MONEY MARKET DEBT MARKETG-SEC MARKET

CAPITAL MARKET

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MONEY MARKET

• Money market means market where money or its equivalent can be traded.

• Money is synonym of liquidity. • Money market consists of financial institutions and dealers in money

or credit who wish to generate liquidity. • It is better known as a place where large institutions and government

manage their short term cash needs. • For generation of liquidity, short term borrowing and lending is done

by these financial institutions and dealers. • Money Market is part of financial market where instruments with

high liquidity and very short term maturities are traded.• Money market is a market where short term obligations such as

treasury bills, commercial papers, CDs etc. are bought and sold.

Benefits of Money Market

• For the lender/investor, it provides a good return on their funds.

• For the borrower, it enables rapid and relatively inexpensive acquisition of cash to cover short-term liabilities.

• One of the primary functions of money market is to provide focal point for RBI’s intervention for influencing liquidity and general levels of interest rates in the economy.

• RBI being the main constituent in the money market aims at ensuring that liquidity and short term interest rates are consistent with the monetary policy objectives.

Money Market & Capital Market

• Money Market is a place for short term lending and borrowing, typically within a year.

• It deals in short term debt financing and investments. • On the other hand, Capital Market refers to stock market, which refers to

trading in shares and bonds of companies on recognized stock exchanges.• Individual players generally cannot invest in money market as the value of

investments is large.• On the other hand, in capital market, anybody can make investments

through a broker. • Stock Market is associated with high risk and high return as against money

market which is more secure. • In case of money market, deals are transacted on phone or through

electronic systems as against capital market where trading is through recognized stock exchanges.

MONEY MARKET INSTRUMENTS

• Call Money Market• Treasury Bills market• CP & CD market• Commercial Bills Market• Discount Market• Money Market Mutual funds(MMMFs)

CALL MONEY MARKET

• Call Money Market is an overnight money market• Participants include, SCBs( excluding RRBs), Co- Op

banks( other than Land Development banks), Primary Dealers.

• NBFCs are not permitted to participate in the call money market

• Call for 1 day is called overnight • 2 to 14 days is called Notice money or Term money• Dealing session upto 5 pm on Week days and upto

2.30 pm on Saturdays

PRUDENTIAL EXPOSURE CEILINGS

Participant Borrowing Lending SCBs 100% of Cap funds. 25% of Cap funds

Co- op banks - 2% of Agg Deposits. No limit

Primary Dealers - 200% of NOF 25% of NOFCapital funds = Tier I & Tier II capitalPrimary Dealer= FI permitted to deal in Govt securities

TREASURY BILLS MARKET

• Treasury bills are short term instruments of max 1 year issued by RBI on behalf of govt to tide over short term liquidity shortfalls.

• It is used by govt to raise short term funds to bridge seasonal or temporary gaps between receipts & payments.

• It is a most important segment of money market in India.• Enable investors to park their surplus in short term

instruments with no risk

Features of Treasury Bills

• T- bills are for 3 maturities. 91 days, 182 days & 364 days.• They are issued at a discount to the FV• On maturity, FV is paid to the investors• Rate of discount & corresponding issue price depend upon

the prevailing market.• Available for a minimum of Rs 25000/ & in multiples of Rs

25000/• They are tradable in the market• It is held in the books of RBI under SGL• SGL holdings can be transferred by issuance of SGL transfer

form.

Treasury Bills

• Investors- Individuals, Firms, Companies, Corporate bodies, Trusts & Institutions, banks, MFs, PFs, FIIs, etc.• T – Bill is eligible for SLR purposes• Auction- 91 days on weekly basis - 182 days Wednesday preceding non Reporting Friday - 364 days- Wednesday preceding Reporting Friday - Even 14 days T bills are also issued• No TDS on the interest earned.• Highly liquid secondary market• No risk

Commercial Paper(CP)

• Issued by Corporates & FIs• Minimum Networth Rs 4 crore• WC limit sanctioned by banks• Classified as Standard Asset• Rating P2 of CRISIL or equivalent• Period: Min 7 days & Max 1 year• Amount: No minimum. But to be issued in denomination of Rs 5 lacs• Maximum Amount of CP restricted to the value of Rating• CP can be issued in demat form only.• Can be issued as a standalone or standby product• IPA can be a bank only• Investors : Individual, Firms, Corporates, banks, Fis, NRIs,etc.

Certificate of Deposit(CD)

• It is a negotiable money market instrument• CDs can be issued by SCBs only( not RRBs & local area banks)• CDs can be issued by select AIFI as permitted by RBI to raise short term resources• Amount Of CDs: Banks have the freedom to issue CD for the amount as required

by them• FIs within the umbrella limit for all borrowings upto 100%of NOF as per the latest

ABS• Minimum size: Rs 1 lakh & Multiples thereof• Period: Minimum 7 days & Maximum 1 year• Interest: CDs can be issued at a discount to FV.• Subscriber: Individuals, Corporates, Trusts, banks, FIs,etc. NRIs can invest but no

repatriation.• CDs are transferrable and there is no lock in period.• No loan is permissible against CDs.

