This power point file consists of a comprehensive understanding of the Indian Financial System, its components, structure and its working mechanism. The contents are tailor-made for B.COM and M.COM Students.

1. INDIAN FINANCIAL
SYSTEM
AUTHORED BY:
SAYANTAN GUHA MAZUMDER
 NET JRF
 ASSISTANT PROFESSOR IN SALT BROOK ACADEMY, B.COM PROGRAMME, DIBRUGARH
 FORMER GUEST FACULTY OF COMMERCE IN DHSK COMMERCE COLLEGE,
DIBRUGARH

2. MEANING OF FINANCIAL SYSTEM
FUNCTIONS OF FINANCIAL SYSTEM
COMPONENTS OF INDIAN FINANCIAL SYSTEM
IN DETAIL
OVERVIEW OF THE INDIAN FINANCIAL
SYSTEM
ECONOMIC REFORMS DURING THE POST
LIBERALIZATION PERIOD
UNIT-I
FINANCIAL SYSTEM

3. FINANCIAL SYSTEM
 A financial system is a system that covers financial
transactions and allows the exchange of funds
between lenders, investors and borrowers.
 Links investors with savers.
 Facilitates the flow of funds from the savers to the
investors to help in wealth creation and development
of both the parties.
 Comprises of a set of sub-systems of financial
institutions, financial markets, financial instruments
and financial services.

4.  Mr. A wants to buy fish.
 He will approach to the Fish Market
 He will be contacting a fish seller
 He will be negotiating and buying fish
 He will be handed with the pieces of fish by the fish
cutter, if any
FINANCIAL SYSTEM
Fish Market  Financial Market
Fish Seller  Financial Institutions
Fish  Financial Assets
Fish cutter  Financial services

5.  The financial system of a country is concerned with:-
 Mobilization and allocation of savings
 Provision of funds
 Facilitating the financial transactions
 Developing financial markets
• Contributes towards economic development as it helps
in creation of wealth by linking savings with
investments.

6. ROLE/FUNCTIONS OF FINANCIAL
SYSTEM
1. Link between savers and investors  mobilizes
and allocates savings into productive investment
2. Promotion of Liquidity  liquidity refers to cash or
money and other assets that can be easily converted
into money without loss of value and time 
financial market provides the opportunity to
liquidate their investments anytime.
3. Allocation of Risk  provides a mechanism for
managing and controlling risk in investments.

7. 4. Makes information available  provides detailed
information to the operators in the market
5. Reduces the cost of transactions and borrowing
 helps in creating a financial structure that lowers
the cost of transactions.
6. Capital Formation  facilitates the savings-
investments process  known as capital formation
7. Financial deepening and broadening  financial
deepening refers to increase in the financial assets as
a percentage of GDP
 financial broadening refers to building an
increasing number and a variety of participants and
instruments

8. 8. Better Decision Making  provide information
about the market and various financial assets 
helps the investors to compare different investment
options and choose the best one.
9. Facilitates payments  provides a payment
mechanism for the exchange of goods and services 
new methods of payment viz. credit cards, debit
cards etc. facilitate quick and easy transactions.

9. COMPONENTS/ ELEMENTS OF INDIAN
FINANCIAL SYSTEM

10. A. FINANCIAL INSTITUTIONS:
 Intermediaries who facilitate smooth functioning of
the financial system by making borrowers and
investors meet
 Middlemen between the savers (by accumulating
funds from them) and borrowers (by lending these
funds)
SAVERS deposits BANKS lends BORROWERS

11.  Categories of Financial Institutions:
a. Banking Institutions  accept deposits for the
purpose of lending loans  extends and create credit
 controlled by the Central Bank i.e. RBI
i. Organized Sector  commercial banks, co-
operative banks, regional rural banks and foreign
banks
ii. Unorganized Sector  indigenous bankers,
money lenders, sahukars etc.

12. b. Non-banking Institutions  lend funds but do
not create credit
i. Organized Sector  IDBI, SIDCs, NABARD etc. and
Investment institutions viz. LIC, GIC, UTI etc.
ii. Unorganized Sector  leasing companies, factoring
companies, housing finance companies etc.

13. B. FINANCIAL MARKETS:
 Market in which securities, commodities and
fungible items are traded at prices representing
supply & demand.
 Market for creation and exchange for financial assets.
 Link the savers and borrowers by mobilizing funds
between them.
 Categories of Financial Markets:
a. Money Market b. Capital Market

14. a. Money Market  financial institutions which deals
with short term funds in the economy  facilitates
borrowing and lending of short term funds  links
the lenders having short term investible funds with
the borrowers who are in need of short term funds.
Examples: promissory notes, bills of exchange etc.
b. Capital Market  facilitates the borrowing and
lending of long term funds like debentures, bonds
equity etc.  longer maturity

15. C. FINANCIAL INSTRUMENTS/ASSETS/SECURITIES:
 A financial instrument is a claim against a person or an
institution for the payment of a sum of money or a
periodic payment in the form of interest or dividend at
a specified future date.
 Categories of Financial Securities:
i. Primary Securities  direct securities as they are
issued directly by the ultimate savers or investors
ii. Secondary Securities  indirect securities as they are
not issued directly by the ultimate borrowers, rather
are issued by financial intermediaries to ultimate
savers.

