Samir K Mahajan Financial Market in India. Financial Market Financial Market is a mechanism which...

Samir K Mahajan

Financial Market in India

Financial Market

Financial Market is a mechanism which enables participants to deal in financial claims . It’s a platform to in which lender and borrower of funds interact to determine price of the such claims .

Financial Market is organized into money and capital market.

Samir K Mahajan

Money Market

Money market is an arrangement /market for short term debt instrument/short term securities/ close money substitutes/ financial assets or instruments having maturity period less than one year.

Demand and supply of money shape the money market. Indian money market has average turn over 1 lac crore which is 2 percent of India’s GDP

Functions:o Balances demand and supply of short term funds

o Provides a focal point for central bank intervention for influencing liquidity and general level of interests in the economy

o Provides reasonable access to suppliers and users of short-term funds to fulfil their borrowing and investment requirement at an efficient market clearing price

Samir K Mahajan

The monetary policy represent polices, objectives and instruments directed towards Regulating money supply and the cost and viability of credit in the economy. Three objectives of economic policy in India is have been economic growth, price stability and social justice. The emphasis , however, have been on the first two objectives. The objectives of monetary policy are price stability and economic growth. The Government of India tries to manipulate monetary policy through Reserve Bank of India, the monetary authority in India. RBI seeks to influence monetary conditions through liquidity through varied instruments.

Tools for managing liquidity in the money market are can be categorized as direct and indirect.

Direct Instruments: o Reserve Requirements( CRR and SLR) o Bank Rate o Administered interest rate o Other qualitative and quantitative restrictions on credit

Indirect Instruments: o Open Market Operation o Repos, the major function of which is to supply liquidity to money market.

Note: Refer to Credit Control or Monetary Policy of RBI for details

Money Market contd. Link between Money Market and Monetary Policy of RBI

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o Treasury Bills(T-Bills)o Call/notice money o Commercial paperso Certificates of deposits o Commercial bills

MONEY MARKET INSTRUMENTS

Money Market contd.

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Treasury Bills (T-Bills): Treasury Bills are short terms instruments issued by RBI on behalf of central government. These are needed to meet the short term liquidity shortfall of central government arising out of seasonal or temporary gaps between its receipts ( revenue and capital) and expenditure .

Treasury bills are offered at a discount on the face value to purchaser . The difference between the face value(maturity price/amount received on maturity) and discounted price is the amount is the discount/interest . These are repaid as par face value and matures at 91-days, 182 days, 364 days.

Treasury bills are available at minimum of Rs.25,000 and their multiples.

Participants in treasury bills are RBI, primary dealers, banks, foreign banks, financial institutions including non-banking financial companies, corporates, mutual funds, provident funds, public sector undertakings, FIIs. State governments can invest their surplus funds as non-competitive bidders in T-bills.

Money Market contd.

Samir K Mahajan

Commercial Paper (CP) Commercial Paper are unsecured short term promissory notes issued at a discount by credit worthy and high rated corporate to meet their working capital requirements . These are negotiable, transferable by endorsement or delivery with a fixed maturity period . Depending on the issuing company also known as finance paper, industrial paper or corporate paper . Banks are not allowed to underwrite or co-accept the issue of a commercial paper. Foreign Institutional Investors(FIIs) are allowed to invest in CP up to certain extent fixed by SEBI.

Commercial papers are mostly issued by manufacturing companies. A CP issue has to be rated by a credit rating agency. A CP is usually priced between lending rate of scheduled commercial banks an a representative money market rate.

CPs are usually placed to investors either through merchant banks or through banks. Investors in CP are individuals, banks, corporates, unincorporated body, bodies, NRIs, Foreign Institutional investors.

CPs attracts stamp duty .

Money Market contd.

Samir K Mahajan

Commercial Bills Commercial Bills are short term negotiable instruments drawn by the seller on the buyers which are in turn, accepted (purchased/ discounted) by commercial banks for supplying working capital requirement.

