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Indian Money

and
capital market
Money Market

 The money market is the market in which


short – term funds are borrowed and lent
 According to RBI

“ Money market is centre for dealings, mainly


of a short-term character, in monetary assets,
it meets the short – term requirements of the
borrowers and provides liquidity or cash to
lenders. It is the place where short term
surplus investible funds at the disposal of the
financial and other institutions and individuals
are bid by borrowers, again comprising
institutions and individuals and also by the
govt.”
Functions of Money Market

 by providing various kinds of credit instruments,


money market augments the supply of funds.
 The efficient working of the money market helps
minimize the gluts and stringencies in the money
market due to the seasonal variations in the flow of
and demand for funds.
 A money market helps in avoiding seasonal
fluctuations in interest rates.
 It enhances the amount of liquidity available to the
economy.
 By augmenting the supply of funds, a money market
helps in making funds available at cheaper rates.
Functions of Money Market

 Through the quick transfer of funds from one


place to another, helps in avoiding regional
gluts and stringencies of funds.
 By providing profitable investment
opportunities for short-term funds, helps in
increasing the profit of the financial institutions.
Money market Constituents and Instruments

 Money market can be classified into two types-


 Inner spheres
 Outer spheres
 Inner spheres includes banks, negotiable securities,
finance companies.
 Outer spheres include solicitors, brokers of
securities and entire system of trade and credit.
 The central bank, commercial bank, co-operative
banks, discount houses, are the main constituents
of well developed money market.
Money market Constituents and Instruments

 In developing countries like India, the money


market is broadly divided into organized and
unorganized sectors.
 Chambers of commerce, trade associations, etc
help the smooth and efficient functioning of the
money market by helping the collection and
distribution of information to industry, trade and
commerce.
Instruments of Money Market

Call/Notice money
 All categories of banks and financial institutions
are allowed to participate in call/notice money.
 The funds are lent for one day or from Saturday
to Monday or for a period of 14 days.
Commercial Bills
 Used to facilitate credit sales.
 Can be discounted with banks, when people are
in need of funds.
Instruments of Money Market

Treasury Bills
 Promissory notes issued by the Central govt. to
raise short term funds to bridge short term
mismatch between receipts and expenditure.
Commercial Paper
 Unsecured promissory notes of short-term
maturity of highly rated companies, issued tom
meet working capital requirements.
Certificate of Deposits
 Introduced by RBI in 1989
 Issued by banks at a discount and face value is
payable at maturity..
Instruments of Money Market

 Issued by banks during periods of tight liquidity.


 The CD’s are short-term deposit instruments for
a period ranging from three months to one
year.
Indian Money Market

 Indian money market id broadly divided in to two parts –


 Unorganized sectors
 Organized sector
 unorganized sector of money comprises of unregulated
non-bank financial intermediaries, indigenous banks,
money lenders etc.
 The organized sector of the Indian money market
comprises the RBI, commercial banks, foreign banks, co-
operative banks, finance corporations, mutual funds,
discount and finance house of India limited
Capital Market

 Market for long – term funds.


 Market for long – term loanable funds as distinct
from money market which deals in short-term
funds.
Nature and Constituents

 Consists of a number of individuals and


Institutions.
 Stock exchanges, commercial banks, financial
institutions, co-operative banks, insurance
companies etc. are important constituents of
the capital market.
Indian Capital Market

 Consists of
1. Organized Sectors
2. Unorganized sectors
Indian Capital
Market Structure
Capital Market

Marketable Securities Non-Marketing Securities

Govt. Corporate Bonds Mutual Banks Deposits Loans & Post office
Securities securities Funds deposits with advances of Deposits &
companies bank &FI certificates

New Issue Market Stock New Issue Market


- Original Market - Players- Issues

•Promoters •Brokers •Merchant bankers


•Associates •Jobbers • underwriters
•Employees •Dealers •Ad. Agencies
•Public •Badla Financiers

