Money Market Concept, Meaning

There are two types of financial markets viz., the money market and the capital market. The money market in that part of a financial market which deals in the borrowing and lending of short term loans generally for a period of less than or equal to 365 days. It is a mechanism to clear short term monetary transactions in an economy.

Functions of Money Market

Money market is an important part of the economy. It plays very significant functions. As mentioned above it is basically a market for short term monetary transactions. Thus it has to provide facility for adjusting liquidity to the banks, business corporations, non-banking financial institutions (NBFs) and other financial institutions along with investors. The major functions of money market are given below:1. 2. 3. 4. 5. 6. To maintain monetary equilibrium. It means to keep a balance between the demand for and supply of money for short term monetary transactions. To promote economic growth. Money market can do this by making funds available to various units in the economy such as agriculture, small scale industries, etc. To provide help to Trade and Industry. Money market provides adequate finance to trade and industry. Similarly it also provides facility of discounting bills of exchange for trade and industry. To help in implementing Monetary Policy. It provides a mechanism for an effective implementation of the monetary policy. To help in Capital Formation. Money market makes available investment avenues for short term period. It helps in generating savings and investments in the economy. Money market provides non-inflationary sources of finance to government. It is possible by issuing treasury bills in order to raise short loans. However this does not leads to increases in the prices. Apart from those, money market is an arrangement which accommodates banks and financial institutions dealing in short term monetary activities such as the demand for and supply of money.

Money markets include markets for such instruments as bank accounts, including term certificates of deposit; interbank loans (loans between banks); money market mutual funds; commercial paper; Treasury bills; and securities lending and repurchase agreements (repos).
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 (A security pledged for the repayment of a loan), 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, nonbank financial institutions, bill brokers, etc. Important institutions of the capital market are stock exchanges, commercial banks and nonbank institutions, such as insurance companies, mortgage banks, building societies, etc. 5. Purpose of Loan: The money market meets the short-term credit needs of business; it provides working capital to the industrialists. The capital market, on the other hand, caters the long-term credit needs of the industrialists and provides fixed capital to buy land, machinery, etc. 6. Risk: The degree of risk is small in the money market. The risk is much greater in capital market. The maturity of one year or less gives little time for a default to occur, so the risk is minimised. Risk varies both in degree and nature throughout the capital market. 7. Basic Role: The basic role of money market is that of liquidity adjustment. The basic role of capital market is that of putting capital to work, preferably to 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.

Meaning and Concept of Capital Market

Capital Market is one of the significant aspect of every financial market. Hence it is necessary to study its correct meaning. Broadly speaking the capital market is a market for financial assets which have a long or indefinite maturity.

Unlike money market instruments the capital market intruments become mature for the period above one year. It is an institutional arrangement to borrow and lend money for a longer period of time. It consists of financial institutions like IDBI, ICICI, UTI, LIC, etc. These institutions play the role of lenders in the capital market. Business units and corporate are the borrowers in the capital market. Capital market involves various instruments which can be used for financial transactions. Capital market provides long term debt and equity finance for the government and the corporate sector. Capital market can be classified into primary and secondary markets. The primary market is a market for new shares, where as in the secondary market the existing securities are traded. Capital market institutions provide rupee loans, foreign exchange loans, consultancy services and underwriting.

Significance, Role or Functions of Capital Market

Like the money market capital market is also very important. It plays a significant role in the national economy. A developed, dynamic and vibrant capital market can immensely contribute for speedy economic growth and development.

