FMS Material

SRI SATHYA SAI PG COLLEGE 2010
The structure of the Financial system in India
The Indian Financial System is broadly classified into broad groups:
1. Organized sector
2.Un organized sector
The Financial system is also divided into users of financial services and providers. Financial
system is also divided into users of financial service s and providers. Financial institutions sell
their services to house holds, businesses and government. They are the users of the financial
services. The boundaries between these sectors are not always clear cut.
Organized Indian financial system: The organized financial system comprises of an

impressive network of banks, Other Financial and Investment Institutions and a range of
financial instruments, which together function in fairly developed capital and money markets.
Short-term funds are mainly provided by the commercial and co-operative banking structure.
Un Organized Financial System: The unorganized Financial system comprises of relatively

less controlled money lenders, indigenous bankers ,lending pawn brokers, land lords, traders
etc. This part of the financial system is not directly amenable to control by the Reserve bank of
India.
FINANCIAL MARKETS&SERVICES PREPARED BY K.SANKARA RAO.

Structure of Financial Institutions in India
Reserve BankBank
Reserve of India
of I
Commercial Banks Co-Operative Societies Other Institutions
Public Private
sector sector
Foreign Non-scheduled
banks banks State land State Co-
development Operative
Banks Banks
Nationalized Regional Rural Co-Operative

Central Co-
Banks
Banks operative Banks
Other institu
Banks
Other Institutions Primary Agriculture
Other Indian Urban cooperative
Banks Credit societies Banks
Banks
Government Public Sector Private Sector
1. National savings LIC,GIC, UTI, 1. Chits, Nidhis,

corporation. DICGC,ECGC, cooperative bodies,
Hire purchase,
2.Post office savings Exim Bank, merchant banking
bank
IDBI BANK,IFCI,IIBI, Leasing companies
Employees
provident fund NABARD, Stock exchange
SIDC, SFCs, Finance companies
SIDBI,SEBI
Credit rating,

Objectives of the financial system-Economic development:
The main objective the financial system is to serve as an agent of socio-economic development
in various sectors, viz; industry, agriculture and international trade. The first and foremost task of
any financial system is to accelerate the growth of the economy. Positive effects of economic
growth are Income distribution, Quality of life, Resource depletion, Environmental impact.
Objectives:
-Speed up economic growth Rapid industrialization
Support to agriculture Support to trade
Rural development Entrepreneurial development
Project finance Development of back ward areas
Housing, Education, Health Infrastructure
Liquidity and Price control Support to institutions
Human development Environment
Research and development
Role of the Financial System in economic development:
Financial systems provide payment services. They mobilize savings and allocate credit. These
diverse services used in varying combinations by households, businesses and governments and
are rendered through an array of instruments and institutions.
Financial services make it cheaper and less risky to trade goods and services and to borrow and
lend.
Finance is the key to investment and hence to growth. Providing saved resources to others with
more productive uses for them raises the income of saver and borrower alike.
Market based arrangements are voluntary. As such, they are driven by the desire for profit,
tempered by concerns about risk.

Functions of Financial System: A financial system performs the following functions:
* It serves as a link between savers and investors. It helps in utilizing the mobilized savings of
scattered savers in more efficient and effective manner. It channelizes flow of saving into
productive investment.
* It assists in the selection of the projects to be financed and also reviews the performance of
such projects periodically.
* It provides payment mechanism for exchange of goods and services.
* It provides a mechanism for the transfer of resources across geographic boundaries.
* It provides a mechanism for managing and controlling the risk involved in mobilizing savings
and allocating credit.
* It promotes the process of capital formation by bringing together the supply of saving and the
demand for investible funds.
* It helps in lowering the cost of transaction and increase returns. Reduce cost motives people to
save more.
* It provides you detailed information to the operators/ players in the market such as individuals,
business houses, Governments etc.
Financial System: The word "system", in the term "financial system", implies a set of complex
and closely connected or interlined institutions, agents, practices, markets, transactions, claims,
and liabilities in the economy. The financial system is concerned about money, credit and
finance-the three terms are intimately related yet are somewhat different from each other. Indian
financial system consists of financial market, financial instruments and financial intermediation
Components/ Constituents of Indian Financial system:

The following are the four main components of Indian Financial system
1.Financial institutions
2.Financial Markets
3 Financial Instruments/Assets/Securities
4.Financial Services.
Financial institutions: Financial institutions are the intermediary who facilitates smooth
functioning of the financial system by making investors and borrowers meet. They mobilize
savings of the surplus units and allocate them in productive activities promising a better rate of
return. Financial institutions also provide a service to entities seeking advises on various issues
ranging from restructuring to diversification plans. They provide whole range of services to the
entities who want to raise funds from the markets elsewhere. Financial institutions act as
financial intermediaries because they act as middlemen between savers and borrowers, where

these financial institutions may be of Banking or Non-Banking institutions.
Financial Markets: Finance is a prerequisite for modern business and financial institutions play
a vital role in economic system. It's through financial markets the financial system of an
economy works. The main functions of financial markets are:
1. to facilitate creation and allocation of credit and liquidity;

2. to serve as intermediaries for mobilization of savings;
3. to assist process of balanced economic growth;
4. to provide financial convenience
Financial Instruments: Another important constituent of financial system is financial

instruments. They represent a claim against the future income and wealth of others. It will be a
claim against a person or an institution, for the payment of the some of the money at a specified
future date.
Financial Services: Efficiency of emerging financial system largely depends upon the quality
and variety of financial services provided by financial intermediaries. The term financial services
can be defined as "activities, benefits and satisfaction connected with sale of money that offers to
users and customers, financial related value".
BENEFITS OF FINANCIAL INTERMEDIATION (INSTITUTIONS):
Financial intermediaries have three main sources of proportional advantage compare to others.
First, financial institutions can achieve economies of balance through specialization of what they
offer and do, because they handle large numbers of transactions, they are able minimize the fixed
cost through spreading between them. Second, financial institutions’ searching and transaction
cost for credit information can be minimized. Lastly, financial institutions have the ability to get
important information concerning the borrowers’ financial position because they have a history
of exercising discretion with this type of information, and they also can reduce unreliable
information concerning about the borrower
SERVICES OF FINANCIAL INSTITUTIONS: In transferring resource allocation from direct

financing to indirect financing, financial institutions provide the following five basic services:
a. Currency alteration: Buying financial claims denominated in one currency and selling
financial claims denominated in another currencies.

b. Quantity Divisibility: Financial institutions are capable in producing a broad range of quantity
from one dollar to many millions, by gathering from different people.
c. Liquidity: Easy to liquidate the instruments by buying direct financial claims with low
liquidity and issuing indirect financial claims with more liquidity.
d. Maturity Flexibility: Creating financial claims with wide range of maturities so as to balance
the maturity of different instruments so as to reduce the gap between assets and liabilities.
e. Credit Risk Diversification (portfolio investment): By purchasing a broad range of

instruments, financial institutions are able to diversify the risk.
TYPES OF FINANCIAL INSTITUTIONS: Different financial institutions exist in our economy and
they serve to accomplish one function i.e. to purchase financial claims from borrowers (deficit
unit) and sell it with different characteristics to the savers (surplus unit). Here are the major types
of intermediaries:
1. Commercial banks are the major institutions that lend money, handle checking accounts, and
also provide an ever-widening range of services, including stock brokerage services and
insurance. Commercial banks are the largest and most diversified institutions on the basis of
range of assets held and liabilities issued.
2. Thrift Institutions - Mutual savings and savings and loan associations are commonly called
thrift institutions. They serve individual savers and residential and commercial mortgage
borrowers, take the funds of many small savers and then lend this money to home buyers and
other types of borrowers.
3. Credit unions are cooperative associations whose members are supposed to have common
bond. Credit unions are often the cheapest source of funds available to individual borrowers.
4. Mutual funds sell equity shares to investors and use these resources to purchase stocks or
bonds. These organizations pool resources and thus minimize risks through diversification. They
also achieve economies of scale in analyzing securities, managing portfolios, and buying and
selling securities.
5. Life insurance companies take savings in the form of premiums and then invest these funds in
bonds, stocks, mortgages, real estate and so on, and then make payments to beneficiaries.
6. Pension funds are retirement plans obtain their funds from employers and employees and
administered generally by the trust departments of commercial banks, or by life insurance
companies. Pension funds invest

Financial markets: Organizational framework within which financial instruments can be bought
or sold. A Market is a place where buyers and sellers come together to exchange something
Financial Markets are where financial Instruments/products are exchanged.

