CENTRAL UNIVERSITY OF SOUTH BIHAR

SCHOOL OF LAW AND GOVERNANCE

PROJECT
“FINANCIAL MARKET REGULATION”
“CAPITAL MARKET V/S MONEY MARKET”

TO………………………........Dr. Pradeep Kumar Das

Assistant Professor
School of Law and Governance
C.U.S.B., Gaya

BY……………….................SAURABH PRIYADARSHI
B.Sc.LL.B (HONS.)
Eighth Semester
Enrll. No: CUB1413115018
DATE……………………… 29/04/2018

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CONTENTS

SR.NO. TITLE PAGE NO.

1. ACKNOWLEDGEMENT 3

2. LITERATURE REVIEW 4

3. RESEARCH METHODOLOGY 5

3. RESEARCH QUESTION OR HYPOTHESIS 6

4. CHAPTER:ONE 7

5. CHAPTER:TWO 8-12

6. CHAPTER:THREE 13-17

7. CHAPTER:FOUR 18-19

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ACKNOWLEDGEMENT

During the course of writing this project, I have received the help, encouragement and assistance from
my teacher, colleagues, friends, library staff and other. I am thankful to all of them.

I am particularly great thankful to my FMR Teacher,Dr. Pradeep Kumar Das for encouragement
and support that he provided during the preparation of the project.

I am deeply indebted to the eminent legal experts and Company Law experts and other scholars of
repute whose valuable work has been highly useful in writing this project.

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LITERATURE REVIEW
BOOKS/STATUTES REFFERED
 The SEBI ACT, 1992.
 Financial Market and Services, E. Gordon & K. Natrajan (Himalya Publisjing
House,10th Edition, Mumbai

 Financial Markets and Institutions , Frederic S Mischin (Pearson 8th

Edition,2017 New Delhi.)
 Financial Markets and Institutions , Dr. Vinod Kumar & Atul Gupta(Lexis
Nexix,12th Edition, New Delhi)
 Financial Markets and Institutions and Services, Sandeep Goel (Eastern Book
Company, 7th Edition)

JOURNALS REFFERED
 Richa Gupta and Deepti Goel, ‘ Indian Capital Market: An Overview’, International
Journal of Emerging Research in Management &Technology, ISSN: 2278-9359
(Volume-3, Issue-5), 2014
 Alan Harper and Zhenhu Jin, ‘ examining the market efficiency in India: an empirical
analysis of Random walk hypothesis’, Journal of Finance and Accountancy, 2011
 Mall, M., Pradhan, B.B., and Mishra, P.K. (2011). The efficiency of India’s stock
market: an empirical analysis. International Research Journal of Finance and
Economics, 69,p. 178- 184.
 N.A. Majumdar, 'Financial Sector Reforms and India's Economic Development',
Academic Foundation, New Delhi, Vol. 1 1, 2002
 Al-Jafari, Mohamed Khaled(2011), ‘Random Walks and Market Efficiency Tests:
Evidence from Emerging Equity Market of Kuwait,’ European Journal of Economics,
Finance and Administrative Sciences, Vol 36, pp 19-28.
 Black, F., “Capital Market Equilibrium With Restricted Borrowing,” Journal of
Business 45, 1972, pp. 444-454.

OTHER SOURCES REFFERED

 ALL INDIA REPORTER

 MANUPATRA
 CORPORATE LAW ADVISOR

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RESEARCH METHODOLOGY

The paper is conceptual in nature primarily, largely based on secondary source of

information, and focuses on various investor protection measures taken by The SEBI time to
time. . As money became a commodity, the money market became a component of
the financial market for assets involved in short-term borrowing, lending, buying and selling
with original maturities of one year or less. Trading in money markets is done over the
counterand is wholesale. The money market consists of financial institutions and dealers in
money or credit who wish to either borrow or lend. Participants borrow and lend for short
periods, typically up to twelve months. 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. A capital market is a financial market in
which long-term debt (over a year) or equity-backed securities are bought and sold.[6] Capital
markets channel the wealth of savers to those who can put it to long-term productive use,
such as companies or governments making long-term investments. Financial regulators like
the Bank of England (BoE) and the U.S. Securities and Exchange Commission (SEC) oversee
capital markets to protect investors against fraud, among other duties.

