Financial Management

Module No.01
Introduction to Financial Management
What is finance? Define business finance
According to Khan and Jain, “Finance is the art and science of managing money”.
According to the Wheeler, “Business finance is that business activity which concerns with the
acquisition and conversation of capital funds in meeting financial needs and overall objectives of a
business enterprise”.
According to the Guthumann and Dougall, “Business finance can broadly be defined as the
activity concerned with planning, raising, controlling, administering of the funds used in the
business”.
In the words of Parhter and Wert, “Business finance deals primarily with raising, administering
and disbursing funds by privately owned business units operating in nonfinancial fields of
industry”.
What is financial Management? Explain the Functions of Financial Management?
The term financial management has been defined by Solomon, “It is concerned with the efficient
use of an important economic resource namely, capital funds”.
The most popular and acceptable definition of financial management as given by S.C. Kuchal is
that “Financial Management deals with procurement of funds and their effective utilization in the
business”.
Howard and Upton : Financial management “as an application of general managerial principles to
the area of financial decision-making.
Weston and Brigham : Financial management “is an area of financial decision-making,
harmonizing individual motives and enterprise goals”.
Joshep and Massie : Financial management “is the operational activity of a business that is
responsible for obtaining and effectively utilizing the funds necessary for efficient operations.
Thus, Financial Management is mainly concerned with the effective funds management in the
business.
Functions of Financial Management
Investment decisions: These decisions relate to the selection of assets in which funds will be
invested by a firm. Funds procured from different sources have to be invested in various kinds of
assets. Long term funds are used in a project for various fixed assets and also for current assets. The
investment of funds in a project has to be made after careful assessment of the various projects
through capital budgeting. A part of long term funds is also to be kept for financing the working
capital requirements. Asset management policies are to be laid down regarding various items of
current assets. The inventory policy would be determined by the production manager and the
finance manager keeping in view the requirement of production and the future price estimates of
raw materials and the availability of funds.
Financing decisions: These decisions relate to acquiring the optimum finance to meet financial
objectives and seeing that fixed and working capital are effectively managed. The financial
manager needs to possess a good knowledge of the sources of available funds and their respective

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costs and needs to ensure that the company has a sound capital structure, i.e. a proper balance
between equity capital and debt.
Dividend decisions: These decisions relate to the determination as to how much and how
frequently cash can be paid out of the profits of an organisation as income for its
owners/shareholders. The dividend decision thus has two elements – the amount to be paid out and
the amount to be retained to support the growth of the organisation, the latter being also a financing
decision; the level and regular growth of dividends represent a significant factor in determining a
profit-making company’s market value, i.e. the value placed on its shares by the stock market.
Liquidity Decision
It is very important to maintain a liquidity position of a firm to avoid insolvency. Firm’s
profitability, liquidity and risk all are associated with the investment in current assets. In order to
maintain a tradeoff between profitability and liquidity it is important to invest sufficient funds in
current assets. But since current assets do not earn anything for business therefore a proper
calculation must be done before investing in current assets.
Explain the Scope of Financial Management?
Financial management evolved gradually over the past 50 years. The evolution of financial
management is divided into three phases. Financial Management evolved as a separate field of
study at the beginning of the century. The three stages of its evolution are:
The Traditional Phase: During this phase, financial management was considered necessary only
during occasional events such as takeovers, mergers, expansion, liquidation, etc. Also, when taking
financial decisions in the organisation, the needs of outsiders (investment bankers, people who lend
money to the business and other such people) to the business was kept in mind.
The Transitional Phase: During this phase, the day- to-day problems that financial managers
faced were given importance. The general problems related to funds analysis, planning and control
were given more attention in this phase.
The Modern Phase: Modern phase is still going on. The scope of financial management has
greatly increased now. It is important to carry out financial analysis for a company. This analysis
helps in decision making. During this phase, many theories have been developed regarding
efficient markets, capital budgeting, option pricing, valuation models and also in several other
important fields in financial management. Based on financial management guru Ezra Solomon’s
concept of financial management, following aspects are taken up in detail under the modern phased
of financial management:
(a) Determination of size of the enterprise and determination of rate of growth.
(b) Determining the composition of assets of the enterprise.
(c) Determining the mix of enterprise’s financing i.e. consideration of level of debt to equity, etc.
(d) Analysis, planning and control of financial affairs of the enterprise.
Until the middle of this century, its scope was limited to procurement of funds under major events
in the life of the enterprise such as promotion, expansion, merger, etc. In the modern times, the
financial management includes besides procurement of funds, the three different kinds of decisions
as well namely investment, financing and dividend.
Explain the relationship of Financial Management with Related Disciplines?
As an integral part of the overall management, financial management is not a totally independent
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area. It draws heavily on related disciplines and areas of study namely economics, accounting,
production, marketing and quantitative methods. Even though these disciplines are inter- related,
there are key differences among them. Some of the relationships are being discussed below:
Financial Management and Economics
Economic concepts like micro and macroeconomics are directly applied with the financial
management approaches. Investment decisions, micro and macro environmental factors are closely
associated with the functions of financial manager. Financial management also uses the economic
equations like money value discount factor, economic order quantity etc. Financial economics is
one of the emerging area, which provides immense opportunities to finance, and economical areas.
Financial Management and Accounting: The relationship between financial management and
accounting are closely related to the extent that accounting is an important input in financial
decision making. In other words, accounting is a necessary input into the financial management
function.
Financial accounting generates information relating to operations of the organisation. The outcome
of accounting is the financial statements such as balance sheet, income statement, and the
statement of changes in financial position. The information contained in these statements and
reports helps the financial managers in gauging the past performance and future directions of the
organisation.
Though financial management and accounting are closely related, still they differ in the treatment
of funds and also with regards to decision making. Some of the differences are:-
Treatment of Funds
In accounting, the measurement of funds is based on the accrual principle i.e. revenue is
recognised at the point of sale and not when collected and expenses are recognised when they are
incurred rather than when actually paid. The accrual based accounting data do not reflect fully the
financial conditions of the organisation. An organisation which has earned profit (sales less
expenses) may said to be profitable in the accounting sense but it may not be able to meet its
current obligations due to shortage of liquidity as a result of say, uncollectible receivables. Such an
organisation will not survive regardless of its levels of profits.
Whereas, the treatment of funds, in financial management is based on cash flows. The revenues
are recognized only when cash is actually received (i.e. cash inflow) and expenses are recognized
on actual payment (i.e. cash outflow). This is so because the finance manager is concerned with
maintaining solvency of the organisation by providing the cash flows necessary to satisfy its
obligations and acquiring and financing the assets needed to achieve the goals of the organisation.
Thus, cash flow based returns help financial managers to avoid insolvency and achieve desired
financial goals.
Decision - making
The purpose of accounting is to collect and present financial data on the past, present and future
operations of the organization. The financial manager uses these data for financial decision making.
It is not that the financial managers cannot collect data or accountants cannot make decisions. But
the chief focus of an accountant is to collect data and present the data while the financial manager’s
primary responsibility relates to financial planning, controlling and decision making. Thus, in a
way it can be stated that financial management begins where accounting ends.
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Financial Management and Other Related Disciplines: For its day to day decision making
process, financial management also draws on other related disciplines such as marketing,
production and quantitative methods apart from accounting. For instance, financial managers
should consider the impact of new product development and promotion plans made in marketing
area since their plans will require capital outlays and have an impact on the projected cash flows.
Likewise, changes in the production process may require capital expenditures which the financial
managers must evaluate and finance. Finally, the tools and techniques of analysis developed in the
quantitative methods discipline are helpful in analyzing complex financial management problems.
Discuss in detail the Objectives of Financial Management? Why profit maximization
fails to be consistent with wealth maximization/ why is wealth maximization a better
goal than profit maximization?
Efficient financial management requires the existence of some objectives or goals because
judgment as to whether or not a financial decision is efficient must be made in the light of some
objective. Objectives of Financial Management may be broadly divided into two parts such as:
 Profit maximization
 Wealth maximization
Profit Maximization: It has traditionally been argued that the primary objective of a company is to
earn profit; hence the objective of financial management is also profit maximisation. This implies
that the finance manager has to make his decisions in a manner so that the profits of the concern are
maximized. Each alternative, therefore, is to be seen as to whether or not it gives maximum profit.
However, profit maximization cannot be the sole objective of a company. It is at best a limited
objective. If profit is given undue importance, a number of problems can arise. Some of these have
been discussed below:
(i) The term profit is vague. It does not clarify what exactly it means. It conveys a different
meaning to different people. For example, profit may be in short term or long term period; it
may be total profit or rate of profit etc.
(ii) Profit maximization has to be attempted with a realization of risks involved. There is a
direct relationship between risk and profit. Many risky propositions yield high profit. Higher
the risk, higher is the possibility of profits. If profit maximization is the only goal, then risk
factor is altogether ignored. This implies that finance manager will accept highly risky
proposals also, if they give high profits. In practice, however, risk is very important
consideration and has to be balanced with the profit objective.
(iii) Profit maximization as an objective does not take into account the time pattern of
returns. Proposal A may give a higher amount of profits as compared to proposal B, yet if the
returns of proposal A begin to flow say 10 years later, proposal B may be preferred which may
have lower overall profit but the returns flow is more early and quick.
(iv) Profit maximization as an objective is too narrow. It fails to take into account the social
considerations as also the obligations to various interests of workers, consumers, society, as
well as ethical trade practices. If these factors are ignored, a company cannot survive for long.
Profit maximization at the cost of social and moral obligations is a short-sighted policy.
Wealth / Value Maximization: The shareholder value maximization model holds that the primary
goal of the firm is to maximize its market value and implies that business decisions should seek to
increase the net present value of the economic profits of the firm.