A Financial Market is known by type of product traded in it.
TYPES OF FINANCIAL MARKETS
There are many different types of financial markets. Each market exists to deal with a different
type of security. Here are some of the major types of markets:
1. Commodity market (Physical asset market) also called tangible or real asset markets
are those market that are traded for such products as wheat, autos and real estate..
2. Forex Market: deal with foreign investments and Payment in foreign currencies.
3. Debt Market: deal with debt, bonds, mortgages, and other claims on real assets.
Debt is a Contract One Party lends to another Party with Predetermined Interest Rate
Participants-Banks, Financial Institutions, Mutual Funds, Insurance Companies etc
Instruments-Government Securities, Public Sector Units Bonds ,Corporate Securities
4. Money market: the markets for debt securities with maturities of less than one year.
Markets for short term Borrowing and Lending
• Primarily used by Banks
Typical Financial Instruments: Bankers Acceptance, Certificate of Deposit (CD), Treasury Bills
Repo’s
5. Capital markets are the markets for long-term debt (more than a year) and corporate stocks.
• Long Term Funds Raised by
• Government
• Corporate
• Trading Instruments used
• Shares
• Derivatives

• Units of Mutual Funds
Spot markets and futures markets are terms that refer to whether the assets are bought or sold
for “on-the-spot” delivery or for transfer at some upcoming date.
Primary markets are markets in which corporation raise new capital such as initial public
offering (IPO).
Secondary markets are markets in which existing or already outstanding, securities are traded
among investors.
Financial Instruments: These assets represent a claim to the payment of a sum of money
sometime in the future and/or periodic payment in the form of interest or dividend.
 Enable channelizing funds from surplus units to deficit units
 There are instruments for savers such as deposits, equities, mutual fund units, etc.
 There are instruments for borrowers such as loans, overdrafts, etc.
 Like businesses, governments too raise funds through issuing of bonds, Treasury bills,
etc.
 Instruments like PPF, KVP, etc. are available to savers who wish to lend money to the
government
Capital Market –Capital Market Instruments:
Provided resources needed by medium and large scale industries. .Supply comes from
individuals, corporate, banks, and financial institutions. Purpose for these resources
 Expansion
 Capacity Expansion
 Investments
 Mergers and Acquisitions
Dimensions of Capital market or Importance of capital market: The capital market is

directly responsible for the following activities:1)Mobilization or concentration of national

savings for economic development.2)Mobilization of important foreign capital and skill to fill up
the deficit in the required financial resources to maintain expected rate of economic growth.3)
Productive utilization of resources.
Constituents of Capital market: The constituents of capital market comprise of
1. Development banks 2.Commercial banks 3.State level development banks 4.Investment

institutions 5. Financial service companies or Specialized financial institutions like Mutual
funds, Insurance companies, Provident fund companies, Financial Intermediaries, Merchant
Banks, Leasing Companies and Venture Capital Companies,6.Specilized institutions like SEBI,
SHCL, CRISIL, IICRA, I-Sec, OTCEI, and National stock exchanges.
Role of capital market: The capital market play vital role in providing liquidity and investment
instruments.1. It fosters economic growth 2. It enhances the efficiency of the financial system. 3.
It provides an alternative means of long term resources for development.4. It also improves
economic efficiency by generating market determined interest rates that reflect the opportunity
costs of the funds at different maturities.5. Well functioning capital markets impose discipline of
firms to excel in performance.6. It enables the valuation of firms on an almost continuous basis
and plays important role in governance of corporate sector.
Capital market instruments: 1. Marketable securities 2.Non-marketable securities
Marketable securities: 1.Govt securities, 2.PSU Bonds, 3.UTIMutual funds,
4. Corporate securities like Equity shares, Preference shares, Cumulative convertible preference
shares, warrants, Debentures/bands, Secured premium notes, Euro convertible bonds.
Non marketable securities: Bank deposits, Loans of banks and Fis, Post office certificates,
Deposits with companies
Industrial Securities Market: Refers to the market for shares and debentures of old and new
companies. New Issues Market- also known as the primary market- refers to rising of new capital
in the form of shares and debentures. Stock Market- also known as the secondary market. Deals
with securities already issued by companies
Strengthening the capital market: The Abid Hussain committee on development of capital
market has suggested that the creation of two-tier stock exchanges along with number fiscal

measures to streamline the stock market for bringing stability and restoring investors’
confidence.
The committee recommended that all the companies that all the companies should go through the
registered merchant banks when they went public. This would act as a safe guard on the listing of
new companies.
Money Market -Money market Instruments: Main Function
To channelize savings into short term productive investments like working capital.
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.
Purpose of the money market: Banks borrow in the money market to:
Fill the gaps or temporary mismatch of funds
To meet the CRR and SLR mandatory requirements as stipulated by the central
bank
To meet sudden demand for funds arising out of large outflows (like advance tax
payments)
Call money market serves the role of equilibrating the short-term liquidity position of the
banks
 Instruments in Money Market
 Call money market
 Treasury bills market
 Markets for commercial paper
 Certificate of deposits
 Bills of Exchange
 Money market mutual funds
 Promissory Note
 Repos

 Inter-bank participation certificates
Call /Notice-Money Market: Call/Notice money is the money borrowed or lent on demand for a
very short period. When money is borrowed or lent for a day, it is known as Call (Overnight)
Money. Intervening holidays and/or Sunday are excluded for this purpose.
Inter-Bank Term Money: Inter-bank 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.
Treasury Bills: These are short term (up to one year) borrowing instruments of the union
government. It is a promise by the Government to pay a stated sum after expiry of the stated
period from the date of issue(14/91/182/364 days i.e. less than one year). They are issued at a
discount to the face value, and on maturity the face value is paid to the holder. The rate of
discount and the corresponding issue price are determined at each auction.
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.
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.
Market Repos: Repo (repurchase agreement) instruments enable collateralized short-term

borrowing through the selling of debt instruments A security is sold with an agreement to
repurchase it at a pre-determined date and rate. Reverse repo is a mirror image of repo and
reflects the acquisition of a security with a simultaneous commitment to resell.
Primary market Operations: While a public issue means an invitation by a company to the
public to subscribe to the securities offered through a prospectus, offer for sale refers to an offer

document. The issue procedure is illustrated with reference to (1) eligibility norms(2) Pricing of
issues (3) Promoter’s contribution and lock in requirements,(4) contents of offer
documents(5)issue advertisement(6)issue of debt instrument (7)book building (8)Green shoe
option (9)Initial public offer through stock exchange online system(E-IPO).(10) issue of capital
by designated financial institution(11)Preferential issues (12)Qualified institutional placement,
and (13) OTCEI issues.
Eligibility norms: Filing of offer document, IPOs/offer for sale by unlisted companies
Public issue by listed companies, Means of finance
Pricing of issues: Differential pricing, Price band, Denominations of shares
Promoter’s contribution and lock- in: Promoter’s contribution, Lock in period, other
requirements
Issue of debt instrument: Credit rating, debenture trustees, Debenture redemption reserve,
Distribution of dividends, Creation of charge, Letter of option, fully convertible debenture.
Book building: 75% book building or 50% book building, offer to public through book building.
E-IPO: Agreement with stock exchange, Appointment of brokers, Registrar to issue, Listing,
Lead managers, Mode of operation.
Preferential issues: Pricing, Currency of financial instruments, Non-transferability of financial

instruments, Share holders’ resolution, other requirements.
Issue by designated financial institutions: Promoter’s contribution, reservation formalities,

Pricing of issue, specific disclosures, Issues of debentures
Pre-issue obligations: The pre issue obligations of merchant bankers are detailed:
Due diligence certificate: The lead merchant banker should exercise due diligence. The standard
of due diligence should be such that he should satisfy himself on all aspects of offering, veracity
and adequacy of disclosure in the offer documents. Such a liability on this part would continue
even after the completion of the issue process.
Registration fee: The lead managers should pay the requisite fee in accordance with
regulation24-A of the SEBI merchant bankers rules and regulations.

Submission of documents: Memorandum of understanding (MOU), Inter-se allocation of
responsibilities, due diligence certificate, certificate in case of further issue by listed companies,
undertaking, list of promoter’s group.
Appointment of intermediaries:
Secondary Market Operations: the SEBI has been set up to ensure that the stock exchanges
discharge their self-regulatory role properly. To prevent malpractices in trading and to protect the
rights of investors, the SEBI has assumed the monitoring functions, requiring brokers to be
registered and stock exchanges to report on their activities.
Stock broking: A stock broker is a member of recognized stock exchange who buys, sells or
deals in securities. A certificate of registration from the SEBI is mandatory to act as a broker.
Registration, code of conduct, Obligations/responsibilities, inspection, penalty, capital
adequacy, registration of transactions.
Foreign broker: Registration, transaction in accounts, Market operations, reporting system,

inspection.
Sub –broker: Registration, obligation, inspection, action in default.
Trading and clearing /self are clearing members: A trading member is a member of a
derivative exchange /derivative segment of stock exchange who settles the trade in the clearing
corporation or clearing house through a clearing member. A self –clearing member means a
member of clearing corporation house who clear/settle transactions on its own account or on
account of its clients only.
Securities lending scheme: To facilitate securities lending for short sellers who sell shares
without owning them, the SEBI approved a scheme in 1997.Short sellers provide liquidity to
genuine investors. In falling market, the purchasers of short sellers, to cover their sales, lead to
recovery in prices. In rising market, short sales can arrest further rise.
The scheme, eligibility criteria, obligations/responsibilities, terms of registration, taxation.
Custodial services: The custodians of securities who provide custodial services play a critical
role in the secondary market. Recognizing their importance in the securities market,the SEBI
custodian of securities regulations,1996 was framed for the proper conduct of their business.
According to the SEBI regulations, custodial services in relation to securities mean (1)safe

keeping of securities of a client who enters into an agreement to avail of these securities and (2)
Providing services incidental there to including maintaining accounts, collecting benefits/rights
accruing to him in respect of securities.
The main elements of the SEBI framework of regulations for custodians of securities are 1.their
registration2. General obligations/ responsibilities 3. Inspection and audit 4. Action in case of
default 5. Uniform norms and practices.
Depository system: Physical dealing in securities had to be completely eliminated to bring to

bring the Indian stock markets at par with international markets, through scrip less trading is the
dematerialization of share certificates through depositories. All certificates are surrendered to the
issuer company that has issued the securities. On the receipt of certificates through the
depository participants and on the advice of the depository with whom the company has already
entered in the register of members of the company in respect of these securities, and the name of
the beneficial owners whose name is recorded as such with a depository and deleted. The
depository system in India operates within the frame work of depositories act, 1996 and the SEBI
depositories and participant’s regulation, 1996.
Listing- Formalities:
The listing of companies’ the capital market implies the admission of the shares of that
company to dealings on a recognized stock exchange. The securities or shares may be of any
public limited company, Central or state government, quasi governmental and other financial
institutions/corporations, municipalities and so on.
The objectives of listing are to:
 Provide liquidity to shares

 Mobilize savings for economic development
 Protect interest of investors by ensuring full disclosures
Most stock exchanges have a listing department to grant approval for listing of shares of
companies in accordance with the various provisions of the law.
A company intending to have its share listed has to comply with the listing requirements
prescribed by the exchange. Companies that have been classified as large cap companies have
slightly different rules from those classified as small cap. Some of the common requirements are
explained below.

