Concept, Security market, Primary & Secondary markets-Functions & Role, Functionaries of stock exchanges-Brokers, Sub- Brokers, Jobbers, Consultants ,Institutional Investors & NRIs. Definition of Capital Market Capital market is the market from where long-term capital raised for industry, trade and commerce and long-term securities are transacted. It is a well-organised market for providing long-term capital whether in the form of securities or borrowings. Distinguish between Money Market and Capital Market. Two main components of financial market are — (1) capital market and (2) money market. Main aim of two markets is to supply money in industry, trade and commerce. The differences between the two markets are discussed here : 1. Definition: Capital market is the market from where long-term capital is collected for the purpose of industry, trade and commerce. Money market is the market from where short-term capital is collected for industry, trade and business. 2. Types of Capital: Capital market supplies long-term capital mainly. Money market supplies short term capital generally.
3. Use of Capital: Capital collected from capital market is used to purchase fixed asset and meet deficiency of current capital. Capital collected from money market is used to meet current capital only. 4. Impact: Capital market creates scope for investment in industry and business through indirect securities transaction. Money market creates scope for investment in agriculture, industry and commerce directly. For example — money market arranges cash credit system in agriculture. 5. Protection of Interests: Capital Market makes arrangement for investment to protect the investors’ interest. Money market makes arrangement of investment for their own interest with depositors’ money. 6. Ancillary Functions: The members of capital market do not usually perform ancillary functions on behalf of clients but they may render institutional services. The members of the money market performs different types of ancillary functions, such as purchase of shares and debentures, collection of dividend, keeping of valuable articles in custody etc. on behalf of their clients.
7. Underwriting Functions: Underwriting of shares and debentures are one of the main functions of capital market. Underwriting of shares and debentures of companies are secondary functions of money market. 8. Constituents: The constituents of capital market are — insurance company, investment trust, underwriters, and government and private organisations. Money market is composed of Reserve Bank of India, commercial bank, cooperative society, indigenous bankers and investors. 9. Segments: Capital market may be divided into two segments viz. new issue market and secondary market. The important segments of money market are: Treasury bill market, commercial paper, call money market, certificates of deposit markets. 10. Regulation: Capital market in India is mainly regulated by the Securities and Exchange Board of India. Indian money market is regulated by The Reserve Bank of India. Describe the features of Indian Capital Market.
The features of Indian capital market are discussed here : (1) Lack of Specialised Agencies: Industrial bank, underwriting agencies, share issue house — all these expert institutions are found in capital market of foreign countries. But such expert organisations are absent in capital market of India. (2) Capital Supply by Managing Agent: In India the custom of supplying capital by managing agent is not found in any other country of the world, though this custom has been abolished now.
(3) Establishment of Capital Supplying Agency: A good number of financing institutions have been set up in India at the initiative of the government. All these institutions are more important than private financing institutions in the capital market of India. (4) Governmental Efforts: Investment trust and insurance companies which play important role in other countries do not play the same role in India. So, to stabilise capital market in India, UTI and LICI have been set up by government initiative. (5) Arrangement of Long-term Loan: Different investment institutions make arrangement of longterm loan for industry and commerce in the capital market of India.
Help to National Growth: One of the main features of Indian capital market is that it helps national development. Collecting small savings of people, Indian capital market forms a monetary fund. This money is utilised for national development in many cases. Describe the functions of Indian Capital Market. The standard of development of a country can be realised from the functions of capital market. Development of any country depends on the formation of capital of that country. So, importance of the functions of capital market is immense for economic development of the country. Function of Indian capital Market is as follows: Help to Establishment and Expansion of Industry and Commerce: Fixed capital is required for establishment, expansion and continuity of industrial and commercial institutions, capital market supplies necessary money for these requirements. Arrangement of Long-term Loan : Long-term loan is required for establishment or expansion of business.
Different investment institutions under this market make arrangement for providing long-term loan in industry and commerce. Help to Public Enterprise : Capital market also helps in transaction of securities of 7 public enterprises. Help to National Growth: Capital market forms a monetary fund from the collection of small savings of the people. This money is utilised for national development in many cases. Motivation to Savings : As capital market is an organised market for long-term investment, both corporate sector and investment sector have great confidence in it. This market encourages the people in savings by creating scope for investment in securities of different profiteering firms. Advisory Functions: investors cannot always choose profitable shares or securities.
