CAPITAL MARKET AND ITS COMPONENTS

■            OVERVIEW OF THE STRUCTURE AND SIGNIFICANCE OF FINANCIAL MARKETS 2 COVERING CAPITAL MARKET AND ITS COMPONENT

FINANCIAL SERVICES AND MARKETS

v    QUESTION

■             ALSO COVERS ANSWER TO THIS QUESTION:-WHAT DO YOU MEAN BY CAPITAL MARKET AND EXPLAIN THE  COMPONENTS OF CAPITAL MARKET?

■            MEANING OF CAPITAL MARKET

■            THE CAPITAL MARKET IS A MARKET FOR FINANCIAL ASSETS WHICH HAVE A LONG OR INDEFINITE MATURITY. IT DEALS WITH LONG TERM SECURITIES WHICH HAVE A MATURITY PERIOD OF ABOVE ONE YEAR.IT PROVIDES LONG TERM FUNDS FOR CORPORATE,CENTRAL AND STATE GOVERNMENT.

■            CAPITAL MARKET MAY BE FURTHER SUBDIVIDED INTO :-

a)    INDUSTRIAL SECURITIES MARKET

b)    GOVERNMENT SECURITIES MARKET

c)    LONG TERM LOAN MARKET

v    FEATURES OF CAPITAL MARKET

a)    DEALING IN MEDIUM AND LONG TERM SECURITIES

b)    DEALING IN MARKETABLE AND NON MARKETABLE: MARKETABLE SECURITIES ARE THOSE SECURITIES ARE THOSE WHICH CAN BE TRANSFERRED LIKE SHARE,DEBENTURES ETC

c)    CAPITAL MARKET COMPRISE  INDIVIDUAL INVESTORS LIKE GENERAL PUBLIC AS WELL AS INSTITUTIONAL INVESTORS INCLUDE MUTUAL FUNDS,LIC ETC

d)    INCLUDES BOTH PRIMARY AND SECONDARY MARKET

e)    OPERATIONS IN THE CAPITAL MARKET IS CONDUCTED WITH THE HELP OF INTERMEDIARIES LIKE MERCHANT BANKERS,SUB BROKERS,COLLECTION BANKERS ETC

v    ROLE OF CAPITAL MARKET

a)    HELPS IN RAISING LONG TERM FUNDS

b)    CHANNELIZING SAVING OF PEOPLE TO PRODUCTIVE USES

c)    HELPS IN CAPITAL FORMATION

d)    ENCOURAGES TO SAVE

e)    PROVIDES INCOME TO INVESTORS

f)     ENCOURAGES TO INVEST

g)    PROVIDES LIQUIDITY TO INVESTMENT

h)    ATTRACT FOREIGN INVESTOR

v    CAPITAL MARKET INSTRUMENTS

■            CAPITAL MARKET INSTRUMENT CLASSIFIED AS THREE TYPES

1. PURE INSTRUMENT:-

• EQUITY
• PREFEFERNEC
• DEBENTURES

2. HYBRID INSTRUMENT: CONVERTIBLE PREFERENCE SHARES,CONVERTIBLE DEBENTURES
3. DERIVATIVE INSTRUMENT: LIKE FUTURE,OBLIGATION AND FORWARD

v    COMPONENT OF CAPITAL MARKET

1.    INDUSTRIAL SECURITIES MARKET

2.    GOVERNMENT SECURITIES MARKET

3.    LONG TERM LOAN MARKET

v  INDUSTRIAL SECURITY MARKET

■            IT IS MARKET FOR INDUSTRIAL SECURITIES FOR EQUITY SHARES,PREFERENCE SHARES,DEBENTURES ETC. IT IS MARKET WHERE INDUSTRIAL CONCERNS RAISE THEIR CAPITAL OR DEBTS BY ISSUING APPROPRIATE INSTRUMENTS.

•                       PRIMARY MARKET OR NEW ISSUE MARKET: INITIAL PUBLIC OFFERING( FIRST TIME) AND EXISTING TRADING COMPANIES RAISE ADDITIONAL CAPITAL THROUGH SEASONED EQUITY OFFERING.

