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Equity Capital Markets: Issuance and Trading of Equity Securities

Understanding Equity Capital Markets

Equity Capital Markets (ECM) are vital to the global financial system, providing companies with a platform to raise capital through the issuance of equity securities, while offering investors the chance to participate in a company’s growth. Whether a company is seeking to expand, invest in innovation, or pay off debts, ECM offers an effective means to access funding without incurring debt. Simultaneously, investors, both retail and institutional, benefit by owning a stake in the company, with potential returns in the form of dividends and capital appreciation.

This article delves into the equity issuance process, the trading of equity securities, and the distinct dynamics of the Indian equity market.

Issuance of Equity Securities

Equity issuance refers to the process by which companies sell ownership stakes to investors, primarily through the following methods:

  1. Initial Public Offering (IPO)
    The process by which a private firm first makes its shares available to the general public is known as an initial public offering, or IPO.This is a significant step in a company’s journey, as it transitions from a privately held entity to a publicly traded one.
  • Process: The IPO journey begins with the selection of underwriters, usually investment banks, who assist in setting the price, handling regulatory paperwork, and marketing the shares to potential investors. Once the shares are priced and allocated, the company gets listed on a stock exchange.
  • Significance: Companies use IPOs to raise capital for expansion, product development, and debt reduction. For early investors, an IPO presents an opportunity to realize their returns.
  1. Follow-On Public Offering (FPO)
    A Follow-On Public Offering (FPO) is a method by which already listed companies issue additional shares to the public to raise further capital. FPOs typically occur after an IPO when the company requires more funds.
  • Dilutive vs. non-dilutive: FPOs can be dilutive, where new shares are issued, reducing the ownership percentage of existing shareholders, or non-dilutive, where existing shares are sold without affecting ownership.
  1. Rights Issue
    An offer to purchase extra shares at a discounted price made by a corporation to its current shareholders, usually prior to issuing the shares to the public, is known as a rights issue.
  • Purpose: Rights issues are generally used when companies are looking to raise money for specific projects or need financial restructuring.

 

Trading of Equity Securities

After issuance, equity securities can be bought and sold in secondary markets.

  1. Stock Exchanges and Secondary Markets
    Stock exchanges, such as the New York Stock Exchange (NYSE), National Stock Exchange (NSE), and Bombay Stock Exchange (BSE), provide the infrastructure for trading equity securities. These exchanges ensure liquidity, transparency, and a secure environment for investors.
  • How it Works: Once listed, a company’s shares are publicly traded, with buyers and sellers interacting through brokers. Prices are determined by the market based on supply and demand dynamics, financial performance, and broader economic factors.
  1. Over-the-Counter (OTC) Trading
    In contrast to trading on formal exchanges, Over-the-Counter (OTC) trading involves direct transactions between buyers and sellers without an exchange. OTC trading is typically less regulated and more suitable for smaller or less frequently traded securities.
  2. Key Market Participants
  • Retail Investors: Individuals who buy and sell shares for personal profit.
  • Institutional Investors: Big organizations that trade stocks in large amounts, affecting the market.
  • Market Makers: Financial companies that help buy and sell stocks, making trading easier.

 

 

Scenario: Indian Equity Markets

India has a vibrant and rapidly growing equity capital market, driven by its two major stock exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Over the past decade, the Indian equity markets have matured significantly, attracting both domestic and international investors.

  1. IPO Boom in India
    The Indian IPO market has seen a surge in activity, with tech-driven companies and startups raising substantial capital. A prime example is the Zomato IPO in 2021, which marked a major milestone for India’s burgeoning startup ecosystem. Companies like Nykaa, Paytm, and Policybazaar have also gone public, highlighting the growth potential of the Indian equity markets.
  • Investor Participation: The number of retail investors in India has grown dramatically, with over 10 million new Demat accounts opened in 2022. Increased access to trading platforms, coupled with growing financial literacy, has contributed to this rise.
  1. Growth of Mutual Funds and SIPs
    In recent years, mutual fund investments through Systematic Investment Plans (SIPs) have gained significant traction in India. The SIP inflows crossed ₹15,000 crores per month in 2023, showcasing the shift toward long-term equity investments among Indian retail investors.
  • Passive Investing: The trend of passive investing through index funds and Exchange-Traded Funds (ETFs) is gaining popularity. These funds offer a low-cost, diversified way for investors to participate in the equity markets, mimicking the performance of broader indices like the Nifty 50 or the Sensex.
  1. Regulatory Framework and SEBI’s Role
    The Securities and Exchange Board of India (SEBI) plays a pivotal role in regulating and ensuring the stability of the Indian equity markets. SEBI’s continuous emphasis on transparency, investor protection, and corporate governance has strengthened the market’s credibility.
  • Innovative Financial Products: India has also seen the introduction of innovative investment vehicles, such as Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), which provide investors new avenues for diversification.

 

 

Challenges and Emerging Trends in ECM

Challenges:

  • Volatility: The quick changes in stock values might result in losses.
  • Market Risk: Economic downturns or geopolitical events can impact the overall market.

Emerging Trends:

  • Technology-Driven Trading: Increased use of algorithms and artificial intelligence for trading.
  • ESG Investing: Growing focus on environmental, social, and governance (ESG) factors in investment decisions.

In my view the uniqueness of Equity Capital Markets lie in that they offer a dual advantage: companies can raise capital without incurring debt, while investors gain ownership stakes, potential dividends, and the ability to vote on important corporate matters.

 

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