- Any Capital Market has two logical segments viz. primary and secondary.
- A primary market is that segment of the market where new securities are issued. These issues may not just be equity issues, they can also be debt securities issued by companies in the form of bonds.
- Secondary market is that segment of the market where trading of securities issued in primary market happens.
- An efficient capital market of a country has many important player each playing a vital role in smooth functioning of the market.
|Capital Market Constituents||Veer Capital Weight|
|Issuers - Companies||25%|
|Investors - Retail, HNI & QIBs||25%|
|Stock Operators & Traders||10%|
Market Regulator: They are ecology providers without which Capital Markets cannot function. Like any major industry all mature capital markets have respective regulators such as SEC in U.S, SEBI in India etc.
Stock Exchange: They are Ecology Providers which facilitates trading of securities (shares, derivatives, currencies etc). Stock Exchange and it's functions are very vital and it provides platform for the liquidity of the issued equity where present owner can sell and new owner can buy keeping the company share capital constant. It also is voting machine for the valuation of the companies’ equity.
Depositories: A securities depository is like a bank which maintains investor's accounts having securities such as shares, mutual fund units, bonds etc. The primary function of a depository is to facilitates the exchange of securities and maintain the book entry. In simple words a depository helps in transferring the ownership of securities from one account to another when trade takes place between the buyer and the seller of the security. Security depositories have several vital functions. In India NSDL & CDSL are accredited depositories.
Banks: Banks as usual are the payment gateway & ecology for every payments & receipts towards IPO (Primary Market) and Transactions on the Stock Exchanges (Secondary Market).
Issuers: Issuer are 25% constituents of Capital Markets. Issuers are the Companies & Institutions that issue securities like shares, bonds etc. They raise capital from investors and service the capital. While Debt is serviced by timely payment of interest and repayment of principle, Equity is serviced by payment of Dividend and Stock Price Appreciation.
Investors: Investors comprises 25% constituents of Capital Markets. Investors are the most important part of the capital market as they are the ones who allocate capital in the subscribing to the Securities issued by issuers like IPOs, FPOs, Right Issues etc. They also buy from secondary market and future capital offerings of the companies. Investors comprises of several entities. Individual Investors are classified as Retail (small) and High Net Worth (large).
There is huge category among Institutional Investors that manage savings of the people. Broadly they are referred as “Qualified Institutional Buyer” (QIB) means -
a) a public financial institution as defined in section 4A of the Companies Act, 1956;
b) a scheduled commercial bank;
c) a mutual fund registered with the Board
d) a foreign institutional investor and sub-account registered with SEBI, other than a sub-account which is a foreign corporate or foreign individual;
e) a multilateral and bilateral development financial institution;
f) a venture capital fund registered with SEBI;
g) a foreign venture capital investor registered with SEBI;
h) a state industrial development corporation;
i) an insurance company registered with the Insurance Regulatory and Development Authority (IRDA);
j) a provident fund with minimum corpus of Rs. 25 crores;
k) a pension fund with minimum corpus of Rs. 25 crores);
l) National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated November 23, 2005 of Government of India published in the Gazette of India.”
Investments Bankers: After investors, Investment Bankers are the most vital 25% constituents of capital markets. They offer Business Consulting for, capital raising via equity or debt, mergers and acquisition, giving advice to businesses that plan to enter in the national & international market and helping small businesses expand for a bigger target market.
Their scope of activities include Crystallizing Sustainable & Scalable Business Model, Pre IPO Valuation, determining IPO size and equity dilution, facilitate appointment of Lead Manager / Co-lead managers / Bankers / Legal advisors / registers and transfer agents / PR & Marketing agents / Brokers for the issue etc and to fix their remuneration.
They shoulder responsibility to oversea and efficiently deal with all statutory authorities namely SEBI / BSE / NSE / Merchant Bankers / Registrars / Chartered Accountants / Company Secretary / Legal Advisors / NSDL & CDSL as also any / all authorities concerning the issue. In the case of Overseas Equity Issuance every foreign agency as in the case of Domestic Equity Issuance have to be coordinated.
Investment Bankers have humongous task. Their long stretched activities and process can be divided into 3 phases:
- Assess readiness for the IPO
- Review of the historical Indian GAAP financial statements and accounting policies
- Identification of potential actions taken/proposed that may impact the IPO process
- Identification of issues impacting valuation and current group structure
- Determine the optimal structure
- Review of the business plan and funding requirements
- Determination of key value drivers and dilution impact on owners
- Review of tax and regulatory implications on the structure
- Assess readiness for post IPO requirements
- Assess Listing Agreement readiness and immediate action steps
- Assess readiness for quarterly and other periodic reporting
- Develop the appropriate action plan
- Develop a Plan for the IPO with proposed timelines
- Develop a framework for the overall corporate governance framework and intangible asset valuation
Project Management Phase
- Identification of merchant bankers
- Identification of other service providers - legal advisors, secretarial consultants, Valuers, PR Agency
- Pre IPO investor presentation and QIB (Anchor Investor) placement arrangement
- Work with merchant bankers/other service providers and project manage the IPO
Post IPO services
- Assist in entity-wide Listing Agreement compliance
- Set up of Investor Relation cell.
Post IPO Placements
- Assist in planning PIPE, QIP & Depositories Receipts flotation.
- Set the Investor Presentations and Meetings with QIBs.
- Opening the floatation and securing the Capital for the Issuer.
Merchant Bankers: They are Regulated Entity constituting 10% in Capital Market. Their primary function is to observe with compliance of Rules, Regulations and Statutory Guidelines. Few Merchant Bankers do offer few or all the offerings of an Investment Bankers.
Stock Brokers: Only a stock broker of a Recognised Stock Exchange can buy and sell securities (Equity & Debt) for both retail and institutional clients through a stock exchange trading terminal. Stock Broking activates constitutes 5% in overall Capital Market.
Stock Operators & Traders: They constitute 10% of Capital Market activities. They comprise of the breed that buys and sells frequently in Cash Market. They also buy & sell Futures and Options that is popularly known as Speculation. They create ripples in the equity price and mainly punt on News, Rumours and Market Sentiments. Of the total 10%, 1% can be attributed to the Dealers who sit on the Trading Terminals through the day. Today Online Trading has made investors buy & sell on their own leaving limited role for the Dealers.
Depository Participants: Investor never deal with a depository directly but indirectly through a depository participant (DP) which is a member of the depository. All major banks and stock brokers are members of country's security depository. For example Wells Fargo, Bank of America, Scott Trade etc are depository participants or members of DTCC in U.S. while ICICI Securities, HDFC Securities, India Infoline, Reliance Money, Religare Capital etc are depository participants of NSDL and CSDL in India.