Gilt-Edged (Government) Securities Market

Government securities refer to the marketable debt issued by the government of semi-government bodies. A government security is a claim on the government. It is a totally securer financial instrument ensuring safety of both capital and income. That is why it is called gilt-edged security or stock. Central Government securities are the safest among all securities. Government securities are issues by:

  • Central Government
  • State Government
  • Semi-Government authorities like local government authorities, e.g., city corporations and municipalities
  • Autonomous institutions, such as metropolitan authorities, port trusts, development trusts, state electricity boards.
  • Public Sector Corporations
  • Other governmental agencies, such as SFCs, NABARD, LDBs, SIDCs, housing boards etc.
Characteristics of Gilt-edged Securities Market

Gilt-edged securities market is one of the oldest market in India. The market in these securities is a significant part of Indian stock market. Main characteristics of government securities market are as follows:

  • Supply of government securities in the market arises due to their issue by the Central, State of Local governments and other semi-government and autonomous institutions explained above.
  • Government securities are also held by Reserve Bank of India (RBI) for purpose and sale of these securities and using as an important instrument of monetary control.
  • The securities issued by government organisations are government guaranteed securities and are completely safe as regards payment of interest and repayment of principal.
  • Gilt-edged securities bear a fixed rate of interest which is generally lower than interest rate on other securities.
  • These securities have a fixed maturity period.
  • Interest on government securities is payable half-yearly.
Read the rest

Role of NBFCs in the Indian Financial Sector

The financial institutions are usually classified as banking institutions and non-banking financial institutions (NBFCs). The banks subject to legal reserve requirements can advance credit by creating claims against themselves, while the non-banking financial institutions can lend only out of resources put at their disposal by the ultimate savers. The distinction between the two has been highlighted by savers while characterizing the former as “creators” of credit, and the letter as mere “purveyors” of credit.

NBFCs and Monetary Policy

The proliferation of NBFCs in India has coincided with a major structural transformation in the Indian financial system, which has an important bearing on the conduct of monetary policy.

  • NBFCs started functioning in the sphere of mobilization of dormant assets and tapping of new users of credit. In the process, they channelized savings in the economy by collecting funds from savings surplus units and allocating them to savings deficit units for investment in real assets, for consumption, for portfolio adjustment of existing wealth, or for all such purposes for which access to bank credit was either denied or restricted. This mechanism is called “transmutation effect” which refers to the catalytic role of financial intermediaries in converting financial liability with a set of characteristics into financial assets with a different set of characteristics, so as to tailor the asset preference of the economic agents.
  • Non-banks provide credit to those sectors which are denied credit by banking sector, thereby defecting to some extent the very purpose of quantitative credit controls. Further, it is often argued that financial innovations place an upward pressure on the money multiplier.
Read the rest

Advantages of Rolling Settlement

Rolling settlement system replaced the badla system from July 2, 2001. On July 2, 2001, 215 scrips were brought under the riling systems, bringing the total to 414 scrips. By January 2, 2002 all scrips were brought under compulsory rolling mode. Internationally most developed countries follow a T+3 cycle and are aiming to move to a T+1 cycle (next day settlement) or a T+0 cycle where trades are settled on the day they are executed (same evening settlement). This is system of T+0 is prevalent in Switzerland and volumes are phenomenal when compared to the T+3 system. Indian stock markets moved to the T+3 system from April 2002, in line with the recommendations of the “Group of Thirty” which suggested it as minimum international standard.

The rolling settlement has many advantages.

  1. One, it reduces speculation and arbitrage in scrips as settlement occurs on a daily basis. Thus, there would be increase in delivery-based transactions reducing the speculation currently existing by way of carry forward of position in various scrips. Apart from this, shifting position from one stock exchange to another will reduce which, in turn will eliminate arbitrage opportunities in scrips.
  2. Two, it reduces pricing glitches and manipulation and explores a better price discovery process. With the rolling settlement in place, all open positions at the end of each day would come up for delivery thereby improving the quality of cash market transactions. Thus, price formation process on daily basis would be improved thereby resulting in improved price discovery process.
  3. Three, it reduces end of settlement period pressure as shares are delivered and cash is paid everyday instead of a week.
Read the rest

Clearing and Settlement of Futures and Options

National Securities Clearing Corporation Limited (NSCCL) undertakes clearing and settlement of all trades executed on the futures and options (F&O) segment of the NSE. It also acts as legal counterparty to all trades on the F&O segment and guarantees their financial settlement.

