Generally speaking, there is no specific place or location to indicate a financial market. Wherever a financial transaction takes place, it is deemed to have taken place in the financial market. Hence financial markets are pervasive in nature since financial transactions are themselves very pervasive throughout the economic system. For instance, issue of equity shares, granting of loan by term lending institutions, deposit of money into a bank, purchase of debentures, sale of shares and so on. However, financial markets can be referred to as those centers and arrangements which facilitate buying and selling of financial assets, claims and services. Sometimes, we do find the existence of a specific place or location for a financial market as in the case of stock exchange.
Classification of Financial Markets
(a) Unorganized Markets: In these markets there are a number of money lenders, indigenous bankers, traders etc., who lend money to the public. Indigenous bankers also collect deposits from the public. There are also private finance companies, chit funds etc., whose activities are not controlled by the RBI. Recently the RBI has taken steps to bring private finance companies and chit funds under its strict control by issuing non-banking financial companies (Reserve Bank) Directions, 1998. The RBI has already taken some steps to bring the unorganized sector under the organized fold. They have not been successful. The regulations concerning their financial dealings are still inadequate and their financial instruments have not been standardized.
(b) Organised Markets : In the organized markets, there are standardized rules and regulations governing
their financial dealings. There is also a high degree of institutionalization and instrumentalization. These markets are subject to strict supervision and control by the RBI or other regulatory bodies.
These organized markets can be further classified into two. They are :
(i) Capital market
(ii) Money market
Capital Market : The capital market is a market for financial assets which have a long or indefinite maturity. Generally, it deals with long term securities which have a maturity period of above one year. Capital market may be further divided into three namely :
(i) Industrial securities market
(ii) Government securities market and
(iii) Long term loans market
I. Industrial securities market
As the very name implies, it is a market for industrial securities namely: (i) Equity shares or ordinary shares, (ii) Preference shares, and (iii) Debentures or bonds. It is a market where industrial concerns raise their capital or debt by issuing appropriate instruments. It can be further subdivided into two. They are :
(i) Primary market or New issue market
(ii) Secondary market or Stock exchange
Primary Market : Primary market is a market for new issues or new financial claims. Hence it is also called New Issue market. The primary market deals with those securities which are issued to the public for the first time. In the primary market, borrowers exchange new financial securities for long term funds. Thus, primary market facilitates capital formation.
There are three ways by which a company may raise capital in a primary market.
They are :
(i) Public issue
(ii) Rights issue
(iii) Private placement
The most common method of raising capital by new companies is through sale of securities to the public. It is called public issue. When an existing company wants to raise additional capital, securities are first offered to the existing shareholders on a pre-emptive basis. It is called rights issue. Private placement is a way of selling securities privately to a small group of investors.
Secondary Market : Secondary market is a market for secondary sale of securities. In other words, securities which have already passed through the new issue market are traded in this market. Generally, such securities are quoted in the stock exchange and it provides a continuous and regular market for buying and selling of securities. This market consists of all stock exchanges recognized by the Government of India. The stock exchanges in India are regulated under the Securities Contracts (Regulation) Act, 1956.
The Bombay Stock Exchange is the principal stock exchange in India which sets the tone of the other stock markets.
II. Government Securities Market : It is otherwise called Gilt-Edged securities market. It is a market where
Government securities are traded. In India there are many kinds of Government Securities-short term and long term. Long term securities are traded in this market while short term securities are traded in the money market. Securities issued by the Central Government, State Governments, Semi-Government authorities like City Corporations, Port Trusts. Improvement Trusts, State Electricity Boards, All India and State level
financial institutions and public sector enterprises are dealt in this market. Government securities are issued in denominations of Rs.100. Interest is payable half-yearly and they carry tax exemptions also. The role of brokers in marketing these securities is practically very limited and the major participant in this market in the
“commercial banks” because they hold a very substantial portion of these securities to satisfy their S.L.R. requirements.The secondary market for these securities is very narrow since most of the institutional investors tend to retain these securities until maturity.
The Government securities are in many forms. These are generally:
(i) Stock certificates or inscribed stock
(ii) Promissory Notes
(iii) Bearer Bonds which can be discounted.
