10.4 Money Market vs Capital Market: T-Bills, Commercial Paper, CD, Stocks, Bonds & SEBI

Financial markets form the structural backbone of economic capital allocation, enabling efficient transfer of funds from surplus savers to deficit borrowers. In India, financial markets are divided into short-term Money Markets (regulated by RBI) and long-term Capital Markets (regulated by SEBI). Banking exams rigorously test candidates on instrument characteristics, minimum denominations, issuer eligibility, settlement dynamics, and regulatory jurisdiction.

1. Money Market vs. Capital Market Overview

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2. Money Market Instruments Deep-Dive

Money markets facilitate non-collateralized and collateralized short-term borrowing.

1. Treasury Bills (T-Bills) and Cash Management Bills (CMBs)

• Issuer: Issued exclusively by the Government of India (RBI conducts auctions on behalf of GoI). State Governments DO NOT issue T-Bills (they issue State Development Loans - SDLs).
• Nature: Short-term zero-coupon debt instruments issued at a discount to face value and redeemed at par (₹100 face value).
• Standard Tenors: 91 Days, 182 Days, and 364 Days.
• Minimum Denomination: ₹25,000 and in multiples of ₹25,000 thereafter.
• Cash Management Bills (CMBs): Ultra-short-term discount instruments issued for tenors of less than 91 days to meet temporary cash flow mismatches of the Central Government.

2. Commercial Paper (CP)

• Introduced: 1990 to enable highly rated corporate borrowers to diversify short-term borrowing sources.
• Nature: Unsecured promissory note issued by corporates, Primary Dealers (PDs), and Non-Banking Financial Companies (NBFCs).
• Maturity Tenor: Minimum 7 days up to maximum 1 year (365 days).
• Minimum Denomination: ₹5 Lakh and in multiples of ₹5 Lakh thereafter.
• Eligibility: Corporate must hold a minimum credit rating of A3 (or equivalent) by a SEBI-registered rating agency.

3. Certificate of Deposit (CD)

• Introduced: 1989.
• Issuer: Scheduled Commercial Banks (excluding RRBs and Local Area Banks) and select All-India Financial Institutions (AIFIs like NABARD, EXIM Bank, SIDBI).
• Maturity Tenor:
  • Issued by Banks: Minimum 7 days to maximum 1 year.
  • Issued by AIFIs: Minimum 1 year to maximum 3 years.
• Minimum Denomination: ₹1 Lakh and in multiples of ₹1 Lakh thereafter.

4. Interbank Money Market (Call, Notice, Term Money)

Uncollateralized lending and borrowing between banking institutions:

• Call Money: Funds borrowed or lent for 1 day (Overnight).
• Notice Money: Funds borrowed or lent for periods between 2 days and 14 days.
• Term Money: Funds borrowed or lent for periods exceeding 14 days up to 1 year.

5. Tri-Party Repo (TREPS)

Managed by the Clearing Corporation of India Limited (CCIL), TREPS is a collateralized repo instrument where a neutral third party (CCIL) acts as an intermediary, managing collateral evaluation, clearing, and settlement for market participants borrowing funds using G-Secs.

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3. Capital Market Instruments & Operations

Capital markets deal with instruments created for medium and long-term financing.

Equity Market Segment

• Primary Market: Facilitates new capital raising via Initial Public Offerings (IPO), Follow-on Public Offerings (FPO), Rights Issues, Offer for Sale (OFS), and Qualified Institutional Placements (QIP).
• Secondary Market: Facilitates liquid trading of existing listed securities on stock exchanges (NSE, BSE). India operates on a T+1 rolling settlement cycle for all equity trades, settled via clearing corporations (NSCCL, ICCL).

Debt Market Segment

• Dated Government Securities (G-Secs): Long-term coupon-bearing bonds issued by GoI with maturities extending up to 40 years.
• Corporate Bonds and Debentures: Debt instruments issued by private and public sector companies. Can be Secured/Unsecured, Convertible/Non-Convertible Debentures (NCDs).
• Sovereign Gold Bonds (SGBs): Government securities denominated in grams of gold issued by RBI. Tenor of 8 years (with exit option after 5th year), paying 2.5% annual interest, with capital gains tax exemption upon maturity for individual investors.

