2. Financial System
Existence of a well organized financial
system
Promotes the well being and standard of
living of the people of a country
Money and monetary assets
Mobilize the saving
Promotes investment
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3. Financial System of any country consists
of financial markets, financial
intermediation and financial instruments
or financial products
Suppliers of funds
(Mainly households)Flow of financial services
Incomes , and financial
claims
Seekers of funds
(Mainly business firms
and government)
Flow of funds (savings)
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4. Indian Financial System
Un-Organized
Organized
Money lenders
Local bankers
Traders
Landlords
Pawn brokers
Regulators
Financial Institutions
Financial Markets
Financial services
Financial Instruments
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5. Organized Indian Financial System
Money Market
Instrument
Capital Market
Instrument
Forex
Market
Capital
Market
Money
Market
Credit
Market
Primary Market
Financial
Instruments
Financial
Markets
Financial
Intermediaries
Secondary Market
Regulators
1.MoF
2.SEBI
3.RBI
4.IRDA
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6. Indian Capital Market
Market Instruments Intermediaries
Primary Secondary
Equity DebtHybrid
Regulator
•Brokers
•Investment Bankers
•Stock Exchanges
•Underwriters
SEBI
Players
Corporate IntermediariesCRA
Banks/FI FDI /FIIIndividual
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7. Financial Markets
Mechanism which allows people to trade
Affected by forces of supply and demand
Process used
In Finance, Financial markets facilitates
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8. Why Capital Markets Exist
Capital markets facilitate the transfer of capital (i.e.
financial) assets from one owner to another.
They provide liquidity.
Liquidity refers to how easily an asset can be
transferred without loss of value.
A side benefit of capital markets is that the
transaction price provides a measure of the value of
the asset.
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9. Role of Capital Markets
Mobilization of Savings & acceleration of Capital
Formation
Promotion of Industrial Growth
Raising of long term Capital
Ready & Continuous Markets
Proper Channelisation of Funds
Provision of a variety of Services
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10. Capital Market Instruments
Derivative
Market
1.Exchange
Traded
2.Future & Option
a.Index
b.Stock
Equity Debt
Primary
Market
1.Public
Issue
2. Private
Placement
a. Domestic Market
b. International Market
Secondary
Market
1.NSE
2.BSE
3.OTCEI
4.ISE
5.RSE
Private
Corporate
Dept.
PSU Bond
Market
Govt.
Securities
Market
Primary Segment Secondary Segment
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11. Factors contributing to growth of Indian Capital Market
Establishment of Development banks &
Industrial financial institution.
Legislative measures
Growing public confidence
Increasing awareness of investment
opportunities
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12. Factors contributing to growth of Indian Capital Market
Growth of underwriting business
Setting up of SEBI
Mutual Funds
Credit Rating Agencies
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13. Indian Capital Market deficiencies
Lack of transparency
Physical settlement
Variety of manipulative practices
Institutional deficiencies
Insider trading
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14. Money Market
Market for short-term money and financial assets
that are near substitutes for money.
Short-Term means generally period upto one year
and near substitutes to money is used to denote any
financial asset which can be quickly converted into
money with minimum transaction cost
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15. Money Market
It is a place for Large Institutions and government
to manage their short-term cash needs
It is a subsection of the Fixed Income Market
It specializes in very short-term debt securities
They are also called as Cash Investments
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16. Defects of Money Market
Lack of Integration
Lack of Rational Interest Rates structure
Absence of an organized bill market
Shortage of funds in the Money Market
Seasonal Stringency of funds and fluctuations in
Interest rates
Inadequate banking facilities
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17. Money Market Instruments
Treasury Bills
Commercial Paper
Certificate of Deposit
Commercial Bills
Term Money
1. Primary Segment
2.Secondary Segment
Call Money Market
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18. FINANCIAL INSTRUMENTS
Money Market Instruments
The money market can be defined as a market for short-term
money and financial assets that are near substitutes for
money. The term short-term means generally a period up to
one year and near substitutes to money is used to denote any
financial asset which can be quickly converted into money
with minimum transaction cost.
Some of the important money market instruments are briefly
discussed below;
1. Call/Notice Money
2. Treasury Bills
3. Term Money
4. Certificate of Deposit
5. Commercial Papers
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19. 1.Call Money Market
Loan disbursed by commercial banks
1 day – 7 days
Bank can recall the loan at its
maturity
Usually advanced to bill brokers &
stock exchange brokers.
