CAPITAL MARKET EFFICIENCY AND CAPITAL MARKET PRODUCT

Capital market perform two functions: 1. Liquidity 2. Fair pricing securities

FORMS OF CAPITAL MARKET EFFICIENCY

y Weak form of efficiency y Semi-strong form of efficiency y Strong form of efficiency

CAPITAL MARKETS IN INDIA

PRIMARY MARKET IN INDIA INCLUDES-: IPOs Financial instruments Private placement Euro issues Government securities Book- building

y y y y y y

Contd.
SECONDARY MARKETS IN INDIA INCLUDES:y SEBI y Derivatives market y Merchant banking y Mutual funds y Hedge funds

Long term sources of financing

Shares
 Types of shares 1. 2.

Ordinary shares. Preference shares.

Ordinary shares
Represent the ownership position in a company. Features of ordinary shares:1. Claim on income. 2. Claim on assets. 3. Right to control. 4. Voting rights. 5. Limited liability.

Preference shares
also known as hybrid security. Features of preference shares :1. Claim on income & assets. 2. Fixed dividend. 3. Cumulative dividends. 4. Sinking fund. 5. Convertibility.

DEBENTURES
A Debenture is a long term promissory note for raising loan capital. The firm promises to pay interest and principal as stipulated. The purchasers of debentures are called Debenture Holder. An alternative form of debenture in India is BOND. Mostly public sector companies in India issue bonds. In USA, the term debenture is generally understood to mean unsecured bond.

Features of Debentures
 Interest rate: The interest rate on debenture is fixed and known. It is called the contractual

rate of interest. Payment of interest is legally binding on a company. Debenture interest tax is deductible for computing the companys corporate tax. However, companies in INDIA are sometimes allowed by the government to issue bonds with tax free interest.

 Maturity: The maturity of debenture indicates the length of time until the company

redeems (returns) the par value to debenture holders and terminates the debentures. In India, a debenture is typically redeemed after 7 to 10 years in installment.

 Redemption:-

debentures are mostly redeemable; they are generally redeemed on maturity. Redemption of debentures can be accomplished either through a sinking fund or buy-back provision.

 Sinking fund:A sinking fund is cash set aside periodically for retiring debentures. The fund is under the control of the trustee who redeems the debentures either by purchasing them in the market or calling them in an acceptable manner.

 Buy back provision:Debenture issues include buy back provision. Buy back provisions enable the company to redeem debentures at a specified price before the maturity date.

 Indenture:An indenture or debenture trust deed is a legal agreement between the company issuing debentures and the debenture holders.

 Security:Debentures are either secured or unsecured. A secured debenture is secured by the lien on the companys specific assets. If a company defaults, the trustee can seize the security on behalf of the debenture holder. When debentures are not protected by any security, they are known as unsecured or naked debentures.

Types of Debentures
y Non convertible debentures (NCDs) y Fully convertible debentures (FCDs) y Partly convertible debentures (PCDs)

Non convertible debentures:- NCDs are pure debentures without a feature of conversion. Fully convertible debentures:- FCDs are converted into shares as per the terms of the issue with regard to price and time of conversion. Partly convertible debentures:- A number of debentures issued by companies in India have two parts: a convertible part and a non convertible part. Such debentures are known as partly convertible debentures.

CONVERTIBLE DEBENTURES
A convertible debenture is a debenture that can be changed into a specified number of ordinary shares at the option of the owner. The most important feature of this debenture is that it promises a fixed income associated with debenture as well as chance of capital gains associated with equity share after the owner has exercised his conversion option. Because of this combination of fixed income and capital gains in the convertible debentures, it has been called a hybrid security. For example:- a company issues 8 lakh 15% convertible debentures of Rs. 125 each that are convertible into two equity shares of Rs. 62.50 each after two years from the date of allotment but within 3 months company receives 8 lakh * 125 = 1000 lakh then debenture holders get their interest on debenture as fixed income. And then after two year debentures get converted into two equity shares. And debenture holders become share holders of the company.

Valuation of convertible debentures

The market value of a convertible debenture will thus depend on: market price of ordinary shares, conversion value, and the value of non convertible or straight debenture, called investment value.

Conversion value = conversion ratio * share price

Conversion ratio is in the replacement of 1 debenture there is how many equity shares provided by the company. Like our last example there is 2 equity share on the behalf of 1 debenture. So the ratio is 1:2.

Venture Capital Financing :

Venture capital is the investment of long term equity finance where the venture capitalist earns his return primarily in the form of capital gains .

Features Of Venture Capital :

Equity participation Long term investment Participation in management

Venture Capital Investment Process :

1.

2. 3. 4. 5. 6.

Deal origination Screening Evaluation Deal structuring Post investment activity Exit

Methods Of Venture Financing :

1. 2. 3. 4.

Equity Conditional Loan Income Note Participating Debenture

Disinvestment Mechanism :
Buyback Initial Public Offerings Secondary Stock Market