FINANCIAL MARKETS

Index Sr. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Contents Introduction Scope and potential of financial markets Features of financial markets Role and functions Constituents of financial markets Classification of financial markets Players of financial markets Financial intermediaries Policy proposals for more stable financial markets C F M I (Centre for financial markets and institutions) Indian financial market and economy Current challenges Conclusion Bibliography Pg No. 3 5 6 7 9 11 30 33 34 36 37 38 39 40

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EXECUTIVE SUMMARY Day in and day out, numerous newspapers, magazines and news channels have some information on Financial Market. This just proceeds to show us the magnistude of role of Financial Market. That is why it is necessary to study Financial Markets and its regulation and challenges. The objective of this project is to have deeper understanding, as to what role is, the importance of Financial Markets, the challenges they face and also the ways they prevent from restrictions. The banking sector in India has an extremely bright future; however Financial Market has a dynamic industry from growing further. The report gives a brief introduction to Financial Markets, helps us understand what and how many Financial Markets are, the different circular and the supervision. The report also contains it in detail giving us a brief knowledge on this topic.

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FINANCIAL MARKETS INTRODUCTION

A financial market is a market in which people and entities can trade financial securities, commodities and other fungible items of value at low transaction costs and at prices that reflect supply of demand. Securities include stocks and bonds, and commodities include precious metals or agricultural goods. There are both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded). Markets work by placing many interested buyers and sellers, including households, firms, and government agencies, in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to anon-market economy such as a gift economy. In finance,financial markets facilitate:

The raising of capital (in the capital markets ) The transfer of risk (in the derivatives markets) Price discovery Global transactions with integration of financial markets The transfer of liquidity (in the money markets) International trade (in the currency markets)

and are used to match those who want capital to those who have it. Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest of dividend. This return on investment is a necessary part of markets to ensure that funds are supplied to them.

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DEFINITION
In economicstypically, the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them. The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. This may be a physical location (like the NYSE, BSE, NSE) or an electronic system (like NASDAQ). Much trading of stocks takes place on an exchange; still, corporate actions (merger, spinoff) are outside an exchange, while any two companies or people, for whatever reason, may agree to sell stock from the one to the other without using an exchange. Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock exchange, and people are building electronic systems for these as well, similar to stock exchanges. Financial markets can be domestic or they can be international. What does the India Financial market comprise of? It talks about the primary market, FDIs, alternative investment options, banking and insurance and the pension sectors, asset management segment as well. With all these elements in the India Financial market, it happens to be one of the oldest across the globe and is definitely the fastest growing and best among all the financial markets of the emerging economies. The history of Indian capital markets spans back 200 years, around the end of the 18th century. It was at this time that India was under the rule of the East India Company. The capital market of India initially developed around Mumbai; with around 200 to 250 securities brokers participating in active trade during the second half of the 19th century.

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SCOPE OF THE INDIAN FINANCIAL MARKET

The financial market in India at present is more advanced than many other sectors as it became organized as early as the 19th century with the securities exchanges in Mumbai, Ahmedabad and Kolkata. In the early 1960s, the number of securities exchanges in India became eight -including Mumbai, Ahmedabad and Kolkata. Apart from these three exchanges, there was the Madras, Kanpur, Delhi, Bangalore and Pune exchanges as well. Today there are 23 regional securities exchanges in India. The Indian stock markets till date have remained stagnant due to the rigid economic controls. It was only in 1991, after the liberalization process that the India securities market witnessed a flurry of IPOs serially. The market saw many new companies spanning across different industry segments and business began to flourish. The launch of the NSE (National Stock Exchange) and the OTCEI (Over the Counter Exchange of India) in the mid 1990s helped in regulating a smooth and transparent form of securities trading.

POTENTIAL OF THE INDIA FINANCIAL MARKET

India Financial Market helps in promoting the savings of the economy - helping to adopt an effective channel to transmit various financial policies. The Indian financial sector is well-developed, competitive, efficient and integrated to face all shocks. In the India financial market there are various types of financial products whose prices are determined by the numerous buyers and sellers in the market. The other determinant factor of the prices of the financial products is the market forces of demand and supply. The various other types of Indian markets help in the functioning of the wide India financial sector.

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FEATURES OF THE FINANCIAL MARKET IN INDIA

India Financial Indices - BSE 30 Index, various sector indexes, stockquotes, Sensex charts, bond prices, foreign exchange, Rupee & Dollar Chart Indian Financial market news Stock News - Bombay Stock Exchange, BSE Sensex 30 index, S&P CNX-Nifty, company information, issues on market capitalization, corporate earning statements Fixed Income - Corporate Bond Prices, Corporate Debt details, Debt trading activities, Interest Rates, Money Market, Government Securities, Public Sector Debt, External Debt Service Foreign Investment - Foreign Debt Database composed by BIS, IMF,OECD,& World Bank, Investments in India & Abroad Global Equity Indexes - Dow Jones Global indexes, Morgan Stanley Equity Indexes Currency Indexes - FX & Gold Chart Plotter, J. P. Morgan Currency Indexes National and Global Market Relations Mutual Funds Insurance Loans Forex and Bullion If an investor has a clear understanding of the India financial market, then formulating investing strategies and tips would be easier.

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ROLE (Financial system and the economy)

One of the important requisite for the accelerated development of an economy is the existence of a dynamic financial market. A financial market helps the economy in the following manner.

