Capital Money & Commodity Market

Chapter No.: 01 Introduction to Capital Market & Stock Market

1.1 Introduction to Capital Market and financial instruments

Capital markets are venues where savings and investments are channelled between
the suppliers who have capital and those who are in need of capital. The entities that
have capital include retail and institutional investors while those who seek capital are
businesses, governments, and people.

Capital markets seek to improve transactional efficiencies. These markets bring

those who hold capital and those seeking capital together and provide a place where
entities can exchange securities.

Capital Markets – Types

Capital markets are mainly divided into 2 different types.

1. Primary Markets: The primary market is the part of the capital market that
deals with the issuance and sale of securities to investors directly by the
issuer. An investor buys securities that were never traded before. Primary
markets create long term instruments through which corporate entities raise
funds from the capital market.
2. Secondary Markets: The secondary market, also called the aftermarket and
follow on public offering is the financial market in which previously issued
financial instruments such as stock and bonds are bought and sold

Capital Market – Examples

Examples of capital markets are given below.

1. Stock Market: A stock market, equity market or share market is the

aggregation of buyers and sellers of stocks, which represent ownership claims
on businesses
2. Bond Market: The bond market is a financial market where participants can
issue new debt, known as the primary market, or buy and sell debt securities
3. Currency and Foreign Exchange Markets: The foreign exchange market is a
global decentralized or over-the-counter market for the trading of currencies.
This market determines foreign exchange rates for every currency.
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1.2 Role of Capital Market in Economy

Capital markets are an essential element in economic development via several
means that make it easier to create money stability, growth, and innovation.

 Facilitating the Mobilization of Resources: Capital markets facilitate the funds

by bringing together those who have excess capital with those who have
investment opportunities. This process helps to achieve better allocation of
resources with an overall effect of driving economic growth and development.
 Promoting Savings and Investments: Capital markets are important for
savings, mobilizations and investments through the provision of many types of
financial instruments. This has led to higher savings that get reinvested into
business operations, expansion, infrastructure, and ultimately in the creation of
employment.
 Enhancing Liquidity and Market Efficiency: Liquidity in capital markets means
that these investors will be able to easily sell or purchase financial securities. This
means the cash is easily obtainable if the assets have to be sold, thus lowering
the risk levels to investors while making markets more efficient.
 Supporting Corporate Governance and Transparency: Capital markets apply
high governance standards to companies that list on their platforms demanding
high standards of disclosure. This improves the standards used in the
management of the companies: thus, bringing more investors to the market and
making the market more stable.
 Driving Economic Innovation and Technological Advancements: Venture
capital and Initial Public Offerings (IPOs) are the two mechanisms that are well
known to support startups and innovation projects with capital markets. This
funding puts a fast tempo to the development of technologies and offers a
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breakthrough towards the creation of new industries, which are beneficial in

fostering steady economic growth.

1.3 Stock Markets in India

Investing in the stock market in India began centuries ago. Trading in loans can be traced to
the 18th century. Trading in shares formally began with the establishment of the Bombay
Stock Exchange in 1875-- a good 148 years ago.

However, much has changed since technology created an efficient stock market trading and
settlement system. Today, you can buy or sell shares with a tap on your smartphone. It
opens up options for you as an investor. You can now actively or passively manage your
portfolio like never before.

So what exactly are shares? Shares are a part-ownership in a company. In proportion to the
amount you invest in the company, you get shareholder rights – voting rights and
dividends.

You can also sell shares to other investors, transferring ownership in the secondary market.
It is called trading in the secondary market when you buy or sell shares. It is the primary
market when you buy shares during a company's initial public offering or IPO.

In this article, we will look at the different stock market participants to understand how the
stock market works.

What is a Stock Market?

A stock market is a platform that enables the movement of capital through an efficient
trading and settlement system. Companies issue shares to you (investors) in the stock
market to raise capital for future growth. It could be in the form of equity shares or debt
(debentures). These are called securities that can be traded on a stock exchange. Investors
buy such securities as a form of financial investment. A buyer gets shares, and the seller gets
the money on the day of the trading settlement. The stock market management's job is to
ensure such settlements happen without fail.

An efficient stock market is pivotal to a country's economic development as it enables the

movement of capital from those who have it to those who need it. India's stock market is
the fifth largest in the world by market value. The evolution of the Indian stock market from
a paper-based trading system to one of the most efficient is a story for another day.

If you want to buy or sell your shares, you have to approach a broker who is a member of
the National Stock Exchange or the Bombay Stock Exchange. You open a Demat account first
and then a trading account with a broker. The two stock exchanges enable your seamless
stock market trading experience through an efficiently management trading and settlement
system.

The Two Primary Stock Exchanges In India

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Stock exchanges are financial markets where stocks and other securities are traded between
buyers and sellers. They provide a centralised platform where publicly traded companies
can sell their shares to the public, and investors can buy and sell those shares to other
investors.

The process of trading on a stock exchange typically involves a broker or a trading platform
that connects buyers and sellers, matching their buy and sell orders. Stock exchanges also
provide information on the performance of the listed companies, such as their financial
statements and other relevant data.

There are two primary stock exchanges in India – the National Stock Exchange (NSE) and the
Bombay Stock Exchange (BSE).

The NSE was established in 1992. It offers investments in equities, indices, initial public
offerings, mutual funds, exchange-traded funds, and derivatives. Trading on the NSE occurs
via electronic limit orders, which are matched through a trading computer. That allows for
anonymity and transparency.

The BSE is India's oldest and first functional stock exchange in Asia. It was established in
1875 and is headquartered in Mumbai. When the stock exchange started, it followed a floor
trading system. Since then, it has advanced. Today, financial transactions on the BSE are
done through an electronic trading system.

All major companies in India prefer to list on the NSE or BSE, or both exchanges.

Regulators and Intermediaries

The Securities Exchange Board of India (SEBI) regulates the Indian stock markets. It is
responsible for overseeing the activities of the Indian stock exchanges. The primary
objective of the SEBI is to protect investors, regulate financial intermediaries in the stock
market, and promote stock exchange development.

In addition to the SEBI, the National Security Clearing Corporation Ltd (NSCCL) and Indian
Clearing Corporation Ltd (ICCL) are important intermediaries you should know about in the
Indian stock markets. They are responsible for settling transactions in the stock exchanges
and ensuring no defaults from buyers or sellers.

Depositories

A depositary is a financial intermediary that facilities the transfer of ownership of securities.

Before electronic trading, share transfers used to happen through physical delivery.
Depositories maintained manual records and enabled the transfer of shares. Today,
everything happens electronically. Therefore, modern depositories enable the transfer of
ownership via Demat accounts.

India has two depositories that facilitate Demat services - National Securities Depository
Limited (NSDL) and Central Depository Services (India) Limited (CDSL). These depositories
 Capital Money & Commodity Market

handle Demat accounts through depository participants. Banks, financial institutions and
members of stock exchanges registered with SEBI can become depository participants.

Stock Market Participants

Those who trade in the stock market are called market participants. These could be
individuals like you, corporates or institutions. Market participants can be categorized as
follows:
• Domestic Retail Participants: Individuals who are by nationality Indian and live in India,
taking part in the stock market.
• Non-Resident Indians and Overseas Citizens of India: Individuals who are Indian nationals
but live outside the country and participate in the stock market.
• Domestic Institutions: Large corporate entities in India trading in the stock market.
• Domestic Asset Management Companies: Mutual Funds or other similar large
investment entities in the country.
• Foreign Portfolio Investors: Non-Indian corporate entities, including foreign Asset
Management Companies and Hedge Funds which invest in Indian stock markets.

Stockbrokers

Stockbrokers are stock market members who facilitate the trade on stock markets. They
could be individuals or companies. They are intermediaries who help execute trade
instructions from investors.

How the Stock Market Works

1. Listing on the Primary Market

The primary market is where stocks are listed for the first time. When a company wants to
raise money, it issues an Initial Public Offering (IPO) whereby stocks of the company go live
for the first time. Investors can then place their bids and will receive the allotment.

2. Trading
You buy and sell shares in the secondary market after shares are allotted for the first time.
That is where you as traders and investors can transfer ownership of stocks to make a
profit.

3.Order Passing
When you place a buy order on the stock exchange, the exchange passes it on to a broker.
They then match you with a sell order. Once that happens and a price is agreed upon, the
order is confirmed.

4.Settlement
After the price agreement, the exchange facilities settlement, or the transfer of ownership.
Earlier, settlement used to take weeks, but it is now completed in T+2 days. That means the
shares will reflect in your Demat account in that time frame, making you the rightful owner.

As a retail investor, you can invest in the Indian stock market by opening a Trading account
and a Demat account. A Trading account is essential for transacting, while a Demat account
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is where you keep your shares. You can open a Trading and Demat account with a registered
stockbroker in the country.

Using the Trading and Demat account, you can invest in IPOs or buy shares of an already
listed company. All you must do is log in to your account and place a trade. Once a seller
accepts it, the exchange will confirm the transaction and transfer ownership.

1.5 Large Cap, Mid Cap, and Small Cap Shares and their significance for
investors along with its valuation

Large-cap Companies

The SEBI has developed criteria for classifying companies. The top 100 companies listed in
the stock market based on market capitalization are classified as large-cap companies. The
mutual funds that hold the companies from the large-cap are called ‘Large-cap funds’.

Large-cap companies usually have good track records. The market value (market cap) of
these companies is significantly high. These are also called ‘blue-chip stocks’. The market
cap for these companies is around Rs.20000 crores and more, and they have a strong
market presence.

Mid-cap Companies

SEBI established a rule in the year 2017, according to which companies that are ranked from
101 to 250 in terms of market capitalization are known as mid-cap companies. The market
cap for these companies will be around Rs.5000 to Rs.20000 crores. Mutual funds that hold
stocks from the mid-cap are called ‘Mid-cap funds’.

