Chapter 5 BS 2 2PUC

8/13/2019 Chapter 5 BS 2 2PUC

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Chapter 5

Money and Capital Market

Meaning

Capital market is one of the sources of raising long term finance for corporate. It is the medium

through which companies and investors interact. Companies enter capital market by way of share

and bond issues which are subscribed by the investors.

It consists of various players like companies, investors and intermediaries. Foreign Institutional

Investors (FIIs) like pension funds, banks etc subscribe to the capital issues in the market. It has

intermediaries such as brokers, merchant bankers, lead managers etc

Need and Importance

a) Plays a vital role in development of economyb) Capital markets play a vital role in filling the gap between entrepreneurs / technocrats and

capitalists.

c) Capital market promote healthy trading in securities and act as a major catalyst in mobilizingcapital.

d) It is an organized set up to raise funds for a business.e) They play a crucial role in bringing of businessmen and willing investors together.f) Healthy capital market is the hallmark of a developed economy

Money Market

The money market is a component of the financial markets for assets involved in short-term

borrowing and lending with original maturities of one year or shorter time frames. It is regulated by

RBI. Money market trades in short-term financial instruments commonly called "paper." This

contrasts with the capital market for longer-term funding, which is supplied by bonds and equity.

Differences between Money and Capital Market

Capital Market Money Market

Market for long term financing Market for short term financing

Transactions involves buying and selling shares,

debentures, units etc

Transactions involve instruments like trade bulls,

reports, commercial papers etc

Open for both institutions and individuals Open only for banks and other institutions.

Individuals cannot transact in money market.

Securities are marketed in stock exchange Securities are marked in open markets

Comparatively riskier in terms of principal Not as risky as capital markets in terms of


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payment and returns returns and repayment of principal.

Primary and Secondary Market

The primary market is that part of the capital markets that deals with the issuance of new securities.

Companies, governments or public sector institutions can obtain funding through the sale of a new

stock or bond issue. In the case of a new stock issue, this sale is an initial public offering (IPO).

The secondary market, also called aftermarket, is the financial market in which previously issued

financial instruments such as stock, bonds, options, and futures are bought and sold

Stock Exchange

The Indian Securities Contracts (Regulation) Act of 1956, defines Stock Exchange as "an association,organization or body of individuals, whether incorporated or not, established for the purpose of

assisting, regulating and controlling business in buying, selling and dealing in securities."

Functions of Stock Exchange

a) Continuous and ready market for securities: Stock exchange provides a ready andcontinuous market for purchase and sale of securities. It provides ready outlet for buying

and selling of securities. Stock exchange also acts as an outlet/counter for the sale of listed

securities.

b) Facilitates evaluation of securities: Stock exchange is useful for the evaluation of industrialsecurities. This enables investors to know the true worth of their holdings at any time.

Comparison of companies in the same industry is possible through stock exchange

quotations (i.e. price list).

c) Encourages capital formation: Stock exchange accelerates the process of capital formation.It creates the habit of saving, investing and risk taking among the investing class and

converts their savings into profitable investment. It acts as an instrument of capital

formation. In addition, it also acts as a channel for right (safe and profitable) investment.

d) Provides safety and security in dealings: Stock exchange provides safety, security and equity(justice) in dealings as transactions are conducted as per well defined rules and regulations.

The managing body of the exchange keeps control on the members. Fraudulent practices arealso checked effectively. Due to various rules and regulations, stock exchange functions as

the custodian of funds of genuine investors.

e) Regulates company management: Listed companies have to comply with rules andregulations of concerned stock exchange and work under the vigilance (i.e supervision) of

stock exchange authorities.

f) Facilitates public borrowing: Stock exchange serves as a platform for marketing Governmentsecurities. It enables government to raise public debt easily and quickly.

g) Provides clearing house facility: Stock exchange provides a clearing house facility tomembers. It settles the transactions among the members quickly and with ease. The

members have to pay or receive only the net dues (balance amounts) because of the

clearing house facility.


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h) Facilitates healthy speculation: Healthy speculation, keeps the exchange active. Normalspeculation is not dangerous but provides more business to the exchange. However,

excessive speculation is undesirable as it is dangerous to investors & the growth of

corporate sector.

i) Serves as Economic Barometer: Stock exchange indicates the state of health of companiesand the national economy. It acts as a barometer of the economic situation / condition

j) Facilitates Bank Lending: Banks easily know the prices of quoted securities. They offer loansto customers against corporate securities. This gives convenience to the owners of

securities.

