eeb 2.2. capital market
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MODULE 2
ii. CAPITAL MARKET
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What is Capital market?
Difference between Money and Capital markets
Role of Capital market
Methods of Raising Capital
Role of SEBI (Brief)
Recent Developments in Indian capital Market
Cap market Reforms- Objectives and Measures
Stock Market Volatility
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CAPITAL MARKET
Pace of economic development isconditioned, among other things, by therate of long term capital investment andcapital formation. And, capital formation is
conditioned by the mobilisation,augmentation and channelisation ofinvestible funds.
Capital market serves this function bypooling capital resources and makingthem available to investors.
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Difference between Money market and CapitalMarket
Money market Capital Market
Term Concerned with shortterm funds(
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Interdependence of the TwoMarkets
Economy requires both types of funds-both short term and long term.
Both markets are supportive of each other.
Both contribute to the flow of funds andliquidity in varying time frames.
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Structure of Capital MarketMarket for medium and long term capital and all
the facilities and institutional arrangementsthereof.
Consists of 2 Constituents- Organised andunorganised
Constituents of Organised Capital Market:1.Govt Securities Market
2. Industrial Securities Market
3.Development Financial Institutions (DFIs)4.Financial Intermediaries
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Structure of Capital Market
Govt Securities Market
- Also known as Gilt-edged market- These securities carry fixed interest and aredated- Investors are mainly FIs like commercial
banks, LIC, GIC, PFs etc- Sometimes these are captivemarkets- RBI plays an important role here through
OMO
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Structure of Capital Market2. Industrial Securities Market:
- Deals with shares and debentures of new andexisting companies
-Divided into Primary market and Secondarymarket
Primary market: Helps raise new capitalthrough shares and debenturesSecondary market: Deals with securitiesalready issued by the companies; Operates
through stock exchangesThis Market helps corporates to raise equity andprovides liquidity to investors because securitiescan be readily bought and sold.
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Structure of Capital Market
3. Development Financial Institutions (DFIs)These were set up to provide medium and long
term financial assistance to private industrialsector- once known as term lending institutions,
now DFIs.Play a very useful role by subscribing to shares
and debentures of old and new companies,giving loans, underwriting new issues etc;
LIC and UTI mobilise resources from public andplace them with the capital market.
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Structure of Capital Market-DFIAll- India DFIs:
Industrial Finance Corporation of India (IFCI)- Small Industries Devt Corporation (SIDBI)- Industrial Investment Bank of India
Specialised Financial Institutions: EXIM Bank
Infrastructure Development Corporation of India
Investment Institutions:
- LIC, UTI, GIC etc
State Level Institutions :- State Financial corporations (SFCs)
- State Industrial Development Corporations (SIDC)
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Structure of Capital Market4. Financial Intermediaries: These help in mobilising
savings and supplying funds to the capital market
Merchant banks- Manage and underwrite new issues andadvise corporate clients on fund raising and other financialaspects.
Leasing companies: Provide finance for acquiring plant andmachinery, especially for SMEs
Mutual Funds: Mobilise funds from general public and investin
capital market
Venture Capital companies: Provide financial support to newideas, introduction and adoption of new technologies
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Role of Capital Market
1. Mobilisation of savings: Network of institutions and varioustypes of financial assets2. Providing liquidity: Enabling transactions to be made quickly and
easily (Covenience and speed of converting assets into cash)3. Determining a fair price for securities (Price Discovery)4. Channelisation of funds into investments: Financial
intermediaries have specialised knowledge, expertise, informationand huge resources to allocate resources to most viableprojects
5. Minimising Transaction Costs i.e., the cost of transferringresources from lenders to borrowers and also the risk of default,flouting contract etc
6. Industrial Devt: Providing funds for diversified purposes likesetting up new units, expansion, modernisation, upgradation oftechnology
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Role of Capital Market
6. Modernisation and rehabilitation of industries:Institutions like IFCI, ICICI and IDBI help in replacingobsolete technology and tech upgradation- these alsosolve problems offoreign exchangeby channelisingfunds from international agencies like International
Finance Corporation7.Technical assistance: Advisory servicesfor preparing
Feasibility studies, training of entrepreneurs8. Encouraging investors to invest in securities: By
providing facilities for continuous regular and ready
buying and selling of securities9. Reliable guide to performance: The capital market is a
guide to the performance and financial position ofcompanies
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Methods of Fund Raising
Primary market is market for fresh capital.
Funds raised through three categoriesi. Initial Public Offer
ii. Rights Issueiii. Private Placement
Players:
Issuer Investor Intermediary
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Initial Public Offering (IPO)
An IPO orstock market launch, is the first
sale of stock by a private company to thepublic. It can be used by either small or largecompanies to raise expansion capital andbecome publicly traded enterprises.
