ROLE OF BANKING SECTOR IN SECONDARY MARKET

Chapter 1 Indian banking sector
1.1] Introduction The banking section will navigate through all the aspects of the Banking System in India. It will discuss upon the matters with the birth of the banking concept in the country to new players adding their names in the industry in coming few years. The banker of all banks, Reserve Bank of India (RBI), the Indian Banks Association (IBA) and top 20 banks like IDBI, HSBC, ICICI, ABN AMRO, etc. has been well defined under three separate heads with one page dedicated to each bank. However, in the introduction part of the entire banking cosmos, the past has been well explained under three different heads namely:
• • •

History of Banking in India Nationalisation of Banks in India Scheduled Commercial Banks in India

The first deals with the history part since the dawn of banking system in India. Government took major step in the 1969 to put the banking sector into systems and it nationalized 14 private banks in the mentioned year. This has been elaborated in Nationalization Banks in India. The last but not the least explains about the scheduled and unscheduled banks in India. Improved performance of the banking industry in India has helped the economy to bounce back to a positive growth level. According to the Reserve Bank of India (RBI), the banking sector in India is sound, adequately capitalized and well-regulated. Indian financial and economic conditions are much better than in many other countries of the world. Credit, market and liquidity risk studies show that Indian banks are generally resilient and have withstood the global downturn well.

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ROLE OF BANKING SECTOR IN SECONDARY MARKET
According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: March 2009', nationalized banks, as a group, accounted for 49.5 per cent of the aggregate deposits, while State Bank of India and its Associates accounted for 24.1 per cent. The shares of other scheduled commercial banks, foreign banks and regional rural banks in aggregate deposits were 18.2 per cent, 5.2 per cent and 3.0 per cent, respectively. Nationalized banks held the highest share of 50.5 per cent in the total bank credit followed by State Bank of India and its associates at 23.1 per cent and other scheduled commercial banks at 18.2 per cent. Foreign banks and regional rural banks had slightly lower share in the total bank credit at 5.9 per cent and 2.3 per cent, respectively. According to the RBI in March 2009, number of all Scheduled Commercial Banks (SCBs) was 171 of which, 86 were Regional Rural Banks and the number of Non-Scheduled Commercial Banks including Local Area Banks stood at 5. Taking into account all banks in India, there are overall 56,640 branches or offices, 893,356 employees and 27,088 ATMs. Public sector banks made up a large chunk of the infrastructure, with 87.7 per cent of all offices, 82 per cent of staff and 60.3 per cent of all automated teller machines (ATMs). Also, growth of aggregate deposits of all Scheduled Commercial Banks (SCBs) including Regional Rural Banks (RRBs) up to March 27, 2009 stood at 19.8 per cent while overall nationalized banks was at 24.7 per cent, foreign banks at 7.8 per cent and private sector banks about 8.0 per cent. According to the RBI, gross bank credit offered by all Scheduled Commercial Banks (SCBs) including Regional Rural Banks (RRBs) grew by 17.3 per cent up to March 2009. Public sector banks' credit grew by 20.4 per cent, foreign banks' credit by 4 per cent and private sector banks about 10.9 per cent.

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Deposits with scheduled commercial banks (SCBs) surged by US$ 13.41 billion in the fortnight ended July 3, as against an accumulation of US$ 1.29 billion in the previous fortnight. In the said fortnight, time and demand deposits jumped by US$ 8.92 billion and US$ 4.49 billion, respectively. Credit offtake from the SCBs was up by US$ 5.8 billion. Corporates, MSMEs, agriculture, and the retail sector have been borrowing strongly, according to major bankers in the country. The government's huge borrowing programme, investments by banks, predominantly in government securities, were higher at US$ 9 billion in the July 3 ended fortnight as against an investment of US$ 4 billion in the preceding fortnight. Non-resident Indians (NRIs) have cumulatively placed US$ 1.167 billion as deposits with banks in the April-May 2009-10 period as against US$ 452 million in the corresponding period last year. NRIs are finding it remunerative to park their money with Indian banks, which are offering higher interest rates. In the April-May 2009 period, NRIs deposited almost US$ 543 million in Foreign Currency Non-Resident (Banks) deposits. In the corresponding period last year, they had pulled out US$ 291 million from the FCNR (B) deposits. The new borrowing level for April-September 2009 has been set at US$ 62.85 billion—nearly 25 per cent more than the March 2009 projection of US$ 50.66 billion—jointly by the Finance Ministry and the Reserve Bank of India (RBI). During 2008-09, non-food bank credit (year-on-year basis) stood at 17.5 per cent by March 2009.India's foreign exchange reserves were US$ 252.0 billion as at end-March 2009 which increased to US$ 253.0 billion by April 10, 2009.The country's largest bank – the State Bank of India's (SBI) branch network, increased by 470 to over 11,900 branches. Based on March-end 2009 figures, SBI's deposits increased by US$ 6 billion to US$ 152.32 billion and advances by US$ 4.57 billion to US$ 120 billion.
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Boosted by gains from gilts, corporate debt and equity, Axis Bank and HDFC Bank have posted healthy net profit growth of 70 per cent and 30 per cent respectively, for the quarter ended June 30, 2009. Public sector banks too are now being approached by more customers owing to low interest rates and better-managed and transparent operations. An analysis by Crisil Research reveals that the increasing customer preference for public sector banks is evident by the rise in their market share by more than 10 per cent over the last one year. The share of the PSBs has in fact risen to 40 per cent of the total vehicle finance portfolio as against 25-30 per cent earlier. Private Banks have retained their share at 50 per cent. ICICI Bank has organised road shows in Asia, Europe and the US, jointly with the Union Ministry of Road Transport and Highways to attract investments for highways and roads. To begin with, the bank organised a meeting between potential investors and the Union Minister of Road Transport and Highways, Mr. Kamal Nath. HDFC Bank has signed an agreement with Guruvayoor Devaswom for offering e-collection through HDFC Bank Payment Gateway. 1.2] Banking services in India With years, banks are also adding services to their customers. The Indian banking industry is passing through a phase of customers market. The customers have more choices in choosing their banks. A competition has been established within the banks operating in India. With stiff competition and advancement of technology, the service provided by banks has become more easy and convenient. The past days are witness to an hour wait before withdrawing cash from accounts or a cheque from north of the country being cleared in one month in the south. This section of banking deals with the latest discovery in the banking instruments along with the polished version of their old systems.
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2009. the central bank of the country. the Reserve Bank has cut the repo rate by 400 basis points to 5 per cent and the reverse repo rate by 250 basis points to 3.5 per cent. said that banks should link more branches to the National Electronic Clearing Service (NECS). Term deposit rates between October 2008-April 18. The reduction in the Reserve Bank's policy rates and easy liquidity conditions in the market have helped all public sector banks. followed by 100-125 basis points by private sector banks and 100 basis points by five major foreign banks.3] Government Initiatives In its platinum jubilee year. most private sector banks and some foreign banks reduce their deposit and lending rates. Currently. Since mid-September 2008 till date. Apart from the bank rate cuts announced in the stimulus packages. a little over 26.ROLE OF BANKING SECTOR IN SECONDARY MARKET 1. The reduction in the range of BPLRs was 125-225 basis points by public sector banks. the RBI. Also. 2009 have been reduced by a range of 125-250 basis points by public sector banks. 75-200 basis points by private sector banks and 100-200 basis points by five major foreign banks. cash withdrawals from bank will not attract tax from April 1. NECS was introduced in September 2008 for centralized processing of repetitive and bulk payment instructions. 2009 following abolition of the banking cash transaction tax (BCTT) in the Union Budget 200809. all core-bankingenabled branches should be part of NECS. in a notification issued on June 25.000 branches of 114 banks are enabled to participate in NECS. The CRR was also reduced by 400 basis points of NDTL of banks and stood at 5 per cent. inter-ATM usage transaction became free of charges effective April 1. 2009. 5 . Ideally.

Scheduled Commercial Banks in India are categorized in five different groups according to their ownership and/or nature of operation. . (iv) Foreign Banks and (v) Other Indian Scheduled Commercial Banks (in the private sector).5 mn and (b) satisfy the RBI that their affairs are not being conducted in a manner detrimental to the interest of their depositors. 1934.ROLE OF BANKING SECTOR IN SECONDARY MARKET 1. All Scheduled Banks comprise Schedule Commercial and Scheduled Co-operative Banks. Scheduled Cooperative banks consist of Scheduled State Co-operative Banks and Scheduled Urban Cooperative Banks. are eligible for inclusion in the Second Schedule to the Reserve Bank of India Act.4] STRUCTURE OF THE BANKING SECTOR According to the RBI definition. (iii) Regional Rural Banks. commercial banks which conduct the business of banking in India and which (a) have paid up capital and reserves of an aggregate real and exchangeable value of not less than Rs 0. and when included are known as ‘Scheduled Commercial Banks’. 6 . These bank groups are (i) State Bank of India and its associates. (ii) Nationalised Banks.

A new rule announced by the Reserve Bank of India for the foreign banks in India in this budget has put up great hopes among foreign banks which allow them to grow unfettered. The policy conveys that foreign banks in India may not acquire Indian ones (except for weak banks identified by the RBI. on its terms) and their Indian subsidiaries will not be able to open branches freely. ABN-AMRO Bank Abu Dhabi Commercial Bank Bank of Ceylon BNP Paribas Bank Citi Bank China Trust Commercial Bank Deutsche Bank HSBC JPMorgan Chase Bank Standard Chartered Bank Scotia Bank Taib Bank 7 . the banking sector in India also become competitive and accurative.5] Foreign Banks In India Foreign Banks in India always brought an explanation about the prompt services to customers. After the set up foreign banks in India. Now foreign banks in India are permitted to set up local subsidiaries.ROLE OF BANKING SECTOR IN SECONDARY MARKET 1. Please see the list of Foreign banks in India List of Foreign Banks in India • • • • • • • • • • • • till date.

ROLE OF BANKING SECTOR IN SECONDARY MARKET
By the year 2009, the list of foreign banks in India is going to become more quantitative as numbers of foreign banks are still waiting with baggage to start business in India.
 The Scheduled Commercial Banks (SCBs) in India have shown an

impressive growth from FY04 to the mid of FY09. Total deposits, advances and net profit grew at CAGR of 19.6%, 27.4% and 20.2% respectively from FY03 to FY08. Banking sector recorded credit growth of 33.3% in FY05 which was highest in last 2 and half decades and credit growth in excess of 30% for three consecutive years from FY04 to FY07, which is best in the banking industry so far. Increase in economic activity and robust primary and secondary markets during this period have helped the banks to garner larger increase in their fee

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ROLE OF BANKING SECTOR IN SECONDARY MARKET

Chapter 2
Indian capital Market

Primary Market • New issues by new companies and government. • Further issues and by existing companies shares, government. shares, govt.

Secondary Market • Trading in existing securities.

Listing of the new issues for investments and disinvestments by savers/investors.

(Issue are securities like equity preference bonds, debentures, securities, etc.)

• Imparting encashability shares.

liquidity to stocks

or and

INDIAN CAPITAL MARKET
Capital market Every company needs long-term as well as short-term capital. Long-term capital is required essentially for investment in fixed assets such as land, building, plant and machinery, vehicles, etc. It also includes core working capital and certain kinds of R&D, pre-operating expenses and preliminary expenses incidental to setting up a business, which are required to be deployed or incurred for the production or rendering of goods and services. Short-term capital or working

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ROLE OF BANKING SECTOR IN SECONDARY MARKET
capital on the other hand, is required essentially for financing the requirements of the day-to-day operations of the business, such as raw materials, work-inprogress, finished goods, trade debtors, etc. capital market is thus a broad term, which includes primary markets, secondary markets, term lending institutions, long-term bonds and debenture markets, banks, investors, and almost anybody who is engaged in providing long-term capital(whether equity or debt capital) to the industrial sector. Year 2008 was the most eventful year for the capital market. The year that started on the bull note has lost their entire lustrous gain that they gained in 2007 .This was sparked by the subprime crisis and their ripple effects, bad economic news started from the USA and spread throughout the world and the effect was so cascading that they ruined the sentiments in capital markets globally and indexes of global market secularly crashed more than 65%. Any positive development, long term growth story, fundamental storey everything blown by bears that came in hurry.

