Scribd
Upload
3K views12 pages

Saransh FSCM Spom Set C

Uploaded by

Ritika Surve
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
3K views12 pages

Saransh FSCM Spom Set C

Uploaded by

Ritika Surve
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Referencer for Quick

Revision
Final Course Paper-6B:
Financial Services and Capital
Markets
A compendium of subject-wise capsules published in the
monthly journal “The Chartered Accountant Student”

Board of Studies
(Academic)
ICAI
INDEX
Page No. Edition of Students’ Journal Topics
1-2 May 2022 Global Financial Market
2-4 May 2022 Capital Market – Primary
4-7 May 2022 Capital Market – Secondary
8-10 May 2022 Money Market
FINANCIAL SERVICES AND CAPITAL MARKETS
CA FINAL - PAPER 6B - FINANCIAL SERVICES AND CAPITAL MARKETS
The objective of the Elective Paper 6B – Financial Services and Capital Markets in the CA Final course is to enable the
students to gain knowledge of financial services rendered by intermediaries and banks and their role and activities in the
financial market in general and the capital market in particular. The purpose is also to help the students in acquiring such
knowledge to address issues in practical scenarios.
In this respect, an attempt has been made to acquaint the students about Global Financial Markets, Capital Market –
both Primary and Secondary, and Money Market in a pictorial form to help them to have a quick revision of the chapters.
Furthermore, students may please note that this capsule should not be considered a substitute for the study material.
Therefore, students are advised to refer to the November 2020 edition of the study material for Part A and July 2021
edition for Part B for May 2022 examination.

CHAPTER 1 – GLOBAL FINANCIAL MARKET


CHAPTER OVERVIEW STAKEHOLDERS IN FINANCIAL MARKET

*OUSPEVDUJPOUP(MPCBM
Role of Financial Market in 3ULPDU\VWDNHKROGHUVLQÀQDQFLDOPDUNHW
Economic Development of
Financial Market
a country
Mutual fund
Organisations/
Indian Financial Shareholders Lenders Companies
Stakeholders in holders/fund
Financial Market Market Scenario managers

Service providers in Financial Market


considering international scenario
MAJOR TYPES OF FINANCIAL MARKETS
Merchant Banker
The functions of merchant banker include – submitting offer
Stock Bond Commodities Derivative documents to SEBI, due diligence i.e. certifying that all the
Market Market Market Market disclosures made in the draft prospectus or letter of offer are
true and fair and will enable the investors to make an informed
decision, etc.
In international scenario, especially in USA, top Merchant Bankers
IMPORTANCE OF FINANCIAL MARKETS BSF .FSSJMM MZODI  $JUJHSPVQ  (PMENBO 4BDIT  +1 .PSHBO BOE
ͳFSF BSF NBOZ TPDJBM CFOFmUT UIBU mOBODJBM NBSLFUT GBDJMJUBUF  Morgan Stanley. They provide services to top companies in the
including: world.

They provide individuals, companies, governments and quasi- Brokers


government organisations with access to capital;
Stock Brokers are individuals who participate in the stock market
on behalf of clients. They buy and sell shares on behalf of the
clients on their instructions. In order to actively participate in the
People with surplus funds for investment get channels for investment capital market, they should be SEBI registered.
and are assured of fair treatment as there is a regulator. (MPCBMMZ NBSHJOmOBODJOHJTQPQVMBS JOXIJDI NBOZMBSHFCSPLJOH
IPVTFTQSPWJEFmOBODJOHGBDJMJUJFTUPDMJFOUTXIPCPSSPXNPOFZUP
invest in stocks. Therefore, Stock exchanges monitor the extent to
which brokers are lending in line with their net worth.
Financial markets create jobs as there are many people
involved in direct and indirect activities.
Underwriters

ROLE OF FINANCIAL MARKET IN ECONOMIC Underwriters are those persons who assume the risk of others.
In capital market, in case of new issues, they assume risk by
DEVELOPMENT OF A COUNTRY guaranteeing that in case the shares are not subscribed fully by
the public, the unsubscribed portion will be subscribed by the
Puts savings into more productive use underwriter itself.

Depositories
Determines the price of securities Depository is an institution which maintains investors account in
electronic form. One of the main functions of the Depository is
to transfer the ownership of shares from one investor to another
whenever the trading of shares takes place.
.BLFTmOBODJBMBTTFUTMJRVJE There are two types of depositories in India which are known
as NSDL (National Securities Depository Limited) and CSDL
(Central Depository Services (India) Limited). Globally,
depositories provide the same set of services as has been rendered
Lowers the cost of transactions by CDSL and NSDL.

The Chartered Accountant Student May 2022 07


1
FINANCIAL SERVICES AND CAPITAL MARKETS
Custodians Pension Fund Regulatory and
Custodians provide custodial services for safe keeping of securities. Development Authority (PFRDA)
After liberalisation in 1991, Foreign Institutional Investors (FIIs) To be a model Regulator for promotion and development of an
were allowed to invest in the Indian Capital Market. Most of the organised pension system to serve the old age income needs of
FII business in India is routed through foreign custodians. people on a sustainable basis.
The main law which governs the establishment, maintenance, and
termination of pension plans in the United States is the Employee
5HJXODWRUVLQÀQDQFLDOPDUNHW Retirement Income Security Act (ERISA).

