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Capital market

A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year,
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as the raising of short-term funds takes place on other markets (e.g.,

the money market). The capital market includes the stock market (equity securities) and the bond market (debt). Money markets and capital markets are parts of financial markets. Financial regulators, such as the UK's Financial Services Authority (FSA) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties. Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange,over-the-counter, or elsewhere.

Meaning and Concept of Capital Market


Capital Market is one of the significant aspect of every financial market. Hence it is necessary to study its correct meaning. Broadly speaking the capital market is a market for financial assets which have a long or indefinite maturity. Unlike money market instruments the capital market intruments become mature for the period above one year. It is an institutional arrangement to borrow and lend money for a longer period of time. It consists of financial institutions like IDBI, ICICI, UTI, LIC, etc. These institutions play the role of lenders in the capital market. Business units and corporate are the borrowers in the capital market. Capital market involves various instruments which can be used for financial transactions. Capital market provides long term debt and equity finance for the government and the corporate sector. Capital market can be classified into primary and secondary markets. The primary market is a market for new shares, where as in the secondary market the existing securities are traded. Capital market institutions provide rupee loans, foreign exchange loans, consultancy services and underwriting.

Significance, Role or

Functions of Capital Market

Like the money market capital market is also very important. It plays a significant role in the national economy. A developed, dynamic and vibrant capital market can immensely contribute for speedy economic growth and development.

Let us get acquainted with the important functions and role of the capital market. 1. Mobilization of Savings : Capital market is an important source for mobilizing idle savings from the economy. It mobilizes funds from people for further investments in the productive channels of an economy. In that sense it activate the ideal monetary resources and puts them in proper investments. 2. Capital Formation : Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. Through mobilization of ideal resources it generates savings; the

mobilized savings are made available to various segments such as agriculture, industry, etc. This helps in increasing capital formation. 3. Provision of Investment Avenue : Capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to invest resources for a long period of time. It provides suitable interest rate returns also to investors. Instruments such as bonds, equities, units of mutual funds, insurance policies, etc. definitely provides diverse investment avenue for the public. 4. Speed up Economic Growth and Development : Capital market enhances production and productivity in the national economy. As it makes funds available for long period of time, the financial requirements of business houses are met by the capital market. It helps in research and development. This helps in, increasing production and productivity in economy by generation of employment and development of infrastructure. 5. Proper Regulation of Funds : Capital markets not only helps in fund mobilization, but it also helps in proper allocation of these resources. It can have regulation over the resources so that it can direct funds in a qualitative manner. 6. Service Provision : As an important financial set up capital market provides various types of services. It includes long term and medium term loans to industry, underwriting services, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum. 7. Continuous Availability of Funds : Capital market is place where the investment avenue is continuously available for long term investment. This is a liquid market as it makes fund available on continues basis. Both buyers and seller can easily buy and sell securities as they are continuously available. Basically capital market transactions are related to the stock exchanges. Thus marketability in the capital market becomes easy. These are the important functions of the capital market.

Final Glance and Conclusion on Capital Market


The lack of an advanced and vibrant capital market can lead to underutilization of financial resources. The developed capital market also provides access to the foreign capital for domestic industry. Thus capital market definitely plays a constructive role in the over all development of an economy.

Financial market
In economics, a financial market is a mechanism that allows people and entities to buy and sell (trade) financial securities (such as stocks and bonds),commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded) exist. Markets work by placing many interested buyers and sellers in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy.

In finance, financial markets facilitate: The raising of capital (in the capital markets) The transfer of risk (in the derivatives markets) Price Discovery Global Transactions with integration of financial markets The transfer of liquidity (in the money markets) International trade (in the currency markets)

and are used to match those who want capital to those who have it. Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends. In mathematical finance, the concept continuous-time Brownian motion stochastic process is sometimes used as a model.

Definition In economics, typically, the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them. The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in financial securities, e.g., a stock exchange orcommodity exchange. This may be a physical location (like the NYSE, BSE, NSE) or an electronic system (like NASDAQ). Much trading of stocks takes place on an exchange; still, corporate actions (merger, spinoff) are outside an exchange, while any two companies or people, for whatever reason, may agree to sell stock from the one to the other without using an exchange. Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock exchange, and people are building electronic systems for these as well, similar to stock exchanges. Financial markets can be domestic or they can be international.
[edit]Types

of financial markets

The financial markets can be divided into different subtypes:

Capital markets which consist of: Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof. Commodity markets, which facilitate the trading of commodities. Money markets, which provide short term debt financing and investment. Derivatives markets, which provide instruments for the management of financial risk. Futures markets, which provide standardized forward contracts for trading products at some future date; see also forward market. Insurance markets, which facilitate the redistribution of various risks. Foreign exchange markets, which facilitate the trading of foreign exchange.

The capital markets may also be divided into primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets, such as during initial public offerings. Secondary markets allow investors to buy and sell existing securities. The transactions in primary markets exist between issuers and investors, while in secondary market transactions exist among investors.
[edit]Raising

the capital

To understand financial markets, let us look at what they are used for, i.e. what where firms make the capital to invest Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such as banks help in this process. Banks take deposits from those who have money to save. They can then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form of loans and mortgages. More complex transactions than a simple bank deposit require markets where lenders and their agents can meet borrowers and their agents,

and where existing borrowing or lending commitments can be sold on to other parties. A good example of a financial market is a stock exchange. A company can raise money by selling shares to investors and its existing shares can be bought or sold. The following table illustrates where financial markets fit in the relationship between lenders and borrowers:
Relationship between lenders and borrowers
Lenders Financial Intermediaries Financial Markets Interbank Stock Exchange Money Market Bond Market Foreign Exchange Borrowers Individuals Companies Central Government Municipalities Public Corporations

Individuals Companies

Banks Insurance Companies Pension Funds Mutual Funds

[edit]Lenders

Who have enough money to lend or to give someone money from own pocket at the condition of getting back the principal amount or with some interest or charge, is the Lender.
[edit]Individuals & Doubles

Many individuals are not aware that they are lenders, but almost everybody does lend money in many ways. A person lends money when he or she:

puts money in a savings account at a bank; contributes to a pension plan; pays premiums to an insurance company; invests in government bonds; or invests in company shares.

[edit]Companies

Companies tend to be borrowers of capital. When companies have surplus cash that is not needed for a short period of time, they may seek to make money from their cash surplus by lending it via short term markets called money markets.

There are a few companies that have very strong cash flows. These companies tend to be lenders rather than borrowers. Such companies may decide to return cash to lenders (e.g. via a share buyback.) Alternatively, they may seek to make more money on their cash by lending it (e.g. investing in bonds and stocks.)
[edit]Borrowers

Individuals borrow money via bankers' loans for short term needs or longer term mortgages to help finance a house purchase. Companies borrow money to aid short term or long term cash flows. They also borrow to fund modernisation or future business expansion. Governments often find their spending requirements exceed their tax revenues. To make up this difference, they need to borrow. Governments also borrow on behalf of nationalised industries, municipalities, local authorities and other public sector bodies. In the UK, the total borrowing requirement is often referred to as the Public sector net cash requirement (PSNCR). Governments borrow by issuing bonds. In the UK, the government also borrows from individuals by offering bank accounts and Premium Bonds. Government debt seems to be permanent. Indeed the debt seemingly expands rather than being paid off. One strategy used by governments to reduce the value of the debt is to influence inflation. Municipalities and local authorities may borrow in their own name as well as receiving funding from national governments. In the UK, this would cover an authority like Hampshire County Council. Public Corporations typically include nationalised industries. These may include the postal services, railway companies and utility companies. Many borrowers have difficulty raising money locally. They need to borrow internationally with the aid of Foreign exchange markets. Borrowers having similar needs can form into a group of borrowers. They can also take an organizational form like Mutual Funds. They can provide mortgage on weight basis. The main advantage is that this lowers the cost of their borrowings.

[edit]Derivative

products

During the 1980s and 1990s, a major growth sector in financial markets is the trade in so called derivative products, or derivatives for short. In the financial markets, stock prices, bond prices, currency rates, interest rates and dividends go up and down, creating risk. Derivative products are financial products which are used to control risk or paradoxically exploit risk. It is also called financial economics. Derivative products or instruments help the issuers to gain an unusual profit from issuing the instruments. For using the help of these products a contract has to be made. Derivative contracts are mainly 3 types: 1. Future Contracts 2. Forward Contracts 3. Option Contracts.
[edit]Currency

markets

Main article: Foreign exchange market Seemingly, the most obvious buyers and sellers of currency are importers and exporters of goods. While this may have been true in the distant past,[when?] when international trade created the demand for currency markets, importers and exporters now represent only 1/32 of foreign exchange dealing, according to the Bank for International Settlements.[1] The picture of foreign currency transactions today shows: Banks/Institutions Speculators Government spending (for example, military bases abroad) Importers/Exporters Tourists [edit]Analysis of financial markets

