What is Capital Market?

 Capital Market refers to that part of the broader financial

market which provides a market for borrowing and lending
of medium and long-term funds, above 1 year.
o Thus, it caters to the borrowing needs for medium
to long term projects and investments.
 Because of the long maturity period, the Capital Market
facilitates the mobilization and allocation of long-term funds.
– Financial Market is a broad term, referring to any center or arrangement where buyers and sellers
participate in the trade of financial claims such as equities, bonds, currencies, and derivatives.
– The Financial Market is classified into two categories.
A. Money Market – Market for trading short-term financial assets with a maturity of upto 1 year
B. Capital Market – Market for borrowing and lending of medium and long-term funds, above 1 year.

Components and Structure of Capital

Market
The capital market is a complex system, formed by various
components. Various components and structure of capital market
can be classified into the following 3 categories.

Capital Market Participants

Capital Market participants include the individuals and institutions

that interact within the market. These participants can be, broadly,
categorized into 2 groups:

 Investors or Suppliers of Capital: These are entities with

surplus funds and are looking to invest. They include
individuals, pension funds, insurance companies, and
commercial banks.
 Borrowers or Issuers of Securities: These are entities
that raise funds by issuing various types of securities. They
 include businesses looking to expand, governments
financing projects, and individuals seeking loans.

Capital Market Instruments

Capital Market Instruments or the Instruments of Capital Market

refer to various types of financial tools used within the market. They
include financial securities and derivatives that serve as mediums
and facilitate the flow of money among the participants of the
capital market.

Various capital market instruments can be, broadly, classified into

the following types:

 Share or Stock
 Debt Instruments
 Derivatives
 Mutual Funds
 Exchange Traded Funds (ETFs)
 Instruments of Foreign Investments
Each type of capital market instrument has been discussed in detail
in our article Instruments of Capital Market.

Capital Market Infrastructure

Capital Market Infrastructure refers to the institutions that facilitate

the smooth operation of the market. These institutions play a crucial
role in connecting various participants and ensuring their regulated
interactions for trading through instruments available in the market.

Major types of institutions forming part of the capital market

infrastructure are as follows:
  Stock Exchanges: Stock exchanges are essentially
marketplaces for buying and selling financial instruments.
They act as a central platform where investors and
companies connect.
o Various concepts regarding Stock Exchanges have
been dealt with in detail below.
 Regulatory Bodies: These organizations ensure fair and
transparent practices within the market. Major regulators
involved in regulation of Capital Market in India are:
o Securities and Exchange Board of India (SEBI)
o Reserve Bank of India (RBI)
o Union Ministry of Corporate Affairs, and
o Department of Economic Affairs, Union Ministry of
Finance.
 Financial Intermediaries: These institutions connect
investors with those seeking capital.
o Brokers, investment banks, and underwriters are
some examples.

Types of Capital Market

Based on the type of securities traded, the Capital Market is of 2
types:

Primary Market or New Issue Market

 The Primary Market is the type of Capital Market where new
securities are issued for the first time.
o Thus, it is also called the New Issue Market.
 The primary market provides the channel for the sale of new
securities. The issuer of securities sells the securities in the
primary market to raise funds for investment and/or to
discharge.
o In other words, the market wherein resources are
mobilized by companies through the issue of new
securities is called the primary market.

Secondary Market or Old Issue Market

  The Secondary Market refers to a market where those
types of securities are traded, which have already
been issued and offered to the public in the Primary Market
and/or listed on the Stock Exchange.
o Thus, it is also called the Old Issue Market.
 The secondary market enables securities holders to adjust
their holdings in response to changes in their assessment of
risk and return or to buy/sell their securities as per their
liquidity needs.

Difference between Primary Market and

Secondary Market
Primary Market Secondary Market

New market securities are sold. Only existing securities are traded.

Investors have the option of only buying the securities. Investors can both buy and sell securities.

The price of securities is mostly decided by the The price of securities is determined by the
management of the issuing company. demand and supply of the market.

Secondary Markets are located at specified

Primary Markets have no fixed geographical location.
places, known as Stock Exchange.

Major intermediaries – Merchant Banks, Underwriters,

Major intermediaries – Brokers, Jobbers, etc.
Debenture Trustees, Portfolio Managers, etc.

The functioning dynamics of both types of markets are discussed in

detail in the sections that follow.

Primary Market or New Issue Market:

Concepts

Types of Issues in Primary Market

The issue of new securities in the Primary Market occurs through

various methods as discussed below.
Public Issue or Public Offering

 Public Issue or Public Offering refers to the process of a

company offering its securities (usually stocks or
bonds) for sale to the general public for the first time or
subsequently.
 It is the usual way through which companies raise capital
from a broad range of investors.
 There are 2 main types of public issues:

Initial Public Offering (IPO)

 Initial Public Offering (IPO) refers to the process when

a private or unlisted company sells its shares to the
public for the very first time.
 This process transforms the company from being privately
owned to a public company.
o This is why an IPO is also referred to as “going
public”.
 It is generally used by new and medium-sized firms that are
looking for funds to grow and expand their business.
 After IPO, the company’s shares are traded in an open
market.
o Those shares can be further sold by investors
through secondary market trading.

Follow on Public Offering (FPO)

 Follow on Public Offering (FPO) refers to the process when

a company, that has already issued shares and is listed
on a stock exchange, issues shares again to raise
additional fund.
 Public companies have to sell at least 25% of their shares to
the public to be traded on a stock exchange. Usually, it is
this requirement that makes companies go for FPOs.

Offer For Sale

 Under this method, securities are not issued directly to the

public but are offered for sale through intermediaries like
issuing houses or stock brokers.
  In this case, a company sells securities enbloc at an agreed
price to brokers who, in turn, resell them to the investing
public.

Bonus Issue or Scrip Issue or Capitalization Issue

 It refers to offer of share to the existing shareholders against

their distributable profit.
 Thus, under this, shareholders’ share in profit is converted
as shares.

Rights Issue

 Rights Issue is an invitation to existing shareholders to

purchase additional new shares in the company.
 This type of issue gives existing shareholders rights to
purchase new shares at a discount to the market price on a
stated future date.
o That’s why it is called Rights Issue.

Private Placement

When an issuer makes an issue of securities to a limited group of

pre-selected investors, and which is neither a rights issue nor a
public issue, it is called a private placement.

Private placement can be of 2 types:

Preferential Allotment

When a listed issuer issues shares or convertible securities to a

select group of persons, it is called a Preferential Allotment.

Qualified Institutional Placement (QIP)

When a listed issuer issues shares or convertible securities to a

select group of Qualified Institutional Buyers (QIBs), it is
called a Qualified Institutional Placement (QIP).
Key Terminologies Related to Primary Market

Declared Price Issue

Its a method of pricing new issues wherein the issuer offers

securities at a pre-fixed price.

