RESEARCH ASSIGNMENT ON FINANCIAL MARKETS AND INSTITUTIONS

Explain the various instruments in Money market and capital market. Which instrument is better for depository institutions from the point of view of cost? INRODUCTION TO THE FINANCIAL MARKET : A financial Market consists of investors or buyers, sellers, dealers and brokers and does not refer to a physical location. A financial market is a market where financial instruments are exchanged or traded. economic functions: Financial markets provide the following three major

1) Price discovery 2) Liquidity 3) Reduction of transaction costs

TYPES OF FINANCIAL MARKET :

1. MONEY MARKET Money market is the sector of the financial market that includes financial instruments that have a maturity or redemption date that is one year or less at the time of issuance. These are mainly wholesale markets. MONEY MARKET INSTRUMENTS : One of the important function of a well developed money market is to channelize saving into short term productive investments like working capital. Major characteristics of money market instruments are: short-term nature; low risk; high liquidity (in general); close to money.

CALL MONEY MARKET The call money markets form a part of the national money market, where day to- day surplus funds, mostly of banks are traded . The call money loans are very short term in nature and the maturity period of this vary from 1 to 15 days. The money which is lent for one day in this market is known as call money, and if it exceeds one day (but less than 15 days), is referred as notice money in this market any amount could be lent or borrowed at a convenient interest rate . Which is acceptable to both borrower and lender .these loans are consider as highly liquid as they are repayable on demand at the option of ether the lender or borrower.

PURPOSE Call money is borrowed from the market to meet various requirements of commercial bill market and commercial banks. Commercial bill market borrower call money for short period to discount commercial bills. Banks borrower in call market to: 1:- Fill the temporary gaps, or mismatches that banks normally face. 2:- Meet the cash Reserve Ratio requirement. 3: - Meet sudden demand for fund, which may arise due to large payment and remittance.

PARTICIPANTS Initially, only few large banks were operating in the bank market. however the market had expanded and now scheduled , non scheduled commercial banks foreign banks ,state , district, and urban cooperative banks , financial institution such as LIC,UTI,GIC, and its subsidiaries , IDBI, NABARD, IRBI, ECGC, EXIM Bank, IFCI, NHB , TFCI, and SIDBI, Mutual fund such as SBI Mutual fund .

INTERBANK MARKET : Interbank market is a market through which banks lend to each other. Commercial banks are required to keep reserves on deposits within central bank. Banks with reserves in excess of required reserves can lend these funds to other banks. Traditionally this formed the basis of the interbank market operations. However, currently these operations involve lending any funds in reserve accounts at a central bank. COMMERCIAL PAPER Commercial paper (CP) is a short-term debt instrument issued only by large, well known, creditworthy companies and is typically unsecured. The aim of its issuance is to provide liquidity or finance companys investments, e.g. in inventory and accounts receivable. The major issuers of commercial papers are financial institutions, such as finance companies, bank holding companies, insurance companies. Financial companies tend to use CPs as a regular source of finance. Non-financial companies tend to issue CPs on an irregular basis to meet special financing needs.

THE FEATURES OF CP 1. They are negotiable by endorsement and delivery. 2. They are issued in multiple of Rs 5 lakhs. 3. The maturity varies between 15 days to a year. 4. No prior approval of RBI is needed for CP issued. 5. The tangible net worth issuing company should not be less than 4 lakhs 6. The company fund based working capital limit should not less than Rs 10 crore. 7. The issuing company shall have P2 and A2 rating from CRISIL and ICRA.

