Basic Terms of Capital Market

8/3/2019 Basic Terms of Capital Market

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Basic Terms of Capital Market

P.Sivarajadhanavel


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What is Investment?

The money you earn is partly spent and the

rest saved for meeting future expenses.

Instead of keeping the savings idle you maylike to use savings in order to get return on it

in the future. This is called Investment.


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Interest is an amount charged to the borrower

for the privilege of using the lenders money. Bonds: It is a fixed income (debt) instrument

issued for a period of more than one year with

the purpose of raising capital. Mutual Funds: These are funds operated by

an investment company which raises money

from the public and invests in a group of

assets (shares, debentures etc.), in accordance

with a stated set of objectives.


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Mutual fund units are issued and redeemedby the Fund Management Company based on

the fund's net asset value (NAV), which is

determined at the end of each trading session.

NAV is calculated as the value of all the shares

held by the fund, minus expenses, divided by

the number of units issued.


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Capital Market

A capital market isa market for securities (debt or equity), where businessenterprises (companies) and governments can raise

long-term funds. It is defined as a market in which money is provided for

periods longer than a year, as the raising of short-termfunds takes place on other markets (e.g., the moneymarket).

The capital market includes the stock market (equitysecurities) and the bond market (debt).


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What is meant by a Stock Exchange?

The Securities Contract (Regulation) Act, 1956

[SCRA] defines Stock Exchange as any body

of individuals, whether incorporated or not,

constituted for the purpose of assisting,

regulating or controlling the business of

buying, selling or dealing in securities.


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What is an Equity/Share?

Share or stock is a document issued by a

company, which entitles its holder to be one

of the owners of the company.

A share is issued by a company or can be

purchased from the stock market.


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International securities identification numbers ISIN

Demat refers to a dematerialised account.

NSDL National Securities Depository Ltd CDSL Central Depository Services (India) Ltd

In the depository system, securities are held in depositoryaccounts, which is more or less similar to holding funds in

bank accounts.

Depository Participant (DP), who is an agent of thedepository, offers depository services to investors.

The investor who is known as beneficial owner (BO) has to

open a demat account through any DP fordematerialisation of his holdings and transferringsecurities.


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What is a Debt Instrument?

Debt instrument represents a contract

whereby one party lends money to another onpre-determined terms with regards to rate

and periodicity of interest, repayment of

principal amount by the borrower to the

lender.


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What is a Derivative?

Derivative is a product whose value is derived

from the value of one or more basic variables,called underlying. The underlying asset can be

equity, index, foreign exchange (forex),

commodity or any other asset.


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What is a Mutual Fund?

AMutual Fund is a body corporate registered with SEBI(Securities Exchange Board of India) that pools moneyfrom individuals/corporate investors and invests thesame in a variety of different financial instruments orsecurities

such as equity shares, Government securities, Bonds,debentures etc.

Mutual funds can thus be considered as financialintermediaries in the investment business that collectfunds from the public and invest on behalf of theinvestors.Mutual funds issue units to the investors.


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What is anIndex?

An Index shows how a specified portfolio of

share prices are moving in order to give an

indication of market trends. It is a basket of

securities and the average price movement of

the basket of securities indicates the index

movement, whether upwards or downwards.


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Topics to be discussed -

CapitalMarket

PrimaryMarket

Features of PrimaryMarket

SecondaryMarket

Equity Shares

Features of Equity shares

Issues Placement of issue

Intermediaries of issues


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CapitalMarket

The capital market is the market for securities, where companies and

governments can raise long term funds. It is a market in which money is

lent for periods longer than a year.

It consist of: PrimaryMarket

SecondaryMarket


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PrimaryMarket

Theprimary marketis that part of the capital market that deals with the issuance of

new securities.

Companies, governments or public sector institutions can obtain funding through

the sale of a new stock or bond issue.

Include all types of securities being sold for the first time.

After being offered in primary market it becomes the part of secondary market.

Primary offer consists of :

IPO(initial public offering) :-where unlisted company is selling the securities to the

public for the first time.

FPO(follow on public offering) :-new offering of the listed company that have sold

securities before.


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Features of primary markets are:

This is the market for new long term capital. Therefore it is also called the

new issue market (NIM).

In a primary issue, the securities are issued by the company directly to

investors.

The company receives the money and issues new security certificates to the

investors.

Primary issues are used by companies for the purpose of setting up new

business or for expanding or modernizing the existing business.

The primary market performs the crucial function of facilitating capital

formation in the economy. The new issue market does not include certain other sources of new long

term external finance, such as loans , debts etc.


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The secondary markets are where existing securities are sold and bought

from one investor or speculator to another, usually on an exchange

Also

Secondary market is the market where stocks are traded after they areinitially offered to the investor in primary market (IPO's etc.) and get listed to

stock exchange. Secondary market comprises of equity markets and the debt

markets.

