Capital and Money market

Capital Market
Definition of Capital Market:

H.T. Parkekh states "By capital market, I mean the market for all the financial
instruments, short-term and long-term, as also commercial, industrial and
Government paper".

Meaning of Capital Market:

Capital market is, generally, used to refer to the market for long-term funds.
In detail, capital market refers to the institutions and mechanism for the
effective pooling of long-term funds from the investing parties, i.e., individual
and institutional savers, and making them available to industrial and
commercial undertakings. In short, it is the market which deals in shares,
debentures, bonds and securities.

Features of Capital Market:

(i) Capital market deals in long-term and medium term funds.

(ii) It is concerned with the transfer of long-term and medium-term funds

from investing parties to industrial and commercial enterprises.

(iii) Ownership securities like equity shares and preference shares and
creditorship securities like debentures and bonds are dealt in capital market.

(iv) Capital market is composed of new securities market (i.e., primary

capital market), stock market (i.e., secondary capital market) and special
financial institutions.

(v) The dealers in the capital market are the industrial and commercial
enterprises, and the investors like individuals and institutional investors.

(vi) Capital market makes long-term funds available, i.e., makes funds
available for investment on fixed assets.

(vii) Capital market arranges large amount of funds.

Functions and Importance of Capital Market:

(a) Capital market facilitates large-scale nation-wide mobilization of savings

and financial resources.

(b) Capital market facilitates acceleration of capital formation.

(c) Capital market helps in procuring foreign capital for the quicker economic
development of a country.

(d) Capital market ensures effective allocation of the mobilized financial

resources among projects which yield highest returns or which contribute to
balanced economic development.

(e) It ensures ready and continuous market for long-term funds.

(f) An organized and well-developed capital market ensures best possible co-
ordination between the flow of savings and the flow of investment.

(g) It directs the flow of savings into most profitable channels, and thereby,
ensures the optimum utilization of financial resources.

(h) Capital market is a hand-maid to industry

(i) It makes available to industry sufficient amount of long-term capital at a

reasonable rate of interest,

(j) It also helps industries in securing foreign capital to promote industrial

and economic development in the country.

(i) It provides profitable investment opportunities to the small savers and

investors.

Classification of Capital Market or Types of Capital Market:

On the basis of the status of the market, the capital market in India is
classified into two types, viz., (a) organized capital market and (b)
unorganized capital market.

(a) Organized Capital Market:

The constituents of the organized capital market are the Reserve Bank of
India, financial institutions like IFCI, LIC, IDBI, U.T.I., commercial banks, stock
market, etc. The organized capital market is the most important component
of the capital market.

(b) Unorganized Capital Market:

The unorganized capital market consists of indigenous bankers, money

lenders, chit funds, etc. The unorganized capital market is very narrow. It
provides funds to small business units.

On the basis of stage of development, capital market is classified into two

types, viz., (a) primary capital market and (b) secondary capital market.

(a) Primary Capital Market or New Issues Market:

Meaning of Primary Capital Market:

Primary capital market is the market in which funds are raised by industrial
and commercial enterprises from investors through the issue of shares,
debentures and bonds. That means, this market is concerned with new
issues only.

Features of Primary Capital Market:

i) Primary capital market is concerned with long-term funds or capital.

(ii) In the primary capital market, securities are sold for the first time. It is for
this reason that the primary capital market is also known as new issues
market.

(iii) In the primary capital market, securities are issued by industrial and
commercial companies directly to investors.

(iv)Primary capital market promotes capital formation directly.

(v) The funds raised in the primary capital market are utilized by the issuing
companies for investment on fixed capital, i.e., fixed assets.

(vi) Primary capital market does not cover long-term loans from financial
institutions.

(b) Secondary Capital Market or Stock Exchange Market:

Meaning of Secondary Market:

Secondary market is the market which facilitates the transfer of ownership

(i.e., purchase and sale) of second-hand or existing securities between
investors. Secondary market is also known as stock exchange market,
because the purchase and sale of existing securities between investors are
made through stock exchanges. By facilitating purchase and sale of existing
securities, secondary market provides liquidity to existing securities.

