Indian Financial System

Primary and secondary market

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Primary market Meaning

The primary market is also called as new issue market deals with the new securities which are issued to the public for the first time.

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Features • 1.The primary market deals with new

securities which are issued for the first time for public subscription. 2.It always concentrate on capital formation. 3.It ensures capital adequacy to the corpSorate entities. 4.It is concerned with the issue of securities such as equity,pref,deb’re etc….. 5.It consists of intermediaries like banker, under writers, brokers etc…. by Jagannath and Santosh (R.N.S.I.T coll)

Classification. Primary market can be classify as follows-

1)Market where firms go to public for the first time through initial public offering. 2)Market where firms which are already trading raise additional capital through seasoned equity offerings.

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Functions. 1)Organizing or origination.

2)Underwriting-full, partial, joint, syndicate, firm ,sub, outright. 3) Distribution.

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Players of primary market 1)Lead manager 2)Underwriters 3)Banker to an issue 4)Registrar to an issue 5)Debenture trustee 6)Broker to an issue 7)Portfolio managers

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Instruments traded in primary market  Zero interest convertible debenture  Deep discount bonds  Secured premium notes  Non convertible debenture with equity warrants  Equity with 100% safety net  Cumulative convertible preference shares  Convertible bonds  Debt with equity warrants  Dual currency bonds  Flip flop notes by Jagannath and Santosh (R.N.S.I.T coll)

Basically there are 4 ways in which a

company may raise equity capital 1)Public issue-procedure,bookbuilding 2)Rights issue 3)Private placement 4)Preferential allotment

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Secondary market • It is a market where existing

securities are traded nothing but already issued securities by the company. • It is also called as stock exchange in India there are 23 stock exchanges BSE and NSE are some important exchange boards. by Jagannath and Santosh (R.N.S.I.T coll)

Functions of secondary market 1)Liquidity and Marketability of securities 2)Safety of funds 3)Supply of long term funds 4)Motivation for improved performance 5)Helps to raise new capital 6)Listing of securities 7)It reflects the business cycle.

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Players in secondary market Client brokers  Floor brokers  Jobbers  Badla financiers  Arbitragers  Bulls  Bears  Stags  Wolves  Lame ducks  Brokers  FII’S  Merchant bankers  Custodians by Jagannath and Santosh (R.N.S.I.T coll)

Stock market • Definition

According to Securities contract(Regulation)1956 ``Stock exchange means any body of individuals, whether incorporated or not, constituted for the for the purpose of listing, regulating and controlling the business of buying & selling in Securities’’.

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Bruges, Belgium

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New York stock exchange

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Shanghai stock exchange

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National association of securities dealers automated quotation

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London stock exchange

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Type Stock Exchange Location Mumbai, India Bombay/Mumbai Stock Owner Exchange Limited Key people Mahesh L. Soneji (CEO) Currency INR No. of listings 4,700 US$ 1.79 trillion (Dec 31, Market Cap 2007) Volume US$ 980 billion (2006) Indexes BSE Sensex Website www.bseindia.com by Jagannath and Santosh (R.N.S.I.T coll)

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Type Stock Exchange Location Mumbai, India National Stock Exchange of Owner India Limited Mr. Ravi Narain Managing Key people Director Currency INR No. of listings 1587 MarketCap US$ 1.46 trillion (2006) S&P CNX Nifty Indexes CNX Nifty Junior S&P CNX 500 Website www.nse-india.com

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Commodity markets Commodity markets are markets where raw

or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts.

by Jagannath and Santosh (R.N.S.I.T coll)

by Jagannath and Santosh (R.N.S.I.T coll)

Introduction Money market is a very important segment of

the Indian financial system. It is the market for dealing in monetary assets of short-term nature. Short-term funds up to one year and for financial assets that are close substitutes for money are dealt in the money market.

