EEB 2.2. Capital Market

7/29/2019 EEB 2.2. Capital Market

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MODULE 2

ii. CAPITAL MARKET


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What is Capital market?

Difference between Money and Capital markets

Role of Capital market

Methods of Raising Capital

Role of SEBI (Brief)

Recent Developments in Indian capital Market

Cap market Reforms- Objectives and Measures

Stock Market Volatility


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CAPITAL MARKET

Pace of economic development isconditioned, among other things, by therate of long term capital investment andcapital formation. And, capital formation is

conditioned by the mobilisation,augmentation and channelisation ofinvestible funds.

Capital market serves this function bypooling capital resources and makingthem available to investors.

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Difference between Money market and CapitalMarket

Money market Capital Market

Term Concerned with shortterm funds(


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Interdependence of the TwoMarkets

Economy requires both types of funds-both short term and long term.

Both markets are supportive of each other.

Both contribute to the flow of funds andliquidity in varying time frames.


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Structure of Capital MarketMarket for medium and long term capital and all

the facilities and institutional arrangementsthereof.

Consists of 2 Constituents- Organised andunorganised

Constituents of Organised Capital Market:1.Govt Securities Market

2. Industrial Securities Market

3.Development Financial Institutions (DFIs)4.Financial Intermediaries


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Structure of Capital Market

Govt Securities Market

- Also known as Gilt-edged market- These securities carry fixed interest and aredated- Investors are mainly FIs like commercial

banks, LIC, GIC, PFs etc- Sometimes these are captivemarkets- RBI plays an important role here through

OMO


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Structure of Capital Market2. Industrial Securities Market:

- Deals with shares and debentures of new andexisting companies

-Divided into Primary market and Secondarymarket

Primary market: Helps raise new capitalthrough shares and debenturesSecondary market: Deals with securitiesalready issued by the companies; Operates

through stock exchangesThis Market helps corporates to raise equity andprovides liquidity to investors because securitiescan be readily bought and sold.


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Structure of Capital Market

3. Development Financial Institutions (DFIs)These were set up to provide medium and long

term financial assistance to private industrialsector- once known as term lending institutions,

now DFIs.Play a very useful role by subscribing to shares

and debentures of old and new companies,giving loans, underwriting new issues etc;

LIC and UTI mobilise resources from public andplace them with the capital market.


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Structure of Capital Market-DFIAll- India DFIs:

Industrial Finance Corporation of India (IFCI)- Small Industries Devt Corporation (SIDBI)- Industrial Investment Bank of India

Specialised Financial Institutions: EXIM Bank

Infrastructure Development Corporation of India

Investment Institutions:

- LIC, UTI, GIC etc

State Level Institutions :- State Financial corporations (SFCs)

- State Industrial Development Corporations (SIDC)


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Structure of Capital Market4. Financial Intermediaries: These help in mobilising

savings and supplying funds to the capital market

Merchant banks- Manage and underwrite new issues andadvise corporate clients on fund raising and other financialaspects.

Leasing companies: Provide finance for acquiring plant andmachinery, especially for SMEs

Mutual Funds: Mobilise funds from general public and investin

capital market

Venture Capital companies: Provide financial support to newideas, introduction and adoption of new technologies


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Role of Capital Market

1. Mobilisation of savings: Network of institutions and varioustypes of financial assets2. Providing liquidity: Enabling transactions to be made quickly and

easily (Covenience and speed of converting assets into cash)3. Determining a fair price for securities (Price Discovery)4. Channelisation of funds into investments: Financial

intermediaries have specialised knowledge, expertise, informationand huge resources to allocate resources to most viableprojects

5. Minimising Transaction Costs i.e., the cost of transferringresources from lenders to borrowers and also the risk of default,flouting contract etc

6. Industrial Devt: Providing funds for diversified purposes likesetting up new units, expansion, modernisation, upgradation oftechnology


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Role of Capital Market

6. Modernisation and rehabilitation of industries:Institutions like IFCI, ICICI and IDBI help in replacingobsolete technology and tech upgradation- these alsosolve problems offoreign exchangeby channelisingfunds from international agencies like International

Finance Corporation7.Technical assistance: Advisory servicesfor preparing

Feasibility studies, training of entrepreneurs8. Encouraging investors to invest in securities: By

providing facilities for continuous regular and ready

buying and selling of securities9. Reliable guide to performance: The capital market is a

guide to the performance and financial position ofcompanies


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Methods of Fund Raising

Primary market is market for fresh capital.

Funds raised through three categoriesi. Initial Public Offer

ii. Rights Issueiii. Private Placement

Players:

Issuer Investor Intermediary


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Initial Public Offering (IPO)

An IPO orstock market launch, is the first

sale of stock by a private company to thepublic. It can be used by either small or largecompanies to raise expansion capital andbecome publicly traded enterprises.

