FINANCIAL MARKETS IN INDIA
Till the early 1990s
most of the financial markets were characterized by controls over the pricing
of financial assets, restrictions on flows or transactions, barrier to entry,
low liquidity and high transaction costs. These characteristics came in the way
of development of the markets and allocation of resources channeled through
them. From 1991 onwards, financial market reforms have emphasized the
strengthening of the price discovery process easing restrictions on
transactions, reducing transaction costs and enhancing systemic liquidity.
The various laws
regulating 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 of
India Act, 1935.
Financial markets in
India mainly comprises of capital market and money market.
Capital market is a
market that specializes in trading long-term and relatively high-risk
securities. Financial markets with maturity of more than 1 year are a part of
capital market. It is a market for long-term capital. The capital market
provides long-term debt and equity finance to the government and the corporate
sector. Capital market comprises of two segments namely the equity market and
Ø EQUITY MARKET:
Financial markets in
which equity instruments are traded are called an equity market. It is also
known as stock market. There are two
types of securities that are traded in these markets namely equity shares and
preference shares. An important distinction between these two forms of equity
securities lies in the degree to which they may participate in any distribution
of earnings, capital and the priority given to each in the distribution of
This market is further
classified into primary market, secondary market and derivatives market.
It deals with the
issuance 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 provides
long-term capital to the companies. The funds collected from the primary market
can be used for modernization of the business.
Issue: This is one of the most commonly used methods for
issuing new issues in the primary market. SEBI defined public issue as ?”an
invitation by a company to public to subscribe to the securities offered through
a prospectus”. When an existing company offers its shares in the primary
market, it is called a public issue. It can be further classified into two:
Offering: When an unlisted company makes
either a fresh issue of securities or offers its existing securities for sale
or both for the first time to the public, it is called an Initial Public Offer
Further Public Offer: When an already listed company makes either a
fresh issue of securities to the public or an offer for sale to the public it
is called Further Public Offer (FPO) or otherwise called as Follow on Offer.
Issue: When a listed company which proposes to issue fresh
securities to its existing shareholders existing as on a particular dated fixed
by the issuer (i.e. record date), it is called as rights issue.
Issue: When an issuer makes an issue of shares to its
existing shareholders as on a record date, without any consideration from them,
it is called a bonus issue.
Placement: When a company offers its shares to a
select group of persons not exceeding 49, and which is neither a rights issue
nor a public issue, it is called a private placement. These are usually not
In India, the primary
market is governed mainly by the provisions of The Companies Act, 2013, which
deals with issues, listing and allotment of various types of securities. The
Securities and Exchange Board of India (SEBI) protect the interests of investors
in securities, promote the development of securities markets as well as
SEBI issued the
guidelines on primary issue of securities under Section 11 of the Securities
and Exchange Board of India Act of 1992. In addition to the specific functions
under the SEBI Act, the functions vested in the government as per Securities
Contracts 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 Investor
Protection Guidelines of SEBI (2000) deals with public issue, offer for sale
and the rights issue by listed and unlisted companies. SEBI framed its DIP
guidelines in 1992. SEBI (Disclosure and investor protection) guidelines 2000
are in short called DIP guidelines The SEBI guidelines shall be applicable to
all public issues by listed and unlisted companies, all offers for sale and
rights issues by listed companies whose equity share capital is listed, except
in case of rights issues where the aggregate value of securities offered does
not exceed Rs 50 lakh.
(a) International Market: International
market is the markets were the issuances of securities are offered
simultaneously to investors of a number of globalization, deregulation and
liberalization of financial markets the companies and the investors in any
country seeking to raise funds are not limited to the financial assets issued
in their domestic market.
(b) Domestic Market: Domestic market is
that part of a nation’s internal market representing the mechanisms for issuing
and trading securities of entities domiciled within that nation. It is a market
where issuers who are domiciled in the country issue securities and where those
securities are subsequently traded. It is otherwise called national or internal
market. Domestic financial markets can be divided into different sub types
(i) Gilt-edged Market:
It is a market for government and semi government securities, which carries
fixed interest rates. Major players in the gilt-edged securities market in
India are the Reserve Bank of India, State Bank of India, private and public
sector commercial banks, co-operative banks and financial institutions.
