Money Maket

8/8/2019 Money Maket

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Money Market

It refers to that segment of the system / market that

enables the raising of short term funds for meeting thetemporary shortages of cash and obligations and the

temporary deployment of excess funds for earning

returns


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Call Money Market

It deals with the (borrowed and lent) overnight / one

day (call) money and notice money for periods of up to

14 days.

It primarily serves as the balancing the short term

liquidity positions of banks.

It is the market for short term funds repayable on

demand and with maturity period varying between one

day to a fortnight.


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Call Money Market

No collateral security is required to coverthis transaction

It is basically an the over the counter market

without the intermediation of brokers. Call money is required by banks to meet

their CRR requirement.

The rate of interest on call loans is known asthe call rate .

It varies from day to day and often hour tohour.


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Commercial bills market

When trade bills are accepted by

commercial banks they are called

commercial bills.

The cost of funds raised was lower than

the cost of inter-bank deposits or loans of

over 60 days and also this inter-bank

deposits was subjected to reserve

requirements


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Treasury Bills market

It is an instrument of a short term

borrowing by the GOI

It is a kind of finance Bill (i.e a bill doesnot arise from any genuine transaction in

goods) or a promissory note issued by the

RBI on behalf of the Government.

The T-Bills are issued to raise short term

funds to bridge seasonal/temporary gaps

between receipts and expenditure of GOI.


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Features of T-Bills

They are negotiable securities

They are issued at discount and are repaid at paron maturity

High liquidity on account of short tenure (i.e 91days and 364 days) and inter bank repos

Absence of default risk due to governmentguarantee and RBIs willingness to always

purchase them negligible capital depreciation. Assured yield

Low transaction cost

Eligibility for inclusion in SLR

Purchases/sales affected through the SGL.


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Ad-hoc treasury Bills

It was introduced to replenish Government cashbalances with RBI.

It was decided between the RBI and the GOI thatthe govt could maintain with the reserve bank acash of not less than Rs 50 crore on Friday and Rs4 crore on other days

Free of obligation to pay interest there on

Whenever the balance fell below the minimum.

The govt. account would be replenished by thecreation of ad-hoc bills in favour of Reserve Bank.

Ad-hoc 91 days T-Bills were created to replenishthe govts cash balances with the Reserve bank.


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CONTD

It is net increase in in the net RBI credit to theGovt .

In 1970s and 1980s a large proportion of ad-hocT-bills were converted in to long termdated/undated G-sec.

This coversion referred to as funding.

This put an constraints on the conduct ofmonetary policy.

This lead to ad-hoc T-bill replaced by WMAs in1997.

It is an arrangement to cover temporarymismatch of the govt. revenue and expenditure.


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CONTD

It is not a source of financing the Govt deficit

It is an overdraft facility of the govt. with theRBI.

They are issued on Yield basis and not onprice basis.

The yield on T-bill is calculated as per thefollowing formula

Y= (100-P) * 365 *100/P*D.

P= Price

Y= Discounted Yield

D= Days of maturity


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T-Bills have a primary as well as secondarymarket

The dealers bids through (negotiated

Dealing System) NDS In secondary market the already ssued T-bills

are traded in by banks, FIs and MFs

The quotes for T-bills in the secondarymarket are on a yield basis.

Two way yield are quoted (Bid and Ask)

Bid yield is higher than the ask yield


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Commercial Paper

Following the recommendations of thevaghul committee in March 1989

RBI permitted the issue of CPs within the

framework of its guidelines It can be issued to individuals ,banks

,companies and other registered Indiancorporate bodies and Unincorporated bodies

N

RIs can be issued a CP only on anon-tranferable and non-repatriable basis.

FIIs are eligible to invest in CPs but withinthe limits set for their investment by theSEBI


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It is an unsecured short term promissorynote, negotiable and tranferable byendorsement and with a fixed maturityperiod.

It is issued at discount by a leading creditworthy ness and highly rated corporates tomeet their working capital requirements. Itis also known as finance paper ,industrial

paper or corporate paper. The PDs and AllIndia financial institution can also issue CPs

It can also be issued in interest bearingform.


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Conditions of issuing CPs

The tangible net worth of the company ,as peraudited balance sheet is not less than Rs 4 Crore

A company has been sanctioned working lmit by

banks or all-India FIs. The borrowal account of the company is classified

as a standard asset by the financingbanks/institution.

Working capital limit means the aggregate limitsincluding those by way purchase/discount of billssanctioned by way of purchase/discount of billssanctioned by banks/FIs for meeting workingcapital requirements.


