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University of Mumbai


A Project Report on


In Partial Fulfillment of
Bachelor of Commerce Financial Market (BFM)

Submitted by:

Smt. MMK College of Commerce & Economics

T.P.S III, 32nd Road, Bandra (West)
Mumbai - 400050, India.






Money market is a market for short term loans and financial assets. It is a
market for lending and borrowing of short term funds. The Money market
refers to an activity rather than a place. This market supplies funds for
financing current business operations, working capital requirements of
industries and short term requirements of government


A market in which individuals and institutions trade financial securities.

Organizations/institutions in the public and private sectors also often sell
securities on the capital markets in order to raise funds. Thus, this type of
market is composed of both the primary and secondary markets.


The financial system is an important element of an economy. The financial
resources are exchanged through the financial system. The financial
market is the heart of the financial system. The financial market refers to a
place or mechanism through which financial instruments are traded.

According to S.K. Cooper and other Financial markets are the markets in
which financial instruments are traded.

Similarly, according to Dudley G. Luckett, Financial market is to be

understood as any exchange of a variety of financial instruments.

The financial market is said to the brain of entire economic system. The
savings are channelled to investments through financial market. The
financial instruments like stock, bond, insurance policy, government
securities and debentures are traded in the financial market.
The two important types of financial market are the money market and
capital market. Concepts of these two types of financial market have been
presented below.


In economics, market does not mean a particular place. Instead, the market
is a process of buying and selling of goods by making contract through
different mediums. Hence, money market also does not denote a particular
place. The money market refers to the whole area where money is bought
and sold. To be more precise, money market is simply a process of buying
and selling of money. Unlike a stock exchange, the money market is not a
particular place but is a system. The transactions may take place between
different persons by telephone, fax without personal meeting.
The short-term funds are transacted in the money market. In general the
term of the loan is less than one year. Hence, the evidence of credit having
maturity of less than one year is the instruments of money market. The
main function of the money market is to make available working capital to
the business and loan to the government. It also makes available loans for
the speculation of goods and securities.

The business firms use the money market to distribute wages and salaries,
repair equipments, pay energy charge, taxes and so on. The government
uses it to meet the deficit in public revenue. The finance companies use it
to provide loans to the consumers. The banks use it to meet the temporary
deficit in reserve. All these credit are only for up to one year.
The meaning of money market becomes clear from the following
definitions: According Dudley G. Luckett -The money market is a market for
short term (less than one year) loans. Its very name suggests that it
is money that is being bought and sold.

In the words of J.A. Cocharan, The money market is a market which

trades in short term, highly liquid, negotiable debt instruments of one
year or less in maturity.

World Bank has defined the money market as, A market in which
short term securities such as treasury bills, certificates of deposits
and commercial bills are traded.

In brief, the money market is a means of exchange of short term

credit. It is quite different from the capital market which deals in long
term credit.


The market dealing in long term finance is known as capital market. This
market makes available funds for long-term investment. Hence, capital
market is a market for long term credit. The meaning of capital market
becomes clear from the following definitions:According to Dudley G. Luckett, A capital market is just what the name
implies: a market for capital funds. Strictly speaking, the capital market
encompasses any transactions involving long-term debt or equity
In the words of S.K. Cooper and others, The framework for the borrowing
and lending of funds for periods longer than a year is called the capital
World Bank has defined the capital market as, The market in which longterm financial instruments such as equities and bonds are raised and

The money market is a wholesale debt market for low risk, highly liquid
short term instrument. Funds are available in this market for periods
ranging from a single day up to a year. Majorly, Governments, banks and
other financial institutions dominate this market. The money market is a
market for short term financial assets that are close substitutes of money.
The most important feature of a money market instrument is that it is liquid
and can be turned over quickly at low cost and provides an avenue for
equilibrating the short term funds of lenders and the requirements of

The money market is a subsection of the fixed income market. We

generally relates the term foxed income as being synonymous to bonds. In
reality, a bond is just one type of fixed income security. The difference
between the money market and the bond market is that the money market
specializes in short term debt markets securities (debt that matures in less
than one year).
Money market instruments are also called cash investments because of
their short maturities.
Money market instruments are very liquid and are considered to be
extremely safe. Since they are extremely conservative, money market
securities offer lower returns than most other securities. One of the main
differences between the money market and the stock market is that the
money market securities trade in very high denominations. This limits
access for the individual investor. Furthermore, the money market is a
dealer market which means that the firms buy and sell securities in their
own accounts and at their own risk. Compare this to the stock market the
investor takes the risk of holding the stock. Another characteristic of a
dealer market is the lack of trading floor or exchange. Deals are transacted
over the phone or through electronic systems.
The easiest way to gain access to the money market is with the money
market mutual funds. These funds pool together the assets of thousands of
investors in order to buy the money market securities on their behalf.
However, some money market instruments like treasury bills can be
purchased directly.
1. The money market deals in financial assets having maturity period up
to one year only.

2. In the money markets participants borrow and lend for short periods
that is up to twelve months.
3. Transactions usually take place via oral communication or written
4. There is no formal place like stock exchange.
5. The money market comprises of the Treasury Bills market,
Commercial Bills market, Call Money market etc.
6. Money market components include central bank, commercial bank,
non banking financial companies, etc.
7. The central bank plays a pivotal role in the money market.


1. Provides the mobilization of short term funds.
2. Helps to overcome the short term deficits.
3. Enables the user to have easy access to short term funds in order to
meet their requirements quickly.
4. Provides the central bank with the authority to influence and regulate
liquidity in the economy through its intervention in this market.