SBI CAPITAL MARKETS LIMITED (SBICAPS)

It is India's leading investment bank and project advisor, assisting domestic companies fund-mobilisation efforts for last many years. Foreseeing the changing needs of clients in a rapidly opening economy, over the years, we have evolved an array of advisory services in almost all sectors of the economy. We are known for professionalism and business ethics and provide a full range of Investment, Advisory and Financial Services under one umbrella. A pioneer in privatisation in India, we have established ourselves as a leader in providing financial and advisory services in the core sector and infrastructure industries. We began operations in August 1986 as a wholly owned subsidiary of the State Bank of India, which is the largest commercial bank in India. In January 1997, fresh equity shares were issued to Asian Development Bank (ADB) and ADB now holds 13.84% stake in the equity of SBICAPS. The distinguished parentage

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ROLE OF BANKING SECTOR IN SECONDARY MARKET
(with a 86.16% stake) together with the long standing association of an internationally renowned financial institution like the Asian Development Bank further enhances our image as a truly 'World Class Investment Bank'. Our Mission - To provide Credible, Professional and Customer Focused worldclass investment banking services. Our Vision To be the best India based Investment Bank.

Our Services We are an edge above others when it comes to understanding the needs of the client. A comprehensive analysis of the dynamics of the markets and an extensive knowledge about the regulatory environment gives us a wider view of all the aspects of this highly competitive market. We tower above others as the thought leaders in analysing and interpreting industry trends, both at micro and macro levels.

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Since. The initiative will allow more funds to flow into the market and provide an opportunity for better returns to NPS subscribers. According to Thomson financial. The NPS corpus earns only 8% interest at present. India has attracted the higher private equity (PE) investments at 12 . “The central government will notify an interim investment pattern for the funds collected under the NPS. The private equity (PE) investment is also on the rise. 500cr have accumulated in public accounts at the center and in 17 states. is the provision permitting investment of a part of the pension corpus in the stock market. the two prominent options for the investing subscriber are likely to be 100% in giltedged securities (government bonds0 and 15% in the capital market (5% in equity and 10% in bonds). Capital inflow Presently.1. India ranks second in capital market inflows. The total foreign institutional investment (FII) till date (19 November 2007) in the Indian markets zoomed to over $17. which have adopted the scheme”.230 billion. to allow 5% investment of the corpus in stock market and another 10% in corporate bonds or reliable bonds. the contributory NPS was introduced for all fresh government recruits in January 2004. about RS. though as per the reports.ROLE OF BANKING SECTOR IN SECONDARY MARKET  Pension funds turn towards capital market (PFRDA) The PFRDA is yet to define the options. The government is also permitting the pension funds to deploy in capital market at the discretion of the subscriber for adequate return. If the fund managers convince the sub scribers to avail themselves of the option of going to the stock market for higher returns. the latter need to consider the financial risk involved. India has replaced Taiwan from the second spot in the Asia-Pacific private equity rankings in the first half of calendar 2007.One of the conspicuous features of the NPS that seems to have generated a natural debate among economists and investors.

the securities are issued by the company directly to investors. • The company receives the money and issues new security certificates to the investors. • In a primary issue. $5 billion came in these sectors. 13 . Features of primary markets are: • This is the market for new long term equity capital. though it can be found in the prospectus. Therefore it is also called the new issue market (NIM). • The primary market performs the crucial function of facilitating capital formation in the economy. In the case of a new stock issue. 2. Out of $10 billion PE fund that India attracted so far.1] Primary Market The primary market is that part of the capital markets that deals with the issuance of new securities. Companies. The primary market is the market where the securities are sold for the first time. This is typically done through a syndicate of securities dealers. governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. Dealers earn a commission that is built into the price of the security offering. this sale is an initial public offering (IPO).ROLE OF BANKING SECTOR IN SECONDARY MARKET $10 billion in 2007 so far. The Indian real estate and infrastructure sector have been a key contributor to this rising inflows. The process of selling new issues to investors is called underwriting. • Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.

Rights issue (for existing companies). • Preferential issue. Borrowers in the new issue market may be raising capital for converting private capital into public capital. such as loans from financial institutions. The work 14 . In coming years more IOP will be coming from the infrastructure and sectors. Methods of issuing securities in the primary market are: • • Initial public offering.ROLE OF BANKING SECTOR IN SECONDARY MARKET • The new issue market does not include certain other sources of new long term external finance. These shares are offered to the public in a price band range. expand and modernize its ports. It is the primary market. These shares are also offered to the financial institutions as well. Indian IPO market IPO means initial public offering which is a method to raise money from the public to meet a company’s expense by issuing shares. which means that the price of the shares issued ranges between two amounts. improve its rail services and boost power generation. this is known as "going public." • The financial assets sold can only be redeemed by the original holder.  Canara Bank plans initial public offering Bangalore: Canara Bank is planning to come up with an initial public offering (IPO) of Rs 175 crore to Rs 225 crore in August or September 2002. The new IOP that come in future It is estimated that Indian needs about US$475 bn between 2007 and 2012 to upgrade its roads.

The tier-II capitalisation route is not attractive because securities are treated as subordinated debts as long as the maturity period does not exceed five years. says Canara Bank chairman R V Shastri. current local and global market situations etc. firm’s future earnings potential. it will be made affordable to the public. 15 . Credit Suisse and Morgan Stanley. Famous merchant bankers world over are Goldman Sachs. Banks like Deutsche. There is no regulatory restriction to use the services of a merchant bank for IPO. which is generally a percentage of the issue size. industry scenario. Since in an IPO a company participates for the first time. Underwriters charge a fee for this activity.” Canara Bank has decided to come out with the IPO irrespective of the prevailing market conditions. Underwriters assess and analyze firm’s current performance. it doesn’t have complete understanding of the rules and documentation. IPO – Role of Underwriter When a company wants to raise funds through initial public offering (IPO) it appoints an investment bank for underwriting the issue. competition in the same sector. to decide the issue price/price band. An Investment bank is also called as merchant bank. required to be submitted.ROLE OF BANKING SECTOR IN SECONDARY MARKET towards fixing the issue price and the appointment of merchant bankers will begin this month. to get a clearance from the regulator. Shastri says: “Though there will be a good premium. Citi.” The bank also rules out the book-building route to subscribe the issue. They also work on the activities like completion of the mandatory documentation as required by the regulatory body. “We will go to the public directly. Currently Canara Bank has an equity capital base of Rs 578 crore. UBS etc have investment banking wings. Declining to detail the possible premium on the forthcoming issue.

The defining characteristic of the secondary market is that investors trade among themselves on previously issued securities without the involvement of the issuing companies (except in the case of buy-back). mutual funds. secondary market can refer to the market for any kind of used goods. as market makers provide bids and offers in the new stock. Once a newly issued stock is listed on a stock exchange. insurance companies or individuals. investors and speculators can easily trade on the exchange. The market that exists in a new security just after the new issue. 2. Alternatively. However one merchant bank leads the other. rather than an issuing corporation. • The secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. The investors could be institutions like FIIs.ROLE OF BANKING SECTOR IN SECONDARY MARKET If the issue size is very large a syndicate of merchant banks takes up the task of underwriting the issue. is often referred to as the aftermarket.2] Secondary market Meaning • Secondary market (stock exchange) is one in which an investor purchases an asset from another investor. Definitions Some of the important definitions are presented below: 16 .

”  According to section 2(3) of the securities contract (regulation) act 1956. “stock exchange or securities market comprises all the places where buyers and sellers of stocks and bonds or their representatives undertake transactions involving the sale of securities. • To explore opportunities for the growth of RSEs in India. • To learn the threats for the growth of RSEs in India. constituted for the purpose of assisting. and those who to invest largely households through the medium of institutions acting upon their behalf. • To study the selected secondary market development indicators in India. 17 . “ stock exchange can be described as the place where a marriage of convenience is enacted between those who wish to raise capital.” Objectives of secondary market • To examine the new bench marks in the secondary market in India. “The stock exchange has been defined as any body of individuals whether incorporated or not. governments and local authorities. such as companies. selling or dealing in securities. • To examine the present disclosure standards for the protection of investors in the Indian capital market. • To suggest the ways to overcome the threats for the growth of RSEs in India. “securities or stock exchanges are privately organized markets which are used to facilitate trading in securities. regulating or controlling the business of buying. • To analyze the trading intensity in the world stock exchanges. • To analyze the powers of SEBI to take punitive or preventive measure for the protection of investors.”  According to Derek honeygold.ROLE OF BANKING SECTOR IN SECONDARY MARKET  According to husband and dockery.”  According to Hastings.

secondary market investors create a huge strategic competitive advantage for lenders needing additional liquidity. In an industry that barely existed a little over a decade ago. securities are sold by and transferred from one investor or speculator to another. where can the secondary market play a role? Secondary market investors must continue to play a larger strategic role in furnishing capital. Lenders can safely clear off their warehouse loan inventory by building relationships with 18 . • To explain the investor awareness/ assistance/ education programmes arranged by SEBI. Many banks don’t possess the massive economies of scale needed for growth and their available capital is limited. It is therefore important that the secondary market be highly liquid and transparent.ROLE OF BANKING SECTOR IN SECONDARY MARKET • To study the Role of SEBI for the Redressal of investor grievances in the Indian capital market. By developing partnerships with secondary market investors.  Secondary market role In a growing market for commercial banks. brokers and bankers increase their profitability potential by seizing new opportunities for capital. • To suggest the Recommendations for strengthening investor confidence in the Indian capital market Function In the secondary market. lenders can benefit from the increased array of funding options offered by secondary market investors permitting lenders to choose the level of risk most appropriate for their business. Further.

 Changing regulations of secondary market The Indian securities market is in transition. supervision and control of the stock exchanges The central government for the first time in April 1988 constituted an administrative body viz.ROLE OF BANKING SECTOR IN SECONDARY MARKET secondary market investors. accounting standards. Because of loan quality requirements. the Indian securities market is at par with the global standards. Market also indirectly improves the mortgage industry by forcing banks and mortgage lenders to run a clean and efficient operation before they can do business in the secondary market. disclosures. financial institutions – whether in the primary or secondary markets – have a tremendous opportunity for strong and increased growth. the secondary. banks and mortgage lenders can reduce their risk-based capital portfolios by tapping into the multiple options offered by secondary market investors. The governing board of the council to be consisting of total 10 members. In the present environment. Equally important. settlement system. The revolutionary changes have been taking place over a period of time. creating new opportunities for additional growth and profitability. the central government enacted an Act granting a statutory recognition to the securities and exchange board of India as a regulator of the securities/ markets. on almost all the operational and systematic risk management parameters. In fact. 19 . corporate finance. 4 from stock exchanges. The positive opportunities for lenders to leverage the multiple services offered by secondary market investors are there for the taking. 4 from government. Some of those initiatives taken place in the secondary market are discussed below: • Overall administration. securities and exchange board of India and in January 1992. Several important changes were brought for the smooth and effective functioning of stock exchanges from the time to time by the SEBI.

commercial banks and companies are also eligible for membership of stock exchanges. 1956 and SEBI norms. The creation of a deep and liquid secondary market for lease 20 . application of the liquidity and hedging tools of modern corporate finance has lagged behind other sectors of the financial services business. A company may issue shares to applicants in the firm allotment category at higher price than the price at which securities are offered to public. corporate finance. taxation. eligible infrastructure companies can freely price their equity shares subject to compliance of disclosure norms of SEBI. Members to have reasonable background in economics. etc. accountancy. • Membership of the stock exchange Minimum basic educational qualification is 12th standard or equivalent and graduation after 5 years.ROLE OF BANKING SECTOR IN SECONDARY MARKET commerce. management and law and 2 from investment and development finance institutions. • Risk management In the equipment leasing industry. Membership is to be open to a qualified person at any time. The public and private sector banks can also freely price their shares subject to approval by RBI. Financial institutions. Multiple memberships are allowed to member to encourage provision of better services to the investing public and to further the healthy development of capital market • Public issues The companies eligible to make a public issue can freely price their equity shares or any security convertible into equity at a later date in cases of public/ rights issues by listed companies and public issue by unlisted companies. The stock exchanges have to approve members (trainers) to impart adequate knowledge and training to aspirants for membership. Further an eligible company is free to make public/ rights issue in any denomination determined by it in accordance with sub-section (4) of section 13 of the companies Act. In addition.

in particular. this article presents an economic and financial analysis of the developing secondary market for lease assumption. hedging through derivative securities. For this reason. settlement and risk management system of stock exchanges are almost completely automated. and techniques and structures such as securitization for improved liquidity. • Systems audit Trading.ROLE OF BANKING SECTOR IN SECONDARY MARKET assumptions will enable liquidity to be made available and provide more flexibility to both lessees and lessors. SEBI does follow-up for rectification of deficiencies pointed out in the systems audit reports. In 2004-2005 too. This paper presents a brief economic and financial analysis of the developing secondary market for lease assumption. focusing on the incentive structure and the underlying rationale for a secondary market. it becomes very important that the systems do not have deficiencies which can impair their efficacy. A continuing development in corporate finance has been the sophisticated risk management methodologies involving credit enhancement. For a better appreciation of how this might come about. significant risk management benefits for lessors. Such follow-up was done through offsite analysis of compliance reports from stock exchanges and meeting with the senior management of stock exchanges. Active stock exchanges have been asked to carry out system audit through external agencies competent to carry system audit exercise. • Institutionalization 21 . The enhanced optionality and liquidity that this advance in the state of the art permits has the potential to create value for all market participants and. It also becomes important to ensure that the stock exchanges have suited disaster recovery sites and business continuity plans and that the systems are adequately secure.

