Unit 4

INDIAN FINANCIAL MARKET

Introduction to Indian Financial System –

The financial system of a country is an important tool for economic development

of the country, as it helps in creation of wealth by linking savings with
investments. It facilitates the flow of funds form the households (savers) to
business firms (investors) to aid in wealth creation and development of both the
parties. The financial system of a country is concerned with:

 allocation and Mobilization of savings

 Provision of funds
 Facilitating the Financial Transactions
 Developing financial markets
 Provision of legal financial framework
 Provision of financial and advisory services

According to Robinson, the primary function of a financial system is “to provide

a link between savings and investment for creation of wealth and to permit
portfolio adjustment in the composition of existing wealth”
A Financial System consists of various financial Institutions, Financial Markets,
Financial Transactions, rules and regulations, liabilities and claims etc

. FEATURES OF FINANCIAL SYSTEM:

It plays a vital role in economic development of a country

 It encourages both savings and investment

 It links savers and investors
 It helps in capital formation
 It helps in allocation of risk
 It facilitates expansion of financial markets
 It aids in Financial Deepening and Broadening

STRUCTURE OF INDIAN FINANCIAL

SYSTEM/COMPONENTS OF INDIAN FINANCIAL SYSTEM:
(1) Financial Institutions – Financial institutions are intermediaries of
financial markets which facilitate financial transactions between
individuals and financial customers. It simply refers to an organization
(set-up for profit or not for profit) that collects money from individuals and
invests that money in financial assets such as stocks, bonds, bank deposits,
loans etc.
There can be two types of financial institutions:
 Banking Institutions or Depository institutions – These are banks and
credit unions that collect money from the public in return for interest
on money deposits and use that money to advance loans to financial
customers.
 Non- Banking Institutions or Non-Depository institutions – These are
brokerage firms, insurance and mutual funds companies that cannot
collect money deposits but can sell financial products to financial
customers.
Financial Institutions may be classified into three categories:
 Regulatory – It includes institutions like SEBI, RBI, IRDA etc. which
regulate the financial markets and protect the interests of investors
  Intermediaries – It includes commercial banks such as SBI, PNB etc.
that provide short term loans and other financial services to individuals
and corporate customers. •
 Non – Intermediaries – It includes financial institutions like NABARD,
IDBI etc. that provide long-term loans to corporate customers.

(2) Financial Markets – It refers to any marketplace where buyers and sellers
participate in trading of assets such as shares, bonds, currencies and other
financial instruments. A financial market may be further divided into capital
market and money market. While the capital market deals in long term
securities having maturity period of more than one year, the money market
deals with short-term debt instruments having maturity period of less than
one year.

(3) Financial Assets/Instruments – Financial assets include cash deposits,

checks, loans, accounts receivable, letter of credit, bank notes and all other
financial instruments that provide a claim against a person/financial
institution to pay either a specific amount on a certain future date or to pay
the principal amount along with interest. It helps a business to liquidate tied
up funds It facilitates financial transactions through provision of various
financial instruments It facilitate trading of financial assets/instruments by
developing and regulating financial markets Importance of Indian Financial
System It accelerates the rate and volume of savings through provision of
various financial instruments and efficient mobilization of savings It aids in
increasing the national output of the country by providing funds to corporate
customers to expand their respective business It protects the interests of
investors and ensures smooth financial transactions through regulatory bodies
such as RBI, SEBI etc. It helps economic development and raising the standard
of living of people It helps to promote the development of weaker section of the
society through rural development banks and co-operative societies It helps
corporate customers to make better financial decisions by providing effective
financial as well as advisory services It aids in Financial Deepening and
Broadening: Financial Deepening – It refers to the increase in financial assets
as a percentage of GDP Financial Broadening – It refers to increasing number
of participants in the financial system.

(4) Financial Services – Financial Services are concerned with the design and
delivery of financial instruments and advisory services to individuals and
businesses within the area of banking and related institutions, personal
financial planning, leasing, investment, assets, insurance etc. It involves
provision of a wide variety of fund/asset based and non-fund based/advisory
 services and includes all kinds of institutions which provide intermediate
financial assistance and facilitate financial transactions between individuals
and corporate customers. Functions of Indian Financial System It bridges the
gap between savings and investment through efficient mobilization and
allocation of surplus funds It helps a business in capital formation It helps in
minimising risk and allocating risk efficiently

MONEY MARKET

Money market is a market for short-term loan or financial assets. It as a market

for the lending and borrowing of short term funds. As the name implies, it does
not actually deals with near substitutes for money or near money like trade bills,
promissory notes and government papers drawn for a short period not exceeding
one year. These short term instruments can be converted into cash readily without
any loss and at low transaction cost.

Money market is the centre for dealing mainly in short – term money assets. It
meets the short-term requirements of borrowers and provides liquidity or cash to
lenders. It is the place where short-term surplus funds at the disposal of financial
institutions and individuals are borrowed by individuals, institutions and also the
Government.
 FEATURES OF MONEY MARKET

The following are the general features of a money market:

1. It is market purely for short-term funds or financial assets called near money.
2. It deals with financial assets having a maturity period up to one year only.
3. It deals with only those assets which can be converted into cash readily without
loss and with minimum transaction cost.
4. Generally transactions take place through phone i.e., oral communication.
Relevant documents and written communications can be exchanged
subsequently. There is no formal place like stock exchange as in the case of a
capital market.
5. Transactions have to be conducted without the help of brokers.
6. The components of a money market are the Central Bank, Commercial Banks,
Non-banking financial companies, discount houses and acceptance house.
Commercial banks generally play a dominant in this market.

OBJECTIVE OF MONEY MARKET

The objectives of the money market are to implement the monetary policy of the
country. Monetary policy has three main objectives — growth, equity and price
stability. The objective of the monetary policy in the first decade of planning was
the revival of traditional weapons of monetary control.
 In the second decade, the emphasis shifted to economic growth and control of
money supply. During the 70’s and 80’s faster economic growth and price
stability assumed importance. The credit policy on the other hand, has been
evolved to meet the credit needs of the developing economy and on the other
hand, to keep in check inflationary prices. This policy has come to be known as
“controlled expansion”.