1. Monetary Policy: Conditions in the market are an indicator of the
monetary state of the economy. Hence it enables the government in

formulating and restricting the monetary policy on the basis of the

monetary conditions prevailing in the market.
2. Trade and Industry: A developed money market plays an important
role in the financial system of a country by supplying short term
working capital requirements adequately and quickly to trade and
3. Authority of the Central Bank: The central bank through the money
market pumps new into the economy in slump and withdraws it
during a boom. The central bank thus has the authority in regulating
the flow of money in the economy so as to promote economic growth.
4. Non-inflationary source of finance to the government: The
government meets its short term requirements trough the issue of
treasury bills. In the absence of a developed short term working
capital requirements the government will be forced to issue additional
notes or to borrow from the central bank. Both the ways would lead to
an increase in prices and the consequent inflationary trend in the
5. Commercial Banks: The money market provides the commercial
banks with facilities for temporarily employing their surplus funds in
the easy realizable assets. The banks can get the funds quickly in
times of need by resorting to the money market.
6. Statutory requirements of Banks: Commercial Banks meet their
statutory requirements of Cash Reserve ratio (CRR) and Statutory
Liquidity Ratio (SLR) by utilizing the money market mechanisms.


1. Constituents of Money Market: Like other markets, money market

also has three constituents:
(a) It has buyers and sellers in the form of borrowers and lenders,
(b) It has a commodity; it deals with short-maturity credit instruments,
like commercial bills, treasury bills, etc.
c) It has a price in the form of rate of interest which is an item of cost
to the borrower and return to the lender.
2. Heterogeneous Market: The money market is not a single
homogeneous market but consists of several sub-markets, each
market dealing with a specific short-term credit instrument, e.g., call
money market, trade bill market, etc. Thus, it is difficult to talk about a
general money market.

3. Short-term Loans: Money market deals with short-term loans. In a

money market, the borrowers can obtain funds for periods varying
from a day, a week, a month, or three to six months.
4. Money Assets: Money market does not deal in money, but in shortterm financial instruments or near-money assets. These assets are
relatively liquid and readily marketable. The assets against which the
funds can be borrowed in the money market include short-term
government securities, bills of exchange, bankers' acceptances, etc.
5. Physical Contact Not Necessary: Money market does not refer to a
specific place where borrowers and lenders meet each other. In fact,
it is not necessary that the borrowers and lenders should have
personal contact with each other at a particular place. They may carry
on their negotiations through telephone or mail. Thus, money market


simply relates to the arrangement which establishes direct an indirect

contact between the borrowers and lenders.
6. Different from Capital Market: Money market is different from
capital market on the basis of maturity period. Money market deals
with the short-term lending and borrowing of funds, while capital
market deals with medium and long-term lending and borrowing of
7. Association with Big Cities: Generally, money markets are
associated with important places or localities. Almost every big city
has a money market. In this way, we have London money market,
New York money -market, Bombay money market, etc.
8. Change with Place and Time: Though the functions of money
markets in different countries are broadly the same, the instruments,
institutions and practices of these markets vary considerably from
country to country. Money markets also change with time.
9. Dealers of Money Market: The financial institutions in the money
market meet the short-term needs of the borrowers. The borrowers in
the money market are traders, manufactures, speculators, and even
government institutions. The lenders in the money market are
commercial banks, central banks, non-bank financial intermediaries,



The Indian money market is "a market for short-term and Long term funds
with maturity ranging from overnight to one year and includes financial
instruments that are deemed to be close substitutes of money. It is
diversified and has evolved through many stages, from the conventional
platform of treasury bills and call money to commercial paper, certificates of
deposit, repos, FRAs and IRS more recently.
The Indian money market consists of diverse sub-markets, each dealing in
a particular type of short-term credit. The money market fulfills the
borrowing and investment requirements of providers and users of shortterm funds, and balances the demand for and supply of short-term funds by
providing an equilibrium mechanism. It also serves as a focal point for the
Central Bank's intervention in the market.

The Indian money market consists of three parts:


Organized sector


Unorganized sector
Cooperative sector


1. Reserve Bank of India
2. DFHI (Discount and Finance House od India)
3. Commercial banks
Public Sector Banks
o SBI with 7 subsidiaries
o Cooperative Banks
o 20 Nationalized Banks
Private Banks
o Indian Banks
o Foreign banks
4.Development Banks ( ICICI, IDBI, IFCI etc)

Indigenous Banks
Money lenders


1. State Cooperative
Primary Agri Credit Societies
Primary Urban Banks
2. State Land Development Banks
Central Land Development Banks
Primary Land Development Banks



While the need for long term financing is met by the capital or financial
markets, money market is a mechanism which deals with lending and
borrowing of short term funds. Post reforms age in India has witnessed
marvelous increase of the Indian money markets. Banks and other financial
institutions have been able to meet the high opportunity of short term
financial support of important sectors like the industry, services and
agriculture. It performs under the regulation and control of the Reserve
Bank of India (RBI). The Indian money markets have also exhibit the
required maturity and flexibility over the past two decades. Decision of the
government to permit the private sector banks to operate has provided
much needed healthy competition in the money markets resulting in fair
amount of improvement in their performance.

