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 of the such claims. Financial Market is organized into money and capital market.
Money Market Money market is an arrangement for short term debt instrument (short term securities or close money substitutes or financial assets or instruments) having maturity period less than one 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 general level of interests in the economy
Money Market contd. Link between Money Market and Monetary Policy of RBI The monetary policy represent polices, objectives and instruments directed towards regulating money supply and credit in the economy. Three objectives of economic policy in India is have been economic growth, price stability and social justice. RBI seeks to influence liquidity in the money market which can be categorized as direct and indirect. Direct Instruments: o Reserve Requirements( CRR and SLR) o Bank Rate o Administered interest rate o Other qualitative and quantitative restrictions on credit Indirect Instruments: o Open Market Operation o Repos and Reverse -Repo the major function of which is to supply liquidity to money market.
Money Market contd. MONEY MARKET INSTRUMENTS o Treasury Bills(T-Bills) o Commercial papers o Certificates of deposits o Commercial bills o Call/notice money
Money Market contd. Treasury Bills (T-Bills): Treasury Bills are short terms instruments issued by RBI on behalf of central government. These are needed to meet the short term liquidity shortfall of central government 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 on maturity) 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. Treasury Bills (T-Bills contd. Participants in treasury bills are RBI, primary dealers, banks, foreign banks, 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-competitive bidders in T-bills.
COMMERCIAL PAPER (CP) : Money Market contd. Commercial Paper (Depending on the issuing company also known as finance paper, industrial paper or corporate paper) unsecured short term promissory notes issued at a discount by credit worthy and high rated corporates to meet their working capital requirements. mostly issued by manufacturing companies. negotiable, transferable by endorsement or delivery with a fixed maturity period.
has to be rated by a credit rating agency. Money Market contd. COMMERCIAL PAPER (CP) contd. : placed to investors either through merchant banks or through banks. Banks not allowed to underwrite or co-accept the issue of a commercial paper. Foreign Institutional Investors(FIIs) allowed to invest in CP up to certain extent fixed by SEBI. Investors in CP are individuals, banks, corporates, unincorporated body, bodies, NRIs, Foreign Institutional investors. CPs attracts stamp duty.
Money Market contd. 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 at India or outside India, or may be drawn by a party in India and payable at India or outside India). may be either an export bills (drawn by exporters on importers abroad ) or an import bills (drawn onimporters in India by exporters abroad). RBI rediscount genuine trade bills at bank rate or at a rate subscribe by it.
Certificates of Deposits(CDs) : Certificates of Deposits are unsecured negotiable and tradable short-term time deposits issued by commercial banks 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, are transferable 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.
Money Market contd. Call /Short Money Market : Call Money Market are market for very short term funds repayable on demand, and with a maturity period varying between one day to fortnight(fourteen days). When borrowed or lent for a day, it is call (overnight) money. Intervening holiday 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 banks borrow money without collateral from other banks to meet cash reserve requirement (CRR) as stipulated by RBI from time to time.
Money Market contd. Call /Short Money Market Participants in call money includes GIC, NABARD, IDBI, money market mutual funds, corporate, Discount and Finance House of India, Securities Trading Corporation of India. Commercial banks are both lenders as well as borrowers of call/notice money. Call rate (i.e. interest rate paid on call loans) are highly volatile and varies from day to day, hour to hour, and even minutes to minutes, and thus are highly sensitive to demand and supply of call loans. Within a fortnight, rates are known to move from 1-2 percent to over 140 percent per annum.
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 same to the productive channels. Functions: o Mobilize long term savings to finance loge term investments o Provide risk capital in the form of equity or quasi-equity to entrepreneurs o Provide boarder partnership of productive assets
Capital Market contd. Capital Market is segmented into primary capital market and secondary capital market.
Primary Market contd. Capital 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 deficit sectors such as government, corporate sector (through primary issue) and to bank and non-bank financial intermediaries (through secondary issue). Primary assets of corporate lead to capital formation. Capital formation helps in creating productive capacities, increasing efficiency and creating jobs which in turn generate wealth.
Capital Market contd.
Primary Issues (Domestic) Primary Market contd. 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 Issues o Private Placement o Preferential Issue o Qualified Institutions Placement Primary Issues are Governed by SEBI in terms of SEBI(Issue of Capital and Disclosure Requirements) Regulations, 2009.
Primary Issues (Domestic) Primary Market contd.
