INDIAN INSTITUTE OF TECHNOLOGY ROORKEE

Money Market and Capital Market

Money Market

Money Market deals with borrowing and lending of short term

funds, having maturity of less than one year.

It is not a market for money but for near money.

It is a market where the short-term surplus investible funds of

banks and other financial institutions that are demanded by
borrowers.

Borrowers are individual companies.

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Structure of Indian Money Market

3
Contd.

Unorganised Banking Sector: Indigenous bankers, NBFCs

Organised Sector: the RBI, the SBI and its associate banks,
nationalised banks, private banks (Indian and foreign)

Organised Sub-Markets: The Treasury bill market, the Commercial

bill market and the inter-bank call-money market.

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Capital Market

Capital market is a market for long term securities whether

equity or debt, which aims to mobilise long term savings to finance
long term investments, provide risk capital in the form of equity,
encourages broader ownership of productive assets.

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 Indian Capital Market

Industrial Securities
Gilt-edged Market Development Financial Financial Intermediaries
Market
(Govt. Securities) Institutions (DFIs)
Merchant Mutual
New Issues Old Issues banks Funds
Market Market
Industrial Credit
(Stock Industrial Finance and Investment Leasing Companies Venture Capital
exchange) Corporation of Corporation of companies
India (IFCI) India (ICICI)
Others
State Financial Industrial
corporations Development Bank
IL&FS CRISIL
(SFCs) of India (IDBI)

SHCIL HUDCO
Industrial
Investment The Unit
Bank of Trust of
India(UTI) HDFC NHB
India (IIBI)

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Intermediaries in Capital Market
Stock Exchanges

Banks

Investment Banks, Trusts and Companies

Specialized Financial Institutions or Development Banks

Mutual Funds

Non-Banking Financial Institutions

Merchant Banks

International Financial Investors and Institutions.

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Investment Banks Vs. Merchant Banks
Investment Banks facilitate:
mergers and acquisitions
through share sales and also
provide research to various
companies;
manage initial public offerings
(IPOs) and also public and
private share offerings.
they also provide services like
underwriting of shares and
brokering related services for
their clients.
Investment bankers deal with
companies which are big both in
terms of size as well as capital
they need for expansion.
Merchant Banks perform:
International financing
activities such as foreign
corporate investing, foreign real
estate investment, and trade
finance.
These include services like
issuing letters of credit,
transferring funds
internationally, trade consulting
and also co-investment in
international projects of the
companies.
As far as merchant banks are
concerned their clients are
mostly middle sized companies.
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Demand for and Supply of Long Term Capital

Demand Supply
By Private sector By individual savers
Manufacturing industries Corporate savings
Agriculture Banks
Government Insurance Companies
Specialised financial agencies
Govt.

9
Concepts of Capital

Authorized (or nominal) capital

Issued Capital

Subscribed Capital

Called-up Capital

Paid-up Capital

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Authorized (or nominal) capital

It is the amount mentioned in the Memorandum of Association

(MoA) by a company.

MoA is a legal document prepared in the formation and registration

process of a limited liability company to define its relationship
with shareholders.

For Example:
A company mentioned in its MoA of INR 10 lacs as its capital, and
divided into 10,000 shares of Rs. 100 each.
In this case, the amount of Rs. 10 lacs is the authorized capital of
the company.

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Issued Capital

It is the value of shares offered to the public by the company.

Example:
Now suppose that the company offers 8,000 shares to the
public.

The issued capital of the company is Rs. 8 lac (8,000 x 100).

The balance of Rs. 2 lacs is the un-issued capital.

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Subscribed Capital

It is the value of shares (no. of shares demanded cost per

share) demanded by the public.

Example:
Out of these 8,000 shares offered to the public, the company
receives only 5,000 applications for the purchase of its
shares.
The subscribed capital of the company is Rs. 5 lacs (5,000 x
100).
The balance of Rs. 3 lacs is the un-subscribed capital.

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Called-Up Capital

If the company requires, it can call the entire amount from

the subscribers.
However, the company calls Rs. 30 (Rs. 10 on application,
Rs. 10 on allotment and Rs. 10 on first call) on each share
subscribed by the public.

The called-up capital of the company is Rs. 1,50,000 (5,000

x 30).

The balance of Rs. 3.5 lacs (5,000 x 70) is the un-called

capital.

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Paid-up Capital

Now suppose that a member to whom 100 shares were allotted

does not pay the first call of Rs.10 on his shares.

The paid-up capital of the company would be Rs. 1,49,000

(1,50,000 - 1000).

The amount of Rs. 1,000 is known as calls in arrears and is still

the part of un-called capital.

