FINANCIAL MARKETS

Financial Markets: Defined as the market in which financial assets are created or transferred.

These assets represent a claim to the payment of a sum of money sometime in the future and/or periodic payment in the form of interest or dividend.

Introduction:

FINANCIAL MARKET

Money Market

Debt Market

Forex Market

Capital Market

Primary

Secondary

MONEY MARKET

MONEY MARKET: Money market means market where money or its equivalent can be traded. RBI defines money market as A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market Money Market is a wholesale market of short term debt instrument and is synonym of liquidity. Money Market is part of financial market where instruments with high liquidity and very short term maturities i.e. one or less than one year are traded.

money market is a market where short term obligations such as

treasury bills, call/notice money, certificate of deposits, commercial papers and repos are bought and sold.
money market

Features of a Money Market It is a market purely for short-term funds or financial assets called near money.

It deals with financial assets having a maturity period upto one year only.
It deals with only those assets which can be converted into cash readily without loss and with minimum transaction cost. Generally transactions take place through phone i.e., oral communication. Relevant document and written communications can be exchanged subsequently. There is no formal place like stock exchange as in the case of a capital market. It is not a single homogeneous market. It comprises of several submarkets, each specializing in a particular type of financing e.g., Call money market, Acceptance market, Bill market and so on. The components of a money market are the Central Bank, Commercial Banks, Non-banking financial companies, discount houses and acceptance houses. Commercial banks generally play a dominant role in this market.

Other features of the money market are: It is a market for short-term loanable funds for a period of not exceeding one year. This market supplies funds for financing current business operations, working capital requirements of industries and short period requirements of the Government.

Each single money market instrument is of large amount. A TB is of minimum for one lakh. Each CD or CP is for a minimum of Rs. 25 lakhs.
The Central bank and Commercial banks are the major institutions in the money market.

Money market instruments generally do not have secondary markets.

Transactions have to be conducted without the help of brokers.

Objective of Money Market: To provide a reasonable access to users of short-term funds to meet their requirement quickly, adequately at reasonable cost. 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.

Main Function To channelize savings into short term productive investments like working capital . Other functions:
money market

By providing various kinds of credit instruments suitable and attractive for different sections, a money market augments the supply of funds. Efficient working of a money market helps to minimize the gluts and stringencies in the money market due to the seasonal variations in the flow of and demand for funds. A money market helps to avoid wide seasonal fluctuations in the interest rates. A money market, by augmenting the supply of funds and making them readily available to the legitimate borrowers, help in making funds available at cheaper rates. It enhances the amount of liquidity available to the entire country. A money market, by providing profitable investment opportunities for short-term surplus funds, helps to enhance the profit of financial institutions and individuals.

Players in Money Market: Reserve Bank of India SBI DFHI Ltd (Amalgamation of Discount & Finance House in India and SBI in 2004) Acceptance Houses Commercial Banks, Co-operative Banks and Primary Dealers Specified All-India Financial Institutions, Mutual Funds, and certain specified entities Individuals, firms, companies, corporate bodies, trusts and institutions

money market

Importance of Money Market: Development of trade & industry. Development of capital market. Smooth functioning of commercial banks. Effective central bank control. Formulation of suitable monetary policy. Non inflationary source of finance to government.

money market

Composition of Money Market: Money Market consists of a number of sub-markets which collectively constitute the money market. They are, Call Money Market Commercial bills market or discount market Acceptance market Treasury bill market

money market

Instruments of Money Market: A variety of instrument are available in a developed money market. In India till 1986, only a few instrument were available. They were Treasury bills Money at call and short notice in the call loan market. Commercial bills, promissory notes in the bill market. Now, in addition to the above the following new instrument are available: Commercial papers. (CP) Certificate of deposit. (CD) Inter-bank participation certificates. Repo instrument Banker's Acceptance Repurchase agreement Money Market mutual fund
money market

INSTRUMENTS OF MONEY MARKET: Call / Notice Money Market:

Part of the national money market

Day-to day surplus funds mainly of banks are traded Short term in nature, Maturity of these loans vary from 1 to 15 days Lent for 1 day: Call money Lent for more than 1 day but less than 15 days: Notice money Convenient interest rate Highly liquid loan repayable on demand The money that is lent for one day in this market is known as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money".
money market

Banks borrow in this market for the following purpose: To fill the gaps or temporary mismatches in funds To meet the CRR & SLR mandatory requirements as stipulated by the Central bank To meet sudden demand for funds arising out of large outflows.

money market

Treasury Bills: T-Bills are the most marketable money market security. Their popularity is mainly due to their simplicity. T-bills are short-term securities that mature in one year or less from their issue date.

