INSTITUTE-UNIVERSITY SCHOOL OF

BUSINESS
DEPARTMENT-MBA
Banking and Financial Services Management
21BAA-635
Chapter 2.1

FACULTY NAME: Manpriya Singh

(Assistant Professor)

Topic- Secondary Market

DISCOVER . LEARN . EMPOWER
 Secondary
Market

Course Outcome
Blooms
Course
Description Taxonomy
Outcome Level
1 To demonstrate a comprehensive knowledge of the disciplines Understand/
of banking and financial services Remember

2 Employing the knowledge of financial services to choose Apply Will be covered in this
between lease, buy or hire-purchase lecture
3 To analyse the performance of the various financial Analyze
instruments

4 Evaluating the different investment vehicles on the basis of Evaluate

credit ratings

5 Design/Create
To structure and appraise the debt securitisation deals for the
2
business
3
Secondary market
Where securities that have been issued at some previous point of time are
traded through the intermediaries in an organized exchange.
These intermediaries may be stockbrokers or sub brokers.
Stock Exchange is a place where the buyer and seller meet to trade in shares in
an organised manner.
There are at present 25 recognized stock exchanges in India and are governed by
the Securities Contracts (Regulation) Act, 1956.
A Stock Exchange is the actual bazaar that conducts securities trading.
Companies that wish their stock to be bought or sold list their shares in the stock
exchange and members registered at the stock exchange either buy or sell these
stocks on behalf of their investor clientele.

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FUNCTIONS OF STOCK EXCHANGE
Members of Stock Exchange
 The Securities Contract Regulation Act, 1956 provides certain
regulations for the admission of an individual in the stock exchange.
 Following are the qualifications an individual must possess in order
to become a member of the stock exchange:
S/he must be 21 years of age.
S/he should be a citizen of India.
S/he should not be insolvent.
S/he should not be convicted for malpractices.
S/he should satisfy the capital adequacy norm.
Types of Orders
The investors place the buying and selling orders of shares with the members of the
stock exchange.
Orders are of the following types:
Limit order: It is an order in which the transactions are executed only at a
specified price.
Best rate order: It is an order in which the investor provides the freedom to the
broker to carry out the order at a favorable rate quoted on that particular date
for the purpose of buying.
Discretionary order: It is an order in which various ranges of prices are provided
by the investor for the purchase and sale of securities. A broker uses his
discretion to buy within a specified limit.
Stop loss order: It is an order to buy or sell orders when a particular price, either
below or above the actual price is reached, due to unfavorable price movements
in the market.
Buying and Selling of Shares
An investor, in order to buy or sell shares, must first locate a
registered broker.
The investor after locating the broker must place an order specifying
the number of shares he intends to buy or sell.
The broker executes the order in his computer terminal and matches
the most appropriate order.
The broker, after finding an appropriate order, delivers a contract
note to the investor.
A contract note specifies the name of the company, number of
shares bought/sold, price, brokerage and date of delivery of shares.
Share Groups
The shares of a company are divided into the following categories in
Bombay Stock Exchange (BSE)
 Group A shares: Also referred to as specified shares selected on the basis
of:
 Track record
 Market capitalization
 Liquidity
 B1 and B2 groups represent equity segment
 F group – Debt segment
 C group – Odd lot segment
 Rolling Settlement System
In rolling settlement, trades outstanding at the end of the day have to be
settled at the end of T + X time framework.

 T + 5 settlement was introduced on 2nd July 2001

 T + 3 settlement was introduced on 1st April 2002

 T + 2 settlement was introduced on 1st April 2003

 Online Trading
The Internet is used as a medium for the trading of shares online.
In online trading, the orders of shares are placed with the stock
exchange through a website.
The Securities and Exchange Board of India (SEBI) has developed an
Order Routing System (ORS)
 In ORS, the requirements for the shares are entered by the investor.
On execution of the order, the investor receives the confirmation of the
order.
Bombay Stock Exchange
• BSE Limited formerly known as Bombay Stock Exchange (BSE) , is the oldest stock
exchange in Asia.
• The BSE has the largest number of listed companies in the world.
• The BSE is the world's 10th largest stock exchange with an overall market
capitalization of more than $2.2 trillion on as of April 2018.Market cap: ₹151,970.87
billion (US$2.2 trillion) ...
• Founded: 9 July 1875, in Mumbai
• No. of listings: 5,439
• It is the world’s 5th most active in terms of number of transactions handled through
its electronic trading system. And it is in the top ten of global exchanges in terms of
the market capitalization of its listed companies (as of December 31, 2009).

