Chapter – 10: Capital Market

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Chapter 10 - Capital Market 

What is meant by capital market? Describe its nature. – 4 marks

  • It is a market where all organizations, financial institutions and instruments provide long and medium term funds to the business sector.
  • The two major components of capital market are
    • Primary (new issue market)
    • Secondary market (stock exchange).

The nature of capital market can be understood from the following points:

  • It acts a link between savers and borrowers who need funds to invest profitably and efficiently.
  • It helps firms to procure finances for long-term investments such as buying plant & machinery, building, etc.
  • It obtains its funds through issue of various securities such as equity shares, bonds, debentures and innovative securities like zero interest bonds and deep discount bonds.
  • It functions thru’ various intermediaries such as underwriters, bankers, stock brokers, etc.
  • It includes both individual investors and institutional investors such as UTI, LIC, IDBI, etc

State any four PROTECTIVE functions of SEBI? (What is insider trading)?

  • It prohibits insider trading. It prevents insiders such as directors, promoters who have access to price sensitive information regarding securities of the company (which is not available to the public) to make individual profits through trading of securities.
  • It prohibits fraudulent and unfair trade practices in the security market like making misleading statements and price rigging. (Manipulating with the sole intention of inflating or deflating the market price of securities is termed as “price rigging)
  • It promotes fair practices and code of conduct in the securities market.

    Example: Looks after the interest of the debenture holders in terms of any mid term revision of interest rate, etc.

  • It takes steps to educate investors.

SEBI is a REGULATORY authority of the securities market. Do you agree? Explain in brief any four reasons in support of your answer. 4 marks - CBSE-2005 Set 1, 2. OR

  • It carries out audit of the share markets
  • It regulates takeover of companies
  • It regulates the business being conducted in the share market.
  • It registers and regulates the working of brokers, sub brokers, transfer agents, merchant banks, underwriters, etc.
  • It registers and regulate the credit rating agency, venture capital funds and mutual funds

State any two developmental functions of SEBI – 4 marks (CBSE-2004 Set 1 )

  • It promotes trading of intermediaries of the securities market.
  • It adopts a flexible approach to develop the capital market.

You are a finance expert. One of your friends comes to you and tells you that the capital market and money market are one and the same, whereas you differ with him. How would you convince him? Give any 4 reasons. – 4 marks CBSE-2004 Set 1,2.3

Or

Dist between: Capital Market and Money Market on the basis of: participants, instruments traded, investment outlay and safety 4 will be asked (4 marks CBSE 2005 Set 2)

Basis

CAPITAL MARKET

MONEY MARKET

Participants

Participants are financial institutions, banks, corporate entities, foreign investors and ordinary retail investors from the public

Participants are institutions such s RBI, Banks, Financial Institutions and finance companies

Instruments

Traded

Equity shares, debentures, bonds, preference shares, etc

Treasury bills, trade bills, commercial papers, certificates of deposit

Investment outlay

Does not require huge investment outlay as value of units of securities is low

Requires huge investment outlay as instruments are quite expensive

Safety

Risky both in terms of returns and principal repayment

Safer with minimum risk of default

Duration

Deals in medium and long term securities

Deals in short term securities from 1 day up to 1 year

Liquidity

Low liquidity

High degree of liquidity

Expected returns

Generally yields high returns

Generally yields low returns

Dist between: 4 marks NSEI and OTCEI on the basis of: size of company, securities traded, settlement, objective.

Basis

NSE(I)

OTCE(I)

Size of company

Paid up capital 3 crores & above

Paid up capital 30 lakhs and above

Securities traded

Trades in Equity, debentures, treasury bills, PSU, bonds, etc

Equity, debentures, etc

Settlement

Payment within 15 days of transaction

Payment within 7 days of the transaction

Objective

Nationwide, ringless transparent trading facility for both capital and money market

Serves as an exchange for securities of small companies

 

Dist between: Primary and Secondary Market on any 4 basis

Basis

Primary Market(New Issue Market)

Secondary Market(Stock Exchange)

Securities trading

It is a market for new securities

It is a market for existing securities

Sale of securities

Securities are sold to investors directly by the company or through their intermediary

Securities are exchanged between investors without involvement of the company

Flow of funds

It directly promotes capital formation as flow of funds is from savers to investors

It indirectly promotes capital formation as it enhances liquidity of shares

Location

It has no fixed geographical location. Shares can be traded from anywhere

It has a fixed location and fixed working hours

Prices

Prices are determined by management of the company

Prices are determined by demand and supply of the securities

The directors of a company want to modernize its plants and machinery by making a public issue of shares. They wish to approach stock exchange, while the finance manager prefers to approach a consultant for the new public issue of shares. Advise the directors whether to approach stock exchange or a consultant for new public issue of shares and why? Also advise about the different methods that the company may adopt for the new public issue of shares.

The directors should approach the consultant for the new public issue of shares. The reason being that as stock exchange is a secondary market, which deals in existing securities while the company wants to make a public issue of shares.

The following are the methods for the new public issue of shares.

Public issue through prospectus:

  • Under this method, the company issues a prospectus to invite the public to invest in its securities.
  • The prospectus provides the following details
    • purpose for which funds are being raised
    • past financial performance of the company
    • background and experience of promoters
  • This information helps the investing public to evaluate the earning potential and risk of the proposed investment.

Offer for sale:

  • The sale of securities takes place in two steps:
    • In the first step the company sells all the shares to intermediaries at an agreed price.
    • In the second step the intermediaries resell these securities to investors at a higher price.
  • The advantage of this method is that the company is saved from the tedious process involved in making a public issue.


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