the government. In tun, the government has the money it needs to continue te function, Organized and Unorganized Financial System Organized Capital Market ‘The capital market which was intially controlled and organized by the Controller of + Capital issues act and then it was repiaced by the Securtles Exchange Board of india + For the governance of capital market in India. The capital market in India ie known as regulated in spheres by SEB! then and there, + The organized capital market ic bifurcated Into two categeries viz Primary ‘market and Secondary market. Primary Market: + Ibis the market forthe fresh issuance of securities by the new 3s well a5, exiting companies, In arde 10 raise the capital from the investors, ‘The Primary market Is further classified Into many segments Initial Public offering: As @ new company registered under the Companies Act 1956 | permitted to raise the capital from the market through the abridged prospectus. Public issue tis another mode of raising the capital from the common pubic by the exiting companies, Private placement: During the issue, the larger investment houses are invited forthe subscription ofthe issue of secures in bulk quantities ata discount price prior to the issue. After the issue, according to the investment policy of the institutional investors, they sll them at higher price tothe individual investors. Ths facilitates the inattutiona investors to book profits through the pracese of private placement. Underwriting: It is another mode of issuing the securities during the issue, more perticulery this mode of issue is found to be an avenue to offload the risk of ‘managing the issue of secures as well as to secure the Issue as fully subscribed, Secondary Market: Ite the market for the securtiae which are aleady available in the market, to buy and sell among the players. This is the market further cassiied into two different ‘categotes viz, mutualisation and demutualization of stock exchanges. Metalized Stock exchanges: These are the exchanges never have any distinction among the members, management and governing body of the stock exchange. ‘These are purely administered by the membars/brokers ofthe stock exchange, og. ‘traditional stock exchanges, Demutualized stock exchanges: These ete separete clstinct feces among themselves. “The roles and responsibilities ofthe brokers, governing body members and people in the management are clearly defined and performed by them without any ambiguty 9, OTCEL,NSE and so on ‘Un-Organized Capital Market Due to stingent guidelines of SEB, unofficial market trading actvtles are banned only in order to safeguard the interest ofthe investors Kerb trading which was teken place among the players of the stock market duting ‘the non-working hours ofthe stock exchange. This trading is known in other words as unofficial trading or black trading among the players asain: smeamaliaaaitbaiiantinassnensadieanihlh cnumciel inilmestanalee ee ee ee ee et eet io, Cree the non-working hours ofthe stack exchange, This trading ie known in other words as unofficial trading or black trading among the players “The next segment is nothing but the money market which controlled and monitored by the Reserve Bank of Indi. Components of Financial system Financial Concepts + Financial Assets + Financial intermediaries + Financial Markets. + Financial instruments + Financial Services + Financial institutions Favecillainies Fwd Mute Fanacilinenoens — Frncil Services Por yieees Sera etacer Banking NonBusig Many MiH.Capis Mt Tom Type FundBuadFeebaed leattinsinetttion | cee a ie Conner) Coops | Toasuy bls Meduatem | -HinPucha Buks Beis | Commercial Bits | “Lengtem | Futonng Parichat -Prinuy Mutt -Prinuy router - Merc ang Peale ee Steonday Mute Steeda owiies «Cet atng ~DesraiveMafot Innova tunes - Merges Fonign Banks Crguite fei organ fran Taghuins tions ‘inancial Assets = A Financial Asset isthe one which is used for production or consumption of for future creation of agseteFinancial intermediarieg = Financial intermediaries include all ypes of organization which intermedi foclitate financial transactions ofboth inviduae & corporate customers = It refers to all financial institutions & Investing inetitutions which facilitate financial ansactions in financial markets = Financial intermediaries in India consist of Organized & Unorganized Sector ‘nancial Markets > Financial Markets can be refered as to those centers & arrangements which faciitate buying & seling of financial assets, claim & services. = Financial markets in India consist of Organized & Unorganized Sector = Financial Market: Ig market place for selling financial securities: stocks, bonds and derivatives = A security is 2 piece of paper that represents the investor's rights to certain, prospects or property and the conditions under which he or she may exercise ‘those rights = Stock o shate represents ownership ght inthe corporation = Bond isa debt instrument issued by corporations who borrow money = Derivative: is a secutty that derives its value from the value of another security Finance is 2 prerequisite for modern business and finance institutions play @ vital role in economic system. I's through financial markets the financial system of an economy works. The main functions of financial markets are: 1. To facilitate creation and allocation of credit and liquidity: 2, To seve as intermediaries for mobilzation of savings 8. To assist process of balanced economic growth: 4.To provide financial convenience ‘Why Study Financial Markets? Financial markets, such as bond and stock markets, are crucial in our econemy, 1. These markets channel funds from savers to investors, thereby promoting wesc economy as a whole 3. Wellfunctioning financial markets, such a6 the bond market, stack market, and foreign exchange market, are key factors in producing high economic growth, “4. We will briefly examine each ofthese markets, Key statistics, and how we wil study them throughout thie couree 5 Dabt markets, or bond markets, allow goverments, corporations, and individuals to borrow to finance activities,aa i 6. In this marke, borrowers Issue a secuty, called a bond, that promises the imely payment of interest and principal over some specific time horizon. 