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Business Studies January 1, 2012

Chapter 5
Money and Capital Market
Meaning Capital market is one of the sources of raising long term finance for corporate. It is the medium through which companies and investors interact. Companies enter capital market by way of share and bond issues which are subscribed by the investors. It consists of various players like companies, investors and intermediaries. Foreign Institutional Investors (FIIs) like pension funds, banks etc subscribe to the capital issues in the market. It has intermediaries such as brokers, merchant bankers, lead managers etc Need and Importance a) Plays a vital role in development of economy b) Capital markets play a vital role in filling the gap between entrepreneurs / technocrats and capitalists. c) Capital market promote healthy trading in securities and act as a major catalyst in mobilizing capital. d) It is an organized set up to raise funds for a business. e) They play a crucial role in bringing of businessmen and willing investors together. f) Healthy capital market is the hallmark of a developed economy 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. It is regulated by RBI. 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. Differences between Money and Capital Market Capital Market Market for long term financing Transactions involves buying and selling shares, debentures, units etc Open for both institutions and individuals Money Market Market for short term financing Transactions involve instruments like trade bulls, reports, commercial papers etc Open only for banks and other institutions. Individuals cannot transact in money market. Securities are marked in open markets Not as risky as capital markets in terms of

Securities are marketed in stock exchange Comparatively riskier in terms of principal

Business Studies January 1, 2012 payment and returns returns and repayment of principal.

Primary and Secondary Market The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. In the case of a new stock issue, this sale is an initial public offering (IPO). The secondary market, also called aftermarket, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold Stock Exchange 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." Functions of Stock Exchange a) 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. b) 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). c) 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. d) 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. e) 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. f) Facilitates public borrowing: Stock exchange serves as a platform for marketing Government securities. It enables government to raise public debt easily and quickly. g) 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.

Business Studies January 1, 2012 h) 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. i) 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 / condition j) 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. Merits of Stock Exchange a) One of the advantages of the stock exchange is that is enjoys economies of scale because so much money passes through it. This helps to keep costs low, making it less expensive to buy and sell stocks. A stock exchange can use millions of transactions to spread fixed costs of setting up and maintaining orderly and secure trading, whether it's done on the computer or the exchange floor. The bigger a stock exchange is, the cheaper it is to trade an individual stock on it. b) Stock exchanges require listed companies to meet strict regulatory requirements with regard to financial reporting, corporate governance and disclosure. In India, the regulatory agency is the Securities Exchange Board of India (SEBI). Investors get access to all relevant information about the listed companies so they can make informed decisions about whether to buy or sell shares. c) A stock exchange provides a reliable and secure clearing mechanism. You can be sure that the stocks you buy will be delivered to you, no matter what happens to the party you bought them from. d) Stock exchanges increase the marketability and liquidity of securities by providing a ready and continuous market. e) Stock exchanges promote the habit of saving and investment among people f) They increase mobility of capital of the investors from less profitable portfolios to more profitable portfolios. Thus they facilitate capital formation and generate economic growth. g) The stock exchange quotations enable the investors to evaluate the real worth of their holdings. h) By listing of shares on a stock exchange, companies enjoy greater reputation and credit. i) Stock exchange acts as a mirror of business cycles. Its trend provides proper guidance to the investors regarding their choice of investment. j) Stock exchanges help the government to raise funds, from the public to undertake projects of national importance and social value. Dealers in Stock Exchange A dealer would be a corporate body, a partnership firm or individuals with net worth of Rs.5 lakhs. Only members are permitted to transact on stock exchange. Members are divided into:

Business Studies January 1, 2012 a) Stock Broker: Is a regulated professional broker who buys and sells shares and other securities through market makers or on behalf of investors. A broker may be employed by a brokerage firm. b) Jobbers: Are members who transact business independently for themselves. They buy and sell securities to earn profits on their own account. Speculators in Stock Market a) Bull: A Bull also called as Tejiwala is an operator who is hopeful of price rise in the near future. In anticipation of price rise he makes purchases of shares and other securities with the intention of selling them at higher prices in future. He being a speculator has no intention of taking delivery of securities but deals only in difference of prices. Such as a speculator is called a Bull because of his resemblance of behaviour with a bull. As a bull is famous for throwing up the opponent in the air, similarly a bull speculator also takes the price of securities high up in the air. He does this by placing high-value purchase orders. b) Bear: A bear or a Mandiwala on the other hand is a speculator who is wary of fall in prices and hence sells securities so that he may buy them at cheap price in future. A bear does not have securities at present but sells them at higher prices in anticipation that he will supply them business purchasing at lower prices in the future. If the prices move down as per the expectations of the bear he will earn profits out of these transactions. c) Stag: A stag is that type of speculator who treads his path very carefully. He applies for shares in new companies and expects to sell them at a premium if he gets an allotment. He selects those companies whose shares are most in demand and are likely to carry a premium. He sells the shares before being called to pay the allotment money. A stag does not indulge in purchase and sale of shares in the market like a bull and a bear. d) Lame Duck: is a bear speculator who has contracted to sell a certain security, at a certain date at a certain price but finds it difficult to meet the commitment on the settlement date. It describes the sad plight of an individual who defaults in the discharge of his stock market related commitments. Like a lame duck of the real life, such a person becomes lame financially! Such a position may arise on account of a variety of reasons like a Crash, rash investing, plain bad luck, Over-Trading beyond one's capacity. An individual turning into a Lame Duck is really a sad thing but a possibility and one should always take precautionary and prudential measures to avoid being turning into a Lame Duck. It will destroy one's credit report and reputation.

