Financial Markets and Institutions

B.Com 6th Semester Study Material

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Introduction

A financial market is a market in which financial assets (securities) such as stocks and
bonds can be purchased or sold. Funds are transferred in financial markets when one
party purchases financial assets previously held by another party. Financial markets
facilitate the flow of funds and thereby allow financing and investing by households, firms,
and government agencies. This chapter provides some background on financial markets
and on the financial institutions that participate in them.

Indian Financial System – An Overview

The services that are provided to a person by the various Financial Institutions including
banks, insurance companies, pensions, funds, etc. constitute the financial system.

Given below are the features of the Indian Financial system:

 It plays a vital role in the economic development of the country as it encourages

both savings and investment
 It helps in mobilizing and allocating one’s savings
 It facilitates the expansion of financial institutions and markets
 Plays a key role in capital formation
 It helps form a link between the investor and the one saving
 It is also concerned with the Provision of funds

Components of Indian Financial System

There are four main components of the Indian Financial System. This includes:

Financial Institutions

Financial Assets

Financial Services

Financial Markets

Let’s discuss each component of the system in detail.

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1. Financial Institutions

The Financial Institutions act as a mediator between the investor and the borrower. The
investor’s savings are mobilised either directly or indirectly via the Financial Markets.

The main functions of the Financial Institutions are as follows:

 A short term liability can be converted into a long term investment

 It helps in conversion of a risky investment into a risk-free investment
 Also acts as a medium of convenience denomination, which means, it can match a
small deposit with large loans and a large deposit with small loans
 The best example of a Financial Institution is a Bank. People with surplus amounts
of money make savings in their accounts, and people in dire need of money take
loans. The bank acts as an intermediate between the two.

The financial institutions can further be divided into two types:

 Banking Institutions or Depository Institutions – This includes banks and other

credit unions which collect money from the public against interest provided on the
deposits made and lend that money to the ones in need
 Non-Banking Institutions or Non-Depository Institutions – Insurance, mutual funds
and brokerage companies fall under this category. They cannot ask for monetary
deposits but sell financial products to their customers.

Further, Financial Institutions can be classified into three categories:

 Regulatory – Institutes that regulate the financial markets like RBI, IRDA, SEBI, etc.
 Intermediates – Commercial banks which provide loans and other financial
assistance such as SBI, BOB, PNB, etc.
 Non Intermediates – Institutions that provide financial aid to corporate customers.
It includes NABARD, SIBDI, etc.

2. Financial Assets

The products which are traded in the Financial Markets are called Financial Assets. Based
on the different requirements and needs of the credit seeker, the securities in the market
also differ from each other.

Some important Financial Assets have been discussed briefly below:

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  Call Money – When a loan is granted for one day and is repaid on the second day,
it is called call money. No collateral securities are required for this kind of
transaction.
 Notice Money – When a loan is granted for more than a day and for less than 14
days, it is called notice money. No collateral securities are required for this kind of
transaction.
 Term Money – When the maturity period of a deposit is beyond 14 days, it is called
term money.
 Treasury Bills – Also known as T-Bills, these are Government bonds or debt
securities with maturity of less than a year. Buying a T-Bill means lending money
to the Government.
 Certificate of Deposits – It is a dematerialised form (Electronically generated) for
funds deposited in the bank for a specific period of time.
 Commercial Paper – It is an unsecured short-term debt instrument issued by
corporations.

3. Financial Services

Services provided by Asset Management and Liability Management Companies. They help
to get the required funds and also make sure that they are efficiently invested.

The financial services in India include:

 Banking Services – Any small or big service provided by banks like granting a loan,
depositing money, issuing debit/credit cards, opening accounts, etc.
 Insurance Services – Services like issuing of insurance, selling policies, insurance
undertaking and brokerages, etc. are all a part of the Insurance services
 Investment Services – It mostly includes asset management
 Foreign Exchange Services – Exchange of currency, foreign exchange, etc. are a part
of the Foreign exchange services

The main aim of the financial services is to assist a person with selling, borrowing or
purchasing securities, allowing payments and settlements and lending and investing.

4. Financial Markets

The marketplace where buyers and sellers interact with each other and participate in the
trading of money, bonds, shares and other assets is called a financial market.

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The financial market can be further divided into four types:

 Capital Market – Designed to finance the long term investment, the Capital market
deals with transactions which are taking place in the market for over a year. The
capital market can further be divided into three types:

(a)Corporate Securities Market

(b)Government Securities Market

(c)Long Term Loan Market

 Money Market – Mostly dominated by Government, Banks and other Large

Institutions, the type of market is authorized for small-term investments only. It is
a wholesale debt market which works on low-risk and highly liquid instruments.
The money market can further be divided into two types:

(a) Organized Money Market

(b) Unorganized Money Market

 Foreign exchange Market – One of the most developed markets across the world,
the Foreign exchange market, deals with the requirements related to multi-
currency. The transfer of funds in this market takes place based on the foreign
currency rate.
 Credit Market – A market where short-term and long-term loans are granted to
individuals or Organizations by various banks and Financial and Non-Financial
Institutions is called Credit Market.

