Financial Markets NCERT 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. 2020-21 Ch_10.indd 252 10/1/2019 10:13:58 AM  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 2020-21 Ch_10.indd 253 10/1/2019 10:13:59 AM  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. 2020-21 Ch_10.indd 254 10/1/2019 10:13:59 AM  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- Classification of Financial Markets FINANCIAL MARKET MONEY MARKET CAPITAL MARKET Primary market Secondary Market Debt Equity Debt Equity 2020-21 Ch_10.indd 255 10/1/2019 10:13:59 AM  BUSINESS  STUDIES 256 Banking Finance Companies, State delivery with a fixed maturity period. Governments, Large Corporate Houses It is issued by large and creditworthy and Mutual Funds. companies to raise short-term funds at lower rates of interest than market Money Market Instruments rates. It usually has a maturity period of 15 days to one year. The issuance 1. Treasury Bill: A Treasury bill is of commercial paper is an alternative basically an instrument of short-term to bank borrowing for large companies borrowing by the Government of India that are generally considered to be maturing in less than one year. They financially strong. It is sold at a are also known as Zero Coupon Bonds discount and redeemed at par. The issued by the Reserve Bank of India original purpose of commercial paper on behalf of the Central Government was to provide short-terms funds to meet its short-term requirement for seasonal and working capital of funds. Treasury bills are issued in needs. For example companies use the form of a promissory note. They this instrument for purposes such as are highly liquid and have assured bridge financing. yield and negligible risk of default. Example: Suppose a company needs They are issued at a price which is long-term finance to buy some lower than their face value and repaid machinery. In order to raise the long at par. The difference between the term funds in the capital market price at which the treasury bills are the company will have to incur issued and their redemption value is floatation costs (costs associated with the interest receivable on them and floating of an issue are brokerage, is called discount. Treasury bills are commission, printing of applications available for a minimum amount of and advertising, etc.). Funds raised ` 25,000 and in multiples thereof. through commercial paper are used Example: Suppose an investor to meet the floatation costs. This is purchases a 91 days Treasury bill known as Bridge Financing. with a face value of ` 1,00,000 for 3. Call Money: Call money is short ` 96,000. By holding the bill until the term finance repayable on demand, with maturity date, the investor receives a maturity period of one day to fifteen ` 1,00,000. The difference of ` 4,000 days, used for inter-bank transactions. between the proceeds received at Commercial banks have to maintain a maturity and the amount paid to minimum cash balance known as cash purchase the bill represents the reserve ratio. The Reserve Bank of India interest received by him. changes the cash reserve ratio from 2. Commercial Paper: Commercial time to time which in turn affects the paper is a short-term unsecured amount of funds available to be given promissory note, negotiable and as loans by commercial banks. Call transferable by endorsement and money is a method by which banks 2020-21 Ch_10.indd 256 11/28/2019 3:07:38 PM  financial markets 257 borrow from each other to be able to buyer (drawee) accepts it. On being maintain the cash reserve ratio. The accepted, the bill becomes a marketable interest rate paid on call money loans instrument and is called a trade bill. is known as the call rate. It is a highly These bills can be discounted with a volatile rate that varies from day-to- bank if the seller needs funds before day and sometimes even from hour-to- the bill matures. When a trade bill is hour. There is an inverse relationship accepted by a commercial bank it is between call rates and other short-term known as a commercial bill. money market instruments such as certificates of deposit and commercial Capital Market paper. A rise in call money rates makes other sources of finance such The term capital market refers to as commercial paper and certificates facilities and institutional arrangements of deposit cheaper in comparison for through which long-term funds, banks raise funds from these sources. both debt and equity are raised and invested. It consists of a series of 4. Certificate of Deposit: Certificates channels through which savings of of deposit (CD) are unsecured, the community are made available for negotiable, short-term instruments industrial and commercial enterprises in bearer form, issued by commercial and for the public in general. It banks and development financial directs these savings into their most institutions. They can be issued productive use leading to growth and to individuals, corporations and development of the economy. The companies during periods of tight capital market consists of development liquidity when the deposit growth of banks, commercial banks and stock banks is slow but the demand for exchanges. credit is high. They help to mobilise An ideal capital market is one where a large amount of money for short finance is available at reasonable cost. periods. The process of economic development 5. Commercial Bill: A commercial is facilitated by the existence of a bill is a bill of exchange used to finance well functioning capital market. In the working capital requirements of fact, development of the financial business firms. It is a short-term, system is seen as a necessary negotiable, self-liquidating instrument condition for economic growth. It is which is used to finance the credit essential that financial institutions are sales of firms. When goods are sold sufficiently developed and that market on credit, the buyer becomes liable operations are free, fair, competitive to make payment on a specific date and transparent. The capital market in future. The seller could wait till should also be efficient in respect of the the specified date or make use of a information that it delivers, minimise bill of exchange. The seller (drawer) transaction costs and allocate capital of the goods draws the bill and the most productively. 