(ii) Housing Finance
Market: Housing finance market is characterized as a mortgage market, which
facilitates the extent of credit, to the housing sector. National housing bank
is an apex bank in the field of housing finance in India. It is a wholly owned
subsidiary of the RBI. The primary responsibility of the bank is to promote and
develop specialized housing finance institutions to mobilize resources and
extent credit for house building.
(iii) Foreign Exchange
Market: Foreign exchange market or Forex-market facilities the trading of
foreign exchange. RBI is the regulatory authority for foreign exchange business
in India. The foreign exchange market in India prior to the 1990s was
characterized by strict regulations, restrictions on external transactions,
barriers to entry, low liquidity and high transaction costs. Foreign exchange
transactions were strictly regulated and controlled by the Foreign Exchange
Regulations Act (FERA), 1973. With the rupee becoming fully convertible on all
current account transactions in August 1994, the risk-bearing capacity of banks
increased and foreign exchange trading volumes started rising. This was
supplemented by wide-ranging reforms undertaken by the Reserve Bank of India
(RBI) in conjunction with the reforms by the Government to remove market
distortions and strengthen the foreign exchange market. The remove market
distortions and strengthen the foreign exchange market. The reform phase
ensured with the Sodhani Committee (1994) which, in its report submitted in
1995, made several recommendations to relax the regulations with a view to
vitalizing the foreign exchange market. Foreign Exchange Regulation Act (FERA)
was replaced by the Foreign Exchange Management Act (FEMA), 1999, in which the
Reserve Bank of India delegated its powers to authorized dealers to release
foreign exchange for a variety of purposes. Capital account transactions were
also liberalized in a systematic manner.
(iv) Futures Market:
Futures markets provide a way for business to manage price risks. A futures
contract is an agreement that requires a party to the agreement to either buy
or sell something at a designated future date at a predetermined price. The
basic economic function of futures market is to provide an opportunity for
market participants to hedge against the risk of adverse price movements.
Buyers can obtain protection against rising prices and sellers can obtain
protection against declining prices through futures contracts. Futures contract
can be either commodity futures or financial futures
A financial market for
trading of securities that have already been issued in an initial private or
public offering is a secondary market. Here, the investor purchases shares from
other investor and not directly from the issuing company. The stock exchange
along with a host of other intermediaries provides the necessary platform for
trading in secondary market and for clearing and settlement.
The secondary markets
in India are:
Stock Exchange (NSE):
It is the leading stock exchange in India which is located in Mumbai. It
was the first exchange in the country which provides a modern, fully automated
screen-based electronic system for trading which makes it easy for the
investors spread across the country. It offers Nifty 50 Index which keeps a
track of the largest assets in the Indian equity market.
Stock Exchange (BSE): It is Asia’s oldest stock exchange which is
located in Mumbai. BSE functions as the first-level regulator in the securities
market, providing monitoring and surveillance mechanisms that are able to
detect irregularities and manipulations in stock prices. It lists close to 6000
companies’ shares. Its overall performance is measured by SENSEX, an index of
30 of BSE’S largest stocks.
There are four types of
speculators who are active on the stock exchanges in India. They are known as
Bull, Bear, Stag, and Lame Duck. These names have been derived from the animal
world to bring out the nature and working of speculators. Bull and bear are the
two classic market types used to characterize the general direction of the
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 other
securities with the intention to sell at higher prices in future. He makes
money when the share prices are rising. The speculator is called bull because
the behavior of the speculator is very much similar to a bull. A bull tends to
throw his sufferer; up in the air. The bull speculator stimulates the price to
rise, lie is an optimistic speculator. A bull also called as Tejiwala.
A market condition that occurs when the prices of shares decline or are about
to decline is a bear market. A bear is a speculator who expects a fall in the
prices of shares in future and sells securities at present with a view to
purchase them at lower prices in future. A bear does not have securities at
present but sells them at higher prices in anticipation that he will supply
them by purchasing at lower prices hi future. A bear speculator tends to force
down the price of securities. A bear is a pessimistic speculator If an investor
is bearish they are referred to as bear because they believe a particular
company, industry, sector or market in general is going to go down. A bear is
also known as a Mandiwala
A stag is a cautious speculator in the stock exchange who neither buys nor
sells but applies for subscription to the new issues, expecting that he can
sell them at a premium. Stag is an investor who buys the shares in the primary
market from public issue in anticipation of rise in prices on the listing of
the shares on stock exchange. He selects those companies whose shares are in
more demand and are likely to carry a premium. He is also called as ‘premium
Duck: When a bear speculator finds it difficult to fulfill
his commitment, he is said to be struggling like a lame duck. A bear speculator
contracts to sell securities at a later date. On the appointed time, he is not
able 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 to
carry over the transactions.
