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MONEY MARKET INSTRUMENTS

ORGANISED INSTRUMENTS UNORGANISED 1. Call money market INSTRUMENTS 2. Treasury Bills 1. Indigenous Bankers 3. Commercial Papers 4. Certificate of Deposits 2. Chit funds 5. Repo & Reverse repo 3. Niddhis 6. MMMFs 7. DFHI 4. Money lenders 8. LAF 5. Finance companies 9. CBLO
prof. Nandini Katti

INTRODUCTION
It is a market for overnight to short term funds and instruments having a maturity period of one or less than one year.. The money market constitutes a very important segment of the Indian financial system The average turnover of the money market in India is over Rs. 40000 crores daily This implies that 2 % of annual GDP of India gets traded in the money market in just one day, and then through the money market it is many times larger than the capital market, it is not even a fraction of the daily trading in developed markets.
prof. Nandini Katti

Call/Notice Money market


The call money market is a market for very short term funds repayable on demand and with a maturity period varying between one day to a fortnight No collateral security is required to cover these transactions. The call money market is a highly liquid market, It is highly risky. Commercial banks borrow money from other banks to maintain a minimum cash balance known as the cash reserve requirement (CRR). This inter bank borrowing has led to the development of the call money market. The interest rate paid on call loans is known as the call rate. It is a highly volatile rate. It varies from day-to-day hour-to-hour. It is very sensitive to change in the demand for and supply of call loans. Within one fortnight rate are known to have moved from 1-2 percent to vary 140%
prof. Nandini Katti

Treasury Bills
Treasury bills are short term instruments issued by the Reserve Bank on behalf of the government to tide over short term liquidity shortfalls. This instrument is used by the government to raise short-term funds to bridge seasonal or temporary gaps between its receipts (Revenue and capital) and expenditure. They form the most important segment of the money market not only in India but all over the world as well. T Bills are repaid at par on maturity. The difference between the amount paid by the tender at the time of purchase.(which is less than the face value) and the amount received on maturity represent the interest on T bills and is known as the discount. Tax deducted at source (TDS) is not applicable on T bills. prof. Nandini Katti

Treasury Bills
Features of T bills: They are negotiable securities. They are highly liquid as they are of shorter tenure and there is a possibility of the interbank repos in them. There is an absence of default risk. They have an assured yield low transaction cost, and are eligible for inclusion in the securities for SLR purposes. They are not issued in scrip from. The purchases and sales are effected through the subsidiary general ledger (SGL) account. At present there are 91 days, 182 days and 364 days. T bills in vague. The 91 days T bills auctioned by the RBI every Friday and the 364 days T bills every alternate Wednesday i.e. the Wednesday preceding the report on Friday. Minimum amount of face value Rs.1 lac and in multiples thereof. There is no specific amount/limit on the extent to prof. Nandini Katti which these can be issued or purchased.

Commercial paper
The working Group on Money Market in 1987 suggested the introduction of the commercial paper (CP) in India. The Reserve Bank introduced commercial papers in January 1990 . A commercial paper is an unsecured short-term permission rate, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is generally issued at a discount by the leading credit worthy and highly rated corporate to meet their working capital requirements.
prof. Nandini Katti

Commercial paper
Depending upon the issuing company, a commercial paper is also known as a finance paper, industrial paper, or corporate paper. It is also known as finance paper, industrial paper or corporate paper. All India financial institution can also issue CPs. It can also be issued in interest bearing form.
prof. Nandini Katti

Commercial paper
Guidelines Relating to CPs: - The maturity period is a minimum for 7 days and maximum upto one year. further brought down to 7days in April 2004. The minimum size of the CP is Rs.5 lakh and in multiples of it. Eligibility: - Corporate, primary dealers and all India finances institutions are eligible to issue a CP. For a corporate to be eligible, it should have tangible net worth of Rs. 4 crores and a sanctioned working capital limit from a bank or a financial institution and the borrower account is a standard asset. Rating Requirement: The minimum credit rating shall be P2 of CRISIL or such equivalent rating by other approved agencies. Investment in CPs: individuals, banks, corporate bodies, NRIs, FIIs are eligible to invest. Issuing & Paying Agent (IPA): only a scheduled commercial bank can act as an IPA.

prof. Nandini Katti

Commercial Bills
A commercial bill is a short term, negotiable and selfliquidating instrument with low risk. It enhances the Liability to make payment on a fixed date when goods are bought on credit. According to the Indian Negotiable Instruments Act, 1881, a bill of exchange is a written instrument containing on unconditional order signed by the maker, directing to pay a certain amount of money only to a particular person, or to the bearer of the instrument. Bills of exchange are negotiable instrument drawn by the seller (drawer) on the buyer (drawee) for the value of the goods delivered to him. Such bills are prof. Nandini Katti called trade bills

Commercial Bills
When trade bills are accepted by commercial banks, they are called commercial bills. The bank discounts these bills by keeping a certain margin and credits the proceeds. Banks when in need of money can also get such bills rediscounted by financial institutions such as LIC, UTI, GIC, ICICI and IRBI. The maturity period of the bills varies from 30 days, 60 days or 90 days depending on the credit extended in the industry.
prof. Nandini Katti

