IIBF JAIIB PPB : CHAPTER - 4 CAPITAL MARKET

CHAPTER - 4

CAPITAL MARKET

It is market where securities like Share, Bonds and Debentures are purchased and sold. Shares (Both Equity and Preference) are dealt in Equity Market whereas Debentures and Bonds are dealt in Debt Market. SEBI  is regulator of Capital Market. Capital Market  is of two types:

1.    Primary Market:  When securities are sold by the Company directly under Public issue or private placement. It is called Primary Market.

2.    Secondary Market: When securities are traded though Stock Exchanges, it is called Secondary Market. Companies are listed in Stock Exchange and sale is made through auction. It also includes OTC (Over the Counter market) which Futures of securities through dealers.

Stock Exchanges	There are 22 Stock Exchanges in India. Out of which 19 are Companies whereas remaining 3 (BSE, ASE and MPSE ) are Associations of persons. All are non-profit making organizations. Transition process of exchanges from mutually owned association to a Company is called Demutualization of Stock Exchanges. National Stock Exchange (NSE) was started in 1992 by banks and FIs. NSE can allow FII up to 26% and FDI up to 23% (Total up to 49%) of its paid up capital which is 45 crore at present. No single investor can invest more than 5% in any Indian Stock Exchange. What is Sensex 30? It is Sensitive Index launched by BSE which is market capitalization weighted index of 30 Stocks (Shares) representing large and sound Indian Companies. What is Nifty 50? It is Sensitive Index launched by NSE which is market capitalization weighted index of 50 Stocks (Shares) representing large and sound Indian Companies.
Shares, Debentures and Bonds	Equity Share Preference Share It is permanent capital and is not redeemed. It forms part of Tier-I Capital. It may be redeemable or non-redeemable. If redeemable, forms part of Tier-II Capital Dividend is paid out of profits after making payment to Preference Share holders. Preference is given while paying dividend. Unpaid dividend can be carried forward. This is why these are called Cumulative Preference shares. The Company, if liquidated, pays to Equity Shares at last. Preference Shares are given preference for payment at the time of liquidation. These carry Voting Rights. These don’t carry Voting rights. Generally Preference Shares are Cumulative and Redeemable. IPO is initial public offer by the Company inviting public to subscribe for shares. FPO is Further public offer to subscribe for same class of shares. Right Issue means Offer of shares to existing shareholders for purchase at a price if same class of share are again issued. Bonus Share is the share issued to existing shareholders without receiving price i.e. free of cost. Preference Shares: Owners of these kind of shares are entitled to fixed dividend on preference. Dividend is paid first. They also get priority over Equity shares in repayment at the time of liquidation. Preference Shares are of following types: ·         Cumulative and Non-Cumulative Preference Shares ·         Redeemable and non-redeemable Preference Shares ·         Participating and non-participating Preference  Shares ·         Convertible and non-convertible Preference Shares
Debentures and Bonds	Debentures and Bonds constitute Debt Market. Debenture Bond Issued by Corporate in Private sector Issued by institutions in Public sector It is Secured by Floating charge It is not secured Provisions of Company Law applies It is governed by Indian Contract Act It can be transferred through registration It is negotiable instrument It can be convertible or non-convertible ·         Bond, if given option can be convertible into equity shares. It can be ·         Zero Coupon Bond ·         Perpetual Bond ·         Floating Bond ·         Deep Discount
Commercial Papers and Certificates of Deposit	Commercial Papers – CP: ·         CP is issued by Corporate with Net Worth minimum 4 Crore, Rating min.P2 (now A2) and availing WC limit from any bank. ·          CP is issued with tenure 7 Days to 1 year. ·         CP is issued in multiples of Rs. 5.00 lac. ·         CP is Promissory Note and is Negotiable and also attracts Stamp Duty. ·         It is fairly active in Secondary market. ·         It is in Demat form and the price is less than Face Value. Certificate of Deposit – CD ·         CD is issued by banks ·         CD is issued with tenure 7 Days to 1 year. ·         CD is issued in multiples of Rs. 1.00 lac ·         CD is Promissory Note and is Negotiable and also attracts Stamp Duty. ·         CD is not very active in Secondary market
Govt. Securities and Treasury Bills	Treasury Bills: ·         These are issued by Govt. of India through RBI. ·         Tenure is 91Days, 182 Days and 364 Days. ·         These are issued at Discount in auction. ·         Banks and PDs participate in the auction. ·         The auction is also available to all financial players (FIs/MFs/Corporate). ·         Auction takes place on Wednesday every week in case of 91 days bills. ·         It takes place on Wednesday every Fortnight in case of 182 D and 364 D bills. Govt. Securities: ·         These are Risk free coupon bearing instruments. ·         Issued by RBI on behalf of GOI. ·         Fixed Interest is paid on Half yearly basis. ·         Short term (up to 1 year) and Long term (up to 30 years) securities can be purchased.
