Professional Documents
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The raising of capital (in the capital markets) The transfer of risk (in the derivatives markets) Price discovery Global transactions with integration of financial markets The transfer of liquidity (in the money markets) International trade (in the currency markets)
DEFINITION
In economics, typically, the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them. The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. This may be a physical location (like the NYSE, BSE and NSE) or an electronic system (like NASDAQ). Much trading of stocks takes place on an exchange; still, corporate actions (merger, spinoff) are outside an exchange, while any two companies or people, for whatever reason, may agree to sell stock from the one to the other without using an exchange. Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock exchange, and people are building electronic systems for these as well, similar to stock exchanges. Financial markets can be domestic or they can be international. Therefore we can conclude saying it is any market place where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives.
FINANCIAL MARKETS
Capital market
I. CAPITAL MARKETS
Money market
A 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: (a) Industrial securities market (b) Govt. securities market and (c) Long term loans market.
So capital markets are financial markets for the buying and selling of longterm debt- or equity-backed securities. These markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments. Thus capital market generally deals in medium and long-term funds. Companies and governments use capital markets to raise funds for their operations; for example, a company may issue an IPO while a government may issue a bond in order to conduct new or expand
ongoing activities. Investors purchase securities in the capital markets in order to extract a return and earn profit on the securities. The market where securities are traded known as Securities market. It consists of two different segments namely primary and secondary market.
1. Primary market : The primary market deals with new or fresh issue of securities and is, therefore, also known as new issue market. In primary markets, new stock or bond issues are sold to investors, often via a mechanism known as underwriting. The main entities seeking to raise long-term funds on the primary capital markets are governments (which may be municipal, local or national) and business enterprises (companies). Governments tend to issue only bonds, whereas companies often issue either equity or bonds. The main entities purchasing the bonds or stock include pension funds, hedge funds, sovereign wealth funds, and less commonly wealthy individuals and investment banks trading on their own behalf.
2. Secondary markets : In the secondary markets, existing securities are sold and bought among investors or traders, usually on an exchange, over-the-counter, or elsewhere. The existence of secondary markets increases the willingness of investors in primary markets, as they know they are likely to be able to swiftly cash out their investments if the need arises The secondary market can also be further divided as: a) Spot market: The spot market where securities are traded for immediate delivery and payment. b) Forward market: The forward market is a market where the securities are traded for future delivery and payment. This forward market is further divided into Futures and Options Market.
II.
MONEY MARKETS
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, its a market for purely short term funds. Generally money market does not deal in cash or money as such but simply provides a market for credit instruments such as bills of exchange, promissory notes, commercial paper, treasury bills, etc. These instruments help the business units, other organizations and the Government to borrow the funds to meet their short-term requirement. Most of the money market transactions are taken place on telephone, fax or Internet. As money became a commodity, the money market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Trading in the money markets is done over the counter and is wholesale. Various instruments exist, such as Treasury bills, commercial
paper, bankers' acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-
lived mortgage-, and asset-backed securities. It provides liquidity funding for the global financial system.
4. Institutions: Important institutions operating in the' money market are central banks, commercial banks, acceptance houses, nonbank financial institutions, bill brokers, etc. Important institutions of the capital market are stock exchanges, commercial banks and nonbank institutions, such as insurance companies, mortgage banks, building societies, etc. 5. Purpose of Loan: The money market meets the short-term credit needs of business; it provides working capital to the industrialists. The capital market, on the other hand, caters the long-term credit needs of the industrialists and provides fixed capital to buy land, machinery, etc. 6. Risk: The degree of risk is small in the money market. The risk is much greater in capital market. The maturity of one year or less gives little time for a default to occur, so the risk is minimized. Risk varies both in degree and nature throughout the capital market. 7. Basic Role: The basic role of money market is that of liquidity adjustment. The basic role of capital market is that of putting capital to work, preferably to longterm, secure and productive employment.
8. Relation with Central Bank: The money market is closely and directly linked with central bank of the country. The capital market feels central bank's influence, but mainly indirectly and through the money market. 9. Market Regulation: In the money market, commercial banks are closely regulated. In the capital market, the institutions are not much regulated.