Certificates of Deposit:
Certificates of deposit (CD) are unsecured, negotiable, short term instruments in bearer firm, issued by commercial banks and development financial institutions. Certificates of deposit were introduced in June, 1989. Only scheduled commercial banks excising Regional Rural Banks and local Area Banks were allowed to issue them initially. Financial institutions were permitted to issue certificates of deposit within the umbrella limit fixed by the Reserve Bank in 1992.
prof. Nandini Katti

Certificates of Deposit:
Certificates of deposit are time deposits of specific maturity similar to fixed deposits (FD). The biggest difference between the two is that CDs, being in bearer form, are transferable and tradable while FDs are not. Like other time deposits, CDs, are subject to SLR and CRR requirement. There is no ceiling on the amount to be raised by banks. The deposits attract stamp duty as applicable to negotiable instruments. They can be issued to individuals. Corporations, companies, trusts, funds, associates, and others. . Non-Resident Indians (NRIS) may also subscribe to CDs, but only on a non-repatriable basis which should be clearly stated on the certificate such CDs cannot endorsed to another NRI in the secondary market. prof. Nandini Katti

discount and Finance House of India (DFHI):


The DFHI was set up in April, 1988 by the Reserve Bank with the objective of deepening and activating the money market. It commenced its operations from July28, 1988. It is a joint stock company in form and is jointly owned by the Reserve bank, public sector banks and all India financial institutions which have contributed to its paid up capital of Rs.200 crore in the proportion of 5:3:2. In addition refinance facility with the Reserve bank and credit of Rs. 100 crore from 28 public sector banks on a consortium basis are the courses of its funds. The role of the DFHI is to function as a specialized money market intermediary for stimulating activity in money market instruments and develop secondary markets in these instruments.
prof. Nandini Katti

discount and Finance House of India (DFHI):


It also undertakes short term buy back operation in the government and approved dated securities The DFHI mobilizes funds/resources from commercial/cooperative banks financial institutions, and corporate entities having resources to lend which are pooled and lent in the money market. The two way regular quotes in money market instruments provided by the DFHI serve as a base to broaden the secondary market and give an assured liquidity to the instruments.
prof. Nandini Katti

Money market Mutual Funds:


Money Markets Mutual Funds (MMMF) were introduced in April 1991 to provide an additional short term avenue for investment and bring money market investment within the reach of individuals. These mutual funds would be invested exclusively in money market instruments. MMMF bridges the gap between small individual investors and the money market. MMMF mobilizes savings from small investors and invest them in short term debt instruments or money market instruments
prof. Nandini Katti

Money market Mutual Funds:


Based on the recommendations of the task force, a detailed scheme of MMMF was announced by the Reserve Bank in April 1992. The MMMF portfolio consists of short term money market instruments. An investor investing in MMMF gets a yield close to short term money market rates coupled with adequate liquidity.

prof. Nandini Katti

Liquidity Adjustment Facility:


The Narsimhan Committee on Banking Sector Reforms (Report II, 1998) recommended that the Reserve Bank provide support to the market through an LAF scheme. This facility would help in adequate liquidity. The interim LAF, introduced in April 1999, provided a mechanism for liquidity management through a combination of repos, export credit refinance, supported by OMO at set rates of interest. The interim LAF was gradually converted into a full-fledged LAF scheme. It was implemented in three phases, in the first phase, the ACLF for banks and primary dealers, in the second stage the CLP for banks and primary dealer was replaced by variable reverse repo questions; and in the final stage, the LAF will be operated at different timings on the prof. Nandini Katti same day in necessary.

Repos: The major function of the money market is to provide liquidity. To achieve this function and to even out liquidity changes, the Reverse Bank uses repos. Repo is a useful money market instrument enabling the smooth adjustment of short-term liquidity among varied market participants such as banks and financial institutions. Repo refers to a transaction in which a participant acquires immediate funds by selling securities and simultaneously agrees to the repurchase of the same or similar securities after a specified time at a specified price. Repo is also referred to as a ready forward transaction as it is a means of funding by selling a security held on a spot basis and repurchasing the same on a forward basis.
prof. Nandini Katti

Reverse repo
the opposite of repo- a party buys a security from another party with a commitment to sell it back to the latter at a specified time and price. In other words, while for one party the transaction is repo, for another party it is reverse repo. A reverse repo is undertaken to earn additional income on idle cash. In India, repo transactions are basically fund management/SLR management devices used by banks
prof. Nandini Katti

Collateralized Borrowing and Lending Obligation (CBLO):


The clearing corporation of India Limited (CCIL) launched a new product collateralized Borrowing and lending obligation (CBLO) on January 20, 2003 to provide liquidity to non-bank entities hit by restrictions on access to the call money market. The minimum order lot for auction market is Re.5lakh and in multiples of Rs.5 lakh thereof. The minimum order lot for normal market is fixed at Rs 5 lakh and in multiple of Rs. 5lakh thereof

prof. Nandini Katti

Features and Defects of the Indian money market.


