Securities Markets in India: An Overview
The process of economic reforms and liberalization was set in motion in the mid-eighties
and its pace was accelerated in 1991 when the economy suffered severely from a precariously
low foreign exchange reserve, burgeoning imbalance on the external account, declining
industrial production, galloping inflation and a rising fiscal deficit. The economic reforms,
being an integrated process, included deregulation of industry, liberalization in foreign
investment, regime, restructuring and liberalization of trade, exchange rate, and tax policies,
partial disinvestments of government holding in public sector companies and financial
sector reforms. The reforms in the real sectors such as trade, industry and fiscal policy
were initiated first in order to create the necessary macroeconomic stability for launching
financial sector reforms, which sought to improve the functioning of banking and financial
institutions (FIs) and strengthen money and capital markets including securities market.
The securities market reforms specifically included:
• Repeal of the Capital Issues (Control) Act, 1947 through which Government used
to expropriate and allocate resources from capital market for favored uses;
• Enactment of the Securities and Exchange Board of India Act, 1992 to provide for
the establishment of the Securities and Exchange Board of India (SEBI) to regulate
and promote development of securities market;
• Setting up of NSE in 1993, passing of the Depositories Act, 1996 to provide for
the maintenance and transfer of ownership of securities in book entry form;
• Amendments to the Securities Contracts (Regulation) Act, 1956 (SCRA) in 1999 to
provide for the introduction of futures and option.
• Other measures included free pricing of securities, investor protection measures,
use of information technology, dematerialization of securities, improvement in trading
practices, evolution of an efficient and transparent regulatory framework, emergence
of several innovative financial products and services and specialized FIs etc.
These reforms are aimed at creating efficient and competitive securities market subject
to effective regulation by SEBI, which would ensure investor protection.
Importance of financial markets in the Indian economy
The well-functioning and resilient financial markets are important for the Indian economy as
they help the monetary policy transmission.
They aid in the efficient allocation of resources.
They facilitate the absorption and allocation the risks in the financial sector. They make the
economy more shock-absorbent in case of a major global financial turmoil.
Financial markets help to mobilise savings and channel them to the most productive use that
ensures the growth of the Indian economy.
Financial markets help with the cost assessment of financial assets.
They also help liquidate financial assets. This comes in handy in cases where the economy needs
more liquidity to handle inflation.
Financial markets provide platforms for buyers and sellers.
Financial markets are important as they result in a reduction in the cost of transactions.
According to various frameworks, it is important to create cheaper means of transactions.
A well-developed financial market lowers the cost of financing and also provides a haven for
returns on investment.
The financial market aids wealth creation and ensures a linkage between savings and investment.
This investment fulfils the long-term and short-term financial needs of household and corporate
sectors.
A question might arise about how financial markets function for the economy to flourish.
Investment bankers play the role of bankers in financial markets in any economy.
They meet the demands of borrowers and lenders along with the whole economy.
Financial markets also provide access to capital for corporations, industries, and governmental
organisations.
Functions of the financial market in the Indian economy
Financial markets set the prices for trading, raise capital, and transfer liquidity and risk at a
global level. Financial markets are places where finance is raised by institutions and they also
issue securities. The financial market reduces the gap between organisations or people with more
money with those who need money.
Types of financial markets
1. Stock market
The stock market is where the exchange of stock shares and financial securities of public
companies takes place. The companies float shares for the general public to raise capital.
2. Capital market
The capital market is the most liquid market in India. It is the place where lending and borrowing
take place. Instruments like treasury bills, certificates of deposits, and commercial papers are
used in this market.
3. Bond market
A bond market is a place where the debt instruments issued by various corporations are sold and
bought. The market includes entities that cover securities issued by the government and
corporations. Investment banking and financial markets
Investment banking organises complex and large financial transactions that run the financial
markets. They undertake functions such as:
Mergers
Initial Public Offering
Underwriting issuance of new securities of a corporation or institutions
Managing the corporation’s IPO
Provide advice for mergers, reorganisations, and acquisitions
To become an investment banker, you can opt for certification courses in investment banking.
