Money Market and Capital Market in India Instruments and Details

Money market refers to lending and borrowing short term funds - funds with a maturity of less then one year. Banks and financial institutions (IDBI, LIC etc) are the main lenders and individuals, companies, Government and others are the main borrowers. The informal market operates through small-scale money-lenders as well as others outside the RBI control.
Money market instruments broadly ar : call money; bill market (both commercial bills and treasury bills) Certificates of Deposit (CD); Commercial paper (CP)
Call Money
Call / Notice money is an amount borrowed or lent on demand for a very short period. If the period is more than one day and upto 14 days it is called 'Notice money' otherwise the amount is known as Call money. No collateral security is required to cover these transactions. The call market enables the banks and institutions to even out their day to day deficits and surplused of money. Commercial banks, Co-operative Banks, mutual funds, primary dealers and others are allowed to borrow and lend in this market Interest rates in the call and notice money market are market determined.
Treasury Bills
Treasury bills are short-term money market instruments, which are issued by the RBI on behalf of the GOI. The GOI uses these funds to meet its short-term financial requirements of the government. T-Bills are soverign zero risk instruments. They are available in primary and secondary market; issued at a discount to face value i.e., investors will buy the T-bill at discount to face value of Rs.100 and on maturity the face value of Rs.100 is received by the investor.
There are T-Bills of 14 days, 91 days, 182 days and 364 days maturity. Minimum investment required in case of T-Bills is Rs 25,000.
A considerable part of the government's borrowings takes place through T bills of various maturities. The usual investors in these instruments are banks. insurance companies and FIs.
Inter Bank Term Money
Inter bank market for deposits of maturity beyound 14 days and upto three months. is referred to as the term money market.
Certificates Of Deposit
After treasury bills, the next lowest risk category investment option is the certificate of deposit (CD) issued by banks and FIs.
Allowed since 1989, a CD is a negotiable promissory note, secure and short term (upto a year) in nature. A nature. A CD is issued at a discount to the face value, the discount rate being negotiated between the issuer and the investor. CDs can be issued by scheduled commercial banks and select all-India Financial Institutions. Minimum amount of a CD shouldbe RS. 1 lakh The maturity period of CDs issued by banks should be not less than 15 days and not more than one year. The FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue.
Inter Corporates Deposits Market
Apart from CPs, corporates also have access to another market called the inter corporate deposits (ICD) market. An ICD is an unsecured loan extended by one corporate to another. Existing mainly as an avenue for low rated corporates. this market allows fund - surplus corporates to lend to other corporates.
Commercial Paper
It represents short term unsecured promissory notes ussued by top rated corporates, primary dealers (PDs), stellite dealers (SDs) and the all-India financial institutions (FIs). The main features of these papers are
corporates having tangible net worth of not less than Rs. 4 crore can issue them
All CPs require credit rating from a credit rating agency
CP can be issued for a minimum period of 15 days and a maximum up to one year.
Minimum amount invested by single investor is Rs. 5 lakhs or multiple there of.
CPs are issued at a discount to face value.
Ready Forward Contracts (Repos)
See Chapter on Monetary Policy
Commercial Bills
Bills of exchange are negotiable instruments drawn by the seller (drawer) of the goods on the buyer (drawee) of the goods for the value of the goods delivered. These bills are called trade bills. These trade bills are called comkmercial bills when they are accepted by commercial banks. If the bill is payable at a future date and the seller needs money immediately, he may approach his bank for discounting the bill.
Discount and Finance House of India (DFHI)
Set up in 1988 by RBI to strengthen the bill market, it buys bills and other forms of short term paper from banks and financial institutions so that surplus and idle cash of institutions can be invested in short term bills. Banks can sell their short term securities DFHI and raise funds
Capital Market
It refers to market for funds with a maturity of 1 year and above, refered to as term funds that includes medium and long term funds. The demand for these funds comes from both the government for its investment purposes and also the private sector, Banks, public financial institutions like LIC and GIC; development financial institution like ICICI, IDBI etc; mutual funds like UTI are the main participants in the market. The elements of the capital market in India are the following;
Government securities
industrial securities that include the shares and debentures of Indian companies-both the primary and secondary market (please refer to the section on stock markets) DFIs (IFCI, IDBI, State Financial Corporations (SFCs); UTI, ICICI (private sector) Financial intermediaries: merchant banks; mutual funds; leasing companies; venture capital companies; and others.
