Basics of Capital Market: formula sheet

Key formulas

Structure of the capital market

Capital market = Primary market (new issues) + Secondary market (trading of existing securities)

Some notes also divide it into the industrial securities market (shares, debentures) and the government securities market (gilt-edged securities).

Capital market vs money market: tenure

Capital market: long-term (generally above 1 year) | Money market: short-term (up to 1 year)

Tenure is the most commonly cited basis of difference. Equity shares have no fixed maturity and belong to the capital market.

Who receives the money

Primary market: money goes to the issuer | Secondary market: money goes to the selling investor

Use this to explain why the secondary market does not raise fresh capital.

Primary vs secondary market

Primary: issuer receives funds | Secondary: investors trade, issuer receives nothing

Use this one-line contrast to open any answer on the primary market.

Rights entitlement

Rights shares = Existing shares held × Rights ratio

If the ratio is 1:5, a holder of 100 shares gets 100 × 1 ÷ 5 = 20 rights shares.

Bonus shares

Bonus shares = Existing shares held × Bonus ratio

A 1:2 bonus means one new share for every two held. No cash is received by the company.

Funds raised from a fresh issue

Funds raised = Number of new shares × Issue price

Issue price = face value + premium, if any. For a bonus issue the funds raised are nil.

Private placement offer

Offer to a select group through a private placement offer letter, within the person limits and conditions of the Companies Act, 2013

Check the current limit on the number of persons in the Act before quoting a figure. Never quote a number you are unsure of.

Classification of methods

Public issue (IPO, FPO) | Rights | Private placement | Preferential | Bonus

Bonus is a capitalisation of reserves, not a method of raising fresh funds.

Primary vs secondary market (core test)

Primary: company ⇄ investor (new securities, funds reach the company). Secondary: investor ⇄ investor (existing securities, funds do not reach the company).

Use this one line to open any comparison answer.

Functions of a stock exchange

Liquidity + Price discovery + Safe and fair dealing + Capital formation support + Economic indicator + Investor protection

Learn this list as a checklist. Add one reason for each point.

Trade lifecycle

Order → Matching and execution → Clearing → Settlement (securities and funds)

Four stages. Name the clearing corporation and depositories at the right stages.

Net obligation in clearing

Net obligation of a member = Total purchases − Total sales (in each security and in funds)

Clearing nets out trades, so members settle only the difference, not every trade.

Instrument classification

Capital market instruments = Equity + Debt + Derivatives + Pooled (mutual fund units)

Use this as the frame for any 'explain the instruments' question.

Order of claim on winding up

Secured creditors and debt ahead of preference shareholders; preference shareholders ahead of equity shareholders

Equity is the residual claim. Do not state this order without noting that statutory priorities in winding up also apply.

Equity vs preference return

Equity: variable dividend, only if declared. Preference: fixed-rate dividend, paid before equity

Preference dividend is fixed but still depends on distributable profits.

Debt return

Debenture or bond holder: fixed or agreed interest + principal on maturity

Interest is a charge on the company and is payable whether or not it earns profit.

Derivative value

Value of derivative = f(price of underlying asset)

Main types: forwards, futures, options, swaps.

Registration rule

Intermediary acts only with a SEBI certificate of registration

Applies to brokers, merchant bankers, DPs, registrars, rating agencies and similar intermediaries. Mention the governing regulations in your answer.

Merchant banker functions

Due diligence + offer document + marketing + allotment coordination + post-issue compliance

Lead manager must exercise due diligence and file a due diligence certificate with SEBI for the offer document.

Depository structure

Investor (beneficial owner) → Depository Participant → Depository (NSDL or CDSL)

The depository is the registered owner of securities in its books; the investor is the beneficial owner.

Registrar to an issue role

Collect applications → finalise allotment basis → issue refunds and credit demat accounts → maintain records

Handles the application and allotment processing. A share transfer agent handles transfers and records for a company after listing.

Credit rating role

Rating = independent opinion on the issuer's ability to pay debt on time

It is an opinion, not a recommendation to buy, sell or hold.