7. The Interest rate isthe cos of borrowing, Organized Sector consists of Capital market & Money market ‘BnanciaLinsteuments = Itrefers to document that represent financial claims or financial assets. = A financial instrument is either cash; evidence of an ownership interest in an entity, ora contractual right to receive, or deliver, cash or another financial = Another Important constituent of financial system Is financial instruments. ‘They representa claim against the future income and wealth of other. wil 1 att eae oat otetit tm ons fo he pal of ade oft abana Rianne = Finance industry encompasses a broad range of organizations that deal with management af money = Orpanizations are Banks, Credit card co, Insurance co, Consumer Finance co, Stock brokerage, Investment Funds eteNew Financial Servoes & Products, = Merchant Banking = Loan synicaton. => Mutual Funds = Factoring, Frfeting, Leasing = Venture Capital = Corporate Advisory Services = Securitization Forwards, Futures, Swaps, Options. ‘SnanciaLinsttutions = Financial Institutions ere the institutions that provide financial services forts cents & members, = Financial institutions are the intermediaries who facilitate smacth functioning of the financial system by making investors and borrowers meet. They ‘mobilize savings ofthe surplus units and allocate them in productive activites promising @ better rate of return, = Financial institutions also provide services to entities seeking advice on various iesuee ranging from restructuring to diverification plans. They provide whole range of services to the entities who want to raise funds from the markets elsewnere = Financial insttations act as financial intermediaries because they act as ‘middlemen between savers and borrowers. Were these financial Insttuions ‘may be of Banking or Non-Banking institution. Why Study Financial institutions? = We will also spend considerable time discussing financial insttutions~the corporations, organizations, and networks that operate the socalled ‘matketplaces” (The Financial ystern) = Why Financial Markets are structured the way they are? > Helps get funds from savers to investors 2. The Role of Banks and Other Financial Inettuione 7 fa arcana = Focusing on the improvements in technology and its impact on how financial products are delivered a ‘4, Managing Risk in Finencial institutions‘grow, transmission of monetary policy through various channels becomes beter Role of Central Bank (RBI): | rete can old ots sning a nee tee atin. wl esti thes ofthe comma tar to nzeace he moneys by luring oat mane. hs condtin were aor the at th cormercl take wo av shed o have thn te Sant il have fo rene ewe dae ard inte foros hen he cout tenia ae pf oe he cet ber tmpced thi veutement nerf rece the money exp, he commer bank i roby be unable borow om the cal brn drt eee the ath eaves Hf they whe o make hater as, They htt act fuer depos tm uae an he eet tes bt canta bank yet by esr the nceny xe, +The central bank can influence the supply of money through special deposits. ‘These ave deposite atthe central bank which the banking sector is required to lodge These are then frozen, thus preventing the sector from accessing them even though Interest is pad at the average Treasury bill rate, Making these special deposits ‘reduces the level ofthe commercial banks! operational deposits which forces them tout back on lending + The supply of money can also be prohibited by the central bank by adjusting its Interest rate which it charges when the commercial banks wish to borrow money (the discount rate). Banks generally have a ratio of cash to deposits which they consider to be the minimum safe level. If command for cash is such that their ‘eserves fal below this level they wil able to borrow money from the central bank at Its discount rate, If market rates were 8% and the discount rate were also 8% then the banks might decrease their cash reserves to their minimum ratio knowing thet if demand exceeds supply they wil be able to borrow at 8%, The central bank, even if, ‘may aise its eiscount rate to 2 value above the market level, in order to encourage banks not to reduce their cash reserves to the minimum during excess loans. By talving the dlecount value to euch @ level, the commercial banke are ven an Incentive to hold moce reserves thus reducing the money multiplier and the money supply. + Another way the money supply can be affected by the central bank is through its I oe ‘operation of the interest rate, By raising or lowering interest rates the demand for money is respectively reduced or increased. If it sets them at a certain level it can clear the market at level by supplying sufficient money to match the demand, ‘Altemativly it could fhe the money supply at @ convinced rate and let the market clear the interest rates at the balance. Trying to fix the money supply s nat easy 0 central banks regulatly set the interest rate and provide the amount of money the smacket demands + The central bank may also involve the maney supply through operating on the ‘open market. Ths allows itt influence the money supply through the financial base i: aaa meneene aeeen ieakimenreiee memmennee eunen metas9:59 AM ‘Merchant Banking Meaning 1+ Marchant Banking Ie combination of Banking and consultancy services. t provides consultency to its cients for financial, marketing, managerial and legal matters. Consultancy means to provide advice, quidance and service for 2 fee. Ithelps a busineseman to start @ business. It helps to alse (collet) finance. It helps to expend end modemize the business. It helps in restructuring of a business. It helps to revive sick business units. I also helps ‘companies to register, buy and sell shares atthe stock exchange. Merchant Bonkng actos Francia Engnerfora Busnes. Functions of Merchant Banking* Raising Finance for Clients eg + Broker in Stock