Indian Capital Market

‡ Capital

Market is the place where the funds are mobilized by the financial and investment intermediaries for long term, to make them available for nation s economic development. ‡ The growth rate of capital market is the index, that can be used for measuring the health of the national economy. ‡ Capital Market is the market for issuing long term funds

rupee convertibility. allowing foreign investors to come to India. tapping of foreign funds. ‡ During last 10 years of so.Indian Capital Market ‡ The changes in economic scenario and the economic growth have raised the interest of Indian as well as Foreign Institutional Investors in the Indian Capital Market. ‡ The massive structural reforms on the economic and industry front in the form of deliscencing. the Indian Capital Market Capital has witnessed growth in volume of funds raised as well as of transactions .

Indian Capital Market ‡ The Capital Market is bifurcated in to :± Primary Market or New Issue Market ± Secondary Market or Stock Market .

Right Issue or Private Placement. these securities are issued directly to the investors through the mechanism called primary market. the Government and the public sector undertakings. the new issue of securities are presented in the form of Public Issue. ‡ In Primary Market. ‡ The primary market discharges the important function of transfer of savings.Primary Market ‡ Companies issue securities from time to time to raise funds in order to meet their financial requirements for modernization. especially of the individuals to the companies. expansion and diversification programme. .

. ‡ Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.Features of primary market ‡ This is the market for new long term equity capital. ‡ In a primary issue. this is known as "going public. ‡ The company receives the money and issues new security certificates to the investors. such as loans from financial institutions. ‡ The new issue market does not include certain other sources of new long term external finance. ‡ The primary market performs the crucial function of facilitating capital formation in the economy. The primary market is the market where the securities are sold for the first time." ‡ The financial assets sold can only be redeemed by the original holder. Therefore it is also called the new issue market (NIM). the securities are issued by the company directly to investors. Borrowers in the new issue market may be raising capital for converting private capital into public capital.

best offering price and time to bring it to market. and they are therefore subject to additional uncertainty regarding their future value ." is when a company issues common stock or shares to the public for the first time. ‡ An IPO can be a risky investment. it is tough to predict what the stock or shares will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company.Initial Public Offer ‡ An initial public offer (IPO) referred to simply as an "offering" or "flotation. which helps it determine what type of security to issue (common or preferred). ‡ In an IPO the issuer may obtain the assistance of an underwriting firm. They are often issued by smaller. younger companies seeking capital to expand. most IPOs are of companies going through a transitory growth period. but can also be done by large privately-owned companies looking to become publicly traded. Also. For the individual investor.

In addition. The money paid by investors for the newly-issued shares goes directly to the company (in contrast to a later trade of shares on the exchange.Reasons for listing ‡ When a company lists its shares on a public exchange. ‡ ‡ . where the money passes between investors). However. This regular ability to raise large amounts of capital from the general market. rather than having to seek and negotiate with individual investors. thereby again providing itself with capital for expansion without incurring any debt. once a company is listed. is a key incentive for many companies seeking to list. it will be able to issue further shares via a rights issue. but instead the new shareholders have a right to future profits distributed by the company and the right to a capital distribution in case of a dissolution. allows a company to tap a wide pool of stock market investors to provide it with large volumes of capital for future growth. An IPO. it will almost invariably look to issue additional new shares in order at the same time. The company is never required to repay the capital. The existing shareholders will see their shareholdings diluted as a proportion of the company's shares. they hope that the capital investment will make their shareholdings more valuable in absolute terms. therefore.

This mode of raising finance is called ³Right Issue´. .Right Issue ‡ If an existing company intends to raise additional funds. One of the most common methods for a public company to use is to offer existing shareholders the opportunity to subscribe further shares. it can do so by borrowing or by issuing new shares.

. ‡ For funding expansion projects. a company may make right issue. companies fount it easy to persuade their shareholders to subscribe cash for new issues with a view to expansion by takeover. the only alternative is to raise cash from a fresh issue of share. unless the company can retain cash from substantial profits. the replacement costs of assts will be high. ‡ At a time when the share prices were relatively high. The company can improve the capital structure position by obtaining extra share capital. ‡ If a company has a proportion of interest bearing loan capital. the company can suffer from a squeeze on profits.Reasons for Right Issue ‡ In times of inflation.

Advantages of Right Issue ‡ To the Companies ‡ To the Shareholders .

. usually to a small number of chosen private investors.Private Placemet ‡ A private placement (or non-public offering) is a funding round of securities which are sold without a initial public offering.

. However. An investor can apply and get allotted a specified number of securities by the issuing company in the primary market. once allotted. as a large number of seller and buyers participates in it and the information regarding the securities is publicly available to all the investors.Secondary Market ‡ Secondary Market refers to the network/system for the subsequent sale and purchase of securities. ‡ The secondary market is represented by the stock exchanges in any capital market ‡ Stock exchange is a perfectly competitive market. the securities can thereafter be sold and purchased in the secondary market only.

For example. .Functions of Secondary Market ‡ The secondary market allows investors to sell to other investors the securities they buy in the primary market. This provides the liquidity that allows investors to purchase securities without having to hold them indefinitely or until maturity. ‡ The securities market helps firms to price the securities they are going to sell in the primary market. the issue price for a right offering may be fixed somewhat below the market price of the securities.

the firm¶s ability to generate shareholders returns depends a lot on the market price of the share which varies in response to firm¶s profitablity. Although. the market price is influences by many variables.Functions of Secondary Market ‡ The secondary market widens the ownership of a firm¶s securities when investors make direct purchases in the secondary market as opposed to depositing funds with the mutual funds or banks etc. ‡ The price of a firm¶s security in the secondary market has a direct impact on the wealth of the shareholders. .