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Financial Institutions
A financial institution (FI) is a company engaged in the business of dealing with financial
and monetary transactions such as deposits, loans, investments, and currency exchange.
Financial institutions encompass a broad range of business operations within the financial
services sector including banks, trust companies, insurance companies, brokerage firms,
and investment dealers. Virtually everyone living in a developed economy has an ongoing
or at least periodic need for the services of financial institutions.

Types of Financial Institutions:

1. Central Banks: Central banks are the financial institutions responsible for the oversight
and management of all other banks. In the United States, the central bank is the Federal
Reserve Bank, which is responsible for conducting monetary policy and supervision and
regulation of financial institutions.1

Individual consumers do not have direct contact with a central bank; instead, large
financial institutions work directly with the Federal Reserve Bank to provide products and
services to the general public.

2. Retail and Commercial Banks: Traditionally, retail banks offered products to individual
consumers while commercial banks worked directly with businesses. Currently, the
majority of large banks offer deposit accounts, lending, and limited financial advice to
both demographics. Products offered at retail and commercial banks include checking and
savings accounts, certificates of deposit (CDs), personal and mortgage loans, credit cards,
and business banking accounts.

3. Internet Banks: A newer entrant to the financial institution market is internet banks,
which work similarly to retail banks. Internet banks offer the same products and services
as conventional banks, but they do so through online platforms instead of brick and
mortar locations. Under internet banks, there are two categories: digital banks and neo-
banks. Digital banks are online-only platforms affiliated with traditional banks. However,
neobanks are pure digital native banks with no affiliation to any bank but themselves.2

4. Credit Unions: Credit unions serve a specific demographic per their field of
membership, such as teachers or members of the military. While the products offered
resemble retail bank offerings, credit unions are owned by their members and operate
for their benefit.

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5. Savings and Loan Associations: Financial institutions that are mutually held and
provide no more than 20% of total lending to businesses fall under the category of savings
and loan associations. Individual consumers use savings and loan associations for deposit
accounts, personal loans, and mortgage lending.

6. Investment Banks and Companies: Investment banks do not take deposits; instead,
they help individuals, businesses and governments raise capital through the issuance of
securities. Investment companies, traditionally known as mutual fund companies, pool
funds from individuals and institutional investors to provide them access to the broader
securities market. Robo-advisors are the new breed of such companies, enabled by
mobile technology to support investment services more cost-effectively and provide
broader access to investing by the public.

7. Brokerage Firms: Brokerage firms assist individuals and institutions in buying and
selling securities among available investors. Customers of brokerage firms can place
trades of stocks, bonds, mutual funds, exchange-traded funds (ETFs), and some
alternative investments.

8. Insurance Companies: Financial institutions that help individuals transfer the risk of
loss are known as insurance companies. Individuals and businesses use insurance
companies to protect against financial loss due to death, disability, accidents, property
damage, and other misfortunes.

9. Mortgage Companies: Financial institutions that originate or fund mortgage loans are
mortgage companies. While most mortgage companies serve the individual consumer
market, some specialize in lending options for commercial real estate only.

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Merchant Banking
In modern terms, a merchant bank is a firm or financial institution that invests equity
capital directly in businesses and often provides those businesses with advisory services.
A merchant bank offers the same services as an investment bank; however, it typically
services smaller clients and makes direct equity investments in them.

Merchant banks mainly work with small-scale enterprises that are unable to raise funds
through an initial public offering (IPO) by providing mezzanine financing, bridge financing,
equity financing, and corporate credit products. They also issue and sell securities on
behalf of corporations through private placements to refined investors who require less
regulatory disclosure.

Large merchant banks place equity privately with other financial institutions by acquiring
a considerable share of ownership from companies with a significant potential for high
growth rate to seal the gap between venture capital and public stock.

Functions of Merchant Banks

Merchant banks perform a number of functions, including the following:

1. Equity Underwriting

Large companies often employ the services of merchant banks in acquiring capital
through the stock market. Equity underwriting is achieved by evaluating the amount of
stock to be issued, the value of the business, the use of proceeds, and the timing of
issuance of the new stock. Merchant banks handle all the necessary paperwork and liaison
with the appropriate marketing division to advertise the stock.

2. Credit Syndication

Merchant banks help in processing loan applications for short and long-term credit from
financial institutions. They provide these services by estimating total costs involved,
developing a financial plan for the entire project, as well as adopting a loan application
for commercial lenders.

