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TITLE PAGE NO.
1 INTRODUCTION 02
2 FEATURES OF FINANCIAL SYSTEM 03
3 ROLE OF FINANCIAL SYSTEM 04
4 BACK DROP OF FINANCIAL SYSTEM 06
5 INDIAN FINANCIAL SYSTEM FROM 1950 – 1980 09
6 INDIAN FINANCIAL SYSTEM POST 1990’S 11
7 FINANCIAL MARKET 13
8 SECURITIES & EXCHANGE BOARD OF INDIA 25
9 BOMBAY STOCK EXCHANGE 28
10 NATIONAL STOCK EXCHANGE 31
11 CORPORATE STRUCTURE 32
12 DERIVATIVESDERIVATIVES 45
13 FINANCIAL INSTITUTION 52
14 BANK 56
15 CONCLUSION 69
16 BIBLIOGRAPHY 70
The financial system or the financial sector of any country consists of:-
(a) specialized & non specialized financial institution
(b) organized &unorganized financial markets and
(c) Financial instruments & services which facilitate transfer of funds.
Procedure & practices adopted in the markets, and financial inter relationships are also
the parts of the system. These parts are not always mutually exclusive. For example, the
financial institution operate in financial market and are, therefore a part of such market.
The word system in the term financial system implies a set of complex and closely
connected or inters mixed institution, agents practices, markets, transactions, claims, &
liabilities in the economy. The financial system is concerned about money, credit, &
finance – the terms intimately related yet some what different from each other.
Money refers to the current medium of exchange or means of payment. Credit or Loan is
a sum of money to be returned normally with Interest it refers to a debt of economic unit.
Finance is a monetary resources comprising debt & ownership fund of the state, company
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FEATURES OF FINANCIAL SYSTEMFEATURES OF FINANCIAL SYSTEM
1. It provides an Ideal linkage between depositors savers and Investors
Therefore it encourages savings and investment.
2. Financial system facilitates expansion of financial markets over a
period of time.
3. Financial system should promote deficient allocation of financial
resources of socially desirable and economically productive purpose.
4. Financial system influence both quality and the pace of economic
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ROLE OF FINANCIAL SYSTEMROLE OF FINANCIAL SYSTEM
The role of the financial system is to promote savings & investments in the
economy. It has a vital role to play in the productive process and in the mobilization
of savings and their distribution among the various productive activities. Savings
are the excess of current expenditure over income. The domestic savings has been
categorized into three sectors, household, government & private sectors.
The savings from household sector dominates the domestic savings component. The
savings will be in the form of currency, bank deposits, non bank deposits, life
insurance funds, provident funds, pension funds, shares, debentures, bonds, units &
trade debts. All of these currency & deposits are voluntary transactions &
precautionary measures. The savings in the household sector are mobilized directly
in the form of units, premium, provident fund, and pension fund. These are the
contractual forms of savings. Financial actively deals with the production,
distribution & consumption of goods and services. The financial system will
provide inputs to productive activity. Financial sector provides inputs in the form of
cash credit & assets in financial for production activities.
The function of a financial system is to establish a bridge between the savers and
investors. It helps in mobilization of savings to materialize investment ideas into
realities. It helps to increase the output towards the existing production frontier. The
growth of the banking habit helps to activate saving and undertake fresh saving.
The financial system encourages investment activity by reducing the cost of finance
risk. It helps to make investment decisions regarding projects by sponsoring,
encouraging, export project appraisal, feasibility studies, monitoring & execution of
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An overview of Financial System and Financial Markets in India
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MINISTRY OF FINANCE
RBI SEBI IRDA
Mutual Fund Venture Capital
NBFC Money Market
BACK DROP OF INDIAN FINANCIAL SYSTEM
At the time of independence, India had a reasonably diversified financial system in terms
of intermediaries but a somewhat narrow focus on terms of intermediation, i.e., a lack of
a long term capital market and the relative neglect of agriculture in particular and rural
areas in general.
As India embarked on a process of industrialization and growth, RBI set up Development
Financial Institutions (DFI’s) and State Finance Corporations (SFC’s) as providers of
long term capital. Agriculture’s need for credit was met by cooperative banks. UTI was
set up to canalize resources from retail investors to the capital market.
In essence, the understanding that requirement of financial needs for accelerated growth
and development was best met by specialized financial intermediaries who performed
specialized functions influenced financial market architecture.
To ensure that these specializations were adhered to, financial intermediaries developed
and promoted by the Reserve Bank of India had significant restrictions on both the asset
and liabilities side of their balance sheets.
In the 1950s and 1960s, despite an expansion of the commercial banking system in terms
of both reach and mobilization of resources, agriculture still remained under funded and
rural areas under banked. Whereas industry’s share in credit disbursed almost doubled
between 1951 and 1968, from 34 to 67.5%, agriculture got barely 2% of available. Credit
to exports and small scale industries were relatively neglected as well.
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Industry’s share in credit doubled,
agriculture, rural areas, SSI, exports still
Nationalisation of Banks to
ensure credit allocation as per
NABARD, EXIM, SIDBI,
Credit to Industry / Govt
Highly segmented financial
market, highly restricted
Neglected: long term, agricultural, and rural area credit
Need for specialized FIs felt.
DFIs, SFCs, UTI, Co-op Banks setup.
In view of the above, it was decided to nationalize the banking sector so that credit
allocation could take place in accordance in plan priorities. Nationalization took place in
two phases, with a first round in 1969 followed by another in 1980.
By the mid-seventies it was felt that commercialized banks did not have sufficient
expertise in rural banking and hence in 1975 Regional Rural Banks (RRBs) were set up
to help bring rural India into the ambit of the financial network. This effort was capped
in 1980 with the formation of National Bank for Agriculture and Rural Development
(NABARD), which was to function as an apex bank for all cooperative banks in the
country, helping control and guide their activities. NABARD was also given the remit of
regulating rural credit cooperatives.
Following with the logic of specialization, the 1980s saw other DFIs with specific remits
being set up – e.g. The EXIM Bank for export financing, the Small Industries
Development Bank of India (SIDBI) for small scale industries and the National Housing
Bank (NHB) for housing finance.
Long term finance for the private sector came from DFIs and institutional investors or
through the capital market. However both price and quantity of capital issues was
regulated by the Controller of Capital Issues.
Therefore the deepening of financial intermediation had occurred with an increase in the
draft by both the commercial sector and the government on financial resources mobilized.
At the end of the 1980s then the Indian financial system was characterized by segmented
financial markets with significant restrictions on both the asset and liability side of the
balance sheet of financial intermediaries as well as the price at which financial products
could be offered.
In the Indian context segmentation meant that competition was muted. In a scenario
where price was determined from outside the system and targets were set in terms of
quantities, there was no pressure for non-price competition as well. As a result the
financial system had relatively high transaction costs and political economy factors meant
that asset quality was not a prime concern. Therefore even though the Indian financial
system at the end of 1980s had achieved substantial expansion in terms of access, this had
come at the cost of asset quality. In addition, was the fact that the draft of the
government on resources of the financial system had increased significantly. This in
itself need necessarily was not a problem but over this period, i.e., the 1980s, the
composition of government expenditure was changing as well, with shift towards current
rather than capital expenditure. In addition, in the absence of a reasonably liquid market
for government securities, an increase in net bank lending to the government meant that
the asset side of banks’ balance sheets tended to become increasingly illiquid.
The impetus for change came from one expected and one unexpected quarter - first, the
importance of prudential capital adequacy ratios was underlined by the announcement of
BaselI norms (see Error: Reference source not found Error: Reference source not found)
That banks were expected to adhere to; second the macroeconomic crisis of 1990-91.
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The reform process that followed accelerated the process of liberalization already begun
in the 1980s and began a series of measured and deliberate steps to integrate India into
the global economy, including the global financial network.
Briefly however, given the problems facing the financial system and keeping in mind the
institutional changes necessary to help India financially integrate into the global
economy, financial reform focused on the following: improving the asset quality on bank
balance sheets in particular and operational efficiency in general; increasing competition
by removing regulatory barriers to entry; increasing product competition by removing
restrictions on asset and liability sides of financial intermediaries; allowing financial
intermediaries freedom to set their prices; putting in place a market for government
securities; and improving the functioning of the call money market.
The government security market was particularly important not only because it was
decided the RBI would no longer monetize the fiscal deficit, which would now be
financed by directly borrowing from the market, but also monetary policy would be
conducted through open market operations and a large liquid bond market would help the
RBI sterilise, if necessary, foreign exchange movements.
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INDIAN FINANCIAL SYSTEM FROM 1950 TO
Indian Financial System During this period evolved in response to the objective of
planned economic development. With the adoption of mixed economy as a pattern of
industrial development, a complimentary role was conceived for public and private
sector. There was a need to align financial system with government economic policies. At
that time there was government control over distribution of credit and finance. The main
elements of financial organization in planned economic development are as follows:-
1. Public ownership of financial institutions –Public ownership of financial institutions –
The nationalization of RBI was in 1948, SBI was set up in 1956, LIC came in to
existence in 1956 by merging 245 life insurance companies in 1969, 14 major private
banks were brought under the direct control of Government of India. In 1972, GIC was
set up and in 1980; six more commercial banks were brought under public ownership.