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Favourable Arguments for Wealth Maximization
 Wealth maximization is superior to the profit maximization because the main aim of the
business concern under this concept is to improve the value or wealth of the shareholders.
 Wealth maximization considers the comparison of the value to cost associated with the
business concern. Total value detected from the total cost incurred for the business
operation. It provides extract value of the business concern.
 Wealth maximization considers both time and risk of the business concern.
 Wealth maximization provides efficient allocation of resources.
 It ensures the economic interest of the society.
Using Ezra Solomon’s symbols and methods, the net present worth can be calculated as shown
below:
i) W=V–C
Where,
W = Net present worth; V = Gross present worth;
C = Investment (equity capital) required to acquire the asset or to purchase the course of
action.
ii) V = E/K
Where,
E = Size of future benefits available to the suppliers of the input capital;
K = The capitalization (discount) rate reflecting the quality (certainty/ uncertainty) and
timing of benefit attached to E.
iii) E = G-(M+T+I)
Where,
G= Average future flow of gross annual earnings expected from the course of action, before
maintenance charges, taxes and interest and other prior charges like preference dividend;
M= Average annual reinvestment required to maintain G at the projected level;
T=Expected annual outflow on account of taxes;
I=Expected flow of annual payments on account of interest, preference dividend and
other prior charges.
iv) The operational objective of financial management is the maximization of W in Point
(i) above
The W (Wealth) can also be expressed symbolically by a short-cut method as follows:-
W = A1/(1+K) + A2/(I+K) + …. + An/(1+K) - C
Where,
A1, A2…... An represents the stream of cash flows expected to occur from a course of action
over a period of time;
K is the appropriate discount rate to measure risk and timing; and
C is the initial outlay to acquire that asset or purse the course of action.
Owing to limitation (timing, social consideration etc.) in profit maximization, in today’s real
world situations which is uncertain and multi-period in nature, wealth maximization is a better
objective. Where the time period is short and degree of uncertainty is not great, wealth
maximization and profit maximization amount to essentially the same.
Distinguish between profit maximisation and wealth maximisation?
In any company, the management is the decision taking authority. As a normal tendency the
management may pursue its own personal goals (profit maximization). But in an organization
where there is a significant outside participation (shareholding, lenders etc.), the management may
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not be able to exclusively pursue its personal goals due to the constant supervision of the various
stakeholders of the company-employees, creditors, customers, government, etc.
Every entity associated with the company will evaluate the performance of the management from
the fulfillment of its own objective. The survival of the management will be threatened if the
objective of any of the entities remains unfulfilled.
The wealth maximization objective is generally in accord with the interests of the various groups
such as owners, employees, creditors and society, and thus, it may be consistent with the
management objective of survival.
Owing to limitation (timing, social consideration etc.) in profit maximization, in today’s real
world situations which is uncertain and multi-period in nature, wealth maximization is a better
objective. Where the time period is short and degree of uncertainty is not great, wealth
maximization and profit maximization amount to essentially the same.
The table below highlights some of the advantages and disadvantages of both profit maximization
and wealth maximization goals:-
Goal Objective Advantages Disadvantages
Profit Large amount I. Easy to calculate I. Emphasizes the short
Maximizatio of profits profits term gains
n II. Easy to determine II. Ignores risk or
the link between uncertainty.
financial decisions III. Ignores the timing of
and profits. returns or benefits.
IV. Requires immediate
resources.
Shareholders Highest Market I. Emphasizes the I. Offers no clear
Wealth value of shares. long term gains. relationship between
Maximisation II. Recognizes the financial decision and
risk or uncertainty. share price.
III. Recognizes the II. Can lead to management
timing of returns anxiety and frustration.
or benefits.
IV. Considers
shareholders
returns.

