FINANCIAL MARKETS

Financial Markets
Capital Market
Equity Market
Primary Market Public Issues Private Placements

Money Market
Debt Market

Private Corporate PSU Bond Market Government securities Market

Domestic Market International Market

Treasury Bills Call Money Market Term Money Market Commercial Bills Commercial Papers Certificates of Deposit

Primary Segment

Secondary Segment

Secondary Market NSE BSE OTCEI Regional Stock Exchanges Derivatives Market Futures Options

CAPITAL MARKET
The capital market is the market for long term funds. Capital market discharge the important function of transfer of savings, especially of the household sector to companies and public sector bodies. Individuals or households with surplus money invest their savings in shares , debentures and other securities of companies. The two segments of the capital market are the primary market and the secondary market.

PRIMARY MARKET Primary market is the market for the long term sources of finance (equity and debt). New issues of equity and debt are arranged in the form of a new floatation , either publically or privately or in the for of rights offer, to the existing shareholders. Companies raise new cash in exchange for financial claims. The financial claims may take the form of shares or debentures.

Public sector undertakings also issue securities.

The transactions in the primary market result in capital formation.

INSTRUMENTS EQUITY SHARES they are ownership securities.

they represent proportionate ownership of a company. this right is expressed in the form of participating in the profits of a going company and sharing the assets of a company after winding up.
they have the lowest priority claim on earnings and assets of all securities issued.

 they have unlimited potential for dividend payments and price appreciation. they have a right to vote on every resolution placed before the company. all share carry proportional rights.
voting right cannot be exercised in respect of shares on which a call or any other sum due to the company has not been paid up.

Par value
It is the face value of a share. It does not tell anything about the value of shares. Dividends are declared as a percentage of the face value. No share can be issued at less than par value even though the par value exceeds the fair value / market value of the share. This is especially the case with sick companies and the revival of such company is hampered.

Book value It is determined by deducting total liabilities including preference shares from the total assets and the difference which is equal to shareholder equity with the number of equity shares outstanding.

PREFERNCE SHARES
Preference shares is hybrid security that is a mixture of ownership and creditor ship security. They carry preferential rights in comparison with ordinary shares. As a rule preference shareholders enjoy a preferential right to dividend. As regards capital , if a company winds up, it carries a preferential right to be repaid, the amount of capital paid-up on such shares.

Types of Preference Shares

Cumulative and Non Cumulative Participating Preference Shares

Redeemable Preference Shares

Convertible Preference Shares

EQUITY FUNDING FROM INTERNATIONAL MARKET

American Depository Receipt [ADR] these are negotiable instruments , denominated in dollars and issued by the US Depository Bank Offers access to the US institutional and retail markets NYSE , NASDAQ etc Requires comprehensive disclosures and greater transparency Companies have to abide by the requirement of SEC DR holders enjoy the same rights as the ordinary domestic shareholders.

Global Depository Receipt [GDR]

equity instrument issued in European and Asian markets these are negotiable instruments , offers access to the markets like Luxemburg Stock Exchange , London Stock Exchange , Dubai Stock Exchange , Singapore stock Exchange etc conversion of GDR into ADR is possible

DEBT MARKET

Market where different type of fixed income securities are issued and traded.

Participants
Central & State Governments PSUs Corporate Banks Mutual funds FIIs PFs

Primary Dealers

DEBENTURES
Debentures are debt securities. It is a certificate which acknowledges indebtedness under companys seal. Features: they are creditor ship securities. fixed rate of returns a charge may be created on the assets of the company . they shall be redeemed after a certain period.

Kinds of Debentures
Participating Debentures & Non Participating Debentures Secured Debentures & Unsecured Debentures Convertible Debentures & Non Convertible Debentures

BONDS
It to refer to debt securities issued by : * government, * semi-government bodies and * public sector financial institutions and * companies.