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Maturity

CP can be issued for maturities between aminimum of 7 days and a maximum upto

one year from the date of issue.Denomination

CP can be issued in denomination of Rs 5Lakh (face value)

Mode of issuance

It is either in the form of a promissory noteor in a demat form through any depositoryapproved by and registered with the SEBI


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Effective Cst/Interest Yield

As CPs are issued at a discount andredeemed at their face value ,their effective

pre-tax interest yield [ Face value Net amt realised /Net amt

realised ]*[360/maturity periods]

Net amt realised = face value- discount-

issuing company and paying agent IPACharges

i.e stamp duty ,rating charges, dealing bankfee and fee for stand by facility.


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Participants

Corporate Bodies

Banks

Mutual Funds

The UTI

LIC

GIC And so on looking out for investment


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Certificate deposits Market

This are unsecured ,negotiable , short terminstruments in bearer form issued by commercialBanks and DFIs

It was introduced in 1989 and are marketablereceipts of funds deposited in abank for period ata specified rate of interest.

They are attractive both to the bankers and theinvestors in the sense that the banker is notrequired to encash the deposit prematurely

While can sell the CDs in the secondary narketbefore its maturity


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Bank can issue 7days (min) with maturity and one year

FIs can issue CDs with maturity 1-3 yrs

I t can issued at a Discount on face value and can also

issue on floating rate basis The interest rate should be set periodically according

to pre-determined formula

Issuer is free to issue or determine discount/coupon

rate. Bank have to maintain SLR and CRR on the issue of the

CDs

No lock in period and can be freely transferred by

endorsement and delivery


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MMMFs

The money market instrument outlinedearlier in the wholesale transactionsinvolving large amount and are suitable

for large corporates and institutionalinvestors to enable small investors tocome or participate MMMFs started orintroduced through that can earn market

related yield.

It bridges the gap between smallindividuals and money market.


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RBI made certain modification in 1995-96 to make itmore flexible and attractive to a large investors basesuch as banks FIs and corporates besides individuals.

Modification done

i. Removal of ceiling for raising resources

ii. Allowing Private sector to set up MMMFs.

iii. Permission to MMMFs to invest in rated bands anddebentures

iv. Min lock-in period 15daysv. MMMMFs allowed to offer a cheque writing facility

in tie up with banks to provide more liquidity to unitholders.

vi. MMMFs have to be setup as a separate entity only

in form of a trustvii. It is Under SEBI since March 2007.


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Market for long-term capital. Demandcomes from the industrial, service sectorand government

Supply comes from individuals,corporates, banks, financial institutions,etc.

Can be classified into: Gilt-edged market

Industrial securities market (new issues andstock market)

THE IN

DIAN

CAPITAL MARKET


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The Indian Capital Market

Development Financial Institutions

Industrial Finance Corporation of India (IFCI)

State Finance Corporations (SFCs)

Industrial Development Finance Corporation (IDFC)

Financial Intermediaries

Merchant Banks

Mutual Funds

Leasing Companies

Venture Capital Companies


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Primaryissue

PublicIssue

IPO FPO

RightIssue

PVTPlacemen

t

Pvt Placement

Preferential Issue

QIPs


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Primary market

It is the market for new issues. It is the

market for fresh capital. Funds are

mobilized through prospectus , right

issue, and the private placement.


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IPO & FPO

1. IPO

It is a offering either of securities or an offer forsale of existing securities or both by an unlisted

company for the first time to the public.

2. FPO

It is an offering of either a fresh issue of securities

or an offer for sale to the public by an alreadylisted company through an offer documentsInvestors participating in these offerings takeinformed decisions based on its track record andperformance.


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Right Issue

It is the issue of new shares in which

existing shareholders are given

preemptive rights to subscribe to the new

issue on a pro-rata basis.

The right is given in the form of an offer

to existing shareholders to subscribe to a

proportionate number of fresh ,extra at a

pre-determined price.


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Private placement

It refers to the direct sale of newly issued

securities by the issuer to a small number

of investors through merchant bankers.

i. Investors

ii. Financial Institutions

iii. Corporatesiv. Banks and High net worth individuals


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Preferential Issue

A public / rights is cumbersome and

requires compliance with statutory

provisions . Hence, many companies opt

for preferential allotment of shares for

raising funds.

Such allotments are made to various

strategic groups including promoters,Foreign Partners, Technical collaborators

and .Private funds.