Development financial institutions. if one is wondering whether or not to invest in 22 . used to play active role in the primary market and secondary capital market. DIFFERANCE BETWEEN PRIMARY MARKET AND SECONDARY MARKET • A company cannot easily find investors its securities (shares or debentures) from the public if they cannot subsequently trade these shares and debentures at will. non-banking finance companies also have been taking interest in dealing in securities. Thus. Earlier institutional investors such as life insurance Corporation of India. used to take minor role in the capital market activity. Indian capital market was dominated by individual investors till early part of the 1990’s. In other words. • The primary market comprises companies who make the security issues and the general public who subscribe to them. a security cannot have a good primary market unless it has an active secondary market. banks etc. Unit trust of India.ROLE OF BANKING SECTOR IN SECONDARY MARKET Capital market are said to be more efficient when they have more participants. the variety of participants taking interest in the Indian capital market substantially increased and the current variety is as large as is available in any other developed market. Additionally. mutual funds. General Insurance Corporation of India and its four subsidiaries. the only mutual fund then. Government of India and SEBI allowed foreign institutional investors. markets its first contact whit the general public. 1990s saw entry of many new participants to the capital market. non-resident Indians and overseas corporate bodies to trade in securities. Therefore.. The primary market is where a company in search of capital. instruments. SEBI permitted private sector and joint sector (Indian as well as foreign). processes and other alternatives.

Thus. having subscribed to the share or debenture of a company. For example. by their very role. one can also buy the share or debenture of a company from the secondary market (if the company listed in the stock exchange). Primary market merely alludes to the first purchase of a new share or debenture by the public directly from the issuing company.ROLE OF BANKING SECTOR IN SECONDARY MARKET the new issues of a company. it will be done in the secondary market. 23 . • The two markets mentioned above are not two physically segregated institutions. whereas secondary market refers to the subsequent trading in those shares and debentures. without having to wait for that company to come out with a new public issue. stock exchanges are an important constituent of the capital market. A stock exchange is the single most important institution in the secondary market for securities. if one then wishes to sell this. Similarly. • The secondary market comprises buyers and sellers of shares and debentures subsequent to the original issue. one is basically contemplating whether or not to participate in the primary market. Often the same parties may be involved in both the markets.

The New York Stock Exchange is a good example of a secondary stock market. The listing price of the shares of a company in the secondary stock market is fixed by the market regulator. In the secondary stock markets the shares of the enlisted companies are traded at steady intervals. it means the stocks of the same are then available for transaction. Secondary Stock Market Details The companies apply for the membership of the specific stock market. The companies are permitted to get into that stock markets after the successful completion of their Initial Public Offerings. Secondary Stock Market and Globalization 24 . Once a company is registered in a certain stock market. In the secondary stock market an investor buys a stock from another investor instead of any particular issuing entity.ROLE OF BANKING SECTOR IN SECONDARY MARKET Chapter 3 Secondary Stock Market Introduction The term secondary stock market means the place where the actual trading of stocks takes place.

This calls for far-reaching changes. that could be used for a variety of purposes like increasing the size of the company as well as making new investments. The computers have contributed to the rise of more avenues of bringing up capital. In fact. which have so far been limited to the privileged few. The secondary stock markets across the world have grown in keeping with the process known as globalization. towns and villages will find it possible to make use of the facilities. stock exchange is not simply a convenience.ROLE OF BANKING SECTOR IN SECONDARY MARKET The phenomenon called globalization has had some impact on the various secondary stock markets at present. As our country moves towards liberalization. to create conditions in which many millions of little investors in cities. Securities 25 . The secondary stock markets are also looking at incorporating information technology into their business procedure. they are the markets which exist to facilitate purchase and sale on securities of companies and the securities or bonds issued by the government in the course of its borrowing operation. which recognizes the rights of private ownership of capital. The task facing the stock exchange is to devise the means to reach down to the masses. The advent of information technology has changed the way business is being executed throughout the world. this tendency is certain to be strengthened. they are essential. to draw the savings of the man in the street into productive investments. institutional as well as operation. Role of stock exchanges in the development of the nation It is no exaggeration to say that in a modern industrialist society. Information technology has also helped the various secondary stock markets to conduct business with more clarity and in a more smooth manner.

Protect interest of investors by ensuring full disclosures. quasi governmental and other financial institutions/corporations. Bye-laws and Regulations of the Exchange. The objectives of listing are mainly to: • • • provide liquidity to securities. The securities may be of any public limited company. municipalities.ROLE OF BANKING SECTOR IN SECONDARY MARKET Securities market is the market in which securities are bought and sold. LISTING OF SECURITIES Listing means admission of the securities to dealings on a recognized stock exchange. this is not related to a physical location. In short. Companies Act 1956. However. securities market loosely stands for the entire system in which financial securities or financial instruments are traded. Central or State Government. it implies the entire infrastructure required for transacting in securities. A company intending to have its securities listed on the Exchange has to comply with the listing requirements. including the people and institutions involved in these transactions. Securities Contracts (Regulation) Rules. the organizations issuing or intending to issue the securities and the systems that enable the trading processes. mobilize savings for economic development. The Exchange has a separate Listing Department to grant approval for listing of securities of companies in accordance with the provisions of the Securities Contracts (Regulation) Act. including the set of regulatory bodies to ensure that the transactions are carried out in a fair and transparent manner. 1956. Guidelines issued by SEBI and Rules. etc. The term. 1957.  Over the Counter Exchange of India (OTCEI) 26 .

ROLE OF BANKING SECTOR IN SECONDARY MARKET Introduction The traditional trading mechanism prevailed in the Indian stock markets gave way to many functional inefficiencies. But. electronic stock exchange OTCEI . • Permitted Securities . • Initiated debentures .  The original certificate will be safely with the custodian. a counter receipt is generated out at the counter which substitutes the share certificate and is used for all transactions. SBI Capital Markets. certificates of listed securities and initiated debentures are not traded at OTC. absence of liquidity.Certain shares and debentures listed on other exchanges and units of mutual funds are allowed to be traded.was created in 1992 by country's premier financial institutions .scripless. lack of transparency. Industrial Development Bank of India. which affected the small investors to a great extent.Any equity holding atleast one lakh debentures of particular scrip can offer them for trading on the OTC.  OTC has a unique feature of trading compared to other traditional exchanges. Industrial Finance Corporation of India. To provide improved services to investors. Securities traded on the OTCEI are classified into: • Listed Securities . Industrial Credit and Investment Corporation of India. unduly long settlement periods and benami transactions. Trading at OTCEI is done over the centres spread across the country.Unit Trust of India. 27 . such as. the country's first ringless. General Insurance Corporation and its subsidiaries and CanBank Financial Services. That is.The shares and debentures of the companies listed on the OTC can be bought or sold at any OTC counter all over the country and they should not be listed anywhere else.

whereas it takes a longer period for the same with respect to other exchanges. Stock market index 28 . the system is similar to a traditional stock exchange. • In the case of an OTC issue (new issue). OTC Exchange network has the following advantages: • OTCEI has widely dispersed trading mechanism across the country which provides greater liquidity and lesser risk of intermediary charges. The difference is that the delivery and payment procedure will be completed within 14 days. • Faster settlement and transfer process compared to other exchanges. the investor gets to know the exact price at which s/he is trading. • Since the exact price of the transaction is shown on the computer screen. • Greater transparency and accuracy of prices is obtained due to the screen-based scrip less trading. with the superior trading mechanism coupled with information transparency investors are gradually becoming aware of the manifold advantages of the OTCEI. the allotment procedure is completed in a month and trading commences after a month of the issue closure. Compared to the traditional Exchanges. Thus.ROLE OF BANKING SECTOR IN SECONDARY MARKET  In the case of permitted securities.

2002. Additionally. 3811 companies were under demit mode and the rest of the companies were brought under compulsory demat mode by 2nd Jan. with the weights reflecting the contribution of the stock to the index. and ride the general trend of the stock market. The principal aim of this strategy is to maximize diversification. DEMAT AND ONLINE TARDING Origin of Demat in India The concept of demat was introduced in Indian capital market in 1996 with the setting up of NSDL. 2001. of which there are many. all investors are required to mandatory trade in dematerialized form in respect of 2335 securities as at end-June 2001. many choose to invest via the index method. the S&P. the FTSE and the Euronext indices. The securities of companies which fail to establish connectivity with both the depositories on the scheduled date as 29 . Starting with 12 script on15th Jan 1998. By Nov. SEBI has mandated compulsory trading and settlement of securities in select securities in dematerialized form. It maintains ownership records of securities in a book entry form and also effects transfer of ownership through book entry. A depository holds securities in dematerialized form. The constituents of the index are reviewed frequently to include/exclude stocks in order to reflect the changing business environment.g. e. minimize taxes from too frequent trading. In this method.ROLE OF BANKING SECTOR IN SECONDARY MARKET The movements of the prices in a market or section of a market are captured in price indices called stock market indices. SEBI has introduced some degree of compulsion in trading and settlement of securities in demat form while the investors have a right to hold securities in either physical or demat form. This was initially introduced for institutional investors and was later extended to all investors. Such indices are usually market capitalization weighted.. one holds a weighted or unweighted portfolio consisting of the entire stock market or some segment of the stock market (such as the S&P 500 or Wilshire 5000).

However in order to mitigate the difficulties of small investors the stock exchanges provide additional windows for sales up to 500 shares in the physical form. • NO stamp duty. Dematerialization Dematerialization (“Demat” in short form) signifies conversion of a share certificate from its physical form to electronic form for the same number of holding which is credited to your demat account which you open with a Depository Participant (DP)Depository. If an investor wants to utilize the services offered by a Depository. • Reduction in brokerage by many brokers for trading in dematerialized securities. bonus etc. A Depository (NSDL & CDSL) is an organization like a Central Bank where the securities of a shareholder are held in the electronic form at the request of the shareholder through the medium of a Depository Participant. the investor has to open an account with the Depository through a Depository Participant. • Reduction in handling of huge volumes of paper and postal delays. • Faster settlement cycle. • Immediate transfer and registration of securities. • Faster disbursement of rights. The main objective 30 .ROLE OF BANKING SECTOR IN SECONDARY MARKET announced by SEBI are traded on the “trade for trade” settlement window of the exchanges. The Depository can legally transfer beneficial ownership which a custodian cannot. Benefits of demat • Elimination of bad deliveries • Elimination of all risks associated with physical certification.

