INDEX

Chapter 1. 1.1 1.2 1.3 1.4 Financial Markets

Introduction History Types Indian Scenario

Chapter 2. Capital markets 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 Introduction Nature & Constituents Importance & Rule Functions of Capital Markets Components of Capital Markets Features of Capital Markets Risk in Capital Markets Types of Capital Markets 2.8.1 Primary Market 2.8.2 Secondary Market

Chapter 3. Money Market 3.1 3.2 3.3 3.4 3.5 Introduction Features & Objectives Characteristics of Developed Money Market Importance of Money Market Types of Money Market 3.5.1 Call Money Market 3.5.2 Commercial Bills Market 3.5.3 Acceptance Market 3.5.4 Treasury Bill Market 3.6 3.7 Financial Institutions of Money Market Money Market Instruments 3.7.1 Commercial Paper 3.7.2 Certificate of Deposits 3.7.3 Inter Bank Participation Certificate Chapter 4. Debt Market and Instruments 4.1 Introduction 4.2 Features Chapter 5. Equity Market 5.1 Introduction 5.2 Equity Markets in India- An Overview Chapter6. Derivatives Market 6.1 Introduction

6.2 Financial Derivatives 6.3 Derivatives Products 6.3.1 Forwards 6.3.2 Options 6.3.3 Warrants 6.3.4 Leaps 6.3.5 Baskets 6.3.6 Swaps 6.4 Types of Derivatives Market 6.4.1 Forwards 6.4.2 Futures Chapter 7. Case studies Chapter 8. Conclusion Bibilography

Chapter 1 Financial Market

1.1 Introduction India Financial Market is one of the oldest in the world and is considered to be the fastest growing and best among all the markets of the emerging economies. The history of Indian Capital markets dates back 200 years towards the end of the 18th Century when India was under the rule of the East India Company. The Development of the capital market in India concentrated around Mumbai where no less than 200 to 250 securities brokers were active during the second half of the 19 th century. However the stock markets in India remained stagnant due to stringent controls on the market economy that allowed only a handful of monopolies to dominate their respective sectors. industry The corporate sector wasnt allowed into many segments, which were dominated by the state

controlled public sector resulting in stagnation of the economy right up to the early 1990s. Thereafter when the Indian economy began liberalizing and the controls began to be dismantled or eased out, the securities markets witnessed a flurry of IPSs that were launched. This resulted in many new companies across different industry segments to come up with newer products and services. A remarkable feature of the growth of the Indian economy in recent years has been the role played by its securities markets in assisting and fuelling that growth with money rose within the economy. This was in marked contrast to the initial phase of growth in many of the fast growing economies of East Asia that witnessed huge doses of FDI (Foreign Direct Investment) spurring growth in their initial days of market decontrol. During this phase in India much of the organized sector has

been affected by high growth as the Financial Markets played an all-inclusive role in sustaining financial resource mobilization. Money PSUs (Public Sector Undertakings) that decided to offload part of their equity were also helped by the well-organized securities market in India. Financial market is a market where financial instruments are exchanged or traded and helps in determining the prices of the assets that are traded in and is also called the price discovery process. 1. Organizations that facilitate the trade in financial products. For e.g. Stock exchanges. (NYSE, Nasdaq) facilitate the trade in stocks, bonds and warrants. 2. Coming together of buyer and sellers at a common platform to trade financial products is termed as financial markets, i.e. stocks and shares are traded between buyers and sellers in a number of ways including: the use of stock exchanges; directly between buyers and sellers. 1.2 History India Financial Market : This is one of the oldest in the world and is considered to be the fastest growing and best among all the markets of the emerging economies. The history of Indian Capital Markets dates back 200 years toward the end of the 18 th Century when India was under the rule of the East India Company. The development of the capital market in India concentrated around Mumbai where no less than 200 to 250 securities brokers were active during the second half of the 19th century.

The financial market in India today is more developed than many other sectors because it was organized long before with the securities exchanges of Mumbai, Ahmadabad and Kolkata were established as early as the 19 th Century. By the early 1960s the total number of securities exchanges in India rose to eight, including Mumbai, Ahmadabad and Kolkata apart from Madras, Kanpur, Delhi, Bangalore and Pune. Today there are 21 regional securities exchanges in India in addition to the centralized NSE (National Stock Exchange) and OTCEI (Over the Counter Exchange of India). However the stock markets in India remained stagnant due to stringent controls on the market economy that allowed only a handful of monopolies to dominate their respective sectors. The corporate sector wasnt allowed into many industry segments, which were dominated by the state controlled public sector resulting in stagnation of the economy right up to the early 1990s. Thereafter when the Indian economy began liberalizing and the controls began to be dismantled or eased out, the securities markets witnessed a flurry of IPOs that were launched. and services. A remarkable feature of the growth of the Indian economy in recent years has been the role played by its securities markets in assisting and fuelling that growth with money rose within the economy. This was in marked contrast to the initial phase of growth in many of the fast growing economies of East Asia that witnessed huge doses of FDI (Foreign Direct Investment) spurring growth in their initial days of market decontrol. During this phase in India much of the organized sector has been affected by high growth as the financial markets played an This resulted in many new companies across different industry segments to come up with newer products

all-inclusive role in sustaining financial resource mobilization. Many PSUs (Public Sector Undertakings) that decided to offload part of their equity were also helped by the well-organized securities market in India. The launch of the NSE (National Stock Exchange) and the OTCEI (Over the Counter Exchange of India) during the mid 1990s by the government of India was meant to usher in an easier and more transparent form of trading in securities. The NSE was conceived as the market for trading in the securities of companies from the large-scale sector and the OTCEI for those from the small-scale sector. While the NSE has not just done well to grow and evolve into the virtual backbone of capital markets in India the OTCEI struggled and is yet to show any sign of growth and development. The integration of IT into the capital market infrastructure has been particularly smooth in India due to the countrys world class IT Industry. This has pushed up the operational efficiency of the Indian Stock market to global standards and as a result the country has been able to capitalize on its high growth and attract foreign capital like never before. The regulating authority for capital markets in India is the SEBI (Securities and Exchange Board of India). SEBI came into prominence in the 1990s after the capital markets experienced some turbulence. It had to take drastic measures to plug many loopholes that were exploited by certain market forces to advance their vested interests. After this initial phase of struggle SEBI has grown in strength as the regulator of Indias capital markets and as one of the countrys most important institutions.

1.3 Indian Financial Market consists of the following markets : 1. Capital Market / Securities Market i. 2. 3. 4. 5. Primary Capital Market ii. Secondary capital Market Money Market Debt Market Equity Market Derivatives Market

1.4 Indian Financial Market Overview As might be expected, the main impact of the global financial turmoil in India has emanated from the significant change experienced in the capital account in 2009-10 so far, relative to the previous year. 2009. Total net capital flows fell from US$17.3 billion in April-June 2009 to US$13.2 billion in April-June While Foreign Direct Investment (FDI) inflows have continued to exhibit accelerated growth (US$ 16.7 billion during April-August 2009 as compared with US$ 8.5 billion in the corresponding period of 2008), portfolio investments by foreign institutional investors (FIIs) witnessed a net outflow of about US$ 6.4 billion in April-September 2009 as compared with a net inflow of US$ 15.5 billion in the corresponding period last year. Similarly, external commercial borrowings of the corporate sector declined from US $ 7.0 billion in April-June 2008 to US $1.6 billion in April-June 2009, partially in response to policy measures in the face of excess flows in 2009-10, but also due to the current turmoil in advanced economics. Whereas the real exchange rate appreciated from an index of 104.9 (base 199394 = 100) (US $1 = Rs. 46.12) in September 2008 to 115.0 (US $1 = Rs. 40.34) in September 2008, it has now depreciated to a level of 101.5 (US $1 = Rs. 48.74) as on October 8, 2009.

Chapter 2 CAPITAL MARKET

2.1 Introduction : The capital market is the market for securities, where companies and governments can raise long term funds. It is market in which money is lent for periods longer than a year. A nations capital market includes such financial institutions as banks, insurance companies and stock exchanges that channel long-term investment funds to commercial and industrial borrowers. Unlike the money market, on which lending is ordinarily short term, the capital market typically finances fixed investments like those in buildings and machinery. 2.2 Nature and Constituents : The capital market consists of number of individuals and institutions (including the government) that canalize the supply and demand for long term capital and claims on capital. The stock exchange, commercial banks, co-operative banks, saving banks, development banks, insurance companies, investment trust or companies, etc. are important constituents of the capital markets. The capital market, like the money market, has three important components, namely the suppliers of loanable funds, the borrowers and the intermediaries who deal with the leaders on the one hand and the borrowers on the other. The demand for capital comes mostly from agriculture,

industry, trade and the government. The predominant form of industrial organization developed capital Market become a necessary infrastructure for fast industrialization. Capital market not concerned solely with the issue of new claims on capital, but also with dealing in existing claims.

