Indian Capital Markets

Capital Market in India-
Capital market is a market where buyers and sellers engage in trade of financial securities like bonds,
stocks, etc. Capital market deals with medium term and long term funds. It refers to all facilities and the
institutional arrangements for borrowing and lending term funds (medium term and long term). The demand for
long term funds comes from private business corporations, public corporations and the government. The supply of
funds comes largely from individual and institutional investors, banks and special industrial financial institutions
and Government.
Definition: Capital market is a market where buyers and sellers engage in trade of financial securities like bonds,
stocks, etc. The buying/selling is undertaken by participants such as individuals and institutions.
A capital market can be defined as An organized mechanism for efficient and efficient transfer of
money capital or financial resources from the investing parties i.e., individuals or institutional savers to the
enterprises engaged in industry or commerce either in the private or public sectors of an economy
Capital market consists of primary markets and secondary markets. Primary markets deal with trade of
new issues of stocks and other securities, whereas secondary market deals with the exchange of existing or
previously-issued securities. Another important division in the capital market is made on the basis of the nature of
security traded, i.e. stock market and bond market.
ROLE AND IMPORTANCE OF CAPITAL MARKET IN INDIA

Capital market has a crucial significance to capital formation. For a speedy economic development adequate
capital formation is necessary. The significance of capital market in economic development is explained below:-
1. Mobilization Of Savings And Acceleration Of Capital Formation :-
In developing countries like India the importance of capital market is self evident. In this market, various types
of securities help to mobilize savings from various sectors of population. The twin features of reasonable return
and liquidity in stock exchange are definite incentives to the people to invest in securities. This accelerates the
capital formation in the country.
2. Raising Long - Term Capital :-
The existence of a stock exchange enables companies to raise permanent capital. The investors cannot commit
their funds for a permanent period but companies require funds permanently. The stock exchange resolves this dash
of interests by offering an opportunity to investors to buy or sell their securities, while permanent capital with the
company remains unaffected.
3. Promotion Of Industrial Growth :-
The stock exchange is a central market through which resources are transferred to the industrial sector of the
economy. The existence of such an institution encourages people to invest in productive channels. Thus it
stimulates industrial growth and economic development of the country by mobilizing funds for investment in the
corporate securities.
4. Ready And Continuous Market :-
The stock exchange provides a central convenient place where buyers and sellers can easily purchase and
Kumadvathi First Grade College, Shikaripura 1
sell securities. Easy marketability makes investment in securities more liquid as compared to other assets.
5. Technical Assistance :-
An important shortage faced by entrepreneurs in developing countries is technical assistance. By offering
advisory services relating to preparation of feasibility reports, identifying growth potential and training
entrepreneurs in project management, the financial intermediaries in capital market play an important role.
6. Reliable Guide To Performance :-
The capital market serves as a reliable guide to the performance and financial position of corporate, and
thereby promotes efficiency.
7. Proper Channelization Of Funds :-
The prevailing market price of a security and relative yield are the guiding factors for the people to channelize
their funds in a particular company. This ensures effective utilization of funds in the public interest.
8. Provision Of Variety Of Services :-
The financial institutions functioning in the capital market provide a variety of services such as grant of long
term and medium term loans to entrepreneurs, provision of underwriting facilities, assistance in promotion of
companies, participation in equity capital, giving expert advice etc.
9. Development Of Backward Areas :-
Capital Markets provide funds for projects in backward areas. This facilitates economic development of
backward areas. Long term funds are also provided for development projects in backward and rural areas.
10. Foreign Capital :-
Capital markets makes possible to generate foreign capital. Indian firms are able to generate capital funds from
overseas markets by way of bonds and other securities. Government has liberalized Foreign Direct Investment
(FDI) in the country. This not only brings in foreign capital but also foreign technology which is important for
economic development of the country.
11. Easy Liquidity :-
With the help of secondary market investors can sell off their holdings and convert them into liquid cash.
Commercial banks also allow investors to withdraw their deposits, as and when they are in need of funds.
12. Revival Of Sick Units :-
The Commercial and Financial Institutions provide timely financial assistance to viable sick units to overcome
their industrial sickness. To help the weak units to overcome their financial industrial sickness banks and FIs may
write off a part of their loan.
Capital market is classified in four ways

a) Gilt - Edged Market:-
Gilt - Edged market refers to the market for government and semi-government securities, which carry
fixed rates of interest. RBI plays an important role in this market.
b) Industrial Securities Market:-
It deals with equities and debentures in which shares and debentures of existing companies are traded and
shares and debentures of new companies are bought and sold.
c) Development Financial Institutions:-
Development financial institutions were set up to meet the medium and long-term requirements of
industry, trade and agriculture. These are IFCI, ICICI, IDBI, SIDBI, IRBI, UTI, LIC, GIC etc. All These
institutions have been called Public Sector Financial Institutions.
d) Financial Intermediaries:-
Financial Intermediaries include merchant banks, Mutual Fund, Leasing companies etc. they help in
mobilizing savings and supplying funds to capital market.
The Industrial Securities Market is further classified into two types

a) Primary Market:-
Primary market is the new issue market of shares, preference shares and debentures of non-government public
limited companies and issue of public sector bonds.
b) Secondary Market
This refers to old or already issued securities. It is composed of industrial security market or stock exchange
market and gilt-edged market.
New issue market(NIM)/ Primary Market

Primary Market is also known as the new issue market. It is the market for issuing new securities. In the
primary market the securities are purchased directly from the issuer, which is not in the case of the secondary
market. The primary market is a market for new capital that will be traded over a longer period. A company's new
offering is placed on the primary market through an initial public offer. When shares are bought in an IPO it is
termed as primary market. The primary market does not involve the stock exchanges. Stocks available for the first
time are offered through new issue market. The issuer may be a new company or an existing company. After
trading in the primary market the securities will entered in the secondary market.
FEATURES OF PRIMARY MARKET:

1. This is the market for new long term capital. The primary market is the market where the securities are sold for
the first time. Therefore it is also called New Issue Market (NIM).
2. In a primary issue, the securities are issued by the company directly to investors.
3. The company receives the money and issue new security certificates to the investors.
4. Primary issues are used by companies for the purpose of setting up new business or for expanding or
modernizing the existing business.
5. The primary market performs the crucial function of facilitating capital formation in the economy
6. The new issue market does not include certain other sources of new long term external finance, such as loans
from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital
into public capital; this is known as going public
Methods of Floating New Issues

New issue in the primary market can be placed as Public Issue, Offer for Sale, Private Placement and Right
Issue.
Methods of issuing new securities
The new companies as well as the existing companies can raise the long term capital in the new issue
market or primary market. So capital can be raised by issue of equity shares or preference shares. For issuing these
shares there are various methods or ways. The following are the ways or methods of floating or placing new issue
of equity shares.
1. Public issue through prospectus
2. Offer for sale
3. Private placement methods
4. Initial public offer
5. Book building process or tender methods
6. Right issue method
7. Issue of bonus shares
8. Bought out deal method.
9. Stock option
1. Public issue through prospectus.

It is common and simple method followed by the companies to raise the capital. Public issue is the direct
method offer made by the company to the general public to subscribe to the securities of the company at a stated
price. Securities may be issued at a premeium or at a discount or at par.
Under this method the issuing company makes on offer to the public through prospectus of fixed number
of equity shares at a specified price.
The prospectus is an invitation to the public to subscribe to the shares or debentures of a company. The
issuing company should disclose all the information in the prospectus prescribed in the companies Act of 1956 and
also by SEBI the prospectus contains the following particulars.
Name of the company
Address of the registered office of the company
Main objective of the company
Location of the industry
Minimum subscription
Names of the board of directors of company
Authorised capital subscribed capital and proposed issued of capital to public.
Advantages
Publicity: Through prospectus method one can give wide range of publicity.
Securities allotted to applicants on non-discriminatory basis
It means fixed quantity of shares has to be allotted among applicants on a non-discriminatory basis. For
this purpose wide publicity is given and danger or artificial restrictions on the quantity of shares is avoided.
Securities are distributed widely
Shares ownership is widely spread. This reduces the chances of concentration of wealth and economic power.
It is more transparent
Disadvantages
1. It is costly
2. It is time consuming
3. It is uneconomical for small issues
4. The public subscription is not guaranteed.
2. Offer for sale method

