Indian Financial Market

India Financial market is one of the oldest in the world and is considered to be the fastest growing and best among the emerging economies. The history of Indian capital markets dates back to 200 years before when India was under the rule of the British Empire. Today, 21 regional securities exchanges in India in addition to the centralized NSE (National Stock Exchange) and OTCEI (Over the Counter Exchange of India).

Recent Developments

New Norms for Credit Rating Agencies

Markets regulator SEBI on November 13, 2018 issued norms for enhanced disclosures by Credit Rating Agencies (CRAs). New Requirements for CRAs are:

  • CRAs would now be required to furnish information whether the rating is factoring in support from a parent, group or government, with an expectation of infusion of funds towards timely debt servicing.
  • SEBI has introduced a specific section on liquidity among key rating drivers that will highlight parameters like liquid investments or cash balances, access to unutilised credit lines, liquidity coverage ratio, and adequacy of cash flows for servicing maturing debt obligation among others.
  • The rating agencies will also have to disclose any linkage to external support for meeting near term maturing obligations.
  • A credit rating is a professional and informed opinion on the creditworthiness of the issuer of a financial instrument.

2.25 lakh More Shell Firms to be De-registered

  • In an effort to intensify the campaign against black money, the government has identified over 2.25 lakh more companies to be struck off the register of companies. With this, a total of over 5 lakh companies will have been legally de-recognized.
  • During FY 2017-18, the Registrar of Companies had removed a total of 2,26,166 companies from the register; over 3.09 lakh directors were disqualified.
  • Shell Companies: Theoretically, Shell Companies are companies without active business operations or significant assets. They can be set up by business people for both legitimate and illegitimate purposes. With the shell company as a front, all transactions are shown on paper as legitimate business transactions, thereby turning black money into white. In this process, the business person also avoids paying tax on the laundered money.

Chit Funds (Amendment) Bill, 2018

  • The Union Cabinet approved the introduction of the Chit Funds (Amendment) Bill, 2018 in Parliament. The Bill seeks to amend the Chit Funds Act, 1982. The 1982 Act regulates chit funds, and prohibits a fund from being created without the prior sanction of the state government.
  • Under a chit fund, people agree to pay a certain amount from time to time into a fund. Periodically, one of the subscribers is chosen by drawing a chit to receive the prize amount from the fund.
    • The Bill seeks to use the words ‘Fraternity Fund’ under the 1982 Act for a chit business. This seeks to distinguish it from ‘prize chits’, which are banned under a separate law.
    • The Act specifies that a chit will be drawn in the presence of at least two subscribers. The Bill seeks to allow these subscribers to join via video-conferencing.
    • Under the Act, the ‘foreman’ is responsible for conducting the chit. He is entitled to a maximum commission of 5% of the chit amount. The Bill seeks to increase the commission to 7%.

Concept of Financial Market

Money Market

The Money Market is a market for lending and borrowing of short-term funds. It deals in funds and financial instruments having a maturity period of one day to one year. It covers money and financial assets that are close substitutes for money. The instruments in the money market are of short term nature and highly liquid.

Organized Money Market Instruments and Features

  • Call and Notice Money Market: Under call money market, funds are transacted on overnight basis. Under notice money market funds are transacted for the period between 2 days and 14 days. Generally, banks rely on the call money market where they raise funds for a single day. The main participants in the call money market are commercial banks (excluding RRBs), cooperative banks and primary dealers.
  • Treasury Bills (T-Bills): T-Bills are short-term securities issued by RBI on behalf of Government of India. They are the main instruments of short term borrowing by the Government. At present, the Government of India issues three types of treasury bills through auctions, namely – 91 days, 182-day and 364-day treasury bills.
  • Commercial Bills: Commercial bill is a short-term, negotiable, and self-liquidating instrument with low risk. They are negotiable instruments drawn by a seller on the buyer for the value of goods delivered by him. Such bills are called trade bills. When trade bills are accepted by commercial banks, they are called commercial bills. Generally, the maturity period is upto 90 days. During the usage period, if the seller is in need of funds, he may approach his bank for discounting the bill.
  • Certificates of Deposits (CDs): CDs are unsecured, negotiable promissory notes issued at a discount to the face value. They are issued by commercial banks and development financial institutions. CDs are marketable receipts of funds deposited in a bank for a fixed period at a specified rate of interest.
  • Commercial Papers (CPs): CPs is an unsecured money market instrument issued in the form of a promissory note with fixed maturity. They indicate the short-term obligation of an issuer. They are quite safe and highly liquid. They are generally issued by the leading, nationally reputed, highly rates and credit worthy large manufacturing and finance companies is the public as well as private sector.
  • Money Market Mutual Funds (MMMFs): RBI introduced MMMFs in April 1992 to enable small investors to participate in the money market. MMMFs mobilize savings from small investors and invest them in short-term debt instruments or money market instruments such as call money, repos, treasury bills, CDs and CPs.