Also, they assist in choosing the ideal financial institutions to provide credit facilities and
act on the terms of the loan application with the financiers. Merchant banks also ensure
the lender’s willingness to participate, organize bridge finance, and engage in legal

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formalities regarding investment to be approved and checking the working capital
requirements.

3. Portfolio Management

Merchant banks provide portfolio management services to institutional investors and

other investors. They help in the management of securities to enhance the value of the
underlying investment. Merchant banks may assist their clients in the purchase and sale
of securities to help them attain their investment objectives.

Investment Bank vs. Merchant Bank

Although there is somewhat a thin line between traditional merchant banks and
investment banks, the financial institutions differ in several ways. First, merchant banks
serve small-scale companies that may not be big enough to attract funding from venture
capitalists and other large investors.

Merchant banks offer such companies creative credit products such as bridge financing,
equity financing, and mezzanine financing. They place equity with other financial
institutions and take ownership of small but promising companies.

Investment banks, on the other hand, focus on underwriting and selling securities through
initial public offerings (IPO) and share offerings. Unlike merchant banks that focus on
small companies with potential for growth, an investment bank’s clientele comprises
large companies with enough resources to finance the sale of securities to the public.
Investment banks advise their clients on mergers and acquisitions, buyouts, and capital
restructuring, among other services.

Traditional merchant banks mainly focus on international financing activities including

trade finance, foreign corporate investment, and foreign real estate investment. Some of
these activities may be shared with investment banks, but there are other functions like
issuing letters of credit and international funds transfer that are predominantly carried
out by merchant banks.

Investment banks focus on raising funds for corporations and governments and issuing
debt or equity on the market. This is a transition from their traditional roles of
underwriting and selling securities. Investment banks also help in mergers and
acquisitions as well as buying and selling large companies.

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Non-Banking Finance companies:
Non-Banking Financial Companies (NBFC) are establishments that provide financial
services and banking facilities without meeting the legal definition of a Bank. They are
covered under the Banking regulations laid down by the Reserve Bank of India and
provide banking services like loans, credit facilities, TFCs, retirement planning, investing
and stocking in the money market. However, they are restricted from taking any form of
deposits from the general public. These organizations play a crucial role in the economy,
offering their services in urban as well as rural areas, mostly granting loans allowing for
the growth of new ventures.

NBFCs also provide a wide range of monetary advice like chit-reserves and advances.
Hence it has become a very important part of our nation’s Gross Domestic Product and
NBFCs alone count for a 12.5% rise in the Gross Domestic Product of our country. Most
people prefer NBFCs over banks as they find them safe, efficient, and quick in assisting
with financial requirements. Moreover, there are various loan products available and
there is flexibility and transparency in their service

Top NBFCs in India:

Power Finance Corporation Limited

Power Finance Corporation Limited was founded in 1986 and is a Navratna Status
company. Rajeev Sharma is the Chairman & Managing Director of the company. Power
Finance Corporation Limited is known to provide financial assistance to different power
projects in the country. It supports organizations involved in Power generation,
transmission, and distribution. The company is also listed on the National Stock Exchange
(NSE) and Bombay Stock Exchange (BSE).

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Shriram Transport Finance Company Limited

Shriram Transport Finance Company Limited focuses on funding commercial and business
vehicles, besides others. The company was founded in 1979 and has been offering funding
services for Light Duty Trucks, Heavy Duty Trucks, Mini Trucks, Passenger Vehicles,
Construction Vehicles, and Farm Equipments. The company’s specialization is in general
insurance, mutual funds, common assets, stock broking, and general protection.

Bajaj Finance Limited

Bajaj Finserv was founded in 2007 and is a unit of Bajaj Holdings and Investments. It offers
loans to doctors for career enhancement, home loans, gold loans, individual loans,
business, and entrepreneur loans, and is an extremely popular finance company. Apart
from these, Bajaj Finserv also provides services like wealth advisory, lending money, and
general insurance. It has over 1400 branches across the country with more than 20000
employees.
Mahindra & Mahindra Financial Services Limited

Mahindra & Mahindra Financial Services Limited (MMFSL) was established in 1991 and
has over 1000 branches, and a customer base of over 3 million, all over the country.
MMFSL is one of the most renowned organizations and has two affiliates offering
Insurance services and rural housing financial services. It also specializes in offering gold

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advances, vehicle advances, corporate advances, home credits, working capital advances,
and much more.
Muthoot Finance Ltd

Muthoot Finance Ltd is India’s first NBFC tracing its history back to 1888 when it began as
a small lender from a village in Kerala. Muthoot Finance Ltd sanctions loans only against
pledge of gold ornaments. It is a leader in India’s gold loan and finance market. Besides
financing gold transactions, Muthoot Finance Ltd offers foreign exchange services, money
transfers, wealth management services, travel, and tourism services. Gold coins are also
sold at Muthoot Finance Branches. The company has its headquarters in Kerala, India, and
operates over 4,400 branches throughout the country. It is also the parent company of
Muthoot Housing Finance (India) Ltd, which offers home loans.
HDB Finance Services

HDB Financial Services is operated by India’s largest private-sector HDFC Bank. It offers a
variety of secured and non-secured financial loans through a network of more than 1,000
branches in 22 Indian states and 3 Union Territories. It provides secured and unsecured
loans, including personal and business loans, doctor's loans, auto loans, gold loans, new
to credit loans, enterprise business loans, consumer durables loans, construction
equipment loans, new and used car loans, equipment loans, and tractor loans. The
company operates through Lending Business and BPO Services segments. It is considered
the fastest growing NBFC in India today.

