UNIT 1: OVERVIEW OF CAPITAL MARKET

INTRODUCTION Every economy needs a sound financial system for encouraging savings
habits, mobilizing savings from households and other segments and
allocating savings into productive usages such as trade, commerce and
manufacture etc.

Financial systems cover both cash and credit transactions. All financial
transactions are dealt with by Cash payment or issue of negotiable
instruments like cheque, bills of exchange, hundies, etc. Thus, a
financial system is a set of institutional arrangements through which
financial surpluses are mobilized from the units generating surplus
income and transferring them to the others in need of them. In a
nutshell, financial market, financial assets, financial services
and financial institutions constitute the financial system.

A country’s financial systems include its banks, securities markets,

pension and mutual funds, insurers, market infrastructures, central
bank, as well as regulatory and supervisory authorities. These
institutions and markets provide a framework/platform for carrying out
economic transactions and monetary policy and it also helps in
mobilizing savings into investment.

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 MONEY
MARKET
FINANCIAL BOND MARKET
DIRECT
MARKETS (DEBT)
CAPITAL
MARKETS
EQUITY
FUNDING
MARKET
FINANCIAL
INSTITUTIONS
FINANCIAL
INDIRECT
INTERMEDIARY
BANKS

FINANCIAL Functions of a Good Financial System:

SYSTEM (i) Regulation of Currency;
(ii) Banking Functions;
(iii) Performance of Agency Services and Custody of Cash Reserves;
(iv) Management of National Reserves of International Currency;
(v) Credit Control;
(vi) Administering Fiscal, National and Monetary Policy;
(vii) Supply and Development of Funds for Productive use;
(viii) Maintaining Liquidity.

Keys for ensuring the Long Term Growth of the Financial System:
(i) Education of investors;
(ii) Giving autonomy to Financial Institutions to become efficient under
competition;
(iii) Consolidation through mergers;
(iv) Facilitating entry of new institutions to add depth to the market;
(v) Minimizing regulatory measures and market segmentation.

ORGANIZATIONA The organizational structure of the financial systems is divided into

L STRUCTURE OF various components:
FINANCIAL (i) Financial Markets
SYSTEM (ii) Products & Market Participants

FINANCIAL
MARKETS

MONEY CAPITAL COMMODITY

MARKET MARKET MARKET

EQUITY
MARKET

BOND
MARKET

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FINANCIAL The financial markets facilitate the efficient transfer of idle resources to
MARKETS others who have need of such resources. It channelizes savings into
investment. The financial market contributes to economic development
of a country which depends on the rates of savings and investments.

In other words, Financial Market is a market in which people trade

financial securities and commodities at low transaction costs and at
prices that reflect supply and demand. Securities include stocks and
bonds, and commodities.

 Financial market is a place which facilitates:

(i) The raising of capital (in the capital markets)
(ii) The transfer of risk (in the derivatives markets)
(iii) The transfer of liquidity (in the money markets)
(iv) International trade (in the currency markets)

The two major components of a financial market are Money market and
Capital Market.

June 2012:“Securities market enhances the pace of Economic Growth.”

Comment.

MONEY MARKET Money Market means a market where borrowers and lenders exchange
(less than 1 year) short – term (not more than 1 year) funds to solve their liquidity needs. It
is market where money is being traded as a commodity to fulfill the
short – term requirements of banks, financial institution and the Govt.
Money market instruments include treasury bills, commercial papers,
certificate of deposits and bills of exchange. Domestic money market in
India is MIBOR whereas LIBOR is an international money market which
decides interest rate.

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  MIBOR: Mumbai Inter – Bank Offered Rate (Benchmark for India
Money Market)
 LIBOR: London Inter – Bank Offered Rate (Benchmark for
International Money Market)

Money markers allow banks to manage their liquidity as well as provide

the Central bank means to conduct monetary policy. Money markets are
markets for debt instruments with a maturity up to 1 year.

In short, a market for the exchange of the short – term funds is known
as the money market and solves the liquidity needs of the lenders.

CAPITAL MARKET The market which involves all kinds of lending and borrowing that are
(Long Term direct or indirect claims to the capital is known as capital market. In
Funds) other words, Capital markets are financial markets for the buying and
selling of long – term debt or equity backed securities.

Example of Capital Market Transactions: When a company wants to raise

long – term finance (i. e. equity shares, debentures & preference etc.), it
often sells equity shares to the capital markets. It is a capital market
transaction.

 Need for Capital Market:

1. This market plays an important role in promoting & sustaining the
growth of an economy.
2. It is a tool for mobilizing funds for private and government sector
organization.
3. It provides an effective source of investment in the economy.
4. A well – functioning capital market tends to improve information
quality as it plays a major role in encouraging the adoption of stronger
corporate governance principles, thus supporting a trading environment,
which is founded on integrity.
5. Capital market has played a crucial role in supporting periods of
technological progress and economic development throughout history.
6. Capital markets make it possible for companies to give shares to their
employees via Employee Stock Option Plans (ESOPs).
7. Capital markets provide a currency for acquisitions via share swaps.
8. Capital markets provide an excellent route for disinvestments to take
place.
9. Venture Capital and Private Equity funds investing in unlisted
companies get an exit option when the company gets listed on the
capital markets.

 Functions of the Capital Market:

1. Mobilization of savings & acceleration of Capital
2. Facilitate buyer and seller for sale and buy of securities
3. Promotion of Industrial growth

However, the capital market also facilitates the process of efficient price
discovery and settlement of transactions with predetermined time
schedule.

