FINANCIAL MARKET- Capital

Market- Primary MArket

Contents
1

Financial market (Introduction)

Relationship Between Lenders & Borrowers

Capital Market (Functions & Instruments)

Money Market (Functions & Instruments)

Financial Market
Any marketplace where buyers and sellers participate in the trade of financial
securities, commodities, and other fungible items of value at low transaction
costs and at prices that reflect supply and demand. Securities include stocks
and bonds, and commodities include precious metals or agricultural goods.
There are both general markets (where many commodities are traded) and
specialized markets (where only one commodity is traded).
In finance, financial markets facilitate:
The raising of capital (in the capital markets)
The transfer of risk (in the derivatives markets)
Price discovery
Global transactions with integration of financial markets
The transfer of liquidity (in the money markets)
International trade (in the currency markets)

Securities

Typically a borrower issues a receipt to the lender promising to pay back the capital.
These receipts are securities which may be freely bought or sold. In return for
lending money to the borrower, the lender will expect some compensation in the
form of interest or dividends. This return on investment is a necessary part of
markets to ensure that funds are supplied to them.

Relationship Between Lenders and Borrowers

Lenders

Financial
Intermediary

Borrowers

Individuals

Banks

Interbank

Insurance
Companies

Stock
Exchange

Pension
Funds

Money Market

Central
Government

Bond Market

Municipalities

Mutual
Funds

Foreign
Exchange

Individual
Companies

Financial
Markets

Companies

Public
Corporations

Financial Market Chart

Company Logo

KINDS OF FINANCIAL MARKET

1.Capital Market

Capital market is a market for financial assets which have a long or indefinite maturity.
Unlike money market instruments the capital market instruments become mature for the
period above one year.

The capital markets may also be divided into primary markets and secondary markets. Newly
formed (issued) securities are bought or sold in primary markets, such as during initial public
offerings. Secondary markets allow investors to buy and sell existing securities. The
transactions in primary markets exist between issuers and investors, while in secondary
market transactions exist among investors

These institutions play the role of lenders in the capital market. Business units and corporate
are the borrowers in the capital market.

Instrument of 2Capital Market 3

STOCKS
The market in
which shares are
issued and traded
either through
exchanges or overthe-counter markets.
Also known as the
equity market.

BONDS
The environment in
which the issuance and
trading of debt
securities occurs. The
bond market primarily
includes governmentissued securities and
corporate debt
securities.

DEBENTURES
A certificate issued by a
corporation with the
purpose of creating a
debt. Debentures are
generally unsecured by
assets and are interest
bearing securities.

TREASURY
BILLS
A short-term
obligation that is not
interest-bearing (it is
purchased at a
discount); can be
traded on a discount
basis for 91 days

FOREIGN
EXCHANGE
The market in which
participants are able
to buy, sell,
exchange and
speculate on
currencies.

FIXED
DEPOSITS
FDs are the deposits
that are repayable on
fixed maturity date
along with the
principal and agreed
interest rate for the
period.

Company Logo

Role Of Capital Market

1.

Mobilization of Savings : Capital market is an important source for mobilizing idle savings from
the economy. It mobilizes funds from people for further investments in the productive channels
of an economy.

2.

Capital Formation : Capital market helps in capital formation. Capital formation is net addition
to the existing stock of capital in the economy.

3.

Provision of Investment Avenue : Capital market raises resources for longer periods of time.
Thus it provides an investment avenue for people who wish to invest resources for a long period
of time.

4.

Speed up Economic Growth and Development : Capital market enhances production and
productivity in the national economy by generation of employment and development of
infrastructure.

5.

Service Provision : As an important financial set up capital market provides various types of
services. It includes long term and medium term loans to industry, underwriting services,
consultancy services, export finance, etc. These services help the manufacturing sector in a
large spectrum.

CAPITAL MARKET
The

market where investment instruments like

bonds, equities and mortgages are traded is
known as the capital market.
The primal role of this market is to make
investment from investors who have surplus
funds to the ones who are running a deficit.

The capital market offers both long term and

overnight funds.
The different types of financial instruments
that are traded in the capital markets are:
> equity instruments
> credit market instruments,
> insurance instruments,
> foreign exchange instruments,
> hybrid instruments and
> derivative instruments.

Importance of Capital Markets

Help firms and governments raise cash by selling securities

Allow investors with excess funds to invest and earn a return

Channel funds from savers to borrowers
Allocate resources optimally (i.e., provide funds to those who
can make the best use of them)
Help allocate cash to where it is most productive
Help lower the cost of exchange
Secondary markets, where investors trade existing securities,
assures investors that they can quickly sell their securities if
the need arises

Types of capital market

There are two types of capital market:
Primary market,
Secondary market

1.aCapital Market PrimaryMARKET

Primary market

MEANING OF NEW ISSUE MARKET

It refers to the set-up which helps the industry to
raise the funds by issuing different types of
securities.
These securities are issued directly to the investors
(both individuals as well as institutional) through the
mechanism called primary market or new issue
market.
The securities take birth in this market.