Exchange * Project Management ‘+ Managing Public Issue of Companies ‘= Handling Government Consent for industrial Projects ] eg ‘+ Money Market Operation + Leasing Services ] eg ¢ Management of Interest and Dividend Raising Finance for Clients: Merchant Banking helps its clients to raise finance through issue of shares, debentures, bank loans, etc. It helps its cients to raise finance from the domestic and international market. Th finance ie used for starting ‘a new business or projector for moderization or expansion ofthe business. Broker in Stock Exchange : Merchant bankers act as brokers in the stock exchange, They buy and sell shares on behalf of ther clients, They conduct research on equity shares. They alzo adviee ther cliante about which shares to buy, when to buy, how ‘much to buy and when to sell Large brokers, Mutual Funds, Venture capital ‘companies and Investment Banks offer merchant banking services, Project Management: Merchant bankers help their cents in the many ways. Fore, ‘dvising about location of a project, preparing 8 projectreport, conducting feasibility studies, making a plan for financing the project, finding out sources of finance, ‘advising about concessions and incentives fram the government, ‘Advice on Expansion and Modernization: Merchant bankers gve advice for ‘expansion and modernization of the business units. They give expert advice on ‘mergers and amalgamations, acquisition and takeovers, diversification of business, foreign collaborations and joint ventures, technology up-gradatin, ete. “Managing Public issue of Companies: Merchant bank advice and manage the pute Issue of companies. They provide following services: ‘+ Advise onthe timing ofthe pubic issue ‘+ Advise onthe siz and price ofthe issue. ‘Acting as manager tothe issue, and helping in accepting applications and allotment of securities. Help in appointing underwriters and brokers to the issue, Listing of i aa eetof securities. Help in appointing underwriters and brokers to the issue. Listing of shares on the stock exchange, etc Handling Government Consent for Industrial Projects: A businessman has to get ‘government permission for stating of the project. Similarly, a company requires permission for expansion oc modernization activities. For this, many formalities have ‘t0.b9.completed, Merchant barks do al this wor fr their conte, ‘Special Assistance to Small Companies and Entrepreneurs: Merchant banks advise ‘small companies about business opportunites, government polices, incentives and concessions avalabe, I also helps them to take advantage of these opportunities, caneessions ete Services to Public Sector Units: Merchant banks offer many services to public sector units and public utilities. They help in raising longterm capita, marketing of secutls,forelgn collaborations and arranging long-term finance ffom term lending Institutions. Revival of Slok Industrial Units: Merchant banks help to revive (cure) sick industria Units. It negotiates with different agencies like banks, term lending institutions, and BIFR (Board for Industrial and Finencial Reconstruction), I also plans end executes the full revival pockage Portfolio Management: A merchant bank manages the portfalios (Investments) of Its clients. This makes investments safe, quid and profitable forthe client. offers expert guidance to ite clients for taking investment decisions Corporate Restructuring: it includes mergers or acquistions of existing business Units, sale of existing unit or disirvestment. This requires proper negotiations, preparation of documents and completion of legal formalities. Merchant bankers offer all these services to thelr clients Money Market Operation: Merchant bankers deal with and underarite short-term ‘money marke instrument, such as: Government Bonds. + Centtioate of deposit esued by banks and financial ineiutions + Commercil paper issued by large corporate fms. + Treasury bils issued by the Government (Herein india by RAD. Leasing Services: Merchant bankers algo help in leasing services. Lease ie a contract between the lessor and lessee, whereby the lessor allows the use of his specific asset such as equipment by the lessee for a certain period, The lessor charges a fee called rentals Management of interest and Dividend: Merchant bankers help their clients in the ‘management of interest on debentures / loans, and dividend on shares. They also ‘advise their client about the timing (interim / year) and rat of cvidend. Definition of investment Company’ ‘+ A corporation or trust engaged inthe business of investing the pooled capital of investors in financial secures. This is most often done either through a9:59 AMO the US, most investment companies are registered with and regulated by the ‘Secutties & Exchange Commission under the Investment Company Act of 1940, Definition of Management Investment Company’ ‘+ Aformal name fora company that sells and manages a portfolio of securities ‘A management investment company is one of the thee fundamental types of Investment companies, the other two being unit investment trusts and face ‘amount certificate companies. Management investment companies allow investors to poo! their capital with that of other investors in order to purchase professionally managed groups of diversified securities, Meaning of Development Banks ‘+ Development barks are specialized financial Institutions. They provide medium and longiterm finance to the industial and agricutural sector. They Provide finance to beth private and public sector. Development banks are ‘multipurpose financial institutions. They do term lending, investment in securities end other activities, They even promote saving and investment habit inthe public Definition of Development Banks ‘+ “Development banks are those financial institutions whose prime goal (motive) Isto finance the primary (basic) needs ofthe society, Such funding results in the growth and development of social and economic sectors of the nation, However, needs of the society vary from region to region due to differences