IBE Module 6

8/8/2019 IBE Module 6

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INDIAN BUSINESS ENVIRONMENT

MODULE 6MONEY

Monitory AggregatesMoney Market

Capital Market

FDI in Economic Development

SEBI ² Functions and AchievementsStock Exchange

Depository System in India







What is Money?

As a store of value, money serves as an

asset that can be used to transport

purchasing power from one time periodto another.



What is Money?

As a uni t of account, money is a

standard that provides a consistent way

of quoting prices.



What is Money?

Money is easily portable,

and easily exchanged for

goods at all times. The liquidi ty pr o perty of

money makes money a good

medium of exchange as well

as a store of value.



Definition of Money Supply

(M1, M2 and M3)

· Definition of Money Supply:

the quantity of money available in the

economy

Definition of Monetary Policy:

the setting of the money supply by

policymakers in the central bank



M1 ² the narrowest definition of money supply, consists ofcurrency outside banks plus checking accounts plustraveller's checks

Currency held outside banks ² includes coins and papermoney in the hands of public

Checking accounts ² balances can be withdrawn by usingcheck

Traveller's check ² issued in specific denominations, theseare treated as cash

M1 = currency held outside banks + checking accounts +traveller's check


(M1, M2 and M3)



M2 ² A broader definition of money supply, it

includes all of the components of M1 plus time

deposits and savings depositsTime deposits (fixed deposits) ² interest-earning

deposits with a specified maturity, which aresubject to penalty for early withdrawal

Savings deposits ² interest-earning depositswith no specific maturity

M2 = M1 + time deposits + saving deposits


(M1, M2 and M3)



M3 = M2 + deposits with non-bank financialinstitution (e.g., deposits of finance companies

and post office saving)


(M1, M2 and M3)



Monetary Aggregates

The RBI defines the monetary aggregates as

Reserve Money (M0):

Currency in circulation + Bankers· deposits with the RBI + ¶Other· deposits with the RBI = Net

RBI credit to the Government + RBI credit to the commercial sector + RBI·s claims on banks +

RBI·s net foreign assets + Government·s currency liabilities to the public ² RBI·s net non-

monetary liabilities.

M1: Currency with the public + Deposit money of the public (Demand deposits with thebanking system + ¶Other· deposits with the RBI).



Monetary Aggregates

M2:

M1 + Savings deposits with Post office savings banks.

M3: M2+ Time deposits with the banking system = Net bank

credit to the Government + Bank credit to the commercial

sector + Net foreign exchange assets of the banking sector

+ Government·s currency liabilities to the public ² Net non-monetary liabilities of the banking sector (Other than Time

Deposits).

M4:

M3 + All deposits with post office savings banks (excludingNational Savings Certificates).



MONEY MARKET



CONTENTS

What is Money Market?

Features of Money Market?

Objective of Money Market? Importance of Money Market?

Composition of Money Market?

Instrument of Money Market? Structure of Indian Money Market?

Disadvantage of Money Market?



What is Money Market?

As per RBI definitions ´ A market for short termsfinancial assets that are close substitute for money,facilitates the exchange of money in primary and

secondary marketµ.

The money market is a mechanism that deals withthe lending and borrowing of short term funds (lessthan one year).

A segment of the financial market in whichfinancial instruments with high liquidity and veryshort maturities are traded.



Continued««.

It doesn·t actually deal in cash or money but

deals with substitute of cash like trade bills,

promissory notes & govt papers which canconverted into cash without any loss at low

transaction cost.

It includes all individual, institution and

intermediaries.



Contd«

Money market refers to a mechanism whereby on

the one hand borrowers manage to obtain short-

term loanable funds and on the other , lenders

succeed in getting creditworthy borrowers for theirmoney.

In any money market, commercial banks are the

most important lenders





Continued««..

Transaction have to be conducted without the helpof brokers.

It is not a single homogeneous market, it comprisesof several submarket like call money market,acceptance & bill market.

The component of Money Market are thecommercial banks, acceptance houses & NBFC(Non-banking financial companies).



Objective of Money Market

To provide a parking place to employ short termsurplus funds.

To provide room for overcoming short term deficits.

To enable the central bank to influence andregulate liquidity in the economy through its

intervention in this market.

To provide a reasonable access to users of short-term funds to meet their requirement quickly,

adequately at reasonable cost.



Importance of Money Market

o Development of trade & industry.

o Development of capital market.

o Smooth functioning of commercial banks.

o Effective central bank control.

o Formulation of suitable monetary policy.





Continued«..