Saving mobilization: Obtaining funds from the savers or surplus units such as household individuals, business firms, public sector units, central government, state governments etc. is an important role played by financial markets. Investment: Financial markets play a crucial role in arranging to invest funds thus collected in those units which are in need of the same. National Growth: An important role played by financial market is that, they contributed to a nations growth by ensuring unfettered flow of surplus funds to deficit units. Flow of funds for productive purposes is also made possible. Entrepreneurship growth: Financial market contribute to the development of the entrepreneurial claw by making available the necessary financial resources. Industrial development: The different components of financial markets help an accelerated growth of industrial and economic development of a country, thus contributing to raising the standard of living and the society of well-being.

FUNCTIONS OF FINANCIAL MARKETS

Intermediary Functions: The intermediary functions of a financial markets include the following: o Transfer of Resources: Financial markets facilitate the transfer of real economic resources from lenders to ultimate borrowers. o Enhancing income: Financial markets allow lenders to earn interest or dividend on their surplus invisible funds, thus contributing to the enhancement of the individual and the national income. o Productive usage: Financial markets allow for the productive use of the funds borrowed. The enhancing the income and the gross national production. o Capital Formation: Financial markets provide a channel through which new savings flow to aid capital formation of a country. o Price determination: Financial markets allow for the determination of price of the traded financial assets through the interaction of buyers and sellers. They provide a sign for the allocation of funds in the economy based on the demand and supply through the mechanism called price discovery process. o Sale Mechanism: Financial markets provide a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets. o Information: The activities of the participants in the financial market result in the generation and the consequent dissemination of information to the various segments of the market. So as to reduce the cost of transaction of financial assets.

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Financial Functions o Providing the borrower with funds so as to enable them to carry out their investment plans. o Providing the lenders with earning assets so as to enable them to earn wealth by deploying the assets in production debentures. o Providing liquidity in the market so as to facilitate trading of funds. o it provides liquidity to commercial bank o it facilitate credit creation o it promotes savings o it promotes investment o it facilitates balance economic growth o it improves trading floors

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CONSTITUENTS OF FINANCIAL MARKETS

Based on market levels

Primary market: Primary market is a market for new issues or new financial claims. Hence its also called new issue market. The primary market deals with those securities which are issued to the public for the first time. Secondary market: Its a market for secondary sale of securities. In other words, securities which have already passed through the new issue market are traded in this market. Generally, such securities are quoted in the stock exchange and it provides a continuous and regular market for buying and selling of securities.

Based on security types

Money market: Money market is a market for dealing with financial assets and securities which have a maturity period of up to one year. In other words, its a market for purely short term funds. Capital market: A capital market is a market for financial assets which have a long or indefinite maturity. Generally it deals with long term securities which have a maturity period of above one year. Capital market may be further divided into: (a) industrial securities market (b) Govt. securities market and (c) long term loans market. o Equity markets: A market where ownership of securities are issued and subscribed is known as equity market. An example of a secondary equity market for shares is the Bombay stock exchange. o Debt market: The market where funds are borrowed and lent is known as debt market. Arrangements are made in such a way that the borrowers agree to pay the lender the original amount of the loan plus some specified amount of interest.

Derivative markets: Financial service market: A market that comprises participants such as commercial banks that provide various financial services like ATM. Credit cards. Credit rating, stock broking etc. is known as financial service market. Individuals and firms use financial services markets, to purchase services that enhance the working of debt and equity markets. Depository markets: A depository market consist of depository institutions that accept deposit from individuals and firms and uses these funds to participate in the debt market, by giving loans or purchasing other debt instruments such as treasure bills.

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Non-Depository market: Non-depository market carry out various functions in financial markets ranging from financial intermediary to selling, insurance etc. The various constituency in non-depositary markets are mutual funds, insurance companies, pension funds, brokerage firms etc.

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CLASSIFICATION OF FINANCIAL MARKETS

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NATURE OF CLAIM DEBT MARKET:

Debt market is the market for trading debt securities. The debt market thus involves corporate bonds, government bonds, municipal bonds, negotiable certificates of deposit, and various money market investments. The debt market also includes individual loans bought from lenders and often packaged together in large amounts. The debt market includes the primary market, where debts are first sold to the public; and the secondary market, where investors sell debts to each other afterward. On the secondary debt market, debts can be sold on exchanges or on the over-the-counter market, but most are traded over the counter. Many debts are also packaged together into mutual funds. There are publications that publish the daily prices of bonds on the debt market.

ADVANTAGES OF DEBT MARKET:

One of the important lessons of the recent Asian crisis was that banks did not pay any attention to protecting themselves from the currency and asset liability mismatches, especially arising from those of their domestic currency loans based on the their foreign currency borrowings. India could, however, escape from the contagion effect because its short term external currency borrowings were relatively small and the banks transferred the entire currency risk to their clients. While banks in India have been able to better protect themselves from asset liability mismatches arising from foreign currency loans they are still to tackle seriously their asset liability mismatches in the domestic currency. In respect of the DFIs it has been observed that the asset liability problem they have so far faced is of a peculiar nature. When they enjoyed the facility to raise rupee funds through government guaranteed bonds the weighted average maturity of their borrowings was higher than the weighted average maturity of their loan portfolio Secondly, since they were able to raise funds at relatively lower rates, and since it was a period of administered interest rates they did not face the problems that the financial intermediaries face on account of interest rate movements. Even in regard to banks the asset liability mismatch problem was minimal as they were lending mainly by way of short-term loans and they had the freedom to raise lending rates in response to developing situations. But this comfortable world came to an end after the financial sector deregulation. Minimizing asset liability mismatches as well as managing interest rate risks are becoming some of the major preoccupations for both banks and the DFIs. All the DFIs
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are exercising call options and redeeming the non-SLR bonds, which they had earlier floated at high interest rates. Since average lending rates have declined during the recent past DFIs are finding that some of their earlier market borrowings are at rates, which are higher than what they charge on fresh loans. The Indian sovereign bond market is not well developed and the interest rate thrown up by the system is still not acceptable to most of the borrowers and lenders. The efforts made by NSE and others to develop benchmark rates will be touched upon in another section. Development of an active bond market will help to resolve some of the problems of asset liability mismatches faced by banks and institutions. After the interest rates regime was deregulated it has become difficult for all the market participants to predict the yield curve with any degree of confidence. Since the month-to- month fiscal situation of the government of India also has become a highly unpredictable variable interest rates at which government raises bond funds have also become unpredictable. RBI has tried to even out these fluctuations by itself stepping in to absorb central government bonds and later selling them of in the secondary market at more appropriate times. All the same the financial intermediaries are often at a loss to predict with any degree of reasonable accuracy to predict either the level or shape of the yield curve. Duration risks in particular are becoming highly unpredictable. Another reality with which banks have to live is the requirement of extending advances not by way of cash credit mechanism as they used to do it earlier but by way of term loans to large borrowers at the insistence of RBI. Earlier the banks could revise interest rates on the outstanding cash credit advances as and when they decided to revise their lending rates. The same flexibility is not available with the term loans. Secondly, the banks have now to worry more about their asset composition to maintain reasonably satisfactory capital adequacy level.