Merits of Stock Exchange

a) One of the advantages of the stock exchange is that is enjoys economies of scale because somuch money passes through it. This helps to keep costs low, making it less expensive to buy

and sell stocks. A stock exchange can use millions of transactions to spread fixed costs ofsetting up and maintaining orderly and secure trading, whether it's done on the computer or

the exchange floor. The bigger a stock exchange is, the cheaper it is to trade an individual

stock on it.

b) Stock exchanges require listed companies to meet strict regulatory requirements withregard to financial reporting, corporate governance and disclosure. In India, the regulatory

agency is the Securities Exchange Board of India (SEBI). Investors get access to all relevant

information about the listed companies so they can make informed decisions about whether

to buy or sell shares.

c) A stock exchange provides a reliable and secure clearing mechanism. You can be sure thatthe stocks you buy will be delivered to you, no matter what happens to the party you bought

them from.

d) Stock exchanges increase the marketability and liquidity of securities by providing a readyand continuous market.

e) Stock exchanges promote the habit of saving and investment among peoplef) They increase mobility of capital of the investors from less profitable portfolios to more

profitable portfolios. Thus they facilitate capital formation and generate economic growth.

g) The stock exchange quotations enable the investors to evaluate the real worth of theirholdings.

h) By listing of shares on a stock exchange, companies enjoy greater reputation and credit.i) Stock exchange acts as a mirror of business cycles. Its trend provides proper guidance to the

investors regarding their choice of investment.

j) Stock exchanges help the government to raise funds, from the public to undertake projectsof national importance and social value.

Dealers in Stock Exchange

A dealer would be a corporate body, a partnership firm or individuals with net worth of Rs.5 lakhs.

Only members are permitted to transact on stock exchange. Members are divided into:


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a) Stock Broker: Is a regulated professional broker who buys and sells shares and othersecurities through market makers or on behalf of investors. A broker may be employed by a

brokerage firm.

b) Jobbers: Are members who transact business independently for themselves. They buy andsell securities to earn profits on their own account.

Speculators in Stock Market

a) Bull: A Bull also called as Tejiwala is an operator who is hopeful of price rise in the nearfuture. In anticipation of price rise he makes purchases of shares and other securities with

the intention of selling them at higher prices in future. He being a speculator has no

intention of taking delivery of securities but deals only in difference of prices. Such as a

speculator is called a Bull because of his resemblance of behaviour with a bull. As a bull is

famous for throwing up the opponent in the air, similarly a bull speculator also takes the

price of securities high up in the air. He does this by placing high-value purchase orders.

b) Bear: A bear or a Mandiwala on the other hand is a speculator who is wary of fall in pricesand hence sells securities so that he may buy them at cheap price in future. A bear does not

have securities at present but sells them at higher prices in anticipation that he will supply

them business purchasing at lower prices in the future. If the prices move down as per the

expectations of the bear he will earn profits out of these transactions.

c) Stag: A stag is that type of speculator who treads his path very carefully. He applies forshares in new companies and expects to sell them at a premium if he gets an allotment. He

selects those companies whose shares are most in demand and are likely to carry a

premium. He sells the shares before being called to pay the allotment money. A stag does

not indulge in purchase and sale of shares in the market like a bull and a bear.

d) Lame Duck: is a bear speculator who has contracted to sell a certain security, at a certaindate at a certain price but finds it difficult to meet the commitment on the settlement date.

It describes the sad plight of an individual who defaults in the discharge of his stock market

related commitments. Like a lame duck of the real life, such a person becomes lame

financially! Such a position may arise on account of a variety of reasons like a Crash, rash

investing, plain bad luck, Over-Trading beyond one's capacity. An individual turning into a

Lame Duck is really a sad thing but a possibility and one should always take precautionary

and prudential measures to avoid being turning into a Lame Duck. It will destroy one's credit

report and reputation.


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OTCEI (Over the Counter Exchange of India)

The OTC Exchange of India (OTCEI) incorporated under the provisions of the Companies Act 1956, is

a public limited company. It allows listing of small and medium sized companies. The minimum

issued share capital required of a company that wants to be listed on OTCEI is Rs.3 million and themaximum Rs.250 million.

Companies engaged in investment, leasing, finance, hire purchase, amusement parks etc., and

companies listed on any other recognized stock exchange in India are not eligible for listing on

OTCEI. Also, listing is granted only if the issue is fully subscribed to by the public and sponsor.

OTCEI is promoted by the Unit Trust of India, the Industrial Credit and Investment Corporation of

India, the Industrial Development Bank of India, the Industrial Finance Corporation of India and

others and is a recognised stock exchange under the SCR Act.

The OTCEI has set up a national, automated screen based and ringless stock market. It helps

companies raise finance from the capital market in a cost effective manner and provides a

convenient and effective avenue of capital market investment for investors at large.