Saving mobilization: Obtaining funds from the savers or surplus units such as household individuals, business firms, public sector units, central government, state governments etc. is an important role played by financial markets.
Investment: Financial markets play a crucial role in arranging to invest funds thus collected in those units which are in need of the same.
National Growth: An important role played by financial market is that, they contributed to a nations growth by ensuring unfettered flow of surplus funds to deficit units. Flow of funds for productive purposes is also made possible.
Entrepreneurship growth: Financial market contributes to the development of the entrepreneurial claw by making available the necessary financial resources.
Industrial development: The different components of financial markets help an accelerated growth of industrial and economic development of a country, thus contributing to raising the standard of living and the society of well-being.
Transfer of Resources: Financial markets facilitate the transfer of real economic resources from lenders to ultimate borrowers.
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Enhancing income: Financial markets allow lenders to earn interest or dividend on their surplus invisible funds, thus contributing to the enhancement of the individual and the national income.
Productive usage: Financial markets allow for the productive use of the fund borrowed, enhancing the income and the gross national production.
Capital Formation: Financial markets provide a channel through which new savings flow to aid capital formation of a country.
Price determination: Financial markets allow for the determination of price of the traded financial assets through the interaction of buyers and sellers. They provide a sign for the allocation of funds in the economy based on the demand and supply through the mechanism called price discovery process.
Sale Mechanism: Financial markets provide a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets.
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Information: The activities of the participants in the financial market results in the generation and dissemination of information to the various segments of the market so as to reduce the cost of transaction of financial assets
Financial Functions
Providing the borrower with funds so as to enable them to carry out their investment plans.
Providing the lenders with earning assets so as to enable them to earn wealth by deploying the assets in production debentures.
it provides liquidity to commercial bank it facilitate credit creation it promotes savings it promotes investment it facilitates balance economic growth it improves trading floors
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SEBI (D&P) Regulations, 1996 prescribe a minimum net worth of Rs. 50 lakh for stockbrokers, R&T agents and non-banking finance companies (NBFC), for granting them a certificate of registration to act as DPs. If a stockbroker seeks to act as a DP in more than one depository, he should comply with the specified net worth criterion separately for each such depository. No minimum net worth criterion has been prescribed for other categories of DPs; however, depositories can fix a higher net worth criterion for their DPs.
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For any investor / client, to avail the services provided by the Depository, has to open Depository account, known as Demat A/c, with any of the DPs. A Depository Participant (DP) is an agent of the depository through which it interfaces with the investor and provides depository services. Public financial institutions, scheduled commercial banks, foreign banks operating in India with the approval of the Reserve Bank of India, state financial corporations, custodians, stock-brokers, clearing corporations /clearing houses, NBFCs and Registrar to an Issue or Share Transfer Agent complying with the requirements prescribed by SEBI can be registered as DP. Banking services can be availed through a branch whereas depository services can be availed through a DP. As per the available statistics at BSE and NSE, 99.9 per cent transactions take place in dematerialized mode only. Therefore, in view of the convenience of trading in dematerialized mode, it is advisable to have a beneficial owner (BO) account for trading at the exchanges. However to facilitate trading by small investors (Maximum 500 shares, irrespective of their value) in physical mode the stock exchanges provide an additional trading window, which gives one time facility for small investors to sell physical shares which are in compulsory demat list. The buyer of these shares has to demat such shares before further selling.First an investor has to approach a DP and fill up an account opening form. The account opening form must be supported by copies of any one of the approved documents which serve as proof of identity (POI) and proof of address (POA) as specified by SEBI. Apart from these PAN card has to be shown in original at the time of account opening.
