FINANCIAL MARKETS IN INDIATill the early 1990smost of the financial markets were characterized by controls over the pricingof financial assets, restrictions on flows or transactions, barrier to entry,low liquidity and high transaction costs. These characteristics came in the wayof development of the markets and allocation of resources channeled throughthem. From 1991 onwards, financial market reforms have emphasized thestrengthening of the price discovery process easing restrictions ontransactions, reducing transaction costs and enhancing systemic liquidity.The various lawsregulating the financial market is·The Companies Act 2013. ·Securities Contract Regulation Act ·Security Exchange Board of India Act,1992 · Government Securities Act 2006 · Reserve Bank ofIndia Act, 1935.
Financial markets inIndia mainly comprises of capital market and money market.CapitalMarket: Capital market is amarket that specializes in trading long-term and relatively high-risksecurities. Financial markets with maturity of more than 1 year are a part ofcapital market. It is a market for long-term capital. The capital marketprovides long-term debt and equity finance to the government and the corporatesector.
Capital market comprises of two segments namely the equity market anddebt market. Ø EQUITY MARKET:Financial markets inwhich equity instruments are traded are called an equity market. It is alsoknown as stock market. There are twotypes of securities that are traded in these markets namely equity shares andpreference shares. An important distinction between these two forms of equitysecurities lies in the degree to which they may participate in any distributionof earnings, capital and the priority given to each in the distribution ofearnings.
This market is furtherclassified into primary market, secondary market and derivatives market.· Primarymarket: It deals with theissuance of new securities. It is otherwise called the New Issue market (NIM).The securities are directly purchased from the issuer in this market. The money raised from this market provideslong-term capital to the companies. The funds collected from the primary marketcan be used for modernization of the business.
Kindsof Issues:PublicIssue: This is one of the most commonly used methods forissuing new issues in the primary market. SEBI defined public issue as ?”aninvitation by a company to public to subscribe to the securities offered througha prospectus”. When an existing company offers its shares in the primarymarket, it is called a public issue. It can be further classified into two:Initial PublicOffering: When an unlisted company makeseither a fresh issue of securities or offers its existing securities for saleor both for the first time to the public, it is called an Initial Public Offer(IPO).Further Public Offer: When an already listed company makes either afresh issue of securities to the public or an offer for sale to the public itis called Further Public Offer (FPO) or otherwise called as Follow on Offer.RightsIssue: When a listed company which proposes to issue freshsecurities to its existing shareholders existing as on a particular dated fixedby the issuer (i.e. record date), it is called as rights issue.
BonusIssue: When an issuer makes an issue of shares to itsexisting shareholders as on a record date, without any consideration from them,it is called a bonus issue.PrivatePlacement: When a company offers its shares to aselect group of persons not exceeding 49, and which is neither a rights issuenor a public issue, it is called a private placement. These are usually nottraded publicallyIn India, the primarymarket is governed mainly by the provisions of The Companies Act, 2013, whichdeals with issues, listing and allotment of various types of securities. TheSecurities and Exchange Board of India (SEBI) protect the interests of investorsin securities, promote the development of securities markets as well asregulate them. SEBI issued theguidelines on primary issue of securities under Section 11 of the Securitiesand Exchange Board of India Act of 1992. In addition to the specific functionsunder the SEBI Act, the functions vested in the government as per SecuritiesContracts Regulations Act (SCRA) of 1956 have also been delegated to the SEBI.The SEBI now enjoy full powers to regulate the new issue market.
