Financial Markets in India

• Financial markets are the centres that provide

facilities for buying and selling of financial assets.

• Financial assets are paper ( or electronic ) claims

on some issuer such as the government or a
corporate body.

• Important financial assets are

• Govt. securities
• Deposits with banks
• Equity shares, debentures
• Mutual fund units, Insurance policies
 Financial Markets in India

• Participants on the demand and supply sides of these

markets are financial institutions, brokers, borrowers,
lenders and savers

• The participants trade in financial products on these

markets either directly or through brokers on
organised exchanges or off –exchanges.
 Classification of Financial Markets
Unorganised markets
• Money lenders lend money to the public
• Indigenous bankers also collect deposits from public
• Regulations concerning their financial dealings are
inadequate.

Organised Markets
• Consist of standardised rules governing their financial
dealings
• High degree of institutions and instruments.
• Subject to control by regulators like RBI, SEBI, IRDA.
 Organised Markets
Organised markets can be classified into two categories
• Capital Market
• Money Market

Capital Market
• It is a market for financial assets which have a long term maturity
period ( more than one year )
• It’s function is to transfer resources from savers to producers.
• It may be further divided into three types
• A) Industrial Securities market
• B) Govt. Securities market
• C) Long term loan market
 Capital Market

A) Industrial Securities market

It is a part of the capital market where companies raise their long
term capital by issuing either shares or debentures.

The shares can be equity shares or pref. Shares

It consists of Primary market ( New Issue market ) and Secondary

market
 Capital Market

Primary market
Primary market is a market for issue of new financial claims.

It deals with those securities which are issued to the public for
the first time.

Borrowers exchange new financial securities for long term

funds.

It facilitates capital formation.

 Capital Market
Companies raise equity capital by
• Public issue of shares
• Rights issue of shares
• Private placement of shares

Secondary Market
It is a market for secondary sale of securities which were
already issued in primary market.
The equity shares are traded in the stock exchanges ( NSE
or BSE ) to provide a continous market for buying and selling of
shares.
 Capital Market
B) Govt. Securities Market
It is market where Govt. securities are traded.

Govt. securities include securities issued by Central Govt, State

Govt and others like NABARD, REC.

Long term securities are traded in this capital market whereas

short term are traded in money market.

Major participants in this market are the commercial banks

because they need to buy these to satisfy their SLR requirements.
 Capital Market
C) Long Term Loan market
This market includes
• Term loan market
• Mortgage market
• Financial guarantee market

Banks play a vital role in this market by supplying long term loans to
corporate customers.

A mortgage loan is a loan against the security of immovable property.

Financial guarantee will be provided mainly by commercial banks and relate

to deferred payments for imports and exports and other loans.
 Importance of capital market

• Capital market serves as an important source for the productive use

of the economy’s savings.

• Absence of capital market acts as a deterrent factor to capital

formation and economic growth.

• It provides an avenue for investors, both retail and HNIs, to invest in

financial assets which are more productive than physical assets.

• It facilitates increase in production in the economy and enhances

economic welfare of the society.

• The operations of different institutions in the capital market induce

economic growth.
 Money Market

Money market is a market for dealing with financial assets

which have a maturity period of upto 1 year ie. Short
term funds market.

It can be classified as
• Call money market
• Commercial bills market
• Treasury bills market
• Short term loan market
 Money Market

Call money market

It is a market for extremely short period loans, ranging from 1

day to 14 days.

It is a highly liquid market and commercial banks are the major

players in this market.

The interest rate varies from day to day and sensitive to

changes in demand and supply of cash liquidity.
 Money Market
Commercial bills market

It is a market for Bills of Exchange arising out of genuine trade

transactions.

In the case of credit sale, the seller draws a Bill of Exchange on

the buyer and once the buyer accepts this bill, the seller can
discount it with a Bank and receive cash.
 Money Market
Treasury bills market

A treasury bill is a promissory note issued by the Govt. and its

repayment is also guaranteed by the Govt.

It is an important instrument for short term borrowing of the

Govt.

T-Bills are issued to Banks and other financial institutions with a

view to raising funds for Govt. to meet its short term financial
needs.

T-Bills have a maturity period of 91 days or 182 or 364 days

only.
 Money Market
Short term loan market
It is a market where short term loans are given to corporates
for meeting their working capital requirements.

Commercial banks provide short term loans in the form of

cash credit and overdraft .

Cash credit is given against the security of commodities and a

proper limit is sanctioned by the Bank, which is normally a %
of value of commodities pledged.

Overdraft is purely a temporary facility extended by Banks

against the security of financial instruments like bonds, LIC
policies.
 Money Market
Short term loan market
Commercial paper ( CP ) is an unsecured promissory note issued
with a fixed maturity by a company approved by RBI.