Some institutions were also set up during this period like development banks, term
lending institutions, UTI was set up in public sector in 1964, provident fund, pension
fund was set up. In this way public sector occupied commanding position in Indian
2.2. Fortification Of Institutional structure –Fortification Of Institutional structure –
Financial institutions should stimulate / encourage capital formation in the economy. The
important feature of well developed financial system is strengthening of institutional
structures. Development banks was set up with this objective like industrial finance
corporation of India (IFCI) was set up in 1948, state financial corporation (SFCs) were
set up in 1951, Industrial credit and Investment corporation of India Ltd (ICICI)was set
up in 1955. It was pioneer in many respects like underwriting of issue of capital,
channelisation of foreign currency loans from World Bank to private industry. In 1964,
Industrial Development of India (IDBI).
3.3. Protection of Investors –Protection of Investors –
Lot many acts were passed during this period for protection of investors in financial
markets. The various acts Companies Act, 1956 ; Capital Issues Control Act, 1947 ;
Securities Contract Regulation Act, 1956 ; Monopolies and Restrictive Trade Practices
Act, 1970 ; Foreign Exchange Regulation Act, 1973 ; Securities & Exchange Board of
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4.4. Participation in Corporate Management –Participation in Corporate Management –
As participation were made by large companies and financial instruments it leads to
accumulation of voting power in hands of institutional investors in several big companies
financial instruments particularly LIC and UTI were able to put considerable pressure on
management by virtual of their voting power. The Indian Financial System between 1951
and mid80’s was broad based number of institutions came up. The system was
characterized by diversifying organizations which used to perform number of functions.
The Financial structure with considerable strength and capability of supplying industrial
capital to various enterprises was gradually built up the whole financial system came
under the ownership and control of public authorities in this manner public sector occupy
a commanding position in the industrial enterprises. Such control was viewed as integral
part of the strategy of planned economy development.
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INDIAN FINANCIAL SYSTEM POST 1990’S
The organizations of Indian Financial system witnessed transformation after launching of
new economic policy 1991. The development process shifted from controlled economy to
free market for these changes were made in the economic policy. The role of government
in business was reduced the measure trust of the government should be on development
of infrastructure, public welfare and equity. The capital market an important role in
allocation of resources. The major development during this phase are:-
1. Privatisation of Financial Institutions1. Privatisation of Financial Institutions ––
At this time many institutions were converted in to public company and number of
private players were allowed to enter in to various sectors:
a) Industrial Finance Corporation on India (IFCI): The pioneer development finance
institution was converted in to a public company.
b) Industrial Development Bank of India & Industrial Finance Corporation of India
(IDBI & IFCI): IDBI & IFCI ltd offers their equity capital to private investors.
c) Private Mutual Funds have been set up under the guidelines prescribed by SEBI.
d) Number of private banks and foreign banks came up under the RBI guidelines.
Private institution companies emerged and work under the guidelines of IRDA,
e) In this manner government monopoly over financial institutions has been
dismantled in phased manner. IT was done by converting public financial
institutions in joint stock companies and permitting to sell equity capital to the
2. Reorganization of Institutional Structure –2. Reorganization of Institutional Structure –
The importance of development financial institutions decline with shift to capital market
for raising finance commercial banks were give more funds to investment in capital
market for this. SLR and CRR were produced; SLR earlier @ 38.5% was reduced to 25%
and CRR which used to be 25% is at present 5%. Permission was also given to banks to
directly undertake leasing, hire-purchase and factoring business. There was trust on
development of primary market, secondary market and money market.
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3. Investors Protection –3. Investors Protection –
SEBI is given power to regulate financial markets and the various intermediaries in the
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Call Money Market
Certificate of Deposit
Treasury Bill Market
Money Market Mutual Fund
International Capital Market
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MONEY MARKET AND GOVT. SECURITIES MARKET
Money market deal with short term monetary assets and claims, which are generally from
one day to one year duration.
Govt. securities on the other hand are also called dated securities to denote that they are
generally long term in nature and are issued by state and central govt. under their
borrowing programmes and duration of more than one year, generally of 5 years and
These securities being long term in nature are also traded in govt. securities market
between institution and banks also on the stock exchanges- debt segments.
One of the important function of a well developed money market is to channelize saving
into short term productive investments like working capital. Call money market, treasury
bills market and markets for commercial paper and certificate of deposit are some of the
example of money market.
CALL MONEY MARKET
The call money markets form a part of the national money market, where day –to- day
surplus funds, mostly of banks are traded . The call money loans are very short term in
nature and the maturity period of this vary from 1 to 15 days. The money which is lent
for one day in this market is known as “call money”, and if it exceeds one day (but less
than 15 days), is referred as “notice money” in this market any amount could be lent or
borrowed at a convenient interest rate . Which is acceptable to both borrower and
lender .these loans are consider as highly liquid as they are repayable on demand at the
option of ether the lender or borrower.
Call money is borrowed from the market to meet various requirements of commercial bill
market and commercial banks. Commercial bill market borrower call money for short
period to discount commercial bills.
Banks borrower in call market to:
1:- Fill the temporary gaps, or mismatches that banks normally face.
2:- Meet the cash Reserve Ratio requirement.
3: - Meet sudden demand for fund, which may arise due to large payment and remittance.
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Banks usually borrow form the market to avoid the penal interest rate for not meeting
CRR requirement and high cost of refinance from RBI. Call money helps the banks to
maintain short term liquidity position at comfortable level.
In India call money markets are mainly located in commercial centers and big industrial
centers and industrial center such as Mumbai, Calcutta, Chennai, Delhi and Ahmedabad.
As BSE and NSE and head office of RBI and many other banks are situated in Mumbai;
the volume of funds involved in call money market in Mumbai is far bigger than other
Initially, only few large banks were operating in the bank market. however the market
had expanded and now scheduled , non scheduled commercial banks foreign banks ,state
, district, and urban cooperative banks , financial institution such as LIC,UTI,GIC, and its
subsidiaries , IDBI, NABARD, IRBI, ECGC, EXIM Bank, IFCI, NHB , TFCI, and
SIDBI, Mutual fund such as SBI Mutual fund . LIC Mutual funds. And RBI
Intermediaries like DFHI and STCI are participants in local call money markets.
However RBI has recently introduced restriction on some of the participants to phase
them out of call money market in a time bound manner.
Participant in call money market are split into two categories
1:- BORROWER AND LENDER:-
This comprises entities those who can both borrower and lend in this market, such as
RBI, intermediaries like DFHI, and STCI and commercial banks.
2:- ONLY LENDER: -
This category comprises of entities those who can act only as lender, like financial
institution and mutual funds.
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The interest paid on call loan is known as the call rates. Unlike in the case of other short
and long rates. The call rate is expected to freely reflect the day to day availability and
long rates. These rates vary highly from day to day. Often from hour to hour. While high
rates indicate a tightness of liquidity position in market. The rate is largely subject to be
influenced by sources of supply and demand for funds.
The call money rate had fluctuated from time to time reflecting the seasonal variation in
fund requirements. Call rates climbs high during busy seasons in relation to those in slack
season. These seasonal variations were high due to a limited number of lender and many
borrowers. The entry of financial institution and money market mutual funds into the call
market has reduced the demand supply gap and these fluctuations gradually came down
in recent years.
Though the seasonal fluctuations were reduced to considerable extent, there are still
variations in the call rates due to the following reason:
1:- large borrower by banks to meet the CRR requirements on certain dates cause a gate
demand for call money. These rates usually go up during the first week to meet CRR
requirements and decline afterwards.
2:- the sanction of loans by banks, in excess of their own resources compel the bank to
rely on the call market. Banks use the call market as a source of funds for meeting dis-
equilibrium of inflow and out flow of fund s.
3:- the withdrawal of funds to pay advance tax by the corporate sector leads to steep
increase in call money rates in the market.
Commercial paper are short term, unsecured promissory notes issued at a discount to face
value by well- known companies that are financial strong and carry a high credit rating .
They are sold directly by the issuers to investor, or else placed by borrowers through
agents like merchant banks and security houses the flexible maturity at which they can be
issued are one of the main attraction for borrower and investor since issues can be
adapted to the needs of both. The CP market has the advantage of giving highly rated
corporate borrowers cheaper fund than they could obtain from the banks while still
providing institutional investors with higher interest earning than they could obtain form
the banking system the issue of CP imparts a degree of financial stability to the systems
as the issuing company has an incentive to remain financially strong.
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THE FEATURES OF CP
1. They are negotiable by endorsement and delivery.
2. They are issued in multiple of Rs 5 lakhs.
3. The maturity varies between 15 days to a year.
4. No prior approval of RBI is needed for CP issued.
5. The tangible net worth issuing company should not be less than 4 lakhs
6. The company fund based working capital limit should not less than Rs 10 crore.
7. The issuing company shall have P2 and A2 rating from CRISIL and ICRA.
CERTIFICATE OF DEPOSIT
Certificate of Deposits,. Instruments such as the Certificates of Deposit (CDs
introduced in 1989), Commercial Paper (CP introduced in 1989), inter-bank
participation certificates (with and without risk) were introduced to increase the range
of instruments. Certificates of Deposit are basically negotiable money market
instruments issued by banks and financial institutions during tight liquidity
conditions. Smaller banks with relatively smaller branch networks generally mobilise
CDs. As CDs are large size deposits, transaction costs on CDs are lower than retail
FEATURES OF CD
1. All scheduled bank other than RRB and scheduled cooperative bank are
eligible to issue CDs.
2. CDs can be issued to individuals, corporation, companies, trust, funds and
associations. NRI can subscribe to CDs but only on a non- repatriation
3. They are issued at a discount rate freely determined by the issuing bank
4. They issued in the multiple of Rs 5 lakh subject to minimum size of each
issue of Rs is 10 lakh.