Your Depository Participant will maintain your securities account balances and intimate to you the status of your holding from time to time. A DP is one with whom you need to open an account to deal in electronic form. can become participants in the depository. With the 31 . While the Depository can be compared to a Bank.ROLE OF BANKING SECTOR IN SECONDARY MARKET of a Depository is to minimize the paper work involved with the ownership. DP is like a branch of your bank with which you can have an account. Both the Banks and the Depository are accountable for the safe keeping of funds and securities respectively Safety to the investor • Securities Exchange Board of India (SEBI) has laid down certain rules and regulations for getting registered as a depository participant. A Bank transfers funds between accounts whereas a Depository transfers securities between accounts. custodians. trading and transfer of securities. stockbrokers etc. Financial Institutions like banks. According to SEBI guidelines. the transfer of funds or securities happens without the actual handling of funds or securities. In both systems. A bank holds funds in accounts whereas a Depository holds securities in accounts for its clients. Depository Participant Similar to the brokers who trade on your behalf in and outside the Stock Exchange. a Depository Participant (DP) is your representative (agent) in the depository system providing the link between the Company and you through the Depository. How does the Depository System operate? The Depository System functions very much like the banking system.

• Transaction costs are usually lower than that in the physical segment. Advantages of dematerialization • There is no risk due to loss on account of fire. Share transactions like sale or purchase and transfer/transmission etc. • A statement of account is received periodically by the investors. can be effected in a much simpler and faster way. theft or mutilation. • The system driven mandatory reconciliation is done between the DP and NSDL. NSDL sends statement of account to a random sample of investors a s a counter check. • The investor has the right to approach NSDL if the grievances of the investors are not resolved by the concerned DP. 32 . • No direct communication links exist between two business partners and all communications are routed through NSDL. Problems of Dematerialisation. • There is no chance of bad delivery at the time of selling shares as there is no signature mismatch.ROLE OF BANKING SECTOR IN SECONDARY MARKET recommendation of the Depository and SEBI's own independent evaluation a DP will be registered under SEBI. • The bonus /rights shares allotted to the investor will be immediately credited into his account. • The data interchange between NSDL and its business partners is protected by standard protection measures such as encryption. • The investors account will be credited / debited by the DP only on the basis of valid instruction from the client. • Periodic inspections of both DP and R&T agent are conducted by NSDL.

But quick money brings with itself a host of problems. The recent IPO allotment scam proves that even a highly automated system is not the solution to prevent malpractices. DP's. as a regulator has to place a system that is alert and vigilant against unjust gains 33 . The scam of Yes bank and IDFC reveal that the investor banker has failed to weed out multiple applications either direct or benami.To reap the benefits of dematerialization SEBI. Lack of coordination between banks. • The concerned DP should strictly enforce the Know your client (KYC) norms rather than relying on bank documents and verification of brokers. Though dematerialization has several benefits the recent scam has the potential to adversely affect the confidence of retail investors in the capital market . registrars and investment bankers and clarity of their roles has given rise to such problems. broker’s depositories. Current regulations prohibit multiple bids or applications by a single person.ROLE OF BANKING SECTOR IN SECONDARY MARKET Prior to dematerialization there was almost a gap of three months between application date and listing of shares . Remedial measures • To prevent the sprouting of fictitious demat accounts at DP's the allotment of shares should be checked thoroughly. • Coordination and Clear definition of roles is important to weed out manipulations.Dematerialisation has reduced this gap to a great extent. • DP's should be asked to give monthly figure of accounts opened for the public. Not only the investor banker the DP and the depository failed to detect the large number of demat accounts opened names. if there is laxity. But the investors open multiple demat accounts and make multiple applications to subscribe to IPO's in the hope of getting allotment.

There are various secondary markets which have separate rates of their own. the closing price and the listing price. where the stock would be traded. The opening price is the one at which trading starts for the day.ROLE OF BANKING SECTOR IN SECONDARY MARKET 3. However. Secondary Market Rate The term secondary market rate means the price of the securities that are traded in the secondary markets. of different types of shares are separate from each other. are liable to fluctuate throughout the entire duration of the transactions. The prices of stocks. Stock Market Rates: The stock market rates are the prices of transaction in the stock markets. There are basically few predominant secondary markets like the stock and bond markets.1] Stock Prices in Secondary Market Introduction The stock price in the secondary market is determined completely by the fluctuations in demand and supply of the particular stocks. The listing price of a particular stock is determined by the market regulator. the investors can keep track of the changes in the prices through the various trading screens. The closing price also serves as the opening price for the coming trading day.the opening price. along with the respective market. The closing price of a stock is the one at which the trading stops for the particular day. However the stock prices in secondary market. that are liquid and are often traded in the secondary markets. There are primarily three different stock market rates or prices . 34 .

our results suggest that banks continue to be special in the presence of a secondary market for bank loans. 35 . Moreover. We show that the banks' bargaining power increases with the degree of debt concentration.ROLE OF BANKING SECTOR IN SECONDARY MARKET Commercial bank debts of developing countries are held by large international banks and smaller domestic banks. thus increasing repayment and secondary-market prices. and that the bank monitoring function and the secondary market for bank loans are complementary sources of information about borrowers. Overall. 3. This paper investigates how debt concentration--the proportion of a country's debt held by large banks relative to small banks--affects the secondary market price for these loans. We find that countries with higher concentrations have higher secondary-market prices. We find that new loan announcements are associated with a positive stock price announcement effect even when a borrower’s loans trade on the secondary market. The recent development of an active secondary market for loans could however potentially diminish this special role. This result also holds true for distressed borrowers who are ex ante expected to be most adversely affected by a potential reduction in bank incentives to monitor as a result of a secondary market for loans. it elicits a positive stock price response.2] Secondary market for loans It is commonly argued that banks play a special role in the financial system because they resolve an important information asymmetry. This study utilizes a unique dataset of secondary market loan prices to examine this issue. Copyright 1999 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association. when a borrower’s existing loans trade for the first time in the secondary loan market. We explain this empirical finding in a bargaining model that endogenizes the maximum penalty that banks can credibly impose on a recalcitrant debtor.

It also generates predictions regarding the future of that market in a world of rapid consolidation and disappearing barriers to geographical expansion. with particular attention paid to the importance of affiliate relationships in explaining secondary market activity. 3.3] BOMBAY STOCK EXCHANGE INTRODUCTON: The Bombay Stock Exchange is the oldest Stock Exchange in Asia located in Dalal Street. Together. Evolution of the Bombay Stock Exchange and its Size The Bombay Stock Exchange was established in 1875 as the “Native Share and Stock Brokers Association” in 1875. This paper uses a new methodology to test the validity of two hypotheses regarding banks' motivations for selling and buying loans: (1) the comparative advantage hypothesis. Loan sales allow banks to deviate from this pattern by transferring loans in part or in their entirety from their own books to those of another institution. Mumbai in India. A third hypothesis--that reputation barriers can limit access to the secondary market--is considered as well. that banks lacking the ability to diversify internally use loan sales and purchases to achieve diversification.ROLE OF BANKING SECTOR IN SECONDARY MARKET Bank Loan Sales: A New Look at the Motivations for Secondary Market Activity Bank lending traditionally involves the extension of credit that is held by the originating bank until maturity. and (2) the diversification hypothesis. the evidence relating to these three hypotheses helps clarify the benefits of an active secondary loan market. that banks with a comparative advantage in originating loans sell and those with a comparative advantage in funding loans buy. It earned a formal status under the 36 .

4 trillion as on 2006. Its online trading system. BSE Network The Exchange reaches physically to 417 cities and towns in the country. The day-to-day operation of BSE is managed by the Managing Director and its school of professional as a management team. The Bombay Stock Exchange uses the Bombay Stock Exchange Sensex as the market index in Asia and India. The committees constituted by the board are broad37 . BSE Management Bombay Stock Exchange is managed professionally by Board of Directors. the board formulates larger policy issues and exercises overall control. nationwide. equity and other debt instruments. October. is a proprietory system and it is BS 7799-2-2002 certified. The BOLT network was expanded. The framework of it has been designed to safeguard market integrity and to operate with transparency. The surveillance and clearing & settlement functions of the Exchange are ISO 9001:2000 certified Organization structure In terms of organization structure. The Board is an inclusive one and is shaped to benefit from the market intermediaries participation. debt instruments and derivatives. The Bombay Stock Exchange deals with trading in derivatives. Market Capitalization of the BSE was about Rs 33.ROLE OF BANKING SECTOR IN SECONDARY MARKET Securities and Exchange Board of India (SEBI) in 1956. The Board exercises complete control and formulates larger policy issues. It comprises of eminent professionals. poularly known as BOLT. It provides an efficient market for the trading in equity. representatives of Trading Members and the Managing Director. in 1997.

BSE DEBT SEGMENT Introduction The capital market comprises of equities market and debt market. a trend which continued until the early sixties. The Indian Debt Markets are today poised on the threshold of momentous change and transition to an efficient. transparent and vibrant market with significant retail participation. The day-to-day operations of the exchange are managed by the managing director and a management team of professionals Sensex Sensex is the value-weighted index of the companies listed on the stock exchange. The Indian Debt Market structure was hitherto that of a wholesale market with participation largely restricted to the Banks. statutory corporations. The first half of the twentieth century had witnessed a significant amount of retail interest and participation in the G-Sec market with more than half the holdings of G-Secs issued being held by retail investors. public bodies. The rapidly expanding volumes in the Wholesale Debt Market over the past few years bear the promise of an immense and attractive financial market with a strong 38 . The administered interest rate regime and the emergence of other equity and debt instruments led to a gradual diminution in the investor interest and participation in the G-Sec market. Bombay Stock Exchange (BSE) in 1986 came out with a stock index that subsequently became the barometer of the Indian stock market. Debt market is a market for the issuance. trading and settlement in fixed income securities of various types. banks and institutions and corporate bodies Transformations in the Market Structure. Fixed income securities can be issued by a wide range of organizations including the Central and State Governments. Institutions and the Primary Dealers.ROLE OF BANKING SECTOR IN SECONDARY MARKET based.

Primary Dealers and financial institutions in India to undertake transactions in debt instruments among themselves or with non-bank clients through the members of Bombay Stock Exchange Limited (BSE). 2005. Debt and Derivative products. 3. 2007 SEBI permitted BSE to launch a trade matching platform with essential features of an OTC Market. BSE is now in the throes of change. Several other initiatives like simplification of the Debt listing agreement. BSE’s Bond with Investors Bombay Stock Exchange Limited (BSE). This notification paved the way for BSE to commence trading in Government Securities and other fixed income instruments. and several significant initiatives are in the offing permitted banks. the premier stock exchange in the country. of India. has heralded the capital market revolution in India and has contributed immensely towards the achievement of global standards of efficiency and safety by the Indian capitals market.4] National stock exchange Introduction 39 . On July 2.BSE.SEBI has subsequently taken several steps towards creation of a vibrant Corporate Bond market. rationalization of stamp duty and introduction of Repos on Corporate Bonds have been taken by SEBI.ROLE OF BANKING SECTOR IN SECONDARY MARKET potential for retail participation. offers investors an efficient and transparent nation-wide platform for trading in Equities. thanks to the pioneering efforts of the Exchanges and the market participants and the strong leadership and guidance by SEBI. with its rich experience of 133 years in the Indian capital market. RBI and the Govt. The Retail Debt Market in India is being created. having transformed itself into a corporate entity effective August 19.

is a Mumbai-based stock exchange. NSE has built a full fledged BCP site operational for last 7 years. technology. an index of fifty major stocks weighted by market capitalisation. Indian Capital Markets are a far cry from what they were 12 years back in terms of market practices. NSE is mutually-owned by a set of leading financial institutions. To ensure continuity of business. banks. It is the largest stock exchange in India in terms of daily turnover and number of trades. NSE was set up with the objectives of: • Establishing nationwide trading facility for all types of securities • Ensuring equal access to investors all over the country through an appropriate telecommunication network • Providing fair. NSE and the Bombay Stock Exchange are the two most significant stock exchanges in India. efficient & transparent securities market using electronic trading system • Enabling shorter settlement cycles and book entry settlements • Meeting International benchmarks and standards Within a very short span of time. and between them are responsible for the vast majority of share transactions. insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities. known as the Nifty. for both equities and derivative trading. clearing and settlement and investor service.01. NSE has a market capitalization of around Rs 47. Though a number of other exchanges exist. risk management. infrastructure. NSE has been able to achieve its objectives for which it was set up.ROLE OF BANKING SECTOR IN SECONDARY MARKET The National Stock Exchange of India Limited (NSE). The NSE's key index is the S&P CNX Nifty. 40 .923 crore (7 August 2009) and is expected to become the biggest stock exchange in India in terms of market capitalization by 2009 end.

