3. Capital Market Instruments

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It is an organized market mechanism for effective and efficientIt is an organized market mechanism for effective and efficient

transfer of money capital or financial resources from the investingtransfer of money capital or financial resources from the investing

class to the entrepreneur class in the private and public sector ofclass to the entrepreneur class in the private and public sector of

the economy.the economy.

Capital market for long term funds.Capital market for long term funds.

he capital market provides long term debt and e!uity financehe capital market provides long term debt and e!uity finance

for govt. and corporate.for govt. and corporate.

Capital market facilitates the dispersion of business o"nershipCapital market facilitates the dispersion of business o"nership

and reallocation of financial resources among corporate andand reallocation of financial resources among corporate and

industries.industries.

Capital MarketsCapital Markets


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#imensions of capital market#imensions of capital market

#irectly responsible for the follo"ing activities$-#irectly responsible for the follo"ing activities$- %obilization or concentration of national saving%obilization or concentration of national saving

for economic development.for economic development.

%obilization and import of foreign capital and%obilization and import of foreign capital andforeign investment capital plus skill to fill up theforeign investment capital plus skill to fill up the

deficit in the re!uired financial resources todeficit in the re!uired financial resources to

maintain the e&pected rate of economic gro"th.maintain the e&pected rate of economic gro"th.

'roductive utilization of resources'roductive utilization of resources #irecting the flo" to funds of high yields and also#irecting the flo" to funds of high yields and also

strive for balanced and diversifiedstrive for balanced and diversified

industrialization.industrialization.


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Capital %arket StructureCapital %arket Structure

Marketa%le Securities Non&Marketa%leSecurities

Govt.securities

Corporatesecurities

'S(s"onds

()I

MutualFunds

"ank$eposits

$epositswithCompanie

soans andadvancesof %anksand FIs.

'*C and

deposits

New IssuesMarketplayers +original

Stock

marketintermediaries

New IssuesMarket

players +forIssues


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Special features of the IndianSpecial features of the Indian

capital marketcapital market

(reater reliance on debt instrument as(reater reliance on debt instrument asagainst e!uity and in particular borro"ingagainst e!uity and in particular borro"ingfrom financial institution.from financial institution.

Issues of debenture) particularly convertibleIssues of debenture) particularly convertibledebentures "ith automatic or compulsorydebentures "ith automatic or compulsoryfrom conversion into e!uity "ithout thefrom conversion into e!uity "ithout thenormal option given to investors.normal option given to investors.

*voidance of under"riting by some cos*voidance of under"riting by some cos

+ast gro"th of mutual funds and subsidiaries+ast gro"th of mutual funds and subsidiariesof banks for financial services.of banks for financial services.


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Capital market instrumentsCapital market instruments

,!uity shares,!uity shares

'reference shares'reference shares

on-voting e!uity shareson-voting e!uity sharesCumulative convertible preference sharesCumulative convertible preference shares

Company fi&ed depositsCompany fi&ed deposits

#ebentures bonds#ebentures bonds

(lobal depository receipts(lobal depository receipts


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Structure of Capital MarketsStructure of Capital MarketsPrimary Markets Secondary Markets

,hen companies need #nancial resources

for its expansion- they %orrow moneyfrom investors through issue of securities.

)he place where such securities are

traded %y these investors is known as thesecondary market.

Securities issueda'reference Shares%!/uity Shares

c$e%entures

Securities like 'reference Shares and$e%entures cannot %e traded in thesecondary market.

!/uity shares is issued %y the underwriters and merchant %ankers on %ehalfof the company.

!/uity shares are trada%le through aprivate %roker or a %rokerage house.

'eople who apply for these securities are0a1igh networth individual

%2etail investorsc!mployeesdFinancial InstitutionseMutual Fund 1ousesf"anks

Securities that are traded are traded %ythe retail investors.

*ne time activity %y the company. 1elps in mo%ili3ing the funds for theinvestors in the short run.


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Stock ExchangeStock Exchange

An organised market place whereAn organised market place where

securities are traded.securities are traded.

Securities include (i). Shares,Securities include (i). Shares,scrips, onds, deentures, (ii).scrips, onds, deentures, (ii).

