CAPITAL MARKETCAPITAL MARKET

CAPITAL MARKET

CAPITAL MARKETCAPITAL MARKETThe 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

CAPITAL MARKETFinancial 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 market.

CAPITAL MARKET

CAPITAL 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

CAPITAL MARKETNature of capital market The nature of capital market is brought out by the following facts:It Has Two SegmentsIt Deals In Long-Term SecuritiesIt Performs Trade-off (an exchange) FunctionIt Helps In Capital FormationIt Helps In Creating Liquidity

CAPITAL MARKET

CAPITAL MARKETMAIN ELEMENTSOF CAPITAL MARKET

CAPITAL MARKET

CAPITAL MARKETTHREE ELEMENTS OF CAPITAL MARKETFINANCIAL ASSETS/INSTRUMENTS/SECURITIES

FINANCIAL INTERMEDIARIES

FINANCIAL MARKETS

CAPITAL MARKET

CAPITAL MARKETTHE 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

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

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

CAPITAL MARKET TYPES OF MARKET

PRIMARY MARKET

SECONDARY MARKET

CAPITAL MARKET

CAPITAL MARKET

CAPITAL MARKET

CAPITAL MARKETWhy Capital Markets ExistCapital 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

CAPITAL MARKETRole of financial market1.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

CAPITAL MARKET2.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 exchange5.Wealth function-financial instrument provide a way to store their wealth

CAPITAL MARKET

CAPITAL MARKETCapital Market Vs Money Market

Capital MarketDeal with long term securities.Risk level of securities is high.The market has wider choice of securities.Trading in smaller lots is possible.Stock exchange facilitatesMoney MarketDeal with short term securitiesSecurities have lower riskThe market has a limited range of securities.Trading is usually in large possible.No fixed place ;it is a telephone market

CAPITAL MARKET

CAPITAL MARKETCapital market instrument1.Fixed income securities.2.Equity shares3.Mutual fund units4.Derivative securities

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CAPITAL MARKET1.Fixed income securitiesThere are two types of Fixed income securities:1.Bonds 2.Preference shares

CAPITAL MARKET

CAPITAL MARKET1.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

CAPITAL MARKETBonds

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

CAPITAL MARKETTypes 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 bondsBond issued by local authoritiesInterest income are exempt from income Tax.

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CAPITAL MARKET3.Corporate bonds-Entail a risk of default by the issuing companiesInterest on bonds are higher than the government bonds.As there a risk element ,an issuing firms are required to obtain credit rating for the instrumentRating symbols the risk level.

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CAPITAL MARKETPreference shareFixed income securities issued by the companiesHybrid security (feature of debt and equities)Fixed rate of dividend.Preferential right for the preference shareholders over equity shareholder.

CAPITAL MARKET

CAPITAL MARKETEquity sharesEquity 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

CAPITAL MARKETMutual fund unitsCollect 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. DerivativesThe securities derived their value from underlying assets such as stock, commodities, currencies etc.

CAPITAL MARKET

CAPITAL MARKETCapital Market Participants3 Is of capital market are:-a)Issuers- There are two types of IssuersNamely companies and governmentb)Intermediariesc)Investors SEBI has listed the following institutions as intermediaries in its handbook of statistics on the Indian securities Market 2008.

CAPITAL MARKET

CAPITAL MARKETStock exchangeBrokersSub-brokersCustodiansDepositories, depository participantsMerchant bankersBanker to the issueUnderwriterRegistrar to issue

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CAPITAL MARKET10.Portfolio Managers11.Mutual funds12.FIIs13.Debentures trustees14.Credit rating agencies15.Collective investment schemes16.Venture capital funds

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CAPITAL MARKETCapital Market segmentPrimary Market Secondary Market

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CAPITAL MARKETFunctions of a capital marketDisseminate information efficientlyProvide insurance against market risk or price risk Enable wider participation Provide operational efficiency through -simplified transaction procedure - lowering settlement timings and - lowering transaction costs

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CAPITAL MARKETDevelop 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 issueTo promote a new companyTo expand an existing companyTo diversify the productionTo meet the regular working capital requirementsTo Capitalise the reserves

MEANING OF NEW ISSUE MARKETIt 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.

