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This article is written by Shobhna Aggarwal, from Banasthali Vidyapith. This article talks about the legal functioning in the capital markets.

Table of Contents


The capital market law, pursuant to Royal Decree No. (M/30) dated 2/6/1424H – 31/7/2003, was issued to generate a fair, regulated, and transparent market that cooperates speedily with the recent developments in international financial markets. Capital market teams of law firms operate as the core of the transaction wheel, cooperating with attorneys in numerous vicinity pertinent to the transaction, for instance, professional lawyers who emphasize on the whole practice and regulations of the issuer, and validate or authenticate that economics transactions must operate within the outline of the industry’s other commitments and its directorial structure. 

The capital market team of a law firm granted with insolvency lawyers has protection or enforcement issues in the ‘worst case’; tax lawyers, who participate in the issuance structure on a cost-effective basis; real estate and real estate collateral; environmental lawyers; litigants, assess the wide range of risks of the issuer or the risks that may arise from financing. The team of lawyers works on dealings and contracts where a corporation utilizes equity securities such as stock and other possession shares of the company, or debt securities which symbolize a preliminary borrowing of monetary help along with a precise amount to be reimbursed within a certain time frame in order to cater the financing needs. 

About the capital market

A capital markets team usually works either with an investment bank who is the underwriter of the proposal or with the corporation which is the issuer of the security, except the objective on either side of the mentioned mutual transactions is to make sure that the underwriters and the issuer are in obedience and agreement with the securities rules and regulations which are prevailing the capital markets.
Moreover, it provides the business with sufficient funding by the composition of security in terms that will please the investors. Furthermore, the team works by performing functions such as auditing, investigation, and evaluation in order to corroborate the truth of a matter taken under consideration, thus it can be framed as the ‘due diligence,’ which is concerning the understanding of an issuer’s company with a thorough intensity to substantiate, or facilitate draft, the prospectus, and to ensure that every intricate and important detail of a client is revealed to prospective investors. Additionally, due diligence engages activities such as doing research with a third-party, conversing with the company management, reviewing contracts, and visiting the sites. Also, coordination of the documents is an important duty while the transaction is about to close whilst guaranteeing that security is settled, plus the funds are relocated in the appropriate opinions, filings, and certifications, and also the checking if required formalities essential for a novel stock that is to be issued are completed. 

The mid-level associates in the team primarily work on outlining and drafting a prospectus, this comprises of duties such as operating with investment bankers and the company in order to illustrate a business company is handling, viewing the potential risks that might occur and influence the business in a negative manner and drafting the probable risk aspects, and ensuring that the prospectus obeys and fulfill the significant security regulations and laws. Moreover, they participate in the negotiation of the contracts, for instance, the underwriting agreement that is a contract among the issuer and investment banks linked to underwriting a security proposal. 

The senior associates in the team are involved in tasks such as supervising everyday transactions and contracts whilst acting as a primary source of contact with the client. Furthermore, they confer the complicated side of a transaction, for instance, the indenture that explains the terms and conditions of a bond.

What are capital markets? 

Capital markets are places acting as a channel between suppliers who possess the capital and the one who requires capital for the investments and the savings. The body encompassing capital comprises institutional and retail investors and the ones who look for capital are governments, people, and commerce industries. Furthermore, capital markets consist of primary and secondary markets. The bond market and stock market are among the most widespread capital markets. Capital markets look forward to advancing and making transactions effective and efficient. These markets guide the one who is in possession of the capital and the one who wants to possess the capital by bringing them together and offering a place where securities can be switched over the entities. Additionally, it can be described as the place where the movement of investments and savings take place between the suppliers and buyers. As mentioned above it comprises two major markets primary and secondary. In the:

  1. Primary market, the brand new securities are provided and sold, and 
  2. Secondary market, the trading of pre-issued securities takes place among investors.

Also, one can define the capital market as a venue for conducting the trading of numerous financial instruments. 

Inclusions in the capital markets

The places in the capital market consist of the currency and foreign exchange markets, the bond markets, and the stock markets. The majority of these markets are present in key financial cities such as Singapore, Hong Kong, New York, and London. The suppliers in the capital market primarily incorporate the households and institutions such as life insurance companies, pension funds, and charitable foundations along with the non-financial institutions. 

Consumers of the funds embrace buyers of motor vehicles and homes, government funding infrastructure, and non-financial companies. Additionally, the market is deployed for the selling of financial goods such as debt securities and equities. Debt securities are interest-bearing IOUs (I owe you) for instance bonds and equities are the stock which is non-redeemable and remains with the company until it gets dissolved. Investors in the case of equities have the right to share profits, claim assets, and vote. 

Moreover, the capital markets play a significant part in the operation of the economy as they constitute the movement of money from the one who is having it, to the one who requires it. The major primary and secondary markets now work under computer-based electronic platforms. In a broad sense, the capital market can be defined as the market for any financial asset. Also, the capital markets refer to the investments receiving capital gains tax treatment.