s58en in ts communal structure, economy and other aspects? ‘+ “Development banks are financial institutions established to lend (loan) finance (money) on subsidized interest rate, Such lending is sanctioned to Promote and develop important sectors lke agriculture, industry, import: —= ‘export, housing and allied activities." Mutual fund “+A mutual fund ie 2 type of profestionally managed collective investment — tcheme that poole money from many investore to purchase eecurtes. While there Is no legal definition of the term “mutual fund, it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. They are sometimes refered to as “investment companies" of “eoistered Investment companies. “Most mutual funds are “openended, meaning stockholders can buy or sel shares ofthe fund at any time. Hedge funds are not considered a typeof mutual fund. ‘+ Inthe United States, mutual funds must be registered with the Securities and Exchange Commission, overseen by a board of directors (or board of trustees if organized as a trust rather than @ corporation or partnership) and menaged by a registered investment adviser. Mutual funds, tke other registered Investment companies, are also subject to an extensive and detailed regulatory regime set forth in the Investment Company Act of 1940. Mutual a © <ee ee eee ee eee eet ‘+ Mutual funds have both advantages and disadvantages compared to direct Investing in individual securities. They have along history in the United States. ‘Today they play an important role in household finances, most notably in retirement planning 1+ There are 3 types of U.S, mutual funds: open-end, unit investment trust, and closedend. The most common type, the openend fund, must be wing to buy back shares from investors every business day. Exchangetraded funds (or "ETFs" for shor) are opemend funds or unit investment trusts that trade on an exchange. Open-end funds are most common, but exchange-traded funds have been gaining in popular ‘+ Mutual funds are generally classified by their principal investments, The four main categories of funds are money matket funds, bond or fhed income funds, stock or equity funds and hybrid funds. Funds may also be categorized ‘2s index or actively managed, ‘Advantages and Disadvantages ‘+ Increased diversification: A fund must hold many securities, Diversifying reduces risks compared to holding a single stock, bond, and other avaiable ‘+ Dally liquidity: This concept applies only to opemend funds. Shareholders may trade their holdings withthe fund manager atthe close ofa trading day based ‘on the closing net asset value ofthe fund's holdings. However, there may be fees and restrictions as stated in the fund prospectus. For holders of = Individual stocks, bonds, closedend funds, ETFs, and other avaiable Instruments, there may not be a buyet/sllr for that inetrument every day Such inetrumente ate termed ilqui. ‘+ Professional investment management: A highly valable aspect of a fund lscussed in the prospectus. Actively managed funds may have large staffs of ‘analysts who actively trade the fund holdings. Management of an index fund may just passively rebelance holdings to match = market index lke the ‘Standard and Poors 600 Index ‘+ Ablity to participate in Investments that may be avallable only to larger Investors: Foreign markets in particular, are rarely open and affordable for Individual investors. More over the esearch required to make sensible foreign Investments may require knowledge of another language, and the rules of regulations of ether markets. 1+ Service and convenience: roof a mutual fund, but rather a feature ofthe fund man. 1ereasingly n recent years, there are funds, notably Exchar JeTFs) that are purely investment Instruments without any adtltional services from the fund management ‘company. ‘+ Government oversight Largely, the US government’ role with mutual funds is to require the publication of a prospectus describing the fund. No sucheeceees peters: eeeeneweenener ieerwen ieeedercenl Seamer senl lice The National Stock Exchange of Ingia (NSE), The National Securities Depository Services Ltd, (NSDL) and the Stock Holding Corporation of india (SHECIL) Objectives of IDB ‘The main objectives of IDB isto serve as the apex institution for term finance for industry in india, ts objectives include o @ ® “ ‘Co-ordination, regulation and supervision ofthe working of other financial Institutions such as FCI, ICICI, UT, LIC Commercial Banks and SFCs. ‘Supplementing the resources of other financial institutions and thereby Widening the scope of their assistance, Planning, promotion and development of Key industries and iversifications of industrial growth. Dewsing and enforcing a system of industrial growth that conforms to national priorities Function OF 1981 ‘The Bt has been established to perform the fellowing functions: o @ ® “ © © o © ° 00) om ‘To grant loans and advances to IFC, SFC or any othe financial institution by way of refinancing of loane granted by euch institutions which are repayable within 25 year To grant loans and advances to scheduled banks or state co-operative banks ty way of refinancing of loans granted by such instutions which are repayable in 15 years To grant loans and advances to IFCI, SFCs, other insttutions, scheduled banks, state oo-operative banks by way of refinancing of loans granted by such institution to industrial concems for exports. To discount or rediscount ils of industrial conceens. To underwtite oF to subscribe to shares or debentures of industrial To subscribe to or purchase stock, shares, bonds and debentures of other financial institutions ‘To grant line of creditor loans and advances to other financial institutions such as IF, SFCs, et. To grant loans to any industrial concern, To guarantee defered payment due from any industrial concer, To quarantee loans ralsed by industrial concerns in the market oF from Institutions. “To provide consultancy and merchant banking services in a autelde Inca, Industrial Finance Corporation of India (IEC. ‘+ At the time of Independence