Under this method securities offered through intermediaries like issue houses, merchant bankers, stock
brokers etc. so in this case securities are not directly offered to the public by the issuing company.
Steps for offer for sale
This method involves two steps
1. The first step is the sale by the issuing company to the issue houses.
2. The second step is the second sale by the issuing houses to the public.
Generally the price of shares offered to the public is higher than the price at which share are directly issued to the
public.
Advantages
It reduces the cost of issue
The uncertainty of public subscription is avoided.
Disadvantages
It is expensive
It is time consuming
The remuneration to the pocked of intermediaries

Not suitable for small scale industries
3. Private Placement Method.
As the name suggests it involves selling of securities privately to a group of investors. The sale of
securities to a relatively small number of selected investors as a way to raising capital is called private placement.
Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension
funds.
Under this method the issue houses or brokers purchase the securities directly from issuing company and
then these issue houses or brokers place with their own clients and not to the public.
Advantages
1. It is cheaper method
2. Simple procedure for issue of securities
3. Suitable for small
Disadvantages
1. Concentration of shares in the hands of new people.
2. Scope for price rigging and artificial scarcity and securities.
3. Initial Public Offer Through Stock Exchange

Under this method on behalf of clients broker places orders through computer trading terminal. After
finalisation allocation of shares through brokers inform to their clients to submit applications and deposit the
amount payable through broker in an escrow account.
4. Book Building Method or Tender method
Under this method the issuing company does not issue of shares to the public but invites bid from
prospective investors i.e., merchant bankers and on the basis of such bids the demand of various price levels is
noted in this case, the merchant bankers undertake full responsibility for the reissue.
The merchant banker appointed by issuing company for book building is known as a book runner. Price of
the securities to be issued will be decided through bidding process.
Advantages
1. It reduces the time gap between allotment and listing
2. Price are fixed on the basis of bids
3. It helps for listing quickly.
5. Rights issue Method
This is the method of raising funds from existing shareholders by offering additional securities to them on
a pre-emptive basis. In the case of companies whose shares are already listed and widely-held, then shares can be
offered to the existing shareholders. Generally the issue price of right issue is lower than the market price of the
company's stock. Shares are offered to existing shareholders in proportion to their current shareholding, respecting
their pre-emption rights.
6. Bought Out Deals
Under this method the promoters of an unlisted company make an outright sale of chunk of equity shares
to a single sponsor.
7. Stock option method
It is a method offering shares to the employees of the issuing company. So it encourages the employees to
take up and subscribe to its securities. It is a incentive to motivate them to stay in the company and participate into
profitability and prosperity of the issuing company. This method is also called Sweat Equity Shares.
Advantages
1. It is less expensive i.e., economical
2. Issue procedure is simple.
Disadvantage
1. It is available only to the existing shareholders and not to others.
8. Issue of Bonus Shares or Capitalization of profits and reserves
Under this method, accumulated profits and reserves are converted in to share capital of the company.
Bonus shares are issued to fully paid shares. So shareholders receive bonus shares instead of receiving
bonus in the form of cash.
It is only a book entry in which the reserves are reduced and the share capital is increased.
Advantages
1. It is economical
2. Minimum subscription is not required.
3. It helps the company to restructure its capital
4. Sources of the company is not effected.
Disadvantages
1. Higher rate of dividend.
FUNCTIONS NEW ISSUE MARKET

The main function of a new issue market is to facilitate transfer of resources from savers to the users. The
savers are individuals, commercial banks, insurance companies etc. The users are public limited companies and the
government. The new issue market plays an important role of mobilizing the funds from the savers and transfers
them to borrowers for production purposes, an important requisite of economic growth. It is not only a platform for
raising finance to establish new enterprises but also for expansion/diversification/modernizations of existing units.
In this basis the new issue market can be classified as follows:
1. Market where firms go to the public for the first time through Initial Public Offering (IPO).
2. Markets where firms which are already trading raise additional capital through Seasoned Equity Offering (SEO).
The main function of a new issue market can be divided into a triple services function:
1. Origination
2. Underwriting
3. Distribution
Origination
It refers to the work of investigation, analysis and processing of new project proposals. Origination starts before an
issue is actually floated in the market. There are two aspects in this function:
1. A careful study of the technical, economical and financial viability to ensure soundness of the project. This is a
preliminary investigation undertaken by the sponsors of the issue.
2. Advisory services which improve the quality of capital issues and ensure its success.
The function of origination is done by merchant bankers who may be commercial banks, all India financial
institutions or private firms. The success of the issue depends, to a large extent, on the efficiency of the market.
The origination itself does not guarantee the success of the issue. Underwriting, the special service is required in
this regard.
Underwriting
It is an agreement whereby the underwriter promises to subscribe to a specified number of shares or debentures or
a specified amount of stock in the event of public not subscribing to the issue. If the issue is fully subscribed, then
there is no liability for the underwriter. If a part of the share issues remain unsold, the underwriter will buy the
shares. Thus, underwriting is a guarantee for the marketability of shares.
Method of underwriting
An underwriting agreement may take any of the following three forms:
i. Standing behind the issue: Under this method, the underwriter guarantees the sale of a specified number of
shares within a specified period. If the public do not subscribe to the specified amount of issue, the underwriter
buys the balance in the issue.
ii. Outright Purchase: The underwriter, in this method, makes outright purchase of shares and resells them to the
investors.
iii. Consortium Method: Underwriting is jointly done by a group of underwriters in this method. The underwriters
form a syndicate for this purpose. This method is adopted for large issues.
Distribution
It is the function of sale of securities to ultimate investors. This service is performed by brokers and agents who
maintain a regular and direct control with ultimate investors.
INSTRUMENTS OF ISSUES
Traditionally, equity shares preference share are issued by companies as ownership capital and debentures
and bonds as debt capital. Recently, new instruments to meet the varied needs of investors in terms of security, rate
of return, marketability and appreciation in value are being issued by the companies.
The important new instruments and their characteristic are explained below
i. Secured premium notes with detachable warrants (SPN)
Secured premium notes are issued along with detachable warrant. The warrants attached to it ensure the
holder the right to apply and get equity shares after a notified the SPN is fully paid up.The SPN is issued at
nominal value and does not carry any interest.
ii. Equity Shares with Detachable Warrants
In this instrument along with fully paid up equity shares, detachable warrants are issued which entitle the
warrant holder to apply for a specified number of shares at a determined price. Detachable warrants are registered
separately with the stock exchange and traded separately.
iii. Preference Shares with Warrants
This instrument shall carry certain number of warrants entitling the holder to apply for equity shares at
premium at any time in one or more stages between the third and fifth year from date of allotment. From the date
of allotment, the preference shares with warrant should be transferred or sold for a period of three years.
iv. Non Convertible Debentures with Detachable Equity Warrants
The holder of instrument is given an option to buy a specified number of shares from the company at a pre
determined price with a definite time frame. There is a specific lock in period after which the holder can exercise
his option to apply for equity shares.
v. Fully Convertible Cumulative Preference Shares
This instrument has two parts A and B. part A is convertible into equity shares on the date of allotment
without application by the allottee. Part B will be redeemed at par /converted space into equity after lock in period,
at the option of investors.
vi. Zero Interest Fully Convertible Debentures (FCDs)
No interest will be paid to the holders of this instrument till the lock in period. After a notified period this
debenture will be automatically and compulsorily converted into shares. Before the conversion of FCDs into
equity, if the company issues rights, it would be available to the holders in the proportion decided by the company.
7. Fully convertible debentures (fcds) with interest
This instrument carries no interest for a specified period. After this period, option is given to apply for
equities at premium for which no additional amount is payable. However, interest in FCDs is payable at a
determined rate from the date of first conversion to second / final conversion and equity will be issued in lieu of it
interest amount.
8. Zero Interest Partly Convertible Debentures (Pcds) With Detachable and Separately Tradable Warrants
This partly convertible debenture has two parts- A and B. part A is convertible into equity shares at a fixed
amount on the date of allotment. Part B is non convertible and redeemed at par at the end of a specific period. Part
B will also carry a detachable and separately tradable warrant. It also gives an option to the holder to receive equity
share for every warrant.

