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FINANCIAL MARKETS
market. Wherever a financial transaction takes place, it is deemed to have taken place in
the financial market. Hence financial markets are pervasive in nature since financial
transactions are themselves very pervasive throughout the economic system. For
instance, issue of equity shares, granting of loan by term lending institutions, deposit of
which facilitate buying and selling of financial assets, claims and services. Sometimes,
we do find the existence of a specific place or location for a financial market as in the
Industrial Govt. Securities Long Term Call Money Commercial Treasury bill Short Term
Securities Market Loan Market Market Bill Market Market Loan Market
Market
Primary Secondary Term Loan Market Market for financial Money Lenders Indigenous,
Market Market Market for Mortgage Guarantees Bankers etc.
Classification of Financial Markets
Unorganized Markets
In these markets there are a number of money lenders, indigenous bankers, and
traders etc., who lend money to the public. Indigenous bankers also collect deposits from
the public. There are also private finance companies, chit funds etc., whose activities are
not controlled by the RBI. Recently the RBI has taken steps to bring private finance
companies and chit funds under its strict control by issuing non-banking financial
companies (reserve Bank) Directions, 1998. The RBI has already taken some steps to
bring the unorganized sector under the organized fold. They have not been successful.
The regulations concerning their financial dealings are still inadequate and their financial
Organized Markets
In the organized markets, there are standardized rules and regulations governing
instrumentalisation. These markets are subject to strict supervision and control by the
Capital Market
The capital market is a market for financial assets which have a long or indefinite
maturity. Generally, it deals with long term securities which have a maturity period of
above one year. Capital market may be further divided into three namely:
(i) Equity shares or ordinary shares, (ii) Preference shares and (iii) Debentures or bonds.
It is a market where industrial concerns raise their capital or debt by issuing appropriate
Primary market is a market for new issues or new financial claims. Hence, it is
also called New Issues market. The primary market deals with those securities which are
issued to the public for the first time. In the primary market, borrowers exchange new
financial securities for long term funds. Thus, primary market facilitates capital
formation. There are three ways by which a company may raise capital in a primary
The most common method of raising capital by new companies is through sale of
securities to the public. It is called public issue. When an existing company wants to
raise additional capital, securities are first offered to the existing shareholders on a pre-
emptive basis. It is called rights issue. Private placement is a way of selling securities
Secondary Market
securities which have already placed through the new issue market are traded in this
market. Generally, such securities are quoted in the Stock Exchange and it provides a
continuous and regular market for buying and selling of securities. This market consists
of all stock exchanges recognized by the Government of India. The stock exchanges in
India are regulated under the Securities Contracts (Regulation) Act, 1956. The Bombay
Stock Exchange is the principal stock exchange in India which sets the tone of the other
stock markets.
Government securities are traded. In India there are many kinds of Government
Securities – short-term and long-term. Long-term securities are traded in this market
while short term securities are traded in the money market. Securities issued by the
Corporations, Port Trusts etc. Improvement Trusts, State Electricity Boards, All India
and State level financial institutions and public sector enterprises are dealt in this market.
half-yearly and they carry tax exemptions also. The role of brokers in marketing these
securities is practically very limited and the major participant in this market is the
“commercial banks’ because they hold a very substantial portion of these securities to
The secondary market for these securities is very narrow since most of the
Government securities offer a good source of raising inexpensive finance for the
Government exchequer and the interest on these securities influences the prices and
yields in this market. Hence this market also plays a vital role in monetary management.
Development banks and commercial banks play a significant role in this market
by supplying long term loans to corporate customers. Long-term loans market may
Government both at the national and regional levels to supply long-term and medium
banks dominate the industrial finance in India. Institutions like IDBI, IFCI, ICICI, and
other state financial corporations come under this category. These institutions meet the
Mortgages Market
The mortgages market refers to those centers which supply mortgage loan mainly
property like real estate. The transfer of interest in a specific immovable property to
secure a loan is called mortgage. This mortgage may be equitable mortgage or legal one.
