CAPITAL MARKETCAPITAL MARKETThe capital market is a market for financial The capital market is a market for financial assets which have a long or indefinite maturity. assets which have a long or indefinite maturity. Generally, it deals with long term securities Generally, it deals with long term securities which have a maturity period of above one which have a maturity period of above one year. Capital market may be further divided into year. Capital market may be further divided into three namely:three namely:

A.A. Industrial securities market.Industrial securities market.B.B. Government securities marketGovernment securities marketC.C. Long term loan marketLong term loan market

A.A. Industrial Securities MarketIndustrial Securities Market :- :-

It is a market for industrial securities namely:It is a market for industrial securities namely:

1.1. Equity shares or ordinary sharesEquity shares or ordinary shares

2.2. Preference sharesPreference shares

3.3. DebentureDebenture

It is a market where industrial concern raise It is a market where industrial concern raise their capital or debt by issuing appropriate their capital or debt by issuing appropriate

instrument .instrument .

B.B. Government Securities MarketGovernment Securities Market :- :-

It is a market where government securities are traded. In India there are many kinds of

government securities – short term and long term. Long term securities are traded in this

market while short term securities are traded in the money market. Securities issued by the

Central Government, state government, Semi government authorities like City Corporations, Port Trust etc. All India and state level financial

institution and public sector enterprises are dealt in this market.

C.C. Long Term Loans Market Long Term Loans Market :-:-

Development banks and commercial banks play a significant role in this market by supplying long term loans to corporate customers. Long term loans market may further be classified into:-

I. Term loans market.II. Mortgages market.III. Financial guarantees market

I.I. Term Loans MarketTerm Loans Market :- :-

In India, many industrial financing institutions In India, many industrial financing institutions have been created by the government both have been created by the government both at the national and regional levels to supply at the national and regional levels to supply long-term and medium term loans to long-term and medium term loans to corporate customers directly as well as corporate customers directly as well as indirectly. These development banks indirectly. These development banks dominate the industrial finance in India. dominate the industrial finance in India. Institutions like IDBI, IFCI, ICICI, and other Institutions like IDBI, IFCI, ICICI, and other state financial corporations come under this state financial corporations come under this category. These institutions meet the growing category. These institutions meet the growing and varied long term financial requirements and varied long term financial requirements of industries by supplying long term loans. of industries by supplying long term loans.

II.II. Mortgages MarketMortgages Market :- :-

The mortgages market refers to those centers The mortgages market refers to those centers which supply mortgage loan mainly to which supply mortgage loan mainly to individual customers. A mortgage loan is a individual customers. A mortgage loan is a loan against the security of immovable loan against the security of immovable property like real estate. The transfer of property like real estate. The transfer of interest in a specific immovable property to interest in a specific immovable property to secure a loan is called mortgage. The secure a loan is called mortgage. The mortgage market may have primary market mortgage market may have primary market as well secondary market. The primary as well secondary market. The primary market consists of original extension of credit market consists of original extension of credit and secondary market has sales and re-sales and secondary market has sales and re-sales of existing mortgages at prevailing prices. of existing mortgages at prevailing prices.

III.III. Financial Guarantees MarketFinancial Guarantees Market :- :-

A Guarantee market is a centre where finance A Guarantee market is a centre where finance is provided against the guarantee of a is provided against the guarantee of a reputed person in the financial circle. reputed person in the financial circle. Guarantee is a contract to discharge the Guarantee is a contract to discharge the liability of a third party in case of his default. liability of a third party in case of his default. Guarantee act as a security from the Guarantee act as a security from the creditor’s point of view. In case the borrower creditor’s point of view. In case the borrower fails to repay the loan, the liability falls on the fails to repay the loan, the liability falls on the shoulders of the guarantor. Hence the shoulders of the guarantor. Hence the guarantor must be know to both the borrower guarantor must be know to both the borrower and he must have the means to discharge his and he must have the means to discharge his liability. liability.

