CAREER OPPORTUNITIES IN CAPITAL MARKETS FOR LAWYERS IN INDIA
By Preety Makkar
The Capital Market is a market for financial investments that are direct or indirect claims to capital. It is wider than the Securities Market and embraces all forms of lending and borrowing, whether or not evidenced by the creation of a negotiable financial instrument. The Capital Market comprises the complex of institutions and mechanisms through which intermediate term funds and long term funds are pooled and made available to business, government and individuals. The Capital Market also encompasses the process by which securities already outstanding are transferred.
India’s capital markets are among the most developed and efficient in the world. The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are among the fastest in the world in terms of transaction time, which makes India among the top globally when it comes to volume of trades in its capital markets.
The lifeblood of the capital markets is the banking sector, which in India has got a major shot in the arm with the Jan Dhan Yojana and the November 2016 demonetization process, which further compelled more Indians to appreciate the benefits of having a bank account. Stock markets are mostly associated with risk by a majority of Indians, therefore, only a fraction of India’s households invest in the stock markets. The Indian capital market mainly thrives on long term loanable funds as distinct from money market which deals in short-term funds. Capital market loans are used by industries primarily for fixed investment.
The capital market in India includes mainly the following institutions since the supply of funds for capital markets comes largely from these organisations;
(i) Commercial Banks
(ii) Insurance Companies (LIC and GIC)
(iii) Specialised financial institutions like IFCI, IDBI, ICICI, SIDCS, SFCS, UTI etc.
(iv) Provident Fund Societies
(v) Merchant Banking Agencies
(vi) Credit Guarantee Corporations
Individuals who invest directly on their own in securities are also suppliers of fund to the capital market.
There are two types of capital markets – the primary capital market, and the secondary capital market. In the primary market, investors buy securities directly from the company issuing them, while in the secondary market, investors trade securities among themselves, and the company with the security being traded does not participate in the transaction.
Thus, like all the markets the capital market is also composed of those who demand funds (borrowers) and those who supply funds (lenders). An ideal capital market at tempts to provide adequate capital at reasonable rate of return for any business, or industrial proposition which offers a prospective high yield to make borrowing worthwhile.
Since independence, the Indian capital market has made widespread growth in all the areas as reflected by increased volume of savings and investments. In 1951, the number of joint stock companies (which is a very important indicator of the growth of capital market) was 28,500 both public limited and private limited companies with a paid up capital of Rs. 775 crore, which in 1990 stood at 50,000 companies with a paid up capital of Rs. 20,000 crore. 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 financial market in India was highly segmented until the initiation of reforms in 1992-93 on account of a variety of regulations and administered prices including barriers to entry. The reform process was initiated with the establishment of Securities and Exchange Board of India.
Financial Intermediaries which shaped the Present Day Capital Markets
The following financial intermediaries have changed the way the Indian economy and its banking sector operates, thereby also creating the need for appropriate types of legal professionals to advise respective stakeholders in each of such intermediaries, since such operations involve a fair amount of monetary risk. These intermediaries are largely regulated by the Securities Exchange Board of India (SEBI), and the market is presently open to all kinds of legal professionals which practice and provide expert advisory on SEBI's various rules, guidelines and bye-laws. Besides these, the applicable laws prescribed by the Reserve Bank of India (RBI) also need to be adhered to by entities intending to operate in the sector.
Merchant Banking
Merchant bankers are financial intermediaries between entrepreneurs and investors. Merchant banks may be subsidiaries of commercial banks or may have been set up by private financial service companies or may have been set up by firms and individuals engaged in financial up by firms and individuals engaged in financial advisory business. Merchant banks in India manage and underwrite new issues, undertake syndication of credit, advice corporate clients on fund raising and other financial aspects.
Since 1993, merchant banking has been statutorily brought under the regulatory framework of the Securities Exchange Board of India (SEBI) to ensure greater transparency in the operation of merchant bankers and make them accountable. The RBI supervises those merchant banks which were subsidiaries, or are affiliates of commercial banks.
Leasing and Hire-Purchase Companies
Leasing has proved a popular financing method for acquiring plant and machinery specially or small and medium sized enterprises. The growth of leasing companies has been due to advantages of speed, informality and flexibility to suit individual needs.