•                       SECONDARY MARKET OR STOCK EXCHANGE

v    NEW ISSUE MARKET

■            DEALS WITH THE NEW SECURITIES WHICH WERE NOT PREVIOUSLY AVAILABLE TO THE INVESTING THE INVESTING PUBLIC I.E SECURITIES THAT ARE OFFERED TO INVESTING PUBLIC FOR THE FIRST TIME.

■            THE NEW ISSUE MARKET COVERS ALL INSTITUTIONS DEALING IN FRESH CLAIMS IN THE FORM OF EQUITY SHARES,PREFERENCE SHARES,DEBENTURES ETC. ALL FINANCIAL INSTITUTIONS WHICH CONTRIBUTE,UNDERWRITER AND DIRECTLY SUBSCRIBE TO THE SECURITIES ARE PART OF NEW ISSUE MARKET.

v    METHODS OF FLOTATION OF SECURITIES IN PRIMARY MARKET

1.    PUBLIC ISSUE THROUGH PROSPECTUS

2.    OFFER FOR SALE

3.    PRIVATE PLACEMENT

4.    RIGHT ISSUE

5.    E-IPOS( ELECTRONIC INITIAL PUBLIC OFFER)

v  METHODS OF FLOTATION OF SECURITIES IN PRIMARY MARKET

1.    PUBLIC ISSUE THROUGH PROSPECTUS:- COMPANY ISSUES A PROSPECTUS TO INFORM AND ATTRACT GENERAL PUBLIC. PROSPECTUS PROVIDE DETAILS ABOUT THE PURPOSE FOR WHICH FUNDS ARE RAISED,PAST PERFORMANCE OF THE COMPANY,RISK FACTORS AND FUTURE PROSPECT OF THE COMPANY.

2.    OFFER FOR SALE:NEW SECURITIES ARE OFFERED TO PUBLIC BY INTERMEDIARIES WHO BUY THE WHOLE LOTS OF SECURITIES FROM THE COMPANY. THIS METHOD CONSIST OF TWO STAGES:-FIRST STAGE DIRECT SALE BY ISSUING COMPANY TO THE ISSUE HOUSE AND BROKERS AT THE NEGOTIATED PRICE AND THE SECOND STAGE RESELL THE ABOVE SECURITIES AT HIGHER PRICE TO THE PUBLIC.

3.    PRIVATE PLACEMENT:-THE SECURITIES ARE SOLD BY THE COMPANY TO INTERMEDIARY AT A FIXED PRICE AND IN THE SECOND STEP INTERMEDIARY SELL TO SELECTED CLIENTS. THE ISSUING COMPANY ISSUE PROSPECTUS SO THAT REPUTED CLIENTS PURCHASE FROM THE INTERMEDIARY

4.    RIGHT ISSUE:- SECTION 81 OF THE COMPANIES ACT DEALS WITH THE RIGHT ISSUE. WHEN A COMPANY INCREASES ITS SUBSCRIBED CAPITAL BY THE ISSUE OF NEW SHARES EITHER AFTER TWO YEARS OF ITS FORMATION OR AFTER ONE YEAR OF ITS FIRST ISSUE WHICH EVER IS EARLIER,THESE HAVE TO FIRST OFFERED TO THE EXISTING SHAREHOLDERS WITH THE RIGHT TO RESERVE THEM IN FAVOR OF A NOMINEE. A CIRCULAR IS SENT TO ALL EXISTING SHAREHOLDERS. TIME LIMIT OF ONE MONTH OR TWO MONTHS ARE GIVEN TO THE EXISTING SHAREHOLDERS TO EXERCISE THE RIGHT.

