Professional Documents
Culture Documents
Date: 3-June-2015
Financial Structure and
Institution
By: Sharanya K S
STRUCTURE OF INDIAN FINANCIAL
SYSTEM
Financial structure refers to shape, components and
their order in the financial system. The Indian financial
system can be broadly classified into formal (organized)
financial system and the informal (unorg anised)
financial system. The informal financial system consists
of individual money lenders, groups of persons
operating as funds or associations, partnership firms
consisting of local brokers, pawn brokers
DIAGRAMMATIC REPRESENTATION OF
INDIAN FINANCIAL SYSTEM
The formal financial system comprises financial
institutions, financial markets, financial instruments
an d financial services
FINANCIAL INSTITUTIONS
Financial institutions are the participants in a financial
market. They are business organizations dealing in
financial resources. They collect resources by
accepting deposits from individuals and institutions
and lend them to trade, industry and others. They buy
and sell financial instruments.
Financial institutions classified as:-
a) Regulatory and financial institutions :
The two major Regulatory and Promotional Institutions in
India are Reserve Bank of India (RBI) and Securities Exchange
Board of India (SEBI).
Both RBI and SEBI administer, legislate, supervise, monitor,
control and discipline the entire financial system.
RBI is the apex of all financial institutions in India. All
financial institutions are under the control of RBI .
The financial markets are under the control of SEBI.
b) Banking institutions :-
-Banking institutions mobilize the savings of
the people.
-They provide a mechanism for the smooth
exchange of goods and services.
-Basic categories of banking institutions are
commercial banks, co-operative banks,
developmental banks
c) Non banking financial institutions:-
- Nonbanking financial institutions also mobilize financial
resources directly or indirectly from the people.
-They lend funds but not create credit
-Companies like LIC, GIC, UTI, Development Financial
Institutions, Organisation o Funds etc. fall in this category.
-Nonbanking financial institutions can be categorized as
investment companies, housing companies, leasing
companies, hire purchase companies, specialized financial
institutions (EXIM Bank etc.) investment institutions, state
level institutions etc
FINANCIAL MARKETS
By: Ajeesh Moosakutty
FINANCIAL MARKETS
Financial market deals in financial securities (or financial
instruments) and financial services. Financial markets are the
centers or arrangements that provide facilities for buying and
selling of financial claims and services. These are the markets
in which money as well as monetary claims is traded in.
Financial markets exist wherever financial transactions take
place. Financial transactions include issue of equity stock by a
company, purchase of bonds in the secondary market, deposit
of money in a bank account, transfer of funds from a current
account to a savings account etc.
FUNCTIONS OF FINANCIAL MARKETS
•To facilitate creation and allocation of credit and
liquidity.
• To serve as intermediaries for mobilization of savings
• To help in the process of balanced economic growth
• To provide financial convenience
•To cater to the various credits needs of the business
organizations.
•To provide information and facilitate transactions at low
cost
• Financial market can be classified in 2 on basis of maturity of claims
1. Money Market and
2. Capital Market
1. Money Market:
A market where short term funds are borrowed and lend is
called money market. It deals in short term monetary assets with a
maturity period of one year or less. Liquid funds as well as highly
liquid securities are traded in the money market.
Examples of money market are Treasury bill market, call money
market, commercial bill market etc.
2. Capital Market:
Capital market is the market for long term funds. This market
deals in the long term claims, securities and stocks with a maturity
period of more than one year. The stock market, the government
bond market and derivatives market are examples of capital market.
• Financial market can be classified in 2 on basis of seasoning of
claim
1. Primary Market and
2. Secondary Market
1. Primary Market:
Primary markets are those markets which deal in the new
securities. Therefore, they are also known as new issue markets.
These are markets where securities are issued for the first time. In
other words, these are the markets for the securities issued directly
by the companies.
2. Secondary Market:
Secondary markets are those markets which deal in existing
securities. Existing securities are those securities that have already
been issued and are already outstanding. Secondary market consists
of stock exchanges.
• Financial market can be classified in 2 on basis of timing of
delivery:
1. Cash / Spot market and
2. Forward/Future market
• Right Issue
Right issue is a method of raising funds in the market by an
existing company. Under this method, the existing company
issues shares to its existing shareholders in proportion to the
number of shares already held by them.
CHARACTERISTICS OF A STOCK EXCHANGE
1. It is an organized capital market.
2. It may be incorporated or non-incorporated body
(association or body of individuals).
3. It is an open market for the purchase and sale of securities.
4. Only listed securities can be dealt on a stock exchange.
5. It works under established rules and regulations.
6. The securities are bought and sold either for investment or
for speculative purpose.
DISTINGUISH BETWEEN MONEY MARKET AND
CAPITAL MARKET
4. Certificate Of Deposit
CD is a certificate in the form of promissory note issued by
banks against the short term deposits of companies and
institutions, received by the bank.
It is payable on a fixed date. It has a maturity period ranging from
three to twelve months.
5. Commercial Paper
• It is a finance paper like Treasury bill. It is an
unsecured, negotiable promissory note.
• It has a fixed maturity period ranging from three to
six months. It is generally issued by leading, nationally
reputed credit worthy and highly rated corporations.
• It is quite safe and highly liquid.
• It is issued in bearer form and on discount. It is also
known as industrial paper or corporate paper.
CAPITAL MARKET INSTRUMENTS
• SWEAT EQUITY
Sweat equity usually takes the form of giving options to
employees to buy shares of the company, so they become part
owners and participate in the profits, apart from earning salary.
• FOREIGN CURRENCY CONVERTIBLE BONDS(FCCBs)
A convertible bond is a mix between a debt and equity
instrument. It is a bond having regular coupon and principal
payments, but these bonds also give the bondholder the option
to convert the bond into stock. FCCB is issued in a currency
different than the issuer's domestic currency.
• DERIVATIVES
A derivative is a financial instrument whose characteristics
and value depend upon the characteristics and value of some
underlying asset typically commodity, bond, equity, currency,
index, event etc.
• GLOBAL DEPOSITORY RECIEPT / AMERICAN DEPOSITORY
RECIEPT
A negotiable certificate held in the bank of one country
(depository) representing a specific number of shares of a stock
traded on an exchange of another country. GDR facilitate trade
of shares, and are commonly used to invest in companies from
developing or emerging markets.
However a company may get listed on these stock exchanges
indirectly – using ADRs and GDRs. If the depository receipt is
traded in the United States of America (USA), it is called an
American Depository Receipt, or an ADR. If the depository
receipt is traded in a country other than USA, it is called a Global
Depository Receipt, or a GDR.
• EQUITY SHARES WITH DETACHABLE WARRANTS
A warrant is a security issued by company entitling the
holder to buy a given number of shares of stock at a stipulated
price during a specified period. These warrants are separately
registered with the stock exchanges and traded separately.
Warrants are frequently attached to bonds or preferred stock as a
sweetener, allowing the issuer to pay lower interest rates or
dividends.
• FULLY CONVERTIBLE DEBENTURES WITH INTEREST
This is a debt instrument that is fully converted over a
specified period into equity shares. The conversion can be in one
or several phases. When the instrument is a pure debt
instrument, interest is paid to the investor. After conversion,
interest payments cease on the portion that is converted.