CAPITAL MARKET

CAPITAL MARKET

CAPITAL MARKET
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.
CAPITAL MARKET

 Financial market plays an important role in

growth of an economy.
Financial instrument/ SECURITIES are
traded in Financial market.
Securities are issued by the government
,companies, local authorities and mutual
fund.
Financial market consists of capital
market ,money market and foreign exchange
CAPITAL MARKET
market.

In other words:

The capital market (securities markets) is

the market for securities, where
companies and the government can raise
long-term funds. The capital market
includes the stock market and the bond
market

CAPITAL MARKET

Nature of capital market

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 (an exchange)
Function
It Helps In Capital Formation
It Helps In Creating Liquidity
CAPITAL MARKET

MAIN ELEMENTS

OF
CAPITAL MARKET

CAPITAL MARKET

THREE ELEMENTS OF CAPITAL MARKET

FINANCIAL ASSETS/INSTRUMENTS/SECURITIES
FINANCIAL INTERMEDIARIES
FINANCIAL MARKETS

CAPITAL MARKET

THE MAIN ELEMENTS

FINANCIAL ASSETS/ INSTRUMENTS/SECURITIES
The tangible/physical asset is one whose value depends
on its physical properties such as buildings, machines,
furniture, vehicles and so on.
The entity/economic unit
that offers the future cash flows is the issuer of the
financial instrument and the owner of the security is
the investor.

CAPITAL MARKET

FINANCIAL INTERMEDIARIES:

Financial intermediaries are institutions that channelise

the savings if investors into investments/loans. As
institutional source of finance ,they act as a link
between the savers and the investors which results in
institutionalization of personal savings.

CAPITAL MARKET

 FINANCIAL MARKETS:

Financial markets perform a crucial function in the

financial system as facilitating organizations. Unlike
financial intermediaries, they are not a source of funds
but are a link and provide a forum in which suppliers of
funds and demanders of loans/investments can transact
business directly

CAPITAL MARKET

TYPES OF MARKET
PRIMARY MARKET
SECONDARY MARKET

CAPITAL MARKET

CAPITAL MARKET

Why Capital Markets Exist

Capital markets facilitate the transfer of

capital (i.e. financial) assets from one

owner to another.
They provide liquidity.

Liquidity refers to how easily an asset

can be transferred without loss of value.
.
CAPITAL MARKET

Role of financial market

1.Flow of funds-Transform savings into

investment ,as a result it shows the surplus

fund to invest .
Business sector and government sector are
demander of fund as their investment is
greater than the savings.
Financial market create necessary
infrastructure for trading.
CAPITAL MARKET

 2.Capital formation-Investment by the public in

shares,bonds etc issued by companies help to

mobilise funds.
Financial market are catalyst in an economy.
3.Risk allocation-Various instruments are offer by
financial market that suits risk preference of
investors.
The company that issue equity share are at a position
to spread its business risk among the equity investors.
4.Liquidity-Marketability of financial instrument
(conversion of financial instrument into cash)
For eg. Stock exchange
5.Wealth function-financial instrument provide a
way to store their wealth
CAPITAL MARKET

Capital Market Vs Money

Market
Capital Market

Money Market

Deal with long term

Deal with short term

securities.
Risk level of securities is
high.
The market has wider
choice of securities.
Trading in smaller lots is
possible.
Stock exchange facilitates

securities
Securities have lower risk
The market has a limited
range of securities.
Trading is usually in large
possible.
No fixed place ;it is a
telephone market

CAPITAL MARKET

Capital market instrument

1.Fixed income securities.
2.Equity shares
3.Mutual fund units
4.Derivative securities

CAPITAL MARKET

1.Fixed income securities

There are two types of Fixed income

securities:
1.Bonds
2.Preference shares

CAPITAL MARKET

 1.Fixed income securities Income are fixed in nature.

Bonds and preference share are the two fixed income

securities.
The issuer pays interest and the principal amount on
these securities.
For Bonds issuing company agrees to pay interest at
fixed rate and at specified intervals of time.
For preference shares issuer specifies to pay certain
% of dividend that are also at a fixed rate.

CAPITAL MARKET

Bonds
It is the debt securities issued by the

government whereas the term debenture is

associated with the issuances of companies.
It is an acknowledgement of debt means issuer
has a obligation to pay interest and repay the
principal amount at time of maturity.
Bond having fixed maturity period.
CAPITAL MARKET

Types of bond
1.Government bonds/Treasury bonds There is no default risk
Bank and FIs are the major investors in the

government bond because of SLR requirements.

