By Dr. Ajit Kumar AGM, MoF CAB, PUNE

CAPITAL MARKET  Definition- borrow/lend lond term capital fund  Capital Market vs Bank Finance  Advantages and Disadvantages  Constituents of Indian capital Market  1.Government Security market-B.R.Act  2. Industrial Security market

Segments of Security Market  1. Primary Market- helps in growth of economy  2. Secondary Market- does not help  Primary market is also known as NIM

Why Secondary market  For the efficient growth of primary market, a sound secondary market is an essential requirement. It provides liquidity to the investors as also a high profit expectation. NIM can’t exist without SM.

Stock Exchanges  Subject to Govt supervision & control  Total no. of stock exchanges –23  Two national stock exchanges-  1.BSE  2.NSE  BSE- estd. In 1857, in fact oldest in Asia  NSE- set up in 1993, has 70% share of total trading  Out of 21 Regional stock exchanges 15 stock exchanges reported NIL transaction.  NSE is harbinger of reforms in capital market

Who Regulates ?  Stock market is regulated by SEBI under ‘Securities Contracts Regulation Act’ 1956 (SCRA)  concurrently with GOI(MOF+MOC), RBI also has a regulatory role with regard to FII & FDI.  SEBI was set up in 1988 but SEBI Act was passed in 1992.

 Prior to SEBI it was regulated by Controller of Capital Issues.

Capital Market Instruments  1.Preference Share  2. Equity Share- min.25% public offer req for new issues for listing  3. Non-voting Equity share- Abid Hussain committee  4. Convertible Cumulative Preference Share  5. Company Fixed Deposit  6. Debenture & Bonds- issued under common seal of the company  7. Warrants- 10 to30% above market price- sweeteners

Methods of Marketing Securities I  1. Pure Prospectus Method- exclusively from general public, adv  2. Offer for Sale – sale to intermediaries at agreed price,adv  3. Private Placement – not more than 50, for listed,lockin5yr  4. Bought Out Deals- same as ppfor unlisted,lock in 18m,adv  5. Rights Issue- existing shareholders,only by listed companies  6. Bonus Issue- accumulated reserves and surplus of profits converted into paid-up capital.Free of charge.  7. Book Building Method- merchant banker-qualified institutional buyers,price bids,free to determine private placement & public subscription portion.

Methods of Marketing securities II  8. Stock Option Method (ESOP)- only for listed companies, with prior approval of shareholders through a special resolution.  9.Initial Public Offer (IPO) -1 time,unlisted only if net worth>3c,profit  Under this method securities are issued to successful applicants on the basis of the order placed by them through their broker.  Red herring clause- A preliminary prospectus (also known as red herring) often with words with letters which say it is preliminary and the price is not yet set.  Green shoe option- additional subscription can be offered by the issuer (15%)

Intermediaries of the Market  Merchant Bankers/ Lead Managers- regulated by SEBI  Registrars and share transfer agents  Underwriters- CARE-a bank can’t uw > 15% of the issue, can’t uw >400 times of it’s net worth, underwriting is eligible for computation of capital market exposure.  Bankers to Issue- certificate of registration from SEBI required  Rating Agencies (CRISIL, ICRA, Fitch)  Brokers & Sub-brokers Broking outfits out of which 29 are foreign brokers

Depositories  Depositories-Depository Act –1996, It’s a company under the Companies Act 1956.We have multi depository system.Depository is a custodian where investors deposit their assets and it executes certain orders of the investors- National Securities Depository Ltd.(NSDL), Centralised Depository Services Ltd. (CSDL)  Depository Participants- It is base level branch of a bank or a non-bank maintaining deposit on behalf of investors- total number 295.

WHY EXPO0SURE NORMS  Why limit on Capital Market Exposure?- Risk  Why emphsis on CD ratio?  Bank Finance- appraisal based/ merit based  Capital Market – theoretically appraisal based but practically confidence based  Bank in a position to monitor by way of post credit supervision, no such mechanism in case of capital market exposure.-guided by market perception and manipulation.

 Glass Steagall Act was enacted in USA after 1929 stock market crash. The bank was not allowed to take direct exposure in stock market. Banks were required to have a firewall between bank’s investment portfolio and others.  Abolished during Reagan regime.  Extant Exposure norms- India

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