9. Zero Interest Bonds
Zero interest bonds are sold at a discount from their eventual maturity value and bear no interest. In India,
zero interest convertible is bonds are issued by companies. These bonds do not carry any interest till the date of
conversion and are converted into equity shares at par or premium on the expiry of a fixed period.
10. Deep Discount Bonds
These bonds are sold at a large discount to their nominal value. There are no interest payments on these
bonds and the investors get return as accretion to the par value of the instrument over its life.
The Industrial Development Bank of India issued in February 1996 deep discount bonds. Each bond having a face
value of Rs. 200000 was issued at a discounted price of Rs. 53000 with a maturity period of 25 years. The
Industrial Finance of India issued Deep Discount Bonds of Rs. 2500 and promised Rs. 100000 after 25 years. The
Small Industrial Bank of India also issued similar type of bonds.
11. Option Bonds
Option Bonds may be cumulative or non-cumulative as per the option of the holder of the bonds. In case of
cumulative bonds, interest is accumulated and is payable on maturity only. In case of non-cumulative bonds, the
interest is paid periodically. The option is to be exercised by the investor at the time of investment. The Industrial
Development Bank of India issued option bonds in January 1992.
12. Bonds with Warrants
A warrant allows the holder to buy a number of equity shares at a pre-specified price in future. The
warrants are usually attached to debentures or preference shares issued by companies as sweeteners to make issues
more attractive. Essar Gujarat, Ranbaxy and Reliance have issues bonds with equity warrants.
PLAYERS/INTERMEDIARIES IN THE NEW ISSUE MARKET

There are many players in the new issue market. The important of them are the following:
1. Merchant bankers:
They are the issue managers, lead managers, co-managers and are responsible to the company and SEBI. Their
functions and working are described in a separate chapter.
2. Registrars to the issue:
Registrars are an important category of intermediaries who undertake all activities connected new issue
management. They are appointed by the company in consultation with the merchant bankers to the issue.
Registrars have a major role, next to merchant bankers, in respect of servicing of investors.
3. Collecting and coordinating bankers:
Collecting bankers collect the subscriptions in cash, cheques, stock invest etc.
Co-ordinating bankers collect information on subscriptions and co-ordinate the collection work. They
monitor the work and inform it to the registrars and merchant bankers.
Collecting banker and co-ordinating banker may be the same bank or different banks.
4. Underwriters and brokers:
Underwriting is an agreement whereby the underwriter promises to subscribe to a specified number of
shares or debentures or a specified amount of stock in the event of public not subscribing to the issue.
Brokers along with the network of sub brokers market the new issues. They send their own circulars and
applications to the clients and do follow up work to market the securities.
Secondary market or stock exchange

The market where existing securities are traded is referred to as the secondary market or stock market. In a
stock market, purchases and sales of securities whether government or semi-government bodies or other public
bodies and also shares and debentures issued by joint stock companies are effected.

Stock exchanges are the important ingredient of the capital market. They are the citadel of capital and fortress of
finance.
Definition
According to Husband and Dockeray
Securities or stock exchanges are privately organized markets which are used to facilitate trading in securities
As per the Securities Contract Act. 1956, a Stock exchange has been defined as follows
It is an association, organization 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
Under this Act, the following securities can be traded.
Shares, scrips, stocks, bonds debentures, stocks or other marketable securities of a like nature in or any
incorporated company or other body corporate.
Government securities and
Rights or interests in securities
Thus, the stock exchanges constitute a market where securities issued by the Central and State Governments,
public bodies and joint-stock companies are traded. Secondary market is market in which existing securities are
bought and sold. Existing securities are bought and sold with the help of brokers. It is the financial market where
previously issued securities and financial instruments such as stock, bonds, options and futures bought and sold.
The stock exchanges are BSE, NSYE and NASDAQ etc.
Chief features of secondary market are:

(1) It Creates Liquidity: The most important feature of the secondary market is to create liquidity in securities.
Liquidity means immediate conversion of securities into cash. This job is performed by the secondary market.
(2) It Comes after Primary Market: Any new security cannot be sold for the first time in the secondary market.
New securities are first sold in the primary market and thereafter comes the turn of the secondary market.
(3) It has a Particular Place: The secondary market has a particular place which is called Stock Exchange.
However, it must be noted that it is not essential that all the buying and selling of securities will be done only
through stock exchange. Two individuals can buy or sell them mutually. This will also be called a transaction of the
secondary market. Generally, most of the transactions are made through the medium of stock exchange.
(4) It Encourages New Investment: The rates of shares and other securities often fluctuate in the share market.
Many new investors enter this market to exploit this situation. This leads to an increase in investment in the
industrial sector of the country.
Functions of Stock Exchange/Secondary Market are listed below:

The secondary market provides an organized place and the mechanism for trading in securities. They also
ensure that the deals struck in the stock are fair and within the framework of law. The efficient functioning of the
stock exchange creates a conductive climate for an active and growing primary market for new issues.
1. Economic Barometer:
A stock exchange is a reliable barometer to measure the economic condition of a country. Every major
change in country and economy is reflected in the prices of shares. The rise or fall in the share prices indicates the
boom or recession cycle of the economy. Stock exchange is also known as a pulse of economy or economic mirror
which reflects the economic conditions of a country.
2. Pricing of Securities:
The stock market helps to value the securities on the basis of demand and supply factors. The securities of
profitable and growth oriented companies are valued higher as there is more demand for such securities. The
valuation of securities is useful for investors, government and creditors. The investors can know the value of their
investment, the creditors can value the creditworthiness and government can impose taxes on value of securities.
3. Safety of Transactions:

In stock market only the listed securities are traded and stock exchange authorities include the companies
names in the trade list only after verifying the soundness of company. The companies which are listed they also
have to operate within the strict rules and regulations. This ensures safety of dealing through stock exchange.
4. Contributes to Economic Growth:
In stock exchange securities of various companies are bought and sold. This process of disinvestment and
reinvestment helps to invest in most productive investment proposal and this leads to capital formation and
economic growth.
5. Spreading of Equity Cult:
Stock exchange encourages people to invest in ownership securities by regulating new issues, better
trading practices and by educating public about investment.
6. Providing Scope for Speculation:
To ensure liquidity and demand of supply of securities the stock exchange permits healthy speculation of
securities.
7. Liquidity:
The main function of stock market is to provide ready market for sale and purchase of securities. The
presence of stock exchange market gives assurance to investors that their investment can be converted into cash
whenever they want. The investors can invest in long term investment projects without any hesitation, as because
of stock exchange they can convert long term investment into short term and medium term.
8. Better Allocation of Capital:
The shares of profit making companies are quoted at higher prices and are actively traded so such
companies can easily raise fresh capital from stock market. The general public hesitates to invest in securities of
loss making companies. So stock exchange facilitates allocation of investors fund to profitable channels.
9. Promotes the Habits of Savings and Investment:
The stock market offers attractive opportunities of investment in various securities. These attractive
opportunities encourage people to save more and invest in securities of corporate sector rather than investing in
unproductive assets such as gold, silver, etc.
Listing
Listing of securities means that the securities are admitted for trading on a recognized stock exchange.
Transactions in the securities of any company cannot be conducted on stock exchanges unless they are listed by
them.
Listing is compulsory for those companies which intend to offer shares/debentures to the public for
subscription by means of issuing a prospectus. Moreover, the SEBI insists on listing for granting permission to a
new issue by a public limited company. Again financial institutions do insist on listing for underwriting new issues.
thus, listing becomes an unavoidable one today.
Meaning
The term 'listing' refers to a process or steps or exercise involved in listing something with some one.
Listing mean permission to quote shares and debentures officially on the trading floor of the stock exchange. The
listed shares appear on the official list of securities for the purposes of trading.
Listing simply means the inclusion of any security for the purpose of trading in a recognized stock exchange.
Listing-Features
Following are the characteristics of listing
Agreement: an agreement entered into between a stock exchange and a company, whereby security listing is
proposed is called a 'listing agreement'
Purpose: The purpose of listing is to facilitate transferency and open disclosure of information relating to the
affairs of the company.
Restriction: a corporate entity is free to have its securities listed in any number of stock exchanges. A stock
exchange is considered to be regional stock exchange provided it is located in the place where the registered office
of the company situated.
Investor Protection: Listing is a barometer of performance and continued good performance of the company. It
protects the investors interests.
Advantages of listing
The advantages of listing are
1. Facilitates buying and selling of securities: listing facilitates easy buying and selling of securities in the market.
2. Ensures liquidity: The listed securities ensures greater liquidity that they can be converted into cash readily at
quoted prices.
3. Offers wide publicity: listed securities give wide publicity to the companies concerned. it is so because the
names of listed companies are frequently mentioned in stock market reports, Tv, newspapers, radio etc
4. Assures finance: the very fact that a security is listed in a recognized stock exchange adds to the prestige of that
company and it enables the company to raise the necessary finance by the issue of such securities.
5. Enables borrowing: listed securities are preferred as collateral securities by commercial banks and other lending
institutions because they are rated high in market quotations and there is a ready market for them also.
6. Protects investors: Listing companies have to necessarily submit themselves to the various regulatory measures
by disclosing vital information about their assets, capital structure, profits, dividend policy, allotment procedure,
bonuses etc. Hence, listing aims at protecting the interest of investors to a greater extent.
Drawbacks
At the same time, listing brings some bad effects also
Leads to Speculation: Listed securities leads manipulate the values such a way as speculation by speculators. it will
harm the interest of the company. sometimes management may indulge in speculative activities with regard to
listed securities by misleading the inside information available.
Degrades company's reputation: sometimes listed securities are subject to wide fluctuations in their values. they
may become victim of depression. These wide fluctuations in their values have the effect of degrading the
company's reputation and image in the eyes of the public as well as the financial intermediaries.
Disclose vital information to competitors: For getting the securities listed, a company has to disclose vital
information such as dividends and bonuses declared, a brief history of the company, sales, remuneration to
managerial personnel and so on. It amounts to leaking of secrecy of the company's operations to trade rivals. Thus,
listing may prove disadvantageous to a company.
Listing Procedure
Listing of corporate securities involves the following steps:
1. Initial Listing:
2. Final listing:
3. Registration and Recording:

4. Continued listing:
1. Initial Listing: This involves making a simple application. The application should contain following documents
1. Certified copies of Memorandum of Association and Articles of Association, Prospectus, Underwriting
agreements, agreements with venders and promoters.
2. Specimen copies of shares and debentures certificates, letter of call, allotment, acceptance and renunciation.
3. Copies of balance sheets and audited accounts for the last 5 years.
4. Copies of offer for sale and circular advertisements offering any securities for subscription or sale during the last
5 years.
5. Certified copies of agreements with managerial personnel.
6. Particulars of dividends and bonuses paid during the last 10 years.
7. A statement showing dividends or interest in arrears. if any
8. A brief history of the company since its incorporation, giving details of its activities
9. Particulars regarding its capital structures
10. Particulars about shares and debentures.
11. A statement showing the distribution of shares along with a list of highest 10 holders of each class of kind of
securities of the company stating the number of securities held by them.
12. Particulars of shares forfeited.
13. Certified copies of agreements if any with the Industrial Finance corporation ICICI etc
14. Listing agreement with the necessary initial and annual list fee.
Criteria for listing
A company which desires its securities to be listed on recognized stock exchange must satisfy the
following conditions.
1. At least 60% of each class of securities issued must be offered to the public for subscription and the minimum
issued capital should be Rs. 3 crore.
2. The minimum public offer for subscription must be at least 25 per cent of each issue and it must be offered
through advertisement in newspapers at least for a period of 2 days.
3. The company should be of a fair size having broad based capital structure and public interest in its securities.
4. There must be at least 10 public shareholders for every Rs 1 lakh share of fresh issue of capital and it is 20 in
the case of subsequent issue of shares.
5. A company having more than Rs. 5 crore paid-up capitals must list its securities on more than one stock
exchange. Listing on the regional stock exchange is compulsory.
6. The company must pay interest on the excess application money received at the rates ranging between 4% and
15% depending on the delay beyond 10 weeks from the date of closure of the subscription list.
7. The existing companies must adhere to the ceiling in expenditure of public issues
8. A certificate to the effect that shares from promoter's quota are not sold or transferred for period of 3 years must
be submitted.
II. Final listing: This involves getting approval of the recognized stock exchange for the listing by means of an
agreement with the stock exchange.
The Stock exchange authorities will scrutinize the application carefully and if they are satisfied with all the
particulars/documents submitted, they will call upon the company to execute a listing agreement.
Listing agreement is an agreement entered between a stock exchange and a company, whereby security listing is
proposed is called 'listing agreement'. This agreement contains a list of conditions and obligations which the
company should strictly follow. In case of failure to follow the conditions and obligations, the stock exchange may
suspend or withdraw the listing facility.
III. Registration and Recording: This involves registering and placing on record the corporate securities openly.
This is done for the purpose of trading of registered members of the stock exchange.
IV. Continued listing: This step involves making efforts by the corporate enterprise for the purpose of continuing
to remain listed on the stock exchange until it is delisted from the records of the stock exchange, either at the
option of the company or at the option of the stock exchange concerned.
Bombay Stock Exchange

Bombay Stock Exchange Limited is the oldest stock exchange in Asia. Popularly known as BSE it was
established as "The Native Share & Stock Brokers Association" in 1875. It is the first stock exchange in India to
obtain permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation)
Act, 1956.
Bombay Stock Exchange played a pivotal role in the development of the Indian capital market and its
index, SENSEX, is tracked worldwide. The Exchange has a nation-wide reach with a presence in 359 cities and
towns of India. Since its inception BSE has played a vital role the growth of the Indian corporate sector by
providing it with an efficient access to resources. The exchange provides an efficient and transparent market for
trading in equity, debt instruments and derivatives. To reach out to a large number of investors BSE has launched
its website in Hindi and Gujarati.
BSE 100 Index

As BSE Sensex has only 30 scrips, a need was felt for a more broad-based index, which could also reflect
the movement of stock prices on a national scale. In 1989, Bombay Stock Exchange Limited, started compilation
and publication of an index series called "BSE National Index". The BSE National Index is now known as BSE
100 and since April 5, 2004 it is calculated on the basis of free-float market capitalization methodology.
BSE 200 Index
BSE 200 Index was constructed and launched on 27th May 1994. The number of companies listed on the
Bombay Stock Exchange registered a phenomenal increase from 992 in the year 1980 to about 3,200 companies by
the end of March 1994.
BSE 500 Index
On August 9, 1999, Bombay Stock Exchange constructed a new index, namely, BSE-500, consisting of
500 scrips in its basket. BSE-500 index represents nearly 93% of the total market capitalisation on Bombay Stock
Exchange Limited.
BSE Bankex
Banking sector reforms such as fall in interest rates, and enactment of Securitization Bill have given a
major fillip to Indian banking industry.
BSE PSU Index
BSE - Public Sector Undertaking (PSU) Index is a stock index that tracks the performance of the listed
PSU stocks on the Exchange.
BSE TECk Index
The BSE-TECk is a stock index constituted of companies in the Information Technology, Media and
Telecom sectors.
Sensex
Sensex is the value-weighted index of the companies listed on the stock exchange. Bombay Stock
Exchange (BSE) in 1986 came out with a stock index that subsequently became the barometer of the Indian stock
market

Bombay Stock Exchange
A specialized market place that facilitates the exchange of securities that already exist is known as Stock
exchange or stock market. It is also called as secondary market for securities. The success of the issues taking
place in the primary market depends upon on the soundness and depth of the secondary market.
The Bombay Stock Exchange, Mumbai was originally established in 1857 under the name 'The native
Share and Stockbrokers Association' as a voluntary non-profit organization. BSE is the oldest stock exchange in
Asia.
BSE provides efficient market mechanism and upholds interest of the investors and ensures redressal of
their grievances, whether against company or its own member brokers.
Management
A governing board comprising of 9 elected directors, an executive director 3 government nominees, a
reserve Bank of India nominee and 5 public representatives is the apex body. A president vice president and
honorary treasures are annually elected from among the elected directors by the governing body following the
election of directors
There are three segments in BSE

1. Equity Segment: in this segment there are 5000 listed companies.
2. Debt Segment: This segment purely deals with debt securities.
3. Derivatives segment: this segment is meant for derivative trading only. like index futures, currency futures,
interest rate futures etc
Functions of Bombay Stock Exchange

I. Listing of Securities
Listing means admission of securities for the purpose of dealings on a recognized stock exchange. The
securities may be of any public limited company, control of state government, Quasi govt and other financial
institutions, corporations municipalities etc.
The objectives of listing are
1. Providing liquidity of securities
2. Mobilizing savings for economies
3. Mobilizing savings for economic development.
4. Protect the interests of investors by ensuring full disclosure
The BSE has separate department called listing department to grant companies in accordance with
provisions of Securities Contract (Regulations) Act, 1956.
II. Safety of Market
The BSE has initiated the following measures towards making the trading both on floor and off floors safer
A. Surveillance Department
The exchange has surveillance department to keep close watch on price movement of scrips detect market
manipulations like price rigging etc. and volumes which are not constitent with normal trading pattern. The
objective of this department is to promote and incalculate honorable and just practices of trade in securities.
B. Circuit Filters
The limit imposed by a stock exchange for the price of security to move within a prescribed band is called
circuit filters. The imposition of circuit filters on scrips ensures that price of a scrip can not move upward or

downward beyond the limit set for a day and a settlement. The objective is to prevent price manipulation. Under
this dispensation, the large variation in the prices as well as the volumes of the scrips is scrutinized and appropriate
actions taken.
C. OLRT
Surveillance system uses On-Line-Real-Time system. The OLRT alerts price and volume variation in
scrips. The system generates alerts on the basis of preset parameters during the trading hours and corrective action
based on further investigation is taken.
D. Transfer of Ownership
Transfer of ownership if the same is not delivered in demat form by the seller, is affected through a date
stamped transfer deed which is signed by the seller and the buyer. Transfer deed remains valid for twelve months
or till the book closure date.
E. Brokerage and Transaction costs.
Brokerage is negotiable. The exchange has not prescribed any minimum brokerage. The maximum
brokerage is subject to a ceiling of 2.5% of the contract value. However, the average brokerage is charged by the
members to the clients is much lower.
III. Opportunities of foreign Investors.