Money markets denote inter-bank market where the banks borrow and lend
between themselves to meet the short term credit and deposit needs of the
economy. Short term normally covers the time period up to one year. The
money market operation help the banks rush over the provisional mismatch
of funds with them. In case a particular bank needs funds for a few days it
can lend from another bank by paying the strong-minded interest rate. The
lending bank also gains as it is able to earn interest on the funds lying idle
with it. In other words money market provides avenues to the players in the
market to strike balance between the surplus funds with the lenders and
the obligation of funds for the borrowers. An significant function of the
money market is to provide a central point for interventions of the RBI to
pressure the liquidity in the financial system and implement other monetary
policy measures. Quantum of liquidity in the banking system is of dominant


importance as it is an important determinant of the inflation rate as well as

the formation of credit by the banks in the financial system. Market forces
generally indicate the need for borrowing or liquidity and the money market
adjusts itself to such calls. RBI facilitates such adjustments with monetary
policy tools obtainable with it. Heavy call for funds overnight indicates that
the banks are in need of short term funds and in case of liquidity crunch the
interest rates would go up.
Depending on the financial situation and available market trends the RBI
intervenes in the money market through a crowd of interventions. In case of
liquidity crunch the RBI has the option of either dropping the Cash Reserve
Ratio (CRR) or pumping in more money supply into the system. Recently to
conquer the liquidity crunch in the Indian money market the RBI has
released more than Rs 75,000 crores with two back-to-back reductions in
the CRR. In adding to the lending by the banks and the monetary
institutions, various companies in the commercial sector also issue fixed
deposits to the public for shorter period and to that amount become part of
the money market mechanism selectively. The maturities of the instruments
issued by the money market as a whole, range from one day to one year.
The money market is also closely linked with the Foreign Exchange Market
throughout the procedure of covered interest arbitrage in which the forward
premium acts as a bridge among the domestic and foreign interest rates.
Determination of appropriate interest for deposits or loans by the banks or
the other financial institutions is a complex device in itself. There are
several issues that need to be determined before the optimum rates are
determined. While the term arrangement of the interest rate is a very
important determinant, the difference between the existing domestic and


Interest rates also emerges as a significant factor. Further, there are

several credit instruments which involve similar maturity but diversely
different risk factors. Such distortions are accessible only in rising and
diverse economies like the Indian economy and need extra care while
handling the issues at the policy level.



Debt instruments which have maturity of less than one year at the time of
issue are called money market instruments. These instruments are highly
liquid and have negligible risk. The major money market instruments are as
1.Call Money Market
2.Bill Market
a. Treasury Bills Market
b. Commercial Bills Market
3.Commercial Papers
4.Certificate of Deposit
6.Market Mutual Funds

The money market is dominated by the government , financial institution

banks and corporate. Individual investors scarcely participate in the money
market directly.


Call/Notice money is the money borrowed or lent on demand for a very
short period. When money is borrowed or lent for a day, it is known as Call


(Overnight) Money. Intervening holidays and/or Sunday are excluded for

the purpose. Thus, money borrowed on a day and repaid on the next
working day,(irrespective of the number of intervening holidays) is Call
Money. When money is borrowed or lent for more than a day and up to 14
days, it is Notice Money. No collateral security is required to cover these
In this market, while banks and primary dealers (PDs) are allowed to both
borrow and lend , non bank participants such as financial institutions. The
ease of transactions as well as low transactions costs arising from least
documentation and same day settlement of funds in call/notice money
market act as strong incentives for non banking institutions to participate in
the call money market.
In India the public sector banks account for 80% of borrowings and foreign
banks/private sector banks account for the balance 20%. Non bank
financial institutions like IDBI, LIC, and GIC etc participate only as lenders
in this market. 80% of the requirement of call money funds is met by the
non bank participants and 20% from the banking system.

The bill market is the most important part of the money market. The bill
market is further subdivided into:

Treasury Bills Market

Commercial Bills Market



A Commercial bill arises out of a genuine trade transaction that is credit

transaction. As soon as the goods are sold on credit the seller draws a bill
on the buyer for the amount due. The buyer accepts it immediately
agreeing to pay the amount mentioned therein after a certain specified
date. Thus, a bit of exchange contains a written order from the creditor to
the debtor, to pay a certain sum, to a certain person, after a certain period.
It is the drawn always for a short period ranging between three months and
six months.

Treasury bills or T-bills mature in one year or less. A Treasury bill is a
promissory note issued by the government under the discount for a specific
period started therein. The government promises to pay the specific
amount mentioned there into the bearer of the instrument on the due date.
The period does not exceed one year. It is purely a finance bil since it is not
arise out of any trade transaction. It does not require any grading since it is
a claim of the government.
Treasury bills are issued by the RBI on behalf of the government. Treasury
bills are issued for meeting temporary government deficits. The Treasury
bill rate or the rate of discount is fixed by the RBI from time to time. It is
lowest one in the entire structure of interest rates in the country because of
short term maturity ad high degree of liquidity and security.

A commercial paper (CP) is an unsecured money market instruments
issued in the form of a promissory note. It was introduced in 1990 with view

to enabling highly rated corporate borrowers to diversify their sources of

short term borrowings and to provide additional instruments to investors.
Also primary dealers (PDs) and All India Financial Institutions (FIs) are
eligible to issue commercial papers.
Commercial papers are also called industrial papers, finance papers and
corporate papers-the names depend upon who liability the paper. If it is a
liability of the business or industrial or commercial or manufacturing
concern, it is known as a industrial or commercial paper it is a liability of the
financial company, it can be called finance paper. The concept of
commercial papers originated in USA in early 19 th century when
commercial banks monopolized and charged high rates of interest on loans
and advances. The financial as well as non financial firms started selling
Commercial papers as substitutes for bank loans required for working
capital. Gradually owing to the advantages available to both the issuer and
the investor, the instrument grew in USA, as the second largest money
market instrument for treasury bills.

In India certificate of deposits (CDs) were first introduced in June 1989 with
the viewed to further widen the range of money market instruments and to
give investors greater flexibility in deployment of their short-term surplus
fund. Certificate of deposit represent the time deposit with the bank,
certificate of deposit are generally issued by commercial banks.
Banks have the freedom to issue certificate of deposits depending on their
requirement. They wear a specific maturity date and specified interest rate.