Dichotomy Structure Existence of the Unorganized Money Market Absence of Integration Diversity in Money Rates of Interests Seasonal Stringency of Money Absence of the Bill Market Less number of Dealers Availability of credit instruments Absence of a Well- organized Banking System
prof. Nandini Katti

Dichotomy Structure
It is a significant aspect of the Indian money market. It has a simultaneous existence of both the organized money market as well as unorganized money markets. The organized money market consists of RBI, all scheduled commercial banks and other recognized financial institutions. However, the unorganized part of the money market comprises domestic money lenders, indigenous bankers, trader, etc.
prof. Nandini Katti

Dichotomy Structure
The organized money market is in full control of the RBI. However, unorganized money market remains outside the RBI control. Thus both the organized and unorganized money market exists simultaneously.

prof. Nandini Katti

Existence of the Unorganized Money Market


The major defect of the Indian money market has always been the existence of the indigenous bankers who do not distinguish between short-term and longterm finance nor even between the purpose of finance (as the Hundi does not indicate whether it is a genuine trade Bill or a financial paper.) Many attempts were made by RBI to bring the indigenous bankers under its direct influence and control. During the last 50 years, there are a whole lot of nonbanking financial companies (NBFC) who raise funds of from the general public but who are generally outside the control and supervision of RBI. prof. Nandini Katti

Absence of Integration
An important defect of the Indian money market at one time was the division of the money market in to several segments or sections, loosely connected to each other. Each section of the money market such as the State Bank of India and its subsidiaries the foreign exchange banks, the urban co-operative banks and indigenous bankers limited itself broadly to a particular class of business and remained independent in its own sphere. Moreover, the relations between the various sections of the Money market were not cordial
prof. Nandini Katti

Absence of Integration
This is so even now between Indian banks and foreign banks. With the passage of the Banking Regulation Act 1949, all banks have been treated equally by RBI as regards licensing, opening of branches, share capital, the types of loans and advances to be given, etc. Accordingly, the Indian money market is getting close integrated. Besides RBI guides and direct them in their lending policies and regularly inspects the books of scheduled commercial banks. However, RBIs control and monitoring of the commercial banking sectors are not fully effective. This is clear from Harshad Mehta scan in 1992 and Ketan Parekh scan in 2001 prof. Nandini Katti

Diversity in Money Rates of Interests


Another defect of the Indian money market related to the existence of too many rest of interest. The borrowing rate of the Government, the deposit and lending rates of commercial banks, deposit and lending rates of cooperative banks, the lending rates are different. The basic reason for the existence of so many rates of interest simultaneously is the immobility of funds from one section of the money market to another. In recent years the different money rates of interest have been promptly adjusting to changes in the bank rate.
prof. Nandini Katti

Seasonal Stringency of Money


A very striking characteristic of the Indian money was the seasonal monetary stringency and high rates of interest during a part of the year during the busy season from November to June when funds are required to move the crops from the villages and up-country districts to the cities and ports. During the off season (July to October) or slack season, banks have large surplus funds and the rates of interest reach low levels. There are even now wide fluctuations in the money rates of interest from one period of the year to another.
prof. Nandini Katti

Seasonal Stringency of Money


RBI attempt to lessen the seasonal fluctuations in the money market, by pumping money into the money market during busy seasons and withdrawing the same during off seasons. This feature of money market seasonal stringency or glut is present even now.

prof. Nandini Katti

Absence of the Bill Market


Another defect of the Indian money market was the absence of a commercial Bill market or a discount market for short term commercial bills. A well organized bill market is necessary for linking up the various credit agencies ultimately and effectively to RBI. bill market was not much developed in India due to reasons
such as the practice of banks keeping a large amount of cash for liquidity purposes, preference of industry and trade for borrowing rather than rediscounting bills the improper drafting of the bazaar hundi
prof. Nandini Katti

Absence of the Bill Market


the system of cash credit as, the main form of borrowing from banks, the preference of cash transitions in certain lines of activity, the absence of warehousing facilities for storing agricultural produce and the high stamp duty on eusance bills.

prof. Nandini Katti

Absence of a Well- organized Banking System


Another major defect of the Indian money market was the absence of a well- organized banking system. Branch banking was extremely slow before bank nationalization in 1969. There were only a few big banks in the country and they concentrated themselves in large towns and mandi towns. The extreme sluggishness in the movement of funds and the existence of slow branch banking in the country. In spite the various steps taken to strengthen the Indian banking system RBI has failed to really central and guide it. In this connection, we may refer to three instances.
prof. Nandini Katti

Absence of a Well- organized Banking System


Harshad Mehta engineered securities scan in 1992 by using funds from well known banks, both foreign and Indian. Ketan Parekh used the funds of urban cooperative banks and these of Bank of India and VTI to manipulate the prices of shares of a few companies in which he was interested. This led to a virtual crash of the Indian stock market as a whole in 2001; and C.M. Agarwal of Home Trade used the funds of urban co- operative banks and of pension funds to play in the gilt edged market in March 2002. prof. Nandini Katti

Availability of credit instruments


Till 1985-86, the Indian money market did not have adequate short term paper instruments. Apart from the call money market, there were no specialist dealers and brokers dealing in different segments of the Indian money market and in different kinds of paper instruments. It was only after 1985-86 that RBI stored introducing new paper instruments such as 182 days treasury bills, later converted to 364 days treasury bills, certificates of deposits (CDs) and commercial paper (CPs). prof. Nandini Katti

Less number of Dealers


There are poor number of dealers in the shortterm assets who can act as mediators between the government and the banking system. The less number of dealers leads to the slow contact between the end lender and end borrowers

prof. Nandini Katti

Reforms of the Indian Money Market (1986-2005)