On the basis of the recommendations of high powered 41 . The following diagram shows the trend in the no. • Delays in communication. late payments and the malpractice’s prevailing in the traditional trading mechanism can be done away with greater operational efficiency and informational transparency in the stock market operations. They are as follows: • NSE brings an integrated stock market trading network across the nation. In order to lift the Indian stock market trading system on particular with the international standards.ROLE OF BANKING SECTOR IN SECONDARY MARKET NSE has several advantages over the traditional trading exchanges. • Investors can trade at the same price from anywhere in the country since inter-market operations are streamlined coupled with the countrywide access to the securities. The number of stocks issued by the listed companies also shows a similar trend. with the support of total computerized network. Here again we register a sharp rise after 1980. of listed companies participating in the Indian Capital Market.

practices and procedures. Though the impetus for its establishment came from policy makers in the country. The day to day management of the Exchange is delegated to the Managing Director who is supported by a team of professional staff. The ownership and management of the Exchange is completely separated from the right to trading members. all Insurance Corporations. owned by the leading institutional investors in the country.(i) 1026 trading members on the Capital Market segment. These committees are manned by industry professionals. Industrial Finance Corporation of India. to trade on the NSE. the Exchange operates various committees to advise it on areas such as good market practices.(ii) 113 trading members on the Wholesale Debt Market segment.ROLE OF BANKING SECTOR IN SECONDARY MARKET Pherwani Committee. selected commercial banks and others. Besides. The Exchange is managed by a Board of Directors. the National Stock Exchange was incorporated in 1992 by Industrial Development Bank of India. settlement procedures. the public and the management. Industrial Credit and Investment Corporation of India. risk containment systems etc. of which around 86% account for corporates and the remaining individuals and firms. all of which account 42 . it has been set up as a public limited company. Decisions relating to market operations are delegated by the Board to an Executive Committee which includes representatives from the Trading Members. NSE is different from most Stock Exchanges in India where membership on an exchange also meant ownership of the exchange. Membership The National Stock Exchange has set up facilities which serve as a model for the securities industry in terms of trading systems. Trading Members and Exchange staff.

2000. The index is well diversified with 23 industries finding representation. The index has been in operation since Nov. The index is owned and operated by Indian index services and products Ltd. a company set up by NSE and CRISIL with technical assistance from standard and Poor’s. Effective monitoring mechanism.e. 106 are members of the Capital Market segment also and are included in the 1026 members). increased efficiency and greater flexibility in money management. capital market and futures and options trading.ROLE OF BANKING SECTOR IN SECONDARY MARKET for corporates. margins which depend on market fluctuations which are adjusted against the exposure of the member. It has three mutually exclusive segments comprising of wholesale debt market.The NSE eliminated the physical trading floor by going in for automated fully screen-based trading system.05. Debt market was activated in early 1994 and the share trading on 03. quick and efficient settlements with its trading members spread across the country. Business At NSE three kinds of margins are imposed i. 1955.e.1995. the date on which NSE capital market segment completed one year of operation. in the national stock exchange. the base period for nifty is the close price on NOV. daily margins.03. the NSE managed to access hitherto removed markets. 43 . a buy order is matched with a sale order. (Out of these 113 trading members. The index touched its peak of 1756 on February 11. lead higher growth in volumes through automation.11. At NSE traders are automatically matches i.1994. S&P CNX nifty index The index popularly called the nifty reflects the price movement of 50 stocks selected on criteria of market capitalization and liquidity. The trading system has the advantages of ensuring best price to market participants.

37 2.11 Difference between BSE and NSE Bombay Stock Exchange and National Stock Exchange are both major stock exchange in India.72 763. But there is a difference between NSE and BSE. But nobody can predict the market as we have already discussed.59 113119.75 9.43 2.15 1457.75 27.72 WEIGHT 1.05 1.12 0.74 85013. But you should be aware that it requires a lot of patience.37 62010. 2009 MARKET CAPITAL 33066.86 2511..05 71457.42 28TH AUG.95 1.80 678.85 CHARGE -3. Investors put their money in the stock market in order to reap huge benefits from their investment.20 2.40 0. The market tumbles down and this is the reason why investors fear of investing their money. 44 .60 13.08 LAST PRICE 918. Also any stock market is decided by its country’s growth.40 2.75 0.90 0.90 %CHARGE -0.ROLE OF BANKING SECTOR IN SECONDARY MARKET S&P CNX NIFTY COMPANY NANE AXIS BANK INDUSTRY BANKSPRIVATE HDFC HDFC BANK SECTOR FINANCEHOUSING BANKSPRIVATE ICICI BANK SECTOR BANKS PRIVATE PNB SECTOR BANKSPULIC SBI SECTOR BANKPUBLIC 1781.45 21390.78 3.40 16.

The secondary markets need to have higher levels of liquidity so that transaction could be carried on properly.ROLE OF BANKING SECTOR IN SECONDARY MARKET Chapter 4 4. In order for secondary market trading to take place a particular security has to be listed in the relevant exchange. Even if they invest for a longer 45 . provided their economic status undergoes a change. The term secondary market trading could also be denoted to the dealing of the smaller parts of a larger loan and ownership interest in business enterprises. The biggest advantage is that the investors can recover their investments to a certain extent.1] Secondary Market Trading Introduction The term secondary market trading signifies the buying and selling of securities. In such cases the investors may refrain from making long term investments. after they have been brought out through an Initial Public Offering. This is different from the conventional lending and partnership agreements. Benefits of Secondary Market Trading There are various benefits of trading in the secondary markets. Nature of Secondary Market In the secondary markets the securities are traded by investors.

there is no listed public market. For the vast majority of private equity investments. The investors are provided such luxuries in case of the securitized loans. the private equity secondary market (also often called private equity secondaries or secondaries) refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds. intended to be a long-term investment for buy-and-hold investors. the private equity asset class is illiquid. Private equity secondary market In finance. This is specifically applicable if the particular investment has been fragmented in comparatively smaller parts.ROLE OF BANKING SECTOR IN SECONDARY MARKET period of time. In the secondary markets the investors are provided the luxury of being able to sell their interests in the respective investments. By its nature. equity interests like bonds or stocks that could be traded. however there is a robust and maturing secondary market available for sellers of private equity assets. 46 . they would charge higher rates of interest for it. Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds.

UBS AG) sold portfolios of direct investments and “pay-to-play” funds portfolios that were typically used as a means to gain entry to lucrative leveraged finance and mergers and acquisitions assignments but had created hundreds of millions of dollars of losses. History of private equity and venture capital Many of the largest financial institutions (e. VC funds face capital adequacy norms In a move that could affect private equity (PE) and venture capital (VC) funds being set up by banks.ROLE OF BANKING SECTOR IN SECONDARY MARKET Driven by strong demand for private equity exposure.  Bank-sponsored PE.g. Deutsche Bank. Abbey National. the Reserve Bank of India (RBI) today said it was planning to lay down a risk management and capital adequacy framework for bank-sponsored private pools of capital.. 47 . a significant amount of capital has been committed to dedicated secondary market funds from investors looking to increase and diversify their private equity exposure.

Indian banks had not shown any strain during the stress test conducted by RBI.ROLE OF BANKING SECTOR IN SECONDARY MARKET The move. RBI said elements of macro-prudential regulation were visible in India even before the global crisis started. And with Indian financial players venturing outside the country. If RBI goes ahead with the move. the banking regulator said it was also in the process of revising the guidelines on stress testing and liquidity risk management and would factor in the new guidance issued by the Basel Committee on Banking Supervision in March. RBI said in its annual report for 2008-09. While RBI had initially expressed certain concerns about State Bank of India’s entry into the private equity-venture capital space. The central bank had started using countercyclical risk weights and provisioning norms. steps are also being taken to strengthen crossborder supervision. Laying emphasis on the macro-prudential dimension of the systemic risk assessment. In recent years. In light of the global 48 . the regulator has laid emphasis on initiatives such as consolidated supervision of banking groups. was being discussed in view of the reputation risk arising from undertaking such activities. While banks such as ICICI Bank and Axis Bank are already in the private equity arena. a part of the new set of prudential norms being discussed by financial sector regulators across the globe in the wake of the credit crisis. others such as State Bank of India and Yes Bank are looking to launch such funds. to ensure that the risk was contained. Canara Bank also has a venture capital fund. such as those for bank loans to the real estate sector. banks would have to factor in the capital they might have to set aside to cover the risk of VC and PE funds promoted by them. it asked the country’s largest banks to initiate certain steps before foraying into the business.

the global initiative would focus on a multi-pronged approach that would focus on introduction of automatic stabilisers by adopting countercyclical capital charge. RBI said regulators could provide capital requirements for reputational and other risk-associated securitisation and activities undertaken by sponsored or connected conduits. Secondary Market Securities' Liquidity 49 . In addition.ROLE OF BANKING SECTOR IN SECONDARY MARKET financial turmoil. risk concentration and valuation of financial instruments. 4. They are responsible for providing the capital that helps to bring about liquidity. Another element that can be used is stipulating capital treatment for trading book exposures. Further. among others. regulators could focus on elements such as offbalance sheet exposure. The speculators and the market makers are important in the context of determining the liquidity of a secondary market.2] Secondary Market Liquidity Introduction The term secondary market liquidity is primarily used in the fields of business. This would help build a cushion during boom years to deal with asset-quality issues in a downturn. to strengthen supervision. they could promote market discipline through better disclosure and clarity on risks associated with certain instruments. besides supplementing the regulatory approach to minimize the incentive for regulatory arbitrage between banking and trading books. The term secondary market liquidity is used to mean the quality of a security to be transferred at the least possible loss of value and least possible price change. RBI said that in the coming days. investment or economics.

The investment portfolio represents a smaller portion of assets. Most banks are subject to legally-mandated reserve requirements intended to help banks avoid a liquidity crisis. clients' deposits are its primary liabilities (in the sense that the bank is meant to give back all client deposits on demand). whereas reserves and loans are its primary assets (in the sense that these loans are owed to the bank. Managing liquidity is a daily process requiring bankers to monitor and project cash flows to ensure adequate liquidity is maintained. not by the bank). For an individual bank. such as the US Federal Reserve bank. liquidity is the ability to meet obligations when they come due without incurring unacceptable losses. borrowing from a central bank. borrowing from other banks. Investment securities can be liquidated to satisfy deposit withdrawals and increased loan demand. 50 . and serves as the primary source of liquidity. depositors may demand their funds when the bank is unable to generate adequate cash without incurring substantial financial losses. Maintaining a balance between short-term assets and short-term liabilities is critical. They may be enumerated as below: • They can be sold quickly • They can be sold at anytime within the trading hours • They can be sold with the minimum loss of value LIGUIDITY (IN BANKS) In banking.ROLE OF BANKING SECTOR IN SECONDARY MARKET The securities that are traded in the secondary markets and have a certain degree of liquidity possess some characteristics. and raising additional capital. this may result in a bank run. Banks have several additional options for generating liquidity. In severe cases. such as selling loans. In a worst case scenario.

51 . an important measure of a bank's value and success is the cost of liquidity. the giltedged market occupies an important position in the financial set. investors. The RBI has introduced a liquidity adjustment facility (LAF) in which liquidity is injected through reverse repo auctions and liquidity is sucked out through repo auctions.ROLE OF BANKING SECTOR IN SECONDARY MARKET Banks can generally maintain as much liquidity as desired because bank deposits are insured by governments in most developed countries. The DFHI is the principal agency for developing a secondary market for money market instruments and Government of India treasury bills. A bank can attract significant liquid funds. Primary dealers bid for these securities and also trade in them. A lack of liquidity can be remedied by raising deposit rates and effectively marketing deposit products. 4. This yield is obtained after a treasury bill matures. more stability. treasury bills are traded based on a certain percentage yield.3] Treasury Bills Secondary Market Introduction The term treasury bills secondary market refers to the place where the actual transactions occur. strengthening of existing instruments and setting up of the Discount and Finance House of India (DFHI). On account of the substantial issue of government debt. but at what cost? Lower costs generate stronger profits. and regulators.up. However.The secondary market was underdeveloped and lacked liquidity. In this particular market. and more confidence among depositors. has a mandate to develop the secondary market in government securities. The Securities Trading Corporation of India (STCI). Several measures have been initiated and include new money market instruments. which started operations in June 1994. The RBI conducts its sales of dated securities and treasury bills through its open market operations (OMO) window.