Certificate of deposit offer a slightly higher yield than treasury bills because
of the slightly higher default list for a bank, but overall the likelihood that a
large bank will go broke its pretty thin.
Certificate of deposit represent bank deposit accounts which are
transferrable from one party from another .Certificate of deposits are
interest bearing, maturity dated obligations of banks & technically they are
a part of the banks time deposits. Certificate of deposits are issued in
multiples of RS 5 lakhs, subject to a minimum size of an issue to a single
investor being RS 25 lakhs.They have a maturity period of three months to
one year, & they would be issued at discount to face value.

Ready forward as a transaction is which agree to buy and sell the same
security at an agreed price. The repo rate represents the borrowing rate for
the use of his money in the intervening period. Internationally are used
extensively in the money market operations. All dated government
securities are eligible for trading in the repo market.
Repos can be for any period. While earlier there was a minimum period of
3 days, this has since been withdrawn. The RBI has been using repo
instrument effectively for its liquidity management; both for absorbing
liquidity & for repurchase agreement. Those who deals in government
securities reps as a form of overnight borrowing. A dealer or other holder of
government securities (usually T-bills) sells the securities to a lender &
agrees to purchase them at an agreed price. They are usually very short
term from overnight to 30 days or more. This short term maturity &
government backing means repos provide lenders with extremely low risk.


Repos are popular because they can virtually eliminate credit problems.
Unfortunately, a number of significant losses over the years from fraudulent
dealers suggest that lenders in this market have not always checked their
collateralization closely enough.
When RBI conducts repos the short term interest rates in the money
market do not go below the RBI repo rate. If the interest rate is lower in
other markets such as foreign exchange market, Treasury bills market
holder of funds may go for repos with RBI.
Thus repos transactions ensure stability in the short term interest rates in
the money market; it will conduct a Reverse Repo transaction with the
primary dealers against government securities.
Reverse Repo- the reverse repo is the complete opposite of a repo. In this
case, a dealer buys government securities from an investor 7 then sells
them back at a later date for a higher price.
The following table summarizes the terminology:

Reverse repo



Cash receiver

Cash provider

Near leg

Sells securities

Buys securities

Far leg

Buys securities

Sells securities



Investment in a portfolio can take different forms. An investor can either
invest directly in securities, or can invest through mutual funds. Mutual

funds collect funds from investors & invest in different various securities in
their behalf. The returns from these investments are passed on to investors
either periodically, or at the end of a specified time period. The mutual fund
charges for its services referred to as management fees.
IN April 1992 the government announced the setting up of the MMMF with
the purpose of bringing money market instruments within the reach of
individuals. The money market mutual funds would be set up by scheduled
commercial banks & public financial institutions. The shares/units of money
market mutual funds would be issued to individuals only. In this respect,
they will differ from UTI & other mutual funds that have been mobilizing the
savings of the middle classes.
Money market fund is a mutual fund that invests solely in money
instruments. Money market instrument are forms of debt that mature in less
than one year are very liquid. Treasury bills make up bulk of the money
market instruments. Securities in the money market are relatively risk free.
Money market funds are generally the safest and the most secure of
mutual fund investments. The goal of a money fund is not preserve
principal, while yielding a modest return. Money market mutual fund is akin
to a high yield bank account but it is now entirely risk free.



Capital markets are markets where people, companies, and governments

with more funds than they need (because they save some of their income)
transfer those funds to people, companies, or governments who have a
shortage of funds (because they spend more than their income). Stock and
bond markets are two major capital markets. Capital markets promote
economic efficiency by channeling money from those who do not have an
immediate productive use for it to those who do.
Capital markets carry out the desirable economic function of directing
capital to productive uses. The savers (governments, businesses, and
people who save some portion of their income) invest their money in capital
markets like stocks and bonds. The borrowers (governments, businesses,
and people who spend more than their income) borrow the savers'


investments that have been entrusted to the capital markets.

For example, suppose A and B make Rs. 50,000 in one year, but they only
spend Rs.40,000 that year. They can invest the 10,000 - their savings - in a
mutual fund investing in stocks and bonds all over the world. They know
that making such an investment is riskier than keeping the 10,000 at home
or in a savings account. But they hope that over the long-term the
investment will yield greater returns than cash holdings or interest on a
savings account. The borrowers in this example are the companies that
issued the stocks or bonds that are part of the mutual fund portfolio.
Because the companies have spending needs that exceeds their income,
they finance their spending needs by issuing securities in the capital


The Indian capital market is more than a century old. Its history goes back
to 1875, when 22 brokers formed the Bombay Stock Exchange (BSE). Up
until May, 1992, the Capital Controller of Issues used to regulate the
primary market. It had laid down various rules, norms for issue and pricing
of the securities. India had a vibrant primary market with wide participation
from 1975 onwards.
Consequent upon the liberalization adopted by the Government in 1991,
and the subsequent abolition of Capital Controller of Issues in May 1992,
the Primary Market got a further tremendous boost. Securities and
Exchange Board of India (SEBI) was set up to regulate and frame rules and
regulations for the conduct of Primary as well as the Secondary Market.
Over the period, the Indian securities market has evolved continuously to


become one on the most dynamic, modern, and efficient securities markets
in Asia. Today, Indian market confirms to best international practices and
standards both in terms of structure and in terms of operating efficiency
.Indian securities markets are mainly governed by a) The Companys
Act1956, b) the Securities Contracts (Regulation) Act 1956 (SCRA Act),
and c) the Securities and Exchange Board of India (SEBI) Act, 1992. A brief
background of these above regulations is given below:
a) The Companies Act 1956 deals with issue, allotment and transfer of
securities and various aspects relating to company management. It
provides norms for disclosures in the public issues, regulations for
underwriting, and the issues pertaining to use of premium and discount on
various issues.
b) SCRA provides regulations for direct and indirect control of stock
exchanges with an aim to prevent undesirable transactions in securities. It
provides regulatory jurisdiction to Central Government over stock
exchanges, contracts in securities and listing of securities on stock
c) The SEBI Act empowers SEBI to protect the interest of investors in the
securities market, to promote the development of securities market and to
regulate the security market.