16. D. FINANCIAL SERVICES:
 activities, benefits and satisfactions connected with
the sale of money that offer to users and customers
 Facilitate financial transactions of individuals and
institutional investors
 Asset based/Fund based services  lease
financing, hire purchase, insurance services etc.
 Fee based/ Advisory services  issue
management, portfolio management, credit rating
etc.

17. OVERVIEW OF THE INDIAN
FINANCIAL SYSTEM
 With the introduction of the LPG policy, the financial
system has undergone massive changes in its
structure.
 These changes can be studied into 3 stages:
1. Before Independence
2. After Independence till 1990
3. After 1990

18. STAGE I: BEFORE INDEPENDENCE
The pre-independence financial system was
characterized by the following:
The system was unorganized.
Capital Stock Exchanges had very few industrial
securities being traded in securities market.
There was no separate issuing institution.
Participation of financial intermediaries had almost
been nil in long term financing of industries.
Industry’s access to outside savings was also restricted.

19. STAGE II: AFTER INDEPENDENCE (1948-90):
After Independence, the government adopted mixed economic
system.
The post independence period stressed on planned economic
development which evolved in 1951  five year plans were
introduced.
New financial institutions were created to supply finance for
both agricultural and industrial development.
Developments that took place include:
 Nationalization of Financial Institutions
 Establishment of Development Banks
 Establishment of Institution for Agricultural development
 Development of Institution for Housing Finance
 Establishment of Stock Holding Corporation of India (SHCIL)
 Establishment of Mutual Funds and Venture Capital Institutions.

20. A. TRANSFER OF OWNERSHIP FROM PRIVATE TO
PUBLIC SECTOR:
 The important developments include:
a. Nationalization of RBI  RBI was nationalized in
the year 1949 through Reserve Bank (Transfer of Public
Ownership) Act, 1948  share capital was acquired by
CG.
b. Setting up of SBI  by taking over the Imperial Bank
of India and other state Associate banks  SBI was
constituted on July 1, 1955 under the SBI Act, 1935
c. Nationalization of Life Insurance Business 245
life insurance companies in 1956  LICI came into
existence on 1st Sept, 1956 under the LIC Act, 1956

21. d. Nationalization of Commercial Banks  14 major
commercial banks (with deposits of Rs. 50 Crores or
more) were nationalized in July,1969  another 6
commercial banks were nationalized in 1980
e. Nationalization of General Insurance Business
 1972 under the General Insurance Business
(Nationalization) Act,1972
B. SETTING UP OF FINANCIAL INSTITUTIONS:
 Main objective was to provide medium and long
term industrial finance to the corporate sector
 The financial institutions included DFIs, Investing
Institutions and other institutions

22. a. Development Finance Institutions  engaged in the
promotion and development of industry, agriculture and
other key sectors.
• In 1948, the first development bank i.e. IFCI was
established.
• Under the State Finance Corporations Act, 1951, SFCs
were organized to assist the small medium enterprises.
• In 1955, ICICI was established.
• In 1964, IDBI was set up as an apex institution in the area
of industrial finance.
b. Investing Institutions  UTI, LICI, GIC etc.
c. Other Institutions  Industrial Reconstruction
Corporation of India was set up in 1971 for rehabilitation
of sick units; in 1982, EXIM Bank was established;
NABARD was also established in 1982.

23. STAGE III: AFTER 1990s:
a. Entry of Private Sector
b. Changing Role of Development Finance Institutions
c. Emergence of NBFCs
d. Growth of Mutual Fund Industry
e. Developments in Secondary Market/ Stock Market

24. ECONOMIC REFORMS DURING
POST LIBERALIZATION PERIOD
 The core objectives of the financial sector reforms are
strengthening of the financial sector and improving the
functioning of the financial markets.
 Financial Sector Reforms in India are on the following
areas:
1. Regulators
 The Govt. acknowledged the important role of regulators.
 The RBI has become more independent
 SEBI AND IRDA became important institutions
 Some opinions are also there that there should be a super
regulator for the financial services sector instead of
multiplicity of regulators.

