CAPITAL MARKET

S.Y.B.A.F.

July 2011

Meaning
Definition: According to K.S. Sharma, Capital market refers to the facilities and institutional arrangements for the borrowings and lending of long term funds. Meaning: It is market for raising capital. A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise longterm funds. It is defined as a market in which money is provided for periods longer than a year Capital market is a market for long term debts and equity shares Two parts: Primary Market Secondary Market

Function of Capital Market

1. 2. 3. 4. 5. 6. 7. 8.

Mobilization of Savings : Provision of finance to business : Link between investor & company : Rational allocation of resources: Capital Formation : Provision of Investment Avenue : Profitable use of funds: Continuous Availability of Funds ie Liquidity:

Types of capital Market

Primary Market
Primary

Market is market for raising fresh capital in the form of share and debentures. In Primary Market, Securities are offered to the public for subscription, for the purpose of raising the capital or funds. The issue of securities in the primary market is subjected to fulfillment of a number of pre-issue guidelines by SEBI and compliance to various provision of the Company Act.

Primary Market
Features of Capital Market This is the market for new long term capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM). In a primary issue, the securities are issued by the company directly to investors. The company receives the money and issues new security certificates to the investors. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. The primary market performs the crucial function of facilitating capital formation in the economy. 6

SECONDARY MARKET

A market, which deals in securities that have been already issued by companies, is called as secondary market. It is also known as stock market. Secondary Market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange. It is Trading in previously issued financial instruments. An organized market for used securities. Examples are the New York Stock Exchange (NYSE), Bombay Stock Exchange (BSE),National Stock Exchange NSE, bond markets, over-the-counter markets,

Difference B/w Primary and Secondary Market

1.

In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading venue in which already existing/pre-issued securities are traded among investors In primary markets, securities are bought by way of public issue directly from the company. In Secondary market share are traded between two investors.

2.

Listing of shares
Listing

is a permission to quote shares and debentures officially on the trading floor of the stock exchange. Only public companies are allowed to list their securities in the stock exchange. Private Limited companies cannot get listing facility. They shall first convert themselves into public limited companies and their Articles of Association shall contain prohibitions as laid down in the listing agreement and as applicable to public limited companies. Securities are required to be listed under Section 9 of the Securities Contract (Regulation) Act, 1956. Characteristics of listing of securities 1.Agreement 2.Purpose 3.Restriction 4.Investor protection.

LISTING PROCEDURE
The listing procedure involves making a simple application by the company and payment of listing fees as prescribed by the respective stock exchange. It is to be completed before the offer of securities to the public and registration of prospectus with the Registrar of Companies. The recognized stock exchange has to give approval and then make an agreement stating the terms and conditions. Registration and recording is done for the purpose of trading by the registered members of the stock exchange and for the official quotation of the security price for the benefit of the public and the investors. The company has to continue listing by paying renewal fees from time to time.

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LISTING PROCEDURE cont

Any

allotment of securities made in the absence of listing or refusal of listing is held to be void i.e. illegal. Again, any failure to comply with the Section 21 of the Securities Contracts (Regulation) Act attracts penalty to the parties. The authority of the stock exchange may refuse listing of the securities of a company. The authorities should intimate the company within 15 days with the reasons for refusal. The company can make an appeal to the Central Government within a prescribed period. The Central Government may either grant or refuse to grant the permission for listing and the decision of the Central Government would be informed to the stock exchange concerned that shall act in conformity with such a decision.

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LISTING PROCEDURE cont

The

stock exchange is empowered to suspend or withdraw an admission to dealing in securities of company for breach or noncompliance with the listing provision on giving an opportunity of being heard in writing. In an eventuality where any withdrawal or suspension exceeds 3 months, the company may appeal to the SEBI who may either vary or set aside the decision of the stock exchange.

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Advantages of Listing
Advantages to Listed Companies Widens Market Easy Marketability Easy Publicity Creates Goodwill Quick Marketing Other Benefits 1.The company enjoys concessions under Direct Tax Laws as such companies are known as companies in which public are substantially interested resulting in low rate of income tax payable by them. 2.The company gains national and international importance by share value quoted on stock exchanges. 3.It ensures wide distribution of shareholding thus avoiding fears of easy takeover of the organization by others. 4.It helps the company to mobilize resources from the shareholders through ' Right Issue for programs of expansion and modernization without depending on the financial institutions in line with the government policies.

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Advantages of Listing
Advantages to Investors Safety Useful as collateral security Ideal for investment Protection to investors Facilitates evaluation Ready Marketability Guidance to investors Other Benefits 1.Rights entitlement in respect of further issues can be disposed of in the market. 2.Listed companies are obliged to furnish un-audited financial results on quarterly basis. The said details enable the investing public to appropriate financial results between the financial periods. 3.Takeover offers concerning the listed companies are to be announced to the public.

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Advantages of Listing
Advantages to Society
Control

on listed companies Activates stock exchange Creates confidence among investors Raises the rate of capital formation Inflow of foreign funds.