Let us get acquainted with the important functions and role of the capital market. 1. Mobilization of Savings : Capital market is an important source for mobilizing idle savings from the economy. It mobilizes funds from people for further investments in the productive channels of an economy. In that sense it activate the ideal monetary resources and puts them in proper investments. 2. Capital Formation : Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. Through mobilization of ideal resources it generates savings; the mobilized savings are made available to various segments such as agriculture, industry, etc. This helps in increasing capital formation. 3. Provision of Investment Avenue : Capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to invest resources for a long period of time. It provides suitable interest rate returns also to investors. Instruments such as bonds, equities, units of mutual funds, insurance policies, etc. definitely provides diverse investment avenue for the public. 4. Speed up Economic Growth and Development : Capital market enhances production and productivity in the national economy. As it makes funds available for long period of time, the financial requirements of business houses are met by the capital market. It helps in research and development. This helps in, increasing production and productivity in economy by generation of employment and development of infrastructure. 5. Proper Regulation of Funds : Capital markets not only helps in fund mobilization, but it also helps in proper allocation of these resources. It can have regulation over the resources so that it can direct funds in a qualitative manner. 6. Service Provision : As an important financial set up capital market provides various types of services. It includes long term and medium term loans to industry, underwriting services, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum. 7. Continuous Availability of Funds : Capital market is place where the investment avenue is continuously available for long term investment. This is a liquid market as it makes fund available on continues basis. Both

buyers and seller can easily buy and sell securities as they are continuously available. Basically capital market transactions are related to the stock exchanges. Thus marketability in the capital market becomes easy. These are the important functions of the capital market.

Final Glance and Conclusion on Capital Market

The lack of an advanced and vibrant capital market can lead to underutilization of financial resources. The developed capital market also provides access to the foreign capital for domestic industry. Thus capital market definitely plays a constructive role in the over all development of an economy.

Definition of 'Equity Market'

The market in which shares are issued and traded, either through exchanges or over-thecounter markets. Also known as the stock market, it is one of the most vital areas of a market economy because it gives companies access to capital and investors a slice of ownership in a company with the potential to realize gains based on its future performance.

Investopedia explains 'Equity Market'

This market can be split into two main sectors: the primary and secondary market. The primary market is where new issues are first offered. Any subsequent trading takes place in the secondary market. Read more: http://www.investopedia.com/terms/e/equitymarket.asp#ixzz2HqsIKX8F

Treasury Bills (T-bills) 1.2 Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon securities and pay no interest. They are issued at a discount and redeemed at the face value at maturity. For example, a 91 day Treasury bill of Rs.100/- (face value) may be issued at say Rs. 98.20, that is, at a discount of say, Rs.1.80 and would be redeemed at the face value of Rs.100/-. The return to the investors is the difference between the maturity value or the face value (that is Rs.100) and the issue price

Definition of 'Security'

A financial instrument that represents: an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option. A security is a fungible(A commodity that is freely interchangeable with another in satisfying an obligation) , negotiable financial instrument that represents some type of financial value. The company or entity that issues the security is known as the issuer. For example, the issuer of a bond issue may be a municipal government raising funds for a particular project. Investors of securities may be retail investors - those who buy and sell securities on their own behalf and not for an organization - and wholesale investors financial institutions acting on behalf of clients or acting on their own account. Institutional investors include investment banks, pension funds, managed funds and insurance companies.

Investopedia explains 'Security'

Securities are typically divided into debt securities and equities. A debt security is a type of security that represents money that is borrowed that must be repaid, with terms that define the amount borrowed, interest rate and maturity/renewal date. Debt securities include government and corporate bonds, certificates of deposit (CDs), preferred stock and collateralized securities (such as CDOs and CMOs). Equities represent ownership interest held by shareholders in a corporation, such as a stock. Unlike holders of debt securities who generally receive only interest and the repayment of the principal, holders of equity securities are able to profit from capital gains.

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1. What is a Government Security? 1.1 A Government security is a tradable instrument issued by the Central Government or the State Governments. It acknowledges the Governments debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more). In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). Government securities carry practically no risk of default and, hence, are called risk-free gilt-edged instruments. Government of India also issues savings instruments (Savings Bonds, National Saving Certificates (NSCs), etc.) or special securities (oil bonds, Food Corporation of India bonds, fertiliser bonds, power bonds, etc.). They are, usually not fully tradable and are, therefore, not eligible to be SLR securities.

i.

ii. iii.

iv. v.