!o"ernment securities.!o"ernment securities.

Securities are issued # !o"t,Securities are issued # !o"t,Semi !o"ts odies, PS$s % C&s'Semi !o"ts odies, PS$s % C&s'


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S-18S-18 1010

unctions o Stock Exchangeunctions o Stock Exchange

*o pro"ide read# market or u#ing % selling*o pro"ide read# market or u#ing % selling

o securities.o securities.

acilitates speculation.acilitates speculation.

Promotes sa"ing hait among generalPromotes sa"ing hait among general

pulic.pulic.

Promotes industrial growth % economicPromotes industrial growth % economic

de"elopment o the countr#.de"elopment o the countr#.

Pro"ides platorm to corporate to raisePro"ides platorm to corporate to raise

unds.unds.


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S2C2, 3+ 4, S,C2II,S %*5,

Securities

Market

EquityMarket

DebtMarket

DerivativesMarket

Government

Securities

Market

Corporate

Debt

Market

Money

Market

Options

Market

Futures

Market


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Capital %arketCapital %arket-- he market for relatively-- he market for relatively

long-term greater than one year originallong-term greater than one year original

maturity9 financial instruments.maturity9 financial instruments.

'rimary %arket'rimary %arket-- * market "here ne"-- * market "here ne"

securities are bought and sold for the firstsecurities are bought and sold for the firsttime a :ne" issues; market9.time a :ne" issues; market9.

Secondary %arketSecondary %arket-- * market for e&isting-- * market for e&isting

used9 securities rather than ne" issues.used9 securities rather than ne" issues.

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Pulic IssuePulic Issue

Securities are sold to hundreds) and oftenSecurities are sold to hundreds) and oftenthousands) of investors under a formal contractthousands) of investors under a formal contract

overseen by federal and state regulatoryoverseen by federal and state regulatory

authorities.authorities.

=hen a company issues securities to the=hen a company issues securities to the

general public) it is usually uses the services ofgeneral public) it is usually uses the services of

anan investment bankerinvestment banker..

'ublic Issue'ublic Issue -- Sale of bonds or stock to

the general public.


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In"estment +ankerIn"estment +anker

Investment banker receives anInvestment banker receives an under"riting spreadunder"riting spread

"hen acting as a middleman in bringing together"hen acting as a middleman in bringing together

providers and consumers of investment capital.providers and consumers of investment capital.

2nder"riting spread2nder"riting spread -- the difference bet"een the-- the difference bet"een the

price the investment bankers pay for the securityprice the investment bankers pay for the security

and the price at "hich the security is resold to theand the price at "hich the security is resold to the

public.public.

Investment 7ankerInvestment 7anker -- * financial institution that

under"rites purchases at a fi&ed price on a fi&ed

date9 ne" securities for resale.


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*raditional $nderwriting*raditional $nderwriting

If the security issue does not sell "ell) eitherIf the security issue does not sell "ell) either

because of an adverse turn in the market orbecause of an adverse turn in the market or

because it is overpriced)because it is overpriced) the under"riterthe under"riter) not) not

the company) takes the loss.the company) takes the loss.

2nder"riting2nder"riting -- 7earing the risk of not being able

to sell a security at the established price by

virtue of purchasing the security for resale to the

public> also kno"n as firm commitmentfirm commitment

underwritingunderwriting.


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+lue chips+lue chipsgenerally sell high-!uality)generally sell high-!uality)

"idely accepted products and services."idely accepted products and services.

+lue chip companies+lue chip companiesare kno"n toare kno"n to

"eather do"nturns and operate profitably"eather do"nturns and operate profitably

in the face of adverse economicin the face of adverse economic

conditions) "hich helps to contribute toconditions) "hich helps to contribute to

their long record of stable and reliabletheir long record of stable and reliablegro"th.gro"th.

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!ilt!ilt--edged securitiesedged securitiesare bonds issuedare bonds issued

by some national governments. he termby some national governments. he term

is of 7ritish origin) and then referred to theis of 7ritish origin) and then referred to the

debtdebt securitiessecuritiesissued by the 7ank ofissued by the 7ank of

,ngland) "hose paper certificates had a,ngland) "hose paper certificates had a

giltgiltor gilded9or gilded9 edgeedge. 4ence) they are. 4ence) they are

kno"n askno"n as giltgilt--edged securitiesedged securities) or) or giltsgiltsfor short.for short.