Commercial bill is the result of bill of exchange or trade bills. Bills of exchange is a written instrument containing an unconditional order signed by the maker(seller/drawer) directing a particular person(drawee/purchaser ) to pay a certain amount of money to a particular person(payee) or bearer for value of goods delivered to the purchaser. When trade bills are accepted commercial banks , they are called commercial bills

Commercial bills is important to finance credit sales. It may be demand bill (payable on demand) or a usance bill (payable after expiry of certain specified time say 30 days, 60 days and 90 days ).

Commercial bills can be inland bills (must be made in India and payable at India) or foreign bills (drawn on a party outside India and may be payable at India or outside India, or may be drawn in India and payable at India or outside India) . It may be either an export bills (drawn by exporters in or outside India ) or an import bills (drawn on importers in India by exporters abroad) .

RBI rediscount genuine trade bills at bank rate or at a rate subscribe by it.

Money Market contd.

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Certificates of Deposits(CDs) Certificates of Deposits are unsecured negotiable and tradable short-term time deposits issued by commercial banks and development financial institutions in bearer form . These are also issued at a discount to face value .

Certificates of deposits are similar to fixed deposits but CDs, being in bearer form, are transferable and tradable while fixed deposits are not .

CDs can be issued to individuals, companies, corporations, trusts funds, associates , NRIs(on non-repatriable basis) and others. These are issued by banks on tight liquidity , relatively at a high interests rate. They represent high cost liability. There is no ceiling to on the amount to be raised by banks. Like other time deposits, CDS are subject to SLR and CRR requirements .

CDs attracts stamp duty .

Samir K Mahajan

Call /Short Money Market Call Money Market are market for very short term funds repayable on demand, and with a maturity period varying between one day to fortnight(fourteen days).

When money is borrowed or lent for a day, it is call (overnight) money. Intervening holiday’s holidays/Sundays are excluded for this purpose.

When money is borrowed or lent for more than one day to 14 days, it is notice money.

No collateral security are required to cover these transactions . These are highly liquid markets with the liquid being highly exceeded by cash, and as such is highly risky as well as extremely volatile .

Call money are mostly required by commercial banks. Commercial banks borrow money without collateral (guarantee/security/mortgage) from other banks to meet cash reserve requirement (CRR) as stipulated by RBI from time to time. CRR refers to the cash that banks have to maintain with RBI as a percentage of their total cash deposits (demand and time liabilities).

Money Market contd.

Samir K Mahajan

Call /Notice Money Market contd.

Participants in call money GIC, NABARD, IDBI, money market mutual funds, corporate , Discount and Finance House of India, Securities Trading Corporation of India. Commercial bans are both lenders as well as borrowers of call/notice money.

Call rate (i.e. interest rate paid on call loans) are highly volatile and varies from day to day, hour to hour, and even minutes to minutes, and thus are highly sensitive to demand and supply of call loans. Within a fortnight, rates are known to move from 1-2 percent to over 140 percent per annum.

Money Market contd.

Samir K Mahajan

Capital Market

Capital market are market for long term-fund- both equity and debt . Funds are raised within India and outside. The capital market aids in economic growth by mobilizing the savings of the economics sectors and directing the same to the productive channels.

Capital Market is segmented into primary capital market and secondary capital market. Functions: o Mobilize long term savings to finance loge term investments o Provide risk capital in the form of equity or quasi-equity to entrepreneurs o Provide boarder partnership of productive assets

Samir K Mahajan

Primary Market

Primary market is the market of new issue . It facilitates long term flow of funds form surplus spending sector to deficit sectors such as government, corporate sector (through primary issue), and to bank and non-bank financial intermediaries (through secondary issue). It is a market for fresh capital.

Primary assets of corporate lead to capital formation (creation of net fixed asset/production of new capital goods and incremental change in inventories of intermediate goods). Capital formation helps in creating productive capacities, increasing efficiency and creating jobs which in turn generate wealth .