The data has been collected from the following sources:-

1. Primary data

2. Secondary data

Primary data:

In this study the questionnaire method have been used to collect primary data.

Secondary data:

Secondary data is collected from the website of SEBI (www.sebi.co.in) and Ministry Of
Corporate Governance, published National Company Law Tribunal and Government of India.
Thus, there is a need to provide protection to the company and investors.

The Main objectives of the study are:

1) To evaluate the performance of the capital market and money market in India.

2) To know the historical development of capital and money market in the world as well
as in India.

3) To understand the concept of capital market and money market in India.

4) To make a comparative study of capital market and money market.

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RESEARCH QUESTION OR PROBLEM
1. What is Capital Market and what are its constituents???

2. What is money market and what are its constituents?

3. What is the difference between capital market and money market?

RESEARCH HYPOTHESIS
1. A capital market is a financial market in which long-term debt (over a year) or equity-
backed securities are bought and sold. Capital markets channel the wealth of savers to those
who can put it to long-term productive use, such as companies or governments making long-
term investments

2. A capital market can be either a primary market or a secondary market. In primary market,
new stock or bond issues are sold to investors, often via a mechanism known as underwriting

3. The money market consists of financial institutions and dealers in money or credit who
wish to either borrow or lend. Participants borrow and lend for short periods, typically up to
twelve months. 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.

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 CHAPTER: ONE

________________________________________________

INTRODUCTION

Today we are living in the world of twenty first century. A wide range of better-regulated
investment options have evolved in the financial world in the recent past. Simultaneously,
these options have brought more complexity in terms of risks, benefits and objectives. As
such, the present day investor is more confused than ever. On the other hand, the investors
today are far more educated and financially literate as compared to a decade age. The high
savings rate has been responsible for seeking guidance and investment advice to facilitate
investor’s diverse goals.1 Hence, the financial planning and wealth management solutions
have gained importance and investors need to analyze the wide opportunities, compare and
contrast and finally take investment decision.2

Financial markets in India comprise the money market Government securities market, capital
market, insurance market, and the foreign exchange market. Recently, the derivatives market
has also emerged. With banks having already been allowed to undertake insurance business,
bane assurance market has also emerged in a big way. Till the early 1990s most of the
financial markets were characterized by controls over the pricing of financial assets,
restrictions on flows or transactions, barrier to entry, low liquidity and high transaction
costs.These characteristics came in the way of development of the markets and allocative
efficiently of resources channelled through them. From 1991 onward, financial market
reforms have emphasized the strengthening of the price discovery process easing restrictions
on transactions, reducing transaction costs and enhancing systemic liquidity

On the basis of maturity/period of the claims. Based on this, financial markets are following
two types: Money market and Capital market.

1.1 Money Market: A financial market for short-term financial assets is called the money
market. It is a market for dealing in monetary assets of shorts-term nature. The traditional
cut off period for short term and long term claim is one year. Financial asset with a

1
E. Gordon & K. Natrajan, Financial Market and Services,25 (Himalya Publisjing House,Mumbai,10 th Edition,
2016).
2
Ibid

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 maturity of one year or less than one year is considered short term and therefore part of
the money market. It is the central wholesale market for short-term debt securities, or for
the temporary investment of large amount of short-term funds. Money market is a
collective name given to various firms and institutions that deal with various grades of
near-money.3 It includes trade bills, promissory notes and government securities. Money
market instruments have the characteristics of quick liquidity and minimum transaction
cost.

1.2 Capital Market: Capital market is a market that specializes in trading long-term and
relatively high-risk securities. A financial asset with a maturity of more than one year is
part of the capital market. It is a market for long-term capital. The capital market provides
long-term debt and equity finance for the government and the corporate sector. 4 Capital
market comprises two segments namely the new issue market and secondary market. The
various constituents of capital market are viz. equity market, dept market, government
securities market, mutual funds etc.

