Indian financial market

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Sub divisions and strata present in the Indian financial market.

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Indian financial market

  1. 1. .
  2. 2. Structure ofIndian MoneyMarketUnorganized Sector Cooperative Sector Organized SectorRBI Public SectorBanksNon-scheduledBanksScheduled BanksForeign BanksIndian BanksPrivateSector BanksDevelopmentBanksDFHI
  3. 3. . Unlike moneylenderswho only lend money, IBs accept deposits as wellas lend money. They operate mostly in urbanareas, especially in western and southern regionsof the country.
  4. 4. FINANCE BROKERSThey act as middlemen betweenlenders and borrowers. Theycharge commission for theirservices. They are found mostlyin urban markets, especially incloth markets and commoditymarkets.
  5. 5. They act as middlemen betweenlenders and borrowers
  6. 6. The Reserve Bank of India (RBI) is Indiascentral banking institution, whichcontrols the monetary policy of theIndian rupee. It was established on 1April 1935 during the British Raj inaccordance with the provisions of theReserve Bank of India Act, 1934.Following Indias independence in 1947,the RBI was nationalized in the year 1949.
  7. 7. Public Sector Banks (PSBs) are banks wherea majority stake (i.e. more than 50%) isheld by a government. The shares ofthese banks are listed on stockexchanges. There are a total of 26 PSBsin India.
  8. 8. • The banks which are not registered in the list ofcentral bank under its charter are known as non-scheduled banks. They are not bound to performbanking services according to the policies andinstructions of central bank e.g. Bank of Punjab wasa non-scheduled bank.• These banks do not fulfill the required qualificationsof a scheduled bank as prescribed by the centralbank. They also do not enjoy the public confidence.In many countries, many non-scheduled banks arealso working.
  9. 9. • Scheduled Banks in India are those banks which havebeen included in the Second Schedule of Reserve Bank ofIndia (RBI) Act, 1934. RBI in turn includes only thosebanks in this schedule which satisfy the criteria laiddown vide section 42 (6) (a) of the Act.• As on 30th June, 1999, there were 300 scheduled banksin India having a total network of 64,918 branches.Scheduled commercial banks in India include State Bankof India and its associates (5), nationalised banks (19),foreign banks (45), private sector banks (32), co-operative banks and regional rural banks.
  10. 10. All those banks where greater parts ofstake or equity are held by the privateshareholders and not by government arecalled "private-sector banks". These arethe major players in the banking sectoras well as in expansion of the businessactivities India.
  11. 11. Development banks are specialized financialinstitutions. They provide medium and long-term finance to the industrial andagricultural sector. They provide finance toboth private and public sector.Development banks are multipurposefinancial institutions. They do term lending,investment in securities and other activities.They even promote saving and investmenthabit in the public.
  12. 12.  Industrial Development Banks : It includes, forexample, Industrial Finance Corporation ofIndia (IFCI), Industrial Development Bank ofIndia (IDBI), and Small Industries DevelopmentBank of India (SIDBI). Agricultural Development Banks : It includes,for example, National Bank for Agriculture &Rural Development (NABARD). Export-Import Development Banks : It includes,for example, Export-Import Bank of India (EXIMBank). Housing Development Banks : It includes, forexample, National Housing Bank (NHB).
  13. 13. Discount and Finance House of India Ltd.(DFHI), a unique institution of its kind, wasset up in April 1988. The discount hasbeen established to deal in moneymarket instruments in order to provideliquidity in the money market. Thus thetask assigned to DFHI is to develop asecondary market in the existing moneymarket instruments.
  14. 14.  Direct discounting as well as re-discounting of bills arising outof sale of machinery of capital equipment by manufacturersin small scale sector on deferred credit. Equity type assistance under national Equity Funds and byway of seed capital to entrepreneurs Re-discounting of short term bills arising out of sale ofproducts of small scale sector. Sources support to National Small industries Corporation andother institutions concerned with small industries Share capital and resources support to factoringorganizations.