A reference to a security that has been registered issued and is being sold
on a market to the public for the first time. Primary are sometimes referred
to as primary shares or new offerings. The term does not necessarily refer
to newly issued stocks, although initial public offerings are the most
commonly known Primary. Securities that can be newly issued include both
debt and equity.
Many investors buy Primary because they often experience tremendous
demand and, as a result, rapid price increases. Other investors don't
believe that Primary warrant the hype that they receive and choose to
watch from the side-lines. An investor who purchases a new issue should
be aware of all the risks associated with investing in a product that has only
been available to the public for a short time; Primary often prove to be
rather volatile and unpredictable.


The Primary market is that part of the capital markets that deals with the
issuance of new securities. This is typically done through a syndicate of
securities dealers. The process of selling Primary to investors is called
underwriting. In the case of a new stock issue, this sale is an initial public
offering (IPO). Dealers earn a commission that is built into the price of the

security offering, though it can be found in the prospectus.

It refers to the set-up which helps industry to raise the funds by issuing
different types of securities. These securities are issued directly to the
investors (both individuals as well as institutional) through the mechanism
called Primary Market.
The securities take birth in this market. The main function new issue
market is to facilitate transfer resources from savers to the users. It plays
an important role in mobilizing the funds from the savers and transferring
them to the borrowers.
1. This is the market for new long term equity capital. The primary market
is the market wherethe securities are sold for the first time. Therefore it
is also called the new issue market (NIM).
2. In a primary issue, the securities are issued by the company directly to
3. The company receives the money and issues new security certificates to
the investors.
4. Primary issues are used by companies for the purpose of setting up new
business or for expanding or modernizing the existing business.
5. The primary market performs the crucial function of facilitating capital
formation in the economy.

6. The new issue market does not include certain other sources of new
long term external finance, such as loans from financial institutions.
Borrowers in the new issue market may be raising capital for converting
private capital into public capital; this is known as "going public.

7. The financial assets sold can only be redeemed by the original holder.

8. It is characterized by being the only moment when the enterprise

receives money in exchange for selling its financial assets.
The main function of new issue market can be divided into three service
1. Origination: It refers to the work of investigation, analysis and
processing of new project proposals. Origination starts before an issue
is actually floated in the market. It includes a careful study of technical,
economical and financial viability to ensure the soundness of the project
and provides advisory services.
2. Underwriting: It is an agreement whereby the underwriter promises to
subscribe to a specified number of shares or debentures in the event of
the public not subscribing to the issue. Thus it is a guarantee for the
marketability of shares.

3. Distribution: It is the function of the sale of securities to the ultimate


investors. Brokers and agents who maintain, regulate and direct


The following are the key players in the primary market process:
1. Issuer: The corporation, municipality, government agency or investment
company offering securities for sale to investors.
2. Underwriter: An investment bank that serves as intermediary between
the issuer and the investing public.
3. Syndicate: A group of investment banks which jointly underwrite and
distribute an offering

There are various participants in the Primary market. These participants
play a major role in the new issue of securities. These are as follows:
Regulators: The key agencies that have a significant regulatory
influence, direct or indirect, over the securities markets such as SEBI
(Securities and Exchange Board of India), RBI (Reserve Bank of
India), DEA (Department of Economic Affairs) and MCA (Ministry of
Corporate Affairs) ,etc.
Stock Exchanges: A stock exchange is an institution where the
securities that have already been issued are bought and sold.
Presently there are 23 stock exchanges in India. The most important


ones being BSE and NSE.

Depositories: A depository is an institution which dematerialize
physical certificates and effects transfer of ownership of securities by
electronic book entries. Presently there are two depositories in India,
viz. NSDL and CDSL.
Brokers: Brokers are registered members of the stock exchanges
through whom investors transact.
Foreign Institutional Investors (FII): Institutional investors from
abroad who are registered with SEBI to operate in the Indian Capital
Market are called FIIs.
Merchant Bankers: Firms that specialize in managing the issue of
securities are called merchant bankers. They have to be registered
with the SEBI.
Syndicate Members: Firms who manage the book (In the Book
Building method of Issuance) are called Book Running Lead
Managers (BRLMs) or Syndicate Members.

They have to be

registered with the SEBI.

Qualified Institutional Bidders: These are Firms that are registered

with SEBI as Institutional Investors, namely: FIIs, Banks, Mutual
Funds, etc.


Non Institutional Investors: These are Individuals or companies

investing Rs.2 lakhs or more in an Issue. They are also called HNIs.

Retail Investors: These are Individuals or companies investing not

more than Rs.2 lakhs in an Issue
Primary Dealers: Appointed by the RBI, Primary Dealers serve as
underwriters in the primary market and as market makers in the
secondary market for governmental securities.
Mutual Funds: A mutual fund is a vehicle for collective investment. It
pools and manages the funds of investors.
Custodians: A custodian looks after the investment back office of a
mutual fund. It receives and delivers securities, collects income,
distributes dividend and segregates the assets between schemes.
Registrars: Also known as transfer agent, a registrar is employed by
a company or a mutual fund to handle all investor-related services.
Underwriters: An underwriter agrees to subscribe to a given number
of shares in case public subscription is inadequate.
Bankers to an issue: The bankers to an issue collect money on
behalf of the company from the applicants.
Debenture trustees: When a company issues debentures, a
debenture trustee has to be appointed to ensure that the borrowing

firm fulfills its contractual obligations.