Many companies that undertake an IPO alsorequest the assistance of an investment bankingfirm acting in the capacity of an underwriter tohelp them correctly assess the value of their

shares, that is, the share price
http://en.wikipedia.org/wiki/Private_companyhttp://en.wikipedia.org/wiki/Private_company


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IPO

When a company lists its securities on a publicexchange, the money paid by investors for thenewly issued shares goes directly to thecompany (in contrast to a secondary market

trade of shares on the exchange, where themoney passes between investors).

An IPO, therefore, allows a company to tap awide pool of investors to obtain capital for futuregrowth, repayment of debt or working capital.

.
http://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Stock_exchange


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Rights Issue

A rights issue is anissue of new shares forcash to existing shareholders in proportionto their existing holdings.

A rights issue is, therefore, a way ofraising new cash from shareholders - thisis an important source of new equity

funding for publicly quoted companies.


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Private Placement

It is direct sale of newly issued securities to a groupof investors ( i.e. FI, banks, corporate, HNI) by issuerthrough merchant bankers.

Advantages

Time and cost is less compared to IPO and right issue. It can be customised for both issuer and investor. It does not require detailed compliance of formalities,

ratings, and disclosure norms

Major issuers All India Financial Institutions, PSUs,central and state level undertakings (i.e. AEC bonds),banks

Major subscribers - Banks, Provident funds, MF, HNI


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Private Placement

Reasons for the Growth of Private Placement

Market

1. Prolonged unfavorable conditions in primary market2. PP was not bound to any regulatory system- (though,

in sept 2003, SEBI issued stringent disclosure norms

which was still unregulated).3. No lock-in period for promoters4. No compliance system formerchant bankers5. Operational flexibility and attractive pricing6. Private sector can tap this route to retire their old

expensive bonds/ debt instruments


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Private Placement

Current Scenario- PP now regulated. Disclosure needs to be made through company on the

site of exchanges. Credit rating is compulsory. (investment grade is

necessary) RBI has barred FIs from investing in unrated securities

and securities below minimum credit rating. All debt issuers must have redemption reserve and

must appoint trustee. Securities issued and traded in demat form All securities must be executed on exchanges only.


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Resource Mobilisation through internationalmarket

How Companies can mobilise resources throughinternational market:

Global Depository Receipts (GDRs)

American Depository Receipts ( ADRs)

Foreign currency convertible bonds (FCCB)

External Commercial Borrowing (ECBs)

Euro Issues


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Secondary Market

Major Constituents of Secondary Market

Different Stock exchanges (BSE, NSE,OTCEI, regional stock exchanges)

Brokers

SEBI (Regulator) Buyers


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SEBI

SEBI is the regulatory authority covering all theoperations of the capital market.

Its main functions are:

Protection of investors interest

Guidelines on capital issue Regulation of the working ofMFs

Regulating the activities ofstock brokers

Restriction on insider trading

Dematerialization of shares Other functions


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Recent Developments in capital market

Earlier, the functioning of stockexchanges was characterised by longdelays, lack of transparency, vulnerability

to price rigging and insider trading. Anumber of measures have been taken toovercome these problems.

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Objectives of Capital Market Reforms

To provide effective control of stock exchangeoperations

To enhance transparency by increasing the flowof information

To protect the interest of investors

To check insider trading

To improve operational efficiency of the stock

markets To promote healthy development of the capital

market

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Capital Market Reforms in IndiaCherunilam, p.257-261

1. IPO guidelines- Free Pricing: Provided that SEBIguidelines on disclosures and investor protection aremet, issuers of capital are able to price their issuesaccording to their assessment of the marketconditions.

2. Transition from open outcry system to electronictrading- leading to transparency, more efficient pricediscovery and reduction in transaction cost

3. More Instruments (Deepening) and More Market

Participants such as MFs and FIIs(widening)4. Improvement in Trading, Clearing and Settlement of

transactions- Shortening of settlement cycle,acceleration of book entries through depository system


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Capital Market Reforms in IndiaCherunilam, p2576-261

5. Dematerialization of accounts- increased speed andsafety reduced transaction cost

6. Reduction in risks: All stock exchanges in the countryhave established clearing houses through whichtransactions are settled. Earlier this was the case only

with some transactions, while others were directlysettled between members. Routing transactionsthrough clearing houses has reduced credit risk.

7. Structure of Information flows: Companies offering

securities in capital market are required to make publicdisclosures of all relevant information; also furnishunaudited quarterly financial results

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8. Emphasis on fair Trading Practices: According to SEBIAct, 1992, insider trading is prohibited; there are alsoseparate regulations governing take-overs andacquisitions and protection of minority share holdersinterest

9. Increasing Integration of Different Segments of theSecurities market: Between regional exchanges, in termsof interest rate structure etc.

10.Measures of investor protection

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Volatility

Volatility is one of the most important characteristics ofany stock market; it is also an important basic statisticalrisk measure.

