CAPITAL MARKET

Over the last few years, SEBI has announced several far-reaching reforms to promote the capital
market and protect investor interests. Reforms in the secondary market have focused on three
main areas: structure and functioning of stock exchanges, automation of trading and post trade
systems, and the introduction of surveillance and monitoring systems. Computerized online
trading of securities, and setting up of clearing houses or settlement guarantee funds were made
compulsory for stock exchanges. Stock exchanges were permitted to expand their trading to
locations outside their jurisdiction through computer terminals. Thus, major stock exchanges in
India have started locating computer terminals in far-flung areas, while smaller regional
exchanges are planning to consolidate by using centralized trading under a federated structure.
Online trading systems have been introduced in almost all stock exchanges. Trading is much
more transparent and quicker than in the past. Until the early 1990s, the trading and settlement
infrastructure of the Indian capital market was poor. Trading on all stock exchanges was through
open outcry, settlement systems were paper-based, and market intermediaries were largely
unregulated. The regulatory structure was fragmented and there was neither comprehensive
registration nor an apex body of regulation of the securities market. Stock exchanges were run as
“brokers clubs” as their management was largely composed of brokers. There was no prohibition
on insider trading, or fraudulent and unfair trade practices . Since 1992, there has been
intensified market reform, resulting in a big improvement in securities trading, especially in the
secondary market for equity. Most stock exchanges have introduced online trading and set up
clearing houses/corporations. A depository has become operational for scripless trading and the
regulatory structure has been overhauled with most of the powers for regulating the capital
market vested with SEBI. The Indian capital market has experienced a process of structural
transformation with operations conducted to standards equivalent to those in the developed
markets. It was opened up for investment by foreign institutional investors (FIIs) in 1992 and
Indian companies were allowed to raise resources abroad through Global Depository Receipts
(GDRs) and Foreign Currency Convertible Bonds (FCCBs). The primary and secondary
segments of the capital market expanded rapidly, with greater institutionalization and wider
participation of individual investors accompanying this growth. However, many problems,
including lack of confidence in stock investments, institutional overlaps, and other governance
issues, remain as obstacles to the improvement of Indian capital market efficiency.

PRIMARY MARKET ( NEW ISSUE MARKET )

1. The main function of financial system is the collection of savings and their distribution
for investment, thereby stimulating capital formation, accelerating the process of
economic growth.
2. Primary market deals with the ‘new securities’ issued for the first time to the public.
3. Functions as a ‘direct link’ between the companies which require funds and the investing
public.
ISSUE OF SHARES

•Need for companies to issue shares to the public.

Most companies are usually started privately by their promoters. However , the
promoters’ capital and the borrowing from banks and financial institutions may not be
sufficient for setting up or running the business over a long term. So companies invite
the public to contribute towards the equity and issue shares t individual investors. The
way to invite share capital from the public is through a ‘public issue’. Simply stated, a
public issue is an offer to the public to subscribe to the share capital of a company.
Once this is done, the company allots shares to the applicants as per the prescribed
rules and regulations laid down be SEBI.

•Kinds of Issues .
Primarily, issues can be classified as a Public , Rights or Preferential Issues ( also
known as private placements ). While public and rights issue involve a detailed
procedure , private placements or preferential issues are relatively simpler. The
classification of issues is illustrated as :

1. 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.
2. 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.
3. 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. This
route is best suited for companies who would like to raise capital without
diluting stake of its existing shareholders.
4. A preferential issue is an issue of shares or of convertible securities by listed
companies to a select group of persons under Section 81 of the Companies Act,
1956 which is neither a rights issue nor a public issue. This is faster way for a
company to raise equity capital.

OBJECTIVES OF PRIMARY ISSUE

1. To promote a new company

2. To expand an existing company
 3. To diversify the production
4. To meet the regular working capital requirements
5. To capitalise the reserves

FUNCTIONS OF NEW ISSUE MARKET

• Origination, that is, Investigation, analysis and processing of new issue proposals
1. Is the work which begins before an issue is actually floated in the market.
2. Many factors need to be analysed to assess the technical feasibility and its
economic and financial viability. Also,
3. The time of floating an issue
4. Type of issue, i.e. equity, preference debentures, etc.
5. Price

• Underwriting, in terms of Guarantee that the issue would be sold irrespective of public
response.
• Distribution of securities to the investors.