 To provide a parking place to employ short-term surplus funds.

 To provide room for overcoming short-term deficits.
 To enable the Central Bank to influence and regulate liquidity in the economy
through its intervention in this market.
 To provide a reasonable access to users of Short-term funds to meet their
requirements quickly, adequately and at reasonable costs.
 Monetary integration of the country,
 Directing credit flow according to policy priorities,
 Assisting in mobilisation of the savings of the community,
 Promotion of capital formation and
 Maintain an appropriate structure of relative prices and demand containment.

Capital market

Meaning of Capital Market

Capital Market is one of the significant aspect of every financial market. Hence it
is necessary to study its correct meaning. Broadly speaking the capital market is a
market for financial assets which have a long or indefinite maturity. Unlike
money market instruments the capital market instruments become mature for
the period above one year. It is an institutional arrangement to borrow and lend
money for a longer period of time. It consists of financial institutions like IDBI,
ICICI, UTI, LIC, etc. These institutions play the role of lenders in the capital
market. Business units and corporate are the borrowers in the capital market.
Capital market involves various instruments which can be used for financial
transactions. Capital market provides long term debt and equity finance for the
government and the corporate sector. Capital market can be classified into
primary and secondary markets. The primary market is a market for new shares,
where as in the secondary market the existing securities are traded. Capital
market institutions provide rupee loans, foreign exchange loans, consultancy
services and underwriting.

STRUCTURE OF CAPITAL MARKET

1. Government Securities Market : This is also known as the Gilt-edged market.
This refers to the market for government and semi-government securities backed
by the Reserve Bank of India (RBI).

2. Industrial Securities Market : This is a market for industrial securities i.e.

market for shares and debentures of the existing and new corporate firms.
Buying and selling of such instruments take place in this market. This market is
further classified into two types such as the New Issues Market (Primary) and the
Old (Existing) Issues Market (secondary). In primary market fresh capital is
raised by companies by issuing new shares, bonds, units of mutual funds and
debentures. However in the secondary market already existing i.e old shares and
debentures are traded. This trading takes place through the registered stock
exchanges. In India we have three prominent stock exchanges. They are the
Bombay Stock Exchange (BSE), the National Stock Exchange (NSE) and Over The
Counter Exchange of India (OTCEI).

3. Development Financial Institutions (DFIs) : This is yet another important

segment of Indian capital market. This comprises various financial institutions.
These can be special purpose institutions like IFCI, ICICI, SFCs, IDBI, IIBI, UTI,
etc. These financial institutions provide long term finance for those purposes for
which they are set up.
4. Financial Intermediaries : The fourth important segment of the Indian capital
market is the financial intermediaries. This comprises various merchant banking
institutions, mutual funds, leasing finance companies, venture capital companies
and other financial institutions.

These are important institutions and segments in the Indian capital market

FEATURES OF CAPITAL MARKET

1. Capital market are big markets and hence companies which require funds in
huge amounts will only go for raising capital through capital markets. Hence
for example if a company requires $50000 then it will take bank loan or loan
from some financial institution and there is no need to go to capital market
for such small funds requirements.

2. In capital markets funds are raised for long period and not for short term and
hence companies which raise funds through equity issue or bond issue use
funds arising out of such issue for long period of time ranging from 5 year to
25 years (in case of equity it is even more).

3. Another feature of capital market is that they are highly regulated because
these markets form the backbone of economy and also these markets help in
capital formation and therefore any problem in these markets can lead to
major problem for economic and financial condition of the country.
4. Another feature of capital market is liquidity; these markets are very liquid
because of presence of many parties like banks, mutual funds, retail investors,
hedge funds and so on. Hence investors who are looking to exit from their
investments can do so anytime unlike other markets like real estate,
commodity etc…, which are illiquid and therefore the investor cannot sell his
or her investments when he or she wants and has to sell the investment at
discounted price to market due to lack of liquidity.

5. In capital markets variety of instruments are available and hence there is lot of
flexibility so as an investor one can invest in bonds, debenture, equity stock,
futures and options and many more depending on his or her risk taking
capacity and future planning and as an company looking to raise funds can
raise funds in many ways like company which is highly leverage can raise
funds through equity route and company which are less leveraged can raise
funds through bond or debenture issue.

As one can see from the above that capital market are very important for not only
economic well being of the country but also for the social well being of the people
because there is positive correlation between economy and social well being of
people, higher the economic development better will be the social well being of
people and vice- versa.
RECENT DEVELOPMENT IN CAPITAL MARKET

After the nationalization of commercial banks, there has been a steady growth in
both agriculture and industrial finance. Certain new financial institutions have
been created in the country such as NABARD, EXIM Bank, SIDBI, etc., which were
responsible for providing funds to the capital market. In the existing development
banks, certain operational changes were made, which enabled them to finance
more industrial activity in the country. Mutual funds, started in both public and
private sector banks have also improved the working of capital market in India.

We can pinpoint the following 25 changes in Indian capital market that had
helped India to compete with developed countries around the world.

