Capital Markets & Money Markets
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Indian Financial System
Financial System •
Existence of a well organized financial system
•
Promotes the well being and standard of living of the people of a country
•
Money and monetary assets
•
Mobilize the saving
•
Promotes investment
Financial System Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products Flow of funds (savings)
Seekers of funds (Mainly business firms Flow of financial services and government) Incomes , and financial claims
Suppliers of funds (Mainly households)
Indian Financial System
Organized Regulators Financial Institutions Financial Markets Financial services
Non- Organized Money lenders Local bankers Traders Landlords Pawn brokers Chit Funds
Evolution of Financial System Barter Money Lender Nidhi's/Chit Funds Indigenous Banking Cooperative Movement Societies
Banks
Joint-Stock Banks
Consolidation Commercial Banks Nationalization Investment Banks Development Financial Institutions Investment/Insurance Companies Stock Exchanges Market Operations Specialized Financial Institutions Merchant Banking Universal Banking
Interrelation--Financial system & Economy Financial System Households Foreign Sectors
Savers Lenders
Investors Borrowers
Corporate Sector Govt.Sector
Economy
Un-organized Sector
Organized Indian Financial System Regulators
Financial Instruments
Forex Market
Financial Markets Capital Market
Money Market
Primary Market Secondary Market
Money Market Instrument
Capital Market Instrument
Financial Intermediaries Credit Market
Financial Markets •
Mechanism which allows people to trade
•
Affected by forces of supply and demand
•
Process used
•
In Finance, Financial markets facilitates
Why Capital Markets Exist •
•
•
Capital markets facilitate the transfer of capital (i.e. financial) assets from one owner to another. They provide liquidity. – Liquidity refers to how easily an asset can be transferred without loss of value. A side benefit of capital markets is that the transaction price provides a measure of the value of the asset.
Role of Capital Markets • • • • • •
Mobilization of Savings & acceleration of Capital Formation Promotion of Industrial Growth Raising of long term Capital Ready & Continuous Markets Proper Channelisation of Funds Provision of a variety of Services
Indian Capital Market Historical perspective •
Stock Market was for a privileged few
•
Archaic systems - Out cry method
•
Lack of Transparency - High tones costs
•
No use of Technology
•
Outdated banking system
•
Volumes - less than Rs. 300 cr per day
•
No settlement guarantee mechanism - High risks
Indian Capital markets Chronology • • • • • • • •
1994-Equity Trading commences on NSE 1995-All Trading goes Electronic 1996- Depository comes in to existence 1999- FIIs Participation- Globalisation 2000- over 80% trades in Demat form 2001- Major Stocks move to Rolling Sett 2003- T+2 settlements in all stocks 2003 - Demutualisation of Exchanges
Capital Markets - Reforms • • • • • • • •
Each scam has brought in reforms - 1992 / 2001 Screen based Trading through NSE Capital adequacy norms stipulated Dematerialization of Shares - risks of fraudulent paper eliminated Entry of Foreign Investors Investor awareness programs Rolling settlements Inter-action between banking and exchanges
Reforms / Initiatives post 2000 • • •
• • • •
Corporatisation of exchange memberships Banning of Badla / ALBM Introduction of Derivative products - Index / Stock Futures & Options Reforms/Changes in the margining system STP - electronic contracts Margin Lending Securities Lending
MARKET STRUCTURE (JULY 31, 2005)
• 22 Stock Exchanges, • Over 10000 Electronic Terminals at over 400 locations all over India. • 9108 Stock Brokers and 14582 Sub brokers • 9644 Listed Companies • 2 Depositories and 483 Depository Participants • 128 Merchant Bankers, 59 Underwriters • 34 Debenture Trustees, 96 Portfolio Managers • 83 Registrars & Transfer Agents, 59 Bankers to Issue • 4 Credit Rating Agencies
Indian Capital Market
Market
Primary
Instruments
•Brokers •Investment Bankers •Stock Exchanges •Underwriters
Secondary
Equity
CRA
Intermediaries Regulator
Hybrid
Corporate Intermediaries
Individual
SEBI
Debt
Banks/FI
Players
FDI /FII
Stock Exchanges in INDIA • • • • • • • • • • • •
Mangalore Stock Exchange Hyderabad Stock Exchange Uttar Pradesh Stock Exchange Coimbatore Stock Exchange Cochin Stock Exchange Bangalore Stock Exchange Saurashtra Kutch Stock Exchange Pune Stock Exchange National Stock Exchange OTC Exchange of India Calcutta Stock Exchange Inter-connected Stock Exchange (NEW)
• •
•
•
• • •
• •
•
Bombay Stock Exchange Madhya Pradesh Stock Exchange Vadodara Stock Exchange The Ahmedabad Stock Exchange Magadh Stock Exchange Gauhati Stock Exchange Bhubaneswar Stock Exchange Jaipur Stock Exchange Delhi Stock Exchange Assoc Ludhiana Stock
The role of the stock exchange •
Raising capital for businesses
•
Mobilizing savings for investment
•
Facilitate company growth
•
Redistribution of wealth
The role of the stock exchange •
Corporate governance
•
Creates investment opportunities for small investors
•
Government raises capital for development projects
•
Barometer of the economy
Growth Pattern of the Indian Stock Market
Sl.N o.
