Financial Markets PDF

chapter 10 Financial Markets SENSEX — The Bombay Stock LEARNING OBJ...

chapter 10 Financial Markets SENSEX — The Bombay Stock LEARNING OBJECTIVES Exchange Sensitive Index Have you counted the number of After studying this chapter, times newspaper headlines in the past you should be able to: few weeks have been discussing the SENSEX? It goes up and down all the time and seems to be a very important ¾¾ explain the meaning of part of business and economic news. Has that made you wonder what the Financial Market; SENSEX actually is? The SENSEX is the benchmark index of the BSE. Since the BSE has ¾¾ explain the meaning of been the leading exchange of the Money Market and describe Indian secondary market, the SENSEX its major Instruments; has been an important indicator of the Indian stock market. It is the most frequently used indicator while ¾¾ explain the nature and reporting on the state of the market. types of Capital Market; An index has just one job: to capture the price movement. So a stock index will reflect the price movements of shares while a bond index captures the ¾¾ d i s t i n g u i s h b e t w e e n manner in which bond prices go up or Money Market and Capital down. If the SENSEX rises, it indicates Market; the market is doing well. Since stocks are supposed to reflect what companies expect to earn in the future, a rising ¾¾ e x p l a i n t h e m e a n i n g index indicates that investors expect and functions of Stock better earnings from companies. It Exchange; is also a measure of the state of the Indian economy. If Indian companies are expected to do well, obviously the economy should do well too. ¾¾ describe the functioning of NSEI and OTCEI; and The SENSEX, launched in 1986 is made up of 30 of the most actively traded stocks in the market. In fact, they account for half the BSE’s market ¾¾ describe the role of SEBI in capitalisation. They represent 13 sectors investor protection. of the economy and are leaders in their respective industries. 2021–22 Ch_10.indd 252 29-Dec-20 3:25:25 PM  FINANCIAL MARKETS 253 Introduction sectors – households which save funds and business firms which You all know that a business needs invest these funds. A financial market finance from the time an entrepreneur helps to link the savers and the makes the decision to start it. It needs investors by mobilizing funds between finance both for working capital them. In doing so it performs what is requirements such as payments for raw known as an allocative function. It materials and salaries to its employees, allocates or directs funds available for and fixed capital expenditure such as investment into their most productive the purchase of machinery or building investment opportunity. When the or to expand its production capacity. allocative function is performed well, The above example gives a fair picture two consequences follow: of how companies need to raise funds The rate of return offered to from the capital markets. Idea Cellular households would be higher decided to enter the Indian capital Scarce resources are allocated to market for its needs of expansion. In those firms which have the highest this chapter you will study concepts productivity for the economy. like private placement, Initial public Offer (IPO) and capital markets which There are two major alternative you come across in the example of mechanisms through which allocation Idea Cellular. Business can raise of funds can be done: via banks or these funds from various sources and via financial markets. Households in different ways through financial can deposit their surplus funds with markets. This chapter provides a brief banks, who in turn could lend these description of the mechanism through funds to business firms. Alternately, which finances are mobilised by a households can buy the shares and business organisation for both short debentures offered by a business using financial markets. The process term and long term requirements. It also by which allocation of funds is done is explains the institutional structure and called financial intermediation. Banks the regulatory measures for different and financial markets are competing financial markets. intermediaries in the financial system, and give households a choice of where Concept of Financial Market they want to place their savings. A business is a part of an economic A financial market is a market system that consists of two main for the creation and exchange of HOUSEHOLDS BUSINESS FIRMS BANKS FINANCIAL MARKETS SAVERS INVESTORS 2021–22 Ch_10.indd 253 29-Dec-20 3:25:34 PM  BUSINESS  STUDIES 254 Financial System financial assets. Financial markets Productive Uses: A financial market exist wherever a financial transaction facilitates the transfer of savings from occurs. Financial transactions could savers to investors. It gives savers the be in the form of creation of financial choice of different investments and