2.3 Importance and role of Capital Market : The capital market serves a very useful purpose by pooling the capital resources of the country and making them available to the enterprising investors well-developed capital markets augment resources by attracting and lending funds on the global scale. A developed capital market can solve this problem of paucity of funds. For an organized capital market can mobilize and pool together even the small and scattered savings and augment the availability of investible funds. While the rapid growth of capital markets, the growth of joint stock business has in its turn encouraged the development of capital markets. A developed capital market provides a number of profitable investment opportunities for small savers. Mobilization of Savings & acceleration of Capital Formation Promotion of Industrial Growth Raising of long term Capital Ready & Continuous Markets Proper Channelization of Funds Provision of a variety of Services.

2.4 Functions of a Capital Market Disseminate information efficiently Enable quick valuation of financial instruments both equity and debt Provide insurance against market risk or price risk Enable wider participation

Provide operational efficiency through-simplified transaction procedure-lowering transaction costs. settlement timings and lowering

Develop integration among-real sector and financial sectorequity and debt instruments long term and short term funds.

Private sector and government sector and Domestic funds and external funds. Direct the flow of funds into efficient channels through investment disinvestment reinvestment.

2.5 Components of Capital Market : Capital Market Consists of : EQUITY MARKETS {STOCK MARKET}, which provide financing through the issuance of shares, and enable the subsequent trading thereof. DEBT MARKETS {BOND MARKET}, which provide financial through the issuance of bonds, and enable the subsequent trading thereof. 2.6 Features of Capital Market: 1. Channelization of Funds: The primal role of the capital market is to channelize investments from investors who have surplus funds to the ones who are running a deficit. The capital market offers both long term and overnight funds. 2. Trading Platform: The primary role of the capital market is to raise long-term funds for governments, banks, and corporations while providing a platform for the trading of securities. 3. Ready & Continuous Market: Fund-raising in the capital market is regulated by the Performance of the stock and

bond markets within the capital market.

The member

organizations of the capital market may issue stocks and bonds in order to raise funds. Investors can then invest in the capital market by purchasing those stocks and bonds. 4. Regulation of the Capital Market: Every capital market in the world is monitored by financial regulators and their respective governance organization. Financial regulatory bodies are The purpose of such also charged with regulation is to protect investors from fraud and deception. minimizing financial losses, issuing licenses to financial service providers, and enforcing applicable laws. 5. The Capital Markets Influence on International Trade : Capital market investment is no longer confined to the boundaries of a single nation. Todays corporations and individuals are able, under some regulation, to invest in the capital market of any country in the world. Investment in foreign capital markets has caused substantial enhancement to the business of international trade. 2.7 Risk involved in Capital Market: The capital market, however, is not without risk. fully investing in the capital market. Capital Markets:1. VOLATILITY RISK AND RISK OF CONTAGIONS: volatility is the characteristic of any capital High market, It is important for investors to understand market trends before Any investor should consider the following factors of risk while investing in the

especially in emerging markets. They are immature and sometimes vulnerable to scandal. They often lack legal and judicial infrastructure to enforce the law. Accounting disclosure, trading and settlement practices may at times

seem overly arbitrary and nave. many emerging markets have

Against this backdrop, had to cope with

unprecedented inflows and outflows of capital. The sudden withdrawal of highly speculative, short-term capital has the potential of taking with it much of a markets price support. Such sudden flights of capital triggered by events in one emerging market can spread instantly to other markets through contagion effects even when those markets have quite different conditions. 2. LIQUIDITY RISK: trading often Many emerging markets are small and to higher costs because large

illiquid. Volumes of trade are quite low. This kind of thin leads transactions have a significant impact on the market. Thus, buyers of large blocks of shares may have to pay more to complete the transaction, and sellers may receive a lower price. 3. CLEARANCE AND SETTLEMENT RISK: Inadequate

settlement procedures still exist in many of the emerging markets. They lead to high FAIL rates. A fail occurs when a trade fails to settle on the settlement date. 4. POLITICAL RISK: political systems In most of the developing countries the are less stable comparative to the This scenario does not give the

development countries.

political system to concentrate more on the capital market happenings and restrict any kind of malfunctions or practices. 5. CURRENCY RISK: rates. The trade in capital markets will be

highly impacted by the fluctuations in the foreign exchange The currencies of the emerging countries are not stable enough to complete with those of the developed

countries.

This leads towards unexpected losses for the

investors in the markets. 6. LIMITED DISCLOSURE & INSUFFICINT LEGAL

INFRASTRUCTURE: As it is already mentioned earlier that disclosure levels will not be up to the required extent in emerging markets, the investors will not have a bright picture of the company in which they are investing, and this may lead toward losses. Indian Capital Market: Factors contributing to growth of Indian Capital Market 2.8 Establishment to growth of Indian Capital Market Legislative measures Growing public confidence Increasing awareness of investment opportunities Growth of underwriting business Settling up of SEBI Mutual Funds Credit Rating Agencies

Types of Capital Market: Capital market divided into two main parts they are as follows : 1. Primary Capital Market 2. Secondary Capital Market

2.8.1 Primary Market Primary market is the place where issuers create and issue equity, debt or hybrid instruments for subscription by the public; the secondary market enables the holders of securities to trade them. Primary market is a market for raising fresh capital in the form of shares. Public limited companies that are desirous of raising capital funds through the issue of securities approach this market. The

public limited and government companies are the issuers and individuals, institutions and mutual funds are the investors in this market. The primary market allows for the formation of capital in the country and the accelerated industrial and economic development. Everywhere in the world capital markets have originated as the new issues markets. Once industrial companies are set up in a big number and with them a considerable volume of business comes into existence a market for outstanding issues develops. In the absence of secondary market or the stock exchange, the capital market will be paralyzed. This is on account of the reason that the business enterprises borrow money from the capital market for a very long period but the investors or savers whose savings are canalized through the capital market generally wish to invest only for a short period. Existence of the stock exchange provides a medium through which these two ends can be reconciled. It enables the investors to sell their shares for money whenever they wish to do so. Thus, the business enterprises keep the possession of permanent capital; the shares can keep on changing hands. In order to sell securities, the company has to fulfill various requirements and decide upon the appropriate timing and method of issue. It is quite normal to obtain the assistance of underwriters, merchant banks or special agencies to look after these aspects. 2.8.1 a] METHODS OF MARKETING IN PRIMARY MARKET 1. PUBLIC ISSUE: A public limited company can raise the amount of capital by selling its shares to the public. issue of shares or debentures. prepare a Prospectus. Therefore, it is called public For this purpose it has to

A prospectus is a document that

contains information relating to the company such as name, address, registered office and names and addresses of company promoters, managers, Managing Director, Directors, company secretary, legal advisors, auditors and bankers. It also includes the details about project, land location, technology, The company collaboration, products, export obligations etc.

has to appoint brokers and underwriters to sell the minimum number of shares and it has to fix the date of opening and closing of subscription list. 2. PRIVATE PLACEMENT: A Company makes the offer of sale to individuals and institutions privately without the issue of a prospectus. This saves the cost of issue of securities. The securities are placed at higher prices to individuals and institutions. Institutional investors play a very important role in the private placement. This has become popular in recent days. This method is less expensive and time saving. The company has to complete a very few formalities. It is suitable for small companies. This method can be used when the stock market is bull. However, the private placement helps to concentrate securities in the few hands. They can create artificial scarcity and increase the prices of shares temporarily and then sell the shares in the stock market and mislead the common and small investors. This method also deprives the common investors of an opportunity to subscribe to the issue of shares. 3. OFFER FOR SALE: A Company sells the securities through the intermediaries such as issue houses, and stockbrokers. This is known as an offer for sale method. Initially, the company makes an offer for sale of its securities to the intermediaries stating the price and other

terms and condition. The intermediaries can make negotiations with the company and finally accept the offer and buy the shares from the company. They these securities or shares are re-sold to the general investors in the stock market normally at a higher price in order to get profit. The intermediaries have to bear the expenses of this issue. The object of this issue is to save the time, cost and get rid of complicated procedure involved in the marketing of securities. The issues can also be underwritten in order to ensure full subscription of the issue. The general publics get the shares at a higher price the middlemen are more benefited in this process. 4. BOUGHT OUT DEALS A Company makes an outright sale of equity shares to a single sponsor or the lead sponsor and such deals are known as bought out deals. There are three parties involved in the bought out deals. The promoters of the company, sponsors and co-sponsors, sponsors are merchant bankers and co-sponsors are the investors. There is an agreement in which an outright sale of a chunk of equity shares is made to a single sponsor or the lead sponsor. The sale price is finalized through negotiations between the issuing company and the purchasers. It is influenced by various factors such as project evaluation, reputation of the promoters, current market sentiments etc. Bought out deals are in the nature of fund-based activity where the funds of the merchant bankers are locked in for at least for a minimum period. These shares are sold at over the Counter Exchange of India or at a recognized stock exchange. Listing takes place when the company gets profits and performs well. The investor-sponsors make profits because the shares are listed at higher price.

5.

