Question No. 3 - MMPC 03 - Business Environment - MBA and MBA (Banking & Finance)

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                            MBA and MBA (Banking & Finance)

MMPC 03 - Business Environment

MMPC-003/TMA/JULY/2022

Question No. 3. Discuss the structure of capital market in detail.   

However, business units and investors need funds for a longer duration also for undertaking business expansions or technology upgrading and in this regard they approach the capital market. A capital market is a market for long term securities or financial instruments having a maturity period of more than one year. Capital markets are important for channelising savings, capital formation and industrial growth. The structure of the capital market in India can be better understood with the help of Figure

Capital markets comprised of two markets i) Primary Market and ii) Secondary Market. The primary market is also known as the New Issue Market (NIM) where the issuer of the securities (shares and bonds) sell the new securities to the investors directly without any intermediaries. Whenever the securities are offered for sale for the first time by the companies they are called Initial Public Offering (IPO). IPO is issued to raise capital for funding purpose. Both the companies and government raise funds by the sale of new stocks in the primary market.

The secondary market is also known as the stock market. It is a place where shares, bonds, options, etc which were sold earlier are sold and purchased. In India, you must have heard about the Bombay Stock Exchange (BSE), National Stock Exchange (NSE) they are some of examples of stock exchanges. The secondary market can be either an auction market or Overthe-Counter. In the auction market, trading of securities is done through the stock exchange. In Over-the-Counter the trading is conducted without using the platform of stock exchange, it does not have any physical location and trading is done electronically

a. Financial Instruments 

Some of the major financial instruments used in capital markets are discussed below. 

i) Shares 

A share indicates a unit of ownership by the buyer of shares called shareholder/holers of the company. A shareholder has ownership in the company and has voting rights and shares the company profit or loss. The benefit which a shareholder receives out of company profit is called a dividend. Let us understand it with an example. Assume that there is a company know as XYZ limited and it needs funds (Rs 100 crore ) for further expansion. For raising this fund the company will go to the public. This capital of Rs 100 crores is divided into 1,000,000 shares of Rs. 1000 per share. Now assume that there are two investors A and B and they want to invest in this company so they will buy some shares. Investor A buys 500 shares and investor B buys 800 shares so they are investing Rs 500000 and Rs 8000000 in this company and have become the shareholders and will share the profit or loss of the company in the proportion to their holdings. Further, shares are of two types namely equity shares and preference shares. 

ii) Bonds 

Bonds are issued by state and central governments, companies and municipalities to raise money for a variety of projects and activities. They are debt instruments in which the entities borrow the funds for a defined period of time at a variable or fixed interest rate. It is fixedincome security and essentially a loan agreement between a bond issuer and an investor. The bondholders unlike shareholders do not have any ownership of the company or have voting rights. 

iii) Debentures

Debentures are also a type of debt instrument which is issued by companies for raising funds but they are not secured by physical assets or collateral. An investor buys debentures based on the reputations and the creditworthiness of the issuer. The interest rate on debentures is higher than that of bonds.

b. Capital Market Intermediaries 

There is a large number of intermediaries in the capital markets some of which are discussed below: 

i) Merchant Bankers 

Merchant Bankers are intermediaries between the investors and the company. They act as an advisor who advises the entrepreneurs from the stage of the conception of the project till the production begins. SEBI defines merchant bankers as “any person who is engaged in the business of issue management either by arranging for buying, selling or subscribing to securities or acting as manager, consultant or rendering corporate advisory services in relation to such issue management”.

ii) Underwriters 

When a company decides to go public to raise funds all of its securities maybe not fully subscribed by the public, so there is a need for someone who can subscribe to those securities. This work is done by the underwriter he agrees with the issuer company that in the case of securities that are not subscribed then the underwriter would subscribe to the securities itself or by others the unsubscribed securities. He is paid a fee called ‘underwriting commission’ for this job. Underwriters can be both institutional (for example IDBI, UTI) or non-institutional. All underwriters need to be registered with SEBI.

iii) Portfolio Managers or Portfolio Management Services (PMS) 

A professional who enters into a contract with the client to advise or direct or undertake investment decisions on behalf of the client. Portfolio managers are of two types discretionary portfolio managers and non-discretionary portfolio managers. When the portfolio manager manages the funds of the client independently according to the needs of the client they are called discretionary portfolio managers. Whereas non-discretionary portfolio manager manages the funds following the directions of the client. Some of the examples of major Portfolio Management Services in India are Motilal Oswal PMS, Kotak PMS, ICICI Prudential PMS, etc.

iv) Stock Brokers 

A stockbroker is an individual or firm which is an intermediary between an investor and a securities exchange. The stockbroker trades in the stock exchange on the behalf of their clients. In return for their services, they are paid commissions of fees. They handle all the paperwork and maintain records of all transaction, manages their client's portfolio and advise the investors on formulating different investment strategies in the dynamic world of financial markets. All stockbrokers are registered with the SEBI.

v) Regulator of the Capital Market /SEBI 

In India, the capital market is regulated by the Securities and Exchange Board of India (SEBI). SEBI was established in 1988 as a non -statutory body but with the passing of SEBI Act 1992, it was accorded statutory power. The major objectives of SEBI are to protect the interest of investors and development and regulation of stock exchange, to prevent deceitful malpractices and to regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc. SEBI performs various functions like registration of stock exchanges, mutual funds, underwriters, brokers and sub-brokers. Levys various fees and other charges promote investors educations, audit and inspection of stock exchanges and various intermediaries, prohibits unfair trade practices relating to the securities market and insider trading.