Securities and Exchange Board of India (SEBI)


Administrative authorities to facilitate the
SEBI was born in 1992. The basic objective was to protect the ÀQDQFLDOPDUNHW
interest of investors in securities and promote the development of
securities market.
Securities Exchange Commission (SEC) in USA performs more or "TTPDJBUJPOPG.VUVBMGVOETPG*OEJB ".'*  The Association
less the same functions as given to SEBI. But the stark difference of Mutual Funds in India (AMFI) is dedicated to developing the
is the amount of penalty. SEC can impose an unlimited amount of Indian Mutual Fund Industry on professional, healthy and ethical
mOFXIJDI4&#*DBOOPU lines and to enhance and maintain standards in all areas with a
view to protecting and promoting the interests of mutual funds
and their unit holders.
Reserve Bank of India
The preamble of the Reserve Bank of India describes its main
functions as to regulate the issue of Bank Notes and keeping of 'PSFJHO &YDIBOHF %FBMFST "TTPDJBUJPO PG *OEJB '&%"*  It’s
reserves with a view to securing monetary stability in India and major activities include framing of rules, governing the conduct of
generally to operate the currency and credit system of the country inter-bank foreign exchange business among banks vis-à-vis public
to its advantage. and liaison with RBI for reforms and development of forex market.
Federal Reserve (Fed) in the USA’s policies is primarily driven by
HSPXUIBOEFNQMPZNFOUmHVSFT BUUIFFYQFOTFPGJOnBUJPO0OUIF
other hand, we have the RBI, whose policies are primarily driven Fixed Income Money Market and Derivative Association of
by inflation, at the expense of growth. *OEJB '*..%" FIMMDA is a voluntary market body for the
bond, money and derivatives markets.
Insurance Regulatory and
Development Authority of India (IRDAI) "TTPDJBUJPO PG *OWFTUNFOU #BOLFST PG *OEJB "*#*  AIBI was
The main aim of the Insurance Regulatory and Development promoted to exercise overall supervision over its members in
Authority of India is to protect the interest of holders of Insurance the matters of compliance with statutory rules and regulations
policies to regulate, promote and ensure orderly growth of pertaining to merchant banking and other activities.
Insurance industry and for matters connected therewith or Internationally, International Association of Investment
incidental thereto. Bankers (IAIB) since its inception in 1994 has leveraged its
In USA, insurance is almost regulated by the individual state collective expertise, best practice knowledge, industry insights,
governments. In Canada, Office of the Superintendent of and global reach to assist clients in executing mergers, acquisitions,
Financial Institutions Canada (OSFI) sets the minimum regulatory divestitures, and strategic partnerships.
requirements and expectations to support policy holder and
creditor protection, giving due regard to the need to allow
institutions to compete effectively.

CHAPTER 3 – CAPITAL MARKET - PRIMARY


CHAPTER OVERVIEW Functions of Capital Market
$BQJUBM.BSLFUJTCBTJDBMMZBQBSUPGmOBODJBMNBSLFUXIFSFCVZJOH
Functions of Major constituents Segments of and selling of long term debt or equity takes place. The main role
Capital Market of Capital Market Capital Market of capital market is providing a platform where long term funds are
raised. The major functions are:

To mobilise resources for investments.


Capital Market Aspects Of
Instruments Primary Market
To facilitate buying and selling of securities.

To facilitate the process of efficient price discovery.

To facilitate settlement of transactions in accordance with the


predetermined time schedules.

08 May 2022 The Chartered Accountant Student

2
FINANCIAL SERVICES AND CAPITAL MARKETS
Segments of Capital Markets Aspects of Primary Market
Primary market is a market where buying and selling Different types of securities issued
PG OFX TFDVSJUJFT UBLF QMBDF GPS UIF mSTU UJNF  *O PUIFS in the primary market
XPSET  UIF NBSLFU  XIFSF UIF mSTU QVCMJD PĉFSJOH PG
equity shares or convertible securities by a company
take place which is followed by the listing of a company’s
shares on a stock exchange is called a primary market.
It is also known as ‘initial public offering’ (IPO). Issue of Public Right Bonus Private
further capital by companies whose shares are already Issue Issue Issue Placement
listed on the stock exchange also comes within the ambit
of Primary market.
Initial Further Preferential 2VBMJmFE
Public Public Issue Institutional
Secondary market is a market in which purchase and Offer Offer Placement
sale of securities which are already issued to the public for
UIFmSTUUJNFBOEMJTUFEPOUIFTUPDLFYDIBOHFUBLFTQMBDF
Therefore, secondary markets are called stock exchanges
and over-the-counter market. When the securities are (1) Types of Offer Document
USBOTGFSSFEGSPNUIFmSTUIPMEFSUPBOPUIFS UIFTFDVSJUJFT
are said to be traded in secondary markets.
Draft offer document JT BO PĉFS EPDVNFOU mMFE XJUI 4&#* GPS
TQFDJGZJOHDIBOHFT JGBOZ JOJU CFGPSFJUJTmMFEXJUIUIF3FHJTUSBS
of Companies (ROCs).
Capital Market Instruments
4IBSFT Share is a type of security, Red herring prospectus is an offer document used in case of a
XIJDIϰTJHOJmFTPXOFSTIJQJOBDPSQPSBUJPOϰBOE book built public issue. It contains all the relevant details except
represents a claim on the part of the UIBUPGQSJDFPSOVNCFSPGTIBSFTCFJOHPĉFSFE*UJTmMFEXJUI30$
corporation’s assets and earnings. As one before the issue opens.
acquires more shares, his or her ownership
stake in the company becomes greater.
Prospectus is an offer document in case of a public issue, which
1SFGFSFODF 4IBSFT These shares form part of has all relevant details including price and number of shares or
the share capital of the company which carry a convertible securities being offered.
preferential right to be paid in case a company
goes bankrupt or is liquidated. Preference
shareholders have got very negligible voting Letter of offer is an offer document in case of a Rights issue of
rights. But they do have a higher claim on the TIBSFTPSDPOWFSUJCMFTFDVSJUJFTBOEJTmMFEXJUI4UPDLFYDIBOHFT
assets and earnings of the company. before the issue opens.

