COMPREHENSIVE EXAM

NOTES

Subject: Financial Market Operations

Units Covered: I – IV

Detailed, Well-Structured & Exam-

Focused Notes

Prepared By:
Satya Prakash Upadhyay
[Link] – 6th Semester
Microtek College of Management and
Technology
Badagaon, Varanasi

Session: 2024–2025
 Unit I: Financial Markets – An
Overview
1. Meaning of Financial Market
A financial market is a marketplace where buyers and sellers participate in
the trade of financial assets like shares, bonds, derivatives, currencies, etc. It
facilitates the mobilization of funds from savers to borrowers.

2. Significance of Financial Market

• Efficient fund allocation: It helps allocate resources to the most
productive sectors.
• Liquidity: Financial markets provide a platform to convert securities
into cash quickly.
• Capital formation: Encourages savings and investment, promoting
capital generation.
• Price discovery: Helps in determining the prices of traded financial
instruments through demand and supply.
• Economic growth: Supports development by funding businesses and
government projects.

3. Financial System and Its Significance

The financial system includes institutions (like banks, insurance companies),
markets (capital and money markets), instruments, and services that facilitate
financial transactions.
Components:
• Financial Institutions – Banks, insurance companies, NBFCs.
• Financial Markets – Money market, capital market.
• Financial Instruments – Shares, bonds, debentures, treasury bills, etc.
• Financial Services – Mutual funds, leasing, factoring, etc.
Significance:
• Promotes savings and investments.
• Enhances economic stability.
• Supports industrial and infrastructure development.
• Encourages entrepreneurship by offering capital.

4. Financial Markets in the Organized Sector

(a) Industrial Securities Market
Deals with securities issued by industrial and business enterprises.
• Includes equity shares, preference shares, debentures.
• Helps in raising long-term capital for industrial growth.

(b) Government Securities Market

• Deals with bonds and securities issued by the central/state
governments.
• Provides a risk-free investment option.
• Supports fiscal policies and government financing.
(c) Long-Term Loans Market
• Provides loans for a longer duration, usually more than 5 years.
• Offered by financial institutions like LIC, SIDBI, NABARD.
• Supports capital-intensive industries and infrastructure.
(d) Mortgages Market
• Deals in loans secured by real estate (residential or commercial
property).
• Includes housing finance institutions like HDFC, LIC Housing, etc.
(e) Financial Guarantee Market
• Institutions provide guarantees to lenders on behalf of borrowers.
• Ensures repayment, thus reducing lender’s risk.
• Examples: Credit guarantee schemes, export credit guarantee.

5. Money Market: Meaning and Structure

Meaning:
A money market is a segment of the financial market where short-term
borrowing, lending, buying and selling of financial instruments (maturity < 1
year) takes place.
Structure of Indian Money Market:
• Organized Sector:
o RBI
o Commercial Banks
o Cooperative Banks
o Financial Institutions
 • Unorganized Sector:
o Indigenous bankers
o Moneylenders
o Chit funds
Money Market Instruments:
• Treasury Bills
• Commercial Papers
• Certificates of Deposit
• Call Money
• Repo and Reverse Repo

6. Characteristics of a Developed Money Market

• Highly integrated with a central bank’s control
• Presence of a variety of credit instruments
• Efficient fund transfer system
• Availability of adequate funds
• Strong network of institutions
• Stability and transparency
 7. Significance of Indian Money Market
• Enables liquidity management for banks and financial institutions
• Provides a platform for short-term investment
• Helps in the transmission of monetary policy
• Facilitates cash flow for businesses and government

8. Defects of Indian Money Market

• Lack of integration between organized and unorganized sectors
• Shortage of funds and instruments
• Limited participation of foreign players
• Seasonal fluctuations in demand and supply
• Underdeveloped secondary market for instruments
• Inefficient interest rate structure
 Unit II: Capital Market
1. Meaning of Capital Market
The capital market is a segment of the financial market where long-term
financial instruments like shares, debentures, and bonds are traded. It
provides a platform for raising and investing funds for more than one year.
It is broadly divided into:
1. Primary Market (New Issue Market)
2. Secondary Market (Stock Exchange)