See Statistical analysis of financial markets, statistical finance--Much effort has gone into the study of financial markets and how prices vary with time. Charles Dow, one of the founders of Dow Jones & Company and The Wall Street Journal, enunciated a set of ideas on the subject which are now called Dow Theory. This is the basis of

the so-called technical analysis method of attempting to predict future changes. One of the tenets of "technical analysis" is that market trends give an indication of the future, at least in the short term. The claims of the technical analysts are disputed by many academics, who claim that the evidence points rather to therandom walk hypothesis, which states that the next change is not correlated to the last change. The scale of changes in price over some unit of time is called the volatility. It was discovered by Benot Mandelbrot that changes in prices do not follow a Gaussian distribution, but are rather modeled better by Lvy stable distributions. The scale of change, or volatility, depends on the length of the time unit to a power a bit more than 1/2. Large changes up or down are more likely than what one would calculate using a Gaussian distribution with an estimated standard deviation. A new area of concern is the proper analysis of international market effects. As connected as today's global financial markets are, it is important to realize that there are both benefits and consequences to a global financial network. As new opportunities appear due to integration, so do the possibilities of contagion. This presents unique issues when attempting to analyze markets, as a problem can ripple through the entire connected global network very quickly. For example, a bank failure in one country can spread quickly to others, which makes proper analysis more difficult.
[edit]Financial

market slang

Poison pill, when a company issues more shares to prevent being bought out by another company, thereby increasing the number of outstanding shares to be bought by the hostile company making the bid to establish majority. Quant, a quantitative analyst with a PhD[citation needed] (and above) level of training in mathematics and statistical methods. Rocket scientist, a financial consultant at the zenith of mathematical and computer programming skill. They are able to invent derivatives of high complexity and construct sophisticated

pricing models. They generally handle the most advanced computing techniques adopted by the financial markets since the early 1980s. Typically, they are physicists and engineers by training; rocket scientists do not necessarily build rockets for a living. White Knight, a friendly party in a takeover bid. Used to describe a party that buys the shares of one organization to help prevent against a hostile takeover of that organization by another party.

Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value.
[1]

Securities are broadly categorized into: debt securities (such as banknotes, bonds and debentures), equity securities, e.g., common stocks; and, derivative contracts, such as forwards, futures, options and swaps.

The company or other entity issuing the security is called the issuer. A country's regulatory structure determines what qualifies as a security. For example, private investment pools may have some features of securities, but they may not be registered or regulated as such if they meet various restrictions. Securities may be represented by a certificate or, more typically, "non-certificated", that is in electronic or "book entry" only form. Certificates may be bearer, meaning they entitle the holder to rights under the security merely by holding the security, or registered, meaning they entitle the holder to rights only if he appears on a security register maintained by the issuer or an intermediary. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, limited partnership units, and various other formal investment instruments that are negotiable and fungible.

Debt and equity Securities are traditionally divided into debt securities and equities (see also derivatives).
[edit]Debt

Debt securities may be called debentures, bonds, deposits, notes or commercial paper depending on their maturity and certain other characteristics. The holder of a debt security is typically entitled to the payment of principal

and interest, together with other contractual rights under the terms of the issue, such as the right to receive certain information. Debt securities are generally issued for a fixed term and redeemable by the issuer at the end of that term. Debt securities may be protected by collateral or may be unsecured, and, if they are unsecured, may be contractually "senior" to other unsecured debt meaning their holders would have a priority in a bankruptcy of the issuer. Debt that is not senior is "subordinated". Corporate bonds represent the debt of commercial or industrial entities. Debentures have a long maturity, typically at least ten years, whereas notes have a shorter maturity. Commercial paper is a simple form of debt security that essentially represents a post-dated check with a maturity of not more than 270 days. Money market instruments are short term debt instruments that may have characteristics of deposit accounts, such as certificates of deposit, and certain bills of exchange. They are highly liquid and are sometimes referred to as "near cash". Commercial paper is also often highly liquid. Euro debt securities are securities issued internationally outside their domestic market in a denomination different from that of the issuer's domicile. They include eurobonds and euronotes. Eurobonds are characteristically underwritten, and not secured, and interest is paid gross. A euronote may take the form of euro-commercial paper (ECP) or euro-certificates of deposit. Government bonds are medium or long term debt securities issued by sovereign governments or their agencies. Typically they carry a lower rate of interest than corporate bonds, and serve as a source of finance for governments. U.S. federal government bonds are called treasuries. Because of their liquidity and perceived low risk, treasuries are used to manage the money supply in the open market operations of non-US central banks. Sub-sovereign government bonds, known in the U.S. as municipal bonds, represent the debt of state, provincial, territorial, municipal or other governmental units other than sovereign governments.

Supranational bonds represent the debt of international organizations such as the World Bank, the International Monetary Fund, regional multilateral development banks and others.
[edit]Equity

An equity security is a share of equity interest in an entity such as the capital stock of a company, trust or partnership. The most common form of equity interest is common stock, although preferred equity is also a form of capital stock. The holder of an equity is a shareholder, owning a share, or fractional part of the issuer. Unlike debt securities, which typically require regular payments (interest) to the holder, equity securities are not entitled to any payment. In bankruptcy, they share only in the residual interest of the issuer after all obligations have been paid out to creditors. However, equity generally entitles the holder to a pro rata portion of control of the company, meaning that a holder of a majority of the equity is usually entitled to control the issuer. Equity also enjoys the right to profitsand capital gain, whereas holders of debt securities receive only interest and repayment of principal regardless of how well the issuer performs financially. Furthermore, debt securities do not have voting rights outside of bankruptcy. In other words, equity holders are entitled to the "upside" of the business and to control the business.

Stock

[edit]Hybrid

Hybrid securities combine some of the characteristics of both debt and equity securities. Preference shares form an intermediate class of security between equities and debt. If the issuer is liquidated, they carry the right to receive interest and/or a return of capital in priority to ordinary shareholders. However, from a legal perspective, they are capital stock and therefore may entitle holders to some degree of control depending on whether they contain voting rights. Convertibles are bonds or preferred stock that can be converted, at the election of the holder of the convertibles, into the common stock of the

issuing company. The convertibility, however, may be forced if the convertible is a callable bond, and the issuer calls the bond. The bondholder has about 1 month to convert it, or the company will call the bond by giving the holder the call price, which may be less than the value of the converted stock. This is referred to as a forced conversion. Equity warrants are options issued by the company that allow the holder of the warrant to purchase a specific number of shares at a specified price within a specified time. They are often issued together with bonds or existing equities, and are, sometimes, detachable from them and separately tradeable. When the holder of the warrant exercises it, he pays the money directly to the company, and the company issues new shares to the holder. Warrants, like other convertible securities, increases the number of shares outstanding, and are always accounted for in financial reports as fully diluted earnings per share, which assumes that all warrants and convertibles will be exercised.

Money market
The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of [1] deposit, federal funds, and short-livedmortgage- and asset-backed securities. It provides liquidity funding for the global financial system. Money markets and capital markets are parts of financial markets.

Overview
The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short-term financial instruments commonly called "paper." This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity. The core of the money market consists of interbank lending--banks borrowing and lending to each other using commercial paper, repurchase agreements and similar instruments. These instruments are often benchmarked to (i.e. priced by reference to) the London Interbank Offered Rate (LIBOR) for the appropriate term and currency. Finance companies, such as GMAC, typically fund themselves by issuing large amounts of assetbacked commercial paper (ABCP) which is secured by the pledge of eligible assets into an ABCP

conduit. Examples of eligible assets include auto loans, credit card receivables, residential/commercial mortgage loans, mortgage-backed securities and similar financial assets. Certain large corporations with strong credit ratings, such as General Electric, issue commercial paper on their own credit. Other large corporations arrange for banks to issue commercial paper on their behalf via commercial paper lines. In the United States, federal, state and local governments all issue paper to meet funding needs. States and local governments issue municipal paper, while the US Treasury issues Treasury bills to fund the US public debt. Trading companies often purchase bankers' acceptances to be tendered for payment to overseas suppliers. Retail and institutional money market funds Banks Central banks Cash management programs Arbitrage ABCP conduits, which seek to buy higher yielding paper, while themselves selling cheaper paper. Merchant Banks [edit]Common

money market instruments

Certificate of deposit - Time deposits, commonly offered to consumers by banks, thrift institutions, and credit unions.

Repurchase agreements - Short-term loansnormally for less than two weeks and frequently for one dayarranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.

Commercial paper - Unsecured promissory notes with a fixed maturity of one to 270 days; usually sold at a discount from face value.

Eurodollar deposit - Deposits made in U.S. dollars at a bank or bank branch located outside the United States.

Federal agency short-term securities - (in the U.S.). Short-term securities issued by government sponsored enterprises such as the Farm Credit System, the Federal Home Loan Banks and theFederal National Mortgage Association.

Federal funds - (in the U.S.). Interest-bearing deposits held by banks and other depository institutions at the Federal Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis. They are lent for the federal funds rate.

Municipal notes - (in the U.S.). Short-term notes issued by municipalities in anticipation of tax receipts or other revenues.

Treasury bills - Short-term debt obligations of a national government that are issued to mature in three to twelve months.

Money funds - Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors.

Foreign Exchange Swaps - Exchanging a set of currencies in spot date and the reversal of the exchange of currencies at a predetermined time in the future.

Short-lived mortgage- and asset-backed securities

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Fungibility
Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution, such as crude oil, wheat, precious metals orcurrencies. For example, if someone lends another person a $10 bill, it does not matter if they are given back the same $10 bill or a different one, since currency is fungible; if someone lends another person their car, however, they would not expect to be given back a different car, even of the same make and model, as cars are not fungible. It refers only to the equivalence of each unit of a commodity with other units of the same commodity. Fungibility does not describe or relate to any exchange of one commodity for some other, different commodity.