Mid-cap companies also have a good track record, but the difference is noticeable
compared to large-cap companies. Mid-cap funds are involved with more risk than large-cap
funds. Mid-cap companies may or may not be included in broad market indexes due to their
limited market presence.
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Small-cap Companies

The companies ranked from the 251st position onwards in terms of market capitalization
are known as small-cap companies. The market cap for these companies is below Rs.5000
crores. The mutual funds that hold stocks from the small-cap are called ‘Small-cap funds’.

Small-cap companies don’t have a long track record. For example, a start-up company or a
company that is under development can fall under the small-cap sector. These companies
are mostly not included in the broad market indices because of their negligible market
presence.

Let us understand the difference between Large-cap, Mid-cap, and Small-cap funds with
respect to risk profile, liquidity and volatility, and returns and growth.

Differences Between Large, Mid and Small-Cap Funds

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Key Takeaways to Get from the Difference Between Large Cap, Mid Cap, And Small Cap

Funds

1. Large-cap funds are less risky than small and mid-cap funds.

2. Small and mid-cap funds have higher growth potential than large-cap funds.

3. Large-cap funds are good for conservative investors.

4. Mid and small-cap funds are suitable for medium-risk takers to aggressive investors.
 Capital Money & Commodity Market

1.6 Depositories in India: NSDL & CDSL

Depositories

Depositories play a crucial role in the smooth functioning of the stock market by holding

securities electronically. When investors buy shares, they are credited to their Demat

account, and when they sell, the shares are debited. However, the actual securities are

maintained by depositories like CDSL and NSDL, ensuring safe storage and smooth

transactions.

Depositories also facilitate trade settlements, share transfers, dematerialisation, and

rematerialisation. Depository participants (DPs), such as brokers, act as intermediaries,

offering investors a platform to trade securities. Once an investor places a buy or sell order,

the depository ensures that ownership is transferred securely within T+2 days.

By digitising the stock market, depositories have enhanced security, eliminated the risk of

physical certificates, and made trading seamless. Investors can now access their holdings

anytime and trade from anywhere. This system not only simplifies investing but also adds

efficiency and transparency to the financial markets.

NSDL

The National Securities Depository Limited (NSDL) is India’s leading securities depository,

established in 1996 to facilitate electronic trading and safekeeping of assets. It enables

dematerialisation, converting physical securities into electronic form, and rematerialisation,

converting them back to physical certificates.

NSDL plays a crucial role in the Indian securities market by providing services to investors,

issuers, and intermediaries. It also manages corporate actions such as dividends, bonuses,

and securities pledging. Additionally, NSDL ensures secure electronic settlements of trades,

making transactions seamless and efficient. Regulated by the Securities and Exchange Board

of India (SEBI), NSDL operates from its headquarters in Mumbai, contributing to the

modernisation and transparency of the Indian financial system.

 Capital Money & Commodity Market

CDSL

Central Depository Services Limited (CDSL) is a leading securities depository in India,

established in 1999 to provide secure and efficient depository services. It facilitates

dematerialisation, converting physical securities into electronic format, and

rematerialisation, restoring them to physical form when needed.

CDSL plays a key role in streamlining securities transactions for investors, issuers, and

market intermediaries. By offering seamless electronic settlements, it enhances the

efficiency and transparency of the Indian financial system. Regulated by the Securities and

Exchange Board of India (SEBI), CDSL ensures compliance with market regulations while

safeguarding investor interests.

As one of India’s two central depositories, it contributes significantly to the modernisation

of securities trading and management.

Function of NSDL and CDSL

Both CDSL and NSDL function as depositories. This means they are administrative bodies

holding securities, financial instruments, and stocks of investment in a dematerialised or

electronic form. Through the means of their DP or depository participant, an investor can
place a request to either depository. In general, both CDSL and NSDL work like banks for

investors. They hold for assets like bonds, shares, financial instruments, and more, rather

than money. This allows for ownership of these stocks, bonds and other debentures to be

seen in a convenient electronic form.

Financial instruments being handled in their physical form posed many risks. Both NSDL and

CDSL provide investors with electronic systems of storing their market acquisitions, akin to a

bank for storing money. This has helped to eliminate most of the risks and inconveniences

involved in the handling of and transfer of physical share certificates of the past.

Furthermore, depository services like that of CDSL and NSDL have helped to reduce the

costliness of transactions as well as the processing time for such transactions. Trading

becoming electronic has helped create a boom in the world of investing.

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Difference between NSDL and CDSL

Although they are vastly similar, here are some points of difference between NSDL and

CDSL.

– The biggest difference between NSDL and CDSL is that National Securities Depository

Limited works to keep electronic copies of stocks, ETFs, bonds, etc, traded on the National

Stock Exchange. Alternatively, the Central Depository Securities Limited works to keep

electronic copies of stocks, ETFs, bonds, etc, traded on the Bombay Stock Exchange. Hence,

NSE is where the National Securities Depository Limited operates while BSE is where the

Central Depository Securities Limited operates.

– Additionally, the National Securities Depository Limited was established as India’s very

first electronic depository incorporated in 1996. It is slightly older than the Central

Depository Securities Limited which was the second official depository established in India

for investors. CDSL was established in 1999.

– NSDL is promoted by the ‘National Stock Exchange’ of India. The National Securities

Depository Limited is also promoted by India’s premier banks and financial institutions like

the Industrial Development Bank of India and Unit Trusts of India. Alternatively, the Bombay

Stock Exchange and the State Bank of India promote the Central Depository Securities

Limited. Other premiere banks and financial institutions also promote the CDSL such as

HDFC Bank, Bank of Baroda, Bank of India, and Standard Chartered Bank, to name a few

notable institutions.

– In terms of active users, the latest data suggests that as of March 2018, Central Depository

Securities Limited had 1.1 crore active accounts while National Securities Depository Limited

had about 1.5 Crore active accounts.

1.7 Demat Account

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A Demat Account is a bit like a bank account for your share certificates and other securities
that are held in an electronic format. Demat Account is short for dematerialisation account
and makes the process of holding investments like shares, bonds, government securities,
Mutual Funds, Insurance and ETFs easier, doing away the hassles of physical handling and
maintenance of paper shares and related documents.

To understand Demat Account meaning, let’s use an example. Let’s say you want to
purchase the shares of Company X. When you buy those shares, they will have to be
transferred in your name. In earlier times, you got physical shares certificates from the
exchange with your name on it. This, as you can imagine, involved tonnes of paperwork.
Each time a share was bought and sold, a certificate had to be created. To do away with this
paperwork, India introduced the Demat Account system in 1996 for trades on NSE.

Today, there’s no paperwork involved, and physical certificates are no longer issued. So
when you buy shares of Company X, all you get is an entry in electronic form, in your Demat
Account. So this is what is a Demat Account.

Today if you want to trade/invest in the stock market (NSE & BSE) or other securities, having
a Demat Account is a must. Your Demat Account number is compulsory for electronic
settlements of the trades and transactions you do.

How to get Demat Account

Now that you know what is Demat Account let’s see how you can go about getting one.
When you open a Demat Account, you are opening one with a central depository like the
National Securities Depository Ltd (NSDL) or the Central Depository Services Ltd (CSDL).
These depositories appoint agents called Depository Participants (DP), who act as
intermediaries between themselves and investors. Your bank, like for instance HDFC Bank, is
a DP, with which you can open a Demat Account. Stockbrokers and financial institutions too
are DPs, and you can open a Demat Account with them also.

Just like a bank account holds money, a Demat Account holds your investments in an
electronic form, which is easily accessible with a laptop or a smart device and Internet. All
you need to have is the unique login ID and password to access it. However, unlike a bank
account, your Demat Account need not have a ‘minimum balance’ of any sort.

You can check the websites of any of the depositories to get a list of DPs with whom you can
open Demat Account with. The choice of a DP should ideally depend on its annual charges.

Note that you have more than one Demat Account, but not with the same DP. So one PAN
card can be linked to multiple Demat and Trading Accounts. Also, make sure to check the
eligibility criteria and documents required to for a Demat Account so you can choose
accordingly.
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Benefits of a Demat Account

There are various benefits of opening a Demat Account and they are as follows:

 No paper certificates:

Prior to the existence of Demat Accounts, share used to exist as physical paper certificates.
Once you purchased shares, you had to store several paper certificates for the same. Such
copies were vulnerable to loss and damage, and also come attached with lengthy transfer
processes. Demat Account turned all of it electronic, saving you much hassle.

 Ease of Storage:

With a Demat Account you can store as many shares as you need to. This way, you can trade
in volumes and keep track of the shares in your account. You can also rely on your Demat
Account to execute quick transfer of shares.

 Variety of Instruments:

Apart from stock market shares, you can also use your Demat Account to hold multiple
assets including mutual funds, Exchange Traded Funds (ETFs), government securities, etc.
Thus, with a Demat Account, you can approach your investment plans more holistically and
easily build a diverse portfolio.

 Easy Access:

Accessing your Demat Account is super easy. You can do so with the help of a smartphone
or laptop and manage your investments from anywhere, at any time. A Demat Account truly
makes investing for a financially secure future more easy and accessible than it has ever
been before.

 Nomination:

A Demat Account also comes with a nomination facility. The process of nomination is to be
followed as has been prescribed by the depository. In case the investor passes away, the
appointed nominee receives the shareholding in the account. This feature enables you to
make plans for future eventualities and avoid legal disputes.

Demat Account details

Once your Demat Account is opened, make sure you get the following details from your DP:
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 Demat Account number: It is known as ‘beneficiary ID’ if under CDSL. It is a mix of 16

characters.

 DP ID: The ID is given to the depository participant. This ID makes a part of your
Demat Account number.

 POA number: This is part of the Power of Attorney agreement, where an investor
permits the stockbroker to operate his/her account as per the given instructions.

 You will also receive a unique login ID and password to your Demat and Trading
Accounts for online access.

Demat and Trading Accounts

A Demat Account is usually accompanied by a Trading Account, which is required for buying
and selling shares on the stock market. HDFC Bank, for example, has a 3 in 1 Account that
combines bank accounts like a Savings Account, a Demat Account and a Trading Account.

Sometimes, people are confused between Demat and Trading Accounts. They are not the
same. A Demat Account contains the details of the shares and other securities in your name.
To purchase and sell shares, you need to open a Trading Account. Many banks and brokers
offer Trading Accounts with online trading facilities, which makes it easier for ordinary
investors to participate in the stock market.

