Financial Institutions and Markets

June 2023 Examination

Q1. Ambey Ltd. is one of the biggest players dealing in fitness machines in India. The
company now intends to launch a range of fitness food for fitness-conscious people and
plans to market it by selling it on various e-commerce portals and opening retail outlets.
So, the management of the company is planning to raise further capital in the debt
market. As a financial advisor to the firm advise the various techniques which the
company can use in order to raise capital from the debt market. (10 marks)

Ans 1.

Introduction

The viral outbreak threw the energy of maintaining one's intellectual and physical health into
sharper relief. As people across us grew aware of their immunity and fitness, this newfound
awareness stimulated human beings to remember fitness as essential to ensure a healthier and
better life. Amid the extended lockdowns, they moved their stance toward exercising in
Favour of sustainable fitness by including any form of activity into their lifestyle. Even those
who did now not commit to a rigorous fitness regime opted for yoga, mini workouts, jogging,
or walking to stay fit.

Market research corroborates this variation and evolution in the sensibilities and mindset of
the Indian populace. Compared to the 2020 survey, in which best 26 percent of the people in
our united states pursued yoga, ten consistent with sent bodyweight sports, and 11 in step
with cent cardio sporting activities, the 2021 information showed a nearly 60 in line with cent
rise in all the exercises and sports. Except for the growing focus on appearance after an
individual's health, the Covid-19 pandemic brought about the growth of on-call for and
convenient digital services and contributed to this development.

Concepts and applications

Debt market gadgets can be defined as all the securities issued by the public sector, the
personal region, or the authorities to raise the budget inside the market. Debt instruments may
be described as files that constitute the obligations for repayment. According to the debt file,
the money taken or borrowed with the company's aid must be repaid to the investor. on this
kind of safety, the interest rate is constant and paid consistently.

Different types of debt market gadgets are to be had by the consumer. Some of them
are-

Bonds

Bonds are the most usual debt market units, such as information about debt, compensation
periods, and interest quotes. It constructs a contract between the borrower and lender and
binds the borrower with obligations.

Bonds are usually issued with the aid of personal businesses and authorities entities. Glues
commonly include a hard and fast fee within the shape of interest and are typically published
on the market charge. The interest rate is known as the face value of a bond, which is
generally always in the percentage form.

Different groups and institutional, government, municipal, and company bonds issued unique
kinds of bonds. It depends on the borrower and the lender which sorts of bonds they want to
address.

Debenture

Debentures are lengthy-time period loans issued when capital is wanted for specific or
specific products. Debentures, unlike bonds, also bear a special interest rate; this is presented
in percent shape. However, in debentures, no asset is provided as collateral—the trust
between the borrower and the lender bureaucracy a contract.

Both company entities and authority entities use debentures to fund specific projects.
However, the debentures issued by using the government are for a longer time than those
given utilizing corporate entities.

Commercial paper

Commercial paper can be defined as a debt marketplace device. Specific entities use this. A
commercial paper is a detailed and unsecured promissory note drawn and constructed through
the borrower at the lender. An industrial paper is general and issued when rated via one-of-a-
kind credit rating agencies.

Fixed Deposits
Fixed deposits are the maximum standard and famous, and quickest-growing sort of debt
instrument. It is the ultimate efficient way of earning a higher price by going back and
investing funds in similar benefits. It's miles a beautiful debt marketplace tool, safer and more
comfortable than shares or mutual funds.

Debt or equity?

Additionally, it is argued that debt is a more potent supply of financing than equity and vice
versa. But as we all know, money owed is a company's lengthy-term borrowings. If a
different debt is utilized for financing functions, the agency's reimbursement responsibilities,
legal responsibility, and danger will boom. It will also increase the constant monetary costs
because interest on debt has to be paid consistently, and the more debt there are greater the
fixed financial charges-

As all of us recognize, equity holders are the company's owners, and if more and more capital
is raised thru equity, there might be more fabulous owners than required. On the other hand,
if funds are raised thru equity continually, it will dilute ownership, the company's control, and
decision-making power. It will adversely affect the control as all choices are taken with the
stockholders' agreement, and exclusive stockholders have distinctive opinions, making it
tough to make informed decisions and ensuing in conflicts.

Conclusion

In the corporate world, there are numerous activities, needs, or initiatives for which entities
want funding. Those finances are commonly lengthy-time period budgets raised for over 12
months. There are excellent resources via which those price ranges can be increased.
However, the most typical and usually used supply is debt. Debt is less costly and a cheaper
and more accessible manner to elevate capital, even though it carries constant financial prices
within the shape of interest.

Generally, in a market, while price ranges are needed by a company, a lender who is worth
sufficient to shop for it pays for it, and the entity issues debt. This shopping for and selling of
debt securities are called the debt market.
Q2. Prabhas has joined non-banking financial companies (NBFCs) but is unclear about
the role and types of NBFCs. Apprise, Prabhas about the role of NBFCs in the financial
services segment with various types of NBFCs as per business activity catering for the
financial needs of the Indian economy with examples. (10 marks)

Ans 2.