Features of primary market

This is the market for new long term equity capital.
The primary market is the market where the
securities are sold for the first time.
In a primary issue, the securities are issued by the
company directly to investors.
The company receives the money and issues new
security certificates to the investors.
Primary issues are used by companies for the
purpose of setting up new business or for expanding
or modernizing the existing business.

Features of primary market

The new issue market does not include certain
other sources of new long term external
finance
Borrowers in the new issue market may be
raising capital for converting private capital into
public capital; this is known as "going public."

Functions of Primary Market

Household Savings
Global Investments
Sale of Government Securities
Primary Market Participants
Marker Risk

 It suggest introduction of new products,

modification of existing products.
It studies marketing competition, channel of
distribution and pricing for suitable changes if
necessary.
It find methods for making the product
popular and raising its goodwill and marketing
reputation.

Public issues or Initial public offering

(IPO)
The issuing company directly offers to the
general public/institutions a fixed number of
securities at a stated price or price band
through a document called prospectus. This is
the most common method followed by
companies to raise capital through issue of the
securities.

Offer of sale
It consists in outright sale of securities through the
intermediary of issue houses or share brokers.
It consists of two stages: the first stage is a direct sale by the
issuing company to the issue house and brokers at an agreed
price.
In the second stage, the intermediaries resell the above
securities to the ultimate investors. The issue houses
purchase the securities at a negotiated price and resell at a
higher price. The difference in the purchase and sale price is
called turn or spread.

Right Issue
When a listed company proposes to issue securities
to its existing shareholders, whose names appear in
the register of members on record date, in the
proportion to their existing holding, through an offer
document, such issues are called Right Issue. This
mode of raising capital is the best suited when the
dilution of controlling interest is not intended.

Private placement
It involves sale of securities to a limited number of
sophisticated investors such as financial institutions,
mutual funds, venture capital funds, banks, and so
on.
It refers to sale of equity or equity related
instruments of an unlisted company or sale of
debentures of a listed or unlisted company.

Preferential Issue
An issue of equity by a listed company to selected
investors at a price which may or may not be related
to the prevailing market price is referred to as
preferential allotment in the Indian capital market.
In India preferential allotment is given mainly to
promoters or friendly investors to ward off the threat
of takeover.

E-IPO
The companies are now allowed to issue capital
to the public through the on-line system of the
stock exchanges. For making such on-line
issues, the companies should comply with the
provisions contained in Chapter 11A of SEBI(
Disclosure and Investor Protection)
Guidelines, 2000.

Pricing of Issues
The companies eligible to make public issue can
freely price their equity shares or any security
convertible at a later date into equity shares as per
SEBI guidelines 2000.
The issuer can fix-up issue price in consultation of
with merchant banker, subject to giving disclosures
of the parameters which have considered while
deciding the issue price.

Fixed Price Process

The price which has been fixed by the company for its
securities before issue is brought to the market.
The price at which the securities are offered/allotted is known
in advance to the investor.
Demand for the securities offered is known only after the
closure of the issue.
Payment is made at the time of subscription whereas refund
is given after allotment.

Book-Building/Price Band
It is a process used for marketing a public offer of equity
shares of a company.
Book building is a process wherein the issue price of a security
is determined by the demand and supply forces in the capital
market
The Price at which securities will be allotted is not known in
advance to the investor. Only an indicative price range is
known. (Also called price band and it should not be more than
20% of the floor price).

BOOK BUILDING PROCESS

In this the issuer company mentions the
Price Band, which contains Minimum (FLOOR) and
Maximum (CAP) prices at which it will sell (issue) its
shares.
The spread between the floor & cap of the price band
shall not be more than 20%.
Thus the offer document (or Red Herring Prospectus)
contains only the price band instead of the price at
which its shares are offered to the public.
Within this price band the investor can choose the
price at which the investor are willing to buy the
shares and also the quantity.
As this process is similar to bidding in an auction, the
application form for book built issue is also known as
the bid form.

At times the issuer may revise the price band

(revision of price band) which has to be
accompanied with news paper advertisement.
Bids by various investors are entered into the
stock exchange system through the brokers (also
called syndicate member) terminal. The list of the
bid received from investors at various price bands
is known as the book (Open Book/Closed Book)
and can be seen in the website(s) of the stock
exchange for each investor category.
Based on the total demand in the book, the cut
off price is then decided by the issuer and
merchant banker.

 LEAD MANAGERS: A Merchant Banker possessing

a valid SEBI registration in accordance with the
SEBI(Merchant Bankers) Regulations, 1992 is
eligible to act as a Book Running Lead Manager to
an issue.
SAFETY NET: It refers to a scheme of buy-back
arrangements of the shares proposed in any
public issue with the objective of protecting the
investors in the event of share prices go down
after the issue is made.
e-IPO: A company proposing to issue capital to
public through the online system of the S.E. for
offer of securities, known as e-IPO.

