University of Cambridge

An Assessment of the Mobilization of the Household Savings and Corporate Investments Via; Indian Stock Markets

CHAPTER 1

Introduction

Financial system facilitates intermediation between savers (public) and investors (firms), and helps to translate saving into investment. Financial system consists of intermediaries, instruments and markets. Intermediaries are those who intermediate between savers and investors, instruments are the claims issued and markets are place where such claim is transacted. The role of financial intermediation, thus reduce market imperfections arising from informational problems and improve allocation of resources. The capital market is one of the intermediaries between savers (public) and investors (corporate sector). Capital market is seen as a market where the corporate sector mobilize funds by means of equity and debentures issue, although it include s market for state bodies securities such as gilt edged securities. In pre-reform periods corporate sector had to function within a fiscal framework and to facilitate investment in the desired directions; the state had actively participated in the development and control of financial system consisting banks, specialized institutions and the capital market. It was seen that financial sector reforms since 1990s brought changes in this set up and led to a movement away from control to a free environment.

Indian economy is going thorough the phase of economic transition since 1991. The Indian capital market received special attention under the policy of liberalization. Reforms in the security market, particularly the establishment of SEBI, abolition of controller of capital issue (CCI), market determined allocation of resources, screen based nation wide trading, market determined interest rate structure have greatly improved the regulatory framework and efficiency of trading and settlement in the Indian capital market. In India the ratio of market capitalization to G D P rose from about 3.6 per cent in the early 1980s to over 34 per cent in 2003, and sock market turn over ratio is 1.39, which rank 6th among 92 countries (Word Bank, 2003). The number of new issue that got listed on the stock market went up considerably during first half of the 1990s but there after till recently the primary market witnessed considerable decline in terms of both number of issue and amount of capital raised (R B I, 2006). It clearly indicates that stock market performing well but its role, as an intermediary to channels households saving for corporate financing of investment is in question.

Literature Review of Financing of Corporate Firms
The corporate firms in developing country heavily depend on external finance and new issue to finance their growth of net assts as compared with developed countries (Ajit Singh 1995). In contrast to this Cherian Samual (1996) argued that stock market play a limited role as a sources of finance for Indian as well as U.S firm. In broad terms India would classified as a bank –oriented economy based on role played by the commercial bank. Both study agree with the fact that external sources is the important sources of finance for firms in developing countries, but they differ in respect of role played by the stock market as a source of finance. He also showed that for a period of 1978 to 1998 internal sources of finance provide about 38 per cent of total fund, where as external sources provide remaining 62 per cent in India and also suggest to the extent that these results are applicable to other developing countries. 
It is expected that an underdeveloped and imperfect financial market will discourage the firms raising finance from stock market, bank and should induce the corporate market to largely grow from internal sources. This phenomenon is partly explained by Taggart and pecking order theory. The Peking order theory emphasis the financing hierarchy faced by the firm where, in firm’s preference sources of finance is internal, debt, then possibly hybrid securities like convertible bond and last resort equity (Mayer, 1986). It has been pointed out by Taggart (1985) that underdeveloped financial markets do not offer freedom of choice of corporate financing instruments. This forces the firms to accept second best, sub optimal capital structures.  

There are number of literature which holds the view that among the corporate in developing countries India depend less on stock market and more on bank as a sources of finance (Cherian Samuel 1996, Ravichandran, Manas Paul, Binayak Pal, 2005)). The study of capital structure of seven developing countries by Jack Glen and Brian Pinto (1994) for the period of 1980-1992 suggests that there remains a significant difference in the capital structures of sample countries. In Brazil, more than two third of total financing is accounted for by equity where as India, Pakistan, and Korea carried relatively low level of equity. In India since 1996 to till recently the primary market has witnessed a considerable decline in the number of new of issue and total amount raised (Subash Gosh 2004).  