INITIAL PUBLIC OFFER:When a company makes public issue of shares for the first time, it is called Initial Public Offer. basis of their demand. The The securities are sold has to appoint through the issue of prospectus to successful applicants on the company underwriters in order to guarantee the minimum subscription. An underwriter is generally an investment banking company. The underwriter agrees to pay the company a certain price and buy a minimum number of shares, if they are not subscribed by the public. The underwriter charges some commission for this work. He can sell these shares in the market afterwards and make profit. There may be two or more underwriters in the case of large issue. The company has to issue a prospectus giving full information about the company and the issue. It has to issue share application forms through the brokers and underwriters. The brokers collect orders from their clients and place orders with the company. The company then makes the allotment of shares with the help of stock exchange. through the depository. The share certificate are delivered to the investors or credited to their demat accounts This method saves time and avoids complicated procedure of issue of shares. With more and more companies coming out with tempting IPO or additional offers, there is greater need to exert caution and pick the best IPO investments. Following four critical factors should be studied in an IPO offer document, before making an IPO investment: Promoter, Performance, Prospects and Price.

1.

Check Promoter Standing This by far is the most important factor in any investment decision. A good promoter or management team is important

for

any

business,

especially

over

long

periods.

While

businesses may have their ups and downs, a good management will take all necessary steps to ensure profitable performance. Secondly, they would be constantly looking at new business opportunities, thereby ensuring regular growth in the company. Thirdly, we are reasonably certain that the company money will not be deliberately misused or siphoned off to the detriment of the shareholders. Therefore, look at the promoters background, the experience he has in the industry, the performance of the other companies promoted by him, his track record, investor complaints etc. Read the risk factors very carefully especially those pertaining to the promoter / management. Check for any serious litigation against the promoter or the company. See whether the company is a defaulter to the banks/FIs and the reason thereof. 2. Study Company Performance The share price is the reflection of the operational performance of the company. Poor numbers say the sales, profit, EPS etc. would mean poor performance on the stock exchange. Therefore, it is important that the company has a track record of good operational performance. in the industry? Look for any window dressing. Are the numbers in line with the similar companies Is there any sudden improvement in the numbers just before the issue, without any justifiable reasons ? Also look at the performance of the group companies and the inter-company transaction within the group. Ensure that there are no dubious transactions. Look at the loans given to group companies. Are they paying reasonable interest ? Is the loan likely to be repaid ?

3.

Understand Future Prospects The future prospects of the Company and the industry would play an important role in the performance of the scrip on the stock exchange. Check the objects. How will they impact the future prospects? How will the funds raised be utilized? Will it additionally benefit the company? Is the money being raised for a project, which will add to the bottom-line of the company? If its an offer-for-sale, it means the existing shareholders are selling a part of their stake in the Company. The amounts Therefore, If the raised from the issue will not go to the Company.

the Company will not benefit from an offer for sale.

purpose of the issue is to list the company on the stock exchange and the 4 Ps are positive, then one can consider investing. 4. Look at the Price Finally of course every product / Scrip has a right price based on its fundamentals and industry prospects. Even if the above 3 Ps were favorable, a high price is likely to reduce the prospects of appreciation at the exchange, thereby defeating your purpose of investing. Look at the average industry PE and the companies EPS and try to estimate the fair price. Compare this with the issue price to see if it is undervalued or overvalued scrip. A little time spent in reading the offer document and analyzing the IPO on the above factors will help you to make right investment decisions and prevent you from ending-up holding a dud stock. 5. RIGHT ISSUE When an existing company issues shares to its existing shareholders in proportion to the number of shares held by

them, it is known as Rights Issue. Rights issue is obligatory for a company where increase in subscribed capital is necessary after two years of its formation or after one year of its first issue of shares, whichever is earlier. SEBI has issued guidelines for issue of right shares.

Accordingly, only a listed company can make right issue. Rights issue can be made only in respect of fully paid up shares. No reservation is allowed for rights issue of fully or The company has to make partly convertible debentures.

announcement of rights issue and once the announcement is made it cannot be withdrawn. The company has to make the appointment Registrar but underwriting is optional. It has also to appoint category I Merchant Bankers holding a certificate of registration issued by SEBI. Letter of offer should contain disclosures as per SEBI requirements. The rights issue should be open for minimum period of 30 days, and maximum up to 60 days. form. The company has to make an agreement with the A minimum subscription of 90 per cent of the issue depository for materialization of securities to be issued in demat should be received. A no complaints certificate is to be filed by the Lead Merchant Banker with the SEBI after 21 days from the date of issue of offer document. 6. BONUS ISSUE:Bonus shares are the shares allotted by capitalization of the reserves or surplus of a company. Issue of bonus shares results in conversion of the companys profits or reserves into share capital. Therefore, it is capitalization of companys reserves. Bonus shares are issued to the equity shareholders in proportion to their holdings of the equity share capital of the company. Issue of bonus shares does not affect the total capital structure of the company. It is simply a capitalization of

that portion of shareholders equity which is represented by reserves and surplus. The issues of bonus shares are issued subject to certain rules and regulations. Issue of bonus shares reduces the market price of the companys shares and keeps it within the reach of ordinary investors. The company can retain earnings and satisfy the desire of the shareholders to receive dividend. Issue of bonus shares is generally an indication of higher future profits. Receipt of bonus shares as compared to cash dividend generally results in tax advantage to the shareholders. 7. BOOK-BUILDING: Companies generally raise capital through public issue. In these cases companies decide the size of the issue and also the price at which the shares are to be offered to the investors. However in this system the issuer is not able to ascertain the price that the market may be willing to pay for the shares, before launching the issue. This is where book building can come to their aid. This method is also known as the price discovery method. This is a mechanism whereby the price is determined on the basis of actual demand as evident from the offers given by the various institutional investors and the underwriters. In the actual public offer process, investors are not involved in determining the offer price, whereas in book building pricing is determined on the basis of investor feedback which assures investor demand. the shares. Since the issue price after the issue marketing there is flexibility in the issue size and the price of

2.8.1 b] INTERMEDIARIES IN PRIMARY MARKET 1. MERCHANT BANKERS:Merchant bankers carry out the work of underwriting and portfolio management, issue management etc. managers. registration. They are required to get separate registration with SEBI as portfolio Underwriting can be done without any additional Only body corporate with a net worth of Rs. 5

crores are allowed to work as category I merchant bankers. They have to carry out the work relating to new issue such as determination of security mix to be issued, drafting of prospectus, application forms, allotment letters, appointment of registrars for handling share applications and transfer, making arrangement for underwriting placement of shares, appointment of brokers and bankers to issue, making publicity of the issue. They are also known as lead managers to an issue. Category II merchant bankers can act as consultants, advisers, portfolio managers and co-managers. Category III merchant bankers can act as underwriters, advisors and consultants and category IV merchant bankers can act only as advisers or consultants to a public issue. Merchant bankers have to fulfill the prescribed minimum capital adequacy norms in terms of net worth and they should have adequate and necessary infrastructure. They should also employ experts having professional qualifications. 2. UNDER WRITERS: The issuing company has to appoint underwriters in consultation with the merchant bankers or lead manager. The underwriters play an important role in the development of the primary market. The underwriters are the institutions or agencies, which provide a commitment to take up the issue of

securities in case the company fails to get full subscription from the public. They get commission for their services. The underwriting services are provided by the brokers, investment companies commercial banks and term lending institutions. 3. BANKERS TO THE ISSUE:The bankers play an important role in the working of the primary market. They collect applications for shares and debentures along with application money for investors in respect of issue of securities. They also refund the application money to the applicants to whom securities could not be allotted on behalf of the issuing company. A company is not The Companies authorized to collect the application money.

Act, 1956, provides that the money on account of issue of shares and debentures should be collected through the banks. Therefore, an issuing company has to appoint bankers to collect money on behalf of the company. 4. REGISTRARS AND SHARES TRANSFER AGENTS:Registrar is an intermediary which carries out functions sub as keeping a proper record of applications and money received from investors assisting the companies in determining the basis of allotment of securities as per stock exchange guidelines and in consultation with stock exchanges assist in the finalization of allotment of securities and processing and dispatching of allotment letters, refund orders, share certificates and other documents related to the capital issues. Share Transfer Agents are also intermediaries who carry out functions of maintaining records of holders of securities of the company for and on behalf of the company and handling all matters related to transfer and redemption of securities of the company,

They also function as Depository Participants, Registrar and share transfer agents are of two categories. Category I carry out the activities of both registrars to an issue and of share transfer agents. Category II carries out the activity fielder of a registrar to an issue or as a share transfer agent. 5. BROKERS TO AN ISSUE: Brokers are the middlemen who provide a vital connecting link between the prospective investors and the issuing company. They assist in the subscription of issue by the public. However, appointment of brokers is not mandatory. Brokers get their commission from the issuing company according to the provisions of the Companies Act and rules and regulations. There is an agreement between the brokers and the issuing company. The maximum brokerage rate is 1.5 per cent of the capital raised in case of public issue and 0.5 per cent in case of private placement. of the issue. The brokers should have an expert knowledge, professional competence and integrity in order to carry out the overall functions of an issue. They have to obtain consent from the stock exchange to act as a broker to the issuing company. The names and addresses of the brokers to the issue are disclosed in the prospects by the company help the investors to make a choice of the company for making their investments. 2.8.2 SECONDARY MARKET A market, which deals in securities that have been already issued by companies, is called as secondary market. It is also known as stock market. It is the base upon which the primary The brokerage covers the cost of mailing, canvassing and all other expenses relating to the subscription

market is depending.

