CAPITAL MARKET

SUBJECT: INDIAN FINANCIAL

SYSTEM(IFS)

SUBMITTED BY:
NAYANA HY
3RD SEM MBA
(B SECTION)
17CQCMD088
INTRODUCTION:

The capital market provides the support to the system of capitalism of the country. The Securities
and Exchange Board of India (SEBI), along with the Reserve Bank of India are the two
regulatory authority for Indian securities market, to protect investors and improve the
microstructure of capital markets in India. With the increased application of information
technology, the trading platforms of stock exchanges are accessible from anywhere in the country
through their trading terminals.

CAPITAL MARKET IN INDIA:

India has a fair share of the world economy and hence the capital markets or the share markets
of India form a considerable portion of the world economy. The capital market is vital to the
financial system.

The capital Markets are of two main types. The Primary markets and the secondary markets. In a
primary market, companies, governments or public sector institutions can raise funds through
bond issues. Also, Corporations can sell new stock through an initial public offering (IPO) and
raise money through that. Thus in the primary market, the party directly buys shares of a
company. The process of selling new shares to investors is called underwriting.

In the Secondary Markets, the stocks, shares, and bonds etc. are bought and sold by the
customers. Examples of the secondary capital markets include the stock exchanges like NSE,
BSE etc. In these markets, using the technology of the current time, the shares, and bonds etc.
are sold and purchased by parties or people.

BROAD CONSTITUENTS IN THE INDIAN CAPITAL MARKETS:

Fund Raisers
Fund Raisers are companies that raise funds from domestic and foreign sources, both public and
private. The following sources help companies raise funds.

Fund Providers
Fund Providers are the entities that invest in the capital markets. These can be categorized as
domestic and foreign investors, institutional and retail investors. The list includes subscribers to
primary market issues, investors who buy in the secondary market, traders, speculators, FIIs/
sub-accounts, mutual funds, venture capital funds, NRIs, ADR/GDR investors, etc.
Intermediaries
Intermediaries are service providers in the market, including stock brokers, sub-brokers,
financiers, merchant bankers, underwriters, depository participants, registrar and transfer agents,
FIIs/ sub-accounts, mutual Funds, venture capital funds, portfolio managers, custodians, etc.

Organizations
Organizations include various entities such as MCX-SX, BSE, NSE, other regional stock
exchanges, and the two depositories National Securities Depository Limited (NSDL) and
Central Securities Depository Limited (CSDL).

Market Regulators

Market Regulators include the Securities and Exchange Board of India (SEBI), the Reserve
Bank of India (RBI), and the Department of Company Affairs (DCA).

ROLE AND IMPORTANCE OF CAPITAL MARKET IN INDIA:

The capital market has a crucial significance to capital formation. For a speedy economic
development, the adequate capital formation is necessary. The significance of capital market in
economic development is explained below:

Mobilization Of Savings And Acceleration Of Capital Formation:

In developing countries like India, the importance of capital market is self-evident. In this
market, various types of securities help to mobilize savings from various sectors of the
population. The twin features of reasonable return and liquidity in stock exchange are definite
incentives to the people to invest in securities. This accelerates the capital formation in the
country.
Raising Long-Term Capital
The existence of a stock exchange enables companies to raise permanent capital. The investors
cannot commit their funds for a permanent period but companies require funds permanently.
The stock exchange resolves this dash of interests by offering an opportunity to investors to buy
or sell their securities, while permanent capital with the company remains unaffected.

Promotion Of Industrial Growth

The stock exchange is a central market through which resources are transferred to the industrial
sector of the economy. The existence of such an institution encourages people to invest in
productive channels. Thus it stimulates industrial growth and economic development of the
country by mobilizing funds for investment in the corporate securities.

Ready And Continuous Market

The stock exchange provides a central convenient place where buyers and sellers can easily
purchase and sell securities. Easy marketability makes an investment in securities more liquid as
compared to other assets.

Technical Assistance
An important shortage faced by entrepreneurs in developing countries is technical assistance. By
offering advisory services relating to the preparation of feasibility reports, identifying growth
potential and training entrepreneurs in project management, the financial intermediaries in
capital market play an important role.

Reliable Guide To Performance

The capital market serves as a reliable guide to the performance and financial position of
corporate, and thereby promotes efficiency.

Proper Channelization Of Funds

The prevailing market price of a security and relative yield are the guiding factors for the people
to channelize their funds in a particular company. This ensures effective utilization of funds in
the public interest.

Provision Of Variety Of Services:

The financial institutions functioning in the capital market provide a variety of services such as a
grant of long-term and medium-term loans to entrepreneurs, provision of underwriting facilities,
assistance in the promotion of companies, participation in equity capital, giving expert advice
etc.
Development Of Backward Areas
Capital Markets provide funds for projects in backward areas. This facilitates economic
development of backward areas. Long-term funds are also provided for development projects in
backward and rural areas.

Foreign Capital
Capital markets make possible to generate foreign capital. Indian firms are able to generate
capital funds from overseas markets by way of bonds and other securities. The government has
liberalized Foreign Direct Investment (FDI) in the country. This not only brings in the foreign
capital but also foreign technology which is important for economic development of the country.

Easy Liquidity
With the help of secondary market, investors can sell off their holdings and convert them into
liquid cash. Commercial banks also allow investors to withdraw their deposits, as and when they
are in need of funds.

PRIMARY MARKET:

The most important type of capital market is the primary market. It is what we call the new issue
market. It exclusively deals with the issue of new securities, i.e. securities that are issued to
investors for the very first time.