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Features o The money market is a wholesale market i.e., o

o

o

o

the volume of transaction is very large and generally transactions are settled on daily basis. Trading in the money market is conducted over the telephone followed written conformation from both the borrowers and lenders. There are large no. of participants in the money market: commercial banks, mutual funds, investment institutions, financial institutions, and finally RBI. The money market can obtain funds from the central bank either by borrowing or sale of securities A well developed money market contributes to an by Jagannath and Santosh (R.N.S.I.T effective implementation ofcoll)the monetary

Indian money market Indian money market was segmented and

highly regulated and lacked depth till the late eighties It was characterized by a limited no. of participants. The instruments were limited to call(over night) and short notice (up to 14 days) money, inter bank deposits and commercial bills Efforts for developing and deepening the money market were made only after the by Jagannath and Santosh (R.N.S.I.T coll)

TYPES OF MONEY MARKET INSTRUMENTS The money market comprises of : b)Call money ( which is over night and short

notice up to 14 days) c)Treasury bills d)Certificate of deposits e)Commercial paper f) Banker’s acceptance g)Repo by Jagannath and Santosh (R.N.S.I.T coll)

TYPES OF MONEY MARKET a) Call/Notice money market:

The call/notice money market was predominantly an interbank market until 1987. o The Discount and Finance House of India(DFHI) was set up on 1988 and Securities Trading Corporation of India(STCI) was set up in 1994 o in order to provide reasonable access to users of short term money and to provide an active secondary market in govt. securities by Jagannath and Santosh (R.N.S.I.T coll)

TYPES OF MONEY MARKET  Treasury Bills: The Treasury bills are short-

term money market instrument that mature in a year or less than that. o The purchase price is less than the face value. At maturity the government pays the Treasury Bill holder the full face value. o The Treasury Bills are marketable, affordable and risk free. o The security attached to the treasury bills comes at the cost of very low returns. by Jagannath and Santosh (R.N.S.I.T coll)

Treasury bills in India Type of Treasury Bills: At present, RBI issues T-Bills for three different

maturities: 91 days, 182 days and 364 days. The 91 day T-Bills are issued on weekly auction basis while 182 day T-Bill auction is held on Wednesday preceding non-reporting Friday and 364 day T-Bill auction on Wednesday preceding the reporting Friday Advantages of investing in Treasury Bills: • No Tax Deducted at Source (TDS) • Zero default risk as these are the liabilities of GOI • Liquid money Market Instrument • Active secondary market thereby enabling by Jagannath and Santosh (R.N.S.I.T holder to meet immediate fundcoll)requirement

TYPES OF MONEY MARKET c) Certificate of Deposit: The certificates of deposit are basically time deposits that are issued by the commercial banks with maturity periods ranging from 3 months to five years. o The return on the certificate of deposit is higher than the Treasury Bills because it assumes a higher level of risk.

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Cont.. Advantages of Certificate of Deposit as a money market instrument 1. Since one can know the returns from before, the certificates of deposits are considered much safe. 2. One can earn more as compared to depositing money in savings account. 3. The Federal Insurance Corporation guarantees the investments in the certificate of deposit.

Disadvantages of Certificate of deposit as a money market instrument: 1. As compared to other investments the returns is less. 2. The money is tied along with the long maturity period of the Certificate of Deposit.

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TYPES OF MONEY MARKET  Commercial Paper: Commercial Paper is

short-term loan that is issued by a corporation use for financing accounts receivable and inventories. o Commercial Papers have higher denominations as compared to the Treasury Bills and the Certificate of Deposit. o The maturity period of Commercial Papers are a maximum of 9 months. o They are very safe since the financial situation of the corporation can be by Jagannath and Santosh (R.N.S.I.T coll)

TYPES OF MONEY MARKET  Banker's Acceptance: It is a short-term

credit investment. It is guaranteed by a bank to make payments. o The Banker's Acceptance is traded in the Secondary market. o The banker's acceptance is mostly used to finance exports, imports and other transactions in goods. o The banker's acceptance need not be held till the maturity date but the holder has the option to sell it off in the secondary market whenever he finds it suitable. by Jagannath and Santosh (R.N.S.I.T coll)

TYPES OF MONEY MARKET  Repos: The Repo or the repurchase

agreement is used by the government security holder when he sells the security to a lender and promises to repurchase from him overnight. o Hence the Repos have terms raging from 1 night to 30 days. They are very safe due to government backing.

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by Jagannath and Santosh (R.N.S.I.T coll)

FOREIGN EXCHANGE MARKET

MEANING The foreign exchange market (currency, forex, or FX) is where currency trading takes place.  It is where banks and other official institutions facilitate the buying and selling of foreign currencies.  FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. 

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BACKGROUND The foreign exchange market that we see today started evolving during the 1970s when world over countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.  Presently, the FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. 