For the efficient growth of the primary

market a sound secondary market is an essential requirement. The secondary market offers an important facility of transfer of securities activities of securities. Secondary market essential comprises of stock exchanges, which provide platform for purchase and sale of securities by investors. In India, apart from the Regional Stock Exchanges established in different centers, there are exchanges like the National Stock Exchange (NSE), who provide nationwide trading facilities with terminals all over the country. The trading platform of stock exchanges in accessible only through brokers and trading of securities in confined only to stock exchanges. The activities of buying and selling of securities in a market are carried out through the mechanism of stock exchange. There are at present 24 Stock Exchanges in India, recognized by the government. The first organized stock exchange was established in India at Bombay in 1887. When the Securities Contracts (Regulation) Act was passed in 1956, only 7 stock exchanges were recognized. There are three important stock exchanges in Bombay namely the Bombay Stock Exchange, National Stock Exchange and over the Counter Exchange of India. There has been a substantial growth of capital market in India during the last 25 years. 2.8.2a] REASONS FOR TRANSITING IN SECONDARY MARKET

There are two main reasons why individuals transact in the secondary market: 1. INFORMATION motivated MOTIVATED believe REASONS: that they Information superior

investors

have

information about a particular security than other market participants. This information leads them to believe that the security is not being correctly period by the market. If the information is good, this suggests that the security is currently under-priced, and investors with access to such information will want to buy the security. On the other hand, if the information is bad, the security will be currently overpriced and such investors will want to sell their holdings of the security. 2. LIQUIDITY MOTIVATED REASONS: - Liquidity motivated investors, on the other hand, transact in the secondary market because they are currently in a position of either excess or insufficient liquidity. Investors with surplus cash holdings (e.g., as result of an inheritance) will buy securities, where as investors with insufficient cash (e.g. to purchase a Car) will sell securities.

2.8.2b] FUNCTION OF THE SECONDARY MARKET 1. To facilitate liquidity and marketability of the outstanding equity and debt instruments. 2. To contribute to economic growth through allocation of funds to the most efficient channel through the process of disinvestments to reinvestment. 3. To provide instant valuation of securities caused by changes in the internal environment (that is, company-wide and industry wide factors). Such valuation facilitates the measurement of the cost of capital and the rate of return of the economic entities at the micro level.

4. To ensure a measure of safety and fair dealing to protect investors interest. To induce companies to improve performance since the market price at the stock exchanges reflects the performance and this market price is readily available to investors. 2.8.2c] Products in the Secondary Markets Following are the main financial products / instruments dealt in the Secondary market which may be divided broadly into Shares and Bonds. 1. Shares : Equity Shares: An equity share, commonly referred to as ordinary share, represents the form of fractional ownership in a business venture. Rights Issue / Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held, at a price. For e.g. a 35 2:3 rights issue at Rs. 125, would entitle a shareholder to receive 2 shares for every 3 shares held at a price of Rs. 125 per share. Bonus Shares: Shares issued by the companies to their

shareholders free of cost based on the number of shares the shareholder owns. Preference shares: Owners of these kind of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the

event of liquidation, their claims rank below the claims of the companys creditors, bondholders/debenture holders. Cumulative Preference Shares: A type of preference shares on which dividend accumulates if remained unpaid. paying dividend on equity shares. Cumulative Convertible Preference Shares: accumulates, if no paid. A type of All arrears of preference dividend have to be paid out before

preference shares where the dividend payable on the same After a specified date, these shares will be converted into equity capital of the company.

2.

Debenture : The term Debenture is derived from the Latin word debere which means to owe a debt. A debenture is an acknowledgement of debt, taken either from the public or a particular source. A debenture may be viewed as a loan, represented as marketable security. The word bond may be used interchangeably with debentures. A stock market index is the reflection of the market as a whole. It is a representative of the entire stock market. Movements in the index represent the average returns obtained by the investors. Stock market index is sensitive to the news of: Company specific Country Specific

Thus the movement in the stock index is also the reflection of the expectation of the future performance of the companies listed on the exchange.

Stock Exchange in India The financial market in India today is more developed than many other sectors because it was organized long before with the securities exchanges of Mumbai, Ahmadabad and Kolkata were established as early as the 19th Century. By the early 1960s the total number of securities exchanges in India rose to eight, including Mumbai, Ahmadabad and Kolkata apart from Madras, Kanpur, Delhi, Bangalore and Pune. Today there are 21 regional securities exchanges in India in addition to the centralized NSE (National Stock Exchange) and OTCEI (Over the Counter Exchange of India). Following are Stock Exchanges in India Mangalore Stock Exchange Hyderabad Stock Exchange Utter Pradesh Stock Exchange Coimbatore Stock Exchange Cochin Stock Exchange Bangalore Stock Exchange Saurashtra Kutch Stock Exchange Pune Stock Exchange National Stock Exchange OTC Exchange of India Calcutta Stock Exchange Inter-connected Stock Exchange (NEW) Madras Stock Exchange Bombay Stock Exchange Madhya Pradesh Stock Exchange Vadodara Stock Exchange The Ahmadabad Stock Exchange Magadha Stock Exchange

Aquatic Stock Exchange Bhubaneswar Stock Exchange Jaipur Stock Exchange Delhi Stock Exchange Assoc Ludhiana Stock Exchange

Chapter 3 Money Market

3.1 Introduction: Money market is a market for short-term loan or financial assets. It as a market for the lending and borrowing of short term funds. As the name implies, it does not actually deals with near substitutes for money or near money like trade bills, promissory notes and government papers drawn for a short period not exceeding one year. These short term instruments can be converted into cash readily without any loss and at low transaction cost. Money market is the centre for dealing mainly in short-term money assets. It meets the short-term requirements of borrowers and provides liquidity or cash to lenders. It is the place where short-term surplus funds at the disposal of financial institutions and individuals are borrowed by individuals, institutions and also the Government. The money market does not refer to a particular place where short-term funds are dealt with. In includes all individuals, institutions intermediaries dealing with short-term finds. The transactions between borrowers, lenders and middleman take place through telephone, telegraph, mail and agents. No personal contact or presence of the two parties is essential for negotiations in a money market. However, a geographical name may be given to a money market according to its location. For example. The London market operates from Wall Street. But, they attract funds from all over the world to be lent to borrowers from all over the globe. Similarly, the Mumbai Money market is the centre for short-term loan able funds of not only Mumbai, but also the whole of India.

DEFINITION OF MONEY MARKET According to Geottery Growther, The money market is the collective name given to the various firms and institutions that deal in the various grades of near money 3.2 Features of a money market; The following are the general features of a money market : 1. It is market purely for short-term funds or financial assets called near money. 2. It deals with financial assets having a maturity period up to one year only. 3. It deals with only those assets which can be converted into cash readily without loss and with minimum transaction cost. 4. Generally transactions take place through phone i.e. oral communication. Relevant documents and written communications can be exchanged subsequently. There is no formal place like stock exchange as in the case of a capital market. 5. Transactions have to be conducted without the help of brokers. 6. The components of a money market are the Central Bank, Commercial Banks, Non-banking financial companies, discount houses and acceptance house. Commercial banks generally play a dominant in this market.

OBJECTIVES The following are the important objectives of a money market : (i) (ii) (iii) To provide a parking place to employ short-term surplus funds. To provide room for overcoming short-term deficits. To enable the Central Bank to influence and regulate liquidity in the economy through its intervention in this market. (iv) To provide a reasonable access to users of Short-term funds to meet their requirements quickly, adequately and at reasonable costs. 3.3 Characteristic of a Developed Money Market: In order to fulfill the above objections, the money market should be fully developed and efficient. In every country of the world, some type of money market exists. Some of them are highly developed while others are not well developed. Prof. S.N. Sen has described certain essential features of a developed money market. (i) Highly organized banking system The commercial banks are the nerve centre of the whole money market. They are principal suppliers of short-term funds. Their policies regarding loans and advances have impact on the entire money market. The commercial banks serve as vital link between the central bank and the various segments of the highly organized banking system co-exist. In an underdeveloped money market, the commercial banking system is not fully developed. (ii) Presence of A Central Bank The Central Bank acts of the bankers bank. their cash reserves and provides them It keeps financial

accommodation in difficulties by discounting their eligible securities. In other words, it enables the commercial banks and other institutions to convert their assets into cash in times of financial crisis. Through its open market operations, the central bank absorbs surplus cash during off-seasons and provides additional liquidity in the busy seasons. Thus, the central bank is the leader, guide and controller of the money market. In an underdeveloped money market, the central bank is in the infancy and not in a position to influence and control the money market. (iii) Availability of Proper Credit Instruments It is necessary for the existence of a developed money market a continuous available of readily acceptable negotiable securities such as bills of exchange, treasury bills etc. In the market. There should be a number of dealers in the money market to transact in these securities. Availability of negotiable securities and the presence of dealers and brokers in large number to transact in these securities are needed for the existence of a instruments as well as dealers to deal in these instruments in an underdeveloped money market. (iv) Existence of Sub-Markets The number of sub-markers determines the development of a money market. The lager the number of sub-makers, the broader and more developed will be the structure of money market. The several sub-makers together make a coherent money market. In an underdevelopment money market, the various sub-makers, particularly the bill market, are absent. Even of sub-makers exist, there is no co-ordination between them. Consequently, different

money rates prevail in the sub-makers and they remain unconnected with of funds. (v) Ample Resources There must be availability of sufficient funds to finance transactions in the sub-makers. These funds may come from within the country and also from foreign countries. The London, New York and Paris money markets attract funds from all over the world. The underdeveloped money markets are starved of funds. (vi) Existence of Secondary Market There should be an active secondary market in these instruments. (vii) Demand and Supply of Funds There should be a large demand and supply of short-term funds. It presupposes the existence of a large domestic and foreign trade. Besides, it should have adequate amount of liquidity in the form of large amounts maturing within a short period. Other Factors Besides the above, other factors also contribute to the development of a money market. Rapid industrial development leading to the emergence of stock exchange, large volume of international trade leading to the system of bills exchange, political stability, favorable conditions for foreign investment, price stabilization etc. are the other factors that facilitate the development of money market in the country.