Primary Market contd. Primary Issues (Domestic) contd. Public issue : Public issue consists of Initial Public offerings and Follow on public offering. o Initials public offerings (IPOs) are offering of either fresh issue of equities/share or sale of existing equity or both sale of securities by an unlisted company for the first time to the public (an unlisted company is one which has not issued its share topublic). o Follow on public offering (FPO) are offering of either fresh issue of equities or sale of existing equity or both sale of securities by an listed company to the public
Primary Market contd. Primary Issues (Domestic) contd. Right Issue: Right Issue is an offer for sale of new securities by listed company to its existing share holder on pro-rata basis (predetermined rate). o Itoffers shares on a right basis either to expand, diversify, restructure their balance sheet or raise the promoter s stake. o Promoters offers right issues at attractive price often at discount to the market price for as they want their issue fully subscribed, they want to reward their shareholders.
Primary Market contd. Primary Issues (Domestic) contd. Private placement: Private placement is direct sale of newly issued 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 mostly issued by unlisted companies.
Primary Market contd. Primary Issues (Domestic) contd. Preferential issue: Preferential issues are allotment of shares to some select/strategic groups such as promoters, foreign partners, technical collaborators and private equity funds in terms of provisions of Chapter XIV of SEBI (DIP Guidelines). o Companies need prior approval from share holders for preferential allotment of shares. o Such securities are issued to avoid statutory provisions. However, they have been misused by both MNCs and Indian companies
Primary Market contd. Primary Issues (Domestic) contd. Qualified Institutions Placements (for listed company) : Qualified institutional placement (QIP) allows a listed company to issue equity shares, fully and partly convertible debentures, or any securities to a qualified institutional investors domestic or foreign. The issuing company is required to allot at least 10 percent of total issue to mutual funds.
Primary Market contd. Primary Issues (External) Issue by Indian Companies in Foreign Land Global Depository Receipts(GDRs): A GDR is a negotiable certificate issued by a multinational depository bank which purchases equity shares/bonds of foreign companies and deposits it on the account. o GDRs represent ownership of an underlying number of shares corresponding to the GDR in fixed ratio e.g. 1GDR= 1 Share or 1 GDR=10 shares.
Primary Market contd. Primary Issues (External) Issue by Indian Companies in Foreign Land o GDRs are offered for sale globally through bank branches, and are listed and traded in a international stock exchanges mostly Luxemburg Stock Exchange and London Stock Exchange and other exchanges such as Dubai and Singapore. o Under this arrangement, an Indian company intending to issue GDRs will issue the corresponding number of shares which are kept in an designated overseas depository banks.
Issue by Indian Companies in Foreign Land Primary Market contd. Primary Issues (External) America Depository Receipts (ADRs) : There is no legal or technical difference between an ADR and a GDR. o ADRs are negotiable instruments denominated in dollars, and issued by the 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 and depositing the underlying equity shares with the ADR depository bank in exchange for ADRs.
Primary Market contd. Primary Issues (External) External Commercial Borrowing: External Commercial Borrowing(ECB) are borrowings 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 fixed rate bonds) availed from non-residents lenders with minimum average maturity period of three years. o ECB policy is administered by Finance Ministry and RBI. ECB are supplements to domestically available resources for expansion of existing capacity as well as for fresh investment.
Primary Market contd. Primary Issues (External) 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 are Reliance Industries, SIDBI, Adani Power, Essar Oil etc. ECB are a key component ofindia s external debt.
Primary Market contd. Primary Issues (External) Foreign Currency Convertible Bonds: Foreign Currency Convertible Bond is a debt instrument which gives the non-resident investor a choice to convert his bond into fixed number of shares at a predetermined price or to receive a fixed yield to maturity. o Such bonds are issued by Indian Companies to non resident subscribers in foreign currencies. o They carry a fixed interest, and are convertible into a certain number of ordinary shares either wholly or partially on the basis of any equity related warrants attached to the debt instruments at a preferred price.
Primary Market contd. Primary Issues (External) Foreign Currency Exchangeable Bond: Foreign Currency Exchangeable Bonds are issued by an Indian company which is part of promoter group of offered company to subscribers living outside India, and are exchangeable into equity shares of offered company in any manner, either wholly or partially on the bases of equity related warranty attached to the debt instruments. For example, Tata Sons (promoter company), a promoter of all key Tata group companies issues exchangeable bonds to raise bonds for Tata Motors (offered company).