The reasons for poor performance primary market are attributed to number of factors. Subash Gosh (2004) Pointed out that firms decision to go public over last decade depend on number of other companies that were getting listed over the last months. This suggests that Indian companies did not depend on the information content of initial returns while taking their decision to go public. He suggest that a key reason for this finding could be that, unlike the developed countries, it took a long time for Indian companies to get actually listed on the stock market after the promoters decided to go public. Sayuri Shirai (2004) also find that firms appear to have taken advantage of the two stock market boom in order to raise fund cheaply, but have shifted away from the market once the boom petered out. Therefore there has been no steady shift among the high quality firms from loans from banks and financial institutions to equity. This reflects an inadequate infrastructure for sound capital market despite SEBI’s efforts to strengthen accounting, auditing and disclosure accounting and to enable high quality firm to issue shares at high price than low quality one regardless of the booms –bust cycle of stock prices.

More interestingly it is demonstrated that internal and alternative financing (capital market) channel provide the most important sources of finance for small medium enterprises, the most successful sector in the Indian economy (Franklin Allen, Rajesh Chakrabarti, Sanker De, Jun Qj Qian, Meijun Qian, 2006). They also find that entrepreneurs and investors relay more on informal governances mechanisms, such as those based on reputation, trust and relationship, than formal mechanisms, to finance corporate growth. In India the large firms seems to use (based on R B I and ICICI data) more internal finance and bond than smaller firms, while latter report higher bank loans and total borrowings than the former. Larger firms have a higher average age and thus have longer and better reputation than smaller firms, which enables them to finance growth from greater retentions and to access the bond market more easily, at lower cost, smaller firms on the other hand have a lower average age which reduce their ability to access the stock market for long terms funds or to use retained profit (David Cobham and Ramesh Subramanium, 1998). Too conclude it is seen from the existing review of literature that a) Indian corporate sector depend more on external finance, particularly bank and debt finance b) Secondly primary market is not performing well.

Problem of the study
Firms in developing countries are found to be more depending on external sources to finance their growth. In India even after 15 years of capital market reforms, poor performance of primary market is not only accounted for limited role played by the stock market in financing of corporate but also since 1996 till recently the primary market has witnessed a considerable decline in terms of number of issues and total amount of capital raised (RBI, 2006). It is quite interesting to note that secondary market is in boom (table appendix) as a result there is rise in share premium, which will reduce the cost of issuing shares / debentures. But corporate firms prefer banks and retained earning than capital market to finance their investment. It in turn result in two problems a) stock market as an institution for financing of corporate sector via mobilization of households saving is in question b) long term financial heath of the firms is in trouble as result of high dependence on debt finance (mainly bank and bond). It is in this background this study is proposed with following objectives.  

The objective of the study
The study aims to analyze the financing pattern of corporate, in general and capital market in particular, in India. It also looks into flow of saving from households sector for financing of corporate sector via stock market. The main objectives of the study are: 

•Trends in Financing Pattern of the Corporative Firms in India
• Performance of New Issue Market
• Changing Pattern of Financial Assets of Households in India

Methodology and data sources
For the study, financing pattern of firms is broadly divided into two, internal and external. Then the external finance is divided as a) borrowing b) paid up capital c) trade deficit and current liabilities. The borrowing consists finance from debentures, bank, and financial institutions. In order understand role of stock market for financing of corporate we take the trends in primary market in general and specifically new issue market. Then have a look into the industry wise classification of capital raised from the primary market. To analyze the intermediary role-played by the stock market to channel the households saving into investment in corporate sector, we take the changing pattern of financial saving of households in the country. Simple ratio and percentage are used for the analysis. The study had primarily relied on companies financing data on non-government non-financial public limited companies published by RBI and handbook of statistics published by SEBI. 

Organization of the study
The study consists of six chapters including introduction and conclusion. The introductory chapter is more generic in nature, including the problems of the study, review of literature, objectives, data and methodology. The second chapter consists of the detailed examination of the financing pattern of the corporate sector. The third chapter consists of the Industry-wise Classification of Capital Raised. In the fourth chapter discuss Flow of funds to corporate sector via corporate securities. In the chapter five we analyze the Changes in Financial Assets of the Household Sector.