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SIZE OF THE MARKET

The Wholesale Debt Market (WDM) segment of NSE, which makes available for trading most of the debt securities, has an aggregate market capitalization of around Rs.6094 billion as of April 2001. Of this the 69.6 % was in the form of dated securities of the Central Government while Treasury bills accounted for an additional 3.1%. The dated securities of the State Governments were 7.4% of the total debt. The relative share of corporate bonds was modest at 2.5%. With the financial institutions becoming increasingly active in raising funds at market related rates, the share of their bonds at 4.6% of the total was higher than that of the corporate bonds .The public sector units mainly of the central government depend on bond to a large extent with the outstanding stock of their bonds accounting for about 5.9% of the total. It is thus clear that the debt market is dominated by the central and the state governments, public sector units, and the financial institutions (mainly the DFIs). Currently, the WDM segment of NSE serves as the only formal platform for trading (including trade reporting) of a wide range of debt instruments.

EQUITY MARKET
A stock market or equity market is a public entity (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together. The largest stock market in the United States, by market capitalization, is the New York Stock Exchange (NYSE). In Canada, the largest stock market is the Toronto Stock Exchange. Major European examples of stock exchanges include the Amsterdam Stock Exchange, London Stock Exchange, Paris Bourse, and the Deutsche Brse (Frankfurt Stock Exchange). In Africa, examples include Nigerian Stock Exchange, JSE Limited, etc. Asian examples include the Singapore Exchange, the Tokyo Stock Exchange, the Hong Kong Stock Exchange, the Shanghai Stock Exchange, etc.

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STOCK EXCHANGE
Stock exchange is generally organised as an association, a society or a company with a limited number of members. It is open only to these members who act as brokers for the buyers and sellers. The Securities Contract (Regulation) Act has defined stock exchange as an association, organisation or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business of buying, selling and dealing in securities. The main characteristics of a stock exchange are: 1. It is an organised market. 2. It provides a place where existing and approved securities can be bought and sold easily. 3. In a stock exchange, transactions take place between its members or their authorised agents. 4. All transactions are regulated by rules and by laws of the concerned stock exchange. 5. It makes complete information available to public in regard to prices and volume of transactions taking place every day. It may be noted that all securities are not permitted to be traded on a recognised stock exchange. It is allowed only in those securities (called listed securities) that have been duly approved for the purpose by the stock exchange authorities. The method of trading now- a-days, however, is quite simple on account of the availability of on-line trading facility with the help of computers. It is also quite fast as it takes just a few minutes to strike a deal through the brokers who may be available close by. Similarly, on account of the system of scrip-less trading and rolling settlement, the delivery of securities and the payment of amount involved also take very little time, say, 2 days.

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FUNCTIONS OF STOCK EXCHANGE:

1. Provides ready and continuous market: By providing a place where listed securities can be bought and sold regularly and conveniently, a stock exchange ensures a ready and continuous market for various shares, debentures, bonds and government securities. This lends a high degree of liquidity to holdings in these securities as the investor can encash their holdings as and when they want. 2. Provides information about prices and sales: A stock exchange maintains complete record of all transactions taking place in different securities every day and supplies regular information on their prices and sales volumes to press and other media. In fact, now-a-days, you can get information about minute to minute movement in prices of selected shares on TV channels like CNBC, Zee News, NDTV and Headlines Today. This enables the investors in taking quick decisions on purchase and sale of securities in which they are interested. Not only that, such information helps them in ascertaining the trend in prices and the worth of their holdings. This enables them to seek bank loans, if required. 3. Provides safety to dealings and investment: Transactions on the stock exchange are conducted only amongst its members with adequate transparency and in strict conformity to its rules and regulations which include the procedure and timings of delivery and payment to be followed. This provides a high degree of safety to dealings at the stock exchange. There is little risk of loss on account of non-payment or nondelivery. Securities and Exchange Board of India (SEBI) also regulates the business in stock exchanges in India and the working of the stock brokers.Not only that, a stock exchange allows trading only in securities that have been listed with it; and for listing any security, it satisfies itself about the genuineness and soundness of the company and provides for disclosure of certain information on regular basis. Though this may not guarantee the soundness and profitability of the company, it does provide some assurance on their genuineness and enables them to keep track of their progress. 4. Helps in mobilisation of savings and capital formation: Efficient functioning of stock market creates a conducive climate for an active and growing primary market. Good performance and outlook for shares in the stock exchanges imparts buoyancy to the new issue market, which helps in mobilising savings for investment in industrial and commercial establishments. Not only that, the stock exchanges provide liquidity and profitability to dealings and investments in shares and debentures. It also educates people on where and how to invest their savings to get a fair return. This encourages the habit of saving, investment and risk-taking among the common people. Thus it helps mobilising surplus savings for investment in corporate and government securities and contributes to capital formation. 5. Barometer of economic and business conditions: Stock exchanges reflect the changing conditions of economic health of a country, as the shares prices are highly sensitive to changing economic, social and political conditions. It is observed that during
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the periods of economic prosperity, the share prices tend to rise. Conversely, prices tend to fall when there is economic stagnation and the business activities slow down as a result of depressions. 6. Better Allocation of funds: As a result of stock market transactions, funds flow from the less profitable to more profitable enterprises and they avail of the greater potential for growth. Financial resources of the economy are thus better allocated.