Introduction

NFBCs (Nonbank financial companies), or nonbank financial institutions, can be defined as

economic institutions that offer diverse banking works but do now not have a banking
license. Generally, these institutions must refrain from taking antique demand profits, readily
available cash, and those in savings or checking accounts- from the public. This hassle keeps
them outside the scope of conventional oversight from the nation and federal monetary
regulators.

Nonbank financial companies fall under the oversight of the customer protection act and
Dodd- frank wall avenue reform, which is why they, as firms, are predominantly engaged in
an economic hobby. At the same time, more than 85% of their consolidated annual gross
incomes or assets are monetary within the term. Nonbanking financial companies include
mortgage lenders, funding banks, coverage groups, money market funds, personal equity
funds, hedge funds, and P2P creditors.

Concepts and applications

Nonbanking economic institutions complement the mainstream banking device. Given the
nature of the employer fashions (cost of borrowing) of the nonbanking economic institutions,
they typically cater to the market, which is inherently considered a better risk by
comprehensive financial institutions and banks. Customers attain out to nonbanking financial
organizations because of their faster choice-making, prompt offerings, minimal
documentation, and flexibility. Nonbanking financial companies price them accurately to
cover the risks.

Position of NFBCs in the financial sector

The role of nonbanking financial companies' inclusion has been rising over the last diverse
years due to the government's objective on financial inclusion and the rising call for credit
from unique sections of society. Per the latest bureau records for June 2022, the credit score
inquiries with nonbanking financial companies were at par with that of PSU banks and the
non-public area at about 15Mn. They provide all sorts of credit scores, along with consumer
loans, private loans, vehicle loans, mortgage loans, gold loans, etc. New credit score clients
are one of the enormous opportunities for nonbanking economic companies.

Banks are careful regarding the creditworthiness of customers. These are people who've yet
to take loans within the beyond. This segment also needs help with financial literacy, as a
result of which they go to the unorganized casual sector for their borrowing necessities. The
informal area is usually faster to fill Nonbanking financial companies are bridging this hole
with a time hole for this segment. With digital and virtual answers, companies are bridging
this hole.

Nonbanking monetary companies have faced numerous challenges over the past three
financial years, irritated through the outbreak of covid. Intensive competition from banks has
sharpened the focal point on retail borrowings, and therefore, the requirement for automation
and quicker turnarounds to remain aggressive has become a survival necessity. Gross NPAs
are anticipated to stay high for a while due to slippages from regulated adjustments and
restructured books in NPA recognition norms. Investment get admission still desires to
normalize for lots of non-banking financial companies. Proper consolidation is going on for
plenty NFBCs. Larger nonbanking monetary companies are gaining marketplace share.

NFBSs with green parentage, low leverage, and excessive liquidity have navigated the
challenges and problems by focusing on higher liquidity, provisioning buffers, and capital.
Those small and mid-sized gamers are taking the route of securitization, co-lending, or other
partnerships with outstanding players and could fund a light business version. Even as the
business version may range from erstwhile instances, nonbanking financial companies will
play an essential role in the economic space.

Types of NBFCs1. Investment & Credit Company

ICC-nonbanking financial institution carrying on its business- an asset the finance, the
provision of finance by making advances or loans or otherwise, for any work other than its
own, and the acquisition of securities. And is not involved in any different types of
nonbanking financial companies as described by RBI in any of its directives.

2. Infrastructure Finance Company

It is an NBFC that -
A) Deploys 2/4th of its total assets in loans

b) Has a minimum net owned capital of Rs. 300 crores

c) Has been considered at least "A" in its credit rating or similar

d) CRAR of at least 15%

Some examples are a Hindustan construction company, GMR infrastructure ltd.

3. Systematically Important Core Investment Company

An NBFC that:

A) That accepts public funds

b) The asset size is Rs. 100 crores

c) It is not included in any work referred to in section 45(c) or 45(f) of the reserve bank of
India 1934.

d) Holds at least 89% of its total assets in investments in stocks, shares, loans or Debt
Company.

e) Out of 89%, 60% should be invested in equity stocks or those which compulsorily covert
later in shares, within a period not more than 10 years from the date of issue,

F) Does not trade in its investment in stocks, loans or debt in group companies except
through the block sale for disinvestment or dilution.

Conclusion

A nonbanking financial company is under the companies act 2013 or 1956. NBFC is a firm in
the business of receiving deposits. It raises capital from the public (indirectly or directly) and
lends it to small companies. NFBCs offer credit facilities and are preferred more than banks.
They are only allowed to work by getting a license from the RBI.

Q3a. Uday is a new joiner at a currency exchange firm. His first task given by the
manager is to prepare a report on trends in the major currency exchange quotes for the
past year. However, Uday has little knowledge about the participants in the foreign
exchange market. Brief Uday about the various participants in the foreign exchange
market for successfully executing his task. (5 marks)

Ans 3a.