Limitation of the study
The study is subjected to some limitations as usually attributed to secondary data study are applicable to the present study also. The time limit, which has been the greatest constraints in undertaking the study, had caused some bias, which could not be avoided but can be minimized. The data, which have collected through secondary sources, could also have shortcomings usually observed in secondary data.

CHAPTER II

Financing Pattern of Corporate Sector

A large network of commercial banks, financial institutions, stock exchanges, and a wide range of financial instruments characterize the Indian financial system. The central issue regarding the finance for the firms is its composition between external and internal sources. Internal sources comprises of paid up capital, reserves and surplus, and provision. External sources include fresh issue of paid up capital, borrowing, trade dues and current liabilities and miscellaneous non-current liabilities. Diagram given bellow depicts the sources of financing of an typical corporate firms 

Pattern of corporate finance

Trends in Financing Pattern of Indian corporate sector
The firm’s fundamental choice of finance is between internal or external. It is seen in the literature that in developing countries corporate firms are depend heavily on external finance where as in developed country main sources of finance is retained earning. In India firms are more depend on external sources (debt) than other developing countries (Ajit Sing 1995,Charian Samuel 1996). In India, having a under developed capital market and banking system it is expected that imperfect capital market will discourage firms from raising external finance and should induce the corporate sector largely grow from internal finance. 
Table appendix1: Despite there is a considerable variation among various countries the mean population internal finance is 38.8, while the issue of equity finance is only 39.3 and long debt provided 20.3 in world. Where as in India long-term debt is higher and equity finance is less as compared with than all other developing countries concerned with the study. It may be due to highly developed banking system in India as compared with capital market (Charian Samual 1996, Singh 1995, Sayuri Shirai 2004). 

Table 1: Financing pattern of Indian firms
Year Internal External
1986-90 31.84 68.16
1991-95 29.92 70.08
1996-00 36.92 63.1
2001-05 60.22 39.78
1985-2005 39.80952 60.19524

Sources: S E B I, R B I

The table1 shows that in between 1985 – 2005 periods the external finance contributed about 60 per cent of total finance and internal finance the remaining 40 percent, of non –governmental and non-financial companies. During the period of 1990-95 on an average external sector contributed 70 per cent of total finance, it may be due to boom in the primary market in that period. It is seen from the table that external source is more important for financing corporate sector in India during 1895-2000. In last five years the internal sources accounted for more than half of total finance of the corporate companies as a result of rise in retained earning of the firms (RBI, 2006).

Components of external finance of corporate sector
The external sources are the most important sources of finance for all industries in the country. The external source mainly consists of paid up capital, borrowing (debentures, bond and financial institutions) and trade dues and current liabilities. 
Table 2: Components of external finance of corporate sector
Year External sources Paid up capital Borrowing a) Debentures b) Bank c) F I Trade dues current liabilities
1985 58.5 3.9 31.3 10.4 11.3 3.7 23
1986 65.5 2.6 36.8 13.2 13.1 6.1 25.6
1987 70.4 3.4 40.1 13.6 14.1 8.6 26.6
1988 63.7 15.8 33.9 9.8 9.8 10 13.7
1989 70.9 7.4 37.2 4.3 19.2 9 26
1990 70.3 6.8 41.4 14.3 11.5 9.6 21.9
1991 62.4 8.7 33.1 6.5 9.7 11.9 20.3
1992 71.9 6.8 41.2 12.2 8.8 14.3 23.8
1993 73.9 22.3 37.5 7.2 12 13.8 14
1994 71.1 29.6 24 6.9 -2 7.6 17.4
1995 71.1 26.8 27.6 2.8 12.4 3.9 16.4
1996 63.4 13.9 31.4 3.5 17.7 6.1 17.9
1997 64.1 10.1 45.6 5.4 13.3 10.2 8.2
1998 66.6 7.6 45.9 12.2 10.1 10.1 12.8
1999 61.7 11 37.5 5.1 29.3 11.1 12.8
2000 59.7 21.9 20.1 3.8 8.4 5.2 17.2
2001 42.9 12.8 9.3 9.5 -0.8 -3.2 20.2
2002 34.7 10.5 8.8 -1.5 21.5 -0.7 14.3
2003 30.2 9.4 5.6 -5.6 27.1 -0.6 14.8
2004 46.6 9.3 17 -3.5 21.4 5.06 20.3
2005 44.5 10.8 15.3 -1.1 15.2 -2.6 18.5
Sources: S E B I, RBI