Book Building Issue

Its is another method of pricing new issues wherein the price is not
announced beforehand. Rather, the issuer, first, offers the shares
and gets application from public and then based on the demand
fixes the price.

Authorized Capital

It is the maximum amount authorized by Memorandum of

Association of a company that can be raised by the company. The
issuer can issue securities upto worth this amount only.

Issued Capital

It is the actual amount issued by the issuer. It may be equal to or

lesser than the Authorized Capital.

Subscribed Capital

After the company issues shares, the public starts subscribing to

those shares. The subscription can be oversubscribed (demand of
shares more than the issued number of shares) or undersubscribed
(demand of shares less than the issued number of shares). The
actual amount subscribed is called Subscribed Capital.

Merchant Bankers
A “merchant banker” means any person who is engaged in the
business of issue management either by making arrangements
regarding selling, buying or subscribing to securities or acting as
manager, consultant, adviser or rendering corporate advisory
service in relation to such issue management.

Underwriting

Underwriting means an agreement with or without conditions to

subscribe to the securities of a body corporate when the existing
shareholders of such body corporate or the public do not subscribe
to the securities offered to them.

Underwriter

The financial intermediary which agrees to purchase the

undersubscribed portion of issued capital is called Underwriter.

Called Up Capital

The company usually collects the subscribed capital in installments.

The portion of money demanded from subscriber is known as Called
Up Capital.

Paid Up Capital

The amount actually paid by subscribers, when the money is

demanded by the issuer, is known as Paid Up Capital.

Reserve Capital
Usually, the issuer does not demand the whole amount from the
subscriber. A small portion of money is left un-demanded, which is
called Reserve Capital.

Secondary Market or Old Issue

Market: Concepts

Components of Secondary Market

Based on the type of trading, the secondary market has 2

components:

Over-The-Counter (OTC) Market

 Over-The-Counter Markets or OTC Markets are essentially

informal markets for trading securities.
 It is a decentralized marketplace where securities are traded
directly between two parties, bypassing a central exchange.
 OTC markets are generally subject to less stringent
regulations than exchanges.

Stock Exchange Market

It refers to markets for trading of securities through a centralized

exchange, usually called Stock Exchange.

Key Terminologies Related to Secondary Market

Listed Securities

Listed Securities refer to those securities that are accepted to be

traded in stock exchanges.

Cash Trading
Its a type of trading in the Secondary Market wherein the sale and
purchase of securities takes place at the prevailing price on the day
of trading.

Forward Trading

Its another type of trading in the Secondary Market wherein both

buyer and seller agree to buy and sell respectively at a future date
at a pre-agreed price, irrespective of the price that prevails on the
day of trade.

Third Market

 Third Market refers to the trading of exchange-listed

securities in the over-the-counter (OTC) market.
 It allows institutional investors to trade blocks of securities
directly, rather than through an exchange, providing
liquidity and anonymity to buyers.

Fourth Market

Fourth Market refers to institution-to-institution trading directly,

without using the service of broker-dealers, thus avoiding both
commissions, and the bid–ask spread.

Stock Exchange
 A Stock Exchange is a regulated marketplace where
investors can buy and sell shares of publicly traded
companies.
o It acts as a central hub for facilitating stock trading
in a secure and efficient manner.
 In India, a Stock Exchange can operate only if it is
recognized by the Government under the Securities
Contracts (Regulation) Act, 1956.
Stock Exchanges of India

Bombay Stock Exchange (BSE)

 The Bombay Stock Exchange (BSE) is India’s largest and

earliest securities market.
 It is also Asia’s first stock exchange.
 BSE On-Line Trading (BOLT) is a screen-based automated
trading platform of BSE.
 The BSE also offers depository services through one of its
arms called the Central Depository Services Limited (CDSL)

National Stock Exchange of India Ltd. (NSE)

 The National Stock Exchange of India Ltd. (NSE) is India’s

largest financial market.
 It ranks fourth in the world by equity trading volume.
 NSE is the first exchange in India to provide modern, fully
automated electronic trading.

Stock Market Index

 A Stock Market Index is a statistical measure that reflects
the overall performance of a specific segment of the stock
market, or the entire market itself.
 Each index is composed of a weighted values of specific
group of stocks chosen based on certain criteria such as
Market Capitalization, Representation of various sectors, etc.
 From each sector, top companies are selected on the basis
of total value of all shares that are traded in the stock
exchange.
o These companies are called Blue Chip Companies.
 It acts as an indicator of rise or fall in the prices of shares or
other securities.
 Investors use Stock Market Indices as a benchmark to track
market movements and compare the performance of their
investments.
Important Stock Market Indices in India

BSE Sensex or Sensitive Index

It is an index of BSE, which measures the price movement of top 30

companies’ shares.

Nifty or National Index for Fifty

It is an index of NSE, which measures price movement of top 50

companies.

Nifty Junior

It is an index of NSE, which measures the price movement of the

next top 50 companies.

Roles and Importance of Capital

Market
The Capital Market, as the major channel for mobilization of funds,
plays very crucial role in an economy. Some of the its major roles
and importance can be seen as follows:

 Mobilization of Savings: It mobilizes idle savings or funds

from people for further investments in the productive
channels of an economy.
 Capital Formation: Through mobilization of ideal resources
it helps in formation of capital.
 Investment Avenues: It enables to raise resources for
longer periods of time. Thus it provides an investment
avenue for people who wish to park their resources for a
long period of time and earn reasonable return.
 Economic Growth and Development: As it makes funds
available for long period of time, the financial requirements
 of business houses are met by the capital market. This, in
turn, helps them grow.
 Optimal Allocation of Fund: By enabling price discovery
as per the demand and supply, it helps in optimal allocation
of financial resources.
 Service Provision: As an important financial set up, capital
market provides various types of services. It includes long
term and medium term liquidity to industry, underwriting
services, consultancy services, export finance, investor
education by widening ownership base.
 Barometer of Economic Health: The performance of the
Secondary Market acts as the barometer of economic health.
The investors use the level of stock exchange indices as a
benchmark to track market movements and compare the
performance of their investments.

