Capital Market

Since development of various segments of the capital market is a prerequisite for a well functioning financial system.

The capital market in India has been modernised over the last 17 years and is now comparable with international markets.

There has been a visible improvement in trading and settlement infrastructure, risk managementsystems and level of transparency.

These improvements have brought a reductuion in the transaction costs and led to impprovement in liquidity.

Meaning

It is an organised market mechanism for effective and efficient transfer of money capital or financial resources from the investing class ( a body of individual or institutional savers) to the entrepreneur class (individual or institutions engaged in industry business or service) in the private and public sectors of the economy.

Types of capital market

There are two types of capital market: Primary market, Secondary market

Primary Market

It is that market in which shares, debentures and other securities are sold for the first time for collecting long-term capital. This market is concerned with new issues. Therefore, the primary market is also called NEW ISSUE MARKET.

In this market, the flow of funds is from savers to borrowers (industries), hence, it helps directly in the capital formation of the country. The money collected from this market is generally used by the companies to modernize the plant, machinery and buildings, for extending business, and for setting up new business unit.

Secondary Market

The secondary market is that market in which the buying and selling of the previously issued securities is done. The transactions of the secondary market are generally done through the medium of stock exchange. The chief purpose of the secondary market is to create liquidity in securities.

If an individual has bought some security and he now wants to sell it, he can do so through the medium of stock . exchange to sell or purchase through the medium of stock exchange requires the services of the broker presently, their are 25 stock exchange in India.

Players & Instruments in the capital markets Instruments Players

Investors Brokers/traders Securities and Exchange Bard of India (SEBI) National Stock Exchange (NSE) Bombay stock Exchange (BSE) Credit rating agencies (CRISIL,CARE etc)

Preference Shares Equity Shares Non voting equity shares Cumulative convertible preference shares Debentures Bonds Company fixed deposits Warrants Secured Premium Notes (SPNs) Euro Convertible Bonds(ECBs) Global Depository Receipts (CDRs)

Equity Shares

Equity shares are known as ordinary shares held by the owners of a corporate entity. Equity shareholders face greater risks They are given larger share of profits through higher dividends than those given to preference share holders.

Preference Shares

Shares that carry preferential rights in comparison with ordinary shares are called Preference shares. The preferential rights are regarding payment of dividend and the distribution of the assets of the company in the event of its winding up, in preference to equity shares.

Debentures

A form of long term debt capital A document that either creates a debt or acknowledges it is known as a debenture. A document that shows on the face of it that a company has borrowed a sum of money from the holder thereof upon certain terms and conditions is called a debenture. More secured & carries fixed interest rate

Shares Vs Debentures

Shareholder has a proprietary interest in the company Entitled to dividends depending on varying profits Enjoys voting rights

Debenture holder is only a creditor of the company

Entitled to fixed interest

Do not enjoy voting rights

DepositoryReceipts(DRs)arenegotiablesecuritiesissuedoutsideI ndiabyaDepositorybank,onbehalfofanIndiancompany,whichrepr esentthelocalRupeedenominatedequitysharesofthecompanyhel dasdepositbyaCustodianbankinIndi

DRslistedandtradedintheUSmarketsareknownasAmericanDepo sitoryReceipts(ADRs)andthoselistedandtradedelsewherearekno wnasGlobalDepositoryReceipts(GDRs).IntheIndiancontext,DRs aretreatedasFDI

tradedonStockExchangesintheUS,Singapore,Luxembourg,London,etc.DRslistedandtradedintheUSmarketsareknownasAmericanDepositoryReceipts(ADRs)andthoselistedandtrad edelsewhereareknownasGlobalDepositoryReceipts(GDRs).IntheIndiancontext,DRsaretreatedasFDI

Companiescanraiseforeigncurrencyresourcesabroadthroughthei ssueofADRs/GDRs,inaccordancewiththeSchemeforissueofForei gnCurrencyConvertibleBondsandOrdinaryShares(ThroughDepo sitoryReceiptMechanism)Scheme,1993andguidelinesissuedbyth eGovernmentofIndia

AcompanyycanissueADRs/GDRs,ifitiseligibletoissuesharestoper sonsresidentoutsideIndiaundertheFDIScheme.Unlistedcompani es,whichhavenotyetaccessedtheADR/GDRrouteforraisingcapital intheinternationalmarket,wouldrequirepriororsimultaneouslistingi nthedomesticmarket,whileseekingtoissuesuchoverseasinstrume nts.Unlistedcompanies,whichhavealreadyissuedADRs/GDRsint heinternationalmarket,havetolistinthedomesticmarketonmakingp rofitorwithinthreeyearsofsuchissueofADRs/GDR

ThereisnoenduserestrictionsonGDR/ADRissueproceeds,exceptf oranexpressbanoninvestmentinrealestateandstockmarkets