BCom 3rd Year Financial market Instrument Their Functions Study Material Notes
Table of Contents
BCom 3rd Year Financial market Instrument Their Functions Study Material Notes: Functions of Financial Market A Money Market Definitions of Money Market Nature of Features of Money market Instruments of Money Market Bill Market in India Advantages or importance of a bill or Exchange New Bill Re discounting Scheme Capital Market Types of Capital market Differences Between Primary and Secondary Market :
BCom 3rd Year Nature Importance Financial Money Study Material notes
FINANCIAL MARKET: INSTRUMENT AND THEIR FUNCTIONS
Financial market refers to that market in which equity shares, loans, bonds, treasury, bills, commercial papers etc. financial assets are created and exchanged. Financial market does not need a particular space or geographical area. It denotes only financial transactions. It includes both money market and capital market. Thus, financial market is a system in which credit giving institutions and people sell and purchase short-term, medium-term and long-term securities through mutual transactions. It is an important part of the financial system of any economy. This market encourages savings and investments.
Defining the financial market, Gant has said, “A financial market is a mechanism which makes it possible for borrowers to obtain funds and for lenders to find suitable outlets for their finance.”.
Thus, financial market refers to that complete area where financial assets are sold and purchased.
market Instrument Their Functions
FUNCTIONS OF FINANCIAL MARKET
The important functions of financial market are as follows:
(1) Mobilisation of Savings: It is the nature of the people that they spent a part of their total income and save the remaining. If they keep their savings with them, it is called passive or inactive savings. Financial market provides the opportunity of investing inactive savings into financial assets and earn extra profit. This mobilizes savings.
(2) Pricing of Financial Instruments : Like the general rules of economics, prices of financial instruments are determined by the forces of demand and supply. The investors consider their investment safe and also earn fair profit.
(3) Liquidity of Financial Assets : Financial asses can be sold in the financial market to obtain liquid money. Similarly, long term securities can be purchased with the help of liquid money.
(4) Reducing the Cost of Transactions : Financial market is an arrangement through which the probable sellers and purchasers of financial assets come in contact with one another and sell and purchase through brokers. Since, the brokers need not search the sellers and purchaser; they can provide Their important services at the minimum commission. This reduces the cost of transactions.
market Instrument Their Functions
KINDS OR CLASSIFICATION OF FINANCIAL MARKET
Financial market can be divided into two classes :
A. Money Market
B. Capital Market
Financial Market
Money Market B. Capital Market
market Instrument Their Functions
A. MONEY MARKET
Money market refers to all those activities and institutions which relate to sale and purchase of money. Sale and purchase of money refers to granting and receiving loans. Generally, loans are both short-term and long-term but there is only exchange of short-term loans in the money market.
In other words, like the market of commodities, money too has its market and there are sellers and purchasers in this market. The purchaser of market includes all those people, traders and industrialists who take loan from this market for the purpose of production. On the other hand, the seller of money includes those people and creditors who give their money as loan to those people who need it. Just as in the market of goods and commodities, the prices are determined by the force of demand and supply, similarly in the money market, the value of money is determined by the demand and supply of money. This determined value is referred to as the rate of interest.
market Instrument Their Functions
DEFINITIONS OF MONEY MARKET
The important definitions of money market are as follows:
(1) According to Crowther, “Money market is the collective name given to the various firms and institutions that deal in the various grades of near money.”
(2) According to Prof. K.C. Chacko, “Money market may be defined as a place where short-term funds are bought and sold.”
(3) According to Sayers, “The money market properly speaking is the market for short term and day to day loans.
(4) According to a Publication of Reserve Bank of India, “Money market is the centre for dealing mainly of short-term character, in monetary assets. It meets the short-term requirements of borrower and provides liquidity or cash to tenders.”
On the basis of above definitions, it can be said that money market refers to that total area where the short-term seller and purchaser of money come in contact with one another and determine the value of money through its demand and supply to meet the requirements of one another. This determined value is called the rate of interest.
market Instrument Their Functions
NATURE OR FEATURES OF MONEY MARKET
The main features of money market a described below :
(1) Dichotomy: The most important feature of Indian Money Market is its dichotomy. It means that it is divided into two sectors–organised and unorganised. There is lack of proper contact and co-operation between these two. Reserve Bank of India, State Bank of India and other commercial banks, foreign banks etc. fall in the category of organised sector while the money lenders and native bankers are included in the unorganised sector.
(2) Transactions : Transactions in the money market can be done with or without the help of brokers or mediators.
(3) Speedy Transactions : The speed of practical activities in the mon market is very fast. Most of the activities in it are done through telephone and the concerned paper work is done later. So, it is also called over the phone market.