They are issued with three-month, six-month and one-year maturities.

At present, the Government of India issues three types of treasury bills through Auctions, namely, 91-day, 182-day and 364-day.

There are no treasury bills issued by State Governments.

T- bills are purchased for a price that is less than their par (face) value; when they mature, the government pays the holder the full par value
money market

Treasury Bills: (cont) The biggest reasons that T-Bills are so popular is that they are one of the few money market instruments that are affordable to the individual investors. T bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. Types of Bills: on tap bills, ad hoc bills, auctioned T- bills Other positives are that T-bills (and all Treasuries) are considered to be the safest investments in the world because the government backs them. In fact, they are considered risk-free.

Furthermore, they are exempt from state and local taxes.

The only downside to T-bills is that you won't get a great return
money market

Commercial Paper (CP):

Commercial paper is an unsecured, short-term loan issued by a corporation with strong and high credit rating., typically for financing accounts receivable and inventories. It is usually issued at a discount, reflecting current market interest rates. Maturities on commercial paper are usually no longer than nine months, with maturities of between one and two months being the average. CP is very safe investment because the financial situation of a company can easily be predicted over a few months.

Sold directly by the issuers to investors or through agents like merchant banks and security houses.
Flexible Maturity Imparts a degree of financial stability to the system.
money market

Certificate of Deposits (CDs)

A certificate of deposit (CD) is a time deposit with a bank. CDs are generally issued by commercial banks. They bear a specific maturity date (from three months to five years), a specified interest rate, and can be issued in any denomination, much like bonds. CDs offer a slightly higher yield than T-Bills because of the slightly higher default risk for a bank The main advantage of CDs is their relative safety and the ability to know your return ahead of time But,

The returns are paltry compared to many other investments. money is tied up for the length of the CD
money market

Banker's Acceptance A bankers' acceptance (BA) is a short-term credit investment created by a non financial firm and guaranteed by a bank to make payment. Acceptances are traded at discounts from face value in the secondary market. For corporations, a BA acts as a negotiable time draft for financing imports, exports or other transactions in goods. This is especially useful when the creditworthiness of a foreign trade partner is unknown a banker's acceptance is that it does not need to be held until maturity, and can be sold off in the secondary markets where investors and institutions constantly trade BAs

money market

Repurchase agreement (Repos) Repo is short for repurchase agreement. Those who deal in government securities use repos as a form of overnight borrowing. A dealer or other holder of government securities (usually T-bills) sells the securities to a lender and agrees to repurchase them at an agreed future date at an agreed price. They are usually very short-term, from overnight to 30 days or more. This short-term maturity and government backing means repos provide lenders with extremely low risk. Repos are popular because they can virtually eliminate credit problems. Reverse Repo (opposite of repo) In this case, a dealer buys government securities from an investor and then sells them back at a later date for a higher price Term Repo - same as a repo except the term of the loan is greater than 30 days.
money market

STRUCTURE OF INDIAN MONEY MARKET: I :- ORGANISED STRUCTURE 1. Reserve bank of India. 2. DFHI (discount and finance house of India). 3. Commercial banks i. Public sector banks SBI with 7 subsidiaries Cooperative banks 20 nationalized banks ii. Private banks Indian Banks Foreign banks 4. Development bank (IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.) II. UNORGANISED SECTOR 1. Indigenous banks 2 Money lenders 3. Chits 4. Nidhis III. CO-OPERATIVE SECTOR 1. State cooperative i. central cooperative banks Primary Agri credit societies Primary urban banks 2. State Land development banks central land development banks Primary land development banks

money market

CHARACTERISTIC FEATURES OF A DEVELOPED MONEY MARKET Highly organized banking system Presence of central bank Availability of proper credit instrument

Existence of sub-market
Ample resources Existence of secondary market Demand and supply of fund

money market

Disadvantages of Money market:

Purchasing power of your money goes down, in case of up in inflation.