Recent in Indian Capital Market

1. Economic Liberalization due to Indian Capital Market::- The economic
liberalization has led to more deregulation, liberalization and privatization of
some of the public sector undertakings in India. This has resulted in the shares of
some of the public sector undertakings being made available to the public. The
Industrial policy adopted by the government earlier did not allow investment in
core sector by either individuals or private sector. But, with the privatization of
some of the public sector undertakings, the shares are now available to the public
for contribution. Example: Steel Authority of India (SAIL). The Navarathna
companies, consisting of major public sector undertakings such as ONGC, BHEL,
Oil India Ltd, Gas Authority etc., are some of the companies which are yet to be
privatized. Recently, the shares of VSNL were bought by TATAs.
2. Promoting more private sector banks::- Opening of more private sector banks
has resulted in the public contributing to the shares of these banks in Indian
capital Market. Recently, the government has announced 74% equity
participation by foreigners in private sector banks in India. This has not only
promoted new banks but also paved the way for the merger of existing banks with
other banks. Example: The merger of Bank of Madura with ICICI Bank.
3. Promotion of Mutual Funds: :- The promotion of mutual funds by nationalized
as well as non-nationalized banks has also improved the Indian capital market.
They were helpful to the public by way of tax saving schemes. Example: UTI’s
monthly income scheme. Mutual Funds promoted by nationalized banks have
increased investments. SEBI has regulated the working of mutual funds and the
banks have to publish their net asset value every week by furnishing the details in
leading newspapers. At present, the condition of some of the mutual funds is very
alarming, with the value of their investment going below the face value of the
securities. Hence, there is every possibility of the public losing their confidence in
the mutual funds. example: Unit Trust of India.
4. Regulation of NRI Investments: :- The Amendment of Foreign Exchange
Regulation Act (FERA) into Foreign Exchange Management Act (FEMA) has
given more encouragement to non resident investors. The percentage of NRI
investment in Indian companies has been increased from 5% to 24%. In the year
1991, India faced an acute shortage of foreign exchange and the then finance
minister adopted certain methods to improve the foreign exchange reserves. He
allowed investment by any individual NRI in any Indian company from the then
existing 5% of paid up capital to 24%. This had resulted in more inflow of foreign
funds into India. Foreign financial institutions have been made to invest directly
in the Indian capital market. The lock-in period of NRIs in equity shares in Indian
companies has been reduced from 3 years to 1 year. Any profit earned while
diluting the shares will attract 20% tax on profit.
5. Direct Foreign Investment::- The Foreign Investment Promotion Board,
consisting of the Secretaries of industries, finance and foreign affairs, have
allowed more direct foreign investment in core sector, especially in power sector.
6. FERA Companies::- Under the Foreign Exchange Regulation Act, a FERA
company is one which has 40% equity participation by foreigners. This limit has
been removed and now even foreign companies are allowed to have 51% equity
participation. For example, Colgate Polmolive has increased its foreign equity
participation from 40 to 51%. As a result, we are able to attract more foreign
capital into Indian capital market. The FERA Act has since been amended and is
now known as Foreign Exchange Management Act (FEMA).
7. Online Trading in Indian Capital Market::- Some of the leading stock markets in
India have introduced computer system for their trading activities. The brokers
can get hooked-up and do their trading on Online basis. The computer terminals
will enable the public and the brokers to know the price prevailing in the market
at any time. This will prevent speculation activities.
8. Transparency through Online trading::- The online trading through computer
has brought in transparency to the transactions in the market. People are able to
know prices prevailing in the market at any time and as such the brokers cannot
deprive their clients of their profits. The manipulation in the opening and closing
prices of shares by the brokers in the market is no longer possible.
9. National Stock Exchange:- A new stock market called National Stock
Exchange has been created which has a large number of companies listed. It is a
big competitor to the Bombay Stock Exchange and it is able to even influence the
Bombay Stock Exchange. The National Stock Exchange deals in shares of
companies throughout India and the prices prevailing in the market is a
benchmark for stock prices. The creation of National Stock Exchange has not only
widened the market, but has also subdued the Bombay Stock Exchange. It has
paved the way for all the leading companies’ equities being traded through a
single market. Thus, it enables the public to know the true picture of the
companies and their real strength.
10. Sensitivity Index in Indian Capital Market:-The calculation of index number
has also undergone a change. Sensitivity index has been introduced which
represents important 30 companies whose volume and value of shares determines
the market condition. The sensitivity index is an indication of the conditions
prevailing in the market and the conditions that are likely to be encountered by
the market.
11. Circuit-Breaker in Indian Capital Market:- Wild fluctuations in the
stock market is a thing of the past. There cannot be any more ‘stock
scam’ as engineered by Harshad Metha. For this purpose, the Bombay
stock market has introduced a cut-off switch which is called circuit
breaker. Whenever the market index goes up by more than 10%, the
circuit breaker will go off, bringing the entire operations in the market to
a standstill. This will be for a period of 30 minutes after which the
market will resume. This will bring down the share price. The stock
market operates for two hours each day and any termination in the
circuit breaker, after initial 1 and half hours of working will result in the
market closing for the day. Since the market operations cannot be
resumed for the day, share prices will fall. Wild speculation in shares will
be a thing of the past.

12. Demating of shares in Indian Capital Market:-The introduction of

demating has resulted in improving transactions further. Demating is a
system under which physical delivery of shares is no more adop ted. It is
called “scripless trade”. The shares of individual investors are held by
stock holding company and a pass book is given to individual investors.
Any sale or purchase of shares will result in entries made in the pass
book. The companies concerned are also informed for making due
alterations in the share register. This has prevented blank transfer and
speculation. Every transaction in the market is not only recorded but it
brings revenue to the Government in the form of registration and stamp
charges. Blank transfers will not be possible and short term speculation
in shares cannot be done. Every share purchased or sold will have to go
for registration and hence bogus or benami share transfer is not possible.

13. Market Makers in Indian Capital Market:- The share price of

companies will be decided by the market forces of supply and demand.
There are market makers who will ensure the supply and reasonable price
for the stocks of companies. By the introduction of these market makers,
manipulation of share price by the brokers is prevented.

14. Securities and Exchange Board of India:- The creation of Securities

and Exchange Board of India (SEBI) is an important development in
Indian capital market of India. SEBI has not only replaced the Controller
of Capital issues, but has brought in uniformity in the transactions in all
stock exchanges.
15. Renewal of Registration:- All the brokers and sub brokers have to
register afresh with SEBI and any complaints against them will be
inquired and if found guilty, punishment is given.

16. Over The Counter Exchange of India (OTCEI):- For the purpose of
newly promoted companies, another stock exchange with lesser degree of
conditions has been promoted and it is called Over The Counter
Exchange of India (OTCEI). It may not be possible for all the newly
companies to list their shares with the existing stock exchanges. The
share capital of these companies will be low and hence there should be an
arrangement for listing such companies’ shares. The creation of Over The
Counter Exchange of India (OTCEI) is helpful to these newly promoted
companies.

