1. Primary and
Secondary Markets

2. Agenda
 Capital Market
 Primary Market
 Features of Primary market
 Secondary Market
 Features of Secondary Market
 Conclusion

3. CAPITAL MARKET
 The market where investment instruments like
bonds, equities and mortgages are traded is
known as the capital market.
 The primal role of this market is to make
investment from investors who have surplus
funds to the ones who are running a deficit.

4.  The capital market offers both long term and
overnight funds.
 The different types of financial instruments
that are traded in the capital markets are:
> equity instruments
> credit market instruments,
> insurance instruments,
> foreign exchange instruments,
> hybrid instruments and
> derivative instruments.

5. Importance of Capital Markets
 Help firms and governments raise cash by selling
securities
 Allow investors with excess funds to invest and earn a
return
 Channel funds from savers to borrowers
 Allocate resources optimally (i.e., provide funds to those
who can make the best use of them)
 Help allocate cash to where it is most productive
 Help lower the cost of exchange
 Secondary markets, where investors trade existing
securities, assures investors that they can quickly sell
their securities if the need arises

6. Types of capital market
There are two types of capital market:
 Primary market,
 Secondary market

7. Primary Market
 It is that market in which
shares, debentures and other securities are
sold for the first time for collecting long-
term capital.
 This market is concerned with new issues.
Therefore, the primary market is also called
NEW ISSUE MARKET.

8.  In this market, the flow of funds is from savers
to borrowers (industries), hence, it helps directly
in the capital formation of the country.
 The money collected from this market is
generally used by the companies to modernize
the plant, machinery and buildings, for
extending business, and for setting up new
business unit.

9. Features of Primary Market
 It Is Related With New Issues
 It Has No Particular Place
 It Has Various Methods Of Float Capital: Following
are the methods of raising capital in the primary
market:
i) Public Issue
ii) Offer For Sale
iii) Private Placement
iv) Right Issue
v) Electronic-Initial Public Offer
 It comes before Secondary Market

10.  Initial public offering (IPO) The first sale of a
company’s stock to the general public.
 Investment bankers Financial specialists who handle
the sales of most corporate and municipal securities.
 Underwriting Process of purchasing an issue from a
firm or government and then reselling the issue to
investors.

11. Factors to be considered by Investors
 Promoters Credibility
 Project Details
 Product
 Financial data
 Risk factors
 Auditors report

12. Secondary Market
 The secondary market is that
market in which the buying and
selling of the previously issued
securities is done.
 The transactions of the secondary
market are generally done through
the medium of stock exchange.
 The chief purpose of the secondary
market is to create liquidity in
securities.

13.  If an individual has bought some
security and he now wants to sell it, he
can do so through the medium of stock
exchange to sell or purchase through
the medium of stock exchange requires
the services of the broker
presently, their are 24 stock exchange
in India.
.

14. Features of Secondary Market
 It Creates Liquidity
 It Comes After Primary Market
 It Has A Particular Place
 It Encourage New Investments
 Aids in financing the industry
 Ensures safe & fair Dealing( MEDIA
BROADCASTING)

15. Functions of Secondary Markets
 Provides regular information about the value of
security.
 Helps to observe prices of bonds and their interest
rates.
 Offers to investors liquidity for their assets.
 Secondary markets bring together many interested
parties.
 It keeps the cost of transactions low.

16. Meaning of Lease and Leasing
• A lease is a contractual arrangement calling for
the lessee (user) to pay the lessor (owner) for use of
an asset
• Leasing is a process by which a firm can obtain the
use of a certain fixed assets for which it must pay a
series of contractual, periodic, tax deductible
payments.

17. Important Terms:
• Lessee is the receiver of the services or the assets
under the lease contract.
• Lessor is the owner of the assets.
• Tenancy is the relationship between the tenant and
the landlord.
• Term is the fixed or an indefinite period of time
involved in the lease contract.
• Rent is the consideration for the lease.