IMPORTANCE OF CAPITAL MARKETIMPORTANCE OF CAPITAL MARKET

Absence of capital market acts as a deterrent Absence of capital market acts as a deterrent factor to capital formation and economic factor to capital formation and economic growth. Resources would remain idle if growth. Resources would remain idle if finances are not funneled through the capital finances are not funneled through the capital market. The importance of capital market can market. The importance of capital market can be briefly summarized as follows :-be briefly summarized as follows :-

1.1. The capital market serves as an important The capital market serves as an important source for the productive use of the economy’s source for the productive use of the economy’s saving. It mobilizes the saving of the people for saving. It mobilizes the saving of the people for further investment and thus avoids their further investment and thus avoids their wastages in unproductive uses. wastages in unproductive uses.

2.2. It provides incentives to saving and facilities It provides incentives to saving and facilities capital formation by offering suitable rates of capital formation by offering suitable rates of interest as the price of capital.interest as the price of capital.

3.3. It provides an avenue for investors, particularly It provides an avenue for investors, particularly the household sector to invest in financial the household sector to invest in financial assets which are more productive than assets which are more productive than physical assets.physical assets.

4.4. The operation of different institution in the The operation of different institution in the capital market induce economic growth. They capital market induce economic growth. They give quantitative and qualitative directions to give quantitative and qualitative directions to the flow of funds and bring about rational the flow of funds and bring about rational allocation of scarce resources.allocation of scarce resources.

5.5. A healthy capital market consisting of expert A healthy capital market consisting of expert intermediaries promotes stability in values of intermediaries promotes stability in values of securities representing capital funds.securities representing capital funds.

6.6. It serves as an important source for It serves as an important source for technological upgradation in the industrial technological upgradation in the industrial sector by utilizing the funds invested by the sector by utilizing the funds invested by the public. public.

PRIMARY MARKETPRIMARY MARKET

Primary market is a market for new issues or new financial claims. Primary market is a market for new issues or new financial claims. Hence, it is also called New Issue Market. The primary market deals Hence, it is also called New Issue Market. The primary market deals with those securities which are issued to the public for the first time. with those securities which are issued to the public for the first time. In the primary market, borrowers exchange new financial securities In the primary market, borrowers exchange new financial securities for long term funds. Thus, primary market facilities capital for long term funds. Thus, primary market facilities capital formation.formation.

There are three ways by which a company may raise capital in a primary market. They are :-

► Public issue► Right issues► Private Placement.

The most common method of raising capital by new companies is through sale of securities to the public. It is called Public Issue. When an existing company wants to raise additional capital, securities are first offered to the existing shareholders on a pre-emptive basis. It is called Right Issue. Private Placement is a way of selling securities privately to a small group of investors.

Functions Of Primary MarketFunctions Of Primary Market

The main function of a primary market is to facilitate transfer The main function of a primary market is to facilitate transfer of resources from savers to the users. The savers are of resources from savers to the users. The savers are individuals, commercial banks, insurance companies etc. The individuals, commercial banks, insurance companies etc. The users are public limited companies and the government. The users are public limited companies and the government. The primary market plays an important role of mobilizing the primary market plays an important role of mobilizing the funds from the savers and transfer them to borrowers for funds from the savers and transfer them to borrowers for production purpose, an important requisite of economic production purpose, an important requisite of economic growth. It is not only a platform for raising finance to establish growth. It is not only a platform for raising finance to establish new enterprises but also for expansion/diversification of new enterprises but also for expansion/diversification of existing units. In this basis the new issue market can be existing units. In this basis the new issue market can be classified as:classified as:

1) Market where firms go to the public for the first time 1) Market where firms go to the public for the first time through initial public offering (IPO)through initial public offering (IPO)

2) Market where firms which are already trading raise 2) Market where firms which are already trading raise additional capital through seasoned equity offering (SEO).additional capital through seasoned equity offering (SEO).