Business Studies January 1, 2012 OTCEI (Over the Counter Exchange of India) The OTC Exchange of India (OTCEI) incorporated under the provisions of the Companies Act 1956, is a public limited company. It allows listing of small and medium sized companies. The minimum issued share capital required of a company that wants to be listed on OTCEI is Rs.3 million and the maximum Rs.250 million. Companies engaged in investment, leasing, finance, hire purchase, amusement parks etc., and companies listed on any other recognized stock exchange in India are not eligible for listing on OTCEI. Also, listing is granted only if the issue is fully subscribed to by the public and sponsor. OTCEI is promoted by the Unit Trust of India, the Industrial Credit and Investment Corporation of India, the Industrial Development Bank of India, the Industrial Finance Corporation of India and others and is a recognised stock exchange under the SCR Act. The OTCEI has set up a national, automated screen based and ringless stock market. It helps companies raise finance from the capital market in a cost effective manner and provides a convenient and effective avenue of capital market investment for investors at large. While the other recognised stock exchanges require that in order to have its securities listed the company should have an issued capital of not less than Rs. 3 crores out of which normally 25% is to be offered to the public, the minimum issued equity share capital of a company for eligibility for listing on the OTCEI is Rs 30 lacs. Listing on OTCEI is advantageous to companies because of the high liquidity of these securities, which is a result of compulsory market making, improved access and speed of transactions resulting from the extensive network of electronically interlinked counters.arial Companies can obtain a fair price of their securities by negotiating the same with the sponsors (who are members of the OTCEI) and save unnecessary issue expenses by placing their securities with the sponsors who will in turn off load the securities to the public. This mechanism is now popularly known as a bought out deal. OTCEI's wide computerized net work will be spread all over India and will make investment easier. All deals will be entered into through remote terminals which will be connected to the mainframe computer of the OTCEI. The exchange will enable transactions to be completed quickly and investors can settle the deals across the counter within a few days. The exchange will also provide liquidity to investors as every scrip listed on the OTCEI will have at least two makers who will continuously give two way quotes.

NSE (National Stock Exchange) In the fast growing Indian financial market, there are 23 stock exchanges trading securities. The National Stock Exchange of India (NSE) situated in Mumbai - is the largest and most advanced exchange with 1016 companies listed and 726 trading members.

Business Studies January 1, 2012 The NSE is owned by the group of leading financial institutions such as Indian Bank or Life Insurance Corporation of India. However, in the totally de-mutualised Exchange, the ownership as well as the management does not have a right to trade on the Exchange. Only qualified traders can be involved in the securities trading. The NSE is one of the few exchanges in the world trading all types of securities on a single platform, which is divided into three segments: Wholesale Debt Market (WDM), Capital Market (CM), and Futures & Options (F&O) Market. Each segment has experienced a significant growth throughout a few years of their launch. While the WDM segment has accumulated the annual growth of over 36% since its opening in 1994, the CM segment has increased by even 61% during the same period. The National Stock Exchange of India has stringent requirements and criteria for the companies listed on the Exchange. Minimum capital requirements, project appraisal, and company's track record are just a few of the criteria. In addition, listed companies pay variable listing fees based on their corporate capital size. The National Stock Exchange of India Ltd. provides its clients with a single, fully electronic trading platform that is operated through a VSAT network. Unlike most world exchanges, the NSE uses the satellite communication system that connects traders from 345 Indian cities. The advanced technologies enable up to 6 million trades to be operated daily on the NSE trading platform. BSE (Bombay Stock Exchange) 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. 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. SEBI (Securities Exchange Board of India) Securities and Exchange Board of India (SEBI) is an apex body for overall development and regulation of the securities market. It was set up on April 12, 1988. To start with, SEBI was set up as a nonstatutory body. Later on it became a statutory body under the Securities Exchange Board of India Act, 1992. The Act entrusted SEBI with comprehensive powers over practically all the aspects of capital market operations. The objectives of SEBI are: a) To protect the interests of investors in securities; b) To promote the development of Securities Market; c) To regulate the securities market and

Business Studies January 1, 2012 d) For matters connected therewith or incidental thereto.