CERTIFICATE OF DEPOSIT Certificate of deposit (CD) states that a deposit has been made with a bank for a fixed period of time, at the end of which it will be repaid with interest. Thus it is, in effect, a receipt for a time deposit and explains why CDs appear in definitions of the money supply such as M4. It is not the certificate as such that is included, but the underlying deposit, which is a time deposit like other time deposits. An institution is said to issue a CD when it accepts a deposit and to hold a CD when it itself makes a deposit or buys a certificate in the secondary market. From an institutions point of view, therefore, issued CDs are liabilities; held CDs are assets. The advantage to the depositor is that the certificate can be tradable. Thus though the deposit is made for a fixed period, he depositor can use funds earlier by selling the certificate to a third party at a price which will reflect the period to maturity and the current level of interest rates. The advantage to the bank is that it has the use of a deposit for a fixed period but, because of the flexibility given to the lender, at a slightly lower price than it would have had to pay for a normal time deposit. The minimum denomination can be 100 000USD, although the issue can be as large as 1 million USD. The maturities of CDs usually range from two weeks to one year. TREASURY BILLS MARKET:Treasury bills are short-term money market instruments issued by government and backed by it. Therefore market participant view these government securities as having little or even no risk. The interest rates on Treasury securities serve as benchmark default-free interest rates. A typical life to maturity of the securities is from four weeks to 12 months. As they do not have a specified

coupon, they are in effect zero-coupon instruments and are issued at a discount to their par or nominal value, at which price they are redeemed. Any new issue with the same maturity date as an existing issue is regarded as a new tranche of the existing security. The treasury bills can be categorized as follows:1) 14 days treasury bills:The 14 day treasury bills has been introduced from 1996-97. These bills are non-transferable. They are issued only in book entry system they would be redeemed at par. Generally the participants in this market are state government, specific bodies & foreign central banks. The discount rate on this bill will be decided at the beginning of the year quarter. 2) 28 days treasury bills:These bills were introduced in 1998. The treasury bills in India issued on auction basis. The date of issue of these bills will be announced in advance to the market. The information regarding the notified amount is announced before each auction. The notified amount in respect of treasury bills auction is announced in advance for the whole year separately. A uniform calendar of treasury bills issuance is also announced. 3) 91 days treasury bills:The 91 days treasury bills were issued from July 1965. These were issued tap basis at a discount rate. The discount rates vary between 2.5 to 4.6% P.a. from July 1974 the discount rate of 4.6% remained uncharged the return on these bills were very low. However the RBI provides rediscounting facility freely for this bill. 4) 182 days treasury bills:The 182 days treasury bills was introduced in November 1986. The chakravarthy committee made recommendations regarding 182 day treasury bills instruments. There was a significant development in this market. These bills were sold through monthly auctions. These bills were issued without any specified amount. These bills are tailored to meet the requirements of the holders of short term liquid funds. These bills were issued at a discount. These instruments were eligible as securities for SLR purposes. These bills have rediscounting facilities. 5) 364 days treasury bills:-

The 364 treasury bills were introduced by the government in April 1992. These instruments are issued to stabilise the money market. These bills were sold on the basis of auction. The auctions for these instruments will be conducted for every fortnight. There will be no indication when they are putting auction. Therefore the RBI does not provide rediscounting facility to these bills. These instruments have been instrumental in reducing, the net RBI credit to the government. These bills have become very popular in India.

CAPITAL MARKET Capital market is market for long term securities. The capital market is the sector of the financial market where long-term financial instruments issued by corporations and governments trade. Here long-term refers to a financial instrument with an original maturity greater than one year and perpetual securities: those securities (those with no maturity). There are two types of capital market that represent shares of ownership interest, also called equity, issued by

corporations, and those that represent indebtedness, or debt issued by corporations and by the state and local governments.. Capital market is the market for long term sources of finance. It refers to meet the long term requirements of the industry. Generally the business concerns need two kinds of finance:1. Short term funds for working capital requirements. 2. Long term funds for purchasing fixed assets. Therefore the requirements of working capital of the industry are met by the money market. The long term requirements of the funds to the corporate sector are supplied by the capital market. It refers to the institutional arrangements which facilitate the lending & borrowing of long term funds. IMPORTANCE OF CAPITAL MARKET Capital market deals with long term funds. These funds are subject to uncertainty & risk. Its supplies long term funds & medium term funds to the corporate sector. It provides the mechanism for facilitating capital fund transactions. It deals I ordinary shares, bond debentures & stocks & securities of the governments. In this market the funds flow will come from savers. It

converts financial assets in to productive physical assets. It provides incentives to savers in the form of interest or dividend to the investors. It leads to the capital formation. The following factors play an important role in the growth of the capital market: A strong & powerful central government. Financial dynamics Speedy industrialization Attracting foreign investment Investments from NRIs Speedy implementation of policies Regulatory changes