2.Municipal bonds
Bond issued by local authorities
Interest income are exempt from income Tax.
CAPITAL MARKET

3.Corporate bonds1. Entail a risk of default by the issuing

companies
2. Interest on bonds are higher than the
government bonds.
3. As there a risk element ,an issuing
firms are required to obtain credit
rating for the instrument
4. Rating symbols the risk level.
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Preference share
Fixed income securities issued by the

companies
Hybrid security (feature of debt and
equities)
Fixed rate of dividend.
Preferential right for the preference
shareholders over equity shareholder.
CAPITAL MARKET

Equity shares
Equity shares provide ownership to the holder.
They have voting rights and are entitled to select

BOD.
Holder receive dividend declare by BOD.
The dividend amount varies and there is no
certainty that dividend will be declare
Return are uncertain that shows its risky nature.
CAPITAL MARKET

Mutual fund units

Collect the capital from the public by

issuing units of mutual fund schemes.

Investors pool together their money to buy
stocks, bonds, or any other investments.
Derivatives
The securities derived their value from
underlying assets such as stock,
commodities, currencies etc.
CAPITAL MARKET

Capital Market Participants

3 Is of capital market are:-

a)Issuers- There are two types of

Issuers
Namely companies and government
b)Intermediaries
c)Investors
SEBI has listed the following
institutions as intermediaries in its
handbook of statistics on the Indian
securities Market
CAPITAL2008.
MARKET

1. Stock exchange
2. Brokers
3. Sub-brokers
4. Custodians
5. Depositories, depository participants
6. Merchant bankers
7. Banker to the issue
8. Underwriter
9. Registrar to issue
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10.Portfolio Managers
11.Mutual funds
12.FIIs
13.Debentures trustees
14.Credit rating agencies
15.Collective investment schemes
16.Venture capital funds

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Capital Market segment

Primary Market
Secondary Market

CAPITAL MARKET

Functions of a capital
market

Disseminate information efficiently

Provide insurance against market risk or
price risk
Enable wider participation Provide
operational efficiency through

-simplified transaction procedure

- lowering settlement timings and

- lowering transaction costs

CAPITAL MARKET

Develop integration among

-real sector and financial sector
-equity and debt instruments
-long term and short term funds
-Private sector and government sector and
-Domestic funds and external funds
Direct the flow of funds into efficient channels
through
-investment
-disinvestment
-reinvestment
CAPITAL MARKET

NEW ISSUE MARKET

Objectives of capital issue

To promote a new company
To expand an existing company
To diversify the production
To meet the regular working capital

requirements
To Capitalise the reserves

MEANING OF NEW ISSUE

MARKET
It refers to the set-up which helps the industry to raise

the funds by issuing different types of securities.

These securities are issued directly to the investors
(both individuals as well as institutional) through the
mechanism called primary market or new issue
market.
The securities take birth in this market.

Primary Market
It is that market in which shares, debentures and

other securities are sold for the first time for

collecting long-term capital.

This market is concerned with new issues.

Therefore, the primary market is also called NEW

ISSUE MARKET.

CAPITAL MARKET

FUNCTIONS OF NEW ISSUE

MARKET
The main function of new issue market is to facilitate

transfer resources from savers to the users.

It plays an important role in mobilizing the funds from
the savers and transferring them to the borrowers.
The main function of new issue market can be divided
into three service functions:

PRIMARY MARKET

The primary market deals with the issue of new

instruments by the corporate sector such as equity
shares, preference shares and debentures.
Function of primary marketORIGINATION: is the work of investigation and
analysis and processing of new issue proposals.
UNDERWRITING: is a form of guarantee that the new
issue would be sold by eliminating the risk arising
from uncertainty of public response.
DISTRIBUTION: is the sale of the ultimate investors.
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PLACEMENT OF THE
ISSUE
Initial issues are floated
1. Through prospectus
2. Bought out deals/offer for sale
3. Private placement
4. Right issue
5. Book building

Prof. Deepak Tandon

OFFER THROUGH PROSPECTUS

Invites offers for subscription or purchase of any shares or debentures

from the public

The salient features of the prospectus are

1. General Information about company

2. Capital structure of the company
3. Terms of the present issue
4. Particulars of the Issue - issue-opening, closing and earliest closing date of
the issue
5. Company Management and Project
6. Details of the outstanding litigations
7. Management perception of risk factors
8. Justification of the issue premium
9. Financial Information - cost of the project, projected earnings

Offer of sale
The promoter places his /her share with an investment banker who

offers it to the public at a later date .In bought out deal, an existing
company off loads a part of the promoters capital to a wholesaler
instead of making a public issue. The sponsor hold on to these
share s for a specific period and offer to the public at an
appropriate date.

Private placement
It involves sale of securities to a limited number of

sophisticated investors such as financial institutions,

mutual funds, venture capital funds, banks, and so on.
It refers to sale of equity or equity related instruments
of an unlisted company or sale of debentures of a
listed or unlisted company.