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National Stock Exchange of India Ltd.
• The National Stock Exchange of India Limited (NSE) was promoted by
IDBI, ICICI, IFCI, GIC, LIC, State Bank of India, SBI Capital Markets
Limited, SHCIL and IL & FS as a Joint Stock Company under the
Companies Act, 1956, on November 27, 1992.
• The Government of India has granted recognition with effect from
April 26, 1993, initially for a period of five years. The GOI has
appointed IDBI as a lead promoter.
• The main objective of NSE is to ensure comprehensive nationwide
securities trading facilities to investors through automated screen-
based trading and automatic post trade clearing and settlement
facilities.

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 Listing of Securities
• Listing means admission of the securities to dealings on a recognised stock
exchange.
• The securities may be of any public limited company, central or state government,
quasi governmental and other financial institutions/corporations, municipalities,
etc.
• The exchange has a separate Listing Department to grant approval for listing of
securities of companies in accordance with the provisions of the Securities
Contracts (Regulation) Act, 1956, Securities Contracts (Regulation) Rules, 1957,
Companies Act, 1956, Guidelines issued by SEBI and Rules, Bye-laws and
Regulations of the Exchange.

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Minimum requirements for the listing of
securities on Stock Exchange
1. Minimum Listing Requirements for new companies
2. Minimum Listing Requirements for companies listed on other stock exchanges
3. Minimum Requirements for companies delisted by this Exchange seeking
relisting of this Exchange
4. Permission to use the name of the Exchange in an Issuer Company's prospectus
5. Submission of Letter of Application
6. Allotment of Securities
7. Trading Permission
8. Requirement of 1% Security
9. Payment of Listing Fees
10. Compliance with Listing Agreement
11. Cash Management Services (CMS) – Collection of Listing Fees 17
REQUIREMENTS FOR LISTING
• Memorandum and Articles of Association
• Copies of all prospectus or statements in lieu of prospectus
• Copies of Balance sheet, audited accounts, agreements with
promoter, underwriters, brokers
• Letter of consent from Controller of capital issues, now replaced with
SEBI
• Details of shares and debentures issued and shares forfeited
• Details of issue of bonuses and dividends declared
• History of the company in brief.
• Agreement with managing directors.
• An undertaking regarding compliance with the provision of the
Companies Act, 1956 and Securities Contracts (Regulation) Act, 1956 as
well as rules made therein
• A list of the highest ten holders of each class and kind of securities of the
company.

The Stock exchange are empowered to withdraw or suspend the

admission granted for trading following any breach of condition.
LISTING PROCEDURE AT NSE
Initial Discussions
Authorised persons of the concerned company hold discussion with
the NSE officials regarding requirements to be filled, qualification of
the issuer for listing.

Approval of Memorandum and Articles of Association Rule 19(2) (a) of

the Securities (Regulation) Rules, 1957 require that the Articles of
Association of the issuer wanting to list its securities must contain the
necessary provision.
 Approval of Draft Prospectus
While drafting the prospectus, the issuer must keep in mind the
following:
• the provision of the Companies Act
• The provisions of the Securities Contract (Regulation) Act
• The SEBI Act and subordinate legislations thereto
• Various notifications, circulars, guidelines etc, governing preparation and
issue of prospectus prevailing at the relevant time.
The issuer files the draft prospectus along with the SEBI acknowledgement
card or letter indicating observations on draft prospectus or letter of
offer by SEBI.
 Submission of Application
All issuers whose securities are going to be listed for the first time and those
who wanting to list further issues have to submit application to the NSE along
with the requisite fees.
Listing Fees: The listing fees depends on the paid up share capital of the
company:
PARTICULAR AMOUNT( Rs)
Initial Listing Fees 7500
Annual Listing Fees for Companies With Paid up share and/ or debentures 4200
capital of Rs. 1 crore
Between 1crore- 5 crore 8400
5 crore – 10 crore 14000
10 crore – 20 crore 28000
20 crore – 50 crore 42000
Above 50 crore 70000 + 1400 for every
increase of Rs. 5crore
Listing Conditions and Requirements