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3
Dr. Vinod Kumar & Atul Gupta,Financial Markets and Institutions ,96 (Lexis Nexix, New Delhi,12th Edition,
2017)
4
Supranote 1

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 CHAPTER: TWO

________________________________________________

CAPITAL MARKET

2.1. MEANING
Capital market refers to ‘sources of long term finance and fields for investment’. As stated by
Prof. S.C. Kuchhal in his book, The Industrial Economy of India, “it consists of a series of
channels through which the savings of the community are made available for industrial and
commercial enterprises and public authorities”.5 As stated by P. Livingston in his book, The
English Capital Market, “it is the business of the capital market to facilitate the movement of
the stream of command over capital to the highest yield. By so doing, it enables them most
effectively, thereby increasing productive capacity and swelling the National Dividend

2.2. COMPONENTS OF THE CAPITAL MARKET

The capital markets are broadly classified into debt and equity markets. Debt markets are
characterized by large institutional involvement with less presence of retail participation.
Debt markets involve in the trade of government securities, treasury bills, corporate bonds,
other debt instruments while equity markets deal mainly in equity shares and to a limited
extent in preference shares and company debentures .6 Recently, futures and options in
indices and equity shares have also become a part of the market. In the context of equity
product, the markets are classified into- Primary market and Secondary market.7 Of late,
derivatives market has also become a part of the broader market. In the capital markets, there
is large number of participants with variety of products
5
Frederic S Miskin, Financial Markets and Institutions, 137 (Pearson, New Delhi, 8th Edition, 2017)
6
Ibid
7
ibid

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The various components of capital market are as follows:-
 Securities: - The term securities include shares, bonds, debentures, futures, options,
mutual funds units.
 Intermediaries: - Intermediaries include brokers, sub-brokers, custodians, share
transfer agents, merchant bankers, and depositories
 Issuers of securities:- Companies, body corporate, banks, government, financial
institutions, mutual funds
 Investors: - Investors include individuals, companies, mutual funds, financial
institutions, foreign institutional investors.
 Market regulators: - The regulators in the capital markets are SEBI, RBI (to some
extent), Department of Company Affairs, and Department of Economic Affairs of the
Central government.

2.3 SEGMENTS OF CAPITAL MARKET

There are two interdependent and inseparable segments in the Indian capital market. These
segments are the primary market and stock (secondary) market.
2.3.1 Primary Market
For sale of new securities the primary market provides the channel. The issuer of securities
sells the securities in the primary market to raise funds for investment and/ or to discharge.8
In other words, the market wherein resources are mobilized by entities through issue of new
securities is called the primary market. These resources are required for new projects as well
as for existing projects with a view to expansion, diversification, and modernization and up
gradation. To the economy of a country the primary market is of great significance. It is
through the primary market that funds flow for productive purposes from investors to
entrepreneurs. The latter use the funds for creating new products and rendering services to
customers in India and abroad.9 The strength of the economy of a country is gauged by the
activities of the Stock exchanges. The primary market creates and offers the merchandise for
the Secondary Market.10
2.3.2 Secondary Market
Secondary market refers to a market where securities are traded after being initially offered to
the public in the primary market and/or listed on the Stock Exchange. Majority of the trading

8
Supranote 5
9
Sandeep Goel, Financial Markets and Institutions and Services, 209 (Eastern Book Company, Lucknow, 7 th
Edition, 2013)
10
Id 8

10 | P a g e
is done in the secondary market. Secondary market comprises of equity markets and the debt
markets23. The secondary market enables participants who hold securities to adjust their
holdings in response to changes in their measurement of risk and return. They also sell
securities for cash to meet their liquidity needs. The secondary market has supplementary two
components, namely the over-the-counter (OTC) market and the exchange- traded market.
OTC is different from the market place provided by the Over The Counter Exchange of India
Limited. OTC markets are fundamentally informal markets where trades are negotiated. Most
of the trades in government securities are in the OTC market. All the spot trades where
securities are traded for immediate delivery and payment take place in the OTC market. The
exchanges do not make available facility for spot trades in a strict sense.
A variant of secondary market is the forward market, where securities are traded for future
delivery and payment. Pure forward is outside the formal market.11 The versions of forward
in formal market are futures and options. In futures market, standardized securities are traded
for future delivery and settlement. These futures can be on a basket of securities like an index
or an individual security. In case of options, securities are traded for conditional future
delivery. There are two types of options–a put option permits the owner to sell a security to
the writer of options at a predetermined price while a call option permits the owner to
purchase a security from the writer of the option at a predetermined price. These options can
also be on individual stocks or basket of stocks like index.