Zero Coupon Bonds Zero coupon bonds are bonds with no coupon payments. Like Treasury Bills, they are issued at a discount to the face value. The Government of India issued such securities in the nineties, It has not issued zero coupon bond after that. 5. What are the Open Market Operations (OMOs)? OMOs are the market operations conducted by the Reserve Bank of India by way of sale/ purchase of Government securities to/ from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis. When the RBI feels there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity. Similarly, when the liquidity conditions are tight, the RBI will buy securities from the market, thereby releasing liquidity into the market. 5 (b) What is meant by buyback of Government securities? Buyback of Government securities is a process whereby the Government of India and State Governments buy back their existing securities from the holders. The objectives of buyback can be reduction of cost (by buying back high coupon securities), reduction in the number of outstanding securities and improving liquidity in the Government securities market (by buying back illiquid securities) and infusion of liquidity in the system. Governments make provisions in their budget for buying back of existing securities. Buyback can be done through an auction process or through the secondary market route, i.e., NDS/NDS-OM.

What are the differences between debt and equity markets?

First, some definitions The debt market is the market where debt instruments are traded. Debt instruments are assets that require a fixed payment to the holder, usually with interest. Examples of debt instruments include bonds (government or corporate) and mortgages. The equity market (often referred to as the stock market) is the market for trading equity instruments. Stocks are securities that are a claim on the earnings and assets of a corporation (Mishkin 1998). An example of an equity instrument would be common stock shares, such as those traded on the New York Stock Exchange. How are debt instruments different from equity instruments? There are important differences between stocks and bonds. Let me highlight several of them:
1. Equity financing allows a company to acquire funds (often for investment) without incurring debt. On the other hand, issuing a bond does increase the debt burden of the bond issuer because contractual interest payments must be paid unlike dividends, they cannot be reduced or suspended. 2. Those who purchase equity instruments (stocks) gain ownership of the business whose shares they hold (in other words, they gain the right to vote on the issues important to the firm). In addition, equity holders have claims on the future earnings of the firm.

In contrast, bondholders do not gain ownership in the business or have any claims to the future profits of the borrower. The borrowers only obligation is to repay the loan with interest. 3. Bonds are considered to be less risky investments for at least two reasons. First, bond market returns are less volatile than stock market returns. Second, should the company run into trouble, bondholders are paid first, before other expenses are paid. Shareholders are less likely to receive any compensation in this scenario.

Definition of 'Dividend'
A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. 2. Mandatory distributions of income and realized capital gains made to mutual fund investors. Face Value/Par Value The face value (also known as the par value or principal) is the amount of money a holder will get back once a bond matures. A newly issued bond usually sells at the par value. Corporate bonds normally have a par value of $1,000, but this amount can be much greater for government bonds. What confuses many people is that the par value is not the price of the bond. A bond's price fluctuates throughout its life in response to a number of variables (more on this later). When a bond trades at a price above the face value, it is said to be selling at a premium. When a bond sells below face value, it is said to be selling at a discount.

Read more: http://www.investopedia.com/university/bonds/bonds2.asp#ixzz2HyFalc4I Coupon (The Interest Rate) The coupon is the amount the bondholder will receive as interest payments. It's called a "coupon" because sometimes there are physical coupons on the bond that you tear off and redeem for interest. However, this was more common in the past. Nowadays, records are more likely to be kept electronically. As previously mentioned, most bonds pay interest every six months, but it's possible for them to pay monthly, quarterly or annually. The coupon is expressed as a percentage of the par value. If a bond pays a coupon of 10% and its par value is $1,000, then it'll pay $100 of interest a year. A rate that stays as a fixed percentage of the par value like this is a fixedrate bond. Another possibility is an adjustable interest payment, known as a floating-rate bond. In this case the interest rate is tied to market rates through an index, such as the rate on Treasury bills.