2. Term Money
Term Money market for deposits of maturity beyond 14 days
is referred to as the term money market. The entry
restrictions are the same as those for Call/Notice Money
except that, as per existing regulations, the specified entities
are not allowed to lend beyond 14 days.
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20. 3. Treasury Bills.
Government Paper Securities
Duration of 91 days
Promissory note of the government to pay a specified
sum after a specified period
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21. 4. Certificate of Deposits
Certificates of Deposit (CDs) is a negotiable money market instrument
and issued in dematerialized form or as a Usance Promissory Note, for
funds deposited at a bank or other eligible financial institution for a
specified time period.
Guidelines for issue of CDs are presently governed by various directives
issued by the Reserve Bank of India, as amended from time to time.
CDs can be issued by
(i) scheduled commercial banks excluding Regional Rural Banks (RRBs)
and Local Area Banks (LABs); and
(ii) select all-India Financial Institutions that have been permitted by RBI
to raise short-term resources within the umbrella limit fixed by RBI.
Banks have the freedom to issue CDs depending on their requirements.
An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e.,
issue of CD together with other instruments viz., term money, term
deposits, commercial papers and interoperate deposits should not
exceed 100 per cent of its net owned funds, as per the latest audited
balance sheet.
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22. 5. Commercial Paper
CP is a note in evidence of the debt obligation of the issuer. On issuing
commercial paper the debt obligation is transformed into an
instrument.
CP is thus an unsecured promissory note privately placed with
investors at a discount rate to face value determined by market forces.
CP is freely negotiable by endorsement and delivery. A company shall
be eligible to issue CP provided - (a) the tangible net worth of the
company, as per the latest audited balance sheet, is not less than Rs. 4
crore; (b) the working capital (fund-based) limit of the company from
the banking system is not less than Rs.4 crore and (c) the borrowal
account of the company is classified as a Standard Asset by the
financing bank/s. The minimum maturity period of CP is 7 days.
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23. Capital Market Instruments
Capital Market Instruments
The capital market generally consists of the following long
term period i.e., more than one year period, financial
instruments; In the equity segment Equity shares,
preference shares, convertible preference shares, non-
convertible preference shares etc and in the debt segment
debentures, zero coupon bonds, deep discount bonds etc.
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24. Equity Market
1 .Primary Markets
Helps companies in raising funds through issue of
securities like shares and debentures.
Governed by SEBI (Securities and Exchange Board of
India).
Methods of issuing securities in Primary Market:
– Public Issue
– Rights Issue
– Bonus Issue
– Private Placement
– Bought-out Deals
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26. International Capital
Markets
Development attributed to following factors:
investors’ need to avoid taxes in their own country
and to ensure protection against depreciating home
currencies.
emergence of new technologies in the area of
financial services, development and deregulation of
financial markets
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27. Equity Instruments
GDR:
instruments which possess a number of underlying shares held by the
custodian domestic bank of the company.
The GDRs are traded on a foreign stock exchange, issued to the non-resident
investors.
The GDR’s are denominated in the foreign currency and the underlying shares
are denominated in the local currency of the issuer.
The GDR’s are considered as common equity of the company and are entitled to
dividends and voting rights.
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28. ADR
Is a dollar denominated negotiable certificate traded in the US-markets
whose underlying securities are of non-US companies.
ADR Level-I :first step for an issuer to enter the US market, minimum
disclosure required, need not comply with the American GAAP. Can
trade only on the OTC market and not on any national stock exchange.
ADR Level-II: significant disclosures to be made to the SEC, company
allowed to list on AMEX, NYSE.
ADR Level-III :fresh capital can be raised company to be registered
with the SEC and shall even follow US GAAP.
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29. Euro Bonds
These are the bonds that are issued outside the
country of the currency in which it is denominated
Features:
No with holding of tax on interest payments
These are in bearer form with coupon interest
attached
Listed on stock exchanges though traded on the OTC
market
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30. Foreign Bonds
Bonds floated in the domestic markets denominated
in the domestic currency by the non-resident.
Yankee Bonds
Samurai Bonds
Bulldog Bonds
Shibosai Bonds
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31. Yankee bonds
These are US dollar denominated issues by the
foreign borrowers in the US markets.
Features
Regulated by the SEC. Requires more disclosure
than that given by the prospectus.
Foreign borrower to adopt US accounting policies
Bonds sponsored by the underwriting syndicate
Requires SEC registration before the sale.