In table2 external sources is divided into three components a) paid up capital b) borrowings c) trade dues and current liabilities. The corporate sectors borrow either from bank, financial institutions or from stock market by issuing debentures or from all the three sources. Looking at the disaggregated data on various external funds, it is seen that bank contributed major component. The declining in external sources has been contributed by decline in the share of paid up capital and borrowing during 1996-2006. The decline in borrowing has been contributed by decline in share of debentures and financial institutions, while the share of bank remained more or less stable during the same period. Table also shows that during the first half of 1990s there is growing reliance of private corporate sector on paid up capital. The striking finding from the table is the importance of bank, trade dues and other liabilities as sources of finance. In terms of relative efficiency of the market vs bank, India’s bank stock market are small relative to the size of its economy, and the financial system is dominated by an efficient but underutilized banking sector (Franklin Allen, Rajesh Chakraborti, 2006). As rightly pointed out by Charian Samuel (1996) and Ajit Singh (1995) Indian financial system is predominantly a bank oriented one. Despite of these during this period, credit deployed by banks and financial institution were at low rate of interests. Low rate of interest made industries more depend upon the financial institutions for resource mobilization. The state promoted and regulated financial system comprising mainly of bank, AIFIs and capital market, and policies in relation to each of them seem to suggest that it could have stimulated external financing (Dennis Raja Kumar, 2001). It is possible that the requirement of large investments could also have compelled the shift from internal to external sources. 

The importance of trade credit and other current liabilities increases in the small-scale segment accounting for over half of or and almost two third of all financing for the SSI (Small Scale Industry) and SSSBE sectors respectively (Franklin Allen, Rajesh Chakraborti, 2006). Since many firms in SSSBE (Small Scale Sector Business Enterprises) sector are engaged in wholesale and retail trade, given the relative importance of current liabilities in these sectors, this finding is not too surprising.

Performance of Primary Market
In primary market, new issue of equity and debt are arranged in the form of new flotation, either publicly or privately or in the form of a rights offer to existing shareholders. Households, firms, financial institutions, who are in financial surplus, exchange their saving for shares or debentures of the companies.

Table3: New Capital Issue by non government Companies
Year Average no of Issue* Amount
1971-1975 154 72
1976-1980 176 123
1981-1985 638 988
1986-1990 371 3683
1991-1995 1205 17548
1995-2000 241 5906
2001-2004 24 6092

Sources: RBI, * It include shares, bonds and debentures
In the Primary market (both new issue and existing issue), number of issues by the corporate sector show upward trend from 154 on an average during 1970-75 and it reached the peak with an average number of issue of 1205 during 1991-1995. The table shows that after 1995 there was a sharp decline in number of issue to 241 during 1995-2000 and 24 in 2001-2004 respectively. The total capital raised was Rs 72 crores in 1971- 75, in 1991-95 it rose to Rs 17548 crores then declined in 1995-2000 to 5906 crores. In between 1971-1975 and 2000-05 average number of issue declined from 241 to 24, while amount of capital raised increased from 5906 crores to 6092 crore. It is interesting to note that this sharp decline in average number of issue did not reflected in the amount of capital raised by the corporate sector due to rise in share/debenture premium in the primary market.

