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History of Indian Money Market

Till 1935, when the RBI was set up the Indian money market remained highly disintegrated, unorganized, narrow, shallow and therefore, very backward. The planned economic development that commenced in the year 1951 market an important beginning in the annals of the Indian money market. The nationalization of banks in 1969, setting up of various committees such as the Sukhmoy Chakraborty Committee (1982), the Vaghul working group (1986), the setting up of discount and finance house of India ltd. (1988), the securities trading corporation of India (1994) and the commencement of liberalization and globalization process in 1991 gave a further fillip for the integrated and efficient development of India money market.

Major Players in money market:Major Players in money market The major players and their main role in the money market is listed below : Player Central Bank Government Bank Discount Houses FIs MFs FIIs Dealers Corporates Role Intermediary Barrowers/Issuers Barrowers/Issuers Market markets Barrowers/Issuers Lenders/Investors Investors Intermediaries Issuers


Central bank of the country - the Reserve Bank of India (RBI) has always been playing the major role in regulating and controlling the India money market. The intervention of RBI is varied curbing crisis situations by reducing the cash reserve ratio (CRR) or infusing more money in the economy.

The Reserve Bank of India is the largest regulator of the Indian Money Market. The Reserve Bank of India regulates the money market by controlling how much money is put into the economy and to what industries they loan funds to. This type of direct control allows the banks to invest in companies that they believe will produce the most jobs and better circulate cash.

The Role of the Reserve Bank of India in the Money Market

The Reserve Bank of India is the most important constituent of the money market. The market comes within the direct preview of the Reserve Bank of India regulations. The aims of the Reserve Banks operations in the money market are:

To ensure that liquidity and short term interest rates are maintained at levels consistent with the monetary policy objectives of maintaining price stability. To ensure an adequate flow of credit to the productive sector of the economy. To bring about order in the foreign exchange market.

The Reserve Bank of India influence liquidity and interest rates through a number of operating instruments - cash reserve requirement (CRR) of banks, conduct of open market operations (OMOs), repos, change in bank rates and at times, foreign exchange swap operations.

History of the Indian Capital market

The history of the capital market in India dates back to the eighteenth century when East India Company securities were traded in the country. The Bombay Stock Exchange was recognized in May 1927 under the Bombay Securities Contracts Control Act, 1925. In the post independence period also, the size the capital market remained small. During the first and second five year plans, the governments emphasis was on the development of the agricultural sector and public sector undertakings. The government enacted the Securities Contracts (regulation) Act in 1956 to regulate stock markets. The Companies Act, 1956 was also enacted. The 1960s was characterized by the wars and droughts in the country which led bearish trends. Financial institutions such as LIC and GIC helped to revive the sentiment by emerging as the most important group of investors. The first mutual fund of India, the Unit Trust of India (UTI) came into existence in 1964. However, the capital market received another severe setback on July 6, 1974, when the government promulgated the Dividend Restriction ordinance, restricting the payment of dividend by companies to 12 per cent of the face value. Later came buoyancy in the stock markets when the multinational companies (MNCs) were forced to dilute their majority stocks in their Indian ventures in favor of the Indian public under FERA 1973. One hundred and twenty three MNCs offered shares worth Rs 150 crore, creating 1.8 million shareholders within four years.

Players in the Indian Capital Markets

Fund Raisers are companies that raise funds from domestic and foreign sources, both public and private. The following sources help companies raise funds: Fund Providers are the entities that invest in the capital markets. These can be categorized as domestic and foreign investors, institutional and retail investors. The list includes subscribers to

primary market issues, investors who buy in the secondary market, traders, speculators, FIIs/ sub accounts, mutual funds, venture capital funds, NRIs, ADR/GDR investors, etc. Intermediaries are service providers in the market, including stock brokers, sub-brokers, financiers, merchant bankers, underwriters, depository participants, registrar and transfer agents, FIIs/ sub accounts, mutual Funds, venture capital funds, portfolio managers, custodians, etc. Organizations include various entities such as MCX-SX, BSE, NSE, other regional stock exchanges, and the two depositories National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CSDL). Market Regulators include the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and the Department of Company Affairs (DCA).

Appellate Authority: The Securities Appellate Tribunal (SAT)






SAT, regulators (SEBI, RBI, DCA, DEA), depositories, stock exchanges (with equity trading, debt market segment, derivative trading), brokers, corporate brokers, sub-brokers, FIIs, portfolio managers, custodians, share transfer agents, primary dealers, merchant bankers, bankers to an issue, debenture trustees, underwriters, venture capital funds, foreign venture capital investors, mutual funds, collective investment schemes.

Capital Market Regulations

Overview In keeping with the broad thrust of the ongoing programs of economic reform, the mechanism of administrative controls over capital issues has been dismantled and pricing of capital issues is now essentially market determined. Regulation of the capital markets and protection of investor's interest is now primarily the responsibility of the Securities and Exchange Board of India (SEBI), which is located in Bombay. Accordingly, SEBI's functions include: Regulating the business in stock exchanges and any other securities markets Registering and regulating the working of collective investment schemes, including mutual funds. Prohibiting fraudulent and unfair trade practices relating to securities markets. Promoting investor's education and training of intermediaries of securities markets. Prohibiting insider trading in securities, with the imposition of monetary penalties, on erring market intermediaries. Regulating substantial acquisition of shares and takeover of companies.

Calling for information from, carrying out inspection, conducting inquiries and audits of the stock exchanges and intermediaries and self regulatory organizations in the securities market. Keeping this in view, SEBI has issued a new set of comprehensive guidelines governing issue of shares and other financial instruments, and has laid down detailed norms for stock-brokers and sub-brokers, merchant bankers, portfolio managers and mutual funds.

On the recommendations of the Patel Committee report, SEBI on 27 July 1995, permitted carry forward deals. Some of the major features of the revised carry-forward transactions as directed by SEBI are:

Carry forward deals permitted only on stock exchanges which have screen based trading system. Transactions carried forward cannot exceed 25% of a broker's total transactions on any one day. 90-day limit for carry forward and squaring off allowed only till the 75th day (or the end of the fifth settlement). Daily margins to rise progressively from 20% in the first settlement to 50% in the fifth.

On 26 January1995, the government promulgated an ordinance amending the SEBI Act, 1992, and the Securities Contracts (Regulation) Act, 1956. In accordance with the amendment adjudicating mechanism will be created within SEBI and any appeal against this adjudicating authority will have to be made to the Securities Appellate Tribunal, which is to be separately constituted. These appeals will be heard only at the High Courts. The main features of the amendment to the Securities Contract (Regulation) Act, 1956, are: The ban on the system of options in trading has been lifted. The time limit of six months, by which stock exchanges could amend their bye-laws, has been reduced to two months. Additional trading floors on the stock exchanges can be established only with prior permission from SEBI. Any company seeking listing on stock exchanges would have to comply with the listing agreements of stock exchanges, and the failure to comply with these, or their violation, is punishable. Fraudulent and Unfair Trade Practices

SEBI is vested with powers to take action against these practices relating to securities market manipulation and misleading statements to induce sale/purchase of securities. Inspection and Enforcement

SEBI has the powers of a civil court in respect of discovery and production of books, documents, records, accounts, summoning and enforcing attendance of company/person and examining them under oath. SEBI can levy fines for violations related to failure to submit information to SEBI / to enter into agreements with clients / to redress investor grievances, violations by mutual funds/stock brokers and violations related to insider trading, takeovers etc.