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ORGANISED INSTRUMENTS UNORGANISED 1. Call money market INSTRUMENTS 2. Treasury Bills 1. Indigenous Bankers 3. Commercial Papers 4. Certificate of Deposits 2. Chit funds 5. Repo & Reverse repo 3. Niddhis 6. MMMFs 7. DFHI 4. Money lenders 8. LAF 5. Finance companies 9. CBLO
prof. Nandini Katti
INTRODUCTION
It is a market for overnight to short term funds and instruments having a maturity period of one or less than one year.. The money market constitutes a very important segment of the Indian financial system The average turnover of the money market in India is over Rs. 40000 crores daily This implies that 2 % of annual GDP of India gets traded in the money market in just one day, and then through the money market it is many times larger than the capital market, it is not even a fraction of the daily trading in developed markets.
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Treasury Bills
Treasury bills are short term instruments issued by the Reserve Bank on behalf of the government to tide over short term liquidity shortfalls. This instrument is used by the government to raise short-term funds to bridge seasonal or temporary gaps between its receipts (Revenue and capital) and expenditure. They form the most important segment of the money market not only in India but all over the world as well. T Bills are repaid at par on maturity. The difference between the amount paid by the tender at the time of purchase.(which is less than the face value) and the amount received on maturity represent the interest on T bills and is known as the discount. Tax deducted at source (TDS) is not applicable on T bills. prof. Nandini Katti
Treasury Bills
Features of T bills: They are negotiable securities. They are highly liquid as they are of shorter tenure and there is a possibility of the interbank repos in them. There is an absence of default risk. They have an assured yield low transaction cost, and are eligible for inclusion in the securities for SLR purposes. They are not issued in scrip from. The purchases and sales are effected through the subsidiary general ledger (SGL) account. At present there are 91 days, 182 days and 364 days. T bills in vague. The 91 days T bills auctioned by the RBI every Friday and the 364 days T bills every alternate Wednesday i.e. the Wednesday preceding the report on Friday. Minimum amount of face value Rs.1 lac and in multiples thereof. There is no specific amount/limit on the extent to prof. Nandini Katti which these can be issued or purchased.
Commercial paper
The working Group on Money Market in 1987 suggested the introduction of the commercial paper (CP) in India. The Reserve Bank introduced commercial papers in January 1990 . A commercial paper is an unsecured short-term permission rate, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is generally issued at a discount by the leading credit worthy and highly rated corporate to meet their working capital requirements.
prof. Nandini Katti
Commercial paper
Depending upon the issuing company, a commercial paper is also known as a finance paper, industrial paper, or corporate paper. It is also known as finance paper, industrial paper or corporate paper. All India financial institution can also issue CPs. It can also be issued in interest bearing form.
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Commercial paper
Guidelines Relating to CPs: - The maturity period is a minimum for 7 days and maximum upto one year. further brought down to 7days in April 2004. The minimum size of the CP is Rs.5 lakh and in multiples of it. Eligibility: - Corporate, primary dealers and all India finances institutions are eligible to issue a CP. For a corporate to be eligible, it should have tangible net worth of Rs. 4 crores and a sanctioned working capital limit from a bank or a financial institution and the borrower account is a standard asset. Rating Requirement: The minimum credit rating shall be P2 of CRISIL or such equivalent rating by other approved agencies. Investment in CPs: individuals, banks, corporate bodies, NRIs, FIIs are eligible to invest. Issuing & Paying Agent (IPA): only a scheduled commercial bank can act as an IPA.
Commercial Bills
A commercial bill is a short term, negotiable and selfliquidating instrument with low risk. It enhances the Liability to make payment on a fixed date when goods are bought on credit. According to the Indian Negotiable Instruments Act, 1881, a bill of exchange is a written instrument containing on unconditional order signed by the maker, directing to pay a certain amount of money only to a particular person, or to the bearer of the instrument. Bills of exchange are negotiable instrument drawn by the seller (drawer) on the buyer (drawee) for the value of the goods delivered to him. Such bills are prof. Nandini Katti called trade bills
Commercial Bills
When trade bills are accepted by commercial banks, they are called commercial bills. The bank discounts these bills by keeping a certain margin and credits the proceeds. Banks when in need of money can also get such bills rediscounted by financial institutions such as LIC, UTI, GIC, ICICI and IRBI. The maturity period of the bills varies from 30 days, 60 days or 90 days depending on the credit extended in the industry.