SN 1 2 3 Nature Income Issuer

Basis

Debentures Debt instrument Fixed Return Private Company

Bonds Debt instrument Fixed Return PSU , Private Company

Risk

Secured /Unsecured

Secured

5 6

Issues Payment

Issued at face value Interest at regular interest + principal at the end

Issued at discount Complete amount paid at the end

Types of Instruments Traded in the Debt Market

Market Segment
Government Securities

Issuer
Central Government

Instruments
zero coupon bonds , coupon bearing bond , Tbills, floating rate bonds coupon bearing bond , floating rate bonds government guaranteed bonds , debentures ,municipal bonds PSU bonds taxable and tax free, debentures , commercial papers ,deep discount bonds debentures , bonds , CPs, FRBs, zero coupon bonds, inter- corporate deposits

State Government Public Sector Bonds Government Agencies/Statutory Bodies PSU

Private Sector Bonds

Corporate

Banks
Financial Institutions

CDs , debentures , bonds

CDs and bonds

 Floating Rate Bonds : wherein the interest rate is not fixed and is linked to a benchmark rate. Zero coupon bonds: no periodic interest payment and are sold at a huge discount to face value Deep Discount Bonds: are zero coupon bonds with a maturity of 15 years onwards. Municipal Bonds: are issued by municipal corporation to finance infrastructure projects

DEBT FUNDING FROM INTERNATIONAL MARKET

External Commercial Borrowings [ECBs] Indian companies free to raise ECBs from any internationally recognized source such as bank , export credit agency , suppliers of equipment , international capital mkt. ECBs need sound risk mgt both interest rates and forex risk. Can be utilized for import of capital goods and services and for project related expenditure but cannot be used for speculative purpose.

Foreign Currency Convertible Bonds [FCCBs]

Bonds are issued by Indian companies and subscribed to by a non-resident in foreign currency. Carry fixed coupon rates and are convertible into certain number of ordinary shares They are listed and traded abroad Till conversion interest to be paid in dollars

TYPES OF ISSUES

PUBLIC ISSUE OF SECURITIES

Public issue of securities, shares or debentures are made in primary market funds mobilized through the primary market constitute investments. There is no specific market place for issue of new securities. Issue of shares and debentures may be made through : prospectus , offer for sale and private placement . Wide publicity about the offer is made through different media : news paper, periodicals, television etc . There is also direct mailing of the application form and prospectus. The intermediaries who organize the entire effort are merchant bankers.

Promoters Prospectus Application Money Over Subscription & Under Subscription Minimum Subscription Underwriting

Initial Issues These are issues of shares for the first time either after : incorporation or conversion from private ltd to public ltd company. Initial Public Offer [IPO] : fresh issue of securities or offer for sale of existing securities or both by an unlisted company for the first time to the public.

Follow-on-Public Offering [FPO]: fresh issue of securities or offer for sale of existing securities or both by already listed company for the first time to the public through an offer document.

Further Issues
Issue of shares are made by existing companies either by: public issues , rights issue , composite issue . these may be offered for cash subscription or for consideration other than cash such as change of ownership either of physical assets or technical know how.

Exchange Issue
It is one in which shares of one company are exchanged for another as in the case of takeovers and mergers. In HLL-TOMCO merger 2 HLL shares were exchanged for 15 TOMCO shares. Exchange issues do not add to the funds of the company making the exchange Although the merger may result in synergy.

Rights Issue
It is the issue of new shares by a listed company in which existing shareholders are given preemptive rights to subscribe to new issue.

Here the existing shareholder are entitled to subscribe to new share in certain proportion to the shares already held by them.
There are generally issued at a premium , which is freely determined by the company.

Composite Issue
It consists of right and public issues. Existing companies can resort to different pricing of their share. The price at which the shares are offered to public may differ from the price at which they are offered to the rights shareholders.

Bonus Issues
These are dividends paid in shares. In this retained profits or free reserves are converted into additional share capital, no additional liabilities are created in the balance sheet. This also do not result in raising new funds. Bonus issue can be made only out of free reserves built out of the genuine profits or share premium collected in cash only. Reserves created out of revaluation of fixed assets are not to be capitalized.

Preferential Issue
includes issue of shares on preferential basis and/ or through private placement in pursuance of a resolution passed issue of shares to the promoters and their relatives lock-in period of 3 years