Financial Markets

When the government raises money from the financial market to meet short-term mismatches in receipts and expenditure, it issues two types of debt instruments – treasury bills and government bonds. Treasury bills are issued by the government to fulfil short term need for money say less than a year. It is issued as promissory notes under discount

Treasury bills have a maximum maturity of 364 days. It is a money market instrument. At present T-bills are issued in three maturities - 91 days, 182 days and 364 days.

The interest received on them is called discount. It is the difference between the issue price and the redemption value.

There are two segments of NSE -

Wholesale Debt Market: It provides a platform for trading in fixed income or debt securities. NSE started operating in wholesale debt market in June 1994. It was the first market which had fully screen based system for trading in Debt securities. There are two parties in debt market - the trading member and the participants. The trading members are the recognised brokers of NSE and the participants are the buyers and sellers of the securities.

Capital market segment: It is the segment where NSE deals in equity shares, preference shares, debentures ETFs, etc. It provides an efficient and transparent platform where the trading can be done in a fair and proper manner. This segment commenced its working in November, 1995. The trading system of this segment is also known as NEAT-CM, which means National Exchange for Automated Trading - Capital Market.

i. To protect the rights and interests of investors, particularly individual investors and to guide and educate them.

ii. To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers etc., with a view to making them competitive sphere.

A beneficial owner is a person who enjoys the benefits of ownership even though title to some form of property is in another name. It also means any individual or group of individuals who, either directly or indirectly, has the power to vote or influence the transaction decisions regarding a specific security, such as shares in a company.

The investor has to sign a broker-client agreement and a client registration form before placing an order to buy or sell securities. One has to provide certain other details and information. These include:

• PAN number

• Date of birth and address.

The financial market is a place where trading of securities takes place. The main functions of financial market are –

1. Mobilisation and Channelization of Savings: Through financial market, the savings of the people can be channelised into a profitable manner. The savings of one will become the capital for another and the money kept idle can be put into the work to attract more money and to multiply itself.

2. Price Discovery: It helps in determining the prices of securities with help of the forces of demand and supply. It helps the investors in getting proper price for their investments and savings.

3. Provides Liquidity: The financial market provides liquidity because the buyers and the sellers of all the securities are readily available. The investors can invest their money as well as can also convert their investment into money as and when required.

4. Reduced Cost of Transactions: People need information regarding various aspects at the time of buying and selling of securities, which requires both time and money. The financial market makes it easy to obtain all type of information without spending any money. So it reduces the cost of transactions.

Money Market is the market for short term funds. The lending and borrowing of funds in the money market varies from overnight to a year. It is an important part of the financial system as it helps in fulfilling the short term and very short term requirements of finance by organised sectors.

Features of Money Market

a) The transaction volume is large in the money market so it is also called wholesale market.

b) The money market participants are banks, mutual funds, investment institutions and Central Banks.

c) The relationship between the participants in the money market is impersonal.

d) Pure competition exists in the money market.

e) It is a market which finances the short term needs of the funds.

The basic points of difference between capital market and securities market are –

The major functions of stock exchange are –

1. Providing Liquidity and Marketability to Existing Securities: The stock exchange is a secondary market for securities trading. Various types of securities are traded here on regular basis. As and when required, an investor can invest his money into securities and can reconvert his investment into cash in the stock market. It is a ready market for sale and purchase of securities, which increases the marketability and improves the liquidity of the securities.

2. Pricing of Securities: The forces of demand and supply in the stock exchange help in deciding the pricing of securities.

3. Safety of Transactions: The stock exchange is an organised market, where the interest of investors is fully protected. It has its own laws and bye-laws which have to be followed by each member of stock exchange else his membership is cancelled.

4. Liquidity: A stock exchange provides double benefit to the investors. Firstly, they can take the advantage of the change in the market price of securities and secondly they can convert the securities into cash at any time.

5. Speculation: The investors who purchase securities with a speculative motive, can easily trade through stock exchange.

The main objectives of SEBI are –

1. To regulate stock exchanges and ensure that efficient services could be provided to all the parties operating there.

2. To protect the interests of the investors and to secure them against the wrong information given by the companies in their prospectus, reducing the risk of delivery and payment, etc.

3. To maintain proper balance between self-regulation of business and its statutory regulations so as to prevent fraud and malpractices.

4. To regulate and develop a code of conduct for market intermediaries.

The objectives of NSE are –

âTo ensure that the investors using electronic trading system can have a fair, transparent and efficient securities market.

âTo establish a broad trading facility for both equities and debt instruments.

âTo ensure access to investors from every nook and corner of the country through an appropriate communication network.

âTo improve the standard of securities market.

After the trade has been executed, within 24 hours the broker issues a Contract Note. This note contains details of the number of shares bought or sold, the price, the date and time of deal, and the brokerage charges. This is an important document as it is legally enforceable and helps to settle disputes/claims between the investor and the broker. A Unique Order Code number is assigned to each transaction by the stock exchange and is printed on the contract note.

The various money market instruments are listed below –

Treasury Bill - It is also called zero coupon Bond and is used by Government of India for short term borrowings. It is issued by RBI on behalf of Central government to fulfil the short term requirement of funds of Central Government. The treasury bills are issued at discount and repaid at par. The maturity period of treasury bill is maximum of 364 days that is less than a year.

Commercial Paper - It is a short term unsecured promissory note having the maturity period less than a year. Its minimum maturity period is of 15 days. It is issued by big and creditworthy companies to meet their short term financial requirements. It is issued at discount and redeemed at par

Call Money - It is a short term instrument which is used for inter bank transactions having maturity period from one day to 15 days. Call money is the facility under which the banks borrow money from each other to maintain the cash reserve ratio as prescribed by the RBI.

