Unit II: Capital Markets and Instruments Functions arx1 Structure -

Primary and Secondary market - Mechanism-instruments and

financing - Regulatory Framework- SEBI Regulations - Stock
Exchanges - Bond Markel - Debt Market in India - Government
Securities- Corporate Bond Market - Recent Developments -
Derivatives Market - Currency and Commodity markets. elaborate
each points and topic an also provide examples

Here’s an elaborate explanation of Unit II, covering **Capital

Markets and Instruments** along with examples:

Here’s a detailed explanation of each function and structural

component of capital markets, along with examples:

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### **Functions of Capital Markets**

#### **1. Mobilization of Savings**

- Capital markets provide a platform for savers (individuals,
institutions) to invest their savings in financial instruments like
stocks, bonds, or mutual funds. This mobilized capital is then
used by businesses and governments for productive purposes,
such as expansion or infrastructure development.

**Example:**
A retail investor buys shares of **Infosys** through the stock
exchange. Their savings are transformed into equity, which the
company can use for business activities like hiring employees
or upgrading technology.

---

#### **2. Allocation of Capital**

- Capital markets allocate funds to sectors or businesses with
the highest potential for returns, ensuring efficient utilization of
resources. This process helps channelize savings into
productive investments.

**Example:**
A startup in the renewable energy sector raises funds through
equity or green bonds. Since renewable energy is a high-
growth sector, capital markets prioritize such projects over less
productive sectors.

---

#### **3. Liquidity Creation**

- Capital markets provide liquidity by enabling investors to buy
and sell securities with ease. Stock exchanges act as
intermediaries, ensuring continuous trading and price updates.

**Example:**
An investor holding **Tata Motors shares** can sell them on the
**NSE** at the current market price. This ease of trading allows
investors to access cash when needed.

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#### **4. Price Discovery**

- Prices of securities in capital markets are determined by the
forces of demand and supply. This price reflects the intrinsic
value of the asset, investor sentiment, and market conditions.

**Example:**
If **Reliance Industries** announces a strong quarterly profit, its
share price might rise due to higher demand from investors,
reflecting its improved valuation.

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#### **5. Economic Growth**

- Capital markets play a significant role in a nation’s economic
development by facilitating the flow of funds from savers to
businesses. These investments result in increased production,
job creation, and infrastructure growth.

**Example:**
A government issues bonds to fund large infrastructure projects
like highways or airports. Investors purchasing these bonds
indirectly contribute to economic development.
---

### **Structure of Capital Markets**

#### **1. Primary Market**

- The primary market deals with the issuance of new securities.
Companies, governments, or institutions raise capital by
offering equity (shares) or debt (bonds) to investors for the first
time.

**Features:**
- Investors purchase securities directly from issuers.
- Instruments include Initial Public Offerings (IPO), Follow-on
Public Offerings (FPO), rights issues, and private placements.

**Example:**
In 2021, **Zomato** launched its IPO, raising ₹9,375 crore by
selling shares to the public for the first time.

---

#### **2. Secondary Market**

- The secondary market facilitates the trading of already issued
securities. It provides liquidity and an exit route for investors.
Transactions take place on stock exchanges like the **NSE**
and **BSE** or over-the-counter (OTC) platforms.
**Example:**
After purchasing shares during an IPO, investors can trade
these shares on the **BSE** or **NSE**, ensuring continuous
price discovery and liquidity.

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#### **3. Participants in Capital Markets**

1. **Retail Investors:**
- Individual investors who participate in capital markets to
achieve financial goals like wealth creation or retirement
planning.
- **Example:** A retail investor buys mutual funds through a
platform like Groww.

2. **Institutional Investors:**
- Large entities like mutual funds, pension funds, insurance
companies, and foreign institutional investors (FIIs) who invest
significant sums in capital markets.
- **Example:** The **Life Insurance Corporation of India
(LIC)** invests heavily in both equity and bond markets.

3. **Regulators:**
- Entities like the **Securities and Exchange Board of India
(SEBI)** ensure that markets operate transparently and
efficiently while protecting investors.
 - **Example:** SEBI mandates companies to disclose
material financial information regularly.

4. **Brokers and Underwriters:**

- **Brokers** facilitate trading by acting as intermediaries
between buyers and sellers.
- **Underwriters** ensure that securities issued in the primary
market are fully subscribed.
- **Example:** Zerodha (broker) and ICICI Securities
(underwriter).

