1. money and capital markets - overview

7/31/2019 1. Money and Capital Markets - Overview

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Money and Capital Markets - Overview

Abhilashita Rao


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Money Market Features

1. This market is primarilya market of short term funds with maturity less thanone year.

2. Call money market is an important segment of this market

3. Other Money Market Instruments are:

Commercial Paper

Certificate of DepositTreasury Bill

Dated Govt. Securities

1. RBI is the regulator for the money market


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Call Market Features

The market has two importantsegments Notice Money funds are traded on overnight basis

Money at call funds are traded for 2 14 days

Call rates are extremely volatile

The market has no fixed location

The daily volumes in Indian callmarket are in excess of Rs 30,000crores


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Call Market Participants

Commercial Banks

Institutions such as DFHI , NABARD andSTCI

Insurance Companies, Development

Financial Institutions and Mutual Funds(These entities act only as lenders and notas borrowers)


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Commercial Paper : Features

1. The instrument is an unsecured promissory note.

2. CP is typically issued at a discount to face value andredeemed at par.

3. The maturity of CP is between 15 days to 1 year.

4. CP is issued in denominations of Rs 5 lacs or multiplesthereof.

5. Amount invested by a single investor should not be lessthan Rs 5 lacs (face value).

6. Banks/FI s are prohibited from underwriting primaryissues of CP.

7. Stamp Duty has to be paid on primary issuance of CP.


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CP: Advantages and Limitations

Advantages: CP issue is a good wayfor corporates to fund their workingcapital because no lien is created on

the assets of the company. Also, awide range of maturity periods isavailable.

Limitations: This route is availableonly to blue chip companies.


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Eligibility Norms For CP Issue

Net worth of not less than Rs 4 crores

Minimum Credit Rating of P2 by CRISIL or itsequivalent

The issuer must have working capital limitssanctioned by a bank.

The account of the issuer must be classified asstandard asset by banks/institutions.


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Certificate of Deposit

This instrument was introduced in 1989 in order to encouragemobilization of bulk deposits by commercial banks.

A CD carries a higher rate of return as compared to a normalfixed deposit

CD s are issued at discount to face value

The denominations for CD s are a minimum of Rs 1 lac andmultiples thereof.

CD s are liquid instruments. Ratings by ICRA, CRISIL etc.enhance their tradability in the secondary market.

In case of CD issues by banks, CRR and SLR are applicable onthe issue price.

The maturity period of CD s issued by banks varies between 7days to one year. FI s can issue CD s with maturities rangingbetween 1 3 years.


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G Secs and T - Bills

1. G Secs are dated securities with maturities rangingbetween 1 -30 years. The interest is paid semi-annually

2. T bills are short term (for 91 days, 182 days or 364days)

3. Both these instruments carry a low rate of interestbecause of nil default risk


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Capital Market

Capital market is the market for long termfunds

In the primary market, the transaction is

between the issuer company and theinvestors. The intermediaries are BRLM s,underwriters etc.

In the secondary market , the transaction

is between the buyer and seller.

SEBI regulates the capital market.


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Primary market: Types of Issues

IPO: In case of unlisted companies

FPO: In case of already listed companies

Private Placement: Issue of equity to selectgroup of persons, not exceeding 49.


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Public Issue: Investor Classes

Retail Individual Investors : who apply forsecurities worth 1 lac or less.

Non Institutional Investors

Qualified Institutional Buyers

Mutual Funds Scheduled Commercial Bank

Development Financial Institution

Provident Fund with a minimum corpus of 25crores


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Entry Norm I: Profitability1. Net tangible assets of at least 3 crore in each of the

preceding 3 years.

2. Distributable profits in at least 3 out of preceding 5 years.

3. Net worth of at least 1 crore in each of the preceding 3years.

4. If the company has changed its name within the last oneyear, at least 50 % of the previous years revenue should be

from the activity suggested by the new name.5. The issue size cannot exceed 5 times the pre issue net

worth.


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Entry Norm 2: Appraisal Route

1. The post issue capital should be at least10 crores.

2. The project should be appraised andfunded to the extent of at least 15% by FIs/ SCBs.


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Intermediaries connected with anIPO/FPO

BRLM/ Merchant Banker: Responsible for drafting theprospectus, compliance and marketing of the issue.

Underwriter: Commits to subscribe to shares if theissue devolves.

Rating Agency: In case of IPO, assesses thefundamentals of issuer as compared to other listedcompanies in the same industry.

Registrar: Is responsible for basis of allotment,

allotment and refunds. Syndicate Member: accepts investors application and

uploads it on the system.


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IPO Terms

Green Shoe Option: A price stabilizingmechanism , shares are issued in excess ofissue size by a max. of 15%.

Differential Pricing: Shares are issued atdifferent prices to different classes ofinvestors. In India, RII s can be issuedshares at a discount of 10%.

Anchor Investor: An investor who can beallotted 30% of the portion reserved forQIBs. The investment will be subject to alock in of 30 days.

1. money and capital markets - overview

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