(4) More Liquidity : There is excess liquidity in the money market ta helps in providing ready market for money market instruments.
(5) Narrow Market : It is a feature of Indian Money Market that it is the narrow market of government and semi-government securities. It limits the area of open market operations of credit control.
(6) Lack of Control of Unorganised Sector : There is control of the Central Bank on the organised sector of Indian money market but there is no control of any institution on the unorganised sector. Consequently, the rate of interest in this sector is high.
(7) Appropriate Approach : Money market provides an appropriate approach to the users of short-term funds to meet their requirements on proper conditions and interest rates. In other words, it establishes a balance between short-term financial demand and supply.
(8) Main Part of Financial Market : Money market is the main part of financial market. It meets the short-term financial requirements of traders, industrialists and the government.
(9) Insufficient Development of Sub-Market : There are many submarkets of Indian money market but all these are not well developed. For example, despite many efforts the bill market in India is undeveloped.
(10) Consists of Many Sub-Market : Money market is a group of many sub-markets. In includes call money market, Treasury bill market, commercial paper market etc.
market Instrument Their Functions
INSTRUMENTS OF MONEY MARKET
Money market is a group of many sub-markets. There is competition among these sub-markets. The instruments through which the transaction of shortterm loans takes place in these sub markets are as follows:
1. Treasury Bill
Instruments of Money Market 2. Commercial Paper Market
3. Call Money or Call Loans
4. Certificate of Deposits-CD
5. Commercial Bill Market
(1) Treasury Bill: Treasury Bill refers to that instrument of money market which are issued by Reserve Bank of India on behalf of the government of India to meet the short-term financial requirements of central government. These bills are generally purchased by commercial banks, non-banking financial Institutions, Life Insurance Corporation, General Insurance Corporation, Unit of India etc. The maturity period of Treasury Bills are generally 14 days, 91 days, 182 days or 364 days. The nature of this bill is that of negotiable instrument and these can be transferred independently. These bills are considered extremely liquid and safe and no interest is paid on these. On the other hand, They are issued on discount. The minimum amount of this instrument is one lakh. However, it can be purchased by common people also but due to low rate of interest, they don’t invest in it.
Dealing Process : Treasury Bill is issued on a low price as compared to their market value while the maturity payment is on the face value. The difference between the face value and the issue value is the profit of the investors. The difference is called discount. No interest is paid on the Treasury bill, so it is also called Zero Coupon Bond.
market Instrument Their Functions
The determination of discounting on the Treasury bill can be in two ways.
(i) On the Basis of Pre-determined Discount Rate : Pre-determined discount rate refers to the system of determining the amount of discount of the time of issuing of the bill itself. For example, if the treasury bill of 1 lakh is issued for a certain period at 95 thousand, the investor will get a profit of 5 thousand in that particular period.
(ii) On the Basis of Auction : To issue Treasury Bill on the basis of auction, Reserve Bank of India invites tenders through advertisement in newspapers. Among the different tenders received, the one with the minimum rate of discount is accepted.
These days, Treasury Bills are issued mostly on the basis of auction.
(2) Commercial Paper Market : Commercial paper is an unsecured and unsafe Promissory Note. So, it is issued only by the reputed companies. Its purchasers include banks, Insurance Companies, Unit Trust of India and firms etc. It is issued generally to obtain working capital. Its period is generally up to 12 months. The minimum face price of a commercial paper is at least 5 lakhs. It can be sold directly or indirectly, it means the company can sell these commercial papers directly to the purchasers or it can do so with the help of certain agency. Dealing Process: This instrument is very popular in USA, England, Japan, Australia etc. It was started in India in 1990. It is issued for a maximum period of 12 months. Generally, it is issued on discount but sometimes it is issued on certain interest rates. There is no active secondary market for it but the issuing company repurchases it on request.
(3) Call Money or Call Loans: It refers to such loan instrument which is paid on the basis of short notice. The period of loan in it is from 1 to 15 days with the view of liquidity, its place is just after cash. The loan receiver are those banks which face temporary shortage of cash and the loan provider are those banks which have temporary surplus of cash. It is used by banks to control SLR (Statutory Liquid Ratio). These days, insurance companies, financial institutions and mutual funds also supply short term funds. The transactions of call money are done generally through telephone and documentary formality.