London Money Market is a highly developed money market because it satisfies all requirements of a developed money market. If any one or more of these factors are absent, then the money market is called an underdeveloped one. 3.4 Importance of Money Market: A developed money market plays an important role in the financial system of a country by supplying short-term funds adequately and quickly to trade and industry. The money market is an integral part of a countrys economy. Therefore, a developed money market is highly indispensable for the rapid development of the economy. A developed money market helps the smooth functioning of the financial system in any economy in the following ways: (i) Development of Trade And Industry Money market is an important source of financing trade and industry. The money market, through discounting operations and commercial papers, finances the short-term working capital requirements of trade and industry and facilities the development of industry and trade both national and international. (ii) Development of Capital Market The short-term rates of interest and the conditions that prevail in the money market influence the long-term interest as well as the resource mobilization in capital market. Hence, the development of capital depends upon the existence of a development of capital money market.

(iii) Smooth Functioning of Commercial Banks The money market provides the commercial banks with facilities for temporarily employing their surplus funds in easily realizable assets. The banks can get back the funds quickly, in times of need, by resorting to the money market. The commercial banks gain immensely by economizing on their cash balances in hand and at the same time meeting the demand for large withdrawal of their depositors. It also enables commercial banks to meet their statutory requirements of cash reserve ratio (C R R) and Statutory Liquidity Ration (SLR) by utilizing the money market mechanism. (iv) Effective Central Bank Control A developed money market helps the effective functioning of a central bank. It facilities effective implementation of the monetary policy of a central bank. The central bank, through the money market, pumps new money into the economy in slump and siphons if off in boom. The central bank, thus, regulates the flow of money so as to promote economic growth with stability. (v) Formulation of Suitable Monetary Policy Conditions prevailing in a money market serve as a true indicator of the monetary state of an economy. Hence, it serves as a guide to the Government in formulating and revising the monetary policy then and there depending upon the monetary conditions prevailing in the market. (vi) Non-Inflationary Source of Finance to Government A developed money market helps the Government to raise short-term funds through the treasury bills floated in the market. In the absence of a developed money market, the

government would be forced to print and issue more money or borrow from the central bank. Both ways would lead to an increase in prices and the consequent inflationary trend in the economy.

3.5 Composition of Money Market As stated earlier, the money market is not a single homogeneous market. It consists of a number of sub-markets which collectively constitute the money market. There should be competition within each sub-market as well as between different sub-markets. The following are the main sub-markets of a money market: 1. Call Money market 2. Commercial Bills Market or Discount Market 3. Acceptance Market 4. Treasury bill Market. 3.5.1 Call Money market The call money market refers to the market for extremely short period loans; say one day to fourteen days. borrower. These loans are repayable on demand at the option of either the lender or the As stated earlier, these loans are given to brokers and dealers in stock exchange. Similarly, banks with surplus lend to other banks with deficit funds in the call money market. Thus, it provides an equilibrating mechanism for Moreover, evening out short term surpluses and deficits. meet their statutory liquidity requirement.

commercial bank an quickly borrow from the call market to They can also maximum their profits easily by investing their surplus funds in the call market during the period when call rates are high and volatile.

Operations in Call Market Borrowers and lenders in a call market contact each other over telephone. Hence, it is basically over-the-telephone market. After negotiations over the phone, the borrowers and lenders arrive at a deal specifying the amount of loan and the rate of interest. After the deal is over, the lender issues FBL cheque in favor of the borrower. The borrower is turn issues call money borrowing receipt. When the loan is repaid with interest, the lender returns the lender the duly discharges receipt. Instead of negotiating the deal directly, it can be routed through the Discount and Finance House of India (DFHI), the borrowers and lenders inform the DFHI about their fund requirement and availability at a specified rate of interest. Once the deal is confirmed, the deal settlement advice is lender and receives RBI cheque for the money borrowed. The reverse is taking place in the case of landings by the DFHI. The duly discharged call deposit receipt is surrendered at the time of settlement. Call loans can be renewed on the back of the deposit receipt by the borrower. Call Loan Market Transitions and Participants: 1. To commercial banks to meet large payments, large

remittances to maintain liquidity with the RBI and so on. 2. To the stock brokers and speculators to deal in stock exchange and bullion markets. 3. To the bill market for meeting matures bills. 4. To the Discount and Finance House of India and the Securities Trading Corporation of India to activate the call market.

5. To individuals of very high status for trade purposes to save interest on O.D. or cash credit. The participants in this market can be classified into categories viz.

1. Those permitted to act as both lenders and borrowers of call loans. 2. Those permitted to act only as lenders in the market. The first category includes all commercial banks, Co-operative Banks, DFHI and STCI. In the second category LIC, UTI, GIC, IDBI NABARD, specified mutual funds etc., are included. They can only lend and they cannot borrow in the call market. Advantages In India, commercial banks play a dominant role in the call loan market. They used to borrow and lend among themselves and such loans are called inter-bank loans. They are very popular in India. So many advantages are available to commercial banks. They are as follows : 1. High Liquidity Money lent in a call market can be called back at any time when needed. So, it is highly liquid. It enables commercial banks to meet large sudden payments and remittances by making a call on the market. 2. High Profitability Banks can earn high profiles by lending their surplus funds to the call market when call rates are high volatile. It offers

a profitable parking place for employing the surplus funds of banks temporarily. 3. Maintenance of SLR Call money enables commercial bank to minimum their statutory reserve requirements. Generally banks borrow on a large scale every reporting Friday to meet their SLR requirements. In absence of call market, banks have to main idle cash to meet their reserve requirements. It will tell upon their profitability. 4. Safe and Cheap Though call loans are not secured, they are safe since the participants have a strong financial standing. It is cheap in the sense brokers have been prohibited form operating in the call market. Hence, banks need not pay brokers on call money transitions. 5. Assistance to Central bank Operations Call money market is the most sensitive part of any financial system. Changes in demand and supply of funds are quickly reflected in call money rates and give an indication to the central bank to adopt an appropriate monetary policy. Moreover, the existence of an efficient call market helps the central bank to carry out its open market operations effectively and successfully. Drawbacks The call market in India suffers from the following drawbacks : 1. Uneven Development: The call market in India is confined to only big industrial and commercial centers like Mumbai, Kolkata, Chennai,

Delhi, Bangalore and Ahmadabad. not evenly development. 2. Lack of Integration:

Generally call markets

are associated with stock exchanges. Hence the market is

The call markets in different centers are not full integrated. Besides, a large number of local call markets exist without any integration. 3. Volatility in Call Money Rates : Another drawback is the volatile nature of the call money rates. Call rates vary to greater extant indifferent centers indifferent seasons on different days within a fortnight. The rates are between 12% and 85%. One cannot believe 85% being charged on call loans. 3.5.2 Commercial Bills Market or Discount Market

A commercial bill is one which arises out of a genuine trade transaction, i.e. credit transaction. As soon as goods are sold on credit, the seller draws a bill on the buyer for the amount due. The buyer accepts it immediately agreeing to pay amount mentioned therein after a certain specified date. Thus, a bill of exchange contains a written order from the creditor to the debtor, to pay a certain sum, to a certain person, after a creation period. A bill of exchange is a self-liquidating paper and negotiable; it is drawn always for a short period ranging between 3 months and 6 months. Definition Section 5 of the negotiable Instruments Act defines a bill exchange a follows : An instrument in writing containing an unconditional order, signed by the maker, directing a certain

person to pay a certain sum of money only to, or to the order of a certain person or to the beater of the instrument. Types of Bills Many types of bills are in circulation in a bill market. They can be broadly classified as follows: 1. Demand and usince bills 2. Clean bills and documentary bills 3. Inland and foreign bills 4. Export bills and import bills. 5. Indigenous bills 6. Accommodation bills and supply bills. 1. Demand and Usince Bills Demand bills are others called sight bills. These bills are payable immediately as soon as they are presented to the drawer. No time of payment is specified and hence they are payable at sight. Usince bills are called time bills. bills. These bills are payable

immediately after the expiry of time period mentioned in the The period varies according to the established trade custom or usage prevailing in the country. 2. Clean bills and documentary bills When bills have to be accompanied by documents of title to goods like Railways, receipt, Lorry receipt, Bill of Lading etc. the bills are called documentary bills. These bills can be further classified into D/A bills and D/P bills. In the case of D/A bills, the documents accompanying bills have to be delivered to the drawer immediately after acceptance. Generally D/A bills are drawn on parties who have a good financial standing.

