Indian Capital Market1

8/8/2019 Indian Capital Market1

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Indian Capital Market

Capital Market is the place where the funds are

mobilized by the financial and investment

intermediaries for long term, to make them availablefor nations economic development.

The growth rate of capital market is the index, that

can be used for measuring the health of the national

economy.

Capital Market is the market for issuing long term

funds


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Indian Capital Market The changes in economic scenario and the

economic growth have raised the interest ofIndian as well as Foreign InstitutionalInvestors in the Indian Capital Market.

The massive structural reforms on theeconomic and industry front in the form of de-liscencing, rupee convertibility, tapping offoreign funds, allowing foreign investors to

come to India. During last 10 years of so, the Indian CapitalMarket Capital has witnessed growth involume of funds raised as well as of transactions


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Indian Capital Market

The Capital Market is bifurcated in to :-

Primary Market or New Issue Market

Secondary Market or Stock Market


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Primary Market

Companies issue securities from time to time to raisefunds in order to meet their financial requirements formodernization, expansion and diversificationprogramme, these securities are issued directly to the

investors through the mechanism called primarymarket.

The primary market discharges the important functionof transfer of savings, especially of the individuals tothe companies, the Government and the public sectorundertakings.

In Primary Market, the new issue of securities arepresented in the form of Public Issue, Right Issue orPrivate Placement.


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Features of primary market

This is the market for new long term equity capital. The primarymarket 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 directlyto investors.

The company receives the money and issues new securitycertificates to the investors.

Primary issues are used by companies for the purpose of setting upnew business or for expanding or modernizing the existing business.

The primary market performs the crucial function of facilitatingcapital formation in the economy.

The new issue market does not include certain other sources of newlong term external finance, such as loans from financial institutions.Borrowers in the new issue market may be raising capital forconverting private capital into public capital; this is known as "goingpublic."

The financial assets sold can only be redeemed by the originalholder.


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Initial Public Offer

An initial public offer(IPO) referred to simply as an "offering" or"flotation," is when a company issues common stock or shares tothe public for the first time. They are often issued by smaller,younger companies seeking capital to expand, but can also be doneby large privately-owned companies looking to become publicly

traded. In an IPO the issuer may obtain the assistance of an underwritingfirm, which helps it determine what type of security to issue(common or preferred), best offering price and time to bring it tomarket.

An IPO can be a risky investment. For the individual investor, it istough to predict what the stock or shares will do on its initial day of

trading and in the near future since there is often little historical datawith which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, and they aretherefore subject to additional uncertainty regarding their futurevalue


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Reasons for listing

When a company lists its shares on a public exchange, it will almostinvariably look to issue additional new shares in order at the sametime. The money paid by investors for the newly-issued shares goesdirectly to the company (in contrast to a later trade of shares on theexchange, where the money passes between investors). An IPO,therefore, allows a company to tap a wide pool of stock market

investors to provide it with large volumes of capital for future growth.The company is never required to repay the capital, but instead thenew shareholders have a right to future profits distributed by thecompany and the right to a capital distribution in case of a dissolution.

The existing shareholders will see their shareholdings diluted as aproportion of the company's shares. However, they hope that the

capital investment will make their shareholdings more valuable inabsolute terms.

In addition, once a company is listed, it will be able to issue furthershares via a rights issue, thereby again providing itself with capital forexpansion without incurring any debt. This regular ability to raiselarge amounts of capital from the general market, rather than having to

seek and negotiate with individual investors, is a key incentive formany companies seeking to list.


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Right Issue

If an existing company intends to raise

additional funds, it can do so by borrowing

or by issuing new shares. One of the most

common methods for a public company to

use is to offer existing shareholders the

opportunity to subscribe further shares.

This mode of raising finance is calledRight Issue.


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Reasons for Right Issue

In times of inflation, the replacement costs of assts will be

high, unless the company can retain cash from substantial

profits, the only alternative is to raise cash from a fresh

issue of share.

For funding expansion projects, a company may make right

issue.

If a company has a proportion of interest bearing loan

capital, the company can suffer from a squeeze on profits.

The company can improve the capital structure position byobtaining extra share capital.

At a time when the share prices were relatively high,

companies fount it easy to persuade their shareholders to

subscribe cash for new issues with a view to expansion by

takeover.


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Advantages of Right Issue

To the Companies

To the Shareholders


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Private Placemet

A private placement (or non-public

offering) is a funding round of securities

which are sold without a initial public

offering, usually to a small number of

chosen private investors.


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Secondary Market Secondary Market refers to the network/system for the subsequent sale

and purchase of securities. An investor can apply and get allotted a

specified number of securities by the issuing company in the primary

market. However, once allotted, the securities can thereafter be sold and

purchased in the secondary market only.

The secondary market is represented by the stock exchanges in anycapital market

Stock exchange is a perfectly competitive market, as a large number of

seller and buyers participates in it and the information regarding the

securities is publicly available to all the investors.


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Functions of Secondary Market

The secondary market allows investors to sell to

other investors the securities they buy in the

primary market. This provides the liquidity that

allows investors to purchase securities withouthaving to hold them indefinitely or until maturity.

The securities market helps firms to price the

securities they are going to sell in the primary

market. For example, the issue price for a right

offering may be fixed somewhat below the

market price of the securities.


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Functions of Secondary Market

The secondary market widens the ownership ofa firms securities when investors make directpurchases in the secondary market as opposed

to depositing funds with the mutual funds or banks etc.

The price of a firms security in the secondarymarket has a direct impact on the wealth of theshareholders. Although, the market price isinfluences by many variables, the firms ability togenerate shareholders returns depends a lot onthe market price of the share which varies inresponse to firms profitablity.

Indian Capital Market1

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