Again it may be a first charge or second charge. Equitable mortgage is created by a mere
deposit of title deeds to properties as securities whereas in the case of a legal mortgage
the title in the property is legally transferred to the lender by the borrower. Legal
Similarly, in the first charge, the mortgager transfers his interest in the specific
mortgaged to somebody else. The mortgagees can also further transfer his interest in the
The mortgage market may have primary market as well secondary market. The
primary market consists of original extension of credit and secondary market has sales
In India, residential mortgages are the most common ones. The Housing and
Urban Development Corporation (HUDCO) and the LIC play a dominant role in
financing residential projects. Besides, the Land Development Banks provide cheap
Mortgage loans for the development of lands, purchase of equipment etc. These
development banks raise finance through the sale of debentures which are treated as
trustee securities.
a reputed person in the financial circle. Guarantee is a contract to discharge the liability
of a third party in case of his default. Guarantee acts as a security from the creditor’s
point of view. In case the borrower fails to repay the loan, the liability falls on the
shoulders of the guarantor. Hence the guarantor must be known to both the borrower and
the lender and he must have the means to discharge his liability.
Through there are many types of guarantees, the common forms are:
(i) Performance Guarantee and (ii) Financial Guarantee. Performance guarantees cover
contracts etc. On the other hand financial guarantees cover only financial contracts. In
Government both central and state and other specialized guarantee institutions like ECGC
(Export Credit Guarantee Corporation) and DICGC (Department Insurance and Credit
and corporate customers. For a smooth functioning of any financial system, this
Financial markets, across the globe, are undergoing profound, unprecedented and
fast-paced changes. Technology has revolutionized the process and the information
explosion has sparked off remarkable changes in the way the world has been operating.
The capital market is one of the most vibrant sectors in the financial systems,
The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
Foreign brokers account for 29 of these. Two major reasons why Indian securities are not
increasing regarded as attractive to international investors are the relatively high returns
compared with the more developed global markets as well as the low correlation with
world markets.
The recent years witnessed significant reforms in the capital market. It is well
known that trading platform has become automatic, electronic, anonymous, overdriven,
and nationwide and screen – base. The reform was needed to address the inadequacies
Other aspects of the market such as the increasing sophistication and the range of
tradable financial products add to the attractiveness of the market as a whole. The
availability of derivative projects including index futures, index options, individual stock
futures and individual stock options reinforces the overall attractiveness of this market to
foreign and domestic investors. The derivatives market in only two years has shown
spectacular growth. We shall analyze such growing trends in the Indian capital Market
Scenario.
economic growth. Resources would remain idle if finances are not funneled through the
capital market. The importance of capital market can be briefly summarized as follows:
The capital market services as an important source for the productive use of the
economy’s savings. It mobilizes the savings of the people for further investment and thus
(ii) It provides an avenue for investors, particularly the household sector to invest
(iii) It facilitates increase in production and productivity in the economy and thus,
towards those who can apply them productively and profitably to enhance the
growth. They give quantitative and qualitative directions to the flow of funds
Thus, a capital market services as an important link between those who save and
Money Market: Money market is a market for debt securities that pay off in the
short term usually less than one year, for example the market for 90 days treasury bills.
This market encompasses the trading and issuance of short-term non-equity debt
of deposits, etc.
Capital Market: Capital market is a market for long-term debt and equity shares.
In this market, the capital funds comprising of both equity and debt are issued and traded.
This also includes private placement sources of debt and equity as well s organized
markets like stock exchanges. Capital market can be further divided into primary and
secondary markets.
A stock, bond or other investment instrument issued by a corporation, government or
Security markets provide a platform for the trade of such securities between
different investors.
Securities generally have two stages in their lifespan. The first stage is when the
company initially issues the security directly from its treasury at a predetermined offering
price.
(IPO’s). Investment dealers frequently buy initial offerings on the primary market and
result the securities on the Secondary Market. This promotes the goal of equal access to
information for everyone. The second stage is when an investor or dealer makes the
shares, bought from a company treasury, available for sale to other investors on the
secondary market. In the secondary market, the trading of shares in between investors.
