chapter

10
Financial Markets
SENSEX — The Bombay Stock
LEARNING OBJECTIVES Exchange Sensitive Index
Have you counted the number of
After studying this chapter, times newspaper headlines in the past
you should be able to: few weeks have been discussing the
SENSEX? It goes up and down all the
time and seems to be a very important
¾¾ explain the meaning of part of business and economic news.
Has that made you wonder what the
Financial Market;
SENSEX actually is?
The SENSEX is the benchmark
index of the BSE. Since the BSE has
¾¾ explain the meaning of been the leading exchange of the
Money Market and describe Indian secondary market, the SENSEX
its major Instruments; has been an important indicator of
the Indian stock market. It is the
most frequently used indicator while
¾¾ explain the nature and reporting on the state of the market.
types of Capital Market; An index has just one job: to capture
the price movement. So a stock index
will reflect the price movements of
shares while a bond index captures the
¾¾ d i s t i n g u i s h b e t w e e n
manner in which bond prices go up or
Money Market and Capital down. If the SENSEX rises, it indicates
Market; the market is doing well. Since stocks
are supposed to reflect what companies
expect to earn in the future, a rising
¾¾ e x p l a i n t h e m e a n i n g index indicates that investors expect
and functions of Stock better earnings from companies. It
Exchange; is also a measure of the state of the
Indian economy. If Indian companies
are expected to do well, obviously the
economy should do well too.
¾¾ describe the functioning of
NSEI and OTCEI; and The SENSEX, launched in 1986
is made up of 30 of the most actively
traded stocks in the market. In fact,
they account for half the BSE’s market
¾¾ describe the role of SEBI in capitalisation. They represent 13 sectors
investor protection. of the economy and are leaders in their
respective industries.

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Introduction sectors – households which save

funds and business firms which
You all know that a business needs
invest these funds. A financial market
finance from the time an entrepreneur
helps to link the savers and the
makes the decision to start it. It needs
investors by mobilizing funds between
finance both for working capital
them. In doing so it performs what is
requirements such as payments for raw known as an allocative function. It
materials and salaries to its employees, allocates or directs funds available for
and fixed capital expenditure such as investment into their most productive
the purchase of machinery or building investment opportunity. When the
or to expand its production capacity. allocative function is performed well,
The above example gives a fair picture two consequences follow:
of how companies need to raise funds • The rate of return offered to
from the capital markets. Idea Cellular households would be higher
decided to enter the Indian capital
• Scarce resources are allocated to
market for its needs of expansion. In
those firms which have the highest
this chapter you will study concepts
productivity for the economy.
like private placement, Initial public
Offer (IPO) and capital markets which There are two major alternative
you come across in the example of mechanisms through which allocation
Idea Cellular. Business can raise of funds can be done: via banks or
these funds from various sources and via financial markets. Households
in different ways through financial can deposit their surplus funds with
markets. This chapter provides a brief banks, who in turn could lend these
description of the mechanism through funds to business firms. Alternately,
which finances are mobilised by a households can buy the shares and
business organisation for both short debentures offered by a business
using financial markets. The process
term and long term requirements. It also
by which allocation of funds is done is
explains the institutional structure and
called financial intermediation. Banks
the regulatory measures for different
and financial markets are competing
financial markets.
intermediaries in the financial system,
and give households a choice of where
Concept of Financial Market
they want to place their savings.
A business is a part of an economic A financial market is a market
system that consists of two main for the creation and exchange of

HOUSEHOLDS BUSINESS FIRMS

BANKS
FINANCIAL MARKETS
SAVERS INVESTORS

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Financial System

financial assets. Financial markets Productive Uses: A financial market

exist wherever a financial transaction facilitates the transfer of savings from
occurs. Financial transactions could savers to investors. It gives savers the
be in the form of creation of financial choice of different investments and
assets such as the initial issue of thus helps to channelise surplus funds
shares and debentures by a firm or the into the most productive use.
purchase and sale of existing financial 2. Facilitating Price Discovery: You
assets like equity shares, debentures all know that the forces of demand
and bonds. and supply help to establish a price
for a commodity or service in the
Functions of Financial Market market. In the financial market, the
Financial markets play an important households are suppliers of funds and
role in the allocation of scarce resources business firms represent the demand.
in an economy by performing the The interaction between them helps
following four important functions. to establish a price for the financial
1. Mobilisation of Savings and asset which is being traded in that
Channeling them into the most particular market.