  15. 15.  The call money market deals in short termfinance repayable on demand, with a maturityperiod varying from one day to 14 days. Commercial banks, both Indian and foreign,co-operative banks, Discount and FinanceHouse of India Ltd.(DFHI), Securities tradingcorporation of India (STCI) participate as bothlenders and borrowers and Life InsuranceCorporation of India (LIC), Unit Trust ofIndia(UTI), National Bank for Agriculture andRural Development (NABARD)can participateonly as lenders. The interest rate paid on call money loans,known as the call rate, is highly volatile
  16. 16. Treasury Bills are the instruments ofshort term borrowing by theCentral/State govt. They arepromissory notes issued at discountand for a fixed period. These were firstissued in India in 1917.
  17. 17. These are issued to raise funds formeeting expenditure needs and alsoprovide outlet for parking temporarysurplus funds by investors.
  18. 18. Treasury bills can be purchased by anyone (including individuals) exceptState govt. These are issued by RBIand sold through fortnightly or monthlyauctions at varying discount ratedepending upon the bids.
  19. 19. Minimum amount of face value Rs.1lakh and in multiples there of. There isno specific amount/limit on the extentto which these can be issued orpurchased.
  20. 20. 91 days and 364 days.
  21. 21. Market determined, based on demandfor and supply of funds in the moneymarket.
  22. 22. • These are highly liquid and safeinvestment giving attractive yield.• Approved assets for SLR purposes andDFHI is the market maker in theseinstruments and provide (daily) two wayquotes to assure liquidity.• RBI sells treasury bills on auction basis(to bidders quoting above the cut-offprice fixed by RBI) every fortnight bycalling bids from banks, State Govt. andother specified bodies.
  23. 23. Commercial bill Market A commercial bill is one which arises out of agenuine trade transaction, i.e. credit transaction. Assoon as goods are sold on credit, the seller draws abill on the buyer for the amount due. The buyeraccepts it immediately agreeing to pay amountmentioned therein after a certain specified date.Thus, a bill of exchange contains a written orderfrom the creditor to the debtor, to pay a certain sum,to a certain person, after a creation period. A bill ofexchange is a ‘self-liquidating’ paper and negotiable;it is drawn always for a short period ranging between3 months and 6 months.
  24. 24. THE CERTIFICATE OF DEPOSIT MARKETThe scheme of Certificate of Deposit (CD) wasintroduced by RBI in 1989. The main purpose ofCD is to enable the commercial banks to raisefunds from the market. The CDs maturity periodranges from 7 days to 1 year (in case of FIsminimum 1 year and maximum 3 years). TheCDs are issued at a discount to its face value.The CDs are issued in denomination of Rs. 1lakh and thereafter, multiples of Rs. 1 lakh. Theholder is entitled to receive a fixed rate ofinterest and have no lock-in period.
  25. 25. HOW CDS WORKCDs typically require a minimum deposit, and may offerhigher rates for larger deposits. The best rates aregenerally offered on "Jumbo CDs" with minimum depositsof $100,000.The consumer who opens a CD may receive a papercertificate, but it is now common for a CD to consistsimply of a book entry and an item shown in theconsumers periodic bank statements; that is, there isoften no "certificate" as such. Consumers who wish tohave a hard copy verifying their CD purchase mayrequest a paper statement from the bank or print out theirown from the financial institutions online banking service.
  26. 26. The Commercial Paper MarketThe scheme of Commercial Paper (CP) was introduced in 1990.Blue chip companies for short term financing issue CPs. As perRBI guidelines, CPs can be issued on the following conditions:The minimum tangible net worth of the company to be at leastRs. 4 crores.The CP receives a minimum rating of A-2 or such other ratingfrom recognized rating agencies like CRISIL, CARE, ICRA, FitchRatings, etc.The company has been sanctioned working capital limit by bank/sor all-India FIs.The CPs maturity period ranges from 7 days to 1 year.They can beissued in multiples of Rs. 5 lakhs and in multiples thereof.Theyare sold at a discount to its face value and redeemed at its facevalue.
  27. 27. REPO MARKET A repurchase agreement, also known as a repo,RP, or sale and repurchase agreement, is the saleof securities together with an agreement for theseller to buy back the securities at a later date. The repurchase price should be greater than theoriginal sale price, the difference effectivelyrepresenting interest, sometimes called the reporate. The party that originally buys the securitieseffectively acts as a lender. The original seller iseffectively acting as a borrower, using theirsecurity as collateral for a secured cash loan at afixed rate of interest.
