CAPITAL MARKET

Market

where investment instruments like bonds, equities and

mortgages are traded is known as the capital market.

Primal

role is to make investment from investors who have surplus

funds to the ones who are running a deficit

Offers
The

both long term and overnight funds.

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 and
> derivative instruments.

Importance of Capital Markets

Help firms and governments raise cash by selling

securities
Allow investors with excess funds to invest and earn a
return
Channel funds from savers to borrowers
Allocate resources optimally (i.e., provide funds to those
who can make the best use of them)
Help allocate cash to where it is most productive
Help lower the cost of exchange
Secondary markets, where investors trade existing
securities, assures investors that they can quickly sell
their securities if the need arises

Types of capital market

There are two types of capital market:
Primary market,
Secondary market

Primary market
The primary markets deal with the trading of newly issued securities.
The corporations, governments and companies issue securities like

stocks and bonds when they need to raise capital.

The investors can purchase the stocks or bonds issued by the

companies. The primary market is also called NEW ISSUE

MARKET.
The flow of funds is from savers to borrowers (industries), hence, it

helps directly in the capital formation of the country.

The money collected from this market is generally used by the

companies to modernize the plant, machinery and buildings, for

extending business, and for setting up new business unit .

Features of Primary Market

It Is Related With New Issues

It Has No Particular Place
It Has Various Methods Of Float Capital: Following are the
methods of raising capital in the primary market:
i) Public Issue
ii) Offer For Sale
iii) Private Placement
iv) Right Issue
v) Electronic-Initial Public Offer

Secondary Market
The

secondary market is that market in which the buying

and selling of the previously issued securities is done.
The transactions of the secondary market are generally done
through the medium of stock exchange.
The chief purpose of the secondary market is to create
liquidity in securities.
The secondary market is that part of the capital market that
deals with the securities that are already issued in the
primary market.
The secondary market needs to be transparent and highly
liquid in nature as it deals with the already issued securities.

Features of Secondary Market

It Creates Liquidity
It Has A Particular Place
It Encourage New Investments
Aids in financing the industry
Ensures safe & fair Dealing( MEDIA BROADCASTING)
Provides regular information about the value of security.
Helps to observe prices of bonds and their interest rates.
Offers to investors liquidity for their assets.
Secondary markets bring together many interested parties.
It keeps the cost of transactions low

What is the difference between Primary Market and Secondary

Market?

Primary Markets

Secondary Markets

The market where new

securities are issued by the
company that wishes to obtain
capital and is sold directly to
the investor

Where securities that have

already been issued are
traded. Instruments that are
usually traded on the
secondary market include
stocks, bonds, options and
futures.

In the primary market, the

company is directly involved in the
transaction

In the secondary market the

company does not involved in
transaction since transaction is
done between investors

The Process of collecting funds is

different from secondary market

Process of collecting funds is

different from primary market

Book Building Process

Book building
A price discovery method. In this method, the company doesn't

fix up a particular price for the shares, but instead gives a price
range, e.g. Rs 80-100.
When bidding for the shares, investors have to decide at which

price they would like to bid for the shares, for e.g. Rs 80, Rs 90 or
Rs 100. They can bid for the shares at any price within this range.
Based on the demand and supply of the shares, the final price is

fixed. The lowest price (Rs 80) is known as the floor price and
the highest price (Rs 100) is known as cap price.
The price at which the shares are allotted is known as cut off

price. The entire process begins with the selection of the lead
manager, an investment banker whose job is to bring the issue to

FEATURES OF BOOK BUILDING

The allotment is normally on proportionate basis to the retail investors
About 15% to retail investors
15% to non-institutional bidders and.,
50% to qualified institutional bidders
Retail bidders to pay the bid money along with application
To register the bid through an online terminal of nse or bse at an authorised bid

center
The issuer comes out with an issue without finalizing the issue price
The floor price and the cap price are announced just before the opening of the
issue
The issuer has the liberty to revise the offer price upward or downward

The Process:
The Issuer who is planning an offer nominates lead merchant
banker(s) as 'book runners'.
The Issuer specifies the number of securities to be issued and the
price band for the bids.
The Issuer also appoints syndicate members with whom orders
are to be placed by the investors.
The syndicate members input the orders into an 'electronic book'.
This process is called 'bidding' and is similar to open auction.
The book normally remains open for a period of 5 days.
Bids have to be entered within the specified price band.

