Module 6

FINANCIAL MARKETS
 The Stock Market In India
Primary And Secondary Markets
OTC Markets
New Issues Market
Underwriting
 OTC markets

A decentralized market of securities

not listed on an exchange where
market participants trade over the
telephone, facsimile or electronic
network instead of a physical trading
floor. There is no central exchange or
meeting place for this market.
 In the OTC market,trading occurs via a network of
middlemen, called dealers, who carry inventories of
securities to facilitate the buy and sell orders of
investors, rather than providing the order matchmaking
service seen in specialist exchanges such as the NYSE.

The Over-The-Counter (OTC) markets are essentially

spot markets and are localised for specific
commodities. Almost all the trading that takes place in
these markets is delivery based.
In general, the reason for which a stock is traded over-
the-counter is usually because the company is small,
making it unable to meet exchange listing
requirements. Also known as "unlisted stock", these
securities are traded by broker-dealers who negotiate
directly with one another over computer networks and
by phone.
 An over-the-counter contract is a bi-lateral
contract, in which two parties agree on how a
particular trade or agreement is to be settled
in the future. For derivatives, these
agreements are usually governed by an
International Swaps and Derivatives
Association agreement.

The buyers as well as the sellers have their

set of brokers who negotiate the prices for
them.
 Treasury Bills Market
Treasury bills (T-bills) offer short-term investment
opportunities, generally up to one year.
At present, the Government of India issues four types of
treasury bills through auctions, namely, 14 day, 91-day, 182-
day and 364-day.
There are no treasury bills issued by State Governments.
Treasury bills are available for a minimum amount of
Rs.25,000 and in multiples of Rs. 25,000.
Treasury bills are issued at a discount and are redeemed at par.
Treasury bills are also issued under the Market Stabilization
Scheme (MSS).
 Treasury Bills Market

While 91-day T-bills are auctioned every week on

Wednesdays, 182-day and 364-day T-bills are auctioned every
alternate week on Wednesdays.
The Reserve Bank of India issues a quarterly calendar of T-bill
auctions which is available at the Banks website.
It also announces the exact dates of auction, the amount to be
auctioned and payment dates by issuing press releases prior to
every auction.
 Government of India : Treasury Bills Outstanding (Face Value)

(`Billion)
Major Holders

Primary Total
As on December 6, 2013 Banks State Govts.
Dealers

1 2 3 4
14-day 764.0 770.2

91-day 381.1 179.1 633.1 1,511.8

182-day 203.2 249.1 9.8 660.1

364-day 279.9 630.6 8.6 1,348.6

 Participation
Provident funds can participate in all T-bill auctions either as
competitive bidders or as non-competitive bidders.
Participation as non-competitive bidders would mean that
provident funds need not quote the price at which they desire
to buy these bills.
The Reserve Bank allots bids to the non-competitive bidders at
the weighted average price of the competitive bids accepted in
the auction.
Allocations to non-competitive bidders are in addition to the
amount notified for sale.
In other words, provident funds do not face any uncertainty in
purchasing the desired amount of T-bills from the auctions.
Purchase

T-bills auctions are held on the Negotiated Dealing System

(NDS) and the members electronically submit their bids on the
system.
Non-competitive bids are routed through the respective custodians
or any bank or Primary Dealer (PD) which is an NDS member.
 Commercial Bills Market

It is a bill of exchange.
It is used for financing a transaction in goods that takes some
time to complete.
It shows the liability to make payment on a fixed date when
goods are bought on credit.
According to the Indian Negotiable Instrument Act, 1881, it is
a written instrument containing an unconditional order, signed
by the maker, directing a certain person to pay a certain sum of
money only to, or to the order of, a certain person, or to the
bearer of the instrument.
 Commercial Bills Market

Classification:
1. Demand bill Payable immediately at sight or on
presentment to the drawee.
2. Usance or time bill Payable at a specified later date.
3. Documentary bills The drafts are accompanied by documents of
title to goods, such as railway receipts.
4. Inland bills a) be drawn or made in India, and must be payable
in India, or b) be drawn upon any person resident in India.
5. Foreign bills a) Drawn outside India and may be payable in and
by a party outside India, or may be payable in India or drawn on a
party resident in India, or b) Drawn in India and made payable
outside India.
 Commercial Paper