Disclosure and InvestorProtection Guidelines of SEBI (2000) deals with public issue, offer for saleand the rights issue by listed and unlisted companies. SEBI framed its DIPguidelines in 1992. SEBI (Disclosure and investor protection) guidelines 2000are in short called DIP guidelines The SEBI guidelines shall be applicable toall public issues by listed and unlisted companies, all offers for sale andrights issues by listed companies whose equity share capital is listed, exceptin case of rights issues where the aggregate value of securities offered doesnot exceed Rs 50 lakh.(a) International Market: Internationalmarket is the markets were the issuances of securities are offeredsimultaneously to investors of a number of globalization, deregulation andliberalization of financial markets the companies and the investors in anycountry seeking to raise funds are not limited to the financial assets issuedin their domestic market. (b) Domestic Market: Domestic market isthat part of a nation’s internal market representing the mechanisms for issuingand trading securities of entities domiciled within that nation. It is a marketwhere issuers who are domiciled in the country issue securities and where thosesecurities are subsequently traded. It is otherwise called national or internalmarket.
Domestic financial markets can be divided into different sub typeslike. (i) Gilt-edged Market:It is a market for government and semi government securities, which carriesfixed interest rates. Major players in the gilt-edged securities market inIndia are the Reserve Bank of India, State Bank of India, private and publicsector commercial banks, co-operative banks and financial institutions. (ii) Housing FinanceMarket: Housing finance market is characterized as a mortgage market, whichfacilitates the extent of credit, to the housing sector. National housing bankis an apex bank in the field of housing finance in India. It is a wholly ownedsubsidiary of the RBI. The primary responsibility of the bank is to promote anddevelop specialized housing finance institutions to mobilize resources andextent credit for house building.
(iii) Foreign ExchangeMarket: Foreign exchange market or Forex-market facilities the trading offoreign exchange. RBI is the regulatory authority for foreign exchange businessin India. The foreign exchange market in India prior to the 1990s wascharacterized by strict regulations, restrictions on external transactions,barriers to entry, low liquidity and high transaction costs. Foreign exchangetransactions were strictly regulated and controlled by the Foreign ExchangeRegulations Act (FERA), 1973. With the rupee becoming fully convertible on allcurrent account transactions in August 1994, the risk-bearing capacity of banksincreased and foreign exchange trading volumes started rising. This wassupplemented by wide-ranging reforms undertaken by the Reserve Bank of India(RBI) in conjunction with the reforms by the Government to remove marketdistortions and strengthen the foreign exchange market.
The remove marketdistortions and strengthen the foreign exchange market. The reform phaseensured with the Sodhani Committee (1994) which, in its report submitted in1995, made several recommendations to relax the regulations with a view tovitalizing the foreign exchange market. Foreign Exchange Regulation Act (FERA)was replaced by the Foreign Exchange Management Act (FEMA), 1999, in which theReserve Bank of India delegated its powers to authorized dealers to releaseforeign exchange for a variety of purposes. Capital account transactions werealso liberalized in a systematic manner. (iv) Futures Market:Futures markets provide a way for business to manage price risks. A futurescontract is an agreement that requires a party to the agreement to either buyor sell something at a designated future date at a predetermined price. Thebasic economic function of futures market is to provide an opportunity formarket participants to hedge against the risk of adverse price movements.
Buyers can obtain protection against rising prices and sellers can obtainprotection against declining prices through futures contracts. Futures contractcan be either commodity futures or financial futures· Secondarymarket: A financial market fortrading of securities that have already been issued in an initial private orpublic offering is a secondary market. Here, the investor purchases shares fromother investor and not directly from the issuing company. The stock exchangealong with a host of other intermediaries provides the necessary platform fortrading in secondary market and for clearing and settlement.The secondary marketsin India are:NationalStock Exchange (NSE): It is the leading stock exchange in India which is located in Mumbai. Itwas the first exchange in the country which provides a modern, fully automatedscreen-based electronic system for trading which makes it easy for theinvestors spread across the country. It offers Nifty 50 Index which keeps atrack of the largest assets in the Indian equity market.