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Measuring Return With Yield Yield is a figure that shows the return you get on a bond. The simplest version of yield is calculated using the following formula: yield = coupon amount/price *100. When you buy a bond at par, yield is equal to the interest rate. When the price changes, so does the yield. Let's demonstrate this with an example. If you buy a bond with a 10% coupon at its $1,000 par value, the yield is 10% ($100/$1,000). Pretty simple stuff. But if the price goes down to $800, then the yield goes up to 12.5%. This happens because you are getting the same guaranteed $100 on an asset that is worth $800 ($100/$800). Conversely, if the bond goes up in price to $1,200, the yield shrinks to 8.33% ($100/$1,200).

The relationship of yield to price can be summarized as follows: when price goes up, yield goes down and vice versa. Technically, you'd say the bond's price and its yield are inversely related. yield = coupon amount/price *100;

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Price In The Market So far we've discussed the factors of face value, coupon, maturity, issuers and yield. All of these characteristics of a bond play a role in its price. However, the factor that influences a bond more than any other is the level of prevailing interest rates in the economy . When interest rates rise, the prices of bonds in the market fall, thereby raising the yield of the older bonds and bringing them into line with newer bonds being issued with higher coupons. When interest rates fall, the prices of bonds in the market rise, thereby lowering the yield of the older bonds and bringing them into line with newer bonds being issued with lower coupons.

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Certificate of Deposit:

These are issued by all scheduled banks. Minimum deposit required is 1 Lakh and multiples of it.Rate of interest is higher than normal fixed deposits. Need to enquire at

different banks to know the competitive interest rates before arriving at the suitable one.Minimum 7 days and maximum up to 3 years. CDs unlike term deposits do not have tax deduction at source. Cannot be liquidated before maturity period, else we may lose all the interest accrued. Hence before investing make sure that the money may not be required for other purposes. Being a dept instrument it is considered almost nil risk. Returns are also lesser. For one year term it runs in to 10.15% and 3 months period it was 10.10%. Presently IDBI offers online purchase of CD for each investor. The person need a demat account with any provider as well a s a bank account with any bank to buy CD from IDBI.

CERTIFICATE OF DEPOSITS
This scheme was introduced in July 1989, to enable the banking system to mobilise bulk deposits from the market, which they can have at competitive rates of interest. The major features are: Who can issue Scheduled commercial banks (except RRBs) and All India Financial Institutions within their `Umbrella limit. CRR/SLR Applicable on the issue price in case of banks Investors Individuals (other than minors), corporations, companies, trusts, funds, associations etc Maturity Min: 7 days Max : 12 Months (in case of FIs minimum 1 year and maximum 3 years). Amount Min: Rs.1 lac, beyond which in multiple of Rs.1 lac Intt. rate Market related. Fixed or floating Loan Against collateral of CD not permitted Pre-mature cancellation Not allowed Transfer Endorsement & delivery. Any time Nature Usance Promissory note. Can be issued in Dematerialisation form only only wef June 30, 2002 Other conditions If payment day is holiday, to be paid on next preceding business day Issued at a discount to face value Duplicate can be issued after giving a public notice & obtaining indemnity

negotiable instrument

Definition
A transferable, signed document that promises to pay the bearer a sum of money at a future date or on demand. Examples include checks, bills of exchange, and promissory notes.
A negotiable instrument is a written order or unconditional promise to pay a fixed sum of money on demand or at a certain time. A negotiable instrument can be transferred from one person to another. Once the instrument is transferred, the holder obtains full legal title to the instrument.

