Fig 2.

1: Flow of Fund

2) To cultivate the habit of saving (Savings): Savings refer to the amount of money,
which is kept aside from the current income for future use. Savings can be made either
by reducing expenditure or by increasing income or by doing both. Saving is income not
spent, or deferred consumption. According to Robinson, the primary function of the
financial system is “to provide a link between savings and investment for the creation of
new wealth and to permit portfolio adjustment in the composition of the existing wealth”.

3) To cultivate the habit of Investing (Investing): Investment is an activity in which

money resources are actually committed to production. In other words, investment is the
utilization of resources in order to increase income or production output in the future.

B. FEATURES OF FINANCIAL SYSTEM

The following are the features of financial system

1) Collection and Distribution of Savings: One of the important functions of a financial

system is to link the savers and investors and thereby, help in collecting and allocating
the savings efficiently and effectively. By allocating resources efficiently, it helps in up
gradation of technologies for growth on the continuous basis.

2) Interrelated Activities: A financial system is a set of interrelated activities. It supplies

funds from people who have surplus funds to people who have deficit fund. The
organizations help in supply of funds to economics activities.

3) Transfer Funds: Financial system helps in transferring of financial resources from one
person to another person. This system includes financial markets, financial
intermediaries, financial assets and services which facilitates fund movements in an
economy.

4) Mobilizes Saving: It helps in allocating idle lying resources with people into productive
means. Financial system is the one which obtains funds from savers and provide it to
those who are in need of it for various development purposes.

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 5) Monitoring the Corporate Performance: Financial markets and institutions, as a part
of financial system, help to monitor corporate performance. In this way, it not only helps
in selecting projects to be funded but also inspires the operators to monitor the
performance on investment.

6) Risk Allocation: Diversification of risk in an economy is important feature of financial

system. Financial system allocates people’s funds in various sources due to which risk is
diversified.

7) Facilitates Investment: Financial system encourages investment by peoples into

different investment avenues. It provides various income-generating investment options
to peoples for investing their savings.

8) Enhances Liquidity: Financial system helps in maintaining optimum liquidity in an

economy. Its facilities free movement of funds from households (savers) to corporates
(investors) which ensures sufficient availability of funds.

2.2 LEGISLATIVE MEASURES

Financial regulation in India is governed by a number of regulatory bodies. Financial
regulation is a form of regulation or supervision, which subjects financial institutions to
certain requirements, restrictions and guidelines, aiming to maintain the stability and integrity
of the financial system. This may be handled by either a government or non-government
organization. Financial regulation has also influenced the structure of banking sectors by
increasing the variety of financial products available. Financial regulation forms one of three
legal categories which constitutes the content of financial law, the other two being market
practices and case law.

A. LEGISLATIVE MEASURES OF INDIAN FINANCIAL SYSTEM

India has a comprehensive system of financial regulations that includes a range of acts
and rules to govern various aspects of the financial sector. Some of the key acts and rules that
regulate the financial sector in India include:

· Reserve Bank of India Act, 1934: This act provides the legal framework for the
functioning of the Reserve Bank of India (RBI), which is the central bank of India. The
RBI is responsible for regulating the monetary policy of the country, managing the
foreign exchange reserves, and supervising the banking sector.

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 · Banking Regulation Act, 1949: This act regulates the functioning of banks in India and
empowers the RBI to supervise and regulate the banking sector.

· Securities and Exchange Board of India Act, 1992: This act established the Securities
and Exchange Board of India 1992 (SEBI), which is responsible for regulating the
securities market in India.

· Insurance Regulatory and Development Authority Act, 1999: This act established the
Insurance Regulatory and Development Authority (IRDA), which is responsible for
regulating the insurance sector in India.

· Companies Act, 2013: This act governs the formation, management, and operation of
companies in India, including those in the financial sector.

· Foreign Exchange Management Act, 1999: This act regulates foreign exchange
transactions in India and aims to facilitate external trade and payments.

· Prevention of Money Laundering Act, 2002: This act aims to prevent money
laundering and the financing of terrorist activities in India.

· Securities Contracts (Regulation) Rules, 1957: These rules regulate the trading of
securities in India and provide guidelines for the functioning of stock exchanges.

· Insider Trading Regulations, 2015: These regulations aim to prevent insider trading in
securities and promote fair trading practices.

· Consumer Protection Act, 2019: This act aims to protect the rights of consumers in
India and includes provisions related to financial services, such as banking, insurance,
and investment products.

2.3 STRUCTURE OF FINANCIAL MARKETS

A Financial Market is a platform or system where individuals, businesses, and
governments can buy and sell various financial instruments such as stocks, bonds, currencies,
commodities, and derivatives. It is a mechanism through which participants can trade assets,
manage risks, and raise capital. Financial market is the market that facilitates transfer of
funds between investors/ lenders and borrowers/ users. Financial market may be defined as ‘a
transmission mechanism between investors (or lenders) and the borrowers (or users) through
which transfer of funds is facilitated’. It consists of individual investors, financial institutions
and other intermediaries who are linked by a formal trading rules and communication

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network for trading the various financial assets and credit instruments. It deals in financial
instruments (like bills of exchange, shares, debentures, bonds, etc).

