Capital Market

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•Basics of Financial Management•Ashish Pingale

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CAPITAL MARKETS

Definition

■ A market where buyers and sellers engage in trade of financial securities like bonds, stocks etc.

■ Securities - a bundle of rights sold to the public by companies, authorities or institutions

■ Types of securities : stocks, bonds, debentures etc.

History

■ Opening of the Suez Canal.■ BSE came into existence in 1875, an unincorporated body of

stockbrokers.■ Very few companies and the number of securities traded in the stock

exchanges was small.■ Significant improvement since Independence.

Types of Capital Market

■ Primary Markets - The market where those wishing to raise funds from the stock market sell their securities to the public.

■ The secondary market - Where those who bought the securities in the Initial Public Offer (IPO) can sell them any time they wish.

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CAPITAL MARKET PARTICIPANTS

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Capital Market Participants■ Individual Investors■ Institutional Investors– Pension Funds– Mutual Funds■ Governments■ Companies and Organizations■ Banks and Financial Institutions

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CAPITAL MARKET INSTRUMENTS

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Capital Market Participants■ Bonds– Government Bonds– Corporate Bonds– Zero Coupon Bonds– Convertible vs Non-convertible Bonds

■ Debentures

■ Equity / Shares

What is an IPO ?

■ An initial public offering (IPO) is the first time that the stock of a private company is offered to the public.

■ IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded.

IPO Pricing

Fixed Price Method

Book Building Method

Combination Method

The price at which securities are offered is fixed in advance.

The investors have to bid in shares within a price band specified by the issuer and the final price is decided after the bidding results.

Components of both fixed price and book building methods are considered.

IPO PROCESS

STEP 6 : LISTING ON THE IPO

STEP 5 : SEBI INPRINCIPLE PERMISSION

STEP 4 : INSPECTION BY SEBI

STEP 3 : SUBMISSION OF RED HERRING PROSPECTUS TO SEBI

STEP 2 : PREPARATION OF RED HERRING PROSPECTUS

STEP 1 : APPOINTMENT OF MERCHANT/INVESTMENT BANKER

STEP1 : APPOINTMENT OF MERCHANT/INVESTOR BANKER

■ A merchant bank is a company that deals mostly in international finance, business loans for companies and underwriting.

STEP 2 :Merchant banker will write RED HERRING PROSPECTUS

A red herring prospectus contains information on :■ Corporate, Subordinate offices■ Creditors and debtors■ Basic company info.■ Cases against company■ Five years of financial data

Step3:Submission of the Red Herring prospectus to SEBI/RBI

■ The document, filed with the SEBI/RBI, is intended to provide pertinent information to prospective shareholders about the company's business description, management, strategic initiatives, financial statements and ownership structure.

Step 4 :Inspection by SEBI■ Once the prospectus has been filed with SEBI, SEBI will inspect the

company and the prospectus and inform the company of discrepancy, if any.

Step 5 :SEBI Inprinciple permission■ SEBI will give in principle permission to the company to issue the

shares.■ Types of capital : Authorized Capital : Amount of capital SEBI has allowed to raise from

equity market. Paid up Capital : Amount of capital company has actually raised from

the market.

Subscribed

Capital

Over subscripti

on

Under subscripti

on

Over Subscription

■ GREEN SHOE OPTION :

In the context of an initial public offering (IPO), it is a provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer if the demand for a security issue proves higher than expected.

Under Subscription

■ Merchant Banker by default takes responsibility of buying remaining % of shares, that have not been demanded in the market.

■ If subscription is less than 50%, the company can call off the issue.

■ Merchant Banker will go to the following to decide on the pricing :

Qualified Institutional Buyers Foreign Institutional Investors Domestic Mutual Funds High Net worth Individuals Retail Institutional Investors

Step 6 :Listing on the IPO■ After all the formalities have been complied to and SEBI gives the

approval, the company gets listed on the IPO and the stock begins to trade in the market.

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Equity Market

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Bulls & Bears

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Bull Market• Economy is in great position.

• Growth in GDP.

• Rise in stock prices.

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Bear Market• Economy is at bad position.

• Recession is looming.

• Stock prices are falling.

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ROLE OF CAPITAL MARKET

Role of Capital Markets

■ Promoting and sustaining the growth of an economy.■ An effective source of investment in the economy.■ Catalyst in transforming the economy into a more innovative and

competitive marketplace.

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FUNCTIONS OF SEBI

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SEBI• Established in the year 1988 by the

GOI.

• Given statutory powers on 12 April 1992 through the SEBI Act, 1992.

• Regulator for the securities market in India.

• SEBI has its headquarters at the business district of Bandra Kurla Complex in Mumbai.

• Regional Offices in New Delhi, Kolkata, Chennai, Ahmedabad

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National Securities Depository Limited

• Indian central securities depository based in Mumbai.

• Established on 8 November 1996.

• First electronic securities depository in India.

• Handles most of the securities held and settled indematerialised form in the Indian capital market.

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Central Securities depository

• A specialist financial organization holding securities.

• Such as shares either in certificated or uncertificated (dematerialized) form.

• Ownership can be easily transferred through a book entry rather than the transfer of physical certificates.

• Domestic central securities depository

• International central securities depository

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STOCK EXCHANGES

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Stock Exchanges• A stock exchange is an exchange where stock brokers and traders can

buy and/or sell stocks, bonds, and other securities.• Provides facilities for issue and redemption of securities.• “Continuous auction" markets.• Raising capital for businesses.• Going public.

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Various Stock Exchanges in India

National level Regional level

• Two national level stock exchanges.

• BSE and NSE

• The BSE is the world's 11th largest stock exchange . More than 5500 companies listed on it.

• NSE is 12th largest stock exchange.

• NSE’s index Nifty is used in India and all over the world as barometer for Indian capital market.

• 23 regional level stock exchanges.

• Few of them are Ahmedabad, Bangalore, Bhubaneshwar, Calcutta, Cochin, Hyderabad, Jaipur.

• Latest added are Coimbatore and Meerut Stock Exchange.

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THANK YOU !!!!!!!