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Capital Market
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 Introduction
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• For starting any Business, an entrepreneur needs investments in the
form of capital.

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• Depending on the size of the project, the amount of capital varies.

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• Entrepreneur cannot go for investing his own money in the business,
so he has to go for borrowing.

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• borrowing has many problem such as paying interest monthly, that
too if it is a long term project, he won’t be able to give interest
regularly.
• Paying Interest has some advantage over taxation.
• Banks/Financial Institution may demand a security for their loans in
the form of collaterals, the promoter may choose to raise the capital by
issuing shares to public making them a offering on future.
 Classification of Capital Marketing

CAPITAL
MARKET

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PRIMARY SECONDARY
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MARKET MARKET

PUBLIC RIGHT BONUS PRIVATE STOCK

 In Primary Market, Securities are offered to the public for subscription, for
the purpose of raising the capital or funds.

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 The issue of securities in the primary market is subjected to fulfillment of

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a number of pre-issue guidelines by SEBI and compliance to various
provision of the Company Act.

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An unlisted issuer making a public issue i.e. (making an IPO) is
required to satisfy the following provisions:
• The Issuer Company shall meet the following requirements:
• (a) Net Tangible Assets of at least Rs. 3 crores in each of the preceding
three full years.
• (b) Distributable profits in at least three of the immediately preceding five
years.
• (c) Net worth of at least Rs. 1 Crore in each of the preceding three full
years.
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• (d) If the company has changed its name within the last one
year, atleast 50% revenue for the preceding 1 year should be

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from the activity suggested by the new name.

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• (e) The issue size does not exceed 5 times the pre ‐ issue net

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worth as per the audited balance sheet of the last financial year
A listed issuer making a public issue (FPO) is required to
satisfy the following requirements :
• (a) If the company has changed its name within the last one
year, at least 50% revenue for the preceding 1 year should be
from the activity suggested by the new name.
• (b) The issue size does not exceed 5 times the pre ‐ issue net
worth as per the audited balance sheet of the last financial year
 PUBLIC ISSUE
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• It involves raising of funds directly from the public and get themselves

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listed on the stock exchange

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• in case of new companies ,the face value of the securities is issue at par,
and

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• in the case of existing companies, the face value of securities are issued at
premium
• Initial public offer (IPO): When an unlisted company makes either a fresh
issue of securities or offers its existing securities for sale or both for the
first time to the public, it is called an IPO. This paves way for listing and
trading of the issuer’s securities in the Stock Exchanges.
• Further public offer (FPO): When an already listed company makes either
a fresh issue of securities to the public or an offer for sale to the public, it is
called a FPO.
 RIGHT ISSUE
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• Right issue is the method of raising additional

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to them on pro rata bases.

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• They are normally issued when
1)companies find it difficult to raise more funds or
more borrowings.
2)To avoid interest on loans.
 Advantages
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• It’s a form of shelf offering or shelf registration

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• Opportunity for existing shareholders

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• It is inexpensive

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• Goodwill of the organization increases

Disadvantages:
• Value of the shares will be diluted if there number
increases
• Generally fixes short term problems
 BONUS ISSUE
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 Companies distribute profits to existing

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shareholders by way of fully paid bonus

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share in lieu of dividend.
 These are issued in the ratio of existing
shares held.
 The shareholders do not have to make
any additional payment for these shares
 PRIVATE PLACEMENT
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• Private Placement is an issue of shares
by a company to a select group of
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persons under the Section 81 of the
companies act 1956. It is a faster way for
a company to raise equity capital.
 Intermediates in issue in the Primary
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• Book Running Lead Managers(BRLM):
• A Merchant banker possessing a valid SEBI registration in
accordance with the SEBI Regulations,1992 is eligible to act as a

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BRLM to an issue.

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• Cut Off Price:

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• In the book-building issue, the issuer is required to indicate either
the price band or a floor price in the RHP. The actual discovered
issue price can be any price in the price band or any price above the
floor price. This issue price is called as the Cut Off Price.
• And the other intermediates are
• Merchant Banker
• Registrars to the Issue
• Bankers to the Issue
• Underwriters
 Secondary Market
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• Secondary Market refers to a market where securities

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the primary market and/or listed on the stock exchange.

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• Secondary market comprises of Equity market and Debt

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market.
• It is the trading avenue in which the already existing
securities are traded amongst investors.
• Banks facilitate secondary market transactions by
opening direct trading and demat accounts to
individuals and companies.
 Financial instruments dealt in Secondary
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• Equity Shares:
• An equity share is commonly referred to as an ordinary share.

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• It is an form of fractional ownership in which a shareholder, as a fractional

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owner, undertakes the entrepreneurial risk associated with the business
venture.

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• Holders of the equity shares are members of the company and have voting
rights.
• Right shares:
• This refers to the issue of new securities to the existing shareholders, at a
ratio to those shares already held.
• Bonus Shares:
• These shares are issued by the companies to their shareholders free of cost
by capitalization of accumulated reserves from the profit earned in the
earlier years.
• Preference shares:
• These shareholder do not have voting rights.
• Owners of these shares are entitled to a fixed dividend or a
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any dividend can be paid in respect of equity shares.
• These shareholders also enjoy priority over the equity

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shareholders in the payment of surplus.

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• Cumulative Preference Shares:

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• This is a type of preference shares on which dividend
accumulates if it remains unpaid.
• Cumulative Convertible Preference Shares:
• This is a type of preference shares on where the dividend
payable on the same accumulates, if not paid. After a
specified date, these shares will be converted into equity
capital of the company.
• Participating Preference Shares:
• This refers to the right of certain preference shareholders
to participate in profits, after a specified fixed dividend
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• Debentures:

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• Debentures are bonds issued by a company bearing a

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fixed rate of interest usually payable half-yearly, on
specific dates and the principal amount repayable on a

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particular date on redemption of the debentures.
• Debentures are normally secured against the asset of the
company in favour of the debenture holder.
• Bonds:
• A bond is a negotiable certificate evidencing
indebtedness. It is normally unsecured.
 The various type of bonds are as follows:
• Coupon Bonds:
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• These are normal bonds on which the issuer pays the investor interest
at the predetermined rate at agreed intervals, normally twice a year.
• Zero Coupon Bonds:

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• A bond issued at a discount and repaid at a face value is called as
Zero coupon bonds.

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• No periodic interest is paid in this case.
• Convertible Bond:
• A bond giving the investor the option to convert the bond into equity
at a fixed conversion price is referred to as a Convertible Bond.
• Treasury Bills:
• These are short term bearer discount security, issued by the
Government as a means of meeting its cash requirements.
 Commonly Used Terms in Capital
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• Securities Transaction Tax(STT):
• Securities Transaction Tax is a tax being levied on all transaction done on

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the stock exchanges at rates prescribed by the central government from time

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to time.
• Rolling Settlement:

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• In Rolling Settlement, trades executed during the day are settled, based on
the Nett obligations for the day. Presently the trade pertaining to the rolling
settlement are settled on a T+2 day basis , where T stands for the trade day.
• Pay- in Day and Pay-out Day:
• Pay-in day is the day when the brokers make payments or delivery of
securities to the exchange.
• Pay-out day is the day when the exchange makes payment or delivery of
securities to the broker.
• Settlement cycle is on a T+2 rolling settlement basis.
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Thank You
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