  28. 28. REVERSE REPO A reverse repo is simply the same repurchaseagreement from the buyers viewpoint, not the sellers.Hence, the seller executing the transaction woulddescribe it as a "repo", while the buyer in the sametransaction would describe it a "reverse repo". Theterm "reverse repo and sale" is commonly used todescribe the creation of a short position in a debtinstrument where the buyer in the repo transactionimmediately sells the security provided by the selleron the open market. On the settlement date of the repo, the buyeracquires the relevant security on the open market anddelivers it to the seller. In such a short transaction theseller is wagering that the relevant security will declinein value between the date of the repo and thesettlement date.
  29. 29.  The MMMFs were introduced in 1992. Theobjective of MMMFs is to provide an additionalshort term avenue to the individual investors. In1995, RBI modified the scheme to allow privatesector organizations to setup MMMFs. The scheme has been made more attractive toinvestors by reducing lock in period from 45 daysto 15 days. Resources mobilized from MMMFs arerequired to be invested in call money, CDs, CPs,commercial bills, treasury bills, and governmentdated securities having an unexpired maturity ofup to 1 year.
  30. 30.  A mutual fund is a type of professionallymanaged collective investment vehicle thatpools money from many investors to purchasesecurities. They are sometimes referred to as "investmentcompanies" or "registered investmentcompanies." Most mutual funds are "open-ended," meaning investors can buy or sellshares of the fund at any time. Hedge funds arenot considered a type of mutual fund.
  31. 31. Drawbacks of IndianMoney Market
  32. 32. Absence of IntegrationThe Indian money market is broadly divided into theOrganized and Unorganized Sectors. The formercomprises the legal financial institutions backed bythe RBI. The unorganized statement of it includesvarious institutions such as indigenous bankers,village money lenders, traders, etc. There is lack ofproper integration between these two segments.
  33. 33. Multiple rate of interestIn the Indian money market, especially thebanks, there exists too many rates of interests.These rates vary for lending, borrowing,government activities, etc. Many rates ofinterests create confusion among theinvestors.
  34. 34. Insufficient Funds or ResourcesThe Indian economy with its seasonal structurefaces frequent shortage of financial recourse.Lower income, lower savings, and lack ofbanking habits among people are some of thereasons for it.
  35. 35. Shortage of Investment InstrumentsIn the Indian money market, various investmentinstruments such as Treasury Bills, CommercialBills, Certificate of Deposits, CommercialPapers, etc. are used. But taking into accountthe size of the population and market theseinstruments are inadequate.
  36. 36. Lack of Organized Banking SystemIn India even through we have a big network ofcommercial banks, still the banking system suffersfrom major weaknesses such as the NPA, hugelosses, poor efficiency. The absence of the organizedbanking system is major problem for Indian moneymarket.
  37. 37. Less number of DealersThere are poor number of dealers in the short-term assets who can act as mediatorsbetween the government and the bankingsystem. The less number of dealers leads tothe slow contact between the end lender andend borrowers.MOVING ON
  38. 38. Capital markets are financial markets for the buying andselling of long-term debt- or equity-backed securities.These markets channel the wealth of savers to thosewho can put it to long-term productive use, such ascompanies or governments making long-terminvestments. Financial regulators, such as the UKsBank of England (BoE) or the U.S. Securities andExchange Commission (SEC), oversee the capitalmarkets in their jurisdictions to protect investorsagainst fraud, among other duties.
  39. 39. Capital market is an important source for mobilizingidle savings from the economy. It mobilizes fundsfrom people for further investments in theproductive channels of an economy. In that sense itactivate the ideal monetary resources and puts themin proper investments.
  40. 40. Capital market helps in capital formation. Capitalformation is net addition to the existing stock ofcapital in the economy. Through mobilization of idealresources it generates savings; the mobilized savingsare made available to various segments such asagriculture, industry, etc. This helps in increasingcapital formation.
  41. 41. Capital market enhances production and productivity inthe national economy. As it makes funds available forlong period of time, the financial requirements ofbusiness houses are met by the capital market. Ithelps in research and development. This helps in,increasing production and productivity in economyby generation of employment and development ofinfrastructure.
  42. 42. Capital markets not only helps in fundmobilization, but it also helps in properallocation of these resources. It can haveregulation over the resources so that it candirect funds in a qualitative manner.
  43. 43. As an important financial set up capital marketprovides various types of services. It includeslong term and medium term loans to industry,underwriting services, consultancy services,export finance, etc. These services help themanufacturing sector in a large spectrum.
