BY Mrs.

Shalu Dua Katyal

A business requires credit for the operations of the business. Credit is generally required and supplied on short and long-term basis. The money market caters to short-term needs only. The long- term capital needs are met by Capital Market.

Capital Market is a place where long-term and medium term financial instruments are traded. Thus it is a market for long term funds- both equity and debts- and funds raised within and outside the country. It consists of a series of channels through which the savings of the community are made available for industrial and commercial enterprises.

Capital Market
Any market in which securities are traded. Companies and governments use capital markets to raise funds for their operations; for example, a company may issue an IPO while a government may issue a bond in order to conduct new or expand ongoing activities. Investors purchase securities in the capital markets in order to extract a return and earn profit on the securities. Capital markets include primary markets, such as IPOs that are placed with investors through underwriters, and secondary markets, in which all subsequent trading takes place. Government agencies in different countries regulate local capital markets, though some, especially exchanges, play some role in regulating themselves.

Comprises Primary and Secondary Market Important constituents of the financial system. acts a link between savers and borrowers who need funds to invest profitably and efficiently. helps firms to procure finances for long-term investments such as buying plant & machinery, building, etc. obtains its funds through issue of various securities such as equity shares, bonds, debentures and innovative securities like zero interest bonds and deep discount bonds. functions thru various intermediaries such as underwriters, bankers, stock brokers, etc. includes both individual investors and institutional investors such as UTI, LIC, IDBI, etc

Role of capital market

Promotion of Industrial Growth Mobilizing funds to meet Private and Public companys financial requirements. Raising long-term funds. Securing foreign Capital. Ready and continuous market Effective allocation of Financial Resources. Hedging and reducing risks. Helps in maintaining liquidity. Operational Efficiency.

Screen-based trading Dematerialization of securities Shorter settlement cycle Foreign Institutional Investors Comprehensive Risk Management System Investor Protection Electronic Clearing services Listing of securities Diversified Infrastructure Corporate Governance

Ownership Equity Shares Preference Shares Securities Debt Securities Bonds

Debentures

Right to Control Limited Liability Risky Capital No Guarantee of Returns( i.e. dividend) Right to vote Right to participate in Management

o o

o o o

Preference in dividends. Preference in assets in the event of liquidation. Convertible into common stock. No participation in management. Nonvoting.

Cumulative And Non-cumulative

Redeemable And Irredeemable

Participating And Non-participating

Convertible And Non-Convertible

In law, a debenture is a document that either creates a debt or acknowledges it. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note.

Debentures are generally freely transferable by the debenture holder. Debenture holders have no voting rights and the interest paid to them is a charge against profit in the company's financial statements.

Lower and Fixed interest bearing securities. Fixed maturity. Priority in repayment No participation in management. Interest on debentures is a charge against profits. Flexibility in capital structure. High stamp duty.

Secured And Unsecured

Redeemable And Irredeemable

Convertible And Non-Convertible

Registered And Unregistered

Participating And Non-participating

Basis
Participation in management Returns Regularity of returns

Equity shares
part owners

Preference Shares
Part owners Returns in the form of dividend Not regular, but fixed dividend Priority over equity shares Less risky than equity shares No deduction, so high income tax Have to redeem within 20 years max.

Debentures
creditors Returns in the form of interests Regular return i.e interests Priority over equity and preference Lesssharesthan risky

Returns in the for of dividend No regular returns Last priority Risky No deduction on dividend Never repaid during the time of the company

Priority repayment
Risk Income tax deductions Repayment

equity and debt Deductable from income, so less income tax liability Have to be redeemed within 20 years, redeemable or irredeemable.

A Bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals.

PAR VALUE: -Amount paid to the stockholder on maturity of the bond. -Discount or premium COUPON INTEREST: -Annual/Semi-annual Naira interest paid to the bondholder MATURITY DATE: -The date on which the issuer is obligated to pay the bondholder

SINKING FUND: -Periodical application of money towards redemption of the bonds before maturity.

Such bonds are sold at heavy discount of their nominal of face value. For example, a bond of the face value of Rs. 1000 may be sold at discounted value of Rs. 300 and be repayable at its face value of Rs. 1000 after 6 years. Such bonds don't earn yearly interest, the difference between the face value and discounted value is the interest for that period. The maturity period of these bonds vary from 5 to 12 years.

They are designed to meet the long term funds requirements of the issuer and investors who are not looking for immediate return and can be sold with a long maturity of 25-30 years at a deep discount on the face value of debentures. IDBI deep discount bonds for Rs 1 lakh repayable after 25 years were sold at a discount price of Rs. 2,700.