Explain the emerging role of financial managers, in India/ Explain the changing role
of financial manager in the present scenario.
Modern financial management has come a long way from the traditional corporate finance. As the
economy is opening up and global resources are being tapped, the opportunities available to
finance managers virtually have no limits.
A new era has ushered during the recent years for chief financial officers. His role assumes
significance in the present day context of liberalization, deregulation and globalisation. The chief
financial officer of an organisation plays an important role in the company’s goals, policies, and
financial success. His responsibilities include:

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 Financial analysis and planning: Determining the proper amount of funds to employ in the
firm, i.e. designating the size of the firm and its rate of growth.
Investment decisions: The efficient allocation of funds to specific assets.
 Financing and capital structure decisions: Raising funds on favourable terms as possible
i.e. determining the composition of liabilities.
 Management of financial resources (such as working capital).
 Risk management: Protecting assets.
Emerging Issues/Priorities Affecting the Future Role of CFO
Regulation: Regulation requirements are increasing and CFOs have an increasingly personal
stake in regulatory adherence.
Globalization: The challenges of globalization are creating a need for finance leaders to
develop a finance function that works effectively on the global stage and that embraces
diversity.
Technology: Technology is evolving very quickly, providing the potential for CFOs to
reconfigure finance processes and drive business insight through ‘big data’ and analytics.
Risk: The nature of the risks that organizations face is changing, requiring more effective risk
management approaches and increasingly CFOs have a role to play in ensuring an
appropriate corporate ethos.
Transformation: There will be more pressure on CFOs to transform their finance functions to
drive a better service to the business at zero cost impact.
Stakeholder Management: Stakeholder management and relationships will become
important as increasingly CFOs become the face of the corporate brand.
Strategy: There will be a greater role to play in strategy validation and execution, because the
environment is more complex and quick changing, calling on the analytical skills CFOs can
bring.
Reporting: Reporting requirements will broaden and continue to be burdensome for CFOs.
Talent and Capability: A brighter spotlight will shine on talent, capability and behaviors in
the top finance role.

Long Term Sources of Finance: Long term financing means capital requirements for a period of
more than 5 years to 10, 15, 20 years or may be more depending on other factors. Capital
expenditures in fixed assets like plant and machinery, land and building etc of a business are
funded using long term sources of finance. Part of working capital which permanently stays with
the business is also financed with long term sources of finance. Long term financing sources can be
in form of any of them:
 Share Capital or Equity Shares
 Preference Capital or Preference Shares
 Retained Earnings or Internal Accruals
 Debenture / Bonds
 Term Loans from Financial Institutes, Government, and Commercial Banks
 Venture Funding
 Asset Securitization/ Leasing
 International Financing by way of Euro Issue, Foreign Currency Loans, ADR, GDR etc.
Equity shares:
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Shares and Stock are synonymous in usage. Shares are the expression of smaller units of Share
capital of the organization.
Right of Equity Shares:
Sec. 85(2) of the Companies Act, 1956 expresses the right of the equity shareholders who hold the
equity shares
 To vote
 To control the management
 To share the profits
 To claim on the residual portion during the winding up
 To exercise pre-emptive
 To apply the court
 To receive the copy of the statutory report, copy of the annual accounts
 To apply the central government for AGM - failure on the part of the company
 To apply company law board for Extraordinary general meeting
Preference Shares:
These types of shares are annexed with preferential rights over the equity shares in sharing the
benefits organization at the moment of declaration. It is nothing but the combination of both equity
shares and debentures; It has some features of equity shares and debenture through redemption. The
dividends are normally paid only to the tune of fixed rate which was agreed only at the moment of
issue in between the issuing company and investors. The dividends are normally declared by them
only subject to the availability of profits.
Type of Preference Shares: The following are the various type of preference shares which the
company normally issues:
 Cumulative Preference Shares
 Non Cumulative Preference Shares
 Convertible preference shares
 Redeemable preference shares
 Non redeemable preference shares
 Participating preference shares
 Non Participating preference shares
Debentures
Sec 2(12) of the Companies Act defines "Debenture includes debenture stock, bonds and any other securities
of a company whether constituting a charge on the assets of the company". Debenture is an evidencing
document i.e., long-term promissory note.
Unique Features of the Debentures
 Debentures are issued on indebtedness
 It is an instrument which indicates the time/date schedule of repayment of principal or interest
 The Charge is created on the assets of the company; to protect the interest of lenders. If any default
arises - the due amount of either principal or interest will be claimed through direct or debenture
trustees action for the realization assets in order to secure the debt
Types of Debentures: The following are the various type of debentures which the company
normally issues:
 Redeemable Debentures
 Irredeemable Debentures
 Fully Convertible Debentures
 Non Convertible Debentures
 Secured or Mortgage Debenture
Retained Profits: Accumulated large profits are also considered to be good source of financing
long-term capital requirements. It is the best and cheapest source of finance. It creates no charge
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on future profits. Retained profits may be represented by various uncommitted reserves and
surpluses or specific reserves created out of profits.
Term Loans from Banks: Many industrial development banks, cooperative banks and commercial
banks grant medium term loans for a period of 3-5 years. There are many specialized financial
institutions established by the Central and State governments which give long term loans at
reasonable rates of interest.
Venture Capital: Venture capital is money provided by investors to startup firms and small
businesses with perceived long-term growth potential. This is a very important source of funding
for startups that do not have access to capital markets. It typically entails high risk for the investor,
but it has the potential for above-average returns.
Lease Contracts: A lease is a legal document outlining the terms under which one party agrees to
rent property from another party. A lease guarantees the lessee (the renter) use of an asset and
guarantees the lessor (the property owner) regular payments from the lessee for a specified number
of months or years. Both the lessee and the lessor must uphold the terms of the contract for the
lease to remain valid.
Angel Investor: An angel investor or angel (also known as a business angel, informal investor,
angel funder, private investor, or seed investor) is an affluent individual who provides capital for a
business start-up, usually in exchange for convertible debt or ownership equity.
Private Equity: Private equity is equity capital that is not quoted on a public exchange. Private
equity consists of investors and funds that make investments directly into private companies or
conduct buyouts of public companies that result in a delisting of public equity. Capital for private
equity is raised from retail and institutional investors, and can be used to fund new technologies,
expand working capital within an owned company, make acquisitions, or to strengthen a balance
sheet.
Warrants: These are nothing but Bearer documents which are title to buy the specified number of
Equity shares at specified price during the future period. The life period of the warrants are
normally too long. The warrants are normally issued by the company only in order to attract the
issue of fixed bearing securities viz preference shares and debentures.
Convertible Security: A convertible security is a security that can be converted into another
security. Convertible securities may be convertible bonds or preferred stocks that pay regular
interest and can be converted into shares of common stock (sometimes conditioned on the stock
price appreciating to a predetermined level).
What is Behavioural Finance? 3 Marks
A field of finance that proposes psychology-based theories to explain stock market abnormalities.
In other words, Behavioural finance is the study of the influence of psychology on the behaviour of
financial practitioners and the subsequent effect on markets.
Psychological Traits affecting financial decisions
 Overconfidence
 Representative bias
 Self-control
 Regret Minimization
What is Financial Engineering? 3 Marks
Financial engineering involves the design, development, and the implementation of innovative
financial instruments and processes and formulation of creative solutions to problems in finance.
Types
 Financial System engineering
 Financial Institution engineering
 Process engineering
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  Product engineering
What is Risk Management? Explain its process? 3/7 Marks
Risk management is the identification, assessment, and prioritization of risks followed by
coordinated and economical application of resources to minimize, monitor, and control the
probability and/or impact of unfortunate events.
In other words, Risk management refers to the practice of identifying potential risks in advance,
analyzing them and taking precautionary steps to reduce/curb the risk.
Steps in Risk Management:
1. Identify a company’s current risk profile and set a target risk profile.
2. Achieve the target risk profile by coordinating resources and executing transactions.
3. Evaluate the altered risk profile.
What is Financial Modeling? 3 Marks
A financial Model is a system of mathematical equations, logic and data that describes the
relationships among financial variables, that attempts to answer a particular financial problem.
Types:
 Optimization Model
 Simulation Model
 Mathematical Model
 Computer Models – Spread Sheets