New Capital Issue by the non -financial and non-governmental Companies
New issue market creates financial claims. It deals with those securities, which have been made available to public for the first time. The performance of new issue market is an indicator of how many new firms are financed by the stock market. 

Fig1: New Capital Issue by the non -financial and non-governmental Companies

Sources: SEBI, RBI

In the new issue market, there was boom in the first few years of 1990s. But after that there are a continuous fluctuation in terms of number of issue and amount raised by the corporate sector on account of inefficiency in the primary market. The number of issue of capital had gone up from 86 in 1992 to 577 in 1995 then registered a substantial decline to 22 in 2004. There is relatively small raise in the number of issues in 2004 and 2005, while the amount of capital raised are increasing at greater extent simply because of higher share/debenture premium in new issue market. It may be the due to the influence of high market capitalization of securities in the secondary market. 

Ajit Singh (1995) explains the boom in primary market in relation to the cost of equity capital. The cost of equity capital relative to that of debt became much more favorable to equities during course of 1980s, the steep rise in international interest rate as well as financial depression rise cost of debt capital. Investor’s optimism and business condition, small and young companies are likely to go to public during the hot period to take advantage of investor’s enthusiasm and firms decision is not depend on information content of initial return (Subhash Gosh.2004). The relatively high rate of interest in the banking sector in early 1990s (Parthpratim Pal, 2002) also led the firm to approach capital market to finance their investment in the early part of 1990s. During 1990s firms do not have the choice of larger number of sources, so they are depend upon second best in the underdeveloped stage of its capital and bank market. Along with this the influence of the government in 1990s also led the firm to depend more on capital market in 1990s (Agit Singh, 1995).

The decline phase of primary market there after is explained by 

a) If a company decided to go public then the average time lapsed between the offer trades and listing date being four month, the deciding to go to public has got listed only after six month (Saurabh Gosh, 2004). 

b) High cost of equity capital and declining rate of interest bank lending after banking reforms (Parthpratim Pal, 2002) encourage the corporate depend upon debt finance.

c) Bank oriented capital market system in the country like Japan and Germany and long term conduct between firms and bank also encourage the firm to depend on the bank for its finance. The repeated scams in the stock market make it as a less reliable and high risky source for financing of corporate investment activities. 

CHAPTER III

Industry-wise Classification of Capital Raised
Industry wise classification of capital raised from the primary market will help us to identify the industries, which are depend least on capital market for financing their investment during the declining phase of primary market, than compared to boom period in the primary market.  
Table 4: Industry-wise classification of capital raised  
Industries 1994-1999 2000-2005
Number Amount Number 
Amount
Banking/Financial institutions 9 2856 12 6817
Cement & Construction 9 451 3 222
Chemical 60 1087 3 168
Electronics 14 342 3 71
Engineering 23 262 42 507
Finance 163 1924 4 252
Food Processing 77 681 2 40
Healthcare 141 485 3 141
Information Technology 15 385 21 1311
Paper & Pulp 9 169 1 327
Plastic 19 84 37 37
Power 22 296 1 128
Others 208 4989 11 6079
Total 648 13970 78 16105

Sources: SEBI, RBI
(All numbers are in average)

Looking at the disaggregated data on various industries raising capital from the stock market on an average total number of issues was declined from 648 to 78 during 1994-99 and 2000-05. . It is interesting to note that average number issue was 648 during 1994-99, raised average amount of capital of 13970 crore, while the capital raised by 78 issues during 2000-05 is 16105 crores. The table also shows that there is an increase in the number of shares / debenture issued by three industries, engineering, information technology and plastic.

