 The term capital market refers to the institutional

arrangements for facilitating the borrowing and lending of

long term funds.
 It may be defined as an organised mechanism for effective and
efficient transfer of money capital or financial resources from
the investing parties i.e individuals or institutional savers to
the entrepreneurs engaged in industry or commerce either in
private or public sectors of an economy
 Indian Capital Market

Market Instruments Intermediaries Regulator

SEBI
•Brokers
•Investment Bankers
Primary Secondary •Stock Exchanges
•Underwriters

Equity Hybrid Debt

Players

CRA Corporate Intermediaries Individual Banks/FI FDI /FII

 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,
• insurance instruments,
• Foreign exchange instruments,
• hybrid instruments
• derivative instruments
 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
There are two types of capital market:
 Primary market
 Secondary market
 The new issue market represents the primary market where
new securities i.e shares or bonds that have never been
previously issues are offered.
 New as well as existing companies can raise capital in this
market
 The prime function of this market is to facilitate the transfer of
funds from the willing investors to the entrepreneurs setting
up new corporate enterprises or going in for expansion,
diversification, growth or modernisation.
 The specialised agencies includes financial inst, underwriters,
brokers, merchant bankers etc.
 This is the market for new long term equity capital.
 The primary market is the market where the securities are sold for
the first time.
 In a primary issue, the securities are issued by the company
directly to investors.
 The company receives the money and issues new security
certificates to the investors.
 Primary issues are used by companies for the purpose of setting
up new business or for expanding or modernizing the existing
business.
 The new issue market does not include certain other sources of
new long term external finance
 Borrowers in the new issue market may be raising capital for
converting private capital into public capital; this is known as
"going public."
 To raise funds for certain purpose.
 To create market for new issues of securities.
 To establish the magnitude of the market.
 To mobilize Resource the economy.
 For overall development of companies.
 Ownership securities or capital stock
i. Equity shares
ii. Preference Shares

 Creditorship Securities
i. Debentures
 It is also known as capital stock represents share
 The capital of a company is divided into number of equal
parts known as shares.
 Share is the most universal form of raising long term
funds from the market.
 According to companies Act 1956, has limited the type of
shares to only two –preference and equity shares.
 It represents the owners capital in a company
 The holders are the real owners of the company
 These are paid dividend after paying it to the

preference shareholders.
 They take risk both regarding dividend and return of

capital
 Equity capital is paid after meeting all other claims

including the preference shares.

 Equity shares provide permanent capital to the

company and can not be redeemed during the life time

of the company.
 Maturity
 Claims/Right to Income
 Claims On Assets
 Right to control
 Right to voting rights
 Pre-emptive Rights
 Limited Liability
 Do not create any obligation to pay a fixed rate of
dividend
 Can be issued without creating any charge over the

assets of the company

 It is a permanent source of capital
 Equity shareholders are the real owners of the company

and have voting rights

 These are the real gainers by way of increased

dividends
 If only these shares are issued, the company cannot
take the advantages of trading on equity.
 These can not be redeemed, there is danger of over

capitalisation
 Shareholders can put obstacles in mgmt by
manipulation
 Higher value of shares can lead to speculation
 Investors with fixed income who desire to invest in

safe securities have no role in such shares.

 The dividend is first paid on preference capital.
 Preference shareholders enjoy preference as to the

repayment of capital at the time of liquidation

 Payment of fixed rate of dividend over the equity

shareholders.
 They do not have any voting rights, have no say in the

management.
 Cumulative preference shares
 Non cumulative preference shares
 Redeemable preference shares
 Irredeemable preference shares
 Participating preference shares
 Non-Participating preference shares
 Convertible preference shares
 Non-Convertible preference shares
1. Cumulative Preference Shares
◦ Fixed rate of dividend is guaranteed.
◦ At the time of inadequate profit, they will not loss
anything.
◦ Arrear will get in subsequent years.

2. Non-Cumulative Preference Shares

◦ Fixed rate of dividend is guaranteed.
◦ At the time of inadequate profit, they will not get
anything.
3. Participating Preference Shares
◦ Fixed rate of dividend is guaranteed.
◦ Entitled to share the surplus profit.