 Bids can be revised by the bidders before the book closes.

On the close of the book building period, the book runners

evaluate the bids on the basis of the demand at various

price levels.
The book runners and the issuer decide the final price at
which the securities shall be issued.
Generally, the number of shares are fixed, the issue size
gets frozen based on the final price per share.
Allocation of securities is made to the successful bidders.
the rest get refund orders.

RED HERRING PROSPECTUS

A document submitted by a company

(issuer) as part of a public offering of

securities
Contains most of the information
pertaining to the companys operations
and prospects, but does not include
key details of the issue such as its price
and the number of shares offered.
The term red herring is derived from
the bold disclaimer in red on the cover
page of the preliminary prospectus.

CONTENT
The red herring statement contains
purpose of the issue;
disclosure of any option agreement;
underwriter's commissions and discounts;
promotion expenses;
net proceeds to the issuing company (issuer);
balance sheet;
earnings statements for last 3 years, if available;
names and address of all officers, directors, underwriters

and stockholders owning 10% or more of the current

outstanding stock;
copy of the underwriting agreement;
legal opinion on the issue;
copies of the articles of incorporation of the issuer.

TRADING
For trading in Indian stock market, three types of

mechanisms are carried out:Cash Trading

Spot Trading
Forward, future (derivative trading)
The NSE trading system called 'National Exchange for
Automated Trading' (NEAT) is a fully automated
screen based trading system.
It is on line and nationwide trading system.
It adopts the principle of an order driven market
In this system a member can punch into the computer
quantities of securities and prices at which he likes to
transact.
The transaction is executed as soon as it finds a
matching sale or buy order from a counter party

Trading Mechanism
A single consolidated order book for each stock displays, on a real

time basis, buy and sell orders originating from all over the country.
The book stores only limit orders, which are orders to buy or sell
shares at a stated quantity and stated price.
The limit orders are executed only if the price quantity conditions
match.
The trading system provides tremendous flexibility to the issuers in
terms of kinds of orders that can be placed on the system.
Several time related (Good-till-Cancelled, Good-till-Day,
Immediate-or-Cancel), and
Price-related (buy/sell limit and stop-loss orders) conditions can be
easily built into an order

Stop-loss orders
It is an order placed with a broker to sell once the

stock reaches a certain price.

A stop-loss is designed to limit an investor's loss
on a security position.
Setting a stop-loss order for 10% below the price
at which you bought the stock will limit your loss
to 10%.
For example, let's say you just purchased ACC at
Rs50 per share. Right after buying the stock you
enter a stop-loss order for Rs45. This means that
if the stock falls below Rs45, your shares will
then be sold at the prevailing market price.

Clearing and Settlement Process at NSE

Clearing and settlement Process

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

Trade details from Exchange to NSCCL

NSCCL notifies the consummated trade details to custodians who affirm back.
Based on the affirmation, NSCCL determines obligations.
Download of obligation and pay-in advice of funds/ securities.
Instructions to clearing banks to make funds available by pay-in-time.
Instructions to depositories to make securities available by pay-in- time.
Pay-in of securities (NSCCL advises depository to debit pool account of
custodians and credit its account and depository does it).
pay-in of funds (NSCCL advises Clearing Banks to debit account of custodians
and credit its account and clearing bank does it).
Pay-out of securities (NSCCL advises depository to credit pool account of
custodians and debit its account and depository doesit).
Pay-out of funds (NSCCL advises Clearing Banks to credit account of custodians
and debit its account and Clearing Banks does it).
Depository informs custodians
Clearing Banks inform custodians

Settlement Cycle

Rolling Settlement
At NSE and BSE, trades in rolling settlement are settled
on a T+2 basis i.e. on the 2nd working day.
For arriving at the settlement day all intervening
holidays, which include bank holidays, NSE holidays,
Saturdays and Sundays are excluded.
Typically trades taking place on Monday are settled on
Wednesday, Tuesday's trades settled on Thursday and so
on.