%FCFOUVSFT#POET One of the most popular


long term debt securities among corporates Abridged prospectus is an abridged version of offer document
is bond. In case of a bond issue, the buyer of in public issue and is issued along with the application form of a
bonds lends the required amount to the issuer public issue. It contains all the salient features of prospectus.
of bonds.

"NFSJDBO %FQPTJUPSZ 3FDFJQU "%3T  An Abridged letter of offer is an abridged version of the letter of offer.
American Depository Receipt (ADR) is a It is sent to all the shareholders along with the application form.
negotiable receipt which represents one or more
depository shares held by a US custodian bank,
which in turn represent underlying shares of Shelf prospectus is a prospectus which enables an issuer to make
non-US issuer held by a custodian in the home BTFSJFTPGJTTVFTXJUIJOBQFSJPEPGZFBSXJUIPVUUIFOFFEPGmMJOH
country. a fresh prospectus every time. This facility is available to public
(MPCBM %FQPTJUPSZ 3FDFJQUT (%3T  (MPCBM sector banks, scheduled banks and Public Financial Institutions.
%FQPTJUPSZ 3FDFJQUT BSF OFHPUJBCMF DFSUJmDBUFT
issued by a depository based outside India to
non-resident investors with publicly traded
Placement document is an offer document for the purpose of
equity shares or foreign currency convertible
2VBMJmFE*OTUJUVUJPOBM1MBDFNFOUBOEDPOUBJOTBMMUIFSFMFWBOUBOE
bonds of the issuer in India as underlying
material disclosures.
security.

%FSJWBUJWFT " EFSJWBUJWF JT B mOBODJBM


instrument which derives its value from some
PUIFS mOBODJBM QSJDF ͳJT APUIFS mOBODJBM QSJDF
is called the underlying. The most important
derivatives are futures and options.

The Chartered Accountant Student May 2022 09


3
FINANCIAL SERVICES AND CAPITAL MARKETS
(2) Capital Market Intermediaries (5) Anchor Investors
"ODIPS JOWFTUPST BSF 2VBMJmFE *OTUJUVUJPOBM #VZFST 2*#  XIP
Investment purchases shares one day before the IPO opens. They help in
Banks BSSJWJOH BU B GBJS QSJDF BOE JOTUJM DPOmEFODF JO UIF NJOET PG UIF
investors. As the name suggests, they are supposed to ‘anchor’ the
JTTVFCZBHSFFJOHUPTVCTDSJCFUPTIBSFTBUBmYFEQSJDFTPUIBUPUIFS
Debenture Portfolio investors may know that there is demand for the shares offered.
Trustees Managers
(6) Private Placement of Shares
Private placement is the process of raising capital directly from
Depository Investment institutional investors. A company that does not have access
Participants Advisors to or does not wish to make use of public capital markets can
JTTVF TUPDLT  CPOET  PS PUIFS mOBODJBM JOTUSVNFOUT EJSFDUMZ UP
institutional investors. Institutional investors include mutual
funds, pension funds, insurance companies, and large banks.
Investment
Custodians Funds (7) Disinvestment
It means sale of equity shares of PSU’s which leads to dilution of
govt.’s shares in such PSU’s. The disinvestment programme was
Brokerage JOJUJBUFECZUIF(PWUPG*OEJBJO
Firms
ͳF QVSQPTF PG UIF EJTJOWFTUNFOU QSPHSBNNF PG UIF (PWU PG
India was to garner funds which can be utilised for development
purpose. Another purpose was to make the loss making PSUs
(3) Applications Supported by Blocked Amount (ASBA) come out of the doldrums and contribute to the Indian economy.
ASBA is basically an application by investors for subscribing to an
issue containing an authorisation to block the application money (8) Right Issue
in a bank account. Therefore, one’s money stays in one’s bank
account until allotment of the issue takes place. There is no hassle The rights issue involves selling of securities to the existing
of refunds - in case of less or no allotment of shares. The advantage shareholders in addition to their current holding at a discount.
is that one gets to earn interest even on the blocked amount until
it is debited for allotment. (9) Exit Offers
With reference to capital market, the term ‘exit offers’ refers to
(4) Green Shoe Option delisting. Delisting is actually the reverse of listing. So, what is the
meaning of the term listing? Listing is basically a platform provided
*UJTBOPWFSBMMPUNFOUNFDIBOJTN(SFFO4IPF0QUJPOJTBOPQUJPO to the newly issued securities of the company in which sale and
to allocate shares in excess of the shares which have already been purchase of the securities of a company takes place. On the other
issued to the public. It is a price stability mechanism to provide hand, delisting means to permanently remove the securities of a
post listing price stability to an initial public offering. listed company from a stock exchange.

CHAPTER 4 – CAPITAL MARKET - SECONDARY


CHAPTER OVERVIEW Transaction in securities is safe in the secondary market –
Transactions executed in the secondary market are safe because all
the trading takes place in an electronic system which is highly secure.
Functions of Stock Market
Secondary Market Organisation in India
Contributes to economic growth – It contributes to economic
Demutualisation of Share Trading in growth through allocation of funds to the most efficient sector
Stock Exchanges Secondary Market through the process of disinvestment to reinvestment.