Unorganized Sector of Indian Money Market

  • Indigenous Bankers: They are financial intermediaries which operate as banks, receive deposits and give loans and deals in ‘hundies’. The ‘hundi’ is a short-term credit instrument. It is the indigenous bill of exchange. The rate of interest differs from one market to another and from one bank to another.
  • Money Lenders: They are those whose primary business is money lending. Money lenders predominate in villages. However, they are also found in urban areas. Interest rates are generally high. Large amount of loans are given for unproductive purposes. The borrowers are generally agricultural labourers, marginal and small farmers, artisans, factory workers, small traders, etc.
  • Financial Intermediaries: They consist of Chit Funds, Nidhis, Loan companies and others.
    1. Chit Funds: They are saving institutions. The members make regular contribution to the fund. The collected funds are given to some member based on previously agreed criterion (by bids or by draws). Chit Fund is more famous in Kerala and Tamil Nadu.
    2. Nidhis: They deal with members and act as mutual benefit funds. The deposits from the members are the major source of funds and they make loans to members at reasonable rate of interest for the purposes like house construction or repairs. They are highly localized and peculiar to South India. Both chit funds and Nidhis are unregulated.
  • Finance Brokers: They are found in all major urban markets especially in cloth markets, grain markets and commodity markets. They are middlemen between lenders and borrowers.

Capital Market

Capital market is the market for medium and long-term funds. It refers to all the facilities and the institutional arrangements for borrowing and lending term funds (medium-term and long-term funds). Capital market includes Development Financial Institutions (DFIs) such as IFCI, SFC, LIC, IDBI, UTI, ICICI, etc. They provide medium-term and long-term funds for business enterprises and public authorities.

Types of Capital Market

The Indian Capital Market is broadly divided into two categories:

1. Gilt- Edged Market: Gilt-edged market is also known as the government securities market. As the securities are risk free, they are known as gilt-edged i.e. the best quality securities. The investors in the gilt-edged market are predominantly institutions. They are required by law to invest a certain portion of their funds in these securities. These institutions include commercial banks, LIC, GIC, and the provident funds.

2. The Industrial Securities Market: It is a market of shares, debentures and bonds which can be bought and sold freely. This market is divided into two categories: Primary Market and Secondary Market.

  • Primary Market: The new issue market called the primary market and the new issue market is concerned with the raising of new capital in the form of shares, bonds and debentures. Many public limited companies often raise capital through the primary market for expanding their business.
  • Secondary Market: The stock exchange market or the secondary market is a market of the purchase and sale of quoted or listed securities. It is a highly organized market for regulating and controlling business in buying, selling and dealing in securities.

Stock Exchanges

Stock Exchanges are an organized marketplace, either corporation or mutual organization, where members of the organization gather to trade company stocks or other securities. The members may act either as agents for their customers, or as principals for their own accounts.

  • The functions of a Stock Exchange include:
  • Provides ready and continuous market
  • Provides information about Prices and Sales
  • Provides safety to dealings and investment
  • Helps in mobilization of savings and capital formation
  • Act as a barometer of economic and business conditions
  • Provide better Allocation of funds

Stock Market

Stock Market is a market where the trading of company stock, both listed securities and unlisted takes place. It is different from stock exchange because it includes all the national stock exchanges of the country. ww

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