Working of Capital Market in India: An Overview
Capital market is one of the most important segments of the Indian financial system. It is the market available to the companies for meeting their requirements of the long term funds. It refers to all the facilities and the institutional arrangements for borrowing and lending funds. It means it is concerned with the raising of money capital for purposes of making long term investments. The market consists of a number of individuals and institutions including the government that canalise the supply and demand for long term capital. The demand for long term capital comes predominately from private sector manufacturing industries, agriculture sector, trade and the government agencies, while the supply of funds for the capital market comes largely from individual and corporate savings, insurance savings, banks, specialized financing agencies and the surplus of governments.
Components of Indian Financial Market
• Commodity Market: It is a market that trades primary rather than manufactured products. Soft commodities are agricultural products such as coffee, wheat. Sugar. Cocoa. Hard commodities are mined such as oil, gold, silver, rubber.
• Capital Market: Markets for buying and selling equity and debt instruments. Capital markets channel savings and investment between suppliers of capital such as retail investors and institutional investors and users of capital like government, businesses and individuals.
• Money Market: It is used by a wide array of participants from a company raising money by selling commercial paper into the market to an investor purchasing CD’s as a safe place to park money in short term.
• Insurance Market: The equitable transfer of the risk of a loss from one entity to another, in exchange for payment in insurance market. It is a form of a risk management primarily used to hedge against the risk of a contingent, uncertain loss.
• Derivative Market: It is the financial market for the derivatives, financial instruments like future contracts or options which are derived from other forms of assets.
• Foreign Exchange Market: The foreign exchange market is a global decentralised market for the trading of the currencies. The main participants in this market are the larger international banks.
Role of Securities Exchange Board of India
SEBI is a regulatory authority established under the SEBI act 1992 in order to protect the interest of the investors in the securities as well as promote the development of the capital market. It involves regulating the business in the stock exchanges supervising the working of the stock brokers, share transfer agents, underwriters, merchant bankers as well as prohibiting unfair trade practices in the securities market.
Functions of SEBI:
1. To promote and regulate the self regulatory organisations.
2. To prohibit insider trading in securities market.
3. To regulate the business of the stock market and other securities market.
4. To prohibit fraudulent and unfair trade practices in securities market.
5. To regulate huge acquisition of shares and take over the companies.
6. To promote the awareness among investors and training of intermediaries about safety of market.
Indian Securities Market
This market refers to the market which deals in equities and debentures of the corporates. This market consist of PRIMARY MARKET and SECONDARY MARKET.
Primary Market: It deals with new securities i.e securities which were not previously available and are offered to the investing public for the first time. It is the market for raising the fresh capital in the form of the shares and debentures. It provides the issuing company with additional funds for starting the a new enterprise or for the other expansion of diversification of an existing one and thus its contribution to compant financing is direct. This new offering by the companies are made either as an initial public offering or rights issue
Secondary Market: Secondary market or stock market is the market for buying and selling securities of the existing companies. Under this securities are traded after being initially offered to public in the primary market or listed on the stock exchange. The stock exchanges are the exclusive centres for trading of securities. It reflects the trends in the economy through fluctuations in the prices of the various securities. Security market is an economic institution within which takes place the sale and purchase transactions of securities between subjects of the economy on the basis of the demand and the supply. Also it can be said that securities market is the system of interconnection between all participants professional and non professional.
It provides effective conditions:
§ To transfer real asset into financial asset.
§ To buy and sell securities and also to attract new capital by means of issuance new security.
§ To invest money for short or long term periods with the aim of deriving profitability.
§ Price determination means demand and supply balancing.
§ Informative function
§ Regulation function means securities market creates the rules of trade, contention regulation, priorities determination.
Difference Between Money Market And Capital Market
1. Duration : It is for short term funds i.e 1 year or less.
2. Nature of Funds : Supplies for working capital requirements.
3. Instruments : Includes commercial papers, certificate of deposits.
4. Amount of Instruments : Each single instruments is of large amount.
5. Institutions: Central banks, commercial banks, non banking financial institutions, brokers etc.
6. Risk : Less due to Similar maturity. In short , probability of default is less.
7. Transactions: It is over phone and no formal place
8. Broker: Transaction takes place without the help of a broker.
9. Market Regulation : Commercial banks are closely regulated.
10. Basic Role : Liquidity adjustment.
11. Relation with Central Bank : Closely and directly linked with the central bank of the country.
1. Duration : It is for long term funds i.e more than 1 year.
2. Nature of Funds : Supplies for fixed capital requirement.
3. Instruments : Includes share, debentures and bonds.
4. Amount of Instruments : Each single instruments is of small amount.
5. Institutions : Stock exchanges, Commercial Banks and non banking institutions such as insurance companies, mortgage banks, buildings, society etc.
