MODULE-II Money Market

Syllabus: - Money Market (MM): Features of MM, Players in the MM, Instruments in the MM,
Institutions of MM.

In Indian Financial System the money market is an important and integral segment which
caters to the needs of short-term funds (one year or less). The instruments traded here have
maturity for less than one year and hence are called near money. The Money market in India is a
collection or markets for different short term debt instruments . It has no physical presence like
any stock market. It is a over-the-phone or internet market where dealings are conducted over
phone or via E-Mail.

Features of Indian Money Market:

Money market deal with requirement for short term funds which may be from overnight to
maximum one year.

I. Instruments traded in MM have maturity for one year or less.

II. It is a market for short term debt instruments both secured and un-secured.
III. Demand and supply of short term funds determines its market dynamics.
IV. Players include Governments (both central and state governments), Scheduled
Commercial Banks , Mutual Funds ,Specialized Financial Institutions, LIC ,GIC and
Corporate. No public dealings are held in MM.
V. It is regulated by Reserve Bank of India.

Functions of Money Market:-

In the Indian financial System , the MM plays a vital and unique role as it plays the role of a
short term funds market and a mechanism to operate the monetary policies of the central bank
i.e. RBI.

Its functions can be discussed as under:

1. It provides a market place where borrowers and lenders of short term funds meet to
transact under an efficient clearing system.
 2. It provides a mechanism to RBI to manage short term liquidity in the economy through
various interventions (borrowing and lending).It thus helps to bring equilibrium in the
short term funds market.
3. It helps economic progress by providing a proper and efficient mechanism to channelize
short term savings into productive uses.

Players in Money Market:

(1) Reserve Bank of India : Reserve Bank of India is the regulator of Indian Money market
as well as a major players involved in borrowing ( for central government) and lending.
(2) Commercial Banks: In order to meet their short term funds requirements scheduled
commercial banks (public sector banks, private sector banks and Foreign Banks) act as
lenders or borrowers as per their individual requirements. They play an active role in call
money market (overnight) , short term government treasury bill market and for
rediscounting of commercial bills.
(3) Cooperative banks: Are also allowed to operate in money market in case of liquidity
mismatch.
(4) Corporate: For investing short term funds corporate buy Certificate of Deposits from
banks or invest in money market funds of Mutual Funds and for borrowing may float
Commercial Papers.
(5) Mutual Funds, LIC and GIC: They can only lend in the money market. They cannot
borrow.

Instruments in the MM:

Important instruments traded in Indian MM include the following;

(1) Treasury Bills

(2) Ad hoc Bills
(3) Call Money
(4) Commercial Paper
(5) Certificate of Deposits
(6) Commercial Bills.
(1)Treasury Bills (T-Bills):

 Treasury Bill are short term instruments issued by Reserve Bank of India on behalf of
Central Government to tide over short term liquidity shortfalls (expenses).
 Treasury Bill is a form of government security.
 Treasury bills are issued at discount to face value and on maturity face value is repaid.
 These are negotiable and can be transferred through endorsement.
 T-Bill is government security with assured return and there is no default risk.
 They are eligible for inclusion as approved securities for SLR purpose.
 Treasury Bills are available for a minimum amount of Rs.25000 and in multiples thereof.
 At present there are 91-Day, 182- Day and 364-Day T-Bills.
 The 91-Day T-Bills are auctioned by RBI every Friday. The 364- Day T-Bills are
auctioned alternate Wednesday.
 The T-Bills is the preferred central bank tool for market intervention to influence
liquidity and short term interest rates. T- Bills also play a vital role in financing short
term requirement of the government.

(2)Ad hoc Bills:

The government maintains its account in RBI. It has to maintain a minimum cash balance
of Rs.50 Crore on Fridays and Rs.4 Crore in other days. In any day if the balance is less than the
minimum balance , RBI was suppose to issue Ad hoc 91-Day T-Bills to replenish the balance.
This system continued upto 1997 after which another system was introduced.

(3) Call Money:-

 Call money market is an unique market where day-to-day surplus funds, mostly of banks
are traded.
 The call money market is a market for very short-term funds repayable on demand and
with a maturity period varying between one day to a fortnight.
 When money is borrowed or lent for a day, it is known as call money. When money is
borrowed or lent for more than a day and upto 14 days, it is known as notice money.
 It is mostly an over-the-phone market. No collateral security is demanded for these
transactions. It is a highly risky and volatile market. All the transactions in the call money
 market are routed through Negotiated Dealing System (NDS), a computer package for the
purpose.
 The interest paid on call loans is called “call rate”. The rate is freely determined by the
demand and supply forces in the call money market.
 Call money is required mostly by commercial banks. Banks are required to maintain a
minimum cash balance called Cash Reserve Ratio (CRR) with Reserve Banks of India.
CRR represents a certain percentage of total demand and time liabilities. For any shortfall
in such CRR they borrow in the call money market.
 Since August, 2005 only Banks and Primary Dealers are the participants in Call Money
Market and it has taken the shape of an Inter-Bank Money Market.
 RBI is the regulator. It also intervenes indirectly in the market through REPO auctions (to
provide liquidity) and reverse repo auctions (to absorb excess liquidity).

(4) Commercial Paper:

 Commercial Paper (CP) is an unsecured money market instrument issued in the form
of a promissory note by corporate and FIs.
 CPs are issued at a discount by creditworthy corporate, primary dealers and all-india
financial institutions.