Dichotomized and loosely integrated Irrational structure of interest rates

Highly volatile market

Seasonal stringency of loan able funds Lack of funds in the money market

Inadequate banking facilities

money market

RECENT DEVELOPMENT IN MONEY MARKET

Integration of unorganized sector with the organized sector

Widening of call Money market Introduction of innovative instrument Offering of Market rates of interest Promotion of bill culture Entry of Money market mutual funds Setting up of credit rating agencies Adoption of suitable monetary policy Establishment of DFHI (discount and finance house of India) Setting up of security trading corporation of India ltd. (STCI)

money market

CAPITAL MARKET:

CAPITAL MARKET: The Indian capital market is more than a century old. Its history goes back to 1875, when 22 brokers formed the Bombay Stock Exchange (BSE). Over the period, the Indian securities market has evolved continuously to become one of the most dynamic, modern, and efficient securities markets in Asia. Indian securities markets are mainly governed by a) The Companys Act 1956, b) the Securities Contracts (Regulation) Act 1956 (SCRA Act), and c) The Securities and Exchange Board of India (SEBI) Act, 1992.

Capital market

Provided resources needed by medium and large scale industries. Purpose for these resources Expansion Capacity Expansion Investments Mergers and Acquisitions

Deals in long term instruments and sources of funds

Main Activity Functioning as an institutional mechanism to channelize funds from those who save to those who needed for productive purpose. Provides opportunities to various class of individuals and entities.

Importance of capital market:

important source for the productive use of the economys savings.

mobilizes the savings of the people for further investment & avoids their wastage in unproductive uses.
provides incentives to savings and facilitates capital formation provides an avenue for investors, to invest in financial assets which are more productive than physical assets. facilitates increase in production and productivity in the economy and thus, enhances the economic welfare of the society. give quantitative and qualitative directions of the flow of funds and bring about rational allocation of scarce resources. promotes stability in values of securities representing capital funds. it serves as an important source for technological upgradation in the industrial

sector by utilizing the funds invested by the public.

The following instruments are being used for raising resources: 1. 2. 3. 4. 5. 6. 7. 8. 9. Equity shares Preference shares Non-voting equity shares Cumulative convertible preference shares Company fixed deposits Warrants Debentures/bonds Secured premium notes (SPNs) Euro Convertible Bonds (ECBs)/Global Depository Receipts (GDRs).

The Indian securities market consists of primary (new issues) as well as secondary (stock) market in both equity and debt.

The primary market provides the channel for sale of new securities, while the secondary market deals in trading of securities previously issued.
There are two major types of issuers who issue securities.

The corporate entities issue mainly debt and equity instruments (shares, debentures, etc.) while the governments (central and state governments) issue debt securities (dated securities, treasury bills). A variant of secondary market is the forward market, where securities are traded for Future delivery and payment in the form of futures and options. The futures and options can be on individual stocks or basket of stocks like index

Capital market

Reforms in the Indian Capital market: the introduction of free pricing Issuers of new capital are brought under SEBIs purview and are required to comply with SEBI guidelines. SEBI raised the standards of disclosure in public issues to enhance their transparency for improving the levels of investor protection to further enhance the efficiency of the secondary market, rolling settlement was reduced to a T+5 basis from 14 days, further shortened to T+2 currently all transactions are settled through the clearing house only margining system, intra-day trading limit, exposure limit and setting up of trade/settlement guarantee

Capital market

Reforms in the Indian Capital market: (Cont) Securities, have been demateralised. There are two depositories operating in the country.

all listed companies are now required to furnish to the stock exchanges and also publish unaudited financial results on a quarterly basis.
Entry to FIIs in mutual funds, pension funds etc, introduction of ADRs, GDRs ECBs.. Regulations in place governing substantial acquisition of shares and takeovers of companies Training programs.