2020-21 Ch_10.indd 257 10/1/2019 10:13:59 AM  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. 2020-21 Ch_10.indd 258 10/1/2019 10:13:59 AM  financial markets 259 (vii)Expected return: The investment in method of raising funds by public capital markets generally yield a companies in the primary market. higher return for investors than the This involves inviting subscription money markets. The possibility of from the public through issue of earnings is higher if the securities prospectus. A prospectus makes a are held for a longer duration. First, direct appeal to investors to raise there is the scope of earning capital capital, through an advertisement gains in equity share. Second, in in newspapers and magazines. The the long run, the prosperity of a issues may be underwritten and also company is shared by shareholders are required to be listed on at least one by way of high dividends and stock exchange. The contents of the bonus issues. prospectus have to be in accordance with the provisions of the Companies Primary Market Act and SEBI disclosure and investor The primary market is also known as protection guidelines. the new issues market. It deals with 2. Offer for Sale: Under this method new securities being issued for the securities are not issued directly to the first time. The essential function of public but are offered for sale through a primary market is to facilitate the intermediaries like issuing houses or transfer of investible funds from savers stock brokers. In this case, a company to entrepreneurs seeking to establish sells securities enbloc at an agreed new enterprises or to expand existing price to brokers who, in turn, resell ones through the issue of securities them to the investing public. for the first time. The investors in this market are banks, financial 3. P r i v a t e P l a c e m e n t : Private institutions, insurance companies, placement is the allotment of securities mutual funds and individuals. by a company to institutional investors A company can raise capital and some selected individuals. It through the primary market in the form helps to raise capital more quickly of equity shares, preference shares, than a public issue. Access to the debentures, loans and deposits. Funds primary market can be expensive raised may be for setting up new on account of various mandatory projects, expansion, diversification, and non-mandatory expenses. Some modernisation of existing projects, companies, therefore, cannot afford a mergers and takeovers etc. public issue and choose to use private placement. Methods of Floatation 4. Rights Issue: This is a privilege There are various methods of floating given to existing shareholders to new issues in the primary market : subscribe to a new issue of shares 1. Offer through Prospectus: Offer according to the terms and conditions through prospectus is the most popular of the company. The shareholders are 2020-21 Ch_10.indd 259 10/1/2019 10:13:59 AM  BUSINESS  STUDIES 260 offered the ‘right’ to buy new shares than the exchange through which it in proportion to the number of shares has offered its securities. The lead they already possess. manager coordinates all the activities 5. e-IPOs: A company proposing to amongst intermediaries connected issue capital to the public through the with the issue. on-line system of the stock exchange has to enter into an agreement with the Secondary Market stock exchange. This is called an Initial The secondary market is also known Public Offer (IPO). SEBI registered as the stock market or stock exchange. brokers have to be appointed for the It is a market for the purchase and purpose of accepting applications and sale of existing securities. It helps placing orders with the company. The existing investors to disinvest and fresh issuer company should also appoint a investors to enter the market. It also registrar to the issue having electronic provides liquidity and marketability to connectivity with the exchange. The existing securities. It also contributes issuer company can apply for listing to economic growth by channelising of its securities on any exchange other 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. 2020-21 Ch_10.indd 260 10/1/2019 10:13:59 AM  financial markets 261 investments through the process liquidity and safety of investment to of disinvestment and reinvestment. the investors and enhance the credit Securities are traded, cleared and worthiness of individual companies. settled within the regulatory framework prescribed by SEBI. Advances in Meaning of Stock Exchange information technology have made According to Securities Contracts trading through stock exchanges (Regulation) Act 1956, stock exchange accessible from anywhere in the means any body of individuals, whether country through trading terminals. incorporated or not, constituted for the Along with the growth of the primary purpose of assisting, regulating or market in the country, the secondary controlling the business of buying and market has also grown significantly selling or dealing in securities. during the last ten years. Functions of a Stock Exchange Stock Exchange The efficient