The main function of a new issue market (primary The main function of a new issue market (primary market) can be divided into triple service market) can be divided into triple service functions:functions:

1.1. OriginationOrigination2.2. UnderwritingUnderwriting3.3. DistributionDistribution

OriginationOrigination:-:-

Origination refers to the work of investigation, Origination refers to the work of investigation, analysis and processing of new project analysis and processing of new project proposals. Origination starts before an issue is proposals. Origination starts before an issue is actually floated in the market. There are two actually floated in the market. There are two aspect in this function:aspect in this function:

a)a) A careful study of the technical, economic and A careful study of the technical, economic and financial viability to ensure soundness of the financial viability to ensure soundness of the project. This is a preliminary investigation project. This is a preliminary investigation undertaken by the sponsors of the issue.undertaken by the sponsors of the issue.

b)b) Advisory service which improve the quality of Advisory service which improve the quality of capital issues and ensure its success.capital issues and ensure its success.

The function of origination is done by The function of origination is done by merchant bankers who may be commercial merchant bankers who may be commercial banks, all India financial institutions, or private banks, all India financial institutions, or private firms. Initially this service was provided by firms. Initially this service was provided by specialized division of commercial banks. At specialized division of commercial banks. At present, financial institutions and private firms present, financial institutions and private firms also perform this service. Depend of issues this also perform this service. Depend of issues this service is highly important on the efficiency of service is highly important on the efficiency of the market. the market.

UnderwritingUnderwriting:-:-

Underwriting is an agreement whereby the Underwriting is an agreement whereby the underwriter promises to subscribe to a specified underwriter promises to subscribe to a specified number of public not subscribing to the issue. If number of public not subscribing to the issue. If the issue is fully subscribed, then there is no the issue is fully subscribed, then there is no liability for the underwriter. If a part of share liability for the underwriter. If a part of share issues remains unsold, the underwriter will buy issues remains unsold, the underwriter will buy the shares. Thus, underwriting is a guarantee for the shares. Thus, underwriting is a guarantee for the marketability of shares. the marketability of shares.

Advantages of UnderwritingAdvantages of Underwriting:-:-

1.1. The issuing company is relieved from the risk of The issuing company is relieved from the risk of finding buyers for the issuing offered to the finding buyers for the issuing offered to the public. The company is assured of raising public. The company is assured of raising adequate capital.adequate capital.

2.2. The company assured of getting the minimum The company assured of getting the minimum subscription within the stipulated time, a statutory subscription within the stipulated time, a statutory obligation to be fulfilled by the issuing company.obligation to be fulfilled by the issuing company.

3.3. Underwriters undertake the burden of highly Underwriters undertake the burden of highly specialized function of distributing securities.specialized function of distributing securities.

4.4. They provide expert advice with regard to timing They provide expert advice with regard to timing of securities issues, the pricing of issues, the size of securities issues, the pricing of issues, the size and type of securities to be issued etc.and type of securities to be issued etc.

5.5. Public confidence on the issues is enhanced when Public confidence on the issues is enhanced when underwritten is done by reputed underwriters.underwritten is done by reputed underwriters.

The Underwriters in india may be classified The Underwriters in india may be classified into two categories:into two categories:

1.1. Institutional underwritersInstitutional underwriters

2.2. Non – institutional underwriters.Non – institutional underwriters.

The institutional underwriters are:The institutional underwriters are:

a.a. Life insurance corporation of india (LIC)Life insurance corporation of india (LIC)

b.b. Unit trust of india (UTI)Unit trust of india (UTI)

c.c. Industrial development bank of india (IDBI)Industrial development bank of india (IDBI)

d.d. Industrial credit and investment corporation of Industrial credit and investment corporation of india (ICICI)india (ICICI)

The pattern of underwriting of the above The pattern of underwriting of the above institutional underwriter differ vastly in India. LIC institutional underwriter differ vastly in India. LIC and UTI have purchased industrial securities from and UTI have purchased industrial securities from new issue market with a view to holding them on new issue market with a view to holding them on their portfolio. These institutions preference for their portfolio. These institutions preference for underwriting shares in large and well established underwriting shares in large and well established firms. The development banks have given special firms. The development banks have given special attention to the issues in backward states and attention to the issues in backward states and industries in the priority list. The trust of industries in the priority list. The trust of development banks is also towards small and new development banks is also towards small and new issues which do not have adequate support from issues which do not have adequate support from other institutions.other institutions.

