BMT 1012

INDIAN FINANCIAL SYSTEM

DIGITAL ASSIGMENT :- 1

- SUBMITTED TO: DR. MANOHARAN M

- SUBMITTED BY: ABHAY KUMAR

- REGISTRATION NO. : 20BBA0080

 - DATE OF SUBMISSIONS: 15/09/2021

1. Compare and contrast financial market regulations in India with any

one advanced nation.

Comparison and Contrast between Indian and Canadian Stock Markets

Basis for comparison India Canada

National Regulator SEBI is responsible for There is no national

regulating the capital market regulatory body in Canada.
in India

State Regulator There is no separate state Each province and territory

regulating bodies in India.
has its own securities
commission that regulates the
market of such a province.
Therefore, there are 13 such
securities regulating
authorities in Canada.

Standard Laws All the capital market
participants are required to
abide by the acts enacted by
the Central govt. such as
SCRA Act, Depositories Act,
SEBI Act, etc. and the rules
and regulations made by the
SEBI.
All the provincial and
territorial governments
formulate laws for their
respective province and all
the market participants are
required to adhere to those
laws.
Indian Securities Regulatory System

With the view to ensure smooth functioning of the capital market, various legislations have
been passed from time to time. Before the initiation of reforms in 1992–93, the Indian
Financial Market was highly segmented with a variety of regulations and administrative
prices. The establishment of the Securities and Exchange Board of India (SEBI) initiated the
process of reforms in the Indian Capital Market.

Legislations regulating the capital market

1. The Securities and Exchange Board of India Act, 1992.

2. The Companies Act, 1956

3. The Securities Contracts (Regulation) Act, 1956

4. The Depositories Act, 1996

Statutory Sources of SEBI’s Authority

SEBI as a regulating authority plays a vital role in the smooth functioning of the capital
market in India. It derives its power from the Securities Contract Regulation Act, 1956 (SCR
Act, hereafter) and the Securities Contract Regulations Rules, 1956 (SCR Rules, hereafter).
The objective is to regulate the stock exchange by preventing undesirable speculation in the
securities transactions.

The legal framework under the Depositories Act, 1996 seeks to facilitate the holding of shares
(or securities) in a dematerialized form (or Fungible form) and also affects the transfer of
securities through book entries in the accounts maintained by the depositories. Registration
and procurement of a certificate from it is a requisite after fulfilling all the conditions
prescribed under the act for the commencement of business.

The Companies Act also empowers SEBI by delegating it the authority to administer various
provisions under the Companies Act, 2013. These provisions seek to achieve the issuer’s
relationship with the investors by mobilizing the capital (i.e. issuance of capital), creation of
liquidity (i.e. transfer) and the realization of its returns (i.e. dividend).

Canadian Securities Regulatory System

The Securities Market is primarily governed by the provincial and territorial governments.
Every province & territory has its own securities regulators that are either funded by
government entities or self-funded commissions. They do not have a national regulatory
authority or a nation-wide law for regulating the affairs of the Securities Market. Such
regulators administer the province’s securities act and also enact their regulations. The
Investment Industry Regulatory Organization of Canada (IIROC) and Mutual Fund Dealers
Association (MFDA) are the two national self-regulatory organizations on which the
regulators of security rely to regulate the member firms of the organization and their
employees.

The biggest provincial regulator is the OSC (Ontario Securities Commission) along with
various other important provincial regulators such as the BCSC (British Columbia Securities
Commission), the ASC (Alberta Securities Commission) and the Autorité des marchés
financiers (Québec). Canadian Securities Administration (CSA) is an informal body formed to
coordinate the work and activities of the provincial and territorial securities regulators towards
harmonizing Canadian capital market regulations.

The CSA is working towards:

1. The development of a common statute which can be adopted by all the provinces and
territories, and

2. Developing a system that can help issuers in complying to a single national security
law rather than to comply with 13 different securities laws in every jurisdiction.

A successful passport system has been implemented by the Canadian Securities

Administration wherein automatic access to the capital market of different jurisdictions is
provided to the market participants by simply acquiring the requirements of a single set of
harmonized laws and meeting the principal regulator’s decision. This passport system involves
the registration of security firms and individuals, prospectus filing, and certain types of
discretionary exemptions. It is used in all the jurisdictions except the Ontario exchange as they
are in support of a national securities regulator.

