Thursday, 9 January 2020

Unit 1: Introduction to Capital Market


Unit 1: Introduction to Capital Market  

When an existing listed company either makes a fresh issue of securities to the public or makes an offer for sale of securities to the public for the first time, through an offer document, such issues are called as 'Follow on Public Offering'.

Such public issue of securities or offer for sale to public is required to satisfy the stock exchange listing obligations along with SEBI guidelines.

When a listed company proposes to issue securities to its existing shareholders, whose names appear in the register of members on the record date, in the proportion to their existing holding, through an offer document, such issues are called 'Rights Issue'.

This mode of raising capital is best suited when the dilution of controlling interest is not intended.

A preferential issue is an issue of equity shares or of convertible securities by listed companies to a select group of persons, which is neither a rights issue nor a public issue.

A company that makes any public or rights issue or an offer for sale can issue shares only in the dematerialised form.

A company shall not make a public or rights issue of shares unless all the existing partly paid shares have been fully paid-up or forfeited.

A company that is making public issue of securities shall make an application to the stock exchange for listing of those shares.

The new issue market encompasses all institutions dealing in fresh claims.

The forms in which these claims are created are equity shares, preference shares, debentures, rights issues, deposits etc.

All financial institutions that contribute, underwrite and directly subscribe to the securities are part of new issue markets.

The industrial securities markets in India consist of new issue markets and stock exchanges.

The new issue market deals with the new securities, which were not previously available to the investing public, i.e. the securities that are offered to the investing public for the first time.

The market, therefore, makes available a new block of securities for public subscription.

In other words, new issue market deals with the raising of fresh capital by companies either for cash or for consideration other than cash.

The process of offering new issues of existing stocks to the purchasers is known as underwriting.

At the same time if new stocks are introduced in the market, it is called the Initial Public Offering.

The primary issues which are offered in the primary capital market provide the essential funds to the companies.

The main function of new issue market is to facilitate transfer resources from savers to the users.

The savers are individuals, commercial banks, insurance company etc. the users are public limited companies and the government.

The various methods which are used in the floating of securities in the new issue market are Public issues, Offer for sale, Placement and Rights issues.

A 'promoter' has been defined as a person or group of persons who are instrumental in formation of the company, who enable the company to start its commercial operations by bringing in the necessary funds required for the concern.

In the post-liberalisation era, the companies are free to make any issue of capital in the form they like and they can freely price the issues.

'Lock- in' indicates the freeze on transfer of shares.

SEBI (Disclosure and Investor Protection) Guidelines, 2000 have stipulated lock-in requirement as to specified percentage of shares subscribed by promoters with a view to avoid unscrupulous floating of securities.

A stock exchange is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities.

The companies are now allowed to issue capital to the public through the on-line system of the stock exchanges.

Initial Public Offering (IPO): An IPO is the first sale of stock by a private company to the public.

Preferential Issue: A preferential issue can be defined as an issue of stock available only to designated buyers.

Rights Issue: The rights issue is a special form of shelf offering or shelf registration for existing Companies.

With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time.

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