18. Types Of Lease
Operating
lease
Capital
lease
Leveraged
lease
Sale and
lease
back
Direct
lease

19. 1. 100% Financing at Fixed Rates.
2. Protection Against Obsolescence.
3. Flexibility.
4. Less Costly Financing.
5. Tax Advantages.
6. Off-Balance-Sheet Financing.
Advantages of Leasing

20. Disadvantages of Leasing:
• If the business is
successful, lessors
may demand higher
rental payments when
leases come up for
renewal.
• A net lease may shift
some or all of the
maintenance costs
onto the tenant.
1 Usually lease terms are
rigid and
difficult to navigate in
circumstances
where the business has to
change its operations
substantially.
2Tactical legal
considerations usually
make it expedient for
lessees to default on
their leases

21. Meaning
 Venture capital means funds made available
for startup firms and small businesses with
exceptional growth potential.
 Venture capital is money provided by professionals who
alongside management invest in young, rapidly growing
companies that have the potential to develop into significant
economic contributors.

22. Venture Capitalists generally:
• Finance new and rapidly growing companies
• Purchase equity securities
• Assist in the development of new products or services
• Add value to the company through active participation.

23. The SEBI has defined Venture Capital Fund in
its Regulation 1996 as ‘a fund established in
the form of a company or trust which raises
money through loans, donations, issue of
securities or units as the case may be and
makes or proposes to make investments in
accordance with the regulations’.

24. Characteristics
• Long time horizon
• Lack of liquidity
• High risk
• Equity participation
• Participation in management

25. Stages of financing
1. Seed Money:
Low level financing needed to prove a new idea.
2. Start-up:
Early stage firms that need funding for expenses
associated with marketing and product development.
3. First-Round:
Early sales and manufacturing funds.
4. Second-Round:
Working capital for early stage companies that are
selling product, but not yet turning a profit .

26. 5. Third-Round:
Also called Mezzanine financing, this is
expansion money for a newly profitable
company
6. Fourth-Round:
Also called bridge financing, it is intended to
finance the "going public" process

27. Methods of Venture Financing
The financing pattern of the deal is the most
important element. Following are the various
methods of venture financing:
• Equity
• Conditional loan
• Income note
• Participating debentures
• Quasi equity

28. MEANING
 A credit rating evaluates the credit worthiness of
a debtor, especially a business (company) or a government.
It is an evaluation made by a credit rating agency of the
debtor's ability to pay back the debt and the likelihood
of default.
 Credit ratings are determined by credit ratings agencies.
The credit rating represents the credit rating agency's
evaluation of qualitative and quantitative information for a
company or government; including non-public information
obtained by the credit rating agencies analysts.

29. MEANING
 Credit ratings are not based on mathematical formulas.
Instead, credit rating agencies use their judgment and
experience in determining what public and private information
should be considered in giving a rating to a particular
company or government.
 The credit rating is used by individuals and entities that
purchase the bonds issued by companies and governments to
determine the likelihood that the government will pay its bond
obligations.
 A poor credit rating indicates a credit rating agency's
opinion that the company or government has a high risk
of defaulting, based on the agency's analysis of the entity's
history and analysis of long term economic prospects.

30. OBJECTIVES OF CREDIT RATING
The main objective is to provide superior and low cost info to investors for
taking a decision regarding risk return trade off, but it also helps to market
participants in the following ways:
 improves a healthy discipline on borrowers,
 Lends greater credence to financial and other representations,
 Facilitates formulation of public guidelines on institutional investments,
 Helps merchant bankers, brokers, regulatory authorities, etc., in discharging
their functions related to debt issues,
 Encourages greater information disclosure, better accounting standards and
improved financial information (helps in investors protection),
 May reduce interest costs for highly rated companies,
 Acts as a marketing tool

31. BENEFITS OF CREDIT RATING
Easy Understandability of Investment Proposal : The rating
agencies gives rating symbols to the instrument, which can be easily
understood by investors. This helps them to understand
the investment proposal of an issuer company. For e.g. AAA (Triple
A), given by CRISIL for debentures ensures highest safety, whereas
debentures rated D are in default or expect to default on maturity
 Choice of Instruments : Credit rating enables an investor to select a
particular instrument from many alternatives available. This choice
depends upon the safety or risk of the instrument.
 Saves Investor's Time and Effort : Credit ratings enable an investor to
his save time and effort in analyzing the financial strength of an issuer
company. This is because the investor can depend on the rating done by
professional rating agency, in order to take an investment decision. He
need not waste his time and effort to collect and analyse the financial
information about the credit standing of the issuer company.