Etymology
The word comes from Latin fungibilis from fungi, meaning "to perform", related to "function" and "defunct". [edit]Fungibility

versus liquidity

Fungibility is different from liquidity. A good is liquid if it can be easily exchanged for money or another different good. A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place. Examples: Cash is fungible: one US$10 bank note is interchangeable with another. Crude oil is fungible: a barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same type and grade of crude oil. Different issues of a government bond (maybe issued at different times) are fungible with one another if they carry precisely the same rights and any of them is equally acceptable in settlement of a trade. Diamonds are not fungible because diamonds' varying cuts, colors, grades, and sizes make it difficult to find many diamonds with the same cut, color, grade, and size. Fungibility does not imply liquidity, and liquidity does not imply fungibility. Diamonds can be readily bought and sold (the trade is liquid) but individual diamonds, being unique, are not interchangeable (diamonds are not fungible). Indian rupee bank notes are mutually interchangeable in London (they are fungible

there) but they are not easily traded there (they cannot be spent in London). In contrast to diamonds, gold coins of the same grade and weight are fungible, as well as liquid. [edit]Fungibility

in law

In legal disputes, when one party is compelled to remedy another party as the result of a ruling or adjudication, the appropriate legal remedy may depend on the fungibility of the underlying right, obligation or property interest that is intended to be restored.
[1]

Depending on whether the interests of the aggrieved

party are fungible (a determination made by the trier of fact) the appropriate remedy may change. For example, a court may require specific performance (an equitable remedy) as a remedy for breach of contract, instead of the more favored remedy of monetary damages.
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Financial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries. Most financial institutions are highly regulated by government. Broadly speaking, there are three major types of financial institutions:
[1]

1. Deposit-taking institutions that accept and manage deposits and make loans, including banks, building societies, credit unions, trust companies, andmortgage loan companies 2. Insurance companies and pension funds; and 3. Brokers, underwriters and investment funds.

Function Financial institutions provide service as intermediaries of financial markets. They are responsible for transferring funds from investors to companies in need of those funds. Financial institutions facilitate the flow of money through the economy. To do so, savings arisk brought to provide funds for loans. Such is the primary means for depository institutions to develop revenue. Should the yield curvebecome inverse, firms in this arena will offer additional fee-generating services including securities underwriting, and pre. fds
[edit]Corporate

valuation

Relative metrics : Price/Equity Price/Book Value Use Equity Multiples (as opposed to Enterprise Multiples). To consider how valuing a Financial Institution's balance sheet is different from a non-Financial firm, consider how an industrial firm wields capital machinery (asset) and the loans (liabilities) it used to finance that asset. The line is blurred in Financial Institutions, which must hold deposit accounts (liabilities) to fuel the issuance of loans (assets). The same accounts are considered loans as they are held in ownership not of the bank, but of the individual client. Dividend Discount Model : Earnings-per-share Dividends-per-share Discounted Cash Flow (DCF) Model : You'll need the FCFE (Free Cash Flow for Equity), which is the amount of money that is returned to shareholders. Calculate an FCFF (Free Cash Flow to the Firm): EBIT (1tax rate) -Capital Expenditures+ (Depreciation & Amortization) - (Net increase in working capital)= FCFF FCFF-Debt+Cash=FCFE Use the Capital Asset Pricing Model, not the Weighted Average Cost of Capital (for the same reasons one uses Equity Multiples in relative valuation) to determine the cost of equity (the return required by shareholders to make the decision to invest in a financial institutions)

Excess Return Model : A model where valuation is expressed as the sum of capital invested currently in the firm and the present value of dollar excess returns that the firm expects to make in the future.[1]
[edit]Standing

settlement instructions

Standing Settlement Instructions (SSIs) are the agreements between two financial institutions which fix the receiving agents of each counterparty in ordinary trades of some type. These agreements allow traders to make faster trades since time used to settle the receiving agents is conserved. Limiting the trader to an SSI also lowers the likelihood of a fraud.
[edit]Regulation

See also: Financial regulation Financial institutions in most countries operate in a heavily regulated environment as they are critical parts of countries' economies. Regulation structures differ in each country, but typically involve prudential regulation as well as consumer protection and market stability. Some countries have one consolidated agency that regulates all financial institutions while others have separate agencies for different types of institutions such as banks, insurance companies and brokers. Countries that have separate agencies include the United States, where the key governing bodies are the Federal Financial Institutions Examination Council (FFIEC), Office of the Comptroller of the Currency National Banks, Federal Deposit Insurance Corporation (FDIC) State "non-member" banks, National Credit Union Administration (NCUA) Credit Unions, Federal Reserve (Fed) - "member" Banks, Office of Thrift Supervision - National Savings & Loan Association, State governments each often regulate and charter financial institutions. Countries that have one consolidated financial regulator include United Kingdom with the Financial Services Authority, Norway with the Financial Supervisory Authority of Norway, Hong Kong with Hong Kong Monetary Authority and Russia with Central Bank of Russia. See also List of financial regulatory authorities by country.

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Pension fund
A pension fund is any plan, fund, or scheme which provides retirement income.Pension funds are important shareholders of listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold about $6 trillion in assets.
[1]

In January 2008, The Economist reported that Morgan Stanley estimates that pension

funds worldwide hold over US$20 trillion in assets, the largest for any category of investor ahead of mutual funds, insurance companies, currency reserves, sovereign wealth funds, hedge funds, or private equity.
[2]

Although the (Japan) Government Pension Investment Fund (GPIF) lost 0.25 percent,

in the year ended March 31, 2011 GPIF was still the world's largest public pension fund which oversees 114 trillion Yen ($1.5 trillion)

Classifications
[edit]Open

vs. closed pension funds


[4]

Open pension funds support at least one pension plan with no restriction on membership while closed pension funds support only pension plans that are limited to certain employees. Closed pension funds are further subclassified into: Single employer pension funds Multi-employer pension funds Related member pension funds Individual pension funds

[edit]Public

vs. private pension funds

A public pension fund is one that is regulated under public sector law while a private pension fund is regulated under private sector law. In certain countries the distinction between public or government pension funds and private pension funds may be difficult to assess. in others, the distinction is made sharply in law, with very specific requirements for administration and investment. For example, local governmental bodies in the United States are subject to laws passed by the states in which those

localities exist, and these laws include provisions such as defining classes of permitted investments and a minimum municipal obligation.
[5]

Building society
A building society is a financial institution owned by its members as a mutual organization. Building societies offer banking and related financial services, especially mortgage lending. These institutions are found in the United Kingdom (UK) and several other countries. The term "building society" first arose in the 18th century in Great Britain from cooperative savings groups. In the UK today, building societies actively compete with banks for most consumer banking services, especially mortgage lending and deposits. Every building society in the UK is a member of the Building Societies Association. At the start of 2008, there were 59 building societies in the UK, with total assets exceeding 360 billion.
[1]

The number of

societies in the UK fell by four during 2008 due to a series of mergers brought about, to a large extent, by the consequences of the financial crisis of 2007-2010. With three further mergers in each of 2009 and 2010, and a demutualisation and a merger in 2011, the current number of building societies is at 47.

Money Market Concept, Meaning Definitions of Money Market


Following definitions will help us to understand the concept of money market.According to Crowther, "The money market is a name given to the various firms and institutions that deal in the various grades of near money." According to the RBI, "The money market is the centre for dealing mainly of short character, in monetary assets; it meets the short term requirements of borrowers and provides liquidity or cash to the lenders. It is a place where short term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the government." According to Nadler and Shipman, "A money market is a mechanical device through which short term funds are loaned and borrowed through which a large part of the financial transactions of a particular country or world are degraded. A money market is distinct from but supplementary to the commercial banking system." These definitions help us to identify the basic characteristics of a money market. A money market comprises of a well organized banking system. Various financial instruments are used for transactions in a money market. There is perfect mobility of funds in a money market. The transactions in a money market are of short term nature.

Functions of Money Market


Money market is an important part of the economy. It plays very significant functions. As mentioned above it is basically a market for short term monetary transactions. Thus it has to provide facility for adjusting liquidity to the banks, business corporations, non-banking financial institutions (NBFs) and other financial institutions along with investors. The major functions of money market are given below:1. To maintain monetary equilibrium. It means to keep a balance between the demand for and supply of money for short term monetary transactions.

2. 3. 4. 5. 6.

To promote economic growth. Money market can do this by making funds available to various units in the economy such as agriculture, small scale industries, etc. To provide help to Trade and Industry. Money market provides adequate finance to trade and industry. Similarly it also provides facility of discounting bills of exchange for trade and industry. To help in implementing Monetary Policy. It provides a mechanism for an effective implementation of the monetary policy. To help in Capital Formation. Money market makes available investment avenues for short term period. It helps in generating savings and investments in the economy. Money market provides non-inflationary sources of finance to government. It is possible by issuing treasury bills in order to raise short loans. However this dose not leads to increases in the prices.

Apart from those, money market is an arrangement which accommodates banks and financial institutions dealing in short term monetary activities such as the demand for and supply of money. There are two types of financial markets viz., the money market and the capital market. The money market in that part of a financial market which deals in the borrowing and lending of short term loans generally for a period of less than or equal to 365 days. It is a mechanism to clear short term monetary transactions in an economy.