Financial System:
The term Financial System is a set of inter related activities or services working together to achieve
some pre determine purpose or goal. It includes different markets, the institutions, instruments,
services, investments, and capital formation. The Indian financial system has established a strong
link between both savings and investments by creating a unique mechanism through which varied
economic activities are created, sustained and development.
Financial system includes many institutions and the mechanism which affects the generation of
savings, mobilization of savings and effective distribution of savings. Thus Indian financial system
performs a crucial role known as capital formation. It is for this reason that the financial system in
sometimes called the Financial Market .The purpose of financial market is to mobilise savings
effectively and allocate the same efficiently among the investors
According to Christy, the objective of the financial system is to “Supply funds to various sectors
and activities of the economy in ways that promote the fullest possible utilization of resources
without the destabilizing the consequence of prize level changes or unnecessary interference with
individual desires.”
According to Robinson, the primary function of the system is “To provide a link between savings
and investment for the creation of new wealth and to permit portfolio adjustment in the
composition of the existing wealth.”

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A financial system or financial sector functions as an intermediary and facilitates the flow of funds
from the areas of surplus of the deficit. It is a composition of various institutions, markets,
regulations and laws, practices money managers, analyst transactions and claims and liabilities.
“The purpose of financial markets is to allocate savings efficiently in an economy to ultimate users
either for investment in real assets or for consumption.”- VAN HORNE
From the above definitions it can be concluded that the primary function of the financial system is
the mobilisation of savings, their distribution for Industrial investment and simulating capital
formation to accelerate the process of Economic Growth.
Functions of Financial System
The financial system of a country performs certain valuable functions for the economic growth of
that country. The main functions of a financial system may be briefly discussed as below:
1. Saving function: An important function of a financial system is to mobilize savings and
channelize them into productive activities. It is through financial system the savings are
transformed into investments.
2. Liquidity function: The most important function of a financial system is to provide money and
monetary assets for the production of goods and services. Monetary assets are those assets which
can be converted into cash or money easily without loss of value. All activities in a financial system
are related to liquidity-either provision of liquidity or trading in liquidity.
3. Payment function: The financial system offers a very convenient mode of payment for goods
and services. The cheque system and credit card system are the easiest methods of payment in the
economy. The cost and time of transactions are considerably reduced.
4. Risk function: The financial markets provide protection against life, health and income risks.
These guarantees are accomplished through the sale of life, health insurance and property insurance
policies.
5. Information function: A financial system makes available price-related information. This is a
valuable help to those who need to take economic and financial decisions. Financial markets
disseminate information for enabling participants to develop an informed opinion about investment,
disinvestment, reinvestment or holding a particular asset.
6. Transfer function: A financial system provides a mechanism for the transfer of the resources
across geographic boundaries. 7. Reformatory functions: A financial system undertaking the
functions of developing, introducing innovative financial assets/instruments services and practices

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and restructuring the existing assts, services etc, to cater the emerging needs of borrowers and
investors (financial engineering and re engineering).
8. Other functions: It assists in the selection of projects to be financed and also reviews
performance of such projects periodically. It also promotes the process of capital formation by
bringing together the supply of savings and the demand for investible funds.
Financial System-Various Parts and Types of Classification

These components are:

1) Financial Institutions
2) Financial Markets
3) Financial Instruments
4) Financial Services
Financial Institutions: Financial institutions are the participants in a financial market. These
institutions collect resources by accepting deposits from individuals and institutions and lend them
to trade, industry and others. They accept deposits, grant loans and invest in securities. As can be
seen from Figure 1.1 these institutions can be classified into, Regulatory, Intermediaries, Non-
intermediaries, and Others. These institutions unlike commercial organizations deal with only
financial assets like; deposits, securities, loans, etc. On the basis of the nature of activities, financial
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institutions may be classified as: (a) Regulatory and promotional institutions, (b) Banking
institutions, and (c) Non-banking institutions.
Financial Markets: Financial markets are another part or component of financial system. This is a
place or mechanism where funds or savings are transferred from surplus units to deficit units.
Financial market deals in financial securities (or financial instruments) and financial services.
These markets can be broadly classified into money markets and capital markets. Money market
deals with short-term claims or financial assets (less than a year) whereas capital markets deal with
those financial assets which have maturity period of more than a year This classification is artificial
as both these markets perform the same function of transferring surplus funds to needy units.
Another classification could be primary markets and secondary’ markets. Primary markets deal in
new issue of securities whereas secondary markets deal with securities which are already issued
and available in the market. Primary markets by issuing new securities mobilise the savings
directly. Secondary markets provide liquidity to the securities and thereby indirectly help in
mobilising the savings. The participants in the financial markets are corporations, financial
institutions, individuals and the government. These participants trade in financial products in these
markets. They trade either directly or through brokers and dealers.
Financial Instruments: Financial instruments are the financial assets,
securities and claims. As already stated, the commodities that are traded or dealt in a financial
market are financial assets or securities or financial instruments. Financial assets represent claims
for the payment of a sum of money sometime in the future (repayment of principal) and/or a
periodic payment in the form of interest or dividend. Financial liabilities are the counterparts of
financial assets. There is a variety of securities in the financial markets as the requirements of
lenders and borrowers are varied. Broadly speaking the financial instruments can be classified as
tradable and non tradable. For example financial assets like deposits with banks, companies and
post offices, insurance policies, NSCs, provident funds and pension funds are not tradable.
Securities (included in financial assets) like equity shares and debentures, or government securities
and bonds are tradable
Let us understand the characteristics of the financial instruments
a) Liquidity: Financial instruments provide liquidity. These can be easily and quickly converted
into cash
b) Collateral value: Financial instruments can be pledged for getting loans.
c) Transferability: Financial instruments can be easily transferred from person to person

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d) Trading- Financial instruments facilitate easy trading in the market
Financial Services: Financial services include the services offered by both types of companies –
Asset Management Companies and Liability Management Companies. The former include the
leasing companies, mutual funds, merchant bankers, issue/portfolio managers. The latter comprises
the bill discounting houses and acceptance houses. The financial services help not only to raise the
required funds but also ensure their efficient deployment. They help to decide the financing mix
and extend their services up to the stage of servicing of lenders. In order to ensure an efficient
management of funds, services such as bill discounting, factoring of debtors, parking of short term
funds in the money market, e-commerce and securitisation of debts are provided by the financial
services firms. Besides banking and insurance, this sector provides specialised services such as
credit rating, venture capital financing, lease financing, factoring, mutual funds, merchant banking,
stock lending, depository, credit cards, housing finance, book building, etc. There are specialized
institutions such as Asset Reconstruction Companies, Credit Information Companies which are also
the main players in the financial services. These services are provided by stock exchanges,
specialised and general financial institutions, banks and insurance companies, and are regulated by
the Securities and Exchange Board of India (SEBI), Reserve Bank of India and the Department of
Banking and Insurance, Government of India, through a plethora of legislations. As the main focus
of this course is on financial services, you will have an opportunity to know more about these
financial service companies and the services offered by them in the subsequent Units and
Blocks.
Classification of Financial Markets
Financial markets are classified in multiple ways. The most common method adopted is on the
basis of maturity and trading. On these two criteria markets are classified under four segments.
Apart from this markets are classified as organised markets and unorganized markets.

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Money Market: The money market is the place or mechanism where short term instruments that
mature in a year or earlier are traded. The money market facilitates short-term financing and
assures the liquidity of short-term financial assets. The money market is a main place for Central
bank activities. It is significant in indicating changes in short-term interest rates, monetary policy
and availability of short term credit.
Capital Market
Capital market is a market where buyers and sellers engage in trade of financial securities like
ordinary shares, bond, debentures and securities of the government. etc. The buying/selling is
undertaken by participants such as individuals and institutions. While from a broader perspective,
Capital Market is viewed as a market of financial assets with long or infinite maturity, it actually
plays a very important role in mobilizing resources and allocating them to productive channels. It
converts financial assets into productive physical assets. It provides incentives to savers in the form
of interest or dividend to the investors. It leads to capital formation. In recent years there has been a
substantial growth in the Capital Market. The market consists of a number of players. They are
categorized as:
• Companies
• Financial Intermediaries
• Investors

Important functions and significance of the capital markets are

Growth of economy -The capital market helps in the proper allocation of resources from the people
who have surplus funds to those who are in need of funds Therefore it helps in the expansion of
industry and trade’ of both public and private sectors leading to balanced economic growth in the
country.
Promotion of Saving Habits: After the development of capital markets and the banking institutions
it provides facilities and provisions to the investors to save more. In the absence of Capital Markets,
people with surplus funds might have invested in unproductive assets like land or gold or might
have indulged in unnecessary spending.
Stable prices stocks: Apart from the mobilization of funds, capital markets help to stabilize the
prices of stocks. Reduction in speculative activities and providing capital to borrowers at a lower
interest rate help in the stabilization of the security prices.

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Ease of availability of Funds: Investments are made in Capital Markets on a continuous basis.
Both the buyers and sellers interact and trade their capital and assets through an online platform.
Stock Exchanges like NSE and BSE provide the platform for this and thus the transactions in the
capital market become easy.
Comparison of Money Market and Capital Market
Money Market Capital Market
Money market is a market for short-term funds. Capital market mainly deals in the trading of
The short-term is defined as a period of 364 medium and long term securities wherein the
days or less. In other words, the borrowing maturity period is more than one year
and repayment take place in 364 days or less.
Money market has no geographical constraints While the money markets are informal in nature
as that of a stock exchange. the capital markets are formal in nature.
The financial institutions dealing in monetary
assets may be spread over a wide geographical
area. Even though there are various centers of
money market such as Mumbai, Calcutta,
Chennai, etc., they are not separate independent
markets but are inter-linked and inter- related.
It is not a single homogeneous market. There are Expected returns are higher due to possibility of
various submarkets such as Call money market, capital gains in the long term and regular
Bill market, etc. The expected returns are lower dividends or bonus etc.
in this market due to shorter duration
Money market establishes a link between RBI Instruments traded in capital market include
and banks and provides information of monetary equity shares, preference shares, debentures
policy and management. Instruments such as bonds, and other long-term securities. Moreover
treasury bills commercial bills, certificate of the capital market securities are less liquid in
deposits and other short term securities are comparison to money market securities.
traded.
At present, scheduled commercial banks, Capital market securities involve greater risk in
cooperative banks, Discount and Finance House terms of repayment of the principal amount.
of India (DFHI) are participating in the money
market both as lenders and borrowers of short-

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term funds, while Life Insurance Corporation
of India (LIC), Unit Trust of India (UTI),
General Insurance Corporation of India (GIC),
Industrial Development Bank of India (IDBI)
and National Bank for Agriculture and Rural
Development (NABARD) are participating as
lenders. Money market securities are less risky
due to short period and sound financial position
of the issuers

Primary and Secondary Markets

The main components of the capital market in India are:
1) Primary Market -New-issue Market (Public issues)
2) Secondary Market (Stock Market)
1) Primary Market
Primary Market is a market for new issues or new financial claims. Hence, it is also called New
Issue Market. The primary market deals with these securities which are issued to the public for the
first time. There are three ways by which a company may raise capital in a primary market. They
are:
a) Public issue
b) Rights issue
c) Private Placement
2) Secondary Market
Secondary Market is a market for secondary sale of securities. In other words, securities which
have already passed through the new issue market are traded in this market. Generally, such
securities are quoted in the Stock Exchange and it provides a continuous and regular market for
buying and selling of securities. This market consists of all stock exchanges recognized by the
Government of India. The stock exchanges in India are regulated under the Securities Contracts
(Regulation) Act, 1956. The Bombay Stock Exchange is the principal stock exchange in India
which sets the tone of the other stock markets. The active secondary market stimulates the activity
in the primary market also.