Functions of SEBI a) To protect the interests of investors through proper education and guidance as regards their investment in securities: For this, SEBI has made rules and regulation to be followed by the financial intermediaries such as brokers, etc. SEBI looks after the complaints received from investors for fair settlement. It also issues booklets for the guidance and protection of small investors. b) To regulate and control the business on stock exchanges and other security markets: For this, SEBI keeps supervision on brokers. Registration of brokers and sub-brokers is made compulsory and they are expected to follow certain rules and regulations. Effective control is also maintained by SEBI on the working of stock exchanges. c) To make registration and to regulate the functioning of intermediaries such as stock brokers, sub-brokers, share transfer agents, merchant bankers and other intermediaries operating on the securities market. In addition, to provide suitable training to intermediaries. This function is useful for healthy atmosphere on the stock exchange and for the protection of small investors. d) To register and regulate the working of mutual funds including UTI (Unit Trust of India). SEBI has made rules and regulations to be followed by mutual funds. The purpose is to maintain effective supervision on their operations & avoid their unfair and anti-investor activities. e) To promote self-regulatory organization of intermediaries. SEBI is given wide statutory powers. However, self-regulation is better than external regulation. Here, the function of SEBI is to encourage intermediaries to form their professional associations and control undesirable activities of their members. SEBI can also use its powers when required for protection of small investors. f) To regulate mergers, takeovers and acquisitions of companies in order to protect the interest of investors. For this, SEBI has issued suitable guidelines so that such mergers and takeovers will not be at the cost of small investors. g) To prohibit fraudulent and unfair practices of intermediaries operating on securities markets. SEBI is not for interfering in the normal working of these intermediaries. Its function is to regulate and control their objectionable practices which may harm the investors and healthy growth of capital market. h) To issue guidelines to companies regarding capital issues. Separate guidelines are prepared for first public issue of new companies, for public issue by existing listed companies and for first public issue by existing private companies.

Business Studies January 1, 2012 SEBI is expected to conduct research and publish information useful to all market players (i.e. all buyers and sellers). i) To conduct inspection, inquiries & audits of stock exchanges, intermediaries and selfregulating organizations and to take suitable remedial measures wherever necessary. This function is undertaken for orderly working of stock exchanges & intermediaries. j) To restrict insider trading activity through suitable measures. This function is useful for avoiding undesirable activities of brokers and securities scams. k) To restrict insider trading activity through suitable measures. This function is useful for avoiding undesirable activities of brokers and securities scams. Dematerialization Dematerialisation is the process of converting the physical form of shares into electronic form. Prior to dematerialisation the Indian stock markets have faced several problems like delay in the transfer of certificates, forgery of certificates etc. Dematerialisation helps to overcome these problems as well as reduces the transaction time as compared to the physical segment. Need for Demat a) Risks of loss, mutilation or theft of certificates associated with physical certificates are completely eliminated. b) Elimination of bad deliveries. c) Effects immediate transfer and registration of securities. d) No stamp duty is payable by the investors for transfer of any kind of securities in DEMAT form. e) Facilitates recording of change of address, transmission, (bank a/c particulars, nomination) etc for all investments held in the account, instead of advising each company separately a single advice will do all such changes. f) Comparing and monitoring of the position of all the investments in a DEMAT account is provided by the statement of account sent periodically by the DP. Importance of Demat a) A Demat account reduces brokerage charges, makes pledging/hypothecation of shares easier, enables quick ownership of securities on settlement resulting in increased liquidity, avoids confusion in the ownership title of securities, and provides easy receipt of public issue allotments or IPOs. b) It also helps avoid bad deliveries caused by signature mismatch, postal delays and loss of certificates in transit. c) Demat account holders also avoid stamp duty (as against 0.5 per cent payable on physical shares), filling up of transfer deeds, and obtain quick receipt of benefits like stock splits and bonuses. also it reduces brokerage charges.(eg 2.5% of brokers charge is saved up an stamp duty is saved too) d) Further, it eliminates risks associated with forgery, counterfeiting, and loss due to damaged stock certificates.

Business Studies January 1, 2012 Previous Year Questions on this Chapter SECTION A 1. 2. 3. 4. 5. 6. 7. 8. 9. What is money market? (Jun-06) Name any one of the stock exchange in India. (Mar-06) Name the market that provides short term finance. (Jun-11) Who are dealers in the stock exchange? (Jun-09, Jun-10) Expand NSE. (Jun-08) State one function of SEBI. (Mar-09) Who is a Bull? (Mar-10) Who is a Bear? (Mar-11) State the types of Capital Market. (Mar-07)

SECTION B 1. 2. 3. 4. 5. 6. State any two differences between capital and money market. (Jul-06) Give the meaning of Stock Market. (Jun-11) List out any two functions of SEBI. (Mar-11, Mar-10) What is meant by OTCEI? (Mar-06) What is meant by NSE? (Mar-05) What is Dematerialization? (Mar-09)

SECTION C 1. Define Stock Exchange. Explain the functions of Stock Exchange. (Jun-07, 08, 09, 10, Mar08,09) 2. What is SEBI? Explain the objectives and functions of SEBI. (Mar-10) 3. What are the merits of stock exchange? (Mar-11) 4. Who is a speculator? Discuss the various types of speculators. (Jun-09, 10, 11) SECTION D 1. List out 10 Stock Exchanges in India. (Mar-08, 11)