Ontario is acknowledged by other authorities as a principal jurisdiction for all passport

decisions but they have not adopted the passport rule. As a result, participants from the
Ontario market have easy access to other exchange jurisdictions through the passport system
but participants from other market exchange do not have access to Ontario. Instead, the O.S.C.
follows a “mutual reliance” policy under which it decides in each case whether to accept the
decision of the principal regulator or not.

2. Explain the role and functions of RBI. Also elaborate the key points of
RBIs recent monetary policy report (Aug 4-6,2021)

Role and Functions of RBI

Monetary Authority
Regulator and supervisor of the
financial system
Regulator and supervisor of the
payment systems
Manager of Foreign Exchange

Issuer of currency

Developmental role

Banker to the Government

Banker to banks
 Monetary Authority:

Formulates, implements and monitors the monetary policy for

A)  Maintaining price stability, keeping inflation in check

B) Ensuring adequate flow of credit to productive sectors.

 Regulator and supervisor of the financial system:

 Lays out parameters of banking operations within which the country’s banking and
financial system functions for-

A) Maintaining public confidence in the system

B) Protecting depositors’ interest

C) Providing cost-effective banking services to the general public.

 Regulator and supervisor of the payment systems:

A) Authorises setting up of payment systems

B) Lays down standards for working of the payment system

C) Lays down policies for encouraging the movement from paper-based payment
systems to electronic modes of payments.

D) Setting up of the regulatory framework of newer payment methods.

E) Enhancement of customer convenience in payment systems.

F) Improving security and efficiency in modes of payment.

 Manager of Foreign Exchange:

 RBI manages forex under the FEMA- Foreign Exchange Management Act, 1999.  in
order to

A) Facilitate external trade and payment

B) Promote the development of foreign exchange market in India.

 Issuer of currency:

 RBI issues and exchanges currency as well as destroys currency & coins not fit for
circulation to ensure that the public has an adequate quantity of supplies of currency
notes and in good quality.

 Developmental role:

 RBI performs a wide range of promotional functions to support national objectives.

Under this it setup institutions like NABARD, IDBI, SIDBI, NHB, etc.

 Banker to the Government: 

Performs merchant banking function for the central and the state governments; also
acts as their banker.

 Banker to banks: 

An important role and function of RBI is to maintain the banking accounts of all
scheduled banks and acts as the banker of last resort.

 An agent of Government of India in the IMF.

Key points RBIs recent monetary policy report (Aug 4-6,2021)

 The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) kept the repo
rate unchanged at 4 per cent while maintaining an ‘accommodative stance’ as long as
 necessary to mitigate the impact of the COVID-19 pandemic, RBI Governor
Shaktikanta Das 
 The reverse repo rate too was kept unchanged at 3.35 per cent.
 The Marginal Standing Facility (MSF) rate and bank rate also remained unchanged at
4.25 percent.
 Government Securities Acquisition Program the RBI will be conducting two more
auctions of Rs 25,000 crore each on August 12 and August 26, 2021 under G-SAP
2.0.
 Extended the on-tap TLTRO scheme by three months till December 31, 2021.
 To provide comfort to banks on their liquidity requirements, including meeting their
Liquidity Coverage Ratio (LCR) requirement, this relaxation which is currently
available till September 30, 2021 is being extended for a further period of three
months, i.e., up to December 31, 2021.”

3. Explain money market. Discuss various money market instruments in

India.

Money Market is a segment of the financial market in India where borrowing and lending of
short-term funds take place. The maturity of money market instruments is from one day to
one year. In India, this market is regulated by both RBI (the Reserve bank of India) and SEBI
(the Security and Exchange Board of India). The nature of transactions in this market is such
that they are large in amount and high in volume. Thus, we can say that the entire market is
dominated by a small number of large players.
 Treasury Bills
Certificate of Deposits
Commercial Papers
Repurchase Agreements
Banker's Acceptance

Treasury Bills (T-Bills)

Issued by the Central Government, Treasury Bills are known to be one of the safest money
market instruments available. However, treasury bills carry zero risk. I.e. are zero risk
instruments. Therefore, the returns one gets on them are not attractive. Treasury bills come
with different maturity periods like 3-month, 6-month and 1 year and are circulated by
primary and secondary markets. Treasury bills are issued by the Central government at a
lesser price than their face value. The interest earned by the buyer will be the difference of
the maturity value of the instrument and the buying price of the bill, which is decided with
the help of bidding done via auctions. Currently, there are 3 types of treasury bills issued by
the Government of India via auctions, which are 91-day, 182-day and 364-day treasury bills.