II. UNORGANISED SECTOR1. Indigenous banks2 Money lenders

3. Chits4. Nidhis

III. CO-OPERATIVE SECTOR1. State cooperative

i. central cooperative banksPrimary Agri credit societiesPrimary urban banks

2. State Land development bankscentral land development banks

Primary land development banks



The Indian Money Market

The Indian money market is not an integrated unit. It

is broadly divided into two parts, viz,

Organised- fairly integrated. Both nationalised and

the private sector commercial banks constitute the

core of the organised money market sector

Unorganised- the unorganised sector comprises theindigenous bankers and money lenders



The Indian Money Market

Unorganised sector of the Indian Money Market

Lending activities are mostly confined to small towns

and villages where modern banking facilities are

still inadequate.

Farmers, artisans and other small scale producers

and traders who do not have access to modernbanks, borrow from them



Unorganised sector of the Indian Money

Market contd«

1. Unregulated non-bank financial intermediaries:

Finance companies

Chit funds

Nidhis

2. Indigenous bankers: Gujarati Shroffs, Chettiars,

Marwari Kayas, Multani Shroffs

3. Money lenders: pathans, Kabulis



Composition of Organised Money

Market

Money Market consists of a number of sub-markets

which collectively constitute the money market. They

are,

Call Money Market

Commercial bills market or discount market

The Repo markets

Treasury bill market

Money market mutual funds



Instrument of Money Market

A variety of instrument are available in a developed

money market. In India till 1986, only a few

instrument were available.

They were

Treasury bills

Money at call and short notice in the call loanmarket.

Commercial bills, promissory notes in the bill

market.



Call Money Markets

The call money market consists of overnight and

money at short notice for periods upto 14 days.

It is meant to balance the short term needs of

banks.



Treasury Bills (T-Bills)

(T-bills) are the most marketable money marketsecurity.

They are issued with three-month, six-month

and one-year maturities. T-bills are purchased for a price that is less than

their par(face) value; when they mature, thegovernment pays the holder the full par value.

T-Bills are so popular among money marketinstruments because of affordability to theindividual investors.





Certificate of deposit (CD)

A CD is a time deposit with a bank.

Like most time deposit, funds can not withdrawnbefore maturity without paying a penalty.

CD·s have specific maturity date, interest rate andit can be issued in any denomination.

The main advantage of CD is their safety.

Anyone can earn more than a saving accountinterest.



Commercial paper (CP)

CP is a short term unsecured loan issued by acorporation typically financing day to dayoperation.

CP is very safe investment because the financialsituation of a company can easily be predictedover a few months.

Only company with high credit rating issues CP·s.



Repurchase agreement (Repos)

Repo is a form of overnight borrowing and is used

by those who deal in government securities.

They are usually very short term repurchasesagreement, from overnight to 30 days of more.

The short term maturity and government backing

usually mean that Repos provide lenders with

extremely low risk.

Repos are safe collateral for loans.



Banker's Acceptance

A banker·s acceptance (BA) is a short-term creditinvestment created by a non-financial firm.

BA·s are guaranteed by a bank to make payment.

Acceptances are traded at discounts from facevalue in the secondary market.

BA acts as a negotiable time draft for financingimports, exports or other transactions in goods.

This is especially useful when the credit worthinessof a foreign trade partner is unknown.



Money market mutual funds

Was introduced in 1992 by RBI

A money market fund is a mutual fund that invests solely inmoney market instruments. Money market instruments areforms of debt that mature in less than one year and are

very liquid. Treasury bills make up the bulk of the money market

instruments. Securities in the money market are relativelyrisk-free.

Money market funds are generally the safest and mostsecure of mutual fund investments. The goal of a money-market fund is to preserve principal while yielding a modestreturn.





Characteristics of Indian Money Market

Lack of integration

Lack of rational interest rates structure

Shortage of funds in the money markets Seasonal stringency of funds

Inadequate banking facilities



CAPITAL MARKETS



Why Capital Markets Exist

Capital markets facilitate the transfer ofcapital (i.e. financial) assets from one owner toanother.

They provide liquidity.

Liquidity refers to how easily an asset canbe transferred without loss of value.

A side benefit of capital markets is that thetransaction price provides a measure of thevalue of the asset.



Financial markets

The term collectively refers to all those

organisations which lend funds to business

enterprises.

