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Module 3:

Introduction to Different Financial Markets: Role of SEBI


Capital market : Features and reforms, Capital Market scams
Money Market: Functions, Structure, Money market Reforms and its recent Trends in
India. Primary Market: Introduction, Concept and Meaning, Functions
Different kinds of Issues of Securities, Secondary Market: Concept and meaning,
features and function.
Financial Market & it’s Features
• Financial Market is a platform to set up various financial institutions
and help borrowers (buyers) and lenders (sellers) meet. Here, various
instruments (Ex: treasury bills, equity shares, bonds, etc.) are sold for
money. They are sold in physical markets in financial institutions or in
online market (referred as Exchanges).
• Features:
• Corporate sector raises short as well as long term funds from the market.
• Financial markets in help in mobilization of funds
• Various financial products and services are sold in the financial markets. These
products and services are known as instruments.
Different Financial Markets/ Structure of
Financial Markets Indian
Financial
Markets

Capital Money
Market Market

Equity Debt • Call Money


Market Market • Treasury Bills
• Commercial Bills
Primary Secondary • Commercial
Market Market Papers
• Certificate of
Deposit
Private Bonus
IPO FPO Right Issues
Placement Shares
1. Capital market
• Capital market is also
known as securities market.
• Capital market is where
mobilization of funds take
place.
• All those capital products
which are sold in capital
market are referred to as
financial instruments.
• These instruments can be
equity or bonds.
1. Capital market
• Features:
• Capital market deals with long term fund requirements.
• It includes securities like: Equity Shares, Debentures and Bonds.
• The participants of Capital markets are:
• Merchant Bankers
• Stock- broker
• Underwriters
• Investors
• Depositories (NSDL, CSDL)
• Institutional Investors
• The regulator of Capital market is SEBI.
1. Capital market
1.1) Debt: Debt is an amount of money borrowed by one party from another.
A debt arrangement gives the borrowing party permission to borrow money
under the condition that it is to be paid back at a later date, usually with
interest.
• Debt can be borrowed by issuing Bonds or Debentures.
1. Capital market
1.2) Equity: A stock or any other security representing an ownership
interest. This may be in a private company (not publicly traded), in which
case it is called private equity. Equity shares issued by Public ltd.
company is Public equity.
• Equity market: It is further divided into primary & secondary market.
1.2.1) Primary Market: It is a market where mobilization of funds takes
place between Company and Investors.
Money

Instruments
1. Capital market
1.2.1) Primary Market: It is a market where companies are launching their
shares for the first time in the market.
Investors can invest in primary market through an associate bank via ASBA.
ASBA (Applications Supported by Blocked Amount) is a process developed by
the India's Stock Market Regulator SEBI for applying to IPO.
Issues in Primary Market:
• Initial Public Offer (IPOs)
• Further Public Offer (FPOs)
• Right Issues
• Bonus Issues
• Private Placement
1. Capital market
Issues in Primary Market:
• Initial Public Offer (IPOs)
• Further Public Offer (FPOs)

• Eg: Suppose any company has 100000 Authorized shares. Out of


that company issues 50000 shares for the first time in the market.
After 4 years company again issues 20000 shares for fund
requirement.
• Thus, here, 50000 shares are IPOs and 20000 shares are FPOs.
1. Capital market
Issues in Primary Market:
• Right shares: Right shares are issued to existing shareholders. These
shares are issued in order to retain the control among the existing
shareholders.
• Bonus Shares: Bonus shares are issued to shareholders without any
consideration (without charging any price).
• Private Placement: It refers to issue of shares to a selected group of
investors instead of inviting public at large.
1. Capital market
1.2.2) Secondary Market: It is a market where mobilization of funds
takes place between Investors and Investors. This market facilitates
trading among various investors to bring liquidity to the securities.

Seller Buyer
Money

Instruments
1. Capital market
1.2.2) Secondary Market:
• Investment in Secondary market can be done through various Stock
exchanges. Major exchanges are: NSE & BSE.
• National Stock Exchange (NSE): Index  Nifty (Nifty 50 companies)
• Bombay Stock Exchange (BSE): Index  Sensex (Sensitivity Index 30 co.)
1. Capital market

• Physical Market (OTC) vs Online market (Exchanges)

• Stock markets refer to a market place where investors can


buy and sell stocks. In earlier times, these markets used to
be physical markets.

