FINANCIAL MARKETS

Financial Markets

Capital Market Money Market

Equity Market Debt Market

Treasury BillsCall Money MarketTerm Money MarketCommercial BillsCommercial PapersCertificates of Deposit

Primary MarketPublic IssuesPrivate Placements

DomesticMarket

InternationalMarket

Secondary MarketNSEBSEOTCEIRegional Stock Exchanges

Private CorporatePSU Bond MarketGovernment securities Market

PrimarySegment Secondary

Segment

Derivatives MarketFuturesOptions

CAPITAL MARKETCAPITAL MARKET

• The capital market is the market for long term funds.

• Capital market discharge the important function of transfer of savings, especially of the household sector to companies and public sector bodies.

• Individuals or households with surplus money invest their savings in shares , debentures and other securities of companies.

• The two segments of the capital market are the primary market and the secondary market.

PRIMARY MARKETPRIMARY MARKET

• Primary market is the market for the long term sources of finance (equity and debt).

• New issues of equity and debt are arranged in the form of a new floatation , either publically or privately or in the for of rights offer, to the existing shareholders.

• Companies raise new cash in exchange for financial claims. The financial claims may take the form of shares or debentures.

• Public sector undertakings also issue securities.

• The transactions in the primary market result in capital formation.

INSTRUMENTS

EQUITY SHARES• they are ownership securities.

• they represent proportionate ownership of a company.

• this right is expressed in the form of participating in the profits of a going company and sharing the assets of a company after winding up.

• they have the lowest priority claim on earnings and assets of all securities issued.

• they have unlimited potential for dividend payments and price appreciation.

• they have a right to vote on every resolution placed before the company.

• all share carry proportional rights.

• voting right cannot be exercised in respect of shares on which a call or any other sum due to the company has not been paid up.

Par value

• It is the face value of a share.• It does not tell anything about the value of shares.• Dividends are declared as a percentage of the face value.• No share can be issued at less than par value even though

the par value exceeds the fair value / market value of the share.

This is especially the case with sick companies and the revival of such company is hampered.

Book value• It is determined by deducting total liabilities including

preference shares from the total assets and the difference which is equal to shareholder equity with the number of equity shares outstanding.

PREFERNCE SHARES

• Preference shares is hybrid security that is a mixture of ownership and creditor ship security.

• They carry preferential rights in comparison with ordinary shares.

• As a rule preference shareholders enjoy a preferential right to dividend.

• As regards capital , if a company winds up, it carries a preferential right to be repaid, the amount of capital paid-up on such shares.

Types of Preference Shares

• Cumulative and Non Cumulative

• Participating Preference Shares

• Redeemable Preference Shares

• Convertible Preference Shares

EQUITY FUNDING FROM INTERNATIONAL MARKET

American Depository Receipt [ADR]• these are negotiable instruments , • denominated in dollars and issued by the US Depository Bank• Offers access to the US institutional and retail markets NYSE ,

NASDAQ etc• Requires comprehensive disclosures and greater transparency• Companies have to abide by the requirement of SEC• DR holders enjoy the same rights as the ordinary domestic

shareholders.

Global Depository Receipt [GDR]

• equity instrument issued in European and Asian markets • these are negotiable instruments , • offers access to the markets like Luxemburg Stock Exchange ,

London Stock Exchange , Dubai Stock Exchange , Singapore stock Exchange etc

• conversion of GDR into ADR is possible

DEBT MARKET

Market where different type of fixed income securities are issued and traded.

Participants

• Central & State Governments• PSUs• Corporate• Banks• Mutual funds• FIIs• PFs

• Primary Dealers

DEBENTURES Debentures are debt securities. It is a certificate which

acknowledges indebtedness under company’s seal.

Features:• they are creditor ship securities.

• fixed rate of returns

• a charge may be created on the assets of the company .

• they shall be redeemed after a certain period.

Kinds of Debentures • Participating Debentures & Non Participating

Debentures

• Secured Debentures & Unsecured Debentures

• Convertible Debentures & Non Convertible Debentures

BONDS

It to refer to debt securities issued by :

* government,

* semi-government bodies and

* public sector financial institutions and

* companies.