STOCK EXCHANGE IN INDIA

The first organised stock exchange in India was started in Mumbai known as Bombay Stock Exchange (BSE). It was followed by Ahmedabad Stock Exchange in 1894 and Kolkata Stock Exchange in 1908. The number of stock exchanges in India went upto 7 by 1939 and it increased to 21 by 1945 on account of heavy speculation activity during Second World War. A number of unorganised stock exchanges also functioned in the country without any formal set-up and were known as kerb market. The Security Contracts (Regulation) Act was passed in 1956 for recognition and regulation of Stock Exchanges in India. At present we have 23 stock exchanges in the country. Of these, the most prominent stock exchange that came up is National Stock Exchange (NSE). It is also based in Mumbai and was promoted by the leading financial institutions in India. It was incorporated in 1992 and commenced operations in 1994. This stock exchange has a corporate structure, fully automated screen-based trading and nationwide coverage. Another stock exchange that needs special mention is Over The Counter Exchange of India (OTCEI). It was also promoted by the financial institutions like UTI, ICICI, IDBI, IFCI, LIC etc. in September 1992 specially to cater to small and medium sized companies with equity capital of more than Rs.30lakh and less than Rs.25crore. It helps entrepreneurs in raising finances for their new projects in a cost effective manner. It provides for nation- wide online ringless trading with 20 plus representative offices in all major cities of the country. On this stock exchange, securities of those companies can be traded which are exclusively listed on OTCEI only.

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ROLE OF SEBI:
As part of economic reforms programme started in June 1991, the Government of India initiated several capital market reforms, which included the abolition of the office of the Controller of Capital Issues (CCI) and granting statutory recognition to Securities Exchange Board of India (SEBI) in 1992 for:

(a) protecting the interest of investors in securities; (b) promoting the development of securities market;

(c) regulating the securities market; and (d) matters connected there with or incidental thereto.

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NATURE OF MATURITY MONEY MARKET:

The money market is a market for short-term funds, which deals in financial assets whose period of maturity is upto one year. It should be noted that money market does not deal in cash or money as such but simply provides a market for credit instruments such as bills of exchange, promissory notes, commercial paper, treasury bills, etc. These financial instruments are close substitute of money. These instruments help the business units, other organisations and the Government to borrow the funds to meet their shortterm requirement. Money market does not imply to any specific market place. Rather it refers to the whole networks of financial institutions dealing in short-term funds, which provides an outlet to lenders and a source of supply for such funds to borrowers. Most of the money market transactions are taken place on telephone, fax or Internet. The Indian money market consists of Reserve Bank of India, Commercial banks, Co-operative banks, and other specialised financial institutions. The Reserve Bank of India is the leader of the money market in India. Some Non Banking Financial Companies (NBFCs) and financial institutions like LIC, GIC, UTI, etc. also operate in the Indian money market. The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit, federal funds, and short-lived mortgage- and asset backed securities. It provides liquidity funding for the global financial system. The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short-term financial instruments commonly called "paper." This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity. The core of the money market consists of interbank lendingbanks borrowing and lending to each other using commercial paper, repurchase agreements and similar instruments. These instruments are often benchmarked to (i.e. priced by reference to) the London Interbank Offered Rate (LIBOR) for the appropriate term and currency.

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MONEY MARKETS INSTRUMENTS

Following are some of the important money market instruments or securities. (a) Call Money: Call money is mainly used by the banks to meet their temporary requirement of cash. They borrow and lend money from each other normally on a daily basis. It is repayable on demand and its maturity period varies in between one day to a fortnight. The rate of interest paid on call money loan is known as call rate. (b)Treasury Bill: A treasury bill is a promissory note issued by the RBI to meet the shortterm requirement of funds. Treasury bills are highly liquid instruments, that means, at any time the holder of treasury bills can transfer of or get it discounted from RBI. These bills are normally issued at a price less than their face value; and redeemed at face value. So the difference between the issue price and the face value of the Treasury bill represents the interest on the investment. (c)Commercial Paper: Commercial paper (CP)is a popular instrument for financing working capital requirements of companies. The CP is an unsecured instrument issued in the form of promissory note. This instrument was introduced in 1990 to enable the corporate borrowers to raise short-term funds. It can be issued for period ranging from 15 days to one year. Commercial papers are transferable by endorsement and delivery. The highly reputed companies (Blue Chip companies) are the major player of commercial paper market. (d) CertificateofDeposit:CertificateofDeposit(CDs)areshort-terminstruments issued by Commercial Banks and Special Financial Institutions (SFIs), which are freely transferable from one party to another. The maturity period of CDs ranges from 91 days to one year. These can be issued to individuals, co-operatives and companies. (e)Trade Bill: Normally the traders buy goods from the wholesalers or manufacture son credit. The sellers get payment after the end of the credit period. But if any seller does not want to wait or in immediate need of money he/she can draw a bill of exchange in favour of the buyer. When buyer accepts the bill it becomes a negotiable instrument and is termed as bill of exchange or trade bill. This trade bill can now be discounted with a bank before its maturity. On maturity the bank gets the payment from the drawee i.e., the buyer of goods. When trade bills are accepted by Commercial Banks it is known as Commercial Bills. So trade bill is an instrument, which enables the drawer of the bill to get funds for short period to meet the working capital needs.