June 2016: “The capital market and the stock exchange in particular are
referred to as the barometer of the economy.” Comment on the following.
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 June 2016& Dec 2010: “A well-functioning securities market is conducive
to sustained economic growth.” Explain.

Securities Market: It is the market for those financial instruments that

are easily transferable by sale. It has two inter – dependent and
inseparable segments i. e. Primary Market and Secondary Market.

Primary market provides platform for mobilizing funds by the Companies

from General Public and Secondary Market provides platform for selling
and buying the issued securities from one investor to another via stock
market.

 PRIMARY MARKET
It is a market for those instruments that are issued for the first time. It
is the market for the mobilization of resources through the issue of new
securities. It is through the primary market that the funds flow for the
productive purposes from the investors to entrepreneurs.

Example: Sale of equity shares in an IPO (Initial Public Offer) by a

company.

In other words, the market wherein resources are mobilized by the

Companies through issue of new securities is called the primary market.
These funds can be used for new projects and also for existing projects
like expansion of the existing projects.

“Primary market is of great significance to the economy.” Comment.

(June 2010, Dec 2015)

 SECONDARY MARKET
This market provides a platform for sale or purchases of already issued
securities in the Stock Market by the existing investors. This market
provides liquidity/exit route to the existing investors.

Example: Trading of shares via Stock Market after public issue from one
person to another.

The trading platform of stock exchanges is accessible only through

brokers and trading of securities is confined only to stock exchanges. In
other words, the stock exchange is synonyms for secondary market
which ensures free marketability, negotiability and price settlement.

December 2011: “The Securities Market has two interdependent and

inseparable segments.” Comment.

Distinguish between Primary Market & Secondary Market(Dec 2008)

BASIS PRIMARY MARKET SECONDARY MARKET
Definition It is a market for those This market provides a
instruments that are platform for sale or
issue for the first time. purchases of already
issued securities in the
Stock Market by the
existing investors.
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 Investment In the primary market, In the Secondary market,
an investor can make an investor can buy
direct investment in the securities from a security
Company and in turn, holder via stock
company allots securities exchange. It means no
to the investors. direct allotment of shares
to the investors.
Example Public issue of Company Stock Exchange (i. e.
for raising funds via Bombay Stock Exchange
IPO/FPO. & National Stock
Exchange).
Classification There is no classification We can classify secondary
of the primary market. market into two parts i. e.
Spot market and Future
Market.
The financial Markets have two major components – the money market and capital markets.
(June 2007)

DEBT MARKET BASIS DEBT MARKET EQUITY MARKET

VS. EQUITY Definition Debt markets are markets Equity Markets are
MARKET for the issuance, trading markets for the issuance,
and settlement of various trading and settlement of
(June 2015) types and features of fixed various types of shares.
income securities.
Issued by Fixed Income securities Shares can be issued by
can be issued by any legal any company including
entity like Central and Government Company.
State Governments,
public bodies, statutory
corporations, banks and
institutions and
corporation bodies.

Risk Debt Market instruments Equity market

are less risky in instruments are more
comparison to equity risky in comparison to
market instruments debt market instruments.
Regulated by RBI SEBI

PRODUCT AND The various products of the securities markets include shares, scrips,
MARKET stocks, bonds, debentures, debentures stocks etc. and the principle of
PARTICIPANTS demand and supply determines the prices of these products.

The major investors in the securities markets include individuals,

companies, government bodies etc. These participants of the securities
market are divided into following three categories:
(i) Issuer of Securities;
(ii) Investor in Securities; and
(iii) The Intermediaries

Securities market and economic growth

The following points are worth noting in connection with the securities

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 market and the economic growth of the country:

(i) Securities Market acts as a Bridge:

The securities market acts as a bridge between the person having
surplus fund for investment and the persons who are in need of them;

(ii) International Linkage:

The advent of globalization has connected the domestic market with the
rest of the world;

(iii) Improved Investment Allocation:

The efficiency with which the existing capital stock is employed is very
well monitored by the securities market;

(iv) Standardized Products and Reduction in Costs:

Due to the increase in competition, the quality of the products is
increasing and consequently their cost is decreasing. The competition is
constantly increasing because a wide range of funds are available
through the financial markets.

(v) Development Benefits:

The securities market provides financial opportunities to the persons
having ideas and talent for developing a business. Subsequently, it
enhances the economic growth and leads to development.

MARKET REGULATION(June 2007)

It is necessary to have a proper regulatory framework for smooth
functioning of securities market and to boost the confidence of investors
for investing money in this market. In this regard, Government of India
to reform/smooth functioning of market, it was initiated establishment
of SEBI and depositories.

In India, we have the following regulatory framework:

 The SEBI Act, 1992:
The SEBI was established for the purposes to:
(i) Product the interests of investors in securities market;
(ii) Promote the development of securities market;
(iii) Regulate the securities market.

 The Securities Contract (Regulation) Act, 1956:

Provides Direct & Indirect control in all aspects of securities trading &
gives jurisdiction over:
(i) Stock exchanges through a process of recognition and continued
supervision;
(ii) Contracts in securities;
(iii) Listing of securities on stock exchanges.
As a condition of recognition, a stock exchange must comply with the
prescribed conditions of Central Government.