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Cholamandalam

Cholamandalam Investment and Finance Company Limited (Chola), was incorporated in

1978 as the financial services arm of the Murugappa Group. Chola started as an
equipment financing company and has surged ahead as a complete financial services
provider offering all kinds of services like - vehicle finance, home loans, home equity
loans, SME loans, investment advisory services, stockbroking, and a host of other financial
services to customers. Chola has 725 branches across India with assets under
management above INR 35,000 Crores.
Tata Capital Financial Services Ltd

Tata Capital Financial Services Limited is top of India’s leading NBFCs. Established in 2007,
it is a subsidiary of Tata Sons Limited. TCFS describes itself as a one-stop financial service
provider that caters to the diverse needs of retail, corporate and institutional customers
across businesses. It is registered with RBI as ‘Systemically Important Non-Deposit
Accepting Non-Banking Financial Company (NBFC)’. Among the various products offered
by TCFS to individuals, families, and businesses, are commercial finance, infrastructure
finance, wealth management, consumer loans, and distribution and marketing of Tata
Cards.
L & T Finance Limited

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 L & T Finance Limited is a strong player in the non-
banking financial sector and was established in 1994. Headquartered in Mumbai, L & T
offers funding services to different sectors like trade, industry, agriculture, Commercial
Vehicle loans, Individual Vehicle loans, and corporate and rural loans. The company caters
to more than 10 lakh people. In 2010, L & T was awarded the “Company of the year” in
the Economic Times awards.
Aditya Birla Finance Ltd.

Aditya Birla Finance Limited, a part of the Aditya Birla Financial Services, was incorporated
in 1991 and is an ISO 9001:2008 certified NBFC. ABFL is registered with RBI as a
‘systemically important non-deposit accepting NBFC’ and it ranks among the top five
largest private diversified NBFCs in India. It offers precise and customized solutions across
a wide range, from corporate finance to commercial mortgage, and from capital markets
to structured finance.

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Money Market Instruments

As per the Reserve Bank of India, the term ‘Money Market’ is used to define a market
where short-term financial assets with a maturity up to one year are traded. The assets
are a close substitute for money and support money exchange carried out in the primary
and secondary market. In other words, the money market is a mechanism which facilitate
the lending and borrowing of instruments which are generally for a duration of less than
a year. High liquidity and short maturity are typical features which are traded in the
money market. The non-banking finance corporations (NBFCs), commercial banks, and
acceptance houses are the components which make up the money market.
Money market is a part of a larger financial market which consists of numerous smaller
sub-markets like bill market, acceptance market, call money market, etc. Besides, the
money market deals are not out in money / cash, but other instruments like trade bills,
government papers, promissory notes, etc. But, the money market transactions can’t be
done through brokers as they have to be carried out via mediums like formal
documentation, oral or written communication.

What are Money Market Instruments?

As the name suggests, money market instrument is an investment mechanism that allows
banks, businesses, and the government to meet large, but short-term capital needs at a
low cost. They serve the dual purpose of allowing borrowers meet their short-term
requirements and providing easy liquidity to lenders.
Examples of Money Market Instrument

 Banker’s Acceptance
 Treasury Bills
 Repurchase Agreements
 Certificate of Deposits

 Commercial Papers

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Features of Money Market Instruments

 Liquidity: They are considered highly liquid as they are fixed-income securities
which carry short maturity periods of a year or less.
 Safety: Since the issuers of money market instruments have strong credit ratings,
it automatically means that the money instruments issued by them will also be
safe.
 Discounted price: One of the main features of money market instruments is that
they are issued at a discount on their face value.

Functions of Money Market Instruments:

Provides Funds
The Money Market Instruments help to provide short-term funds to the private and public
institutions who need finance for their working capital requirements. These funds are
provided by discounting the trade bills through commercial banks, brokers, discount
houses, and acceptance houses. Therefore, the money market instruments, in turn, can
help the development of trade, industry and commerce within and outside the country.

Use of Surplus Funds

Money market instruments provide opportunity to the banks and financial institutions to
use their surplus funds profitably for a small period of time. They include commercial
banks as well as large non-financial corporations, states and other local governments.