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CAPITAL MARKET
Capital Market may be defined as a market dealing in medium and longterm funds. It is an institutional arrangement for borrowing medium and long-term funds and which provides facilities for marketing and trading of securities. So it constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign markets and raising of capital by issue various securities such as shares debentures, bonds, etc. In the present chapter let us discuss about the market for trading of securities. The market where securities are traded known as Securities market. It consists of two different segments namely primary and secondary market. The primary market deals with new or fresh issue of securities and is, therefore, also known as new issue market; whereas the secondary market provides a place for purchase and sale of existing securities and is often termed as stock market or stock exchange. Capital Market is a market for financial investments that are direct or indirect claims to capital. It comprises of the institutions and mechanisms through which funds are pooled and made available to business, government and individuals. With the expansion of commercial banking and unprecedented development of multinational corporations, the domestic financial markets has assumed global outlook. The integration of world financial and capital market with that of the Indian provides greater benefits to both the demanders and suppliers of funds and opportunity to diversify risk. This globalisation has added depth to the market with a large number of market participants. The market wherein resources are mobilised by companies through issue of new securities is termed as the primary market. In India, the primary market has grown exponentially during the last decades.

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SEASONING OF CLAIM PRIMARY MARKET

The Primary Market consists of arrangements, which facilitate the procurement of longterm funds by companies by making fresh issue of shares and debentures. You know that companies make fresh issue of shares and/or debentures at their formation stage and, if necessary, subsequently for the expansion of business. It is usually done through private placement to friends, relatives and financial institutions or by making public issue. In any case, the companies have to follow a well-established legal procedure and involve a number of intermediaries such as underwriters, brokers, etc. who form an integral part of the primary market. Many initial public offers (IPOs) made recently by a number of public sector undertakings such as ONGC, GAIL, NTPC and the private sector companies like Tata Consultancy Services (TCS), Biocon, Jet-Airways and so on.

SECONDARY MARKET
The secondary market known as stock market or stock exchange plays an equally important role in mobilising long-term funds by providing the necessary liquidity to holdings in shares and debentures. It provides a place where these securities can be encashed without any difficulty and delay. It is an organised market where shares, and debentures are traded regularly with high degree of transparency and security. In fact, an active secondary market facilitates the growth of primary market as the investors in the primary market are assured of a continuous market for liquidity of their holdings. The major players in the primary market are merchant bankers, mutual funds, financial institutions, and the individual investors; and in the secondary market you have all these and the stockbrokers who are members of the stock exchange who facilitate the trading .

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TIMING OF DELIVERY CASH MARKET OR SPOT MARKET

The spot market or cash market is a public financial market, in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market in which delivery is due at a later date. A spot market can be: an organized market, an exchange or "over the counter", OTC. Spot markets can operate wherever the infrastructure exists to conduct the transaction. The spot market for most instruments exists primarily on the Internet.

Spot Forex
The spot foreign exchange market imposes a two-day delivery period, originally due to the time it would take to move cash from one bank to another. Most speculative retail forex trading is done as spot transactions on an online trading platform.

Energy Spot
The spot energy market allows producers of surplus energy to instantly locate available buyers for this energy, negotiate prices within milliseconds and deliver actual energy to the customer just a few minutes later. Spot markets can be either privately operated or controlled by industry organizations or government agencies. They frequently attract speculators, since spot market prices are known to the public almost as soon as deals are transacted.

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FORWARD MARKET /FUTURE MARKET Future market

A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. These types of contracts fall into the category of derivatives. Such instruments are priced according to the movement of the underlying asset (stock, physical commodity, index, etc.). The aforementioned category is named "derivatives" because the value of these instruments is derived from another asset class.

Forward market
Forward contract is negotiated contract .forward contract hedges the risk perfectly because they are signed for exact date and quantity required. Settlement of forward contract is by actually delivery of goods and payment of money. Forward contracts were standard at the time. However, most forward contracts weren't honored by both the buyer and the seller. For instance, if the buyer of a corn forward contract made an agreement to buy corn, and at the time of delivery the price of corn differed dramatically from the original contract price, either the buyer or the seller would back out. Additionally, the forward contracts market was very illiquid and an exchange was needed that would bring together a market to find potential buyers and sellers of a commodity instead of making people bear the burden of finding a buyer or seller.

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ORGANISATIONAL STRUCTURE OTC MARKET

A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network In general, the reason for which a stock is traded over-thecounter is usually because the company is small, making it unable to meet exchange listing requirements. Also known as "unlisted stock", these securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone. Although Nasdaq operates as a dealer network, Nasdaq stocks are generally not classified as OTC because the Nasdaq is considered a stock exchange. As such, OTC stocks are generally unlisted stocks which trade on the Over the Counter Bulletin Board (OTCBB) or on the pink sheets. Be very wary of some OTC stocks, however; the OTCBB stocks are either penny stocks or are offered by companies with bad credit records. Instruments such as bonds do not trade on a formal exchange and are, therefore, also considered OTC securities. Most debt instruments are traded by investment banks making markets for specific issues. If an investor wants to buy or sell a bond, he or she must call the bank that makes the market in that bond and asks for quotes.

