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You all know that a business needs finance from the time an entrepreneur makes the decision to start it. It needsfinance both for working capital requirements such as payments for raw materials and salaries to its employees, and fixed capital expenditure such as the purchase of machinery or building or to expand its production capacity. The above example gives a fair picture of how companies need to raise funds from the capital markets. Idea Cellular decided to enter the Indian capital market for its needs of expansion.
In this chapter you will study concepts like private placement, Initial public Offer (IPO) and capital markets which you come across in the example of Idea Cellular. Business can raise these funds from various sources and in different ways through financial markets. This chapter provides a brief description of the mechanism through which finances are mobilised by a business organisation for both short term and long term requirements. It also explains the institutional structure and the regulatory measures for different financial markets.
CONCEPT OF FINANCIAL MARKET
A business is a part of an economic system that consists of two main sectors – households which save fundsand business firms which invest these funds. A financial market helps to link the savers and the investors by mobilizing funds between them. In doing so it performs what is known as an allocative function. It allocates ordirects funds available for investment into their most productive investment opportunity.
When the allocative function is performed well, two consequences follow:
• The rate of return offered tohouseholds would be higher
• Scarce resources are allocated to those firms which have the highest productivity for the economy.
There are two major alternative mechanisms through which allocation of funds can be done: via banks or via financial markets. Households can deposit their surplus funds with banks, who in turn could lend these funds to business firms. Alternately, households can buy the shares anddebentures offered by a business using financial markets. The process by which allocation of funds is done is called financial intermediation. Banks and financial markets ar competing intermediaries in the financial system, and give households a choice of where they want to place their savings.
The money market is a market for short term funds which deals in monetary assets whose period of maturity is upto one year. These assets are close substitutes for money. It is a market where low risk, unsecured and short term debt instruments that are highly liquid are issued and actively traded everyday. It has no physical location, but is an activityconducted over the telephone and through the internet. It enables the raising of short-term funds for meeting the temporary shortages of cash and obligations and the temporary deployment of excess funds for earning returns. The major participants in the market are the Reserve Bank of India
Multiple choice questions
1. Primary and Secondary Markets
a. Compete with each other
b. Complement each other
c. Function Independently
d. Control each other
2. Total number of Stock Exchanges in India are
a. 20 b. 21 c. 22 d. 23
3. The settlement cycle in NSE is
a. T + 5 b. T + 3 c. T + 2 d . T+1
4. National Stock Exchange of India was recognized as stock exchange in the year.
a. 1992 b. 1993 c. 1994 d. 1995
5. NSE commenced futures trading in the year
a. 1999 b. 2000 c. 2001 d. 2002
6. Clearing and settlement operations of NSE is carried out by
a. NSDL b. NSCCL c. SBI d. CDSL
7. OTCEI was started on the lines of
a. NASDAQ b. NYSE c. NASAQ d. NSE
8. To be listed on OTCEI, the minimum capital requirement for a company is
a. Rs. 5 Crores
b. Rs. 3 Crores
c. Rs. 6 Crores
d. Rs. 1 Crores
9. Treasury Bills are basically
a. An instrument to borrow short term funds
b. An instrument to borrow long term funds
c. An instrument of capital market
d. N one of the above
a. Repurchase agreement
b. Reliance Petroleum
c. Read and Process
d. None of the above
Short answer questions
1. What are the functions of financial markets?
2. “Money Market is essentially Market for short term funds” Discuss.
3. What is Treasury Bill ?
4. What is REPO and Reverse REPO?
5. Distinguish between Capital Market and Money Market.
6. What are the functions of Stock Exchange?
7. What are the objectives of SEBI?
8. What are the objectives of NSE?
9. What is OTCEI?
Long answer questions
1. Explain the various Money Market Instruments.
2. What are the methods of floatation in Primary Market.
3. Explain the Capital Market reforms in India.
4. Explain the objectives and functions of SEBI
5. Explain the various segments of NSE.
Please refer to attached file for NCERT Class 12 Business Studies Financial Markets
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