Functions of Secondary Market Motivating people to invest in equity shares – Efficient secondary
market motivates people to invest in the securities market.
Secondary market is a market where shares initially issued are traded.
Trading of securities takes place when securities are purchased or
sold. This market is also known as stock market. In India, secondary
market consists of recognised stock exchanges operating under rules, It ensures safety and measure of fair dealing to protect investors’
regulations and guidelines approved by the government. Various interest.
functions are as follows:

Economic Indicator – Every major change in the economy either It induces companies to improve their performance since market
due to government policy or any major international event has a price of shares showing at the stock exchanges is the indicator
bearing on the secondary/stock market. that reflects a company’s performance and is easily available to the
investors.
Valuation of Securities – Secondary market helps in the valuation
of securities through its demand and supply.

10 May 2022 The Chartered Accountant Student

4
FINANCIAL SERVICES AND CAPITAL MARKETS
STOCK MARKET ORGANISATION IN INDIA

Stock Market Organisation in India

Custodial Depository
Stock Broking
Services Services

Depository
Broking Sub-Broking Trading and Foreign Trading and
Clearing Brokers Clearing
Members Members
of Currency
Derivative CDSL NSDL
Segment

Depository
Participant

Banks and
Financial
Institutions

The stock market organisation in India as shown in the above diagram


is discussed as below: Demutualisation of Stock Exchanges
A demutualised stock exchange is basically a company form of
Stock Broking – Brokers are members of stock exchange. organisation in which the company goes public and owners will be
They enter into share trading transactions either on their given equity shares. Advantages of Demutualisation are as follows:
own account or on behalf of their clients. They have to get
registration from SEBI before starting their operations
and have to comply with the prescribed code of conduct. Enable stock exchanges to have more access to
funds for investment in technology.

Custodians – The related services provided by them are Facilitate merger and acquisition of other exchanges
as follows: and alliances with other stock exchanges.
Maintaining accounts of the securities of a client.
$PMMFDUJOH UIF CFOFmUTSJHIUT BDDSVJOH UP UIF DMJFOU JO
#FOFmUUPNFNCFSTPGUIFTUPDLFYDIBOHFBTUIFJS
respect of securities.
asset becomes liquid and members get share of the
Keeping the client informed of the actions taken by issuer QSPmUTNBEFCZFYDIBOHFTUISPVHIEJWJEFOET
of securities.
Maintaining and reconciling records of the services as
referred above. Makes operations of the stock exchanges transparent.

Transparency brings better governance.


Depository System – A major reform of the Indian stock
markets has been the introduction of the depository
system and scripless trading mechanism. The Depository
"DU XBT QBTTFE JO  UP QSPWJEF GVSUIFS mMMJQ UP UIF Share Trading in Secondary Market
process.
The issuers should enter into an agreement with the 0QFOB#BOL"DDPVOUͳFmSTUTUFQUPXBSETJOWFTUJOHJO*OEJBO
depository to enable the investors to dematerialise the stock market is to open a bank account. A bank account is required
securities. to hold the funds which would be investing in secondary market.

0QFO B %FNBU "DDPVOU Just as a bank account is required to


hold the funds, a Demat Account is required to hold and trade the
securities i.e. shares, debentures and mutual funds electronically.

The Chartered Accountant Student May 2022 11


5
FINANCIAL SERVICES AND CAPITAL MARKETS
0QFO B USBEJOH BDDPVOU After opening a Demat account, a Circuit Breaker
trading account is required to trade in securities market. A trading/ Trigger limit Trigger Time Market halt duration
brokerage account allows you to purchase stocks, bonds, mutual
Before 1 p.m. 45 minutes
funds, and other units by paying the broker to do the trading on
your behalf. At or after 1 p.m. upto 15 minutes
10%
2.30 p.m.
At or after 2.30 p.m. No halt
5SBEJOH .FDIBOJTN With the advent of technology, trading at Before 1 p.m. 1 hour 45 minutes
stock exchanges are now taking place through an open electronic
limit order book, in which order matching is done by the trading At or after 1 p.m. upto 45 minutes
15%
computer. The buy or sell orders placed by the investors are 2 p.m.
matched automatically with the order which is best for them. On or after 2 p.m. Remainder of the day
20% Any time during market Remainder of the day
hours
1BZNFOU UP #SPLFS GPS QVSDIBTF PG TIBSFTTFDVSJUJFT The
payment for the shares purchased is required to be done prior to III. Trading and Settlement
the pay-in date for the relevant settlement or as otherwise provided
in the Rules and Regulations of the Exchange. Rolling settlement is basically settlement of transaction in stock
market in a certain number of days after the trade is agreed.

%FMJWFSZPGTIBSFTUPUIFCSPLFSGPSTBMF The delivery of shares Rolling Settlement


has to be done prior to the pay-in date for the relevant settlement or Activity Description of Activities Day Timings
as otherwise provided in the Rules and Regulations of the Exchange
and agreed with the broker/sub-broker in writing. Trading by investors T day
(i.e.
Trading
Trading
day)
Shelf prospectus is a prospectus which enables an issuer to make
BTFSJFTPGJTTVFTXJUIJOBQFSJPEPGZFBSXJUIPVUUIFOFFEPGmMJOH National Securities Clearing T+1 By 1.30
a fresh prospectus every time. This facility is available to public Corporation Ltd. (NSCCL) p.m.
sector banks, scheduled banks and Public Financial Institutions. DPOmSNT UIF USBEF GSPN
Clearing stock exchange. Then,
NSCCL processes and
Receipt of money for a sale transaction and receipt of shares for EPXOMPBET PCMJHBUJPO mMFT
BCVZUSBOTBDUJPO Brokers were required to make payment or give to brokers.
delivery within two working days of the pay-out day. However, as Pay-in of securities and T+2 By 10.30
settlement cycle has been reduced from T+3 rolling settlement to funds to NSCCL. a.m.
Settlement
T+2, the pay out of funds and securities to the clients by the broker NSCCL gives pay out of By 1.30
will be within 24 hours of the pay-out. Recently, stock market has securities and funds. p.m.
shifted to a shorter settlement cycle of T+1.
As the stock market is shifted to T + 1 recently, it would mean that
trades will be settled the day after the transaction. So, a buyer would
get the shares in the demat account and the seller would get the sale
Buy Back of Shares proceeds the next day.