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Stock Exchange

Stock Exchange is an organized market for buying and selling

financial instruments known as securities, which include
stocks/share (equity securities), bonds (debt securities), options,
and futures (derivative securities).
Securities are the financial instrument that has monetary value
and can be traded.
These are a form of ownership that are traded on as a secondary
market.
The basic difference between options and futures depends on the
obligations they put on their buyers and sellers. An option gives
the buyer the right, but not the obligation to buy (or sell) a certain
asset at a specific price at any time during the life of the contract.

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Characteristics of Stock Exchange

Market for securities : Stock exchange is a market, where securities of corporate bodies,
government and semi-government bodies are bought and sold.
Deals in second hand securities : It deals with shares, debentures bonds and such securities
already issued by the companies. In short it deals with existing or second hand securities and
hence it is called secondary market.
Regulates trade in securities : Stock exchange does not buy or sell any securities on its own
account. It merely provides the necessary infrastructure and facilities for trade in securities to
its members and brokers who trade in securities. It regulates the trade activities so as to
ensure free and fair trade
Allows dealings only in listed securities : In fact, stock exchanges maintain an ocial list of
securities that could be purchased and sold on its oor. Securities which do not gure in the
ocial list of stock exchange are called unlisted securities. Such unlisted securities cannot be
traded in the stock exchange.

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 Contd
Transactions eected only through members : All the transactions in securities at the stock
exchange are eected only through its authorized brokers and members. Outsiders or direct
investors are not allowed to enter in the trading circles of the stock exchange. Investors have to
buy or sell the securities at the stock exchange through the authorized brokers only.
Association of persons : A stock exchange is an association of persons or body of individuals
which may be registered or unregistered.
Recognition from Central Government : Stock exchange is an organized market.
Working as per rules : Buying and selling transactions in securities at the stock exchange are
governed by the rules and regulations of stock exchange as well as SEBI Guidelines. No
deviation from the rules and guidelines is allowed in any case.
Specic location : Stock exchange is a particular market place where authorized brokers come
together daily (i.e. on working days) on the oor of market called trading circles and conduct
trading activities. The prices of dierent securities traded are shown on electronic boards. After
the working hours market is closed. All the working of stock exchanges is conducted and
controlled through computers and electronic system.
Financial Barometers : Stock exchanges are the nancial barometers and development
indicators of national economy of the country. Industrial growth and stability is reected in the
index of stock exchange.

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Functions of Stock Exchange

Continuous and ready market for securities: Stock exchange provides a

ready and continuous market for purchase and sale of securities. It
provides ready outlet for buying and selling of securities. Stock exchange
also acts as an outlet/counter for the sale of listed securities.
Facilitates evaluation of securities: Stock exchange is useful for the eval
uation of industrial securities. This enables investors to know
the true worth of their holdings at any time. Comparison of companies in
the same industry is possible through stock exchange quotations.
Encourages capital formation: Stock exchange accelerates the process
of capital formation. It creates the habit of saving, investing
and risk taking among the investing class and converts their savings into
protable investment. It acts as an instrument of capital formation.
In addition, it also acts as a channel for right (safe and
protable) investment.

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Contd
Provides safety and security in dealings: Stock exchange prov
ides safety, security and equity (justice) in dealings as transactio
ns are conducted as per well-dened rules and regulations.
The managing body of the exchange keeps control on the members.
Fraudulent practices are also checked eectively.
Due to various rules andregulations, stock exchange functions a
s the custodian of funds of genuine investors.
Regulates company management: Listed companies have to
comply with rules and regulations of concerned stock exchange
andwork under the vigilance (i.e. supervision) of stock exchange
authorities.
Facilitates public borrowing: Stock exchange serves as a platf
orm for marketing Government securities. It enables governmen
t to raise public debt easily and quickly.
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Contd
Provides clearing house facility: Stock exchange provides a
clearing house facility to members. It settles the transactions
among the members quickly and with ease.
The members have to pay or receive only the net dues (bala
nce amounts) because of the clearing house facility.
Facilitates healthy speculation: Healthy speculation, keeps t
he exchange active.
Normal speculation is not dangerous but provides
more business to the exchange. However, excessive specula
tion is undesirable as it is dangerous to
investors & the growth of corporate sector.
Serves as Economic Barometer: Stock exchange indicates
the state of health of companies and the national economy. It
acts as a barometer of the economic situation / conditions.
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Major Stock Exchanges of the World

New York Stock Exchange (NYSE),

Nasdaq Stock Market

London, England; Paris, France; Milan, Italy; Hong Kong, China; Toronto,
Canada; and Tokyo, Japan.