25. 2. The Banking System/ Banking Sector Reforms:
 In August, 1991, the GOI formed a high level
committee called the Narasimham Committee led by
economist Narasimham in order to suggest policy for
banking sector reforms.
 Recommendations of the Narasimham Committee:
 Reduction in SLR from 38.5% to 25%; Current SLR
rate is 18%
 Reduction in CRR. Current CRR is 4%
 Determination of interest rates by market forces
 Reduce the stock of NPA
 Freedom of operations  banks are free to open new
branches

26. 3. Capital Market Reforms:
Establishment of SEBI in 1992 for protecting the
interests of the investors
Online trading facility has been introduced
Opening of capital market to FIIs and allowing India
companies to raise capital abroad
NSE was established in 1994 as an automated
electronic exchange

27. BANKING INSTITUTIONS: COMMERCIAL BANKS
RURAL BANKING AND NABARD
CENTRAL BANK AND RBI

28. COMMERCIAL BANKS
Commercial bank is a financial institution which
accepts deposits from the public and gives loans for
the purposes of consumption and investment.
Main aim is deposit taking and lending loans
Performs the function of banking  accepting
deposits for the purpose of lending.

29. FUNCTIONS OF COMMERCIAL
BANKS

30. A. PRIMARY FUNCTIONS:
1. Acid-test Functions:
i. Accepting Deposits  mobilize deposits from
the public
ii. Advancing Loans  lending must be on the
basis of funds raised through acceptance of
deposits
2. Other Primary Functions:
i. Credit Creation  expansion of deposits
through loans and investment
ii. Cheque System of Payment of Funds
directing the banker to make the payment

31. B. SECONDARY FUNCTIONS:
1. Agency Functions  acts as an agent of the
customer
i. Collection and Payment of credit and other
instruments
ii. Sale and purchase of stock exchange securities
iii. Administration of wills and trusteeship
iv. Remittance and Correspondence
2. General Utility Services
i. Locker Facility
ii. Acting as a referee
iii. Acting as Underwriters
iv. Acting as information banks
v. Issuing letters of credit and gift cheques

32. SOURCES & APPLICATION OF
FUNDS OF COMMERCIAL BANKS
PERFORMA OF A BALANCE SHEET OF A BANK

33. RURAL BANKING & NABARD
 Rural Bank:  financial institution that rationalizes
the developing regions or developing country to
finance their needs specially the projects regarding
agricultural progress
 Provides customized financial services to rural
communities
 Caters to the needs of the rural public in India’s
villages
 Main aim is to advance credit to small farmers,
agricultural labourers, artisans and small
entrepreneurs  develop agriculture, trade,
commerce, industry etc.

34. BASIS RURAL BANK COMMERCIAL BANK
1. MEANING Rationalize the developing
regions to finance their
needs  agricultural
Accepts deposits for the
purpose of lending
2. POPULATION Serves customers from the
rural villages
Serves the general
population
3. SCOPE Limited to agricultural
finance, small sector loans
etc.
Wider in scope
4. FOCUS More focus on accepting
deposits and granting loans
Focuses on many other
services
5. PURPOSE Development of rural and
backward areas
Make profits out of its
operations
6. STAKEHOLDERS GoI, SG & Commercial
Banks
Public, CG etc.

35. REGIONAL RURAL BANKS
 RRBs  set up by the SG and the sponsoring
commercial banks  developing the rural economy.
 RRBs are set up as rural lending institutions under the
RRB Act, 1976.
 Established in 1975 under the provisions of the
Ordinance promulgated on 26th September, 1975.
 RRBs provide banking services and credit to small
farmers and small entrepreneurs in the rural areas.
 The RRBs are under the control of NABARD.

36. FUNCTIONS OF RRBs:
i. Granting of loans and advances to small and
marginal farmers and agricultural labourers or
cooperative societies for agricultural purposes.
ii. Granting of loans and advances to artisans, small
entrepreneurs engaged in trade, commerce and
industry
iii. Accepting deposits
iv. Acting as a financial agent of the customers
v. Other functions viz. issuing cheque books, demand
drafts etc.

37. NABARD
 NABARD  National Bank for Agriculture and Rural
Development.
 Apex development bank in India established on 12 July,
1982 by a Special Act of the Parliament  focus on
agriculture and rural development
 Headquartered at Mumbai with branches all over
India.
 Established on the recommendations of the committee
under the chairmanship of Mr. Shriraraman
 Entrusted with matters concerning policy, planning
and operations in the field of credit for agriculture and
other economic activities in rural areas

38. FUNCTIONS OF NABARD
1. Provides investment and production credit for promoting
the various developmental activities in rural areas.
2. Refinances the loans granted by the SG, State Co-
Operative Banks, Land Development Bank, RRB and
other financial institutions for purposes of rural
development.
3. Co-ordinates the rural financing activities of all
institutions engaged in developmental work at the field
level.
4. Promotes research in rural banking and the field of
agriculture and rural development.
5. Partakes in development of institutions and provides
training facilities to institutions working in the field of
rural uplifment.

