Professor Vipin 2015
An Overview Of Capital And Commodities Markets
Primary Market
The primary markets deal with the trading of newly issued securities. The corporations, governments
and companies issue securities like stocks and bonds when they need to raise capital. The investors can
purchase the stocks or bonds issued by the companies.
Money thus earned from the selling of securities goes directly to the issuing company. The primary
markets are also called New Issue Market (NIM). Initial Public Offering is a typical method of issuing
security in the primary market. The functioning of the primary market is crucial for both the capital
market and economy as it is the place where the capital formation takes place.
Secondary Market
The secondary market is that part of the capital market that deals with the securities that are already
issued in the primary market.
The investors who purchase the newly issued securities in the primary market sell them in the secondary
market. The secondary market needs to be transparent and highly liquid in nature as it deals with the
already issued securities. In the secondary market, the value of a particular stock also varies from that of
the face value. The resale value of the securities in the secondary market is dependant on the
fluctuating interest rates.
Depositories
A depository is an organization which holds securities of investors in electronic form at the request of
the investors through a registered Depository Participant. It also provides services related to
transactions in securities.
At present two Depositories viz. National Securities Depository Limited (NSDL) and Central Depository
Services (I) Limited (CDSL) are registered with SEBI.
A Depository Participant (DP) is an agent of the depository through which it interfaces with the investor.
A DP can offer depository services only after it gets proper registration from SEBI. Banking services can
be availed through a branch whereas depository services can be availed through a DP.
Private Placement
Private placement (or non-public offering) is a funding round of securities which are sold not through a
public offering, but rather through a private offering, mostly to a small number of chosen investors. PIPE
(private investment in public equity) deals are one type of private placement.
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Professor Vipin 2015
Buy Back of Shares
It is the repurchase of outstanding shares (repurchase) by a company in order to reduce the number of
shares on the market. Companies will buy back shares either to increase the value of shares still
available (reducing supply), or to eliminate any threats by shareholders who may be looking for a
controlling stake.
Issue Mechanism
Public Issue Through Prospectus
Company issue a prospectus which is an invitation for subscription by the investing public. It is a direct
offer by the company to the public. Normally the shares of new company are issued at par and shares of
existing company can be issued at premium. Prospectus contains all the details of the company and its
promoters, prospects and risk associated.
Key Features - simple way of issuing shares.
- wide distribution of share is possible.
- floatation costs, administrative costs, publicity costs and
legal costs are high.
Offer for Sale
The company does not offer shares directly to the public, but through intermediaries, such as, issuing
houses or stock broker firms. Sale of securities done in two stages. In the first stage, the issuing
company makes an en bloc sale of securities to the issue house at an agreed fixed price. The second
stage involves re-issue of securities by issue houses to the ultimate investor at higher price. The
difference between the sale and purchase price of issue house is called as turn. All the costs related with
the issue like underwriting, advertisement etc. have to meet by issuing houses, out of the turn.
Major benefit of the method is issuing company is free of hassles involved in issuing shares.
Private Placement
Under this method, the securities are acquired by the issuing company at an agreed price and then
these are placed only with their investor-clients, both individual and institutional investors, at a higher
price and hence earning turn. In this case no underwriting is required. The advantage of this method is
no advertisement costs or no underwriting fee is to be paid.
Advantages SEs requirement regarding prospectus is also less stringent.
On the other hand, the major limitation of this method is – fear of issue getting concentrated in few
hands. This method is more common for Government Owned Institutions.
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Professor Vipin 2015
Right Issue
A fresh issue of shares by an existing company to its existing shareholders in proportion to the number
of shares already held by them is called as right issue. Only a company whose shares are already listed
can make right issue. It is offered on pro-rata basis.
Major advantage of this method is – it is economical and do not disturb the existing shareholding
pattern. Limitations are – only existing company can issue it, shares may get concentrated in few hands
and there may be conflict between the rights of existing shareholders and overall societal considerations
of diffusion of share ownership for promoting dispersal of wealth and economic power.
Bonus Shares
It does not result in raising fresh capital. It is merely a conversion of existing reserves and surpluses into
share capital. It represents just a book entry subject to certain rules and regulation. Total resource base
of the company does not change nor it results into entry of new shareholders
IPOs through Secondary Market
In October 1999, SEBI accepted the proposal for marketing IPOs through the secondary market, i.e.
using existing infrastructure. Here the brokers place orders on behalf of clients through a special
window on trading terminal. After finalisation of allocation, brokers are advised to inform the allottees.
Successful allottees submit the application form and the amount payable through the broker to the
clearing house. Subsequently the share certificates would be delivered to the investors by crediting the
depositories account in the name of investor.
The major advantage of the method is investors need not to park their funds until allotment.
Book Building
Most commonly used method now-a-days. In this case the issuer company does not directly issue shares
to the public but invites bids from public. Therefore this method is also called as “Price Discovery
Through book Building Process”. In this method the bids are collected from investors at various prices
which are above or equal to the floor price. The offer price is determined after the bid closing date. In
this case the issuer company advertises about the issue in the national newspaper.
The advertisement will have the information about floor price, price band and cap price. Floor price is
the minimum price of the issue and cap price is the maximum price, and the spread between these two
prices are called as price band. Here the cap price must not be more than 120 percent of the floor price.
The book shall remain open minimum for three days. The price band can be revised also and in that case
the bidding process can be extended to three more days subject to total bidding period not exceeding
ten days. The actual discovered issue price can be any price between the price bands.
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Professor Vipin 2015
Commodity Market
Commodity
A reasonably homogeneous good or material, bought and sold freely as an article of commerce.
Commodities include agricultural products, fuels, and metals and are traded in bulk on a commodity
exchange or spot market.
Commodity Market
Multi Commodity Exchange of India is a de-mutualized online commodity exchange of India promoted
by Financial Technologies (I) Ltd, SBI, Fidelity International, NSE, NABARD, HDFC Bk, SBI Life Insurance
Co., Union Bank of India, Canara Bank, Bank of India, Bank of Baroda and Corporation Bank.
Commodity vs Stock Market
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