functioning of a stock A stock exchange is an institution exchange creates a conducive climate which provides a platform for buying for an active and growing primary and selling of existing securities. market for new issues. An active As a market, the stock exchange and healthy secondary market in facilitates the exchange of a security existing securities leads to positive (share, debenture etc.) into money environment among investors. The and vice versa. Stock exchanges help following are some of the important companies raise finance, provide functions of a stock exchange. History of the Stock Market in India The history of the stock market in India goes back to the end of the eighteenth century when long-term negotiable securities were first issued. In 1850 the Companies Act was introduced for the first time bringing with it the feature of limited liability and generating investor interest in corporate securities. The first stock exchange in India was set-up in 1875 as The Native Share and Stock Brokers Association in Bombay. Today it is known as the Bombay Stock Exchange (BSE). This was followed by the development of exchanges in Ahmedabad (1894), Calcutta(1908) and Madras(1937). It is interesting to note that stock exchanges were first set up in major centers of trade and commerce. Until the early 1990s, the Indian secondary market comprised regional stock exchanges with BSE heading the list. After the reforms of 1991, the Indian secondary market acquired a three tier form. This consists of: Regional Stock Exchanges National Stock Exchange (NSE) Over the Counter Exchange of India (OTCEI) 2020-21 Ch_10.indd 261 10/1/2019 10:13:59 AM  BUSINESS  STUDIES 262 4. Contributes to Economic Growth: A stock exchange is a market in which existing securities are resold or traded. Through this process of disinvestment and reinvestment savings get channelised into their most productive investment avenues. This leads to capital formation and economic growth. 5. Spreading of Equity Cult: The stock exchange can play a vital role in ensuring wider share ownership by regulating new issues, better trading practices and taking effective Bombay Stock Exchange steps in educating the public about investments. 1. Providing Liquidity and Market- ability to Existing Securities: The 6. Providing Scope for Speculation: basic function of a stock exchange is the The stock exchange provides sufficient creation of a continuous market where scope within the provisions of law for securities are bought and sold. It gives speculative activity in a restricted investors the chance to disinvest and and controlled manner. It is generally reinvest. This provides both liquidity accepted that a certain degree of and easy marketability to already healthy speculation is necessary to existing securities in the market. ensure liquidity and price continuity 2. Pricing of Securities: Share prices in the stock market. on a stock exchange are determined by the forces of demand and supply. Trading and Settlement Procedure A stock exchange is a mechanism of Trading in securities is now executed constant valuation through which the through an on-line, screen-based prices of securities are determined. electronic trading system. Simply Such a valuation provides important put, all buying and selling of shares instant information to both buyers and and debentures are done through a sellers in the market. computer terminal. 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, 2020-21 Ch_10.indd 262 10/1/2019 10:13:59 AM  financial markets 263 now almost all exchanges have gone business hours of the stock exchange. electronic and trading is done in the The computer in the brokers office is broker’s office through a computer constantly matching the orders at the terminal. A stock exchange has its best bid and offer price. Those that are main computer system with many not matched remain on the screen and terminals spread across the country. are open for future matching during Trading in securities is done through the day. brokers who are members of the stock Electronic trading systems or exchange. Trading has shifted from the screen-based trading has certain stock market floor to the brokers office. advantages: Every broker has to have access to 1. It ensures transparency as it a computer terminal that is connected allows participants to see the to the main stock exchange. In this prices of all securities in the screen-based trading, a member logs market while business is being on to the site and any information about transacted. They are able to see the shares (company, member, etc.) he the full market during real time. wishes to buy or sell and the price is 2. It increases efficiency of fed into the computer. The software is information being passed on, thus so designed that the transaction will helping in fixing prices efficiently. be executed when a matching order is The computer screens display found from a counter party. The whole information on prices and also transaction is carried on the computer capital market developments that screen with both the parties being able influence share prices. to see the prices of all shares going up 3. It increases the efficiency of and down at all times during the time operations, since there is reduction that business is transacted and during in time, cost and risk of error. 