The issuers has to fulfill the listing conditions and requirements contained in the
listing agreement form.
After that following information for further processing to manager of listing
department of NSE.
• A brief note on the promoters and management
• Company profile
• Copies of the Annual Report for last 3 years
• Copies of the Draft offer document
• Memorandum and Articles of Association
DEPOSITORY SYSTEM
• One of the biggest problem faced by Indian capital market has been
the manual and paper based settlement system.
• It poses many problems like -- delay in settlements, high level of
failed trade, high cost of transactions, bad deliveries etc.
• Thus, old system of transfer was replaced with the new and modern
system of depositories.
• GOI enacted the DEPOSITORY ACT 1996 for orderly growth and
development.
• Transfer of securities take place through book entry on the ledger or the
depository without the physical movement of securities.
• It eliminates paper work.
• Facilitates automatic and transparent trading in securities.
• There are essentially 4 players in the depository system:
(i) The Depository.
(ii) The Participant.
(iii) The Beneficial owner.
(iv) The Issuer.
The Depository—

• A depository is a provider(firm) for holding and transacting securities in

electronic form(by means of book entry).
• A depository functions are somewhat similar to a commercial bank.
• At present there are two depositories in India.
(I) National Securities Depositories System(NSDL).
(II) Central Depositories Services Limited (CDSL).
The Participant –
• A Depository Participant (DP) is an agent of the depository and
provides depository services to investors.
• To avail the services of the depository, the investors has to open an
account with a DP.
• Both the depository and participant has to be registered with SEBI.
The Beneficial Owner—
• Beneficial Owner is a person in whose name a demat account is opened
with CDSL for the purpose of holding securities in the electronic form and
• whose name is recorded with CDSL.
• He is the real owner of the securities.
• He has all the rights and liabilities associated with the securities.
The Issuer:
• The Issuer is the company which issues the security.
• It maintains a register for recording the names of the registered owners of
securities.
• The issuer sends a list of shareholders who opt for the depository system to
the depositories.
FACILITIES OFFERED BY DEPOSITORY
SYSTEM
• Dematerialisation.
• Rematerialisation.
• To maintain record of holdings in the electronic form.
• Settlement of trades by delivering / receiving underlying
securities from / in BO accounts.
• Pledging of dematerialised securities & facilitating loans against shares.
• Nomination facility: (i) Only individual can be appointed as nominee. (ii)
Minor can also be appointed as nominee (iii) It can be changed as and
when required.
• Freezing of the demat account: No transaction will be executed from the
account.
DEMATERIALISATION OF SHARES
• Securities held in physical form are converted into electronic form
and credited to demat account.
• It offers a number of benefits to the investor.
• It is a safe and convenient way to hold securities compared to holding
securities in physical form.
• No stamp duty is levied on transfer of securities held in demat form.
• Instantaneous transfer of securities enhances liquidity.
• Any number of securities can be transferred/ delivered with one delivery
order.
• SEBI has made it compulsory for trades in all listed securities to be
settled in demat mode.
• W.e.f. 2nd January 2002.
• The procedure of opening a demat account with DP is similar to opening
an account with a bank.
ADVANTAGES OF DEPOSITORY
SYSTEM
• Reduction in paper work
• Elimination of risk.
• Elimination of bad delivers.
• Increased liquidity of securities.
• Low transaction cost.
• No stamp duty on transfer.
• Emergence of healthy and efficient capital market.
 STEPS INVOLVED IN
DEMATERIALISATION
• Investor has to first choose a DP based on his convenience and the DP’s
charges.
• Investor has to be submit Demat Request Form(DRF)and share
certificate to DP who in turn will check whether securities are available
for demat.
• The investor should defaces the certificate by stamping ‘Surrendered
for Dematerialisation”. DP punches two holes on the name of the
company and draws two parallel lines across the face of the certificate.
This ensures that your shares are not lost in transit or misused till credit
is received by you in your demat account. The DP upon receipt of the
shares and the DRF, will issue the client an acknowledgement and will
send an electronic request to the Company.
• DP enters the Demat request in his system.
• DP dispatches the physical certificates along with the DRF to the Agent or
the issuer company.
• R&T Agent, on receiving the physical documents and the electronic
request, verify and check them. Once the R&T Agent is satisfied,
dematerialization of the concerned securities is electronically confirmed to
the depository.
• Depository credits the dematerialised securities to the beneficiary account
of the investor and intimates the DP electronically.
• The DP issues a statement of transaction to the client.
37
ELECTRONIC SETTLEMENT OF
TRADE
PROCEDURE FOR SELLING DEMATERIALISED SECURITIES:
• Investor sells securities in any of the stock exchanges linked to
depository through a broker.
• Investor instructs his DP to debit his demat account with the number
of securities sold and credit the brokers clearing account.
• Before the pay in day, broker of the investor transfers the securities
to clearing corporation.
• The broker receive payment from the stock exchange.
• The investor receives payment from the broker for the sale of
securities.
PROCEDURE FOR BUYING DEMATERIALISED SECURITIES:
• Investor instructs DP to receive credits into his account in the prescribed
form.
• Broker receive payment from investor and arranges payment to clearing
corporation.
• Broker receive credit of securities in clearing account on the pay out day.
• Broker gives instructions to DP to debit clearing account and credit client’s
account.
• Investor receive shares into his account by way of book entry.
REMATERIALISATION OF SHARES
• Securities can be changed from demat form to physical form.
• For this one has to submit a Rematerialisation Request Form (RRF)
through the concerned DP in the same manner as
Dematerialisation.
• The Depository Participant will forward the request to the
Depository after verifying that the client has the necessary
securities in balance.
• The Depository in turn will intimate the Registrar and Transfer Agents of
the Company who will print and dispatch the share certificates for the
number of shares so rematerialised and the beneficiary account will be
debited by the Depository and credited with the Company.
• It is not necessary that one gets the shares of the same folio number. The
Registrars and Transfer Agents will print new certificates with a new
range of certificate numbers. The investor will be allotted a new folio
number;
 NATIONAL SECURITIES
DEPOSITORY LIMITED (NSDL)
• National Securities Depository Limited (NSDL) is a financial organization created to hold
securities such as bonds, shares etc. in the form of physical or non-physical certificates i.e. in
dematerialized format.