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5erb trading5erb trading

3n the3n the curcuris a financial term thatis a financial term that

describes the act ofdescribes the act of tradingtradingsecuritiessecurities

outside the mainstream stock e&change)outside the mainstream stock e&change)

either because the company operating theeither because the company operating the

e&change has very strict listinge&change has very strict listing

re!uirements cf$ alternative stockre!uirements cf$ alternative stock

e&change9 or because investors are soe&change9 or because investors are sointerested to continueinterested to continue tradingtradingeven aftereven after

the official ...the official ...

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S-18S-18 6060

+EEI*S o S*&C- EC/A!E+EEI*S o S*&C- EC/A!E

(SE)(SE)

*o companies*o companies

Image o compan# goes up once theImage o compan# goes up once the

shares are listed on a stock exchange.shares are listed on a stock exchange.0ide market or shares % deentures.0ide market or shares % deentures.

1uicker response rom in"estors to the1uicker response rom in"estors to the

listed securities.listed securities.Enhancing argaining position o aEnhancing argaining position o acompan# in case o its merger'.compan# in case o its merger'.


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+eneits to communit#+eneits to communit#

Encourage people to sa"e mone#.Encourage people to sa"e mone#.

/elps in capital ormation./elps in capital ormation.

Perormance o an# compan# isPerormance o an# compan# is

relected through stock exchange. likerelected through stock exchange. like

inos#s,inos#s,

Encouraging pri"ate C&s to go pulic.Encouraging pri"ate C&s to go pulic.

Encouraged # recent oom 23334 C&sEncouraged # recent oom 23334 C&sare going pulic # oering shares'.are going pulic # oering shares'.


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S-18S-18 6666

+eneits to In"estors+eneits to In"estors

eady market for trading.eady market for trading.

Interest is safeguard through S,7IInterest is safeguard through S,7I@a".@a".

4edge against inflation.4edge against inflation.

S, provides day to day informationsS, provides day to day informationsthat are published in all dailies.that are published in all dailies.

%ultiplies your investmentA.%ultiplies your investmentA.


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+ull (*e6iwala)+ull (*e6iwala)

* person "ho first buys then sells* person "ho first buys then sells

shares e&pecting a rise in price ofshares e&pecting a rise in price of

that share.that share.

So) he buys the shares "henSo) he buys the shares "hen

prices go up) he sells them enDoysprices go up) he sells them enDoysprice differenceA.price differenceA.


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S-18S-18 6E6E

+ear (Mandiwala)+ear (Mandiwala)

4e first sells then buys the shares4e first sells then buys the shares

e&pecting a fall in prices of ae&pecting a fall in prices of a

particular securities.particular securities.

So "hen prices "ould fall in future heSo "hen prices "ould fall in future he

"ill buy at cheaper rtes then make"ill buy at cheaper rtes then makea profitA.a profitA.


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StagStag

* speculator "ho al"ays applies for* speculator "ho al"ays applies for

shares of a ne" company .shares of a ne" company .

4e acts "ith an intention of snatching4e acts "ith an intention of snatching

a !uick profitsA.a !uick profitsA.


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9egulation o Stock Exchange9egulation o Stock Exchange


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S-18S-18 6868

Securities ContractsSecurities Contracts

(9egulation) Act (SC9A)(9egulation) Act (SC9A)

In India the dealings on theIn India the dealings on the

SEs are regulated bySEs are regulated by

1.1.SCRA, andSCRA, and

2.2.the SEBI the SEBI


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Securities Contracts (9egulation)Securities Contracts (9egulation)

Act (SC9A)Act (SC9A)Enacted in 1956, came into force on Feb 20, 1957Enacted in 1956, came into force on Feb 20, 1957

3bDectives of the *ct$3bDectives of the *ct$

1.1. 'rovides po"er to central govt to regulate S,'rovides po"er to central govt to regulate S,

6.6. o promote healthy development of S,s.o promote healthy development of S,s.


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3. Capital Market Instruments

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