5. The bank can issue CDs ranging from 3 month t 1 year , whereas financial
institution can issue CDs ranging from 1 year to 3 years.
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TREASURY BILLS MARKETTREASURY BILLS MARKET:-:-
Treasury bills are the main financial instruments of money market. These bills are issued
by the government. The borrowings of the government are monitored & controlled by the
central bank. The bills are issued by the RBI on behalf of the central government. The
RBI is the agent of Union Government. They are issued by tender or tap. The bills were
sold to the public by tender method up to 1965. These bills were put at weekly auctions.
A treasury bill is a particular kind of finance bill. It is a promissory note issued by the
government. Until 1950 these bills were also issued by the state government. After 1950
onwards the central government has the authority to issue such bills. These bills are
greater liquidity than any other kind of bills. They are of two kinds: a) ad hoc, b) regular.
Ad hoc treasury bills are issued to the state governments, semi government departments
& foreign ventral banks. They are not marketable. The ad hoc bills are not sold to the
banks & public. The regular treasury bills are sold to the general public & banks. They
are freely marketable. These bills are sold by the RBI on behalf of the central
The treasury bills can be categorized as follows:-
1) 14 days treasury bills:-
The 14 day treasury bills has been introduced from 1996-97. These bills are non-
transferable. They are issued only in book entry system they would be redeemed
at par. Generally the participants in this market are state government, specific
bodies & foreign central banks. The discount rate on this bill will be decided at
the beginning of the year quarter.
2) 28 days treasury bills:-
These bills were introduced in 1998. The treasury bills in India issued on auction
basis. The date of issue of these bills will be announced in advance to the market.
The information regarding the notified amount is announced before each auction.
The notified amount in respect of treasury bills auction is announced in advance
for the whole year separately. A uniform calendar of treasury bills issuance is also
3) 91 days treasury bills:-
The 91 days treasury bills were issued from July 1965. These were issued tap
basis at a discount rate. The discount rates vary between 2.5 to 4.6% P.a. from
July 1974 the discount rate of 4.6% remained uncharged the return on these bills
were very low. However the RBI provides rediscounting facility freely for this
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4) 182 days treasury bills:-
The 182 days treasury bills was introduced in November 1986. The chakravarthy
committee made recommendations regarding 182 day treasury bills instruments.
There was a significant development in this market. These bills were sold through
monthly auctions. These bills were issued without any specified amount. These
bills are tailored to meet the requirements of the holders of short term liquid
funds. These bills were issued at a discount. These instruments were eligible as
securities for SLR purposes. These bills have rediscounting facilities.
5) 364 days treasury bills:-
The 364 treasury bills were introduced by the government in April 1992. These
instruments are issued to stabilise the money market. These bills were sold on the
basis of auction. The auctions for these instruments will be conducted for every
fortnight. There will be no indication when they are putting auction. Therefore the
RBI does not provide rediscounting facility to these bills. These instruments have
been instrumental in reducing, the net RBI credit to the government. These bills
have become very popular in India.
Money Market Mutual Funds (MMMFs)
The benefits of developments in the various in the money market like cell money
loans. Treasury bills, commercial papers and certificate of deposits were available
only to the few institutional participants in the market. The main reason for this
was that huge amounts were required to be invested in these instruments, the
minimum being Rs. 10 lack, which was beyond the means of individual money
markets to small investors.
MMMFs are mutual funds that invest primarily in money market instruments of
very high quality and of very short maturities. MMMFs can be set up by very high
quality and of very short maturities. MMMFs can be set up by commercial bank,
RBI and public financial institution either directly or through their existing mutual
fund subsidiaries. The guidelines with respect to mobilization of funds by
MMMFs provide that only individuals are allowed to invest in such funds.
Earlier these funds were regulated by the RBI. But RBI withdrew its guidelines,
with effect form March 7, 2001 and now they are governed by SEBI.
The schemes offered by MMMfs can either by open – ended or close-ended. In
case of open- ended schemer, the units are available for purchase on a continuous
basis and the MMMFs would be willing to repurchase the units. A close –ended
scheme is available for subscription for a limited period and is redeemed at
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The guidelines on the on MMMfs specify a minimum lock – in period of 15 days
during which the investor cannot redeem his investment. The guidelines also
stipulate the minimum size of the MMMF to be Rs. 50 crore and this should not
exceed 2% of the aggregate deposits of the latest accounting year in the case of
banks and 2% of the long-term domestic borrowings in the case of public
Structure of capital market
CAPITAL MARKETCAPITAL MARKET
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Listing Trading Practices of Settlements
Banks FIIs & Broker)
Capital market is market for long term securities. It contains financial instruments of
maturity period exceeding one year. It involves in long term nature of transactions. It
is a growing element of the financial system in the India economy. It differs from the
money market in terms of maturity period & liquidity. It is the financial pillar of
industrialized economy. The development of a nation depends upon the functions &
capabilities of the capital market.
Capital market is the market for long term sources of finance. It refers to meet the
long term requirements of the industry. Generally the business concerns need two
kinds of finance:-
1. Short term funds for working capital requirements.
2. Long term funds for purchasing fixed assets.
Therefore the requirements of working capital of the industry are met by the money
market. The long term requirements of the funds to the corporate sector are supplied by
the capital market. It refers to the institutional arrangements which facilitate the lending
& borrowing of long term funds.
IMPORTANCE OF CAPITAL MARKETIMPORTANCE OF CAPITAL MARKET
Capital market deals with long term funds. These funds are subject to uncertainty & risk.
Its supplies long term funds & medium term funds to the corporate sector. It provides the
mechanism for facilitating capital fund transactions. It deals I ordinary shares, bond
debentures & stocks & securities of the governments. In this market the funds flow will
come from savers. It converts financial assets in to productive physical assets. It provides
incentives to savers in the form of interest or dividend to the investors. It leads to the
capital formation. The following factors play an important role in the growth of the
• A strong & powerful central government.
• Financial dynamics
• Speedy industrialization
• Attracting foreign investment
• Investments from NRI’s
• Speedy implementation of policies
• Regulatory changes
• The level of savings & investments pattern of the household sectors
• Development of financial theories
• Sophisticated technological advances.
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PLAYERS IN THE CAPITAL MARKETPLAYERS IN THE CAPITAL MARKET
Capital market is a market for long term funds. It requires a well structured market to
enhance the financial capability of the country. The market consist a number of players.
They are categorized as:-
2. Financial intermediaries
Generally every company which is a public limited company can access the capital
market. The companies which are in need of finance for their project can approach
the market. The capital market provides funds from the savers of the community.
The companies can mobilize the resources for their long term needs such as project
cost, expansion & diversification of projects & other expenditure of India to raise
the capital from the market. The SEBI is the most powerful organization to monitor,
control & guidance the capital market. It classifies the companies for the issue of
share capital as new companies, existing unlisted companies& existing listed
companies. According to its guidelines a company is a new company if it satisfies
all the following:-
a) The company shall not complete 12 months of commercial operations.
b) Its audited operative results are not available.
c) The company may set up by entrepreneurs with or without track
A company which can be treated as existing listed company, if its shares are listed
in any recognized stock exchange in India. A company is said to be an existing
unlisted company if it is a closely held or private company.
II. FINANCIAL INTERMEDIARIES:
Financial intermediaries are those who assist in the process of converting savings
into capital formation in the country. A strong capital formation process is the
oxygen to the corporate sector. Therefore the intermediaries occupy a dominant role
in the capital formation which ultimately leads to the growth of prosperous to the
community. Their role in this situation cannot be. The government should
encourage these intermediaries to build a strong financial empire for the country.
They are also being called as financial architectures of the India digital economy.
Their financial capability cannot be measured. They take active role in the capital
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The major intermediaries in the capital market are:-
b) Stock brokers & sub brokers
c) Merchant bankers
f) Mutual funds
g) Collecting agents
j) Advertising agencies
The capital market consists many numbers of investors. All types of investor’s
basic objective is to get good returns on their investment. Investment means,
just parking one’s idle fund in a right parking place for a stipulated period of
time. Every parked vehicle shall be taken away by its owners from parking
place after a specific period. The same process may be applicable to the
investment. Every fund owner may desire to take away the fund after a
specific period. Therefore safety is the most important factor while
considering the investment proposal. The investors comprise the financial
investment companies & the general public companies. Usually the individual
savers are also treated as investors. Return is the reward to the investors. Risk
is the punishment to the investors for being wrong selection of their
investment decision. Return is always chased by the risk. An intelligent
investor must always try to escape the risk & attract the return. All rational
investors prefer return, but most investors are risk average. They attempt to
get maximum capital gain. The return can be available to the investors in two
types they are in the form of revenue or capital appreciation. Some investors
will prefer for revenue receipt & others prefer capital appreciation. It depends
upon their economic status & the effect of tax implications.
K.E.S. SHROFF COLLEGE Page 23
STRUCTURE OF THE CAPITAL MARKET IN INDIA
The structure of the capital market has undergone vast changes in recent years. The
Indian capital market has transformed into a new appearance over the last four & a half
decades. Now it comprises an impressive network of financial institutions & financial
instruments. The market for already issued securities has become more sophisticated in
response to the different needs of the investors. The specialized financial institutions
were involved in providing long term credit to the corporate sector. Therefore the premier
financial institutions such as ICICI, IDBI, UTI, and LIC & GIC constitute the largest
segment. A number of new financial instruments & financial intermediaries have
emerged in the capital market. Usually the capital markets are classified in two ways:-
A. On the basis of issuer
B. On the basis of instruments
On the basis of issuer the capital market can be classified again two types:-
a) Corporate securities market
b) Governments securities market
On the basis of financial instruments the capital markets are classifieds into two kinds:-
a) Equity market
b) Debt market
Recently there has been a substantial development of the India capital market. It
comprises various submarkets.