There are a large number of experienced brokers in capital market who assist the investors by rendering advice relating to investment. Mobility of Savings : Capital market keeps savings of the country mobile by creating scope for investment in profitable securities. Functions of Underwriter: Underwriting of shares and debentures are one of the main functions of capital market. Capital Formation : One of the main functions of capital market is capital formation. Small savings of people are deposited in capital market as investment and form a monetary fund. Long-term loan is provided to different business institutions from this monetary fund. Create Ready Market: Transactions of securities are regularly held in the capital market. Thus give the scope to the investors to collect money by selling securities in their need and to purchase securities in right time.
Describe the constituent of Indian Capital Market. The constituents of capital market are — (a) investment trust, (b) insurance company, (c) securities market and (d) special financing institution. Let us describe them in details: Investment Trust These institutions are formed as Joint Stock Limited Company. These institutions collect capital by selling own shares and debentures and supply capital to the industrial concerns through the purchase of their shares and debentures. Remarkable Investment Trusts of our country are — The Tata Investment Trust (Pvt. Ltd.), The Investment Corporation of India Ltd., The New India Investment Corporation Company Ltd. [♦> Advantages of Investment Trust (1) Profitability : From small investors point of view investment of their small savings in investment trust is more profitable. (2) Less Risk : Investors are assured of safety to their investment in investment trust.
(3) Capital Formation : Investment trust creates the habit of savings among common people. As a result capital is formed and that capital helps expand industry in the country. ❖ Disadvantages of Investment Trust (1) Non-disclosure of Information : Investment trusts do not disclose all information regarding investment of investors. As a result investors remain in the dark about many factors of investment. (2) Personal Interest: Many times management of investment trusts invest the money of investors in small profitable institutions for personal interest. As a result interests of investors are dissatisfied.] Insurance Company Insurance companies collect much money as premium and invest this amount in long-term securities of different institutions. Of the insurance companies LICI has the most influence.
❖ Advantages of Insurance Company (1) Stable Return : If any policyholder makes insurance for certain amount of premium under LICI, at the maturity of the policy, the policyholder gets back insured money along with bonus and interest. If the policyholder expires by any means, his nominee is provided with the fixed amount of money. (2) Encouragement to Savings and Investment: Insurance company encourages common people in small savings and teach him to invest his savings profitably. (3) Facility of Ploughing Back Profit: The profit available from invested money in the insurance company is re-invested. As a result amount of refundable profit goes on increasing every year. Securities Market The market where transactions of securities are held, is called securities market. Securities market is classified into two sectors — (1) new issue market and (2) share market. Both types of securities markets are significant for long-term investment.
Special Financing Institutions Lack of capital is the main reason of under-development of trade and commerce in India. To dispel this deficiency many financing institutions have been set up at the initiative of the Central and State Government. Of these Industrial Finance Corporation of India and National Industrial Development Corporation are important. Indian capital market improved a lot with the help of these institutions. ❖ Advantages of Special Financing Institutions (1) Granting Long-term Loan : These institutions grant long-term loan to different industries.
(2) Underwriting: All these institutions act as underwriter in case of issue of new shares. (3) Foreign Capital: There are a good number of financing institutions like ICICI which help much to bring foreign capital. Besides — (a) provident fund institutions and (b) building institutions also helped a lot for the development of Indian capital market. What do you mean by Securities Market? Securities include shares, scrip, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate. Generally the market where the transaction of such securities is field or the institutions which help to sell or resell share or debenture are called securities market.
Securities market is divided into two sectors — (a) new issues market or primary market and (b) share market or secondary market. Both types of securities market are important for long-term industrial investment. What is New Issues Market? Describe the features of such market. The primary market or New Issues Market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. Primary markets create long term instruments through which corporate entities borrow from capital market.
The features of New Issues Market are as follows: (1) New Issues Business: New issues market deals in new issues. Therefore, the securities which were not available before will be issued to the investors for the-first time and these will be sold from this market. (2) Supply of Additional Fund : As new issues are sold from new issues market or primary market, therefore, the issuing amount of securities supplies excess fund to institutions. So, this market is directly related with financial supply of issuing institutions. (3) No Centralised Control: New issues market is not under central control and administration for the fulfillment of its business. (4) No Institutional Structure: New issues market is not confined to a particular place. So, this market has no geographical existence. In a word, it can be said that new issues market has no institutional structure. (5) Help to Entrepreneurs : To help the entrepreneurs who wish to take up new venture or like to expand present venture is the main function of this market.
