Paper-6 by shilpabangalore


									                                                             International Journal of Advances in Science and Technology,
                                                                                                        Vol. 2, No.5, 2011

  A Study on Raising Money from Capital Market
                                      Dr.SRI KANTH RANGANATHAN


     We have tested for the weak form of efficiency of the Indian capital market. Capital market consists
     as a market for borrowing and lending long term capital funds required for business enterprises.
     Capital market is a market pillar for financial assets. It provides a fillip for prospective investors in
     an effective manner. Financial capital market is a market where financial instruments are
     exchanged or traded and helps in determining the prices of the assets that are traded in and is also
     called the price discovery process. 1. Organizations that facilitate the trade in financial products.
     For e.g. Stock exchanges facilitate the trade in stocks, bonds and warrants. 2. Coming together of
     buyer and sellers at a common platform to trade financial products is termed as financial markets,
     i.e. stocks and shares are traded between buyers and sellers in a number of ways including: the use
     of stock exchanges; directly between buyers and sellers etc. In this paper we present a review of
     research done in the field of raising money from Indian capital markets.

     Keywords: Financial market, Indian capital market, Stock exchanges.


     Capital market consists as a market for borrowing and lending long term capital funds required for
     business enterprises. Capital market is a market pillar for financial assets. It provides a fillip for
     prospective investors in an effective manner. A financial market is a mechanism that allows people to
     buy and sell (trade) financial securities, commodities , and other fungible items of value at low
     transaction costs and at prices that reflect the efficient-market hypothesis. Both general market and
     specialized markets exist. Markets work by placing many interested buyers and sellers in one "place",
     thus making it easier for them to find each other. An economy which relies primarily on interactions
     between buyers and sellers to allocate resources is known as a market economy in contrast either to a
     command economy or to a non-market economy such as a gift economy.

     A capital market is a market for securities, where business enterprises and governments can raise long-
     term funds. It is defined as a market in which money is provided for periods longer than a year, as the
     raising of short-term funds takes place on other markets. The capital market includes the stock market
     and the bond market . Capital markets may be classified as primary markets and secondary markets. In
     primary markets, new stock or bond issues are sold to investors via a mechanism known as
     underwriting. In the secondary markets, existing securities are sold and bought among investors or
     traders, usually on a securities exchange, over-the-counter, or elsewhere.In economics, typically, the
     term market means the aggregate of possible buyers and sellers of a certain good or service and the
     transactions between them.

     The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate
     the trade in financial securities, e.g., a stock exchange or commodity exchange. This may be a physical
     location or an electronic system. Much trading of stocks takes place on an exchange; still, corporate
     actions are outside an exchange, while any two companies or people, for whatever reason, may agree to
     sell stock from the one to the other without using an exchange.
     Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock
     exchange, and people are building electronic systems for these as well, similar to stock exchanges.

Special Issue                                      Page 55 of 70                                     ISSN 2229 5216
                                                                         International Journal of Advances in Science and Technology

     The financial markets can be divided into different subtypes:

               Capital markets which consist of:

                    o      Stock markets, which provide financing through the issuance of shares or common
                           stock, and enable the subsequent trading thereof.

                    o      Bond markets, which provide financing through the issuance of bonds, and enable
                           the subsequent trading thereof.

               Commodity markets, which facilitate the trading of commodities.

               Money markets, which provide short term debt financing and investment.

               Derivatives markets, which provide instruments for the management of financial risk.

               Futures markets, which provide standardized forward contracts for trading products at some
                future date; see also forward market.

               Insurance markets, which facilitate the redistribution of various risks.

               Foreign exchange markets, which facilitate the trading of foreign exchange.

     The capital markets consist of primary markets and secondary markets. Newly formed (issued)
     securities are bought or sold in primary markets. Secondary markets allow investors to sell securities
     that they hold or buy existing securities. The transaction in primary market exist between investors and
     public while secondary market its between investors


     To understand financial markets, let us look at what they are used for, i.e. what where firms make the
     capital to invest. Without financial markets, borrowers would have difficulty finding lenders
     themselves. Intermediaries such as banks help in this process. Banks take deposits from those who
     have money to save. They can then lend money from this pool of deposited money to those who seek
     to borrow. Banks popularly lend money in the form of loans and mortgages.

