Financial markets and institutions notes as per BPUT syllabus for MBA 4th
Financial Institutions and Markets (MBA 406B)
Module - I: Financial Markets
1. Financial System- Meaning
It is a complex and well integrated set of sub system of financial institutions, financial markets, and financial
intermediaries, services which facilitate transfer and allocation of funds effectively and efficiently. It also consists
of regulations, laws and practices followed in the system.
2. Financial Markets- Meaning
Financial market refers to those centers and arrangements which facilitate buying & selling of financial assets /
instruments. Whenever a financial transaction takes place, it is deemed to have taken place in financial market.
There is no specific place or location to indicate a financial market.
Financial markets consist of agents, brokers, institutions, and intermediaries transacting purchases and sales of
securities. The many persons and institutions operating in the financial markets are linked by contracts,
communications networks which form an externally visible financial structure, laws, and friendships. The
financial market is divided between investors and financial institutions.
The term financial institution is a broad phrase referring to organizations which act as agents, brokers, and
intermediaries in financial transactions. Agents and brokers contract on behalf of others; intermediaries sell
for their own account. Financial intermediaries purchase securities for their own account and sell their own
liabilities and common stock. For example, a stockbroker buys and sells stocks for us as our agent, but a
savings and loan borrows our money (savings account) and lends it to others (mortgage loan). The
stockbroker is classified as an agent and broker, and savings and loan is called a financial intermediary.
Brokers and savings and loans, like all financial institutions, buy and sell securities, but they are classified
separately, because the primary activity of brokers is buying and selling rather than buying and holding an
investment portfolio. Financial institutions are classified according to their primary activity, although they
frequently engage in overlapping activities.
Financial markets provide our specialized, interdependent economy with many financial services, including
time preference, distribution of risk, diversification of risk, transactions economy, transmutation of
contractual arrangements, and financial management
3. Types, Classification of Financial Markets:
Types of financial markets are given in the diagram below:
The financial markets are classified into two groups:
A. Capital Market
1. Corporate Securities Market
2. Government Securities Markets
3. Long Term Loans Markets
Term Loan Markets
Financial Guarantees Markets
B. Money Market
1. Unorganized Market
2. Organized Money Market
Commercial Paper (CP)
Certificate Of Deposit (CD) etc
Call Money Market
Commercial Bill Market
Classification of Financial Markets
There are five ways that one can classify financial markets:
(1) Nature of the claim:
The claims traded in a financial market may be either for a fixed rupee amount or a residual amount and financial
markets can be classified according to the nature of the claim. As explained earlier, the former financial assets are
referred to as debt instruments, and the financial market in which such instruments are traded is referred to as the debt
market. The latter financial assets are called equity instruments and the financial market where such instruments are
traded is referred to as the equity market or stock market. Preferred stock represents an equity claim that entitles the
investor to receive a fixed rupee amount. Consequently, preferred stock has in common characteristics of instruments
classified as part of the debt market and the equity market. Generally, debt instruments and preferred stock are classified
as part of the fixed income market.
(2) Maturity of the claims:
A second way to classify financial markets is by the maturity of the claims. For example, a financial market for shortterm financial assets is called the money market, and the one for longer maturity financial assets is called the capital
market. The traditional cutoff between short term and long term is one year. That is, a financial asset with a maturity of
one year or less is considered short term and therefore part of the money market. A financial asset with a maturity of
more than one year is part of the capital market. Thus, the debt market can be divided into debt instruments that are part
of the money market, and those that are part of the capital market, depending on the number of years to maturity.
(3) New versus seasoned claims:
Because equity instruments are generally perpetual, a third way to classify financial markets is by whether the financial
claims are newly issued. When an issuer sells a new financial asset to the public, it is said to “issue” the financial asset.
The market for newly issued financial assets is called the primary market. After a certain period of time, the financial
asset is bought and sold (i.e., exchanged or traded) among investors. The market where this activity takes place is
referred to as the secondary market.
(4) Cash versus derivative instruments:
Some financial assets are contracts that either obligate the investor to buy or sell another financial asset or grant the
investor the choice to buy or sell another financial asset. Such contracts derive their value from the price of the financial
asset that may be bought or sold. These contracts are called derivative instruments and the markets in which they trade
are referred to as derivative markets. The array of derivative instruments includes options contracts, futures contracts,
forward con- tracts, swap agreements, and cap and floor agreements.
(5) Organizational structure of the market:
Although the existence of a financial market is not a necessary condition for the creation and exchange of a financial
asset, in most economies financial assets are created and subsequently traded in some type of organized financial market
structure. A financial market can be classified by its organizational structure. These organizational structures can be
classified as auction markets and over-the-counter markets.
(6) Exchanges and Over-the-Counter Markets
Exchange = buyers and sellers meet in a central location.
Example: Bombay Stock Exchange.
Over-the-Counter (OTC) Market = dealers at different locations trade via computer and telephone networks.
Examples: Over the counter exchange of India (OTCEI).
4. Money Market:
Money market is concerned with the supply and the demand for investible funds. Essentially, it is a reservoir
of short-term funds. Money market provides a mechanism by which short-term funds are lent out and
borrowed; it is through this market that a large part of the financial transactions of a country are cleared. It is
place where a bid is made for short-term investible funds at the disposal of financial and other institutions by
borrowers comprising institutions, individuals and the Government itself. It is a market for dealing with
financial assets and securities which have a maturity period of up to one year. Hence, it is a market for purely short
term funds. Thus, money market covers money, and financial assets which are close substitutes for money.
The money market is generally expected to perform following three broad functions:
(i) To provide an equilibrating mechanism to even out demand for and supply of short term funds.
(ii) To provide a focal point for Central bank intervention for influencing liquidity and general level of interest
rates in the economy.
(iii) To provide reasonable access to providers and users of short-term funds to fulfill their borrowing and
investment requirements at an efficient market clearing price.
Functions and importance of Money Market
A well-developed money market is essential for a modern economy. Though, historically, money market has
developed as a result of industrial and commercial progress, it also has important role to play in the process of
industrialization and economic development of a country. Importance of a developed money market and its
various functions are discussed below:
1. Financing Trade: Money Market plays crucial role in financing both internal as well as international trade.
Commercial finance is made available to the traders through bills of exchange, which are discounted by the
bill market. The acceptance houses and discount markets help in financing foreign trade.
2. Financing Industry: Money market contributes to the growth of industries in two ways:
(a) Money market helps the industries in securing short-term loans to meet their working capital requirements
through the system of finance bills, commercial papers, etc.
(b) Industries generally need long-term loans, which are provided in the capital market. However, capital
market depends upon the nature of and the conditions in the money market. The short-term interest rates of
the money market influence the long-term interest rates of the capital market. Thus, money market indirectly
helps the industries through its link with and influence on long-term capital market.
3. Profitable Investment: Money market enables the commercial banks to use their excess reserves in
profitable investment. The main objective of the commercial banks is to earn income from its reserves as well
as maintain liquidity to meet the uncertain cash demand of the depositors. In the money market, the excess
reserves of the commercial banks are invested in near-money assets (e.g. short-term bills of exchange) which
are highly liquid and can be easily converted into cash. Thus, the commercial banks earn profits without
4. Self-Sufficiency of Commercial Bank: Developed money market helps the commercial banks to become
self-sufficient. In the situation of emergency, when the commercial banks have scarcity of funds, they need
not approach the central bank and borrow at a higher interest rate. On the other hand, they can meet their
requirements by recalling their old short-run loans from the money market.
5. Help to Central Bank: Though the central bank can function and influence the banking system in the
absence of a money market, the existence of a developed money market smoothens the functioning and
increases the efficiency of the central bank.
Money market helps the central bank in two ways:
(a) The short-run interest rates of the money market serves as an indicator of the monetary and banking
conditions in the country and, in this way, guide the central bank to adopt an appropriate banking policy,
(b) The sensitive and integrated money market helps the central bank to secure quick and widespread
influence on the sub-markets, and thus achieve effective implementation of its policy.
Money market can be further sub divided into:
Call money market
Commercial bill market
Treasury bill market
Short term loan market
Commercial paper market
Certificate of deposit market
The key objective of money market is to provide balancing mechanism for short term surpluses and deficits.
5. Call money Market:
The most active segment of the money market has been the call money market, where the day to day
imbalances in the funds position of scheduled commercial banks are eased out. The call notice money market
has graduated into a broad and vibrant institution .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 this 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 transactions. It is also known as Inter-bank money market. In this, day to
day surplus funds mostly of banks are traded. It is a market for extremely short period loans say one day to
fourteen days. Such loans are repayable on demand at the option of either the lender or the borrower. Interest
rates changes hour to hour or day to day based on the demand and supply of money.
The entry into this field is restricted by RBI. Commercial Banks, Co-operative Banks and Primary Dealers are
allowed to borrow and lend in this market. Specified All-India Financial Institutions, Mutual Funds, and
certain specified entities are allowed to access to Call/Notice money market only as lenders. Reserve Bank of
India has recently taken steps to make the call/notice money market completely inter-bank market. Hence the
non-bank entities will not be allowed access to this market beyond December 31, 2000.