Features of Secondary Capital Market or Stock Market:

(i) Secondary market is not the place of origin of the securities.

(ii) Secondary market deals in previously issued securities (i.e., existing

securities).

(iii) In the secondary market, securities are not directly issued by a company
to the investors. Securities are sold by an existing investor to another
investor.

(iv) In the secondary market, the securities are bought and sold by investors
through brokers.

(v) Secondary market does not directly contribute to capital formation.

(vi) Secondary market provides liquidity to securities, and thereby, increases

the marketability of securities.

Differences between Primary Capital Market or New Issues Market

and Secondary Capital Market or Stock Market:

(i) New issues of securities are dealt in primary market, whereas existing
securities (i.e., securities issued earlier) are dealt in secondary market.

(ii) In primary market, securities are exchanged between companies and

investors. But in secondary market, securities are exchanged between
investors.

(iii) Primary market promotes capital formation directly, whereas secondary

market promotes capital formation only indirectly.
(iv) In the primary market, securities are only bought by the investors from
companies, and they are not sold. On the other hand, in the secondary
market, securities are bought and sold.

(v) The prices of securities dealt in the primary market are determined by the
management of issuing companies. But the prices of securities dealt in the
secondary market are determined by the demand for and the supply of
securities.

(vi) In the primary market, securities are issued to investors for the first time,
whereas in the secondary market, securities can be bought and sold any
number of times.

Money Market
Definition of Money Market:

According to G. Growther, "Money market is the collective name given to the

various firms and institutions that deal in the various grades of near money".

Meaning of Money Market:

The term 'Money Market' does not refer to any particular place or office
where money is bought (i.e., borrowed) and sold (i.e., lent). It refers to an
activity, i.e., the borrowing and lending of short-term funds against short-
term credit instruments (i.e., near money instruments), such as treasury
bills, bills of exchange, bankers' acceptances, short-term Government
securities, etc. It is the collective name given to all the financial institutions
in an economy which handle the purchase, sale and transfer of short-term
credit instruments. In short, it is the entire mechanism (i.e., machinery) for
borrowing and lending short-term funds.

Characteristics of Money Market:

1. Money market is concerned with the borrowing and lending of short-term
funds only.

2. For the borrowing and lending of funds, it is not necessary that the
borrower and the lender should meet each other face to face at a particular
place. They can carry on negotiations ar.u effect their financial transactions
through telephone, 'telegram, mail or any other means of communication

3. Near-money, i.e., short-term credit instruments, such as bills of exchange,

treasury bills, etc. are also dealt with in a money market.

4.A money market is not a single homogeneous market. It is composed of

several specialized sub-markets, such as call market, treasury bill market,
discount market, collateral loan market, etc.

5. As in any other market, in the money market also, there is a price for the
money borrowed and lent. That price is called interest.

6. There are a large number of borrowers and lenders in the money market.

7. A large volume of short-term funds is traded in money market.

8. Money market is the source of working capital finance. It (i.e., money

market) is the major source of working capital finance.

9. There are various instruments of money market. They are call money (i.e.,
inter-bank loans), treasury bills of the Government, trade bills of commercial
enterprises, commercial papers, etc., promissory notes issued by reputed
companies), certificates of deposit (i.e., time deposit) issued by commercial
banks.

10. The dealers in money market are lenders (i.e., the suppliers of short-term
funds) like the central bank, the commercial banks, discount houses, bill
brokers, insurance companies, financial corporations and business houses,
and borrowers of short-term funds such as the Government, semi-
Government institutions commercial banks, industrial and business concerns,
stock exchange dealers, farmers and private individuals.

Functions and Importance of Money Market:

1. It provides an outlet to commercial banks for the employment of their
short-term funds. The commercial banks employ their short-term funds in the
call market, bill market and the collateral loan market.

2.It offers a channel to non-banking financial institutions, such as insurance

companies, financial houses, etc. for the investment of their short-term
funds.

3.It plays a very important role in the financing of trade and commerce. Both
inland and international trade are, usually, financed through the system of
discounting of bills in the discount market. The bill brokers, acceptance
houses, the discount houses in England and the commercial banks all over
the world play a very important role in the financing of trade and commerce.