There are two main types of financial market in India where majority of trading is
happening. The first one is money market and second one is capital market.

1. Money Market

Money market is a type of market which trade in such securities which has a short
maturity period (less than one year). Such securities are often risk free. As their maturity
periods are smaller (more liquid), and the risk of loss (volatility) is also smaller, hence
their yield is also less. People generally invest in money market through money market
mutual funds.

Securities which trade in money market are T-Bills, Certificate of Deposits (CD’s),
Commercial Papers (CP’s), Repo etc.

2. Capital Market

On one hand Indian household has small savings. On other hand corporates need funds to
meet their capital requirements. If an Indian household want to invest in business, it can
be done through the security market. Capital market has further two branching.

· Primary Market: This market is also called the new issue market. Company raise
capital here to fund its business activity. In the primary market, companies issue their
securities for the first time to public (in form of shares or bonds). It is here where the
IPOs are issued by companies.

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 · Secondary Market: Households who’ve bought the security in primary market can
sell (exit) it in secondary market. When we say “stock exchange” we are actually
referring to the secondary market. Here the already issued securities are traded
between buyers and sellers independent of the issuers intervention. If the issuer
(company) wants to buyback its shares, they have to do it in secondary market.

COMPONENTS OF FINANCIAL MARKETS

The structure of the financial market in India is multi-tiered and consists of various
participants and institutions. Here’s an overview of the key components of the financial
market structure in India:

1. Regulators: The financial market in India is regulated by several regulatory bodies,

including the Reserve Bank of India (RBI), the Securities and Exchange Board of India
(SEBI), the Insurance Regulatory and Development Authority (IRDA), and the Pension
Fund Regulatory and Development Authority (PFRDA). These regulators formulate
policies, oversee market activities, and ensure compliance with rules and regulations.
2. Central Bank: The Reserve Bank of India (RBI) acts as the central bank and plays a
crucial role in the Indian financial market. It formulates and implements monetary
policies, regulates and supervises banks, manages the country’s foreign exchange
reserves, and maintains financial stability.
3. Stock Exchanges: The major stock exchanges in India are the National Stock Exchange
(NSE) and the Bombay Stock Exchange (BSE). These exchanges provide platforms for
trading equity shares and other securities, ensuring fair and transparent transactions.
They operate electronic trading systems and facilitate price discovery.
4. Clearing and Settlement Entities: Clearing corporations and depository participants
play a vital role in the financial market structure. Clearing corporations, such as the
National Securities Clearing Corporation Limited (NSCCL) and the Indian Clearing
Corporation Limited (ICCL), provide clearing and settlement services for trades
executed on stock exchanges. Depository participants, such as the National Securities
Depository Limited (NSDL) and the Central Depository Services Limited (CDSL),
facilitate the electronic holding and settlement of securities.
5. Banks and Financial Institutions: Commercial banks, development banks, and non-
banking financial companies (NBFCs) form an integral part of the financial market
structure. They provide various financial services, including lending, deposit-taking,
investment banking, and asset management.
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 6. Insurance Companies: Insurance companies offer life insurance, general insurance, and
health insurance products to individuals and businesses. They operate under the
regulatory framework of the Insurance Regulatory and Development Authority (IRDA)
and provide risk protection and financial compensation against unforeseen events.
7. Mutual Funds: Mutual funds pool money from investors and invest in a diversified
portfolio of securities. They provide individuals with an opportunity to invest in a
professionally managed portfolio. The Association of Mutual Funds in India (AMFI)
promotes and regulates the mutual fund industry.
8. Non-Banking Financial Companies (NBFCs): NBFCs are financial institutions that
offer a range of financial services but do not hold a banking license. They provide credit,
leasing, investment, and other financial services to individuals and businesses,
contributing to the overall financial market ecosystem.

These components, along with individual and institutional investors, comprise the
structure of the financial market in India. The interconnectedness of these participants and
institutions facilitates the flow of funds, allocation of capital, and the functioning of various
financial products and services.

2.4 IMPORTANCE OF STOCK MARKET IN INDIA

The following are the importance of Stock Market

1) Savings, Mobilization and Capital Acceleration: The capital market plays a

significant role in a developing country like India where there exists shortage of
resources along with increased demand for investments by governments and industrial
firms. Thus, capital markets help in mobilizing savings from different sectors of the
people and also helps in getting good returns.

2) Productive investment: The capital market provides a mechanism for those who have
savings, transfer their savings to those who need funds for productive investments. It
diverts resources from wasteful and unproductive channels such as gold, jewelry,
conspicuous consumption, etc. to productive investments.

3) Development of Industrial Growth: The capital market acts as a central market in

transferring the resources to the industrial sector of the economy. The development of
industrial sector helps the people to make investments in productive activities than the
unproductive activities. Therefore, capital markets contribute towards the industrial
growth by mobilizing funds from the public and transferring them to industrial sector.
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