To be rated by the US credit rating agencies
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32. Samurai Bonds
Yen denominated bonds issued in the Japanese
markets by the non- Japanese companies.
Features
Maturity: 3-20 years
Borrowers in order of priority sovereigns,
supranational and their entities, high quality private
corporations having some kind of Japanese trade
links.
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33. Bull Dog Bonds
Sterling denominated foreign bonds floated in the
UK market.
Features:
Maturity 5 for short maturities 25 for long
maturities.
Subscribed by the long-term institutional investors-
pension funds, life insurance Co’s
Bonds offered by placing or offer for sale process will
have to be listed on the London SE
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34. Shibosai Bonds
Privately placed bonds issued in the Japanese
market
Features
Offered to institutional investors, including banks
the issue’s eligibility, coupon rate, etc governed by
the Japan’s MOF guidelines
Pricing done based on base rate and spread which
depends on the rating of Co or country.
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35. Forex Markets
Foreign Exchange Market: Deals with transactions in currencies
other than one’s own currency.
Exchange rate: The rate at which one currency can be converted
into another currency
Participants:
– Exporters
– Importers
– Commercial Banks
– Central Banks
– Authorized Dealers and Money Changers
– Brokers
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36. Equity Market
2. Secondary Market
Securities already issued in the primary market are traded
in the secondary market. Provides liquidity to the securities
held by the investors.
Provides liquidity to the securities held by the
investors.
Operates through stock exchanges that regulate the trading
activities in this market.
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37. Equity Market
3. Derivatives Market
Financial derivative is a product derived from the market of an
underlying asset.
Participants:
– Hedgers
– Speculators
– Arbitrators
Types of Derivatives:
– Futures
– Options
- Caps
- floors and Collars
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38. Debt. Market
Government of India, public sector units and corporations
together comprise as dominant issuer of debt markets in
India. Local governments, mutual funds and international
financial institution issue debt instruments as well but very
infrequently. The Central Government mobilizes funds
mainly through issue of dated securities and T-bills. Bonds are
also issued by government sponsored institutions like the
development financial institutions (DFIs) like IFCI and IDBI,
banks and public sector units. Some, but not all, of the PSU
bonds are tax-exempt. The corporate bond market comprise of
commercial papers and bonds. In recent years, there has been
an increase in issuance of
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40. Financial Institution
Financial Institutions
Industrial Development Bank of India (IDBI)
Industrial Finance Corporation of India (IFCI )
Industrial Investment Bank of India (IIBI)
Export and Import Bank of India
State Financial Corporations
State Industrial Development Corporations
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41. Non-banking financial institution
Non-Banking Financial Companies
Investment Trusts or Investment Companies: Close end
organizations, having fixed amount of authorized capital
provides services through conserving and managing
property for those who cannot manage their own funds.
Mutual Benefit Funds or Nidis: Sources of their funds are
share capital, deposits.
Merchant Banks : Offers financial advice & services for
fees; Services offered are management, marketing,
underwriting of new issue, project promotion & finance,
corporate advice, BOD, venture capital etc.
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42. Hire Purchase Finance Companies
Lease Finance Companies
Housing Finance Companies
National Housing Bank : Wholly owned by subsidiary of
RBI, Aim is to promote housing finance Institution at
local & regional levels, It refinance housing loans to
scheduled commercial & co operative banks, housing
finance companies etc.
Venture Capital Funding Companies
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43. DEVELOPMENT FINANCE INSTITUTION
All India Financial Institutions
IFCI: Industrial Finance Corporation of India
The IFCI, India’s first DFL, was established on 1 July 1948
IFCI principal activities can be categorised into
- Financing
- Promotional activities
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45. PROMOTIONAL ACTIVITIES
Played a key role in the development of cooperatives in the sugar and
textile sector
It has promoted technical consultancy organisation
primarily in less developed state, to provide
necessary services to the promoters of small and
medium- sized industries in collaboration with other banks and
institutions.