BombayStock Exchange (BSE): It is Asia’s oldest stock exchange which islocated in Mumbai. BSE functions as the first-level regulator in the securitiesmarket, providing monitoring and surveillance mechanisms that are able todetect irregularities and manipulations in stock prices. It lists close to 6000companies’ shares. Its overall performance is measured by SENSEX, an index of30 of BSE’S largest stocks. There are four types ofspeculators who are active on the stock exchanges in India. They are known asBull, Bear, Stag, and Lame Duck. These names have been derived from the animalworld to bring out the nature and working of speculators. Bull and bear are thetwo classic market types used to characterize the general direction of themarket.
Bull:Bull is a speculator who expects a rise in prices of securities in the future.In anticipation of price rise, he makes purchases of shares and othersecurities with the intention to sell at higher prices in future. He makesmoney when the share prices are rising. The speculator is called bull becausethe behavior of the speculator is very much similar to a bull. A bull tends tothrow his sufferer; up in the air. The bull speculator stimulates the price torise, lie is an optimistic speculator. A bull also called as Tejiwala.Bear:A market condition that occurs when the prices of shares decline or are aboutto decline is a bear market.
A bear is a speculator who expects a fall in theprices of shares in future and sells securities at present with a view topurchase them at lower prices in future. A bear does not have securities atpresent but sells them at higher prices in anticipation that he will supplythem by purchasing at lower prices hi future. A bear speculator tends to forcedown the price of securities. A bear is a pessimistic speculator If an investoris bearish they are referred to as bear because they believe a particularcompany, industry, sector or market in general is going to go down.
A bear isalso known as a MandiwalaStag:A stag is a cautious speculator in the stock exchange who neither buys norsells but applies for subscription to the new issues, expecting that he cansell them at a premium. Stag is an investor who buys the shares in the primarymarket from public issue in anticipation of rise in prices on the listing ofthe shares on stock exchange. He selects those companies whose shares are inmore demand and are likely to carry a premium. He is also called as ‘premiumhunter’.LameDuck: When a bear speculator finds it difficult to fulfillhis commitment, he is said to be struggling like a lame duck. A bear speculatorcontracts to sell securities at a later date.
On the appointed time, he is notable to get the securities, as the holders are not willing to part with them.In such situations, he feels concerned. Moreover, the buyer is not willing tocarry over the transactions.
§ Acts and Regulations GoverningListing of Companies:A company intending tolist its securities in stock exchange shall fulfill all the basic requirementsof listing stated in The Companies Act, 2013 and the Securities Contracts(regulations) Act of 1956. The issuer company shall also comply with all theconditions of listing stated both by SEBI and the concerned stock exchange. Thesecurities listed on the exchange at its discretion, as the stock exchange hasthe right to include, suspend or remove from the list the said securities atany time and for any reason, which it considers appropriate. The company’sdesire to list their securities shall comply with all the relevant provisionsof listing stated in the following Acts, Rules, Regulations and Guidelines. · Indian Companies Act, 2013. ·Securities Contacts (Regulations) Act, 1956.
·SEBI Guidelines (Disclosure and Investor Protection), 2000. · Rules, bye-lawsand regulations of the stock exchange made by time to time.· DerivativesMarket: A derivative is definedas ?”a contract between a buyer and a seller entered into today regarding atransaction to be fulfilled at a future point in time”. Derivative is definedin another way as ?”a contract embodied with a right and or an obligation tomake an exchange of financial asset from one party to another party.” The termDerivative has been defined in the securities Contracts (Regulations) Act of1956. As per the Act derivative includes: 1. A security derived from a debt instrumentshare, loan, whether secured or unsecured, risk instrument or contract fordifferences or any other form of security. 2.
A contract whichderives its value form the prices, or index of prices, of underlyingsecurities. · Derivatives are financialproducts. · Derivative is derived fromanother financial instrument/contract called the underlying. · Derivative derives its valuefrom the underlying assets Developmentof Derivatives Market in India:SEBI set up a 24 membercommittee under the Chairmanship of Dr. L.C. Gupta on November 18, 1996 todevelop an appropriate regulation framework for derivations trading and torecommend a bye-law for Regulation and Control of Trading and Settlement ofDerivatives Contracts in India. The committee submitted its report on March 17,1998 prescribing necessary pre-conditions for introduction of derivatives tradingin India.