Certificate of Deposits (CDs)

A Certificate of Deposit or CD, functions as a deposit receipt for money which is deposited
with a financial organization or bank. However, a Certificate of Deposit is different from a
Fixed Deposit Receipt in two aspects. The first aspect of difference is that a CD is only issued
for a larger sum of money. Secondly, a Certificate of Deposit is freely negotiable. First
announced in 1989 by RBI, Certificate of Deposits have become a preferred investment
choice for organizations in terms of short-term surplus investment as they carry low risk
while providing interest rates which are higher than those provided by Treasury bills and term
deposits. Certificate of Deposits are also relatively liquid, which is an added advantage,
especially for issuing banks. Like treasury bills, CDs are also issued at a discounted price and
their tenor ranges between a span of 7 days up to 1 year. However, banks issue Certificates of
Deposits for durations ranging from 3 months, 6 months and 12 months. They can be issued
to individuals (except minors), trusts, companies, corporations, associations, funds, non-
resident Indians, etc.

Commercial Papers (CPs)

Commercial Papers are can be compared to an unsecured short-term promissory note which
is issued by highly rated companies with the purpose of raising capital to meet requirements
directly from the market. CPs usually feature a fixed maturity period which can range
anywhere from 1 day up to 270 days. Highly popular in countries like Japan, UK, USA,
Australia and many others, Commercial Papers promise higher returns as compared to
treasury bills and are automatically not as secure in comparison. Commercial papers are
actively traded in secondary market.

Repurchase Agreements (Repo)

Repurchase Agreements, also known as Reverse Repo or simply as Repo, loans of a short
duration which are agreed upon by buyers and sellers for the purpose of selling and
repurchasing. These transactions can only be carried out between RBI approved parties
Repo / Reverse Repo transactions can be done only between the parties approved by RBI.
Transactions are only permitted between securities approved by the RBI like treasury bills,
central or state government securities, corporate bonds and PSU bonds.

Banker's Acceptance (BA)

Banker's Acceptance or BA is basically a document promising future payment which is

guaranteed by a commercial bank. Similar to a treasury bill, Banker’s Acceptance is often
used in money market funds and specifies the details of the repayment like the amount to be
repaid, date of repayment and the details of the individual to which the repayment is due.
Banker’s Acceptance features maturity periods ranging between 30 days up to 180 days.

4. A
Financial sector reforms in India
Narasimham Committee report, 1991
The Narasimham committee was established in August 1991 to give comprehensive
recommendations on the financial sector of India including the capital market and banking
sector. The major recommendations made by the committee are

 To reduce the cash reserve ratio CRR and the statutory liquidity ratio SLR- The
committee recommended reducing CRR to 10% and SLR to 25% over the period of
time.

 Recommendations on priority sector lending- the committee recommended to

include marginal farmers, small businesses cottage industries etc in the definition of
priority sector. The committee recommended for fixing at least 10% of the credit for
priority sector lending.

 Deregulation of interest rates- the committee recommended deregulating the interest

rates charged by the banks. This was necessary to provide independence to the banks
for setting the interest rates themselves for the customers.

 The committee recommended to set up tribunals for recovering loans of non-

performing assets etc. It gave recommendations on asset quality classifications.

 The committee recommended for entry of new private banks in the banking system.

Banking sector reforms

 Changes in CRR and SLR: One of the most important reforms includes the
reduction in cash reserve ratio (CRR) and statutory liquidity ratio (SLR). The SLR has
been reduced from 39% to the current value of 19.5%. The cash reserve ratio has been
reduced from 15 % to 4%. This reduction in the SLR and CRR has given banks more
financial resources for lending to the agriculture, industry and other sectors of the
economy.

 Changes in administered interest rates: Earlier, the system of administered interest

rate structure was prevalent in which RBI decided the interest rate charged by the
banks. The main purpose was to provide credit to the government and certain priority
sectors at concessional rates of interest. The system has been done away and RBI no
 longer decides interest rates on deposits paid by the banks. However, RBI regulates
interest on smaller loans up to Rs 2 lakhs on which the interest rate should not be
more than the prime lending rates.

 Capital Adequacy Ratio: The capital adequacy ratio is the ratio of paid-up capital
and the reserves to the deposits of banks. The capital adequacy ratio of Indian banks
had not been as per the international standards. The capital adequacy of 8% on the
risk-weighted asset ratio system was introduced in India. The Indian banks had to
achieve this target by March 31, 1994, while the foreign Bank had to achieve this
norm by 31st March 1993. Now, Basel 3 norms are introduced in India.