Regulation of Capital Market in India

 Securities Contracts (Regulations) Act, 1956: It gives
Central Government regulatory jurisdiction over
o stock exchanges – through a process of recognition
and continued supervision.
o contracts in securities, and
o listing of securities on stock exchanges.
 Companies Act, 2013: It regulates incorporation of a
company, lays down responsibilities of a company, directors,
dissolution of a company.
o The Companies Act is mainly administered by the
Union Ministry of Corporate Affairs.
 SEBI Act, 1992: It has established the Securities and
Exchange Board of India (SEBI) as the primary regulator of
securities markets in India.
 Depositories Act, 1996: It provides a legal framework for
establishment of depositories to facilitates holding of
securities in physical/dematerialised form and to effect the
transfer of securities through book entry only.
 RBI’s Provisions for NBFCs: Of late, the RBI has proposed
a significant shift in its regulatory approach towards the
NBFCs.
The Capital Market serves as a vital channel for mobilizing savings
into investments, and hence driving economic growth and
prosperity. As India aims to grow faster in the time times to come,
the role of the Capital Market is going to become even more
important. Efforts should be taken to ensure its efficient functioning
by focusing on transparency, fairness, and regulatory oversight to
maintain investor confidence and market integrity.

Regulatory frame work

Regulatory bodies are institutions of the state or other public authorities
tasked with exercising oversight or regulatory power over specific
contexts in which people are involved in any activity. Whether in the field
of banking, insurance, pension funds, commodities market or the capital
market - the existence of regulatory frameworks is important for security
and growth.

In the case of the capital market, regulation leads to growth and the
development of a market economy depends on the growth of the capital
market. A market that is tightly controlled can boost the number of
participating and contributing investors, resulting in the development of
the economy as well. A well-structured capital markets course helps you
have a better understanding of the already existing regulatory
frameworks and the constant evolution of the same.
In the article, we shall discuss a brief outlook on the ever-evolving
regulatory frameworks in India.

Regulatory frameworks in India

Over the last few years, India has established itself as one of the key
players in the capital market, having one of the most refined new equity
issuance markets. In the financial sector, India has several regulatory
bodies at play. From SEBI. RBI, to IRDA, PFRDA - India boasts of an array
of regulatory bodies in the financial sector.
The capital market is a market of equity and debt securities, and in India,
it is predominantly regulated by the Securities and Exchange Board of
India, which is known as SEBI. SEBI is an autonomous authority
responsible to regulate and develop the capital market.
Regulatory agencies:
India currently has four product-driven functioning regulatory agencies,
that are -
 Securities and Exchange Board of India: established in 1988, SEBI at
first was a non-statutory board. In 1992, it became an autonomous
body with more power through an ordinance. SEBI now overviews and
regulates market and investment products.
 Reserve Bank of India: RBI was established in 1935 in accordance with
the provisions of the RBI Act of 1934. Although the central office of the
Reserve Bank of India was initially founded in Kolkata, it was later
moved to Mumbai in 1937. RBI was privately owned since its
inception. In 1949 after the nationalisation, it came under the
Government of India. Reserve Bank of India is responsible for
regulating credit products, savings and remittances.
 Insurance Regulatory and Development Authority: formed by the IRDA
Act 1999, IRDA is the national agency under the Government of India
based in Hyderabad. The IRDA Act 1999 was amended later in 2002 to
include some emerging requirements. Insurance Regulatory and
Development Authority regulates insurance products, protects the
interests of the policyholders and promotes elderly growth in the
insurance industry.
 Pension Fund Regulatory and Development Authority: established by
the Government of India in 2003, PFRDA looks after the pension sector
and related products.
 There also existed the Forward Markets Commission or FMC, with a
headquarter in Mumbai, that was responsible for regulating
commodity-based exchange. This was a statutory body established in
1953 under the Forward Contracts (Regulation) Act 1952. FMC was
merged with SEBI in 2015.
Quasi-regulatory agencies:
A quasi-regulatory agency is an agency with a partly legislative character
having the right to make rules and regulations with the force of law. It is
essentially legislative in character but not within the legislative power or
function, especially defined by the Constitution. A neatly tailored capital
markets course helps you have a clear understanding of the differences
between regulatory agencies and quasi-regulatory ones. There are several
government bodies performing quasi-regulatory functions other than SEBI,
RBI, IRDA, and PFDA. Those are:
 National Bank for Agriculture and Rural Development: NABARD
supervises and regulates the regional and rural banks along with the
state and district cooperative banks.
 Small Industries Development Bank of India: SIDBI looks after the
state finance corporations (SFC) that are responsible for financing
small industries.
 National Housing Bank: NHB, as the name suggests, is responsible for
overviewing the housing finance companies.
Central ministries:
Various central ministries under the Government of India are involved in
policy-making in the financial system of the country which can lead to
economic growth. The Ministry of Finance is the most prominent of those.
Ministry of Finance (MoF) representatives who are on the Boards of
regulatory agencies like SEBI and RBI are important policy-makers. Many
of the MoF representatives are also part of the board of public sector
banks and development financial institutes.
State governments:
The state government regulates the cooperative banking institutions
through the Registrar of Cooperatives under the Departments of
Agriculture and Cooperation.
FSDC:
To bring more efficient and effective coordination among the financial
market regulator, an important addition was made to the regulatory
framework in India. Financial Stability and Development Council (FSDC)
was formed by the Government of India in 2010 as a non-statutory set-up.
The agency since then has worked to maintain financial stability and
enhance inter-regulatory coordination, while promoting development in
the financial sector in India. It also resolves inter-agency disputes and
performs wealth management functions dealing with multiple financial
products.
Objectives of regulatory bodies
Financial regulation translates to the supervision of financial institutions to
certain requirements, guidelines and restrictions. The foremost goal of the
financial regulatory bodies is to maintain the stability and integrity of the
financial ecosystem in the country. Therefore, the key objectives of the
regulatory bodies are:
 Financial stability: providing protection and enhancing the financial
stability of the country.
 Consumer protection: protecting and working in the best interests of
the consumers and stakeholders.
 Market confidence: upholding and maintaining the integrity of the
financial system.
 Reduction in financial frauds: reducing the possible avenues of
businesses from facing finance-oriented crimes and frauds, thus
reducing the loss.
Conclusion
Although India has established quite strong regulatory bodies for the
financial sectors, constantly revising and upgrading their functioning
policies to match the ever-evolving market is the only way of improving
them. Learning about the regulatory bodies and acquiring knowledge of
the market is how you can take a step forward. Imarticus Learning in
collaboration with IIM Calcutta offers an in-depth capital markets
course that helps you grasp the understanding of the topic.
The IIM Calcutta executive program provides you with hands-on
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Elements of a Capital Market

 Individual investors, commercial banks, financial
institutions, insurance companies, business
corporations, and retirement funds are some significant
suppliers of funds in the market.
  Investors offer money intending to make capital gains
when their investment grows with time. In addition, they
enjoy perks like dividends, interests, and ownership
rights.
 Companies, entrepreneurs, governments, etc., are fund-
seekers. For instance, the government issues debt
instruments and deposits to fund the economy and
development projects.
 Usually, long-term investments such as shares, debt,
government securities, debentures, bonds, etc., are
traded here. In addition, there are also hybrid
securities such as convertible debentures and
preference shares..
 Stock exchanges operate the market predominantly.
Other intermediaries include investment banks, venture
capitalists, and brokers.
 Regulatory bodies have the authority to monitor and
eliminate any illegal activities in the capital market. For
instance, the Securities and Exchange Commission
overlooks the stock exchange operations.
 The capital market and money market are not the same.
Securities exchanged in the former would typically be a
long-term investment with over a year lock-in period.
Short-term investments trade in the money markets and
include a certificate of deposits, bills of
exchange, promissory notes, etc.