From May 1, 1989, the interest rates in the call and the notice money market are market determined. Interest
rates in this market are highly sensitive to the demand - supply factors. Within one fortnight, rates are known
to have moved from a low of 1 - 2 per cent to dizzy heights of over 140 per cent per annum. Large intra-day
variations are also not uncommon. Hence there is a high degree of interest rate risk for participants. In view of
the short tenure of such transactions, both the borrowers and the lenders are required to have current accounts
with the Reserve Bank of India. This will facilitate quick and timely debit and credit operations. The call
market enables the banks and institutions to even out their day to day deficits and surpluses of money. Banks
especially access the call market to borrow/lend money for adjusting their cash reserve requirements (CRR).
The lenders having steady inflow of funds (e.g. LIC, UTI) look at the call market as an outlet for deploying
funds on short term basis
6. Govt. Securities Market ( Govt. Securities Market /GILT-EDGED MARKET)
The gilt edged market is the market is government securities or the securities guaranteed (as to both
principle and interest) by the government. Since the government cannot default on its payment obligations,
the government securities are risk free and hence are known as gilt-edged (which means ‘of the best quality’).
1. It is a risk free market and returns are guaranteed. Accordingly there is no uncertainty regarding yield,
payment on time, etc. and there is no scope for speculation and manipulation ') of the market.
2. The government securities market consists of two parts - the new issues market and the secondary market.
Since it is the Reserve Bank of India that manages entirely the public debt operations of the Central as well as
the State governments, it is responsible for all the new issues of government loans. The secondary market
deals in old issues of government loans and operates largely through a few large stockbrokers who keep in
touch with the Reserve Bank and other prospective buyers and sellers.
3. Reserve Bank of India plays a dominant role in the government securities market. As noted by S.B. Gupta,
"there are only brokers or investors in the market and no dealers or jobbers (other than the RBI) who would
make a market in government loans by standing ready to buy and sell any amount of government securities on
their own account."
4. Government securities are the most liquid debt instruments.
5. The transactions in the government securities market are very large and each transaction may run into
several crores of rupees.
7. Capital Market:
The capital market is the place where the short, medium-term and long-term financial needs of business and
other undertakings are met by financial institutions which supply medium and long-term resources to
borrowers. Capital market is a market for financial assets which have a long or indefinite maturity. Generally
it deals with long term securities having a maturity period of above one year. Capital market may be further
divided into three parts, i.e.
(i) Industrial security market
(ii) Govt. securities market
(iii) Long term loan market
Capital market serves as a important source for the productive use of economy’s savings and investment.
These savings and investments facilitate capital formation and through this facilitates increase in production
and productivity in the economy. A capital market thus serves as an important link between those who saves
and those who aspire to invest their savings.
Capital markets – Types
(i) Industrial Security Market – It is market where industrial concerns raise their capital or debt by issuing
instruments like equity hares or ordinary shares, preference shares, debentures or bonds. This market can be
sub divided into:
(a) Primary Market or new issue market
(b) Secondary Market or stock Exchange
Primary Market is a market for new issues and hence it is called new issue market. It deals with securities
which are issued to the public for the first time. There are three ways through which capital is raised in
primary market. These are:
- Public issue
- Right Issue
- Private placement
Secondary market is a market for secondary sale of securities i.e. securities which already passed through
the new issue market are traded in this secondary market. Generally, such securities are quoted in stock
exchange and it provides a continuous; and regular market for buying and selling of securities.
(ii) Govt. Security Market – It is a market where Long term Govt securities are traded which are issued by
central Govt, State Govt, Semi Govt authorities like City Corporations, Port Trusts, Improvement Trusts, State
Electricity Boards, All India and State level financial institutions and public sector organizations/enterprises
are dealt in this market. Govt. Securities are in many forms such as :
- Stock Certificates or inscribed stock
- Promissory Notes
- Bearer bonds.
Govt securities are sold through public debt office of RBI. Interest on these securities influences price and
yield in market.
(iii) Long Term loan market – Commercial banks and development banks play a significant role in this
market by supplying long term loans to corporate customers. Long term loan market may further be classified
- Term loan market
- Mortgage Market
- Financial guarantee Market.
Term Loan Market – In India many industrial finance institutions have been created by Central and State
Govts., which provide medium and long term loans to corporate customers. Institutions like IDBI, IFCI, ICICI
and other state financial corporations come in this category.
Mortgage Market – Refers to those centres which supply mortgage loan mainly to individual customers
against security of immovable property like real estate.
Financial guarantee Market – Refers to centres where finance is provided against the guarantee of reputed
person in financial circle. This guarantee may be in the form of (i) Performance guarantee or (ii) Financial
guarantee. Performance guarantee covers the payment of earnest money retention money, advance payments
and non compilation of contracts etc. The financial guarantee covers only financial contracts.
Functions and importance of Capital Market
Capital market plays an important role in mobilizing resources, and diverting them in productive channels. In
this way, it facilitates and promotes the process of economic growth in the country. Various functions and
significance of capital market are discussed below:
1. Link between Savers and Investors: The capital market functions as a link between savers and investors.
It plays an important role in mobilizing the savings and diverting them in productive investment. In this way,
capital market plays a vital role in transferring the financial resources from surplus and wasteful areas to
deficit and productive areas, thus increasing the productivity and prosperity of the country.
2. Encouragement to Saving: With the development of capital, market, the banking and non-banking
institutions provide facilities, which encourage people to save more. In the less- developed countries, in the
absence of a capital market, there are very little savings and those who save often invest their savings in
unproductive and wasteful directions, i.e., in real estate (like land, gold, and jewellery) and conspicuous
3. Encouragement to Investment: The capital market facilitates lending to the businessmen and the
government and thus encourages investment. It provides facilities through banks and non-banking financial
institutions. Various financial assets, e.g., shares, securities, bonds, etc., induce savers to lend to the government or invest in industry. With the development of financial institutions, capital becomes more mobile,
interest rate falls and investment increases.
4. Promotes Economic Growth: The capital market not only reflects the general condition of the economy,
but also smoothens and accelerates the process of economic growth. Various institutions of the capital market,
like non-banking financial intermediaries, allocate the resources rationally in accordance with the
development needs of the country. The proper allocation of resources results in the expansion of trade and
industry in both public and private sectors, thus promoting balanced economic growth in the country.
5. Stability in Security Prices: The capital market tends to stabilize the values of stocks and securities and
reduce the fluctuations in the prices to the minimum. The process of stabilization is facilitated by providing
capital to the borrowers at a lower interest rate and reducing the speculative and unproductive activities.
6. Benefits to Investors: The credit market helps the investors, i.e., those who have funds to invest in longterm financial assets, in many ways:
(a) It brings together the buyers and sellers of securities and thus ensure the marketability of investments,
(b) By advertising security prices, the Stock Exchange enables the investors to keep track of their investments
and channelize them into most profitable lines,
(c) It safeguards the interests of the investors by compensating them from the Stock Exchange Compensating
Fund in the event of fraud and default.
Difference between Money Market and Capital Market
Money market is distinguished from capital market on the basis of the maturity period, credit instruments and the institutions:
1. Maturity Period: The money market deals in the lending and borrowing of short-term finance (i.e., for one year or less),
while the capital market deals in the lending and borrowing of long-term finance (i.e., for more than one year).
2. Credit Instruments: The main credit instruments of the money market are call money, collateral loans, acceptances, bills
of exchange. On the other hand, the main instruments used in the capital market are stocks, shares, debentures, bonds,
securities of the government.
3. 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.
4. Institutions: Important institutions operating in the' money market are central banks, commercial banks, acceptance
houses, non-bank financial institutions, bill brokers, etc. Important institutions of the capital market are stock exchanges,
commercial banks and non-bank 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
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 long-term, 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.
8. Debt Market:
It is a market meant for trading (i.e. buying or selling) fixed income instruments. Fixed income instruments
could be securities issued by Central and State Governments, Municipal Corporations, Govt. Bodies or by
private entities like financial institutions, banks, corporates, etc. The bond market (also debt market or
credit market) is a financial market where participants can issue new debt, known as the primary market, or
buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, but it may
include notes, bills, and so on. The primary goal of the bond market is to provide a mechanism for long term
funding of public and private expenditures. Maturity is the date on which the investor is repaid the principal
by the issuer. The tenure for the maturity of an instrument can range from one day to 30 years. Generally, for
a longer the time period towards maturity the issuer pays a higher interest rate on the instrument. Instruments
with a maturity under 364 days are termed as short-term instruments.
Debt markets are vital to the sustained growth of any economy since they offer efficient mobilization and
allocation of financial resources. Debt instruments are used to finance developmental activities undertaken by
the Government. They also aid in managing the liquidity in the economy. Borrowings from the debt market
allow the Government to reduce its dependence on external sources of funding. It also reduces the pressure on
institutional financing to fund public sector or private sector projects.
The issue & trade of securities in India are regulated by either RBI or SEBI. Government securities and
bonds, instruments issued by banks and financial institutions are regulated by RBI while issues of nongovernment securities (i.e. issue by corporates) are regulated by SEBI.
The corporate debt market can be classified into Primary market and Secondary market. In the primary
market, corporate debt is via private placements like corporate bonds placed with wholesale investors like
banks, financial institutions, mutual funds, etc. The Secondary market for corporate debt is available on
platforms offered by various exchanges in the country. The secondary debt market in India can be broadly
categorized into –
Wholesale Debt Market – comprising of investors like Banks, financial institutions, RBI, insurance
companies, Mutual funds, corporates and FIIs.
