Chapter 1.

Capital Market

Chapter 1. Capital Market

MEANING OF CAPITAL MARKET

The capital market is a market for financial assets which have a long or
indefinite maturity. Generally, it deals with long term securities which have a maturity
period of above one year.

The capital market is the market for securities, where companies and
governments can raise long term funds. It is a market in which money is lend for
periods longer than a year. The capital market includes the stock market and the bond
market.
Capital market may be further divided into three types:-
1. Industrial securities market
2. Government securities market
3. Long term loan market

1. Industrial securities market:

it’s a market for industrial securities namely 1st equity share, 2nd preference
shares, 3rd debenture & bond. It is a market where industrial concern raises their
capital issuing appropriate instrument. It can be further subdivided into two they are,

1st Primary Market

2nd Secondary Market

1 Primary Market:

Primary market is market for new issue or new financial claim & it is
also called new issue market. The primary market deals with those securities
which are issued to the public for the 1 st time. In the primary market, borrower
exchange new financial securities for long term funds. Thus primary market
facilitates capital formation.

There are three ways by which a company may raise a capital in

primary market. They are Public issue, Right issue, and Private placement.

2 Secondary Markets:-

Secondary Market is a market for secondary sale of security. In other

word, securities which have already passed through the new issue market are
trade in this market. It provide continues and regular market for buying and
selling of securities. The stock exchange in India is regulated under the
securities Act, 1956.
2. Government Securities Market:

It is also known as Gilt-Edged Securities Market. In this, government

securities are traded. In India, there are many kind of government security.

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• Short term
• Long term
Long term securities are traded in this market while short term securities are
traded in the money market.
The Government securities are in many forms:

a) Stock certificates or inscribed stock.

b) Promissory notes
c) Bearer bonds which can be discounted.

Government securities are traded through the public debt office of the RBI.
This market also plays a wide role in the monetary management.

3. Long Term Loan Market:

Development banks and commercial banks play a significant role in this market by
supplying long term loans to corporate customers. Long term loans market may
further be classified into:
• Term loans market
• Mortgages market
• Financial Guarantees market
 Term Loans Market
In India, many industrial financing institutions have been created by the Government
both at the national and regional levels to supply long term and medium term loans
to corporate customers directly as well as indirectly. These development banks
dominate the industrial finance in India. Institutions like IDBI, IFCI, ICICI, and other
state financial corporations come under this category. These institutions meet the
growing and varied long-term financial requirements of industries by supplying long
term loans. They also help in identifying investment opportunities, encourage new
entrepreneurs and support modernization efforts.
 Mortgage market:
• A mortgage loan is a loan against the security of immovable property like
real estate. The transfer of interest in a specific immovable property to secure
loan is called mortgage. This mortgage may be equitable mortgage or legal
one. It may be a first charge or second charge.
• Equitable mortgage is created by a more deposit of title deeds to properties
as security where as in the case of legal mortgage the title in the property is
legally transferred to the lender by the borrower. Legal mortgage is less risky.

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• In the first charge, the mortgager transfers his interest in the specific property
to the mortgager as security.
• When the property in question is already mortgaged once to another creditor,
it becomes a second charge when it is consequentially mortgaged to somebody
else. The mortgage can also further transfer his interest in the mortgaged
property to another. In such a case it is called a sub-mortgage.
• The mortgage market may have primary market as well as secondary market.
The primary market consists of original extension of credit and secondary
market has sales and resale of existing mortgages at prevailing prices.
• In India, residential mortgages are the most common ones.
• The housing and urban development corporation (HUDCO) and the LIC play
a dominant role in financing residential projects. besides, the land
development banks provide cheap mortgage loans for the development lands,
purchase of equipment etc. These development bank raise finance through the
sale of debenture which are treated as trustee securities.
 Financial Guarantees Market:

A Guarantee market is a centre where finance is provided against the guarantee of a

reputed person in the finance circle. Guarantee is a contract to discharge the
liability of their party in case of his default. Guarantee acts as security from the
creditor’s point of view. In case the borrower fails to replay the loan. The liability
falls on the shoulders of guarantor. Hence the guarantor must be known to both the
borrower and the lender and he must have the means to discharge his liability.

Though there are many types of guarantee, the common from are:
(1) performance guarantee:
performance guarantee cover the payment of earnest money , retention
money , advance payments, non completion of contracts etc.
(2) Financial guarantees:
On the other hand financial guarantees cover only financial contracts. In India,
the market for financial guarantees covers only financial contracts.
In India, the market for financial guarantees is well organized. The financial
guarantees in India relate to:

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(1) Deferred payments for imports and exports.

(2) Medium and long term loan raised abroad.
(3) Loans advanced by banks and other financial institution.

