INDIAN CAPITAL MARKET

Naman Sharma
Enroll. No. : 12117703817
Section: C
Semester: VI
Subject: Investment and
Competition Law
Submitted to: Ms. Gauri Gupta
Introduction
What are financial markets?
Financial market is a market where financial instruments are exchanged or traded and helps in
determining the prices of the assets that are traded in and is also called the price discovery
process.
1. Organizations that facilitate the trade in financial products. For e.g. Stock exchanges (NYSE,
NASDAQ) facilitate the trade in stocks, bonds and warrants.
2. Coming together of buyer and sellers at a common platform to trade financial products is
termed as financial markets, i.e. stocks and shares are traded between buyers and sellers in a
number of ways including: the use of stock exchanges; directly between buyers and sellers etc.
1

Financial markets in India comprise the money market Government securities market, capital
market, insurance market, and the foreign exchange market. Recently, the derivatives market
has also emerged1 . With banks having already been allowed to undertake insurance business,
bane assurance market has also emerged in a big way. Till the early 1990s most of the financial
markets were characterized by controls over the pricing of financial assets, restrictions on flows
or transactions, barrier to entry, low liquidity and high transaction costs. These characteristics
came in the way of development of the markets and allocative efficiently of resources
channelled through them. From 1991 onward, financial market reforms have emphasized the
strengthening of the price discovery process easing restrictions on transactions, reducing
transaction costs and enhancing systemic liquidity.2
Research Problem
• What is financial market?
• What is the functions of the Indian financial market?
• What is the significance of capital market?
• What are the instruments of capital market?
• How capital market is different from money market?

Main functions of financial market

Let us now see the main functions of financial market.
1 It provides facilities for interaction between the investors and the borrowers.
2 It provides pricing information resulting from the interaction between buyers and sellers in
the market when they trade the financial assets.
3 It provides security to dealings in financial assets.

1
What are financial markets, available at:
https://www.slideshare.net/kommaram/notes-on-indian-financial-markets-final-np-24822765(24 April,2020)
2
financial market, available at:
https://shodhganga.inflibnet.ac.in/bitstream/10603/45803/12/12_chapter%205.pdf
4 It ensures liquidity by providing a mechanism for an investor to sell the financial assets.
5 It ensures low cost of transactions and information.3

Financial markets may be classified on the basis of-

• Types of claims – debt and equity markets
• Maturity – money market and capital market
• Trade – spot market and delivery market
• Deals in financial claims – primary market and secondary market4
Indian Financial Market consists of the following markets:
• Capital Market/ Securities Market
o Primary capital market
o Secondary capital market
• Money Market
• Debt Market
Primary capital market- A market where new securities are bought and sold for the first time.5

Capital Market
Capital Market is an institutional arrangement for borrowing medium and long-term funds and
which provides facilities for marketing and trading of securities. So it constitutes all long-term
borrowings from banks and financial institutions, borrowings from foreign markets and raising
of capital by issue various securities such as shares, debentures, bonds, etc. The securities
market has two different segments namely primary and secondary market.
Primary Market vs Secondary Market: The primary market consists of arrangements for
procurement of long-term funds by companies by fresh issue of shares and debentures. The
secondary market or stock exchange provides a ready market for existing long term securities.
Stock exchange is the secondary market, which provides a place for regular sale and purchase
of different types of securities like shares, debentures, bonds & government securities. It is an
organised market where all transactions are regulated by the rules and laws of the concerned
stock exchanges.
Secondary Markets or Stock Exchanges: The functions of a stock exchanges are to provide
ready and continuous market for securities, information about prices and sales, safety to
dealings and investment, helps mobilisation of savings and capital formation. It acts as a
barometer of economic and business conditions and helps in better allocation of funds. Stock
exchanges provide many benefits to companies, investors and the society as a whole. But they
also suffer from limitations like exclusive speculation and fluctuation in prices due to rumours
and unpredictable events. There are 21 stock exchanges in India presently, including BSE, NSE

3
Functions of financial market< available at:
https://www.clearias.com/financial-market-money-market-and-capital-market/
4
Ibid.
5
Ibid.
and OTCEI. Stock Exchanges are regulated by the Securities Contracts (Regulation) Act and
by SEBI. SEBI has initiated a number of reforms in the primary and secondary market to
regulate the stock market. Documentary and procedural requirements for listing and trading
have been made stricter and fool proof to protect investors’ interest.
The secondary market has further two components. First, the spot market where securities are
traded for immediate delivery and payment. The other is forward market where the securities
are traded for future delivery and payment. This forward market is further divided
into Futures and Options Market (Derivatives Markets). In futures Market the securities are
traded for conditional future delivery whereas in option market, two types of options are traded.
A put option gives right but not an obligation to the owner to sell a security to the writer of the
option at a predetermined price before a certain date, while a call option gives right but not an
obligation to the buyer to purchase a security from the writer of the option at a particular
price before a certain date.6