Bond Valuation and Yield Dynamics

Bond Prices and Market Yields share an inverse relationship:

• When market interest rates rise, existing bond prices fall.
• When market interest rates fall, existing bond prices rise.

$\text{Current Yield} = \left( \frac{\text{Annual Coupon Payment}}{\text{Current Market Price}} \right) \times 100$

$\text{Yield to Maturity (YTM)} \approx \frac{C + \frac{F - P}{n}}{\frac{F + P}{2}}$

Where $C$ = Annual Coupon, $F$ = Face Value, $P$ = Bond Price, $n$ = Years to Maturity.

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4. Securities and Exchange Board of India (SEBI)

Established in 1988 as an administrative body, SEBI was given statutory authority under the SEBI Act, 1992 following the Harshad Mehta securities scam. Headquartered in Mumbai, SEBI is led by a Board consisting of a Chairman and whole-time members.

Core Regulatory Functions

1. Regulating Market Intermediaries: Licensing and supervising stock brokers, sub-brokers, merchant bankers, portfolio managers, underwriters, and credit rating agencies (CRISIL, ICRA, CARE).
2. Regulating Depositories: Supervising NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited) under the Depositories Act, 1996.
3. Regulating Collective Investment Schemes: Overseeing Mutual Funds under SEBI (Mutual Funds) Regulations, 1996, and Alternative Investment Funds (AIFs).
4. Prohibiting Market Abuse: Enforcing strict regulations against Insider Trading (SEBI PIT Regulations) and Fraudulent & Unfair Trade Practices (FUTP).

Summary Table: Money Market Instruments

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5. Step-by-Step Worked Example

Problem Scenario

An institutional investor purchases a 91-day Treasury Bill issued by the RBI at a discount price of ₹98.20 per unit (Face Value = ₹100).

Calculate:

1. Absolute Discount Amount
2. Annualized Discount Yield
3. Money Market (Investment) Yield

Step-by-Step Solution

1. Absolute Discount Amount: $\text{Discount} = \text{Face Value} - \text{Purchase Price} = \text{INR }100 - \text{INR }98.20 = \text{INR }1.80$

2. Annualized Discount Yield: $\text{Discount Yield} = \left( \frac{\text{Discount}}{\text{Face Value}} \right) \times \left( \frac{365}{\text{Tenor}} \right) \times 100$ $\text{Discount Yield} = \left( \frac{1.80}{100} \right) \times \left( \frac{365}{91} \right) \times 100 = 0.018 \times 4.01099 \times 100 = 7.22\%$

3. Money Market (Investment) Yield: $\text{Investment Yield} = \left( \frac{\text{Discount}}{\text{Purchase Price}} \right) \times \left( \frac{365}{\text{Tenor}} \right) \times 100$ $\text{Investment Yield} = \left( \frac{1.80}{98.20} \right) \times \left( \frac{365}{91} \right) \times 100 = 0.01833 \times 4.01099 \times 100 = 7.35\%$

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6. Exam Strategies & Common Traps

• Trap 1: State Governments and T-Bills. State Governments cannot issue Treasury Bills. They raise market borrowings exclusively by issuing State Development Loans (SDLs).
• Trap 2: CP vs. CD Minimum Denominations. Commercial Paper (CP) minimum denomination is ₹5 Lakh. Certificate of Deposit (CD) minimum denomination is ₹1 Lakh. Treasury Bill minimum denomination is ₹25,000.
• Trap 3: Call vs. Notice vs. Term Money. Call Money = 1 Day (overnight). Notice Money = 2 to 14 Days. Term Money = 15 Days to 1 Year.
• Trap 4: Bond Price and Yield Inverse Relationship. Remember that when bond prices fall, bond yields rise; when bond prices rise, yields fall.