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Indian CapitalMarket
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Organized Indian FinancialSystem
Money MarketInstrument
Capital MarketInstrument
Forex
Market
Capital
Market
Money
Market
Credit
Market
Primary Market
FinancialInstruments FinancialMarkets FinancialIntermediarie
s
Secondary Market
Regulators
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Money Market Vs CapitalMarket
It is for short term
Supplies funds for
WC Instruments are T-
bill, CM, etc
Each single
instrument is oflarge amount
Central bank andCommercial banksare major.
It is for long term
Supplies funds for
fixed capitalrequirement
Instruments areshares, debentures,etc.
Each singleinstrument is ofsmall amount
Development bankand insurance
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Conti..
Theseinstruments do
not havesecondarymarket.
Transactions are
on over phoneand no formalplace
Transaction
Theseinstruments have
secondarymarket.
Transactions areat formal place.
Eg stock market.
Transaction haveto be conducted
with the help of
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Why Capital Markets
Exist Capital markets facilitate the transfer of
capital (i.e. financial) assets from one
owner to another. They provide liquidity.
Liquidity refers to how easily an assetcan be transferred without loss ofvalue.
A side benefit of capital markets is thatthe transaction price provides a
measure of the value of the asset.
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Role of Capital Markets
Mobilization of Savings & acceleration ofCapital Formation
Promotion of Industrial Growth Raising of long term Capital Ready & Continuous Markets Proper Channelisation of Funds Provision of a variety of Services
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Functions of a capitalmarket
Disseminate information efficiently Enable quick valuation of financial
instruments both equity and debt
Provide insurance against marketrisk or price risk Enable wider participation Provide operational efficiency
through
-simplified transaction procedure
- lowering settlement timings and
- lowerin transaction costs
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Develop integration among
-real sector and financial sector-equity and debt instruments-long term and short term funds-Private sector and government sector and
-Domestic funds and external funds
Direct the flow of funds into efficient channelsthrough-investment
-disinvestment-reinvestment
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Factors contributing togrowth of Indian Capital
Market Establishment of Development banks &Industrial financial institution.
Legislative measures
Growing public confidence
Increasing awareness of investment
opportunities Growth of underwriting business
Setting up of SEBI
Mutual Funds
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Indian Capital Market -
Historical perspective Stock Market was for a privileged few
Archaic systems - Out cry method
Lack of Transparency - High tones costs
No use of Technology
Outdated banking system Volumes - less than Rs. 300 cr per day
No settlement guarantee mechanism -
High risks
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Indian Capital markets -
Chronology 1994-Equity Trading commences on
NSE
1995-All Trading goes Electronic
1996- Depository comes in to existence
1999- FIIs Participation- Globalisation
2000- over 80% trades in Demat form
2001- Major Stocks move to Rolling Sett
2003- T+2 settlements in all stocks
2003 - Demutualisation of Exchanges
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Capital Markets -
Reforms Each scam has brought in reforms - 1992 /
2001
Screen based Trading through NSE Capital adequacy norms stipulated Dematerialization of Shares - risks of
fraudulent paper eliminated
Entry of Foreign Investors Investor awareness programs Rolling settlements
Inter-action between banking andexchan es
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CAPITAL MARKET REFORMS
IN INDIA The 1990s have witnessed the
emergence of the securities
market as a major source offinance for trade and industry inIndia.
A growing number of companieshave been accessing the securitiesmarket rather than depending onloans from financial institutions /
banks.
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Reforms / Initiatives
post 2000 Corporatisation of exchange
memberships
Banning of Badla / ALBM Introduction of Derivative products -
Index / Stock Futures & Options
Reforms/Changes in the marginingsystem
STP - electronic contracts
Margin Lending
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MARKET STRUCTURE
(JULY 31, 2005) 22 Stock Exchanges,22 Stock Exchanges,
Over 10000 Electronic Terminals at over 400Over 10000 Electronic Terminals at over 400
locations all over India.locations all over India.
9108 Stock Brokers and 14582 Sub brokers9108 Stock Brokers and 14582 Sub brokers
9644 Listed Companies9644 Listed Companies
2 Depositories and 483 Depository Participants2 Depositories and 483 Depository Participants
128 Merchant Bankers, 59 Underwriters128 Merchant Bankers, 59 Underwriters
34 Debenture Trustees, 96 Portfolio Managers34 Debenture Trustees, 96 Portfolio Managers
83 Registrars & Transfer Agents, 59 Bankers to83 Registrars & Transfer Agents, 59 Bankers to
IssueIssue
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Stock Exchanges in
INDIA Mangalore StockExchange
Hyderabad StockExchange
Uttar Pradesh StockExchange
Coimbatore StockExchange
Cochin Stock Exchange Bangalore Stock
Exchange
Saurashtra Kutch StockExchange
Pune Stock Exchange National Stock Exchange OTC Exchange of India Calcutta Stock Exchange
Inter-connected StockExchange (NEW)
Bombay Stock Exchange
Madhya Pradesh StockExchange
Vadodara StockExchange
The Ahmedabad StockExchange
Magadh Stock Exchange
Gauhati Stock Exchange
Bhubaneswar StockExchange
Jaipur Stock Exchange
Delhi Stock ExchangeAssoc
Ludhiana Stock
Gr th P tt rn f th Indi n St ck M rk t
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Growth Pattern of the Indian Stock MarketSl.N
o.
