1st Answer

Introduction: Capital markets refer to the markets where savings and investments are
moved between the providers of capital and the ones who are in need
of capital. Usually, the ones supplying the capital is the general public and the ones who
are constantly in need of capital are the corporations, newly listed companies, banks,
financial institutions and government companies. Capital market comprises of primary
markets where companies often issue new securities, mostly for the first time. It is
known as the Initial Public offer. Secondary market refers to places where the already-
issued securities are traded between general public who can be termed as the
investors. These people are free to trade shares among themselves without any
involvement from the corporation. However, they need to follow the rules stipulated by
the SEBI from time-to-time. Capital markets are organized in the following ways:

Primary Market: It refers to the market for fresh issuance of securities by newly-listed
corporations and companies. It is classified into many segments:

Initial Public offering: Since a new company registered under the Companies Act
1956 is authorized to raise funds from the primary market through the abridged
prospectus.

Public issue: It refers to another way of raising funds from the common public by the
existing corporations.

Private placement: At the time of the issue, the larger houses of investment are invited
for the subscription of the securities issue in bulk quantities at a discount price before
the issue. After the issue, according to the policy of investment of the Institutional
investors, they sell them at more prices to the individual investors. This facilitates the
institutional investors to gain profits through the private placement process.

Underwriting: It refers to another mode where the securities are issued during the
issue, more particularly this mode of issue is said to be an avenue to off-load the risk of
managing the securities issue as well as to secure the issue as fully subscribed.
Secondary market: It refers to the market for the securities which are already available
in the market, to purchase and sell among the players. This is said to be the market
which is market further classified into two different categories viz. mutualization and
demutualization of stock exchanges.

Mutualized Stock exchanges: These refer to the exchanges which would never have
any distinction among the members, management and authorization body of the stock
exchange. These refer to purely administered by the members/brokers of the stock
exchange, e.g. Traditional Stock Exchanges.
Demutualized stock exchanges: These refer to separate different faces among
themselves. This clearly defines the broker’s roles and responsibilities, members of the
governing body and people in the management and performed by them without any
confusion e.g. OTCEI, NSE and so on.

The following are the reforms introduced in the capital market:

1. In 1990s, the secondary market in India only comprised of regional stock exchanges
wherein, first was the BSE. However, after the reforms introduced in 1991, the Indian
Stock Market acquired a three-tier system. This consists of Regional Stock Exchanges,
National Stock Exchange and Over the Counter Exchange of India (OTCEI).

Regional Stock Exchange

The first Regional Stock Exchange was introduced in the city of Ahmedabad as
Ahmedabad Stock Exchange (ASE) in the year 1894. In the same way, in the year
1908, Calcutta Stock Exchange (CSE) was established. Subsequently, in the later years
other regional stock exchanges were launched in Calcutta, Madras, Ahmedabad, Delhi,
Hyderabad and Indore. In the recent times, regional stock exchanges were developed in
Coimbatore as Coimbatore Stock Exchange and in Meerut as Meerut Stock
Exchange. Currently, there are 22 regional stock exchanges in the country.
National Stock Exchange
The NSE refers to the latest stock exchange which is driven by technology, and it was
recognized in 1993. It began its business operations in the year 1994 with trading in
money market securities. Later, it also expanded its operations of trading in the
segment of capital market. NSE was launched in order to establish a nationwide
platform in order to trade for all kinds of securities. It makes sure the development of fair
and efficient market of securities. Within the span of its existence, NSE has been able
to transform the Indian capital market and has taken the stock market to the doorstep of
the investor. It renders a wide screen-based trading system which is automated across
the nation and ensures equal access to each and every investor.
Over the Counter Exchange of India (OTCEI)
OTCEI refers to a company which was launched in the year 1990 under the Companies
Act, 1956 but later was identified as a stock exchange under the Securities Contracts
Regulation Act, 1956. It began its operations in trading in the year 1992 and is modeled
along the lines of NASDAQ, the OTC exchange in USA. It has an objective to provide
the small companies a smooth access to the capital market. OTCEI renders a screen
based nationwide system of trading, that acts as a market where purchasers meet the
sellers and negotiate for acceptable trade terms. In this, dealers are able to trade both
in newly issued securities as well as secondary market. It refers to a single window
exchange providing a convenient, transparent and efficient avenue for investing into the
capital market.
Conclusion: So, it can be concluded that the capital market consists of primary as well
as secondary market. Primary market refers to a place where companies issue newly
securities and public gets an opportunity to buy them from the newly listed companies.
In secondary market, general public buys and sells securities from each other without
any direct involvement of the company. Also, with more and improved reforms in the
capital market, today, each and every person having a smartphone has an access to
purchasing and selling of shares.
2nd Answer

Introduction: Exchange rate has an extremely important role in a nation’s trade

level, which is important to most every economy having a free market all over the
world. For this reason, exchange rates refer to the most watched, analyzed and
governmentally manipulated measures of economy. However, exchange rates
matter on a smaller scale as well: they impact the real return of the portfolio of an
investor. Here, we look at some of the major forces behind exchange rate
movements.

