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 ofthe such claims .

Financial Market is organized into money and capital market.

Samir K Mahajan

Money Market

Money market is an arrangement for short term debt instrument (short term securities orclose money substitutes or financial assets or instruments) having maturity period less thanone year.

Demand and supply of money shape the money market.

Functions:o Balances demand and supply of short term funds

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

Samir K Mahajan

The monetary policy represent polices,objectives and instruments directedtowards regulating money supply andcredit in the economy. Three objectivesof economic policy in India is have beeneconomic growth, price stability andsocial justice.

RBI seeks to influence liquidity in themoney market which can be categorizedas direct and indirect.

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

Samir K Mahajan

Direct Instruments:

o Reserve Requirements( CRR and SLR)o Bank Rateo Administered interest rateo Other qualitative and quantitative

restrictions on credit

Indirect Instruments:

o Open Market Operationo Repos and Reverse -Repo the major function

of which is to supply liquidity to moneymarket.

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

MONEY MARKET INSTRUMENTS

Money Market contd.

Samir K Mahajan

Treasury Bills (T-Bills): Treasury Bills are short terms instruments issued by RBIon behalf of central government.

These are needed to meet the short term liquidity shortfall of centralgovernment arising out of seasonal or temporary gaps between its receipts (revenue and capital) and expenditure .

offered at a discount on the face value to purchase.

The difference between the face value(maturity price/amount received onmaturity) and discounted price is the discount/interest .

repaid as par face value matures at 91-days, 182 days, 364 days.

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

Money Market contd.

Samir K Mahajan

Treasury Bills (T-Bills contd.

Participants in treasury bills are RBI, primary dealers, banks, foreignbanks, 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-competitivebidders in T-bills.

Money Market contd.

Samir K Mahajan

COMMERCIAL PAPER (CP) :

Commercial Paper (Depending on the issuing company also known asfinance paper, industrial paper or corporate paper)

unsecured short term promissory notes issued at a discount by creditworthy and high rated corporates to meet their working capitalrequirements.

mostly issued by manufacturing companies.

negotiable, transferable by endorsement or delivery with a fixed maturityperiod.

Money Market contd.

Samir K Mahajan

COMMERCIAL PAPER (CP) contd. :

has to be rated by a credit rating agency.

placed to investors either through merchant banks or through banks.

Banks not allowed to underwrite or co-accept the issue of a commercialpaper.

Foreign Institutional Investors(FIIs) allowed to invest in CP up to certainextent fixed by SEBI.

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 Bills of exchange accepted(purchased or discounted) by commercial banks.Can 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 ).

can be inland bills (must be made in India and payable at India)

can be foreign bills (drawn on a party outside India and may be payable atIndia or outside India, or may be drawn by a party in India and payable atIndia or outside India) .

may be either an export bills (drawn by exporters on importers abroad ) oran 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.

Samir K Mahajan

Certificates of Deposits(CDs) : Certificates of Deposits are unsecurednegotiable and tradable short-term time deposits issued by commercialbanks and development financial institutions in bearer form.

are also issued at a discount to face value .

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

can be issued to individuals, companies, corporations, trusts funds,associates , NRIs (on non-repatriable basis) and others.

issued by banks on tight liquidity , relatively at a high interests rate.

CDs attracts stamp duty. Samir K Mahajan

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

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

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

Call money are mostly required by commercial banks. Commercial banksborrow money without collateral from other banks to meet cash reserverequirement (CRR) as stipulated by RBI from time to time.

Money Market contd.

Samir K Mahajan

Call /Short Money Market

Participants in call money includes GIC, NABARD, IDBI, money market mutualfunds, corporate , Discount and Finance House of India, Securities TradingCorporation of India. Commercial banks are both lenders as well asborrowers of call/notice money.

Call rate (i.e. interest rate paid on call loans) are highly volatile and variesfrom day to day, hour to hour, and even minutes to minutes, and thus arehighly sensitive to demand and supply of call loans.

Within a fortnight, rates are known to move from 1-2 percent to over 140percent per annum.

Money Market contd.

Samir K Mahajan

Capital Market

Capital market are market for long term-fund- both equity and debt (bond ,debentures).

Funds are raised within India and outside. The capital market leads to capital formation and aids in economic growth

by mobilizing the savings of the economics sectors and directing the sameto the productive channels.

Functions:o Mobilize long term savings to finance loge term investmentso Provide risk capital in the form of equity or quasi-equity to entrepreneurso Provide boarder partnership of productive assets

Samir K Mahajan

Capital Market contd.

Capital Market is segmented into primary capital market andsecondary capital market.