Commercial Paper (CP) is an unsecured money market

instrument issued in the form of a promissory note.
It was introduced in India in 1990 with a view to enabling
highly rated corporate borrowers to diversify their sources of
short-term borrowings and to provide an additional instrument
to investors.
Subsequently, primary dealers and all-India financial
institutions were also permitted to issue CP to enable them to
meet their short-term funding requirements for their
operations.
 Issue

Corporates, primary dealers (PDs) and the All-India Financial

Institutions (FIs) are eligible to issue CP.
A corporate would be eligible to issue CP provided
1. The tangible net worth of the company, as per the latest
audited balance sheet, is not less than Rs. 4 crore
2. Company has been sanctioned working capital limit by
bank/s or all-India financial institution/s; and
3. The borrowal account of the company is classified as a
Standard Asset by the financing bank/s/ institution/s.
 Rating requirement for issuance of CP

All eligible participants shall obtain the credit rating for

issuance of Commercial Paper either from Credit Rating
Information Services of India Ltd. (CRISIL) or the Investment
Information and Credit Rating Agency of India Ltd. (ICRA) or
the Credit Analysis and Research Ltd. (CARE) or the FITCH
Ratings India Pvt. Ltd. or such other credit rating agency
(CRA) as may be specified by the Reserve Bank of India from
time to time, for the purpose.
The issuers shall ensure at the time of issuance of CP that the
rating so obtained is current and has not fallen due for review.
Maturity
CP can be issued for maturities between a minimum of 7 days and a
maximum of up to one year from the date of issue. However, the
maturity date of the CP should not go beyond the date up to which the
credit rating of the issuer is valid.
Denominations
CP can be issued in denominations of Rs.5 lakh or multiples thereof.
Issue
The total amount of CP proposed to be issued should be raised within a
period of two weeks from the date on which the issuer opens the issue for
subscription.
Participants
Individuals, banking companies, other corporate bodies (registered or
incorporated in India) and unincorporated bodies, Non-Resident Indians
(NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in CPs.
However, investment by FIIs would be within the limits set for them by
Securities and Exchange Board of India (SEBI) from time-to-time.
 Only a scheduled bank can act as an Issuing and Paying Agent
(IPA) for issuance of CP.
CP can be issued either in the form of a promissory note or in a
dematerialised form through any of the depositories approved by
and registered with SEBI. Banks, FIs and PDs can hold CP only in
dematerialised form.
CP will be issued at a discount to face value as may be determined
by the issuer.
No issuer shall have the issue of Commercial Paper underwritten
or co-accepted.
CPs are actively traded in the OTC market. Such transactions,
however, are to be reported on the FIMMDA (Fixed Income
Money Market and Derivatives Association of India) reporting
platform within 15 minutes of the trade for dissemination of trade
information to market participation thereby ensuring market
transparency.
 Certificate of Deposits

Certificate of Deposit (CD) is a negotiable money market

instrument and issued in dematerialised form or as a Usance
Promissory Note against funds deposited at a bank or other
eligible financial institution for a specified time period.
Guidelines for issue of CDs are presently governed by various
directives issued by the Reserve Bank of India (RBI), as
amended from time to time.
Eligibility
CDs can be issued by (i) scheduled commercial banks {excluding
Regional Rural Banks and Local Area Banks}; and (ii) select All-
India Financial Institutions (FIs) that have been permitted by RBI to
raise short-term resources within the umbrella limit fixed by RBI.
Minimum Size of Issue and Denominations
Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum
deposit that could be accepted from a single subscriber should not
be less than Rs.1 lakh, and in multiples of Rs. 1 lakh thereafter.
Investors
CDs can be issued to individuals, corporations, companies
(including banks and PDs), trusts, funds, associations, etc. Non-
Resident Indians (NRIs) may also subscribe to CDs, but only on
non-repatriable basis, which should be clearly stated on the
Certificate. Such CDs cannot be endorsed to another NRI in the
secondary market.
Maturity
The maturity period of CDs issued by banks should not be less than 7 days and
not more than one year, from the date of issue.
The FIs can issue CDs for a period not less than 1 year and not exceeding 3
years from the date of issue.
Discount / Coupon Rate
CDs may be issued at a discount on face value. Banks / FIs are also allowed to
issue CDs on floating rate basis provided the methodology of compiling the
floating rate is objective, transparent and market-based.
Transferability
CDs in physical form are freely transferable by endorsement and delivery. CDs
in demat form can be transferred as per the procedure applicable to other demat
securities. There is no lock-in period for the CDs.
Trades in CDs
All OTC trades in CDs shall be reported within 15 minutes of the trade on the
FIMMDA reporting platform.
Loans / Buy-backs
Banks / FIs cannot grant loans against CDs. Furthermore, they
cannot buy-back their own CDs before maturity. However, the
RBI may relax these restrictions for temporary periods through a
separate notification.
 Call Money market

Day to day surplus funds, of banks, are traded in.