The literature on financing of Indian corporate sector shows that small and newly emerged companies are more depend on stock market fiancé as compared with debt finance. Financial healths of engineering and information technology industries are better as compared with other industries after reforms. In the case of these two industries accounted for not only an increase in number issue but also rise in the share premium, which may be the result healthy financial indicators of the company along with rise in the market capitalization of existing securities of the companies in the secondary market. In the case of information technology industry with an increase of only 6 issues but amount raised increased from 385 to 1311 crore. This further reduces the cost of issuing shares / debentures in the primary market. 

All data primary market shows that shows there is rise in the share premium in the primary market, which will reduce cost financing corporate from stock market, but in contrast to this firms are not depend on stock market to fiancé their investment. 

Flow of funds to corporate sector from various sectors of the economy
As pointed out by Mayer (1988), there are two sources of information for studying aggregate corporate financing pattern in different countries. The first is national flow of funds between different sector of an economy and between domestic and overseas residents. The second sources are company account that are constructed on an individual firm basis but are often aggregated or extrapolated to industry or economy levels.

Table 5: Flow of funds to corporate sector via various sectors of the economy
Year 1985-1995 Per cent of total finance
Banking 13257 29.2
O F I* 14654 32.3
Government 1081 2.3
World 2637 5.8
Household 3857 8.5
Sector n e 9275 20.4
Total 45252 100

Sources: Flow of funds account s of RBI

Table 5 shows that banking and other financial institutions account for more than 60 per cent of total flow of funds to the corporate sector during 1985-1995. Financial institutions other than banks, which account for 32.3 percent funds, flowed to the corporate sector during the same periods. The house holds sector contribution is only 8.5 per of total flow of funds to the corporate sector during 1985-1995. The flow of accounts also strengthening the argument that stock market played a limited role as an intermediary to channel the households saving to corporate sector investment.

CHAPETR IV

Flow of funds to corporate sector via corporate securities (1951-1995)

Corporate securities contributed only a small portion of total finance raised by the corporate firms before 1980. While 1980 onwards there was continuous increase in the capital mobilized by the firms through corporate securities. 

Table 6: Flow of funds to corporate sector via corporate securities (1951-1995)
Year Corporate Security (average)
1951-1955 41
1956-1960 58
1961-1965 167
1965-1970 66
1970-1975 94
1975-1980 316
1980-1985 1020
1895-1990 3631
1990-1995 24481

Sources: Flow of funds account s of RBI

Table 6 indicates that during 1975-80 capital raised by the firm through corporate securities were only 316 corers (average), while in 1990-95 it increased to 24481 corers (average). Since 1980s there was a boom in the primary market, both in terms of number of listed companies and also in capital raised through stock market by the corporate sector in India. Instrumental wise flow of funds should strengthen the argument that there was a boom in the primary market immediately after the capital market reforms. But when we look at the sector wise flow of funds banks and financial institutions accounted for more than 60 per cent (table5) of flow of funds to corporate sector during 1985 – 1995. It is also seen that even in the booming period of primary market the financial flow from households sector to corporate sector is relatively less as compared with bank and financial institutions other than bank. 
Debt Equity Ratio
Debt to equity is the ratio of total debt to total equity. It compares the funds provided by creditors to the funds provided by shareholders. Equity is defined as net worth share capital and, reserves and surplus. Total debt means both long term and short-term borrowing. As more debt is used, the debt to equity ratio will increase. Since firm incur more fixed interest obligations with debt, risk increases. On the other hand, the use of debt can help improve earnings since firm get to deduct interest expense on the tax return. 

The Debt to Equity Ratio is calculated as follows
Debt Equity Ratio = Total Debt/ Equity

Fig 2: Debt Equity Ratio (year wise debt and equity raised)

Sources: SEBI, RBI

In 1995 debt equity ratio is 1.3, but has risen to 55.3 in 2002. The debt equity ratio for Indian companies during 1995-2005 is 5.6. The last three years debt –equity ratio is 3.5 it is not due to rise in number of issues equity but due to high share premium through new issue of capital. 

