Basic Terms of Capital Market

P.Sivarajadhanavel

What is Investment?
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. This is called Investment.

 Interest is an amount charged to the borrower for the privilege of using the lender s money. Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the purpose of raising capital. Mutual Funds: These are funds operated by an investment company which raises money from the public and invests in a group of assets (shares, debentures etc.), in accordance with a stated set of objectives.

 Mutual fund units are issued and redeemed by the Fund Management Company based on the fund's net asset value (NAV), which is determined at the end of each trading session. NAV is calculated as the value of all the shares held by the fund, minus expenses, divided by the number of units issued.

Capital Market
A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt).

What is meant by a Stock Exchange?

The Securities Contract (Regulation) Act, 1956 [SCRA] defines Stock Exchange as any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.

What is an Equity /Share?

Share or stock is a document issued by a company, which entitles its holder to be one of the owners of the company. A share is issued by a company or can be purchased from the stock market.

International securities identification numbers ISIN Demat refers to a dematerialised account. NSDL National Securities Depository Ltd CDSL Central Depository Services (India) Ltd In the depository system, securities are held in depository accounts, which is more or less similar to holding funds in bank accounts.

Depository Participant (DP), who is an agent of the depository, offers depository services to investors. The investor who is known as beneficial owner (BO) has to open a demat account through any DP for dematerialisation of his holdings and transferring securities.

 What is a Debt Instrument ? Debt instrument represents a contract whereby one party lends money to another on pre-determined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to the lender.

 What is a Derivative? Derivative is a product whose value is derived from the value of one or more basic variables, called underlying. The underlying asset can be equity, index, foreign exchange (forex), commodity or any other asset.

What is a Mutual Fund?

A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of India) that pools money from individuals/corporate investors and invests the same in a variety of different financial instruments or securities such as equity shares, Government securities, Bonds, debentures etc. Mutual funds can thus be considered as financial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors. Mutual funds issue units to the investors.

What is an Index?
An Index shows how a specified portfolio of share prices are moving in order to give an indication of market trends. It is a basket of securities and the average price movement of the basket of securities indicates the index movement, whether upwards or downwards.

Topics to be discussed Capital Market Primary Market Features of Primary Market Secondary Market Equity Shares Features of Equity shares Issues Placement of issue Intermediaries of issues

Capital Market
The capital market is the market for securities, where companies and governments can raise long term funds. It is a market in which money is lent for periods longer than a year. It consist of: Primary Market Secondary Market

Primary Market
The primary market is that part of the capital market 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. Include all types of securities being sold for the first time. After being offered in primary market it becomes the part of secondary market. Primary offer consists of : IPO(initial public offering) :-where unlisted company is selling the securities to the public for the first time. FPO(follow on public offering) :-new offering of the listed company that have sold securities before.

Features of primary markets are:

This is the market for new long term capital. Therefore it is also called the new issue market (NIM). 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. The primary market performs the crucial function of facilitating capital formation in the economy. The new issue market does not include certain other sources of new long term external finance, such as loans , debts etc.

Secondary market
The secondary markets are where existing securities are sold and bought from one investor or speculator to another, usually on an exchange Also Secondary market is the market where stocks are traded after they are initially offered to the investor in primary market (IPO's etc.) and get listed to stock exchange. Secondary market comprises of equity markets and the debt markets. Secondary market is a platform to trade listed equities, while Primary market is the way for companies to enter in to secondary market

Equity Shares
In business and finance, a share (also referred to as equity share) of stock means a share of ownership in a corporation (company).