Short term in nature, maturity varies from one day to
a fort night.
Highly liquid as these loans are repayable on demand
and at the option of either the lender or borrower.
Nature of this market in different countries varies
from each other.
 Call Money market

Call loans in India are given:

a) To the bill market
b) For the purpose of dealing in the bullion markets and stock
exchanges,
c) Between banks, and
d) Frequently to individuals of high financial status in Mumbai
for ordinary trade purposes in order to save interest on cash
credits and overdrafts.
 Participants

a) Scheduled commercial banks

b) Non - Scheduled commercial banks
c) Foreign banks
d) State, District and Urban, Co- operative banks
e) Discount and Finance House of India
f) Securities Trading Corporation of India
 Call Rates

The rate of interest paid on call loans is known as the call rate.
Highly variable from day to day, and often from hour to hour.
It varies from centre to centre.
Sensitive to changes in demand and supply of call loans.

.
 Government security
A Government security is a tradable instrument issued by the
Central Government or the State Governments.
It acknowledges the Governments debt obligation.
Such securities are short term (usually called treasury bills, with
original maturities of less than one year) or long term (usually called
Government bonds or dated securities with original maturity of one
year or more).
In India, the Central Government issues both, treasury bills and
bonds or dated securities while the State Governments issue only
bonds or dated securities, which are called the State Development
Loans (SDLs). Government securities carry practically no risk of
default and, hence, are called risk-free gilt-edged instruments.
Government of India also issues savings instruments (Savings
Bonds, National Saving Certificates (NSCs), etc.) or special
securities (oil bonds, Food Corporation of India bonds, fertiliser
bonds, power bonds, etc.).
 Government security
They are normally issued in the denomination of Rs. 100 or
Rs.1,000.
Interest rates on these securities are relatively lower because of their
being liquid and safe and is exempt from tax subject to a limit.
 Financial Derivatives
Contracts which are written between two parties (counter parties) and whose
value is derived from the value of underlying assets.
Types of derivatives:
1. Forwards
2. Futures
3. Options
4. Swaps : Agreements b/w two parties to exchange assets or sets of financial
obligations or a series of cash flows for a specified period of time at
predetermined intervals.
5. Warrants and Convertibles
Warrant is a contract/ option entered into by the issuing company giving the holder
the right to purchase or subscribe to the stated number of equity shares of that
company within a predetermined specified period of time at a predetermined price.
Convertible bonds/ debentures and convertible preference shares can be fully or
partially converted into equity of the issuing company on specified terms with
regard to the timing, the price and the ratio of conversion.
 Foreign Exchange Market

It is an informal, electronically linked network of banks,

foreign exchange brokers and dealers whose function is to
bring buyers and sellers together.
The foreign exchange market is the market in which currencies
are bought and sold against each other. The foreign exchange
market allows currencies to be exchanged in order to facilitate
international trade or financial transactions.
The system for exchanging foreign currencies has evolved
from the gold standard, to agreements on fixed exchange rates,
to a floating rate system.
 Foreign Exchange Market
Types of Transactions:
1. Spot market
The market for immediate exchange is known as the spot market.
Trading between banks occurs in the interbank market. Within this
market, brokers sometimes act as intermediaries. The interbank
foreign exchange market is an over-the-counter (OTC) market.
2. Forward market
The forward market enables an MNC to lock in the exchange rate at
which it will buy or sell a certain quantity of currency on a specified
future date.
Customers in need of foreign exchange are concerned with quote
competitiveness, special banking relationship, and speed of execution,
advice about current market conditions, and forecasting advice.
 Interest Rate Futures Market

A futures contract with an underlying instrument that

pays fixed interest such as treasury bills, bonds and
certificate of deposits.
An interest rate future is a contract between the buyer
and seller agreeing to the future delivery of any
interest-bearing asset.
The interest rate future allows the buyer and seller to
lock in the price of the interest-bearing asset for a
future date.