In 1947, India’s capital market was relativelyeee eee ‘Exporkimport Bank of india (EXIM) ‘The Export-mport (EXIM) Bank of India i the principal financial institution in India for coordinating the working of institutions engaged in financing export and import de. It Isa statutory corporation wholly owned by the Government of India. t was established on January 1, 1982 for the purpose of financing, facilitating and promoting foreign trade of India Capital ‘The authorized capital ofthe EXIM Bank is Rs, 200 crore and paid up capital is Rs. 100 crore, wholly subscribed by the Central Government. The bank can raise ‘addtional resources through: () Loaney/grants from Central Government and Reserve Bank of India: (i Lines of ereit from institutions abroad (li) Funds raleed from Euro Currency markets () Bonds issued in nda, Functions of Export-Import Bank of india ‘The main functions of the EXIM Bank areas follows: ‘+ Financing of exports and imports of goods and services, not only of Inca but ‘also ofthe thie world countries; ‘+ Financing of exports and imports of machinery and equipment on lease basis; ‘+ Financing of joint ventures in foreign countries ‘+ Providing loans to Indian partiee to enable them to contibute to the share capital of jlnt ventures in foreign countries; 1+ {0 undertake limited merchant banking functions such at undenwrting of stocks, shares, bonds or debentures of Indian companies engaged in export corimport and 1+ To provide technical, adminctrative and financial aecletance to parties in ‘connection with export and import ‘The Export-Import Bank of India, set up In 1982, for the purpose of financing facilitating and promating foreign rade of India, isthe principal financial inetitution in the country for coordinating working of institutions engaged in financing exports ‘end imports The Exim bank is fully owned by the Government of India and is managed by a Board of Directors with representation from Government, financial institutions, benk and.business community. The operations are grouped into Project Finance. Trade Finance and Oversees investment Finance, supported by Planning and Co-ordination Groups Objectives and Functions ‘+ Grant of loans and advances in India solely or jointly with commercial banks to.persons exporting or intending to export India goods which may include the ‘expor of tukey projec and cl consultancy services + Grant of ines ered to Goverrmanta, financial inatitutions and other eutable ‘organizations in foreign counties to enable person eutsde India to import from India, goods including turnkey projects, civil construction coatracis and ‘other services including consultancy services. + Handling transaction where a mix of government creit and commercial credit for exports involved ‘+ Purchasing, discounting and negotiating export bis. + Selling or discounting export bils in intemational markets + Discounting of export bills negotiated or purchased by a scheduled bank or financial institution notified by government, or granting loans and advances against such bis + Providing refinance faites to specified financial institutions against credits ‘extended by them for specified exports or imports. + Granting loans and advances of issuing guarantees solely or jointly with a ‘commercial bank forthe import of goods and services from abroad, + Issuing confirmation/endotsing letters of credit on behalf of exporters in lea, regotiating, collecting ils under letters of credit, opening laters of crit on behalf of importers of goods is services and negotiating documents recelved there under. ‘+ Buying and seling foreign exchange and performing such other functions of ‘an authorized dealer 2s may necessary forthe function of an export- import bank ‘+ Undertaking and financing research, surveys and techno-economic studies bearing onthe promotion and development of international trade, Cooperative Banking Institutions ‘+ According to the International Co-operative Allance Statement of co-operative ldantity, 2 co-operative is an autonomous association of persons united voluntary to meet their common economis, socal, and cultural needs and ‘acpratione through a joinly-owned and democratically contrliad enterprise Cooperatives are based on the values of celfhelp, selfresponcibilty, ‘democracy, equality, equity and solidarity. Inthe tradition of thet founders, co ‘operative members believe inthe ethical values of honesty, openness, soci responsibilty and caring for others.sell securities as they are continuously available. Basically capital market ‘ansactions are related to the stack exchanges. Thus marketabilly in the capital ‘market becomes easy, Importance of Capital Market ~ Capital market plays an important role in mobilizing resources, and diverting them ‘productive channels. In this way, it facilitates and promotes the process of economic ‘growth in the county. \Various functions and significance of capital market are discussed below: 1. Link between Savers and Investors: ‘The copital market functions as a link between savers and investors. it plays an Important role in mobilizing the savings and diverting them in productive investment. In thie way, capital market plays a vital role in traneferting the financial resources from surplus and wasteful areas to deficit and productive areas, thus increasing the ‘productivity and prosperity of the country. 