Types of Demat Accounts

Now that we’ve understood Demat Account definition let’s look at the types of Demat
Account. There are mainly three types:

 Regular Demat Account: This is for Indian citizens who reside in the country.

 Repatriable Demat Account: This kind of Demat Account is for non-resident Indians
(NRIs), which enables money to be transferred abroad. However, this type of Demat
Account needs to be linked to a NRE bank account.

 Non-Repatriable Demat Account: This again is for the NRIs, but with this type of
Demat Account, fund transfer abroad is not possible. Also, it has to be linked to an
NRO bank account.

DR Demat Account
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DR Demat Account is a special purpose Demat Account which facilitates holding of securities
during the transit from overseas Depository System to Indian Depository System. Usually
this is during the cancellation of the Depository Receipts (DRs) held in American Depository
Receipts or Global Depository Receipts by the investor(s).

There are two types of DR accounts for Individuals, namely

A. Resident DR Demat Account

B. NRE DR Demat Account

These DR Demat Accounts comes with limitations such as:

1. Standalone Demat Accounts – Trading Accounts is not linked

2. Disabled Standing Instruction – The client will have to submit a “Receipt Instruction” to
receive the securities (The client will get the Receipt Instruction Slip book after opening the
demat account). The details of both the Delivery & Receipt instruction including execution
date should be exactly same to match and settle the transaction.

3. For receipt & transfer of Depository Receipt – This type of demat account is used by the
client for the credit of securities only on account of GDR conversion / cancellation. Account
is not to be utilised for holding / transacting any other securities. At the time of Account
Opening customer is required to give a declaration to this effect.
Securities received into DR Demat Account are then to be transferred to Regular Demat
Account held in the capacity as NRE / Resident / Resident Corporate / Foreign Corporate and
subsequently these DR Account is to be closed.

1.8 Types of share - Equity Shares, Preference Shares, Bonus Shares, Right
Shares, Contract Note

 Equity Shares:

Ordinary or equity share is the commonest variant of stock that a public company issues to
raise capital. Typically, holders of ordinary shares enjoy voting rights, can attend general and
annual meetings of a company, and are also entitled to a company’s surplus profits.

When it comes to types of shares, ordinary shares involve classification based on two
understandings. One is definition-based, and the other is feature-based.
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The definition-based types of equity shares are –

Authorised Share Capital

It denotes the total amount of capital that a company can raise by issuing stocks, as
mentioned in the Memorandum of Association (MoA).

Issued Share Capital

As the name suggests, issued share capital refers to the amount of capital a company raises
by means of issuing stocks.

Subscribed Capital and Paid-up Capital

It refers to a percentage of issued capital to which investors have subscribed. It can happen
that investors do not purchase all the shares that a company issues.

Feature-based types of equity shares are –

Voting Shares and Non-voting Shares

As the name suggests, entities holding these voting shares are entitled to cast their vote in
matters concerning a company’s policies or election of directors. Typically most ordinary
shares are voting shares.

In the case of non-voting shares, it might entail differential voting rights or none at all. An
exasmple of differential voting rights is mentioned above, where Tata Motors issued ‘A’
shares in 2008.

Sweat Equity Shares

Companies can issue shares to their employees and directors as a means of compensation,
usually when they perform excellently. By means of sweat equity shares, companies retain
efficient employees by giving them a stake in the ownership.

Right Shares

Among the many types of stocks, a company issues this variant to its existing shareholders.
In a stricter sense, companies proffer existing stakeholders the right to purchase such shares
before it is open for trade to external investors.

Bonus Shares

Companies issue bonus shares in lieu of monetary compensation for dividends. Therefore,
existing shareholders are only entitled to bonus shares. Organisations can also issue bonus
shares to convert a portion of retained earnings into equity shares.
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 Preference Shares:

Preference shares carry special rights or preferential treatments, especially in regard to

dividend receipt and capital reimbursement when an organisation is winding up. In other
words, preference shareholders receive dividends on the highest priority and also
companies return their capital before ordinary shareholders when undergoing liquidation.
Both these types of shares vary in regards to share in profitability, voting rights, as well as
settlement of capital when a company is winding up or is being liquidated.

Types of Preference Shares

The different types of shares under preference shares are –

Redeemable and Irredeemable Preference Shares

In the case of redeemable types of shares, the issuing company and such shareholders agree
that the company can redeem or buy-back those shares at a later period, either after the
expiration of a certain time or on a future date. Redeemable shares vary based on who can
exercise the buy-back provision – the shareholder or the organisation. An irredeemable
share is, therefore, the exact opposite of a redeemable stock.

Convertible and Non-convertible Preference Shares

Another way types of shares can be categorised based on whether they carry the provision
of conversion or not. To that effect, holders of convertible preference stocks can convert
their holdings to equity shares upon meeting specific conditions. Conversely, holders of non-
convertible preference shares are not entitled to that provision.

Participating and Non-Participating Preference Shares

Holders of participating preference shares have the right to partake in a company’s profits
once a company allots dividends to ordinary shareholders. Therefore, when a company’s net
income is substantially high, such shareholders stand to receive a part of such profits. On
the other hand, holders of non-participating shares are only entitled to a fixed dividend
payment. The latter is a commoner variant.

Cumulative and Non-Cumulative Preference Shares

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If a company does not provide dividends for preference shares in a particular year, such
dividend entitlement is carried forward to the following year if it is a cumulative stock.
Conversely, in the case of non-cumulative preference shares, the dividend amount is not
carried forward if an organisation does not pay dividends in a specific year.

 Bonus Shares

Bonus shares are shares distributed by a company to its current shareholders as fully paid
shares free of charge.

 to capitalise a part of the company's retained earnings

 for conversion of its share premium account, or
 distribution of treasury shares.

An issue of bonus shares is referred to as a bonus share issue.

A bonus issue is usually based upon the number of shares that shareholders already own.
(For example, the bonus issue may be "n shares for each x shares held"; but with fractions of
a share not permitted.) While the issue of bonus shares increases the total number of shares
issued and owned, it does not change the value of the company. Although the total number
of issued shares increases, the ratio of number of shares held by each shareholder remains
constant. In this sense, a bonus issue is similar to a stock split.

 Right Shares:

When a company needs to raise additional capital and keep the voting rights of the existing
shareholders proportionately balanced, the company issues rights shares.

A rights share issue is an offering of rights given to a company's existing shareholders,

allowing them to purchase additional shares directly from the company at a discounted
price, rather than buying them through the secondary market. The number of additional
shares that a shareholder can purchase depends on their existing holding.

Features of Right Issue of Shares

● Corporations issue rights when they need cash for various purposes. This process allows
the company to raise funds without incurring underwriting fees.

● A rights issue gives existing shareholders preferential treatment by giving them the right,
rather than the obligation, to purchase shares at a lower price on or before a certain date.

● Existing shareholders also have the right to trade with other interested market
participants until new shares are available for purchase. Rights shares are traded in the
same manner as ordinary equity shares.

● The number of additional shares available to shareholders is generally proportional to

their existing shareholdings.
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● Existing shareholders may choose to forego the rights shares. However, if they do not
purchase additional shares, their existing holdings will get diluted once the additional shares
are issued.

 Contract Note:

A contract note in the stock market is a crucial document, providing a formal record of
transactions between a stockbroker and a client. It details the specifics of a trade, including
the type and quantity of securities bought or sold, the price, the transaction date, and any
associated charges or fees.

This legally binding document confirms the transaction, outlining key elements agreed upon
during the trade execution. It serves as evidence of the agreement between the investor
and the broker, offering transparency and accountability in financial dealings.

The broker typically generates this note after the completion of a trade and sends it to the
client. It serves as proof of the executed trade, enabling investors to verify the accuracy of
the transaction details, including prices and quantities.

Regulatory bodies often mandate the issuance of this to ensure transparency and
compliance with market regulations. This document aids in dispute resolution and is an
essential record for taxation purposes, audit trails, and trade settlement procedures.
 Capital Money & Commodity Market

Chapter No.: 02 Issue of Shares & Role of Investment Banker

2.1 Issue of Shares-Meaning

The issue of shares is the procedure in which enterprises allocate new shares to the
shareholders. Shareholders can be either corporates or individuals. The enterprise follows
the rules stipulated by Companies Act 2013 while circulating the shares. The Issue of
Prospectus, Receiving Applications, Allocation of Shares are 3 key fundamental steps of the
process of issuing the shares.

A noticeable feature of the company’s capital is that the amount on its shares can be
progressively collected in simple instalments that are spread over a time frame relying upon
its enhancing financial obligation. The 1st instalment is collected with the application and is
hence, called as application money, the 2nd is on allocation (termed as allocation or
allotment of money), and the 3rd instalment is known as a 1st call, 2nd call and so on. The
word-final is suffixed to the final instalment. This procedure, in no way, prevents an
enterprise from calling the entire amount on shares during the period of application.

The significant steps in the process of issue of shares are given below:

 Issue of Prospectus: The enterprise initially issues the prospectus to the public
generally. The prospectus is an appeal to the public that a new enterprise has come
into the presence and it would require funds for operating the trading concern. It
comprises of complete data regarding the enterprise and the way in which the
money is to be collected from the prospective investors.
 Receipt of Applications: When the prospectus is circulated to the public, prospective
investors contemplating to sign up and subscribe the share capital of the enterprise
would make an application along with the application money and deposit it with a
scheduled bank as mentioned in the prospectus.
 Allocation of shares: Once the minimum subscription has been done, the shares can
be allocated. Normally, there is always oversubscription of shares, so the allocation
is done on pro-rata ground. Letters of Allotment are sent out to those people who
have been allocated their part of shares. This results in an authentic contract
between the enterprise and the claimant, who will now be a part-owner of the
enterprise.

2.2 Modes of Issue of Shares-

IPO
 Capital Money & Commodity Market

Initial Public Offering (IPO) refers to the process where private companies sell their shares to
the public to raise equity capital from the public investors. The process of IPO transforms a
privately-held company into a public company. This process also creates an opportunity for
smart investors to earn a handsome return on their investments.

