Unit II

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Capital Market

Financial
market

Capital Money
market market

Primary Secondary
market market
Concept of capital market
Capital market is a financial market in which long-term debt or
equity-backed securities are bought and sold, in contrast to a money
market where short-term is bought and sold.
Types of capital market
I. Primary market; is the market for new shares and securities
ll. Secondary market; it deals with the exchange of
prevailing or previously- issued securities among
investors.
Differences between primary and secondary market
Primary market Secondary market

For fresh issue Existing securities or shares

Regulated by company's act Regulated by stock exchange

Price determined by company Price depends on demand and supply

Price of securities will be fixed Price will be fluctuated


Functions of Capital Markets
1. Link between savers and investors:
 The capital market serves an intermediary between the people having excess
funds and the ones who need funds.
 The financial intermediaries will take the capital or fund from the saver who
invests in them, and they will give their own capital to their borrowers.
 It mobilizes people’s savings by directing and guiding them for productive
investment. These investments provide regular income and growth to the
investors.
 Example: saver give 3 million to the financial intermediaries and the borrower
want a capital of 2milion to do his business, so the financial intermediaries will
give the loan to the borrower by adding his own interest rate to the borrower.
2. Encourage economic growth:
 Well functioning markets ensure that both corporations and investors
get or receive fair prices for their securities.
 Capital market speeds up the economic growth rate in the country by
providing funds among different sectors of the economy continuously.
 It makes funds available for longer period of time, the financial
requirements of business are met by the capital markets.
 It provides funds for the large infrastructural development requiring
huge funds in the country.
 For example: Easy and smooth availability of funds for medium and
long period encourages the entrepreneurs to take profitable
ventures/businesses in the field of trade, industry, commerce and even
agriculture.
3. Generating liquidity:
 Liquidity means convertibility into cash.
 It is a liquid market as buyers and sellers of securities are continuously available
in capital markets.
 Foe example: Shares of the public companies are transferable i.e., in case of
financial requirements these shares can be sold in the stock market and the cash
can be obtained.
 This is how capital market generates liquidity.

4. Continuous Availability Of Funds:


 The capital market ensures the sufficient availability of funds in the economy.
 It continuously provides long term investment avenues to investors. It is a liquid
market as buyers and sellers of securities are continuously available here.
 It always circulates funds among the different sectors of society, thereby ensuring
adequate availability of funds.
5. Increase the national income:
 Funds flow into the capital market from individuals and financial
intermediaries which are absorbed by commerce, industry and
government.
 It thus facilitates the movement of stream of capital to be used more
productively and profitability to increase the national income.

6. Basis for industrialization:


 Capital market generates long term funds, which are essential for the
establishment of industries.
 Thus, capital market acts as a basis for industrialization
Advantages of Capital Market
Capital market improves transactional
efficiency.
Capital markets are very liquid.

Disadvantages of Capital Market


Capital market is very risky.
Additional cost
Primary Market
Primary market is the part of the capital market which deals with the new
securities.

Primary market creates long term instruments through which corporate


entities raise funds from the capital market. It is also known as the New
Issue Market.

Publicly traded companies can issue new shares in what is called a primary
issue of the debt or stock.

Primary issues are used by companies for the purpose of setting up new
business or for expanding or modernizing the existing business
Public Issue
Public issue is a method to raise share capital by selling securities
to the public at large.
In Bhutan public issue are governed by Company Registrar Division
in accordance to REGULATIONS FOR PUBLIC ISSUE OF SHARES,
2015.
The issue of Public issue follows an elaborate process which can be
seen in REGULATIONS FOR PUBLIC ISSUE OF SHARES, 2015.
Right issue
A right issue involves selling securities in the primary market by
issuing rights to the existing shareholders only.
When a company issue additional equity capital, it has to be offered
in the first instance to the existing shareholders on a pro rata basis
(According to the shares they hold).
Case A
Lets say a company wants to make a public issue. What are the
requirement for the company to make public issue.
Issue to more than 50 person
Should have minimum paid up capital of 20 million before IPO
Debt to equity ratio should be maintained at 2:1
The company should get permission from securities exchange to
list its shares
Private Placement of Shares
Private Placement of shares
Private placement means selling its securities privately to a selected group
of investors not exceeding 200 persons.
Investors usually includes friends, exclusive investors and institutional
investors.
Not issued at general public.
Less regulatory requirements, reduced cost and time
Company only offers to known people of the company
Shares offered maybe fully paid or partly paid-up and the amount to be paid
by investors should be by cheque, demand draft or electronic transfer, but
not in cash.
Existing shareholder have to approve it in general meeting.
A company can make private placement in two
ways;
a. Right Issue: the right given to Existing
equity shareholders to invest in the shares
b. Preferential allotment: issues securities
to a select group of people, it is known as
preferential.
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Investment Banker
Is an individual who often works a part of financial
institution and is primarily concerned with raising
capital for corporations, government or other entities.
Responsibilities;
a) Raising capital
b) Underwriting
c) Conduct research
d) Mergers and Acquisitions
e) Financial Advice.
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Differences between Investment Bank and merchant
Bank
Basis Merchant Bank Investment Bank
Main International financing and Underwriting and issuance of
activity trade activity securities
scope Deals with medium, small Deals with large companies
companies and HNI clients. and HNIs.
Merger and Such service are provided on a Provide such services from a
Acquisition lower scale longer time.
Direct Raise funds through equity. Do not make any direct
investment investment.
Clients Institutional investors, Companies and high net worth
government, and corporations. individuals.
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Commodity Market
Is a marketplace for buying, selling and trading of raw
materials or primary products.
Types of Commodities
1. Hard commodities
• It includes natural resources that must be mined or
extracted.
• It is classified into two categories:
i. Metal- Gold, silver, zinc, copper, platinum
ii. Energy- Natural gas, crude oil, gasoline, heating oil
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2. Soft commodities
•It includes agricultural products or livestock that are grown
and cared.
•It is classified into two categories:
i. Agriculture- Rice, corn, wheat, cotton, soybean, coffee,
salt, sugar
ii. Livestock and meat- Feeder cattle, live cattle, egg
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Debt Market
The debt market is the marketplace where debt
instruments are traded.
These financial instruments are fixed-income securities,
giving fixed returns to the investors.
The issuer of these securities can be local bodies,
municipalities, state government, corporate, etc.
Major debt market securities are bonds, government bonds,
debentures, treasury bills, certificates of deposits,
commercial papers, etc.
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Challenges faced by commodity and debt market


