CAPITAL

MARKET

CAPITAL MARKET
The

market where investment

instruments like bonds, equities
and mortgages are traded is
known as the capital market.
The primal role of this market is to
make investment from investors
who have surplus funds to the
ones who are running a deficit.

The capital market offers both long

term and overnight funds.
The
different types of financial
instruments that are traded in the
capital markets are:
> equity instruments
> credit market instruments,
> hybrid instruments and
> derivative instruments.

History of Capital Markets

The Real Merchants of Venice 1300

The First Stock Exchange -Sansthe
Stock Antwerp, Belgium 1531
All Those East India Companies 1600
A Little Stock With Your Coffee?
The South SeasBubble Bursts
The New York Stock Exchange - 1773

Nature of capital market

The nature of capital market is brought
out by the following facts:
It Has Two Segments
It Deals In Long-Term Securities
It Performs Trade-off Function
It Creates Dispersion In Business
Ownership
It Helps In Capital Formation
It Helps In Creating Liquidity

Money Market Vs
Capital
Market
It is for long
It is for short

term
Supplies funds
for WC
Instruments are
T-bill, CP, etc
Each single
instrument is of
large amount

term
Supplies funds
for fixed capital
requirement
Instruments are
shares,
debentures,
etc.
Each single

Conti..

Transactions
are on over
phone and no
formal place
Transaction
without the
help of broker.

Transactions
are at formal
place. Eg stock
market.
Transaction
have to be
conducted with
the help of
broker.

Types of capital market

There are two types of capital
market:
Primary market,
Secondary market

Primary Market
It is that market in which
shares, debentures and other
securities are sold for the first
time for collecting long-term
capital.
This market is concerned with
new issues. Therefore, the
primary market is also called
NEW ISSUE MARKET.

In this market, the flow of funds is

from savers to borrowers (industries),
hence, it helps directly in the capital
formation of the country.
The money collected from this
market is generally used by the
companies to modernize the plant,
machinery and buildings, for
extending business, and for setting
up new business unit.

Features of Primary
Market
It Is Related With New Issues

It Is Related With New Issues

It Has No Particular Place
It Has Various Methods Of Float Capital:
Following are the methods of raising
capital in the primary market:
i) Public Issue
ii) Offer For Sale
iii) Private Placement
iv) Right Issue
v) Electronic-Initial Public Offer
It comes before Secondary Market

Public issue through Prospectus

Invitation for subscription by

investing public
Direct offer
Known as offer document
Is underwritten(for a reason?)
Prospectus contain information
relating???????
Abridged prospectus

Advantages of public issue through

prospectus

Transparency
Company gets publicity
Allotted on non-discriminatory basis

Drawbacks
Mode of issue expensive
Floating cost-ex underwriting
expense
Administrative cost-cost of printing
prospectus
Publicity cost
Legal cost-registration fees

Private placement

Securities are offered to selected big

institutional clients only.

advantages

Private placements offer small

businesses a number of advantages
over IPOs.
Detail compliance not required
Do not require the assistance of brokers
or underwriters, they are considerably
less expensive and time-consuming.
Private placements may be the only
source of capital available to risky
ventures or start-up firms.

Drawbacks

Suitable investors may be difficult to

locate
Does not generate confidence
Fear of issue getting concentrated in
few hands

Right issues
A rights issue is an issue of rights to
buy additional securities in a company
made to the company's existing
security holders.
companies opt for a rights issue????
problems raising equity capital from the
general public and choose to ask their
existing shareholders to buy more shares
Create goodwill

Rules regarding right issue

Listed companies
By issuing a circular to existing
shareholders
Option with the shareholder

Merits of right issue

Economical of raising fresh capital

method
Management of applications and
allotment lot easier
existing shareholders earn the first
right to share prosperity

Demerits

Can be used only by existing

companies

Free pricing regime

Before 1992,Regulator of new issues was CCI

(Controller of Capital Issues)

Approval from CCI for raising funds in primary

mkt.

Timing, quantum ,and pricing of the issue were

decided by the controller
New companies could issue at par

Existing companies with substantial reserves

could issue shares at premium

Free price mechanism resulted in under pricing

of many issues

After 1992, promoter and merchant banker

together decide the price of the issue.

Fixed price mechanism of new

issue
To

offer share at a fixed price

Firm and merchant banker decide an offer
price
Investor opinion wasnt considered while
setting offer price
Long time lag among the date of pricing,
the date issue opens ,and the date when
trading commences.

Book building

During the IPO or FPO, the company offers

its shares to the public either at fixed price
or offers a price range, so that the
investors can decide on the right price.

The method of offering shares by providing

a price range is called as book building
method

Demand for shares at various price acts as

an important input to arrive at an offer
price

example

A price discovery method. In this

method, the company doesn't fix up
a particular price for the shares, but
instead gives a price range,
e.g. Rs 100-120.

Based on the demand and supply of

the shares, the final price is fixed.

The lowest price (Rs 100) is known as

the floor price

highest price (Rs 120) is known as

cap price.

The price at which the shares are

allotted is known as cut off price.

For e.g if the cut off in the above example is

fixed at Rs 110, those who bid at Rs 100, will
have to pay Rs 10 per share and those who bid
at Rs 120, will end up getting the refund of Rs
10 per share.