It is composed of two constituents- money marketand the capital market

Money market- deals with provision of short term

funds Capital market- deals with grant of medium term

and long term credit



Interdependencies in both markets

Reasons for interdependencies

Most of the suppliers prefer to operate in bothmarkets

Users of funds also have an option to obtain fundsfrom either market

Funds flow freely in the market

Rate of interests are interdependent

Some institutions serve both money and capitalmarkets



Role of Capital Markets

Mobilization of Savings & acceleration ofCapital Formation

Promotion of Industrial Growth Raising of long term Capital

Ready & ContinuousMarkets

Proper Channelisation of Funds Provision of a variety of Services



Structure of capital market

Financial institutions- IFCI, IDBI, LIC, ICICI, SFC, Exim

banks

Securities markets- 1. gilt edged market- market for

government securities

2. corporate securities market- market where

securities issued by firms can be bought and soldfreely

I di C i l M k Hi i l



Indian Capital Market - Historical

perspective

StockMarket was for a privileged few

A

rchaic systems - Out cry method Lack of Transparency

No use of Technology

Outdated banking system Volumes - less than Rs. 300 cr per day

No settlement guarantee mechanism - High

risks



Indian Capital Market

Market Instruments Intermediaries

Primary

New Issues

Secondary

stocks

Equity DebtHybrid

Regulator

Brokers

Investment BankersStock Exchanges

Underwriters

SEBI

Players

Corporate IntermediariesCRA Banks/FI FDI /FIIIndividual



Capital Markets - Reforms

Each scam has brought in reforms - 1992 / 2001

Screen based Trading through NSE

Capital adequacy norms stipulated Dematerialization of Shares - risks of fraudulent

paper eliminated

Entry of Foreign Investors

Investor awareness programs Inter-action between banking and exchanges



CapitalMarket Instruments

ADR / GDR

Equity Debt

Equity

Shares Preference

Shares Debentures Zero coupon

bonds

Deep

Discount

Bonds

Hybrid



FDI-Introduction

Foreign direct investment is an investment made by

a foreign individual or company in productive

capacity of another country. It is the movement of

capital across national frontiers in a way that grantsthe investor control over the acquired asset.



Background

As the third-largest economy in the world, India is

a preferred destination for foreign direct

investments (FDI); India has strengths in information technology and

other important areas such as auto components,

apparels, chemicals, pharmaceuticals, jewelry and

so on. Although India has always held promise for global

investors, its rigid FDI policies were a significant

hindrance in this context.



Background

However, as a result of a series of ambitious and

positive economic reforms aimed at deregulating the

economy and stimulating foreign investment, India has

positioned(projected) itself as one of the front-runnersin Asia Pacific Region.

India has a large pool of skilled managerial and

technical expertise. The size of the middle-class

population at 300 million exceeds the population ofboth the US and the EU, and represents a powerful

consumer market.



Current Status

India's recently liberalized FDI policy permits up to a

100% FDI stake in ventures.

Industrial policy reforms have substantially reduced

industrial licensing requirements, removed restrictionson expansion and facilitated easy access to foreign

technology and FDI.

The upward moving growth curve of the real-estate

sector owes some credit to a booming economy and

liberalized FDI regime.



Current Status

A number of changes were approved on the FDIpolicy to remove the cap in most of the sectors.Restrictions will be relaxed in sectors as diverse ascivil aviation, construction development, industrialparks, commodity exchanges, petroleum and naturalgas, credit-information services, Mining and so on.

But this still leaves an unfinished agenda of permittinggreater foreign investment in politically sensitiveareas like insurance and retailing.



Government Stand

Government of India accepts the key role ofForeign Direct Investment (FDI) in economicdevelopment not only as an addition to domestic

capital but also as an important source oftechnology and global best practices. TheGovernment of India has put in place a liberaland Transparent FDI policy.

FDI up to 100% is allowed under the automaticroute in most sectors/activities.



Government Stand

FDI policy in India is reckoned to be among the

most liberal in emerging economies. FDI Policy

permits FDI up to 100 % from foreign/NRIinvestor without prior approval in most of the

sectors including the services sector under

automatic route.



FDI Prohibited

FDI is not permissible in Gambling and Betting, or

Lottery Business, Business of chit fund, Nidhi

Company, Housing and Real Estate business,

Trading in Transferable Development Rights (TDRs), Retail Trading, Atomic Energy Agricultural or

plantation activities or Agriculture (excluding

Floriculture, Horticulture, Development of Seeds,

Animal Husbandry, Cultivation of Vegetables, Mushrooms etc. under controlled conditions and

services related to agro and allied sectors) and

Plantations(other than Tea plantations)



Financial Regulators

Securities and Exchange Board of India (SEBI)

Reserve Bank of India

Ministry of Finance



SEBI

It was constituted and made a statutory body by

SEBI act 1992.

