Capital market is a platform where buyers/sellers engage in the trade of financial securities like bonds, stocks, etc. Usually, the buying/selling is undertaken by partakers such as individuals or institutions.
According to the Ethiopian Capital Market Proclamation, “Capital Market” means
“ . . . a market where securities such as shares or equities, bonds, derivatives, or other related securities are bought and sold”.
Conceptually, capital markets help streamline surplus funds from savers to institutions which then invest them into more valuable process.
Generally, this market deals mostly in long-term securities through primary and secondary markets. Primary markets usually deal with the trade of fresh issues of stocks and other securities; whereas, secondary market deals with the exchange of existing or previously-issued securities. In this regard, it is important to understand the basic nature of Capital Market Transactions that incorporates the following basic points.
Stocks and bonds are the two types of securities where the capital market investments are done. Capital market transactions are supervised by the financial regulatory bodies. Of course, a typical capital market includes the trading of securities and also the ideal marketplace for the corporations and governments to raise funds.
Usually, there are financial regulatory bodies in every country that regulate and monitor the capital market transactions to protect the investors from being deceived. The Primary capital market controls the new issue transactions while the Secondary capital market takes care of the trading of the existing securities. The corporations, banks or governments release stocks and bonds in the capital market to raise the long-term funds. The individual investors, companies, agencies and corporations can invest in these stocks and bonds either by purchasing or selling them.
All financial investor needs to conduct safe transactions along with their investments. There are financial advisers available to guide the investors telling them where to invest and where not to. There are stock brokers also who are experienced and eligible to guide people with stock and bond investments. The capital market transactions are done by the brokers who are registered with the exchange to carry out the trading on behalf of their clients.
Similarly, legal advisors are also key players in the transactional processes. They can advise debt and equity issuers and the investment banks which structures and sells the financial instruments. Hence, the role of lawyers may include –
- Regulatory & Other Approvals – Regulatory and other approvals are a necessary step. They range from simple listing approvals for frequent bond issuers, to more time-consuming activities. Ratings agencies also require legal advice when determining a product’s rating. Complex contracts are demanding professional services and interventions from lawyers.
- Negotiating and drafting Contracts – Negotiating and drafting contracts are big parts of the lawyers’ job in the capital market transaction. There are a lot of contracts which need to be signed off by different parties and every contract is of great importance to every party. As such, negotiations should be protracted by legal professionals. Issuers want the best terms. Further, investment banks need the clauses to be acceptable to their internal credit committees and in the case of securities; they want terms that make the product optimal for selling.
- Legal and Regulatory Advice – in equity capital markets, an initial public offering (IPO) is transformative for a company. It requires lawyers to ensure the company is ready to list on an exchange and take the company through every step in the process. A first-time borrower in the debt capital markets also requires lawyers to prepare it for the new transaction.
Source: Further Africa
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