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QIPs

It has emerged as a new fund raising

investment for listed companies in India.

Through QIPs issue funds can be raised

from foreign as well as domestic

institutional investors without getting

listed on a foreign exchange ,which is

lengthy and cumbersome.


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International Capital market

GDRs ADRs

ECBs FCCBs


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gdr

GDRs are essentially equity instrumentsissued abroad by authorized overseascorporate bodies against shares/bonds of

Indian companies held with nominatedcustodian banks.

The issue of GDR creates equity shares ofthe issuing company which kept with a

designated bank . GDR are freely transferable outside India and

dividend in respect of the sharesrepresented by GDR is paid in Indian rupees.


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ADR

ADRs are negotiable instrumentsdenominated I dollars and issued by the USdepository bank.

A non-Us company that seeks to list in theUS ,deposits it shares with a bank andreceive a receipt which enables the companyto issue the American depository shares.

These ADS serve as a stock certificates and

are used interchangeably with the ADRwhich represents ownership of depositedshares There is no legal or technicaldifference between an GDR and ADR.


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ECBs

Indian corporates are allowed to raiseforeign loans for financing infrastructureprojects.

The Indian companies are free to raise ECBsfrom any internationally recognized source,such as bank, export credit agencies,suppliers of equipments,foreign

collaborators, foreign equity holders, andinternational capital markets .

ECBs are linked to federal reserve board ratewhich is 3% since April 2005.


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FCCBs

FCCBs are bonds issued by Indian companiesand subscribed to by anon-resident inforeign currency.

They carry a fixed interest or coupon rateand are convertible into a certain number ofordinary shares at a preferred price.

They are convertible into ordinary shares ofthe issuing company either in whole or a

part on the basis of any equity-relatedwarrants attached to the debt instruments .

This bonds are listed and traded abroad.


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Till conversion the interest is paid in dollars

And if conversion option is not exercisedthan the redemption is also made in dollars.

Thus Foreigners prefer FCCBs and Indian

companies prefer to issue GDRs.

The rate of interest is less but the exchange

risk is more in FCCBs as interest is payable in

foreign currency.


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Secondary market

The secondary market is a market in whichexisting securities are resold or traded. Thismarket is also Known as the Stock market

In India secondary market consist of

recognized Stock exchanges operating underrules, by-laws and regulation duly approved bythe government.

These stock exchanges Constitute an organizeStock market where securities are issued by thecentral and State govt, public bodies and jointstock companies are traded.


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Stock exchange defn

A Stock exchange is defined under section

2 (3) of the securities contract

(Regulation) Act, I956, as any body of

individuals whether incorporated or not,

constituted toe the purpose or assisting,

Regulating or controlling the business of

buying selling, or dealing in securities.


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Function of the Secondary market To Facilitate liquidity and marketability at theoutstanding equity and debt instruments

To contribute to economic growth throughallocation of funds to the most efficient Channelthrough the process of disinvestment toreinvestment.

To provide instant valuation at securities causedby Changes in the internal environment(company-wide and industy wide factors). suchvaluation facilitates the measurement of the costof capital and the rate of return of the economic

entities at the micro level.


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To ensure a measure of safety to improve

and fair dealing to protect investors

interest.

To induce companies to improve

performance Since the market price at

the Stocks exchanges reflects the

performance and this market price is

readily available to investors.


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Preference shares TYPES

1. CUMULATIVE preference Shares

Share where the arrears of dividends in times of and for leanprofits can be accumulated and paid in the year in which the

company earns good profits. This is the type of preference share on which

dividend accumulates if it is remains unpaid. All arrears ofpreference dividend have to be paid out before paying dividend onequity Shares.


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Non-Cumulative preference shares',Shares where the carry forward of the

arrears of dividends is not possible.

Participating preference shares: shares

that enjoy the right to participate insurplus profits or Surplus assets on theliquidation of a company or in both, if theArticles of Association provides for it.


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Redeemable preference shares

Shares that are to be repaid at the end ofthe term of issue, the max. period of redemption being 20 years redeemed witheffect from 1/03/1997 under the companiesamendment act ,1996. Since they are similarto debentures . Only fully paid shares areredeemed Where redemption is made out of

profits a capital redemption Reserve Account isopened to which a sum equal to the nominalvalue off the shares is transferred, It is treatedas paid-up Share capital of the company.


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Fully convertible cumulative preference

shares

Shares comprises of two parts

Part A is convertible into equity shares

Money Maket

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