Functions of Capital Market

 It mobilizes parties’ savings from cash and other forms
to financial markets. It bridges the gap between
people who supply capital and people in need of money.
 Any initiative requires cash to materialize. Financial
markets are central to national and economic
development as they provide rich sources of funds. For
example, the World Bank collaborates with global capital
markets to mobilize funds to achieve its goals, such as
poverty elimination.
 The International Bank for Reconstruction and
Development (IBRD) has assisted over 70 countries by
 raising nearly $ 1 trillion since the first bond in 1947.
Likewise, a report suggested that the European Union
companies need to turn to this market to manage their
pandemic balance sheet as banks alone will not suffice.
 For the participants, the exchange instruments
possess liquidity, i.e., they can be converted into cash
and cash equivalents.
 Also, the trading of securities becomes easier for
investors and companies. It helps minimize transaction
and information costs.
 With higher risks, investors can gain more profits.
However, there are many products for those with a low-
risk appetite. In addition, there are some tax
benefits obtained from investing in the stock market.
 Usually, the market securities can work as collateral for
getting loans from banks and financial institutions.

Instruments of Capital Market

Below are the 10 major instruments of capital market. Let’s look at individually.

1. Stocks
Stocks or Equity instruments represent ownership in a company. They
represent the residual claim on the assets and profits of a corporation after all
debts have been paid. The holders of these stocks, called shareholders, are
entitled to dividends when declared by the company and may vote for key
decisions such as board members.
2. Equities
Equities are the instruments of capital market that involve buying and selling
shares. They represent ownership in a company and enable individuals to
share in the profits or losses generated by the company. By owning equities,
investors may receive a dividend income from companies when they declare
dividends and any potential capital appreciation.
Investors can purchase equities directly from the companies offering them or
through stock exchanges.
3. Bonds
Bonds function as tools for issuers to secure funds from investors by offering
them a debt-based investment opportunity. These instruments guarantee
periodic interest payments and the repayment of the principal amount upon
maturity, all at a predetermined interest rate. The value of bonds can fluctuate
in the secondary market, influenced by various factors such as credit ratings,
changes in the economy, and other pertinent considerations.
In this type of capital market instrument, investors can take part in this market
by buying and selling bonds, considering these factors and potential returns.
4. Derivatives
Investors can efficiently and profitably reach their financial goals by using
derivatives. Financial derivatives derive their value from an underlying asset,
like stocks, commodities, or currencies. They are mainly used to hedge
against price fluctuations in the underlying asset and to speculate on future
market trends.
5. Commodities
Commodities serve as tangible capital market instruments that encompass
essential raw materials and primary goods of commerce. These include
agricultural products, steel, other metals, energy sources such as coal and oil,
and livestock. Commodities are traded on a regulated exchange through
futures contracts that require the buyer to purchase the commodity at a fixed
price in the future.
6. Mutual Funds
Mutual funds are an ideal choice for people who want to invest but lack the
expertise or time to manage their portfolio of stocks and bonds. It involves
pooling together money from various investors with similar investment
objectives and investing in various securities such as equities, debt
instruments etc. The performance of these funds depends on the type of fund,
its asset composition, the market conditions, etc.
7. Exchange Traded Funds (ETFs)
ETFs are like mutual funds that track an index, commodity or basket of assets
like an index fund, but they trade like a stock on an exchange throughout the
day. ETFs have become increasingly popular over recent years due to their
low cost, tax efficiency, and diversity. They are an easy way to diversify a
portfolio and take advantage of different market sectors without purchasing
multiple stocks.
8. Initial Public Offerings (IPOs)
An IPO signifies when a privately-held company transforms into a publicly-
traded entity, making its shares available for the general public to purchase
for the first time. Companies utilize IPOs to raise capital from public investors
and list their shares on a stock exchange.
9. Real Estate Investment Trusts (REITs)
REITs serve as a capital market intrument that amass funds from investors to
invest in real estate properties that generate income. They allow individuals to
invest in real estate without directly owning physical properties. REITs
distribute a significant portion of their income as dividends to investors.
The appeal of REITs lies in their liquidity, providing the flexibility to buy or sell
shares, diversification benefits, and the potential for regular income, making
them an attractive investment option.
10. Exchange-Traded Funds (ETFs)
ETFs are investment funds traded on stock exchanges, akin to individual
stocks. Their objective is to mirror the performance of a specific index, sector,
or asset class. This capital market instrument offer advantages such as
diversification across multiple securities, flexibility in daily trading, and
transparency in tracking underlying assets.
INNOVATION IN INSTRUMENTS IM FINANCIAL
MARKET
Concept of Financial
Instruments
Financial instruments refer to those documents which represent
financial claims on assets. Financial asset refers to a claim to the
repayment of a certain sum of money at the end of a specified
period together with interest or dividend.
Examples are Bill of Exchange, Promissory Notes, Treasury Bills,
Government Bonds, Deposit Receipt, Shares, Debenture, etc.
Financial instruments can also be called financial
securities. Financial securities can be classified into:

1. Primary or Direct Securities

2. Secondary or Indirect Securities
3. Short-Term Securities
4. Medium-Term Securities
5. Long-Term Securities

Primary or Direct Securities

These are securities directly issued by the ultimate investors to the
ultimate savers, e.g. shares and debentures issued directly to the
public.

Secondary or Indirect Securities

These are securities issued by some intermediaries called financial
intermediaries to the ultimate savers, e.g. Unit Trust of India and
mutual funds issue securities in the form of units to the public, and
the money pooled is invested in companies.

Again these securities may be classified on the basis of duration as

follows:
Short-Term Securities
These securities are those which mature within a period of one year.
For example, the Bill of Exchange, the Treasury Bill, etc.

Medium-Term Securities
These securities are those which have a maturity period ranging
between one and five years like Debentures maturing within a
period of 5 years.

Long-Term Securities
These securities are those which have a maturity period of more
than five years. For example, Government Bonds generally mature
after 10 years.

Characteristics of Financial
Instruments
1. Most of the instruments can be easily transferred from
one hand to another without many cumbersome
formalities.

2. They have a ready market i.e., they can be bought and

sold frequently, and thus trading in these securities is
made possible.