32. BENEFITS OF CREDIT RATING
 Wider Audience for Borrowing : A company with high rating for its
instruments can get a wider audience for borrowing. It can approach financial
institutions, banks, investing companies. This is because the credit ratings are
easily understood not only by the financial institutions and banks, but also by
the general public.
 Good for Non-Popular Companies : Credit rating is beneficial to the non-
popular companies, such as closely-held companies. If the credit rating is
good, the public will invest in these companies, even if they do not know
these companies.
 Act as a Marketing Tool : Credit rating not only helps to develop a good
image of the company among the investors, but also among the
customers, dealers, suppliers, etc. High credit rating can act as a marketing
tool to develop confidence in the minds of customers, dealer, suppliers, etc.
 Helps in Growth and Expansion : Credit rating enables a company to grow
and expand. This is because better credit rating will enable a company to get
finance easily for growth and expansion

33. DEMERITS OF CREDIT RATING
 Problems for New Companies : There may be problems for new
companies to collect funds from the market. This is because, a new
company may not be in a position to prove its financial soundness.
Therefore, it may receive lower credit ratings. This will make it difficult to
collect funds from the market.
 Downgrading by Rating Agency : The credit-rating agencies periodically
review the ratings given to a particular instrument. If the performance of a
company is not as expected, then the rating agency will downgrade the
instrument. This will affect the image of the company.
 Difference in Rating : There are cases, where different ratings are
provided by various rating agencies for the same instrument. These
differences may be due to many reasons. This will create confusion in the
minds of the investor.

34. DEMERITS OF CREDIT RATING
 Possibility of Bias Exist : The information collected by the rating agency
may be subject to personal bias of the rating team. However, rating
agencies try their best to praovide an unbiased opinion of
the credit quality of the company and/or instrument. If not, they will not
be trusted.
 Improper Disclosure May Happen : The company being rated may not
disclose certain material facts to the investigating team of the rating
agency. This can affect the quality of credit rating.
 Impact of Changing Environment : Rating is done based on present and
past data of the company. So, it will be difficult to predict the future
financial position of the company. Many changes take place due to
changes in economic, political, social, technological, legal and other
environments. All this will affect the working of the company being rated.
Therefore, rating is not a guarantee for financial soundness of the
company.

35. WHAT IS FACTORING ?
Factoring is the Sale of Book Debts by a firm (Client) to a financial institution
(Factor) on the understanding that the Factor will pay for the Book Debts as
and when they are collected or on a guaranteed payment date. Normally, the
Factor makes a part payment (usually upto 80%) immediately after the debts
are purchased thereby providing immediate liquidity to the Client.
PROCESS OF FACTORING
CLIENT CUSTOMER
FACTOR

36. So, a Factor is,
a) A Financial Intermediary
b) That buys invoices of a manufacturer or a trader, at a
discount, and
c) Takes responsibility for collection of payments.
The parties involved in the factoring transaction are:-
a) Supplier or Seller (Client)
b) Buyer or Debtor (Customer)
c) Financial Intermediary (Factor)

37. PROCESS INVOLVED IN
FACTORING
Client concludes a credit sale with a customer.
Client sells the customer‟s account to the Factor and notifies the customer.
Factor makes part payment (advance) against account purchased, after
adjusting for commission and interest on the advance.
Factor maintains the customer‟s account and follows up for payment.
Customer remits the amount due to the Factor.
Factor makes the final payment to the Client when the account is collected
or on the guaranteed payment date.

38. CHARGES FOR FACTORING
SERVICES
Factor charges Commission (as a flat percentage of value of Debts
purchased) (0.50% to 1.50%)
Commission is collected up-front.
For making immediate part payment, interest charged. Interest is higher
than rate of interest charged on Working Capital Finance by Banks.
If interest is charged up-front, it is called discount.