2. Encouragement to Saving: ‘With the development of capital, market, the banking and non-banking institutions provide facilites, which encourage people to save more. In the less- developed countries, in the absence of a capital market, there are very litle savings and those who save often invest their savings in unproductive and wasteful directions, Le, in ‘eal estate (ke land, gold, and jewelry) and conspicuous consumption 8. Encouragement to Investment ‘The capital market facttates lending to the businessmen and the government and. ‘thus encourages investment. it provides facilities through banks and nonbank financial institutions. Various financial assets, e.g, shares, securities, bonds, etc, induce savers to lend to the government or invest in industry. Wi ff financial institutions, capital becomes more mobile, interest rate falls and Investment increases. the development ‘4, Promotes Economie Growth: “The capital market not only reflects the general condition of the economy, but also smoothens and accelerates the process of economic growth. Various institutions of the capital market, like nonbank financial intermediaries, allocate the resources tatlonally in accordance with the development needs of the country. The proper __allocation of resources results in the expansion of trade and industry in both public - ~ and private sectors, thus promoting balanced economic growth inthe country. 5. Stability in Security Prices: ‘The capital market tends to stabilize the values of stocks and securities and reduce the fluctuations in the prices to the minimum. The process of stabilization is ‘SAUNA ley HURTING DARNNAL Hattie beeline: nel ides tale ined ecgthe fluctuations in the prices to the minimum. The process of stabilization ie {aclitated by providing capital tothe borrowers at a lower interest rate and reducing the speculative and unproductive activities. 6. Benefits to Investors: ‘The credit market helps the investors, term financial assets, n many ways: fe, those who have funds to invest in long- (@ _Itbrings together the buyers and sellers of securities and thus ensure the marketability of investments, © Byadvertsing secunty prices, the Stock Exchange enables the Investors to oop track of their investments and channelize them into most profitable lines, (©) It safeguards the interests of the investors by compensating them from the Stock Exchange Compensating Fund in the event af fraud and default, Instruments of Capital Markets Capital market instrumente are responsible for generating funds for companies, ‘corporations and sometimes national governments, These are used by the investors, to make a profit out of thelr respective markets. ‘There ae a number of capital market instruments used for market trade, including - + Stocks + Bonds + Debentures + Treasury bile ‘+ Foreign Exchange + Fixed deposits, and others Capital market is also known as Securities Market because long term funds are talged through trade on debt and equity securities. These activites may be ‘conducted by both companies and governments. This market is divided into: 1. Primary capital market and 2. Secondary capital market, Primary Markets ing of Primary Markets + The primary markets deal with the trading of newly issued securities. The corporations, governments and companies Issue securities like stocks and bonds when they need to raise capital. The investors can purchase the stocks cor bonds issued by the companies. + Money thus earned from the selling of securities goes directly to the issuing ‘company. The primary markets are also called New Issue Market (NIM). Initial Public Offering is a typical method of issuing security in the primary market. The functioning of the primary market is crucial for both the capital market tnd economy as it is the place where the capital formation takes place.‘and economy as iis the place where the capital formation takes place. ‘The primary market is also known as the new iesues market. It deals with new securities being issued for the first time. The essential function of a primary market Is to facilitate the wansfer of investable funds from savers to entrepreneurs seeking to establish new enterprises or to expand existing ones ‘through the issue of securities for the first time. The investors inthis market ‘are banks, financial institutions, insurance companies, mutual funds and Individuals, ‘A company can raise capital through the primary market in the form of equity shares, preference shares, debentures, loans and deposits. Funds raised may be for setting up new projects, expansion, diversification, madernization of existing projects, mergers and takeovers ete. Companies raise funds to finance thelr projects through various methods. The promoters can bring thelr ‘own money of borrow from the financial institutions oF mobilize capital by issuing securities. The funds maybe raised through issue of fresh shares at par or premium, preferences shares, debentures or global depository receipts. ‘The main objectives of a capital iesue are given below: (2) Topromote anew company (©) Toexpand an existing company (© Todiversiy the production (6) Tomeet the regular working capital requirements (©) Tocepitaze the reserves Stocks available for the fist time are offered through primary market. The issuer may be a new company or an existing company. These issues may be ‘of new type or the security used in the past. In the primary market the issuer ccan be considered as @ manufacturer. The issuing houses, investment bankers and brokers act as the channel of cistribution for the new issues. They take the responsibilty of selling the stocks to the public. Role of Primary Market ‘Capital formation - It provides attractive issue to the potential investors and with this ‘company can raise capital at lower coste. Liquidity - As the securities issued in primary market can be immediately sold in ‘secondary market the rate of liquidity i higher. Diversification - Many financial intermediaries invest in primary market; therefore there is less rik if there is failure in investment as the company does nat depend on 4a single investor. The diversification of investment reduces the overall risk. Reduction in cost - Prospectus containing all details about the securities are given to the Investors hence reducing the cost is searching and assessing the individualnot, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities." Features of Stock Exchange Characterities or features of stock exchange are @ » © @ © 0 @ ) 0 Market for securities : Stock exchange is a market, where securities of corporate bodies, goverment and semigovernment bodies are bought ‘and sold, Deals in second hand securities: It deals with shaves, debentures bonds ‘and such securities