This trading usually takes place through such as the Toronto, New York, Montreal or
In the primary market, securities are offered to pubic for subscription for the
undertakes the maximum entrepreneurial risk associated with a business venture. The
holders of such shares re members of the company and have voting rights. A company
may issue such shares with differential rights as to voting, payment of dividend, etc.
Rights Issue / Rights Shares: The issue of new securities to existing shareholders
Bonus Shares: Shares issued by the companies to their shareholders free of cost
years.
dividend can be paid in respect of equity share. They also enjoy priority over the
claims rank below the claims of the company’s creditors, bondholders / debenture
holders.
Cumulative Preference Shares: A type of preference shares on which dividend
dividend payable on the same accumulates, if not paid. After a specified date,
Participation right is linked with the quantum of dividend paid on the equity
securitization.
bearing instruments which are issued by the Reserve Bank of India on behalf of
programme. These securities have a fixed coupon that is paid on specific dates on
half-yearly basis. These securities are available in wide range of maturity dates,
from short dated (less than one year) to long dated (upto twenty years).
payable half yearly on specific dates and principal amount repayable on particular
date on redemption of the debentures. Debentures are normally secured/charged
A bond investor lends money to the issuer and in exchange, the issuer promises to
repay the loan amount the loan amount on a specified maturity date. The issuer
usually pays the bondholder periodic interest payments over the life of the load.
• Zero Coupon Bond: Bond issued at a discount and rapid at a face value. No
periodic interest is paid. The difference between the issue price and redemption
price represents the return to the holder. The buyer of these bonds receives only
• Convertible Bond: A bond giving the investor the option to convert the bond into
issued by companies with a high credit standing in the form of a promissory note
redeemable at par to the holder on maturity and therefore, doesn’t require any
tenure of 90-days.
• Treasury Bills: Shore-term (upto 91 days) bearer discount security issued by the
companies. They are broadly divided into two categories, namely, specified securities
(forward list) and non-specified securities (cash list). Equity shares of dividend paying,
growth-oriented companies with a paid-up capital of at least Rs.50 million and a market
capitalization of at least Rs.100 million and having more than 20,000 shareholders are
normally, put in the specified group and the balance in non-specified group.
Two types of transactions can be carried out on the Indian stock exchanges: (a)
Spot delivery transactions; for delivery and payment within the time or on the date
stipulated when entering into the contract which shall not be more than 14 days following
the date of the contract” and (b) forward transactions “delivery and payment can be
extended by further period of the contract”. The latter is permitted only in the case of
specified shares. The brokers who carry over the outstanding pay carry over charges
prevailing.
A member broker in an Indian stock exchange can act as an agent, buy and sell
securities for his clients on a commission basis and also can act as a trader or dealer as a
principal, buy and sell securities on his own account and risk, in contrast with the practice
prevailing on New York and London Stock Exchanges, where a member can act as a
style of face-to-face trading with bids and offers being made by open outcry. However,
there is a great amount of effort to modernize the Indian stock exchanges in the very
recent times. Brokers of stock trading get membership at stock exchange after fulfilling
conditions. Brokers maintain an online link with the stock exchange. He is constantly
updated with the real quotes in the market, their position, and the demand and supply
Customer toes to the office of the broker of gives him a call regarding the sale or
the purchase of a particular number of shares. Broker, after receiving the order, enters it
into the online system. If an appropriate match is established with reference to the price
available at the market that is both the buy and sell rates match. This implies that the
deal is struck. If there is no match then the order is stacked in the system until a matched
The trading system of the national Stock exchange provides enormous flexibility
to trading members. Members can easily exercise the various options available to them
on a trading floor and when entering the order can place limit on either the number or the
higher order and accordingly the order is matched at the best price available. Members
have the option of canceling all outstanding orders in one stock if necessary or he may
choose the entire order to be carried out as one deal or in smaller lots. This kind of a
system provides full transparency. Identity of trading members entering order in the
system will be protected and will have direct participation by large players also without
There is a book entry transfer system for securities, which will operate just, like a
passbook system in a bank. Accounts will be maintained against each member detailing
the securities held in trading member’s name. At the end of each trading day exchange
computer will generate a report of matched traders of each trading member, which in turn
would be received by each trading member and the money refundable or deliverable to
This will reduce the bank office work of the trading member, thus allowing them
provide better service to the investors. In order to expedite the settlement process a
depository has been established. Through this system, the trade transactions have shown a
The recent years witnessed significant in the capital market. It is well known that
trading platform has become automatic, electronic, anonymous, out – driven and
nationwide and screen base. Shouting and gesticulations have given way to punching and
clicking. Speed and efficiency are the hallmark of the present system. Across the system
multitude of the market participants trade with one another anonymously and
simultaneously. On any trade day more then 10,000 terminals come alive, in around 400
response.