 LOCK-IN: The term indicate a freeze on shares.

SEBI guidelines have stipulated lock-in
requirements on shares of promoters mainly
to ensure that the promoters or main persons
who are controlling the company, shall
continue to hold some minimum percentage in
the company after the public issue.
PROMOTERS: This has been defined as a
person who are in overall control of the
company. Promoter Group includes the
promoter, an immediate relative of the
promoter( i.e. spouse, parent, brother, sister,
child).
DIFFERENTIAL PRICING: Pricing of an issue
where one category is offered, shares at a
different price from the other category.

 Institutional investors like venture funds,

private equity funds etc., invest in unlisted
company when it is very small or at an early
stage. Subsequently, when the company
becomes large, these investors sell their
shares to the public, through issue of offer
document and the companys shares are
listed in stock exchange. This is called as
Offer For Sale.
IPO grading: It is the professional assessment of a
Credit Rating Agency (CRAs) on the fundamentals
of a company in relation to the other listed equity
shares in India.

 An IPO grade is NOT a suggestion or

recommendation as to whether an investor
should subscribe to the IPO or not. IPO
grade needs to be read together with the
disclosures made in the offer document
including the risk factors as well as the
price at which the shares are being offered.
Examples:

IPO grade 1: Poor fundamentals

IPO grade 2: Below average fundamentals
IPO grade 3: Average fundamentals
IPO grade 4: Above average fundamentals
IPO grade 5: Strong fundamentals

 Credit rating: It is an opinion of a Credit

Rating Agency (CRA) on the likelihood of
timely payment of interest and principal
(credit risk) on the rated debt instrument.
It is an unbiased, objective, and independent
assessment of the issuer's capacity to meet its financial
obligations and is conveyed with alphanumeric
symbols.

SEBI has issued ICDR (Issue of Capital and

Disclosure Requirements) Regulations with a view
to protect the interest of investors. These
regulations provides for disclosure of material
information including risk factors to enable the
investors to take an informed investment decision.

UNDERWRITING
A marketing strategy corporate enterprises are
able to sell their securities to the public
Agreement between the issuing company &
the financial intermediary, whereby sale of
certain quantum of securities is guaranteed
for the issuing company.

Underwriting Types
Firm Underwriting: Underwriter agrees to
take up a specified number of securities
Sub-Underwriting: Underwriting of securities
is contracted out by the main underwriter to
other underwriting intermediaries for a
commission.
Joint Underwriting: Securities underwritten
by two or more underwriting intermediaries
jointly.

Underwriting Agencies
Private Agencies: M/s Dalal and Co., M/s
Kothari & Co. etc
Investment Companies: Industrial Investment
Trust of Bombay, Devkaran Nanji Investment
Co. and Investment Trust of India Ltd.
Commercial Banks
DFIs: LIC, IFCI, ICICI, IDBI, UTI etc.

Underwriter
Factors to be taken into consideration while
selecting underwriter:
Financial Strength
Experience in primary Market
Past underwriting performance & defaults if
any
Overall reputation of the underwriter.

Factors to be taken into consideration

while selecting the company
Companys standing & record
Competence of the management,
Objectives of the issue
project details
offer price
other terms of the issue etc.

SEBI Guidelines
Optional: Issue is not underwritten & 90
percent of the amount is not collected,
amount will be refunded.
Number of underwriters: Lead Manager must
satisfy themselves about the net worth of the
underwriters & outstanding commitments &
disclosing the same to the SEBI.

 Registration: Underwriting firm must

registered with SEBI & having a minimum net
worth of Rs.20 Lakh.
Obligations: Should not exceed 20 times an
underwriters networth.

Underwriting Commission
No underwriting commission is payable on the
amount taken up by promoters, employees,
directors and their friends & Business
associates.
Commission is to be paid within 15 days of
finalization of allotment.

Underwriting Commission
In case of equity shares, 2.5% commission on the
amount devolving on underwriter & amount
subscribed by the public.
In respect of preference, Convertible & NonConvertible Debentures
a) Underwriting upto Rs.5lakh, 2.5% comm. on the
amount devolved by the underwriter & 1.5% on the
amount subscribed by the public.

b) Underwriting exceeding Rs.5lakh, 2%comm.

For the amount devolving on underwriter &
1% on the amount subscribed by the public.

Security Analysis | Primary Market v/s Secondary Market Presentation

Different between primary

market and secondary market
Primary market
In primary markets,
securities are bought by way
of public issue directly from
the company.
New issue are available in
primary market.
The primary is a middlemen.
New issue of common
stock;bonds and preferred
stock are sold by companies.

Secondary market
In Secondary market share
are traded between two
investors.
Securities usually bought
and sold through the
secondary market.
The secondary market are
broker and dealer.
The secondary market stock
and bonds issues are sold to
the public.