Capital market

PRIMARY & SECONDARY MARKET

PRIMARY MARKET / NEW ISSUE MARKET The primary market provides the channel for sale of new securities. Primary market provides opportunity to issuers of securities; Government as well as corporates, to raise resources to meet their requirements of investment and/or discharge some obligation. They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc. They may issue the securities in domestic market and/or international market. Its main function is to transfer resources from savers to entrepreneurs.

Capital market

New issues are classified into: Issues by new companies Issues by old companies New money issue New non money issue

FEATURES OF PRIMARY MARKET: Deals with securities which are issued fro first time for public subscription it neither possesses a tangible form nor any administrative organisational set up. provides issuing copmanies with funds for starting new enterprise or expansion

OBJECTIVES to aid industrial growth and therby economic development to intermediate resources from savers to investors and allocate in an efficient manner to accelerate the process of industrialiastion to provide an impetus for the performance of secondary markets as well

Services Organisation Underwriting distribution

Types of Issues: Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuers securities. follow on public offering (Further Issue) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. Rights Issue is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders.
Capital market

Preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital.

OTHERS: OFFER THROUGH PROSPECTUS PRIVATE PLACEMENT

Capital market

Principal Steps of a Public Issue

Draft prospectus Fulfillment of Entry norms (EN) Appointment of underwriters Appointments of Bankers Initiating allotment procedure Brokers to the issue Filing Documents Printing of prospectus and application forms Listing the issue Publication in news papers Allotment of shares Underwriters Liability Operational Listing.

A central listing authority (CLA) has been set up under regulation 8 of SEBI (CLA) regulations, 2003 to perform following functions: processing applicaitions for letter precendent to listing from applicants make recommendaitons to sebi on issues of protection of investors interest make suggestions for the development and regulation of securities market undertake any other funciton as may be deligated to in by sebi

Players in the New Issue Market

Merchant bankers Registrars Collecting and co-ordinating bankers Underwriters and brokers Printers, advertising agencies and mailing agencies. Investment bankers Venture capitalists Foreign Financial Institutions (FIIs). SEBI

Issues in NEW ISSUE MARKET suffers from functional and institutional gaps wholesale market for new issues is yet to develop as merchant banking is in its infancy adequate attentions in not given in technical, managerial and entrepreneurial aspects with a risk aversion in the new issue market, funds are diverted from the risky market to less risky debentures there are operationsal deficiencies for investores in semi urban and rural areas there are inordinate delays in allotment of shares, refunding, transfer, etc. free pricing ( failurs of new issues with high premiums) Timing of issues

SECONDARY MARKET: Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets.

Capital market

Role of Secondary market: For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduitby facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions.

Capital market

Products in Secondary market: 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 eg. 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.

Capital market

Products in Secondary market: Shares: (Cont) 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. Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company.
Capital market

Products in Secondary market: Bonds: is a negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan. Types of Bond:

Zero Coupon Bond

Convertible Bond Treasury Bills
Capital market

Primary Markets
When companies need financial resources for its expansion, they borrow money from investors through issue of securities.
Securities issued a) Preference Shares b) Equity Shares c) Debentures Equity shares is issued by the under writers and merchant bankers on behalf of the company. People who apply for these securities are: a) High networth individual b) Retail investors c) Employees d) Financial Institutions e) Mutual Fund Houses f) Banks

Secondary Markets
The place where such securities are traded by these investors is known as the secondary market.
Securities like Preference Shares and Debentures cannot be traded in the secondary market.

Equity shares are tradable through a private broker or a brokerage house. Securities that are traded are traded by the retail investors.

One time activity by the company.

Helps in mobilising the funds for the investors in the short run.

FOREIGN EXCHANGE MARKET

FOREIGN EXCHANGE MARKET The Foreign Exchange market allows currencies to be exchanged in order to facilitate international trade or financial transactions.