Capital market transactions 

The capital market transactions take place during the process of trading of securities in the capital market. The two types of securities are bonds and stocks where the investments of the capital market are initiated. The transactions happening in the capital market are supervised by the financial regulatory bodies. It is a place where the government and industries can raise their funds as it includes trading of securities. The presence of stringent financial regulatory bodies in every region ensures the protection of the investors from fraudulent activities by monitoring each and every transaction. Some of the major regulatory bodies are 

Furthermore, in the capital market, the investments are done in the already-issued securities or newly issued securities. Wherein the issue of the new security is controlled by the primary market, the trading of already-issued securities is done through the secondary market. Additionally, the governments, banks, and corporations release the bonds and stocks in the capital market for raising long-term finances. The agencies, companies, individual investors, and corporations who are willing to invest can invest in these stocks either by selling the security or by purchasing it. The trading is not suitable for the novice player as it is hard to predict the dynamics of a capital market. The availability of financial advisers makes it easier for potential investors to invest. Similarly, stockbrokers are present to the ones with bond and stock investments. The transactions in the capital market are completed by the brokers registered to perform the deal on behalf of their clients.

Example of capital market transactions

The government sells bonds in the capital market when required to raise long-term funds. In the early 21st century, governments would sell their bonds by organizing with the investment banks. The bank will provide guarantees for the bonds and often leads a federation of brokers, some of which may be located in other investment banks. The group will then be sold to numerous investors. In emerging economies, an extra layer of underwriting was provided by the multilateral development bank which leads to the risk among the multilateral organization, the end investors, and the investment bank. At present, the government makes their bonds openly available for acquiring over the internet. Usually, the government puts a huge stock for sale. Some of the governments also sell bonds through alternate channels. For example:

Initial public offerings

Merrill Lynch, IDFC Capital, Enam Securities, ICICI Securities, SBI Capital Markets, and Yes Bank Limited in the IPO of A2Z Maintenance & Engineering Services Limited.

Qualified institutions placements

Acted as domestic legal counsel to the issuer in the QIP of Glenmark Pharmaceuticals Limited.

Foreign currency convertible bonds

International Finance Corporation in connection with subscription to FCCBs aggregating up to USD 7.5 million issued by Vivimed Labs Limited on a private placement basis. 

How is it related to the field of law

The capital market and the transaction in the capital market are related to each other as lawyers acquire a major role in the process of transaction that infuses the capital markets’ world. Moreover, the team of lawyers work as advisors to equity and debt issuers and also to the investment banks that frame and sell the financial instruments. As in the field of law, the lawyers in the transactions of the capital market plays a role in negotiating contracts, working with bankers to attain agreement from numerous parties such as listing agencies, rating agencies, regulators drafting documents, and advising on legal and regulatory matters. Moreover, some of the transactions are straightforward deals as major parties use standard documents and are active in the capital market. Junior lawyers prominently work on specialized deals. 

Additionally, they work as a regulatory and legal advisor as in the equity capital markets, an IPO is transformative for the industry. It needs hours of the time of lawyers to make sure the company is prepared and all set to register on an exchange. Also, the novel borrower in the debt capital markets needs hours of the lawyer’s time to arrange and organize it for the new transaction.

Need of law department in capital market 

The need for a separate law department in capital market to keep a check on capital market transactions is important as there are growing fraudulent cases and an increase in the number of investors and buyers. The lawyers in this department majorly work in various aspects such as drafting documents where they check the main clauses and make them right if needed, thus there are a huge number of documents to be prepared as the prospectus ranges from 20 to more than 500 pages depending upon the contract. Also, dissimilar to swap confirmations which contain a short majority of the capital markets transactions are opposite. 

The lawyers in the department negotiate the contracts owing to the presence of a huge number of contracts that are required to be signed off by parties. Often negotiations can be extended as investors want the perfect and acceptable clauses and issuers need the best terms. Though the involvement of investors is negligible in the negotiations but in case they are not satisfied with the structure of the instruments, they will not purchase them. Also, the department looks for regulatory and other approvals which are essential steps ranging from simple approvals to complex activities. 


The need for law in the capital market and capital market transaction is a significant part to carry out any business. It is a one-time journey for the capital market. At present, the capital market is well organized, mature, fairly integrated, and advanced. The capital market is one of the best around the world on the basis of technology. Advancements and developments in communications and computer technology cooperate on the internet, thus, crushing the geographic boundaries. Moreover, trading through the internet has become a global happening. 

The existence of regulatory bodies boost the transaction in the capital market as it increases investments in stock markets, FDI (foreign direct investment) flows and enhances the economy. It executes a significant purpose in channelizing resources. The team of lawyers guides and looks after the aspects of the investments, bonds, and securities. Moreover, the lawyers in the transactions of the capital market play a role in negotiating contracts, working with bankers to attain agreement from numerous parties such as listing agencies, rating agencies, regulators drafting documents, and advising on legal and regulatory matters which makes the department to be an essential part in the law firm.


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