FINANCIAL MARKETS

FINANCIAL MARKETS

Market where entities can trade financial securities, commodities, at low transaction costs and at prices that reflect supply and demand.

Securities include stocks and bonds, and commodities include precious metals or agricultural goods.

KINDS OF FINANCIAL MARKET

MONEY MARKET
As per RBI A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market .

A mechanism that deals with the lending and borrowing of short term funds. A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded.

COMPOSITION OF MONEY MARKET

Money Market consists of a number of sub-markets which collectively constitute the money market. They are:

Call Money:
lending and borrowing transactions are carried out for one day that may or may not be renewed the next day. Demand comes from commercial banks that need to meet requirements of CRR and SLR,whereas supply comes from commercial banks with excess funds, and FIs like IDBI, etc.

The Treasury Bill Market:

It deals in Treasury Bills of short term duration: 14 days, 182 days ,91 days, and 364 days. They are issued by Government and largely held by RBI. The treasury bills facilitate the financing of Central Government temporary deficits. The rate of interest for treasury bills is determined by the market, depending on the demand and supply of funds in the money market.

The Commercial Bill Market:

Deals in bills of exchange, a seller draws a bill of exchange on the buyer to make payment within a certain period of time. The bills can be domestic bills or foreign bills of exchange. The commercial bills are purchased and discounted by commercial banks, and are rediscounted by FIs like EXIM Bank, SIDBI, IDBI, etc.

The Commercial Paper Market:

The scheme of Commercial Paper (CP) was introduced in 1990 for short term financing issue . They can be issued in multiples of Rs. 5 lakhs and in multiples thereof As per RBI guidelines, CPs can be issued on the following conditions: a) The minimum tangible net worth of the company to be at least Rs. 4 crores. a) The working capital limit should have been sanctioned by a bank or financial institution.

STRUCTURE OF MONEY MARKETS

ORGANISED MONEY STRUCTURE

UNORGANISED MONEY STRUCTURE

ORGANISED MONEY STRUCTURE

PARTICIPANTS:

Reserve bank of India. DFHI (discount and finance house of India) Commercial banks:(i)Public sector banks SBI with 7 subsidiaries Cooperative banks 20 nationalized banks (ii)Private banks Indian Banks Foreign banks Development bank -- IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.

UNORGANISED SECTOR

Indigenous

Money lenders
Unregulated Intermediaries

INDEGENEOUS BANKS
Private firms that receive deposits and give loans and thereby operate as banks As activities are not regulated properly ,they are unorganized segment Broadly classified into 4 groups- GUJRATI SHROFFS,MULTANI SHROFFS,CHETTIARS AND MARWARI KAYAS

MONEYLENDERS

Broadly classified into 2categories: PROFESSIONAL MONEYLENDERS NON PROFESSIONAL MONEYLENDERS

UNREGULATED INTERMEDIARIES
A)FINANCE COMPANIES- gives loans to the retailers,artisians and other self-employed persons

B) CHIT FUNDS- are saving institutions

C) NIDHIS- operate in unregulated credit market and provide kind of mutual benefit funds

DISADVANTAGES OF MONEY MARKET

Absence of integration Shortage of funds

Lower rate of return

Larger amount of transaction fee

CAPITAL MARKET

The market where investment instruments like bonds, equities and mortgages are traded is known as the capital market. The primal role of this market is to make investment from investors who have surplus funds to the ones who are running a deficit.

CAPITAL MARKET
The capital market offers both long term and

overnight funds. The different types of financial instruments that are traded in the capital markets are: > equity instruments > credit market instruments, > insurance instruments, > foreign exchange instruments, > hybrid instruments and > derivative instruments.

STRUCTURE OF THE CAPITAL MARKET

Capital market is divided into 2 constituents : The financial institutions provide long-term and medium term loan facilities. The securities market Gilt-edged market The corporate securities market

Gilt-edged Market
Market in government securities. Risk-free market. Government securities market consist of The new issue market The secondary market RBI plays a dominant role The investors are predominantly institutions which are required statutorily to invest in g-sec.

 G-sec are the most liquid debt instruments. Transaction in Government securities market are very large.

CORPORATE SECURITIES MARKET

It is a market where securities issued by firms can be bought and sold freely. It consist of the new issues market - the stock exchange

THE NEW ISSUE MARKET

It Is Related With issue of new securities. It Has No Particular Place. The public limited companies often raise funds through primary market for setting up or expanding their business. Following are the methods of raising capital in the primary market: i) Prospectus ii) Offer For Sale iii) Private Placement iv) Right Issue

THE STOCK EXCHANGE

The stock exchange market is a highly organized market for the purchase and sale of second-hand quoted or listed securities. quoting or listing of a particular security implies incorporating the security in the register of the stock exchange so that it can be bought and sold there.

ROLE OF CAPITAL MARKET IN INDIAS INDUSTRIAL GROWTH

Financing Five Year Plans Mobilization of savings and acceleration of capital formation. Promotion of industrial growth. Raising long-term capital. Ready and continuous market. Proper channelization of funds. Provision of a variety of services.

FACTORS CONTRIBUTING TO THE GROWTH OF CAPITAL MARKET IN INDIA

Establishment of development banks and industrial financing institutions. Legislative measures. Growth of underwriting business. Growing public confidence. Increasing awareness of investment opportunities. Setting up of SEBI. Mutual funds. Credit rating agencies.

PROBLEMS OF THE INDIAN CAPITAL MARKET : THE PRE-REFORM PHASE

EQUITY MARKET as of 1992, BSE was a monopoly, so it had high cost of intermediation. open outcry , brokers used to charge the investors a much higher price. No price-time priority. Manipulative practices prevailed. Retail investors were dependent on sub-brokers.

 Inefficiency of the exchange for the below largest 100 stocks. Future-style settlement Order execution was unreliable and costly. Share certificates were printed on paper.

DEBT MARKET
in 1992, debt trading took place without an exchange. Credit risk narrowed the market. Enforcement of Cartels. Trading took place by telephone in Mumbai. Trade prices were not centrally reported. RBI tracks ownership of G-sec in a database called SGL(subsidiary general ledger). It was maintained manually.

STRENGTHENING THE CAPITAL MARKET: THE POST-REFORM PHASE

GOVERNMENT SECURITIES MARKET The auction system for the sale of government of india medium and long-term securities was introduced from june 3, 1992. the government of india set up the Securities trading corporation of india. Scheme of 14-day intermediate treasury bills was introduced. A system of primary dealers was established in 1995.

 Market orientation to issues of government securities paved the way for the RBI to activate the open market operation as a tool of market intervention. Improvement were brought in transparency of operations and data dissemination. A practise of pre-announcing a calendar of treasury bills was introduced. Foreign institutional investors were allowed to set up 100per cent debt funds to invest in government securities. Retail trading in government securities commenced in 2003.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

SEBI set up in 1988 was given statutory recognition in 1992 on recommendations of the Narasimham Committee. The Aims of SEBI are : regulating the business in stock market and other security market. Registering and regulating the working of stock brokers. Registering and regulating the working of investment schemes.

 Promoting and regulating the self-regulatory organizations.

Prohibiting fraudulent and unfair trade practices.

Prohibiting insider trading. Regulating substantial acquisition of shares and takeover of companies.

NATIONAL STOCK EXCHANGE OF INDIA

NSE is a securities exchange set up in 1992. It is a limited liability company. The physical floor was replaced by anonymous, computerized order-matching with strict price-time priority. Satellite communication removed the limitation of physical place. Transparency.