Investing in IPOs can be a smart move if you are an informed investor. But not every new
IPO is a great opportunity. Benefits and risks go hand-in-hand. Before you join the
bandwagon, it is important to understand the basics.

IPO stands for Initial Public Offering. Initial Public Offering (IPO) can be defined as the
process in which a private company or corporation can become public by selling a portion of
its stake to the investors.

An IPO is generally initiated to infuse the new equity capital to the firm, to facilitate easy
trading of the existing assets, to raise capital for the future or to monetize the investments
made by existing stakeholders.

The institutional investors, high net worth individuals (HNIs) and the public can access the
details of the first sale of shares in the prospectus. The prospectus is a lengthy document
that lists the details of the proposed offerings.

Once the IPO is done, the shares of the firm are listed and can be traded freely in the open
market. The stock exchange imposes a minimum free float on the shares both in absolute
terms and as a ratio of the total share capital.

Types of IPO

There are two common types of IPO. They are-

1) Fixed Price Offering

Fixed Price IPO can be referred to as the issue price that some companies set for the initial
sale of their shares. The investors come to know about the price of the stocks that the
company decides to make public.

The demand for the stocks in the market can be known once the issue is closed. If the
investors partake in this IPO, they must ensure that they pay the full price of the shares
when making the application.

2) Book Building Offering

In the case of book building, the company initiating an IPO offers a 20% price band on the
stocks to the investors. Interested investors bid on the shares before the final price is
 Capital Money & Commodity Market

decided. Here, the investors need to specify the number of shares they intend to buy and
the amount they are willing to pay per share.

The lowest share price is referred to as the floor price, and the highest stock price is known
as the cap price. The ultimate decision regarding the price of the shares is determined by
investors’ bids.

FPO

A Follow-on Public Offer is a stock issuance by a publicly traded company to raise additional
capital. While an IPO is a landmark event that shifts a company from private to public status,
an FPO occurs after that transition. Companies usually opt for an FPO for several reasons:
finance acquisitions, fund capital expenditure, or pay down debt.

In the Indian market, FPOs have been increasingly popular as they provide a quicker way for
companies to raise capital without diluting the ownership of existing stakeholders to a large
extent.

Regulatory Framework

In India, FPOs are governed by the Securities and Exchange Board of India (SEBI). Companies
have to meet stringent guidelines, disclose financials, and pass through various audits
before they are given the green light to issue an FPO.

 Pricing Mechanism

Unlike IPOs, the pricing in FPOs is generally more transparent. Since the company is already
publicly traded, historical trading data and financials are available, which makes it easier for
investors to evaluate the offer.

 Risk and Returns

Investing in an FPO comes with its own set of risks and rewards. It is generally considered
less risky than an IPO because the company is already publicly traded, and a wealth of
information about its performance is available. However, the success of the FPO depends on
how effectively the raised capital is utilised.

How Does a Follow-on Public Offer Work?

The mechanism behind a Follow-on Public Offer in India is a multi-step process that closely
aligns with regulatory guidelines set by the Securities and Exchange Board of India (SEBI).
Here’s how it generally functions:

 Need Assessment
 Capital Money & Commodity Market

The first step in an FPO process is for the company’s board to identify the need for
additional capital. This could be for various reasons, such as expansion, acquisitions, or debt
reduction.

 Regulatory Approval

Before proceeding, the company must obtain approvals from regulatory bodies, including
filing a draft red herring prospectus (DRHP) with SEBI detailing the intended use of the
funds.

 Price Band

One of the unique aspects of an FPO in the Indian market is the price band. Companies must
offer a price range within which investors can bid for shares. The final price is decided after
considering the bids.

 Offer Period

Unlike IPOs, which can be oversubscribed, FPOs usually have a set offer period during which
investors can buy the shares. The period is typically shorter than that of an IPO.

 Allotment

After the closure of the offer period, shares are allotted to investors based on the bids
received. A lottery system may be employed to ensure fair distribution in case of
oversubscription.

 Listing

Post-allotment, the new shares are listed on stock exchanges, thereby increasing the total
number of shares in circulation for the company. This process is generally quicker for FPOs
than for IPOs.

 Utilisation of Funds

Companies are obligated to update their investors on how the funds raised are being
utilized. This is generally outlined in quarterly reports and annual general meetings (AGMs).

 Performance Monitoring

Investors and regulatory bodies closely monitor how well the raised capital is utilized to
meet the objectives stated in the prospectus.

The process is intricate and bound by stringent regulatory frameworks designed to protect
the investing public’s interests.

Types of FPO
 Capital Money & Commodity Market

Follow-on Public Offers in the Indian market can primarily be classified into two types

 Dilutive FPO

In a dilutive FPO, the company issues new shares, thereby increasing the total number of
shares in circulation. This leads to a dilution of ownership for existing shareholders.
However, the capital raised directly benefits the company, enabling it to pursue growth
initiatives or reduce debt. This is the most common form of FPO and is generally seen as
beneficial if the company has a solid track record and growth prospects.

 Non-Dilutive FPO

Unlike dilutive FPOs, non-dilutive ones don’t involve the issuance of new shares by the
company. Instead, existing shareholders such as promoters or venture capitalists sell off a
portion of their holdings. While this increases the liquidity of the shares, it doesn’t provide
any new capital to the company. Investors should be cautious with this type, as it may
indicate that existing large shareholders are reducing their stake.

Example of an FPO

One of the most illustrative examples of a Follow-on Public Offer would be that of the State
Bank of India (SBI) in 2014. SBI, one of India’s largest public sector banks, announced an FPO
to raise around INR 8,032 crore. The primary objective was to augment the bank’s capital
base to meet the growing business needs and comply with international capital adequacy
norms.

SBI followed the standard protocol, beginning with the approval from its board and then
filing the Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of
India (SEBI). The FPO was dilutive, meaning new shares were issued, leading to the dilution
of ownership for existing shareholders. The price band for the FPO was set at INR 1,500-
1,590, and the offer was open for a specified period.

The FPO saw significant interest from retail and institutional investors, resulting in an
oversubscription. Eventually, the shares were allotted, and the new shares started trading
on the stock exchanges shortly after the closure of the FPO. This example illustrates several
key aspects of how an FPO operates, including the necessity for regulatory approvals, the
setting of a price band, the public’s participation, and finally, the listing of new shares.

It also highlights the importance of the FPO as a financial instrument for companies looking
to raise significant capital without taking on debt, especially in a growing economy like India.

Right Issue
 Capital Money & Commodity Market

A rights issue is an offering of rights to the existing shareholders of a company that gives
them an opportunity to buy additional shares directly from the company at a discounted
price rather than buying them in the secondary market. The number of additional shares
that can be bought depends on the existing holdings of the shareowners.

Features of a Rights Issue

 Companies undertake a rights issue when they need cash for various objectives. The
process may allow the company to raise money without necessarily incurring
underwriting fees, although some rights issuances may be underwritten if the
company wants to ensure the amount of capital raised.
 These rights are normally distributed in the form of a dividend and the number of
additional shares that can be purchased by the shareholders is usually in proportion
to their existing shareholding. Rights may be fully or partially exercised by the
holder.
 A rights issue gives preferential treatment to existing shareholders, where they are
given the right (not obligation) to purchase shares at a lower price on or before a
specified date.
 Existing shareholders also enjoy the right to trade with other interested market
participants until the date at which the new shares can be purchased. The rights are
traded in a similar way as normal equity shares.
 Existing shareholders can also choose to ignore the rights; however, if they do not
purchase additional shares, then their existing shareholding will be diluted post issue
of additional shares.

Reasons for a Rights Issue

 When a company is planning an expansion of its operations, it may require a huge

amount of capital. Instead of opting for debt, they may like to go for equity to avoid
fixed payments of interest. To raise equity capital, a rights issue may be a faster way
to achieve the objective.
 A project where debt/loan funding may not be available/suitable or expensive
usually makes a company raise capital through a rights issue.
 Companies looking to improve their debt-to-equity ratio or looking to buy a new
company may opt for funding via the same route.
 Sometimes troubled companies may issue shares to pay off debt in order to improve
their financial health.

Example of a Rights Issue

Let’s say an investor owns 100 shares of Arcelor Mittal and the shares are trading at $10
each. The company announces a rights issue in the ratio of 2 for 5, i.e., each investor holding
5 shares will be eligible to buy 2 new shares. The company announces a discounted price of,
 Capital Money & Commodity Market

for example, $6 per share. It means that for every 5 shares (at $10 each) held by an existing
shareholder, the company will offer 2 shares at a discounted price of $6.

 Investor’s Portfolio Value (before rights issue) = 100 shares x $10 = $ 1,000
 Number of right shares to be received = (100 x 2/5) = 40
 Price paid to buy rights shares = 40 shares x $6 = $ 240
 Total number of shares after exercising rights issue = 100 + 40 = 140
 Revised Value of the portfolio after exercising rights issue = $ 1,000 + $240 = $1,240
 Should be price per share post-rights issue = $1,240 / 140 = $8.86

According to theory, the price of the share after the rights issue should be $8.86, but that is
not how the markets behave. An uptrend in the share price will benefit the investor, while if
the price falls below $8.86, the investor will lose money. The decline in share price can be
attributed to several factors. Here are some of them:

 It gives a signal to the market that the company may be struggling, which can be the
reason the company issued shares at a discount.
 By issuing more shares, there is dilution in the value of available shares.

Private Placement

As per the Section 42 of the Companies Act, 2013, private placement means any offer or
invitation to subscribe or issue of securities to a selected group of persons by a company
(other than by way of public offer) through private placement offer-cum-application form,
which satisfies the conditions specified in section 42 of the Companies Act, 2013.

Section 42 of the Companies Act, 2013 states that the maximum allotment that can be done
in a year is 200, exceeding which the issue is considered public and the company has to
follow the procedure of public issue. In the process of private placement, no prospectus is
issued.