Treasury Bill Rates The maturity period for the treasury bills in the United States is not more than a year. treasury bills are issued by the Treasury Department through the Public Department Bureau. The maximum maturity period for treasury bills is one year. The price of a bill ranges from one thousand to five million US dollars. Treasury Bills India: Treasury Bills are short term (up to one year) borrowing instruments of the Government of India which enable investors to park their short term surplus funds while reducing their market risk. three or six months.ROLE OF BANKING SECTOR IN SECONDARY MARKET Treasury Direct The Treasury Direct enables buyers of these types of securities to purchase treasury bills through the Internet. They can have the funds taken out and subsequently deposited directly into the bank accounts of respective buyers. 52 . The maximum price of a treasury bill is five million Treasury Bills in USA In the United States. The mechanism of these bills is utilized by the United States government during the time it conducts open market operations. bills may be issued for a one. On maturity the face value is paid to the holder. Those treasury bills have maturity periods of one. or six month period. The minimum worth of a treasury bill is a thousand US dollars. three. however. They are auctioned by Reserve Bank of India at regular intervals and issued at a discount to face value. There are other treasury bills available as well.

RBI issues T-Bills for three different maturities: 91 days. Firms. Treasury Bills are eligible securities for SLR purposes. 25. Corporate bodies. Companies. Treasury Bills are issued in the form of SGL . Trusts and Institutions can purchase Treasury Bills. Recently Treasury Bills are also being issued frequently under the Market Stabilization Scheme (MSS). Treasury Bills are available for a minimum amount of Rs.ROLE OF BANKING SECTOR IN SECONDARY MARKET The rate of discount and the corresponding issue prices are determined at each auction.25. returns on Treasury Bills sometimes become even higher than returns on bank deposits of similar maturity. • Active secondary market thereby enabling holder to meet immediate fund requirement. The SGL holdings can be transferred by issuing a SGL transfer form.000 and in multiples of Rs. • Liquid money Market Instrument.000 thereafter. Type of Treasury Bills: At present. 53 . The 91 day T-Bills are issued on weekly auction basis while 182 day T-Bill auction is held on Wednesday preceding non-reporting Friday and 364 day T-Bill auction on Wednesday preceding the reporting Friday Advantages of investing in Treasury Bills: • No Tax Deducted at Source (TDS). When liquidity is tight in the economy. They are available in both Primary and Secondary market. • Zero default risk as these are the liabilities of GOI. 182 days and 364 days. Any person in India including Individuals.entries in the books of Reserve Bank of India to hold the securities on behalf of the holder.

1] Secondary Bond Market Introduction: The bond market (also known as the debt. credit. or fixed income market) is a financial market where participants buy and sell debt securities Bond Market Rates There are two different types of bonds in the market as per the rates . It never changes throughout the entire term period of the bond. is an active player in the both the primary and the secondary market for Treasury Bills with an impressive turnover of Rs.ROLE OF BANKING SECTOR IN SECONDARY MARKET SBI DFHI Ltd. The interest on the floating rate bonds are normally paid after 54 .5428 crores. In the fixed rate bonds the interest rate stays the same. The interest rate of the floating rate bonds are determined by a money market index. Chapter 5 5.the fixed rate bonds and the floating rate bonds. The spread stays the same throughout the term period of the bonds. In the floating rate bonds a spread is grouped together with the rates of the governmental funds.

Any individual is allowed to buy government bond. the only one corporate bond issued by Islamic Bangladesh Bank Limited (IBBL).ROLE OF BANKING SECTOR IN SECONDARY MARKET every three months. however. investors can purchase investment grade Corporate Bonds for their purposes. There are certain bonds like the zero coupon bonds. a commercial bank or other financial intermediaries. This means that buyers will get interest payment at the rates fixed by the committee. 182-day and 364-day. Through SBI DFHI Invest Plus. is an active participant in the Bond Market. 10 years. from the primary or secondary market through any bank. IBBL Mudaraba Perpetual Bond. How to Buy or Sell It? Corporate bonds can be bought through a full service or discount broker. The auction committee fixes bond interest rate and it is applicable throughout the bond's life. No capital market can reach 55 . 15 years and 20 years. depriving the capital market of the gains and benefits expected from it. 91-day. There is a secondary market for sale and purchase of bonds. Since its inception at the Dhaka bourse. which do not require the payment of interest. SBI DFHI Ltd. there had been negligible transactions at the secondary market. The best time to buy a corporate bond is when interest rates are relatively high. The central bank holds auction for treasury bonds every week and anybody can bid for it through any bank. Yet this market has not been functioning properly since its inception in 2005. The treasury bonds are sold to meet budget deficit and long-term government financing. The mature periods for such bill are 28-day.1 million denominations or its multiplier. which pays interest or coupon after every six months and it is of Tk 0.The central bank sells treasury bills and bonds to meet short-term borrowing needs of the government. The mature periods are five years. showed some good performance.

the bank said.  Canara Bank raises Rs 600 cr via bonds issue Mumbai: State-run lender Canara Bank has raised Rs 600 crore by issuing bonds. 56 . PSU Bonds/Corporate Debentures • Since these securities are yet to be dematerialized. the status on purchase of bonds/debentures by way of Letter of Allotment by banks is not clear. • Banks are allowed to buy these securities only from registered holders and not if these are in “street names”. etc. Once the government bond market becomes vibrant." Last week the bank had said it would raise Rs 400 crore by issuing non-convertible subordinate perpetual Tier-I bonds with an additional option to raise another Rs 200 crore. 2009. The bonds are with a coupon rate of 9. These include problems of directors’ signatures. insistence on rubber stamp of issuer company or transfer agents for previous transfers. separate resolution for selling and buying.ROLE OF BANKING SECTOR IN SECONDARY MARKET maturity without a strong bond market. In a filing to the Bombay Stock Exchange. which opened on August 18.10 per cent per annum for the first 10 years. The issue. only then the private sector bond market grows. closed on August 21. "we have collected total issue amount of Rs 600 crore under the said issue. problems relating to physical settlement and non-standardized settlement practices persist. • Finally. banker’s attestation of signatures. again hampering transfer. Transfer of bonds and debentures is further constrained due to some sellers insisting on endorsing the instruments specifically in favour of the buyer. if the issue is fully subscribed.

The investors must use their prudence and experience. debt markets are a crucial source of funds. Bonds can be broken before they mature.2] Secondary Debt Market Investors Introduction For a developing economy like India.and bonds issued by public sector undertakings. Debt markets are now considered an alternative route to banking channels for finance. It includes government securities – the largest component . 5. which the issuer would pay to the legal owner of the Instruments. Some of the benefits to the investors in debt instruments are:  The investors benefit by investing in fixed income securities as they preserve and increase their invested capital and also ensure the receipt of regular interest income. other government bodies. Debt Instruments are obligations of issuer of such instruments as regards certain future cash flows representing Interest & Principal. A through study of the secondary bond market must be done before investing. Bond market investors are also a type of secondary debt market investors when they trade in the secondary market.ROLE OF BANKING SECTOR IN SECONDARY MARKET Shares of Canara Bank were trading at Rs 265.75. Generally debt instruments represent agreements to receive certain cash flows as per the terms contained within the agreement. financial institutions. banks and companies. The debt market in India is amongst the largest in Asia. Secondary market investors have their share of advantages and disadvantages. They can also be said to be tradable form of loans.47 per cent in the late afternoon trade on the BSE. 57 . up 1. Investing in municipal securities can be a very lucrative option.

 The prices of Debt securities display a lower average volatility as compared to the prices of other financial securities and ensure the greater safety of accompanying investments. For a developing economy like India. public sector undertakings. debt markets are crucial sources of capital funds. Governments raise monetary resources by way of public borrowings to bridge the gap between budgetary receipts and payments. The Impact of the debt market on the economy The Asian financial crisis in the 1990s stressed the importance of a fully active debt market. Reduced role of banks and political intervention in use of funds. other government bodies.  Debt securities enable wide-based and efficient portfolio diversification and thus assist in portfolio risk-mitigation. It includes government securities. the lack of which aggravated the crisis. securities.ROLE OF BANKING SECTOR IN SECONDARY MARKET  The investors can even neutralize the default risk on their investments by investing in Govt.4] DEBT IN BANKS. In fact. Almost all debt instruments have a rating assigned to them by a Rating Agency which enables the investor to choose his degree of risk and corresponding returns. banks and companies. GFD of the Central government is met broadly 58 . The debt market in India is amongst the largest in Asia. as banks have to follow norms laid down by the central bank 12. financial institutions. which are normally referred to as risk-free investments due to the sovereign guarantee on these instruments. technically known as Gross Fiscal Deficit (GFD).

Till 1993-94 the Central Government was by and large financing its deficits through a process of larger pre-emption from the banking system and other captive borrowers besides taking recourse to central bank finance through 59 . Demand for credit from productive sectors and other events such as foreign funds flows and monetary policy actions can impact the liquidity conditions in the market. which include optimisation of cost of borrowing. While the rates of interest on government debt were administered. The monetary policy had to be compensatory in nature and in the main required successive and large increases in cash reserve and statutory liquidity requirements. achieving dispersion of ownership of government securities down to the retail level and fostering a deep and vibrant market for government securities. is in a position to advise the Governments about the appropriate timing of debt issuance. therefore. The Reserve Bank has specialized knowledge about the market conditions and. The Indian debt market is dominated by government securities both in terms of outstanding stock as well as turnover.public borrowings or internal debt. other liabilities and external borrowings. Large statutory pre-emption and borrowing from the RBI provided the government the ability to meet its borrowing requirements to finance large fiscal deficits. Till recently.ROLE OF BANKING SECTOR IN SECONDARY MARKET from three sources. the public sector assumed a pre dominant role in the development process. Management of public debt by the RBI involves various policy considerations. central bank financing was extended at much below market interest rates. Reserve Bank of India has the statutory obligation to manage the internal debt (public debt) of the Central government while its obligation to manage the internal debt (public debt) of State Governments arises from bilateral agreements between the Bank and the respective State Governments.

ROLE OF BANKING SECTOR IN SECONDARY MARKET automatic monetisation. The market for government securities. as a result. Government securities market in India has thus passed through different stages reflecting the developments in the financial sector from time to time. in June 1992 auction system for issue of government securities was introduced. did not develop and mature to be in a position to discover prices of government securities at the primary issue stage or in the secondary market. Consequently. Financial sector reforms initiated in the year 1992 provided an impetus to RBI's efforts to bring about debt market reforms. This had resulted in coupon rates being low as compared to interest rates on other assets such as loans. internal debt management was transformed into a market driven activity requiring development of pricing and trading skills. the system of automatic monetisation ended on March 31. Thus from being viewed as an instrument of mobilisation of plan resources for government during the first four decades of independence. the interest rate on government securities (known as Coupon Rate) were also administered and did not reflect the consensus of financial market. Problems by Investor 60 . which in any case. The voluntary agreement between the Government of India and the Reserve Bank of India to phase out the automatic monetisation was a path-breaking move in the reform process. Government of India's willingness to borrow from the markets at market rates along with the decision to introduce auction system for sale of government loans paved the way for developing a sovereign benchmark yield curve and thus helped the price discovery in the government and non-government debt market. was not well developed. As the interest rates for banks were being administered by the Reserve Bank of India. 1997. institutional and market infrastructure with the necessary legal and technological back-up. To start with.