4.It provides short-term funds to industrialists to meet their requirements of

working capital. Commercial banks and even non-banking financial
institutions play a very important role in this respect.

5. It helps the Government to raise the necessary short-term funds through

the issue of treasury bills or short-term bonds.

6. The development of a capital market is dependent on the money market.

The short-term rates of interest prevailinq in the money market determine
the long-term rates of interest prevailing in the capital market, and thereby,
influence the capital market.

7. It serves as the medium through which the central bank of a country can
exercise its control over the creation of credit.

8. The various sub-markets, and the short-term rates of interests that prevail
in the money market serve as a good barometer (i.e., indicator) of the
monetary and banking conditions in the country.

Differences between Capital Market and Money Market:

(i) Capital market deals in long-term and medium-term funds, i.e., funds for
periods varying between 1 year to 5 years (i.e., for medium term) or for
periods varying from 5 years to 20 years (i.e., for long term). But money
market deals in short-term funds (i.e., for periods up to 1 year).

(ii) Capital market arranges large amount of funds. But money market
arranges small amount of funds.
(iii) Capital market makes funds available for fixed capital, i.e., for
investment in fixed assets. On the other hand, money market makes funds
available for working capital.

(iv) Capital market has limited and selected market, whereas money market
has widely distributed market.

(v) The rate of interest in the capital market is, generally, low. But the rate of
interest in money market is, generally, high.

(vi) Capital market deals with long-term securities like equityshares,

preference shares, debentures and bonds. On the other hand, money market
deals with short-term credit instruments, such as, trade bills (i.e., bills of
exchange), treasury bills, commercial papers, certificates of deposits, etc.

(vii) In capital market, investment banks like special financial corporations,

investment trusts, mutual funds, etc. are the leading financial institutions,
whereas in money market,' commercial banks are the principal financial
institutions.

(viii) Capital market acts as a link between investing parties and industrial
and commercial enterprises. But money market acts as a link between the
depositors and the borrowers.

STOCK EXCHANGES
Introduction:

Stock exchanges are of recent growth. The first stock exchange of the world,
viz., the London Stock Exchange, was founded only in 1773, and was re-
organized in 1886. Following the example of London Stock Exchange, stock
exchanges were developed in France and Germany. Stock exchanges were
developed in the U.S.A. in 1865. Today, stock exchanges are present not only
in all the developed countries but also in developing countries like India.

Definition of Stock Exchange:

The Securities Contracts (Regulation) Act of 1956 defines stock exchange as

"an association, organisation or body of individuals, whether incorporated or
not, established for the purpose of assisting, regulating and controlling
business in buying, selling and dealing in securities".

Importance and Functions of Stock Exchanges:

1. Stock exchanges provide central and convenient meeting

places for sellers and buyers of securities:
Stock exchanges provide central and convenient meeting places and
common platforms for sellers a securities for making their open offers
and bid under free competition
2. Provide permanent market for securities:
Stock exchanges provide permanent market places for buyinq and
selling securities.
3. Provide provide ready and continuous market for securities:
A holder of securities can sell his securities in a stock exchange at any
time without much loss. An investor can buy securities in a stock
exchange at any time at reasonable prices.
4. Increase the marketability and liquidity of securities:
By providing a ready and continuous market for the resale of securities,
stock exchanges increase the marketability and liquidity of securities.
5. Contribute to stability of prices of securities:
By providing a continuous market for the purchase and sale of
securities, stock exchanges contribute to the stability of prices of
securities.
6. Equalization of prices of securities:
If a security is selling at a higher price in one market, the speculators
will buy it from the other markets and sell it there till the supply
matches the demand and prices become equalized.
7. Smoothen price movements:
If a speculator expects a big rise in the price of a security, he begins to
purchase it in advance, thus causing a slow rise in its price.
8. Help the investors to know the worth of their holdings or in
evaluation of securities: On the basis of stock exchange quotations,
every holder of securities dealt in the stock exchange can know the
worth of his holdings from time to time. That means, a stock exchange
helps the holder of securities in evaluating the prices of their
securities.