Types of Private Placement

There are two types of private placement that are followed:

1. Preferential Allotment

2. Qualified institutional placement

Preferential Allotment: Preferential allotment is the practice of issuing of securities to a

selected group of entities such as mutual fund companies, financial institutions or
promoters at a particular price. The directives for such an allotment is specified in the
 Capital Money & Commodity Market

Chapter XIII of SEBI (DIP) guidelines. The investors may also have a lock-in period for the
issue of securities and the company needs to take.

Qualified Institutional Placement: In this mode of private placement, a listed company is

able to issue shares or other securities to only institutional buyers. It is a way of encouraging
the listed companies to raise capital from the domestic market. The rule governing such
placements is specified in Chapter XIIIA of SEBI (DIP) guidelines.

2.3 Procedure for issue of equity shares and preference shares

Step-1

issue of prospectus: When a Public company intends to raise capital by issuing its shares to
the public, it invites the public to make an offer to buy its shares through a document called
'Prospectus'.

According to Section 60 (1), a copy of prospectus is required to be delivered to the Registrar

for registration on or before the date of publication thereof.

It contains the brief information about the company, its past record and of the project for
which company is issuing share.

It also includes the opening date and the closing date of the issue, amount payable with
application, at the time of allotment and on calls, name of the bank in which the application
money will be deposited, minimum number of shares for which application will be accepted,
etc.

Step-2

To receive application: After reading the prospectus if the public is satisfied then they can
apply to the company for purchase of its shares on a printed prescribed form.

Each application form along with application money must be deposited by the public in a
schedule bank and get a receipt for the same.

The company cannot withdraw this money from the bank till the procedure of allotment has
been completed (in case of first allotment, this amount cannot be withdrawn until the
certificate to commence business is obtained and the amount of minimum subscription has
been received).

The amount payable on application for share shall not be less than 5% of the nominal
amount of share.
 Capital Money & Commodity Market

Step-3

Allotments of shares: Allotments of shares means acceptance by the company of the offer
made by the applicants to take up the shares applied for.

The information of allotment is given to the shareholders by a letter known as 'Allotment

Letter', informing the amount to be called at the time of allotment and the date fixed for
payment of such money.

It is on allotment that share come into existence. Thus, the application money on the share
after allotment becomes a part of share capital.

Decision to allot the share is taken by the I Board of Directors in consultation with the Stock
Exchange. After the closure of the subscription list, the bank sends all applications to the
company.

On receipt of applications, each application is carefully scrutinised to ascertain that the

application form is properly filled up and signed and the money is deposited with the bank.

Step-4

To make calls on shares: The remaining amount left after application and allotment money
due from shareholders may be demanded in one or more parts which are termed as 'First
Call' and 'Second Call' and so on.

A word 'Final' word is added to the last call. The amount of call must not exceed 25% of the
nominal value of the shares and at least 1 month have elapsed since the date which was
fixed for the payment of the last preceding call, for which at least 14 days’ notice specifying
the time and place must be given.

2.4 Investment Banking Meaning

The meaning of investment banking is a unique category of bank facility where the value of
transactions is many times greater. It is one definition of investment banking. Clients can
use it for business deals involving mergers and acquisitions (M&A) or initial public offers
(IPOs).
Therefore, fund managers and corporations assign the function of an intermediate
institution to the reputed investment banking services. Doing so assures a highly
transparent and mutually beneficial deal lifecycle that satisfies all the parties involved in the
deal.
Investment banking is the division of financial institutions that serves governments and
large multinational corporations in their investment plans. Investment banks act as
 Capital Money & Commodity Market

intermediaries between investors and corporations. They provide underwriting (capital

raising), mergers and acquisitions (M&A) advisory services, reorganizations, and broker
trades for institutions and private investors. Investment banks also guide issuers regarding
the offering and placement of stock.
Importance of Investment Banking
The IB industry creates a reliable, fast, transparent ecosystem for investors, corporations,
and fund managers. Therefore, multiple entities can succeed in deal execution without
additional resources. IB is indeed crucial for protecting everyone’s interests, as highlighted
below.
 Investor bankers have experience in handling large transactions by combining
several strategies. Therefore, they save time by analyzing the financial models
through standardized professional solutions.
 Also, all parties have a better chance of a balanced deal closure because the
investment banking services facilitate the impartial or objective evaluation of buyer
negotiation terms.
 Besides, investment banks must enforce a strong accountability culture to maintain
and grow their brand. So, the clients can acquire the best deals and terms.
 You can stay relaxed so that no external party will access the confidential data
involved in the deal negotiation, evaluation, and optimization. Investment banks are
committed to keeping your organizational and stakeholder data secure.

Strategic Benefits of Investment Banks

You might experience some operational and performance efficiencies since the investment
banking services reduce the financial risk burden to you and your stakeholders. Moreover, it
is one of the strategic benefits of allowing investment banks to guide your M&A deals and
capital market management.
If an organization invests its resources in alternative solutions, it will be liable to stay
relevant to the latest legal and ethical developments in investment banking regulations.
Additionally, there is the risk of neglecting or delaying your core operations due to
unsuccessful deal execution.
You can avoid these undesirable deal outcomes by employing expert investment bankers to
execute the deals and fund-raising programs.

Role of Investment Bankers in Issues of Shares & Securities

Investment bankers play a crucial role in the issuance of shares and securities by acting as
financial intermediaries between companies and investors. Their expertise ensures smooth
capital-raising processes, regulatory compliance, and market efficiency. Below are the
detailed roles investment bankers play in issuing shares and securities:
 Capital Money & Commodity Market

1. Understanding Investment Banking in Securities Issuance

Investment banks specialize in underwriting new securities issued by companies. They assist
in structuring, pricing, and marketing the securities to potential investors.

Key Services Provided:

 Advisory Services – Assisting companies in deciding the best method to raise capital.
 Underwriting – Purchasing securities from the issuing company and selling them to
investors.
 Market Making – Providing liquidity for the issued securities.
 Regulatory Compliance – Ensuring adherence to legal and financial regulations.
 Risk Management – Assessing and mitigating risks associated with securities
issuance.

2. Role of Investment Bankers in Equity (Shares) Issuance

A. Initial Public Offering (IPO) Process

An Initial Public Offering (IPO) is the process by which a private company offers its shares to
the public for the first time. Investment bankers play a vital role in this process:

1. Preliminary Assessment & Due Diligence

o Evaluating the company's financial health, growth prospects, and risk factors.
o Preparing financial statements and business reports.

2. Structuring the IPO

o Deciding the number of shares to be issued and their pricing.
o Advising on the type of shares to be issued (common stock, preferred stock,
etc.).

3. Underwriting the IPO

o Investment banks purchase the shares from the company and resell them to
the public.
o Types of underwriting:
 Firm Commitment – The bank guarantees the purchase of all shares.
 Best Efforts – The bank sells as many shares as possible but does not
guarantee full subscription.

4. Regulatory Compliance
o Preparing and filing the Red Herring Prospectus and Final Prospectus with
the Securities and Exchange Commission (SEC) or relevant authorities.
o Ensuring compliance with stock exchange rules and financial regulations.

5. Marketing & Roadshows

 Capital Money & Commodity Market

o Promoting the IPO to institutional and retail investors.

o Organizing investor roadshows to create awareness and demand for shares.

6. Pricing & Allotment of Shares

o Investment bankers use book-building or fixed pricing to determine the final
offer price.
o Allocating shares to institutional investors, retail investors, and employees.

7. Post-Issue Market Stabilization

o Engaging in price stabilization through greenshoe options (buying back
shares to prevent price falls).
o Ensuring stock liquidity in the market.

B. Follow-On Public Offering (FPO)

 Similar to IPOs, investment bankers help companies issue additional shares after
being publicly listed.
 Used to raise additional capital for expansion, debt repayment, or acquisitions.

3. Role of Investment Bankers in Debt Securities (Bonds & Debentures) Issuance

Investment bankers also facilitate the issuance of debt securities, such as corporate bonds,
government bonds, and debentures.

A. Structuring the Debt Issue

 Advising on the type of debt instruments (convertible, non-convertible, secured,

unsecured).
 Determining the coupon rate (interest rate) and maturity period.

B. Credit Rating & Risk Analysis

 Coordinating with credit rating agencies (e.g., Moody’s, S&P, Fitch) to assess
creditworthiness.
 Advising on strategies to improve ratings and attract investors.

C. Underwriting & Distribution

 Similar to equity underwriting, investment banks purchase bonds and sell them to
institutional investors.
 Issuing bonds through public offerings or private placements.

D. Regulatory Compliance

 Ensuring compliance with capital market regulations and government policies.

 Filing bond prospectuses and disclosures with regulatory bodies.
 Capital Money & Commodity Market

E. Market Making & Liquidity Management

 Ensuring that debt securities remain liquid and tradable in secondary markets.

4. Role of Investment Bankers in Private Placements

Investment banks help companies raise capital through private placements, where
securities are sold to select institutional investors instead of the public.

 Faster capital raising compared to IPOs.

 Lower regulatory burden.
 Less dilution of ownership.

Investment bankers identify potential investors, structure deals, and negotiate terms to
ensure favorable conditions for the issuer.

5. Mergers & Acquisitions (M&A) & Strategic Advisory

Apart from issuing securities, investment bankers also:

 Assist in mergers, acquisitions, and takeovers by structuring the deal and arranging
financing.
 Provide valuation services for companies involved in an acquisition or merger.
 Advise on leveraged buyouts (LBOs) and corporate restructuring.

6. Compliance & Risk Management in Securities Issuance

Investment banks ensure that securities issuance follows legal and financial regulations:

 Securities and Exchange Commission (SEC) regulations

 Stock exchange listing requirements
 Anti-money laundering (AML) and know-your-customer (KYC) laws

They also assess risks such as:

 Market Risks – Price fluctuations due to market conditions.

 Credit Risks – Risk of default on bonds and debt securities.
 Operational Risks – Issues related to mismanagement or regulatory non-compliance.
 Capital Money & Commodity Market

Chapter No.: 03 Regulation of Indian Capital Market Regulatory

Framework

3.1 Securities and Exchange Board of India (SEBI)

The Securities and Exchange Board of India (SEBI) is the regulatory body for securities
markets in India. Established in 1988 and given statutory powers in 1992, SEBI ensures the
fair and efficient functioning of capital markets by regulating intermediaries, protecting
investors, and promoting market integrity.

