indian money market and capital market

Indian Money Indian Money

and and

capital marketcapital market

Indian Money Indian Money

and and

capital marketcapital market

Money MarketMoney MarketMoney MarketMoney Market

The money market is the market in which short – term funds are borrowed and lent

According to RBI “ Money market is centre for dealings, mainly of a short-term character, in monetary assets, it meets the short – term requirements of the borrowers and provides liquidity or cash to lenders. It is the place where short term surplus investible funds at the disposal of the financial and other institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the govt.”

Functions of Money MarketFunctions of Money MarketFunctions of Money MarketFunctions of Money Market

by providing various kinds of credit instruments, money market augments the supply of funds.

The efficient working of the money market helps minimize the gluts and stringencies in the money market due to the seasonal variations in the flow of and demand for funds.

A money market helps in avoiding seasonal fluctuations in interest rates.

It enhances the amount of liquidity available to the economy.

By augmenting the supply of funds, a money market helps in making funds available at cheaper rates.

Functions of Money MarketFunctions of Money MarketFunctions of Money MarketFunctions of Money Market

Through the quick transfer of funds from one place to another, helps in avoiding regional gluts and stringencies of funds.

By providing profitable investment opportunities for short-term funds, helps in increasing the profit of the financial institutions.

Money market Constituents and InstrumentsMoney market Constituents and InstrumentsMoney market Constituents and InstrumentsMoney market Constituents and Instruments

Money market can be classified into two types- Inner spheres Outer spheres Inner spheres includes banks, negotiable

securities, finance companies. Outer spheres include solicitors, brokers of

securities and entire system of trade and credit. The central bank, commercial bank, co-

operative banks, discount houses, are the main constituents of well developed money market.

Money market Constituents and InstrumentsMoney market Constituents and InstrumentsMoney market Constituents and InstrumentsMoney market Constituents and Instruments

In developing countries like India, the money market is broadly divided into organized and unorganized sectors.

Chambers of commerce, trade associations, etc help the smooth and efficient functioning of the money market by helping the collection and distribution of information to industry, trade and commerce.

Instruments of Money MarketInstruments of Money MarketInstruments of Money MarketInstruments of Money Market

Call/Notice money All categories of banks and financial institutions

are allowed to participate in call/notice money. The funds are lent for one day or from Saturday

to Monday or for a period of 14 days.Commercial Bills Used to facilitate credit sales. Can be discounted with banks, when people are

in need of funds.

Instruments of Money MarketInstruments of Money MarketInstruments of Money MarketInstruments of Money Market

Treasury Bills Promissory notes issued by the Central govt. to

raise short term funds to bridge short term mismatch between receipts and expenditure.

Commercial Paper Unsecured promissory notes of short-term

maturity of highly rated companies, issued tom meet working capital requirements.

Certificate of Deposits Introduced by RBI in 1989 Issued by banks at a discount and face value is

payable at maturity..

Instruments of Money MarketInstruments of Money MarketInstruments of Money MarketInstruments of Money Market

Issued by banks during periods of tight liquidity. The CD’s are short-term deposit instruments for

a period ranging from three months to one year.

Indian Money MarketIndian Money MarketIndian Money MarketIndian Money Market

Indian money market id broadly divided in to two parts –

Unorganized sectorsOrganized sector unorganized sector of money comprises of

unregulated non-bank financial intermediaries, indigenous banks, money lenders etc.

The organized sector of the Indian money market comprises the RBI, commercial banks, foreign banks, co-operative banks, finance corporations, mutual funds, discount and finance house of India limited

Capital MarketCapital MarketCapital MarketCapital Market

Market for long – term funds. Market for long – term loanable funds as distinct

from money market which deals in short-term funds.

Nature and ConstituentsNature and ConstituentsNature and ConstituentsNature and Constituents

Consists of a number of individuals and Institutions.

Stock exchanges, commercial banks, financial institutions, co-operative banks, insurance companies etc. are important constituents of the capital market.

Indian Capital MarketIndian Capital MarketIndian Capital MarketIndian Capital Market

Consists of 1. Organized Sectors2. Unorganized sectors

Indian Capital Market Structure

Capital MarketCapital Market

Marketable SecuritiesMarketable Securities Non-Marketing SecuritiesNon-Marketing Securities

Govt. Govt. SecuritiesSecurities

Corporate Corporate securitiessecurities

Mutual Mutual FundsFundsBondsBonds Banks Banks

depositsdepositsDeposits Deposits

with with companiescompanies

Loans & Loans & advances of advances of bank &FIbank &FI

Post office Post office Deposits & Deposits & certificatescertificates

New Issue MarketNew Issue Market

- Original- Original

StockStock

MarketMarket

New Issue MarketNew Issue Market

- Players- Issues- Players- Issues

•PromotersPromoters•AssociatesAssociates•EmployeesEmployees•PublicPublic

•BrokersBrokers•JobbersJobbers•DealersDealers•Badla FinanciersBadla Financiers

•Merchant bankersMerchant bankers• underwritersunderwriters•Ad. AgenciesAd. Agencies

Indian Capital Market StructureIndian Capital Market Structure

Development of the capital marketDevelopment of the capital marketDevelopment of the capital marketDevelopment of the capital market

The Indian capital market has undergone remarkable changes in the post independence period.