The European Association of Securities Dealers Automated Quotation system

(EASDAQ)

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Objectives of Capital Mobilisation Through
Stock Market
To encourage Public participation and mobilize savings for economic
development;
Facilitates growth as more capital could be mobilized through stock
markets.
They encourage investment by providing places for buyers and sellers
to trade securities. This investment, in turn, enables corporations to
obtain funds to expand their businesses.
To ensure greater transparency
To make the funds accessible to the small scale and upcoming
enterprises.
To protect interest of investors by ensuring full disclosures.

They protect investors by upholding rules and regulations that ensure

buyers will be treated fairly and receive exactly what they pay for.
Exchanges also support state-of-the-art technology and the business
of brokering. This support helps traders buy and sell securities
quickly and efficiently.

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Stock Exchanges in India

India's oldest and first stock exchange is Bombay Stock Exchange

Established in 1875. More than 7,784 stocks listed.
Total number of approved stock exchanges in India: 23.
Out of these, 10 stock exchanges contributing 98% of the trading
volumes of the country are connected to NSDL (National
Securities Depository Limited).
A list of these 10 stock exchanges connected to NSDL is given:
NSE - National Stock Exchange of India
BSE - The Stock Exchange, Mumbai
ASE - The Stock Exchange, Ahmedabad
BgSE - Bangalore Stock Exchange
CSE - The Calcutta Stock Exchange
DSE - The Delhi Stock Exchange
LSE - The Ludhiana Stock Exchange
ISE - Interconnected Stock Exchange
MSE - Madras Stock Exchange
OTCEI - OTC Exchange of India
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Features
There is also a National Stock Exchange (NSE), set up in 1993 and
opened in 1994 which is located in Mumbai.
Both BSE and NSE provide fully automated, screen based trading
systems.
The two Exchanges provide continuous trading from 9.00 a.m. to
3.30 p.m.
Trading cycle is on a daily rolling basis with settlement on T+3
basis in the demat segment.
Both Exchanges provide for settlement through the Clearing House
/ Clearing Corporation and have trade / settlement guarantee and
investor protection funds.
NSE has a market capitalization of around INR1,10,47,315 crore
(February 2017) with 1847 listing (Market Capitalization is the
value of a company that is traded on the stock market, calculated
by multiplying the total number of shares by the present share
price)

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Contd

BSE also calculates a dollar-linked version of SENSEX

and historical values of this index are available since its
inception.

The regulatory agency which oversees the functioning of

stock markets is the Securities and Exchange Board of
India (SEBI), which is also located in Bombay.

Listing means admission of the securities to dealings on a

recognised stock exchange. The securities may be of any
public limited company, Central or State Government,
quasi governmental and other financial
institutions/corporations, municipalities, etc.

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Evolution of BSE

Six people started trading in the stocks of the British East India
Company and a few commodities in 1875
In 1956, it became the first stock exchange in the country to obtain
permanent recognition from the government of India under the
Securities Contracts (Regulation) Act, 1956
It turned into a corporate entity in 2005.
The Sensex itself was born in 1986 as a representative index for
Indian shares with a basket of 30 constituent stocks drawn from a
sample of large, liquid and representative companies.
The base value of the SENSEX is 100 on April 1, 1979, and the
base year of BSE-SENSEX is 1978-79.

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Stock Indices in India

BSE Indices NSE Indices

BSE Sensex BSE Bankex S&P CNX NIFTY
BSE100 Index BSE CG S&P CNX DEFTY
BSE 200 Index BSE CD S&P CNX 500
BSE 500 Index BSE FMCG NFTY MIDCAP 50
BSE MIDCAP BSE HC CNX IT
BSE SMLCAP BSE IT CNX100
BSE TECK BSE Metal BANK NIFTY
BSE PSU BSE Oil & Gas
BSE Auto
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SENSEX

The SENSEX is the benchmark index of the Indian Capital

Markets with wide acceptance among individual investors,
institutional investors, foreign investors and fund managers.

During market hours, prices of the index scrips, at which trades are
executed, are automatically used by the trading computer to
calculate the SENSEX every 15 seconds and continuously updated
on all trading workstations connected to the BSE trading computer
in real time.

Scrips are the legal certificates having legal tender.

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Objectives of SENSEX

To measure market movements (SENSEX is widely used to

describe the mood in the Indian Stock markets)

Benchmark for funds performance. The inclusion of blue chip

companies and the wide and balanced industry representation in
the SENSEX makes it the ideal benchmark for fund managers to
compare the performance of their funds.

