Capital Market

Capital Market • It is a market which deals with financial assets which have a long or indefinite maturity. • It is divided as :• Industrial Securities Market •

1. Primary market 2. Secondary market

• Govt. Securities • Long Term Loans •

Term loans, Mortgage, Financial Guarantee

Importance • Link between savers and those who need money • Provides suitable return as it provides profitable investment avenues • Increases the National income by increasing production in the economy • It leads to capital formation as it pools the small savings to meet investment demands

Primary Market • It deals with new issues. It is also called New Issue Market. • There are 3 ways to raise capital:• Public issue • Right issue • Private placement Different Instruments in capital market •

Equity shares,Preference shares,

•

Debentures,Bonds

Functions • 1.origination 2.underwriting 3. distribution • Origination: It refers to pre-issue analysis,investigation etc • A careful study of techenical,economic,and financial viability. • These functions are done by merchant bankers and commercial banks. It It looks into:• The time of issue •

Type of issue

•

Price

• UNDERWRITING • It is an agreement whereby the underwriter promises to buy a specific no. Of shares in the event of under purchase • DISTRIBUTION It deals with selling of IPOs and SEOs through brokers and agents.

Benefits of underwriting • The co. is assured of IPOs or SEOs. • The minimum subscription is assured • Automatic publicity • Public confidence is boosted if underwriter is a reputed one • Professional management of the issue.

Methods Of Floating New Issues • Public Issues • Offer for sell • Private Placement • Rights Issue • Different Instruments in capital market •

Equity shares,Preference shares,

•

Debentures,Bonds

• Primary market

• Secondary market

• Deals with new instruments

• Deals with existing instruments

• IPOs,SEOs are main operations • Less volatile • Less risky • More organized • No role of stock exchange

• Regular trading in different instruments • More volatile • More risky • Less organized • Greater role of stock exchange

Secondary market • Market where securities are bought and sold • It may be organized or unorganized • When share are sold outside the stock exchange it is unorganized • SECONDARY MARKET Is Controlled through the following process • Recognition of stock exchange •

Application must be accompanied by copy of bye-laws ,rules relating to its constitution

Grant of recognition • Rules and bye laws must ensure fair dealing and protect the interest of investors • It should be in the interest or trade and public interest • Renewal application is to be filed 3 months before expiry • Recognition may be withdrawn by central govt. if it is not in the interest of trade or public

Functions of Stock Exchange • Marketability and liquidity to securities • Safety of funds

• Ensures long term supply of fund • Flow of capital to profitable ventures • To motivate the company to improve the performance • Promotion of investments • Reflection of business cycle • Marketing of new issues • Miscellaneous services

Listing of Securities • It means official permission for a security to be traded in a stock exchange • It is compulsory for those companies which intend to issue a prospectus • SEBI and financial Institution insist listing on anew issue • ADVANTAGES • Facilitates buying and selling of securities • Ensures liquidity • Offers wide publicity • Borrowing from commercial banks is made easy

• Disadvantages • Leads to speculation • Degr Degrad ades es com compa pany ny’s ’s rep reput utat atio ion n • Discloses vital information to competitors competitors • LISTING PROCEDURE • A company should submit the following documents • Certified MOA and AOA ,prospectus or  statement in lieu of prospectus • Specimen copies of shares debentures

• Audited final accounts for last 5years or projected 5 years • Copy of advertisement for offering in last 5years • Copies of agreement with managerial personnel • Details of dividend, bonus shares, rights shares offered in last 10 years • Statements of arrears, interest and dividend • A brief history of company since its incorporation • Particulars regarding its capital structure • Listing agreement with details

Criteria for listing • The following conditions must be satisfied;• Minimum issued capital should be 3crores • The offer should appear in newspaper for at least 2 days • The company should have good goodwill so as to interest public • The company must pay interest oh the excess application money if allotment is delayed by 10 weeks • Promoter shares should not be transferred • within a period of 3years

Listing obligation • Companies whose shares are listed have certain obligations towards stock exchange like;• Date of board meeting, change in managerial personnel ,change in capital structure ,reissue of any forfeited shares etc. • Any other information which is necessary for shareholders to appraise the company’s position

Listing Agreement • The stock exchange after scrutinizing the application enters into a contract with the company. This is listing agreement and it lays down certain conditions in order to protect the interest of the investors •

BROKERS • A broker is a middle man to transact on behalf  of non-members for a commission • To deal with a stock exchange a broker must register with SEBI • Qualifications to register as broker • Indian citizen with 21 years of age • Neither bankrupt nor convicted of offence or fraud, • Have completed 12 standard

• He should not be engaged in any other business • He should not be a default of stock exchange • Registration of broker • Application should be submitted to SEBI via stock exchange • Stock exchange should forward the application with 30 days • The registered broker have to pay fee

• A broker can appoint a sub broker who is not a member • Sub brokers have to follow all the norms which a broker has to do . • KINDS OF BROKER • Jobber,Taraniwalas,Commission Agents, Authorized Clerks

Merchant Bankers • An institution engaged in the business of issue management by making arrangements to buying and selling of securities • It deals only with funds to be raised in money or capital market • They are management oriented and can take risk • Their activities are:-project counseling, capital restructuring, amalgamation, mergers, takeovers, underwriting

Registrars to Issue • They are appointed by co. in consultation to merchant bankers. • Help in identifying collection centers and opening accounts with banks • Receive on regular basis the amount collected • Inform stock exchange regarding closure of  issue • Sort out the applications, groups them and finalise allotment as approved by stock

• Refund amount within 70 days from closure date • Makes arrangement for brokerage and underwriting commission • For appointment as registrar their registration with SEBI is must • They should have adequate capital, storage space, computers and should maintain proper books of accounts

RECENT DEVELOPMENTS • Many steps have taken to reform stock market. some developments are;• Regulation of Intermediaries • Change in the management structure • Prohibition of Inside Trading • Transparency of accounting practices • Setting up of credit rating agencies • Introduction of electronic trading • Setting up of national market system