39. CENTRAL BANK
 Central Bank is an apex institution in the banking
and financial structure of a country.
 Regulates the monetary system of an economy.
 Leader of the money market  plays an important
role in controlling, regulating, supervising and
developing the banking and financial structure of
the economy
 It is called central  it occupies a central place in the
monetary and banking structure of the country
 Manages the expansion and contraction of the
volume of money in the interest of general public
welfare.

40. BASIS CENTRAL BANK COMMERCIAL BANK
1. MEANING Apex institution of the monetary
and banking structure of the
country
Accepting deposits for the
purpose of lending
2. OBJECT Aims at maximizing the public
welfare
Earn profit
3. OWNERSHIP State owned institution Private or public joint
stock banks
4. SCOPE Controls the entire banking
system of the country
Operates under the
guidelines of the Central
Bank
5. BANKER Banker of government and also
commercial banks
Banker of public
6. NOTE-ISSUE Sole monopoly over note issue Cannot issue notes

41. FUNCTIONS OF RBI/CENTRAL BANK
A. TRADITIONAL FUNCTIONS:  fundamental
functions of every Central Bank
a. Issue of Currency Notes:  sole right or monopoly of
issuing currency notes except one rupee notes and coins
of smaller denominations  because of three reasons:
 Brings uniformity to note issue
 Easier to supervise the note issue
 Helps in stabilization of the internal and external value of the
currency
b. Banker, Fiscal Agent and Advisor to the Government:
 Banker  accepts deposits from central and state
government, makes collections and payments on their
behalf
 Fiscal Agent  manages national debt and issue of
securities and loans
 Advisor  advises on all policy matters

42. c. Banker to the Banks  bank of the commercial
banks  holds cash reserves of commercial banks
d. Lender of the Last Resort  helps the commercial
banks at the time of financial crisis by granting loans
e. Clearing House Function  as all banks have their
accounts with the central bank  bank of clearance,
settlement and transfer
f. Controller of Money Supply and Credit 
regulates the credit creation capacity
g. Foreign Exchange Control  buys and sells foreign
currencies

43. B. DEVELOPMENTAL/PROMOTIONAL
FUNCTIONS:
i. Promotion of Commercial Banking
ii. Promotion of Co-operative Banking
iii. Promotion of Agricultural and Rural Credit
iv. Promotion for Finance for Exports
C. SUPERVISORY FUNCTIONS:
i. Granting license to Banks
ii. Bank Inspection
iii. Control over NBFIs
iv. Implementation of Deposit Insurance Scheme

44. MONETARY POLICY
 Process by which the central bank controls the supply
of money in the economy  to ensure price stability,
achieve high economic growth and to meet some
specified macro-economic objectives
 Regulates the availability, cost and use of money and
credit
 Change in money supply changes the prevailing
interest rate
 Important tool of macro-economic management

45. OBJECTIVES OF MONETARY POLICY
1. Rapid Economic Growth
2. Price Stability
3. Exchange Rate Stability
4. Balance of Payments Equilibrium
5. Full Employment
6. Neutrality of Money
7. Stabilization of the Money Market
8. Promote Efficiency

46. TOOLS OF MONETARY POLICY/
CREDIT CONTROL METHODS
A. QUANTITATIVE OR GENERAL METHODS:
 Regulates the volume of total credit
i. Bank Rate  rate at which Central Bank lends
money to commercial banks in case of shortage of
reserves
 Inflation RBI increases bank rate  borrowings
of commercial banks will decrease money supply
will decrease
 Deflation RBI decreases bank rate  borrowings
will increase  money supply will increase

47. ii. Open Market Operations purchase and sale of short
term and long term securities by the RBI
 Inflation  RBI sells securities commercial banks
buy them  money supply in the economy reduces
 Deflation  RBI buys securities  money supply
increases
iii. Variable Reserve Ratio = CRR + SLR
 Cash Reserve Ratio (CRR)  proportion of Net
Demand and Time Liabilities to be maintained with RBI
in the form of reserves
 Increase in CRR  decreases money supply
 Decrease in CRR  increases money supply
 Statutory Liquidity Ratio (SLR)  proportion of
reserves to be maintained in the form of gold or foreign
securities with itself

48. B. QUALITATIVE OR SELECTIVE METHODS:
 Regulate credit in particular segments of the
economy
i. Fixing Margin Requirements  difference
between amount of loan granted and value of
security mortgaged
ii. Credit Rationing  prescribes the maximum limit
and amount of credit that commercial banks can
grant
iii. Moral Suasion  oral or written appeals made by
the country’s central bank to its member banks to
either increase or decrease money supply in the
economy

49. iv. Direct Action  directions and restrictions
enforced on the commercial banks  RBI imposes
action against the bank if certain banks are not
obeying the RBI’s directives
v. Publicity  RBI publishes various reports stating
what is good and what is bad in the system

50. UNIT 3
FINANCIAL MARKETS
•MONEY MARKET
•CAPITAL MARKET: PRIMARY & SECONDARY
MARKET
•MERCHANT BANKING & ITS FUNCTIONS
•UNDERWRITERS
•MARKETABLE & NON MARKETABLE
SECURITIES

51. FINANCIAL MARKET
 Market in which securities, commodities and
fungible items are traded at prices
representing supply & demand.
 Market for creation and exchange for
financial assets.
 Link the savers and borrowers by mobilizing
funds between them.