Many companies that undertake an IPO alsorequest the assistance of an investment bankingfirm acting in the capacity of an underwriter tohelp them correctly assess the value of their
shares, that is, the share price
http://en.wikipedia.org/wiki/Private_companyhttp://en.wikipedia.org/wiki/Private_company -
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IPO
When a company lists its securities on a publicexchange, the money paid by investors for thenewly issued shares goes directly to thecompany (in contrast to a secondary market
trade of shares on the exchange, where themoney passes between investors).
An IPO, therefore, allows a company to tap awide pool of investors to obtain capital for futuregrowth, repayment of debt or working capital.
.
http://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Stock_exchange -
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Rights Issue
A rights issue is anissue of new shares forcash to existing shareholders in proportionto their existing holdings.
A rights issue is, therefore, a way ofraising new cash from shareholders - thisis an important source of new equity
funding for publicly quoted companies.
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Private Placement
It is direct sale of newly issued securities to a groupof investors ( i.e. FI, banks, corporate, HNI) by issuerthrough merchant bankers.
Advantages
Time and cost is less compared to IPO and right issue. It can be customised for both issuer and investor. It does not require detailed compliance of formalities,
ratings, and disclosure norms
Major issuers All India Financial Institutions, PSUs,central and state level undertakings (i.e. AEC bonds),banks
Major subscribers - Banks, Provident funds, MF, HNI
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Private Placement
Reasons for the Growth of Private Placement
Market
1. Prolonged unfavorable conditions in primary market2. PP was not bound to any regulatory system- (though,
in sept 2003, SEBI issued stringent disclosure norms
which was still unregulated).3. No lock-in period for promoters4. No compliance system formerchant bankers5. Operational flexibility and attractive pricing6. Private sector can tap this route to retire their old
expensive bonds/ debt instruments
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Private Placement
Current Scenario- PP now regulated. Disclosure needs to be made through company on the
site of exchanges. Credit rating is compulsory. (investment grade is
necessary) RBI has barred FIs from investing in unrated securities
and securities below minimum credit rating. All debt issuers must have redemption reserve and
must appoint trustee. Securities issued and traded in demat form All securities must be executed on exchanges only.
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Resource Mobilisation through internationalmarket
How Companies can mobilise resources throughinternational market:
Global Depository Receipts (GDRs)
American Depository Receipts ( ADRs)
Foreign currency convertible bonds (FCCB)
External Commercial Borrowing (ECBs)
Euro Issues
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Secondary Market
Major Constituents of Secondary Market
Different Stock exchanges (BSE, NSE,OTCEI, regional stock exchanges)
Brokers
SEBI (Regulator) Buyers
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SEBI
SEBI is the regulatory authority covering all theoperations of the capital market.
Its main functions are:
Protection of investors interest
Guidelines on capital issue Regulation of the working ofMFs
Regulating the activities ofstock brokers
Restriction on insider trading
Dematerialization of shares Other functions
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Recent Developments in capital market
Earlier, the functioning of stockexchanges was characterised by longdelays, lack of transparency, vulnerability
to price rigging and insider trading. Anumber of measures have been taken toovercome these problems.
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Objectives of Capital Market Reforms
To provide effective control of stock exchangeoperations
To enhance transparency by increasing the flowof information
To protect the interest of investors
To check insider trading
To improve operational efficiency of the stock
markets To promote healthy development of the capital
market
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Capital Market Reforms in IndiaCherunilam, p.257-261
1. IPO guidelines- Free Pricing: Provided that SEBIguidelines on disclosures and investor protection aremet, issuers of capital are able to price their issuesaccording to their assessment of the marketconditions.
2. Transition from open outcry system to electronictrading- leading to transparency, more efficient pricediscovery and reduction in transaction cost
3. More Instruments (Deepening) and More Market
Participants such as MFs and FIIs(widening)4. Improvement in Trading, Clearing and Settlement of
transactions- Shortening of settlement cycle,acceleration of book entries through depository system
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Capital Market Reforms in IndiaCherunilam, p2576-261
5. Dematerialization of accounts- increased speed andsafety reduced transaction cost
6. Reduction in risks: All stock exchanges in the countryhave established clearing houses through whichtransactions are settled. Earlier this was the case only
with some transactions, while others were directlysettled between members. Routing transactionsthrough clearing houses has reduced credit risk.
7. Structure of Information flows: Companies offering
securities in capital market are required to make publicdisclosures of all relevant information; also furnishunaudited quarterly financial results
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8. Emphasis on fair Trading Practices: According to SEBIAct, 1992, insider trading is prohibited; there are alsoseparate regulations governing take-overs andacquisitions and protection of minority share holdersinterest
9. Increasing Integration of Different Segments of theSecurities market: Between regional exchanges, in termsof interest rate structure etc.
10.Measures of investor protection
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Volatility
Volatility is one of the most important characteristics ofany stock market; it is also an important basic statisticalrisk measure.