Significance of Capital Markets

A well-functioning stock market may help the development process in an economy through the
following channels:
1. Growth of savings,
2. Efficient allocation of investment resources,
3. Better utilization of the existing resources.
In market economy like India, financial market institutions provide the avenue by which long-
term savings are mobilized and channeled into investments. Confidence of the investors in the
market is imperative for the growth and development of the market. For any stock market, the
market Indices is the barometer of its performance and reflects the prevailing sentiments of the
entire economy. Stock index is created to provide investors with the information regarding the
average share price in the stock market. The ups and downs in the index represent the
movement of the equity market. These indices need to represent the return obtained by typical
portfolios in the country.7
Generally, the stock price of any company is vulnerable to three types of news:
• Company specific
• Industry specific
• Economy specific
An all-share index includes stocks from all the sectors of the economy and thus cancels out the
stock and sector specific news and events that affect stock prices, (law of portfolio
diversification) and reflect the overall performance of the company/equity market and the news
affecting it.8

6
What is capital market, available at:
https://www.clearias.com/financial-market-money-market-and-capital-market/(22 April,2020)
7
significance of capital market, available at:
https://www.slideshare.net/kommaram/notes-on-indian-financial-markets-final-np-24822765(22 April,2020)
8
Ibid.
The most important use of an equity market index is as a benchmark for a portfolio of stocks.
All diversified portfolios, belonging either to retail investors or mutual funds, use the common
stock index as a yardstick for their returns. Indices are useful in modern financial application
of derivatives.
Capital Market Instruments9 –
some of the capital market instruments are:
• Equity
• Preference shares
• Debenture/ Bonds
• ADRs/ GDRs
• Derivatives
Corporate Securities-10
Shares
The total capital of a company may be divided into small units called shares. For example, if
the required capital of a company is US $5, 00,000 and is divided into 50,000 units of US $10
each, each unit is called a share of face value US $10. A share may be of any face value
depending upon the capital required and the number of shares into which it is divided. The
holders of the shares are called shareholders. The shares can be purchased or sold only in
integral multiples.
Stocks
The word stock refers to the old English law tradition where a share in the capital of the
company was not divided into “shares” of fixed denomination but was issued as one chunk.
This concept is no more prevalent, but the word “stock” continues. The word “joint stock
companies” also refers to this tradition.
Debt Instruments
A contractual arrangement in which the issuer agrees to pay interest and repay the borrowed
amount after a specified period of time is a debt instrument. Certain features common to all
debt instruments are:
• Maturity – the number of years over which the issuer agrees to meet the contractual
obligations is the term to maturity. Debt instruments are classified on the basis of the time
remaining to maturity • Par value – the face value or principal value of the debt instrument is
called the par value.
• Coupon rate – agreed rate of interest that is paid periodically to the investor and is calculated
as a percentage of the face value. Some of the debt instruments may not have an explicit coupon
rate, for instance zero coupon bonds. These bonds are issued on discount and redeemed at par.

9
Ibid.
10
Ibid. at 5
Thus the difference between the investor’s investment and return is the interest earned. Coupon
rates may be fixed for the term or may be variable. 613814#
• Call option – option available to the issuer, specified in the trust indenture, to ‘call in’ the
bonds and repay them at pre-determined price before maturity. Call feature acts like a ceiling
f or payments. The issuer may call the bonds before the stated maturity as it may recognize that
the interest rates may fall below the coupon rate and redeeming the bonds and replacing them
with securities of lower coupon rates will be economically beneficial. It is the same as the
prepayment option, where the borrower prepays before scheduled payments or slated maturity
o some bonds are issued with ‘call protection feature, i.e they would not be called for a
specified period of time
o Similar to the call option of the issuer there is a put option for the investor, to sell the securities
back to the issuer at a predetermined price and date. The investor may do so anticipating rise
in the interest rates wherein the investor would liquidate the funds and alternatively invest in
place of higher interest
• Refunding provisions – in case where the issuer may not have cash to redeem the debt
instruments the issuer may issue new debt instrument and use the proceeds to repay the
securities or to exercise the call option.
Debt instruments may be of various kinds depending on the repayment:
• Bullet payment– instruments where the issuer agrees to repay the entire amount at the
maturity date, i.e. lump sum payment is called bullet payment
• Sinking fund payment– instruments where the issuer agrees to retire a specified portion of
the debt each year is called sinking fund requirement
• Amortization – instruments where there are scheduled principal repayments before maturity
date are called amortizing instruments.11
What Is an American Depositary Receipt – ADR?
An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. depository
bank representing a specified number of shares—or as little as one share—investment in a
foreign company's stock. The ADR trades on markets in the U.S. as any stock would trade.