2.4 ROLE AND IMPORTANCE OF MONEY MARKET

In mobilizing savings and channeling them into productive investments Capital market plays
a vital role. By connecting Surplus Spending Units [SSUs] and Deficit Spending Units
[DSUs], it helps in diverting resources from wasteful and unproductive channels to
productive investments.12 It provides incentives to savers in the form of interest or dividend
for their funds, thus encourages capital formation. It helps the corporate sector to expand,
grow and diversify and thereby it facilitates growth of output and income in the economy. In
the capital market that operates the various institutions such as banks, development banks and
stock market give quantitative and qualitative direction to the flow of funds and bring rational
allocation of resources. For new as well as existing ventures Capital market provides money.
They are allowed freely to enter into the capital market and raise any amount of funds they
wanted. The capital market by connecting the borrowers and lenders, reduces time lag and

11
Supra note 5
12
Ibid

11 | P a g e
information cost and thereby transaction cost to the corporate sector27 . Capital market has a
crucial importance to capital formation. For a speedy economic development adequate capital
formation is necessary.
The primary role of the capital market is to raise long-term funds for governments, banks,
and corporations while providing a platform for the trading of securities. This fundraising is
regulated by the performance of the stock and bond markets within the capital market. The
member organizations of the capital market may issue stocks and bonds in order to raise
funds. Investors can then invest in the capital market by purchasing those stocks and bonds.
The capital market, however, is not without risk. It is important for investors to understand
market trends before fully investing in the capital market. To that end, there are various
market indices available to investors that reflect the present performance of the market.

The significance of capital market in economic development is explained below:-

 Mobilization of Savings and Acceleration of Capital Formation: The importance
of capital market is self-evident in developing countries like India. In this market,
various types of securities help to mobilize savings from various sectors of
population.
 Easy Liquidity: In the secondary market investors can sell off their holdings and
convert them into liquid cash.
 Ready and Continuous Market: The stock exchange provides a central convenient
place where buyers and sellers can easily purchase and sell securities.
 Technical Assistance: In developing countries an important shortage faced by
entrepreneurs is technical assistance.
 Raising Long - Term Capital: The existence of a stock exchange enables companies
to raise permanent capital. The investors cannot commit their funds for a permanent
period but companies require funds permanently. The stock exchange resolves this
dash of interests by offering an opportunity to investors to buy or sell their securities,
while permanent capital with the company remains unaffected.
 Reliable Guide to Performance: The capital market serves as a reliable guide to the
performance and financial position of firm, and thereby promotes efficiency.
 Promotion of Industrial Growth: The stock exchange is a central market through
which resources are transferred to the industrial sector of the economy
 Revival of Sick Units: The Commercial and Financial Institutions provide timely
financial assistance to viable sick units to overcome their industrial sickness. To help

12 | P a g e
 the weak units to overcome their financial industrial sickness banks and FIs may write
off a part of their loan.
 Proper Channelization of Funds: The prevailing market price of a security and
relative yield are the guiding factors for the people to channelize their funds in a
particular company. This ensures effective utilization of funds in the public interest.
 Development of Backward Areas: Capital Markets provide funds for projects in
backward areas. This facilitates economic development of backward areas. Long term
funds are also provided for development projects in backward and rural areas.

Hence in this way the capital market has played a crucial role in wakening the
crippled Indian economy.