 The Depositories Act, 1996:

This Act provides for the establishment of Depositories in securities with
the objective of –
(i) Making the securities of public limited companies freely transferable
in electronic mode;
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 (ii) Dematerialization of securities;
(iii) Maintenance of ownership records in a book entry form.

In India, there are two depositories (NSDL – National Securities

Depositories Ltd. and Central Depository Services Ltd.) registered with
SEBI.

 The Companies Act, 2013:

The Act deals with:
(i) The issue, allotment and transfer of securities;
(ii) Managing various aspects relating to company management;
(iii) Regulating the underwriting and use of premium and discount on
issues.

 Regulators:
The Securities Market is being regulated by the following regulators:-
(i) Department of economic affairs;
(ii) Ministry of Corporate Affairs (MCA) in connection with the Companies
Act, 2013;
(iii) Reserve Bank of India (RBI) in connection with the receipt of foreign
remittances in the form of Securities;
(iv) Securities Exchange Board of India (SEBI) in connection with Indian
Securities Market including Primary Market & Secondary Market.

SECURITIES The Govt. of India and SEBI has taken a number of measures in order to
MARKET improve the working of securities market. In this regard, the major
REFORMS & reforms undertaken in capital market of India include:
REGULATORY
MEASURES  Control over issue of Capital: Earlier, the capital market was
regulated by the Capital Issues (Control) Act, 1947. In 1992, the SEBI
(June 2009) Act, 1992 was enacted by the Parliament of India to protect the
interests of investors and also to regulate the capital market. The
SEBI Act, 1992 replaced the earlier law i. e. the Capital Issues
(Control) Act, 1947.

 Establishment of regulator: A major initiative of regulation was the

establishment of a statutory autonomous agency i. e. SEBI in year
1992.

 Screen Based Regulator: To make the capital market transparent, a

major initiative was a nation – wide on – line fully – automated screen
based trading system (SBTS) where a member can punch into the
computer quantities of securities and the prices at which he likes to
transact and the transaction is executed as soon as it finds a
matching sale or buy order from 0a counter party.

 Depositories Act, 1996: The earlier settlement system gave rise to

settlement risk. This was due to the time taken for settlement and
due to the physical movement of paper. Further, the transfer of
shares in favour of the purchaser by the company also consumed
considerable amount of time. To obviate these problems, the
Depositories Act, 1996 was passed to provide for the establishment of
depositories in securities.

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  Corporate Governance: The SEBI amended Clause 49 of the Listing
Agreement and inserted the new provisions relating to the Corporate
Governance. The major changes in the new Clause 49 include
amendments/additions to provisions relating to definition of
independent directors, strengthening the responsibilities of audit
committees, improving quality of financial disclosures etc. Certain
non – mandatory clauses are also included like whistle blower policy.

 Green Shoe Option: As a stabilization tool for post listing price of

newly issued shares, SEBI has introduced the green shoe option
facilities in IPOs.

 Grading for Initial Public Offerings: Grading of all IPOs was made
mandatory. The grading would be done by credit rating agencies,
registered with SEBI. It would be mandatory to obtain grading from
at least one credit rating agency. The grading would be disclosed in
the prospectus, abridged prospectus and in every advertisement for
IPOs.

December 2018: “SEBI has come a long way since its inception as an
institution regulating the Indian Capital Markets. It has initiated a lot of
reforms to make the market safer for customers.” Explain briefly the
major policy initiatives taken by SEBI since its inception.

FEATURES OF The International Organization of Securities Commissions (IOSCO),

DEVELOPED established in 1983 for the purpose to bring together the world’s
CAPITAL securities regulators. It is a recognized global standard setter for the
MARKET: securities sector.

THE IOSCO develops, implements, and promotes adherence to internationally

INTERNATIONAL recognized standards for securities regulation, and is working intensively
ORGANIZATION with the G20 and the Financial Stability Board (FSB) on the global
OF SECURITIES regulatory reform agenda.
COMMISSION
(IOSCO) IOSCO’s membership regulates more than 95% of the world’s securities
markets. Its members include over 120 securities, regulators and 80
(Dec 2014) other securities markets participants (i. e. stock exchanges, financial
regional and international organizations etc.).

IOSCO is the only international financial regulatory organization which

includes all the major emerging markets jurisdictions within its
membership. IOSCO provides comprehensive technical assistance to its
members which regulate the emerging market.

IOSCO OBJECTIVES
IOSCO has been established for achieving the following objectives:

(i) To Protect Investor: To enhance investor protection and promote

investor confidence in the integrity of securities markets, through
strengthened information exchange and cooperation in enforcement
against misconduct and in supervision of markets and market
intermediaries;

(ii) To Ensure that Markets are Fair, Efficient and Transparent: To

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 cooperate in developing, implementing and promoting adherence to
internationally recognized and consistent standards of regulation,
oversight and enforcement in order to protect investors, maintain fair,
efficient and transparent markets, and seek to address systemic risks;
and

(iii) To Reduce Systemic Risk: To reduce systemic (universal) risk, IOSCO

exchanges information at both global and regional levels on their
respective experiences in order to assist the development of markets,
strengthen market infrastructure and implement appropriate regulation.

MEMBERSHIP OF IOSCO:(DECEMBER 2017)

There are three types of memberships of IOSCO based on the different
approaches to the securities market issues.
ORDINARY Ordinary members of IOSCO are those members who
MEMBER are primarily working as regulators of securities or
futures markets in a jurisdiction and each ordinary
member has one vote.

