AN OVERVIEW OF CAPITAL AND COMMODITY - STOCK AND COMMODITY MARKET

Notes 14 Pages

Bengaluru City University

Bachelor of Business Administration

Contributed by

Tabeed Malpani

1

FACULTY NAME: Mrs NALINI.N
COLLEGENAME: MES INSTITUTE OF MANAGEMENT
SUB:STOCK AND COMMODITY MARKET

CHAPTER-I

AN OVERVIEW OF CAPITAL AND COMMODITY
MARKET
.

Financial System: It is a set of all financial institution which facilitates financial transactions
in financial markets. It brings under its fold the financial markets and the financial institution
which support the system.
Definition

Financial system is a complex well integrated set of sub system of financial institutions, market,
instruments and services which facilitates the transfer and allocation of funds efficiently and
effectively
System helps to mobilize the surplus funds and utilizing in productive manner

Components

 Financial Instruments

 Financial Markets

 Financial Institutions

 Financial Services

 Regulatory Authority

Financial Markets

Financial market is a place or mechanism which facilitates the transfer of resources from one
entity to another
ROLE OF FINANACIAL MARKETS
1.

Transfer of resources:- FM facilitates the transfer of resources from one person to another.
2.

Productivity usage: - Financial markets allow for the productive use of the funds in financial
system thus enhancing the income and gross national production.
3.

Growth in income:- Financial markets allow lenders earn Interest and Divided on their surplus
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investable funds thus contributing to the growth in their income.
4.

Capital formation: -A channel through which savings low to aid capita formation of a country.
5.

Price discovery: - FM allow for the determination of the price of the traded financial assets
through the interactions of different set of participants.
Function of financial markets

1.

Facilitate creation and allocation of credit and liquidity
2.

Serves as intermediaries
3.

Assist process of economic growth
4.

Caters financial needs
Types of financial markets

Money Market

Definitions:Money market is collective name given to the various firms and institutions that deal
in various grades of near money
Characteristics of money market (MM)

1.

Concerned with borrowing and lending of short term funds only.
2.

Source of working capital finance.
3.

Dealings are done on negotiations and effect their financial transactions through telephone
,telegram ,mail or any other means of communication
4.

Market. Is composed of several specialised sub markets such as (1).call money market.(2)
T. bill market.(3)Discount market.(4) collateral loan market.
5.

Various instruments of MM. areCall money (inter bank loan),Certificate of deposits(time
deposit)Treasury bill of the Govt., trade bills ,commercial papers promissory notes by reputing
co.’s
6.

Dealers in MM are;-
(1)

Central Bank
(2)

Commercial Bank
(3)

Discount houses
(4)

Bill brokers
(5)

Insurance companies
(6)

Financial corporations

Functions of money market

(1)

It provides an outlet to commercial banks for the employment of their shout term funds.
(2)

It offers a channel to non-banking financial institutions such as Co’s, financial houses etc. for the
investment of their short term funds.
(3)

It provides short term funds to industrialists to meet their requirements of working capital.
(4)

It helps the Govt to raise the necessary short-term funds through the issue of treasury bills or
short-term loans.
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(5)

It serves as a medium through which the central back of a country can exercise its control over
the creation of credit
Capital Market

Capital market refers to the institution and mechanism for the effective pooling of long-term
funds from the investing parties. . It includes shares debentures bonds and securities
Classification

Primary market

Secondary market
Features of capital market

1.

Capital markets deals in Long-term and medium-term funds.
2.

It concerned with the transfer of long-term and medium-term funds from investing parties to
industrial and commercial enterprises.
3.

Deals with Ownership securities like equity shares and preference shares
and Creditor ship Securities like Debentures & bonds
4.

Capital market is composed of new securities market (primary market), stock Market (Secondary
market) and Special Financial institutions.
5.

The dealers in the capital market are individual investors and institutional investors.

Importance of Capital Markets

1.

Productive use of economy’s savings

2.

Provides incentives for saving

3.

Facilitates capital formation

4.

Increases production and productivity

5.

Stabilizes value of securities

6.

