PROJECT

ON

CORPORATE & FINANCE PROJECT

CAPITAL MARKET

SUBMITTED TO:

Mr. SHAIL SHAKYA

ASST. PROFESSOR

FACULTY OF LAW, DSMNRU

SUBMITTED BY:

UTKARSH MISHRA

FOURTH YEAR, 8th SEMESTER

B.COM. LL.B (H)

 ACKNOWLEDGEMENT

At the very outset, I utkarsh mishra would like to thank all those who were the „guiding lights‟
behind this project. First of all I would like to take this opportunity with esteem privilege to express
our heartfelt thanks and gratitude to our course teacher MR. SHAIL SHAKYA for giving me the
opportunity to choose this project topic which is both in accordance with my interests and of large
importance. Subsequently, I would like to thank my university for allowing me to avail the
computer lab, internet facilities, and the library without which this project would have been in a
distant realm.
 CAPITAL MARKET

"Capital Markets" refers to activities that gather funds from some entities and make them available
to other entities needing funds. The core function of such a market is to improve the efficiency of
transactions so that each individual entity doesn't need to do search and analysis, create legal
agreements, and complete funds transfer. A capital market is a financial market in which long-
term debt (over a year) or equity-backed securities are bought and sold.[6] Capital markets channel
the wealth of savers to those who can put it to long-term productive use, such as companies or
governments making long-term investments.[a] Financial regulators like the Bank of England
(BoE) and the U.S. Securities and Exchange Commission (SEC) oversee capital markets to protect
investors against fraud, among other duties.

Modern capital markets are almost invariably hosted on computer-based electronic trading
systems; most can be accessed only by entities within the financial sector or the treasury
departments of governments and corporations, but some can be accessed directly by the
public.[b]There are many thousands of such systems, most serving only small parts of the overall
capital markets. Entities hosting the systems include stock exchanges, investment banks, and
government departments. Physically, the systems are hosted all over the world, though they tend
to be concentrated in financial centers like London, New York, and Hong Kong. 1

ORIGIN OF JOINT STOCK COMPANIES

The joint stock companies had its origin in the middle of 19th Century, enabling the pooling of
small savings from the general public into the companies' treasury and issuing shares to the
investors in lieu thereof. Initially the benefit of limited liability did not attach to these corporate
securities called company shares. In other words, investments in companies carried the same
unlimited liability for the investors as was the case with investments in proprietorship concerns
and partnership firms. The investors control the management group through their representatives
at the Board meetings and other company meetings, where the affairs of the company are managed
by professionals. Thus, the privity and close association which are noticed in a partnership firm
amongst the investing partners do not exist in a joint stock company between the management and

1
Gart A; Handbook of the money and capital market quorum Books New York 1988
the investing public. Soon after the concept of joint stock companies came into being a number of
companies mismanaged and lost their capital and worse still, the creditors chased the investors of
the joint stock companies and attached their private properties also, to satisfy their claims on the
basis of unlimited liability. At this juncture, the joint stock concept itself received a rude shock
and was about to become defunct. First at this stage that the protection of limited liability was
conceived and added as a feature of the investments in the shares of joint stock companies. In fact,
this innovation was a remarkable one which paved the way for large sized joint stock companies
to emerge and mop up private savings for being channelised into productive purposes. It is
therefore often held that after the invention of the Rail Road Engine, the most spectacular
innovation of the 19th Century was the creation of joint stock companies with limited liability for
the investors and with separation of ownership from management in the conduct of trade and
commerce. With the growth in corporate activity collection of funds towards shares in joint stock
companies became common. However this involved detailed legal provisions in different
enactments compelling issuers of capital to disclose all relevant -information fully and fairly and
to follow the laid down procedures 3 for protecting the interest of investors, and consulting and
obtaining approval from them on matters of relevance to them. The practice of circulating annual
accounts prepared by the Board of Directors, to the members along with the director's report and
seeking their approval for appointment of directors and auditors and obtaining their consent on
other statutorily prescribed matters had its origin from the above considerations. The principle of
corporate democracy was embedded in the corporate legislations from the Inception so that the
managements even while possessing majority voting power in their hands were obliged to consult
and give an opportunity to the minority share holders also, to have a say in passing resolutions at
the general meetings. The system of statutory audit by duly qualified accountants holding
certificate of practice and observing standard accounting procedure and disclosure norms followed
in due course.