17. Merchant banker:- Merchant bankers have been permitted to take

part in the stock market. operations and their functions are
also regulated by SEBI. They not only help companies in capital
budgeting but also guide the foreign investors in the purchase of
securities. The merchant bankers, through the financial markets, help
some of the Indian companies to obtain fresh capital. They also go in for
syndication of loans and help the newly started companies in the issue of
shares.

18. Non Banking Financial Companies:- The role of non-financial

companies has also been controlled. RBI has introduced new conditions,
restricting their activities. New norms with regard to capital of non
banking financial companies have been introduced. For chit funds, a
separate Act has been passed and it restricts the maximum bidding to
40%.

19. Forward trading in Indian Capital market:- Forward trading has been
introduced since 9th June 2000 in Bombay Stock Exchange on a trial
basis and if found successful, it will be extended. It will be helpful to the
investors in ascertaining the true colors of existing companies.

20. Badla transactions in Indian Capital Market:- Badla is a transfer of a

contract from one period to another, where, either the buyer or the seller
is unable to execute the contract for which purpose, the defaulting
parties will pay Badla charges (which are decided by the Stock exchange).
At present, SEBI has banned Badla transactions.
21. Restrictions on Mutual Fund’s Investment:-There have been
restrictions on the role of mutual funds in the market. They cannot invest
more than 10% of their investable funds in any single company and not
more than 10% of single company’s issue of shares can be purchased by
mutual funds.

22. Educating Public:- Press and media have contributed a lot in

popularizing the Indian capital market and they are highlighting the
prices of securities everyday. The mutual funds and merchant banks have
been asked to set apart a portion of their funds towards educating the
public on the developments in the Indian capital market.

23. Government Securities Market:- After the stock scam, the Central
Government has de-linked Government securities from trading along
with company securities. In other words, there will be separate market for
Government securities and they will not be dealt along with company
securities in the stock
market. The measure was taken by Dr. Manmohan Singh when he was the
Finance Minister.
24. Future trading in Indian Capital Market:- Future trading is a contract
to buy or sell a particular financial instrument on a future date at a
specific price. The contract enables the parties to transfer according to
the changes in the price from one person to another. By this, the risk is
minimized. In every future contract, we have a buyer and a seller. And if
one makes a profit in a particular contract, the other person may try to
minimize his loss through some other contract. Thus, the future market
provides scope for the traders to minimize their loss or the risks in
trading of financial instruments. We have different types of ‘financial
futures’.

25. Penalty for insider trading in Indian Capital Market: - In 2002, SEBI
Act was amended to make insider trading punishable as a serious
offense. The penalty rate has been enhanced to Rs. 1 lakh per day and the
maximum penalty can go up to Rs. 25 crores.

26. Period of settlement in Indian Capital Market: :- After removing the

Badla, SEBI has introduced T+2…… – system for settling transactions in
Indian capital market. Accordingly, all transactions entered in the
capital market, should be completed within 2 days excluding the date of
trading.

RECENT DEVELOPMENT IN MONEY MARKET

1. Deregulation of the Interest Rate : In recent period the government has adopted
an interest rate policy of liberal nature. It lifted the ceiling rates of the call money
market, short-term deposits, bills re-discounting, etc. Commercial banks are
advised to see the interest rate change that takes place within the limit. There was
a further deregulation of interest rates during the economic reforms. Currently
interest rates are determined by the working of market forces except for a few
regulations.

2. Money Market Mutual Fund (MMMFs) : In order to provide additional short-

term investment revenue, the RBI encouraged and established the Money Market
Mutual Funds (MMMFs) in April 1992. MMMFs are allowed to sell units to
corporate and individuals. The upper limit of 50 crore investments has also been
lifted. Financial institutions such as the IDBI and the UTI have set up such funds.

3. Establishment of the DFI : The Discount and Finance House of India (DFHI)
was set up in April 1988 to impart liquidity in the money market. It was set up
jointly by the RBI, Public sector Banks and Financial Institutions. DFHI has
played an important role in stabilizing the Indian money market.

4. Liquidity Adjustment Facility (LAF) : Through the LAF, the RBI remains in the
money market on a continue basis through the repo transaction. LAF adjusts
liquidity in the market through absorption and or injection of financial resources.

5. Electronic Transactions : In order to impart transparency and efficiency in the

money market transaction the electronic dealing system has been started. It
covers all deals in the money market. Similarly it is useful for the RBI to watchdog
the money market.

6. Establishment of the CCIL : The Clearing Corporation of India limited (CCIL)

was set up in April 2001. The CCIL clears all transactions in government
securities, and repose reported on the Negotiated Dealing System7. Development
of New Market Instruments : The government has consistently tried to introduce
new short-term investment instruments. Examples: Treasury Bills of various
duration, Commercial papers, Certificates of Deposits, MMMFs, etc. have been
introduced in the Indian Money Market.

These are major reforms undertaken in the money market in India. Apart from
these, the stamp duty reforms, floating rate bonds, etc. are some other prominent
reforms in the money market in India. Thus, at the end we can conclude that the
Indian money market is developing at a good speed.

WHAT IS THE DIFFERENCE BETWEEN CAPITAL MARKET

AND MONEY MARKET?

We have provided you the answer to this question in the table below:

Basis Money market Capital Market

Definition Money Market provides short- A capital market is a type of

term borrowing and lending financial market where long-
for providing short-term term securities are issued and
liquidity to the Global traded
Financial System.

Maturity It deals with the borrowing Capital Market deals with the
period and lending of short-term borrowing and lending of long-
finance which is of one year or term finance (more than a year)
less.

Institutions The institutions involved in Important Institutions of the

 Money Market are Capital Markets are Stock
Commercial Banks, Central Exchanges, Commercial Banks,
Banks, Non-Banking NBFCs like Insurance
Financial Institutions (NBFCs) Companies etc.

Instruments Credit Instruments used by The main instruments of Capital

Money Market are Call Markets are Stocks, Shares,
Money, Collateral Loans, Debentures, Bonds, and
Acceptances, Bills of Government Securities.
exchange.