The buyback is a process in which a company uses its surplus cash to


IV. National Securities Clearing Corporation Limited
buy shares from the public. It is almost the opposite of initial public
(NSCCL)
PĉFS JO XIJDI TIBSFT BSF JTTVFE UP UIF QVCMJD GPS UIF mSTU UJNF *O
buyback, shares which have already been issued are bought back The NSCCL undertakes the counter party risk of each member
from the public. And, once the shares are bought back, they get and guarantees settlement. Settlement guarantee is a guarantee
absorbed and cease to exist. provided by the clearing corporation for the settlement of all
trading of products in the stock exchange.
The organisations linked with Clearing Corporation in the clearing
Risk Management in Secondary Market and settlement process are discussed as below:

I. Trading Rules and Regulations Custodians/ Clearing banks Depositories


Clearing Members
Strict rules and regulations have been framed to prevent unfair
trading practices and insider trading. Stock exchanges impose N S C C L They act as a link They hold
different types of margins on brokers for individual stocks, takes trading between clearing securities in
depending upon the exposures taken by these brokers in these information from corporation dematerialised
stocks, both on ownership basis and on behalf of clients. the exchange and clearing form for the
and pass the member. Every investors in
trade details clearing member UIFJS CFOFmDJBSZ
II. Circuit Breakers to Curb Excess Volatility to custodians/ is required account. Every
clearing members. to maintain a clearing member
Circuit Breaker is a temporary halt or suspension of trading in any Custodians clearing account is required
particular stock or index for certain period of time. The move is DPOmSN UIF with one of the to maintain a
basically resorted to curb excess volatility in the stock market. obligations of the clearing banks. clearing pool
parties by netting. account with the
depositories.

12 May 2022 The Chartered Accountant Student

6
FINANCIAL SERVICES AND CAPITAL MARKETS
V. Market Making System %HQHÀWVRIDQHIÀFLHQW'HEW0DUNHWWRWKH
The job of the market maker is to provide liquidity to the stock ÀQDQFLDOV\VWHPDQGWKHHFRQRP\
market by providing a two way quote i.e. a buy and a sell quote.
So, without the presence of market makers, very few trades could ͳFEFCUNBSLFUBMMPXTHPWFSONFOUUPSBJTFNPOFZUPmOBODFUIF
happen. Consequently, companies would have more limited access development activities of the government.
to capital.

VI. Securities Lending and Borrowing It plays an important role in efficient mobilisation and allocation of
resources in the economy.
Securities lending means lending of stocks, derivatives and other
TFDVSJUJFT UP JOWFTUPS PS mSN 4FDVSJUJFT MFOEJOH SFRVJSFT UIF
borrower to pledge, whether cash, security or a letter of credit to
the lender. When a security is lent, the title and the ownership are ͳF(PWFSONFOUTFDVSJUJFTBSFJTTVFEUPNFFUUIFTIPSUUFSNBOE
also transferred to the borrower. MPOHUFSN mOBODJBM OFFET PG UIF HPWFSONFOU  UIFZ BSF OPU POMZ
used as instruments for raising debt, but have emerged as key
VII. Straight Through Processing (STP) instruments for internal debt management, monetary management
and short-term liquidity management.
The concept of Straight Through Processing is designed to
complete the transaction without human intervention. Straight
UISPVHIQSPDFTTJOH 451 JTBOJOJUJBUJWFUIBUmOBODJBMDPNQBOJFT
use to optimise the speed at which they process transactions. This The debt market also provides greater funding avenues to public
is performed by allowing information that has been electronically sector and private sector projects and reduces the pressure on
entered to be transferred from one party to another in the JOTUJUVUJPOBMmOBODJOH
settlement process without manually re-entering the same pieces
of information repeatedly over the entire sequence of events.
It also enhances mobilisation of resources by unlocking illiquid
retail investments like gold.
VIII. Margin Trading
Margin Trading is a facility given to the investors in which they can
JOWFTUJOTIBSFTCZQBSUmOBODJOHGSPNUIFCBOL*OPUIFSXPSET  3FEVDUJPO JO UIF CPSSPXJOH DPTU PG UIF (PWFSONFOU BOE FOBCMF
investors can provide some amount of money from their pocket to mobilisation of resources at a reasonable cost.
JOWFTUJOTIBSFT BOESFTUPGUIFBNPVOUJTmOBODFECZUIFCBOLT

IX. Short Selling Different types of risks with regard to debt


Short Selling means selling shares without owning it. In other securities
words, the task of short sellers is to borrow the shares (generally
through the clearing corporation of an exchange) and sell them. %FGBVMU 3JTL In default *OUFSFTU 3BUF 3JTL It
The borrowed shares which have been sold are bought back when risk, an issuer of a bond may DBO CF EFmOFE BT UIF
prices are lower. The shares are then returned back to the lender be unable to make timely risk emerging from an
BOEUIFFYDFTTQSPmUJTQPDLFUFECZUIFTIPSUTFMMFS payment of interest or adverse change in the
principal on a debt security interest rate prevalent in
or to otherwise comply with the market so as to affect
Indian Debt Market the provisions of a bond the yield on the existing
#BTJDBMMZ EFCUNBSLFUJTBmOBODJBMNBSLFUXIFSFCVZJOHBOETFMMJOH indenture and is also referred instruments.
of debt securities takes place. to as credit risk.

