FINANCIAL INSTITUTIONS AND MARKETS III B.

COM V SEM

Module-2

Capital Market

The capital market is a market for financial assets which have a long or indefinite maturity.
Generally, it deals with long term securities which have a maturity period of above one year.
The term capital market refers to facilities and institutional arrangements through which long-
term funds; both debt and equity are raised and invested. The capital market consists of
development banks, commercial banks and stock exchanges.

Meaning of capital market

Capital market is a place where the medium-term and long term financial needs of business
and other understandings are met by financial institutions which supply medium and long-
term resources to borrowers.

STRUCTURE OF CAPITAL MARKET

The capital market in India is a crucial component of the financial system that facilitates the
trading of long term financial instruments, such as stocks, bonds and other securities. It
consists of a primary and secondary market where various entities raise funds and investors
trade security. Here‟s an overview of the structure of the capital market in India:
1. Primary Market: the primary market also known as new issue market is where newly
issued securities are sold to investors for the first time. Companies and governments raise
funds by issuing shares (equity) or bonds (debt) to the public. The security exchange
Board of India (SEBI) regulates the primary market and ensures transparency and
Investors Protection. Investment banks and financial intermediaries play a role in
Underwriting and distributing new security in the primary market.

2. Secondary Market: The secondary market, also known as the stock market or security
market, is where existing securities are bought and sold among investors. This market
provides liquidity to investors who want to sell their holdings. The two major stock
exchanges In India are the National Stock Exchange( N SE) and the Bombay Stock
Exchange(BSE). secondary market transaction occur through trading platform and
involve stock brokers and financial institutions

3. Equity Market: The equity market is where shares or ownership stakes in Companies
are bought and sold. Investors can participate in the equity market through Stock
Exchange and invest in individual stocks or equity mutual funds.

BASAVA SHRUTHI C S 1
FINANCIAL INSTITUTIONS AND MARKETS III B.COM V SEM

4. Debt Market: The market is where various debt instruments, such as Government
Bonds, corporate bonds, and debentures are traded. Debt instruments represent loans
made by investors Issures and interest payments are made to investors over time.

5. Derivative Market: The derivatives market enables trading of financial contracts from
underlying assets like stocks, indices, commodities and currencies. It includes instruments
like futures and options that allow investors to speculate on price movements or hedge
against risks.

6. Commodity Market: the commodity market allows trading of commodities like

Agricultural Products, metals, and energy resources. Commodity exchange facilitates the
buying and selling of commodity Future contracts.

7. Currency Market (Forex): The currency market or Forex market is where currencies are
traded. it includes spot and derivative transactions involving different currencies.

8. Regulatory Framework: SEBI plays a crucial role in regulating the capital

market, ensuring fair practices, preventing manipulation and protecting investor interests.
Stock exchanges also have regulatory roles in overseeing market operation and participant
behaviour.

9. Investor Participation: Individuals, institutional investors, mutual funds, foreign

institutional investors (FII) and retail investors participate in the capital market.
dematerialisation of security (holding security in electronic form) has streamlined trading
and settlement processes.

10. Technological Advancements: Technology advancements, such as electronic trading

platforms and algorithm trading, having transformed the way securities are traded.

IMPORTANCE OF CAPITAL MARKET

1. In mobilizes the savings of peoples and channelizes them into productive uses.
2. It helps industrial establishments to increase production by providing necessary funds
3. It leads to economic growth of the country
4. It leads to technological up gradation
5. A healthy capital market consisting of expert intermediaries‟ promoters‟ stability in
value of securities representing capital funds.