Retail Debt Market – comprising of investors like individuals, pension funds, private trusts, NBFCs and
other legal entities.
9. Primary and Secondary Market:
Primary Market is a market for new issues and hence it is called new issue market. It deals with securities which
are issued to the public for the first time. There are three ways through which capital is raised in primary market.
- Public issue
- Right Issue
- Private placement
Secondary market is a market for secondary sale of securities i.e. securities which already passed through the
new issue market are traded in this secondary market. Generally, such securities are quoted in stock exchange and
it provides a continuous; and regular market for buying and selling of securities.
10. Interlinking Financial Market-Indian and Global Financial Markets:
The term “integration” refers to the establishment of close connections or effective linkages between different
constituents and between different parts of the financial system. Financial integration is the opposite of the
maturity wise, geographical, institutional, seasonal, instrumental, segmentation or Compartmentalization of
the financial markets. The integration process has helped the financial markets both at national and
international levels to enhance their efficiency and it has also facilitated in globalization of financial services.
The flow of foreign capital from the industrialized countries to the developing countries has been the
significant outcome of this integration process.
Global Integration of Financial Markets
In terms of international trade and financial flows, Indian economy is to a very great extent an open economy,
though the extent of its openness may not be as great as in countries like USA, UK, Germany, Japan,
Philippines. The foreign exchange markets are cleared at a conversion price, i.e. at the exchange rate. The
foreign exchange rates are an important part of financial analysis. Though the exchange rate is apparently
determined by the supply of and demand for foreign exchange, the complex forces of exports and imports lie
behind the whole process of exchange rate determination. The international aspects of savings and
investments flows are reflected in the volume of capital flows between nations.
The world economy has witnessed significant changes in recent years. India has already opened up its
economic frontiers and presently expects increasing gains from the new world trade order and the world
finance system. Since 1990, the global economy has emerged very swiftly requiring significant changes. The
openness of the economy is also apparent in the projections of the Eight Plan. While exports are expected to
grow by 13.6% p.a. in volume terms to reach a level of US $33.55 billion by the year 1996-97, imports are
projected to increase by 8.4% in volume terms. The trade policy reforms have been made part of overall
reform process for he realization of aforesaid objectives.
The GATT played a significant role in facilitating the rapid expansion in global trade through a succession of
rounds which culminated in the Uruguay Round and resulted in the transformation of GATT into World Trade
Organization. The Uruguay Round has been the most ambitious and comprehensive multilateral trade
negotiations in history. During the 1996-1994, international transaction sin good and non-factor services as a
proportion of GDP enhance from 33% to 43% for the developing world as a whole. The General Agreement
on Trade in services is the first multilaterally agreed and legally enforceable rules to cover international trade
in services. Share of services in global trade has increased to over 22% in 1994 against 15% in 1980.
The way the Indian Corporate sector reacted to the domestic liberalization process as well as to the Uruguay
Round results disclose that a large segment is quite conscious that this liberalization process is desirable,
possibly also irreversible and the world trade liberalization through the Uruguay Round can be a position
factor that will facilitate the adjustments needed to be done at the corporate level in response to the domestic
Thus global integration of financial markets resulted from de-regulatory measures, technological and
information explosion and financial innovations. The Indian Corporate Sector has appreciated the concept of
globalization of economy and has been initiating measures to emerge as Indian multinationals. The measures
include improved quality products, establishment of overseas distribution and marketing channels, capacity
utilization, cost consciousness, strategic alliances for both domestic and international operations and so forth.
Module - II: Financial Institutions
1. Financial Institutions
The financial institutions in any country are significant financial and commercial organizations responsible for
providing proper facilitation to the flow of money and finances through the economy, through acting as major and main
financial intermediaries between the potential lenders or investors and the borrowers of all categories. In most of the
countries all across the world, these financial institutions operate under heavily and stringently regulated environment,
usually by the governments, because of being magnificent and critical part of country's economy. By dint of these facts
and privileges, the financial institutions of all over the world, therefore, deserve our special attention and selective legal
1.1: Broad Categories
The structure of financial institutions (FIs) in India is widely diversified and includes National and State level
development financial institutions, insurance corporations and investment institutions. For purposes of classification, the
financial institutions can be classified into three broad heads: (a) All-India Financial Institutions, (b) State-level
Institutions (SFCs and SIDCs), and (c) Other Institutions (ECGC and DICGC). All-India Financial Institutions can be
further reclassified under four broad heads – All-India Development Banks (IDBI, ICICI, SIDBI, IIBI and IFCI);
Specialized-Financial Institutions (EXIM Bank, RCTC, ICICI Venture, TFCI and IDFC); Investment Institutions (UTI,
LIC and GIC and its subsidiaries); and Refinance Institutions (NABARD and NHB). In the case of investment
institutions, UTI, being a mutual fund, is discussed under the section on capital markets while for the LIC and the GIC
and its subsidiaries.
To reduce transaction costs by specializing in the issuance of standardized securities.
To reduce the information costs of screening and monitoring borrowers. They curb asymmetries,
helping resources flow to most productive uses.
To give savers ready access to their funds.
Financial intermediation and leverage have shifted away from traditional banks and toward other
financial institutions less subject to government regulations.
Brokerages, insurers, hedge funds, etc.
Provide services that compete with banks but do not accept deposits.
Take on more risk than traditional banks and are less.
Rapid growth in some financial instruments made it easier to conceal leverage and risk-taking.
2. Money Market Institutions /PARTICIPANTS IN MONEY MARKET
The major participants who supply the funds and demand the same in the money market are as follows:
i) Reserve Bank of India: Reserve Bank of India is the regulator over the money market in India. As the Central
Bank, it injects liquidity in the banking system, when it is deficient and contracts the same in opposite situation.
ii) Banks: Commercial Banks and the Co-operative Banks are the major participants in the Indian money market. They
mobilize the savings of the people through acceptance of deposits and lend it to business houses for their short term
working capital requirements. While a portion of these deposits is invested in medium and long-term Government
securities and corporate shares and bonds, they provide short-term funds to the Government by investing in the Treasury
Bills. They employ the short-term surpluses in various money market instruments.
iii) Discount and Finance House of India Ltd. (DFHI): DFHI deals both ways in the money market instruments.
Hence, it has helped in the growth of secondary market, as well as those of the money market instruments.
iv) Financial and Investment Institutions: These institutions (e.g. LIC, UTI, GIC, Development Banks, etc.) have
been allowed to participate in the call money market as lenders only.
v) Corporates: Companies create demand for funds from the banking system. They raise short-term funds directly from
the money market by issuing commercial paper. Moreover, they accept public deposits and also indulge in inter
corporate deposits and investments.
vi) Mutual Funds: Mutual funds also invest their surplus funds in various money market instruments for
short periods. They are also permitted to participate in the Call Money Market. Money Market Mutual Funds
have been set up specifically for the purpose of mobilization of short-term funds for investment in money
3. Capital Market Institutions
These institutions may further be classified into investing institutions and development banks on the basis of
the nature of their activities and the financial mechanism adopted by them. Investing institutions comprise
those financial institutions which garner the savings of the people by offering their own shares and stocks, and
which provide long-term funds, especially in the form of direct investment in securities and underwriting
capital issues of business enterprises. These institutions include investment banks, merchant banks,
investment companies and the mutual funds and insurance companies. Development banks include those
financial institutions which provide the sinews of development, i.e. capital, enterprise and know-how, to
business enterprises so as to foster industrial growth.
4. Financial Services Institutions, Functions and structure introduced:
Financial institutions or institutions offer various types of transformation services. They issue claims to their
customers that have characteristics different from those of their own assets. For example, banks accept
deposits as liability and convert them into assets such as loans. This is known as “liability-asset
transformation” function. Similarly they choose and manage portfolios whose risk and return they alter by
applying resources to acquire better information and to reduce or overcome transaction costs. They are able to
do so through economies of scale in lending and borrowing. They provide large volumes of finance on the
basis of small deposits or unit capital. This is called “size-transformation” function.
Further, they distribute risk through diversification and thereby reduce it for savers as in the case of mutual
funds. This is called “risk-transformation” function. Finally they offer savers alternate forms of deposits
according to their liquidity preferences, and provide borrowers with loans of requisite maturities. This is
known as “maturity-transformation” function. A financial system also ensures that transactions are effected
safely and swiftly on an on-going basis. It is important that both buyers and sellers of goods and services
should have the confidence that instruments used to make payments will be accepted and honored by all
parties. The financial system ensures the efficient functioning of the payment mechanism.
In short, financial markets can be said to perform proximate functions such as:
1. Enabling economic units to exercise their time preference,
2. Separation, distribution, diversification, and reduction of risk,
3. Efficient operation of the payment mechanism,
4. Transmutation or transformation of financial claims so as to suit the preferences of both savers and
5. Enhancing liquidity of financial claims through securities trading, and
6. Portfolio management.
5. Stock Exchanges:
“Stock Exchange means any body or individuals whether incorporated or not, constituted for the purpose of
assisting, regulating or controlling the business of buying, selling or dealing in securities”. It is an association
of member brokers for the purpose of self-regulation and protecting the interests of its members.
It can operate only if it is recognized by the Government under the Securities Contracts (Regulation)Act,
1956. The recognition is granted under Section 3 of the Act by the Central Government, Ministry of FinanceStock Exchange Division.