While the other recognised stock exchanges require that in order to have its securities listed the

company should have an issued capital of not less than Rs. 3 crores out of which normally 25% is to

be offered to the public, the minimum issued equity share capital of a company for eligibility for

listing on the OTCEI is Rs 30 lacs.

Listing on OTCEI is advantageous to companies because of the high liquidity of these securities,

which is a result of compulsory market making, improved access and speed of transactions resulting

from the extensive network of electronically interlinked counters.arial

Companies can obtain a fair price of their securities by negotiating the same with the sponsors (who

are members of the OTCEI) and save unnecessary issue expenses by placing their securities with the

sponsors who will in turn off load the securities to the public. This mechanism is now popularly

known as a bought out deal.

OTCEI's wide computerized net work will be spread all over India and will make investment easier.

All deals will be entered into through remote terminals which will be connected to the mainframe

computer of the OTCEI. The exchange will enable transactions to be completed quickly and investors

can settle the deals across the counter within a few days. The exchange will also provide liquidity toinvestors as every scrip listed on the OTCEI will have at least two makers who will continuously give

two way quotes.

NSE (National Stock Exchange)

In the fast growing Indian financial market, there are 23 stock exchanges trading securities. The

National Stock Exchange of India (NSE) situated in Mumbai - is the largest and most advanced

exchange with 1016 companies listed and 726 trading members.


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The NSE is owned by the group of leading financial institutions such as Indian Bank or Life Insurance

Corporation of India. However, in the totally de-mutualised Exchange, the ownership as well as the

management does not have a right to trade on the Exchange. Only qualified traders can be involved

in the securities trading.

The NSE is one of the few exchanges in the world trading all types of securities on a single platform,

which is divided into three segments: Wholesale Debt Market (WDM), Capital Market (CM), and

Futures & Options (F&O) Market. Each segment has experienced a significant growth throughout a

few years of their launch. While the WDM segment has accumulated the annual growth of over 36%

since its opening in 1994, the CM segment has increased by even 61% during the same period.

The National Stock Exchange of India has stringent requirements and criteria for the companies

listed on the Exchange. Minimum capital requirements, project appraisal, and company's track

record are just a few of the criteria. In addition, listed companies pay variable listing fees based on

their corporate capital size.

The National Stock Exchange of India Ltd. provides its clients with a single, fully electronic trading

platform that is operated through a VSAT network. Unlike most world exchanges, the NSE uses the

satellite communication system that connects traders from 345 Indian cities. The advanced

technologies enable up to 6 million trades to be operated daily on the NSE trading platform.

BSE (Bombay Stock Exchange)

BSE is the leading and the oldest stock exchange in India as well as in Asia. It was established in 1887

with the formation of "The Native Share and Stock Brokers' Association". BSE is a very active stock

exchange with highest number of listed securities in India.

Nearly 70% to 80% of all transactions in the India are done alone in BSE. In 2005, BSE was given the

status of a full fledged public limited company along with a new name as "Bombay Stock Exchange

Limited". The BSE has computerized its trading system by introducing BOLT (Bombay On Line

Trading) since March 1995.

BSE is operating BOLT at 275 cities with 5 lakh (0.5 million) traders a day. Average daily turnover of

BSE is near Rs. 200 crores.

SEBI (Securities Exchange Board of India)

Securities and Exchange Board of India (SEBI) is an apex body for overall development and regulation

of the securities market. It was set up on April 12, 1988. To start with, SEBI was set up as a non-

statutory body. Later on it became a statutory body under the Securities Exchange Board of India

Act, 1992. The Act entrusted SEBI with comprehensive powers over practically all the aspects of

capital market operations.

The objectives of SEBI are:

a) To protect the interests of investors in securities;b)

To promote the development of Securities Market;

c) To regulate the securities market and


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d) For matters connected therewith or incidental thereto.

Functions of SEBI

a) To protect the interests of investors through proper education and guidance as regards theirinvestment in securities:

For this, SEBI has made rules and regulation to be followed by the financialintermediaries such as brokers, etc.

SEBI looks after the complaints received from investors for fair settlement. It also issues booklets for the guidance and protection of small investors.

b) To regulate and control the business on stock exchanges and other security markets: For this, SEBI keeps supervision on brokers. Registration of brokers and sub-brokers is made compulsory and they are expected

to follow certain rules and regulations.

Effective control is also maintained by SEBI on the working of stock exchanges.c) To make registration and to regulate the functioning of intermediaries such as stock brokers,

sub-brokers, share transfer agents, merchant bankers and other intermediaries operating on

the securities market.