The important facts that have contributed to the development of the capital market in India are-

Legislative measures. Establishment of development banks.Growth of underwriting business. Public confidence. Increasing awareness of investment

opportunities.Capital Market reform.

Stock ExchangeStock ExchangeStock ExchangeStock Exchange

“ Stock exchange is a market in which securities are brought and sold”

“ Stock exchange means any body of individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.”

Functions of Stock ExchangeFunctions of Stock ExchangeFunctions of Stock ExchangeFunctions of Stock Exchange

Provides a ready market for buying and selling of securities.

Directs flow of capital in the most profitable channels.

Facilitates speculation. Promotes industrial growth and economic

development. Promotes habit of savings and investment.

How Business is Transacted in a stock ExchangeHow Business is Transacted in a stock ExchangeHow Business is Transacted in a stock ExchangeHow Business is Transacted in a stock Exchange

A typical investment transaction will consist of four stages-

Placing an order with a broker. Execution of Order Reporting deal to the client Settlement of transactions.

Regulation of Stock Exchange

Securities Contracts (regulation) Act 1956Securities Contracts (regulation) Act 1956Securities Contracts (regulation) Act 1956Securities Contracts (regulation) Act 1956

SCRA enacted in 1956, came into force on February 20, 1957.

Objectives To prevent undesirable transaction in securities To regulate dealings in securities Regulation of stock exchanges. Regulation of buying and selling of securities

out side the limits of stock exchange.

ProvisionsProvisionsProvisionsProvisions

1. Grant of Recognition The Act provides that only recognized stock

exchanges can function in the country. As of today, all the 23 stock exchanges have

been recognized by the govt. The grant of recognition of the stock exchange

shall be published in the Gazette of India and will come into effect from the date of publication in the gazette.

ProvisionsProvisionsProvisionsProvisions

2. Submission of Returns Section 6 of the Act lays down that every stock

exchange shall furnish to the central govt. such periodical returns as may be prescribed relating to its affairs.

The periodical returns shall be filled by the recognized stock exchanges before 31st January each year.

ProvisionsProvisionsProvisionsProvisions

3. Power to Direct Rules to be Made or to Make Rules

Section 8 of the Act empowers the central govt. to direct the stock exchange to frame rules or to amend rules already made in respect of the following-

Management of stock exchange Duties and powers of office – Bearers The procedure for registration

ProvisionsProvisionsProvisionsProvisions

4. Power to Make or Amend Bye Laws Section 9 of the Act empowers the recognized

stock exchange to make bye-laws for the regulation and control of contracts with the approval of the central govt.

Section 10 of the act empowers the central govt. to amend the bye-laws as framed under section 9

ProvisionsProvisionsProvisionsProvisions

5. Power to Supersede Governing Body and Suspend Business.

Section 11 and 15 of the act, empower the central govt. to supersede the governing body of a stock exchange and to suspend the business of a recognized stock exchange.

ProvisionsProvisionsProvisionsProvisions

6. Power to Make Listing of securities Compulsory Section 21 of the Act empowers the central

govt. to make listing of securities by public companies compulsory.

7. Power to Impose Penalties Section 23 of the act lays down penalties for

offence committed by individuals. Section 24 of the act provides for the same but

for offence committed by companies. The penalty may include imprisonment for a

period of one year or fine or both.

Securities and Exchange Board of IndiaSecurities and Exchange Board of IndiaSecurities and Exchange Board of IndiaSecurities and Exchange Board of India

SEBI was constituted in 1988 by a resolution of govt. of India.

It was made a statutory body by the Securities and Exchange Board of India Act 1992.

Objectives Regulating the business in stock markets and

other securities market. Registering and regulating the working of stock

brokers. Registering and regulating the working of

investment schemes.

Promoting and regulating the self-regulatory organizations.

Prohibiting fraudulent and unfair trade practices relating to securities market.

Regulating substantial acquisition of shares and take over of the companies.

Functions of the SEBIFunctions of the SEBIFunctions of the SEBIFunctions of the SEBI

Regulating the business in stock exchanges and any other securities market.