The main function of the primary market is capital formation for the likes of companies,
governments, institutions etc. It helps investors invest their savings and extra funds in companies
starting new projects or enterprises looking to expand their companies.

The companies raise money in the primary market through securities such as shares, debentures,
loans and deposits, preference shares etc. Let us take a look the various methods of how new
securities are floated in the primary market.

METHODS OF RAISING FUNDS

1] Offer through Prospectus

This is a method of public issue. It is also the most used method in the primary market to raise
funds. Here the company invites the investors (general members of the public) to invest in their
company via an advertisement also known as a prospectus.

After a prospectus is issued, the public subscribes to shares, debentures etc. As per the response,
shares are allotted to the public. If the subscriptions are very high, allotment will be done on
lottery or pro-rata basis.
The company can sell the shares directly to the public, but it generally hires brokers and
underwriters. Merchant banks are another option to help out with the process, especially Initial
Public Offerings.

2] Private Placement
Public offers are an expensive affair. The incidental costs of IPO’s tend to be very high. This is
why some companies prefer not to go down this route. They offer investment opportunities to a
select few individuals.

So the company will sell its shares to financial institutes, banks, insurance companies and some
select individuals. This will help them raise the funds efficiently, quickly and economically.
Such companies do not sell or offer their securities to the public at large.

3] Rights Issue
Generally, when a company is looking to expand or are in need of additional funds, they first
turn to their current investors. So the current shareholders are given an opportunity to further
invest in the company. They are given the “right” to buy new shares before the public is offered
the chance.

This allotment of new shares is done on pro-rata basis. If the shareholder chooses to execute his
right and buy the shares, he will be allotted the new shares. However, if the shareholder chooses
to let go of his rights issue, then these shares can be offered to the public.

4] e-IPO
It stands for Electronic Initial Public Offer. When a company wants to offer its shares to the
public it can now also do so online. An agreement is signed between the company and the
relevant stock exchange known as the e-IPO.

This system was introduced in India some three years ago by the SEBI. This makes the process
of the IPO speedy and efficient. The company will have to hire brokers to accept the
applications received. And a registrar to the issue must also be appointed.

SECONDARY MARKET:

After the primary market is the secondary capital market. This is more commonly known as the
stock market or the stock exchange. Here the securities (shares, debentures, bonds, bills etc) are
bought and sold by the investors.

The main point of difference between the primary and the secondary market is that in the
primary market only new securities were issued, whereas in the secondary market the trading is
for already existing securities. There is no fresh issue in the secondary market.
 The securities are traded in a highly regularised and legalized market within strict rules and
regulations. This ensures that the investors can trade without the fear of being cheated. In the last
decade or so due to the advancement of technology, the secondary capital market in India has
seen a great boom.

MAJOR INSTRUMENTS AND PLAYERS IN SECONDARY MARKET

The secondary market deals with fixed income, variable income, and hybrid instruments.
Fixed income instruments are usually debt securities like bonds, debentures. It also
includes Preference shares. Variable income instruments are equity and derivatives. Hybrid
instruments are preference shares and convertible debentures. Major players in the market are
Brokerage and Advisory services (commission broker, security dealers and more); Financial
Intermediaries (Banks, Insurance companies, Mutual Fund, Non-Banking Financial
companies); and retail investors

TYPES OF SECONDARY MARKET:

EXCHANGES
It is a marketplace, wherein there is no direct contact between the buyer and the seller, like
NYSE or NASDAQ. There is no counterparty risk as an exchange is a guarantor. Also, heavy
regulations make it a safe place for investors to trade securities. However, investors face a
comparatively higher transaction cost due to exchange fees and commission.

OVER-THE-COUNTER (OTC) MARKETS

It is a decentralized place, where the market is made up of members trading among
themselves. Foreign exchange market (FOREX) is one such type of market. There is more
competition among the participants to get higher volume, so prices of security may vary from
seller to seller. Also, OTC markets suffer from counterparty risk as parties deal with each
other directly.

PRICING IN SECONDARY MARKETS

In the primary market, the price of a security is set beforehand. However, in the secondary
market, the price of a security is determined by its supply and demand. For instance, if most
of the investors believe that the stock would gain going ahead, the demand for that stock goes
up, and hence, its price. Similarly, if investors feel the stock will lose value, they will want to
sell it, resulting in a price drop.

IMPORTANCE OF SECONDARY MARKETS

 It is a good indicator of a country’s economic condition. A rise or drop in the stock market
suggests a boom or recession in an economy.
 It helps in valuing a company as economic forces of supply and demand determine the
prices.
 Ensures liquidity for the investors as one can easily buy or sell the securities.
 It gives investors a chance to use their idle money to earn some returns.
 It helps the company to monitor and control public perceptions.

SECONDARY AND PRIMARY MARKET – DIFFERENCE

 When a company issues IPO, it sells its stock in the primary market. After the IPO, the shares
start to trade in the stock markets.
 Proceeds from the sale of shares in the primary market go to the issuing company. In the
secondary market, proceeds go the investors selling the security.
 Small investors, usually, don’t buy the securities in the primary market because issuing
company sells in lots, which requires a big investment. In the secondary market, however,
investors can buy any number of stocks they want.
 Price of securities doesn’t fluctuate in the primary market, unlike in the stock market.
 Issuing company hire investment banks to manage their IPO in the primary market. In the
secondary market, investors hire brokers to carry their trade.

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