The Powers of the Central Government under the Act are far-reaching and include the following in particular:
(1) Grant and withdrawal of recognition, approval or change of byelaws.
(2) Call for periodical returns from the Stock Exchange.
(3) Direct enquiries on the members or on the Stock Exchange.
(4) Liability of the Exchange to submit annual reports.
(5) Directing the Stock Exchange to make certain rules.
(6) Supersede the Governing Board of the Exchange.
(7) Suspend the Governing Board of the Exchange.
(8) Impose any other conditions or regulations for trading.
A Governing Board comprising of 9 elected director (one third of them retire every year by rotation), an
Executive Director, three Government nominees, a Reserve Bank of India nominee and five public
representatives, is the apex body which regulates the Exchange and decides its policies. A President, a VicePresident and an honorary Treasurer are annually elected from among the elected directors, by the Governing
Board following the election of directors. The Executive Directors as the Chief Executive Officer is
responsible for the day-to-day administration of the Exchange.
Earliest records of securities trading in India are available from the end of the eighteenth century. Before
1850, there was business conducted in Mumbai in shares of banks and the securities of the East India
Company which were considered as securities for buying, selling and exchange. The shares of the
Commercial Bank, Mercantile Bank and Bank of Bombay were some of the prominent shares traded. The
business was conducted under sprawling banyan tree in front of the Town Hall, which is now in the
Horniman Circle Park.
In 1850, the Companies Act was passed and that heralded the commencement of joint stock companies in
India, It was the American civil war that helped Indians to establish broking business. The leading broker,
Shri Premchand Roychand was responsible for developing conventions and procedures. In 1874, the Dalal
Street became the prominent place of meeting of the brokers to conduct their business. The brokers organized
and Association on 9th July 1875 known as the Native Share Brokers Association to protect character, status
and interest of the Native Brokers and that was the foundation of the Stock Exchange, Mumbai.
The Exchange was established with 318 members. The number increased to 333 in 1896 and a present, it is
641. The membership fee has increased gradually from Rs. 1 in 1887 to Rs. 1,000.- in 1896, Rs. 48,000/- in
1920, Rs. 7.51 lakhs in 1986 and Rs. 55 lakhs at present.
In 1950, Stock Exchanges became an exclusively Central Government subject following adoption of the
Constitution of India. In 1956, the Securities Contracts (Regulation) Act was passed. In 1992, the Securities
and Exchange Board of India Act was passed though the Securities Exchange Board of India (SEBI) came
into existence in 1988. In the last three years, SEBI has been empowers by the Central Government to
regulate and develop capital markets in India.
In 1992, the Over the Counter Exchange of India (OTCEI) came into existence where equities of small
Companies are listed. In 1994, birth of the National Stock Exchange took place, in 1995, the Exchange rapidly
computerized its trading operations and thus the open cut-cry system of share trading was replaced by screen
based trading in the Stock Exchange, Mumbai. In January 1996, the revised carry forward system was
introduced. In September 1997, BSE On-Line Trading System network went nationwide.
The recognized stock exchanges at Mumbai, Ahmadabad, Indore are voluntary non-profit-making
associations, while the Calcutta, Delhi, Bangalore, Cochin, Kanpur, Ludhiana, Guwahati and Kanara Stock
Exchanges are join-stock companies limited by shares and the Mumbai, Hyderabad and Pune stock Exchanges
are companies limited by guarantee. Since the Rules of Articles of Association defining the constitution of the
recognized stock exchanges are approved by the Central Government, there is an uniformity in their
The governing body of a recognized stock exchange has wide governmental and administrative powers and is
the decision – taking body. It has the power, subject to governmental approval, to make, amend and suspend
the operation of the rules, byelaws and regulations of the exchanges. It also has complete jurisdiction over all
members and in practice, its power of management and control are almost absolute. Under the constitution,
the governing body has the power to admit and expel members, to warn, censure, fine and suspend members
and their partners, attorneys, remisiers, authorized clerks and employees, to approve the formation and
dissolution of partnerships and appointment of attorney, remisiers and authorized clerks, to enforce attendance
and information, adjudicate disputes and impose penalties, to determine the mode and conditions of stock
exchange business and regulate stock exchange trading all its aspects and generally to supervise, direct and
control all matters and activities affecting the stock exchange.
The organisation of Mumbai Stock Exchange is typical. The members on roll elect 16 members to be
Directors on the Governing Board, who in turn elect a President. Vice-President and Treasurer. The Executive
Director is appointed by the government on the recommendation of the Governing Board to the Chief
Administrator of the Exchange. There are also three representatives from the Government, three from the
public and one from the RBI on the Board to represent their interests. As per the SEBI guidelines, the
Exchanges have agreed to have 50% representation to non-members on the Governing Board.
FUNCTIONS OF A STOCK EXCHANGE
The functions of stock exchange can be enumerated as follows:
1. Provides ready and continuous market: By providing a place where listed securities can be bought and
sold regularly and conveniently, a stock exchange ensures a ready and continuous market for various shares,
debentures, bonds and government securities. This lends a high degree of liquidity to holdings in these
securities as the investor can encash their holdings as and when they want.
2. Provides information about prices and sales: A stock exchange maintains complete record of all
transactions taking place in different securities every day and supplies regular information on their prices and
sales volumes to press and other media. In fact, now-a-days, you can get information about minute to minute
movement in prices of selected shares on TV channels like CNBC, Zee News, NDTV and Headlines Today.
This enables the investors in taking quick decisions on purchase and sale of securities in which they are
interested. Not only that, such information helps them in ascertaining the trend in prices and the worth of their
holdings. This enables them to seek bank loans, if required.
3. Provides safety to dealings and investment: Transactions on the stock exchange are conducted only
amongst its members with adequate transparency and in strict conformity to its rules and regulations which
include the procedure and timings of delivery and payment to be followed. This provides a high degree of
safety to dealings at the stock exchange. There is little risk of loss on account of non-payment or non-delivery.
Securities and Exchange Board of India (SEBI) also regulates the business in stock exchanges in India
and the working of the stock brokers. Not only that, a stock exchange allows trading only in securities that
have been listed with it; and for listing any security, it satisfies itself about the genuineness and soundness of
the company and provides for disclosure of certain information on regular basis. Though this may not
guarantee the soundness and profitability of the company, it does provide some assurance on their
genuineness and enables them to keep track of their progress.
4. Helps in mobilization of savings and capital formation: Efficient functioning of stock market creates a
conducive climate for an active and growing primary market. Good performance and outlook for shares in the
stock exchanges imparts buoyancy to the new issue market, which helps in mobilizing savings for investment
in industrial and commercial establishments. Not only that, the stock exchanges provides liquidity and
profitability to dealings and investments in shares and debentures. It also educates people on where and how
to invest their savings to get a fair return. This encourages the habit of saving, investment and risk-taking
among the common people. Thus it helps mobilizing surplus savings for investment in corporate and
government securities and contributes to capital formation.
5. Barometer of economic and business conditions: Stock exchanges reflect the changing conditions of
economic health of a country, as the shares prices are highly sensitive to changing economic, social and
political conditions. It is observed that during the periods of economic prosperity, the share prices tend to rise.
Conversely, prices tend to fall when there is economic stagnation and the business activities slow down as a
result of depressions. Thus, the intensity of trading at stock exchanges and the corresponding rise on fall in the
prices of securities reflects the investors’ assessment of the economic and business conditions in a country,
and acts as the barometer which indicates the general conditions of the atmosphere of business.
6. Better Allocation of funds: As a result of stock market transactions, funds flow from the less profitable to
more profitable enterprises and they avail of the greater potential for growth. Financial resources of the
economy are thus better allocated.
6. Prudential Norms:
SEBI – Market Regulator and Investors’ Protector
SEBI is required to create a proper and conducive atmosphere required for raising money from the capital
market. The atmosphere includes the rules, regulations, trade practices, customs and relations among
institutions, brokers, investors and companies. it shall endeavor to restore the trust of investors and
particularly to safeguard the interest of the small investors. This can be achieved by meeting the needs of
the persons connected with the security market and establishing proper coordination among the three
main groups directly connected with its operations, namely, (a) investors, (b) corporate sectors and (c)
SEBI is expected to educate investors and make them aware of their rights in clear and specific terms. It
shall provide investors with information and see that the market maintains liquidity, safety and
profitability of the securities which are crucial for any investments.
SEBI shall create a proper investments climate and enable the corporate sector to raise industrial
securities easily, efficiently and at affordable minimum cost.
SEBI shall develop a proper infrastructure so that the market automatically facilitate expansion and
growth of business to middlemen like brokers, jobbers, commercial banks, merchant bankers, mutual
funds, etc, Thus, it will ensure that they provide efficient service to their constituents, namely, investors
and the corporate sector at a competitive price.