3. They possess liquidity, i.e., some instruments can be

converted into cash readily. For instance, a bill of
exchange can be converted into cash readily by means of
discounting and rediscounting.

4. Most of the securities possess security value, i.e., they

can be given as security for the purpose of raising loans.

5. Some securities enjoy tax status, i.e., investments in

these securities are exempted from Income Tax, Wealth
Tax, etc., subject to certain limits.
 6. They carry risk in the sense that there is uncertainty with
regard to payment of principal or interest or dividend as
the case may be.

7. These instruments facilitate future trading so as to cover

risks due to price fluctuations, interest rate fluctuations,
etc.

8. These instruments involve fewer handling costs since the

expenses involved in buying and selling these securities
are generally much less.

9. The return on these instruments is directly in proportion

to the risk undertaken.

10. These instruments may be short-term or medium-

term or long-term depending upon the maturity period of
these instruments.

Innovative Financial
Instruments
In recent years, innovation has been the key word behind the
phenomenal success of many financial service companies and it
forms an integral part of all planning and policy decisions. This has
helped them to keep in tune with the changing times and changing
customer needs.

Accordingly, many innovative financial instruments have come into

the financial market in recent times. Some of them have been
discussed hereunder:
1. Commercial Paper
2. Treasury Bill
3. Certificate of Deposit
4. Inter-Bank Participation (IBPs)
5. Zero Interest Convertible Debenture/Bonds
6. Deep Discount Bonds
7. Index-Linked Guilt Bonds
8. Option Bonds
9. Secured Premium Notes
 10. Medium Term Debentures
11. Variable Rate Debentures
12. Non-Convertible Debentures with Equity Warrants
13. Equity with 100% Safety Net
14. Cumulative Convertible Preference Shares
15. Convertible Bonds
16. Debentures with ‘Call’ and ‘Put’ Feature
17. Easy Exit Bond
18. Retirement Bond
19. Regular Income Bond
20. Infrastructure Bond
21. Carrot and Stick Bonds
22. Convertible Bonds with a Premium Put
23. Debt with Equity Warrant
24. Dual Currency Bonds
25. ECU Bonds (European Currency Unit Bonds)
26. Yankee Bonds
27. Flip-Flop Notes
28. Floating Rate Notes (FRNs)
29. Loyalty Coupons
30. Global Depository Receipt (GDR)
Commercial Paper
A paper is a short-term negotiable money market instrument. It has
the character of an unsecured promissory note with a fixed maturity
of 3 to 6 months. Banking and non-banking companies can issue this
for raising their short-term debt. It also carries an attractive rate of
interest.
Commercial papers are sold at a discount from their face value and
redeemed at their face value. Since its denomination is very high, it
is suitable only for institutional investors and companies.

Treasury Bill
A treasury bill is also a money market instrument issued by the
Central Government. It is also issued at a discount and redeemed at
par. Recently, the Government has come out with short-term
treasury bills of 182-day bills and 364-day bills.

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Certificate of Deposit
The scheduled commercial banks have been permitted to issue
certificates of deposit without any regulation on interest rates. This
is also a money market instrument and unlike a fixed deposit
receipt, it is a negotiable instrument and hence it offers maximum
liquidity.

As such, it has a secondary market too. Since the denomination is

very high, it is suitable mainly for institutional investors and
companies.

Inter-Bank Participation (IBPs)

The scheme of inter-bank participation is confined to scheduled
banks only for a period ranging between 91 days and 180 days. This
may be “with risk” participation or “without risk” participation.
However, only a few banks have so far issued IBPs carrying an
interest rate ranging between 14 and 17 percent per annum. This is
also a money market instrument.

Zero Interest Convertible

Debenture/Bonds
As the very name suggests, these instruments carry no interest till
the time of conversion. These instruments are converted into equity
shares after a period of time.

Deep Discount Bonds

There will be no interest payments in the case of deep discount
bonds also. Hence, they are sold at a large discount to their nominal
value. For example, the Industrial Development Bank of India issued
in February 1996 deep discount bonds.
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Each bond has a face value of Rs. 2,00,000 and was issued at a
deeply discounted price of Rs.5300 with a maturity period of 25
years. Of course, provisions are there for early withdrawal or
redemption in which case the deemed face value of the bond would
be reduced proportionately. This bond could be gifted to any person.

Index-Linked Guilt Bonds

These are instruments having a fixed maturity. Their maturity value
is linked to the index prevailing as of the date of maturity. Hence,
they are inflation-free instruments.
Option Bonds
These bonds may be cumulative or non-cumulative as per
the option of the holder of the bonds. In the case of cumulative
bonds, interest is accumulated and is payable only on maturity. But,
in the case of a non-cumulative bond, the interest is paid
periodically. This option has to be exercised by the prospective
investor at the time of investment.
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Secured Premium Notes

These are instruments that carry no interest for three years. In other
words, their interest will be paid only after 3 years, and hence,
companies with high capital-intensive investments can resort to this
type of financing.

Medium Term Debentures

Generally, debentures are repayable only after a long period. But,
these debentures have a medium-term maturity. Since they are
secured and negotiable, they are highly liquid. These types of debt
instruments are very popular in Germany.

Variable Rate Debentures

Variable rate debentures are debt instruments. They carry a
compound rate of interest, but this rate of interest is not a fixed one.
It varies from time to time in accordance with some pre-determined
formula as we adopt in the case of Dearness Allowance calculations.

Non-Convertible Debentures with

Equity Warrants
Generally, debentures are redeemed on the date of maturity but
these debentures are redeemed in full at a premium in installments
as in the case of anticipated insurance policies. The installments
may be paid at the end of the 5th, 6th, 7th, and 8th year from the
date of allotment.
Equity with 100% Safety Net
Some companies make “100% safety net” offer to the public. It
means that they give a guarantee to the issue price. Suppose, the
issue price is Rs.40/- per share (nominal value of Rs.10/ – per share),
the company is ready to get it back at Rs.40/- at any time,
irrespective of the market price.

That is, even if the market price comes down to Rs.30/- there is a
100% safety net and hence the company will get it back at Rs.40/-.

Cumulative Convertible Preference

Shares
These instruments along with capital and accumulated dividend
must be compulsorily converted into equity shares in a period of 3 to
5 years from the date of their issue, according to the discretion of
the issuing company.

The main object of introducing it is to offer the investor an assured

minimum return together with the prospect of equity appreciation.
This instrument is not popular in India.

Convertible Bonds
A convertible bond is one which can be converted into equity shares
at a pre-determined time neither fully nor partially. There are
compulsory convertible bonds that provide for conversion within 18
months of their issue.