Dealing Process : The number of those who deal with the help of this instrument is very limited but the amount of every dealing is very high. The minimum amount of this instrument is 10 crore but most of the dealing are of * 100 crore. As mentioned above, its initial dealing is through telephone and paper work is completed later. The creditor grants credit to the debtor by issuing a cheque of Reserve Bank of India. The debtor pays the loan through a cheque of Reserve Bank of India and gets back receipt. This loan is for a very short term but can be renewed as per need.
market Instrument Their Functions
(4) Certificate of Deposit (CD) : Certificate of Deposit is a negotiable document. It can be transferred through endorsement after a certain period. It is issued by scheduled commercial banks and other financial institutions like! IFCI, SIDBI, EXIM Banks etc. to people, federations, companies, corporation etc. The minimum marked price of certificate of deposit is 5 lakhs and it is essential for an investor to take certificate of deposit for the minimum amount of 25 lakhs. Its period is from 91 days to 1 year.
Dealing Process: The duration of certificate of deposit is from 91 days to 1 year. It is issued on discount; it can be endorsed to any person after 45 days of purchasing. The stamp duty on it has to be paid on the basis of market price.
(5) Commercial Bill Market : Bill Market refers to that sector in which short-term bills are purchased and sold. An organised bill market is very essential for the proper development of money market of any country, but unfortunately there has not been proper development of bill market in India so far now.
In the modern time, the transactions of goods are done both on cash and credit. In the situation of selling on credit, the seller wants to get an assurance of payment on a certain time from his purchaser or debtor. The purchaser can give the assurance of payment with the help of various kinds of credit instruments. These include bill of exchange, promissory note, hundi etc.
According to section 5 of Indian Negotiable Instrument Act, 1881, “A Bill of Exchange is an instruments in writing, an unconditional order signed by the maker directing to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.”
Bill of exchange is considered legal when such permission is accepted in written by the debtor.
market Instrument Their Functions
CHARACTERISTICS OF BILL OF EXCHANGE
The main characteristics of bill of exchange are as follows:
(i) It is an unconditional written order.
(ii) It is an order of payment and not a request for payment.
(iii) This order is unconditional.
(iv) This contains the signature of the drawer.
(v) It contains the acceptance of debtor.
(vi) The date of payment is fixed.
(vii) It is stamped as per rules.
(viii) It can be endorsed.
(ix) The payee of bill of exchange is a certain person.
(x) Its payment is made in the money in circulation in the country.
market Instrument Their Functions
PARTIES TO A BILL OF EXCHANGE
A bill of exchange has three parties :
(1) Drawer : The drawer of a bill of exchange is that seller or creditor who is authorised to get its payment. It also contains the signature of the drawer.
(2) Drawee or Acceptor: It is the debtor. Bill of exchange is written in the name of this person. The drawee signs on it for its acceptance.
(3) Pavee : It is the person who has to obtain the amount of the hill Generally, the obtainer of the amount is drawer of the bill, but in the endorsement or discounting the bill with bank, the obtainer of the becomes the person in whose name the bill has been endorsed or the bank respectively.
Dealing Process: When a seller sells goods on credit, he draws a bill of exchange in the name of the purchaser. The purchaser signs the bill to indicate his acceptance and returns it to the seller or creditor. This is a short term document which is generally issued for 90 days. Days of grace for a period of 3 days are also given for its payment. On the date of maturity, the creditor takes the amount from his debtor and returns the bill. If the purchasers need the amount before period, he can get it discounted with the bank. Besides, there can also be endorsement of bill of exchange.
market Instrument Their Functions
ADVANTAGES OR IMPORTANCE OF A BILL OF EXCHANGE
The main advantages or importance of the use of a bill of exchange are as follows:
The use of bill of exchange leads to the expansion of credit and also of trade.
(2) It is an evidence of loan.
(3) It is a legal document. So, as per need it can be produced in the court as evidence.
(4) It can be discounted with the bank and instant financial requirement can be met.
(5) It can be endorsed in the favour of other person.
(6) Loan can be obtained from financial institution using it as mortgage.
(7) There is saving of liquid money with the help of its use.
(8) It can be used in foreign payment also.
(9) It is easy to make financial planning as the date of payment is fixed.
(10) The trade remains unaffected even in the scarcity of cash.
market Instrument Their Functions
BILL MARKET IN INDIA
Bill market has been undeveloped in India. The Indian Central Banking Inquiry committee had recommended for a well organised bill market in India in 1931. But then British government did not pay any attention to this recommendation. Consequently, there could not be any development in this direction. There are following causes for the inavailability of a developed and organised bill market in India.
(1) Hundi had been in use in India since ancient time. Hundis are written in the regional languages. So there is a lack of uniformity in form, language and types of Hundis. The bill of exchange could not be used on the national level due to these dissimilarities.
(2) Cash credit has had an important contribution in the development of commercial banks in India. Due to the easy availability of cash credit the bill of exchange could not get much popularity.
(3) High cost due to stamp on bill of exchange was also a barrier of development.