39. TYPES OF FACTORING
 Recourse Factoring
 Non-recourse Factoring
 Maturity Factoring
 Cross-border Factoring

40. RECOURSE FACTORING
 Upto 75% to 85% of the Invoice Receivable is factored.
 Interest is charged from the date of advance to the date of collection.
 Factor purchases Receivables on the condition that loss arising on account
of non-recovery will be borne by the Client.
 Credit Risk is with the Client.
 Factor does not participate in the credit sanction process.
 In India, factoring is done with recourse.

41. NON-RECOURSE FACTORING
 Factor purchases Receivables on the condition that the Factor has
no recourse to the Client, if the debt turns out to be non-
recoverable.
 Credit risk is with the Factor.
 Higher commission is charged.
 Factor participates in credit sanction process and approves credit
limit given by the Client to the Customer.
 In USA/UK, factoring is commonly done without recourse.

42. MATURITY FACTORING
 Factor does not make any advance payment to the Client.
 Pays on guaranteed payment date or on collection of Receivables.
 Guaranteed payment date is usually fixed taking into account
previous collection experience of the Client.
 Nominal Commission is charged.
 No risk to Factor.

43. CROSS - BORDER FACTORING
 It is similar to domestic factoring except that there are four parties, viz.,
a) Exporter,
b) Export Factor,
c) Import Factor, and
d) Importer.
 It is also called two-factor system of factoring.
 Exporter (Client) enters into factoring arrangement with Export Factor in
his country and assigns to him export receivables.
 Export Factor enters into arrangement with Import Factor and has
arrangement for credit evaluation & collection of payment for an agreed
fee.
 Notation is made on the invoice that importer has to make payment to the
Import Factor.
 Import Factor collects payment and remits to Export Factor who passes on
the proceeds to the Exporter after adjusting his advance, if any.
 Where foreign currency is involved, Factor covers exchange risk also.

44. FACTORING
vs
BILLS DISCOUNTING
BILL DISCOUNTING
1. Bill is separately examined
and discounted.
2. Financial Institution does
not have responsibility of
Sales Ledger Administration
and collection of Debts.
3. No notice of assignment
provided to customers of
the Client.
FACTORING
1. Pre-payment made against
all unpaid and not due
invoices purchased by
Factor.
2. Factor has responsibility of
Sales Ledger Administration
and collection of Debts.
3. Notice of assignment is
provided to customers of
the Client.

45. FACTORING
vs
BILLS DISCOUNTING (contd…)
BILLS DISCOUNTING
4. Bills discounting is usually
done with recourse.
5. Financial Institution can get
the bills re-discounted
before they mature for
payment.
FACTORING
4. Factoring can be done
without or without recourse
to client. In India, it is done
with recourse.
5. Factor cannot re-discount
the receivable purchased
under advanced factoring
arrangement.

46. STATUTES APPLICABLE TO
FACTORING
Factoring transactions in India are governed by the following
Acts:-
a) Indian Contract Act
b) Sale of Goods Act
c) Transfer of Property Act
d) Banking Regulation Act.
e) Foreign Exchange Regulation Act.

47. WHY FACTORING HAS NOT
BECOME POPULAR IN INDIA
Banks‟ reluctance to provide factoring services
Bank‟s resistance to issue Letter of Disclaimer (Letter of
Disclaimer is mandatory as per RBI Guidelines).
Problems in recovery.
Factoring requires assignment of debt which attracts Stamp Duty.
Cost of transaction becomes high.

48. FORFAITING
“Forfait” is derived from French word „A Forfait‟
which means surrender of fights.
Forefaiting is a mechanism by which the right for
export receivables of an exporter (Client) is
purchased by a Financial Intermediary (Forfaiter)
without recourse to him.
It is different from International Factoring in as
much as it deals with receivables relating to
deferred payment exports, while Factoring deals
with short term receivables.

49. FORFAITING (contd…)
Exporter under Forfaiting surrenders his right for claiming payment
for services rendered or goods supplied to Importer in favour of
Forefaiter.
Bank (Forefaiter) assumes default risk possessed by the Importer.
Credit Sale gets converted as Cash Sale.
Forfaiting is arrangement without recourse to the Exporter (seller)
Operated on fixed rate basis (discount)
Finance available upto 100% of value (unlike in Factoring)
Introduced in the country in 1992.