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SEBI
History:
SEBI

(Securities and Exchange Board of India) was initially constituted on April 12, 1988 as a non statutory body through a resolution of the Government for dealing with all matters relating to development and regulation of securities market and investor protection and to advise the Government on all these matters. SEBI was given statutory status and powers through an ordinance promulgated on January 30, 1992. It was formed officially by the Government of India in 1992 with SEBI Act 1992 being passed by the Indian Parliament. SEBI is headquartered in the business district of Bandra-Kurla complex in Mumbai.

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Objectives of SEBI
The three main objectives are:1.To protect the interest of the investors in securities: 2.To promote the development of securities market: 3.To regulate the securities market: To protect the interest of investors so there that is a steady flow of savings in to the capital market. To regulate the securities market and ensure fair practices by the issues of securities so that they can raise resources at minimum cost. To promote efficient services by brokers, merchant bankers and other intermediaries so that they become competitive and professional. Other Objectives: Power of issue directions. Power of investigation. Registration of stock brokers, sub brokers and share transfer agents etc Prohibition of manipulative and deceptive devices, insider trading.

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SEBI
Function of SEBI 1. Regulating the business in stock exchange and any other securities market 2. Registering and regulating the workings of intermediaries associated with securities market 3. Registering and regulating the working of collective investment schemes including mutual funds 4. Promoting and regulating self-regulatory organizations 5. Prohibiting fraudulent and unfair trade practices in the securities market 6. Promoting investors education and training of intermediaries in securities market 7. Prohibiting insiders trading in securities 8. Regulating substantial acquisition of shares and take-over of companies 9. Calling for information, undertaking inspection, conducting enquiries and audits of the stock exchanges, intermediaries and self-regulatory organizations in the securities market

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SEBI
Power of SEBI 1. SEBI powers relating to stock exchanges and intermediaries SEBI has wide powers regarding the stock exchanges and intermediaries dealing in securities. It can ask information from the stock exchanges and intermediaries regarding their business transactions for inspection / scrutiny and other purpose. 2. SEBI powers relating to monetary penalties SEBI has been empowered to impose monetary penalties on capital market intermediaries and other participants for a range of violations. It can even impose suspension of their registration for a short period. 3. SEBI has power to initiate actions relating to functions assigned SEBI has a power to initiate actions in regard to functions assigned. For example, it can issue guidelines to different intermediaries or can introduce specific rules for the protection of interests of investors. 4. SEBI power relating to insider trading SEBI has power to regulate insider trading or can regulate the functions of merchant bankers.

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SEBI
5. SEBI powers under securities contracts (Regulation) Act For effective regulation of stock exchange, the Ministry of Finance issued a Notification on 13 September, 1994 delegating several of its powers under the Securities Contracts (Regulations) Act to SEBI. SEBI is also empowered by the Finance Ministry to nominate three members on the Governing Body of every stock exchange. 6. SEBI has power to regulate business of stock exchanges SEBI is also empowered to regulate the business of stock exchanges, intermediaries associated with the securities market as well as mutual funds, fraudulent and unfair trade practices relating to securities and regulation of acquisition of shares and takeovers of companies.

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Bombay stock exchange

Bombay stock exchange There are 23 stock exchanges in the India. Mumbai's (earlier known as Bombay), Bombay Stock Exchange is the largest, with over 6,000 stocks listed. In 1875 BSE became an official organization known as 'The Native Share & Stock Brokers Association'. In 1956, the BSE became the first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act. The BSE Established in 1875, the exchange is also the oldest in Asia among all other Stock Exchanges recognised by the Government of India under the Securities Contracts (Regulation) Act, 1956, The Bombay Stock Exchange (BSE) on Dalal Street, Mumbai and is the oldest stock exchange in Asia. The BSE SENSEX, also called "BSE 30", is a widely used market index in India and Asia. Though many other exchanges exist, BSE and the National Stock Exchange of India account for the majority of the equity trading in India.
Sensex is calculated using a market- capitalization weighted methodology. As per this methodology, the level of index at any point of time reflects the total market value of 30 components stock relative to a base period.1978-79. (The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company).

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National Stock Exchange of India

The Nifty index is a composite of the top 50stocks listed on the National stock exchange. National Stock Exchange of India or in short NSE happens to be Indias largest Stock Exchange and Worlds third largest stock exchange in terms of transactions. It is located in Mumbai and was incorporated in November 1992 as a tax-paying company. It was in April 1993 that NSE was recognized as stock exchange under the Securities Contract Act 1956. The pherwani committee recommended establishing the NSE with a view to provide single market. It was set up in MUMBAI with paid up capital of Rs 25 crores.

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CREDIT RATING
An assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities. Credit rating provides a system of gradation by which the relative capacities of the companies (borrowers) to make timely repayment of interest and principal amount on a particular type of debt security. A credit rating assesses the credit worthiness of an individual, corporation, or even a country. Credit ratings are calculated from financial history and current assets and liabilities. A credit rating tells a lender or investor the probability of the subject being able to pay back a loan. A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates.

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