&ODVVLÀFDWLRQRI,QGLDQ'HEW0DUNHW Reinvestment Counter Party 1SJDF 3JTL It


3BUF 3JTL It can 3JTL It is the refers to the
CF EFmOFE BT UIF normal risk possibility of
Government Securities Market (G-Sec Market) associated with any
probability of a not being able
fall in the interest transaction and to receive the
t *U DPOTJTUT PG DFOUSBM BOE TUBUF HPWFSONFOU TFDVSJUJFT *U
rate resulting in refers to the failure expected price
means that, loans are being taken by the central and state or inability of the
a lack of options on any order due
government. It is also the most dominant category in the to invest the opposite party to to an adverse
Indian debt market. interest received the contract to movement in the
at regular intervals deliver either the prices.
Bond Market at higher rates at promised security
comparable rates or the sale-value
t *UDPOTJTUTPG'JOBODJBM*OTUJUVUJPOCPOET DPSQPSBUFCPOET in the market. at the time of
and debentures and Public Sector Unit bonds. These settlement.
CPOETBSFJTTVFEUPNFFUmOBODJBMSFRVJSFNFOUTBUBmYFE
DPTUBOEIFODFSFNPWFVODFSUBJOUZJOmOBODJBMDPTUT

The Chartered Accountant Student May 2022 13


7
FINANCIAL SERVICES AND CAPITAL MARKETS
CHAPTER 5 – MONEY MARKET
CHAPTER OVERVIEW Supply based-sources influence uses
Banks are generally the main sources of funds in the money
market. Commercial Banks are the main supplier of funds in
Basics of Money Market Money Market Money Market Instruments especially RBI which issues Treasury
Money Market Participants Instruments #JMMTPOCFIBMGPGUIF(PWFSONFOUPG*OEJB

Not many instruments


(PWFSONFOU Unlike European Market, only few money market instruments are
CRR and Determination of
Securities available in India i.e. Treasury bill, commercial papers, commercial
SLR Interest Rates
Market CJMM DFSUJmDBUFPGEFQPTJUBOEDBMMOPUJDFNPOFZJO*OEJB

Reserve requirements
Recent
Repo and
Development in ͳFSFBSFmYFESFTFSWFSFRVJSFNFOUTJODBTFPG$BTI3FTFSWF3BUJP
Reverse Repo
Money Market (CRR) and Statutory Liquidity Ratio (SLR) which banks have to
maintain at all times. CRR is the reserve which banks have to
keep with RBI. Whereas, SLR is the reserve which banks have to
keep with themselves, thus, restricting the flow of money market
instruments.
Concept of Money Market
ͳF NPOFZ NBSLFU NBZ CF EFmOFE BT B DFOUSF JO XIJDI mOBODJBM
Lack of transparency
institutions congregate for the purpose of dealing impersonally in
NPOFUBSZBTTFUT*OBXJEFSTQFDUSVN BNPOFZNBSLFUDBOCFEFmOFE There is lack of transparency in money market because the
BTBNBSLFUGPSTIPSUUFSNNPOFZBOEmOBODJBMBTTFUTUIBUBSFOFBS secondary market is not very well developed. Since, the
substitutes for money. The term short-term means generally a period transactions are done Over the Counter (OTC), there is lack of
upto one year and near substitutes to money is used to denote any transparency and public information.
mOBODJBM BTTFU XIJDI DBO CF RVJDLMZ DPOWFSUFE JOUP NPOFZ XJUI
minimum transaction cost.
Commercial transactions are mainly in cash
Since most of the transactions are done through cash, the
3UH&RQGLWLRQVIRUDQ(IÀFLHQW0RQH\0DUNHW circulation of funds in money market instrument is restricted.
A well-developed money market has following characteristics–
Heavy Stamp duty limiting use of exchange bills
6TFTBCSPBESBOHFPGmOBODJBMJOTUSVNFOUT USFBTVSZCJMMT CJMMTPG
exchange, etc). In case of issuance of commercial bills, stamp duty is paid in case
of bill of exchange, thus, limiting their use. Further, in case of
Commercial Paper (CP), the stamp duty rates applicable to non-
Channelises savings into productive investments (like working CBOLFOUJUJFTBSFmWFUJNFTIJHIFSUIBOUIPTFBQQMJDBCMFUPCBOLT
capital).

Money Market Participants or Intermediaries


1SPNPUF mOBODJBM NPCJMJUZ JO UIF GPSN PG JOUFS TFDUPSBM nPXT PG
funds. Reserve Bank of India (RBI)
RBI is the most important participant of money market which
Facilitate the implementation of monetary policy by way of open takes requisite measures to implement monetary policy of the
market operations. country. As the Central bank, RBI regulates the money market
in India and injects liquidity in the banking system, when it is
EFmDJFOUPSDPOUSBDUTUIFTBNFJOPQQPTJUFTJUVBUJPO
Rigidities in the Indian Money Market Scheduled Commercial Banks (SCBs)
SCBs form the nucleus of money market. They are the most
Markets are not integrated
important borrower/supplier of short-term funds. They mobilise
Money market in India is not well integrated. There is a well- the savings of the people through acceptance of deposits and
developed secondary capital market in India, which does not exist lend it to business houses for their short-term working capital
in money market. requirements.