1. Objectives of SEBI

SEBI was formed with the primary objective of regulating and developing the Indian
securities market while protecting the interests of investors. Its key objectives include:

1. Investor Protection – Safeguarding the rights and interests of investors from

fraudulent and unfair trade practices.
2. Market Development – Ensuring the smooth and systematic growth of capital
markets.
3. Fair Trade Practices – Preventing malpractices such as insider trading and price
rigging.
4. Regulating Market Intermediaries – Ensuring transparency and efficiency in stock
exchanges, brokers, mutual funds, and investment advisors.
5. Preventing Market Manipulation – Curbing speculative trading, insider trading, and
corporate fraud.
 Capital Money & Commodity Market

6. Encouraging Innovation – Facilitating new financial instruments and technological

advancements in trading.

2. Management of SEBI

SEBI functions under the Ministry of Finance, Government of India, and is governed by a
Board of Directors consisting of:

 Chairperson – Appointed by the Government of India.

 Two Officials from the Union Ministry of Finance – Representing the government’s
financial policies.
 One Member from the Reserve Bank of India (RBI) – Ensuring coordination between
SEBI and RBI.
 Five Other Members – Appointed by the government, with at least three being full-
time members.

The board is responsible for policymaking, regulation enforcement, and overall market
supervision.

3. Powers and Functions of SEBI

SEBI exercises quasi-legislative, quasi-judicial, and quasi-executive powers, making it a

powerful regulator in India’s financial system.

A. Powers of SEBI

1. Regulatory Powers
o Regulating stock exchanges, brokers, mutual funds, depositories, and
investment advisors.
o Issuing guidelines for IPOs, FPOs, and debt market instruments.
o Setting norms for Foreign Portfolio Investors (FPIs) and domestic institutional
investors.

2. Enforcement Powers
o Conducting investigations and inspections to detect market fraud.
o Imposing penalties and suspending market intermediaries for non-
compliance.
o Ordering the suspension of trading in case of market manipulation.

3. Supervisory Powers
o Monitoring corporate governance and financial disclosures of listed
companies.
o Ensuring investor education and awareness programs.
o Overseeing compliance with Securities Contracts (Regulation) Act, 1956 and
Companies Act, 2013.
 Capital Money & Commodity Market

4. Quasi-Judicial Powers
o SEBI has the authority to hear complaints, conduct hearings, and impose
penalties on violators.
o It can issue directives against fraudulent practices and insider trading.

4. Regulatory Role of SEBI

SEBI regulates the Indian securities market by ensuring fairness, transparency, and investor
confidence. Its regulatory role includes:

A. Regulating Stock Exchanges and Market Intermediaries

 SEBI oversees stock exchanges (NSE, BSE, MCX, etc.), ensuring compliance with
listing norms.
 It regulates brokers, sub-brokers, credit rating agencies, depositories, merchant
bankers, and portfolio managers.

B. Regulating IPOs, FPOs, and Corporate Fundraising

 SEBI reviews and approves IPO and FPO prospectuses before companies can issue
shares.
 It ensures that companies provide accurate financial statements and risk disclosures.

C. Regulating Mutual Funds & Foreign Investments

 SEBI issues guidelines for mutual funds, including their investment strategies and
disclosures.
 It sets policies for Foreign Institutional Investors (FIIs) and Foreign Portfolio
Investors (FPIs).

D. Curbing Unfair Trade Practices

 SEBI enforces rules against price rigging, stock manipulation, and front running.
 It ensures market transparency by mandating disclosure of shareholding patterns.

5. Investor Protection Role of SEBI

SEBI prioritizes investor protection through various initiatives and regulations:

A. Investor Awareness & Education

 SEBI conducts investor awareness programs to educate retail investors.

 It promotes financial literacy through workshops, advertisements, and online
resources.
 Capital Money & Commodity Market

B. Grievance Redressal Mechanism

 SEBI has set up SCORES (SEBI Complaints Redress System), an online platform for
investor complaints.
 It ensures prompt action against fraud and mismanagement.

C. Compensation & Refunds

 SEBI directs companies to compensate investors in cases of fraud or

misrepresentation.
 It mandates refunds if IPO proceeds are misused.

D. Corporate Governance & Disclosure Norms

 SEBI enforces strict corporate governance norms for listed companies.

 It mandates periodic financial disclosures, audit reports, and shareholder
transparency.

6. Insider Trading: Rationale & Regulations

A. What is Insider Trading?

Insider trading refers to buying or selling securities based on non-public, price-sensitive

information. It is illegal because it provides an unfair advantage and undermines market
integrity.

B. SEBI’s Regulations on Insider Trading

SEBI has implemented strict rules to curb insider trading under the Prohibition of Insider
Trading Regulations, 2015.

1. Definition of Insiders
o Company executives, board members, employees, auditors, and consultants
with access to confidential financial data.

2. Prohibited Actions
o Trading based on unpublished financial results, mergers, or corporate
actions.
o Sharing insider information with friends or family for personal gain.

3. Penalties & Enforcement

o Heavy fines, imprisonment, and market bans for violators.
o SEBI has the power to investigate and impose penalties under the SEBI Act,
1992.

4. Whistleblower Protection
 Capital Money & Commodity Market

o SEBI encourages reporting of insider trading through its informant

mechanism.
o Rewards and anonymity are provided to whistleblowers.

C. Rationale Behind Insider Trading Laws

 Maintains Market Integrity – Prevents unfair advantage for insiders.

 Ensures Fair Play – Promotes equal access to information for all investors.
 Protects Retail Investors – Prevents price manipulation that affects small investors.
 Boosts Investor Confidence – Enhances credibility in stock markets.

3.2 Qualified Institutional Buyers (QIBs) – Detailed Notes

Qualified Institutional Buyers (QIBs) are institutional investors recognized by SEBI

(Securities and Exchange Board of India) as financially stable and knowledgeable investors
in the capital markets. They have special privileges in IPOs, FPOs, and debt offerings,
ensuring efficient price discovery and market stability.

1. Definition of QIBs

According to SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, a

Qualified Institutional Buyer (QIB) is:

An institutional investor with expertise and financial capacity to invest in securities,

recognized by SEBI.

QIBs are not required to register with SEBI individually but must belong to specific
categories defined by SEBI.

2. Categories of QIBs

QIBs include:

A. Domestic Institutional Investors (DIIs)

1. Mutual Funds – SEBI-registered mutual funds.

2. Scheduled Commercial Banks – Banks regulated under RBI.
3. Insurance Companies – IRDAI-registered life and general insurers.
4. Pension Funds – PFRDA-regulated funds.
5. Provident & Gratuity Funds – Approved by SEBI & government bodies.
 Capital Money & Commodity Market

B. Foreign Institutional Investors (FIIs) & Foreign Portfolio Investors (FPIs)

6. Foreign Venture Capital Investors (FVCI) – SEBI-registered foreign investors in Indian

startups.
7. Sovereign Wealth Funds – Investment arms of foreign governments.
8. Multilateral and Development Institutions – Entities like the World Bank, IMF, and
ADB.

C. Alternative Investment Funds (AIFs) & Infrastructure Funds

9. Category I & II AIFs – Private equity, venture capital, and infrastructure funds.

3. Role & Importance of QIBs in Capital Markets

A. Participation in IPOs & FPOs

 SEBI mandates that 50% of IPO allocations must go to QIBs.

 QIBs provide credibility to IPO pricing and encourage retail investor participation.

B. Stability in Debt & Equity Markets

 QIBs reduce volatility by holding stocks for the long term.

 Their investments act as a benchmark for pricing securities.

C. Efficient Price Discovery

 QIBs engage in book-building processes, helping companies determine fair stock

prices.

D. Boosting Liquidity & Market Confidence

 Institutional investments enhance liquidity, making markets more efficient.

4. Special Privileges of QIBs

A. No Need for Pre-issue Due Diligence

 Unlike retail investors, QIBs do not need to submit applications with pre-verified
KYC documents.

B. Preferential Allotment

 QIBs can get shares at a discount (up to 5%) in preferential issues.

C. Anchor Investor Concept

 Capital Money & Commodity Market

 Anchor investors (a subset of QIBs) can invest in IPOs before public bidding.
 They must hold at least 50% of allotted shares for 30 days.

5. Regulatory Framework for QIBs

A. SEBI Guidelines

 QIBs must adhere to SEBI’s Listing Obligations and Disclosure Requirements (LODR).
 They are required to disclose their shareholding in listed companies.

B. Investment Restrictions

 No minimum investment limit, but subject to sectoral FDI caps in certain industries.
 QIBs cannot participate in retail investor quotas in IPOs.

6. Difference Between QIBs, FIIs, & DIIs

Criteria QIBs FIIs DIIs

Large institutional Foreign investors in Indian Domestic investors in

Definition
investors markets Indian markets

Regulation SEBI SEBI & RBI SEBI & RBI

Mutual funds, banks, Sovereign wealth funds,

Examples LIC, SBI, UTI, HDFC MF
pension funds hedge funds

IPO Can invest if registered as

Mandatory 50% quota Can invest under QIB quota
Participation QIB

3.3 FII
An FII is typically an investor, an investment fund, or an asset that invests in a foreign
country outside of the one where it is headquartered or registered. In India, FII is used for
overseas entities that invest in the Indian financial markets. FIIs play a significant role in any
economy. They are typically big companies and organisations such as banks, mutual fund
houses, and other such entities that invest massive sums of money in the Indian investment
market. The presence of FIIs in a stock market, and the securities they purchase, help the
markets move upward. As such, they can strongly influence the total cash inflow coming
into an economy.
Where can foreign institutional investors invest in India?
Here’s a list of investment opportunities that FIIs can explore if they wish to invest in India.
1. Primary and secondary market securities such as shares, debentures or company
warrants.
 Capital Money & Commodity Market

2. Units of schemes that are floated by domestic fund houses, for instance, the Unit Trust of
India. FIIs can invests in unit schemes whether or not they are listed on recognised stock
exchanges.
3. Units of schemes that are floated by collective investment schemes
4. Derivatives that are traded on recognised stock exchanges
5. Dated Government Securities and Commercial papers of Indian establishments,
corporations, organisations or firms
6. Credit enhanced bonds that are rupee dominated
7. Indian depository receipts and security receipts
8. Listed as well as unlisted non-convertible bonds or debentures issued by Indian
companies belonging to the infrastructure sector. Here ‘infrastructure’ represents the terms
of the External Commercial Borrowings or ECB guidelines.