• These securities are held in depository accounts such as funds held in bank accounts. It
facilitates prompt transfer of securities as ownership is transferred simply through book entries.

• This is usually done electronically thus eliminating the extra time that was taken in following the
traditional practice where physical certificates had to be exchanged after a trade was
completed.

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• The capital market of India, that is more than a century old, has
always been very active. However, it had certain shortcomings like
bad delivery, delayed execution of transfer, etc. due to paper-based
settlements.
• To curb these issues, The Depositories Act, 1996, was passed and it
came into force on September 20, 1995.
• This act provided for creation of Security Depositories in India for
managing securities.

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Role of SEBI in regulating/development of
stock market
SEBI was established as a non-statutory board in 1988 and in January
1992 it was made a Statutory body. The main objectives of SEBI are
1)    To protect the interest of investors.
2)    To bring professionalism in the working of intermediaries in capital
markets (brokers, mutual funds, stock exchanges, demat depositories
etc.).
3)    To create a good financial climate, so that companies can raise
long term funds through issue of securities (shares and debentures).

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Reforms In Capital Market :-

SEBI has introduced many reforms in Capital Market. Some of them are

:-
a)  Demat of shares
b)  PAN made compulsory.
c)  Buy back of shares allowed.
d)  Corporate Governance introduced
e)  Transparency rules in Brokers Transactions.