CAPITAL MARKETPrimary 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 MARKETThe 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:

CAPITAL MARKETPRIMARY MARKETThe primary market deals with the issue of new instruments by the corporate sector such as equity shares, preference shares and debentures. Function of primary market-ORIGINATION: 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.

CAPITAL MARKET

PLACEMENT OF THE ISSUEInitial issues are floated 1. Through prospectus 2. Bought out deals/offer for sale 3. Private placement 4. Right issue 5. Book buildingProf. Deepak Tandon

OFFER THROUGH PROSPECTUSInvites offers for subscription or purchase of any shares or debentures from the public

The salient features of the prospectus are1. General Information about company2. Capital structure of the company3. Terms of the present issue4. Particulars of the Issue - issue-opening, closing and earliest closing date of the issue5. Company Management and Project6. Details of the outstanding litigations 7. Management perception of risk factors 8. Justification of the issue premium9. Financial Information - cost of the project, projected earnings

Offer of saleThe 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 placementIt 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 formalityStructure Effectiveness - flexible to suit the financial intermediariesAccess 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 BuildingPublic issue can be made through a fixed price offer /through book building modeIn 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

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

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 discovery.

CAPITAL MARKET

CAPITAL MARKET

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

CAPITAL MARKET

CAPITAL MARKETLimitations of book building methodNo road shows doneStill dependent on good faithNo. of investors invited to apply are limitedLack of transparency Not proved to be good price discovery mechanismLag time of more than 60 days between issue pricing and listingIssuer may have to sell cheap due to collective bargainingHigh institution holding may affect stocks liquidityVolatility may increase due to bulk offloading

CAPITAL MARKET

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.

CAPITAL MARKETIssuance ProcessPublic 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

CAPITAL MARKETPublic 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 MARKETCAPITAL MARKET :The regulatory framework1.SEBI Act ,19922.The companies Act ,19563.The security contract Act (Regulation) Act ,19564.The depositories Act,1996

CAPITAL MARKET

CAPITAL MARKET1.SEBI Act ,1992Establish 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

CAPITAL MARKETThe 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 prospectusLegal Aspects concerning dividends,rights and bonus issues are covered in companies Act.

CAPITAL MARKET

The securities contract Act,1956Provide regulation and supervision of stock exchangeTo issue appropriate orders for ensuring the smooth flow of transactions in stock exchange.CAPITAL MARKET

CAPITAL MARKET

CAPITAL MARKETRole of SEBI in the Indian Capital MarketPrimary 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

CAPITAL MARKET1.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

CAPITAL MARKETThe 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 companyA company which is already a listed company may plan for raisingcapital through public issues called as FPO(further public offer/Follow-on-public 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

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

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.CAPITAL MARKET

CAPITAL MARKET

Promoters ContributionThe 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

CAPITAL MARKET

Right issue of the companyPublic 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 DocumentsEPSPre 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 shareNAV after the issueComparison of all accounting ratios.CAPITAL MARKET

CAPITAL MARKET

Pricing of IssuesPricing 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 optionwhen 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

CAPITAL MARKET

INTERMEDIATRIES TO ISSUEIntermediaries to an issue are:Lead Managers Registrars to the issue Bankers to the issueUnderwriters to the issueAdvertising agenciesFinancial institutionsGovernment/ statutory agencies

1.Lead Managers/managers to the issueLead manager appointed by the company to manage the public issue program.Duties of lead manager:-Drafting of prospectusPreparing 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 issue-a) 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 institutions7.Government and statutory parties:-SEBIRBIRegistrar of companiesRelevant stock exchange Industrial licensing authorityPollution control board

CAPITAL MARKETCAPITAL MARKETINDIRA SCHOOL OF CAREER STUDIES*INDIRA SCHOOL OF CAREER STUDIESCAPITAL MARKETCAPITAL MARKETINDIRA SCHOOL OF CAREER STUDIES*INDIRA SCHOOL OF CAREER STUDIESCAPITAL MARKETCAPITAL MARKETINDIRA SCHOOL OF CAREER STUDIES*INDIRA SCHOOL OF CAREER STUDIES