1_Money Market and Capital Market

Money Market and Capital Market: 

Money Market and Capital Market Prepared for : ITM Executive Learning Centre By: Husain Merchant

Financial Markets in India: 

Financial Markets in India

Money Markets: 

Money Markets As per RBI guidelines a market for short term financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market. The money market is a mechanism that deals with the lending and borrowing of short term funds (less than a year) A segment of the financial markets in which financial instruments with high liquidity and very short maturities are traded.

Money Markets: 

Money Markets

Call Money Markets: 

Call Money Markets Call money market is the part of the money market where day to day surplus funds are traded by the banks. It is a market for short term funds. The maturity of loans in this market is just one day to 15 days. The loans are highly liquid. The loans in this market may or may not be renewed the next day. The call money market is also known as inter-bank call money market because the banks and financial institutions operate in this market.

Definitions:: 

Definitions: Call Money means dealing in overnight funds Notice Money means dealing of funds in 2-14 days period Fortnight shall be on a reporting on Friday basis and mean to the period beginning from Saturday and ending on Friday, both days inclusive.

Working of Call Money Market: 

Working of Call Money Market Borrowers and lenders can contact each other on phone The borrowers and lenders arrive at a deal specifying the amount of loan and the rate of interest After the deal is over, the lender issues cheque in favour of the borrower The borrower in turn issue Call Money Borrowing Receipt When the loan is repaid with interest, the lender returns the Borrowing Receipt to the Borrower.

Operations through DFHI: 

Operations through DFHI The deal can be directly negotiated by routing it through the Discount and Finance House of India The borrowers and lenders inform the DFHI about their funds availability or requirement at a specified rate of interest Once the deal is confirmed the Deal Settlement Advice is exchanged. In case, if DFHI borrows, it issues a Call Deposit Receipt to the lender and receives RBI cheque for the money borrowed. The reverse take place for lending the money. The duly deal settlement advice is surrendered at the time of settlement.

Players of the Call Money Market: 

Players of the Call Money Market The entry is restricted by the RBI Commercial Banks, co-operative banks and Primary Dealers are allowed to borrow and lend money in the Call Money market. Specified All India Financial Institutions, Mutual Funds, and certain specified entities are allowed to access Call money market as lenders only.

Slide 10: 

Dealing Sessions: Monday to Friday: 8.00 am to 5.00 pm Saturday : upto 2.30 pm Reporting Requirement: It is mandatory for all NDS (Negotiated Dealing System) members to report their deals on NDS. Deals should be reported within 15 minutes on NDS.

Commercial Bill Market: 

Commercial Bill Market Purchasing and discounting of bills of exchange is another way of employing bank funds. The amount of working capital required by companies is mainly provided by banks through cash credits, overdrafts and purchase or discounting of commercial bills. Bills of exchange and Promissory Notes are negotiable instruments which enable the debtors to discharge their obligations towards their creditors. The Negotiable Instrument Act 1881 defines a bill of exchange as “ a written instrument, containing an unconditional order signed by the maker, directing a certain person, to pay a certain sum of money only, to or to the order of a certain person or to the bearer of the instruments.” -

Slide 12: 

Commercial bill market is important for trade and industry and development of money markets in the country. It imparts flexibility to the money market by functioning as its effective constituent. The commercial bill market helps ease out liquidity crunch in the banking system. The existence of a commercial bill market enable banks and other financial institutions to park their surplus funds profitably by selecting appropriate maturity.

Kinds of Bills of Exchange: 

Kinds of Bills of Exchange Time and Demand Bills Trade Bills and Accommodation Bill Clean and Documentary bills Inland and Foreign Bills

Working of Commercial Bills: 

Working of Commercial Bills

COMMERCIAL PAPER: 

COMMERCIAL PAPER A commercial paper is an unsecured promissory note issued with a fixed maturity by a company approved by RBI, negotiable by endorsement and delivery, issued in bearer form and issued at such discount on the face value as may be determent by the issuing company.

Features of Commercial Paper: 

Features of Commercial Paper Commercial paper is a short-term money market instrument comprising usince promissory note with a fixed maturity. It is a certificate evidencing an unsecured corporate debt of short term maturity. Commercial paper is issued at a discount to face value basis but it can be issued in interest bearing form. The issuer promises to pay the buyer some fixed amount on some future period but pledge no assets, only his liquidity and established earning power, to guarantee that promise. Commercial paper can be issued directly by a company to investors or through banks/merchant banks.

Issue Requirement: 

Issue Requirement A tangible net work of not less than Rs. 4 crore as per the latest balance sheet. Working capital limit of not less than Rs. 4 crore. The company should have minimum P2/A2 rating from CRISIL / ICRA / CARE or any other credit rating agency. Also rating should not be more than 2 months old. The company should be listed on one of the recognised stock exchange. However the govt. companies are exempted from listing requirements.