(4) High rate of discounting in the case of getting it discounting with banks also became a barrier in its use.
(5) There has been lack of institutions getting the bill accepted on behalf of customers.
(6) The tendency of commercial banks to invest money in government securities also created barrier in the development of bill market
(7) The Reserve Bank also started its attempts very late in this direction
(8) The lack of awareness for its use among the traders has also been a barrier in its use.
Bill Market Scheme of Reserve Bank : Reserve Bank started a bill market scheme from 16th Jan. 1952 with the objective of encouraging the bill market in India. According to this scheme. Reserve Bank gave the banks the facility that they can convert the demand promissory notes obtained from their customers in return for cash credit, overdraft or loans into certain promissory notes of 90 days or bills of the same time. At the same time they were also allowed to take demand loan from Reserve Bank on the mortgage of these tenure bill. Initially, this scheme was limited for those scheduled banks only which had at least 10 crore as their total deposit. A bank had to take loans for a minimum amount of 25 lakh and the minimum amount of bill was determined to be 1 Lakh. The small banks were not able to get the benefit of this scheme due to these conditions. Again in June 1953, this scheme was implemented on banks having a deposit of 5 crore or more. In July 1954, all those schedule banks which had the license of doing banking work were included in this scheme. It means the condition of amount of deposit was removed. At the same time, the limitation of loans to be taken by banks was reduced from 25 lakh to 10 lakh. Initially, this scheme was for one year and its minimum amount was determined to be * 2 lakh. The minimum amount for every bill was determined to be 20 thousand. From October 1959, the minimum amount of Loan was reduced to be 31 Lakh and the minimum amount per bill was determined to be 10 thousand. From Jan. 1961, the amount per bill was reduced to be * 5 thousand. An amendment in the Reserve Bank of India Act was made in September 1962 and the period of export bill for sale and purchase and rediscounting was increased up to 180 days. To encourage the export, Reserve Bank of India launched Export Bill Credit Scheme from March 1963. According to it, the scheduled bank declares the export bills under their authority and writes promissory notes to RBI. They get loan from RBI on the basis of this promissory note.
market Instrument Their Functions
NEW BILL RE DISCOUNTING SCHEME, 1970
According to the recommendations of the observation committee set up in February, 1970, RBI launched a new scheme in November 1970. It was called Bill Re discounting Scheme, 1970. There was an arrangement in this scheme that RBI will accept such trade bills for rediscounting which have been presented by the licensed scheduled banks and the bill has been written by the licensed banks and also accepted by the licensed banks. If it is not so, it must contain the signature of any licensed scheduled bank. The general period of the bill was determined to be 90 days but in special circumstances, it was allowed to accept bills for 120 days also. The minimum amount of every bill of exchange presented before RBI for rediscounting was determined to be * 5 thousand. At the same time, the total amount of bill of exchange presented before RBI at a time should not be less that 50 thousand. It was expected from scheduled banks that they should get more and more benefits from this scheme and get the bill discounted by them re discounted by RBI.
Two important steps were taken by RBI in 1974-75 under Bill rediscounting scheme.
These steps are as follows:
(1) The scheduled commercial banks could have their bill of exchange rediscounted by some other institutions besides RBI such as other commercial banks, Life Insurance Corporation, General Insurance Corporation, Unit Trust of India etc.
(2) The facilities of rediscounting of bills were provided from the Ahmedabad office of RBI since 1st April, 1975.
Evaluation : However the Bill Market scheme of RBI has played a commendable role in encouraging the bill market in India, it had certain lackings :
(1) It was a major drawback of this scheme that it did not provide the system of independent sale and purchase of bills. Instead, it made arrangement for changing bills into tenure bill by scheduled banks.
(2) It was expensive to change demand bills into tenure bills.
(3) It was not favourable for smaller banks because they fell short of the minimum limits of loans and bills.
(4) It was not capable of fulfilling the long term financial requirements.
(5) Non-banking finance institutions were kept away from this scheme.
(6) This scheme could meet only seasonal requirements.
(7) There was lack of flexibility in the condition of getting loan under this scheme.
(8) There was no provision for agricultural loan in this scheme.
market Instrument Their Functions
SUGGESTIONS FOR THE DEVELOPMENT OF BILL MARKET
Following suggestion can be given for the development of bill market in India :
(1) However stamp duty was reduced by the government of India, according to the recommendations of Indian Central Banking Inquiry committee, there is need of more reduction in it.
(2) There should be standardisation of bills and hundis in use in India for the organised development of bill market.
(3) Clearing houses should be set up in the country and they provide the same kind of assistance in the payment of bills they provide to banks.
