CAPITAL MARKET Chapter 2 “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Learning Goals: To provide the basics of financial market and its importance To understand the characteristics of various financial instruments To know the various participants in the capital market To explain the role of the regulator in the financial market  To discuss the contours of development of the Indian capital market “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Introduction Sweeping changes Spurt in the amount mobilised,SEs Number of new instruments Mutual funds Active secondary market Regulatory changes Increased awareness “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Financial Market Capital market, Money Market, Foreign Exchange market Benefits: Flow of Funds, Capital formation, Risk allocation, Liquidity, wealth function Capital Market and Money Market “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Capital Market Instruments ‘Securities’defined by SCRA Fixed Income Securities Preference shares Bonds: Government bonds or treasury bonds. Municipal bonds,Corporate bonds,Foreign bonds Equity Shares MF units Derivative securities “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Capital Market Participants Stock exchanges Brokers, Sub brokers Custodians Depositories, Depository participants Merchant bankers Bankers to the issue Underwriters Contd… “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Registrars to the issue Portfolio managers Mutual funds Foreign Institutional Investors (FII s) Debenture trustees Credit rating agencies, Collective Investment Schemes and, Venture capital funds “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

CAPITAL MARKET:REGULATORY FRAMEWORK The SEBI Act ,1992. The Companies Act ,1956 The Securities Contract (Regulation) Act,1956 The Depositories Act,1996 “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Role of SEBI in Indian Capital Market SEBI is an autonomous organization. Functions as the market regulator or the watch dog of the capital market. Comparable to the Securities Exchange Commission (SEC) in the US capital market. “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

SEBI guidelines : Primary market Disclosure and Investor Protection(DIP) Guidelines 2000: Salient Features: Eligibility norms for public issues Promoters’ contribution Contents of offer documents Pricing of Issues Book building Green shoe option “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

SEBI guidelines : Secondary market 1. Recognition of stock exchanges 2. Registration of brokers, sub-brokers and other intermediaries 3. Listing of securities Contd… “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

4. Trading in securities 5. Controlling volatility 6. Risk management

Indian Capital Markets - Review Structure of the market Securities markets consists of issuers, investors and intermediaries According to the SEBI- NCAER Survey in March2003,an estimate of 13 million households have been found to have investments in capital market. This is roughly 7% of the total Indian households . Contd… “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

The Society for Capital Market Research and Development estimated a total of 20 million investors in 1997. The number of investor accounts with the Depositories is around 10227490 as on March2007. “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Indian Capital Markets - Review Capital Mobilised Considerable increase in amount mobilised, number of IPOs issued over the period of years. Total amount raised from the market through equity and debt issues and through private placement has also gone up considerably. Contd… “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Euro issues has shown a phenomenal rise over the years. According to a study by Ernst and Young, the Indian IPO market has been ranked 7th globally in terms of the proceeds and 5th largest in terms of the number of issues in the year 2007. “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Indian Capital Markets - Review Secondary Market No of stock exchanges and brokers Index behaviour and market capitalisation Turnover Volatility of market Derivatives market “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Conclusion A vibrant capital market enables the corporate sector to access funds for investment. The formation of SEBI paved the way for an orderly growth of the market intermediaries in India. Investor protection and development of the securities market are kept as the two primary objectives of regulation in India . Contd… “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Penetration of the corporate bond market is still low in india. Private placement market is dominating over the public issue market. The potential for growth in capital market still exists in India. Contd… “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Market Intermediaries “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Resource Mobilisation in Primary Market “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Market Turnover “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.