assets such as the initial issue of thus helps to channelise surplus funds shares and debentures by a firm or the into the most productive use. purchase and sale of existing financial 2. Facilitating Price Discovery: You assets like equity shares, debentures all know that the forces of demand and bonds. and supply help to establish a price for a commodity or service in the Functions of Financial Market market. In the financial market, the Financial markets play an important households are suppliers of funds and role in the allocation of scarce resources business firms represent the demand. in an economy by performing the The interaction between them helps following four important functions. to establish a price for the financial 1. Mobilisation of Savings and asset which is being traded in that Channeling them into the most particular market. 2021–22 Ch_10.indd 254 29-Dec-20 3:25:42 PM  FINANCIAL MARKETS 255 3. Providing Liquidity to Financial than one year are traded in the money Assets: Financial markets facilitate market. Instruments with longer easy purchase and sale of financial maturity are traded in the capital assets. In doing so they provide market. liquidity to financial assets, so that they can be easily converted into Money Market cash whenever required. Holders of assets can readily sell their financial The money market is a market for short assets through the mechanism of the term funds which deals in monetary financial market. assets whose period of maturity is upto one year. These assets are close 4.Reducing the Cost of Transactions: Financial markets provide valuable substitutes for money. It is a market information about securities being where low risk, unsecured and short traded in the market. It helps to save term debt instruments that are highly time, effort and money that both liquid are issued and actively traded buyers and sellers of a financial asset everyday. It has no physical location, would have to otherwise spend to try but is an activity conducted over the and find each other. The financial telephone and through the internet. It market is thus, a common platform enables the raising of short-term funds where buyers and sellers can meet for for meeting the temporary shortages of fulfillment of their individual needs. cash and obligations and the temporary Financial markets are classified deployment of excess funds for earning on the basis of the maturity of returns. The major participants in financial instruments traded in them. the market are the Reserve Bank of Instruments with a maturity of less India (RBI), Commercial Banks, Non- Banking Finance Companies, State Governments, Large Corporate Houses and Mutual Funds. Classification of Financial Markets FINANCIAL MARKET MONEY MARKET CAPITAL MARKET Primary market Secondary Market Debt Equity Debt Equity 2021–22 Ch_10.indd 255 29-Dec-20 3:25:42 PM  FINANCIAL MARKETS 257 capital Market The term capital market refers to facilities and institutional arrangements through which long-term funds, both debt and equity are raised and invested. It consists of a series of channels through which savings of the community are made available for industrial and commercial enterprises and for the public in general. It directs these savings into their most productive use leading to growth and development of the economy. The capital market consists of development banks, commercial banks and stock exchanges. An ideal capital market is one where finance is available at reasonable cost. The process of economic development is facilitated by the existence of a well functioning capital market. In fact, development of the financial system is seen as a necessary condition for economic growth. It is essential that financial institutions are sufficiently developed and that market operations are free, fair, competitive and transparent. The capital market should also be efficient in respect of the information that it delivers, minimise transaction costs and allocate capital most productively. 2021–22 Ch_10.indd 257 29-Dec-20 3:25:42 PM  BUSINESS  STUDIES 258 The Capital Market can be divided small savings to subscribe to these into two parts: a. Primary Market securities. In the money market, b. Secondary Market transactions entail huge sums of money as the instruments are quite Distinction between Capital Market expensive. and Money Market (iv) Duration: The capital market The major points of distinction between deals in medium and long term the two markets are as follows: securities such as equity shares and debentures. Money market (i)Participants: The participants in instruments have a maximum the capital market are financial tenure of one year, and may even institutions, banks, corporate be issued for a single day. entities, foreign investors and ordinary retail investors from (v)Liquidity: Capital market securities members of the public. Participation are considered liquid investments in the money market