Process of Share Issue and Role of Stock Exchanges	Securities offered to public must be listed in one or more Stock exchanges. Any Company making public issue or a listed company making Right Issue of value more than Rs. 50 lac is required to file a draft offer document with SEBI for its observations. Company has to open Issue within 3 months. The Offer Document means Prospectus in case of IPO/FPO or Letter of Offer for sale in case of Right Issue which are filed with ROC. The Draft Offer Document is to be filed with SEBI at-least 21 days prior to filing of Offer Document with ROC.
Rolling Settlement Pay in and Pay out day	Presently trades pertaining to Rolling Settlement are settled on T+2 day basis, where T stands for trade day. Trade executed on Monday are settled on Wednesday. Pay in Day is the day when exchange makes payment or delivery of securities to the Broker. Pay out Day is the day when Broker makes payment or delivery of securities to the Exchange. Exchanges ensure that Brokers make payment or deliver securities with in 24 hours of Pay out.
Red Hearing Prospectus  ---- Price Band  ------ Book Building	RHP is the Offer Document which does not have details of either price or number of shares being offered or the amount of issue. Under Price Band, the price is not disclosed but upper and lower price bands are disclosed. The cap in Price Band should not be more than 20% of Floor Price. Only on completion of bidding process, details of final price are included in the offer document. The Offer document filed thereafter is called Prospectus. Book Building  is a process of building up of demand. It is the process of Price discovery by receiving Bids from public. Actual price of the security is assessed on the basis of bids obtained. Under book-building process, the proportion of different types of investors is as under: 1.    RII (Retail Individual Investor) ---------35% 2.    NII (Non- Institutional Investors--------15% 3.    QIB (Qualified Institutional Buyers----50% RII is a person who has to apply for shares up to Rs. 2.00 lac
Safety Net – 1000 shares – Period 6M	It is a Buy-back arrangement for original investors who are resident individual. Maximum number of shares is 1000 and the period of Buy back is 6 M from date of dispatch of securities.
Qualified Institutional Buyers (QIBs)	QIBs are listed as under: 1.    Public Financial Institutions 2.    Scheduled Commercial Banks 3.    Mutual Funds 4.    FIIs registered with SEBI. 5.    Venture Capital Funds (Indian and Foreign) registered with SEBI. 6.    SIDCs 7.    Insurance Companies 8.    Provident Fund with minimum corpus of 25 crore 9.    Pension Fund with minimum corpus of 25 crore Shares allotted to QIBs is called QIP (Qualified Institutional placement)
SEBI	Security and Exchange Board of India was established in 1988 and accorded statutory powers through SEBI Act 1992 for the following purposes: 1.    Protecting interest of investors 2.    Promotion , Development and Regulation of Security Market 3.    Registration of brokers, sub-brokers and underwriters 4.    Prohibiting unfair practice 5.    Inspection of books of companies SEBI has same powers as that of Civil Court. It can: ·         Suspend trading ·         Restrain a person from assessing security market ·         Attach bank account for maximum 30 days ·         Impound proceeds of securities SEBI has introduced rule of refund of allotment money if 90% subscription is not received. It has also made compulsory completion of allotment procedure within 30 days.
ASBA	“Applications Supported by Block Amount” is a system of on-line application for subscription of securities without parting with funds by the investor. The funds remain in the account and are remitted only if allotment is made by the company. Otherwise block is released when allotment is finalized and shares are not allotted.
Security Receipt	It is a Receipt issued by Securitization company or a Reconstruction company to a QIB for acquiring any right, title or interest in the financial assets of such companies.
Gold ETF	ETF means Exchange Traded Fund which is an investment fund traded in stock exchanges . It can hold stocks, commodities including Gold bonds. It trades close to NAV. Gold ETF is a mutual fund scheme that invests in standard gold of 99.5 purity. Value of ETF is based on market price of gold. It is held in Demat form and can be traded in exchanges.
Rajiv Gandhi Equity Saving Scheme	It is a scheme for providing 50% tax rebate to new retail investors who invest up to 50000/- in eligible securities provided their annual income is up to Rs. 10.00 lac. Lock in period for investment is 3 years. (Sec 80CCG of IT Act.)