     More complex transactions than a simple bank deposit require markets where lenders and their agents
     can meet borrowers and their agents, and where existing borrowing or lending commitments can be
     sold on to other parties. A good example of a financial market is a stock exchange. A company can
     raise money by selling shares to investors and its existing shares can be bought or sold.

     The following table illustrates where financial markets fit in the relationship between lenders and

             Relationship between lenders and borrowers

             Lenders       Financial Intermediaries          Financial                 Borrowers
                                                             Inter        bank         Individuals
                                                             Stock Exchange            Companies
             Individuals           Insurance Companies
                                                             Money      Market         Central Government
             Companies             Pension      Funds
                                                             Bond       Market         Municipalities
                                   Mutual Funds
                                                             Foreign Exchange          Public Corporations

Special Issue                                         Page 56 of 70                                           ISSN 2229 5216
                                                                       International Journal of Advances in Science and Technology


     Seemingly, the most obvious buyers and sellers of currency are importers and exporters of goods.
     While this may have been true in the distant past, when international trade created the demand for
     currency markets, importers and exporters now represent only 1/32 of foreign exchange dealing,
     according to the Bank for International Settlements.

     The picture of foreign currency transactions today shows:

               Banks/Institutions

               Speculators

               Government spending (for example, military bases abroad)

               Importers/Exporters

               Tourists


     Much effort has gone into the study of financial markets and how prices vary with time. Charles Dow,
     one of the founders of Dow Jones & Company and The Wall Street Journal, enunciated a set of ideas
     on the subject which are now called Dow Theory. This is the basis of the so-called technical analysis
     method of attempting to predict future changes. One of the tenets of "technical analysis" is that market
     trends give an indication of the future, at least in the short term. The claims of the technical analysts are
     disputed by many academics, who claim that the evidence points rather to the random walk hypothesis,
     which states that the next change is not correlated to the last change.

     The scale of changes in price over some unit of time is called the volatility. It was discovered by
     Benoit Mandelbrot that changes in prices do not follow a Gaussian distribution, but are rather modeled
     better by Levy stable distributions. The scale of change, or volatility, depends on the length of the time
     unit to a power a bit more than 1/2. Large changes up or down are more likely than what one would
     calculate using a Gaussian distribution with an estimated standard deviation.

     A new area of concern is the proper analysis of international market effects. As connected as today's
     global financial markets are, it is important to realize that there are both benefits and consequences to a
     global financial network. As new opportunities appear due to integration, so do the possibilities of
     contagion. This presents unique issues when attempting to analyze markets, as a problem can ripple
     through the entire connected global network very quickly. For example, a bank failure in one country
     can spread quickly to others, which makes proper analysis more difficult.


               Poison pill, when a company issues more shares to prevent being bought out by another
                company, thereby increasing the number of outstanding shares to be bought by the hostile
                company making the bid to establish majority.

               Quant, a quantitative analyst with a PhD (and above) level of training in mathematics and
                statistical methods.

               Rocket scientist, a financial consultant at the zenith of mathematical and computer
                programming skill. They are able to invent derivatives of frightening complexity and
                construct sophisticated pricing models. They generally handle the most advanced computing
                techniques adopted by the financial markets since the early 1980s. Typically, they are
                physicists and engineers by training; rocket scientists do not necessarily build rockets for a

Special Issue                                        Page 57 of 70                                          ISSN 2229 5216
                                                                      International Journal of Advances in Science and Technology

               White Knight, a friendly party in a takeover bid. Used to describe a party that buys the shares
                of one organization to help prevent against a hostile takeover of that organization by another
     1. Determine the capital needs of your company. How much money can your company absorb without
     overextending itself? Do you need equity capital or debt capital? New equity capital can be raised by
     issuing new shares, while debt capital can be acquired though a bond issue or with a bank loan.