9. Protect the genuine investors:

Through strict enforcement of rules and regulations, stock exchanges
check illegitimate speculation, manipulation and excessive charge of
commission on the part of the members of the stock exchanges, and
thereby, protect the interests of the genuine investors.
10. Promote the habit of saving and investment:
Stock exchanges promote the habit of saving and investment among
the general public.
11. Help capital formation:
The steady and continuous facilities provided by the exchanges for the
purchase and sale of securities encourages people to save and invest.
12. Help the distribution of new securities:
Public response to new issues is easily secured, if they are listed in
stock exchanges. Shares listed on stock exchanges are more
acceptable and fetch higher prices.

Benefits of Stock exchange

1. Stock exchanges provide ready and continuous market for the

purchase and sale of securities

2. Stock exchanges increases marketability and liquidity of securities

by providing ready and continuous market.

3.Stock exchanges promote the habit of saving and investment among

people.
4.They increase mobility of capital of the investors from less profitable
portfolios to more profitable portfolios. Thus they facilitate capital
formation and generate economic growth.

5.By increasing mobility of capital, stock exchanges make optimum use

of capital and thereby ensure a fair return on investment.

6.By listing the shares, stock exchanges help the companies to enjoy
greater reputation and credit.

7.The stock exchange quotations enable the investors to evaluate the

real worth of their holdings.

8. Stock exchanges regulate the activities of the members and thus

safeguard the interests of investors.

9. Stock exchange acts as a mirror of business cycle. Its trend provides

proper guidance to the investors regarding their choice of investment.

10.Stock exchanges help the Government to raise funds from the

public to undertake projects of national importance and social value.

Organisation and management

There is no uniformity in the form or ownershIp of stock exchanges that
are functioning in the country today. Some stock exchanges are
organised as voluntary association and some are limited companies
and some are guaranteed companies. Whatever the form of ownership,
the stock exchanges are managed by an Executive Committee
/Governing body which consists of a president, a vice-president,
executive director, elected directors, public representatives and
nominees of the Government. The Governing body
is responsible for policy formulation and smooth running of the
exchange. The executive functions are discharged by the executive
director.

DEALERS IN STOCK EXCHANGE

The dealer would be a corporate body, a partnership firm, individuals
having a net worth of Rs. 5 lakhs. Only the members are permitted to
transact business in stock exchanges. Non-members can have
transactions in the stock exchanges through brokers of the stock
exchanges are classified into two categories. (a) Brokers (b) Jobbers.
a.Brokers
Brokers are commission agents who act as intermediaries between
buyers and sellers of securities. They do not own the securities but
they transact business on behalf of non-members. They are entitled to
a prescribed scale of brokerage for the service rendered by them.

b.Jobbers
Jobbers are the members who transact business independently for
themselves. They buy and sell securities to earn profit on their own
account.

Speculation in the stock exchange

Speculative transactions are undertaken in stock exchange with a view
to make profit resulting from price differentiation. Speculation refers to
transactions of members to buy or sell securities dealt on the stock
exchange with a view to make profit through anticipated rise or fall in
the prices of securities. Speculators are those who deal in securities in
order to make profit. They do not take delivery of the securities
purchased or sold by them, but only pay or receive the differences
between the purchase price and
sale price. There are four types of speculators, the bull, the bear, the
stag and lame duck.
Bull

A bull, also known as the Tejiwala, is a speculator who buys securities

in the expectation of selling them later at higher prices. He makes
money when the share prices are rising.

Bear
A bear, also known as Mandiwala, is one who sells securities in the
expectation of a fall in their prices in future.

Stag
A stag neither buys nor sells but applies for subscription to the new
issues expecting that he can sell them at a premium.

Lame Duck
The lame duck is a bear speculator who has contracted to sell certain
security on a certain date at a certain price, but finds it difficult to
meet the commitment on the settlement day as the concerned security
is not available in the market and the other party is not agreeable to
the postponement of the transaction. He is called a lame duck because
he, like a lame duck is in the water, is struggling to meet his obligation
on
the settlement day.

