Indian Capital Market

-Sowmya S
-Faculty, MBA, UOM
 Topics to be covered
Primary and Secondary capital markets in India.
Markets for Stocks and Bonds
Markets for derivative Instruments(Financial and
commodities)
Over the counter Markets-OCTEI,NCDEX,MCX.
Markets for government securities
Mock exercise in online stock market operations on
Sensex and Nift
Primary and Secondary capital markets
in India
 Primary and Secondary capital markets in
India
 What is Primary Market?
 A primary market is one in which the securities are sold for the
first time in order to collect long term capital for the business. It
is basically responsible for acquiring new issues.
 It is also called as “THE NEW ISSUE MARKET”
Primary Market
Why are Funds collected in primary market?
Newly established business
Existing Business

Funds collected in primary markets are used for?

Setting up of new Business unit
Expanding the business
Modernizing the plant,Machinery,etc..,
Features of the Primary Market
1. It is related with New Issues: That is IPO
2. It has No Particular Place: Primary market is not the name of
any particular place but the activity of bringing in new issues is
called the primary market.
3. It has Various Methods of Floating Capital:
(a)Public Issue: Issues a prospectus and invites the general public to
purchase shares or debentures.
(b)Offer for Sale: New securities are offered to an intermediary
(generally firms of stock brokers) at a fixed price.
(c)Private Placement: The company sells securities to the institutional
investors or brokers instead of selling them to the general public.
(d)Right Issue :Invites its existing shareholders at first place.
(e) Electronic Initial Public Issue (e-IPOs):The company issuing securities
through this medium enters into a contract with a Stock Exchange.
Features of the Primary Market
4. It Comes before Secondary Market:
The transactions are first made in the primary market.
The turn of the secondary market comes later.
Sources Of Primary Market
Public Issue
Offer for sale
Private
Placement
Rights Issue
E-IPO’s
Functions of Primary Market

1. New issue offer

2. Underwriting services
3. Distribution of new issue: prospectus issue.
Types of Primary Market Issuance
Private Placement
 Understanding Private Placement
 There are two kinds of private placement-
preferential allotment and qualified institutional placement.
 A listed company can issue securities to a select group of
entities, such as institutions or promoters, at a particular price.
This scenario is known as a preferential allotment.
 QIP is a process which was introduced by SEBI so as to enable
the listed companies to raise finance through the issue of
securities to qualified institutional buyers (QIBs).
 The eligibility of investors, in this case, is specified in Chapter
XIII of SEBI (DIP) guidelines. Investors may have a lock-in
period.
Secondary Market
What is the Secondary Market?
The secondary market is the place where investors
trade previously issued securities (for example,
stocks and bonds). It is commonly known as
the stock market or the after issue market.
Entities Functional in Secondary Market:
 Retail investors.
 Advisory service providers, brokers, security dealers.
 Financial intermediaries, NBFC’s, Insurance
companies, banks and mutual funds.
Secondary Market
 Functions of Secondary Market

Platform to investors
Active trading
Organized exchanges
Medium for price determination
Indicative of economic barometer
Using of Savings
Attracting Foreign Capital
Improving Monitory and Fiscal policies
Mobilizing Funds
Protecting Investors:
 Functions of Secondary Market

 Platform to investors: A Secondary markets provides a platform to investors to

enter into a trading transaction of bonds, shares, debentures and such other financial
instruments.
 Active trading: Transactions can be entered into at any time, and the market allows
for active trading so that there can be immediate purchase or selling with little
variation in price among different transactions. Also, there is continuity in trading,
which increases the liquidity of assets that are traded in this market.
 Organized exchanges: Investors find a proper platform, such as an organized
exchange to liquidate the holdings. The securities that they hold can be sold in
various stock exchanges.
 Medium for price determination: A secondary market acts as a medium of
determining the pricing of assets in a transaction consistent with the demand and
supply. The information about transactions price is within the public domain that
enables investors to decide accordingly.
 Indicative of economic barometer: It is indicative of a nation’s economy as well,
and also serves as a link between savings and investment. As in, savings are
mobilized via investments by way of securities.
 Functions of Secondary Market
 Using of Savings: The public gets the chance to use their savings with the help
of investment trusts, mutual funds, or other securities. Even if you can’t afford
to invest in a lot of securities, you can do so through these organizations.
 Attracting Foreign Capital: Bring more foreign funds into a country.The
exchange rate of the respective currency will improve if the government
undertakes more trade.
 Improving Monitory and Fiscal policies: The stock exchange can show the
government what goes wrong. Then, they can take the appropriate measures to
regulate the market.
 Mobilizing Funds: The stock exchange lets both the companies and the
investors circulate their securities. money market makes short term funds
available for public and banks offer funds for dealing in exchanges too.
 Protecting Investors: his happens because only genuine companies get to be
listed in secondary market. SEBI regulates these activities making it more
secured.
DIFFERENCES BETWEEN THE PRIMARY AND
SECONDARY MARKET
Stock Market and Bond Market
Bond market and Stock market
Meaning: Stock Market and Bond market
Stock Market :A stock market is a place where
investors go to trade equity securities (e.g.,
shares) issued by corporations.
The bond market: is where investors go to buy
and sell debt securities issued by corporations or
governments.
Bond Market vs. Stock Market:

Bond Market
 In a Nutshell

Financial Markets bring together individuals who want

to save money with other individuals or companies
who want to raise money.
The bond market and the stock market are the two
most important types of financial markets. The bond
market allows participants to issue and trade bonds,
i.e., certificates of indebtedness of the issuer to the
holder (debt finance).
Whereas the stock market is a financial market where
participants can issue and trade stocks, i.e.partial
ownership in a company (equity finance).
 Derivative Instruments
What are Derivative Instruments?
A derivative is an instrument whose value is
derived from the value of one or more underlying
asset, which can be commodities, precious metals,
currency, bonds, stocks, stocks indices, etc.
Four most common examples of derivative
instruments are Forwards, Futures, Options and
Swaps
Features Of Derivative Market
Financial Derivative is a contract.
It derives value from underlying assets.
It has specified obligation as per the contract which
means there are parties involved with specified
conditions.
Financial Derivatives are carried off-balance sheets.
Trading of underlying assets is not involved.
Financial Derivatives are mostly secondary market
instruments.
Financial Derivatives are exposed to risks such as
operational, counter party and legal.
Derivatives Classifications
Commodity Derivatives: Wheat, gold, crude oil,
silver….
Thus futures,options,swaps On commodity like wheat,
gold etc are commodity derivatives.

Financial Derivatives: Stocks, Bonds, Currencies,

Interest rate, Risk bearing securities….
Thus futures,options,swaps On Currencies,gilt,edged
securities, stock and share market indices etc are
financial derivatives
 COMMODITY MARKET
DERIVATIVES
 Commodity derivatives :In commodity derivatives, the
underlying asset is a commodity, such as cotton, gold,
copper, wheat, or spices.
Commodity derivatives were originally designed to protect
farmers from the risk of under- or overproduction of crops.
 Commodity derivatives are investment tools that allow
investors to profit from certain commodities without
possessing them.
The buyer of a derivatives contract buys the right to
exchange a commodity for a certain price at a future date.
The buyer may be buying or selling the commodity.
Commodity Derivative Underlying
Two important types of Commodity
Derivatives
1.Predetermined delivery price at a
1. Commodity specific future time.
Futures 2. Futures are standardized agreements.
Contracts 3. Traded on organized futures exchanges.
4. Transfer price risk from hedgers to
speculators

1.Used for hedging and speculation.

2. Commodity 2. There are two kinds of commodity options
Options contracts a)Call Option
b)Put Option
The exchange was established in 1990 to provide
investors and companies with an additional way to trade
and issue securities. It arose primarily from small
companies in India finding it difficult to
raise capital through mainstream national
stock exchanges because they could not fulfill the
stringent requirements to be listed on them.
Over-The-Counter Exchange of
India (OTCEI)
 The Over-The-Counter Exchange of India (OTCEI) is an Indian
electronic stock exchange composed of small- and mid-cap
companies.
 The purpose of the OTCEI is for smaller companies to raise capital,
which they cannot do at the national exchanges due to their inability
to meet the exchange requirements.
 The OTCEI implements specific capitalization rules that make it
suited for small- to medium-sized companies while preventing larger
companies from being listed.
 The key players in the OTCEI include brokers, market makers,
custodians, and transfer agents.
Features of the Over-The-Counter Exchange of India
(OTCEI)

 Stock Restrictions: Stocks that are listed on other exchanges will not be
listed on the OTCEI and, conversely, stocks listed on the OTCEI will not
be listed on other exchanges.
 Minimum Capital Requirements: The requirement for the minimum
issued equity capital is 30 lakh rupees.
 Large Company Restrictions: Companies with issued equity capital of
more than 25 crore rupees ($3.3 million) are not allowed to be listed.
 Member Base Capital Requirement: Members must maintain a base
capital of 4 lakh rupees ($5,277) to continue to be listed on the exchange.
 Computerization: First ever nationwide electronically operated stock
exchanges.OTC designated dealers to operate through computer
terminals which are hooked and connected to central computer. All
transactions are recorded and processed.
 Minimum Lock-in-period:3 years lock-in-period
Difference between regular stock exchange and OTCEI