is by and because they are marketable on large undertaken by institutional the stock exchanges. However, a participants such as the RBI, share may not be actively traded, banks, financial institutions and i.e. it may not easily find a buyer. finance companies. Individual Money market instruments on investors although permitted to the other hand, enjoy a higher transact in the secondary money degree of liquidity as there is market, do not normally do so. formal arrangement for this. The Discount Finance House of India (ii) Instruments: The main instruments (DFHI) has been established for traded in the capital market are the specific objective of providing – equity shares, debentures, a ready market for money market bonds, preference shares etc. The instruments. main instruments traded in the (vi) Safety: Capital market instruments money market are short term debt are riskier both with respect to instruments such as T-bills, trade returns and principal repayment. bills reports, commercial paper and Issuing companies may fail to certificates of deposit. perform as per projections and (iii) Investment Outlay: Investment in promoters may defraud investors. the capital market i.e. securities But the money market is generally does not necessarily require a huge much safer with a minimum financial outlay. The value of units risk of default. This is due to the of securities is generally low i.e. shorter duration of investing and Rs 10, Rs 100 and so is the case also to financial soundness of the with minimum trading lot of shares issuers, which primarily are the which is kept small i.e. 5, 50, 100 government, banks and highly or so. This helps individuals with rated companies. 2021–22 Ch_10.indd 258 29-Dec-20 3:25:43 PM  FINANCIAL MARKETS 259 (vii)Expected return: The investment in capital markets generally yield a higher return for investors than the money markets. The possibility of earnings is higher if the securities are held for a longer duration. First, there is the scope of earning capital gains in equity share. Second, in the long run, the prosperity of a company is shared by shareholders by way of high dividends and bonus issues. priMary Market The primary market is also known as the new issues market. It deals with new securities being issued for the first time. The essential function of a primary market is to facilitate the transfer of investible funds from savers to entrepreneurs seeking to establish new enterprises or to expand existing ones through the issue of securities for the first time. The investors in this market are banks, financial institutions, insurance companies, mutual funds and individuals. A company can raise capital through the primary market in the form of equity shares, preference shares, debentures, loans and deposits. Funds raised may be for setting up new projects, expansion, diversification, modernisation of existing projects, mergers and takeovers etc. 2021–22 Ch_10.indd 259 29-Dec-20 3:25:43 PM  BUSINESS STUDIES 260 secondary Market The secondary market is also known as the stock market or stock exchange. It is a market for the purchase and sale of existing securities. It helps existing investors to disinvest and fresh investors to enter the market. It also provides liquidity and marketability to existing securities. It also contributes to economic growth by channelising funds towards the most productive priMary and secondary Markets — a coMparison Primary Market Secondary Market (New Issue Market) (Stock Exchange) (i) There is sale of securities by new (i) There is trading of existing shares companies or further (new issues of only. securities by existing companies to investors). (ii) Securities are sold by the company (ii) Ownership of existing securities is to the investor directly (or through exchanged between investors. The an intermediary). company is not involved at all. (iii) The flow of funds is from savers to (iii) Enhances encashability (liquidity) investors, i.e. the primary market of shares, i.e. the secondary market directly promotes capital formation. indirectly promotes capital formation. (iv) Only buying of securities takes place (iv) Both the buying and the selling of in the primary market, securities securities can take place on the stock cannot be sold there. exchange. (v) Prices are determined and decided by (v) Prices are determined by demand and the management of the company. supply for the security. (vi) There is no fixed geographical (vi) Located at specified places. location. 