• With the up gradation of technology, these physical


markets got turned into virtual markets with the help of
online exchanges.
1. Capital market

Old Platform – Over the counter (OTC) market


1. Capital market
New Platform – Exchange Market (Stock Market
Terminal)
1. Capital market
Stock Exchanges & Indices
Equity/Debt Commodity Currency

• NSE – National • Multi Commodity Exchange • Foreign Exchange


(MCX)
Stock exchange (FOREX)
• Index – Nifty (50
Companies) • Indian Commodity Exchange
Limited (ICEX)

• National Commodity and


• BSE – Bombay Derivatives Exchange (NCDEX)
Stock Exchange
• Index – Sensex • National Multi-Commodity
(30 Companies) Exchange of India Ltd (NMCEX)
1. Capital market

Global Stock Indices


US MARKET Indices EUROPEAN MARKETS Indices  ASIAN MARKETS Indices
• DOW JONES  FTSE 100  NIKKIE
 DAX
 SENSEX (BSE India)
• DOW FUTURES (MINI)
 NIFTY (NSE India)
 CAC 40
• NASDAQ  STRAIT TIMES
• NASDAQ FUTURES  HANG SENG
 TAIWAN WEIGHTED
 KOSPI
 SHANGHAI COMPOSITE
1. Capital market
Execution of Buy & Sell Orders
1. Capital market
Volatility (means fluctuation in prices)
Bear Effect

Bull Effect
1. Capital market
Regulatory body:
Security Exchange Board of India (SEBI)
• SEBI is the regulator for the Capital/Security Market in India.
• In 1988 SEBI was established by the Government of India through an
executive resolution, and was subsequently upgraded as a fully
autonomous body (a statutory Board) in the year 1992 with the passing
of the Securities and Exchange Board of India Act (SEBI Act) on 30th
January 1992.

• The SEBI was established on April 12, 1992.


1. Capital market
Security Exchange Board of India (SEBI)
• Chaired by Mr. Ajay Tyagi, SEBI is headquartered in the popular business
district of BKC in Mumbai, and has Northern, Eastern, Southern and
Western regional offices in New Delhi, Kolkata, Chennai and
Ahmadabad.

• The Preamble of the SEBI describes the basic functions of the Securities
and Exchange Board of India as
• “…..to protect the interests of investors in securities and to promote the
development of, and to regulate the securities market and for matters
connected therewith or incidental thereto”
1. Capital market
Security Exchange Board of India (SEBI)
• SEBI has to be responsive to the needs of three groups, which constitute the
market:
- The issuers of securities
- The investors
- The market intermediaries.

• SEBI has three functions rolled into one body quasi legislative, quasi-judicial
and quasi-executive.
- It drafts regulations in its legislative capacity
- It conducts investigation and enforcement action in its
executive function and it passes rulings and orders in its
judicial capacity.
1. Capital market
SCAMS
• There have been many instances in Indian Capital Market,
where investors and system as a whole faced tremendous losses
because of various scams.

• These scams not only harmed the financial position of investors,


but also raised a big question on due diligence of SEBI.

• Following these scams, there were many changes adopted by


SEBI in order to improve transparency and accountability.
1. Capital market
Harshad Mehta Scam
• Estimated Size: Rs 4,000 crore
• Central figure: Harshad Mehta
• Discovered: In 1992
• Modus Operandi: Used money from banks to
make personal gains via investment in shares
• Use of fake BRs
• Converted an RF deal into an unsecured loan
• Bank of Karad (BOK) and Metropolitan Cooperative
Bank (MCB) issued fake BRs
• Passed to banks
• Banks in turn gave money to Mehta
• This money used to drive prices of stocks
• The shares were sold for a profit
• The money due to the bank was returned
1. Capital market
Ketan Parekh Scam
• Estimated Size: Rs 800 crore
• Central Figure: Ketan Parekh
• Discovered: 2001
• Modus Operandi: Circular trading
in selected stocks via borrowed
money from banks to manipulate
share prices
1. Capital market
Ketan Parekh Scam
• The companies in which KP held stakes
included (K10):
• Amitabh Bachchan Corporation Limited
(ABCL)
• Mukta Arts
• Tips
• Pritish Nandy Communications
• HFCL
• Global Telesystems (Global)
• PentaMedia Graphics
• Lupin Laboratories
• Zee Telefilms
• Crest Communications
• PentaMedia Graphics
• Lupin Laboratories
• Zee Telefilms
• Crest Communications
1. Capital market
Satyam Scam
• Estimated Size: Rs 14,162 crore
• Central Figure: Ramalinga Raju
• Discovered: 2009
• Modus Operandi: The top
management of the software
company cooked up accounts to
show inflated sales, profits and
margins from 2003 to 2008.
2. Money market
• Money market is a market for borrowing and lending of
short term funds. Borrowers can meet their short term fund
requirement and lenders can earn short term returns.
• Features:
• Funds are transferred for less than or up to a period of 1 year.
• Short term need of RBI
• Short term need of other banks
• Short term need of other financial institutions
• Transaction between a buyer and a seller
• Transaction between a corporate and an investor
2. Money market
• Functions:
• Expansion of Trade and Industry by helping firms borrow
funds from the market.
• Efficient functioning of central bank is dependent on the
functioning of money market. A well established money market
helps in smooth functioning of RBI.
• Formulation of an appropriate monetary policy is also
dependent on the money market.
• Money market is a source of finance to government in times
of deficit
• Smooth operations of commercial banks is also dependent on
functioning of money market.
2. Money market
• Instruments:
• Call Money
• Commercial Bill
• Treasury Bills
• Certificate of Deposits
• Commercial Papers

• All these instruments are used to raise short term funds.