The non institutions underwriters are The non institutions underwriters are brokers. They guarantee shares only with a view brokers. They guarantee shares only with a view to earning commission from the company floating to earning commission from the company floating the issues. the issues.

The broker work with profit motive in The broker work with profit motive in underwriting industrial securities. After the underwriting industrial securities. After the elimination of forward trading , stock exchange elimination of forward trading , stock exchange brokers have begun to take an underwriting brokers have begun to take an underwriting business. The percentage of securities business. The percentage of securities underwritten to the total private capital issue underwritten to the total private capital issue varies between 72% and 97%. varies between 72% and 97%.

DistributionDistribution :- :-

Distribution is the function of sale of securities Distribution is the function of sale of securities to ultimate investors. This service is performed to ultimate investors. This service is performed by brokers and agent who maintain a regular by brokers and agent who maintain a regular and direct contact with the ultimate investors.and direct contact with the ultimate investors.

According to the companies act 1956 every According to the companies act 1956 every application form must be accomplished by a application form must be accomplished by a prospectus. Now, it is no longer necessary to prospectus. Now, it is no longer necessary to furnish a copy of the prospectus along with every furnish a copy of the prospectus along with every application form as per the companies application form as per the companies Amendment act 1988, an abridged prospectus, is Amendment act 1988, an abridged prospectus, is being annexed to every share application form.being annexed to every share application form.

Merits if issue through prospectus Merits if issue through prospectus :- :-

1.1. Sale through prospectus has the advantages of Sale through prospectus has the advantages of inviting a large section of the investing public inviting a large section of the investing public through advertisement.through advertisement.

2.2. It is a direct method and no intermediaries are involved in It is a direct method and no intermediaries are involved in it.it.

3.3. Shares, under this method are allotted to a large Shares, under this method are allotted to a large section of investors on a non discriminatory basis. section of investors on a non discriminatory basis. This procedure helps in wide dispersion of shares This procedure helps in wide dispersion of shares and to avoid concentration of wealth in few hands.and to avoid concentration of wealth in few hands.

DemeritsDemerits:-:-

1.1. It is an expensive method. The company has to It is an expensive method. The company has to incur expenses on printing of prospectus, incur expenses on printing of prospectus, advertisement, bank’s commission, underwriting advertisement, bank’s commission, underwriting commission, legal charges, stamp duty listing fee commission, legal charges, stamp duty listing fee and registration charges.and registration charges.

2.2. This method is suitable only for large issues. This method is suitable only for large issues.

SECONDARY MARKETSECONDARY MARKET

Secondary market is a market for secondary Secondary market is a market for secondary sale of securities. In other words, securities sale of securities. In other words, securities which have already passed through the new which have already passed through the new issues market are traded in this market. issues market are traded in this market. Generally, such securities are quoted in the Generally, such securities are quoted in the stock exchange and it provide a continuous and stock exchange and it provide a continuous and regular market for buying and selling of regular market for buying and selling of securities. This market consists of all stock securities. This market consists of all stock exchanges recognized by the government of exchanges recognized by the government of India. The stock exchange in India are regulated India. The stock exchange in India are regulated under the securities contract act 1956. the under the securities contract act 1956. the Bombay stock exchange is the principal stock Bombay stock exchange is the principal stock exchange in India which sets the tone of the exchange in India which sets the tone of the other stock markets. other stock markets.

Functions of secondary marketFunctions of secondary market :- :-

Liquidity & marketability of securitiesLiquidity & marketability of securities Safety of fundsSafety of funds Supply of long term fundsSupply of long term funds Flow of capital to profitable venturesFlow of capital to profitable ventures Motivation for improved performanceMotivation for improved performance Promotion of investmentPromotion of investment Marketing of new issuesMarketing of new issues Miscellaneous serviceMiscellaneous service

Liquidity and marketability of securitiesLiquidity and marketability of securities :- :-

Stock exchange provide liquidity to securities since Stock exchange provide liquidity to securities since securities can be converted into cash at any time securities can be converted into cash at any time according to the discretion of the investors by according to the discretion of the investors by selling them at the listed prices. They facilitate selling them at the listed prices. They facilitate buying & selling securities at listed prices by buying & selling securities at listed prices by providing continuous marketability to the investors providing continuous marketability to the investors in respect of securities they hold or intend to hold. in respect of securities they hold or intend to hold. Thus they create a ready outlet for dealing in Thus they create a ready outlet for dealing in securities. securities.