Example: Securities and Exchange Board of India

(SEBI) is the regulator of Indian Securities Market.
Securities Exchange Commission is the regulator of
USA Securities Market.

In other words, all governmental body which are

responsible for regulation of securities can only be
entered as ordinary member under the category. The
ordinary membership of a self – regulatory body
admitted to IOSCO will lapse if a governmental
regulatory body from the same jurisdiction becomes
the ordinary member for that jurisdiction.

ASSOCIATE Associate members of IOSCO are those members

MEMBER which are other securities and/or futures regulators
in a jurisdiction, if that jurisdiction has more than
one.

Example: The Commodity Futures Trading

Commission, the International Commission of
Securities and the North American Securities
Administrators’ Association in the United States are
associate members of IOSCO with the U. S.
Securities and Exchange Commission being the
ordinary members for the United States.

Note: Associate members have no rights to vote in

IOSCO. A self-regulatory body is not eligible for
associate membership.

AFFILIATE Affiliate members of IOSCO are those members other

MEMBER than the regulators.

Example: Stock exchanges, self – regulatory

organizations, and various stock market industry
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 associations. Affiliate members have no voting rights.

In other words, A self – regulatory body (SRO), or an

international body, with an appropriate interest in
securities regulation is eligible for this category of
membership.

Note: Currently, IOSCO has 145 members: 118

ordinary members, 12 associate members and 15
affiliate members.

MULTILATERAL MMoU is a document signed by the members of IOSCO for cross – border
MEMORANDUM co – operation to combat violations of securities and derivatives laws. In
OF other words, it is an arrangement among the member countries of
UNDERSTANDIN IOSCO for sharing information while investigating possible securities law
G CONCERNING violations.
CONSULTATION
AND CO – An international benchmark for co – operation and information sharing
OPERATION AND that builds on the many existing IOSCO Resolutions and Principles to
EXCHANGE OF enhance the level of co – operation and information exchange to combat
INFORMATION cross – border fraud and other securities violations. Therefore, it is a
(MMoU) commitment among signatories to provide assistance and co – operation
in accordance with the terms and conditions set out in the MMoU.

What are the objectives of the MMoU?

(i) Enhancing jurisdictions’ ability and willingness of Co – operation
internationally.
(ii) To better ensure compliance with and enforcement of securities laws
and regulations.
(iii) Enhancing the ability of regulators to detect and deter cross – border
financial crime.

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 UNIT 6: MONEY MARKET
INTRODUCTION Money Market is a market where borrowers and lenders exchange short
– term funds to fulfill their liquidity needs. This market is a very
important segment of Indian Financial System.

In other words, this market operates as a wholesale market for low risk,
highly liquid, short term instruments such as the call market, the bill
market, the Treasury bill market, commercial paper market and
certificate of deposit market. Government of India is an active player in
the money market and also the biggest borrower. It is a formal financial
market that deals with short term fund management.

Moreover, the banking industry also plays an important part in the

money market. The instruments of this market are Govt. Securities,
Treasury Bills issued by the Reserve Bank of India (RBI) for and on
behalf of the Govt. of India to meet the liquidity requirement of Govt. of
India.

Money market is for a maximum tenor of 1 year, depending upon the

tenors, the money market is classified into:

(a) Overnight Market: The tenor of transactions is one working day.

(b) Notice money market: The tenor of the transactions is from 2 days to
14 days.
(c) Term Money Market: The tenor of the transactions is from 15 days to
one year.

MONEY MARKET V. Basis Money Market Capital Market

CAPITAL MARKET Maturity It deals with short – It deals with long – term
Period term funding. funding.
(June 2012) Credit Treasury bills, Stocks, Shares, Debentures,
Instruments commercial bills, Bonds & Corporate deposits
commercial papers.
Institutions Government of India, Any Company registered in
involved Banks, Non – Banking India, Bank and Insurance
Financial Institutions companies
Purpose of The money market The Capital market fulfils
loan fulfils the short – term long – term fund
fund requirements of requirements of Business
Business Houses and house like expansion of
Govt. of India. business, purchase of land
& building.
Risk & Less risk and more More risk and less liquidity
liquidity liquidity
Market This market is being This market is less
Regulation closely regulated and regulated by the SEBI.
controlled by RBI.
FEATURES OF (i) It is a wholesale market and involves heavy transactions which are
MONEY MARKET settled on daily basis.
(ii) It is a market for fulfilment of short term liquidity requirements of
market participants.
(iii) Govt. of India, RBI, Banks & other financial institutions are the key

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 players of this market.
(iv) It transacts the large size of Financial Instruments.
(v) There are a large number of participants in the money market.
(vi) The RBI occupies a strategic position in the money market.
(vii) Money market provides balancing mechanism for short – term
surpluses and deficiencies.

It provides:
(i) A balancing mechanism for short term surpluses and deficiencies.
(ii) a focal point of central bank intervention for influencing liquidity in
the economy; and
(iii) A reasonable access to the users of short term funds to meet their
requirements at realistic or reasonable price or cost.

Note: This market is safe for borrowers and lenders because only
persons of high standing are permitted by the RBI to enter into this
market.

GROWTH OF Post reforms period in India has witnessed tremendous growth of

MONEY MARKET Indian Money markets. Banks and other financial institutions have
been able to meet the high expectations of short term funding of
important sectors like the Industry, services and agriculture.
Functioning under the regulation and control of RBI, the Indian money
markets have also exhibited the required maturity and resilience over
the years.