Equity market is more popular in India. It refers to the market for equity shares of
existing & new companies. Every company shall approach the market for raising of
funds. The equity market can be divided into two categories (a) primary market (b)
secondary market. Debt market represents the market for long term financial instruments
such as debentures, bonds, etc.
To meet the financial requirement of their project company raise their capital through
issue of securities in the company market.
Capital issue of the companies were controlled by the capital issue control act 1947.
Pricing of issue was determined by the controller of capital issue the main purpose of
control on capital issue was to prevent the diversion of investible resources to non-
essential projects. Through the necessity of retaining some sort of control on issue of
capital to meet the above purpose still exist . The CCI was abolished in 1992 as the
practice of government
K.E.S. SHROFF COLLEGE Page 24
control over the capital issue as well as the overlapping of issuing has lost its relevance
in the changed circumstances.
SECURITIES & EXCHANGE BOARD OF INDIA
It was set up in 1988 through administrative order it became statutory body in 1992.
SEBI is under the control of Ministry of Finance. Head office is at Mumbai and regional
offices are at Delhi, Calcutta and Chennai. The creation of SEBI is with the objective to
replace multiple regulatory structures. It is governed by six member board of governors
appointed by government of India and RBI.
OBJECTIVES OF SEBI:OBJECTIVES OF SEBI:
1. To protect the interest of investors in securities.
2. To regulate securities market and the various intermediaries in the market.
3. To develop securities market over a period of time.
POWERS AND FUNCTIONS OF SEBI:POWERS AND FUNCTIONS OF SEBI:
(1) ISSUE GUIDELINES TO COMPANIES:-
SEBI issues guidelines to the companies for disclosing information and to protect
the interest of investor. The guidelines relates to issue of new shares, issue of
convertible debentures, issue by new companies, etc. After abolition of capital
issues control act, SEBI was given powers to control and regulate new issue
market as well as stock exchanges.
(2) REGULATION OF PORTFOLIO MANAGEMENT SERVICES:-
Portfolio Management services were brought under SEBI regulations in January
1993. SEBI framed regulations for portfolio management keeping securities
scams in mind. SEBI has been entrusted with a job to regulate the working of
portfolio managers in order to give protections to investors.
(3) REGULATION OF MUTUAL FUNDS:-
The mutual funds were placed under the control of SEBI on January 1993. Mutual
funds have been restricted from short selling or carrying forward transactions in
securities. Permission has been granted to invest only in transferable securities in
money market and capital market.
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(4) CONTROL ON MERCHANT BANKING:-
Merchant bankers are to be authorized by SEBI, they have to follow code of
conduct which makes them responsible towards the investors in respect of pricing,
disclosure of/ in the prospectus and issue of securities, merchant bankers have
high degree of accountability in relation to offer documents and issue of shares.
(5) ACTION FOR DELAY IN TRANSFER AND REFUNDS:-
SEBI has prosecuted many companies for delay in transfer of shares and refund of
money to the applicants to whom the shares are not allotted. These also gives
protection to investors and ensures timely payment in case of refunds.
(6) ISSUE GUIDELINES TO INTERMEDIARIES:-
SEBI controls unfair practices of intermediaries operating in capital market, such
control helps in winning investors confidence and also gives protection to
(7) GUIDELINES FOR TAKEOVERS AND MERGERS:-
SEBI makes guidelines for takeover and merger to ensure transparency in
acquisitions of shares, fair disclosure through public announcement and also to
avoid unfair practices in takeover and mergers.
(8) REGULATION OF STOCK EXCHANGES FUNCTIONING:-
SEBI is working for expanding the membership of stock exchanges to improve
transparency, to shorten settlement period and to promote professionalism among
brokers. All these steps are for the healthy growth of stock exchanges and to
improve their functioning.
(9) REGULATION OF FOREIGN INSTITUTIONAL INVESTMENT (FIIS):-
SEBI has started registration of foreign institutional investment. It is for effective
control on such investors who invest on a large scale in securities.
TYPES OF ISSUE
A company can raise its capital through issue of share and debenture by means of :-
PUBLIC ISSUE :-
K.E.S. SHROFF COLLEGE Page 26
Public issue is the most popular method of raising capital and involves raising capital
and involve raising of fund direct from the public .
RIGHT ISSUE :-
Right issue is the method of raising additional finance from existing members by
offering securities to them on pro rata basis.
A company proposing to issue securities on right basis should send a letter of offer to
the shareholders giving adequate discloser as to how the additional amount received
by the issue is used by the company.
Some companies distribute profits to existing shareholders by way of fully paid up
bonus share in lieu of dividend. Bonus share are issued in the ratio of existing share
held. The shareholder do not have to nay additional payment for these share .
PRIVATE PLACEMENT :-
private placement market financing is the direct sale by a public limited company or
private limited company of private as well as public sector of its securities to a
limited number of sophisticated investors like UTI , LIC , GIC state finance
corporation and pension and insurance funds the intermediaries are credit rating
agencies and trustees and financial advisors such as merchant bankers. And the
maximum time – frame required for private placement market is only 2 to 3 months.
Private placement can be made out of promoter quota but it cannot be made with
The secondary market is that segment of the capital market where the outstanding
securities are traded from the investors point of view the secondary market imparts
liquidity to the long – term securities held by them by providing an auction market
for these securities.
The secondary market operates through the medium of stock exchange which
regulates the trading activity in this market and ensures a measure of safety and fair
dealing to the investors.
India has a long tradition of trading in securities going back to nearly 200 years.
The first India stock exchange established at Mumbai in 1875 is the oldest exchange
in Asia. The main objective was to protect the character status and interest of the
native share and stock broker.
K.E.S. SHROFF COLLEGE Page 27
BOMBAY STOCK EXCHANGE
Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now
spanning three centuries in its 133 years of existence. What is now popularly known as
BSE was established as "The Native Share & Stock Brokers' Association" in 1875.
BSE is the first stock exchange in the country which obtained permanent recognition (in
1956) from the Government of India under the Securities Contracts (Regulation) Act
1956. BSE's pivotal and pre-eminent role in the development of the Indian capital market
is widely recognized. It migrated from the open outcry system to an online screen-based
order driven trading system in 1995. Earlier an Association of Persons (AOP), BSE is
now a corporatised and demutualised entity incorporated under the provisions of the
Companies Act, 1956, pursuant to the BSE (Corporatisation and Demutualisation)
Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI). With
demutualisation, BSE has two of world's best exchanges, Deutsche Börse and Singapore
Exchange, as its strategic partners.
Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector by
providing it with an efficient access to resources. There is perhaps no major corporate in
India which has not sourced BSE's services in raising resources from the capital market.
Today, BSE is the world's number 1 exchange in terms of the number of listed companies
and the world's 5th in transaction numbers. The market capitalization as on December 31,
2007 stood at USD 1.79 trillion . An investor can choose from more than 4,700 listed
companies, which for easy reference, are classified into A, B, S, T and Z groups.
The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic
stature , and is tracked worldwide. It is an index of 30 stocks representing 12 major
sectors. The SENSEX is constructed on a 'free-float' methodology, and is sensitive to
market sentiments and market realities. Apart from the SENSEX, BSE offers 21 indices,
including 12 sectoral indices. BSE has entered into an index cooperation agreement with
Deutsche Börse. This agreement has made SENSEX and other BSE indices available to
investors in Europe and America. Moreover, Barclays Global Investors (BGI), the global
leader in ETFs through its iShares® brand, has created the 'iShares® BSE SENSEX India
Tracker' which tracks the SENSEX. The ETF enables investors in Hong Kong to take an
exposure to the Indian equity market.
K.E.S. SHROFF COLLEGE Page 28
BSE has tied up with U.S. Futures Exchange (USFE) for U.S. dollar-denominated futures
trading of SENSEX in the U.S. The tie-up enables eligible U.S. investors to directly
participate in India's equity markets for the first time, without requiring American
Depository Receipt (ADR) authorization. The first Exchange Traded Fund (ETF) on
SENSEX, called "SPIcE" is listed on BSE. It brings to the investors a trading tool that
can be easily used for the purposes of investment, trading, hedging and arbitrage. SPIcE
allows small investors to take a long-term view of the market.
BSE provides an efficient and transparent market for trading in equity, debt instruments
and derivatives. It has a nation-wide reach with a presence in more than 450 cities and
towns of India. BSE has always been at par with the international standards. The systems
and processes are designed to safeguard market integrity and enhance transparency in
operations. BSE is the first exchange in India and the second in the world to obtain an
ISO 9001:2000 certification. It is also the first exchange in the country and second in the
world to receive Information Security Management System Standard BS 7799-2-2002
certification for its BSE On-line Trading System (BOLT).
BSE continues to innovate. In recent times, it has become the first national level stock
exchange to launch its website in Gujarati and Hindi to reach out to a larger number of
investors. It has successfully launched a reporting platform for corporate bonds in India
christened the ICDM or Indian Corporate Debt Market and a unique ticker-cum-screen
aptly named 'BSE Broadcast' which enables information dissemination to the common
man on the street.
