An insight into Indian Capital Market

Presented by:

Rajesh Kumar

MBA(Finance), ACS, AIII

Capital Market A market in which individuals and institutions trade

financial securities. Organizations/institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets.

Capital markets are financial markets for the buying and selling of long-term debt- or equity-backed securities. These markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments.

• Capital Market is where trading in financial instruments is conducted to raise capital.

Three categories of participants:

i) Issuer of securities: Borrowers or deficit savers who issue securities to raise funds(corporate sector, central government).

ii) Investors: Surplus savers who deploy savings by subscribing to these securities(include retail investors, mutual funds).

iii) The Intermediaries: Agents who match the need of the users and suppliers of funds.

Nature Of Capital Market The nature of capital market is brought out by the

Following facts:

Its has two segments primary and secondary market.

It performs trade-off function.It deals in long-term securities.It helps in creating liquidity.It creates dispersion in business ownership.It helps in capital function.

Role and Function of Capital Market

Capital FormationAvenue Provision of Investment Speed up Economic Growth and

Development Mobilization of SavingsProper Regulation of Funds Service Provision Continuous Availability of Funds

Factors affect the Capital Market

• Economy of the Country• Money Supply • Interest Rate • Corporate Results• Global Capital Market Scenario • Foreign Funds Inflow • Strength/Weakness of the local currency

Types of capital marketThere are two types of capital market:

1. Primary market

2. Secondary market

* 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.

Classification of Capital Marketing

CAPITAL MARKET

PRIMARY MARKETSECONDARY

MARKET

PUBLIC ISSUE

RIGHT ISSUE

BONUS ISSUE

PRIVATE PLACEMENT

STOCK MARKET

Primary Market 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.

An unlisted issuer making a public issue i.e. (making an IPO) is required to satisfy the following provisions:

The Issuer Company shall meet the following requirements:

(a) Net Tangible Assets of at least Rs. 3 crores in each of the preceding three full years.

(b) Distributable profits in at least three of the immediately preceding five years.

(c) Net worth of at least Rs. 1 Crore in each of the preceding three full years.

(d) If the company has changed its name within the last one year, at least 50% revenue for the preceding 1 year should be from the activity suggested by the new name.

(e) The issue size does not exceed 5 times the pre‐ issue net worth as per the audited balance sheet of the last financial year.

MONEY MARKET: It is the market for short term funds i.e. Up to one year maturity; or it is the market for lending and borrowing of short term funds.

It consists of :• Call money market: The call money market deals

in short term finance repayable on demand, with a maturity period varying from one day to 14 days. It is done mostly by commercial banks.

• Bill market: Treasury bills are instrument of short-term borrowing by the Government of India, issued as promissory notes under discount.

• 364 days bill market: The 364 day treasury bills have thus become an

important instrument of government borrowing from market and also leading

money market instrument in the sense that their yield is most reflective of

market condition. Financial institutions recognise the yield rate on 364 days.

• Certificate of Deposit(COD): It is a instrument of borrowing by

commercial for a minimum period of 3 month and a maximum of 1 year in a

multiples of 25 lakhs. The minimum value is reduced and and is presently 1

lakh. It is issue on at a discount to face value. And discount rate is freely

determined according to the market conditions.

• Commercial Papers (CPs): Commercial Paper is the short term unsecured

promissory note issued by corporate and financial institutions at a discounted

value on face value. They come with fixed maturity period ranging from 3 to 6

months. It is issued by companies with a net worth of 10 cr later reduced to 5 cr.

It is issued in multiple of 25 lakhs subject to minimum issue of 1 cr.

• Repos and Reverse repos:Repos: The rate at which the RBI lends money

to commercial banks is called repo rate, a short term for repurchase agreement. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.

Reverse repos: To sell dated government securities through auction at fixed cut-off rate of interest. The objective is to provide short term avenue to bank to park their Surplus funds when there is considerable liquidity in money market.

Classification of IssuesISSUES

RIGHTPRIVATE

PLACEMENT

PUBLIC

INITIAL PUBLIC

OFFERING

FURTHER PUBLIC

OFFERING

FRESH ISSUE

OFFER FOR SALE

FRESH ISSUE

OFFER FOR SALE

Classification of IssuePUBLIC ISSUE :

It involves raising of funds directly from the public and get themselves listed on the stock exchange.