Structure of Indian Money Market - Chart

The entire money market in India can be divided into two parts. They are organised money market and the unorganized money market. The unorganised money market can also be known as an unauthorized money market. Both of these components comprise several constituents. The following chart will help you in understanding the organisational structure of the Indian money market.

Components, SubMarkets of Indian Money Market

After studying above organisational chart of the Indian money market it is necessary to understand various components or sub markets within it. They are explained below. 1. Call Money Market : It an important sub market of the Indian money market. It is also known as money at call and money at short notice. It is also called inter bank loan market. In this market money is demanded for extremely short period. The duration of such transactions is from few hours to 14 days. It is basically located in the industrial and commercial locations such as Mumbai, Delhi, Calcutta, etc. These transactions help stock brokers and dealers to fulfill their financial requirements. The rate at which money is made available is called as a call rate. Thus rate is fixed by the market forces such as the demand for and supply of money. 2. Commercial Bill Market : It is a market for the short term, self liquidating and negotiable money market instrument. Commercial bills are used to finance the movement and storage of agriculture and industrial goods in domestic and foreign markets. The commercial bill market in India is still underdeveloped. 3. Treasury Bill Market : This is a market for sale and purchase of short term government securities. These securities are called as Treasury Bills which are promissory notes or financial bills issued by the RBI on behalf of the Government of India. There are two types of treasury bills. (i) Ordinary or Regular Treasury Bills and (ii) Ad Hoc Treasury Bills. The maturity period of these securities range from as low as 14 days to as high as 364 days. They have become very popular recently due to high level of safety involved in them. 4. Market for Certificate of Deposits (CDs) : It is again an important segment of the Indian money market. The certificate of deposits is issued by the commercial banks. They are worth the value of Rs. 25 lakh and in multiple of Rs. 25 lakh. The minimum subscription of CD should be worth Rs. 1 Crore. The maturity period of CD is as low as 3 months and as high as 1 year. These are the transferable investment instrument in a money market. The government initiated a market of CDs in order to widen the range of instruments in the money market and to provide a higher flexibility to investors for investing their short term money. 5. Market for Commercial Papers (CPs) : It is the market where the commercial papers are traded. Commercial paper (CP) is an investment instrument which can be issued by a listed company having working capital more than or equal to Rs. 5 cr. The CPs can be issued in multiples of Rs. 25 lakhs. However the minimum subscription should at least be Rs. 1 cr. The maturity period for the CP is minimum of 3 months and maximum 6 months. This was introcuced by the government in 1990. 6. Short Term Loan Market : It is a market where the short term loan requirements of corporates are met by the Commercial banks. Banks provide short term loans to corporates in the form of cash credit or in the form of overdraft. Cash credit is given to industrialists and overdraft is given to businessmen. 7. Dichotomic Structure : It is a significant aspect of the Indian money market. It has a simultaneous existence of both the organized money market as well as unorganised money markets. The organized money market consists of RBI, all scheduled commercial banks and other recognized financial institutions. However, the unorganized part of the money market comprises domestic money lenders, indigenous bankers, trader, etc. The organized money market is in full control of the RBI. However, unorganized money market remains outside the RBI control. Thus both the organized and unorganized money market exists simultaneously. 8. Seasonality : The demand for money in Indian money market is of a seasonal nature. India being an agriculture predominant economy, the demand for money is generated from the agricultural operations. During the busy season i.e. between October and April more agricultural activities takes place leading to a higher demand for money. 9. Multiplicity of Interest Rates : In Indian money market, we have many levels of interest rates. They differ from bank to bank from period to period and even from borrower to borrower. Again in both organized and

unorganized segment the interest rates differs. Thus there is an existence of many rates of interest in the Indian money market. 10. Lack of Organized Bill Market : In the Indian money market, the organized bill market is not prevalent. Though the RBI tried to introduce the Bill Market Scheme (1952) and then New Bill Market Scheme in 1970, still there is no properly organized bill market in India. 11. Absence of Integration : This is a very important feature of the Indian money market. At the same time it is divided among several segments or sections which are loosely connected with each other. There is a lack of coordination among these different components of the money market. RBI has full control over the components in the organized segment but it cannot control the components in the unorganized segment. 12. High Volatility in Call Money Market : The call money market is a market for very short term money. Here money is demanded at the call rate. Basically the demand for call money comes from the commercial banks. Institutions such as the GIC, LIC, etc suffer huge fluctuations and thus it has remained highly volatile. 13. Limited Instruments : It is in fact a defect of the Indian money market. In our money market the supply of various instruments such as the Treasury Bills, Commercial Bills, Certificate of Deposits, Commercial Papers, etc. is very limited. In order to meet the varied requirements of borrowers and lenders, It is necessary to develop numerous instruments.

Drawbacks of Indian Money Market

Though the Indian money market is considered as the advanced money market among developing countries, it still suffers from many drawbacks ordefects. These defects limit the efficiency of our market. Some of the important defects or drawbacks of indian money market are :1. Absence of Integration : The Indian money market is broadly divided into the Organized and Unorganized Sectors. The former comprises the legal financial institutions backed by the RBI. The unorganized statement of it includes various institutions such as indigenous bankers, village money lenders, traders, etc. There is lack of proper integration between these two segments. 2. Multiple rate of interest : In the Indian money market, especially the banks, there exists too many rates of interests. These rates vary for lending, borrowing, government activities, etc. Many rates of interests create confusion among the investors. 3. Insufficient Funds or Resources : The Indian economy with its seasonal structure faces frequent shortage of financial recourse. Lower income, lower savings, and lack of banking habits among people are some of the reasons for it. 4. Shortage of Investment Instruments : In the Indian money market, various investment instruments such as Treasury Bills, Commercial Bills, Certificate of Deposits, Commercial Papers, etc. are used. But taking into account the size of the population and market these instruments are inadequate. 5. Shortage of Commercial Bill : In India, as many banks keep large funds for liquidity purpose, the use of the commercial bills is very limited. Similarly since a large number of transactions are preferred in the cash form the scope for commercial bills are limited.

6.

Lack of Organized Banking System : In India even through we have a big network of commercial banks, still the banking system suffers from major weaknesses such as the NPA, huge losses, poor efficiency. The absence of the organized banking system is major problem for Indian money market.

7.

Less number of Dealers : There are poor number of dealers in the short-term assets who can act as mediators between the government and the banking system. The less number of dealers leads tc the slow contact between the end lender and end borrowers.

These are some of the major drawbacks of the Indian money market; many of these are also the features of our money market.

Recent Reforms in Indian Money Market

Indian Government appointed a committee under the chairmanship ofSukhamoy Chakravarty in 1984 to review the Indian monetary system. Later,Narayanan Vaghul working group and Narasimham Committee was also set up. As per the recommendations of these study groups and with the financial sector reforms initiated in the early 1990s, the government has adopted following major reforms in the Indian money market. Reforms made in the Indian Money Market are:1. Deregulation of the Interest Rate : In recent period the government has adopted an interest rate policy of liberal nature. It lifted the ceiling rates of the call money market, short-term deposits, bills rediscounting, etc. Commercial banks are advised to see the interest rate change that takes place within the limit. There was a further deregulation of interest rates during the economic reforms. Currently interest rates are determined by the working of market forces except for a few regulations. 2. Money Market Mutual Fund (MMMFs) : In order to provide additional short-term investment revenue, the RBI encouraged and established the Money Market Mutual Funds (MMMFs) in April 1992. MMMFs are allowed to sell units to corporate and individuals. The upper limit of 50 crore investments has also been lifted. Financial institutions such as the IDBI and the UTI have set up such funds. 3. Establishment of the DFI : The Discount and Finance House of India (DFHI) was set up in April 1988 to impart liquidity in the money market. It was set up jointly by the RBI, Public sector Banks and Financial Institutions. DFHI has played an important role in stabilizing the Indian money market. 4. Liquidity Adjustment Facility (LAF) : Through the LAF, the RBI remains in the money market on a continue basis through the repo transaction. LAF adjusts liquidity in the market through absorption and or injection of financial resources. 5. Electronic Transactions : In order to impart transparency and efficiency in the money market transaction the electronic dealing system has been started. It covers all deals in the money market. Similarly it is useful for the RBI to watchdog the money market. 6. 7. Establishment of the CCIL : The Clearing Corporation of India limited (CCIL) was set up in April 2001. The CCIL clears all transactions in government securities, and repose reported on the Negotiated Dealing System. Development of New Market Instruments : The government has consistently tried to introduce new shortterm investment instruments. Examples: Treasury Bills of various duration, Commercial papers, Certificates of Deposits, MMMFs, etc. have been introduced in the Indian Money Market.

These are major reforms undertaken in the money market in India. Apart from these, the stamp duty reforms, floating rate bonds, etc. are some other prominent reforms in the money market in India. Thus, at the end we can conclude that the Indian money market is developing at a good speed

Non-Performing Assets (NPA) - Meaning


Non-Performing Assets are popularly known as NPA. Commercial Banksassets are of various types. All those assets which generate periodical income are called as Performing Assets (PA). While all those assets which do not generate periodical income are called as Non-Performing Assets (NPA). If the customers do not repay principal amount and interest for a certain period of time then such loans become nonperforming assets (NPA). Thus non-performing assets are basically non-performing loans. In India, the time frame given for classifying the asset as NPA is 180 days as compared to 45 days to 90 days of international norms.