Players restricted Co-operative Banks

0OMZ (PWFSONFOU  CBOLT  '**  BOE CJH DPNQBOJFT BSF JOWPMWFE Functions similarly as the commercial banks.
in the money market. Retail investors are rarely interested in
the money market, making it restricted to only corporates, the Financial and Investment Institutions
(PWFSONFOU BOE'PSFJHO*OTUJUVUJPOBM*OWFTUPST 'MMT 
ͳFTF JOTUJUVUJPOT FH -*$  65*  (*$  %FWFMPQNFOU #BOLT FUD 
have been allowed to participate in the call money market as
lenders only.

14 May 2022 The Chartered Accountant Student

8
FINANCIAL SERVICES AND CAPITAL MARKETS
Corporates
t 5#T DBO CF QVSDIBTFE CZ BOZ QFSTPO  mSN 
Companies create demand for funds from the banking system. Eligibility
company, body corporate and institutions.
They raise short-term funds directly from the money market by
issuing commercial paper. Moreover, they accept public deposits
and also indulge in inter-corporate deposits and investments.
t ͳFUSFBTVSZCJMMTBSFSFQBJEBUQBSPOUIFFYQJSZ
Mutual Funds Repayment of their tenor at the office of the Reserve Bank
of India, Mumbai.
Mutual funds also invest their surplus funds in various money
market instruments for short periods. They are also permitted
to participate in the Call Money Market. Money Market Mutual
'VOETIBWFCFFOTFUVQTQFDJmDBMMZGPSUIFQVSQPTFPGNPCJMJTBUJPO t "MM UIF USFBTVSZ CJMMT BSF IJHIMZ MJRVJE
of short-term funds for investment in money market instruments. Availability instruments available both in the primary and
secondary market.
Discount and Finance House of India
The Discount and Finance House of India Limited (DFHI) has
been set up by the Reserve Bank of India jointly with public sector
CBOLT BOE BMMo*OEJB mOBODJBM JOTUJUVUJPOT UP EFBM JO TIPSUUFSN t 'PSUSFBTVSZCJMMTUIFEBZDPVOUJTUBLFOBT
Day Count
money market instruments. days for a year.

Money Market Instruments


Minimum
Amount of t 5#TBSFJTTVFEJOMPUTPGR25,000.
Call/Notice Money Bids
Call money market, or inter-bank call money market, is a segment
of the money market where scheduled commercial banks lend or
borrow on call (i.e., overnight) or at short notice (i.e., for period upto
 EBZT  UP NBOBHF UIF EBZUPEBZ TVSQMVTFT BOE EFmDJUT JO UIFJS Commercial Bills
cash-flows.
A commercial bill is one which arises out of a genuine trade
Location: The core of the Indian money market structure transaction, i.e. credit transaction. When the goods are sold, the
is the inter-bank call money market which is centralised seller draws a bill of exchange (BOE) on the buyer to pay a certain
primarily in Mumbai, with sub-markets in Delhi, Kolkata, amount on a particular date. The buyer then accepts the BOE, signs it
Chennai and Ahmedabad. and sends it to the seller. The seller on the maturity date presents the
BOE to the buyer and collects its payment. It is basically a negotiable
instrument and issued for a short period generally ranging from 3 to
Duration: ͳF BDUJWJUJFT JO UIF DBMM NPOFZ BSF DPOmOFE 6 months.
generally to inter-bank business, predominantly on an
overnight basis, although a small amount of business,
known as notice money was also transacted side by side &HUWLÀFDWHRI'HSRVLWV
with call money with a maximum period of 14 days.

t "MM TDIFEVMFE CBOLT FYDFQU 33#T BOE -PDBM


Area Banks) are eligible to issue CDs. It can
Participants:
Eligibility be also be issued by select all India Financial
a. Those who can both borrow as well as lend in the
Institutions.
market are RBI, Commercial Banks, Co-operative
banks and Primary Dealers.
b. Non-bank institutions (other than PDs) are not
permitted in the call/notice money market.
t ͳF$%TDBOCFJTTVFECZTDIFEVMFEDPNNFSDJBM
banks (excluding RRBs) at a discount to face
Term value for a period from 7 days to one year.
Treasury Bills
Treasury Bills (TBs) are one of the most popular money market
instruments issued by the Reserve Bank of India on behalf of the t ͳF$%TDBOCFJTTVFEGPSNJOJNVNBNPVOUPG
(PWFSONFOUPG*OEJB5#JMMTBSFHFOFSBMMZJTTVFEUPXBSEPĉTIPSU R1 lakhs to a single investor and multiples of R1
Denomi- lakh thereafter. There is, however, no limit on the
term mismatches in receipts and expenditure. Therefore, the purpose nation
of issuing treasury bills is to tackle short term liquidity problems. total quantum of funds raised through CDs.
Treasury bills are generally issued at discount and redeemed at par.

t $%T JTTVFE JO QIZTJDBM GPSN BSF GSFFMZ


t ͳF USFBTVSZ CJMMT BSF JTTVFE JO UIF GPSN PG transferable by endorsement and delivery.
promissory note in physical form or by credit Transfera- Procedure of transfer of dematted CDs is similar
Form to any other demat securities. There is no lock in
UP4VCTJEJBSZ(FOFSBM-FEHFS 4(- BDDPVOU bility
PS(JMUBDDPVOUJOEFNBUFSJBMJTFEGPSN period for the CDs.