2021–22 Ch_10.indd 260 29-Dec-20 3:25:43 PM  FINANCIAL MARKETS 261 investments through the process for an active and growing primary of disinvestment and reinvestment. market for new issues. An active and Securities are traded, cleared and healthy secondary market in existing settled within the regulatory framework securities leads to positive environment prescribed by SEBI. Advances in among investors. The following are information technology have made some of the important functions of a trading through stock exchanges stock exchange. accessible from anywhere in the country through trading terminals. Along with the growth of the primary market in the country, the secondary market has also grown significantly during the last ten years. Stock Exchange A stock exchange is an institution which provides a platform for buying and selling of existing securities. As a market, the stock exchange facilitates the exchange of a security (share, debenture etc.) into money Bombay Stock Exchange and vice versa. Stock exchanges help companies raise finance, provide 1. Providing Liquidity and Market- liquidity and safety of investment to ability to Existing Securities: The the investors and enhance the credit basic function of a stock exchange is the worthiness of individual companies. creation of a continuous market where securities are bought and sold. It gives Meaning of Stock Exchange investors the chance to disinvest and reinvest. This provides both liquidity According to Securities Contracts and easy marketability to already (Regulation) Act 1956, stock exchange existing securities in the market. means any body of individuals, whether 2. Pricing of Securities: Share prices incorporated or not, constituted for the on a stock exchange are determined purpose of assisting, regulating or by the forces of demand and supply. controlling the business of buying and A stock exchange is a mechanism of selling or dealing in securities. constant valuation through which the prices of securities are determined. Functions of a Stock Exchange Such a valuation provides important The efficient functioning of a stock instant information to both buyers and exchange creates a conducive climate sellers in the market. 2021–22 Ch_10.indd 261 29-Dec-20 3:25:44 PM  BUSINESS  STUDIES 262 3. Safety of Transaction: The There was a time when in the open membership of a stock exchange is outcry system, securities were bought well- regulated and its dealings are and sold on the floor of the stock well defined according to the existing exchange. Under this auction system, legal framework. This ensures that the deals were struck among brokers, investing public gets a safe and fair prices were shouted out and the shares deal on the market. sold to the highest bidder. However, 4. Contributes to Economic Growth: now almost all exchanges have gone A stock exchange is a market in electronic and trading is done in the which existing securities are resold broker’s office through a computer or traded. Through this process of terminal. A stock exchange has its disinvestment and reinvestment main computer system with many savings get channelised into their terminals spread across the country. most productive investment avenues. Trading in securities is done through This leads to capital formation and brokers who are members of the stock economic growth. exchange. Trading has shifted from the 5. Spreading of Equity Cult: The stock market floor to the brokers office. stock exchange can play a vital role Every broker has to have access to in ensuring wider share ownership by a computer terminal that is connected regulating new issues, better trading to the main stock exchange. In this practices and taking effective steps in screen-based trading, a member logs educating the public about investments. on to the site and any information about 6. Providing Scope for Speculation: the shares (company, member, etc.) he wishes to buy or sell and the price is The stock exchange provides sufficient fed into the computer. The software is scope within the provisions of law for so designed that the transaction will speculative activity in a restricted be executed when a matching order is and controlled manner. It is generally found from a counter party. The whole accepted that a certain degree of transaction is carried on the computer healthy speculation is necessary to screen with both the parties being able ensure liquidity and price continuity to see the prices of all shares going up in the stock market. and down at all times during the time that business is transacted and during Trading and Settlement Procedure business hours of the stock exchange. Trading in securities is now executed The computer in the brokers office is through an on-line, screen-based constantly matching the orders at the electronic trading system. Simply best bid and offer price. Those that are put, all buying and selling of shares not matched remain on the screen and and debentures are done through a are open for future matching during computer terminal. the day. 2021–22 Ch_10.indd 262 29-Dec-20 3:25:44 PM  FINANCIAL MARKETS 263 can sit in the broker’s office, log on to the computer at the same time and buy or sell securities. This system has enabled a large number of participants to trade with each other, thereby improving the liquidity of the market. 