Can be used to measure the market risk of a single
instrument or the entire portfolio of instruments.
Today, volatility is calculated for all sorts of variables,such as stock returns, interest rates, market value of aportfolio etc.
Stock return volatility is the variation of the stock returnsin time. It is the standard deviation of daily stock returnsaround the mean value.
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Volatility of Indian Stock marketThe stock market barometer Sensex fell by 5,054 points
during 2011 to end at 15,454.92 points. The totalinvestor wealth, measured in terms of cumulative marketvalue of all listed stocks, dipped by Rs 19.46 lakh croreto Rs 53,48,644.8 crore ($1.002 trillion).
In percentage terms, the losses in the stock market were24.6 per cent
In contrast, 2012 saw indian stock markets doing verywell
Currently Sensex is trading close to -------.
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Gold appreciated by 32 per cent and silver by 10
per cent during 2011. Gold prices began the year 2011 at Rs 20,890
per ten gram and ended at Rs 27,640.
During 2011, prices of precious metals had alsobeen volatile.
Gold had risen to close to Rs 30,000 level, whilesilver had gone close to Rs 60,000 at one point
of time.. Currently gold is trading above ---- and silver
around----.
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Factors Influencing Stock Market Volatility
Stock market volatility may be related to:
Global crude prices: Stock returns tend to be lower after anincrease in crude oil price and higher if crude oil price falls in theprevious month. In general, a decrease in this months crude price
on the average indicates a higher stock market return in the comingmonth. i.e, stock market tends to move in the opposite direction tocrude oil.
Global gold prices: Investors typically include in their portfolioinvestments that have historically exhibited an inverse relationshipwith stock market movement as risk insurance. Gold has anincreasing price trend in recent years and considered to be a hedgeagainst inflation. During inflation, stocks are usually valued low andgold acts as a better investment portfolio.
US Stock market reflected by Dow Jones Industrial Average: Somelarge firms are entirely export-driven and global volatility affects theircustomers.
FII Flows: Move towards safe countries32
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Volatility in 2013 Domestically, the outcomes of the elections in five
states, the Budget of 2013 (which may be populist due tothe 2014 general Elections) and the rate at whichinflation comes down (which will also result in interestrates coming down) will be events to be watched in thefirst half of calendar year 2013.
It would also depend on whether funds perceive India asa stable investment destination against a backdrop ofvolatile global markets and policy flip-flops..
Global economic uncertainty will continue to plague usas it has since the year 2008.
The movement in world capital markets would bedetermined by the events in Europe, China and USA.
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Recap Quiz1. A company selling common shares is not required to repay the
capital to investors. T/ F
2. Direct sale of newly issued securities to a group of investors ( i.e.FI, banks, corporate, HNI) by issuer through merchant bankers iscalled ________ ____________.
3. Indian companies can go directly for ADRS without domestic
offering T/ F4. ________ is the regulatory authority covering all the operations ofthe capital market.
5. FCCB can be converted into _________ of issuing companyeither in whole or in part.
6. Only companies with large _________ ________ potential opt forFCCB.
7. Rcom, Hotel Leela Ventures, JSW Steel, Suzlon Energy, SterlingBiotechfaced FCCB __________ between Feb and June12
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Recap Quiz1. A company selling commonshares is not required to repay the
capital to investors. T (DEBT needs to be repaid; share implies
ownership and so it need not be repaid)2. Direct sale of newly issued securities to a group of investors ( i.e. FI,
banks, corporate, HNI) by issuer through merchant bankers is calledPrivate Placement
3. Indian companies can go directly for ADRS without domesticoffering T
4. SEBI is the regulatory authority covering all the operations of thecapital market
5. FCCB Can be converted into ordinary shares of issuing companyeither in whole or in part (Hence convertible)
6. Only companies with large forex earnings potential opt for FCCB.
7. Rcom, Hotel Leela Ventures, JSW Steel, Suzlon Energy, SterlingBiotech all had FCCB redemptions between Feb and June12
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Recap Quiz1. A prospectus, which does not have complete
particulars on the price of the securities offered and
quantum of securities offered is called_________________.
2. A rights issue is a way of raising -------- cash from ----------- shareholders
3. _________manage and underwrite new issues andadvise corporate clients on fund raising and otherfinancial aspects.
4. ________ mobilise funds from general public andinvest in capital market.
5. ___________provide financial support to new ideas,introduction and adoption of new technologies.
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Recap Quiz
1. A prospectus, which does not have complete particulars on theprice of the securities offered and quantum of securities offered iscalled Red Herring prospectus.
2. A rights issue is a way of raising new cash from existing
shareholders3. Merchant banks manage and underwrite new issues and advise
corporate clients on fund raising and other financial aspects.
4. Mutual Funds mobilise funds from general public and invest incapital market.
5. Venture Capital companies provide financial support to new ideas,introduction and adoption of new technologies.
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