Size of Commercial Paper: 

Size of Commercial Paper Minimum amount of per commercial paper is Rs. 5 lakh. In multiple of Rs. 5 lakhs. Maximum amount by single investor is Rs. 25 lakhs. The total amount of issue should not be more than 75% of the maximum bank borrowings.

Who can invest in CP: 

Who can invest in CP An Individuals NRIs Banks and Financial Institutions Body Corporate / Individual Firms *NRIs can not transfer CPs. Duration of CP: 3 to 12 months.

Certificate of Deposit: 

Certificate of Deposit The CD is a bearer document readily negotiable. It is a short term deposit instruments issued by banks and financial institutions to raise large sums of money. Features of Certificate Of Deposit Document of title to time deposit. Unsecured negotiable promotes. Freely transferable by endorsement and delivery. Issued at discount to face value. Repayable on a fixed date without grace days. Subject to stamp duty. Tradable in Secondary Market.

Slide 21: 

Size of Issue: Minimum amount to single investor is Rs. 5 lakhs and then in multiple of Rs. 1 lakh. Duration of Issue: 15 days to 1 year

Treasury Bills: 

Treasury Bills Just like commercial bills which represent commercial debt, treasury bills represent short-term borrowings of the Government. Treasury bill market refers to the market where treasury bills are brought and sold. Treasury bills are very popular and enjoy higher degree o9f liquidity since they are issued by the government. Meaning and Features of Treasury Bills: A treasury bills nothing but promissory note issued by the Government under discount for a specified period stated therein. The Government promises to pay the specified amount mentioned therein to the beater of the instrument on the due date. The period does not exceed a period of one year. It is purely a finance bill since it does not arise out of any trade transaction. It does not require any ‘grading’ or’ endorsement’ or ‘acceptance’ since it is clams against the Government. Treasury bill are issued only by the RBI on behalf of the Government. Treasury bills are issued for meeting temporary Government deficits. The Treasury bill rate of discount is fixed by the RBI from time-to-time. It is the lowest one in the entire structure of interest rates in the country because of short-term maturity and degree of liquidity and security.

Types of Treasury Bills : 

Types of Treasury Bills ordinary or regular, and ‘ad hoc’ ordinary treasury bills are issued to the public and other financial institutions for meeting the short-term financial requirements of the Central Government. These bills are freely marketable and they can be brought and sold at any time and they have secondary market also. On the other hand ‘ad hocs’ are always issued in favour of the RBI only. They are not sold through tender or auction. They are purchased by the RBI on top and the RBI is authorised to issue currency notes against them. They are marketable sell them back to the RBI.

Slide 24: 

On the basis of periodicity, treasury bills may be classified into three they are: 91 Days treasury bills; 182 days; and 364 Days treasury bills. 91 days treasury bills are issued at a fixed discount rate of 4% as well as through auctions. 364 days bills do not carry any fixed rate. The discount rate on these bills are quoted in auction by the participants and accepted by the authorities. Such a rate is called cut off rate.

Operations and Participations in TB: 

Operations and Participations in TB The RBI holds 14/91 day’s treasury bills (TBs) and they are issued on top basis throughout the week. However, 364 days TBs are sold through auction which is conducted once in a fortnight. The date of auction and the last date of submission of tenders are notified by the RBI through a press release. Investors can submit more than one bid also. On the next working day of the date auction, the accepted bids with prices are displayed. The successful bidders have to collect letters of acceptance from the RBI and deposit the same along with cheque for the amount due on RBI within 24 hours of the announcement of auction results. Institutional investors like commercial banks, DFHI, STCI, etc, maintain a subsidiary General Ledger (SGL) account with the RBI. Purchases and sales of TBs are automatically recorded in this account invests who do not have SGL account can purchase and sell TBs though DFHI. The DFHI does this function on behalf of investors with the helps of SGL transfer forms. The DFHI is actively participating in the auctions of TBs. It is playing a significant role in the secondary market also by quoting daily buying and selling rates. It also gives buy-back and sell-back facilities for period’s upto 14 days at an agreed rate of interest to institutional investors. The establishment of the DFHI has imported greater liquidity in the TB market. The participants in treasury bill market are: RBI and SBI, Commercial banks, State Governments, DFHI, STCI, Financial institutions like LIC, GIC, UTI, IDBI, ICICI, IFCI, NABARD, etc. Corporate customers Public Through many participants are there, in actual practice, this market is in the hands at the banking sector. It accounts for nearly 90 % of the annual sale of TBs.