Different minimum post-issue paid-up capital and the minimum issue size can be prescribed for
large and small cap companies. The same is the case with minimum income, turnover and
number of shareholders post-issue.
Most exchanges insist on a due diligence study conducted by an independent team of Chartered
Accountants or Merchant Bankers appointed by the exchange.
A company intending to have its share listed has to comply with the listing requirements
prescribed by the exchange. Companies that have been classified as large cap companies have
slightly different rules from those classified as small cap. Some of the common requirements
are explained below.
Different minimum post-issue paid-up capital and the minimum issue size can be prescribed for
large and small cap companies. The same is the case with minimum income, turnover and
number of shareholders post-issue.
Most exchanges insist on a due diligence study conducted by an independent team of Chartered
Accountants or Merchant Bankers appointed by the exchange.
The applicant, promoters and/or group companies, should be in compliance of the listing
agreement.
Most exchanges follow a set procedure for companies that wish to offer their scrips through
public issues. The companies are required to obtain the exchange's prior permission to use its
name in the prospectus or offer for sale documents before filing the same with the concerned
office of the Registrar of Companies.
Submission of Letter of Application
As per Section 73 of the Companies Act, 1956, a company seeking listing of its scrips on an
exchange is required to submit a letter of application to all the stock exchanges where it proposes
to have its shares listed before filing the prospectus with the Registrar of Companies.
Allotment of Securities
Most exchanges stipulate that a company complete allotment of scrips offered to the public
within 30 days of the date of closure of the subscription list and approach the regional stock
exchange that is the stock exchange nearest its registered office, for approval of the basis of
allotment. In case of a book building issue, allotments are normally insisted upon not later than
15 days from the closure of the issue.
Trading Permission
As per Securities and Exchange Board of India Guidelines, the issuer company should
complete the formalities for trading at all the stock exchanges where the securities are to be listed
within 7 working days of finalization of basis of allotment.

A company should scrupulously adhere to the time limit for allotment of all securities and
dispatch of allotment letters/share certificates and refund orders and for obtaining the listing
permissions of all the exchanges whose names are stated in its prospectus or offer documents. In
the event of listing permission to a company being denied by any stock exchange where it had
applied for listing of its securities, it cannot proceed with the allotment of shares. However, the
company may file an appeal before the Securities and Exchange Board of India under Section 22
of the Securities Contracts (Regulation) Act, 1956.
Requirement of 1 per cent Security
The companies making public issues are generally required to deposit 1 per cent of the issue
amount with the regional stock exchange before the issue opens. This amount is liable to be
forfeited in the event of the company not resolving the complaints of investors regarding delay in
sending refund orders/share certificates, non-payment of commission to underwriters, brokers
and so on.
Payment of Listing Fees
Most exchanges require that all listed companies pay an annual listing fee.
Compliance with Listing Agreement
The companies wanting to get their shares listed are normally required to enter into an agreement
with the exchange called the Listing Agreement. This agreement is of great importance and is
executed under the common seal of a company. Under the Listing Agreement, a company could
undertake, among other things, to provide facilities for prompt transfer, registration, sub-division
and consolidation of securities; to give proper notice of closure of transfer books and record
dates, to forward copies of unabridged annual reports and balance sheets to the shareholders, to
file distribution schedule with the exchange annually; to furnish financial results on a quarterly
basis; intimate promptly to the exchange the happenings which are likely to materially affect the
financial performance of the company and its stock prices, to comply with the conditions of
corporate governance and so on.
Functions of Stock Exchanges
Role: “A Stock Exchange fulfills a vital function in the economic development of a nation: its
main function is to ‘liquefy’ capital by enabling a person who has invested money in, say a
factory or railway, to convert it into cash by disposing off his shares in the enterprise to someone
else. Investment in Joint stock companies is attractive to the public, because the value of the
shares is announced day after day in the stock exchanges, and shares quoted on the exchanges
are capable of almost immediate conversion into money. All public companies are anxious to
obtain permission from reputed exchanges for securing quotations of their shares and the

management of a company is anxious to inform the investing public that the shares of the
company will be quoted on the stock exchanges.
Functions of Stock Exchange
The stock exchange is really an essential pillar of the private sector corporate economy. It
discharges three essential functions:
First, the stock exchange provides a market place for purchase and sale of securities viz. shares,
bonds, debentures etc. It, therefore, ensures the free transferability of securities.
Secondly, the stock exchange provides the linkage between the savings in the household sector
and the investment in the corporate economy. It mobilizes savings, channelizes them as
securities into these enterprises which are favored by the investors on the basis of such criteria as
future growth prospects, good returns and appreciation capital.
Thirdly, by providing a market quotation of the prices of shares and bonds- a sort of collective
judgment simultaneously reached by many buyers and sellers in the market- the stock exchange
serves the role of a barometer, not only of the state of health of individual companies, but also of
the nation’s economy as whole.
Role of SEBI:
Securities and Exchange Board of India:
Establishment: The SEBI is a body corporate. It consists of (a) a chairman appointed by the
Govt, (b) two members from amongst officials of the ministry of finance, and ministry of law,
(c) one member from amongst the officials of, and nominated by the RBI, (d0 five members of
whom at least two should be whole time members nominated by the Govt. Its general
superintendence, direction and management is vested in a Board members which may exercise
all powers and all acts may be exercised by the SEBI.
The SEBI has been set up under the SEBI act to 1. Protect the interest of investors in securities
and 2. Promote the development of, and regulate, the securities market by much measure as it
thinks fit.
SEBI's functions include:
* Regulating the business in stock exchange and any other securities markets

* Registering and regulating the working of collective investment schemes, including mutual
funds.
* Prohibiting fraudulent and unfair trade practices relating to securities markets.

* Promoting investor's education and training of intermediaries of securities markets.
* Prohibiting insider trading in securities, with the imposition of monetary penalties, on erring
market intermediaries.
* Regulating substantial acquisition of shares and takeover of companies.

* Calling for information from, carrying out inspection, conducting inquiries and audits of the
stock exchanges and intermediaries and self regulatory organizations in the securities marke
Powers:
To issue directions: Orderly development of security market. To prevent the affairs of any
intermediary being conducted in manner detrimental to the interests of investors.
To investigate: If any person produce to any book, register, other document, record which is his
duty to produce, furnish any information which is his duty.
To cease and deist proceedings: If SEBI finds that any person has violated any provisions of
the SEBI act, rule, regulations, it may pass an order requiring such person to cease and desist to
committing such violation.
To issue registration certificate: No stock broker, sub broker, share transfer agent, banker to an
issue, trustee of trust deed, registrar to an issue, merchant banker, under writer portfolio
manager, investment advisor, depository, custodian of securities, foreign institutional investors,
credit rating agency except under conditions of certificate of registration obtained from SEBI in
accordance with regulations made under SEBI act.

Financial Services:
Financial services is concerned with the design and delivery of advice and financial products to
individuals and businesses within the areas of banking and related institutions, personal financial
planning, investment, real assets, insurance and so on.
Concept: The ‘financial service’ can also be called ‘financial intermediation is a process by
which funds are mobilized from a large number of savers and make them available to all those
who are in need of it and particularly to corporate customers. Thus, financial services sector is a
key area and it is very vital for industrial developments. A well developed financial service
industry is absolutely necessary to mobilize the savings and to allocate them to various investible
channels and thereby to promote industrial development in a country.
Classification of financial services: The financial intermediaries in India can be traditionally

classified into two:
1. Capital market intermediaries and

2. Money market intermediaries
The capital market intermediaries consist of term lending institutions and investing institutions
which mainly provide long term funds. On the other hand, money market consists of commercial
banks, co-operative banks and other agencies which supply only short term funds.
Scope of financial services: Financial services cover a wide range of activities. They can be
1. Traditional activities
2. Modern activities
Traditional activities: Traditionally, the financial intermediaries have been rendering a wide
range of services encompassing both capital and money market activities. They can be grouped
under two heads viz:
1. Fund based activities and

2. Non-fund based activities.
Fund based activities: The traditional services which come under fund based activities are the
following:
1. Underwriting of or investment in shares, debentures, bonds etc., of new issues(Primary

market activities)
2. Dealing in secondary market activities
3. Participating in money market instruments like commercial papers, certificate of deposits,
treasury bills, discounting of bills etc.