BASAVA SHRUTHI C S 2
FINANCIAL INSTITUTIONS AND MARKETS III B.COM V SEM

FUNCTIONS OF CAPITAL MARKET

1. Link between savers and investors: The capital market functions as a link between
savers and investors. It plays an important role in mobilizing the savings and diverting
them in productive investment. In this way, capital market plays a vital role in transferring
the financial resources from surplus and wasteful areas to deficit and productive areas,
thus increasing the productivity and prosperity areas, thus increasing the productivity and
prosperity of the country.
2. Encouragement to saving: With the development of capital market, the banking and
non-banking institutions provide facilities, with encourage people to save more. In the less
developed countries, in the absence of a capital market, there are very little savings and
those who save often invest their savings in unproductive and wasteful directions, i.e., in
real estate (like land, gold and jewelery) and conspicuous consumption.
3. Encouragement to investment: The capital market facilitates lending to the businessmen
and the government and thus encourages investment. It provides facilitates through books
and nonbank financial institutions. Various financial assets, example shares, securities
bonds etc. induce savers to lend to the government or invest In industry. With the
development of financial institutions, capital becomes more mobile, interest rate falls and
investment increases.
4. Promotes economic growth: The capital market not only reflects the general conditions
of the economy but also smoothens and accelerates the process of economic growth.
Various institutions of the capital market, like non-banking financial intermediaries,
allocate the resources rationally in accordance with to development needs of the country.
The proper allocations of resources results in the expansion of trade and industry in both
public and private sectors, thus promoting balance economic growth in the country.

5. Stability in security prices: The capital market trends to stabilize the values of stocks and
securities and thereby reduce the fluctuation in the prices to the minimum. The process of
stabilization is fluctuated by providing capital to the border at the lower interest rate and
reducing the Speculative and unproductive activities

6. Benefits to investors: The credit market helps the investor that is those who have funds
to invest in long term financial assets, in many ways:

(a) It brings together the buyers and sellers of securities and thus ensure the marketability
of investments.
b) By advertising security prices, the stock exchange enables the investors to keep track of
their Investments and channelise them into most profitable lines.

BASAVA SHRUTHI C S 3
FINANCIAL INSTITUTIONS AND MARKETS III B.COM V SEM

c) It safeguards the interest of the investor by compensating them from the Stock
Exchange Compensating Fund in the event of fraud and Default.

PLAYERS IN THE CAPITAL MARKET

1. Fund raisers: They are companies that Rises funds from domestic and foreign
sources, both public and private. The sources could be shares, debentures, bonds etc.
2. Fund providers: fund providers are the entities that invest in the capital markets.
These can be categorized as domestic and foreign investor, institutional and retail
investors. The list includes subscribers to primary market issues, investors who buy in
the secondary market, traders, speculators, IIs/ sub Accounts, Mutual Funds, venture
capital funds, NRIs,ADR/GDR investors etc.
3. Intermediaries: Intermediate is are service providers in the market, including stock
brokers, sub-brokers financiers, Merchant bankers underwriters, depository
participants, registrar, and transfer agents, FIIs/ IIs/ sub Accounts, Mutual Funds,
venture capital funds, portfolio managers, custodians etc.
4. Organizations: Organization includes various entities such as MCX- SX, BSE, NSE,
other regional Stock Exchange and the two depositories viz,. National
security depository Limited (NSDL) and Central securities depository Limited(
CSDL).
5. Market Regulators: market regulators include the securities and exchange Board of
India (SEBI), the Reserve Bank of India( RBI) and the development of company
affairs( DCA).

INSTRUMENTS OF CAPITAL MARKET

Instruments of capital market are the certificates or documents that act as evidence of
investment. There are a number of instruments traded in the capital market, here are the most
common ones:

1. Shares: Shares, also known as stocks or equities, are issued by the companies. An
investment into a share or equity of a company translates to acquiring a part of its

BASAVA SHRUTHI C S 4
FINANCIAL INSTITUTIONS AND MARKETS III B.COM V SEM

ownership. In addition, this contract of ownership through equity stands in perpetuity until
it is sold to investors in the secondary market or when the company is liquidated.
2. Debt Instruments: Corporations, as well as governments, raise funds for capital-intensive
projects by issuing a debt instrument. As a result, this type of instrument leads to the
formation of a borrower-creditor relationship. Therefore, unlike equities, holders of debt
instruments do not possess any ownership in the issuing entity.
 A local Government- Municipal Bond
 State Governments and the Central Government - Government Bonds
 A Corporate Body or Company- Corporate Bonds and Debentures
3. Derivatives: These instruments are derived from other securities that are known as
underlying assets. Though the level of associated risk, function, and price of a derivative
depends on its underlying assets, it is very volatile and comes with higher risks than
equities.
Moreover, these instruments are unpredictable and largely speculation-oriented. Some of the
common derivative instruments in India are:
 Swap Contracts
 Options Contracts
 Future Contracts
 Forwards Contracts.
4. Preference Shares: These are the shares that have preferential rights in a company, in
terms of dividend payment or pay-out in case of liquidation. In simpler words, this implies
that a business has to first pay its preference shareholders first.
Moreover, preference shares can be of several types, they include:
 Redeemable Preference Shares: The issuing company can redeem these preference
shares by opting for a buy-back at a later stage.
 Irredeemable Preference Shares: These can only be redeemed if their issuing company
liquidates itself.
 Convertible Preference Shares: These can be converted into equity shares after a
certain period of time.
5. Investors’ Choice : In India, there are various capital market instruments traded or
available either in primary or secondary markets or both. The instruments briefed above
are the common ones and not the entire list.
With regard to investment in any of the capital market instruments in India, investors should
exercise caution as each instrument has its own risk and capital requirements. Investors
should do thorough research before making any investment decisions.

