SECURITIES LAW AND MARKET
OPERATIONS
Unit-I
CAPITAL MARKET
The market where investment instruments like
bonds, equities and mortgages are traded is
known as the capital market.
The primal role of this market is to make
investment from investors who have surplus
funds to the ones who are running a deficit.
Importance of Capital Markets
Help firms and governments raise cash by selling
securities
Allow investors with excess funds to invest and earn a
return
Channel funds from savers to borrowers
Allocate resources optimally (i.e., provide funds to those
who can make the best use of them)
Help allocate cash to where it is most productive
Help lower the cost of exchange
Secondary markets, where investors trade existing
securities, assures investors that they can quickly sell
their securities if the need arises
Primary Market
It is that market in which shares, debentures and
other securities are sold for the first time for collecting
long-term capital.
This market is concerned with new issues. Therefore,
the primary market is also called NEW ISSUE
MARKET.
In this market, the flow of funds is from savers to
borrowers (industries), hence, it helps directly in the
capital formation of the country.
Role of Primary Market
Household Savings
Global Investments
Sale of Government Securities
Primary Market Participants
Marker Risk
New issue market can be classified
Market where firms go to the public for the
first time through initial public offering
(IPO).
Market where firms which are already
trading raise additional capital through
seasoned equity offering (SEO).
Functions of Primary Market
Origination: It refers to the work of investigation, analysis and
processing of new project proposals.
Underwriting: It is an agreement whereby the underwriter
promises to subscribe to a specified number of shares or
debentures or a specified amount of stock in the event of public
not subscribing to the issue. There are two types of underwriters
in India - Institutional ( LIC, UTI, IDBI, ICICI) and Non-
institutional are brokers.
Distribution: It is the function of sale of securities to ultimate
investors. This service is performed by brokers.
Secondary market
A market where investors purchase
securities or assets from other investors,
rather than from issuing companies
themselves.
Functions of Secondary Markets
Provides regular information about the
value of security.
Helps to observe prices of bonds and their
interest rates.
Secondary markets bring together many
interested parties.
It keeps the cost of transactions low.
Methods of Floating New Issues in
Primary Market
Public issue: When a company raises funds by selling (issuing) its
shares to the public through issue of offer document (prospectus), it
is called a public issue.
Initial Public Offer (IPO): When a (unlisted) company makes a
public issue for the first time and gets its shares listed on stock
exchange, the public issue is called as initial public offer (IPO).
Follow-on public offer (FPO): When a listed company makes
another public issue to raise capital, it is called follow-on offer
(FPO).
Contd,
Offer for sale: Institutional investors invest in unlisted
company when it is at an early stage. When the company
becomes large, these investors sell their shares to the
public, through issue of offer document and the
companys shares are listed in stock exchange.
Private Placement: The sale of securities to a relatively
small number of selected investors for raising capital.
Investors involved in private placements are usually large
banks, mutual funds, insurance companies and pension
funds.
Contd..,
Issue of Indian Depository Receipts (IDR): A foreign
company which is listed in stock exchange abroad can raise
money from Indian investors by selling shares. These shares
are held in trust by a foreign custodian bank against which a
domestic custodian bank issues an instrument called Indian
depository receipts (IDR).
Bonus Issue, the company issues new shares to its existing
shareholders. As the new shares are issued out of the
companys reserves (accumulated profits), shareholders need
not pay any money to the company for receiving the new
shares.
Contd..,
Rights issue (RI): When a company raises funds from its
existing shareholders by selling (issuing) them new shares /
debentures, it is called as rights issue. The offer document for
a rights issue is called as the Letter of Offer and the issue is
kept open for 30-60 days. Existing shareholders are entitled to
apply for new shares in proportion to the number of shares
already held.