OVER THE COUNTER EXCHANGE (OTC)

The Over The Counter Exchange of India was incorporated under
section 25 of the Companies Act in October] 990 and started
functioning from September 1992. Since then the OTCEI has made a
commendable progress in creating a fair and disciplined market to the
benefit of Issuers, investors and members/dealers of the exchanges. In
October 1992, a computerized trading system called "Authorized
Securities Trading Over the Computer System" (ASTOCS) was installed.
The OTCEI has also successfully created a real secondary market for
debt securities which was hitherto non-existent.

Meaning
Over The Counter Exchange is a negotiated stock market which is fully
computerized and having special features of ringless, scripless stock
exchange with trading and settlement standards in tune with the
global standards. OTCEI is a ringless, scripless electronic market that
brings together traders around the nation
Over the counter exchange helps small and medium sized companies
to have an access to a marketer as well as raise finance from the
capital market without spending a lot of money on issue of shares.
They provide a convenient medium for investors to have a direct
access with the stock exchanges. With the opening of OTCEI counter in
Delhi, Madras, Calcutta and representative offices in cities all over
India, the nationwide trading has become possible.

Functions of OTCEI
1. To help small investors who face the problems of access, liquidity,
delay in payment and delivery, and uncertainty about prices at
which shares are bought and sold.
2. To help the companies which face the problems of prohibitive issue
cost and restricted access to the market.
3. To provide computerized trading system.
4. To provide a retail secondary market for debt securities, which was
hitherto non-existent.

Promoters:
The promoters of OTCEI are
Unit Trust of India.
Industrial Credit and Investment Corporation of India.
Industrial Development Bank of India,
SBI capital markets.
Industrial Finance Corporation of India;
Life Insurance Corporation of India.
General Insurance Corporation of India and its subsidiaries.
Canbank Finance services.

Benefits for the investors

Besides single window access, the OTCEI offers investors the following
benefits.
a. Safety: OTCEI provides safety to the investors. Every investor is
provided an invest OTC card. The invest OTC card should be used for
all transactions for OTC issues. This card provides safety and
security to the investment.
b. Transparency: The PIT/OTC screen will display the best buy/sell
prices. The exact prices at which the investors transact will be
printed on the trading documents. This provides transparency and
minimizes disputes.
c. Liquidity: Every scrip will initially have at least two market makers
who continuously offer buy/sell quotes, so an investor can buy/ sell
at any time. Sponsorship: Every scrip listed on OTCEI will have a
sponsor from among the OTC members. The sponsor will appraise
the scrip for investor worthiness and thus provides quality for
investment.
d. Access: Every OTC counter acts as a single window to the entire OTC
exchange nation wide. So, investors could buy/sell at the nearest
counter which may be in their neighbourhood.
e. Transfers: Those who are dealing in OTCEI can transfer shares within
seven days, provided their consolidated holding of the scrip does
not exceed 0.5% of the issued capital of the company.
f. Allotment: There is not much waiting of investors. Allotments of
shares is expected to be completed in every aspect in 35 days. And
trading begins immediately there-after.

National Stock Exchange (NSE)

NSE stands for National Stock Exchange. It was set-up by IDBI and
other all India financial institutions in November 1992 at Mumbai.
The NSE has revolutionized the trading in securities, as there is no
fixed place of trading under the NSE. The trades are carried through
with the help of computer systems, telephone, telex & fax.
Trading is screen based and online and there is very little scope for
any type of a fraud by the intermediarieslike the brokers etc.
National Stock Exchange is a national market in its true sense. The
National Stock Exchange has grown in size as well as coverage and
it has already become bigger than the Bombay Stock Exchange.
The brokers in the NSE are allowed only to trade. In the sense, they
are not the shareholders; this makes them not to interfere with the
management of the NSE as they are not part of the decision making
body.
NSEs board comprises of a team of eminent professionals drawn
from the field of commerce, management, finance, senior
executives from promoter institutions, persons of high eminence in
the public, three nominees from the SEBI and a full time executive
of the exchange.