Features of equity:
Maturity Right to income Claim on asset Right to control Pre-emptive rights Limited liability

Issue
Public Right Preferential

Placement of Issue
Offer through prospectus Offer for sale Private placement Book building Right issue Red herring prospectus

Offer through prospectus

Invites offer for subscription or purchase of any share
1. The salient feature of prospectus are:          General information of company Capital structure of company Terms of the present issue Particulars of the issue Company management and project Details of the outstanding litigations Management perception of risk factors Justification of the issue premium Cost of project, projected earning

Offer for sale

Promoter places his share with an investment banker who offer it to the public at later date. Hold on period is 70 to year Bought out dealer decide the price after analyzing the viability and future projections Bought out dealer sheds the share at the premium to the public

Promoter

Investment Banker

Public

Advantages of the issuing company:      Helps the promoters to realize the fund without any loss of time. The cost of raising fund is reduced. Helps the new entrepreneurs, not familiar with capital market, to raise adequate fund. Company with no track record of the project , public issue at premium may pose problems. Possess low risk to the investors since the sponsor have already held the share for certain period.

Disadvantage:     Sell at a hefty premium. Manipulation of the results. Insider trading and price rigging .

Private placement
Small number of financial intermediaries like unit trust of India, mutual funds, insurance companies purchase the shares and sell them to the investor at later at suitable prices.

Advantages:
    Cost effective Time effective Access effective Structure effectiveness

Right issue
Offers shares at the first to existing share holder. In proportion to the share held by them at time of offer. Offered at advantageous rate compared to the market.

Certain conditions: 1. A notice should be issued to specify the number of shares issued 2. The time given to accept should not be less than 15 days 3. Right of share holder to renounce the offer in favor of other

Book building
Process of price discovery. Not a fixed priced for its shares. Indicate a price band which give highest (the cap price) and lowest (the floor) prices. The spread between floor and cap of the price band should not be more than 20%. The cap should not be more than 120% of the floor. The price is finalized by the book runner and issuer .

Red herring
Prospectus without either details of price and number of shares being offered or the amount of issue. A preliminary registration statement that must be filed with SEBI describing a new issue of stock and prospectus of the issuing company. It is known as red herring because it contains a passage in red that states the company is not attempting to sell their shares before the registration is not approved by the SEBI

PRICING OF ISSUE
Prior to 1992, governed by the controller of capital Issues Act of 1947, fixation of a fair price on the basis of the net asset value per share. Era of free pricing 1992, SEBI does not play any role in price fixation. Issuer in consultation with merchant banker shall decide the price. Price discovery through book building. At premium companies are permitted to price their issue at premium if subscription is very high At par value some times company have to give at par value.

1. 2.

Intermediatries to issue
Lead Managers. Registrar to the issue. Underwriter to the issue. Financial Institutions Advertising agencies Government agencies

Lead Manager
Appointed by the company to manage public issue program He should posses valid SEBI registration

Main duties: Drafting of Prospectus. Preparing Budget of expenses related to issue. Suggesting appropriate timings of the issue. Assisting in marketing of the public issue. Advising the company in appointing registrars ,underwriter , brokers, advertising agency , bankers etc.

The banking division of financial institutions, subsidiary of commercial banks, foreign banks, private sector bank and private agencies are available to act as lead manager. Some of them are SBI capital market Limited, Bank of Baroda,canera bank,ICICI securities etc.

Role of Lead Manager in the Pre & post Issue

Pre issue Due diligence Design of prospectus , memo etc. Ensure the formality. Appointment with intermediatries Marketing strategy Post issue Management of escrow a/c Co-ordinate non-institutional allocation Intimation of allocation Dispatch of refund to bidders Look at the functioning of agencies

Registrar
Finalizes the list of eligible allotees after deleting the invalid application. Action for crediting the shares to demat account of applicants. Dispatch of refund order to those applicable. Receive the share application from various collection centre. Arrange for dispatching of shares certificate.

Bankers to the issue

Ensure that funds are collected and transferred to escrow accounts. Estimate of collection and advising the issuer about the closer of the issue.

Underwriters
Underwriting means they will subscribe to the balance share if all share are not picked up at IPO. Can be a banker ,broker or financial institutions. Done for a commission.

Aspect considered before appointing:

    Reputation. Network of investor Clientele Past performance Experience.