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Comparison between Primary market and Secondary market
Primary Market (New Issue Market) Secondary Market
Sale of securities by new companies for raising In this market trading of existing shares only is
capital is undertaken. undertaken.
Securities are sold by the company to the Ownership of existing securities is exchanged
investor directly (or through an intermediary). between investors. The company is not involved
at all.
The primary market directly promotes capital The secondary market indirectly promotes
formation. capital formation. Enhances encash ability
(liquidity) of shares.
The activity in this market is for buying of Both buying and selling of securities is
securities, the securities cannot be sold there. undertaken through the stock exchange.
Price for a new issue is determined and decided Prices are determined by demand and supply for
by the management of the company. the security.
There is no fixed geographical location. Located at specified places.
Organized Markets and Unorganized markets
Organized Markets
The organized sector, comprises the Reserve Bank of India, the commercial banks (both
nationalized and private), the foreign banks and the cooperative banks. The financial institutions
like LIC, GIC, UTI and mutual funds are the other institutions which operate in the organized
sector. Regional rural banks, chit funds and post office. Savings banks also play a significant role in
the semi-urban areas and small towns.
Unorganised markets
The unorganized sector consists of the indigenous bankers and the money lenders called mahajans,
seths, shroffs, chettiars, etc. who pursue the banking business on traditional lines and their practices
and operations vary from place to place. Many of the indigenous bankers combine banking
business with trading and commission business, and mostly deal in hundis’ and promissory notes.
Money Market- sub markets and participants
Money markets play a key role in banks’ liquidity management and the transmission of monetary
policy. The money market is a market for shortterm funds, which deals in financial assets. The
period of maturity of assets dealt in this market is up to one year. Money market does not deal in

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cash or money it simply provides a market for credit instruments such as bills of exchange,
promissory notes, commercial paper, treasury bills, etc.

Call and notice Money Market

“Call Money” means borrowing or lending in unsecured funds on overnight basis; “Notice Money”
means borrowing or lending in unsecured funds for tenors up to and inclusive of 14 days excluding
overnight borrowing or lending; “Term Money” means borrowing or lending in unsecured funds
for
periods exceeding 14 days and up to one year. The transactions in money market are undertaken on
telephone, fax or Internet. The Indian money market consists of Reserve Bank of India,
Commercial banks, Co- operative banks, and other specialized Financial Institutions. The Reserve
Bank of India is the leader of the money market in India. Some Non- Banking Financial Companies
(NBFCs) and financial institutions like LIC, GIC, UTI, etc. also operate in the Indian money
market.
Participants
The following entities can participate in the Call, Notice and Term Money Markets, both as
borrowers and lenders:
a) Scheduled Commercial Banks (excluding Local Area Banks);
b) Payment Banks;
c) Small Finance Banks;
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d) Regional Rural Banks;
e) State Co-operative Banks, District Central Co-operative Banks and Urban
Co- operative Banks, and
f) Primary Dealers
The call/notice money market forms an important segment of the Indian money market. Call money
is required mostly by banks. Commercial banks borrow money without collateral from other banks
in order to maintain a minimum cash balance known as cash reserve ratio (CRR). In this market
surplus funds of financial institutions and banks are traded. In India call money markets are mainly
located in commercial centres like Mumbai, Kolkata, Chennai, Delhi and Ahmadabad.
Treasury Bill Market
This is a market for sale and purchase of short term government securities. These securities are
called as Treasury Bills (T-Bills) which are promissory notes or financial bills issued by the RBI on
behalf of the Government of India. There are two types of treasury bills. (i) Ordinary or Regular
Treasury Bills and (ii) Ad Hoc Treasury Bills. The maturity period of these securities promissory
note. The advantage of Treasury bills is that they are highly liquid instruments; the holder of
treasury bills can transfer it or get it discounted from RBI. These bills are normally issued at a price
less than their face value; and redeemed at face value. So the difference between the issue price and
the face value of the Treasury bill represents the interest on the investment. T-Bills are issued
through a bidding process at auctions. Banks, Financial institutions and corporations normally play
major role in the Treasury bill market.
Commercial Paper
Commercial Paper Market is another segment of money market. It is a market which deals in
commercial papers. Commercial paper (CP) is a popular instrument for financing working capital
requirements of companies. Commercial papers are unsecured short term promissory notes issued
by reputed, well established and big companies having high credit rating. They can be issued to (or
purchased by) individuals, banks, companies and other registered Indian corporate bodies. They are
issued for period ranging from 15 days to one year. Commercial papers are transferable by
endorsement and delivery.
Commercial Bill Market
When goods are sold on credit, the seller draws a bill of exchange on the buyer for the amount due.
The buyer accepts it immediately and agrees to pay the amount mentioned therein after a certain
specified date. This bill is called trade bill. The seller of goods have an option to retain the bill till