India and Non-Performing Assets


In India, NPA were very high in the beginning of 90's. Over a period of time there is considerable decline in the NPA's of all banks. In the case of public sector banks, gross non-performing assets were 9.4% in 2002-03 and it declined to 7.8% in 2003-04. The net NPA during the same period declined from 4.5% to 3%.

Types of NPA
NPA have been divided or classified into following four types:1. Standard Assets : A standard asset is a performing asset. Standard assets generate continuous income and repayments as and when they fall due. Such assets carry a normal risk and are not NPA in the real sense. So, no special provisions are required for Standard Assets. 2. 3. 4. Sub-Standard Assets : All those assets (loans and advances) which are considered as non-performing for a period of 18 months are called as Sub-Standard assets. Doubtful Assets : All those assets which are considered as non-performing for period of more than 18 months are called as Doubtful Assets. Loss Assets : All those assets which cannot be recovered are called as Loss Assets. These assets can be identified by the Central Bank or by the Auditors.

Provision on types of assets


Provision is allocating money every year to meet possible future loss.

Causes of NPA
NPA arises due to a number of factors or causes like:1. 2. Speculation : Investing in high risk assets to earn high income. Default : Willful default by the borrowers.

3. 4. 5. 6.

Fraudulent practices : Fraudulent Practices like advancing loans to ineligible persons, advances without security or references, etc. Diversion of funds : Most of the funds are diverted for unnecessary expansion and diversion of business. Internal reasons : Many internal reasons like inefficient management, inappropriate technology, labour problems, marketing failure, etc. resulting in poor performance of the companies. External reasons : External reasons like a recession in the economy, infrastructural problems, price rise, delay in release of sanctioned limits by banks, delays in settlements of payments by government, natural calamities, etc.

Balance of Payments of a Country - Introduction


The balance of payments of a country is a systematic record of all transactions between the residents of a country and the rest of the world carried out in a specific period of time. Image Credits Jenn. India's balance of payment worsened in the early 1990's but now the situation is under control. In fact, India has a good foreign exchange reserves mainly due to capital inflows from foreign financial institutions or the stock exchange.

Summary of India's Balance of Payments (BoP)


Table below indicates India's BoP position in between 1990-91 to 2005-06.

Main Components of India's Balance of Payments

1. Trade Balance

Trade balance was in deficit through out the period shown in the table as imports always exceeded the exports. Within the imports the POL items constituting a sizeable position continued to increase throughout. Exports did not achieve the required growth rate. Trade deficit in 2005-06 stood at $ -51,841 billion US $.

2. Current Account

Current account balance includes visible items (trade balance) and invisibles is in a more encouraging position. It declined to $ -2,666 million in 2000-01 from $-9680 million in 1990-91 and recorded a surplus in 2003-04 to the extent of $ 14,083 million. In 2005-06, once again there was a deficit of $ 9,186 million. The main reason for the improvement during 2001-05 was the success of invisible items.

3. Invisible

The impressive role placed by invisibles in covering trade deficit is due to sharp rise invisible receipts. The main contributing factor to rise in invisible receipts are non factor receipts and private transfers. As far as non factor services receipts are concerned the main development has been the rapid increase in the exports of software services. As far as private transfers are concerned their main constituent is workers remittance from abroad. During this period the private transfer receipts also increased from $ 2,069 million in 1990-91 to $ 24,102 million in 2005-06. The current trend of outsourcing a number of jobs by the developed countries to the developing ones is also helping us to get more jobs and earn additional foreign exchange.

4. Capital Account

Capital account has been positive throughout the period. NRI deposits and foreign investment both portfolio and direct have helped to a great extent. The main reasons for huge increase in capital account is due to large capital inflows on account of Foreign direct investment (FDI); Foreign Institutional Investors (FIIs) investment on the stock

markets and also by way of Euro equities raised by Indian firms. The Non-resident deposit also form a part of capital account.

5. Reserves

Reserves have changed during this period depending on a balance between current and capital account. An increase in inflow under capital account has helped us to build up our foreign exchange reserve making the country quiet comfortable on this count. In April 2007 we had $ 203 billion foreign exchangereserves. The year 2005-06 registered the highest trade deficit so far running into $ 51,841 million, because of rising Oil prices; As a result despite impressive positive earnings of as much as $ 42,655 million from invisibles, the current account deficit in this year was $ 9,189 million which is 1.1% of GDP.

Conclusion

The balance of payment situation started improving since 1992-93. There was a satisfactory balance of payment position in that period; the reasons are (i) High earnings from invisibles, (ii) Rise in external commercial borrowings, and (iii) Encouragement to foreign direct investment. The positive earnings from invisibles covered a substantial part of trade deficit and current account deficit reduced significantly. The external commercial borrowings was extensively used to finance the current account deficit. The net non resident deposits were positive through out the ten year period. There has been a growing strength in India's balance of payment position in the post reform period inspite of growing trade deficit and current account deficit.

Fiscal Responsibility and Budget Management FRBM Act 2003


Concerned over the worsening of fiscal situation, in 2000, the Government of India had set up a committee to recommend draft legislation for fiscal responsibility. Based on the recommendations of the Committee, Government of India introduced the Fiscal Responsibility and Budget Management (FRBM) Bill in December 2000. In this Bill numerical targets for various fiscal indicators were specified. The Bill was referred to the Parliamentary Standing Committee on Finance. The Standing Committee recommended that the numerical targets proposed in the Bill should be incorporated in the rules to be framed under the Act. Taking into account the recommendations of the Standing Committee, a revised Bill was introduced in April 2003. The Bill was passed in Lok Sabha in May 2003 and in Rajya Sabha in August 2003. After receiving the assent of the President, it became an Act in August 2003. The FRBM Act 2003 was further amended.The FRBM Bill / Act provides rules for fiscal responsibility of the Central Government. The FRBM Act 2003 (as amended) became effective from July 5, 2004. Under this Act, Rules are framed relating to fiscal responsibility of the Central Government, which came into force on 5th July 2004.

Objectives of FRBM Act 2003

The main objectives of FRBM Bill / Act are :1. 2. 3. To reduce fiscal deficit To adopt prudent debt management. To generate revenue surplus.

Features of FRBM Act 2003

1. Revenue Deficit

The first important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that the central government should take certain specific measures related with reduction of revenue deficit. Measures relating to reduction of revenue deficits are:1. 2. 3. The government should reduce revenue deficit by an amount equivalent to 0.5 percent or more of the GDP at the end of each financial year, beginning with 2004-2005. The revenue deficit should be reduced to zero within a period of five years ending on March 31, 2009. Once revenue deficit becomes zero the central government should build up surplus amount of revenue which it may utilised for discharging liabilities in excess of assets.

2. Fiscal Deficit

The second important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that the central government should take certain specific measures related with reduction of fiscal deficit. Measures relating to reduction of fiscal deficits are:1. 2. The government should reduce Gross fiscal deficit by an amount equivalent to 3.3% or more of the GDP at the end of each financial year, beginning with 2004-2005. The central government should reduce Gross Fiscal deficit to an amount equivalent to 2% of GDP upto March 31 2006.

3. Exceptional Grounds

The third important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that it clearly stated that the revenue deficit and fiscal deficit of the government may exceed the targets specified in the rules only on the grounds of national security or national calamity faced by the country.

4. Public Debt

The fourth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that the central government should ensure that the total liabilities (including external debt at current exchange rate) should not exceed 9% of GDP for the financial year 2004-2005. There should be progressive reduction of this limit by atleast one percentage point of GDP in each subsequent year.

5. Borrowing from the RBI

The fifth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is related with borrowings done by central government from R.B.I. The Amended FRBM bill 2000 or FRBM Act 2003 clearly states that the central government shall not normally borrow from the R.B.I. However the central government may borrow from R.B.I. by way of advances to meet temporary excess of cash payments over the cash receipts during any financial year in accordance with the agreements which may entered into by the government with the R.B.I.

6. Fiscal Transparency

The sixth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is related with fiscal transparency. The Amended FRBM bill 2000 or FRBM Act 2003 clearly stated two important measures to ensure greater transparency in fiscal operations of the government. These two important features are as follows :1. 2. The central government should minimize as far as possible secrecy in preparation of annual budget. The central government at the time of presentation of the annual budget shall disclose the significant changes in accounting standards, policies and practices likely to affect the computation of fiscal indicators.

7. Limit On Guarantees

The seventh important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that it restricts the guarantees given by the central government to 0.5% of GDP in any financial year beginning with 2004-2005.

8. Medium term fiscal policy statement

The eighth important feature of amended FRBM bill 2000 or FRBM Act 2003 is that the central government should present medium term fiscal policy statement in both houses of parliament along with annual financial statement. The medium term fiscal policy statement should project specifically for important fiscal indicators. These fiscal indicators are as follows :1. 2. 3. 4. Revenue deficit as percentage of GDP. Fiscal deficit as percentage of GDP. Tax revenue as percentage of GDP. Total outstanding liabilities as percentage of GDP.