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 Secondary Market
It is a market for the secondary sale
of securities. In other words, the
market where existing securities are
traded is referred to as the
secondary market or stock market.
Types of Securities Traded

 Industrial Securities
 Government Securities
 Financial Intermediaries Securities
 Stock Market in India

 With small beginnings in the early 19th century, India’s stock market has
risen to great heights.
 By 1990, India had 19 stock exchanges. By 1999, the number of stock
exchanges has risen to 23.
 There were around 9877 listed companies.
 Role and Functions
The major roles played by a stock exchange in a country are:
The stock exchange provides a market place for purchase and sale
of securities.
The stock exchange provides the linkage between the savings in the
household sector and the investment in corporate economy.
The stock exchanges provide a market quotation of the prices of
shares and bonds.
It serves a barometer, not only of the state of health of individual
companies, but also of a nation’s economy as a whole.
The stock exchanges in India serve the joint sector units as also! to
some extent public sector enterprises.
Another important function that stock exchanges in India discharge
is of providing a market for gilt-edged securities. Central Government,
State Government, and Municipalities etc issue gilt- edged securities.
 Individual Membership Qualifications

(a) Minimum age of 21.

(b) Citizenship of India: The Governing Board may, in suitable case, relax this
condition.
(c) Not been adjudged bankrupt or insolvent.
(d) Not compounded with his creditors.
(e) Not been convicted of an offence involving fraud or dishonesty.
(f) Not engaged as principal or employee in any business other than that
of securities.
(g) Not been, at any time, expelled or declared a defaulter by any other Stock
Exchange.
(h) Either matriculate or has the 10 plus 2 years, qualification. Generally,
however, preference is given to professionally qualified persons.
 Weaknesses of Stock Exchanges in India
1 Unprecedented booms and crashes lead to rampant speculative activities. This does
not reflect a very healthy state of affairs.
2. Insider trading is rampant on Indian stock exchanges. Insider trading means
operating on information, which is price sensitive and not available to the public.
Potential source of information is people working in companies.
3.Demand and supply forces in the stock market are not allowed to act freely. It is
highly dominated by large financial firms, big brokers and operators. Therefore, it is
oligopolistic in structure. In an Oligopoly market, only few sellers prevail.
4.There are limited forward trading activities in the stock exchanges.
5.The major problem areas include settlement periods, margin system and carry
forward (badla) system.
6.The recent development of the primary market has created serious problems of
interfacing with the secondary market. The secondary market should be re-oriented as
to discharge the new responsibilities cast on it by the recent developments.
 Weaknesses of Stock Exchanges in India
7. Indian stock market has still fragmented regulation even with the arrival of SEBI. There
is multiplicity of administration.
8. The Primary markets are not ignited enough to cope with changes taking place in the
financial system.
9. Poor disclosure in prospectus is still rampant.
10. Even with the world of dematerialization, investors face problems of delays (refund,
transfer, etc.).
11. FIIs are now permitted to invest in unlisted securities and corporate and Government
debt. Still there is some wall separating the foreign institutional investors to invest in
Indian securities.
12. Stock Exchanges are run as brokers’ clubs. Management is still dominated by brokers.
13. Poor disclosures by mutual funds are the main problem in the mutual fund industries.
Net asset value (NAV) is not revealing the real picture about the performance of the fund.
 Reforms in Indian Securities Market
1. Capital Issues (Control) Act of 1947 was repealed and the office of controller
of Capital Issues abolished. Control over price and premiums of shares were
removed. Companies are now free to raise funds from securities markets
after filing prospectus with the Securities and Exchange Board of India (SEBI).
2. The power to regulate stock exchanges has been delegated to SEBI by the
Government.
3. SEBI introduces regulations for primary and other secondary market
intermediaries, brings them within the regulatory framework.
4. Reforms by SEBI in the primary market include improved disclosure
standards, introduction of prudential norms, and simplification of issue
procedures. Companies are required disclosing all material facts and specific
risk factors associated I with their projects while making public issues.
5. Listing agreements of stock exchanges have been amended to require listed
companies to furnish annual statement showing variations between financial
projections and projected utilization of funds in the offer document and
actual figures. This is to enable shareholders to make comparisons between
performance and promises.
 Reforms in Indian Securities Market
6. SEBI introduces a code of advertisement for public issues to ensure fair and
truthful disclosures.
7. Disclosure norms further have strengthened by introducing cash flow statements.
8. New issue procedures have been introduced. Book building for institutional
investors is introduced to bring down the costs of issue.
9. SEBI introduces regulations governing substantial acquisition of shares and takeovers
and lays down conditions under which disclosures and mandatory public offers are to be
made to the shareholders. Regulations further revised and strengthened in 1996.
10.SEBI reconstitutes the governing boards of the stock exchanges and introduces
capital adequacy norms for broker accounts. Hi. Private mutual funds are permitted
and several such funds have been already set up. All mutual funds are allowed to
apply for firm allotment in public issues. This is to reduce issue costs.
11.Regulations for mutual funds have been revised in 1996, giving more flexibility to
fund managers while increasing transparent-disclosure, and accountability.
 Reforms in Indian Securities Market