No need to borrow from banks

In case of a developed money market, there is no need to borrow money from commercial
and central bank. However, if there is a short of cash requirement, they can call in some
of their loans from the money market. Also, the most of the commercial banks would
rather prefer to recall their loans than recalling it from the central banks at a higher rate
of interest.

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Helps Government
The money market instruments prove helpful to the government in borrowing short-term
funds on the basis of treasury bills at low interest rates. Besides, it would lead to
inflationary pressures in the economy if the Government had to issue paper money or
borrow from the central bank.

Helps in Monetary Policy

The existence of a well-developed money market will help in successfully implementing
the monetary policies of central bank. Is only through money market the central banks
can control the banking system and therefore Influence commerce and the industry.

Helps in Financial Mobility

The Monet market helps in financial stability by smoothening the transfer for funds from
one sector to another. And, financial mobility is important for the development of
commerce and industry.

Promotes Liquidity and Safety

Apart from encouraging savings and investments, the money market instruments
promote liquidity and safety of financial assets.

Equilibrium between Demand and Supply of Funds

The money market brings a balance between the demand and supply of loanable funds
by allocating saving into investment channels.

Economy in Use of Cash

The money market instruments deal with assets which are not cash but equivalent to cash
and thus help in economizing the use of cash. And hence it can be considered as a
convenient way to transfer funds from one place to another.

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Important Objectives of Money Market Instruments
Following are the objectives of served by a money market:
 The money markets not only help in the storage of short-term surplus funds but
also help in lowering short term deficits.
 Money markets helps the central bank in regulating liquidity in the economy.
 Money market assists the short-term fund users to fulfill their needs at a very
reasonable rate.
 It helps in the development of capital market and trade and industry.
 Money markets help in designing effective monetary policies.

 It also facilitates in streamlined functioning of commercial banks.

Instruments of the Money Market

Following are the types of Money Market Instruments:

Promissory Note:
A promissory note is one of the earliest type of bills. It is a financial instrument with a
written promise by one party, to pay to another party, a definite sum of money by
demand or at a specified future date, although it falls in due for payment after 90 days
within three days of grace. However, Promissory notes are usually not used in the
business, but USA is an exception.

Bills of exchange or commercial bills

The bills of exchange can be compared to the promissory note; besides it is drawn by the
creditor and is accepted by the bank of the debater. The bill of exchange can be
discounted by the creditor with a bank or a broker. Additionally, there is a foreign bill of
exchange which becomes due for payment from the date of acceptance. However, the
remaining procedure is the same for the internal bills of exchange.

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Treasury Bills (T-Bills)

 The Treasury bills are issued by the Central Government and known to be one of
the safest money market instruments available. Besides, they carry zero risk, so
the returns are not attractive. Also, they come with different maturity periods like
1 year, 6 months or 3 months and are also circulated by primary and secondary
markets. The central government issues them at a lesser price than their face-
value.
 The difference of maturity value of the instrument and the buying price of the bill,
which is decided with the help of bidding done via auctions, is basically the interest
earned by the buyer.
 There are three types of treasury bills issued by the Government of India currently
that is through auctions which are 91-day, 182-day and 364-day treasury bills.

Call and Notice Money

Call and Notice Money exist in the market. With respect to Call Money, the funds are
borrowed and lent for one day, whereas in the Notice Market, they are borrowed and
lent up to 14 days, without any collateral security. The commercial banks and cooperative
banks borrow and lend funds in this market. However, the all-India financial institutions
and mutual funds only participate as lenders of funds.

Inter-bank Term Market

The inter-bank term market is for the cooperative and commercial banks in India who
borrow and lend funds for a period of over 14 days and up to 90 days. This is done without
any collateral security at the rates determined by markets.

Commercial Papers (CPs)

 Commercial papers can be compared to an unsecured short-term promissory note

which is issued by top rated companies with a purpose of raising capital to meet
requirements directly from the market.
 They usually have a fixed maturity period which can range anywhere from 1 day up to
270 days.

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 They offer higher returns as compared to treasury bills. They are automatically not as
secure in comparison. Also, Commercial papers are traded actively in secondary
market.

Certificate of Deposits ( CD’s )

 This functions as a deposit receipt for money which is deposited with a financial
organization or bank. The Certificate of Deposit is different from a Fixed Deposit
receipt in two ways. i. Certificate of deposits are issued only of the sum of money is
huge. ii. Certificate of deposit is freely negotiable.
 The RBI first announced in 1989 that the Certificate of Investments have become the
most preferred choice of organization in terms of investments as they carry low risk
whilst providing high interest rates than the Treasury bills and term deposits.
 CD’s are also issued at discounted price like the Treasury bills and they range between
a span of 7 days up to 1 year.
 The Certificate of Deposit issued by banks range from 3 months, 6 months and 12
months.
 Note: CD’s can be issued to individuals (except minors), companies, corporations,
funds, non–resident Indians, etc.