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ETF MARKET
India is not only hot economically; its evolved into a proving ground for new products and services before theyre unleashed (or not) upon the rest of the world. These products, many of which satisfy social needs, may promote growth in the countrys economy and exchange traded funds (ETFs) through increased consumption. Rural India is becoming a laboratory for companies to test products and services that will then be replicated in foreign markets, reports Sapna Agarwal for Livemint. Some examples include: Tata Chemicals Ltd. is test marketing a low-cost water purifier, Tata Swach, which will be put to Indias markets and on to other emerging markets. [ ETF Strategies to Play the BRICs.] Godrej Appliances Ltd is also test marketing a batter-powered refrigerator for people who dont have access to regular electricity. Nokia Life Tools, a mobile phone that accesses agricultural, educational and entertainment content, was introduced to Indonesia and will be heading to other emerging economies this year . Hindustan Unilever Ltd has developed the Pureit home water purifier system for the rural market, which will first be introduced in Indias cities and then taken overseas. [What India Needs to Keep the Momentum] Mark H. Pearson, managing director (supply chain management) at consulting firm Accenture Ltd., believes that rural India is the new battleground for multinationals to win if they want to win in emerging markets like that of Russia, Brazil and Africa. Companies are trying to tap into the so-called bottom of the pyramid that is aspiring to have an urban influenced lifestyle.

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OTHER MARKETS INCLUDE INSURANCE MARKET

With largest number of life insurance policies in force in the world, Insurance happens to be a mega opportunity in India. Its a business growing at the rate of 15-20 per cent annually and presently is of the order of Rs 450 billion. Together with banking services, it adds about 7 per cent to the countrys GDP. Gross premium collection is nearly 2 per cent of GDP and funds available with LIC for investments are 8 per cent of GDP. Yet, nearly 80 per cent of Indian population is without life insurance cover while health insurance and non-life insurance continues to be below international standards. And this part of the population is also subject to weak social security and pension systems with hardly any old age income security. This itself is an indicator that growth potential for the insurance sector is immense. A well-developed and evolved insurance sector is needed for economic development as it provides long term funds for infrastructure development and at the same time strengthens the risk taking ability. It is estimated that over the next ten years India would require investments of the order of one trillion US dollar. The Insurance sector, to some extent, can enable investments in infrastructure development to sustain economic growth of the country. Insurance is a federal subject in India. There are two legislations that govern the sectorThe Insurance Act- 1938 and the IRDA Act- 1999. The insurance sector in India has come a full circle from being an open competitive market to nationalisation and back to a liberalised market again. Tracing the developments in the Indian insurance sector reveals the 360 degree turn witnessed over a period of almost two centuries.

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Historical Perspective The history of life insurance in India dates back to 1818 when it was conceived as a means to provide for English Widows. Interestingly in those days a higher premium was charged for Indian lives than the non-Indian lives as Indian lives were considered more risky for coverage. The Bombay Mutual Life Insurance Society started its business in 1870. It was the first company to charge same premium for both Indian and non- Indian lives. The Oriental Assurance Company was established in 1880. The General insurance business in India, on the other hand, can trace its roots to the Triton (Tital) Insurance Company Limited, the first general insurance company established in the year 1850 in Calcutta by the British. Till the end of nineteenth century insurance business was almost entirely in the hands of overseas companies. Insurance regulation formally began in India with the passing of the Life Insurance Companies Act of 1912 and the provident fund Act of 1912. Several frauds during 20's and 30's sullied insurance business in India. By 1938 there were 176 insurance companies. The first comprehensive legislation was introduced with the Insurance Act of 1938 that provided strict State Control over insurance business. The insurance business grew at a faster pace after independence. Indian companies strengthened their hold on this business but despite the growth that was witnessed, insurance remained an urban phenomenon. The Government of India in 1956, brought together over 240 private life insurers and provident societies under one nationalised monopoly corporation and Life Insurance Corporation (LIC) was born. Nationalisation was justified on the grounds that it would create much needed funds for rapid industrialization. This was in conformity with the Government's chosen path of State lead planning and development. The (non-life) insurance business continued to thrive with the private sector till 1972. Their operations were restricted to organised trade and industry in large cities. The general insurance industry was nationalised in 1972. With this, nearly 107 insurers were amalgamated and grouped into four companies- National Insurance Company, New India Assurance Company, Oriental Insurance Company and United India Insurance Company. These were subsidiaries of the General Insurance Company (GIC).

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FOREIGN EXCHANGE MARKET

The foreign exchange market (forex, FX, or currency market) is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies. The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay Pound Sterling, even though the business' income is in US dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation on the change in interest rates in two currencies. In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system. The foreign exchange market is unique because of Its huge trading volume representing the largest asset class in the world leading to high liquidity. Its geographical dispersion. Its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday; The variety of factors that affect exchange rates. The low margins of relative profit compared with other markets of fixed income; and The use of leverage to enhance profit and loss margins and with respect to account size. As such, it has been referred to as the market closest to the ideal of perfect Competition, notwithstanding currency intervention by central banks.

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PLAYERS OF FINANCIAL MARKETS

Financial institutions are institutions that participate in financial markets, i.e., in the creation and/or exchange of financial assets. The following are the major players of financial markets

BROKER A broker is a commissioned agent of a buyer (or seller) who facilitates trade by locating a seller (or buyer) to complete the desired transaction. A broker does not take a position in the assets they trade. The profits of brokers are determined by the commissions they charge to the users of their services (the buyers, the sellers, or both).