Companies issue bonus share for various reasons: o to boost liquidity of their stock o to bring down stock price o to restructure their capital

Capital Market contd.

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Primary Market contd.

Samir K Mahajan


Bonus Issue: Bonus issue is one of the way of raising capital but it does not bring in fresh capital. Some companies distribute profit to existing share holder by way of fully paid bonus share instead of paying them dividend. Bonus share are issued in proportion of existing share held. The share holders need not have to pay for bonus share but retained earnings are converted into bonus share. Thus, bonus share enable the company to restructure its capital.

Companies issue bonus share for various reasons: o To boost liquidity of their stock o To bring down stock price

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Primary Issues (Domestic)

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Fund raising in primary market can be classified as follows:

o Public Issues (such as initial public offerings and follow on public offering) o Right Issueso Private Placement o Preferential Issueo Qualified Institutions Placement

Primary Issues are Governed by SEBI in terms of SEBI(Issue of Capital and Disclosure Requirements) Regulations, 2009.

Primary Issues (Domestic) contd.

Primary Market contd.Primary Issues (Domestic) contd.

Samir K Mahajan

Public issue Public issue consists of Initial Public offerings and Follow on public offering. Initials public offerings (IPOs) are offering of either fresh issue of securities/equities/share or sale of existing securities/equity/share or both sale of securities by an unlisted company for the first time to the public (an unlisted company is one which has not issued its share to public) Follow on public offering (FPO) are offering of either fresh issue of securities/equities/share or sale of existing securities/equity/share or both sale of securities by an listed company to the public

Right Issue: Right Issue is an offer for sale of new securities by listed company to its existing share holder on pro-rata basis (predetermined rate). It offers shares on a right basis either to expand , diversify, restructure their balance sheet or raise the promoter’s stake. Promoters offers right issues at attractive price often at discount to the market price for as they want their issue fully subscribed, they want to reward their shareholders


Samir K Mahajan

Private placement:Private placement is direct sale of newly issued securities by the issuer to a small number of investors (though merchant banker). These investors are financial institutions, corporate, banks, high net worth individuals. Private placement are mostly issued by unlisted companies Preferential issue: Preferential issues are allotment of shares to some select/strategic groups such as promoters, foreign partners, technical collaborators and private equity funds in terms of provisions of Chapter XIV of SEBI (DIP Guidelines).

Companies need prior approval from share holders for preferential allotment of shares Such securities are issued to avoid statutory provisions. However, they have been misused by both MNCs and Indian companies


Samir K Mahajan

Qualified Institutions Placements(for listed company) Qualified institutional placement (QIP) is a capital-raising tool, primarily used in India and other parts of southern Asia, whereby a listed company can issue equity shares, fully and partly convertible debentures, or any securities to a qualified institutional buyer . Through an QIP, fund can be raised from foreign as well as domestic institutional investors without getting listed on a foreign exchange which is length and cumbersome affairs. The issuing company is required to allot at least 10 percent of total issue to mutual funds Issue by foreign companies in India: India Depository Receipts(IDRs)

India Depository Receipts(IDRs enable foreign companies to raise fresh funds in India by issuing share to Indian nationals /residents in India. It enable globalization of Indian stock market. An IDR is an instrument denominated in Indian rupees in the form of depository receipts against the underlying equity of issuing company to enable foreign companies to raise funds from Indian capital market. NRIS and FIIs cannot subscribe to IDRS


Samir K Mahajan

Issue by Indian Companies in Foreign Land

Global Depository Receipts(GDRs) GDRs give opportunity a domestic company to raise funds for foreign markets, and provide exposer to global markets.

A GDR is a negotiable certificate issued by a depository bank (multinational bank) which purchases equity shares/bonds of foreign companies and deposits it on the account. GDRs represent ownership of an underlying number of shares corresponding to the GDR in fixed ratio say 1GDR=1 Share or 1 GDR=10 shares.