Various factors enable to determine exchange rates. Most of these factors are
related to the trading relationship between two nations. Remember, exchange
rates are relative, and can be expressed as a comparison of the currencies of
two nations. The following refer to some of the principal determinants of the
exchange rate between two nations.
Differentials in inflation: Usually, a country having a consistently lower rate of
inflation demonstrate an increasing value of currency as its purchasing power
rises relative to other currencies. On the other hand, nations having a high
inflation rate witness the value of their currency going down. This is simple to
understand. If the rate of inflation increases, it means that everyone has a higher
purchasing power and can spend high money on products and services. This
makes the products and services expensive and leads to a decreased value of
currency as that amount is not enough to buy a certain product because the price
of that product has gone up. This also leads to higher interest rates as everyone
has extra money so they can afford to pay higher interest rate. All this devalues
the currency of that nation.
Interest Rate: Interest rates, inflation, and exchange rates are all highly
correlated. An increased rate of interest provides lenders in an economy a higher
return as compared to other countries. Therefore, higher rates of interest attract
foreign capital and this leads to an increased exchange rate. The impact of
higher interest rates is eliminated, however, if inflation in the nation is much
higher as compared to others, or if additional factors influence the value of the
currency down. The opposite relationship exists for a decrease in the rate of
interest - that is, lower interest rates cause decrease exchange rates
When investors and corporations in another nation realize that they will earn a good
interest rate on investing money in another nation, the value of our currency is
improved. So, investors start investing money in a nation like India. On the other hand, if
the interest rates go down, nobody would invest money in a nation like India as no
foreign country would want to earn low profits.
Conclusion: So, it can be concluded that low interest rates lead to a decline in the
foreign investment in the country. Higher interest rates leading to more foreign direct
investment, thus leading to a high exchange rate. A higher exchange rate of a country is
good for its importers as they can import at a low price and bad news for exporters and
vice versa.
3rd Answer

3a.

Introduction: Money market is referred to as dealing in instruments of debentures

having less than a year to maturity bearing fixed income. Money Market refers to a
financial market where short-term financial assets having liquidity of less than one year
or one year are traded on stock exchanges. The securities or trading bills are extremely
liquid. Also, these facilitate the short-term borrowing needs of the participant through
bills of trading. Usually, banks, large institutional investors and individual investors are
the participants in this financial market.

The money market has a very important role in the economy. It enables a variety of
participants to raise funds. It provides liquidity to both the investors and the borrowers.
So, it helps to maintain a balance between the demand and supply for money. This
enables to facilitate the development and growth of the economy.

Following are some of the money market instruments:

Treasury Bills:

T-bills refer to the most popular instruments of money market. They have different short-
term maturities. The Indian government issues it at a discount ranging from 14 days to
364 days.

These instruments are issued at a discount and repaid at face value at the time of
maturity. Also, a company, firm, or person is eligible to purchase TB’s.

2. Commercial Bills: Commercial bills, also an instrument of the money market, have
functions similar to the bill of exchange. Businesses issue them in order to meet the
requirements of their short-term money.

These instruments render much better liquidity. As the same is possible to be

transferred from one person to another in situations of an immediate cash-crunch.

3. Certificate of Deposit: Certificate of deposit or CD’s are a negotiable term deposit

accepted by commercial banks. Mostly promissory notes are used to issue Certificates
of Deposit. CD’s are issued to individuals, corporations, trusts, etc. Also, the CD’s can
be issued by scheduled commercial banks at a discount. The duration of these differs
between 3 months to 1 year. The same, when issued by a financial institution, is issued
for a minimum of 1 year and mostly for 3 years.

Conclusion: In the first scenario, it is wise to park his money in treasury bills. Since the
mutual fund manager has 450 million of idle cash and he wants to park his money for
less than 180 days, he being an individual should go for the safest option, although the
returns won’t be much. He can opt for treasury bills ranging from 90-180 days.

3b.

4. Commercial Paper: Corporates issue CP’s to fulfill their requirements of short-term

working capital. This serves as an alternative to a method of bank-borrowing. Also, the
duration of commercial paper ranges from 15 days to 1 year.

RBI has laid down the policies related to the issuance of CP. As a result, a company
needs a prior approval of RBI in order to issue a CP in the market. Also, CP has to be
issued at a discount and matures at face value. And the market decides the rate of
discount.

Denomination and the size of CP:

Minimum size – Rs. 25 lakhs

Maximum size – 100% of the issuer’s working capital

5. Call Money: It refers to a segment of the market where scheduled commercial banks
lend or borrow on short notice (say a period of 14 days). In order to manage the
everyday cash flows. The rate of interests in the market are driven by market factors
and hence highly sensitive to demand and supply. Also, the interest rates are known to
fluctuate by a large % at certain times.

Conclusion: So, it be concluded that in the second situation, the oil refinery company
should prefer commercial papers to raise 1500 million as they need these funds to settle
their invoices.