Indian Capital Market Structure


Development of the capital market

 The Indian capital market has undergone remarkable


changes in the post independence period.
 The important facts that have contributed to the
development of the capital market in India are-
 Legislative measures.
 Establishment of development banks.
 Growth of underwriting business.
 Public confidence.
 Increasing awareness of investment opportunities.
 Capital Market reform.
Stock Exchange

“ Stock exchange is a market in which securities


are brought and sold”
“ Stock exchange means any body of individuals
whether incorporated or not, constituted for the
purpose of assisting, regulating or controlling
the business of buying, selling or dealing in
securities.”
Functions of Stock Exchange

 Provides a ready market for buying and selling


of securities.
 Directs flow of capital in the most profitable
channels.
 Facilitates speculation.
 Promotes industrial growth and economic
development.
 Promotes habit of savings and investment.
How Business is Transacted in a stock Exchange

A typical investment transaction will consist of


four stages-
 Placing an order with a broker.
 Execution of Order
 Reporting deal to the client
 Settlement of transactions.
Regulation of
Stock Exchange
Securities Contracts (regulation) Act 1956

 SCRA enacted in 1956, came into force on


February 20, 1957.
Objectives
 To prevent undesirable transaction in securities
 To regulate dealings in securities
 Regulation of stock exchanges.
 Regulation of buying and selling of securities
out side the limits of stock exchange.
Provisions

1. Grant of Recognition
 The Act provides that only recognized stock
exchanges can function in the country.
 As of today, all the 23 stock exchanges have
been recognized by the govt.
 The grant of recognition of the stock exchange
shall be published in the Gazette of India and
will come into effect from the date of
publication in the gazette.
Provisions

2. Submission of Returns
 Section 6 of the Act lays down that every stock
exchange shall furnish to the central govt. such
periodical returns as may be prescribed relating
to its affairs.
 The periodical returns shall be filled by the
recognized stock exchanges before 31st January
each year.
Provisions

3. Power to Direct Rules to be Made or to Make Rules


 Section 8 of the Act empowers the central govt.
to direct the stock exchange to frame rules or
to amend rules already made in respect of the
following-
 Management of stock exchange
 Duties and powers of office – Bearers
 The procedure for registration
Provisions

4. Power to Make or Amend Bye Laws


 Section 9 of the Act empowers the recognized
stock exchange to make bye-laws for the
regulation and control of contracts with the
approval of the central govt.
 Section 10 of the act empowers the central
govt. to amend the bye-laws as framed under
section 9
Provisions

5. Power to Supersede Governing Body and Suspend


Business.
 Section 11 and 15 of the act, empower the
central govt. to supersede the governing body
of a stock exchange and to suspend the
business of a recognized stock exchange.
Provisions

6. Power to Make Listing of securities Compulsory


 Section 21 of the Act empowers the central
govt. to make listing of securities by public
companies compulsory.
7. Power to Impose Penalties
 Section 23 of the act lays down penalties for
offence committed by individuals.
 Section 24 of the act provides for the same but
for offence committed by companies.
 The penalty may include imprisonment for a
period of one year or fine or both.
Securities and Exchange Board of India

 SEBI was constituted in 1988 by a resolution of


govt. of India.
 It was made a statutory body by the Securities and
Exchange Board of India Act 1992.
Objectives
 Regulating the business in stock markets and
other securities market.
 Registering and regulating the working of stock
brokers.
 Registering and regulating the working of
investment schemes.
 Promoting and regulating the self-regulatory
organizations.
 Prohibiting fraudulent and unfair trade practices
relating to securities market.
 Regulating substantial acquisition of shares and
take over of the companies.
Functions of the SEBI

 Regulating the business in stock exchanges and any other


securities market.
 Registering and regulating the working of collective
investment schemes.
 Promoting and regulating self-regulatory organizations.
 Registering and regulating the working of stock brokers,
sub brokers, share transfer agents, merchant bankers,
underwriters, portfolio managers, investment advisors, and
such other intermediaries who are associated with
securities in any manner.
Functions of the SEBI