50. MECHANICS OF FORFAITING
EXPORTER IMPORTER
FORFAITER AVALLING BANK
HELD TILL MATURITY
SELL TO GROUPS OF INVESTORS
TRADE IN SECONDARY MARKET

51. ESSENTIAL REQUISITES OF
FORFAITING TRANSACTIONS
Exporter to extend credit to Customers for periods above 6
months.
Exporter to raise Bill of Exchange covering deferred receivables
from 6 months to 5 years.
Repayment of debts will have to be avallised or guaranteed by
another Bank, unless the Exporter is a Government Agency or a
Multi National Company.
Co-acceptance acts as the yard stick for the Forefaiter to credit
quality and marketability of instruments accepted.

52. IN FORFAITING:-
 Promissory notes are sent for avalling to the Importer‟s Bank.
 Avalled notes are returned to the Importer.
 Avalled notes sent to Exporter.
 Avalled notes sold at a discount to a Forefaiter on a NON-
RECOURSE basis.
 Exporter obtains finance.
 Forfaiter holds the notes till maturity or securitises these
notes and sells the Short Term Paper either to a group of
investors or to investors at large in the secondary market.

53. CHARACTERISTICS OF
FORFAITING (contd….)
Exporter is freed from credit administration.
Provides long term credit unlike other forms of bank credit.
Saves on cost as ECGC Cover is eliminated.
Simple Documentation as finance is available against bills.
Forfait financer is responsible for each of the Exporter‟s trade
transactions. Hence, no need to commit all of his business or
significant part of business.
Forfait transactions are confidential.

54. COSTS INVOLVED IN
FORFAITING
Commitment Fee:- Payable to Forfaiter by Exporter in
consideration of forefaiting services.
Commission:- Ranges from 0.5% to 1.5% per annum.
Discount Fee:- Discount rate based on LIBOR for the period
concerned.
Documentation Fee:- where elaborate legal formalities are
involved.
Service Charges:- payable to Exim Bank.

55. FACTORING vs. FORFAITING
POINTS OF
DIFFERENCE
FACTORING FORFAITING
Extent of Finance Usually 75 – 80% of the
value of the invoice
100% of Invoice value
Credit
Worthiness
Factor does the credit
rating in case of non-
recourse factoring
transaction
The Forfaiting Bank
relies on the
creditability of the
Avalling Bank.
Services provided Day-to-day administration
of sales and other allied
services
No services are
provided
Recourse With or without recourse Always without
recourse
Sales By Turnover By Bills

56. COMPARATIVE ANALYSIS
BILLS
DISCOUNTED
FACTORING FORFAITING
1. Scrutiny Individual Sale
Transaction
Service of Sale
Transaction
Individual Sale
Transaction
2. Extent of
Finance
Upto 75 – 80% Upto 80% Upto 100%
3. Recourse With Recourse With or
Without
Recourse
Without
Recourse
4. Sales
Administration
Not Done Done Not Done
5. Term Short Term Short Term Medium Term
6. Charge
Creation
Hypothecation Assignment Assignment

57. WHY FORFAITING HAS NOT
DEVELOPED
Relatively new concept in India.
Depreciating Rupee
No ECGC Cover
High cost of funds
High minimum cost of transactions (USD 250,000/-)
RBI Guidelines are vague.
Very few institutions offer the services in India. Exim Bank alone
does.
Long term advances are not favoured by Banks as hedging becomes
difficult.
Lack of awareness.

58. STAGES INVOLVED IN FORFAITING:-
 Exporter approaches the Facilitator (Bank) for obtaining Indicative
Forfaiting Quote.
 Facilitator obtains quote from Forfaiting Agencies abroad and
communicates to Exporter.
 Exporter approaches importer for finalising contract duly loading the
discount and other charges in the price.
 If terms are acceptable, Exporter approaches the Bank (Facilitator) for
obtaining quote from Forfaiting Agencies.
 Exporter has to confirm the Firm Quote.
 Exporter has to enter into commercial contract.
 Execution of Forfaiting Agreement with Forefaiting Agency.
 Export Contract to provide for Importer to furnish avalled BoE/DPN.