Samir K Mahajan

Primary Market contd.

Primary market is the market of new issue .

market for fresh capital.

facilitates long term flow of funds from surplus spending sector to deficitsectors such as government, corporate sector (through primary issue) andto bank and non-bank financial intermediaries (through secondary issue).

Primary assets of corporate lead to capital formation.

Capital formation helps in creating productive capacities, increasingefficiency and creating jobs which in turn generate wealth .

Capital Market contd.

Samir K Mahajan

Capital Market contd.

Samir K Mahajan

Primary Market contd.Primary Issues (Domestic)

Samir K Mahajan

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 Placemento Preferential Issueo Qualified Institutions Placement

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

Primary Market contd.Primary Issues (Domestic)

Samir K Mahajan

Public issue : Public issue consists of Initial Public offerings and Follow onpublic offering.

o Initials public offerings (IPOs) are offering of either fresh issue ofequities/share or sale of existing equity or both sale of securities by anunlisted company for the first time to the public (an unlisted company isone which has not issued its share to public).

o Follow on public offering (FPO) are offering of either fresh issue of equitiesor sale of existing equity or both sale of securities by an listed company tothe public

Primary Market contd.Primary Issues (Domestic) contd.

Samir K Mahajan

Right Issue: Right Issue is an offer for sale of new securities by listedcompany to its existing share holder on pro-rata basis (predetermined rate).

o It offers shares on a right basis either to expand , diversify, restructure theirbalance sheet or raise the promoter’s stake.

o Promoters offers right issues at attractive price often at discount to themarket price for as they want their issue fully subscribed, they want toreward their shareholders.

Primary Market contd.Primary Issues (Domestic) contd.

Samir K Mahajan

Private placement: Private placement is direct sale of newlyissued securities by the issuer to a small number of investors(through merchant banker).

o These investors are financial institutions, corporate, banks,high net worth individuals. Private placement are mostlyissued by unlisted companies.

Primary Market contd.Primary Issues (Domestic) contd.

Samir K Mahajan

Preferential issue: Preferential issues are allotment of shares to someselect/strategic groups such as promoters, foreign partners, technicalcollaborators and private equity funds in terms of provisions of Chapter XIVof SEBI (DIP Guidelines).

o Companies need prior approval from share holders for preferentialallotment of shares .

o Such securities are issued to avoid statutory provisions. However, they havebeen misused by both MNCs and Indian companies

Primary Market contd.Primary Issues (Domestic) contd.

Samir K Mahajan

Qualified Institutions Placements (for listed company) : Qualifiedinstitutional placement (QIP) allows a listed company to issue equityshares, fully and partly convertible debentures, or any securities to aqualified institutional investors domestic or foreign.

The issuing company is required to allot at least 10 percent of total issue tomutual funds.

Primary Market contd.Primary Issues (Domestic) contd.

Samir K Mahajan

Issue by Indian Companies in Foreign Land

Global Depository Receipts(GDRs): A GDR is a negotiable certificateissued by a multinational depository bank which purchases equityshares/bonds of foreign companies and deposits it on the account.

o GDRs represent ownership of an underlying number of sharescorresponding to the GDR in fixed ratio e.g. 1GDR= 1 Share or 1GDR=10 shares.

Primary Market contd.Primary Issues (External)

Samir K Mahajan

Issue by Indian Companies in Foreign Land

o GDRs are offered for sale globally through bank branches, and are listedand traded in a international stock exchanges mostly Luxemburg StockExchange and London Stock Exchange and other exchanges such asDubai and Singapore.

o Under this arrangement, an Indian company intending to issue GDRs willissue the corresponding number of shares which are kept in andesignated overseas depository banks.

Primary Market contd.Primary Issues (External)

Samir K Mahajan

Issue by Indian Companies in Foreign Land

America Depository Receipts (ADRs) : There is no legal or technical differencebetween an ADR and a GDR.

o ADRs are negotiable instruments denominated in dollars, and issued bythe US depository banks against share of a foreign company in USA.

o They are listed on New York Stock Exchange (NSSE) and the NADAQ(National Association of Securities Dealers Automated Association).

o GDRs can be converted into ADRs by surrendering the existing GDRs anddepositing the underlying equity shares with the ADR depository bank inexchange for ADRs.

Primary Market contd.Primary Issues (External)

Samir K Mahajan

External Commercial Borrowing: External Commercial Borrowing(ECB) areborrowings raised from international market by Indian corporates.

o ECB refers to commercial loans in the form of bank loans, suppliers’ credit,buyers’ credit securitized instruments (such as floating rate notes, and fixedrate bonds) availed from non-residents lenders with minimum averagematurity period of three years.

o ECB policy is administered by Finance Ministry and RBI. ECB are supplementsto domestically available resources for expansion of existing capacity as wellas for fresh investment.