As on 31st December
1
No. of Stock Exchanges
2
1946
1961
1971
1975
1980
1985
1991
1995
7
7
8
8
9
14
20
22
No. of Listed Cos.
1125
1203
1599
1552
2265
4344
6229
8593
3
No. of Stock Issues of Listed Cos.
1506
2111
2838
3230
3697
6174
8967
11784
4
Capital of Listed Cos. (Cr. Rs.)
270
753
1812
2614
3973
9723
32041
59583
5
Market value of Capital of Listed Cos. (Cr. Rs.)
971
1292
2675
3273
6750
25302
11027 9
47812 1
6
Capital per Listed Cos. (4/2) (Lakh Rs.)
24
63
113
168
175
224
514
693
86
107
167
211
298
582
1770
5564
7
Market Value of Capital per Listed Cos. (Lakh Rs.) (5/2) Appreciated value of Capital per
358
170
148
126
170
260
344
803
8
Capital Market Instruments
Hybrid
Equity
Equity Shares
Preference Shares
ADR / GDR
Debentures Zero coupon bonds
Debt
Deep Discount Bonds
Factors contributing to growth of Indian Capital Market •
• • •
Establishment of Development banks & Industrial financial institution. Legislative measures Growing public confidence Increasing awareness of investment opportunities
Factors contributing to growth of Indian Capital Market • • • •
Growth of underwriting business Setting up of SEBI Mutual Funds Credit Rating Agencies
Indian Capital Market deficiencies • • • • •
Lack of transparency Physical settlement Variety of manipulative practices Institutional deficiencies Insider trading
Money Market •
Market for short-term money and financial assets that are near substitutes for money.
•
Short-Term means generally period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost
Money Market •
It is a place for Large Institutions and government to manage their short-term cash needs
•
It is a subsection of the Fixed Income Market
•
It specializes in very short-term debt securities
•
They are also called as Cash Investments
Defects of Money Market •
Lack of Integration
•
Lack of Rational Interest Rates structure
•
Absence of an organized bill market
•
Shortage of funds in the Money Market
•
Seasonal Stringency of funds and fluctuations in Interest rates
•
Inadequate banking facilities
Money Market Instruments •
Treasury Bills
•
Commercial Paper
•
Certificate of Deposit
•
Money Market Mutual Funds
•
Repo Market
Segment Issuer
Instruments
Govern ment
Zero Coupon Bonds, Coupon Bearing Bonds, Capital Index Bonds, Treasury Bills.
Public Sector
Private
Central Government
Government Agencies / Statutory Bodies Public Sector Units
Govt. Guaranteed Bonds, Debentures
PSU Bonds, Debenture, Commercial Paper
Corporate
Debentures, Bonds, Commercial Paper, Floating Rate Bonds, Zero Coupon Bonds, InterCorporate Deposits
Banks
Certificate of Deposits, Bonds
Financial Institutions
Certificate of Deposits, Bonds
Financial Regulators
Financial Regulators •
Securities and Exchange Board of India (SEBI)
•
Reserve Bank of India
•
Ministry of Finance
Security Exchange Board of India (SEBI) •
•
•
Securities and Exchange Board of India (SEBI) was first established in the year 1988 Its a non-statutory body for regulating the securities market It became an autonomous body in 1992
Functions Of SEBI •
Regulates Capital Market.