already issued by the companies. In short it deals with ‘existing oF second hand securities and hence itis called secondary market. Regulates trade in securities : Stock exchange does not buy or sell any securities on its own account. It merely provides the necessary infrastructure and faclities for trade in securities to its members and brokers wo trade in securities. It regulates the trade activities so as to censure free and fair trade Allows dealings only in listed securities : In fact, stock exchanges ‘maintain an official Ist of securities that could be purchased and sold on its floor. Securities which do not figure in the offical ist of stock exchange are called unlisted securties, Such unlisted securities cannot be wraded in the stock exchange, ‘Traneactions effected only through members : All the transactions in securities at the stock exchange are effected only through its authorized brokers and members. Outsiders or dict investors are not allowed to ‘enter in the trading circles of the stock exchange. Investors have to buy of sel the securities at the stock exchange through the authorized brokers nly ‘Association of persons :A stock exchange is an association of persons or ‘body of incviduals which may be registered or unregistered. Recognition from Central Government : Stock exchange is an organized ‘market It equites rezogniton from the Central Government. ‘Working as per rules : Buying and seling transactions in securities atthe stock exchange ate governed by the rules and regulations of stock ‘exchange a5 well as SEB! Guidelines. No deviation from the rules and ‘uidelines is alowed in ary case. ‘Specific location : Stock exchange is a particular market place where authorized brokers come together daly (Le. an working days) on the floor (of market called trading circles and conduct trading activities. The prices of different securities traded are shown on electronic boards. After the ‘wotking hours market ie closed. All the working of stock exchanges is ‘conducted and controlled through computers and electronic system. Financial Barometers: Stock exchanges are the financial berometers and development indicators of national economy of the country. Industral ‘growth and stability is reflected inthe index of stock exchange. Functions of Stock Exchange 1. Continuous and ready market for securities Stock exchange provides a ready and continuous market for purchase and sale of securities. t provides ready outlet for buying and seling of securities, Stock exchange also acts as an outle/counter for the sale of listed secures.~ 2. Faclitates evaluation of securities + Stock exchange is useful for the evaluation of industrial securities. This tenables investors to know the true worth of their holdings at any time, Comparison of companies in the same industy is possible through stock exchange quotations (ie. price lst), 3. 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. 4. 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, 5, Regulates company management *+ Listed companies have to comply with rules and regulations of concerned stock exchange and work under the vigilance (.e supervision) of stock ‘exchange authorities, 6. Facilitates public borrowing '+ Stock exchange serves as a platform for marketing Government securities. It enables government to raise public debt easly and quickly 7. Provides clearing house facility + Stock exchange provides @ clearing house facility to members. It setlles the \ransactione among the members quicky and with eace. The members have to pay or receive only the net dues (balance amounts) because ofthe clearing house facility 8, Facitates healthy speculation ‘+ Healthy speculation, keeps the exchange active, Normal speculation is not dangerous but provides more business to the exchange. However, excessive speculation is undesiable ag it is dangerous to investors & the growth of corporate sector. ~ 9, Serves as Economic Barometer + Stock exchange indicates the state of health of companies and the national economy. It acts as a barometer ofthe economic situation / conditions, 10. Faciitates Bank Lending + Banks easily know the prices of quoted securities. They olfer loans to customers against corporate securities, Thi gives convenience tothe owners of secures. Benefits to the Community-Investors-Companies ‘+ Tolist any company nthe stock exchange isnot easy. Ths is because when ‘company wants to be isted in the stock exchange it has to satisfy many legal requirements under the lays regulation public companies as well the stock exchange listing requirements. However when company is listed in a stock exchange it enjoys many benefits compared to when it was a private10:03 AM@ Features of Organized and Unorganized Money Markets Indian money market is characterized by its dichotomy ie. there are two sectors of money market. The organized sector and unorganized eector. The organized cector Is within the direct purview of RBI regulations. The unorganized sector consists of indigenous bankers, money lenders, non-banking financial institutions etc. ‘STRUCTURE OF INDIAN MONEY MARKET. ORGANISED SECTOR ‘+ Organized Money Market is not a single market, it consist of number of ‘markets, The most important feature of money market instrument is that itis liquid. Ite characterized by high degree of safety of principal. Folowing are the instruments which are traded in money market Call and Notice Money Market “Treasury Bll Market ‘Commercial Bills Cotificate of Deposit Commercial Papers Money Market Mutual Funds 7. The REPO Market 8. OFHI 1) Calland Notice Money Market:- + The market for extremely short period is referred as call money market. Under call money market, funds are transacted on overnight basis, The participants ‘are mostly banks. Therefore itis also called Inter-Bank Money Market. Under notice money market funds are transacted for 2 days and 14 days period. The lender iesuee a notice to the borrower 2 to 3 days before the funde are to be Paid, On receipt of notice, borrower has to repay the funds. ‘+ In thie market the rate at which funde are borrowed and lent ie called the eal ‘money rate. The call money rate is determined by demand and supply of short ‘term funds. In call money market the main participants are commercial banks, ‘co-operative banks and primary dealers. They paticipate as borrowers and lenders, Discount and Finance House of India (OFHI), Nor-banking financial inetitutions lke LIC, GIC, UTI, and NABARD etc. are allowed to participate in call money market as lenders. ‘+ Call money markets are located in big commercial centres like Mumbai, Kolkata, Chennai, Delhi ete. Call money matket is the indicator of liquidity positon of money market. RBI intervenes in call money market as there is Close link betwoen the call money market and other segments of money market. 