The Indian money market has now been closely knit together, at least in the organized sector. RBI has considerably reduced the differences in the rates of interest which existed in different places and at different times, RBI has been able to reduce considerably monetary stringency through open market operations and the bill market scheme. The Indian money market is still centered on the call money market but a beginning has been made to develop a secondary money market.
prof. Nandini Katti

Reforms of the Indian Money Market (1986-2005)


A major problem in the call money market is its high volatility. In recent years, the quantum of call money transition has been increasing and the average call money rates have been rising. On the review of the working of the Monetary System, and the Narasimhan Committee Report on the Working of the Financial System in India, 1991, RBI has initiated a series of money market reforms
prof. Nandini Katti

Relaxation of Interest Rate Regulations


As part of its anti-inflationary policy, RBI had followed a strict policy of interest rate control and regulating deposit rates of banks, lending rates of banks and financial institutions all kinds of interest rates were subject to strict control and regulation by RBI. However from 1988, RBI took steps to reduce the ceiling rate on bank advances on interbank call and short notice money. Following the recommendations as the Narasimham Committee in November 1991, interest rates were further deregulated and banking and financial institutes were told to determine and adopt market related rates of prof. Nandini Katti interest.

Relaxation of Interest Rate Regulations The minimum lending rate of commercial banks and public sector development financial institution (DFIs) declined steeply from 18 percent in 1990-91 to 10.5 percent in 2005-06. The present position of interest rate regulations are:
prof. Nandini Katti

Relaxation of Interest Rate Regulations


RBI has continued to reduce the bank rate from 10 percent in 1990-91 to 6 percent in 2004-05 because of improved liquidity position with the banking system and also because of the need to stimulate the economy. Interest rates on domestic term deposits have been broadly decontrolled. Likewise rate of interest on bank loans has been decontrolled and is determined by market forces. In other words, the system of administered interest rates in India has been dismantled.
prof. Nandini Katti

Introduction of new instruments in the money market


The Indian money market had suffered from inadequately of short-term credit instruments. In the past, there were only 91 days bills which were traded in the Indian money market. On the recommendation of Vaghul working Group, RBI has introduced many new instruments on the money market

prof. Nandini Katti

Introduction of new instruments in the money market


182 days treasury bills: These bills with variable interest bills and were sold through fortnightly auctions. The yield of this long dated paper had become attractive as a highly liquid instrument. These were replaced by 364 days Treasury bills. They have been re-introduced during 19992000.
prof. Nandini Katti

364 days Treasury Bills. There was considerable scope for banks and financial institutions to be interested in long dated bills, as they were far superior to their loan assets and investments which could not be easily liquidated in times of need, without incurring heavy losses. The 364 days treasury Bills have thus become an important instrument of government borrowing from the market and also leading money market instrument in the sense that their yield is most reflective of market conditions. Financial institutions recognize the yield rate on 364 day Treasury Bills as the anchor rate for floating interest rate instruments.

prof. Nandini Katti

RBI introduced two more treasury bills in 1997


14 days intermediate Treasury Bills from April,1997 at a discount rate equipment to the rate of interest on ways and means advances to the Government of India these bills cater to the needs of state governments foreign, central banks and other specified bodies (these have surplus funds which can be invested for very short periods) A new category of 14 days Treasury Bills, sold through auction for the first time in June, 1997 is meeting the cash management requirements of various actions of the prof. economy. Nandini Katti

two more treasury bills in 1997.


Dated Government securities: The Government of India has also decided to self dated securities (of 5 years maturity and 10 years maturity) on an auction basis. The purpose of this Government decision is: To develop dated securities as a monetary instrument with flexible yields. To provide financial instruments to suit investors expectations. To meet Government needs directly from the market.
prof. Nandini Katti

Repos and Reverse Repos:


Since December, 1992 in respect of central Government dated securities, Repos are new a regular feature of RBIs market operations. If the banking system experiences liquidity shortage and consequently, the rate interest are rising, RBI comes to assist the banking securities by repurchasing Government securities. When Government securities are repurchased from the market, payment is made by RBI to commercial banks, and this adds to their liquidity and enables them to expand their credit to industry and trade. Repos are developing into instruments useful for leveling out sharp fluctuations in liquidity and rate of interest in the money market.
prof. Nandini Katti

Repos and Reverse Repos:


Since November, 1996, RBI has introduced. Reverse Repos i.e. to sell dated government securities through auction at fixed cutoff rate of interest. The objective is to provide short term revenue to banks to park their surplus funds then there is considerable liquidity in the money market and the call rate has a tendency to decline.
prof. Nandini Katti

Interim Liquidity Adjustment Facility (ILAF)


Collateralized lending facility (CLF) up to 0.25 percent of the fortnightly average outstanding aggregate deposits in 1997-98. CLF available for two weeks at the Bank Rate. Additional collateralized lending facility (ACLF) for an equivalent amount of CLF available at Bank Rate plus 2 percentage points. CLF and ACLF for beyond two weeks subject to an additional rate of 2 percent.
prof. Nandini Katti

Interim Liquidity Adjustment Facility (ILAF)


Cooling period of two weeks after CLF/ACLF at penal rate (since dispensed with based on feedback from market participants). To facilitate systematic adjustment in liquidity, restriction on participation in money market (during the period of availing liquidity) withdrawn. Scheduled commercial banks eligible for export credit refinance facility at the Bank Rate with effect from April 1, 1999. Liquidity support against the collateral of Government securities, based on bidding commitment and other parameters available to PDs at Bank Rate for a period of 90 days.
prof. Nandini Katti