As on 31st
December
1946 1961 1971 1975 1980 1985 1991 1995
1 No. of
Stock Exchanges
7 7 8 8 9 14 20 22
2 No. ofListed Cos.
1125 1203 1599 1552 2265 4344 6229 8593
3No. of Stock
Issues of
Listed Cos.
1506 2111 2838 3230 3697 6174 8967 11784
4Capital of Listed
Cos. (Cr. Rs.)
270 753 1812 2614 3973 9723 32041 59583
5Market value of
Capital of Listed
Cos. (Cr. Rs.)
971 1292 2675 3273 6750 25302 11027
9
47812
1
6Capital per
Listed Cos. (4/2)(Lakh Rs.)
24 63 113 168 175 224 514 693
7
Market Value of
Capital per Listed
Cos. (Lakh Rs.)
(5/2)
86 107 167 211 298 582 1770 5564
8Appreciated valueof Capital per 358 170 148 126 170 260 344 803
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Primary Market
Market for new issues/freshcapital (IPOs)
New issues mkt. Participants
issuer
investorsintermediaries
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Mobilization of funds
- Prospectus
- Right issues and
- Private placement
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Free pricing regime Before 1992,Regulator of new issues was CCI
(Controller of Capital Issues)
Approval from CCI for raising funds in primary mkt.
Timing, quantum ,and pricing of the issue were decidedby the controller
New co.s can issue shares only at par
Existing companies with substantial reserves couldissue shares at premium
Fixed price mechanism resulted in under pricing ofmany issues
After 1992, promoter and merchant banker togetherdecide the price of the issue.
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Fixed price mechanism of
new issue CCI regime To offer share at a fixed price Firm and merchant banker decide an
offer price Investor opinion wasnt considered
while setting offer price Long time lag among the date of
pricing, the date the issue opens ,andthe date when trading commences
Raises possibility of price fluctuations inintervening period
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Book Building-A new issue
mechanism in India mechanism through which an
offer price for IPOs based oninvestors demand isdetermined .
Auction of shares
k b ildi
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Book building process1. Appointment of book runner i.e.
merchant banker
2. Preparation and submission of draftdocuments to SEBI and obtaining ofan acknowledgement card.
3. A specified price band (range) is to bedetermined by issuer and bookrunner
4. Different price levels are invited fromsyndicate members .Adv. Should
mention opening and closing dates forthe bids5. Issuer arrives at a final cut-off rate &
final allocation in consultation withbook runner and lead manager
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Contd..
6.Issuer and book runner mayimpose restrictions on number ofshares that can be allotted to eachclient
7. Final prospectus is filed with the(ROC) along with procurementagreement
8.Placement portion opens for
subscription9.Placement portion closes a day
before the opening of public issueportion
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Book building options
75% book building
Issue can be categorized into
-placement portion
- Public portion (net offer to the
public) 100% book building
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Limitations of book
building method No road shows done Still dependent on good faith No. of investors invited to apply are limited
Lack of transparency Not proved to be good price discovery
mechanism Lag time of more than 60 days between issue
pricing and listing Issuer may have to sell cheap due to collective
bargaining High institution holding may affect stocks
liquidity Volatility may increase due to bulk offloading
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Distinction betweenPrimary and Secondary
Market Functional differences
Organizational differences
Nature of contributions toindustrial finance
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Secondary Market
Secondary/Stock
market!!!! JARGON OF EQUITY
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JARGON OF EQUITYMARKET:
SECURITY
BOND
STOCK
1)COMMON STOCKS2)PREFERRED STOCKS
SHARE
MUTUAL FUNDS.
PAR VALUE vs. MARKET VALUE
BULLISH vs. BEARISH
How does the stock market function?
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How does the stock market function?Stock exchangesBrokersRegistrarsDepositories and their participants
Securities and Exchange Board of India (SEBI) Financial RegulatorsSEBI
RBIMinistry of finance
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The role of the stock
exchange Corporate governance
Creates investment opportunities forsmall investors
Government raises capital for
development projects
Barometer of the economy
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Functions Of SEBI Regulates Capital Market.
Checks Trading of securities.
Checks the malpractices in securities market. It enhances investor's knowledge on market by
providing education.
It regulates the stockbrokers and sub-brokers.
To promote Research and Investigation
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Functions Of RBIMonetary Authority:
Issuer of currency:
Regulator and supervisor of the financial system:
Authority On Foreign Exchange:
Developmental role:
Related Functions:
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WHY STOCK PRICE RISES? The price of every stock increases or decreases for thefollowing possible reasons:
News about company.
News about the country. Exchange rate regime. Depends on demand and supply for that stock.
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DRAWBACKS OF INDIAN STOCK MARKET:
Unethical practices.Big irrational greed, excessive speculation.Lack of protection to interests of the genuine and small
investors .
Trading is extremely thin and restricted.Structural and organisational imbalance in the growth othe
stock market.
Volatility of the market has increased over the years.
HOW TO MAKE MONEY
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HOW TO MAKE MONEYFROM CAITAL MARKET?
patience, profound knowledge.
Best guess.Diversification .
Portfolio
management.
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Indian Capital Market
deficiencies Lack of transparency
Physical settlement Variety of manipulative practices
Institutional deficiencies
Insider trading
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