Chap 1 Capital Market

8/14/2019 Chap 1 Capital Market

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Chapter 1. Capital Market


MEANING OF CAPITAL MARKET

The capital market is a market for financial assets which have a long or indefinite maturity. Generally, it deals with long term securities which have a maturity

period of above one year.

The capital market is the market for securities, where companies andgovernments can raise long term funds. It is a market in which money is lend for

periods longer than a year. The capital market includes the stock market and the bondmarket.

Capital market may be further divided into three types:-1. Industrial securities market2. Government securities market

3. Long term loan market

1. Industrial securities market:

its a market for industrial securities namely 1 st equity share, 2 nd preferenceshares, 3 rd debenture & bond. It is a market where industrial concern raises their capital issuing appropriate instrument. It can be further subdivided into two they are,

1st Primary Market2nd Secondary Market

1 Primary Market:

Primary market is market for new issue or new financial claim & it isalso called new issue market. The primary market deals with those securitieswhich are issued to the public for the 1 st time. In the primary market, borrower exchange new financial securities for long term funds. Thus primary marketfacilitates capital formation.

There are three ways by which a company may raise a capital in primary market. They are Public issue, Right issue, and Private placement .

2 Secondary Markets:-

Secondary Market is a market for secondary sale of security . In other word, securities which have already passed through the new issue market aretrade in this market. It provide continues and regular market for buying andselling of securities. The stock exchange in India is regulated under thesecurities Act, 1956.

2. Government Securities Market:

It is also known as Gilt-Edged Securities Market. In this, governmentsecurities are traded. In India, there are many kind of government security.

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Short term Long term

Long term securities are traded in this market while short term securities aretraded in the money market.

The Government securities are in many forms:

a) Stock certificates or inscribed stock.b) Promissory notesc) Bearer bonds which can be discounted.

Government securities are traded through the public debt office of the RBI.This market also plays a wide role in the monetary management.

3. Long Term Loan Market:

Development banks and commercial banks play a significant role in this market bysupplying long term loans to corporate customers. Long term loans market may

further be classified into:

Term loans market

Mortgages market

Financial Guarantees market

Term Loans MarketIn India, many industrial financing institutions have been created by the Government

both at the national and regional levels to supply long term and medium term loans

to corporate customers directly as well as indirectly . These development banks

dominate the industrial finance in India. Institutions like IDBI, IFCI, ICICI, and other

state financial corporations come under this category. These institutions meet the

growing and varied long-term financial requirements of industries by supplying long

term loans. They also help in identifying investment opportunities, encourage new

entrepreneurs and support modernization efforts.

Mortgage market: A mortgage loan is a loan against the security of immovable property like

real estate. The transfer of interest in a specific immovable property to secure

loan is called mortgage. This mortgage may be equitable mortgage or legal

one. It may be a first charge or second charge.

Equitable mortgage is created by a more deposit of title deeds to properties

as security where as in the case of legal mortgage the title in the property is

legally transferred to the lender by the borrower. Legal mortgage is less risky.



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In the first charge , the mortgager transfers his interest in the specific property

to the mortgager as security.

When the property in question is already mortgaged once to another creditor,

it becomes a second charge when it is consequentially mortgaged to somebodyelse. The mortgage can also further transfer his interest in the mortgaged

property to another. In such a case it is called a sub-mortgage .

The mortgage market may have primary market as well as secondary market.

The primary market consists of original extension of credit and secondary

market has sales and resale of existing mortgages at prevailing prices.

In India, residential mortgages are the most common ones.

The housing and urban development corporation (HUDCO) and the LIC playa dominant role in financing residential projects. besides, the land

development banks provide cheap mortgage loans for the development lands,

purchase of equipment etc. These development bank raise finance through the

sale of debenture which are treated as trustee securities.

Financial Guarantees Market:

A Guarantee market is a centre where finance is provided against the guarantee of a

reputed person in the finance circle . Guarantee is a contract to discharge theliability of their party in case of his default. Guarantee acts as security from the

creditors point of view. In case the borrower fails to replay the loan. The liability

falls on the shoulders of guarantor. Hence the guarantor must be known to both the

borrower and the lender and he must have the means to discharge his liability.

