FINANCIAL SYSTEM AND ITS COMPONENTS

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briefings of financial system and its components ; financial market, financial assets and institutions has been given

briefings of financial system and its components ; financial market, financial assets and institutions has been given

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  • 1. INDIAN FINANCIAL SYSTEM By: Dr. Silony Gupta Assistant Professor, Department of MBA, Quantum School of Management, Roorkee, Uttarakhand
  • 2.  “Financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy”.  is the system that allows the transfer of money between savers (and investors) and borrowers.  is the set of Financial Intermediaries, Financial Markets and Financial Assets.  helps in the formation of capital.  meets the short term and long term capital needs of households, corporate houses, Govt. and foreigners.  its responsibility is to mobilize the savings in the form of money and invest them in the productive manner.
  • 3.  To link the savers & investors.  To inspire the operators to monitor the performance of the investment.  To achieve optimum allocation of risk bearing.  It makes available price - related information.  It helps in promoting the process of financial deepening and broadening
  • 4. Financial system Financial Intermediaries Financial Markets Financial Assets
  • 5.  Come in between the ultimate borrowers and ultimate lenders  provide key financial services such as merchant banking, leasing, credit rating, factoring etc.  Services provided by them are: Convenience( maturity and divisibility), Lower Risk(diversification), Expert Management and Economies of Scale.
  • 6. Financial Intermediaries Banks NBFCs Mutual Funds Insurance Organizations
  • 7.  Collect savings primarily in the form of deposits and traditionally finance working capital requirement of corporates  With the emerging needs of economic and financial system banks have entered in to:  Term lending business particularly in the infrastructure sector,  Capital market directly and indirectly,  Retail finance such as housing finance, consumer finance……  Enlarged geographical and functional coverage
  • 8.  A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/ bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, etc.  Provide variety of fund/asset-based and non- fund based/advisory services.  Their funds are raised in the form of public deposits ranging between 1 to 7 years maturity.
  • 9.  Depending upon the nature and type of service provided, they are categorised into:  Asset finance companies  Housing finance companies  Venture capital funds  Merchant banking organisations  Credit rating agencies  Factoring and forfaiting organisations  Housing finance companies  Stock brokering firms  Depositories
  • 10.  A mutual fund is a company that pools money from many investors and invests in well diversified portfolio of sound investment.  issues securities (units) to the investors (unit holders) in accordance with the quantum of money invested by them.  profit shared by the investors in proportion to their investments.  set up in the form of trust and has a sponsor, trustee, asset management company and custodian  advantages in terms of convenience, lower risk, expert management and reduced transaction cost.
  • 11.  They invest the savings of their policy holders in exchange promise them a specified sum at a later stage or upon the happening of a certain event.  Provide the combination of savings and protection  Through the contractual payment of premium creates the desire in people to save.
  • 12.  It is a place where funds from surplus units are transferred to deficit units.  It is a market for creation and exchange of financial assets  They are not the source of finance but link between savers and investors.  Corporations, financial institutions, individuals and governments trade in financial products on this market either directly or indirectly.
  • 13. Financial Market Money Market Capital/ Securities Market Secondary/ Stock Market Primary Market
  • 14.  A market for dealing in monetary assets of short term nature, less than one year.  enables raising up of short term funds for meeting temporary shortage of fund and obligations and temporary deployment of excess fund.  Major participant are: RBI and Commercial Banks  Major objectives:  equilibrium mechanism for evening out short term surpluses and deficits  focal point for influencing liquidity in economy  access to users of short term funds at reasonable cost
  • 15. Money Market Call Market T-bills Market Bills Market CP Market CD Market Repo Market
  • 16.  A market for long term funds  focus on financing of fixed investments  main participants are mutual funds, insurance organizations, foreign institutional investors, corporate and individuals.  two segments: Primary market and secondary market
  • 17.  A market for new issues i.e. a market for fresh capital.  provides the channel for sale of new securities, not previously available.  provides opportunity to issuers of securities; government as well as corporates.  to raise resources to meet their requirements of investment and/or discharge some obligation.  does not have any organizational setup  performs triple-service function: origination, underwriting and distribution.
  • 18.  A market for old/existing securities.  a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc.  enables corporates, entrepreneurs to raise resources for their companies and business ventures through public issues.  has physical existence  vital functions are:  nexus between savings and investments  liquidity to investors  continuous price formation
  • 19. Financial Instruments Primary Securities Indirect Securities Derivatives
  • 20. Securities issued by the non-financial economic units  Equity Shares: An equity share are the ownership securities. They bear the risk and enjoy the rewards of ownership.  Preference Shares: Holders enjoy preferential right as to: (a) payment of dividend at a fixed rate during the life time of the Company; and (b) the return of capital on winding up of the Company  Debentures: An creditorship security. Holders are entitled to predetermined interest and claim on the assets of the company.
  • 21.  Innovative Debt instruments: A variety of debt innovative instruments emerges with the growth of financial system to make them more attractive.  Participative Debentures: participate in the excess profits of the company after the payment of dividend.  Convertible debentures with options:  Third party convertible debentures: entitle the holder to subscribe to the equity of another firm at a preferential price.  Convertible debenture redeemable at premium: issued at face value with option to sell at premium.  Debt equity swap: offers to swap debentures for equity.  Zero coupon convertible notes : convertible in to shares and all the accrued /unpaid interest is forgone.
  • 22.  Warrants: entitles the holder to purchase specified number of shares at a stated price before a stated date. Issued with shares or debentures.  Secured premium notes with detachable warrants:  redeemable after lock-in period  warrants entitle the holder to receive shares after the SPN is fully paid  no interest during lock-in period  option to sell back SPN to company at par after lock-in.  no interest/ premium on redemption if option exercised  right to receive principal+interest in instalments, in case of redemption after expiry of the term  detachables required to be converted in to shares within specified period.
  • 23.  Non -Convertible debenture with detachable equity warrants: option to buy a specified no. of share at a specified price and time.  Zero interest Fully Convertible debentures: carries no interest and convertible in to shares after lock-in period.  Secured zero interest partly convertible debentures with detachable and separately tradable warrants:  Having two parts  Part A convertible at a fixed amount on the date of allotment  Part B redeemable at par after specified period from date of allotment.  Carries warrants of equity shares at a price to be determined by company
  • 24.  Fully convertible debentures with interest(optional):  No interest for short period  After that option to apply for equities at premium without paying for premium.  Interest is made from first conversion date to the second/final conversion date
  • 25.  Issued by financial intermediaries.  such as units of mutual funds, policies of insurance companies, deposits of banks, etc.  Better suited to small investors  Benefits of pooling of funds by intermediaries  Convenience, lower risk and expert management.
  • 26.  Derivative is a product whose value is derived from the value of one or more basic variables called base, in a contractual manner  The underlying asset can be equity/forex or any other assets.  The Securities Contracts (Regulation) Act, 1956 (SCIA) defined derivative to include- 1. A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security. 2. A contract which derives its value from the prices, or index of prices, of underlying securities.
  • 27. Derivatives Forward Contract Indirect Securities Options
  • 28.  is a customized contract between two entities, where settlement takes place on a specific date in the future at today's pre- agreed price.  At the end offsetting is done by paying the difference in the price.
  • 29.  is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price.  They are special types of forward contracts which are standardized exchange-traded contracts.
  • 30.  Contracts that give the buyer the right to buy or sell securities at a predetermined price within/at the end of a specified period.  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.