Risks Since the duration of credit is In the Capital Market, the risk is
much lesser in Money much greater in terms of degree
Markets, the degree of risk is and nature as it is a long-term
smaller. investment.

Purpose The short-term credit On the other hand, the Capital

requirements of the Market provides fixed capital to
companies like the working buy land and machinery etc and
capital of the industrialists are caters the long-term needs of the
catered by the money market. industrialists.
STOCK EXCHANGE

Meaning and definition

Stock exchange is an organization which facilitates this process of buying and

selling existing securities by providing a medium for buyers and sellers to interact
with each other. As there could be a large number of buyers and sellers who want
to trade in a particular security, stock exchanges facilitates arriving at trading
price based on supply and demand by providing a medium. They help both
buyers and sellers arrive at a mutually satisfactory price.

The word “Stock Exchange” is made from two words 'Stock' and Exchange. Stock
means part or fraction of the capital of a company, and Exchange means a
transferring the ownership; representing a market for purchasing and selling.
Thus, we can describe the stock exchange as a market or a place where different
types of securities are bought and sold. Securities traded on a stock exchange
include shares issued by companies, unit trusts, derivatives, pooled investment
products and bonds. As the stock exchange deals in all types of securities, it is
known as 'securities market' or 'securities exchange' also. A stock exchange is a
secondary market of securities because the trading happens only for the securities
that have already been issues to the public and now being allowed to be traded on
the floor of a stock exchange after getting listed with the stock exchange. The
initial offering of stocks and bonds to investors is by definition done in the
primary market and subsequent trading is done in the secondary market.

K.L. GARG has described the stock exchange as “an association of persons engaged
in the buying and selling of stocks, bonds and shares for the public on commission
and guided by certain rules and conditions.”

FEATURES OF STOCK EXCHANGES:

 Based on the above discussion and definitions, given below are the main
characteristics of any stock exchange:
 Organized Market: Stock exchange is an organized market of securities
(shares, debentures, bonds, etc.) where the securities are bought and sold
on the floor of a stock exchange. All transactions are regulated by the rules
and bye-laws of the concerned stock exchange.
 Formation & Membership: A stock exchange is generally registered as an
association or a society or a company. The membership of the stock
exchange is restricted to a certain number, and new members are admitted
only when there are vacancies. Every member has to pay the prescribed
membership fee.
 Only Members Can Trade: Stock exchange is only open to the members of
exchange also known as brokers. Brokers act as an agent of the buyers and
 sellers of shares, debentures and bonds. In a stock exchange, transactions
take place between members or their authorized agents on behalf of the
investors.
 Listed Securities: To be able to trade a security on a certain stock exchange,
it must be listed on the respective stock exchange as per the guidelines
issued by the exchange. The stock exchanges do not allow trading in each
and every company's securities. Companies which want their securities to
be traded on the floor of a stock exchange have to fulfill certain conditions.
The stock exchange satisfies itself about the genuineness and soundness of
the company to protect the investors from being cheated. Exchanges
maintain records at a central location of such securities but now the trade
is increasingly moving from physical places to electronic networks enabling
speed and reducing cost.

FUNCTIONS OF STOCK EXCHANGES:

 Stock exchange is one of the most important financial intermediaries and

plays a very important role in the capital formation and economic
development of the country. Given below are some important functions of
stock exchanges from economic point of view:
 Marketability of Securities: The stock exchange provides for easy
marketability of securities as securities can be bought and sold
conveniently on the floor of the stock exchange. The Stock Exchange
 provide companies with the facility to raise capital for expansion through
selling shares to the investing public and on the other hand provides
investors with a platform to trade these shares.
 Price Determination & Continuity: Since transactions take place regularly
on a stock exchange there is continuity in the dealings. Supply and
demand in stock markets are driven by various factors and this balance of
supply and demand affects the price of stocks. These prices gets duly
recorded and reported in the newspapers for the benefit of investing
public. Besides, stock exchanges have defined rules and regulations to
moderate price fluctuations to ensure continuity in buying and selling.
 Mobilizing Surplus Savings: Stock exchange is an integral part of the capital
market of a country. When people draw their savings and invest in shares
(through an IPO or the issuance of new company shares of an already listed
company), this leads mobilization of funds to help companies finance their
organizations. They facilitate the process by which the savings from all
parts of country gets channelized as investment into industrial and
commercial undertakings financing their capital requirements. This
promotes business activity resulting in stronger economic growth and
higher productivity levels of firms.
 Barometer of the Economy: The share prices fluctuate on stock exchanges as
a result of underlying market forces. The intensity of buying and selling of
securities and the corresponding rise or fall in the prices of securities
 reflects the investors' assessment of the economic and business conditions.
Share prices tend to rise or remain stable when companies and the
economy show signs of stability and growth whereas they might fall sharply
at the time of an economic recession, stagnation, depression, or financial
crisis. Change in security prices are known to be highly sensitive to
changing economic, social and political conditions and hence act as a
barometer of economic and business conditions.
 Mobility of Capital: Investing in other businesses require huge capital
outlay whereas investing in shares is open to both the large and small stock
investors. Stock exchanges furnish an open and continuous market for
small investors and their savings that are invested in securities are
converted into cash for reinvestment in other securities. Thus, stock
exchanges provide mobility to capital and facilitate sound investment.
Savings are encouraged when people come to invest in stock exchange.
 Profit Sharing & Resource Allocation: As a result of stock market
transactions, funds flow from the less profitable to more profitable
enterprises. All type of stock investors whether they are individuals,
professional stock investors, institutional investors earn capital gains
through dividends and stock price increases. This enables them to share in
the wealth of profitable businesses. Industries which have potentials of
growth are able to attract the savings of people towards their ventures
relatively more than those which have no such prospects. Thus, financial
 resources of the economy are allocated on a reasonable basis. Unprofitable
and troubled businesses may result in capital losses for shareholders.
 Speculation: The stock exchanges are also fashionable places for speculation
and bring equilibrium in the prices of securities which are bought and sold
by speculators. In a financial context, the terms "speculation" and
"investment" are actually quite inter-related because "investment" means
the act of placing money in a financial vehicle with the intent of producing
returns over a period of time. Speculators generally buy securities in
anticipation of rise in the prices. As a result of their buying, prices do not
decline as low as might have been the case without their buying and vice
versa hence regulating excessive price fluctuations.
 Liquidity: This is the most important function provided by the stock
exchanges. The capital investments are generally long term and if
shareholder wants their investment back, in a physical scenario, it will
result in winding up the company and selling its assets to discharge the
money. Investors usually prefer liquidity of their investment. The stock
markets facilitate and provide that assurance to investors. These are
markets which facilitate buying and selling of securities assuring liquidity
of investments which goes to serve the investor's need.
 Corporate Governance: As stock exchanges facilitate ownership of
companies to be help by a wide and varied scope of owners, companies
generally tend to improve management standards and efficiency to satisfy
 the demands of these shareholders. To safeguard the interest of investors
more stringent rules are imposed by public stock exchanges and the
government on public corporations when compare to privately owned
enterprises. Every stock exchange defined its own rules and regulations for
the control of operations of the exchange. Only members are allowed to
deal in securities and make transactions. As the members have to transact
their business strictly according to the rules, the investors' interests are
safeguarded against dishonesty or malpractices. Traded public companies
tend to have better management records than privately held companies.