The organization and structure of the money market has undergone a

sea change in the last decade in India. This was accompanied by a
growth in quantitative term also.

Upto 1987, the money market consisted of 6 facets:

1. Call Money Market
2. Inter Bank Term Deposit/Loan Market
3. Participation Certificate Market;
4. Commercial Bills Market;
5. Treasury bills markets and
6. Inter Corporate Market.

The market had 3 main deficiencies:

1. it had a very narrow base with RBI, banks, LIC and UTI as the only
participants lending funds while the borrowers were large in Number;
2. There were only few money market instruments;
3. The interest rates were not market determined but were controlled
either by RBI or by a voluntary agreement between the participants
through the Indian Banks Association (IBA)

To set right these deficiencies, the recommendations of Chakravarthy

Committee and Vaghul Committee laid foundation for systematic
development of Indian Money Market. The implementation of the
suggestions of the respective committees has widened and deepened the
market considerably by increasing the number of participants and
instruments and introducing market determined rates as against the
then existing administered or volunteered interest rates.

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 Further, an active secondary market for dealings of money market
instrument was created which positively impacted the liquidity of these
instruments. For this purpose, the Discount and Finance House of
India Limited was formed as an autonomous financial intermediary in
April 1988 to embellish the short term liquidity imbalances and to
develop an active secondary market for the trading of instruments in
money market. The DFHI plays the role of a market maker in money
market instruments.

STRUCTURE AND The Indian Money Market consists of two types of segments: an
INSTITUTIONAL Organized segment and an unorganized segment. In the unorganized
DEVELOPMENT segment, interest rates are much higher than in the organized segment.

Organized segment consists of RBI, SBI with its associate banks, Public
Sector Banks, Private Sector Commercial banks, Foreign Banks,
Regional Rural Banks, Non Scheduled Commercial Banks, apart from
Non-Banking Financial Intermediaries such as LIC, GIC, etc

The unorganized segment essentially consists of indigenous bankers,

money lenders and other non-banking financial intermediaries such as
Chit Funds. For these institutions there is no clear cut demarcation
between short term and long term and between a genuine trade bill and
mere financial accommodation. The share of the unorganized sector in
providing trade finance has greatly diminished after Nationalization of
Bank and expansion thereof into the length and breadth of the country.

MONEY MARKET INSTRUMENTS

TREASURY BILLS Treasury Bills (TB) are an instrument issued by Govt. of India for
financing its short – term liquidity requirements. Presently, Treasury
(Dec 2009, bills are being issued by the Govt. of India for three tenors i. e. 91 days,
June 2019) 182 days and 364 days. The Reserve Bank of India issues treasury bills
for and on behalf of the Govt. of India. The Govt. of India borrows funds
to finance its fiscal deficits.

Process Flow Chart of Treasury Bills:

Treasury bills are zero coupon securities and pay no interest. It is
generally issued at a discount price e. g. a days’ treasury bills of `100
(face value) may be issued at a discount of `1.80. It means T – bills
issued at `98.20 and will be redeemed at `100/-.

Treasury Bills are very useful instruments to deploy short – term

surpluses depending upon the availability and requirement. Even funds
which are kept in current accounts can be deployed in treasury bills to
maximize returns. Banks do not pay any interest on fixed deposits of
less than 15 days, or balances maintained in current accounts,
whereas treasury bills can be purchased for any number of days
depending on the requirements. This helps in development of idle funds
for very short periods as well.
In short, it is a tool of monetary management in the economy.

Example: ABC Ltd. has a surplus cash of `500/- crores to be deployed

for a project over a period of two months. However, the company does
not require the funds at one go but requires them at different points of
time as given below:-
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 Funds available as on 1st June, 2013 = `500 crores
Deployment of funds:
05.06.2013 = `100 Crores
14.06.2013 = `50 Crores
02.07.2013 = `100 Crores
10.07.2013 = `250 Crores

The company has two options for effective management of the funds:
Option I: Funds deposit with Bank
The Bank does not give any interest on the deposits less than 15 day.
Accordingly, the Company will not get any interest amount on `150/-
Crores till the date of 14th June, 2013 since `150 Crores are required
within the first 15 days of deposits.

The Company will get only interest on `350 Crores.

Option II: Investment in the Treasury bills

The company will get interest on its entire fund i. e. `500 Crores.

From the above example, ABC Ltd. will definitely go with the option – II
and will invest the entire fund in the Treasury Bills and will earn more
interest.

Types of Treasury Bills:

(i) 14 – day T bill: This Treasury bill matures in 14 days and its auction
is on every Friday of every week. The notified amount for this auction is
`100 crores.

(ii) 91 – day T bill: This Treasury bill matures in 91 days and its auction
is on every Friday of every week. The notified amount for this auction is
`100 crores.

(iii) 182 – day T bill: This Treasury bill matures in 182 days and its
auction takes place on every alternative Wednesday (which is not a
reporting week). The notified amount for this auction is `100 crores.

(iv) 364 – day T – bill: This Treasury bill matures in 364 days and its
auction takes place on every alternate Wednesday (which is a reporting
week). The notified amount for this auction is `500 crores.