61 . take delivery. shallow secondary markets. while yields on T-bills for the first half of 1996 were consistently higher than those offered by bank deposits. make payment. safety.1. he has to repeat much of this process at the time of sale. To invest in debentures. • After the crash of the equity markets. affix transfer stamps. In addition. they did not elicit any retail interest. • At most times however. • Retail investors have low interest in Government securities due to settlement related problems as well as the lack of direct or indirect access to the electronic clearing and settlement system at the RBI. The one instrument which meets all these requirements is a bank deposit. he continues to be plagued by the problems related to settlement. liquidity. he still needs to find a broker.000 of a bank deposit is insured with DICGC. follow up with Issuer Company and collect interest payment.00. The fact that up to Rs. yields on Government securities are lower than those on other available investment options due to higher liquidity and statutory demand from banks in the wholesale market. Low liquidity in the retail secondary market for Government securities keeps retail investors away from them.ROLE OF BANKING SECTOR IN SECONDARY MARKET 1] Retail investors can be best understood by first examining their principal needs viz. the traditional retail investor has moved to bonds of PSUs and corporate debentures in a bid to get higher yields and greater safety. relatively lower safety than those offered by bank deposits or Government securities and extremely cumbersome operational procedures. But the most important reason which keeps retail investors away from the gilts market is lack of awareness regarding the yields prevailing in Government securities and the procedures for investment. yield and ease of operation. lodge for transfer. imparts it with additional safety. However. As a result.

ROLE OF BANKING SECTOR IN SECONDARY MARKET • Larger players. 2] Wholesale investors include banks. further dampens retail interest. Other problems of the wholesale investor category include : • • Evaluation of investment performance continues to be based on profit or loss on sale. and hence liquidity in the secondary market. insurance companies. particularly banks. relate primarily to banks. 62 . and are in no way equipped to trade in the secondary market. financial institutions and FIIs. particularly for non-SLR securities. • Finally. The shadow of the securities scam continues to hinder active trading not only in public sector banks but also in several private sector and foreign banks. under the apprehension of creating an adverse impact on their own deposits. mutual funds. have been reluctant to market debt instruments to retail investors. the absence of market makers. • Since the secondary market is dominated by banks. and the concept of holding period returns is still alien. • A number of public sector banks do not yet have a policy in place for secondary market purchases. Some of these problems are attitudinal: • • Treasury is considered a compliance centre instead of a profit centre in most public sector banks. These managers also bear varied other responsibilities. most of the problems enumerated. The market is highly segmented as certain segments invest only for statutory requirements. Trading limits are not delegated to the dealer level but continue to vest with levels as high as general and deputy general managers.

These securities are generally fixed maturity and fixed coupon securities carrying semi-annual coupon. They may be in the form of Treasury Bills or Dated Government Securities. a large corpus of funds is prevented from entering the debt market. PSEs therefore.1] Government securities market Introduction Government Securities are securities issued by the Government for raising a public loan or as notified in the official Gazette. a corporate debenture may sell at yields higher than a PSU paper. Bearer Bonds.: bonds with a maximum tenure of one year. Stocks or Bonds held in Bond Ledger Account. Mostly Government Securities are interest bearing dated securities issued by RBI on behalf of the Government of India. reflecting an anomaly in pricing. Till such time as minimum lock-in period and the prohibition on provision of checking facility by these funds continues. their popularity with retail investors will remain low. • Money market mutual funds are virtually non-existent. take the easy way out and place their funds out in Certificates of Deposit of approved banks. • There are several restrictions on investment of surplus funds by public sector enterprises viz. Since the date of 63 . They consist of Government Promissory Notes. As a result. GOI uses these funds to meet its expenditure commitments. since their efforts to mobilize funds have not been too successful. Chapter 6 6.ROLE OF BANKING SECTOR IN SECONDARY MARKET • Risk weightage for banks is based on statutory regulations rather than rating assigned to the issue. As a result. and government securities with maximum residual maturity of three years.

viz. Provident Funds. 64 . Trusts. • No default risk as the securities carry sovereign guarantee.24% payable half yearly. which carries a coupon of 8. Financial Institutions. • Securities qualify as SLR investments (unless otherwise stated). 8. RBI also has a scheme of noncompetitive bidding for small investors (see SBI DFHI Invest on our website for further details). The dated Government securities market in India has two segments with respect to banks: 1] Primary Market: The Primary Market consists of the issuers of the securities. • Maturity ranges from of 2-30 years. Insurance Companies & Co-operative Banks. • No tax deducted at source • Can be held in D-mat form. Insurance Companies. • Rate of interest and tenor of the security is fixed at the time of issuance and is not subject to change (unless intrinsic to the security like FRB’s). • Interest payment on a half yearly basis on face value.24% GOI 2018 is a Central Government security maturing in 2018.ROLE OF BANKING SECTOR IN SECONDARY MARKET maturity is specified in the securities. 2] Secondary Market: The Secondary Market includes Commercial banks.g. Financial Institutions. • Redeemed at face value on maturity. Central and Sate Government and buyers include Commercial Banks. Features of Government Securities • Issued at face value. these are known as dated Government securities.. Primary Dealers. e. • Liquidity as the investor can sell the security in the secondary market.

RBI holds uniform-price auctions. bids are received from the Primary Dealers (PD) indicating the amount they are willing to underwrite and the fee expected. State Development Loans & T-Bills are regularly sold by RBI through periodic public auctions. Price Base deduction leads to a better price discovery then the Yield base deduction. as well as the coupon rate. Underwriting in Auction: One day prior to the auction. G-Secs. The eligibility criteria is specified in the relative Government notification. the PD need not subscribe to the issue unless they have bid for it. Even Corporates and Individuals can invest in Government Securities. The auction committee of RBI then examines the bid on the basis of the market condition and takes a decision on the amount to be underwritten and the fee to be paid. SBI DFHI Ltd. RBI announces the issue size or notified amount and the tenor of the paper to be auctioned. Bids at price lower then the cut off price are rejected and bids higher then the cut off price are accepted. the bids put in by the PD’s are set off against the amount underwritten while deciding the amount of devolvement and in case the auction is fully subscribed. Price Based: In this type of auction. SBI DFHI Ltd gives investors an opportunity to buy 65 . The bidders submit bids in terms of the price.ROLE OF BANKING SECTOR IN SECONDARY MARKET Mutual Funds. Primary Dealers and Reserve Bank of India. is a leading Primary Dealer in Government Securities. In case of devolvement. This method of auction is normally used in case of reissue of existing government securities.

• • • • • • 66 . Investors may also invest in high yielding Government Securities through “SBI DFHI Trade” where “buy and sell price” and a buy and sell facility for select liquid scrips in the secondary markets is offered. A system of Delivery Versus Payment (DVP) in Government securities was introduced in Mumbai in June 1995 to ensure that the transactions in government securities were fully secured. • A phased reduction in SLR requirements from an effective 37. The DFHI was authorized to deal in government securities in 1992-93 The Securities Trading Corporation of India (STCI) was set up in 1994 by the RBI jointly with public sector banks and all India financial institutions with the main objective of fostering the development of the government securities market (It commenced operations in September 1994) Market transparency was achieved through regular publication of details of SGL transactions in Government securities put though Mumbai PDO since September 1994.ROLE OF BANKING SECTOR IN SECONDARY MARKET G-Sec / SDLs / T-Bills at primary market auctions of RBI through its SBI DFHI Invest scheme (details available on website itself). Reforms in Secondary market in Government Securities. The Repo market has been activated by allowing repos/reverse repos transactions in all government securities besides treasury bills of all maturities. After its establishment and becoming operational in June 1994.4 per cent in March 1992 to a little over 28 per cent in March 1996.It has since been reduced to the statutory benchmark level of 25%. the National Stock Exchange provided secondary market treading facilities through its wholesale debt market segment.

1956 as government securities are "Securities" as defined in the Act. as also ready forward contracts in all debt instruments.ROLE OF BANKING SECTOR IN SECONDARY MARKET • Non-bank entities which are holders of account with the RBI have been allowed to enter reverse repo (but not direct) transactions with banks/PDs With a view to encouraging Mutual Funds to set up gilt funds in government securities either by way of outright purchase or reverse repos to the extent of 20 per cent of the outstanding investments. money market securities. gold related securities and derivatives based on these securities. Hence the provisions of the Act are applicable for the transactions in Government securities. Reserve Bank of India has permitted Repos and Reverse Repos subject to the terms and conditions and among the participants as specified hereunder: a. 67 . • • RBI IN Securities • Transactions in securities are governed by the Securities Contracts (Regulation) Act. ready forward contracts are undertaken only in Treasury Bills and transferable dated securities of all maturities issued by the Government of India and State Governments. Transactions on the stock exchanges will be in addition subject to the regulations prescribed by the Securities & Exchange Board of India (SEBI). Under the Act the Reserve Bank has been delegated powers by the Government of India to regulate contracts in government securities. Guidelines for satellite dealers in government securities market were announced in December 1996 And in April 1997 and the RBI granted approval to 17 entities for registration as satellite dealers in government securities. to promote/activate retailing in Government securities.

In order to develop the securities market on healthy lines and to facilitate price discovery in the market. ready forward contracts in the securities specified at (a) above may be entered into by a banking company. Effective management of public debt by the Reserve Bank is closely linked to the development of a deep and liquid secondary market and RBI has been taking various initiatives in this direction. Over-the -Counter outright transactions in government securities can be freely concluded providing for spot delivery (payment on the same day of the contract or next day) as per the Act. a cooperative bank or any person. no sale transaction should be put through without actually holding the securities in the portfolio. This has helped in the establishment of sovereign yield curve. RBI daily makes available to the market the prices in respect of secondary market transactions in government securities. enlargement of the types of securities and eligible participants for the repo market will depend upon the establishment of the secure infrastructure for the securities market including establishment of a Securities Clearing Corporation to facilitate tri-partite repos . c. 68 . and d. such ready forward contracts shall be settled through the Subsidiary General Ledger Accounts of the participants with Reserve Bank of India at Mumbai only. only among themselves. While RBI policy supports the establishment of a deep and liquid repo market. which are settled through SGL Account. Presently. Short selling in securities is prohibited. promoted market transparency and improved price discovery for government securities in the Indian Market. maintaining a Subsidiary Ledger Account and a Current Account with Reserve Bank of India. Mumbai.ROLE OF BANKING SECTOR IN SECONDARY MARKET b.

and to regulate.ROLE OF BANKING SECTOR IN SECONDARY MARKET 6..2] Securities and exchange board of India (SEBI) Introduction SEBI established in 1988 and became a fully autonomous body by the year 1992 with defined responsibilities to cover both development & regulation of the market. and to foster growth by promoting financial system 69 . The FSAP is designed to help countries enhance their resilience to crisis and cross-border contagion. Financial Services Assessment Programme (FSAP) to strengthen the monitoring of financial systems in the context of the IMF’s bilateral surveillance and the World Bank’s financial sector development work. which constitute the market: • The issuers of securities • The investors How SEBI came into picture The World Bank and the International Monetary Fund (IMF) have introduced a benchmark i.e. SEBI and its Role in the Secondary Market The SEBI is the regulatory authority established under Section 3 of SEBI Act 1992 to protect the interests of the investors in securities and to promote the development of. Functions and Responsibilities • SEBI has to be responsive to the needs of three groups. the securities market and for matters connected therewith and incidental there to.

7.ROLE OF BANKING SECTOR IN SECONDARY MARKET soundness and financial sector diversity. one each for primary and secondary market to provide advisory guidance informing policies and regulations. 4. It has two advisory committees. which will facilitate India and SEBI to achieve above objective. issue management department. Payments of interest on refund amt after 30 days from date of closure of issue. Publication of quarterly results. Allotment of shares only if minimum 90% subscription is received from the public. 2.allotment within 90 days. Free pricing of equity issues by companies. secondary market department and institutional investment department. 70 . 5. 6. 3. Management SEBI is managed by its chairman and five member and his departments such as primary market department. Introduction of stock invests for subscription. To refund the application money in case of Non. SEBI has been able to introduce certain measure such as: 1. Adequate disclosure of all material and specified risk factors associated with project in the prospectus and the same to be attached with share application form. The mission of SEBI is to make India as one of the best securities market of the world and SEBI as one of the most respected regulator in the world. Amendments will be required to be made in the Securities Laws especially the SEBI Act. SEBI endeavors to achieve the standards of IOSCO/FSAP.

and enactment of Securitization Bill have given a major fillip to Indian banking industry. Completion of allotment within 30. BSE considered it important to design an index exclusively for bank stocks. • Scrips that are a part of Bankex should have a minimum market capitalization coverage of 90% in banking sector based on free-float final rank. named as Bankex.3] Bankex Introduction Banking sector reforms such as fall in interest rates. which represent 90 percent of the total market capitalization of all banking sector stocks listed on BSE.Bankex is disseminated on a real-time basis through BSE Online Trading (BOLT) terminals. Scrip Selection Criteria for BSE Bankex • Scrips should at least have a trading frequency of 90% in preceding three months. Stocks Constituting Bankex 71 .ROLE OF BANKING SECTOR IN SECONDARY MARKET 8. These developments have significantly impacted the performance of bank stocks and bank stocks have emerged as a major segment in the equity markets. • Scrips classified under the banking sector and which constitute a part of BSE-500 index are eligible for Bankex. Twelve stocks. is based on the free float methodology of index construction. Hence. Bankex tracks the performance of the leading banking sector stocks listed on the BSE. are included in the index. 6. The index. The base date for Bankex is 1st January 2002 and the base value is 1000 points.