4. People from all over the country and even abroad who wish to participate in the stock market can buy or sell securities through brokers or members without knowing each other. That is, they 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 Electronic Trading System been provided as business is 2020-21 Ch_10.indd 263 10/1/2019 10:13:59 AM  BUSINESS  STUDIES 264 transacted at the same time in all trades were to be settled on specified the trading centres. Thus, all the dates, this gave rise to speculation and trading centres spread all over the price of shares used to rise and fall country have been brought onto suddenly due to trading and defaults one trading platform, i.e., the by brokers. A new system, i.e, rolling stock exchange, on the computer. settlement, was introduced in 2000, Now, screen-based trading or on-line so that whenever a trade took place it trading is the only way in which you would be settled after some days. Since can buy or sell shares. Shares can 2003, all shares have to be covered be held either in physical form or an under the rolling settlement system electronic book entry form of holding on a T+2 basis, meaning thereby and transferring shares can also be that transactions in securities are adopted. This electronic form is called settled within 2 days after the trade dematerialised form. date. Since rolling settlement implies fast movement of shares, it requires Steps in the Trading and Settlement effective implementation of electronic Procedure fund transfer and dematerialisation It has been made compulsory to of shares. settle all trades within 2 days of The following steps are involved in the trade date, i.e., on a T+2 basis, the screen-based trading for buying since 2003. Prior to the reforms, and selling of securities: securities were bought and sold, i.e., 1.If an investor wishes to buy or sell any traded and all positions in the stock security he has to first approach a exchange were settled on a weekly/ registered broker or sub-broker fortnightly settlement cycle whether it and enter into an agreement was delivery of securities or payment with him. The investor has to of cash. This system prevailed for a sign a broker-client agreement long time as it increased the volume of and a client registration form trading on the exchange and provided before placing an order to buy liquidity to the system. However, since or sell securities. He has also to Project Work 1. Study the website of Mumbai 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? 2020-21 Ch_10.indd 264 10/1/2019 10:13:59 AM  financial markets 265 provide certain other details and 4.The broker then will go on-line information. These include: and connect to the main stock PAN number exchange and match the share and (This is mandatory) best price available. 5.When the shares can be bought or Date of birth and address. sold at the price mentioned, it will Educational qualification and be communicated to the broker’s occupation. terminal and the order will be Residential status (Indian/ executed electronically. The broker NRI). will issue a trade confirmation slip to the investor. Bank account details. 6.After the trade has been executed, Depository account details. within 24 hours the broker issues Name of any other broker with a Contract Note. This note contains whom registered. details of the number of shares Client code number in the bought or sold, the price, the client registration form. date and time of deal, and the brokerage charges. This is an The broker then opens a trading important document as it is legally account in the name of the enforceable and helps to settle investor. disputes/claims between the 2.The investor has to open a ‘demat’ investor and the broker. A Unique account or ‘beneficial owner’ Order Code number is assigned (BO) account with a depository to each transaction by the stock participant (DP) for holding and exchange and is printed on the transferring securities in the demat contract note. form. He will also have to open a 7.Now, the investor has to deliver the bank account for cash transactions shares sold or pay cash for the in the securities market. shares bought. This should be 3.The investor then places an order done immediately after receiving with the broker to buy or sell the contract note or before the shares. Clear instructions have day when the broker shall make to be given about the number of shares and the price at which the payment or delivery of shares to the shares should be bought or sold. exchange. This is called the pay-in The broker will then go ahead with day. the deal at the above mentioned 8.Cash is paid or securities are price or the best price available. An delivered on pay-in day, which is order confirmation slip is issued to before the T+2 day as the deal has the investor by the broker. to be settled and finalised on the 2020-21 Ch_10.indd 265 10/1/2019 10:13:59 AM  BUSINESS  STUDIES 266 T+2 day. The settlement cycle is For this, the investor has to open a on T+2 day on a rolling settlement demat account with an organisation basis, w.e.f. 1 April 2003. called a depository. In fact, now all 9.On the T+2 day, the exchange Initial Public Offers (IPOs) are issued will deliver the share or make in dematerialisation form and more payment to the other broker. This than 99% of the turnover is settled by is called the pay-out day. The delivery in the demat form. broker then has to make payment The Securities and Exchange Board to the investor within 24 hours of India (SEBI) has made it mandatory of the pay-out day since he has for the settlement procedures to take already received payment from the place in demat form in certain select exchange. securities. Holding shares in demat form is very convenient as it is just 10. The broker can make delivery like a bank account. Physical shares of shares in demat form directly can be converted into electronic to the investor’s demat account. form or electronic holdings can be The investor has to give details of reconverted into physical certificates his demat account and instruct (rematerialisation). Dematerialisation his depository participant to take