SEBI shall make more effective the law in the existing status as far as they relate to the industrial
securities, mutual funds, investments in Units, LIC savings plan. Chit-Fund companies and securities
issued by housing/industrial societies and corporations with the purpose of making investments in
SEBI shall create the framework for more open, orderly, and unprejudiced conduct in relation to takeover
and mergers in the corporate sector to ensure fair and equal treatment to all the security holders, and to
facilitate such takeovers and mergers in the interest of efficient by prescribing a mechanism for more
7. SEBI Regulations (REGULATIONS OF STOCK EXCHANGES)
As indicated earlier, the stock exchanges suffer from certain limitations and require strict control over their
activities in order to ensure safety in dealings thereon. Hence, as early as 1956, the Securities Contracts
(Regulation) Act was passed which provided for recognition of stock exchanges by the central Government. It
has also the provision of framing of proper bylaws by every stock exchange for regulation and control of their
functioning subject to the approval by the Government. All stock exchanges are required submit information
relating to its affairs as required by the Government from time to time. The Government was given wide
powers relating to listing of securities, make or amend bylaws, withdraw recognition to, or supersede the
governing bodies of stock exchange in extraordinary/abnormal situations. Under the Act, the Government
promulgated the Securities Regulations (Rules) 1957, which provided inter alia for the procedures to be
followed for recognition of the stock exchanges, submission of periodical returns and annual returns by
recognized stock exchanges, inquiry into the affairs of recognized stock exchanges and their members, and
requirements for listing of securities.
ROLE OF SEBI
As part of economic reforms programme started in June 1991, the Government of India initiated several
capital market reforms, which included the abolition of the office of the Controller of Capital Issues (CCI) and
granting statutory recognition to Securities Exchange Board of India (SEBI) in 1992 for:
(a) protecting the interest of investors in securities;
(b) promoting the development of securities market;
(c) regulating the securities market; and
(d) matters connected there with or incidental thereto.
SEBI has been vested with necessary powers concerning various aspects of capital market such as:
regulating the business in stock exchanges and any other securities market;
registering and regulating the working of various intermediaries and mutual funds;
promoting and regulating self regulatory organisations;
promoting investors education and training of intermediaries;
prohibiting insider trading and unfair trade practices;
regulating substantial acquisition of shares and take over of companies;
calling for information, undertaking inspection, conducting inquiries and audit of stock exchanges,
and intermediaries and self regulation organisations in the stock market; and
performing such functions and exercising such powers under the provisions of the Capital Issues
(Control) Act, 1947 and the Securities Contracts (Regulation) Act, 1956 as may be delegated to it
by the Central Government.
As part of its efforts to protect investors’ interests, SEBI has initiated many primary market reforms, which
include improved disclosure standards in public issue documents, introduction of prudential norms and
simplification of issue procedures. Companies are now required to disclose all material facts and risk factors
associated with their projects while making public issue. All issue documents are to be vetted by SEBI to
ensure that the disclosures are not only adequate but also authentic and accurate. SEBI has also introduced a
code of advertisement for public issues for ensuring fair and truthful disclosures. Merchant bankers and all
mutual funds including UTI have been brought under the regulatory framework of SEBI. A code of conduct
has been issued specifying a high degree of responsibility towards investors in respect of pricing and premium
fixation of issues. To reduce cost of issue, underwriting of issues has been made optional subject to the
condition that the issue is not under-subscribed. In case the issue is under-subscribed i.e., it was not able to
collect 90% of the amount offered to the public, the entire amount would be refunded to the investors. The
practice of preferential allotment of shares to promoters at prices unrelated to the prevailing market prices has
been stopped and private placements have been made more restrictive. All primary issues have now to be
made through depository mode. The initial public offers (IPOs) can go for book building for which the price
band and issue size have to be disclosed. Companies with dematerialized shares can alter the par value as and
when they so desire.
As for measures in the secondary market, it should be noted that all statutory powers to regulate stock
exchanges under the Securities Contracts (Regulation) Act have now been vested with SEBI through the
passage of securities law (Amendment) Act in 1995. SEBI has duly notified rules and a code of conduct to
regulate the activities of intermediaries in the securities market and then registration in the securities market
and then registration with SEBI is made compulsory. It has issued guidelines for composition of the governing
bodies of stock exchanges so as to include more public representatives. Corporate membership has also been
introduced at the stock exchanges. It has notified the regulations on insider trading to protect and preserve the
integrity of stock markets and issued guidelines for mergers and acquisitions. SEBI has constantly reviewed
the traditional trading systems of Indian stock exchanges and tried to simplify the procedure, achieve
transparency in transactions and reduce their costs. To prevent excessive speculations and volatility in the
market, it has done away with badla system, and introduced rolling settlement and trading in derivatives. All
stock exchanges have been advised to set-up Clearing Corporation / settlement guarantee fund to ensure
timely settlements. SEBI organizes training programmes for intermediaries in the securities market and
conferences for investor education all over the country from time to time.
8. Sensitive Indices: Security market Index measures the behaviour of the security prices and the stock market.
Indicators represent the entire stock market and its segments which measure the movement of the stock market.
The most popular index in India are the Bombay stock exchange sensitivity Index (BSE Sensex or BSE – 100) and
the National Stock Exchange Nifty. The two prominent Indian market indexes are Sensex and Nifty. Sensex is
the oldest market index for equities; it includes shares of 30 firms listed on the BSE, which represent about
45% of the index's free-float market capitalization. It was created in 1986 and provides time series data from
April 1979, onwards. Another index is the S&P CNX Nifty; it includes 50 shares listed on the NSE, which
represent about 62% of its free-float market capitalization. It was created in 1996 and provides time series
data from July 1990, onward.
Purpose of Index
Security Index is helpful to show the economic health and analyzing the movement of price of various securities
listed into the stock exchange.
Helpful to evaluate the Risk – return portfolio analysis.
Helpful to measure the growth of the secondary market.
Index can be used to compare a given share prices behaviour with its movement.
It is helpful to the investor to make their Investment decision.
Funds can be allocated more rationally between stocks with knowledge of the relationship of price of
individual with the movements in the market.
Market indices act as sensitive barometer of the changes in trading pattern in the stock market.
Factors that influence the construction of Index numbers
Selecting the shares for inclusion in the index making.
Determine the relative importance of each share included in the sample weighting
Average the included share into single share measure.
Sample List of Indices
BSE 500 and Sectoral Indices
S&P CNX 50
CNX Nifty Junior
OTCEI – Composite Index
9. Services given by Stock Exchange to Investors:
Stock exchange provides liquidity: (i.e. easy convertibility to cash) to investment in securities. An investor
can sell his securities at any time because of the ready market provided by the stock exchange. Stock
exchange provides easy marketability to corporate securities.
Provides collateral value to securities: Stock exchange provides better value to securities as collateral for a
loan. This facilitates borrowing from a bank against securities on easy terms.
Offers opportunity to participate in the industrial growth: Stock exchange provides capital for industrial
growth. It enables an investor to participate in the industrial development of the country.
Estimates the worth of securities: Stock exchange provides the facility of knowing the worth (i.e true market
value) of investment due to quotations (i.e. price list) and reports published regularly by the exchange. This
type of information guides investors as regards their future investments. They can purchase or sell securities
as per the price trends (i.e. latest price value) in the market.
Offers safety in corporate investment: An investor can invest his surplus money (i.e. extra money) in the
listed securities with reasonable safety. The risk in such investment is reduced considerably due to the
supervision of stock exchange authorities on listed companies. Moreover, securities are listed only when the
exchange authorities are satisfied as regards legality and solvency of company concerned. Such scrutiny
(detailed checking) avoids listing, of securities of unsound companies (i.e. companies with bad financial
Services given by Stock Exchange to Companies:
Widens market for securities: Stock exchange widens the market for the listed securities and enables the
companies to collect capital for promotion, expansion and modernization purpose. It indirectly provides
financial support to companies / corporations.
Creates goodwill and reputation: Stock exchange enhances the goodwill and the reputation of the
companies whose securities are listed. Listing acts as a character certificate given to a company. It gives
prestigious position to company.
Facilitates fair pricing of listed securities: The market price of listed securities tends to be slightly higher in
relation to earnings and property values.
Provides better response from investors: Listed securities get better response from the investor due to safety
and security. Listing of securities is a unique service which stock exchanges offer to companies. It is a moral
support given to stable companies.
Facilitates quick selling of securities: Stock exchange enables companies to sell their securities easily and
quickly. This is natural as investors always prefer to invest money in listed securities.
10. Grievance Redressal Measures: (Investor Grievance Redressal)
Securities and Exchange Board of India (SEBI) has been established with the prime mandate to protect the
interest of investors in securities. It is also mandated to promote the development of and to regulate the
An investor enjoys investing, if
he knows how to invest;
he has full knowledge of the market;
the market is safe and there are no miscreants; and
There are arrangements to redress the grievances.
Accordingly, SEBI’s investor protection strategy has four elements.
First, build the capacity of investors through education and awareness to enable an investor to take
informed investment decisions. SEBI endeavors to ensure that the investor learns investing, that is, he obtains
and uses information required for investing, evaluates various investment options to suit his specific goals,
ascertains his rights and obligations in a particular investment, deals through registered intermediaries, takes
necessary precautions, seeks help if he gets into any problem, etc.
Towards this end, SEBI has been organizing investor education and awareness workshops directly,
and through investor associations and market participants, and also been encouraging market participants to
organize similar programmes. It maintains an updated, comprehensive web site for education of investors. It
publishes various kinds of cautions through media. It responds to the queries of investors through telephone,
e-mails, letters, and in person for those who visit SEBI office.