2. New Issue Market – Meaning and Functions

Meaning:
The New Issue Market (also known as the Primary Market) is where new
securities are issued and sold for the first time to the public.
Functions:
• Helps companies raise long-term capital
• Facilitates industrial and economic growth
• Mobilizes savings for investment in productive assets
• Determines the price of newly issued securities
• Provides an investment avenue to investors

3. Instruments of New Issues

• Equity Shares – Ownership shares with voting rights
 • Preference Shares – Fixed return shares, preference over equity
holders in dividend and capital
• Debentures/Bonds – Debt instruments with fixed interest
• Convertible Debentures – Debentures that can be converted into
equity
• Public Deposits – Direct borrowing from the public

4. Players in the New Issue Market

• Issuing Companies – Corporates raising funds
• Merchant Bankers – Help in issue management and underwriting
• Underwriters – Guarantee minimum subscription
• Registrars and Share Transfer Agents – Manage records of investors
• Bankers to the Issue – Handle collection of funds
• Advertising Agencies – Promote the issue
• Investors – Retail, institutional, or foreign investors

5. Issue Pricing and Marketing

Pricing Methods:
1. Fixed Price Issue – Price is pre-determined and disclosed in advance.
2. Book Building Method – Price is discovered based on investor
demand within a price band.
Marketing:
• Roadshows and investor meets
• Prospectus circulation
• Advertisements and public announcements
• Use of intermediaries like brokers and agents

6. Defects of New Issue Market

• Lack of investor awareness
• Poor pricing transparency in some cases
• Inefficient allotment process
• Inadequate regulatory oversight in earlier times
• Delays in listing and refunds
• Malpractices by intermediaries (in rare cases)

7. Remedies to Improve New Issue Market

• Strict SEBI regulations for transparency and fairness
• Online IPO applications (ASBA) for efficient allotment
• Mandatory disclosures and prospectus screening
• Increased investor education
• Efficient grievance redressal system
 Unit III: Secondary Market
1. Meaning of Secondary Market
The Secondary Market refers to the market where already issued securities
(shares, debentures, bonds, etc.) are bought and sold by investors. It is also
known as the Stock Exchange or Stock Market.
Purpose:
• Provides liquidity and marketability to existing securities.
• Enables price discovery through demand and supply.
• Offers investors the chance to exit their investment when needed.

2. Functions of the Secondary Market

1. Liquidity Provider
Investors can buy or sell securities any time, turning them into cash
easily.
2. Fair Price Determination
Market forces determine the prices of securities through trading
activity.
3. Safety and Regulation
SEBI regulates stock exchanges to ensure transparency, fairness, and
investor protection.
4. Mobilization of Savings
Encourages investment by providing an exit route to investors.
 5. Capital Allocation
Helps allocate capital efficiently by shifting funds to profitable
businesses through share value.
6. Economic Indicator
Acts as a barometer for the country's economic health. Rising indices
usually indicate investor confidence.

3. Role of Stock Exchanges

A stock exchange is an organized platform for the trading of securities. It
provides a regulated and transparent environment for transactions.
Key Stock Exchanges in India:
• NSE (National Stock Exchange)
• BSE (Bombay Stock Exchange)
• OTCEI (Over The Counter Exchange of India) – for small
companies, less active now
 4. Listing of Securities: Procedure and Legal Requirements
Listing:
It refers to the official admission of a company's securities to the stock
exchange for public trading.
Procedure:
1. Company applies to a recognized stock exchange.
2. Submits required documents (prospectus, balance sheet, board
resolution).
3. Stock exchange verifies the financial health and compliance.
4. Once approved, securities are listed and tradable.
Legal Requirements:
• Must comply with SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015
• Company must maintain regular disclosure of financial results,
shareholding patterns, and corporate governance standards.
 What are Public Stock Exchanges?
Public stock exchanges are official, organized, and government-
recognized platforms where securities such as shares, debentures, bonds,
and other financial instruments are bought and sold by the public. They are
open to all investors—individuals, institutions, foreign investors, etc.
They provide a regulated environment under the oversight of SEBI
(Securities and Exchange Board of India) to ensure transparency, investor
protection, and fair trading practices.