(4) To encourage the agricultural bills written on the basis of standing crops could be accepted and there should be arrangement of granting loans on the basis of their mortgage.
(5) Acceptance houses should be established on large scale in the country.
(6) There should be establishment of licensed godowns in large number so that agricultural bills can be written on the basis of agricultural products kept in godowns.
(7) The use of hundis of native bankers should also be encouraged like other bills.
SHORTCOMINGS OF THE INDIAN MONEY MARKET
It’s essential to have a developed money market for the consolidation of Indian economy. But the Indian money market is still undeveloped. Their main shortcomings are :
(1) Lack of Organisation and Cooperation : Indian money market is divided into two parks organised and unorganised. There is neither organisation nor cooperation between these two. The sub-market of the money market also compete among them. Such a situation is not proper for the economy of any country.
(2) Multiplicity of Indigenous Bankers and Mahajans : Indigenous bankers and mahajans have much influence in the Indian money market. They don’t have any control of RBI over them. As a result, it is not affected by the interest rate of the market. Sometimes due to this monetary policy of RBI doesn’t succeed properly.
(3) Dissimilarities in Interest Rates : There is difference in the interest rates of the organised and unorganised sectors. At the same time there is difference in the interest rates within the organised sector itself. The different rates of interest are affected on the loans of different institutions. It is a major shortcoming of the money market.
(4) Seasonal Scarcity of Money : There is a peak period with the respect of transactions of loan in the Indian money market from Oct.-Nov. to April-May. In this period, there is an increased demand of money but there is no increase in the supply. Consequently, the rate of interest increases in this period. The increase in the demand of money in this period is to meet agricultural requirements. Again, during the thin period the demand of money is less and it lowers the rate of interest of the economy. Fluctuation in interest rate is not in favour of the economy.
(5) Lack of all India Money Market : Indian money market is divided into regional sub-market. There is lack of an all India money market. There is also lack of mutual communication in these regional markets.
(6) Lack of Organised Bill Market: The bill market is still underdeveloped in India for various reasons while the bill market is not only an effective organ of the money market but it benefits the purchasers, sellers and banks.
(7) Lack of Clearing Houses : However, there are large number of clearing houses in the country, but their members is still insufficient. Most of the clearing houses in the country are organised by the State Bank of India. There are many faults in its working which causes inconvenience to customers.
market Instrument Their Functions
MEASURES TO IMPROVE INDIAN MONEY MARKET
Money Market is an important organ of the economy of the country. So, many steps have been taken from time to time by the government to remove the shortcomings of this market. RBI was established in 1935 and it was nationalised in 1949. Banking companies Act was implemented in 1949 and there have been several amendments in it at various points of times. Again, the establishment of SBI and nationalisation of commercial banks are considered steps taken for the improvement of money market. A committee, popularly known as Sukhmay committee, was set up to give recommendations for the improvement and development in the monetary system. This committee gave many recommendations in 1985. RBI set up a work force, in the chairmanship of Mr. N. Bhaghal to consider over these recommendations. It presented its report in 1987. Many measures for the improvement in the money market were taken on the basis of these recommendations. RBI set up Discount and finance House of India-DFHI with the cooperation of the public sector banks and the other major financial institutions. The commercial paper and deposit certificate were started in 1988-89. The regulation of interest rate was made flexible and the determination of it started to take place with the forces of demand and supply. There was also expansion of government security market. A new credit evaluation agency called Onida Individual Credit Rating Agency of India Limited ONICRA was started in November 1993 for evaluation of personal credit. This eased the job of credit evaluation of the persons demanding credit for trade. However the bance of indigenous bankers and mahajans still continues. Their activities have weakened after the foundation of Regional Rural Banks.
Despite the above mentioned steps, there is the need of adopting following measures
(1) RBI should determine solid policies for the regulation of unorganized sector of money market.
(2) It should observe whether the rural people are properly profited by the development of co-operative banks or not.
(3) There should be standardization of hundis by bringing uniformity in these.
(4) There should be increase in the numbers of clearing houses.
(5) There should be development of bill market.
(6) The mutual cooperation and organisation of financial markets should be strengthened.
(7) There should be increase in the facility of money transfer considering the common people.
(8) The use of credit instruments should be promoted.
(9) The branches of banks should be established in the areas where these are not presented.
(10) The banking habit should be developed among people.
B. CAPITAL MARKET
Capital market refers to such market in which all those facilities and institutions are included which are involved in the functions of meeting the long-term financial requirements. The main practice in this market is sale and purchase of shares and debentures. This market encourages people to invest their small savings in productive activities. This benefits the investors, those who demand finance in the economy.