A considerable part of the government’s borrowings is financed through

T – bills of various maturities. T – bills are issued at a discount can be
traded in the market. Most of the time, unless the investor requests
specifically, these are issued not as securities but as entries in the
Subsidiary General Ledger (SGL) which is maintained by RBI. The
transactions cost on T – bill are non – existent and trading is
considerably high in each bill, immediately after its issue and
immediately before its redemption.

Benefits of T – Bills:
(i) T – Bills are highly liquid.
(ii) No tax deducted at source.
(iii) No risk of default as its being issued by the Govt. of India.
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 (iv) Better returns especially in the short – term.
(v) Transparency.
(vi) Low transaction cost.
(vii) The yield on T – bills is assured.
(viii) Simplified settlement.
(ix) High degree of tradability and active secondary market facilitates
meeting unplanned fund requirements.

June 2015: Treasury bill is a powerful instrument in the money market.

June 2014: Treasury Bills are effective cash management product.

Features of Treasury Bills:

(i) Form: The treasury bills are issued in the form of promissory note in
physical form or by credit to Subsidiary General Ledger (SGL) account
or Gilt account in dematerialized form.

(ii) Minimum Amount of Bids: Bids for treasury bills are to be made for
a minimum amount of `25,000/- only and in multiples thereof.

(iii) Eligibility: All entities registered in India like banks, financial

institutions, Primary Dealers, firms, companies, corporate bodies,
partnership firms, institutions, mutual funds, Foreign Institutional
Investors, State Governments, Provident Funds, trusts, research
organizations, Nepal Rashtra Bank and even individuals are eligible to
bid and purchase Treasury bills.

(iv) Repayment: The treasury bills are repaid at par on the expiry of
their tenure at the office of the Reserve Bank of India.

(v) Availability: All treasury Bills are highly liquid instruments available
both in the primary and secondary market.

(vi) Day Count: For treasury bills the day count is taken as 365 days for
a year.

(vii) Yield Calculation: The yield of a Treasury bill is calculated as per

the following formula:-

(100−𝑃)×365 ×100
Y= 𝑃 ×𝐷

Where Y = Discounted yield

P = Price D = Days to maturity

Example: A co – operative bank wishes to buy 91 Days’ Treasury Bill on

Oct. 12, 2012 which is Maturing on Dec. 6, 2012. The rate quoted by
seller is `99.1489 per `100 face values. The YTM can be calculated as
following:-

The days to maturity of Treasury bill are 55 (October – 20 days,

November – 30 days and December – 5 days)

(100−99.1489)×365 ×100
YTM = (99.1489 ×55)
= 5.70%

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 Similarly if the YTM is quoted by the seller, price can be calculated by
inputting the price in above formula.

CERTIFICATES OF Certificate of Deposits (CD) is a negotiable instrument and is issued in

DEPOSITS dematerialized form. It can only be issued by the Banks or financial
institution for specified time period, The issue of certificate of deposits
(DEC 2018, is governed under the guidelines of Reserve Bank of India. A bank can
Dec 2011, issue Certificate of Deposits for maturities from 7 days to one year
June 2007) whereas a financial institution can issue for maturities from 1 year to 3
years.

Who shall issue CDs?

(i) Any scheduled commercial bank excluding Regional Rural Bank (e. g.
Gramin Bank) and Local Areas Banks can issue certificate of depot.

(ii) Any other Financial Institutions as permitted by RBI.

Minimum size of Issue and Denominations: The minimum amount of a

CD should be of `1 lakh and in the multiples thereof. It means a single
subscriber should not be subscribed less than `1 lakh for one unit of
CD.

CD can be issued to Individual, corporations, trust, funds, associations

and non – resident Indian etc.

Maturity Period: A Bank can issue CDs of maturity period not less than
7 days and not more than one year whereas a Financial Institution can
issue CDs for a period not less than 1 year and not exceeding 3 years
from the date of issue.

Coupon/Discount rate: CDs may be issued at Interest

(Coupon)/discount by the Banks/Financial Institution. The issuing
banks/financial institution are free to determine the discount/coupon
etc.

Transferability: The CDs in physical forms are freely transferable by

endorsement and delivery.
Demat CDs can also be transferred, provided:
(i) There is no lock – in period.
(ii) There is no loan against the CDs.

Note: The Issuing Bank/Financial Institution can’t buy back their CDs
before the maturity date.

Format of CDs: The CDs should be issued only in the dematerialized

form. However, the investors have the option to seek certificate in the
physical form.

Payment of CDs:
The payment of CDs can be made to the following persons:-
(i) To the original subscriber.
(ii) To the last holder who shall bring the CD for payment.

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 Note: Banks should take necessary precautions and make sure that the
payment should only be made through the crossed cheque or bank
transfer. The issuer, on the maturity date, shall arrange for the
repayment to holder by the way of Banker’s cheque.

INTER – It is an unsecured loan extended by one company to another subject to

CORPORATE the compliance of the provisions of the Companies Act, 2013. This
DEPOSITS (ICD) instrument allows corporate with surplus funds to lend to other
corporate facing shortage of funds. Since the ICD is an unsecured
(June 2007) instrument and therefore, it is available at the higher rate of interest as
compared to the loan from the Bank. Accordingly, the cost of this
instrument is very high.

ICDs are very risky instruments for lender corporate as it is an

unsecured loan. The ICDE market is an unorganized market with very
less information available publicly about transaction details.