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Rematerialisation, known as remat, is reverse of demat, i.e. getting physical certificates from the electronic securities
Transfer of securities, change of beneficial ownership Settlement of trades done on exchange connected to the Depository
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linked to the stock exchanges (nine of them including the main onesNational Stock Exchange and Bombay Stock Exchange). In order to facilitate transfers between investors having accounts in the two existing depositories in the country the Securities and Exchange Board of India has asked all stock exchanges to link up with the depositories. Sebi has also directed the companies registrar and transfer agents to effect change of registered ownership in its books within two hours of receiving a transfer request from the depositories. Once connected to both the depositories the stock exchanges have also to ensure that inter-depository transfers take place smoothly. It also involves the two depositories connecting with each other. The NSDL and CDSL have signed an agreement for inter-depository connectivity. 1 NATIONAL SECURITIES DEPOSITORY LIMITED NATIONAL SECURITIES DEPOSITORY LIMITED [NSDL] is a depository promoted by National Stock Exchange of India Limited, IDBI, UTI, SBI and other financial institutions. NSDL commenced operation in November 1996. 2 CENTRAL DEPOSITORY SERVICE [INDIA] LIMITED CENTRAL DEPOSITORY SERVICE (INDIA) LIMITED [CDSL] is a depository promoted by The Stock Exchange, Mumbai jointly with SBI, Bank Of India, HDFC Bank and other financial institutions. CDSL commenced its operations in July 15th 1999.
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CDSL was promoted by BSE Ltd. jointly with leading banks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank and Union Bank of India. CDSL was set up with the objective of providing convenient, dependable and secure depository services at affordable cost to all market participants. Some of the important milestones of CDSL system are:
CDSL received the certificate of commencement of business from SEBI in February, 1999.
Honorable Union Finance Minister, Shri Yashwant Sinha flagged off the operations of CDSL on July 15, 1999.
Settlement of trades in the demat mode through BOI Shareholding Limited, the clearing house of BSE Ltd., started in July 1999.
All leading stock exchanges like the National Stock Exchange, Calcutta Stock Exchange, Delhi Stock Exchange, The Stock Exchange, Ahmadabad, etc have established connectivity with CDSL.
As at the end of Jan 2012, Over 10,000 issuers have admitted their securities (equities, bonds, debentures, and commercial papers), units of mutual funds, certificate of deposits etc. into the CDSL system.
A Depository facilitates holding of securities in the electronic form ande n a b l e s s e c u r i t i e s t r a n s a c t i o n s t o b e p r o c e s s e d b y b o o k e n t r y b y a Depository Participant (DP), who as an agent of the depository offers depository services to investors. According to SEBI guidelines, financial institutions, banks, custodians, stockbrokers, etc. are eligible to act as DPs. The investor who is known as beneficial
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owner (BO) has to open a demat account through any DP for dematerialisation of his holdings and transferring securities. The balances in the investors account recorded and maintained with CDSL can be obtained through the DP. The DP is required to provide the i n v e s t o r , a t r e g u la r i n t e r v a l s , a s t a t e me n t o f a c c o u n t wh i c h g i v e s t h e details of the securities holdings and transactions. The depository system has effectively eliminated paper-based certificates which were prone to be f a k e , f o r g e d , c o u n t e r f e i t r e s u lt i n g i n b a d d e l i v e r i e s . C DS L o f f e r s a n efficient and instantaneous transfer of securities. CDSL was promoted by Bombay Stock Exchange Limited (BSE) j o i n t l y wi t h l e a d i n g b a n k s s u c h a s S t a t e B a nk o f I n d i a , B a n k o f I n d i a , Bank of Baroda, HDFC Bank, Standard Chartered Bank, Union Bank of India and Centurion Bank. CDSL Ventures Limited (CVL) CDSL Ventures Limited is a subsidiary of Central Depository Services (India) Limited. It was set with the motive to provide convenient, dependable services at affordable prices. CDSL Ventures Limited (CVL) is a wholly owned subsidiary of Central Depository Services (India) Limited (CDSL), a leading securities depository in the country. CVL derives its confidence from its team, which has a 'Securities Market Domain Expertise'. CVL has in place a stringent policy and systems to ensure confidentiality of data. Strong electronic and physical security measures ensure security of confidential data. CSDL ventures limited (CVL) is owned subsidiary of central depository services India limited it is one of the leading depository in the country.