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3. Providing Liquidity to Financial than one year are traded in the money
Assets: Financial markets facilitate market. Instruments with longer
easy purchase and sale of financial maturity are traded in the capital
assets. In doing so they provide market.
liquidity to financial assets, so that
they can be easily converted into Money Market
cash whenever required. Holders of
assets can readily sell their financial The money market is a market for short
assets through the mechanism of the term funds which deals in monetary
financial market. assets whose period of maturity is
upto one year. These assets are close
4.Reducing the Cost of Transactions:
Financial markets provide valuable substitutes for money. It is a market
information about securities being where low risk, unsecured and short
traded in the market. It helps to save term debt instruments that are highly
time, effort and money that both liquid are issued and actively traded
buyers and sellers of a financial asset everyday. It has no physical location,
would have to otherwise spend to try but is an activity conducted over the
and find each other. The financial telephone and through the internet. It
market is thus, a common platform enables the raising of short-term funds
where buyers and sellers can meet for for meeting the temporary shortages of
fulfillment of their individual needs. cash and obligations and the temporary
Financial markets are classified deployment of excess funds for earning
on the basis of the maturity of returns. The major participants in
financial instruments traded in them. the market are the Reserve Bank of
Instruments with a maturity of less India (RBI), Commercial Banks, Non-
Banking Finance Companies, State
Governments, Large Corporate Houses
and Mutual Funds.
Classification of Financial Markets
FINANCIAL MARKET

MONEY MARKET CAPITAL MARKET

Primary market Secondary Market

Debt Equity Debt Equity

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capital Market
The term capital market refers to
facilities and institutional arrangements
through which long-term funds,
both debt and equity are raised and
invested. It consists of a series of
channels through which savings of
the community are made available for
industrial and commercial enterprises
and for the public in general. It
directs these savings into their most
productive use leading to growth and
development of the economy. The
capital market consists of development
banks, commercial banks and stock
exchanges.
An ideal capital market is one where
finance is available at reasonable cost.
The process of economic development
is facilitated by the existence of a
well functioning capital market. In
fact, development of the financial
system is seen as a necessary
condition for economic growth. It is
essential that financial institutions are
sufficiently developed and that market
operations are free, fair, competitive
and transparent. The capital market
should also be efficient in respect of the
information that it delivers, minimise
transaction costs and allocate capital
most productively.

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The Capital Market can be divided small savings to subscribe to these

into two parts: a. Primary Market securities. In the money market,
b. Secondary Market transactions entail huge sums of
money as the instruments are quite
Distinction between Capital Market expensive.
and Money Market (iv) Duration: The capital market
The major points of distinction between deals in medium and long term
the two markets are as follows: securities such as equity shares
and debentures. Money market
(i)Participants: The participants in
instruments have a maximum
the capital market are financial
tenure of one year, and may even
institutions, banks, corporate
be issued for a single day.
entities, foreign investors and
ordinary retail investors from (v)Liquidity: Capital market securities
members of the public. Participation are considered liquid investments
in the money market is by and because they are marketable on
large undertaken by institutional the stock exchanges. However, a
participants such as the RBI, share may not be actively traded,
banks, financial institutions and i.e. it may not easily find a buyer.
finance companies. Individual Money market instruments on
investors although permitted to the other hand, enjoy a higher
transact in the secondary money degree of liquidity as there is
market, do not normally do so. formal arrangement for this. The
Discount Finance House of India
(ii) Instruments: The main instruments (DFHI) has been established for
traded in the capital market are the specific objective of providing
– equity shares, debentures, a ready market for money market
bonds, preference shares etc. The instruments.
main instruments traded in the
(vi) Safety: Capital market instruments
money market are short term debt
are riskier both with respect to
instruments such as T-bills, trade
returns and principal repayment.
bills reports, commercial paper and
Issuing companies may fail to
certificates of deposit.
perform as per projections and
(iii) Investment Outlay: Investment in promoters may defraud investors.
the capital market i.e. securities But the money market is generally
does not necessarily require a huge much safer with a minimum
financial outlay. The value of units risk of default. This is due to the
of securities is generally low i.e. shorter duration of investing and
Rs 10, Rs 100 and so is the case also to financial soundness of the
with minimum trading lot of shares issuers, which primarily are the
which is kept small i.e. 5, 50, 100 government, banks and highly
or so. This helps individuals with rated companies.