GDRs are offered for sale globally through bank branches, and are listed and traded in a international stock exchange ( mostly Luxemburg Stock Exchange and London Stock Exchange ) and cleared through the Euromarkets clearing systems, Euroclear and Clearstream. GDRs may also be listed on other exchanges, such as Dubai and Singapore.

GDRs are fungible in nature which means that a holder of GDRs can instruct the depository to convert them into underlying shares (number of shares it represents) and sell them in the domestic market. Once the conversion takes place, the underlying shares are listed and traded on the domestic market. The GDR holders can instruct their depository to vote on their favour.

Under this arrangement, an Indian company intending to issue GDRs will issue the corresponding number of shares which are kept in an designated overseas depository banks. GDRS are freely transferable outside India, and dividend in respect of shares represented by the GDRs are is paid in Indian rupee. Indian GDRs are primarily sold to institutional investors.

Primary Market contd.Primary Issues (External)

Samir K Mahajan

America Depository Receipts (ADRs)ADRs are negotiable instruments denominated in dollars, and issued by the US depository banks against share of a foreign company in USA. ADRs which represents the ownership of deposited shares of a foreign company by a holder in America. There is no legal or technical difference between an ADR and A GDR. As they are listed on New York Stock Exchange (NSSE) and the NADAQ (National Association of Securities Dealers Automated Association). ADR issues offer access to US institutional markets and retail markets while GDR issue offer access to US institutional markets. GDRs can be converted into ADRs by surrendering the existing GDRs and depositing the underlying equity shares with the ADR depository in exchange for ADRs.


Primary Issues (External)

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External Commercial Borrowing: External Commercial Borrowing(ECB) are borrowings raised from international market by Indian corporates. ECB refers to commercial loans in the form of bank loans, suppliers’ credit, buyers’ credit securitized instruments (such as floating rate notes, and fixed rate bonds) availed from non-residents lenders with minim average maturity period of three years.

ECB policy is administered by Finance Ministry and RBI. ECB are supplements domestically available resources for expansion of existing capacity as well as for fresh investment. Indian companies have preferred this rout of ECB as cost of such borrowings are low in the international markets. Major borrowers are Reliance Industries, SIDBI, Adani Power, Essar Oil etc. ECB are a key component of India’s external debt.

Foreign Currency Convertible Bonds:Foreign Currency Convertible Bond is a debt instrument which gives the non-resident investor a choice to convert his bond into fixed number of shares at a predetermined price or to receive a fixed yield to maturity . Such bonds are issued by Indian Companies to non–resident subscribers in foreign currencies. They carry a fixed interest, and are convertible into a certain number of ordinary shares either wholly or partially on the basis of any equity related warrants attached to the debt instruments at a preferred price. Foreign Currency Exchangeable Bond: Foreign Currency Exchangeable Bonds are issued by an Indian company which is part of promoter group of offered company to subscribers living outside India, and are exchangeable into equity shares of offered company in any manner, either wholly or partially on the bases of equity related warranty attached to the debt instruments.For example, Tata Sons (promoter company) , a promoter of all key Tata group companies issues exchangeable bonds to raise bonds for Tata Motors (offered company).


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Other External Fund

Foreign Direct Investment (FDI):Foreign direct investment (FDI) is a direct investment into production or business in a home country by an individual or company of foreign country, either by buying a company in the target country or by expanding operations of an existing business in that country.

FDI includes mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans. In a narrow sense, FDI leads to building new facilities./ i.e. capital formation.

Foreign Intuitional Investments: Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets. typical investors include banks, insurance companies, retirement or pension funds, hedge funds, investment advisors and mutual funds.

Foreign Intuitional Investments is used most commonly in India to refer to foreign institutional investors investing in the financial markets of India.


Samir K Mahajan

Secondary market also know as stock market is the market where existing/outstanding securities are resold/traded. A company has to list its securities on the stock exchange for trading . A company can list seek listing on more than one stock exchange. A company listed on in any stock exchange is permitted for trading on the other.