Following are the opportunities available for foreign investors.
A. Direct Investment
In certain specific industries, foreigners can even have holding up to 100%
B. Investment through Stock exchanges
The foreign institutional investors upon registration with the SEBI and RBI can operate through following
ways.
1. Portfolio investment :
Foreign investment under a financial collaboration which is permitted up to 51% in all priorities/
FII can invest through offshore single or regional funds, GDRs and Euro Convertibles.
2. Disinvestment
It is allowed through a member broker of a stock exchange. A registered FII is required to buy or sell
securities on a stock exchanges only for a delivery.
C. Investment in Euro Issues/Mutual funds floated overseas
Foreign investors can invest in Euro issues of Indian companies and in India specific funds floated abroad.
IV. Derivatives Trading
The Stock Exchange created history by launching the first exchange traded financial derivatives.
Sensex Index
In 1986, the BSE 30 sensex first compiled on the basis of a market capitalization weighted index 30 scrips.
It represents 30 large well-established and financially sound companies.
Besides above functions the Bombay stock exchange as a secondary market performs following functions
1. Raising capital for business
A continuous market for shares provides a favorable climate for raising capital. The negotiability and
transferability of the securities helps the companies to raise long-term funds. When it is easy to trade the securities,
investors are willing to subscribe to the initial public offerings. This stimulates the capital formation.
2. Mobilizing savings for investment
The BSE perform another important function in an economy, i.e. mobilization of public savings and
channelization of the same for productive purposes. it helps in the mobilization of savings and surplus funds of
individuals, firms and other institutions
3. Facilitating company growth
Stock markets promotes habit of saving so that savings will be channelized to productive and remunerative
ventures.
4. Protects investors growth
The stock exchange protects the interests of the investors through the strict enforcement of their rules and
regulations. The malpractices of the brokers are punishable with heavy fine, suspension of their membership and
even imprisonment.
5. Economic Barometer.
A stock exchange serves as a reliable barometer of a company economic status. Stock exchanges support
and promote industrial development. It stimulates investment in productive sector which accelate the process of
economic growth of the country.
6. Best Utilization of capital
The stock exchange regulates and controls the flow of investment from unproductive to productive,
uneconomic to economic, unprofitable to profitable enterprises. Thus, the savings of the people are channelized
into industry yielding good returns and underutilization of capital is avoided.
National Stock Exchange

The national Stock Exchange of India Ltd was set up on the basis of the recommendations of the High
powered study group establishment of new stock exchange.
The committee identified the following weaknesses in the Indian stock markets.
1. Inefficient and outdated traded system resulting in non-transportation operations which has an adverse effect on
investors confidence
2. Outdated settlement system inadequate to cater to the growing volume of business leading to delays and
illiquidity in market.
3. Inability of various stock exchanges to function cohesively in terms of legal structure regulatory framework,
trading and settlement procedures jobbing and spreads
4. Inability to develop a debt market.
To overcome these deficiencies the national stock exchange was incorporated in November 1992 with an
equity capital of Rs. 25 crore and promoted by IDBI, ICICI, LIC and GIC and its subsidiaries state bank of India.
And SBI capital markets limited.
The National Stock Exchange (NSE) is India's leading stock exchange covering 364 cities and towns
across the country. NSE was set up by leading institutions to provide a modern, fully automated screen-based
trading system with national reach. The Exchange has brought about unparalleled transparency, speed & efficiency,
safety and market integrity. It has set up facilities that serve as a model for the securities industry in terms of
systems, practices and procedures.
Objectives
The NSE has following has following objectives
1. To establish nationwide trading facility for equities, debts and hybrids

2. To facilitate equal access to investors across the country.
3. To provide fairness, efficiency and transparency to securities trading.
4. To enable shorter settlement cycles
5. To meet international securities market standard
Features/Functions
1. The NSE employs a fully automated screen based trading system.
2. It has three segments: The capital market segment, wholesale debt market segment derivative market.
3. The NSE market is fully automated screen based environment. There is no trading floor as is prevalent in the
traditional stock exchanges.
4. The market operates with all participants stationed at their offices and making use of their computer terminals, to
receive market information to enter orders and to execute trade.
5. The trading members in the capital market segment are connected to the central computer in Mumbai through a
satellite link up using VSAT.
6. The system provides enormous flexibility to trading members. A trading member can place various conditions
on the order in terms of price, time or size.
7. Identity of the trading member is not revealed to others when he places an order or when his pending orders are
delayed. Hence, large order can be placed on NSE without fear of influencing the market sentiment.
8. On the eight day of trading, each member gets a statement showing his net position, the amount of cash he has to
transfer to the clearing bank and the securities he has to deliver to the clearing house.
9. Members are required to deliver securities and cash by the thirteenth and fourteenth day respectively. The
fifteenth day is the payout day.
10. The trading member can transact a high volume of business through automated trade matching system.
11. There is transparency in dealings. The investors can check the exact price at which their transactions took
place.
Malpractices in Securities Market
With the growth of securities market, the number of malpractices also increased in both the primary and
secondary markets. Few examples of malpractices are as follows
1. Manipulation of security prices
Companies issuing securities, often artificially push up the prices before the issue of securities. This
process starts well before a company seeks permission.
2. Price rigging
A common way of pushing up the prices is to resort to circular trading- three or four parties buy and sell
stock among themselves and push the prices up.
3. Insider trading
Insider trading by agents of companies or brokers caused wide fluctuations in the prices of securities. Many
companies have intricate network of brokers, their clients, friends and associates. The insiders who are privy to
price sensitive information use such information to their advantage and build up large fortunes.
4. Delay in settlement
The delay is noticed in giving delivery of shares, making payments to clients and passing contract notes
5. Delay in listing
Delay in listing and commencement of trading in shares was also prevalent.
Deficiencies in the Market

Indian stock market suffers from lot of deficiencies

1. Lack of diversity in financial instruments
Indian stock market suffers from lack of variety of financial instruments. Equity shares and convertible
debentures seem to be the only instruments in the armory of companies. Preferences shares, debentures etc are not
issued by the companies.
2. Disclosure of financial information
Most of companies will not provide full and complete information to the investors. The prospectus issued
by a company does not contain adequate and relevant information to enable investors to take correct investment
decisions. Sometimes, the information given is misleading and deceptive.
3. Preponderance of speculative trading
A major portion of transactions in stock market are done by speculative motive. The main motive is to
derive benefit from short term price fluctuations.
4. Poor liquidity
The Indian stock market suffers from poor liquidity. Only a small portion of shares are actively traded and
highly liquid.
5. Lack of control over brokers
Lack of control over the activities of brokers and jobbers is another deficiency of capital market.
Significantly few people are able to cause fluctuations in the market activity. Besides many of them lack high
professional standards.
6. Absence of genuine investors
The investors are purchasing the shares and securities only for the purpose of getting short term benefits. most of
them are engaged in speculative trading. Over 85% of trading in stock exchanges carried on by speculators.
7. Presence of price rigging.
The most of companies uses technique of artificially pushing up of prices of securities before the issue of
securities.
8. Prevalence of Insider trading
Insider trading is now common practice in India. Insiders are those who have access to unpublished price-
sensitive information by virtue of their position in the company and who use such information their best
advantage.
9. Scarcity of floating securities
The market suffers from lack of securities. The institutional investors nearly 75% of investments in private
sectors and they do not offer the securities for public trading. individual investors do not have wide portfolio
investment.
10. Poor response from Indian households
At present there is lack of confidence of genuine investors in the stock market. A analysis of the portfolio
of Indian households reveals the poor response to the securities of companies.
Securities Exchange Board of India (SEBI).