Banker’s Acceptance (BA)

 A Banker’s Acceptance is a document that promises future payment which is

guaranteed by a commercial bank. Also, it is used in money market funds and will
specify the details of repayment like the date of repayment, amount to be paid, and
details of the individual to which the repayment is due.
 BA’s features maturity periods that range between 30 days up to 180 days.

Repurchase Agreements (Repo)

 Repo’s are also known as Reverse Repo or as Repo. They are loans of short duration
which are agreed by buyers and sellers for the purpose of selling and repurchasing.
 However, these transactions can be carried out between RBI approved parties.
 Note: Transactions can only be permitted between securities approved by RBI like the
central or state government securities, treasury bills, central or state government
securities, and PSU bonds.

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Debt Market
Debt Market is a market place, where buying and selling of debt market financial
instruments take place. These financial instruments are fixed-income securities, giving
fixed returns to the investors. These securities provide regular interest payments at a
fixed rate with principal repayment at the time of maturity. The issuer of these securities
can be local bodies, municipalities, state government, central government, corporate, etc.
Major Debt Market securities are Bonds, Government Bonds, Debentures, Treasury Bills,
Certificate of Deposits, Commercial Papers, etc.

In Debt Market, the creditworthiness of the issuer plays a very important role. Credit
Rating agencies like Moody’s, Standard & Poor’s, Fitch, ICRA, etc give credit ratings to all
these debt securities according to their credibility. Investors rely heavily on these ratings,
before investing in debt securities.

Who issues Debt Market Instruments?

The debt market is one of the important platforms for raising debt. Debt Market
Instruments helps the issuers to procure funds and satisfy their needs. Many entities issue
Debt Market instruments, which are as follows:-

Corporate/ Companies

Companies often rely on debt instruments to finance their projects, expansion, or growth.
Raising money through equity is always not a feasible option, in such a situation the
companies go for Debt Market securities.

Banks and Financial Institutions

Banks and Financial Institutions flourish on deposits and lending business. Debt Market
instruments give Banks and Financial Institutions, an opportunity to raise funds for
lending. These institutions and banks accept deposits from the public at large at a lower
interest rate and thereafter lends money to the borrowers at a higher rate.

State and/or Central Government

The State and/or Central Government raises money through Debt Market instruments to
execute its various infrastructural projects and welfare programs. Sometimes the
government does not have enough funds even after considering all taxes income and
other incomes. In such a situation, the government raises funds through the general
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public. The infrastructural projects once start functioning, they repay the government and
the same funds are given back as returns and redemptions to investors.

Local Panchayats or/and Municipal Corporations or/and Local Body

At even small town or village level, Debt instruments are useful for raising funds. In a
similar manner to Central and State Government, these local Municipalities or Village
Panchayats use these instruments for collecting funds for their infrastructural projects
and other welfare programs.

Public Sector Units (PSUs)

Public Sector Units (PSUs), have to directly compete with private entities. These Units also
use debt instruments to raise funds for their projects and expansion.

Types of Debt Market Instruments:

In the Debt Market, the trading of many securities takes place. All these securities
individually have a different set of qualities and serve different purposes. All those issuers
of these securities according to their financial requirements and available options selects
the best debt instrument. They are as follows:-

Bonds

Bonds are mainly of two types, i.e. Government Bonds and Corporate Bonds. Government
Bonds holds less risk than Corporate Bonds. Mostly, Corporate Bonds pay a higher interest
rate than Government Bonds. There are other Bonds like Municipal Bonds and Institutions
Bonds. The Bonds have a fixed coupon rate and pay that interest to the bondholder
periodically. And also repay the principal amount at the time of maturity. The interest
rates of bonds are variable in the case of Floating Rate Bonds.

Floating Rate Bonds provide a variable interest rate that fluctuates according to the
changes in the interest rates in the economy. Fixed-Rate Bonds gives fixed interest rates,
irrespective of any market changes. There are Zero-Coupon Bonds, which does not
provide any interest rate periodically or at the time of redemption. Rather These bonds
are issued at a discount to the par value or face value of the bond. And the redemption
of such bonds at maturity at the par value of the bond. The difference between the par
value and the discount value is the return for the investor or we can say that is the interest
for the bondholders.

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Issuance of Corporate Bonds sometimes takes place with a call option and put option. In
the case of a call option, the company can call back their bonds once a particular time has
passed. In the case of a put option, the investors can sell their bonds, back to the company
after a particular time or date as indicated at the time of issuance.

Government Securities

These are debt instruments, mostly issued by the Central Bank of the country, in the place
of the Central or State Government. These securities can be for the long term or short
term. These securities give a fixed coupon rate to the investors. The yield of Government
securities are mostly considered as a benchmark for return and are even considered as a
risk-free rate. Treasury Bills are short-term securities. Long term Government securities
include instruments like Dated Securities or Bonds.