Second, make available every detail relevant for investment in public domain. SEBI has adopted
disclosure based regulatory regime. Under this framework, issuers and intermediaries disclose relevant details
about themselves, the products, the market and the regulations so that the investor can take informed
investment decisions based on such disclosures. SEBI has prescribed and monitors various initial and
Third, ensure that the market has systems and practices which make transactions safe. SEBI has taken
various measures, such as, dematerialization of securities; screen based trading system, T+2 rolling
settlement, etc. The dematerialization of securities eliminated a large number of investor grievances
emanating from servicing of paper based securities such as bad delivery of shares, delay/non-transfer of
shares, etc. This facilitated migration from account period settlement to T+2 rolling settlement which reduced
settlement risk substantially.
Fourth, help an investor in problem. SEBI has a comprehensive mechanism to facilitate redressal of
investor grievances against intermediaries and listed companies. It follows up with the companies and
intermediaries who do not redress investors’ grievances, by sending reminders to them and having meetings
with them. It takes appropriate enforcement actions (adjudication, prosecution proceedings, directions, etc.),
as provided under the law where progress in redressal of investor grievances is not satisfactory. It has
provided for a comprehensive arbitration mechanism in stock exchanges and depositories for resolution of
disputes of the investors with brokers and depository participants. It has instituted investor protection funds at
Exchanges to compensate investors where a broker is declared a defaulter. Depository indemnifies investors
for loss due to negligence of depository or depository participant. Recently, SEBI has realized a receipt of
unlawful gain of about Rs. 30 crore and so far disbursed about Rs. 24 crore among the investors who lost out
in the IPO irregularities.
While SEBI has been taking various measures for the investor protection, this memorandum focuses on the
investor grievance redressal mechanism available in SEBI, its performance, measures taken in recent years for
expediting the redressal of investors’ grievances, difficulties in the existing system and improvements
Redressal of Investors’ Grievances
The Office of Investor Assistance and Education (OIAE) acts as the single window interface,
interacting with investors seeking assistance of SEBI. Investors can submit grievances either by post or hand
delivery at any of the SEBI office or by electronic mode (web or e-mail). All grievances received by SEBI
(excluding those which refer/pertain to investigation) are individually acknowledged with unique number,
which facilitates tracking.
Dedicated investor helpline telephone numbers (022-26449188 & 26449199) are available for
investors seeking general guidance pertaining to securities markets and to provide assistance in filing
grievances. Dedicated personnel manning the helpline also guide the investors in filing up the grievance
submission forms as well as in determining the appropriate authority for their first recourse. Guidance is also
provided to approach the appropriate authority if their grievance is outside the purview of SEBI.
Grievances against listed companies: The grievances lodged by investors are taken up with the
respective listed company and are continuously monitored. The company is required to respond in prescribed
format in the form of Action Taken Report (ATR). Upon the receipt of ATR, the status of grievances is
updated. Where the response of the company is insufficient / inadequate, follow up action is initiated.
Grievances against stock brokers and depository participants: Grievances pertaining to stock
brokers and depository participants are taken up with concerned stock exchange and depository for redressal
and monitored by the concerned department through periodic report obtained from them.
Grievances against other intermediaries: Grievances pertaining to other intermediaries are taken up
with them directly for redressal and are continuously monitored by concerned Department of SEBI.
SEBI is in the process of upgrading the investor grievance redressal mechanism. The upgraded
mechanism SCORES (SEBI Complaints Redress System) would be a web-based, centralized grievance
redress system for SEBI.
The salient features of the new system are:
Centralized grievances tracking system for the entire SEBI.
Grievance pertaining to any of the Regional Offices of SEBI can be lodged from anywhere.
All grievances and Action Taken Report to be in electronic mode
Action taken and the current status of the grievance can be accessed online by the investors.
Facility for online updation of Action Taken Reports.
SCORES will reduce grievance process time at SEBI since physical movements of grievances are not
required. Similarly the grievance redressal time will be reduced since the entire process is in electronic mode,
including action taken report submitted by the company/intermediary. The problems arising from
loss/misplacement of grievance records would be eliminated since grievances are available in electronic
format. Similarly, the problem of physical storage, maintenance and redressal has also been addressed due to
the proposed conversion of physical grievances into electronic mode. Each grievance will be treated as
resolved /closed only after SEBI’s satisfaction. As investors can track their grievance redressal status online,
multiple correspondences from investors to know the status of their grievances are avoided.
The software for the new system is being developed by the National Informatics Centre (NIC),
Ministry of Information Technology, New Delhi.
Presentation on SCORES was given to representatives of Stock Exchanges, Depositories, Stock
Brokers, Registrars and Depository Participants to create awareness and get suggestions/ comments from the
participants. Feedback and suggestions were obtained from the various departments of SEBI on SCORES.
As a comprehensive list of listed companies is currently not available with SEBI, it is essential to have
this list for lodging grievances against them on SCORES. In view of the above, a separate database is being
developed based on the data obtained from Stock Exchanges. Formats for various categories of grievances
received by SEBI, Action Taken Reports by the companies /intermediaries and flow of grievances within
SEBI, its regional offices and intermediaries have been developed.
A demonstration on SCORES was given to the division chiefs and dealing officers of various
departments of SEBI on the modules developed viz. how to lodge a grievance, the Action taken report format,
etc. A similar demonstration was also given to Stock Exchanges, Depositories, RTAs and companies forming
part of NIFTY and SENSEX.
Subsequent to the demonstration, parallel processing in SCORES has commenced for grievances
against stock brokers and depository participants since September 15, 2010 and for NIFTY and SENSEX
companies from December 12, 2010 for testing the software.
The development of various query modules, MIS reports and standardized letters to be issued to the
complainants for different status of grievances are in progress.
This memorandum is submitted for information of and guidance from the Board.
Financial Services Institutions:
11. Clearing Corporation of India Limited (CCIL)
The CCIL is the clearing agency for Government securities. It acts as a Central Counter Party (CCP) for all transactions
in Government securities by interposing itself between two counterparties. In effect, during settlement, the CCP
becomes the seller to the buyer and buyer to the seller of the actual transaction. All outright trades undertaken in the
OTC market and on the NDS-OM platform are cleared through the CCIL. Once CCIL receives the trade information, it
works out participant-wise net obligations on both the securities and the funds leg. The payable / receivable position of
the constituents (gilt account holders) is reflected against their respective custodians. CCIL forwards the settlement file
containing net position of participants to the RBI where settlement takes place by simultaneous transfer of funds and
securities under the ‘Delivery versus Payment’ system. CCIL also guarantees settlement of all trades in Government
securities. That means, during the settlement process, if any participant fails to provide funds/ securities, CCIL will
make the same available from its own means. For this purpose, CCIL collects margins from all participants and
maintains ‘Settlement Guarantee Fund’.
12. Discount and Finance House of India Ltd:
DISCOUNT & FINANCE HOUSE OF INDIA (DFHI)
DHFI has been set up as a specialized money market institution with the object of providing liquidity to money
market instruments and to develop a secondary market. The DFHI is a joint stock company owned by RBI, public
sector banks and All India Financial Institutions which have contributed towards its paid up capital of Rs.150
Main functions of DFHI
- To discount, rediscount, buy, sell, underwrite or acquire or sell marketable securities and negotiable instruments.
- To undertake buy back arrangements in trade and Treasury Bills.
- To carry on business as a lender, borrower broker or as a broking house in the inter-bank call money market.
- To promote development of short term money market.
- To advise banks, govt, financial institutions or business houses in evolving schemes of growth, development and
expansion of money market
The operations of DFHI aimed at imparting greater flexibility to banks in their fund management. It participates in
call, notice and term market as a borrower and lender. It also purchases and sells TBs at auction, commercial bills,
commercial papers and certificate of deposits. All transactions are done through exchange of cheques drawn on
RBI to facilitate same day settlement.
13. National Securities Depository Ltd
NSDL, the first and largest depository in India, established in August 1996 and promoted by institutions of
national stature responsible for economic development of the country has since established a national
infrastructure of international standards that handles most of the securities held and settled in dematerialized
form in the Indian capital market.
Although India had a vibrant capital market which is more than a century old, the paper-based settlement of
trades caused substantial problems like bad delivery and delayed transfer of title till recently. The enactment
of Depositories Act in August 1996 paved the way for establishment of NSDL, the first depository in India.
This depository promoted by institutions of national stature responsible for economic development of the
country has since established a national infrastructure of international standard that handles most of the
trading and settlement in dematerialised form in Indian capital market.
Using innovative and flexible technology systems, NSDL works to support the investors and brokers in the
capital market of the country. NSDL aims at ensuring the safety and soundness of Indian marketplaces by
developing settlement solutions that increase efficiency, minimise risk and reduce costs. At NSDL, we play a
quiet but central role in developing products and services that will continue to nurture the growing needs of
the financial services industry.
In the depository system, securities are held in depository accounts, which is more or less similar to holding
funds in bank accounts. Transfer of ownership of securities is done through simple account transfers. This
method does away with all the risks and hassles normally associated with paperwork. Consequently, the cost
of transacting in a depository environment is considerably lower as compared to transacting in certificates
Under the provisions of the Depositories Act, NSDL provides various services to investors and other
participants in the capital market like, clearing members, stock exchanges, banks and issuers of securities.
These include basic facilities like account maintenance, dematerialisation, rematerialisation, settlement of
trades through market transfers, off market transfers & inter-depository transfers, distribution of non-cash
corporate actions and nomination/ transmission.
The depository system, which links the issuers, depository participants (DPs), NSDL and Clearing
Corporation/ Clearing house of stock exchanges, facilitates holding of securities in dematerialised form and
effects transfers by means of account transfers. This system which facilitates scripless trading offers various
direct and indirect services to the market participants.