There are optionally convertible bonds that provide for conversion

within 36 months. There are also bonds that provide for conversion
after 36 months and they carry ‘call’ and ‘put’ features.

Debentures with ‘Call’ and ‘Put’

Feature
Sometimes debentures may be issued with the “Call” and “Put”
features. In the case of debentures with a “Call feature”, the issuing
company has the option to redeem the debentures at a certain price
before the maturity date.

In the case of debentures with “Put features”, the company gives

the holder the right to seek redemption at specified times at
predetermined prices.
Easy Exit Bond
As the name indicates, this bond enables small investors to encash
the bond at any time after 18 months of its issue and thereby paving
the way for an easy exit. It has a maturity period of 10 years with a
call option at any time after 5 years. Recently the IDBI has issued
this type of bond with a face value of Rs.5000 per bond.

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Retirement Bond
This type of bond enables an investor to get an assured monthly
income for a fixed period after the expiry of the “wait period”
chosen by him. No payment will be made during the “wait period”.
The longer the waiting period, the higher will be the monthly
income.

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Besides these, the investor will also get a lump sum amount on
maturity. For example, the IDBI has issued Retirement Bond 96
assuring a fixed monthly income for 10 years after the expiry of the
wait period. This bond can be gifted to any person.

Regular Income Bond

This bond offers an attractive rate of interest payable half yearly
with the facility of early redemption. The investor is assured of
regular and fixed income. For example, the IDBI has issued Regular
Income Bond 96 carrying 16% interest p.a. It is redeemable at the
end of every year from the expiry of 3 years from the date of
allotment.

Infrastructure Bond
It is a kind of debt instrument issued with a view to giving tax
shelter to investors. The resources raised through this bond will be
used for promoting investment in the field of certain infrastructure
industries.

Tax concessions are available under Sec. 88, Sec. 54 EA and Sec.
54EB of the Income Tax Act. HUDCO has issued for the first time
such bonds. Its face value is Rs. 1000 each carrying an interest rate
of 15% per annum payable semi-annually. This bond will also be
listed on important stock exchanges.

Carrot and Stick Bonds

Carrot bonds have a low conversion premium to encourage early
conversion, and sticks allow the issuer to call the bond at a specified
premium if the common stock is trading at a specified percentage
above the strike price.

Convertible Bonds with a Premium

Put
These are bonds issued at face value with a put, which means that
the bondholder can redeem the bonds for more than their face
value.

Debt with Equity Warrant

Sometimes bonds are issued with warrants for the purchase of
shares. These warrants are separately tradable.

Dual Currency Bonds

Bonds that are denominated and pay interest in one currency and
are redeemable in another currency come under this category. They
facilitate interest rate arbitrage between two markets.

ECU Bonds (European Currency Unit

Bonds)
These bonds are denominated in a basket of currencies of the 10
countries that constitute the European community. They pay
principal and interest in ECUs or in any of the 10 currencies at the
option of the holder.

Yankee Bonds
If bonds are raised in the U.S.A., they are called Yankee bonds and if
they are raised in Japan, they are called Samurai Bonds.
Flip-Flop Notes
It is a kind of debt instrument that permits investors to switch
between two types of securities e.g. to switch over from a long-term
bond to a short-term fixed-rate note.

Floating Rate Notes (FRNs)

These are debt instruments that facilitate periodic interest rate
adjustments.

Loyalty Coupons
These are entitlements to the holder of debt for two to three years
to exchange into equity shares at discount prices. To get this facility,
the original subscriber must hold the debt instruments for the said
period.

Global Depository Receipt (GDR)

A global depository receipt is a dollar-denominated instrument
traded on a stock exchange in Europe or the U.S.A. or both. It
represents a certain number of underlying equity shares. Though
the GDR is quoted and traded in dollar terms, the underlying equity
shares are denominated in rupees.

The shares are issued by the company to an intermediary called the

depository in whose name the shares are registered. It is the
depository that subsequently issues the GDRs.

FAQs About the Innovative

Financial Instruments
What are innovative financial
instruments?
These are the types of innovative financial instruments:
1. Commercial Paper
2. Treasury Bill
3. Certificate of Deposit
4. Inter-Bank Participation (IBPs)
5. Zero Interest Convertible Debenture/Bonds
6. Deep Discount Bonds
7. Index-Linked Guilt Bonds
8. Option Bonds
9. Secured Premium Notes
10. Medium-Term Debentures.

What Is Primary Market?

primary market is a source of new securities. Often on an exchange, it's
where companies, governments, and other groups go to obtain financing
through debt-based or equity-based securities. Primary markets are
facilitated by underwriting groups consisting of investment banks that set a
beginning price range for a given security and oversee its sale to investors.

Once the initial sale is complete, further trading is conducted on

the secondary market, where the bulk of exchange trading occurs each
day.

KEY TAKEAWAYS

 In the primary market, new stocks and bonds are sold to the public
for the first time.
 In a primary market, investors are able to purchase securities
directly from the issuer.
 Types of primary market issues include an initial public offering
(IPO), a private placement, a rights issue, and a preferred allotment.
 Stock exchanges instead represent secondary markets, where
investors buy and sell from one another.
 After they’ve been issued on the primary market, securities are
traded between investors on what is called the secondary market—
essentially, the familiar stock exchanges.
Understanding Primary Markets
The primary market is where securities are created. It's in this market that
firms sell or float (in finance lingo) new stocks and bonds to the public for
the first time during the primary distribution. These stocks and bonds—also
called primary instruments—trade on mainstream exchanges with prices
based on their market value.

Companies and government entities sell new issues of common and

preferred stock, corporate bonds, and government bonds, notes, and bills
on the primary market to fund business improvements or expand
operations. Although an investment bank may set the securities' initial
price and receive a fee for facilitating sales, most of the money raised from
the sales goes to the issuer.

The primary market isn't a physical place; it reflects more the nature of the
goods. The key defining characteristic of a primary market is that securities
on it are purchased directly from an issuer—as opposed to being bought
from a previous purchaser or investor, "second-hand" so to speak.

Investors typically pay less for securities on the primary market than on the
secondary market.

All issues on the primary market are subject to strict regulation.

Companies must file statements with the Securities and Exchange
Commission (SEC) and other securities agencies and must wait until their
filings are approved before they can offer them for sale to investors.

After the initial offering is completed—that is, all the stock shares or bonds
are sold—that primary market closes. Those securities then start trading
on the secondary market.

Types of Primary Market Issues

An initial public offering, or IPO, is an example of a security issued on a
primary market. An IPO occurs when a private company sells shares of
stock to the public for the first time, a process known as "going public."
The process, including the original price of the new shares, is set by a
designated investment bank, hired by the company to do the initial
underwriting for a particular stock.