Mutual Funds
These are pooling of savings by a number of investors-small, medium and large. The corpus of fund collected becomes sizeable which is managed by a team of investment specialists backed by critical evaluation and supportive data. A mutual fund is fairly secure and does not essentially rely on the investor’s knowledge and awareness. It attempts to optimise high return, high safety and high liquidity trade off for maximum of investor’s benefit. It is one of the most pivotal capital market institutions in the present day market. Several public sector banks and financial institutions set up mutual funds on a tax exempt basis to attract strong investor support.
Global Depository Receipts (GDR)
Since 1992, the authorities have allowed foreign investment in Indian securities through the issue of Global Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs).
Venture Capital Companies (VCC)
The aim of venture capital companies is to give financial support to new ideas and to introduction and adaptation of new technologies. They are of a great importance to technical entrepreneurs who have technical competence and expertise but lack venture capital. Financial institutions generally insist on greater contribution to the investment financing, in which technocrat entrepreneurs can depend on venture capital companies. Venture capital financing involves high risk.
Other New Financial Intermediaries
Besides the above given institutions, the government has established a number of new financial intermediaries to serve the increasing financial needs of commerce and industry is the area of venture Capital, credit rating and leasing etc.
(i) Technology Development and Information Company of India (TDICI) Ltd., a technology venture finance company, which sanctions project finance to new technology venture since 1989.
(ii) Risk Capital and Technology Finance Corporation (RCTFC) Ltd., which provides risk capital to new entrepreneurs and offers technology finance to technology-oriented ventures since 1988.
(iii) Infrastructure Leasing and Financial Services (IL&FS) Ltd., set up in 1988 focuses on leasing of equipment for infrastructure development.
(iv) The credit rating agencies namely credit rating information services of India (CRISIS) Ltd., setup in 1988; Investment and Credit Rating Agency (ICRA) setup in 1991, and Credit Analysis and Research (CARE) Ltd., setup in 1993 provide credit rating services to the corporate sector.
(v) Credit rating promotes investors interests by providing them information on assessed comparative risk of investment in the listed securities of different companies. It also helps companies to raise funds more easily and at relatively cheaper rate if their credit rating is high.
(vi) Stock Holding Corporation of India (SHCIL) Ltd., setup in 1988, with the objective of introducing a book entry system for transfer of shares and other type of scrips thereby avoiding the voluminous paper work involved and thus reducing delays in transfers.
Career Prospects
With such complex and diverse operations and options in the capital markets, there is a wide variety of roles that lawyers can assume to contribute their skills in present day capital markets. These skills can be broadly categorized in the following heads:
1. Advisory, Research & Consultation – A wide variety of advisory, research and consultation can be provided by lawyers to firms and organisations dealing in Investment Banking, Private Equity, Financial Research, Audits, Tax Consultancies. These services are considered to be highly specialized and are valued quite well in the industry. Furthermore, with the advent of foreign consulting companies and given the global utilisation of such services, the lawyers in India are being outsourced prestigious and rewarding assignments from abroad in large numbers. This also involves drafting of complex and intricate agreements to facilitate securities trades.
2. Litigation – With new laws and forums coming into place to address the dynamic capital markets, lawyers have various avenues to contribute their skills and acumen. Various laws associated to the market such as Securities Contracts (Regulation) Act, 1956; SEBI Act, 1992; Depositories Act, 1996; Prevention of Money Laundering Act, 2002; Companies Act, 2013 and several others, have led legal professionals now to develop expertise in specific fields of such laws and forums.
3. Managerial – Managerial positions in financial companies or firm, whereby daily legal checks and balances, and compliances in tandem with the relevant SEBI and RBI guidelines have to be ensured by legally competent executives.
4. Entrepreneurship – The most inviting aspect of both financial and legal sector ventures is that both can be started within a very limited capital structure, which has today encouraged thousands of professionals to initiate their own financial advisory/trading venture.
5. Service – Banking Job in private or govt. banks, or even join Central Govt. Services such the Indian Revenue Service or Indian Economic Service, having cleared the Union Public Service Commission Examination.
References
1. https://www.bloombergquint.com/opinion/2017/04/28/sensex-at-30000-are-indias-capital-markets-a-boon-or-bane-for-the-economy
2. http://www.yourarticlelibrary.com/economics/market/indian-capital-market-classification-and-growth-of-indian-capital-market/23476/
3. https://www.icsi.edu/Docs/Webmodules/Publications/CM&SL%20Final%20PDF.pdf
4. https://www.ipe.com/developing-indias-capital-markets/28411.fullarticle
5. https://blog.ipleaders.in/10-fundamental-principles-securities-laws-every-indian-businessman-know/