Capital Markets

Capital Market

Capital Market

• Topics– Concept– Functions– Types of Capital Markets– Introduction to different players of Capital Market

Capital Market Concept

Capital Market- Definition

• Definition – 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 where money is provided for periods longer than a year.

• The Capital Market includes the stock market(equity securities) and the bond market(debt).

Capital Market- Objectives

• Objectives : The objectives of a Capital Market is twofold – – It ensures best possible co-ordination and balance

between the flow of savings on the one hand and the flow of investment leading to capital formation on the other.

– Directs the flow of savings into most profitable channels and thereby ensures optimum utilisation of financial resources.

Capital Market- Components

• The Capital market in India is a well-integrated structure comprising of :– Market

• New Issue Market or Primary Market• Stock Market or Secondary Market

– Instruments• Equity• Debt

– Intermediaries• Brokers• Investment Bankers• Stock Exchanges• Underwriters

Capital Market- Components

– Regulators• SEBI

– Players• Credit Rating Agencies• Corporate• Intermediaries• Individual• Banks/FI• FDI/FII

Capital Market- Structure

• The Capital Market in India may be classified into two categories :– Organised– Unorganised

• The structure of a Capital Market is composed of – The sources of demand and– The supply of long term capital.


• In organised sector of capital market– Demand comes from – corporate enterprises,

pulic sector enterprises, government and semi-government institutions

– Sources of supply of funds - individual investors, corporate and institutional investors, investment intermediaries, financial institutions, commercial banks and government.


• The unorganised sector of the capital market consists of– Indigenous bankers– Private money lenders

• The demand in the unorganised capital market comes from the– Agriculturists– Private individual for consumption rather than production – Small traders.

Capital Market- Features

• The Capital market deals with Capital.• The Capital market serves an important purpose by pooling the savings.• The capital market is generally understood as a market for long term

funds and investments in long term instruments available in this market.• Capital market is a market where borrowing and lending of long term

funds take place.• Capital Market deals with in both equity and debt.• Capital market refers to all the institutes and mechanisms of raising

medium and long term funds, through various instruments available like shares, debentures, bonds etc.

Capital Market Functions

Capital Market - Functions• The major functions performed by a capital

market are:– Mobilisation of financial resources on a nation-wide

scale.– Securing the foreign capital and know-how to fill up

the deficit in the required resources for economic growth at a faster rate

– Effective allocation of the mobilise financial resources, by directing the same to projects yielding highest yield or to the projects needed to promote balanced economic development.

Capital Market - Functions– Promotes economic growth through the mobilisation of long-

term savings – Serves a very useful purpose by pooling the savings– The Capital Market encourage capital formation in the

country.– Capital Markets facilitate the growth of the industrial sector,

as well as the other sectors of the economy.– The capital market provides funds for the projects in the

backward areas.– Capital Market generates employment in the country.– They also facilitate the development of the stock markets.– Due to capital markets the public has alternative sources of

investments.

Capital Market - Role• Role of capital market in an economy

– Provides an important alternative source of long-term finance for long-term productive instruments.

– Provides equity capital and infrastructure development capital that has strong socio-economic benefits – roads, water, sewer system, housing, energy, telecommunications, public transport, etc. ideal for financing through capital markets.via long dated bonds and asset backed securities.

– Provide avenues for investment opportunities that encourages a thrift culture critical in increasing the domestic savings and investment ratios that are essential for rapid industrializations.

Capital Market - Role– Encourages broader ownership of productive assets by

small savers to enable them benefit from India’s economic growth and wealth distribution. Equitable distribution of wealth is a key indicator of poverty reduction.

– Promotes pulic-private sector partnerships to encourage participation of private sector in productive investments.

– Assists the Government to close resource gap, and complement its effor in financing essential socio-economic development through raising long term project based capital.

– Improves the efficiency of capital allocation through competitive pricing mechanism for beter utilization of scarce resources for increased economic growth.

Capital Market - Role– Provides a gateway to India for global and

foreign porfolio investors, which is critical in supplementing the low domestic saving ratio.

Types of Capital Market

Capital Market- Types

• Two types of Markets – Capital markets may be classified as –– Primary markets – In primary markets, new stock or

bond issues are sold to investors via a mechanism known as underwriting.

– Secondary markets – In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over the counter or elsewhere.

Capital Market- Primary Market

• Primary Market– Primary Market is a market of new issues. It deals with

those securities that are issued to the public for the first time. Hence called the New Issues Market.

– It deals with the raising of fresh capital in the form of equity shares, preference shares, debentures, bonus, right issues etc.

– Resources in capital market can be mobilised through :• Equity issues (Domestic and External)• Debt issues (Domestic and External)

Capital Market- Primary Market

– Domestic equity issues include equity shares, preference shares, right issues and units of mutual funds in the country

– External equity issues include equity shares through the issue of Global Depository Receipts(GDR), and American Depository Receipts(ADR)

– Domestic debt issues include bonds, debentures (convertible and non convertible)

– External debt issues are funds mobilised in the form of debt from overseas through External Commercial Borrowings(ECB).

Capital Market- Secondary Market

• Secondary Market– Deals with securities that are already issued by the companies– It facilitates trading in securities and operates through stock

exchanges– The secondary market has three types of stock exchanges that

provide liquidity to the investors through trading transactions(buying and selling of securities) with the help of brokers and other financial intermediaries. The 3 types of stock exchanges are

• National Stock Exchange• Regional Stock Exchange• Over the Counter Exchange of India


– The National Stock Exchange(NSE) and the Bombay Stock Exchange(BSE) are the two premier stock exchanges.

