INDIAN FINANCIAL SYSTEM

TRENDS IN CAPITAL AND MONEY MARKET IN INDIA

 Trends in Indian Capital market:

Over The Counter Exchange of India (OTCEI):

For the purpose of newly promoted companies, another stock exchange with lesser degree of
conditions has been promoted and it is called Over The Counter Exchange of India (OTCEI).
It may not be possible for all the newly companies to list their shares with the existing stock
exchanges. The share capital of these companies will be low and hence there should be an
arrangement for listing such companies’ shares. The creation of Over The Counter Exchange
of India (OTCEI) is helpful to these newly promoted companies.

Merchant banker:

Merchant bankers have been permitted to take part in the stock market. operations and their
functions are also regulated by SEBI. They not only help companies in capital budgeting but
also guide the foreign investors in the purchase of securities. The merchant bankers, through
the financial markets, help some of the Indian companies to obtain fresh capital. They also go
in for syndication of loans and help the newly started companies in the issue of shares.

Non Banking Financial Companies:

The role of non-financial companies has also been controlled. RBI has introduced new
conditions, restricting their activities. New norms with regard to capital of non banking
financial companies have been introduced. For chit funds, a separate Act has been passed and
it restricts the maximum bidding to 40%.

Forward trading in Indian Capital market:

Forward trading has been introduced since 9th June 2000 in Bombay Stock Exchange on a
trial basis and if found successful, it will be extended. It will be helpful to the investors in
ascertaining the true colors of existing companies.

Badla transactions in Indian Capital Market:

Badla is a transfer of a contract from one period to another, where, either the buyer or the
seller is unable to execute the contract for which purpose, the defaulting parties will pay
Badla charges (which are decided by the Stock exchange). At present, SEBI has banned
Badla transactions.
Restrictions on Mutual Fund’s Investment:

There have been restrictions on the role of mutual funds in the market. They cannot invest
more than 10% of their investable funds in any single company and not more than 10% of
single company’s issue of shares can be purchased by mutual funds.

Educating Public:

Press and media have contributed a lot in popularizing the Indian capital market and they are
highlighting the prices of securities everyday. The mutual funds and merchant banks have
been asked to set apart a portion of their funds towards educating the public on the
developments in the Indian capital market.

Government Securities Market:

After the stock scam, the Central Government has de-linked Government securities from
trading along with company securities. In other words, there will be separate market for
Government securities and they will not be dealt along with company securities in the
stockmarket. The measure was taken by Dr. Manmohan Singh when he was the Finance
Minister.

Future trading in Indian Capital Market:

Future trading is a contract to buy or sell a particular financial instrument on a future date at a
specific price. The contract enables the parties to transfer according to the changes in the
price from one person to another. By this, the risk is minimized. In every future contract, we
have a buyer and a seller. And if one makes a profit in a particular contract, the other person
may try to minimize his loss through some other contract. Thus, the future market provides
scope for the traders to minimize their loss or the risks in trading of financial instruments. We
have different types of ‘financial futures’.

Penalty for insider trading in Indian Capital Market:

In 2002, SEBI Act was amended to make insider trading punishable as a serious offense. The
penalty rate has been enhanced to Rs. 1 lakh per day and the maximum penalty can go up to
Rs. 25 crores
 Trends in Indian money market:
Most of the active participation is by foreign banks, followed by Indian banks,
corporates and finally, FI's. The absence of nationalised banks from the IRS
scene is noteworthy.

IRS today can be used by corporates only for an actual hedging exercise, and it
has to have board permission. Moreover, the deal would be within the exposure
limits of that firm for the bank with which it is dealing. These measures are to
ensure that corporate do not undertake speculative activities, and start dealing
only after they have proper risk- management systems in place.

On the first day of trading, more than 30 deals were recorded, worth over Rs.
600 crores in notional principal terms. Rs. 500 crores of this was accounted for
by corporate deals The rush was because the European and private banks
wanted to be a part of the history dealing on first day, rather than actual
hedging. It has also been reported that some deals were circular between three
players, with no real effect in any players position. No deal was stuck for more
than a year tenor.

Since the first day, there have been almost no deals, and the markets are cold.
The reasons for this are many. At the short term level, almost all the players
expect the interest rates to go down in the next few months. This means that
there are no conflicting views among players about interest rates, and so IRS
deals are not very tempting. Again, there are very few Floating rate loans
around. These and other fundamental reasons have been discussed in the next
section.

In spite of these, there are many underlying reasons for going for IRS. Today,
the major financial intermediaries viz Indian banks, foreign banks, financial
institutions, and corporates have radically different sets of asset-liability
structures.

Thus for ALM alone IRS are a good options. For example, the FI's have much
of their liabilities as bullet repayment bonds, and the bulk of their assets by way
of installment repayment loans.
Thus, chances are that their liabilities portfolio is longer than their assets
portfolio Commercial banks, on the other hand, have bulk of their liability
portfolio in relatively short-term maturities, and assets are at longer maturities
with fixed interest rates. Thus banks and FIs alone can enter in a lot of mutually
beneficial deals.

corporate would also like to hedge their interest rate risks, and convert their
filed rate loans to floating rates, now that the options are available. However,
their needs could be medium term in nature (2 to 8 year’s) and as yet there are
no takers for these long maturities. The market is only about 2 months old now,
and is yet to evolve.

Some other trends:

1. Nationalization of commercial banks to boost money market in India

Commercial banks were nationalized in order to stimulate the growth of Indian money
market. The nationalization enabled banking sector to provide more loans to agriculture and
discount agricultural bills.

2. Introduction of various relief acts to boost up growth of Indian money market

The passing of Public Debt Relief Act has released many people, especially in rural areas
from the clutches of the money lenders. The Urban Debt Relief Act has given relief to the
urban poor. In 1988, the discount and finance house was set up for discounting commercial
bills brought by commercial banks.

3. Reduction of stamp duty

Reduction of stamp duty and re-discounting rate on promissory notes has made it more
popular. In 1986, the Government issued 180-days treasury bills and in 1989 certificate of
deposits, and commercial paper in 1990.

In 1991, Money Market Mutual fund was set up to allow more people to take part in the
money market activities in India.
4. Steps taken to curb disparity in Interest rates

The interest rate of commercial banks which was controlled by RBI has been deregulated.
This curtails the adverse effect of disparity in Interest rates among various money markets
and in turn helps boost up the growth of Indian money market.

5. Repurchase of options of treasury bills to boost bill market

RBI has introduced repurchase of options of treasury bills to provide more additional funds to
commercial banks. This attracts more activity in the bill market and help boost money market
in India.

6. Relaxation fore foreign institutions by Indian Government

More relaxation for foreign institutions to invest foreign funds in the Indian money market.
This brings in more liquidity during the period of busy season (between June to February).

7. Introduction of Credit rating for commercial paper and promissory notes

Credit rating has been introduced for promissory notes as well as commercial paper by which
the credibility of these instruments has gone up. Credit worthiness of these instrument plays a
major role for the growth of Indian money market.