Primary Market contd. Primary Issues (External) Other External Fund Foreign Direct Investment (FDI): Foreign direct investment (FDI) is a direct investment into production or business in a home country by an individual or company of foreign country, either by buying a company in the target country or by expanding operations of an existing business in that country. FDI includes mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans. In a narrow sense, FDI leads to building new facilities i.e. capital formation.
Primary Market contd. Primary Issues (External) Other External Fund Foreign Intuitional Investments: Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets. Typical investors include banks, insurance companies, retirement or pension funds, hedge funds, investment advisors and mutual funds. Foreign Intuitional Investments is used most commonly in India to refer to foreign institutional investors investing in the financial markets of India.
Primary Market contd. Primary Issues (Domestic) contd. ISSUE BY FOREIGN COMPANIES IN INDIA: INDIA DEPOSITORY RECEIPTS(IDRS) India Depository Receipts(IDRs) enable foreign companies to raise fresh funds in India by issuing share to Indian nationals /residents in India. It enable globalization of Indian stock market. An IDR is an instrument denominated in Indian rupees in the form of depository receipts against the underlying equity of issuing company to enable foreign companies to raise funds from Indian capital market. NRIs and FIIs cannot subscribe to IDRS
Primary Market contd. Bonus Issue: Bonus issue isone of the way of raising capital but it does not bring infresh capital. o Some companies distribute profit to existing share holder by way of fully paid bonus share instead of paying them dividend. o Bonus share are issued in proportion of existing share held. The share holders need not have to pay for bonus share but retained earnings are converted into bonus share. o Thus, bonus share enable the company to restructure its capital. Companies issue bonus share for various reasons: o to boost liquidity of their stock o to bring down stock price o to restructure their capital
Secondary (Stock) Market Secondary market also know as stock market is the market where existing/outstanding securities are resold/traded. A company has to list its securities on the stock exchange for trading. A company can list seek listing on more than one stock exchange. A company listed on in any stock exchange is permitted for trading on the other. Functions of Secondary Market o facilitates liquidly and marketability of existing equity and debt instrument o Provides instant valuation of securities o Contribute to economic growth through allocation of funds to the most efficient through disinvestment and re-investment
Stock Market in India The Native Share and Stock Broker s Association, now known as BSE was formed in Bombay (Mumbai ) in 1875. This was followed by exchanges in Ahmedabad in 1894, Calcutta (Kolkata) in 1908and Madras (now Chennai) in 1937. The Calcutta Stock Exchange 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 India o 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
Secondary (Stock) Market contd. Stock Market in India contd. In all, there are, at present 21 stock exchanges in the country. The National Stock Exchange was established in 1994. it was the first modern, high tech stock exchanges with new trading practices, new institutions and new products. OCTAI was set up in 1992 as stock exchange providing small and medium sized companies the means to generate capital. Internet trading was introduced in India since 2000, which allows trading (purchase and sale of shares) by investors on line through internet All 21 public sector banks, leading private banks, public sector undertakings and corporate are shareholders of the stock exchanges exchange. Interconnected stock exchange is the stock exchange of stock exchanges.
Regulation of Stock Exchanges: SEBI Secondary (Stock) Market contd. The stock exchanges in India are regulated by central government under the Securities Contract (Regulation) Act, 1956 which provide for the recognition of stock exchanges, supervision and control of recognised stock exchanges, regulation of contracts in securities, listing of securities, transfer of securities and many other functions. The Securities and Exchange Board of India (SEBI) was established 1992 to protect the interest of the investors in securities, and promote and regulate the securities market in India.
Stock Market Index Secondary (Stock) Market contd. Stock market index is the index based on a statistical compilation of the share prices of a number of representative stocks. Stock market index is the weighted average prices of selected stock prices. The index incorporates as et of scrips/stocks which have high market capitalisation high liquidity. Market capitalisation is the market value of a company s stock which is derived by multiplying its market price with number outstanding equities. Liquidity is reflected in the ability buy or sell a scrip close to the current market price. Stock market index serves as the barometer of equity market as well as barometer of country s expectation about economy s performance. It reflects market direction and indicates 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 BSE o Standard & Poor s CNX Nifty incorporating 50 scrips (previously NSE Nifty)
Secondary (Stock) Market contd. 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 sector or the securities market as a whole.