59. STAGES INVOLVED IN FORFAITING:- (contd…..)
 Forfaiter commits to forefait the BoE/DPN, only against Importer Bank‟s Co-
acceptance. Otherwise, LC would be required to be established.
 Export Documents are submitted to Bank duly assigned in favour of Forfaiter.
 Bank sends document to Importer's Bank and confirms assignment and copies
of documents to Forefaiter.
 Importer‟s Bank confirms their acceptance of BoE/DPN to Forfaiter.
 Forfaiter remits the amount after deducting charges.
 On maturity of BoE/DPN, Forfaiter presents the instrument to the Bank and
receives payment.
 Forfaiter commits to forefait the BoE/DPN only against Importer Bank‟s Co-
acceptance. Otherwise, LC would be required to be established.

60. STAGES INVOLVED IN FORFAITING:- (contd…..)
 Export Documents are submitted to Bank duly assigned in favour of
Forfaiter
 Importer‟s Bank confirms their acceptance of BoE/DPN to
Forfaiter.
 Forfaiter remits the amount after deducting charges.
 On maturity of BoE/DPN, Forfaiting Agency presents the
instruments to the Bank and receives payment

61. STAGES INVOLVED IN EXPORT FACTORING
Exporter (Client) gives his name, address and credit limit required to the
Export Factor.
Export Factor submits the details of Buyer to the Import Factor.
Import Factor decides on the credit cover and communicates decision to
Export Factor.
Export Factor enters into Factoring Agreement with Exporter.
Overseas Buyer is notified of this arrangement.
Exporter is then free to ship the goods to Buyers directly.
Exporter submits original documents, viz., invoice and shipping documents
duly assigned and receives advance there-against (upto 80%).

62. STAGES INVOLVED IN EXPORT FACTORING
Exporter (Client) gives his name, address and credit limit required to the
Export Factor.
Export Factor submits the details of Buyer to the Import Factor.
Import Factor decides on the credit cover and communicates decision to
Export Factor.
Export Factor enters into Factoring Agreement with Exporter.
Overseas Buyer is notified of this arrangement.
Exporter is then free to ship the goods to Buyers directly.
Exporter submits original documents, viz., invoice and shipping documents
duly assigned and receives advance there-against (upto 80%).

63. STAGES INVOLVED IN EXPORT FACTORING (contd…..)
Export Factor despatches all the original documents to Importer/Buyer
after duly affixing “Assignment Clause” in favour of the Import Factor.
Export Factor sends copy of invoice to Import Factor in the Debtor‟s
country.
Import Factor follows up and receives payment on due date and remits to
Export Factor.
Export Factor, on receipt of payment, releases the balance of proceeds to
Exporter.

64. Hire purchase
Hire purchase is an option for those buyers who cannot pay the whole amount of
his or her purchase. Hire purchase refers to an agreement where the buyer of a
good can take goods on a monthly rental basis and once the rent equals original
price of a good in addition to the interest then the buyer may exercise his or her
option to buy the goods at a predetermined price or return the goods to the
owner. Given below are some of the features of hire purchase -
1. The person who has hire the goods will give regular installment or rent to the
owner of the good which will include some portion of principal amount and some
portion of interest as agreed by both the parties.
2. The ownership of good passes only when the person has paid the last
installment of the goods which he or she has hired.
3. Under hire purchase system the buyer can return the goods to the seller if he
or she does not want to continue with the agreement.
4. In case of hire purchase the person who has taken the good on hire cannot
transfer the goods to a third party as he or she does not have the ownership of
the goods.

65. Hire purchase
 Hire purchase can be defined as a contract in which the buyer acquires the
possession of the goods immediately and agrees to pay the total cost in
installment where each installment is treated as hire charges. The
ownership of goods is transferred to the buyer from seller only when the
last Installment is paid. Here is the list of features of hire purchases -
 1. Under hire purchase agreement the hire seller transfers possession of
goods immediately to the purchaser.
 2. The Buyer agrees to make payment in Installment over a period of time.
 3. The Ownership of the goods will remain with the seller until the payment
of the last Installment.
 4. The hire purchaser generally makes a down payment on signing the
agreement.
 5. If the purchaser of the goods default even the last Installment, the hire
seller has the right to takes the goods back without making any
compensation to the buyer of goods