ADRs represent a feasible, liquid way for U.S. investors to purchase stock in companies
abroad. Foreign firms also benefit from ADRs, as they make it easier to attract American
investors and capital—without the hassle and expense of listing themselves on U.S. stock
exchanges. The certificates also provide access to foreign listed companies that would not be
open to U.S. investment otherwise.12

How Do American Depositary Receipts – ADRs -- work?

ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial
institution overseas. ADR holders do not have to transact the trade in the foreign currency or

11
Ibid. at 6
12
What is ADRs, available at:
https://www.investopedia.com/terms/a/adr.asp(22 April,2020)
worry about exchanging currency on the forex market. These securities clear through U.S.
settlement systems.

To offer ADRs a U.S. bank will purchase shares on a foreign exchange. The bank will hold the
stock as inventory and issue an ADR for domestic trading. ADRs list on either the New York
Stock Exchange (NYSE), American Stock Exchange (AMEX), or the NASDAQ, but they are
also sold over-the-counter (OTC).

U.S. banks require that foreign companies provide them with detailed financial information.
This requirement makes it easier for American investors to assess a company's financial
health.13

Global Depositary Receipt (GDR)

What Is a Global Depositary Receipt?
A global depositary receipt (GDR) is a bank certificate issued in more than one country
for shares in a foreign company.14

Understanding Global Depositary Receipt

A global depositary receipt (GDR) is very similar to an American depositary receipt (ADR). It
is a type of bank certificate that represents shares in a foreign company, such that a foreign
branch of an international bank then holds the shares. The shares themselves trade as domestic
shares, but, globally, various bank branches offer the shares for sale. Private markets use GDRs
to raise capital denominated in either U.S. dollars or euros. When private markets attempt to
obtain euros instead of U.S. dollars, GDRs are referred to as EDRs.

Investors trade GDRs in multiple markets, as they are considered to be negotiable certificates.
Investors use capital markets to facilitate the trade of long-term debt instruments and for the
purpose of generating capital. GDR transactions in the international market tend to have lower
associated costs than some other mechanisms that investors use to trade in foreign securities.15

13
Ibid.
14
What is GDRs, available at:
https://www.investopedia.com/terms/g/gdr.asp(22 April,2020)
15
Ibid.
16

Derivatives
What are derivatives? A derivative picks a risk or volatility in a financial asset, transaction,
market rate, or contingency, and creates a product the value of which will change as per changes
in the underlying risk or volatility. The idea is that someone may either try to safeguard against
such risk (hedging), or someone may take the risk, or may engage in a trade on the derivative,
based on the view that they want to execute. The risk that a derivative intends to trade is called
underlying.
A derivative is a financial instrument, whose value depends on the values of basic underlying
variable. In the sense, derivatives is a financial instrument that offers return based on the return
of some other underlying asset, i.e. the return is derived from another instrument
The best way will be take examples of uncertainties and the derivatives that can be structured
around the same.
• Stock prices are uncertain - Lot of forwards, options or futures contracts are based on
movements in prices of individual stocks or groups of stocks.

16
Process to issue ADR and GDR, available at:
https://www.slideshare.net/Yashal24/adr-and-gdr(22 April,2020)
 • Prices of commodities are uncertain - There are forwards, futures and options on
commodities.
• Interest rates are uncertain - There are interest rate swaps and futures.
• Foreign exchange rates are uncertain - There are exchange rate derivatives.
• Weather is uncertain - There are weather derivatives, and so on.
Derivative products initially emerged as a hedging device against fluctuations in commodity
prices, and commodity linked derivatives remained the sole form of such products for almost
three hundred years. It was primarily used by the farmers to protect themselves against
fluctuations in the price of their crops. From the time it was sown to the time it was ready for
harvest, farmers would face price uncertainties. Through the use of simple derivative products,
it was possible for the farmers to partially or fully transfer price risks by locking in asset
prices.17

Money Market and Capital Market: A comparison18

Point of Distinction Money Market Capital Market

1. Time period / Term Deals in short-term funds. Long term funds.

Deals in securities like

Deals in securities like treasury bills,
shares, debentures,
2. Instrument Dealt In commercial paper, bills of exchange,
bonds and
certificate of deposits etc.
government securities.

17
What are Derivatives, available at:
https://www.slideshare.net/kommaram/notes-on-indian-financial-markets-final-np-24822765(22 April,2020)
18
Difference between capital and money market, available at:
https://www.clearias.com/financial-market-money-market-and-capital-market/(22 April,2020)
 Stock brokers,

under writers,
Commercial banks,
3. Participants mutual funds,
NBFS, chit funds etc.
individual investors,

financial institutions

4. Regulatory body RBI SEBI

Bibliography and References

• Internet
• Wikipedia.com
• Investopedia.com
• Slideshare.com
• Clearias.com
• shodhganga.in