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Indian Economic Policy

Notes (vi) Finally, RBI plays a dominant role in the gilt-edged market through its open-market operations
which are governed by the twin objectives of monetary stability and of ensuring the success of
government’s borrowing programme.
Besides gilt edged market and variable yield industrial securities, the Indian capital market
includes development financial institutions and financial Intermediaries.
Indian Capital Market before Independence

The Indian capital market was not properly developed before Independence. The growth of the
industrial securities market was very much hampered since there were very few companies and the
number of securities traded in the stock exchanges was still smaller. Most of the British enterprises in
India looked to the London capital market for funds than to the Indian capital market. A large part of
the capital market consisted of the gilt-edged market for government and semi-government securities.
Before independence, individual investors were very few and limited to the affluent classes in the
urban and rural areas. Besides, the Government had placed many restrictions on the institutional
savers such as banks and insurance companies which necessarily had to prefer government securities
and only to a small extent to the fixed interest-bearing debentures.
Specialised issue houses, so common in Western countries were not developed in India, and the
managing agency system, a peculiar institution in pre-Independence India, performed to some extent
the functions of promotion, issue and underwriting of new capital issues. Finally, there were no
specialised intermediaries and agencies to mobilise the savings of the public and channelise them to
investment. Such institutions were started only after Independence.
The Indian Capital Market since Independence
Since Independence and particularly after 1951, the Indian capital market has been broadening
significantly and the volume of saving and investment has shown steady improvement. All types of
encouragement and tax relief exist in the country to promote savings. Besides, many steps have been
taken to protect the interests of investors. A very important indicator of the growth of the capital
market is the growth of joint stock companies or corporate enterprises. In 1951 there were about
28,500 companies both public limited and private limited companies with a paid-up capital of ` 775
crores; in 2000, there were over 70,000 companies with a paid-up capital of over ` 200,000 crores.
The rate of growth of investment has been phenomenal in recent years, in keeping with the accelerated
tempo of development of the Indian economy under the impetus of the Five Year Plans. The growth
of public borrowings for investment purposes is also an indicator of the growth of the capital market.
By 2003-04, there were 250 non-departmental public enterprises of the Central Government alone
with capital investment of ` 150,000 crores.
In the last two decades alone, the capital market in India has witnessed rapid growth. The volume of
capital market transactions has increased sharply; its functioning has been diversified. New financial
instruments, such as fully and partly paid convertible debentures (FCDs and PCDs) 364-day treasury
bills, commercial paper, CDs have appeared. These reflect the growing diversification and a measure
of sophistication of the financial services in the capital and money markets. The volume of new issues
was ` 31,800 crores during 1994-95, though it declined in the subsequent years (` 12,900 crores during
1996-97). The number of shareholders runs into several millions indicating the growth of the cult of
equity.
21.2 Development Financial Institutions (DFIs)

Soon after Independence, the Government of India set up a series of financial institutions to be of
special help to the private sector industries in the matter of finance. IFCI was the first of these
institutions (1948). It was followed by SFCs (set up by State Governments with cooperation of RBI
and other banks) to provide long term finance to small and medium industrial units. ICICI (1955),
IDBI (1964) and UTI (1964) followed soon after. LIC was set up in 1956 to mobilise individual savings
and to invest part of the savings in the capital market. Many more specialised financial institutions
were set up and are commonly called public sector financial institutions. These institutions have

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