Capital Market 2

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What is Capital Market

A capital market is simply any market where a

government or a company can raise money

(capital) to fund their operations and long

term investment.

Capital Market is characterized as the provider

of long-term financing.


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The capital market is a market for financial

assets which have a long or indefinite

maturity. Unlike money market

instruments the capital market intruments

become mature for the period above one year.

It is an institutional arrangement to borrow

and lend money for a longer period of time. Itconsists of financial institutions like IDBI, ICICI,

UTI, LIC, etc.


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Why Capital Markets Exist

Capital markets facilitate the transfer of capital

(financial) assets from one owner to another.

They provide liquidity.Liquidity refers to how

easily an asset can be transferred without loss

of value.

A side benefit of capital markets is that the

transaction price provides a measure of the

value of the asset


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Indian Capital Market Historical

perspective

Stock Market was for a privileged few

Lack of Transparency - High tones costs

No use of TechnologyOutdated banking system

Volumes - less than Rs. 300 cr per day


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Indian Capital markets -Chronology

1994-Equity Trading commences on NSE

1995-All Trading goes Electronic

1996- Depository comes in to existence1999- FIIs Participation- Globalisation

2000- over 80% trades in Demat form

2003- T+2 settlements in all stocks


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Factors contributing to growth

of Indian Capital Market

Establishment of Development banks & Industrialfinancial institution.

Legislative measures Growing public confidence

Increasing awareness of investment opportunities

Growth of underwriting business

Setting up of SEBI Mutual Funds

Credit Rating Agencies


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Capital Markets - Reforms

Each scam has brought in reforms - 1992 /

2001

Screen based Trading through NSE

Dematerialization of Shares - risks of fraudulent

paper eliminated

Entry of Foreign InvestorsIntroduction of Derivative products - Stock

Futures &Options


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Significance, Role or Functions of

Capital Market

Mobilization of Savings

Capital Formation

Speed up Economic Growth and Development Proper Regulation of Funds

Continuous Availability of Funds


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Capital market instruments

Debt Instruments

Equities

Preference Shares Derivatives


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Primary Market

The primary market is also known as the newissues market. It deals with new securities beingissued for the first time. The investors in thismarket are banks, financial institutions, insurance

companies, mutual funds and individuals. A company can raise capital through the primary

market in the form of equity shares, preferenceshares, debentures, loans and deposits. Funds

raised may be for setting up new projects,expansion, diversification, modernisation ofexisting projects, mergers and takeovers etc.


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Role of Primary Market

Capital formation - It provides attractive issue to the potentialinvestors and with this company can raise capital at lower

costs.

Liquidity - As the securities issued in primary market can be

immediately sold in secondary market the rate of liquidity ishigher.

Diversification - Many financial intermediaries invest in

primary market; therefore there is less risk if there is failure in

investment as the company does not depend on a single

investor. The diversification of investment reduces the overall

risk.

Reduction in cost - Prospectus containing all details about the

securities are given to the investors hence reducing the cost is

searching and assessing the individual securities.


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Features of Primary Market

It is the new issue market for the new long term

capital.

Here the securities are issued by companydirectly to the investors and not through anyintermediaries.

On receiving the money from the new issues, thecompany will issue the security certificates to theinvestors.

The amount obtained by the company after thenew issues are utilized for expansion of thepresent business or for setting up new ventures.


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Prerequisites for Investor to Participate in

Primary market Activities:

PAN Number

Bank Account Demat Account


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Types of issues Public issues can be classified into 3 types:

Initial Public Offering (IPO) Fresh issue of shares or

selling existing securities by an unlisted company for

the first time is known as IPO. Listing and trading of

securities of a company takes place in IPO.

Rights Issue Rights issue is when the listed company

issues new securities and provides special rights to its

existing shareholders for buying the securities before

issuing it to public. The rights are issued on particular

ratio based on the number of securities currently held

by the share holder.


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Preferential Issue It is the fresh issue of

securities and shares by listed company. It is

called as preferential as the shareholders with

preferential shares get the preference when itcomes to dividend disbursement.


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Benefits

Price manipulation is very less in primary

market compared to secondary market.

There is no payment of brokerage, transaction

fees, and stamp duty or service tax.

Investors get the shares at same prices so

market fluctuations do not affect


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Disadvantages

Money is locked in for longer time, as it is a

long term investment.

The shares allotment for the investor takes

few days in primary market compared to

secondary.


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Secondary Market

The secondary market is also known as the stockmarket or stock exchange. It is a market for thepurchase and sale of existing securities. It helps

existing investors to disinvest and fresh investorsto enter the market. It also provides liquidity andmarketability to existing securities. It alsocontributes to economic growth by channelising

funds towards the most productive investmentsthrough the process of disinvestment andreinvestment


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Securities are traded, cleared and settled

within the regulatory framework prescribed

by SEBI. Advances in information technology

have made trading through stock exchangesaccessible from anywhere in the country

through trading terminals. Along with the

growth of the primary market in the country,the secondary market has also grown

significantly during the last ten years.

R t D l t i C it l


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Recent Developments in Capital

Market of India

Establishment of SEBI -

The main functions of SEBI are:- To regulate the business of the stock market and other

securities market.

To promote and regulate the self regulatory organizations. To prohibit fraudulent and unfair trade practices in

securities market.

To promote awareness among investors and training ofintermediaries about safety of market.

To prohibit insider trading in securities market.

To regulate huge acquisition of shares and takeover ofcompanies


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Establishment of Creditors Rating Agencies

Candid Performance of Indian Economy (FII

FDI etc)

Rising Electronic Transactions

Growing Mutual Fund Industry

Growing Stock Exchanges Investor's Protection


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Growth of Derivative Transactions

Commodity Trading


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Corporations have five primary methods

which are used to raise funds in capital

market. 1) Issue of bonds : - Bond is an amount of money

which has to be given at a certain date or dates in

future. Bondholders receive interest payments atfixed rate and specific dates. Corporate issuesbonds because interest rates which must payinvestors are lower than rates of borrowing andholders can sell bonds to someone else beforethey due.


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2) Issue of preferred stock : - company choose

this to raise capital. If a company have

financial trouble the buyers of shares gets

special status. If profits are limited thenowners will be paid the dividend after

bondholders receive the interest payments.


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3) Sell of common stock : - if financial condition of the

company is good then it can raise the capital issue the

common stock. Bank helps the companies to do theinvestment and issue stock. Investors gets interested

if the company pays large dividends and offers steady

income. Value of shares increases if investor expects

the corporate earning to rise.

4) Borrowing:- companies used to raise short term

capital by getting the loans from banks or other

sources. After good market run the profits which the

company gets can be used to finance their operating

by retaining their earnings.

Capital Market 2

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