BASAVA SHRUTHI C S 5
FINANCIAL INSTITUTIONS AND MARKETS III B.COM V SEM

RECENT TRENDS IN CAPITAL MARKET

Fintech and digitalisation Innovations continuous to reshape the capital market landscape.
The use of blockchain technology for improving transparency. Settlements and reducing
transactions caused have gained transaction. Digital platform for trading, investing and
Portfolio Management are becoming more popular.
1. SPACs (Special Purpose Acquisition Companies): SPACs have gained attention as an
alternative route for companies to go public. These are companies formed with the sole
purpose of acquiring existing private companies and taking them public without the
traditional initial public offering( IPO) process.

2. Rise of retail investors: Increase retail investor participation, often driven by social
media and online forums, has influence stock prices and market dynamics. Retail investor
have been engaging in trading and investing, particularly in Mimi stocks and trading
assets.

3. Sustainable ESG Investing: Environment and government (ESG) consideration are

becoming integral to Investment decisions. Investors are seeking companies that
demonstrate strong sustainability practices and responsible governance.

4. SPDRs and ETFs: Exchange - Traded Funds (ETFs) and Sectoral Index Funds (SPDRs)
are gaining popularity due to their diversification benefits, low cost and easy of trading
ETF that track specific sector or themselves have seen increase demand.

5. Remote work impact: The Coward 19 pandemic has accelerated the adoption of remote
work and digital communication tools, affecting investors behaviour and the way financial
information is accessed and analyzed.

6. Regulatory changes: Regulatory bodies continue to adopt the changes landscape,

focusing on investors, market integrity and Technology advancements. Regulation around
cryptocurrency, digital Assets and the use of AI in trading is evolving.

7. Crypto Global economic recovery: As economics recover from the pandemic- induced
slowly down, capital market have experienced period of volatility and fluctuations in
response to economic data, physical policies and Central Bank actions.

BASAVA SHRUTHI C S 6
FINANCIAL INSTITUTIONS AND MARKETS III B.COM V SEM

8. Alternative investment: Institutional and retail investors are increasingly exploring

alternative investment such as private equity, when should capital and real estate seeking
higher return and Portfolio diversification.

9. Tech and healthcare Sectors: Tech and Healthcare sectors have been particularly active
with significance IPOs, mergers acquisition and innovative development in area like
Biotech Artificial Intelligence and electric vehicles.

10. Crypto and digital assets: Crypto currencies and digital assets have gained widespread
attention, with major developments in terms of adoption by institutional investors,
regulatory discussions and the emergence of decentralization Finance platforms.

MONEY MARKET

INTRODUCTION TO MONEY MARKET:

Money market is concerned with the supply and demand for investible funds.
Essentially, it is Reservoir of short term funds. money market provides a mechanism by
which short term funds are lent out and borrowed; it is through this market that a large part
of financial transaction of a country are cleared. It is a place where a „ bid‟ is made for short
term investible funds at disposal of financial and other institutions by borrowers comprising
institutions, individuals and government itself.

MEANING OF MONEY MARKET

Money market refers to the market where money and highly liquid marketable
securities are bought and sold having a maturity period of 1 or less than 1 year. The money
market constitutes very important segments of the Indian financial system.