Credit Rating Agencies: A credit rating agency assigns ratings
primarily to debt securities. In India there are two main credit rating
agencies, Credit Rating Investment Services of India Limited
(CRISIL) and Investment Information and Credit Rating Agency


Secondary market is an avenue in which equity and pre-issued securities
are traded between potential investors.
The secondary market, also called aftermarket, is the financial market
where previously issued securities and financial instruments such as stock,
bonds, options, and futures are bought and sold. It is also known as Stock
The term "secondary market" is also used to refer to the market for any
used goods or assets, or an alternative use for an existing product or asset
where the customer base is the second market (for example, corn has
been traditionally used primarily for food production and feedstock, but a
"second" or "third" market has developed for use in ethanol production).
With primary issuances of securities or financial instruments, or the primary
market, investors purchase these securities directly from issuers such as
corporations issuing shares in an IPO or private placement, or directly from
the federal government in the case of treasuries. After the initial issuance
investors can purchase the same from other investors in the secondary
market.The activities of buying and selling of securities in a secondary
market are carried out through the mechanism of STOCK EXCHANGES.
The secondary market for a variety of assets can vary from loans to stocks,
from fragmented to centralized, and from illiquid to very liquid. The major
stock exchanges are the most visible examples of liquid secondary markets


- in this case, for stocks of publicly traded companies. Exchanges such as

the New York Stock Exchange, Nasdaq and the American Stock Exchange
provide a centralized liquid secondary market for the investors who own
stocks that trade on those exchanges. Most bonds and structured products
trade over the counter or by phoning the bond desk of one's broker-dealer.
Loans sometimes trade online using a Loan Exchange.
Secondary marketing is vital to an efficient and modern capital market. In
the secondary market, securities are sold by and transferred from one
investor or speculator to another. It is therefore important that the
secondary market be highly liquid (originally, the only way to create this
liquidity was for investors and speculators to meet at a fixed place
regularly; this is how stock exchanges originated, see History of the Stock
Exchange). As a general rule, the greater the number of investors that
participate in a given marketplace and the greater the centralization of that
marketplace, the more liquid the market.
Fundamentally, secondary markets match the investor's preference for
liquidity (i.e., the investor's desire not to tie up his or her money for a long
period of time, in case the investor needs it to deal with unforeseen
circumstances) with the capital user's preference to be able to use the
capital for an extended period of time.
Accurate share price allocates scarce capital more efficiently when new
projects are financed through a new primary market offering, but accuracy
may also matter in the secondary market because: 1) price accuracy can
reduce the agency costs of management, and make hostile takeover a less
risky proposition and thus move capital into the hands of better managers,


and 2) accurate share price aids the efficient allocation of debt finance
whether debt offerings or institutional borrowing.
The term may refer to markets in things of value other than securities. For
example, the ability to buy and sell intellectual property such as patents, or
rights to musical compositions, is considered a secondary market because
it allows the owner to freely resell property entitlements issued by the
government. Similarly, secondary markets can be said to exist in some real
estate contexts as well (e.g. ownership shares of time-share vacation
homes are bought and sold outside of the official exchange set up by the
time-share issuers). These have very similar functions as secondary stock
and bond markets in allowing for speculation, providing liquidity, and
financing through securitization.1) to facilitate liquidity marketability of long
term instrument. 2) to provide instant valuation of securities caused by
changes in the environment.
In private equity, the secondary market (also often called private equity
secondaries or secondaries) refers to the buying and selling of pre-existing
investor commitments to private equity funds. Sellers of private equity
investments sell not only the investments in the fund but also their
remaining unfunded commitments to the funds.


Following are the key players and participants in the Secondary market:
The Stock Exchanges: A stock exchange is the marketplace where
companies are listed and where the trading happens. They provide a
transparent and safe (risk-free) forum of a market for investors to

transact and invest their funds. There are 23 Stock Exchanges

registered with SEBI and under its regulation. National Stock
Exchange (NSE) and the Bombay Stock Exchange (BSE) are the
pre-dominant ones.
Regulatory Body: SEBI (the Securities & Exchange Board of India)
an autonomous and statutory body acts as the market regulator and
market developer. SEBI also looks into investor complaints against
companies. It is quasi-judicial and can try cases and pass judgments
against any market participant.
Broker-dealer: It is a company or firm that trades securities for its
own account or on behalf of its clients. Any person wanting to trade or
deal on the stock market has to go through a broker-dealer.
Investor: The person who makes an investment. There are different
types of investors in the financial market including Sweat equity
investor, Individual investors, Investment banks, Investment trusts,
Institutional Investors, Foreign Institutional Investors, Insurance
companies, Pension Funds, Mutual Funds, etc.
Market maker: It is a firm that quotes both a buy and a sell price in a
financial instrument or commodity on a regular and continuous basis.
He provides liquidity and depth in the market and thereby earning a
small spread.
Speculator: An individual or organization who buys or sells or is
involved in short-selling of various investments thereby seeking to
gain profits derived from the variations in pricing, rather than
purchasing for the purpose of income through dividends or interest.
He does not take or give delivery of securities.


