Theseindicesneedtorepresentthereturnobtainedbytypicalportfoliosinthecountry.
StockmarketallowstradingofdiverseCapitalMarketInstruments.Theseinstrumentsareusedtolayclaim
overspecifiedfinancialasset.Someofthecapitalmarketinstrumentsare:Equity,Preferenceshares,
Debenture/Bonds,ADRs/GDRs,Derivatives.
Whatarederivatives?
Aderivativeisaninstrumentwhichderivesitsvaluefromanunderlyingasset.
Differentpeoplehavedifferenceperceptionaboutmovementofpricesoffinancialassetinfuture.Thisprovides
themavenueforspeculationandexploitpotentialcreatedbycurrentpriceandexpectedprice.
Forexampleapersoncanbuyanoptiontobuyaspecifiedasset,onspecifiedfuturedateandataspecified
price.SaysomeshareiscurrentlypricedatRs.25andMr.Xexpectsitwilltouch30rightsafter1month.He,
basedonhisperceptionwillbuyanoptiontobuythisshareatRs.25nextmonth.Asthedateapproachesand
actualpriceofRs.25willmove.Anymovementwillcreateavalueofthiscontractas(eithernegativeor
positive)ashehasrightbutnotobligationtobuyatRs.25,whatevermaybetherate.
Thisisexamplehowderivativeinstrumentgetsitsvalueandistradedseparatelyonstockexchanges.There
aremanysuchinstrumentslikeFutures,forwardcontractsetc.
OnemayaskthatwhydoesntMr.Xbuythatshareitselftoexploitpossibleprofit?Buyingsharewillrequirehim
toinvestRs25,butincaseofoptionhellpaysmallpremiumwhileenteringintodealandhelldirectlygetprofit
onfinaldate.
Itshouldbenotedthatthesecontractsarestandardizedbyexchangesandthensoldasproducts.Itsnotlike
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foreveryindividualinvestorbrokerstrytochartaseparatedeal.
Aderivativepicksariskorvolatilityinafinancialasset,transaction,marketrate,orcontingency,andcreatesa
productthevalueofwhichwillchangeasperchangesintheunderlyingriskorvolatility.
DerivativescanbederivedfromShares,Commodities,ForeignExchange,andInterestrateDifferentials.
Practicallyitalsocanbedonefromcricket/footballmatchesorevenfromuncertaintiesofclimates
ForcommodityderivativesthereisNationalCommodityandDerivativeExchange(NCDEX),MultiCommodity
Exchange(MCX)andNationalMultiCommodityExchange(NMCE).ReadaboutItsroleinAgriculturehere
ForRegulationofcommodityderivativemarketForwardMarketCommissionactsasapexregulator.
SecuritiesandExchangeBoardofIndia(SEBI)
SEBIwasenactedin1992inaccordancewiththeprovisionsoftheSecuritiesandExchangeBoardofIndiaAct,
1992toprotecttheinterestsofinvestorsinsecuritiesandtopromotethedevelopmentof,andto
regulatethesecuritiesmarketandformattersconnectedtherewithorincidentalthereto.Itisquasi
legislative,quasijudicial,quasiadministrativebody.
TimeandagaintherehavebeenScamsinstockexchangeslikeHarshadMehtaScam,KetanParekhScamore
morerecentoneSatyamScam.Inallthesescamslakhsofgenuineinvestorslosttheirhardearnedmoney.