5.    E-IPOS( ELECTRONIC INITIAL PUBLIC OFFER): NEW METHOD OF ISSUING SECURITIES THROUGH ON LINE OF STOCK EXCHANGE, REGISTERED BROKERS ARE APPOINTED FOR THE PURPOSE OF ACCEPTING APPLICATIONS AND PLACING ORDERS. IT HAS TO APPLY FOR LISTING OF ITS SECURITIES ON ANY EXCHANGE OTHER THAN THE EXCHANGE IT HAS OFFERED.

v    STOCK EXCHANGE

■            THE SECONDARY MARKET IS THE MARKET FOR THE SALE AND PURCHASE OF PREVIOUSLY ISSUED OR SECOND HAND SECURITIES,

■            FEATURES OF A SECONDARY MARKET:-

a)    TRADING OF SECURITIES IN THE SECONDARY MARKET DOES NOT PROVIDE ANY FUNDS TO THE COMPANY

b)    THE INVESTORS AS WELL THE SPECULATORS TRADE IN THE SECURITIES

c)    SECURITIES OF LISTED PUBLIC LIMITED COMPANIES ARE TRADED ON RECOGNIZED STOCK EXCHANGE

d)    PROVIDE LIQUIDITY TO THE INVESTOR

e)    THE MARKET PROVIDES LIQUIDITY TO THE INVESTORS

v    MARKET SEGMENTS

1.    CAPITAL MARKET SEGMENT:- EQUITY,PREFERENCE,SHARES AND WARRANT ARE TRADED

2.    WHOLE SALE DEBT MARKET: WHERE STATE,AND CENTRAL GOVERNMENT SECURITIES,T-BILLS,PSU BONDS,CORPORATE DEBENTURES,COMMERCIAL PAPERS,CERTIFICATES OF DEPOSITS,MUTUAL FUNDS ARE TRADED.

3.    FUTURE AND OPTIONS: DERIVATIVES ON EQUITY,INDICES ARE TRADED

v    PARTICIPANTS AND MARKET INTERMEDIARIES

1. INVESTORS

• RETAIL INVESTORS
• INSTITUTIONAL INVESTORS
• FOREIGN INSTITUTIONAL INVESTORS

2. MARKET INTERMEDIARIES
3. REGULATORY BODIES

■            MARKET INTERMEDIARIES:-

a)    STOCK EXCHANGE MEMBERS/BROKERS AND DEPOSITORIES

b)    DEPOSITORY PARTICIPANT

v  GOVERNMENT SECURITIES MARKET

■            ALSO CALLED GILT EDGED SECURITIES MARKET. IT IS MARKET WHERE GOVT SECURITIES ARE TRADED.

■            IT IS OF TWO TYPES:

a)    SHORT TERM  : MONEY MARKET

b)    LONG TERM: IN THE CAPITAL MARKET

THE SECONDARY MARKET FOR GOVT SECURITIES IS NARROW BECAUSE THEY ARE RETAINED TILL THESE MATURITY

GOVERNMENT SECURITIES ARE SOLD THROUGH THE PUBLIC DEBT OFFICE OF THE RBI WHILE TREASURY BILLS ARE THROUGH AUCTIONS

v    LONG TERM LOAN MARKET

1. LONG TERMS LOANS ARE PROVIDED BY DEVELOPMENT AND COMMERCIAL BANKS LON TERM LOANS MAY BE CLASSIFIED :-

• TERM LOAN MARKET: DEVELOPMENT BANKS BOTH AT THE STATE AND REGIONAL LEVEL PROVIDE LONG TERM AND MEDIUM TERM LOANS DIRECTLY OR INDIRECTLY.

2. MORTGAGE MARKET:-SUPPLY MORTGAGE LOANS MAINLY TO INDIVIDUAL CUSTOMERS. IT IS AGAINST THE SECURITIES OF IMMOVABLE PROPERTY  LIKE REAL ESTATE
3. FINANCIAL GUARANTEE:-WHERE FINANCE IS PROVIDED AGAINST THE GUARANTEE OF A REPUTED PERSON IN THE FINANCIAL CIRCLE. GUARANTEE IS A CONTRACT TO DISCHARGE OF A REPUTED PERSON IN THE CASE OF DEFAULT.

a)    PERFORMANCE GUARANTEE:-

b)    FINANCIAL GUARANTEE: COVERS ONLY FINANCIAL GUARANTEE