 A corporate would be eligible to issue CP provided –

o the tangible net worth of the company, as per the latest audited balance sheet, is
not less than Rs. 4 crore
o company has been sanctioned working capital limit by bank/s or all-India
financial institution/s; and
o the borrowal account of the company is classified as a Standard Asset by the
financing bank/s/ institution/s.
 CPs can be issued for minimum 7 Days and maximum 1 Year period.
 A CP is negotiable and transferable by endorsement and delivery.
 A CP can be issued to individuals , banks , companies and others
 A CP is usually privately placed with investors either through merchant bankers or banks.
The total amount of CP proposed to be issued should be raised within a period of two
weeks from the date on which the issuer opens the issue for subscription.
  A specified credit rating (like P2 of CRISIL) or its equilivilant is to be obtained from
credit rating agencies.
 The paper attracts stamp duty.
 CP can be issued in denominations of Rs.5 lakh or multiples thereof.

(5) Certificate of Deposits (CDs)

 The Certificate of Deposit (CD) is an agreement between the depositor and the
bank where a predetermined amount of money is fixed for a period and the bank
pays interest on it. It is a money market instrument issued by banks and FIs only.
 A Certificate of Deposit issued by the commercial banks can have maturity period
ranging from 7 days to 1 year. For financial institutions, it ranges is from 1 year to
3 years.
 Minimum amount to be deposited is Rs. 1 Lakh.
 CDs are transferable.
 The Reserve Bank of India (RBI) issues guidelines for the CD from time to time.
 The Certificate of Deposit is issued in dematerialised form i.e. issued
electronically and may automatically be renewed if the depositor fails to decide
what to do with the matured amount during the grace period of 7 days.

(6) Commercial Bills

A Commercial bill is a short term ,negotiable and sel-liquidating instrument with low risk. A
Commercial Bill arises out of a genuine trade transaction. A bill of exchange is an important
commercial bill which is drawn by the seller on the buyer for the amount due to him. The
maturity period of bill may vary from three to six months. Commercial Bills may be of different
types . We can discuss the following types.

a. Demand and usance bills.

b. Clean and documentary bills.

1.Demand and usance bills. A demand bill is one in which no time of payment is
specified. So, demand bills are payable immediately when they are presented to the
drawee.
 Usance bill is otherwise known as time bill. It is payable after the expiry of time specified
therein. The time for payment is determined according to the trade custom or usage in
practice.

2. Clean bills and documentary bills:

Bills that are accompanied by documents of title to goods are called Documentary bills.
Examples for documentary bills are railway receipt, lorry receipt, bill of lading, etc.

Documentary bills can again be classified into D/A bills and D/P bills.

The documents accompanying D/A bills have to be delivered to the drawee immediately
after the acceptance of the bill. In this sense, the D/A bill becomes a clean bill immediately
after delivery of documents.

In the case of D/P bills, the documents have to be handed over to the drawee only against
payment. Clean bills are drawn without accompanying any document.

Discounting/Rediscounting of Commercial Bills by Banks:

When trade bills are accepted by banks they are called Commercial Bills. Commercial
Bills are negotiable instruments drawn by the seller on the buyer. These commercial bills are
in turn accepted and discounted by Banks.

Banks when in need of money can get such commercial bills rediscounted by FIs like
LIC,GIC ,IRBI ,RBI etc.

Institutions in the Money Market:

Major Players in Money Market includes

1. Reserve Bank of India
2. Commercial Banks
3. DFHI
4. STCI
5. Primary Dealers
1. Reserve Bank of India:
Indian Money Market is regulated by RBI. However it also acts like a player in certain ways to
implement monetary policies.

The monetary policy represents policies ,objectives and instruments directed towards
regulating money supply and the cost and availability of credit in the economy. The objectives
of monetary policy are akin to economic objective of India i.e. growth and price stability

The government of India tries to manipulate its monetary policy through Reserve Bank of
India , the monetary authority in India.

The RBI seeks to influence monetary conditions through management of liquidity by

operating in varied instruments. These instruments can be categorized as direct and indirect
market-based instruments.

Direct Instruments include

 Reserve Requirements for Banks (SLR and CRR Rates).
 Limits on refinancing to Banks.
 Administered interest rates.
 Qualitative and Quantitative restrictions on credit.
These instruments were used mostly before 1990 when the country had administered or
controlled regime of money and financial market.
Indirect instruments are more in use after 1991 i.e in the deregulated regime.
Indirect Instruments include:
 Open Market Operations (OMO)
 Repos
For example if the RBI desires to inject liquidity for short period, it could resort to repos-
providing funds to banks in exchange of securities at a predetermined interest rate and
reversing the transaction at a predetermined time. If RBI wants to absorb liquidity it resorts to
reverse repos.
Similarly, if the RBI wants to influence liquidity on an enduring basis, it could resort to open
market operations involving outright purchase or sale of securities.
 (2) DFHI

DFHI stands for Discount Finance House of India. It is a specialised money market institution
which was established in April 1988 with an objective to provide liquidity to money market
Instruments and to develop secondary market. The DFHI was set up jointly by the RBI, public
sector banks and financial institutions.

Functions and Role of DFHI : DFHI was given the specific task of widening and deepening
the money market.

Functions and Role of DFHI

1. To discount, rediscount, purchase and sell treasury bills, trade bills of exchange,
commercial bills and commercial papers.
2. To play an important role as a lender, borrower or broker in the inter-bank call money
market.
3. To promote and support company funds, trusts and other organisations for the
development of short term money market.
4. To advise Government, banks, and financial institutions involving schemes for growth
and development of money market.
5. To undertake buy back arrangements in trade bills and treasury bills as well as securities
of local authorities, public sector institutions, Govt. and commercial and non-commercial
houses.
(3)STCI

STCI Finance Ltd (formerly Securities Trading Corporation of India Limited), is a

Systemically Important Non-Deposit taking NBFC registered with Reserve Bank of India
(RBI). Presently STCI Finance Ltd is classified as a loan NBFC.