WitheverysuchfailureSEBIhasemergedstrongerwithplugginguptheloopholes.Buteventoday,
participationandtrustofcommonmaninmarketsiswavering.Itisgeneralperceptionthatonlyupperfewblue
chipcompaniesaregovernedgenuinelyobservingalldisclosurerequirementsandotherregulations.Inother
lesserknowncompanies,manipulationofthestockpricesbyinsiders(promoters,directorsandauditors)is
rampant.Infact,Satyambeforerevelationofscamwasoneofthebestperformingbluechipstock.Butallthis
washappeningonthebasisoffalselycookedupbooksandauditorswerepartytothismanipulation.Indian
lawsdontprovidestringentpunishmentforfraudscommittedinthemarkets.ItisironicalthatRaju
RamalingamsrevelationaboutSatyamfraudandsubsequentcollapseinshareprices,claimedlivesoffew
peoplewhocommittedsuicideandRajuisoutonbail.Incontrast,USlawsareverystringentinthiscase.Itwas
observedincaseofRajatGuptaandRajRajanatnam,whowereAmericancitizensaresentencedforlifeterms
longerthan20years.Thisisjustbecausetheywereaccusedofindulgingintoinsidertradinginthiscase
effectonmarketdoesntmatter.Insidersarepeoplewhoaresupposedtohaveaccesstopricesensitive
unpublishedinformationofacompany.ThesepeopleareDirectors,Promoters,Auditors,Secretariesetc.Ifthey
trade(buyorsell)insharesonbasisofsuchinformation,thatwillbecalledinsidertrading.
Whenacompanyislisted,itssharesareopenfortradingforanyone.Sosovereigntyofpromoter,directorsetc.
issubstantiallycurbed.Practically,ownerofthecompanycanbeanyone,andtheseowners(shareholders)
gatheratannualgeneralmeetofthecompanytoappointnewdirectorsbyvoting.Onesharecarriesonevote.
Promotors,likeAmbanisforRelianceholdmajoritysharesintheircompanies,soineffectwillofAmbanis
prevailsandtheyendupkeepingtoppositionforthemselves.Noweverydecision,theyhavetomakeshallbe
ininterestoftheseinvestorsatlargeandcompany.StockpricesfluctuatesduetothreereasonsI.e.Macro
Economicevents,IndustryspecificeventsandCompanyspecificevents.Informationaboutformertwo
generatesoutsidepremisesofthecompany,butinlastcaseitsthecompanywhichgeneratestheInformation.
AnypriceSensitiveinformationmaytriggertheselloff,ifitsbadnewsorreversemayhappenincaseofgood
news.Soinsidersbeinginpositiontoinfluence,retain,blocksuchinformationmaycauseharmtoinvestorsat
largefortheirpersonalgain.
SEBIstrivestoprovidelevelplayingfieldforinsidersandoutsidersandhenceinsidertradingisprohibited.
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Sometimespromotercreatesartificialdemandbyoverinvestingintheirownshares,seeinggoodperformance
ofthosesharespublicatlargestartsinvestingandtheninsiderspulltheplugbysellingtheirinvestmentsathigh
prices.
DespiteofSEBIsrelentlesseffortssuchthingsarenotuncommoninIndianMarkets.SEBIapartfrommaking
generalrulesforwholemarketmaintainsastrictvigilofindividualcompaniesbasedoninformationreceivedby
itthroughcomplaintsanddisclosure.
SEBIsbasicfunctions
1. RegulatesStockExchanges.
2. Registeringandregulatingtheworkingofintermediarieslikestockbrokers,subbrokers,sharetransfer
agents,bankerstoIssuesandothersuchpersonsinvolvedinsharemarket.
3. RegisteringandregulatingCollectiveinvestmentschemes,mutualfunds,venturecapitalfundsetc.
4. Prohibitingfraudulentandunfairtradepracticesrelatingtosecuritiesmarkets
5. Prohibitinginsidertradinginsecurities
6. Promotinginvestorseducationandtrainingofintermediariesofsecuritiesmarkets.
7. ControlsandregulatesFIIs
8. EnsureCorporateGovernance
EverycompanywillingtogetlistedhastoenterintoalistingagreementwithSEBI,inwhichcompanyagrees
certaintermsandconditionsinInterestofinvestors.Clause49ofListingagreementisspecificallydirected
towardsCorporateGovernanceforitrequirescompaniestoappointcertainindependentdirectors.
Recently,bySecuritiesLaws(amendment)bill,powersofSEBIovercollectiveinvestmentschemeswere
increased.Itwasgivenauthoritytoattachpropertiesofnoncomplaintcompanies.ThiswasrelatedSaradha
Scam.
InSaharacase,itcameoutthatSEBIhaspowertoregulateanycompanywhichissuesandsecurity.Prior
positionwasthatitonlyhadpowersoverlistedcompanies.