IMPORTANCE OF CAPITAL MARKET

 The capital market serves as an important

source for the productive use of the
economy’s saving. It mobilizes the saving of
the people for further investment & thus
avoids their wastage in unproductive uses.

 It provides incentives to saving and

facilitates capital formation by offering
suitable rates of interest as the price of
capital.

 It provides an avenue for investors,

particularly the household sector to invest in
financial assets which are more productive
then physical assets.

 It facilitates increase in production and

productivity in the economy and thus
enhances the economic welfare of the
society. Thus, it facilitates “the movement of
steam of command over capital to the point
of highest yield”. Towards those who can
apply them productively and profitably to
enhance the national income in the
aggregate.

 The operations of different institutions in

the capital market induce economic growth.
They give quantitative and qualitative

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directions to the flow of funds and bring

rational allocation of scarce resources.

 Moreover, it serves as an important source

for technological up gradation in the
industrial sector by utilizing the funds
invested by the public.

MONEY MARKET

Money market is a market for dealing with financial assets and securities which have
a maturity period of up to one year. In other words, it is a market for purely short term
funds. The money market may be subdivided into four. they are following as :-

1. Call money market.

2. Commercial hills market.
3. Treasury bills market.
4. Short term loan market.

1. Call money market:-

The call money market is a market for extremely short period
loans say one day to fourteen days. So, it is a highly liquid. the loans are repayable
on demand at the option of either the lender or the borrower. In India, call money
markets are associated with the presence of stock exchange. Hence, they are located
in major industrial towns like Bombay, Calcutta, madras, delhi ,ahemdabad etc.

2. Commercial bills market:-

It is a market for bills of exchange arising out of
genuine trade transactions. In the case of credit sale ,the seller may draw a bill of
exchange on the buyer. The buyer accepts such a bill promising to pay at a later date
specified in the bill. The seller need not wait until the due date of the bill. Instead ,he
can get immediate payment by discounting the bill.

3. Treasury bill market:-

It is a market for treasury bills which have short term maturity.
A treasury bill is a promissory note or a finance bill issued by the government .it is a
highly liquid because its repayment is guaranteed by the government .It is an
important instrument for short term borrowing of the government.

4.Short term loan market :-

It is a market where short term loans are given to
corporate customers for meeting their working capital requirement. Commercial
banks play a significant role in this market. Commercial banks provide short term
loans in the form of cash credit and overdraft. Overdraft facility is mainly given to

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business people where as cash credit is given to industrialists’ .Overdraft is purely

a temporary accommodation and it is given in the current account itself. But cash
credit is for a period of one year and it is sanctioned in a separate account.

RECENT TRENDS IN INDIAN CAPITAL MARKET

The Indian capital market, which has a long history spanning over 100 years is
currently passing through the Indian capital market witnessed. Some significant
changed during the eighties, both the primary and secondary segments continues to
suffer from some serious deficiencies. Many unhealthy practices prevailed in the
primary market to attract the retail investors. Although over the years, a number of
agencies came into existence offering different types of services in connection with
the new issues of capital. The problems were even more serious in the secondary
market. The general functioning of stock exchanges was not satisfactory. The
exchanges were governed by their internal bye-laws and managed by their governing
bodies. Insider trading was one of the major causes of excessive speculative activity,
leading to default by stock brokers, frequent payment cries and disruption of market
activity.
POLICY DEVELOPMENT IN PRIMARY MARKET

 SEBI stipulated the requirements of issue size, subscription to the issue and
disclosure to be made in the prospectus of Issue. Such as general information,
disclaimer clause, offering details, Risk factors and financial information
among other requirements.

 Listed companies have to maintain a minimum level of public shareholding at

25% of the share issued.

 SEBI facilitated a quick & cost effective method of raising funds termed as
qualified institutional placement.

 SEBI protected the interest of investors & improving the level of investors and
given guidelines to introduce “Restriction on pre-issue publicity” from the
time the Issuer co.’s board approves the Issue till the actual allotment of shares
of the issue.

MEASURES UNDERTAKEN IN THE AREA OF SECONDARY MARKET

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 The stock exchanges were advised to update the applicable value at risk
margin at least 5 times in a day. By closing price of the previous day at the
start of trading at 11:00 a.m., 12:30 p.m., 2:00 p.m. & at the end of the trading
session.

 Initial issue expenses and dividend distribution procedure for mutual funds
were rationalized.

 Mutual funds were permitted to introduce gold exchange traded funds.SEBI

stipulated that the BSE limited would set up and maintain the corporate bond
reporting platform.

 Government of India’s policy on foreign investments in infrastructure

companies in the Indian securities market

The trading time has been increased by one hour i.e. from 9a.m. to 3.30
p.m

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