SN Basis Debentures Bonds

1 Nature Debt instrument Debt instrument

2 Income Fixed Return Fixed Return

3 Issuer Private Company PSU , Private Company

4 Risk Secured /Unsecured Secured

5 Issues Issued at face value Issued at discount

6 Payment Interest at regular interest + principal at the end

Complete amount paid at the end

Types of Instruments Traded in the Debt Market

Market Segment Issuer Instruments

Government Securities Central Government zero coupon bonds , coupon bearing bond , T-bills, floating rate bonds

State Government coupon bearing bond , floating rate bonds

Public Sector Bonds Government Agencies/Statutory Bodies

government guaranteed bonds , debentures ,municipal bonds

PSU PSU bonds –taxable and tax free, debentures , commercial papers ,deep discount bonds

Private Sector Bonds Corporate debentures , bonds , CPs, FRBs, zero coupon bonds, inter- corporate deposits

Banks CDs , debentures , bonds

Financial Institutions CDs and bonds

• Floating Rate Bonds : wherein the interest rate is not fixed and is linked to a benchmark rate.

• Zero coupon bonds: no periodic interest payment and are sold at a huge discount to face value

• Deep Discount Bonds: are zero coupon bonds with a maturity of 15 years onwards.

• Municipal Bonds: are issued by municipal corporation to finance infrastructure projects

DEBT FUNDING FROM INTERNATIONAL MARKET

External Commercial Borrowings [ECBs]

• Indian companies free to raise ECBs from any internationally recognized source such as bank , export credit agency , suppliers of equipment , international capital mkt.

• ECBs need sound risk mgt – both interest rates and forex risk.

• Can be utilized for import of capital goods and services and for project related expenditure but cannot be used for speculative purpose.

Foreign Currency Convertible Bonds [FCCBs]

• Bonds are issued by Indian companies and subscribed to by a non-resident in foreign currency.

• Carry fixed coupon rates and are convertible into certain number of ordinary shares

• They are listed and traded abroad• Till conversion interest to be paid in dollars

TYPES OF ISSUES

PUBLIC ISSUE OF SECURITIES

• Public issue of securities, shares or debentures are made in primary market funds mobilized through the primary market constitute investments.

• There is no specific market place for issue of new securities.• Issue of shares and debentures may be made through :

prospectus , offer for sale and private placement .• Wide publicity about the offer is made through different

media : news paper, periodicals, television etc . • There is also direct mailing of the application form and

prospectus.• The intermediaries who organize the entire effort are

merchant bankers.

• Promoters• Prospectus• Application Money• Over Subscription & Under Subscription• Minimum Subscription• Underwriting

Initial Issues

These are issues of shares for the first time either after :

• incorporation or • conversion from private ltd to public ltd company.

Initial Public Offer [IPO] : fresh issue of securities or offer for sale of existing securities or both by an unlisted company for the first time to the public.

Follow-on-Public Offering [FPO]: fresh issue of securities or offer for sale of existing securities or both by already listed company for the first time to the public through an offer document.

Further Issues

Issue of shares are made by existing companies

either by:

• public issues , rights issue , composite issue .

• these may be offered for cash subscription or

• for consideration other than cash such as change of ownership either of physical assets or technical know how.

Exchange Issue

It is one in which shares of one company are exchanged for another as in the case of takeovers and mergers.

In HLL-TOMCO merger 2 HLL shares were exchanged for 15 TOMCO shares.

• Exchange issues do not add to the funds of the company making the exchange

• Although the merger may result in synergy.

Rights Issue

It is the issue of new shares by a listed company in which existing shareholders are given pre-emptive rights to subscribe to new issue.

• Here the existing shareholder are entitled to subscribe to new share in certain proportion to the shares already held by them.

• There are generally issued at a premium , which is freely determined by the company.

Composite Issue

• It consists of right and public issues.

• Existing companies can resort to different pricing of their share.

• The price at which the shares are offered to public may differ from the price at which they are offered to the rights shareholders.

Bonus Issues

These are dividends paid in shares. In this retained profits or free reserves are converted into additional share capital, no additional liabilities are created in the balance sheet.

• This also do not result in raising new funds. • Bonus issue can be made only out of free reserves

built out of the genuine profits or share premium collected in cash only.

• Reserves created out of revaluation of fixed assets are not to be capitalized.

Preferential Issue

• includes issue of shares on preferential basis and/ or through private placement in pursuance of a resolution passed

• issue of shares to the promoters and their relatives• lock-in –period of 3 years