A Treasury bill is issued by:

The RBI, on behalf of the Government of India

Large companies, to meet their short-term needs for funds

The RBI, on behalf of the Government of India

SEBI, to regulate the money market and its participants

Commercial banks, to individual depositors and companies

Which of the following statements is true of the SECONDARY market?

It deals in already-issued securities, priced by demand and supply

The company itself sells newly created securities directly to investors

It directly provides fresh long-term capital to the companies whose shares trade

It deals only in instruments with a maturity of under one year

Which of the following is a feature of the MONEY market rather than the capital market?

Its instruments mature within a year and are highly liquid

Its main instruments are equity shares and debentures

The funds raised are mainly used to buy fixed assets

Its instruments mature within a year and are highly liquid

Small individual investors are its main participants

Financial Markets — Money Market, Capital Market, Stock Exchange and SEBI

A financial market is a market for the creation and exchange of financial assets. It brings together the households that save and the businesses that need funds, and it does four things: it mobilises savings and channels them into the most productive uses; it facilitates price discovery, since the price of a financial asset is set by demand and supply; it provides liquidity, so that a financial asset can be turned into cash; and it reduces the cost of transactions, by giving buyers and sellers information and a place to meet. Financial markets divide by the maturity of what they trade: the money market for short-term funds of up to a year, and the capital market for medium- and long-term funds. The chapter ends with the stock exchange and its regulator, SEBI.

The Money Market and Its Instruments

The money market deals in short-term funds with a maturity of up to one year. It has no single physical location; its major participants are the Reserve Bank of India, commercial banks, non-banking finance companies, state governments, large corporate houses and mutual funds. Because the instruments are short-term and issued by reliable borrowers, they are highly liquid and relatively safe, and the return on them is correspondingly modest.

The five money market instruments
Instrument	Issued by / used for	What identifies it
Treasury bill	The Reserve Bank of India, on behalf of the Government of India, for the government’s short-term borrowing	Maturity under one year; issued at a discount and redeemed at par, so it is also called a zero coupon bond
Commercial paper	Large, creditworthy companies, to raise short-term funds — often as bridge financing to meet floatation costs before a share issue	A short-term unsecured promissory note, negotiable and transferable by endorsement and delivery
Call money	Mainly between banks, to maintain their required cash balances	Repayable on demand, for very short periods; its interest rate is the call rate
Certificate of deposit	Commercial banks and development financial institutions, to individuals, corporations and companies, usually when liquidity is tight	Unsecured, negotiable, short-term instruments in bearer form
Commercial bill	Firms, to finance working capital requirements	A bill of exchange; a trade bill accepted by a commercial bank becomes a commercial bill and can be discounted

⚠️ Commercial paper versus commercial bill

The names are nearly the same and the instruments are not. Commercial paper is a promissory note — a company’s own unsecured promise to repay, issued only by large, creditworthy firms. A commercial bill is a bill of exchange arising from a trade sale, which a bank accepts. Likewise, a Treasury bill is the government’s instrument, not a company’s. Read who issues it before reading anything else.

The Capital Market

The capital market deals in medium- and long-term funds — equity shares, debentures, bonds, preference shares and the like — and its participants include development banks, commercial banks, stock exchanges and a large number of individual investors. It has two parts. The primary market, or new issues market, deals in new securities issued for the first time; a company raises fresh capital directly from investors, so the primary market directly promotes capital formation. The secondary market, or stock market, deals in existing securities already issued; ownership passes from one investor to another, prices are set by demand and supply, and the company receives no new money — so it contributes to capital formation only indirectly, by giving investors the liquidity that makes them willing to buy in the primary market.

