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Capital market is a market where buyers and sellers engage in trade of financial securities like bonds,
stocks, etc. Capital market deals with medium term and long term funds. It refers to all facilities and the
institutional arrangements for borrowing and lending term funds (medium term and long term). The demand for
long term funds comes from private business corporations, public corporations and the government. The supply of
funds comes largely from individual and institutional investors, banks and special industrial financial institutions
and Government.
Definition: Capital market is a market where buyers and sellers engage in trade of financial securities like bonds,
stocks, etc. The buying/selling is undertaken by participants such as individuals and institutions.
A capital market can be defined as An organized mechanism for efficient and efficient transfer of
money capital or financial resources from the investing parties i.e., individuals or institutional savers to the
enterprises engaged in industry or commerce either in the private or public sectors of an economy
Capital market consists of primary markets and secondary markets. Primary markets deal with trade of
new issues of stocks and other securities, whereas secondary market deals with the exchange of existing or
previously-issued securities. Another important division in the capital market is made on the basis of the nature of
security traded, i.e. stock market and bond market.
Advantages
Publicity: Through prospectus method one can give wide range of publicity.
Securities allotted to applicants on non-discriminatory basis
It means fixed quantity of shares has to be allotted among applicants on a non-discriminatory basis. For
this purpose wide publicity is given and danger or artificial restrictions on the quantity of shares is avoided.
Securities are distributed widely
Shares ownership is widely spread. This reduces the chances of concentration of wealth and economic power.
It is more transparent
Disadvantages
1. It is costly
2. It is time consuming
3. It is uneconomical for small issues
4. The public subscription is not guaranteed.
INSTRUMENTS OF ISSUES
Traditionally, equity shares preference share are issued by companies as ownership capital and debentures
and bonds as debt capital. Recently, new instruments to meet the varied needs of investors in terms of security, rate
of return, marketability and appreciation in value are being issued by the companies.
The important new instruments and their characteristic are explained below
i. Secured premium notes with detachable warrants (SPN)
Secured premium notes are issued along with detachable warrant. The warrants attached to it ensure the
holder the right to apply and get equity shares after a notified the SPN is fully paid up.The SPN is issued at
nominal value and does not carry any interest.
ii. Equity Shares with Detachable Warrants
In this instrument along with fully paid up equity shares, detachable warrants are issued which entitle the
warrant holder to apply for a specified number of shares at a determined price. Detachable warrants are registered
separately with the stock exchange and traded separately.
iii. Preference Shares with Warrants
This instrument shall carry certain number of warrants entitling the holder to apply for equity shares at
premium at any time in one or more stages between the third and fifth year from date of allotment. From the date
of allotment, the preference shares with warrant should be transferred or sold for a period of three years.
iv. Non Convertible Debentures with Detachable Equity Warrants
The holder of instrument is given an option to buy a specified number of shares from the company at a pre
determined price with a definite time frame. There is a specific lock in period after which the holder can exercise
his option to apply for equity shares.
v. Fully Convertible Cumulative Preference Shares
This instrument has two parts A and B. part A is convertible into equity shares on the date of allotment
without application by the allottee. Part B will be redeemed at par /converted space into equity after lock in period,
at the option of investors.
vi. Zero Interest Fully Convertible Debentures (FCDs)
No interest will be paid to the holders of this instrument till the lock in period. After a notified period this
debenture will be automatically and compulsorily converted into shares. Before the conversion of FCDs into
equity, if the company issues rights, it would be available to the holders in the proportion decided by the company.
7. Fully convertible debentures (fcds) with interest
This instrument carries no interest for a specified period. After this period, option is given to apply for
equities at premium for which no additional amount is payable. However, interest in FCDs is payable at a
determined rate from the date of first conversion to second / final conversion and equity will be issued in lieu of it
interest amount.
8. Zero Interest Partly Convertible Debentures (Pcds) With Detachable and Separately Tradable Warrants
This partly convertible debenture has two parts- A and B. part A is convertible into equity shares at a fixed
amount on the date of allotment. Part B is non convertible and redeemed at par at the end of a specific period. Part
B will also carry a detachable and separately tradable warrant. It also gives an option to the holder to receive equity
share for every warrant.
Listing
Listing of securities means that the securities are admitted for trading on a recognized stock exchange.
Transactions in the securities of any company cannot be conducted on stock exchanges unless they are listed by
them.