Enables technological up gradation

Functions of capital Market (CM)

1.

Mobilization of savings-

Capital market facilitates Large Scale nationwide mobilisation of savings and financial
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resources.it helps in transfer of resources from investors to institutions

2.

Capital formation:
Capital market facilitates acceleration of capital formation. It channels
idle resources to various segments
3.

Continuous availability of funds:
It ensures ready and continuous market for long-term funds.
4.

Economic growth:
CM acceleration production sector and service sector and helps in perusing
foreign capital for the quicker economic development of a country.
5.

Returns for investment:
Capital markets ensure effective allocation of the mobilised financial
resources among projects which yield highest return
Difference between Money market and Capital Market.

Money market

Capital Market

It is for period less than a year
Its period exceed s one year
It supplies funds for current Business
operations, working Capital requirements
It finances fixed capital requirement of
Trade and commerce
The instruments used in Money
Market are bills of exchange,like shares,
bonds etc
Treasury Bills
Deals with shares and debentures
Each single Money Market is of Large
amount
e.g. TB of 1 lakh
Each single instrument is of a smaller
value e.g., one equity share – Rs 10
Central and commercial banks are
The major players in this market
It include individual and institutional
investors
Money Market instruments do not
Have secondary markets
Capital market instruments generally
have
secondary market
Transaction happens without broker
Transaction happens only through an

broker
Act as a intermediary between depositors
and
borrower
Link between investor and
company/entrepreneur

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Primary Market (or) New Issues Market

Primary Market (PM) is the market in which funds are raised by industrial and commercial
enterprises from investors through issue of shares, debentures and bonds.

Features of Primary Market

PM is concerned with long term funds or capital.

(1)

In the PM securities are for the first time .That is PM is concerned only new issues of securities
for this reason PM are popularly known as new issue market.
(2)

Securities are issued by industrial and commercial co. directly to investors.
(3)

It promotes capital formation directly.
(4)

The funds raised in the primary capital market are utilised by the issuing co.’sfor investment on
fixed capital that is assets
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New issue mechanism
A company can rise finance by issuing E.g. Shares in different forms.

IPO ( initial Public Offerings) FPO ( Follow Up offer)

 Right issue.
 Pvt Placements. PreferentialAllotments.

Bought out deals (offer for sale). Book Building

IPO Initial Public Offer:
A initial public offering is process of issuing share to the public for the
first time by a company

PROCEDURE REGARDING NEW ISSUES:

Issue of Prospectus - A company, which intends to raise finance from the public through
new issues, must be familiar to public .. This can be done by issuing a prospectus. The
prospectus is any document described or issued as a prospectus and includes any notice, circular,
advertisement or other document inviting deposits from the public, inviting offers from the public for
the subscription or purchase of shares or debentures of a company.
Application - When a company issues the prospectus, the investors/public may apply for the
shares offered by the company. These application forms may be obtained from the brokers,
bankers or lead managers, who assist the company in the issue of new shares. The application
may be in the name of individuals or companies. The applicant usually pays an amount called
‘application money’ along with the application
Application for listing of securities - A company can create a favorable impression in the
minds of the investors about its financial soundness, marketability of its shares etc., by
getting its securities listed in stock exchange. The prospectus for new issues should include
details regarding submission of application form for listing of its securities in recognized
stock exchanges.
Allotment of shares - On closing the subscription list, the company can allotshares to the
applicants. After allotment of shares, the allottees become the shareholders of the company.
Allotment / Regret letter - After the allotment of shares, the allotment letters or
share certificates be sent to the allottees within a reasonable time, say, two months from the
date of closing of subscription list. Letters of regret along with refund orders must be sent to
non- allotees
Advantages of going public

Access to capital - basic purpose for going public is to have larger access to capital for long
term long term
Stock holder diversification-founders can diversify their holdings and thereby reduce the
risk of portfolio.
o Investor’s recognition.
o Liquidity to promoters-
o Reputation of the company-when company go for public it enhances the image ad reputation
of the company
o Signals from Markets.it provides useful information about the market to managers
Disadvantages

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1. Dilution of control- when shares are issued to public it leads to dilution of proportionate
ownership in the firm
2. Loss of flexibility.-company will lose it flexibility in decision making process since they are
accountable to public
3. Disclosure- company requires to disclose the information to investors
4. Accountability-company should be responsible and accountable to public in management
activities as they are the owners of the company
5. Cost associated with issue- apart from cost issuing shares company from cost issuing shares
company has to incur cost for providing investors for periodical reports, holing share holders
meetings etc
Parties involved in IPO


Managers to the issue/Lead managers.

