Capital & New Issue
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Transcript of Capital & New Issue
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Ajith S
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New Issue MarketPrimary market, characterized by the
presence of a set of all institutions , structures , people, procedures , services , and practices involved in raising of fresh capital funds by both new and existing companies
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Methods of marketing securities• Pure Prospectus Method Existing enterprises mops up capital fund
from general public by issuing a prospectusAdvantageso Excellent mode of disclosure of all the
information pertaining to the issueo Wide diffusion of ownership of securities
leading to reduction in concentration of economic power
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Disadvantageso High issue costo Time consuming
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Offer for sale methodMarketing of securities takes place in bulk
quantity to intermediariesAdvantageo Saves company from the hassles involved in
selling the sharesDisadvantageo Expensive for the investors
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Private Placement methodIssuer makes the offer of sale to individuals
and institutions privately without the issue of prospectus
Advantageo Less expensiveo Less troublesome for the issuero Used when stock market is dull and public
issue is doubtful
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Disadvantageo Concentration of securities in few handso Depriving the common investors of an
opportunity to subscribe to the issue
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Initial Public OfferPublic issue made by a corporate entity for
the first timeOften prompted by venture capitalists who
wish to realize a cash return on their investment.
Founders of the firm may wish to go through an IPO to establish a value for their company.
There exists greater price uncertainty with an IPO than with other new public stock issues
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Right Issue MethodWhere the shares of an existing company are
offered to the existing shareholders , it takes the form of ‘right issue’. Under this method, the existing company issues shares to its existing shareholders in proportions to the number of shares already held by them
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Bonus Issue methodA method of marketing the securities of a
company by converting its accumulated reserves and surplus profits, it takes the form of ‘bonus issue method’.
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Book-building methodA method of marketing the shares of a company whereby the quantum and the bid price of the securities to be issued will be decided on the basis of the bids received from the prospective shareholders by the lead merchant bankers is known as book building method
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Employees Stock Option SchemeA method of marketing the securities of a
company whereby its employees are encouraged to take up shares and subscribe to it is known as ‘Stock Option’.
Help to retain the most productive employees in an industry , which is known for its constant churning of personnel
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Bought – out dealsA method of marketing of securities of a body
corporate whereby the promoters of an unlisted company make an outright sale of a chunk of equity shares to a single sponsor or to the lead sponsor, is known as “bought –out deal”
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CAPITAL MARKET
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Definition A market for borrowing and lending long
term capital funds required by business enterprises
Have long or indefinite maturityThe primal role of the capital market is to
channelize investments from investors who have surplus funds to the ones who are running a deficit.
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Characteristics• Securities market
dealings are done through shares and debentures
• Security pricesprices are determined through the general laws of demand and supply.
• prices depends upon 1) Yield on securities2)Level of demand for funds3)Extend of funds available from public savings
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4) Flow of funds from the banking system5) Price situation in generalParticipants-Brokers -FII - Block exchanges - Depositories - Underwriters
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-Mutual funds - Venture capital funds - RegulatorsLocation
exists all over the country,where suppliers and users of capital get together and do business
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FUNCTIONS• Allocation function
- the current savings for a period are allocated amongst the various users and uses.- also allocates and rations funds by a system of incentives and penalities.
• Liquidity function-Provides a means where by buyers and sellers can exchange securities at mutually satisfactory prices.-allows better securities for the securities that are traded
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Indicative function- Showing not only the progress, but also the economy as a whole through share price movements
Savings and Investment function- Provides a means of quickly converting long- term investment into liquid funds, thereby generating confidence among investors and speeding up the process of saving and investment.
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Transfer function- facilitates the transfer of existing assets among individual economic units or groups
Merger function- encourages voluntary take-over mechanismto put the management of inefficient companies into more competent hands
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CONSTITUENTS OF INDIAN CAPITAL MARKET
1. The gilt-edged market2. The industrial securities market
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GILT EDGED MARKET Also known as gov. securities market Market for gov securities and semi-
gov. securitiesFEATURES:1. Guaranteed return on investment2. No speculation in securities3. Institutional based investors which are
compelled by low to invest a portion of their funds in these securities
4. Predominated by such institutions as LIC, GIC,etc.
5. Heavy volume of transactions necessitating negotiation of each transaction
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INDUSTRIAL SECURITIES MARKET Market for industrial securities such as
bonds and equities Has two segments1. Primary market2. Secondary market
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PRIMARY MARKET Also known as new issues market(NIM) Market for raising fresh capital in the form of
shares & debentures Allows for the formation of capital in the country MODES OF RAISING CAPITAL1. Public issue : securities issued to the members
of general public2. Rights issue : issue of equity shares of a body
corporate is made to the existing shareholders as a preemptive method
3. Private placement : shares of a body corporate are sold to a group of small investors
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SECONDARY MARKETMarket which deals in securities that have
been already issued by companies.Also called stock exchange or share
market.IMPORTANCE:For efficient growth of primary market, a
sound secondary market is necessary.Its because secondary market offers the
important facility of trading of securities
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STOCK EXCHANGESIntegral part of secondary market in India24 stock exchanges in India recognized by the
gov.A stock exchange operating at the national level
is also there – Over the Counter Exchange of India (OTCEI)
a) it operates through electronically linked counters at different
locationsb) helps small & start up companies to
overcome the problem of raising capitalc) helps investors to overcome the
problem of illequidity.