Commercial Bill Market

• Commercial bill is a short term , negotiable and self liquidating instrument.

• It is Bill of Exchange covered under NI Act 1881• It is classified into Demand & Usance bills• Demand bill is payable on sight & Usance bill is payable after a

specified period• The supplier upon raising the bills can get discount of bill from

banks and get immediate cash. • On the due date of the bill, bank realizes the money from the

beneficiary’s bank.• There is no secondary market for this instrument.

Discount Market

• Discount market comprises of institutions to provide liquidity• For this purpose, Discount & Finance House of India(DFHI) was set

up by RBI with PSBs & FIs in 1988• DFHI has been actively trading in Money market instruments by

creating market by acting as a broker(PD) & also providing refinance of bills.

• DFHI discount commercial & Treasury bills to provide liquidity• DFHI is also authorised to deal in Govt securities.

Money Market Mutual Funds(MMMFs)

• MMMFs were introduced in 1991 to provide an additional short term avenue for investment to the individuals.

• MMMFs invest exclusively in money market instruments• MMMFs mobilise savings from small investors and invest

them in short term money market instruments• MMMFs gets yield close to short term money market coupled

with adequate liquidity• MMMFs work under the purview of SEBI

REPO & REVERSE REPO

• It is an effective tool used by RBI to manage short term liquidity in the banking system

• Repo is a transaction where banks acquire immediate liquidity by selling securities, simultaneously undertaking to re purchase the same or similar security after a specified time at a specified price.

• This would enable injecting of liquidity into the banking system• Reverse repo is a mechanism where banks buy security from RBI

against cash.• Under this route, RBI absorbs the liquidity and hence control

excess supply of liquidity in the banking system• ROI: Repo: 4.75%• Reverse Repo 3.25%

DEBT MARKET• Debt Instruments are obligations of issuer of such instrument as regards certain

future cash flow representing Interest & Principal, which the issuer would pay to the legal owner of the Instrument.

• Debt Instruments are of various types like Bonds, Debentures, Government Securities (G secs) etc

• The G-Secs market is the oldest and the largest component of the Indian debt market in terms of market capitalization, trading volumes and outstanding securities.

• The G-Secs market plays a vital role in the Indian economy as it provides the benchmark for determining the level of interest rates in the country through the yields on the government securities which are treated as the risk-free rate of return in any economy.

• Debt instruments provide fixed return declared as coupon rate. Retail investors would have a natural preference for fixed income returns and especially so in the current situation of increasing volatility in the financial markets

Debt Market• Debt Market is the most critical of the financial system of any

economy & acts as a fulcrum for economic development• In developed economies, debt market is much bigger than the

capital or money market• The Debt market comprises of: - Private Corporate Debt market - PSUs Bond Market - Govt. Securities Market• Debt market is a market for long term investments.• The characteristic of an efficient debt market is competitive

structure, low transaction cost, safe & strong market infrastructure & a high level of heterogeneity among market participants

Debt Market- Participants

• Small number of large players.• PDs act as Market Makers in G-sec market• Central & State Govts.- To support the budget deficits & to meet

other financial requirements• PSUs- Issue Tax free & taxable bonds to meet their Long Term funds

requirement• PSUs as also investors to park their surplus funds• Corporates- Both as Issuers & Investors• Banks- Both as Issuer of Bonds & Investor of Debt instruments• Mutual funds• FIIs• PFs

DEBENTURE OR BONDS

• Debenture is a document to raise long term sources• Debentures are generally secured and negotiable• Bearer debentures are negotiable & transferrable by delivery• Regd Debenture not negotiable but can be transferred subject to

transfer in the register of the company• Debentures generally have a maturity of over 3 years.• Medium Term Deb= 1 to 5 years & Long Term 5 to 12 years• Debentures of over 18 months should have a credit rating• For debentures of over 18 months, Debenture Redemption

Reserve will have to be created• In such cases DRR equal to 50% of the issue amount to be created

before redemption commences

Types of Debentures(Bonds)

• Convertible Debentures: - Convertible partially or fully into equity shares at a pre

determined price & time as stated in Prospectus - It is optional at the hands of debenture holders• Non convertible debentures are to be redeemed on the due

date• Debentures may carry a fixed rate of interest or floating rate

or Zero rate of interest• Debenture may also carry Put( for investor) option or Call( for

issuer) option at a specified time

Special Types of Debentures

• Deep Discount Bonds: - The Bonds do not carry interest but is issued at a Deep

Discount over the Face value - It is also referred to as Zero Coupon bonds. - In 1992, IDBI issued Deep discount bonds with a FV of Rs

1,00,000 issued at a Discounted price of Rs 2500/ for 25 years - Carried a Put & Call option at the end of 5,9,12,15& 20 years at a value of Rs 5300/,9600/, 15300/, 25000/, & 50000/. - It helps the investors against Re-investment risk.