On the order hand, the documents have to be handed over to the drawer only against payment in the case of D/P bills. The documents will be retained by the banker. payment of such bills. Till the When bills are drawn without

accompanying any documents they are called clean bills. In such a case, documents will be directly sent to the drawee. 3. Inland and foreign bills Inland bills are those drawn upon a person resident in India and are payable in India. Foreign bills are drawn outside India and they may be payable either in India or outside India. They may be drawn upon a person resident in India also. Foreign boils have their origin outside India. They also include bills drawn on India made payable outside India. 4. Export bills and import bills. Export bills are those drawn by Indian exports on importers outside India and import bills are drawn on Indian importers in India by exports outside India. 5. Indigenous bills Indigenous bills are those drawn and accepted according to native custom or usage of trade. These bills are popular among indigenous bankers only. In India, they called hundis the hundis are known by various names such as Shah Jog, Nam Jog, Jokhani, Termain Jog, Darshani, Dhanijog, and so on. 6. Accommodation bills and supply bills. If bills do not arise out of genuine trade transactions, they are called accommodation bills. bills or wind bills. They are known as kite Two parties draw bills on each other

purely for the purpose of manual financial accommodation. These bills are discounted with bankers and the proceeds are shared among themselves. On the due dates, they are paid. Supply bills are those neither drawn by suppliers or contractors on the government departments for the goods nor accompanied by documents of title to goods. are not considered as negotiable instruments. So, they These bills

are useful only for the purpose of getting advances from commercial banks by creating a charge on these bills. Operations in Bill Market From the operations point of view, the bill market can be classified into two viz. Discount Market Acceptance Market

A] Discount Market Discount market refers to the market where short-term genuine trade bills are discounted by financial intermediaries like commercial banks. When credit sales are affected, the seller draws a bill on the buyer who accepts in promising to pay the specified sum at the specified period. The seller has to wait until the maturity of the bill for getting payment. But, the presence of a bill market enables him to get payment immediately. The seller can ensure payment immediately by discounting the bill with some financial intermediary by paying a small amount of money called Discount rate on the date of maturity, the intermediary claims the amount of the bill from the person who has accepted the bill.

In some countries, there are some financial intermediaries who specialize in the field of discounting. For instance, in London Money Market there are specialize in the field discounting bills. Such institutions are conspicuously absent in India. Hence, commercial banks in India have to undertake the work of discounting. However, the DFHI has been established to activate this market. 3.5.3 Acceptance Market The acceptance market refers to the market where short-term genuine trade bills are accepted by financial intermediaries. All trade bills cannot be discounted easily because the parties to the bills may not be financially sound. In case such bills are accepted by financial intermediaries like banks, the bills earn a good name and reputation and such bills can readily discounted anywhere. In London, there are specialist firms However, their

called acceptance house which accept bills drawn by trades and import greater marketability to such bills. acceptance houses. importance has declined in recent times. In India, there are no The commercial banks undertake the acceptance business to some extent. Advantages or Importance 1. Liquidity 2. Certainty of Payment 3. Ideal Investment 4. Simple Legal Remedy 5. High and Quick Yield 6. Easy Central Bank Control

3.5.4 Treasury Bill Market Just like commercial bills which represent commercial debt, treasury bills represent short-term borrowing of the Government. Treasury bill market refers to the market where treasury bills are bought and sold. issued by the government. Meaning and Feature A treasury bills nothing but promissory note issued by the Government under discount for a specified period stated therein. The Government promises to pay the specified amount mentioned therein to the beater of the instrument on the due date. The period does not exceed a period of one year. It is purely a finance bill since it does not arise out of any trade transaction. It does not require any grading or endorsement or acceptance since it is claims against the Government. Treasury bill are issued only by the RBI on behalf of the Government. Treasury bills are issued for meeting temporary Government deficits. The Treasury bill rate of discount is fixed by the RBI from time-to-time. It is the lowest one in the entire structure of interest rates in the country because of short-term maturity and degree of liquidity and security. Types of Treasury Bills In India, there are two types of treasury bills viz. (i) ordinary or regular and (ii) ad hoc known as ad hocs ordinary treasury bills are issued to the public and other financial institutions for meeting the short-term financial requirements of the Central Government. These bills are freely marketable and they can be Treasury bills are very popular and enjoy higher degree of liquidity since they are

bought and sold at any time and they have secondary market also. On the other hand ad hocs are always issued in favour of the RBI only. They are not sold through tender or auction. They are purchased by the RBI on top and the RBI is authorized to issue currency notices against them. They are marketable sell them back to the RBI. following ways: I. They replenish cash balances of the central Government. Just like State Government get advance (ways and means advances) from the RBI, the Central Government can raise finance through these ad hocs. II. They also provide an investment medium for investing the temporary surpluses of State Government, SemiGovernment departments and Foreign Central Banks. On the basis of periodicity, treasury bills may be classified into three they are: I. 91 days treasury bills Ad hocs serve the Government in the

II. 192 days treasury bills and III. 364 days treasury bills Ninety one days treasury bills are issued at a fixed discount rate of 4% as well as through auctions. 364 days bills do not carry any fixed rate. The discount rate on these bills are quoted in auction by the participants and accepted by the authorities. Such a rate is called cut off rate. In the same way, the rate is fixed for 91 days treasury bills sold through auction. 91 days treasury bills (top basis) can be rediscounted with the RBI at

any time after 14 days of their purchase. penal rate is charged. Operations and Participants

Before 14 days a

The RBI holds days treasury bills (TBs) and they are issued on top basis throughout the week. However, 364 days TBs are sold through auction which is conducted once in a forthnight. The date of auction and the last date of submission of tenders are notified by the RBI through a press release. Investors can submit more than one bid also. One the next working day of the date auction, the accepted bids with prices are displayed. The successful bidders have to collect letters of acceptance from the RBI and deposit the same along with cheque for the amount due on RBI within 24 hours of the announcement of auction results. Institutional investors like commercial banks; DFHI, STCI, etc. maintain a subsidiary General Ledger (SGL) account with the RBI. Purchases and sales of TBs are automatically recorded in this account invests who do not have SGL account can purchase and sell TBs though DFHI. forms. TBs. The DFHI does this function on behalf of investors with the help of SGL transfer The DFHI is actively participating in the auctions of It is playing a significant role in the secondary market

also by quoting daily buying and selling rates. It also gives buyback and sell-back facilities for periods up to 14 days at an agreed rate of interest to institutional investors. The establishment of the DFHI has imported greater liquidity in the TB market.

3.6

Financial Institutions The participants in this market are the followers: i. ii. iii. iv. v. vi. vii. viii. RBI and SBI Commercial banks State Governments DFHI STCI Financial Institutions like LIC, GIC, UTI, IDBI, ICICI, IFCI, NABARD, etc. Corporate Customers. Public

Through many participants are there, in actual practice, this market is in the hands at the banking sector. It accounts for nearly 90% of the annual sale of TBs. 3.7 Money Market Instrument A variety of instruments are available in a developed money market. i. ii. iii. In India, till 1986, only a few instruments were available. They were : Treasury bills in the treasury market Money at call and short notice in the call loan market. Commercial bills, promissory notices in the bill market.

Now, in additional to the above, the following new instruments are available. i. ii. iii. iv. Commercial Papers Certificate of deposit Inter-bank participation certificates Repo Instruments.

3.7.1 COMMERCIAL PAPERS Introduction During the 1980s wave of financial liberalization and innovation in financial instruments swept across the world. feature of the many innovations is the trend A basic towards

securitization, i.e. raising money direct from the investors in the form of negotiable securities as a substitute for the bank credit. The companies found it cheaper to borrow directly from public as it involved lower information and transaction cost. This also suits the interest of many investors as it provides them with a wide spectrum of financial instruments to choose from and in placing their instrument used for financing working capital requirements of corporate enterprises. A commercial paper is an unsecured promissory note issued with a fixed maturity by a company approved by RBI, negotiable by endorsement and delivery, issued in bearer form and issued at such discount on the face value as may be determent by the issuing company. 1. Commercial maturity. 2. It is a certificate evidencing an unsecured corporate debt of short term maturity. 3. Commercial paper is issued at a discount to face value basis but it can be issued in interest bearing form. 4. The issuer promises to pay the buyer some fixed amount on some future period but pledge no assets, only his paper is a short-term money market

instrument comprising ursine promissory note with a fixed

liquidity and established earning power, to guarantee that promise. Commercial paper can be issued directly by a company to investors or through banks / merchant banks. Advantages of Commercial Paper 1. Simplicity 2. Flexibility 3. Easy to Raise Long Term Capital Commercial Paper in India In India, on the recommendations of the Vaghul working Group, the RBI announced on 27 th March, 1989, that commercial paper will be introduced soon in Indian Money Market. The recommendations of the Vaghul Working Group on introduction of commercial paper in Indian money market are as flowers : 1. There is a need have limited introduction of commercial paper. It should be carefully planned and the eligibility criteria for the issuer should be sufficiently rigorous to ensure that the commercial paper market develops on healthy lines. 2. Initially, access to the commercial paper market should be registered to rated companies having a new worth of Rs. 5 Crore and above with good dividend payment record. 3. The commercial paper market should function within the overall discipline of CAS. The RBI would have to administer the entry on the market, the amount if each issues the total quantum that can be raised in a year.