STRUCTURE OF THE CAPITAL MARKET IN INDIA The structure of the capital market has undergone vast changes in recent years. The Indian capital market has transformed into a new appearance over the last four & a half decades. Now it comprises an impressive network of financial institutions & financial instruments. The market for already issued securities has become more sophisticated in response to the different needs of the investors. The specialized financial institutions were involved in providing long term credit to the corporate sector. A number of new financial instruments & financial intermediaries have emerged in the capital market. Usually the capital markets are classified in two ways:A. On the basis of issuer B. On the basis of instruments

On the basis of issuer the capital market can be classified again two types:a) Corporate securities market b) Governments securities market On the basis of financial instruments the capital markets are classifieds into two kinds:a) Equity market b) Debt market Recently there has been a substantial development of the India capital market. It comprises various submarkets. Equity market is more popular in India. It refers to the market for equity shares of existing & new companies. Every company shall approach the market for raising of funds. The equity market can be divided into two categories (a) primary market (b) secondary market. Debt market represents the market for long term financial instruments such as debentures, bonds, etc. PRIMARY MARKET: To meet the financial requirement of their project company raise their capital through issue of securities in the company market. Capital issue of the companies were controlled by the capital issue control act 1947. Pricing of issue was determined by the controller of capital issue the main purpose of control on capital issue was to prevent the diversion of investible resources to non- essential projects. Through the necessity of retaining some sort of

control on issue of capital to meet the above purpose still exist . The CCI was abolished in 1992 as the practice of government control over the capital issue as well as the overlapping of issuing has lost its relevance in the changed circumstances. SECURITIES & EXCHANGE BOARD OF INDIA It was set up in 1988 through administrative order it became statutory body in 1992. SEBI is under the control of Ministry of Finance. Head office is at Mumbai and regional offices are at Delhi, Calcutta and Chennai. The creation of SEBI is with the objective to replace multiple regulatory structures. It is governed by six member board of governors appointed by government of India and RBI.

OBJECTIVES OF SEBI: 1. To protect the interest of investors in securities. 2. To regulate securities market and the various intermediaries in the market. 3. To develop securities market over a period of time.

SECONDRY MARKET The secondary market is that segment of the capital market where the outstanding securities are traded from the investors point of view the secondary market imparts liquidity to the long term securities held by them by providing an auction market for these securities. The secondary market operates through the medium of stock exchange which regulates the trading activity in this market and ensures a measure of safety and fair dealing to the investors. BOMBAY STOCK EXCHANGE Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now spanning three centuries in its 133 years of existence. BSE is the first stock exchange in the country which obtained permanent recognition (in 1956) from the Government of India under the Securities Contracts (Regulation) Act 1956. BSE's pivotal and pre-eminent role in the development of the Indian capital market is widely recognized. BSE has two of world's best exchanges, Deutsche

Brse and Singapore Exchange, as its strategic partners. BSE provides an efficient and transparent market for trading in equity, debt instruments and derivatives. It has a nation-wide reach with a presence in more than 450 cities and towns of India. NATIONAL STOCK EXCHANGE The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country. 2nd part answer : Bond is an instrument which is better for depository institutions from the point of view of cost. Bond is an instrument of indebtedness of the bond issuer to the holders. It is a

debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the principal at a later date, termed the maturity. Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly). Very often the bond is negotiable, i.e. the ownership of the instrument can be transferred in the secondary market. Thus a bond is a form of loan or IOU: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates of deposit (CDs) or short term commercial paper are considered to be money market instruments and not bonds: the main difference is in the length of the term of the instrument. Bonds and stocks are both securities, but the major difference between the two is that (capital) stockholders have an equity stake in the company (i.e. they are owners), whereas bondholders have a creditor stake in the company (i.e. they are lenders). Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks are typically outstanding indefinitely. An exception is an irredeemable bond, such as Consoles, which is a perpetuity, i.e. a bond with no maturity.

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TOTAL % -- 4%