Debentures

Debentures are similar in nature to Bonds; the only difference is the security level.
Debentures are riskier in nature. Not only this, Bonds can be issued by the Government
and Companies, but Debentures can only be issued by Companies. Debentures can be of
different types, which are as follows:-

Registered Debentures and Bearer Debentures

The Registered Debenture is there in the company’s records. The names of the debt
holders and other details are recorded in the company and the repayment of the
debenture is made to that particular name only. These debentures are transferable but
need to complete the transfer process. Recording of Bearer Debentures does not take
place. The issuer of the Debenture is entitled to make the repayment of the bond amount
to whoever holds the debenture certificate.

Secured Debentures and Unsecured Debentures

Secured Debentures are backed by collateral security. The Unsecured Debentures have
no backing of any collateral security. Secured are less risky in comparison to the
Unsecured ones.

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Redeemable Debentures and Non-Redeemable Debentures

Redeemable Debentures are repaid at the time of maturity only. Repayment of Non-
Redeemable Debentures takes place at the time of liquidation only.

Convertible Debentures and Non-Convertible Debentures

Convertible Debentures can be converted into equity shares on a future date. Non-
Convertible Debentures cannot be converted into equity shareholders on any future date.

First Debentures and Second Debentures

At the time of liquidation, First Debentures have the preference over the Second
Debentures at the time of repayment.

The above-mentioned list does not include all debt market instruments available in the
market. Other instruments are Fixed Deposits, Certificates of Deposits, Commercial
Papers, National Savings Certificates, etc.

BONDS
When you purchase a stock, you're buying a microscopic stake in the company. It's yours
and you get to share in the growth and also in the loss. On the other hand, a bond is a
type of loan. When a company needs funds for any number of reasons, they may issue a
bond to finance that loan. Much like a home mortgage, they ask for a certain amount of
money for a fixed period of time. When that time is up, the company repays the bond in
full. During that time the company pays the investor a set amount of interest, called the
coupon, on set dates (often quarterly).

There are many types of bonds, including government, corporate, municipal and
mortgage bonds. Government bonds are generally the safest, while some corporate
bonds are considered the most risky of the commonly known bond types.

For investors, the biggest risks are credit risk and interest rate risk. Since bonds are debts,
if the issuer fails to pay back their debt, the bond can default. As a result, the riskier the
issuer, the higher the interest rate will be demanded on the bond (and the greater the
cost to the borrower). Also, since bonds vary in price opposite interest rates, if rates rise
bond values fall.

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Issuers of Bonds:

There are four primary categories of bond issuers in the markets. However, you may also
see foreign bonds issued by corporations and governments on some platforms.

Corporate bonds are issued by companies. Companies issue bonds—rather than seek
bank loans for debt financing in many cases—because bond markets offer more favorable
terms and lower interest rates.

Municipal bonds are issued by states and municipalities. Some municipal bonds offer tax-
free coupon income for investors.

Government (sovereign) bonds such as those issued by the U.S. Treasury. Bonds (T-
bonds) issued by the Treasury with a year or less to maturity are called “Bills”; bonds
issued with 1 to 10 years to maturity are called “notes”; and bonds issued with more than
10 years to maturity are called “bonds”. The entire category of bonds issued by a
government treasury is often collectively referred to as "treasuries." Government bonds
issued by national governments may be referred to as sovereign debt. Governments may
also offer inflation-protected bonds (e.g. TIPS) as well as small denomination savings
bonds for ordinary investors,

Agency bonds are those issued by government-affiliated organizations such as Fannie

Mae or Freddie Mac.

Characteristics of bonds:

Some basic information about bonds.

Face value

Corporate bonds normally have a par value of $1,000, but this amount can be much
greater for government bonds.

Interest

Most bonds pay interest every 6 months, but it's possible for them to pay monthly,
quarterly or annually.

Coupon or interest rate

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Fixed-rate bonds generate a constant interest rate. You receive the same amount each
year or month, depending on the interest payment schedule.

There are also 2 types of floating-rate bonds. The interest rate is either set in advance
each year or tied to market rates.

Step-up bonds have yields that increase over a set period (e.g., 4% the first year, 4.5% the
second year, etc,). They can also be bought back at the issuer's choosing.

Other bonds have an adjustable floating rate, tied to market rates such as Treasury bills.
If Treasury bill yields to up, the investor wins out. The reverse also is true: if yields go
down, the bond issuer wins out.

Fixed-rate bonds are therefore considered safer than floating-rate bonds, but their yield
may be lower.

Maturity

Maturities can range from as little as one day to as long as 30 years (though terms of 100
years have been issued!

A bond that matures in one year is much more predictable and thus less risky than a bond
that matures in 20 years. Therefore, the longer the time to maturity, the higher the
interest rate. Also, a longer term bond will fluctuate more than a shorter term bond.