The foreign exchange market is the market in which foreign exchange transactions take place.
It is a market in which national currencies are bought and sold against one another.

FUNCTIONS OF FOREIGN EXCHANGE MARKET Transfer of Purchasing Power.

Provision of Credit for promotion of foreign trade

Provision of Hedging facilities.

In India foreign exchange business has a three tired structure Trading between banks and their commercial customers Trading between through authorized brokers

Trading with banks abroad

Motives For Investing In Foreign Markets: Economic conditions: Exchange Rate Expectations

International Diversification
Motives For Providing Credit In Foreign Markets: High Foreign Interest Rates

Exchange Rate Expectations

International Diversification Motives For Investing In Foreign Markets: Low Interest Rates Exchange Rate Expectations

METHODS OF AFFECTING INTERNATIONAL PAYMENTS Telegraphic Transfer Mail Transfer Cheque and Bank drafts

Foreign Bill of Exchange

Documentary (Reimbursement)

STRUCTURE OF FOREIGN EXCHANGE MARKET

RESERAVE BANK OF INDIA

Foreign Exchange Dealers Association of India (FEDAI)

AUTHORISED DEALERS

CUSTOMERS

FOREIGN EXCHANGE MONEY CHANNGERS

TRANSACTIONS IN FOREIGN EXCHANGE MARKET SPOT EXCHANGES:

Spot Exchange refers to the class of foreign exchange transactions which require the immediate delivery, or exchange of currencies on the spot.
In practice the settlement takes place within two days in most markets.

The rate of exchange effective for spot transactions is known as spot rate and the market for such transactions is known as spot market. FORWARD EXCHANGES:
Forward transaction is an agreement between two parties, requiring the delivery at some specified future date of a specified amount of foreign currency by one party against payment in domestic currency by the other party.

Forward Exchange Rate

The rate of exchange applicable to the forward contract is called forward exchange rate. With reference to its relationship with the spot rate, the forward rate may be at par, discount or premium. At Par : If the forward exchange rate is quoted exactly to the spot rate at the time of making the contract, the forward exchange rate is said to be at par. At Premium : A forward rate for a currency is said to be at premium with respect to spot rate when 1 currency buys more units of another currency in forward than in spot market. At Discount : A forward rate for a currency is said to be at discount with respect to spot rate when 1 currency buys fewer units of another currency in forward than in spot market. Forward and discounts are generally expressed in terms of percentage

REPO MARKET

Repo stands for repurchase Repo / repurchase agreement is a window which enables a bank or FI to borrow money in short term In a repo transaction a bank sells govt. securities or bonds to other bank / FI with an agreement to buy the securities back after a specified time and price. Reverse repo is acquiring of the debt securities with a simultaneous commitment to resell.

A repo transaction is secured borrowing, the difference between the sale and repurchase price is the borrowing cost.
It is usually short term in nature ( one day to fortnight)

Repo instruments Under a repo transaction borrower parts with securities to lender with an agreement to repurchase at a fixed period at a specified price. Difference between purchase and repurchase price is cost for the borrower i.e. repo rate. A transaction is repo when viewed from the perspective of the seller of securities and Reverse repo if viewed from the perspective of the supplier of funds.

Repo transactions are conducted in money market. In India repos are normally conducted for a period of 3 days.
Eligible securities are decided by RBI, includes, government Promissory notes, T bills and PSU bonds.

Advantages of Repo Repo entails instantaneous legal transfer of ownership of the eligible securities. It helps to promote greater integration between the money and the Government securities markets. Repo can be used to facilitate Governments cash management. Repo is a very powerful and flexible money market instrument for modulating market liquidity.

Repo also serves the purpose of an indirect instrument of monetary policy at the Short- end of the yield curve.

Significance of Repo transactions When RBI conducts a repo, what it does in effect is it lends to bank by purchasing securities and selling them back at a predetermined price. When RBI does a reverse repo, it borrows from bank by selling them securities RBI uses it as a tool to manage short term liquidity.

The rate serves as a benchmark for banks and other institutions.

In India only select institutions in the financial sector has RBI permissions to enter into repo and reverse repo transactions.