CorporateGovernance
Whatiscorporategovernance?
CGconceptholdsthatcompanyshouldnotignoreinterestofitsanystakeholder.Mainstakeholdersare
investors,employees,governmentandsocietyatlarge.
1. Investorsinterest:BetterReturns,Transparency&accountabilityinbusiness,securefutureofcompany.
2. EmployeesInterest:Regularsalaries,goodworkingconditions,Careerprogresspotentialandsocial
status.
3. interest:Regularpaymentoftaxes,Compliancewithlaws&rules,Nonindulgenceinantinational
activities.
4. SocietysInterest:generationofemployment,lesspollution,efficientutilizationofscarceresources,
Healthy&affordableproductsetc.
SEBIsroleinsafeguardinginterestofinvestorsandcurbingmalpracticesissignificantfrompointofviewof
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CorporateGovernance.
ApartfromthisCompaniesact,2013toogivessoundstressonCGItprovidesforappointmentof
Independentdirectors,Regulatesremunerationofdirectors,InternalAuditCommittee,increasesresponsibility
andpenaltiesofauditorsandprovidesthatatleast1directorshouldbewoman.
NewcompaniesactalsointroducedmandatoryCorporateSocialResponsibilityclause.Everycompany
havingnetworthofrupeesfivehundredcroreormore,orturnoverofrupeesonethousandcroreormoreora
netprofitofrupeesfivecroreormoreduringanyfinancialyearshallconstituteaCorporateSocialResponsibility
CommitteeoftheBoardconsistingofthreeormoredirectors,outofwhichatleastonedirectorshallbean
independentdirector.
TheyalsoneedtoformulateaCSRpolicywhichshouldbecontinuouslymonitored.Companyshouldspendfor
CSR,minimum,2%ofitsaveragenetprofitduringpreviousthreeyears.
TwomaincommitteesforcorporategovernanceinpastwereKumarManglamBirlaCommitteein1999and
N.R.NarayanMurthyCommitteein2002.Readhereandhere
MutualFunds
Differentsharesinthemarketcarrydifferentkindanddegreeofrisks.Soaninvestorsinsteadofputtingalleggs
inonebasket,diversifiesitsportfolio.Heattemptstominimizehisriskandmaximizereturnbyinvestinginboth
debtandequityandfurtherwithinequity,hepicksupvarioussectorsinfra,textile,IT,Cement,Housing,
bankingetc.
Anormalinvestoroftenfacesinformationconstraintsandfailstogetanadequateportfolio.Forthispurpose
thereareAssetManagementCompanieswhichformsafundbyissuingunitstothepublic.Theseunitsarejust
likeanyotherinstrumentsharesordebentures.PublicpurchasestheseunitsandmoneyreachesAMC.Now
thisAMCismannedwithfinancialmarketexpertsandtheywillinvestthismoneyindifferentsectorssoasto
maximizereturnsandminimizerisk.Asprofitfromdifferentinvestmentflowsvalueofunitsofmutualfund
increases.Theseunitsarealsotradedonstockexchanges.
ThemutualfundindustryinIndiawasstartedin1963withtheformationofUnitTrustofIndia(UTI),atthe
initiativeofthegovernmentofIndiaandReserveBank.ThehistoryofmutualfundsinIndiacanbebroadly
dividedintodifferentphases.InthefirstphaseUTIhasenjoyedthestatusofmonopolyinthemutualfund
industry.InthesecondphasesomepublicsectormutualfundssetupbythepublicsectorbanksandLife
InsuranceCorporationofIndia(LIC)andGeneralInsuranceCorporationofIndia(GIC)werelaunchedbesides
theUTI.Inthethirdphase,whichstartedin1993,thegovernmentallowedprivateplayerstooffermutualfund
schemesgivingtheIndianinvestorsawiderchoiceoffundfamilies.