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DEALER Like brokers, dealers facilitate trade by matching buyers with sellers of assets; they do not engage in asset transformation. Unlike brokers, however, a dealer can and does "take positions" (i.e., maintain inventories) in the assets he or she trades that permit the dealer to sell out of inventory rather than always having to locate sellers to match every offer to buy. Also, unlike brokers, dealers do not receive sales commissions. Rather, dealers make profits by buying assets at relatively low prices and reselling them at relatively high prices (buy low - sell high). The price at which a dealer offers to sell an asset (the "asked price") minus the price at which a dealer offers to buy an asset (the "bid price") is called the bid-ask spread and represents the dealer's profit margin on the asset exchange.

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INVESTMENT BANKS
An investment bank assists in the initial sale of newly issued securities (i.e. in IPOs = Initial Public Offerings) by engaging in a number of different activities: Advice: Advising corporate on whether they should issue bonds or stock, and, for bond issues, on the particular types of payment schedules these securities should offer; Underwriting: Guaranteeing corporate a price on the securities they offer, either individually or by having several different investment banks form a syndicate to underwrite the issue jointly; Sales Assistance: Assisting in the sale of these securities to the Public

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FINANCIAL INTERMEDIERIES
Unlike brokers, dealers, and investment banks, financial intermediaries are financial institutions that engage in financial asset transformation. That is, financial intermediaries purchase one kind of financial asset from borrowers - generally some kind of long-term loan contract whose terms are adapted to the specific circumstances of the borrower (e.g. a mortgage) - and sell a different kind of financial asset to savers, generally some kind of relatively liquid claim against the financial intermediary (e.g. a deposit account). In addition, unlike brokers and dealers, financial intermediaries typically hold financial assets as part of an investment portfolio rather than as an inventory for resale. In addition to making profits on their investment portfolios, financial intermediaries make profits by charging relatively high interest rates to borrowers and paying relatively low interest rates to savers.

Types of financial intermediaries include:

Depository Institutions (commercial banks, savings and loan associations, mutual savings banks, credit unions); Contractual Savings Institutions (life insurance companies, fire and casualty insurance companies, pension funds, government retirement funds); and Investment Intermediaries (finance companies, stock and bond mutual funds, money market mutual funds).

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POLICY PROPOSALS FOR MORE STABLE FINANCIAL MARKETS .1 Prudential regulation and supervision
Developing countries, which are introducing liberalising measures, in both the domestic financial system and the capital account, can benefit from the introduction of extra prudential measures in the banking system. Banking regulations can place limits on banks foreign borrowing and foreign exchange transactions. Restrictions can also be placed on foreign currency loans to domestic companies limited to those that have the capacity to generate foreign currency as well as limit bank lending to domestic companies that have high exposure to short-term foreign denominated liabilities. These measures can help to prevent the kinds of currency and maturity mismatches that were seen during the crises of the late 1990s and the beginning of this century.

.2 Capital controls
There is growing evidence that in a fully liberalised environment, the risk of periods of financial instability leading to large-scale macro shocks is higher than under more controlled conditions.23 Surges of capital inflows can cause difficulties for developing countries in good times and bad. Not only does the volatility in international financial markets mean that inflows can suddenly cease or reverse, thereby increasing the risk of crisis, but largescale inflows also create problems for macroeconomic management. At the same time, government investment in public services often becomes limited because public spending decisions are made with the reaction of financial markets firmly in mind. Developing country governments may, therefore, find it useful to use some form of controls on capital inflows.

.3 Local bond and equity markets

Following the financial crises of the last decade, much emphasis was placed on the banking system as the main form of financial intermediation. in developing countries. It has been argued, however, that many countries would benefit from establishing deeper equity and bond markets. Since the late 1990s, many developing countries have been developing their domestic corporate bond markets. This has a number of advantages: it increases the options available to local firms, helps to reduce the dependency of developing countries on external borrowing, and can help to reduce the maturity and currency mismatches on the balance sheets of firms and banks in developing countries (IMF, 2005). A well functioning local corporate bond market, which attracts both domestic and foreign investors, can also serve to minimise the vulnerability to international capital markets and to cutbacks in lending by local banks. However, domestic bond markets are themselves subject to volatility and in situations where local bond markets are developing very quickly, they need close supervision by regulators to reduce the risk of accumulating bad credits.

.4 Currency transactions taxes

Currency transaction taxes (CTT) are small taxes levied on transactions in foreign currency markets an idea which could possibly be extended to markets for securities,
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derivatives and other financial instruments. Currencies are traded in high volumes in liquid markets across the world and therefore have the potential to be a very attractive tax base. Often referred to as the Tobin tax, the idea for a tax on foreign exchange transactions was put forward by James Tobin in 1972 as a way to enhance macroeconomic stability by reducing the volume of speculative short-term currency dealing.

.5 Supervision at the international level

Progress on making the international financial system more stable has so far been asymmetrical, with the focus on strengthening macroeconomic policies and financial regulation in developing countries. Progress at the global level, and particularly in capital source countries, has been far less encouraging.