     2. Think about whether you can satisfy your capital needs in the domestic market. Raising money in
     the country where your company is based is easier and normally costs less than going overseas in
     search of investments in your business. Can you cover your needs by a domestic issuance of shares or
     bonds? If it's not enough, you may need to tap into the global capital market. Look at what your
     competitors are doing in this respect and try not to fall behind (if they are getting funds from the global
     capital markets, you should probably do likewise).

     3. Determine how you can access the global capital market. Contact investment banks and seek their
     help. One of the most popular ways to get access to the global capital market is though an initial public
     offering (IPO). An IPO is a sale of your firm's securities, usually common stocks, to the investing
     public on an organized stock exchange such as the New York Stock Exchange (NYSE) or the London
     Stock Exchange (LSE). Doing an IPO requires a lot of time, energy and money from the firms'
     executives and directors. At the same time, it transforms the way a firm is run, turning it into a public
     company that needs to make sure it meets its investors' expectations in terms of dividend payouts and
     corporate strategy.

     4. Choose the best option for raising money from the global capital market and plan how you will go
     about raising the required capital. Whether you choose an IPO or a bonds issue, you will have to
     prepare for it, making changes to your corporate governance and financial reporting. You will need to
     audit your corporate financial accounts, hire a PR firm and prepare a prospectus--a business plan that
     also has information on the securities being issued. Contact your investment bank to get more help with

     5. Carry out your capital raising plan. Work closely with your investment bank to do everything
     required to sell your shares or bonds to global investors. Be flexible. If you see a lack of demand for
     your securities, you may need to postpone the offering until market conditions recover.

     Derivatives are financial contracts, which derive their value off a spot price time-series, which is called
     “the underlying”. The underlying asset can be equity, index, commodity or any other asset. Some
     common examples of derivatives are Forwards, Futures, Options and Swaps.

     Derivatives help to improve market efficiencies because risks can be isolated and sold to those who are
     willing to accept them at the least cost. Using derivatives breaks risk into pieces that can be managed
     independently. From a market-oriented perspective, derivatives offer the free trading of financial risks.
     Financial derivatives:
     Financial derivatives are financial instruments whose prices are derived from the prices of other
     financial instruments. Although financial derivatives have existed for a considerable period of time,
     they have become a major force in financial markets only since the early 1970s. In the class of equity
     derivatives, futures and options on stock indices have gained more popularity than on individual
     stocks, especially among institutional investors, who are major users of index-linked derivatives. Even
     small investors find these useful due to high correlation of the popular indices with various portfolios
     and ease of use.

Special Issue                                        Page 58 of 70                                         ISSN 2229 5216
                                                                         International Journal of Advances in Science and Technology


     Some significant derivatives that are of interest to us are depicted in the accompanying graph :


                 Based on                         Financial                                            Other
                 where traded                     Derivatives                                          Underlying

                Exchan                   Index              Individual                     Weather                 Catastrophe
                ge         OTC           Based              Financial
                Traded                                      Securities

                                                                                           Real                    Metals
                                         FX                 Interest                       Estate

                                         Credit             Equity                      Agricultural               Energy

     8.1 Major types of derivatives:

     Derivative contracts have several variants. Depending upon the market in which they are traded,
     derivatives are classified as 1) exchange traded and 2) over the counter. The most common variants are
     forwards, futures, options and swaps.

     Forwards: A forward contract is a customized contract between two entities, where settlement takes
     place as a specific date in the future at today’s predetermined price. Ex: On 1st June, X enters into an
     agreement to buy 50 bales of cotton for 1st December at Rs.1000 per bale from Y, a cotton dealer. It is
     a case of a forward contract where X has to pay Rs.50000 on 1st December to Y and Y has to supply
     50 bales of cotton.

     Options: Options are of two types – call and put. Calls give the buyer the right but not the obligation to
     buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give
     the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given
     price on or before a given date.

     Warrants: Options generally have maturity period of three months, majority of options that are traded
     on exchanges have maximum maturity of nine months. Longer-traded options are called warrants and
     are generally traded over-the-counter.

Special Issue                                       Page 59 of 70                                             ISSN 2229 5216
                                                                      International Journal of Advances in Science and Technology

     Leaps: The acronym LEAPS means Long-term Equity Anticipation Securities. These are
     options having a maturity of up to three years.

