Introduction to Capital Market

Introduction to Capital Market (Part 1)

• Definition: The capital market plays a crucial role in the development of the economy by allocating unutilized resources and providing channels for the allocation of savings to investments.
• Details: It consists of investors, issuers, regulatory bodies, and intermediaries, and its primary role is to facilitate the raising of capital and its deployment in the economy.

Key Concepts

• Capital Market Structure: The capital market is divided into the Primary Market and Secondary Market, while the Money Market is classified into Organized Money Market and Unorganized Money Market.
• Primary Market: It is the new issue market where issuers raise resources to meet their investment requirements, and securities are allotted to the public for the first time for listing, known as an Initial Public Offer (IPO).
• Secondary Market: It provides liquidity to securities already issued in the primary market, allowing investors to liquidate their investments, and operates through the Over-The-Counter (OTC) market and the Exchange Traded Market.

Products in the Indian Securities Market

• Equity Market Products: Include equity shares, preference shares, convertibles, warrants, mutual funds, and exchange-traded funds (ETFs).
• Derivative Market Products: Include futures and options, which are traded on the Indian stock exchanges, and are based on underlying assets such as equity, forex, commodity, or any other asset.
• Debt Market Products: Consist of bond markets, which provide financing through the issuance of debentures and bonds, and enable subsequent trading, and are divided into the government securities (G-Sec) market and the corporate bond market.

Participants and Regulators

• Participants: Include investors, issuers, regulatory bodies, and intermediaries, such as banks, financial institutions, insurance companies, mutual funds, and foreign portfolio investors (FPIs).
• Regulators: Play a crucial role in overseeing the capital market, ensuring fair practices, and protecting investor interests, with key regulators including the Securities and Exchange Board of India (SEBI).

Introduction to Capital Market (Part 2)

• Debt Segment: The debt segment includes instruments such as bonds and debentures that offer periodic interest (called ‘zero coupon’). These instruments are redeemed by repayment of the principal amount as per the stated terms of issue.
• Money Market Instruments: Other instruments available for trading in the debt segment include Treasury Bills, Commercial Papers, and Certificates of Deposits.

Participants in the Indian Securities Market

• Issuer: Any company/corporation making an offer of securities. They approach the market, stating their specific objectives and collecting funds from the general public by offering securities.
• Investors: Persons who invest their funds in the securities offered by the issuer. They are broadly categorized as:
  • Retail Investors: Investing up to Rs. Two lakh in a single public issue transaction.
  • Institutional Investors: Comprise domestic financial institutions, mutual funds, FPIs, etc., commonly known as Qualified Institutional Buyers (QIBs).
  • Non-Institutional Investors: Include individuals, companies, and other entities that are not classified as retail or institutional investors.
• Intermediaries: Many intermediaries in the Indian securities market, including:
  • Stock Brokers: Members of a stock exchange who provide advice and recommendations relating to investment opportunities to their clients.
  • Custodians: Entities that provide custodial services, including the safekeeping of securities.
  • Depositories: Provide a facility for investors to hold and transfer securities in dematerialized form.
  • Depository Participants (DPs): Agents of depositories who provide services to clients.
  • Merchant Bankers: Engaged in the business of issue management, including managing capital issues, advising clients on valuation of securities, and underwriting issues.
  • Registrars and Transfer Agents: Entities that collect applications from investors, maintain records, and assist in the allotment and transfer of securities.
  • Self-Certified Syndicate Banks (SCSBs): Bankers to an issue registered with SEBI, offering the facility of Application Supported by Blocked Amount.

Regulators in the Indian Securities Market

• Securities and Exchange Board of India (SEBI): The primary regulator of the securities market, responsible for protecting the interests of investors and promoting the development of the market.
• Reserve Bank of India (RBI): Regulates the money market, including bonds and deposits, and decides on interest rates and other macroeconomic factors.
• Ministry of Company Affairs (MCA): Regulates the corporate sector through the administration of the Companies Act, 2013.
• Insurance Regulatory and Development Authority of India (IRDAI): Regulates the insurance sector, protecting the interests of policyholders and promoting the growth of the industry.
• Pension Fund Regulatory and Development Authority (PFRDA): Regulates the pension sector, responsible for providing a sustainable solution to retirement income for citizens.

Introduction to Capital Market (Part 3)

• Regulatory Framework: The Ministry of Finance (MOF) regulates the securities market in accordance with the Government of India guidelines, under the regulation of the PFRDA. The Reserve Bank of India regulates investments into India by foreign or Non-Resident Indian investors through the Foreign Exchange Management Act, 1999.
• Interrelation between Authorities: All authorities have an interrelation with each other. For example, a company issuing equity shares in the securities market for the first time must comply with the Companies Act, SEBI Regulations, and RBI regulations if the issue is subscribed to by foreign investors or Non-resident Indians.
• Role of Investment Banker in Private Equity: Investment bankers play a key role in advising companies seeking to raise capital through private equity sources. Their role includes:
  • Growth Plan Formulation: Advising the company on arriving at a growth plan and capital investment required.
  • Transaction Structuring: Coming up with the correct instrument, quantum of capital to be raised, and the capital structure of the company pre and post the proposed transaction.
  • Arriving at Pre-Money Valuation: Conducting the valuation of the company for the proposed transaction.
  • Offer Literature, Data Room Assistance: Preparing transaction-related literature and assisting in the compilation of information and documents for the data room.
  • Leading the Transaction: Handholding the entire transaction from the initial stage till the parties execute definitive agreements.