Industrial securities market
The market for industrial securities is known as securities market. It
offers an ideal market for corporate securities such as shares and debentures. Industrial
securities market is relatively much smaller in India than that in other industrialized
countries. This is because of the industrial structure, investment habits and the level of
education of investors in India. During the planning period the role of public sector
companies has much increased in the business activity of the country. Industrial securities
are not a major source of funds even for private sector industrial units. The volume of
industrial securities in relation to government securities, their role in financing the private
sector and their significance as a savings medium indicate that the industrial securities
market in India can hardly be regarded as a barometer of economic activity.
Industrial securities market comprises of the following segments :
(a) Primary Market.
(b) Secondary Market.
Government Securities Market
The Government of India issues securities to raise capital for development projects. These
securities are called government securities or G-secs, issued by RBI. The RBI manages the
public debt of the Indian government. G-secs are issued in three forms: treasury bills, dated
securities and bonds.
Long Term Loan Market
This loan comes with significantly higher repayment tenures, and you can repay it over an
extended period of time, usually ranging from 3 years to 30 years. Examples of long-term
loans include Home Loans, Car Loans, Two-Wheeler Loans, Personal Loans, Small Business
Loans, to name a few
Mortgage Market
The mortgage market is the underlying structure that supports home lending through mechanisms
that help with the free flow of funds so that lending can continue. While that definition covers
what it is, it’s necessary to break things down a little bit further.
Let’s take this from the beginning. A mortgage is any loan that pledges a piece of real estate as
collateral. You can have mortgages associated with buildings and pieces of land, but the
everyday consumer is probably most familiar with the mortgage as a home loan.
The mortgage market is split into two main components: a primary mortgage market and a
secondary mortgage market. The primary market is the one consumers interact with. In this
market, you obtain a mortgage through a bank or a specialized mortgage originator like Rocket
Mortgage
Financial Guarantee Market
A financial guarantee in the corporate world is a non-cancellable indemnity. This is a bond
backed by an insurer or other secure financial institution. It gives investors a guarantee towards
the payment of principal and interest amounts within a contract. Many insurance companies
specialize in financial guarantees and similar products used by debt issuers as a way of attracting
investors. Moreover, the guarantee gives investors comfort that the investment will be repaid if
the securities issuer does not fulfill the contractual obligation to make timely payments. Financial
guarantee helps the businesses to recover the loss owing to deferred payments from debtors. In
addition, financial guarantee reduces the risk and mistrust between seller and consumer by acting
as an assurer. Therefore, increasing financial risk involved in business transactions in driving the
growth of the market. The financial guarantees require less documentation and therefore,
processing of loan becomes easier and simple for the banks. Therefore, this is a major growth
factor for the growth of the market. However, an individual with a poor credit history cannot
obtain a financial guarantee for the business or other activities. Thus, strict assessment by the
banks before providing financial guarantee is restraining the growth of the market. Contrarily,
the automation of document verification and credibility checking procedures have increased the
efficiency of the banks.
Money Market, Structure and Functions.
money markets is that segment of financial markets where borrowing and lending of the short-
term funds takes place. The maturity of the money market instruments is one day to one year. In
our country, Money Markets are regulated by both RBI and SEBI.
Indian money market is divided into organized and unorganized segments. Unorganized market
is old Indigenous market mainly made of indigenous bankers, money lenders etc. Organized
market is that part which comes under the regulatory purview of RBI and SEBI. The nature of
the money market transactions is such that they are large in amount and high in volume. Thus,
the entire market is dominated by small number of large players. At the same time, the money
market in India is yet underdeveloped. The key players in the organized money market include
Governments (Central and State), Discount and Finance House of India (DFHI), Mutual Funds,
Corporate, Commercial / Cooperative Banks, Public Sector Undertakings (PSUs), Insurance
Companies and Financial Institutions and Non-Banking Financial Companies (NBFCs)
Structure of Organised Money Market in India
The organized money market in India is not a single market but is a conglomeration of markets
of various instruments. They have been discussed below:
Contents
Call Money / Notice Money / Term Money Market
Treasury Bill (T – Bills)
Commercial Bills
Certificate Of Deposits (CDs)
Commercial Papers (CP)
Money Market Mutual Funds (MMMFs)
The Repo / Reverse Repo Market
Discount And Finance House Of India (DFHI)
Call Money / Notice Money / Term Money Market
Call Money, Notice Money and Term Money markets are sub-markets of the Indian Money
Market. These refer to the markets for very short term funds. Call Money refers to the borrowing
or lending of funds for 1 day. Notice Money refers to the borrowing and lending of funds for 2-
14 days. Term money refers to borrowing and lending of funds for a period of more than 14
days.