In May 1994, STCI Finance Limited was promoted by RBI with the main objective of
fostering an active secondary market in Government of India Securities and Public Sector
bonds. RBI owned a majority stake of 50.18% in the paid up share capital of the company. In
1996, the Company was accredited as the first Primary Dealer in the India. As one of the
 leading Primary Dealers in the country, the Company was a market maker in government
securities, corporate bonds and money market instruments.

RBI divested its entire shareholding in STCI in two stages- first in 1997 and in 2002. Bank of
India became the largest shareholder in the company with 29.96% stake.

In order to diversify into new activities, the Company hived off its Primary Dealership
business to its separate 100% subsidiary, STCI Primary Dealer Limited (STCI-PD) in June
2007. Since year 2007, the Company has been undertaking lending and investment activities
with its main focus on lending/ financing activities. With growth in the size of the Look Book,
the lending activity became the core business of the Company and STCI Finance Limited was
classified as a Loan NBFC . With a view to reflecting the lending/ financing business of the
Company, the name of the Company was changed from Securities Trading Corporation of
India to ‘STCI Finance Limited’ with effect from October 24, 2011.

(6) Primary Dealers:

Primary dealers are registered entities with the RBI who have the license to
purchase and sell government securities. They are entities who buys government
securities directly from the RBI (the RBI issues government securities on behalf of the
government), aiming to resell them to other buyers. In this way, the Primary Dealers
create a market for government securities.

The Primary Dealers system in the government securities market was introduced by
the RBI in 1995.

The PDs are thus created to promote transactions in government securities market.
A facilitating arrangement is essential for selling of government securities as
government is the single largest borrower in the market who borrows through the issue
of its securities – treasury bills and bonds.

The RBI instructs PDs to have a minimum turnover ratio, bidding ratio, underwriting
ratio, secondary market participation etc to ensure that they are active in supporting
the trade in government securities. PDs are active in the stock market also for
enhancing the trading of government securities.

STCI Primary Dealer Limited (STCI PD): This company is a wholly owned subsidiary of
STCI Finance Limited established consequent to the hiving off of the Company's primary
dealership business in line with the Reserve Bank of India guidelines on diversification of
business activities by primary dealers. The Company undertakes trading in government
securities, corporate bonds, money market instruments, interest rate swaps and trading in equity.
MODULE-II Capital Market

Syllabus: -Capital Market (CM) : Primary Market: Functions of Primary Market , Initial Public
Offer (IPO), SEBI Guidelines for IPO, Methods of issuing IPO. Secondary Market:- functions of
Secondary market, Instruments traded in Secondary Market, trading Mechanism in Secondary
Market – Online trading , De-Materialization of Accounts , Brokers – Kinds of Brokers
,Registration of Brokers.

CAPITAL MARKET:

Capital Market:

 The capital market is an important constituent of the financial system.

 It is a market for long-term funds both Debt and Equity. It covers both domestic and
overseas market.
 Deficit units seeking funds can directly raise funds in the capital market without any
intermediation .However the same has to be done within the defined rules and
regulations of the market.
 Capital market has two segments. The Primary market is for new issue of securities and
the Secondary market is the market for second hand securities.

Functions of Capital market:

1. It provides a mechanism to mobilize long term funds (both ownership and debt capital)
for long term use.
2. It helps to raise risk capital through issue of Equity and quasi equity instruments.
3. Improve the efficiency of capital allocation in the economy through a competitive pricing
mechanism.
4. It provides a platform for buying and selling of corporate securities and thereby providing
much needed liquidity.
5. Lower the cost of transaction and information.
Role of SEBI

The SEBI is the regulatory authority in India established under Section 3 of SEBI Act to protect
the interests of the investors in securities and to promote the development of, and to regulate, the
securities market and for matters connected therewith and incidental thereto.

 Protecting the interests of investors in securities and promoting and regulating the
development of the securities market
 Regulating the business in stock exchanges
 Registering and regulating the working of stock brokers, sub–brokers, share transfer
agent etc.
 Registering and regulating the working of venture capital funds, collective investment
schemes (like mutual funds) etc
 Promoting investor’s education and training intermediaries
 Promoting and regulating self-regulatory organizations
 Prohibiting fraudulent and unfair trade practices
 Calling for information from, undertaking inspection, conducting inquiries and audits of
the stock exchanges, intermediaries, self – regulatory organizations, mutual funds and
other persons associated with the securities market.
 Primary Capital Market:

It is also called new issue market. Whenever a new issue of any financial security is made to
raise capital it is done in primary market. The issue of security may be by companies or
government. It may be sold to public at large or a group of institutional buyers or to existing
members.

Functions of Primary Capital market:

The key function of the primary market is to facilitate capital growth by enabling individuals
to convert savings into investments. It facilitates companies to issue new stocks to raise money
directly from households for business expansion or to meet financial obligations.

 It provides a market or a mechanism to raise fresh funds by issuing new issue of

securities.
 It helps channelization of savings directly to capital formation without any
intermediation.
 It lowers cost of transactions and information.
 It provides a mechanism for price discovery .
Public issue of securities:

 Initial Public Offering (IPO) –

• A first time offer of sale of securities by an unlisted company.
 Follow-on Public Offering (FPO) –
• An offer of sale of securities by an existing listed company

Initial Public Offer (IPO):

IPOs-“initial public offer” means an offer of specified securities by an unlisted issuer to the
public for subscription and includes an offer for sale of specified securities to the public by any
existing holders of such specified securities in an unlisted issuer.-SEBI
  Public Issue means an invitation by a company to the public to subscribe to the securities
offered through a prospectus.