CD vs. ICD Basis Certificate of Deposit Inter Corporate Deposit

(Dec 2014) Meaning It means a negotiable An ICD is an unsecured
money market loan extended by one
instrument, issued in corporate to another.
dematerialized form or
as a promissory note,
for funds deposited at a
bank or other financial
institutions
Issuer/ CD can be issued by Any Corporate or
Borrower (i) . SCB Company
(ii) All India Financial
Institutions
Nature CD market is an ICD market is organized
organized Market market, with less
information available
publicly about
transaction details.
Minimum Size The minimum deposit No fixed denomination
& that can be accepted
Denomination from a single subscriber
should not be less than
`100,000 and in
multiples of `1 Lakh
COMMERCIAL Commercial Bills are a negotiable instrument and have the same
BILLS features like Bills of Exchange. In other words, it is a negotiable
instrument which is being accepted by buyer for obtaining goods or
services on credit.

The most common practice is that the seller who gets the accepted bills
of exchange discounts it with the Bank or financial institution or a bill
discounting house and collects the money (less the interest charged for
the discounting).

A commercial bill facility is a flexible credit facility which can give a

company a short or long – term injection of cash to finance an
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 individual export contract or general export growth. The volume of bills
both inland and foreign, which is discounted/accounted, forms a
substantial part of the total scheduled commercial bank credit.

COMMERCIAL  Commercial Paper (CP) is an unsecured money market instrument

PAPER (CP) issued in the form of a promissory note.

(June 2012,  In India, it was introduced in 1990s as a privately placed

June 2009) instrument. CP enables the borrowers to meet their short – term
funding requirement for operations.

 In the Global Market, it is very useful instrument with the fixed

maturity period of not more than 270 days.

 Commercial paper is a money – market security issued (sold) by

large corporation houses to get money to meet short – term debt
obligations and is only backed by an issuing bank or corporation’s
promise to pay the face amount on the maturity date.

Who shall issue CP?

Corporate Houses, Primary Dealers and Financial Institutions can issue
CP provided they have permission from the Reserve Bank of India.

Note: A corporate house has the tangible net worth of not less than `4
Crores and the company also has sanctioned working capital by the
Bank.

Rating Requirement:
The issuing company shall obtain credit rating for issuance of CP from
one of the credit rating agency i. e. CRISIL, ICRA, CARE and FITCH.
The credit rating shall not be less than “A2”.

Maturity:
These can be issued for a minimum period of 7 days and maximum
period of 1 year.

Denominations:
CPs can be issued in denominations of `5 lakh or multiples thereof.

Investment in CPs:
CPs are issued to individuals, banking companies, other corporate
bodies, NRIs and FIIs.

Procedure for Issuance

(i) First of all, the issuer must obtain an Issuing and Paying Agent (IPA);
(ii) The financial position must be disclosed by the issuer to the
potential investors;
(iii) Physical certificates shall be issued to investor by issuer after the
confirmation of the deal;
(iv) Investors shall also be given a copy of IPA certificate.

Roles and Responsibilities

Issuer: It is the duty of the issuers to ensure that the guidelines and
procedures laid down for the issue of CP are strictly followed.
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 Issuing and Paying Agent: Only a scheduled bank has the right to act
as an IPA.

(i) IPA should ensure that issuer has the minimum credit rating as
stipulated by the RBI.
(ii) The entire document should be verified by an IPA.
(iii) Certified copies of original document should be held in the custody
of IPA.
(iv) All the IPAs report about every CP issue to Chief General Manager
within 3 days.

Distinguish between Commercial Bills & Commercial Papers (June 2008,

June 2010, Dec 2012, Dec 2014)

FACTORING Factoring means a financial transaction where an entity sells its

(June 2015, Dec receivables to a third party called a FACTOR at discounted prices. It is a
2013) method for the management of receivables. In this concept, the
Banks/financial institutions sale their recoverable loans to third party
(factor) at a discounted rate.

The companies use this method for cleaning up their Balance Sheet. In
factoring, a financial institution (factor) buys the accounts receivable of
a company (Client) and pays up to 80% (rarely up to 90%) of the
amount immediately on formation of agreement.

Factoring company pays the remaining amount (Balance 20% - finance

cost – opening cost) to the client when the customer pays the debt.
Collection of debt from the customer is done either by the factor or the
client depending upon the type of factoring. The account receivable in
factoring can either be for a product or service.

A factor provides the following services:

(a) Credit management and covering the credit risk involved.
(b) Provision of prepayment of funds against the debts it agreed to buy.
(c) Arrangement for collection of debts.
(d) Administration of sales outstanding.

PARTIES IN FACTORING
(i) The Seller, who has produced/sold the goods/services and raised the
invoice.
(ii) The Buyer, the consumer of goods/services and the party to pay.
(iii) The Factor, the financial institution that advances the portion of
funds to the seller.

FACTORING PROCESS
The seller interacts with the funding specialist/broker and explains the
funding needs. The broker prepares a preliminary client profile form
and submits to the appropriate funder for consideration.

Once both parties agree that factoring is possible, the broker puts the
seller in direct contact with the funder to ask/answer any additional
questions and to negotiate a customized factoring agreement, which will
meet the needs of all concerned.
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 At this point, the seller may be asked to remit a fee with formal
application to cover the legal research costs, which will be incurred
during “due diligence”. This is the process by which the buyer’s
creditworthiness is evaluated through background checks, using
national database services.