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#### **4. Instruments in Capital Markets**

1. **Stocks:**
- Represent ownership in a company. Investors earn returns
through dividends and capital appreciation.
- **Example:** Shares of companies like TCS or HDFC Bank.

2. **Bonds:**
- Debt instruments issued by companies or governments to
raise funds. Bondholders earn fixed interest over time.
- **Example:** The Indian government issues **10-year
Treasury Bonds**.

3. **Derivatives:**
 - Contracts derived from underlying assets like stocks,
currencies, or commodities. Used for hedging or speculation.
- **Example:** Futures contracts on **Nifty 50**.

4. **Mutual Funds:**
- Pooled investment managed by professionals, offering
diversification and ease of access to investors.
- **Example:** **SBI Bluechip Fund**, which invests in large-
cap equities.

---

This explanation highlights the critical roles and structure of

capital markets with practical examples. Let me know if you
need more details or case studies!
### **2. Primary and Secondary Market**

#### **Primary Market:**

- Deals with new issues of securities.
- Companies raise funds through **Initial Public Offerings
(IPO)** or rights issues.
- **Example:** LIC raised ₹21,000 crore in its IPO in May 2022.

#### **Secondary Market:**

- Facilitates trading of previously issued securities.
- Stock exchanges like the **BSE and NSE** provide liquidity.
- **Example:** Reliance shares traded daily on NSE after its
IPO.

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### **3. Mechanism - Instruments and Financing**

#### **Primary Market Mechanism:**

1. **Public Issue:** Securities are sold to the public (e.g., IPO).
2. **Private Placement:** Offered to a select group of investors.
3. **Rights Issue:** Issued to existing shareholders at a
discount.
4. **Book Building Process:** Investors bid within a price range
to determine the final price.

#### **Instruments in Primary Market:**

- Equity shares.
- Bonds (corporate and government).
- Preference shares.

#### **Secondary Market Mechanism:**

1. **Trading:** Buyers and sellers meet on exchanges.
2. **Settlement:** Transactions are settled through
clearinghouses like NSCCL.

#### **Financing through Capital Markets:**

- Companies raise long-term funds for business growth or debt
repayment.
- **Example:** A startup raising funds through equity issuance
in the primary market.

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### **4. Regulatory Framework - SEBI Regulations**

- **SEBI (Securities and Exchange Board of India):** Regulates

and protects investor interests.
- **Functions:**
- Ensure transparency and fairness in markets.
- Prevent malpractices like insider trading.
- Register and regulate stockbrokers, mutual funds, and
investment advisors.

#### **Key SEBI Regulations:**

1. **Listing Obligations and Disclosure Requirements
(LODR):** Mandates listed companies to disclose material
information.
2. **Insider Trading Regulations:** Penalize individuals using
confidential information for personal gains.
3. **Mutual Fund Regulations:** Protects investor interests in
mutual funds.

#### **Example:**
In 2021, SEBI fined violators for insider trading in Infosys
stocks.

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### **5. Stock Exchanges**

- Stock exchanges facilitate trading in securities.

- **Major Indian Stock Exchanges:**
1. **Bombay Stock Exchange (BSE):** Oldest in Asia.
2. **National Stock Exchange (NSE):** Introduced electronic
trading.

#### **Example:**
Nifty 50 and Sensex track the top companies listed on NSE and
BSE, respectively.

---

### **6. Bond Market**

#### **Types of Bonds:**

1. **Government Bonds:** Issued by the government to finance
projects.
2. **Corporate Bonds:** Issued by companies to raise debt.
3. **Municipal Bonds:** Issued by municipalities for
infrastructure.

#### **Functions of the Bond Market:**

- Provide long-term financing.
- Offer fixed returns to investors.

#### **Example:**
The **Sovereign Gold Bonds (SGB)** issued by the Indian
government provide returns linked to gold prices.

---

### **7. Debt Market in India**

The debt market is where debt securities like bonds and

debentures are issued and traded.

#### **Features:**
1. **Government Debt Market:**
- Includes treasury bills, bonds, and state development loans.
- Example: The RBI auctions 10-year government bonds
regularly.

2. **Corporate Debt Market:**

- Companies issue bonds for working capital or expansion.
 - Example: Tata Motors issues corporate bonds for
expansion.

---

### **8. Government Securities**

- Long-term or short-term debt instruments issued by the

government.
- Include Treasury Bills (short-term) and Government Bonds
(long-term).