Secondary market is a platform to trade listed equities, while Primary market

is the way for companies to enter in to secondary market

Secondary market


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Equity Shares

In business and finance, a share (also referred to as equity share) ofstock means a share of

ownership in a corporation (company).

Features of equity:

Maturity

Right to income

Claim on asset

Right to control

Pre-emptive rights

Limited liability


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Issue

Public Right Preferential


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Placement of Issue

Offer through prospectus

Offerfor sale

Private placement

Book building

Right issue

Red herring prospectus


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Offer through prospectus

Invites offer for subscription or purchase of any share

The salient feature of prospectus are:

1.

General information of company

Capital structure of company

Terms of the present issue

Particulars of the issue

Company management and project

Details of the outstanding litigations

Management perception of risk factors Justification of the issue premium

Cost of project, projected earning


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Offer for sale

Promoter places his share with an investment banker who offer it to the public at later date.

Hold on period is 70 to year

Bought out dealer decide the price after analyzing the viability and future projections

Bought out dealer sheds the share at the premium to the public

`

PromoterInvestment

BankerPublic


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Advantages ofthe issuing company:

Helps the promoters to realize the fund without any loss of time.

The cost of raising fund is reduced.

Helps the new entrepreneurs, not familiar with capital market, to raise adequate fund.

Company with no track record of the project , public issue at premium may pose problems.

Possess low risk to the investors since the sponsor have already held the share for certain period.

Disadvantage:

Sell at a hefty premium.

Manipulation of the results.

Insider trading and price rigging .


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Private placement

Small number of financial intermediaries like unit trust of India, mutual funds, insurance

companies purchase the shares and sell them to the investor at later at suitable prices.

Advantages:

Cost effective

Time effective

Access effective

Structure effectiveness


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Right issue

Offers shares at the first to existing share holder.

In proportion to the share held by them at time of offer.

Offered at advantageous rate compared to the market.

Certain conditions:

1. A notice should be issued to specify the number of shares issued

2. The time given to accept should not be less than 15 days

3. Right of share holder to renounce the offer in favor of other


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Book building

Process of price discovery.

Not a fixed priced for its shares.

Indicate a price band which give highest

(the cap price) and lowest (the floor) prices.

The spread between floor and cap of the price

band should not be more than 20%.

The cap should not be more than 120% of the

floor.

The price is finalized by the book runner

and issuer .


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Red herring

Prospectus without either details of price and number of shares being offered or the amount

of issue.

A preliminary registration statement that must be filed with SEBI describing a new issue of

stock and prospectus of the issuing company.

Itis known as redherring because it contains a passage in red that states the company is not

attempting to sell their shares before the registration is not approved by the SEBI


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PRICING OF ISSUE

Prior to 1992, governed by the controller of capital Issues Act of 1947, fixation of a fair

price on the basis of the net asset value per share.

Era of free pricing 1992, SEBI does not play any role in price fixation.

Issuer in consultation with merchant banker shall decide the price.

Price discovery through book building.

1. At premium companies are permitted to price their issue at premium if subscription is very

high

2. At par value some times company have to give at par value.


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Intermediatries to issue

LeadManagers.

Registrar to the issue.

Underwriter to the issue.

Financial Institutions

Advertising agencies

Government agencies


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LeadManager

Appointed by the company to manage public issue program

He should posses valid SEBI registration

Main duties:

Drafting of Prospectus.

Preparing Budget of expenses related to issue.

Suggesting appropriate timings of the issue.

Assisting in marketing of the public issue.

Advising the company in appointing registrars ,underwriter , brokers, advertising agency ,

bankers etc.


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The banking division of financial institutions, subsidiary of commercial banks,

foreign banks, private sector bank and private agencies are available to act as lead

manager.

Some of them are SBI capital market Limited, Bank of Baroda,canera bank,ICICI

securities etc.


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Role of LeadManager in the Pre &

post Issue

Pre issue Post issue

Due diligence Management of escrow a/c

Design of prospectus , memo etc. Co-ordinate non-institutional allocation

Ensure the formality. Intimation of allocation

Appointment with intermediatries Dispatch of refund to bidders

Marketing strategy Look at the functioning of agencies


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Registrar

Finalizes the list of eligible allotees after deleting the invalid application.

Action for crediting the shares to demat account of applicants.

Dispatch of refund order to those applicable.

Receive the share application from various collection centre.

Arrange for dispatching of shares certificate.


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Bankers to the issue

Ensure that funds are collected and transferred to escrow accounts.

Estimate of collection and advising the issuer about the closer of the issue.


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Underwriters

Underwriting means they will subscribe to the balance share if all share are not picked up at

IPO.

Can be a banker ,broker or financial institutions.

Done for a commission.

Aspect considered before appointing:

Reputation.

Network of investor Clientele

Past performance

Experience.


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Basic Terms of Capital Market

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