Safety of fundsSafety of funds :- :-

Stock exchange ensure safety of funds invested Stock exchange ensure safety of funds invested because they have to function under strict rules and because they have to function under strict rules and regulation & ensure safety of investible funds. Over regulation & ensure safety of investible funds. Over trading , illegitimate speculation etc are prevented trading , illegitimate speculation etc are prevented through carefully designed set of rules. This would through carefully designed set of rules. This would strengthen the investor’s confidence and promote strengthen the investor’s confidence and promote larger investment.larger investment.

Supply of long term fundsSupply of long term funds :- :-

The securities traded in the stock market are The securities traded in the stock market are negotiable and transferable in character and such negotiable and transferable in character and such they can be transferred with minimum of they can be transferred with minimum of formalities from one hand to another. So, when a formalities from one hand to another. So, when a security is transacted, one investor is substituted security is transacted, one investor is substituted by another, but the company is assured of long by another, but the company is assured of long term availability of funds.term availability of funds.

Flow of capital to profitable venturesFlow of capital to profitable ventures :- :-

The profitability & popularity of companies are The profitability & popularity of companies are reflected in stock prices. The prices quoted reflected in stock prices. The prices quoted indicate the relative profitability and indicate the relative profitability and performance of companies. Funds tend to be performance of companies. Funds tend to be attracted towards securities of profitable attracted towards securities of profitable companies and this facilities the flow of capital companies and this facilities the flow of capital into profitable channels.into profitable channels.

Motivation for improved performanceMotivation for improved performance :- :-

The performance of a company is reflected on The performance of a company is reflected on the prices quoted in the stock market. These the prices quoted in the stock market. These prices are more visible in the eyes of the public. prices are more visible in the eyes of the public. This public exposure makes a company This public exposure makes a company conscious of its status in the market and it acts conscious of its status in the market and it acts as a motivation to improve its performance as a motivation to improve its performance further.further.

Promotion of investmentPromotion of investment :- :-

Stock exchange mobilize the savings of the public Stock exchange mobilize the savings of the public and promote investment through capital formation. and promote investment through capital formation. But for these stock exchanges, surplus funds But for these stock exchanges, surplus funds available with individuals and institutions would not available with individuals and institutions would not have gone for productive and remunerative have gone for productive and remunerative venture.venture.

Marketing of new issuesMarketing of new issues :- :-

If the new issues are listed, they are readily If the new issues are listed, they are readily acceptable to the public. Costs of underwriting acceptable to the public. Costs of underwriting such issues would be less. Public response to such such issues would be less. Public response to such new issues would be relatively high. Thus, a stock new issues would be relatively high. Thus, a stock market helps in the marketing of new issues also. market helps in the marketing of new issues also.

Miscellaneous servicesMiscellaneous services :- :-

Stock exchange supplies securities of different Stock exchange supplies securities of different kinds with different maturities and yields. It kinds with different maturities and yields. It enable the investors to diversify their risks by a enable the investors to diversify their risks by a wider portfolio of investment. It also inculcates wider portfolio of investment. It also inculcates saving habits among the community and paves saving habits among the community and paves the way for capital formation. It guides the the way for capital formation. It guides the investors in choosing securities by supplying the investors in choosing securities by supplying the daily quotation of listed securities and by daily quotation of listed securities and by disclosing the trends of dealings on the stock disclosing the trends of dealings on the stock exchange. It enables companies and the exchange. It enables companies and the government to raise resources by providing a government to raise resources by providing a ready market for their securities.ready market for their securities.