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(vii)Expected return: The investment in

capital markets generally yield a
higher return for investors than the
money markets. The possibility of
earnings is higher if the securities
are held for a longer duration. First,
there is the scope of earning capital
gains in equity share. Second, in
the long run, the prosperity of a
company is shared by shareholders
by way of high dividends and
bonus issues.

priMary Market
The primary market is also known as
the new issues market. It deals with
new securities being issued for the
first time. The essential function of
a primary market is to facilitate the
transfer of investible funds from savers
to entrepreneurs seeking to establish
new enterprises or to expand existing
ones through the issue of securities
for the first time. The investors in
this market are banks, financial
institutions, insurance companies,
mutual funds and individuals.
A company can raise capital
through the primary market in the form
of equity shares, preference shares,
debentures, loans and deposits. Funds
raised may be for setting up new
projects, expansion, diversification,
modernisation of existing projects,
mergers and takeovers etc.

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secondary Market
The secondary market is also known
as the stock market or stock exchange.
It is a market for the purchase and
sale of existing securities. It helps
existing investors to disinvest and fresh
investors to enter the market. It also
provides liquidity and marketability to
existing securities. It also contributes
to economic growth by channelising
funds towards the most productive

priMary and secondary Markets — a coMparison

Primary Market Secondary Market

(New Issue Market) (Stock Exchange)

(i) There is sale of securities by new (i) There is trading of existing shares
companies or further (new issues of only.
securities by existing companies to
investors).
(ii) Securities are sold by the company (ii) Ownership of existing securities is
to the investor directly (or through exchanged between investors. The
an intermediary). company is not involved at all.
(iii) The flow of funds is from savers to (iii) Enhances encashability (liquidity)
investors, i.e. the primary market of shares, i.e. the secondary market
directly promotes capital formation. indirectly promotes capital formation.
(iv) Only buying of securities takes place (iv) Both the buying and the selling of
in the primary market, securities securities can take place on the stock
cannot be sold there. exchange.
(v) Prices are determined and decided by (v) Prices are determined by demand and
the management of the company. supply for the security.
(vi) There is no fixed geographical (vi) Located at specified places.
location.

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investments through the process for an active and growing primary

of disinvestment and reinvestment. market for new issues. An active and
Securities are traded, cleared and healthy secondary market in existing
settled within the regulatory framework securities leads to positive environment
prescribed by SEBI. Advances in among investors. The following are
information technology have made some of the important functions of a
trading through stock exchanges stock exchange.
accessible from anywhere in the
country through trading terminals.
Along with the growth of the primary
market in the country, the secondary
market has also grown significantly
during the last ten years.

Stock Exchange
A stock exchange is an institution
which provides a platform for buying
and selling of existing securities.
As a market, the stock exchange
facilitates the exchange of a security
(share, debenture etc.) into money
Bombay Stock Exchange
and vice versa. Stock exchanges help
companies raise finance, provide 1. Providing Liquidity and Market-
liquidity and safety of investment to ability to Existing Securities: The
the investors and enhance the credit basic function of a stock exchange is the
worthiness of individual companies. creation of a continuous market where
securities are bought and sold. It gives
Meaning of Stock Exchange investors the chance to disinvest and
reinvest. This provides both liquidity
According to Securities Contracts and easy marketability to already
(Regulation) Act 1956, stock exchange existing securities in the market.
means any body of individuals, whether
2. Pricing of Securities: Share prices
incorporated or not, constituted for the
on a stock exchange are determined
purpose of assisting, regulating or
by the forces of demand and supply.
controlling the business of buying and
A stock exchange is a mechanism of
selling or dealing in securities. constant valuation through which the
prices of securities are determined.
Functions of a Stock Exchange
Such a valuation provides important
The efficient functioning of a stock instant information to both buyers and
exchange creates a conducive climate sellers in the market.