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CSDL is promoted by Bombay stock exchange in association with most of the leading banks such as bank of India, bank of Baroda, state bank of India, HDFC. CDSL was set with the motive to provide convenient, dependable services at affordable prices to all the market participants. According to SEBI norms any one can act as depository participant (DP) which includes banks, financial institutes, or even a stock broker and many more. Person who wants to invest in this field is popularly known by the name beneficial owner has to open a DMAT account through any of the depository participant for holding and transferring securities.
CONVINIENCE
DEPEDABILITY
SECURITY
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WHY A DEMAT ACCOUNT WITH CDSL CONVENIENCE: WIDE DP NETWORK: CDSL has over 300 DPs spread around cities/towns across the country, offering convenience for an investor to select a DP b a s e d o n h i s location. ON-LINE DP SERVICES: T h e D P s a n d i t s b r a n c h e s c a n a l s o b e d i r e c t l y c o nn e c t e d t o C DS L thereby providing on-line and efficient depository service to investors. WIDE SPECTRUM OF SECURITIES AVAILABLE FOR DEMAT: Over-5000 users have admitted their securities in CDSL consisting of debt instruments viz. bonds, debentures, commercial paper, government securities, certificate of deposits, etc. Thus an investor can hold almost all his securities in one account with CDSL. COMPETITIVE FEES STRUCTURE: CDSL has kept its tariffs very competitive to provide a f f o r d a b l e depository services to investors. INTERNET ACCESS: A DP of CDSL can provide to its BOs their demat account statement along with a valuation of their holding as per the last
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traded price on B S E a n d a s u m m a r y o f t h e i r t r a n s a c t i o n s f o r a l l a c c o u n t h o l d e r s through CDSLs internet facility easi. The BOs can also avail of the facility of execution of all types of transactions viz, on market, off-market and inter-depository, through CDSLs internet facility easiest. DEPENDABILITY: O N- L I N E I N FO R M AT I O N T O U S E R S : CDSL's system is built on a centralized database architecture and thuse n a b l e s D P s t o p r o v i d e o n l i n e d e p o s i t o r y s e r v i c e s wi t h t h e l a t e s t status of the investor's account. CONVENIENT TO DPS: In case any system related problem develops at the DPs end, it doesn o t a f f e c t t h e B O s i n t e r e s t i n a n y w a y a s t h e C D S L d a t a b a s e i s maintained centrally. C O NT I NG E N CY A R RA NG E ME NT S : CDSL has made provisions for contingency terminals, which enables aDP to update transactions, in case of any system related problems at the DP's office. M E E T I N G US E R ' S R E Q UI RE ME NT S : Continuous updation of procedures and processes in tu n e w i t h evolving market practices is another hallmark of CDSL's system.
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A U DI T A ND I NS PE C T I O N : CDSL conducts regular audit of its DPs to ensure comp l i a n c e o f stringent operational and regulatory requirements. SECURITY: COMPUTER SYSTEMS: CDSL has state-of-the-art computer systems, data storage methods and communication networks which ensure the security and integrity of all data uninterruptedly. All data at CDSL and is automatically mirrored a n d t r a n s mi t t e d t o a Di s a s t e r R e c o v e r y s i t e , wh i c h i s l o c a t e d a wa y from the main site. UNIQUE BO ACCOUNT NUMBER: Each BO in CDSL is allotted a unique account number. This preventsw r o n g t r a n s f e r o f s e c u r i t i e s i n t h e e v e n t t h e t r a n s f e r e e s a c c o u n t number is keyed in wrongly. SYSTEM ACCESS: Only a person at the DPs end who has been pre authorized by CDSL can access the CDSL system. INSURANCE COVER : C DS L h a s o b t a i ne d a d e q u a t e i n s u r a n c e c o v e r f o r a n y u n l i k e l y l o s s occurring to a BO due to the negligence of CDSL
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receipt of securities into his/her account, a BO can give one time "standing instruction" to DP. Once such a standing instruction is given to the DP, there is no need to submit separate instructions for receipt every time the investor buys securities. Account Statement Generally a DP sends to the BO, a statement of his account, monthly, if there is any transaction in the account or every quarter if the account is not operated during that period. The balances and transactions can also be viewed by the BOs through CDSL web based facility 'easi' Rematerialisation Rematerialisation is the process by which the electronic balances held in the demat account can be converted back into physical certificates Pledging If the BO decides to pledge any securities in his BO account, he can avail of the same by submitting the pledge creation form duly completed, to his DP. Nomination Individual BOs have a facility for nomination in favor of an individual. If the sole or all the joint holders are deceased, the shares of different companies held in the demat account will be transmitted easily to the demat account of the nominee on submission of the death certificate and transmission form. It may be noted that in the event of the death of one of the joint holders, the securities will be transmitted in the demat account of the surviving holders.