52. PARTICIPANTS IN FINANCIAL
MARKET
 Banks
 Financial Institutions
 Brokers
 Merchant Bankers
 Foreign Institutional Investors
 Custodians
 Stock Exchange
 Depositories

53. MONEY MARKET
a. financial institutions which deals with short
term funds in the economy  facilitates
borrowing and lending of short term funds 
links the lenders having short term investible
funds with the borrowers who are in need of
short term funds.
Examples: promissory notes, bills of
exchange etc.
 Short term credit market  deals in assets of
relative liquidity  reservoir of short term
funds

54. INSTRUMENTS DEALT IN
MONEY MARKET
1. Call and Short Notice Money
 Call money refers to a money given for a very
short period  maturity should be more than
14 days.
 Notice Money  when money is borrowed or
lent for more than a day and up to 14 days
 If the loan cannot be called back on demand
and will require a notice of at least 3 days, it
is called money at short notice

55. 2. Commercial Bills:
 negotiable, self liquidating  finances the
working capital requirements of business
firms
3. Treasury Bills:
 Issued by the CG on behalf of the GoI
 Overcomes liquidity shortfalls
 Duration 91 days
 Highly secured because of guarantee of
repayment by the RBI
4. Certificate of Deposits:
 unsecured, negotiable, short term
instruments in bearer form issued by
commercial banks and DFIs.

56. 5. Commercial Papers:
 Unsecured short term promissory notes
issued by reputed and well established
companies having high credit rating
 These instruments are traded in their
respective markets:
◦ Call Money Market
◦ Collateral Loan Market
◦ Acceptance Market
◦ Commercial Bill and Treasury Bill market
◦ Certificate of Deposit Market
◦ Commercial Paper Market

57.  Economic Development
 Development of Capital Market
 Profitable Investment
 Borrowings by the government
 Helpful to Central Bank
 Mobilization of funds
 Self Sufficiency of Commercial Banks
 Savings and Investment

58. 1. Highly Developed Commercial Banking
System
2. Presence of a Central Bank
3. Existence of Specialized Sub-markets
4. Existence of Near Money Assets
5. Availability of ample resources
6. Integrated interest rate structure
7. Remittance facilities
8. Other Factors

59. facilitates the borrowing and lending of long
term funds like debentures, bonds equity etc.
longer maturity
BASIS MONEY MARKET CAPITAL MARKET
1. MEANING lending and borrowing of
short term funds are done
long term funds are
issued and traded
2. LIQUIDITY Higher degree of liquidity Less liquid
3. RISK &
SAFETY
Less risky  safe High risk

60. BASIS MONEY MARKET CAPITAL MARKET
4. Instruments Treasury bills, commercial
papers, certificate of deposits
etc.
Shares, debentures,
bonds, retained
earnings etc.
5. Participants FIs, banks, public & private
companies but foreign and
ordinary retail investors do
not participate in money
market
FIs, banks, public &
private companies,
foreign investors,
ordinary retail
investors, stock
exchange
6. Purpose Short term credit
requirements
Fulfill long term credit
requirements of the
companies
7. Expected
Return
Less due to short duration Higher in capital
market as along with
regular dividend or
interest
8. Type of
Capital
Working capital requirements Fixed capital
requirements
9. Duration Tenure less than 1 year Deals in medium and
long term securities

61.  The New Issue Market represents the Primary
Market where new securities i.e. shares or
bonds that have never been previously issued
are offered
 It deals with new securities being issued for
the first time  IPOs
 Prime function is to facilitate the transfer of
funds from the willing investors to the
entrepreneurs setting up new corporate
enterprises or going in for expansion,
growth, diversification or modernization.

62. 1. Related with the new issue
2. No particular place
3. Purpose of raising finance
4. Promotes Capital Formation
5. Methods of Floating Capital
6. It comes before Secondary Market

63. 1. Origination  work of investigation, analysis
and processing of new project proposals
2. Underwriting agreement whereby the
underwriter promises to subscribe to a
specified number of shares or debentures in
the event of public not subscribing to the issue
3. Distribution  sale of securities to ultimate
investors
4. Capital Formation  raise capital at lower costs
5. Liquidity  high liquidity
6. Diversification of risk  reduces the overall risk
7. Reduction in Cost

64.  Market where existing securities are traded
 Market for the sale and purchase of previously
issued or second hand securities
 Provides liquidity and marketability to existing
securities
 “Stock Exchange means an association,
organization or body of individuals, whether
incorporated or not established for the purpose
of assisting, regulating and controlling the
business of buying, selling and dealing in
securities.” - The Securities Contract
(Regulation) Act