ROLE OF STOCK EXCHANGE

Role of Stock Exchanges are varied and highly important in the development of
economy of a country. They measure and control the growth of a country.Stock
markets are the places, where exactly you do your business. Your stock trading
transactions are executed at the stock exchanges through your broker, unless you
have a membership with that exchange, which enable you to trade directly.Stock
exchange apart from being hub of primary and secondary market, they have very
important role to play in the economy of the country. Some of them are listed
below.

 Raising capital for businesses

Exchanges help companies to capitalize by selling shares to the investing public.
 Mobilizing savings for investment
They help public to mobilize their savings to invest in high yielding economic
sectors, which results in higher yield, both to the individual and to the national
economy.
 Facilitating company growth
They help companies to expand and grow by acquisition or fusion.
 Profit sharing
They help both casual and professional stock investors, to get their share in the
wealth of profitable businesses.
 Corporate governance
Stock exchanges impose stringent rules to get listed in them. So listed public
companies have better management records than privately held companies.
 Creating investment opportunities for small investors
Small investors can also participate in the growth of large companies, by buying a
small number of shares.
 Government capital raising for development projects
They help government to rise fund for developmental activities through the issue
of bonds. An investor who buys them will be lending money to the government,
which is more secure, and sometimes enjoys tax benefits also.
 Barometer of the economy
They maintain the stock indexes which are the indicators of the general trend in
the economy.They also regulate the stock price fluctuations.
 LIST OF VARIOUS STOCK EXCHANGE
1
NewYork Stock Exchange
2
NASDAQ
3
London Stock Exchange
4
Tokyo Stock Exchange
5
Euronext
6
Frankfurt Stock Exchange
7
Shanghai Stock Exchange
8
BME Spanish Exchanges
9
Italian Stock Exchange
10
Hong Kong Stock Exchange
11
Shenzhen Stock Exchange
12
Korea Exchange
13
SWX Swiss Exchange
14
OMX Nordic Exchanges
15
Toronto Stock Exchange
STEPS INVOLVED IN STOCK MARKET TRANSACTIONS:-
 Step 1: The initial step in a stock market transaction is when a customer
gives the order to the broker, the latter notes down the same in his order
book and enters the floor of the market. The market has different pits. They
indicate different industries and a broker may deal in different securities
simultaneously. Only stocks or shares of companies listed in the stock
exchange will be transacted.
 Step 2: The broker who wants to buy or sell securities at a specific price will
indicate his preference in the stock market and when two brokers have
settled their transactions they enter into an agreement for settling
transactions.
 Step 3: The particular transaction is given a number and a sale order, or a
buying order will be placed. The order will denote the quantity of shares,
the name of the company and the price, including commission.
 Step 4: This sale or buying note will be delivered to the respective clients.
 Step 5: In the case of buying note, the buyer will be informed and
accordingly he has to make payments.
 Step 6: In the case of seller, the broker after selling the security at the
prescribed rate will deliver the cheque after receiving it from the buyer.
 Step 7: After coming back to the office, the broker will hand over to the
buyer three documents, namely the security, transfer document from
and buying note.
 Step 8: In the case of buying, the broker will hand over the documents to
the buyer along with the buying notes.
 Step 9: In the case of selling, the seller will sell the securities according to
instruction of seller and hand over the sale note.
 Step 10: The broker will collect the cheque later from the buyer and hand
over the same to his customer. For both buying and selling, commission will
be charged by the broker as per the rules prevailing in the stock market.
 Step 11: While buying securities, the broker will deliver along with the
shares, transfer documents of the stock market which contain the seal of
the market with the specific indication. The transfer document will contain
the signature of the seller along with the witness in the place of transferor.
 Step 12: The buyer will sign the document in the place of transferee along
with a witness and send the shares to the company for registration.
Depending upon the value of shares, stamps have to be affixed. Thus, at
every stage of the stock market transaction made in the market brings
revenue to the government.
 Step 13: But when shares are purchased not for registration but for resale
within a short period, then the buyer will hand over the share to the broker
within a short period for sale. This is called blank transfer. More
precautions are taken to prevent blank transfer of securities at present.
SEBI
The Securities and Exchange Board of India, also referred to as the SEBI is similar
to the United States Securities and Exchange Commission. They are the governing
body for financial regulations in India. The SEBI is responsible for maintaining a
stable investment and financial market for India. The board was established in
1988 but not given any regulating abilities until 1992 when the Securities and
Exchange Board of India Act passed. The SEBI headquarters are in Mumbai, and
the board is headed by eight members.