 1. Trading Activities:
 Trading is done on Floor in conventional stock exchange,
whereas in OTCEI, the trading is done through network or
computer system.
 2. Minimum paid up capital:
 Paid-up capital of Rs.10 crores; or Market capitalization of
Rs.25 crores (In case of unlisted companies Net worth
more than Rs.25 crores) Credit rating where in Minimum
Capital Requirements: The requirement for the minimum
issued equity capital is 30 lakh rupees, which
is approximately $40,000.
Difference between regular stock exchange and OTCEI

3. Membership restrictions:

Membership is restricted to region or location in a
regular stock exchange, whereas the membership in
OTCEI is spread throughout the country.
4. Securities traded:
In a conventional stock exchange securities belonging
to that region and other permitted securities are traded.
But in OTCEI, securities of all companies throughout
India are traded.
Difference between regular stock exchange and OTCEI

 5. Need for market maker:

 Need for a market Maker depends upon the exchange in a
regular stock exchange. But market maker is a must for
securities of each company in OTCEI.
 6. Settlement days:
 Settlement of Transactions are done on the basis of T+5 days
in regular stock exchange. But in OTCEI, settlements are done
as per its rules.
 7. Primary Objective:
 The primary objective of conventional stock exchange is being
the improvement of Capital Market. But Primary objective of
OTCEI is to help small companies to raise funds.
6 Major Commodity exchanges in India:
 Multi Commodity Exchange(MCX)
 Is an exchange like BSE and NSE where commodities are traded.
 It was established in November 2003 under the regulatory
framework of FMC.
 In 2016, the FMC was merged with SEBI and MCX as an
exchange falls under the regulatory purview of SEBI.
 Buying and selling of commodities happens over MCX. They are
physical settled, or cash settled. SEBI, the regulator of MCX has
made physical settlement of stock derivatives mandatory recently
 Multi Commodity Exchange(MCX)
 MCX is the gateway to trade in gold, silver and other expensive
commodities including, bullions, non-ferrous metals and plantations, among
others.
 MCX is the country’s first exchange to offer commodity options contract and
focuses on providing its participants with a neutral and transparent trade
mechanism.
 Index- MCXCOMDEX gives a real time composite commodity future price
index which gives information on market movement on key commodity.
 Other Indicies-MCXAgri,MCXEnergy,MCXMetal
 Margins in commodity trading:

 Initial Margin:
 This is the minimum amount you have to pay to enter the
futures contract.
 M2M Margin:
 Profit or loss is adjusted on a day to day basis by means of
Mark-to-market margin. If you earn profit in a day, money is
transferred to your account from the clearing house and if
you lose, money from your account is transferred to the
clearing house by the broker.
 Special Margin:
 This is collected to control volatility and excessive
speculation.
Which commodities are traded on MCX?
Bullion (Gold)
Base Metals
Energy
Agro
Commodities
 NCDEX- National Commodity & Derivatives
Exchange

What Is the National Commodity & Derivatives

Exchange (NCDEX)?
The National Commodity & Derivatives Exchange
(NCDEX) is a commodities exchange dealing primarily
in agricultural commodities in India. The National
Commodity & Derivatives Exchange was established in
2003, and its headquarters are in Mumbai.
Exchanges like NCDEX have also played a key role in
improving Indian agricultural practices.
Barley, wheat, and soybeans are some of the leading
agricultural commodities traded on the NCDEX
 Understanding the National Commodity &
Derivatives Exchange

The National Commodity & Derivatives Exchange

(NCDEX) is one of the top commodity exchanges in
India based on value and the number of contracts.
 It is second only to the Multi Commodity Exchange
(MCX), which is focused on energy and metals. The
National Commodity & Derivatives Exchange is
located in Mumbai but has offices across the country
to facilitate trade.
The NCDEX plays a critical role in India's growing
agriculture sector.
Benefits of NCDEX
Maintaining an online futures market for crops.
The exchange assists Indian farmers in the price
discovery process.
Increases Market transparency.
Cutting out middleman.
Standardizing the quality specifications has raised
quality awareness.
Hedging and speculation helps farmers mitigate risks.
Markets For Government
Securities
What are government securities Market?
Government securities are Financial instruments and
securities issued by a government towards raising loan
from the public.
Government securities consist of bearer bonds,
promissory notes, bond ledger accounts etc..,
These are risk free securities or gilt edged securities.
Govt raises short term and long term capital by issuing
these securities.
Features of government securities
Issued at face value
Carries a Sovereign guarantee, hence have zero risks
of default.
Investors can sell this secondary market.(Treasury
bonds treasury bills)
Government securities will be in dematerialized
form.
Interest paid on these govt securities does not attract
TDS or tax deducted at source
Features of government securities
Most of the Government security qualify as SLR.
The interest rate of the government securities are
fixed for entire tenure and cannot be changed during
this tenure.
The government securities are redeemable at the face
value at the time of maturity.
The maturity period can range from 2-30 years.
Payment on interest on government securities are paid
on face value
Participants of government securities
market

