Money and Capital Markets - Overview

Abhilashita Rao

Money Market Features

1. 2. 3. This market is primarily a market of short term funds with maturity less than one year. Call money market is an important segment of this market Other Money Market Instruments are: Commercial Paper Certificate of Deposit Treasury Bill Dated Govt. Securities RBI is the regulator for the money market

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Call Market Features

The market segments has two important

Notice Money funds are traded on overnight basis Money at call funds are traded for 2 14 days

Call rates are extremely volatile The market has no fixed location The daily volumes in Indian call market are in excess of Rs 30,000 crores

Call Market Participants

Commercial Banks Institutions such as DFHI , NABARD and STCI Insurance Companies, Development Financial Institutions and Mutual Funds (These entities act only as lenders and not as borrowers)

Commercial Paper : Features

1. 2. 3. 4. 5. 6. 7. The instrument is an unsecured promissory note. CP is typically issued at a discount to face value and redeemed at par. The maturity of CP is between 15 days to 1 year. CP is issued in denominations of Rs 5 lacs or multiples thereof. Amount invested by a single investor should not be less than Rs 5 lacs (face value). Banks/FI s are prohibited from underwriting primary issues of CP. Stamp Duty has to be paid on primary issuance of CP.

CP: Advantages and Limitations

Advantages: CP issue is a good way for corporates to fund their working capital because no lien is created on the assets of the company. Also, a wide range of maturity periods is available. Limitations: This route is available only to blue chip companies.

Eligibility Norms For CP Issue

Net worth of not less than Rs 4 crores Minimum Credit Rating of P2 by CRISIL or its equivalent The issuer must have working capital limits sanctioned by a bank. The account of the issuer must be classified as standard asset by banks/institutions.

Certificate of Deposit
This instrument was introduced in 1989 in order to encourage mobilization of bulk deposits by commercial banks. A CD carries a higher rate of return as compared to a normal fixed deposit CD s are issued at discount to face value The denominations for CD s are a minimum of Rs 1 lac and multiples thereof. CD s are liquid instruments. Ratings by ICRA, CRISIL etc. enhance their tradability in the secondary market. In case of CD issues by banks, CRR and SLR are applicable on the issue price. The maturity period of CD s issued by banks varies between 7 days to one year. FI s can issue CD s with maturities ranging between 1 3 years.

G Secs and T - Bills

1. G Secs are dated securities with maturities ranging between 1 -30 years. The interest is paid semiannually T bills are short term (for 91 days, 182 days or 364 days) Both these instruments carry a because of nil default risk low rate of interest

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Capital Market
Capital market is the market for long term funds In the primary market, the transaction is between the issuer company and the investors. The intermediaries are BRLM s, underwriters etc. In the secondary market , the transaction is between the buyer and seller. SEBI regulates the capital market.

Primary market: Types of Issues

IPO: In case of unlisted companies FPO: In case of already listed companies Private Placement: Issue of equity to select group of persons, not exceeding 49.

Public Issue: Investor Classes

Retail Individual Investors : who apply for securities worth 1 lac or less. Non Institutional Investors Qualified Institutional Buyers
Mutual Funds Scheduled Commercial Bank Development Financial Institution Provident Fund with a minimum corpus of 25 crores

Entry Norm I: Profitability

1. 2. 3. 4. Net tangible assets of at least 3 crore in each of the preceding 3 years. Distributable profits in at least 3 out of preceding 5 years. Net worth of at least 1 crore in each of the preceding 3 years. If the company has changed its name within the last one year, at least 50 % of the previous years revenue should be from the activity suggested by the new name. 5. The issue size cannot exceed 5 times the pre issue net worth.

Entry Norm 2: Appraisal Route

1. The post issue capital should be at least 10 crores. 2. The project should be appraised and funded to the extent of at least 15% by FI s/ SCBs.

Intermediaries connected with an IPO/FPO

BRLM/ Merchant Banker: Responsible for drafting the prospectus, compliance and marketing of the issue. Underwriter: Commits to subscribe to shares if the issue devolves. Rating Agency: In case of IPO, assesses the fundamentals of issuer as compared to other listed companies in the same industry. Registrar: Is responsible for basis of allotment, allotment and refunds. Syndicate Member: accepts investors application and uploads it on the system.

IPO Terms
Green Shoe Option: A price stabilizing mechanism , shares are issued in excess of issue size by a max. of 15%. Differential Pricing: Shares are issued at different prices to different classes of investors. In India, RII s can be issued shares at a discount of 10%. Anchor Investor: An investor who can be allotted 30% of the portion reserved for QIBs. The investment will be subject to a lock in of 30 days.