capital market, indian finance

1. Capital
Market
A market for long term funds
Equity & debt
Domestic & international

2. Meaning of Capital Market
Capital Market is the part of financial system which is
concerned with raising capital funds by dealing in shares,
Bonds and other long term investments.
The market where investments instruments like bonds,
equities and mortgages are traded is known as the capital
market.

3. Different types of financial instruments that are traded in
capital market are:
1.Equity Instruments
2.Credit market Instruments
3.Insurance Instruments
4.Foreign Exchange Instruments
5.Hybrid Instruments

4. Significance, Role or Functions of Capital Market
 Mobilisation of Savings
 Capital Formation
 Provision of Investment Avenues
 Speed up economic growth and development
 Proper Regulation of Funds
 Service Provision

6. Primary Market
It is the that market in which shares debentures and other
securities are sold for the first time for collection of long
term capital.
Secondary Market
It is that market in which buying and
selling of previously issued securities is
done.

7.  A market for new issues
 Leads to capital formation
 Nature of fund raising
 Domestic
• equity issues by corporates and FI
• debt issues by corporates, government and FI
 International
• equity issues through GDRs, ADRs
• debt issue through ECBs
Other funds from international markets-
• FDI- in equity and debt form
• FII- in the form of portfolio investments
• NRI - in the form of short and medium term
deposits
Primary Market

8. Fund Raising in the Primary
Market Public issue by prospectus
 Private placement
 Rights issues

9. Primary Issues

10. Rights Issue
 Issue of new shares to existing
shareholders on a pro-rata basis
 To be kept open for at least 30 days and
not more than 60 days
 Why rights?
 to reward shareholders
 to reflect the stock’s true worth
 to hike promoter’s stake
Example
A K S CREDITS has announced a rights issues in the
ratio of 1:5
A K S CREDITS fixed record date 02/Jan/1996 and book
closure date 23/Jan/1996 for right issue in ration of
1:5.Premium for new shares are Rs0.

11. Private Placement Market
 Direct sale of securities to a few investors
through merchant bankers.
The investors are selected clients such as FIs,
corporates, banks and HNIs.
Subscription from less than 50 members
Time as well as cost of issue is low
 Tailor made issues
 Less formalities, disclosures
Popular for placement of Debt instruments

12. Preferential Allotment
An issue of shares by a listed company to a
select group of persons consisting of
Promoters, Foreign partners, Technical
collaborators, Private equity funds
Need not file offer document.
Three years lock-in period for promoters
Why preferential allotment?
 to enhance promoter’s holding
 as part of debt restructuring/conversion of loans
 to issue shares by way of ESOPs.
 quick fund raising at low cost

13. Public Issue
Initial Public Offering (IPO)- It is an offering of either
a fresh issue of securities or an offer for sale of existing
securities or both by an unlisted company for the first
time to public.
Follow-on Public Offering(FPO)- It is an offering of
either a fresh issue of securities or an offer for sale to
the public by an already listed company through an
offer document.

14.  Merchant banker
- should be registered with SEBI
- Act as book running lead
manager(BRLM)
- Performs pre-issue and post-issue
activities
 Registrars to the issue
- to finalise list of eligible allot tees,
ensure crediting of shares and dispatch
refund orders
 Bankers to the issue
- collection of application amounts
Intermediaries to an
Issue

15.  Before 1992, Controller of Capital
Issues regulated price
 After 1992, the promoter and the
merchant banker decide the pricing
Free Pricing Regime

16. Fixed Price Offerings
 Made to uninformed investors
 Investors demand not taken into account
An alternative method, Book Building
A mechanism through which an offer price
for IPOs based on the investor’s demand is
determined.
Uses investors demand for shares at various
prices

17. Basically an auction of shares
Investors can watch the ‘book being built’
The company appoints one or more merchant
banker(s) who compulsorily underwrite the
issue.
 Company enters into an agreement with stock
exchanges
Book runner appoints stock brokers
Collects information from potential buyer and
attempts to build interest through road shows.
Book runner submits draft Red herring
prospectus to SEBI and ROC which contain all
the disclosures except have details of either
price or number of shares being offered.
Book-building Process

18. Offer of shares at a specified price band
Public issue shall be kept open for 3 to 10
working days
Bidding process shall be through an
electronically linked transparent bidding facility
provided by stock exchanges
On-line graphical display of demand and bid
prices
Based on the bids, issue price is determined by
issuer
Retail individual investors may bid at ‘cut-off’
price
Final prospectus registered with ROC

19. Allotment of a Book-built Issue
Category-wise % of issue to be allotted on a
proportionate basis
Not more than 50% to Qualified Institutional
Buyers
High Net-worth Individuals- atleast15%
Retail Investor-at least 35%
Retail individual investor – who bids in a book
built issue for a value not more than Rs
2,00,000
Allotment and refund shall be made not later

21. FDI and FII
FDI- Foreign Direct Investment
• an investor which picks up more than 10% stake in a
company’s equity.
• in the form of fully-owned subsidiary or a joint
venture,
• stable, enhances management quality, transfer of
technology and generation of employment.
FII- Foreign Institutional Investment
• An institution incorporated outside India as a
pension fund, mutual fund, bank, insurance
company, foreign government agency, foreign
central bank etc.
• In the form of portfolio investment
• short to medium term investments
• can invest only up to 10 percent of capital in a

22. Foreign Venture Capital
Venture capital is a source of funding for new
entrepreneurs and technology.
FVCI is an investor incorporated/established outside India
who is registered under the SEBI(Foreign Venture Capital
Investor) Regulations, 2000.
A registered FVCI may invest in Indian Venture capital
funds.
Private Equity
•PE are the investment banks who invest into proven businesses.
• exit strategy is usually the company going public or acquired.
•PE funds attract capital form pension funds, insurance funds
etc.
•All PE from outside India are classified either as FDI, in

23. ADRs and GDRs
Depository receipts are negotiable instruments denominated
in U.S. dollars or another currency representing a publicly-
traded issuer’s local currency equity shares.
Listed and traded on a foreign stock exchange
represent one or more shares of the issuing company
Indian GDRs are primarily sold to institutional investors
In US GDRs can be issued to qualified institutional buyers but
ADRs can be sold both to institutional and retail investors
ADR listing requires comprehensive disclosures and greater
transparency as compared to GDR listing
GDRs can be converted into ADRs

24. ECBs
Borrowings raised from international
markets by corporates
Can be raised from any international source
Supplement domestic resources
 Low cost of borrowing

25. FCCBs Bonds issued by Indian companies in foreign
currency
 Fixed interest/coupon rate paid in foreign
currency
 partly or fully convertible into ordinary shares
 Interest rates lower than domestic rates
 Bonds listed and traded abroad
 Exchange risk is more as interest is payable in
foreign currency

26. IDR
Indian Depository Receipts
Issued by foreign companies for raising equity funds
from Indian market