#### **Example:**
The RBI issues **Treasury Bills** with maturities of 91, 182, or
364 days to meet short-term borrowing needs.

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### **9. Corporate Bond Market**

- Corporates raise funds by issuing bonds.

- Investors receive periodic interest payments.
- Bonds may be secured or unsecured.

#### **Example:**
Reliance Industries issued **debentures** to fund its Jio
expansion projects.

---

### **10. Recent Developments in Indian Capital Markets**

1. **Digitalization:** Introduction of platforms like UPI for stock

investments.
2. **Introduction of REITs:** Real Estate Investment Trusts for
real estate investment.
3. **Regulation Enhancements:** SEBI introduced stricter
norms for IPO pricing.
4. **Rise of ESG Investing:** Increased focus on
environmental, social, and governance (ESG) factors.

#### **Example:**
The launch of platforms like **Zerodha and Groww** simplifies
equity investments.

---

### **11. Derivatives Market**

- Derivatives derive their value from an underlying asset (e.g.,

stock, commodity, or currency).
#### **Types:**
1. **Futures:** Contracts to buy or sell assets at a
predetermined price on a future date.
2. **Options:** Give the right but not the obligation to buy/sell.
3. **Swaps:** Exchange of cash flows (e.g., interest rate
swaps).

#### **Example:**
Investors use **Nifty Futures** to hedge against market
volatility.

---

### **12. Currency and Commodity Markets**

#### **Currency Market:**

- Facilitates trading of currencies.
- **Example:** USD/INR trading allows businesses to hedge
against forex risks.

#### **Commodity Market:**

- Trades in physical commodities (gold, crude oil) or their
derivatives.
- **Example:** The Multi Commodity Exchange (MCX)
facilitates trading in crude oil futures.

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### **Conclusion**
Capital markets, driven by various instruments and
mechanisms, are crucial for raising funds, fostering
investments, and enabling economic growth. The regulatory
framework by SEBI ensures transparency, and recent
innovations like digital trading platforms continue to
revolutionize the landscape. Let me know if you need further
clarification!

Let’s dive into **every topic** from **Unit II: Capital Markets and
Instruments**, with detailed explanations and examples for
each:

---

### **1. Functions and Structure of Capital Markets**

(Already detailed in the previous response.)

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### **2. Primary and Secondary Market**

#### **Primary Market**

- The market where companies raise funds by issuing new
securities directly to investors. It helps in capital formation for
businesses and the government.
**Features:**
- Securities are issued for the first time.
- Examples include IPOs, FPOs, rights issues, and private
placements.

**Example:**
- **LIC’s IPO in 2022** raised ₹21,000 crore, allowing the
government to divest a portion of its stake.

---

#### **Secondary Market**

- Facilitates the trading of previously issued securities,
providing liquidity and a platform for investors to buy or sell.

**Features:**
- Securities are traded between investors (not directly with the
issuer).
- Includes stock exchanges (NSE, BSE) and over-the-counter
(OTC) markets.

**Example:**
- After buying shares of **Zomato** in its IPO, an investor can
trade them on NSE or BSE.

---
### **3. Mechanism – Instruments and Financing**

#### **Mechanism in Primary Markets:**

1. **Book Building Process:** Investors bid within a price range
to determine the final issue price.
- **Example:** In an IPO, Zomato offered shares at ₹72–₹76,
and the final price was determined by bids.
2. **Underwriting:** Intermediaries ensure all issued shares are
subscribed.
- **Example:** Investment banks like Goldman Sachs
underwrite large IPOs.

#### **Mechanism in Secondary Markets:**

1. **Trading:** Investors trade through brokers on stock
exchanges using platforms like Zerodha or Groww.
2. **Settlement:** Clearing corporations like **NSCCL** ensure
secure transactions.
- **Example:** A trade on NSE is settled within **T+2 days.**

---

#### **Instruments in Capital Markets:**

1. **Equity Shares:** Represent ownership in a company; offer
voting rights and dividends.
- **Example:** Shares of Infosys.
2. **Debt Instruments:** Fixed-income securities like bonds or
debentures.
 - **Example:** 10-year government bonds.
3. **Derivatives:** Futures, options, and swaps used for
hedging risks.
- **Example:** A **futures contract** on Reliance stock.
4. **Mutual Funds:** Pooled investment vehicles for diversified
exposure.
- **Example:** SBI Magnum Equity Fund.