NATURE AND FEATURES OF CAPITAL MARKET,
The main Features of the capital market are as follows:
(1) Important Component of Financial Market : There are two parts of financial market : Money market and capital market. The capital market plays an important role in fulfilling the long-term financial requirements of the economy. The development of industries has taken place due to capital market only.
(2) Dealing in Securities : Long-term securities refers to such securities which have more than one year of maturity period. This market deals in marketable and non-marketable government and non-government securities. The marketable securities includes shares and debentures issued by companies and bonds etc. issued by the government while the non-marketable securities include the fixed deposits with banks and companies and loans and advances given to industrial institutions.
(3) Segments : There are two segments of the capital market-Primary market and secondary market. New shares are issued in the primary market while previously purchased shares are sold and purchased in the secondary market.
(4) Intermediaries : The capital market works through various intermediaries which include under writers, mutual funds, stock brokers, banks etc.
(5) Investors: There are both individual and institutional investors investing in long-term funds in the capital market.
(6) Flow of Capital : This market makes the flow of capital from investors to the needy people. This provides an economic stage to those who demand capital and those who supply capital.
(7) Helpful in Capital Formation: There is opportunity of investment in the capital market. It brings profit. This profit is again invested and the sequence goes on. This leads to capital formation.
TYPES OF CAPITAL MARKET
There are two types of capital market-Organised Capital Market and Unorganised Capital Market. Again, the organised capital market includes primary and secondary capital markets. The types of capital market can be clarified with the help of the following diagram.
Capital Market
I. Organised Capital Market II. Unorganised Capital Market
(a) Primary Market (b) Secondary Market
1 Organised Capital Market : The organised capital market refers to such Capital Market which is bound with certain rule or controlled by the government or any organisation of the government. Indian capital market is controlled by Securities and Exchange Board of India—SEBI and RBI.
There are two parts of organised capital market : (a) Primary Market and (b) Secondary Market.
(a) Primary Market : Primary Market relates to new issues. Through this market newly established company and old company collect capital. There is first time sale of shares, debentures and other securities in the primary market to collect long-term capital. When any company issues new shares or debentures it is called Initial. Public Offer (IPO). It is worth–mentioning here that Primary Market is not any geographical area but it is an activity of new issuing by companies. In this market,
flow of money is from savers to industries.
Dealing Process in Primary Market : There are following methods of collecting capital from primary market ::
(1) Public Issue: In this process, the company invites the people to purchase shares or debentures by issuing prospectus. Prospectus refers to such advertisement, information or request through which people are invited to buy shares or debentures. The points mentioned in the prospectus should be according to the guidelines of Indian Company Act and SEBI.
(2) Offer for Sale : In this process of issuing, the company proposes to sell the issuing of securities to its promoters or share brokers on pre-determined prices. Later the shares are sold to common people on high prices through brokers or other mediators. So, in this process company does not sell securities directly to people.
(3) Private Placement: In this process of issuing, the company can sell its securities privately to small groups of investors which includes brokers, financial
Financial Market : Instrument and their Functions | 99 institutions etc. This process is adopted particularly in the collaboration of the domestic and foreign companies. The company is prevented from the cost of public issuing.
(4) Right Issue: When any old company wants to collect surplus capital, it proposes to its current shareholders to buy extra equity shares in then ratio of their current shares. This process is called Right Issue. The shareholder can accept this proposal themselves or can transfer in the favour of somebody else.
(5) Electronic Initial Public Offer (IPOs): In this process, the company issues the initial public offer through electronic medium after taking the approval of SEBI. Internet is its basis. In this process, the brokers authorised by SEBI are appointed to accept online application form. The company issuing securities also appoints a registrar to fulfill the work of issue.
Thus, the issuing of securities in the primary market can be done through any of the above mentioned processes.
(b) Secondary Market: When any security is resold, it is called secondary market activity. Such activities are generally fulfilled through stock exchange. Secondary market provides liquidity to securities. Only those securities which are listed with the stock exchange are dealt in the secondary market. In the words of Payle, “A stock exchange is a place where listed securities are sold and purchased with the view of investment and speculation.
DIFFERENCES BETWEEN PRIMARY AND SECONDARY MARKET
The main differences between the primary and secondary market has been clarified in the following table :
II. Unorganised capital market includes indigenous bankers, creditors and pawn brokers. It has hi SEBI. However these days the grasp of RBI and SEBI on to creditors and pawn brokers. It has little control of RBI and in the interest of investors. se days the grasp of RBI and SEBI on this sector has increased
INSTRUMENTS OF CAPITAL MARKET
The securities which are dealt in the capital market are called the struments of capital market. The main instruments of the capital market Include shares, debentures and bonds. These can be explained in the following ways:
SHARES
The smallest divisible units of total capital of any joint stock company are called shares.