Can be used to measure the market risk of a single

instrument or the entire portfolio of instruments.

Today, volatility is calculated for all sorts of variables,such as stock returns, interest rates, market value of aportfolio etc.

Stock return volatility is the variation of the stock returnsin time. It is the standard deviation of daily stock returnsaround the mean value.

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Volatility of Indian Stock marketThe stock market barometer Sensex fell by 5,054 points

during 2011 to end at 15,454.92 points. The totalinvestor wealth, measured in terms of cumulative marketvalue of all listed stocks, dipped by Rs 19.46 lakh croreto Rs 53,48,644.8 crore ($1.002 trillion).

In percentage terms, the losses in the stock market were24.6 per cent

In contrast, 2012 saw indian stock markets doing verywell

Currently Sensex is trading close to -------.

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Gold appreciated by 32 per cent and silver by 10

per cent during 2011. Gold prices began the year 2011 at Rs 20,890

per ten gram and ended at Rs 27,640.

During 2011, prices of precious metals had alsobeen volatile.

Gold had risen to close to Rs 30,000 level, whilesilver had gone close to Rs 60,000 at one point

of time.. Currently gold is trading above ---- and silver

around----.

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Factors Influencing Stock Market Volatility

Stock market volatility may be related to:

Global crude prices: Stock returns tend to be lower after anincrease in crude oil price and higher if crude oil price falls in theprevious month. In general, a decrease in this months crude price

on the average indicates a higher stock market return in the comingmonth. i.e, stock market tends to move in the opposite direction tocrude oil.

Global gold prices: Investors typically include in their portfolioinvestments that have historically exhibited an inverse relationshipwith stock market movement as risk insurance. Gold has anincreasing price trend in recent years and considered to be a hedgeagainst inflation. During inflation, stocks are usually valued low andgold acts as a better investment portfolio.

US Stock market reflected by Dow Jones Industrial Average: Somelarge firms are entirely export-driven and global volatility affects theircustomers.

FII Flows: Move towards safe countries32


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Volatility in 2013 Domestically, the outcomes of the elections in five

states, the Budget of 2013 (which may be populist due tothe 2014 general Elections) and the rate at whichinflation comes down (which will also result in interestrates coming down) will be events to be watched in thefirst half of calendar year 2013.

It would also depend on whether funds perceive India asa stable investment destination against a backdrop ofvolatile global markets and policy flip-flops..

Global economic uncertainty will continue to plague usas it has since the year 2008.

The movement in world capital markets would bedetermined by the events in Europe, China and USA.

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Recap Quiz1. A company selling common shares is not required to repay the

capital to investors. T/ F

2. Direct sale of newly issued securities to a group of investors ( i.e.FI, banks, corporate, HNI) by issuer through merchant bankers iscalled ________ ____________.

3. Indian companies can go directly for ADRS without domestic

offering T/ F4. ________ is the regulatory authority covering all the operations ofthe capital market.

5. FCCB can be converted into _________ of issuing companyeither in whole or in part.

6. Only companies with large _________ ________ potential opt forFCCB.

7. Rcom, Hotel Leela Ventures, JSW Steel, Suzlon Energy, SterlingBiotechfaced FCCB __________ between Feb and June12

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Recap Quiz1. A company selling commonshares is not required to repay the

capital to investors. T (DEBT needs to be repaid; share implies

ownership and so it need not be repaid)2. Direct sale of newly issued securities to a group of investors ( i.e. FI,

banks, corporate, HNI) by issuer through merchant bankers is calledPrivate Placement

3. Indian companies can go directly for ADRS without domesticoffering T

4. SEBI is the regulatory authority covering all the operations of thecapital market

5. FCCB Can be converted into ordinary shares of issuing companyeither in whole or in part (Hence convertible)

6. Only companies with large forex earnings potential opt for FCCB.

7. Rcom, Hotel Leela Ventures, JSW Steel, Suzlon Energy, SterlingBiotech all had FCCB redemptions between Feb and June12


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Recap Quiz1. A prospectus, which does not have complete

particulars on the price of the securities offered and

quantum of securities offered is called_________________.

2. A rights issue is a way of raising -------- cash from ----------- shareholders

3. _________manage and underwrite new issues andadvise corporate clients on fund raising and otherfinancial aspects.

4. ________ mobilise funds from general public andinvest in capital market.

5. ___________provide financial support to new ideas,introduction and adoption of new technologies.

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Recap Quiz

1. A prospectus, which does not have complete particulars on theprice of the securities offered and quantum of securities offered iscalled Red Herring prospectus.

2. A rights issue is a way of raising new cash from existing

shareholders3. Merchant banks manage and underwrite new issues and advise

corporate clients on fund raising and other financial aspects.

4. Mutual Funds mobilise funds from general public and invest incapital market.

5. Venture Capital companies provide financial support to new ideas,introduction and adoption of new technologies.

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EEB 2.2. Capital Market

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