Capital Market: Subject: Indian Financial System (Ifs)
Capital Market: Subject: Indian Financial System (Ifs)
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.
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.
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).
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:
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.
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.
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.
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
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.
---------------------------------------------------------------------------------------------------------------------