“Capital market is the market for securities, where companies and the government can raise long term funds. The Capital market includes the stock market and the bond market.”
Capital Market is basically the market in which shares are issued by the companies, purchased by investor and transferred amongst investors. Primary function of the capital market is to enable flow of capital which helps the investors to transfer the resources from those idle or surplus cash to a financial product or securities which would help them gain capital appreciation. Capital market helps in conversion of savings to investment.
Capital market is divided into two parts
In this article we will be starting with Primary markets in India, Following with secondary market. How the stock market works would explained in the next article.
Primary market is a market where companies issue securities to a group of people such as institutions like banks, financial institutions, mutual funds etc. Companies often issue securities to raise capital for expansion of business. The shares offered may be new shares issued by companies to the investors, or offer for sale, where an existing large investor/investors or promoters offer a portion of the holding to the public.
Companies would use several methods to issue securities such as: Public issue, IPO, FPO, Private Placement, Qualified Institutional Placements, Preferential issue, Rights issue, Bonus Issue, On Shore Off Shore Offerings, Offer for sale.
IPO also called as Initial Public offering refers to offering of shares to the public for the first time. The issuing company gets listed on the respective stock exchanges and then the shares are traded in the secondary market.
One of the most successful IPO’s in Indian history are Avenue Supermarket (DMART), was subscribed 104.5 times, receiving Rs.463.61 crore against total issue size of Rs.4.43 crores. The company was listed 604.4 which was over 102% over issue price of Rs.299/-, which was a bumper listing at BSE.
Also the most recent one was the IPO of CDSL (Central Depository Services Limited) wherein the company had planned to raise a total of Rs 523.99 crore . It received bids for 18,75,67,500 shares against the total issue size of 2.48 crores. The issue price was 125% above the expected opening price as it got a robust response.
The other way to issue securities is through private placement where the issuing company issues shares the selected group of person and institutional investors such as Mutual Funds, Pension funds, Insurance companies, Financials Institutions etc. Private Placement neither rights issue nor public issue. It can be in the form of QIP or a preferential allotment. A private placement company can be a private limited and company and does not have to follow SEBI guidelines. A Private limited company can be listed on stock exchange if It fulfills the criteria.
Issuing of securities by a listed company to a group of people or institutions like Mutual Funds, Pension funds, Insurance companies, Financials Institutions etc. Private Placement basis and does not include offer through public issue, Rights issue, bonus issue, issue of sweat equity shares or ESOP’S.
QIP’s known as Qualified Institutional placement is the private placement of securities to Qualified Institutional Buyers (QIB’s) such as like Mutual Funds, Pension funds, Insurance companies, Financials Institutions. QIB’s is simpler and cheap way to raise capital rather than going for IPO, as it takes 4-6 months for approval from SEBI, on the other hand QIB’S takes only 4-6 days approval time from SEBI.
For Eg : The quantity of shares of CDSL reserved for QIBs was subscribed 97% on 10th July itself.
When the company needs additional equity capital, it has two choices, it can raise capital from existing shareholders or go for fresh issue of shares. The existing shareholders have the right to purchase shares at a discounted price than the prevailing market price. Subscription to such an issue is not a compulsion. The company would go for issuing to existing shareholders as if they were to issue fresh equity shares then, there would be dilution of shares to the existing shareholders, thus they offer equity shares to existing shareholders. Let us see how
E.g.: If the company issues 1-for-2 rights issue at Rs. 70 per share, shareholder ‘A’ will have the right to buy one share for every two shares held by him at Rs. 70. As ‘A’ has 10 shares, he can buy 5 more shares at Rs. 70.
In bonus shares, additional shares are issued in the form of stock dividend to the existing shareholders. This is generally observed often when the company has cash crunch. Instead of giving cash dividend they offer stock dividend to its shareholders. Bonus shares are issued in a proportion.
For E.g.: So, if an investor is holding 100 shares of Reliance capital Ltd at current market Price of 1000, the company has decided to give bonus at 1:1 basis, therefore mathematically investor would have pre-bonus (100*1000=10,000) worth of shares and post bonus he would be having (200*500=10000), leaving its value unchanged. As we can see that only investors holding remains the same even after post bonus.