 Offer for Sale means offer of securities by existing shareholders of an unlisted company
to the public for subscription , through an offer document.

SEBI Guidelines on IPO

A. Entities not eligible to make an initial public offer:

(1) An issuer shall not be eligible to make an initial public offer -
(a) if the issuer, any of its promoters, promoter group or directors or selling shareholders
are debarred from accessing the capital market by the Board.
(b) if any of the promoters or directors of the issuer is a promoter or director of any other
company which is debarred from accessing the capital market by the Board.
(c) if the issuer or any of its promoters or directors is a wilful defaulter.
(d) if any of its promoters or directors is a fugitive economic offender.

(2) An issuer shall not be eligible to make an initial public offer if there are any outstanding
convertible securities or any other right which would entitle any person with any option to
receive equity shares of the issuer.

B. Eligibility requirements for an initial public offer:

(1) ENTRY NORMS: Two Routes

1. Profitability Route: An issuer shall be eligible to make an initial public offer only if

I. Net tangible assets of at least Rs.3 Crores in each of the preceding three full years
, of which not more than 50% is held in monetary assets

II. it has an average operating profit of at least fifteen crore rupees during the
preceding three years.

III. it has a net worth of at least one crore rupees in each of the preceding three full
years
 IV. if it has changed its name within the last one year, at least fifty per cent. of the
revenue ,
V. for the preceding one full year has been earned by it from the activity indicated by
its new name.

2. QIB Route:
An issuer not satisfying the condition stipulated in sub-regulation (1) shall be eligible to
make an initial public offer only if the issue is made through the book-building process and
the issuer undertakes to allot at least seventy five per cent. of the net offer to qualified
institutional buyers and to refund the full subscription money if it fails to do so.

3. General conditions:

I. It has made an application to one or more stock exchanges to seek an in-principle

approval for listing of its specified securities on such stock exchanges and has chosen one
of them as the designated stock exchange

II. It t has entered into an agreement with a depository for dematerialisation of the specified
securities already issued and proposed to be issued

III. All its specified securities held by the promoters are in dematerialised form prior to filing
of the offer document;
IV. All its existing partly paid-up equity shares have either been fully paid-up or have been
forfeited;
V. It has made firm arrangements of finance through verifiable means towards seventy five
per cent. of the stated means of finance for a specific project proposed to be funded from
VI. The issue proceeds, excluding the amount to be raised through the proposed public issue
or through existing identifiable internal accruals.
Merchant Bankers and their roles:
Merchant Bankers are specialized financial institutions engaged in public issue
management activities. As per SEBI guidelines any company interested to issue its securities to
public for subscription has to do it through one or more merchant bankers registered with SEBI.
In the management of a public issue the merchant banker plays an important role as Lead
Manager of Issue or as Co-Manager of Issue or simply as an advisor to the issue.All merchant
bankers in India have to be registered with SEBI. Based on their net worth , capabilities and size
the merchant bankers may be given registration as a Catergory ,I ,II ,III or IV types . They can in
a public issue based on their category. The Securities and Exchange Board of India (Merchant
Bankers) Regulations, 1992 governs all aspect of merchant bankers in India
Registration of Merchant banker is done under following categories.

(a) Category I, that is—

(i) to carry on any activity of the issue management, which will, inter alia,
consist of preparation of prospectus and other information relating to the
issue, determining financial structure, tie up of financiers and final allotment
and refund of the subscriptions; and
(ii) to act as adviser, consultant, manager, underwriter, portfolio manager;
(b) Category II, that is to act as adviser, consultant, co-manager, underwriter,
portfolio manager;
(c) Category III, that is to act as underwriter, adviser, consultant to an issue;
(d) Category IV, that is to act only as adviser or consultant to an issue.

Methods of Marketing New Issue of Corporate Securities:

1. Pure Prospectus Method: The method whereby a corporate enterprise mops up capital funds
from the general public by means of an issue of a prospectus is called Pure Prospectus Method .
It is the most popular method of making public issue of securities by corporate enterprises.
Prospectus: is a document that contains information relating to the various aspects of the
issuing company, besides other details of the issue is called a Prospectus

2. Offer for Sale Method: Where the marketing of securities takes place through intermediaries,
such as issue houses, stockholders and others, it is a case of Offer for sale Method .

Under this method, the sale of securities takes place in two stages. Accordingly, in the first stage,
the issuer company makes an en-block sale of securities to intermediaries such as the issue
houses and share brokers of an agreed price. Under the second stage, the securities are re-sold to
ultimate investors at a market-related price.

3. Private Placement Method: A method of marketing of securities whereby the issuer makes
the offer of sale of individuals and institutions privately without the issue of a prospectus is
known as Private Placement Method.
4. Rights Issue Method : Where the shares of an existing company are offered to its existing
shareholders. It takes the form of rights issue. Under this method, the existing company issues
shares to its existing shareholder sin proportion in the number of shares already held by them.

5. Book-building Method: A method of marketing the shares of a company whereby the

quantum and the price of the securities to be issued will be decided on the basis of the bids
received from the prospective shareholders by the lead merchant bankers is known as book-
building method .

6. Stock Option Method: A method of marketing the securities of a company whereby its
employees are encouraged to take up shares and subscribe to it is known as stock option . It is a
voluntary scheme on the part of the company to encourage employees participation in the
company. The scheme also offers an incentive to the employees to stay in the company.

