Brief Description of capital market

1. Financial Markets
Capital Market
Money Market
BY ALOK SINGH(KANPUR)
ALOK.LPU@YAHOO.COM

2. • Securities – These are financial instruments
that are tradable.
• These include shares, stocks, bonds,
debentures, or other marketable securities of
similar nature.

3. • Primary Securities – These are the direct
securities as they are directly issued by the
ultimate borrowers of the funds to the
ultimate savers.
• Example – Equity shares and Debentures.

4. • Secondary securities are indirect securities as
they are issued by the financial intermediaries
to the ultimate savers.
• Example – Mutual Funds, Insurance Policies
etc

5. • The Indian financial market has two major
components:
• Money Market and Capital Market

6. Capital Markets
• It is an important constituent of financial
System
• It is the market for Long term funds. (Both
Equity and Debt).
• Funds are raised within and outside the
country.

7. • Capital markets help channelise surplus funds
from savers to institutions which then invest
them into productive use. They facilitate it
through following measures:
• Issuing Primary securities in primary market
• Issuing Secondary Securities in market
• Secondary market transactions in outstanding
securities which facilitate liquidity.

8. Primary Capital Market and
Secondary Capital Market

9. Primary Capital Market
• It is a market for the new issues.
• In Primary market, Long term flow of funds
from the

10. • The fund raising in the primary market can be
classified as follows:
• Public Issue (IPO, FPO)
• Private placement
• Rights issue
• Preferential issues

11. • 1. Initial Public Offer (IPO): When an unlisted
company wants to go public for the first time,
it can be done through Initial Public Offer.
• Here, the investors bid for the company
within a band (generally given by the
company).
• The bidding value depends upon the valuation
of the company. IPO helps the company to get
listed and generate funds from public.

12. Reasons for IPO
• To raise funds for financing capital
expenditure needs. (Expansion,
diversification).
• To finance increased working capital needs.
• As an exit route fir the existing investors
(Private Equity Investors, Promoters, Venture
Capitalists).

13. • 2. Further Public Offer (FPO): Here the
already listed company generate the funds
from the public (anyone interested) for few
projects, expansion etc.

14. • Rights Issue: The listed company issues the
securities only to the existing shareholders of its
company.
• It is based on the ratio in which the shareholders
are holding number of shares on any fixed date.
• Generally, the rights issue are on the discounted
rate and are beneficial for the shareholders, So,
they prefer to invest.
• Example – 1:3 means one rights equity share for
every three equity shares.

15. • Private Placement:
• A private placement is a capital raising event that
involves the sale of securities to a relatively small
number of select investors.
• Investors involved in private placements can
include large banks, mutual funds, insurance
companies and pension funds.
• A private placement is different from a public
issue in which securities are made available for
sale on the open market to any type of investor.

16. • Since such an offering does not qualify as a
public sale of securities, it does not need to be
registered with SEBI.
• Private placements are generally considered a
cost-effective way for small businesses to
raise capital without "going public" through an
initial public offering (IPO).

17. • Private placements offer small businesses a
number of advantages over IPOs.
• Since private placements do not require the
assistance of brokers or underwriters, they
are considerably less expensive and time-
consuming.
• In addition, private placements may be the
only source of capital available to risky
ventures or start-up firms.

18. • Preferential Issue
• Preferential Allotment, is the allotment of
shares or debentures to a selected group of
persons is made by a listed company, to raise
funds.

19. Raising Funds from External
Markets

20. Equity Issues
• GDR (Global Depository Reciept)
• Global Depository Receipt (GDR) is an
instrument in which a company located in
domestic country issues one or more of its
shares or convertibles bonds outside the
domestic country.

21. • In GDR, an overseas depository bank i.e. bank
outside the domestic territory of a company,
issues shares of the company to residents
outside the domestic territory.
• Such shares are in the form of depository
receipt or certificate created by overseas the
depository bank.

22. • The domestic company enters into an
agreement with the overseas depository bank
for the purpose of issue of GDR.
• The overseas depository bank issues shares to
foreign investors.
• American Depository Reciepts

23. • An American depositary receipt is
a negotiable security that represents
securities of a non-U.S. company that trades
in the U.S. financial markets.
• Shares of many non-U.S. companies trade on
U.S. stock exchanges through ADRs, which are
denominated and pay dividends in U.S.
dollars and may be traded like regular shares
of stock.

24. External Commercial Borrowing
• ECB is basically a loan availed by an Indian
entity from a nonresident lender.
• Most of these loans are provided by foreign
commercial banks and other institutions.
• It is a loan availed of from non-resident
lenders

25. Advantages of ECB
• ECBs provide opportunity to borrow large
volume of funds
• The funds are available for relatively long term
• Interest rate are also lower compared to
domestic funds
• ECBs are in the form of foreign currencies.
Hence, they enable the corporate to have
foreign currency to meet the import of
machineries etc.

26. Secondary Markets

27. • Role of the Primary market is Capital
formation while the role of Secondary market
is :
• “To facilitate the liquidity and Marketability of
outstanding Debt Equity instruments”.
• Examples – BSE, NSE, NYSE, London
Stockexchange

28. Functions of Secondary markets
(Stock Exchange)
• Economic Barometer
• The rise or fall in the share prices indicates the boom
or recession cycle of the economy.
• Pricing of Securities:
• The stock market helps to value the securities on the
basis of demand and supply factors.
• The securities of profitable and growth oriented
companies are valued higher as there is more demand
for such securities.
• The valuation of securities is useful for investors,
government and creditors.

29. • Safety of Transactions:
• In stock market only the listed securities are
traded and stock exchange authorities include
the companies names in the trade list only after
verifying the soundness of company.
• The companies which are listed they also have to
operate within the strict rules and regulations.
• This ensures safety of dealing through stock
exchange.

30. • Spreading of Equity Cult:
• Stock exchange encourages people to invest in
ownership securities by regulating new issues,
better trading practices and by educating
public about investment.

31. • Liquidity:
• The main function of stock market is to
provide ready market for sale and purchase of
securities.
• The presence of stock exchange market gives
assurance to investors that their investment
can be converted into cash whenever they
want.

32. • Promotes the Habits of Savings and
Investment:
• The stock market offers attractive
opportunities of investment in various
securities.
• These attractive opportunities encourage
people to save more and invest in securities of
corporate sector