6. Risk : Higher.
7. Transactions : Are at formal place e.g stock market.
8. Broker : Transaction have to be conducted with the help of broker.
9. Market Regulation : The institution are not much regulated.
10. Basic Role : Putting capital to work, preferably to long term secure and productive employment
11. Relation with Central Bank : The capital market feels Central Bank’s influence but mainly indirectly and through the money market.
Major Capital Markets
Bond Market: It is defined as the environment in which the insurance and trading of the debt securities occurs. The bond market primarily includes government issued securities and corporate debt securities and facilitates the transfer of capital form from servers to the issuers or organization requiring capital for government projects, business expansion and ongoing operations.
Types of Bond Markets:
The securities industry and financial markets association classified the broad bond into five specified bond markets:
3. Mortgage Backed
5. Government And Agency.
Stock Market: An equity market or stock market is the aggregation of buyers and sellers basically it is a loose network of economic transaction not a physically facility or discrete entity of shares, these are securities listed on stock exchange as well as those only traded privately.
Initial Public Offering: It is a type of a public offering where shares of stock in a company are sold to the general public on a securities exchange for the first time. Though this process a private company transforms into a public company.
Share Market: It is a place where shares of pubic listed companies are traded. The primary market is where companies float shares to the general public in an initial public offering (IPO) to raise capital. Once new securities have been sold in the primary market, they are traded in the secondary market—where one investor buys shares from another investor at the prevailing market price or at whatever price both the buyer and seller agree upon. The secondary market or the stock exchanges are regulated by the regulatory authority. In India, the secondary and primary markets are governed by the Security and Exchange Board of India (SEBI).
A stock exchange facilitates stock brokers to trade company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange. Thus, it is the meeting place of the stock buyers and sellers. India's premier stock exchanges are the Bombay Stock Exchange and the National Stock Exchange.
Demat Account: It refers to a deposit made at an Indian financial institution that can be used for investing in shares of stocks and other financial assets.Securities are held electronically in a DEMAT Account, thereby eliminating the need for physical paper certificates.
For example, a DEMAT Account became available after India adopted the DEMAT system for the electronic storing of stock shares and other securities in 1996. DEMAT is short for Dematerialized and such accounts require that an investor open an account with an investment broker linked to a savings or other funded account. Access to a DEMAT Account requires both an Internet and transaction password, and such accounts allow for the transfer of securities without any physical certificates changing hands. This feature helps prevent problems such as loss, forgery or theft of the certificates and makes the process of buying and selling securities much more efficient.
Nature of Shares: A share is the interest of a member in a company. Section 2(84) of the Companies Act, 2013 (hereinafter referred to as Act) “share” means a share in the share capital of a company and includes stock. It represents the interest of a shareholder in the company, measured for the purposes of liability and dividend. It attaches various rights and liabilities. Share, debentures or other interest of any member in a company shall be movable property. It shall be transferable in any manner provided for in the articles of association of the company. A member may transfer any “other interest” in the company in the manner provided in the articles. For example rights attached to a member in a guarantee company such as membership interest, suspension of membership or assignment of interest may be made transferable by making a provision in the Articles of the company.