A tabular representation of the

settlement cycle for rolling settlement
Activity

Day

Trading

Rolling Settlement
Trading

clearing

Custodial Confirmation

T+1 working days

settlement

Securities and Funds

pay in

T+2 working days

Securities and Funds

pay out

T+2 working days

Evaluation of Initial Public Offering (IPO)

An initial public offering (IPO) or stock market launch is a type

of public offering where shares of stock in a company are sold to the general
public, on a securities exchange, for the first time.
Through this process, a private company transforms into a public
company.
Initial public offerings are used by companies to raise expansion capital, to
possibly monetize the investments of early private investors, and to become
publicly traded enterprises.
Here are a few things to look out for1.
No History
2. The Lock-Up Period
3. Avoid the Hype
4. PRICE DISCOVERY
5. Market sentiments

No history
It's hard enough to analyze the stock of

an established company.
An IPO company is even trickier to
analyze since there won't be a lot of
historical information.
Your main source of data is the red
herring, so make sure you examine this
document carefully.
Look for the usual information, but also
pay special attention to the
management team and how they plan to
use the funds generated from the IPO.
Successful IPOs are typically supported
by bigger brokerages that have the
ability to promote a new issue well.

The Lock-Up Period

When a company goes public, the underwriters make

company officials and employees sign a lock-up agreement.

Lock-up agreements are legally binding contracts between the
underwriters and insiders of the company, prohibiting them
from selling any shares of stock for a specified period of time.
The period can range anywhere from three to 24 months.
When lockups expire all the insiders are permitted to sell their
stock.
The result is a rush of people trying to sell their stock to realize
their profit.
This excess supply can put severe downward pressure on the
stock price.

Avoid the hype

It's important to understand that underwriters are

salesmen.
The whole underwriting process is intentionally hyped up
to get as much attention as possible.
Since IPOs only happen once for each company, they are
often presented as "once in a lifetime" opportunities.
Of course, some IPOs soar high and keep soaring. But
many end up selling below their offering prices within the
year.
One should not buy a stock only because it's an IPO one
should do it because it's a good investment.

Price discovery
An attractively priced IPO often gets good

response from investors as the chances of listing

gains become higher. Conversely, if an IPO is
"over-priced", it may not be able to list
attractively.
IPO pricing is done in two ways-by book-building
or through a fixed-price offer.
Book-built pricing gives investors the
opportunity to take a call on the price they are
willing to pay. The underwriters generally specify
the 'floor price' and 'cap price' (called a price
band) and investors must choose a price within
the given range.

 The most popular price among the investors is selected as

the offer price (also called the 'cut-off price').
Shares are allotted to anyone who bids over the cut-off
price, proportionately given the size of the issue.
A comparison of the price of an IPO with the share price of
its peers which are already trading can give an idea whether
a new offer is overvalued or undervalued

Market sentiments
Apart from pricing, success of an IPO also depends a lot on the

market sentiments at the time of listing.

Those who are looking to make short-term gains must invest in
the new offers only when the markets are bullish, say experts.
Moods make markets that applies to stock markets in
general, but even more so for IPO activity on the so-called
primary market.
Thats because the way companies and their consortium banks
evaluate the market determines whether they will venture going
public.
Additionally, whether investors will participate in and IPO
depends on their expectations regarding the development of the
new issue.

Group Members
Maria Boltwala-06
Urvi Panchal-27
Avinanash Dawra-70
Taruna Manwani-71
Joyti Solanki-72
Sagar Hukamani-76