In addition, to provide suitable training to intermediaries. This function is useful for healthy atmosphere on the stock exchange and for the

protection of small investors.

d) To register and regulate the working of mutual funds including UTI (Unit Trust of India). SEBI has made rules and regulations to be followed by mutual funds. The purpose is to maintain effective supervision on their operations & avoid their

unfair and anti-investor activities.

e) To promote self-regulatory organization of intermediaries. SEBI is given wide statutory powers. However, self-regulation is better than external regulation. Here, the function of SEBI is to encourage intermediaries to form their professional

associations and control undesirable activities of their members.

SEBI can also use its powers when required for protection of small investors.f) To regulate mergers, takeovers and acquisitions of companies in order to protect the

interest of investors. For this, SEBI has issued suitable guidelines so that such mergers and

takeovers will not be at the cost of small investors.

g) To prohibit fraudulent and unfair practices of intermediaries operating on securitiesmarkets.

SEBI is not for interfering in the normal working of these intermediaries. Its function is to regulate and control their objectionable practices which may harm

the investors and healthy growth of capital market.

h) To issue guidelines to companies regarding capital issues. Separate guidelines are prepared for first public issue of new companies, for public

issue by existing listed companies and for first public issue by existing private

companies.


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SEBI is expected to conduct research and publish information useful to all marketplayers (i.e. all buyers and sellers).

i) To conduct inspection, inquiries & audits of stock exchanges, intermediaries and self-regulating organizations and to take suitable remedial measures wherever necessary. This

function is undertaken for orderly working of stock exchanges & intermediaries.

j) To restrict insider trading activity through suitable measures. This function is useful foravoiding undesirable activities of brokers and securities scams.

k) To restrict insider trading activity through suitable measures. This function is useful foravoiding undesirable activities of brokers and securities scams.

Dematerialization

Dematerialisation is the process of converting the physical form of shares into electronic form. Prior

to dematerialisation the Indian stock markets have faced several problems like delay in the transfer

of certificates, forgery of certificates etc. Dematerialisation helps to overcome these problems aswell as reduces the transaction time as compared to the physical segment.

Need for Demat

a) Risks of loss, mutilation or theft of certificates associated with physical certificates arecompletely eliminated.

b) Elimination of bad deliveries.c) Effects immediate transfer and registration of securities.d) No stamp duty is payable by the investors for transfer of any kind of securities in DEMAT

form.

e) Facilitates recording of change of address, transmission, (bank a/c particulars, nomination)etc for all investments held in the account, instead of advising each company separately a

single advice will do all such changes.

f) Comparing and monitoring of the position of all the investments in a DEMAT account isprovided by the statement of account sent periodically by the DP.

Importance of Demat

a) A Demat account reduces brokerage charges, makes pledging/hypothecation of shareseasier, enables quick ownership of securities on settlement resulting in increased liquidity,

avoids confusion in the ownership title of securities, and provides easy receipt of public issue

allotments or IPOs.

b) It also helps avoid bad deliveries caused by signature mismatch, postal delays and loss ofcertificates in transit.

c) Demat account holders also avoid stamp duty (as against 0.5 per cent payable on physicalshares), filling up of transfer deeds, and obtain quick receipt of benefits like stock splits and

bonuses. also it reduces brokerage charges.(eg 2.5% of brokers charge is saved up an stamp

duty is saved too)

d) Further, it eliminates risks associated with forgery, counterfeiting, and loss due to damagedstock certificates.


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Previous Year Questions on this Chapter

SECTION A

1. What is money market? (Jun-06)2. Name any one of the stock exchange in India. (Mar-06)3. Name the market that provides short term finance. (Jun-11)4. Who are dealers in the stock exchange? (Jun-09, Jun-10)5. Expand NSE. (Jun-08)6. State one function of SEBI. (Mar-09)7. Who is a Bull? (Mar-10)8. Who is a Bear? (Mar-11)9. State the types of Capital Market. (Mar-07)

SECTION B

1. State any two differences between capital and money market. (Jul-06)2. Give the meaning of Stock Market. (Jun-11)3. List out any two functions of SEBI. (Mar-11, Mar-10)4. What is meant by OTCEI? (Mar-06)5. What is meant by NSE? (Mar-05)6. What is Dematerialization? (Mar-09)

SECTION C

1. Define Stock Exchange. Explain the functions of Stock Exchange. (Jun-07, 08, 09, 10, Mar-08,09)2. What is SEBI? Explain the objectives and functions of SEBI. (Mar-10)3. What are the merits of stock exchange? (Mar-11)4. Who is a speculator? Discuss the various types of speculators. (Jun-09, 10, 11)

SECTION D

1. List out 10 Stock Exchanges in India. (Mar-08, 11)

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Chapter 5 BS 2 2PUC