ROLE
 Protecting the interests of investors in securities and promoting and
regulating the development of the securities market
 Regulating the business in stock exchanges
 Registering and regulating the working of stock brokers, sub–brokers,
share transfer agent etc.
 Registering and regulating the working of venture capital funds, collective
investment schemes (like mutual funds) etc
 Promoting investor’s education and training intermediaries
 Promoting and regulating self-regulatory organizations
 Prohibiting fraudulent and unfair trade practices
 Calling for information from, undertaking inspection, conducting inquiries
and audits of the stock exchanges, intermediaries, self – regulatory
 organizations, mutual funds and other persons associated with the
securities market.

CONSUMER PROTECTION ACT

Consumer rights
1. Right to Safety:
According to this right the consumers have the right to be protected against the
marketing of goods and services which are hazardous to life and property, this
right is important for safe and secure life. This right includes concern for
consumer’s long term interest as well as for their present requirement.Sometimes
the manufacturing defects in pressure cookers, gas cylinders and other electrical
appliances may cause loss to life, health and property of customers. This right to
safety protects the consumer from sale of such hazardous goods or services.

2. Right to Information:
According to this right the consumer has the right to get information about the
quality, quantity, purity, standard and price of goods or service so as to protect
himself against the abusive and unfair practices. The producer must supply all
the relevant information at a suitable place.

3. Right to Choice:
According to this right every consumer has the right to choose the goods or
services of his or her likings. The right to choose means an assurance of
availability, ability and access to a variety of products and services at competitive
price and competitive price means just or fair price.The producer or supplier or
retailer should not force the customer to buy a particular brand only. Consumer
should be free to choose the most suitable product from his point of view.

4. Right to be Heard or Right to Representation:

According to this right the consumer has the right to represent him or to be heard
or right to advocate his interest. In case a consumer has been exploited or has any
complaint against the product or service then he has the right to be heard and be
assured that his/her interest would receive due consideration.This right includes
the right to representation in the government and in other policy making bodies.
Under this right the companies must have complaint cells to attend the
complaints of customers.

5. Right to Seek Redressal:

According to this right the consumer has the right to get compensation or seek
redressal against unfair trade practices or any other exploitation. This right
assures justice to consumer against exploitation.The right to redressal includes
compensation in the form of money or replacement of goods or repair of defect in
the goods as per the satisfaction of consumer. Various redressal forums are set up
by the government at national level and state level.
6. Right to Consumer Education:
According to this right it is the right of consumer to acquire the knowledge and
skills to be informed to customers. It is easier for literate consumers to know their
rights and take actions but this right assures that illiterate consumer can seek
information about the existing acts and agencies are set up for their
protection.The government of India has included consumer education in the
school curriculum and in various university courses. Government is also making
use of media to make the consumers aware of their rights and make wise use of
their money.

Failure of consumerism in india

I.lliteracy and Ignorance: Consumers in India are mostly illiterate and ignorant.
They do not understand their rights. A system is required to protect them from
unscrupulous businessmen
. 2. Unorganised Consumers: In India consumers are widely dispersed and are not
united. They are at the mercy of businessmen. On the other hand, producers and
traders are organized and powerful.
3. Spurious Goods: There is increasing supply of duplicate products. It is very
difficult for an ordinary consumer to distinguish between a genuine product and
its imitation. It is necessary to protect consumers from such exploitation by
ensuring compliance with prescribed norms of quality and safety.
4. Deceptive Advertising: Some businessmen give misleading information about
quality, safety and utility of products. Consumers are misled by false
advertisement and do not know the real quality of advertised goods. A
mechanism is needed to prevent misleading advertisements.
5. Malpractices of Businessmen: Fraudulent, unethical and monopolistic trade
practices on the part of businessmen lead to exploitation of consumers.
Consumers often get defective, inferior and substandard goods and poor service.
Certain measures are required to protect the consumers against such
malpractices.
6. Freedom of Enterprise: Businessmen must ensure satisfaction of consumers. In
the long run, survival and growth of business is not possible without the support
and goodwill of consumers. If business does not protect consumers' interests,
Government intervention and regulatory measures will grow to curb unfair trade
practices.
7. Legitimacy for Existence: Business exists to satisfy the needs and desires of
consumers. Goods are produced with the purpose of selling them. Goods will, in
the long run, sell only when they meet the needs of consumers.
8. Trusteeship: Businessmen are trustees of the society's wealth. Therefore, they
should use this wealth for the benefit of people.

CONCLUSION

Invariably, consumers are a vulnerable lot for exploitation, more so in a

developing country with the prevalence of mass poverty and illiteracy. India too is
no exception to it. Instances like overcharging, black marketing, adulteration,
profiteering, lack of proper services in trains, telecommunication, water supply,
airlines, etc are not uncommon here. From time to time, the government has
attempted to safeguard consumer's interests through legislations and the CPA
1986 is considered as the most progressive statute for consumer protection.
Procedural simplicity and speedy and inexpensive redressal of consumer
grievances as contained in the CPA are really unique and have few parallels in the
world. Implementation of the Act reveals that interests of consumers are better
protected than ever before. However, consumer awareness through consumer
education and actions by the government, consumer activists, and associations
are needed the most to make consumer protection movement a success in the
country.

RIGHT TO SERVICE ACT

Right to Public Services legislation in India comprises statutory laws which
guarantee time bound delivery of services for various public services rendered by
the Government to citizen and provides mechanism for punishing the
errant public servant who is deficient in providing the service stipulated under
the statute. Right to Service legislation are meant to reduce corruption among the
government officials and to increase transparency and public accountability.
Madhya Pradesh became the first state in India to enact Right to Service Act on 18
August 2010 and Bihar was the second to enact this bill on 25 July 2011. Several
other states like Bihar, Delhi, Punjab, Rajasthan, Himachal

Pradesh, Kerala, Uttarakhand, Haryana, Uttar

Pradesh, Odisha, Jharkhand Maharashtra and West Bengal have introduced
similar legislation for effectuating the right to service to the citizen.

MAIN CHARACTERSTICS OF THIS LEGISLATION

Departments and Services

The list of the departments and services that are to be covered under this act will
be provided through notification which will be updated from time to time. The
current list of services includes water connections, issuing ration cards, death
certificates, electricity connections, driving licenses, attestations, mark sheets, etc.
The services covered depends on several factors such as demand from the citizens,
the willingness of the departments or even their current efficiency. The
department covered under this act include Revenue Department, Human
Resource Development, Transport Department, Police, Labour Department and
Administration Department.