With the growth in the dealings of stock markets, lot of malpractices also started in stock markets such as
price rigging, unofficial premium on new issue, and delay in delivery of shares, violation of rules and regulations
of stock exchange and listing requirements. Due to these malpractices the customers started losing confidence and
faith in the stock exchange. So government of India decided to set up an agency or regulatory body known as
Securities Exchange Board of India (SEBI).
Securities and Exchange Board of India (SEBI) was established on April 12, 1992 in accordance with the
provisions of the Securities and Exchange Board of India Act, 1992. It monitors and regulates corporate
governance of listed companies in India through Clause 49 of the Listing Agreement. This clause is incorporated in
the listing agreement of stock exchanges and it is compulsory for them to comply with its provisions. It was first
introduced in the financial year 2000-01 based on the recommendations of Kumar Mangalam Birla committee.

Objectives of SEBI:
The overall objectives of SEBI are to protect the interest of investors and to promote the development of
stock exchange and to regulate the activities of stock market. The objectives of SEBI are:
1. To regulate the activities of stock exchange.
2. To protect the rights of investors and ensuring safety to their investment.
3. To prevent fraudulent and malpractices by having balance between self regulation of business and its
statutory regulations.
4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.
ROLE and POWERS AND FUNCTIONS OF SEBI:-

1. Protection of Investor's Interest:-
SEBI frames rules and regulations to protect the interest of investors.
It monitors whether the rules and regulations are being followed by the concerned parties i.e., issuing companies,
mutual funds, brokers and others. It handles investor grievances or complaints against brokers, securities issuing
companies and others.
2. Restriction On Insider Trading:-
SEBI restricts insider trading activity. It prohibits dealing, communication or counseling on matters
relating to insider trading. SEBIs regulation states that no insider (connected with the company) shall - either on
his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange on
the basis of any unpublished price sensitive information.
3. Regulates Stock Brokers Activities:-
SEBI has also laid down regulations in respect of brokers and sub-broker. No brokers or sub-broker can
buy, sell or deal in securities without being a registered member of SEBI. It has also made compulsory for brokers
to maintain separate accounts for their clients and for themselves. They must also have their books audited and
audit reports filed with SEBI.
4. Regulates Merchant Banking:-
SEBI has laid down regulations in respect of merchant banking activities in India. The regulations are in
respect of registration, code of conduct to be followed, submission of half-yearly results and so on
5. Dematerialization of Shares:-
Demat of shares has been introduced in all the shares traded on secondary stock markets as well as those
issued to public in prirriary markets. Even bonds and debentures are allowed in demat form.
6. Guidelines on Capital Issues:-
SEBI has framed necessary guidelines in connection with capital issues. The guidelines are applicable to
First Public Issue of New Companies, First Public Issue by Existing Private / Closely held Companies, Public Issue
by Existing Listed Companies.
7. Regulates Working Of Mutual Funds:-
SEBI regulates the working of mutual funds. SEBI has laid down rules and regulations that are to be
followed by mutual funds. SEBI may cancel the registration of a mutual fund, if it fails to comply with the
regulations.
8. Monitoring Of Stock Exchanges:-
To improve the working of stock markets, SEBI plays an important role in monitoring stock exchanges.
Every recognized stock exchange has to furnish to SEBI annually with a report about its activities during the
previous year.
9. Secondary Market Policy:-
SEBI is responsible for all policy and regulatory issues for secondary market and new investments
products. It is responsible for registration and monitoring of members of stock exchanges, administration of some
of stock exchanges and monitoring of price movements and insider trading.
10. Investors Grievances Redressal :-
SEBI has introduced an automated complaints handling system to deal with investor complaints. It assist
investors who want to make complaints to SEBI against listed companies.
11. Institutional Investment Policy:-
SEBI looks after institutional investment policy with respect to domestic mutual funds and Foreign Institutional
Investors (FIIs). It also looks after registration, regulation and monitoring of FIls and domestic mutual funds.
12. Takeovers and Mergers:-
To protect the interest of investors in case of takeovers and mergers SEBI has issued a set of guidelines.
These guidelines are to be followed by corporations at the time of takeovers and mergers.
REFORMS I DEVELOPMENTS IN CAPITAL MARKET SINCE 1991:-

The government has taken several measures to develop capital market in post-reform period, with which
the capital market reached new heights. Some of the important measures are
1) Securities And Exchange Board Of India (SEBI) :-
SEBI became operational since 1992. It was set with necessary powers to regulate the activities connected
with marketing of securities and investments in the stock exchanges, merchant banking, portfolio management,
stock brokers and others in India. The objective of SEBI is to protect the interest of investors in primary and
secondary stock markets in the country.
2) National Stock Exchange (NSE) :-
The setting up to NSE is a landmark in Indian capital markets. At present, NSE is the largest stock market
in the country. Trading on NSE can be done throughout the country through the network of satellite terminals. NSE
has introduced inter-regional clearing facilities.
3) Dematerialization Of Shares:-
Demat of shares has been introduced in all the shares traded on the secondary stock markets as well as
those issued to the public in the primary markets. Even bonds and debentures are allowed in demat form. The
advantage of demat trade is that it involves Paperless trading.
4) Screen Based Trading :-
The Indian stock exchanges were modernized in 90s, with Computerized Screen Based Trading System
(SBTS), It cuts down time, cost, risk of error and fraud and there by leads to improved operational efficiency. The
trading system also provides complete online market information through various inquiry facilities.
5) Investor Protection:-
The Central Government notified the establishment of Investor Education and Protection Fund (IEPF) with
effect from 1st Oct. 2001: The IEPF shall be credited with amounts in unpaid dividend accounts of companies,
application moneys received by companies for allotment of any securities and due for refund, matured deposits and
debentures with companies and interest accrued there on, if they have remained unclaimed and unpaid for a period
of seven years from the due date of payment. The IEPF will be utilized for promotion of awareness amongst
investors and protection of their interests.
6) Rolling Settlement:-
Rolling settlement is an important measure to enhance the efficiency and integrity of the securities market.
Under rolling settlement all trades executed on a trading day (T) are settled after certain days (N). This is called T
+ N rolling settlement. Since April 1, 2002 trades are settled' under T + 3 rolling settlement. In April 2003, the
trading cycle has been reduced to T + 2 days. The shortening of trading cycle has reduced undue speculation on
stock markets.
7) The Clearing Corporation Of India Limited (CCIL):-
The CCIL was registered in 2001, under the Companies Act, 1956 with the State Bank of India as the
Chief Promoter. The CCIL clears all transactions in government securities and repos and also Rupee / US $ forex
spot and forward deals All trades in government securities below Rs. 20 crores would be mandatorily settled
through CCIL, white those above Rs. 20 crores would have the option for settlement through the RBI or CCIL.
8) The National Securities Clearing Corporation Limited (NSCL) :-
The NSCL was set up in 1996. It has started guaranteeing all trades in NSE since July 1996. The NSCL is
responsible for post-trade activities of NSE. It has put in place a comprehensive risk management system, which is
constantly monitored and upgraded to pre-expect market failures.
9) Trading In Central Government Securities:-
In order to encourage wider participation of all classes of investors, Including retail investors, across the
country, trading in government securities has been introduced from January 2003. Trading in government securities
can be carried out through a nation wide, anonymous, order-driver, screen-based trading system of stock exchanges
in the same way in which trading takes place in equities.
10) Credit Rating Agencies:-
Various credit rating agencies such as Credit Rating Information services of India Ltd. (CRISIL 1988),
Investment Information and credit Rating Agency of India Ltd. (ICRA 1991), etc. were set up to meet the
emerging needs of capital market. They also help merchant bankers, brokers, regulatory authorities, etc. in
discharging their functions related to debt issues.
11) Accessing Global Funds Market:-
Indian companies are allowed to access global finance market and benefit from the lower cost of funds.
They have been permitted to raise resources through issue of American Depository Receipts (ADRs), Global
Depository Receipts (GDRs), Foreign Currency Convertible Bonds (FCCBs) and External Commercial
Borrowings (ECBs). Further Indian financial system is opened up for investments of foreign funds through Non-
Resident Indians (NRIs), Foreign Institutional investors (FIls), and Overseas Corporate Bodies (OCBs).
12) Mutual Funds:-
Mutual Funds are an important avenue through which households participate in the securities market. As
an investment intermediary, mutual funds offer a variety of services / advantages to small investors. SEBI has the
authority to lay down guidelines and supervise and regulate the working of mutual funds.
13) Internet Trading:-
Trading on stock exchanges is allowed through internet, investors can place orders with registered stock
brokers through internet. This enables the stock brokers to execute the orders at a greater pace.
Differences between Primary Market and Secondary Market

Primary Market Secondary Market
0 The primary Market is that part of capital markets The Secondary market is the financial market in which
1 that deals with the issuance of new securities previously issued financial instruments are bought and
sold
0 It deals with only new fresh issued made by It deals with existing securities, which are already issued
2 companies for the first time by companies
0 No fixed geographical location for primary It has fixed place of trading, Bombay Stock Exchange
3 market.
0 For the first time securities are created in the New The existing securities are transferred from one hand to
4 issue market another.
0 All companies can enter primary The securities which have issued securities in primary
5 market can enter.
0 Subject to regulation mostly by SEBI, stock Subject to regulation both from within and outside the
6 exchanges company
0 Primary market creates long term securities for It Provides liquidity for those instruments which are
7 saving and investments. already issued by companies.