The phrase `sweat equity' refers to equity shares given to the company's employees on favorable terms, in recognition of their work. Sweat equity usually takes the form of giving options to employees to buy shares of the company, so they become part owners and participate in the profits, apart from earning salary. This gives a boost to the sentiments of employees and motivates them to work harder towards the goals of the company. The Companies Act defines `sweat equity shares' as equity shares issued by the company to employees or directors at a discount or for consideration other than cash for providing knowhow or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

A negotiable certificate held in the bank of one country (depository) representing a specific number of shares of a stock traded on an exchange of another country. GDR facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets. GDR prices are often close to values of related shares, but they are traded and settled independently of the underlying share. If the depository receipt is traded in the United States of America (USA), it is called an American Depository Receipt, or an ADR. If the depository receipt is traded in a country other than USA, it is called a Global Depository Receipt, or a GDR.

A warrant is a security issued by company entitling the holder to buy a given number of shares of stock at a stipulated price during a specified period. These warrants are separately registered with the stock exchanges and traded separately. Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. Ex-Essar Gujarat, Ranbaxy, Reliance issue this type of instrument.

This is a debt instrument that is fully converted over a specified period into equity shares. The conversion can be in one or several phases. When the instrument is a pure debt instrument, interest is paid to the investor. After conversion, interest payments cease on the portion that is converted. If project finance is raised through an FCD issue, the investor can earn interest even when the project is under implementation. Once the project is operational, the investor can participate in the profits through share price appreciation and dividend payments

A convertible bond is a mix between a debt and equity instrument. It is a bond having regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock. FCCB is issued in a currency

different than the issuer's domestic currency.

The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock. Due to the equity side of the bond, which adds value, the coupon payments on the bond are lower for the company, thereby reducing its debt-financing costs.

A tracking stock is a security issued by a parent company to track the results of one of its subsidiaries or lines of business; without having claim on the assets of the division or the parent company. It is also known as "designer stock". When a parent company issues a tracking stock, all revenues and expenses of the applicable division are separated from the parent company's financial statements and bound to the tracking stock. Oftentimes, this is done to separate a subsidiary's high-growth division from a larger parent company that is presenting losses. The parent company and its shareholders, however, still control the operations of the subsidiary. ExQQQQ, which is an exchange-traded fund that mirrors the returns of the Nasdaq 100 index

Also referred to as "P-Notes" Financial instruments used by investors or hedge funds that are not registered with the Securities and Exchange Board of India to invest in Indian securities. Indian-based brokerages buy Indiabased securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. These are issued by FIIs to entities that want to invest in the Indian stock market but do not want to register themselves with the SEBI.

There has been tremendous growth in the capital market in recent years both as regards turnover of securities and their prices specially after liberalization in 1991. Following are the main areas of growth:

Establishment of SEBI. Entry in global market. Entry of foreign Institutional Investors. Establishment of National Securities depository Ltd. Appointment of market Makers. Establishment of Over the Counter Exchange of India (OTCEI). Establishment of National Stock Exchange(NSE). Establishment of Credit Rating Agencies. Establishment of specialized financial Institutions like- UTI, IDBI, ICICI etc. Development of financial services. Increase in number of stocks exchanges (24). Growth of Mutual Funds. Development of Underwriting. Increase in awareness and confidence of investing public.

Only few genuine investors. Trading in few strips only. Non-availability of tradable securities. Lack of confidence of genuine investors. Violent fluctuations in prices at stock exchange. Lack of transparency in dealings. Cumbersome procedure of settlement. Price-rigging. Prevalence of insider trading. Dominance of financial institutions as investors. Loss of faith in private sector. Apathy of companies towards shareholders.

There are various processes that Issuers of securities follow or utilize in order to tap the savers for raising resources. Some of the commonly used processes and methods are described below: Companies, new as well as old, can offer their shares to the investors in the primary market. This kind of tapping the savings is called an IPO or Initial Public Offering. SEBI regulates the way in which companies can make this offering. Companies can make an IPO if they meet SEBI guidelines in this regard. The size of the initial issue, the exchange on which it can be listed, the merchant bankers' responsibilities, the nature and content of the disclosures in the prospectus, procedures for all these are laid down by SEBI and have to be strictly complied with.