COMMERCIAL PAPER DEFINITIONS :

1. Commercial paper is an unsecured and discounted promissory note issued to finance the short-term credit needs of large institutional buyers. Banks, corporations and foreign governments commonly use this type of funding. 1. An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates. 2. An unsecured and unregistered short-term obligation issued by an institutional borrower to investors who have temporarily idle cash. 3. Short-term, unsecured, discounted, and negotiable notes sold by one company to another in order to satisfy immediate cash needs. COMMERCIAL PAPER IN INDIA: INTRODUCTION: It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers/ to diversify their sources of short-term borrowings and to provide an additional instrument to investors. ISSUER OF COMMERCIAL PAPER: Corporate, primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP. ELIGIBILITY CRITERIA FOR ISSUING COMMERCIAL PAPER: A corporate would be eligible to issue CP provided 1. the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore 2. company has been sanctioned working capital limit by banks or all-India financial institutions 3. the borrowal account of the company is classified as a Standard Asset by the financing banks/ institutions. To summaries the above discussion on commercial paper

CPs are issued by companies in the form of usance promissory note, redeemable at par to the holder on maturity.

The tangible net worth of the issuing company should be not less than Rs.4 crores. Working capital (fund based) limit of the company should not be less than Rs.4 crores.

Credit rating should be at least equivalent of P2/A2/PP2/Ind.D.2 or higher from any approved rating agencies and should be more than 2 months old on the date of issue of CP.

Corporates are allowed to issue CP up to 100% of their fund based working capital limits. It is issued at a discount to face value. CP attracts stamp duty. CP can be issued for maturities between 15 days and less than one year from the date of issue. CP may be issued in the multiples of Rs.5 lakh. No prior approval of RBI is needed to issue CP and underwriting the issue is not mandatory. All expenses (such as dealers fees, rating agency fee and charges for provision of stand -by facilities) for issue of CP are to be borne by the issuing company

Bills of exchange
Bills of exchange are a form of short term financing. Your customer pays an invoice using a bill of exchange transaction and is therefore able to extend his or her payment period (for example, by three months). You can then discount the bill of exchange. That is, you can transfer it to another party ( bill of exchange usage). You can transfer the bill of exchange prior to its maturity to a bank for refinancing (discounting). The bank purchases the bill of exchange from you. Since the bank will receive the amount at the date of maturity, it will charge interest (discount) for the period from receiving the bill of exchange to the maturity. The bank may also charge fees. If you do not discount the bill of exchange, you will either present it to your customer for payment at maturity yourself or transfer it before maturity to a bank that will present it for collection. The bank will charge a service fee for the collection. You can also transfer the bill of exchange to a third party such as a vendor in settlement of your account payable (means of payment). The bill is transferred by endorsement (on the back of the to-the-order instrument). In foreign trade, bills of exchange are often bought (forfaiting). With this option, the seller of the bill of exchange can eliminate his or her exposure to recourse.

Definition of 'Debenture'
A type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture.

Investopedia explains 'Debenture'

Debentures have no collateral. Bond buyers generally purchase debentures based on the belief that the bond issuer is unlikely to default on the repayment. An example of a government debenture would be any government-issued Treasury bond (T-bond) or Treasury bill (T-bill). T-bonds and T-bills are generally considered risk free because governments, at worst, can print off more money or raise taxes to pay these type of debts.

Read more: http://www.investopedia.com/terms/d/debenture.asp#ixzz2I45xZIuS What Is Forex? The foreign exchange market is the "place" where currencies are traded. Currencies are important to most people around the world, whether they realize it or not, because currencies need to be exchanged in order to conduct foreign trade and business. If you are living in the U.S. and want to buy cheese from France, either you or the company that you buy the cheese from has to pay the French for the cheese in euros (EUR). This means that the U.S. importer would have to exchange the equivalent value of U.S. dollars (USD) into euros. The same goes for traveling. A French tourist in Egypt can't pay in euros to see the pyramids because it's not the locally accepted currency. As such, the tourist has to exchange the euros for the local currency, in this case the Egyptian pound, at the current exchange rate. The need to exchange currencies is the primary reason why the forex market is the largest, most liquid financial market in the world. It dwarfs other markets in size, even the stock market, with an average traded value of around U.S. $2,000 billion per day. (The total volume changes all the time, but as of August 2012, the Bank for International Settlements (BIS) reported that the forex market traded in excess of U.S. $4.9 trillion per day.)