In 2006, BSE launched the Directors Database and ICERS (Indian Corporate Electronic
Reporting System) to facilitate information flow and increase transparency in the Indian
capital market. While the Directors Database provides a single-point access to
information on the boards of directors of listed companies, the ICERS facilitates the
corporates in sharing with BSE their corporate announcements.
BSE also has a wide range of services to empower investors and facilitate smooth
Investor Services: The Department of Investor Services redresses grievances of investors.
BSE was the first exchange in the country to provide an amount of Rs.1 million towards
the investor protection fund; it is an amount higher than that of any exchange in the
country. BSE launched a nationwide investor awareness programme- 'Safe Investing in
the Stock Market' under which 264 programmes were held in more than 200 cities.
The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates on-line
K.E.S. SHROFF COLLEGE Page 29
screen based trading in securities. BOLT is currently operating in 25,000 Trader
Workstations located across over 450 cities in India.
BSEWEBX.com: In February 2001, BSE introduced the world's first centralized
exchange-based Internet trading system, BSEWEBX.com. This initiative enables
investors anywhere in the world to trade on the BSE platform.
Surveillance: BSE's On-Line Surveillance System (BOSS) monitors on a real-time basis
the price movements, volume positions and members' positions and real-time
measurement of default risk, market reconstruction and generation of cross market alerts.
BSE Training Institute: BTI imparts capital market training and certification, in
collaboration with reputed management institutes and universities. It offers over 40
courses on various aspects of the capital market and financial sector. More than 20,000
people have attended the BTI programmes
• The World Council of Corporate Governance has awarded the Golden Peacock
Global CSR Award for BSE's initiatives in Corporate Social Responsibility
• The Annual Reports and Accounts of BSE for the year ended March 31, 2006 and
March 31 2007 have been awarded the ICAI awards for excellence in financial
• The Human Resource Management at BSE has won the Asia - Pacific HRM
awards for its efforts in employer branding through talent management at work,
health management at work and excellence in HR through technology
Drawing from its rich past and its equally robust performance in the recent times, BSE
will continue to remain an icon in the Indian capital market.
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NATIONAL STOCK EXCHANGE
The National Stock Exchange of India Limited has genesis in the report of the High
Powered Study Group on Establishment of New Stock Exchanges, which recommended
promotion of a National Stock Exchange by financial institutions (FIs) to provide access
to investors from all across the country on an equal footing. Based on the
recommendations, NSE was promoted by leading Financial Institutions at the behest of
the Government of India and was incorporated in November 1992 as a tax-paying
company unlike other stock exchanges in the country.
On its recognition as a stock exchange under the Securities Contracts (Regulation) Act,
1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM)
segment in June 1994. The Capital Market (Equities) segment commenced operations in
November 1994 and operations in Derivatives segment commenced in June 2000.
NSE's mission is setting the agenda for change in the securities markets in India. The
NSE was set-up with the main objectives of:
• establishing a nation-wide trading facility for equities, debt instruments and
• ensuring equal access to investors all over the country through an appropriate
• providing a fair, efficient and transparent securities market to investors using
electronic trading systems,
• enabling shorter settlement cycles and book entry settlements systems, and
• Meeting the current international standards of securities markets.
The standards set by NSE in terms of market practices and technology have become
industry benchmarks and are being emulated by other market participants. NSE is more
than a mere market facilitator. It's that force which is guiding the industry towards new
horizons and greater opportunities.
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NSE is one of the first de-mutualised stock exchanges in the country, where the
ownership and management of the Exchange is completely divorced from the right to
trade on it. Though the impetus for its establishment came from policy makers in the
country, it has been set up as a public limited company, owned by the leading
institutional investors in the country.
From day one, NSE has adopted the form of a demutualised exchange - the ownership,
management and trading is in the hands of three different sets of people. NSE is owned
by a set of leading financial institutions, banks, insurance companies and other financial
intermediaries and is managed by professionals, who do not directly or indirectly trade on
the Exchange. This has completely eliminated any conflict of interest and helped NSE in
aggressively pursuing policies and practices within a public interest framework.
The NSE model however, does not preclude, but in fact accommodates involvement,
support and contribution of trading members in a variety of ways. Its Board comprises of
senior executives from promoter institutions, eminent professionals in the fields of law,
economics, accountancy, finance, taxation, and etc, public representatives, nominees of
SEBI and one full time executive of the Exchange.
While the Board deals with broad policy issues, decisions relating to market operations
are delegated by the Board to various committees constituted by it. Such committees
includes representatives from trading members, professionals, the public and the
management. The day-to-day management of the Exchange is delegated to the Managing
Director who is supported by a team of professional staff.
K.E.S. SHROFF COLLEGE Page 32
STRUCTURE OF INTERNATIONAL CAPITAL MARKET
K.E.S. SHROFF COLLEGE Page 33
INTERNATIONAL CAPITAL MARKETS
The genesis of the present international markets can be teased to 1960s, when there was a
real demand for high quality dollar-denominated bonds form wealthy Europeans (and
others) who wished to hold their assets their home countries or in currencies other then
their own. These investors were driven by the twin concerns of avoiding taxes in their
home country and protecting themselves against the falling value of domestic currencies.
The bonds which were then available for investment were subjected to withholding tax.
Further it is was also necessary to register to address these concerns. These were issued in
bearer forms and so, there was no of ownership and tax was withheld.
Also, until 1970, the International Capital Market focused on debt financing and the
equity finances were raised by the corporate entities primarily in the domestic markets.
This was due to the restrictions on cross-border equity investments prevailing unit then in
many countries. Investors too preferred to invest in domestic equity issued due to
perceived risks implied in foreign equity issues either related to foreign currency
exposure or related to apprehensions of restrictions on such investments by the regulator.
Major changes have occurred since the ‘70s which have witnessed expanding and
fluctuating trade volumes and patterns with various blocks experiencing extremes in
fortunes in their exports/imports. This was the was the period which saw the removal of
exchange controls by countries like the UK, franc and Japan which gave a further
technology of markets have played an important role in channelizing the funds from
surplus unit to deficit units across the globe. The international capital markets also
become a major source of external finance for nations with low internal saving. The
markets were classified into euro markets, American Markets and Other Foreign Markets.
Borrowers/Issuers, Lenders/ Investors and Intermediaries are the major players of the
international market. The role of these players is discussed below.
These primarily are corporates, banks, financial institutions, government and quasi
government bodies and supranational organizations, which need forex funds for various
reasons. The important reasons for corporate borrowings are, need for foreign currencies
for operation in markets abroad, dull/saturated domestic market and expansion of
operations into other countries.
Governments borrow in the global financial market to adjust the balance of payments
mismatches, to gain net capital investments abroad and to keep a sufficient inventory of
K.E.S. SHROFF COLLEGE Page 34
foreign currency reserves for contingencies like supporting the domestic currency against
In case of Euro-loans, the lenders are mainly banks who possess inherent confidence in
the credibility of the borrowing corporate or any other entity mention above in case of
GDR it is the institutional investor and high net worth individuals (referred as Belgian
Dentists) who subscribe to the equity of the corporates. For an ADR it is the institutional
investor or the individual investor through the Qualified Intuitional Buyer who put in the
money in the instrument depending on the statutory status attributed to the ADR as per
statutory requirements of the land.
They undertake due diligence and preparation of offer circular, marketing the issues and
arranger for road shows.
Underwriters of the issue bear interest rate/market risks moving against them before they
place bonds or Depository Receipts. Usually, the lend managers and co-managers act as
underwriters for the issue.
On behalf of DRs, the custodian holds the underlying shares, and collects rupee dividends
on the underlying shares and repatriates the same to the depository in US dollars/foreign
Apart from the above, Agents and Trustees, Listing Agents and Depository Banks also
play a role in issuing the securities.
The early eighties witnessed liberalization of many domestic economies and globalization
of the same. Issuers form developing countries, where issue of dollar/foreign currency
denominated equity shares were not permitted, could access international equity markets
through the issue of an intermediate instrument called ‘Depository Receipt’.
A Depository Receipt (DR) is a negotiable certificate issued by a depository bank which
represents the beneficial interest in shares issued by a company. These shares are
deposited with the local ‘custodian’ appointed by the depository, which issues receipts
against the deposit of shares.
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The various instruments used to raise funds abroad include: equity, straight debt or hybrid
instruments. The following figure shows the classification of international capital markets
based on instruments used and market(s) accessed.
GLOBAL DEPOSITORY RECEIPTS (GDR):
A GDR is a negotiable instrument which represents publicly traded local-currency equity
share. GDR is any instrument in the from of a depository receipt or certificate created by
the Overseas Depository Bank outside India and issued to non-resident investors against
the issue of ordinary shares or foreign currency convertible bonds of the issuing
company. Usually, a typical GDR is denominated in US dollars whereas the underlying
shares would be denominated in the local currency of the Issuer. GDRs may be – at the
request of the investor – converted into equity shares by cancellation of GDRs through
the intermediation of the depository and the sale of underlying shares in the domestic
market through the local custodian.
GDRs, per se, are considered as common equity of the issuing company and are entitled
to dividends and voting rights since the date of its issuance. The company transactions.
The voting rights of the shares are exercised by the Depository as per the understanding
between the issuing Company and the GDR holders.