Methods of floatation in the primary market
Method	What identifies it
Offer through prospectus	The company invites the public to subscribe by issuing a prospectus
Offer for sale	Securities are sold to an intermediary, such as an issuing house or stockbroker, at an agreed price, who resells them to the public at a higher price
Private placement	Securities are allotted to a few institutional investors or selected individuals, saving the cost of a public issue
Rights issue	New shares are offered first to existing shareholders, in proportion to the shares they already hold
e-IPO	The issue is offered through the online system of a stock exchange, through registered brokers

Capital market against money market
Basis	Capital market	Money market
Participants	Financial institutions, banks, corporates, foreign investors and ordinary retail investors	Mainly the RBI, banks, financial institutions and finance companies; individuals rarely
Instruments	Equity shares, debentures, bonds, preference shares	Treasury bills, commercial paper, call money, certificates of deposit, commercial bills
Duration	Medium and long term	Up to one year
Liquidity and safety	Less liquid and riskier	Highly liquid and safer
Expected return	Higher	Lower

The Stock Exchange

A stock exchange is an institution that provides a platform for buying and selling existing securities — the organised form of the secondary market. The Bombay Stock Exchange, established in 1875, is the oldest in Asia. The book lists its functions: providing liquidity and marketability to existing securities; pricing of securities through demand and supply; safety of transactions, since dealings are regulated; contributing to economic growth by channelling savings into investment; spreading the equity cult by encouraging ordinary people to invest; and providing scope for speculation within the law, which itself helps liquidity.

Trading today is screen-based: orders are placed through a registered broker and matched electronically. Securities are held in electronic form after dematerialisation — converting physical certificates into electronic holdings. They are kept by a depository, an institution that holds securities in electronic form, much as a bank holds money; India has two, the NSDL and the CDSL. An investor reaches a depository through a depository participant, such as a bank or broker, with whom the investor opens a demat account.

SEBI — the Securities and Exchange Board of India

SEBI was set up by the Government of India on 12 April 1988 as an interim, non-statutory body, and was given statutory powers in 1992 through the SEBI Act, 1992. Its objectives: to regulate stock exchanges and the securities industry so that they function in an orderly way; to protect the rights and interests of investors, particularly individual investors, and to guide and educate them; to prevent trading malpractices and strike a balance between self-regulation by the industry and statutory regulation; and to regulate and develop a code of conduct and fair practices for intermediaries such as brokers and merchant bankers.

SEBI’s three kinds of function
Kind	Examples
Protective — to protect investors	Prohibiting fraudulent and unfair trade practices; controlling insider trading; checking price rigging; promoting fair practices; educating investors
Developmental — to develop the market	Training intermediaries; promoting the activities of stock exchanges through a flexible approach — for example, permitting internet trading through registered brokers
Regulatory — to regulate the business	Registering brokers, sub-brokers, merchant bankers and other intermediaries; regulating takeover bids; levying fees; conducting inspections, inquiries and audits of stock exchanges and intermediaries

🧠 Who benefits decides the kind

If the action shields the INVESTOR from being cheated — insider trading, price rigging, misleading statements — it is protective. If it REGISTERS or POLICES an intermediary — licensing brokers, auditing an exchange, regulating takeovers — it is regulatory. If it GROWS the market — training, new trading methods — it is developmental.

Key takeaways

Financial markets mobilise savings, discover prices, provide liquidity and reduce transaction costs. The money market handles funds of up to a year; the capital market, medium- and long-term funds.
Treasury bill: RBI for the government, zero coupon. Commercial paper: unsecured promissory note of a large company, used for bridge financing. Call money: repayable on demand, between banks. Certificate of deposit: banks, bearer form. Commercial bill: a bank-accepted trade bill.
The primary market issues new securities and directly creates capital; the secondary market trades existing ones. Floatation methods: prospectus, offer for sale, private placement, rights issue, e-IPO.
A stock exchange provides liquidity, prices securities, makes dealings safe and spreads the equity cult. Dematerialised securities are held by a depository (NSDL, CDSL) through a depository participant.
SEBI: set up in 1988, statutory since 1992. Protective functions guard investors (insider trading, price rigging); regulatory functions register and police intermediaries; developmental functions grow the market.

Practice questions (8)

Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.