 Allowing private sector banks: after the financial reforms, private banks we are
given life and HDFC Bank, ICICI Bank, IDBI Bank, Corporation Bank etc. were
established in India. This has brought much needed competition in the Indian money
market which was essential for the improvement of its efficiency. Foreign banks have
also been allowed to open branches in India and banks like Bank of America,
Citibank, American Express opened many new branches in India. Foreign banks
were allowed to operate in India using the following three channels:

o As foreign bank branches,

o As a subsidiary of a foreign bank which is wholly owned by the foreign Bank

o A subsidiary of a foreign bank within maximum foreign investment of 74%

 Reforms related to non performing assets (NPA): non performing assets are those

loans on which the loan installments have not been paid up for 90 days. RBI
introduced the recognition income recognition norm. According to this norm, if the
income on the assets of the bank is not received in two quarters after the last date, the
income is not recognised. Recovery of bad debt was ensured through Lok adalats,
civil courts, Tribunals etc. The Securitisation And Reconstruction of Financial Assets
and Enforcement of Security Interest (SARFAESI) Act was brought to handle the
problem of bad debts.

 Elimination of direct or selective credit controls: earlier, under the system of

selective or direct credit control, RBI controlled the credit supply using the system of
changes in the margin for providing a loan to traders against the stocks of sensitive
 commodities and to the stockbrokers against the shares. This system of direct credit
control was abolished and now the banks have greater freedom in providing credit to
their customers.

 Promotion of microfinance for financial inclusion: for the promotion of financial

inclusion, microfinance scheme was introduced by the government, and RBI the gave
guidelines for it. The most important model for microfinance has been the Self Help
Group Bank linkage programme. It is being implemented by the regional rural banks,
cooperative banks, and Scheduled commercial banks.

Reforms in the government debt market

 The policy of automatic monetization of the fiscal deficit of government was phased
out in 1997 through an agreement between the government and RBI. Now the
government borrows money from the market through the auction of government
securities.

 The government borrows the money at market determined interest rates which have
made the government cautious about its fiscal deficits.

 The government introduced treasury bills for 91 days for ensuring liquidity and
meeting short-term financial needs and for benchmarking.

 Foreign institutional investors were now allowed to invest their funds in the
government securities.

 The government introduced the system of delivery versus payment settlement for
ensuring transparency in the system.

 The system of repo was introduced for dealing with short term liquidity adjustments.

Role of regulators

 Importance of the role of the regulator was recognised and RBI became more
independent to take decisions. More operational autonomy was granted to RBI
to fulfill its duties.

 The Securities and Exchange Board of India (SEBI) became an important institution
in managing the securities market of India.
  The insurance regulatory and Development Authority was an important institution for
initiating reforms in the Insurance sector. Its responsibilities include the Regulation
and supervision of the Insurance sector in India.

Reforms in the foreign exchange market

Since 1950s, India had a highly controlled foreign exchange market and foreign exchange
was made available to the Reserve Bank of India in a very complex manner. The steps taken
for the reform of the foreign exchange market were:

 In 1993, India moved towards market based exchange rates, and the current account
convertibility was now allowed. The commercial banks were allowed to undertake
operations in foreign exchange.

 The Rupee foreign currency swap market has been developed. New players are now
allowed to enter this market and undertake currency swap transactions subject to
certain limitations.

 The authorised dealers of foreign exchange were now given the permission for

activities such as initiating trading positions, borrowing and investing in foreign
markets etc. subject to certain limitations and regulations.

 The foreign exchange Regulation Act, 1973 was replaced by the foreign exchange
management Act, 1999 for providing greater freedom to the exchange markets.

 The foreign institutional investors and non-resident Indians were allowed to trade in
the exchange-traded derivatives contracts subject to certain regulations and
limitations.

Other important financial sector reforms

 Some important steps were taken for the non-banking financial companies for the
improvement of their productivity, efficiency, and competitiveness. Many of the non-
banking financial companies have been brought under the regulation of Reserve Bank
of India. Many of the other intermediaries were brought under the supervision of the
Board of Financial Supervision.
  In 1992, the Monopoly of UTI was ended and mutual funds were opened for the
private sector. The mutual fund industry is now controlled by the SEBI Mutual Funds
regulations, 1996 and its amendments.

 In 1992, the Indian capital market was opened for the foreign institutional investors in
all the securities.

