Classification of financial markets in India


According to the period of maturity of the financial assets with which the markets are dealing, the markets can be classified as

* Money Market.
* Capital Market.

These markets are again classified as primary markets and secondary markets.

Money market deals with instruments having a period of maturity of one year or less like treasury bills, bills of exchange etc. Capital market deals with all instruments having a period of maturity of above one year like corporate debentures, government bonds, equity and preference shares etc.

Money Market

Money market deals in short-term debt, and channel the savings into short-term productive investments like working capital, call money, treasury bills etc.

In India, money market is classified into the organized segment and unorganized segment. The organized segment is characterized by fairly rigid and complex rules and is dominated by commercial banks and major financial institutions like UTI. This segment is subjected to tight control by the Reserve Bank of India. Unorganized segment is characterized by informal procedures; flexible terms and attractive rates of interest both depositors and borrowers. The unorganized sector is dominated by money lenders.

The Discount and Finance House of India (DFHI) is a finance house established as a company under the Companies Act, 1956. It is providing liquidity to money market instruments by creating a secondary market and offering buying / selling quotes for various instruments. RBI actually operates in the money market through the DFHI

The position of money market in the Indian system has become important with recent liberalization of monetary policies, such as deregulation of lending rates, permitting mutual funds and banks subsidiaries to enter into money market operations. Money market ensures efficient functioning of the financial system and provides greater flexibility in banks’ operations

Capital Market

Capital market is the market for financial assets having a period of maturity of more than one year or of an indefinite period. Thus, capital market provides long-term resources needed by medium and large scale industries.

The Indian capital market which had been lying dormant in the seventies up to mid eighties has witnessed an unprecedented boom and undergone sea change with a number of financial services and banking companies, merchant bankers, more stock exchanges, ventures capital funds, private sector mutual funds, foreign institutional investors, over-the-counter exchange, national stock exchange, credit rating services, custodial services, portfolio management services, non-resident investment, new regulations etc. emerging on the Indian capital scene.

Before repeal of Capital Issues Control Act 1947, the entire working of the new issue market in India was governed by the Controller of Capital issues Control Act, 1947. The timing of the new issues by private sector companies, the composition of securities to be issued, interest (dividend) rates which can be offered on debentures and preference shares, the premium to be charged on securities were all subject to the regulation of the CCI.

The repeal of Capital Issues Control Act, 1947 and the establishment of Securities Exchange board of India (SEBI) has been a milestone in the history of capital market in India. There is complete metamorphosis of the market system, policies and regulation with the birth of SEBI like allowing companies to fix the price of instruments, making guidelines for various issues involved in primary market and framing guidelines for various intermediaries of both primary and secondary market. The role of SEBI has changed from controlling to regulatory with investor protection as the primary motive.