enables shares to be transferred to delivery of securities directly in his some other account just like cash beneficial owner account. and ensures settlement of all trades through a single account in shares. Dematerialisation and Depositories These demat securities can even be pledged or hypothecated to get loans. All trading in securities is now done There is no danger of loss, theft or through computer terminals. Since all forgery of share certificates. It is the systems are computerised, buying and broker’s responsibility to credit the selling of securities are settled through investor’s account with the correct an electronic book entry form. This is number of shares. mainly done to eliminate problems like theft, fake/forged transfers, transfer Working of the Demat System delays and paperwork associated with share certificates or debentures held 1.A depository participant (DP), either in physical form. a bank, broker, or financial services This is a process where securities company, may be identified. held by the investor in the physical 2.An account opening form and form are cancelled and the investor is documentation (PAN card details, given an electronic entry or number so photograph, power of attorney) that she/he can hold it as an electronic may be completed. balance in an account. This process 3.The physical certificate is to be of holding securities in an electronic given to the DP along with a form is called dematerialisation. dematerialisation request form. 2020-21 Ch_10.indd 266 10/1/2019 10:14:00 AM  financial markets 267 4.If shares are applied in a public In India, there are two depositories. offer, simple details of DP and National Securities Depositories demat account are to be given and Limited (NSDL) is the first and largest the shares on allotment would depository presently operational in automatically be credited to the India. It was promoted as a joint demat account. venture of the IDBI, UTI, and the 5.If shares are to be sold through a National Stock Exchange. broker, the DP is to be instructed to The Central Depository Services debit the account with the number Limited (CDSL) is the second of shares. depository to commence operations and was promoted by the Bombay 6.The broker then gives instruction to Stock Exchange and the Bank of India. his DP for delivery of the shares to Both these national level depositories the stock exchange. operate through intermediaries who 7.The broker then receives payment are electronically connected to the and pay the person for the shares depository and serve as contact points sold. with the investors and are called 8.All these transactions are to be depository participants. completed within 2 days, i.e., The depository participant (DP) delivery of shares and payment serves as an intermediary between the 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 National Stock Exchange of India technology driven electronic storage (NSE) system. It has no paper work relating to share certificates, transfer, forms, The National Stock Exchange is the etc. All transactions of the investors are latest, most modern and technology settled with greater speed, efficiency driven exchange. It was incorporated and use as all securities are entered in 1992 and was recognised as a stock in a book entry mode. exchange in April 1993. It started 2020-21 Ch_10.indd 267 10/1/2019 10:14:00 AM  BUSINESS  STUDIES 268 operations in 1994, with trading on Objectives of NSE the wholesale debt market segment. NSE was set up with the following Subsequently, it launched the capital objectives: market segment in November 1994 as a trading platform for equities and a. Establishing a nationwide trading the futures and options segment facility for all types of securities. in June 2000 for various derivative b. Ensuring equal access to investors instruments. NSE has set up a all over the country through nationwide fully automated screen an appropriate communication based trading system. network. The NSE was set up by leading c. Providing a fair, efficient and financial institutions, banks, transparent securities market insurance companies and other using electronic trading system. financial intermediaries. It is managed d. Enabling shorter settlement cycles by professionals, who do not directly and book entry settlements. or indirectly trade on the exchange. e. Meeting international benchmarks The trading rights are with the trading and standards. members who offer their services Within a span of ten years, NSE to the investors. The Board of NSE has been able to achieve its objectives comprises senior executives from for which it was set up. It has been promoter institutions and eminent playing a leading role as a change professionals, without having any agent in transforming the Indian representation from trading members. capital market. NSE has been able Stock Market Index A stock market index is a barometer of market behaviour. It measures overall market sentiment through a set of stocks that are representative of the market. It reflects market direction and indicates day-to-day fluctuations in stock prices. An ideal index must represent changes in the prices of securities and reflect price movements of typical shares for better market representation. In the Indian markets the BSE, SENSEX and NSE, NIFTY are important indices. Some important global stock market indices are: Dow Jones Industrial Average is among the oldest quoted stock market index in the US. NASDAQ Composite Index is the market capitalisation weightages of prices for stocks listed in the NASDAQ stock market. S and P 500 Index is made up of 500 biggest publicly traded companies in the US. The S and P 500 is often treated as a proxy for the US stock market. FTSE 100 consists of the largest 100 companies by full market value listed on the London Stock Exchange. The FTSE 100 is the benchmark index of the European market. 