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Capital Markets

Segments of the Capital Market

 Primary market
-Channel for creation of new securities

 Secondary market
-The new securities issued in the primary
market are traded the secondary market
Primary Market

 The primary market provides the channel for creation of

new securities.
 Primary market provides opportunity to issuers of
securities; Government as well as corporates, to raise
resources to meet their requirements of investment.
 They may issue the securities at face value, or at a
discount/premium and these securities may take a
variety of forms such as equity, debt etc.
Classification of Issues
Initial Public Offer

 Initial Public Offering (IPO) is when an unlisted

company makes either a fresh issue of securities or an
offer for sale of its existing securities or both for the
first time to the public. This paves way for listing and
trading of the issuer’s securities.
 A follow on public offering (Further Issue) is when
an already listed company makes either a fresh issue of
securities to the public or an offer for sale to the public,
through an offer document.
Pricing of an Issue

 Fixed Price
 Price discovery through Book Building Process
Book Building Process

 Book Building is basically a process used in IPOs for

efficient price discovery.

 It is a mechanism where, during the period for which

the IPO is open, bids are collected from investors at
various prices, which are above or equal to the floor
price. The offer price is determined after the bid closing
Rights Issue

 Rights Issue is when a listed company which proposes

to issue fresh securities to its existing shareholders as
on a record date.

 The rights are normally offered in a particular ratio to

the number of securities held prior to the issue and
generally issued at a price lower than the currently
traded market price of the share
Preferential Issue

 A Preferential issue is an issue of shares or of

convertible securities by listed companies to a select
group of persons which is neither a rights issue nor a
public issue.

 This is a faster way for a company to raise equity

Private Placement

 A Private Placement is the issue of securities;debt or

equity, to a limited number of subscribers such as
banks,financial institutions,mutual funds and high net
worth individuals.

 Private placement can be done with a maximum of 50

Secondary Market

 Secondary market refers to a market where securities

are traded after being initially offered to the public in
the primary market and/or listed on the Stock
Exchange. Majority of the trading is done in the
secondary market.

 Secondary market comprises of equity markets and the

debt markets.
Role of Secondary Market

 For the general investor, the secondary market provides

an efficient platform for trading of his securities.

 For the management of the company, secondary equity

markets serve as a monitoring and control conduit—by
facilitating value-enhancing control activities
Stock Exchange

The stock exchanges in India, under the overall

supervision of the regulatory authority, the Securities and
Exchange Board of India (SEBI),provide a trading
platform, where buyers and sellers can meet to transact in
Role of Stock Exchange

 Facilitate Listing of Securities

 Register members -Stock Brokers,sub brokers
 Make and enforce bye-laws
 Provide trading platform to investors
 Manage risk in securities transactions
 Provide indices
Leading Stock Exchanges
 National Stock Exchange (NSE)
 The Stock Exchange, Mumbai (BSE)
National Stock Exchange (NSE)

 NSE, promoted by leading financial institutions, was

incorporated in 1992 as a corporate entity.

 Trading in Equities and Debt Market commenced in


 It is the largest exchange in the country in terms of

volume of trading.

 It enjoys leadership position among exchanges in India.

The Stock Exchange, Mumbai (BSE)

 The Stock Exchange, Mumbai, popularly known as

"BSE" was established in 1875 as "The Native Share
and Stock Brokers Association“

 It is the oldest stock exchange in Asia.

 It has evolved over the years into its present status as

the premier Stock Exchange in the country.

 It is the first Stock Exchange in the Country to get

recognition from the Govt. of India under the Securities
Contracts (Regulation) Act, 1956.
Capital Market Intermediaries

 Merchant Bankers
 Registrar &Transfer Agents (R&T agents)
 Stock Brokers
 Custodians
 Mutual Funds
 Depositories
 Depository Participants
Merchant Bankers

As per the SEBI [Merchant Bankers]Rules, 1992

merchant banker means “any person who is engaged in
the business of issue management either by making
arrangements regarding selling,buying or subscribing to
securities or acting as manager, consultant, adviser or
rendering corporate advisory services in relation to
issue management”
R&T Agents-Registrar to Issue