Treasury Bill (T – Bills)
The bill market is a sub-market of the money market in India. There are two types of bills viz.
Treasury Bills and commercial bills. While Treasury Bills or T-Bills are issued by the Central
Government; Commercial Bills are issued by financial institutions.
Commercial Bills
Commercial bills market is basically a market of instruments similar to Bill of Exchange. The
participants of commercial bill market in India are banks and financial institutions but this
market is not yet developed.
Certificate Of Deposits (CDs)
Certificate of Deposit (CD) refers to a money market instrument, which is negotiable and
equivalent to a promissory note. All scheduled commercial banks excluding Regional Rural
Banks (RRBs) and Local Area Banks (LABs) and Select All India Financial Institutions
permitted by RBI are eligible to issue certificates of deposits
Commercial Papers (CP)
Commercial Paper (CP) is yet another money market instrument in India, which was first
introduced in 1990 to enable the highly rated corporates to diversify their resources for short
term fund requirements.
Money Market Mutual Funds (MMMFs)
Money Market Mutual Funds (MMMFs) were introduced by RBI in 1992 but since 2000, they
are brought under the purview of the SEBI. They provide additional short-term avenue to
individual investors.
The Repo / Reverse Repo Market
Repo (repurchase agreement ) was introduced in December 1992. Repo means selling a security
under an agreement to repurchase it at a predetermined date and rate. Repo transactions are
affected between banks and financial institutions and among bank themselves, RBI also
undertake Repo. IN 1996, Reverse Repo was introduced. Reverse Repo means buying a security
on a spot basis with a commitment to resell on a forward basis. Reverse Repo transactions are
affected with scheduled commercial banks and primary dealers.
Discount And Finance House Of India (DFHI)
It was established in 1988 by RBI and is jointly owned by RBI, public sector banks and all India
financial institutions which have contributed to its paid up capital. DFHI plays important role in
developing an active secondary market in Money Market Instruments. From 1996, it has been
assigned status of a Primary Dealer (PD). It deals in treasury bills, commercial bills, CDs, CPs,
short term deposits, call money market and government securities.
Functions of Money Markets
Due to short maturity term, the instruments of money market are liquid and can be converted to
cash easily and thus are able to address the need of the short term surplus fund of the lenders and
short term borrowing requirements of the borrowers. Thus, the major function of the money
markets is to cater to the short term financial needs of the economy. The other functions are as
follows:
1. Money Markets help in effective implementation of the RBI’s monetary policy
2. Money markets help to maintain demand and supply equilibrium with regard to short term
funds
3. They cater to the short term fund requirement of the governments
4. They help in maintaining liquidity in the economy
Characteristic of a developed Money Market
1. Highly organized banking system: The commercial banks are the nerve centre of the
whole money market. They are principal suppliers of short-term funds. Their policies
regarding loans and advances have impact on the entire money market. The commercial
banks serve as vital link between the central bank and the various segments of the highly
organized banking system co-exist. In an underdeveloped money market, the commercial
banking system is not fully developed.
2. Presence Of A Central Bank: The Central Bank acts as the banker’s bank. It keeps their
cash reserves and provides them financial accommodation in difficulties by discounting
their eligible securities. In other words, it enables the commercial banks and other
institutions to convert their assets into cash in times of financial crisis. Through its open
market operations, the central bank absorbs surplus cash during off-seasons and provides
additional liquidity in the busy seasons. Thus, the central bank is the leader, guide and
controller of the money market. In an underdeveloped money market, the central bank is
in its infancy and not in a position to influence and control the money market.