9. Compliance of rules

Finally the ninth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is related with measures to enforce compliance of rules. These measures are as follows :1. 2. 3. 4. The FRBM bill clearly states that the Finance Minister shall review every quarter, the trends in receipts and expenditure in relation with the budget and place it before both houses of parliament the outcome of such reviews. The finance minister shall also make statement in both houses of parliament if there is any deviations in meeting the obligations of the central government. If deviations are substantial then the Finance Minister will declare the remedial measures which the central government proposes to take in future period of time. The rules mandate the central government to take appropriate corrective action in case of revenue & fiscal deficit exceeding 45% of the budget estimates or total non-debt receipts falling short of 40% of the budget estimates at the end of first half of the financial year.

10. Task force on implementation of FRBM Act

Following the enactment of FRBM Act, Government constituted a Task Force headed by Dr. Vijay Kelkar for drawing up the medium term framework for fiscal policies to achieve the FRBM targets. The task force proposed the following measures :1. 2. Widening the tax base through removal of exemptions. An All-India goods and service-tax (GST) on the basis of a "grand bargain" with States, whereby States will have the concurrent powers to tax service, subject to certain principles that will help foster a national common market. 3. 4. Income tax exemption limit to be increased to Rs.1,00,000. A two-tire rate structure of 20 percent tax for income of Rs. 1,00,000 to Rs. 4,00,000 and 30% for income above Rs. 4,00,000 for individuals and elimination of standard deduction available to the salaried taxpayer.

5. 6. 7. 8.

A reduction in the corporate income tax to 30% for domestic companies and the reduction in depreciation rates from 25 to 15%. A 3-tier custom duty rates of 5, 8 and 10% to bring down tariffs to ASEAN levels. Allocation of greater portion of expenditure to legitimate public goods by revisiting the classification of expenditure. Empowering panchayats / local bodies through reserve transfer.

The task force stated that under the reforms measures recommended by it, tax GDP ratio of the central government should be raised from 9.2% in 2003 to 13.2% of GDP in 2008-09. A revenue surplus of 0.2% of GDP is estimated to emerge in 2008-09. Fiscal deficit estimated to fall from 4.8% of GDP in 2003-04 to 2.8% of GDP in 2008-09. The above features of Amended FRBM bill 2000 or Fiscal Responsibility and Budget Management Act 2003 clearly points out that the government intends to create a strong institutional mechanism to restore fiscal discipline at the level of the central government. Similarly the government wants to introduce greater transparency in fiscal operations of the central government.

Criticism / Limitations of FRBM Act 2003

Though the Fiscal Responsibility and Budget Management Act 2003 or Amended FRBM bill 2000 is a credible effort by the government to fix responsibility on the government to reduce fiscal deficit and bring transparency in fiscal operations of the government it has certain limitations. These limitations of Amended FRBM Bill 2000 or FRBM Act pointed out by various economists are as follows :-

1. Target regarding GFD very stringent

The Bill stipulates that by March 31, 2006, the Gross Fiscal Deficit (GFD) as a proportion of GDP must be 2%. This, of course, means that the government can borrow from the economy only to the extent of 2% of GDP, whatever be the level of savings. Given the present need of government borrowings, 2% limit is very low. The increase in public investment helps to increase the level of effective demand and increases private investment in the economy. According to Dr. Raja Chelliah the ratio of Gross Fiscal Deficit (GFD) to GDP should be 4% to 5% of GDP as public investment on infrastructure sector is essential to boost economic growth.

2. Neglect of equity and growth

According to critics the Amended FRBM Bill 2000 or FRBM Act 2003 is heavily loaded against investment in both human development and infrastructure sector. One of the major ommission of amended FRBM Bill 2000 or FRBM Act

2003 was complete absence of any target for time bound minimum improvement in areas of power generation, transport, etc. which is very important both from the point of equity and higher economic growth.

3. Non-Coverage of State Governments

The provisions of the bill impose restrictions on only the central government but state governments are out of its scope. But, deficits of state governments are as much or even a greater problem. For instance, the State of Maharashtra has already crossed the deficit of Rs. 1 lakh crore as on December 2004 (the second State after Up to cross deficit of Rs. 1 lakh crore). Therefore, there is a need for fiscal responsibility legislation for the State Governments as well.

4. Neglect of Development Needs

Today, the levels of capital expenditures by the government are miserably low in India. These capital expenditures increase the efficiency and productivity of private investment and thus contribute to the development process in the country. If Revenue Deficit is to be reduced to zero and GFD to be 2% of GDP as per the requirement of FRBM Bill, it is the capital expenditure which will be sacrificed and thus will hinder further development of the country.

5. Need to Increase Revenue

Revenue deficits are determined by the interplay of expenditure and revenues, both tax and non-tax. Too often, attention gets focused only on the expenditure side of the identity to the neglect of the revenue side. Increasing nontax revenue requires that public sector services be appropriately priced, which may be difficult as the present society has got used to the subsidised education, health, food items, etc.

6. Neglect of Social Sector

The FRBM bill does not mention anything relating to social sector development. However, investment in social sector such as health, education, etc is very vital for the economic development of the nation.

7. Problem of Subsidies

The government may be able to reduce revenue deficit by reducing subsidies. However, it is quite likely that the government will be under severe pressure to continue the subsidies. It means the expenditure on the productive areas may be reduced due to subsidies.

8. Stable Growth Deficit

Chelliah points out that given the household financial savings in India, the overall fiscal deficit termed as stable growth deficit of the government sector as a whole should be pegged at 6% of GDP with revenue deficit being gradually phased out. Thus, the target of 2% of fiscal deficit GDP ratio stated in FRBM bill is not desirable from the point of view of productive investment according to Chelliah.

9. False Assumptions

The FRBM Bill is based on the following assumptions :1. 2. 3. Lower fiscal deficit lead to higher growth. Larger fiscal deficit lead to higher inflation Larger fiscal deficit increase external vulnerability of the economy.

These assumptions have been rejected by C.P. Chandrashekhar and Jayanti Ghosh who have given the following arguments :1. 2. 3. If the deficit is in the form of capital expenditure it would contribute to future growth. Fiscal deficit is not only the cause for higher inflation. During the late 1990s the rate of inflation has fallen even when the fiscal deficit was as high as 5.5% of GDP. Higher fiscal deficit need not necessarily cause external crisis. The external vulnerability depends more on capital and trade account convertibility. In India we have managed to build large foreign exchange reserves, though fiscal deficit has not come down.

Conclusion on FRBM Act 2003

The Amended FRBM Bill 2000 or FRBM Act 2003 despite above criticism can play a very important role in controlling fiscal deficit and in bringing transparency in fiscal operation of the government if it is implemented effectively in letter and spirit by the concerned government.

Meaning of Foreign Exchange Market


The term market has been interpreted in Economics as the place where both the buyers as well as the sellers meet and they buy and or sell goods. The foreign exchange market is a place where the transactions in foreign exchange are conducted. In practical world the external transaction requires the use of foreign purchasing power i.e. foreign currency. The foreign exchange market facilitates such transactions by performing number of functions.

Definitions of Foreign Exchange Market

According to Paul Einzig, "The foreign exchange market is the system in which the conversion of one national currency in to another takes place with transferring money from one country to another." According to Kindleberger, "It is place where foreign moneys are bought and sold." In simple words, the foreign exchange market is a market in which national currencies are bought and sold against one another. There are large numbers of foreign transactions such as buying goods abroad, visiting foreign country for any purpose. Corresponding nation in whose currency the transaction is to be fulfilled. The foreign exchange market provides the foreign currency against any national currency. However, it is to be understood that unlike other markets, this market is not restricted to any particular country or any geographic area. There are large numbers of dealers' instruments such as exchange bills, bank drafts, telegraphic transfers (TT), etc. There are certain other dealers such as brokers, acceptance houses as well as the central bank and treasury of the nation.

Functions of Foreign Exchange Market

(A) Transfer Function : As mentioned above, the foreign exchange markets are exchange markets engaged in transferring the purchasing power between two nations and two currencies. It is prime function of this market. In simple terms, it is conversion of one currency into another such as converting Indian Rs. into U.S. $ and vice versa at some rate. Various instruments like bank drafts, exchange bills, are used for transferring the purchasing power. In this regard international clearing to both the direction is important to because it simplifies the conduct of international trade as well as capital movements from one country to another.

(B) Credit Function : Under this function the foreign exchange market provides credit to the traders such as exporters and importers. Exporters can get credit such as reshipment and post-shipment credit. Recently started Euro-Dollar market is a leading credit market at international level. This function of making credit available plays a crucial role in growth and expansion of the international trade.

(C) Hedging : Hedging is a specific function. Under this function the foreign exchange market tries to protect the interest of the persons dealing in the market from any unforeseen changes in the exchange rate. The exchange rates (price of one currency expressed in another currency) under free market situation can go up and down. This can either bring gains or losses to the concerned parties. Foreign exchange market guards the interest of both exports as well as importers, against any changes in the exchange rate.

Thus, these are various functions performed by the foreign exchange market. To perform above functions it uses the following instruments.

Instruments of Foreign Exchange Market

The instruments, with the help of which the international payments are effected. They are, 1. 2. Cheques and Bank Drafts : Persons dealing with foreign exchanges can use bank cheques as well as bank drafts in order to make payments. The cheque is drawn on particular bank instead of a person. Bills of Exchange : It is also called as foreign bill of exchange which is an unconditional order in writing addressed by one person to another. It mentions the person to whom a certain sum is to be paid either on demand or on specific date. 3. 4. Mail Transfer (MT) : Under this, funds are transferred from one account of a destination to the another destination in the nation by mail. For international payments air-mail is used. Telegraphic Transfers (TT) : By this method a sum can be transferred from one place to another place in the world by cable or telex. This is the quickest method of transferring fund from one place to another. Thus, these are various instruments / methods used for inflecting International payments.