In case of new companies ,the face value of the securities is issue at par; and

In the case of existing companies, the face value of securities are issued at premium.

Initial public offer (IPO): When an unlisted company makes either a fresh issue of securities or offers its existing securities for sale or both for the first time to the public, it is called an IPO. This paves way for listing and trading of the issuer’s securities in the Stock Exchanges.

Further public offer (FPO): When an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, it is called a FPO.

Cont… RIGHT ISSUE: Right issue is the method of raising additional finance from existing

members by offering securities to them on pro rata bases. The rights offer should be kept open for a period of 60 days and should be announced within one month of the closure of books.

BONUS ISSUE: Companies distribute profits to existing shareholders by way of fully paid

bonus share in lieu of dividend. These are issued in the ratio of existing shares held. The shareholders do not have to make any additional payment for these

shares.

PRIVATE PLACEMENT: Private Placement is an issue of shares by a company to a select group of

persons under the Section 81 of the companies act 1956. It is a faster way for a company to raise equity capital.

Secondary 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 the trading avenue in which the already existing securities are traded amongst investors.

Banks facilitate secondary market transactions by opening direct trading and demat accounts to individuals and companies.

Cont…

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.

• Secondary market comprises of Equity market and Debt market.

Financial instruments dealt in secondary market

Equity Shares: An equity share is commonly referred to as an ordinary share. It is an form of fractional ownership in which a shareholder, as a

fractional owner, undertakes the entrepreneurial risk associated with the business venture.

Holders of the equity shares are members of the company and have voting rights.

Right shares: This refers to the issue of new securities to the existing shareholders,

at a ratio to those shares already held.

Bonus Shares: These shares are issued by the companies to their shareholders free of

cost by capitalization of accumulated reserves from the profit earned in the earlier years.

Cont… Preference shares: These shareholder do not have voting rights. Owners of these shares are entitled to a fixed dividend or a

dividend calculated at a fixed rate to be paid regularly before any dividend can be paid in respect of equity shares.

These shareholders also enjoy priority over the equity shareholders in the payment of surplus.

Cumulative Preference Shares: This is a type of preference shares on which dividend

accumulates if it remains unpaid. Cumulative Convertible Preference Shares: This is a type of preference shares on where the dividend payable

on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company.

Derivative Market• Derivatives are synthetic instruments.• They derive value from an underlying asset

class.• Asset classes range from financial instruments

to commodities to even classes such as weather and industrial effluents.

• However the common underlying theme of derivatives is that they are leveraged products

• Derivatives are not always priced at respective asset value (fair value).

Derivative Positions and Types of Derivative Market Players

• Naked open position taking a directional call on the markets

• Hedge against underlying asset class• Arbitrage position within an asset class • Speculators• Hedgers• Arbitrageurs

Underlying Asset Class

• It is important to understand the underlying asset class before using derivatives.

• Asset classes can be classified into two broad categories- financial which includes currencies and commodities.

• Financial asset classes can be broadly categorised into interest rates, equities and currencies.

• Commodities range from agricultural commodities to minerals and metals.

Financial Asset Classes• Broadly categorized into equity, interest rates and

currencies.• Equity as an asset class will include single stocks

and equity indices.• Interest rates as an asset class will include

government bonds, government bond benchmarks and money market benchmarks.

• Currencies as an asset class will include currency pairs such as USD/INR, USD/JPY etc.

• Credits as defined by corporate bonds can also be categorized into financial assets and derivatives on them are called credit derivatives.

Equity Derivatives• Equity derivatives can be classified into single

stock derivatives and index derivatives.• Single stock derivatives are derivatives on

specific stocks eg. Reliance.• Index derivatives are derivatives on stock

exchange indices eg- Nifty.• Hybrid derivatives on equity include

convertible shares (partly or fully).• Employee stock options are also equity

derivatives.

Interest Rate Derivatives Interest rate derivatives have many different

types:• Derivatives on government bonds• Derivatives on bond indices/ benchmark• Derivatives on short term money market

benchmarks

Examples: Bond futures and interest rate swaps based on benchmarks such as libor/ mibor.

Currency Derivatives

• Currency derivatives are based on currency pairs.

• Currency forwards and options eg- USD/INR forwards and options.