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3. Safety of Transaction: The There was a time when in the open

membership of a stock exchange is outcry system, securities were bought
well- regulated and its dealings are and sold on the floor of the stock
well defined according to the existing exchange. Under this auction system,
legal framework. This ensures that the deals were struck among brokers,
investing public gets a safe and fair prices were shouted out and the shares
deal on the market. sold to the highest bidder. However,
4. Contributes to Economic Growth: now almost all exchanges have gone
A stock exchange is a market in electronic and trading is done in the
which existing securities are resold broker’s office through a computer
or traded. Through this process of terminal. A stock exchange has its
disinvestment and reinvestment main computer system with many
savings get channelised into their terminals spread across the country.
most productive investment avenues. Trading in securities is done through
This leads to capital formation and brokers who are members of the stock
economic growth. exchange. Trading has shifted from the
5. Spreading of Equity Cult: The stock market floor to the brokers office.
stock exchange can play a vital role Every broker has to have access to
in ensuring wider share ownership by a computer terminal that is connected
regulating new issues, better trading to the main stock exchange. In this
practices and taking effective steps in screen-based trading, a member logs
educating the public about investments. on to the site and any information about
6. Providing Scope for Speculation: the shares (company, member, etc.) he
wishes to buy or sell and the price is
The stock exchange provides sufficient
fed into the computer. The software is
scope within the provisions of law for
so designed that the transaction will
speculative activity in a restricted
be executed when a matching order is
and controlled manner. It is generally
found from a counter party. The whole
accepted that a certain degree of
transaction is carried on the computer
healthy speculation is necessary to
screen with both the parties being able
ensure liquidity and price continuity
to see the prices of all shares going up
in the stock market.
and down at all times during the time
that business is transacted and during
Trading and Settlement Procedure business hours of the stock exchange.
Trading in securities is now executed The computer in the brokers office is
through an on-line, screen-based constantly matching the orders at the
electronic trading system. Simply best bid and offer price. Those that are
put, all buying and selling of shares not matched remain on the screen and
and debentures are done through a are open for future matching during
computer terminal. the day.

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can sit in the broker’s office, log

on to the computer at the same
time and buy or sell securities.
This system has enabled a large
number of participants to trade
with each other, thereby improving
the liquidity of the market.
5. A single trading platform has
been provided as business is
transacted at the same time in all
the trading centres. Thus, all the
trading centres spread all over the
country have been brought onto
Electronic Trading System one trading platform, i.e., the
stock exchange, on the computer.
Electronic trading systems or Now, screen-based trading or on-line
screen-based trading has certain trading is the only way in which you
advantages: can buy or sell shares. Shares can
1. It ensures transparency as it be held either in physical form or an
allows participants to see the electronic book entry form of holding
prices of all securities in the and transferring shares can also be
market while business is being adopted. This electronic form is called
transacted. They are able to see dematerialised form.
the full market during real time. The following steps are involved in
2. It increases efficiency of the screen-based trading for buying
information being passed on, thus and selling of securities:
helping in fixing prices efficiently. 1.If an investor wishes to buy or sell any
The computer screens display security he has to first approach a
information on prices and also registered broker or sub-broker
capital market developments that and enter into an agreement
influence share prices. with him. The investor has to
3. It increases the efficiency of sign a broker-client agreement
operations, since there is reduction and a client registration form
in time, cost and risk of error. before placing an order to buy
4. People from all over the country or sell securities. He has also to
and even abroad who wish to provide certain other details and
participate in the stock market information. These include:
can buy or sell securities through • PAN number
brokers or members without (This is mandatory)
knowing each other. That is, they
• Date of birth and address.

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• Educational qualification and • Client code number in the

occupation. client registration form.
• Residential status (Indian/ The broker then opens a trading
NRI). account in the name of the
• Bank account details. investor.
• Depository account details. 2.The investor has to open a ‘demat’
account or ‘beneficial owner’
• Name of any other broker with
(BO) account with a depository
whom registered. participant (DP) for holding and
transferring securities in the demat
Regulator
form. He will also have to open a
NDSL (NSE)
AND CDSL BI
bank account for cash transactions
(BSE) SE
in the securities market.
Gateway IE
S Bank,
OR
to access
Trading
DE
PO
AIT Financial
Institution, 3.The investor then places an order
Broker
with the broker to buy or sell
Y
Terminal OR
SIT TS (D
P)

Transact, PO
DE CIPA
N eligible as
per SEBI
track,
markey move
PA
R TI
shares. Clear instructions have
and manages
fund to be given about the number of
RS T
TO UN
ES CCO
shares and the price at which the
V
IN TA
MA shares should be bought or sold.
DE
The broker will then go ahead with

TRANSACTION DAY [T]

