Capital Market
The capital market is a platform that provides medium- and long-term funds for various sectors of the economy. It represents a comprehensive network of institutions, organizations, and financial instruments that channel long-term savings into productive investments.
It plays a crucial role in mobilizing the savings of individuals and making them available to industrial and commercial enterprises, as well as the public at large.
The capital market includes institutions such as development banks, commercial banks, and stock exchanges. Funds in this market are raised and invested in the form of debt and equity, using instruments like shares, debentures, bonds, and public deposits.
A well-functioning capital market significantly contributes to economic development. In fact, the development of a strong financial system is widely regarded as a key prerequisite for sustained economic growth.
Primary Market
The primary market is the market where securities are sold for the first time. It is also known as the New Issues Market (NIM). Its main function is to facilitate the transfer of investible funds from savers to entrepreneurs through the initial issue of securities.
The major participants in the primary market include banks, financial institutions, insurance companies, mutual funds, and individual investors. Funds raised in this market may be used for setting up new projects, expansion, diversification, modernization of existing projects, mergers, takeovers, and other purposes.
The primary market plays a direct role in capital formation, as it channels long-term funds into productive uses.
Methods of Floatation
- Offer Through Prospectus
- Offer for Sale
- Private Placement
- Right Issue
- E-IPO (Electronic Initial Public Offer)
1. Offer Through Prospectus
Under this method, a company invites the public to apply for its securities by issuing a prospectus. A prospectus makes a direct appeal to investors and is widely advertised in newspapers and magazines. Companies often take the help of underwriters or brokers to ensure the success of the issue.
The contents of the prospectus must comply with the provisions of the Companies Act and SEBI’s Disclosure and Investor Protection Guidelines.
2. Offer for Sale
In this method, securities are not issued directly to the public. Instead, they are first sold to intermediaries such as issue houses or stockbrokers at a fixed price. These intermediaries then resell the securities to the public at a higher price.
Benefit: This method saves the company from the formalities and complexities of issuing securities directly to the public.
3. Private Placement
In a private placement, the company sells securities to a selected group of institutional investors and individuals.
Benefits:
- Capital can be raised more quickly compared to a public issue.
- It is more economical, as it avoids many mandatory and non-mandatory expenses of public issues.
- Companies that cannot afford a public issue often prefer this method.
Typical investors include UTI, LIC, GIC, and high–net-worth individuals.
4. Right Issue
Under this method, a company offers new shares to its existing shareholders in proportion to the number of shares already held by them. This provides shareholders with a pre-emptive right to subscribe to new shares.
If the existing shareholders do not subscribe within the specified period, the company is free to offer the shares to the general public.
5. E-IPO (Electronic Initial Public Offer)
In this method, a company issues securities to the public through the online system of the stock exchange. Since the process is conducted electronically, it is known as an E-IPO.
A registrar with electronic connectivity to the stock exchange is appointed. The lead manager coordinates the activities of all intermediaries such as:
- Merchant bankers
- Bankers to the issue
- Escrow account managers
Stock Exchange: Past vs Present
Past Scenario
Earlier, securities were bought and sold on the floor of the stock exchange through the open outcry system or the auction method. Under this system, brokers gathered physically on the trading floor, shouted bid and offer prices, and executed deals among themselves.
Shares were sold to the highest bidder, and the entire process relied heavily on verbal communication.
Present Scenario
Today, the traditional auction method has been completely replaced by online, screen-based electronic trading systems. Trading is now fully computerized, enabling investors to buy and sell securities through terminals connected to the stock exchange network.
Advantages of Electronic (Screen-Based) Trading
- Ensures Transparency - Prices and trades are visible to all market participants.
- Improves Information Efficiency - Market information is updated in real time.
- Increases Operational Efficiency - Trades are executed faster and more accurately.
- Enables Large Participation - Investors from anywhere can trade online.
- Provides a Single Trading Platform - All buy and sell orders are matched on a unified electronic system.
Physical Form vs Electronic Form
Earlier, shares were issued in physical certificates, which led to several problems such as:
- Theft
- Fake or forged certificates
- Delays in transfer
- Excessive paperwork
To eliminate these issues, the system has shifted to Dematerialisation (Demat), allowing securities to be stored electronically through a depository.
Dematerialisation
Dematerialisation is the process of converting physical share certificates into electronic form. Once converted, the investor holds these securities as an electronic balance in a demat account.
Electronic securities can also be reconverted back into physical certificates through a process called dematerialisation.
Depository
A depository is an institution that holds securities such as shares, debentures, and bonds in electronic form.
In India, there are two major depositories:
- NSDL – National Securities Depository Limited
- CDSL – Central Depository Services Limited
Depository Participant (DP)
A Depository Participant (DP) acts as an intermediary between the investor and the depository (NSDL/CDSL). DPs are authorized to open and maintain demat accounts and handle transactions related to dematerialised securities.
Entities that can act as DPs include:
- Financial Institutions
- Banks
- Stock Brokers
- Clearing Corporations
- NBFCs
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