Hedgers: An individual or institution who hedges stock for

diversifying risk by pairing the stock owned (the long position) with an
appropriate short position. Thus, hedging is not about absolute return
but rather the relative advantage one stock or commodity has over
another. Hedging is for sophisticated investors only.
Arbitrageur: An individual or institution who seeks to make profit
from the price difference (mispricing) between two or more markets
and a person who engages in arbitrage is called an arbitrageur.
Arbitrage is not the simple act of buying one asset at one market and
then selling it to another market at a later time when the price is
higher. Rather to avoid market risks of price change you need to
make sure that both the transactions at both the market are done
The Depositories and their Participants: The depositories are
institutions that have rendered the market paperless by holding
stocks of investors in an electronic form through a registered
depository participant (DP) and can be compared to a bank.
Depositories hold securities in an account, transfer securities
between accounts on the instruction of the account holder and
facilitate the transfer of ownership without the account holder needing
to handle securities. They provide ease and speed for those
transacting in the market. There are two depositories in India--the
National Securities Depository Ltd (NSDL)

and the Central

Depository Services Ltd (CDSL), while there are over a 700 DPs.
Proprietary trader: The firm that trades stocks, bonds, currencies, or
other financial instruments with the firm's own money so as to make a
profit for itself.


Quantitative analyst: A specialist in the numerical or quantitative

techniques of finance. In the investment industry, they are frequently
called quants.
Clearing member: They consist of Trading and Clearing Members.
They clear their own trades as well as the trades of other member
Portfolio managers: They provide a range of services to the
investors and are registered with SEBI and act under the regulation
of SEBI abiding by the Code of Conduct prescribed for each of the





Money market refers to the market for short-term securities with original
maturity of one year or less. These securities include T-bills, certificates of
deposits, commercial paper, and so on.
Money market instruments are relatively more liquid. The major players are
banks, FIs, mutual funds, and large corporate entities. The role of
individuals is not significant.
The term capital market, in general, refers to a market for long-term
securities, such as corporate stocks and bonds for financing long-term
assets. Capital market is a much wider term and often denotes different
segments, which function independent of each other.
The first segment is the stock (share) market, in which equity shares are
traded. Securities in the form of debt instruments (also called loan-stocks)
are traded in the second segment. In the third, derivative instruments
relating to equity and debt securities are traded. In addition, capital market
includes the money market segment, where financial assets particularly
short-term debts of less than 12 months are traded
Money market is a component of financial market where short-term borrowing can be
issued. This market includes assets that deal with short-term borrowing, lending,
buying and selling. A capital market is a component of a financial market that allows
long-term trading of debt and equity-backed securities. Long-term borrowing or
lending is done by investors or corporations that have large amounts of wealth at their
When it comes to business, each business at a certain point has to borrow
money in order to keep running business. There are multiple ways that a
company can borrow money, including issuing bonds, shares or taking up a
loan. There are two different components of the financial market; known as


Money Market and Capital Market. These terms are more commonly come
across in business and economics.
Money market is a component of financial market where short-term
borrowing can be issued. This market includes assets that deal with shortterm borrowing, lending, buying and selling. The short-term ensures that
the borrowing and lending period has a lease of less than one year. The
lease can also be as short as a one hour, depending on the borrower and
the lender. According to The Global Money Markets, Trading is usually
done over the counter using instruments such as Treasury bills, commercial
paper, bankers' acceptances, deposits, certificates of deposit, bills of







mortgage-, and asset-backed securities. The money market was created as

some businesses has a surplus of cash, while the other businesses were
looking for loans.
In the United States, all federal, state and local governments issue papers
that are traded in form of money. These include municipal paper and
Treasury bills. The main functions of Money market include: Transfer from
parties with surplus funds to parties with a deficit, transfer of large sums of
money, help to implement monetary policies, determine short-term interest
rates and allow government to raise funds. The interest rates in a Money
market are also high as the borrowing time is low. Trading in the money
markets are usually done by banks or companies with high credit ratings.

A capital market is a component of a financial market that allows long-term

trading of debt and equity-backed securities. Long-term borrowing or
lending is done by investors or corporations that have large amounts of
wealth at their disposal. The most popular capital market is the NYSE or


the New York Stock Exchange. Huge financial regulators are responsible
for overseeing the capital market to ensure that companies do not defraud
their investors. Trading can be done by a number of credit instruments such
as stocks, shares, equity, debentured, bonds, and securities. Much of the
trading is actually done online using a computer. There is no actual cash
involved in trading.
Investments made in a capital market usually last longer than a year and
can even last up to 25-30 years. Some investments may depend on the life
of the company, with the investment ending if the company shuts down. A
benefit of this investment is that if need arises, the investor can swiftly cash
their investment. Capital market can be divided into two divisions: stock
markets and bond markets. In stock markets investors acquire the
ownership of the company they are investing in, while in bond markets
investors are considered as creditors. Investment done in capital markets
are usually for acquiring physical capital goods that would help increase its
income. However, generating an income may take anywhere from a couple
of months to many years or could even fall through.



The money market and the capital market are interrelated. The main points
of difference between these two markets are as follows:-

Definition: The market where transactions of money and financial

assets are accomplished for short time is called money market. On
the other end, capital market is meant that market where transactions
of money and financial assets are occurred for a long period.
Maturity: In general, these two markets are separated on the basis of
the maturity of the credit instruments related to these markets. The
maturity of the instruments of money market is one year or less than
one year. On the other hand, the maturity of the instruments of capital
market is more than one year.
Risks: The risks are less in money market. Because, there is less
possibility of default of the credit of less than one year maturity.
Likewise, the risk of interest rate is also low in the money market. On
the other hand, the credit of the capital market is of long term nature.
Due to this risks are more and are of varied nature in capital market.
Instruments: The main instruments of money market are -treasury
bills, commercial papers, certificate of deposit which are of short-term
nature. On the other hand, the main instruments of the capital market
are -debentures, equities or shares and government securities which
are of long-term nature.