ORDERMATCH ON
EXCHANGE
BUY ORDER SELL ORDER

BROKER BROKER
SAUDA (TRADE) ORDER PLACED
CONTRACT NOTE CONTRACT NOTE
T+2 SEETTLEMENT

T+2 SEETTLEMENT

FILES OF OBLIGATION
DOWNLOADED BY CLEARNING
MEMBERS (NDSL/CDSL)

Transfer to the Transfer to the

pool account of Pool Pool pool account of
clearning houses clearning houses
T+1
Backent Process

Transfer to the pool Transfer to the pool

account of the broker account of the broker

Transfer to the pool Transfer to the pool

account of the broker account of the broker

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the deal at the above mentioned 7.Now, the investor has to deliver the
price or the best price available. An shares sold or pay cash for the
order confirmation slip is issued to shares bought. This is called the
the investor by the broker. pay-in day.
4.The broker then will go on-line
8.Cash is paid or securities are
and connect to the main stock
delivered on pay-in day, which is
exchange and match the share and
best price available. before the T+2 day as the deal has
to be settled and finalised on the
5.When the shares can be bought or
T+2 day. The settlement cycle is
sold at the price mentioned, it will
on T+2 day on a rolling settlement
be communicated to the broker’s
terminal and the order will be basis, w.e.f. 1 April 2003.
executed electronically. The broker 9.On the T+2 day, the exchange
will issue a trade confirmation slip will deliver the share or make
to the investor. payment to the other broker. This
6.After the trade has been executed, is called the pay-out day. The
within 24 hours the broker issues broker then has to make payment
a Contract Note. This note contains to the investor within 24 hours
details of the number of shares of the pay-out day since he has
bought or sold, the price, the already received payment from the
date and time of deal, and the exchange.
brokerage charges. This is an
10. The broker can make delivery
important document as it is legally
enforceable and helps to settle of shares in demat form directly
disputes/claims between the to the investor’s demat account.
investor and the broker. A Unique The investor has to give details of
Order Code number is assigned his demat account and instruct
to each transaction by the stock his depository participant to take
exchange and is printed on the delivery of securities directly in his
contract note. beneficial owner account.

Project Work
1. Study the website of Bombay Stock Exchange, i.e., www.bseindia.com and
compile information which you find useful. Discuss it in your class and find out
how it can help you should you decide to invest in the stock market. Prepare
a report on your findings with the help of your teacher.
2. Prepare a report on the role of SEBI in regulating the Indian stock market.
You can get this information on its website namely www.sebi.gov.in. Do you
think something else should be done to increase the number of investors in
the stock market?

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Dematerialisation and Depositories through a single account in shares.

These demat securities can even be
All trading in securities is now done
pledged or hypothecated to get loans.
through computer terminals. Since all
There is no danger of loss, theft or
systems are computerised, buying and
forgery of share certificates. It is the
selling of securities are settled through broker’s responsibility to credit the
an electronic book entry form. This is investor’s account with the correct
mainly done to eliminate problems like number of shares.
theft, fake/forged transfers, transfer
delays and paperwork associated with Working of the Demat System
share certificates or debentures held
in physical form. 1.A depository participant (DP), either
This is a process where securities a bank, broker, or financial services
held by the investor in the physical company, may be identified.
form are cancelled and the investor is 2.An account opening form and
given an electronic entry or number so documentation (PAN card details,
that she/he can hold it as an electronic photograph, power of attorney)
balance in an account. This process may be completed.
of holding securities in an electronic 3.The physical certificate is to be
form is called dematerialisation. given to the DP along with a
For this, the investor has to open a dematerialisation request form.
demat account with an organisation
4.If shares are applied in a public
called a depository. In fact, now all
offer, simple details of DP and
Initial Public Offers (IPOs) are issued
demat account are to be given and
in dematerialisation form and more
the shares on allotment would
than 99% of the turnover is settled by
automatically be credited to the
delivery in the demat form.
demat account.
The Securities and Exchange
Board of India (SEBI) has made 5.If shares are to be sold through a
it mandatory for the settlement broker, the DP is to be instructed to
procedures to take place in demat debit the account with the number
form in certain select securities. of shares.
Holding shares in demat form 6.The broker then gives instruction to
is very convenient as it is just his DP for delivery of the shares to
like a bank account. Physical shares the stock exchange.
can be converted into electronic
7.The broker then receives payment
form or electronic holdings can be
and pay the person for the shares
reconverted into physical certificates
sold.
(rematerialisation). Dematerialisation
enables shares to be transferred to 8.All these transactions are to be
some other account just like cash completed within 2 days, i.e.,
and ensures settlement of all trades delivery of shares and payment