CAPITAL MARKET: 

CAPITAL MARKET

Primary Market: 

Primary Market Companies issue securities from time to time to raise funds in order to meet their financial requirements for modernisation, expansions and diversification programmes. These securities are issued directly to the investors (both individuals as well as institutional) through the mechanism called primary market or new issue market . The primary market refers to the set-up which helps the industry to raise the funds by issuing different types of securities. Primary market has two distinguishing features : It is the segment of the capital market where capital formation occurs; and In order to obtain required financing, new issues of shares, debentures securities are sold in the primary market. Subsequent trading in these securities occurs in other segment of the capital market, known as secondary market.

Securities issue through Primary Market: 

Securities issue through Primary Market Public issue of New Equity, Preference Shares, Debentures, Bonds and other Debt Instruments Rights issue of Equity and Preference Shares

Methodology of new issue: 

Methodology of new issue Company decide for money raising Merchant Banker Underwriting Appointment of issue brokers

Merchant Banker: 

Merchant Banker The capital issue are managed are category-1 merchant banker and constitutes the most important aspects of their services. Merchant banker is the agency at the apex level of the plan, coordinate and control the entire issue activity and direct different agencies to contribute to the successful marketing of securities. The public issue of corporate securities involves marketing of capital issues of new and existing companies, and public issues are managed by the involvement of various agencies i.e. underwriters, brokers, bankers, advertising agency, printers, auditors, legal advisers, registrar to the issue, etc.

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The procedure of the managing a public issue by a merchant banker is divided into two phases, viz; Pre-issue management; and Post-issue management

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Pre-Issue Management Steps required to be taken to manage pre-issue activity is as follows:- (1) Obtaining stock exchange approvals to memorandum and articles of associations. (2) Taking action as per SEBI guide lines (3) Finalizing the appointments of the following agencies: - Co-manager/Advisers to the issue - Underwriters to the issue - Brokers to the issue - Bankers to the issue and refund Banker - Advertising agency - Printers and Registrar to the issue (4) Advise the company to appoint auditors, legal advisers and broad base Board of Directors (5) Drafting of prospectus

Slide 33: 

(6) Obtaining approvals of draft prospectus from the company’s legal advisers, underwriting financial institutions/Banks (7) Obtaining consent from parties and agencies acting for the issue to be enclosed with the prospectus. (8) Approval of prospectus from Securities and Exchange Board of India. (9) Filing of the prospectus with Registrar of Companies. (10) Making an application for enlistment with Stock Exchange along, with copy of the prospectus. (11) Publicity of the issue with advertisement and conferences. (12) Open subscription list.

Slide 34: 

Post-issue Management (1) To verify and confirm that the issue is subscribed to the extent of 90% including devolvement from underwriters in case of under subscription (2) To supervise and co-ordinate the allotment procedure of registrar to the issue as per prescribed Stock Exchange guidelines (3) To ensure issue of refund order, allotment letters / certificates within the prescribed time limit of10 weeks after the closure of subscription list (4) To report periodically to SEBI about the progress in the matters related to allotment and refunds (5) To ensure he listing of securities at Stock Exchanges. (6) To attend the investors grievances regarding the public issue

Underwriters: 

Underwriters Another important intermediary in the new issue/primary market is the underwriters to the issues of capital who agree to purchase securities which are not minimum 90% subscribed. They make a commitment to get the issue subscribed either by other or by themselves. Eventhough Underwriting is not compulsory since April 1995, underwriting is an important component of Primary Market.

Procedure for Issue: 

Procedure for Issue Issue of Prospectus: The company first issues the prospectus to the public. Prospectus is an invitation to the public that a new company has come into existence and it needs funds for doing business. It contains complete information about the company and the manner in which the money is to be collected from the prospective investors. Receipt of Applications: When prospectus is issued to the public, prospective investors intending to subscribe the share capital of the company would make an application along with the application money and deposit the same with a scheduled bank as specified in the prospectus.

Slide 37: 

The company has to get minimum subscription within 120 days from the date of the issue of the prospectus. If the company fails to receive the same within the said period, the company cannot proceed for the allotment of shares and application money should be returned within 130 days of the date of issue of prospectus. Allotment of Shares: If minimum subscription has been received, the company may proceed for the allotment of shares after fulfilling certain other legal formalities. Letters of allotment are sent to those whom the shares have been allotted, and letters of regret to those to whom no allotment has been more. When allotment is made, it results in a valid contract between the company and the applicants who now became the shareholders of the company.

Secondary Market: 

Secondary Market The secondary market, also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold. Many securities are traded on stock exchange which includes : Shares, Bonds, Debentures, Treasury Bills, Commercial Papers, etc.