AMERICAN DEPOSITORY RECEIPTS (ADR):
ADR is a dollar denominated negotiable certificate, it represents a non-US company’s
publicly traded equity. It was devised in the last 1920s to help Americans invest in
overseas securities and assist non-US companies wishing to have their stock traded in the
American Markets. ADRs are divided into 3 levels based on the regulation and privilege
of each company’s issue.
I. ADR LEVEL – I:
It is often step of an issuer into the US public equity market. The issuer can
enlarge the market for existing shares and thus diversify to the investor base.
In this instrument only minimum disclosure is required to the sec and issuer
need not comply with the US GAAP (Generally Accepted Accounting
Principles). This type of instrument is traded in the US OTC Market.
K.E.S. SHROFF COLLEGE Page 36
The issuer is not allowed to raise fresh capital or list on any one of the
national stock exchanges.
II. ADR LEVEL – II:
Through this level of ADR, the company can enlarge the investor base for
existing shares to a greater extent. However, significant disclosures have to
be made to the SEC. The company is allowed to List on the American Stock
Exchange (AMEX) or New York Stock Exchange (NYSE) which implies
that company must meet the listing requirements of the particular exchange.
III. ADR LEVEL – III:
This level of ADR is used for raising fresh capital through Public offering in
the US Capital with the EC and comply with the listing requirements of
AMEX/NYSE while following the US-GAAP.
The process of lending money by investing in bonds originated during the 19th century
when the merchant bankers began their operations in the international markets.
Issuance of Eurobonds became easier with no exchange controls and no government
restrictions on the transfer of funds in international markets.
All Eurobonds, through their features can appeal to any class of issuer or investor.
The characteristics which make them unique and flexible are:
a) No withholding of taxes of any kind on interests payments
b) They are in bearer form with interest coupon attached
c) They are listed on one or more stock exchanges but issues are generally traded
in the over the counter market.
Typically, a Eurobond is issued outside the country of the currency in which it is
denominated. It is like any other Euro instrument and through international syndication
and underwriting, the paper is sold without any limit of geographical boundaries.
Eurobonds are generally listed on the world's stock exchanges, usually on the
Luxembourg Stock Exchange.
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a) FIXED-RATE BONDS/STRAIGHT DEBT BONDS:
Straight debt bonds are fixed interest bearing securities which are redeemable
at face value. The bonds issued in the Euro-market referred to as Euro-bonds,
have interest rates fixed with reference to the creditworthiness of the issuer.
The interest rates on dollar denominated bonds are set at a margin over the US
treasury yields. The redemption of straights is done by bullet payment, where
the repayment of debt will be in one lump sum at the end of the maturity
period, and annual servicing.
b) FLOATING RATE NOTES (FRNs):
FRNs can be described as a bond issue with a maturity period varying from 5-
7 years having varying coupon rates - either pegged to another security or re-
fixed at periodic intervals. Conventionally, the paper is referred to as notes
and not as bonds. The spreads or margin on these notes will be above 6
months USOR for Eurodollar deposits.
These are relatively lesser known bonds issued by foreign entities for raising medium to
long-term financing from domestic money centers in their domestic currencies. A brief
note on the various instruments in this category is given below:
a) YANKEE BONDS:
These are US dollar denominated issues by foreign borrowers (usually foreign
governments or entities, supranational and highly rated corporate borrowers)
in the US bond markets.
A bond denominated in U.S. dollars and is publicly issued in the U.S. by
foreign banks and corporations. According to the Securities Act of 1933, these
bonds must first be registered with the Securities and Exchange Commission
(SEC) before they can be sold. Yankee bonds are often issued in trenches and
each offering can be as large as $1 billion.
Due to the high level of stringent regulations and standards that must be
adhered to, it may take up to 14 weeks (or 3.5 months) for a Yankee bond to
be offered to the public. Part of the process involves having debt-rating
agencies evaluate the creditworthiness of the Yankee bond's underlying issuer.
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Foreign issuers tend to prefer issuing Yankee bonds during times when the
U.S. interest rates are low, because this enables the foreign issuer to pay out
less money in interest payments.
b) SAMURAI BONDS:
A yen-denominated bond issued in Tokyo by a non-Japanese company and
subject to Japanese regulations. Other types of yen-denominated bonds are
Euro/yens issued in countries other than Japan.
Samurai bonds give issuers the ability to access investment capital available in
Japan. The proceeds from the issuance of samurai bonds can be used by non-
Japanese companies to break into the Japanese market, or it can be converted
into the issuing company's local currency to be used on existing operations.
Samurai bonds can also be used to hedge foreign exchange rate risks.
These are bonds issued by non-Japanese borrowers in the domestic Japanese
c) BULLDOG BONDS:
These are sterling denominated foreign bond which are raised in the UK
domestic securities market.
A sterling denominated bond that is issued in London by a company that is not
These sterling bonds are referred to as bulldog bonds as the bulldog is a
national symbol of England.
d) SHIBOSAI BONDS:
These are the privately placed bonds issued in the Japanese markets.
Euronotes as a concept is different from syndicated bank credit and is different from
Eurobonds in terms of its structure and maturity period. Euronotes command the price
of a short-term instrument usually a few basic points over LIBOR and in many
instances at sub – LIBOR levels. The documentation formalities are minimal (unlike in
the case of syndicated credits or bond issues) and cost savings can be achieved on that
score too. The funding instruments in the form of Euronotes possess flexibility and can
be tailored to suit the specific requirements of different types of borrowers. There are
numerous applications of basic concepts of Euronotes.
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These may be categorized under the following heads:
a) COMMERCIAL PAPER:
These are short-term unsecured promissory notes which repay a fixed amount
on a certain future date. These are normally issued at a discount to face value.
b) NOTE ISSUANCE FACILITIES (NIFs):
The currency involved is mostly US dollars. A NIF is a medium-term legally
binding commitment under which a borrower can issue short-term paper, of up
to one year. The underlying currency is mostly US dollar. Underwriting banks
are committed either to purchase any notes which the borrower b unable to sell
or to provide standing credit. These can be re-issued periodically.
c) MEDIUM-TERM NOTES (MTNs):
MTNs are defined as sequentially issued fixed interest securities which have a
maturity of over one year. A typical MTN program enables an issuer to issue
Euronotes for different maturities. From over one year up to the desired level of
maturity. These are essentially fixed rate funding arrangements as the price of
each preferred maturity is determined and fixed up front at the time of
launching. These are conceived as non-underwritten facilities, even though
international markets have started offering underwriting support in specific
A Global MTN (G-MTN) is issued worldwide by tapping Euro as well as the-
US markets under the same program.
Under G-MTN programs, issuers of different credit ratings are able to raise
finance by accessing retail as well as institutional investors. In view of flexible
access, speed and efficiency, and enhanced investor base G-MTN programs
afford numerous benefits to the issuers.
Spreads paid on MTNs depend on credit ratings, treasury yield curve and the
familiarity of the issuers among investors. Investors include Private Banks,
Pension Funds, Mutual Funds and Insurance Companies.
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FOREIGN EXCHANGE AND FOREIGN EXCHANGE MARKETS –
In today’s world no country is self sufficient, so there is a need for exchange of goods
and services amongst the different countries. However, unlike in the primitive age the
exchange of goods and services is no longer carried out on barter basis. Every sovereign
country in the world has a currency which is a legal tender in its territory and this
currency does not act as money outside its boundaries. So whenever a country buys or
sells goods and services from or to another country, the residents of two countries have to
exchange currencies. So we can imagine that if all countries have the same currency then
there is no need for foreign exchange.
FOREIGN EXCHANGE IN INDIA
In India, foreign exchange has been given a statutory definition. Section 2 (b) of Foreign
Exchange Regulation Act, 1973 states:
‘Foreign exchange’ means foreign currency and includes:
• All deposits, credits and balances payable in any foreign currency and any drafts,
traveler’s cheques, letters of credit and bills of exchange , expressed or drawn in
Indian currency but payable in any foreign currency,
• Any instrument payable, at the option of drawee or holder thereof or any other
party thereto, either in Indian currency or in foreign currency or partly in one and
partly in the other.
For India we can conclude that foreign exchange refers to foreign money, which includes
notes, cheques, bills of exchange, bank balances and deposits in foreign currencies.
ABOUT FOREIGN EXCHANGE MARKET
Particularly for foreign exchange market there is no market place called the foreign
exchange market. It is mechanism through which one country’s currency can be
exchange i.e. bought or sold for the currency of another country. The foreign exchange
market does not have any geographic location. The market comprises of all foreign
exchange traders who are connected to each other through out the world. They deal with
each other through telephones, telexes and electronic systems. With the help of Reuters
Money 2000-2, it is possible to access any trader in any corner of the world within a few
K.E.S. SHROFF COLLEGE Page 41
WHO ARE THE PARTICIPANTS IN FOREIGN EXCHANGE MARKETS?
The main players in foreign exchange markets are as follows:
The customers who are engaged in foreign trade participate in foreign exchange
markets by availing of the services of banks. Exporters require converting the
dollars in to rupee and importers require converting rupee in to the dollars as they
have to pay in dollars for the goods/services they have imported.
2. COMMERCIAL BANKS
They are most active players in the forex market. Commercial banks dealing with
international transactions offer services for conversion of one currency in to
another. They have wide network of branches. Typically banks buy foreign
exchange from exporters and sells foreign exchange to the importers of the goods.
As every time the foreign exchange bought and sold may not be equal banks are
left with the overbought or oversold position. The balance amount is sold or
bought from the market.
Nowadays, in international foreign exchange markets, the international trade
turnover accounts for a fraction of huge amounts dealt, i.e. bought and sold. The
balance amount is accounted for either by financial transactions or speculation.