72 . The base date for BANKEX is 1st January 2002 and base value for BANKEX is 1000 points. Feature A few important features of the BANKEX are given below: • BANKEX tracks the performance of the leading banking sector stocks listed on the BSE. Bankex Index includes 12 selected major stocks which represent total 90% market capitalization of all the banking sector stocks listed on the BSE.ROLE OF BANKING SECTOR IN SECONDARY MARKET  UTI Bank Ltd  Kotak Mahindra Bank  UCO Bank  Indian Overseas Bank  Jammu & Kashmir Bank  Vijaya Bank  Allahabad Bank Ltd  Centurion Bank Ltd  Indusind Bank Ltd  Karnataka Bank Limited  Federal Bank Ltd  Yes Bank Ltd  IDBI Bank Ltd  Indusind Bank Ltd Bankex was launched by BSE to track the performance of the leading banking sectors as bank stocks are emerging as a major segment of the stock market.

• • Stocks which represent 90 percent of the total market capitalization of all banking sector stocks listed on BSE are included in the Index. BSE has calculated the historical index values of BANKEX since 1st January 2002.5 billion exposure in secondary market transactions. have lined up to participate in a big way in the secondary market for the deal. conducted by Standard Chartered Bank. The UK-based Standard Chartered. including State Bank of India (SBI). which was one of the banks to have syndicated the Tata-Corus funding deal. Chapter 7 EXAMPLE OF IN SECONDARY MARKET 1] Indian banks line up Tata-Corus debt in secondary market Mumbai. have bought parts of the debt 73 . • The Index is disseminated on a real-time basis through BSE Online Trading (BOLT) terminals. has already offloaded a majority of its own $2.ROLE OF BANKING SECTOR IN SECONDARY MARKET • BANKEX is based on the free-float methodology of index construction • The base date for BANKEX is 1st January 2002. A number of Indian banks. after missing out in their direct exposure in the $6 billion syndicated Tata-Corus deal. • The base value for BANKEX is 1000 points. Oct 15: Indian banks. • Stocks forming part of the BANKEX along with the particulars of their free-float adjusted market capitalization are listed below.

institutions which take exposure in the secondary market and the company which had received the original funding. regional head-client relationships. managing director. A catch-all term for any market whose existence depends on the products created in the primary market. whether it be cars. the US subprime crisis had its impact on the rates. For Standard Chartered. we will be again in a position to expand our exposure further for the group. which will have Indian implications. BANKER'S ACCEPTANCES. India & South Asia. The Tata Group is the largest global institutional customer of Standard Chartered Bank. SBI alone has bought over $1 billion of the TataCorus debt from Standard Chartered Bank.” said Bala Swami Nathan. The secondary market deal has a mechanism called ‘price flex’ by which the new higher rates are agreed among the original funding agencies. PROMISSORY NOTES. Pembroke and one oil and gas consultancy firm. the bank globally has acquired two small companies. the bank had already committed over $10 billion to India Inc for overseas buys over a one-year period. 2] Generically. The prices in the secondary market are partially dependent on the prices in the primary market. Besides. Harrison Lovegrove. the secondary market transactions have been very profitable as the banks. etc. 74 . mortgages. According to Swaminathan. TREASURIES. CERTIFICATES OF DEPOSIT. farm equipment. StanChart is hardly left with $750 million of the debt in its own book and would like to bring it to zero in future.one aircraft leasing company.ROLE OF BANKING SECTOR IN SECONDARY MARKET from Standard Chartered. “By offloading the entire Tata-Corus funding. which bought in the secondary market had to buy at slightly higher rates than the rate at which the deal was struck with the original financial institutions. Meanwhile. any market that depends on the existence of the primary market.

The swindler tells a potential investor that enormous profits can be made by purchasing these fresh cut securities and selling them the next day in the Secondary Market. the quality of the lender. Here is another example: the lending bank owns individually qualified mortgages for a nanosecond and sells them by established contract to ABC Mortgage. but this in no way affects either the value of your loan or your obligations). ABC gets the full rights to all remaining interest and principal payments.e. and various calculations based on risk-adjusted fair value calculation standards for the current market. a large investor in mortgages. i. (In many instances. and by the administration fee it is paid by ABC for collecting the monthly payments from the borrower.In each case. the lending bank continues to collect the mortgage payments for an administration fee. let's say ABC Mortgage (secondary market). The Scam: Swindlers involved in HIGH-YIELD INVESTMENT PROGRAM scams often refer to the Secondary Market as pension funds. so you may not know that your loan has been sold. ABC pays the lending bank the risk-adjusted fair value of those mortgages. the value of each individual mortgage is judged by the terms of the loan. can sell a block of these qualified mortgages to a finance company. mortgages on which the payments have a good record for at least one year. The lending bank profits by the points it collected from the borrower. Trusts.ROLE OF BANKING SECTOR IN SECONDARY MARKET This is just one example: a lending bank (primary market) holding SEASONED individual mortgages on its own customers. 75 . and insurance companies that purchase FRESH CUT SECURITIES created in bulk* once they have been seasoned for as short a period as overnight. brokerage houses.

" The year-on-year credit growth of top banks fell to 15. the securities are considered a safe investment by the Secondary Market. Also. The scammer would have you believe that securities are created in bulk. the report said. 2004.ROLE OF BANKING SECTOR IN SECONDARY MARKET The con artist tells you that "seasoned" means that the Secondary Market cannot purchase securities directly from the issuer. it added. Bank of India. However. depreciation on investments was written back during the quarter.” Due to improvement in the secondary market conditions. The top 12 lenders – State Bank of India.unattached to individual specific transactions. helping banks to lower total provisioning cost. the report said. with public-sector banks taking lead in the process. ICICI Bank.000 crore. The con artist must use your money to create the securities or purchase the securities.1 per cent for the month ended June 2009. HDFC Bank. Bank of Baroda. BANK GUARANTEES. taking the total restructured assets to nearly Rs 73.530 crore in FY10. Axis Bank. the report said. or LETTERS OF CREDIT. the proportion of total restructured advances to total loans remained within a comfortable level of 4 per cent. Central 76 . the lowest level since March. the top 12 lenders restructured loans worth Rs 32. Once this has been accomplished. Canara Bank. the banks could report lower provisioning during the quarter due to a change in secondary market conditions. However. known in ScamSpeak™ as a FUNDS FIRST deal. as it were . IDBI Bank. This is complete hogwash and bears absolutely no resemblance to actual issuance and trade of securities. run off the printing press in batches.

Overseas. Four years later. ICICI Bank offered made an equity offering in the form of ADRs on the New York Stock Exchange (NYSE). In the following year. the bank made secondary market sales to institutional investors. Present Scenario • ICICI Bank has its equity shares listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited.ROLE OF BANKING SECTOR IN SECONDARY MARKET Bank of India. with ICICI Bank. Union Bank of India and Syndicate Bank – covers 61 per cent of the credits in India. In the next year.  ICICI Bank ICICI Bank started as a wholly owned subsidiary of ICICI Limited. in 1994. the High Court of Gujarat at Ahmedabad as well as the High Court of Judicature at Mumbai and the Reserve Bank of India. As of December 31. it acquired the Bank of Madura Limited in an all-stock amalgamation. ICICI's shareholding was reduced to 46%. ICICI Personal Financial Services Limited and ICICI Capital Services Limited. ICICI is India's second-largest 77 . 2008. With a change in the corporate structure and the budding competition in the Indian Banking industry. the merger was approved by its shareholders. In the year 2000. an Indian financial institution. It was in 2001 that the Boards of Directors of ICICI and ICICI Bank sanctioned the amalgamation of ICICI and two of its wholly-owned retail finance subsidiaries. Punjab National Bank. its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE). the management of both ICICI and ICICI Bank were of the opinion that a merger between the two entities would prove to be an essential step. Later in the year and the next fiscal year. when the company offered ICICI Bank's shares to the public. thereby becoming the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE.

in crores 786. Punjab National Bank holds 74% of the total capital of PNB Gilts with other institution such as IDBI.80 17. The sheer quality of paper provides better liquidity and low default risk.08 % of total 67% 2% 3% 28% 78 . Description Government securities State loan Treasury Bills Bonds Rs. Punjab & Sindh Bank. The company was initiated with the view of enforcing the view of Narsiman committee and RBI’s norm of regulating the debt market. a wholly owned subsidiary of Punjab National Bank (PNB). Industrial Investment Bank of India holding sizeable stake. PNB Gilts currently trades in mainly in soverign or highly rated paper with portfolio size of Rs. acquired licence to operate as primary dealer in government securities market in 1996. G-Secs and rated bonds.10 billion and profit after tax Rs. 30. that ended on December 31.1171 crores.  PUNJAB NATIONAL BANK PNB Gilts. 3.744.50 34.04 1171.75 332. PNB Gilts is the intermediary whose role is to participate in primary auctions and open market operation of G-Secs conducted by RBI and participates in secondary market operations of treasury bills.ROLE OF BANKING SECTOR IN SECONDARY MARKET bank. UTI. 2008. boasting an asset value of Rs.14 billion. for the nine months.

79 . The banking sector is playing a major role in the secondary markets. The banks are making maximum profit out of the boon in the economy and are providing a platform for mobilizing more funds in the market.ROLE OF BANKING SECTOR IN SECONDARY MARKET CONCLUSION It is very evident from the performance of the Bankex that banks are stealing the thunder of other market heavy weights.

and greater stability. Keeping the growth and development of several banks in mind I have a few recommendations on the project prepared as follows: • More banks should become public and issue IPO’s which would in turn help both banks and the depositors in more than one ways. This project has helped me understand that banks play an important role in the growth of the secondary market and the secondary market plays an important role in the banks development. 80 . The role of Banks in the secondary market has become very significant since the liberalization of the economy. • The banks will get more funds to not only carry out their regular operations but also carry out various other financial services. RECOMMENDATIONS There is no doubt that banks are playing a vital role in the secondary markets. Still there are many banks that haven’t gone public yet. the future of the banking sector is very bright and will enjoy more success with healthy competition. steady growth.ROLE OF BANKING SECTOR IN SECONDARY MARKET The private sector is ate the help of the growth in the banks.

D. R.ROLE OF BANKING SECTOR IN SECONDARY MARKET • It will also give the banks to restructure themselves and integrate more technology in to the services provided to the customers.Rajarajen vanjeko . 2008 81 MAGAZINE: • . 2008 • Stock Market in India . • Capital market reforms and individual investors . It will also make the functioning of the bank more transparent for the depositors and the shareholders. Veena - Publisher: Ashish. BIBLIOGRAPHY Books: • Changing pattern of capital markets in India: an analytical study .Gaddam Naresh Reddy - Publisher: Cyber tech publications 2007.Publisher : Dominant publishers and Distributors. 1988 • Indian Capital Markets: Recent Trends and Reforms .Arindam Banerjee - Publisher: Icfai university Survey of Indian Industry.

com www.com www.com 82 .in www.sec.ROLE OF BANKING SECTOR IN SECONDARY MARKET Websites: www.com www.co.lycos.altavista.com www.banknet.gov.icicibank.rbi.com www.sbi.