INDIAN FINANCIAL MARKETS

Outline of Topics
Financial Markets: Nature / Classification
Primary Markets Secondary Markets Money Markets Forex Markets

Trading Arrangements: Need & Purpose Regulations: Objective/ Rationale/ Authorities

RBI, SEBI, IRDA
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FINANCIAL MARKETS
Significant component of the INDIAN FINANCIAL
SYSTEM Facilitators in the savings-investment process Nerve centers for arrangements of claims and services Comprise Capital / Securities market & Money Market

 Participants on the demand and supply sides of

these markets are

Financial institutions Agents brokers Dealers Borrowers Lenders Savers

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MARKETS
The Capital
/ Securities markets represent institutional source of long-term funds The structure of capital markets consists of

Primary / New Issue market/ Direct Market Secondary / Stock market/ Exchange / Indirect
markets.

Primary Markets
Primary markets mobilize and supply additional
capital to business requirements

Primary markets mobilize savings and supply

fresh or additional capital to business units.

Secondary Markets
Secondary markets provide liquidity to the
market by dealing in outstanding securities

Secondary markets do not contribute directly to

the supply of additional capital

They make the primary markets liquid

Financial markets are further classified

Credit Market Money markets (Short term claims) Capital markets (long term claims) Forex Markets Debt Market Derivatives market
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CLASSIFICATION OF MARKETS

Primary

Secondary

Capital Markets

Money Markets Un-Organized

Organized
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ORGANISED MARKETS

CONTROLLED BY RBI NATIONALISED BANKS PRIVATE BANKS FOREIGN BANKS COOPERATIVE BANKS

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Unorganized Markets
Transactions take place outside the well
established exchanges Markets in villages or rural areas Involve families and small groups of individuals lending and borrowing from each other NOT REGULATED BY RBI

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Credit Market
Predominant source of finance
ORGANISED SECTOR DFIs, NBFCs, HFCs UNORGANISED SECTOR Money lenders, Indigenous bankers Term Structure: Short term banks Medium term - NBFCs Long term FIs
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Constituents of Financial Markets

Banks para banking services too
leasing, hire-purchasing, factoring, venture capital, merchant banking Financial Institutions IDBI, IFCI, ICICI, SIDBI, IIBI, NABARD, UTI, EXIM BANK, NHB, Non Banking Financial Companies (NBFCs) Loan Companies (LC), Investment companies (IC), hire purchase companies, equipment leasing companies, Mutual fund companies
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 Housing Finance Companies funded by Central

and state govts, GIC, LIC, HUDCO, Co-op banks, NHB- wholly owned subsidiary of RBI Forex Exchange Market - customers, Authorised dealers (AD), and RBI Grown in depth since 1990s based on the recommendations of 3 committees: i. High level committee on BOP Dr. C. Rangarajan ii. Report of Expert group on FE Market Sri. O.P. Sodhani iii. Committee on Capital Account Convertibility S.S. 14 Tarapore

 Debt Market i. Government securities - widely spread

14 day, 91 day, 182 day, 364 day maturity Participants banks, coop banks, insurance companies, MFs, PFs, gilt funds, primary dealers, NBFCs, satellite dealers, need a well developed secondary markets ii. Other securities private corporate debt, PSU bonds, DFIs funds
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Constituents.
Secondary Market Window Central Banks play
the role of market makers by providing 2 way quotes i. Fixing buying and selling prices ii. Using a dynamic approach to adjust the secondary market window pricing to market forces

Discount Housing Arrangements DFHI, STCI Primary Dealer system 1996, to strengthen
trading, liquidity and turnover in govt. securities Act as market makers by give 2 way quotes in NIM, facilitate open market operations

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Constituents
Satellite Dealers 1996 to provide retail outlets for
government securities Limited support from RBI Gilt Funds mutual funds exclusively dealing with Gilts is called as gilt funds dedicated to investing in government securities

NSE introduced NEAT National Exchange for

Automated Trading transparent screen based trading platform OCTEI Over the counter Exchange in India - 1997
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Constituents .
Other Debt Markets corporate debt markets - Interest rate ceiling on corporate debentures
abolished in 1991