CorporateDebt/bondMarketinIndia
Aswehaveread,resourceforinvestmentcanbeeithermobilizedinformofeitherEquityorDebt.Foregone
discussionwasforequity.Anybusinesspreferstogetfinancedfirstfrominternalsourceslikeprofitfromitsown
operation,orcapitalinfusedbyitsowners.Secondcomesthedebtandequityispreferredonlyifdebtis
unavailable.Thisisbecauseequitygetsshareofprofitinreturn,whiledebtisentitledonlytofixedinterest.
Normally,formerissignificantlyhigherthanlatter.Soallovertheworldcooperatebondmarketsarewell
developed.Inthiscorporatesraiseequity,notbyissuingshares,butbydebenturesorbonds,onwhich
investors/lenderswillgetfixedrateofinterest.InIndiagovernmentbondmarketiswelldevelopedandithas
beenfinancingitsfiscaldeficitbysuchbonds,butcorporatebondmarketisquitelaggard.
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InIndia,theGovernmentbondmarkethasexperiencedasteadygrowthovertheyearsduetotheneedto
financethefiscaldeficit.TheGovernmentbondmarket,whichisaround39.5percentofGDPinend2010in
IndiacomparesfavourablytomostotherAsiancountries.Thecorporatebondmarketontheotherhandisjust
1.6percentofGDPinend2010andsmallinrelationtotheeconomyssize.From2008to2010corporatebond
marketinIndiainvaluetermsgrewfrom$7.85billionto$24.99billion.Incomparisontoothercountriessuchas
SouthKorea($380.62billion)andChina($522.09billion),theIndiancorporatebondmarketappearstobe
underdeveloped.TheunderdevelopmentofthecorporatebondmarketinIndiaisnotincidentalandismainly
attributabletothestructureoftheIndianfinancialsystemandregulatorystructure.
Currentlycorporatesandbusinessgetmajority(almostall)ofthelendingfrombanks.Banksareexposedto
numerousotherrisks.Ifbankscreditisexposedtoabadcompany(saykingfisher)thananydefaultbythat
company(inrepayment)cancauseharmtodepositor,whootherwisewouldnthaveoptedtogetexposedto
thisbadcompany.SoCorporatebondmarketprovidesinvestorsoptiontochoosetheirriskandreturn.Italso
leavesfinancewithbanktolendtomoresociallyproductiveventures.Lastbutnotleast,acompanywithgood
reputationcangetcheapfinanceforitsexpansionasthisisdirectlyfrompublicandmiddlemanbankis
eliminated.Bysamelogic,investorwillalsogetsomewhatbetterdeal.Forcorporatedebtmarkettodevelop,it
isimperativethatregulatorymechanismisstrengthenedatveryfirstplace.
Corporatebondsmarketstoohaveprimaryandsecondarydistinction.

MobilizationofSmallSavingsinInvestment
Foregoingdiscussionwasrelatedmobilizationofsavingsunderwhichcentralobjectiveofsaversisjustto
investandincreasetheirwealth.Thereareotherformsofsavingsunderwhichsmalldenominationsofsavings
getstogethertoformsignificantinvestmentfigures.ThesearemainlyInsurance,Providentfundandpension
Savings(alsocalledcontractualsavings).Thesehaveanimportantsocialsecurityangle,butherefocusison
resourcemobilizationthroughthem.Thesefundshavelongmaturity(repayment)periodsotheyarebetter
placedtocaterneedofprojectswithlonggestationperiodslikeinfrastructure.ButinIndia,theinvestment
patternsofthesefundsarehighlyregulatedwithabiastowardsinvestmentinGovernmentsecurities.Thereis
needtoderegulatetheselongtermfundsourcesandformulateprudentialnormsforsuchfinancing.Insurance
sectorissomewhatcontributingtoprivatesector,butpensionandprovidentsavingsarecompletelygovernment
controlled,sothewillbediscussedinnextarticlealongwithgovernmentfinance.
Savingsthroughthesethreeforms2025%oftotalhouseholdsavings,soefficientmobilizationbecomes
crucial.
Insurance
Insuranceisserviceinwhichindividualeconomicriskisspreadoverlargenumberofpeople.Anylossthatcan
bequantifiedinmoneycanbeinsured.Fore.g.LifeInsuranceprovidesriskcoveronlifeofaperson.Life
cannotbequantifiedinitself,buteconomichardshipsonsurvivorsofadeceasedbreadwinnercanbe
undoubtedlyquantifiedinmoneyterms,sothiswaylifeinsurancecanbedone.
