Capital Markets

PRIMARY MARKET

It is the new issue market for the new long term capital.

Here the securities are issued by company directly to the investors

On receiving the money from the new issues, the company will issue the security certificates to the investors.

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

Role of Primary Market

Capital formation Liquidity DiversificationReduction in cost

Types of issues

• Initial Public Offering (IPO)• Rights Issue• Preferential Issue

Advantages

• Raising capital for business.• Mobilising savings• Government can raise capital through sale of

Treasury bonds• Open market operation to effect monetary

policy of the government• It is a vehicle for direct foreign investment.

Secondary Markets

financial market for trading of securities that have already been issued in an initial private or public offering

securities are sold by and transferred from one investor or speculator to another.

It should be highly liquid and transparentEg. market for long term securities like bonds,

equity stocks and preferred stocks, debentures

Regulatory Framework

A comprehensive legal framework was provided by the: Securities Contract Regulation Act, 1956 and the

Securities and Exchanges Board of India Act, 1992. A three tire regulatory structure comprising • the Ministry of Finance, • the Securities and Exchanges Board of India • the Governing Boards of the Stock Exchanges

regulates the functioning of stock exchanges

Functions of secondary markets

Raising capital for industries• The negotiability and transferability of the securities helps the companies to raise long-term fund

• Easy trade encourages investors to subscribe to IPO – stimulates capital formation

To maintain active trading• price vary from transaction to transaction• increases liquidity and marketability

Fixation of prices• Demand and supply

To ensure safe and fair dealing• rules, regulations and by-laws of the stock exchanges

Dissemination of Information• publication by stock exchanges• Handouts, handbooks and pamphlets provide information regarding the functioning of the stock

exchanges.

to maintain healthy performance of corporate sector

• The prices of stock reflect the performance of the traded companies

• makes corporate firms concerned abt improving performance

Instruments

• Equity Shares• Rights Issue/ Rights Shares• Bonus Shares• Preferred Stock/ Preference shares• Cumulative Preference Shares• Cumulative Convertible Preference Shares• Bond• Debentures• Commercial Paper• Treasury Bills

• Equity Shares: - commonly referred to as ordinary share -represents the form of fractional ownership in

which a shareholder undertakes the maximum entrepreneurial risk associated with a business venture.

- The holders of such shares are members of the company and have voting rights.

• Rights Issue / Rights Shares: The issue of new securities to existing

shareholders at a ratio to those already held.• Bonus Shares: Shares issued by the companies to their

shareholders free of cost by capitalization of accumulated reserves from the profits earned in the earlier years.

• Preferred Stock / Preference shares: Owners of these kinds of shares are entitled to a

fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share.

They also enjoy priority over the equity shareholders in payment of surplus.

But in the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders / debenture holders.

• Cumulative Preference Shares: A type of preference shares on which dividend

accumulates if remains unpaid. • Cumulative Convertible Preference Shares: A type of preference shares where the dividend

payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company.

• Government securities (G-Secs): These are sovereign (credit risk-free) coupon

bearing instruments which are issued by the RBI on behalf of Government of India, in lieu of the Central Government's market borrowing programme.

These securities have a fixed coupon that is paid on specific dates on half-yearly basis. These securities are available in wide range of maturity dates, from short dated (less than one year) to long dated (up to twenty years).

• Debentures: Bonds issued by a company bearing a fixed

rate of interest usually payable half yearly on specific dates and principal amount repayable on particular date on redemption of the debentures.

Debentures are normally secured / charged against the asset of the company in favour of debenture holder.

• Debentures: Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on particular date on redemption of the debentures. Debentures are normally secured / charged against the asset of the company in favour of debenture holder.

• Bond: A negotiable certificate evidencing indebtedness. It is

normally unsecured. A debt security is generally issued by a company,

municipality or government agency. A bond investor lends money to the issuer and in

exchange, the issuer promises to repay the loan amount on a specified maturity date.

The issuer usually pays the bond holder periodic interest payments over the life of the loan. The various types of Bonds are as follows-