Government securities are sold through the Public Debt Office of the RBI while Treasury Bills (short term securities) are sold through auctions. Government securities offer a good source of raising inexpensive finance for the Government exchequer and the interest on these securities influences the prices and
yields in this market. Hence this market also plays a vital role in monetary management.
III. Long Term Loans Market : Development banks and commercial banks play a significant role in this market by supplying long term loans to corporate customers. Long term loans market may further be classified into :
(i) Term loans market
(ii) Mortgages market
(iii) Financial Guarantees market
Term Loans Market : In India, many industrial financing institutions have been created by thee Government both at the national and regional levels to supply long term and medium term loans to corporate customers directly as well as indirectly. These development banks dominate the industrial finance in India. Institutions like IDBI, IFCI, ICICI, and other state financial corporations come under this category. These institutions meet the growing and varied long-term financial requirements of industries by supplying long term loans. They also help in identifying investment opportunities, encourage new entrepreneurs and support modernization efforts.
Mortgages Market : The mortgages market refers to those centers which supply mortgage loan mainly to individual customers. A mortgage loan is a loan against the security of immovable property like real estate. The transfer of interest in a specific immovable property to secure a loan is called mortgage. This mortgage may be equitable mortgage or legal one. Again it may be a first charge or second charge. Equitable
mortgage is created by a mere deposit of title deeds to properties as security whereas in the case of legal mortgage the title in the property is legally transferred to the lender by the borrower. Legal mortgage is less risky. Similarly, in the first charge, the mortgagor transfers his interest in the specific property to the mortgagee as security. When the property in question is already mortgaged once to another creditor, it becomes a second charge when it is subsequently mortgaged to somebody else. The mortgagee can also further transfer his interest in the mortgaged property to another. In such a case, it is called a sub-mortgage.
The mortgage market may have primary market as well secondary market. The primary market consists of original extension of credit and secondary market has sales and re-sales of existing mortgages at prevailing prices. In India residential mortgages are the most common ones. The Housing and Urban Development Corporation (HUDCO) and the LIC play a dominant role in financing residential projects. Besides, the Land Development Banks provide cheap mortgage loans for the development of lands, purchase of equipment etc. These development banks raise finance through the sale of debentures which are treated as trustee securities.
Financial Guarantees Market : A Guarantee market is a center where finance is provided against the guarantee of a reputed person in the financial circle. Guarantee is a contract to discharge the liability of a third party in case of his default. Guarantee acts as a security from the creditor’s point of view. In case the borrower fails to repay the loan, the liability falls on the shoulders of the guarantor. Hence the guarantor must be known to both the borrower and the lender and he must have the means to discharge his liability.
Though there are many types of guarantees, the common forms are : (i) Performance Guarantee, and (ii) Financial Guarantee. Performance guarantees cover the payment of earnest money, retention money, advance payments, non-completion of contracts etc. On the other hand financial guarantees cover only financial contracts.
In India, the market for financial guarantees is well organized. The financial guarantees in India relate to :
(i) Deferred payments for imports and exports
(ii) Medium and long term loans raised abroad
(iii) Loans advanced by banks and other financial institutions
These guarantees are provided mainly by commercial banks, development banks, Governments both central and states and other specialized guarantee institutions like ECGC (Export Credit Guarantee Corporation) and DICGC (Deposit Insurance and Credit Guarantee Corporation). This guarantee financial service is available to both individual and corporate customers. For a smooth functioning of any financial system, this
guarantee service is absolutely essential.
Importance of Capital Market
Absence of capital market acts as a deferent factor to capital formation and economic growth. Resources would remain idle if finance are not funneled through capital market. The importance of capital market can be briefly summarized as follows :
(i) The capital market serves as an important source for the productive use of the economy’s savings. It mobilizes the savings of the people for further investment and thus avoids their wastage in unproductive uses.
(ii) It provides incentives to saving and facilitates capital formation by offering suitable rates of interest as the price of capital.
(iii) It provides an avenue for investors, particularly the household sector to invest in financial assets which are more productive than physical assets.
(iv) It facilitates increase in production and productivity in the economy and thus enhance the economic welfare of the society. Thus, it facilitates “the movement of stream of command over capital to the point of highest yield” towards those who can apply them productively and profitably to enhance the
national income in the aggregate.
(v) The operations of different institutions in the capital market induce economic growth. They give quantitative and qualitative directions to the flow of funds and bring about rational allocation of scarce resources.