G-Secs (Gilt edged securities)
Government securities, or G-Secs as they are popularly known, are securities issued by the RBI on behalf of the Government of India to meet the latter's borrowing programme for financing fiscal deficit. The G-Sec instrument is in the nature of a bond.
GOI Dated Security can be held by any person, firm, company, corporate body or institution, state Governments, Provident Funds and Trusts. Non - Resident Indians (NRIs, viz., Indian citizens and Individuals of Indian origin), Overseas corporate bodies predominantly owned by NRIs and Foreign Institutional investors registered with SEBI and approved by Reserve Bank of India are also eligible to invest in the Government Stock.
G-Secs have a maturity period ranging from one to 30 years and they carry a coupon rate (interest rate) which is paid semi-annually. they are issued both in demat and physical form.
The minimum investment in G-Secs in Rs 10,000 and certificates are issued in denominations of Rs. 100 each. G-Secs could be of the following types:
Dated Securities: They have fixed maturity and fixed coupon rates payable half yearly and are identified by their year of maturity.
Floating Rate Bonds: They are bonds with variable interest rates with a fixed percentage over a benchmark rate. There may also be a cap and a floor rate attached, thereby fixing a maximum and minimum interest rate payable on it.
Capital Indexed Bonds: They are bonds where the interest rate is a fixed percentage over the wholesale price index. Redemption is linked to the wholesale price index.
DFls or Development Banks
Financial institutions assume a critical role in the provision of long term credit. especially in the absence of a well-developed long-term debt market. The. financial institutions could be categorised into three broad heads, viz., all-India financial institutions (AIFls), state-level institutions and other institutions. Of the three categories, AIFls are the most dominant in terms of assets and range of operations.
Organisational Classification of Financial Institutions
The all-India financial institutions comprise of all-India Development Banks
specialised financial institutions and
investment institutions.
The major AIFIs are the Industrial Develompment Bank of India (IDBI), IFCI Ltd., ICICI Ltd., Industrial Investment Bank of India Ltd. (IIBI), Small Industries Development Bank of India (SIDBI), National Housing Bank (NHB), National Bank for Agriculture and Rural Development (NABARD), Export Import Banks of India (EXIM Bank), Tourism Finance corporation of India Ltd. (TFCI), Unit Trust of India (UTI), Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC) and its subsidiaries and Infrastructure Development Finance Company of India Ltd. (IDFC). All these institutions operate on all-India basis.
Other institutions comprise Export Credit and Guarantee Corporation (FCGC) and Deposit insurance and Credit Guarantee Corportion (DICGC).
The state level institutions consist of state financial corporations (SFCs) and state industrial development corporations (SIDCs). The SFC, established under the SFCs Act, 1951, with the exception of tamil Nadu Industrial and Investment Corporation Ltd., established in 1949 under the Companies Act as Madras industrial Investment Corporation also functions as SFC, are playing an important role in the development of small and medium enterprises in their respective states in tandem with national priorities. there are at present 18 SFCs in the country. Likewise, the SIDCs were established under the Companies Act as wholly-owned undertakings of state governments for promotion and development of medium and large scale industries in respective states. There are 28 SIDCs in the country. Of the 28 SIDCs, those in Andaman and Nicobar, Arunchal Pradesh, Daman and Diu, Dadra and Nager Haveli, Goe, Manipur, Meghalaya, mizoram. Nagaland, Tripura, Pondicherry and Sikkim also function as SFCs and provide assistance to small and medium enterprises and act as promotional agencies.
The sources of funds of FIs are broadly grouped under internal and external. Internal sources of funds of financial institutions consist of capital, reserves and surplus, sale / redemption of investment, repayments of loans and advances, dividends and interest on investment. External sources includes, inter alia, fresh borrowings by way of bonds / debentures, fresh Rupee and foreign currency borrowings, etc. (Read along with Universal Bank)
Merchant banks / Investment Banks
MBs are those who manage and underwrite (Underwriting an issue means to guarantee to purchase any shares in a new issue or rights issue not fully subscribed by the public) new public issues floated by companies to raise funds form public. They advise corporate clients on fund raising. they are also called investment banks (I banks) They deal only with corporates and not general public.
