Capital Market and Financial Services
Capital Market and Financial Services covers the structure and regulation of the Indian capital market and the intermediaries that make it function.
Core rules
- SEBI regulates the securities market; the RBI regulates the money market and banking. The primary market raises fresh capital through IPO, FPO, rights and preferential allotment; the secondary market trades existing securities on exchanges.
- ASBA blocks the applicant's funds in the bank account until allotment; depositories (NSDL, CDSL) hold securities in dematerialised form.
- Rights issue: entitlement in the stated ratio, usually priced below market. Theoretical ex-rights price = (market value of existing shares + issue proceeds) ÷ total shares after the issue.
- Financial services: merchant banking (issue management), underwriting, leasing versus hire purchase, factoring (sale of receivables), credit rating, venture capital and mutual funds.
Worked example
A company with 4 shares at ₹120 each makes a 1-for-4 rights issue at ₹80. Theoretical ex-rights price = (4 × 120 + 1 × 80) ÷ 5 = 560/5 = ₹112. Value of the right = cum-rights price − ex-rights price = 120 − 112 = ₹8 per existing share, which also equals (120 − 80) ÷ 5. The shareholder is neither better nor worse off immediately: 4 × 120 = 480 before, and 5 × 112 = 560 after paying ₹80.
Traps
Confusing primary with secondary market functions; attributing securities regulation to the RBI; treating the rights price as the ex-rights price; forgetting the ratio adjustment when valuing a right; mixing merchant banking with plain underwriting.