Banks have enough financial strength and wide experience to speculate the
market and banks does so. Which is popularly known as the trading in the forex
Commercial banks have following objectives for being active in the foreign
• They render better service by offering competitive rates to their customers
engaged in international trade;
• They are in a better position to manage risks arising out of exchange rate
• Foreign exchange business is a profitable activity and thus such banks are in a
position to generate more profits for themselves;
• They can manage their integrated treasury in a more efficient manner.
• In India Reserve Bank of India has given license to the commercial banks to deal
in foreign exchange under section 6 Foreign Exchange Regulation Act, 1973,
which are called the Authorized Dealers (ADs).
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3. CENTRAL BANK
In all countries central banks have been charged with the responsibility of
maintaining the external value of the domestic currency. Generally this is
achieved by the intervention of the bank. Apart from this central banks deal in the
foreign exchange market for the following purposes:
1) Exchange rate management: It is achieved by the intervention though
sometimes banks have to maintain external rate of the domestic currency at a
level or in a band so fixed.
2) Reserve management: Central bank of the country is mainly concerned with
the investment of countries foreign exchange reserve in a stable proportions in
range of currencies and in a range of assets in each currency. For this bank has to
involve certain amount of switching between currencies.
4. EXCHANGE BROKERS
Forex brokers play a very important role in the foreign exchange markets.
However the extent to which services of forex brokers are utilized depends on the
tradition and practice prevailing at a particular forex market center. In India as per
FEDAI guidelines the A Ds are free to deal directly among themselves without
going through brokers. The forex brokers are not allowed to deal on their own
account all over the world and also in India.
5. OVERSEAS FOREX MARKETS
Today the daily global turnover is guestimated to be more than US $ 1.5 trillion a
day. The international trade however constitutes hardly 5 to 7 % of this total
turnover. The rest of trading in world forex markets is constituted of financial
transactions and speculation. As we know that the forex market is 24-hour market,
the day begins with Tokyo and thereafter Singapore opens, thereafter India,
followed by Bahrain, Frankfurt, Paris, London, New York, Sydney, and back to
FORWARD EXCHANGE CONTRACT
WHAT IS THE NEED FOR FORWARD EXCHANGE CONTRACT?
The risk on account of exchange rate fluctuations, in international trade transactions
increases if the time period needed for completion of transaction is longer. It is not
uncommon in international trade, on account of logistics, the time frame can not be
foretold with clock precision. Exporters and importers alike, can not be precise as to the
time when the shipment will be made as sometimes space on the ship is not available,
while at the other, there are delays on account of congestion of port etc.
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In international trade there is considerable time lag between entering in to a
sales/purchase contract, shipment of goods, and payment. In the meantime, if exchange
rate moves against the party who has to exchange his home currency in to foreign
currency, he may end up in loss. Consequently, buyers and sellers want to protect them
against exchange rate risk. One of the methods by which they can protect themselves is
entering in to a foreign exchange forward contract.
We can see from the daily report of the Vadilal Industries Limited (Forex division) that
the rupee fell down nearly 25 paise in a day.
The date of this fluctuation is 25th
May 2000. Now let suppose that the exporter has dealt
FORWARD EXCHANGE FORWARD CONTRACT
Forward exchange forward contract is a contract wherein two parties agree to deliver
certain amount of foreign exchange at an agreed rate either at a fixed future date or
during a fixed future period. If the merchants are sure about the remittance or the
payment of the foreign exchange then they can choose the fix date forward exchange
contract, in which they are bound by the date on which they have to meet their part of
liability in the agreement.
If the customers are not sure about the date of remittance or the payment of the foreign
exchange they can enter in to the option period forward exchange contract. Both the types
are explained below.
1. FIXED DATE FOREIGN EXCHANGE FORWARD CONTRACT
If under the foreign exchange forward contract, foreign exchange is to be
delivered at fixed date, the contract is known as fixed date foreign exchange
2. OPTION FOREIGN EXCHANGE FORWARD CONTRACT
If under the foreign exchange forward contract, foreign exchange is to be
delivered in future, during a specified period, the contract is known as option
foreign exchange forward contract. In this type of contract there is no option for
taking/ delivery of foreign exchange. Such contracts provide for option as far as
date of delivery of foreign exchange is concerned. While entering in to a option
forward contract first date and the last date for exercising option for giving /taking
delivery of foreign exchange is always fixed.
In India, like developed countries, there are not many instruments available for
hedging foreign exchange risk. As a result the merchants have to hedge their
foreign exchange exposures through forward contracts only.
For merchants this is the only tool available to minimize the risk due to adverse
foreign exchange fluctuation.
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The emergence of the market for derivative products, most notably forwards, futures and
options, can be traced back to the willingness of risk-averse economic agents to guard
themselves against uncertainties arising out of fluctuations in asset prices. By their very
nature, the financial markets are marked by a very high degree of volatility. Through the
use of derivative products, it is possible to partially or fully transfer price risks by
locking-in asset prices.
Introduction of derivatives in the Indian Capital market is the beginning of a new era,
which is truly exciting. Index futures were introduced as the first exchange traded
derivatives product in the Indian Capital Market in June 2000. With introduction of index
options, individual stock futures and options, Indian derivatives market has turned multi-
product derivatives market, at par with the global standards.
Derivatives, worldwide are recognized as Risk Management products. These products
have a long history in India in the unorganized sector, especially in currency and
commodity markets. The availability of these products on organized exchanges has
provided the market with broad-based risk management tools.
Derivatives also facilitate the creation of new financial products in an economy. Today,
financial markets around the world are undergoing a profound change in terms of the
financial innovation. New financial products are being architected, on a day-to-day basis,
to cater to the specific needs of both the issuers and investors. To keep pace with the
global markets, Indian Securities Market also needs to develop new financial products in
all the dimensions of the economy including commodities, securities, currency etc.
In recent years, the market for financial derivatives has grown tremendously both in
terms of variety of instruments available, their complexity and also turnover. In the class
of equity derivatives, futures and options on stock indices have gained more popularity
than on individual stocks, especially among individual investors, who are major users of
index-linked derivatives. Even small investors find this useful due to high correlation of
the popular indices with various portfolios and ease of use.
The lower costs associated with index derivatives vis-à-vis derivative products based on
individual securities is another reason for their growing use.
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DEFINITION OF DERIVATIVES:
Derivative is a product whose value is derived from the value of one or more basic
variables called bases (underling asset, index, or reference rate), in a contractual manner.
The underlying asset can be equity, forex, commodity or any other asset. For example
wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a
change in prices by that date. Such a transaction is an example of a derivative. The price
of this derivative is driven by the spot price of wheat which is the “underlying”.
TYPES OF DERIVATIVES
The most commonly used derivatives contracts are forwards, futures and options and
since this project revolves around futures and options, it will be discussed in greater
detail later on. For now we take a brief look at the various derivatives contracts that have
come to be used.
A forward contract is a customized contract between two entities, where settlement
takes place on a specific date in the future at today’s pre-agreed price.
A futures contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. In simpler words, futures are forward
contracts quoted in an exchange.
Options are of two types: - Calls and Puts. Calls give the buyer the right but not the
obligation to buy a given quantity of the underlying asset at a given price on or before
a given future date. Puts give the buyer the right, but not the obligation to sell a given
quantity of the underlying asset at a given price on or before a given date.
Options generally have lives of up to one year, the majority of options traded on
options exchanges having a maximum maturity of nine months. Longer dated
warrants are called warrants and are generally traded over the counter.
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The acronym LEAPS mean Long-Term Equity Anticipation Securities. These are
options having a maturity of up to three years.
Basket options are options on portfolios of underlying assets. The underlying asset is
usually a moving average or a basket of assets. Equity index options are a form of
Swaps are private agreements between two parties to exchange cash flows in the
future according to prearranged formula. They can be regarded as portfolios of
forward contracts. The two commonly used swaps are:
(A) INTEREST RATE SWAPS:
These entail swapping only the interest related cash flows between the
parties in the same currency.
(B) CURRENCY SWAPS:
These entail swapping both principal and interest between the parties, with
the cash flows in one direction being in a different currency than those in the
Swaptions are options to buy or sell a swap that will become operative at the expiry
of the options. Thus a swaption is an option on a forward swap. Rather than have calls
and puts, the swaptions market has receiver swaptions and payer swaptions. A
receiver swaption is an option to receive fixed and pay floating. A payer swaption is
to pay fixed and receive floating.
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A forward contract, as it occurs in both forward and futures markets, always involves a
contract initiated at one time; performance in accordance with the terms of the contract
occurs at a subsequent time. It is a simple derivative that involves an agreement to buy/
sell an asset on a certain future date at an agreed price. This is a contract between two
parties, one of which takes a long position and agrees to buy the underlying asset on a
specified future date for a certain specified price. The other party takes a short position,
agreeing to sell the asset at the same date for the same price.
For example, when one orders a car, which is not in stock, from a dealer, he is buying a
forward contract for the delivery of a car. The price and description of the car are
The mutually agreed price in a forward contract is known as the delivery price. The
delivery price is chosen in such a way that the value of the forward contract to both the
parties is zero, so that it costs nothing to take either a long or a short position. On
maturity, the contract is settled so that the holder of the short position delivers the asset to
the holder of the long position, who in turn pays a cash amount equal to the delivery
price. The value of a forward contract is determined, chiefly by the market price of the
Forward contracts are being used in India on a large scale in the foreign exchange market
to hedge the currency risk. Forward contracts, being negotiated by the parties on one to
one basis, offer them tremendous flexibility to articulate the contract in terms of price,
quantity, quality (in case of commodities), delivery time and place.