It recommended that derivatives should be declared as “securities” sothat regulatory framework applicable to trading of securities could also applyto trading of derivatives. The Board of SEBI in its meeting held on May 11,1998 accepted the recommendations of the Gupta committee and introducedderivatives trading in India with Stock Index Futures.SEBI also appointedanother group in June 1998 under the Chairmanship of Prof. J.R.
Varma, torecommend measures for risk containment in derivatives market in India. Thereport, which was submitted in October 1998, worked out the-operational detailsof margining system, methodology for charging initial margins, broker networth, deposit requirement and real-time monitoring requirements.Derivative products-wereintroduced in a phased manner starting “With Index Futures Contracts inJune 2000. SEBI permitted the derivative segments of two stock “exchanges,NSE and BSE, and their clearing house/corporation to commencetrading-and-settlement in approved derivatives contracts. The derivativestrading on NSE commenced with S CNX Nifty Index futures on June 12, 2000.
The index futures and options contract on NSE are based on S CNX Tradingand I settlement in derivative contracts is done in accordance with the rules,byelaws, and regulations of “the respective exchanges and their clearinghouse/corporation and are duly approved by SEBI and notified in the officialgazette.In terms of volume andturnover, NSE is the largest derivatives exchange in India. Currently, thederivatives contracts have a maximum of three-month expiration cycles.
Threecontracts are available for trading, with one month, 2 months and 3 monthsexpiry.Ø DEBT MARKET:A financial market inwhich debt instruments are traded is referred to as a debt market. Debtinstruments represent contracts whereby one party lends money to another onpre-determined terms and based on rate of interest to be paid by the borrowerto the lender, the periodicity of such interest payment and the repayment ofthe principal amount borrowed. Debt securities include bonds, debentures, notesor commercial papers, bonds.GovernmentSecurities Market: According to Public Debt Act of 1994,government securities means a security created and issued by the government forraising a public loan or any other purpose as notified by the government.
It isissued by the Central Government and State Government.PublicSector Undertakings (PSU) Bond Market: PSU Bonds are mediumand long-term obligations that are issued by public sector undertakings. PSUbonds issue is a phenomenon of the late 1980s when the Central Governmentstopped / reduced funding to PSUs through the general budget. PSUs borrow fundsfrom the market for their regular working capital or capital expenditurerequirement by issuing bonds. The market for PSU bonds has grown substantiallyover the past decade. All PSU bonds have a built in redemption and some of themare embedded with put or call options.
Many of these are issued byinfrastructure related companies such as railways and power companies, andtheir sizes vary widely from Rs 10-1000 crore. PSU bonds have maturitiesranging between five and ten years. They are issued in denominations of Rs1,000 each. Ø MONEY MARKET:A financial market forshort-term financial assets is called a money market. All financial assets witha maturity of less than 1 year are termed as short-term assets.
The instrumentsin money markets are relatively risk-free and the relationship between thelender and borrower is largely impersonal. Borrowers in the money market arethe central government, state governments, local bodies, traders,industrialists, farmers, exporters, importers and the public. The money marketcomprises several sub-markets, which are following:TreasuryBills: The government issues these bills for meeting itsshort-term financial commitments. The treasury bills market is a market, whichdeals in treasury bills issued by the Central Government for a short period ofnot more than 365 days. It is a permanent source of funds for the government.Regular treasury bills are sold to the banks and public, which are freelytransferable.
CallMoney Market: Call money means the amount borrowedand lent by commercial banks for a very short period i.e. for one day to a maximumof two weeks.
It is also called as inter-bank call money market, because theparticipants in the call money market are mostly commercial banks. Call moneymarket is the core of the Indian money market, which supply short-term funds.Call money market plays an important role in removing the routine fluctuationsin the reserve position of the individual banks and improving the functioningof the banking system in the country.