     Baskets: Basket Options are currency-protected options and its return-profile is based on the average
     performance of a pre-set basket of underlying assets. The basket can be interest rate, equity or
     commodity related. A basket of options is made by purchasing different options. The payout is
     therefore the addition of each individual option payout.

     Swaps: Swaps are private agreement between two parties to exchange cash flows in the future
     according to a pre-arranged formula. They can be regarded as portfolio of forward contracts. The two
     commonly used Swaps are
     i) Interest Rate Swaps: - A interest rate swap entails swapping only the interest
     related cash flows between the parties in the same currency.
     ii) Currency Swaps: - A currency swap is a foreign exchange agreement between two parties to
     exchange a given amount of one currency for another and after a specified period of time, to give back
     the original amount swapped.


     1.Capital markets development projects have been very successful. The three projects reviewed
     each had an identifiable link to significant improvements in the operation of India’s capital markets.
     Each offered concrete experimentation with promising activities, and each pushed the policy
     environment in a favorable direction. Each led to establishment of new or stronger institutions that
     have grown and evolved to solve real development problems. USAID/India was able to work
     constructively with appropriate host-country institutions and provide timely and effective support.

     2. Capital markets are critical to India’s development.
     India needs to grow at 8 or 9 percent a year in order to eliminate pervasive poverty within a generation.
     It cannot do this without better capital markets. Improving capital markets in India would have two
     important effects. First, it would increase the quality of investment in the economy. India’s economic
     growth problem in the past half-century has been due more to the quality of national investment than to
     its quantity. Indian savings rates are sufficiently high to support faster economic growth. Better capital
     markets are particularly important to moving savings into more efficient investments. Second, efficient
     and transparent capital markets can attract increased foreign savings to India (billions of dollars a year)
     to finance additional investment in public infrastructure. Increased infrastructure investment is
     essential for both faster economic growth and poverty reduction. The faster development of India’s
     infrastructure requires both progress on the policy environment and innovative approaches to financing
     long-term investment.

     3. In India, capital markets development is important to poverty alleviation in the long term.
     India would have substantially less poverty today if its government had given more attention to capital
     markets efficiency and less to directly intervening in the economy, often in the name of poverty
     alleviation. USAID usually prefers activities where the links to poverty are tangible. In India’s case,
     there is simply too much to be done for micro level activities to make any dent in the problem.
     Permitting markets to allocate investment is one of the prerequisites to large-scale poverty reduction.

     10. REFERENCE:
         1.     T.E. Copeland, J.F. Weston (1988): Financial Theory and Corporate Policy, Addison-Wesley,
                West Sussex

         2.     E.J. Elton, M.J. Gruber, S.J. Brown, W.N. Goetzmann (2003): Modern Portfolio Theory and
                Investment Analysis, John Wiley & Sons, New York

         3.     E.F. Fama (1976): Foundations of Finance, Basic Books Inc., New York (ISBN 978-

Special Issue                                       Page 60 of 70                                          ISSN 2229 5216
                                                                   International Journal of Advances in Science and Technology

         4.     Marc M. Groz (2009): Forbes Guide to the Markets, John Wiley & Sons, Inc., New York
                (ISBN 978-0470463383)

         5.     R.C. Merton (1992): Continuous-Time Finance, Blackwell Publishers Inc. (ISBN 978-

         6.     Keith Pilbeam (2010) Finance and Financial Markets, Palgrave (ISBN 978-0230233218)

         7.     Steven Valdez, An Introduction To Global Financial Markets, Macmillan Press Ltd. (ISBN 0-

         8.     The Business Finance Market: A Survey, Industrial Systems Research Publications,
                Manchester (UK), new edition 2002 (ISBN 978-0-906321-19-5)


     Dr. SRI KANTH RANGANATHAN received his MBA degree from the Alagappa University, in
                  2006. He received the PhD degree from University of Allahabad from June 2010,

Special Issue                                     Page 61 of 70                                         ISSN 2229 5216

To top