5. A single trading platform has been provided as business is transacted at the same time in all the trading centres. Thus, all the trading centres spread all over the country have been brought onto Electronic Trading System one trading platform, i.e., the stock exchange, on the computer. Electronic trading systems or Now, screen-based trading or on-line screen-based trading has certain trading is the only way in which you advantages: can buy or sell shares. Shares can 1. It ensures transparency as it be held either in physical form or an allows participants to see the electronic book entry form of holding prices of all securities in the and transferring shares can also be market while business is being adopted. This electronic form is called transacted. They are able to see dematerialised form. the full market during real time. The following steps are involved in 2. It increases efficiency of the screen-based trading for buying information being passed on, thus and selling of securities: helping in fixing prices efficiently. 1.If an investor wishes to buy or sell any The computer screens display security he has to first approach a information on prices and also registered broker or sub-broker capital market developments that and enter into an agreement influence share prices. with him. The investor has to 3. It increases the efficiency of sign a broker-client agreement operations, since there is reduction and a client registration form in time, cost and risk of error. before placing an order to buy 4. People from all over the country or sell securities. He has also to and even abroad who wish to provide certain other details and participate in the stock market information. These include: can buy or sell securities through PAN number brokers or members without (This is mandatory) knowing each other. That is, they Date of birth and address. 2021–22 Ch_10.indd 263 29-Dec-20 3:25:46 PM  BUSINESS  STUDIES 264 Educational qualification and Client code number in the occupation. client registration form. Residential status (Indian/ The broker then opens a trading NRI). account in the name of the Bank account details. investor. Depository account details. 2.The investor has to open a ‘demat’ account or ‘beneficial owner’ Name of any other broker with (BO) account with a depository whom registered. participant (DP) for holding and transferring securities in the demat Regulator form. He will also have to open a NDSL (NSE) AND CDSL BI bank account for cash transactions (BSE) SE in the securities market. Gateway IE S Bank, OR to access Trading DE PO AIT Financial Institution, 3.The investor then places an order Broker with the broker to buy or sell Y Terminal OR SIT TS (D P) Transact, PO DE CIPA N eligible as per SEBI track, markey move PA R TI shares. Clear instructions have and manages fund to be given about the number of RS T TO UN ES CCO shares and the price at which the V IN TA MA shares should be bought or sold. DE The broker will then go ahead with TRANSACTION DAY [T] ORDERMATCH ON EXCHANGE BUY ORDER SELL ORDER BROKER BROKER SAUDA (TRADE) ORDER PLACED CONTRACT NOTE CONTRACT NOTE T+2 SEETTLEMENT T+2 SEETTLEMENT FILES OF OBLIGATION DOWNLOADED BY CLEARNING MEMBERS (NDSL/CDSL) Transfer to the Transfer to the pool account of Pool Pool pool account of clearning houses clearning houses T+1 Backent Process Transfer to the pool Transfer to the pool account of the broker account of the broker Transfer to the pool Transfer to the pool account of the broker account of the broker 2021–22 Ch_10.indd 264 29-Dec-20 3:25:47 PM  FINANCIAL MARKETS 265 the deal at the above mentioned 7.Now, the investor has to deliver the price or the best price available. An shares sold or pay cash for the order confirmation slip is issued to shares bought. This is called the the investor by the broker. pay-in day. 4.The broker then will go on-line 8.Cash is paid or securities are and connect to the main stock delivered on pay-in day, which is exchange and match the share and best price available. before the T+2 day as the deal has to be settled and finalised on the 5.When the shares can be bought or T+2 day. The settlement cycle is sold at the price mentioned, it will on T+2 day on a rolling settlement be communicated to the broker’s terminal and the order will be basis, w.e.f. 1 April 2003. executed electronically. The broker 9.On the T+2 day, the exchange will issue a trade confirmation slip will deliver the share or make to the investor. payment to the other broker. This 6.After the trade has been executed, is called the pay-out day. The within 24 hours the broker issues broker then has to make payment a Contract Note. This note contains to the investor within 24 hours details of the number of shares of the pay-out day since he has bought or sold, the price, the already received payment from the date and time of deal, and the exchange. brokerage charges. This is an 10. The broker can make delivery important