Functions of Secondary Market o facilitates liquidly and marketability of existing equity and debt instrument o Provides instant valuation of securities o Contribute to economic growth through allocation of funds to the most efficient through disinvestment and re-

investment

Secondary (Stock) Market

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Stock Market in India

Secondary (Stock) Market contd.

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The Native Share and Stock Broker’s Association, now known as BSE was formed in Bombay (Mumbai ) in 1875. This was followed by exchanges in Ahmedabad in 1894, Calcutta (Kolkata) in 1908and Madras (now Chennai) in 1937. The Calcutta Stock Exchange was the largest stock exchange till 1960s.

Stock Market in India , after initiations of reforms in India in 1990, comprises of : o Regional Stock Exchange (15 nons.)o National Stock Exchanges {Bombay Stock Exchange (BSE)and National Stock Exchange (NSE)}o Over the Counter Stock Exchange of India (OCTEI)o Inter-connected Stock Exchange Of Indiao In all, there are thus 21 stock exchanges in India . o MCX Stock Exchange of India o United Stock Exchange of India Limited

Stock Market in India

Samir K Mahajan

Stock Market in India contd.

In all, there are, at present 21 stock exchanges in the country. The National Stock Exchange was established in 1994. it was the first modern , high tech stock exchanges with new trading practices, new institutions and new products.

OCTAI was set up in 1992 as stock exchange providing small and medium sized companies the means to generate capital.

Internet trading was introduced in India since 2000, which allows trading (purchase and sale of shares) by investors on line through internet

All 21 public sector banks, leading private banks, public sector undertakings and corporate are shareholders of the tock exchanges exchange. Interconnected stock exchange is the stock exchange of stock exchange.


Samir K Mahajan

Demutualization of Stock Exchanges ALL the Stock exchanges in India, except NSE and OCTAI, were earlier owned and controlled by the

brokers. The ownership rights and managerial rights of the broker often led conflict of interests, where in interest of the brokers were preserves at the cost of investors.

Demutualization is separation of Separation of ownership rights and trading rights of brokers. In other words, demutualisation is the process by which any member-owned organisation can become a shareholder owned company. Such a company could either be listed and on a stock exchange or be closely held by its shareholders.NSE and OCTEI are the first demutualised stock exchanges in India.

Stock exchange is a corporate tax paying entity . Present day stock exchange safeguard the interests of investors, bring greater transparency in the function of stock exchanges,


Samir K Mahajan

The stock exchanges in India are regulated by central government under the Securities Contract (Regulation) Act, 1956 which provide for the recognition of stock exchanges, supervision and control of recognised stock exchanges, regulation of contracts in securities, listing of securities, transfer of securities and many other functions.

The Securities and Exchange Board of India (SEBI) was established 1992 to protect the interest of the investors in securities, and promote and regulate the securities market in India.


Regulation of Stock Exchanges: SEBI

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Stock Market Index

Stock market index is the index based on a statistical compilation of the share prices of a number of representative stocks. Stock market index is the weighted average prices of selected stock prices. The index incorporates as et of scrips/stocks which have high market capitalisation high liquidity. Market capitalisation is the market value of a company’s stock which is derived by multiplying its market price with number outstanding equities. Liquidity is reflected in the ability buy or sell a scrip close to the current market price.

Stock market index serves as the barometer of equity market as well as barometer of country’s expectation about economy’s performance. It reflects market direction and indicates day-today fluctuations in stock prices. It is a precursor of economic cycles.

Major stock indices in India are

o BSE Sensitive BSE Sensex) Index incorporating 30 select scrips listed in BSEo Standard & Poor’s CNX Nifty incorporating 50 scrips (previously NSE Nifty)


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Bullish and Bearish Market

A bull market is loosely defined as a period when the stock market as a whole is rising in price.

A bear market is loosely defined as a period when the stock market as a whole is declining in price.

Bear market or bearish market may be for a single security or asset, group of securities in particular sector or the securities market as a whole.


Samir K Mahajan

Samir K Mahajan Financial Market in India. Financial Market Financial Market is a mechanism which...

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