2020-21 Ch_10.indd 268 10/1/2019 10:14:00 AM  financial markets 269 to take the stock market to the door (ii) Capital Market Segment: The capital step of the investors. It has ensured market segment of NSE provides an that technology has been harnessed efficient and transparent platform to deliver the services to the investors for trading in equity, preference, across the country at the lowest cost. debentures, exchange traded It has provided a nation wide screen funds as well as retail Government based automated trading system with securities. a high degree of transparency and equal access to investors irrespective BSE (Bombay Stock Exchange Ltd.) of geographical location. BSE Ltd (formerly known as Bombay Stock Exchange Ltd) was established Market Segments of NSE in 1875 and was Asia’s first Stock The Exchange provides trading in the Exchange. It was granted permanent following two segments. recognition under the Securities (i) Whole Sale Debt Market Segment: Contract (Regulation) Act, 1956. It This segment provides a trading has contributed to the growth of platform for a wide range of fixed the corporate sector by providing income securities that include a platform for raising capital. It is central government securities, known as BSE Ltd but was established treasury bills, state development as the Native Share Stock Brokers loans, bonds issued by public Association in 1875. Even before sector undertakings, floating the actual legislations were enacted, rate bonds, zero coupon bonds, BSE Ltd already had a set of Rules index bonds, commercial paper, and Regulations to ensure an orderly certificate of deposit, corporate growth of the securities market. As debentures and mutual funds. discussed earlier, a stock exchange Some Common Stock Market Terms You would have often come across the following terms in magazines or newspapers when you read about the stock market. BOURSES is another word for the stock market BULLS and BEARS – The term does not refer to animals but to market sentiment of the investors. A Bullish phase refers to a period of optimism and a Bearish phase to a period of perssimism on the Bourses. BADLA – This refers to a carry forward system of settlement, particularly at the BSE. It is a facility that allows the postponement of the delivery or payment of a transaction from one settlement period to another. ODD LOT TRADING – Trading in multiples of 100 stocks or less. PENNY STOCKS – These are securities that have no value on the stock exchange but whose trading contributes to speculation. 2020-21 Ch_10.indd 269 10/1/2019 10:14:00 AM  BUSINESS  STUDIES 270 can be set up as a corporate entity Securities and Exchange Board of with different individuals (who are not India (SEBI) brokers) as members or shareholders. The Securities and Exchange Board BSE is one such exchange set up of India was established by the as a corporate entity with a broad Government of India on 12 April shareholder base. It has the following 1988 as an interim administrative objectives: body to promote orderly and healthy (a) T o p r o v i d e a n e f f i c i e n t a n d growth of securities market and for transparent market for trading investor protection. It was to function in equity, debt instruments, under the overall administrative derivatives, and mutual funds. control of the Ministry of Finance of (b) To provide a trading platform for the Government of India. The SEBI equities of small and medium was given a statutory status on 30 enterprises. January 1992 through an ordinance. The ordinance was later replaced by (c) To ensure active trading and an Act of Parliament known as the safeguard market integrity through Securities and Exchange Board of an electronically-driven exchange. India Act, 1992. (d) To provide other services to capital market participants, like risk Reasons for the Establishment of management, clearing, settlement, SEBI market data, and education. The capital market has witnessed a (e) To conform to international tremendous growth during 1980’s, standards. characterised particularly by the increasing participation of the Besides having a nation-wide public. This ever expanding investors presence, BSE has a global reach with population and market capitalisation customers around the world. It has led to a variety of malpractices on the stimulated innovation and competition part of companies, brokers, merchant across all market segments. It has bankers, investment consultants established a capital market institute, and others involved in the securities called the BSE Institute Ltd, which market. The glaring examples of these provides education on financial malpractices include existence of self markets and vocational training to a – styled merchant bankers unofficial number of people seeking employment private placements, rigging of prices, with stock brokers. The exchange has unofficial premium on new issues, about 5000 companies listed from non-adherence of provisions of the all over the country and outside, and Companies Act, violation of rules and has the largest market capitalisation regulations of stock exchanges and in India. listing requirements, delay in delivery 2020-21 Ch_10.indd 270 10/1/2019 10:14:00 AM  financial markets 271 of shares etc. These malpractices and accurate and authentic information unfair trading practices have eroded and disclosure of information on a investor confidence and multiplied continuous basis. investor grievances. The Government To the intermediaries, it should offer and the stock exchanges were rather a competitive, professionalised and helpless in redressing the investor’s expanding market with adequate problems because of lack of proper and efficient infrastructure so penal provisions in the existing that they are able to render better legislation. In view of the above, the service to the investors and issuers. Government of India decided to set- up a separate regulatory body known Objectives of SEBI as Securities and Exchange Board of India. The overall objective of SEBI is to protect the interests of investors and Purpose and Role of SEBI to promote the development of, and regulate the securities market. This The basic purpose of SEBI is to may be elaborated as follows: create an environment to facilitate 1.To regulate stock exchanges and the efficient mobilisation and allocation securities industry to promote their of resources through the securities orderly functioning. 