Primary Market contd.Primary Issues (External)

Samir K Mahajan

External Commercial Borrowing contd.o Indian companies have preferred this rout of ECB as cost of such

borrowings are low in the international markets. Major borrowers areReliance Industries, SIDBI, Adani Power, Essar Oil etc. ECB are a keycomponent of India’s external debt.

Primary Market contd.Primary Issues (External)

Samir K Mahajan

Foreign Currency Convertible Bonds: Foreign Currency ConvertibleBond is a debt instrument which gives the non-resident investor achoice to convert his bond into fixed number of shares at apredetermined price or to receive a fixed yield to maturity .

o Such bonds are issued by Indian Companies to non–residentsubscribers in foreign currencies.

o They carry a fixed interest, and are convertible into a certainnumber of ordinary shares either wholly or partially on the basis ofany equity related warrants attached to the debt instruments at apreferred price.

Primary Market contd.Primary Issues (External)

Samir K Mahajan

Foreign Currency Exchangeable Bond: Foreign CurrencyExchangeable Bonds are issued by an Indian company which is partof promoter group of offered company to subscribers livingoutside India, and are exchangeable into equity shares of offeredcompany in any manner, either wholly or partially on the bases ofequity related warranty attached to the debt instruments.

For example, Tata Sons (promoter company), a promoter of all keyTata group companies issues exchangeable bonds to raise bonds forTata Motors (offered company).

Primary Market contd.Primary Issues (External)

Samir K Mahajan

Other External Fund

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

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

Primary Market contd.Primary Issues (External)

Samir K Mahajan

Other External Fund

Foreign Intuitional Investments: Institutional investors areorganizations which pool large sums of money and invest thosesums in securities, real property and other investment assets.Typical investors include banks, insurance companies, retirementor pension funds, hedge funds, investment advisors and mutualfunds.

Foreign Intuitional Investments is used most commonly in India torefer to foreign institutional investors investing in the financialmarkets of India.

Primary Market contd.Primary Issues (External)

Samir K Mahajan

ISSUE BY FOREIGN COMPANIES IN INDIA: INDIA DEPOSITORY RECEIPTS(IDRS)

India Depository Receipts(IDRs) enable foreign companies toraise fresh funds in India by issuing share to Indian nationals/residents in India. It enable globalization of Indian stockmarket. An IDR is an instrument denominated in Indian rupeesin the form of depository receipts against the underlying equityof issuing company to enable foreign companies to raise fundsfrom Indian capital market.

NRIs and FIIs cannot subscribe to IDRS

Primary Market contd.Primary Issues (Domestic) contd.

Samir K Mahajan

Primary Market contd.

Bonus Issue:Bonus issue is one of the way of raising capital but it does not bring in fresh capital.

o Some companies distribute profit to existing share holder by way of fully paid bonusshare instead of paying them dividend.

o Bonus share are issued in proportion of existing share held. The share holders neednot have to pay for bonus share but retained earnings are converted into bonusshare.

o Thus, bonus share enable the company to restructure its capital.

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

Samir K Mahajan

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

Functions of Secondary Marketo facilitates liquidly and marketability of existing equity and debt instrumento Provides instant valuation of securitieso Contribute to economic growth through allocation of funds to the most efficient

through disinvestment and re-investment

Secondary (Stock) Market

Samir K Mahajan

The Native Share and Stock Broker’s Association, now known as BSE was formed inBombay (Mumbai ) in 1875. This was followed by exchanges in Ahmedabad in 1894,Calcutta (Kolkata) in 1908and Madras (now Chennai) in 1937. The Calcutta StockExchange 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

Samir K Mahajan

Stock Market in India contd.

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

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

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

All 21 public sector banks, leading private banks, public sector undertakings andcorporate are shareholders of the stock exchanges exchange. Interconnected stockexchange is the stock exchange of stock exchanges.

Secondary (Stock) Market contd.

Samir K Mahajan

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

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

Secondary (Stock) Market contd.

Regulation of Stock Exchanges: SEBI

Samir K Mahajan

Stock Market Index

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

Stock market index serves as the barometer of equity market as well as barometer ofcountry’s expectation about economy’s performance. It reflects market direction andindicates 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)

Secondary (Stock) Market contd.

Samir K Mahajan

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 sectoror the securities market as a whole.

Secondary (Stock) Market contd.

Samir K Mahajan