The Integral World of Finance

Business Standard     27th November 2020     Save    

Context:  The need for liquid and efficient capital market markets to be made available to all investors,

Significance of a liquid capital market:

  • Provides risk capital for firms: The primary market for equity is important because it provides risk

capital for firms.

  • Liquidity premium: A liquid market is one in which an investor can effortlessly sell large quantities of shares as and when desired and more liquid the market is, more the valuations of share become.
  • Allows foreign investors to provide better capital prices to Indian firms:
    • For E.g. capital is an input that is used by an Indian steel company, and global competitiveness requires that Indian firms should have access to capital at world prices.
  • Recommended by C Rangarajan Committee: The Report of the High-Level Committee on Balance of Payments suggested full access to the Indian financial market for Foreign Institutional Investors (FIIs).
  • Institutional measures:
    • FIIs have been allowed to invest in shares, debentures, and warrants issued by companies which are listed on the Indian stock exchanges and domestic mutual funds.
    • Participatory notes are financial instruments issued by FIIs to any investor seeking India’s exposure but want to avoid the onerous process of registering with every individual jurisdiction.
      • For e.g., University endowment funds and civil service pension funds in the US have been investors in India through PNs for decades.
    • The government had earlier approached the Securities & Exchange Board of India, to allow merchant bankers to issue participatory notes, in order to meet the divestment targets.

Ways to make markets accessible to all Investors:

  • Determine the nature of desirable and undesirable investors: investees and Financial Instruments and establish a system of capital controls to enforce these views.
  • Increase liquidity in Primary and Secondary market: This will encourage the participation of foreign investors in Indian secondary market
  • Encourage PN: PN will help global investors to cut across borders without formal legal recognition in each country.
  • Incorporate greater skills and capacity in tax and enforcement machinery: Convenience of tax administrators should not be a major consideration in financial, economic policy

Conclusion: A liquid and efficient markets accessible to all investors will help in achieving a low cost of capital to Indian firm