FINANCIAL MARKETS

Financial Markets

Capital Market Money Market

Equity Market Debt Market

Treasury Bills
Primary Market Private Corporate Call Money Market
Public Issues
Private Placements PSU Bond Market Term Money Market
Government securities Commercial Bills
Market Commercial Papers
Domestic Certificates of Deposit
Market

International
Market Primary
Segment Secondary
Segment
Secondary Market
NSE
BSE
OTCEI
Regional Stock Exchanges

Derivatives Market
Futures
Options
 CAPITAL 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 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 Complete amount

interest + principal paid at the end
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 government guaranteed

Agencies/Statutory Bodies 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