Listing is compulsory for those companies which intend to offer shares/debentures to the public for
subscription by means of issuing a prospectus. Moreover, the SEBI insists on listing for granting permission to a
new issue by a public limited company. Again financial institutions do insist on listing for underwriting new issues.
thus, listing becomes an unavoidable one today.
Meaning
The term 'listing' refers to a process or steps or exercise involved in listing something with some one.
Listing mean permission to quote shares and debentures officially on the trading floor of the stock exchange. The
listed shares appear on the official list of securities for the purposes of trading.
Listing simply means the inclusion of any security for the purpose of trading in a recognized stock exchange.
Listing-Features
Following are the characteristics of listing
Agreement: an agreement entered into between a stock exchange and a company, whereby security listing is
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proposed is called a 'listing agreement'
Purpose: The purpose of listing is to facilitate transferency and open disclosure of information relating to the
affairs of the company.
Restriction: a corporate entity is free to have its securities listed in any number of stock exchanges. A stock
exchange is considered to be regional stock exchange provided it is located in the place where the registered office
of the company situated.
Investor Protection: Listing is a barometer of performance and continued good performance of the company. It
protects the investors interests.
Advantages of listing
The advantages of listing are
1. Facilitates buying and selling of securities: listing facilitates easy buying and selling of securities in the market.
2. Ensures liquidity: The listed securities ensures greater liquidity that they can be converted into cash readily at
quoted prices.
3. Offers wide publicity: listed securities give wide publicity to the companies concerned. it is so because the
names of listed companies are frequently mentioned in stock market reports, Tv, newspapers, radio etc
4. Assures finance: the very fact that a security is listed in a recognized stock exchange adds to the prestige of that
company and it enables the company to raise the necessary finance by the issue of such securities.
5. Enables borrowing: listed securities are preferred as collateral securities by commercial banks and other lending
institutions because they are rated high in market quotations and there is a ready market for them also.
6. Protects investors: Listing companies have to necessarily submit themselves to the various regulatory measures
by disclosing vital information about their assets, capital structure, profits, dividend policy, allotment procedure,
bonuses etc. Hence, listing aims at protecting the interest of investors to a greater extent.
Drawbacks
At the same time, listing brings some bad effects also
Leads to Speculation: Listed securities leads manipulate the values such a way as speculation by speculators. it will
harm the interest of the company. sometimes management may indulge in speculative activities with regard to
listed securities by misleading the inside information available.
Degrades company's reputation: sometimes listed securities are subject to wide fluctuations in their values. they
may become victim of depression. These wide fluctuations in their values have the effect of degrading the
company's reputation and image in the eyes of the public as well as the financial intermediaries.
Disclose vital information to competitors: For getting the securities listed, a company has to disclose vital
information such as dividends and bonuses declared, a brief history of the company, sales, remuneration to
managerial personnel and so on. It amounts to leaking of secrecy of the company's operations to trade rivals. Thus,
listing may prove disadvantageous to a company.
Listing Procedure
Listing of corporate securities involves the following steps:
1. Initial Listing:
2. Final listing:
3. Registration and Recording:
Besides above functions the Bombay stock exchange as a secondary market performs following functions
1. Raising capital for business
A continuous market for shares provides a favorable climate for raising capital. The negotiability and
transferability of the securities helps the companies to raise long-term funds. When it is easy to trade the securities,
investors are willing to subscribe to the initial public offerings. This stimulates the capital formation.
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2. Mobilizing savings for investment
The BSE perform another important function in an economy, i.e. mobilization of public savings and
channelization of the same for productive purposes. it helps in the mobilization of savings and surplus funds of
individuals, firms and other institutions
3. Facilitating company growth
Stock markets promotes habit of saving so that savings will be channelized to productive and remunerative
ventures.
4. Protects investors growth
The stock exchange protects the interests of the investors through the strict enforcement of their rules and
regulations. The malpractices of the brokers are punishable with heavy fine, suspension of their membership and
even imprisonment.
5. Economic Barometer.
A stock exchange serves as a reliable barometer of a company economic status. Stock exchanges support
and promote industrial development. It stimulates investment in productive sector which accelate the process of
economic growth of the country.
6. Best Utilization of capital
The stock exchange regulates and controls the flow of investment from unproductive to productive,
uneconomic to economic, unprofitable to profitable enterprises. Thus, the savings of the people are channelized
into industry yielding good returns and underutilization of capital is avoided.