•
Checks Trading of securities.
•
Checks the malpractices in securities market.
Functions Of SEBI •
It enhances investor's knowledge on market by providing education.
•
It regulates the stockbrokers and sub-brokers.
•
To promote Research and Investigation
Objectives of SEBI •
It tries to develop the securities market.
•
Promotes Investors Interest.
•
Makes rules and regulations for the securities market.
The Recent Initiatives Undertaken •
Sole Control on Brokers
•
For Underwriters
•
For Share Prices
•
For Mutual Funds
Reserve Bank of India •
Established on April 1, 1935 in accordance with the provisions of the RBI Act, 1934.
•
The Central Office of the Reserve Bank has been in Mumbai.
•
It acts as the apex monetary authority of the country.
Functions Of RBI Monetary Authority: • Formulation and Implementation of monetary policies. • Maintaining price stability and ensuring adequate flow of credit to the Productive sectors. Issuer of currency: • Issues and exchanges or destroys currency and coins. • Provide the public adequate quantity of supplies of currency notes and coins.
Functions Of RBI Regulator and supervisor of the financial system: • •
Prescribes broad parameters of banking operations Maintain public confidence, protect depositors' interest and provide cost-effective banking services.
Authority On Foreign Exchange: • •
Manages the Foreign Exchange Management Act, 1999. Facilitate external trade, payment, promote orderly development and maintenance of foreign exchange market.
Functions Of RBI Developmental role: Performs a wide range of promotional functions to support national objectives. •
Related Functions: Banker to the Government: performs merchant banking function for the central and the state governments. • Maintains banking accounts of all scheduled banks. •
Monetary Measures (a) Bank Rate: The Bank Rate was kept unchanged at 6.0 per cent. (b) Reverse Repo Rate: The Repo rate is around 7 per cent and Reverse repo rate is around 6.10 per cent. (c) Cash Reserve Ratio: The cash reserve ratio (CRR) of scheduled banks is currently at 5.0 per cent.
Reforms in the Financial System •
Pre-reforms period
•
Steps taken
•
Objectives
•
Conclusion
Pre-Reforms Period •
The period from the mid 1960s to the early 1990s.
•
Characterized by: – – – – –
Administered interest rates Industrial licensing and controls Dominant public sector Limited competition High capital-output ratio
Pre-Reforms Period •
Banks and financial institutions acted as a deposit agencies.
•
Price discovery process was prevented.
•
Government failed to generate resources for investment and public services.
•
Till 90s it was closed, highly regulated, and segmented system.
Steps Taken •
Economic reforms initiated in June 1991.
•
The committee appointed under the chairmanship of M Narasimham.
•
He submitted report with all the recommendations
•
Government liberalized the various sectors in the economy.
•
Reform of the public sector and tax system.
Objectives •
Reorientation of the economy
•
Macro economic stability
•
To Increase competitive efficiency in the operations
•
To remove structural rigidities and inefficiencies
•
To attain a balance between the goals of financial stability & integrated & efficient markets
Recommendations •
Reduce the level of state ownership in banking
•
Lift restrictions on foreign ownership of banks
•
Spur the development of the corporate-bond market
•
Strengthen legal protections
Recommendations •
Deregulate the insurance industry
•
Drop proposed limits on pension reforms
•
Increase consumer ownership of mutualfund products
•
Introduce a gold deposit scheme
Recommendations •
Speed up the development of electronic payments.
•
Separate the RBI's regulatory and centralbank functions
•
Lift the remaining capital account controls
•
Phase out statutory priority lending and restrictions on asset allocation
Conclusion •
The financial system is fairly integrated, stable, efficient.
•
Weaknesses need to be addressed.
•
The reforms have been more capital centric in nature.
•
Foreign capital flows and foreign exchange reserves have increased but absorption of foreign capital is low.