It has developed many institutions like
Management Development institute
Investment and credit rating agency
Tourism finance corporation of India
Rashtriya Gramin Vikas Nidhi
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46. DISADVANTAGES
The reasons to this dismal state of affairs of the company are as follows
Operational Inefficiency
Political Interference
Traditional sector financing
Higher provisioning for Non –performing assets
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47. The steps taken for the revival of IFCI are as follows:
IFCI constituted an expert committee in 2001
To formulate a medium-to long term strategic plan for IFCI in the
emerging new business environment
The committee has laid down the road map plan for the next five years
It has made recommendations covering a wide range of structural and
operational areas
It has strengthened its risk management techniques and is putting in
efforts to bring down the NPAs to a manageable level, through
corporate debt structuring
It has initiated action against defaulters and has filed suits against
defaulter companies
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48. INDUSTRIAL DEVELOPMENT BANK OF INDIA
Established in 1964 by Parliament as a wholly owned subsidiary of the
RBI
In 1976, the banks ownership was transferred to the Government of
India
IDBI has engineered the development of capital market through
helping in setting up of the
- Securities Exchange Board of India (SEBI)
- National Stock Exchange of India Limited (NSE)
- Credit Analysis and Research Limited (CARE)
- Stock Holding corporation of India Limited (SHCIL)
- Investors Services of India Limited (ISIL)
- National Securities Depository Limited (NSDL)
- Clearing Corporation of India Limited (CCIL)
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49. IDBI has undertaken several initiatives to reposition itself as a universal
Bank:-
In April 2001, IDBI appointed Boston consulting Group India Private
Limited (BCG) as consultant to draw up a road map for conversion into
a universal bank
Formation of high level risk management committee to develop overall
risk management policy
The bank has constituted a credit risk management group to evaluate
credit risk both at the transaction level and also at the portfolio level
It has pioneered the setting up of Asset Reconstruction Company
(India) Limited (ARCIL) in 2002 in association with select banks and
financial institutions
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50. IDBI-SERVICES
IDBI provides Merchant banking and wide array of corporate advisory
services as part of its fee based activities
This includes professional advice and services for
- issue management
- private placement of equity/debt instruments
- project evaluation
- credit syndication
- share valuation
- corporate restructuring including mergers and acqusitions and
divestment of equity
the bank also offers a number of Forex related services on a
commission basis including opening of letters of credit and remittance
of foreign currency on behalf of its assisted companies for import of
its goods and services
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51. IIBI
Established in 1985 under the IRBI Act 1984
It is a principal credit & reconstruction agency for re-habilitation of sick
& closed industrial units.
The range of its services include provision of infrastructure facilities ,
consultancies , managerial & merchant banking facilities & making
available machinery & other equipment on a lease or hire purchase
bases
It was renamed as industrial investment bank of India & brought
under companies act 1956 since March 17 1997.
It finances new projects , modernization work , balancing equipment
needs , correcting imbalance in current Assets , relieving strains on
cash resources , repayment of pressing liabilities and other activities.
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52. IDFC
Conceived as an institution to facilitate the flow of private finance to
commercially viable infrastructure projects & help mitigate commercial
& structural risk contain therein , by designing innovative products &
processes.
It operates in areas such as energy , telecommunication & IT ,
integrated transportation , Urban infrastructure & food & agri-business
infrastructure.
It offers the variety of services to projects in the infrastructure &
advisory services.
It helps promoters raise resources from international markets
It intends offering advisory services to these funds to facilitate &
strengthen their connectivity with infrastructure projects.
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53. NABARD
Established in July 1982 under an act of parliament , is an apex dvpt.
Bank for promotion & dvpt. Of agriculture , small-scale industries ,
cottage & village industries & other allied economic activities in rural
areas.
Objective is to promote integrated rural development for overall
prosperity of rural areas.
Provides long term investment credit to the Farm sector for various
approved agricultural & allied activities such as minor irrigation ,
plantation etc.
It also extends refinance to banks for financing government sponsered
programmes like prime minister Rojgar Yojna , Swarna Jayanti Gram
Swarozgar Yojna etc.
Other important development includes setting up of micro finance
development fund by NABARD.
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54. SIDCS
Established under the companies act 1956, as wholly owned
undertakings of the state governments with the specific objective of
promoting and developing medium and large industries in the
respective states.
It undertakes a range of promotional activities including:
-repression of preparation of feasibility reports .
-conducting industrial potential surveys.
-entrepreneurship training and development programs.
-developing industrial estates.
It also offer package of developmental services that include
Technical guidance, assistance in plant location and coordination with
other agencies.
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55. EXIM BANK
Established in 1982, is a wholly government owned financial institution
setup for the purpose of financing, facilitating and promoting India’s
foreign trade.
Its financing services include a range of fund and non-fund based
programs to enhance the exports, competitiveness of Indian
companies.