 In commodity market:
1. Commodity risk
2. External factors

 In debt market:
1. Inflation
2. Fixed interest rate return
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Difference between Commodity and Debt Market


Basis Commodity Market Debt market
Meaning Is a marketplace for buying, selling The debt market is the marketplace
and trading of raw materials or where debt instruments are
primary products. traded.

Nature of Investing directly in the Investing in loans


investment commodity.
Inflation Good for commodity market. Not good for debt market.
Volatility More volatile compared to debt Comparatively less volatile.
market.
Participants Manufacturers, producers, dealers, Central government, banks,
traders and also speculators. financial institutions, insurance
companies, etc.
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Regulatory Framework
Introduction
- Systematic arrangement of laws and institutions for
the control, regulation and as well as the
development of an economy.
- Every Country has evolved its own regulatory
system to ensure smooth functioning of the financial
sector.
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Capital Market Regulatory Framework In Bhutan


 The Capital Market is governed by two separate laws with two
regulatory bodies and one exchange (SRO).
Companies Act,2016 – RoC/MoEA- Primary Market Regulation/ CG/
minority interest protection for all 550 companies including 22 listed
Companies
- Issued Rules like IPO, Bond, CP and approves issue of
securities/ review of offer documents – Sec 420/Chapter 6
Financial Service Act (FSA), 2011- RMA- Secondary Market/
Financial Institution/ Market intermediaries (brokers, FMCs)
RSEB- SRO-exchange / self regulator for 21 listed companies and
stakeholder in both primary and secondary market
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Governing Laws:
Statutes:
-Companies Act, 2016
• Delegated Legislations:
• Corporate Bond Regulations, 2012
• Public Issue of Shares (IPO)Regulation, 2015
• Guidelines for Issue of Commercial Papers, 2018
- Financial Service Act, 2011
• Delegated Legislations:
• Listing/ exchange rules
• Regulations for Securities Brokers
• Guidelines for CD
- AML/CFT Act,2018
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Regulatory Framework

RMA/RSEB
• Money Market
• Capital - Secondary Market

ROC
• Corporate Regulation
• Capital – Primary Market
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Importance of Regulatory Systems


- To infuse high level of confidence in
market
-To ensure protection of consumer
-Enhance the financial system
- Reduce financial crimes
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Role of Market Regulator


 The Ministry of Economic Affairs issued the Regulations for
Public issue of Shares, 2015 in accordance with section 138 of
the Companies Act of Kingdom of Bhutan 2000.
Public offer of share
 An issuer shall make public offer of shares, if it intends to
issue its shares to more than fifty persons at a time.
 The issuer shall have minimum paid-up capital of Nu. 20
million prior to IPO.
 The issuer shall offer at least 20% to public and 10% for
institution.
 The debt to equity a ratio of the issuer shall be maintained at
2:1
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Public Issue of Share at Premium


 Issuer shall have record profitability for two of last three
years
 Has net worth of Nu. 10M in each of the last three financial
years.
Approval and Registration of Prospectus
 The Prospectus for Public issue of shares shall be reviewed
and approved by the Prospectus Approval Committee(PAC).
 The Registrar of Companies shall register the Prospectus
after the approval of the same by the PAC as per section 34
of the Companies Act of the Kingdom of Bhutan, 2000.
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Minimum Subscription to Qualify for Allotment


 The minimum subscription to be received in an
issue shall not be less than fifteen percent of the
issued capital , subscribed by at least fifty investors.
 In the event of non-receipt of minimum subscription
referred to in subsection (1), all application moneys
received shall be refunded to the applicants within
the period specified in section 37 of the Companies
Act, 2000.
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Listing and Stock market trading with special reference to RSEB

Definition
Listing: means the grant of a listing of, and
permission to deal in, securities on the exchange and
“listed” shall be construed accordingly.
OR
Listing means the formal admission of securities of a
company to the trading platform of the exchange.
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Listing rules: means the rules governing the official listing


of securities herein contained and made by the Royal
Securities Exchange of Bhutan with the approval of the RMA.

1. Equity Securities
 Incorporated under Companies Act
 Suitable for listing
 Profitability for Two years
 Face value
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2. Debt Securities
Incorporated under Companies Act
Suitable for listing
Audited account for 3 financial year
Negotiable
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Listing Procedures
Listing Application
Listing Particulars
Listing Undertaking
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Listing Committee
1. One member from the board of RSEB as chairman
2. Royal Monetary Authority of Bhutan
3. Ministry of Economic Affairs
4. Bhutan Chambers of Commerce and Industries
5. Two representatives from Exchange
6. One independent representative
7. One representative from Academia
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Functions of Listing Committee

I. To examine the eligibility and suitability of application

II. To admit or refuse admission


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Benefits of listing in stock market

1. Access to capital growth


2. Enhanced visibility
3. Transparency and efficiency
4. Liquidity

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