Commercia Insurance Financial

l Banks Companies Institutions

Provident Mutual
NBFC
Fund Funds
Issuers of government securities market

Central
State Semi
Governme Government Government
nt

IDBI IFCI NABARD

Advantages Of Government Securities
 Risk free: Government bonds promise assured returns and stability
of funds to investors.
 Returns: There is a guarantee of principal along with fixed interest.
 Liquidity: One can buy and sell government bonds like equity
instruments.
 Portfolio Diversification: It mitigates the risk of the overall
portfolio since government bonds are risk-free investments.
 Regular Income: As per RBI guidelines, the interest accrued on
government bonds shall be disbursed every six months to
bondholders.
 Does not attract TDS: No TDS deducted for interest payment
 Transparent transaction: Transparent and simplified transaction
through NSDL.
 Disadvantages or Risk involved in
investing in government securities
 Low Returns: The yield or interest earned on government
bonds is relatively lower in comparison to other investment
options like equity, real estate, etc.
 Interest Rate Risk: Government bonds are long term
investment bonds where the maturity is ranging from 5 years –
40 years. Hence, the bond might lose its value over this period
 Reinvestment Risk: Long term nature of government bonds
rises the risk of reinvestment.
 Market Risk: This is the risk that interest rates may be high
when the bond is sold in the secondary market, and the higher
the prevailing yield, the lower will be the price received by the
holder.
Types Of Government Securities
Dated
Treasury
Government
Bills
Cash
Securities
Management
Bills (CMBs)
State Zero-
Developme Coupon
nt Loans Bonds
TIPS
Capital Floating
Indexed Rate Bonds
Bonds
 Types Of Government Securities
Treasury Bills: Treasury bills, also called T-bills, are
short term government securities with a maturity
period of less than one year issued by the central
government of India.
Treasury bills are short term instruments and issued
three different types:
1) 91 days
2) 182 days
3) 364 days
issued at a discount rate and redeemed at face value on
the date of the maturity.
 Types Of Government Securities
Cash Management Bills (CMBs):CMBs are issued
for less than 91 days of a maturity period which makes
these securities an ultra-short investment option
Generally, the government of India use these securities
to fulfill temporary cash flow requirements.

State Development Loans: State development loans

are dated government securities issued by the State
government to meet their budget requirements.
 Types Of Government Securities
Dated Government Securities: Dated Government
securities are a unique type of securities because they
either have fixed or a floating rate of interest also
called the coupon rate.
They provide a wide range of tenure starting from 5
years up to 40 years
The investors investing in dated government securities
are called primary dealers.
Different types of dated government securities are:
Capital Indexed Bonds, Special Securities, Floating
rate Bonds etc..
 Types Of Government Securities
 Treasury Inflation-Protected Securities (TIPS):
 Are available based on five, 10 or 30 year term periods. These securities
deliver interest payments to all users every six months.
 TIPS are similar to conventional treasury bonds, but it comes with one
major difference.
 The same principle is issued during the entire term of the bond in a standard
treasury bond.
 However, the par value of TIPS will increase gradually to match up with the
Consumer Price Index (CPI) to keep the bond’s principle on track with
inflation.

 If inflation increases during the year, there will be an increase in the security
value during that year. It means you will have a bond that maintains its
value throughout life instead of a bond that’s worthless after maturity.
 Types Of Government Securities
Zero-Coupon Bonds:
Zero-coupon bonds are generally issued at a discount
to face value and redeemed at par. These bonds were
issued on January 19th 1994.
The securities do not carry any coupon or interest rate
as the tenure is fixed for the security. In the end, the
security is redeemed at face value on its maturity date.
Capital Indexed Bonds: In these securities, the
interest comes in a fixed percentage over the wholesale
price index, which offers investors an effective hedge
against inflation.
Types Of Government Securities
Floating Rate Bonds:
Floating rate bonds does not come with a fixed coupon
rate. They were first issued in September 1995.
Floating rate bonds are issued by the government.