Thank you
Financial System •
Existence of a well organized financial system
•
Promotes the well being and standard of living of the people of a country
•
Money and monetary assets
•
Mobilize the saving
•
Promotes investment
Financial System Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products Flow of funds (savings)
Seekers of funds (Mainly business firms Flow of financial services and government) Incomes , and financial claims
Suppliers of funds (Mainly households)
Indian Financial System
Organized Regulators Financial Institutions Financial Markets Financial services
Non- Organized Money lenders Local bankers Traders Landlords Pawn brokers Chit Funds
Evolution of Financial System Barter Money Lender Nidhi's/Chit Funds Indigenous Banking Cooperative Movement Societies
Banks
Joint-Stock Banks
Consolidation Commercial Banks Nationalization Investment Banks Development Financial Institutions Investment/Insurance Companies Stock Exchanges Market Operations Specialized Financial Institutions Merchant Banking Universal Banking
Interrelation--Financial system & Economy Financial System Households Foreign Sectors
Savers Lenders
Investors Borrowers
Corporate Sector Govt.Sector
Economy
Un-organized Sector
Organized Indian Financial System Regulators
Financial Instruments
Forex Market
Financial Markets Capital Market
Money Market
Primary Market Secondary Market
Money Market Instrument
Capital Market Instrument
Financial Intermediaries Credit Market
Financial Markets •
Mechanism which allows people to trade
•
Affected by forces of supply and demand
•
Process used
•
In Finance, Financial markets facilitates
Why Capital Markets Exist •
•
•
Capital markets facilitate the transfer of capital (i.e. financial) assets from one owner to another. They provide liquidity. – Liquidity refers to how easily an asset can be transferred without loss of value. A side benefit of capital markets is that the transaction price provides a measure of the value of the asset.
Role of Capital Markets • • • • • •
Mobilization of Savings & acceleration of Capital Formation Promotion of Industrial Growth Raising of long term Capital Ready & Continuous Markets Proper Channelisation of Funds Provision of a variety of Services
Indian Capital Market Historical perspective •
Stock Market was for a privileged few
•
Archaic systems - Out cry method
•
Lack of Transparency - High tones costs
•
No use of Technology
•
Outdated banking system
•
Volumes - less than Rs. 300 cr per day
•
No settlement guarantee mechanism - High risks
Indian Capital markets Chronology • • • • • • • •
1994-Equity Trading commences on NSE 1995-All Trading goes Electronic 1996- Depository comes in to existence 1999- FIIs Participation- Globalisation 2000- over 80% trades in Demat form 2001- Major Stocks move to Rolling Sett 2003- T+2 settlements in all stocks 2003 - Demutualisation of Exchanges
Capital Markets - Reforms • • • • • • • •
Each scam has brought in reforms - 1992 / 2001 Screen based Trading through NSE Capital adequacy norms stipulated Dematerialization of Shares - risks of fraudulent paper eliminated Entry of Foreign Investors Investor awareness programs Rolling settlements Inter-action between banking and exchanges
Reforms / Initiatives post 2000 • • •
• • • •
Corporatisation of exchange memberships Banning of Badla / ALBM Introduction of Derivative products - Index / Stock Futures & Options Reforms/Changes in the margining system STP - electronic contracts Margin Lending Securities Lending
MARKET STRUCTURE (JULY 31, 2005)
• 22 Stock Exchanges, • Over 10000 Electronic Terminals at over 400 locations all over India. • 9108 Stock Brokers and 14582 Sub brokers • 9644 Listed Companies • 2 Depositories and 483 Depository Participants • 128 Merchant Bankers, 59 Underwriters • 34 Debenture Trustees, 96 Portfolio Managers • 83 Registrars & Transfer Agents, 59 Bankers to Issue • 4 Credit Rating Agencies
Indian Capital Market
Market
Primary
Instruments
•Brokers •Investment Bankers •Stock Exchanges •Underwriters
Secondary
Equity
CRA
Intermediaries Regulator
Hybrid
Corporate Intermediaries
Individual
SEBI
Debt
Banks/FI
Players
FDI /FII
Stock Exchanges in INDIA • • • • • • • • • • • •
Mangalore Stock Exchange Hyderabad Stock Exchange Uttar Pradesh Stock Exchange Coimbatore Stock Exchange Cochin Stock Exchange Bangalore Stock Exchange Saurashtra Kutch Stock Exchange Pune Stock Exchange National Stock Exchange OTC Exchange of India Calcutta Stock Exchange Inter-connected Stock Exchange (NEW)
• •
•
•
• • •
• •
•
Bombay Stock Exchange Madhya Pradesh Stock Exchange Vadodara Stock Exchange The Ahmedabad Stock Exchange Magadh Stock Exchange Gauhati Stock Exchange Bhubaneswar Stock Exchange Jaipur Stock Exchange Delhi Stock Exchange Assoc Ludhiana Stock
The role of the stock exchange •
Raising capital for businesses
•
Mobilizing savings for investment
•
Facilitate company growth
•
Redistribution of wealth
The role of the stock exchange •
Corporate governance
•
Creates investment opportunities for small investors
•
Government raises capital for development projects
•
Barometer of the economy
Growth Pattern of the Indian Stock Market
Sl.N o.