§ Acts and Regulations Governing
Listing of Companies:
A company intending to
list its securities in stock exchange shall fulfill all the basic requirements
of listing stated in The Companies Act, 2013 and the Securities Contracts
(regulations) Act of 1956. The issuer company shall also comply with all the
conditions of listing stated both by SEBI and the concerned stock exchange. The
securities listed on the exchange at its discretion, as the stock exchange has
the right to include, suspend or remove from the list the said securities at
any time and for any reason, which it considers appropriate. The company’s
desire to list their securities shall comply with all the relevant provisions
of 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-laws
and regulations of the stock exchange made by time to time.
A derivative is defined
as ?”a contract between a buyer and a seller entered into today regarding a
transaction to be fulfilled at a future point in time”. Derivative is defined
in another way as ?”a contract embodied with a right and or an obligation to
make an exchange of financial asset from one party to another party.” The term
Derivative has been defined in the securities Contracts (Regulations) Act of
1956. As per the Act derivative includes:
1. A security derived from a debt instrument
share, loan, whether secured or unsecured, risk instrument or contract for
differences or any other form of security.
2. A contract which
derives its value form the prices, or index of prices, of underlying
· Derivatives are financial
· Derivative is derived from
another financial instrument/contract called the underlying.
· Derivative derives its value
from the underlying assets
of Derivatives Market in India:
SEBI set up a 24 member
committee under the Chairmanship of Dr. L.C. Gupta on November 18, 1996 to
develop an appropriate regulation framework for derivations trading and to
recommend a bye-law for Regulation and Control of Trading and Settlement of
Derivatives Contracts in India. The committee submitted its report on March 17,
1998 prescribing necessary pre-conditions for introduction of derivatives trading
in India. It recommended that derivatives should be declared as “securities” so
that regulatory framework applicable to trading of securities could also apply
to trading of derivatives. The Board of SEBI in its meeting held on May 11,
1998 accepted the recommendations of the Gupta committee and introduced
derivatives trading in India with Stock Index Futures.
SEBI also appointed
another group in June 1998 under the Chairmanship of Prof. J.R. Varma, to
recommend measures for risk containment in derivatives market in India. The
report, which was submitted in October 1998, worked out the-operational details
of margining system, methodology for charging initial margins, broker net
worth, deposit requirement and real-time monitoring requirements.
introduced in a phased manner starting “With Index Futures Contracts in
June 2000. SEBI permitted the derivative segments of two stock “exchanges,
NSE and BSE, and their clearing house/corporation to commence
trading-and-settlement in approved derivatives contracts. The derivatives
trading 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 Trading
and I settlement in derivative contracts is done in accordance with the rules,
byelaws, and regulations of “the respective exchanges and their clearing
house/corporation and are duly approved by SEBI and notified in the official
In terms of volume and
turnover, NSE is the largest derivatives exchange in India. Currently, the
derivatives contracts have a maximum of three-month expiration cycles. Three
contracts are available for trading, with one month, 2 months and 3 months
Ø DEBT MARKET:
A financial market in
which debt instruments are traded is referred to as a debt market. Debt
instruments represent contracts whereby one party lends money to another on
pre-determined terms and based on rate of interest to be paid by the borrower
to the lender, the periodicity of such interest payment and the repayment of
the principal amount borrowed. Debt securities include bonds, debentures, notes
or commercial papers, bonds.
Securities Market: According to Public Debt Act of 1994,
government securities means a security created and issued by the government for
raising a public loan or any other purpose as notified by the government. It is
issued by the Central Government and State Government.