According to M. C. Kuchhal, “A share in a company is one of the units into which the total capital of the company is divided.”
KINDS OF SHARES
According to Indian company Act, 1956, there are two kinds of shares 1. Preference shares and 2. Equity shares.
(1) Preference Shares : The preference shares refer to those shares on which there is preference of getting dividend on the pre-determined rate and capital return in the case of the liquidation of the company.
There are following types of preference shares :
(i) Cumulative Preference Shares : The holders of these shares has right to get dividend first of all. If in a year, the bearer of such shares don’t get dividend due to insufficient profit or no profit, such dividend becomes cumulative so long as they are not completely paid.
(ii) Non-cumulative Preference Shares: The dividend of such shares is not cumulative. If in a year, the company does not declare any dividend for any reason, the holder doesn’t get any dividend nor is it considered to be due.
(iii) Participating Preference Shares : Participating Preference Shares are those shares which are entitled to a share in the surplus profit of the company which remains after payment to equity shareholders. Thus, these shares get a share in surplus profit apart from fixed rate of dividend.
(iv) Non-Participating Preference Shares: The holders of such shares have the authority of getting dividend at a fixed rate only. If the articles of associations are silent, all preference shares are assumed to be
cumulative and non-participating.
(v) Redeemable Preference Shares: These are such shares the amount of which is redeemable during the lifetime of company according to the condition of issuing.
(vi) Iredeemable Preference Shares: The amount of this shares cannot be refunded before the liquidation of the company.
(vii) Convertible Preference Shares : The holder of this shares have the authority that they can get these shares converted into equity shares according to the condition of issuing.
(vii) Non-convertible Preference Shares : The holder of this shares are not given the right to convert their shares into equity shares.
(2) Equity Shares : Equity shares refers to those shares which are not preference shares. They get dividend from the amount remaining after giving dividends to the preference shareholders from the divisible profits. According to the Article 85(2) of the Indian Company Act, 1956, “Equity shares refer to those shares which don’t have preference as in the case of preference shares.”
Sweat Equity Shares : Sweat Equity Shares are those shares which are issued by the company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available intellectual property rights provided that not less than one year has lashed since the date of commencement of business. Such shares cannot be resold within a period of one year.
Debenture and Bonds: Debenture is an agreement between the creditor and the company according to which the company makes the promise of repaying the loan taken by it along with proper interest, according to the Article 2(12) of the Indian Company Act, 1956, “Debenture includes debenture of stock, bonds and any other security of a company whether constituting a charge on the assets of the company or not.”
Similarly bond is also a document resembling debenture. Generally bonds are issued by the government, but these days even the semi-government and non-government organisations have started issuing bond as the evidence of loan. There is one fundamental difference between bond and debenture that in the case of debenture the interest rate is predetermined, while bonds can be issued without predetermined interest rates some examples are—Deep Discount Bond, Zero Coupon Bond etc.
KINDS OF DEBENTURES
The types of debentures are as follows:
(1) Registered Debentures: The names of the holders of these debentures are mentioned in the register of the company. The redemption of debentures with interest is made only to those persons whose name is there in the register of the company. This debenture is not transferred independently.
(2) Bearer Debentures : The payment of the principal and interest on this debenture is done to the bearer of the debenture.
(3) Secured or Mortgaged Debentures : These are such debentures for the payment of which either some particular assets of the company called fixed charge or all the assets called floating charge are mortgaged. In the case of any fault or failure in the payment of principal or interest, the company can’t sell the mortgaged property.
(4) Unsecured or Naked Debentures : These are such debentures on which the assets of the company are not mortgaged for the payment of principal or interest.
(5) Redeemable Debentures: These are such debentures the payment of which is done during the life time of the company as a lump sum amount or in installments.
(6) Iredeemable Debentures : The payment of the principal of this debenture is not in the life time of the company. Holders of such debentures cannot demand their repayment before the winding up of a company.
(7) Convertible Debentures : The holder of these debentures are given an option to convert them into shares at a stated rate of exchange after a certain period.