Introduction

The foreign exchange market (also known as FX, forex, or the currencies market) is an over-
the-counter (OTC) global The marketplace calculates or determines the exchange charge for
currencies around the globe. Participants in this market can sell, buy, alternate, and speculate
on the relative alternate rates of different currency pairs.

Concept and application

There are various varieties of members in the foreign exchange market. Let's speak about the
following:

a) Investment banks and commercial banks: they commonly act on their own and do not
depend on others based on the necessities and needs of their customers.

b) Brokers act as intermediaries between financial companies or as links with private

people in trade for a fee.

c) Supranational entities and critical banks: crucial banks are accountable for issuing their
use of ad’s currency and controlling and dealing with the money supply. Imperative banks,
for this reason, interfere in currency markets- in a coordinated or personal manner- to keep
the value of their currencies inside limits described by the monetary rules in pursuance of
express commitments, which includes the case of fixed alternate prices or otherwise, the
usage of the foreign currency reserves. Supranational corporations have mandates in market
analysis, supervisory, investment resources, etc.

d) Sovereign funds (China Investment Corporation, Norway authority’s pension fund,

ADIA-Abu Dhabi investment authority, etc.) are public funding funds that invest proceeds
from natural sources, business privatizations, etc., in foreign currency assets.

e) Price range and funding entities- that intervene in foreign exchange markets to obtain
returns or with speculative purposes.
f) Non-financial entities, including companies (large corporations, multinationals, and
SMEs) or institutional investors (which include asset managers or insurance companies) that
engage in exchange for funding or business functions)

g) Individuals: Who operates in the foreign exchange market for speculative or transactional
functions?

Conclusion

We have explained various contributors inside the foreign exchange market. Uday can use the
details to record trends in the primary currency exchange prices for the previous year.

Q3b. “Regulatory mechanisms are implemented to ensure that there is always a balance
between the inflow of money and the outflow of funds so that the financial markets are
able to function efficiently and effectively.” Explain the important regulatory
authorities in India with their functions. (5 marks)

Ans 3b.

Introduction

Different financial regulators in India-

RBI

The RBI's primary responsibility is to ensure price stability. Its predominant capabilities
include the following:

A) Circulating and printing currency all through the country

b) Maintaining banking industry reserves by using setting reserve ratios.

c) Examining bank monetary statements to keep a direct eye on any stresses in the financial
industry.

D) Regulating settlements and payments as well as their infrastructure.

e) Maintaining inflation charges and being instrumental in deciding interest fees in the
country.
F) Managing the nation's foreign exchange reserves.

g) Controlling and regulating interest prices, which affect cash marketplace liquidity.

SEBI

It was established in 1992. SEBI responded to rising malpractices in the capital markets that
destroyed investors' self-belief lower back then.

Capabilities of SEBI-

a) Sebi has the authority to supervise the stock change's functioning.

b) It regulates the business of exchanges.

c) It has full access to the exchanges' financial statistics and the firms listed at the trade.

d) It oversees companies' delisting and list methods from any alternate in the country.

e) It can take movements, such as penalties and fines against malpractices.

g) It additionally promotes traders' knowledge.

h) It conducts audits and inquiries and inspects while it spots wrongdoing.

IRDA

The IRDA protects the pastimes of insurance policyholders and regulates the insurance
industry. It was the installation in 1999. since the coverage quarter is constantly changing,
IRDA advisories are important for insurance companies to keep up with the adjustments in
regulations and guidelines.

The IRDA specifies the education and qualifications for insurance retailers and other
intermediaries, which the insurer must follow.

PFRDA

The PFRDA was set up in 2013 as the only regulator of India's pension industry. The PFRDA
scope involves:

a) Putting in place hints for investing in pension schemes.

b) Settling disputes between pension fund subscribers and intermediaries.

c) Increasing attention to pension and retirement schemes.

d) Investigating other participants and intermediaries for malpractice.

Ministry of Corporate Affairs (MCA)

The MC issues itself with administering the company's activities and different iterations. It
sets up the regulations and rules for the lawful functioning of the company industry.

Except for the agencies act, MCA also managed the constrained legal responsibility
partnership act of 2008. It oversees all guidelines and actions that alter the functioning of the
corporate industry in India.

Its purpose is to assist the boom of companies. The MCA's registrar of corporations
authorizes organization registration as well as their functioning per regulation.

Conclusion

Diverse research explains why Covid-19 has caused a substantial economic loss and will
maintain to do so quickly. Nowadays, amongst various professionals, there is consensus that
we may be headed for no longer just a lockdown but perhaps even a recession.

Therefore, there is a requirement for empowered regulatory bodies that may steer policies to
make sectors of the companies robust and easily exclude the financial outcomes of the
COVID-19 pandemic.