DEFINITION OF MONEY MARKET

According to Reserve Bank of India, “money market is the centre of dealing, mainly of
short term character, in money assets; it meets the short term requirements of borrowings and
provides liquidity or cash to the lenders. It is the place where short term surplus investible
funds at the disposal of financial and other institutions and individuals are bit by borrowers‟
agents comprising Institutions and individuals also the government itself.”

IMPORTANCE OF MONEY MARKET

Developed money market plays an important role in the financial system of a country by
supplying short-term funds adequately and quickly to trade and industry. The money market
is an integral part of a country‟s economy.

BASAVA SHRUTHI C S 7
FINANCIAL INSTITUTIONS AND MARKETS III B.COM V SEM

A developed money market helps the smooth functioning of the financial system in any
economy in the following ways:

1. Development of trade and industry: money market is an importance source of financing

trade and industry. The money market through discounting operations and commercial
papers, finances the short-term working capital requirement of trade and industry and
facilities the development of industry and trade both national and international.

2. Development of capital market: The short-term rates of interest and the conditions that
prevail in the money market influence the long-term interest as well as the resources
mobilization in capital market. Hence, the development of capital market depends upon
the existence of developed money market.

3. Smooth functioning of commercial banks: The money market provides the commercial
banks with facilities for temporarily employing their surplus funds in easily realizable
assets. The banks can get back the funds quickly, in times of need, by resorting to the
money market.

4. Effective central bank control: A developed money market helps the effective
functioning of a central bank. It facilitates effective implementation of the monetary
policy of central banks. The central banks, through the money market, pumps new money
into the economy in slump and siphon it off in boom. The central banks, thus, regulates
the flow of money so as to promote economic growth with stability.

5. Formulation of suitable monetary policy: Conditions prevailing in a money market

serve as a true indicator of the monetary state of an economy. Hence, it serves as a guide
to the government in formulating and revising the monetary policy then and there
depending upon the monetary conditions prevailing in the market.

6. Non- inflationary source of finance to government: a developed money market helps

the government to raise short-term funds through the treasury bills floated in the market.
In the absence of a developed money market, the government would be forced to print and
issue more money or borrow from the central bank. Both ways would lead to an increase
in prices and the consequent inflationary trend in the economy.

FUNCTIONS OF MONEY MARKET

A well development is essential for modern economy. Through, historically, money market
as developed as a result of Industrial and commercial progress, it also has important role to
play the process of industrialisation and economic development of country

1. Financing trade: money market place crucial role in financing both internal as well as
international trade. Commercial finance is made available to the traders through bills of

BASAVA SHRUTHI C S 8
FINANCIAL INSTITUTIONS AND MARKETS III B.COM V SEM

exchange, which are discounted by the Bill market. the acceptances houses and discount
markets helps in financing foreign trade.

2. Financing industry: money market contributes to the growth of industry in two ways:
a. Money market helps the industries in securing short term loans to meet their working
capital requirements through the system of Finance bills, commercial papers etc.
b. Industries generally need long term loans, which are provided in capital market.
However, capital market depends upon the nature of and the conditions in the money
market. The short term interest rates of money market influence the long term interest
rate of the capital market. Thus, money market indirectly helps the industries through
its link with and influences on long term capital market
.
3. Profitable investment: money market enables the commercial banks to use their excess
Reserves in portfolio Investments. the main objective of the commercial bank is to earn
income from its reserves as well as maintain liquidity to meet the answer to cash demand
of the depositors.

4. Self sufficiency of commercial banks: developed money market helps the commercial
banks to become self sufficient. in the situation of emergency, when the commercial
banks have scarcity of funds, they need not approach the central bank and borrow us at a
higher rate of interest rate. on the other hand, they can meet there requirements by
recalling there old short- run loans from the money market.

5. Helps to Central Bank: through the central bank can function and influences the
banking system in the absence of money market, the existence of developed Money
market smoothens the functioning and increases the efficiency of Central Bank.

6. Money market helps the central bank in two ways:

a) The short run interest rates of money market sir as an indicator of monetary and
banking conditions in the country and, in this way, write the central bank to adopt and
appropriate banking policy
b) The sensitive and integrated money market helps the central bank to secure quick and
widespread Influence on the submarket and thus achieve effective implementation of its
policy.