For index based derivative products Institutional investors, money

managers and small investors all refer to the SENSEX for their
specific purposes

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Index Specification
Base Year: 1978-79
Base Index: Value 100
Date of Launch: 01-01-1986
Method of calculation: Launched on full market capitalization method and
effective September 01, 2003, calculation method shifted to free-float Market
Capitalisation.
Number of scrips: 30 Index Constituents
Index calculation frequency: Real Time
Free-float: Free-float Methodology refers to an index construction methodology
that takes into consideration only the free-float market capitalization of a
company for the purpose of index calculation and assigning weight to stocks in
the Index.
Free-float market capitalization takes into consideration only those shares issued
by the company that are readily available for trading in the market.
It generally excludes promoters' holding, government holding, strategic holding
and other locked-in shares that will not be available to the market for trading in
the normal course. In other words, the market capitalization of each company in
a Free-float index is reduced to the extent of its readily available shares in the
market.

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Qualification Criteria for Selecting company
for Sensex
Quantitative Criteria:
Final Rank: The scrip (temporary document representing shares)
should figure in the top 100 companies listed by Final Rank.
The final rank is arrived at by assigning 75% weightage to the rank
on the basis of six-month average full market capitalisation and 25%
weightage to the liquidity rank based on six-month average daily
turnover & six-month average impact cost.

Trading Frequency: The scrip should have been traded on each and
every trading day for the last six months. Exceptions can be made for
extreme reasons like scrip suspension etc.

Market Capitalization Weightage: The weight of each scrip in

SENSEX based on six-month average Free-Float market
capitalisation should be at least 0.5% of the Index.

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Contd..
Industry Representation: Scrip selection would take into account a
balanced representation of the listed companies in the universe of
BSE. The index companies should be leaders in their industry group.

Listed History: The scrip should have a listing history of at least 3

months on BSE. However, the Committee may relax the criteria
under exceptional circumstances

Qualitative Criteria:
Track Record: In the opinion of the Committee, the company should have
an acceptable track record.

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 Criteria for Selection and Review of SENSEX
Constituents
The scrip selection and review policy for BSE Indices is based on
the objective of

Improvement
Transparency
Simplicity
 Free-float Market Capitalization
Free-float market capitalization is defined as that proportion of total shares
issued by the company that are readily available for trading in the market.
It generally excludes promoters' holding, government holding, strategic holding
and other locked-in shares that will not come to the market for trading in the
normal course.
So, Free-float market capitalization is the proportion of total shares available for
trading to the general public.

The following categories of holding are generally excluded from the definition
of Free-float.

Shares held by founders/directors/ acquirers which has control element

Shares held by persons/ bodies with "Controlling Interest
Shares held by Government as promoter/acquirer
Holdings through the FDI Route
Strategic stakes by private corporate bodies/ individuals
Equity held by associate/group companies (cross-holdings)
Equity held by Employee Welfare Trusts
Locked-in shares and shares which would not be sold in the open market in
normal course.
Market Capitalization, Weightage of an individual
Company and the SENSEX
 Market Capitalisation

Example:1
Current market price of X firm (BSE) is $70.44. Its authorised
capital is 2,500 million. 1,767 million shares are issued, out of
which 542 million shares are held as treasury stock.

Total number of outstanding shares = 1,767 million 542

million = 1,225 million

Market capitalization = $70.44 1,225 million = $86,289

million

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Contd
Example 2

Lets say Market Capitalization based on the performance of

the 30 key stocks is 8060000
the base index of 1978-79 is 60000.
The index divisor becomes 100/60000
The Sensex index value = 8060000 x 100/60000 = 13433 for
that day.

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 Example 3
Lets say there are 2 companies A & B
Now suppose the current market price of stock A is Rs 120. with 1000 shares and 800
shares are available to public.
Thus, the 'total or full market capitalisation of company A is Rs 120,000 (1,000 x 120),
but its free-float market capitalisation is Rs 96,000 (800 x 120).
Similarly, suppose the current market price of stock B is Rs 200 with 2000 shares, but 1000
shares are available to the public.
The total market capitalisation of company B will thus be Rs 400,000 (2,000 x 200), but its
free-float market cap is only Rs 200,000 (1,000 x 200).
So as of today the market capitalisation of the index (i.e. stocks A and B) is Rs 520,000 (Rs
120,000 + Rs 400,000);
while the free-float market capitalisation of the index is Rs 296,000. (Rs 96,000 + Rs
200,000).
The year 1978-79 is considered the base year of the index with a value set to 100. What
this means is that suppose at that time the market capitalisation of the stocks that
comprised the index then was, say, 60,000, then we assume that an index market cap of
60,000 is equal to an index-value of 100.
Thus the value of the index today is = 296,000 x 100/60,000 = 493.33

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 Advantages of Free-float Methodology
A Free-float index reflects the market trends more rationally as it takes into
consideration only those shares that are available for trading in the market.