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, practices, infrastructure and policy 3.To prevent trading malpractices and framework. achieve a balance between self This environment aims at meeting regulation by the securities industry the needs of the three groups which and its statutory regulation. basically constitute the market, viz, 4.To regulate and develop a code the issuers of securities (Companies), of conduct and fair practices the investors and the market by intermediaries like brokers, intermediaries. merchant bankers etc., with a view To the issuers, it aims to provide to making them competitive and a market place in which they can professional. confidently look forward to raising finances they need in an easy, fair Functions of SEBI and efficient manner. Keeping in mind the emerging nature To the investors, it should provide of the securities market in India, SEBI protection of their rights and was entrusted with the twin task of inte re s t s thro u g h ad equ ate, both regulation and development of the 2020-21 Ch_10.indd 271 10/1/2019 10:14:00 AM  BUSINESS  STUDIES 272 securities market. It also has certain Protective Functions protective functions. 1.Prohibition of fraudulent and unfair trade practices like making mis- Regulatory Functions leading statements, manipulations, 1. Registration of brokers and sub- price rigging etc. brokers and other players in the 2.Controlling insider trading and market. imposing penalties for such 2. Registration of collective investment practices. schemes and Mutual Funds. 3.Undertaking steps for investor 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 , protection. portfolio exchanges, underwriters 4.Promotion of fair practices and code and merchant bankers and the of conduct in securities market. business in stock exchanges and any other securities market. The Organisation Structure of SEBI 4. Regulation of takeover bids by companies. As SEBI is a statutory body there has been a considerable expansion in the 5.Calling for information by under- range and scope of its activities. Each of taking inspection, conducting the activities of the SEBI now demands enquiries and audits of stock more careful, closer, co-ordinated exchanges and intermediaries. and intensive attention to enable it 6. Levying fee or other charges for to attain its objectives. Accordingly, carrying out the purposes of the SEBI has been restructured and Act. rationalised in tune with its expanded 7.Performing and exercising such scope. It has decided its activities into power under Securities Contracts five operational departments. Each (Regulation) Act 1956, as may be department is headed by an executive delegated by the Government of director. Apart from its head office at India. Mumbai, SEBI has opened regional offices in Kolkalta, Chennai, and Delhi Development Functions to attend to investor complaints and liaise with the issuers, intermediaries 1.Training of intermediaries of the and stock exchanges in the concerned securities market. region. 2.Conducting research and publishing The SEBI also formed two advisory information useful to all market committees. They are the Primary participants. Market Advisory Committee and 3.Undertaking measures to develop the Secondary Market Advisory the capital markets by adapting a Committee. These committees consist flexible approach. of the market players, the investors 2020-21 Ch_10.indd 272 10/1/2019 10:14:00 AM  financial markets 273 associations recognised by the SEBI d. To advise for changes in legal and the eminent persons in the capital framework to introduce market. They provide important inputs simplification and transparency to the SEBI’s policies. in the primary market. The objectives of the two e. To advise the board in matters Committees are as follows: relating to the development and regulation of the secondary market a. To advise SEBI on matters relating in the country. to the regulation of intermediaries The committees are however non- for ensuring investors protection statutory in nature and the SEBI is not in the primary market. bound by the advise of the committee. b. To advise SEBI on issues related to These committees are a part of SEBI’s the development of primary market constant endeavor to obtain a feedback in India. from the market players on various c. To advise SEBI on disclosure issues relating to the regulations and requirements for companies. development of the market. 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 2020-21 Ch_10.indd 273 10/1/2019 10:14:00 AM  BUSINESS  STUDIES 274 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. 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. 2020-21 Ch_10.indd 274 10/1/2019 10:14:00 AM  financial markets 275 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) 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. 2020-21 Ch_10.indd 275 10/1/2019 10:14:00 AM