65. 1. Liquidity  provide ready market for sale
and purchase of securities
2. Continuous market for securities  regular
market for trading in securities
3. Pricing of Securities  valued on the basis
of demand and supply factors
4. Safety of Transactions  dealings are well
defined according to the legal framework
5. Mobilizing Surplus Savings  attractive
opportunities  more savings

66. 6. Economic Barometer  measures the
economic condition of a country
7. Contributes to Economic Growth  capital
formation  economic growth
8. Listing of securities  permission to quote
shares and debentures in the trading
platform
9. Spreading of Equity Cult  encourages
people to invest in ownership securities,
regulates new issues, educates public

67. 10. Providing Scope for Speculation  healthy
speculation is necessary to ensure liquidity
11. Clearing House of Business Information
 provide financial statements, annual
reports and other reports to ensure
maximum publicity
12. Better Allocation Of Capital  leading to
higher profits

68. BASIS PRIMARY MARKET SECONDARY MARKET
1. Meaning New securities are issued Second hand securities are
traded
2. Type of
Purchasing
Securities are sold by
company to the investor
directly
Securities are traded
between investors
3. Price Fixed by the
management of the
company
Fixed by demand and
supply forces
4. Capital
Formation
Direct capital formation Indirect capital formation
5. Geographical
location
No fixed marketplace Present physically as stock
exchange
6. Income The amount received
from the securities are
the income of the
company
Income belongs to the
investors
7. Frequency Securities can be sold
only once
Securities can be sold an
infinite number of times
8. Entry All companies Only listed companies

69.  Combination of banking and consultancy services
 Provides consultancy, advice, guidance and
service to its clients for financial, marketing,
managerial and legal matters for a fee.
 Helps a businessman to start a business, raise
finance, expand and modernize the business,
restructure the business etc.
 Acts as a financial engineer for a business.
 Provides advice to entrepreneurs right from the
stage of conception of the project till the
commencement of production
 Also known as Investment Banker

70. 1. Corporate Counselling
2. Project Counselling
3. Capital Restructuring Services
4. Portfolio Management
5. Issue management
6. Loan/Credit Syndication
7. Lease Finance
8. Venture Capital
9. Underwriting of Public Issue
10. Revival of Sick Industrial Units

71.  Underwriting  undertaking a responsibility
or giving a guarantee that the securities
offered to the public will be subscribed for.
 Firms undertaking the guarantee are called
underwriters.
 Underwriting is a guarantee given by the
underwriter that in the event of under
subscription, the amount would be provided
by him to the extent of under subscription.
 An insurance term as it provides protection to
the issuing company against the failure of an
issue of capital to the public.

72.  The underwriters, for providing this service,
charge a commission at a rate on the issue
price of the securities.
Role of Underwriters:
 Assurance of Adequate Finance
Supplying valuable information to companies
Distribution of securities
Increase in Goodwill of the issuing company
Service to prospective investors
Service to the society

73. SEBI: OBJECTIVES & FUNCTIONS,
MANAGEMENT, POWERS & FUNCTIONS
MUTUAL FUND: MEANING, TYPES, ROLE,
PROBLEMS

74. SECURITIES EXCHANGE
BOARD OF INDIA
As a result, a separate regulatory body in the name of SEBI was
established.
Customers started losing confidence in the stock market
With the growth in the dealings of the stock market, lot of
malpractices also started in stock markets.
The Capital Market witnessed tremendous growth during 1980s
due to increasing participation of public.

75.  SEBI was established by the GoI on 12
April,1988 interim administrative body to
promote orderly and healthy growth of securities
market + for investor protection.
Regulator, controller & promoter for securities
market
 Statutory status  30 Jan, 1992
Set up under SEBI Act, 1992 with the aim of
protecting the interests of the investors,
promoting the development of investments in
securities and controlling the security market.

76. OBJECTIVES OF SEBI:
ISSUERS
INVESTORS
INTERMEDIARIES

77. i. To the Issuers:
 SEBI provides a marketplace in which they
can raise finance
ii. To the Investors:
 SEBI provides protection and supply of
accurate and correct information
iii. To the Intermediaries:
 SEBI provides a competitive professional
market

78.  The basic purpose of SEBI is to create an
environment to facilitate efficient mobilization
and allocation of resources through the
securities market.
 Also keeps a check on the malpractices and
protect the interest of investors.
 The main objectives of SEBI are:
i. Regulation of Stock Exchanges
ii. Investor Protection
iii. Prevent trading malpractices
iv. Develop a code of conduct

79. FUNCTIONS OF SEBI
 The Preamble of the SEBI describes the
functions of SEBI:
i. To protect the interests of investors in
securities.
ii. To promote the development of the
securities market.
iii. To regulate the securities market.
iv. For matters connected therewith or
incidental thereto.