Interim Liquidity Adjustment Facility (ILAF)


Additional liquidity support against Government securities to PDs for two weeks at the Bank Rate plus 2 percentage points. Absorption of liquidity in the market would continue to be in the form of fixed rate repos. The above mentioned facilities to be supplemented by OMOs by the RBI. export credit refinance.

prof. Nandini Katti

Liquidity Adjustment Facility (LAF):


Liquidity Adjustment Facility (LAF): In the last one decade, RBI has been using Repos and Reverse Repos as a deliberate policy to, Influence the volume of liquidity in the money market and through it. Stabiles the short term rate of interest or the call rates.

prof. Nandini Katti

Liquidity Adjustment Facility (LAF):


This policy of using Repos and Reverse Repos is now called the Liquidity Adjustment Facility (LAF). RBI has adopted LAF as on important tool for adjusting liquidity through Repos and Reverse Repos on a day to day basis. Since 2000-01, LAF has emerged as a major instrument of monetary policy.
prof. Nandini Katti

Certificates of deposit (CDs):


CDs are another important money market instrument. They were issued by banks in multiple of Rs.25 lakhs to expand the investor base for CDs the minimum value was reduced and is presently Rs.1 lakh. The maturity is between 3 months and one year. They are issued at a discount to the face value and the discount rate is freely determined according to market conditions CDs are freely transferable after 45 days after the date of issue.
prof. Nandini Katti

Certificates of deposit (CDs):


The CDs became immediately popular with banks for raising resources at competitive rates of interest. Two important policy decisions were taken by RBI regarding the issue of CDs. First, RBI raised, from May, 1992, the limit for issue of CDs by scheduled commercial banks from 5 to 7 percent of their average aggregate deposits. As a direct result the aggregate limits for the banking system for issue of CDs increased from Rs. 7540 crores to Rs. 20,600 crores.
prof. Nandini Katti

Commercial Paper (CP):


The CP is issued in multiple of Rs. 5 lakhs subject to a minimum issue of Rs. 1 crore maturity of CP is between 3 to 6 months. The CPs is issued at a discount to face value and the discount rate is freely determined. The maximum amount of CP that a company can raise was limited 20 percent (now raised to 30 percent) of the maximum permissible bank finance.
prof. Nandini Katti

Certificates of deposit (CDs):


Second RBI permitted IDBI, ICICI, and IFCI as development financial institutions to issue CDs with a maturity period of more than one year and up to 3 years. The aim of the step was to provide flexibility to development financial institutions to raise resources from the market. Despite these steps there was lack of interest among banks in issuing fresh CDs.
prof. Nandini Katti

Electronic Transactions:
In order to impart transparency and efficiency in the money market transaction the electronic dealing system has been started. It covers all deals in the money market. it is useful for the RBI to watch the money market.

prof. Nandini Katti

Establishment of the CCIL:


The Clearing Corporation of India limited (CCIL) was set up in April 2001. The CCIL clears all transactions in government securities, and repose reported on the Negotiated Dealing System.

prof. Nandini Katti

composition of the Indian Capital Market


Capital Market is the market for long-term funds, just as the money market is the market for short-term fund. It is a market that facilities and helps the institutional managements for borrowing and lending term funds (mediumterm and long-term funds.) It does not deal in capital goods but it concerned with the raising of money capital for purpose of investment. long-term money capital is demanded predominantly by private sector ,manufacturing industries, agriculture and by the Government , largely for the purpose of economic development.
prof. Nandini Katti

composition of the Indian Capital Market..


the Central and State Governments are investing not only on economic overhead as transport; irrigation and power development but also in basic industries and even in consumer goods industries, they require substantial amount of funds from the capital market. The supply of funds for the capital market comes largely from individual savers, corporate savings, banks, insurance companies, specialized financing agencies and the government. Among institutions, we may refer to the following:
prof. Nandini Katti

composition of the Indian Capital Market.


Commercial banks are important investors, but they are largely interested in government securities and, to a small extent in debentures of companies; LIC and GIC are of growing importance in the Indian Capital market, though their major interest is still in government securities; Provident funds constitute a major medium of savings but their investments too are mostly in government securities;
prof. Nandini Katti

composition of the Indian Capital Market.


Special institutions set up since Independence, vizIFCI, ICICI, IDBI, UTI, etc generally called development financial institutions (DFIs) aim at supplying funds to investors. Like all markets, the capital market is also composed of those who demand funds (borrowers) and those who supply funds (lenders)

prof. Nandini Katti

Indian capital market


Indian Capital Market Industrial Securities Mkt

Gilt-Edge Mkt

Primary

Secondary

primary

Secondary

prof. Nandini Katti

The gilt-edged market


The gilt-edged market refers to the market for government and semi-government securities, backed by the Reverse Bank of India. The securities traded in this market are stable in value and area much sought after by banks and other institutions.

prof. Nandini Katti

The industrial securities


the industrial securities market refers to the market for shares and debentures of old issues and new issues the new issue market-often referred to as primary market refers to the raising of new capital in the form of shares and debentures the old issues market commonly known as stock exchange as stock market deals with securities already issued by companies. the old issues market of the stock exchange is also known as secondary market. both markets are equally important

prof. Nandini Katti

DFIs
DFIs supply funds for investment: Financial Intermediaries like merchant bankers help the corporate sector to raise funds in the capital market. Eg: Industrial Finance Corporation of India (IFCI), State Finance Corporations (SFCs), Industrial Development Finance Corporation (IDFC).