Certificate of Deposit - These are the short-term instruments issued by Commercial Banks and Financial Institutions to individuals, corporations, and companies when they have tight liquidity position due to slow growth of bank deposits and high demand for loans and credit. These instruments are negotiable and unsecured.

Commercial Bills - It is short term negotiable and self liquidity instrument. When goods are sold on credit the seller draws bill of exchange which is accepted by the buyer and is called trade bill. It is an order to pay a certain sum of money on a specified date. The seller can retain the bill till maturity date or can get it discounted from the bank. When the bill is discounted from the bank it becomes a commercial bill.

The major reforms in capital market of India since 1990 are listed below –

1. Establishment of SEBI: The Securities and Exchange Board of India was established in the year 1988 to –

âRegulate the activities of the merchant banks,

âRegulate the mutual funds’ operations

âWork as a promoter of stock exchange activities

âAct as a regulatory authority of new issue activities of the companies.

The main objective was to protect the interest of investors in securities market.

2. Establishment of Credit Rating Agencies: The Credit Rating Agencies like CRISIL, ICRA, and CARE were set up to assess the financial health of the Financial Institutions and agencies related to the stock market activities. It helps the investors in evaluating the risk of their investment.

3. Increased Merchant Banking activities: The merchant banking division is new division in commercial banks. These divisions provide financial services and are helping hands to the factors related to the capital market.

4. Mutual Funds: The growth of mutual funds in India has an important role in the capital market growth. It has given a wide choice to the common investors to enter the capital market.

5. Investors Protection: Government of India has set up Investor Education and Protection Fund in 2001 to educate and guide the investors in the capital market and to protect their interest from frauds and malpractices.

Objectives of SEBI:

1. Protection: To protect the rights and interests of the investors and to guide and educate them.

2. Competitive and Professional: To regulate the activities of intermediaries like merchant bankers, brokers etc. and develop a code of conduct to make them competitive and professional.

3. Prevention of Fraud: To prevent frauds and malpractices in securities trading.

4. Balance: To maintain a proper balance between statutory regulation and self regulation.

5. Smooth Functioning: To ensure the efficient and proper functioning of stock exchange and securities market through regulatory measures.

Functions of SEBI

The functions of SEBI may be categorised under 3 broad headings –

a. Primary market: The primary market is also known as the new issues market. It deals with new securities being issued for the first time.

b. Right issue: This is a privilege given to existing shareholders to subscribe to a new issue of shares according to the terms and conditions of the company.

c. Offer through Prospectus: Offer through prospectus is the most popular method of raising funds by public companies in the primary market. This involves inviting subscription from the public through issue of prospectus. A prospectus makes a direct appeal to investors to raise capital, through an advertisement in newspapers and magazines. The contents of the prospectus have to be in accordance with the provisions of the Companies Act and SEBI disclosure and investor protection guidelines.

i. Offer for Sale: Under this method securities are not issued directly to the public but are offered for sale through intermediaries like issuing houses or stock brokers. In this case, a company sells securities enbloc an agreed price to brokers who, in turn, resell them to the investing public.

The subsequent steps involved in the screen-based trading for buying and selling of securities in this case are as follows

1. If an investor wishes to buy or sell any security he has to first approach a registered broker or sub-broker and enters into an agreement with him. The investor has to sign a broker-client agreement and a client registration form before placing an order to buy or sell securities. He has also to provide certain other details and information. These include:

• PAN number

(This is mandatory)

• Date of birth and address.

• Educational qualification and occupation.

• Residential status (Indian/ NRI).

• Bank account details.

• Depository account details. Etc

2. The investor has to open a ‘Demat’ account or ‘beneficial owner’ (BO) account with a depository participant (DP) for holding and transferring securities in the Demat form. He/She will also have to open a bank account for cash transactions in the securities market.

3. The investor then places an order with the broker to buy or sell shares. Clear instructions have to be given about the number of shares and the price at which the shares should be bought or sold. An order confirmation slip is issued to the investor by the broker.

4. The broker then will go on-line and connect to the main stock exchange and match the share and best price available.

5. When the shares can be bought or sold at the price mentioned, it will be communicated to the broker’s terminal and the order will be executed electronically. The broker will issue a trade confirmation slip to the investor.

6. After the trade has been executed, within 24 hours the broker issues a Contract Note. This note contains details of the number of shares bought or sold, the price, the date and time of deal, and the brokerage charges. This is an important document as it is legally enforceable and helps to settle disputes/claims between the investor and the broker. A Unique Order Code number is assigned to each transaction by the stock exchange and is printed on the contract note.

7. Now, the investor has to deliver the shares sold or pay cash for the shares bought. This should be done immediately after receiving the contract note or before the day when the broker shall make payment or delivery of shares to the exchange. This is called the pay-in day.

8. Cash is paid or securities are delivered on pay-in day, which is before the T+2 day as the deal has to be settled and finalized on the T+2 day. The settlement cycle is on T+2 day on a rolling settlement basis.

9. On the T+2 day, the exchange will deliver the share or make payment to the other broker. This is called the pay-out day. The broker then has to make payment to the investor within 24 hour of the pay-out day since he has already received payment from the exchange.

10. The broker can make delivery of shares in Demat form directly to the investor’s Demat account. The investor has to give details of his Demat account and instruct his depository participant to take delivery of securities directly in his beneficial owner account.