3. Availability of Proper Credit Instruments: It is necessary for the existence of a
developed money market a continuous availability of readily acceptable negotiable
securities such as bills of exchange, treasury bills etc. in the market. There should be a
number of dealers in the money market to transact in these securities. Availability of
negotiable securities and the presence of dealers and brokers in large numbers to transect
in these securities are needed for the existence of a instruments as well as dealers to deal
in these instruments in an underdeveloped money market.
4. Existence of Sub-Markets: The number of sub-markers determines the development of a
money market. The lager the number of sub-makers, the broader and more developed will
be the structure of money market. The several sub-makers together make a coherent
money market. In an underdevelopment money market, the various sub-makers,
particularly the bill market, are absent. Even of sub-makers exist, there is no co-
ordination between them. Consequently, different money rates prevail in the sub-makers
and they remain unconnected with of funds.
5. Ample Resources: There must be availability of sufficient funds to finance transactions
in the sub-makers. These funds may come from within the country and also from foreign
countries. The London, New York and Paris money markets attract funds from all over
the world. The underdeveloped money markets are starved of funds.
6. Existence of Secondary Market: There should be an active secondary market in these
instruments.
7. Demand And Supply Of Funds: There should be a large demand and supply of short-
term funds. It presupposes the existence of a large domestic and foreign trade. Besides, it
should have adequate amount of liquidity in the form of large amounts maturing within a
short period.
8. Other factors: Besides the above, other factors also contribute to the development of a
money market. Rapid industrial development leading to the emergence of stock
exchange, large volume of international trade leading to the system of bills exchange,
political stability, favorable conditions for foreign investment, price stabilization etc. are
the other factors that facilitate the development of money market in the country.
Defects of the Indian Money Market:
1. Existence of Un-organised Money Market:
The most important defect of the Indian money market is the existence of unorganised segment.
In this segment of the market the purpose as well period are not clearly demarcated. In fact, this
segment thrives on this characteristic.
This segment undermines the role of the RBI in the money market. Efforts of RBI to bring
indigenous bankers within statutory frame work have not yielded much result.
2. Lack of Integration:
Another important deficiency is the lack of integration of different segments or functionaries.
However, with the enactment of the Banking Companies Regulation Act 1949, the position has
changed considerably. The RBI is now almost fully effective in this area under various
provisions of the RBI Act and the Banking Companies Regulation Act.
3. Disparity in Interest Rates:
There have been too many interest rates prevailing in the market at the same time like
borrowings rates of government, the lending rates of commercial banks, the rates of co-operative
banks and rates of financial institutions.
This was basically due to lack of mobility of funds from one sub- segment to another. However,
with changes in financial sector the different rates of interest have been quickly adjusting to
changes in the bank rate.
4. Seasonal Diversity of Money Market:
A notable characteristic is the seasonal diversity. There are very wide fluctuations in the rates of
interest in the money market from one period to another in the year. November to June is the
busy period. During this period crops from rural areas are moved to cities and parts. The wide
fluctuations create problems in the money market. The Reserve Bank of India attempts to lessen
the seasonal fluctuations in money market.
5. Lack of Proper Bill Market:
Indian Bill market is an underdeveloped one. A well orgnaised bill market or a discount market
for short term bills is essential for establishing an effective link between credit agencies and
Reserve Bank of India. The reasons for this situation are historical, like preference for cash to
bills etc. Reserve Bank of India started making efforts in this direction in 1952. However, a new
and proper bill market was introduced in 1970. There has been substantial improvement since
then.
6. Lack of a well Organised Banking System:
Till 1969, the branch expansion was very slow. There was tremendous effort in this direction
after nationalisation. A well-developed banking system is essential for money market. Even, at
present the lack of branches in rural areas hinders the movement of funds. With emphasis on
profitability, there may be some problems on this account.
In totality it can be said that Indian Money Market is relatively under developed. In no case it
can be compared with London Money Market or New York Money Market. There are number of
factors responsible for it in addition to the above discussed characteristics.