Mutual Funds
Mutual Funds were virtually synonymous with the Unit Trust of India (UTI) till two decades ago when India witnessed financial sector liberalization and many more public sector and provate mutual funds came up. Mutual funds raise money from public and invest them in stock market securities; bonds etc. SEBI regulates mutual funds.
Venture Capital
Venture capital is money provided by financial institutions who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors. Venture capital is an important source of equity for start-up companies.
Angel Investors
Individuals who invest in businesses looking for a higher return than possible from traditional investments. They invest their own money unlike a venture capitalish who invests public money. They became popular in recent years after the web-based enterprises came up in the 1990's.
QIPs
The QIP Scheme is open to investments made by "Qualified Institutional Placement" (which includes public financial institutions. mutual funds. foreign institutional investors, venture capital funds and foreign venture capital funds registered with the SEBI) in any issue of equity shares / fully convertible debentures / partly convertible debentures or any securities which are convertible into or exchangeable with equity shares at a later date (Securities).
Since the beginning of 2009, Indian companies are raising billions of dollars form the QIP route
NBFC
A company is treated as an NBFC if its financial assets are more than 50% of the gross income
NBFC means Non-banking financial company. A non-banking financial company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares / stock / bonds / debentures / securities issued by government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, ale / purchase / construction of immovable property. NBFCs are similar to banks; however they are different. For example, an NBFC cannot accept demand deposits:
ECBs
External Commercial Borrowings (ECBs) include bank loans, suppliers' and buyers' credits, .borrowings from private sector winclows of multilateral Fimmcial Institutions such as International Finance Corporation. In India, External Commercial Borrowings are being permitted by the Government for providing an additional source of funds to Indian corporates and PSUs for financing expansion of existing capacity and as well as for fresh investment, to augment the resources available domestically. ECBs can be used for any purpose (rupee-related expenditl,lre as well as imports) except for investment in stock market and speculation in real estate.
External Commercial Borrowings (ECB) are defined to include
commercial bank loans
buyer's credit,
supplier's credit,
securitised instruments such as floating rate notes, fixed rate bonds ete
credit from official export credit agencies.
commercial borrowings from the private sector window of multilateral financial institutions such as IFC, ADB, etc.
and Investment by Foreign Institutional Investors (FIls) in dedicated debt funds
Applicants are free to raise ECB from any internationally recognised source like banks, export credit agencies, suppliers of equipment, foreign collaborations, foreign equity - holders, international capital markets etc.
The department of Economic Affairs, Ministry of Finance, Government of India with support of Reserve Bank of India, monitors and regulates Indian firms access to global capital markets. From time to time, they announce guidelines on policies and procedures for ECB and Euro-issues.
ECB access may be restricted when the. there is a deluge of foreign inflows and the rupee is getting strong. It may be relaxed when the opposite happens as we have seen in recent months and years. ECBs help diversify risk for the companies. Also. the interest rates may be softer abroad.
Euro issues
Indian companies are permitted to raise foreign currency resources through issue of foreign Currency .convertible. Roncls (FCCBs), ordinary equity shares through Global Depository Receipts (GDRs) /American Depository Reccipts (ADRs) to foreign investors i.e. institutional investors or indivisuals (including NRIs) residing abroad.
That is, Euro-issues include Euro-convertible bonds and GDRs.
Private equity
In finance, private equity means equity securities in operating companies that are not publicly traded on a stock exchange. Investments in private equity most often involve either an investment of capital into an operating company or the acquisition of an operating company. Capital for private equity is raised primarily from institutional investors. The term private equity has different connotations in different countries.
Stock Market
Given in detail in the next chapter
Apart from the above mentioned sources of capital for Indian companies from within the country, the International Finance Corporation (IFC) of the World Bank (WB) also provides funds for the private sector
External Commercial Borrowings and FCCBs are also available from abroad.