Key Features of Public Stock Exchanges

1. Open Access: Anyone who complies with regulations (e.g., KYC
norms) can participate in buying or selling securities.
2. Standardized Rules: Operations and trading are governed by uniform
rules framed by the stock exchange and SEBI.
3. Real-time Trading: Buy and sell orders are matched electronically
through order-driven systems.
4. Transparency: Prices, trade volumes, and financial disclosures are
made publicly available.
5. Liquidity: Investors can enter and exit investments quickly, providing
flexibility.
6. Listing Platform: Companies list their shares to raise public funds and
get exposure to a large investor base.

Examples of Public Stock Exchanges in India

1. BSE (Bombay Stock Exchange)
 o Established in 1875
o Oldest stock exchange in Asia
o Houses SENSEX – a benchmark index of top 30 companies
2. NSE (National Stock Exchange)
o Established in 1992
o First fully electronic stock exchange in India
o Hosts NIFTY 50 – index of 50 large-cap Indian companies
3. OTCEI (Over The Counter Exchange of India)
o Launched in 1992 for small companies
o Less active today due to dominance of NSE & BSE
4. MCX (Multi Commodity Exchange) (For commodities)
o Trades commodities like gold, silver, oil – not equities

Functions of Public Stock Exchanges

• Provide liquidity by enabling easy buying/selling
• Ensure fair price discovery
• Promote savings and investments
• Support economic development by aiding corporate fundraising
• Ensure investor protection through SEBI regulations

Eligibility for Companies to List on a Public Stock Exchange

• Minimum capital requirement (as per SEBI norms)
• Profitability and operational history
 • Transparency in financial reporting
• Corporate governance compliance
• Public offer through IPO or other SEBI-approved routes

Benefits to the Public/Investors

• Investment opportunities with potential for returns
• Ability to diversify investment portfolio
• Access to real-time prices and market data
• Trust in a regulated environment
• Easy exit through sale in secondary market

5. Functions of Market Intermediaries

a) Brokers
• Act as licensed middlemen between investors and the stock exchange.
• Execute buy/sell orders on behalf of clients.
• Earn commission/brokerage for services.
• Must be registered with SEBI and stock exchange.
b) Sub-brokers
• Assist brokers by acting as agents, especially in smaller cities.
• Not directly members of stock exchanges.
• Also need SEBI registration.
c) Market Makers
• Appointed intermediaries who provide continuous buy and sell
quotes.
• Ensure liquidity by being ready to trade at all times.
• Mostly found in less-liquid markets (like OTCEI earlier).
d) Jobbers
• Dealers who buy and sell securities on their own account.
• Profit from price difference, no direct dealing with the public.
• Rare in modern electronic trading environments.
e) Portfolio Consultants
• Advise clients on managing their investments.
• Design customized investment portfolios based on goals, risk appetite,
and market trends.
• Registered with SEBI as investment advisors.
f) Institutional Investors
• Large organizations like mutual funds, insurance companies, pension
funds, and banks.
• Trade in bulk and have a strong influence on market movements.
• Known for stable, long-term investments.
 6. Importance of Secondary Market
• Provides liquidity and flexibility to investors.
• Assists in capital formation by encouraging more people to invest.
• Enhances corporate governance, as listed companies must follow
disclosure norms.
• Reflects the health of the economy through stock index movements.
• Encourages global investors to participate in Indian markets.
 Unit IV: Investor Protection
•

• 1⃣ Why Investor Protection Matters

• Asymmetry of information: Companies & insiders know more than
small investors.
• Market integrity: Confidence in fair play keeps capital flowing.
• Systemic stability: Preventing frauds & failures protects the wider
economy.
• Social objective: Safeguards retail savers’ hard-earned money.