Negotiable by endorsement and delivery.

Issued in bearer form and at such discount on the face value.

Minimum maturity period of 7 days and maximum is 6 months.

Minimum amount to be invested by an investor is Rs. 1 crore and

in multiples of Rs. 5 lakhs.
 Repo Instruments
• Repo stands for Repurchase. Reverse Repo is the opposite of
Repo
• sells securities

SBI RBI
• receives cash

• The borrower ( SBI ) sells securities to lender ( RBI ) with an

agreement to repurchase them at the end of the fixed maturity
period at a specified price
• The difference between purchase price and the original sale
price is the cost for the borrower
• This cost of borrowing is called Repo Rate.
 Distinction between Capital & Money market
• Long term funds Vs Short term funds
• Fixed capital Vs Working capital
• Deals in instruments like shares, debentures
Vs
Bills of exchange, TBs, Commercial paper
• Instrument denomination is of small amount ( as low as Rs.10 )
Vs
Instrument denomination is of large amount
• Transactions done at a formal place ( stock exchange)
Vs
No formal place and done over the phone
 Primary market / New Issue market

Merchant Bankers or Lead Managers

Merchant banker means any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying or
subscribing to securities or acting as manager, consultant, adviser or
rendering corporate advisory service in relation to such issue management.

Simply defined, a ‘MB’ is a Sponsor of capital issues.

 Categories of ‘MB’
• Category I, that is –
• (i) to carry on any activity of the issue management, which will inter-alia
consist of preparation of prospectus and other information relating to
the issue, determining financial structure, tie-up of financiers and final
allotment and refund of the subscription; and

• (ii) to act as adviser, consultant, manager, underwriter, portfolio

manager.

• (b) Category II, that is, to act as adviser, consultant, co-manager,

underwriter, portfolio manager;

• (c) Category III, that is to act as underwriter, adviser, consultant to an

issue;

• (d) Category IV, that is to act only as adviser or consultant to an issue.

 Capital adequacy norms
• A ‘MB’ will be registered by SEBI in different categories on the basis of
capital adequacy norms in terms of its net worth.
• Category Minimum Amount
• Category I Rs. 5, 00, 00, 000
• Category II Rs. 50, 00, 000
• Category III Rs. 20, 00, 000
• Category IV Nil

• Explanation: For the purposes of this regulation "net worth"

means in the case of an applicant which is a partnership firm or
a body corporate, the value of the capital contributed to the
business of such firm or the paid up capital of such body corporate
plus free reserves as the case may be at the time of making application.
 Registration Fee
• A ‘MB’ has to pay a fee at the time of original registration
• Category I Rs. 10 Lakhs
• Category II Rs. 5 Lakhs
• Category III Rs. 1 Lakh
• Category IV Rs. 5000

• The certificate of registration granted under regulation 8 shall be

valid for a period of three years from the date of its issue to the
applicant.

• The certificate of renewal granted under regulation 9, shall be

valid for a period of three years from the date of its issue to the
applicant.
• Determines the types of securities to be issued ( capital structure )

• Drafting of prospectus ( offer documents )

• Listing of securities
• Appointment of Registrars to deal with share application & transfers

• Selection of brokers and bankers to the Issue

• Popular Lead Managers are ICICI Securities, Enam Securities, JM

Financial, UBS Securities India pvt. Ltd, Kotak Mahindra capital, SBI
Capital Markets.
 Merchant Bankers
Compulsory Registration
Merchant Banker must be a body corporate having adequate office space
and man power.

Merchant Bankers require compulsory registration with SEBI to carry out

their activities.

The directors of a ‘ MB ’ should not be involved in any litigation relating to

securities market.

They must have professional qualification in business management, finance

or law.

SEBI grants a certificate of registration to a merchant banker on

consideration of all relevant matters.
 Merchant Bankers

Code of conduct
Make all efforts to protect the interests of investors

Maintain high standards of integrity in the conduct of business

Ensure that adequate disclosures are made to the investors to enable them
make an informed decision.

Clearly demarcate the responsibilities of various intermediaries appointed by

it so as to avoid any conflict in their job description.

Ensure that SEBI is promptly informed about any legal action initiated against
it.
 Underwriters
• Another important intermediary in the new issue market is the
underwriters to the Issue of capital, who agrees to take up securities
which are not fully subscribed.

• Underwriters make a commitment to get the issue subscribed either by

others or by themselves

• Underwriters are appointed by the issuing companies in consultation

with the Lead Manager or Merchant Banker to the issue.

• To act as an Underwriter, a certificate of Registration must be obtained

from SEBI, after payment of prescribed fee to SEBI.