9. Non-convertible bonds or debentures, which are issued by companies belonging to the

NBFC (Non-Banking Financial Companies) sector. The Reserve Bank of India categorises
these companies as Infrastructure Finance Companies or IFCs.
10. Rupee dominated bonds which are issued by the infrastructure debt funds
 Capital Money & Commodity Market

Chapter No.: 04 Introduction to Money Market

4.1 Nature & Characteristics of Money Market
A market or a segment of the financial market in which lending and borrowing of short-term
funds take place is known as a Money Market. A money market primarily deals with highly
liquid and low-risk instruments having maturity, usually with a range from overnight to one
year. In a money market, the short-term surplus investible funds with the banks and other
financial institutions are bid by borrowers. It plays a crucial role in facilitating efficient fund
allocation. It also helps meet short-term fund requirements of different participants of an
economy. The basic objectives of the Money Market include short-term financing, liquidity
management, low-risk investments, benchmark interest rates, market stability and
transparency, and monetary policy implementation.
A Money Market is not the same as a Capital Market. The former is a market that deals with
borrowing and lending of short-term funds; however, the latter is a market that deals with
long-term funds. Even though these markets are different from each other, they are closely
related as there is some overlapping between the short-term and long-term loan
transactions. A money market is a part or segment of the financial market. A financial
market includes a money market, capital market, government securities market, and foreign
exchange market
Characteristics of the Indian Money Market
Some of the key characteristics or features of the Indian Money Market are as follows:
1. Segmented Structure: The Indian money market can be categorised into organised and
unorganised sectors. The organised sector includes institutions like the Reserve Bank of
India (RBI), commercial banks, cooperative banks, and other financial institutions. However,
the unorganised sector comprises indigenous bankers and money lenders.
 Capital Money & Commodity Market

2. Regulatory Oversight by the RBI: The Reserve Bank of India plays a pivotal role in
regulating and supervising the Indian money market. It controls the money supply in the
economy, manages liquidity, and ensures the stability of the financial system.
3. Focus on Short-Term Financing: The Indian money market predominantly deals with
short-term financial instruments having maturities of up to one year. It enables participants
to fulfil their short-term funding requirements and efficiently manage liquidity.
4. Diverse Array of Instruments: The Indian money market offers a wide range of
instruments, including treasury bills, certificates of deposit, commercial papers, call money,
etc. These instruments serve as avenues for short-term borrowing, lending, and investment
activities.
5. High Liquidity: The Indian money market is known for its high liquidity due to the
presence of diverse participants and instruments. Market participants can readily buy or sell
their holdings without significant price fluctuations.
6. Low-risk Instruments: Instruments in the Indian money market are generally considered
low-risk because of their short maturities and backing by credible issuers such as the
government, banks, and financial institutions. Consequently, they are attractive to risk-
averse investors.
7. Significance in Monetary Policy Transmission: The money market plays a critical role in
transmitting monetary policy decisions. The RBI employs various tools, such as open market
operations, repo rate, and reverse repo rate, to regulate liquidity in the money market and
influence overall interest rates in the economy.
8. Dominance of Institutional Investors: Institutional investors, including banks, financial
institutions, and mutual funds, primarily dominate the Indian money market. Individual
retail investors have limited direct participation, although they can indirectly access the
money market through mutual funds and other investment vehicles.
9. Interconnectedness with Other Financial Markets: The Indian money market exhibits
interconnections with other segments of the financial market, such as the capital market
and foreign exchange market. Funds from the money market can flow into long-term
investments or be utilised for currency trading.
10. Ongoing Infrastructure Development: The Indian money market has experienced
significant growth and development in recent years. Efforts have been made to enhance
market infrastructure, improve transparency, and introduce new instruments to cater to the
evolving needs of participants.

4.2 FIMMDA (Fixed Income, Money Market and Derivatives Association)

 Capital Money & Commodity Market

1. Introduction to FIMMDA

FIMMDA (Fixed Income, Money Market, and Derivatives Association of India) is an

industry body for the fixed income, money market, and derivatives markets in India. It
was established in 1998 and plays a key role in developing and regulating India's bond,
money, and derivatives markets.

 It acts as a self-regulatory organization (SRO) for institutions dealing in government

securities (G-Secs), corporate bonds, interest rate derivatives, and money market
instruments.
 It works closely with RBI, SEBI, and market participants to ensure market efficiency,
transparency, and standardization.

2. Objectives of FIMMDA

 Develop and standardize practices in the fixed-income and money markets.

 Set benchmark rates, such as the FIMMDA Corporate Bond Valuation and reference
rates for interest rate derivatives.
 Improve transparency and efficiency in the bond and derivatives markets.
 Provide training and capacity building for market participants.
 Collaborate with regulators (RBI, SEBI, and IRDAI) for smooth market functioning.

3. Functions of FIMMDA

A. Market Development & Regulation

 Establishes best practices for trading in government securities, corporate bonds, and
money market instruments.
 Recommends guidelines on bond pricing, valuation, and settlement procedures.
 Works with RBI to improve market infrastructure.

B. Benchmark Rate Fixation

 Publishes daily yield curves for government and corporate bonds.

 Provides benchmark rates for interest rate derivatives (IRS, FRA, OIS, etc.).
 Helps in the valuation of corporate bonds used by mutual funds and insurance
companies.

C. Training & Capacity Building

 Conducts workshops, seminars, and certification programs for bond traders,

bankers, and financial institutions.

D. Policy Advocacy & Industry Representation

 Capital Money & Commodity Market

 Acts as a bridge between market participants and regulators (RBI, SEBI, IRDAI,
PFRDA).
 Recommends policy changes to improve market depth and liquidity.

4. Instruments Covered Under FIMMDA

FIMMDA regulates and provides benchmarks for:

1. Government Securities (G-Secs) – Treasury Bills, Bonds, SDLs.

2. Corporate Bonds – Debentures, PSU bonds, NBFC bonds.
3. Money Market Instruments – Call Money, Commercial Papers (CPs), Certificates of
Deposit (CDs).
4. Interest Rate Derivatives – Interest Rate Swaps (IRS), Forward Rate Agreements
(FRA), Overnight Indexed Swaps (OIS).

5. Importance of FIMMDA in the Indian Financial System

Function Impact

Standardization Ensures uniform practices in bond and derivatives markets.

Benchmark Rate Setting Provides reliable valuation for bonds and derivatives.

Transparency & Efficiency Improves investor confidence and market depth.

Market Development Encourages participation from FIIs, DIIs, and retail investors.

Regulatory Collaboration Works with RBI & SEBI to align with global best practices.

Certificate of Deposit (CD)

These certificates are issued directly by a commercial bank at a discounted rate, and their
tenure usually ranges from seven days to one year. CDs function similarly to a bank fixed
deposit, except for the higher negotiating factor and higher liquidity.

Introduced by the Reserve Bank of India (RBI) in 1989, CDs have become a popular
investment option for investors looking for short-term assets since they carry no risk while
offering interest rates greater than those offered by fixed deposits.

Treasury Bills
These are issued by the Government of India when it requires funds to meet its short-term
requirements. The treasury banknotes are issued at a discounted value and are traded on
primary and secondary markets.
 Capital Money & Commodity Market

Since treasury bills are backed by the sovereign, the associated risk is negligible. However,
these securities do not generate any interest. The only profit is the difference between the
maturity value of the bill and its discounted purchase price.

Commercial Papers
This is an unsecured money market instrument issued by well-established corporations as
promissory notes. The maturity period of these instruments is less than a year; hence, the
interest rate is quite low if you compare it with other debt securities.
This money market instrument enables corporate borrowers to avail of short-term
borrowing by raising capital directly from the market.

Repurchase Agreements
Also known as buybacks, these are formal agreements between two parties where the
issuer offers a guarantee to repurchase the security in the future. These transactions can
only be made between two parties that are approved by RBI, as repurchase agreements
usually involve trading of government securities. The date of purchase and interest rate is
predetermined.

Banker’s Acceptance
Issued by commercial banks, this is a financial document that guarantees a future payment
to the lender. The document clearly mentions the repayment terms, including the date of
repayment and the amount to be repaid. The maturity period of this safe and reliable
instrument usually ranges from 30 days to 180 days.

Factoring
A factor is an intermediary agent that provides cash or financing to companies by
purchasing their accounts receivables. In short, a factor is a funding source; the factor
agrees to pay the company the value of an invoice—less a discount for commission and
fees.
Factoring can help companies improve their short-term cash needs by selling their
receivables in return for an injection of cash from the factoring company. The practice is
also known as factoring, factoring finance, and accounts receivable financing.
 Capital Money & Commodity Market

Chapter No.: 05 Introduction to Commodities Market

5.1 Commodity Market
A commodity market is where you can buy and sell goods taken from the earth—from cattle
to gold, oil to oranges, and orange juice to wheat. Commodities are turned into products
like baked goods, gasoline, or high-end jewellery, which in turn are bought and sold by
consumers and other businesses. Markets in these goods are the oldest in the world, but
they are as crucial to the most modern societies as they were to the small trading
communities of ancient civilizations.
Commodities are split into two broad categories: hard and soft commodities. Hard
commodities include natural resources that must be mined or extracted, such as gold,
rubber, and oil, while soft commodities are agricultural products or livestock, such as corn,
wheat, coffee, sugar, soybeans, and pork. They are traded directly in spot markets or
financial commodity markets through contracts for them or their future prices.