(8) Non-convertible Debentures: Such debentures cannot be converted into equity shares in
DIFFERENCE BETWEEN SHARES AND DEBENTURES
The difference between shares and debentures can be clarified in the follow table :
| Basic of Difference | Shares | Debentures |
| 1. Part | Share is a part of a Capital | A debenture is a part of loan |
| 2.Ownwrship | Its Holder is Called Owner | Its Holder is called Creditors |
| 3.Dividend/ Interest | Dividend on Paid on Shares | Interest is paid on Debentures |
| 4. Certainty of Income | Shareholders Generally participate in management | There is Interest on a certain rate on it |
| 5.Securrity | Shares are Generally in secured | Debentures are Generally Secured |
| 6. Power in Management | Shareholders Generally participate in management | The Holders of debentures do not have voting right in the company |
| 7.Types | The share holders have the voting right in the company | The holders of debentures do not have voting right in the company |
| 8 Types
|
There are tow types of shares | There are many types of debentures |
market Instrument Their Functions
DIFFERENCE BETWEEN CAPITAL MARKET AND MONEY MARKET
Both the capital market and money market are organs of financial market. But there are some differences between the two. Their main difference can be clarified in the following table
| Basis of difference | Capital market | Money Market |
| 1. Period | Its period is more than 1 Year | Its period is from 1 day to year
one year |
| 2. Components | Its main components are primary and secondary |
Its main components in clude demand money market , bill money market and discounting money market.
|
| 3. Liquidity | It has limited liquidity | It has high liquidity |
| 4. Instruments | The main instruments of the capital market include shares, debentures and trade bills, treasury bills, bonds.
|
The main instruments of money market includes certificate of deposits and commercials papers.
|
| 5. Control | Capital market is controlled trolled by SEBI. | Money Market is controlled trolled by RbI |
| 6. Safety Elements | There is more risk in this market because there is sale and purchase of sale and purchase of securities of all kinds of Companies In it . | There is more safety in this market because there is Sale and purchase of securities of government, financial institutions and good companies.
|
| 7. Role of Brokers | All the transactions are through brokers in this market | Transactions take lace with or without the help of brokers |
| 8. Participant | . Its participants include people, financial institute – Companies and foreign investors | Its Participants include Rbi Financial Institutions and financial Companies |
| 9. Cos of Transactions | It has high cost of transactions | It has comparatively low cost of transactions . |
| 10. Nature of Capital | Both permanent and work-Only working capital are arranged in the Capital Market | Only working Capital is arranged in the money market |
market Instrument Their Functions
EXERCISE QUESTIONS
Long Answer Type Questions
1 What do you mean by Financial Market ? Describe its functions.
2. What is Money Market? Explain its characteristics.
3. Explain the main instruments of Money Market.
4. Explain the shortcoming of Indian Money Market. What measures are taken to improve it?
5. What is Capital Market ? Explain its characteristics.
6. Explain the kinds of Capital Market.
7. What is share ? Explain its type.
8. What is debenture ? What are its types ?
9. Distinguish between Capital Market and Money Market.
10. Distinguish between Primary Market and Secondary Market
Short Answer Type Questions
1. What is Financial Market ?
2. What do you mean by Money Market?
3. Explain Treasury Bill.
4. Explain the dealing process of demand money.
5. Write a note on bill of exchange.
6. What do you mean by New Bill Rediscounting Scheme, 1970 ?
7. Describe the nature of Capital Market.
8. Distinguish between shares and debentures.
9. What do you understand by debentures ?
10. What is Sweat Equity Shares ?
market Instrument Their Functions
III. Objective Type Questions
Choose the correct option
1 Money market deals in ………
(a) Short-term Fund
(b) Long-term Fund
(c) Medium-term Fund
(d) None of these
2. Capital market deals in ……
(a) Short-term Fund
(b) Medium-term Fund
(c) Long-term Fund
(d) All these
3. The maximum period for treasury bill is …
(a) 14 days
(b) 91 days
(c) 182 days
(d) 364 days
4. Maximum period of commercial paper is .
(a) 3 Months
(b) 6 Months
(c) 12 Months
(d) 36 Months
5. Instruments of money market includes(s).
(a) Treasury Bill
(b) Commercial Paper
(c) Certificate of Deposit
(d) All these
6. The market of new issue of called ………….
(a) Primary Market
(b) Stock Exchange
(c) Produce Exchange
(d) All these
7. Which of these is/are process(es) of dealing in the primary market ?
(a) Public Issue
(b) Initial Offer
(c) Private Arrangement
(d) All these
8. Which kind of issue relates to the secondary market ?
(a) New
(b) Old
(c) New and Old
(d) Government
9. The holders of shares are …………….. of the company.
(a) Owner
(b) Creditor
(c) Debtor
(d) None of these
10. The holders of debentures get in the return:
(a) Dividend
(b) Interest
(c) Dividend and Interest
(d) None of these
11. The participants of capital market is/are.
(a) Common People
(b) Financial Institutions
(c) Companies
(d) All these
[Ans. 1. (a), 2.(c), 3. (d), 4. (c), 5. (d), 6. (a), 7. (d), 8. (b), 9. (a), 10.(b), 11. (d).
market Instrument Their Functions
