Introduction, Origin, Need, Functions, Constituents and Types of Capital Markets.

1. Capital Markets
Dr Raju Indukoori

2. Topics
• Introduction
• Origin of capital markets
• Need for capital markets
• Functions of capital markets
• Constituents of capital markets
• Types of capital markets
• Capital market and economic development.
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3. Capital Market
It is the market for long term capital requirements of
corporations, government and government bodies
comprising of debt and equity form of capital.
It bridges the gap between net savers and net
borrowers contributing to economic development
and growth.
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4. ORIGIN OF CAPITAL MARKETS
12th Century: Securities trading in Lyon, France.
1250s: Tradable bonds in Italy.
13th Century: Bruges, Belgium active trade center (Bourses)(Center) originated.
1350s: Venice, Pisa, Verona, Genoa and Florence, Italy - Active market for government securities.
1409: Antwerp, Netherlands became the heart of trading extended to Flanders, Ghent and Rotterdam.
1553: Muscovy Company (The Mystery and Companie of Merchant adventures fo the Discoverie of
Regios, Dominions, Islands and Places Unknown) in London is the world’s First Chartered Joint Stock
Company.
1585: Frankfurt Stock Exchange (Frankfurter Wertpapierbörse).
1602, Amsterdam Stock Exchange, Netherlands Launched by Dutch East India Company (VOC).
1611: The Dutch East India Company was the first corporation to be listed on a stock exchange (VOC).
1773 – London, UK.
1791 – Philadelphia, USA.
1792 – NYSE, USA.
1830s – Calcutta
1850s – Mumbai Town Hall.
1874 – Dalal Street ‘The Native Share and Stock Brokers Association (Bombay Stock Exchange.
1878 – Tokyo Stock Exchange, Japan.
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5. Roof less Amsterdam Stock exchange in 1612
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6. Bond issued by Dutch East India Company on 07.11.1623
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7. Dalal Street in Early 19th Century.
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8. NEED FOR LONG TERM CAPITAL
A. Government Needs
B. Companies Needs
C. Individuals Needs
D. Offshore Needs
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9. A. Government Needs
a. Fiscal Deficit.
b. Public Expenditure.
c. External payments.
d. Infrastructure.
e. Unforeseen Contingencies.
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10. B. Companies Needs
a. New business.
b. Capacity Expansion.
c. Export business.
d. Working capital.
e. Automation or Computerization.
f. Meeting the legal standard or norms.
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11. C. Individuals Needs
a. Housing.
b. Long Term Credit.
c. Individual Business.
d. Long Term Investments.
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12. D. Off Shore Sector Needs
a. Individuals
– Investments
– Repatriation
b. Companies
– Investments
– Imports
– Exports
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13. Raju Indukoori
FUNCTIONS OF CAPITAL MARKET
A. Financial Intermediation
B. Provide Income generation channels
C. Participation promotion
D. Market efficiency
E. Contribute to Economic Growth
F. Regulation
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A. Financial Intermediation
 Long Term capital transfer from surplus savers to those
with productive need.
 Provide channel for reallocation of savings to investments.
 Provides platform for demand and supply of capital through
various financial securities.
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B. Income Generations Channels
 Trading
 Investment
 Hedging
 Arbitrage
 Speculation
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C. Participation Promotion
 Provides liquidity and tradability.
 The market provides a match for liquidity, maturity, risk and cost
of capital of various securities.
 Risk management tools through hedging and financial
derivatives.
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D. Market Efficiency
 Lowers cost of financial transactions.
 Provide pricing mechanism promoting efficiency of capital
allocation.
 Reflect valuation with efficiency of sensitivity of prices.
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E. Economic Growth
Capital market accelerate economic growth through the following.
 Promote Savings Culture
 Capital Formation
 Efficient Capital Allocation
 Build confidence among domestic and foreign investors by
stabilizing the prices
 Accelerate Economic Development
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F. Capital Market Regulation
 Disseminate information promoting transparency.
 Ensures safety and security through a regulatory system.
 Risk management through counter guarantee and risk.
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20. CONSTITUENTS OF CAPITAL MARKETS
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21. CONSTITUENTS OF CAPITAL MARKETS
1. Capital Market Instruments
2. Capital Market Participants
3. Capital Market Intermediaries
4. Capital Market Technology
5. Capital Market Regulators
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22. 1. Instruments
 Equity
 Debt
 Hybrid
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23. 2. Participants
A. Issuers
B. Lenders
C. Investors
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24. 2. Participants
A. Issuers
 Companies : Debt and Equity
 Government: Central, State and Regional
 Government Bodies
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25. 2. Participants
B. Investors
 Retail investors
 Non Institutional : HNIs
 Institutional Investors
 Domestic Institutional Investors (DIIs)
 Banks
 Pension funds
 Mutual funds
 Foreign Portfolio Investors (FPIs)
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26. 2. Participants
C. Lenders
Commercial Banks and Stock brokers do the
lending activities in the following forms.
 Loan Securitization.
 Loans against securities.
 Margin Trade Funding.
 Employee Stock Option (ESOP) Scheme Funding.
 Broker Funding
 IPO Funding
 Application Supported by Blocked Amount (ASBA)
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27. 3. Intermediaries
 Stock Exchanges
 National Stock Exchanges : NSE and BSE
 Regional Stock Exchanges: NDSE, CSE, MSE…….
 Stock Brokers
 Stock exchange members
 Sub Brokers and Franchisee
 Commercial Banks: Application, Payment, receipts
 Merchant Banks
 Underwriters
 Registrars
 Individuals : Commission Agents, Brokers, Fee based
consultants.
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28. 4. Technology
 Screen based trading
 Online trading
 Dematerialization
 Clearing and Settlement.
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29. NSE Technology