With the coming into effect of SEBI, some of the

powers and function exercised by the centralgovernment, in respect of regulation of stock

exchanges were transferred to the SEBI.



OBJECTIVES OF SEBI

1.Registring and regulating the working of stock brokers, sub-

brokers, share transfer agents, underwriters«««.who

may be associated securities market in any manner.

2.Registering and regulating the working of collective

investment scheme including mutual funds.

3.Prohibiting insider trading in securities.

4.Regulating substantial acquisition of shares and takeovers of

companies.



Functions Of SEBI

It enhances investor's knowledge on market by

providing education.

It regulates the stockbrokers and sub-brokers.

To promote Research and Investigation



The Recent Initiatives Undertaken

Sole Control on Brokers

For Underwriters

For Share Prices

For Mutual Funds



WHAT IS STOCK EXCHANGE

Stock exchange is that place where trading of shares is done in

terms of sale and purchase.



The role of the stock exchange

Raising capital for businesses

Mobilizing savings for investment

Facilitate company growth

Redistribution of wealth



The role of the stock exchange

Corporate governance

Creates investment opportunities for small investors

Government raises capital for development projects

Barometer of the economy

Growth Pattern of the Indian Stock Market



Sl.No.

As on 31stDecember

1946 1961 1971 1975 1980 1985 1991 1995

1No. ofStock Exchanges

7 7 8 8 9 14 20 22

2No. ofListed Cos.

1125 1203 1599 1552 2265 4344 6229 8593

3No. of StockIssues ofListed Cos.

1506 2111 2838 3230 3697 6174 8967 11784

4

Capital of Listed

Cos. (Cr. Rs.)

270 753 1812 2614 3973 9723 32041 59583

5Market value ofCapital of ListedCos. (Cr. Rs.)

971 1292 2675 3273 6750 25302 110279

478121

6Capital perListed Cos. (4/2)

(Lakh Rs.)

24 63 113 168 175 224 514 693

7

Market Value ofCapital per ListedCos. (Lakh Rs.)(5/2)

86 107 167 211 298 582 1770 5564

8

Appreciated value

of Capital per

358 170 148 126 170 260 344 803



INTRODUCTION :

There are 23 stock exchanges in the India. Mumbai's (earlier known as Bombay), Bombay Stock Exchange is the largest, with over 6,000 stocks listed. The BSE accounts for over two thirds of the

total trading volume in the country. Established in 1875, the exchange is also the oldest in Asia. Among the twenty-two Stock Exchanges recognised by the Government of India under the Securities Contracts (Regulation) Act, 1956, it was the first one to be recognised and it is the

only one that had the privilege of getting permanent recognition ab-initio.



Cont««.

Bombay stock exchange : it has 30 companies sripted.

Name:1.ACC

2.BAJAJ

3.AIRTEL

4.BHEI

5.CIPLA

6.DLF

7.GRASIM

8.GUJRAT AMBUJA

9.HDFC

10.HDFC BANK



CONT««

11.HERO HONDA

12.HINDALCO

13.HUL

14.ICICI BANK

15.INFICYS

16.ITC

17.L&T

18.MARUTI

19.NTPC

20.ONGC



CONT««

21.RANBAXY

22.RELIANCE COMMUNICATION

23.RELIANCE ENERGY

24.RIL

25.SATYAM

26.SBI

27.TCS

28.TATA MOTERS

29.TATA STEEL

30.WIPRO



BSE CHART



NSE

The National Stock Exchange (NSE),

located in Bombay, is India's first debt

market. It was set up in 1993 to

encourage stock exchange reform through system modernization and

competition.

It opened for trading in mid-1994. It

was recently accorded recognition as a

stock exchange by the Department of

Company Affairs.





CONT«««

Based on the recommendations, NSE was promoted by leading

Financial Institutions at the behest of the Government of India and was

incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country



Cont««««««««..ss

NSE Group:

1. India Index Services & Products Ltd. (IISL)

2. National Securities Clearing Corporation Ltd.

(NSCCL) 3. NSE.IT Ltd.

4. National Securities Depository Ltd. (NSDL)

5. DotEx International Limited




What is a depository?

A "Depository" is a facility for holding securities, whichenables securities transactions to be processed by bookentry.

To achieve this purpose, the depository may immobilize thesecurities or dematerialise them (so that they exist only aselectronic records).India has chosen the dematerialisationroute. In India, a depository is an organisation, which holdsthe beneficial owner's securities in electronic form, through aregistered Depository Participant (DP).