CONCEPT OF CAPITAL MARKET

The capital market is a market for financial investments that are direct or indirect claims to capital.
The capital market comprises the complex of institutions and mechanism through which
intermediate term funds and long term funds are pooled and made available to business,
government and individuals. The capital Market also encompasses the process by which securities
already outstanding are transferred . The capital market is a place where the suppliers and users of
capital meet to share one another's views, and where a balance is sought to be achieved among
diverse market participants. The securities decouple individual's acts of saving and investment
over time, space and entities and thus allow savings to occur without concomitant investment.
Moreover, yield- bearing securities makes present consumption more expensive relative to future
consumption, including people to save. The composition of savings changes with less of it being
held in the form of idle money or unproductive assets, primarily because more divisible and liquid
assets are available. The Capital market facilitates mobilization of savings of individuals and pools
them into reservoir of capital which can be used for the economic development of a country. An
efficient capital market is essential for raising capital by the corporate sector of the economy and
for the protection of the interest of investors in corporate securities. There arises a need to strike a
balance between raising of capital for economic development on one side and protection of
investors on the other. Unless the interests of investors are protected, raising of capital, by
corporates is not possible. An efficient capital market can provide a mechanism for raising capital
and also by protecting investors in corporate securities. The capital market has two interdependent
and inseparable segments, the primary market and stock (secondary market).

BREAKING DOWN 'Capital Markets'

Capital markets consist of suppliers and users of funds. Suppliers of funds include households and
institutions serving them, such as pension funds; life insurance companies; charitable foundations
such as colleges, hospitals, and religious institutions; and nonfinancial companies generating cash
beyond their needs for investment. Users of funds include home and motor vehicle purchasers;
nonfinancial companies; and governments financing infrastructure investment and operating
expenses.

Markets include primary markets, where new equity stock and bond issues are sold to investors,
and secondary markets, which trade existing securities.

Capital Markets in Context

Broadly, capital markets can refer to markets for any financial asset. (See also, Financial Markets:
Capital Versus Money Markets.)
In the context of corporate finance, the term refers to venues for obtaining investable capital for
nonfinancial companies. Here, "investable capital" includes the external funds included in a
weighted average cost of capital calculation – common and preferred equity, public bonds, and
private debt – that are also used in a return on invested capital calculation.

In a more limited corporate finance context, it refers to only equity funding, excluding debt.

In a financial services industry context, it refers to financial companies involved primarily in

private markets, as opposed to public ones. In this sense, it is referring to investment banks, private
equity, and venture capital firms in contrast to broker-dealers and public exchanges. In this case,
capital markets are considered primary offerings of debt and equity (initial public offering)
supported by investment banks through underwriting. This contrasts with the time after the initial
public offering when the offering is publicly trading on exchanges in a secondary market. In the
U.S., the primary regulator for an exchange is the Securities and Exchange Commission (SEC).
This industry context is often meant when "capital markets" are contrasted with "financial
markets."

In the context of public markets operated by a regulated exchange, "capital markets" can refer to
equity markets in contrast to debt/bond/fixed income, money, derivatives, and commodities
markets. Mirroring the corporate finance context, "capital markets" can also mean equity and
debt/bond/fixed income markets. (See also, Introduction to Capital Markets History.)

In a tax context, capital markets might refer to investments intended to be held for over one year
for capital gains tax treatment. This is often related to transactions arranged privately through
investment banks or private funds (such as private equity or venture capital).

Versus money markets

The money markets are used for the raising of short-term finance, sometimes for loans that are
expected to be paid back as early as overnight. In contrast, the "capital markets" are used for the
raising of long-term finance, such as the purchase of shares/equities, or for loans that are not
expected to be fully paid back for at least a year.
Funds borrowed from money markets are typically used for general operating expenses, to provide
liquid assets for brief periods. For example, a company may have inbound payments from
customers that have not yet cleared, but need immediate cash to pay its employees. When a
company borrows from the primary capital markets, often the purpose is to invest in additional
physical capital goods, which will be used to help increase its income. It can take many months or
years before the investment generates sufficient return to pay back its cost, and hence the finance
is long term.