The Chartered Accountant Student May 2022 15


9
FINANCIAL SERVICES AND CAPITAL MARKETS
t $%TNBZCFJTTVFEBUBEJTDPVOUPOGBDFWBMVF Cash Reserve Ratio and Statutory Liquidity
Banks / FIs are also allowed to issue CDs on
floating rate basis, provided the methodology Ratio
Discount of compiling the floating rate is objective,
transparent and market-based. Cash Reserve Ratio
CRR is the amount of reserve which banks have to keep with
Reserve Bank of India (RBI). The current CRR rate is 4%. However,
t #BOLT IBWF UP NBJOUBJO BQQSPQSJBUF SFTFSWF this rate may change from time to time as per the discretion of the
requirements, i.e., Cash Reserve Ratio (CRR) RBI. So, CRR is basically a fraction of the total amount of deposits
Reserve and Statutory Liquidity Ratio (SLR), on the issue collected from the customers and kept as reserve either in cash or
Requirements price of the CDs. as deposits with the central bank. CRR is prescribed according to
the guidelines of the central bank of a country.

Statutory Liquidity Ratio (SLR)


Commercial Paper SLR is the amount of reserve which banks have to keep it with
CPs are unsecured and negotiable promissory notes issued by themselves. Apart from Cash Reserve Ratio (CRR), banks have to
high rated corporate entities to raise short-term funds for meeting maintain a certain portion of their deposits in the form of liquid
working capital requirements directly from the market instead of assets like cash, gold and non-mortgaged securities. The current
borrowing from banks. SLR rate is 18%. However, this rate may change from time to time
as per the discretion of the RBI.

5JNJOHPG$1The timing of the launch of the CP issue Money Market Instruments: G SEC
would be indicated by RBI while giving its permission,
to ensure an orderly approach to the market. (Government Securities)
The Reserve Bank of India issues securities on behalf of the
Denomination and size of CP (PWFSONFOU ͳF UFSN (PWFSONFOU 4FDVSJUJFT JODMVEFT $FOUSBM
Denomination of CP note – R5 lacs or multiples (PWFSONFOU4FDVSJUJFT 4UBUF(PWFSONFOU4FDVSJUJFTBOE5SFBTVSZ
thereof. #JMMTͳFEJĉFSFOUUZQFTPG(PWFSONFOU4FDVSJUJFTBSFo
Maximum size of CP issue – 100% of the issuer's Dated Zero Coupon Floating Rate Capital
working capital (fund based) limits (determined by Securities Bonds or Deep Bonds Indexed
the consortium leader). Discount Bonds
Bonds
Period of CP Issued at par Issued at Issued at face Issued at face
Minimum currency – 7 days from the date of issue. value discount to face value value
Maximum currency – One year from the date of value
issue.
Interest or Do not carry Interest rate is Interest Rate
coupon any mYFE is reckoned
Mode of CP SBUF JT mYFE interest % over a as a
CP has to be issued at a discount to face value. at the predetermined % over
Discount rate has to be freely determined by the time of floating rate Inflation
markets issuances benchmark benchmark
which may be,
/FHPUJBCJMJUZPG$1 CP (being usance promissory may be WPI or CPI
note) would be freely negotiable by endorsement MIBOR or at the
and delivery. I N B M K time of
( I n d i a n issuance.
6OEFSXSJUJOHDPBDDFQUBODF PG $1T The CP Benchmark
issue cannot be underwritten or co-accepted in Swap) curve
any manner. Commercial Banks, however, can The tenor The tenor of the The tenor of The tenor of
provide standby facility for redemption of CPs on of the TFDVSJUZJTmYFE the the
the maturity date.
security is security is security is
mYFE mYFE mYFE
ͳF JTTVFS BOE UIF JTTVF FYQFOTFT The CP issuer
can be a company incorporated under the Companies The security The security is The security is The security is
Act subject to some requirements. The issue of CP is redeemed at redeemed at redeemed at
would be subject to payment of stamp duty. All issue redeemed at face face face
expenses such as dealer's fees, issuing and paying face value on its value on its value on its
agent's fees, rating agency fees, charges levied by banks value on its maturity maturity maturity
for providing redemption standby facilities and any maturity date plus Zero date date
other charges connected with the issue of CPs are to date coupon interest
be borne by the issuer.
on
the security

16 May 2022 The Chartered Accountant Student

10

Referencer for Quick Revision B o a r d o f S t u d i e s ( A c a d e m i c ) I C A I
INDEX Page No. Edition of Students’ Journal Topics 1-2 May 2022 Global Financial Market 2-4 May 2022 Capital Market –
FINANCIAL SERVICES AND CAPITAL MARKETS The Chartered Accountant Student May 2022 07 CA FINAL - PAPER 6B - FINANCIAL
08 May 2022 The Chartered Accountant Student FINANCIAL SERVICES AND CAPITAL MARKETS 5HJXODWRUVLQÀQDQFLDOPDUNHW Admi
FINANCIAL SERVICES AND CAPITAL MARKETS The Chartered Accountant Student May 2022 09 Segments of Capital Markets Aspe
10 May 2022 The Chartered Accountant Student FINANCIAL SERVICES AND CAPITAL MARKETS (2) Capital Market Intermediaries
FINANCIAL SERVICES AND CAPITAL MARKETS The Chartered Accountant Student May 2022 11 STOCK MARKET ORGANISATION IN IND
12 May 2022 The Chartered Accountant Student FINANCIAL SERVICES AND CAPITAL MARKETS Circuit Breaker Rolling Settlement
FINANCIAL SERVICES AND CAPITAL MARKETS The Chartered Accountant Student May 2022 13 V. Market Making System The job of t
14 May 2022 The Chartered Accountant Student FINANCIAL SERVICES AND CAPITAL MARKETS CHAPTER 5 – MONEY MARKET CHAPTER

You might also like