PRIVATE PLACEMENT
Advantages:

Cost Effective - statutory and non-statutory

(mailing, underwriter etc.) expenses are
avoided.
Time Effective-No legal formality
Structure Effectiveness - flexible to suit the
financial intermediaries
Access Effective listed and non listed companies
mobilise capital.

Right Issue
When a listed company proposes to issue securities to its
existing shareholders, whose names appear in the
register of members on record date, in the proportion to
their existing holding, through an offer document, such
issues are called Right Issue. This mode of raising
capital is the best suited when the dilution of
controlling interest is not intended.

- to be kept open for at least 30 days and not more

than 60 days.
Why rights ?
- to reward shareholders
- to reflect the stocks true worth
- to hike promoters stake

Book Building
Public issue can be made through a fixed price

offer /through book building mode

In a fixed price offer , the price of the shares and
the number of share to be issued is known in
advance.
In Book building price is not known in advance .
The indicative floor price /price band is
announced by the issuer and the applicants for
shares are asked to mention their preferred price.
CAPITAL MARKET

 Book Building method is an auction method

Bids are invited from the public through

application bid form .

The investor specifies the number of share he
wants to apply and the price.
The amount of price shall be above the floor price.
Price bid may vary as per the investor /applicant.
After applying at a particular price , the applicant
has a facility of revising his bid by submitting
another bid form. CAPITAL MARKET

 The bid will be open for at least 5 days and

only electronic bidding is permitted.

The number of shares applied for and the
price bids are then analysed by the lead
merchant banker/book running lead
manager(BRLM).
He assess demand with issuers and fixes the
final issue price.
The price is called as the cut off price.
Book building method also called as the
method is found to be a process of Price
CAPITAL MARKET
discovery.

 SEBI has prescribed that a capital issuing

firm has two choices.

1.Adopt 75% Book Building route.
2. Adopt 100% Book Building route.
In case of 100% Book Building mode
In case of 75% Book Building route- 75%
through Book Building mode and 25%
fixed price mode.

CAPITAL MARKET

Limitations of book building method

No road shows done

Still dependent on good faith
No. of investors invited to apply are limited
Lack of transparency
Not proved to be good price discovery mechanism
Lag time of more than 60 days between issue pricing and listing
Issuer may have to sell cheap due to collective bargaining
High institution holding may affect stocks liquidity
Volatility may increase due to bulk offloading

CAPITAL MARKET

CAPITAL MARKET

Public issues or Initial public

offering (IPO)
The issuing company directly offers to the
general public/institutions a fixed number
of securities at a stated price or price band
through a document called prospectus. This
is the most common method followed by
companies to raise capital through issue of
the securities.

Issuance Process
Public Issue- It is an invitation by a company to public to

subscribe to the securities offered through a prospectus

Initial Public Offer (IPO) - When an unlisted company

makes either a fresh issue of securities or offers its

existing securities for sale or both for the first time to the
public, it is called IPO.
Further Public Offer (FPO) - When an already listed

company makes either a fresh issue of securities to the

public or an offer for sale to the public, it is called an
FPO.
CAPITAL MARKET

 Public issue by the Indian companies is

subject to provisions of the companies

Act,1956and the disclosure and Investor
Protection (DIP) guidelines 2000 prescribed
by SEBI.
The guidelines provide eligibility for
companies issuing securities ,pricing of
securities, listing formalities, contents of
prospectus and other offer documents
,disclosures lock-in period for promoters
contribution, pre and post issue obligations.
CAPITAL MARKET

CAPITAL MARKET :The

regulatory framework
1.SEBI Act ,1992
2.The companies Act ,1956
3.The security contract Act (Regulation) Act

,1956
4.The depositories Act,1996

CAPITAL MARKET

1.SEBI Act ,1992

Establish SEBI as market regulators with all

statutory powers.
Established to protect the interest of
investors and for regulation and
development of securities market in India.
Power to regulate all the market
intermediaries (grant registration, power to
inspect, monitor, take penal action.
CAPITAL MARKET

 The Companies Act 1956 a set code of

conduct regarding issue, allotment and

transfer of the securities.
It provides for disclosures to be made in the
prospectus
Legal Aspects concerning dividends,rights
and bonus issues are covered in companies
Act.
CAPITAL MARKET

 The securities contract Act,1956

Provide regulation and supervision of stock

exchange
To issue appropriate orders for ensuring the
smooth flow of transactions in stock
exchange.

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Role of SEBI in the Indian Capital

Market
Primary Market has issued the DIP

guidelines 2000 to provide eligibility

criteria for companies to access the capital
market , listing norms and disclosure norms
relating to offer documents.
Salient features of SEBI guidelines are as
follows:CAPITAL MARKET

 1.Capital issues by an unlisted company An unlisted companies are those companies

whose shares are not listed yet.

