CAPITAL MARKET

CAPITAL MARKET
 The market

where investment instruments like equity shares, preference shares, bonds and debentures 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.

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

INDIAN CAPITAL MARKET



The Indian Capital Market is one of the oldest capital markets in Asia which evolved around 200 years ago. Chronology of the Indian capital markets >1830s: Trading of corporate shares and stocks in Bank and cotton Presses in Bombay. >1850s: Sharp increase in the capital market brokers owing to the rapid development of commercial enterprise.

>1860-61: Outbreak of the American Civil War and ' Share Mania ' in India. >1894: Formation of the Stock Brokers Association. >1908: Formation of the Calcutta Stock Exchange Association.

The pattern of growth in the Indian capital markets in the post independence regime can be analyzed from the following graphs:

From the above graph we find that the number of stock exchanges in India increased at a crawling pace till 1980 but witnessed a sharp rise thereafter till 1995.

The following diagram shows the trend in the no. of listed companies participating in the Indian Capital Market. Here again we register a sharp rise after 1980. The number of stocks issued by the listed companies also shows a similar trend:

Segments 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 Has No Particular Place It Has Various Methods Of Floating Capital: Following are the methods of raising capital in the primary market: i) Public Issue ii) Private Placement iii) Rights Issue iv) Book Building v) Offer for Sale vi) Electronic-Initial Public Offer It comes before Secondary Market

Secondary Market

The secondary market is that market in which the buying and selling of the previously issued securities is done.  The transactions of the secondary market are generally done through the medium of stock exchange.  The chief purpose of the secondary market is to create liquidity in securities.


Primary vs. Secondary Markets

               The main points of distinction between the primary market and secondary market are as follows: 1. Function : While the main function of primary market is to raise long-term funds through fresh issue of securities, the main function of secondary market is to provide continuous and ready market for the existing long-term securities. 2. Participants: While the major players in the primary market are financial institutions, mutual funds, underwriters and individual investors, the major players in secondary market are all of these and the stockbrokers who are members of the stock exchange. 3. Listing Requirement: While only those securities can be dealt within the secondary market, which have been approved for the purpose (listed), there is no such requirement in case of primary market. 4. Determination of prices: In case of primary market, the prices are determined by the management with due compliance with SEBI requirement for new issue of securities. But in case of secondary market, the price of the securities is determined by forces of demand and supply of the market and keeps on fluctuating.

Relationship between New Issue Market and Stock Exchange

Complimentary to each other Connected at the time of new issue through listing Both markets are integrated as a single market: industrial securities market
Common effect of environmental conditions Stock prices increase; new issues increase and vise-versa

Functions of the New Issue Market

 Origination: It refers to the work of investigation, analysis and processing of new project proposals. Origination starts before an issue is actually floated in the market. It includes a careful study of the technical, economic and financial viability to ensure the soundness of the project and provides advisory services.  Underwriting: It is an agreement whereby the underwriter promises to subscribe to a specified number of shares or debentures in the event of public not subscribing to the issue. Thus it is a guarantee for the marketability of shares. Underwriters may be institutional and non-institutional.  Distribution: It is the function of sale of securities to ultimate investors. Brokers and agents who maintain regular and direct contract with the ultimate investors, perform this service.

Instruments of Issue
 Secured Premium Notes with detachable warrants (SPN)  Equity Shares with detachable warrants  Preference Shares with warrants  Non-convertible debentures with detachable equity warrants  Fully convertible cumulative preference shares  Zero interest Fully-convertible debentures  Fully-convertible debentures with interest  Zero interest Partly convertible debentures with separately tradable & detachable warrants  Deep discount Bonds  Bonds with warrants

Methods of Floatation: Public Issue

Issue through Prospectus Allotment made only if Minimum Subscription has been received (90% of entire issue) Underwriting allowed: Sole Underwriting, Syndicate Underwriting, Sub Underwriting

Methods of Floatation: Rights Issue

Selling securities in the primary market by issuing rights to the existing shareholders Letter of Offer and Composite Application form sent ( Part A, B, C & D) to be mailed back within 30 days Issue price: Company decided

Methods of Floatation: Private Placement

Securities issued to selected investors like Banks or Financial Institutions Undertaken when issue size is not very big and the issuing company doesnt want to spend much money Private placement market has grown phenomenally

Reasons for growth of the Private Placements Market

Accessibility: ease in accessing & accommodating smaller sized issues Flexibility: No hackles of prospectus, underwriting, negotiated terms Speed: Public issue takes upto 6 months, private placements take lesser time Lower issue costs

Methods of Floatation: Book Building

 New issues priced on demand feedback  Draft prospectus without price filed with SEBI  Lead Merchant Banker appointed as Book Runner  Book Runner circulates copies of prospectus among Institutional investors and Underwriters  Book Runner maintains records of offers with price and quantity  On the basis of these data Book Runner along with the Company decides the price  Thereafter underwriting is done

Book Building made compulsory for companies not having track record of profitability or net worth as per SEBI 60% to be made available to QIB Book Building route made compulsory for IPOs with issue size more than 5 times the pre-issue net worth

Players in the New Issue Market

Merchant Bankers Registrars Collecting and co-ordinating Bankers Underwriters Brokers, Agents Printers Advertising Agencies Mailing Agencies SEBI

Recent Trends