Read more: http://www.investopedia.com/university/forexmarket/forex1.asp#ixzz2I47J954F

Call money is also refereed as inter bank. A short-term money market, which allows for large financial institutions, such as banks, mutual funds and corporations to borrow and lend money at inter bank rates. The loans in the call money market are very short, usually lasting no longer than a week and are often used to help banks meet reserve requirements. While known as an inter bank market, many of the players are not banks. Mutual funds, large corporations and insurance companies are able to participate in this market. Many countries, such as India, are beginning to push for a purification of the call money market, but adding regulations that allow only banks to participate.

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Primary Dealers In India

The system of Primary Dealers (PDs) in the Government Securities Market was introduced by Reserve Bank of India in 1995 to strengthen the market infrastructure of Government Securities and put in place an improved, efficient secondary market trading system. This was to encourage holding of Government Securities on large scale and make the market more vibrant and liquid. In 2006-07, RBI gave Banks the option to undertake Primary Dealership business departmentally. DFHI was set up by RBI along with public sector banks and financial institutions in March 1988 to activate the Money Market. It got the status of Primary Dealer in February 1996. Over a period of time, RBI divested its stake and DFHI became a subsidiary of State Bank of India (SBI). SBI had also set up a subsidiary in 1996 for doing PD business namely SBI Gilts Limited. Both these companies were merged in 2004 to become the largest Primary Dealer in the country in terms of net worth (Rs. 1,059 crores as on March 31, 2008) Primary Dealers can also be referred to as Merchant Bankers to Government of India as only they are allowed to underwrite primary issues of government securities other than RBI who have since shed this role. Stand-alone PDs are allowed the following activities as core activities:

Dealing and underwriting in Government securities. Dealing in Interest Rate Derivatives. Providing broking services in Government securities. Dealing and underwriting in Corporate / PSU / FI bonds/ debentures. Lending in Call/ Notice/ Term/ Repo/ CBLO market. Investment in Commercial Papers. Investment in Certificates of Deposit. Investment in Security Receipts issued by Securitization Companies/ Reconstruction Companies, Asset Backed Securities (ABS), Mortgage Backed Securities (MBS). Investment in debt mutual funds where entire corpus is invested in debt securities.

PDs are permitted to undertake the following activities under non-core activities: a) Activities, which are expected to consume capital, such as:

1. 2. 3.

Investment / trading in equity and equity derivatives market Investment in units of equity oriented mutual funds Underwriting public issues of equity

b) Services which do not consume capital or require insignificant capital outlay, such as:
1. 2. 3. 4. 5. 6. 7. 8. 9. Professional Clearing Services Portfolio Management Services Issue Management Services Merger & Acquisition Advisory Services Private Equity Management Services Project Appraisal Services Loan Syndication Services Debt restructuring services Consultancy Services

10. Distribution of mutual fund units 11. Distribution of insurance products

PDs are not allowed to undertake broking in equity, trading / broking in commodities, gold and foreign exchange. Their total investment pattern should include minimum 50% in Government Securities. PDs are permitted to borrow, lend and trade in the money market including call money market, CBLO of CCIL and participate in Repos. They are eligible for memberships of electronic dealing, trading and settlement systems (NDS platforms / INFINET / RTGS / CCIL). Standalone PDs can also open CSGL accounts to enable customers to hold government securities in demat form.