Clearing Entities

Clearing and settlement activities in the F&O segment are undertaken by NSCCL with the help of the following entities:

  • Clearing members: In the F&O segment, some members, called self clearing members, clear and settle their trades executed by them only either on their own account or on account of their clients. Some others called trading member—cum—clearing member, clear and settle their own trades as well as trades of other trading members (TMs). Besides, there is a special category of members, called professional clearing members (PCM) who clear and settle trades executed by TMs. The members clearing their own trades and trades of others, and the PCMs are required to bring in additional security deposits in respect of every TM whose trades they undertake to clear and settle.
  • Clearing banks: Funds settlement takes place through clearing banks. For the purpose of settlement all clearing members are required to open a separate bank account with NSCCL designated clearing bank for F&O segment.

The Clearing and Settlement process comprises of the following three main activities:

  1. Clearing
  2. Settlement
  3. Risk Management
Settlement Mechanism

All futures and options contracts are cash settled, i.e. through exchange of cash. The underlying for index futures/options of the Nifty index cannot be delivered. These contracts, therefore, have to be settled in cash.… Read the rest

Financial Market Regulation in India (Guidelines Issued by RBI and SEBI)

Guidelines Issued by Reserve Bank of India for the Regulation of Financial Markets

1) Management oversight, policy/operational guidelines – The management of a Primary Dealer should bear primary responsibility for ensuring maintenance of appropriate standards of conduct and adherence to proper procedures by the entity. Primary Dealers (PD) should frame and implement suitable policy guidelines on securities transactions. Operational procedures and controls in relation to the day-to-day business operations should also be worked out and put in place to ensure that operations in securities are conducted in accordance with sound and acceptable business practices. With the approval of respective Boards, the PDs should clearly lay down the broad objectives to be followed while undertaking transactions in securities on their own account and on behalf of clients, clearly define the authority to put through deals, procedure to be followed while putting through deals, and adhere to prudential exposure limits, policy regarding dealings with brokers, systems for management of various risks, guidelines for valuation of the portfolio and the reporting systems etc. While laying down such policy guidelines, the Primary Dealers should strictly observe Reserve Bank’s instructions on the following:

1) Ready Forward deals

2) Transactions through SGL Account

3) Internal Controls/Risk Management System

4) Dealings through Brokers

5) Accounting Standards

6) Audit, Review and Reporting

Any other instructions issued from time to time The internal policy guidelines on securities transactions framed by the PD, duly certified by its management to the effect that they are in accordance with the RBI guidelines and that they have been put in place, may be perused by the Statutory Auditors and commented upon as to the conformity of the guidelines with the instructions/guidelines issued by RBI.… Read the rest

Financial Market Regulation: Meaning and Objectives

Financial Market Regulation

The nature of securities markets is such that they are inherently susceptible to failures due to the existence of information asymmetries and existence of high transaction costs. It needs to be emphasized that when securities markets come into existence, the interest of the member brokers are taken care of through margin requirements, barriers to entry of membership, listing agreements. However the investors/clients who buy and sell via their brokers are not able to form an organization to safeguard their interests due to the cost of creation of such organizations and free rider problems. The distinctive nature of the market can be observed with reference to the commodity, its quality, the system of transactions and the participants in the market, as follows:

(a) the commodity(the security)has a life to perpetuity.

(b) while the outcome of the contract say the redemption of debt is certain, in the case of the government, it is not always so in the case of a private debt instrument, hence uncertainty comes into focus.

(c) the quality of private debt instrument is unobservable and hence, it is the trust reposed on the trader or the issuer that is the decisive factor, here the problem of information comes into focus.

(d) in any securities market in any transaction or deal there are at least four participants, two clients and two brokers. The brokers negotiate deals with each other on behalf of their clients and thus the problem of transaction cost comes into focus. When there is so much scope for failure and opportunism, there appears to be substantial ground for prescribing an institution that oversees the market at different stages to ensure its reliability, efficiency and it’s very existence.… Read the rest