3.Capital Markets

Capital market is divided into securities market and financial institutions or funds broadly.

Securities Market

Securities means a certificate document indicating that its holder is eligible to receive a certain amount of money at a particular time. It is a document giving title property or claim on income which may be lodged. This could be an Equity and Debt. It is income yielding and traded in the stock exchange or secondary market. The essential characteristic of a security is that it is saleable. Securities can be issued by the government known as gilt edged security or by corporate securities (share, debentures, or bonds).  The market where securities are traded is known as securities market. The securities market is regulated by government by SEBI.

The corporate securities can be divided as Primary market and secondary market.

3.1 Primary Market

A primary market issues new securities on an exchange for companies, governments, and other groups to obtain financing through debt-based or equity-based securities. The firms raising the funds could be a new company or already existing company with raising new funds or going public i.e., becoming a public limited company.

3.1.1 Methods/ Instruments for rising funds in primary market:

• Initial public offering (IPO): Initial public offering is the process by which a private company can go public by sale of its stocks to general public. It could be a new, young company or an old company which decides to be listed on an exchange and hence goes public.
• Follow on public offering (FPO): A follow-on public offering (FPO) is the issuance of shares to investors by a company listed on a stock exchange. A follow-on offering is an issuance of additional shares made by a company after an initial public offering (IPO). Companies usually announce FPOs to raise equity or reduce debt.
• Public issue: it is open to all the citizens of India.
• Rights Issue: Company issues more shares but gives First right to Existing shareholders to buy them, if they refuse then offered to outsiders. It is often transferrable, allowing holders to sell them in open market.
• Private placement: it means the issue is placed privately with few financial institutions or individuals and not with the general public.
• Equity – Share certificate / Shares: It is the residual value of a company’s assets after all outside liabilities, except to shareholders have been allowed for is Equity. Shareholder gets dividend from the profits of the company. Equity holders called owners, proprietors of the company. The equity holders have last priority in claim during liquidation.
• Stock: it is a form of fixed interest security. It is also known as share or equity.
• Bond: it is a form of fixed interest security issued by government, companies, banks, or other institutions. It does not always carry fixed interest. Stockholders are owners of the company whereas bondholders are lenders to the company.
• Debentures: these are unsecured, long term corporate bonds. The debenture holders are not protected by collateral, but they have the right to claim repayment.

Debt Holder gets interest & Principal irrespective of whether company makes profit or not. Debt holders are creditors of the company. Debt holder has 1^st priority in claim during liquidation. For e.g. when a corporation is liquidated, its creditor paid in a particular order including secured creditor/bond holder gets, 1^st priority, then unsecured creditors and the stock holder has last priority in this order.

3.2 Secondary market

      It is a market where assets are resold and purchased. In secondary market, where existing or already-issued securities are traded between investors. Issuing companies do not have a part in the secondary market. The main purpose of this market is to provide liquidity to securities. The secondary market can be divided into stock exchange and over the counter exchange.

E.g.: Bombay stock Exchange (i.e.) shares sold at Primary market is resold at Secondary Market. Here prices of shares are determined by Market (i.e. Demand & Supply). This is commonly known as Share Market or Stock exchange. Like underwriter in IPO offering, here Brokers works in Secondary Market.

3.2.1 Stock Exchange

It is an institution for orderly buying and selling of listed securities. Listed securities are those that are approved by the stock exchange. Stock Exchanges are companies who bought licenses to perform as a platform for exchange. It includes an association of persons or firms to regulate and supervise all transactions, rules, regulations and standard practices to govern all market transactions, authorized stockbrokers meet to buy or sell securities. It has up to date information about the prices of trading and publishes its index as an indicator of stock market situation.  The main stock exchanges are:

1. BSE – Bombay stock Exchange: it is India’s oldest stock exchange of India established in 1887. It became a national exchange in 2002. It became a corporate entity in 2005. It has indices such as Sensex, BSE-200, BSE-500, and DOLLEX.
2. NSE – National stock Exchange: it was set up in 1992. The index of NSE is NIFTY. The NSE is the first stock exchange in India to admit overseas shareholders.

SENSEX: The BSE SENSEX (also known as Sensitive Index is a free-float market-weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock Exchange. It was started in 1978.

NIFTY: The NIFTY 50 index National Stock Exchange of India’s benchmark broad based stock market index for the Indian equity market. Full form of NIFTY is National Stock Exchange Fifty. It represents the weighted average of 50 Indian company stocks in 13 sectors. It was started in 1993

3. Over the counter Exchange of India (OTCEI): It deals in securities that are not listed on the stock exchange. It is basically the securities of small companies and for MSME Industries. MSMES will get credit facility from MUDRA Bank but with higher interest rates. So, they can’t interest to take loan from MUDRA Banks. So, for those, OTCEI is a platform to sell their equity and raise funds easily. It is the India’s 1^st exchange for small companies as well as 1^st screen based national wide stock exchange in India.