4. Non-Participating Preference Shares

◦ Fixed rate of dividend is guaranteed.
◦ Does not share the surplus profit.

5. Redeemable Preference Shares

◦ Shares which a company may repay after a fixed
period of time or earlier.

6. Irredeemable Preference Shares

◦ It do not carry the arrangement for redemption.
◦ Shares are repayable only at winding up.
7. Convertible Preference Shares
◦ It can be converted into Equity shares within a
certain period.

8. Non-Convertible Preference Shares

◦ It cannot be converted into Equity shares.
 Maturity
 Claims on Income
 Claims on Assets
 Right to Control only
 Hybrid form of security
1. Company’s point of view
 There is no legal obligation to pay dividend on preference shares

 It provides a long term capital for the company

 No liability of the company to redeem preference shares during the

life time of the company. There is no significant penalties for

delaying redemption of such share
 Redeemable shares have the advantage of repayment of capital

whenever there are surplus funds with the company

 As a fixed rate of dividend is payable on preference shares, it

enables a company to trade on equity.

 These are the part of company’s net worth, it enhances the credit

worthiness of a firm.
 Nominal value is lower.
 Dividend varies according to
profit.
 No right for arrears of dividend.
 No priority in dividend and
repayment of capital.
 Cannot be redeemed.
 There is more risk.
 Wider voting right.
 Control over management.
 Highly speculative.
 Ready to take risk and to get
greater dividend prefer this.
Equity Shares
 Nominal value is higher.
 Rate dividend is fixed.
 Cumulative preference shares
get arrears.
 Priority in dividend and
repayment of capital.
 Can be redeemed.
 The risk is lower.
 Limited voting right.
 No control over management.
 Less speculative.
 Not ready to take risk and
expect steady income prefer
this.
Preference Shares
 A debenture or a bond is long-term promissory note for
raising loan capital. The firm promises to pay interest and
principal as stipulated.
 The purchaser of debenture is called lender or debenture-
holder.
 Although the money raised by the debentures becomes a
part of the company's capital structure, it does not
become share capital.
1. Interest rate:
 The interest rate on a debenture is fixed and known.
 Debenture interest is tax deductible.

2. Maturity:
 Debentures are issued for a specific period of time.
3. Redemption:
 Debentures are mostly redeemable, they are generally
redeemed on maturity.
4. Sinking fund:
A sinking fund is cash set aside periodically for retiring
debentures. Periodic retirement of debt through sinking
fund reduces the amount required to redeem the remaining
debt at maturity
.5. Buy-back (call) provision:
 Buy-back provisions enable the company to redeem debenture at a

specified price before the maturity date.

 Buy-back price may be more than par value.

6. Indenture or debenture trust deed:

 An indenture is a legal agreement between the company issuing

debentures and the debenture trustee who represents the debenture

holders.
 Trustee ensures that the company will fulfill the contractual

obligations.
7. Security:
 Debentures are either secured or unsecured.

 A secured debenture is secured by a lien on the company’s specific

assets.
 When debentures are not protected by any security, they are known

as unsecured debenture.
8. Yield
 The yield is related to its market price; Two types of yield:

 The current yield on a debenture is the ratio of the annual

interest payment to the debenture’s market price.

 The yield-to-maturity takes into account the payments of

interest and principal, over the life of the debenture.

9. Claims on assets and income

 Debenture holders have a claim on the company’s earning,

prior to that of the shareholders.

1. Non-convertible debentures (NCDs):
 NCDs are pure debentures without a feature of conversion.

They are repayable on maturity. The investor is entitled for

interest and repayment of principal.
2. Fully-convertible debentures (FCDs):
 FCDs are converted into shares as per the terms of the issue,

with regard to the price and time of conversion.

3. Partly-convertible debenture (PCDs):
 The investor has advantages of both convertible and non-

convertible debenture blended into single debenture.

1. Less costly
2. No ownership dilution
3. Fixed payment of interest
4. Reduced real obligation
1. Obligatory payments
2. Financial risk
3. Cash outflows
4. Restricted covenants