• 2⃣ Typical Investor Grievances on Stock Exchanges

• Area • Common problems

• • Delay / non-receipt of share certificates, demat

• Primary credits or refund orders after IPO
market • Misstatements in prospectus
• Mispricing & oversubscription issues

• • Fake / bad delivery of shares

• Secondary • Unauthorised trades by brokers / sub-brokers
market • Excess brokerage / hidden charges
• Front-running & price manipulation

• Corporate • • Non-receipt / wrong calculation of dividends,

actions bonus, rights, splits

• Demat / • • Delay in dematerialisation / rematerialisation

depository • Wrong debits / credits in demat a/c
• Area • Common problems

• Service & • • Mis-selling by advisors, portfolio consultants

conduct • Insider trading & rumours

• 3⃣ Mechanisms for Redressal & Removal of Grievances

• a. Stock-Exchange–Level Remedies
• Investor Service Centres (ISCs) – first point of contact.
• Arbitration Panels – quick, low-cost dispute resolution between
investor & broker.
• Investor Protection Fund (IPF) – compensates clients when a
defaulting member cannot pay.
• b. Depository Processes (NSDL & CDSL)
• Online complaint modules, mandatory resolution T+15 days.
• Escalation to Depository Participant (DP), then to Depository, then
SEBI-SCORES.
• c. Company Law Tribunals
• NCLT (National Company Law Tribunal) – handles oppression,
mismanagement, refusal of share transfer, etc.
• NCLAT – appellate body over NCLT & SEBI rulings.
• d. SEBI’s SCORES Portal
• Centralised online platform; time-bound resolution (30 days by entity +
30 days by SEBI).

• 4⃣ Demat Trading: Concept & Advantages

• Aspect • Details

• Holding & transferring securities electronically

• Meaning through a Depository (NSDL/CDSL) rather than
physical certificates.

• Investor ➜ opens Demat A/c with a DP ➜ orders

• Process routed via trading account ➜ trade settled T+1 in
demat form.

• • Eliminates theft, loss, forgery

• Faster settlement (T+1)
• Advantages • No stamp duty on transfer
• Odd-lot problem removed
• Lower transaction cost

• 5⃣ SEBI Guidelines for Investor Protection

• Primary Market
• Disclosure-based Regulation (DBR): Detailed prospectus, risk
factors, use of proceeds.
• Book-building norms: 75 % QIBs, price band ≤ 20 %.
• Minimum promoter contribution & lock-in.
• ASBA (Application Supported by Blocked Amount) – funds stay in
bank a/c till allotment.

• Secondary Market
• T+1 rolling settlement & Trade Guarantee Fund.
• Circuit breakers & price bands to curb volatility.
• Compulsory demat trading for most securities.
• Surveillance systems (SPAN margin, VaR) to manage risk.

• General Investor Interests

• Prohibition of Insider Trading Regulations, 2015
• LODR Regulations, 2015 – continuous disclosure, corporate
governance.
• Investment Adviser Regulations, 2013 – registration, fiduciary duty,
segregation of advisory & distribution.
• Buy-back & delisting norms ensure fair exit price.
• SMS/e-mail alerts for all demat & bank transactions.

• 6⃣ Role of NCLT & NCLAT in Investor Protection

• Tribunal • Key powers benefiting investors

• • Oppression & mismanagement petitions

(Sec 241-242, Companies Act 2013)
• Class action suits (Sec 245)
• NCLT
• Approval of compromises, arrangements & mergers
(Sec 230-232)
• Fast-track share transfer / transmission disputes

• • Hears appeals against NCLT-orders, SEBI, IBBI &

• NCLAT CCI decisions
• Ensures uniform jurisprudence & quicker final relief

• Recent Initiatives to Strengthen Investor Protection

• T+0 & Instant Settlement (pilot) for selected scrips.
• Online Dispute Resolution (ODR) platform being rolled out.
 • Enhanced ESG disclosures – Business Responsibility & Sustainability
Reporting (BRSR).
• Social Stock Exchange – safeguards for impact investors.
• Investor Education & Awareness Fund (IEPF) – unclaimed
dividends transferred; claims process streamlined.

8️⃣ Best Practices for Investors (Exam Tip!)

• Use SEBI-registered intermediaries only.
• Keep contact details & KYC updated with DP/broker.
• Enable two-factor authentication & view CAMS/KFIN consolidated
account statements monthly.
• Verify contract notes, demat credits same day.
• Escalate unresolved issues on SCORES within 60 days.