Merchant Banking Meaning

Merchant Banking is a combination of Banking and consultancy services. It provides consultancy, to its clients, for financial, marketing, managerial and legal matters. Consultancy means to provide advice, guidance and service for a fee. It helps a businessman to start a business. It helps to raise (collect) finance. It helps to expand and modernise the business. It helps in restructuring of a business. It helps to revive sick business units. It also helps companies to register, buy and sell shares at the stock exchange.

In short, merchant banking provides a wide range of services for starting until running a business. It acts as Financial Engineer for a business. Image credits VFR Photography. Merchant banking was first started in India in 1967 by Grindlays Bank. It has made rapid progress since 1970.

Functions of Merchant Banking

The important functions of merchant banking are depicted below.

The functions of merchant banking are listed as follows: 1. Raising Finance for Clients : Merchant Banking helps its clients to raise finance through issue of shares, debentures, bank loans, etc. It helps its clients to raise finance from the domestic and international market. This finance is used for starting a new business or project or for modernization or expansion of the business. 2. Broker in Stock Exchange : Merchant bankers act as brokers in the stock exchange. They buy and sell shares on behalf of their clients. They conduct research on equity shares. They also advise their clients about which shares to buy, when to buy, how much to buy and when to sell. Large brokers, Mutual Funds, Venture capital companies and Investment Banks offer merchant banking services. 3. Project Management : Merchant bankers help their clients in the many ways. For e.g. Advising about location of a project, preparing a project report, conducting feasibility studies, making a plan for financing the project, finding out sources of finance, advising about concessions and incentives from the government. 4. Advice on Expansion and Modernization : Merchant bankers give advice for expansion and modernization of the business units. They give expert advice on mergers and amalgamations, acquisition and takeovers, diversification of business, foreign collaborations and joint-ventures, technology upgradation, etc. 5. Managing Public Issue of Companies : Merchant bank advice and manage the public issue of companies. They provide following services: 1. 2. 3. 4. Advise on the timing of the public issue. Advise on the size and price of the issue. Acting as manager to the issue, and helping in accepting applications and allotment of securities. Help in appointing underwriters and brokers to the issue.

5.

Listing of shares on the stock exchange, etc. Handling Government Consent for Industrial Projects : A businessman has to get government permission for

starting of the project. Similarly, a company requires permission for expansion or modernization activities. For this, many formalities have to be completed. Merchant banks do all this work for their clients. Special Assitance to Small Companies and Entreprenuers : Merchant banks advise small companies about business opportunities, government policies, incentives and concessions available. It also helps them to take advantage of these opportunities, concessions, etc. Services to Public Sector Units : Merchant banks offer many services to public sector units and public utilities. They help in raising long-term capital, marketing of securities, foreign collaborations and arranging longterm finance from term lending institutions. Revival of Sick Industrial Units : Merchant banks help to revive (cure) sick industrial units. It negotiates with different agencies like banks, term lending institutions, and BIFR (Board for Industrial and Financial Reconstruction). It also plans and executes the full revival package. Portfolio Management : A merchant bank manages the portfolios (investments) of its clients. This makes investments safe, liquid and profitable for the client. It offers expert guidance to its clients for taking investment decisions. Corporate Restructuring : It includes mergers or acquisitions of existing business units, sale of existing unit or disinvestment. This requires proper negotiations, preparation of documents and completion of legal formalities. Merchant bankers offer all these services to their clients. Money Market Operation : Merchant bankers deal with and underwrite short-term money market instruments, such as: 0. 1. 2. 3. Government Bonds. Certificate of deposit issued by banks and financila institutions. Commercial paper issued by large corporate firms. Treasury bills issued by the Government (Here in India by RBI). Leasing Services : Merchant bankers also help in leasing services. Lease is a contract between the lessor and lessee, whereby the lessor allows the use of his specific asset such as equipment by the lessee for a certain period. The lessor charges a fee called rentals. Management of Interest and Dividend : Merchant bankers help their clients in the management of interest on debentures / loans, and dividend on shares. They also advise their client about the timing (interim / yearly) and rate of dividend.