Final Cap Market

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    Chapter 1 - Capital Market in India

    Introduction:-

    The capital market is the market for securities, where companies and governments can

    raise long term funds. Selling stock and selling bonds are two ways to generate capitaland long term funds. Thus bond markets and stock markets are considered capital

    markets. The capital markets consist of the primary market, where new issues are

    distributed to investors, and the secondary market, where existing securities are traded

    .The Indian Equity Markets and the Indian Debt markets together form the Indian

    Capital markets

    Indian Equity Market at present is a lucrative field for investors. Indian stocks are

    profitable not only for long and medium-term investors but also the position traders,

    short-term swing traders and also very short term intra-day traders. In India as on

    December 30 2007, market capitalisation (BSE 500) at US$ 1638 billion was 150 per cent of

    GDP, matching well with other emerging economies and selected matured markets.

    For a developing economy like India, debt markets are crucial sources of capital funds.

    The debt market in India is amongst the largest in Asia. It includes government securities,

    public sector undertakings, other government bodies, financial institutions, banks and

    companies.

    Indian Capital Market

    Debt MarketEquity Market

    Primary

    Market

    Secondary

    Market

    Primary

    Market

    Secondary

    Market

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    R E V I E W O F L I T E R A T U R E

    y C A P I T A L M A R K E T S :

    DEFINITION:

    THE TERM CAPITAL MARKETS CAN BE A CAUSE OF MUCH CONFUSION. CAPITALMARKETS COULD MEAN:

    1. Organizations that facilitate the trade in financial products. i.e. Stock exchanges

    facilitate the trade in stocks, bonds and warrants.

    2. The coming together of buyers and sellers to trade financial products. i.e. stocks and

    shares are traded between buyers and sellers in a number of ways including: The use of

    stock exchanges; directly between buyers and sellers etc. In academia, students of finance

    will use both meanings but students of economics will only use the second meaning.

    Financial markets can be domestic or they can be international.

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    Equity market in India:-

    Stock is the type of equity security with which most people are familiar. When

    investors (savers) buy stock, they become owners of a "share" of a company's assets and

    earnings. If a company is successful, the price that investors are willing to pay for its stock

    will often rise and shareholders who bought stock at a lower price then stand to make a

    capital profit. If a company does not do well, however, its stock may decrease in value and

    shareholders can lose money. Stock prices are also subject to both general economic and

    industry-specific market factors.

    The equity market is classified as :-

    (a) Primary market

    (b) Secondary market

    (a) Primary market:-

    The primary market provides the channel for creation of new securities through

    the issuance of financial instruments by public companies as well as government

    companies , bodies and agencies.

    Features of primary markets are:

    This is the market for new long term capital. The primary market is the marketwhere 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 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 primary market issuance is done either through public issue or private placement

    . A public issue does not limit any entity in investing while in private placement , the

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    issuance is done to select people. In terms of Indian Companies Act , 1956 as issue

    becomes public if it results in allotment to more than 50 persons. This means an issue

    resulting in allotment to less than 50 persons is private placement .

    An IPO is the first sale of stock by a company to the public. In this market company can

    raise money by issuing equity. If the company has never issued equity to the public, it's

    known as an IPO. Mostly public companies go for IPO. But large privately-owned

    companies may also go for an IPO to become publicly traded. In an IPO the company

    offloads a certain percentage of its total shares to the public at a certain` price In an IPO,

    the issuer obtains the assistance of an underwriting firm, which helps it determine what

    type of security to issue (common or preferred), best offering price and time to bring it to

    market.. Most IPOS these days do not have a fixed offer price. Instead they follow a

    method called BOOK BUILDIN PROCESS, where the offer price is placed in a band or a

    range with the highest and the lowest value (refer to the newspaper clipping on the page).

    The public can bid for the shares at any price in the band specified. Once the bids comein, the company evaluates all the bids and decides on an offer price in that range. After

    the offer price is fixed, the company allots its shares to the people who had applied for its

    shares or returns them their money in case of non allotment of shares.

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    Advantages of going public

    Increased Capital

    A public offering will allow a company to raise capital to use for various corporate

    purposes such as working capital, acquisitions, research and development, marketing,and expanding plant and equipment.

    Liquidity

    Once shares of a company are issue through an IPO & traded on a public exchange, those

    shares have a market value and can be resold. This allows a company to attract and retain

    employees by offering stock incentive packages to those employees. Moreover, it also

    provides investors in the company the option to trade their shares thus enhancing

    investor confidence.

    Increased Prestige

    Public companies often are better known and more visible than private companies, this

    enables them to obtain a larger market for their goods or services. Public companies are

    able to have access to larger pools of capital as well as different types of capital.

    Valuation

    Public trading of a company's shares sets a value for the company that is set by the public

    market and not through more subjective standards set by a private valuator. This is

    helpful for a company that is looking for a merger or acquisition. It also allows the

    shareholders to know the value of the shares.

    Increased wealth

    The founders of the company often have the sense of increased wealth as a result of the

    IPO. Prior to the IPO these shares were illiquid and had a more subjective price. These

    shares now have an ascertainable price and after any lockup period these shares may be

    sold to the public, subject to limitations of law.

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    Disadvantages of going Public

    Time and Expense

    Conducting an IPO is time consuming and expensive. A successful IPO can take up to a

    year or more to complete and a company can expect to spend large amount of money onattorneys, accountants, and printers. In addition, the underwriter's fees can range from

    3% to 10% of the value of the offering. Due to the time and expense of preparation of the

    IPO, many companies simply cannot afford the time or spare the expense of preparing

    the IPO.

    Disclosure

    Once a company goes public it comes under the purview of SEBI . It is supposed to file

    quarterly results with SEBI and follow other regulations as per SEBI guidelines. .

    Decisions based upon Stock Price

    Management's decisions may be affected by the market price of the shares and the feeling

    that they must get market recognition for the company's stock. They may give more

    consideration to market price of the share and as a consequence may take a decision

    which is not prudent & sound .

    Regulatory Review

    The Company will be open to review by the SEBI to ensure that the company is making

    the appropriate filings with all relevant disclosures.

    Falling Stock Price

    If the shares of the company's stock fall, the company may lose market confidence,

    decreased valuation of the company may affect lines of credits, secondary offering pricing,

    the company's ability to maintain employees, and the personal wealth of insiders and

    investors.

    Vulnerability

    If a large portion of the company's shares are sold to the public, the company may

    become a target for a takeover, causing insiders to lose control. A takeover bid may be the

    result of shareholders being upset with management or corporate raiders looking for an

    opportunity. Defending a hostile bid can be both expensive and time consuming.

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    Parameters to judge an IPO

    Good investing principles demand that you study the minutes of details prior to investing

    in an IPO. Here are some parameters you should evaluate:-

    Promoters

    Is the company a fa