Need of a repo transactions Repos are safer as lender holds government securities in its own name. thus repo is a zero risk transaction. Repo helps bank to meet their mandatory requirements for investing in government securities

GOVERNMENT SECURITIES MARKET

Government securities market is at the core of financial markets of any country. It deals with tradable debt instruments issued by the government for meeting its financial requirements.

Development of primary segment of GSM enables the managers of public debt to raise resources from the market in a cost effective manner.
Secondary segment of GSM helps in effective operation of monetary policy through application of indirect instruments, such as open market operations.

Trading in GSM is referred to as the gilt edged market. Its is mostly OTC and trading is confined to likes of banks, FIs Brokers acts as an intermediatory between the organizations. Government sector is the major borrower in India and government securities represents government debt to the other sectors of economy.

Government securities are held by RBI and working of two major techniques: Open market operations and Statutory Liquidity ratio. As government security is the claim on government, it is an absolutely secured financial instrument which guarantees the certainty of both income and capital. It is therefore called a gilt-edged security.

Role and significance of GSM it may adversely affect private investment by directly competing for the limited resources it can have a positive influence on private investment by enabling the development of private bond market, by providing basic financial infrastructure. it serves as a back bone of fixed income markets through the creation of risk free benchmarks and facilitates the development of other financial markets serves as a channel of integration of various segments of the financial markets. allows greater application of indirect or market based instruments of monetary policy like open market operations. it provides credit risk free, highly liquid financial instruments, which participants are more willing to transact and take positions

 GSM securities are used by dealers as a major hedging tool for interest rate risk. large borrowing by government provides impetus to the development of bond market. for government GSM facilitates borrowing at reasonable cost. it plays a crucial role in monetary policy transmission mechanism.

GSM performs three principal functions: it provides resources, both short term and long term to the government. it acts as a benchmark for pricing corporate papers for various maturities

it facilitates the conduct of open market operations.

Salient features of Government Securities:

issued in denomination of Rs. 1,000. interest on Government securities is payable half yearly.

Central Government securities are more liquid than State Government and Semi-Government securities.

Government Securities are issued through the Public Debt Office (PDO) of the RBI. The RBI does have its approved brokers for marketing of government securities.
The gilt-edged market is an over-the counter market and each sale and purchase has to be separately negotiated.

With the developments taken place in the financial system, the maturity structure of government debt has considerably shortened. The longest maturity is kept at ten years. Government Securities are deemed to be listed on stock exchanges and as such there is no separate listing requirement for them. The RBI has advised the banks that, securities transactions should be undertaken directly between banks and no bank should engage the services of any brokers. Interest on government securities is subject to tax deducted at source.

Principal forms of government securities stock certificates promissory notes

bearer bonds

Stock certificates: debt is held in form of a stock. owner is given a certificate registered in the books of PDO of RBI, as to the rate of interest, payable dates, maturiy, etc. execution of transfer deed is necessary for transfers stocks can be jointly held. restricted to institutions, agencies, banks and those with a corporate status with RBI Promissory Notes: negotiable instrument payable to the order of a specified person transferable by endorsement promise to pay a specified amount at a specified date Bearer bonds: it certifies that the bearer is entitled to certain sum specified in rupees on the date indicated. interest is paid to the holder of the coupon and bond is discharged on the due date of the loan by physical representation of the bearer.

Role of the Reserve bank with RBI acting as the debt manager to the government, a well developed and liquid GSM is essential to ensure the smooth passage of governments market borrowing to finance its deficit

the development of GSM is also necessary to facilitate the emergence of a risk free rupee yield curve to serve as a benchmark for pricing other debt instruments.
GSM plays a vital role in the effective transmission of monetary policy impulses in a deregulated environment.

Reforms in GSM new auction based instruments were introduced with varying maturities such as 364, 182, 91 and 14 days T bills and zero coupon bonds part payment feature was added to the auction of GOI dated securities a system of Primary dealers was made operational FII were allowed to set up 100% debt funds to invest in government securities in primary and secondary markets commencement of retail trading of government securities at select exchanges.