prof. Nandini Katti

Financial Intermediaries
Financial intermediation consists of channeling funds between surplus and deficit agents. A financial intermediary is a financial institution that connects surplus and deficit agents. Eg: Merchant Banks, Mutual Funds, Leasing Companies, Venture Capital Companies

prof. Nandini Katti

The Government Securities (G SEC) market VS Industrial Securities Market The Government Securities market, also known as the gilt edged market differs from the industrial securities market in many important respects: There are uncertainties regarding yield managements, additions to capital, etc. and, therefore, there is much less speculation in this market. The investors in government securities are predominantly institutions which are often compelled by law to invest a certain portion of their funds in these security. The commercial banks the LIC the GIC and the provident funds come under this category these are often referred to as the captive market for government securities. prof. Nandini Katti

The Government Securities (G SEC) market VS Industrial Securities Market. The average value of the transactions in the government securities market is very much larger than in the case of shares and debentures of companies often a single transaction in government securities many may run into several crores or even hundreds of crores of rupees.

prof. Nandini Katti

Primary market

Primary issue

Public Issue

Right Issue

PVT
Placement

IPO

FPO

Pvt Place ment

Preferential

Issue

QIPs

prof. Nandini Katti

Primary market
It is the market for new issues. It is the market for fresh capital. Funds are mobilized through prospectus, right issue, and the private placement.

prof. Nandini Katti

Public Issue
IPO (Initial Public Offering): It is a offering either of securities or an offer for sale of existing securities or both by an unlisted company for the first time to the public.

FPO: It is an offering of either a fresh issue of securities or an offer for sale to the public by an already listed company through offer documents Investors participating in these offerings take informed decisions based on its track record and performance.
prof. Nandini Katti

Right Issue
It is the issue of new shares in which existing shareholders are given preemptive rights to subscribe to the new issue The right is given in the form of an offer to existing shareholders to subscribe to a proportionate number of fresh issues, at a predetermined price.

prof. Nandini Katti

Private placements
A company can raise money by issuing debt instruments like debentures/non convertible debentures (NCD) by a public offer. Depending on their need for money in a short time frame or on basis of credit rating or lower cost, they can also go for "private placement" of the bond/NCD for raising money.

prof. Nandini Katti

Private placements
It refers to the direct sale of newly issued securities by the issuer to a small number of investors through: merchant bankers. Investors Financial Institutions Corporate Banks and high net worth individuals.
prof. Nandini Katti

Preferential Issue
A public / rights is cumbersome and requires compliance with statutory provisions. Hence, many companies opt for preferential allotment of shares for raising funds. Such allotments are made to various strategic groups including promoters, foreign partners, technical collaborators and private funds.

prof. Nandini Katti

Qualified Institutional placements (QIPs)


It has emerged as a new fund raising investment for listed companies in India. Through QIPs issue funds can be raised from foreign as well as domestic institutional investors without getting listed on a foreign stock exchange, which is lengthy and cumbersome.

prof. Nandini Katti

International Capital market

GDRs

ADRs

ECBs

FCCBs

prof. Nandini Katti

Global Depositories Receipts (GDRs)


GDRs are essentially equity instruments issued abroad by authorized overseas corporate bodies against shares/bonds of Indian companies held with nominated custodian banks The issue of GDR creates equity shares of the issuing company which is kept with a designated bank GDRs are freely transferable outside India dividend in respect of the shares represented by GDRs is paid in Indian rupees.
prof. Nandini Katti

Foreign Currency Convertible Bonds (FCCBs)


FCCBs are bonds issued by Indian companies and subscribed by a non-resident in foreign currency. They carry a fixed interest or coupon rate and are convertible into a certain number of ordinary shares at a preferred price. They are convertible into ordinary shares of the issuing company either in whole or a part on the basis of any equityrelated warrants attached to the debt instruments. These bonds are listed and traded abroad till conversion, the interest is paid in dollars. if conversion option is not exercised then the redemption is also made in dollars. Thus foreigners prefer FCCBs and Indian companies prefer to issue GDRs. The rate of interest is less but the exchange risk is more in FCCBs as interest is payable in foreign currency. prof. Nandini Katti

American Depository receipts


ADRs are negotiable instruments denominated in dollars and issued by the US depository bank. A Non-US company that seeks to list in the US deposits with a bank and receive a receipt which enables the company to issue the American depository shares. These ADS serve as stock certificates and are used interchangeably with the ADR which represents ownership of deposited shares. There is no legal or technical difference between a GDR and ADR.
prof. Nandini Katti

External Commercial Borrowings


Indian corporate is allowed to raise foreign loans for financing infrastructure projects. The Indian companies are free to raise ECBs from any internationally recognized source, such as bank, export credit agencies, suppliers of equipments, foreign collaborators, foreign equity holders, and international capital markets . ECBs are linked to federal reserve board rate which is 3% since April 2005.
prof. Nandini Katti

The secondary market


The secondary market is a market in which existing securities are resold or traded. This market is also known as the Stock market. In India secondary market consist of recognized Stock exchanges operating under rules, by-laws and regulation duly approved by the government. These stock exchanges constitute an organize Stock market where securities are issued by the central and State government, public bodies and joint stock companies are traded.
prof. Nandini Katti

