Financial Market

Money market
Money market
 Call money market: market for very short term funds
 Over night market
 Short notice market
 Bill market / discount market:
 Most important market
 Short term bills up to 90 days
 Certificates of deposits (CDs)
 Issued by banks, generally in multiples of Rs. 25 lakhs, min amount is
Rs. 25 lakhs
 Maturity: 3 months to 1 year
 Commercial paper:
 Issued by companies with a net worth of Rs. 5 crores, minimum issue
is Rs. 1 crore
Features and defects of Indian money
market
 Existence of unorganized money market
 Absence of integration – each segment is loosely connected
 Diversity in money rates of interest
 Seasonal stringency of money – high rates during some
seasons e.g. Nov-June, when crops generally move from
villages to districts
 Absence of bill market (duration < 90 days)
 Highly volatile commercial money market
 Absence of well organised banking system
 Availability of credit instruments
Most
important
 Facilities and institutional arrangements for borrowing and
lending term funds (medium term and long term)
 It does not deal in capital goods but is concerned with the raising
of money capital for purposes of investment
 Demand for long term funds:
 Private sector – manufacturing industries
 Agriculture
 Government for economic development
 Supply:
 Individual savers
 Corporate savings
 Banks
 Insurance companies
 Specialized financing agencies
 Government
 Institutions like:
 Commercial banks – interested in govt. securities
 LIC/GIC - interested in govt. securities
 Provident funds - interested in govt. securities
 Development financial institutions like IFCI, ICICI, UTI, IDBI – private
sector
 Merchant bankers, MFs
Government securities market
 Market for government and semi government securities,
backed by RBI
 Securities traded in this market are stable in value
 Sought after by banks and other institutions
Industrial securities market
 Market for shares and debentures of old and new companies
 New issue market
 Secondary market (stock exchange)
Government securities market vs.
industrial securities market
Govt. security Industrial security
Uncertainties in yield, No Yes
management etc
Investors Institutions which are All players
compelled by law e.g. LIC,
GIC etc
Average value of transaction Very large Small-large
Market type Over the counter Auctions
(negotiations)
Role of RBI Dominant Not so dominant
Development financial institutions
 Initially set up as financial institutions of special help to the
private sector
 Functions:
 Subscribe to the shares of new and old companies
 Give loan assistance
 Underwriting of new issues etc.
 LIC and UTI also mobilize resources from public and place
them at the disposal of capital market
flowchart
Why is regulation required?
 Absence of perfect competition  role of regulator becomes
important
 The regulator ensures that the market participants behave in
a certain manner so that the securities markets continue to
be a major source of finance for the corporate sector and the
government while protecting the interests of investors.
Regulators
 Department of Economic Affairs (DEA),
 the Ministry of Company Affairs (MCA),
 the Reserve Bank of India (RBI), and
 SEBI
Regulatory framework
 the SEBI Act, 1992;
 the Companies Act, 1956, which sets the code of conduct for the
corporate sector in relation to issuance, allotment, and transfer of
securities, and disclosures to be made in public issues;
 the Securities Contracts (Regulation) Act, 1956, which provides
for the regulation of transactions in securities through control over
stock exchanges;
 the Depositories Act, 1996 which provides for electronic
maintenance and transfer of ownership of demat (dematerialized)
shares; and
 (e) the Prevention of Money Laundering Act, 2002.
SEBI Act
 Statutory powers:
 protecting the interests of investors in securities,
 promoting the development of the securities market, and
 regulating the securities market
 regulatory jurisdiction extends over corporates in the
issuance of capital and transfer of securities, in addition to all
intermediaries and persons associated with the securities
market
Securities Contracts (Regulation) Act,
1956
 This Act provides for the direct and indirect control of virtually all
aspects of securities trading and the running of stock exchanges,
and aims to prevent undesirable transactions in securities.
 It gives the Central Government regulatory jurisdiction over
 stock exchanges through a process of recognition and continued
supervision,
 contracts in securities, and
 the listing of securities on the stock exchanges.
 As a condition of recognition, a stock exchange complies with the
conditions prescribed by the Central Government.
 Organized trading activity in securities takes place on a specified
recognized stock exchange.
 The stock exchanges determine their own listing regulations,
which have to conform to the minimum listing criteria set out in
the Rules.
Depositories Act, 1996
 The Depositories Act, 1996 provides for the establishment of
depositories in securities with the objective of ensuring free
transferability of securities with speed, accuracy, and security by
 making securities of public limited companies freely transferable,
subject to certain exceptions;
 dematerializing the securities in the depository mode; and
 providing for the maintenance of ownership records in a book entry
form
 In order to streamline the settlement process, the Act envisages
the transfer of ownership of securities electronically by book
entry, without making the securities move from person to person
Companies Act, 1956
 It deals with the issue, allotment, and transfer of securities, as
well as various aspects relating to company management
 It provides the standard of disclosure in:
 public issues of capital, particularly in the fields of company
management and projects,
 information about other listed companies under the same
management, and
 the management’s perception of risk factors
 It also regulates underwriting, the use of premium and
discounts on issues, rights, and bonus issues, the payment of
interest and dividends, the supply of annual reports, and
other information.
 Prevention of Money Laundering Act,
2002
 The primary objective of this Act is to:
 prevent money laundering, and
 to allow the confiscation of property derived from or involved in money
laundering
 According to the definition of “money laundering,” anyone who
acquires, owns, possess, or transfers any proceeds of crime, or
knowingly enters into any transaction that is related to the proceeds of
crime either directly or indirectly, or conceals or aids in the
concealment of the proceeds or gains of crime within India or outside
India commits the offence of money laundering.
 The Act also casts an obligation on the intermediaries, the banking
companies, etc. to furnish information of such prescribed transactions
to the Financial Intelligence Unit-India, to appoint a principal officer,
to maintain certain records, etc.