From the simplicity of the contract and its obvious usefulness in resolving uncertainty
about the future, it is not surprising that forward contracts have had a very long history.
THE FORWARD PRICE
The forward price of a contract is the delivery price, which would render a zero value to
the contract. Since upon initiation of the contract, the delivery price is so chosen that the
value of the contract is nil, it is obvious that when a forward contract is entered into, the
delivery price and forward price are identical. As time passes the forward price could
change but the delivery price would remain unchanged. Generally, the forward price at
any given time varies with the maturity of the contract so that the forward price of a
contract to buy or sell in one month would be typically different from that of a contract
with time of three months or six months to maturity.
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A futures contract is a type of forward contract with highly standardized and closely
specified contract terms. As in all forward contracts, a futures contract calls for the
exchange of some good at a future date for cash, with the payment for the good to occur
at a future date. The purchaser of a futures contract undertakes to receive delivery of the
good and pay for it, while the seller of a future promises to deliver the good and receive
payment. The price of the good is determined at the initial time of contracting.
In a crude sense, futures markets are an extension of forward markets. These markets,In a crude sense, futures markets are an extension of forward markets. These markets,
being organized/ standardized, are very liquid by their own nature. Therefore, liquiditybeing organized/ standardized, are very liquid by their own nature. Therefore, liquidity
problem, which persists in the forward market, does not exist in the futures market. Inproblem, which persists in the forward market, does not exist in the futures market. In
futures market, clearing corporation/ house becomes the counter-party to all the trades orfutures market, clearing corporation/ house becomes the counter-party to all the trades or
provides the unconditional guarantee for their settlement i.e. assumes the financialprovides the unconditional guarantee for their settlement i.e. assumes the financial
integrity of the entire system. In other words, we may say that in futures market, theintegrity of the entire system. In other words, we may say that in futures market, the
credit risk of the transactions is eliminated by the exchange through the clearingcredit risk of the transactions is eliminated by the exchange through the clearing
corporation/ housecorporation/ house..
INTRODUCTION TO OPTIONS
We now come to the next derivative product that is traded, namely Options. Options are
fundamentally different from forward and future contracts. An option gives the holder of
the option the right to do something. The holder need not exercise this right. In contrast,
in a forward or futures contract, the two parties are committed and have to fulfill this
commitment. Also it costs nothing (except margin requirement) to enter into a futures
contract whereas the purchase of the option requires an upfront payment called the option
TYPES OF OPTION CONTRACTS:
1. CALL OPTION:
A call option gives the buyer the right to purchase a specified number of
shares of a particular company from the option writer (seller) at a specified
price (called the exercise price) up to the expiry of the option. In other words
the option buyer gets a right to call upon the option seller to deliver the
contracted shares anytime up to the expiry of the option. The contract thus is
only a one-way obligation, i.e. the seller is obliged to deliver the contracted
shares while the buyer has the choice to exercise the option or let the contract
lapse. The buyer is not obliged to perform.
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Intrinsic value Lines
(a) Buy A Call (b) Write a Call
An option buyer starts with a loss equivalent to the premium paid. He has to carry on
with the loss till the stock market price equals the exercise price as shown in (a). The
intrinsic value of the option up to this price remains zero, and thus runs along the X-axis.
As the stock price increases further, the loss starts reducing and gets wiped out as soon as
the increase equals the premium, represented on the graph by point ‘b’, also called the
break even point. The profitability line starts climbing up at an inclination of 45 degrees
after crossing the X-axis at b and from thereon moves into the positive side of the graph.
The inclined line beyond the point ‘ b’ indicates that the option acquires intrinsic value
and is, thus referred to as the intrinsic value line.
The position graph (b) represents the profitability status of the writer who does not own
the stock i.e. naked or an uncovered writer. The graph is logically the inverse of that for
the option buyer.
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2. PUT OPTION
A put option gives a buyer the right to sell a specified number of shares of a
particular stock to the option of the writer at a specific price (called exercise
price) any time during the currency of the option. The seller of a put option
has the obligation to take delivery of underlying asset. When put position is
opened, the buyer pays premium to the put seller. If the price of underlying
asset rises above the strike price and stays there, the put will expire worthless.
The seller of put will keep the premium as his profit and the put buyer will
have a cost to purchase right.
Put buyers are bearish, they believe that the price of the underlying asset will fall and
they may not be able to sell the asset at a higher price. Put sellers are bullish, as they
believe that the price of the underlying asset will rise.
Intrinsic Value Line
Swap can be defined as a financial transaction in which two counter parties agree to
exchange streams of payments, or cash flows, over time. Two types of swaps are
generally seen i.e. interest rate swaps and currency swaps. Two more swaps being
introduced are commodity swaps and the tax rate swaps, which are seen to be an
extension of the conventional swaps. A swap results in reducing the borrowing cost of
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ALL INDIA DEVELOPMENT BANK
Industrial Development Bank
Industrial Finance Corporation of India
Industrial Investment Bank of India
Export Import Bank of India
State Financial Corporation
State Industrial Development Corporation
Life insurance Corporation
General Insurance Corporation
Unit trust of India
Reserve Bank of India
Regional Rural Banks
NON BANKING FINANCIAL CORPORATION
Hire Purchases Finance Company
Lease Finance Company
Housing Finance Companies
National Housing Bank
Venture Capital Funding Companies
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ALL INDIA DEVELOPMEN T BANKS
INDUSTRIAL DEVELOPMENT BANK OF INDIA
IDBI was established in 1964 as a subsidiary of the RBI by an act of the parliament and
was made a wholly owned govt. of India undertaking in 1975. It was established with the
main objective of serving as an apex financial institution to coordinate the functioning of
all other financial institution. Planning ,promoting and developing functioning of all other
financial institution .industries to fill the gaps in the industrial structure of the country
providing technical administrative assistance for promoting or expansion of industry .
undertaking market and investment research survey n connection with the development
of industry and to provide finance keeping in view national priorities irrespective of the
financial attractiveness of project are its other objective IDBI finance industries directly
& also support state financial corporation and state industrial development corporations
by providing refinance and through the bill rediscounting scale IDBI was transformed
from finance institution to commercial bank in the year 2004.
INDUSTRIAL FINANCE CORPORATION OF INDIA
IFCI is the first financial institution to be established in India in 1948 by an act of
parliament with objective of providing medium and long term finance to industrial
concerns eligible for financing under the act. The sector for which the IFCI provides
finance extend through the industrial spectrum of the country.
INDUSTRIAL INVESTMENT BANK OF INDIA
The IIBI first came into existence as a central government corporation with the name
Industrial Reconstruction Corporation of India in 1971. Its basic objective was to finance
the reconstruction and rehabilitation of sick and closed industrial unit. Its name was
changed to Industrial reconstruction bank of India and it was made the principal credit
and reconstruction agency in the country in 1985 through the RBI act 1984. The bank
started co-ordinary similar work of the institutions and banks preparing schemes for
reconstructions by reconstructing the liabilities appraising schemes of merger &
amalgamation of sick company and providing financial assistance for modernization
expansion, diversification and technological up gradation of sick units.
In March 1987, in line with the ongoing policies of financial and economic reforms, IRBI
was converted into a full-fledged development financial institution. It was renamed as
Industrial Investment Bank of India ltd. And was incorporated as company under the
companies act 1956. Its entire equity is finance for the establishment of new industrial
project as well as for expansion diversification and modernization of existing industrial
K.E.S. SHROFF COLLEGE Page 53
It provides financial assistance in the form of term loans, subscription to debenture
equity shares and deferred payment guarantees. IIBI is now also active ion merchant
banking and its services includes inter alia, structuring suitable instrument for public
rights issues preparation of prospective offer documents and working as a lead manager it
also offers its services for debt syndication and package of services for merger and
THE EXPORT IMPORT BANK OF INDIA .
The EXIM Bank was set up in 1982 to coordinate the activity of the various institutional
engaged in trade finance it helps Indian exporter in extending credit to their overseas
customer by providing long term finance to them it also provides financial assistance to
bank in extending credit for export and export linked imports it also provides advisory
services and information to exports.
STATE FINANCIAL CORPORATION .
At the beginning of the fifties the govt. found that of achieving rapid industrialization
separate institution should be set up that cater exclusively to the needs of the small
medium sector therefore the SFC was act passed by the parliament in 1951 to enable the
state govt. establish SFC the basic objective for which the SFC was set up was to provide
financial assistance to small and medium scale industries estates. The SFC provides
finance in the form of log term loan, by underwriting issue of share and debentures and
standing guarantee for loans raised from other institution and form the general public.
STATE INDUSTRIAL DEVELOPMENT CORPORATIONS.
The SIDCS have been set up to facilitate rapid industrial growth in the respective state. In
addition to providing finance , the SIDC identify and sponsor project in the participation
of private entrepreneurs.
LIFE INSURANCE CORPORATION OF INDIA .
The LIC was established in 1956 by amalgamation and nationalization of 245 private
insurance companies by an enactment of parliament . the main business of LIC is to
provide life insurance and it has almost a monopoly in this business. The LIC act permits
it invest up to 10 percent of the investable funds in the private sector . it provides finance
by participating in a consortium with other institution and does not undertake
independent appraisal of projects.
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