CHAPTER: THREE

________________________________________________

MONEY MARKET

3.1 MEANING

Money market is a very important segment of the Indian financial system. It is a market for
short-term funds up to one year and for financial assets that are close substitutes for money.
Money market is the market for dealing in monetary assets of short-term nature. Money
market makes available funds for duration ranging from a single day to one year. Money
market instruments have the characteristics of liquidity (quick conversion into money),
minimum transaction cost and no loss in value. It is a market where excess funds are
deployed, which in turn is availed of to meet temporary shortages of cash and other
obligations. The money market provides a reasonable source to those who require short-term
funds to meet their requirements at a minimum cost. Money market performs the crucial role
of providing an equilibrating mechanism to even out short-term Liquidity in the process. The
money market is the major mechanism through which the Reserve Bank influences liquidity.
The Bank's interventions to influence liquidity serve as a signaling-device for other segments
of the financial system.13
Money market may be defined as "an organisation for lending and borrowing of short-term
funds through the use of such instruments as commercial bills of exchange, short-term
government securities and bankers’ acceptance, etc. The money market is the centre where

13
N.A. Majumdar, 'Financial Sector Reforms and India's Economic Development', Academic Foundation, New
Delhi, Vol. 1 1, 2002

13 | P a g e
transactions in monetary assets of a short-term character take place. Central Bank is also
interested in other financial markets like stock market and capital market which deal in long-
term capital transactions. The capital market is distinguished from the money market as the
former deals with long-term money capital, while the latter deals with short-term money
market. However, it is sometimes difficult to distinguish between them owing to their
overlapping natures.
Money market is the market which deals with all short-term assets which are close substitutes
for money.” Any institution having short- term surplus liquidity would like to park its funds
for that brief period in risk free instruments which would earn a decent return rather than
keep these funds idle. Similarly, those who have deficits for short periods, due to temper
mismatches between the availability of funds and their development would like to borrow for
minimum periods. These temporary mismatches- whether surplus or deficits - get equilibrate
in the money market. Thus money market is a specialized market - geared to the short-term
needs. Thus, the money market is collective name given to various firms and institutions that
deal in the various grades of near money.

3.2 COMPONENTS OF MONEY MARKET

The money market is not a single homogeneous market. It consists of a number of
sub-markets which collectively constitute the money market. There should be
competition within each sub-market as well as between different sub-markets. The
following are the main sub-markets of a money market:
 Call Money Market
 Commercial Bills Market and Discount Market
 Acceptance Market
 Treasury Bill Market
3.2.1 Call Money Market
The call money market refers to the market for extremely short period loans; say one day to
fourteen days. These loans are repayable on demand at the option of either the lender or the
borrower. The money that is lent for one day in this market is known as “Call Money”, and if
it exceeds one day (but less than 15 days) it is referred to as “Notice Money”. Term Money
refers to Money lent for 15 days or more in the Inter Bank Market. These loans are given to
brokers and dealers in stock exchange. Similarly, banks with ‘surplus’ lend to other banks
with ‘deficit funds’ in the call money market.14 Thus, it provides an equilibrating
mechanism for evening out short term surpluses and deficits. Moreover, commercial banks
can quickly borrow from the call market to meet their statutory liquidity requirements. They
can also maximize their profits easily by investing their surplus funds in the call market
during the period when call rates are high and volatile.

The call money market as a significant component of the money market possesses a few
special characteristics:-

14
Supra note 13

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1. Call money is an instrument for ultra-short period management of funds and is easily
reversible.
2. It is primarily a “telephone” market and is therefore, administratively convenient to manage
for both borrowers and lender.
3. Being an instrument of liability management, it provides incremental funds and adds to the
size of balance sheet of banks.

From the macro-side, developed call money market helps to smoothen the fluctuations in the
reserve-deposit rations of banks thereby contributing to the stability of the money-multiplier
process. A stable money multiplier in turn serves as a reliable means of monetary regulation
and policy guide. From the micro angle, short-run borrowing by banks improves the
efficiency of funds management in two ways. One way, it enables banks to hold higher
reserve-deposit ratio than would be possible otherwise. In another way, it allows some banks
to permanently increase their pool of investible funds. Hence, active well-organized call
money market improves the funds management practices of banks which in turn further their
overall efficiency and profitability.