CommercialBill Market: Commercial bills are important devicefor providing short-term finance to the trade and industry. Commercial billmarket deals in commercial bills issued by the firms engaged in business. Thesebills are generally issued for a period of three months. After acceptance, thebill becomes a legal document. Such bills can be transferred from one person toanother by endorsement. The holder of the bill can discount the bills in acommercial bank for cash.CommercialPaper Market: Unsecured promissory notes issued bycredit worthy companies to borrow funds on a short-term basis are known ascommercial paper.
They are issued in denominations of 5 lakh or multiplesthereof. They are transferable by endorsement and delivery. Maturity period ofcommercial paper lies between 7 days and 365 days.Certificateof Deposit Market: Certificate of deposit market dealswith the certificate of deposits issued by commercial banks. A certificate ofdeposit is a document of title to a time deposit. The minimum amount ofinvestment should not be less than Rs. one lakh and in the multiples of 1 lakhthereafter.
The maturity period of CDs issued by banks should not be less thanseven days and not more than one year. They are freely transferable byendorsement and delivery. Certificate of deposits provide greater flexibilityto an investor in the deployment of their short-term funds. Digitizationin Indian Financial Markets: NSEbecame the first demutualized electronic exchange in the country. The NSEtrading system is called National Exchange for Automated Trading (or NEAT).
BSE followed suit andembraced technology in 1995. The open outcry system was abolished and theexchange introduced the BSE Online Trading (or BOLT) system on March 14, 1995.BOLT had a capacity of 8 million orders per day. The BSE introduced the world’sfirst centralized exchange based internet trading system, BSEWEBx.co.in thatenabled investors to trade from anywhere in the world on its platform. However,this transition wasn’t easy as many BSE stock brokers had gone on a long strikedue to digitization of all processes.
The next step included the establishmentof electronic depositories to store and transfer shares electronically.National SecuritiesDepository Limited (or NSDL) is an Indian central securities depository establishedon 8 November 1996. NSDL became the first Indian electronic securitiesdepository. It had established a national infrastructure usinginternational standards that handled most of the securities, stored andsettled them in dematerialized form. Central Depository Services Limited (orCDSL), is the second Indian central securities depository based in Mumbai. Itsmain function includes holding securities either in certificated ordematerialized form, to enable book entry transfer of securities. The Indianstock market benefited significantly due to digitization.
DEMATACCONT:Stocks in Demat accountremain in dematerialized form. Dematerialization is the process of convertingphysical shares into electronic format. A demat account number is required toenable electronic settlements of all the trades. Demat account functions like abank account, where you hold your money and respective entries are done in bankpassbook. In a similar form, securities too are held in electronic form and aredebited or credited accordingly. A demat account can be opened with no balanceof shares. You can have a zero balance in your account.
Settlement CycleSince payment is donethrough online banking the transaction duration has reduced significantly. Thetrade settlement cycle reduced 21 days to 2 days. Bad delivery This was a majorproblem prior to computerization era. Forged, fake, and damaged certificateswere common and lead to transaction failure. Digitization solved this problemas the credentials of the seller are mentioned in the dematerializedcertificates. There is no chance of loss, damage, and theft during thetransaction in electronic form. Bad deliveries have reduced significantlysince then. Capital InflowThe digitization ofshare certificates and all processes helped in building trust and investorconfidence.
The probability of scams, insider trading, stock price riggingdeclined since all stock market related transactions can be accessed by theIndian regulator SEBI. Foreign Institutional Investors (or FIIs) startedinvesting in India since 1992. Their net equity investment in India has crossed$159 billion. The participation from Domestic Institutional Investors (orDIIs) and retail investors improved significantly.
TurnoverThe daily averageturnover of equity segment at the NSE increased from INR 17 crore during FY1994-95 to INR 17,154 crore during FY 2015-16.