80. A. REGULATORY FUNCTIONS:
 Regulates the business in stock exchange
a. SEBI has framed rules and regulations and a code
of conduct to regulate the intermediaries
b. Registers and regulates the working of stock
brokers, sub brokers, share transfer agents,
trustees etc.
c. Registers and regulates the working of collective
investment schemes and MFs
d. Regulates takeover of the companies.
e. Levies fees, penalties or other charges for
carrying out the purpose of the Act.
f. Considers inquiries and audit of stock exchanges.

81. B. DEVELOPMENTAL FUNCTIONS:
 Promotes and develops the stock exchange activities and
increase the business in stock exchange
i. SEBI promotes training of intermediaries
ii. Tries to promote activities of stock exchange by
adopting flexible and adaptable approach in the
following ways:
a. It has permitted internet trading through brokers
b. Made underwriting optional to reduce the cost of issue
c. IPOs are permitted
iii. Conducts research and publishes information useful to
all market participants

82. C. PROTECTIVE FUNCTIONS:
 Protects the interests of investors and provide safety of
investment
i. Checks Price Rigging  manipulation of prices
ii. Prohibits insider trading  takes action against insiders
iii. Prohibits fraudulent practices
iv. Promotes fair practices
v. Educates Investors

83. MANAGEMENT OF SEBI
 The affairs of the SEBI shall be managed by a board.
A. Formation of the Board:
 The Board shall consist of the following members:
a. A Chairman  appointed by CG
b. 2 members from amongst the Officials of the Ministry
of CG  nominated by CG
c. One member from the officials of RBI  nominated
by RBI.
d. 5 other members from which at least 3 shall be whole
time members to be appointed by the CG
 The members shall be persons of ability, integrity and
standing who have shown capacity in dealing with the
problems of the securities market.

84. B. Term of Office and Conditions of Service:
 Term of office  as prescribed
 The appointment can be terminated at any time before the
expiry by giving not less than 3 months notice or 3 months’
salary and allowances in lieu thereof.
C. Removal of Member from Office:
 The CG shall remove a member from office, if:
a. Declared insolvent
b. Of unsound mind
c. Convicted of an offence
d. Abused his position
D. Meetings (Operation of the Board):
 Decisions are to be made by a majority vote
 In the event of equality of votes, the Chairman or the
presided member has a second or casting vote.

85. POWERS AND FUNCTIONS OF SEBI
regarding protection of the interests of
investors
 Investors are the pillars of the financial and securities
market.  determine the level of activity in the market.
 The powers of SEBI regarding protection of investors can
be stated as:
1. According to the provisions of the Companies Act,
SEBI may for the protection of investors –
a. Specify, by regulations-
i. The matters relating to issue of capital, transfer of
securities and other matters incidental thereto;
and
ii. The manner in which such matters shall be
disclosed by the companies.

86. b. By general or special orders-
i. Prohibit any company from issuing of prospectus, any
offer document, or advertisement soliciting money
from the public for the issue of securities
ii. Specify the conditions subject to which prospectus,
such offer document or advertisement may be issued.
2. According to the provisions of section 21 of the
securities contracts (Regulation) Act, 1956, the
Board may specify the requirements for listing
and transfer of securities and other matters
incidental thereto.

87.  SEBI has given the following guidelines for protecting
the interest of the investor:
A. Disclosing fair and adequate information for the
investor for the purpose of the investment decision.
B. Disclose its capacity utilization, adverse events and
material changes of key personnel.
C. Right to cancel registration of any underwriter who
fails to furnish business details to SEBI.
D. Evolved a system of redressal of investor grievances.
E. Encourages investor- education.

88. MUTUAL FUND
DIFFERENT TYPES OF MUTUAL FUND SCHEMES
ROLE OF MUTUAL FUNDS IN FINANCIAL MARKET
PROBLEMS OF MUTUAL FUND IN INDIA

89. HOW DOES MUTUAL FUND WORK?

90. MUTUAL FUND
Institutional device or an investment vehicle
through which the investors pool their savings
for investing in a diversified portfolio of
securities with the aim of attractive yields and
appreciation in their value
The fund is termed as ‘mutual’ as all its returns
minus expenses are shared by the investors.

91.  “A Mutual Fund is a financial service
organization that receives money from
shareholders, invests it, earns returns on it,
attempts to make it grow and agrees to pay the
shareholders cash on demand for the current
value of his investment.” – as per Mutual Fund
Book published by Investment Company Institute of the
U.S.A

93. TYPES OF MF SCHEMES:
A. According to Ownership:  type of
company that sponsors the mutual funds.
a. Public Sector Mutual Funds:
 Mutual funds registered with and regulated by SEBI 
government, its financial institutions and public sector
banks hold individually or collectively more than 50%
of equity of the AMC
b. Private Sector Mutual Funds:
 Sponsored by the companies of the private sector.