For example, company ABCWXYZ Inc. hires five underwriting firms to

determine the financial details of its IPO. The underwriters detail that the
issue price of the stock will be $15. Investors can then buy the IPO at this
price directly from the issuing company. This is the first opportunity that
investors have to contribute capital to a company through the purchase of
its stock. A company's equity capital is comprised of the funds generated
by the sale of stock on the primary market.

A rights offering (issue) permits companies to raise additional equity

through the primary market after already having securities enter the
secondary market. Current investors are offered prorated rights based on
the shares they currently own, and others can invest anew in newly minted
shares.
Private Placement and Primary Market
Other types of primary market offerings for stocks include private
placement and preferential allotment. Private placement allows companies
to sell directly to more significant investors such as hedge funds and banks
without making shares publicly available. Preferential allotment offers
shares to select investors (usually hedge funds, banks, and mutual
funds) at a special price not available to the general public.

Similarly, businesses and governments that want to generate debt

capital can choose to issue new short- and long-term bonds on the primary
market. New bonds are issued with coupon rates that correspond to the
current interest rates at the time of issuance, which may be higher or lower
than those offered by pre-existing bonds.

Primary Market vs. Secondary Market

The primary market refers to the market where securities are created and
first issued, while the secondary market is one in which they are traded
afterward among investors.

Primary Market
Take, for example, U.S. Treasuries—the bonds, bills, and notes issued by
the U.S. government. The Dept. of the Treasury announces new issues of
these debt securities at periodic intervals and sells them at auctions, which
are held multiple times throughout the year. This is an example of the
primary market in action.

Individual investors can buy newly issued U.S. Treasuries directly from the
government via TreasuryDirect, an electronic marketplace and online
account system.1 This can save them money on brokerage commissions
and other middleman fees.

Secondary Market
Now, let's say some of the investors who bought some of the government's
bonds or bills at these auctions—they're usually institutional investors, like
brokerages, banks, pension funds, or investment funds—want to sell them.
They offer them on stock exchanges or markets like the NYSE, Nasdaq, or
over-the-counter (OTC), where other investors can buy them. These U.S.
Treasuries are now on the secondary market.

With equities, the distinction between primary and secondary markets can
seem a little cloudier. Essentially, the secondary market is what's
commonly referred to as "the stock market," the stock exchanges where
investors buy and sell shares from one another. But in fact, a stock
exchange can be the site of both a primary and secondary market.

For example, when a company makes its public debut on the New York
Stock Exchange (NYSE), the first offering of its new shares constitutes a
primary market. The shares that trade afterward, with their prices daily
listed on the NYSE, are part of the secondary market.

Types of Secondary Markets

Secondary markets are further divided into two types:

 An auction market, an open outcry system where buyers and sellers

congregate in one location and announce the prices at which they
are willing to buy and sell their securities
 A dealer market, in which participants in the market are joined
through electronic networks. The dealers hold an inventory of
security, then stand ready to buy or sell with market participants.

The key distinction between primary and secondary markets: the seller or
source of the securities. In a primary market, it's the issuer of the shares or
bonds or whatever the asset is. In a secondary market, it's another
investor or owner. When you buy a security on the primary market, you're
buying a new issue directly from the issuer, and it's a one-time transaction.
When you buy a security on the secondary market, the original issuer of
that security—be it a company or a government—doesn't take any part
and doesn't share in the proceeds.

In short, securities are bought on the primary market. They trade on the
secondary market.

PRIMARY MARKET INTERMEDIARIES

Primary market
Intermediaries
21st January 2019 by stocksbaazigar

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Capital Market intermediaries are the important link between the
regulators, issuer, and investor. SEBI has issued regulations in
respect of each intermediary to ensure proper services to be
rendered by them to the investors and the capital market. In this
post, we will learn about some primary market intermediaries.

The following market intermediaries are involved in the primary

market:

1. Merchant Bankers/Lead Managers

2. Registrars and Share Transfer Agents
3. Underwriters
4. Bankers to the Issue
5. Debenture Trustees etc.
Merchant Bankers
 Merchant Bankers play an important role in the issue
management process. Merchant Bankers are mandated
by SEBI to manage public issues (as lead managers) and
open offers in take-overs.
 Apart from these, they have other diverse services and
functions. These include organizing and extending
finance for investment in projects, assistance in financial
management, acceptance house business, raising Euro-
dollar loans and issue of foreign currency bonds.
 Lead Managers (Category 1 merchant bankers) has to
ensure correctness of the information furnished in the
offer document.
 They have to ensure compliance with the SEBI Rules and
regulations and also guidelines for Disclosure and
Investor Protection. To this effect, they have are to
submit to SEBI a Due Diligence Certificate confirming
that disclosures made in the draft prospectus or letter of
offer are true, fair and adequate to enable the
prospective investors to make a well-informed
investment decision.

Regulation:

Merchant Bankers are one of the major intermediaries between the

issuer and the investors, hence their activities are regulated by

1. SEBI (Merchant Bankers) Regulations, 1992

2. Guidelines of SEBI and Ministry of Finance
3. Companies Act 1956.
4. Securities Contracts (Regulation) Act, 1956. and so on.
Criteria for Merchant Banker:

Regulation 3 of SEBI (Merchant Bankers) Regulations, 1992 lays

down that the application by a person desiring to become merchant
banker shall be made to SEBI in the prescribed form seeking a
grant of a certificate of registration along with a non-refundable
application fee as specified.

 The applicant shall be a body corporate other than NBFC

 The applicant has the necessary infrastructure like
adequate office space, equipment’s and manpower to
effectively discharge his activities.
 the applicant has in his employment a minimum of two
persons who have the experience to conduct the
business of the merchant banker.
 The applicant shall be a net worth of not less than 5
Crore rupees.
 The applicant, his director, partners, or principal officer
is not involved in any litigation connected to securities
market
 the applicant, his director, partner, or principal officer
has not any time been convicted for any offence
involving moral turpitude or has been found guilty of any
offence.
 the applicant has the professional qualification from an
institution recognized by the Government of Finance,
Law or Business Management.
 the applicant is fit and proper person
 grant of certificate to the applicant is in the interest of
investors
Registrars and transfer agents
 R & T agents form an important link between the
investor and issuer in the Securities Market.
 R & T agent is appointed by the issuer to act on its
behalf to service the investors in respect of all corporate
actions like sending out notices and other
communications to the investors as well as dispatch of
dividends and other non-cash benefits.
 R & T agents perform an equally important role in the
depository system as well.
 R & T agents are registered with SEBI in the terms of
SEBI (Registrars to the Issue and Share Transfer
Agents) Rules and Regulations, 1993.
Underwriters
 Underwriting services are provided by some large
specialists financial institutions such as banks, insurance
or investment houses, whereby they guarantee payment
in case of damage or financial loss and accept the
financial risk for liability arising from such guarantee.
 Securities underwriting is the process by which
investment banks raise investment capital from investors
on behalf of corporations and governments that are
issuing securities (both equities and debt capital). The
services are typically used during a public offering in the
primary market.
 Underwriters are required to register with SEBI in terms
of SEBI (Underwriters) Rules and Regulations, 1993.
Bankers to the Issue
Bankers to an Issue means a scheduled bank carrying on all of the
following activities:

 acceptance of application and application money

 acceptance of allotment of call money
 refund of application money
 Payment of dividends or interest warrants etc.