document as it is legally enforceable and helps to settle of shares in demat form directly disputes/claims between the to the investor’s demat account. investor and the broker. A Unique The investor has to give details of Order Code number is assigned his demat account and instruct to each transaction by the stock his depository participant to take exchange and is printed on the delivery of securities directly in his contract note. beneficial owner account. Project Work 1. Study the website of Bombay Stock Exchange, i.e., www.bseindia.com and compile information which you find useful. Discuss it in your class and find out how it can help you should you decide to invest in the stock market. Prepare a report on your findings with the help of your teacher. 2. Prepare a report on the role of SEBI in regulating the Indian stock market. You can get this information on its website namely www.sebi.gov.in. Do you think something else should be done to increase the number of investors in the stock market? 2021–22 Ch_10.indd 265 29-Dec-20 3:25:47 PM  BUSINESS  STUDIES 266 Dematerialisation and Depositories through a single account in shares. These demat securities can even be All trading in securities is now done pledged or hypothecated to get loans. through computer terminals. Since all There is no danger of loss, theft or systems are computerised, buying and forgery of share certificates. It is the selling of securities are settled through broker’s responsibility to credit the an electronic book entry form. This is investor’s account with the correct mainly done to eliminate problems like number of shares. theft, fake/forged transfers, transfer delays and paperwork associated with Working of the Demat System share certificates or debentures held in physical form. 1.A depository participant (DP), either This is a process where securities a bank, broker, or financial services held by the investor in the physical company, may be identified. form are cancelled and the investor is 2.An account opening form and given an electronic entry or number so documentation (PAN card details, that she/he can hold it as an electronic photograph, power of attorney) balance in an account. This process may be completed. of holding securities in an electronic 3.The physical certificate is to be form is called dematerialisation. given to the DP along with a For this, the investor has to open a dematerialisation request form. demat account with an organisation 4.If shares are applied in a public called a depository. In fact, now all offer, simple details of DP and Initial Public Offers (IPOs) are issued demat account are to be given and in dematerialisation form and more the shares on allotment would than 99% of the turnover is settled by automatically be credited to the delivery in the demat form. demat account. The Securities and Exchange Board of India (SEBI) has made 5.If shares are to be sold through a it mandatory for the settlement broker, the DP is to be instructed to procedures to take place in demat debit the account with the number form in certain select securities. of shares. Holding shares in demat form 6.The broker then gives instruction to is very convenient as it is just his DP for delivery of the shares to like a bank account. Physical shares the stock exchange. can be converted into electronic 7.The broker then receives payment form or electronic holdings can be and pay the person for the shares reconverted into physical certificates sold. (rematerialisation). Dematerialisation enables shares to be transferred to 8.All these transactions are to be some other account just like cash completed within 2 days, i.e., and ensures settlement of all trades delivery of shares and payment 2021–22 Ch_10.indd 266 29-Dec-20 3:25:47 PM  FINANCIAL MARKETS 267 received from the buyer is on a T+2 investor and the Depository (NSDL or basis, settlement period. CSDL) who is authorised to maintain the accounts of dematerialised shares. Depository Financial institutions, banks, clearing corporations, stock brokers and Just like a bank keeps money in safe non-banking finance corporations custody for customers, a depository are permitted to become depository also is like a bank and keeps securities participants. If the investor is buying in electronic form on behalf of the and selling the securities through the investor. In the depository a securities broker or the bank or a non-banking account can be opened, all shares can finance corporation, it acts as a DP be deposited, they can be withdrawn/ for the investor and complete the sold at any time and instruction to formalities. deliver or receive shares on behalf of the investor can be given. It is a o technology driven electronic storage system. It has no paper work relating to share certificates, transfer, forms, etc. All transactions of the investors are settled with greater speed, efficiency and use as all securities are entered in a