Howindividualeconomicriskisspreadoverlargenumberofpeople?
Ininsurancelargenumberofpeoplepaypremiumandtheirriskgetscovered.Incaseofanymishappening,
underwhichclaimcanbeinvokedasperlegalagreementpersonwillgetcompensatedbyInsurancecompany.
Notallcoveredvehicleswillmeetanaccident,norallcoveredpersonswilldie.Buteveryonecertainlyhasrisk
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ofdyingorgettingtrappedintoanaccident.Sopremiumfromallpeopleunderriskisusedtopayapersonwho
reallymetaccidentorrelativesofpersonwhodied.
Insuranceishighlyprofitableandcashrichbusiness.Premiumiscollectedandclaimsaretobepaidwhen
thereisriskmaterialized.Theinsurancesectorhasbeenanimportantsourceoflowcostfundsoflongterm
maturitiesallovertheworld.IntheIndiancontext,however,theinsurancecompanies,particularlyinlife
insurance,apartfromcoveringriskarealsocommittedtorepaymentoftheprincipalwithinterest
althoughwithlongmaturitiesandtherebytendtoactasinvestmentfunds.Oneofthereasonsthatthis
hashappenedisthattheaveragepremiumchargedbytheinsurancecompaniesinIndiatendstobe
relativelyhighduetoobsoleteandrigidactuarialpracticesandinefficientoperations.
ThisisthereasonLifeInsuranceCorporationisoneoftherichestandomnipresentgovernmentcompanies.
(ActuariesareExpertswhotriestoquantifyriskinaparticularsegmentanddeterminetheappropriate
premium.)
InsuranceindustryisgenerallyclassifiedintoLifeInsuranceBusinessandGeneralInsurance.Formerwas
nationalizedin1950sandlatterin1970s.AfterLPGreformstherehavebeenincreasinginvolvementof
privatessector.Awatershedmomentcamein1999whenInsuranceRegulatoryandDevelopmentAuthorityact
waspassedwhichestablishIRDA.ThisindependentauthorityremainsatapexofInsurancebusiness.Thiswas
necessarybecausegovernmentwaskeenonpromotingprivatesectorparticipation,forwhichindependentand
efficientregulatorsareprerequisite.
AnordinancerecentlyhasbeenpromulgatedtoallowFDIupto49%ininsurancesector.Thisisexpectedto
bringmuchneededforex,HumanResourceanddifferentiatedproductsinthesector.
Capitalmarkets,asnamesuggests,mobilizesavingstowardsproductivecapitalassets.Highinvestmentin
primarymarketwillsuggesthighfixedcapitalformation,whichinturnwillhaveallaroundimpacton
employmentcreation,taxcollectionandeventuallyhigherstandardofliving.However,capitalmarketsattimes
cansqueezesavingsfromlargepublictoahandfulofsectors.Thisresultsinincomeinequalities.Aswasseen
inlastdecade,thatmuchgrowthwasduetoservicessectorandmuchoftheresourcesgotconcentratedinto
thatsector.Governmentthroughitspolicyinterventionshastomakesurethatanygrowthisinclusiveofall
sects,regions,classesofthecountry,itisonlythenitcanbesustainable.Otherwiseitwillreceiveabacklash
fromdisadvantagedpeople,whichhasstrongimplicationsforpoliticalandeconomicstabilityofthecountry.

Questions
1. WhatreformswereundertakeninIndiatoreviveitsStockExchanges?Explainhowtheyhelpin
mobilizationofresources.(200words)
2. Whatisimportanceofcorporatedebtmarket?(200words)
3. DoyouthinkgovernmentshouldfacilitatedevelopmentofaburgeoningCorporateBondmarket?Why?
(200words)
4. HowdoesInsurancehelpsinmobilizationofsmallsavings?ShouldFDIallowedinInsurancesectorat
timewhendomesticindustryisnascent?(200words)
INSIGHTS2015.AllRightsReserved.

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