Capital Market in India

Capital Market

Capital market is one of the most important segments of the Indian financial system. It is the market available to the companies for meeting their requirements of the 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 (the money market). In other words, it is concerned with the raising of money capital for purposes of making long-term investments. The capital market includes the stock market (equity securities) and the bond market (debt).

The capital market has 3 components-the equity market, the debt market, and the derivative market. It consists of all those connected with issuing and trading in equity shares and also medium and long term debt instruments, namely, bonds and debentures. It is well accepted that tenures less than one year are considered as short term,; while tenures more than one year and up to three years may be taken as medium term while more than three years can be considered as long term. Both equity and debt market have 2 segments- the primary market dealing with new issues of equity and debt instruments and the secondary market is the market for buying and selling securities of the existing companies. Under this, securities are traded after being initially offered to the public in the primary market or listed on the stock exchange. 

The capital market operations are regulated by the Securities and Exchange Board of India (SEBI)

It is the regulatory authority established under the SEBI Act, 1992 in order to protect the interests of the investors in securities as well as promote the development of the capital market. It involves regulating the business in stock exchanges supervising the working of stock brokers, share transfer agents, merchant bankers, underwriters etc as well as prohibiting unfair trade practices in the securities market.

The main functions of SEBI are as follows

•  To regulate the business of the stock market and other securities market.
•  To promote and regulate the self-regulatory organizations.
•  To prohibit fraudulent and unfair trade practices in securities market.
•  To promote awareness among investors and training of intermediaries about safety of market.
•  To prohibit insider trading in securities market. 
•  To regulate huge acquisition of share and takeover of companies

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. It is the market for raising fresh capital in the form of shares and debentures. It provides the issuing company with additional funds for starting a new enterprise or either expansion or diversification of an existing one and thus, its contribution to company financing is direct. The new offering by the companies are made either as an Initial Public Offering (IPO) or rights issue. This is typically done through a syndicate of securities dealers.

The process of selling new issues to investors is called underwriting.

Features of Primary Market:

• This is the market for new long term equity capital. The primary market is the market where the securities are sold for the first time. Therefore 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 sued by companies for the purpose of setting up new business or for expanding or modernizing the existing business.
• The primary market performs the crucial functions of facilitating capital formation in the economy.
• The financial assets sold can only be redeemed by the original holder.
• The new issue market does not include certain other sources of new long term external finance such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as "going public".

Initial Public Offering (IPO)

An initial public offering is when an unlisted company makes either a fresh issue of securities of an offer for sale of its existing securities or both for the first time to the public.

Further Issue

A follow on public offering is known as further issue. This is offered through an offer document when an already listed organization makes either a fresh issue of securities to the public or an offer for sale to the public.

Rights Issue

Here, a listed organization proposes to issue fresh securities to its existing shareholders as on a record date. The rights are offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for organization who would like to raise capital without diluting the stake of its existing shareholders.

Preferential Issue

This is an issue of either shares or convertible securities by listed organizations to a select group of people under Section 81 of the Companies Act, 1956. This issue is neither a Rights issue nor Public issue and is a faster way for any organization to raise capital.

Secondary Market

The secondary market, also known as the aftermarket, it is the market for buying and selling securities of the existing companies. Under this, securities are traded after being initially offered to the public in the primary market and listed on the stock exchange. The stock exchanges are the exclusive centers for trading of securities. It is a sensitive barometer and reflects the trends in the economy through fluctuations in the prices of various securities. Security market is an economic institute within which takes place the sale and purchase transactions of securities between subjects of the economy on the basis of demand and supply. Also, we can say that securities market is a system of interconnection between all participants (professional and nonprofessional).

The main difference between the two is that in the primary market, an investor gets securities directly from the company through IPOs, while in the secondary market, one purchases securities from other investors willing to sell the same. Equity shares, bonds, preference shares, treasury bills, debentures, etc. are some of the key products available in a secondary market. SEBI is the regulator of the same.