PARTIES INVOLVED IN NEW ISSUE

• Lead managers to the issue

• Registrar to the issue
• Underwriters
• Bankers to the issue
• Advertising agents
• The financial institutions

PRIMARY MARKET FOR GOVERNMENT SECURITIES ( G-SECS )

• The issue of G-secs or treasury securities is done by the Reserve Bank of

India (RBI) which serves as the merchant banker to the central and state
governments.
• The RBI announces the auction of G-secs through a press notification and
invites bids from prospective investors.
• Two systems of treasury auctions are widely used all over the world :
(A) French auction : In a french auction (or discriminatory price
auction),successful bidders pay the actual price (yield) they bid for.
 (B) Dutch auction : In a dutch auction successful bidders pay a uniform
price which is usually the cut off price (yield)

PARTICIPANTS IN THE G-SECS MARKET

• Banks are the largest holders of G-secs . Other investors are insurance
companies , provident funds, mutual funds, trusts, primary and satellite
dealers.
• The RBI provides the facility of Subsidiary General Ledger (SGL)
account to large banks and financial institutions so that they can hold
their investment in G-secs and treasury bills in the electronic book entry
form. These institutions can settle their trades in securities through DVP
( delivery versus payment ) mechanism.
• Primary dealers are important intermediaries in the G-secs market . They
serve as underwriters in the primary market, act as market makers in the
secondary market, and enable investors to access the SGL account.

SECONDARY MARKET

Definition .

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 , enabling implementation
of incentive-based management contracts , and aggregating information ( via price discovery )
that guides management decisions.

Difference between the Primary and Secondary Market

In the primary market, securities are offered to public for subscription for the purpose of raising
capital fund. Secondary market is an equity trading venue in which already existing/ pre-issued
securities are traded among investors . secondary market could be either auction or dealer
market. While stock exchange is the part of an auction market, over –the- counter ( OTC ) is a
part of the dealer market.

Products in the Secondary Market

Following are the main financial products/ instruments dealt in the secondary market which may
be divided broadly into shares and bonds :

SHARES

• Equity shares : An equity share , commonly referred to as ordinary share, represents the
form of fractional ownership in a business venture.
• Rights Issue/ Rights shares : The issue of new securities to existing shareholders at a ratio
to those already held, at a price.
For e.g. A 2:3 rights issue at rs 125, would entitle a shareholder to receive 2 shares for
every 3 shares held at a price of Rs. 125 per share.
• Bonus share : Shares issued by the companies to their shareholders free of cost based on
the number of shares the shareholder owns.
• Preference Shares : Owners of these kind of shares are entitled to a fixed dividend
calculated at affixed rate to be paid regularly before dividend can be paid in respect of
equity share. They also enjoy priority over the equity shareholders in payment of surplus.
But in the event of liquidation , their claims of the company’s creditors, bondholders/
debenture holders.
 • Cumulative Preference Shares : A type of preference shares on which dividend
accumulates if remained unpaid. All arrears of preference dividend have to be paid out
before paying dividend on equity shares.
• Cumulative Convertible Preference Shares : A type of preference shares where the
dividend payable on the same accumulates , if not paid. After a specified date, these
shares will be converted into equity capital of the company.

BOND

It is a negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is

generally issued by a company, municipality or government agency. A bond investor lends
money to the issuer and in exchange , the issuer promises to repay the loan amount on a specified
maturity date. The issuer usually pays the bond holder periodic interest payments over the life of
the loan. The various types of bonds are :

• Zero coupon Bond : Bond issued at a discount and repaid at a face value. No periodic
interest is paid. The difference between the issue price and redemption price represents
the return to the holder. The buyer of these bonds receives only one payment, at the
maturity of the bond.
• Convertible Bond : A bond giving the investor the option to convert the bond into equity
at a fixed conversion price.
• Treasury bills : Short-term ( up to one year ) bearer discount security issued by
government as a means by government as a means of financing their cash requirements.