14. Securities Trading Corporation of India Ltd: STCI was set up as a subsidiary of Reserve Bank of India
in May 1994 with the objective of fostering an active secondary market in Government of India Securities and
Public Sector bonds. Securities Trading Corporation of India Ltd (STCI) was established in 1994 as a
subsidiary of RBI with the objective of developing an active secondary market for GoI securities and public
sector bonds. In 1996, STCI was authorized by RBI as one of the first Primary Dealers in India. In 1997, RBI
divested a part of its holding in STCI which reduced its shareholding to 14.41%. In 2002, RBI sold its
remaining shareholding in STCI to the existing shareholders. During 2007, the company hived off it is
primary dealership business to its subsidiary STCI Primary Dealer Ltd. STCI is a registered Systemically
Important-Non Deposit taking NBFC.
STCI’s primarily undertakes investment and loan activities. Under its loan business STCI grants loans to its
customers against the collateral of equity shares and undertakes funding for subscription of shares offered by
companies under IPOs. Under investment activities, the company runs a proprietary book in equity trading,
fixed income securities and commodities futures trading. The company provides financial services for
individuals, HNIs, firms and corporates.
15. Credit Rating Institutions.
Credit Rating: Meaning
Credit rating is a codified rating assigned to an issue by authorized credit-rating agencies like CRISIL, CARE
and ICRA. These agencies have been promoted by well-established financial Institutions like IDBI, ICICI.
Unit Trust of India and reputed banks/finance companies, Credit-rating is a relative ranking arrived at by a
systematic analysis of the strengths and weaknesses of a company and debt instrument issued by the company,
based on financial statements, project analysis, creditworthiness factors and future prospectus of the project
and the company appraised at a point of time.
Objectives of Credit Rating
Credit rating alms to (i) provide superior information to the investors at a low cost; (ii) provide a sound basis
for proper risk-return structure; (iii) subject borrowers to a healthy discipline, and (iv) assist in the framing of
public policy guidelines on institutional investment. Thus, credit rating financial services represent
anexercise in faith building for the development of a healthy financial System.
Credit Rating Information Services of India Limited (CRISIL)
CRISIL was set up by ICICI and UTI in 1988. CRISIL rates debentures, fixed deposits, commercial paper,
preference shares and structured obligations. The rating methodology followed by CRISIL involves and
analysis of the following factors:
(i) Business Analysis
(a) Industry risk, including analysis of the structure of the industry, the Demand -supply position, a study of
the key success factors, the nature and basis of competition, the impact of government policies, cyclic and
seasonality of the industry.
(b) Market position of the company within the industry including market shares, product and customer
diversity, competitive advantages, selling and distribution arrangements.
(c) Operating efficiency of the company like locational advantages, labour relationships, technology,
manufacturing efficiency as compared to competitors.
(d) Legal position including the terms of the prospectus, trustees and their responsibilities an systems for
(ii) Financial Analysis
(a) Accounting quality like any overstatement or understatement of profits, auditors‟ qualifications in their
reports, methods of valuation of inventory, depreciation policy
(b) Earnings protection in terms of future earning growth for the company and future profitability.
(c) Adequacy of cash flows to meet debt servicing requirements in addition to fixed and working capital
needs. An opinion would be formed on the sustainability of cash flows in the future and the working capital
management of the company.
(d) Financial flexibility including the company’s ability to source finds from other sources like group
companies, ability to defer capital expenditure and alternative financing plans in times of stress.
(iii) Management Evaluation: The quality and ability of the management would be judged on the basis of the
past track record, their goals, philosophies and strategies their ability to overcome difficult situations, etc. In
addition to ability to repay, an assessment would be made of the management’s willingness to pay debt. This
would involve an opinion of integrity of the management.
(iv) Regulatory and competitive environment and regulatory framework of the financial system would be
examined keeping in view their likely impact on the company. Trends in regulation / deregulation are also
examined keeping in view their likely impact on the company.
(v) Fundamental Analysis
a) Capital adequacy, i.e. the true net work as compared to the volume of business and risk profile assets.
b) Asset quality including the company’s credit risk management, systems for monitoring credit, exposure to
individual borrowers and management of problem credits.
c) Liquidity management. Capital structure, term matching of assets and liabilities and policy on liquid assets
in relation to financial commitments would be some of the areas examined.
d) Profitability and financial position in terms of past historical profits, the spread of funds deployed and
accretion to reserves.
e) Exposure to interest rate changes and tax law changes.
The rating process begins at the request of the company. A professionally qualified team of analysis
visits the company’s plants and meets with different levels of the management including the CEO. On
completion of the assignment, the team interacts with a back-up team that has separately collected additional
industry information and prepares a report. This report is placed before an internal committee and there is an
open discussion to arrive at the rating. The rating is presented to an external committee which then takes the
final decision which is communicated to the company.
Should the company volunteer any further information at that point which could affect the rating is
passed on to the external committee. Therefore, the company has the option to request for a review of rating.
CRISIL publishes the CRISIL ratings in SCAN which is a quarterly publication in Hindi and Gujarathi
besides English. CRISIL can rate mutual funds, banks and chit funds. Rating of mutual funds has assumed
importance after the poor performance of mutual fund industry in 1995 to 1996. CRISIL Ventured into mutual
fund rating market in 1997. It may also start rating real estate developers and governments. CRISIL is
equipped to do equity grading.
CRISIL Rating Symbols
AAA Highest Safety
AA High safety
A Adequate safety
BBB Moderate safety
BB Inadequate safety
B High risk
C Substantial risk
(Debentures rated “D” are in default and in arrears of interest or principal payment or are expected to default
on maturity. Such debentures are extremely speculative and returns from these debentures may be realized
only on reorganization or liquidation), Crisil may apply plus or minus signs for ratings from AA to D to
reflect comparative standing within the category. For rating preference shares, the letters pf are prefixed to the
debentures rating symbols, e.g. pfAAA (Triple A)
Fixed Deposit Program
FAAA Highest Safety
FAA High Safety
FA Adequate safety
FB Inadequate safety
FC High risk
FD Default or likely to be in default
Short – term Instruments
P-1 Very Strong degree of safety
P-2 Strong degree of safety
P-3 adequate degree of safety
P-4 inadequate degree of safety
AAA (SO) Highest Safety
AA (SO) Higher Safety
A (SO) Adequate safety
BBB (SO) Moderate safety
BB (SO) Inadequate safety
B(SO) High risk
C(SO) Substantial risk
Investment Information and Credit Rating Agency (ICRA)
ICRA which was promoted IFCI in 1991 carries out rating of debt instruments of manufacturing
companies, finance companies and financial institutions. The factors that ICRA takes into consideration for
rating depend on the nature of borrowing entity. The inherent protective factors, marketing strategies,
competitive edge, level of technological development, operational efficiency, competence and effectiveness of
management, human resource development policies and practices, hedging of risks, trends in cash flows and
potential liquidity, financial flexibility, asset quality and past record of servicing of debt as well as
government policies affecting the industry and unit arc examined.
ICRA commences work at the request of the prospective issuer. A team of analysts collect data by
going through the company’s books, interviewing executives and from the in-house research and data base of
ICRA. ICRA offers the company on opportunity to get the instrument rated confidentially and also an option
regarding the use of the rating. If, the company decided to use the rating. ICRA monitors it until
redemption/repayment. In the case of misstatement by the company ICRA can disclose the correct position.
ICRA Rating Symbols
Long-term including debentures, bonds and preferences shares
LAAA Highest Safety
LAA High Safety
LA Adequate Safety
LBBB Moderate Safety
LBB Inadequate safety
LB Risk prone
LC Substantial risk
Medium – term including fixed deposits
MAAA Highest Safety
MAA High Safety
MA Adequate safety
MB Inadequate safety
MC Risk prone
A-1 Highest Safety
A-2 High Safety
A-3 Adequate safety
A-4 Risk prone
Credit Analysis and Research in Equity Limited (CARE)
Credit Analysis and Research in Equity Limited is the third rating agency promoted by IDBI jointly with
investment institution, banks and finance companies in 1993. They include Canara Bank, Unit Trust of India,
Credit Capital Venture Fund (India) Limited, (since taken over by Infrastructure Leasing and Financial
Services Ltd.). Sundaram Finance Limited, The Federal Bank Limited the Vysya Bank Limited, First Leasing
Company of India Limited, ITC Classic Finace, Kolak Mahindra Finance among others. CARE commenced
its rating operations in October, 1993.
Credit rating by CARE covers all types of debt instruments such as debentures, fixed deposits, commercial
paper and structured obligations. It also undertakes credit analysis of companies for the use of bankers, other
lenders and business enterprises.
CARE’s Rating Symbols
For long-term and medium-term instruments
Best quality investments.
CARE AAA (FD)/(CD)/(SO) Debt service payments protected by stable Cash flows with good margin
CARE AA (FD)/(CD)/(SO) High quality but rated lower because of Somewhat lower margin of protection
Upper medium grade.
CARE AA (FD)/(CD)/(SO) Safety adequate
CARE BBB (FD)/(CD)/(SO) Sufficient safety. But adverse changes in assumptions likely to weaken the debt
CARE BB (FD)/(CD)/(SO)
Speculative instruments. Inadequate protection for interest and principal
CARE C (FD)/(CD)/(SO)
CARE D (FD)/(CD)/(SO)
Highest investment risk.