0 Depth of primary market depends on number and Depth depends upon the activities of the primary market
8 the volume of issue
Difference between Capital Market and Money Market
Money Market Capital Market

0 It is a market for short term loanable funds for a It is a market for long-term funds exceeding a
1 period of not exceeding one year period above one year.
0 This market supplies funds for financing current This market supplies funds for financing the
2 business operations, working capital requirements fixed capital requirements of trade and
of industries and short period requirement of the commerce as well as the long-term requirements
government of the government.
0 The instruments that are dealt in a money market This market deals in instruments like shares,
3 are bills of exchange, treasury bills, commercial debentures, government bonds etc
papers, certificate of deposit etc
0 Each single money market instruments is of large Each single capital market instrument is of small
4 amount. amount.
0 The central bank and commercial banks are the Development banks and insurance companies
5 major institutions in the money market play a dominant role in the capital market.
0 Money market instruments generally do not have Capital market instruments generally have
6 secondary markets secondary market
0 Transactions generally take place over the phone Transactions take place at a formal place viz
7 and there is not formal place stock exchange
0 Transactions have to be conducted without the Transactions have to be conducted only through
8 help of brokers authorized dealers.
0 It creates link between the depositors and It act as link between investors and industrial
9 borrowers and commercial enterprises
1 Rate of interest is high Rate of interest is low
0
What is Money Market? What are the important functions performed by it?
MEANING OF MONEY MARKET

A money market is a market for borrowing and lending of short-term funds. It deals in funds and financial
instruments having a maturity period of one day to one year. It is a mechanism through which short-term funds are
loaned or borrowed and through which a large part of financial transactions of a particular country or of the world
are cleared.
It is different from stock market. It is not a single market but a collection of markets for several
instruments like call money market, Commercial bill market etc. The Reserve Bank of India is the most important
constituent of Indian money market. Thus RBI describes money market as the centre for dealings, mainly of a
short-term character, in monetary assets, it meets the short-term requirements of borrowers and provides liquidity
or cash to lenders.
II. PLAYERS OF MONEY MARKET :-
In money market transactions of large amount and high volume take place. It is dominated by small
number of large players. In money market the players are :-Government, RBI, DFHI (Discount and finance House
of India) Banks, Mutual Funds, Corporate Investors, Provident Funds, PSUs (Public Sector Undertakings), NBFCs
(Non-Banking Finance Companies) etc.
The role and level of participation by each type of player differs from that of others.
FUNCTIONS OF MONEY MARKET :-

1) It caters to the short-term financial needs of the economy.
2) It helps the RBI in effective implementation of monetary policy.
3) It provides mechanism to achieve equilibrium between demand and supply of short-term funds.
4) It helps in allocation of short term funds through inter-bank transactions and money market Instruments.
5) It also provides funds in non-inflationary way to the government to meet its deficits.
6) It facilitates economic development.
Explain the structure or components of Indian Money Market.

What are the principal constituents of Indian Money Market?
Components, SubMarkets of Indian Money Market

The entire money market in India can be divided into two parts. They are organised money market and the
unorganized money market. The unorganised money market can also be known as an unauthorized money market.
Both of these components comprise several constituents
1. Call Money Market : It an important sub market of the Indian money market. It is also known as money at
call and money at short notice. It is also called inter bank loan market. In this market money is demanded for
extremely short period. The duration of such transactions is from few hours to 14 days. It is basically located in the
industrial and commercial locations such as Mumbai, Delhi, Calcutta, etc. These transactions help stock brokers
and dealers to fulfill their financial requirements. The rate at which money is made available is called as a call rate.
Thus rate is fixed by the market forces such as the demand for and supply of money.
2. Commercial Bill Market : It is a market for the short term, self liquidating and negotiable money market
instrument. Commercial bills are used to finance the movement and storage of agriculture and industrial
goods in domestic and foreign markets. The commercial bill market in India is still underdeveloped.
3. Treasury Bill Market : This is a market for sale and purchase of short term government securities. These
securities are called as Treasury Bills which are promissory notes or financial bills issued by the RBI on
behalf of the Government of India. There are two types of treasury bills. (i) Ordinary or Regular Treasury
Bills and (ii) Ad Hoc Treasury Bills. The maturity period of these securities range from as low as 14 days
to as high as 364 days. They have become very popular recently due to high level of safety involved in
them.
4. Market for Certificate of Deposits (CDs) : It is again an important segment of the Indian money market.
The certificate of deposits is issued by the commercial banks. They are worth the value of Rs. 25 lakh and
in multiple of Rs. 25 lakh. The minimum subscription of CD should be worth Rs. 1 Crore. The maturity
period of CD is as low as 3 months and as high as 1 year. These are the transferable investment instrument
in a money market. The government initiated a market of CDs in order to widen the range of instruments
in the money market and to provide a higher flexibility to investors for investing their short term money.
5. Market for Commercial Papers (CPs) : It is the market where the commercial papers are traded.
Commercial paper (CP) is an investment instrument which can be issued by a listed company having
working capital more than or equal to Rs. 5 cr. The CPs can be issued in multiples of Rs. 25 lakhs.
However the minimum subscription should at least be Rs. 1 cr. The maturity period for the CP is minimum
of 3 months and maximum 6 months. This was introcuced by the government in 1990.
6. Short Term Loan Market : It is a market where the short term loan requirements of corporates are met by
the Commercial banks. Banks provide short term loans to corporates in the form of cash credit or in the
form of overdraft. Cash credit is given to industrialists and overdraft is given to businessmen.
Unorganized Sector Of Money Market :-