A Treasury bill is issued by:
1. Large companies, to meet their short-term needs for funds
2. The RBI, on behalf of the Government of India
3. SEBI, to regulate the money market and its participants
4. Commercial banks, to individual depositors and companies
Show answer
Answer: B — The RBI, on behalf of the Government of India
A Treasury bill is the government’s short-term borrowing instrument, issued by the RBI on behalf of the Government of India, at a discount and redeemed at par. Large companies issue commercial paper, which is the usual confusion. Commercial banks issue certificates of deposit, and SEBI regulates the securities market rather than issuing instruments.
A listed company needs more capital and offers new shares to its existing shareholders — one new share for every four already held — before offering any to outsiders. This method of raising capital is:
1. Private placement
2. Offer for sale
3. Rights issue
4. e-IPO
Show answer
Answer: C — Rights issue
Offering new shares first to existing shareholders in proportion to their holdings is a rights issue. Private placement allots securities to a few selected institutions or individuals, not to all existing shareholders pro rata. An offer for sale goes through an intermediary who resells to the public, and an e-IPO is an issue to the public through an exchange’s online system.
Which of the following statements is true of the SECONDARY market?
1. It deals in already-issued securities, priced by demand and supply
2. The company itself sells newly created securities directly to investors
3. It directly provides fresh long-term capital to the companies whose shares trade
4. It deals only in instruments with a maturity of under one year
Show answer
Answer: A — It deals in already-issued securities, priced by demand and supply
The secondary market trades existing securities between investors, and their prices are determined by demand and supply. A company selling new securities and directly raising fresh capital both describe the primary market, which is the contrast the question tests. Instruments of under one year belong to the money market, not to either half of the capital market.
SEBI was set up in 1988 as a non-statutory body. In which year was it given statutory powers?
1. 1988
2. 1956
3. 1991
4. 1992
Show answer
Answer: D — 1992
SEBI became a statutory body in 1992 through the SEBI Act, 1992. 1988 is the year it was set up, but without statutory powers — that difference is what the question turns on. 1991 is the year of the new economic policy, which candidates sometimes attach to SEBI, and 1956 has nothing to do with SEBI’s creation.
SEBI penalises a company director who bought the company’s shares using price-sensitive information that had not yet been made public. Under which category of SEBI’s functions does controlling such conduct fall?
1. Developmental functions
2. Regulatory functions
3. Advisory functions
4. Protective functions
Show answer
Answer: D — Protective functions
Trading on unpublished price-sensitive information is insider trading, and controlling it is listed among SEBI’s protective functions, whose aim is to shield investors from unfair practices. Regulatory functions are the tempting choice because a penalty sounds regulatory, but that category covers registering and supervising intermediaries, regulating takeovers and levying fees. Developmental functions grow the market, and "advisory" is not one of the three categories.
A large company with an excellent credit rating plans a public share issue in three months and needs funds now to pay the expenses of the issue. It raises them through an unsecured short-term promissory note sold to investors. The instrument is:
1. Treasury bill
2. Commercial paper
3. Certificate of deposit
4. Call money
Show answer
Answer: B — Commercial paper
An unsecured short-term promissory note issued by a large, creditworthy company is commercial paper, and raising funds to meet floatation costs before a share issue is the bridge financing it is typically used for. A Treasury bill is issued by the RBI for the government, a certificate of deposit by banks, and call money is borrowing between banks repayable on demand.
An investor hands her old paper share certificates to her depository participant, and they are cancelled and credited to her account in electronic form. This process is called:
1. Dematerialisation
2. Underwriting
3. Listing
4. Private placement
Show answer
Answer: A — Dematerialisation
Converting physical certificates into electronic holdings is dematerialisation, and the depository participant is the investor’s link to the depository that holds them. Underwriting is a guarantee to buy unsold shares in an issue, listing is the admission of a security for trading on an exchange, and private placement is a way of issuing new securities to a few investors; none describes a change of form.
Which of the following is a feature of the MONEY market rather than the capital market?
1. Its main instruments are equity shares and debentures
2. The funds raised are mainly used to buy fixed assets
3. Its instruments mature within a year and are highly liquid
4. Small individual investors are its main participants
Show answer
Answer: C — Its instruments mature within a year and are highly liquid
Money market instruments mature within a year and are highly liquid and relatively safe. Equity shares and debentures are capital market instruments, and long-term funds for fixed assets are what the capital market supplies. Individual retail investors take a large part in the capital market, whereas the money market’s participants are mainly the RBI, banks and financial institutions — so the claim that small individual investors are its main participants has the two markets the wrong way round.