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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