 Lead Managers are appointed by the company to regulate the initial public issue.

The main duties-

 Drafting of prospects.
 Preparing the budgets for estimate the expenses.
 Suggesting the appropriate timings of the public issue.
 Provide assistance in marketing.
 Living advice to fix of registers, underwriters, brokers, bankers and the advertising agents
etc.
 Directing the various agencies involved in the public issue.
Registrar to the issue.

After the appointment of the lead managers to the issue the registor is appointed for the
purpose of
 Receive share application from various collection centres.
 Basic of allotment of shares.
 Consultation with regional stock exchange for approval.
 Share certificate dispatching.
Underwriters.

Underwriters act as a middlemen in between the company & the public. The un subscribed
capital is collected by the company from the underwriters once the UW is purchased some
share for guarantee purpose he will become the shareholders.
Advertising Agent:
Advertising plays a Key role in promoting the public issue. It takes the
responsibility of giving publicity to the issue on the suitable media.
Issue management activities

Merchant banker is the agency that plan co-ordinate and control the enlite issue activity the
merchant banker divided into phases
(1)

Pre-issue mgt
(2)

Post-issue mgt
Steps in pre issue mgt

 Obtaining stock exchange approvals
 Taking actions as per SEBI guide lines
 Finalising the appointment
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1. Co-manages
2. Underwriter to issue
3. Broker to the issue
4. Banker to the issue and refund banker
5. Advising agency
Advice the company to appoint
Auditors
Legal advisors
Board of directors
 Drafting prospects
 Obtaining approval
 Approval of SEBI for the prospects
 Filling prospects
 Making of applications
 Publicity of the issue
Post issue mgt

(a)

To verify and confirm that the issue is subscribed
(b)

To supervise and co-ordinate the allotment procedure of registrar to issue
(c)

To ensure issue of refund order allotment letter
(d)

Periodical reports of progress related to the allotment of shares
(e)

To ensure listing of securities

Follow on public offers

Are popular methods for co s raise additional ex; capital the company need to fulfill certain
conditions before going for subsequent issue and company should be listed in stock exchange
for at least 3years divided payments of 3years details
Right issue:
Right issue is method of issuing equity/securities in the primary market to
existing shareholders on prorate basis
essentials of right issue

 Shareholders gets numbers of shares hold by him as per the ratio fixed by the company
 Price per share is determined by the company
 Existing shareholders can exercise right and can apply for share.
 Rights can be sold.
Advantages

1. Less expensive as compared to the public issue.
2. Existing share holders pattern not disturbed
3. Mgt of applications and allotments is less cumbersome.
Disadvantages

1. Can be used only existing shareholders.
2. Not skilled for large issue’

Private placements

Refers to the allotment of shares by a company to few selected sophisticated investors,
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mutual friends insurance co.’s and banks etc, in this method issue is placed with small
number of finance restitution corporate bodies and high networks individuals.
Process of issue through private placement
: Company seeking pvt placement issues a
private placement memorandum Consulting attorneys who specialize in private placement.
Meeting with SEC securities Exchange commission
Advantages

 Cost effective – No costs relating to underwriting commission , application & allotment of
shares or publicity etc.
 Time effective – A public offering usually takes 6 months but private placement can be made
in 2-3 months.
 Structure effective – It can be structured to meet the needs of the entrepreneurs. Here the
terms of the issue can be negotiated with the purchasing institutions easily since they are few
in number.
 Access effective – Through private placement a public limited company, listed or unlisted
can mobilize capital and issue of all sizes, big or small can be accommodated .
Disadvantages

 Fear of issue getting concentrated in few hands .
 Difficult to find target investors group
 Artificial scarcity of these securities may be created for hiking up their prices temporarily,
thus misleading investors.
 Placement of shares does not generate confidence in the minds of investing public.