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received from the buyer is on a T+2 investor and the Depository (NSDL or
basis, settlement period. CSDL) who is authorised to maintain
the accounts of dematerialised shares.
Depository Financial institutions, banks, clearing
corporations, stock brokers and
Just like a bank keeps money in safe
non-banking finance corporations
custody for customers, a depository
are permitted to become depository
also is like a bank and keeps securities
participants. If the investor is buying
in electronic form on behalf of the
and selling the securities through the
investor. In the depository a securities
broker or the bank or a non-banking
account can be opened, all shares can
finance corporation, it acts as a DP
be deposited, they can be withdrawn/
for the investor and complete the
sold at any time and instruction to
formalities.
deliver or receive shares on behalf
of the investor can be given. It is a o
technology driven electronic storage
system. It has no paper work relating
to share certificates, transfer, forms,
etc. All transactions of the investors are
settled with greater speed, efficiency
and use as all securities are entered
in a book entry mode.
In India, there are two depositories.
National Securities Depositories
Limited (NSDL) is the first and largest
depository presently operational in
India. It was promoted as a joint
venture of the IDBI, UTI, and the
National Stock Exchange.
The Central Depository Services
Limited (CDSL) is the second
depository to commence operations
and was promoted by the Bombay
Stock Exchange and the Bank of India.
Both these national level depositories
operate through intermediaries who
are electronically connected to the
depository and serve as contact points
with the investors and are called
depository participants.
The depository participant (DP)
serves as an intermediary between the

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Reasons for the Establishment of

SEBI
The capital market has witnessed a
tremendous growth during 1980’s,
characterised particularly by the
increasing participation of the
public. This ever expanding investors
population and market capitalisation
led to a variety of malpractices on the
part of companies, brokers, merchant
bankers, investment consultants
and others involved in the securities
market. The glaring examples of these
malpractices include existence of self
– styled merchant bankers unofficial
private placements, rigging of prices,
unofficial premium on new issues,
non-adherence of provisions of the
Companies Act, violation of rules and
regulations of stock exchanges and
listing requirements, delay in delivery
of shares etc. These malpractices and
securities and eXchange Board oF
unfair trading practices have eroded
india (seBi) investor confidence and multiplied
The Securities and Exchange Board investor grievances. The Government
of India was established by the and the stock exchanges were rather
Government of India on 12 April helpless in redressing the investor’s
1988 as an interim administrative problems because of lack of proper
body to promote orderly and healthy penal provisions in the existing
growth of securities market and for legislation. In view of the above, the
investor protection. It was to function Government of India decided to set-
under the overall administrative up a separate regulatory body known
control of the Ministry of Finance of as Securities and Exchange Board of
the Government of India. The SEBI India.
was given a statutory status on 30
January 1992 through an ordinance. Purpose and Role of SEBI
The ordinance was later replaced by The basic purpose of SEBI is to
an Act of Parliament known as the create an environment to facilitate
Securities and Exchange Board of efficient mobilisation and allocation
India Act, 1992. of resources through the securities

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markets. It also aims to stimulate 2.To protect the rights and interests of
competition and encourage innovation. investors, particularly individual
This environment includes rules investors and to guide and educate
and regulations, institutions and them.
their interrelationships, instruments, 3.To prevent trading malpractices and
practices, infrastructure and policy achieve a balance between self
framework. regulation by the securities industry
This environment aims at meeting and its statutory regulation.
the needs of the three groups which 4.To regulate and develop a code
basically constitute the market, viz, of conduct and fair practices
the issuers of securities (Companies), by intermediaries like brokers,
the investors and the market merchant bankers etc., with a view
intermediaries. to making them competitive and
• To the issuers, it aims to provide professional.
a market place in which they can
confidently look forward to raising Functions of SEBI
finances they need in an easy, fair
Keeping in mind the emerging nature
and efficient manner.
of the securities market in India, SEBI
• To the investors, it should provide was entrusted with the twin task of
protection of their rights and both regulation and development of the
int e re s ts thro u g h ad equ ate, securities market. It also has certain
accurate and authentic information protective functions.
and disclosure of information on a
continuous basis. Regulatory Functions
• To the intermediaries, it should offer 1.Registration of brokers and sub-
a competitive, professionalised and brokers and other players in the
expanding market with adequate market.
and efficient infrastructure so 2.Registration of collective investment
that they are able to render better schemes and Mutual Funds.
service to the investors and issuers. 3.R e g u l a t i o n o f s t o c k b r o k e r s ,
portfolio exchanges, underwriters
Objectives of SEBI and merchant bankers and the
The overall objective of SEBI is to business in stock exchanges and
protect the interests of investors and any other securities market.
to promote the development of, and 4.Regulation of takeover bids by
regulate the securities market. This companies.
may be elaborated as follows: 5.Calling for information by under-
1.To regulate stock exchanges and the taking inspection, conducting
securities industry to promote their enquiries and audits of stock
orderly functioning. exchanges and intermediaries.