 Electronic trading was introduced in the National Stock Exchange (NSE) established
in 1994, and later on in the Bombay Stock Exchange (BSE) in 1995.

Non-Performing Assets (NPA) in Indian banking industry

Money or assets provided by banks to companies as loans sometimes remain unpaid by

borrowers. This late or non-payment of loans is defined as Non-Performing Assets (NPA).
They are also termed as bad assets.

In India, the RBI monitors the entire banking system and, as defined by the country’s central
bank, if for a period of more than 90 days, the interest or installment amount is overdue then
that loan account can be termed a Non-Performing Asset.

The increase in non-performing assets in Indian banks follows the recognition standards
being pursued by the banks after the RBI highlighted it in the Asset Quality Review (AQR).
Of course, the main reason is inadequate progress in the financial health of the companies.

Recent Developments and Ways to Tackle NPA  

 Insolvency and Bankruptcy Code (IBC) – With the RBI’s push for the IBC, the
resolution process is expected to quicken while continuing to exercise control over the
quality of the assets. There will be changes in the provision requirement, with the
requirement for the higher proportion of provisions going to make the books better.
 Credit Risk Management – This involves credit appraisal and monitoring
accountability and credit by performing various analyses on profit and loss accounts.
While conducting these analyses, banks should also do a sensitivity analysis and
should build safeguards against external factors.
 Tightening Credit Monitoring – A proper and effective Management Information
System (MIS) needs to be implemented to monitor warnings. The MIS should ideally
 detect issues and set off timely alerts to management so that necessary actions can be
taken.
 Amendments to Banking Law to give RBI more power – The present scenario
allows the RBI just to conduct an inspection of a lender but doesn’t give them the
power to set up an oversight committee. With the amendment to the law, the RBI will
be able to monitor large accounts and create oversight committees.
 More “Haircuts” for Banks – For quite some time, PSU lenders have started putting
aside a large portion of their profits for provisions and losses because of NPA. The
situation is so serious that the RBI may ask them to create a bigger reserve and thus,
report lower profits.  
 Stricter NPA recovery – It is also discussed that the Government needs to amend the
laws and give more power to banks to recover NPA rather than play the game of
“wait-and-watch.”
 Corporate Governance Issues – Banks, especially the public sector ones, need to
come up with proper guidance and framework for appointments to senior-level
positions.
 Accountability – Lower-level executives are often made accountable today; however,
major decisions are made by senior-level executives. Hence, it becomes very
important to make senior executives accountable if Indian banks are to tackle the
problem of NPAs.

5. Primary markets are new issues market – explain the step by step
process of raising capital for a company through IPO.
 Proposals

Underwriter

Team

Documentation

Marketing & Updates

Board & Processes

Shares Issued

Post IPO

1. Proposals

Underwriters present proposals and valuations discussing their services, the best type
of security to issue, offering price, amount of shares, and estimated time frame for the market
offering.

2. Underwriter

The company chooses its underwriters and formally agrees to underwriting terms through an
underwriting agreement.

3. Team

IPO teams are formed comprising underwriters, lawyers, certified public accountants (CPAs),

and Securities and Exchange Commission (SEC) experts.

4. Documentation
Information regarding the company is compiled for required IPO documentation. The S-1
Registration Statement is the primary IPO filing document. It has two parts—the prospectus
and the privately held filing information.

The S-1 includes preliminary information about the expected date of the filing. It will be
revised often throughout the pre-IPO process. The included prospectus is also revised
continuously.

5. Marketing & Updates

Marketing materials are created for pre-marketing of the new stock issuance. Underwriters
and executives market the share issuance to estimate demand and establish a final offering
price. Underwriters can make revisions to their financial analysis throughout the marketing
process. This can include changing the IPO price or issuance date as they see fit.

Companies take the necessary steps to meet specific public share offering requirements.
Companies must adhere to both exchange listing requirements and SEC requirements for
public companies.

6. Board & Processes

Form a board of directors and ensure processes for reporting auditable financial and
accounting information every quarter.

7. Shares Issued

The company issues its shares on an IPO date. Capital from the primary issuance to
shareholders is received as cash and recorded as stockholders' equity on the balance sheet.
Subsequently, the balance sheet share value becomes dependent on the company’s
stockholders' equity per share valuation comprehensively.

8. Post IPO

Some post-IPO provisions may be instituted. Underwriters may have a specified time frame
to buy an additional amount of shares after the initial public offering (IPO) date. Meanwhile,
certain investors may be subject to quiet periods.
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