As on 31st December
1
No. of Stock Exchanges
2
1946
1961
1971
1975
1980
1985
1991
1995
7
7
8
8
9
14
20
22
No. of Listed Cos.
1125
1203
1599
1552
2265
4344
6229
8593
3
No. of Stock Issues of Listed Cos.
1506
2111
2838
3230
3697
6174
8967
11784
4
Capital of Listed Cos. (Cr. Rs.)
270
753
1812
2614
3973
9723
32041
59583
5
Market value of Capital of Listed Cos. (Cr. Rs.)
971
1292
2675
3273
6750
25302
11027 9
47812 1
6
Capital per Listed Cos. (4/2) (Lakh Rs.)
24
63
113
168
175
224
514
693
86
107
167
211
298
582
1770
5564
7
Market Value of Capital per Listed Cos. (Lakh Rs.) (5/2) Appreciated value of Capital per
358
170
148
126
170
260
344
803
8
Capital Market Instruments
Hybrid
Equity
Equity Shares
Preference Shares
ADR / GDR
Debentures Zero coupon bonds
Debt
Deep Discount Bonds
Factors contributing to growth of Indian Capital Market •
• • •
Establishment of Development banks & Industrial financial institution. Legislative measures Growing public confidence Increasing awareness of investment opportunities
Factors contributing to growth of Indian Capital Market • • • •
Growth of underwriting business Setting up of SEBI Mutual Funds Credit Rating Agencies
Indian Capital Market deficiencies • • • • •
Lack of transparency Physical settlement Variety of manipulative practices Institutional deficiencies Insider trading
Money Market •
Market for short-term money and financial assets that are near substitutes for money.
•
Short-Term means generally period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost
Money Market •
It is a place for Large Institutions and government to manage their short-term cash needs
•
It is a subsection of the Fixed Income Market
•
It specializes in very short-term debt securities
•
They are also called as Cash Investments
Defects of Money Market •
Lack of Integration
•
Lack of Rational Interest Rates structure
•
Absence of an organized bill market
•
Shortage of funds in the Money Market
•
Seasonal Stringency of funds and fluctuations in Interest rates
•
Inadequate banking facilities
Money Market Instruments •
Treasury Bills
•
Commercial Paper
•
Certificate of Deposit
•
Money Market Mutual Funds
•
Repo Market
Segment Issuer
Instruments
Govern ment
Zero Coupon Bonds, Coupon Bearing Bonds, Capital Index Bonds, Treasury Bills.
Public Sector
Private
Central Government
Government Agencies / Statutory Bodies Public Sector Units
Govt. Guaranteed Bonds, Debentures
PSU Bonds, Debenture, Commercial Paper
Corporate
Debentures, Bonds, Commercial Paper, Floating Rate Bonds, Zero Coupon Bonds, InterCorporate Deposits
Banks
Certificate of Deposits, Bonds
Financial Institutions
Certificate of Deposits, Bonds
Financial Regulators
Financial Regulators •
Securities and Exchange Board of India (SEBI)
•
Reserve Bank of India
•
Ministry of Finance
Security Exchange Board of India (SEBI) •
•
•
Securities and Exchange Board of India (SEBI) was first established in the year 1988 Its a non-statutory body for regulating the securities market It became an autonomous body in 1992
Functions Of SEBI •
Regulates Capital Market.