The economy on one hand performs through organised sector and on other hand in rural areas there is
continuance of unorganised, informal and indigenous sector. The unorganised money market mostly finances short-
term financial needs of farmers and small businessmen. The main constituents of unorganised money market are:-
Indigenous Bankers (IBs)
Indigenous bankers are individuals or private firms who receive deposits and give loans and thereby
operate as banks. IBs accept deposits as well as lend money. They mostly operate in urban areas, especially in
western and southern regions of the country. The volume of their credit operations is however not known. Further
their lending operations are completely unsupervised and unregulated. Over the years, the significance of IBs has
declined due to growing organised banking sector.
Money Lenders (MLs)
They are those whose primary business is money lending. Money lending in India is very popular both in
urban and rural areas. Interest rates are generally high. Large amount of loans are given for unproductive purposes.
The operations of money lenders are prompt, informal and flexible. The borrowers are mostly poor farmers,
artisans, petty traders and manual workers. Over the years the role of money lenders has declined due to the
growing importance of organised banking sector.
Non - Banking Financial Companies (NBFCs)
They consist of :-
Chit Funds
Chit funds are savings institutions. It has regular members who make periodic subscriptions to the fund.
The beneficiary may be selected by drawing of lots. Chit fund is more popular in Kerala and Tamilnadu. Rbi has
no control over the lending activities of chit funds.
Nidhis :-
Nidhis operate as a kind of mutual benefit for their members only. The loans are given to members at a
reasonable rate of interest. Nidhis operate particularly in South India.
Loan Or Finance Companies
Loan companies are found in all parts of the country. Their total capital consists of borrowings, deposits and owned
funds. They give loans to retailers, wholesalers, artisans and self employed persons. They offer a high rate of
interest along with other incentives to attract deposits. They charge high rate of interest varying from 36% to 48%
p.a.
Finance Brokers
They are found in all major urban markets specially in cloth, grain and commodity markets. They act as
middlemen between lenders and borrowers. They charge commission for their services.
Q. 3:Explain the main features of Indian Money Market. OR
State the drawbacks I defects of Indian Money Market?
FEATURES I DEFICIENCIES OF INDIAN MONEY MARKET
Indian money market is relatively underdeveloped when compared with advanced markets like New York and
London Money Markets. Its' main features / defects are as follows
1. Dichotomy:-
A major feature of Indian Money Market is the existence of dichotomy i.e. existence of two markets:
-Organised Money Market and Unorganised Money Market. Organised Sector consist of RBI, Commercial Banks,
Financial Institutions etc. The Unorganized Sector consist of IBs, MLs, Chit Funds, Nidhis etc. It is difficult for
RBI to integrate the Organized and Unorganized Money Markets. Several segments are loosely connected with
each other. Thus there is dichotomy in Indian Money Market.
2. Lack Of Co-ordination And Integration :-
It is difficult for RBI to integrate the organized and unorganized sector of money market. RBT is fully
effective in organized sector but unorganized market is out of RBIs control. Thus there is lack of integration
between various sub-markets as well as various institutions and agencies. There is less co-ordination between co-
operative and commercial banks as well as State and Foreign banks. The indigenous bankers have their own ways
of doing business.
3. Diversity In Interest Rates:-
There are different rates of interest existing in different segments of money market. In rural unorganized
sectors the rate of interest are high and they differ with the purpose and borrower. There are differences in the
interest rates within the organised sector also. Although wide differences have been narrowed down, yet the
existing differences do hamper the efficiency of money market.
4. Seasonality of Money Market :-
Indian agriculture is busy during the period November to June resulting in heavy demand for funds.
During this period money market suffers from Monetary Shortage resulting in high rate of interest. During slack
season rate of interest falls &s there are plenty offunds available. RBI has taken steps to reduce the seasonal
fluctuations, but still the variations exist.
5. Shortage of Funds:-
In Indian Money Market demand for funds exceeds the supply. There is shortage of funds in Indian Money
Market an account of various factors like inadequate banking facilities, low savings, lack of banking habits,
existence of parallel economy etc. There is also vast amount of black money in the country which have caused
shortage of funds. However, in recent years development of banking has improved the mobilization of funds to
some extent.
6. Absence Of Organized Bill Market :-
A bill market refers to a mechanism where bills of exchange are purchased and discounted by banks in
India. A bill market provides short term funds to businessmen. The bill market in India is not popular due to
overdependence of cash transactions, high discounting rates, problem of dishonor of bills etc.
7. Inadequate Banking Facilities:-
Though the commercial banks, have been opened on a large scale, yet banking facilities are inadequate in
our country. The rural areas are not covered due to poverty. Their savings are very small and mobilization of small
savings is difficult. The involvement of banking system in different scams and the failure of RBI to prevent these
abuses of banking system shows that Indian banking system is not yet a well organized sector.
8. Inefficient And Corrupt Management:-
One of the major problem of Indian Money Market is its inefficient and corrupt management. Inefficiency
is due to faulty selection, lack of training, poor performance appraisal, faulty promotions etc. For the growth and
success of money market, there is need for well trained and dedicated workforce in banks. However, in India some
of the bank officials are inefficient and corrupt.
B. CONCLUSION :-
The above features / defects of Indian Money Market clearly indicate that it is relatively less developed
and has yet to acquire sufficient depth and width. The deficiencies are slowly and steadily overcomed by policy
measures undertaken by RBI from time to time.
Q. 4: Explain the reforms introduced by RBI to strengthen the money market in India. OR
Discuss the measures to strengthen the Indian Money Market?
Ans. A) REFORMS I MEASURES TO STRENGTHEN THE INDIAN MONEYMARKET:-
On the recommendations of S. Chakravarty Committee and Narasimhan Committee, the RBI has initiated a
number of reforms.
1. Deregulation Of Interest Rates :-
RBI has deregulated interest rates. Banks have been advised to ensure that the interest rates changed
remained within reasonable limits. From May 1989, the ceiling on interest rates on call money, inter-bank short-
term deposits, bills rediscounting and inter-bank participation was removed and rates were permitted to be
determined by market forces.
2. Reforms In Call And Term Monev Market :-
To provide more liquidity RBI liberalized entry in to call money market. At present Banks and primary
dealers operate as both lenders and borrowers. Lenders other than UTI and LIC are also allowed to participate in
call money market operations. RBI has taken several steps in recent years to remove constraints in term money
market. In October 1998, RBI announced that there should be no participation of non-banking institutions in call /
term money market operations and it should be purely an interbank market.
3. Introducing New Money Market Instruments:-
In order to widen and diversify the Indian Money Market, RBI has introduced many new money market
instruments like 182 days Treasury bills, 364 days Treasury bills, CD3 and CPs. Through these instruments, the
government, commercial banks, financial institutions and corporates can raise funds through money market. They
also provide investors additional instruments for investments.
4. Repo :-
Repos were introduced in 1992 to do away. With short term fluctuations in liquidity of money market. In
1996 reverse repos were introduced. RBI has been using Repo and Reverse repo operations to influence the
volume of liquidity and to stabilise short term rate of interest or call rate. Repo rate was 6.75% in March 2011 and
reverse repo rate, was 5.75%.
5. Refinance By RBI :-
The RBI uses refinance facilities to various sectors to meet liquidity shortages and control the credit
conditions. At present two schemes of refinancing are in operations :- Export credit refinance and general
refinance.
RBI has kept the refinance rate linked to bank rate.
6. MMMFs:-
Money Market Mutual Funds were introduced in 1992. The objective of the scheme was to provide an
additional short-term avenue to the individual investors. In 1995, RBI modified the scheme to allow private sector
organisation to set up MMMFs. So far, three MMMFs have been set up one each by IDBI, UTI and one in private
sector.
7. DFHI:-
The Discount and Finance House of India was set up on 25th April 1988. It buys bills and other short term
paper from banks and financial institutions. Bank can sell their short term securities to DFHI and obtain funds in
case they need them, without disturbing their investments.
8. The Clearing Corporation Of India Limited (CCIL) :-
CCIL was registered in 2001 under the Companies Act, 1956 with the State Bank of India as Chief
Promoter. CCIL clears all transaction in government securities and repos reported on NDS (Negotiated Dealing
System) of RBI and also Rupee / US $ foreign exchange spot and forward deals.
9. Regulation Of NBFCs:-
In 1997, RBI Act was amended and it provided a comprehensive regulation for non bank financial
companies (NBFCs) sector. According to amendment, no NBFC can carry on any business of a financial institution
including acceptance of public deposit, without obtaining a Certificate of Registration from RBI. They are required
to submit periodic returns to RBI.
10. Recovery Of Debts:-
In 1993 for speedy recovery of debts, RBI has set up special Recovery Tribunals. The Special Recovery
Tribunals provides legal assistance to banks to recover dues.

Indian Capital Markets

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Indian Capital Markets

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Capital Market in India-

ROLE AND IMPORTANCE OF CAPITAL MARKET IN INDIA

Capital market is classified in four ways

The Industrial Securities Market is further classified into two types

New issue market(NIM)/ Primary Market

FEATURES OF PRIMARY MARKET:

Methods of Floating New Issues

1. Public issue through prospectus.

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2. Offer for sale method

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3. Initial Public Offer Through Stock Exchange

FUNCTIONS NEW ISSUE MARKET

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PLAYERS/INTERMEDIARIES IN THE NEW ISSUE MARKET

Secondary market or stock exchange

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Chief features of secondary market are:

Functions of Stock Exchange/Secondary Market are listed below:

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Bombay Stock Exchange

BSE 100 Index

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There are three segments in BSE

Functions of Bombay Stock Exchange

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III. Opportunities of foreign Investors.

National Stock Exchange

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Deficiencies in the Market

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Securities Exchange Board of India (SEBI).

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ROLE and POWERS AND FUNCTIONS OF SEBI:-

REFORMS I DEVELOPMENTS IN CAPITAL MARKET SINCE 1991:-

Differences between Primary Market and Secondary Market

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Difference between Capital Market and Money Market

Money Market Capital Market

MEANING OF MONEY MARKET

FUNCTIONS OF MONEY MARKET :-

Explain the structure or components of Indian Money Market.

Components, SubMarkets of Indian Money Market

Unorganized Sector Of Money Market :-

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