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PARTICIPANTS  Individuals:

 First

tier: ultimate customer and banker  Second tier: between banks  Arbitrageurs:

profit seeking from variations in rates in different markets  Speculators: profit seeking from movements in exchange rates

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tourists, migrants  Firms: importers and exporters  Banks  Governments/ monetary authorities  International agencies  Two tier market:

TRADING CENTERS  The

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main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well.

FEATURES liquidity: the market operates the enormous money supply and gives absolute freedom in opening or closing a position in the current market quotation.  availability: a possibility to trade round-theclock; a market participant need not wait to respond to any given event.  flexible regulation of the trade arrangement system: a position may be opened for a pre-determined period of time in the FOREX market, at the investor’s discretion, which enables to plan the timing of one’s future activity in advance. 

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CONT.. one-valued quotations: with high market liquidity, most sales may be carried out at the uniform market price, thus enabling to avoid the instability problem existing with futures and other forex investments where limited quantities of currency only can be sold concurrently and at a specified price;  margin: the credit “leverage” (margin) in the FOREX market is only determined by an agreement between a customer and the bank or the brokerage house that pushes it to the market and is normally equal to 1:100. 

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DETERMINANTS OF FX RATES Economic factors 1. Government budget deficits or surpluses • The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency. 2. Balance of trade levels and trends • The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. 

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CONT..

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3. Inflation levels and trends • Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising 4. Economic growth and health • Reports such as GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health.  Political conditions • Internal, regional, and international political conditions and events can have a profound effect on currency markets.

FINANCIAL INSTRUMENTS

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1. Spot • A spot transaction is a two-day delivery transaction (except in the case of the Canadian dollar and the Mexican Nuevo Peso, which settle the next day), as opposed to the futures contracts, which are usually three months. • Currency arbitrage: buying a currency at cheaper rate in one market and selling at a higher rate in another market • Currency speculation: buying and holding a currency for sale at a higher rate in the near future • Spot transactions has the second largest turnover by volume after Swap.

FINANCIAL INSTRUMENTS

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2. Forward • In this transaction, money does not actually change hands until some agreed upon future date. • A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. • The duration of the trade can be a one day, a few days, months or years. Usually the date is decided by both parties

FINANCIAL INSTRUMENTS

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3. Swap • The most common type of forward transaction is the currency swap. • In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. • These are not standardized contracts and are not traded through an exchange

FINANCIAL INSTRUMENTS

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4. Option • A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. • The FX options market is the deepest, largest and most liquid market for options of any kind in the world.

FOREX VS. STOCKS Forex Market Stock Market

Trade Around the Clock

Yes

Limited

Pay No Commissions

Yes

Limited

Unlimited Short-selling

Yes

   No

Market Information Easily Available

Yes

   Yes

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Advantage

STRUCTURE Decentralized 'interbank' market  Main participants: Central Banks, commercial and investment banks, hedge funds, corporations & private speculators  The free-floating currency system arose from the collapse of the Bretton Woods agreement in 1971  Online trading began in the mid to late 1990's 

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SIZE  

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

One of the largest financial markets in the world $3.2 trillion average daily turnover, equivalent to:    More than 10 times the average daily turnover of global equity markets1  More than 35 times the average daily turnover of the NYSE2  Nearly $500 a day for every man, woman, and child on earth3  An annual turnover more than 10 times world GDP4 The spot market accounts for just under one-third of daily turnover

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AVERAGE DAILY TURNOVER BY GEOGRAPHIC LOCATION

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Rank

Currency

ISO 4217 code (Symbol)

% daily share (April 2007)

 United States dollar

USD ($)

86.3%

2

 Euro

EUR (€)

37.0%

3

 Japanese yen

JPY (¥)

17.0%

4

 Pound sterling

GBP (£)

15.0%

5

 Swiss franc

CHF (Fr)

6.8%

6

 Australian dollar

AUD ($)

6.7%

7

 Canadian dollar

CAD ($)

4.2%

8-9

 Swedish krona

SEK (kr)

2.8%

8-9

 Hong Kong dollar

HKD ($)

2.8%

10

 Norwegian krone

NOK (kr)

2.2%

11

 New Zealand dollar

NZD ($)

1.9%

12

 Mexican peso

MXN ($)

1.3%

13

 Singapore dollar

SGD ($)

1.2%

14

 South Korean won

KRW (₩)

1.1%

Other

14.5%

Total

200%

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1

THANK YOU 

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