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6.Levying fee or other charges for

carrying out the purposes of the
Act.
7.Performing and exercising such
power under Securities Contracts
(Regulation) Act 1956, as may be
delegated by the Government of
India.

Development Functions
1.Training of intermediaries of the
securities market.
2.Conducting research and publishing
information useful to all market
participants.
3.Undertaking measures to develop
the capital markets by adapting a
flexible approach.

Protective Functions
1.Prohibition of fraudulent and unfair
trade practices like making mis-
leading statements, manipulations,
price rigging etc.
2.Controlling insider trading and
imposing penalties for such
practices.
3.Undertaking steps for investor
protection.
4.Promotion of fair practices and code
of conduct in securities market.

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key terMs
Financial Market Money Market Treasury Bills
Commercial Paper Call Money Certificate of Deposit
Commercial Bill Money Market Mutual Fund Capital
Market Primary Market Secondary Market
Stock Exchange SEBI, NSE OTCEI

SUMMARY
Financial Market is a market for creation and exchange of financial assets.
It helps in mobilisation and channelising the savings into most productive
uses. Financial markets also helps in price discovery and provide liquidity to
financial assets.
Money Market is a market for short-term funds. It deals in monetory assets
whose period of maturity is less than one year. The instruments of money market
includes treasury bills, commercial paper, call money, Certificate of deposit,
commercial bills, participation certificates and money market mutual funds.
Capital Market is a place where long-term funds are mobilised by the corporate
undertakings and Government. Capital Market may be devided into primary
market and secondary market. Primary market deals with new securities which
were not previously tradable to the public. Secondary market is a place where
existing securities are bought and sold.
Stock Exchanges are the organisations which provide a platform for buying
and selling of existing securities. Stock exchanges provide continuous market
for securities, helps in price discovery, widening share ownership and provide
scope for speculation.
Securities and Exchange Board of India was established in 1988 and was
given statutory status through an Act in 1992. The SEBI was set-up to protect
the interests of investors, development and regulation of securities market.

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EXERCISES

Very Short Answer Type

1. What is a Treasury Bill?
2. Name the segments of the National Stock Exchange (NSE).
3. State any two reasons why investing public can expect a safe and fair
deal in the stock market. (Point w.r.t safety of Transactions – Functions
of the Stock Exchange).
4. What is the common name for Beneficiary Owner Account, which is to
be opened by the investors for trading in securities?
5. Name any two details that need to be provided by the investor to the
broker while filling a client registration form.

Short Answer Type

1. What are the functions of Financial Market?
2. “Money Market is essentially a Market for short term funds.” Discuss.
3. Distinguish between Capital Market and Money Market.
4. What are the functions of the Stock Exchange?
5. What are the objectives of SEBI?
6. State the objective of NSE?
7. Name the document prepared in the process of online trading of securities
that is legally enforceable and helps to settle disputes/claims between
the investor and the broker.

Long Answer Type

1. Explain the various Money Market instruments.
2. Explain the recent Capital Market reforms in India.
3. Explain the objectives and functions of the SEBI.
4. India’s largest domestic investor Life Insurance Corporation of India has
once again come to government’s rescue by subscribing 70% of Hindustan
Aeronautics’ `4,200-crore initial public offering.
a. Which market is being reflected in the above case?
b. State which method of floatation in the above identified market is
being highlighted in the case? (Primary Market)

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c. Explain any two other methods of floatation. (Private Placement, Offer

through prospectus, offer for sale).
5. Lalita wants to buy shares of Akbar Enterprises, through her broker
Kushvinder. She has a Demat Account and a bank account for cash
transactions in the securities market. Discuss the subsequent steps
involved in the screen-based trading for buying and selling of securities
in this case.

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