Floating Rate Bonds

• Here the Interest rates are linked to a market bench mark like T-Bill, deposit rate, etc

• SBI in 1993 issued these bonds @ 3% over the bank’s maximum deposit interest rate

• These bonds protect the investor against inflation & price rise

• Indexed Bonds: - It contains two parts. The first part( a portion) represent a

fixed amount and the second part is floating linked to some Index rates like BSE, NSE etc

G- SEC MARKET

• It constitutes an important segment of the debt market• It is a huge resource for the govt & a bench mark for all corporate papers.• These bonds carry Zero risk and hence termed as Gilt edged securities• RBI issues these bonds on behalf of govt and is accounted through SGL a/c

maintained by it.• The GSec Market can be broadly classified into Central Government

Securities, Treasury Bills, State Government Securities, Government Guaranteed Bonds and PSU Bonds.

• G secs are medium to long-term rupee denominated obligations issued by RBI on behalf of the Govt. of India to finance the Central Government's fiscal deficit.

• There are various types of GSecs such as fixed-rate bonds, floating rate bonds, zero coupon bonds, etc.

• Coupon payments on fixed rate and floating rate bonds are made semi-annually.

G-Sec cont….d

• GSecs are not rated• Commercial banks are dominant investors in GSecs due to the RBI's requirement

of SLR. • The investor base also includes insurance companies, NBFCs, provident funds,

pension funds and cash rich corporations. RBI also buys GSecs for open market operations.

• G-secs can be held by any person, NRIs, FIIs, firms, company, corporate body or institution, State governments, and trusts

• The maturity period of GSecs ranges from 1 to 25years.• Benefits: - Greater safety and lower volatility as compared to corporate bonds. - Transparency in transactions and simplified settlement procedures . - Higher leverage available in case of borrowings against G-Secs. - No TDS on interest payments. - Greater diversification opportunities

CAPITAL MARKET• PRIMARY MARKET: - Refers to long term flow of funds from new issues(primary issues) - Primary issues of the corporate sector lead to capital formation

resulting in expansion of the economy.

• SECONDARY MARKET: - It is a market for existing securities - It provides eternal market for equities - It facilitates liquidity & marketability of existing securities/equities - It contributes to the economic growth through disinvestment &

reinvestment - Provides instant valuation of securities

Capital Market in India

• Important Stock Exchanges: - National Stock Exchange (NSE) - Bombay Stock Exchange (BSE) - Other Exchanges, viz. Ahmedabad, B’lore, Baroda,

Bhubaneswar, Chennai, Cochin, Coimbatore, Delhi, Guwahati, Hyderabad, Indore, Jaipur, Kanpur, Kolkata, Ludhiana, M’lore, Patna, Pune, Rajkot

- Over The Counter Exchange of India(OTCEI) - Inter Connected Stock Exchange(ISE) - National Commodity & Derivatives Exchange(NCDEX) - Multi Commodity Exchange( MCX)

NSE

• Started the operations from June 1994• Provide nation wide trading facility for all types of securities

including Derivatives, Futures & Options • Fully automated & provide screen based trading• Owned by leading banks & FIs• Its main Index consist of 50 companies representing 25

sectors of the economy• Other Stock Exchanges does similar functions of NSE

CORPORATE FINANCE

• Corporate Finance is a segment of finance which deals with the decision taken by the corporates to fund their requirements.

• The primary objective of such decision is to maximize the corporate value.

• The structure of corporate finance depends upon the period of funds requirement.

• It can be bifurcated into Long Term requirement & Short Term requirement.

• Long Term funds requirement could be met by: - Equity OR - Debt OR - Combination of both at a specified percentage.

CORPORATE FINANCE

• Sources of Long Term Finance:• Equity: - Equity Capital, including Preference capital - Retained Earnings• Debt: - Term Loans - Debentures.• Short Term Financial requirements met by: - Working capital - Money Market instruments like CP, CD, etc.

Corporate Finance

• Differences between Equity & Debt Equity Debt Return by way of Dividend Interest Maturity Infinite Finite Control over company Yes No Dividend P&L appr P&L Dr Tax – Dividend is paid after Tax Interest: Tax is deductible Liquidation Last priority Better priority

Corporate Finance

Advantages:• No compulsion to pay dividends• No maturity and hence no need to redeem• Enhances the creditworthiness(networth) of the company• Enhances borrowing capacity & hence expansion

Disadvantages:• Issuance of shares dilutes the stake of the promoter & hence the

controlling the interest.• Cost of Equity is very high• Dividends are paid after tax & hence no advantage• Interest payments are Tax deductible expenses- Advantage

Advantages of Debt Finance

• Interest is a tax deductible expenses• Does not result in dilution of capital & controlling

interest• Not entitled for the value created by the company.• Maturity of the instrument can be tailored to suit cash

flows• Cost of debt is lower compared to equity• Fixed Maturity & Not perpetual• Provides protection against inflation• Regulatory prescriptions are manageable

Disadvantages of Debt Finance

• Fixed repayment, irrespective of downtrend.• Loan default may result in bankruptcy• Increases the financial leverage• Reduces the ability for further borrowing

unless supplemented by further infusion of capital

• If inflation is low, then cost of debt becomes costly