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Certificates of Deposit:
Certificates of deposit (CD) are unsecured, negotiable, short term instruments in bearer firm, issued by commercial banks and development financial institutions. Certificates of deposit were introduced in June, 1989. Only scheduled commercial banks excising Regional Rural Banks and local Area Banks were allowed to issue them initially. Financial institutions were permitted to issue certificates of deposit within the umbrella limit fixed by the Reserve Bank in 1992.
prof. Nandini Katti
Certificates of Deposit:
Certificates of deposit are time deposits of specific maturity similar to fixed deposits (FD). The biggest difference between the two is that CDs, being in bearer form, are transferable and tradable while FDs are not. Like other time deposits, CDs, are subject to SLR and CRR requirement. There is no ceiling on the amount to be raised by banks. The deposits attract stamp duty as applicable to negotiable instruments. They can be issued to individuals. Corporations, companies, trusts, funds, associates, and others. . Non-Resident Indians (NRIS) may also subscribe to CDs, but only on a non-repatriable basis which should be clearly stated on the certificate such CDs cannot endorsed to another NRI in the secondary market. prof. Nandini Katti
Repos: The major function of the money market is to provide liquidity. To achieve this function and to even out liquidity changes, the Reverse Bank uses repos. Repo is a useful money market instrument enabling the smooth adjustment of short-term liquidity among varied market participants such as banks and financial institutions. Repo refers to a transaction in which a participant acquires immediate funds by selling securities and simultaneously agrees to the repurchase of the same or similar securities after a specified time at a specified price. Repo is also referred to as a ready forward transaction as it is a means of funding by selling a security held on a spot basis and repurchasing the same on a forward basis.
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Reverse repo
the opposite of repo- a party buys a security from another party with a commitment to sell it back to the latter at a specified time and price. In other words, while for one party the transaction is repo, for another party it is reverse repo. A reverse repo is undertaken to earn additional income on idle cash. In India, repo transactions are basically fund management/SLR management devices used by banks
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Dichotomy Structure
It is a significant aspect of the Indian money market. It has a simultaneous existence of both the organized money market as well as unorganized money markets. The organized money market consists of RBI, all scheduled commercial banks and other recognized financial institutions. However, the unorganized part of the money market comprises domestic money lenders, indigenous bankers, trader, etc.
prof. Nandini Katti
Dichotomy Structure
The organized money market is in full control of the RBI. However, unorganized money market remains outside the RBI control. Thus both the organized and unorganized money market exists simultaneously.
Absence of Integration
An important defect of the Indian money market at one time was the division of the money market in to several segments or sections, loosely connected to each other. Each section of the money market such as the State Bank of India and its subsidiaries the foreign exchange banks, the urban co-operative banks and indigenous bankers limited itself broadly to a particular class of business and remained independent in its own sphere. Moreover, the relations between the various sections of the Money market were not cordial
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Absence of Integration
This is so even now between Indian banks and foreign banks. With the passage of the Banking Regulation Act 1949, all banks have been treated equally by RBI as regards licensing, opening of branches, share capital, the types of loans and advances to be given, etc. Accordingly, the Indian money market is getting close integrated. Besides RBI guides and direct them in their lending policies and regularly inspects the books of scheduled commercial banks. However, RBIs control and monitoring of the commercial banking sectors are not fully effective. This is clear from Harshad Mehta scan in 1992 and Ketan Parekh scan in 2001 prof. Nandini Katti
Relaxation of Interest Rate Regulations The minimum lending rate of commercial banks and public sector development financial institution (DFIs) declined steeply from 18 percent in 1990-91 to 10.5 percent in 2005-06. The present position of interest rate regulations are:
prof. Nandini Katti
364 days Treasury Bills. There was considerable scope for banks and financial institutions to be interested in long dated bills, as they were far superior to their loan assets and investments which could not be easily liquidated in times of need, without incurring heavy losses. The 364 days treasury Bills have thus become an important instrument of government borrowing from the market and also leading money market instrument in the sense that their yield is most reflective of market conditions. Financial institutions recognize the yield rate on 364 day Treasury Bills as the anchor rate for floating interest rate instruments.
Electronic Transactions:
In order to impart transparency and efficiency in the money market transaction the electronic dealing system has been started. It covers all deals in the money market. it is useful for the RBI to watch the money market.
Gilt-Edge Mkt
Primary
Secondary
primary
Secondary
DFIs
DFIs supply funds for investment: Financial Intermediaries like merchant bankers help the corporate sector to raise funds in the capital market. Eg: Industrial Finance Corporation of India (IFCI), State Finance Corporations (SFCs), Industrial Development Finance Corporation (IDFC).
Financial Intermediaries
Financial intermediation consists of channeling funds between surplus and deficit agents. A financial intermediary is a financial institution that connects surplus and deficit agents. Eg: Merchant Banks, Mutual Funds, Leasing Companies, Venture Capital Companies
The Government Securities (G SEC) market VS Industrial Securities Market The Government Securities market, also known as the gilt edged market differs from the industrial securities market in many important respects: There are uncertainties regarding yield managements, additions to capital, etc. and, therefore, there is much less speculation in this market. The investors in government securities are predominantly institutions which are often compelled by law to invest a certain portion of their funds in these security. The commercial banks the LIC the GIC and the provident funds come under this category these are often referred to as the captive market for government securities. prof. Nandini Katti
The Government Securities (G SEC) market VS Industrial Securities Market. The average value of the transactions in the government securities market is very much larger than in the case of shares and debentures of companies often a single transaction in government securities many may run into several crores or even hundreds of crores of rupees.
