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.