STRUCTURE OF MONEY MARKET

The entire money market in India can be divided into two parts. They are:
1. Organized money market
a. The call money
b. The treasury bill markets
c. The commercial bill market

BASAVA SHRUTHI C S 9
FINANCIAL INSTITUTIONS AND MARKETS III B.COM V SEM

d. The certificate of deposit market

e. The commercial paper market
f. Money market Mutual Fund
2. Unorganised money market
a. Indigenous bankers(IBs)
b. Money lenders
c. Chitfunds and Nidhis
d. Finance brokers
e. Finance Companies

1. Organized money market: The RBI is the apex institution which controls and monitors
all the organizations in the organized sector. The commercial banks can operate as
members and operators. The financial Institutions like IDBI, ICICI and other operates as
lenders
.
The main components of organized money market:

a. The call money: It is also known as interbank call money market. , here lending and
borrowing transactions are carried out of one day. These One day means may or may
not renewed the next day, the demand for call money comes from commercial banks that
need to meet requirements of CRR and SLR, whereas supply comes from commercial
Banks with excess funds FIs like IDBI, etc.

b. The Treasury bill market: It deals in treasury bills of short term duration. 14 days, 91
days, 182 days and 364 days. They are issued by government and largely held by RBI.
The treasury bill facilities that financing of Central Government temporary deficits. From
me 2001, the auction of 14 days and 182 days treasury bills has been discontinued. At
present, there are 91 days and 364 days Treasury bills.

c. The commercial bill market: It deals in bill of exchange. A Seller draws a bill of
exchange on the buyer to make payment within a certain period of time. The bills can be
domestic bills or foreign bill of exchange. The commercial bills are purchase and
discounted by commercial banks and are re-discounted by FIs life EIXM Bank, SIDBI.
IDBI, etc.

d. The certificate of deposit market: the scheme of certificate of deposit (CD) was
introduced by RBI in 1989. The main purpose of CD is to enable commercial bank to
raise funds from the market. That CDs maturity period ranges from 7 days to 1 year (in
BASAVA SHRUTHI C S 10
FINANCIAL INSTITUTIONS AND MARKETS III B.COM V SEM

case of FIs minimum 1 year and maximum 3 years). The CDs are issued at discount to eat
face value. The CD is issued in denomination of 100000 and thereafter, multiples of
100000. The holder is entitled to receive a fixed rate of interest and have no lock in
period.
e. The commercial paper market: the scheme of commercial paper (CP) was introduced in
1990. 0 blue chips companies are for short term financing issues CPs. As per RBI
guidelines, CPs can be issued on the following conditions
 The minimum tangible networth of the company to be at least 4 crores.
 The CP receives a minimum rating ofA-2 or such other rating from recognize rating
agencies like CRISIL, CARE,ICRA, Fitch Ratings, etc.
 The company has been sanction working capital limit by banks or all India FIs.
 The CPs maturity period ranges from 7 days to 1 year. They can be issued in multiple
of 5 lakh and in multiple thereof. They are sold at the discount to its face value and
redeemed at its its phase value.

f. Money market Mutual Fund (MMMFs): The MMMFs were introduced in 1992. The
objective of MMMFs each to provide and additional short term Avenue investors. In
1995, RBI modified the scheme to allow private sector organizations to set up MMMFs.
During 1996, the scheme of MMMFs was made more flexible by bringing each on
par with all mutual funds by allowing investment by corporate and other. The scheme has
been made more attractive to investors by reducing locked in periods from 45 days to 15
days. Its maturity period is up to 1 year.

2. Unorganized money market: Unorganized money market mostly finances short term
financial need of former and small businessman. The main component of unorganised
money market is:

a) Indigenous bankers (IBs): These are individuals or private forms that receive deposits
and give loans and thereby they operate as banks. Unlike money lenders who only lend
money, IBs except deposit as well as Lend money. They operate mostly in urban
areas, especially in western and Federal region of the country. Over the years, IBs face
stiff competition from Cooperative Bank and commercial banks.

b) Money lenders: These are important participants in unorganised money market in India.
There are professional as well as non professional MLs. The land money in rural area as
well as urban areas. Then normally charge and invariably high rate of interest ranging
between 15% per annum to 50% per annum and even more.