A few of the promoters of the NSE are IDBI, IFCI, LIC, SBI, ICICI
BANK, UTI, National Insurance Corporation of India Ltd, New India
Assurance Company Ltd, The Oriental Insurance Company Ltd, Bank
of Baroda, Canara Bank etc.,

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

Formation of SEBI:

The Securities and Exchange Board of India (SEBI) was constituted

on 12th April, 1988 under a resolution of the Government of India.
On 31st January, 1992, it was made a statutory body by the
Securities and Exchange Board of India Act, 1992. It was given
additional powers by the overnment
of India on 25th January, 1995 through an amendment to the
Securities and Exchange Board of India Act, 1992. The Companies
(Amendment) Act, 2000 has given certain powers to SEBI as regards
the issue and transfer of securities and non- payment of dividend.

Objectives of SEBI:
(i) To regulate the securities market and to develop a healthy and
orderly securities market.
(ii) To protect the interests of investors in securities.

Powers and Functions of SEBI:

(i) Regulating the business in stock exchanges and other securities
markets.
(ii) Registering and regulating the working of stock brokers, sub-
brokers, share transfer agents, bankers to an issue, trustees of trust
deeds, registrars to an issue, merchant bankers, underwriters,
portfolio managers, investment advisers and such other
intermediaries who may be associated with securities markets in
any manner.
(iii) Registering and regulating the work of collective investment
scheme, including mutual funds.
(iv) Promoting and regulating self-regulatory organisation.
(v) Promoting investors' education, an training intermediaries of
securities markets.
(vi) Prohibiting insider trading in securities.

(vii) Prohibiting fraudulent and unfair trade practices relating to

securities market.
(viii) Regulating substantial acquisition of shares and takeover of
companies.
(ix) Calling for information from, undertaking inspection,
conducting .enquiries and audits of the stock exchange and
intermediaries and self-regulating organisations in
the securities market.
(x) Conducting research for the above purposes.
(xi) Performance of such other functions as may be prescribed.

The Amendment to the Securities and Exchange Board of India Act,

1992, made on 25th January, 1995, has empowered the SEBI to
exercise the following additional powers for ensuring the orderly
development of the capital market and for protecting the interests
of the members:

(i) Power to approve the bye-laws of stock exchanges.

(ii) Power to make or amend the bye-laws of stock exchanges.
(iii) Power to inspect the books of accounts and call periodical
returns from recognised stock exchanges.
(iv) Power to grant licence to any person for the purpose of dealing
in certain areas.
(v) Power to compel listing of securities in any recognised stock
exchange.
(vi) Power to delegate powers exercisable by it.
(vii) Power to try directly the voliation of certain provisions of the
Companies Act.

DEMATERIALISATION OR DEMAT
Introduction:

An investor's paper securities may be subject to problems, such as

mutilation of certificates, loss of certificates, forged certificates, bad
delivery, etc. These problems can be overcome through
dematerialisation or demat.
Meaning of Dematerialisation:

Dematerialisation is a process by which the paper certificates of an

investor are taken back and an equivalent number of securities are
credited in electronic holdings of that investor. In other words, it is
the process by which securities in the physical or paper form are
cancelled and
credited in the form of electronic balances to the demat account of
the investor maintained with a depository. (A depository is like a
bank where securities are held in electronic form, scrips are
collected, and receipts and record of the account are given to the
investor.)

Need for and Advantages of Dematerialisation:

The system of dematerialisation is needed for different purposes.

The different purposes served by dematerialization or the
advantages of dematerialisation are :
(a) It helps to solve the following problems:

(i) Bad delivery or faulty paper work (i.e., delivery of a share

certificate together with a deed of transfer which does not meet the
requirements of title transfer from the seller to the buyer).
(ii) Loss of share certificates.
(iii) Postal delays in receiving securities.
(iv) Transfer-related problems.
(v) Fake certificates.
(vi) Forged transfer deeds.
(vii) Theft of certificates.

(b) It facilitates speedier settlements, increases efficiency and

lowers transaction costs.

(c) It facilitates safe transfer of securities.