Sector Undertakings (PSU) Bond Market: PSU Bonds are medium
and long-term obligations that are issued by public sector undertakings. PSU
bonds issue is a phenomenon of the late 1980s when the Central Government
stopped / reduced funding to PSUs through the general budget. PSUs borrow funds
from the market for their regular working capital or capital expenditure
requirement by issuing bonds. The market for PSU bonds has grown substantially
over the past decade. All PSU bonds have a built in redemption and some of them
are embedded with put or call options. Many of these are issued by
infrastructure related companies such as railways and power companies, and
their sizes vary widely from Rs 10-1000 crore. PSU bonds have maturities
ranging between five and ten years. They are issued in denominations of Rs
Ø MONEY MARKET:
A financial market for
short-term financial assets is called a money market. All financial assets with
a maturity of less than 1 year are termed as short-term assets. The instruments
in money markets are relatively risk-free and the relationship between the
lender and borrower is largely impersonal. Borrowers in the money market are
the central government, state governments, local bodies, traders,
industrialists, farmers, exporters, importers and the public. The money market
comprises several sub-markets, which are following:
Bills: The government issues these bills for meeting its
short-term financial commitments. The treasury bills market is a market, which
deals in treasury bills issued by the Central Government for a short period of
not 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 freely
Money Market: Call money means the amount borrowed
and lent by commercial banks for a very short period i.e. for one day to a maximum
of two weeks. It is also called as inter-bank call money market, because the
participants in the call money market are mostly commercial banks. Call money
market is the core of the Indian money market, which supply short-term funds.
Call money market plays an important role in removing the routine fluctuations
in the reserve position of the individual banks and improving the functioning
of the banking system in the country.
Bill Market: Commercial bills are important device
for providing short-term finance to the trade and industry. Commercial bill
market deals in commercial bills issued by the firms engaged in business. These
bills are generally issued for a period of three months. After acceptance, the
bill becomes a legal document. Such bills can be transferred from one person to
another by endorsement. The holder of the bill can discount the bills in a
commercial bank for cash.
Paper Market: Unsecured promissory notes issued by
credit worthy companies to borrow funds on a short-term basis are known as
commercial paper. They are issued in denominations of 5 lakh or multiples
thereof. They are transferable by endorsement and delivery. Maturity period of
commercial paper lies between 7 days and 365 days.
of Deposit Market: Certificate of deposit market deals
with the certificate of deposits issued by commercial banks. A certificate of
deposit is a document of title to a time deposit. The minimum amount of
investment should not be less than Rs. one lakh and in the multiples of 1 lakh
thereafter. The maturity period of CDs issued by banks should not be less than
seven days and not more than one year. They are freely transferable by
endorsement and delivery. Certificate of deposits provide greater flexibility
to an investor in the deployment of their short-term funds.
in Indian Financial Markets:
became the first demutualized electronic exchange in the country. The NSE
trading system is called National Exchange for Automated Trading (or NEAT).
BSE followed suit and
embraced technology in 1995. The open outcry system was abolished and the
exchange 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’s
first centralized exchange based internet trading system, BSEWEBx.co.in that
enabled 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 strike
due to digitization of all processes. The next step included the establishment
of electronic depositories to store and transfer shares electronically.
Depository Limited (or NSDL) is an Indian central securities depository established
on 8 November 1996. NSDL became the first Indian electronic securities
depository. It had established a national infrastructure using
international standards that handled most of the securities, stored and
settled them in dematerialized form. Central Depository Services Limited (or
CDSL), is the second Indian central securities depository based in Mumbai. Its
main function includes holding securities either in certificated or
dematerialized form, to enable book entry transfer of securities. The Indian
stock market benefited significantly due to digitization.
Stocks in Demat account
remain in dematerialized form. Dematerialization is the process of converting
physical shares into electronic format. A demat account number is required to
enable electronic settlements of all the trades. Demat account functions like a
bank account, where you hold your money and respective entries are done in bank
passbook. In a similar form, securities too are held in electronic form and are
debited or credited accordingly. A demat account can be opened with no balance
of shares. You can have a zero balance in your account.
Since payment is done
through online banking the transaction duration has reduced significantly. The
trade settlement cycle reduced 21 days to 2 days.
This was a major
problem prior to computerization era. Forged, fake, and damaged certificates
were common and lead to transaction failure. Digitization solved this problem
as the credentials of the seller are mentioned in the dematerialized
certificates. There is no chance of loss, damage, and theft during the
transaction in electronic form. Bad deliveries have reduced significantly
The digitization of
share certificates and all processes helped in building trust and investor
confidence. The probability of scams, insider trading, stock price rigging
declined since all stock market related transactions can be accessed by the
Indian regulator SEBI. Foreign Institutional Investors (or FIIs) started
investing in India since 1992. Their net equity investment in India has crossed
$159 billion. The participation from Domestic Institutional Investors (or
DIIs) and retail investors improved significantly.
The daily average
turnover of equity segment at the NSE increased from INR 17 crore during FY
1994-95 to INR 17,154 crore during FY 2015-16.