(vi) A healthy capital market consisting of expert intermediaries promotes stability in values of securities representing capital funds.
(vii) Moreover, it serves as an important source for technological up gradation in the industrial sector by utilizing the funds invested by the public.
Thus, a capital market serves as an important link between those who save and those who aspire to invest these savings.
Money Market
Money market is a market for dealing with financial assets and securities which have a maturity period of up-to one year. In other words, it is a market for purely short term funds. The money market may be subdivided into four. They are:
(i) Call money market
(ii) Commercial bills market
(iii) Treasury bills market
(iv) Short term loan market
Call Money Market : The call money market is a market for extremely short period loans say one day to fourteen days. So, it is highly liquid. The loans are repayable on demand at the option of either the lender or the borrower. In India, call money markets are associated with the presence of stock exchanges and hence, they are located in major industrial towns like Bombay, Calcutta, Madras, Delhi, Ahmedabad etc. The special feature of this market is that the interest rate varies from day to day and even from hour to hour and center to center. It is very sensitive to changes in demand and supply of call loans. Commercial Bills Market : It is a market for bills of exchange arising out of genuine trade transactions. In the case of credit sale, the seller may draw a bill of exchange on the buyer. The buyer accepts such a bill promising to pay at a later date specified in the bill. The seller need not wait until the due date of the bill. Instead, he can get immediate
payment by discounting the bill. In India the bill market is under-developed. The RBI has taken many steps to develop a sound bill market. The RBI has enlarged the list of participants in the bill market. The Discount and Finance House of India was set up in 1988 to promote secondary market in bills. In spite of all these, the growth of the bill market is slow in India. There are no specialized agencies for discounting bills. The commercial banks play a significant role in this market.
Treasury Bills Market : It is a market for treasury bills which have ‘short-term’ maturity. A treasury bill is a promissory note or a finance bill issued by the Government. It is highly liquid because its repayment is guaranteed by the Government. It is an important instrument for short term borrowing of the Government. There are two types of treasury bills namely (i) ordinary or regular and (ii) adhoc treasury bills popularly known as ‘adhocs’. Ordinary treasury bills are issued to the public, banks and other financial institutions with a view to raising resources for the Central Government to meet its short term financial needs. Adhoc treasury bills are issued in favour of the RBI only. They are not sold through tender or auction. They can be purchased by the RBI only. Adhocs are not marketable in India but holders of these bills can sell them back to 364 days only. Financial intermediaries can park their temporary surpluses in these instruments and earn
income.
Short-Term Loan Market : It is a market where short-term loans are given to corporate customers for meeting their working capital requirements. Commercial banks play a significant role in this market. Commercial banks provide short term loans in the form of cash credit and overdraft. Overdraft facility is mainly given to business people whereas cash credit is given to industrialists. Overdraft is purely a temporary accommodation and it is given in the current account itself. But cash credit is for a period of one year and it is sanctioned in a separate account.
Foreign Exchange Market
The term foreign exchange refers to the process of converting home currencies into foreign currencies and vice versa. According to Dr. Paul Einzing “Foreign exchange is the system or process of converting one national currency into another, and of transferring money from one country to another”.
The market where foreign exchange transactions take place is called a foreign exchange market. It does not refer to a market place in the physical sense of the term. In fact, it consists of a number of dealers, banks and brokers engaged in the business of buying and selling foreign exchange. It also includes the central bank of each country and the treasury authorities who enter into this market as controlling authorities.
Functions : The most important functions of this market are :
(i) To make necessary arrangements to transfer purchasing power from one country to another.
(ii) To provide adequate credit facilities for the promotion of foreign trade.
(iii) To cover foreign exchange risks by providing hedging facilities.
In India, the foreign exchange business has a three-tiered structure consisting of:
(i) Trading between banks and their commercial customers.
(ii) Trading between banks through authorized brokers.
(iii) Trading with banks abroad.
Brokers play a significant role in the foreign exchange market in India. Apart from authorized dealers, the RBI has permitted licensed hotels and individuals (known as Authorized Money Changers) to deal in foreign exchange business. The FEMA helps to smoothen the flow of foreign currency and to prevent any misuse of foreign exchange which is a scarce commodity.
No comments:
Post a Comment