Basics of capital market


The capital market consists of primary markets and secondary markets and there is a close link between them. The primary market creates long-term instruments through which corporate entities raise capital. This is also referred to as the new issue market. But secondary market is the one which provides liquidity and marketability t the instruments created in the primary market by providing an arena for the buying and selling (trading) of these securities.

Primary Market

Primary markets facilitate the formation of capital. This market generally referred to as the market for mobilization of resources by the companies and government. When a company wishes to raise capital by issuing securities, it goes to the primary market, where issuers exchange financial securities for long-term funds. No elements of trading in primary market operations and investors apply through applications and subscribe directly to equity / debt of a company.

Ways of raising capital in Primary Market.

* Public issue
* Rights issue
* Private placement.
* Bought-out deals.

Public issue involving the sale of securities to the public is the most important mode of raising long-term funds. Rights issue is the method of raising further capital fro the existing shareholders by offering additional securities to them on pre-emptive basis. For both public issue and rights issue SEBI has prescribed the prospectus contents and abridged prospectus requirements which should be accompanied by each applicationform.

Private placement is a way of selling securities by a company to one or few investors, and the terms of issue are negotiated between the company (issuing securities) and the investor. In private placement market, securities are sold, mainly to institutional investors like UTI, mutual funds, insurance companies (LIC and GIC) etc. SEBI has now prescribed a lock-in period for securities which are privately placed.

A bought-out deal is a process whereby an investor or a group of investors buy out a significant portion of the equity of an unlisted company with a view to taking it to the public in an agreed time frame.

Secondary Market

Secondary market is a market where securities created in primary market are traded. It provides liquidity to the securities issued in primary market. The secondary market operates through the medium of stock exchanges which regulates the trading activities in the market and ensures a measure of safety and fair dealing to the investor.

Ever since the decade of eighties there has been an unprecedented growth of the stock markets. The number of stock exchanges in the country increased from 8 in 1980 to 22. I addition, there are Over the Counter Exchange of India and National Stock Exchange (NSE). The twenty two stock exchanges are located at Mumbai, Calcutta, Delhi, Madras, Ahmedabad, Bangalore, Hyderabad, Indore, Pune, Kanpur, Cochin, Ludhiana, Mangalore, Patna, Guwahati, Bhubaneshwar, Jaipur, Saurashtra, Surat, Baroda, Coimbatore and Rajkot. These are referred to as Regional Stock Exchanges.

The stock exchanges in India are regulated under the Securities Contracts (Regulation) Act which was passed in 1956. Under this Act, Government has powers to supervise and control the stock exchanges and also keep a check on the governing body and supercede it if any irregularities are found committed.

The first Indian stock exchange established at Mumbai in 1875 is the oldest exchange in Asia. The Mumbai Stock Exchange represents two-thirds of the whole trading volume of the secondary market.

Securities and Exchange Board of India (SEBI), an autonomous body oversees the functioning of the securities market and the intermediaries like Brokers, Portfolio Managers, Investment Advisors and Transfers Agents etc.