During the next several days, the funder completes the “due diligence”
process on the seller, further verifies invoices and acknowledges any
liens, UCC filings, judgments or other recorded encumbrances on the
seller’s accounts receivables.

The seller is advised of the facility and is asked to advise the buyers of
the Factor by letter and submit an acknowledged copy of the same to
the Factor for records.

 A detailed sanction letter is given to the seller and their acceptance

on the same taken, with the required signatories. (Authorized
signatories would be mentioned in the “Signing Authorities” section
of the Proposal presented by seller).

 Sanction terms must contain the following:

(a) The period for which the sanction is valid.

(b) When the facility comes into effect.
(c) Who the authorized signatories are for signing invoices for factoring.

ADVANTAGES FOR THE SELLER

(a) Seller gets funds immediately after the sale is affected and on
presentation of accepted sales invoices and Promissory notes.
(b) Major part of paper work and correspondence is taken care of by the
factor.
(c) Follow – up, for recovery of funds, is done mainly by the factor.
(d) Interest rates are not as high as normal discounting.
(e) Increased cash flow to meet payroll.
(f) Immediate funding arrangements.
(g) No additional debt is incurred on balance sheet.

June 2015: "Factoring is a financial option for the management of

receivables." In the light of this statement, explain the meaning and
advantages of factoring.

BILLS Bill Rediscounting means the rediscounting of trade bills, which have
REDISCOUNTING already been purchased by/discounted with the bank by the
customers. These trade bills arise out of supply of goods/services. Bill
(Dec 2012) discounting is a money market instrument where the bank buys the bill
(i. e. bill of exchange or Promissory Note) before it is due and credits the
value of the bill after a discount charge to the customer’s account. Now,
the bank which has discounted the bill may require getting it
‘rediscounted’ with some other bank to get the fund.

TYPES OF MONEY MARKET

PRIMARY MARKET In the primary market, Government sales new Govt. Securities like
treasury bills & others securities. The RBI for and on behalf of
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 Government of India issues treasury bills through auction.

Salient Features of the Auction Technique:

(i) The auction of treasury bills is done only at Reserve Bank of India,
Mumbai.

(ii) Bids are to be submitted on Negotiated Dealing System (NDS) by

2:30 PM on Wednesday, If Wednesday happens to be a holiday then
bids are to be submitted on previous day (Tuesday).

(iii) Bids are submitted in terms of price per `100. For example, a bid
for 91 – day Treasury bill auction could be for `97.50 for per unit of T –
bill of face value of `100.

(iv) Auction committee of Reserve Bank of India decides the cut – off
price and results are announced on the same day.

(v) Bids above the cut – off price receive full allotment; bids at cut – off
price may receive full or partial allotment and bids below the cut – off
price are rejected.

SECONDARY In the secondary, the sale and purchase of Treasury bills after their
MARKET original issuance in the primary market. The participants can also trade
T – bills held from primary market in the secondary market established
for the purpose.

The major advantages of dealing in Treasury bill secondary market are:

Market related yields, ideal matching for funds management
particularly for short – term tenors of less than 15 days, Transparency
in operations as the transactions would be put through Reserve Bank of
India’s SGL or Client’s Gilt account only, two way quotes offered by
primary dealers for purchase and sale of treasury bills and certainty in
terms of availability, entry and exit.

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 SUMMARY
Particulars T Bill Commercial Commercial Certificate of Inter
Paper Bill Deposit Corporate
Deposits
Meaning Treasury Bills Commercial Commercial Certificate of An ICD is an
are money Paper (CP) is an Bills are a Deposits unsecured
market unsecured negotiable (CDs) is a loan extended
instruments money market instrument negotiable by one
issued by RBI instrument and have the money market corporate to
to finance the issued in the same instrument another.
short term form of a features like and issued in Existing
requirements promissory Bills of dematerialised mainly as a
of the note. CP, as Exchange. form or as refuge for low
Government a privately Usance rated
of India. placed In other Promissory corporates,
These are instrument, was words, it is a Note, against this market
discounted introduced in negotiable funds allows
securities and India in 1990 instrument deposited at a corporates
thus are with a view to which is bank or other with surplus
issued at a enable highly being eligible funds to lend
discount to rated corporate accepted by financial to other
face value. borrowers buyer for institution for corporates
The to diversify their obtaining a specified facing
return to the sources of goods or time period. shortage of
investor is the short-term services on funds.
difference borrowings and credit.
between the to provide an
maturity value additional
and issue instrument to
price. investors.

Minimum `25000 & in `5 Lakhs or in No such limit `1 Lakh or in No such limit

Amount multiples multiples multiples
thereof thereof thereof
Maturity 14 days, 91 Not less than 7 Less than Not less than Less than one
days, 182 days and not one year 7 days and year
days & 364 more than 1 not more than
days year 1 year
Eligible RBI Companies, PDs Any Person Banks & Corporates
Issuers and financial Financial
institutions (FIs) Institutions
Other Points The treasury Minimum Credit - Banks have to Banks have to
bills are issued Rating shall be maintain the maintain the
in the form of “A-2” appropriate appropriate
promissory reserve reserve
note in requirements, requirements,
physical form i.e., cash i.e., cash
or by credit to reserve ratio reserve ratio
Subsidiary (CRR) and (CRR) and
General statutory statutory
Ledger (SGL) liquidity ratio liquidity ratio
account or Gilt (SLR), on the (SLR), on the
account in issue price of issue price of
dematerialized the CDs. the CDs.
form.

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