Derivates Market
Forward markets, forex markets, OTC and exchange traded arrangements allowed Bancassurance Synergy between banks and insurance companies Provide fee based services without risk, infrastructure support, JVemerging resource

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Money Market and Capital Market

Both transfer resources from suppliers to producers Markets are classified as money market and capital
market based on maturity

Money markets deal in the short term claims (one

year or less)

Capital markets deal in the long-term claims

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EXAMPLES
MONEY MARKETS Treasury bills market Call money market Commercial bills market
CAPITAL MARKET Stock market Government bonds markets
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Forex Market measures taken to widen depth .

Banks given freedom to fix net limits Free to determine NRI interest rates Initiate trading positions in overseas markets ADs allowed to borrow abroad

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DIFFERENCES BETWEEN NIM & SM

Parameters
Types of securities Nature of Financing Organization Functions

New Issues Stock Exchange Market

New Direct Old/ Existing Indirect

No geographical Physical existence existence Triple Service Nexus between function Savings/Investment Origination Market place Continuous price Underwriting Distribution formation
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SIMILARITIES
In spite of the organizational and functional
differences, the NIM and Stock Exchanges are INSEPERABLY CONNECTED Stock Exchange Listing: pre-condition Control: SE exercise control over new issues Economic Interdependence: Activity & Price New and old markets are the part of the single market: INDUSTRIAL SECURITIES MARKET

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SIMILARITIES..
Behavior of stock markets influence the level of
activity in the NIM and its responses to capital issues Activity in NIM and prices of securities in the SE are related: NEW ISSUES INCREASE WHEN SHARE VALUES ARE RISING and vice versa Prices of new issues are influenced by price movements on the stock exchanges Flow of new savings into NIM is influenced by the conditions prevailing in the old securities market
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Functions of Financial Markets

Secondary markets /Stock Exchanges

Nexus between savings and investment Market place Continuous Price formation: collective judgement Todays prices being yesterdays prices, altered, corrected and adjusted Tomorrows values being todays values altered, corrected and adjusted Investor can value his investments at any point of time and plan his personal needs accordingly
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FUNCTIONS..

Primary Markets
Facilitate transfer of resources from savers to
entrepreneurs New / Initial issues / Old or Further / Rights issue New Money Issues: newly created shares No new money issues: sale of shares already in existence and sold by their holders Bonus issues (capitalization issue) & Exchange issues: shares in one company exchanged for securities of another
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FUNCTIONS
NIM facilitates the transfer of resources by providing
the specialist institutional facilities to perform triple service function Triple service function Origination: involves the process Investigation, analysis, processing of new proposals by Specialist agencies Advisory services including determination of the Class of security, Timing and magnitude of issues, methods of flotation, selling techniques
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 Underwriting: guarantee success of issue Eliminate risk arising from uncertainty of public
response Instill confidence in the minds of Investing public

Distribution: refers to sale of securities to the

ultimate investors By brokers and dealers

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Issue Mechanism in Primary Markets

1. Public Issue through Prospectus
Name of the registered office, Existing and proposed activities BOD, Location of the industry, Authorized, subscribed and proposed
issue of capital to public, Opening and closing subscription list dates Name of brokers, underwriters, bankers, Minimum subscription Application to stock exchange

2. Tender / Book - Building Method: Company quotes minimum price INVESTORS required to quote the number of securities and the price at which they wish to acquire
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3. Offer of Sale merchant banks/ investment banks - through the INERMEDIARY Issue houses, merchant bankers, investment bankers. Sale of securities with an offer for sale is done is 2 stages: issuing company sells enbloc to the issuing houses at an agreed fixed price shares resold by issuing houses to the investors at a higher price (turn) 30

4. Placement Method- by issue house to their clients Like offer for sale, shares are acquired by issue houses and subsequently places with clients of issue houses: individuals and institutions (investor clients) 5. Rights Issue Offer of shares for sale to the existing shareholders only in proportion to the number of shares held
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Thank You

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