Meaning of Exchange Rate

Image Credits Daniel_isBORED

The concept of exchange rate has great significance because in case of the open economy transactions there is an existing of at least two currency. Exchange rate refers to the price of one national currency expressed in terms of any other foreign currency. External economic transactions need an essential symmetry between two currencies

Definition of Exchange Rate

Exchange Rate can be defined as, "the amount of the foreign currency that may be bought for one unit of the domestic currency." It can also be defined as, "the cost in domestic currency of purchasing one unit of the foreign currency." Suppose the exchange rate between Indian Rupee and the U.S. Dollar is expressed as Re. 1 = $0.0211227 or $ 1 = Rs.47. It simply means the value of one Indian Rupee is 0.02127 dollars or in other words one dollar costs Rs.47. Thus, exchange rate is the price of one currency expressed in any other currency. In order to simplify the fulfillment of international transactions an expression of exchange rate is must in external economic transactions. Suppose an Indian importer wish to import goods from New York, then he must convert his Indian rupees in to U.S. dollars in order to make payments. However, on the other side when the U.S. importer buys goods in India, then he has to convert U.S. dollars in to the Indian Rupees. The rate at which this conversion takes place is called as an exchange rate. How this symmetry between two currencies is expressed i.e. how the exchange rate is determined is mentioned in the next section. However, it is to be understood that there are two fundamental types of the exchange rates.

Two Fundamental Types of the Exchange Rates

(A) Spot Exchange Rate : This refers to the price of foreign exchange in terms of domestic money payable for the immediate delivery of particular foreign currency. It is an existing or day-to-day exchange rate. It is an exchange of currencies on the spot. In simple words that rate of exchange, which is effective for spot transactions is known as the spot exchange rate.

(B) Forward Exchange Rate : There are several future transactions whose delivery would be made sometime in the future. The rates at which these transactions are consummated are called as forward rate of exchange. It is the rate fulfilling the agreement between two parties based on future delivery of goods. The exchange rate which is applicable for forward transaction is called as forward exchange rate. The forward rate is expressed at par, at premium and at a discount.

Theories for Determination of Exchange Rate

Three important thoeries for the exchange rate determination are. 1. Mint Parity Theory (Gold Standard) : However, the gold standard had collapsed during the First World War (1914 - 1918). Under the mint parity the exchange rate was determined on a weight-to-weight basis of the two currencies. However, after the break-down of the gold standard, there was confusion in determination of the exchange rate. Gustav Cassel a Swedish economist enunciated the theory of determination of the equilibrium exchange rate which was based in the parity between two currencies of the countries. 2. Purchasing Power Parity (PPP) Theory. 3. Balance of Payment (BOP) Theory.

What is Stock Exchange? Meaning


Stock Exchange (also called Stock Market or Share Market) is one important constituent of capital market. Stock Exchange is an organized market for the purchase and sale of industrial and financial security. It is convenient place where trading in securities is conducted in systematic manner i.e. as per certain rules and regulations. It performs various functions and offers useful services to investors and borrowing companies. It is an investment intermediary and facilitates economic and industrial development of a country. Image Credits Niyantha Stock exchange is an organized market for buying and selling corporate and other securities. Here, securities are purchased and sold out as per certain well-defined rules and regulations. It provides a convenient and secured mechanism or platform for transactions in different securities. Such securities include shares and debentures issued by public companies which are duly listed at the stock exchange, and bonds and debentures issued by government, public corporations and municipal and port trust bodies.

Stock exchanges are indispensable for the smooth and orderly functioning of corporate sector in a free market economy. A stock exchange need not be treated as a place for speculation or a gambling den. It should act as a place for safe and profitable investment, for this, effective control on the working of stock exchange is necessary. This will avoid misuse of this platform for excessive speculation, scams and other undesirable and anti-social activities. London stock exchange (LSE) is the oldest stock exchange in the world. While Bombay stock exchange (BSE) is the oldest in India. Similar Stock exchanges exist and operate in large majority of countries of the world.

Definitions of Stock Exchange

According to Husband and Dockerary, "Stock exchanges are privately organized markets which are used to facilitate trading in securities." The Indian Securities Contracts (Regulation) Act of 1956, defines Stock Exchange as, "An association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities."

Features of Stock Exchange

Characteristics or features of stock exchange are:1. 2. Market for securities : Stock exchange is a market, where securities of corporate bodies, government and semi-government bodies are bought and sold. Deals in second hand securities : It deals with shares, debentures bonds and such securities already issued by the companies. In short it deals with existing or second hand securities and hence it is called secondary market. 3. Regulates trade in securities : Stock exchange does not buy or sell any securities on its own account. It merely provides the necessary infrastructure and facilities for trade in securities to its members and brokers who trade in securities. It regulates the trade activities so as to ensure free and fair trade 4. Allows dealings only in listed securities : In fact, stock exchanges maintain an official list of securities that could be purchased and sold on its floor. Securities which do not figure in the official list of stock exchange are called unlisted securities. Such unlisted securities cannot be traded in the stock exchange. 5. Transactions effected only through members : All the transactions in securities at the stock exchange are effected only through its authorised brokers and members. Outsiders or direct investors are not allowed to enter in the trading circles of the stock exchange. Investors have to buy or sell the securities at the stock exchange through the authorised brokers only. 6. Association of persons : A stock exchange is an association of persons or body of individuals which may be registered or unregistered.

7. 8.

Recognition from Central Government : Stock exchange is an organised market. It requires recognition from the Central Government. Working as per rules : Buying and selling transactions in securities at the stock exchange are governed by the rules and regulations of stock exchange as well as SEBI Guidelines. No deviation from the rules and guidelines is allowed in any case.

9.

Specific location : Stock exchange is a particular market place where authorised brokers come together daily (i.e. on working days) on the floor of market called trading circles and conduct trading activities. The prices of different securities traded are shown on electronic boards. After the working hours market is closed. All the working of stock exchanges is conducted and controlled through computers and electronic system.

10.

Financial Barometers : Stock exchanges are the financial barometers and development indicators of national economy of the country. Industrial growth and stability is reflected in the index of stock exchange.

Introduction - Balance of Payments (BOP) Theory

BOP is yet another important theory of exchange rate determination. It is also known as General Equilibrium Theory. According to this theory, when there is free market situation, the exchange rates are determined by the market forces i.e. demand for and supply of the foreign exchange. This theory is based on simple market mechanism in which the price of any commodity is determined.

Under this theory the external values cf domestic currency depends on the demand for and the supply of the currency. The Nation's overall Balance of Payments (BOP) can either be in surplus or in deficits. When the nation's BOP is in deficits, the exchange rate depreciates, and when BOP is in surplus, there will be healthy foreign exchange reserves, leading to the appreciation of the home currency. Under deficits in the BOP, residents of a country in question demands foreign currency, excessively leading to excess demand for foreign currency in terms of home currency. However, under surplus BOP situation there is an excess demand for home currency from foreigners than the actual supply of home currency. Due to this price of home currency in terms of concerned foreign currency rises, i.e. exchange rate improves or appreciates. Thus according to this theory the exchange rate is basically determined by the demand for and the supply of foreign currency in concerned nations.

The BOP theory of exchange rate determination is more satisfaction is more satisfactory than the PPP theory of exchange rate determination. It is because BOP theory recognizes the significance of all items in the BOP rather than few items selected under the PPP theory. The BOP theory is like the general equilibrium theory, under which market farces determines the value of the commodity.

According to this theory the BOP disequilibrium can be corrected by adjusting the exchange rate in either direction i.e. devaluation or revaluation. However, this theory has a drawback like it ignores the impact of exchange rate on the BOP.

Methods Used To Determine Exchange Rates

Read comprehensive tutorial on Charles Sturt Univeristy's Website to understand which methods are used to determine exchange rates.

Limitations or Demerits of BOP Theory

Although BOP theory is superior to the PPP theory, still it is not free from demerits. The BOP theory is based on the unrealistic assumption such as perfect competition in foreign exchange market. Also BOP theory ignores the link between domestic price level and exchange rate determination. The BOP positions on exchange rate however the exchange rate can also influence the BOP position.

Final Conclusion

Thus, despite these demerits; the BOP theory is more satisfactory or superior to the PPP theory of exchange rate determination

Functions of Stock Exchange - Main Functions In The Market


1. Continuous and ready market for securities
Stock exchange provides a ready and continuous market for purchase and sale of securities. It provides ready outlet for buying and selling of securities. Stock exchange also acts as an outlet/counter for the sale of listed securities.

2. Facilitates evaluation of securities

Stock exchange is useful for the evaluation of industrial securities. This enables investors to know the true worth of their holdings at any time. Comparison of companies in the same industry is possible through stock exchange quotations (i.e price list).

3. Encourages capital formation

Stock exchange accelerates the process of capital formation. It creates the habit of saving, investing and risk taking among the investing class and converts their savings into profitable investment. It acts as an instrument of capital formation. In addition, it also acts as a channel for right (safe and profitable) investment.