4. Involving in Equipment Leasing, Hire purchase, Housing loans, Venture capital,
Mutual funds, Insurance products, Bills of discounting, Factoring, Forfaiting,
Securitization of Debt. Etc.
5. Dealing in foreign exchange market activities.
6. Banking Services
Non-funding based activities: Financial intermediaries provide services on the basis of non-
fund activities also. This can also be called “fee based activity. Customers expect more financial
services companies.
1. Managing the capital issues, i.e ., management of pre issue and post issues activities
relating to the capital issue an accordance with SEBI Guide lines.(Merchant banking).
2. Making arrangements for placement of capital and debt instruments with investment
institutions.
3. Arrangements of funds from financial institutions for the client’s project cost or his
working capital.
4. Assisting in the process of getting all government and other clearances.
Some other modern activities:
1. Undertaking services relating to the capital market such as:
Clearing services, Registration and Transfers, Safe custody of securities, Collection of income on
securities.
2. Rendering project advisory services right from the preparation of the project report till the
raising of funds.
Planning for mergers and acquisitions and assisting for their smooth carry out.
Guiding corporate customers in capital restructuring
Acting as trustees to the debenture-holders
Recommending suitable changes in the management structure and management style
Rehabilitating and restructuring sick companies through appropriate scheme of reconstruction
Hedging of risks due to exchange rate risk, interest rate risk, economic risk, and political risk by
using swaps and other derivative products
Managing the portfolio of large public sector corporations
Promoting credit rating agencies for the purpose of rating companies which want to go public by
the issue of debt instruments

Merchant Banking:
Banking is essentially a service industry. Rapid innovations in the field of banking have resulted
in many activities. One such innovation is the merchant banking facilities. Merchant banking is
exclusive service function. Merchant banker has to seek a client, established good relations with,
offer him the kind of services he needs and maintain continuing relationship with him.
Merchant banking services are activities ,i.e., counseling corporate clients, who are in need of
capital, on capital structure, form of capital to be raised ,the terms and conditions of issue,
underwriting of issue, timing of issue, and preparation of the prospectus and publicity for
grooming the issue for the market.
Types: Merchant banking set up in the country is broadly divided into the following groups:
Merchant banking division
Foreign Banks Indian banks Financial Private merchant bankers

Institutions
Subsidiary A division with in

institutions the bank
Foreign Banks: Along with Grind lays bank, Citibank, Charted bank and Hong Kong bank are
also active in merchant banking.
Indian Banks: State bank of India took the lead among Indian banks and is present well
established in the merchant banking field. The other banks that followed suit are Bank of India,
central bank of India, Bank of Baroda, Punjab national bank, which have established similar
divisions.

Private merchant bankers: Leading private broker firms were already doing consultancy for
portfolio investment. They took advantage of the situation and started ‘merchant banking and
consultancy service in a big way.
Financial Institutions: ICICI has a well established merchant banking office.
Role of merchant bankers in issue management: To promote the new issue market there is
need for a qualitative improvement in the offer of new issues both in terms of time taken and cost
of floatation. At present the time taken for organizing a new issue is between 12 to 18 months
and the cost of raising new capital varies from 3%to 8% and some times 20%.This can be
brought down relatively by specialized merchant banking Institutions by catering to the
requirements of both large and small industrial units. Cost of floatation of equity and preference
capital is higher for new companies in making new issue. Merchant banks can help saving in the
cost of new companies.
There has been a decline in the proportion of share capital in the total capital employed due to
the steep rise in the cost of new issues. There are certain minimum costs to be incurred in respect
offers to brokers, promoters’ expenses, under writing commission etc., irrespective of the size of
the project.
Responsibilities of Merchant bankers: The merchant banking institutions can assist the
entrepreneurs in all areas after project appraisal, formulate a plan for financing it. They can assist
the clients in raising the funds they require. They ensure that the amount sought is reasonable.
They do not themselves provide large resources for their function is mainly to act as sponsors
and under writers rather than a source of finance. They advise the clients on the best method of
raising capital and the best time in which to float their issues.. In respect of mergers, acquisitions
and reorganizations, the merchant bank helps in handling the actual operations.

Objectives of Merchant banking:
Guidance
O
B Project formation
J
Implementation
E
C Modernization
T
Diversification
I
V
Mobilizing resources
E
E
Raising working capital
Merchant banking functions:
Functions
Project Credit Issues

counselling syndication management
Consultancy of
Portfolio sick units
Resource
management
mobilization

Project counseling: Under this head, a merchant banker is expected to:
1. Identifying promising projects

2. Prepare feasibility studies
3. Prepare in depth project reports
4. Assist investors in obtaining licenses
5. Do price capital structuring
6. Arrange and negotiate foreign collaborations.
Syndication of loans and project finance:
1. Aid in applying to financial institutions, banks and other sources of finance

2. Expert advice on government policies, demand-supply gaps, raw material availability,
product-mix, plan capacity utilization,.
3. Consultation about alternative sources of finance, debt-equity ratio.
4. Liaison with government departments, financial institutions.
5. Advice and assistance for modernization, expansion, diversification
Issue management (Including equity dilution): following are the services rendered by the
merchant banker under this head:
1. Deciding the size and time of a public issue in the light of the market condition.
2. Preparing the base of successful issue in the light of the market condition.
3. Optimum underwriting support,
4. Appointment of bankers and brokers as well as issue houses
5. Issue management
6. Professional liaison with share market functionaries like brokers, portfolio managers
7. Preparation of draft prospectus and other documents.
8. Preparation of advertising and promotional material.
Portfolio management for non-residents: The merchant banker assists in this area by
identifying suitable arrangements of investment suitable to each non-resident Indian.
1. Guidance on purchase and sale of securities

2. Handling of such transactions
3. Advice on market conditions
4. Safe custody of documents

SEBI guide lines for merchant bankers:
1. Authorization: Any person or body proposing to engage in the business of merchant

banking would need authorization by the SEBI in their prescribed format.
2. Authorization criteria: SEBI ‘s authorization criteria would take into account mainly the
following (a) professional competence(b) capital adequacy
3. Terms of Authorization: (a) All merchant bankers, including the existing ones, must
obtain the authorization from SEBI within three months from the issue of these
guidelines.
4. All merchant bankers must have a minimum net worth of Rs. One crore.
5. SEBI may collect from the merchant bankers an initial authorization fee, annual fee, and
a renewal fee.
Venture capital:
Venture capital is a new financial service, the emergence of which went towards developing
strategies to help a new class of new entrepreneurs to translate their business ideas into realities.
As the name suggests it implies capital provided to start a new venture.
What is venture capital: Venture capital broadly implies an investment of long-term, equity
finance in high reward possibilities. It is equity finance based on the principle that a partnership
can be formed between the entrepreneur and the investors and thus represents an attempt to
institutionalize entrepreneurship particularly associated with innovations.
Def: Venture capital is “equity support to fund new concepts that involve a higher risk and at the
same time, have high growth and profit potential”.
Salient features of venture capital:
1. It is high risk venture. The success rate in developed economies is around 60% where as
in a developing country it is expected to be around 20%-30%
2. It finance high-tech projects
3. The gestation period is long. The benefit or profit from the venture capital investment
will start accruing only after an average period of 4 to 5 years.
4. Venture capitalists also make available to the assisted units the managerial and marketing
assistance.
5. It is an equity or quasi equity form of investment.
6. When the assisted company has reached a certain stage of profitability, the venture
capitalists sells his shares in the stock market at a hefty premium.

Advantages of venture capital: Venture capital has made significant contributions to

technological innovations and promotions of entrepreneurism. Many of path breaking
technologies world over in the fields of bio- technology micro electronics, computers (e.g.
Apple, Micro, Lotus, Intel Microsoft,etc.) have emerged from small businesses set up by people
with ideas and supported by venture capital.
1. Economy oriented (a) Helps in the industrialization of the country. (b) Generates
employment (c) Helps in developing entrepreneurial skills.
2. Investor oriented (a) Benefit to the investor is that they are invited to invest only after the
company starts earning profit, so the risk is less and the healthy growth of capital market
is entrusted.(c) Profit to venture capital companies/venture capital funds.
3. Entrepreneur oriented: (a) Helps small and medium first generation entrepreneurs to
translate their ideas into a reality. (b) Promotes and fosters entrepreneurship in the
country.
Functions of venture capital: Venture capital plays the crucial role in fostering industrial
development by exploring vast and untapped potentialities. The key functions of venture capital
are:
1. Venture capital provides finance as well as skills to new enterprises and new ventures
of existing ones based on high technology innovations. It provides seed capital funds to
finance innovations even in the pre-start stage.
2. Venture capitalists fill the gap in the relation to the quantum of equity required to support
the successful launching of a new business or the optimum scale of operations of an
existing business.
3. It acts as a trigger in launching new business and as a catalyst in stimulating existing
firms to achieve optimum performance.
4. Venture capitalist’s duty extends even as far as to see that the firm has proper and
adequate commercial banking and receivable financing.
5. Venture capitalists assist the entrepreneurs in locating, interviewing and employing
outstanding corporate achievers to professionalize the firm.
Financing pattern of venture capital: The selection of investment by a VCI is closely related
to the stages and type of investment. Based on the four stages of development of business, the
venture capital financing may be classified as
Seed finance: At the formulation of an idea stage, the risk associated is very high. Here an idea
needs to be translated into business proposition. So finance required at this stage is the seed
finance from the venture capital fund.

Start-up finance: The second stage being implementation phase, it is required for the purpose of
implementing the appropriate production processes.
Beginner’s finance: In this stage commercial production is to be started, and it is required to

develop the marketing and other infrastructure.
Establishment finance: In this stage, when the business is fully established, it requires finance
for its growth and expansion so as to reap economies of scale.
The degree of risk associated with a business gradually diminishes in ever subsequent stage of
business. Venture capital investments are generally idea based and growth based.
Structural aspects: The structuring of VCI,s is important from the view point of the profitability
of such organizations and their contributors and participants. The alternative forms in which
VCIs can be structured are(1) Limited partnership (2) Investment company.(3) Investment
trust(4) Offshore funds and (5) Small business investment company.
Growth of Venture capital in India: The needs for venture capital in the country were felt
around 1985 when lot of investors’ burnout their fingers by investing fledging enterprises with
unproven projects which were not yet commercialized.
In recognizing of the growing importance of venture capital as one of the sources of finance for
the Indian industry, particularly for the smaller, unlisted companies, the govt of India announced
a policy governing the establishment of domestic VCF,s. Recognizing the acute need for higher
investment in venture capital activities, SEBI appointed the Chandrasekhar committee to identify
the impediments in the growth of venture capital industry in the country and suggest suitable
measures for its rapid growth.
The salient features of Indian venture capital industry are briefly outlined in this section in terms
of the 1) Recommendations of Chandrasekhar committee,2)amended SEBI VCFs
Regulations,2000 3) SEBI Foreign venture capital Investors regulations,2000,4)Present structure
of VCFs and 5)players/schemes.
Players/Schemes; The sponsors of VCFs in India fall into five broad categories(1) Central
financial institutions such as IDBI, SIDBI.2) State level financial institutions 3) banks 4) private
sector institutions 5) overseas.

