Capital Markets and Stock Exchanges - Comprehensive Notes | MODULE D: FINANCIAL PRODUCTS AND SERVICES
Capital Markets and Stock Exchanges
Primary Market
The Primary Market deals with the issuance of new securities. Corporates, governments, and other institutions raise funds through the sale of equity or debt instruments to investors. The primary market facilitates capital formation directly.
Secondary Market
The Secondary Market involves trading of securities previously issued in the primary market. It provides liquidity to investors and helps in price discovery. Stock exchanges are vital platforms for secondary market transactions.
Stock Exchanges in India
Major stock exchanges in India include the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Both are regulated by the Securities and Exchange Board of India (SEBI) to ensure transparent and fair trading practices.
Financial Products/Instruments in the Secondary Market
- Equity Shares
- Preference Shares
- Debentures
- Government Securities (G-Secs)
- Corporate Bonds
- Derivatives (Options and Futures)
Regulatory Requirements Specified by SEBI for Corporate Debt Securities
SEBI mandates disclosure norms, rating requirements, listing standards, and investor protection measures for corporate debt securities. Regular compliance reporting is also obligatory for issuers.
Commonly Used Terms in the Capital Market
- IPO - Initial Public Offering
- FPO - Follow-on Public Offering
- Rights Issue - Offer to existing shareholders
- Bonus Issue - Additional shares given free
- Market Capitalization - Total value of a company’s shares
Types of Capital Issues in the Primary Market
- Public Issue
- Rights Issue
- Private Placement
- Preferential Allotment
Eligibility Norms for Making Capital Issues
Companies must meet SEBI's criteria like profitability, net worth thresholds, and disclosure requirements before issuing shares in the primary market.
Intermediaries in an Issue in the Primary Market
- Merchant Bankers
- Registrars to an Issue
- Underwriters
- Bankers to an Issue
- Debenture Trustees
Applications Supported by Blocked Amount (ASBA)
ASBA is a process where an investor’s application money remains blocked in their bank account until shares are allotted. It enhances transparency and reduces refunds and delays.
Qualified Institutional Placement (QIP)
QIP is a way for listed companies to raise capital by issuing equity shares or convertible securities to Qualified Institutional Buyers (QIBs) without undergoing lengthy regulatory procedures.
Advanced Mathematical Example: Valuation of a Bond in the Secondary Market
Let's calculate the price (P) of a bond:
Suppose a bond pays a semi-annual coupon of Rs. 50, has 5 years remaining to maturity, and a face value of Rs. 1,000. The market yield is 8% per annum compounded semi-annually.
Price of Bond, P is calculated as:
P = (C / (1+r)^1) + (C / (1+r)^2) + ... + (C / (1+r)^n) + (F / (1+r)^n)
where,
C = Coupon Payment = 50,
r = Yield per period = 0.08/2 = 0.04,
n = Number of periods = 5*2 = 10,
F = Face Value = 1000
Using formula for Present Value of an Annuity and a Lump Sum:
P = 50 × [(1 - (1+0.04)^-10) / 0.04] + 1000 × (1+0.04)^-10
P = 50 × 8.1109 + 1000 × 0.67556
P = 405.545 + 675.56
P = 1081.105
Thus, the fair price of the bond should be approximately Rs. 1081.11.
Chapter List: MODULE D: FINANCIAL PRODUCTS AND SERVICES
- Overview of Financial Markets
- Money Markets and Capital Markets
- Fixed Income Markets - Debt / Bond Markets
- Forex Markets
- Interconnection of various markets/Market Dynamics
- Merchant Banking Services
- Derivatives Market including Credit Default Swaps
- Factoring, forfaiting & Trade Receivables Discounting System (TReDS)
- Venture capital
- Leasing and Hire Purchase
- Credit Rating agencies & their functions
- Mutual Funds
- Insurance Products
- Pension Funds (include APY, NPS)
- Guidelines on Para Banking & Financial Services provided by Banks
- Real Estate Investment Funds / Infrastructure Investment Fund (concept)
Comments