Objectives
The NSE has following has following objectives
1. To establish nationwide trading facility for equities, debts and hybrids
0 No fixed geographical location for primary It has fixed place of trading, Bombay Stock Exchange
3 market.
0 For the first time securities are created in the New The existing securities are transferred from one hand to
4 issue market another.
0 All companies can enter primary The securities which have issued securities in primary
5 market can enter.
0 Subject to regulation mostly by SEBI, stock Subject to regulation both from within and outside the
6 exchanges company
0 Primary market creates long term securities for It Provides liquidity for those instruments which are
7 saving and investments. already issued by companies.
0 It creates link between the depositors and It act as link between investors and industrial
9 borrowers and commercial enterprises
1 Rate of interest is high Rate of interest is low
0
What is Money Market? What are the important functions performed by it?
B. CONCLUSION :-
The above features / defects of Indian Money Market clearly indicate that it is relatively less developed
and has yet to acquire sufficient depth and width. The deficiencies are slowly and steadily overcomed by policy
measures undertaken by RBI from time to time.
Q. 4: Explain the reforms introduced by RBI to strengthen the money market in India. OR
Discuss the measures to strengthen the Indian Money Market?
Ans. A) REFORMS I MEASURES TO STRENGTHEN THE INDIAN MONEYMARKET:-
On the recommendations of S. Chakravarty Committee and Narasimhan Committee, the RBI has initiated a
number of reforms.
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1. Deregulation Of Interest Rates :-
RBI has deregulated interest rates. Banks have been advised to ensure that the interest rates changed
remained within reasonable limits. From May 1989, the ceiling on interest rates on call money, inter-bank short-
term deposits, bills rediscounting and inter-bank participation was removed and rates were permitted to be
determined by market forces.
2. Reforms In Call And Term Monev Market :-
To provide more liquidity RBI liberalized entry in to call money market. At present Banks and primary
dealers operate as both lenders and borrowers. Lenders other than UTI and LIC are also allowed to participate in
call money market operations. RBI has taken several steps in recent years to remove constraints in term money
market. In October 1998, RBI announced that there should be no participation of non-banking institutions in call /
term money market operations and it should be purely an interbank market.
3. Introducing New Money Market Instruments:-
In order to widen and diversify the Indian Money Market, RBI has introduced many new money market
instruments like 182 days Treasury bills, 364 days Treasury bills, CD3 and CPs. Through these instruments, the
government, commercial banks, financial institutions and corporates can raise funds through money market. They
also provide investors additional instruments for investments.
4. Repo :-
Repos were introduced in 1992 to do away. With short term fluctuations in liquidity of money market. In
1996 reverse repos were introduced. RBI has been using Repo and Reverse repo operations to influence the
volume of liquidity and to stabilise short term rate of interest or call rate. Repo rate was 6.75% in March 2011 and
reverse repo rate, was 5.75%.
5. Refinance By RBI :-
The RBI uses refinance facilities to various sectors to meet liquidity shortages and control the credit
conditions. At present two schemes of refinancing are in operations :- Export credit refinance and general
refinance.
RBI has kept the refinance rate linked to bank rate.
6. MMMFs:-
Money Market Mutual Funds were introduced in 1992. The objective of the scheme was to provide an
additional short-term avenue to the individual investors. In 1995, RBI modified the scheme to allow private sector
organisation to set up MMMFs. So far, three MMMFs have been set up one each by IDBI, UTI and one in private
sector.
7. DFHI:-
The Discount and Finance House of India was set up on 25th April 1988. It buys bills and other short term
paper from banks and financial institutions. Bank can sell their short term securities to DFHI and obtain funds in
case they need them, without disturbing their investments.
8. The Clearing Corporation Of India Limited (CCIL) :-
CCIL was registered in 2001 under the Companies Act, 1956 with the State Bank of India as Chief
Promoter. CCIL clears all transaction in government securities and repos reported on NDS (Negotiated Dealing
System) of RBI and also Rupee / US $ foreign exchange spot and forward deals.
9. Regulation Of NBFCs:-
In 1997, RBI Act was amended and it provided a comprehensive regulation for non bank financial
companies (NBFCs) sector. According to amendment, no NBFC can carry on any business of a financial institution
including acceptance of public deposit, without obtaining a Certificate of Registration from RBI. They are required
to submit periodic returns to RBI.
10. Recovery Of Debts:-
In 1993 for speedy recovery of debts, RBI has set up special Recovery Tribunals. The Special Recovery
Tribunals provides legal assistance to banks to recover dues.