The secondary market


A Stock exchange is defined under section 2 (3) of the securities contract (Regulation) Act, I956, as anybody of individuals whether incorporated or not, constituted to the purpose or assisting, regulating or controlling the business of buying selling, or dealing in securities

prof. Nandini Katti

The secondary market


The Indian secondary market can be segregated into two: 1. The secondary market for corporate and financial intermediaries. For trading in issues of corporate and financial intermediaries, these are the following entities: recognised stock exchanges National Stock Exchange of India Limited(NSE) Over the Counter Exchange of India (OTCEI) The Interconnected Stock Exchange of India (ISE) The participants on this market are registered brokers- both individuals and institutions. They operate through a network of sub-brokers and sub-dealers and are connected through an electronic networking system.
prof. Nandini Katti

Role/significance of capital market


Process of capital formation involves 3 steps 1. SAVINGS 2. MOBILISATION OF SAVINGS 3. INVESTMENTS A sound and efficient capital mkt. facilitates the process of capital formation which contributes to economic development

prof. Nandini Katti

Mobilisation of savings
It mobilises savings through various instruments & channelises them into productive areas Resources are diverted from consumtion purpose to productive purposes Various availability of financial assets encourages savings in capital mkt. Financial needs of industry, trade & business are fulfilled by the capital mkt.
prof. Nandini Katti

Channelisation of funds into investments


It raises efficiency in the following manner 1. Allocates resources to the most viable projects, which improves allocation of resources 2. Reduces the cost of resources, from lenders to borrowers, related to contract, risk of default, etc. 3. It provides high returns to savers & reduces the charges to borrowers
prof. Nandini Katti

Industrial development
It provides adequate, cheap & diversified finance to the industrial sector for various purposes Provides funds for modernisation, upgradation of tech. establishment of new units Provides variety of services to entrepreneurs like underwriting, participation in equity capital, credit rating, consultancy services etc. this stimulates industrial entrepreneurship
prof. Nandini Katti

Modernisation & rehabilitation of industries


Setting up of DFIs in India like IFCI, IDBI, ICICI has helped existing industries to adopt modernisation & replacement of obsolete machinery Enabled industrial units to solve problems of forex by channelising from IFC

prof. Nandini Katti

Technical assistance
Capital mkt. plays an imp. role in stimulating industrial entrepreneurship by offering 1. advisory services 2. Identifying growth potential 3. Training entrepreneurs in project mgmt

prof. Nandini Katti

Encourage investors
Secondary mkt. encourage investors to invest in industrial securities by making them liquid It provides facilities for continuous, regular & ready buying n selling of securities Industries are able to raise substantial amount of funds from various segments of the economy

prof. Nandini Katti

Capital market reforms



PRIMARY MKT REFORMS Abolition of Comptroller of Capital Issues(CCI) SEBI Disclosure std.s Freedom to determine par value of shares Underwriting optional FIIs permitted Accessing global funds mkt
prof. Nandini Katti

Capital market reforms.


Intermediaries under purview of SEBI Merchant bankers prohibited from carrying fund based activities Credit rating agencies Disclosure & investor protection guidelines for new issues

prof. Nandini Katti

Abolition of Comptroller of Capital Issues(CCI)


Companies are allowed to approach the capital mkt. without prior govt. permission subject to getting offer documents cleared by SEBI Narsimhan comm. Recommended the abolition of CCI and wanted SEBI to take over

prof. Nandini Katti

Securities & Exchange Board of India


SEBI was set up in 1988, it was made a statutory body in 1992 It has introduced various guidelines for capital issues in primary mkt.

prof. Nandini Katti

Disclosure standards
Companies are required to disclose all material facts & specific risk factors associated with their projects SEBI has introduced a code of advertisement for pub. Issues in order to ensure fair & truthful disclosures

prof. Nandini Katti

Par value of shares


The requirement to issue shares at a par value of Rs 10 and Rs100 was withdrawn. This gave companies the freedom to determine a fixed value per share. Moreover, the shares cannot be issued in the decimal of a rupee. The companies which have already issued shares at Rs10 or Rs100 value are also eligible for splitting and consolidating the share values.
prof. Nandini Katti

Underwriting optional
To reduce the cost of issue, underwriting is made optional It is subject to the condition that if an issue was not underwritten & was not able to collect 90% of the amount offered to the public, the entire amt. collected would be refunded to the investors

prof. Nandini Katti

Permitting FIIs
FIIs such as mutual funds & pension funds are allowed to invest in equity shares & in debt mkt. as well which includes dated govt. securities & TBs

prof. Nandini Katti

Accessing global funds mkt.