7. Bought-out Deals Method: A method for marketing of securities of a body corporate

whereby the promoters of an unlisted company make an outright sale of a chunk of equity shares
to a single sponsor or the lead sponsor is known as bought-out deals . Sponsor forms a syndicate
with other merchant bankers for meeting the resource requirements and for distributing the risk.
The sale price is finalized through negotiations between the issuing company and the purchaser.
The investor-sponsor make a profit, when at a future date, the shares get listed and higher prices
prevail. Listing generally takes place at a time when the company is performing well in terms of
higher profits and larger cash generations from projects. Sale of these share at Over-the-Counter
Exchange of India (OTCEI) or at a recognized stock exchanges, the time of listing these
securities and off-loading them simultaneously are being generally decided in advance.

Table 1: Table 1: Resources Mobilised from the Primary Market (Rs. In crore)
Category - wise Issuer Type
Total
Period Public Rights Listed IPOs

No. Amt No. Amt No. Amt No. Amt No. Amt
1 2 3 4 5 6 7 8 9 10 11
2010-11 91 67,609 68 58,105 23 9,503 38 32,049 53 35,559
2011-12 71 48,468 55 46,093 16 2,375 17 6,953 54 41,515
2012-13 69 32,455 53 23,510 16 8,945 36 25,926 33 6,528
2013-14 90 55,652 75 51,075 15 4,576 52 54,416 38 1,236
2014-15 88 19,202 70 12,452 18 6,750 42 15,891 46 3,311
2015-16 108 58,166 95 48,927 13 9,239 34 43,351 74 14,815
2016-17 134 62,067 122 58,651 12 3,416 28 32,963 106 29,104
2017-18 231 110,269 210 88,869 21 21,400 30 26,585 201 83,684
Apr 17-Dec 14 4,611 140 64,183
160 73,138 146 68,527 20 8,956
17
Apr 18-Dec 6 1,843 103 13,947
124 44,355 118 42,513 21 30,408
18

Raising Funds Overseas by Indian Companies:

1.American Depository Receipt (ADR) :

 American Depository Receipt (ADR) is a certified negotiable instrument issued by
an American bank suggesting the number of shares of a foreign company that can be
traded in U.S. financial markets.
 American Depository Receipts provide US investors with an opportunity to trade in
shares of a foreign company
 The domestic company, already listed in its local stock exchange, sells its shares in bulk
to a U.S. bank to get itself listed on U.S. exchange.
 The U.S. bank accepts the shares of the issuing company. The bank keeps the shares in its
security and issues certificates (ADRs) to the interested investors through the exchange
2. Global Depository Receipt (GDR):
 GDRs are the global equivalent of the original American depositary receipts (ADR).
 It is a negotiable instrument which is denominated in some freely convertible currency.
GDRs for Citizens of any country.
 GDRs enable a company, the issuer, to access investors in capital markets outside of its
home country.
 Several international banks issue GDRs, such as JPMorgan
Chase, Citigroup, Deutsche Bank, The Bank of New York Mellon.
 GDRs are often listed in the Frankfurt Stock Exchange, Luxembourg Stock
Exchange, and the London Stock Exchange,
 Module II – Part 3 SECONDARY CAPITAL MARKET

Secondary market: functions of Secondary market, Instruments traded in Secondary Market,

Trading Mechanism in Secondary Market – Online trading , De-Materialization of Accounts ,
Brokers – Kinds of Brokers ,Registration of Brokers.

Meaning:

 The Secondary Market is a market in which existing securities are resold or traded.
 This market is also known as Stock Market.
 A Stock Exchange is defined U/S 2(3) of the Securities Contracts (Regulation) Act,1956
as “ anybody of individuals whether incorporated or not , constituted for the purpose of
assisting , regulating or controlling the business of buying ,selling or dealing in
securities.”
 In India the Secondary Market consists of recognised stock exchanges operating under
rules, by-laws and regulations dully approved by the government.
 These stock exchanges constitute an organised market where securities issued by the
central and state governments , public bodies and joint stock companies are traded.

Functions of the Secondary Market

 To facilitate liquidity and marketability of the outstanding equity and debt instrument.
 To contribute to economic growth through allocation of funds to the most efficient channel
through the process of disinvestment or reinvestment.
 To provide instant valuation of securities caused by changes in the internal environment
( company-wide and industry-wide factors).
 To ensure a measure of safety and fair dealing to protect investor’s interest.
 To induce companies to improve performance since market reflects their performance.
Development of Indian Stock Markets:

 Companies Act 1850

 The Native Share and Stock Brokers’Association (Bombay Stock Exachange – 1875
 Ahmedabad SE-1894
  Calcutta SE-1908
 Madras SE -1937
 In 1960 1203 Companies were listed.576 in Calcutta SE (CSE).
 Between 1947 and 1990 total number of recognised stock exchanges increased from 7 to
22, no. of listed companies from 1125 to 2471.
 Big reforms were introduced after 1991
Milestones in the history of Indian capital Market

Date Event
July ,1875 Native Share and Stock Brokers’ Association with 318 members were
formed in Bombay 9 latter on became Bombay Stock Exchange (BSE)
1925 The Bombay Securities Contract Control Act comes into force.
January ,1986 The BSE Sensex was launched as the first stock market index with
1978-79 as the base year.
April ,1988 The Securities and Exchange Board of India (SEBI) was set up.
January , 1992 SEBI was given statutory Powers.
May,1992 The Capital Issues Control Act 1947 is repealed
Nov. 1994 National Stock Exchange -NSE , the capital market segment starts
operation. For the first time screen based trading starts.
April ,1996 NIFTY is borne and National Securities Clearing Corporation Ltd
(NSCCL) ,India’s first clearing corporation was set up.
Nov.1996 The National Securities Depository Limited is created
May,1997 The BSE introduces screen based trading.
Feb.2000 Internet trading starts in NSE.
June 2000 The BSE and NSE introduce derivatives trading in India.
July 2001 SEBI bans carry forward and introduces rolling settlement.
Stock Market Vs Stock Exchange:

A stock market is the market where the trading of a company’s stocks – both listed and
unlisted securities takes place. So, Indian stock market includes all the stock exchanges across
the nation and all transactions that take place off-exchange as well.