Issuers

The issuer's stability is your main assurance of getting paid back when the bond matures.

For example, the Canadian and U.S. governments are far more secure than any
corporation. Their default risk–the chance of the debt not being paid back–is extremely
small, so small that they are considered risk free assets. The reason behind this is that a
government will always be able to bring in future revenue through taxation.

A company on the other hand must continue to make profits, which is far from
guaranteed. This means the corporations must offer a higher yield in order to entice
investors–this is the risk/return trade-off in action.

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Rating agencies

The bond rating system helps investors distinguish a company's or government's credit
risk. Blue-chip firms, which are safer investments, have a high rating while risky
companies have a low rating.

Equity Market
An equity market is a platform that allows companies to raise capital via different
investors. A company thus issues stocks that investors or traders purchase in expectation
of earning gains from future sales of said stock.

Often, the equity market is also interchangeably used with the stock market, which more
or less, serves the same purpose of facilitating stock trading. Nevertheless, equity markets
also encompass over-the-counter trading markets alongside exchanges.

Thereby, equity markets serve as a platform for both private stocks traded over the
counter and public stocks listed on exchanges such as BSE, NSE, etc.

Traders can realise gains based on the future performance of a stock they have invested
in. Equity markets can also be represented as a common point where sellers and buyers
of the stock meet to trade. Here’s an elaboration on the sub-parts of an equity market.

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Types of Equity Market:

Equity markets comprise structured trading and investment and can be defined into
two types of platforms, i.e., primary and secondary markets.

 Primary market
Each company plans to offer its shares for public trading must start with Initial Public
Offering or IPO. In this process, the company offers a part of its total equity to the
public for raising capital initially. Once the IPO is complete, the stocks so offered are
listed on the stock exchange for further trading.
The entire process of introducing the IPO by a company takes place in the primary
market. In other words, this market comprises only the IPO introduction and
investment.

 Secondary market
Once the shares have already been listed on either of the exchanges, further trading
for them is held in the secondary market. Here, the initial investors get an opportunity
to exit their investments via stock sale in this live equity market. These stocks can
comprise shares, along with other types of securities that can include convertible
bonds, corporate bonds, etc.

Top Stock Exchanges in the Indian Equity Market

Shares and securities in India are primarily traded through two stock exchanges, i.e., NSE
and BSE. Here’s a detailed look at these two exchanges.

NSE or National Stock Exchange

Established back in 1992, the National Stock Exchange aimed to bring transparency in the
equity share market of India. Currently, NSE holds the 12th spot in the ranking of the
world’s biggest stock exchanges.

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As the first exchange in the country, it came up with an end-to-end automated electronic
system to facilitate stock trading for investors. Trading in the capital market on NSE
started in 1994 while the year 2000 saw the commencement of derivatives trading on this
platform.

BSE or Bombay Stock Exchange

Situated in Mumbai’s Dalal Street, the Bombay Stock Exchange was established back in
1875. As against NSE, BSE ranks 11th globally in terms of stock exchange market size and
operations. Also, with a median trading speed of 6 microseconds, it also stands as the
fastest stock exchange in the world.

Equity Trading in the Stock Market

Trading in the equity market primarily entails the seller fixing a price and a buyer agreeing
to pay that price to purchase the security, thus executing a sale. In a general context, the
understanding of what is equity in the share market extends to all types of shares and
securities traded that are also termed as stock. Equity and stock are thus used
interchangeably for the purpose of trading.

Procedures Involved in the Equity Market:

An equity market does not solely serve to facilitate trading. It is functioning also
encompasses other procedures. Here’s a gist of these procedures.

Trading

As explained earlier, trading is a fundamental procedure that involves buying and selling
of securities belonging to listed companies. The procedure is completed through the
screen-based automated system, with brokering agents providing these services to
individual traders against stipulated fees. It serves as an open platform where buyers and
sellers can place an order as per trade option availability.

Risk management

Risk management is another specific procedure associated with stock markets. As

investing in the equity market involves risk, the comprehensive system of risk
management ensures that investors’ interest remains protected while exercising any
curbs on frauds from a company’s end.

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The system also enables the stock market to remain updated with any changing trading
mechanisms and hedge possible market failures.

Settlement and clearing

Every investment or trading made throughout the day is cleared and settled by the end
of this particular day. A stock exchange does this through a well-defined cycle of
settlement. In Indian exchanges, the T+2 cycle is adopted for such settlements, which
means the settlements are made within two days after the trade has been concluded for
a specific day, considered day 1.

An equity market comes with immense opportunities for individuals to fulfil their financial
requirements for the future via strategic trading and investment. Such gains can help ride
off the increasing inflationary pressure and the consequent strain on finances due to
rising prices. It is thus ideal to get accustomed to the basics of the stock market along with
its regulations for disciplined earning via investment and trading in the long run.

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