 Private Placement Many companies choose to raise capital for their operations through various intermediaries by taking what in marketing terms would be known as the wholesale route. This is called in financial markets as private placement. The retail route of approaching the public is expensive as well as time consuming. SEBI has prescribed the eligibility criteria for companies and instruments as well as procedures for private Placement. However, liquidity for the initial investors in privately Placed securities is ensured as they can be traded in the secondary market. But such securities have different rules for listing as well as for trading.

Preferential Offer/Rights Issue

Companies can expand their capital by offering the new shares to their existing shareholders. Such offers for sale can be made to the existing shareholders by giving them a preferential treatment in allocation or the offer can be on a rights basis, i.e., the existing holders can get by way of their right, allotment of new shares in certain proportion to their earlier holding. All such offers have also to be approved by SEBI which has laid out certain criteria for these routes of tapping the public. These have to be complied with.

Internet Broking
With the Internet becoming ubiquitous, many institutions have set up securities trading agencies that provide online trading facilities to their clients from their homes. This has been possible since all the players in the securities market, viz., stockbrokers, stock exchanges, clearing corporations, depositories, DPs, clearing banks, etc., are linked electronically. Thus, information flows amongst them on a real time basis. The trading platform, which was converted from the trading hall to the computer terminals at the brokers' premises, has now shifted to the homes of investors. This has introduced a higher degree of transparency in transactions.

The government has initiated a number of steps to strengthen the capital Market. Several reform measures have been undertaken both in Primary Market and Secondary Market.

The Primary market reforms:

The SEBI was given statutory powers in January 1992 for regulating the stock market. The Capital Issue (Control) Act, 1947 was abolished in May 1992, allowing issuers of securities to raise capital without requiring the consent of any authority. The requirement to issue share at par of Rs. 10 and Rs. 100 was withdrawn. This gave companies the freedom to determine a fixed value per share. This facility is available to companies which have dematerialized their shares. Simplified issue procedures and improved disclosure standards have been prescribed. Companies are required to disclose all material facts, specific risk factors associated with their projects. In order to reduce the cost of issue, underwriting by the issuer was made optional, subject to the condition that if an issue was not underwritten and in case it failed to secure 90% of the amount offered to the public. For integrating Indian Capital Market with the International Capital Markets, permission was given to FIIs such as Mutual Funds and pension funds to operate in the Indian Market. Indian Companies have also been allowed to raise capital from the international capital markets through issues of ADRs , GDRs, FCCBs, etc.

Besides merchant bankers, various intermediaries such as mutual funds, portfolio manages, registrars to an issue, share transfer agents, underwriters, etc. have also been brought under the preview of SEBI. The entry norms for IPOs have been tightened by modifying the disclosure and investor protection guidelines. A code of conduct on advertisement has been issued for mutual funds, banning them from making any assurance or claims that might mislead the public. The issuer can make a public or right offers of shares in demat form only. Every public-listed company making an IPO of any security for Rs. 10 crore or more is required to make an offer only in dematerialized form. The Central Listing Authority was set-up to ensure uniform from standard practices for listing the securities on stock exchange. In March 2003, the SEBI introduced changes in IPO norms to boost investor confidence. It changed the eligibility criteria for IPOs. According to the new norms, companies making IPOs should have Net Tangible Assets of Rs. 3 crore in each of the 2 proceeding years. Of this, not more than 50% should be held in monetary assets- cash or its equivalent such as securities. On March 29, 2005, the SEBI redefined the retail investor as one who applies or bids for securities of or for a value not exceeding Rs. 1 Lakh. The facility of electronic Clearing Services was extended to refunds arising out of public issue so as to ensure faster refunds.

The open system was replaced by the on-line screen based electronic trading. 3 new stock Exchanges at national level were set-up. These are the Over-the-counter Exchange of India(1992), The National Stock exchange of India(1994) and Interconnected stock Exchange of India(1999). Trading and Settlement Cycles were uniformly reduced to 7 days from 14 days. Rolling settlement(T+5) was introduced for the dematerialized segment, shortened to (T+3) in April 1, 2002. Depository system were introduced to provide protection to investors. Companies have been allowed to buy back their own shares for Capital restructuring, subject to the condition that the buy-back does not exceed 25% of the paid up capital and free reserves. In order to prohibit insider trading, the insider trading regulations have been formulated by SEBI. Internet trading was permitted in February 2000. It is mandatory for listed companies to announce quarterly results. It is mandatory for all brokers to disclose all details of block deals. Block deals include trading which accounts for more than 0.5% of the equity shares of that listed company. The SEBI has made it mandatory for every intermediary to apply for allotment of unique identification number for itself and for its related persons.