4.

Ni restriction be placed on the commercial paper market except by way of minimum size of note. The size of single issue should not be less than Rs. 1 Crore and the size of each lot should not be less than Rs. 5 lakhs.

5.

Commercial

paper

should

be

excluded

from

the

stipulations on insecure advances in the case of banks. 6. Commercial paper would not be tied to any transaction and the maturity period may be 7 days and above but not exceeding six months, backed up if necessary by a revolving underwriting facility of less than three years. 7. The using company should have a net worth of net less than Rs. 5 crores, a debt quality ratio of not more than 105, current ratio of more than 1033, a debt servicing ratio closer to 2, and be listed on the stock exchange. 8. The interest rate on commercial paper would be marked dominated and the paper could be issued at a discount to face value or could be interest bearing. 9. Commercial paper should not be subject to stamp duty at the time of issue as well as at the time transfer by endorsement and delivery. On the recommendations of the Vaghul Working Group, the RBI announced on 27th March, 1989 that commercial paper will be introduced soon in Indian money market. Detailed guidelines were issued in December, 1989, through non-banking companies (acceptance of Deposits through commercial paper) Direction, 1989 and finally the commercial papers were instructed in India from 1st January, 1990.

3.7.2

CERTIFICATE OF DEPOSIT (CD)

Certificate of deposits are short term deposit instruments issued by banks and financial institutions to raise large sums of money. Features of Certificate of Deposit 1. Document of title to time deposit 2. Unsecured negotiable promotes 3. Freely transferable by endorsement and delivery 4. Issued at discount to face value 5. Repayable on a fixed date without grace days. 6. Subject to stamp duty like the usince promissory notes. The banks in USA in 1960s introduced CDs which are freely negotiable and marketable any time before maturity. The CDs were issued by big banks in the USA of $1 million at face value bearing fixed interest with a maturity generally ranging from 1 to 6 months. Banks sold CDs direct to investors or through dealers who subsequently traded this instrument in secondary market. The American banks issued for the first time dollar CDs in London in 1966. The bank of England gave permission to around 40 banks to make CD issue. The feasibility of introducing CDs in India was examined by the Tamb Working Group in 1982 which did not, however, favour the introduction of this instrument. Market. The manner was again studied in 1987 by the Vaghul Working Group on the Money The Vaghul Group recognized that CP world by attractive both the banker and investor in that the bank is not required to encase the deposit prematurely while the investor

can liquefy the instrument before its maturity in the secondary market. On the recommendations of the Vaghul Committee, the RBI formulated a scheme in June 1989 permitting scheduled commercial banks (excluding RRBs) to issue CDs. It terms of the scheme, CDs can be issued by scheduled commercial banks at discount on face value and the discount rates are market determined. The RBI has issued detailed guidelines for the issue of CDs and, with the changes introduced subsequently, the scheme for CDs has been liberalized. RBI Guidelines 1. The denomination of CDs could be in multiples of Rs. 5 lakh subject to a minimum size of an issue to a single investor being Rs. 25 lakh. The CDs above Rs. 25 lakh The amount rates to will be in multiples of Rs. 5 lakh.

face value (not mortuary value) of CDs issued. 2. The CDs are short-term deposit instruments with maturity period ranging from 3 months to one year. The banks can issues at their discretion the CDs for any member of months / days beyond the minimum usince period of three months and within the maximum usince of one year. 3. CDs can be issued to individuals, corporations,

companies, trut funds, associations, etc. non-resident Indians (NRIs) can also subscribe to CDs but only on a non-repatriation. 4. CDs are freely transferable by endorsement and delivery but only after 45 days of the date of issue the primary

investor. As such, the maturity period of CDs available in the market can be anywhere between 1 day and 320 days. 5. They are issued in the form of usince promissory notes payable on a fixed date without days of grace. CDs are subject to payment of stamp duty like the usince promissory notes. 6. Banks have to maintain CRR and SLR on the issue price of CDs and report them as deposits to the RBI. Banks are neither permitted to grants loans against CDs nor to buy them back prematurely. 7. From October 17, 1992, the limit for issue of CDs by scheduled commercial banks (excluding Regional Rural Banks) has been raised from 7 per cent to 10 per cent of the fortnightly aggregate deposits in 1989-90. The ceiling on outstanding of CDs at any point of time are prescribed by the Reserve Bank of India for each bank. Banks are advised by the RBI to ensure that the individual bank wise limits prescribed for issue of CDs are not exceeded at any time. At present the total permissible limits for issue of certificates of deposits (CDs). By the banking system amounts to Rs. 15,038 crore equivalents to 10 percent of the fortnightly average outstanding aggregate deposits in 1989-90. The outstanding amount of CD issued by 50 scheduled commercial banks as on February 5, 1998 amounted to Rs. 10,261 crore and formed 70.4 per cent of the limit set for these banks for issue of CDs. To enable banks to mobilize deposits on comparative terms id has been decided to enhance the limits for issue of CDs. Accordingly, with effect from April 17, 1993 scheduled

commercial banks (excluding Regional Rural Banks) can issue CDs equivalent to 10 per cent of the fornightly average outstanding aggregate deposits in 1991-92. Consequently the aggregate limits for issue of CDs by eligible banks would increase from Rs. 15,038 crore of Rs. 20,552 crore. 8. There financial instruments, viz. industrial development banks in India, industrial credit and investment corporation of India and Industrial Finance Corporation of India, were permitted to issue CDs with a maturity aggregate limit of Rs. 100 crore (enhanced to Rs. 1,350 crore in May 1992). Effective from July 29, 1992 the industrial reconstruction Bank of India has also been permitted by issue CDs upto a limit of Rs. 100 crore.

3.7.3 INTER-BANK PARTICIPATION CERTIFICATE The Governor of the Reserve Bank of India while dealing with credit policy measures in October 1988 had informed the bank chiefs about a proposal to authorize banks to fund their short term needs from within the system through issuance of InterBank Participations. This announcement by the RBI was in line with recommendations made by the working group money market. Inter-Bank Participation Certificate provides them an additional instrument for even out short-term liquidity within the perimeter of the banking system, particularly at time when there are imbalances affecting the maturity mix of assets in bankers book.

Chapter 4 Debt market and Instruments 4.1 Introduction

Debt market represents a contract whereby one party lends money to another on pre determined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to the lender. In India securities markets, the term bond is used for debt instruments issued by the central and State governments and public sector organizations and the term debenture is used for instruments issued by private corporate sector. There are three main segments in the debt market in India viz, 1. Government Securities, 2. Public sector units (PSU) bonds, 3. Corporate securities. The market for Government Securities compromises the centre, State and State-sponsored securities. In the recent past, local bodies such as municipalities have also begun to tap the debt markets for funds. Some of the PSU bonds are tax free, while most bonds including government securities are not tax free. Corporate bond markets comprise of commercial paper and bonds. These bonds typically are structured to suit the requirements of investors and the issuing corporate and include a variety of tailor made features with respect to interest payments and redemption. A contractual arrangement in which the issuer agrees to pay interest and repay the borrowed amount after a specified period of time is a debt instrument.

4.2 Features Maturity- The number of years over which the issuer agrees to meet the contractual obligations is the term to maturity. Par value- The face value or principal value of the debt instrument is called the par value. Refunding provisions- In case where the insurer may not have cash to redeem the debt instrument and use the proceeds to repay the securities or to exercise the call options. Some bonds are issued with call protection feature, ie. they would not be called for a specified of time.