---

### **4. Regulatory Framework – SEBI Regulations**

#### **Role of SEBI:**

- **Securities and Exchange Board of India (SEBI)** protects
investor interests, ensures transparency, and regulates capital
markets.

#### **Key SEBI Regulations:**

1. **Listing Obligations and Disclosure Requirements
(LODR):** Companies must disclose financial and operational
information.
- **Example:** TCS discloses quarterly earnings reports.
2. **Insider Trading Regulations:** Prevent trading on
confidential information.
- **Example:** In 2021, SEBI fined individuals for insider
trading in Infosys stocks.
3. **Mutual Fund Regulations:** Ensure fair pricing and
transparency in fund management.
- **Example:** SEBI caps total expense ratios (TER) for
mutual funds.

---

### **5. Stock Exchanges**

#### **Functions:**
- Provide a trading platform for securities.
- Facilitate price discovery and liquidity.
- Monitor listed companies' compliance.

#### **Major Indian Stock Exchanges:**

1. **Bombay Stock Exchange (BSE):** Established in 1875,
lists over 5,000 companies.
2. **National Stock Exchange (NSE):** Introduced electronic
trading in 1994 and is home to the **Nifty 50 Index**.

**Example:**
Nifty 50 tracks the top 50 companies listed on NSE, including
HDFC Bank, Reliance, and Infosys.

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### **6. Bond Market**

#### **Types of Bonds:**

1. **Government Bonds:** Issued to fund public projects or
fiscal deficits.
- **Example:** Sovereign Gold Bonds (SGB).
2. **Corporate Bonds:** Issued by companies for long-term
financing.
- **Example:** Tata Steel’s bonds with a 7.5% interest rate.
3. **Municipal Bonds:** Issued by municipal authorities to fund
urban infrastructure.
- **Example:** Pune Municipal Corporation issued green
bonds.

---

### **7. Debt Market in India**

The debt market is divided into two segments:

1. **Government Debt Market:**
- Includes Treasury Bills, dated government securities (G-
secs), and State Development Loans (SDLs).
- **Example:** RBI auctions 364-day Treasury Bills to meet
government borrowing needs.

2. **Corporate Debt Market:**

 - Corporates issue bonds to fund working capital or
expansion.
- **Example:** ICICI Bank raises funds through corporate
bonds.

---

### **8. Government Securities**

- Issued by the government to fund its expenditures, offering

fixed returns and low risk.

#### **Types:**
1. **Treasury Bills:** Short-term instruments with maturities of
91, 182, or 364 days.
- **Example:** RBI issues 91-day T-bills.
2. **Dated Securities:** Long-term bonds with maturities up to
40 years.
- **Example:** 10-year government bonds.

---

### **9. Corporate Bond Market**

#### **Characteristics:**
- Corporates issue bonds to raise long-term funds.
- Can be secured or unsecured and offer fixed interest rates.

**Example:**
Reliance Industries issued corporate bonds to fund its Jio
expansion.

---

### **10. Recent Developments in Indian Capital Markets**

1. **Digital Platforms:** Introduction of **UPI for IPOs** and

apps like Zerodha and Groww for easy investing.
2. **REITs and InvITs:** Real Estate Investment Trusts (REITs)
and Infrastructure Investment Trusts (InvITs) allow retail
participation in large infrastructure projects.
- **Example:** Embassy REIT was India’s first REIT.
3. **Rise in ESG Investments:** Investors focus on
environmentally and socially responsible companies.

---

### **11. Derivatives Market**

#### **Types of Derivatives:**

1. **Futures:** Contracts to buy/sell assets at a future date at a
fixed price.
- **Example:** Nifty Futures.
2. **Options:** Offer the right but not the obligation to buy/sell.
- **Example:** Reliance call options.
3. **Swaps:** Exchange of cash flows, like interest rate swaps.
- **Example:** Banks use swaps to manage interest rate
risks.

---

### **12. Currency and Commodity Markets**

#### **Currency Market:**

- Trades in foreign exchange pairs, helping businesses and
investors hedge currency risks.
- **Example:** USD/INR pair traded on NSE.

#### **Commodity Market:**

- Deals in raw materials or primary products like gold, silver,
crude oil, or agricultural products.
- **Example:** MCX (Multi Commodity Exchange) facilitates
crude oil futures trading.

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Let me know if you'd like further elaboration on any specific

topic!