• Currency derivatives are combined with interest rate derivatives to offer exotics.

• Exotics include principle only swaps, currency swaps.

Derivative Exchanges

• Derivative exchanges are separate from stock exchanges.

• In US CBOT and CME are the largest exchanges for derivatives.

• In UK LIFFE is the premier derivative exchange.

• In India NSE is the largest equity derivative exchange while commodity exchanges are NCDEX and MCX.

Hedging or Leveraging

• Derivatives are viewed as a hedging instrument.• The holder of an underlying asset can hedge

fluctuations in prices of the asset using derivatives.

• However derivatives are increasingly being used for taking up leveraged positions in an underlying asset.

• This enables higher returns for taking on higher risk.

Mutual Fund

• Form of trust that pools the funds of a whole lot of investors to make more money by investing in an array of financial instruments.

• Advantages of a Mutual Fund:– Professional Management– Diversification– Flexibility in choice - selection, redemption– Low costs– Transparency

Types of funds

• Open ended fund • Close ended fund• Interval fund• Debt fund• Equity fund• Hybrid fund• Other funds

Commodity Market A commodity is any good or service produced by

human labor and offered as a product for general sale on the market .

Characteristics: Commodity is anything movable (a good) that has following characteristics:

• Fungible, i.e. the same no matter who produces it• Derivatives, i.e. involves further processing into

number of products• Economic cost, i.e. production of it involves some

cost

Classification of Commodities

Commodity Trading Instruments

There are a variety of basic types of instruments traded in commodity marketplaces:

• “Spot” contracts• “Cash market” contracts• Forward contracts• Futures contracts• Options

Commodity – Indian Structure

FMC – THE REGULATOR

COMMODITY EXCHANGE

NATIONAL EXCHANGES

REGIONAL EXCHANGES

NCDEX NMCE MCX NBOT20 OTHER

REGIONAL EXCHANGES

Reasons for Investing in Commodities

Commodity provides true diversification in financial portfolio.

Commodity act as hedge against risks involved in business.

Rising income will ensure Inflation which in turn will ensure bull market in commodities.

Explosion of population and shrinking agricultural land would leave commodity scarce.

Returns chasing funds & investors (traders, investor &HNI) will make it vibrant.

Consumption / Spending in infrastructure / GDP growth will lead to depletion of metals.

Secular bull market in commodities is likely to continue.

Stock Exchange

‘Stock Exchange’ denotes a place where stocks, shares and other securities are bought and sold. In other words, a stock exchange is any organization or a group of persons which constitutes, maintains or provides a market place or facilities for bringing together purchasers and sellers of securities.

STOCK EXCHANGES

IN INDIA

Functions of Stock Exchange

Motivates individual to save and invest funds.

A safe and productive channels for investment of savings.

Provides liquidity to the savings of the investors, by developing a secondary capital market.

Meeting the large capital needs of organized industry, trade and business.

Legal Framework

Securities Contracts (Regulation) Act, 1956

It 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 SEBI regulatory jurisdiction over

(a) stock exchanges through a process of

recognition and continued supervisions.

(b) contracts in securities.

(c) listing of securities on stock exchange.

Objectives of Securities Contracts (Regulation) Act, 1956

• To provide for the regulation of stock exchanges.

• To provide for the regulation of transactions in securities.

• To prevent undesirable speculations in securities.

• To regulate the buying and selling of securities outside the limits of stock exchanges.

• To provide for ancillary matters.

Important SEBI Regulations

• SEBI ( ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) Regulations, 2009

• SEBI ( ISSUE AND LISTING OF DEBT SECURITIES) Regulations, 2008.

• SEBI ( PROHIBITION OF INSIDER TRADING ) Regulations, 1992• SEBI ( MERCHANT BANKERS ) Regulations, 1992• SEBI ( UNDERWRITERS ) Regulations, 1993• SEBI ( REGISTRARS TO AN ISSUE AND SHARE TRANSFER

AGENTS ) Regulations, 1993• SEBI ( BANKERS TO AN ISSUE ) Regulations, 1994• SEBI ( SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS

) Regulations 1997 (Takeover Code) • SEBI ( PROHIBITION OF FRADULENT AND UNFAIR TRADE

PRACTICES RELATING TO SECURITIES MARKET ) Regulations, 2003

Thank you