INDIAN CAPITAL MARKET

Primary and Secondary

Markets

Instruments of Indian Capital Market

1.
2.
3.
4.
5.
6.
7.

Equity Shares
Preference Shares
Sweat Equity
Debentures
Warrant
Secured Premium Notes (SPNs)
Derivative

The Money and Capital Markets

Two types of external markets for funds:
1. Money market
Short-term debt securities: maturity of less
than 1 year
T-bills, commercial paper, bankers
acceptances, and short-term certificates of
deposit
2. Capital market
Intermediate-term securities: maturity of
more than 1 but less than 10 years
Long-term securities: maturity of 10 or
more years
Equity securities: preferred and common
stock have longest time horizon since they are
issued for life of corporation

1. Equity shares
Equity shares referred to common
stock or ordinary shares.
Share refers to the unit of share
capital of a co.
(The share capital of a co. is divided
into a number of small units of equal
value called as share)
Stock refers to the aggregate of a
members fully paid up shares of equal
value merged into one fund.

2. Preference shares
One type of share which offers some
privilege to the share holders.
1. Their claims on the companys
income are limited.
2. They receive a fixed percentage of
dividend.
3. In the event of liquidation of the
co. their claims on the assets of the
firm are also fixed
and also they get priority to receive
their investment.

3. Sweat Equity
New equity instrument introduced in
the Companies (Amendment)
Ordinance, 1998 (sec.79A of the Cos.
Act 1956).
It can be issued out of a class of
equity shares already issued by the
co. and it cannot form a new class of
equity shares.

Meaning of sweat equity

1. Shares issued at a discount to
employees and directors.
Shares issued for consideration other
than cash for providing know-how
etc.
2. Second type of sweat equity can
be issued at par or above par value.

4. Debentures
According to Cos. Act 1956
Debentures includes debenture
stock, bonds and any other securities
of company, whether constituting a
charge on the assets of the
company or not.
They are issued by the private cos.
as a long-term promissory note for
raising loan capital.

5. Warrant
A warrant is a bearer document of title
to buy specified number of equity
shares at a specified price.
It is
exercised over a no. of yrs.
Warrants are issued to make the bond
or stock more attractive.
Warrants can be sold by the investor in
the market
(Can be traded in the
market)

6. Secured premium notes (SPNs)

SPN is issued along with a
detachable warrant and is
redeemable after a notified period
with features of medium to long tern
notes.
Each SPN has a warrant attached to
it which gives the holder the right to
apply for or seek allotment of equity
share, provided the SPN is fully paid.

7. Derivatives
A derivative is a financial instrument
whose characteristics and value
depend upon the characteristics and
value of some underlying asset
typically commodity, bond, equity,
currency, index, event etc.
Types of derivatives are i) Options ii)
Futures
iii) Swaps

Options
Derivatives in the nature of legal
contracts are called as Options.
They are derived from underlying
assets which could be stocks, bonds
or currencies.
An option contract gives the holder
the right to buy /sell the stock at a
price on a future date. (The price is
called as Strike price)

Call / Put options

Depending on whether the holder is
a buyer or a seller, the options are
termed as Put /Call options.
Call Conveys the right of the holder
to buy
Put - Conveys the right of the holder
to sell

Futures
A future contract is a series of forward
contract. There are three types of people
who deal in futures.
1. Speculators: Who speculates the
market (Buy at a low price and sell at a
high price)
2. Hedgers: They buy and sell futures to
offset a risky position in the spot market.
(They either produce or use the asset)
3. Arbitrageurs: Those who gain from the
price differentiation of different markets.

Swaps
A Swap deal is a transaction in which
the bank buys and sells the specified
foreign currency simultaneously for
different maturity dates which would
help banks to eliminate exposure
risk.

Two categories of Indian Capital Market

1. New Issue Market (Primary

Market)
2. Stock Market (Secondary Market)

New Issue Market (Primary)

A Primary market represents the new
issue of securities (shares / bonds)
that have never been previously
issued are offered.
Both new cos. And the existing cos.
can raise capital in the new issue
market.

Features of primary/New issue market

It is concerned with new long term capital
Securities are sold for the first time in the
market
Securities are issued directly to investors.
Security certificates are issued to investors.
Issued for cos. For setting up new business, for
expansion, modernization of existing business
Facilitates capital formation in the economy
Funds are used for purchase of fixed assets
It is the process of going public (Private capital
into public capital)

Functions of primary market

The primary function is to facilitate
the transfer of funds from the
interested investors to the new
business entrepreneurs
i) To set up Cos.
Ii) Expansion
Iii) Growth or Modernization
Iv) diversification
V) to secure the funds of corporate
cos.

Stock Market (Secondary

Market)
Stock market or a secondary market is

also called as aftermarket.

It is a financial market where previously
issued securities and financial
instruments (Stock, bonds, options and
futures) are bought and sold.
Second market refers to used goods /
assets or an alternative use for an
existing product /asset (Ex: Corn
primary as a food product and feedstock
/ Secondary - use in ethanol)

Futures of stock market

Secondary market deals in previously
issued securities.
Securities are not directly issued by the
Cos. To investors.
Securities are sold by existing investors
to another investors.
Any buyer and seller can buy and sell
their securities thro brokers.
Security market provides liquidity to
the investment and helps marketability
of securities.

Functions of stock market

1. Ensures Liquidity of Capital: Stock market
is a place where securities are converted into
cash.
2. Continuous market for securities: It provides
a ready market for securities. Listed securities
continue to be traded at the exchange.
3. Evaluation of securities: The investors can
evaluate the worth of their holdings from the
prices quoted at different exchanges for the
securities.

functions

- ctd.

4.Mobilizing surplus savings: Any

investor can purchase shares, bonds
etc. from the ready market.
5. Helpful in raising new capital: The
new and existing companies need
capital for their activities.
6. Safety in dealings: Dealings of
stock exchange are governed by SEBI
and hence no scope for manipulating
transactions.

functions - ctd.
7. Listing of securities: only listed
securities can be purchased at stock
exchanges. Every co. interested in
listing will apply to the exchange
authorities, who will scrutinize the
cos. Management, capital structure
and prospectus.