It makes the index more broad-based by reducing the concentration of top few
companies in Index.
It improves index flexibility in terms of including any stock from the universe of
listed stocks. This improves market coverage and sector coverage of the index.

Globally, the Free-float Methodology of index construction is considered to be

an industry best practice and all major index providers like MSCI, FTSE, S&P
and STOXX have adopted the same.

MSCI, a leading global index provider, shifted all its indices to the Free-float
Methodology in 2002.
The MSCI India Standard Index, which is followed by Foreign Institutional
Investors (FIIs) to track Indian equities, is also based on the Free-float
Methodology.
NASDAQ-100, the underlying index to the famous Exchange Traded Fund
(ETF) - QQQ is based on the Free-float Methodology.
 How is the closing Index calculated?
The closing SENSEX is computed taking the weighted average
of all the trades on SENSEX constituents in the last 15 minutes
of trading session.

If a SENSEX constituent has not traded in the last 15 minutes,

the last traded price is taken for computation of the Index
closure.

If a SENSEX constituent has not traded at all in a day, then its

last day's closing price is taken for computation of Index
closure. The use of Index Closure Algorithm prevents any
intentional manipulation of the closing index value.
 What is the beta of SENSEX scrips?

Beta measures the sensitivity of a scrip movement relative to

movement in the benchmark index i.e. SENSEX.

A Beta of one means that for every change of 1% in index,

the scrip moves by 1%. Statistically Beta is defined as:
Covariance (SENSEX, Stock )/ Variance (SENSEX)

Note: Covariance and variance are calculated from the Daily Returns data of the SENSEX and SENSEX scrips.
 Listing and Grouping of Companies

Listing of shares, on a stock exchange, means, such shares can be bought and sold,
in stock exchange.
The detailed and elaborate procedure of getting the shares listed on a stock
exchange is monitored by SEBI. The SEBI, issues guidelines and notifications,
from time to time, with regard to listing of securities.
Once the shares are listed, the are divided into two categories:
1. GROUP "A" SHARES
2. GROUP "B" SHARES

GROUP "A" SHARES: are referred to as " Cleaned Securities " or " specified
shares". The facility for carrying forward a transaction from one account period
to another is available for these shares. Group "A" shares represent
companies, with huge amount of capital, and equally a large scope
for investment. These shares are frequently traded and command
higher price.
GROUP "B" SHARES: are referred to as, Non-cleaned securities or non-
specified shares. For these groups facility of carrying forward is not available.
 Benefits of Listing
Listing provides an opportunity to the corporates / entrepreneurs to raise capital
to fund new projects/undertake expansions/diversifications and for acquisitions.

It also helps to generate an independent valuation of the company by the

market.

It raises a company's public profile with customers, suppliers, investors,

financial institutions and the media. A listed company is typically covered in
analyst reports and may also be included in one or more of indices of the stock
exchanges.

An initial listing increases a company's ability to raise further capital through

various routes like preferential issue, rights issue, Qualified Institutional
Placements and in the process attract a wide and varied body of institutional and
professional investors.

Listing leads to better and timely disclosures and thus also protects the interest
of the investors.

It provides a continuing liquidity to the shareholders of the listed entity. This in

turn helps broaden the shareholder base.
 What is a demat
Demat refers to a dematerialised account.

It is just like a bank account where actual money is replaced by shares.

You have to approach the DPs (Depository Participants) to open your demat
account. DP is an authorized body which is involved in dematerialization of
shares and maintaining of the investors accounts.

Don't have to possess any physical certificates showing that you own these
shares. They are all held electronically in your account. As you buy and sell the
shares, they are adjusted in your account.

Just like a bank passbook or statement, the depository participants/intermediary

(DP) will provide you with periodic statements of holdings and transactions.A
DP will just give you an account to hold those shares.
 Advantages of Trading in Demat Shares
Earlier, shares would not be transferred easily due to problems of
bad deliveries, difference in signatures, theft, fire, and mutilation
of shares.
There is no stamp duty incurred while trading in demat shares.
Brokers charge lower brokerage fee (due to less paperwork).
There is a status report provided to the client, and there is periodic
inspection of depository participants records/books (who operate
the demat account for you).
No minimum balance is required in demat accounts.
One can choose the Depository Participant based on its history,
charges and services provided.
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