•
Checks Trading of securities.
•
Checks the malpractices in securities market.
Functions Of SEBI •
It enhances investor's knowledge on market by providing education.
•
It regulates the stockbrokers and sub-brokers.
•
To promote Research and Investigation
Objectives of SEBI •
It tries to develop the securities market.
•
Promotes Investors Interest.
•
Makes rules and regulations for the securities market.
The Recent Initiatives Undertaken •
Sole Control on Brokers
•
For Underwriters
•
For Share Prices
•
For Mutual Funds
Reserve Bank of India •
Established on April 1, 1935 in accordance with the provisions of the RBI Act, 1934.
•
The Central Office of the Reserve Bank has been in Mumbai.
•
It acts as the apex monetary authority of the country.
Functions Of RBI Monetary Authority: • Formulation and Implementation of monetary policies. • Maintaining price stability and ensuring adequate flow of credit to the Productive sectors. Issuer of currency: • Issues and exchanges or destroys currency and coins. • Provide the public adequate quantity of supplies of currency notes and coins.
Functions Of RBI Regulator and supervisor of the financial system: • •
Prescribes broad parameters of banking operations Maintain public confidence, protect depositors' interest and provide cost-effective banking services.
Authority On Foreign Exchange: • •
Manages the Foreign Exchange Management Act, 1999. Facilitate external trade, payment, promote orderly development and maintenance of foreign exchange market.
Functions Of RBI Developmental role: Performs a wide range of promotional functions to support national objectives. •
Related Functions: Banker to the Government: performs merchant banking function for the central and the state governments. • Maintains banking accounts of all scheduled banks. •
Monetary Measures (a) Bank Rate: The Bank Rate was kept unchanged at 6.0 per cent. (b) Reverse Repo Rate: The Repo rate is around 7 per cent and Reverse repo rate is around 6.10 per cent. (c) Cash Reserve Ratio: The cash reserve ratio (CRR) of scheduled banks is currently at 5.0 per cent.
Reforms in the Financial System •
Pre-reforms period
•
Steps taken
•
Objectives
•
Conclusion
Pre-Reforms Period •
The period from the mid 1960s to the early 1990s.
•
Characterized by: – – – – –
Administered interest rates Industrial licensing and controls Dominant public sector Limited competition High capital-output ratio
Pre-Reforms Period •
Banks and financial institutions acted as a deposit agencies.
•
Price discovery process was prevented.
•
Government failed to generate resources for investment and public services.
•
Till 90s it was closed, highly regulated, and segmented system.
Steps Taken •
Economic reforms initiated in June 1991.
•
The committee appointed under the chairmanship of M Narasimham.
•
He submitted report with all the recommendations
•
Government liberalized the various sectors in the economy.
•
Reform of the public sector and tax system.
Objectives •
Reorientation of the economy
•
Macro economic stability
•
To Increase competitive efficiency in the operations
•
To remove structural rigidities and inefficiencies
•
To attain a balance between the goals of financial stability & integrated & efficient markets
Recommendations •
Reduce the level of state ownership in banking
•
Lift restrictions on foreign ownership of banks
•
Spur the development of the corporate-bond market
•
Strengthen legal protections
Recommendations •
Deregulate the insurance industry
•
Drop proposed limits on pension reforms
•
Increase consumer ownership of mutualfund products
•
Introduce a gold deposit scheme
Recommendations •
Speed up the development of electronic payments.
•
Separate the RBI's regulatory and centralbank functions
•
Lift the remaining capital account controls
•
Phase out statutory priority lending and restrictions on asset allocation
Conclusion •
The financial system is fairly integrated, stable, efficient.
•
Weaknesses need to be addressed.
•
The reforms have been more capital centric in nature.
•
Foreign capital flows and foreign exchange reserves have increased but absorption of foreign capital is low.
Thank you
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