Lowest category , Likely to be in default soon
In order of increasing risk, the ratings for short-term instruments are PR-1,PR-2, PR-3 and PR-5 and CARE
-1, CARE -2, CARE -3, CARE – 4, and CARE – 5 for credit analysis of companies.
Duff and Phelps Credit Rating Agency of India Ltd., (DCR)
DCR (India) set up in 1996 is one of the credit rating agencies for rating the non-banking financial companies
(for fixed deposits). The minimum investment grade credit rating to be assigned by this company which will
be acceptable to the RBI has been fixed at Ind-BBB. Since the criteria used by DCR (India) for rating fixed
deposits of NBFCs are not available, the factors specific to financial companies may be noted.
16. COMMERCIAL PAPER (CP)
A CP is unsecured promissory note issued with a fixed maturity, issued by a company approved by RBI negotiable
by endorsement and delivery, issued in bearer form and issued at such discount on the face value as may be
determined by issuing company. Commercial paper are short term, unsecured promissory notes issued at a
discount to face value by well- known companies that are financial strong and carry a high credit rating .
They are sold directly by the issuers to investor, or else placed by borrowers through agents like merchant
banks and security houses the flexible maturity at which they can be issued are one of the main attraction for
borrower and investor since issues can be adapted to the needs of both. The CP market has the advantage of
giving highly rated corporate borrowers cheaper fund than they could obtain from the banks while still
providing institutional investors with higher interest earning than they could obtain form the banking system
the issue of CP imparts a degree of financial stability to the systems as the issuing company has an incentive
to remain financially strong.
Features of CP are:
Short term money market instrument with a fixed maturity.
Unsecured corporate debt
Issued at discount in interest bearing form
Issuer promises to pay buyer some fixed amount on future period.
Issued directly by a company to investor or through bank/merchant banker. They are negotiable by
endorsement and delivery.
They are issued in multiple of Rs 5 lakhs.
The maturity varies between 15 days to a year.
No prior approval of RBI is needed for CP issued.
The tangible net worth issuing company should not be less than 4 lakhs
The company fund based working capital limit should not less than Rs 10 crore.
The issuing company shall have P2 and A2 rating from CRISIL and ICRA.
Investors in CPs are:
Individuals, banks, corporate,s NRIs, Public sector units.
Issued by : Private sector companies, public sector companies, non banking finance companies(NBFCs). In India,
CPs were introduced w.e.f. 1.1.1990. The issuing company has to fulfill conditions prescribed by RBI. Only very
financially sound companies are permitted to issue CPs.
Periods – The CPs are used for a minimum period of 7 days with a maximum period of 6 months and a grace
period on maturity.
Amount – CPs are issued in the multiples of Rs.25 lacs and a investor has to invest minimum amount of Rs.1
Issuing company : has to comply with provisions of Indian companies Act, Income Tax Act , negotiable
instruments Act and guidelines prescribed by RBI in this regard.
Advantages : Simple to issue, flexibility, easy to raise funds, high return.
17. CERTIFICATE OF DEPOSIT (CD)
CDs are short term deposit instruments issued by banks and financial institutions with a maturity period ranging
from 3 months to one year. These CDs are in the form of promissory note and are transferable from one party to
another. Due to their negotiable nature, they are also known as negotiable certificate of deposit. CDs are available
for subscription by individuals, corporations, trusts, associations etc. They are issued at discount to face value
repayable on a fixed date without grace days and are subject to stamp duty. Banks have to maintain CRR & SLR
on the issue price of CDs.
The RBI has issued detailed guidelines on issue of CDs according to which CD could be in the multiple of Rs. 5
lacs, they are freely transferable by endorsement and delivery after 45 days of issue to a primary investor. Three
financial institutions i.e. Industrial Dev. Bank of India, Industrial Credit & Investment Corporation of India and
Industrial Finance Corporation of India have been permitted by RBI to issue CDs for more than one year upto
3years. In 1992, RBI also permitted Industrial Reconstruction Bank of India to issue CDs upto a limit of Rs.100
Advantages of CDs –
- Most convenient instrument to earn higher return.
- Offer maximum liquidity as they are transferable by endorsement and delivery.
- It is an ideal instrument for banks with short term surplus funds to invest at attractive rates.
FEATURES OF CD
1. All scheduled bank other than RRB and scheduled cooperative bank are eligible to issue CDs.
2. CDs can be issued to individuals, corporation, companies, trust, funds and associations. NRI can subscribe
to CDs but only on a non- repatriation basis.
3. They are issued at a discount rate freely determined by the issuing bank and market.
4. They issued in the multiple of Rs 5 lakh subject to minimum size of each issue of Rs is 10 lakh.
5. The bank can issue CDs ranging from 3 month t 1 year, whereas financial institution can issue CDs
ranging from 1 year to 3 years.
18. Treasury Bill (TB) – Treasury bills are the main financial instruments of money market. These bills are
issued by the government. The borrowings of the government are monitored & controlled by the central bank.
The bills are issued by the RBI on behalf of the central government. The RBI is the agent of Union
Government. They are issued by tender or tap. The bills were sold to the public by tender method up to 1965.
These bills were put at weekly auctions. A treasury bill is a particular kind of finance bill. It is a promissory
note issued by the government. Until 1950 these bills were also issued by the state government. After 1950
onwards the central government has the authority to issue such bills. These bills are greater liquidity than any
other kind of bills. They are of two kinds: a) ad hoc, b) regular. Treasury bill represents short term borrowing of
the Govt. T.B. is nothing but a promissory note issued by Govt under discount for a specified period stated therein.
The Govt. promises to pay the specified amount mentioned therein to the bearer of instrument on the due date. TBs
are issued by the RBI on behalf of Govt. for meeting the temporary Govt deficits. The rate of discount on a T.B. is
fixed by RBI. . The rate of discount is lowest because of short term maturity, high degree of liquidity and security.
Institutional investors like commercial banks, Discount Finance house of India (DFHI) and State Trading
Corporation of; India (STCI) maintain subsidiary ledger account (SGL) with RBI through which purchase and sale
of TB‟s are automatically recorded through SGL Account. DFHI is actively participated in the auction of TBs on
behalf of investors.
Various participants in TB market are RBI, SBI, Commercial banks, State Govts, DFHI, STCI, LIC, GIC, Nabard
Key advantages of TBs are : Safety, liquidity, ideal short term investment, ideal for fund management meets SLR
requirements of banks as per RBI decision, non-inflationary investment.
Ad hoc treasury bills are issued to the state governments, semi government departments & foreign ventral
banks. They are not marketable. The ad hoc bills are not sold to the banks & public. The regular treasury bills
are sold to the general public & banks. They are freely marketable. These bills are sold by the RBI on behalf
of the central government.
The treasury bills can be categorized as follows:1) 14 days treasury bills:The 14 day treasury bills has been introduced from 1996-97. These bills are non-transferable. They are
issued only in book entry system they would be redeemed at par. Generally the participants in this
market are state government, specific bodies & foreign central banks. The discount rate on this bill
will be decided at the beginning of the year quarter.
2) 28 days treasury bills:-
These bills were introduced in 1998. The treasury bills in India issued on auction basis. The date of
issue of these bills will be announced in advance to the market. The information regarding the notified
amount is announced before each auction. The notified amount in respect of treasury bills auction is
announced in advance for the whole year separately. A uniform calendar of treasury bills issuance is
3) 91 days treasury bills:The 91 days treasury bills were issued from July 1965. These were issued tap basis at a discount rate.
The discount rates vary between 2.5 to 4.6% P.a. from July 1974 the discount rate of 4.6% remained
uncharged the return on these bills were very low. However the RBI provides rediscounting facility
freely for this bill.
4) 182 days treasury bills:The 182 days treasury bills was introduced in November 1986. The chakravarthy committee made
recommendations regarding 182 day treasury bills instruments. There was a significant development in
this market. These bills were sold through monthly auctions. These bills were issued without any
specified amount. These bills are tailored to meet the requirements of the holders of short term liquid
funds. These bills were issued at a discount. These instruments were eligible as securities for SLR
purposes. These bills have rediscounting facilities.
5) 364 days treasury bills:The 364 treasury bills were introduced by the government in April 1992. These instruments are issued
to stabilize the money market. These bills were sold on the basis of auction. The auctions for these
instruments will be conducted for every fortnight. There will be no indication when they are putting
auction. Therefore the RBI does not provide rediscounting facility to these bills. These instruments
have been instrumental in reducing, the net RBI credit to the government. These bills have become
very popular in India.
19. Commercial Bills
Bills of exchange are negotiable instruments drawn by the seller (drawer) on the buyer (drawee) for the value
of the goods delivered to him. Such bills are called trade bills. When trade bills are accepted by commercial
banks, they are called commercial bills. If the seller wishes to give some period for payment, the bill would be
payable at a future date (usance bill). During the currency of the bill, if the seller is in need of funds, he may
approach his bank for discounting the bill. One of the methods of providing credit to customers by bank is by
discounting commercial bills at a prescribed discount rate. The bank will receive the maturity proceeds (face
value) of discounted bill from the drawee. In the meanwhile, if the bank is in need of funds, it can rediscount
the bill already discounted by it in the commercial bill rediscount market at the market related rediscount rate.