94. B. According to Scheme of Operations:
 On the basis of the functions that a fund
performs
i. Open-Ended Schemes:
 Offers units for sale without specifying any duration
for redemption
 No fixed maturity; entry is always open
ii. Close-Ended Schemes:
 Period of maturity of the scheme is specified
 Subscription can be made only at the time of initial
issue
iii. Interval Schemes:
 Kept open for a specific interval and after that, it
operates as a closed scheme

95. C. According to Portfolio:
 On the basis of types of securities in which
investments are made
i. Income Funds:
 Aim is to provide safety and regular income to
investors
 Income is distributed periodically amongst the
investors
 Return as well as risk is lower
ii. Growth Funds:
 Aim at providing capital appreciation in the
value of investment
 Concentrate on value appreciation of securities
and not on regularity of income

96. iii. Balanced or Conservative Funds:
 Invest in both common stock and preferred
stock
 Aim is to provide both capital appreciation in
stock as well as regular return/income in the
shape of interest and dividend
iv. Stock/Equity Fund:
 Invest in shares of the companies
 Aim is to generate potentially superior returns
by taking on higher risk
v. Debt/Bond Funds:
 Invest in debt instruments to ensure low risk
and provide a fixed and regular income to the
investors

97. vi. Money Market Mutual Funds:
 Invests in money market instruments viz. treasury
bills, call and notice money, commercial paper etc.
 Aim is to provide easy liquidity, preservation of
capital and moderate income
D. According to Geographical Location:
 On the basis of location from which they mobilize
funds
i. Domestic Funds:  mobilize resources from a
particular geographical locality within a country
ii. Off-shore Funds:  mobilize funds in countries
other than where investments are to be made

98. Role of MF in the Indian Financial
Market
1. Mobilize Savings  savings of small
investors are mobilized, invested and returns
are distributed in the same proportion
2. Portfolio Diversification spread out and
minimize risks
3. Professional Management  benefit of
expert supervision and management
4. Liquidity  convertible into cash
5. Tax benefit tax advantages under the
Income tax Act

99. 6. Low Operating Cost  large investible
funds  economies of large scale reduces
transaction costs
7. Boost to Capital Market bridges the gap
between investors and capital market
8. Flexibility  provide flexible investment
plans to its subscribers viz. regular investment
plans, regular withdrawal plans, dividend
reinvestment plans
9. Investor Protection  MFs are regulated
and monitored by SEBI

100. 10.Reduced Risk and Higher Returns:
 mutual funds invest in a large number of
companies and are managed professionally the
risk is reduced  higher returns
11.Systematic Approach to Investments:
 Systematic approaches viz. Systematic
Investment Plan (SIP), Systematic Withdrawal
Plan (SWP), Systematic Transfer Plan (STP)
etc. promote an investment discipline.

101. PROBLEMS OF MF IN INDIA
1. Liquidity Crisis  bad delivery; no easy exit
2. Inadequate Research  no facilities for in-
house research
3. Low level of awareness  low financial
literacy
4. Inadequate Disclosures  not clearly
understandable
5. Lack of Satisfactory Performance  no
performance guarantee
6. Delays in Service  no response to complaints
7. Conventional Pattern of investment low
returns
8. High cost high fees and commissions
9. Lack of Innovation  no innovative schemes

102. MUTUAL FUNDS: RBI GUIDELINES
• 1. Prior approval of the RBI should be obtained by
banks before undertaking mutual fund business.
• 2. Bank-sponsored mutual funds should comply
with guidelines issued by SEBI from time to time.
• 3. The bank-sponsored mutual funds should not use
the name of the sponsoring bank as part of their
name.
• 4. Where a bank's name has been -associated with a
mutual fund, a suitable disclaimer clause should be
inserted while publicizing new schemes that the
bank is not liable or responsible for any loss or
shortfall resulting from the operations of the
scheme.

103. • 5. Banks may enter into agreements with mutual funds for marketing the
mutual fund units subject to the following terms and conditions:
• a. Banks should only act as an agent of the customers, forwarding the
investors' applications for purchase I sale of MF units to the Mutual Funds/
the Registrars / the transfer agents. The purchase of units should be at the
customers' risk and without the bank guaranteeing any assured return.
• b. Banks should not acquire units of Mutual Funds from the secondary
market.
• c. Banks should not buy back units of Mutual Funds from their
customers.
• d. If a bank proposes to extend any credit facility to individuals against
the security of units of Mutual Funds, it should be as per guidelines of RBI
on advances against shares / debentures and units of mutual funds.
• e. Banks holding custody of MF units on behalf of their customers,
should ensure that their own investments and investments made by /
belonging to their customers are kept distinct from each other.
• f. Banks should put in place adequate and effective control mechanisms
in this regard. Besides, with a view to ensuring better control, retailing of
units of mutual funds may be confined to certain select branches of a bank.