Legal aspects and guide lines for venture capital:
SEBI venture capital funds (VCFs) rtegulations,1996: According to these regulations, a VCF
means a fund established in the form of a trust /company; including body corporate, and
registered with SEBI which(1) has a dedicated pool of capital raised in a manner specified in
these regulations and 20invest in accordance with these regulations
Registration: All VCFs must be registered with SEBI and pay Rs 1, 00,000 as application fee and
Rs 10, 00,000 as registration fee for grant of certificate.
Investment conditions and restrictions: Minimum investment in VCFs; The VCFs are authorized
to raise funds money from 1) Indian 2) foreign, 3)non-resident Indians investors by way of issue
of units that is beneficial interest of the investors in the scheme floated by trust; including body
of corporate.
Restriction on investment by VCF: The VCFs should disclose the investment strategy at the time
of their registation.They cannot invest more than 25 percent corpus of the fund in one venture
capital undertaking. They are prohibited from investing in associated companies.
Prohibition on listing: No VCF should be entitled to get its units listed in any recognized stock
exchange till the expiry of three years from the date of issuance of units by it.
General obligations and responsibilities: A VCF is not permitted to issue any document inviting
offers from public finance r subscription of any of its units.
Inspection and investigations: SEBI may Suomoto ,or upon receipt of information/complaint
appoint one/ more persons as investigating officer to undertake inspection of books.
Action in case of default: Suspension of registration. or Cancellation of registration.
Lease finance (Frame work of leasing):
A lease is an agreement allowing one party to use another’s property, plant, or equipment for a
stated period of time in exchange for consideration. Leases have become more prevalent as
businesses and consumers look for alternatives to finance the acquisition of fixed assets. A lease
agreement involves at least two parties) a lessor (such as a bank), who owns the property, and a
lessee, who uses the property. The lessor, essentially a creditor in the transaction, is repaid from
a combination of lease or rental payments, tax benefits, and proceeds from the sale or re-leases of
the property at the end of the lease term.

Essential elements: The essential elements of leasing are the following
Parties to the contract: There are essentially two parties to a contract of lease financing, namely
the owner and the user, called the lessor and the lessee respectively. Lessors as well as lessees
may be individuals, partnerships, joint stock companies, corporations. Besides, there may be a
lease- broker who acts as an intermediary in arranging lease deals.
Asset: The asset, property or equipment to be leased is the subject matter of contract of lease
financing.
Ownership separated from user: The essence of a lease financing during the lease tenure,
ownership of the asset contract is that vests with the lessor and its use is allowed to lessee.
Term of lease: The term of lease is the period for which the agreement of lease remains in
operation. Every lease should have a definite period otherwise it will be legally in operative.
Lease rentals: The consideration which the lesse pays to the lessor for the lease transaction is
the lease rental.
Risks Associated with Lease Financing: The applicable risks associated with lease financing
are credit, interest rate, liquidity, transaction, and compliance.
Categories of Leases: A lease must be correctly categorized before its proper accounting
treatment can be established. To categorize a lease properly, one uses the facts and circumstances
surrounding the origination of the transaction and whether or not substantially all of the benefits
and risks of ownership are transferred to the lessee.
Capital lease (finance lease)- Operating lease:
In capital lease the lessor transfers to the lessee, substantially all the risks and rewards incidental
to the ownership of the asset whether or not the title is eventually transferred.
An operating lease does not transfer the risk and benefits of ownership to the lessee. The lessor,
as owner of the property, retains legal title. In this transaction, the lessor is entitled to any tax
benefits of ownership (such as accelerated depreciation). The lessor also retains the rights to the
property’s residual value at the end of the term.

Sale and lease back -Direct lease:
It is an indirect form of leasing. The owner of the equipment sells to a leasing company (lessor)
which leases it back to the owner.
In direct lease, the lessee, and the owner of the equipment are two different entities. A direct
lease can be of two types: Bipartee lease and Tripartee lease.
Single investor lease and leveraged lease:
There are only two parties to the lease transaction the lessor and the lessee. The leasing company
{lessor} funds the entire investment by an appropriate mix of debts and equity funds. The debts
raised by leasing company to finance the asset are without recourse to the lessee.
A leveraged lease is a specialized form of direct financing lease that involves at least three
parties: a lessee, a long-term creditor (the debt participant), and a lessor (the equity participant).
This type of lease transaction is complex because of its size, the number of parties involved,
legal demands, and the unique advantages to all parties.
Domestic lease and international lease:
A lease transaction is classified as domestic if all parties to the agreement, namely equipment
supplier, lessor and the lessee, are domiciled in the same country.
If the parties to the lease transaction are domiciled in different countries, it is known as
international lease. This type of lease is further sub-classified into (1) import lease (2) cross
border lease.
Financial evaluation of leasing(Evaluations leasing option/Debt borrowing):The process of

financial appraisal in a lease transaction generally involves three steps (1) Appraisal of client in
terms of financial strength and credit worthiness (2) evaluation of the security/collateral security
offered and (3) financial evaluation of the proposal. The most critical part of a leasing transaction
is the financial evaluation.
Lessee’s Perspective: Finance lease effectively transfers the risks and rewards associated with
the ownership of equipment from the lessor to lessee. A lease can be evaluated either as an
investment decision or as a financing alternative. Given that investment decision has already
been made, a firm (lessee) has to evaluate whether it will purchase the asset/equipment or
acquire it on lease basis. Since lease rental payments are similar to payments of interest on debt,
leasing in essence an alternative to borrowing. The lease evaluation from the lessee’s point of
view, thus essentially involves a choice between debts financing versus lease financing.

It is in this context that an evaluation of lease financing from the point of view of lessee is
presented. The decision –criterion used is the Net Present value of leasing NPV (L)/Net
Advantage of Leasing (NAL).The discount rate used is the marginal cost of capital for all cash
flows other than lease payments and the tax cost of debt for lease payments. The interest tax
shield is included as forgone cash flow in the computation of NAV (L).
NPV (L)/NAL= Investment-(Present value of lease payments - Present value of tax shield)
NPV (O) = Investment+ (Present Residual value +Present value of tax shield on interest+
present value of tax shield on depreciation+ present value of tax on capital loss) -Net present
value of installments.
NPV (O): Net present value of owning the equipment
Credit rating:
An investor in search of investment avenues has recourse to various sources of information –
offer documents of the issuer’s research reports of market intermediaries, media reports etc. In
addition to these sources, Credit rating agencies have come to occupy a pivotal role as
information providers, particularly for credit related opinions in respect to debt instruments.
The factors leading to the growing importance of the credit rating system:
1. Increased role of capital and money markets consequent to dis intermediation

2. Increased securitization of borrowing and lending consequent to dis intermediation
3. Globalization of the credit market
4. The continuing growth of information technology
What is credit rating: Credit rating is a symbolic indicator of the current opinion of a rating
agency and of the relative capability and willingness of an issuer of a debt programme to service
the debt obligations as per terms of the contract.
Concept: Rating, usually expressed in alphabetical or alphanumerical symbols, are a simple and
easily understood tool enabling the investors to differentiate between debt instruments on the
basis of their underlying credit quality. A rating is specific to a debt instrument and is intended as
a grade, an analysis of the credit risk associated with the particular instrument.
Objective: The primary objective of rating is to provide guidance to investors/creditors in

determining a credit risk associated with a debt instrument /credit obligation. It does not amount
to recommendation to buy, hold or sell an instrument as it does not take into consideration
factors such as market prices, personal risk preferences and other considerations which may
influence an investment decision.

Types of credit rating: Credit ratings are different types, depending upon the requirements of
the rater and the rated. The following common types of rating:
1. Bond rating: Rating the bonds or debt securities issued by a company, government or
quasi government body is called bond rating. This occupies the major business of credit
rating agencies.
2. Equity rating: The rating of equity of capital market is called equity rating.
3. Commercial paper rating: It is mandatory on the part of a corporate body to obtain the
ratings of an approved credit rating agency to issue commercial paper.
4. Sovereign rating: This includes rating a country as to its credit worthiness, probability to
risk, etc.
Benefits of credit rating/functions of credit rating agencies:
The benefits to various parties concerned with credit rating are listed below
Investors: 1) It enables the investors to get superior information at low cost. 2) It enables the
investors to take calculated risk in their investment decisions.3) It encourages the common man
to invest his savings in corporate securities and get high returns.
Corporate borrowers:1) It facilitates companies with good rating to enter the capital market
confidently and raise funds at comparatively cheaper rates. 2) it can be used as marketing tool 3)
It facilitates foreign collaborations.4) It encourages discipline among the corporate borrowers.
Government: 1) Fair and good ratings motivate the public to invest their savings in good shares,
deposits and debentures. Thus the idle savings of the public are channelized for productive uses.
2)It facilitates the formulation of the public policy guidelines on institutional
investments.3)Credit rating system plays a vital role in investor protection without casting
burden for that responsibility on the government.