Once each investor pays the actual issue price,

the shares are allotted.

Company issuing securities through bookbuilding process is required to issue a red

herring prospectus.

Application supported by blocked

amount(ASBA)

Alternate payment system for book

building
Instead of full advance payment the
amount retains in bank account till
complete allotment
Self certified syndicate bank offers
the facility of ASBA

Reverse book building

Share holders are asked to bid for the

prices at which they are willing to offer
their shares
Reverse book is done for those companies
who want to delist their shares or buy
back shares from shareholders
Delisting means permanent removal of
securities of a listed company from a
stock exchange

QIB

Qualified institution buyer is a public

financial institution or a commercial
bank or a mutual fund or FII OR
venture capitalist or an insurance
company or any other such body
corporates who applies or bids for
securities

Anchor investor

These are QIB making an application

for a large value (10 crore or more)
through the book building process
For a reason?????????/
They help arriving at an approximate
benchmark price for shares and
create confidence in retail investors

Retail investor

Who applies or bids for securities of

a company for a value of not more
than 1 lakh. If he bids more than
1lakh he will be termed as non
institutional buyer

American Depositary Receipt

A negotiable certificate issued by a U.S. bank

representing a specified number of shares (or
one share) in a foreign stock, which gets traded
on a U.S. exchange.

Shares of many non-US companies trade on

US stock exchanges through ADRs.

ADRs are denominated and pay dividends in

US dollars and may be traded like regular
shares of stock.

Global Depositary Receipt

????????????
A bank certificate issued in more than one
country for shares in a foreign company.
The shares are held by a foreign branch of
an international bank. The shares trade as
domestic shares, but are offered for sale
globally through the various bank branches.

A financial instrument used by private

markets to raise capital denominated in
either U.S. dollars or euros.

These instruments are called EDRs when

private markets are attempting to obtain
euros.

CAPITAL MARKET REFORMS IN

INDIA

The 1990s have witnessed the

emergence of the securities market
as a major source of finance for trade
and industry in India.
A growing number of companies
have been accessing the securities
market rather than depending on
loans from financial institutions /
banks.
The corporate sector is increasingly

The Securities and Exchange Board of

India was set up in early 1988 as a
non-statutory body under an
administrative arrangement. It was
given statutory powers in January
1992 through the enactment of the
SEBI Act, 1992 for regulating the
securities market. The two objectives
mandated in the SEBI Act are
investor protection and orderly
development of the capital market.

The Capital Issues (Control) Act, 1947 was

repealed in May 1992, allowing issuers of
securities to raise capital from the market
without requiring the consent of any
authority either for floating an issue or
pricing it. Restrictions on right and bonus
issues were also removed. The interest
rate on debentures was freed. However,
the new issue of capital has now been
brought under SEBIs purview and issuers
are required to meet the SEBI guidelines
for disclosure and investor protection,
which are being strengthened from time
to time to protect investor interest.

The requirement to issue shares at a

par value of Rs 10 and Rs 100 was
withdrawn. This gave companies the
freedom to determine a fixed value
per share. This facility is available to
companies which have dematerialized
their shares. Moreover, the shares
cannot be issued in the decimal of a
rupee. The companies which have
already issued shares at Rs 10 or Rs
100 per value also eligible for splitting
and consolidating the share values.

To reduce the cost of issue, underwriting by

issuer was made optional, subject to the
condition that if an issue was not
underwritten and in case it failed to secure
90 per cent of the amount offered to the
public, the entire amount so collected would
be refunded.
Merchant bankers are prohibited from
carrying on fund based activities other than
those related exclusively to the capital
market. Multiple categories of merchant
bankers have been abolished and there is
only one entity, the merchant banker.

One of the significant steps towards

integrating the Indian capital market
with the international capital markets
was the permission given to foreign
institutional investors such as mutual
funds, pension funds, and country
funds, to operate in the Indian market.
Foreign institutional investors were
initially allowed to invest only in equity
shares; later, they were allowed to
invest in the debt market, including
dated government securities and
treasury bills.

Indian companies have also been allowed

to raise capital from the international
capital markets through issues of Global
Depository Receipts, American Depository
Receipts, Foreign Currency Convertible
Bonds (FCCBs) and External Commercial
Borrowings (ECBs). Companies were
permitted to invest all ADR / GDR
proceeds abroad. Two way fungibility was
announced for ADRs/ GDRs in 2000-01 for
persons residing outside India. Converted
local shares could be reconverted into
ADRs / GDRs while being subject to
sectoral caps wherever applicable.

Besides merchant bankers, various other

intermediaries such as mutual funds,
portfolio managers, registrars to an issue,
share transfer agents, underwriters,
debentures trustees, bankers to an issue,
custodian of securities, venture capital
funds and issues have also been brought
under the purview of SEBI.
It is mandatory for listed companies to
announce quarterly results. This enables
investors to keep a close track of the
scrips in their portfolios. The declaration of
quarterly results is in line with the practice
prevailing in the stock market in developed
countries.

To check price manipulation

mandatory client code and minimum
floating stock for continuous listing
were stipulated in November 2001.
The government amended the
Securities Contracts (Regulation)
Rules, 1957 to standardize listing
requirements at stock exchanges.

Thank you