Indian cos. are permitted to raise resources through issue of ADRs, GDRs, FCCBs & ECBs Indian cos. Can list their securities on foreign stock exchanges through ADR/GDR issues Indian financial sys. Is opened up for investments of foreign funds through NRIs, FIIs & OCBs
prof. Nandini Katti

Intermediaries under purview of SEBI


The following are under the purview of SEBI 1. MFs 2. UTI 3. Portfolio managers 4. Registrars to an issue 5. Share transfer agents 6. Underwriters 7. Debenture trustees 8. Bankers to an issue 9. Custodian of securities 10. Venture capital funds
prof. Nandini Katti

Prohibiting merchant bankers


Merchant bankers are prohibited from carrying out fund based activities other than those related exclusively to capital mkt. NBFCs activities like accepting deposits, leasing, bill discounting etc. are not undertaken by merchant bankers

prof. Nandini Katti

Credit rating agencies


CRISIL (1998), ICRA (1991), CARE (1993) were set up to meet emerging needs of the cap. mkt. They provide assessment of investment quality of credit instruments issued by business units Indirectly it helps investors & merchant bankers, brokers, regulatory authorities etc. to discharge their functions related debt issues
prof. Nandini Katti

Disclosure & investor protection (DIP)


In order to remove inadequacies, deficiencies, to protect investors & for orderly growth and development of securities mkt. SEBI put in guidelines to govern new issues Cos. issuing capital in primary mkt. are required to disclose material facts & specify risk factors Issuer has to disclose the price, size of issue, & no. of securities offered to public
prof. Nandini Katti

Capital market reforms.


SECONDARY MKT REFORMS
Setting up of NSE OTCEI Screen based training Coporatisation & demutulisation of stock ex s Depository system Rolling statement Investor protection measures NSCL Derivatives
prof. Nandini Katti

Capital market reforms.


NSCL Derivatives trading Trading in central govt. securities Permitting FIIs PAN mandatory Mutual funds Permitted stock ex s to set trading hours
prof. Nandini Katti

Setting up NSE (1994)


to provide a nation wide trading facility for equities, debt instruments & hybrids Provide equal access to investors across the country through suitable network Provide for fair, efficient & transparent securities trading sys. to investors Provide shorter settlement cycles & book entry settlement Bring the Indian stock mkt. in line with international mkts.
prof. Nandini Katti

Setting up NSE (1994)..


By the end of 1997 NSE had spread its business in 200 cities As per no. of trades per calendar year NSE occupied the IIIrd position in 2006 IInd position by NYSE & Ist by NASDAQ in 2006

prof. Nandini Katti

OTCEI (1992)
It is an electronic national stock exchange listing an entirely new set of cos. which will not be listed on other stock exchanges OTCEI can list cos. with issued capital from Rs. 30 lacs to Rs. 25 cr.

Its main objectives are

prof. Nandini Katti

Objectives
Provide medium & small enterprises access to capital mkt. Provide investors a convenient mode of investment Cater to the needs of cos. Which cannot be listed on other official stock exchanges Eliminate problems of illiquid securities, delayed settlements & unfair prices faced by investors
prof. Nandini Katti

Screen based trading


Indian stock exchanges were modernised based on SBTS It cuts down on time, risk, cost, fraud, etc It allows a large no. of participants located at different places to trade with one another simultaneously Identity of parties is not revealed It provides complete online mkt. information It improves the depth & liquidity of the mkt.
prof. Nandini Katti

Corporatisation & demutulisation of stock exchanges


corporitasion will lead to segregation of ownership, mgmt & trading rights from each other Demutulisation of BSE will turn it into a company This change will make BSE a modern, professionally managed transparent, competitive & efficient stock exchange
prof. Nandini Katti

Depository system
Intro. of depository sys. & scripless trading mechanism since 1996 This has erased the delays, counterfeit scrips, forged certificates, wrong signatures etc. It facilitates transfer of ownership without handling securities Scripless trading is demat of shares i.e. converting physical security holdings with depository into electronic forms 2 depositories NSDL & CDSL have been estblished
prof. Nandini Katti

Rolling statement
The change over to rolling statement from the traditional a/c period settlement marks an imp. change in age old practices Under this method all trades executed on trading day (T) are settled after certain days (N) This is called T+N rolling settlement Since 2003 trades are settled under T+2
prof. Nandini Katti

Investor protection measures


Govt. has established Investor Education & Protection Fund (IEPF) w.e.f 2001 IEPF is credited with amount in unpaid dividend accounts of cos., & interest accrued theron, if they have remained unclaimed & unpaid for 7 yrs from the date of payment

prof. Nandini Katti

National Securities Clearing Corp. Ltd


NSCL started guaranteeing all trades in NSE since 1996 Its central functions are clearing, settelment of trades & risk mgmt It clears All trades Determines obligation of trading members Arranges for pay in & pay out of funds Collects & maintains margins/collaterls/base capital
prof. Nandini Katti

Derivatives trading
Derivatives trading inequities started in Indian in June 2000 At present there are 4 equity derivative products in India Stock option Stock futures Index options index futures Derivatives trading is allowed on 2 stock exchanges NSE & BSE
prof. Nandini Katti

Trading in Central Govt. securities


Trading in govt sec has been introduced since Jan 2003, to encourage participation by all investors belonging to all classes It carried out on the basis of screen based trading on all stock exchanges Participation in retail mkt. is opened to individuals, firms, cos, corp. bodies, institutions, trusts & any other equity approved by RBI
prof. Nandini Katti

FIIs
FIIs like Pension funds MFs Investment trusts Portfolio mgmt cos. are allowed to invest in Indian capital mkt. if they are registered under SEBI No. of registered FIIs stood at 1,718 by Dec.2010
prof. Nandini Katti

Trading hours
Stock mkts trading in cash & derivative segments The timings are fixed bet. 9a.m. to 5p.m.

prof. Nandini Katti

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