Trading Methodology: 

Trading Methodology

Broker: 

Broker A broker is a member of recognised stock exchange, who is permitted to do trades on the screen-based trading system of stock exchange. He is enrolled as a member with the concerned Stock Exchange and is registered with SEBI. A broker may be: An Individual; or A firm/Institution. Broker appoints sub-broker for the smooth trading and more business in the stock market.

BSE screen terminal BOLT: 

BSE screen terminal BOLT To facilitate smooth transactions, BSE had replaced its open outcry system with the BSE On-line Trading (BOLT) facility in 1995. This totally automated, screen-based trading in securities was put into practice nation-wide within a record time of just 50 days. BOLT has been certified by DNV for conforming to ISO 27001:2005 security standards. The capacity of the BOLT platform stands presently enhanced to 80 lakh orders per day.

NEAT system of NSE: 

NEAT system of NSE The NEAT system has four types of market. They are: 1. Normal Market All orders which are of regular lot size or multiples thereof are traded in the Normal Market. For shares that are traded in the compulsory dematerialised mode the market lot of these shares is one. Normal market consists of various book types wherein orders are segregated as Regular lot orders, Special Term orders, Negotiated Trade Orders and Stop Loss orders depending on their order attributes. 2. Odd Lot Market All orders whose order size is less than the regular lot size are traded in the odd-lot market. An order is called an odd lot order if the order size is less than regular lot size. These orders do not have any special terms attributes attached to them. In an odd-lot market, both the price and quantity of both the orders (buy and sell) should exactly match for the trade to take place. Currently the odd lot market facility is used for the Limited Physical Market as per the SEBI directives.

Slide 43: 

3. Auction Market In the Auction Market, auctions are initiated by the Exchange on behalf of trading members for settlement related reasons. There are 3 participants in this market. (i) Initiator - the party who initiates the auction process is called an initiator (ii) Competitor - the party who enters orders on the same side as of the initiator (iii) Solicitor - the party who enters orders on the opposite side as of the initiator 4. RETDEBT Market The RETDEBT market facility on the NEAT system of capital market segment is used for transactions in Retail Debt Market session. Trading in Retail Detail Market takes place in the same manner as in equities (capital market) segment. The main features of this market are detailed in a separate section (1.15) on RETDEBT market

Pay in day and Pay out day: 

Pay in day and Pay out day Pay in day is the day when broker make payment and takes delivery from the stock exchange. Pay out day is the day when stock exchange makes payment to broker and collect delivery.

Different terminologies of Trading: 

Different terminologies of Trading Arbitration Day Trading Fast Trading Direct Market Access – DMA is a facility which allows brokers to offer to their clients direct access to the exchange trading system through the broker’s infrastructure without manual intervention of the broker.

History of Stock Exchanges: 

History of Stock Exchanges India's oldest and first stock exchange: Mumbai (Bombay) Stock Exchange. Established in 1875. More than 6,000 stocks listed. Total number of stock exchanges in India: 22 They are in: Ahmadabad, Bangalore, Calcutta, Chennai, Delhi etc. There is also a National Stock Exchange (NSE) which is located in Mumbai. There is also an Over The Counter Exchange of India (OTCEI) which allows listing of small and medium sized companies. The regulatory agency which oversees the functioning of stock markets is the Securities and Exchange Board of India (SEBI), which is also located in Bombay. SEBI's website location is at http://www.sebi.gov.in but you need a password to access it.

OTCEI: 

OTCEI OTCEI was incorporated in 1990 as a Section 25 company under the Companies Act 1956 and is recognized as a stock exchange under Section 4 of the Securities Contracts Regulation Act, 1956. The Exchange was set up to aid enterprising promoters in raising finance for new projects in a cost effective manner and to provide investors with a transparent & efficient mode of trading. Listing Requirement: A company should have a minimum paid-up capital of Rs. 30 lakhs and the minimum offer to the public should be 25% of the issued capital or Rs. 20 lakhs worth of shares in face value, whichever is higher. SEBI Guidelines on Disclosure and Investor Protection will be applicable to all OTCEI issues.

Trading on Stock Market: 

Trading on Stock Market Equity Shares Preference Shares Debentures Bonds IDRs (Indian Depository Receipt)

Indian Depository Receipt: 

Indian Depository Receipt The Securities and Exchange Board of India (SEBI), has introduced guidelines for foreign companies to raise capital in India by issuing Indian depository receipts (IDRs). The Indian capital market regulator has laid down detailed norms for foreign companies to tap the Indian market and list on domestic bourses. It has set a minimum size of the IDR float at Rs 50 crore and the minimum investment limit at Rs 2 lakh per investor. IDRs are transferable securities to be listed on Indian stock exchanges in the form of depository receipts created by a Domestic Depository in India against the underlying equity shares of the issuing company which is incorporated outside India.