BASAVA SHRUTHI C S 11
FINANCIAL INSTITUTIONS AND MARKETS III B.COM V SEM

c) Chit funds and Nidhis: They collect funds from the member for the purpose of landing
to members (who are in the need of funds) for personal or other purpose. The Chit Fund
lend money to its members by draw of chips or lots, where as Nidhis lend money to its
members and others.

d) Finance brokers: they act as middleman between lenders and borrowers. They charge
Commission for their services. They are found mostly in urban market, especially in cloth
market and commodity market.

e) Finance Company: they operate throughout the country. They borrow or accept deposit
and lend them to others. They provide funds to Small traders and other. They operate like
indigenous bankers.
INSTRUMENTS OF MONEY MARKET

1. Treasury bills: Treasury bills are short-term instruments issued by the reserve bank on
behalf of the government to tide over short-term liquidity shortfalls. His instruments
are used by the government to raise short-term funds to bridge seasonal or temporary
gaps between its receipts (revenue and capital) and expenditure.
2. Commercial papers: A commercial papers is an unsecured short-term instruments
issued by the large banks and corporations in the form of promissory note, negotiable
and transferable by endorsement and delivery with a fixed maturity period to meet the
short-term financial requirement. There are four basic kinds of commercial paper:
promissory notes, drafts, checks and certificate of deposit.
3. Certificate of deposits: Certificate of deposit are unsecured, negotiable, short-term
instruments in bearer form, issued by commercial banks and development financial
institutions. The scheme was introduced by RBI as a step towards deregulations of
interest rates on deposits.
4. Repurchase Agreement (Repo): Repo is a money market instruments, which enables
collateralized short-term borrowing and lending through sale/purchase operations in
debt instruments. Under a repo transaction, a holder of securities sells them to
investors with an agreement to purchase at a predetermined date and rate.
5. Reserve Repos: A reverse repo is the mirror image of a repo. For, in a reverse repo,
securities are acquired with a simultaneous commitment to resell. Hence whether a
transaction is a repo or a reverse repo is determined only in terms of who initiated the
first leg of transaction.
6. Inter-Corporate Deposits (ICD): An inter-corporate deposit (ICD) is an unsecured
borrowing by corporate and FIs from other corporate entities registered under the

BASAVA SHRUTHI C S 12
FINANCIAL INSTITUTIONS AND MARKETS III B.COM V SEM

Companies Act 1956. The corporate having surplus funds would lend to another
corporate in need of funds.

RECENT TRENDS IN MONEY MARKET

1. Low interest rate environment: Central banks in various countries, including the
U.S. Federal reserve, have maintained historically low interest rates as part of their
monetary policy response to the COVID-19 pandemic. This has impacted money
market yield and influenced investment decisions.
2. Digital payments systems: The growth of digital payments systems, including mobile
wallets and unified payments interface(UPI), has transformed the way transaction are
conducted in the money market. Digital platforms have gained popularity due to
convenience and contactless transactions.
3. Cash management strategies: With a interest rates at low levels, corporations and
institutional investors have been focusing on optimizing their cash management
strategies to maintain liquidity while seeking higher yields within the money market.
4. Shifts in demand for short-term instruments: The demand for short-term money
market instrument such as Treasury bill and commercial paper have been influenced
by factors like liquidity needs, market conditions and changes in investor sentiment.
5. Government stimulus and market liquidity: Government stimulus packages and
liquidity measures by central banks have provided support to money market during
time of market stress, helping to maintain stability and prevent disruptions.
6. Investor’s preference for safety: The uncertainty caused by the pandemic as led
investors to prioritize safety and liquidity in their investment choices. Favoring money
market funds and instruments perceived as lower risk.
7. Regularity reforms: Regulatory bodies have continued to monitor and implement
reforms in money market segments to hence transparency, stability and investors
protections. These reforms aim to prevent a recurrence of the disruptions seen during
the 2008 financial crisis.
8. Short-term funding markets: Development in short-term funding markets, such as
the repurchase agreement (repo) market, has implications for liquidity management
and financial stability.
9. Global economic recovery: As economics recover from the pandemic impact, shifts
in economic data, inflation expectations, and central bank action. Can influence money
markets conditions.
10. Alternative cash investments: institutional investors have explored alternative cash
investment options behind traditional money market funds, seeking potential higher
yields and diversifications.

BASAVA SHRUTHI C S 13