Pariksha SaathiLesson 10 of 10 · Indian Economy
Financial Markets: Money Market, Capital Market, SEBI, Insurance and Pensions
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The financial system
Financial markets bring together those who save and those who need funds for investment. By the length of the funds they divide into the money market, for short-term funds of up to one year, and the capital market, for long-term funds. Each part has a regulator: the RBI for banks, the money market, government securities and foreign exchange; SEBI for the securities market; IRDAI for insurance; and PFRDA for pensions. The Financial Stability and Development Council (FSDC), set up in 2010 and chaired by the Union Finance Minister, coordinates them.
The money market
Its instruments are short-term and highly liquid. Call money is lent overnight between banks, notice money for 2 to 14 days, and term money for longer periods up to one year. Treasury bills are short-term borrowing by the central government, issued by the RBI on its behalf for 91, 182 and 364 days at a discount and repaid at face value. Certificates of deposit (from 1989) are issued by banks and commercial paper (from 1990) by companies to raise short-term funds. The RBI regulates the money market.
The capital market
The capital market deals in long-term instruments such as equity shares, debentures and bonds. The primary market, or new issue market, is where securities are sold for the first time and the money goes to the issuer: through an initial public offering (IPO) for a first listing, a follow-on public offer (FPO), a rights issue to existing shareholders or a private placement. The secondary market is where existing securities are traded among investors on stock exchanges; it gives liquidity and price discovery but raises no new money for the company. Shares are now held in electronic (demat) form with the depositories NSDL (1996) and CDSL (1999) under the Depositories Act 1996.
SEBI
The Securities and Exchange Board of India was set up on 12 April 1988 by a government resolution as a non-statutory body and became statutory on 30 January 1992 through an ordinance, later replaced by the SEBI Act 1992; its headquarters is in Mumbai. Its three aims are to protect investors, to promote the development of the securities market and to regulate it. It registers and regulates stock exchanges, brokers, merchant bankers, mutual funds, credit rating agencies and foreign portfolio investors, prohibits insider trading and fraudulent practices, and regulates takeovers. The Controller of Capital Issues, which earlier fixed the prices of new issues, was abolished in 1992. In 2015 the Forward Markets Commission, the commodity futures regulator, was merged into SEBI. Appeals against SEBI orders go to the Securities Appellate Tribunal and then to the Supreme Court.
Stock exchanges and indices
The Bombay Stock Exchange (BSE), on Dalal Street in Mumbai, began in 1875 as the Native Share and Stock Brokers' Association and is Asia's oldest stock exchange. The National Stock Exchange (NSE), set up in 1992, began trading in 1994 and introduced nationwide, fully automated screen-based trading. A stock index tracks the overall movement of a chosen group of shares. The BSE Sensex (Sensitive Index), launched in 1986 with 1978-79 as its base year and a base value of 100, follows 30 large companies; the NSE's Nifty 50 follows 50 companies, with a base value of 1000 as of November 1995. Both are weighted by free-float market capitalisation, counting only shares available for trading.
Mutual funds and bonds
A mutual fund pools money from many investors and invests it in a spread of securities through a professional asset management company; investors hold units whose value is the net asset value (NAV). Open-ended funds take in and pay out money at any time, while closed-ended funds have a fixed term. The Unit Trust of India (1963) was the first mutual fund, public sector funds came in 1987 and private funds in 1993, and SEBI regulates all of them. A bond is a loan to the issuer, who pays fixed interest called the coupon and repays the face value at maturity; when market interest rates rise, existing bond prices fall, so price and yield move in opposite directions. Common types are government securities, corporate bonds, zero-coupon bonds, masala bonds (rupee-denominated bonds sold abroad) and Sovereign Gold Bonds (first issued in 2015).
Insurance and pensions
Life insurance was nationalised when the Life Insurance Corporation of India (LIC) was formed on 1 September 1956, and general insurance under the General Insurance Business (Nationalisation) Act 1972. The Malhotra Committee (1993) recommended opening the sector to private companies, and the IRDA Act 1999 set up the Insurance Regulatory and Development Authority of India (IRDAI), based in Hyderabad. The Pension Fund Regulatory and Development Authority (PFRDA), set up in 2003 and made statutory by the PFRDA Act 2013, regulates the National Pension System (NPS). NPS became compulsory for central government employees (except the armed forces) joining from 1 January 2004 and was opened to all citizens in 2009; PFRDA also runs the Atal Pension Yojana (2015) for workers in the unorganised sector.
Key facts
- Money market (up to one year, regulated by RBI): call money (overnight), notice money (2-14 days), treasury bills (91, 182, 364 days), CDs (1989), CP (1990).
- Capital market: long-term funds; primary market = new issues (IPO, FPO, rights issue); secondary market = trading of existing securities on exchanges.
- SEBI: 12 April 1988 (non-statutory), statutory 30 January 1992, SEBI Act 1992; HQ Mumbai; Forward Markets Commission merged into it in 2015; appeals go to SAT.
- BSE 1875, Asia's oldest exchange; NSE 1992, nationwide fully automated screen-based trading; depositories NSDL 1996 and CDSL 1999.
- Sensex: 30 stocks, base 1978-79 = 100; Nifty 50: 50 stocks, base value 1000 (November 1995); both free-float weighted.
- Mutual funds: UTI 1963 was the first; public sector funds 1987, private funds 1993; unit value = NAV; regulated by SEBI.
- Bond price and yield move in opposite directions; masala bonds are rupee-denominated bonds issued abroad; Sovereign Gold Bonds were first issued in 2015.
- Insurance: LIC 1 September 1956; general insurance nationalised 1972; Malhotra Committee 1993; IRDA Act 1999; IRDAI based in Hyderabad.
- Pensions: PFRDA 2003, statutory under the PFRDA Act 2013; NPS for central employees from 1 January 2004, open to all citizens 2009; Atal Pension Yojana 2015.
- Regulators: RBI (money market, banks, forex), SEBI (securities, mutual funds), IRDAI (insurance), PFRDA (pensions); FSDC 2010, chaired by the Finance Minister.
Quick revision
Money market up to 1 year (RBI): call, notice, T-bills 91/182/364 days, CD 1989, CP 1990; capital market long-term (SEBI): primary (IPO, FPO) and secondary; SEBI 1988, statutory 30 Jan 1992, HQ Mumbai, FMC merged 2015; BSE 1875, NSE 1992; Sensex 30 (base 1978-79 = 100), Nifty 50 (base 1000, 1995); UTI 1963; NSDL 1996, CDSL 1999; LIC 1956, IRDA Act 1999 (Hyderabad); PFRDA 2003/2013, NPS 2004; FSDC 2010.