FPI entry route

FPI registers through a designated depository participant (DDP) under SEBI (FPI) Regulations, 2019

FPIs are registered in categories under those regulations. Check the category details in your study material.

SEBI Act, 1992 - core objective

Protect investors + Promote development + Regulate the securities market

Learn this three-part objective; it is the base of most 'role of SEBI' answers.

Three types of SEBI powers

Quasi-legislative + Quasi-judicial + Quasi-executive

Give one example of each: regulations; adjudication orders and penalties; inspection and investigation.

Law to area match

Companies Act, 2013 → issue and company matters; SCRA, 1956 → stock exchanges and trading; SEBI Act, 1992 → SEBI and market conduct; Depositories Act, 1996 → demat and depositories

Use this match to name the correct Act in any framework answer.

Regulator to area match

SEBI → securities market; RBI → banks, money market, government securities, forex; MCA → companies; Exchanges → members and listed entities

For SEBI vs RBI, contrast the area regulated and the Act used.

Quick revision

• The capital market deals in long-term funds; the money market deals in short-term funds.
• The primary market is where securities are issued for the first time; the secondary market is where existing securities are traded.
• Companies raise capital in the primary market through methods such as public issue, rights issue and private placement.
• Stock exchanges provide a platform for trading, liquidity and price discovery.
• Key instruments include equity shares, preference shares, debentures and bonds.
• Intermediaries, such as merchant bankers, registrars, depositories and brokers, support issuing and trading.
• SEBI is the main regulator of the securities market in India.
• Know the main laws in the framework: the SEBI Act, the Securities Contracts (Regulation) Act and the Companies Act.
• In a difference question, give at least four clear points of difference.
• Write each answer as provision or definition, explanation, then conclusion.

Common mistakes

• Saying the secondary market raises capital for companies. Fix: State that in the secondary market money passes between investors. The company gets funds only in the primary market.
• Treating the money market as part of the capital market. Fix: Keep them separate. Money market means short-term funds up to one year. Capital market means long-term funds.
• Treating a bonus issue as a method of raising capital. Fix: Write that bonus shares are issued free by capitalising reserves and no funds are raised.
• Saying a rights issue can be offered to the public. Fix: State that rights shares are offered only to existing shareholders in proportion to their holdings.
• Saying the company receives money when shares are traded on the exchange. Fix: Write clearly that funds pass between investors. The company gains only indirectly through liquidity and a market valuation.
• Listing functions as bare words such as 'liquidity, pricing' with no explanation. Fix: Attach one reason to each function. Liquidity: investors can exit quickly, so they invest more readily.
• Calling preference shareholders creditors of the company. Fix: They are shareholders. They have priority in dividend and capital repayment but are not creditors. Debenture holders are the creditors.
• Saying preference dividend is guaranteed. Fix: Say it is payable at a fixed rate, but only out of distributable profits. Cumulative shares carry forward unpaid dividend.
• Treating a registrar to an issue and a share transfer agent as the same thing. Fix: Say the registrar handles application and allotment for an issue, while the transfer agent handles transfers and holder records. Note that one entity may do both if registered for both.
• Saying the depository directly deals with investors. Fix: Show the chain: investor, DP, depository. The investor opens the demat account with a DP, not with NSDL or CDSL.

Exam tips

• Short notes on capital market features, functions or structure are common, so prepare a 5-point version of each.
• For 'distinguish' questions, use a two-column layout in your answer sheet with at least five bases.
• Name the regulator in your answer: SEBI for the capital market and RBI for the money market.
• Use one-line Indian examples such as an IPO, a rights issue or treasury bills to show applied understanding.
• Link back to the topic: always finish with a one-line conclusion on economic development.
• Open with a one-line definition of the primary market. It sets up the answer and earns marks quickly.
• For comparison questions, use a clear point-by-point format: meaning, offered to, document, cost, control.
• Always say that a bonus issue brings no funds, and show this in numerical answers.