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maturity or get it discounted through a banker so that the can get cash immediately. When trade
bills are accepted by commercial banks, they are called commercial bills. The bank discounts the
bills given by their clients. A certain amount known as discount is deducted from the amount of the
bill and balance is paid to the client (seller). Commercial bills are widely used in both domestic and
foreign trade to discharge the business obligations.
Certificates of Deposits Market (CD)
CD is a certificate in the form of promissory note issued by banks against the short term deposits of
companies and institutions, received by the bank. Simply stated, it is a time deposit of specific
maturity and is easily transferable. It is a document of title to a time deposit. It is issued as a bearer
instrument and is negotiable in the market. It is payable on a fixed date. It has a maturity period
ranging from three to twelve months. It is issued at a discount. The discount rate is determined by
the issuing bank and the market. Banks and financial institutions are major issuers of CD. Banks
can raise money so as to increase their lending capacity. The CD market provides an opportunity
for banks with surplus funds to invest and maximize their earnings. CDs can be issued to
individuals, corporations, companies (including banks and Primary Dealers), trusts, funds,
associations, etc. Non- Resident Indians (NRIs) may also subscribe to CDs, but only on
nonrepatriable basis, which should be clearly stated on the Certificate.
Money Market Mutual Funds
Money market mutual funds (MMMF) are used to manage short-term cash needs. These funds are
open-ended in the debt fund category and deal only in cash or cash equivalents. Money market
securities have an average maturity of one-year; that is why these are termed as money market
instruments. They were introduced in India in April 1991 to provide an additional short-term
avenue to investors and to bring money market instruments within the reach of individuals. In
October 1997, MMMFs were permitted to invest in rated corporate bonds and debentures with a
residual maturity of up to one year, within the ceiling existing for Commercial Paper (CPs). The
minimum lockin period was also reduced gradually to 15 days, making the scheme more attractive
to investors. A significant feature of MMMFs or liquid Mutual Funds in India is that they have
been mainly catering to the short-term investment needs of institutional investors such as corporate
and banks whose redemption requirements are large and simultaneous.
Repurchase Agreements (REPO)
Repurchase agreements, or repos, are a form of short-term borrowing used in the money markets,
which involve the purchase of securities with an agreement to sell them back at a specific date,

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usually for a higher price. The difference between the purchase price and the original price is the
cost for the borrower. This cost of borrowing is called repo rate. In simple terms, it is an exchange
of a security (which acts as collateral) for cash. Repurchase agreements are commonly used to
provide short-term liquidity. A transaction is called a Repo when viewed from the perspective of
the seller of the securities and reverse when described from the point of view of the suppliers of
funds. Thus whether a given agreement is termed Repo or Reverse Repo depends largely on which
party initiated the transaction. Thus Repo is a transaction in which a participant (borrower) acquires
immediate funds by selling securities and simultaneously agrees to repurchase the same or similar
securities after a specified period at a specified price. It is also called ready forward contract.
Discount and Finance House of India
Discount & Finance House of India Limited was set up by the Reserve Bank of India (RBI), jointly
with Public Sector Banks and All-India Financial Institutions, as a sequel to Vaghul Working
Group recommendations, to deal in money market instruments. DFHI participates in transactions in
all the market segments, it borrows and lends in the call, notice and term money market, purchases
and sells treasury bills sold at auctions, commercial bills, CDs and CPs. The presence of DFHI as
an intermediary in the money market has helped the corporate entities, banks, and financial
institutions to invest their short-term surpluses in money market instruments. DFHI provides
liquidity to money market instruments and facilitates money market transactions of small and
medium sized institutions that are not regular participants in the market.
Unorganized market
Money lenders
Money-lending is probably the oldest form of business in the rural areas of India. In spite of the
spread of the banking network, the village mahajan continues to be an indispensable source of
credit. Money-lending laws were introduced by some of the State Govts. with an intention to curb
nonregulated indigenous lenders from charging exorbitant interest rates to borrowers. These laws
typically require licensing of money lenders, impose a ceiling on rate of interest that money lenders
can charge, and generally provide that a court shall not take cognizance of a matter filed by an
unlicensed money lender. Even though getting a valid license under the Money Lending Act helps
money lenders to carry on business lawfully and have legal recourse against the defaulters, one of
the major reasons for nonregistration is the ceiling on interest rate. Some of the money lenders are
not even aware about the requirement of such registration.
Indigenous bankers

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Indigenous bankers are private firms or individuals who operate as banks and as such both receive
deposits and give loans. Like banks, they are also financial intermediaries. They may be termed as
professional moneylenders whose primary business is not banking but money lending. The
indigenous bankers have been playing a significant role in the economic life of India. When
commercial banking had not developed, they were the main source of finance for agriculturists,
traders, businessmen, small industrialists, etc.
After nationalization of commercial banks and the spread of banking in urban and rural areas, the
activities of indigenous bankers have declined, but their importance has not become less because of
the difficulties still faced by the borrowers in getting loans from the banks.
The borrowers approach them directly and informally and get loans promptly and easily. They do
not have any fixed banking hours and do not enter into formalities and procedures followed by
commercial banks in advancing loans. That is why they are still popular with traders, businessmen,
agriculturists, and ordinary people. The indigenous bankers act as commission agents when they
purchase agricultural products on behalf of firms, mills, and trading houses. In this way, they again
help in the development of internal trade.
Capital Market- Functions and Participants
Capital market simply refers to a market for long term funds. These funds are subject to uncertainty
and risk. Capital market is a vehicle through which long term finance is channelized for the various
needs of industry, commerce, govt. and local authorities. It deals in ordinary shares, bonds,
debentures and stocks and securities of the government. Capital markets play a crucial role in the
economic development of a country. They provide financial resources required for the long-term
sustainable development of the economy.
Development of viable capital markets is therefore considered an important element in the macro-
financial policy toolkit, including for objectives such as financial stability and the transmission of
monetary policy.
Functions of a capital market
1) Facilitates long term investments by mobilizing long term savings.
2) Provides risk capital in the form of equity or quasi-equity to companies/entrepreneurs.
3) Provides liquidity platform enabling the investor to sell financial assets.
4) Provision of information efficiently to enable participants to undertake an informed opinion
about investment, disinvestment, reinvestment etc.
5) Provides a platform for quick valuation of instruments – both equity and debt.

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6) Safety of investors is ensured through insurance against market risk, through derivative trading
and default risk through investment protection fund.
7) Operational efficiency is ensured through: (a) simplified transaction procedures, lowering
settlement times, and (c) lowering transaction costs.
Players or Participants of Capital Market
As already stated, there are many players in the capital market. We will discuss about a few
important players as stated below
a)Companies
b) Financial Intermediaries
c) Investors
a. Companies:- Generally every public company can access the capital market. The companies
which are in need of finance for their projects can approach the market. The companies can
mobilise the resources for their long-term needs such as project cost, expansion and diversification
of projects and other expenditure items. In India, the companies should get the prior permission
from the SEBI (Securities Exchange Board of India) to raise the capital from the market.
b. Financial Intermediaries:- Financial intermediaries assist in the process of converting savings
into capital formation in the country. The intermediaries occupy a dominant role in the capital
formation which ultimately leads to the growth and prosperity. The major intermediaries
in the capital market are:
i) Merchant bankers
ii) Registrar to the Issue
iii) Bankers
iv) Brokers and sub-brokers
v) Underwriters
i) Merchant bankers: Merchant bankers play an important role in attracting public funds to capital
issues. They act as issue managers, lead managers or co-managers
ii) Registrars to the issue: Registrars are intermediaries who undertake all activities connected
with new issue management. They are appointed by the company in consultation with the merchant
bankers to the issue.
iii) Bankers: Some commercial banks act as collecting agents and some act as coordinating
bankers. Some bankers act as merchant bankers and some are brokers. They play an important role
in transfer, transmission and safe custody of funds.