Time Period
Time period assigned for providing services depends on state to state. Different
stipulated time period depends on several factors such as the volume of
application and departmental complexity in that state etc. For measuring the
time period, criteria decided is, the time taken for submitting an application to
designated officer or to any authorized or responsible officer to the time taken for
providing the applicant with an acknowledgment receipt. Like in Rajasthan
under Janani Shishu Suraksha Yojana (JSSY), the birth certificate is made
immediately after the woman gave delivery but in the case of Punjab, it took
around 7 days for granting a birth certificate.

Nodal Departments

The nodal department made under authority of government has the main role in
assisting the government in providing efficient services to the public and
decreasing the burden of the department. These nodal departments differed as
per specific state and are decided as per the number of applications and demand
of services from such departments in that state. Some of them include
Administrative Reforms Department, General Administration Department,
Department of Home, Department of Revenue or Department of Information
Technology.

Appeals
Every state has its own rules to appeal on bad services, unreasonable ground or
non-complied services are provided by the department. For instance, in the State
of Bihar, Uttar Pradesh and Madhya Pradesh two-tier appeal system is in
practice, that means if the application is rejected by designated officer, the
applicant can file an appeal with First Appellant Officer (FAO) within 30 days
from rejection or if prescribed limit expires. If the application is rejected by the
FAO, the applicant can appeal for the second time with the Second Appellant
Authority (SAT) within 60 days of rejection. In the case of Punjab, Haryana and
Uttrakhand there is a three appeal system where a final appeal is made to the
special commission set up by the state whose decision will be considered final. On
the other hand, FAO or designated officer can also file the revision to the
nominated officer as provided in the legislation.

• Initial Application: Application received by Designated Officers (DO) and DO

are provided with two options either to accept the application and provide service
or to reject the application and intimidate reason for same in the prescribed time
limit.

First appeal: Citizens must contact the First Appellant Officers (FAO) within 30
days from the day of rejection intimidation to file the first appeal. The FAO may
confirm the DO’s rejection or order to extend the service.
• Second appeal: A second appeal is made with the Second Appellant Authority
(SAT) within sixty days from the date of the FAO’s decision. The Second Appellant
Authority holds the power to punish any officer who fails to comply with services
without sufficient cause.

Penal provision

Every government officer who does not comply with the rules mentioned will be
liable to be penalized. In major states like UP, Bihar, Orissa etc the penalty is of
Rs. 250 per day with the total amount not exceeding Rs. 5000. While in Delhi, the
penalty is Rs. 10 per day with total amount not exceeding Rs. 200. In Karnataka it
is Rs. 20 per day with a total not exceeding Rs. 500. In Himachal Pradesh, there is
no per day penalty but the total amount of fine ranges between Rs. 1000 to Rs.
5000.

Knowledge Gateway

Information concerning to any services or any departments of any state under

this act will be published through an online notification on the official website of
Ministry of State. This provision has been made to reduce the gap between public
and private departments with regard to any information from that department
or for any new service if launched by the ministry. The information will be
routinely updated on the website.
Although by this act monetary penalizing to officials, for wrong delivery of
services, has been considered as a great mechanism for stopping a conventional
cycle of impunity and unaccountability, but it is still unsure how effective this
mechanism would be. If we look at State of Maharashtra or Madhya Pradesh,
there were same service programs having a monetary penal theory in place by
different names were running, but the strategy failed. This does not mean that
monetary penalizing against bureaucrats is ineffective, but it is also not a surety,
that it will be a successful delivery system. The success of this act depends not only
on penalty provisions, but it also involves political and administrative
accountability. Broadly speaking, reforms are needed to improve structures of
department, control and re-sourcing. Political reformation should be made so
that local politician gets power to hold local officials accountable. Penal provision
will restrict the officials from doing their duty of providing service. We need
reforms that direct institution and officials to provide public service in a
responsible manner, not in fear. The check holding is implemented where the
relation of right and duty could breathe

RIGHT TO INFORMATION
Right to Information (RTI) is an Act of the Parliament of India to provide for
setting out the practical regime of right to information for citizens and replaces
the erstwhile Freedom of information Act, 2002. Under the provisions of the Act,
any citizen of India may request information from a "public authority" (a body of
Government or "instrumentality of State") which is required to reply expeditiously
or within thirty days. The Act also requires every public authority to computerise
their records for wide dissemination and to proactively certain categories of
information so that the citizens need minimum recourse to request for
information formally.This law was passed by Parliament on 15 June 2005 and
came fully into force on 12 October 2005. The first RTI application was filed at a
police station in Pune by Shahid Raza Burney.

SCOPE
The Act covers the whole of India except Jammu and Kashmir, where J&K Right to
Information Act is in force. It covers all the constitutional authorities, including
executive, legislature and judiciary; any institution or body established or
constituted by an act of Parliament or a state legislature. It is also defined in the
Act that bodies or authorities established or constituted by order or notification of
appropriate government including bodies "owned, controlled or substantially
financed" by government, or non-Government organizations "substantially
financed, directly or indirectly by funds".

Private bodies

Private bodies are not within the Act's ambit directly. In a decision of Sarbjit roy
vs Delhi Electricity Regulatory Commission the Central Information
Commission also reaffirmed that privatised public utility companies fall within
the purview of RTI.[5] As of 2014, private institutions and NGOs receiving over
95% of their infrastructure funds from the government come under the Act.[6]

Political parties

The Central Information Commission (CIC) held that the political parties are
public authorities and are answerable to citizens under the RTI Act. The CIC said
that six national parties - Congress, BJP, NCP, CPI(M), CPI and BSP and BJD -
has been substantially funded indirectly by the Central Government and have the
character of public authorities under the RTI Act as they perform public functions
in August 2013 the government introduced a Right To Information (Amendment)
Bill which would remove political parties from the scope of the law