3.2.2 Commercial Bills Market or Discount Market.

A commercial bill is one which arises out of a genuine trade transaction, i.e. credit
transaction. As soon as goods are sold on credit, the seller draws a bill on the buyer for the
amount due. The buyer accepts it immediately agreeing to pay amount mentioned therein
after a certain specified date. Thus, a bill of exchange contains a written order from the
creditor to the debtor, to pay a certain sum, to a certain person, after a creation period. A bill
of exchange is a ‘self-liquidating’ paper and negotiable/; it is drawn always for a short period
ranging between 3 months and 6 months.

3.2.3 Acceptance Market

Acceptance market is an investment market based on short-term credit instruments typically

used by exporters who prefer to get paid faster for their exported goods. Acceptances are
typically used to finance imports and exports between foreign countries and storage of readily
marketable staples in foreign countries. An acceptance is a time draft or bill of exchange that
is accepted as payment for goods.15A banker's acceptance, for example, is a time draft drawn
on and accepted by a bank as a common method of financing short-term debts in international
trade including import-export transactions. An acceptance is a short-term credit instrument
signed by a buyer indicating its intention to pay a specific sum of money to the seller (or
exporter) at an agreed date.

3.2.4 Treasury bill Market.

A treasury bills nothing but promissory note issued by the Government under discount for a
specified period stated therein. The Government promises to pay the specified amount
mentioned therein to the beater of the instrument on the due date. 16 The period does not
exceed a period of one year. It is purely a finance bill since it does not arise out of any trade
transaction. It does not require any ‘grading’ or’ endorsement’ or ‘acceptance’ since it is
clams against the Government. Treasury bill are issued only by the RBI on behalf of the

15
Supra note 13
16
Ibid

15 | P a g e
Government. Treasury bills are issued for meeting temporary Government deficits. The
Treasury bill rate of discount is fixed by the RBI from time-to-time. It is the lowest one in the
entire structure of interest rates in the country because of short-term maturity and degree of
liquidity and security.

3.3 FEATURES OF MONEY MARKET

The money market is a market for short-term instruments that are close substitutes
for money. The short term instruments are highly liquid, easily marketable, with
little change of loss. It provides for the quick and dependable transfer of short term
debt instruments maturing in one year or less, which are used to finance the needs of
consumers, business agriculture and the government. The money market is not one
market but is “a collective name given to the various form and institutions that deal
with the various grades of near money.”

In other words, “it is a network of market that are grouped together because they deal
in financial instruments that have a similar function in the economy and are to some
degree substitutes from the point of view of holders.”

Thus the money market consists of call and notice market, commercial bills market;
commercial paper market, treasury bills market, inter-bank market and certificates of
deposit market. All these markets are closely interrelated so as to make the money
market. It is a wholesale market where large numbers of financial assets or
instruments are traded.

The money market is divided into direct, negotiated, or customers’ money market and the
open or impersonal money market. In the former, banks and financial firms supply funds to
local customers and also to larger centres such as London for direct lending. In the open
money market, idle funds drawn from all- over the country are transferred through
intermediaries to the New York City market or the London market. 17 However following are
the features of money market:

1. Market for short term.

2. No fixed geographical location.

3. Major Institutions involved in money market are R.B.I., Commercial Banks, LIC, GIC, etc.

17
Richa Gupta and Deepti Goel, “Indian Capital Market: An Overview”, ISSN: 2278-9359 (Volume-3, Issue-5),
2014

16 | P a g e
4. Common Instruments of money market are Call money, Treasury Bill, CP, CD,
Commercial bill, etc.

3.4 INSTRUMENTS OF MONEY MARKET

Following are the main instruments of money market:

3.4.1 Treasury Bills

Treasury bills (T-bills) are short-term notes issued by the U.S. government. They come in
three different lengths to maturity: 90, 180, and 360 days. The two shorter types are auctioned
on a weekly basis, while the annual types are auctioned monthly. T-bills can be purchased
directly through the auctions or indirectly through the secondary market. Purchasers of T-
bills at auction can enter a competitive bid (although this method entails a risk that the bills
may not be made available at the bid price) or a noncompetitive bid. T-bills for
noncompetitive bids are supplied at the average price of all successful competitive bids.