  44. 44. Capital market is place where the investment avenue iscontinuously available for long term investment. Thisis a liquid market as it makes fund available oncontinues basis. Both buyers and seller can easily buyand sell securities as they are continuously available.Basically capital market transactions are related tothe stock exchanges. Thus marketability in the capitalmarket becomes easy.
  45. 45. Structure ofcapital market in IndiaGilt EdgedSecuritiesMarketIndustrialSecuritiesMarketPrimaryMarketSecondaryMarketDevelopment banksIFIIDBIICICISFCUTILICOthersFinancial ServiceMerchantBankingLeasingFactoringVentureCapitalMutualFundsOthers
  46. 46. Primary market is the part of capital market whereissue of new securities takes place. Public sectorinstitutions, companies and governments obtainfunds for further growth of the company after thesale of their securities or bonds in primary market.The selling process of new issues in primary market iscalled as Underwriting and this process is done bya group of people called underwriters or securitydealers. From a retail investor’s point of view,investing in the primary market is the first steptowards trading in stocks and shares
  47. 47.  Capital formation - It provides attractive issue to the potentialinvestors and with this company can raise capital at lower costs. Liquidity - As the securities issued in primary market can beimmediately sold in secondary market the rate of liquidity is higher. Diversification - Many financial intermediaries invest in primarymarket; therefore there is less risk if there is failure in investment as thecompany does not depend on a single investor.The diversification ofinvestment reduces the overall risk. Reduction in cost - Prospectus containing all details about thesecurities are given to the investors hence reducing the cost is searchingand assessing the individual securities.
  48. 48. Features of PrimaryMarket It is the new issue market for the new long termcapital. Here the securities are issued by company directly tothe investors and not through any intermediaries. On receiving the money from the new issues, thecompany will issue the security certificates to theinvestors. The amount obtained by the company after the newissues are utilized for expansion of the presentbusiness or for setting up new ventures. External finance for longer term such as loans fromfinancial institutions is not included in primary market.There is an option called ‘going public’ in which theborrowers in new issue market raise capital forconverting private capital into public capital.
  49. 49. PAN NumberBank AccountDemat Account
  50. 50. Secondary marketSecondary market refers to a market wheresecurities are traded after being initiallyoffered to the public in the primary marketand/or listed on the Stock Exchange.Majority of the trading is done in thesecondary market. Secondary marketcomprises of equity markets and the debtmarkets.
  51. 51. Also…Secondary market is that financial market inwhich investor can buy and sell shares andbonds after its issue by company. Afterissuing shares or debentures, it becomesexisting product and it will be saleable likeany other product.Not only secondary market for shares butsecondary market for any thing can be madeaccording to requirement.
  52. 52. What is the role of the SecondaryMarket?For the general investor, the secondary marketprovides an efficient platform for trading of hissecurities.For the management of the company, Secondaryequity markets serve as a monitoring and controlconduit-by facilitating value-enhancing controlactivities, enabling implementation of incentive-based management contracts, and aggregatinginformation (via price discovery) that guidesmanagement decisions.
  53. 53. DIFFERENCE:Basis Primary Market Secondary MarketMeaning Deals in the issuance ofnew securities.Deals in the securitiesalready issued in theprimary market.Trading Price Securities in the primarymarket are issued at theissue price.Securities in the secondarymarket are trader at themarket price.Creation/Transfer ofSecuritiesPrimary market is themarket for the creation ofnew securitiesSecondary market simplytransfers of securities fromone hand to another.Regulation It is subject to the rules andregulations framed by theSEBI and the companiesact, 1956.Secondary market issubject to the rules andregulations framed by theSEBI fro time-to-time.Main objective To create long term capital. To provide liquidity andmarketability to the longterm securities.
  54. 54. Stock exchangeA stock exchange is a form of exchange which providesservices for stock brokers and traders to trade stocks,bonds, and other securities. Stock exchanges also providefacilities for issue and redemption of securities and otherfinancial instruments, and capital events including thepayment of income and dividends. Securities traded on astock exchange include shares issued by companies, unittrusts, derivatives, pooled investment products and bonds.
  55. 55. Stock exchange provides a ready and continuousmarket for purchase and sale of securities. Itprovides ready outlet for buying and selling ofsecurities. Stock exchange also acts as anoutlet/counter for the sale of listed securities.