2) ‘Treasury Bil Market (T- ils) = a © <2) ‘Treasury Bill Market (T- ils) = + This market deals In Treasury Alls of short term duration issued by RE on behalf of Government of India. At present thvee types of treacury bille are issued through auctions, namely 91 day, 182 day and364day treasury bills, State government does not issue any treasury bis. Interest is determined by market forces. Treasuy bils ere available for a minimum amount of Rs, 25000 and in multiples of Rs. 25,000. Periodic auctions are held for their love + Tolls are highly liquid, readily available; there is absence of rik of default. India T-bills have narrow market and are undeveloped, Commercial Banks, Primary Deelers, Mutual Funds, Corporates, Financial Institutions, Provident or Pension Funds and insurance Companies can participate in T-bills market. 3) Commercial Bits + Commercial bills are short term, negotiable and selfiquidating money market Instruments with low rsk. A bill of exchange is drawn by a seller on the buyer to make payment within a certain perlod of time. Generally, the matury period is of three months. Commercial bill can be resold a numberof times during the usance period of bill The commercial bills are purchased and discounted by commercial banks and are rediscounted by financial Institutions tke EXIM banks, S108}, IDB ete + Inndia, the commercial bill market is very much underdeveloped. RB is trying to develop the bill market in our country. RBI has introduced an innovative Instrument known as “Derivative Usance Promissory Notes, with a view to climinate movement of papers and to facilitate multiple rediscounting 4) Contficate Of Deposits (CDs)~ + CDs are issued by Commercial banks and development financial institutions. CCDs are unsecured, negotiable promissory notes issued at a discount to the face value, The scheme of COs was introduced in 1989 by RBI. The main purpose was to enable the commercial banks to raise funds from market. At present, the maturity period of CDs ranges from 3 months to 1 year. They are Issued in muitiples of Rs, 25 lakh subject to a minimum size of Rs. 1 crore (CDs can be issued at discount to face value, They are freely transferable but only ater the lock-in-period of 45 days ater the date of issue. + Iningia the size of CDs market is quite small + In 1992, RB! allowed four 4 5 ICICY, IDB, FCI and IRL 10 goue CDs with a maturity three years. 15) Commercial Papers (CP) = Hl + Commercial Papers were introduced in January 1990, The CommercialCommercial Papers. were introduced in January 1990, The Commercial — Papers con be issued by listed company which has working capital of not less than Rs. 5 cores. They could be issued in multiple of Rs. 25 laths, The ‘minimum sizeof issue being Rs. 1 core. At present the maturity period of CPs ranges between 7 days to 7 year. CPs are iseued at a discount to lis face value and redeemed atts face value. 66). Money Market Mutual Funds (MMMFs):- ‘A Scheme of MMMFs was introduced by RBI in 1992. The goal was to provide ‘an addtional short-term avenue to individual investors. In November 1995 RBI ‘made the scheme more flexible, The existing guidelines allow banks, public financial inetitutione and aleo private eector inetitutione to eet up MMMFs, ‘The ceiling of Rs. 50 crores onthe size of MMMFs stipulated earlier, has been Wwithdravm, MMMES are allowed to issue units to corporate enterprises and ‘thers on par with other mutual funds. Resources mobilized by MMMIFS are ‘now required to be invested in call money, CD, CPs, Commercial Bills arising out of genuine trade transactions, treasury bills and government dated ‘securities having an unexpired maturity up to one year. Since March 7, 2000 [MMM heve been brought under the purview of SEBI regulations. At present there are 3 MMMFs in operation. 7) The Repo Market;- 8) Repo was introduced in December 1992. Repo is @ repurchase agreement. It ‘means seling @ security under an agreement to repurchase it at @ predetermined date and rate, Repo transactions are affected between banks {and financial institutions and among bank themselves, RBI also undertake Repo. Jn November 1996, RBI introduced Reverse Repo. it means buying a sacurlty (on a spot basis with a commitment to resell ona forward basis. Reverse Repo transactions ore affected with scheduled commercial banks and primary dealers, In March 2003, to broaden the Repo market, RBI allowed NBFCs, Mutual Funds, Housing Finance and Companies. and Insurance Companies. to Undertake REPO trancactione, Discount and Finance House Of India (OFHI) In 1988, DFHI was set up by nec by RB, public sector banks ‘and all India financial nett tributed to its paid up capita It is playing an important role in developing an active secondary market in ‘Money Market Instruments In February 1996, it was accredited as a Primary Dealer (PD). The DFHI deals in treasury bils, commercial bills, CDs, CPs, short term deposits, call money market and government securities Unorganized Sector Of Money Market = ‘The economy on one hand performs through organized sector and on other hand in rural areas there is contiwance of unorganized, informal and Indigenous sector. The unorganized money market mostly finances short term financial needs of farmers and small_businessmen. The main