Rating methodology/System of credit rating in CRISIL, ICRA, and CARE:
The rating exercise commences at the request of a company. A rating applies to a particular debt
obligation of the company and is not a general purpose evaluation of the company. The focus of
the evaluation is on the ability and the willingness of the company to meet the financial
obligations on the debt instrument in a timely manner.
In evaluation and monitoring ratings, both qualitative and quantitative criteria are employed. The
methodology involves an analysis of the past performance of the company and an assessment of
its future prospects, which involves judgment of the company’s competitive position and
evaluation of its management and strategies.
REVIEW OF THE PUBLIC INFORMATION ON THE CLIENT
QUSTIONNAIRE
MEETING WITH CLIENT
PREPARATION OF DRAFT REPORT
DRAFT REPORT SENT TO SUBJECT CLIENT
AMENDED REPORT
RATING COMMITTEE MEETING/DISCUSSION AND ASSIGNMENT OF RATING
CLIENT ADVISED RATING
RATING MADE PUBLIC.

BILL DISCOUNTING:
Introduction: Bill financing is considered to be an appropriate form of financing trade and

business. Under this form of financing, seller of the goods draw a bill of exchange on the buyer
(who accepts and returns the same to the drawer). Subsequently seller of the goods discounts the
bill of exchange with bank or finance company and avail the finance accordingly. Only those
bills which arise out of genuine trade transactions are considered by the banks and finance
companies for discounting purpose.
Bill of exchange: The Bill of Exchange is an instrument in writing containing un conditional

order to pay a certain amount of money to a specified person.
Parties to a bill of exchange
Parties to a bill of exchange are as follows: A) The drawer (seller of the goods) Who draws the
bill:
Who ensures that the bill is accepted and paid according to its tenor?
Who promises to compensate the holder or any endorser of the bill if it is dishonored?
B) The drawee (buyer of the goods)
 The person on whom the bill is drawn.

 Who has shown assent by signing across the bill for payment at maturity (thus becoming
the acceptor)
 The person who assumes legal obligation to pay the bill.
C) The Payee: The person to whom or to whose order the bill is payable.
D) The Endorser
 The payee or any endorsee who signs the bill on negotiation.
 If the bill is negotiated to several persons who signs it in turn becomes an endorser.
 The endorser is liable as a party to the bill.
Benefits of finance through bill discounting:
Following are the benefits of bill discounting for the drawer:

Cheaper form of Credit: Banks usually discount bills at a rate lower than the rate charged for
cash credit. In view of this, drawer of the bill can reduce its cost of funds by raising the funds
through discounting of bills with banks.
Better Funds Management: Bills seems to have certainty of payment on due dates and this
helps to have efficient working capital management. It also leads to greater financial discipline
as bills are discounted only against genuine trade transactions as compared with bank overdraft
facilities which may be utilized for any other purpose.
Following are the benefits of providing finance against bills for the banker.
No Risk in Lending: By providing finance against bill, the bank can ensure safety of funds lent.
As a bill is a legal negotiable instrument with the signatures of two concerned parties,
enforcement of a claim is easier.
Greater Liquidity: A banker who is in need of funds can rediscount bills with various financial
institutions as approved by the RBI. Thus bank can raise the funds easily and quickly against the bills
which are discounted.
No change in the value of the bill: As a security, the value of a bill is not subject to fluctuations which
are found in case of values of tangible goods and financial securities. The amount payable on account of a
bill is fixed and the acceptor is liable for the whole amount.
Precautions for Bill Discounting:
Before approving a bill for discounting the following should be ensured by the banker :
1. The signature as well as credit limit of the bank’s borrowers have been verified. (Need to
ensure that limit for bill discounting has been sanctioned by the credit manager).
2. The nature of the transaction is mentioned on the bill and all invoice details are provided.
There is a need to verify and ensure that bill is drawn against a genuine trade transaction. (i.e.
bill covers only sale of goods transactions).
3. The original tenor of the bill does not exceed 120 days if Bill Discounting Facility is to be
availed of.
4. The payment instructions and maturity date are clearly mentioned on the bill. The bill is drawn
in favour of or endorsed to the discounting bank.
5.All material alterations have been authenticated.
6. Notice of dishonour and presentment has been waived.

Factoring services:
Factoring is a financial service covering the financing and collection of accounts receivables in
domestic as well as in international trade. Basically factoring is an arrangement in which
receivables on account of sale of goods or services are sold to the factor at a certain discount. As
the factor gets title to the receivables on account of the factoring contract, he becomes
responsible for all credit control, sales ledger administration and debt collection from the
customers.
Parties to Factoring Contract: There are three parties involved generally in a factoring
contract, viz.,1) Buyer of goods (i.e. customer) who has purchased goods or services on credit
and as such has to pay for the same once the credit period gets over.2) Seller of goods (i.e.
client) who has supplied goods or provided services to the customers on credit terms. 3) ‘Factor’
who purchase the invoices (receivable) from seller of goods and collect the money from the
customers of his clients.
Functions of the Factor:
1) To provide finance against book debts, say up to 90 per cent of the invoice value immediately.
Thus the client gets funds immediately for his working capital.
2) To collect cash against receivables on due date from the customers of the clients and furnish
reports to the client.
3) To undertake sales ledger administration (i.e. accounting work) for the client in respect of
client’s transactions with its customers.
4) Under the non-recourse factoring arrangement, if the customer become financially insolvent
and cannot pay up, the Factor provides protection to the client against bad debts on all approved
invoices. Thus the Factor provides debt insurance facility to the client against possible losses
arising from insolvency or bankruptcy of the customer.
5) Factor also provides other information such as sales analysis and overdue invoice analysis
which enable the client to run the business more effectively. Besides, the Factor also provides
relevant expertise in the areas of marketing, finance, etc., to the client.

Mechanism of factoring:
Operation of Factoring Services: There are three parties to a domestic factoring arrangement:1)
The client who is supplier or seller of goods and services. 2) The customer who is a debtor or
buyer of goods and services provided by the client. 3) The factor who is a financial institution or
intermediary between client and customer who provides the factoring services.
Normal business, the client sells the goods to the customer on credit. He sends invoices to the customer
directly and also collects payment directly from the customer as shown in the following diagram.
1
CLIENT (Supplier of goods CUSTOMER(Buyer of goods
and /or services) 2 and /or services)
1) Goods are sent on credit along with invoices to the customer.
2) Payment is made by the customer to the client on due date.
When a client enters into an agreement with a factor then a third party namely the factor is also
introduced and their relationship can be shown here as under:
CLIENT (Supplier of goods and 1 CUSTOMER (Buyer of goods and

/or services) /or services)
3 4. 7 6 5
FACTOR

1) Customer places an order with the client for goods and/or services on credit.
2) Client delivers the goods and invoice with a notice to pay to the factor.
3) Client sends of invoice to the factor.
4) Factor provides finance (pre-payment) to the client say 80-90 per cent of the invoice value on
the production of a copy of invoice.
5) Monthly statement of accounts are sent to the customer and follow-up if invoice remains
unpaid by due date.
6) Customer pays money to the factor on due date (i.e. collects book debts).
7) Factor makes the balance payment of the invoice value to the client
These are two types of costs in factoring services
1. Service Fee or Charges
2. Discount Charges
1) Service Fee: Service fee is levied for the work involved in administering the sales ledger as
well as protection against bad debts. It is calculated as a percentage of gross value of the invoices
factored and is assessed on the following criteria:
a) Gross annual sales volume; b) Number of customers; c) Number of invoices and credit notes;
and d) Degree of risk represented by the customer.
The service fee for domestic factoring ranges from 0.30 per cent to 0.75 per cent and it would be higher
when non-recourse arrangements are made.
2) Discount Charge (interest charge): The discount charge is levied on the advance provided by the
factor and is computed on the basis of prime lending rate of banks plus premiums for credit risk basis. It
is calculated on a day-to-day basis on the advances outstanding and ranges from 1 to 3 per cent above the
reference bank’s prime lending rate.

Forfaiting:
Forfaiting is the purchase of receivables along with availed negotiable instruments like
promissory note or bills of exchange (without recourse to any previous holder of the instruments)
due on a specific date to be matured in future and arising from the exports of goods on credit.
Thus, Forfeiting is a source of trade finance which enables exporters to get funds from the
institution called forfeiter on transferring the right to recover the debts from the importer. The
debt instrument is purchased by the forfeiter at an appropriate discount. This facility is always
provided with non-recourse feature. Normally all exports of capital goods and other goods made
on medium to long term credit are considered for providing finance through Forfeiting
arrangement.
Features of a Forfaiting Arrangement:
1) It is a specific form of export trade finance.
2) Export receivables are discounted at a specific but fixed discount rate.
3) Debt instruments most commonly used in Forfaiting arrangement are a bill of exchange and a
promissory note.
4) Payment in respect of export receivables which is further evidenced by bill of exchange or

promissory notes, must be guaranteed by the importers’ bank.
5) It is always without recourse to the seller (viz. Exporter).
6) Full value of export receivables i.e. 100 per cent of the contract value is taken into account.
7) Normally the export receivables carrying medium to long term maturities are considered.
Cost of Forfeiting Services: A Forfeiting service is subjected to various costs such as

commitment fee, discount rate and documentation fee. Of these, discount rate, which is fixed,
forms a larger portion of cost of Forfeiting service. The discount rate charged by the forfeiter is
based on the following elements:
1. A charge for the credit extended or finance provided. This is the main element and is roughly
equivalent to the forfaiter’s own costs of raising the money.
2.A charge based on the risk of interest rate and exchange rate movements in the currency in
which the credit is extended.
3. A charge based on the sovereign risk, political risk and transfer risk e.g. the probability of a
change of government and imposition of exchange controls preventing the discharge of the debt.
4. A charge based on the credit risk attached to the importer as well as avalor.