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iv) Brokers: They act as intermediaries in purchase and sale of securities in the primary and
secondary markets. They have a network of sub brokers spread throughout the length and breadth
of the country.
v) Underwriters: Generally, investment bankers act as underwriters. They at times agree to take a
specified number of shares or debentures offered to the public, if the issue is not fully subscribed
by the public. Underwriters may be financial institutions, banks, mutual funds, brokers etc.
c) Investors- The capital market consists of large number of investors. The basic objectives of an
investor are to get good returns on his/her investment. An investor may desire to take away the
fund/s after a specific period. Therefore, safety is the most important factor while considering the
investment proposal. The investors comprise of financial and investment companies and the general
public companies. Usually, the individual savers are also treated as investors. Return is the reward
to the investors.
STOCK EXCHANGE
Stock market is a market place where investors can buy and sell securities. While the primary
market deals with only new issue of shares, debentures and bonds, the secondary market provides a
place for securities which have already been issued in an initial private or public offering. Stock
exchange ensures continuous and ready market for the securities. After the securities are issued in
primary market, they are traded in the secondary market by the companies issuing securities,
investors, brokers etc. Stock exchanges provide the opportunity for small as well as large investors
to own shares There has been vide ranging changes in the Indian securities market, especially in the
secondary market. Technological advancement and online-based transactions have modernized the
stock exchanges.
Stock exchanges are formal organizations, approved and regulated by the regulatory authorities of a
country. Trading in securities can be undertaken only by the members of the stock exchange. For
undertaking trading rules and regulations are prescribed for various types of transactions. There are
23 stock exchanges in India. Among them, two are national-level stock exchanges namely Bombay
Stock exchange (BSE) and National Stock Exchange (NSE). The rest 21 are Regional Stock
Exchanges (RSEs). As on 6th February 2022 there are 9 active stock exchanges in India.
Major Stock Exchanges in India
In India the first organized stock exchange was Bombay Stock Exchange. It was started in 1877.
Later on, the Ahmedabad Stock Exchange and Calcutta Stock Exchange were started in 1894 and
1908 respectively. Brief descriptions of major Stock Exchanges are given below:

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Bombay Stock Exchange (BSE)
Bombay Stock Exchange (BSE) is the oldest and the largest stock exchange in Asia. Bombay Stock
Exchange traces its history to the 1980s, when a dozen stockbrokers gathered under a banyan tree
in front of Mumbai’s Town Hall. As the number of brokers kept increasing this location kept
changing and finally moved to Dalal Street in 1874. The Bombay Stock Exchange was recognised
in May 1927 under the Bombay Securities Contracts Control Act of 1925. It is the first stock
exchange in the country to secure permanent recognition from the Government of India in 1956
under the Securities Contracts (Regulation) Act of 1956. BSE has started allowing its members to
set-up computer terminals outside the city of Mumbai. In 2005, BSE was given the status of a fully
fledged public limited company along with a new name as "Bombay Stock Exchange Limited". The
BSE has computerized its trading system by introducing BOLT (Bombay on Line Trading) since
March 1995. BSE is operating BOLT at 275 cities.
National Stock Exchange of India (NSE)
In the year 1991 Pherwani Committee recommended to establish National Stock Exchange (NSE)
in India. In 1992 the Government of India authorized IDBI for establishing this exchange. However
the trading started in 1994. It has a fully- automated screen-based electronic trading system. The
NSE does not have trading floors as in conventional stock exchanges. The trading is entirely screen
based with automated order machine. The screen provides entire market information at the press of
a button. NSE is the first exchange in the world to use satellite communication technology for
trading. Its trading system, called National Exchange for Automated Trading (NEAT), is a state
of-the-art client server based application. The brokers can sit in their own offices and trade on the
system which offers versatile trading solutions. The trading software provides all the options which
are available on a trading floor or through telephone trades. The screen provides entire market
information at the press of a button which the existing telephone trade or trading floor cannot
provide instantaneously. As the system provides for concealment of the identity of market
information continuously on a real time basis, it is a significant improvement over all the existing
traditional trading systems. The screen gives all the required information about the depth of the
market, the types of orders floating into the system, the best buy order value, the best buy price, the
best sell price, the order value available at the best sells price, the last traded price, all previous
trade that have taken place, outstanding orders of the concerned trading member, etc. Information is
dynamically updated. As market participants sit in their own offices they have all advantages of the
back office support and facility to get in touch with their constituents.

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Over the Counter Exchange of India (OTCEI)
The OTCEI was incorporated in October, 1990 as a Company under the Companies Act 1956. It
became fully operational in 1992 with opening of a counter at Mumbai. It is recognised by the
Government of India as a recognized stock exchange under the Securities Control and Regulation
Act 1956. It was promoted jointly by the financial institutions like UTI, ICICI, IDBI, LIC, GIC,
SBI, IFCI, etc. It was set up to provide small and medium sized enterprises access to the capital
markets and to investors a convenient mode of investments. It is a ring less electronic national
exchange listing entirely new companies, which will not be listed on any other exchange.

Companies engaged in investment, leasing, finance, hire purchase, amusement parks etc. and the
companies listed on any other stock exchange are not eligible for getting listed on OTCEI. Also,
listing is granted only if the issue is fully subscribed to by the public and sponsor. It handles both
primary issues and secondary transactions especially of those securities which are not listed in
stock exchanges. The Over the Counter market is a negotiated market, because prices are settled
through individual bargaining between buyers and sellers. In OTC market the business is not
conducted at any one place designated as market place. Some stocks trade in the Over the Counter
Market because the company is small or unknown or the company simply does not wish to list the
security on a stock exchange or stock is closely held. Thus, over the counter market is the only
place where certain stocks can be purchased or sold. Small companies or companies that do not
meet exchange listing requirements are traded in over the counter market that have limited
marketability and liquidity.

27 | P a g e

Strictly for internal circulation only. Questions and Answers typed and printed here are for the use of
27th batch of MBA students, AY - 2025, AKIM, Ballari.