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Transmission of securities CDSL offers a facility for transmission of balances held in BO account/s (to other BO account/s) if so required due to death, lunacy, bankruptcy, insolvency or required due to operation of any law. Change in Address A BO who wishes to register his change in address submits his/her request in writing to his/her DP. The changes entered by the DP in the CDSL system will be automatically downloaded to all the companies in which the BO is holding securities. This facility offered by CDSL saves money, time and effort for the BO. Bank Account Details SEBI has made it mandatory for companies to print details of bank account of the BO on dividend/interest warrants etc. to prevent possibilities of misuse of the warrants. All BOs should submit a request in writing to the DP if they wish to record / change their bank account details. SMS CDSL sends SMS regarding transactions and modifications in account details to the mobile number registered in the account.
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Wide DP Network: CDSL has a wide network of DPs, operating from over 10,000 sites, across the country, offering convenience for an investor to select a DP based on his location.
On-line DP Services: The DPs are directly connected to CDSL thereby providing on-line and efficient depository service to investors.
Wide Spectrum of Securities Available for Demat: The equity shares of almost all A, B1 & B2 group companies are available for dematerialisation on CDSL, consisting of Public (listed & unlisted) Limited and Private Limited companies. These securities include equities, bonds, units of mutual funds, Govt. securities, Commercial papers, Certificate of deposits; etc. Thus, an investor can hold almost all his securities in one account with CDSL. A BO can also hold warehouse receipts pertaining to commodities, in a demat account. However, a separate account should be opened for holding warehouse receipts.
Competitive Fees Structure: CDSL has kept its tariffs very competitive to provide affordable depository services to investors.
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Internet Access: A DP, which registers itself with CDSL for Internet access, can in turn provide demat account holders with access to their account on the Internet.
Dependability:
On-line Information to Users: CDSL's system is built on centralized database architecture and thus enables DPs to provide on-line depository services with the latest status of the investor's account. Convenient to DPs: The entire database of investors is stored centrally at CDSL. If there is any system-related issues at DPs end, the investor is not affected, as the entire data is available at CDSL. Contingency Arrangements: CDSL has made provisions for contingency terminals, which enables a DP to update transactions, in case of any system related problems at the DP's office. Meeting User's Requirements: Continuous updating of procedures and processes in tune with evolving market practices is another hallmark of CDSL's services. Audit and Inspection: CDSL conducts regular audit of its DPs to ensure compliance of operational and regulatory requirements.
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Dormant Account Monitoring: CDSL has in place a mechanism for monitoring dormant accounts. Helpdesk: DPs and investors can obtain clarifications and guidance from CDSL's prompt and courteous helpline facility.