12. Over-the-Counter Exchange of India has been formed.

13. National Stock Exchange (NSE) has been established as a stock
exchange with nationwide electronic trading.
14. Bombay Stock Exchange (BSE) introduces screen-based trading. 15
stock exchanges now have screened-based trading. BSE has been granted
permission to expand its trading network to other centers.
15.Capital adequacy requirement for brokers has been enforced.
16.System of mark-to-market margins has been introduced in the stock
exchanges.
17.Stock lending scheme has been introduced.
18.Transparency is brought about in short selling.
19.NSE has set up the National Securities Clearing Corporation, Ltd.
20.BSE is in the process of implementing a trade guarantee scheme
 Reforms in Indian Securities Market
21. SEBI strengthens surveillance mechanisms and directs all stock exchanges to
have separate surveillance departments.
22. SEBI strengthens enforcement of its regulations.
23. SEBI begins the process of prosecuting companies for misstatements and
ensures refunds of application in several issues on account of misstatements
in the prospectus.
24. Indian companies are permitted to access international capital markets
through Euro issues.
25. Foreign direct investment has been allowed in stock broking, asset
management companies, merchant banking, and other non-bank finance
companies.
26. Foreign institutional investors (FIIs) are allowed access to Indian capital
markets on registration with SEBI.
 Regulation of Stock Exchanges
All stock exchanges were subject to self-regulation from their own
management bodies i.e., Board of Governors till 1956. However, after that it is
changed to three-tier regulation.

1.Constitution of India lists the subject of ‘Stock Exchanges and Future Markets’
under the exclusive authority of Central Government. Central Government
through Ministry of Finance regulates the stock exchanges primarily through
Securities Contract (Regulation) Act, 1956 (SCRA).
2. The Securities and Exchange Board of India (SEBI) also regulates the
stock exchanges in order to protect the interest of investors and to promote
the development of security markets in India.
3.In addition, all stock exchanges have their own separate rules, byelaws and
regulations, which are exercised through their governing Councils.
 Role of SEBI in Regulation
Few rules and regulations of SEBI are given below:
1.SEBI (Portfolio Managers) Rules and Regulations, 1992.
2.SEBI (Stockbrokers and Sub-brokers) Rules and Regulations, 1992.
3.SEBI (Insider Trading) Regulation, 1992
4.SEBI (Merchant Bankers) Rules and Regulations, 1992.
5.SEBI (Mutual Fund) Regulations, 1993.
6.SEBI (Underwriters) Rules and Regulations, 1993.
7.SEBI (Registrars to Issue and Share Transfer Agents) Rules and Regulations, 1993.
8.SEBI (Debentures Trustee) Rules and Regulations, 1993.
9.SEBI (Bankers to an Issue) Rules and regulations, 1993.
Self-Regulatory Body

 Self-regulatory organizations (SROs) have been adopted in

many countries to regulate various participants in the
securities market. The SRO’s bylaws and codes of conduct
bind members.
 Through the SEBI Act of 1992, SROs were introduced in the
Indian capital market, but they are not yet operational.
 References
• M.Y. Khan (2006), Financial Services, Tata McGraw-Hill Publishing Co. Ltd., New Delhi.
• L. M. Bhole (2007), Financial Institutions and Markets, Tata McGraw-Hill Publishing Co. Ltd., New
Delhi.
• V. K. Bhalla: Management of Financial Services, Anmol Publications.
• V. A. Avdhani: Marketing of Financial Services, Himalaya Publishing House.
• Bansal, L.K., Merchant Banking and Financial Services, Tata McGraw Hill.
• http://www.economicsdiscussion.net/india/money-market/money-market-in-india-features- struct
ure-constituents-participants-and-defects/31348
• International Journal Of Finance

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Assessment Pattern

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