Whereas a stock exchange is an organized marketplace where the members meet

(physically or otherwise) to trade company stock or other listed securities. The members could
be agents acting on behalf of their clients or could be principals representing their own accounts.

Therefore when one talks about a “stock market bubble” or says that “the stock market is
bullish”, one is speaking not about a particular stock exchange but of sentiments across all the
exchanges that make up the stock market.

Post Reform Market Scenario:

The Indian secondary market now has a four tier form , which includes

1. Regional Stock Exchanges

2. The National Stock Exchanges - (BSE and NSE).
3. The Over the Counter Exchange of India (OTCEI): For small and medium
companies.
4. The Inter connected Stock Exchange of India

Financial Instruments Traded in Secondary Market

Financial instruments mean documents that evidence the claims on income or asset.

Financial instruments in other words means as “any contract that gives rise to both a financial
asset on one enterprise and a financial liability or equity instrument of another enterprise”.

1. Securities: ‘Securities’ is a general term for a stock exchange investment. Securities are
generally classified into ownership securities and creditorship securities. Equity shares and
preference shares are ownership securities. They are also known as capital stock. Creditorship
securities are bonds, debentures etc. They are referred to as debt capital.
Securities Contract (Regulation) Act, 1956 defines securities as to include:

1. Shares, Scripts, Stocks, Bonds, Debentures.

2. Government Securities.
3. Such other instruments as may be declared by the Central government to be securities.
4. Rights or interests in securities and,
5. Derivatives
6. Securitized instruments.

1. Equity Shares:

Equity Shares are the ordinary shares of a limited company. It is an instrument, a

contract, which guarantees a residual interest in the assets of an enterprise after deducting all its
liabilities- including dividends on preference shares. Equity shares constitute the ownership
capital of a company. Equity holders are the legal owners of a company.

Blue Chip Shares: These are shares of Blue Chip Companies. Blue Chip Companies are
growth oriented companies showing signs of expansion, diversification, modernization of
technology etc. They have consistent profitability and profit margins to sustain consistent
dividend distribution. Colgate, Hindustan Lever, L&T, Reliance etc. are some examples of blue
chip companies

2. Preference Shares: The Companies Act (Sec, 85), 1956 describes preference shares as those
which Carry a preferential right to payment of dividend during the life time of the company and
Carry a preferential right for repayment of capital in the event of winding up of the company.

Preference shares have the features of equity capital and features of fixed income like
debentures. They are paid a fixed dividend before any dividend is declared to the equity holders.
3. Debentures: Debenture is an instrument under seal evidencing debt. The essence of debenture
is admission of indebtedness. It is a debt instrument issued by a company with a promise to pay
interest and repay the principal on maturity. Debenture holders are creditors of the company.

4. Bonds: Bonds are debt instruments that are issued by governments/government owned
companies to raise funds for financing their capital requirements. By purchasing a bond, an
investor lends money for a fixed period of time at a predetermined interest (coupon) rate. Bonds
have a fixed face value, which is the amount to be returned to the investor upon maturity of the
bond.

During this period, the investors receive a regular payment of interest, semi-annually or
annually, which is calculated as a certain percentage of the face value and known as a ‘coupon
payment.’ Bonds can be issued at par, at discount or at premium. A bond, whether issued by a
government or a corporation, has a specific maturity date, which can range from a few days to
20-30 years or even more.

Both debentures and bonds mean the same. In Indian parlance, debentures are issued by
corporate and bonds by government or semi-government bodies

5. Derivative: A derivative is a financial security with a value that is reliant upon or derived
from, an underlying asset or group of assets—a benchmark. The derivative itself is a contract
between two or more parties, and the derivative derives its price from fluctuations in the
underlying asset. The most common types of derivatives are futures, options, forwards and
swaps.

It is a financial instrument which derives its value/price from the underlying assets.
Originally, underlying corpus is first created which can consist of one security or a combination
of different securities. The value of the underlying asset is bound to change as the value of the
underlying assets keep changing continuously. Generally stocks, bonds, currency, commodities
and interest rates form the underlying asset.
Trading Mechanism in Stocks

Basically stock exchange is an entity that provides facility or service to the broker and trader to
trade on stocks, bonds, derivatives.
In India the following two stock exchanges have predominant position and nationwide presence

 BSE (Bombay Stock Exchange)

 NSE (National Stock Exchange)

NSE: NSE operates on the 'National Exchange for Automated Trading' (NEAT) system, a fully
automated screen based trading system, which adopts the principle of an order driven
market. NSE consciously opted in favour of an order driven system as opposed to a quote driven
system.

BSE: The trading platform used by BSE is called BOLT-Bombay Online Trading. The order of
investors is placed on the basis of time and price basis.

Online Trading: Trading online is an act of buying and selling of products on the web.
This trading is like any other trading, except, the process takes place virtually.

Online trading is simply buying and selling assets through a brokerage's internet-based
proprietary trading platforms Stocks, bonds, mutual funds, ETFs, options, futures, and currencies
can all be traded online. Also known as e-trading or self-directed investing. NSE was first to
offer online trading in India.

NSE operates on the 'National Exchange for Automated Trading' (NEAT) system, a fully
automated screen based trading system, which adopts the principle of an order driven market.