A depository functions somewhat similar to a commercialbank. To avail of the services offered by a depository, theinvestor has to open an account with a registered DP



What is dematerialisation?

"Dematerialisation" is a process by which physical certificates areconverted into electronic form.

Who is a Beneficial Owner (BO)?

"Beneficial Owner" is a person in whose name a demat account isopened with CDSL for the purpose of holding securities in theelectronic form and whose name is recorded as such with CDSL.

Who is a Depository Participant?

A "Depository Participant" (DP) is an agent of the depository who isauthorised to offer depository services to investors. Financial

institutions, banks, custodians and stockbrokers complying with therequirements prescribed by SEBI/ Depositories can be registered asDP.



What is an ISIN (International Securities Identification Number)?

"ISIN" is the unique identification number given to a security of an issuer at the time of admittingsuch security in the depository system.

Whether different securities issued by the same Issuer will have same ISIN?

No, different securities issued by the same issuer will have different ISINs.

What services are provided by a DP?

Following services can be availed of through a DP :

a) Dematerialisation, i.e. getting physical securities converted into electronic form.b) Rematerialisation, i.e. getting electronic securities balances held in a BO account converted into

physical form.

c) To maintain record of holdings in the electronic form.

d) Settlement of trades by delivering / receiving underlying securities from / in BO accounts.

e) Settlement of off-market trades i.e. transactions between BOs entered outside the StockExchange.

f) Providing electronic credit in respect of securities allotted by issuers under IPO or otherwise.

g) Receiving on behalf of demat account holders non-cash corporate benefits, such as, allotment ofbonus and rights shares in electronic form or securities resulting upon consolidation, stock splitor merger / amalgamation of companies.




What is a ´spotµ transaction?

In a spot market, transactions are settled ´on the

spotµ. Once a trade is agreed upon, the settlement ²

i.e. the actual exchange of money for goods ² takesplace with the minimum possible delay. When a

person selects a shirt in a shop and agrees on a price,

the settlement

(exchange of funds for goods) takes place immediately.That is a spot market.



In a forward contract

Two parties irrevocably agree to settle a trade at a future

date,for a stated price and quantity. No money changes

hands at the time the trade is agreed upon.

Suppose a buyer L and a seller S agree to do a trade in 100 grams of gold on 31 Dec

2001 at Rs.5,000/tola. Here, Rs.5,000/tola is the ´forward price of 31 Dec 2001

Goldµ.

The buyer L is said to be long and the seller S is said to be short.

Once the contract has been entered into, L is obligated to pay S Rs. 500,000 on 31

Dec 2001, and take delivery of 100 tolas of gold. Similarly, S is obligated to be ready toaccept Rs.500,000 on 31 Dec 2001, and give 100 tolas of gold in exchange.

What are ´derivativesµ?



What are derivatives ?

A derivative is a financial instrument which derives its

value from some other financial price. This ´other

financial priceµ is called the underlying.

A wheat farmer may wish to contract to sell his harvest at a future date toeliminate the risk of a change in prices by that date. The price for such a

contract would obviously depend upon the current spot price of wheat. Such atransaction could take place on a wheat forward market. Here, the wheat

forward is the ´derivativeµ and wheat on the spot market is ´the underlyingµ.The terms ´derivative contractµ, ´derivative productµ, or ́ derivativeµ are used

interchangeably.

The most important derivatives are futures and options.



Continued

Derivative securities are available on stocks,

stock indices, bullion, index, currency, bonds,

interest rates, commodities.

Very important financial instruments for risk

management as they allow risks to be separated

and traded and act as a form of insurance. Risks

in trading derivatives may change depending onwhat happens to the underlying asset

Wh i f d i f l F



Why is forward contracting useful -FuturesForward contracting is valuable in hedging and speculation.

A futures contract is a forward contract which trades on anexchange.

The classic hedging application is that of a wheat farmer forward-selling his

harvest, at the time of sowing, in order to eliminate price risk. Conversely, a bread

factory could buy wheat forward in order to assist production planning without therisk of price fluctuations.

If a speculator has information or analysis which forecasts an upturn in a price, then shecan adopt a buy position (go long) on the forward market instead of the cash market.

The speculator would wait for the price to rise, and then close out the position on theforward market (by selling off the forward contracts).

This is a good alternative to speculation using the spot market, which involves buying

wheat, storing it for a while, and then selling it off. A speculator prefers transactionsinvolving a forward market because

(a) the costs of taking or making delivery of wheat is avoided, and

(b) funds are not blocked for the purpose of speculation.





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