3 Types of Share Capital (A) Equity Share Capital Section 43 of the Act provides that the share capital of a company limited by shares shall be of two kinds: (a) equity share capital-
(i) with voting rights; or SHARE CAPITAL AND DEBENTURES 1 2 Share Capital and Debentures
(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed; and
(B) preference share capital: ‘‘Equity share capital’’, with reference to any company limited by shares, means all share capital which is not preference share capital. As per section 43 (a) equity share capital may be divided on the basis of voting rights and differential rights (DVR) as to dividend, voting rights or otherwise according to the rules. A DVR share is like an ordinary equity share, but it provides fewer voting rights to the shareholder. The difference in voting rights can be achieved by reducing the degree of voting power. It is ideal for long term investors, typically small investors who seek higher dividend and are not necessarily interested in taking a voting position. The Companies (Share Capital and Debentures) Rules, 2014 (hereinafter referred to as Rules) provide that no company whether it is unlisted, listed or a public company limited by shares shall issue equity shares with differential rights as to dividend, voting or otherwise, unless it complies with the following conditions:
(a) the articles of association of the company authorizes the issue of shares with differential rights;
(b) the issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders: Provided that where the equity shares of a company are listed on a recognized stock exchange, the issue of such shares shall be approved by the shareholders through postal ballot ;
(c) the shares with differential rights shall not exceed twenty six percent of the total post-issue paid up equity share capital including equity shares with differential rights issued at any point of time;
(d) the company having consistent track record of distributable profits for the last three years;
(e) the company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares;
(f) the company has no subsisting default in the payment of a Share Capital and Debentures 3 declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend;
(g) the company has not defaulted in payment of the dividend on preference shares or repayment of any term loan from a public financial institution or State level financial institution or scheduled Bank that has become repayable or interest payable thereon or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund to the Central Government;
(h) the company has not been penalized by Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934 , the Securities and Exchange Board of India Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies being regulated by sectoral regulators. The Rules as aforesaid clearly state that the company shall issue DVR shares only after approval from shareholder by passing a ordinary resolution. It further provides that a listed company where the equity shares of a company are listed on a recognized stock exchange, the issue of such shares shall be approved by the shareholders through postal ballot.
The explanatory statement to be annexed to the notice of the general meeting to be convened pursuant to section 102 or of a postal ballot pursuant to section 110 shall contain the following particulars:
(a) the total number of shares to be issued with differential rights;
(b) the details of the differential rights;
(c) the percentage of the shares with differential rights to the total post issue paid up equity share capital including equity shares with differential rights issued at any point of time;
(d) the reasons or justification for the issue;
(e) the price at which such shares are proposed to be issued either at par or at premium;
The other type of share capital is the “Preference share capital”. According to section 55 of the Act, a company limited by shares cannot issue any preference shares which are irredeemable. However a company limited by shares may, if so authorised by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue. With reference to any company limited by shares, Preference share capital means that part of the issued share capital of the company which carries or would carry a preferential right with respect to :
(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax;
(b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company;
Capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely:
(a) that in respect of dividends, in addition to the preferential rights to the amounts with respect to dividend, it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid; (b) that in respect of capital, in addition to the preferential right to the repayment, on a winding up, of the amounts aforesaid, it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.
A mutual fund is a pool of money from numerous investors who wish to save or make money just like you. Investing in a mutual fund can be a lot easier than buying and selling individual stocks and bonds on your own. Investors can sell their shares when they want to sell.
NAV means Net Asset Value. The investments made by a Mutual Fund are marked to market on daily basis. In other words, we can say that current market value of such investments is calculated on daily basis. NAV is arrived at after deducting all liabilities (except unit capital) of the fund from the realisable value of all assets and dividing by number of units outstanding. Therefore, NAV on a particular day reflects the realisable value that the investor will get for each unit if the scheme is liquidated on that date. This NAV keeps on changing with the changes in the market rates of equity and bond markets. Therefore, the investments in Mutual Funds is not risk free, but a good managed Fund can give you regular and higher returns than when you can get from fixed deposits of a bank etc.
Mutual Funds also declare whether this will be an open ended scheme (i.e. there is no specific date when the scheme will be closed) or there is a closing date when finally the scheme will be wind up. Thus, according to the time of closure schemes are classified as follows :-
(A) Open Ended Schemes
(B) Close Ended Schemes
Open ended funds are allowed to issue and redeem units any time during the life of the scheme, but close ended funds can not issue new units except in case of bonus or rights issue. Therefore, unit capital of open ended funds can fluctuate on daily basis (as new investors may purchase fresh units), but that is not the case for close ended schemes. In other words we can say that new investors can join the scheme by directly applying to the mutual fund at applicable net asset value related prices in case of open ended schemes but not in case of close ended schemes. In case of close ended schemes, new investors can buy the units only from secondary markets.