3.4.2 Federal Agency Notes

Some agencies of the federal government issue both short-term and long-term obligations,
including the loan agencies Fannie Mae and Sallie Mae. These obligations are not generally
backed by the government, so they offer a slightly higher yield than T-bills, but the risk of
default is still very small. Agency securities are actively traded, but are not quite as
marketable as T-bills. Corporations are major purchasers of this type of money market
instrument.

3.4.3 Short-Term Tax Exempts

These instruments are short-term notes issued by state and municipal governments. Although
they carry somewhat more risk than T-bills and tend to be less negotiable, they feature the
added benefit that the interest is not subject to federal income tax. For this reason,
corporations find that the lower yield is worthwhile on this type of short-term investment.18

3.4.4 Certificates of Deposit

N.A. Majumdar, “Financial Sector Reforms and India's Economic Development”, Academic Foundation, New
18

Delhi, Vol. 1 1, 2002

17 | P a g e
Certificates of deposit (CDs) are certificates issued by a federally chartered bank against
deposited funds that earn a specified return for a definite period of time.19They are one of
several types of interest-bearing "time deposits" offered by banks. An individual or company
lends the bank a certain amount of money for a fixed period of time, and in exchange the
bank agrees to repay the money with specified interest at the end of the time period. The
certificate constitutes the bank's agreement to repay the loan. The maturity rates on CDs
range from 30 days to six months or longer, and the amount of the face value can vary greatly
as well. There is usually a penalty for early withdrawal of funds, but some types of CDs can
be sold to another investor if the original purchaser needs access to the money before the
maturity date.

3.4.5 Commercial Paper

Commercial paper refers to unsecured short-term promissory notes issued by financial and
nonfinancial corporations. Commercial paper has maturities of up to 270 days (the maximum
allowed without SEC registration requirement). Dollar volume for commercial paper exceeds
the amount of any money market instrument other than T-bills. It is typically issued by large,
credit-worthy corporations with unused lines of bank credit and therefore carries low default
risk.

3.4.6 Bankers' Acceptances

A banker's acceptance is an instruments produced by a nonfinancial corporation but in the

name of a bank. It is document indicating that such-and-such bank shall pay the face amount
of the instrument at some future time. The bank accepts this instrument, in effect acting as a
guarantor.20To be sure the bank does so because it considers the writer to be credit-worthy.
Bankers' acceptances are generally used to finance foreign trade, although they also arise
when companies purchase goods on credit or need to finance inventory. The maturity of
acceptances ranges from one to six months.21

3.4.6 Repurchase Agreements

Repurchase agreements—also known as repos or buybacks—are Treasury securities that are

purchased from a dealer with the agreement that they will be sold back at a future date for a

19
Ibid
20
Black, F., “Capital Market Equilibrium With Restricted Borrowing,” Journal of Business 45, 1972, pp. 444-
454.
21
Supra note 13

18 | P a g e
higher price. These agreements are the most liquid of all money market investments, ranging
from 24 hours to several months. In fact, they are very similar to bank deposit accounts, and
many corporations arrange for their banks to transfer excess cash to such funds automatically.

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CHAPTER: FOUR

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CAPITAL MARKET V/S MONEY MARKET

As Mentioned Above, capital market and money market are the two strong pillars of financial
market. They together support the growth of Indian economy yet there are many differences
between them. Some of differences are as summarized below:

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SERIAL
MONEY MARKET
NO.
It is a market for short term loanable
1.
funds for a period of one year.
This Market Supplies Funds For
Financing Current Business, Operations,
2. Working Capital Requirements Of
Industries And Short Term Period
Requirements Of The Government
The instruments that are dealt in a
money market are bills of exchange,
treasury bills, commercial papers,
3. certificate
of deposits etc.
Each single money market instrument is
of large amount TB is of minimum for
4. one lakh. Each CD or CP is for a
minimum of Rs. 25 lakhs.
The central bank and commercial banks
are the major institutions is money
5.
market.
Money market instruments generally do
6.
not have secondary market
Transactions mostly take place over the
7.
phone and there is no formal place.
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CAPITAL MARKET
It is a market for long term funds
exceeding a period of one year.
This markets supplies funds for
financing current business for
financing fixed capital operations,
working capital requirements of trade
and requirements of industries and
commerce as well as long period
requirements of term requirements of
the the Government
Capital market deals with instruments
like shares, debentures, Government
bonds etc.
Each single capital market instruments
is of small amount. Each share value is
Rs. 10 & each debenture value is Rs.
50
. Development banks and Insurance
companies play a dominant role in the
capital market
Capital market instruments generally
have secondary market.
Transactions take place at a formal
place i.e. stock exchange.
 Transactions have to be conducted Transactions have to be conducted
8. without help of brokers. only through authorized dealers.

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CHAPTER: FIVE

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CONLUDING REMARKS AND SUGGESTIONS

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The term, financial markets, is a loosely coined term to depict the broader market where
exchange of financial securities takes place. It brings both borrowers and lenders to transact.
The financial markets are merely a vehicle that bridges the gap between supply and demand.
This enables a healthy circulation of excess funds from one entity to another. The financial
markets, in enabling the transactions help in the development of an economy. A healthy
financial market environment is crucial to the health of the economy. Lenders who have
excess capital make use of the financial markets in order to lend money and earn additional
income. Borrowers on the other hand, use the financial markets in order to borrow money to
meet their capital requirements and to allow them to undertake corporate actions.

The financial markets are mainly divided into the money markets and the capital markets.
Pick up any type of a financial instrument and chances are that it can be categorized into one
of the two main categories of the financial markets. The financial instruments fall into one of
the two categories depending on the borrowing and the repayment requirements. In this
article, we explain the capital markets and money markets. You will learn about the
differences between these two types of markets and how they are used to suit specific
purposes.22

The money markets are an unorganized aspect of the financial markets which includes
banking and financial institutions besides other entities such as dealers and brokers. Trading
in the money markets are short term and another word used for the money markets is the
wholesale markets.23

Some of the most common financial instruments traded in the money markets include credit
trade, commercial paper, certificate of deposits and treasury bills to name a few. What is
common to such type of financial instruments is that they are short term in nature.

The redemption period is limited to no longer than one year. Due to the short duration of
these instruments, the returns are not as high compared to other markets. Because of the low
rate of return, the money market financial instruments are considered to be relatively safe
when compared to their other counterparts.

An important aspect to know about the money markets is that it is an unsystematic market. In
other words, trading is mostly done over the counter as the two counterparties agree to the
terms. The trade's economic details are mostly confirmed over the phone or by fax. The
money markets play a crucial role in the circulation of the short-term funds in the economy.
This enables the participating institutions to meet their working capital requirements.

Capital markets are another segment of the financial markets where in major financial
instruments such as government and corporate securities are traded. The purpose of the
capital markets, as the name defines is to raise the long-term financing needs for the
institutions to meet their capital requirements. Some of the most popular securities traded in
the capital markets include stocks, bonds, and debentures, to name a few. What is common to
these types of financial markets is that they have a long-term maturity beyond a year. On
some securities, there is no maturity, for example stocks. The capital markets play a major
role in the circulation of capital in the economy. It plugs the need between lenders and

22
Capital Market v/s Money Market, India, available at: https://www.wallstreetmojo.com/money-market-vs-
capital-market/ (last modified 23rd january 2019)
23
Ibid

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borrowers also known as suppliers and the users. The capital markets are closely regulated. In
the United States, the capital markets fall under the supervision of the Securities and
Exchange Commission (SEC) and abroad, there are similar financial regulators for the capital
markets. The capital market combines the dealers and the auction markets. A sub-
classification of the capital markets can be categorized into the primary and the secondary
markets.

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