Trading Cycle:
An investor today need that wait with his fingers crossed for a fortnight or more
for getting crossed cheques or crisp notes for the sale proceeds of his securities. The
trading cycle has been shortened to T+2. This shortening of the cycle has been done in a
Dematerialization:
dematerialization of scripts. Now 99% of the scrip’s in the market are dematerialized.
Almost 100% of the shares are in Demat form. Inconvenience of physical custody and
transfer, tedium of indicating change of address and problems of bad delivery, late
delivery, non-delivery and risk of forgery and frauds have virtually disappeared. The
situation and a negligible trade failure of 0.003%. The Clearing Corporation of the
exchanges assumes the counter party risk of each member and guarantees settlement
through a fine tuned risk management system and an innovative method of online
position monitoring. It also ensures the financial settlement of trades on the appointed
day and time irrespective of default by members to deliver the required funds and/or
Derivatives market:
Sensex is the branded equity index of the BSE, Asia’s oldest stock exchange with
a 128 years history. Analysts and the business media track India’s stock market
The beginning of index futures trading on June 9, 2000 was perhaps the defining
moment for the BSE in the context of equity derivatives. Few events thereafter matched
the grand and epochal launch. The BSE currently accounts for about 3 per cent of India’s
It is quite likely the BSE does not mind the insignificance of its share. It had
resolutely regarded equity derivatives as inapt substitutes for babla; a system of carry-
forward trading that defined the BSE’s prestige. It had resolutely argued that India was
not ready for equity derivatives. Yet, the BSE was the first to launch equity derivatives.
Though index futures and index options were listed ahead of stock options and
stock futures, stock futures have raced ahead of all other contracts. Stock futures
accounted for over 60 per cent of the NSE’s and, therefore, India’s total derivatives
activity by number of contracts and turnover in May 2003. Stock options accounted for
about 22 per cent of total derivatives activity by number of contracts and about 24 per
cent of turnover.
Stock derivatives have equity shares of companies, say, Reliance and Satyam
Computer Services, as the underlying. The securities and Exchange Board of India
(SEBI) approved 31 stocks on which call and put options could be listed by the BSE and
The same set of 31 stocks applied to the listing of stock futures by the BSE and
NSE in November 2001. In January 2003, SEBI extended the approved list by 31 more
stocks. Stock derivatives dominate the marketplace, and some may regard this as going
Book – Building:
Book Building is basically a capital issuance process used in Initial Public Offer
(IPO), which aids price and demand discovery. It is a process used for marketing a
public offer of equity shares of a company. It is a mechanism where, during the period
which the book for the IPO is open, bids are collected from investors at various prices,
which are above or equal to the floor price. The process aims at tapping both wholesale
and retail investors. The offer/issue price is then determined after the bid closing date
Transition to rolling settlement. SEBI should not have a policy through which
stock market trading should only be allowed to take place using rolling
settlement, starting with the largest stocks in the country and covering all stocks
Onset of index futures and index options. This process can commence the
movement the SCRA is amended. Under the best scenario, we can expect to see
step, once exchange-traded derivatives exists, is to trade derivatives which enable risk
outcome of the confidence the RBI has in the quality of NSE’s derivatives exchange and