Registering and regulating the working of collective investment schemes.

Promoting and regulating self-regulatory organizations.

Registering and regulating the working of stock brokers, sub brokers, share transfer agents, merchant bankers, underwriters, portfolio managers, investment advisors, and such other intermediaries who are associated with securities in any manner.

Functions of the SEBIFunctions of the SEBIFunctions of the SEBIFunctions of the SEBI

Promoting of investors education and training of intermediaries in securities market.

Prohibiting insider trading in securities. Regulating substantial acquisition of shares and

take over of companies. Calling information, undertaking inspection,

conducting enquiries and audits of the stock exchanges, intermediaries and self-regulatory organizations.

Functions of the SEBIFunctions of the SEBIFunctions of the SEBIFunctions of the SEBI

Performing such functions and exercising such powers under the provisions of the Capital Issues ACT 1947, Securities Contracts (Regulation) Act 1956, as may be delegated by the central Govt.

Performing such other functions as may be prescribed by the govt.

Trends in Stock ExchangeTrends in Stock ExchangeTrends in Stock ExchangeTrends in Stock Exchange

1. Online Purchasing Many of the stock exchanges in India

automated their activities. Introduction of ELOB( Open Electronic Limit

Order Book Market Scheme) made customers to purchase shares through online.

2. Nationwide Integrated Markets Nationwide integration has been made possible

though satellite communications. Nationwide integrated markets help the trader

any where in India to have equal access to the markets.

Trends in Stock ExchangeTrends in Stock ExchangeTrends in Stock ExchangeTrends in Stock Exchange

3. Clearing House that Guarantees the Trade National Securities Clearing Corporation (NSCC)

was set up on NSE to guarantee, the all trade on NSE

Every trade that takes place is free from risk4. Information Dissemination System Well integrated information dissemination

system established in each stock exchange to give all stock related information to customers.

It stops the exploitation of clients by brokers.

Trends in Stock ExchangeTrends in Stock ExchangeTrends in Stock ExchangeTrends in Stock Exchange

5. Inflow of foreign Portfolio Investment From 1993 onwards, nearly $40,000 core worh

of securities have been picked up by foreign institutional investors.

6. Broad base of Investing Public It is a popular belief that investors include only

rich income class group. Farmers, peons, drivers etc. constitute a major

chunk of investors. It is said that in every eight shareholder in our

country today, one is farmer

SEBI and Capital Market ReformsSEBI and Capital Market ReformsSEBI and Capital Market ReformsSEBI and Capital Market Reforms

SEBI in consultation with the govt. has taken a number of steps to introduce improved practices and greater transparency in the capital markets and the healthy development of the capital markets.

Primary Market Reforms Companies issuing capital in the primary market

are now required to disclose all material facts and specific risk factors with their projects.

They should also give information regarding the basis of calculation of premium.

SEBI introduced a code of advertisement for public issues for ensuring fair and truthful disclosures

In order to encourage IPO, SEBI has permitted companies to determine par value of shares by them.

SEB has allowed issues of IPO’s to go for ‘Book Building’

To reduce the cost of issue, SEBI has made underwriting of issue optional.

SEBI has introduced regulations governing substantial acquisition of shares and takeovers.

Merchant baking has been statutorily brought under the regulatory framework of SEBI.

SEBI has advised stock exchanges to amend the listing agreement to ensure that a listed company furnishes annual statement to the stock exchanges showing the variations between financial projections and utilization of funds in the offer documents.

Through SEBI, govt. has now permitted the setting up of private mutual funds.

The govt. of India has liberalized investment norms for NRI’s so that NRI’s and overseas corporate bodies can buy shares and debentures without prior permission of RBI.

Secondary market reforms SEBI has started the process of registration of

intermediaries, such as stock brokers and sub-brokers under the provisions of the Securities and Stcck Exchange Board Act 1992.

SEBI made rules for making client/broker relationships more transparent, in particularly segregating client and broker accounts.

SEBI has notified regulations on insider trading under the provisions of SEBI Act.

Since 1992, SEBI has constantly reviewed the traditional trading systems in Indian Stock Exchanges.

To make the governing bodies of stock exchanges, the governing body of stock exchanges should have 5 elected members, not more than 4 members nominated by the govt. or SEBI and 3 or fewer embers nominated as public representatives.

The govt. has allowed foreign institutional investors (FII’s) such as pension funds, mutual funds, investment trusts, portfolio management companies etc. to invest in the Indian capital market provided they are registered with SEBI.

To prevent excessive speculation in the stock market, SEBI has introduced rolling settlements form July 2, 2001.