FINANCIAL MARKETS•Market where entitiescan trade financial securities, commodities, at low transactioncosts and at prices that reflect supply and demand.•Securities include stocks and bonds, and commodities includeprecious metals or agricultural goods.
KINDS OF FINANCIAL MARKET
MONEY MARKETAs per RBI “ A market for short terms financialassets that are close substitute for money, facilitatesthe exchange of money in primary and secondarymarket”.A mechanism that deals with the lending andborrowing of short term funds.A segment of the financial market in whichfinancial instruments with high liquidity and veryshort maturities are traded.
COMPOSITION OF MONEY MARKETMoney Market consists of a number of sub-markets whichcollectively constitute the money market. They are:Call Money:• lending and borrowing transactions are carried out for oneday that may or may not be renewed the next day.•Demand comes from commercial banks that need to meetrequirements of CRR and SLR,whereas supply comes fromcommercial banks with excess funds, and FIs like IDBI, etc.
The Treasury Bill Market:• It deals in Treasury Bills of short term duration: 14days, 182 days ,91 days, and 364 days.• They are issued by Government and largely held byRBI.•The treasury bills facilitate the financing of CentralGovernment temporary deficits.• The rate of interest for treasury bills is determinedby the market, depending on the demand and supplyof funds in the money market.
The Commercial Bill Market:•Deals in bills of exchange, a seller draws a bill ofexchange on the buyer to make payment within acertain period of time.•The bills can be domestic bills or foreign bills ofexchange.•The commercial bills are purchased anddiscounted by commercial banks, andare rediscounted by FIs like EXIM Bank, SIDBI, IDBI,etc.
The Commercial Paper Market:•The scheme of Commercial Paper (CP) was introduced in1990 for short term financing issue . They can be issued inmultiples of Rs. 5 lakhs and in multiples thereof• As per RBI guidelines, CPs can be issued on the followingconditions:a) The minimum tangible net worth of the company to be at least Rs. 4 crores.a) The working capital limit should have been sanctioned by a bank or financial institution.
STRUCTURE OF MONEY MARKETSORGANISED MONEY STRUCTUREUNORGANISED MONEY STRUCTURE
ORGANISED MONEY STRUCTUREPARTICIPANTS: Reserve bank of India. DFHI (discount and finance house of India) Commercial banks:- (i)Public sector banks SBI with 7 subsidiaries Cooperative banks 20 nationalized banks (ii)Private banks Indian Banks Foreign banks Development bank -- IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
INDEGENEOUS BANKSPrivate firms that receive deposits and give loans andthereby operate as banksAs activities are not regulated properly ,they areunorganized segmentBroadly classified into 4 groups- GUJRATISHROFFS,MULTANI SHROFFS,CHETTIARS AND MARWARIKAYAS
MONEYLENDERSBroadly classified into 3 categories:PROFESSIONAL MONEYLENDERSITINERANT MONEYLENDERSNON PROFESSIONAL MONEYLENDERS
UNREGULATED INTERMEDIARIESA)FINANCE COMPANIES- gives loans to the retailers,artisians and other self-employed personsB) CHIT FUNDS- are saving institutionsC) NIDHIS- operate in unregulated credit market and provide kind of mutual benefit funds
DISADVANTAGES OF MONEY MARKETAbsence of integrationShortage of fundsLower rate of returnLarger amount of transaction fee
CAPITAL MARKET The market where investment instruments like bonds, equities and mortgages are traded is known as the capital market. The primal role of this market is to make investment from investors who have surplus funds to the ones who are running a deficit.
CAPITAL MARKET The capital market offers both long term and overnight funds. The different types of financial instruments that are traded in the capital markets are: > equity instruments > credit market instruments, > insurance instruments, > foreign exchange instruments, > hybrid instruments and > derivative instruments.
STRUCTURE OF THE CAPITAL MARKET• Capital market is divided into 2 constituents : – The financial institutions provide long-term and medium term loan facilities. – The securities market »Gilt-edged market »The corporate securities market
Gilt-edged Market• Market in government securities.• Risk-free market.• Government securities market consist of The new issue market The secondary market RBI plays a dominant role The investors are predominantly institutions which are required statutorily to invest in g-sec.
• G-sec are the most liquid debt instruments.• Transaction in Government securities market are very large.
CORPORATE SECURITIES MARKET• It is a market where securities issued by firms can be bought and sold freely. It consist of – the new issues market - the stock exchange
THE NEW ISSUE MARKET It Is Related With issue of new securities. It Has No Particular Place. The public limited companies often raise funds through primary market for setting up or expanding their business. Following are the methods of raising capital in the primary market: i) Prospectus ii) Offer For Sale iii) Private Placement iv) Right Issue
THE STOCK EXCHANGE The stock exchange market is a highly organized market for the purchase and sale of second-hand quoted or listed securities. ‘quoting’ or ‘listing’ of a particular security implies incorporating the security in the register of the stock exchange so that it can be bought and sold there.
ROLE OF CAPITAL MARKET IN INDIA’S INDUSTRIAL GROWTH• Financing Five Year Plans• Mobilization of savings and acceleration of capital formation.• Promotion of industrial growth.• Raising long-term capital.• Ready and continuous market.• Proper channelization of funds.• Provision of a variety of services.
FACTORS CONTRIBUTING TO THE GROWTH OF CAPITAL MARKET IN INDIA• Establishment of development banks and industrial financing institutions.• Legislative measures.• Growth of underwriting business.• Growing public confidence.• Increasing awareness of investment opportunities.• Setting up of SEBI.• Mutual funds.• Credit rating agencies.
PROBLEMS OF THE INDIAN CAPITAL MARKET : THE PRE-REFORM PHASE EQUITY MARKET• as of 1992, BSE was a monopoly, so it had high cost of intermediation.• “open outcry” , brokers used to charge the investors a much higher price.• No price-time priority.• Manipulative practices prevailed.• Retail investors were dependent on sub-brokers.
• Inefficiency of the exchange for the below largest 100 stocks.• Future-style settlement• Order execution was unreliable and costly.• Share certificates were printed on paper.
DEBT MARKET in 1992, debt trading took place without an exchange. Credit risk narrowed the market. Enforcement of Cartels. Trading took place by telephone in Mumbai. Trade prices were not centrally reported. RBI tracks ownership of G-sec in a database called SGL(subsidiary general ledger). It was maintained manually.
STRENGTHENING THE CAPITAL MARKET: THE POST-REFORM PHASE GOVERNMENT SECURITIES MARKET The auction system for the sale of government of india medium and long-term securities was introduced from june 3, 1992. the government of india set up the Securities trading corporation of india. Scheme of 14-day intermediate treasury bills was introduced. A system of primary dealers was established in 1995.
Market orientation to issues of government securities paved the way for the RBI to activate the open market operation as a tool of market intervention. Improvement were brought in transparency of operations and data dissemination. A practise of pre-announcing a calendar of treasury bills was introduced. Foreign institutional investors were allowed to set up 100per cent debt funds to invest in government securities. Retail trading in government securities commenced in 2003.
SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)• SEBI set up in 1988 was given statutory recognition in 1992 on recommendations of the Narasimham Committee.• The Aims of SEBI are : regulating the business in stock market and other security 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. Prohibiting insider trading. Regulating substantial acquisition of shares and takeover of companies.
NATIONAL STOCK EXCHANGE OF INDIA• NSE is a securities exchange set up in 1992.• It is a limited liability company.• The physical floor was replaced by anonymous, computerized order-matching with strict price-time priority.• Satellite communication removed the limitation of physical place.• Transparency.