BSE online trading was established in 1995 and is the first exchange to be set up in
Asia. The BSE provides an efficient and transparent market for trading in debt instruments,
equity and derivatives. This is performed through a system known as BOLT - BSE's Online
Trading System
Trading Mechanism:

In order to induce more transparency and efficiency in the trading system, NSE and BSE
introduced nationwide online fully automated “Screen Based Trading System”. The trading
platform used by BSE is called BOLT-Bombay Online Trading. The order of investors is placed
on the basis of time and price basis. Recently BSE has launched new software for trading called
BEST (BSE Electronic Smart Trader).

Trading Process
STEP 1: Finding a Broker

A broker acts as an intermediary or a mediator between the investor and the stock exchange. The
work of a broker is transfer of order electronically from the investor to the exchange. Any
transaction that occurs in stock market is taken care by the stock exchange. Normally in India the
stock exchange for trading is active from 9:15 AM to 3:30 PM. However from 1st October, 2018
SEBI has decided to extend the trading hours till 11:55 pm in a move to attract the investors
dealing in Indian products on overseas exchanges.

STEP 2: Opening Account With the Broker

A broker always opens a trading account in the name of the investor/ client only if he/she is
satisfied about the credit worthiness of the client. If the broker feels satisfied with the client
he/she will open the account by writing the client’s name in the broker’s book. The minimum
requirement for opening a trading account is PAN card, and bank account failing to which the
account cannot be opened.

STEP 3: Placing the Order

After the account is opened successfully a notification will be provided via email or message.
Then the investor can begin the trading as per his/her wish. The trading or investment is done by
purchasing a specified number of shares of a particular company. The order when placed is
incomplete until the order status shows complete.

STEP 4: Execution of the Order

The orders are executed by the broker on behalf of the clients. The buy orders must tally the sell
orders if not then the broker will sell/buy to match the order. For this the broker charges an
amount. Normally in an electronic platform the execution occurs automatically.

STEP5: Preparation of Contract Notes

A contract note is a written agreement between the broker and the investor for smooth execution
of the transaction. A contract note is sent through an automated message and via mail through
the registered phone and mail respectively by the end of the day. However it varies from broker
to broker and the timing varies.
A contract contains the transaction name, brokerage charges, trading on BSE/ NSE, SEBI
registration number of the broker, settlement number and a digital signature by the broker.

STEP 6: Contract Settlement

The settlement is done by the clearing agency which functions in each stock exchange. The
clearing agency delivers the share certificates by the end of the day.
Types of Orders:

1. Buy Orders: Buy orders are placed when the price of the share is expected to rise.
2. Sell Orders: Sell orders are executed when the investor feels that the price of the share
will decline from now on.
3. Limit order: It is an order for buying or selling of securities at a particular price as set by
the investor. However there is no guarantee that the limit order will be executed.
4. Stop Loss order: It is an order to sell the shares as soon as the price of the share falls up
to a particular level or from the buy side to buy the share when the price rises up to a
specified level. This is set by the client to avert the loss which can occur in share market.
This is done to not suffer loss more than the specified limit.
5. Fixed Price order: When the investor specifies the price at which he/she wants to
buy/sell the shares is called fixed price order.
6. Market order: A market order is executed at CMP (Current Market Price). It occurs
mainly during intraday trading. When the buyer has bought the shares and has not sold
the shares before 3:15pm then from the broker side the shares are sold at CMP.
7. Discretionary order: It is normally done by the broker from their side when the investor
has complete faith and trusts the broker. It is an order to the broker to buy/sell the shares
at whatever price the broker thinks will be good for the investor.
8. Cancel order: If the price is not matched then the order is cancelled and new fresh orders
have to be placed again. Also, however if the margins are insufficient then order is
cancelled. In that case the trader has to place order with a reduced number of order
quantity.
9. Day order: The validity of these orders is for the day in which they are put in the trading
platform. However if they are not executed (buy/sell) then the orders are cancelled
automatically from the broker side.
10. Good Till Day order: An order can be placed by the investor specifying the number of
days for which the orders will remain open. However even after the price level is not met
then the order has to be cancelled and it is automatically cancelled.
Trading Cycle:

Settlement of Trades

Intraday vs Carry Forward :

When you purchases and sales the shares, Intraday means the purchase of the shares and sell
them on the same day or vice versa.

In carry forward, You purchases the shares and not sell them on same day. You should have
sufficient margin in your account if you desires to carry forward your Holdings otherwise your
Broker/Sub Broker would sell it very next day at prevailing prices. Also, Brokerage in Carry
Forward is Higher than Intraday.

Settlement:
Regular Settlement: A situation in which a buyer or, more commonly, his/her broker, receives
delivery of the securities he/she bought and makes payment for them on the normal
settlement date.
Old Settlement System: (Badla or Carry forward System -14 Days settlement period)
Ordinarily, a buyer/seller of securities is supposed to take/provide delivery thereof and
pay/receive the consideration at the end of each settlement period. But, on Indian stock markets,
he enjoys an option of carrying forward his transaction.

The carry forward facility enables him to defer or postpone his commitments to the next
settlement period The process may be repeated several times subject to the rule that it will not be
permitted beyond 90 days and at the end of this period, the transaction must be completed either
by restoring to squaring up’ or by receiving/effecting actual delivery.

This facility is available in respect of Category ‘A’/cleared/forward shares only. It has

often been abused by the leading market players to either jack up or push down the prices of their
favorite scripts resulting in undue heavy speculation and securities scam.
Rolling Settlement :
A rolling settlement is the process of settling security trades on successive dates based
upon the specific date when the original trade was made so that trades executed today will have
a settlement date one business day later than trades executed yesterday
Trade life Cycle in NSE -Dematerialised settlement

In a rolling settlement , each trading day is considered as a trading period and trades
executed during the day are settled based on net obligations for the day. In India, trades in rolling
settlement are settled on a T+2 basis i.e. on the 2nd working day after a trade

For all trades executed on the T day, NSE Clearing determines the cumulative obligations
of each member on the T+1 day and electronically transfers the data to Clearing Members
(CMs). All trades concluded during a particular trading date are settled on a designated
settlement day i.e. T+2 day.
Dematerialisation of Account:

Meaning: Dematerialization is a process through which physical securities such as share

certificates and other documents are converted into electronic format and held in a Demat
Account.