Security:
Computer Systems: All data held at CDSL is automatically mirrored at the Disaster Recovery site and is also backed up and stored in fireproof cabinets at the main and disaster recovery site. Unique BO Account Number: Every BO in CDSL is allotted a unique account number, which prevents any erroneous entry or transfer of securities. If the transferor's account number is wrongly entered, the transaction will not go through the CDSL system, unless corrected. Data Security: All data and communications between CDSL and its users are encrypted to ensure its security and integrity. Claims on DP:
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If any DP of CDSL goes into liquidation, the creditors of the DP will have no access to the holdings of the BO. Insurance Cover: CDSL has an insurance cover in the unlikely event of loss to a BO due to the negligence of CDSL or its DPs.
connectivity, non-disruptive capacity and performance scalability, multiple processors, resulting in faster performance, continuous data availability and data integrity. The EMC systems also provide the most advanced software capabilities, including full and incremental replication and anytime/any distance mirroring for business continuity protection. Database Architecture CDSL has gone in for a centralised database system. This centralised architecture provides distinct advantages to the users. The initial set-up cost for Issuer Companies/their RTAs and Depository Participants is low. Information on investor's holdings is available to the Depository Participant and the Issuer or its RTA instantly. Disaster Recovery Site (DRS) From the business continuity angle, CDSL has in place, a robust system with multiple back-up levels including a redundant fail-over cluster and a DRS, Located at a different seismic zone over 1000 kms from the main site. Consequently, in the event of a disaster at the main site, users connected to the CDSL connectivity network viz. Depository Participants (DPs), Clearing Corporations and Registrar & Transfer Agents (RTAs) can electronically connect to the DRS for seamlessly carrying on day-to-day operations. Information Security CDSL has committed itself to highest level of information security practices and is committed to maintain the Confidently, Integrity and Availability of all its information, in any from whatsoever. Towards, this end CDSL has complied with ISO 27001 Standards and has been awarded the coveted ISO 27001 certificate by leading certification body.
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Business Continuity CDSL is one of the few depository institutions in the world to be awarded ISO22301:2012 certification for it Business continuity Management Systems in June 2013. It is a step to assure all its stakeholders across the world for uninterrupted operations of CDSL depository services.
CDSL AND DTCC (U.S.A.) SIGN INFORMATION SHARING AND COLLABORATION PACT
The MOU noted that the parties anticipate developing a closer w o r k i n g r e l a t i o ns h i p i n t h e f u t u r e a n d wi s h t o ma i n t a i n c h a n n e l s o f c o mmu n i c a t i o n f o r e x c h a ng e o f i n f o r ma t i o n a n d t o p r o mo t e v i s i t s f o r reasons of friendship and other business purposes.
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India is one of the fastest growing areas of the world and CDSL is a major part of the securities infrastructure in the country, said Donald F D o n a h u e D T C C C h a i r ma n e l e c t a n d C h i e f Ex e c u t i v e Of f i c e r . T h i s agreement with CDSL will give us a structure to exchange ideas, share market insights and develop coordinated ways of working with each other in what is rapidly becoming a global trading environment. The MOU with DTCC is an extension of the good relations that CDSL shares with them. I see it as an initial formal handshake, the beginning of a long and mu t u a l l y b e n e f i c i a l b u s i n e s s r e l a t i o ns h i p , s a i d Vi j a y V . R a u t , C DS L M a n a g i n g D i r e c t o r & C E O . We a r e s u r e t h a t t h i s e v e n t wi l l r e s u l t i n significant, tangible benefits, not just to both organizations but also to our s t a k e h o l d e r s a n d t o t h e s e c u r i t i e s ma r k e t s a t l a r g e . He f u r t h e r a d d e d , Although DTCC and CDSL have different legislative frameworks and settlement systems; it would be beneficial for both depositories to share their experiences to reduce risks and to enhance the efficiency of systems. We look forward to sharing our experience and tapping DTCC's expertise on global market practices.
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BIBLIOGRAPHY Books:
Financial markets and services Gordon and Natarajan NSEs Certification in Financial Markets
Website:
www.cdslindia.com www.cdsl.net.in www.cvlindia.com www.cdsl.co.in
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ANNEXURE
What is a depository?
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Is it necessary for a BO to open a demat account with the same DP as that of the broker for settling trades done through him?
How does a BO get information that the account has been updated after each transaction?
Can a sole holder of the share certificate, add/ delete any name as a joint holder, at the time of dematerialising the share certificate?
What is the procedure for delivery of securities demats form in case of sale of securities?
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What is the procedure for delivery of securities demats form in case of sale of securities?
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