4. Provides safety and security in dealings

Stock exchange provides safety, security and equity (justice) in dealings as transactions are conducted as per well defined rules and regulations. The managing body of the exchange keeps control on the members. Fraudulent practices are also checked effectively. Due to various rules and regulations, stock exchange functions as the custodian of funds of genuine investors.

5. Regulates company management

Listed companies have to comply with rules and regulations of concerned stock exchange and work under the vigilance (i.e supervision) of stock exchange authorities.

6. Facilitates public borrowing

Stock exchange serves as a platform for marketing Government securities. It enables government to raise public debt easily and quickly.

7. Provides clearing house facility

Stock exchange provides a clearing house facility to members. It settles the transactions among the members quickly and with ease. The members have to pay or receive only the net dues (balance amounts) because of the clearing house facility.

8. Facilitates healthy speculation

Healthy speculation, keeps the exchange active. Normal speculation is not dangerous but provides more business to the exchange. However, excessive speculation is undesirable as it is dangerous to investors & the growth of corporate sector.

9. Serves as Economic Barometer

Stock exchange indicates the state of health of companies and the national economy. It acts as a barometer of the economic situation / conditions.

10. Facilitates Bank Lending

Banks easily know the prices of quoted securities. They offer loans to customers against corporate securities. This gives convenience to the owners of securities.

Role of Stock Exchanges In Capital Market of India

Stock Exchanges play a crucial role in the consolidation of a national economy in general and in the development of industrial sector in particular. It is the most dynamic and organised component of capital market. Especially, in developing countries like India, the stock exchanges play a cardinal role in promoting the level of capital formation through effective mobilisation of savings and ensuring investment safety.

1. Effective Mobilisation of savings

Stock exchanges provide organised market for an individual as well as institutional investors. They regulate the trading transactions with proper rules and regulations in order to ensure investor's protection. This helps to consolidate the confidence of investors and small savers. Thus, stock exchanges attract small savings especially of large number of investors in the capital market.

2. Promoting Capital formation

The funds mobilised through capital market are provided to the industries engaged in the production of various goods and services useful for the society. This leads to capital formation and development of national assets. The savings mobilised are channelised into appropriate avenues of investment.

3. Wider Avenues of investment

Stock exchanges provide a wider avenue for the investment to the people and organisations with investible surplus. Companies from diverse industries like Information Technology, Steel, Chemicals, Fuels and Petroleum, Cement, Fertilizers, etc. offer various kinds of equity and debt securities to the investors. Online trading facility has brought the stock exchange at the doorsteps of investors through computer network. Diverse type of securities is made available in the stock exchanges to suit the varying objectives and notions of different classes of investor. Necessary information from stock exchanges available from different sources guides the investors in the effective management of their investment portfolios.

4. Liquidity of investment

Stock exchanges provide liquidity of investment to the investors. Investors can sell out any of their investments in securities at any time during trading days and trading hours on stock exchanges. Thus, stock exchanges provide liquidity of investment. The on-line trading and online settlement of demat securities facilitates the investors to sellout their investments and realise the proceeds within a day or two. Even investors can switch over their investment from one security to another according to the changing scenario of capital market.

5. Investment priorities

Stock exchanges facilitate the investors to decide his investment priorities by providing him the basket of different kinds of securities of different industries and companies. He can sell stock of one company and buy a stock of another company through stock exchange whenever he wants. He can manage his investment portfolio to maximise his wealth.

6. Investment safety

Stock exchanges through their by-laws, Securities and Exchange Board of India (SEBI) guidelines, transparent procedures try to provide safety to the investment in industrial securities. Government has established the National Stock Exchange (NSE) and Over The Counter Exchange of India (OTCEI) for investors' safety. Exchange authorities try to curb speculative practices and minimise the risk for common investor to preserve his confidence.

7. Wide Marketability to Securities

Online price quoting system and online buying and selling facility have changed the nature and working of stock exchanges. Formerly, the dealings on stock exchanges were restricted to its head quarters. The investors across the country were absolutely in dark about the price fluctuations on stock exchanges due to the lack of information. But today due to Internet, on line quoting facility is available at the computers of investors. As a result, they can keep track of price fluctuations taking place on stock exchange every second during the working hours. Certain T.V. Channels like CNBC are fully devoted to stock market information and corporate news. Even other channels display the on line quoting of stocks. Thus, modern stock exchanges backed up by internet and information technology provide wide marketability to securities of the industries. Demat facility has revolutionised the procedure of transfer of securities and facilitated marketing.

8. Financial resources for public and private sectors

Stock Exchanges make available the financial resources available to the industries in public and private sector through various kinds of securities. Due to the assurance of liquidity, marketing support, investment safety assured through stock exchanges, the public issues of securities by these industries receive strong public response (resulting in oversubscription of issue).

9. Funds for Development Purpose

Stock exchanges enable the government to mobilise the funds for public utilities and public undertakings which take up the developmental activities like power projects, shipping, railways, telecommunication, dams & roads constructions, etc. Stock exchanges provide liquidity, marketability, price continuity and constant evaluation of government securities.

10. Indicator of Industrial Development

Stock exchanges are the symbolic indicators of industrial development of a nation. Productivity, efficiency, economicstatus, prospects of each industry and every unit in an industry is reflected through the price fluctuation of industrial securities on stock exchanges. Stock exchange sensex and price fluctuations of securities of various companies tell the entire story of changes in industrial sector.

11. Barometer of National Economy

Stock exchange is taken as a Barometer of the economy of a country. Each economy is economically symbolized (indicators) by its most significant stock exchange. New York Stock Exchange, London Stock Exchange, Tokyo Stock Exchange and Bombay Stock Exchange are considered as barometers of U.S.A, United Kingdom, Japan and India respectively. At both national and international level these stock exchanges represent the progress and conditions of their economies.

Thus, stock exchange serves the nation in several ways through its diversified economic services which include imparting liquidity to investments, providing marketability, enabling evaluation and ensuring price continuity of securities.

1. Bombay Stock Exchange BSE

BSE is the leading and the oldest stock exchange in India as well as in Asia. It was established in 1887 with the formation of "The Native Share and Stock Brokers' Association". BSE is a very active stock exchange with highest number of listed securities in India. Nearly 70% to 80% of all transactions in the India are done alone in BSE. Companies traded on BSE were 3,049 by March, 2006. BSE is now a national stock exchange as the BSE has started allowing its members to set-up computer terminals outside the city of Mumbai (former Bombay). It is the only stock exchange in India which is given permanent recognition by the government. At present, (Since 1980) BSE is located in the "Phiroze Jeejeebhoy Towers" (28 storey building) located at Dalal Street, Fort, Mumbai. Pin code 400021. Image Credits Vikram Walia.

In 2005, BSE was given the status of a full fledged public limited company along with a new name as "Bombay Stock Exchange Limited". The BSE has computerized its trading system by introducing BOLT (Bombay On Line Trading) since March 1995. BSE is operating BOLT at 275 cities with 5 lakh (0.5 million) traders a day. Average daily turnover of BSE is near Rs. 200 crores.

2. National Stock Exchange NSE

Formation of National Stock Exchange of India Limited (NSE) in 1992 is one important development in the Indian capital market. The need was felt by the industry and investing community since 1991. The NSE is slowly becoming the leading stock exchange in terms of technology, systems and practices in due course of time. NSE is the largest and most modern stock exchange in India. In addition, it is the third largest exchange in the world next to two exchanges operating in the USA.

Image Credits Wikimedia.

The NSE boasts of screen based trading system. In the NSE, the available system provides complete market transparency of trading operations to both trading members and the participates and finds a suitable match. The NSE does not have trading floors as in conventional stock exchanges. The trading is entirely screen based with automated order machine. The screen provides entire market information at the press of a button. At the same time, the system provides for concealment of the identify of market operations. The screen gives all information which is dynamically updated. As the market participants sit in their own offices, they have all the advantages of back office support, and facility to get in touch with their constituents. 1. 2. 3. Wholesale debt market segment, Capital market segment, and Futures & options trading.

3. Over The Counter Exchange of India OTCEI

The OTCEI was incorporated in October, 1990 as a Company under the Companies Act 1956. It became fully operational in 1992 with opening of a counter at Mumbai. It is recognised by the Government of India as a recognised stock exchange under the Securities Control and Regulation Act 1956. It was promoted jointly by the financial institutions like UTI, ICICI, IDBI, LIC, GIC, SBI, IFCI, etc.

Image Credits Siddhartha Shukla.

The Features of OTCEI are :1. 2. 3. OTCEI is a floorless exchange where all the activities are fully computerised. Its promoters have been designated as sponsor members and they alone are entitled to sponsor a company for listing there. Trading on the OTCEI takes place through a network of computers or OTC dealers located at different places within the same city and even across the cities. These computers allow dealers to quote, query & transact through a central OTC computer using the telecommunication links. 4. 5. 6. i. A Company which is listed on any other recognised stock exchange in India is not permitted simultaneously for listing on OTCEI. OTCEI deals in equity shares, preference shares, bonds, debentures and warrants. The Participants of OTCEI are :Members and dealers appointed by OTCEI,

ii. iii. iv. v. vi.

Companies whose securities are listed, Investors who trade in the OTCEI, Registrar who keeps custody of scrip certificates, Settlement Bank which clears the payment between counters, and SEBI and Government who supervise and regulate the working.

This was a brief outline of the various Stock Exchanges in India.