book entry mode. In India, there are two depositories. National Securities Depositories Limited (NSDL) is the first and largest depository presently operational in India. It was promoted as a joint venture of the IDBI, UTI, and the National Stock Exchange. The Central Depository Services Limited (CDSL) is the second depository to commence operations and was promoted by the Bombay Stock Exchange and the Bank of India. Both these national level depositories operate through intermediaries who are electronically connected to the depository and serve as contact points with the investors and are called depository participants. The depository participant (DP) serves as an intermediary between the 2021–22 Ch_10.indd 267 29-Dec-20 3:25:47 PM  BUSINESS STUDIES 270 Reasons for the Establishment of SEBI The capital market has witnessed a tremendous growth during 1980’s, characterised particularly by the increasing participation of the public. This ever expanding investors population and market capitalisation led to a variety of malpractices on the part of companies, brokers, merchant bankers, investment consultants and others involved in the securities market. The glaring examples of these malpractices include existence of self – styled merchant bankers unofficial private placements, rigging of prices, unofficial premium on new issues, non-adherence of provisions of the Companies Act, violation of rules and regulations of stock exchanges and listing requirements, delay in delivery of shares etc. These malpractices and securities and eXchange Board oF unfair trading practices have eroded india (seBi) investor confidence and multiplied The Securities and Exchange Board investor grievances. The Government of India was established by the and the stock exchanges were rather Government of India on 12 April helpless in redressing the investor’s 1988 as an interim administrative problems because of lack of proper body to promote orderly and healthy penal provisions in the existing growth of securities market and for legislation. In view of the above, the investor protection. It was to function Government of India decided to set- under the overall administrative up a separate regulatory body known control of the Ministry of Finance of as Securities and Exchange Board of the Government of India. The SEBI India. was given a statutory status on 30 January 1992 through an ordinance. Purpose and Role of SEBI The ordinance was later replaced by The basic purpose of SEBI is to an Act of Parliament known as the create an environment to facilitate Securities and Exchange Board of efficient mobilisation and allocation India Act, 1992. of resources through the securities 2021–22 Ch_10.indd 270 29-Dec-20 3:25:48 PM  FINANCIAL MARKETS 271 markets. It also aims to stimulate 2.To protect the rights and interests of competition and encourage innovation. investors, particularly individual This environment includes rules investors and to guide and educate and regulations, institutions and them. their interrelationships, instruments, 3.To prevent trading malpractices and practices, infrastructure and policy achieve a balance between self framework. regulation by the securities industry This environment aims at meeting and its statutory regulation. the needs of the three groups which 4.To regulate and develop a code basically constitute the market, viz, of conduct and fair practices the issuers of securities (Companies), by intermediaries like brokers, the investors and the market merchant bankers etc., with a view intermediaries. to making them competitive and To the issuers, it aims to provide professional. a market place in which they can confidently look forward to raising Functions of SEBI finances they need in an easy, fair Keeping in mind the emerging nature and efficient manner. of the securities market in India, SEBI To the investors, it should provide was entrusted with the twin task of protection of their rights and both regulation and development of the int e re s ts thro u g h ad equ ate, securities market. It also has certain accurate and authentic information protective functions. and disclosure of information on a continuous basis. Regulatory Functions To the intermediaries, it should offer 1.Registration of brokers and sub- a competitive, professionalised and brokers and other players in the expanding market with adequate market. and efficient infrastructure so 2.Registration of collective investment that they are able to render better schemes and Mutual Funds. service to the investors and issuers. 3.R e g u l a t i o n o f s t o c k b r o k e r s , portfolio exchanges, underwriters Objectives of SEBI and merchant bankers and the The overall objective of SEBI is to business in stock exchanges and protect the interests of investors and any other securities market. to promote the development of, and 4.Regulation of takeover bids by regulate the securities market. This companies. may be elaborated as follows: 5.Calling for information by under- 1.To regulate stock exchanges and the taking inspection, conducting securities industry to promote their enquiries and audits of stock orderly functioning. exchanges and intermediaries. 