Benefits of forfaiting services:

The benefits accruing to the exporter are numerous. Few of these benefits are stated below:
1) Exporter can convert export transaction under deferred payment arrangement into a cash
transaction. Thus he can improve his own liquidity position.
2) Since the forfaiter takes all risks, naturally exporter is relieved of the risks arising out of the
default by the buyer (importer) as also the political and exchange risk.
3) Since the Forfaiting is a fixed rate contract, the exporter is hedged against interest rate risk and
exchange rate risk.
4) Exporter gets finance upto 100 per cent of the contract value (which is to be reduced to the
extent of Forfaiting cost).
5) Exporter is freed from credit administration and collection problems.
Differences between factoring and forfaiting services
1) Factoring services is mainly meant for financing and collecting of receivables arising from
short term credit transactions say upto 180 days. As against this, Forfaiting is meant for
financing credit transactions of having deferred credit period of more than 1 year.
2) Factoring arrangement can be with recourse or without recourse depending on the terms of
factoring contract between a client and a factor. As against this, Forfaiting transaction is always
without recourse where forfeiter absorbs credit risk also.
3) Factoring services can be considered either for domestic transaction or for export transaction.
As against this Forfeiting transaction is always considered for export transactions only.
4) Factoring is done on the strength of sales invoices only. Whereas Forfeiting involves use of
availed negotiable instruments like bill of exchange or promissory note.
5) In a factoring arrangement, a margin of 5 to 20 per cent is kept. In other words, finance is

provided immediate on the purchase of invoice to the extent 80 to 95 per cent of invoice value.
As against this; a forfeiter discounts the entire sale value of the export transaction without
keeping any margin.
6) Factoring services include sales ledger, administration, collection of receivables and other
advisory services. On the other hand, Forfeiting is a pure financial arrangement.
7) Factoring is done on whole turnover basis, whereas, Forfeiting can be done on transaction
basis.

Mutual funds-concepts:
A mutual fund is special type of investment institution that acts as an investment conduit. It
pools the savings, particularly of the relatively small investors, and invests them in well
diversified portfolio of sound investment. Mutual funds issue securities (known as units) to the
investors (known as unit-holder) in accordance with the quantum of money invested by them.
Profits are shared by the investors in proportion to their investment.
A mutual fund is a professionally managed type of collective investment scheme that pools
money from many investors and invests typically in investment securities (stocks, bonds, short-
term money market instruments, other mutual funds, other securities, and/or commodities such
as precious metals.
A mutual fund is set up in the form of a trust. Which has Sponsor: promoters of the company
and established the trust.
Investors: People who invest money in the mutual fund
Trustees: Trustees are the people within a Mutual Fund organization, who are responsible for
ensuring that investors’ interests are taken care of. The trustees are vested with the general power
of superintendence and direction over AMC, they monitor the performance and compliance of
the SEBI regulations by the mutual fund.
Asset Management Company (AMC): AMC manages the investment portfolios of schemes
Distributors: A person or a party responsible for bringing investors into the schemes of a MF
Registrars: The Registrar keeps a track of the investor’s investments and dis-investment
Custodian / Depository: An entity, usually a bank or Trust company, which holds and
safeguards securities owned by a Mutual Fund.
NAV or Net Asset Value: On each valuation date, the Fund calculates the market value of all
the investments it holds. From this value it deducts the expenses of the Fund as of the valuation
date. The result (Net Value) is divided by the total number of units held by the Fund. This is the
Net Asset Value per unit, commonly referred to as the NAV or Unit Value.
Entry Load: Entry Load is charged at the time an investor purchases the units of a scheme. The
entry load is a percentage fixed by the Mutual Fund.

Exit Load: Exit load is charged at the time of redeeming (or transferring an investment between
schemes). The Exit Load percentage is deducted from the NAV at the time of redemption (or
transfer between schemes).
Unit Value / Unit: The Unit Value is the amount an investor pays to buy a unit in a Mutual
Fund. They disinvest by selling its units.
Valuation Date: Each Mutual Fund is valued on a specific day called the valuation date. Most
Funds are valued daily, but some are valued weekly. Others, such as Real Estate Funds, are
valued monthly or quarterly.
A front-end load or sales charge is a commission paid to a broker by a mutual fund when shares
are purchased, taken as a percentage of funds invested. The value of the investment is reduced by
the amount of the load.
Some funds have a deferred sales charge or back-end load. In this type of fund an investor pays
no sales charge when purchasing shares, but will pay a commission out of the proceeds when
shares are redeemed depending on how long they are held.
Another derivative structure is a level-load fund, in which no sales charge is paid when buying
the fund, but a back-end load may be charged if the shares purchased are sold within a year.
Load funds are sold through financial intermediaries such as brokers, financial planners, and
other types of registered representatives who charge a commission for their services
It is possible to buy many mutual funds without paying a sales charge. These are called no-load
funds.
Types of schemes by Tenor
Open-ended: These funds are on-going and do not have a fixed maturity. Investors can encash
all or part of their units at any time and receive the current value of the units.
Close-ended: These have a fixed maturity. Investors in Close-ended funds can encash their units
only at the end of the maturity period.
Advantages of investing in mutual funds: The mutual fund Industry has been playing key role in
the capital market. The advantage of investing in mutual funds arises for the following reasons.
1. Professional management: You avail of the services of experienced and skilled professionals
who are backed by a dedicated investment research team which analyses the performance and
prospects of companies and selects suitable investments to achieve the objectives of the scheme.
2. Diversification: Mutual funds invest in number of companies across a broad cross-section of

industries and sectors. This diversification reduces the risk because seldom do all stocks decline
at the same time and in the same proportion.

3. Low costs: Mutual funds are relatively less expensive way to invest compared to directly
investing in the capital markets because benefits of scale in brokerage, custodial and other fees
translate into lower costs for investors.
Other advantages are:
1. Offering wide portfolio investment

2. Providing better yields
3. Offering tax benefits
4. Promoting industrial development
5. Reducing market cost.
A short overview of the types of mutual funds along with benefits of each is provided below.
1. Growth funds - Capital appreciation in the medium to long term

2. Income funds- Provide steady return on investment
3. Balanced funds- These funds capital appreciation and regular income.
4. Tax saving funds- These funds offer tax savings in line with the provisions of income tax
5. Index funds: NAVs of these funds fallow the rise and fall of the indices.
Dynamics in the mutual funds:
 The trend towards open ended funds.

 Greater awareness among individual investors about how mutual funds work and the
value they add.
Role of mutual funds in the stock market:
Mutual funds have played an important role in the development of the capital market.
Mutual funds are an ideal vehicle for investment by retail investors in the stock market for
several reasons.
First, it pools the investments of small investors together increasing thereby the participation in
the stock market.
Secondly, Mutual funds, being institutional investors, can invest in market analysis generally not
available to individual investors
Thirdly, mutual funds can diversify the portfolio in a better way as compared with individual
investors due to the expertise and availability of funds.
Fourthly, growing investor interest in the equity market over the years could also be gauged from
the resources mobilized by mutual funds.

Organization and management: Mutual fund spectrum
SEBI Mutual fund SEBI Mutual fund Mutual fund

regulations Schemes/products/options
guide lines
Products/funds Options/Plans
Equity funds Bonds/debt/inc Hybrid funds Money market

ome funds mutual funds
Growth,Mid-
cap, Value,
uc
Corporate, Balanced,
Income Fund,
s
Gilt,floating Asset allocation.
Index, ETFs
Rates,Bond
Sector Index
ELSS
Growth, Systematic Systematic Switching Gifts

dividend, investment withdrawal
Reinvestment
Dollar cost Value averaging

averaging

Regulation and supervision of mutual funds: The focus of regulation and supervision of
mutual funds is to facilitate the creation of structure mutual funds to cater to the requirements of
the nascent economy and the investors. The regulatory frame work rests with the SEBI, RBI, and
the association of mutual funds (AMFI) in introducing an appropriate regulatory environment.
Money market mutual funds that would invest exclusively in money market instruments would
be regulated by the RBI on the basis of specified guidelines to be laid down by the RBI.
Offshore funds which have non-residential investors and are regulated by the provisions of the
countries where these are registered shall be outside the purview of these guidelines.
To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds.
All mutual funds are required to be registered with SEBI before they launch any scheme.
Guide lines for mutual funds:
RBI Guidelines: Constitution and management;
Every mutual fund shall constitute as a trust under Indian trust act and the sponsoring bank
should appoint a board of trustees to manage it. The board of trustees should have at least two
outside trustees.
The day to day management of the schemes under the fund, as may be delegated by the Board of
trustees, should be looked after by a full-time Executive trustee who should no be concurrently
discharging any other responsibility in the convened bank.
SEBI Guidelines: Establishment:
Mutual funds shall be sponsored by the registered companies with sound track record, general
reputation and fairness in all their business transactions
The trust shall then be authorized to float one or several different schemes under which units
shall be issued to the investor.
Mutual funs operated only by separately established Asset management companies.
Working of public and private mutual funds in India: Mutual funds have emerged as
significant avenue of finance for industry and notable intermediary in the Indian capital market.
Until 1987, the UTI(Unit trust of India) was sole mutual fund in the company. Subsidiaries of
public sector banks launched mutual funds subsequently. Later Life insurance Corporation of
India and the General insurance Corporation of India also floated mutual funds.
In post -1992 periods, mutual funds sponsored by other public and private sector financial
institutions, corporate in collaboration with foreign investment and fund mangers and foreign
institutional investors emerged on scene.