Describe the Functions of New Issues Market or Primary Market New issues market deals in new securities. Therefore, the securities which were not sold before and will be issued to the investors for the first time, are sold from this market. Important functions of this market are discussed here : (1) Help to Entrepreneurs : Main function of new issue market is to help the entrepreneurs who like to take up new venture or expand their present venture. (2) Supply of Excess Fund: As new issues market deals in new issues, money collected by issuing securities supplies excess fund to the institutions. (3) Help to Transfer of Savings : This market helps much to transfer the savings of the savers to the entrepreneurs. In a word, it helps utilise saved money in productive use or constructive function.
(4) Function of Primary Enquiry : This market also performs the function of primary enquiry into the legal and financial sides of the new issues companies. (5) Advisory Functions: This market renders some service in the form of advice to the new issues companies. Remarkable among these advice are — (a) determination of types of investment, (b) price of new issues shares in the context of the share market situation,(c) determine the time of issue of new shares and importance, (d) procedure of issues, (e) sale’s technique etc. (6) Underwriters’ Functions : New issues market helps new companies very much through underwriters. Underwriters are one kind of brokers, who promise to sell off definite amount of securities. (7) Distribution Functions : Function of distribution depends on the method of transferring securities in the hands of the investors. This market performs this function very well with the help of skilled and expert brokers and sub-brokers.
(8) Help to Development of Industry : New issues market is not confined to a particular place. It has no geographical existence. So, the entrepreneurs can take help of this market in any part of the country. Describe the procedures of Marketing of New Securities under New Issues Market. New issue market is known as primary market for issue of securities to raise fresh capital. Procedure of this marketing is discussed here : 1. Public Issue through Prospectus : It is the natural procedure for collection of money for public companies. The company appeals to people directly to purchase share and debenture through publicity. The prospectus makes people aware of future prospect of the company and the objectives of the use of collected money. Those who are willing to purchase share on the conditions advertised in the prospectus lodges application to the company to purchase shares in response to the appeal of the company. In this process wide publicity is possible along with sale of shares. 2. Sale through Brokers : Securities of the company may be sold through brokers. At present many experts, banks and insurance organisations function as brokers.
Brokers get proper commission for this job. 3. Sale through Underwriters: Underwriters are a kind of broker who are bound up with underwriting contract with the company giving assurance of selling a definite portion of shares. Underwriters purchase the shares they fail to sell. They get commission in exchange of their job. Rates of commission may be different for different securities. Of course there must be proper guide line during this in the rules of the company. This system is considered to be the best means for sale of securities. 4. Sale through Investment Institutions/Private Placement: Under this method the issuing company generally engages the investment institutions as stock brokers to sell securities. Investment institutions generally buy total shares or debentures of the company at an agreed price.
5. Issue of Bonus and Right Shares : As per Companies Act any existing company can increase its capital by selling their new shares. But if such decision is taken, the rule is to dispose of the shares proportionately to the present shareholders. If present shareholders are unwilling to purchase or if a special resolution is taken by the shareholders that the shares be sold to the public first and if such proposal is approved by the Central Government, the shares may be sold to the public in this way. This method is called issue of bonus and right share. 6. Sale through Employees : Many companies sell securities to their employees and collect money. This system improves the relationship between industrialist and labours and grows eagerness and enthusiasm for work among the workers. Write a short note on Book Building An Initial Public Offer (IPO) is the selling of securities to the public in the primary market.
This Initial Public Offering can be made through the fixed price method, book building method or a combination of both. Book Building is essentially a process used by companies raising capital through Public Offeringsboth Initial Public Offers (IPOs) or Follow-on Public Offers ( FPOs) to aid price and demand discovery. Usually, the issuer appoints a major investment bank to act as a major securities underwriter or bookrunner. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. The process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process.
The Process: • The Issuer who is planning an offer nominates lead merchant banker(s) as ‘book runners’. • The Issuer specifies the number of securities to be issued and the price band for the bids. • The Issuer also appoints syndicate members with whom orders are to be placed by the investors. • The syndicate members input the orders into an ‘electronic book’. This process is called ‘bidding’ and is similar to open auction. • The book normally remains open for a period of 5 days. • Bids have to be entered within the specified price band.
• Bids can be revised by the bidders before the book closes. • On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels. • The book runners and the Issuer decide the final price at which the securities shall be issued. • Generally, the number of shares are fixed, the issue size gets frozen based on the final price per share. • Allocation of securities is made to the successful bidders. The rest get refund orders. Advantages of Book Building: 1. It reduces the duration between allotment and listing of shares. 2. It discovers the selling price of the shares. 3. There is very little scope of manipulating the price before listing. 4. This method is a reliable procedure for allotment.