2021–22 Ch_10.indd 271 29-Dec-20 3:25:48 PM  BUSINESS STUDIES 272 6.Levying fee or other charges for carrying out the purposes of the Act. 7.Performing and exercising such power under Securities Contracts (Regulation) Act 1956, as may be delegated by the Government of India. Development Functions 1.Training of intermediaries of the securities market. 2.Conducting research and publishing information useful to all market participants. 3.Undertaking measures to develop the capital markets by adapting a flexible approach. Protective Functions 1.Prohibition of fraudulent and unfair trade practices like making mis- leading statements, manipulations, price rigging etc. 2.Controlling insider trading and imposing penalties for such practices. 3.Undertaking steps for investor protection. 4.Promotion of fair practices and code of conduct in securities market. 2021–22 Ch_10.indd 272 29-Dec-20 3:25:48 PM  FINANCIAL MARKETS 273 key terMs Financial Market Money Market Treasury Bills Commercial Paper Call Money Certificate of Deposit Commercial Bill Money Market Mutual Fund Capital Market Primary Market Secondary Market Stock Exchange SEBI, NSE OTCEI SUMMARY Financial Market is a market for creation and exchange of financial assets. It helps in mobilisation and channelising the savings into most productive uses. Financial markets also helps in price discovery and provide liquidity to financial assets. Money Market is a market for short-term funds. It deals in monetory assets whose period of maturity is less than one year. The instruments of money market includes treasury bills, commercial paper, call money, Certificate of deposit, commercial bills, participation certificates and money market mutual funds. Capital Market is a place where long-term funds are mobilised by the corporate undertakings and Government. Capital Market may be devided into primary market and secondary market. Primary market deals with new securities which were not previously tradable to the public. Secondary market is a place where existing securities are bought and sold. Stock Exchanges are the organisations which provide a platform for buying and selling of existing securities. Stock exchanges provide continuous market for securities, helps in price discovery, widening share ownership and provide scope for speculation. Securities and Exchange Board of India was established in 1988 and was given statutory status through an Act in 1992. The SEBI was set-up to protect the interests of investors, development and regulation of securities market. 2021–22 Ch_10.indd 273 29-Dec-20 3:25:48 PM  BUSINESS  STUDIES 274 EXERCISES Very Short Answer Type 1. What is a Treasury Bill? 2. Name the segments of the National Stock Exchange (NSE). 3. State any two reasons why investing public can expect a safe and fair deal in the stock market. (Point w.r.t safety of Transactions – Functions of the Stock Exchange). 4. What is the common name for Beneficiary Owner Account, which is to be opened by the investors for trading in securities? 5. Name any two details that need to be provided by the investor to the broker while filling a client registration form. Short Answer Type 1. What are the functions of Financial Market? 2. “Money Market is essentially a Market for short term funds.” Discuss. 3. Distinguish between Capital Market and Money Market. 4. What are the functions of the Stock Exchange? 5. What are the objectives of SEBI? 6. State the objective of NSE? 7. Name the document prepared in the process of online trading of securities that is legally enforceable and helps to settle disputes/claims between the investor and the broker. Long Answer Type 1. Explain the various Money Market instruments. 2. Explain the recent Capital Market reforms in India. 3. Explain the objectives and functions of the SEBI. 4. India’s largest domestic investor Life Insurance Corporation of India has once again come to government’s rescue by subscribing 70% of Hindustan Aeronautics’ `4,200-crore initial public offering. a. Which market is being reflected in the above case? b. State which method of floatation in the above identified market is being highlighted in the case? (Primary Market) 2021–22 Ch_10.indd 274 29-Dec-20 3:25:48 PM  FINANCIAL MARKETS 275 c. Explain any two other methods of floatation. (Private Placement, Offer through prospectus, offer for sale). 5. Lalita wants to buy shares of Akbar Enterprises, through her broker Kushvinder. She has a Demat Account and a bank account for cash transactions in the securities market. Discuss the subsequent steps involved in the screen-based trading for buying and selling of securities in this case. 2021–22 Ch_10.indd 275 29-Dec-20 3:25:48 PM