 Promoting of investors education and training of


intermediaries in securities market.
 Prohibiting insider trading in securities.
 Regulating substantial acquisition of shares and take
over of companies.
 Calling information, undertaking inspection, conducting
enquiries and audits of the stock exchanges,
intermediaries and self-regulatory organizations.
Functions of the SEBI

 Performing such functions and exercising such


powers under the provisions of the Capital
Issues ACT 1947, Securities Contracts
(Regulation) Act 1956, as may be delegated by
the central Govt.
 Performing such other functions as may be
prescribed by the govt.
Trends in Stock Exchange

1. Online Purchasing
 Many of the stock exchanges in India automated their
activities.
 Introduction of ELOB( Open Electronic Limit Order Book
Market Scheme) made customers to purchase shares
through online.
2. Nationwide Integrated Markets
 Nationwide integration has been made possible though
satellite communications.
 Nationwide integrated markets help the trader any where in
India to have equal access to the markets.
Trends in Stock Exchange

3. Clearing House that Guarantees the Trade


 National Securities Clearing Corporation (NSCC) was
set up on NSE to guarantee, the all trade on NSE
 Every trade that takes place is free from risk

4. Information Dissemination System


 Well integrated information dissemination system
established in each stock exchange to give all stock
related information to customers.
 It stops the exploitation of clients by brokers.
Trends in Stock Exchange

5. Inflow of foreign Portfolio Investment


 From 1993 onwards, nearly $40,000 core worh of securities
have been picked up by foreign institutional investors.
6. Broad base of Investing Public
 It is a popular belief that investors include only rich income
class group.
 Farmers, peons, drivers etc. constitute a major chunk of
investors.
 It is said that in every eight shareholder in our country
today, one is farmer
Trends in Stock Exchange

7. Increase in No. of Brokers


 In India there are about 3000 brokers
 There are about 30,000 sub-brokers and
consultants spread all over country.
SEBI and Capital Market Reforms

 SEBI in consultation with the govt. has taken a number of steps to


introduce improved practices and greater transparency in the
capital markets and the healthy development of the capital markets.
Primary Market Reforms
 Companies issuing capital in the primary market are now required
to disclose all material facts and specific risk factors with their
projects.
 They should also give information regarding the basis of calculation
of premium.
 SEBI introduced a code of advertisement for public issues for
ensuring fair and truthful disclosures
 In order to encourage IPO, SEBI has permitted companies to
determine par value of shares by them.
 SEB has allowed issues of IPO’s to go for ‘Book Building’
 To reduce the cost of issue, SEBI has made underwriting of
issue optional.
 SEBI has introduced regulations governing substantial
acquisition of shares and takeovers.
 Merchant baking has been statutorily brought under the
regulatory framework of SEBI.
 SEBI has advised stock exchanges to amend the listing
agreement to ensure that a listed company furnishes annual
statement to the stock exchanges showing the variations
between financial projections and utilization of funds in the offer
documents.
 Through SEBI, govt. has now permitted the setting up of private
mutual funds.
 The govt. of India has liberalized investment norms for NRI’s so
that NRI’s and overseas corporate bodies can buy shares and
debentures without prior permission of RBI.
Secondary market reforms
 SEBI has started the process of registration of intermediaries, such
as stock brokers and sub-brokers under the provisions of the
Securities and Stcck Exchange Board Act 1992.
 SEBI made rules for making client/broker relationships more
transparent, in particularly segregating client and broker accounts.
 SEBI has notified regulations on insider trading under the provisions
of SEBI Act.
 Since 1992, SEBI has constantly reviewed the traditional trading
systems in Indian Stock Exchanges.
 To make the governing bodies of stock exchanges, the governing
body of stock exchanges should have 5 elected members, not
more than 4 members nominated by the govt. or SEBI and 3 or
fewer embers nominated as public representatives.
 The govt. has allowed foreign institutional investors (FII’s) such as
pension funds, mutual funds, investment trusts, portfolio
management companies etc. to invest in the Indian capital
market provided they are registered with SEBI.
 To prevent excessive speculation in the stock market, SEBI has
introduced rolling settlements form July 2, 2001.

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