Brought out deals/offer for sale

Promoters place their shares with an investment banker who is brought out dealer or sponsor
who offers it to the public later. Existing company off loads a part of the promoters capital to
a wholesaler instead of making public issue
Book Building

A book building is a price discovery mechanism. Under this methodology, issuer company
don't fix up a the issue price for the securities but provide a price range. For example Rs 200-
350 per share Investors put their bid within the price range and depending on the demand
supply of the units, the final price is decided by the company during allotment period. For ex
company decides cut off price as 250 / share. Whom so ever applied for rice of 250 will get
the allotment.

Buy-back of shares

Buy-Back is a corporate action in which a company buys back its shares from the existing
shareholders usually at a price higher than market price. When it buys back, the number of
shares outstanding in the market reduces
Reasons

Un used cash: company possesses huge cash reserve but has no upcoming projects to invest
into. In that case the company may plan to invest in itself and offer the existing shareholders
an option to sell their shares to the company at an attractive price. It is similar to reinvesting
its cash in itself which also aims at bringing in dilution in the markets as outstanding shares
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in the market are reduced.
Tax gains
: Since dividends are taxed at higher rate than capital gains , the co’s prefer
buyback to reward their investors instead of distributing less dividend gains tax is lower.
To change capital structure
: Some companies may also use it as a tool to change their
capital structure i.e. debt-equity ratio in specific. By buying back the shares from open
market, a company may increase its reliance on the debt financing rather than equity
financing.
To increase market value of shares
: a company may also go for buybacks with an aim of
projecting better valuation of their stocks when they think it is undervalued in the market.
The reason is companies buy its shares at higher price than current market price which
indicates that its worth in the market is more than the present value. This in turn shoots up
company’s stock prices post buy back.
For projecting better financial ratios
companies also
go for buyback with intent of projecting better financial ratios as indicated below:
EPS: Earnings per share = Earnings/ Shares outstanding
To increase RoA and RoE

When a company buys its stock, the cash assets on its balance sheets reduce. This increases
the return on the assets value. And further due to reduction in the outstanding shares in the
market, the RoE value also shoots up.
Exit option
: Company who wants move out of country or if planning to wind up activities
may buy back shares

Restriction on buy back by Indian co’s/ SEBI Gudelines of buy back of shares

 A special resolution has been passed in shareholders meeting.
 Buy back should not exceed 25% of the total paid up capital and free reserves .
 Declaration of solvency has to be filed with SEBIandRgistrar of companies
 The shares bought back should be extinguished and physical destroyed.
 The co should not make any further issue of securities within 2 years except bonus ,
conversion warrents.
Methods of buy back
Tender offer ,Open offer, Emloyee Stock Option Dutch Auction
Repurchase of odd lots
SEBI Guidelines for Buyback for Shares
: SEBI guidelines for buyback for shares are as
follows:
(a) Notice of special resolution
(b) Buying from Members through Tender offer
(c) Buyback through Stock Exchange.
Notice of special resolution:
The notice of special resolution to be passed by the members should
contain explanatory statement giving details of the buy back deal as prescribed in Schedule I of SEBI
Regulations.
Buying from Members through Tender offer:
Under this method, the maximum price at
which the company intends to buy back the shares should be indicated in the notice of the general
meeting. If the promoters intend to offer their shares for buy back, details should be given in the
notice of the general meeting. The company should make a public announcement in at least one
English National Daily, One Hindi National Daily and One regional newspaper daily, all with wide
circulation giving details prescribed in Scheduled II of SEBI Regulations.
The public announcement will mention the ‘specified date’ for the purpose of determining the
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AN OVERVIEW OF CAPITAL AND COMMODITY - STOCK AND COMMODITY MARKET

AN OVERVIEW OF CAPITAL AND COMMODITY - STOCK AND COMMODITY MARKET

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