  56. 56. Stock exchange is useful for the evaluation ofindustrial securities. This enables investors toknow the true worth of their holdings at anytime. Comparison of companies in the sameindustry is possible through stock exchangequotations (i.e price list).
  57. 57. Stock exchange accelerates the process of capitalformation. It creates the habit of saving,investing and risk taking among the investingclass and converts their savings into profitableinvestment. It acts as an instrument of capitalformation. In addition, it also acts as a channelfor right (safe and profitable) investment.
  58. 58. Stock exchange provides safety, security and equity(justice) in dealings as transactions are conducted asper well defined rules and regulations. Themanaging body of the exchange keeps control on themembers. Fraudulent practices are also checkedeffectively. Due to various rules and regulations,stock exchange functions as the custodian of fundsof genuine investors.
  59. 59. Listed companies have to comply with rules andregulations of concerned stock exchange andwork under the vigilance (i.e. supervision) ofstock exchange authorities.
  60. 60. Stock exchange serves as a platform for marketingGovernment securities. It enables government toraise public debt easily and quickly.
  61. 61. Stock exchange provides a clearing house facilityto members. It settles the transactions amongthe members quickly and with ease. Themembers have to pay or receive only the netdues (balance amounts) because of the clearinghouse facility.
  62. 62. Banks easily know the prices of quoted securities.They offer loans to customers against corporatesecurities. This gives convenience to the ownersof securities.
  63. 63. • BSE is the oldest stock exchange in Asia. Theextensiveness of the indigenous equity brokingindustry in India led to the formation of theNative Share Brokers Association in 1875, whichlater became Bombay Stock Exchange Limited(BSE).• BSE is widely recognized due to its pivotal andpre-eminent role in the development of theIndian capital market.
  64. 64. The National Stock Exchange (NSE) (Hindi:Rashtriya Share Bazaar) is stock exchangelocated at Mumbai, India. It is the 11th largest stockexchange in the world by market capitalization andlargest in India by daily turnover and number oftrades, for both equities and derivative trading.NSE was recognized as a stock exchange in April1993 under the Securities Contracts (Regulation)Act. It commenced its operations in Wholesale DebtMarket in June 1994. The capital market segmentcommenced its operations in November 1994,whereas the derivative segment started in 2000.
  65. 65. OTC Exchange Of India (OTCEI) OTC Exchange Of India (OTCEI) also known as Over-the-Counter Exchange of India based in Mumbai, Maharashtra. Itis the first exchange for small companies. It is the first screenbased nationwide stock exchange in India. It was set up toaccess high-technology enterprising promoters in raisingfinance for new product development in a cost effectivemanner and to provide transparent and efficient tradingsystem to the investors. OTCEI is promoted by the Unit Trust of India, the IndustrialCredit and Investment Corporation of India, the IndustrialDevelopment Bank of India, the Industrial FinanceCorporation of India and others and is a recognized stockexchange under the SCR Act.
  66. 66. The Securities and Exchange Boardof India (frequently abbreviatedSEBI) is the regulator for thesecurities market in India. It wasestablished on 12 April 1992through the SEBI Act, 1992.
  67. 67.  For the discharge of its functions efficiently, SEBI hasbeen invested with the necessary powers which are: to approve by−laws of stock exchanges. to require the stock exchange to amend their by−laws. inspect the books of accounts and call for periodicalreturns from recognized stock exchanges. inspect the books of accounts of a financialintermediaries. compel certain companies to list their shares in one ormore stock exchanges. levy fees and other charges on the intermediaries forperforming its functions. prosecute and judge directly the violation of certainprovisions of the companies Act.
  68. 68. The first objective of SEBI is to regulate stockexchanges so that efficient services may beprovided to all the parties operating there.
  69. 69. • The capital market is meaningless in the absence of theinvestors. Therefore, it is important to protect the interests ofthe investors.• The protection of the interests of the investors meansprotecting them from the wrong information given by thecompanies in their prospectus, reducing the risk of deliveryand payment, etc. Hence, the foremost objective of the SEBI isto provide security to the investors.
  70. 70. • It is important to keep an eye on the activitiesof the brokers and other middlemen in orderto control the capital market. To have a controlover them, it was necessary to establish theSEBI.last

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