Securitization of Debt:
Securitization is a process through which illiquid assets are transferred into more liquid form of
assets and distributed to a broad range of investors through capital market. The leading
institutions assets are removed from its balance sheet and instead are funded by investors through
a negotiable financial instrument. The security is backed by expected cash flow.
Concept: securitization in simple terms means the conversion of existing or future cash flows of
any person into tradable security, which then may be sold in the market. The cash flow from
financial assets such as mortgage loans, automobile loans, trade receivables, credit card
receivables, fare collections become the security, against which, borrowings are made
Structured financing instruments are derivatives of traditional secured debt instruments.
Securitization is best understood as “the repacking of receivables in tradable form.” These

securities can be in the form of equity or debt but must be serviced by a discrete pool of assets or
receivables.
Securitization structure:
Lender or company Borrowers of assets

holding financial assets
Transfer of assets Payment for assets Loan repayments
Credit support or
Issuer Or SPV Servicer or collection
Credit enhancer (Special purpose agent
vehicle)
Issues securities Principle and interest repayments Payment for securities
Investor

The steps in a securitization transaction:
Step1: Origination-Lender (FI, BANK, and NBFC) makes a loan to a borrower for purchase of
an asset (Car, property).
Step2: Pooling –Large number of homogeneous loans are aggregated or packaged into a pool.
The maturities and interest rates of pooled loans are generally the same.
Step3: Sale/Transfer of assets from originator to an entity that is generically referred to as a

specific purpose vehicle or SPV .An SPV may be a trust, a special purpose bank ruptacy remote
company, or a public sector entity.
Step4: Credit enhancement- Protection against failure of borrowers to make interest and
principle payments on the loans. Examples, letter of credit, financial guarantee from a third
party.
Benefits of securitization:
To investor: Liquidity-Instruments are freely tradable in the market.
Safety- Instruments are rated and backed by assets and collaterals.
Cash flows: Flexible range of maturities to suit different cash requirements.
To seller (originator):
Securitization mitigated the risk arising on account of liquidity, and interest rates.
Diversification of funding services whenever seller wants to fund new projects.
To market:
It creates more depth in the market by adding more diversified instruments with different
maturities.
More fee based income for financial institutions.

WHAT IS DEMAT ACCOUNT:
DEMAT account is the account in which securities (shares/units/bonds etc.) are kept in
electronic form and related transactions are performed through account.
DEMAT: means dematerialization of shares.
It is the process by which your physical share certificates are converted to equivalent number of
securities in electronic from and are credited to your DEMAT Account. Shares in DEMAT are
more safe as compare to physical or paper form, from risk of theft, loss in handling, bad delivery
etc. It also reduces the transaction costs. It helps for easy & smooth working.
Documents Required For Opening An Account: You will require just a PAN Card and Saving
Account with Us. All DEMAT services are available with us at competitive rates without any
hidden cost. You have to visit personally at any of our DEMAT centre at least at the time of
DEMAT account opening with original PAN card, original address proof and photocopies of
PAN card and address proof.
Role of NSDL and CSDL:(Depository and custodial services):A depository is an organization

where the securities of share holder are held in electronic form as compared to the traditional
way of holding physical paper certificates.
Concept: A depository reaches out the general investor through its intermediaries that are the
participants. The main objective of the depository is to eliminate paper ownership and minimize
the paper work in trading and transfer of securities. A depository is a bank for securities. When
an investor deposits securities with a depository the investor’s account with depository is
credited for the deposit, and the securities are sent for transfer in the name of the depository.
Therefore, the beneficial ownership of the securities will be with the investor but the legal
ownership will be with the depository. In other words, the investor will continue to get all
benefits like interest, dividend, rights, bonus and voting rights but instead of investor’s name, the
depository registers are maintained by the company.

Functions of the depository:
(a) Maintain investor holding in electronic form: Depository, through its participants, will
maintain account balances for individual investors that will reflect their portfolio securities.
(b)Provide for dematerialization and rematerialisation of securities: Dematerialization is a

process by which physical certificates of investors are destroyed and equivalent securities are
credited in electronic mode. Rematerialization: It is a term used for converting electronic holding
back into physical certificates if so desired by the investor.
(c) Effect settlement of securities traded on exchanges: Trades carried out on the exchange are
settled through the transfers in depository. The clearing corporation plays vital role in effecting
the settlement concluded in the stock exchange.
(d) Allow for receipt of allotment in the electronic form: In the case of fresh public issues, an
investor can opt for receiving his allotment in electronic mode.
(e) Providing pledging/hypothecation facilities for stocks held with it: If the investor wants to
pledge /hypothecate stocks with others like banks, the depository will provide facilities.
How depositories will help to:
Brokers: Less risky settlements.
 Greater profits from increased trading volumes.

 Improved cash flow, funds neither are nor tied up for long periods.
 Counterfeiting eliminated
Issuers: Up to date knowledge of share holder’s names and addresses
Saving in issue costs
Higher efficiency of register and transfer agent functions
Improved ability to attract international investors
Investors: Reduction is risks of loss, mutilation, theft, forgery.
 Greater liquidity from speedier settlement and reduced registration delays.

 Faster receipt of benefits and rights resulting from corporate actions.
 Reduced transaction costs.
 Advantages of Depository;

1. Paperless settlement: Elimination of paper work at various levels and reduction of cost
involved.
2. Elimination of loss of certificates and Elimination of stolen or fake certificates
3. Elimination of bad deliveries
4. Cost of transactions for brokers/registrars/custodians will fall, because of reduction in back

office.
5. No stamp duty for transactions effected through depository
6. Settlement can be much easier and quicker
How does depository system works: The following types of securities related transactions 1)New
issues- allot tees 2) Secondary market transactions-buy/sell through stock exchanges 3)secondary
transactions out side the stock exchange.
NSDL ISSUER/R&T
AGENT
CLEARING CLEARING Depository

CORPORATION MEMBER participant
STOCK TRADING INVESTOR

EXCHANGE MEMBER
New issues: The depository organization provides for an option to the investor to take the shares
either in physical mode or through the depository.
Secondary market transactions through stock exchanges: While there may not be any difference
in the trading procedures, there will be a difference in clearing and settlement procedures. The
settlement procedure may differ depending upon whether the securities will be delivered in
electronic or physical mode. The following settlement scenarios are possible:

1) Seller opting to give delivery in physical mode and the buyer willing to take delivery in
physical mode:
2) Seller opting to deliver from depository account and the buyer willing to take delivery into
depository account. 3) Seller opting to give delivery in physical mode but buyer wants to
delivery in electronic form;
4) Seller opting to give delivery in electronic mode but the buyer wants delivery in physical
mode.

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SRI SATHYA SAI PG COLLEGE 2010

The structure of the Financial system in India

The Indian Financial System is broadly classified into broad groups:

2.Un organized sector

Organized Indian financial system: The organized financial system comprises of an

Un Organized Financial System: The unorganized Financial system comprises of relatively

FINANCIAL MARKETS&SERVICES PREPARED BY K.SANKARA RAO.

Commercial Banks Co-Operative Societies Other Institutions

Nationalized Regional Rural Co-Operative

Government Public Sector Private Sector

1. National savings LIC,GIC, UTI, 1. Chits, Nidhis,

FINANCIAL MARKETS&SERVICES PREPARED BY K.SANKARA RAO.

Objectives of the financial system-Economic development:

-Speed up economic growth Rapid industrialization

Support to agriculture Support to trade

Rural development Entrepreneurial development

Project finance Development of back ward areas

Housing, Education, Health Infrastructure

Liquidity and Price control Support to institutions

Human development Environment

Research and development

Role of the Financial System in economic development:

FINANCIAL MARKETS&SERVICES PREPARED BY K.SANKARA RAO.

Functions of Financial System: A financial system performs the following functions:

Components/ Constituents of Indian Financial system:

FINANCIAL MARKETS&SERVICES PREPARED BY K.SANKARA RAO.

1. to facilitate creation and allocation of credit and liquidity;

Financial Instruments: Another important constituent of financial system is financial

BENEFITS OF FINANCIAL INTERMEDIATION (INSTITUTIONS):

SERVICES OF FINANCIAL INSTITUTIONS: In transferring resource allocation from direct

FINANCIAL MARKETS&SERVICES PREPARED BY K.SANKARA RAO.

e. Credit Risk Diversification (portfolio investment): By purchasing a broad range of

FINANCIAL MARKETS&SERVICES PREPARED BY K.SANKARA RAO.

Financial Markets are where financial Instruments/products are exchanged.

TYPES OF FINANCIAL MARKETS

• Primarily used by Banks

• Long Term Funds Raised by

• Trading Instruments used

FINANCIAL MARKETS&SERVICES PREPARED BY K.SANKARA RAO.

 Enable channelizing funds from surplus units to deficit units

 There are instruments for borrowers such as loans, overdrafts, etc.

Capital Market –Capital Market Instruments:

 Mergers and Acquisitions

Dimensions of Capital market or Importance of capital market: The capital market is

FINANCIAL MARKETS&SERVICES PREPARED BY K.SANKARA RAO.

Constituents of Capital market: The constituents of capital market comprise of

1. Development banks 2.Commercial banks 3.State level development banks 4.Investment

Capital market instruments: 1. Marketable securities 2.Non-marketable securities

Marketable securities: 1.Govt securities, 2.PSU Bonds, 3.UTIMutual funds,

FINANCIAL MARKETS&SERVICES PREPARED BY K.SANKARA RAO.

Money Market -Money market Instruments: Main Function

Fill the gaps or temporary mismatch of funds

 Instruments in Money Market

 Call money market

 Treasury bills market

 Markets for commercial paper

 Money market mutual funds

FINANCIAL MARKETS&SERVICES PREPARED BY K.SANKARA RAO.

Certificate of Deposits: Certificates of Deposit (CDs) is a negotiable money market instrument

Market Repos: Repo (repurchase agreement) instruments enable collateralized short-term

FINANCIAL MARKETS&SERVICES PREPARED BY K.SANKARA RAO.

Public issue by listed companies, Means of finance

Pricing of issues: Differential pricing, Price band, Denominations of shares