Clause 41 of Listing Agreement makes it compulsory for listed companies to publish number of complaints received from investors. Clearing and settlement cycle time was further reduced to T+2 w.e.f., April 1, 2003. The BSE and NSE have started a separate trading windows for block deals. In order to protect interest of minority shareholders, the Securities contracts( Regulation) Act was amended in 2004 to recognize delisting. The notification in this regard was issued on Oct.30, 2006 stating that stock exchanges will have to delist a company if: (a) It has suffered losses during the last three consecutive years and net worth has turned negative. (b) Trading in its securities has remained suspended for more than 6 months. It violates SEBI Act or Depository Act. (d) It furnishes false addresses or there is an unauthorized change of registered office.

Regulatory Framework of Capital Market

The regulatory framework of Capital Market in India includes the following regulatory authorities: Securities Contracts(Regulation) Act, 1956(SCRA). Securities and Exchange Board of India (SEBI). The Companies Act, 1956 (Company Law Regulations). The depositories Act, 1956. Prevention of Money Laundering Act, 2002. Securities and Exchange Commission In particular, it is responsible for (i) institutional reforms in the securities markets, (ii) building regulatory and market institutions, (iii) strengthening investor protection mechanism, and (iv) providing efficient legislative framework for securities markets,

Securities Contracts(Regulation) Act, 1956(SCRA).

This Act provides for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges and aims to prevent undesirable transactions in securities. It gives Central Government regulatory jurisdiction over:$$ Stock exchanges through a process of recognition and continued supervision, $$ Contracts in securities, and, $$ Listing of securities on stock exchanges. As a condition of recognition, a stock exchange complies with conditions prescribed by Central Government. Organised trading activity in securities take place on a specified recognized stock exchange. The stock exchanges determine their own listing regulations which have to conform to the minimum listing criteria set out in the rules.

The Companies Act, 1956

The Act deals with issue, allotment and transfer of securities and various aspects relating to company management. It provides for standard of disclosure in public issue of capital, particularly in the fields of company management and projects, information about other listed companies under the same management and management perception of risk factors. It also regulates underwriting, the use of premium and discounts on issues, rights and bonus issues, payment of interests and dividends, supply of annual report and other information.

Securities and Exchange Board of India (SEBI)

This is the regulatory authority established under the SEBI Act 1992, in order to protect the interests of the investors in securities as well as promote the development of the capital market. It involves regulating the business in stock exchanges; supervising the working of stock brokers, share transfer agents, merchant bankers, underwriters, etc; as well as prohibiting unfair trade practices in the securities market. The following departments of SEBI take care of the activities in the secondary market:

Market Intermediaries Registration and Supervision Department (MIRSD)

- concerned with the registration, supervision, compliance monitoring and inspections of all market intermediaries in respect of all segments of the markets, such as equity, equity derivatives, debt and debt related derivatives.

Market Regulation Department (MRD) - concerned with formulation of new

policies as well as supervising the functioning and operations (except relating to derivatives) of securities exchanges, their subsidiaries, and market institutions such as Clearing and settlement organizations and Depositories.

Derivatives and New Products Departments (DNPD) - concerned with

supervising trading at derivatives segments of stock exchanges, introducing new products to be traded and consequent policy changes.

THE DEPOSITORIES ACT, 1996:

The paper based ownership and transfer of securities has been a major drawback of the Indian Securities Markets since it often resulted in delay in settlement and transfer of securities and also lead to "bad delivery", theft, forgery etc. The Depositories Act, 1996 was therefore enacted to pave the way for smooth and free transfer of securities. It also helps in dematerializing the securities in the depository mode. The act envisages transfer of ownership of securities electronically by book entry without making the securities move from person to person.

 The primary objective of the act is to prevent money-laundering and to provide confiscation of property derived from or involved in moneylaundering. The term money-laundering is defined as whoever acquires, owns, possess or transfers any proceeds of crime; or knowingly enters into any transaction which is related to proceeds of crime either directly or indirectly or conceals or aids in the concealment of the proceeds or gains of crime within India or outside India commits the offence of moneylaundering, Besides providing punishment for offence, the act also provides other measures of prevention of money-laundering.

Prevention of Money Laundering Act, 2002

 Securities and Exchange

Commission

The apex regulatory institution of the capital market Established by Government Registers listed securities Registration of stock exchanges and dealing members Sets the Rules and regulations and ensures compliance Market surveillance to prevent insider abuse Dispute resolution