The public issue in these case is described
as the IPO.
The company opt for an IPO on fixed price
basis/book building basis.
The SEBI norms are:CAPITAL MARKET

 The company has a net worth of atleast Rs. 1 crore in

each of the preceding full 3-year period.

It has a track record of distributable profits for atleast 3
years out of the preceding 5-year.
The aggregates of the proposed new issue and any
other issues made during the same financial year
should not exceed five times the size of the pre-issue
net worth.
The company has net tangible assets of atleast of at
least Rs. 3 crore in each of the preceding full 3 year
period,of which not more than 50% of it is held in
monetary assets.
CAPITAL MARKET

2.Public issue by a listed

company

A company which is already a listed company

may plan for raisingcapital through public issues

called as FPO(further public offer/Follow-onpublic offer)
The company is eligible to go tofor public issue
provided the issue size does not exceed 5 times
the size of its pre-issue net worth.
The company opt for an IPO on fixed price
basis/book building to issue the securities.
CAPITAL MARKET

3.Public issues by an unlisted company who

does not meet the above criteria:
An unlisted Company as well as a listed company

that do not meet the above criteria should fulfill

the below conditions: The public issue will be compulsorily under the
book building route.
Atleast 50% of the issue will have have to be
alocated to the QIBs or,the project shall at least
have a 15%participation by the FIs/commercial
bank.
CAPITAL MARKET

 In addition to this ,atleast 10% of the size

shall be allocated to the QIBs.

Market making: The minimum post issue
face value of the company shall be
Rs.10Crores,there shall be a compulsory
market making for at least 2 year from the
date of listing of the share.
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Promoters Contribution
The promoters contribution in case of public issue/offer by sale

by an unlisted company should not less than 20% of post issue

capital.
In case of issue by listed companies ,the promoter should
contribute to the extent of 20% of the post issue capital.
Three case where rules for promoter contribution do not apply:-

The promoters contribution shall be locked in for a period of 3

years from the date of allotment.

CAPITAL MARKET

 Right issue of the company

Public issue by companies where no

identifiable promoter groups exist.

Public issue by listed companies that have a
track record of dividend payment for at
least three preceding years.
The contributors should bring their
contribution at least 1 day before the
opening of the public issue.
The promoter should be locked in for at
least 3 year from the date of allotment.

Contents of Offer Documents

EPS
Pre issue EPS for the last 3 years.
Pre issue Price/Earning ratio.
Average return on net worth (last 3 year)
Return on net worth required to maintain the pre

issue EPS.
NAV per share
NAV after the issue
Comparison of all accounting ratios.
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Pricing of Issues
Pricing of Issues can be done through fix

price mode or through book building mode.

Listing of Securities
Listing means admission of the securities to
dealings on a recognized stock exchange.
The securities may be of any public limited
company, central or state government, quasi
governmental and other financial
institutions/corporations, municipalities etc.

Objectives of Listing
Providing liquidity to securities;
Mobilize savings for economic development;
Protect interest of investors by ensuring full

disclosures.
The exchange has a separate Listing Dept. to grant
approval for listing of securities of companies in
accordance with the various provisions of the
concerned laws, guidelines issued by SEBI and
rules, bye-laws and regulation of the exchange.

Green shoe option

when an issue is oversubscribed ,the

companies generally exercise the green shoe

option.
An option of allocating shares in excess of the
shares included in the public issue and also
operating a post issue price stabilising
mechanism.
The company should have obtained the
approval of shareholder for exercising the
green shoe option.CAPITAL MARKET

INTERMEDIATRIES TO ISSUE
Intermediaries to an issue are:
Lead Managers
Registrars to the issue
Bankers to the issue
Underwriters to the issue
Advertising agencies
Financial institutions
Government/ statutory agencies

1.Lead Managers/managers to the

issue
Lead manager appointed by the company to manage

the public issue program.

Duties of lead manager: Drafting of prospectus
Preparing the budget of expenses.
Suggesting appropriate timing of public issue.
Marketing work.
Selecting commission to underwriter, broker,
advertising agent etc.
Coordination between various other agencies.

2.Registrar to the issue:Duties of registrar to the issuea) Receiving the share application.
b) Suggesting the basis of allotment.
c) Dispatching the shared certificate.
d) Keeping the issue record.

3.Underwriter They give assurance to the

insurer agencies to sell.
4.Bankers to the issue:a) Collection of application money along with
application form.
b) Bankers charge commission for their
services.
c) To create investment awareness collecting
branches are designated in different
town/cities.

 5.Advertising agents-All sorts of promotional role

and fulfillment of tentative target.

6.Financial institutions
7.Government and statutory parties: SEBI
RBI
Registrar of companies
Relevant stock exchange
Industrial licensing authority
Pollution control board