Primary market
Primary issue
Public Issue
Right Issue
PVT
Placement
IPO
FPO
Preferential
Issue
QIPs
Primary market
It is the market for new issues. It is the market for fresh capital. Funds are mobilized through prospectus, right issue, and the private placement.
Public Issue
IPO (Initial Public Offering): It is a offering either of securities or an offer for sale of existing securities or both by an unlisted company for the first time to the public.
FPO: It is an offering of either a fresh issue of securities or an offer for sale to the public by an already listed company through offer documents Investors participating in these offerings take informed decisions based on its track record and performance.
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Right Issue
It is the issue of new shares in which existing shareholders are given preemptive rights to subscribe to the new issue The right is given in the form of an offer to existing shareholders to subscribe to a proportionate number of fresh issues, at a predetermined price.
Private placements
A company can raise money by issuing debt instruments like debentures/non convertible debentures (NCD) by a public offer. Depending on their need for money in a short time frame or on basis of credit rating or lower cost, they can also go for "private placement" of the bond/NCD for raising money.
Private placements
It refers to the direct sale of newly issued securities by the issuer to a small number of investors through: merchant bankers. Investors Financial Institutions Corporate Banks and high net worth individuals.
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Preferential Issue
A public / rights is cumbersome and requires compliance with statutory provisions. Hence, many companies opt for preferential allotment of shares for raising funds. Such allotments are made to various strategic groups including promoters, foreign partners, technical collaborators and private funds.
GDRs
ADRs
ECBs
FCCBs
Mobilisation of savings
It mobilises savings through various instruments & channelises them into productive areas Resources are diverted from consumtion purpose to productive purposes Various availability of financial assets encourages savings in capital mkt. Financial needs of industry, trade & business are fulfilled by the capital mkt.
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Industrial development
It provides adequate, cheap & diversified finance to the industrial sector for various purposes Provides funds for modernisation, upgradation of tech. establishment of new units Provides variety of services to entrepreneurs like underwriting, participation in equity capital, credit rating, consultancy services etc. this stimulates industrial entrepreneurship
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Technical assistance
Capital mkt. plays an imp. role in stimulating industrial entrepreneurship by offering 1. advisory services 2. Identifying growth potential 3. Training entrepreneurs in project mgmt
Encourage investors
Secondary mkt. encourage investors to invest in industrial securities by making them liquid It provides facilities for continuous, regular & ready buying n selling of securities Industries are able to raise substantial amount of funds from various segments of the economy
Disclosure standards
Companies are required to disclose all material facts & specific risk factors associated with their projects SEBI has introduced a code of advertisement for pub. Issues in order to ensure fair & truthful disclosures
Underwriting optional
To reduce the cost of issue, underwriting is made optional It is subject to the condition that if an issue was not underwritten & was not able to collect 90% of the amount offered to the public, the entire amt. collected would be refunded to the investors
Permitting FIIs
FIIs such as mutual funds & pension funds are allowed to invest in equity shares & in debt mkt. as well which includes dated govt. securities & TBs
OTCEI (1992)
It is an electronic national stock exchange listing an entirely new set of cos. which will not be listed on other stock exchanges OTCEI can list cos. with issued capital from Rs. 30 lacs to Rs. 25 cr.
Objectives
Provide medium & small enterprises access to capital mkt. Provide investors a convenient mode of investment Cater to the needs of cos. Which cannot be listed on other official stock exchanges Eliminate problems of illiquid securities, delayed settlements & unfair prices faced by investors
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Depository system
Intro. of depository sys. & scripless trading mechanism since 1996 This has erased the delays, counterfeit scrips, forged certificates, wrong signatures etc. It facilitates transfer of ownership without handling securities Scripless trading is demat of shares i.e. converting physical security holdings with depository into electronic forms 2 depositories NSDL & CDSL have been estblished
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Rolling statement
The change over to rolling statement from the traditional a/c period settlement marks an imp. change in age old practices Under this method all trades executed on trading day (T) are settled after certain days (N) This is called T+N rolling settlement Since 2003 trades are settled under T+2
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Derivatives trading
Derivatives trading inequities started in Indian in June 2000 At present there are 4 equity derivative products in India Stock option Stock futures Index options index futures Derivatives trading is allowed on 2 stock exchanges NSE & BSE
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FIIs
FIIs like Pension funds MFs Investment trusts Portfolio mgmt cos. are allowed to invest in Indian capital mkt. if they are registered under SEBI No. of registered FIIs stood at 1,718 by Dec.2010
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Trading hours
Stock mkts trading in cash & derivative segments The timings are fixed bet. 9a.m. to 5p.m.