Indian companies are continually relay heavily on external sources of finance averaging 60 percent during the period 1985-2006.On the other hand the amount of equity finance has been reducing continually in recent years, it will rise share of the debt in the total finance of corporate firms. Dennis Raja Kumar (2001) suggest that it was not relative cost, which induce more of equity financing but was the results of information asymmetry as seen through moral hazards, adverse selection signaling. The dependence on debt finance make India’s corporate sector vulnerable to domestic financial shocks. At macro economic level, this vulnerability stems from large fiscal deficits and sizable government debt, which has the financial potential to crowd out private investment and slow growth (Pretia Topalova, 2004). Too conclude high debt equity ratio may be a signal for future financial crisis in the corporate sector. 

CHAPTER V

Changes in Financial Assets of the Household Sector (At Current Prices)

Households constitute the primary sources for capital formation in the country. Of the saving ratio of 28.1 per cent in 2003-04 households accounted for 86.4 percent, and household sector ratio was 24.3 per cent (1993-94 base periods). Saving of the households is mainly categorized into physical saving and financial saving. Financial saving of the households is increased from 47 per cent on an average in 1980-1991 to 52 percent in 2003 (Table 4 appendix). The one of the objective of capital market reforms is to facilitate the financing of corporate sector from households saving via stock market. It is believed that stock market development will improve not only gross household saving but also change the pattern of households saving towards financial assets, particularly in shares and debentures.

Fig 3: Saving pattern of household sector

Sources: SEBI, RBI 

Fig 3 shows that financial saving as a percent of total saving has increased during 19991 to2003, but percent share of shares and debentures in financial saving is continually decreasing from 1994 to 2005. In 1994 percentage share of shares and debentures in total financial saving of the households was 13.5 per cent, while in 2004 it declined to .1 in 2004 and 1 in 2005. In 2006 there is a slight increase in share of shares and debentures in the assets basket of the households, this is attributed by high price of shares / debentures in the primary market. Since 15 years after financial liberalization households are investing in the traditional asset such as, gold bank deposit etc than riskier assets like shares or bonds.

CHAPTER VI

Conclusion

The stock market can boost economic activity through creation of new companies and liquidity (Levine and Becivenga Smith, 1996). Agarwal (2001) also suggest that in India the well stock market may be able to offer financial services other than those of the banking system and therefore provide an extra impetus to economic activity. On contrasts to this in India firms are depend less on capital market for financing their investment. Stock market finances only few new companies in recent years. In this context the argument that stock market can boost economic activity through creation of new companies is questionable. It is true that stock market provide liquidity to securities and also financial services other than those of the banking system, which facilitate growth of economic activity. It is seen in the study that the primary market securities is exhibiting certain features that limit their secondary market liquidity. a) Small size of issue b) equity ownership is highly concerted with in founders or controlling shareholders. This limiting feature are small size issue and also as find out by Franklin Allen and Rajesh Chakraborti (2006) equity ownership is highly concentrated with in founders or controlling share holders. In the long run declining new issue and concentration of equity ownership may partially limit liquidity in the secondary market. 

In India firms preference is for banks and bond finance and less on equity, lead to high debt equity ratio. As rightly said by Petia Topalova (2004), the dependence of Indian corporate sector on banks and bond finance make it vulnerable to domestic financial shocks. More over Indian companies are also depending more on short-term finance, which may also worsen the current liquidity ratio of firms.  

There is little evidence of an increase in aggregative gross domestic saving or an increasing in the proportion of financial saving as a result of growth of stock market (Nagaraj, 1996, Nagashi 1999). In this study also it is seen that percentage share of shares and debentures in financial assets of the households is continually declining after 1994 to till recently. The recent increase in the capital raised from the stock market is mostly due rise in share premium in the primary market, so it cannot be accounted as improvement in primary market. The small size of issue in the primary market and declining trend of shares and debentures in the financial assets holding pattern of the households rightly indicating that stock market played a limited role in mobilizing households saving to finance corporate investment.

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