Page 22 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Unit 2: Financial Market Reforms

interventions, rapid industrialization of the country, path breaking technological developments, Notes
entry of financial institutions and foreign investors in the market, growing community of retail
investors willing to take direct investment risks and strong support by Indian stock market.
As such, it would be appropriate to present a panoramic view of developments of Indian new
issue market during the pre and post-reform period.

Coverage of Financial Sector Reforms

What constituents of the Financial Sector were covered by reforms? The components of the
financial markets that were chosen for effecting measures under the reforms are:
1. Money Market
2. The Securities market.

Objective of Financial Sector Reforms by Government of India & RBI

To widen, deepen and integrate the different segments of financial sector, namely, the money
market, debt market (particularly Government securities) and foreign exchange market.

2.1 New Issue Market during Pre-reform Period

2.1.1 An Overview

The new issue market in India was in its infancy at the time of independence because of a host of
factors.

Example: Low demand for long-term funds due to feeble industrial base and low saving
rate, reliance of many foreign companies on the London capital market for garnering funds,
predominance of managing agency system with its rampant malpractices in promotion,
management and underwriting of new capital issues, indifferent attitude of Indian corporates in
accessing market for raising funds through shares and debentures and hazards of administered
interest rate structure.
Even during the initial years of planning new issue activity remained subdued due to low level
of household savings, absence of investing attitude among the individuals, retarded industrial
and infrastructural development, inadequate support from the stock market and financial
institutions, absence of underwriting facilities, and above all, the government control, which
regulated everything from the size of the issue to its pricing and issuing of bonus shares.

Table 2.1: Amount of Issues During the First Plan to the Seventh Plan Period

Period Amount of issues Period Amount of issues

`
`
( In crore) ( In crore)
First Plan 84.5 Fourth Plan 308.8
(Yearly Average) (16.9) (Yearly Average) (61.8)
Second Plan 171.1 Fifth Plan 415.8
(Yearly Average) (34.2) (Yearly Average) (83.2)
Third Plan 365.0 Sixth Plan 1090.80
(Yearly Average) (73.0) (Yearly Average) (218.2)
Three Annual Plans 268.6 Seventh Plan 2793.0
(Yearly Average) (89.9) (Yearly Average) (558.6)

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