Though there are many types of guarantee, the common from are:

(1) performance guarantee: performance guarantee cover the payment of earnest money , retention

money , advance payments, non completion of contracts etc.

(2) Financial guarantees:

On the other hand financial guarantees cover only financial contracts. In India,

the market for financial guarantees covers only financial contracts.

In India, the market for financial guarantees is well organized. The financial

guarantees in India relate to:



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directions to the flow of funds and bringrational allocation of scarce resources.

Moreover, it serves as an important sourcefor technological up gradation in theindustrial sector by utilizing the fundsinvested by the public.

MONEY MARKET

Money market is a market for dealing with financial assets and securities which havea maturity period of up to one year. In other words, it is a market for purely short termfunds. The money market may be subdivided into four. they are following as :-

1. Call money market.2. Commercial hills market.3. Treasury bills market.4. Short term loan market.

1. Call money market:-The call money market is a market for extremely short period

loans say one day to fourteen days . So, it is a highly liquid. the loans are repayableon demand at the option of either the lender or the borrower. In India, call moneymarkets are associated with the presence of stock exchange. Hence, they are locatedin major industrial towns like Bombay, Calcutta, madras, delhi ,ahemdabad etc.

2. Commercial bills market:-It is a market for bills of exchange arising out of

genuine trade transactions . In the case of credit sale ,the seller may draw a bill of exchange on the buyer. The buyer accepts such a bill promising to pay at a later datespecified in the bill. The seller need not wait until the due date of the bill. Instead ,hecan get immediate payment by discounting the bill.

3. Treasury bill market:-It is a market for treasury bills which have short term maturity.

A treasury bill is a promissory note or a finance bill issued by the government .it is ahighly liquid because its repayment is guaranteed by the government .It is animportant instrument for short term borrowing of the government.

4.Short term loan market :-It is a market where short term loans are given to

corporate customers for meeting their working capital requirement. Commercial banks play a significant role in this market. Commercial banks provide short termloans in the form of cash credit and overdraft . Overdraft facility is mainly given to



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business people where as cash credit is given to industrialists .Overdraft is purelya temporary accommodation and it is given in the current account itself. But cashcredit is for a period of one year and it is sanctioned in a separate account .

RECENT TRENDS IN INDIAN CAPITAL MARKET

The Indian capital market, which has a long history spanning over 100 years is

currently passing through the Indian capital market witnessed. Some significant

changed during the eighties, both the primary and secondary segments continues to

suffer from some serious deficiencies. Many unhealthy practices prevailed in the

primary market to attract the retail investors. Although over the years, a number of

agencies came into existence offering different types of services in connection with

the new issues of capital. The problems were even more serious in the secondary

market. The general functioning of stock exchanges was not satisfactory. The

exchanges were governed by their internal bye-laws and managed by their governing

bodies. Insider trading was one of the major causes of excessive speculative activity,

leading to default by stock brokers, frequent payment cries and disruption of market

activity.

POLICY DEVELOPMENT IN PRIMARY MARKET

SEBI stipulated the requirements of issue size, subscription to the issue and

disclosure to be made in the prospectus of Issue. Such as general information,

disclaimer clause, offering details, Risk factors and financial information

among other requirements.

Listed companies have to maintain a minimum level of public shareholding at

25% of the share issued.

SEBI facilitated a quick & cost effective method of raising funds termed as

qualified institutional placement.

SEBI protected the interest of investors & improving the level of investors and

given guidelines to introduce Restriction on pre-issue publicity from the

time the Issuer co.s board approves the Issue till the actual allotment of shares

of the issue.

MEASURES UNDERTAKEN IN THE AREA OF SECONDARY MARKET



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The stock exchanges were advised to update the applicable value at risk

margin at least 5 times in a day. By closing price of the previous day at the

start of trading at 11:00 a.m., 12:30 p.m., 2:00 p.m. & at the end of the tradingsession.

Initial issue expenses and dividend distribution procedure for mutual funds

were rationalized.

Mutual funds were permitted to introduce gold exchange traded funds.SEBI

stipulated that the BSE limited would set up and maintain the corporate bond

reporting platform.

Government of Indias policy on foreign investments in infrastructure

companies in the Indian securities market

The trading time has been increased by one hour i.e. from 9a.m. to 3.30

p.m


Chap 1 Capital Market

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