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C F M I (Centre for Financial Markets and Institutions)

Financial Markets and sectors associated with financial markets have seen significant growth and change in every parts of the world including India. The Finance and Economics Areas of Indian Institute of Management Bangalore (IIMB) contribute significantly in the form of research, training and courses covering various segments of financial markets. They are also rated best among business schools in India. Many faculty members of finance and economics are closely associated with regulators, stock exchanges, financial intermediary institutions and institutions providing technology and software to financial markets and institutions financial markets. In order to leverage the strength of the faculty members and their association with financial markets, the Institute has set up Centre for Financial Markets and Institutions (CFMI) with an objective to carry out cutting-edge research and offer specialized programmes and training to meet the increasingly sophisticated demands of the financial sector. The activities of the centre include Conducting high-quality research on both technical and non-technical topics of financial markets and institutions addressing both immediate and long-term needs of the industry Close and active association and interaction with various agencies and organizations connected with financial markets and institutions

.
Disseminating the knowledge through new courses, case studies, executive training, conferences and workshops. Offering a forum for exchange of views between the practitioners and academics by inviting eminent scholars and experts from the industry and regulating agencies to discuss, debate and direct future policies relating to financial markets and institutions. Encouraging and sponsoring academic and industry exchange programs in which faculty members can spend a short period with some organizations and similarly practitioners can spend a short period in IIMB.

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INDIAN FINANCIAL MARKET AND ECONOMY

Financial markets in India in the period before the early 1990s as I mentioned earlier were marked by administered interest rates, quantitative ceilings, statutory preemptions, captive market for government securities, excessive reliance on central bank financing, pegged exchange rate, and current and capital account restrictions. As a result of various reforms, the financial markets have now transited to a regime characterized by market-determined interest and exchange rates, price-based instruments of monetary policy, current account convertibility, phased capital account liberalisation and auctionbased system in the government securities market. A noteworthy feature is that the government securities and corporate debt markets are essentially domestically driven since Foreign Institutional Investor and non-resident participation in these markets are limited and subjected to prudential ceilings. The Reserve Bank has taken a proactive role in the development of financial markets. Development of these markets has been done in a calibrated, sequenced and careful manner such that these developments are in step with those in other markets in the real sector. The sequencing has also been informed by the need to develop market infrastructure, technology and capabilities of market participants and financial institutions in a consistent manner. The Reserve Bank has accorded priority to the development of the money market as it is the key link in the transmission mechanism of monetary policy to financial markets and finally, to the real economy. The Reserve Bank has special interest in the development of government securities market as it also plays a key role in the effective transmission of monetary policy impulses in a deregulated environment. A qualitative change was brought about in the legal framework by the enactment of the Foreign Exchange Management Act (FEMA) in June 2000 by which the objectives of regulation have been redefined as facilitating trade and payments as well as orderly development and functioning of foreign exchange market in India. The legal framework envisages both the developmental dimension and orderliness or stability. The legislation provides power to the government to reimpose controls if public interest warrants it. The Reserve Bank has undertaken various measures towards development of spot as well as forward segments of foreign exchange market. Market participants have also been provided with greater flexibility to undertake foreign exchange operations and manage their risks. Linkage between the money, government securities and forex markets has been established and is growing. The price discovery in the primary market is more credible than before and secondary markets have acquired greater depth and liquidity. The number of instruments and participants has increased in all the markets, the most impressive being the government securities market. The institutional and technological infrastructure has been created by the Reserve Bank to enable transparency in operations and to provide secured payment and settlement systems.

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CURRENT CHALLENGES The critical task before the public policy, in general, and Reserve Bank of India, in particular, is to strengthen the structural factors in the economy but determinedly moderate the cyclical and excessively volatile elements of the economy. There are reasonable grounds for optimism in regard to the prospects for Indian economy, and this has been globally recognised. However, it is necessary to remain guarded in matters relating to economic growth and stability of an emerging market economy in the current global environment of high output-growth, notable inflation pressures, persisting global imbalances, incipient signs of re-pricing of risks, and perceived volatility of capital flows. We do recognise that relative to most large emerging market economies, we have several significant economic strengths but we also have twin deficits current and fiscal; have a higher component of more volatile portfolio flows on capital account, and severe policy challenges in managing capital flows. In view of the proven success of our overall approach to reform over the last fifteen years, there is considerable merit in pursuing the gradualist, participative and harmonious approach towards further reforms in financial and external sectors. Since it is generally accepted that financial and external sectors in India are reasonably strong and resilient, high priority is being accorded for further reforms in fiscal sector, agriculture, physical infrastructure, especially in power and urban areas, and delivery of public services such as water, health and education. Progress in these sectors will help, over the medium term, enhance competitiveness and accelerated reforms in financial and external sectors, in a harmonious and non-disruptive manner, thus, reinforcing self - accelerating growth with assured stability.

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CONCLUSION The objective of the financial sector reforms is to establish a viable environment, which will allow investment to be channeled in the most efficient way. One of the first priorities for any emerging market is to mobilise domestic savings; to this end, the securities markets have proved to be most efficient. Foreign direct and portfolio investment require a certain level of financial market infrastructure. So far, the role and diversity of the financial institutions will grow. A financial market is a market in which people and entities can trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural goods. There are both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded). Markets work by placing many interested buyers and sellers, including households, firms, and government agencies, in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy. In finance, financial markets facilitate: The raising of capital (in the capital markets) The transfer of risk (in the derivatives markets) Price discovery Global transactions with integration of financial markets The transfer of liquidity (in the money markets) International trade (in the currency markets) and are used to match those who want capital to those who have it. Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends. This return on investment is a necessary part of markets to ensure that funds are supplied to them

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BIBLIOGRAPHY BOOK: 1. BOOK NAME: Financial markets.

NEWSPAPERS/ MAGAZINES/ JOURNALS: 1. The Financial Express. 2. The Times Of India 3. The Economic Times 4. India Today 5. DNA WEBSITES: 1) www.personalfinance.byu.edu 2) www.google.com 3) www.yahoo.com 4) www.valuenotes.com

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