The activities of the Banker to an issue in the Indian Capital Market
are regulated by SEBI (Bankers to an issue) Regulations, 1994

Debenture Trustees
Debenture Trustee means a Trustee of a Trust deed for securing
any issue of debentures.

 Debenture trustees call for periodical reports from the

body corporate
 takes possession of trust property in accordance with the
provisions of the trust deed
 enforce security in the interest of debenture holders
 do such acts as necessary in the event the security
becomes enforceable
 carry out such acts as are necessary for the protection of
debenture holders and to do all things necessary in
order to resolve the grievances of the debenture holders.
  ascertain and specify that debenture certificates have
been discharged within 30 days of registration of the
charge with ROC
 ascertain and specify that debenture certificates have
been discharged in accordance with the provisions of the
Company Act
 ascertain and specify that interest warrants for interest
due on the debentures have been dispatched to the
debenture holders on or before the due date and so on.
 To inform SEBI in case of breach of Trust Deed and take
measures accordingly.
Functions of the Primary Market
There are three entities involved in the functions of the primary market. It
includes a company, an investor, and an underwriter. Following are the
functions of the primary market:
1. New Issue Offer
New issues are issues that have never been traded on other exchanges
and are now offered on a primary market. Setting up a new issue market
entails a wide range of responsibilities. For example, carefully assessing
the project’s viability. Financial arrangements are formed for this purpose
and take into consideration promoters’ equity, liquidity ratio, debt-equity
ratio, etc.
2. Underwriting
When launching a new issue, underwriting is crucial and necessary. If the
firm is unable to sell the required number of shares, underwriters are in
charge of purchasing unsold shares in the primary market. Financial
institutions that take on the role of underwriters can receive underwriting
commissions. Investors analyse underwriters and decide if taking the risk of
investing in the issue is worthwhile. Also, it is quite possible that the
underwriter buys the entire IPO issue and subsequently sells it to the
investors.
3. New Issue Distribution
Distribution is yet another very important function. To begin the distribution
process, first, a new prospectus is issued. Next, an announcement is made
to invite the general public to subscribe to the issue. Here, a detailed report
of the company and the issue and information regarding the underwrites is
made available for investors to assess and analyse the issue.
The company issues the securities to its investors. The issue can be in the
form of a public issue, private placement, rights or bonus issue, and many
more. Once the company receives the money, it issues the certificate to the
investor. The securities can be issued at face value, premium value or par
value. When the issue closes, securities are traded in the secondary
market. The trading in the secondary market can happen on the stock
exchange, bond market, or derivatives exchange.
The companies that offer securities are looking for expanding their
business operations, fund their business targets, or increase their physical
presence across the market. The Securities and Exchange Board of India
(SEBI) regulates the primary market.
How do Primary Markets Raise Funds?
The primary market enables companies, government, and other institutions
to raise funds through the sale of equity and debt-related securities. Public
sector institutions raise funds through bond issues. While, the corporations
raise capital through the issue and sale of new stock through an initial
public offering (IPO). Furthermore, the other ways to raise funds in a
primary market is through Further Public Offer or Follow on Offer or FPO,
Private placement, Preferential issue, Qualified institutional placement,
Rights issue and Bonus issue.
Types of Primary Market Issues
1. Public issue
The public issue is one of the most common methods of issuing securities
to the public. The company enters the capital market to raise money from
kinds of investors. Here, the securities are offered for sale to new investors.
The new investor becomes the shareholder of the issuing company. This is
called a public issue. The further classification of the public issue is –
2. Initial Public Offer
As the name suggests, it is a fresh issue of equity shares or convertible
securities by an unlisted company. These securities are traded previously
or offered for sale to the general public. After the process of listing, the
company’s share is traded on the stock exchange. The investor can buy
and sell securities after listing in the secondary market.
3. Further Public Offer or Follow on Offer or FPO.
When a listed company on the stock exchange announces fresh issues of
shares to the general public. The listed company does this to raise
additional funds.
4. Private placement
Private placements mean that when a company offers its securities to a
small group of people. The securities may be bonds, stocks, or other
securities. The investors can be either individual or institution or both.
Comparatively, private placements are more manageable to issue than an
IPO. The regulatory norms are significantly less. Also, it reduces cost and
time. The private placement is suitable for companies that are at early
stages (like startups). The company may raise capital through an
investment bank or a hedge fund or ultra-high net worth individuals (HNIs)
5. Preferential issue
The preferential issue is one of the quickest methods for a company to
raise capital for their business. Here, both listed and unlisted companies
can issue shares. Usually, these companies issue shares to a particular
group of investors.
It is important to note that the preferential issue is neither a public issue nor
a rights issue. In the preferential allotment, the preference shareholders
receive dividends before the ordinary shareholders receive it.
6. Qualified institutional placement.
Qualified institutional placement is another type of private placement. Here,
the listed company issues equity shares or debentures (partly or wholly
convertible) or any other security not including warrants. These securities
are convertible in nature. Qualified institutional buyer (QIB) purchases
these securities.
QIBs are investors who have requisite financial knowledge and expertise to
invest in the capital market. Some of the QIBs are –
Foreign institutional investors who are registered with SEBI.

 Alternate investment funds

 Foreign venture capital investors
 Mutual funds
 Public financial institutions
 Insurers
 Scheduled commercial banks
 Pension funds

Comparatively, qualified institutional allotment is simpler than the

preferential allotment. The reason is they do not attract any standard
regulations like submitting pre-issue filings with SEBI. Thus, the process
becomes much more comfortable and less time-consuming.
7. Rights issue
This is another type of issue in the primary market. Here, the company
issues shares to its existing shareholders by offering them to purchase
more. The issue of securities is at a predetermined price.
In a rights issue, the investors have a choice of buying shares at a discount
price within a specific period. It enhances the control of the existing
shareholders of the company. It helps the company to raise funds without
any additional costs.
8. Bonus issue
When a company issues fully paid additional shares to its existing
shareholders for free. The company issues shares from its free reserves or
securities premium account. These shares are a gift for its current
shareholders. However, the issuance of bonus shares does not require
fresh capital.