The R&T agents provide services to shareholders on

behalf of issuers for
 Maintaining Register of Members [ROM]
 Managing corporate benefits like distribution of
dividends, interest on debentures,bonus shares,rights
 Share transfer services
 Management of public issue ( Registrar to Issue)
Stock Brokers

A stock-broker is a member of the Stock Exchange

 Stock-brokers are the intermediaries who are allowed to
trade in securities on the exchange of which they are
 Brokers buy and sell on their own behalf as well as on
the behalf of their clients
 Any person can act as a stock-broker only after
registering as such with SEBI
 Custodians are appointed by institutional
investors,mutual funds,banks etc for physical custody of
securities,settlement services, monitoring and collection
of corporate benefits and maintaining of their accounts
of securities
 HSBC Bank,SHCIL,Citibank, Deutsche bank,Standard
Chartered Bank provide custodial services
Mutual Funds

 Mutual Funds are financial intermediaries. A mutual

fund is a collective investment that allows many
investors, with a common objective, to pool individual
investments and give to a professional manager who in
turn would invest these monies in line with the common
 The units of Mutual Funds are tradable securities
 Their price is determined by their Net Asset Value (NAV)
which is declared periodically

A depository is an organization where the securities of

an investor are held in electronic form, at the request of
the investor through the medium of a Depository

Principal function of a depository is to dematerialise

securities and enable their transactions in book entry
Depository Participants

 Depository Participants are agents of the depository

 They are intermediaries between the depository and the

Services offered by DP
 Account Opening & Maintenance

 Dematerialisation of Securities

 Transfer of Securities

 Pledging of Securities

 Rematerilisation of Securities
Other Intermediaries

 Credit rating agencies

 Portfolio Managers
 Underwriters
Capital Market Instruments

 Equity shares
 Preference shares
 Futures and Options
 Debentures/Bonds
 Government securities
Equity Shares

Equity shares represent proportionate ownership in a

company . Investors who own equity shares in a
company are entitled to ownership rights such as
 Share in the profits of the company ( in the form of
dividends )
 Share in the residual funds after liquidation / winding up
of the company
 Voting rights
Why do Companies issue equity?

If a company wants to grow—maybe build more

factories, hire more people, or develop new products—it
needs money. It could get a loan from a bank. But then
it would owe money. By issuing stock, a company can
raise money without going into debt. People who buy
the equity are giving the company the money it needs
to grow.
Why should one buy equity?

 Owning equity in a company means owning part of that

company. Each part is known as a share.

 If a company has issued 100 shares of stock, and you

bought one, you own 1% of that company. People who
own stock are called stockholders, or shareholders.

 Stockholders hope the company will earn money as it

grows. If a company earns money, the stockholders
share the profits. Over time, people usually earn more
from owning stock than from leaving money in the
bank, buying bonds, or making other investments.
Preference Shares

Preferential shareholders enjoy a preferential right over

equity shareholders with regards to :
 Receipt of dividend
 Receipt of residual funds after liquidation
Futures and Options

 Future and Options are derivative products whose value

is derived from the value of one or more basic variables

 Underlying Asset can be Equity, Forex, commodity or

any other asset.
Debentures/ Bonds

 Debt instruments issued by corporates and government

 Debentures and bonds can have many variations
depending upon redemption,charge,convertibility etc.
Government Securities

The Central Government and the State Governments

issue securities periodically for the purpose of raising
loans from the public . There are two main types of
Government securities :
 Dated Securities :
These securities have a maturity period of more than 1
 Treasury Bills :
These have a maturity period of less than 1 year
Regulatory Framework

Main legislations governing the capital market

 Securities Contract (Regulations) Act,1956

 Companies Act, 1956
 Securities Exchange Board of India Act, 1992
 Depositories Act,1996
Why do we need regulators?

 The regulator ensures that the market

participants behave in a desired manner so
that securities market continues to be a major
source of finance for corporate and
government and the interest of investors are
Role of SEBI

SEBI was set up to

 develop and regulate capital market
 protect interest of investors
 register various participants
 make rules for participants
 regulate stock exchanges
 prohibit fraudulent and unfair practices
 promote investors’ education
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