Chapter 5 EQUITY MARKET 5.1 Introduction

The equity capital market is an important part of the capital market. In these markets, companies and financial institutions raise funds and provide equities using the shares of same business. Investors invest in the company by purchasing the shares or equities. Company stocks are the prime financial instruments of the equity capital market. This instrument is provided by the company or the financial institution. The provided data helps the investor understand the present position and the future of the company in the equity capital market. When the investors are satisfied, he or she makes the investment and the money grow with the company. In certain situation the result may not be beneficial to the investor. In the past wealthy investors dominated the market but market trends are different now. In financial markets, stock is the capital raised by a corporation through the issuance and distribution of the shares. A person or organisation which holds shares of stocks is called a shareholder. The aggregate value of the corporations issued shares is its market capitalisation. When one buys a share of a company, he becomes a shareholder in that company. Shares are also known as equities. Equities have the potential to increase value overtime. It also provides the portfolio with the growth necessary to reach the long term investment goals. Since 1990 till date, the Indian stock market has returned about 17% to investors on an average in terms of increase in share prices or capital appreciation annually. Besides that on an average stock are paid 1.5% dividend annually. The first company to issue shares of stock was the Dutch East India Company in 1602. Equity markets the world over, grew at a great speed in the decades of nineties. The

introduction of dematerialisation of shares, leading to faster and cheaper transaction and introductions of derivative products and compulsory rolling settlement has followed subsequently. Despite a series of stock market scams and crisis beginning from 1992, Harshad Mehtas scam to the Ketam Parekhs 2001 scam, the Indian equity markets have transformed themselves from a broker dominated market to a mass market. 5.2 Equity Markets In India- An Overview According to the world development indicators 2007, world bank there has been in increase inb market capitalisation as percentage of GDP in some of the major country groups. The increase, however, has not been uniform across countries. The market capitalisation as a percentage of GDP was the highest at 112.9% for the high income countries as at end 2005 and lowest for middle income companies at 45.9%. Market capitalisation as percentage of GDP in India stood at 68.6% as at end of 2005. The turnover ratio which is a measure of liquidity, was 122.2% for high income companies and 96.6% for low income countries. The total number of listed companies stood at 28733 for high income countries, 11,141 for middle income countries and 6177 for low income companies as at the end of 2006.

CHAPTER 6 DERIVATIVES MARKET 6.1 INTRODUCTION

A derivative picks a risk or volatility in a financial asset, transaction, market rate or contingency and creates a product the value of which will change as per changes in the underlying risk. The idea is that someone may either try to safeguard against such risk or someone may take the risk or may engage in a trade on the derivative, based on the view that they want to execute. The risk that a derivative intends to trade is called underlying. A derivative is a financial instrument that offers return based on the return of some other under lying asset, I.e. the return is derieved from another instrument. The best way will be take examples of uncertainties and the derivative that can be structured around the same. Stock prices are uncertain lot of forward, options or futures contracts are based on movements in prices of individual stocks. Prices of commodity are uncertain there are forward, options or futures on commodities. Interest rates are uncertain there interest rates and swaps and futures. Weather is uncertain. 6.2 Financial derivatives

Financial derivatives are financial instruments whose prices are derived from prices of other financial instruments. Although financial derivatives have existed for a considerable period of time, they have become a major force in financial markets only since the year 1970s 6.3 Derivatives products

Some significant derivatives that are of interest to us are depicted as major types of derivatives. 6.3.1 Forwards A forward contract is a customized contract between two entities, where settlement takes place as a specific date in the future at todays pre determined price. 6.3.2 Options Options are of two types- cal and put. Calls gives the buyer the right but not the obligation to buy a given quantity of underlying asset, at a

given price on or before a given future date. Puts gives the buyer a right, but not the obligation to sell a given quantity of underlying asset, at a given price on or before a given date. 6.3.3 Warrants Options generally have maturity period of 3 months, majority of options that are traded on exchanges have maximum maturity of 9 months. Longer traded options are called warrants and are generally traded over-the- counter. 6.3.4 Leaps The acronym LEAPS means long term equity anticipation securities. These are options having a maturity upto 3 years. 6.3.5 Baskets Basket options are currency- protected options and its return- profile is based on the average performance of pre-set basket of underlying assets. The basket can be interest rate, equity or commodity related. A basket of options is made by purchasing different options. 6.3.6 Swaps Swaps are private agreement between two parties to exchange cash flows in the future according to a pre-arranged formula. They can be regarded as portfolio of forward contracts. The two commonly used swaps are interest rate swaps and currency swaps. 6.4 Types of derivatives market 6.4.1 Forwards a forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a specified future date for a specified price. The forward contracts are normally traded outside the exchange. Salient features They bilateral and hence exposed to counter party risk. The contract price is generally not available in public domain Limitations The lack of centralization of trading. Illiquidity and counter party risk. 6.4.2 Futures Future contract is a standardized transaction taking place on the features exchange. Futures market was designed to solve the

problems that exist in forward market. A futures contract agreement is between two parties, to buy or sell an asset at a certain time in the future at a certain price, but unlike forwards contract the futures contract are standardized exchange traded. Futures exchange has a division or subsidiary called a clearing house that performs the specific responsibilities of paying and collecting daily gains and losses as well as guaranteeing performance of one party to another. A futures contract can be offset prior to maturity by entering into an equal and opposite transactions. More than 99% of futures transactions are offset this way.

Chapter 7. CASE STUDIES

The problem When Anthony Voigt started Brighton Consulting in 2001, he was a sole trader struggling to make ends meet. As he built his business he admits that he and his fellow director, John Keanmade pricing mistakes. The core of their business is developing and managing web sites for credit unions and their biggest error during this time was providing a fixed price quote for delivering a piece of software. The solution Today, they price project-based work on a more realistic hourly rate. Many of their biggest clients also pay a monthly retainer for Brighton's services, giving them a reliable income stream. The retainer is based on a discounted hourly rate, reflecting the importance of these ongoing relationships. Now that were six and a half years old, were actually starting to understand the kind of price that we should be charging for our work, he says. In the past, we were guilty too often of undercharging. Underpricing your services does them little justice and tends to diminish their value in the eyes of the customer Brightons unique selling proposition is the range of complementary skills they can bring to a clients business. The key thing for us is that we integrate design skills, technical skills and business strategy, says Voigt. Focus on the customers needs. You can have the greatest idea in the world, but if nobody wants to buy it, it wont last. The result With 54 credit unions serving 300,000 clients, they are the largest supplier of integrated online services to the Australian credit union industry. Were busier than weve ever been, says Voigt. Since then, he and his fellow director, John Kean, have built an e-business consultancy with 12 staff and a growing list of clients.

CASE STUDY 2.

The problem Crematech was an importer and wholesaler of caf supplies and equipment. Despite the quality of its products and a healthy market for coffee, the company was having difficulty increasing sales. One reason was that its products were expensive compared to its competitors. Higher prices resulted in slower turnover, which in turn meant reduced cash flow. Consequently, the company could only afford to buy three shipments of stock per year. The solution Crematechs owners decided that they needed to accelerate the cash flow cycle by increasing stock turnover. After talking to a Commonwealth Bank Trade Specialist, they used a Trade Finance facility to fund extra shipments of stock. At the same time, they cut the mark-up on their products from 50% to 20%, significantly reducing their prices. Lower prices soon meant higher sales. In a short time, Crematech was turning over stock monthly, rather than quarterly, generating sufficient cash flow for 12 shipments a year. The result Even though each individual sale was less profitable, Crematechs lower prices created enough new sales to cover operating costs and still leave the company with a higher profit. Meanwhile, the companys Trade Finance facility helped it to cover any cash flow gap between paying for stock and being paid by its retail clients. As a result, Crematech was able to earn a higher profit on the same initial investment, while still lowering its prices. Old Pricing $250,000 50% $125,000 3 $375,000 $120,000 New pricing $250,000 20% $50,000 12 $600,000 $120,000

Cost of stock (per shipment) Mark-up Gross profit (per shipment) Shipments per year Gross profit (per year) Operating costs

Operating profit $255,000 $480,000 This is a hypothetical example for illustrative purposes only and does not represent any particular individual or company.

Important information As this advice has been prepared without considering your objectives, financial situation or needs, you should before acting on this advice, consider its appropriateness to your circumstances. Applications for finance are subject to the Bank's normal credit approval. Full terms and conditions will be included in our Loan Offer. Fees and charges are payable. Financial markets products contain an element of risk: the level of risk varies depending on the product's specific attributes and how it is used. The Bank will enter transactions on the understanding that the customer has: made their own independent decision to enter into the transaction; determined that the transaction is appropriate; ensured they have the capacity to evaluate and understand the terms, conditions and risks, and is not relying on any communication or information from the Bank as advice.

Chapter 8 Conclusion
Financial market is a market where financial instruments are exchanged or traded and helps in determining the prices of the assets that are traded in and is also called the price discovery process. The capital serves a very useful purpose by pulling the capital resources of the country and making them available to the enterprises investors well developed capital markets augment recourses by attracting and lending funds on the global scales. Today there are 21 regional securities exchange in India in addition to the centralized NSC (National Stock Exchange) and OTCI (Over the counter exchange of India) . Money market is the center for the dealing in mainly in short term money assets. It meets the short term requirements of borrowers and provides liquidity or cash to lenders. It is a place where short term surplus funds at the disposal of financial institution institution and and individual also the are borrowed by individual, instrument government. Debt

represents a contract whereby one party lends money to another on predetermined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrowers to the lenders. The equity capital market is an important part of the capital market. In this market, the companies and financial institutions raise funds and provide equities using the shares of their own business. A derivative picks a risk or volatility in a financial asset, transactions, market rate, or contingency, and creates a product the value of which will change as per changes in the underlining risk or volatility.

BIBLIOGRAPGHY Books Referred 1. Investment Management Preeti Singh 2. Indian Financial Market T.R Venkatesh 3. Financial Market- P.K Bandgar Magazines 1. Business Today

2. India Today 3. Business World Websites 1. www.nesindia.com 2. www.financialexpress.com 3. www.google.com 4. www.equitymaster.com