Its major operations presently comprise
-financing of projects
-products and service exports
-building export competitiveness
-promotional programs
-Financing of research and development activities of exporting
companies.
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56. SFC
It is a state level development bank setup under the
SFCs act, 1951, for the development of small and
medium scale industries in their respective states.
It aims at bringing about balanced regional
development by wider dispersal of industries and
generating larger employment opportunities.
It includes composite loan scheme, scheme for
women entrepreneurs, modernization scheme,
equipment finance scheme etc.
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57. SIDBI
It offer a chain of financial product covering micro
finance, business,incubation, venture capital etc.
It also provides support services such as training,
market information and advise for enhancing the
inherent strength of small scale units.
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58. Products And Services of SIDBI
Direct finance scheme.
Bills finance scheme.
Re-finance scheme.
International finance scheme.
Marketing finance and development schemes.
SIDBI foundation for micro-credit.
Other schemes.
Promotional and development activities.
Fixed deposit/bond.
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61. Security Exchange Board of India
(SEBI)
Securities and Exchange Board of India
(SEBI) was first established in the year
1988
Its a non-statutory body for regulating
the securities market
It became an autonomous body in 1992
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62. Functions Of SEBI
Regulates Capital Market.
Checks Trading of securities.
Checks the malpractices in securities market.
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63. Functions Of SEBI
It enhances investor's knowledge on market by
providing education.
It regulates the stockbrokers and sub-brokers.
To promote Research and Investigation
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64. Objectives of SEBI
It tries to develop the securities market.
Promotes Investors Interest.
Makes rules and regulations for the securities
market.
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66. Reserve Bank of India
Established on April 1, 1935 in accordance with the
provisions of the RBI Act, 1934.
The Central Office of the Reserve Bank has been in
Mumbai.
It acts as the apex monetary authority of the country.
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67. Functions Of RBI
Monetary Authority:
Formulation and Implementation of monetary
policies.
Maintaining price stability and ensuring adequate
flow of credit to the Productive sectors.
Issuer of currency:
Issues and exchanges or destroys currency and coins.
Provide the public adequate quantity of supplies of
currency notes and coins.
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68. Regulator and supervisor of the financial system:
Prescribes broad parameters of banking operations
Maintain public confidence, protect depositors' interest
and provide cost-effective banking services.
Authority On Foreign Exchange:
Manages the Foreign Exchange Management Act, 1999.
Facilitate external trade, payment, promote orderly
development and maintenance of foreign exchange
market.
Functions Of RBI
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69. Developmental role:
Performs a wide range of promotional functions to
support national objectives.
Related Functions:
Banker to the Government: performs merchant banking
function for the central and the state governments.
Maintains banking accounts of all scheduled banks.
Functions Of RBI
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70. Monetary Measures
(a) Bank Rate:
The Bank Rate was kept unchanged at 6.0 per cent.
(b) Reverse Repo Rate:
The Repo rate is around 7 per cent and Reverse repo
rate is around 6.10 per cent.
(c) Cash Reserve Ratio:
The cash reserve ratio (CRR) of scheduled banks is
currently at 5.0 per cent.
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71. Objectives Of MoF
Reorientation of the economy
Macro economic stability
To Increase competitive efficiency in the
operations
To remove structural rigidities and inefficiencies
To attain a balance between the goals of financial
stability & integrated & efficient markets
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72. Recommendations
Reduce the level of state ownership in banking
Lift restrictions on foreign ownership of banks
Spur the development of the corporate-bond
market
Strengthen legal protections
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73. Recommendations
Deregulate the insurance industry
Drop proposed limits on pension reforms
Increase consumer ownership of mutual-fund
products
Introduce a gold deposit scheme
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74. Recommendations
Speed up the development of electronic payments.
Separate the RBI's regulatory and central-bank
functions
Lift the remaining capital account controls
Phase out statutory priority lending and
restrictions on asset allocation
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76. IRDA Function….
Data Correction Approval (License)
• Shows list of data correction requests by DPs
• IRDA can approve these requests
Cancellation Approval (License/Certificate)
• Shows list of license cancellation requests
• IRDA can approve or reject
• IRDA can cancel with or without refund
Recall Cancellation Approval
• Shows list of license recall cancellation requests
• IRDA can approve or reject
Termination Approval
• Shows list of license termination requests by Corporate DP
• IRDA can approve or reject termination requests
Terminate License
• IRDA can terminate individual/corporate license
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