Depository: Depository is a place where financial securities are held in dematerialised form. It is
responsible for maintenance of ownership records and facilitation of trading in dematerialised
securities.

A depository is responsible for holding the securities of a shareholder in electronic form,

these securities could be in the form of Share Certificates, bonds, government securities, and
mutual fund units,

Currently, there are two depositories registered with SEBI and are licensed to operate in
India: National Securities Depository Ltd (NSDL) and Central Securities Depository Ltd
(CDSL). Various Depository Participants linked to each one of them in India. All the details in
form of electronic records of equity and debt are kept there.

Depository Participant (DP) : A Depository Participant (DP) is described as an Agent (law) of

the depository. They are the intermediaries between the depository and the investors.

Depository interacts with its clients or investors through its agents, called Depository
Participants normally known as DPs. For any investor or client, to avail the services provided by
the Depository, has to open Depository account, known as Demat A/c, with any of the DPs.

Process of Dematerialization: The detailed process of Dematerialisation as under:

Dematerialisation starts with opening a Demat account. For demat account opening, the
investor needs to shortlist a Depository Participant (DP) that offers Demat services. Once the
Demat Account is opened, the investor (registered owner) is required to submit a request to the
DP in the Dematerialisation Request Form (DRF) for dematerialisation along with the
certificates of securities (Share Certificates) to be dematerialised. On each share certificate,
“Surrendered for Dematerialisation” needs to be mentioned. The DP verifies the details filled in
the DRF including the certificates. The scrutiny involves Verification of Client's signature on
 the dematerialisation request with the specimen signature, comparison of the names on DRF and
certificates with the client account, paid up status, distinctive numbers etc. If the form and
security count is in order, the DP issues an acknowledgement slip duly signed and stamped, to
the client.

Brokers , Kinds of Brokers and registration of Brokers:

Broker is a person who buys and sells securities for his clients in the stock exchange for a fee or
commission.

Broker is a regulated professional who buys and sells financial instruments on the behalf of a
client and charges a fee for doing so. Clients can be individual investors or companies. The
financial instruments that are bought or sold can come in many forms including
shares, derivatives, bonds, stocks and so on. A broker can work alone but they are usually part of
a brokerage firm. Brokers exist not only in financial markets, but also real estate, commodities
and even the art and antique markets..

Types of Brokers:

1. Commission Broker: All brokers buy and sell securities for earning a commission. From
the investor’s point of view, he is the most important member of the exchange because
his main function and responsibility is to buy and sell stock for his customers. He acts as
an agent for his customer and earns a commission for the service performed. He is an
independent dealer in securities. He purchases and sells securities in his own name. He is
not allowed to deal with non-members. He can either deal with a broker or another
jobber.
2. Jobbers: They are professional independent brokers engaged in buying and selling of
specified securities in their own name. Jobbers cannot deal on behalf of public and are
barred from taking commission. They deal with brokers who in turn transact on behalf of
the public. A jobber deals in a limited number of securities which he tracks regularly.
Jobbers generally quote two prices, one at which he is prepared to purchase and the
other at which he is prepared to sell a security. This two way price is known as
‘double-barrelled price‘.
3. Odd Lot dealers: They specialize in buying and selling of securities in odd lots. They
buy odd lot units at a lesser price.
 4. Sub-brokers/Remisiers: Sub-brokers are agents of stock brokers. Since they are not
members of a stock exchange, he cannot directly deal in securities. He helps clients to
buy and sell securities only through the stock broker. In the Bombay Stock Exchange the
sub-brokers are termed as ‘Remisiers‘. They receive a share in the brokerage
commission that a commission broker charges to his client.

Registration of Brokers:

Under Section 12(1) of the Securities & Exchange Board of India Act 1992, no stock broker shall buy or

sell or deal in securities except under, and in accordance with the conditions of a certificate of registration

obtained from the Securities & Exchange Board of India (SEBI) in accordance with the Rules and

Regulations made thereunder. In case of a present member stock broker of recognised Stock Exchanges,

he may continue to do his present business, if he has made an application for such registration within a

period of 3 months from the establishment of the Board,

Registration of Sub-Brokers: All Sub-Brokers are required to obtain a Certificate of Registration from

SEBI without which they are not permitted to deal in securities.

Demutualisation of Stock Exchanges

Demutualisation is the process by which any member-owned organization can become a

shareholder –owned company. Such a company could either be listed on a stock exchange or be
closely held by its shareholders.

Through demutualization a stock exchange becomes a corporate entity , changing from a non-
profit making company to a profit making and tax- paying company. Demutualization separates
the ownership and control of stock exchanges from the trading rights of its members.
Demutualization process is similar to a company going public. The BSE completed the process
in 1997. NSE is in the form of a company right from its starts.
Listing of Securities:

Listing means the admission of securities of a company to trading on a stock exchange. Listing is
not compulsory under the Companies Act. It becomes necessary when a public limited company
desires to issue shares or debentures to the public. When securities are listed in a stock exchange,
the company has to comply with the requirements of the exchange.

Objectives of Listing:

The major objectives of listing are

1. To provide ready marketability and liquidity of a company’s securities.

2. To provide free negotiability to stocks.
3. To protect shareholders and investors interests.
4. To provide a mechanism for effective control and supervision of trading.