– They operate under the rules and regulations of SEBI

– Thus the secondary market in India deals in scrips of a large number of listed companies and provides a world class trading due to wide range of product availability.


• The Indian Secondary Market can be segregated into two:– The secondary market for corporates and financial

Intermediaries. • The entities involved in trading in the corporate issues are

– Regional Stock Exchanges– The National Stock Exchanges– The Over the Counter Exchange of India(OTCEI)

• The participants in this market are:– Registered brokers – both individual and institutions.– They in turn operate through a network of sub brokers and sub-dealers and are

connected through electronic network system.


– The secondary market for government securities and public sector undertaking bonds. • The trading in government securities is basically divided into :

– Short term money market instruments such as treasury bills– Long term government bonds ranging in maturity from 5 to 20 years.

• The main participants in secondary market for government securities are entities like:

– Primary dealers, Banks, Financial institutions and Mutual funds

• The governement securities and the public sector undertaking bonds are traded in the Wholesale Debt Market(WDM) segment of the NSE, BSE and the OTCEI

Introduction to different Players of Capital Markets

Capital Market – Introduction to Major Players

• Institutions – – The important institutions operating in the Capital market are

• Credit Rating Agencies• Corporate• Intermediaries

– Brokers– Investment Bankers– Stock Exchanges– Underwriters

• Individual• Banks/FI• FDI/FII


• Intermediaries– Brokers - A stockbroker is a regulated professional

individual, usually associated with a brokerage firm or broker dealer, who buys and sells stocks and other securities for both retail and institutional clients, through a stock exchange or over the counter, in return for a fee or commission.

– Stock Brokers in India • IndiaInfoline, ICICIdirect, Share khan, India bulls, Geojit

Securities, HDFC, Reliance Money, Religare, Angel Broking


– Investment Bankers - An investment bank is a financial institution that assists individuals, corporations, and governments in raising capital by underwriting or acting as the client's agent in the issuance of securities (or both). An investment bank may also assist companies involved in mergers and acquisitions (M&A) and provide ancillary services such as market making, trading of derivatives and equity securities.

– Unlike commercial Banks and retail banks, investment banks do not take deposits.

– Investment Banks in India – Bank of America, B.N.P. Paribas, Citi Bank, J.P. Morgan, Kotak Mahindra Bank, Yes Bank Limited, HSBC Limited.


– Stock Exchanges - A stock exchange is a form of exchange which provides services for stock brokers and traders to buy or sell stock and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and dividends. Securities traded on a stock exchange include stock issued by listed companies, unit trusts, derivatives, pooled investment products and bonds. Stock exchanges often function as "continuous auction" markets, with buyers and sellers consummating transactions at a central location, such as the floor of the exchange.


– To be able to trade a security on a certain stock exchange, it must be listed there.

– Trade on an exchange is by members only.– Modern Markets are electronic networks, which gives them

advantages of increased speed and reduced cost of transactions.

– A stock exchange is often the most important component of a stock market.

– In India trading is done through two major exchanges – NSE and BSE.

– For commodities trading – NCDEX and MCX.


– Underwriters - Underwriters are those persons who, in a public issue, agree to take up shares or debentures which are not fully subscribed. They make a commitment to get the issue subscribed either by others or by themselves. When a company decides to go public, it needs an assurance that if its securities are not fully subscribed by the public, there would be someone to subscribe to those securities. And the underwriter does this job. It enters into an agreement with the issuer company that in the occurrence of such an event, it would subscribe to, by itself or by others, the securities that remain unsubscribed.

– For performing this job, he receives a certain amount from the issuer company, known as the ‘underwriting commission’. Apart from this amount, he can also earn profits by selling these securities in the market.

Capital Market – Introduction to Major Players– Underwriters in India

• Industrial Development Bank of India – largest Institutional underwriter in India

• Unit Trust of India – one of the four largest underwriter• Life Insurance Corporation• Industrial Credit and Investment Corporation of India • Industrial Finance Corporation• Private Firms like - M/s Dalal and Co., M/s Kothari and Co., M/s

Wright and Co• Investment Companies and trusts - Industrial Investment Trusts of

Bombay, Birds Investment Ltd., Calcutta, Devkaran nanji Investment co., and Investment Trust of India Ltd.


• Credit Rating - Definition: Credit rating is an analysis of the credit risks associated with a financial instrument or a financial entity. It is a rating given to a particular entity based on the credentials and the extent to which the financial statements of the entity are sound, in terms of borrowing and lending that has been done in the past.A credit rating agency (CRA) is a company that assigns credit ratings


• Description: Usually, is in the form of a detailed report based on the financial history of borrowing or lending and credit worthiness of the entity or the person obtained from the statements of its assets and liabilities with an aim to determine their ability to meet the debt obligations. It helps in assessment of the solvency of the particular entity. These ratings based on detailed analysis are published by various credit rating agencies like Standard & Poor's, Moody's Investors Service, and ICRA, to name a few.

• Credit rating Agencies in India – CRISIL(Credit Rating Information Services of India Limited), ICRA Limited(Investment Information and Credit Rating Agency of India Limited), CIBIL(Credit Information Bureau India Limited)


• FDI/FII– FDI is an investor which picks up more than

10% stake in a company’s equity.– FIIs are in the form of portfolio investment

both in primary market and secondary capital markets. They help in bridging the short-to medium-term savings-investment gap

Economy & Finance

Capital Markets