Together, money markets and capital markets form the financial markets, as the term is narrowly
understood. The capital market is concerned with long-term finance. In the widest sense, it consists
of a series of channels through which the savings of the community are made available for
industrial and commercial enterprises and public authorities.

Government on primary markets

When a government wants to raise long-term finance it will often sell bonds in the capital markets.
In the 20th and early 21st centuries, many governments would use investment banks to organize
the sale of their bonds. The leading bank would underwrite the bonds, and would often head up a
syndicate of brokers, some of whom might be based in other investment banks. The syndicate
would then sell to various investors. For developing countries, a multilateral development bank
would sometimes provide an additional layer of underwriting, resulting in risk being shared
between the investment bank(s), the multilateral organization, and the end investors. However,
since 1997 it has been increasingly common for governments of the larger nations to bypass
investment banks by making their bonds directly available for purchase online. Many governments
now sell most of their bonds by computerized auction. Typically, large volumes are put up for sale
in one go; a government may only hold a small number of auctions each year. Some governments
will also sell a continuous stream of bonds through other channels. The biggest single seller of
debt is the U.S. government; there are usually several transactions for such sales every second,
which corresponds to the continuous updating of the U.S. real-time debt clock.

Company on primary markets

When a company wants to raise money for long-term investment, one of its first decisions is
whether to do so by issuing bonds or shares. If it chooses shares, it avoids increasing its debt, and
in some cases the new shareholders may also provide non-monetary help, such as expertise or
useful contacts. On the other hand, a new issue of shares will dilute the ownership rights of the
existing shareholders, and if they gain a controlling interest, the new shareholders may even
replace senior managers. From an investor's point of view, shares offer the potential for higher
returns and capital gains if the company does well. Conversely, bonds are safer if the company
does poorly, as they are less prone to severe falls in price, and in the event of bankruptcy, bond
owners may be paid something, while shareholders will receive nothing.

When a company raises finance from the primary market, the process is more likely to involve
face-to-face meetings than other capital market transactions. Whether they choose to issue bonds
or shares, companies will typically enlist the services of an investment bank to mediate between
themselves and the market. A team from the investment bank often meets with the company's
senior managers to ensure their plans are sound. The bank then acts as an underwriter, and will
arrange for a network of brokers to sell the bonds or shares to investors. This second stage is
usually done mostly through computerized systems, though brokers will often phone up their
favored clients to advise them of the opportunity. Companies can avoid paying fees to investment
banks by using a direct public offering, though this is not a common practice as it incurs other legal
costs and can take up considerable management time.

Capital controls
Capital controls are measures imposed by a state's government aimed at managing capital account
transactions – in other words, capital market transactions where one of the counterparties[h]
involved is in a foreign country. Whereas domestic regulatory authorities try to ensure that capital
market participants trade fairly with each other, and sometimes to ensure institutions like banks do
not take excessive risks, capital controls aim to ensure that the macroeconomic effects of the capital
markets do not have a negative impact. Most advanced nations like to use capital controls sparingly
if at all, as in theory allowing markets freedom is a win-win situation for all involved: investors
are free to seek maximum returns, and countries can benefit from investments that will develop
their industry and infrastructure. However, sometimes capital market transactions can have a net
negative effect: for example, in a financial crisis, there can be a mass withdrawal of capital, leaving
a nation without sufficient foreign-exchange reserves to pay for needed imports. On the other hand,
if too much capital is flowing into a country, it can increase inflation and the value of the nation's
currency, making its exports uncompetitive. Countries like India employ capital controls to ensure
that their citizens' money is invested at home rather than abroad.

Capital markets majorly serve two purposes:

Firstly, it gathers different investors who have capitals along with the companies seeking capital
through debt and equity instruments.

Secondly, and more importantly, the capital markets offer a secondary market where the investors
in these securities can exchange them among themselves at the standard market prices. Without
the liquidity created by a secondary market, investors would not be interested in purchasing equity
and debt instruments for fear of being unable to unload them in the future.
 BIBLIOGRAPHY

https://timesofindia.indiatimes.com/business/faqs/market-
faqs/whatis-capital-market-in-india/articleshow/63202744.cms
https://economictimes.indiatimes.com/definition/capital-market
https://www.investopedia.com/terms/c/capitalmarkets.asp
https://en.wikipedia.org/wiki/Capital_market