5.2 Participants in the Commodity Derivatives Market

 Producers and Consumers: Producers and consumers of physical commodities are
the largest participants in the Commodity Derivatives Market. They use futures and
options contracts to hedge against price risks associated with their physical
 Capital Money & Commodity Market

commodities. Producers can use these contracts to lock in a selling price for their
products, while consumers can use them to lock in a buying price for their raw
materials.
 Producers, also known as hedgers, use commodity derivatives to lock in prices for
their future production. This allows them to manage the risk associated with volatile
commodity prices. For example, if a farmer is growing a crop that is expected to be
in high demand in the future, they can sell futures contracts to lock in a favorable
price for their harvest. This protects the farmer from price changes in the market
and provides them with a stable source of income.
 Consumers, also known as end-users, use commodity derivatives to manage the
price risk associated with purchasing commodities. For example, an airline may use
fuel hedging to protect itself against fluctuations in the price of jet fuel. By entering
into a futures contract, the airline can lock in a set price for fuel, which helps it
budget for its future operations and manage its financial risk.

 Speculators: Speculators are financial institutions and investors who trade in futures
and options contracts with the aim of making a profit from price movements. They
do not have a direct interest in the underlying commodities and are not using these
contracts to hedge against price risks. Speculators are individuals or organizations
that invest in commodity derivatives for the purpose of profiting from price
movements. They do not have an underlying exposure to the commodity and enter
into the market solely for the purpose of generating returns. Speculators play a
critical role in the commodity markets as they provide liquidity and help to smooth
out price movements.

 Intermediaries, such as banks and brokers, play a critical role in facilitating

transactions in the commodity derivatives market. They help participants enter into
contracts, provide market information and price quotes, and manage the settlement
and delivery of contracts. Intermediaries also play a key role in reducing the risk
associated with commodity derivatives by providing hedging and risk management
services to their clients

5.3 Structure of Commodity Market

The commodities market exists in two distinct forms:
 over-the-counter (OTC) market
 exchange based market
Similar to equities, there exists the spot and the derivatives segments. Spot markets are
essentially OTC markets and participation is restricted to people who are involved with that
commodity, such as the farmer, processor, wholesaler, etc.
 Capital Money & Commodity Market

A majority of the derivatives trading takes place through the exchange-based markets with
standardized contracts, settlements, etc. The exchange-based markets are essentially
derivative markets and are similar to equity derivatives in their working, that is, everything
is standardized and a person can purchase a contract by paying only a percentage of the
contract value.
A person can also go short on these exchanges. Moreover, even though there is a provision
for delivery, most contracts are squared-off before expiry and are settled in cash. As a result,
one can see an active participation by people who are not associated with the commodity.
The typical structure of commodity futures markets in India is as follows

Ministry of Consumer Affairs, Food, and Public Distribution

The Department pertaining to consumer affairs is responsible for the formulation of policies
for:
 Monitoring Prices
 Consumer Movement in the country
 Controlling of statutory bodies (Bureau of Indian Standards (BIS) and Weights and
Measures)
 Internal Trade
 Inter-State Trade- The Spirituous Preparations (Inter-State Trade and Commerce)
Control Act, 1955 (39 of 1955).
 Control of Futures Trading- the Forward Contracts (Regulations) Act, 1952 (74 of
1952)

The Department for food and public distribution is responsible for the formulation of
policies for:
 Capital Money & Commodity Market

 Ensuring food security for the country through timely and efficient procurement and
distribution of food grains.
 Building up and maintenance of food stocks, their storage, movement and delivery
to the distributing agencies and monitoring of production, stock and price levels of
food grains.
 Incentivizing farmers through fair value of their produce by way of Minimum Support
Price mechanism, distribution of food grains to Below Poverty Line (BPL) families.
 Covering poor households at the risk of hunger under Antyodaya Anna Yojna (AAY).
 Establishing grain banks in food scarce areas and involvement of Panchayati Raj
Institutions in Public Distribution System (PDS).
 Concerns for the sugar sector such as fixing of Fair and Remunerative Price (FRP) of
sugarcane payable by Sugar factories, development and regulation of sugar industry
(including training in sugar technology), fixation of levy price of sugar and its supply
for PDS and regulation of supply of free sale sugar.
 Export and import of food grains, sugar and edible oils.
Forward Market Commission
The Commission functions under the control of the Ministry of Consumer Affairs, Food &
Public Distribution, Department of Consumer Affairs, Government of India. The functions of
the Forward Markets Commission are:
 To advise the Central Government in respect of the recognition or the withdrawal of
recognition from any association or in respect of any other matter arising out of the
administration of the Forward Contracts (Regulation) Act 1952.
 To keep forward markets under observation and to take such action in relation to
them, as it may consider necessary, in exercise of the powers assigned to it by or
under the Act.
 To collect and whenever the Commission thinks it necessary, to publish information
regarding the trading conditions in respect of goods to which any of the provisions of
the Act is made applicable, including information regarding supply, demand and
prices, and to submit to the Central Government, periodical reports on the working
of forward markets relating to such goods.
 To make recommendations generally with a view to improving the organization and
working of forward markets.
 To undertake the inspection of the accounts and other documents of any recognized
association or registered association or any member of such association whenever it
considers it necessary.

5.4 Instruments in Commodity Markets

The following are the trading instruments in the commodities market.
 Futures Contracts
 Capital Money & Commodity Market

One of the main commodity market instruments is futures contracts. These standardised
contracts make it easier to buy or sell a certain amount of a commodity at a certain price
and later date. Without owning the real item, traders can participate in the commodity
market, speculate on price changes, and protect themselves against potential dangers
thanks to futures contracts.
 Options Contracts
This is also one of the most effective commodity trading instruments. Trading in options
contracts gives investors the opportunity to buy (call option) or sell (put option) a
commodity at a predetermined price and within a predetermined time frame, but not the
responsibility to do so. Options offer flexibility and can be applied to tactics like hedging,
speculating, and revenue generation.
 ETFs (Exchange-Traded Funds)
Investors can obtain exposure to a particular commodity or a basket of commodities
through commodity Exchange-Traded Funds (ETFs) without actively trading futures
contracts. These funds, which may be purchased and sold on stock exchanges like individual
stocks, are designed to monitor changes in the prices of the underlying commodities.
 ETNs (Exchange-Traded Notes)
Financial institutions issue ETNs as debt securities. They are made to offer investors returns
depending on an underlying commodity index’s performance. ETNs are traded on stock
exchanges and provide simple access to changes in commodity prices.

Commodity Exchanges

Commodity exchanges are marketplaces where various commodities and derivatives are
traded. They help in price discovery, risk management, and provide liquidity for various
commodities such as metals, agricultural products, and energy resources.

1. Multi Commodity Exchange (MCX)

Established: 2003
Headquarters: Mumbai, India
Regulated by: Securities and Exchange Board of India (SEBI)
Website: www.mcxindia.com

Key Features:

 India’s largest commodity derivatives exchange.

 Primarily focuses on non-agricultural commodities such as metals (gold, silver,
copper), energy (crude oil, natural gas), and bullion.
 Provides electronic trading, settlement, and risk management for futures contracts.
 Capital Money & Commodity Market

 Introduced India’s first commodity options contract in gold.

Major Commodities Traded:

 Bullion: Gold, Silver

 Base Metals: Copper, Aluminium, Zinc, Lead, Nickel
 Energy: Crude Oil, Natural Gas
 Agricultural Commodities (Limited): Cotton, Mentha Oil

2. National Commodity & Derivatives Exchange (NCDEX)

Established: 2003
Headquarters: Mumbai, India
Regulated by: Securities and Exchange Board of India (SEBI)
Website: www.ncdex.com

Key Features:

 A leading exchange for trading agricultural commodity futures in India.

 Focuses on price risk management for farmers, traders, and agribusinesses.
 Helps in price discovery for various agricultural products.
 Offers futures and options contracts for agricultural commodities.

Major Commodities Traded:

 Food Grains: Wheat, Barley, Maize

 Pulses: Chana (Chickpeas)
 Oilseeds & Edible Oils: Mustard Seed, Soybean, Soy Oil
 Spices: Jeera (Cumin), Turmeric, Coriander
 Other Commodities: Guar Seed, Guar Gum

3. London Metal Exchange (LME)

Established: 1877
Headquarters: London, UK
Regulated by: Financial Conduct Authority (FCA), UK
Website: www.lme.com

Key Features:

 One of the world's largest and most influential metal trading exchanges.
 Specializes in industrial metals and provides benchmark pricing for global metal
markets.
 Capital Money & Commodity Market

 Operates a ring-based open outcry trading system, along with electronic trading and
telephone market platforms.
 Offers futures, options, and spot trading for metals.
 Warehousing system allows physical delivery of metals globally.

Major Commodities Traded:

 Base Metals: Aluminium, Copper, Zinc, Lead, Nickel, Tin

 Ferrous Metals: Steel Rebar, Steel Scrap
 Minor & Battery Metals: Cobalt, Molybdenum, Lithium

Comparison of MCX, NCDEX, and LME

Feature MCX NCDEX LME

Non-agricultural (Metals, Agricultural

Primary Focus Industrial Metals
Energy) Commodities

Regulated By SEBI (India) SEBI (India) FCA (UK)

Ring, Electronic &

Trading Mode Electronic Electronic
Phone

Market Scope National (India) National (India) Global

Settlement
Cash & Physical Cash & Physical Physical & Cash
Type

Ring Trading in Commodities

Definition:
Ring trading is a traditional open-outcry method where traders physically gather on a
trading floor (or "pit") to buy and sell commodities through verbal bids and hand signals.

Key Characteristics:

 Conducted in designated trading "rings" at commodity exchanges.

 Used historically by exchanges like the London Metal Exchange (LME).
 Price discovery happens through direct negotiation between traders.
 Declining in popularity due to the rise of electronic trading systems.

Exchanges Practicing Ring Trading:

 London Metal Exchange (LME) – The last major exchange using this system for
metals trading.
 Other global exchanges have largely shifted to electronic platforms for efficiency and
transparency.
Capital Money & Commodity Market