Institutions: The different financial institutions related to short-term

credit participate in the money market. But there is predominance of

commercial banks. In fact, the commercial bank is an institution

related to the money market. On the other hand, different kinds of
financial intermediaries participate in the capital market. The main
participants of the capital market are -development bank, finance
company, provident fund, insurance company, Investment Company
and so on. The service institutions are also involved in the capital
market such as investment banking, commission brokers association,
investment consultancy etc. In recent clays, the commercial banks
also provide long-term loans to some extent. So they may also be
included among the participants of the capital market.
Finance: The money market deals in only short-term funds. It
receives short term deposits and also provides the short-term credit.
On the other hand, the capital market receives long-term deposits
and also grants long term loan and equity capital to the business and
the government.








accomplished for one or less than one year. While capital market
transactions are for long time.
Transaction Procedures: Since fewer formalities are required in
money market therefore, transactions cost is also minimum. While,
many formalities are required in making capital market transaction
successful and therefore its transaction cost is little bit higher than the
money market.


Nature of Credit Instruments: The credit instruments dealt with in

the capital market are more heterogeneous than those in money
market. Some homogeneity of credit instruments is needed for the
operation of financial markets. Too much diversity creates problems
for the investors.
Relation with the Central Banks: The money market has close and
direct relationship with the central bank. The central bank implements
its monetary policy through this market. The central bank directly
regulates the commercial banks in the money market. On the other
hand, the central bank has influence over the capital market only
indirectly through money market. Similarly, the institutions of the
capital market are less regulated by the central bank.



A developed money market plays an important role in the development of

an economy. Thus the RBI should ensure qualitative development of all the
money market instruments in order to build a strong financial system in the
country. The issue of commercial paper plays a vital role in meeting the
short term working capital requirements of corporations. The borrowers can
get up to 20% of their working capital requirements directly from the
markets at rates which may be more advantageous than borrowing through
a bank. Hence in the initial stages RBI should concentrate on the quality
rather than quantity.

Capital markets are perhaps the most widely followed markets. Both the
stock and bond markets are closely followed and their daily movements are
analyzed as proxies for the general economic condition of the world
markets. As a result, the institutions operating in capital markets - stock
exchanges, commercial banks and all types of corporations, including
nonbank institutions such as insurance companies and mortgage banks are
carefully scrutinized. The institutions operating in the capital markets
access them to raise capital for long-term purposes, such as for a merger
or acquisition, to expand a line of business or enter into a new business, or
for other capital projects. Entities that are raising money for these long-term
purposes come to one or more capital markets. In the bond market,
companies may issue debt in the form of corporate bonds, while both local
and federal governments may issue debt in the form of government bonds.
Similarly, companies may decide to raise money by issuing equity on the
stock market. Government entities are typically not publicly held and,


therefore, do not usually issue equity. Companies and government entities

that issue equity or debt are considered the sellers in these markets.
The buyers, or the investors, buy the stocks or bonds of the sellers and
trade them. If the seller, or issuer, is placing the securities on the market for
the first time, then the market is known as the primary market. Conversely,
if the securities have already been issued and are now being traded among
buyers, this is done on the secondary market. Sellers make money off the
sale in the primary market, not in the secondary market, although they do
have a stake in the outcome of their securities in the secondary market.

The buyers of securities in the capital market tend to use funds that are
targeted for longer-term investment. Capital markets are risky markets and
are not usually used to invest short-term funds. Many investors access the
capital markets to save for retirement or education, as long as the investors
have long time horizons, which usually means they are young and are risk
Money market is often accessed alongside the capital markets. While
investors are willing to take on more risk and have patience to invest in
capital markets, money markets are a good place to "park" funds that are
needed in a shorter time period - usually one year or less. The financial
instruments used in capital markets include stocks and bonds, but the
instruments used in the money markets include deposits, collateral loans,
acceptances and bills of exchange. Institutions operating in money markets
are central banks, commercial banks and acceptance houses, among
Money markets provide a variety of functions for either individual, corporate

or government entities. Liquidity is often the main purpose for accessing

money markets. When short-term debt is issued, it is often for the purpose
of covering operating expenses or working capital for a company or
government and not for capital improvements or large scale projects.
Companies may want to invest funds overnight and look to the money
market to accomplish this, or they may need to cover payroll and look to
the money market to help. The money market plays a key role in ensuring
companies and governments maintain the appropriate level of liquidity on a
daily basis, without falling short and needing a more expensive loan or
without holding excess funds and missing the opportunity of gaining
Investors, on the other hand, use the money markets to invest funds in a
safe manner. Unlike capital markets, money markets are considered low
risk; risk-adverse investors are willing to access them with the anticipation
that liquidity is readily available. Older individuals living on a fixed income
often use the money markets because of the safety associated with these
types of investments.

There are both differences and similarities between capital and money
markets. From the issuer or seller's standpoint, both markets provide a
necessary business function: maintaining adequate levels of funding.
The goal for which sellers access each market varies depending on their
liquidity needs and time horizon. Similarly, investors or buyers have unique
reasons for going to each market: Capital markets offer higher-risk
investments, while money markets offer safer assets money market returns
are often low but steady, while capital markets offer higher returns. The
magnitude of capital market returns is often a direct correlation to the level

of risk, however that is not always the case of capital markets.

Although markets are deemed efficient in the long run, short-term
inefficiencies allow investors to capitalize on anomalies and reap higher
rewards that may be out of proportion to the level of risk. Those anomalies
are exactly what investors in capital markets try to uncover. Although
money markets are considered safe, they have occasionally experienced
negative returns. Inadvertent risk, although unusual, highlights the risks
inherent in investing - whether long or short term, money markets or capital


Reference books

Banking Theory Law and Practice by Sundaram and Varshney


Financial Markets and Services by Gordan and Natrajan


An Introduction to Global Financial Markets- by Stephen Valdez


India Banking- by S. Natrajan and R. Parameshwaran


Financial Institution and Markets- by L.M.Bhole


Reserve Bank Of India Bulletin

Reference Websites