 National Exchange for Automated Trading (NEAT).
 Open Dealer Integrated Network (ODIN).
 Computer to Computer Link (CTCL).
 NEAT on Web (NOW).
 Algorithmic Trading for Institutional Traders through co
location.
 EMERGE for Small and Medium Enterprise (SME) stocks.
 Mutual Fund Service System (MFSS) for web based mutual fund
trading.
 NSE Mutual Fund (NMF) Platform for distributors.
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30. 5. Regulators
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A. Ministry of Finance (MoF).
B. Reserve Bank of India (RBI).
C. Securities Exchange Board of India (SEBI).
D. Securities Appellate Tribunal (SAT).
E. Self Regulatory Organizations(SROs).
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31. A. Ministry of Finance (MoF)
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Headed by Union Minister of Finance and Minister of
State. It has 5 departments as follows.
a. Department of Economic Affairs.
b. Department of Financial Services.
c. Department of Investment and Public Asset
Management.
d. Department of Expenditure.
e. Department of Revenue.
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32. A. Ministry of Finance (MoF)
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Department of Economic Affairs (DEA)
DEA directly manages capital markets by formulating
rules and regulations in the direction of MoF.
 Headed by the Secretary, Economic Affairs
 Chief Economic Advisor
 Assistant Secretary, Economic Affairs
 Assistant Secretary, Investments
 Financial Markets division of DEA controls or
regulates capital markets under direction of MoF.
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33. A. Ministry of Finance (MoF)
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Financial Markets Division
 Securities Contracts (Regulation) Act 1956.
 Forward Contracts (Regulation) Act 1952.
 Securities and Exchange Board of India Act, 1992.
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34. C. Securities & Exchange Board of India(SEBI)
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• SEBI is the apex body governing the Indian stock exchanges.
• The Securities & Exchange Board of India (SEBI) Act, 1992
regulates the functioning of SEBI.
• The participation in the Indian Stock Market of both the
domestic or foreign financial intermediaries are governed by
the regulations framed by SEBI.
• Foreign Portfolio Investors (FPIs) can participate in Indian
Stock Market after registering them with an authorized
Depository Participant.
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35. SEBI Functions
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 Protective Functions
I. It checks Price rigging
II. Prohibits insider trading
III. prohibits fraudulent and Unfair Trade Practices
 Development Functions
I. SEBI promotes training of intermediaries of the securities market.
II. SEBI tries to promote activities of stock exchange by adopting a flexible and
adaptable approach
 Regulatory Functions
I. SEBI has framed rules and regulations and a code of conduct to regulate
the intermediaries such as merchant bankers, brokers, underwriters, etc.
II. These intermediaries have been brought under the regulatory purview
and private placement has been made more restrictive.
III. SEBI registers and regulates the working of stock brokers, sub-brokers,
share-transfer agents, trustees, merchant bankers and all those who
are associated with stock exchange in any manner
IV. SEBI registers and regulates the
V. working of mutual funds etc.
VI. SEBI regulates takeover of the companies
VII. SEBI conducts inquiries and audit of stock exchanges.
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36. E. Self Regulatory Organizations (SROs)
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 Stock Exchanges: NSE and BSE.
 Depositories: NSDL and CDSL.
 Association of Mutual Funds in India (AMFI).
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37. TYPES OF CAPITAL MARKETS
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38. Types of Capital Markets
1. Primary market (Fresh First Issue Markets)
2. Secondary market (Stock Exchanges)
3. Third market (Tertiary Markets)
4. Fourth market (Direct Markets)
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39. 1. Primary Markets
This is the market for issue of new or fresh securities by a
company or government or government body for the first time or
again and again. This market can be classified as follows
1. Primary Debt Market
2. Primary Equity Market
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40. 2. Secondary markets
This is the market for trading of existing or listed securities of
different issuers. These are the markets for debt, equity and
derivative products. They can be classified as follows.
1. National Stock Exchanges: NSE, BSE, MCXSX
2. Regional Stock Exchanges: NDSE, CSE, MSE, HSE, BgSE,
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41. 3. Third markets
 It is the market for trading between the parties without
exchange as the platform.
 The product in terms of quantity, order, pricing are
customized when compared to an exchange.
 It has no or low liquidity
 Unlike exchange trading, OTC trades have low liquidity
and high risk as they doesn’t have counter party risk
guarantee.
 In India OTCEI is the form of this market and in USA it
is carried out by Market Makers.
 Debt, equity and derivatives products are traded in OTC
Markets.
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42. 4.Fourth market
It is the institution-to-institution direct trading bypassing the
services of a stock exchange and brokers. They are also
known as direct markets.
a. avoiding both commissions
b. Absence of spreads.
c. Block trades
d. Trades are not subject to reporting requirements.
e. Confidentiality of trades.
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43. Direct Market Access (DMA)
 DMA is the alternative of fourth market.
 It is the electronic trading facilities that gives the traders or
investors to interact with the order book of the exchange
which is usually restricted to the exchange members.
 Buy side firms, sell side firms and private traders are the
major participants.
 It is meant for algorithmic trading strategies with privacy.

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44. Economic Development and Growth with Capital Markets
 Capital formation.
 Capital markets fulfill long term capital needs.
 The role of capital markets is important for a country’s
economic development.
 The growing size of capital market indicates more wealth
accumulation in the economy.
 Three sector’s participation is more important in terms of
source as well as need.
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Any Questions
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